Tow a r d s 2 0 1 5 – Sp e ndi n g f or I nd o ne s i a ’s De v e l o pm e nt Shaping the prospects of a Middle -Income Country August 2009 Table of Content Acknowledgements 5 Executive Summary 1 Seeing Indonesia as a Middle-Income Country 1 How public spending will shape the next decade of development 1 The past decade of spending: much progress but also missed opportunities 2 Spending during the global crisis and its aftermath 5 The next five years: Indonesia’s fiscal choices 6 Chapter 1. A Decade of Public Spending, 2001-09 10 1.1 A decade of transition and development 10 1.2 Discretionary expenditure and financing 12 1.3 Spending across sectors 17 1.4 Spending on key sectors 19 1.5 Subsidies 32 1.6 Budget Execution 34 1.7 Decentralization 36 Chapter 2. Indonesia in the Current Economic Downturn 42 2.1 Indonesia’s economy has been impacted by the crisis by less than most 42 2.2 Indonesia’s policy-makers have responded to the global downturn 47 2.3 Scope remains for a fuller policy response to the global downturn 52 Chapter 3. The Next Five Years: Indonesia’s Fiscal Choices 55 3.1 A unique opportunity 55 3.2 Growing resources 57 3.3 Business as usual? 64 3.4 Or a “big push�? 66 3.5 Spending more and better in health and infrastructure 67 3.6 Spending better in education and agriculture 79 3.7 Energy subsidies or social protection? 89 3.8 Bureaucracy reform 92 3.9 Costing a big push 96 3.10 Financing a big push 98 3.11 The potential benefits and risks of a big push 104 Annexes 107 A list of figures Figure 1 Indonesia 2000-09: A decade of reducing Indonesia‘s debt burden ............................................................... 3 Figure 2 What Indonesia has spent its public resources on during the past decade ..................................................... 4 Figure 3 The size of Indonesia‘s stimulus plan is typical of other economies in the region … ...................................... 5 Figure 4 … but tax cuts make up a much larger share in Indonesia ............................................................................. 5 Figure 5 Bold choices to reallocate and expand resources would increase development spending ............................. 8 Figure 1. 1 Indonesia has done well in reducing its debt burden ................................................................................. 13 Figure 1. 2 Tax revenues (excluding oil and gas) are steadily growing ....................................................................... 14 Figure 1. 3 Discretionary spending has not increased as much as expected due to growing energy subsidies ......... 15 Figure 1. 4 In 2008, the Government allocated over 50 percent of discretionary spending to subsidies ..................... 15 Figure 1. 5 Subsidies introduce uncertainty in budget planning .................................................................................. 15 Figure 1. 6 Until the price collapse in 2009, Indonesia has struggled to catch up with global fuel prices despite domestic adjustments .............................................................................................................................. 15 Figure 1. 7 Financing needs have increased and constitute a fiscal risk..................................................................... 17 Figure 1. 8 Indonesia‘s borrowing costs remain high and exceed those of its peers .................................................. 17 Figure 1. 9 What Indonesia has spent its public resources on during the past decade ............................................... 18 Figure 1. 10 Education spending continues to rise ..................................................................................................... 20 Figure 1. 11 After rising until 2007, health spending has stagnated and remains inadequate .................................... 23 Figure 1. 12 Infrastructure public spending continues to rise, but too slowly .............................................................. 25 Figure 1. 13 Total (public and private) investment in infrastructure............................................................................. 26 Figure 1. 14 Agriculture spending has been growing, but driven mainly by subsidies ................................................ 28 Figure 1. 15 Spending on government administration has been increasing, mainly driven by sub-national governments ............................................................................................................................................ 31 Figure 1. 16 Subsidies remain large and the most volatile budget item ...................................................................... 33 Figure 1. 17 Incidence of fuel subsidies, 2007 ............................................................................................................ 33 Figure 1. 18 Regressive electricity subsidies, 2005 .................................................................................................... 33 Figure 1. 19 Total budget disbursement, 2005-08 ...................................................................................................... 34 Figure 1. 20 Total capital expenditure, 2005-08 .......................................................................................................... 34 Figure 1. 21 Transfers to sub-national governments have stabilized since 2006 ........................................................ 37 Figure 1. 22 Poorer regions continue to benefit more than richer regions .................................................................. 38 Figure 1. 23 Government administration remains the largest spending item by sub-national governments ............... 39 Figure 1. 24 Sub-national government savings have stabilized at a high level and could provide additional spending capacity .................................................................................................................................... 40 Figure 2. 1 Per-capita GDP is now one-fifth above pre-crisis levels and growth has picked up .................................. 42 Figure 2. 2 Indonesia‘s growth has been relatively broadly based across expenditure components ........................... 43 Figure 2. 3 Indonesia‘s exports make up a relatively smaller share of the economy, and have not expanded as rapidly as in many other economies in the region .................................................................................... 43 Figure 2. 4 The global financial market turmoil and economic downturn is impacting Indonesia‘s markets and economy................................................................................................................................................... 44 Figure 2. 5 Commodity prices, having collapsed relative to their peaks, are at early 2006 levels ............................... 45 Figure 2. 6 Indonesia‘s slowdown has been relatively mild ........................................................................................ 45 Figure 2. 7 Indonesia‘s exports make up a relatively smaller share of the economy, and have not expanded as rapidly as in many other economies in the region… ................................................................................. 46 Figure 2. 8 … it is little exposed to the medium- and high-tech manufacturing especially affected by this downturn . 46 Figure 2. 9 As in previous easing cycles, BI‘s rate cuts are yet to be fully passed on to borrowers ........................... 47 Figure 2. 10 The size of Indonesia‘s stimulus plan, while moderate, is typical of other economies in the region........ 48 Figure 2. 11 … but tax cuts make up a much larger share of Indonesia‘ s plan than in neighboring economies ....... 48 Figure 2. 12 Personal income tax cuts will only benefit the richest 37 percent of workers .......................................... 51 Figure 2. 13 Fiscal stimulus: the trade-off between speed of implementation and socio-economic impact................. 53 Figure 3. 1 Growth, revenue and borrowing are the major determinants of the resource envelope ............................ 57 Figure 3. 2 Public resources will almost certainly continue to grow over the next RPJM period ................................. 60 Figure 3. 3 A falling public debt burden will continue to expand discretionary space .................................................. 61 Figure 3. 4 A business-as-usual approach would largely maintain the past pattern of public expenditure .................. 65 Figure 3. 5 With bold policy choices, the annual health budget could rise substantially by 2014. ............................... 68 Figure 3. 6 The health sector needs to anticipate a major transition in demographics ................................................ 72 Figure 3. 7 The demographic transition will call for much higher health spending ...................................................... 73 Figure 3. 8 With bold policy choices, the annual infrastructure budget could rise substantially by 2014 ..................... 74 Figure 3. 9 Annual education spending is expected to stabilize as a share of the budget, but will continue to grow in nominal and real terms ............................................................................................................................. 80 Figure 3. 10 If prioritized, funding for secondary education could expand substantially by 2014 ................................. 81 Figure 3. 11 If annual agriculture spending was maintained as share of the budget, resources would continue to grow in nominal and real terms ................................................................................................................ 87 Figure 3. 12 Existing policies will lead to a rebound in spending on energy subsidies when oil prices recover ........... 90 Figure 3. 13 Spending on government administration would stay relatively high under the business-as-usual scenario ................................................................................................................................................... 92 Figure 3. 14 The stock of debt (as a share of GDP) is likely to continue falling even with expanded spending and adverse market shocks .......................................................................................................................... 101 Figure 3. 15 Reallocations from lower priorities and increased resources could help fund a big push ..................... 104 Figure 3. 16 A big push would mark a bold departure from the past pattern of public expenditure ........................... 105 A list of tables Table 1 Costing and financing a big push ..................................................................................................................... 9 Table 1. 1 Comparison of key regional education outcome indicators, 2007 .............................................................. 20 Table 1. 2 Net enrollment rates by quintile, 2007 ........................................................................................................ 21 Table 1. 3 Comparison of key regional health outcome indicators .............................................................................. 23 Table 1. 4 Civil-service employment has grown rapidly in recent years ...................................................................... 31 Table 1. 5 A decade of decentralization ...................................................................................................................... 36 Table 2. 1 Marginal tax rates have been cut and income tax brackets raised ............................................................. 49 Table 3. 1 Costing and financing a big push ............................................................................................................... 56 Table 3. 2 Resource envelope projections are sensitive to assumptions about growth and the fiscal deficit .............. 58 Table 3. 3 Total public resources are likely to rise substantially over the next RPJM period ...................................... 59 Table 3. 4 Fiscal space is growing, but depends critically on policy choices ............................................................... 62 Table 3. 5 A big push would require more resources and could help accelerate growth and poverty reduction ......... 97 Table 3. 6 Balancing and containing public financing risks ........................................................................................ 102 Table 3. 7 Options for financing a big push ................................................................................................................ 103 Table 3. 8 Comparison of the business-as-usual and big-push scenarios ................................................................ 105 A list of Boxes Box 1. 1 Fiscal Space and Discretionary Spending .................................................................................................... 12 Box 1. 2 Reshaping Indonesia‘s economic geography ............................................................................................... 41 Box 2. 1 The Government‘s stimulus package ............................................................................................................ 49 Box 3. 1 Public expenditure is important for development .......................................................................................... 63 Box 3. 2 Planning for the implementation of universal coverage ................................................................................. 70 Box 3. 3 Breaking through with highway investment in India – lessons from the Golden Quadrilateral project........... 76 Box 3. 4 Breaking through on the trans-Java highway ................................................................................................ 77 Box 3. 5 Achieving universal junior secondary and increased senior secondary enrolment would require a significant increase in spending ................................................................................................................... 82 Box 3. 6 Teacher accreditation costs will continue to rise during the next RPJM period ............................................. 84 Box 3. 7 Rational and best practice for input subsidies schemes ............................................................................... 88 Box 3. 8 Improved regulation and program implementation could potentially yield significant savings ....................... 99 Acknowledgements This report was prepared by a core team led by Wolfgang Fengler and Shubham Chaudhuri. The analysis for the three individual chapters was undertaken and managed by Ahya Ihsan, Tim Bulman and Hassan Noura. The core team also included Lloyd McKay, Peter Milne, Dhanie Nugroho, Camilo Gomez Osorio and Soekarno Wirokartono. On the government side, the core team benefited from the close involvement and valuable insights from all those who participated at the Bappenas Macro Team Retreat in Bogor in early 2009, which discussed the Government‘s ―resource envelope‖. Special thanks go to Slamet Seno Aji (Deputy for Economic Affairs, Bappenas), as Team Leader of the Bappenas Macro Team, together with all the senior directors and staff involved in the retreat. Specific thanks also go to Lukita Dinarsyah Tuwo (Deputy Minister for Development Funding Affairs, Bappenas), Wismana Adi Suryabrata (Director Development Funding Allocation, Bappenas), and all members of the IPEA steering committee meeting, who provided valuable input throughout the process of producing this report. A larger group from within the World Bank contributed to the report, for which the core team expresses its thanks and gratitude. In particular, on bureaucracy reform this report benefited from input from Staffan Synnerstrom and Edwin Ariadharma; on health, Claudia Rokx, Pandu Harimurti and Elif Yavuz; on education, Andy Ragatz, Cut Dian Agustina, Dandan Chen, Enrique Luque and Sukmawah Yuningsih; and on infrastructure, Hongjoo Hahm, Elvy Nasution Schaefer and Nupur Gupta; and on agriculture, Camilo Osorio, who also made a major contribution to the infrastructure section. Valuable input and support were also provided by Jock McKeon, Enrique Blanco Armas, Enrique Aldaz- Carroll, Matthew Wai-Poi and Puteri Watson. Peter Milne and Arsianti were responsible for editing, design and publication of the final drafts of the report. Peer reviewers are: Timothy Buehrer (Chief of Party, ASEAN-US Technical Assistance and Training Facility, ASEAN Secretariat), Mohamad Ikhsan (LPEM, University of Indonesia), and Milan Brahmbhatt (Economic Advisor, PRMVP). Overall guidance was provided by Vikram Nehru (Sector Director, East Asia Poverty Reduction and Economic Management Department), Joachim von Amsberg (World Bank Country Director, Indonesia), and William Wallace (World Bank Lead Economist, Indonesia). This report was made possible through contributions from the Public Financial Management Multi-Donor Trust Fund (PFM MDTF) funded by the European Commission and the Netherlands. Executive Summary Seeing Indonesia as a Middle -Income Country A decade after a twin As the first decade of the 21st century draws to a close, Indonesia has emerged crisis, Indonesia is as a middle-income economy, economically strong, politically stable, and with now an emerging increasing confidence and global standing. This was unexpected a decade ago, confident middle- when Indonesia experienced a severe economic crisis that resulted in the income country … economic dislocation of millions of households, a sharp rise in poverty, a 13 percent decline in GDP, and near bankruptcy of the financial sector. The economic crisis triggered a dismantling of the previous political order, leading to a period of political turmoil characterized by several changes of government and the heightening of separatist tensions. … with fundamental Over the past decade, Indonesia‘s fiscal and political systems have been structural changes transformed. Perhaps less obvious, but ultimately just as important, Indonesia is ahead. also in the midst of a fundamental demographic and geographic shift. Indonesia is now an urban country with more than 50 percent of the population living in urban areas. Within the next five years, Indonesia will have a population of 250 million people, almost 60 percent of whom will live in cities. At the same time, fertility rates are declining. This will give Indonesia a ―demographic bonus‖ as the working age population increases relative to the rest of the population — a situation unlikely to change until after 2020 when the number of over-65-year-olds will finally start to increase more sharply. Imagine a new Based on these developments, it is now possible to imagine a new Indonesia Indonesia. that can build on its achievements by making far more rapid progress in reducing poverty. This new Indonesia would provide every child with a quality education through to senior secondary school; it would connect Surabaya, Jakarta and Medan with modern highways, providing market access and an economic lifeline to the towns and villages along the route; and it would guarantee all Indonesians affordable access to quality health services. Addressing the However, to realize this vision of a rising Indonesia, much remains to be done. challenges. Growth has restarted and has been robust, but infrastructure continues to be poor and the investment climate remains weak. Against the background of a strong fiscal position, the next five years provide an opportunity for Indonesia to address its remaining structural weaknesses. If Indonesia is able to build on the robust foundation of macroeconomic and political stability it has established thus far and accelerate growth while ensuring that growth is shared and is sustainable, it has the potential to become a dynamic, competitive and inclusive middle-income country in the decade ahead. How public spending will shape the next decade of development An opportune moment This is a particularly opportune moment to reflect on Indonesia‘s development prospects, as a new Government will enact a new five-year plan shortly after taking office in October 2009. This next Medium-Term Development Plan (RPJM) is the Government‘s main tool to help Indonesia reach the next level of development. The Government has a crucial opportunity to shape Indonesia‘s development prospects for the next five years and also lay the foundations for the remainder of the coming decade. Indonesia Public Expenditure Review Spending for Development Setting spending The new Government has an opportunity to implement an ambitious priorities well for the development program. Indonesia has weathered the global downturn well and next decade is critical can shape the next five-year plan from a strong fiscal position. Even more than for poverty reduction.... other middle-income countries, Indonesia can afford to think far more proactively about development and spending priorities for the next five years. The Government will face important public expenditure choices. The amount of resources Indonesia will spend on development, where it chooses to spend these resources and how effectively it implements its development programs will substantially influence Indonesia‘s longer-term economic and social prospects. … although More successful countries have spent their resources more effectively and international evidence efficiently. Countries that grow rich are able to build and maintain infrastructure on the impact of public and provide social services that improve the well-being of their citizens. There is spending remains also strong evidence that certain types of spending, such as providing public inconclusive. goods, has a higher impact on the well-being of the population than subsidizing private inputs, e.g. through consumer subsidies. However, the literature is inconclusive on the impacts of the type and level of public spending on growth, and is complicated by enormous variation in conditions across countries. This reemphasizes the need for country case studies and we hope that this report makes such a contribution. What this report is This report seeks to contribute to the discussion on Indonesia‘s spending about – and not about. priorities for the years ahead. These choices will impact the lives of Indonesians, and their opportunities to grow richer and receive better services The report is meant to contribute to Indonesia‘s next five-year plan, the RPJM, which will take effect in January 2010. The report focuses on public spending and does not attempt to cover the broad range of institutional reforms, including regulatory 1 reform, which is well covered in other publications. The past decade of spending: much progress but also missed opportunities Much progress has In 2008, Indonesia, for the first time in its history, attained a public expenditure been made in budget threshold of Rp 1,000 trillion (US$100 billion). That it was able to do so managing Indonesia’s reflects the remarkable progress Indonesia has made over the past decade in fiscal position. restoring macroeconomic and political stability, in restarting economic growth, and in managing its fiscal position. The increase in the budget has brought a corresponding increase in Indonesia‘s discretionary spending — from 7 percent of GDP in 2002 to above 9 percent of GDP in 2008, equivalent to around Rp 100 trillion (US$10 billion) annually. A success story in Indonesia has been one of the most successful countries in reducing its reducing the debt debt-to-GDP ratio. Since 1999, when debt levels reached over 90 percent of burden GDP, Indonesia has reduced its debt levels to just above 30 percent of GDP by the end of 2008. At the beginning of this decade Indonesia was among the most indebted countries in East Asia. At the end of this decade, Indonesia ranks among the least indebted countries in the region (Figure 1). 1 A selection of these reports includes: Social Protection Reform in Indonesia, GTZ 2007; Health Financing in Indonesia, World Bank 2009; Teacher Employment and Deployment in Indonesia, World Bank 2008; Development Policy Review, Word Bank. 2009; Indonesia‘s Doctors, Midwifes and Nurses, World Bank. 2009; and Doctors, Midwives and Nurses, World Bank 2009. 2 Indonesia Public Expenditure Review Spending for Development Figure 1 Indonesia 2000-09: A decade of reducing Indonesia’s debt burden Notes and sources: MoF, IMF-IFS and World Bank staff estimates. Spending on Reflecting a national priority, education spending has increased from 11 percent education, a critical of total government spending in 2001 to 15 percent in 2008, and this should rise development priority, further in 2009 in line with a commitment to ensure that national spending on has grown… education equates to 20 percent of the central-government budget. Along with this commitment, there has been a continued increase in enrollment rates, especially at the primary level where enrollment is now close to universal. Today, the challenge for the education sector is to raise the quality of education services and to increase enrollment rates at higher levels of schooling. …but because Despite a major push in 2006 to reduce fuel subsidies and an additional fuel spending on energy price adjustment mid-2008, energy subsidies absorbed 25 percent of the subsidies and government budget in 2008 due to rising world oil prices. This comes on top of government apparatus 14 percent spending for ―government administration‖ (Figure 2). Lower has also remained high… international oil prices in 2009 are expected to reduce both government revenue from oil and gas, and expenditure on fuel subsidies, although the present arrangement will continue to leave government expenditure vulnerable to a rebound in oil prices. Meanwhile, efforts underway to implement major bureaucracy reform have the potential to further inflate expenditure allocations to government administration, when these resources are urgently needed to accelerate development efforts. 3 Indonesia Public Expenditure Review Spending for Development Figure 2 What Indonesia has spent its public resources on during the past decade Notes and sources : World Bank staff estimates based on MoF data. *Data on sub-national spending between 2007 and 2009 are estimates. **Data for Central Government spending in 2008 are preliminary realizations, and 2009 data are based on fiscal stimulus revised budget (APBN). …spending in other Spending on infrastructure and health services has been particularly constrained critical areas— and these are critical for sustained economic growth and development. Indonesia infrastructure and continues to face a major infrastructure gap, and public expenditure in this sector health in particular— has never fully recovered following its sharp post-crisis decline in the late 1990s. has been less than needed… Public spending on infrastructure in Indonesia is only about 2 percent of GDP, which is one of the lowest rates in Asia. Public spending on health has been rising but still remains below 1 percent of GDP, which is less than half of the amount that the Philippines, Thailand or Malaysia are spending. …and has not always Even in sectors that have seen a substantial increase in funding, such as been well-directed. agriculture, there has often been a low development impact. For example, much of the public resources flowing to agriculture have been used to subsidize private inputs, especially fertilizer, and few funds have been allocated to public goods such as research and extension and irrigation. This is despite the fact that the rates of return to investment in such public goods are known to be high. Bottlenecks in the Although improved since 2005, budget execution continues to be slow and system hamper budget disbursements remain skewed towards the end of the year. As a result, over the implementation, past four years, roughly half of the capital budget has been spent in the final especially capital quarter of the fiscal year. However, in 2009, the first signs of progress have expenditures. become apparent, with cumulative spending in Q1 at close to 13 percent compared with 10 percent in Q1 2008. Indonesia transfers a Over the past decade, Indonesia has implemented one of the most ambitious third of its budget to decentralization programs of modern times. After two waves of large expansions the sub-national in transfers to sub-national governments in 2001 and 2006, transfers reached governments. The about Rp 300 trillion (US$30 billion) in 2008 and are likely to stabilize at this main beneficiaries have been the poorest level in the short term. Indonesia‘s transfer system has greatly benefited poorer regions. regions and has led to a new situation today in terms of public spending: the issue is no longer one of transferring more resources to poor regions, but instead of helping poor regions spend their resources wisely. 4 Indonesia Public Expenditure Review Spending for Development Spending during the global crisis and its aftermath Indonesia has thus Although impacted, Indonesia‘s economic performance has been relatively far proved resilient in robust in the face of the current global financial crisis. Thanks largely to a broad- the face of the global based economy that is less dependent on exports than many other Asian crisis… economies, and relatively strong domestic demand, Indonesia‘s economic annual growth rate is projected to only slow from 6.1 percent in 2008 to 3.5 to 4 percent in 2009. This is a smaller decline in growth than was achieved by any other major Asian country and is remarkable given that the world economy is now expected to contract by about 3 percent in 2009. …in part due to the The positive impact has been in part due to the timely response of Government’s Bank Indonesia and the Government. Bank Indonesia eased monetary policy proactive and and cut interests rate by 2.5 percent between December 2008 and June 2009. pre-emptive response. The Government approved a 2009 revised budget four months into the year to implement a fiscal stimulus package. Fiscal stimulus has The Rp 73 trillion stimulus package (about 1.5 percent of GDP) was quickly been modest, but designed, approved and implemented. Although modest by international timely, with a focus standards, it is fairly typical of other regional economies, and widened the on tax cuts… budgeted fiscal deficit for 2009 from 1.0 percent of GDP to 2.5 percent of GDP (Figure 3). However, Indonesia‘s stimulus package is unusual in the heavy share allocated to tax cuts (Figure 4). Figure 3 The size of Indonesia’s stimulus plan is Figure 4 … but tax cuts make up a much larger share typical of other economies in the region … in Indonesia (percent of GDP) (share of tax cuts in stimulus packages) Singapore Indonesia China Korea Korea Singapore Philippines Philippines Indonesia Thailand Vietnam China Malaysia Vietnam Thailand Malaysia U.S. U.S. 0% 2% 4% 6% 8% 10% 0% 20% 40% 60% 80% 100% Source: World Bank staff estimates. … which are less The package does include modest increases in government spending in critical targeted but easier to areas such as infrastructure, but overall its impact on the poor and vulnerable is implement. largely indirect and likely to be small. The increase in social and poverty expenditures is particularly modest, especially given that Indonesia lacks the automatic stabilizers and social safety nets of many other countries. Measures to increase public investment remain constrained by the slow rate at which funds tend to be disbursed. These challenges limit the Government‘s ability to significantly expand spending as part of any stimulus package. Tax cuts, by contrast, are less targeted but are easier to implement. 5 Indonesia Public Expenditure Review Spending for Development Further stimulus with The current global downturn is likely to be unusually severe and the recovery greater targeting of the sluggish and protracted, according to the consensus forecast, so additional poor and near-poor policy responses by the Government could provide further support for the may be desirable. Indonesian economy. This should both mitigate the welfare effects of external developments — especially on the poor and vulnerable — and help consolidate and strengthen the expected recovery in 2010. This is possible without jeopardizing fiscal sustainability because Indonesia‘s budget deficit remains modest, public debt is relatively low and external financing remains sustainable. However, the lack of significant new social expenditure at a time of slower growth raises concerns about the potential welfare impacts in Indonesia and the prospect that poverty reduction may halt or be reversed. Such concerns strengthen the case for further policy responses by the Government to help support employment and social welfare objectives. The crisis has not, The crisis has not, however, changed Indonesia‘s development priorities. however, changed Despite a substantial government stimulus, Indonesia‘s debt level is expected to Indonesia’s remain around 33 percent of GDP in 2009. Thus, Indonesia remains in a development priorities. favorable fiscal position. If anything, addressing the fundamental development challenges — middle-income infrastructure services, better education, a viable social protection system — have become more urgent with the onset of the financial crisis and as the impacts of Indonesia‘s geographic and demographic transition manifest themselves. The next five years: Indonesia’s fiscal choices A unique opportunity Indonesia will have a unique opportunity to improve its development outcomes exists. over the next five years because its resources will almost certainly rise. Under a baseline or ―business-as-usual‖ scenario developed for this Report — which assumes that Indonesia continues to weather the global crisis as well as it has thus far and largely maintains existing fiscal policies — the annual budget is expected to increase beyond Rp 1,500 trillion (US$150 billion) by 2014, making the five-year plan a Rp 7,100 trillion (US$710 billion) package. Renewed growth of around 6 percent per annum, coupled with a modest recovery in oil prices and fiscal deficits averaging 1.2 percent of GDP would generate a real increase in total public resources of about 21 percent for the 2010-14 period compared with the previous five years. Moreover, because of a continued decline in debt as a share of GDP, fiscal space will expand even more. More spending on key Given Indonesia‘s current position, there is a strong case for spending more and sectors is necessary, spending better. Indonesia continues to suffer from major deficiencies, including but not sufficient. funding shortfalls, particularly in infrastructure, health and social protection. However, while the mobilization and allocation of resources to priority sectors and sub-sectors is necessary it is not sufficient to achieve development results. This report focuses on Indonesia‘s development needs and the financing options to meet those needs. However, the report does not attempt to provide new analysis on Indonesia‘s institutional challenges, instead drawing heavily on the wealth of existing analysis. Business as usual or a Indonesia‘s development needs, particularly in health and infrastructure, are big push? larger than might be expected for an emergent Middle-Income Country (MIC) with a track record of sound economic policies. Thus, a business-as-usual approach to fiscal policy would result in lost opportunities as Indonesia will only be able to fund a small portion of its development needs. Alternatively, Indonesia 6 Indonesia Public Expenditure Review Spending for Development could depart from this approach and make a big push to address its challenges and more fully realize its potential. A big push could include the ambitious targets of more than doubling public expenditure on health and social protection (from 1.2 percent to 3 percent of GDP) and doubling public investment in infrastructure (from 2 percent to 4 percent of GDP) over the coming five years. This would provide Indonesia with greater opportunities to upgrade its transport system and pay renewed attention to water, sanitation and irrigation, while at the same time embarking on an ambitious program to provide quality health services to all Indonesians. However, increased spending alone is not sufficient to improve outcomes. Thus, institutional, governance and regulatory reforms aimed at increasing the efficiency and effectiveness of public spending should also be a critical feature of a big push. A big push would To realize such a big push, the Government will need to make two fundamental require bolder policy fiscal choices. The first choice is about its spending priorities, which in turn will choices in order to influence the country‘s growth potential, and thus its resource envelope. A better spend existing big push will require a departure from past spending allocations, away from high resources …. allocations for energy subsidies and government administration and towards increasing the development focus of the budget. This alternative path would put more emphasis on the core sectors in which Indonesia is lagging, particularly infrastructure and health, while at the same time addressing the composition of the existing education and agriculture budgets. An important choice will also be whether to reallocate energy subsidies towards health insurance and other social protection programs. This is because the Government will simply not be able to fully finance all development priorities while continuing to spend over 10 percent of the budget on fuel subsidies, particularly if it embarks on bureaucracy reform involving a tripling or quadrupling of salaries for civil servants. … and expand the The second choice concerns the level of resources. The resource envelope can overall level of be expanded through increasing revenues — which depend on overall growth resources. and tax administration — and increasing borrowing. The Government will have opportunities to do either or a combination of both. It can build on its track record of expanding the tax base, while also expanding the fiscal deficit without increasing the current low level of debt to GDP. The Government could This report presents one big-push scenario combining options for reallocating mobilize existing resources with an expanded total resource envelope (Figure 5). In broad Rp 1,580 trillion in terms, the Government could mobilize Rp 850 trillion from reallocations, including extra resources for key reducing energy subsidies, and Rp 730 trillion from expanding tax revenues and priorities with a combination of bolder the fiscal deficit. This also assumes that the increase in spending on key policy choices. development priorities, particularly infrastructure, helps accelerate growth, which in turn also contributes to the increase in total resources. Moreover, while difficult to quantify, a concerted effort to improve efficiency across all areas of spending could yield large savings which could also be reallocated to development spending. In summary, a big push could mobilize at least Rp 1,580 trillion in extra resources for spending on key development goals and other priorities. 7 Indonesia Public Expenditure Review Spending for Development Figure 5 Bold choices to reallocate and expand resources would increase development spending Notes and sources: World Bank staff projections based on the business-as-usual and big-push scenarios. This could sharply If used well and accompanied by efforts to strengthen institutions and improve health governance, these resources could improve health services and expand social services, expand social protection and also begin to address major infrastructure deficiencies. It would be protection and start to enough to complete a major highway connecting Jakarta with Surabaya, double address major infrastructure access to safe water, sanitation and electricity, and substantially widen health deficiencies. insurance and social protection coverage in Indonesia (see Table 1 below and Chapter 3). There is also a strong Some of the extra resources could also be allocated to maintaining expenditure case for improving on other priority sectors, such as education and agriculture as a share of an allocations within the expanded budget. More importantly, however, the new Government has an education and opportunity to build on the recent fiscal expansions in these sectors to improve agriculture sectors. the use of resources within these sectors. For example, much of the increase in education resources could be used to improve the quality of teaching and increase enrollment rates in secondary schools. Options include scholarship programs and further improvements in teacher qualifications, together with a capacity expansion of secondary education. Meanwhile, making better use of teachers would improve efficiency and could yield significant savings. Furthermore, better geographic distribution is important for improving education outcomes at remote schools. In agriculture, the development impact would be greater if less was spent on fertilizer subsidies and more on research and development, extension services, irrigation facilities, and the development of higher-value agricultural products such as livestock and horticulture. 8 Indonesia Public Expenditure Review Spending for Development Bureaucracy reform is The current level of spending on government administration is high, at about also a government 14 percent of the national budget. However, this high level is not due to an priority, but salary excessive central Government payroll but mainly driven by sub-national increases could governments, particularly the high overheads for new districts (see Chapter 1). At potentially cost 1 percent of GDP. the same time there is broad agreement that Indonesia needs a competitive, competent and well-paid civil service. The Ministry of Finance has piloted a reform initiative that features substantial salary increases and a stronger performance orientation. This has received broad support and the Government is currently planning to extend this initiative to all ministries and other government institutions at the central level. This would more than triple the payroll and require at least Rp 370 trillion (or US$37 billion) in additional resources over the next five years — equivalent to around 1 percent of GDP. Table 1 Costing and financing a big push Incremental Incremental resource needs resources 2010-14* 2010-14* Key development goals and other priorities (Rp trillion) Financing options (Rp trillion) 1. Target of gradually doubling public expenditure 547 1. Reallocations from on infrastructure from 2% to 4% of GDP by 2014 334 lower-priority sectors o/w 10 million new electricity connections 374 o/w 10 million new water connections 80 2. Savings from reducing 517 o/w trans-Java highway 37 energy subsidies 2. Target of gradually increasing public Sub-total from better expenditure on health & social protection from 458 spending of existing 850 1.2% to 3% of GDP by 2014 resources o/w expansion of health insurance 218 o/w expansion of cash transfers 35 3. Extra revenue from 3. Maintaining spending on education and improving the efficiency of 420 205 agriculture as a share of the budget tax collections 4. Resources from Sub-total of increased spending on key 1,210 expanding the fiscal deficit 310 development goals by 1% per year Sub-total from increasing 4. Implementing bureaucracy reform 370 730 total resources TOTAL 1,580 TOTAL 1,580 Notes and sources: World Bank staff projections based on business-as-usual and big-push scenarios. *Incremental resources are relative to the business-as-usual scenario. A new decade, a new After many years of catching up with its Asian neighbors and the rest of the Government, a new world, Indonesia will enter the new decade from a position of economic and fiscal development strategy strength — one that is has never had before. This is why the new Government will have a unique opportunity to address Indonesia‘s remaining development challenges. But those challenges remain large and hard to address. It will demand a combination of more and better spending, as well as institutional change. The Government‘s new development strategy for 2010-14 will provide an opportunity to shape the prospects of the new Indonesia, as an emergent and dynamic middle-income country. 9 Indonesia Public Expenditure Review Spending for Development Chapter 1. A Decade of Public Spending, 2001-09 1.1 A decade of transition and development Indonesia has undergone a major transition both economically and politically over the past decade. Not only has the country overcome the shock and dislocation of the Asian financial crisis of the late 1990s but it has also transformed itself into one of the leading democracies in Southeast Asia. These changes contributed towards Indonesia’s attaining a public expenditure budget threshold of US$100 billion in 2008 — the first time in its history. With this level of resources at its disposal the Government has considerable scope to improve the lives of Indonesians through well-targeted and efficiently used development spending in the years ahead. Indonesia has Indonesia has continued to make excellent progress in consolidating its recovery continued to make from the Asian financial crisis a decade ago. In terms of economic growth, good progress, with a Indonesia did particularly well from 2004 to 2008. Per-capita GDP now exceeds recovery in economic pre-crisis levels and growth accelerated to a 10-year high of 6.4 percent in 2007, growth. followed by 6.1 percent in 2008. Overall, real GDP has been growing at 5 to 6 percent annually since 2004. In addition, Indonesia is weathering the 2008-09 global financial crisis relatively well, with GDP growth slowing to an estimated 3.4 percent in 2009 (see Chapter 2). The benefits of The ―big bang‖ process of decentralization in 2001 devolved substantial funds decentralization are and authority/responsibility to sub-national governments. This has created new starting to emerge. forms of decentralized participation in policy-making and has been underwritten by the implementation of direct elections at the local level. One of the consequences of this process is that local leaders are now being held more accountable by their constituents, with many incumbent leaders being replaced by the democratic process. The expectation is that this will encourage locally elected leaders to be more attentive to improving the quality of public service delivery. Indeed, modest signs indicate that this is now starting to occur. But there are several Indonesia has done less well in three crucial areas. First, despite the return to areas in which higher levels of economic growth, Indonesia‘s performance in reducing poverty Indonesia has done far has been disappointing and a large percentage of the population remains poor or less well: poverty highly vulnerable to falling into poverty. While poverty levels declined from reduction for one… 16.7 percent in 2004 to 14.2 percent in 2009, this is still far higher than the goal set in the Medium-term Development Plan (RPJM) 2004-09 of bringing poverty 2 levels under 10 percent by 2009. ….while job creation is Second, Indonesia‘s growth over the past decade has often been described as another. ―jobless growth‖, given the failure to translate higher growth levels into employment creation. Indonesia lags its neighbors in creating non-agricultural jobs and many Indonesians continue to work in the informal sector. Although open unemployment has fallen from a peak of 11.2 percent in 2005, it remains high, especially among the young. In 2008, over 40 percent of the workforce still derived its livelihood from low-productivity work in agriculture and related areas. Only 30 percent of the workforce appears to have shifted to higher-value-added activities, either as employees in the formal manufacturing and service sectors, 3 or as employers in organized enterprises. 2 Indonesia Poverty Assessment, World Bank, 2006. 3 Indonesia Jobs Report, World Bank, (forthcoming). 