93253 Indonesia: Repeat Public Expenditure and Financial Accountability (PEFA) Report & Performance Indicators FOR OFFICIAL USE ONLY Indonesia: Repeat Public Expenditure and Financial Accountability (PEFA) Report & Performance Indicators December 2012 This document has restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. Public Financial Management Multi-Donor Trust Fund for Indonesia Repeat Public Expenditure and Financial Accountability (PEFA) Report & Performance Indicators ACKNOWLEDGMENTS The World Bank Office Jakarta Indonesia Stock Exchange Building Tower II/12th floor Jl. Jend. Sudirman Kav 52-53 Jakarta 12190 Tel : (6221) 5299-3000 Fax : (6221) 5299-3111 This report was prepared by a World Bank team led by Theo Thomas, Senior Public Sector Management Specialist, Website: www.worldbank.org/id and Rajat Narula, Senior Financial Management Specialist, together with Christina Schmalhofer, Public Financial Management Specialist, Imad Saleh, Lead Procurement Specialist, Ramesh Siva, Lead IT Specialist, Amien The World Bank Sunaryadi, Senior Operations Officer (Anti-Corruption), Hari Purnomo, Senior Public Financial Management 1818 H Street NW Specialist, Erwin Ariadharma, Senior Public Sector Specialist, Jonas Arp Fallov, Senior Public Sector Specialist Washington, DC 20433, USA (Budget), Rubino Sugana Harmawan, Senior Tax Specialist, Unggul Suprayitno, Senior Financial Management Tel :(202) 458-1876 Specialist, Novira Kusdarti Asra, Senior Financial Management Specialist, I G Ngurah Wijaya Kusuma, Financial Fax :(202) 522-1557/1560 Management Consultant, Ashley Taylor, Economist, Fitria Fitrani, Research Analyst, Charles Egu (USAID), Senior Website :www.worldbank.org Financial Management Specialist, Sally MacKenzie (AusAID), Public Financial Management Specialist, Mark Ahern, Lead Public Sector Management Specialist, Sandra Buana Sari, Romawaty Sinaga, Operations Analyst, Printed in December 2012 Bintoro, Tax analyst, Maria Tambunan, and Enda Ginting, Public Sector Specialist. Cover: Indra Irnawan (iirnawan@worldbank.org) The team benefited from the close involvement and valuable insights of many colleagues from the Government, under the oversight of the Secretary-General, K.A. Badaruddin, and the former Secretary General, Mulia P. Nasution, the Director-General of Budget, Herry Purnomo, and the Director-General of Treasury, Agus Suprijanto. The team also wishes to thank the government counterpart team, led by Mrs. Sumiyati, Head of Planning and Finance Bureau of Secretary General of Ministry of Finance, as well as many other officers from the Ministry of Finance and from other ministries and agencies. Indonesia: Repeat Public Expenditure and Financial The core team also expresses its thanks to a larger group within the Bank and Government who provided Accountability (PEFA) Report & Performance Indicators is a product of the staff of the World Bank. valuable inputs to the report and support. The team is grateful to the peer reviewers: Frans Ronsholt—PEFA The findings, interpretation, and conclusions expressed Secretariat; the IMF Fiscal Affairs Department; Donor Representatives from the PFM MDTF including the herein do not necessarily reflect the views of the World European Commission, the Government of the Netherlands, the Swiss Government and USAID; Yasuhiko Bank, its board of Executive Directors, officers or any of Matsuda, Senior Public Sector Specialist at the World Bank; Samia Msadek, WB EAPFM Sector Manager; Shubham its member countries. Chaudhuri, WB Lead Economist; and Jens Kristensen, Lead Public Sector Management Specialist. The World Bank does not guarantee the accuracy of The team also expresses its gratitude to the European Commission, the Royal Netherlands Embassy, the Swiss the data included in this work. The boundaries, colors, Government and USAID for their assistance in co-funding this work through the Public Financial Management denominations, and other information shown on any Multi-Donor Trust Fund (PFM MDTF). map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. For any questions regarding this report, please contact Theo Thomas (tthomas3@worldbank.org) or Enda Ginting (eginting@worldbank.org) iii Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators TABLE OF CONTENTS Currency Equivalents Currency Unit Rupiah (Rp) US$1 = Rp 9,493 ACKNOWLEDGMENTS iii Fiscal Year: January 1 to December 31. TABLE OF CONTENTS iv ABBREVIATIONS & ACRONYMS v ABBREVIATIONS & ACRONYMS SUMMARY ASSESSMENT 1 ADB Asian Development Bank SECTION 1. INTRODUCTION 11 AGA Autonomous Government Agencies SECTION 2. COUNTRY BACKGROUND INFORMATION 13 APBN Anggaran Pendapatan dan Belanja Negara (State Budget of Central Government) SECTION 3. ASSESSMENT OF PFM SYSTEMS, PROCESSES AND INSTITUTIONS 17 APBD Anggaran Pendapatan dan Belanja Daerah (Budget of Sub-National Government) BAPPENAS Badan Perencanaan Pembangunan Nasional (National Agency for Development Planning) Section 3.1 Budget Credibility 17 BUMN Badan Usaha Milik Negara (State Owned Enterprises) Section 3.2 Comprehensiveness and Transparency 20 BAKN Badan Administrasi Kepegawaian Negara (Government Employee Administration Agency) Section 3.3 Policy-based budgeting 31 BKN Badan Kepegawaian Negara (Government Employee Agency) Section 3.4 Predictability and control in budget execution 33 BPK Badan Pemeriksa Keuangan (State Audit Agency) Section 3.5 Accounting, Recording, and Reporting 46 BPKP Badan Pengawasan Keuangan dan Pembangunan (Financial and Development Supervisory Board) Section 3.6 External Scrutiny and Audit 49 COA Chart of Accounts Section 3.7 Development-Partner Practices 52 COFOG Classification of the Function of Government SECTION 4. GOVERNMENT REFORM PROCESS 55 DAU Dana Alokasi Umum (General Allocation Fund) Section 4.1 Recent and ongoing PFM reforms 55 DBH Revenue sharing Fund DG Directorate General Section 4.2 Institutional Factors Impacting Reform Planning and Implementation 57 DGT Directorate General of Taxes DIPA Daftar Isian Pelaksanaan Anggaran (Budget Execution Document) Annex A: Sources of Information and Main References 58 DPR Dewan Perwakilan Rakyat (House of Representatives) Annex B: Deviations by Budget Heads 62 DSA Debt Sustainability Analysis FMRC Financial Management Reform Committee FY Fiscal Year List of Figures GDP Gross Domestic Product GFS Government Finance Statistics Figure 1: Summary Comparison of PEFA Ratings: 2007 and 2011. 2 GFMIS Government Financial Management Information System Figure 2: GDP growth (expenditure side) 13 GFMRAP Government Financial Management & Revenue Administration Project Figure 3: GDP growth (production side) 13 GFSM Government Finance Statistics Manual IDB Islamic Development Bank IG Inspectorate General List of Tables IMF International Monetary Fund IPSAS International Public Sector Accounting Standards IPEA Initiative for Public Expenditure Analysis Table 1: Performance indicators summary 8 JBIC Japan Bank for International Cooperation Table 2: Entities included as MDAs in 2011 12 KADIN Indonesian Chamber of Commerce Table 3: Balance of payments (US$ billion) 14 KMK Keputusan Menteri Keuangan (Decision issued by the Finance Minister) Table 4: Budget outcomes 15 KPP Kantor Pelayanan Pajak (Tax Service Office) KPPN Kantor Pelayanan Perbendaharaan Negara (Treasury Payment Office) KSAP Komite Sistem Akutansi Pemerintah (Government Accounting Standards Committee) KTP Kartu Tanda Penduduk (National Identification Card) iv v Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators LKPP Laporan Keuangan Pemerintah Pusat, (Financial Statements of the Central Government) and also Lembaga Kebijakan Pengadaan Barang/Jasa Pemerintah (National Public Procurement Agency) MDA Ministries, Departments and Agencies MOF Ministry of Finance MOH Ministry of Health MOHA Ministry of Home Affairs SUMMARY ASSESSMENT MONE Ministry of National Education MPN Modul Penerimaan Negara (Government Revenue Accounting System) MPW Ministry of Public Work 1. This repeat Public Expenditure and Financial Accountability (PEFA) assessment for Indonesia MSOE Ministry of State Owned Enterprises was undertaken by a team of World Bank and donor staff with close involvement of counterparts MTEF Medium Term Expenditure Forecasting from the Government of Indonesia. This Report updates the previous assessment, carried out in 2007, NoD Notice of Disbursement which utilized the PEFA measurement framework1 to establish a baseline of performance indicators to NPPO National Public Procurement Office measure Indonesia’s Public Financial Management (PFM) system. The framework does not measure the PEFA Public Expenditure and Financial Accountability performance of fiscal policies. PER Public Expenditure Review 2. This report focuses mainly on the changes in the performance of the PFM system from 2007 to PFM MDTF Public Financial Management Multi Donor Trust Fund 2011.2 This report does not try to replicate (or update) the information presented in the 2007 Report, PLN Perusahaan Listrik Negara (State-owned Electricity Company) and focuses largely on the major changes since 2007, and also on the ongoing reforms that should PMK Peraturan Menteri Keuangan (Ministry of Finance Regulation) impact an assessment in the future. In many cases the legal and institutional framework remains the PP Peraturan Pemerintah (Government Regulation) same, and has not been repeated in this report. Consequently, this report might be read in conjunction PPP Public-Private Partnership with the earlier report for a more complete elaboration of the PFM system in Indonesia. In addition, RAPBN Rencana Anggaran Pendapatan dan Belanja Negara (Draft of State Budget) the PEFA methodology for assessing a few of the high-level indicators has been updated since 2007, RDA Rekening Pembangunan Daerah (Regional Development Account) although this report uses the original methodology for the purposes of consistency.3 RDI Rekening Dana Investasi (Investment Fund Account) 3. The PEFA measurement framework has been developed after consultation with a wide group RKP Rencana Kerja Pemerintah, (Government Work Plan) of donors, client countries and international professional organizations. It provides an integrated, RKAKL Rencana Kerja dan Anggaran Kementerian Negara/Lembaga (Ministerial Work Plan and Budget) standardized and indicator-led methodology to measure and monitor PFM performance over time. RPJM Rencana Pembangunan Jangka Menengah (Medium Term Development Plan) The objective is to help assess the performance of PFM systems, processes and institutions relative ROSC Report on the Observance of Standards and Codes to internationally recognized good system characteristics. The rating methodology, covering a set of SATKER Satuan Kerja (Work Units in Spending Ministries). 31 high level performance indicators, with over 70 dimensions, emphasizes empirical and observable SAI Sistem Akuntansi Instansi facets for each PFM area. The framework was not designed to rank countries by means of an overall SAU Sistem Akutansi Umum aggregate rating nor is this report meant to judge policy actions or provide explicit recommendations. SAP Sistem Akutansi Pemerintah (Government Accounting Standards) Instead, it is designed to support a strengthened approach to PFM reforms by facilitating dialogue between the Government and other stakeholders. SIKD Sistem Informasi Keuangan Daerah (Financial Information System for Local Governments) SIDJP Sistem informasi Direktorat Jenderal Pajak (Directorate General of Tax Information Systems) (i) Integrated Assessment of PFM Performance SPKN Standar Pemeriksaan Keuangan Negara (State Finance Auditing Standards) SNG Sub national Governments Key changes from 2007 to 2011: For a summary of ratings in 2007 and 2011 see Table 1 below SOE State-Owned Enterprise 4. Results of the 2007 assessment reflected a mixed picture of strengths and weaknesses in the SOP Standard Operating Procedures PFM system. Key strengths pertained to transparent and comprehensive budget documentation, a SPM Surat Perintah Membayar (Payment Order) well defined budget process with both executive and legislative adhering to the schedule, a budget SPKN State Finance Auditing Standards classification which complied with international standards and efforts to strengthen the external audit TIN Taxpayer Identification Number function. The first PEFA also highlighted the sound regulatory framework that had been put in place in the TSA Treasury Single Account preceding few years for almost all PFM areas, the major reorganization that had taken place at the Ministry UU Undang-Undang (Law) of Finance (which created the separate budget and treasury functions), and the advances that had been VAT Value Added Tax made in budget preparation, such as instituting a unified budget. Weaknesses, on the other hand, were 1 See www.pefa.org for further information on the framework. 2 The 2007 Report for Indonesia can be found on the PEFA website: www.pefa.org 3 The exception to this is PI-19, the performance indicator for procurement practices as the new indicator has been substantially revised. vi 1 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators identified across dimensions of budget execution such as financial reporting, weak recording of cash, In addition, the assessment highlights the ongoing problems of weak spending outturns, relative to payroll controls and internal audit, as well as the high variation between budgets and outturns. budget, particularly for capital spending, which perhaps reflects the focus on tightening of expenditure controls and compliance rather than on delivery and performance. 