91674 the world bank Indonesia: Improving Development Outcomes through Better Institutions IBRD Results SYNOPSIS The World Bank Group, and IBRD in particular, has for many years supported Indonesia’s efforts to trans- form its economy and improve the lives of its poorest people. Through a range of financial and technical programs, IBRD has helped Indonesians enjoy greater access to clean water and sanitation, endure far less red tape to start a business, rebuild after disasters, protect their natural resources and fight corruption. Challenge Key Statistics and Results Indonesia’s transition has come a long way in terms of the ÔÔ US$10 billion – the amount of extra funds Indonesia public’s voice and the state’s stability. Amidst the global eco- has available to spend per year after cutting costly sub- nomic slump, Indonesia is one of the few countries to con- sidies. tinue posting significant growth, and the national economy ÔÔ 60 days – the time required to start up a new business is expected to grow by 5.5 percent in 2010 and by 6 percent in Indonesia. in 2011. While Indonesia is doing well, it could be doing ÔÔ 24,000 kms – the length of roads preserved in Sumatra. far better in the areas of poverty reduction, service delivery ÔÔ 1,500 kms – the length of roads improved in Eastern and governance. Indonesia. ÔÔ 4,500 meters – the combined length of bridges im- More than 32 million Indonesians currently live below proved in Eastern Indonesia. the poverty line and approximately half of all households ÔÔ 851,501 – the number of land title certificates distrib- remain clustered around the national poverty line set at uted to land owners in nine provinces under the Land 200,262 Indonesia Rupiah (equivalent to US$21.47 as of Management Policy Development Project. February 12, 2010). Employment growth has been slower ÔÔ 121,594 – the number of land title certificates distribut- than population growth. Public services remain inadequate ed to land owners in post-tsunami Aceh, as of May 2008. by middle income standards. Indonesia is also doing poorly ÔÔ 50 percent – the amount by which illegal and de- in a number of health- and infrastructure-related indicators, structive fishing and coral mining activities have been and as a result may fail to reach several Millennium Devel- reduced in most pilot areas under the Coral Reef Re- opment Goals (MDGs). For example, in terms of maternal habilitation and Management Program (COREMAP). mortality, 2008 data shows that Indonesia is still suffering ÔÔ 75 percent – the proportion of Indonesia’s public now 307 deaths for every 100,000 live births—more than dou- aware of the dangers of coral reef degradation. ble the MDG target of 105 deaths by 2015. Also, despite ÔÔ 38,000 – the number of villages and cities that have recent progress, access to improved sanitation facilities cur- increased access to vital infrastructure and water/sani- rently stands at 68 percent of the population, significantly tation resources through community-driven develop- short of the MDG target of 86 percent. ment programs. March 2010 2 Indonesia: Improving Development Outcomes through Better Institutions US$30 billion in 2009, higher than the IBRD estimate of US$27 billion. ÔÔ Significant reductions in fuel subsidies, and less spend- ing on subsidies overall ➔ the Indonesian government now has an extra US$10 billion a year to spend on so- cial protection programs. Investment climate – the ways in which the DPL series has helped to create a more supportive business environment for investors, as well as to strengthen, diversify and increase access to the finance sector, include: ÔÔ Reducing the state bank share of the overall banking system ➔ to 36 percent in 2007 from 46 percent in 2003, indicating an increasing role for private banks. ÔÔ Helping small- and medium-sized enterprises (SMEs) ÔÔ 250,000 hectares – the size of the irrigated area benefit- benefit from market-based services ➔ loans to SMEs ing from improved water management. comprised 52 percent of total loans in 2007, compared ÔÔ 72 percent – the proportion of births now attended by to 47 percent in 2003. trained health workers, as of 2007. ÔÔ Reducing the start-up time for a new business to 60 ÔÔ 1,208 – the number of villages now benefitting from days in 2009 from 168 days in 2003. functioning water supply systems. ÔÔ Improving regulatory and institutional frameworks for public-private partnerships (PPPs) ➔ a decree was issued requiring transparent competitive bidding Results in Detail for PPPs, and special committees and units have been established within Ministry of Finance to determine Since 2004, the IBRD has disbursed a total of US$1.9 bil- public funding for PPPs. lion in development policy loans (DPLs)—which have proven to be an effective way of providing budgetary and Public service delivery – in several areas, the DPL series technical support to the Indonesian government’s policy has helped the government to improve