10 Indonesia Public Expenditure Review Spending for Development Progress towards Third, progress towards improving the provision of public goods and services has better services and been decidedly mixed. Despite significant increases in real levels of public development expenditure, human development outcomes have been uneven at best. This is outcomes has been partially explained by geographic and income-related disparities, together with mixed and Indonesia will miss some of its the relatively poor quality of health, water and sanitation, and education service MDG targets. delivery at the local level. Some indicators have seen little improvement over the past decade and, in a few cases, there has even been some regression. As a result, Indonesia lags behind most of its neighbors, particularly in the prevalence of child malnutrition, maternal mortality and access to water and sanitation systems. In addition, there is mounting evidence that Indonesia‘s environmental quality is deteriorating and its natural resources are being depleted uncontrollably. As a consequence, Indonesia seems destined to miss some of its Millennium Development Goals (MDG) targets, particularly in health, and water and sanitation. There have been Over the past few years, against the backdrop of Indonesia‘s transition and its several noteworthy efforts to address the country‘s development challenges, there have been changes in public several notable changes in public spending patterns. These can be summarized spending patterns in as follows: the past few years.  Fuel subsidies. There was a significant decline in fuel subsidies following the policy change in October 2005. However, this decline was later reversed by the rapid rise of global oil prices in 2007-08, but is expected to drop sharply again in 2009 following the fall in global oil prices. (Annex Table A1)  Transfers. Transfers to sub-national governments rose significantly in 2006. However, transfers have subsequently stabilized in real terms and may fall slightly in 2009 following the introduction of a ―burden-sharing‖ policy. (Annex Figure A.1)  Education spending. Education spending has continued to rise in nominal terms and is expected to be close to 20 percent of the total central government budget for the first time in 2009.  Government debt. Indonesia‘s reductions in the public debt-to-GDP ratio (to 33.1 percent at the end of 2008) and the associated reduction in debt servicing obligations have continued.  Spending on government administration. There has been a further steady rise in government administration spending, driven mainly by sub- national governments.  Spending on infrastructure and health. Finally, there has been a steady increase in resources allocated to both infrastructure and health, but spending levels nonetheless remain too low to meet the needs in both of these sectors. 11 Indonesia Public Expenditure Review Spending for Development 1.2 Discretionary expenditure and financing Indonesia’s progress in reducing the burden of public debt and its rising public revenues associated with economic growth have allowed the Government to expand discretionary expenditure. However, increases in discretionary spending have been used largely for subsidies and government administration, leaving less scope for development spending on public services for the poor. Subsidies, particularly for fuel, electricity and fertilizers, continue to dominate public spending. Meanwhile, despite lower levels of debt as a share of GDP, gross financing needs remain substantial and pose risks — highlighted during the global financial crisis in late 2008 — that could constrain discretionary spending. The government Total public expenditure continued to rise rapidly, at an average of 12 percent budget has continued annually in real terms in the three-year period from 2006 to 2008, with the budget to rise, increasing crossing the US$100 billion threshold (Rp 985.3 trillion) in 2008 for the first time. discretionary Sound fiscal management coupled with robust economic growth in 2006-08 development spending. helped to expand the scope for sustainable increases in development spending, which rose from about 8.6 percent of GDP in 2005 to about 9.8 percent in 2008. The expansion in The expansion of the Government‘s discretionary spending envelope (Box 1.1) discretionary spending has been boosted largely by Indonesia‘s strong record in reducing the burden of has been helped by public debt. This has been achieved by sustaining modest fiscal deficits and public debt reduction. supporting substantial real economic growth (Figure 1.1). Not only has this achievement reduced fiscal risks but, by reducing annual debt service obligations from 6.1 percent of GDP in 2001 to 3.9 percent in 2008, it has expanded the Government‘s capacity to provide resources for strategic investments in development. Box 1. 1 Fiscal Space and Discretionary Spending What do we actually mean by the terms ―fiscal space‖ and ―discretionary spending‖? The concept of fiscal space remains ambiguous and is frequently used in policy debates without much clarity as to its meaning. In this report we make use of Peter Heller‘s 2005 definition of fiscal space, which states that: ―…fiscal space can be defined as the availability of budgetary room that allows a government to provide resources for a desired purpose without any prejudice to the sustainability of a government‘s financial position.‖ * However, in this report we take the above definition a step further in order to differentiate between fiscal space at the central government level and at the sub- national government level. In terms of central government spending, we define fiscal space as being the total public spending envelope less interest payments, civil service salaries, and transfers to the regions. In terms of sub-national government spending, we define fiscal space as being the total public spending envelope at the sub-national government level less civil service salaries. Interest payments have not been included at the sub-national level, since at the present time sub-national government borrowing is negligible. Where is does occur it is largely borrowing by sub-national state-owned water utilities (PDAM). In this report we also use the term ―discretionary spending‖. We define discretionary spending as essentially the same as fiscal space, the major difference being that in this chapter we use discretionary spending to describe fiscal space in historical terms, i.e. looking back at previous fiscal years. What is potential fiscal space this year and next can no longer be described as ―space‖ when looking back in time. Most importantly, in our definition of fiscal space and discretionary spending subsidies are considered discretionary and therefore part of fiscal space, i.e. they are the result of government policy-making and within the realm of the government to alter if it so wishes. 12 Indonesia Public Expenditure Review Spending for Development Following Heller‘s definition, future fiscal space is defined as the existing discretionary spending plus the possibilities to increase the resource envelope through increases of revenues or borrowing (Chapter 3). * Heller, Peter S. (2005) ―Understanding Fiscal Space‖, IMF Policy Discussion Paper, Fiscal Affairs Department. Note that this is also the definition referred to and followed in the 2007 Indonesia Public Expenditure Review (World Bank, 2007). Source: World Bank and IMF. Nominal debt levels have increased modestly over the past decade by an average 3 percent annually from Rp 1,263 trillion (US$132bn) to Rp 1,640 trillion (US$151bn). However, Indonesia‘s debt burden has fallen dramatically as the nominal values of Indonesia‘s economic output and government revenue have increased. This led to debt to GDP falling from 90.9 percent in 2000 to only 33.1 percent at the end of 2008, while government revenue grew by an average 14 percent annually, creating a much larger pool of resources to service the stock of debt. Figure 1. 1 Indonesia has done well in reducing its debt burden Source: MoF, IMF-IFS and World Bank staff estimates. The increase in Higher economic growth and continuing improvements in tax administration in revenues has also recent years have contributed to the widening of discretionary expenditure. While helped the expansion tax revenues (excluding oil and gas) have maintained a steady upward trend of discretionary since 2001, oil and gas revenues (both tax and non-tax) have been more volatile spending. and are expected to fall sharply in 2009 reflecting the collapse of international oil prices. Tax revenues (excluding oil and gas) rose from 9.6 percent of GDP in 2001 to 11.7 percent in 2008 (Figure 1.2). Meanwhile, major reforms started in 2006 have led to a new tax threshold and lower marginal tax rates for all income 4 groups (encouraged by a so-called ―sunset policy‖ in 2008-09). These reforms have meant that the number of taxpayers has risen from 4.8 million in 2006 to 14.1 million as of May 2009, while tax revenues doubled from Rp 298.3 trillion in 2005 to Rp 571.1 trillion in 2008. 4 The ―sunset policy‖ is a tax amnesty policy implemented by the Government (i.e. Directorate General of Taxation) to improve tax registration and compliance. Through this policy the administrative penalties of previous non-compliance are waived, encouraging tax registration and more accurate tax reporting. 13 Indonesia Public Expenditure Review Spending for Development Figure 1. 2 Tax revenues (excluding oil and gas) are steadily growing Note: The lines refer to the RHS axis (% of GDP), while the bars refer to the LHS axis (Rp trillion). Source: MoF and World Bank staff estimates. But increases in Falling (non-discretionary) debt service payments and sustained economic discretionary spending growth have helped to expand discretionary expenditure for development. have been used for However, the decline in debt service payments as a share of government spending on expenditure has been more than offset by renewed expansion of subsidies and 5 subsidies and government high levels of spending on government administration (Figure 1.3). administration, limiting Consequently, while discretionary spending has increased since 2006, a large the increase in share has been consumed by energy subsidies, resulting in a stagnation of the resources available for share available for development spending. In 2008, subsidies consumed more development. than half of central government discretionary spending, significantly curtailing the ability of the central government to increase its allocation of funds to Indonesia‘s development priorities (Figure 1.4). Oil and gas revenues are strongly correlated with spending on energy subsidies. Increasing oil prices in the second half of 2005 and the first half of 2008 resulted in increased energy subsidy spending, as well as increased revenues from oil and gas. With revenues from oil and gas continuing to increase, subsidies represent a lost opportunity to use these revenues more efficiently. In 2005 and 2008, energy subsidies consumed more than two thirds of oil and gas revenues. Furthermore, compounding this lost opportunity crude oil production in Indonesia 6 has fallen by one-third since 2000. Going forward, if this downward production trend continues, the Government will only be able to afford energy subsidies at their current levels at a very high fiscal cost. 5 Subsidies here include energy subsidies (fuels and electricity), tax credits, PSO, and others. In 2008, energy subsidies represented more than 90 percent of total subsidies. Subsidies for agricultural sectors (fertilizer, seedling, and food) are categorized as sectoral spending on agriculture, and hence also considered as part of discretionary expenditure. 6 World Bank (2008). Black Hole or Black Gold? The Impact of Oil and Gas Prices on Indonesia‘s Public Finances, Policy Research Working Paper 4718. 14 Indonesia Public Expenditure Review Spending for Development Figure 1. 3 Discretionary spending has not increased Figure 1. 4 In 2008, the Government allocated over 50 as much as expected due to growing energy subsidies percent of discretionary spending to subsidies 16 Central (Subsidies) Central (Sectoral spending) 14 Province Discretionary spending (% of GDP) Districts 12 Transfers to Subsidies*, Region, 29.9% 51% 10 Discretionary 8 Spending 51% Infrastructure, 10% 6 Education 9% Health 3% 4 Salaries, 11.5% Agriculture*, 8% 2 Others 20% Interest 0 Payments, 8.9% 2001 2002 2003 2004 2005 2006 2007 2008 2009* Source: MoF and World Bank staff calculations. Subsidies introduce Not only have subsidies been a major drain on government resources, they also uncertainty in budget increase uncertainty in budget planning and implementation due to the difficulties preparation. of estimating their final magnitude. Over the past five years, fuel subsidies have been more than 30 percent higher than the amount budgeted for, the sole exception being 2006 (Figure 1.5). High oil prices in 2007-08 reversed the gains achieved by the reduction in fuel subsidies implemented in late 2005. Despite the 2005 policy change that led to a sharp increase in domestic fuel prices, further increases in global oil prices over 2007 and the first half of 2008 resulted in subsidies once again exceeding expectations and continuing to dominate government spending (Figure 1.5). Despite the adjustments made in the domestic fuel price over the past decade, Indonesia has continually struggled to catch up with the global full price — at least until the collapse of international prices at the end of 2008 (Figure 1.6). As oil prices slowly recover, so the gap is widening once again. Figure 1. 6 Until the price collapse in 2009, Indonesia Figure 1. 5 Subsidies introduce uncertainty in budget has struggled to catch up with global fuel prices planning despite domestic adjustments Source: MoF and World Bank staff estimates. Note: The US price is the average US retail price converted into rupiah. Source: U.S. Department of Energy; CEIC; World Bank staff calculations. 15 Indonesia Public Expenditure Review Spending for Development Fiscal risks remain Despite sound fiscal management and small deficits in recent years, fiscal risks despite conservative persist as Indonesia‘s gross government financing needs rose sharply in 2006 fiscal policies. and 2007 (although they declined significantly in 2008 due to additional revenue from high oil prices driving the budget deficit down). However, anticipating lower revenue in 2009 due to the global economic downturn and higher spending to cope with the impact of the global recession, the Government has opted to increase the budget deficit to 2.5 percent of GDP. This has led gross financing needs to spike to close to 5 percent of GDP, or over Rp 250 trillion in 2009 (Figure 1.7). The rise in gross financing needs coincides with the current global financial crisis and with it a reduction in easy access to large amounts of credit. Indonesia was particularly hard hit by higher borrowing costs in late 2008, as domestic bond yields rose sharply. Ironically, despite faster debt reduction, Indonesia experienced a far sharper rise in borrowing costs than Thailand or the Philippines at the peak of the crisis (Figure 1.8). However, since then Indonesia‘s borrowing 7 costs have fallen and are now more in line with its regional peers. The Government is While limiting the expansion of its debt stock, the Government has switched its switching to a greater financing strategy towards greater reliance on the market, especially domestic reliance on market, sources of funds, and away from official external finance. The value of external and Islamic, finance. official debt has moved between US$60bn and US$70bn over this decade, slightly lowering its share in the total stock of debt from nearly 50 percent to about 44 percent. Meanwhile, the stock of outstanding conventional US dollar bonds has grown to US$14.2bn, while that of rupiah bonds rose from US$67bn in 2000 to a peak of US$86.5bn in mid-2008, and by mid-2009 was a little over US$70bn (Figure 1.7). Such large financing needs, and the Government‘s increasing reliance on the domestic bond market to fill them, create an exposure to the market‘s changing conditions. In the face of this exposure, the Government has set up an innovative facility that will support its spending 8 priorities during periods of adverse market conditions. In addition, as the Government has increased its reliance on the bond market, so it has increased its access to the bond market and its capacity to manage its portfolio of outstanding bonds. It is now working to better match its offerings with the instruments (in terms of maturity and rate structure) preferred by the market. It is also developing the domestic sukuk (Islamic bond) market and also accessing global sukuk finance. 7 Historically, in times of significant financial turbulence Indonesia has been perceived as being a relatively high-risk borrower, more risky than its peers such as Thailand and the Philippines. This negative perception may be explained by several factors: Indonesia‘s yield started high after the Asian financial crises due to a hangover from the capital flight and subsequent collapse of the rupiah experienced during the 1998 crisis; Indonesia‘s reserve-to-debt ratio is lower than its peers; and, given oil price volatility, energy subsidies could put pressure on the government budget or conversely domestic increases in fuel prices could cause an inflationary spike. 8 This is a contingent financing facility to the value of US$5.5 billion supported by a number of development partners. 16 Indonesia Public Expenditure Review Spending for Development Figure 1. 7 Financing needs have increased and constitute Figure 1. 8 Indonesia’s borrowing costs remain a fiscal risk high and exceed those of its peers 5 250 % 21 Total (% of GDP; RHS) 4 18 200 Rph Trillions 15 Indonesia 3 % of GDP 150 Official external 12 (LHS) 9 100 2 Philippines Bonds 6 (LHS) 50 1 3 Thailand Budget deficit (LHS) 0 0 0 Jan Apr Jul Oct Jan Apr 2004 2005 2006 2007 2008 2009* 08 08 08 08 09 09 Source: MoF and World Bank staff estimates. Source: National exchanges, via CEIC. 1.3 Spending across sectors With almost 40 percent of total public expenditure going towards subsidies and government administration, Indonesia is missing an opportunity to use its discretionary spending as well as it might. The result is that the Government has far less scope than it could have for increasing spending on education, health, infrastructure and agricultural services. The fiscal space The fiscal space created over the past decade could have been better invested. created in the past While spending on education has increased significantly and is expected to soon decade has not been reach 20 percent of the central budget as mandated by the constitution, used as well as it subsidies have also increased significantly, as well as spending on government might. administration. In 2008 alone, the combined share of spending on subsidies and government administration accounted for almost 40 percent of the total budget. Health and infrastructure, two sectors in which the Government is under- spending, have only seen marginal increases in their share of budget allocations over the past decade (Figure 1.9). 17 Indonesia Public Expenditure Review Spending for Development Figure 1. 9 What Indonesia has spent its public resources on during the past 9 decade Notes and sources : World Bank staff estimates based on MoF data. *Data on sub-national spending between 2007 and 2009 are estimates. **Data for Central Government spending in 2008 are preliminary realizations, and 2009 data are based on fiscal stimulus revised budget (APBN). Spending on education Spending on education has increased steadily over the past decade, signaling has increased steadily the Government‘s desire to prioritize the sector. Education is also a high priority over the past decade. for local governments, absorbing around one third of government spending at the sub-national level. This compares favorably with some of Indonesia‘s regional peers (such as the Philippines and Vietnam), but Malaysia and Thailand still spend more on education as a share of GDP than Indonesia. Health has been Despite being identified as a national priority, the resources allocated for the identified as a priority, health sector continue to be low, at less than 1 percent of GDP. As a share of but resource total spending, health spending in Indonesia is significantly lower than its peers allocations fail to in the region, with only Vietnam having a similar share of its budget allocated to reflect this. 10 health. Infrastructure Total infrastructure investment (private and public) contracted significantly in the spending is only now aftermath of the 1997-98 Asian financial crisis, from over 7 percent pre-crisis to starting to recover just above 2 percent of GDP in 2000. Public spending on infrastructure is only from the Asian crisis now starting to recover, at about 2 percent of GDP. This level of spending of 1997-98. remains inadequate to meet recognized needs and is very low not only by Indonesian pre-crisis standards but also compared with other countries in the region. 11 Spending on Spending on government administration continued to rise until 2006 and has government since remained relatively stable as a share of total government spending, at administration about 14 percent (Figure 1.9). This includes an extremely large share of sub- continued to rise until national government administration expenditure, at about 22 percent for 2006 and has been relatively stable since. provinces and about 61 percent for districts/cities of the total national spending on government administration (average between 2001 and 2009). 9 The spending categories presented in this Figure represent on average 83 percent of total government spending. The energy subsidies category includes some spending on non-energy subsidies (around 10 percent of total on average). The agriculture category includes spending on - agriculture related subsidies. 10 World Bank (2009). Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia. 11 Government administration comprises personnel spending, materials, maintenance, travel, investment, and others. 18 Indonesia Public Expenditure Review Spending for Development 1.4 Spending on key sectors Spending patterns within the four sectors focused on in this report all tell somewhat different stories. Spending on education continues to rise, albeit at a slower pace, and primary school enrollments are now almost 100 percent. But more emphasis is needed on maintaining school infrastructure and improving teacher quality. Health spending has risen more slowly and Indonesia’s health outcomes are relatively poor compared with its regional peers. Meanwhile, although spending on infrastructure is rising, the pace of the increase is too slow to develop infrastructure services to a level that is commensurate with a new middle-income country. Finally, despite increases in public spending on agriculture in recent years this has failed to increase agricultural productivity Education In line with Indonesia’s constitutional commitment, the Government has made education a priority in the past few years and in 2009 is on the verge of realizing the target of devoting 20 percent of public spending towards the sector. This increased level of spending has been successfully reflected in improvements in net enrollment rates at all levels of schooling. However, more progress is needed to improve human resources, teaching quality and better maintain school infrastructure, together with raising transition rates to secondary education. In addition, significant geographic and income inequities are still apparent. The Government has National public spending on education rose from 2.8 percent of GDP in 2001 to made investing in 3.1 percent in 2006 and further to 3.3 percent in 2008 (Figure 1.10). The share education a major of education spending reached around 15 percent of the total national budget by priority and is 2006, and is expected to reach close to 20 percent of total expenditures in allocating the sector 12 2009. In constant 2007 prices, education spending has surged from Rp 71 an increasing share of its budget. trillion in 2001 to a projected Rp 160 trillion in 2009. Despite the prioritizing of Indonesia‘s education sector in recent years, human resources and the quality of teaching still require significant improvement, while more resources need to be allocated towards maintaining school infrastructure and supporting poorer students to transition from the primary to the secondary level. Geographic and income inequalities also remain significant, hindering disadvantaged groups from benefiting from the prioritization of education spending. A large share of In 2006, 56 percent of public education expenditures were spent at the sub- spending goes 13 towards salaries. national level. District/city governments are the main spenders, accounting for 51 percent of total spending, while sub-national governments account for just over 5 percent (Figure 1.10). But although districts/cities now spend the majority of the education budget, this spending is mostly on non-discretionary routine expenditure. At the district/city level over 96 percent of routine expenditure went towards salaries in 2006. 12 The Constitutional Court (No. 13/PUU-VI/2008) obliged the Government to meet the ‗20 percent rule‘ in 2009. This 20 percent rule refers to 20 percent of total central government expenditure including estimates of education spending transferred to and spent by sub-national government. 13 This is the most recent year for which sub-national education expenditure data are available. 19 Indonesia Public Expenditure Review Spending for Development Figure 1. 10 Education spending continues to rise 180 4.0% 40% central, province, and district expenditures Education spending as a share of national, IDR Trillions (constant 2007 prices) 160 3.5% 35% District 140 3.0% 30% 120 2.5% 100 25% 2.0% 80 National 20% 1.5% 60 1.0% 15% 40 Province 20 0.5% 10% 0 0.0% Central 5% 2001 2002 2003 2004 2005 2006 2007* 2008* 2009** Central Province District Share of GDP 0% 2001 2002 2003 2004 2005 2006 2007* 2008* 2009** Notes and sources: World Bank staff estimates based on MoF data. *Data on sub-national spending between 2007 and 2009 are estimates. **Data for Central Government spending in 2008 are preliminary realizations, and 2009 data are based on fiscal stimulus revised budget (APBN). Increased spending More than half of the combined education spending by central, provincial, and levels in education are district governments is directed to the primary school level. Funding allocations reflected in at this level tend to be pro-poor, given that a larger proportion of the poor attend improvements in net primary school. This has resulted in an expansion in enrollment rates. The net enrollment rates at all schooling levels. primary school enrollment rate increased from 92.4 percent in 2000 to 93.8 percent in 2007/08. The net enrollment rate for junior secondary education also increased, rising from 61.7 percent in 2000 to 66.6 percent in 2007. The senior secondary enrollment rate also increased, albeit at a rather more modest rate, from 39.5 percent in 2000 to 44.6 percent in 2007/08. However, Indonesia‘s enrollment rates for secondary and tertiary levels still lag its regional peers such as Malaysia and the Philippines (Table 1.1). Table 1. 1 Comparison of key regional education outcome indicators, 2007 Indicator Indonesia Malaysia* China Philippines Vietnam School enrollment, primary (% net) 93.8 99.9 n.a. 91.4 n.a. School enrollment, secondary (% net) 55.8 68.7 n.a. 60.4 n.a. School enrollment, tertiary (% gross) 17.0 28.6 21.6 28.5 n.a. Student-teacher ratio, primary 19 16.9 18.3 34.6 20.7 Student-teacher ratio, secondary 13 17.0 17.5 37.3 22.7 Source: Susenas, 2007 and World Bank Development Data Platform. * 2005. A low allocation for Relatively little money is allocated towards educational operations and O&M is reflected in maintenance (O&M). In 2006, most sub-national governments — which are poor schooling responsible for O&M of education infrastructure — allocated less than 0.4 infrastructure. percent of their routine expenditure to O&M. Most routine expenditure is absorbed by salaries (more than 96 percent of sub-national budget routine expenditure and more than 75 percent of provincial routine expenditure), financed through the General Allocation Fund (DAU) transfer. This lack of funding for O&M is reflected in the poor condition of education infrastructure. In 2007/08, about 23 percent of classrooms at the primary school level were classified by the Ministry of National Education (MoNE) as badly damaged, and a further 25 percent were classified as slightly damaged. The condition of schools at the junior and senior secondary levels is better, but even there an estimated 20 and 10 percent of classrooms, respectively, were classified as damaged in 2007/08. 20 Indonesia Public Expenditure Review Spending for Development While improving, a The need for better qualified teachers remains. At the primary and junior higher share of secondary levels, only 18 percent and 67 percent of teachers, respectively, have teachers should have the necessary qualifications (Law No. 19/2005). Most teachers at the primary the minimum legal level only graduated from senior secondary school (SMA) or are Diploma II qualifications. graduates. The Government is tackling the problem through its law on teacher certification by providing incentives for teachers to obtain certification, including salary increases. However, with such a large share of spending already going towards salaries, if salaries of teachers are to be raised then there is also a need to address another issue, namely that Indonesia still has too many teachers. Salary increases without consideration of the total number of teachers will have major budget implications. Significant efficiency gains relieving pressure on the budget could be made by increasing student-teacher ratios (STR) closer to internationally accepted norms. Current STRs of 19:1 for primary, 13:1 for junior secondary, and 13:1 for senior secondary education are very low and well below the generally accepted STR of 30:1. Unequal teacher Another important issue is the unequal distribution of teachers between urban, distribution is non-remote rural and remote rural areas. The adverse impact on teaching quality undermining education of this unequal distribution is compounded by the higher proportion of under- quality. qualified teachers in remote rural areas. In urban and non-remote rural areas, 68 and 52 percent of schools, respectively, have an over-supply of teachers, while schools in remote rural areas have teacher shortages and lower teaching quality 14 levels, with 66 percent of schools being under-supplied. Transitioning from Inequalities between income levels persist in net enrollment rates (NER), primary to secondary particularly at the secondary education level. While primary NERs are close to is hard for the poor… universal across income groups, there is a marked difference in enrollment rates in junior secondary education. In 2007, the junior secondary NER for the richest quintile was 75.1 percent, while for the lowest income group the rate was only 52.4 percent. The rates decline to 69.4 and 20.7 percent, respectively, for the highest and lowest income groups at the senior secondary level, highlighting low transition rates from primary to junior secondary schooling (Table 1.2). With the education budget close to achieving the mandated 20 percent threshold, there is now scope to increase investment in secondary education to improve transition rates through pro-poor scholarships. Table 1. 2 Net enrollment rates by quintile, 2007 Junior Senior Quintile Primary secondary secondary Poorest (%) 91.9 52.4 20.7 Quintile 2 (%) 94.4 64.6 32.9 Quintile 3 (%) 95.3 69.7 43.2 Quintile 4 (%) 94.4 75.6 57.0 Richest (%) 93.2 75.1 69.4 Source: Susenas, 2007. …while inequalities As for regional disparities, NERs in primary education range from around 80 across regions and income levels persist percent in Papua to about 95 percent in Central Kalimantan. At the junior in net enrolment rates. secondary level, the rate varies from 43 percent in Papua to 83 percent in 14 These data use the current allocation formula for teachers, which allocates a minimum of nine teachers to each primary school. 21 Indonesia Public Expenditure Review Spending for Development Yogyakarta, and at the senior secondary level from around 28 percent in NTT to 62 percent in Yogyakarta. These large differences in secondary school net enrollment rates call for renewed attention towards secondary education at the district level, particularly in lagging regions. This does not necessarily mean that more funds are needed, as there are large variations in outcomes for a given 15 level of district expenditure across districts. Health Health spending has been increasing since the Asian financial crisis in 1997-98, but at a slower pace than other development sectors, such as education and agriculture. With public spending less than 1 percent of GDP, health outcomes in Indonesia trail behind those of its regional peers. These poor health outcomes are compounded by significant disparities between regions. Management of the health workforce is hampered by inflexibility at the local level, while the quality of health workers is lagging. Encouraging equitable deployment remains difficult in the absence of incentive-based provider-payment systems. Health infrastructure is often inadequate and many community health centers lack essential medication. In addition to these challenges, Indonesia is undergoing a major demographic and epidemiological transition that will require a new and more expensive type of healthcare, especially in view of government plans to achieve universal health insurance coverage. At constant 2007 prices, total public spending on health more than doubled from Health spending has risen, but remains low about Rp 16 trillion in 2001 to over Rp 36 trillion in 2008 (Figure 1.11). Although by regional public spending on health has risen significantly and stood at around 0.9 percent comparisons. of GDP in 2008 (equivalent to 4 percent of total public expenditure), the level of 16 spending remains low by international comparison. In contrast to the education sector where districts dominate spending, the provinces spend a higher share of their budgets on health at just under 9 percent since 2007. Conservative estimates indicate that only about 26 percent of the population has Health insurance some form of health insurance (Susenas 2007). About 14 percent of the coverage is low in Indonesia. population is covered by the Government's Jamkesmas program targeting the poor, 6 percent is covered under Askes (the civil service health insurance scheme), 2.4 percent by Jamsostek (the state-owned pension fund providing social security protection for those in the formal sector), and 3.6 percent by other forms of insurance. The Government has recently extended coverage of Jamkesmas to over 76.4 million people (about one third of the population) and plans to eventually cover the entire population (World Bank, 2008; 2009 and see Chapter 3 for further details). 15 World Bank, 2009, ―Investing in Indonesia‘s Education at the District Level‖, Jakarta: The World Bank 16 World Bank, (2009a), Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia. 22 Indonesia Public Expenditure Review Spending for Development Figure 1. 11 After rising until 2007, health spending has stagnated and remains inadequate 45 1.2% 10% central, province, and district expenditures Province Health spending as a share of national, IDR Trillions (constant 2007 prices) 40 9% 1.0% 35 8% District 30 0.8% 7% 25 6% 0.6% 20 5% National 15 0.4% 4% 10 3% 0.2% 5 2% Central 0 0.0% 1% 2001 2002 2003 2004 2005 2006 2007* 2008* 2009** 0% Central Province District Share of GDP 2001 2002 2003 2004 2005 2006 2007* 2008* 2009** Notes and sources: World Bank staff estimates based on MoF data. *Data on sub-national spending between 2007 and 2009 are estimates. **Data for Central Government spending in 2008 are preliminary realizations, and 2009 data are based on fiscal stimulus revised budget (APBN). Health outcomes are While important improvements have been made in life expectancy and child relatively poor mortality, maternal mortality remains high, as does child malnutrition (Table 1.3). compared with There are also significant disparities in health outcomes across regions, with Bali regional peers. and Java generally outperforming the eastern and more remote provinces. While it is true that every effort needs to be made to ensure that existing resources are used as effectively as possible to generate the maximum impact on health outcomes, it is also clear that the sector needs more resources. Table 1. 3 Comparison of key regional health outcome indicators Country/Region Life Under-five Infant Maternal Child expectancy mortality mortality mortality malnutrition rate Rate rate per 100,000 rate per 1,000 per 1,000 population (2000-06) (%) births births (2005) Bangladesh 64 69 52 570 41 China 72 24 20 45 7 India 64 76 57 450 44 Indonesia 68 34 26 420 23 Malaysia 74 12 10 62 -- Philippines 71 32 24 230 21 Sri Lanka 75 13 11 58 23 Thailand 70 8 7 110 -- Vietnam 71 17 15 150 27 East Asia and Pacific 67 44 35 286 24 (EAP) Lower middle-income 68 45 34 233 11 countries (LMC) Note: EAP and LMC numbers are unweighted country averages. Source: World Development Indicators. Malnutrition rates have Although Indonesia reduced child malnutrition from 38 percent in 1990 to stagnated since 2000 25 percent in 2000, malnutrition rates have stagnated since, with the latest and maternal health measure for 2005 at 23 percent (WDI, 2009). Maternal health is another policy outcomes are some of area requiring increased attention and resources. Based on past trends and the the worst in the region. latest estimates for maternal mortality, whether applying those from 2007 IDHS (228) or the 2005 WHO estimates (420), Indonesia will almost certainly fail to achieve its fifth Millennium Development Goal of 102 deaths per 100,000 live births (World Bank, forthcoming, maternal health assessment). 23 Indonesia Public Expenditure Review Spending for Development Indonesia faces In 2006, Indonesia had only 16 doctors per 100,000 people, one of the lowest serious challenges ratios in Asia and the world. This is even lower in rural and remote areas. In with regard to health contrast, Indonesia has relatively more midwives, who are also well distributed workforce quality and thanks to the previous bidan-di-desa policy of placing midwives in every village. deployment, the latter especially in remote However, many of these midwives, similar to a large number of Indonesia‘s areas. nurses, are poorly qualified and provide care (curative and diagnostic services) that they are not legally permitted to provide. Nonetheless, they tend to provide such care because they are often the only health workers available in remote areas. Absenteeism is also a Up to 40 percent of doctors have been found to be absent from their posts major issue, without valid reason during official public working hours. Proper oversight exacerbated by ―dual mechanisms are still weak, leading to poor accountability to district governments practice‖ and the limited authority of and few effective sanctions. Lack of incentive-based provider-payment methods, local governments. especially in the public sector, may also be a contributing factor. In addition, 17 since urban areas generally allow for more dual practice opportunities, this may have contributed to a shortage of health workers in rural areas. O&M expenditure is In 2006, only 7 percent of the total central government health budget went under-funded, which is towards O&M, while more than 11 percent was spent on travel costs. Likewise, a particular problem at spending at the sub-national level on O&M stood at 1.2 percent of the total the sub-national level. routine budget (and the development budget included an O&M component). Sub-national governments spent the largest budget allocation shares on routine spending and particularly on personnel expenditures, which accounted for 78 percent. This low level of resources for O&M has made it difficult for health personnel in districts to carry out their supervisory responsibilities adequately. Health spending for In general, public subsidies for secondary healthcare are not pro-poor in secondary healthcare Indonesia. The poorest quintile of the population received less than 10 percent of tends to be regressive. all hospital subsidies in 2001 and 2006. Subsidies for non-hospital care were distributed roughly proportionately in 2001 although not in 2006. The top two quintiles, or the richest 40 percent of the population, received 65 to 70 percent of all hospital subsidies in 2001, although this declined slightly to about 60 percent in 2006.18 Increases in health Despite demographic and epidemiological transitions, coupled with budget spending are pressures arising from plans to expand universal health insurance for the poor, warranted and a the health sector is accorded a relatively low priority in the budget. One option number of policy would be to reduce fuel and other subsidies in favor of targeted increases in options exist to expand the resource health spending. Other options include cross-subsidization within a universal envelope. health insurance system, earmarking taxes (for example taxes on cigarettes), and improved efficiency in the use of existing resources. 17 Dual practice: In the 1980s, when the relatively low salaries of public health workers made it difficult for them to keep practicing their profession, the government — rather than restricting levels of employment and raising salaries — allowed staff to maintain private practices outside of their normal working hours. An estimated 65 percent of publicly employed health staff have second jobs. 18 World Bank, (2009b), Health Financing Study. 24 Indonesia Public Expenditure Review Spending for Development 19 Infrastructure Investment in infrastructure has still not fully recovered to pre-Asian crisis level and trails well behind Indonesia’s regional peers. Levels of investment in the energy sector have been particularly low, resulting in blackouts across the country. Investment in the provision of clean water and sanitation has actually fallen in real terms since the 1990s, making it unlikely that Indonesia will achieve its MDG 2015 targets. Total investment in Total investment (public and private) in infrastructure remains very low, at a mere infrastructure remains 4.1 percent of GDP in 2007 (Figure 1.13), which is still below the 6-7 percent very low… level achieved prior to the Asian financial crisis of 1997-98. This contrasts with total investment levels of about 10 percent of GDP by some of Indonesia‘s regional peers, such as China and Vietnam. Although public spending on infrastructure has been increasing steady since 2006, led principally by the sub- national government, the pace of the increase is too slow (Figure 1.12). As a share of GDP, public spending has stagnated at just under 2 percent, compared with 1.3 percent in 2001. However, at constant 2007 prices total public spending on infrastructure has doubled, from Rp 43.5 trillion in 2001 to a projected Rp 84.7 trillion in 2009. Poor levels of infrastructure development are impeding Indonesia‘s competitiveness by raising the cost of doing business. While overall investment in infrastructure has been relatively low compared with the mid-1990s, the decline has been particularly severe in the energy and water sectors. Inadequate power supply presents a persistent risk and limits efforts to expand access, while continued widespread lack of access to safe water and improved sanitation pose major health risks. Figure 1. 12 Infrastructure public spending continues to rise, but too slowly Infrastructure spending as a share of national, central, 25% 90 2.5% Province IDR Trillions (constant 2007 prices) 80 province, and district expenditures 20% 70 2.0% District 60 1.5% 15% 50 40 National 1.0% 10% 30 20 0.5% 10 5% Central 0 0.0% 2001 2002 2003 2004 2005 2006 2007* 2008* 2009** 0% Central Province District Share of GDP 2001 2002 2003 2004 2005 2006 2007* 2008* 2009** Notes and sources: World Bank staff estimates based on MoF data. *Data on sub-national spending between 2007 and 2009 are estimates. **Data for Central Government spending in 2008 are preliminary realizations, and 2009 data are based on fiscal stimulus revised budget (APBN). 19 Spending on infrastructure includes: transportation, irrigation, water and sanitation and sewage systems, energy, and telecommunications. Irrigation trends and developments are discussed in Agriculture section. 25 Indonesia Public Expenditure Review Spending for Development …although transport At the same time, the transport sector recovered quickly from the crisis and as a has recovered to pre- share of GDP is now similar to its pre-crisis level of 1.8 of GDP (Figure 1.13). crisis levels. However, the potential benefits of an expanded expressway network and urban mass transport systems are likely to require significant additional resources beyond current investment levels (see Chapter 3). Figure 1. 13 Total (public and private) investment in infrastructure 8 8 7 7 6 6 5 % of GDP 5 % of GDP 4 4 3 3 2 2 1 1 0 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Central Sub-national SOE Private Transport Irrigation WSS Energy Telecom Source: MoF; annual reports for state-owned enterprises; World Bank‘s PPI database for private investment, excluding cancelled projects. Levels of investment in With electricity demand growing at over 6 percent annually over the past decade the energy sector have and very little system expansion, the system now has inadequate reserve been particularly low, capacity. The Government has placed a high priority on encouraging investment resulting in in the electricity sector over the past two years. Since early 2006, the widespread blackouts Government has been pursuing a ―crash program‖ to procure 10,000MW of coal- across Indonesia. fired power plants to be operated by PLN, the state-owned electricity company (PLN). Around 3,600MW of capacity is expected to be commissioned by the end of 2010, with the remainder of the crash program expected to be delivered by 2012. Simultaneously, PLN has been pursuing additional private investment in electricity, with independent power producers (IPPs) expected to make an increasingly important contribution to capacity after 2012. However, the task of raising finance for this new investment is problematic given that electricity tariffs have not increased since 2003, when the average tariff was brought to the pre- crisis level of 6.8 cents/kWh. Because of the high level of oil in PLN‘s fuel mix, during much of 2008 the fuel cost alone exceeded the average tariff. Spending on the Public expenditure on the provision of safe water and improved sanitation provision of clean remains particularly low, rising from Rp 5 trillion in 1997 to Rp 5.7 trillion in 2008 water and sanitation in real terms. This is reflected in the relatively low access to improved sanitation remains particularly and safe water in Indonesia, with only 18 percent of the population having low. access to piped water and 2.5 percent connected to a sewerage system. Despite major urbanization (a trend that is only set to continue), investment in storm water and sanitation systems in urban areas has been minimal. The effects of this have been severe, shown most clearly in the now annual floods that afflict Jakarta. This has exacerbated traffic congestion in the city, as well as the risk of diseases such as diarrhea, cholera, typhoid and mosquito-borne ailments. As such, unless there is a major push in these areas in the next medium-term development plan (RPJM) period, Indonesia is very unlikely to reach its adopted 2015 MDG target for expanded access to safe water of 86 percent, or for improved sanitation of 73 percent. 