5. Indonesia has made steady progress in strengthening the quality of PFM systems and processes between 2007 and 2011. Chart 1 compares the average PEFA ratings for each of the six main categories 8. Many reforms remain a ‘work in progress’. Both assessments acknowledge the reform efforts of key of the budget cycle considered by the PEFA methodology (with a maximum rating of four for each stakeholders of the budget process, which have been ongoing since the political transition in 1998 category). The chart highlights the average improvements made in five of the six categories, namely: and especially following the PFM White Paper in 2002. The Government continues to demonstrate the comprehensiveness and transparency of the budget; policy-based budgeting; predictability and its commitment to the reforms set out in the White Paper, although the timing and sequencing control in budget execution; accounting, recording and reporting; and external audit and scrutiny. is continually evolving around the main pillars of the budget system to reflect the variable capacity constraints and changing political/policy and economic priorities. However, the main objectives have 6. Improvements in the ratings reflect the continued progress towards achieving the broad-based remained the same. These include: (i) improving the results-orientation in state budget planning and and ambitious PFM reform agenda outlined in the Government White Paper of 2002. The new development; (ii) modernizing budget and treasury management; (iii) strengthening monitoring and assessment underscores progress in the area of budget execution, with the development of a unified evaluation of public expenditures and programs; (iv) improving the public procurement systems; (v) budget and a Treasury Single Account (TSA) to strengthen the comprehensiveness and control over improving government accounting and audit functions; (vi) civil service reforms to improve the quality spending and cash management. In addition, there have been improvements in the coverage of fiscal and performance of the workforce; (vii) debt management; (viii) strengthening regional public financial accounts, accounting practices, payroll, internal controls and fiscal risk management. Notably, the 2009 management; and (xi) governance and anti-corruption. external audit report was the first to achieve a qualified audit opinion, as opposed to a disclaimer, and similar feat was achieved in 2010 with over 60 percent of ministries and agencies achieving unqualified 9. Below is a summary of the results based on the classification used in the PEFA PFM performance opinions. Furthermore, the Government has publicly set an ambitious target for achieving an unqualified indicators, with the detailed ratings across all indicators listed in the main indicator Table. audit opinion for all of central government by 2014. Credibility of the Budget: Indicators P1 – P4 Figure 1: Summary comparison of PEFA ratings: 2007 and 2011 10. Budget outturns have continued to differ markedly from budget projections, although the assessment covers a period of unprecedented global economic turmoil. The assessment for 2011 considers the budget outturns, relative to the budget, for 2007-09, which includes the global financial crisis. The crisis increased uncertainty over international commodity prices and many governments, including Indonesia’s, undertook emergency fiscal stimulus measures in 2008. These features made fiscal planning even more difficult than normal. In Indonesia volatile oil and mineral production determines a significant portion of budget revenues, transfers to the regions and subsidy expenditure. However, while the credibility of aggregate budget outturns seems to have increased, the composition of spending has deteriorated as many ministries and agencies (K/Ls) have consistently under spent their budgets (even during the stimulus period) while subsidy payments have been volatile as domestic prices have been slow to adjust to changes in international prices. Comprehensiveness and Transparency of the Budget 11. The comprehensiveness and transparency of the budget system has generally improved since 2007. Changes in management of the Government Treasury, such as establishing a Treasury Single Account (TSA), the disclosure (and closure) of many off-budget ministry bank accounts and the incorporation of the regional development and investment accounts into financial reports and budget documents have contributed to increased transparency and a reduction in unreported government Note: The chart shows the simple average of the PEFA ratings in each category, with a maximum rating of 4 for an ‘A’ and 1 for a ‘D’ and half a operations. The exact extent of extra-budgetary operations, although difficult to quantify, is not point is given for a ‘+’. It excludes the indicators for donor practices. considered significant.4 The public access to budget information has also improved while there has been a steady improvement in the coverage and scope of the annual fiscal risk statement, which was 7. However, it was too still early to measure the improvements in some reform areas. For example: first included in the 2008 budget. the medium-term expenditure framework (MTEF) and performance-based budgeting (PBB) were only recently introduced in the 2011 budget, and will require considerable refinement over the next few years; there is an ongoing capacity building effort to strengthen internal and external audit; the computerized GFMIS (SPAN) that will strengthen financial management capabilities will be rolled out in 2012; despite the new procurement law and introduction of e-procurement and new disclosure policies, weaknesses remain in the systems application; and accrual accounting is due to be introduced in 2015. 4 This compares to the Indonesia, Report on the Observance of Standards and Codes (ROSC), Fiscal Transparency Module, IMF July 7, in 2006. The Report is available at www.imf.org 2 3 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators Policy Based Budgeting capital expenditure allocations frequently under-spent. Improving the disbursement rate for investment projects, while retaining appropriate expenditure controls, is a key PFM challenge. 12. While the budget process remains orderly and clear, and despite the longstanding system of national planning, Indonesia is only just starting to introduce a medium-term expenditure 18. Through issuance of Government Regulation PP No. 60/2008, the Government has adopted framework (MTEF) and move towards performance-based budgeting (PBB). Since the last PEFA- COSO as its internal control framework. The regulation and presidential instructions issued assessment in 2007, Indonesia has taken a number of steps to introduce a multi-year perspective for subsequently have also clarified roles and responsibilities on internal audit. However, the quality of fiscal planning, expenditure policy, budgeting and debt management. Following the issuance of a joint audit by Inspector Generals (IG) in line ministries and in local government remains sub-optimal, with MoF and planning ministry (Bappenas) manual on PBB and MTEF in June 2009, and pilot projects with little focus on risk-based audit, even though some of the IGs in line ministries, including the MoF and six line ministries, the program structure was revised. The new program structure aligns programs with the MPW, have embarked on a significant modernization of their functions. The lack of trained auditors organizational structures and establishes much clearer lines of accountability for performance. Line and the scale of the country with local government inspectorate auditors in over 500 locations make ministries have also formulated targets and indicators, which provide a better basis for evaluating the the task of reforming the internal audit function in the country challenging. The next step is preparation performance of programs and activities in the coming years, thus fulfilling a fundamental prerequisite of a strategy for internal audit expected in 2012. of PBB. The new programs, targets, and indicators have been incorporated in the five-year national plan 19. The external auditor, the State Audit Agency (BPK), has given a ‘qualified’ opinion on government (RPJM) for 2010-14, and first implemented in the FY2011 budget. financial statements for 2010. This is the second successive year that government annual financial 13. The 2011 budget was also the first year of implementing a detailed MTEF process. Ministries statements have received a ‘qualified’ opinion after a ‘disclaimer’ status in the previous five years. The prepared budget estimates for two years following the fiscal year (2012 and 2013) and incorporated major qualifications in the audit report relate to mismatch between budget classifications and the them into the budget documentation presented to Parliament (although Parliament will not be realizations, problems in assets management and under-recording of pension funds. BPK also identified appropriating funds beyond the fiscal year). The Government is aware that this is an exercise that will some key internal control weaknesses in the Government’s functioning. The number of line ministries have to be strengthened going forward, and the 2012 budget process has further refined the process, with a clean opinion has also increased, from 16 in 2007 to 34 in 2008 to 53 in 2010. The number and is incorporating new elements, such as the definition of a baseline and new initiatives, ensuring of ministries with disclaimers has come down from 33 in 2007 to 18 in 2008 to 2 in 2010. Capacity better linkages between planning (RKP) and budget documents (RKA-KL) and improving the use of the constraints in the line ministries are the biggest challenge: the number of trained accountants in line rolling financial estimates. ministries and sub-national governments is low, and the quality of their work needs improvement. 14. The Government also recognizes that PBB/MTEF implementation needs to be strengthened further. Accounting, Recording and Reporting For the near term, there is an ongoing need to improve the quality of program structures and performance indicators and to fine-tune the existing MTEF and costing system. For the medium term, the focus of 20. The annual financial statements are prepared using a mix of cash and accrual concepts, and there budget reforms is likely to gradually shift towards: (i) developing a PBB-driven monitoring and evaluation is a plan to move to full accrual accounting for line ministries and sub-national governments by (M&E) system that focuses on the quality of spending; (ii) enhancing capacity to conduct a range of modern 2015. The accounting standards for accrual accounting have already been prepared and a government budget analytical techniques in accordance with PBB and introducing the appropriate change management regulation on these has recently been issued. Draft accounting policies and chart of accounts have and organizational arrangements; (iii) strengthening the link between budget and bureaucracy reforms, in been prepared and under review. The pilot implementation is expected to start in 2013. particular the link to performance management; and (iv) strengthening the use of the MTEF and performance 21. The annual financial statement and semester report are published on a regular and timely information in budget review, development and oversight, including in the Parliament (DPR). basis, with regular reconciliation between spending data and bank accounts. However, some Predictability and Control in Budget Execution weaknesses remain, particularly in the coverage and consolidation of agency and SNG accounting systems. One of the Government’s main priorities is the roll-out of the new automated Government 15. There has been little improvement in the indicators for revenue administration, despite ongoing reform Financial Management Information System (known as SPAN), currently scheduled for 2012, which can efforts, and significant challenges remain. There has been a rapid increase in the number of registered be used to enhance fiscal recoding, accounting and reporting, to strengthen internal controls and also taxpayers over the past few years, although weaknesses in the assessment and enforcement processes to provide greater access to timely information at different levels of government. undermine compliance rates, which significantly reduce revenues, and tax arrears remain relatively high. External Scrutiny and Audit 16. There have been some significant improvements in budget execution control processes since the last assessment. Improvements have been made in the recoding of cash balances and debt, 22. Parliament (DPR) is developing new roles to help shape and oversee the state budget, although particularly as the TSA and cash forecasting have continued to be strengthened. New IT systems and these remain largely work in progress. Two new arrangements were implemented by the DPR in 2009. procedures have strengthened the management of personnel and payroll information at the MDA and First, the former Budget Committee became the Budget Board (Badan Anggaran) and a permanent entity regional treasury (KPPN) level, although weaknesses remain in reconciling the information at the center responsible for the endorsement of the state budget. Second, the State or Public Finance Accountability and with procedures at the sub-national government (SNG) level. Board (Badan Akuntabilitas Keuangan Negara) was established as a permanent entity to review audit reports prepared by BPK. Although not mandated in the law, planning has started for the establishment 17. However, in practice budget execution continues to be plagued by delays because of of a Parliamentary Budget Office (PBO), which is intended to provide support for the implementation of cumbersome and rigid procedures and lengthy procurement processes. Expenditure on goods the budget function of the DPR through providing data, information, analysis and research needed by and services and capital expenditures tends to be heavily skewed towards the end of the fiscal year with the members of Parliament in their discussions of the annual state budget. 4 5 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators 23. A peer review for BPK conducted by the Dutch Court of Auditors in 2009 pointed out that BPK Efficient Service Delivery had made major strides in its mandate, capacity and practices in the past five years. There has been significant growth in the budget, the number of staff and the number of regional offices.5 The 27. Budget execution reforms have often focused on improving control and compliance, but report also identified some areas for improvement, mainly the need to improve the readability of audit implementation within line ministries continues to be a significant barrier to efficient service reports and the quality of analysis in the audit. delivery. Expenditure controls, including audit and accounting reforms, and procurement processes lead to significant delays in the acquisition of goods and services and capital expenditure appropriations are BPK has prepared a new strategic plan for the 2011-15. The new strategic plan reflects both lessons from frequently under-spent. The limited flexibility to allocate resources during the year may also compromise the peer review and the vision of the new BPK Board. BPK has also prepared a detailed implementation efficient service delivery by limiting the ability to respond to changing needs or changing program plan to support the execution of the strategic plan. performance. While this may be an appropriate response to the 1998 crisis and weak governance systems, the result is at times excessive risk aversion and under-spending. However, it should be noted that much Donor Practices service delivery, for example in education and health, is primarily the responsibility of SNGs rather than 24. Indonesia is not a heavily aid-dependant country, with development partner funds declining to central government, and introducing a greater performance orientation at this level is a challenge. around 6 percent of primary government expenditure in 2010. There has been an improvement in 28. The move to enhance the performance of the public sector, through PBB and performance the predictability of budget support, with actual in-year disbursements improving as the Government management, is becoming a priority. As robust expenditure controls and compliance mechanisms are appears to be meeting its performance targets more consistently. However, development partners’ being established (and the PEFA suggests more are still needed in this area), the Government’s focus is compliance with the government regulation requiring reporting in government financial reports turning towards improving the delivery of public services and infrastructure to support development. This appears to have deteriorated slightly. includes both the setting and monitoring of high-level objectives, as well as mechanisms of downward (ii) Assessment of the Impact of PFM Weaknesses accountability, such as performance reports for MDAs along with greater flexibility in managing their programs. Currently, surveys also suggest that there is little awareness of the legal rights or how to demand Aggregate Fiscal Discipline better services, such as free education. Without such performance-orientated demand pressure, officials’ priorities are likely to remain focused on legal compliance rather than performance. 