the quality, cover- reforms in the areas of macroeconomic stability, invest- age and utilization of basic services, especially for the poor, ment climate, service delivery and public financial man- including: agement: ÔÔ Improved professional competency and performance Macroeconomic stability – since the DPL series began, incentives of all teachers ➔ the number of junior and Indonesia has managed to fulfill many of its fiscal targets, senior high school teachers with bachelor’s level degrees including: increased to 375,620 in 2008 from 260,026 in 2002. Initial anecdotal evidence also shows that a 2007 Min- ÔÔ Improved budget discipline ➔ the budget deficit was isterial Decree requiring teachers to perform 24 teach- reduced to 2.2 percent of gross domestic product ing hours per week has led to teachers in overstaffed (GDP) in 2009 from 4.4 percent in 1998. school requesting transfers to understaffed schools. ÔÔ Improved debt management ➔ the debt-to-GDP ratio ÔÔ Stronger district and provincial capacity to manage fell to 30.7 percent in 2008 from 61 percent in 2003. a decentralized health system thanks to three IBRD- ÔÔ Higher non-oil tax revenues, thanks to a modernized financed Provincial Health Projects ➔ helped to in- tax system ➔ revenues amounted to approximately crease the proportion of birth deliveries by trained IBRD RESULTS 3 health workers from 37 percent in 1995 to 72 percent to many of Indonesia’s poor, and that non-state justice sys- in 2007, and to improve the immunization coverage of tems—for example, mediation through village heads—are measles vaccine from 63 percent in n1995 to 72 per- seen as more reliable options that need strengthening. cent in 2007. ÔÔ Successful piloting of conditional cash transfer pro- Indonesia’s commitment to eradicating corruption gained grams in seven provinces ➔ cash transfers are given significant ground with the establishment of the indepen- to poor families on condition that their children are dent KPK, whose many investigations have lead to numer- enrolled in and attend schools, and make better use of ous high-profile prosecutions. The IBRD was instrumental public health facilities. in helping to build the legal basis for the KPK, to ensure ÔÔ Increased percentage of households with access to safe due process in the selection of its members and to provide drinking water ➔ functioning water supply systems support in its operations. have been established in 1,208 villages (covering 3.04 million villagers). Since 2007, the IBRD has disbursed a total of US$650 mil- lion in infrastructure development policy loans (I-DPLs) Public financial management – the DPL series has helped to support efforts to increase the level and effectiveness of to improve transparency, accountability, efficiency and infrastructure financing. The number of new infrastructure effectiveness in the use of public resources, as well as to projects dropped significantly after the 1997 Asian finan- improve the institutional framework for addressing corrup- cial crisis, and the lack of adequate infrastructure is now tion by: the main constraint to Indonesia’s growth potential. IBRD studies indicate that infrastructure investments of US$4.7 ÔÔ Having all line ministries prepare financial statements billion could boost GDP by 2.4 percent. Now in its fourth using new government accounting standards. annual installment, among other things, the I-DPL series ÔÔ Improving cash management through a Treasury Single has contributed to efforts: Account Approach. ÔÔ Creating a new decree that defines service delivery re- ÔÔ To increase capital spending by infrastructure minis- sponsibilities at each level of government. tries by 25 percent. ÔÔ Helping to build the legal basis for the Anti-Corrup- ÔÔ To increase the proportion of electricity subsidies allo- tion Commission (KPK), to ensure due process in the cated to the lowest income consumers. selection of its members and to provide support in its ÔÔ To prepare competitive and transparent tenders for operation. PPP transactions. ÔÔ To speed up the processing of construction contracts. The IBRD has played a significant advisory role in helping Indonesia become more transparent and accountable in In the area of disaster risk management, at the govern- managing its public finances. New laws and regulations on ment’s request, the IBRD initiated, designed and drafted State Finances, State Treasury and State Audit have been the founding legislation for the establishment of the Aceh passed. The Ministry of Finance is now a better organized, Reconstruction and Rehabilitation Agency, which suc- more efficient, more accountable and more productive state cessfully managed the complex reconstruction and reha- apparatus, thanks to the IBRD-supported Government Fi- bilitation of Aceh and Nias in the wake of the tsunami of nancial Management and Revenue Administration Project December 2004. The IBRD also provided continuous tech- (GFMRAP). nical assistance