26 Indonesia Public Expenditure Review Spending for Development Road congestion is Insufficient investment in roads and mass transit systems has resulted in high hindering Indonesia’s rates of congestion within and between Indonesia‘s major cities, a key problem competitiveness. which is reducing efficiency and competitiveness. Currently, 43 percent of the road network in Java and an even higher percentage in Jakarta are congested, causing long travel times and higher costs. Lack of road Another issue is the lack of investment in maintaining the road network. In 2006, maintenance has been the national road network of 35,000 km included 81 percent in good or fair a significant cause of condition, 10 percent in poor condition, and 9 percent in bad condition. The inefficiencies. percentage of national roads in good or fair condition improved from 81.6 percent to 83.3 percent between 2006 and 2008, but is still below the 87 percent seen in 2000. More than one third of provincial roads and more than half of district roads are in poor condition. The under-funding of the O&M budget has led to deterioration in the quality of the road network, which is particularly problematic at the sub-national level. The budget for infrastructure O&M stood at 2.1 percent of total routine sub-national expenditure — below the level required to maintain existing infrastructure. In contrast, personnel expenses accounted for 69 percent of sub-national routine budgets (World Bank, 2007). The Ministry of Public Works‘ Directorate General of Highways has an ambitious goal to have no roads in poor or bad condition by 2010, an objective that will depend to a large extent on extra budget being made available for maintenance spending. Agriculture While public spending on agriculture has increased in recent years, agricultural productivity has not grown at the same rate and valued-added per worker has stagnated. Fertilizer subsidies have become one of the largest spending items, but its beneficiaries are mostly better off farmers. Meanwhile, spending on irrigation has fallen in the past 10 years and R&D spending remains low. Agriculture provides Agriculture plays an important role in Indonesia‘s economy, providing income to two-thirds of employment to over 40 percent of the workforce and income to two-thirds of the the country’s poor. country‘s poor. Increases in agricultural productivity are credited with driving poverty reduction during the 1970s and 1980s. Even now agriculture continues to be the key livelihood for many and a key source of poverty alleviation. 20 Spending on In 2001-08, total public spending on agriculture increased by an annual agriculture has average of 16 percent in real terms (Figures 1.14). Meanwhile, over the same increased, far more period the share of Government spending on agriculture doubled from than increases in 2.7 percent to 5.6 percent, surpassing 1 percent of GDP in 2008 due to production. increased spending on agriculture subsidies. Over the same period, production increased by an average of 3 percent annually, but per-worker value-added remained stagnant. 20 For the purpose of this analysis, national agriculture expenditure includes expenditure of agriculture function/sector within central and sub-national budget (agriculture, fisheries, and forestry), central government subsidies closely related to agriculture (e.g. seeds, fertilizers, and food subsidies). As noted earlier, spending on irrigation is discussed in this section though its spending is classified as infrastructure 27 Indonesia Public Expenditure Review Spending for Development Figure 1. 14 Agriculture spending has been growing, but driven mainly by subsidies 50 1.4% 7% central, province, and district expenditures District Spending on agri. as a share of national, IDR Trillions (constant 2007 prices) Central 45 Province 1.2% 6% Province Central Non-subsidies 40 Central Subsidies 35 1.0% Share of GDP 5% National 30 0.8% 4% 25 0.6% 20 3% District 15 0.4% 2% 10 0.2% 5 1% 0 0.0% 2001 2002 2003 2004 2005 2006 2007* 2008* 2009** 0% 2001 2002 2003 2004 2005 2006 2007* 2008* 2009** Notes and sources: World Bank staff estimates based on MoF data. *Data on sub-national spending between 2007 and 2009 are estimates. **Data for Central Government spending in 2008 are preliminary realizations, and 2009 data are based on fiscal stimulus revised budget (APBN). Spending on In 2008, the Government spent Rp 53 trillion on agriculture (excluding forestries agriculture is being and fisheries), of which half of it was directed towards supporting private goods. increasingly directed The fertilizer subsidy accounted for half that budget (Rp 15.2 trillion) (Annex towards subsidizing Table A.2), as well as other subsidies for seeds, food security (Raskin), and private goods, rather than providing public agriculture credit. This means that by 2008 the allocation for agriculture subsidies goods. 21 was four times its 2001 level (Figure 1.14). Although significantly larger than 2001, the budget of the Ministry of Agriculture (MoA) (Rp 8 trillion in 2008) grew at a slower pace and channeled 42 percent of its resources (Rp 3.7 trillion) towards a ―social aid‖ component. By allocating a large Social aid has become an umbrella for many projects that transfer resources to budget share through farmers through farmers‘ associations, and religious and community groups. It social aid spending, was scaled up to improve project implementation by avoiding cumbersome the MoA is subsidizing 23 procurement procedures. More detailed analysis reveals that these resources private inputs even mostly funded private inputs (seeds and agricultural equipment). 24 In 2007, further. about Rp 1.1 trillion was spent on rice and soya bean grants, falling to Rp 395 billion in 2008. In the 2009 budget, the grants for seeds and agriculture equipment account for Rp 314 billion. Other directorates also use social aid spending to provide private inputs such as water pumps, cattle and other goods. The fertilizer subsidy The manufacture of urea (a non-organic fertilizer) uses natural gas as the has grown to become primary input. While gas prices drove global urea prices up by 50 percent in one of the largest 2007-08, spending on fertilizer subsidies increased by 142 percent, suggesting spending items, but its beneficiaries are that production costs were not the sole driver of spending. Findings from a World mostly non-needy Bank incidence analysis on fertilizer subsidies also show that most rice farmers. 22 producers benefited from the subsidy program, regardless of the size of their 21 Public goods are defined as goods that are i) non excludable, i.e. it is not possible to prevent consumption from those who did not contribute for their provision, and ii) non rival in consumption, i.e. individual consumption does not reduce the availability of the good for consumption by others. In our use of the term "public good" we include goods that may be prone to congestion, common pool goods, like irrigation. 22 For more information on the incidence of the fertilizer subsidy using BPS household data, see World Bank 2009, policy note: Fertilizer Subsidies in Indonesia (forthcoming). 23 In 2006-08, the social aid component accounted for 40 percent of the budget of the MoA. 28 Indonesia Public Expenditure Review Spending for Development paddies or rice gross revenues. This means that the impact of fertilizer subsidies is regressive because those rice farmers with larger paddies and/or higher revenues received greater allocations of public resources. Indonesia’s fertilizer Most of the fertilizer subsidy goes towards urea production. A more balanced use subsidy is directed of a blend of fertilizers to provide a range of chemicals is likely to have a greater towards urea impact on yields. Several studies exploring the productivity of rice in Indonesia production. have found that farming intensity in some areas has led to soil-fatigue as a result 25 of the overuse of urea fertilizer. Public goods are a There are trade-offs to consider between the provision of public goods and the driver of agriculture subsidization of private inputs. Governments that heavily subsidize private goods productivity. do so at the expense of deepening investment in public goods that have far higher returns. Investments in rural roads, irrigation, extension services or research are the main drivers of agricultural productivity. Thus, these public goods also have a multiplier effect and generate positive externalities for society as a whole. Conversely, subsidizing private inputs often represents simply a transfer of resources, with little impact on consumption or on production. When there is increased input use, there is often overuse and negative externalities, e.g. chemical pollution in the case of fertilizers. Irrigation spending has In the 1990s, the focus on irrigation area expansion neglected maintenance of decreased in real the existing infrastructure and this was compounded by the lack of mechanisms terms over the past for cost recovery and inadequate local engagement in management. Recent decade. improvements in management through water users‘ associations are partly credited for the increase in rice production in 2007 and 2008. However, this is unlikely to lead to major increases in irrigation coverage, as only the public sector is well-positioned to carry out these investments. Agricultural R&D Public spending on research and development (R&D) was only 0.22 percent of remains too low. the agriculture output in 2003. After adding in private sector agricultural R&D investments, the intensity with which Indonesia invested in agricultural 26 research, at 0.27 percent was at the level of Laos (0.24 percent), and much lower than Malaysia (1.92 percent) or the Philippines (0.46 percent). 24 The Gen Secretary and the DG of Food Crops are responsible for half of the spending classified as social aid with about one-third of this component being directed to the Rural Agribusiness Development Program (PUAP), which accounted for Rp 1 trillion in 2008. 25 Pantjar and Timmer 2008, Adiningsih 1997. 26 R&D expenditure as a share of total agriculture output. 29 Indonesia Public Expenditure Review Spending for Development The MoA allocates an The MoA allocates a large and increasing share of resources to increase the increasing share of production of food crops. Often this focus comes at the expense of other high- resources to boost value products with great export potential, as shown by a decreasing share in the food crop production. budget of DG Horticulture from 6 percent in 2003 to 3 percent in 2009. In addition, spending in other directorates (Land and Water Management, Agricultural Research or the General Secretary) is often guided by the objective of increasing productivity of food crops, particularly rice. Better irrigation Rice production has increased in recent years, allowing Indonesia to become contributed to self-sufficient once again and thereby avoid some of the pressures experienced increasing rice by many of its neighbors as food prices spiked in 2008. Preliminary analysis production in 2008. suggests that this success stems from increased cropping intensity on existing farmland. While rice yields and farmland statistics reflect little change, improved irrigation management (in addition to relatively good weather), allowed rice farmers to increase the number of harvests in 2008. Government Administration Spending on government administration has been increasing since 2001, but seems to have stabilized at about 14 percent of total national expenditure since 2006. The bulk of this expenditure is spent by sub- national governments (83 percent). The transfer of civil servants from the center to sub-national governments and the mushrooming number of new districts after decentralization largely explain this trend at the sub-national 27 level. At the central level, a Bureaucracy Reform Initiative started in 2006 and led by the MoF is expected to cover all ministries and other central government institutions by 2011. Spending on 28 Spending on government administration continued to rise until 2006 and has government remained relatively stable as a share of total government spending since then, at administration has about 14 percent (Figure 1.15). The substantial increase between 2001 and 2006 stabilized at 14 percent of national expenditure was largely driven by sub-national governments, with the rapidly rising number of since 2006. districts driving the increase. 27 The Bureaucracy Reform Initiative is the official name of a civil service reform designed by and implemented within the MoF. It aims for enhanced services, improved efficiency and performance and reduced corruption by reforming organizational structures and standard operating procedures and by improved HRM policies and practices. The Bureaucracy Reform Initiative is currently being rolled out to some additional 15 central Government institutions and eventually all central institutions are expected to implement the reforms. 28 ―Government apparatus‖ is a line item in the national budget. It comprises personnel spending, materials, maintenance, travel, investment, and others. In this report we refer to ―government apparatus‖ as government administration, although the definition remains the same. 30 Indonesia Public Expenditure Review Spending for Development Figure 1. 15 Spending on government administration has been increasing, mainly driven by sub-national governments 45% Spending on govt. administration as a share of 140 3.5% IDR Trillions (constant 2007 prices) Province national, central, province, and district 40% 120 3.0% 35% 100 2.5% District 30% expenditures 80 2.0% 25% 60 1.5% 20% National 40 1.0% 15% 10% 20 0.5% Central 5% 0 0.0% 2001 2002 2003 2004 2005 2006 2007* 2008* 2009** 0% Central Province District Share of GDP 2001 2002 2003 2004 2005 2006 2007* 2008* 2009** Notes and sources: World Bank staff estimates based on MoF data. *Data on sub-national spending between 2007 and 2009 are estimates. **Data for Central Government spending in 2008 are preliminary realizations, and 2009 data are based on fiscal stimulus revised budget (APBN). Indonesia’s civil Indonesia‘s civil service has expanded rapidly in recent years, with numbers service has grown rising from 3.6 million in 2006 to just over 4 million in 2008 (excluding the armed rapidly in recent years, forces [TNI], the national police [Polri], and honorarium staff) (Table 1.4). This driven by the represents a ratio of 60 citizens per civil servant which, despite the recent formation of new 29 districts. increase, is still comparable with other middle-income countries in Asia. Nonetheless, the expansion in numbers has exerted pressure on the national budget and consumed a growing share of discretionary spending at the expense of other priorities. The rapid growth in the civil service largely reflects the establishment of new sub- national governments as part of Indonesia‘s ongoing decentralization. The number of districts/cities has increased from 336 in 2001 to 486 in 2009. In addition, the increase also reflects the current policy of allowing unskilled 30 honorarium staff to be converted into civil servants. The trend has been compounded by weak controls within the bureaucracy, with no mechanisms available to shut down or merge redundant institutions or to reduce staff numbers. Table 1. 4 Civil-service employment has grown rapidly in recent years June 2006 Dec 2007 June 2008 National civil service 3,633,216 4,067,201 - Central level 851,785 856,107 - Provincial level 291,849 310,355 - Regional level 2,489,582 2,900,739 - o/w teachers* 1,491,633 1,468,715 1,629,635 Honorarium staff 920,000 Army - - 400,000 Police - - 363,000 29 The ratio in Thailand is also 60:1 and in South Korea 50:1. 30 These auxiliary personnel are contracted to state institutions under the general labor law. These auxiliary personnel occupy a range of largely unskilled and low-paid positions that the civil-service regulations cannot accommodate and are excluded from many of the benefits available to civil servants. 31 Indonesia Public Expenditure Review Spending for Development Notes and source: BKN and World Bank staff estimates. *December 2006 figures. Central government The most comprehensive reform concept is the Bureaucracy Reform Initiative has initiated developed and implemented by the MoF starting in 2006. This initiative aims to bureaucracy reform in address both corruption and efficiency shortcomings by reforming: (i) an attempt to improve organizational structures; (ii) standard operating procedures; and (iii) human performance of central government resource management policies and practices, including application of institutions. performance requirements and salary increases. The initiative has led to a successful restructuring of the MoF and contributed to increasing tax and customs revenues, faster budget disbursements and reduced levels of corruption. Due to inflexibility in the national civil service regulations, the increased remuneration has been provided through a substantial new allowance. Thus, officials at the MoF now receive basic pay and all previous allowances, as well as a new special allowance linked to revised job descriptions. This has resulted in as much as a fivefold increase in net salaries of some MoF officials. However, the budget for such allowances needs to be approved annually on an ad hoc basis by parliament. The MoF initiative was endorsed by the Government and parliament in 2007 and is gradually being expanded to other institutions at the central government level. The State Audit Agency (BPK) and the Supreme Court have also received extra budget allocations and are currently implementing the initiative, while an additional 15 institutions are scheduled to be added in 2009. The Government‘s plan is for all of the more than 70 central institutions to be implementing the initiative by the end of 2011 (see Chapter 3 for details). 1.5 Subsidies Increasing government expenditure on subsidies, particularly energy subsidies, has limited the availability of discretionary spending on development sectors. Higher oil prices in 2006-08 reversed the gains achieved in reducing the burden of subsidies implemented in late 2005. Due to their poorly targeted nature, energy and agricultural subsidies are generally highly regressive. The major subsidies Not only did fuel subsidies rise again in 2006, but electricity subsidies surged 31 go towards fuel, even more rapidly in 2007 and 2008. This was the result of Indonesia‘s over- electricity and reliance on oil-burning power stations and no change in electricity tariffs. agriculture. Although fuel remains the dominant subsidy item, electricity subsidies are now the second largest item, while agricultural subsidies also increased significantly year-on-year in 2008, with spending on fertilizers more than doubling. Spending on agricultural subsidies (fertilizer, seeds and food) now represents 3 percent of 32 total national expenditure, at Rp 28.3 trillion. Consequently, between 2006 and 2008 subsidies as a share of the total agriculture budget rose sharply from 16 to over 28 percent (Figure 1.16) ( Annex Table A.1). 31 Since 2006, subsidies for diesel fuel for power generation have been shifted from Pertamina (state- owned oil company) to PLN (state-owned power company). Thus, PLN purchases diesel fuel at the market price from Pertamina and charges the price difference to the government as a subsidy. Before 2006, PLN used to purchase diesel fuel for power generation at a subsidized price from Pertamina. 32 World Bank (forthcoming), Indonesia Agriculture Public Spending and Growth, Policy Note. 32 Indonesia Public Expenditure Review Spending for Development Figure 1. 16 Subsidies remain large and the most volatile budget item IDR Trillion % of GDP and (current prices) total exp 300 30 250 25 Others 200 20 Agriculture Electricity 150 15 Fuels 100 10 % of total exp 50 5 % of GDP 0 0 2004 2005 2006 2007 2008* 2009** Note: * 2008 are preliminary realization figures, ** and 2009 are budget figures (APBN). Source: World Bank staff estimates based on MoF data. 33 Subsidies are Fuel, electricity and agricultural subsidies are regressive, largely benefiting the regressive. wealthy. The regressive nature of fuel subsidies can be seen from a benefit incidence based on the 2007 Susenas household survey (Figure 1.17). Defining the lowest income quintile as poor, more than 90 percent of fuel subsidies benefit the non-poor. Even the subsidy on kerosene is regressive: it is often argued that the significant kerosene subsidy is justified on the grounds that it is the main fuel product consumed by the poor. While it is true that the poor do consume more kerosene than other fuel, Susenas data also reveal that kerosene consumption increases with income level, with the only exception being the richest dectile, for whom kerosene appears to be an inferior good (Annex Section A1). Figure 1. 17 Incidence of fuel subsidies, 2007 Figure 1. 18 Regressive electricity subsidies, 2005 Rp.trillion Subsidies go mostly to the richest 1.4 Share of fuel subsidy received by households in each consumption decile 50% 1.2 40% 1.0 0.8 30% 0.6 20% 6600VA 0.4 2200VA 10% 1300VA 0.2 900VA 450VA 0% 1 2 3 4 5 6 7 8 9 10 - Poor Household consumption decile Rich 1 2 3 4 5 6 7 8 9 10 Souce: Susenas 2007 and preliminary World Bank calculations Poorest Richest Sources: World Bank calculations from Susenas 2005 and 2007. 33 World Bank (2008), Black Hole or Black Gold? The Impact of Oil and Gas Prices on Indonesia‘s Public Finances, Policy Research Working Paper 4718, p17; and World Bank (2007), Indonesia Public Expenditure Review 2007, p15. 33 Indonesia Public Expenditure Review Spending for Development Electricity subsidies are also regressive, albeit to a lesser degree than fuel subsidies. In 2005, the richest dectile received 44 percent more in subsidies than the poorest dectile. However, the subsidy that go towards the lowest voltage category of 450VA is progressive, while most of the regressive nature of electricity subsidies comes from the four other categories in the range 900VA to 6,600VA (Figure 1.18) 1.6 Budget Execution Budget execution remains challenging and spending patterns continue to be skewed towards the end of the year, particularly in goods and services, and capital spending. This disrupts infrastructure investment and causes quality issues as implementation is rushed at the end of the year. However, 2008 saw a slight improvement as a result of government steps to speed up disbursement. Although improved The execution of the Indonesian budget follows a perverse disbursement pattern: since 2005, budget spending is particularly slow at the start of the fiscal year (Q1); then expenditures execution has been accelerate after July and August when parliament finishes its revision; this is characterized by slow followed by a spending rush in the final three months (Q4). This delayed and and back-loaded disbursements. skewed disbursement pattern reflects rigidities in the budget execution framework and institutional constraints across the cycle. These include highly detailed budget documentation, cumbersome revision procedures, major mid- year revisions, and procurement bottlenecks. Nonetheless, there has been progress in budget execution and a decline in the spending pressures in Q4, particularly reflected in the 2008 budget (Figure 1.19). In general, the end-year pressures were more acute in two budget items: the goods and services component and the capital budget, both of which require lengthy procurement processes. In the past four years, The capital budget is particularly skewed towards the final months of the year roughly half of the and is often below the initial budget. In 2005, 54 percent of total capital capital budget was investment was disbursed in December, improving to 35 percent of the budget by spent in Q4. 2008. Furthermore, overall realization of the capital budget was 12 percent short of the initial budget in 2008, highlighting the complexity of the existing institutional bottlenecks that affect the budget process. Figure 1. 19 Total budget disbursement, 2005-08 Figure 1. 20 Total capital expenditure, 2005-08 100% Monthly Disbursement 2005 100% 100% 100% Monthly Disbursement 2005 90% Monthly Disbursement 2006 90% Monthly Disbursement 2006 Monthly Disbursement 2007 Monthly Disbursement 2007 80% Monthly Disbursement 2008 80% Monthly Disbursement 2008 Cumulative Disbursement 2005 Cumulative Disbursement 2005 70% 70% Cumulative Disbursement 2006 Cumulative Disbursement 2006 60% Cumulative Disbursement 2007 Cumulative Disbursement 2007 54.3% 60% Cumulative Disbursement 2008 Cumulative Disbursement 2008 50% 50% 41.2% 40% 28.9% 40% 25.6% 36.1% 30% 34.9% 23.7% 30% 20% 20.5% 20% 10% 10% 0% 0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: MoF, World Bank. Sources: MoF, World Bank. A skewed spending Given that infrastructure projects require multi-year financial planning and cash 34 Indonesia Public Expenditure Review Spending for Development pattern disrupts flow certainty throughout the year, this back-loaded disbursement has created infrastructure uncertainty of funding in the implementation of the capital budget. Also, because investment and project of single-year budgeting, the process of procuring a project could not be rolled implementation, and into the following budget year. Thus, contractors cannot easily plan for multi- raises concerns over the quality of year projects and often rush to deliver by year end, compromising quality. The spending. lack of continuously flowing funds throughout the year results in some projects being implemented without adequate resources to support them. The first quarter of In Q1 2009, cumulative spending stood at close to 13 percent of the total budget. 2009 showed progress This was an improvement on the 10 percent registered in Q1 2008 and was in speeding up the mostly driven by accelerated capital spending, which reached 10.3 percent in disbursement cycle. Q1 2009 compared with only 4 percent of Q1 2007. The social assistance component also registered an increase in disbursement over previous years as a result of the Government‘s scaling-up of the National Community Empowerment Program (PNPM). Also, spending on the general election in April 2009 was an important disbursement driver in Q1 (Figure 1.20). Government has taken The Government has taken several steps to improve budget execution in recent positive steps to years: address disbursement  Timely issuance of budget execution documents. Since 2007, budget delays. execution documents (DIPAs) have been issued in early January (i.e. the beginning of the fiscal year). Previously, DIPAs could be delayed if the relevant parliamentary commission failed to complete its budgetary review before the beginning of the year.  Early procurement before the fiscal year starts. A move in 2008 to allow procurement procedures to start as early as October has helped to accelerate the execution of the capital budget. However, this will have an even greater impact once resources are allocated to support this early procurement process. Supporting this step is the issuance of a circular by DG Treasury, enabling disbursement by previously appointed officers (those listed on the DIPA document) in cases where no replacements have been identified for the new fiscal year. The public A self-assessment by the National Public Procurement Office found that: (i) procurement reform Indonesia‘s legal framework for public procurement should be strengthened by agenda remains anchoring it with an overarching consolidated and comprehensive national public significant and a major sector procurement law; (ii) there was a need for a capacity building strategy determinant in improving budget and the creation of a procurement function in implementing agencies; (iii) less execution than 5 percent of private-sector suppliers participated in public-sector performance. procurement and that their capacity was usually weak. In addition, collusive practices were common amongst bidders; and finally, (iv) while appropriate anti- corruption provisions are included in the legislation, there is a need for better procurement audits, improved implementation of sanctions, and a review of the compliant-handling mechanism. 35 Indonesia Public Expenditure Review Spending for Development 1.7 Decentralization 34 Over the past decade Indonesia has implemented one of the most ambitious decentralization programs of modern times. This has greatly benefited Indonesia’s poorer regions and has led to a new situation today in terms of public spending: the issue is no longer to transfer more resources to poor regions, but instead to help them spend the resources they now have wisely. Ten years after the ―big bang‖ In 1999, Indonesia enacted one of the Indonesia‘s ―big bang‖ decentralization came into effect on January 1, 2001. As a most far reaching result, sub-national governments are now managing some Rp 364 trillion in reforms of inter- public funds, which amounts to more than one third of Indonesia‘s total public governmental relations spending, and more than half of key sectoral spending (education, health, in any large country. infrastructure and agriculture). In fact, when excluding interest payments and subsidies, spending by central and sub-national governments is now almost equal. While transfers have been increasing since 2001, so have the number of provinces and districts. At the start of decentralization Indonesia had 30 provinces and 336 districts managing Rp 92 trillion. Today Indonesia has 486 districts and 33 provinces managing Rp 364 trillion (Table 1.46). Table 1. 5 A decade of decentralization 2001 2004 2009* Provinces (#) 30 33 33 Districts/cities (#) 336 434 486 Total expenditures (Rp trillion, real) 163 220 294 Total expenditures (Rp trillion, nominal) 92 151 364 Source: World Bank decentralization database, MoF, and MoHA. Note: * 2009 expenditures figures are budget. Number of districts/cities does not include six administrative districts within DKI Jakarta. Over the past decade, Indonesia‘s decentralization has gone through three distinct periods (Figure 1.21):  ―Big bang‖ decentralization and initial consolidation (2001-05). In January 2001, Indonesia‘s sub-national governments took over primary responsibility for managing public services, and received more than a twofold increase in resources.  Second ―big bang‖ (2006-08). Against a background of rising oil and gas revenues in 2006, the central government increased transfers to sub-national governments by almost 50 percent, mainly benefiting Indonesia‘s poorest provinces. In 2007 and 2008, the government maintained this high level of transfers.  Reduction in transfers (starting in 2009). In 2009, for the first time central government transfers, and thus resources at the sub-national level, declined in real terms. This was due to a combination of a national revenue shortfall stemming from the global financial crisis and a new policy of sharing the 34 For a more in-depth analysis of Indonesia‘s decentralization achievements and challenges, see Fengler/Hofman 2008; for a more technical assessment of Indonesia‘s fiscal transfer system, including the transfer formula see World Bank 2007 (Spending for Development). 36 Indonesia Public Expenditure Review Spending for Development 35 burden of subsidies with sub-national governments. Figure 1. 21 Transfers to sub-national governments have stabilized since 2006 400 40 Without "burden sharing policy" Transfers as share of 350 35 total expenditure (%) Share of total central govt exp and GDP (%) 300 30 Nominal 250 25 Trillions Rupiah Real (constant 2007 prices) 200 20 150 Transfers 15 as share of GDP (%) 100 10 50 5 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 Revenue Sharing DAU DAK Special Autonomy Fund & Adjust. Fund Total transfers (nominal) Total transfers without burden sharing policy Share of transfer of total expenditures Transfers as share of GDP Source : Ministry of Finance and World Bank staff estimates. Equalization has worked and most poor regions have benefited Poor regions, The transfer system is now designed such that poorer regions, particularly those especially in eastern in eastern Indonesia, benefit more than richer regions. As a result, Indonesia is Indonesia, have addressing its wide socio-economic disparities, and this process of equalization benefited. has improved since 2005. Today, poorer regions receive substantially higher transfers per-capita than they did in 2005, when the transfer system was already tilted in their favor (Figure 1.22). 35 The main instrument of sub-national finance is the General Allocation Fund (Dana Alokasi Umum) which represents 26 percent of Indonesia‘s domestic revenue pool. Prior to 2006, the share of DAU of the total revenue pool was 25 percent (2001-03) and 25.5 percent (2004-05). The revenue pool was defined as: total domestic revenues – revenue sharing. In 2009, this definition was changed. The revenue pool is now defined as: total domestic revenues – revenue sharing – subsides. As a result, the total amount of resources transferred to sub-national governments will fall by a further 26 percent of the value of subsidies. 37 Indonesia Public Expenditure Review Spending for Development Figure 1. 22 Poorer regions continue to benefit more than richer regions 6 6 DAU Per capita 2006 (Rph Million) DAU Per capita 2008 (Rph Million) y = 76199x + 217297 y = 42393x + 347135 5 R2 = 0.3574 5 R2 = 0.2654 4 4 3 3 2 2 1 1 0 0 0 5 10 15 20 25 30 35 40 45 0 5 10 15 20 25 30 35 40 45 Poverty Headcount 2008 (%) Poverty Headcount 2005 (%) Source: World Bank staff estimates. 38 Indonesia Public Expenditure Review Spending for Development The second big bang There are two reasons behind this pronounced increase in transfers to and the phasing out of Indonesia‘s poorer regions. First, the 2006 second ―big bang‖ (including the the ―hold harmless‖ improvement of DAU formula) benefited the poor regions while the resource-rich rule explain why poor regions experienced no noticeable increase in their DAU allocations (see PER regions have benefited. 2007). Second, in 2008 the government phased out the ―hold harmless‖ rule, which until then had ensured that richer provinces could sustain the previous year‘s level of transfers. With the phasing out of the ―hold harmless‖ rule, richer districts and provinces experienced substantial declines in transfers (Annex Figure A1). As a result of these two adjustments to Indonesia‘s fiscal decentralization architecture, resources are now more equitably distributed across districts. Spending for development in the regions Today, the main In the past, sub-national governments had difficulty spending their resources on decentralization priority sectors. This shortcoming was compounded by the substantial increase challenge is not to in transfers in recent years. Provinces and districts spent about one third of their transfer resources to resources on themselves. This is a substantial increase on the early years of poor regions but to help them spend their decentralization when spending on government administration — which includes resources effectively. core administrative services but excludes the salaries of teachers, nurses and doctors — was already very high. Since 2003, spending on government administration has overtaken education as the leading sector. Although increasing in real terms, the share of spending on education declined from 31 percent in the early years of decentralization to 25 percent in 2006, while the share of spending on infrastructure increased from 16 percent in 2001 to 21 percent in 2006 (Figure 1.23). Figure 1. 23 Government administration remains the largest spending item by sub- national governments 35% Government Apparatus 30% Share of total sub-national expenditure (%) Education 25% 20% Infrastructure 15% Others 10% Health 5% Agriculture 0% 2001 2002 2003 2004 2005 2006 2007* Notes and sources: World Bank staff estimates based on MoF data. *Data on sub-national spending between 2007 and 20 are estimates. **Data for Central Government spending in 2008 are preliminary realizations, and 2009 data are based on f stimulus revised budget (APBN). The growing number The rapidly rising number of districts is behind the rising level of spending on of districts has been a government apparatus. Since the start of decentralization, the number of districts major factor in has significantly increased from 336 to 486 (2009). New districts spend a large increased spending on 39 Indonesia Public Expenditure Review Spending for Development government portion of their budgets on setting up new administrative structures. Significant administration. administrative expenditure goes towards capital spending and covers items such as office buildings, equipment and cars. It is estimated that the average cost of setting up a new district between 2001 and 2005 was Rp 9.1 trillion, money that 36 could have been used for development spending. Sub-national governments have Sub-national governments have had difficulty spending the resources they 37 struggled to spend receive. By the end of 2008, reserves held by sub-national governments were their resources. substantial and provided significant additional discretionary expenditure (Figure 1.24). Accumulated sub-national savings amounted to Rp 71 trillion (1.6 percent of GDP) as of December 2008. As administrative capacities rise, sub-national governments could utilize these resources over time to expand spending and improve services. A recent study by the Decentralization Support Facility (DSF) suggests that these substantial accumulated savings are unplanned. There are three main reasons behind these high cash surpluses: (i) under-estimation of revenue, (ii) under-spending of budget, and (iii) under-financing (limited use of 38 operational surplus). Figure 1. 24 Sub-national government savings have stabilized at a high level and could provide additional spending capacity 120 3.5 Kabupaten/Kota (IDR Trios) 3.0 100 Province (IDR Trios) % GDP 2.5 80 IDR Trillions % of GDP 2.0 60 1.5 Kabupaten/Kota 40 1.0 20 0.5 Province 0 0.0 Nov Jan Jun Jan Jul Mar Apr Mar Feb Aug Sep Feb Oct Dec May Nov. Nov. Nov. Nov. Nov. Jan. Jun. Jul. Jan. Jun. Jul. Jan. Jun. Jul. Jan. Jun. Jul. Jan. Jun. Jul. Feb. Mar. Apr. Feb. Apr. May. Aug. Sep. Dec. Mar. May. Aug. Sep. Dec. Feb. Mar. Apr. May. Aug. Sep. Dec. Feb. Mar. Apr. May. Aug. Sep. Dec. Feb. Mar. Apr. May. Aug. Sep. Dec. Oct. Oct. Oct. Oct. Oct. 2003 2004 2005 2006 2007 2008 2009 Source: World Bank staff estimates. 36 DSF (2007), Costs and Benefits of New Region Creation, Jakarta. 37 Sub-national accumulated saving or reserve is defined as any type savings in the banking sector owned by sub-national government (provinces and districts). Source of data is Bank Indonesia (www.bi.go.id). 38 DSF (2008), Increases in Regional Government Surpluses: An Empirical Analysis. 40 Indonesia Public Expenditure Review Spending for Development Box 1. 2 Reshaping Indonesia’s economic geography Indonesia is one of the most diverse countries in the world and living standards range from developed-country standards to entrenched poverty. Population density, economic activity and poverty also vary greatly: Java is one of the most densely populated islands in the world, while Papua is one of the least densely populated. Poverty rates range from less than 3 percent in the cities of Denpasar (Bali) and Bekasi (West Java) to more than 50 percent in Manokwari (West Papua) and Puncak Jaya (Papua). In Indonesia, 90 percent of the population lives in Java and Sumatra, and 90 percent of Indonesia‘s economic activity takes place in these two main islands. Indonesia is thus a case of strong economic concentration and confirms the World Bank‘s 2009 World Development Report (WDR) finding that economic growth will always be 1 unbalanced (World Bank, 2009). However, following the theme of the 2009 WDR, Indonesia‘s development can still be inclusive because the off-Java/Bali regions receive 63 percent of Indonesia‘s inter-governmental transfers, despite having only 40 percent of the population and generating 41 percent of its economic activity. High economic density in Java/Bali Indonesia's population is heavily concentrated: Indonesia‘s fiscal decentralization is helping to the islands of Java/Bali are home to 60 percent of the counterbalance the country‘s economic concentration on total population. Java/Bali by transferring proportionately more funds to off- Java/Bali regions. Note: Provincial size shows the proportion of provincial Note: Provincial size shows the proportion of provincial and population relative to national population. district total revenues. Source: World Bank, 2009. World Bank Development Report. 41 Indonesia Public Expenditure Review Spending for Development Chapter 2. Indonesia in the Current Economic Downturn 2.1 Indonesia’s economy has been impacted by the crisis by less than most Indonesia is in a position of relative economic strength despite the impact of the global financial crisis. This is largely thanks to its broad-based growth that has avoided over-reliance on exports. The share of output that Indonesia exports is actually the smallest of the major Southeast Asian economies. Indonesia entered 2009 Indonesia‘s growth accelerated to a 10-year high of 6.3 percent in 2007, and with a strong continued at 6.1 percent in 2008 despite the sharp slowdown in the global economy. economy. Real GDP has been growing at a rate of 5 to 6 percent annually since 2002. In 2005, real per-capita GDP for the first time exceeded the high reached just prior to the Asian financial crisis in 1997, and by early 2009 was more than one-fifth higher (Figure 2.1). Figure 2. 1 Per-capita GDP is now one-fifth above pre-crisis levels and growth has picked up 16% Real GDP grow th rate (LHS) GDP per capita index (RHS) 120 12% 115 8% 4.7% 5.4% 5.0% 5.7% 110 3.8% 4.4% 4.7% 4% 105 -13.1% 0% 100 0.8% 5.5% 6.3% 6.1% -4% 95 -8% 90 -12% 85 -16% 80 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Sources: BPS via CEIC, and World Bank. Indonesia’s growth In recent years, Indonesia‘s growth has been relatively broadly-based and less has been relatively reliant on exports than many other Asian economies (Figure 2.2). The share of broadly based. Indonesia‘s output that is exported is the smallest of the major economies in Southeast Asia, and the growth of this share has not been particularly fast (Figure 2.3). Similarly, Indonesia‘s tradeables production industries (in contrast to the production that is not easily tradable, such as utilities or government services) contributed about one-third of Indonesia‘s output growth in the past five years, similar to Malaysia, but otherwise the smallest contribution amongst the Southeast Asian economies. Furthermore, several tradeables industries that had been drivers of Indonesia‘s growth before the 1997-98 Asian financial crisis have stagnated in recent years. For example, petroleum refining output has shrunk at an annual average of 2 percent over the past four years, while production in the labor-intensive textiles, footwear and furniture industries has failed to grow in this period. 42 Indonesia Public Expenditure Review Spending for Development Figure 2. 3 Indonesia’s exports make up a relatively smaller share of the economy, and have not expanded as rapidly as in many other economies in Figure 2. 2 Indonesia’s growth has been relatively the region broadly based across expenditure components (exports share of GDP and percentage point change in GDP (annual real GDP growth and percentage point contributions) share) 12% Change in exports' Aggregate share of GDP: 9% GDP Malaysia -3.5% 6% 3% Thailand 10.7% 0% 2003 Taiwan 17.4% -3% -6% Korea 2008 13.0% Net exports -9% Residual Philippines -11.7% -12% Investment Gov't consump'n Indonesia 8.1% -15% Private consump'n -18% India 6.4% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 0% 40% 80% 120% Sources: BPS via CEIC, and World Bank. Sources: National statistical authorities via CEIC, and World Bank. Indonesia is being Indonesia‘s economy peaked in mid-2008, with the run-up in global commodity affected by the global prices, growth in external demand, easier access to credit and supportive crisis, but not as much domestic conditions created by an expanding economy. In the second half of as in other regional 2008 most of these conditions reversed: the prices paid for Indonesia‘s economies. commodity exports slumped along with financial markets around the globe, and credit became exceptionally scarce. Global production fell at the fastest pace since the second world war and trade flows collapsed. Through various channels these global developments have impacted Indonesia‘s economic growth and, hence, social outcomes (Figure 2.4). 43 Indonesia Public Expenditure Review Spending for Development Figure 2. 4 The global financial market turmoil and economic downturn is impacting Indonesia’s markets and economy 2007 Q3 2008 Q1 2008 Q3 2008 Q4 2009 H1  Commodity prices boom Commodity prices burst International financial market turmoil Global economic downturn Export prices , terms of trade weaken Volatile & weaker Indo. financial mkts Impacts domestic real economy Slower decline in poverty Sources: BPS via CEIC, and World Bank The global economy is Global GDP fell in the final quarter of 2008 and the first quarter of 2009; in 2009 suffering its largest as a whole it is expected to fall by about 3 percent compared with 2008. This is contraction since the the most severe contraction in global outlook since the second world war. Both a Great Depression, consequence and cause of this synchronized downturn is the quick collapse in hitting commodity prices, industrial industrial production and commodity prices. International commodity prices have production and trade. been extremely volatile. Energy prices increased almost 2½-fold from the start of 2007 to their peak 18 months later, and then lost two-thirds of their value in about half a year (Figure 2.5). The diversity of Indonesia‘s export basket and the depreciation in the rupiah has protected it from some of this volatility but the overall negative impact has been large. Commodities made up about 70 percent of the value of Indonesia‘s exports in 2008. On average, World Bank estimates suggest that the prices Indonesia receives for these exports in mid-2009 were half those of a year earlier, and Indonesia‘s export prices overall, including manufactured exports, fell by about one-third from their mid-2008 peak to early 2009 trough (Figure 2.5). This has a significant impact on firms‘ revenues, profits, the wages they pay their employees — and ultimately the taxes they pay to the Government. 44 Indonesia Public Expenditure Review Spending for Development Figure 2. 6 Indonesia’s slowdown has been relatively Figure 2. 5 Commodity prices, having collapsed mild relative to their peaks, are at early 2006 levels (percentage-point change in year-on-year GDP growth, between (indexed to 100 at July 2008 peak) Q2 2008 and Q1 2009) 100 Index 0 % International Indonesian non-energy -2 export 80 prices -4 -6 60 -8 International -10 40 energy -12 -14 20 Philippines Malaysia Thailand Indonesia India China Taiwan Korea 0 2005 2006 2007 2008 2009 Source: World Bank Sources: national statistical agencies via CEIC, and World Bank. Indonesia’s growth Indonesia‘s growth slowed by 2 percentage points in year-on-year terms from slowed at the end of mid-2008 to the first quarter of 2009, to 4.4 percent year-on-year. While this is 2008 and early 2009, the sharpest slowdown in Indonesia‘s growth this decade, it is a much smaller fall but resilient domestic than recorded elsewhere in the region (Figure 2.6). There are several demand has offset the decline in the external explanations why Indonesia has been less affected by the current global sector. slowdown than other economies. Broadly, they relate to the strength of Indonesia‘s macroeconomy approaching the global downturn, robust domestic demand and limited exposure to global economic developments due to its limited trade shares. The first sections of Chapter 1 and this Chapter have described the strength of Indonesia‘s economy as the global economy deteriorated in mid-2008. As the global finance and economic crisis intensified in the final quarter of 2008, both domestically and externally focused sectors of Indonesia‘s economy slowed. Firms cut machinery investment and anecdotal reports suggest that inventories were run-down, while banks sharply cut approvals for new loans, especially for working capital. By the first quarter of 2009 the situation had recovered somewhat, as domestically focused industries regained some momentum, although externally- oriented sectors remained weak and equipment investment continued to be cut. Much of this strength in domestic demand has been attributed to spending in the run-up to the April legislative elections, valued at as much as Rp 25 trillion or about 6 percent of private non-food consumption in the quarter or almost 2 percent of GDP. This supported production in some sectors, such as paper and printing manufacturing. The domestic momentum appears to have continued into the second quarter. Consumers were increasingly confident, with surveys reporting levels at four-year highs. This translated into a pick-up in retail sales, as reported by Bank Indonesia‘s (BI) index and some recovery in motor vehicle and motorcycle sales from their January lows. Household energy consumption was stable, while non- industrial businesses increased their usage. However, spending on capital goods continued to decline, as indicated by import statistics, although banks‘ approval of loans to businesses for working capital and investment stabilized. 