25. Indonesia has maintained its record of aggregate fiscal discipline as reflected in low budget deficits and declining debt levels (less than 3 percent of GDP since 1999, and less than 25 percent of GDP 29. Addressing the constraints in PFM at the sub-national level is an urgent priority. Sub-national in 2010, respectively). Indonesia has also strengthened its risk management framework in recent years, governments, which are increasingly tasked with service delivery, are struggling to spend their increasing particularly over debt and contingent liabilities. The legal framework also sets fiscal targets for general budgets and have built up sizeable reserves in recent years. The main constraints include: (i) providing government (i.e. including SNGs), which has controlled the impact of the ongoing decentralization on timely estimates from the sectoral ministries of revenue-sharing transfers; (ii) building the capacity of fiscal aggregates. Nonetheless, there are still pressures on fiscal aggregates coming from the significant SNGs to better estimate their fiscal resources and manage accumulated reserves; and (iii) improving and increase in public service payroll costs in recent years—coming from increasing numbers of staff, streamlining the budget approval process. particularly at the SNG level, and ‘performance’ pay awards—combined with volatile subsidy costs and (iii) Prospects for Reform Planning and Implementation the recent introduction of new earmarks for specific categories of expenditure (e.g. for education6). 30. In recent years, Indonesia has made significant strides in the way its public finances are managed Strategic Allocation of Resources and in increasing transparency and independent oversight. In almost all areas of PFM, changes 26. Although significant advances have been made on the budget preparation side, in-year in the legal and regulatory architecture are now largely complete and the momentum has shifted expenditures continue to deviate from plan. This spending pattern is of concern because project towards implementation of new PFM practices. Advances have been made in budget preparation with implementation is disrupted by an adverse cycle, and under-spending on capital expenditure the introduction of MTEF and PBB, government accounting standards have been formally established constrains increases in infrastructure investments. Although it has recovered partially, Indonesia’s recent and are being adhered to in order to produce comprehensive annual financial statements, there is investment in infrastructure still lags well below its pre-1997/98 crisis levels.7 The development of a fully progress towards moving to accrual-based accounting, COSO control framework has been adopted to operational MTEF and PBB, with well-articulated medium-term fiscal targets and detailed indicative strengthen controls, and the external audit function has made significant progress in the past few years. revenue and expenditure figures at the MDA and program level, should help to bolster aggregate fiscal However, internal controls in the execution of budget by spending agencies need improvement. To discipline, expenditure prioritization and the efficiency of spending. However, the the lack of medium- address some of the ongoing weaknesses, a Government Financial Management Information System term certainty seems to be one of the factors that reduces the ability of MDAs to enter into multi-year (GFMIS) to provide information for budget management at all levels of government is expected to be commitments and contracts and hinders much needed capital spending. rolled out in 2012, while weak controls in budget execution processes are being addressed in an effort to mitigate the risk that these would jeopardize the gains from reforms introduced in other areas of PFM. 31. Weaknesses in financial management and accountability continue to be gradually addressed 5 The number of BPK staff has risen from 2,854 in 2004 to around 6,000 in 2010. The annual budget for FY11 is Rp 2.3 trillion compared with Rp 234 through the Government’s PFM reform program discussed above, with the support of billion in 2004. development partners. Much remains to be done, and it will take time to realize the full impact 6 The education sector budget has been earmarked at 20 percent of government spending, with calls for other sectors to receive similar dispensa- tions. This could increase fiscal rigidity and costs. of these more advanced reforms, such as the MTEF, PBB and accrual-based accounting. However, 7 For a full discussion see section C. of the June 2011, Indonesia Economic Quarterly, “Indonesia 2014 and beyond: A Selective Look”, World Bank. the trajectory of reform appears to be in the right direction and, most importantly, the Government continues to demonstrate high commitment in completing the planned reforms. 6 7 8 Table 1: Performance indicators summary NS = Not Scored 2007 2011 Scoring Dimension Ratings Dimension Ratings PFM Performance Indicator & Performance Indicators Method Overall Overall Repeat Public Expenditure Page Change Rating Rating i  ii iii iv i ii iii iv A. PFM-OUT-TURNS: Credibility of the budget and Financial Accountability (PEFA) Report Aggregate expenditure out-turn PI-1 M1 D     D  17 C     C ↑ compared to original approved budget Composition of expenditure out-turn PI-2 M1 C     C  17 D     D ↓ compared to original approved budget Aggregate revenue out-turn compared PI-3 M1 A     A 18 A     A — to original approved budget Stock and monitoring of expenditure PI-4 M1 A B   B+  19 A B   B+ — payment arrears B. KEY CROSS-CUTTING ISSUES: Comprehensiveness and Transparency PI-5 Classification of the budget M1 A     A  20 A     A — Komprehensifitas informasi yang PI-6 M1 A     A  21 A     A — termasuk dalam dokumentasi anggaran Extent of unreported government PI-7 M1 NS C   NS  23 C B   C+ ↑ operations Transparansi hubungan fiskal antar- PI-8 M2 A C D C+  25 A B C B ↑ lembaga pemerintah Transparency of inter-governmental PI-9 M1 C D   D  28 B C   C+ ↑ fiscal relations PI-10 Public access to key fiscal information M1 B      B 30 A      A ↑ C. BUDGET CYCLE C (i) Policy-Based Budgeting Orderliness and participation in the an- PI-11 M2 A A A A  31 A A A A — nual budget process Multi-year perspective in fiscal planning, PI-12 M2 C D C D D+  33 C B B C C+ ↑ expenditure policy and budgeting C (ii) Prediktabilitas dan Pengendalian dalam Pelaksanaan Anggaran Transparency of taxpayer obligations PI-13 M2 B B C B  35 B B C B — and liabilities Effectiveness of measures for taxpayer PI-14 M2 C B C C+  37 C B C C+ — registration and tax assessment Effectiveness in collection of tax PI-15 M1 C A D D+  39 C A C C+ ↑ payments Predictability in the availability of funds PI-16 M1 C A A C+  41 C A A C+ — for commitment of expenditures Recording and management of cash PI-17 M2 D C C D+  42 B B A B+ ↑ balances, debt and guarantees PI-18 Effectiveness of payroll controls M1 D C A C D+  43 C B A C C+ ↑ Competition, value for money and PI-19 M2 D B C C  45 B D C D C — controls in procurement Effectiveness of internal controls for non- PI-20 M1 C B D D+  47 B B C C+ ↑ salary expenditure PI-21 Effectiveness of internal audit M1 D C C D+  48 D C C D+ — C (iii) Accounting, Reporting and Auditing Timeliness and regularity of accounts PI-22 M2 B B   B  50 B B   B — reconciliation Availability of information on resources PI-23 M1 D     D  51 D     D — received by service delivery units Quality and timeliness of in-year budget PI-24 M1 C B C C+  51 C B B C+ — reports Quality and timeliness of annual PI-25 M1 C A B C+  53 B A B B+ ↑ financial statements & Performance Indicators and Financial Accountability (PEFA) Report Repeat Public Expenditure 9 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators SECTION 1. indicator. Scoring method M2 is used where a low rating on one dimension of the indicator does not necessary undermine the impact of a high rating on another dimension of the same indicator. Scoring method M1 is used for indicators where poor performance on one dimension of the indicator is likely to undermine the impact of good performance of other dimensions of the same Each indicator includes one or more dimensions. A separate rating is given for each dimension. Where there is more than one dimension, the overall rating for the indicator is arrived at by combin- ↑ ↑ — ↑ ↓ — INTRODUCTION D+ C+ B+ B+ B+ C 1. This PEFA assessment for Indonesia was undertaken by a team of World Bank staff and development partners with close involvement of counterparts from the Government of A Indonesia, including the Ministry of Finance, State Ministry of Development Planning (Bappenas)       and some line ministries.8 Discussions were also held with external State Audit Agency (BPK) A B B and a member of Parliament. In line with its stated objectives, this report has utilized the Public Expenditure and Financial Accountability (PEFA)9 measurement framework that was first used A C B B B   in 2007 to establish a baseline of indicators to help measure Indonesia’s performance in Public Financial Management (PFM). D A A C C B 2. This report can be used by the Government, as well as other stakeholders to monitor progress and effectiveness of the ongoing PFM reform program. The objective of the assessment is  54  59 55 56 57 58 to update the integrated, standardized, indicator-led assessment of PFM systems, processes and institutions as a whole against good international practices. 3. The Government has collaborated extensively by providing necessary information and C+ C+ C+ C+ C+ C assigning MoF staff to work alongside the Bank-led team. This PEFA assessment has been funded by the Bank and a multi-donor trust fund, supported by contributions from the European Commission, the Governments of the Netherlands and the Swiss Confederation, and USAID. An ing the dimension ratings according to the prescribed methodology (M1 or M2) for the indicator. A       orientation seminar was held in Jakarta in January 2011 for stakeholders to explain the objectives, concepts and methodology underlying the PEFA framework and to discuss a Concept Note for C B B its application in Indonesia. Extensive fieldwork was undertaken during the first quarter of 2011. Discussions were also held with development partners and some external stakeholders, including A C C C C   professional firms and the Indonesian Chamber of Commerce and Industry.10 The draft ratings and assessment were discussed with a core team of officers from the MoF at a workshop in Jakarta in A C C C B B October 2011 and with senior officials before finalization. The report has also been peer reviewed by the PEFA Secretariat, Bank staff, development partners and staff from the IMF. M1 M1 M1 M1 M1 M1 4. As in 2007, the scope of this assessment is confined to the central government, comprising ministries, departments and agencies (MDAs) although sub-national governments (SNGs) Scope, nature and follow-up of external Legislative scrutiny of the annual budget Proportion of aid that is managed by use have continued to assume greater importance in the PFM system following the substantial donors for budgeting and reporting on Predictability of Direct Budget Support Legislative scrutiny of external audit decentralization program since 2001.11 Some performance indicators rated only some aspects Financial information provided by of decentralization, such as PI 8 (‘Framework for inter government fiscal relations’); PI 9 (‘Fiscal risks D. DONOR PRACTICES arising from SNGs’); and PI 23 (‘Availability of information on resources at front line service delivery C (iv) External Scrutiny and Audit project and program aid units’), although this would not be a substitute for a more comprehensive measurement of PFM of national procedures processes at district/city governments. reports audit 8 Discussions were held with the Ministry of Finance, the State Ministry of Development Planning, the Ministry of Public Works, the Ministry of Health law and the Ministry of National Education. 9 For more information on this framework, please visit www.pefa.org PI-26 PI-27 PI-28 10 Please see Annex A for a detailed list of Sources of Information and Main References. D-1 D-2 D-3 11 Sub-national governments currently account for some 40 percent of total public expenditure. (Indonesia Public Expenditure Review 2007). 10 11 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators 5. Apart from central government ministries and their departments there are also a number of central government autonomous government agencies (AGAs or badan), such as the Aceh SECTION 2. Reconstruction Agency (BRR); institutions (lembaga and komisi) such as the Constitutional Court, State Intelligence Agency and the National Archives; and public service agencies (badan layanan umum), such as hospitals. All of these agencies (AGAs) are funded through the state budget, but COUNTRY BACKGROUND INFORMATION enjoy greater financial autonomy than line ministries. They account for a relatively small share of public expenditure. 