and support during the first few months of BRR’s existence. Segments of Indonesia’s poor and marginalized people now have greater access to judicial services. The IBRD-support- Multi-Donor Fund (MDF) for Aceh and Nias – The ed Justice for the Poor (non-lending) program was born on IBRD mobilized over US$700 million in commitments the premise that formal justice institutions are inaccessible from 15 donors in support of the MDF for Aceh and Nias 4 Indonesia: Improving Development Outcomes through Better Institutions (under World Bank administration), as well as leveraging The outcomes achieved following IBRD’s shift in approach additional bilateral Trust Funds and restructuring a number have been significant: of International Development Association (IDA) projects. CDD projects continue to achieve results on the ground ÔÔ The MDF helped build 4,400 new houses; rehabilitate – the two IBRD-financed CDD programs, the Kecamatan 4,050 old houses; build 43 community health clinics; Development Project and the Urban Poverty Program, have build or repair 282 schools; repair 846 bridges; rebuild been successful in delivering small-scale infrastructure and 2,330 kilometers of village roads and 199 kilometers basic services to poor communities. These programs have of urban roads; finance 1,211 irrigation and drainage built or rehabilitated schools, health center facilities, water projects in rural areas; rehabilitate 178 kms of drain- and sanitation systems, roads, bridges, markets and electri- age in urban areas; build 1,148 clean water systems; and fication systems and are providing employment, building build 1,032 sanitation units. capacity and deepening local governance. Java Reconstruction Fund – Lessons from Aceh were also DPLs have contributed strongly to advancing cross-cut- applied successfully to Yogyakarta and Central Java’s recon- ting reforms – policy-based loans have become the center- struction, following the May 2006 earthquake. The govern- piece of a more mature partnership between IBRD and ment employed the IBRD’s community-based approach in Indonesia. The DPL program has been effective in three its own large housing program. In addition to support on ways: donor coordination, and the damage and loss assessment exercise, at the government’s request the IBRD also estab- ÔÔ Advancing reforms – the DPL s have allowed reform- lished the Multi-donor Java Reconstruction Fund ( JRF) minded policy-makers to translate broad objectives bringing together over US$85 million in grant funds, pri- into priority actions. marily supporting home reconstruction. T he closing dates ÔÔ Predictable low-cost financing – as a middle income of both MDF and JRF were recently extended and their country, Indonesia can choose from a variety of fund- scope enhanced to promote sustainable, locally centered ing sources. However, with Indonesia’s high gross bor- and managed institutional and economic development. rowing needs (over US$16 billion annually), DPLs have become a preferred option. ÔÔ 146,173 houses have been built through Bank support ÔÔ Cementing development partner coordination – the as of March 2007. DPL series has improved harmonization and rein- forced support for reforms among Indonesia’s main development partners: the IBRD, the Asian Devel- The Approach opment Bank (ADB) and Japan. The ADB and Japan been providing parallel financing to the DPL program. Since 2004, the IBRD’s support for Indonesia has evolved to become an integral part of the policy agenda defined and Strong donor partnerships leading to trust fund mobili- led by the government. IBRD is well positioned to advise zation have allowed IBRD to re-engage in some sectors the government on several issues, proving its value as a “go and deepen support in others – the availability of trust to” partner on policy issues. A substantial effort was made fund financing has led to a marked increase in the IBRD’s to seek entry-points into key emerging policy issues such as analytical, technical assistance and advisory services. For ex- education, environment, fuel subsidy reduction, uncondi- ample, IBRD has become an ally in the government’s efforts tional cash transfers and conditional cash transfers. Equally to encourage donor support for its education agenda. important was the IBRD’s foresight in identifying and pri- oritizing problems before they were widely recognized as IBRD has emerged as a key convener that responds quick- challenges, as well as IBRD’s flexibility to respond quickly ly and efficiently to post-disaster reconstruction and oth- to government requests and needs on demand. er emerging requests – IBRD’s role became evident during IBRD RESULTS 5 the immediate post-tsunami/earthquake period when it mitments of US$5.98 billion in various sectors including was asked by the government to lead a coordinated donor roads, energy, education, health, irrigation and rural devel- effort to address the reconstruction in Aceh, Nias and Yo- opment. In