45 Indonesia Public Expenditure Review Spending for Development Meanwhile, Indonesia‘s overall economy has also been protected by the relatively small share of domestic output that is exported and the small contribution to growth that exports have made to Indonesia‘s economic growth in recent years (Figure 2.7). What Indonesia does export tends to be a long way upstream from the consumer goods and capital equipment industries particularly affected by this downturn. Primary goods make up as much as three-quarters of the value of Indonesia‘s exports. Similarly, Indonesia‘s overall manufacturing sector has a relatively small share of medium- and high-tech industries, the type of industries severely affected by the current slowdown (Figure 2.8). Figure 2. 7 Indonesia’s exports make up a relatively smaller share of the economy, and have not expanded as rapidly as in many other economies in Figure 2. 8 … it is little exposed to the medium- and the region… high-tech manufacturing especially affected by this (exports share of GDP and percentage-point change in GDP downturn share) (indexed to 100 = early 2008 peak; seasonally adjusted) Change in exports' 2 share of GDP: 1 Indonesia Malaysia -3.5% 0 GDP growth (Sep-08 to Mar-09) Australia -1 Thailand 10.7% Canada -2 2003 Spain France Taiwan 17.4% -3 US UK Netherlands Korea 13.0% -4 2008 Italy Korea -5 Philippines -11.7% -6 Germany Malaysia Indonesia 8.1% -7 Taiwan Japan -8 Mexico Thailand India 6.4% -9 0 5 10 15 20 25 0% 40% 80% 120% Medium- and high-tech manufacturing output (% of GDP) Sources: National statistical agencies via CEIC, and World Bank. Sources: IMF, national statistical agencies via CEIC, BPS, RBA, and World Bank. Consumer prices The falls in global commodity prices, especially energy, weaker demand, and stabilized, with perhaps the lagged effects of BI‘s anti-inflationary contractions in monetary policy inflation slowing in mid-2008, have left Indonesian consumer prices barely changed in the seven especially for poorer months to June 2009. Food price inflation fell especially sharply, while the households. inflationary impact of the depreciated rupiah was only evident in clothing costs. While falling transportation costs and food prices subtracted most from the CPI, the disinflation appears to be more broadly based, with core inflation (which excludes these items) declining to 5.6 percent in the year to June 2009, and most other items recording moderating price growth over the first half of 2009. These developments have benefited poorer households in particular. As poorer households spend a far larger proportion of their budget on food than the average household, they have benefited greatly from the stabilization in food prices — in contrast to the concern over the run-up in food prices into the first half of 2008. World Bank estimates of a poverty-consumption-bundle weighted CPI show that the prices faced by poor households rose by 4.6 percent on average in the year to June 2009, 10 percentage points below the September 2008 inflation peak. 46 Indonesia Public Expenditure Review Spending for Development 2.2 Indonesia’s policy-makers have responded to the global downturn Monetary policy was eased and a Rp 73 trillion stimulus package approved by parliament, together with alternative sources of trade finance. Aware of the difficulties of rapid disbursement, the Government is stepping up efforts to reform the budget process. However, the final package could be relatively limited. Indonesian policy A swift and broad-based response to the global economic downturn by makers responded Indonesian policy-makers is helping limit its impact on Indonesia. (These quickly to the crisis developments are discussed more fully in the World Bank‘s Indonesia Economic across a broad front. Quarterly, June 2009.) Monetary policy has Monetary policy has been eased substantially. BI cut its policy interest by 275 been eased. bps from December 2008 to July 2009, similar in scale to cuts occurring elsewhere in the region. However, commercial banks have cut the interest rate they charge on their loans by a fraction of this amount, similar to previous interest-rate reduction cycles (Figure 2.9). BI has taken other measures too. For example, during the period of peak turbulence on financial markets it boosted liquidity and reduced the wedge between the interest rate that it pays on deposits placed at BI and charges on loans to banks. Figure 2. 9 As in previous easing cycles, BI’s rate cuts are yet to be fully passed on to borrowers (commercial banks’ lending rates for investment and working capital loans and BI’s policy rate, during recent interest rate cutting episodes) Sources: BI via CEIC and World Bank. Fiscal stimulus has Fiscal policy also quickly moved to provide more stimulus. During a downturn — been increased. particularly of the current type with its collapses in commodity prices and trade flows — the tax revenues flowing to the Government automatically fall with smaller profits and lower incomes, thus generating some ―automatic‖ fiscal deficit stimulus. In addition, parliament speedily moved to pass a revised budget including a Rp 73 trillion stimulus package, just four months after it had approved the initial budget. The Government also introduced various measures to ensure the stimulus would be disbursed quickly and fully, despite the distractions of the election year. Alternative sources of This crisis has also had a significant impact on trade finance, limiting exporters‘ trade finance have ability to find markets. The Government has therefore created alternative sources been created. of trade finance to help exporters who may be experiencing liquidity constraints. 47 Indonesia Public Expenditure Review Spending for Development Also on the trade front, Indonesian producers of consumer goods became increasingly concerned about the impact on their businesses of goods being dumped or imported illegally into Indonesia at very low prices as demand elsewhere in the world slumped. There is evidence that a large amount of imports of some consumer goods, such as textiles, avoid Indonesian customs. To control this, the Government has increased inspection of imports and required that some goods only be imported through major ports. To allow policy makers With the crisis expected to slow poverty reduction nation-wide and even reverse to limit the impact of recent gains in poverty in some districts, the Government is investing in an the downturn on enhanced rapid-response system to monitor social outcomes across the country. welfare, poverty Previously, information on poverty rates has only been collected in annual nation- monitoring has been strengthened. wide surveys, and through anecdotal reports. The enhanced monitoring will enable the Government to respond more timely to deteriorating welfare outcomes in particular areas, for example by allocating more resources through the National Community Empowerment Program (PNPM) to areas adversely affected. Indonesia’s fiscal Similar to many countries around the world, Indonesia is implementing a fiscal stimulus package is stimulus package in order to counter the current global crisis. The package, adapted to the current which was passed by parliament in February 2009, is worth Rp 73.3 trillion or constraints of slow around 1.5 percent of Indonesia‘s GDP, and widens the fiscal deficit for 2009 disbursement of new programs. from an initially budgeted 1.0 percent of GDP to 2.5 percent. While relatively modest, the size of the package is fairly typical of other regional economies (Figure 2.10). However, Indonesia‘s stimulus package is unusual in the heavy share allocated to tax cuts (Figure 2.11). These are intended to put more money into the hands of private individuals and firms with the expectation that they will spend it or remain sufficiently profitable that, for example, fewer jobs will need to be cut. The package does, however, include modest increases in government spending in critical areas such as infrastructure. Given the problems of slow and late disbursement, particularly for newer spending programs where systems have not been established, this heavy weight afforded to tax cuts is intended to maximize the impact of the stimulus package on the economy (disbursement performance is discussed in Chapter 1). Box 2.1 describes some key features of Indonesia‘s fiscal stimulus package. Figure 2. 10 The size of Indonesia’s stimulus plan, Figure 2. 11 … but tax cuts make up a much larger while moderate, is typical of other economies in the share of Indonesia’ s plan than in neighboring region economies (percent of GDP) (share of tax cuts in stimulus packages) Singapore Indonesia China Korea Korea Singapore Philippines Philippines Indonesia Thailand Vietnam China Malaysia Vietnam Thailand Malaysia U.S. U.S. 0% 2% 4% 6% 8% 10% 0% 20% 40% 60% 80% 100% Sources: National authorities and World Bank. 48 Indonesia Public Expenditure Review Spending for Development Box 2. 1 The Government’s stimulus package The Government‘s stimulus package is designed to support consumers‘ purchasing power, protect the business sector from the global downturn, and generate employment to mitigate the impact of job losses in the private sector. It does this via two mechanisms: expanding government spending especially on infrastructure; and lowering taxes for specific sectors. The tax cuts are in addition to the already programmed 2009 cuts in income tax rates that are a component of the Government‘s drive to expand taxpayer registration, and the reduction in tax receipts due to declining profitability. Together, the Government estimates that these measures will cost about 1.5 percent of GDP, in line with other stimulus packages announced across the region. By far the largest component of the Table 2. 1 Marginal tax rates have been cut stimulus plan is tax cuts, making and income tax brackets raised Indonesia‘s stimulus package stand out Rates from 1 Jan 2009 Previous rates from others in the region. In a policy move Yearly income, Marginal Yearly income, Marginal made before the depth of the downturn Rp million tax rate: Rp million tax rate: was apparent, the Government lowered Less than 25 5% Less than 50 5% income and personal tax rates and raised 25 to 50 10% the tax-free income threshold to Rp 15.8 50 to 250 15% 50 to 100 15% million. These measures are budgeted to 250 to 500 25% 100 to 200 25% forego Rp 43 trillion in revenue in 2009, Above 500 30% Above 200 35% Minimum taxable although they form part of a larger plan to Rp 15.84 m Rp 13.2 m income: increase taxpayer registration and hence the tax base, strengthening the Source: MoF. Government‘s revenues in the long term. As the depth of the global downturn emerged, the Government introduced more targeted tax cuts, including VAT on oil and gas exploration, and low-cost household cooking oil, reduced import duties on imported raw materials and capital goods, and payroll tax breaks for firms in labor-intensive industries. Rp 13.3 trillion is budgeted for these cuts. The Government also cut electricity tariffs for industrial users and reduced the price of automotive diesel. Finally, slower growth and lower prices for oil and other commodities mean smaller profits, lower income growth, in turn cutting government revenues. This acts as a stabilizer, with the amount of funds the Government is removing from the economy automatically falling as the economy weakens. The deterioration in the outlook for 2009 cut about Rp 38.7 trillion from tax revenues, almost half of which is due to the lower expected oil price (from US$80 in the initial 2009 budget to US$45/barrel). Lower consumption also means lower VAT — down 6 percent from the budget passed in November. These projections are based on economic growth of 4.5 percent and inflation of 6.2 percent, and significant downside risks exist to both projections, hence also revenues. In contrast to the experience of the 1997/98 Asian financial crisis when spending on infrastructure and social support were cut, the Government‘s revised budget expanded the budgeted increase in spending on infrastructure and social support. The stimulus package allocates Rp 12.2 trillion to infrastructure — generally labor-intensive projects with little lead time before work can start, such as road maintenance and rural irrigation. This brings capital spending to 16.5 percent above 2008‘s realized levels. This stimulus package also adds Rp 0.6 trillion to the National Community Empowerment Program (PNPM). Sources: MoF, World Bank Indonesia Economic Quarterly June 2009. Indonesia’s difficulties The efficacy of the proposed fiscal stimulus measures, particularly on the in disbursing funds government spending side, depends critically on the rate at which such funds limits what the package can be disbursed. However, disbursing funds, both in the course of conventional can include. government operations and through new spending programs and expanding existing programs, remains a serious challenge in Indonesia. Disbursement of budgeted funds has historically been slow and uneven and, despite some progress, spending remains skewed towards the final months of each budget year. These challenges limit the Government‘s ability to significantly expand spending as part of any stimulus package and highlight the practicalities of focusing the stimulus package on tax cuts, which are easier to implement. The Government is Recognizing the need to ensure that its fiscal stimulus is effective and timely, the responding by Government has taken extraordinary measures to accelerate disbursement in stepping up efforts to 2009 and to improve its budget process. In particular, the Government has reform the budget 49 Indonesia Public Expenditure Review Spending for Development process. streamlined the budget allocation process by making funds available sooner in the initial process, simplifying procedures for amending existing allocations while maintaining fiscal controls, and by simplifying the allocations so that line ministries can reallocate funds across sub-activities without needing approval from the Budget Office. To monitor the speed of budget disbursement, the Government has established a committee to follow the progress of the implemented reforms and their effect on the budget disbursement throughout the year. The Government is also working to improve the procurement process, so that large infrastructure projects can start earlier and funds be spent more efficiently (discussed in the infrastructure section of Chapter 1.4). After a slow start, the After a slow start, there are tentative signs that the Government‘s efforts to Government’s stimulus speed up the pace of budget disbursement are paying off. As discussed in is being disbursed. Chapter 1 (Section 1.6 Budget Execution), close to one-third of the total budget had been spent by in the first half of the year. While this is about the same total ratio as 2008, in that year the budget for energy subsidies was being disbursed very quickly, while core government spending was slow. Encouragingly, in 2009 the increase is driven by accelerated capital spending and social assistance outlays. In addition, tax cuts have been even more effective in immediately reducing the amount of funds the Government withdraws from the economy, although it is not clear whether the beneficiaries have saved the difference or used it on greater spending or keeping workers employed. Using revenue data from the first four months of 2009 and GDP-tax elasticities, it is estimated that non-oil and gas revenue receipts to date are 10 to 15 percent below what would have been expected had there been no change in the pace of nominal economic growth or the tax system over the past year. Around 60 percent of this decline is estimated to be the result of the tax cuts with the remainder attributed to the general decline in economic activity and profitability. The tax cuts have second round effects too. For example, they are one of several factors contributing to the improvement in consumer confidence in Indonesia over recent months, which should translate into continued resilience in consumption. However, the ultimate However, the relatively modest size of the stimulus package and focus on tax impact of the package cuts suggest that its overall impact on the economy could be fairly limited. could be relatively Although the range of potential impact is large, multipliers derived from studies limited… on developed economies and some of Indonesia‘s neighbors suggest government purchases have the largest impact on growth (0.3-1.6 percentage point increase in growth for a 1 percent of GDP increase in expenditures) followed by government transfers to households (0.3-1.0 percentage point increase in growth), with tax cuts having the weakest impact (0.3-0.8 percent). Using these multipliers, it is estimated that Indonesia‘s package will boost growth by between 0.2 and 0.8 percent in 2009 (World Bank East Asia and Pacific Update April 2009). The cuts in corporate tax rates, which account for 25 percent of the total stimulus package, are generalized and will benefit those companies that are heavily exposed to the global downturn, as well as companies focused on the relatively more robust domestic market. While these tax cuts may stimulate business investment over the longer term, it is by no means certain that they will encourage firms in heavily trade-exposed sectors, such as clothing and textiles, to hold onto workers in the short term given the unprecedented contraction in external demand. 50 Indonesia Public Expenditure Review Spending for Development …and it does not The package‘s focus on generalized tax cuts may not help the poorest and most support the most vulnerable groups and individuals. Around one-third of the total stimulus package vulnerable. is devoted to lowering personal income tax rates and raising the tax-free income threshold for individuals from Rp 13.2 million per year to Rp 15.8 million. These reforms are important and will help boost taxpayer registration and strengthen the tax base over the longer term. They will also provide a boost to real incomes and help stimulate consumption (although a portion of the tax cuts is likely to be saved). However, these reforms will only benefit individuals well-off relative to average Indonesians, earning over Rp 13.2 million per year, currently estimated at around 37 percent of the workforce or less than 40 million income earners (Figure 2.12). Moreover, since the benefits can only accrue to workers registered for tax, or whose employers are paying tax on their behalf, and so are mostly working in the formal sector, the total number of immediate beneficiaries is likely to be even smaller. Furthermore, the new tax-free threshold is more than seven times the national poverty line of around Rp 180,000 per month (February 2008) or just over Rp 2 million per year. This means that the changes will not help some 100 million Indonesians who live below or close to the poverty line. Figure 2. 12 Personal income tax cuts will only benefit the richest 37 percent of workers (percent of workers with a reported annual income in each band) 37% of households 8 Poverty line 6 Percent 4 Tax-free threshold 2 0 0 1000000 2000000 3000000 4000000 Net salary / wage in last month from main job Sources: BPS and World Bank. Other smaller elements of the tax cuts are more targeted, including measures to lower the value-added tax on low-cost household cooking oil (around 5 percent of the package), and a special tax-cut directed at labor-intensive industries. In addition, the increased expenditure on labor-intensive infrastructure projects (17 percent) and social support (around 1 percent) will more directly benefit vulnerable groups, although the overall expenditure increases are very modest. 51 Indonesia Public Expenditure Review Spending for Development 2.3 Scope remains for a fuller policy response to the global downturn Additional policy responses could provide further support, especially given the lack of social safety nets. For these to be effective, they should be carefully targeted to those most in need, be disbursed in a timely way and support longer-term policy objectives. While growth in While Indonesia is weathering the global crisis relatively well and growth is Indonesia is expected expected to recover in 2010, there is a growing consensus that the current global to recover in 2010, downturn is likely to be unusually severe and protracted with a sluggish recovery. additional policy This could hinder efforts to significantly reduce poverty in Indonesia over the responses could help provide further coming years. Moreover, the risk of further negative external developments support. cannot be ruled out. In this context, additional policy responses by the Government could help provide further support for the economy, both to mitigate the welfare effects of external developments — especially on the poor and vulnerable — and to help consolidate and strengthen the expected recovery in 2010. Fiscal stimulus packages are key in responding to the global economic crisis, provided they do not compromise medium-term fiscal and debt sustainability, according to the international policy consensus. However, as noted in Chapter 1, Indonesia‘s fiscal position remains favorable. The budget deficit remains modest, public debt is relatively low and external financing remains sustainable. Thus, Indonesia has the fiscal capacity to respond further to the crisis — if it chooses to do so — without jeopardizing its fiscal position. Indonesia‘s historical difficulty in quickly disbursing funds and enacting or expanding spending projects may, however, continue to impose constraints on what any further fiscal stimulus packages can include. Additional policy As discussed above, the public expenditure component of the stimulus package responses are is relatively modest compared with other countries. The increase in expenditure particularly important on social support is particularly modest, especially given that Indonesia lacks the given the lack of social comprehensive automatic stabilizers and social safety nets of many other safety nets and other automatic stabilizers in countries. While Indonesia has seen tax receipts fall in response to the crisis — Indonesia. reducing the amount of funds the Government is withdrawing from the economy — there has not been an automatic increase in expenditure on items such as unemployment benefits or social support as occurs in countries with more established social security systems. The lack of significant new social expenditure at a time of global economic crisis raises concerns about the potential welfare impacts in Indonesia and the prospect that recent gains in poverty could be reversed. Such concerns strengthen the case for further policy responses by the Government to help support employment and social welfare objectives. Consistent with the Fiscal policy responses to the crisis that protect social welfare and maintain Government’s current employment numbers have the following attributes: stimulus package, additional policy (1) Targeted at the poorest and most vulnerable households. Particular attention responses should be well-targeted, timely, could be given to poor households in regions particularly exposed to the current consistent with longer- crisis such as Sumatra, Western Kalimantan and much of Sulawesi. A large term policy objectives proportion of low-skilled workers in these regions is concentrated in and complement trade-exposed sectors such as manufacturing, mining and agriculture private sector efforts. (especially estate crops such as crude palm oil) and is particularly vulnerable to the current, externally driven slowdown. While establishing a social safety net 52 Indonesia Public Expenditure Review Spending for Development that protects households suffering from negative income shocks is a long-term process, in the shorter term the Government can expand existing programs using the information on emerging areas of vulnerability gained through the enhanced poverty monitoring program. (2) Timely, so as to provide immediate stimulus and not come into effect once the economy is well into a post-crisis upswing. Given the projected depth and length of the current global downturn, the risk of this may be smaller than during shorter, shallower downturns. Nonetheless, priority should be given to small, locally-based projects can be quickly implemented and, where possible, funded 39 through existing mechanisms (e.g. BLT, PNPM and BOS) (Figure 2.13). This would avoid delays as new administrative mechanisms are generated and so maximize the speed of disbursement. Further reforms to help speed up and streamline the budget disbursement process would complement this. Efforts should also be made to connect central government spending to sub-national government projects to ensure that new funding is quickly disbursed to ready projects in the most vulnerable regions and districts of Indonesia. (3) Supportive of longer-term policy and structural objectives that could potentially enhance long-term growth, such as priorities being developed as part of the 2010-14 Medium-Term Development Plan (RPJM) (see Chapter 3). This would leave Indonesia better-placed for stronger growth after the crisis. (4) Complementary to private sector efforts to create employment. For example, while the Government can act as a quick source of employment in the short term through public works projects, policies should be designed in the least distortive manner so that they do not impede long-term private sector activity — the key source of sustainable employment and income growth. Policies that reduce competition and threaten long-term growth in productivity, such as raising trade barriers, should be avoided. Figure 2. 13 Fiscal stimulus: the trade-off between speed of implementation and socio-economic impact High New, more targeted social Impact on economic and social outcomes programs Expand existing Small-scale social programs Large scale infrastructure & infrastructure public works Interest rate cuts Tax cuts Low Slow High Speed of implementation and impact Sources: World Bank. 39 BLT is the unconditional cash transfer (bantuan langsung tunai), while BOS is the operational school fund (bantuan operasional sekolah). 53 Indonesia Public Expenditure Review Spending for Development Some examples of polices that include the above qualities include:  Allocating additional funding to its core poverty-mitigation programs. Targeted social protection programs, such as low-cost rice distribution and health insurance for poorer households, educational scholarships and unconditional cash transfers to poor and near-poor households, can be resumed and/or expanded to an additional 10-30 percent of poor and near- poor households. Additional funding could be allocated to the PNPM program for poor communities. The unconditional cash transfer program (BLT) for poor households, which expired in March 2009, could be extended until the economy fully recovers. Work-for-food programs could also be expanded.  Allocating additional funding for previously identified priorities in key sectors such as education, health, agriculture and infrastructure. In education, additional funding could be allocated to repairing damaged classrooms. In health, Jamkesmas — the health insurance program for the poor — could be expanded. In the agriculture sector, additional funding could be provided to rural communities for the repair and expansion of irrigation systems and road networks, building on the current stimulus package. Additional funding could also be provided to expand rural safety nets, for example, by providing additional income support to poor farmers. In infrastructure, additional funding could be allocated to: improve water and sanitation systems in urban areas; improve major roads within and between cities; and expand power generation and improve services for the poor.  Implementing further targeted tax cuts with a higher incidence on poorer households. For example, payroll taxes for firms that employ poor and low-skilled workers in hard-hit sectors of the economy could be reduced. 54 Indonesia Public Expenditure Review Spending for Development Chapter 3. The Next Five Years: Indonesia’s Fiscal Choices 3.1 A unique opportunity Despite significant Notwithstanding noteworthy achievements over the past decade, Indonesia challenges, past continues to face significant economic and social challenges and major gaps achievements leave remain in many areas of public expenditure (Chapter 1). However, sustained Indonesia well placed fiscal consolidation and governance reforms, as well as resilience in the face of to push forward with sustained poverty the global crisis, leave Indonesia well placed to push forward with sustained reduction. poverty reduction (Chapters 1 and 2). Strategic use of public resources and continued growth could see swift improvement in economic and social outcomes over the coming five years. Indonesia has a unique As this Chapter will show, Indonesia has a unique opportunity over the next five opportunity over the years to realize key development goals. This is possible because public next five years to resources will almost certainly continue to rise, even if the global environment realize key remains unfavorable (Section 3.2). Total resources are likely to rise strongly over development goals. 2010-14, largely reflecting an expected continuation of relatively-robust economic growth. Moreover, fiscal space is likely to rise even more due to a declining debt burden. Used well, such resources could have a significant positive impact on growth, and hence on development and poverty reduction. Indonesia could The fiscal choices made by Indonesian policy-makers for the next RPJM continue to spend as it (2010-14) will be critical to maximizing development opportunities. Indonesia has, but this would could continue to spend its resources as it has over the past decade. However, result in further lost this would result in further lost opportunities as Indonesia would only be able to opportunities. Or it could make a big push address some of its development challenges (Section 3.3). Alternatively, to more fully realize its Indonesia could depart from this ―business-as-usual‖ approach and instead make potential. a ―big push‖ to more fully realize its potential (Section 3.4). A key feature of a big push could be an ambitious target to more than double expenditure on health and social protection to 3 percent of GDP by 2014 and double expenditure on infrastructure to 4 percent. Sustaining increased resources for education and agriculture could also be an important feature. However, increased spending alone is not sufficient to improve outcomes. Thus, institutional, governance and regulatory reforms aimed at increasing the efficiency and effectiveness of public spending should also be a critical feature of a big push. A big push would A big push would require a departure from the past pattern of public expenditure. require a departure There are critical areas where Indonesia urgently needs to spend more and from the past pattern better (Section 3.5). Substantially more public expenditure and further reforms of public expenditure. are needed to improve health outcomes in Indonesia. Similarly, more needs to be spent on infrastructure in order to alleviate the wide-ranging bottlenecks that are hampering growth. There are also other areas where Indonesia needs to spend better (Section 3.6). The education and agriculture sectors have received a large increase in resources in recent years, but the RPJM planning period is an opportune time to evaluate whether these resources are being appropriately allocated and efficiently spent. Indonesia may also want to rethink the existing spending mix between energy subsidies, which continue to consume a large share of public resources, and social protection, where spending remains low (Section 3.7). Finally, Indonesia will need to decide how much it wants to spend on bureaucracy reform (Section 3.8). Bureaucracy reform is critical for enhancing government effectiveness and increased compensation for civil servants is an important element. However, the central Government‘s current reform plans entail risks and need to be carefully considered before further implementation takes place, especially in light of the potential costs. 55 Indonesia Public Expenditure Review Spending for Development A big push may A big push may require additional resources of Rp 1,580 trillion and could help require additional accelerate growth and poverty reduction, and expand total public resources resources of (Table 3.1 and Section 3.9). Around Rp 1,210 trillion may be needed to fund key Rp 1,580 trillion. development goals, including around: Rp 550 trillion for infrastructure; Rp 460 trillion for health and social protection; and Rp 200 trillion to maintain the current share of the education and agriculture budgets. In addition, if the central Government proceeds with its plans for bureaucracy reform, then additional resources of at least Rp 370 trillion may be required. Table 3. 1 Costing and financing a big push Incremental Incremental resource needs resources 2010-14* 2010-14* Key development goals and other priorities (Rp trillion) Financing options (Rp trillion) 1. Target of gradually doubling public expenditure 547 1. Reallocations from on infrastructure from 2% to 4% of GDP by 2014 334 lower-priority sectors o/w 10 million new electricity connections 374 o/w 10 million new water connections 80 2. Savings from reducing 517 o/w trans-Java highway 37 energy subsidies 2. Target of gradually increasing public Sub-total from better expenditure on health & social protection from 458 spending of existing 850 1.2% to 3% of GDP by 2014 resources o/w expansion of health insurance 218 o/w expansion of cash transfers 35 3. Extra revenue from 3. Maintaining spending on education and improving the efficiency of 420 205 agriculture as a share of the budget tax collections 4. Resources from Sub-total of increased spending on key 1,210 expanding the fiscal deficit 310 development goals by 1% per year Sub-total from increasing 4. Implementing bureaucracy reform 370 730 total resources TOTAL 1,580 TOTAL 1,580 Notes and Sources: World Bank staff projections based on the business-as-usual and big-push scenarios. *Incremental resources are relative to the business-as-usual scenario. Financing a big push However, financing a big push would require difficult and bold policy choices to would require bold spend existing resources better and expand overall resources (Section 3.10). policy choices such The bulk of the funds could be raised by enhancing the efficiency and as: (1) reallocating effectiveness of public spending and government administration: reallocations resources from lower-priority areas; from lower-priority sectors could yield at least Rp 330 trillion (a concerted effort to (2) improving the improve spending across all activities and programs could potentially yield larger efficiency of tax savings); reducing energy subsidies in favor of better-targeted social protection collections; and (3) programs could save around Rp 520 trillion; and Rp 420 trillion could potentially expanding the fiscal be raised by improving the efficiency of tax collections. In addition, an additional deficit. Rp 310 trillion could be raised by expanding the fiscal deficit by 1 percent of GDP per year, which Indonesia can afford. Indonesia‘s current stock of debt is relatively low and appears sustainable, giving it the option to borrow more to invest in development, while continuing to reduce debt as a share of GDP. A big push could yield A big push could lead to improved economic and social outcomes over the next significant benefits, five years, and a very different pattern of public expenditure compared to the but also entails some past decade. However, if increased spending is not accompanied by stronger risks. institutions and governance, there is a risk that these resources may not be spent well and thus fail to improve development outcomes (Section 3.11). 56 Indonesia Public Expenditure Review Spending for Development 3.2 Growing resources Public resources will almost certainly continue to rise over the next five years (2010-14), even if the global environment remains unfavorable. Total resources are projected to rise by more than 20 percent relative to the previous five years (2005-09), largely reflecting an expected continuation of relatively-robust growth of around 6 percent per year. Moreover, fiscal space is likely to rise even more due to a continued decline in debt and interest payments as a share of GDP. Used well, these resources could have a big impact because appropriately-targeted public spending can have a significant positive impact on growth and poverty reduction. Total public resources are likely to rise significantly over 2010-14… The total envelope of Projecting the level of resources that Indonesia may have over the next five public resources over years is an important part of the RPJM preparations. Total public-sector the next five years will resources or the ‗resource envelope‘ during the next RPJM period will largely be largely be determined determined by economic growth and the Government‘s revenue-raising capacity, by economic growth, revenue and borrowing but can also be supplemented through government borrowing (Figure 3.1). Oil levels. and gas revenues also remain an important source of revenue for Indonesia, albeit a smaller one following a decline in production over the past decade. In addition, the Government can influence its ultimate resource envelope through its tax, economic and fiscal policies. For example, important tax reforms in recent years have contributed to strong growth in tax revenue, as have sound macroeconomic policies. Government policy choices can also have important secondary affects. A decision to increase borrowing, for example, would not only directly increase the resource envelope. If the extra resources are effectively spent to alleviate key growth constraints, such as critical infrastructure bottlenecks, the resulting increase in public demand and associated spillovers to the private sector would have multiplier effects, increasing overall growth and thus tax revenues and further expanding the resource envelope. Figure 3. 1 Growth, revenue and borrowing are the major determinants of the resource envelope Resource envelope Revenue Borrowing Non-oil & gas Oil & gas Fiscal policy tax revenue revenue Tax system Domestic Commodity Financing production prices constraints Tax policy Domestic growth International economic & Economic policy financial conditions Sources: World Bank staff. However, the global However, the international economic and financial environment will also influence recession will also the resource envelope. The current global crisis (2009-10) is expected to exert play a role. 57 Indonesia Public Expenditure Review Spending for Development downward pressure on the resource envelope during the early years of the next RPJM period through numerous channels such as weaker external demand for Indonesia‘s exports, lower commodity prices (which will reduce resource revenues) and tighter financing conditions (which may restrict access to or increase the cost of borrowing). Projections of the While medium-term projections should be interpreted with caution, they are resource envelope are nonetheless useful and important for medium-term planning. For this report, a sensitive to the baseline or ―business-as-usual‖ scenario of the economic environment that specific assumptions 40 Indonesia is most likely to face over the next five years was developed. This made. scenario is based on: (1) the current outlook for the Indonesian and global economies; and (2): an assumption that existing macroeconomic, fiscal and public expenditure policies will largely be maintained. The projections of the resource envelope simulated under this scenario are sensitive to underlying estimates and assumptions made. For example, a one percentage point increase in the fiscal deficit as a share of GDP – all other things being equal – would increase the total resource envelope by Rp 370 trillion over five years (Table 3.2). This equates to around Rp 260 trillion or US$25 billion at constant 2007 prices. The model is also sensitive, although to a lesser extent, to growth with one percentage point higher average real growth over five years yielding additional resources of around Rp 150 trillion (around Rp 102 trillion at constant 2007 prices or US$10 billion). Table 3. 2 Resource envelope projections are sensitive to assumptions about growth and the fiscal deficit 1 percentage point 1 percentage point increase in the fiscal increase in per deficit annum growth Change in total nominal resources (Rp trillion) 370 150 Change in total real resources (Rp trillion, 2007 prices) 259 102 Change in total real resources (US$ billion, 2007 prices) 26 10 Notes and sources: World Bank staff projections based on business-as-usual scenario. US$ numbers calculated using a constant exchange rate of Rp 10,000/US$. Notwithstanding this, Notwithstanding the above caveats, the total resource envelope over the next total public resources RPJM period is projected to rise to Rp 7,100 trillion (Rp 4,900 trillion at constant are projected to rise by 2007 prices), up from Rp 4,200 trillion (Rp 4,100 trillion at constant 2007 prices) 21 percent, in real during the current RPJM period. This is a real increase of 21 percent over five terms, over the next five years… years. This projection is based on growth averaging 6 percent per annum over the next RPJM period, inflation averaging 4.7 percent per annum and total central Government revenue averaging 16.4 percent of GDP. This projection also assumes that the Government will maintain its current relatively conservative 40 This scenario was developed using the World Bank‘s Revised Minimum Standard Model Extended (RMSM-X) for Indonesia which was jointly updated by the World Bank and Bappenas in late 2008/early 2009. Due to data availability at the time, 2007 was selected as the base year. RMSM-X is a simulation tool for facilitating the forecasting, monitoring and analysis of financial flows of (developing) countries. It models the (demand side of the) economy by using an economy wide consistent flow-of-funds framework in which different agents are identified. More precisely, the basic model includes five sectors - the National Accounts; Balance of Payments; (general) Government; Monetary Survey and a rest of the economy account. In addition to these sectors, the model forecasts detailed trade accounts and foreign debt flows and stocks. As such, it can be used to produce a comprehensive and internally consistent outlook for a developing country. For further details, see: The World Bank Revised Minimum Standard Model: Concepts and Issues, World Bank, 1989. 58 Indonesia Public Expenditure Review Spending for Development fiscal policy, which equates to an average fiscal deficit of 1.2 percent of GDP 41 over the next five years. Under this scenario, Indonesia‘s debt-to-GDP ratio would continue to decline and reach 26 percent by 2014. Moreover, the poverty rate could decline from 14.15 percent in March 2009 to between 7.5 and 10.0 percent by 2014 as wages grow through a combination of sustained economic growth and a continued structural shift away from lower-paying agricultural and informal employment, often in rural areas, towards higher-paying employment in service and manufacturing industries in urban areas. The key assumptions and outputs for the scenario, as well as outcomes for the current RPJM period, are summarized in Table 3.3 (see Annex Table B.1 for details on the business-as-usual scenario). Table 3. 3 Total public resources are likely to rise substantially over the next RPJM period 2005-09 RPJM* 2010-14 RPJM Average over 5 years GDP growth rate (%) 5.4 6.0 Central Government Tax/GDP (%) 12.5 12.7 Central Government total revenue/GDP (%) 18.0 16.4 Fiscal deficit/GDP (%) 1.1 1.2 Domestic prices, growth rate (%) 12.5 4.7 World growth rate (%) 3.3 3.5 World inflation rate (%) 2.5 1.2 Debt-to-GDP ratio (%, end of period) 32.9 26.0 Poverty rate (%, end of period) 14.15 7.5-10 Central Government resource envelope (thousand trillion rupiah) Nominal or current prices 3.9 6.5 Real 2007 prices 3.8 4.5 Total government resource envelope (thousand trillion current rupiah) Nominal or current prices 4.2 7.1 Real 2007 prices 4.1 5.0 Real increase in total resource envelope (vs 2005-09) (%) 21 Notes and sources: World Bank staff projections based on the business-as-usual scenario. *Data for 2009 are forecasts and the poverty rate is sourced from BPS (March 2009). …largely reflecting The increase in the resource envelope over the next RPJM period largely reflects continued growth in continued growth in revenue, which accounts for 94 percent of the rise (split total revenue – 86 percent and 8 percent respectively between the central and sub-national Governments). Total revenue is projected to grow by 20 percent in real terms relative to the current RPJM period. This primarily reflects continued growth in central Government non-oil and gas tax revenue, which is projected to increase by 37 percent in real terms, and rise from 11.4 percent of GDP in 2009 to 12.3 percent by 2014. The Government‘s decision to provide tax-cuts for selected industries and to implement tax-policy reform as part of its fiscal stimulus package in early 2009 is expected to reduce tax revenue in 2009. Beyond that, however, the reforms are expected to strengthen the tax base and contribute to increased revenues in subsequent years. albeit at a slower pace However, the overall growth in revenue will be dragged down by stagnating due to declining oil growth in oil and gas revenue following a fall in production over the past decade and gas revenue… and a lower oil price assumption for the next five years. Assuming no further 41 The fiscal deficit is assumed to widen to over 2 percent of GDP in 2009 in response to the Government‘s stimulus package but gradually declines to 0.8 percent of GDP by 2014. 59 Indonesia Public Expenditure Review Spending for Development decline in production, total Government revenue from oil and gas during the next RPJM period is expected to be some 25 percent lower in real terms relative to the current RPJM period. This would see oil and gas revenues decline from an estimated 5.7 percent of GDP in 2008 to 2.4 percent in 2009 and rise to only 2.8 percent by 2014. Together, these two contrasting trends will result in central Government revenue declining as a share of GDP to an average of 16.4 percent over the next RPJM period, compared with an average of 18 percent during the current RPJM. However, this highpoint was partly due to exceptionally high oil and gas revenues in 2005 and 2008. …and slightly higher A slight increase in the budget deficit relative to the current RPJM period budget deficits. contributes the remaining 6 percent of the increase in the resource envelope. The fiscal deficit averages 1.2 percent of GDP in the next RPJM, up from 1.1 percent during the current RPJM. Moreover, a sensitivity In light of the current uncertainty regarding the future path of global economic analysis suggests that activity, alternative scenarios were developed to assess the sensitivity of the total public resources resource envelope projection to further changes in the outlook for the global would grow under 42 economy. This analysis suggests that total resources would still rise by over even less favorable economic conditions. 10 percent even if the global recession proves deeper and more protracted than currently anticipated, which would reduce resources by about Rp 500 trillion to around Rp 6,600 trillion. However, if the global financial and economic crisis proves milder and shorter than currently anticipated, total resources would rise by an additional Rp 200 trillion to around Rp 7,300 trillion. In summary, it is prudent to assume that the annual Government resource envelope will grow by over 6 percent per year between 2010 and 2014 to reach around Rp 1,600 trillion by 2014, with some variation depending on further developments in the global economy (Figure 3.2). This would equate to a total resource envelope of around Rp 7,100 trillion over the next RPJM period. Figure 3. 2 Public resources will almost certainly continue to grow over the next RPJM period Notes and sources: World Bank staff projections based on the business-as-usual scenario. Data for 2009 are forecasts. 42 See Annex Table A3 for the key assumptions and outputs of these alternative scenarios. 