6. Indonesia also has a large state-owned enterprise (SOE) sector, spread over 37 business sectors, varying in size from large monopolies and infrastructure enterprises to relatively small 7. Over 2011, Indonesia’s economy continued to consolidate its recovery from the global service companies. The largest SOEs are Pertamina (the state oil company), PLN (electricity), Garuda economic and financial crisis with growth moving up to 6.5 percent. Indonesia Airways and Bank Mandiri. As they are owned by the central government their financial 8. Compared with other countries in the region, Indonesia was less affected by the global accountability and relationship with the budget, including monitoring of any fiscal risks to central economic downturn of 2008-09 and growth has since moved back to, and above, pre-crisis government arising from their operations, are part of this PFM assessment. levels. GDP growth declined from 6 percent year-on-year in 2008 to 4.6 percent in 2009 before moving up to 6.5 percent in 2011 (Figure 2). The economy grew by 6.3 percent year-on-year in the Table 2: Entities included as MDAs in 2011 first quarter 2012. Growth has been supported primarily by private consumption with investment Institutions Number of Entities also making a strong contribution to growth (Figure 3). The domestic economy continued to Central government 74 outpace growth abroad leading to a muted contribution from the external sector. Domestically, State-owned enterprises (majority owned by government) 141 solid consumer confidence, moderate inflation and favorable financial market conditions supported Other state-owned enterprises (minority share) 18 demand. District/city and provincial governments 524 9. Indonesia’s economic growth has been driven by domestic demand. Household and private consumption were the major contributors to growth in the first quarter of 2012, as inflation came down to decade lows. In recent years, Indonesia’s export performance has been supported by its export mix, focused on commodities, which has benefited from international price rises and demand for raw materials from China and other emerging economies. Nevertheless, the recent downturn in international environment has resulted in a negative net contribution to growth from net exports in recent quarters. On the production side, growth has been more broad-based across sectors. Towards the end of 2011 and the first quarter of 2012, agriculture, manufacturing and the services sectors were all contributing to growth. Particularly noteworthy over 2011 as a whole was the pick-up in manufacturing sector performance Figure 2: GDP growth has been robust Figure 3: Domestic demand has been the primary driver of (GDP growth, percent) growth (Contribution to quarter-on-quarter seasonally adjusted GDP growth, percent) Note: *Average QoQ growth between Q4 2005 – Q4 2011 Source: BPS Sources: BPS, World Bank seasonal adjustment 12 13 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators 10. Strong balance of payment inflows through mid-2011 have reversed in recent quarters. 13. The revised 2012 budget projects a rise in the deficit to Rp  190.1 trillion (2.2 percent of Following strong inflows in the first half of 2011, the balance of payments has seen overall outflows GDP), up from Rp 124.0 trillion (1.5 percent of GDP) in the original 2012 budget. The revised since Q3 2011 (the first quarterly deficits since Q4 2008). For 2011 as a whole, balance of payment revenue numbers were 3.5 percent higher than the original budget while expenditures were 7.9 inflows reached US$11.9 billion (down from US$30.3 billion in 2010, Table 3). The outflows since percent higher. Both these increases were driven by the assumed higher oil price of US$105 per Q3 2011 were due primarily to the reversal of inflows on the capital account, reflecting Indonesia’s barrel compared with US$90 per barrel in the original budget assumptions. Energy subsidy spending continued exposure to changes in investor sentiment. In addition, the current account balance has was increased by 20 percent relative to the original budget. In light of the likely higher spending been trending downwards, moving into deficit in the fourth quarter of 2011 and in the first quarter of on energy subsidies, the Government proposed a one-third increase in the subsidized fuel price in 2012. This move into deficit reflects a decline in the goods trade surplus, as well as the large services its draft revised budget. However, the approved budget allows the Government to make such an deficit and rising outflows on the income balance. The narrowing in the goods surplus reflected the increase if the six-month average Indonesia crude oil price is 15 percent higher than that assumed relative strength of domestic demand within a weakening external environment, which has resulted in the budget (US$105). With oil prices coming down sharply in May, it appears unlikely that this in a lowering in both commodity prices and external demand. condition will be met. The budget also included additional spending on temporary compensating programs, including a cash transfer to the poor combined with anti-poverty programs at the Table 3: Balance of payments (US$ billion) community level and public transport subsidies, while infrastructure spending also received a boost,   2008 2009 2010 2011 2012f with capital expenditures rising by just over 11 percent on the original budget level. Overall Balance of Payments -1.9 12.5 30.3 11.9 7.9 Current Account 0.1 10.6 5.1 1.7 -4.1 Table 4: Budget outcomes Trade 9.9 21.2 21.3 23.3 15.4     2009 2010 2011 2012 (P) Income -15.2 -15.1 -20.8 -25.8 -24.2 Transfers 5.4 4.6 4.6 4.2 4.7 A. State revenue and grants 848.8 995.3 1199.5 1358.2 Capital & Financial Accounts -1.1 4.9 26.6 14.0 11.9   1. Tax revenue 619.9 723.3 872.6 1,016.2 Capital Account 0.3 0.1 0.0 0.0 0.0   i. Income tax 601.3 694.4 818.6 968.3 Financial Account -1.4 4.8 26.6 14.0 11.9   - Oil and gas 317.6 357.0 430.8 513.7 Direct Investment 3.4 2.6 11.1 11.1 9.3   - Non oil and gas 50.0 58.9 73.1 67.9 Portfolio 2.7 10.3 13.2 4.5 7.8   ii. Other domestic taxes 267.5 298.2 357.7 445.7 Other -7.3 -8.2 2.3 -1.6 -5.2   b. International trade tax 283.7 337.3 387.8 454.6 Reserves(a) 51.6 66.1 96.2 110.1 112.2    i. Import duties 18.7 28.9 54.0 47.9 Source: Bank Indonesia and World Bank Indonesia Economic Quarterly (April 2012) projections for 2012   ii. Export duties 18.1 20.0 25.2 24.7   ii. Bea Ekspor 0.6 8.9 28.8 23.2 11. After rising in late 2010 due to higher food prices, inflation has come down through early   2. Non-tax revenue 227.2 268.9 324.3 341.1 2012. Sharp increases in food prices, such as for rice and chili, contributed to rising headline CPI   o/w natural resources 139.0 168.8 215.3 217.2 inflation in late 2010. But over 2011 inflation declined, and at 3.6 percent year-on-year in February 2012 it had declined to its lowest rate in almost two years. However, April 2012 saw an uptick, to   i. Oil and gas 125.8 152.7 194.7 198.3 4.5 percent year-on-year as base effects from the high food prices unwound, and potentially price-   ii. Non oil and gas 12.8 16.1 20.6 18.8 setting took into account the scope for higher subsidized fuel prices (as discussed below, in late B. Expenditure 937.4 1042.1 1289.6 1548.3 March, the Government submitted a proposal to raise subsidized fuel prices in its draft revised   1. Pemerintah Pusat 628.8 697.4 878.3 1069.5 2012 Budget which increased inflationary expectations). Core inflation, which reached a two-and-   - Pegawai 127.7 148.1 175.5 212.3 a-half-year high of 5.1 percent year-on-year in August 2011, eased to 4.1 percent by May 2012. Bank   - Belanja Barang dan Jasa 80.7 97.6 121.0 186.6 Indonesia has been required to shift its monetary policy stance in response to these changing   - Belanja Modal 75.9 80.3 115.9 168.7 inflationary pressures, as well as capital flow developments.   - Pembayaran Bunga 93.8 88.4 93.3 117.8   - Subsidi 138.1 192.7 294.9 245.1 12. The fiscal deficit in 2011 remained relatively low as under-spending in core government   - Balanja Hibah 0.0 0.1 0.3 1.8 programs more than offset high spending on energy subsidies. The realized (unaudited) government deficit of Rp 90.1 trillion (1.2 percent of GDP) came in well below the revised budget   - Belanja Sosial 73.8 68.6 70.9 55.4 level of Rp 151 trillion (2.1 percent of GDP). Although in nominal terms spending in 2011 was 24   - Belanja Lain-lain 38.9 21.7 6.5 65.5 percent higher than the 2010 realized budget, the disbursement rates relative to the revised budget   2. Transfers to the regions 308.6 344.7 411.4 478.8 remained at similar levels. The absorption capacity of core spending (salary, materials and capital C. Primary balance 5.2 41.5 3.2 -72.3 expenditures) worsened, suggesting that challenges with budget execution remain, such as the D. SURPLUS / DEFICIT -88.6 -46.8 -90.1 -190.1 complicated land acquisition process and the lengthy budget revision and procurement processes. Defisit (persent dari PDB) -1.6 -0.7 -1.2 -2.2 Spending remained skewed towards the end of the year: in particular 43.5 percent of the realized capital expenditures for the year were spent in December, compared with 37 percent in 2010. Source: MoF and World Bank estimates 14 15 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators 14. National spending on infrastructure and health services, critical for sustained economic growth and development, remains relatively low. SECTION 3. ASSESSMENT OF PFM SYSTEMS, PROCESSES AND INSTITUTIONS Section 3.1 Budget Credibility PI–1. Aggregate expenditure outturn compared with original approved budget (% of spending) Rating 2007 Rating 2011 Performance Change Summary Comments Performance has improved based on deviations of: Deviations in subsidies and under spending D C 2004-06: 28.9%, 50.3%, 10.6% in most K/Ls, particularly for capital programs, 2007-09: 4.1%, 27.9%, 14.2% impacted the overall budget outturn. The difference between actual primary expenditure and the originally budgeted primary expenditure (i.e., excluding debt service charges and Indonesia continues to face a major infrastructure gap, and public expenditure in this sector has externally financed project expenditure) over the past three years. never fully recovered following its sharp post-crisis decline in the late 1990s. While the Government has significantly increased its spending allocation to infrastructure the implementation of this In no more than one of the past three years did actual primary expenditure deviate from budget spending remains hampered by the above-mentioned disbursement issues. Education spending estimates by more than 15 percent.12 Despite the impact of the global financial crisis, which increased has increased, in line with the constitutional amendment that 20 percent of the budget go to the uncertainty and warranted stimulus measures in 2008 and 2009, this qualifies for an improved rating of C. sector, but there remain challenges in converting the quantity of spending into quality educational In addition, over the three-year period the nominal primary budget expenditure (in rupiah) increased by outcomes. around 50 percent. 15. Indonesia’s strong growth over the past five years has contributed to the improvement in Deviations between budgets and outturns over the three years reviewed are largely due to subsidies the poverty rate, although a large share of the population remains vulnerable to shocks to and low execution rates, notably for capital spending. Given the significant deviations in the budgeted income and health. The absolute number of urban poor and rural poor fell to 11 million and 19 and actual spending for subsidies, which deviated by 33 percent, 181 percent and -22 percent in 2007, 2008 million (respectively) in 2011. The overall poverty rate declined to 12.5 percent, from 13.3 percent in and 2009, respectively, and their large weight in the overall primary spending of central government, this 2010. Despite this positive progress, nearly 40 percent of Indonesians live on 1.5 times poverty-line category constituted well over 50 percent of the total deviation each year. Overall, the majority of ministries expenditure (or less), meaning there are many who remain vulnerable to impoverishment. Without and agencies (K/Ls) also consistently under-spent during the period.13 the recent spikes in food prices, particularly in the second half of 2010, poverty reduction would have probably been more pronounced. Indonesia's labor market also appeared to be turning the corner PI-2. Composition of expenditure outturn compared with original approved budget and the phenomenon of "jobless growth" may be easing. Employment growth of 3.2 percent was Rating 2007 Rating 2011 Performance Change Summary Comments seen in August 2010 and 1.4 percent in February 2012. However, given the large number of youth Performance appears to have deteriorated based on Deviations in subsidies and under spending entering the labor market each year there is a need to ensure increased creation of quality jobs (with deviations of: in most K/Ls, particularly for capital programs, a large share of the workforce remaining in the informal sector). C D 2004-06: 15.7%, 3.9%, 1.0% impacted the composition of the budget 2007-09: 16.3%, 22.2%, 2.2% outturn. Extent to which variance in primary expenditure composition exceeded overall deviation in primary expenditure (as defined in PI-1) during the past three years. The variance in expenditure composition exceeded the overall deviation in primary expenditure by more than 10 percent in two of the three years under review.14 The rating has therefore moved from a ‘C’ to a ‘D’. While there have been substantial in-year modifications of budgeted amounts, particularly with 12 See Annex B for detailed data and definition. 13 For analysis of the under-spending in central government see: 14 PEFA revised the methodology for calculating this indicator in 2011, although for comparison the 2005 Framework was used for both observations. However, the change in the methodology does not impact the actual rating or the change in the rating. 16 17 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators regard to calculating the subsidies that are based on movements in international fuel prices, the significant under-spending by many K/Ls also impacted the compositional variation of budget outturns. The analysis of expenditure outturns at the disaggregated level indicates that the weak budget execution translates into significant effective re-allocations between budget heads. The reduction in the rating perhaps reflects the increased volatility of international fuel prices and in-year adjustments as a result of the global financial crisis. PI–3. Aggregate revenue outturn compared with original approved budget Rating 2007 Rating 2011 Performance Change Summary Comments Performance appears to have deteriorated The significant deviation in 2009 was due to the stim- based on deviations of: A A ulus package of tax reductions introduced to help 2004-06: 114%, 130%, 97% combat the global financial crisis. 