addition, the Bank supervises another 11 proj- gyakarta. ects financed out of the Aceh and Nias MTF and the Java Reconstruction Fund. IBRD has also launched a first generation of local govern- ment projects to build capacity for improved local gover- In the 2009 fiscal year, IBRD lending more than doubled nance, accountability and transparency while maintaining the expected US$2 billion envelope under the new Coun- a focus on poverty reduction at the local level. As part of try Partnership Strategy (2009–2012) to US$4.2 billion, the Initiatives for Local Government Reform project prepa- including the US$2 billion Public Expenditure Support ration, local level poverty reduction strategies were formu- Facility/Development Policy Loan with a Deferred Draw- lated in 15 districts after public consultations. down Option (DPL-DDO). In addition to lending, the IBRD administers for Indonesia Summary Timeline the largest portfolio of trust funds and grants in the EAP region, totaling about US$1 billion. The World Bank Group has maintained an active presence in Indonesia since1967. Indonesia briefly graduated from The IBRD is playing a lead role in supporting decentral- IDA in the early-1990s but became IDA-eligible again ization through the management and administration of a in the mid-1990s and a “blend” country—receiving both multi-donor Decentralization Support Facility. The Bank’s IDA and IBRD financing—when it was hit by the Asian private sector arm, the International Finance Corp has economic crisis. In the past ten years, Indonesia has trans- helped to improve the investment climate by working with formed itself into a confident middle-income country and district governments on licensing and other regulatory re- an active IBRD borrower. forms. IBRD Contribution World Bank Group As of December 31, 2009, IDA/IBRD’s lending portfolio Engagement in Indonesia consists of 32 active projects with total com- IFC has strongly increased its program in Indonesia and currently has a portfolio of US$960 million invested in such sectors as financial services, agribusiness and manu- facturing. Out of US$960 million, some US$840 million is debt, US$100 million is equity and the remaining US$20 million is quasi-equity. Reforms in the business environ- ment have resulted in the improved ranking of Indonesia in the Doing Business 2010 report from 129th in 2009 to 122th in 2010, although significant challenges remain, with Indo- nesian businesses identifying labor, infrastructure and gen- eral regulatory reforms as critical to increased investment. Through its advisory program, IFC has built the capacity of rural banks and micro-finance institutions, which is now being complemented by investments. IFC has worked with six women’s cooperatives, 153 farmers’ groups, and rural 6 Indonesia: Improving Development Outcomes through Better Institutions banks in Bali and Eastern Java. IFC is contributing to the deliver public goods, coupled with increased private invest- creation of the first wholesale micro-finance institution. ment, would also create a cycle of sustainable and inclusive growth. The Multilateral Investment Guarantee Agency continues to use its online services to assist Indonesia to attract for- World Bank Group support for Indonesia will continue eign direct investment by profiling potential investment op- to embrace a wide range of sectors, both economic and so- portunities in the country. cial: agriculture, civil service, climate change, energy, urban development, health, education, public financial manage- ment, disaster risk mitigation, water and sanitation, roads Good Practices Developed/ and service decentralization. Replicated Partners The Multi-Donor Fund for Aceh and Nias—the largest post-disaster fund in the Bank—is considered a “best prac- A number of key development partners will continue to tice” mechanism for donor coordination in response to nat- leverage IBRD’s technical, managerial and fiduciary capa- ural disasters. The MDF’s close coordination with the Aceh bilities on the ground to advance on shared objectives. This Reconstruction and Rehabilitation Agency and the local is reflected by a robust set of strategic partnerships, most government has contributed greatly to its success. notably through bilateral and multilateral trust funds and co-financing arrangements. Major World Bank Group part- ners include the Asian Development Bank, the Australian Next Steps Government, the European Commission, as well as the Jap- anese, Dutch and British Governments. Future success now depends on improving the quality of Indonesia’s public institutions. This includes improving regulatory quality, the rule of law, the control of corruption through more accountability, and institutional capacity. learn more With more effective and accountable public institutions, Indonesia’s available resources can be turned into greater –– www.worldbank.org/id development outcomes. Stronger institutional capacity to