60 Indonesia Public Expenditure Review Spending for Development …and fiscal space is likely to rise even more. Discretionary While the total resource envelope is likely to rise substantially over the next five spending becomes a years, it is necessary to look more narrowly at the fiscal space that will be larger share of total available to gain a clearer indication of how much resource the Government will expenditure as the potentially be able to allocate to key development priorities. More expenditure planning period lengthens. items become discretionary during the course of a five-year planning period. For example, interest payments are not discretionary. Salary payments for civil servants can only be changed over time and reducing staff numbers usually involve substantial retrenchment costs, but these costs are certainly discretionary when considering a five-year period. New investment expenditures are more discretionary in 2014, but less so in the short term since some infrastructure projects are already underway. Material and small equipment purchases are always considered discretionary even on an annual basis and are often subject to delay when resources are scarce. While there is considerable debate about which expenditure categories should be considered fixed and which are subject to policy decisions when preparing the RPJM, most items – including subsidies – should be considered discretionary by the end of five years. This increases the flexibility to reallocate resources to focus on economic and social development priorities. Moreover, falling debt The continued decline in the debt-to-GDP ratio and lower interest rates are and interest payments projected to reduce interest payments further both as a share of GDP and as a will continue to share of total public spending during the next RPJM period (Figure 3.3). This increase discretionary will increase discretionary spending as a share of total spending, although more spending. slowly that it has over the past decade. Figure 3. 3 A falling public debt burden will continue to expand discretionary space Notes and sources: World Bank staff projections based on the business-as-usual scenario. Data for 2009 are forecasts. As a result, fiscal The continued fall in interest payments as a share of GDP, together with the space will grow more fact that more expenditure items become discretionary over time, means that over the next five fiscal space will grow more rapidly than total spending over the next five years. years than growth in In order to assess the potential fiscal space available over the next RPJM the resource envelope. 43 period, some fixed expenditures need to be subtracted from the resource 43 Fiscal space is the total resource envelope less interest payments and civil service salaries. 61 Indonesia Public Expenditure Review Spending for Development envelope (Table 3.4). Subtracting interest payments and civil service salaries gives total discretionary resources of around Rp 4,500 trillion over the RPJM period (around Rp 3,200 trillion in constant 2007 prices). This represents a real increase of 23 percent over discretionary spending during the current RPJM period. Table 3. 4 Fiscal space is growing, but depends critically on policy choices 2010 2011 2012 2013 2014 Total Government resources/GDP 19.1 19.2 19.1 19.1 19.2 Central Government resources/GDP 17.4 17.5 17.5 17.6 17.7 Interest payments/GDP 1.9 1.9 1.8 1.7 1.7 Salary exp. of central Government/GDP 2.4 2.4 2.3 2.3 2.4 Transfers to region 5.3 5.2 5.3 5.4 5.5 Salary exp. of sub-national governments/GDP 2.7 2.7 2.7 2.7 2.7 Total fiscal space Rp trillion (nominal) 711 799 891 1,000 1,123 o/w energy subsidies** 116 136 157 181 208 o/w energy subsidies (% of fiscal space) 16.3 17.0 17.7 18.1 18.5 % of GDP 12.0 12.2 12.2 12.3 12.4 Rp trillion (constant 2007 prices) 551 591 629 673 722 Central Government fiscal space* Rp trillion (nominal) 461 525 585 658 744 o/w energy subsidies** 116 136 157 181 208 o/w energy subsidies (% of fiscal space) 25.2 26.0 26.9 27.5 27.9 % of GDP 7.8 8.0 8.0 8.1 8.2 Rp trillion (constant 2007 prices) 357 388 413 444 478 Sources: World Bank staff projections based on the business-as-usual scenario. *Central Government fiscal space is the Central Government resource envelope less interest payments, civil service salaries, and transfers to the regions. **Includes some spending on non-energy subsidies (around 10 percent of total on average). However, actual fiscal However, the actual fiscal space that will be available for spending on space will depend development over the next five years will depend critically on Government critically on policy choices concerning established expenditure items such as subsidies and Government policy government administration. Government administration is critical for the efficient choices. use of resources and the effective delivery of public services, including education, health and agricultural extension. However, care needs to be taken to ensure that non-core expenditures are contained and do not crowd out expenditures on key development priorities. Finally, it should be Finally, it should be noted that Indonesia‘s commitment to decentralization and noted that transfers associated transfer of resources from the central Government to sub-national between different governments does not have an effect on overall fiscal space. While it is true that levels of Government such transfers have sharply reduced fiscal space at the central Government do not reduce overall expenditure space, but level, this is not a reduction in a national sense as national public expenditure is can impact on service the combination of central Government and sub-national governments‘ delivery. expenditures. However, because many local governments continue to have limited capacity to deliver services, an unintended consequence of decentralization may have been a net reduction in service-delivery capacity. Nonetheless, after a rapid rise in the transfer of resources to 35 percent of central Government revenue, this share is now expected to stabilize. 62 Indonesia Public Expenditure Review Spending for Development Such a large rise in The projected strong rise in total resources and the even faster growth in fiscal public resources space over the next five years will create unprecedented opportunities to would create big address some of Indonesia‘s key development challenges and objectives, along opportunities. with a challenge to see that public resources are used efficiently and effectively in pursuit of these objectives. Used well, such resources could have a significant positive impact Policy choices about Policy choices regarding the level and allocation of public resources are the level and critically important in light of growing evidence that public expenditure can have composition of public a significant impact on growth and development (Box 3.1). A number of studies spending matter. have found that the net effect of public spending on growth has been positive for fast developing countries. However, this is provided that spending is: (1) not at the expense of macroeconomic stability (as there is a strong negative link between inflation and growth); and (2) supported by sound institutions and governance systems. In particular, public expenditure on economic or ―productive‖ activities such as education, health, transport and communications has been found to have a significant positive effect on growth both over the short and medium term. Box 3. 1 Public expenditure is important for development While there is a great deal of empirical uncertainty regarding the direction and magnitude of the impact of public spending on growth, there is growing evidence, both at the macroeconomic and microeconomic level, that public expenditure and investment can have an important impact on development. Well-implemented public investment focused on areas where there are market failures and public good externalities have a highly positive rate of return and yield benefits that substantially outweigh the costs. In contrast, poorly-implemented efforts in activities that are better suited to private activities can be counter-productive. Moreover, there is also growing evidence that the positive impact of public spending also depends critically on good institutions and governance. Macroeconomic evidence: Fast developing countries have not only maintained sound macroeconomic management and a stable policy environment, but they have also consistently made significant public-funded investments in activities such as education, health and various aspects of infrastructure. Although there has been much debate about the causes of the so called ‗East Asia Miracle‘, it is clear that rising human capital due to improvements in primary and secondary education made an important contribution. Aghion, Meghir and Vandenbenbussche also conclude that there is a link between human capital accumulation, or education attainment, and growth. More recently, Moreno-Dobson found that public expenditure on economic or ―productive‖ activities (e.g. education, health, transport and communications) had a significant positive effect on growth both in the short and medium term. Microeconomic evidence: There are now many examples of cases where public investments in the presence of market failures or positive externalities have been highly beneficial. As noted above, it is widely recognized that investment in primary education to ensure universal basic education has high internal rates of return. So does investment in basic healthcare, with special reference to containing communicable diseases. The public good properties of basic education and health makes it likely that private decision making alone would lead to underinvestment in education and health services. Public investment in R&D and extension services also has high rates of return, especially when there are many fragmented beneficiaries, lumpy investments, and high risks of investors not being able to capture the benefits from basic lumpy investments. After looking at nearly 700 rates of return on investments for agricultural sector R&D and extension services across the developing world, the WDR 2008 estimates a rate of return of 43 percent on average. Public infrastructure investments also have been shown to have high rates of return in rapidly developing counties. Indeed, infrastructure investments are often critical for alleviating constraints on growth and sustaining rapid development. Even though it was reduced by implementation delays, the economic rate of return for India‘s large golden quadrilateral highway investment has been estimated at around 20 percent. Rural road investments are important for access to goods and labor markets and for the effectiveness of investments in education and health sector expenses. The importance of good institutions and governance: An important qualification comes from evidence that the 63 Indonesia Public Expenditure Review Spending for Development positive effect of public expenditure on growth depends to some degree on good institutions and good governance. For example, recent work by Gray et al focused on the Eastern Europe and Central Asian region finds that increased government spending can have a negative effect on growth in countries with weak governance, but strong governance can mitigate this negative effect. Moreover, Rajkumar and Swaroop, who examine the links between public spending, governance and outcomes, find that governance indicators have a powerful impact on the ability of public expenditures to promote human development goals such as reduced infant mortality and improved educational attainment. Their results suggest that increased public spending on health and education only improves outcomes in countries with good governance (measured by the level of corruption or quality of the bureaucracy). In countries with poor governance, increased spending can have no effect on outcomes. ************************ Sources: Blanca Moreno-Dodson, 2008, ―Assessing the Impact of Public Spending on Growth, ―Lessons from Seven Fast Growing Countries‖, World Bank Working Paper 4663. World Bank, 2008, ―World Development Report 2008 – Agriculture for Development‖, Washington DC: The World Bank. Aghion, Meghir and Vandenbenbussche, Growth, Distance to Frontiers and Composition of Human Capital, 2004, Journal of Economic Literature. Gray, Lane and Varoudakis, Fiscal Policy and Economic Growth: Lessons for Eastern Europe and Central Asia, World Bank 2007. Rajkumar and Swaroop, Public Spending and Outcomes: Does Governance Matter?, World Bank Working Paper 2840, 2002. Thus, getting the This research suggests that, in the presence of good institutions and spending mix right and governance systems, the level and composition of public expenditure can have improving governance an important effect on economic growth and hence on development and poverty are just as important reduction. Increasing public expenditure on areas with significant public-good as increasing the level of spending. characteristics such as education, health, infrastructure and public good aspects of agriculture can lift growth and hasten development. These are also some of the areas that private individuals would tend to under-invest in because market failures would mitigate against their capturing the full benefit from their investment. Hence, allocating public resources to these activities creates positive externalities and addresses market failures. This highlights the importance of allocating greater resources to these high-impact activities while at the same time increasing efforts to strengthen institutions and governance. 3.3 Business as usual? Indonesia could continue to spend as it has over the past decade. Reflecting the overall increase in resources, this “business-as-usual� approach to budget allocations would expand resources to high and low priority areas alike, thereby maintaining all the strengths and limitations of the existing allocation of resources. However, in light of the significant needs in critical sectors such as health and infrastructure and the possibility to hasten development by doing things differently, such an approach would result in further lost opportunities as Indonesia would only be able to address some of its development challenges. Continuing with a How Indonesia allocates its growing public resources over the next five years will business-as-usual play a critical role in determining how much of its development opportunities it will budget allocation be able to realize. However, reallocating resources between and within sectors would expand can be politically and administratively challenging. Thus, Indonesia could, by resources to all sectors alike. default, continue to allocate its expanding public resources in much the same way that it has over the past decade, i.e. it could maintain a ‗business-as-usual‘ approach to public expenditure allocations. Such an approach would lead to all sectors receiving greater resources, in both nominal and real terms, over the next five years – in proportion to their existing share of the budget – as the total 44 resource envelope expands (Figure 3.4). 44 To simulate the implications of this approach, 2009 budget allocation shares are extrapolated out over the next RPJM period. Interest payments, subsidies and transfers to sub-national Governments are derived from the business-as-usual scenario. 64 Indonesia Public Expenditure Review Spending for Development Figure 3. 4 A business-as-usual approach would largely maintain the past pattern of public expenditure 2,000 Projections 1,800 1,600 Others Rupiah trillion (nominal) 1,400 Interest payments 1,200 Subsidies 1,000 Government Admin 800 Agriculture 600 Health 400 Infrastructure 200 Education 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Notes and sources: World Bank staff projections based on the business-as-usual scenario. Data for 2009 based on fiscal stimulus revised budget (APBN). ‗Others‘ includes the following functions: Mining; Trade, Business Dev, Finance & Cooperative; Manpower; National Defense and Security; Environment and Spatial Planning; and Others. This would maintain all Such an approach would make no adjustment to current sectoral expenditure the strengths and shares in response to urgent priorities and would maintain all the strengths and limitations of the limitations of the existing allocation of public resources highlighted in Chapter 1. existing allocation of That is: (1) the education and agriculture sectors would continue to be relatively resources... well-resourced; (2) subsidies and government administration would continue to absorb around 25 percent of the national budget; and (3) the share of spending devoted to the especially resource-poor priority sectors of health and infrastructure would remain unchanged. …and result in further Such an outcome would represent a lost opportunity for Indonesia to use its lost opportunities. fiscal space to significantly address major development challenges such as improving education and health outcomes, alleviating infrastructure bottlenecks that are constraining economic growth and poverty reduction, and investing in programs that help and protect the poorest and most vulnerable. 65 Indonesia Public Expenditure Review Spending for Development 3.4 Or a ―big push‖? Alternatively, Indonesia could depart from the business-as-usual approach and instead make a big push to more fully realize its potential as a dynamic middle-income country. A key feature of a big push could be an ambitious target of more than doubling spending on health and social protection (from 1.2 to 3 percent of GDP) and doubling infrastructure spending (from 2 to 4 percent of GDP) by 2014. Sustaining increased resources for education and agriculture could also be an important feature. However, increased spending alone is not sufficient to improve outcomes. Thus, institutional, governance and regulatory reforms aimed at increasing the efficiency and effectiveness of public spending should also be a critical feature of a big push. Indonesia could depart Alternatively, Indonesia could depart from the business-as-usual approach and from the instead make a big push to more fully realize its potential as a dynamic business-as-usual middle-income country. A big push would require a departure from the past approach and instead pattern of public expenditure. Sustained rapid development success will depend make a big push... on alleviating constraints to poverty-reducing growth. This will require deepening investments in human capital through improved education and health services and on expanding investment in infrastructure and public goods more generally (particularly in the agriculture sector given its importance to the Indonesian economy and as a source of employment for a large proportion of the country‘s poor). Moreover, improved urban infrastructure and strengthened health services will be critical for meeting the twin challenges of increased urbanization and an ageing population. Thus, the health, social protection, infrastructure, education and agriculture sectors could be prioritized as part of a big push to accelerate development and poverty reduction over the next RPJM period. ...which could feature: Two priority sectors, health (along with social protection) and infrastructure, will (1) a more than require greater funding over the next five years to achieve key development doubling of public objectives. The resource needs in these sectors are substantial and wide expenditure on health ranging, and more efficient spending and policy reforms alone will not be and social protection and a doubling of sufficient to significantly improve outcomes. Health needs in Indonesia remain expenditure on very large and selected outcomes are falling behind MDG targets. Meanwhile, infrastructure; infrastructure needs are enormous and must be addressed in order to alleviate their constraining effect on growth, on the effectiveness of expenditures in education, health and agriculture, and on access to employment opportunities. Thus, a key feature of a big push could be an ambitious target to more than double public expenditure on health and social protection from around 1.2 percent of GDP in 2009 to almost 3 percent of GDP by 2014 and to double expenditure on infrastructure from 2 to 4 percent over the same period. Such a large increase in spending on human and physical capital would provide an opportunity to improve outcomes and, by strengthening competitiveness, could help accelerate growth and development. Faster economic growth in turn would lead to faster growth in public resources which would partly fund such an expansion. However, considerable extra resources would also need to be mobilized and increased spending would need to be accompanied by institutional and regulatory reforms. (2) sustaining Improving spending efficiency and addressing key intra-sectoral priorities will be increased resources central to achieving development outcomes in the other two priority sectors: for education and education and agriculture. Noteworthy progress has been made in increasing the agriculture; and resources allocated to education, but there remains significant room for improving education outcomes, as well as net enrollment rates at the secondary school level. Meanwhile, agriculture sector public goods, such as research, extension services and irrigation, need additional resources. As part of a big push, a commitment could be made to maintain spending on these sectors as 66 Indonesia Public Expenditure Review Spending for Development a share of the national budget. For education this would be around 18-19 percent and for agriculture it would be around the 5½ percent high point reached in 2009. This would ensure these sectors are not crowded out by other spending and that they receive greater resources when overall public resources expand. (3) reforms aimed at However, as noted in Section 3.2, international evidence suggests that increased improving the spending alone is not sufficient to improve outcomes. Thus, institutional, efficiency and governance and regulatory reforms aimed at increasing the efficiency and effectiveness of public effectiveness of public spending should also be a critical feature of a big push. spending. Otherwise, there is a risk that increased spending may fail to improve development outcomes in areas like infrastructure and health. However, a big push However, a big push would require difficult and bold policy choices in order to would require difficult mobilize the extra resources that would be required (See Annex Table B.2 for and bold policy details on the big push scenario). Before addressing these issues, the next four choices. Sections (Sections 3.5-3.8) examine in more detail the public expenditure needs and reform challenges in each of the high-priority sectors as well as the government administration sector. 3.5 Spending more and better in health and infrastructure Two priority sectors, health and infrastructure, will require greater funding over the next five years to achieve key development objectives. The resource needs in these sectors are substantial and wide-ranging and more efficient spending and policy reforms alone will not be sufficient to significantly improve outcomes. Indonesia needs a different health system, which will inevitably be more expensive Substantially more To meet its goal of significantly improving health outcomes over the next five public expenditure and years, Indonesia will need to substantially increase its public spending on health further reform is – an aspiration that is possible, but will require bold policy choices – and needed in order to continue to reform its health system. In particular, more resources are needed to: improve health outcomes in further improve maternal health; rehabilitate and upgrade health infrastructure; Indonesia. and improve health outcomes for the poor. Increasing attention to public health will also be crucial, in terms of preventing communicable disease, but also life-style-related chronic diseases. More broadly, the Government is committed to provide universal health insurance coverage, but key decisions will be required concerning the type and specifics of the system to be implemented. A detailed assessment of the potential costs is being undertaken in 2009. However, improving health outcomes will also require further reforms to improve the quality of health services, including through better management of health personnel and by addressing the large discrepancies in deployment across regions. Improved education and incentive-based payment systems hold potential in this area. The urgency of addressing these issues is growing given that demographic, epidemiological and nutrition transitions currently underway in Indonesia are expected to pose considerable challenges in the future to the already stretched health system. With bold policy The size of the health budget over the next RPJM period will depend on choices, the health Government policy choices. A business-as-usual approach to budget allocations budget could grow would see the share of spending on health remain relatively low at around substantially over the 4 percent of the national budget and 1 percent of GDP (Figure 3.5). Spending on next five years. health would rise slowly under such a scenario and total Rp 317 trillion over the five year period. This is an incremental increase of just Rp 62 trillion (Rp 25 trillion at constant 2007 prices) relative to what would be available if the health budget was simply fixed at its projected 2010 level, constraining efforts to 67 Indonesia Public Expenditure Review Spending for Development improve health outcomes. A big push, however, could see the health budget rise to as much as 11 percent of the national budget and 2.4 percent of GDP by 2014. Under such a scenario, the health resource envelope could rise by an additional Rp 384 trillion over five years (Rp 254 trillion at constant 2007 prices) to Rp 702 trillion, greatly expanding the opportunities to address Indonesia‘s significant health challenges. Figure 3. 5 With bold policy choices, the annual health budget could rise substantially by 2014. Source: World Bank staff projections based on the business-as-usual and big-push scenarios. Increased spending is Indonesia‘s health needs are large and the country is starting to fall behind on a needed on: (1) key number of MDG targets. For example, maternal mortality remains extremely high health programs, and latest estimates for 2005 indicate that the maternal mortality ratio is at 420 particularly maternal (WHO et al, 2008). Indonesia is far off track with respect to this MDG target, and health; is unlikely to meet its goals by 2015. Tackling the issue will require investments in the quality of health workers, such as midwives and birth attendants, but should also increase demand and supply for institutional deliveries and improve the referral system. (2) public health Spending on public health interventions is a very cost-effective way to increase interventions for health outcomes for Indonesians of all ages and socio-economic strata. communicable as well Interventions can be targeted not only to traditional public health issues related to as chronic disease; communicable disease, but should also focus on life-style related diseases for and which smoking and obesity are risk factors. For example, efforts to curb smoking could be put in place, targeting all segments of Indonesian society. With respect to communicable disease, malaria interventions should be targeted to Indonesia‘s remote areas that still show outcomes much below the national average. HIV interventions will need to reflect the dual nature of Indonesia‘s epidemic, with high-prevalence in urban areas where injecting drug use is the main mode of transmission, and in the provinces of Papua and West Papua where prevalence is an alarming 2.4 percent and the main mode of transmission is unprotected sex. Currently less than 30 percent of HIV spending in Indonesia is contributed by the public sector (the rest is funded by international partners) while the growing prevalence of HIV makes the epidemic one of the fastest 68 Indonesia Public Expenditure Review Spending for Development 45 growing in Asia. Finally, nutrition and other interventions should also be further scaled up. Given the rising prevalence of cardiovascular disease and obesity, interventions targeting smokers and promoting dietary changes should be implemented nation-wide. (3) improved health Given low levels of insurance coverage in Indonesia, more spending is also protection for the poor. needed to improve risk protection, especially for the poor. Current health expenditures tends to favor higher income groups, while catastrophic health expenditures can still drive vulnerable Indonesians into poverty. The Government is planning to improve access and protection for the poor by increasing the coverage of Jamkesmas, the national health insurance program for the poor that currently covers 76.4 million people. This expansion of the program forms part of a broader reform effort of the Government to move towards the implementation of universal coverage. Although the time-line of these reforms remains somewhat unclear, at present, the newly elected Government will continue the reform implementation. However, further protecting Indonesians from unexpected health expenses will require large increases in public spending over the next RPJM period, even under preliminary actuarial estimates (Box 3.2). More broadly, the More broadly, commitment to Law No. 40/2004 on Social Security and the goal Government’s to cover all Indonesians‘ health insurance by 2020 necessitates an improvement commitment to of health system performance and the Government faces key policy choices with universal health respect to the configuration of the health financing system. High-level political coverage is a bold vision, but more work decisions are necessary on key elements of the health financing reform package, and resources will be such as: (1) the benefits that can be afforded and their impacts on health needed for this to outcomes and financial protection; (2) how to provide insurance to more than become a reality. 50 percent of those currently without coverage; (3) how to pay medical care providers to assure access, efficiency, and quality; (4) developing a streamlined and efficient health administration structure; (5) how to address the current supply constraints to assure availability of promised services; and (6) how to raise revenues to finance the system, including the program for the poor, as well as currently uninsured groups that may require Government subsidization. These groups include the more than 60 million informal sector workers, the 85 percent of workers in firms of less than five employees, and the 70 percent of the population living in rural areas. Regardless of which system is ultimately decided upon it is clear that health spending will need to be significantly increased to attain universal health coverage under a national insurance scheme (for one plausible scenario see Box 3.2). This highlights the importance of undertaking a detailed assessment of the potential future costs in order to better understanding the fiscal space that will be required to make this vision a reality (World Bank, 2009b). 45 National AIDS Commission Country report on the Follow-up to the Declaration of Commitment on HIV/AIDS (UNGASS Report) 2006-2007 69 Indonesia Public Expenditure Review Spending for Development Box 3. 2 Planning for the implementation of universal coverage The largest growing spending item within the Indonesian health budget is the cost of ongoing health insurance reform. In 2009, an estimated 0.6 percent of GDP or Rp 33 trillion (around 70 percent of the health budget) is expected to be spent on health insurance programs, of which Rp 4.6 trillion (10 percent of the budget) will be spent on Jamkesmas. Law 40/2004 on the National Social Security System (SJSN) specifies the type of health services that are eventually to be provided to all Indonesian citizens based on need. Citizens will go to public or private health care facilities, clinics and hospitals to receive medically necessary care. Prescription drugs are also covered as part of the health insurance program. The health insurance fund will be obligated to promptly reimburse providers for the services they provide at pre-negotiated prices. While the SJSN calls for universal coverage by 2020, the details and time-line for implementation of the reform remains ambiguous. Nevertheless, the reforms will undoubtedly move forward, and the Government needs to plan for substantial increases in health spending over the coming years. Although properly estimating the cost of health programs is highly complex due to the need for detailed information on unit cost, utilization and true health care costs (World Bank, 2009), the following projection illustrates some of the potential costs of expanding insurance coverage, based on preliminary findings from ongoing actuarial work. The projections are based on the current Askes program benefit package for civil servants and the poor with some adjustments. The required contributions for the program are calculated based on expected utilization rates and costs for each service. Moreover, a number of important assumptions are made regarding the rate of expansion in coverage, the costs of the program for civil servants and the poor, the number of civil servants and the rate of inflation for medical costs (see Annex Section A.2 for further details on the actuarial work and key assumptions underpinning the projections). Expanding health insurance will require a substantial increase in public spending by 2014. Based on these assumptions, the cost of health insurance would rise to approximately 1.4 percent of GDP by 2014 and to 2.9 percent of GDP by 2025 (based on reaching universal coverage by 2020). Costs in the early years are low because not everyone is covered and due to limitations on the supply-side. This would translate into extra spending of Rp 218 trillion over the next RPJM period above what would be required to maintain 2009 spending on insurance in real terms. Moreover, adding an additional linear increase in remaining public spending on health (projecting forward) suggests that the Government needs to spend at least 2.5-3 percent of GDP on health by 2014. Sources: World Bank 2008, and Draft Consultancy Report June 2009 on Actuarial Baselines for universal coverage in Indonesia and staff projections based on big push scenario. 70 Indonesia Public Expenditure Review Spending for Development Improving health International research emphasizes that increased spending alone is insufficient outcomes will also to improve health outcomes. Rather, improving outcomes also depends critically require further on: (1) careful targeting of interventions towards the poor and areas where institutional, market failures are most prevalent; and (2) the efficiency and effectiveness of governance and 46 regulatory reforms. public health service delivery. This implies that improving health outcomes in Indonesia will also require further institutional, governance and regulatory reforms in addition to increased public spending. For example, further reforms are needed to improve the functioning of the health system and the quality of health services, including better management and education of health personnel and improved deployment across regions. Although physical access to health services in Indonesia is generally considered adequate, there are shortages in the number and distribution – not to mention the poor quality – of health professionals, especially in remote areas. In particular, there are few specialists, and this will be a major issue with non- communicable disease (NCD) needs expanding rapidly. A number of policy reforms could help address the issues with deployment and quality. Health services in outlying regions could be improved by reorganizing the existing workforce to achieve a more balanced skill mix between doctors, nurses and midwives in remote areas. Incentive-based provider-payment methods can be implemented at the primary as well as secondary care level. Strengthening the accountability system for public working hours would allow for more efficient use of existing staff and facilities by reducing absenteeism and dual practice. Moreover, amendments to the general allocation fund (DAU) could be made in order to provide incentives for local civil service reform. Current full coverage of the sub-national wage bill provides a disincentive for sub-national governments to streamline their civil services. Removing full coverage would strengthen the equalizing impact of DAU transfers and empower sub-national governments to find a more optimal combination of inputs (size of workforce, capital, intermediate inputs and outsourcing) for health service delivery and encourage a more efficient distribution of the health workforce. Finally, amending PP No.55 to allow for deconcentration funds to be used for operational costs could also contribute 47 to improved provider performance. Meanwhile, The need to address the existing shortcomings in Indonesia‘s health system is Indonesia’s changing growing in urgency. This is because, even as Indonesia struggles to address population profile is traditional healthcare challenges, the country is undergoing a major demographic set to add transformation, together with epidemiological and nutritional transitions, that will considerable future challenges to the add considerable future challenges to the already stretched health system. already stretched health system… Indonesians are living longer and fewer children are dying from communicable disease, which will lead to a substantial ageing of the population over the coming decades (Figure 3.6). By 2025, the number of 30-60 year olds will be only slightly lower than the number of 0-30 year olds. At the same time, Indonesia is in the midst of epidemiological transition, with communicable diseases (such as tuberculosis and measles) in decline and NCDs (such as diabetes and heart disease) on the rise. The exception to this is HIV which is rising drastically and will require increased investment from the Government both for prevention and 46 See for example: (1) Gupta, Verhoeven and Tiongson, Public Spending on Health Care and the Poor. (September 2001). IMF Working Paper; and (2) Filmer, Deon and Pritchett, Lant, Child Mortality and Public Spending on Health: How Much Does Money Matter? (November 1999). World Bank Policy Research Working Paper No. 1864. 47 See Health Public Expenditure Review 2008 for further detail. 71 Indonesia Public Expenditure Review Spending for Development treatment. Moreover, there are large emerging differences in the progress of epidemiological transitions across Indonesia with eastern Indonesian provinces remaining at the initial stages of the transition with continuing high levels of communicable disease and child mortality, while provinces in Java and Bali have higher levels of NCDs. These developments will make the current health challenges more pressing and reinforce the case for health sector reform across several fronts. Figure 3. 6 The health sector needs to anticipate a major transition in demographics Notes and sources: Investing in Indonesia‘s Health, World Bank, 2008. …and require a Indonesia‘s expected population and health transitions will demand a different different and more health system, which will inevitably be more expensive. The main effects will be expensive health seen in the changing patterns of bed occupancy rates, greater demand for system. quality health services, increasing complexity of required healthcare services (personnel, specialization, sophisticated medical equipment and technology); and increased expenditure for healthcare (primary, secondary and tertiary services). A significant increase in spending on inputs into the sector should be anticipated. The number of doctors and specialists per 100,000 people will need to increase from the current low rates. It is estimated that at least a 100 percent increase in the overall number of bed-days may be required, with a likelihood of an even greater increase being required in the number of tertiary beds. Aging alone will have significant implications for utilization. Outpatient visits for the age category 55-59 alone may increase from about 3 million in 2007 to 4 million in 2015 and 5.5 million in 2025 (Figure 3.7). Similar increases are expected for most age categories over 45 years of age. Inpatient bed-days are also expected to increase significantly from 2007 levels: the age category 55-59 is expected to see an increase from around 2 million in 2007 to 3 million in 2015 and 3.9 million in 2025. 72 Indonesia Public Expenditure Review Spending for Development Figure 3. 7 The demographic transition will call for much higher health spending 8000000 8000000 6000000 Outpatient visits Inpatient bed-days 6000000 2025 4000000 4000000 2015 2025 2007 2015 2000000 2000000 2007 0 0 4 10 -9 15 14 20 19 25 24 30 29 35 34 40 39 45 44 50 49 55 54 60 59 65 64 70 69 4 4 10 -9 15 14 20 19 25 24 30 29 35 34 40 39 45 44 50 49 55 54 60 59 65 64 70 69 4 + + -7 -7 0- 0- 75 75 5 5 - - - - - - - - - - - - - - - - - - - - - - - - Age category Age category Notes and sources: Indonesia Health Financing Study, World Bank 2009. More spending is needed to alleviate infrastructure bottlenecks Greater public In view of the large and growing needs, coupled with limited private-sector expenditure and participation to date, Indonesia should consider substantially increasing public further reform is expenditure on infrastructure during the next five years – an aspiration that is needed to alleviate the possible, but will require bold policy choices. Increased public spending will be wide-ranging infrastructure critical to easing the infrastructure bottlenecks that are acting as a constraint to bottlenecks that are higher economic growth and faster poverty reduction. In particular, increased hampering economic spending is required to: improve water and sanitation services; ease congestion growth. within and between major cities; and address Indonesia‘s growing power shortages. Improving infrastructure will also require institutional and policy reforms and continued efforts to encourage greater private-sector participation. Following limited Given Indonesia‘s large infrastructure investment needs, it is desirable that the success in financing burden be shared with the private sector. However, the private sector encouraging has been reluctant to step forward with the needed funds and slow progress with private-sector efforts to secure public-private partnerships (PPPs) since an infrastructure participation, it may be time for the public summit in 2006 suggests that mobilizing private-sector investment in sector to make a infrastructure is still going to take some time. Meanwhile, Indonesia‘s big push to improve infrastructure needs continue to grow. Thus, it may be time for the public sector infrastructure. to take the lead and commit to a big push on infrastructure while continuing with efforts to get the private sector on board. 73 Indonesia Public Expenditure Review Spending for Development With bold policy The size of the public infrastructure budget over the next RPJM period will choices, public depend on the Government‘s policy choices. A business-as-usual approach to spending on budget allocations would see the share of spending on infrastructure remain infrastructure could relatively low at around 10 percent of the national budget and 2 percent of GDP rise substantially over the next five years. (Figure 3.8). Spending on infrastructure would rise slowly under such a scenario and total Rp 705 trillion over the five year period. This is an incremental increase of just Rp 138 trillion (Rp 55 trillion at constant 2007 prices) relative to what would be available if the infrastructure budget was simply fixed at its projected 2010 level, limiting efforts to undertake major new infrastructure investments. A big push, however, could see the infrastructure budget rise to over 18 percent of the national budget and to 4 percent of GDP by 2014. Under such a scenario, the infrastructure resource envelope could rise by an additional Rp 547 trillion over five years (Rp 360 trillion at constant 2007 prices) to Rp 1,251 trillion, greatly expanding the opportunities to address Indonesia‘s wide-ranging infrastructure bottlenecks. Figure 3. 8 With bold policy choices, the annual infrastructure budget could rise substantially by 2014 Source: World Bank staff projections based on the business-as-usual and big-push scenarios. Greater spending is As noted in Chapter 1, water and sanitation has been among the least funded needed to help: (1) and least developed infrastructure sectors in Indonesia with the result that, in the improve water and absence of a big push in this area, Indonesia is unlikely to meet its MDG targets sanitation services for expanding access to safe water and sanitation. Thus, increased spending on (especially in urban areas); water and sanitation should clearly be a top priority within infrastructure over the next RPJM period. The Government could begin by developing modern storm water and sanitation systems in Indonesia‘s major cities. Indonesian cities have very underdeveloped flood control and sanitation systems. A Jakarta-wide major sanitation program (US$2-3 billion) of the kind London supported in the mid-1800s and that Singapore financed in the 1960s would help transform the city, improving the lives of Jakarta‘s citizenry. This would also become a major public works program, generating much employment. Investment in water connections, especially for the poor, is also essential. A comprehensive water connection program is urgently needed to increase access to safe clean water and to decrease the risks from preventable diseases. The Government is planning to link an additional 10 million households to the piped 74 Indonesia Public Expenditure Review Spending for Development water supply by 2013, effectively doubling the existing number of people able to 48 access clean water, at an estimated cost of around Rp 80 trillion (US$8 billion). Investing in providing clean water and sanitation will not only directly impact development outcomes, but will also significantly enhance well-being in Indonesia. The benefits from having healthier population will be felt across all sectors. While additional resources are clearly needed both from public and private sources, it is also apparent that major changes are required in institutional arrangements and policies relating to water and sanitation infrastructure if Indonesia is to achieve its desired improvement in outcomes. (2) ease congestion by Transport. Another key priority over the next five years should be easing improving transport congestion within and between Indonesia‘s major cities, a key problem which is systems within cities reducing efficiency and competitiveness. Improved public transport, including and by progressing investments in mass transit systems, are needed to relieve road congestion in initiatives to connect urban areas. In addition, an important national priority is the development of a major cities; and network of expressways, with ring-roads for urban centers, to link Indonesia‘s major cities (e.g. a trans-Java highway linking Jakarta and Surabaya, and a trans-Sumatra highway linking Jakarta and Medan). The national road-network master plan calls for the creation of 2,885 km of toll-road expressways, compared with 700 km of expressways already in existence. The development of an expressway network would help reduce long travel times, expand markets, sharply reduce costs and risks, and improve competitiveness. This would provide an important boost to economic growth, much as the Golden Quadrilateral initiative has done for India (Box 3.3). 48 Ministry of Public Works, August 2008. 75 Indonesia Public Expenditure Review Spending for Development Box 3. 