2007-09: 98%, 126%, 86% Actual domestic revenue collection compared with domestic revenue estimates in the original budget over the past three years. Actual domestic revenue was below 97 percent of budgeted domestic revenue in only one of the past three years. This qualifies for a rating of ‘A’ under PEFA’s original performance measurement framework that looks only at the extent of over-estimation of revenues, as overestimation is not desirable, as it leads to a budget that is not fully funded and thus not credible.15 However, the main reason for the lower than budgeted revenue outturn in 2009 was the introduction of a fiscal stimulus package during that year to combat the impact of the global financial crisis. Indonesia’s stimulus package was unusual in the heavy share allocated to tax cuts—around Rp 61 trillion was allocated to income and corporate tax cuts, compared with around Rp 12 trillion through increased infrastructure and other spending for 2009.16 As noted elsewhere, revenue outturns are also heavily dependent on volatile international oil and gas prices. Roughly one quarter of state revenue is derived from oil and gas through tax (VAT and income) and non-tax sources (production sharing and royalties). As is the case in many countries rich in natural v resources, actual revenue outturns are highly vulnerable to volatile international commodity prices. In such a fiscal environment, reasonably conservative oil price assumptions are generally considered prudent fiscal Source: Financial Note APBN 2007 and Law No. 18/2006, Financial Note APBN 2008 and Law No. 45/2007, Financial Note APBN 2009 and Law No. 41/2008. LKPP reports for 2007, 2008, and 2009. management. Nonetheless, shortfalls have often occurred for major non-mineral tax revenues and compliance PI-4. Stock and monitoring of expenditure payment arrears rates remain low. In particular there have been shortfalls in non oil and gas income tax and VAT in a number Rating 2007 Rating 2011 Performance change Summary Comments of years (see table below). There were also substantial revenue payments made in December 2009 for tax Performance has improved with the end- The government has reduced the already relatively obligations that had remained unsettled from previous years and were part of the tax office’s compliance year stock of arrears declining (as % of small amount of potential arrears. Reliable and complete crackdown. The general reasons for the underperformance in tax collection are manifold. Tax revenue targets B+ B+ spending): payables data is included in the periodic financial 2004-06: less than 2% statements, but not with detailed information on the stock are used as performance incentives for the tax administration and maybe thus purposely set at a level above 2007-09: less than 1% of arrears. the technical forecasts. At the same time, weaknesses in the tax administration system, for example taxpayer registration (see PI 14 and PI 15), have limited the ability to expand tax collections, particularly of income As noted in the previous PEFA report, while a pure cash accounting system does not record arrears, taxes, and compliance rates remain relatively low (with tax collections remaining below 13 percent of GDP). Indonesia’s current cash-towards-accrual accounting system periodically records the stock of liabilities to third parties. Since Indonesia follows a cash based budgeting system with a strict annual authority to spend given to K/Ls (DIPA) limiting the legal authority to commit expenditures, arrears should not arise unless there are delays by in submitting claims for payment by the end of a fiscal year. In addition, the accounting system applies cash-toward-accrual concepts, in anticipation of the adoption of accrual accounting by 2015, and the six monthly (semester) and annual financial statements report on government payables. The audited financial report shows that the Government had more than Rp 100 trillion in short- term unpaid claims for the past three fiscal years (2007 to 2009, see table below). 15 PEFA revised this indicator to be symmetric in 2011. Under the new formulation Indonesia would have rated a ‘C’ in 2007 and a ‘D’ in 2011: the later is defined as “Actual domestic revenue was below 92 percent or above 116 percent of budgeted domestic revenue in two or all of the past three years”. 16 For further details of the stimulus package see Box 1 in the World Bank publication, Indonesia’s Economic Quarterly, June 2009. 18 19 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators Short term liabilities (Rp million) 31 December 2007 31 December 2008 31 December 2009 In 2010, Indonesia introduced a new program structure consistent with the implementation of PBB. Programs were strictly aligned with the administrative structure, i.e. a program was assigned to a specific Due to third party withheld 525,495 233,349 906,088 Echelon 1 official, with an activity assigned to an Echelon 2 official. It also removed the budget classification of Liabilities to third parties 5,934,336 15,593,144 22,310,440 salaries and other employee compensation costs as separate programs within the general services function, Liabilities from excess revenues - 249,306 1,943,343 which had inhibited the analysis of the total program costs. The structure was used for the latest five-year Current portion of long-term liabilities 92,179,557 106,497,354 92,505,447 development plan (RPJM 2010-14),17 the annual work programs (RKP), as well as the ministerial work plans Liabilities of borrowing costs (interest) 15,151,055 20,627,684 18,526,548 and budgets (RKAKL). There were over 500 programs in the 2011 budget. Also in 2010, the Government Subsidy liabilities 19,146,423 12,503,315 15,717,146 decided to implement the Accrual Based Accounting Standard by 2015. Accordingly, the COA will be further Treasury bonds 4,035,410 9,581,589 26,515,739 refined, for example by adding new segments to ensure consistency with output indicators and accrual Other short-term liabilities 2,760,047 16,057,522 9,409,772 transactions (commitments, depreciation, payables, etc). Total short-term liabilities 139,732,332 181,343,265 187,839,287 The Government applies national public sector or government accounting standards (SAP) that are Source: BPK Audit Reports of the Government Financial Report broadly consistent with international standards (IPSAS). SAP is set by an independent Government However, few of these short-term payables can be classified as arrears. For example, the ‘current portion Accounting Standards Committee (KSAP), which was established in 2004 and comprises government of long-term liabilities’ has the greatest proportion of the short-term payables, but these are not “arrears” officers, academics, and accounting professionals. Since 2004, Indonesia has applied a “cash towards accrual” but amortization that is not yet due for payment and reflects financing transaction. Similarly, payables on accounting standard, but by 2015 an “Accrual” Based Accounting Standard will be adopted (Government subsidies and liabilities to local governments reflect transfers to holding accounts (escrow) prior to final Regulation No. 71/2010). An assessment made by an IMF consultant to the draft accrual accounting standard verification and payment of the obligations. The other large portion of payables, liabilities of borrowing confirmed that “the conceptual framework, principles and standard are based largely on International Public costs reflect accrued interest expenses, which will be due for payment in the future. Consequently, only one Sector Accounting Standards (IPSAS) and generally accepted accounting principles …. as such the standards in relatively small type of payables could contain arrears to third parties, as shown in the table below (note that spirit are consistent with the very high standards”. this would constitute a maximum). PI-6. Comprehensiveness of information included in budget documentation Because of the low probability of arrears, the MoF neither monitors the stock nor does it report the age profile information on arrears Rating 2007 Rating 2011 Performance Change While generally comprehensive, budget documentation lacks information in relation to two of the Possible Expenditures Payable as “arrears” (Rp million) 2007 2008 2009 A A benchmarks: financial assets are not presented at beginning of year, and new initiatives are not systematically presented Other short term liabilities incurred by K/Ls (excl. promissory notes, and 2,757,697 4,681,292 6,508,068 intra government transactions) The official budget documentation as shared with the Parliament comprises the following five elements: (% of spending) (0.3) (0.5) (0.7) Total expenditure 757,649,913 985,730,751 937,382,019 • Presidential budget speech, in which the President lays out the main challenges and prioritizations for the budget year; Source: BPK Audit Reports of the Government Financial Report • Draft yearly budget law, which mandates spending and sets a number specific rules regarding revenues Section 3.2 Comprehensiveness and Transparency and expenditures; • Financial note which contains a number of explanatory chapters on, among other things, government PI-5. Classification of the budget priorities, macroeconomic assumptions, fiscal policy outlook, revenues and grants, central government expenditures, fiscal decentralization, budget financing and fiscal risk; Rating 2007 Rating 2011 Performance Change • Budget submission forms (Himpunan RKA-KL) detailing budget submissions by organization, function, The Chart of Accounts used for formulation, execution and reporting of the central government’s sub-function, program, activity, output and economic classification; and A A budget follow cash based GFS2001/COFOG, while a new program structure was introduced in 2010 and accrual accounting standards have been developed (though not yet implemented) • One-year government work plan (RKP) comprising a brief description of programs and activities as well as indicative ceilings at KL and program-level. As noted in the last PEFA report, State Finance Law No. 17/2003 continues to regulate the budget In addition, there are a number of relevant pieces of documentation publicly available, but which are not classification, but the detailed classification has been updated. The budget is appropriated based on officially submitted to Parliament as part of the budget documentation. These include: the annual and organizational units, function, sub-function, program, activity and economic classification. The functional bi-annual financial statements; and the budget realization report submitted to Parliament. classification follows a COFOG standard with the additional function for religion. In total there are 11 functions complemented by 79 sub-functions. The economic classification system is consistent with GFSM 2001 with eight expenditure classes (salaries, goods and services, capital, interest, subsidies, grants, social assistance, and others). The detailed description of functions, sub-functions, programs, activities, unit organizations, and economic classification is regulated by PMK 91/2007 on the chart of accounts (COA). The COA is consistently used for budget formulation, execution, accounting, and reporting in central government financial statements and can be used to track spending and revenues at the level of spending units. 17 In Book II of the RPJMN (2010-14), there is a matrix with 178 national development programs (although there are over 500 programs), 10,000 activi- ties, and around 6,400 performance indicators. 20 21 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators Information benchmarks on comprehensiveness of budget documentation Also, the Ministry of Finance has identified 100 special government entities that are not operating as part Item Included Source of the formal hierarchy of MDAs. Of these entities, 73 were active in 2010. These include the following types: Macro-economic assumptions, including at least • State-Owned Legal Entities (BHMN) such as a number of universities, research and training institutions; 1 estimates of aggregate growth, inflation and Yes Financial note exchange rate • Independent non-structural institutions, such as commissions and councils; and • State Foundations. Fiscal deficit , defined according to GFS or other 2 Yes Financial note internationally recognized standard Financial information from these entities is now reported in the LKPP. In 2010, the Treasury Deficit financing, describing anticipated 3 Yes Financial note developed a report profiling each of the entities and coordinated with the State Secretariat to identify composition new independent non-structural institutions. The non-structural independent institutions include the Debt stock, including details at least for the 4 beginning of the current year Yes Financial note Housing Fund for civil servants, which were listed in the 2007 PEFA as unreported. In 2009, 4 independent non-structural institutions were funded entirely by extra budgetary funds and 4 independent non- There is no ex ante reporting in the budget documentation as 5 Financial assets including details at least for the No submitted to parliament. However it is included in the Financial structural institutions received funding from both the budget and other sources of funding. By the end beginning of the current year in a timely manner of 2009, such entities received extra-budgetary funds of Rp 1.7 trillion. In 2010, 10 new independent statement which is submitted to Parliament separately (LKPP). Financial note, chapter 4 contains summarized budget outturn- non-structural institutions were identified. An accounting system for other agencies (Sistem Akuntansi data for prior years by economic classification. In addition the Badan Lainnya) that includes extra budgetary activities is currently being developed that is expected Prior year’s budget outturn, presented in the 6 Yes Financial note for 2012 contains an appendix with outturn to define, identify and disclose the extra budgetary activities/funds of Independent non-structural same format as the budget proposal data for 2006-2010 by ministry/organization, economic classification, function and sub function. institutions. Current year’s budget (either the revised budget The LKPP now also contains information on a number of revolving funds, including the regional 7 or the estimated outturn) presented in the same Yes Financial note chapter 4 format as the budget proposal development loans and investment accounts (RDI/RDA), which are revolving off-budgetary loan Summarized budget data for both revenue and operations managed by the MoF. The projected income and outflows for RDA/RDI are also reported in expenditure according to the main heads of the financial notes and their transactions discussed by parliament. The balances for some other off-budget 8 Yes Financial note chapter 4 the classification used , including data for the revolving funds managed by line ministries are also reported in the annual financial statements (LKPP). current and previous year Explanation of budget implication of new policy The financial note contains a description of new developments The Government has also determined through PMK No. 34/2004 that all eligible military (but 9 initiatives with estimates of the budgetary No on the revenue side and their consequences for the budget. On not police) enterprises are to be transferred to the Government and thus become part of fiscal impact of all major revenue policy changes and/ the expenditure side, there are brief sections for each ministry, or some major changes to expenditure programs but they do not distinguish new from on-going initiatives. reporting. Until 2009, the agency for the transformation of the management