3 Breaking through with highway investment in India – lessons from the Golden Quadrilateral project In 1999 India embarked on its largest infrastructure project since independence – the National Highway Development Program (NHDP). Phase 1 of the program popularly called the Golden Quadrilateral constituted - four and six laning of 5846 km of highways linking India‘s four largest cities, New Dehli, Kolkota, Chennai and Mumbai. This project has cost US$ 5.7 billion until now, took almost eight years to complete, and was financed mostly with public resources. Special arrangements were made for securing the funding for the project. An excise on fuel was mandated for financing the program. In addition, multilateral funding, market borrowing and public-private-partnerships were also tapped into for meeting the programs funding requirements. To bridge the geographic and institutional divides confronting such a project, India‘s Government set up an autonomous authority to oversee the project. This agency was empowered to streamline the contracting process and circumvent the entrenched bureaucracy, both at the central and state Government level. Foreign companies were allowed to compete for contracts and do much of the work, departing from decades of traditional focus on self-sufficiency and associated protecting for domestic contractors. While there were some implementation delays, the project‘s economic rate of return was still estimated to be about 20 percent. Originally intended for completion by end 2005, the project was roughly 88 percent complete by then with only one of the four arms incomplete. By 2008 the project was substantially complete. The biggest sources of delay were land acquisition, poor quality designs, and contractor non performance. By reducing travel time and costs, this highway has provided a more efficient economic lifeline between India‘s major commercial centers and linked the towns and villages along the way as well. It has linked markets, thereby expanding them, and provided more effective market access to large parts of the country. It is an important part of the India‘s drive to become more competitive. By itself, this road project does not eliminate poverty but it is an important part of the foundation upon which rapid private sector development is reducing poverty. Sources: World Bank staff, WB ICR, ADB ICR. The Government could begin by accelerating efforts to complete the long-delayed trans-Java highway. This project first commenced in 1997 but has been plagued by delays, primarily due to land acquisition issues. After more than a decade, less than a third of the highway is in operation. In comparison, India‘s Golden Quadrilateral initiative commenced two years later in 1999 and was largely complete by 2008, despite being more than six times the length. India adopted many innovative solutions to ensure the project was completed including mandating an excise on fuel to help finance the project and setting up an autonomous authority to oversee the project. Some of these ideas could be considered to help speed up the completion of the trans-Java highway. A big push to complete the trans-Java highway, which links Indonesia‘s two largest cities and passes through the country‘s most heavily populated and economically important region, would yield significant economic returns and should be a key priority for the next RPJM period. Completing the project could cost an estimated Rp 37 trillion over the next five years (Box 3.4). Ideally, private-sector partners will be forthcoming for remaining sections of this network. Failing that, however, there is a strong case for the Government to move forward with the project regardless. While public funding to finish the project would take up almost 70 percent of the incremental resources that the infrastructure sector would receive under the business-as-usual scenario (Rp 55 trillion), limiting the spending that could be made in other infrastructure areas, it would certainly be affordable under a big push scenario. 76 Indonesia Public Expenditure Review Spending for Development Finally, the central and especially sub-national governments need to invest more resources in timely operations and maintenance for roads in order to improve and maintain the quality of the existing national road network. Box 3. 4 Breaking through on the trans-Java highway Traffic congestion between Indonesian‘s major cities is taking a toll on economic growth and well-being. Improvements to the national road network should be top public expenditure priority because of the multiplier effects that would be stimulated by linking communities and markets. The trans-Java toll road stands out as a project that would generate great benefits and employment opportunities, as the Government moves towards increasing the participation of the private sector in financing infrastructure. Travel time by road between Jakarta and Surabaya, Indonesia‘s largest two cities, currently takes over 14 hours to complete. However, this long journey could be cut in half when the trans-Java highway is completed. This project comprises 900km of roads across the island of Java and is segmented into 16 toll-road sections that were assigned to private concessions. Not only will it connect the most populated areas and the economic nucleus of the country, it will also significantly increase economic activity by reducing transaction costs, easing passenger freight, and enabling better intra-island movement. About half of the toll concessions where assigned in 1997, but little progress has been made since with only 5 of the 16 segments in operation in 2009 (250 km). The financial viability of the projects has not been a central issue, as they cover Indonesia‘s most travelled artilleries. Like other transport projects of this nature, some concessions have struggled to secure debt financing, which requires significant resources up front that will be paid over a long period (15 years or more). However, the biggest project obstacle has been bearing the costs of land acquisition. The contract arrangements placed this burden on the private companies and many have not yet reached financial closure. The trans-Java toll road is an investment that would generate high returns to public sector spending. Excluding the five segments that are already in operation, the investment required for the remaining 653 km of this four-lane highway are estimated at Rp 37 trillion, of which Rp 4 trillion is for land acquisition costs. Given that this road will be a motor of growth for Java and, on the basis that there are gains to be made from investing, the Government should start the land acquisition process to reduce the time and risks. Sources: World Bank staff. (3) address Energy. A decade of underinvestment has left Indonesia facing a power crisis. Indonesia’s growing Blackouts are now frequent across the country and small-scale residential users, power shortages. especially the poor, are still underserved. The Government has placed a high priority on encouraging investment in the electricity sector over the past two years. However, there is a long lead time in contracting and construction, and it will not be until at least 2010 that substantial new capacity will be brought on line to address power shortages that have arisen from several previous years of inadequate investment. Moreover, the fact that electricity tariffs have not been increased since 2003 has acted as a disincentive to greater investment in the power sector. Thus, urgent new efforts are needed to quickly provide greater energy capacity. With projections that the demand for electricity is likely to grow by between 7 and 9 percent per annum over the next 10 years, significant investment is required to address existing shortages and to meet future demand. The national state-owned electricity provider (PLN) will need to add close to 2 million annual connections, which is twice the current annual average of 1 million, in order to reach the Government‘s target of giving energy access to 76 percent of the population by 2014 (up from 61 percent in 2007). This could require an estimated Rp 374 trillion (US$37 billion) in additional public spending over the next RPJM 77 Indonesia Public Expenditure Review Spending for Development period assuming a phased roll out of PLN‘s long-term expansion plan 49 (2008-18). Improving However, as with the health sector, increased public spending alone will not be infrastructure will also sufficient to improve infrastructure in Indonesia. Rather, improving infrastructure require institutional, will also require institutional, governance and policy reforms. For example, road governance and policy maintenance can be strengthened by introducing fiscal incentives for reforms… sub-national governments to invest more in maintaining the local road network. Power-service delivery to the poor can be improved through increased PSO transparency. Also important is following through with the 2010 deadline for tariff reform for PLN. Current electricity subsidies are inefficient and regressive, encouraging excessive electricity consumption and providing greater support to rich consumers than to the poor. Building the capacity of the Land Working Group and giving it a national mandate would strengthen efforts to remove impediments to timely land acquisition for infrastructure development. Finally, improving governance and regulations in procurement could enhance the competitiveness of procurement bids and substantially reduce costs, allowing 50 more infrastructure to be built for any given level of public spending. …as well as continued Improving infrastructure will also require continued efforts to encourage great efforts to encourage private-sector participation. Indonesia‘s infrastructure needs are significant and greater private-sector public spending in this area should compliment and encourage greater participation. private-sector participation, rather than substitute for it. However, while the Government is pursuing PPPs in all infrastructure sectors such as toll roads, power plants, natural gas pipelines and airports, institutional constraints have resulted in modest outcomes. Over the three years since the first infrastructure summit, not one compliant PPP project has been successfully tendered. Construction has commenced on over US$2 billion of new PPP projects yet, to date, all of these PPPs have occurred on an ad-hoc basis outside the official PPP framework. Slow progress in compliant PPPs to date has generally been the result of poor project preparation, with inadequate background analysis undertaken prior to tendering, resulting in unrealistic expectations by tendering agencies. The Government has strengthened its project preparation process by placing greater reliance on external advisers and addressing land acquisition issues that have blocked private investment in toll-road development (with the creation of a revolving land fund). However, getting a small number of PPPs tendered and transacted would be a strong demonstration of the Government‘s commitment to the PPP framework. Another way to move the PPP agenda forward would be for the public sector to invest in key infrastructure projects that can serve to jump start the process of deepening private-sector engagement. With actions like providing contingent liability guarantees or investing in flagship projects, the Government can send a powerful signal to the private sector and leverage deeper investment for infrastructure. 49 This estimate is based on the RUPTL 2009 (Rencana Usaha Penyediaan Tenaga Listrik 2009-2018). The PLN long-term expansion plan covers the period 2008-2018 and requires a total investment of US$84 billion (Rp 882 trillion assuming a constant exchange rate of Rp 10,000/US$) in order to reach an electrification target of 90 percent by 2018. This includes generation, transmission, and distribution costs. The public sector contribution is estimated at US$58 billion (around 70 percent). 50 Position paper with respect to the development of construction services industry, KPPU (2008). 78 Indonesia Public Expenditure Review Spending for Development 3.6 Spending better in education and agriculture Improving spending efficiency and addressing key intra-sectoral priorities will be central to achieving development outcomes in the education and agriculture sectors. The key focus for education should be spending to improve outcomes and transition rates to secondary schooling, while agriculture spending would yield greater returns if directed towards public goods and higher-value production. Education is well funded, but resources could be better allocated and used more efficiently The key challenge in After a large rise in resources over recent years, the education budget is education will be to expected to stabilize at a relatively high share of the national budget over the translate increased next five years. The key challenge will be to ensure that these resources are resources into used efficiently to address key priorities such as improving transition rates from improved education outcomes. primary to secondary school and improving the quality of schooling across all levels. That latter is essential if Indonesia is to translate its considerable investment in education into improved outcomes, and will require investments in teacher quality, pre-service training and improvements to classroom infrastructure. However, care needs to be taken to ensure that the salary increases accompanying an initiative to improve teacher quality do not crowd out spending on other programs. At the same time, other programs like early childhood and university education will also place demands on the education budget. Simultaneously addressing all these competing demands will require difficult policy choices and greater efforts to improve efficiency in education spending. Education spending is With the expected realization of the 20 percent of central Government spending expected to stabilize at target in 2009, education spending is expected to stabilize at a relatively high a relatively high share share of around 18-19 percent of the national budget and around 3.5-4 percent of the national budget. of GDP over the next RPJM period (Figure 3.9). This will ensure that the already considerable education resources will continue to grow in nominal and real terms, albeit more slowly, as the budget and economy expand over the next five years. Under a business-as-usual scenario the education envelope could total Rp 1,298 trillion over the next five years. This is an incremental increase of Rp 269 trillion (Rp 112 trillion at constant 2007 prices) relative to what would be available if the education budget were simply fixed at its projected 2010 level. However, under a big push scenario, the education resource envelope would rise by an additional Rp 160 trillion (Rp 96 trillion at constant prices) to Rp 1459 trillion over five years, increasing the incremental resources to Rp 430 trillion (Rp 208 trillion at constant prices). 79 Indonesia Public Expenditure Review Spending for Development Figure 3. 9 Annual education spending is expected to stabilize as a share of the budget, but will continue to grow in nominal and real terms Source: World Bank staff projections based on the business-as-usual and big-push scenarios But the challenge will However, the key test will be to ensure that these considerable resources are be to ensure that these used efficiently and effectively to tackle the significant challenges still facing the resources are used education sector such as low transition rates to secondary school, poor well to address key classroom infrastructure, uneven distribution of teachers and a high number of priorities. poorly qualified teachers. In the context of the next RPJM, the Government could consider altering the current spending mix in the education budget in favor of these priorities or, at the very least, allocating most, if not all, of the incremental increase in the budget to these priorities. In particular, As noted in Chapter 1, the bulk of education spending is allocated to primary secondary education education where enrollment rates are now close to universal. Efforts to target the needs to be remaining 6 percent of children not yet in primary school should continue, prioritized... including by improving access to primary schools in selected remote regions. However, increasing expenditure allocations to secondary education should be a priority during the next RPJM. Increased funding would help address low transition rates from primary school, and thereby meet the nine-year compulsory education target, as well as raise enrollment rates at the senior secondary school level. Given the link between poverty and low enrollment rates, concurrent efforts are needed to ensure equitable access to education and to reduce regional discrepancies. Specifically, programs to provide scholarships as well as to attract and bring youth back to school need to be strengthened and better-targeted in order to increase the transition rate among the poor and reduce drop-out rates at the junior secondary level. 80 Indonesia Public Expenditure Review Spending for Development Figure 3. 10 If prioritized, funding for secondary education could expand substantially by 2014 Notes and sources: World Bank staff projections based on the business-as-usual scenario. …including by To address these important challenges at the secondary-school level, it would be allocating it a larger desirable to allocate this sub-sector a larger share of the education budget. share of the education However, this need not be at the expense of other levels of schooling. Rather, budget. considering the substantial increase in funding to other programs in recent years, it could be achieved by allocating the sector a major share of any further real increases in the education budget. For example, if the projected real incremental increase in the education budget over the next five years (Rp 112 trillion under the business-as-usual scenario) was devoted entirely to secondary education, its budget could rise from Rp 50 trillion in 2010 (at constant 2007 prices) to Rp 97 trillion in 2014, taking its share of total education spending from around 31 percent in 2009 to around 47 percent by 2014 (Figure 3.10). Such a significant increase in resources could cover the costs of achieving universal enrolment rates at the junior secondary school level and substantially increasing enrolment rates at the senior secondary school level, which together could cost an estimated Rp 102 trillion over the next five years at constant 2007 prices (Box 3.5). 81 Indonesia Public Expenditure Review Spending for Development Box 3. 5 Achieving universal junior secondary and increased senior secondary enrolment would require a significant increase in spending Indonesia has made significant progress in achieving nine years of compulsory schooling, particularly at the primary level, but realizing this target requires further efforts. The net enrolment rate at the junior secondary level, at 67 percent in 2007, remains well below universal. Moreover, the net enrolment rate at the optional senior secondary level is even lower at 45 percent. According to household survey data, 4.4 million children of junior-secondary-school age (13-15 years old) and 7 million of senior-secondary-school age (16-18 years old) were not enrolled in 2007. Given the high rates of return to secondary schooling, a substantial push in this area would yield significant benefits over the longer-term through increases in wages and by raising Indonesia‘s potential rate of productivity and economic growth. The push could aim to achieve universal junior secondary enrolment and 60 percent enrolment at the senior secondary over the next RPJM period A detailed costing of education programs is outside the scope of this report. However, the following simulation illustrates some of the potential costs of achieving these goals. Attaining universal junior secondary school enrolment by 2014 could cost an estimated Rp 70 trillion over the next RPJM period in constant 2007 prices. Of this, Rp 47 is for ongoing routine expenditure associated with new students, Rp 22 trillion is for building the more than 170,000 new classrooms that would be required (assuming an average of 30 students per class) and Rp 1.6 trillion is for scholarships of around Rp 500,000 per year to encourage children from the poorest quintile (1.6 million in 2007) to enroll in school. However, the later would also required improved mechanisms to identify and target these students. Similarly, raising the net enrolment rate at the senior secondary school level to 60 percent by 2014 could cost an estimated Rp 32 trillion over the next RPJM period. Of this, Rp 21 is for ongoing routine expenditure, Rp 10 trillion is for building the approximately 70,000 new classrooms that would be required (assuming an average of 35 students per class) and Rp 1.4 trillion is for scholarships for the poorest quintile of children (2.0 million in 2007). Attaining universal junior-secondary enrolment could Expanding senior-secondary enrolment to 60 percent cost Rp 70 trillion by 2014 could cost Rp 32 trillion by 2014 The total cost of achieving these goals could total Rp 102 trillion (in constant 2007 prices) over the next RPJM period, which represents 11 percent of the total national education budget over this period (under the base case). This suggests that such an ambition could be affordable if the Government chooses to make it a priority. Sources: World Bank staff projections based on: (1) the business-as-usual scenario; (2) Susenas, MoF and MoNE data; and the classroom cost methodology set out in the Preliminary Damage and Loss Assessment: Yogyakarta and Central Java Disaster report of June 2006. Increasing the quality Investing in teaching quality is crucial to improving the quality of education and of education across all increasing the returns to education spending. The 2005 Teacher Law aims to levels is a key priority address this by providing incentives for teachers to get accreditation and by and will require increasing the base salaries for those teachers that have higher qualification investments in teacher 82 Indonesia Public Expenditure Review Spending for Development quality. levels, better performance and/or are located in remote areas. Beyond certification, deepening pre-service teacher training reforms is crucial to avoid ever-increasing numbers of unqualified teachers. However, care needs However, care needs to be taken to ensure that the salary increases associated to be taken to ensure with improving teacher quality do not crowd out spending on other education that salary increases programs. The continued implementation of the Teacher Law could increase accompanying the spending on teacher salaries by a projected Rp 172 trillion over the next five initiative to improve teacher quality do not years, raising total spending on teacher salaries to around 60 percent of the crowd out spending on annual education budget by 2014 (Box 3.6). However, this substantial increase in other programs. salary expenses could be partially offset by a simultaneous increase in student-teacher ratios through a reduction in the overall number of teachers as well as other efficiency improvements. Improving the quality Improving the standard of classroom facilities could also help improve the quality of classrooms would of education. As a start, the Government could repair the high number of also help. classrooms at the primary and, to a lesser extent, secondary school level that are damaged, a program which could cost an estimated Rp 22 trillion (at constant 51 2007 prices). In the context of the current global economic recession, the implementation of such a program in the near future could also act as stimulus, helping to inject funds and create jobs at the local level throughout the country. However, sustaining such improvements will require an additional commitment by sub-national governments to allocate a higher share of their education budgets to operations and maintenance. Greater spending Given the large increases in resources in recent years, the education sector is efficiency also needs now relatively well funded. Thus, greater focus on improving the efficiency of to be a key priority. spending is needed, particularly as the education budget share is unlikely to go far beyond the current 20 percent. Significant efficiency gains could be potentially obtained by reforming staffing norms at the school level, strengthening monitoring and evaluation and establishing an integrated information and communication technology framework to improve information and data flows. 51 This estimated is calculated using data on damaged classes published by MoNE and the methodology set out in the Preliminary Damage and Loss Assessment: Yogyakarta and Central Java Disaster report of June 2006. 83 Indonesia Public Expenditure Review Spending for Development Box 3. 6 Teacher accreditation costs will continue to rise during the next RPJM period The Teacher Law, introduced in December 2005, introduces an additional certification requirement that will significantly increase the level of routine spending on teacher wages (salary and incentives). The law stipulates that all teachers must be certified by 2016 and that, upon certification, they will receive a professional allowance equivalent to their base salary plus a functional allowance equivalent to 50 percent of their base salary. The law also specifies a special area allowance, which will be given to teachers in conflict, natural disaster, remote, and other hardship areas. Approximately 10 percent of teachers are expected to receive this special area allowance. The law resulted in some teachers receiving over a threefold increase in their salary (base salary + professional incentive + special area incentive + functional incentive). Since it began in 2006, accreditation has already increased spending on teacher salaries by an estimated Rp 47 trillion (at constant 2007 prices), although the burden of this has been cushioned by a substantial increase in the overall education budget over this period. Even assuming no change in teacher numbers, spending on the professional incentive would continue to gradually increase over the next RPJM period (and beyond) as more teachers get certified. Spending on functional and special-area allowance would also continue to increase, albeit modestly, since these incentives have largely already been implemented. Additional spending on the three allowances could amount to an estimated Rp 172 trillion over the next five years, equivalent to around 19 percent of the total education budget over this period. The cost of teacher salaries will continue to rise over the next five years Increasing teacher salaries upon certification seems justified. However, if these increases crowd out other recurrent education expenditures, they are likely to negatively affect education outcomes. The projected increase in spending on salaries over the next five years would see total spending on teacher salaries reach around 60 percent of the annual education budget by 2014 (under the business-as-usual scenario). This estimate is premised on the critical assumption that teacher numbers do not increase. If, however, teacher hiring continues uncontrolled at its current pace, teacher salaries could make up over 80 percent of the education budget by 2014 and will certainly crowd out many core education programs. Simultaneously tackling the oversupply of teachers would reduce potential inefficiencies and lower the 52 burden of increased teacher compensation. Sources: World Bank staff projections based on the business-as-usual scenario. 52 See the forthcoming publication Teacher Certification in Indonesia: A strategy for teacher quality improvement for a more detailed discussion of this issue. 84 Indonesia Public Expenditure Review Spending for Development The efficiency of The efficiency of spending in education could be significantly enhanced by spending could be reforming existing staffing norms at the school level, and providing adequate significantly enhanced incentives to the local governments to better manage teacher deployment by reforming staffing together with incentives to schools to better utilize teachers. With teacher norms at the school level, and providing salaries absorbing around half of all education expenditure, inefficiencies in adequate incentives to staffing are extremely costly. As noted in Chapter 1, Indonesia has some of the the local governments lowest student-teacher ratios (STRs) in the Asia Pacific region and it is estimated to better manage that there is an excess of 21 percent of teachers, despite shortages in remote 53 teacher deployment. areas, which amounts to over 10 percent of the total education budget. This amount is now being exacerbated with teacher certification, as more teachers begin to receive a doubling of salary. Given that teachers are civil servants, there are few options other than attrition or ―pay outs‖ to reduce overall numbers, and the latter solution would be expensive in the short-tem. An important complementary strategy would be to limit the intake of prospective teachers into training institutions and to reorient primary teachers to Early Childhood Development Programs, an area that has received comparably little attention to date, or to secondary education, where expansion in enrollment is expected to take place. Moreover, the DAU formula – which encourages schools and districts to request more teachers from the central Government then they need – could be reformed. A potential option for staffing schools in the future is to determine teacher numbers on the basis of the number of students, rather than the number of classes, with a weighting for smaller schools. More radically, such funds could be provided directly to schools since having the teacher salaries come straight out of their budgets would encourage schools to be efficient in the number of teachers hired. Strengthening Strengthening monitoring and evaluation, particularly that of targeted programs, monitoring and would improve program efficiency and effectiveness. Key targeted programs evaluation would also include BOS, teacher certification, scholarships for the poor, and improve efficiency and community-based Early Child Development service delivery. These programs effectiveness... have potentially significant impacts on sector performance and account for a significant proportion of the sector‘s budget. Key issues that need to be addressed include: whether funding reaches the intended beneficiaries, what the development impacts are, and whether they are most cost-effective. In addition, other In addition to all these immediate priorities in the education sector, other programs like early programs, like early childhood and university schooling, will also place demands childhood and on the education budget over the next five years. Despite considerable university education international evidence pointing to the strong economic benefits that can be will also place demands on the derived from effective investments in early childhood education and education budget. development, Indonesia currently spends very little on early childhood education and the gross enrolment rate at this level was only 20 percent in 2007. However, the Government has set the target of having 70 percent of districts reaching 72 percent or higher enrolment, which would entail a substantial increase in 54 public spending. Similarly, the expansion of Indonesia‘s university sector and increased enrolment rates at this level will also be important for long-term economic growth and may also require substantial injections of public funds. 53 Investing in Indonesia‘s Education, World Bank, 2007. 54 Draft Renstra 2010-2014. 85 Indonesia Public Expenditure Review Spending for Development Addressing all these It will not be possible to simultaneously address all the existing and emerging competing demands demands in the education sector within the existing and prospective education will require difficult 55 budget. The three programs costed here alone amount to a real increase in policy choices and expenditure of around Rp 300 trillion over the next five years, which is around greater efficiency in spending. triple the real incremental resources that would be allocated to the sector under the business-as-usual scenario and 50 percent more than would be allocated under a big push scenario. Thus, responding to all the challenges in education will require tough policy choices in order to determine priorities, contain costs and achieve greater efficiencies across all programs. Existing agriculture resources could be better directed Significant efficiency gains could be made by reallocating existing agriculture sector resources. In particular, a reduction in fertilizer subsidies could free up significant resources for other agriculture needs. The high rates of return for research and development, extension and irrigation, coupled with the small or falling current funding for these activities, suggest that agriculture development would be well served by increasing public funding in these activities. Also, there is greater potential for horticulture development and other higher value-added activities (e.g. livestock). These activities need to be given a more prominent place in expenditures and future agriculture sector development in order to expand employment opportunities and generate higher farm incomes. Lastly, improvements to the monitoring and evaluation system would allow Indonesian policy-makers to better assess the impact of agriculture public spending from more effective programs. Maintaining the Given its importance to the Indonesian economy and as a source of employment agriculture sector’s for a large proportion of the country‘s poor, there is a strong case for at least existing budget share maintaining the agriculture sector‘s existing share of the budget. Following a would see spending sharp increase in recent years, this would see agriculture spending stabilize at stabilize at around 5½ percent of the around 5½ percent of the national budget and around 1 percent of GDP over the budget and 1 percent next RPJM period (Figure 3.11). This will ensure that agriculture resources will of GDP over the next continue to grow in nominal and real terms, albeit more slowly, as the budget and five years. economy expand over the next five years. Under a business-as-usual scenario the agriculture resource envelope could total Rp 385 trillion over the next five years. This is an incremental increase of Rp 78 trillion (Rp 32 trillion at constant 2007 prices) relative to what would be available if the agriculture budget were simply fixed at its 2010 level. However, under a big-push scenario, the envelope would rise by an additional Rp 45 trillion (Rp 28 trillion at constant prices) to Rp 430 trillion over five years, increasing the incremental resources to Rp 125 trillion (Rp 60 trillion at constant prices). 55 (1) Repairing damaged classrooms; (2) achieving universal junior secondary and increase senior secondary enrolment; and (3) teacher accreditation. 86 Indonesia Public Expenditure Review Spending for Development Figure 3. 11 If annual agriculture spending was maintained as share of the budget, resources would continue to grow in nominal and real terms Source: World Bank staff projections based on the business-as-usual and big-push scenarios. Agriculture could be a Agriculture productivity and value-added per worker have been flat since the greater source of early 1990s. This is also reflected in low growth in yields for some key employment and commodities since the early 1990s. The current stagnation comes after several generate higher living decades of successful improvements in agricultural productivity in the 1970s and standards for the rural population 1980s and in using agriculture and rural development to alleviate poverty in the country. There are several ways in which Indonesia can try to reverse this trend and revitalize agriculture. Indonesia should Horticulture, livestock and other higher value products (e.g. flowers) are driving focus support in global agriculture markets through the emergence of global supply chains. higher value Research has shown that participation in these global supply chains can production, with better increase farmers‘ incomes by between 10 and 100 percent (WDR, 2008). demand prospects both domestically and Higher-value products are also the main source of increased demand in globally Indonesia, as the country modernizes and income levels increase (World Bank, ―Horticultural Producers and Supermarket Development in Indonesia‖, 2007). Participating in global The evidence suggests that only those farmers at the higher end of the scale value chains and (larger land plots, more education, enhanced capacity to invest) are able to meeting the domestic benefit from new agriculture opportunities (WDR, 2008). The Government has a demand for higher role to play in strengthening the access of farmers to markets and in allowing value products is challenging for small them to participate in markets for higher-value products. This refocusing would farmers require the promotion of higher-value agricultural products as a key objective of Indonesian agricultural policies. This could translate into increased budget allocations to certain agencies in the Ministry of Agriculture (e.g. more resources to DG Horticulture or the Quarantine Agency) and re-focusing of spending of certain agencies to support higher value agriculture (e.g. Human Resources Agency or the Agricultural Research Agency). 87 Indonesia Public Expenditure Review Spending for Development Reallocating resources To improve productivity, the Government should reallocate public spending from from subsidizing items that may not have as high an impact on production (e.g. subsidization of private goods to private inputs) to providing public goods with demonstrated high returns, such as provision of public irrigation or research and extension. Private inputs are being subsidized directly goods is essential to improve agriculture (through fertilizer or seed subsidies) or indirectly (through social aid programs productivity that most directorates are implementing). Subsidies should be reduced and better targeted. Subsidy schemes should also be clearly designed to address market failures. Furthermore, fertilizer subsidies should not be so heavily focused on one nutrient – nitrogen through urea. Box 3.7 below provides guidance on the rational for subsidies and best practice in the design of subsidy programs. Box 3. 7 Rational and best practice for input subsidies schemes Two issues should be considered when designing a subsidy scheme for agricultural inputs: the economic and social reasons that justify the subsidy; and the lessons learned from designing and implementing subsidy programs in other countries. The economic reasons may include missing markets (and the subsidy helps in creating those markets), to stimulate the adoption of newer technologies, creating positive externalities, as well as missing or imperfect credit and insurance markets. Subsidies can also be used to support farmers for social reasons, like social safety-nets (e.g. food security or emergency income support). Yet, in these cases, income support programs are often more effective than subsidizing agricultural inputs. Key lessons learned from input subsidy programs:  clear identification and definition of program objectives;  setting the program within an agriculture development strategy;  establish clear targeting so the program design can take into account who are the target beneficiaries, what identification criteria to use and delivery mechanism;  define and limit the programs scale and costs from the early design stage;  establish clear Monitoring and Evaluation arrangements for expenditures, activities, outputs and impact, so Government can tailor the program to minimize costs and risks;  engage with the private sector in the design to avoid replacing private investment; and  implement subsidies on a temporary basis with exit options. Sources: WDR 2008 and SOAS et. al. 2008. The removal or The Government also sees the improvement of farmers‘ welfare and their reduction of subsidies livelihoods as a key responsibility of the Ministry of Agriculture. As such, the can be coupled with an reduction of subsidies to private inputs could be coupled with an income support income support program to the poorer farmers. Indonesia has implemented in the past several program for farmers income support programs successfully, for which the challenges of designing such a program for the rural sector can be addressed. A strong monitoring and evaluation system is necessary in order to better assess the impact of all forms of public spending, but in particularly those providing income and consumption support. Only then will Indonesian policy-makers be able to review options for public support for agricultural development and design more effective programs. Indonesia should Large investments in irrigation systems, as well as higher levels of spending for increase investments research and extension, were largely behind the successful increase of in key public goods for agriculture productivity in Indonesia in the 1970s and 1980s. This is also in line agricultural with research conducted in other countries, which shows high returns to development – irrigation, R&D and investments in irrigation infrastructure, research and development, and extension extension services services. In addition to the allocation of sufficient resources, the Government can also improve the effectiveness of available resources. Decentralization has brought public services closer to the end-user, but also further away from the authority of the central Government. As such, the central Government needs to 88 Indonesia Public Expenditure Review Spending for Development work with sub-national governments to ensure that sufficient resources are allocated for the maintenance of key infrastructure for rural development (roads, bridges, and irrigation systems), as well as the provision of extension services. Agriculture development should be part of a broader development strategy for the country and particularly its poorer rural areas. Agriculture has played a key role in Indonesia‘s development, and even more so in the alleviation of poverty, acting as a safety net for many Indonesians during the 1997/98 financial crisis. Even so, as the country modernizes, the role of agriculture in the country‘s development is likely to diminish. The fact that agriculture accounts for 40 percent of employment reflects as much a failure of other sectors to create employment and growth as of the potential that agriculture still has in rural areas. As agriculture becomes more productive, it is likely to shed rather than create labor. It is therefore crucial to link the development of the agriculture sector with the public sector support for the development of rural areas in general (infrastructure and human capital) and the development and off-farm employment prospects in rural areas (such as agro-processing services, etc.). 3.7 Energy subsidies or social protection? Two other areas worth examining are energy subsidies and social protection. The former needs to be examined because it would continue to consume a relatively large and growing share of the national budget if existing policies are maintained. The latter warrants examination because the continued modest amount of resource provided to social protection would be insufficient to meet the need for basic social safety nets and other social assistance. If existing policies are The dramatic fall in oil and other energy prices in late 2008 and early 2009 led to maintained, spending a dramatic fall in spending on energy subsidies (as well as a fall in oil and gas on energy subsidies revenues). However, if existing subsidies are maintained as part of a would rise to continuation of business-as-usual policies, spending on energy subsidies will 12 percent of the budget and over rebound when global energy prices recover in line with a broader recovery in the 2 percent of GDP by global economy, along with an increase in oil and gas revenues. This occurs 2014, even with a because as prices rise, the gap between the economic cost and the regulated conservative future oil price widens for both fuels and electricity generation. Under the price profile. business-as-usual scenario, which includes a conservative future oil price profile 56 rising to around US$76 by 2014 , spending on energy subsidies would rise from over 8 percent of the national budget in 2009 to 12 percent in 2014 and from 1.7 percent to 2.3 percent of GDP over the same period (Figure 3.12). Thus, by 2014 Indonesia would again be spending more on energy subsidies than it does on infrastructure and more than double what it spends on health. Under such a scenario, spending on energy subsidies would grow strongly in nominal and real 57 terms, and could total Rp 798 trillion over the next RPJM period. This would represent an incremental increase of Rp 218 trillion over the next RPJM period (Rp 108 trillion at constant 2007 prices), relative to what would be spent if total spending on subsidies were capped at its projected 2010 level. 56 The future oil price profile under the business-as-usual scenario is taken from DEC May 2009, which forecasts that oil prices will average around US$47 in 2009, rising to around US$76 by 2014. 57 Includes some spending on non-energy subsidies (around 10 percent of total on average). 89 Indonesia Public Expenditure Review Spending for Development Figure 3. 12 Existing policies will lead to a rebound in spending on energy subsidies when oil prices recover Source: World Bank staff projections based on the business-as-usual scenario. Moreover, future Moreover, projections of future spending on energy subsidies are highly sensitive spending on energy to the future path of global energy prices – especially the world price for oil – subsidies could be which are difficult to predict in the current economic environment. However, as dramatically higher if demonstrated by the recovery in oil prices beginning in March 2009, there is an oil prices recover more quickly or to a higher upside risk to the profile of oil prices assumed under the business-as-usual level. scenario. A sensitivity analysis based on the business-as-usual scenario suggests that if oil prices instead average around US$62 per barrel in 2009 and gradually rise to US$100 per barrel by 2014 (with the existing subsidy policy in place) then spending on energy subsidies could rise by an additional Rp 297 trillion to Rp 1,095 trillion over the next five years (to over 16 percent of the budget and 3 percent of GDP) (Figure 3.12). If prices rose more drastically and gradually returned to the US$150 per barrel levels witnessed in 2008 then spending on energy subsidies could rise by a further Rp 458 trillion to Rp 1,553 trillion (to around 25 percent of the budget and 5 percent of GDP). Increased spending on Higher oil prices would also increase revenues and thus the increased spending energy subsidies on energy subsides would be offset in terms of the total national budget. would be offset by However, this would represent another lost opportunity to use the benefits of higher revenues, but higher revenues to fund key development priorities. Furthermore, higher oil this would represent another lost prices would reduce fiscal space at the center and potentially crowd out other opportunity to central Government priorities. This is because the central Government pays for increase spending on all the energy subsidies, but transfers around 30 percent of its oil and gas development priorities. revenues to sub-national governments. Thus, higher oil prices are a net drag on the central Government‘s budget, although they are always a net positive for 58 sub-national governments. Thus, the current However, the Government could depart from this business-as-usual approach. period of low oil prices The current period of low oil prices, which happens to coincide with the planning coinciding with the period for the next RPJM, is an opportune time to re-examine the spending mix next RPJM planning between energy subsidies and social protection. A period of low energy prices 58 For more information, see World Bank (2008). Black Hole or Black Gold? The Impact of Oil and Gas Prices on Indonesia‘s Public Finances, Policy Research Working Paper 4718. 90 Indonesia Public Expenditure Review Spending for Development period is an opportune would be a good time to scale back the existing policy so as to mitigate the time to re-examine the potential fiscal risks of future increases in the oil price. Moreover, while protecting spending mix between the vulnerable is often cited as a rationale for energy subsidies, Indonesia‘s energy subsidies and existing policy is highly regressive and overwhelmingly benefits the non-poor (see social protection. Chapter 1 and Annex Section A1). In 2005 the Government began shifting some resources from subsidies to social assistance programs that better target the poor and near-poor. In particular, the Government launched Bantuan Langsung Tunai (BLT), an unconditional cash transfer program for over 19 million vulnerable households, which successfully mitigated the inflationary impact caused by reducing fuel subsidies. A strong argument exits for continuing with this approach of redirecting spending on energy subsidies to social protection programs that better target the vulnerable. Despite this, spending While existing poverty and social protection programs seem to be relatively on social protection in 59 successful, the social protection system remains underdeveloped. Moreover, Indonesia remains public expenditure on social protection in Indonesia remains small and is small. insufficient in light of the persistence of poverty and high levels of vulnerability. According to the economic classifications in the budget, the central Government spent Rp 57 trillion on ‗social assistance‘ in 2008, which represents 5.5 percent of the national budget or 1.1 percent of GDP. However, most of this is spent on education (e.g. BOS) and health insurance programs (e.g. Jamkesmas) are included in the education and health budgets under the functional classifications in the budget. A much smaller amount, Rp 16.7 trillion (1.6 percent of the budget or 0.3 percent of GDP), was spent on community driven development and social assistance programs, which is around 6 percent of the amount spent on energy subsidies in the same year. Current shocks Although the current crisis (2009-10) threatens to undo recent gains, the new threaten to undo Government is in a strong position to accelerate poverty reduction and expand recent gains, but the social protection. As growth continues and fiscal space exists, Indonesia can new Government is in continue to invest more resources into programs that successfully reduce a strong position to invest more in social poverty. More attention is needed to help the vulnerable mitigate risks and cope protection. with shocks – such as the current crisis – which threaten to slow or even reverse poverty reduction. As Indonesia emerges as a middle-income country, there is also a need to develop new instruments that extend social insurance. There are a number of key priorities that could be addressed over the next RPJM period: existing poverty reduction programs could be improved and expanded once implementation challenges are resolved; a shock-response system could be developed that uses public works and unconditional cash transfers to mitigate risks for the vulnerable; and carefully preparing for the gradual implementation of a national social security system. 59 Social protection includes social assistance (e.g. cash transfers), social insurance (e.g. health insurance) and social safety nets (e.g. public works programs for the unemployed). 91 Indonesia Public Expenditure Review Spending for Development 3.8 Bureaucracy reform In addition to the priority development sectors already noted, the Government has made a strong commitment to advance bureaucracy reform. This is an important priority that is critical for enhancing the efficiency and effectiveness of government administration and to improving public service delivery in Indonesia. However, reforms in this area need to be carefully designed and implemented. The central Government is currently planning to expand the Bureaucratic Reform Initiative to the entire central bureaucracy by 2011. This Initiative has notable strengths that could help improve efficiency and also includes increased salaries for civil servants as a key feature. However, the plan also has some limitations which could reduce its effectiveness, which is risk in light of the large potential costs associated with salary increases. Spending on A business-as-usual approach to public expenditure would see spending on government government administration stabilize at a relatively high share of over 14 percent administration would of the national budget and almost 3 percent of GDP (Figure 3.13). Thus, stabilize at over Indonesia would continue to spend as much on government administration as it 14 percent of the budget and almost does on health and infrastructure combined. Under such a scenario, spending on 3 percent of GDP government administration would continue to grow in nominal and real terms, under the and could total Rp 1,042 trillion over the next RPJM period (Rp 730 trillion at business-as-usual constant 2007 prices). This would represent an incremental increase of scenario. Rp 202 trillion over the next RPJM period (Rp 79 trillion at constant 2007 prices), relative to what would be available if the government administration budget were capped at its projected 2010 level. Figure 3. 13 Spending on government administration would stay relatively high under the business-as-usual scenario Source: World Bank staff projections based on business-as-usual scenario. 92 Indonesia Public Expenditure Review Spending for Development Bureaucracy reform is critical for enhancing the efficiency and effectiveness of government administration and public spending… The expansion of As noted in Chapter 1, Indonesia‘s civil service has expanded in recent years, Indonesia’s civil exerting pressure on the national budget. This trend has been compounded by service, together with weak establishment controls within the bureaucracy and by civil service weak establishment regulations, policies, rules and practices which impede institutional reforms controls and poor regulation raise aimed at improving performance within all kinds of public functions from service concerns about the delivery to policy making. These developments raise concerns about the efficiency of spending efficiency of existing public spending on government administration and left on government unaddressed, this state of affairs will continue to exert growing pressures on the administration. budget, crowd out spending on key development priorities and, in the longer term, could become unsustainable. Thus, improving the Thus, in the context of the next RPJM period, there is strong case for departing quality of spending on from the business-as-usual approach when it comes to public spending in this government area. The Government has made a strong commitment to advancing administration is an bureaucracy reform. This is an important priority which is critical for enhancing important priority. the efficiency and effectiveness of government administration and, more generally, to improving public service delivery in Indonesia. …and increased compensation for civil servants is an important element. Increased Increased compensation for civil servants is an important element of bureaucracy compensation for civil reform. However, reforms in this area need to be designed carefully in order to servants is an achieve the intended purpose of improving performance in a cost-effective important element of manner. Indonesian legislation stipulates that all civil servants have the right to bureaucracy reform but needs to be receive pay that is equitable, sufficient and calculated based upon the workload carefully designed to and responsibility. Take home pay for civil servants in Indonesia consists of a ensure basic salary and different allowances, both of which are determined by cost-effectiveness. Government regulations. The Government reviews the basic salary each year, th and provides a 13 monthly salary across the board to all civil servants subject to the Government‘s financial capacity. The Organization for Economic Cooperation and Development‘s (OECD) ‗standard‘ for civil service pay is that, so far as possible, 100 percent of take home pay should be contained in the basic salary, which should be set out in published pay scales, thus providing transparency, promoting good performance and providing reasonable pension entitlements. Policies providing numerous allowances are in most countries today neither regarded as supporting transparency nor as promoting good performance. In addition, one general and fundamental principle of good governance is that no public institution or public official should be allowed to set their own salaries. The pay grading The pay grading scheme developed by and applied within the anti-corruption scheme developed by agency (KPK) corresponds to international good practice. It also solves the the anti-corruption problem of large discrepancies between structural and functional positions, which agency (KPK) could currently provide incentives for civil servants to abandon functional positions. serve as a template. The grading and pay scheme applied in KPK could serve as a template for general pay and grading reform in the Indonesian civil service. 93 Indonesia Public Expenditure Review Spending for Development The Government’s plan to extend the Bureaucratic Reform Initiative to the rest of the civil service could help improve efficiency… The Initiative has some The Government has committed itself to further bureaucracy reform and is notable strengths and planning to expand the Bureaucratic Reform Initiative developed by the MoF to its extension to other the entire central bureaucracy by 2011. The Initiative has some notable strengths institutions has the and its good design and comprehensive nature are credited with contributing to potential to improve efficiency. improvements in the form of increased tax and customs revenues, faster budget disbursement and reduced corruption in the MoF, as well as of increased diplomatic capacity and skills in the Ministry of Foreign Affairs which has also implemented the Initiative. Therefore, extending the Initiative to other institutions has the potential to achieve significant efficiency improvements across the civil service. The reforms at MoF also led to as much as a five-fold increase in the salaries of MoF officials. …although the plan also has some limitations which could reduce its effectiveness… However, the difficulty However, the difficulties for bureaucracy reform to have a real impact should not of bureaucracy reform be underestimated. Civil-service reform is complicated and touches on processes should not be and behaviors that are ingrained in the minds of people both within the underestimated. administration and outside. Resistance to change is strong and vested interests are many and powerful. Pressure from above and from outside is necessary to maintain reform efforts. Thus, it is critical that reforms in this area are designed and implemented carefully. Moreover, the Initiative Moreover, despite its notable strengths, the Initiative that the Government is has some limitations planning to roll out also has some limitations that could compromise its which could effectiveness once it is implemented. These limitations mainly arise because the compromise its Initiative pursues reform within the limited authority of individual line institutions: effectiveness.  Line institutions have to continue to apply central policies and regulations instead of being able to reform them. The consequence is that they have to ―work around‖ the system and add structures and schemes to the existing ones, which does not increase administrative efficiency.  There are major issues in need of reform that cannot be addressed by line institutions, such as policies and processes for determining organizational structures and staffing, budgeting of the wage bill, pension policies and national standards for human resource data, for example. If only the institutional reform concepts are implemented, then problems in these areas will continue to be unresolved.  As long as institutional reform achievements do not become anchored in general policies and central regulations but are approved on an ad-hoc basis as exemptions to the general schemes, the sustainability of those reforms is not secured. In addition, ad-hoc determination of remuneration levels outside the normal institutional checks and balances poses risks to transparency and appropriate governance in the determination process.  Finally, because the reform concept is predicated upon substantial up-front increases to civil servant allowances, it is an attractive concept for most Indonesian state institutions. Although for the most part the leadership of each institution is sincere in the desire to reform, there remains a risk that some may focus too closely on the increased remuneration component alone. 94 Indonesia Public Expenditure Review Spending for Development Complementing the To address some of these limitations and sustain reform, the current reform Initiative with more plans need to be broadened and scaled up in the sense that they must now start comprehensive to address policies and regulations at the national level. Thus, the Government national reforms could could consider complementing the ad-hoc reforms at the institutional level with help address some of its limitations. more-comprehensive reforms that address overarching issues such as the overall regulatory framework, establishment controls, pay and grade schemes as well as pension policies. Moreover, budget Moreover, the introduction of program budgeting and modernized budget processes and practices are also preconditions for successful implementation of the more practices must be fundamental civil-service reform. Modernization of Indonesia‘s civil service will modernized in order to require that establishment control and decisions on size, organizational structure enable successful reform. and staffing of institutions and sub-national governments are moved from the administrative domain controlled by MenPAN into the public expenditure management domain controlled by the MoF and ultimately by the parliament through the budget process. Nonetheless, if the Nonetheless, should the Government proceed with its current plans, it will be Government proceeds important to rigorously implement the elements of the Bureaucracy Reform with its current plans, Initiative which are aimed at increasing efficiency and reducing costs over time. it will be important to Thus, it will be important to establish effective mechanisms for evaluating the rigorously implement other elements of the results of the Initiative before further roll out takes place. KPK has acknowledged Initiative aimed at the critical need to evaluate progress and outcomes in the three pilot institutions improving efficiency (MoF, BPK and Supreme Court) before the Initiative becomes the Government‘s and reducing costs. official reform concept. KPK has also underlined the need for independent evaluation of the readiness for reform in the 15 institutions selected to initiate reforms in 2009 and has advised against additional budget allocations being approved in the absence of comprehensive screening. Moreover, further rollout should be subject to cost assessments and budgetary impact analysis before being introduced. …which is a risk in light of the potential costs. Notwithstanding its The potential limitations of the Initiative is a risk in light of the large potential cost substantial size, the of implementing the reform. Due to the substantial salary increases involved, government rolling out the initiative to the more than 70 agencies by 2011 at the central administration budget Government level could impose a very large burden on the central Government is insufficient to cover the estimated costs of budget in the near term. Based on the current grading profile of the central planned bureaucracy bureaucracy, and assuming that other agencies get an average of 75 percent of 60 reforms at the central the new allowances that were awarded to MoF , the reforms could translate into level. an estimated weighted-average increase in salaries of around Rp 4 million per month per civil servant. Thus, the current plan to extend these special allowances to the entire central bureaucracy (around 850,000 employees), as well as the military and police force (around 760,000 officers), by 2011 could increase the central Government wage bill by an estimated Rp 90 trillion per year by 2011 (equivalent 7.3 percent of the central budget or 1.4 percent of GDP) and Rp 450 trillion over the next RPJM period (1.2 percent of GDP). This is more than double the incremental resources that the government administration budget would receive over the next five years under a business-as-usual scenario, leaving a funding shortfall of around Rp 250 trillion. This highlights the importance of increased efficiency and finding off-setting savings within the government administration sector, politically and administratively difficult though this may be. Moreover, increased spending of 1.4 percent of GDP in 2011 would 60 MoF officials have traditionally received above-average salaries. 95 Indonesia Public Expenditure Review Spending for Development be challenging to finance without drastically reducing spending in other areas or significantly expanding borrowing. One lower-cost option could be to proceed with the current agencies ear-marked for implementing the initiative as planned (including the military and police), but to extend the timeframe for rolling out the Initiative to the entire bureaucracy by three years to 2014. This could reduce the cost of the plan to Rp 60 trillion in 2011 (0.9 percent of GDP) and to Rp 370 over the next RPJM period (1 percent of GDP). 3.9 Costing a big push A big push could help accelerate growth and poverty reduction as well as expand total public resources, but may require additional resources of around Rp 1,580 trillion over five years. Around Rp 1,210 trillion may be needed to fund key development goals, including around: Rp 460 trillion for health and social protection; Rp 550 trillion for infrastructure; and Rp 200 trillion to maintain spending on education and agriculture as a share of the expanding national budget. In addition, if the central Government proceeds with its plans for bureaucracy reform, then additional resources of at least Rp 370 trillion may be required. A big push could help accelerate growth and poverty reduction, and expand total public resources… A big push could help A big push that included a more than doubling of public expenditure on health accelerate growth and and social protection from 1.2 percent of GDP in 2009 to 3 percent of GDP by expand total public 2014 and a doubling of expenditure on infrastructure to 4 percent of GDP over resources… the same period could help accelerate growth and development in Indonesia. In particular, such a large increase in expenditure on infrastructure would be expected to have a significant positive impact on growth over the next five years both directly, because of increased public spending, and indirectly, because of the positive spillovers to the private sector and multiplier effects that would be created by alleviating major infrastructure bottlenecks. As noted earlier, there is a great deal of empirical uncertainty about the size of the growth impacts of increased public spending and the ultimate size of the impact will depend critically on the efficiency and effectiveness with which the extra resources are used. In light of these uncertainties and Indonesia‘s historical difficulty in disbursing funds for large-scale infrastructure projects, the big push scenario conservatively assumes that a 1 percent-of-GDP increase in expenditure on infrastructure will lead to a 0.5 percentage point increase in economic growth which is within the range of estimates often cited. This has the effect of raising average growth over the next RPJM period by 0.6 percent to 6.6 percent 61 (Table 3.5). The increase in growth also expands the total envelope of public resources, which means the big push on infrastructure would partly pay for 62 itself. 61 The positive impact on growth is assumed to occur in proportion to the gradual increase in public expenditure on infrastructure as a share of GDP. In 2010, an increase in spending by 0.4 percent to 2.4 percent of GDP leads to a 0.2 percentage point increase in economic growth. In 2014, an increase in spending by 2 percent to 4 percent of GDP leads to a 1 percentage point increase in growth. 62 As noted in Table 3.1, one percentage point higher average real growth over five years – all other things being equal – would expand the resource envelope by around Rp 150 trillion. 96 Indonesia Public Expenditure Review Spending for Development ..and accelerate the While it gets increasingly harder to reach the remaining poor as poverty declines, pace of poverty a big push could also help accelerate the pace of poverty reduction in Indonesia reduction. due to: higher economic growth; more rapid development and structural change in the economy; and increased spending on social protection. By 2014, the poverty rate could decline by a further 2.5-3.0 percentage points to between 5 and 7 percent. This additional reduction in poverty would represent around one-third of the remaining Indonesians living in poverty by 2014. Table 3. 5 A big push would require more resources and could help accelerate growth and poverty reduction Business-as- usual Incremental Big-push resource resource resource allocation need* allocation 2010-14 2010-14 2010-14 Key development goals and other priorities (Rp trillion) (Rp trillion) (Rp trillion) 1. Target of gradually doubling public expenditure on 705 547 1,251 infrastructure from 2% to 4% of GDP by 2014 o/w 10 million new electricity connections 374 o/w 10 million new water connections 80 o/w trans-Java highway 37 2. Target of gradually increasing public expenditure on health & 419 458 877 social protection from 1.2% to 3% of GDP by 2014 o/w expansion of health insurance 218 o/w expansion of cash transfers 35 3a. Maintaining spending on education as a share of the budget 1,298 160 1,459 3b. Maintaining spending on agriculture as a share of the budget 385 45 430 Sub-total of increased spending on key development goals 2,807 1,210 4,017 4. Implementing bureaucracy reform 370 370 TOTAL SPENDING ON PRIORITIES 2,807 1,580 4,387 Business as Change* Big push Economic impacts of a big push (averages over five years) usual GDP growth rate (%) 6.0 0.6 6.6 Deflator growth rate (%) 4.7 0.4 5.1 Poverty rate (%, end of period) 7.5-10 2.5-3 5-7 Notes and Sources: World Bank staff projections based on the business-as-usual and big-push scenarios. *Incremental resource needs/changes are relative to the business-as-usual scenario. …but may require Rp 1,580 trillion in additional resources. Around A big push would require considerable extra resources, including around Rp 1,000 trillion would Rp 1,000 trillion to reach key development targets (Table 3.5). More than be needed to fund the doubling public expenditure on health and social protection from around key development 1.2 percent of GDP in 2009 to 3 percent by 2014 could need an additional targets of more than doubling expenditure Rp 458 trillion in resources over five years relative to the business-as-usual on health and social scenario, of which Rp 218 trillion could be needed to expand health insurance protection as a share programs and Rp 35 trillion could be spent on expanding cash transfers (see of GDP and doubling Section 3.5). Gradually doubling public expenditure on infrastructure from expenditure on 2 percent of GDP in 2009 to 4 percent of GDP by 2014 would need an additional infrastructure. Rp 547 trillion. Some of this could be used to fund key projects such as 97 Indonesia Public Expenditure Review Spending for Development expanding electricity (Rp 374 trillion) and water (Rp 80 trillion) connections to 10 million new homes and completing the trans-Java highway (Rp 37 trillion). A proportion could also be used to increase expenditure on operations and maintenance in order to improve and maintain the quality of the existing infrastructure. A further A further Rp 205 trillion would be required to maintain spending on education at Rp 205 trillion would around 18-19 percent and agriculture at around 5½ percent of the expanding be required to maintain national budget. The extra Rp 160 trillion that would be allocated to education spending on education could be used to help raise enrollment rates at the secondary school level and and agriculture and Rp 370 trillion would address other challenges facing the sector (see Section 3.6). The extra be required to pay for Rp 45 trillion that would be allocated to agriculture could be used to expand bureaucracy reforms. spending on agriculture public goods such as research and development, extension and irrigation which would yield high returns. In addition, if the Government proceeds with its current plans to extend the Bureaucracy Reform Initiative to the entire central civil service then additional resources of at least Rp 370 trillion would be required (see Section 3.8). In summary, an In summary, an ambitious big push may require additional resources of around ambitious big push Rp 1,580 trillion over the next RPJM period, of which around Rp 1,210 trillion would require around would be needed for development priorities and around Rp 370 trillion for Rp 1,580 trillion. bureaucracy reform. Exploring options for how this big push could be financed is the focus of the next section. 3.10 Financing a big push Financing a big push would require difficult and bold policy choices to spend existing resources better and expand overall resources. The bulk of the funds could be raised by enhancing the efficiency and effectiveness of public spending and government administration: reallocations from lower priority sectors could yield at least Rp 330 trillion (a concerted effort to improve spending across all activities and programs could potentially yield larger savings); reducing energy subsidies in favor of better-targeted social protection programs could save around Rp 520 trillion; and Rp 420 trillion could potentially be raised by improving the efficiency of tax collections. In addition, an additional Rp 310 trillion could be raised by expanding the fiscal deficit by 1 percent of GDP per year, which Indonesia can afford. Indonesia’s current stock of debt is relatively low and appears sustainable, giving it the option to borrow more to invest in development, while continuing to reduce debt as a share of GDP. Improving efficiency could enable at least Rp 330 trillion to be reallocated from lower-priority areas… Given Indonesia’s A number of options could be considered to fund a big push, but all would entail large development some political or administrative challenges and would require bold policy choices. needs, improving the Given Indonesia‘s large and growing development needs and increased efficiency of spending pressures on public finances stemming from growing urbanization, demographic is an important priority. change and the global crisis, finding savings by improving the efficiency and effectiveness of public spending is an important priority. Improved efficiency in One way to improve the efficiency of public spending is to reallocate resources government away from less-productive or lower priority areas. With government administration and administration and lower-priority areas projected to consume almost lower-priority areas Rp 3,000 trillion (or 40 percent of the total national budget) over the next RPJM could enable around Rp 330 trillion to be period under the business-as-usual scenario, even small efficiency reallocated to improvements in these areas could yield significant savings that could help pay high-priority sectors. for the Government‘s priorities. However, cutting the nominal budgets of departments can be administratively challenging. An alternative could be to 98 Indonesia Public Expenditure Review Spending for Development freeze existing budgets, in real terms, which would encourage efficiency gains to be found over time. Freezing the government administration budget, in real terms, at its 2009 level would lead to an incremental saving of around Rp 160 trillion over five years relative to the business-as-usual scenario. Similarly freezing the budgets of other lower-priority sectors could yield additional savings of around Rp 170 trillion, providing total savings of around Rp 330 trillion which can be reallocated to high-priority sectors. A detailed examination A concerted effort to improve regulations and the implementation of activities and of activities and programs across all areas of spending could potentially yield much larger programs across all savings. Quantifying the potential savings would require a detailed review of spending areas could spending across a large number of activities and programs and is outside the yield significant further savings. scope of this report. However, the findings of a number of more detailed studies undertaken in recent years suggest that the potential savings could be significant (Box 3.8). This calls for improvements to the monitoring and evaluation of public spending in order to allow Indonesian policy-makers to better assess the impact and effectiveness of existing programs. Box 3. 8 Improved regulation and program implementation could potentially yield significant savings A number of detailed studies undertaken in recent years have identified areas where significant savings could potentially be found by addressing regulatory and implementation issues:  Introducing reform measures in the public procurement system to increase efficiency and reduce leakages due to corruption and outdated practices would yield significant savings. A 2008 position paper on the development of construction services industry by Indonesia‘s competition watchdog (KPPU) suggests that improving procurement regulations could potentially reduce costs by as much as 30-50 percent, allowing more infrastructure to be built for any given level of public spending. These figures seem to be relatively high and it would be more achievable to assume savings of 10-15 percent based on other reform experiences.  A 2008 review of the public expenditure on health found that inefficiencies could be reduced by improving oversight and accountability of public working hours (which would help reduce high levels of health worker absenteeism), as well as the quality of health services (which could increase currently low utilization of existing health capacity) (Health PER, World Bank 2008).  Similarly, a 2007 review of public expenditure on education found that considerable savings amounting to as much as 10 percent of the education budget could be realized by adjusting the current allocation formula which has led to an oversupply of teachers (Education PER, World Bank 2007). Based on the projected education budget under the business-as-usual scenario, this could amount to over Rp 100 trillion over the next RPJM period. Notes and Sources: World Bank staff. …and reducing energy subsidies in favor of better-targeted social protection programs could save an additional Rp 520 trillion In addition, a reduction Another lower-priority spending area where significant savings could be made is in spending on energy energy subsidies. As noted in Section 3.7, a strong argument exists for scaling subsidies could yield back existing subsidies given that vulnerable households could be more around Rp 520 trillion cost-effectively protected from high oil prices through targeted social protection in savings, enough to pay for the target of programs. Freezing spending on energy subsidies, in real terms, at the 2009 more than doubling level, then gradually reducing this spending in half again by 2012, would yield expenditure on health savings of around Rp 520 trillion over five years relative to the business-as-usual and social protection. scenario. Such a saving would cover the cost of more than doubling public expenditure on health and social protection to 3 percent of GDP by 2014. 99 Indonesia Public Expenditure Review Spending for Development Rp 420 trillion could potentially be raised from improved tax collections Indonesia’s tax system Another area of Government that could help fund a big push is tax collections. is comparable with The efficiency of Indonesia‘s tax system is comparable with other middle-income similar countries, countries (MICs), although there appears to be scope for improvement. In 2008, although there is Indonesia‘s tax-to-GDP ratio was an estimated 13.3 percent, which is slightly scope to improve efficiency and expand higher than the average for all MICs, but lower than all other major MICs in tax-payer registration. East Asia with the exception of China, and lower than the post-crisis peak of 63 16.3 percent. Moreover, as noted in Chapter 1, despite significant progress in 64 recent years, tax-payer registration in Indonesia remains low. The income-tax cuts introduced as part of the Government‘s 2009 stimulus package are part of a larger plan to expand the registration and hence the tax base (Chapter 2). These reforms are expected to reduce tax revenue in 2009, but increase it from 2012 onwards. A concerted effort to A concerted effort to expand registration combined with other measures to expand registration improve the effectiveness of the tax system could increase tax revenues plus efficiency significantly. If these efforts are able to increase the rate growth in income tax by improvements could 10 percent per year between 2012-14, revenue could increase by an estimated raise Rp 420 trillion in 65 extra revenue. Rp 420 trillion. In summary, a concerted effort to improve the efficiency and effectiveness of Government spending and tax administration could yield Rp 1,270 trillion in savings and new revenue over five years. This could fund the bulk, although not all, of the extra resources needed to meet key development priorities over the next RPJM period. Moreover, Indonesia’s current stock of debt appears sustainable… Indonesia‘s strong record in debt reduction over the past decade has left it in a relatively strong fiscal position compared to many of its neighbors. Thus, Indonesia could consider expanding the fiscal deficit to help finance a big push. Moreover, this could be done while continuing to reduce debt as a share of GDP. Indonesia’s current A conventional analysis of debt sustainability takes the current stock of debt, stock of debt appears trends in the movement of that stock, and then assesses whether that stock to be sustainable. passes certain thresholds in the case of significant but historically plausible shocks to various variables, such as the exchange rate, Government revenues and GDP growth. For Indonesia, this analysis finds that even with the most extreme shocks based on historical volatility, the Government‘s debt-to-exports and debt-to-revenue ratios are within standard thresholds for an economy with institutions and macroeconomic management of a quality similar to Indonesia‘s. The cost of debt service remains below 25 percent of the projected value of exports, and at peak of just above 25 percent of Government revenue, is well below the standard 35 percent threshold. Alternatively, if economic conditions in the next decade are closer to relatively conservative modal projections, Indonesia‘s stock of debt is likely to be near 25 percent of GDP by 2015 (Figure 3.14). If the Government were to increase 63 In 2007, Mongolia had a tax-to-GDP ratio of 25.3 percent, Thailand 16.2 percent and the Philippines 14 percent, while in 2006 China had a ratio of 9.4 percent and the average for all MICs was 11.6 percent (WDI database). Indonesia‘s ratio fell from a peak of 16.3 percent in 1999 to less than 12 percent in the years immediately following the crisis. 64 Only 14.1 million people were registered as of May 2009 out of a total population of around 230 million (around 6 percent) 65 World Bank staff estimates based on big push scenario. 100 Indonesia Public Expenditure Review Spending for Development spending, hence the primary deficit, by 1 percent of GDP for the next five years, the debt stock would stabilize around current levels, although debt servicing costs are considerably larger. Even renewed financial market turbulence, with interest rates on new debt rising and an extreme exchange rate depreciation towards Rp 15,000/US$, does not significantly affect the debt stocks. The bottom line is that Indonesia can afford a stabilization of its debt stocks around current levels. Figure 3. 14 The stock of debt (as a share of GDP) is likely to continue falling even with expanded spending and adverse market shocks (central Government gross financing needs, trillions of IDR, and stock of debt in percent of GDP, under various scenarios) Sources: Ministry of Finance, CEIC, and World Bank. Even so, a careful With debt stocks now at sustainable levels, the challenge for policy-makers is to financing strategy can minimize the long-term costs of servicing the remaining debt, and the risks to the free more resources Government‘s finances of some shock that may alter its ability to repay that debt. for core Government In choosing how to fill its financing needs, there are three sources of risk: the spending, and reduce the risks surrounding exchange rate, the interest rate and market absorption capacity (Table 3.6). the Government’s finances Policy-makers can choose whether to access official or market sources of finance. Official sources tend to offer relatively cheap funds: interests rates are low or very low and generally stable, and maturity structures are long. But they may come with non-financial conditions, such as requiring that funds be spent on particular projects. Furthermore they are denominated in foreign currency, currently largely Japanese yen and US dollars, and potentially in the future the Chinese Renminbi, and so their servicing costs may jump if the rupiah depreciates. Further, policy-makers may wish to take a long-term view about the outlook for particular currencies. For example, they may expect the US dollar to depreciate relative to the Renminbi, which would argue for a greater weighting in US dollar-denominated debt and limiting exposure to Renminbi-denominated debt. If policy-makers decide instead to tap market sources, they face two key choices: currency and term structure. Rupiah-denominated bonds tend to pay higher interest rates than US dollar-denominated bonds, although the gap has narrowed with the recent turbulence on global financial markets. Rupiah bonds bare inflation and currency depreciation risks that the Government bares with 101 Indonesia Public Expenditure Review Spending for Development US-dollar bonds. Rupiah bonds are also drawing on much the same pool of funds as private-sector investors. While Indonesia‘s capital markets are much more integrated into global finance than many other economies in the region, a larger call by the Government on rupiah funds may push up the cost of borrowing for private investors. When tapping private finance markets, policy-makers must also choose the term structure of their finance – do they sell short- or longer-term bonds to the market. This choice will follow market conditions – during periods of relatively low risk tolerance or when capital is readily available, the premium on longer-term borrowing is low. Longer-term borrowing reduces the Government‘s financing needs in the years immediately ahead. However, when the premium on longer- term funds is high, the compounding cost of deferring roll-over financing can be high enough to justify the risks of larger, short-term financing needs. This increases the Government‘s exposure to financial markets, with their tendency to fluctuate rapidly with investor sentiment that may be tenuously related to fundamental conditions. Table 3. 6 Balancing and containing public financing risks Key Risks Option Positives Negatives Interest rate Fixed rate Fixes debt service costs Typically higher price Variable rate Typically lower cost Risk of cost rising over time Currency Rupiah Avoids currency risk Typically higher interest rate To the extent that the local supply of funds is limited, they may push up borrowing costs for the private sector Foreign currency Lower interest rate Risk of Rupiah depreciating Lessens crowding out on local could raise overall cost market Creates longer-term balance of Creates short-term capital payments outflows, with interest inflows, supporting the balance and, eventually, principal of payments payments Roll over and market absorption risk Long term Infrequent refinancing contains Lower risk annual gross borrowing need Typically higher unit cost Short term Typically lower interest rate Frequent refinancing raises Possible fall in costs if expect gross financing need i/r to fall Exposes gov‘t to risks of rising costs if i/r increases Source: World Bank staff estimate. 102 Indonesia Public Expenditure Review Spending for Development …affording it the choice to borrow more to investment in development. Expanding the fiscal Thus, should it choose to do so, Indonesia has the option to borrow more to help deficit by 1 percent of fund a big push without compromising its fiscal sustainability and without raising GDP per year could debt as a share of GDP. Expanding the fiscal deficit by 1 percent of GDP over increase net resources the next RPJM period could expand public resources by Rp 390 trillion under the by Rp 310 trillion and help fund the target of big push scenario. However, borrowing costs could also rise, by an estimated doubling public Rp 80 trillion, giving a net increase in resources of Rp 310 trillion. Moreover, expenditure on under the big push scenario, the debt-to-GDP ratio would still decline to infrastructure. 29.2 percent by 2014. The resources raised from this increase in borrowing could help fund the ambitious target of doubling public expenditure on infrastructure to 4 percent of GDP by 2014. Such an investment would help to accelerate economic growth and in turn further expand public resources, making it a good return on public expenditure. Table 3. 7 Options for financing a big push Incremental resources 2010-14* Financing options (Rp trillion) 1. Reallocations from lower-priority sectors 334 o/w other sectors 173 o/w government administration 161 2. Savings from reducing energy subsidies 517 Sub-total from better spending of existing resources 850 3. Extra revenue from improved efficiency in tax collections 420 4. Net increase in resources from expanding the fiscal deficit by 1% GDP per year 310 o/w resources from expanding the fiscal deficit 390 Less cost of borrowing 80 Sub-total from increasing total resources 730 TOTAL 1580 Notes and Sources: World Bank staff projections based on the big-push scenario. *Incremental resources are relative to the business-as-usual scenario. A combination of these In summary, a concerted effort to better spend existing resources (through four financing options reallocations and reductions in energy subsidies) and to expand total public could help pay for a resources (through improved tax collections and an expanded fiscal deficit) could big push. together raise the resources needed to pay for a big push (Table 3.7 and Figure 3.15). Spending on lower priorities would be reduced by around Rp 850 trillion, in nominal terms, over five years relative to the business-as-usual scenario. Moreover, total resources would expand by around Rp 800 trillion in gross terms (Rp 730 trillion net of increased interest payments). Together, this could enable spending on government priorities to rise by Rp 1,580 trillion relative to the business-as-usual scenario. 103 Indonesia Public Expenditure Review Spending for Development Figure 3. 15 Reallocations from lower priorities and increased resources could help fund a big push 8,000 Bureaucracy reforms Rp 1,580 Social protection more 6,000 Agriculture spending Rupiah trillion (nominal) on key Health priorities Infrastructure 4,000 Education Rp 850 Interest payments less 2,000 Energy subsidies spending on lower Government Admin. priorities Others 0 2005-09 RPJM Business as usual Big push (Rp 4,200 trillion) (Rp 7,100 trillion) (Rp 7,900 trillion) Notes and sources: World Bank staff projections based on business-as-usual and big-push scenarios. Numbers in parentheses are the total resource envelope. 3.11 The potential benefits and risks of a big push A big push could lead to improved economic and social outcomes over the next five years, and a very different pattern of public expenditure compared to the past decade. However, if increased spending is not accompanied by stronger institutions and governance, there is a risk that these resources may not be spent well and thus fail to improve development outcomes. A big push could lead In summary, If Indonesia chooses to make some of the bold choices needed to to improved economic depart from a business-as-usual approach and instead realize a big push, it and social outcomes... could lead to improved economic outcomes over the next five years (Table 3.8): growth could accelerate from an average of 6 percent per annum under a business-as-usual scenario to 6.6 percent; the tax-to-GDP ratio could rise from an average of 12.7 percent to 13.2 percent; the poverty rate could be reduced from 7.5-10 percent to 5-7 percent; and the total resource envelope could expand from Rp 7,100 trillion to Rp 7,900 trillion which is 34 percent higher, in real terms, than the resource envelope during the current RPJM. See Annex B Table B.1 and Table B.2 for additional detail on the business-as-usual and big-push scenarios. 104 Indonesia Public Expenditure Review Spending for Development Table 3. 8 Comparison of the business-as-usual and big-push scenarios Business as usual Big push Average over 5 years GDP growth rate (%) 6.0 6.6 Central government Tax/GDP (%) 12.7 13.2 Central government total revenue/GDP (%) 16.4 16.9 Fiscal deficit/GDP (%) 1.2 2.2 Domestic prices, growth rate (%) 4.7 5.1 World growth rate (%) 3.5 3.5 World inflation rate (%) 1.2 1.2 Debt-to-GDP ratio (%, end of period) 26.0 29.2 Poverty rate (%, end of period) 7.5-10 5-7 Central government resource envelope (thousand trillion rupiah) Nominal or current prices 6.5 7.3 Real 2007 prices 4.5 5.1 Total government resource envelope (thousand trillion current rupiah) Nominal or current prices 7.1 7.9 Real 2007 prices 5.0 5.5 Real increase in total resource envelope (vs 2005-09) (%) 21 34 Notes and sources: World Bank staff projections based on the business-as-usual and big-push scenarios. …and a very different Moreover, the pattern of public expenditure over the next five years would look the pattern of public very different to the past decade under a big push. The share of public spending expenditure compared devoted to the high-priority sectors of health, social protection, infrastructure, to the past decade. education and agriculture would gradually rise from around 40 percent in 2009 to around 55 percent by 2014 and spending on other lower-priority areas would no longer dominate public expenditure as it has over the past decade (Figure 3.16). Figure 3. 16 A big push would mark a bold departure from the past pattern of public expenditure 2,500 Bureaucracy reforms Projections Social protection 2,000 Agriculture Rupiah trillion (nominal) Health 1,500 Infrastructure Education 1,000 Interest payments 500 Government Admin. Others 0 Energy subsidies 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Notes and sources: World Bank staff projections based on the big-push scenario. 105 Indonesia Public Expenditure Review Spending for Development However, a big push However, a big push would also entail some risks. In particular, if public spending would also entail some – particularly on health and infrastructure – is substantially increased but the risks. accompanying reforms to strengthen institutions, governance and regulations do not occur or are unsuccessful, there is a significant risk that these resources may not be spent well. This could result in a decrease, rather than increase, in the efficiency and effectiveness of public spending. Moreover, the increased spending, some of it potentially borrowed, could fail to translate into improved health and education outcomes or improved infrastructure in Indonesia. 