of military businesses (Badan Pengelola Transformasi Bisnis TNI) had identified 900 foundations, which are now in the process Budget documentation in Indonesia is generally comprehensive and of high quality. However, as can of being scrutinized to determine whether they should be included in government fiscal reporting. be seen from the table above, there are a few areas where further improvements could be made. Financial Nonetheless, there appears to remain some amount of unreported government activities relating to assets at the beginning of the year are not presented as part of budget documentation, but are available to military and police enterprises, but the magnitude, although it cannot be estimated precisely, is likely to parliament members and the public in the audited financial statement, the LKPP, submitted not later than be less than 10 percent of total government spending. six months after the end of the fiscal year. New Initiatives on the expenditure side are also not systematically Government Regulation PP No.2/2006 on foreign grants and loans, as revised by PP No. 10/2011, presented in budget documentation as distinct from on-going initiatives and in a way that would allow a states that all development partner-funded projects (government-executed as well as development clear picture of the budgetary implications. partner-executed) should be included in financial reporting. This Regulation is detailed further in PP No. The move to MTEF and PBB from 2011 is likely to be a catalyst for further improvements in budget documentation 40/2009, which requires all development partners to use the government financial reporting format. Since in order to increase the visibility of the MTEF and the budgetary consequences of government priorities. It will 2009, MDAs must report all development partner-funded grants using “notices of disbursement” or similar also reinforce the distinction between new and on-going initiatives and strengthen parliamentary commitment hand-over documents received from development partners, which become the basis for inclusion in a Budget to reforms. For example, for the 2012 budget the financial note includes a separate chapter on the MTEF. Realization Report for Grants (Laporan Keuangan Bagian Anggaran 999.02). This report includes revenues from grants, with expenditures reported in the government financial statement alongside expenditures from PI-7. Extent of unreported government operations other funding sources. Rating 2007 Rating 2011 Performance Change While all loans and government-executed grants are included in fiscal reporting, in 2009 this was N/A C+ Progress has been made to both disclose and reduce extra budgetary activities, while the majority of only true for some of the development partner-executed grants. As illustrated in the table below, in donor-executed grants are recorded in the budget realization report for grants. 2009 total grant revenues totaled Rp 3.3 trillion. DG Debt Management estimates that in 2009 a further Since the last PEFA assessment in 2007, progress has been made in disclosing and reducing the Rp924 billion (28 percent) of revenues were not reported due to development partners not consistently using the right documentation. extent of unreported operations. As also described under PI-17, the Government has taken a number of steps to rationalize and reduce unreported bank accounts opened by K/Ls, including closing those that lack justification. The results are published in the 2009 financial statement (LKPP). 22 23 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators Planned and reported revenues from donor-executed grants The past few years have seen a continuation in the move towards decentralization. In 2010, Indonesia’s Rp Million 2007 2008 2009 524 SNGs accounted for about 41 percent of total general government expenditures.18 The legal framework for intergovernmental transfers’ remains the same as described in the 2007 PEFA, as set out in Law No. 33/2004 Donor grants projected in the Budget (APBN) 3,823,318 2,948,636 1,006,536 and detailed in Government Regulation PP No. 55/2005. Government revenues remain highly centralized Donor grants reported in Financial statement (LKPP) 1,697,748 2,304,013 1,666,644 with only a limited sub-national tax base and district/city governments, and to a lesser extent provincial Total Grants reported in Laporan Keuangan system     3,341,684 governments, rely heavily on transfers from the central government. Source: LKPP, 2007, 2008, 2009. Laporan Keuangan BA 999.02 Hibah, 2009. Transfers to district/city governments are placed within the Balancing Fund and the Special Allocation Fund (DAK) as illustrated in the table below. Within the balancing fund, which covers 85 percent of the It is the responsibility of each line ministry to record and report expenditures financed by development total transfer amounts, there are three kinds of transfers: shared revenues and taxes (DBH), General Allocation partner-executed grants. DG Debt Management only has the responsibility to report on the revenue side. Grant (DAU), and Specific Allocation Grant (DAK). K/Ls report the expenditures through the Treasury system along-side other expenditures. As highlighted in the above table, expenditures for Rp 1.7 trillion were recorded and reported to LKPP in 2009. The amount Intergovernmental transfers in APBN 2011 of unreported revenues, however, may also affect the completeness of expenditure-reporting although   Billions of Rupiah Percentage unreported expenditures are considered less than 50 percent. I. Balancing Fund 334,324.0 85.1 The recording of grants in the budget realization report for 2009 is a big step towards increasing the Revenue sharing Fund (DBH) 83,558.4 21.3 transparency of reporting on development partner-executed grants. However, reporting arrangements with development partners on planned and actual expenditures may still be improved. This is evidenced by General Allocation Fund (DAU) 225,532.8 57.4 the still sizeable amount of unreported development partner-executed revenues and the disparities between Specific Allocation Fund (DAK) 25,232.8 6.4 planned revenues in the budget (APBN) and the actual revenues. There is also a lack of consensus on the II. Special Autonomy and Adjustment Fund 58,656.3 14.9 method of reporting. While the budget realization report on grants uses the notifications of disbursement, pecial Autonomy Fund 10,421.3 2.7 the LKPP “matches” revenues with recording of expenditures. Adjustment Fund, incl. Dana Incentives 48,235.0 12.3 Indicator Score 2007 Score 2011 Performance Change Total 392,980.3 100.0 PI-7 Extent of unreported Not rated C+ Source: Budget summary statistics, Ministry of Finance, 2010 government operations. [M1] Progress has been made in disclosing a number of The special autonomy and adjustment fund covers expenditures for the take home pay of regional significant extra-budgetary-activities in the LKPP civil servant-teachers, a professional allowance for teachers, the schools operational assistance relating to illegal bank accounts, revolving funds and (i) The level of extra-budgetary funds for entities which are not part of the normal MDA- program (BOS) and infrastructure funding. A new and more performance-based transfer mechanism expenditure (other than hierarchy. A large number of foundations affiliated with has also been set up, the so-called “dana incentives”. This transfer amount depends on the performance of development partner-funded Not rated C the military are still being scrutinized to determine projects) which is unreported, i.e. the region in relation to elements determined in the annual budget law. In 2010, 54 regions received extra whether they should be included in fiscal reporting. No not included in fiscal reports systematic data was available to allow quantification, transfers through this mechanism based on good audit-reports. According to the 2011 Budget Law, the but the unreported activities are likely to be less than incentive mechanism will be focused on educational performance. 10 percent, the threshold for a D. Complete income/expenditure data for all loan financed Apart from these transfers, central government departments, including education, public works and and government executed grant funded projects is health, directly undertake de-concentrated spending on mandates that are legally decentralized. included in fiscal reports. Since 2009, revenues for the majority of development partner-executed grants are While this spending benefits local governments and communities, it is not designed as transfers and (ii) Income/Expenditure information on donor-funded recorded in the budget realization report for grants. DG therefore is technically still central government spending. The Ministry of Finance has, since 2009, issued C B Debt Management estimates that a further 28 percent projects which is included in fiscal of revenues are unreported. Expenditures financed by recommendations to shift de-concentrated spending to transfers and to allow more transparent and reports equitable criteria for this spending based on criteria such as fiscal capacity and the Human Development development partner-executed grants are reported in the LKPP. Reporting may be incomplete, but the Index (HDI), both of which are also part of the formula for calculating the DAU. amount of unreported expenditures is much less than 50 percent. Overall, more than 90 percent of the transfers to SNGs are to be considered both transparent and rule- based. The DBH and DAU have direct formulas embedded in law and regulation, but also DAK allocations PI-8. Transparency of inter-governmental fiscal relations and most transfers from the Special Autonomy and Adjustment Fund are based on criteria set out in law or regulation. The regional budgets (APBD) follow the calendar year as does the central government budget. Rating 2007 Rating 2011 Performance Change Summary Comments SNGs are required to adopt their budgets for the upcoming year by 31 December of the previous year and Information on the budgeted transfers Despite ongoing improvements, there continue to be C+ B from central to SNGs is reasonably reliable delays in budget approval and reporting for SNGs that submit to the MoF and Ministry of Home Affairs (MoHA) by the end of January. and timely. inhibit the consolidation of reports. 18 The number of SNGs has risen from 473 in the previous PEFA, though transfers remain around 40 percent of total government spending. 24 25 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators Firm and reliable information on transfers to individual SNGs are not established until October when Indicator Score 2007 Score 2011 Performance Change the central government annual budget (APBN) is set up. As noted in the previous PEFA, the central PI-8 Transparency of Inter-Governmental government is hesitant to issue the figures in the draft Budget Law (R-APBN19) to individual SNGs because C+ B Fiscal Relations. [M2] of concerns that SNGs might treat them as definite commitments, while changes are often made by the (i) Transparency and rules based systems Horizontal and vertical allocations of more DPR. Transfer allocations are issued by letter and then disbursed, leaving two months for SNGs to enact their in the horizontal allocation among SNGs than 90 percent of all transfers from the central annual budget law. The actual decree establishing the transfer amounts may be issued later (typically in of unconditional and conditional transfers A A government are determined by transparent and from central government (both budgeted December), but this is to finalize the legality of the decree and does not involve changes in the amounts of and actual allocations) rule based systems. transfer allocations. At the time of notification in October, SNGs are still discussing their APBDs for the coming Transfer allocations for individual SNG are issued fiscal year. This discussion ends in November in order for the SNGs to finalize their budgets before the start in October with enactment of the annual budget of the fiscal year. However, SNGs’ planning and budget cycles commence much earlier, in May or June, based (ii) Timeliness of reliable information to law leaving two months for SNGs to complete their SNGson their allocations from central C B budgets, which should be sufficient to include on allocations in previous years. The two months from October until the end of the year should be sufficient government for the coming year significant changes. There is a lack of timeliness in to make even sizeable changes. SNG budget submissions, but this appears to be due to other local factors. There is a lack of timeliness in the regional budget process and many SNGs do not enact their budgets Beginning June 2011, a report for FY 2008 and (iii) Extent to which consolidated fiscal on time. The past three years has seen some improvements in the timely submission of regional budgets, but data (at least revenue and expenditure) FY 2009 has been produced with ex-post fiscal D C data for 421 SNGs (82.5 percent) consistent with for FY 2010 only 41 percent of the regional budgets (APBDs) were enacted before the start of the fiscal year and is collected and reported for general central government transfers. The report consists in February of fiscal year only 86 percent were enacted. This has led the MoF to impose sanctions by withholding government of budget realization and balance sheet reports. transfer payments from the balancing fund (as mandating by Law No. 33/2004). The lack of compliance with budget regulations is reportedly not due to individual transfer allocations being issued too late, but rather PI-9. Oversight of aggregate fiscal risk from other public sector entities with difficulties for SNGs in forecasting own-source revenues, delays following local elections and a lack of harmonization in the communication channels between SNGs and district/city parliaments (DPRDs). Rating 2007 Rating 2011 Performance Change There has been a steady improvement in the coverage and scope of the annual fiscal risk statement, Government Regulations PP No. 13/2006 and PP No. 56/2005 require SNGs to send annual financial D C which was first included in the 2008 budget. In addition, while fiscal risks are better disclosed and reports to the central government (approved by sub-national parliaments) no later than 7 months managed for AGAs and SNGs they are not all consolidated in the annual risk statement. after the end of the fiscal year to the MoF and MoHA no later than August 31. However, there is a lack As noted in the previous PEFA report, since 2008, the fiscal risk unit in the FPO of MoF has prepared of compliance by SNGs. As of February 2011, 81 percent of SNGs had submitted their reports for fiscal year a fiscal risk statement in the annual budget financial note (see for example financial note 2011, chapter 2009. While Law No. 33/2004 allows the central government to sanction SNGs not meeting their reporting 