106 Annexes Annex A. Supporting figures and tables Table A.1 Government subsidies, 2005-09 Type of subsidies 2004 2005 2006 2007 2008* 2009** Trln Trln Trln Trln Trln Trln Rp % Rp % Rp % Rp % Rp % Rp % Energy subsidies 71.3 77.9 104.5 86.6 94.6 88.0 116.9 77.8 223.0 81.0 67.0 54.3 Fuels 69.0 75.4 100.4 83.1 64.2 59.7 83.8 55.8 139.1 50.5 24.5 19.8 Electricity 2.3 2.5 4.1 3.4 30.4 28.3 33.1 22.0 83.9 30.5 42.5 34.4 Non-energy subsidies 20.2 22.1 16.2 13.4 12.9 12.0 33.3 22.2 52.3 19.0 56.5 45.7 Agriculture 6.1 6.6 8.4 7.0 8.6 8.0 13.3 8.9 28.3 10.3 31.8 25.8 Food 4.8 5.3 6.5 5.3 5.3 4.9 6.3 4.2 12.1 4.4 13.0 10.5 Seedling 0.1 0.1 0.1 0.1 0.1 0.1 0.5 0.3 1.0 0.4 1.3 1.1 Fertilizer 1.2 1.3 1.8 1.5 3.2 2.9 6.6 4.4 15.2 5.5 17.5 14.2 PSO 0.7 0.8 0.8 0.6 1.8 1.7 1.0 0.7 1.7 0.6 1.4 1.1 Tax 1.3 1.4 6.2 5.1 1.9 1.7 17.1 11.4 21.0 7.6 18.3 14.8 Credit Interest 0.1 0.1 0.9 0.7 0.3 0.3 0.3 0.2 0.9 0.3 4.7 3.8 Others 12.0 13.1 0.0 0.0 0.3 0.2 1.5 1.0 0.3 0.1 0.4 0.3 Total subsidies 91.5 100.0 120.8 100.0 107.5 100.0 150.2 100.0 275.3 100.0 123.5 100.0 % of total expenditure 21.4 23.7 16.1 19.8 27.9 12.5 % of GDP 4.0 4.3 3.2 3.8 5.6 2.3 Source and notes: World Bank staff estimates based on Ministry of Finance data. *2008 Preliminary realization of central Government expenditures. ** 2009 central Government budget (APBN) fiscal stimulus document. Figure A.1 The impact of ―hold-harmless rule‖ lifting in 2008 on DAU allocations and growth rates of resource rich regions, 2007-2008 Kab. Tanj. Jabung Barat Prop. Kalimantan Timur Prop. Kepulauan Riau Kab. Kepulauan Riau Kab. Musi Banyuasin Kota Tanjung Pinang Kab. P. Paser Utara Kab. Seram Barat Prop. DKI Jakarta Prop. Jawa Timur Kota Banda Aceh Prop. Jawa Barat Kota Balikpapan Kab. Rokan Hilir Kota Samarinda Kab. Manokwari Kota Sukabumi Kab. Bengkalis Kab. Jayapura Kab. Waropen Kota Bontang Kab. Karimun Kota Tarakan Kab. Natuna Kota Sorong Kab. Kerinci Kab. Lingga Kota Batam Kota Banjar Kota Dumai Prop. Riau Kab. Kutai Kab. Siak 0 0 -50 -20 -100 Growth 2007-2008 (%) -40 Rp Billion -150 -60 -200 Differences in DAU allocation (07-08) -80 -250 DAU Growth (07-08) -300 -100 Source and notes: World Bank staff estimates based of Ministry of Finance data Indonesia Public Expenditure Review Spending for Development Table A.2 National agriculture spending (% of total agriculture spending) Spending Item 2001 2002 2003 2004 2005 2006 2007 2008* R&D 1.3 1.4 1.3 1.7 1.8 1.7 1.9 1.3 Agriculture 24.1 28.1 26.4 24.0 23.2 29.5 32.3 24.4 Fisheries & Forestry 16.2 18.1 19.7 24.8 20.9 23.6 15.8 13.9 Irrigation 33.6 23.5 25.6 21.3 17.7 19.9 16.9 13.2 Subsidies 24.7 28.9 27.0 28.3 36.4 25.3 33.1 47.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source and notes: World Bank staff estimates based on Ministry of Finance data. *2008 Preliminary realization of central Government expenditures Figure A.2 Ministry of Agriculture budget by function, 2003-09 Rph Trillion (current prices) 9 8 Land and Water Mngnt 7 Quarantine Agency Food Security Agency 6 Human Resources 5 Agri. Research Agency Processing & Marketing 4 Livestock 3 Estate Crops Horticulture 2 Staple Crops General Inspectorate 1 General Secretary 0 2003 2004 2005 2006 2007 2008* 2009* Source and notes: Ministry of Agriculture 108 Indonesia Public Expenditure Review Spending for Development Section A.1 – Fuel subsidies The fuel subsidy and Indonesia’s poor Domestic fuel prices (and, implicitly, subsidies) have direct and indirect effects on household real income. The direct effect of the subsidies is the gain in disposable income due to lower prices paid by households for consumption of fuel products. The indirect effect is received through the lower prices paid by households for other goods and services led by the lower costs for fuel-based inputs of production, for example, the food cooked by street vendors using kerosene stoves. Precisely quantifying these effects is difficult. We cannot directly observe which socio-economic groups consume which products and at what price. The official energy statistics handbook in Indonesia reports only aggregate fuel consumption by sectors, while the disaggregation by refined products (e.g. premium, diesel, kerosene) is not available by the sector of the economy consuming the fuel. This is probably because retail sales of refined products do not record whether the purchased product will be used for domestic or commercial transport purposes. Based in household survey data for 2004, households consume 5.2 million liters of gasoline or 30 percent out of total retail sales (17.5 million liters); 291,000 liters of diesel, or 1 percent of the total retail sales (27.1 million liters); and 10.1 million liters of kerosene or 89 percent of the total retail sales (11.4 million liters). If the same consumption shares are assumed for 2007, then 51 percent of the total amount budgeted for fuel subsidies would be absorbed by households. Indonesia‘s fuel subsidies are regressive. Benefit incidence results can be drawn based on the 2007 National Household Survey. Defining the lowest income quintile of the population as poor, 89 percent of fuel subsidies benefit the non-poor. Alternatively expressed, the poor (lowest quintile) of the population consume only one third of the value of fuel products — and receive only one-third of the subsidies — compared with the richest quintile. Assuming that consumers pay the same price regardless of their income, we can see that the pattern of fuel products consumption directly determines the distribution of the subsidy. It is commonly argued, for example, that the significant subsidies for kerosene are justified on grounds that kerosene is the main fuel product consumed by lower income households. Yet, while the poor consume more kerosene than any other fuel, national survey data reveal that kerosene consumption increases with income level, with the only exception of the highest 10 percent of the income distribution, for whom kerosene appears to be an inferior good. Incidence of fuel subsidies, 2007 Source: World Bank calculations from Susenas 2007 Source and notes: World Bank, 2008, Black Hole or Black Gold? The Impact of Oil and Gas Prices on Indonesia‘s Public Finances, Policy Research Working paper 4718 109 Indonesia Public Expenditure Review Spending for Development Section A.2- Health insurance cost projections Although properly estimating the cost of health programs is highly complex due to the need for detailed information on unit cost, utilization and true health care costs (World Bank, 2009), the projections presented in Box 3.2 following are based on preliminary findings from ongoing actuarial work in the area. This work, undertaken in preparation of the GoI Health Sector Assessment sets out to: (i) Develop actuarial baselines for the existing health coverage in Indonesia; (ii) Perform actuarial analyses of the implementation of universal coverage, including costs of covering informal sector workers, on the basis of alternative scenarios based on different benefit packages and financing modes (e.g., general revenues, premiums, user-fees or combinations thereof); (iii) Estimate both supply and demand behavioral responses to program modifications which may differ by scheme and enrollee characteristics. In the projections, the current Askes program benefit package for civil servants and the poor (with some adjustments, i.e. medical inflation; out-of-pocket expenditures-OOPs etc.), is used. The required contributions for the program are calculated based on expected utilization rates and costs for each services. Moreover, for the purpose of the projections, the following was assumed:  The percent of the population covered will linearly increase from ~38.8% in 2007 to 100% by 2020;  The true cost of the insurance program for civil servants in 2006 is equal to the cost per member per month, adjusted for some patterns in utilization and OOPs;  The ultimate cost of coverage for the poor will be equal to 90% of the cost for the civil servants. In 2006, the claim cost for the poor is only 28.3% of that for commercial insurance. It was assumed this will increase linearly to 90% by 2020;  Loss ratios reflecting certain overhead costs for the program will increase from an average of 83% in 2006 to 90% by 2020 because of legal changes and economies of scale;  The number of civil servants covered increases at the same rate as the population increases;  66 Medical cost increases each year will be 1% larger than increases in GDP ; Based on these assumptions, the cost of the health program as a percent of GDP would be approximately 1.6% by 2015, and 2.9% in 2025, based on reaching UC by 2020. Costs in the early years are low Health care cost projections because not everyone is covered and Year Cost as % of GDP because of limitation on the supply- 2010 0.7% side. However, it is assumed that by 2015 1.6% 2020, the entire population is covered 2020 2.7% and there are sufficient facilities to 2025 2.9% meet increasing demand. Despite many adjustments and assumptions, the insurance program still costs a mere 2.9% of GDP, which appears low by international standards. Users will likely have additional out-of-pocket expenses for services that are not covered by the health program, and medical costs can be expected to continue to grow as a percent of GDP after 2025. 66 This will slowly increase medical costs as a percent of GDP and is intended to adjust for changes in medical care and technology as well are for the construction of new facilities and purchase of equipment. 110 Indonesia Public Expenditure Review Spending for Development Table A.3 Alternative baseline scenarios Even less Business as More favourable usual favourabl global e global economy economy Average over 5 years GDP growth rate (%) 4.9 6.0 6.5 CG Tax/GDP (%) 12.6 12.7 12.7 CG total revenue/GDP (%) 16.2 16.4 16.5 Fiscal deficit/GDP (%) 1.2 1.2 1.2 Domestic prices, growth rate (%) 4.2 4.7 5.2 World growth rate (%) 2.9 3.5 4.0 World inflation rate (%) 1.0 1.2 1.8 Debt-to-GDP ratio (%, end of period) 27.8 26.0 24.6 Central government resource envelope (thousand trillion rupiah) 0.0 0.0 0.0 Nominal or current prices 6.0 6.5 6.8 Real 2007 prices 4.3 4.5 4.6 Total government resource envelope (thousand trillion current rupiah) Nominal or current prices 6.6 7.1 7.3 Real 2007 prices 4.7 5.0 5.1 Real increase in total resource envelope (vs 2005-09) (%) 14 21 23 Source and notes: World Bank staff estimates 111 Indonesia Public Expenditure Review Spending for Development Annex B: Key indicators of resource envelope projections Table B.1 Key macroeconomics indicators of resource envelope projections (baseline scenario) 2009 2010 2011 2012 2013 2014 (f) (p) (p) (p) (p) (p) National Accounts Real GDP (% change) 3.4 5.4 6.0 6.2 6.2 6.2 Real investment (% change) 4.1 7.1 8.2 8.7 9.2 10.1 Private (% change) 3.7 6.6 8.0 9.0 9.5 10.5 Government (% change) 7.1 10.3 9.4 6.5 7.0 6.8 Central (% change) 9.1 15.6 13.4 7.4 8.3 7.9 Sub-national (% change) 5.3 5.4 5.3 5.5 5.5 5.5 Real consumption (% change) 4.6 4.8 4.9 4.9 4.9 4.9 Private (% change) [1] 3.9 4.8 4.8 5.1 4.9 4.9 Government (% change) 10.8 5.4 5.9 4.0 4.9 4.8 Real exports (% change) -5.0 3.5 7.5 8.6 9.7 10.7 ow oil & gas (% change) 0.8 2.1 1.6 1.7 2.3 2.9 ow non-oil & gas (% ch.) -6.8 3.9 9.4 10.5 11.8 12.7 Real imports (% change) -1.4 3.6 6.7 7.5 9.2 11.2 Investment (% GDP) 26.6 27.2 27.7 28.1 28.6 29.4 Savings (% GDP) 21.8 22.5 23.0 23.3 23.6 23.8 Central Government (% GDP) Revenue 15.5 15.8 16.1 16.4 16.7 16.9 Oil & gas 2.4 2.5 2.6 2.7 2.7 2.8 Non oil & gas 13.1 13.3 13.5 13.7 13.9 14.1 Tax 12.2 12.3 12.5 12.7 12.9 13.0 Expenditure 17.6 17.4 17.5 17.5 17.6 17.7 Consumption 8.3 8.3 8.3 8.2 8.2 8.1 Central 4.1 4.0 4.0 3.8 3.8 3.8 ow Personnel 2.5 2.5 2.5 2.4 2.4 2.4 ow Materials 1.6 1.5 1.5 1.4 1.4 1.5 Sub-national 4.2 4.3 4.3 4.3 4.3 4.3 Capital Investment 3.3 3.5 3.5 3.5 3.5 3.5 Central 1.6 1.8 1.9 1.9 1.9 1.9 Sub-national 1.7 1.7 1.7 1.7 1.6 1.6 Interest payments 1.9 1.9 1.9 1.8 1.7 1.7 Subsidies 2.4 2.6 2.8 2.9 3.0 3.1 Transfers ow Social assistance & others 2.1 1.8 1.7 1.7 1.7 1.7 ow Transfers to regions 5.6 5.3 5.2 5.3 5.4 5.5 % domestic revenue 35.9 33.4 32.6 32.5 32.4 32.3 Fiscal deficit -2.1 -1.6 -1.4 -1.1 -0.9 -0.8 Public debt 32.9 31.9 30.8 29.2 27.6 26.0 Monetary GDP deflator (% change) 4.5 4.6 4.7 4.7 4.8 4.8 Foreign (US) deflator (% change) -0.9 -0.8 0.7 1.7 2.1 2.2 Memo items: World GDP growth (%) -1.3 1.9 3.5 4.0 4.0 4.0 Int. crude oil price (US$) 47 53 58 63 69 76 Source and notes: World Bank staff estimates 112 Indonesia Public Expenditure Review Spending for Development Table B.2 Key macroeconomics indicators of resource envelope projection - big push scenario 2009 2010 2011 2012 2013 2014 (f) (p) (p) (p) (p) (p) National Accounts Real GDP (% change) 3.4 5.6 6.4 6.8 7.0 7.2 Real investment (% change) 4.1 8.3 8.5 10.1 11.1 12.6 Private (% change) 3.7 6.5 8.4 9.5 10.3 11.5 Government (% change) 7.1 21.4 9.7 13.9 15.9 18.8 Central (% change) 9.1 38.2 12.9 19.8 22.4 26.0 Sub-national (% change) 5.3 5.6 5.8 6.2 6.4 6.6 Real consumption (% change) 4.6 5.8 4.9 5.1 5.2 5.2 Private (% change) [1] 3.9 4.8 4.8 5.2 5.2 5.2 Government (% change) 10.8 13.8 5.4 4.6 5.2 4.7 Real exports (% change) -5.0 3.5 7.8 8.9 10.2 11.5 ow oil & gas (% change) 0.8 2.1 1.6 1.7 2.3 2.9 ow non-oil & gas (% ch.) -6.8 3.9 9.8 10.9 12.4 13.7 Real imports (% change) -1.4 6.7 5.5 7.4 9.5 11.9 Investment (% GDP) 26.6 27.5 27.9 28.5 29.3 30.5 Savings (% GDP) 21.8 21.7 22.4 22.9 23.3 23.8 Central Government (% GDP) Revenue 15.5 15.8 16.1 16.8 17.5 18.3 Oil & gas 2.4 2.5 2.6 2.7 2.7 2.7 Non oil & gas 13.1 13.3 13.5 14.1 14.9 15.7 Tax 12.2 12.3 12.5 13.1 13.8 14.5 Expenditure 17.6 18.4 18.5 18.9 19.5 20.1 Consumption 8.3 8.9 8.9 8.7 8.7 8.5 Central 4.1 4.6 4.5 4.4 4.3 4.3 ow Personnel 2.5 3.0 3.0 2.9 2.8 2.8 ow Materials 1.6 1.6 1.5 1.5 1.5 1.4 Sub-national 4.2 4.3 4.3 4.3 4.3 4.3 Capital Investment 3.3 3.8 3.9 4.1 4.4 4.8 Central 1.6 2.1 2.2 2.5 2.8 3.2 Sub-national 1.7 1.7 1.7 1.7 1.6 1.6 Interest payments 1.9 2.0 2.0 2.0 2.0 1.9 Subsidies 2.4 1.8 1.5 1.5 1.4 1.4 Transfers ow Social assistance & others 2.1 2.4 2.7 2.8 2.8 2.9 ow Transfers to regions 5.6 5.5 5.6 5.9 6.1 6.4 % domestic revenue 35.9 34.9 34.8 34.9 34.9 35.0 Fiscal deficit -2.1 -2.6 -2.4 -2.1 -1.9 -1.8 Public debt 32.9 32.8 32.4 31.5 30.4 29.2 Monetary GDP deflator (% change) 4.5 4.9 5.1 5.1 5.3 5.3 Foreign (US) deflator (% change) -0.9 -0.8 0.7 1.7 2.1 2.2 Memo items: World GDP growth (%) -1.3 1.9 3.5 4.0 4.0 4.0 Int. crude oil price (US$) 47 53 58 63 69 76 Source and notes: World Bank staff estimates 113 Indonesia Public Expenditure Review Spending for Development Annex C: Government budget statistics Table C. 1 Economic composition of national public expenditure, 2000-09 (Rph trillion, current prices) Economic Classification 2001 2002 2003 2004 2005 2006 2007 2008* 2009** Personnel Expenditures 80.6 85.3 103.9 118.6 123.1 158.5 209.9 248.1 282.2 Material Expenditures 20.9 27.9 30.2 30.0 46.6 69.9 84.9 91.2 127.9 Interest Payments 87.1 87.7 65.4 62.5 65.2 79.1 79.8 88.6 110.6 Subsidies 77.4 43.6 43.9 91.5 120.8 107.4 150.2 275.3 123.6 Social Assistance 0.2 0.1 0.4 0.0 24.9 40.7 49.8 56.8 82.5 Others Routine 14.1 15.3 28.5 25.4 46.1 50.8 35.7 53.3 80.8 Capital 102.1 165.5 199.3 223.9 232.7 Development 72.5 83.2 133.1 120.8 Stimulus Spending for Infrastructure 11.2 Total National 352.8 343.1 405.4 448.8 528.7 671.9 809.5 1,037.2 1,051.6 Source and notes: World Bank staff estimates based on Ministry of Finance and SIKD data. *2008 Preliminary realization of central Government expenditures, ** 2009 central Government budget (APBN) fiscal stimulus document, sub-national expenditures between 2001 and 2006 are actual/realization and between 2007 and 2009 are estimates Table C. 2 Economic composition of national public expenditure, 2000-09 (% of total national expenditure) Economic Classification 2001 2002 2003 2004 2005 2006 2007 2008* 2009** Personnel Expenditures 22.8 24.9 25.6 26.4 23.3 23.6 25.9 23.9 26.8 Material Expenditures 5.9 8.1 7.4 6.7 8.8 10.4 10.5 8.8 12.2 Interest Payments 24.7 25.6 16.1 13.9 12.3 11.8 9.9 8.5 10.5 Subsidies 22.0 12.7 10.8 20.4 22.8 16.0 18.6 26.5 11.8 Social Assistance 0.0 0.0 0.1 0.0 4.7 6.1 6.1 5.5 7.8 Others Routine 4.0 4.5 7.0 5.7 8.7 7.6 4.4 5.1 7.7 Capital 19.3 24.6 24.6 21.6 22.1 Development 20.5 24.2 32.8 26.9 Stimulus Spending for Infrastructure 1.1 Total National 100 100 100 100 100 100 100 100 100 Source and notes: World Bank staff estimates based on Ministry of Finance and SIKD data. *2008 Preliminary realization of central government expenditures. ** 2009 central government budget (APBN) fiscal stimulus document, Sub-national expenditures between 2001 and 2006 are actual/realization and between 2007 and 2009 are estimates 114 Indonesia Public Expenditure Review Spending for Development Table C. 3 Economic composition of national public expenditure, 2000-09 (% of GDP) Economic Classification 2001 2002 2003 2004 2005 2006 2007 2008* 2009** Personnel Expenditures 5.6 4.7 5.2 5.2 4.4 4.7 5.3 5.5 5.3 Material Expenditures 1.4 1.5 1.5 1.3 1.7 2.1 2.1 2.0 2.4 Interest Payments 6.0 4.8 3.2 2.7 2.3 2.4 2.0 2.0 2.1 Subsidies 5.3 2.4 2.2 4.0 4.3 3.2 3.8 6.1 2.3 Social Assistance 0.0 0.0 0.0 0.0 0.9 1.2 1.3 1.3 1.5 Others Routine 1.0 0.8 1.4 1.1 1.7 1.5 0.9 1.2 1.5 Capital 3.7 5.0 5.0 5.0 4.4 Development 5.0 4.6 6.6 5.3 Stimulus Spending for Infrastructure 0.2 Total National 24.3 18.8 20.1 19.5 19.0 20.1 20.5 23.1 19.7 Source and notes: World Bank staff estimates based on Ministry of Finance and SIKD data. *2008 Preliminary realization of central Government expenditures, ** 2009 central Government budget (APBN) fiscal stimulus document, sub-national expenditures between 2001 and 2006 are actual/realization and between 2007 and 2009 are estimates Table C. 4 Composition of economic expenditure by level of government, 2000-09 2001 2002 2003 2004 2005 2006 2007 2008* 2009** Total Central 261 224 256 297 362 440 505 693 685 Personnel Expenditures 38.7 39.5 47.7 52.7 54.3 73.3 90.4 112.4 140.2 Material Expenditures 9.9 12.8 15.0 15.5 29.7 47.2 54.5 57.0 91.7 Interest Payments 87.1 87.7 65.4 62.5 65.2 79.1 79.8 88.6 110.6 Subsidy 77.4 43.6 43.9 91.5 120.8 107.4 150.2 275.3 123.6 Social Assistance 0.0 0.0 0.0 0.0 24.9 40.7 49.8 56.8 79.0 Others Routine 5.7 3.1 15.0 13.7 34.0 37.4 15.6 30.2 56.8 Capital 32.9 55.0 64.3 72.3 72.0 Development 41.6 37.3 69.2 61.5 Stimulus Spending for Infrastructure 11.2 Total Province 21 29 34 32 35 49 61 63 70 Personnel Expenditures 5.8 5.8 6.7 8.8 9.8 13.5 17.0 17.8 19.1 Material Expenditures 3.9 5.1 3.9 3.6 4.2 5.6 7.2 7.5 8.3 Social Assistance 0.08 0.03 0.23 0.00 0.00 0.00 0.00 0.00 0.00 Others Routine 2.4 3.6 2.3 0.5 0.3 0.5 0.6 0.6 0.7 Development 8.4 14.7 20.7 19.5 20.7 29.1 35.8 37.5 41.6 Total District 72 90 115 119 132 183 244 281 297 Personnel Expenditures 36.1 40.0 49.6 57.1 59.0 71.7 102.5 117.9 123.0 Material Expenditures 7.0 10.1 11.3 10.9 12.7 17.1 23.2 26.7 27.9 Social Assistance 0.1 0.1 0.2 0.0 0.0 0.0 0.0 0.0 3.6 Others Routine 6.0 8.6 11.1 11.1 11.8 12.9 19.5 22.4 23.4 Development 22.5 31.1 43.2 39.8 48.5 81.4 99.2 114.2 119.1 Total National 353 343 405 449 529 672 810 1,037 1,052 Source and notes: World Bank staff estimates based on Ministry of Finance and SIKD data. *2008 Preliminary realization of central Government expenditures, ** 2009 central Government budget (APBN) fiscal stimulus document, sub-national expenditures between 2001 and 2006 are actual/realization and between 2007 and 2009 are estimates 115 Indonesia Public Expenditure Review Spending for Development Table C.5 Economic composition of central government expenditures in Indonesia, 2000-09 2001 2002 2003 2004 2005 2006 2007 2008* 2009** Total Central 100 100 100 100 100 100 100 100 100 Personnel Expenditures 14.9 17.6 18.6 17.7 15.0 16.6 17.9 16.2 20.5 Material Expenditures 3.8 5.7 5.9 5.2 8.2 10.7 10.8 8.2 13.4 Interest Payments 33.5 39.1 25.5 21.0 18.0 18.0 15.8 12.8 16.2 Subsidy 29.7 19.5 17.1 30.8 33.4 24.4 29.8 39.7 18.0 Social Assistance 6.9 9.3 9.9 8.2 11.5 Others Routine 2.2 1.4 5.9 4.6 9.4 8.5 3.1 4.4 8.3 Capital 0.0 0.0 0.0 0.0 9.1 12.5 12.7 10.4 10.5 Development 16.0 16.7 27.0 20.7 Stimulus Spending for Infrastructure 1.6 Total Province 100 100 100 100 100 100 100 100 100 Personnel Expenditures 28.1 19.9 19.6 27.1 27.9 27.8 28.1 28.1 27.3 Material Expenditures 19.0 17.3 11.6 11.0 12.0 11.5 11.9 11.9 12.0 Social Assistance 0.4 0.1 0.7 0.0 0.0 0.0 0.0 0.0 0.0 Others Routine 11.6 12.4 6.9 1.6 1.0 0.9 1.0 1.0 1.0 Development 40.9 50.3 61.2 60.3 59.1 59.8 59.1 59.1 59.7 Total District 100 100 100 100 100 100 100 100 100 Personnel Expenditures 50.4 44.5 43.0 48.0 44.7 39.2 41.9 41.9 41.4 Material Expenditures 9.8 11.2 9.8 9.2 9.6 9.3 9.5 9.5 9.4 Social Assistance 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 1.2 Others Routine 8.3 9.5 9.7 9.3 9.0 7.0 8.0 8.0 7.9 Development 31.4 34.7 37.4 33.5 36.7 44.5 40.6 40.6 40.1 Source and notes: World Bank staff estimates based on Ministry of Finance and SIKD data. *2008 Preliminary realization of central Government expenditures, ** 2009 central Government budget (APBN) fiscal stimulus document, sub-national expenditures between 2001 and 2006 are actual/realization and between 2007 and 2009 are estimates 116 Table C. 6 Realized central government budget, 2005-09 (Rph billion, current prices) 2009 2008 2005 2006 2007 2008* 2009** (APBN- (Audited) P) 495,224 637,987 707,808 981,031 981,609 848,572 872,632 I. Domestic Revenues 493,919 636,153 706,110 978,721 979,305 847,633 871,640 1. Tax Revenues 347,031 409,203 490,989 658,665 658,701 661,759 652,122 a. Domestic Tax 331,792 395,972 470,053 622,353 622,359 642,227 632,099 i. Income Tax 175,541 208,833 238,431 327,504 327,498 319,610 340,376 - Oil & Gas 35,143 43,188 44,000 77,019 77,019 38,768 49,500 - Non Oil & Gas 140,398 165,645 194,431 250,485 250,479 280,842 290,876 ii. Sales tax (VAT) 101,296 123,036 154,527 209,640 209,647 233,649 203,084 iii. Land and Building Tax 16,217 20,859 23,724 25,348 25,354 23,864 23,864 iv. Duties on Land and Building Transfer 3,432 3,185 5,953 5,574 5,573 7,166 6,980 v. Excises 33,256 37,772 44,680 51,252 51,252 54,400 54,545 vi. Other taxes 2,050 2,287 2,738 3,034 3,034 3,540 3,250 b. International Trade Tax 15,239 13,232 20,936 36,312 36,342 19,532 20,023 i. Import duties 14,921 12,140 16,699 22,766 22,764 17,151 18,624 ii.Export tax 318 1,091 4,237 13,547 13,578 2,380 1,400 2. Non Tax Receipts 146,888 226,950 215,121 320,056 320,605 185,874 219,518 a. Natural Resources Revenues 440,467 167,474 132,893 222,003 224,463 103,693 139,997 i. Oil and Gas 103,762 158,086 124,784 209,723 211,617 91,999 129,088 - Oil 72,822 125,145 93,605 171,859 169,022 62,352 92,432 - Gas 30,940 32,941 31,179 37,864 42,595 29,647 36,656 ii. Non Oil & Gas 6,705 9,388 8,109 12,280 12,846 11,693 10,909 - Public Mining 3,191 6,781 5,878 9,886 9,511 8,723 9,044 - Forestry 3,249 2,410 2,115 2,316 2,316 2,500 1,715 - Fishery 265 197 116 78 78 150 150 b. Profits of Public Enterprises 12,835 21,451 23,223 30,836 29,088 26,110 29,215 c. Revenue from public service centers (BLU) 0 1,523 0 2,428 3,734 5,442 5,891 d. Other Non-tax revenues (PNBP) 23,586 36,503 59,005 64,790 63,319 50,630 44,416 II. Grants 1,305 1,834 1,698 2,965 2,304 939 992 509,633 667,129 757,651 985,300 985,790 988,087 1,005,674 I. Central Government Expenditure 361,155 440,032 504,625 692,600 693,356 685,036 696,101 1. Personnel Expenditures 54,345 73,252 90,425 112,394 112,830 140,198 133,709 2. Material Expenditures 29,718 47,182 54,511 56,972 55,964 91,731 87,004 3. Capital Expenditures 32,889 54,952 64,289 72,279 72,773 71,991 74,281 4. Interest Payments 65,200 79,083 79,808 88,623 88,430 110,636 110,051 a. Domestic 43,496 54,897 54,081 59,923 59,887 70,070 70,857 Indonesia Public Expenditure Review Spending for Development b. Foreign 14,136 24,129 25,727 28,700 28,543 37,819 39,194 5. Subsidies 120,765 107,432 150,215 275,291 275,292 123,586 159,951 a. Energy 104,548 94,605 116,890 223,013 223,013 67,017 102,462 - Fuel 100,438 64,212 83,816 139,107 139,107 24,517 54,300 - Electricity 4,110 30,393 33,074 83,907 83,907 42,500 48,162 b. Non Energy 16,247 12,881 33,325 52,277 52,278 56,569 57,489 6. Grants 0 0 0 0 0 0 32 7. Social Assistance 24,904 40,709 49,756 56,846 57,741 78,973 77,765 8. Others 33,972 37,423 15,621 30,235 30,328 56,765 53,309 II. Transfer to Regions 150,464 226,180 253,026 292,632 292,433 303,052 309,572 1. Balancing Funds 143,221 222,131 243,967 278,914 278,715 279,313 285,317 a. Revenue Sharing 49,692 64,900 62,942 78,619 78,420 68,080 74,083 b. General Allocation Funds (DAU) 88,765 145,664 164,787 179,507 179,507 186,414 186,414 c. Special Allocation Funds (DAK) 4,764 11,566 16,238 20,787 20,787 24,820 24,820 2. Special Autonomy and Adj.Fund 7,243 4,049 9,296 13,719 13,719 23,739 24,255 3. Suspended Fund -1,987 917 -237 0 0 0 0 50,791 49,941 29,965 84,353 84,250 -28,880 -22,991 -14,408 -29,142 -49,843 -4,270 -4,180 -139,515 -133,042 (% of GDP) -0.5 -0.9 -1.3 -0.1 -0.1 -2.5 -2.5 11,121 29,416 42,456 55,515 55,515 139,515 133,042 I. Domestic Financing, net 21,393 55,982 66,308 74,615 74,615 109,459 144,821 1. Domestic Banking -2,550 18,913 8,420 -11,700 -11,700 65,797 55,984 2. Non-banking 23,943 37,069 57,889 86,315 86,315 43,661 88,838 a. Privatization 0 400 304 82 82 500 - b. Banking Restructuring asset selling 6,564 2,684 2,413 2,810 2,810 2,565 -13,254 c. Bond Selling 22,575 35,986 57,172 85,923 85,923 54,719 102,091 i. Government Bond Issues (incl. 0 60,979 116,858 -2,500 99,619 international bonds) -2,500 0 ii. Amortizations -24,798 -25,142 -59,686 -39,210 -39,210 -44,900 0 iii. Buy back bonds 0 0 0 0 0 0 0 d. Infrastructure Support -5,195 -2,000 -2,000 0 0 -14,123 0 II. Foreign Financing, net -10,272 -26,567 -23,852 -19,100 -19,100 -14,475 -11,779 1. Foreign Loan Disbursement 26,840 26,115 34,071 44,074 44,074 57,621 70,687 a. Program Loan 12,265 13,580 19,608 29,602 29,602 31,900 31,783 b. Project Loan 14,576 12,535 14,463 14,473 14,473 25,721 38,904 2. Amortisation -37,112 -52,681 -57,923 -63,175 -63,175 -72,096 -82,466 -76,319 -106,965 -167,452 -106,654 -106,565 -256,511 -215,508 Source and notes: Ministry of Finance. *2008 Preliminary realization of central Government expenditures. ** 2009 central Government budget (APBN) fiscal stimulus document. For analysis purposes, this report uses 2008 preliminary realization and 2009 fiscal stimulus document budgets. 2008 audited and revised 2009 budgets (APBN) were not available when the analysis was taken undertaken 118 Indonesia Public Expenditure Review Spending for Development Table C. 7 Realized central government budget, 2000-08 (% of GDP) 2009 2008 2005 2006 2007 2008* 2009** (APBN- (Audited) P) A. State Revenues and Grants 17.8 19.1 17.9 19.8 19.8 15.5 16.1 I. Domestic Revenues 17.7 19.1 17.8 19.8 19.8 15.4 16.1 1. Tax Revenues 12.5 12.3 12.4 13.3 13.3 12.1 12.0 a. Domestic Tax 11.9 11.9 11.9 12.6 12.6 11.7 11.7 i. Income Tax 6.3 6.3 6.0 6.6 6.6 5.8 6.3 - Oil & Gas 1.3 1.3 1.1 1.6 1.6 0.7 0.9 - Non Oil & Gas 5.0 5.0 4.9 5.1 5.1 5.1 5.4 ii. Sales tax (VAT) 3.6 3.7 3.9 4.2 4.2 4.3 3.7 iii. Land and Building Tax 0.6 0.6 0.6 0.5 0.5 0.4 0.4 iv. Duties on Land and Building Transfer 0.1 0.1 0.2 0.1 0.1 0.1 0.1 v. Excises 1.2 1.1 1.1 1.0 1.0 1.0 1.0 vi. Other taxes 0.1 0.1 0.1 0.1 0.1 0.1 0.1 b. International Trade Tax 0.5 0.4 0.5 0.7 0.7 0.4 0.4 i. Import duties 0.5 0.4 0.4 0.5 0.5 0.3 0.3 ii.Export tax 0.0 0.0 0.1 0.3 0.3 0.0 0.0 2. Non Tax Receipts 5.3 6.8 5.4 6.5 6.5 3.4 4.0 a. Natural Resources Revenues 15.8 5.0 3.4 4.5 4.5 1.9 2.6 i. Oil and Gas 3.7 4.7 3.2 4.2 4.3 1.7 2.4 - Oil 2.6 3.7 2.4 3.5 3.4 1.1 1.7 - Gas 1.1 1.0 0.8 0.8 0.9 0.5 0.7 ii. Non Oil & Gas 0.2 0.3 0.2 0.2 0.3 0.2 0.2 - Public Mining 0.1 0.2 0.1 0.2 0.2 0.2 0.2 - Forestry 0.1 0.1 0.1 0.0 0.0 0.0 0.0 - Fishery 0.0 0.0 0.0 0.0 0.0 0.0 0.0 b. Profits of Public Enterprises 0.5 0.6 0.6 0.6 0.6 0.5 0.5 c. Revenue from public service centers (BLU) 0.0 0.0 0.0 0.0 0.1 0.1 0.1 d. Other Non-tax revenues (PNBP) 0.8 1.1 1.5 1.3 1.3 0.9 0.8 II. Grants 0.0 0.1 0.0 0.1 0.0 0.0 0.0 B. Expenditures 18.3 20.0 19.1 19.9 19.9 18.0 18.5 I. Central Government Expenditure 13.0 13.2 12.8 14.0 14.0 12.5 12.8 1. Personnel Expenditures 2.0 2.2 2.3 2.3 2.3 2.6 2.5 2. Material Expenditures 1.1 1.4 1.4 1.2 1.1 1.7 1.6 119 Indonesia Public Expenditure Review Spending for Development 3. Capital Expenditures 1.2 1.6 1.6 1.5 1.5 1.3 1.4 4. Interest Payments 2.3 2.4 2.0 1.8 1.8 2.0 2.0 a. Domestic 1.6 1.6 1.4 1.2 1.2 1.3 1.3 b. Foreign 0.5 0.7 0.7 0.6 0.6 0.7 0.7 5. Subsidis 4.3 3.2 3.8 5.6 5.6 2.3 2.9 a. Energy 3.8 2.8 3.0 4.5 4.5 1.2 1.9 - Fuel 3.6 1.9 2.1 2.8 2.8 0.4 1.0 - Electricity 0.1 0.9 0.8 1.7 1.7 0.8 0.9 b. Non Energy 0.6 0.4 0.8 1.1 1.1 1.0 1.1 6. Grants 0.0 0.0 0.0 0.0 0.0 0.0 0.0 7. Social Assistance 0.9 1.2 1.3 1.1 1.2 1.4 1.4 8. Others 1.2 1.1 0.4 0.6 0.6 1.0 1.0 II. Transfer to Regions 5.4 6.8 6.4 5.9 5.9 5.5 5.7 1. Balancing Funds 5.1 6.7 6.2 5.6 5.6 5.1 5.3 a. Revenue Sharing 1.8 1.9 1.6 1.6 1.6 1.2 1.4 b. General Allocation Funds (DAU) 3.2 4.4 4.2 3.6 3.6 3.4 3.4 c. Special Allocation Funds (DAK) 0.2 0.3 0.4 0.4 0.4 0.5 0.5 2. Special Authonomy and Adjustment Fund 0.3 0.1 0.2 0.3 0.3 0.4 0.4 3. Suspended Fund -0.1 0.0 0.0 0.0 0.0 0.0 0.0 C. Primary Balance 1.8 1.5 0.8 1.7 1.7 -0.5 -0.4 D. SURPLUS / DEFICIT -0.5 -0.9 -1.3 -0.1 -0.1 -2.5 -2.5 (% of GDP) -0.5 -0.9 -1.3 -0.1 -0.1 -2.5 -2.5 E. Net Financing 0.4 0.9 1.1 1.1 1.1 2.5 2.5 I. Domestic Financing, net 0.8 1.7 1.7 1.5 1.5 2.0 2.7 1. Domestic Banking -0.1 0.6 0.2 -0.2 -0.2 1.2 1.0 2. Non-banking 0.9 1.1 1.5 1.7 1.7 0.8 1.6 a. Privatization 0.0 0.0 0.0 0.0 0.0 0.0 0.0 b. Banking Restructuring asset selling 0.2 0.1 0.1 0.1 0.1 0.0 -0.2 c. Bond Selling 0.8 1.1 1.4 1.7 1.7 1.0 1.9 i. Government Bond Issues (incl. international bonds) 0.0 1.8 3.0 -0.1 -0.1 1.8 0.0 ii. Amortizations -0.9 -0.8 -1.5 -0.8 -0.8 -0.8 0.0 iii. Buy back bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 d. Infrastructure Support -0.2 -0.1 -0.1 0.0 0.0 -0.3 0.0 II. Foreign Financing, net -0.4 -0.8 -0.6 -0.4 -0.4 -0.3 -0.2 1. Foreign Loan Disbursement 1.0 0.8 0.9 0.9 0.9 1.1 1.3 a. Program Loan 0.4 0.4 0.5 0.6 0.6 0.6 0.6 120 Indonesia Public Expenditure Review Spending for Development b. Project Loan 0.5 0.4 0.4 0.3 0.3 0.5 0.7 2. Amortisation -1.3 -1.6 -1.5 -1.3 -1.3 -1.3 -1.5 F. Gross Financing -2.7 -3.2 -4.2 -2.2 -2.2 -4.7 -4.0 Source and notes: Ministry of Finance and World Bank staff estimates. *2008 Preliminary realization of central Government expenditures. ** 2009 central Government budget (APBN) fiscal stimulus document. For analysis purposes, this report uses 2008 preliminary realization and 2009 fiscal stimulus document budgets. 2008 audited and revised 2009 budgets (APBN) were not available when the analysis was undertaken 121 Table C. 8 Central, province and district government budget realization, 2000-08 (Rph trillion, current prices) 2001 2002 2003 2004 2005 2006 2007 * 2008 * 2009** I. CENTRAL GOVERNMENT Revenues 301 299 341 403 495 638 708 981 849 Expenditures 342 322 377 427 510 667 758 985 988 Transfer to Regions 81 98 120 130 150 226 253 293 303 Own Expenditures 261 224 256 297 362 440 505 693 685 Balance -40 -24 -35 -23 -14 -29 -50 -4 -140 II. PROVINCE Revenues 25 33 40 46 56 69 82 94 100 Transfer from Center 14 17 19 20 24 34 41 47 49 Own Revenues 11 16 21 26 32 36 46 52 57 Expenditures 23 32 40 43 49 65 82 94 100 Transfer to lower levels 2 3 6 11 14 16 22 30 30 Own expenditures 21 29 34 32 35 49 61 63 70 Balance 2 1 0 3 8 5 0 0 1 III. KABUPATEN/KOTA Revenues 79 93 115 122 146 210 244 281 293 Transfer from Center 71 81 97 102 121 183 212 245 254 Own Revenues 8 12 18 20 25 27 50 57 61 Expenditures 72 90 115 119 132 183 244 281 297 Balance 7 3 0 3 14 27 0 0 -4 IV. AGGREGATE BUDGET Revenues 320 327 380 450 553 701 805 1,090 967 Central Government 301 299 341 403 495 638 708 981 849 Province (Own Revenues) 11 16 21 26 32 36 46 52 57 District (Own Revenues) 8 12 18 20 25 27 50 57 61 Expenditures 353 343 405 448 529 672 810 1,037 1,052 Central Government 261 224 256 297 362 440 505 693 685 Province 21 29 34 32 35 49 61 63 70 District 72 90 115 119 132 183 244 281 297 Balance -31 -19 -35 -18 7 2 -50 -4 -142 Central Government -40 -24 -35 -23 -14 -29 -50 -4 -140 Province 2 1 0 3 8 5 0 0 1 District 7 3 0 3 14 27 0 0 -4 Source and notes: World Bank staff estimates based on Ministry of Finance and SIKD data. *2008 Preliminary realization of central Government expenditures, ** 2009 central Government budget (APBN) fiscal stimulus document, sub-national expenditures between 2001 and 2006 are actual/realization and between 2007 and 2009 are estimates Indonesia Public Expenditure Review Spending for Development Table C.9 Central, province and district government budget realization (% of total national expenditure) 2001 2002 2003 2004 2005 2006 2007 * 2008 * 2009** Revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Central Government 94.0 91.3 89.8 89.7 89.6 91.0 88.0 90.0 87.8 Province (Own Revenues) 3.4 5.0 5.5 5.8 5.8 5.1 5.8 4.8 5.9 District (Own Revenues) 2.5 3.7 4.8 4.5 4.6 3.9 6.3 5.2 6.3 Expenditures 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Central Government 73.8 65.3 63.2 66.2 68.4 65.5 62.3 66.8 65.1 Province 5.9 8.5 8.4 7.2 6.6 7.2 7.5 6.1 6.6 District 20.3 26.2 28.4 26.5 25.0 27.3 30.2 27.1 28.2 Source and notes: World Bank staff estimates based on Ministry of Finance and SIKD data. *2008 Preliminary realization of central Government expenditures, ** 2009 central Government budget (APBN) fiscal stimulus document, sub-national expenditures between 2001 and 2006 are actual/realization and between 2007 and 2009 are estimates Table C.10 Central, province and district government budget realization (% of GDP) 2001 2002 2003 2004 2005 2006 2007 * 2008 * 2009** Revenues 22.1 18.0 18.9 19.6 19.8 21.0 20.3 24.3 18.1 Central Government 20.8 16.4 17.0 17.6 17.8 19.1 17.9 21.9 15.9 Province 0.8 0.9 1.0 1.1 1.1 1.1 1.2 1.2 1.1 Kabupaten 0.6 0.7 0.9 0.9 0.9 0.8 1.3 1.3 1.1 Expenditures 24.3 18.8 20.1 19.5 19.0 20.1 20.5 23.1 19.7 Central Government 18.0 12.3 12.7 12.9 13.0 13.2 12.8 15.4 12.9 Province 1.4 1.6 1.7 1.4 1.3 1.5 1.5 1.4 1.3 District 4.9 4.9 5.7 5.2 4.7 5.5 6.2 6.3 5.6 Source and notes: World Bank staff estimates based on Ministry of Finance and SIKD data. *2008 Preliminary realization of central Government expenditures, ** 2009 central Government budget (APBN) fiscal stimulus document, sub-national expenditures between 2001 and 2006 are actual/realization and between 2007 and 2009 are estimates C.11 Sectoral composition of national public expenditure 2001-2008 (Rph trillion, current prices) Functions/Sectors 2001 2002 2003 2004 2005 2006 2007* 2008* 2009** Agriculture 9.4 12.6 16.8 17.2 20.5 27.4 33.6 52.9 57.3 Education 40.1 49.8 63.2 61.4 73.2 102.5 129.1 155.1 197.6 Health 9.4 11.8 17.6 17.3 18.3 29.9 39.0 42.0 47.0 Infrastructure 24.7 25.0 39.0 35.0 38.7 66.6 74.1 94.7 104.9 Government Administration 32.2 37.5 52.7 55.7 70.5 96.9 114.1 141.3 151.5 National Defense 15.9 19.4 27.0 29.4 33.2 41.8 39.6 41.5 51.3 Mining 0.6 0.7 1.0 1.1 1.1 1.7 1.8 2.3 2.3 Trade, Business Dev, Finance & Cooperative 3.1 4.8 4.8 3.4 3.8 5.6 10.3 6.3 6.4 Manpower 0.6 1.0 1.7 1.5 1.5 2.5 2.9 3.3 3.2 Environment and Spatial Planning 2.0 2.6 3.3 3.0 3.4 5.7 9.0 9.7 11.8 Others 53.6 51.4 75.2 76.1 87.7 113.4 139.4 152.6 215.9 Subsidies 73.9 38.9 37.8 85.4 111.7 98.8 136.9 247.0 91.7 Interest payments 87.1 87.7 65.4 62.5 65.2 79.1 79.8 88.6 110.6 Total 352.8 343.1 405.4 448.8 528.7 671.9 809.5 1,037.2 1,051.6 Source and notes: World Bank staff estimates based on Ministry of Finance and SIKD data. *2008 Preliminary realization of central Government expenditures, ** 2009 central Government budget (APBN) fiscal stimulus document, sub-national expenditures between 2001 and 2006 are actual/realization and between 2007 and 2009 are estimates 123 Indonesia Public Expenditure Review Spending for Development C.12 Sectoral composition of national public expenditure 2001-2008 (% of total national expenditure) Functions/Sectors 2001 2002 2003 2004 2005 2006 2007* 2008* 2009** Agriculture 2.7 3.7 4.1 3.8 3.9 4.1 4.1 5.1 5.5 Education 11.4 14.5 15.6 13.7 13.8 15.3 16.0 15.0 18.8 Health 2.7 3.5 4.3 3.9 3.5 4.5 4.8 4.0 4.5 Infrastructure 7.0 7.3 9.6 7.8 7.3 9.9 9.1 9.1 10.0 Government Administration 9.1 10.9 13.0 12.4 13.3 14.4 14.1 13.6 14.4 National Defense 4.5 5.6 6.7 6.6 6.3 6.2 4.9 4.0 4.9 Mining 0.2 0.2 0.2 0.2 0.2 0.3 0.2 0.2 0.2 Trade, Business Dev, Finance & Cooperative 0.9 1.4 1.2 0.8 0.7 0.8 1.3 0.6 0.6 Manpower 0.2 0.3 0.4 0.3 0.3 0.4 0.4 0.3 0.3 Environment and Spatial Planning 0.6 0.7 0.8 0.7 0.6 0.9 1.1 0.9 1.1 Others 15.2 15.0 18.6 16.9 16.6 16.9 17.2 14.7 20.5 Subsidies 21.0 11.3 9.3 19.0 21.1 14.7 16.9 23.8 8.7 Interest payments 24.7 25.6 16.1 13.9 12.3 11.8 9.9 8.5 10.5 Total 100 100 100 100 100 100 100 100 100 Source and notes: World Bank staff estimates based on Ministry of Finance and SIKD data. *2008 Preliminary realization of central Government expenditures, ** 2009 central Government budget (APBN) fiscal stimulus document, sub-national expenditures between 2001 and 2006 are actual/realization and between 2007 and 2009 are estimates C.13 Sectoral composition of national public expenditure 2001-2008 (% of GDP) Functions/Sectors 2001 2002 2003 2004 2005 2006 2007* 2008* 2009** Agriculture 0.7 0.7 0.8 0.7 0.7 0.8 0.8 1.2 1.1 Education 2.8 2.7 3.1 2.7 2.6 3.1 3.3 3.5 3.7 Health 0.6 0.7 0.9 0.8 0.7 0.9 1.0 0.9 0.9 Infrastructure 1.7 1.4 1.9 1.5 1.4 2.0 1.9 2.1 2.0 Government Administration 2.2 2.1 2.6 2.4 2.5 2.9 2.9 3.2 2.8 National Defense 1.1 1.1 1.3 1.3 1.2 1.3 1.0 0.9 1.0 Mining 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.1 0.0 Trade, Business Dev, Finance & Cooperative 0.2 0.3 0.2 0.1 0.1 0.2 0.3 0.1 0.1 Manpower 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Environment and Spatial Planning 0.1 0.1 0.2 0.1 0.1 0.2 0.2 0.2 0.2 Others 3.7 2.8 3.7 3.3 3.1 3.4 3.5 3.4 4.1 Subsidies 5.1 2.1 1.9 3.7 4.0 3.0 3.5 5.5 1.7 Interest payments 6.0 4.8 3.2 2.7 2.3 2.4 2.0 2.0 2.1 Total 24.3 18.8 20.1 19.5 19.0 20.1 20.5 23.1 19.7 Source and notes: World Bank staff estimates based on Ministry of Finance and SIKD data. *2008 Preliminary realization of central Government expenditures, ** 2009 central Government budget (APBN) fiscal stimulus document, sub-national expenditures between 2001 and 2006 are actual/realization and between 2007 and 2009 are estimates 124 Indonesia Public Expenditure Review Spending for Development C.14 Sectoral composition of central government expenditure 2001-2008 (Rph trillion, current prices) Functions/Sectors 2001 2002 2003 2004 2005 2006 2007 2008* 2009** Agriculture 6.0 7.8 11.1 11.1 14.0 17.0 20.9 38.7 42.3 Education 11.9 13.3 20.9 17.7 29.3 45.3 50.8 65.7 100.0 Health 3.3 3.7 7.3 6.2 5.8 12.2 16.0 16.1 19.6 Infrastructure 13.7 9.8 18.3 14.6 15.6 24.8 26.0 40.7 47.7 Government Administration 3.7 4.3 7.5 7.8 14.5 25.0 15.7 30.5 34.1 National Defense 15.9 19.4 27.0 29.4 33.2 41.8 39.6 41.5 51.3 Mining 0.4 0.4 0.5 0.7 0.7 1.2 1.1 1.5 1.7 Trade, Business Dev, Finance & Cooperative 0.7 1.0 1.8 1.8 2.1 3.1 7.1 2.7 2.9 Manpower 0.2 0.3 0.8 0.6 0.4 1.0 1.0 1.2 1.5 Environment and Spatial Planning 0.9 0.8 1.2 1.3 1.0 2.3 4.6 4.8 6.7 Others 42.7 36.5 56.6 58.4 68.1 88.5 105.1 113.6 175.0 Subsidies 73.9 38.9 37.8 85.4 111.7 98.8 136.9 247.0 91.7 Interest payments 87.1 87.7 65.4 62.5 65.2 79.1 79.8 88.6 110.6 Total 260.5 224.0 256.2 297.5 361.8 440.0 504.6 692.6 685.0 Source and notes: World Bank staff estimates based on Ministry of Finance and SIKD data. *2008 Preliminary realization of central Government expenditures, ** 2009 central Government budget (APBN) fiscal stimulus document, sub-national expenditures between 2001 and 2006 are actual/realization and between 2007 and 2009 are estimates C.15 Sectoral composition of central government expenditure 2001-2008 (% of total central expenditure) Functions/Sectors 2001 2002 2003 2004 2005 2006 2007 2008* 2009** Agriculture 2.3 3.5 4.4 3.7 3.9 3.9 4.1 5.6 6.2 Education 4.6 5.9 8.2 6.0 8.1 10.3 10.1 9.5 14.6 Health 1.2 1.7 2.9 2.1 1.6 2.8 3.2 2.3 2.9 Infrastructure 5.3 4.4 7.1 4.9 4.3 5.6 5.2 5.9 7.0 Government Administration 1.4 1.9 2.9 2.6 4.0 5.7 3.1 4.4 5.0 National Defense 6.1 8.6 10.5 9.9 9.2 9.5 7.9 6.0 7.5 Mining 0.2 0.2 0.2 0.2 0.2 0.3 0.2 0.2 0.2 Trade, Business Dev, Finance & Cooperative 0.3 0.5 0.7 0.6 0.6 0.7 1.4 0.4 0.4 Manpower 0.1 0.2 0.3 0.2 0.1 0.2 0.2 0.2 0.2 Environment and Spatial Planning 0.4 0.3 0.5 0.4 0.3 0.5 0.9 0.7 1.0 Others 16.4 16.3 22.1 19.6 18.8 20.1 20.8 16.4 25.5 Subsidies 28.4 17.4 14.8 28.7 30.9 22.5 27.1 35.7 13.4 Interest payments 33.5 39.1 25.5 21.0 18.0 18.0 15.8 12.8 16.2 Total 100 100 100 100 100 100 100 100 100 Source and notes: World Bank staff estimates based on Ministry of Finance and SIKD data. *2008 Preliminary realization of central Government expenditures, ** 2009 central Government budget (APBN) fiscal stimulus document, sub-national expenditures between 2001 and 2006 are actual/realization and between 2007 and 2009 are estimates 125 Indonesia Public Expenditure Review Spending for Development C.16 Sectoral composition of central government expenditure 2001-2008 (% of GDP) Functions/Sectors 2001 2002 2003 2004 2005 2006 2007 2008* 2009** Agriculture 0.4 0.4 0.6 0.5 0.5 0.5 0.5 0.9 0.8 Education 0.8 0.7 1.0 0.8 1.1 1.4 1.3 1.5 1.9 Health 0.2 0.2 0.4 0.3 0.2 0.4 0.4 0.4 0.4 Infrastructure 0.9 0.5 0.9 0.6 0.6 0.7 0.7 0.9 0.9 Government Administration 0.3 0.2 0.4 0.3 0.5 0.7 0.4 0.7 0.6 National Defense 1.1 1.1 1.3 1.3 1.2 1.3 1.0 0.9 1.0 Mining 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Trade, Business Dev, Finance & Cooperative 0.0 0.1 0.1 0.1 0.1 0.1 0.2 0.1 0.1 Manpower 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Environment and Spatial Planning 0.1 0.0 0.1 0.1 0.0 0.1 0.1 0.1 0.1 Others 2.9 2.0 2.8 2.5 2.4 2.7 2.7 2.5 3.3 Subsidies 5.1 2.1 1.9 3.7 4.0 3.0 3.5 5.5 1.7 Interest payments 6.0 4.8 3.2 2.7 2.3 2.4 2.0 2.0 2.1 Total 18.0 12.3 12.7 13.0 13.0 13.2 12.8 15.4 12.9 Source and notes: World Bank staff estimates based on Ministry of Finance and SIKD data. *2008 Preliminary realization of central Government expenditures, ** 2009 central Government budget (APBN) fiscal stimulus document, sub-national expenditures between 2001 and 2006 are actual/realization and between 2007 and 2009 are estimates C.17 Sectoral composition of provincial government expenditure 2001-2008 (Rph billion, current prices) Functions/Sectors 2001 2002 2003 2004 2005 2006 2007* 2008* Agriculture 1,228 1,489 1,713 1,823 2,013 2,690 3,416 3,577 Education 1,943 3,999 3,922 3,815 3,834 5,456 6,688 7,002 Health 1,745 2,372 2,822 3,000 3,265 3,917 5,265 5,512 Infrastructure 2,922 4,302 5,577 6,675 6,628 10,227 12,032 12,596 Government Administration 8,304 10,509 13,426 12,379 13,893 19,300 24,086 25,216 National Defense 0 0 0 0 0 0 0 0 Mining 85 156 283 213 224 282 370 387 Trade, Business Dev, Finance & Cooperative 852 1,331 854 599 630 856 1,075 1,125 Manpower 176 281 376 417 466 561 753 789 Environment and Spatial Planning 328 462 758 566 910 1,146 1,493 1,563 Others 3,068 4,323 4,167 2,916 3,151 4,266 5,374 5,626 Total 20,651 29,222 33,897 32,404 35,014 48,702 60,552 63,394 Source and notes: World Bank staff estimates based on Ministry of Finance and SIKD data. *2008 Preliminary realization of central Government expenditures, ** 2009 central Government budget (APBN) fiscal stimulus document, sub-national expenditures between 2001 and 2006 are actual/realization and between 2007 and 2009 are estimates 126 Indonesia Public Expenditure Review Spending for Development C.18 Sectoral composition of provincial government expenditure 2001-2008 (% of total expenditure) Functions/Sectors 2001 2002 2003 2004 2005 2006 2007* 2008* Agriculture 5.9 5.1 5.1 5.6 5.7 5.5 5.6 5.6 Education 9.4 13.7 11.6 11.8 11.0 11.2 11.0 11.0 Health 8.5 8.1 8.3 9.3 9.3 8.0 8.7 8.7 Infrastructure 14.1 14.7 16.5 20.6 18.9 21.0 19.9 19.9 Government Administration 40.2 36.0 39.6 38.2 39.7 39.6 39.8 39.8 National Defense 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Mining 0.4 0.5 0.8 0.7 0.6 0.6 0.6 0.6 Trade, Business Dev, Finance & Cooperative 4.1 4.6 2.5 1.8 1.8 1.8 1.8 1.8 Manpower 0.9 1.0 1.1 1.3 1.3 1.2 1.2 1.2 Environment and Spatial Planning 1.6 1.6 2.2 1.7 2.6 2.4 2.5 2.5 Others 14.9 14.8 12.3 9.0 9.0 8.8 8.9 8.9 Total 100 100 100 100 100 100 100 100 Source and notes: World Bank staff estimates based on Ministry of Finance and SIKD data. *2008 Preliminary realization of central Government expenditures, ** 2009 central Government budget (APBN) fiscal stimulus document, sub-national expenditures between 2001 and 2006 are actual/realization and between 2007 and 2009 are estimates C.19 Sectoral composition of district government expenditure 2001-2008 (Rph billion, current prices) Functions/Sectors 2001 2002 2003 2004 2005 2006 2007* 2008* Agriculture 2,240 3,248 3,928 4,201 4,471 7,706 9,245 10,638 Education 26,241 32,577 38,345 39,805 40,049 51,768 71,609 82,396 Health 4,387 5,725 7,472 8,108 9,203 13,836 17,752 20,426 Infrastructure 8,020 10,856 15,118 13,738 16,439 31,497 36,000 41,423 Government Administration 20,227 22,697 31,820 35,544 42,017 52,607 74,368 85,570 National Defense 0 0 0 0 0 0 0 0 Mining 83 133 209 128 157 264 320 368 Trade, Business Dev, Finance & Cooperative 1,600 2,430 2,095 1,046 1,103 1,615 2,105 2,422 Manpower 200 367 501 448 556 928 1,132 1,303 Environment and Spatial Planning 734 1,332 1,333 1,219 1,497 2,264 2,909 3,347 Others 7,892 10,524 14,458 14,721 16,438 20,656 28,918 33,274 Total 71,625 89,888 115,279 118,959 131,931 183,142 244,358 281,167 Source and notes: World Bank staff estimates based on Ministry of Finance and SIKD data. *2008 Preliminary realization of central Government expenditures, ** 2009 central Government budget (APBN) fiscal stimulus document, sub-national expenditures between 2001 and 2006 are actual/realization and between 2007 and 2009 are estimates 127 Indonesia Public Expenditure Review Spending for Development C.20 Sectoral composition of district government expenditure 2001-2008 (% of total expenditure) Functions/Sectors 2001 2002 2003 2004 2005 2006 2007* 2008* Agriculture 3.1 3.6 3.4 3.5 3.4 4.2 3.8 3.8 Education 36.6 36.2 33.3 33.5 30.4 28.3 29.3 29.3 Health 6.1 6.4 6.5 6.8 7.0 7.6 7.3 7.3 Infrastructure 11.2 12.1 13.1 11.5 12.5 17.2 14.7 14.7 Government Administration 28.2 25.3 27.6 29.9 31.8 28.7 30.4 30.4 National Defense 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Mining 0.1 0.1 0.2 0.1 0.1 0.1 0.1 0.1 Trade, Business Dev, Finance & Cooperative 2.2 2.7 1.8 0.9 0.8 0.9 0.9 0.9 Manpower 0.3 0.4 0.4 0.4 0.4 0.5 0.5 0.5 Environment and Spatial Planning 1.0 1.5 1.2 1.0 1.1 1.2 1.2 1.2 Others 11.0 11.7 12.5 12.4 12.5 11.3 11.8 11.8 Total 100 100 100 100 100 100 100 100 Source and notes: World Bank staff estimates based on Ministry of Finance and SIKD data. *2008 Preliminary realization of central Government expenditures, ** 2009 central Government budget (APBN) fiscal stimulus document, sub-national expenditures between 2001 and 2006 are actual/realization and between 2007 and 2009 are estimates C.21 Expenditure on key sectors by level of government 2001-2008 (Rph trillion, current prices) Functions/Sectors 2001 2002 2003 2004 2005 2006 2007 2008 Education 40.1 49.8 63.2 61.4 73.2 102.5 129.1 155.1 Central 11.9 13.3 20.9 17.7 29.3 45.3 50.8 65.7 Province 1.9 4.0 3.9 3.8 3.8 5.5 6.7 7.0 District 26.2 32.6 38.3 39.8 40.0 51.8 71.6 82.4 Health 9.4 11.8 17.6 17.3 18.3 29.9 39.0 42.0 Central 3.3 3.7 7.3 6.2 5.8 12.2 16.0 16.1 Province 1.7 2.4 2.8 3.0 3.3 3.9 5.3 5.5 District 4.4 5.7 7.5 8.1 9.2 13.8 17.8 20.4 Infrastructure 24.7 25.0 39.0 35.0 38.7 66.6 74.1 94.7 Central 13.7 9.8 18.3 14.6 15.6 24.8 26.0 40.7 Province 2.9 4.3 5.6 6.7 6.6 10.2 12.0 12.6 District 8.0 10.9 15.1 13.7 16.4 31.5 36.0 41.4 Agriculture 9.4 12.6 16.8 17.2 20.5 27.4 33.6 52.9 Central 6.0 7.8 11.1 11.1 14.0 17.0 20.9 38.7 Province 1.2 1.5 1.7 1.8 2.0 2.7 3.4 3.6 District 2.2 3.2 3.9 4.2 4.5 7.7 9.2 10.6 Government Administration 32.2 37.5 52.7 55.7 70.5 96.9 114.1 141.3 Central 3.7 4.3 7.5 7.8 14.5 25.0 15.7 30.5 Province 8.3 10.5 13.4 12.4 13.9 19.3 24.1 25.2 District 20.2 22.7 31.8 35.5 42.0 52.6 74.4 85.6 Source and notes: World Bank staff estimates based on Ministry of Finance and SIKD data. *2008 Preliminary realization of central Government expenditures, ** 2009 central Government budget (APBN) fiscal stimulus document, sub-national expenditures between 2001 and 2006 are actual/realization and between 2007 and 2009 are estimates 128 Indonesia Public Expenditure Review Spending for Development C.22 Expenditure on key sectors by level of government 2001-2008 (% of total) Functions/Sectors 2001 2002 2003 2004 2005 2006 2007 2008 Education 100 100 100 100 100 100 100 100 Central 29.7 26.6 33.1 28.9 40.0 44.2 39.4 42.4 Province 4.8 8.0 6.2 6.2 5.2 5.3 5.2 4.5 District 65.4 65.4 60.7 64.9 54.7 50.5 55.5 53.1 Health 100 100 100 100 100 100 100 100 Central 34.7 31.6 41.5 35.7 31.9 40.7 41.0 38.2 Province 18.6 20.0 16.0 17.4 17.8 13.1 13.5 13.1 District 46.7 48.3 42.4 46.9 50.3 46.2 45.5 48.6 Infrastructure 100 100 100 100 100 100 100 100 Central 55.6 39.3 46.9 41.7 40.4 37.3 35.1 43.0 Province 11.9 17.2 14.3 19.1 17.1 15.4 16.2 13.3 District 32.5 43.5 38.8 39.2 42.5 47.3 48.6 43.7 Agriculture 100 100 100 100 100 100 100 100 Central 63.3 62.3 66.4 64.9 68.4 62.0 62.3 73.1 Province 13.0 11.8 10.2 10.6 9.8 9.8 10.2 6.8 District 23.7 25.8 23.4 24.5 21.8 28.2 27.6 20.1 Government Administration 100 100 100 100 100 100 100 100 Central 11.4 11.4 14.1 13.9 20.6 25.8 13.7 21.6 Province 25.8 28.0 25.5 22.2 19.7 19.9 21.1 17.8 District 62.8 60.5 60.4 63.8 59.6 54.3 65.2 60.6 Source and notes: World Bank staff estimates based on Ministry of Finance and SIKD data. *2008 Preliminary realization of central Government expenditures, ** 2009 central Government budget (APBN) fiscal stimulus document, sub-national expenditures between 2001 and 2006 are actual/realization and between 2007 and 2009 are estimates 129