6.4). The fiscal risk statement identifies, analyzes, monitors and reports on fiscal risks with four different requirements, this option has so far not been applied. categories of risk: Differences in standards and classification systems and the lack of timeliness in fiscal reporting make • Sensitivity analysis, including the sensitivity of the budget deficit to changes in macroeconomic it difficult to produce consolidated general government reports. Accounting standards and classification assumptions, and the sensitivity of the net contribution of taxes, subsidies, transfers and debt payments systems for SNGs are gradually being adapted to meet national standards. SNGs must report on the same to changes in macroeconomic variables. chart of accounts as the central government and use similar accounting standards for recognition of assets • Central government debt risks, including from interest rate and exchange rate movements and from and liabilities, but they are granted some flexibility in using different chart of account-codes during the year. refinancing requirements. Permendagri No. 59/2007 Article 77(12) states that “the list of accounts name and code shall not be used as • Central government contingent liabilities including guarantees for state owned enterprise debt to the fixed reference in formulating the account code since the selection will be based on the objective needs accelerate a number of infrastructure projects and other prioritized projects, guarantees on liabilities and the local characteristics of the regions". Government Regulation PP No. 56/2005 Article 9 states that the and equity levels of state owned financial institutions such as Bank Indonesia and export financing purpose of the regional finance system, among other things, is to present regional finances nationally, but there institutions, unfunded pension obligations, pending law suits and claims to government, commitments is no mention of consolation with central government accounts. However, beginning in June 2011, the MoF to international organizations and fiscal risks of natural disasters. (DG Fiscal Balance) does produce reports for 2008 and 2009 with ex-post fiscal information for 421 SNGs (82.5 • Fiscal decentralization risks associated with an increasing number of SNGs. In 2010 there were 524 SNGs percent) consolidated with central government transfers. The report shows budget realization tables by source compared with 507 SNGs in 2009. This development is part of an effort to create a more efficient and of revenue, including central government transfers and, on the expenditure side, by economic classification as effective service delivery, but there are potential fiscal risks in the form of expenditure pressures on well as a balance sheet report consolidating data for all 421 SNGs. While the report does not present data for DAU and DAK allocations and on the deployment of more central government representatives in the central government and SNGs together, the data in the report are consistent with central government data. new regions. The chapter on fiscal risks also mentions regional loans from central government and in particular the trend in overdue loan re-payments. In 2009, there were 141 state-owned enterprises and 18 enterprises with minority government share.20 Each SOE must submit quarterly financial statements to MSOE and the relevant line ministry, and 19 The R-APBN includes exact numbers for all aggregate allocations of the Balancing Fund, the Special Allocation Fund, and Adjustment Fund. 20 Law 19/2003 and Ministry of State Owned Enterprises (MSOE) Ministerial Decree 100/2002 provide a sound basis for the monitoring of SOEs 26 27 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators produce audited financial statements (operating statement and balance sheet) annually as part of its annual including subtracting the liabilities from the payments to those SNGs from the balancing fund (DAU transfers) report. MSOE Ministerial Decree No. 100/2002 also requires regular assessments of the financial health of and voiding the right to raise new loans in the subsequent three-year period. In practice SNG debt levels are SOEs based on a set of eight standard financial criteria and in practice some rudimentary assessments are very low, less than 0.4 percent of GDP. carried out by both MSOE and MoF. Since SNG direct liabilities constitute only a limited source of fiscal risk, the fiscal risk statement does SOEs mostly comply with reporting requirements and FPO encourages compliance further by having regular not contain a complete overview and reporting of SNGs fiscal position. However, overdue payments are meetings with SOEs in preparing the fiscal risk statement. The annual Central Government Fiscal Report monitored as part of the fiscal risk statement. Fiscal risks may also arise from other SNG contingent liabilities summarizes the financial position of SOEs, and in 2009 all but 13 of the SOEs had submitted audited financial such as sub-national pension obligations where there may be an implicit central government guarantee. reports for fiscal year 2009 (including the largest SOEs). The Fiscal Risk Statement monitors the 22 largest SOEs Due to a lack of timely and reliable reporting by SNGs (as outlined in the discussion on PI-8) these risks are representing more than 90 percent of the asset value of SOEs, and are covered in the sensitivity analysis to not monitored systematically. establish a link between changes in macroeconomic assumptions and variables and establishing a link to revenues (from taxes and dividends), expenditures (subsidies) and financing such as capital injections and Indicator Score 2007 Score 2011 Performance Change guarantees for projects run by SOEs. PI-9 Oversight of aggregate fiscal risk from other public D C+ Autonomous government agencies (AGAs) can be divided into four types (see explanation under PI- sector entities. [M1] 7). The BHMN, independent non structural institutions and state foundations generally follow reporting Major SOEs submit audited annual financial reports requirements either as government spending units or following PMK No. 08/PMK.05/2010. For fiscal year (i) Extent of central government and the major 22 SOEs are covered in the annual fiscal monitoring of AGAs and Public C B risk statement included in budget documentation. The 2009, the independent non structural institutions generally submitted their financial statements that were Enterprises risk statement does not include AGAs as they do not included in the LKPP. represent a major fiscal risk. The fiscal position of SNGs is monitored annually and Government Regulation PP No. 23/2005 set up a new framework for Public service bodies (BLUs), such fiscal risk statement includes overdue loan payments (ii) Extent of central government as universities, laboratories, and training institutions. As discussed previously, these semi-autonomous monitoring of SNG fiscal position D C from SNGs. Delays in reporting inhibits a comprehensive entities enjoy greater flexibility than MDAs in their financial management requirements. In return for this monitoring and fiscal reporting on SNGs. However, risks are mitigated by strict regulations on regional borrowing. flexibility MoF Decree No. 466/KMK.01/2006 sets out clear reporting requirements, including submission of annual and semi-annual financial reports to the MoF, which is charged with financial oversight of BLUs. BLUs most comply with the reporting requirements. For fiscal year 2010, 92 BLUs submitted their fiscal statements PI-10. Public access to key fiscal information (although 19 were late), while 9 did not. Rating 2007 Rating 2011 Performance Change The fiscal risk statement does not explicitly contain a comprehensive account of the risks stemming Progress has been made with greater access to the semi-annual budget report and to contract awards on B A from AGAs. It would seem that the timeliness and compliance rates are sufficient to include AGAs in the the websites of agencies. risk statement, but the Government is of the opinion that the fiscal risks stemming from these units are very limited. This is supported by two factors. First, own-source revenues in AGAs represent only about 1 percent The budget process in Indonesia is generally open with most major fiscal documents being available to the of total revenues in the central government budget (2010). Second, BLUs (by far the largest group of AGAs) public. Indonesia meets 5 out of the 6 information benchmarks for this indicator as shown in the following typically budget with a significant surplus. In 2010, the surplus averaged 20 percent of the BLU-revenues and table. Since the last PEFA-assessment progress has been made in the following areas: on average 40 percent of the expenditure in BLUs was covered by APBN-financing. Therefore, variability in • The semester fiscal report is available on-line (previously only hard copies were available from the MoF revenues represents only a minor risk for the central government budget. on request);21 and For SNGs, PP No. 54/2005 mitigates the fiscal risk arising from direct liabilities incurred in financial markets or • Implementation of Presidential Decree No. 80/2003. Contract awards above a threshold of Rp 50 million from central government in a number of ways. Regional loans can be of both short-term nature (within one are now publicly available on agency websites of major MDAs. fiscal year) to off-set cash shortages, and medium to long term to finance service provision not resulting in revenues and long-term investment projects resulting in revenue. A tight regulatory framework is in place that limits direct access of SNGs to capital markets. While SNGs are allowed to borrow and issue municipal bonds, prior approval by the MoF and the MoHA is required. An annual MoF decree (see for example PMK No. 149/2010) sets limits for regional deficits and debt levels in order to accommodate fiscal risk, and to ensure that the overall fiscal rules on public sector debts and deficits are accommodated. In 2011, the maximum accumulated deficits to be financed by regional loans were set at 0.3 percent of GDP and the maximum yearly deficits for SNGs were set at 4.5 percent of the total regional budget. There are additional requirements in PP No. 54/2005 regarding the size of medium- to long-term 21 Interestingly this assessment is at odds with The Open Budget Survey 2010, conducted by the International Budget Partnership (www. loans compared with annual revenues and ratios for the capability of SNGs to repay the loans. In the openbudgetindex.org), which concluded that “In Indonesia, there is no In-Year Report made available to the public, and there is no Year-End event of SNGs not fulfilling their debt service payments, the regulations stipulates a number of sanctions Report”. This might reflect problems of accessing the information from the MoF websites, which are noted in the table. 28 29 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators This practice gives ministries and agencies sufficient fiscal guidance and time to meaningfully Benchmarks on public access to key fiscal information complete their detailed budget requests. Circulars on budget ceilings are approved by the President and No. Item Available Source Cabinet before being issued. 1 Annual Budget Yes Annual budget documentation made available on DG Budget website after PP No. 90/2010 and the new regulation from the State Minister of Development Planning (PMK documentation submission to parliament www.anggaran.depkeu. go.id No. 1/2011) means that starting with the 2012 budget, budget proposals will be based on forward Semester report (Laporan Realisasi Anggaran) published on DG Treasury website estimates from the previous year. The regulation outlines a process whereby all changes to this estimate 2 In-year execution report Yes after submission to DPR and within four weeks of period-end www.perbendaharaan.go.id come through a special process of proposing, scrutinizing and deciding new initiatives with funding consequences for existing estimates. The regulation says that new initiative proposals can be submitted Year-end financial 3 statements 6 months Yes The LKPP is available on-line at DG treasury website three times leading up to the indicative, temporary and definitive ceilings. This new regulation is likely to www.perbendaharaan.go.id after end of fiscal year further increase the orderliness and participation in the process, as cabinet is involved earlier and more External audit reports made available on BPK website after submission of audit systematically (from the preparation of the indicative ceilings and the new initiatives they are based on), and 4 External audit reports Yes report to DPR changes to forward estimates are dealt with in clearly defined stages. www.bpk.go.id Available on agency websites – see for example the Ministry of Public Works eastern While adherence to the budget calendar is not an issue in Indonesia and the budget has been passed 5 Contract awards Yes Indonesia road project website: on time during the past three years (and even longer than that), there is a rather unique tradition www.pmueinrip-binamarga.com for allowing certain parts of the budget to be blocked from execution. Such blocking can be initiated There has been no significant change since 2007. Information is generally not by Parliament if sectoral commissions have agreed to the RKA-KL but not approved the detailed use of the provided. Some aggregate figures of budget allocations to schools and hospitals are included in budget documents and some information is available on central budget. It can also be blocked by the MoF (typically DG Budget) in instances where budget documentation Resources available to 6 primary service units No government hospitals and educational institutions that are AGAs. Most primary does not fully comply with relevant regulations. Between 2005 and 2010, 11 percent of the budget was service providers are located at the SNG level and receive funding from several levels of government with separate lines of reporting, making it difficult to obtain blocked and about 4 percent remained blocked (unspent) at the end of the fiscal year. This practice tends to comprehensive funding information. prolong budget preparation into the fiscal year and weakens the incentives of the parties to finalize budget documentation on time. It may also have an adverse effect on the timely implementation of the budget. PI-11. Orderliness and participation in the annual budget process Indicator Score 2007 Score 2011 Performance Change Rating 2007 Rating 2011 Performance Change PI-11 Orderliness and The budget process remains orderly and clear, with additional progress having been made to im- participation in the annual A A A A budget process. prove forward planning and the use of forward estimates. A clear statutory budget calendar is stipulated in Law No. 17/2003 The budget process follows a fixed calendar. This calendar is stipulated in State Finance Law No. 17/2003 (i) Existence of and on State Finances and in PP No. 90/2010 on the work plan and and detailed in Presidential Regulation PP No. 90/2010, which define the contents and timing of each step. adherence to a fixed budget A A budget formulation. The budget calendar is adhered to, giving calendar MDAs more than 6 weeks from receipt of budget circular to Budget preparation starts in February, preceding the fiscal year with the preparation of indicative ceilings and submittal of their detailed budget requests. baseline updates. It culminates in adoption of the budget law by Parliament in October, no later than two months prior to the beginning of the fiscal year. After the adoption of the budget, the Government has until Comprehensive and clear budget circulars are issued in two stages (ii) Guidance on the to guide preparations. President/Cabinet reviews and approves the end of November to detail the adopted budget in a Presidential Decree on the Budget (i.e. Keppres No. preparation of budget A A ceilings including funding for new initiatives before the budget submissions 26/2010), which forms the basis of the formulation of budget implementation documents (DIPAs) for each circulars are issued. spending unit. (iii) Timely budget approval The budget was approved before the beginning of the fiscal year A A by the legislature during the last three years (2009, 2010, 2011) Specific dates are set for each phase of the budget cycle. These include issuance of decrees on budget ceilings, preparation of budget requests by line ministries, and legislative involvement. Both the executive and the legislature adhere to the statutory budget calendar and the budget was enacted on time in the past three years. Section 3.3 Policy-based budgeting Budget ceilings are issued in three rounds mandated by PP No. 90/2010 and each issued by government PI-12. Multi-year perspective in fiscal planning, expenditure policy and budgeting circular: Rating 2007 Rating 2011 Performance Change 1) Circular on indicative ceilings issued jointly by the State Ministry of Development Planning and the Since the last PEFA-assessment in 2007, Indonesia has taken a number of steps to introduce a multi-year Ministry of Finance by the second week of March at the latest; D+ C+ perspective for fiscal planning, expenditure policy, budgeting and debt management. 2) Circular on budget ceilings (formerly known as temporary ceilings) issued by the Ministry of Finance no later than end-June; and 3) Circular on budget allocations (formerly definitive ceilings) issued by the Ministry of Finance in November following the adoption of the budget proposal. 30 31 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators First, the MoF makes a fiscal capacity assessment for the medium term as the basis for formulating Programs and activities (as substitute for sector strategies) are costed through a number of steps: the resource envelope and subsequent indicative ceilings at ministry and program-level for the fiscal year and 3 out-years. The determination of the resource envelope consists of three key processes: • the five-year government work plan (RPJM) includes the Government’s policy strategy and priorities for preparation of the Medium-Term Macro-Economic Framework (MTMF), preparation of the Medium-Term the medium term and contains baseline-allocations for 179 national priority programs Fiscal Policy Framework (MTFF) and preparation of the Medium-Term Budget Framework (MTBF). • The one-year government work plan and the medium-term work plan for each MDA also contain allocations for programs and activities set within the indicative budget ceilings for the medium term The MBTF as presented in the financial note is not disaggregated by function, only the main headers • The forward estimates formulated as part of the RKA-KL detail the costing of programs and activities up (expenditures, revenues, surplus/deficit and financing), but the framework is detailed in subsequent planning to the “component”-level, which is a disaggregation of the outputs of each activity. and budget documents. Even with such detailed forward estimates there are some limitations to achieving a full costing of Indicative ceilings are based on the MBTF, taking into account last year’s budget realization data, programs and activities as the basis for linking policy and budgeting for the medium term. First, the adjusted for inflation, as well as to new government fiscal policies. Differences between the MTBF and link between capital and re-current budgeting is still weak. Investments are not consistently selected on the the indicative ceilings are not clearly laid out in the Budget Circular. In addition, 2011 is the first year of basis of both capital and recurrent cost implications. Discussions within the Government and with Parliament detailed forward estimates, so 2012 will be the first budget year in which the indicative ceilings will take into on investment projects are based on the government work-plan (RKP). The RKP, however, contains budget account a “roll-over” of updated baselines from the previous year. numbers and descriptions of investment projects at a general level, but does not include comprehensive information on recurrent cost implications for future years. Recurrent costs such as building maintenance Beginning with the 2011 budget, the MDAs formulate rolling four-year work-plans with a reference and office operational costs are based on specific cost standards (SBU) laid out in separate regulations and to the indicative ceilings and to the yearly government work plan and the five-year government technical standards from a DG Public Works Regulation PMP No. 45/PRT/2007. These costs are only budgeted work-plan (RPJM). Also starting in 2011, budget submission documents have been prepared with detailed starting with the year following the finalization of an investment project. forward estimates for two out-years. The forward estimates cover the part of the central government budget managed by MDAs and debt interest payments, in 2011 corresponding to 44 percent of the Indicator Score 2007 Score 2011 Performance Change budget. The other main expenditure areas such as local government grants and subsidies are outside the PI-12 Multi-Year Perspective scope of the MTEF. in fiscal planning, expenditure D+ C+ policy and budgeting. [M2] The budget proposal will be based on the forward estimate from the previous year. A new MoF Regulation PP A multi-year fiscal framework is prepared for fiscal year +3 out years. No. 90/2010, PMK No. 104/2010 and a new Bappenas Regulation No. 1/2011 means that, starting with the 2012 No functional classification is included, but detailed in subsequent budget, the budget proposal will be based on the forward estimate from the previous year. The regulation (i) Multi-Year fiscal forecasts and program/activity allocations and forward estimates in budget and C C planning documents. Differences between fiscal framework and says that all changes to an estimate (other than baseline updates for inflation, etc) must be channeled functional allocations indicative ceilings are not clearly laid out. As 2011 is the first year with through a special process whereby new initiatives will be put forward, scrutinized and approved with funding detailed forward estimates, evidence on the roll-over of baselines consequences for existing estimates (see also PI-6). The requirement is clearly stated in the regulation to “roll- and the link to indicative ceilings is still not clear. over” the forward estimates from the previous year and use updated estimates as the starting point for the DG Debt Management prepares a debt management strategy report (ii) Scope and frequency of debt for a five-year period including a DSA for both domestic and foreign development of the new budget. This will also be supported by the formulation of new business processes for sustainability analysis D B debt issued as a MoF decree (see KMK.514/2010). The DSA is updated budget planning and budget preparation and supported by a new cost-solution for budget preparation to be annually and used for budget preparation. incorporated into the GFMIS-system currently being implemented (SPAN). However, since reforms are still in the From the 2011-budget, all line ministries (44 percent of the budget) initial stages, the evidence of the strength of this link is not yet clear, particularly the ability of MoF and Bappenas (iii) Existence of costed sector C B prepare detailed forward estimates for two-out years. The forward strategies estimates are the detailing of program and activity allocations in the to enforce it and to build sufficient capacity in the center and in line ministries. government 5-year and 1-year strategic plans. The Government’s capacity for debt sustainability analysis (DSA) has been developed gradually following Investment projects are included in detailed forward estimates. (iv) Linkages between investment However, selection of investment projects is not consistently based PMK No. 447/KMK.06/2005 on government debt management strategy, but was not fully implemented until budgets and forward estimates D C on a full costing of capital and re-current expenditures, which are still 2008. The MoF (DG Debt Management) now prepares a debt management strategy report for a five-year separated budget processes. period, which is issued as a MoF decree.22 In the current debt management strategy there is a target to reduce public debt to 24 percent of GDP by the end of 2014. The DSA is integrated in Chapters 2-5 of the debt management strategy report and covers both domestic and foreign debt. The DSA is subject to review Section 3.4 Predictability and control in budget execution every year and includes: PI-13. Transparency of taxpayer obligations and liabilities - Analysis of achievements of debt management in 2004 – 09 Rating 2007 Rating 2011 Performance Change - Analysis of debt capacity and financing budget needs in 2010 – 14 - Analysis of characteristic of lender, investor, line ministries, etc Progress has been made in trying to improve the balance between taxpayers’ rights and the efficiency and B B integrity of the tax powers of the Directorate General of Taxes (DGT), though significant challenges still - Analysis of target of debt portfolio structure remain. 22 See KMK.514/2010 for the report covering 2010-14 32 33 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators Since the previous PEFA, the Government has issued a General Tax Provisions and Procedures Law The ambiguous definition of the state revenue potential loss has created some reservation for the objection (No. 28/2007), which became effective in January 2008. The law aims to improve the balance between officer to make a firm decision. To avoid risking an administrative sanction for honestly accepting a false taxpayers’ rights and the efficiency of the tax powers of the DG Taxes (DGT).23 For example, taxpayers now have objection, the objection officers would rather reject the objection, and effectively transfer the decision easy access to comprehensive, user friendly and up-to-date information on tax liabilities and administrative to the Tax Court when the taxpayer files an appeal. This practice, and the new policy for issuing one VAT procedures for major taxes through various means, such as web access and print publications. These are Reassessment Notice (SKP PPN), if any, for each tax period (can no longer be combined) have caused the frequently supplemented by public education efforts, including special seminars. However, taxpayers and number of cases handled by the Tax Court increased exponentially. This situation has put pressure on the Tax tax advisors have to be proactive checking for new regulations or decrees since they are not always publicly Court because according to the Law No. 14/2002 appeals filed by taxpayers under the general circumstances announced. The DGT has also been given powers strengthened investigation and enforcement powers. For must be resolved within 12 months. Over the past two years, DGT has been developing the capacity and customs and excise taxes information available to taxpayers remains somewhat limited and delays in issuing improving the competency of the objection officers and officers who involve in the Tax Court proceedings. implementing regulations sometimes occur. Summary ratings of the transparency of taxpayer obligations and liabilities However, the Indonesian Chamber of Commerce and Industry (Kadin) and tax advisors reportedly consider the review process of tax audits and objections against tax assessments to be not consistently Indicator Score 2007 Score 2011 Performance Change effective. For example, the taxpayer community maintains that detailed explanations underlying decisions PI-13 Transparency of Taxpayer B B made on a tax assessment as a result of an audit process are not always provided to taxpayers, despite Obligations and Liabilities. [M2] a ministerial decree on tax audit procedures and accompanying implementing regulations requiring tax A comprehensive legal and regulatory framework exists for major taxes, although some inconsistencies between administrative auditors to inform taxpayers in writing about the results of the audit. DGT also recognizes that often the (i) Clarity and comprehensiveness of C B decrees and enabling legislation arise. The new tax laws improve quality of an audit report is substandard. As a result, transparency and clarity of taxpayer obligations may be tax liabilities the balance between taxpayers’ rights and the efficiency of the tax compromised. powers of the tax administration. Taxpayers have easy access to information on tax liabilities and In a survey of the ease of paying taxes Indonesia was ranked 126 out of 183 countries in 2010.24 This (ii) Taxpayers’ access to information administrative procedures for all major taxes, including income tax on tax liabilities and administrative B B put Indonesia behind countries such as Malaysia (24), Cambodia (58), and Lao PDR (113) and the rank has procedures and VAT, and this is supplemented by taxpayer education programs. Information for other types of taxes is somewhat limited. declined from 119 in 2009. However, similar investment climate surveys conducted by the University of Indonesia reveal that the compliance costs for filing returns, obtaining VAT refunds, and customs clearance An independent tax appeals system is in place. However, the low (iii) Existence and functioning of a quality of audit reports, combined with insufficient numbers of have improved in 2010, compared with 2005-07. In addition, the national tax administration has been tax appeals mechanism B C qualified Objections Officers have caused an increasing backlog of showing consistent improvement in the Corruption Perception Index score, which is measured through cases being handled by the Tax Court. large-scale surveys by Transparency International Indonesia (TII) every two years. In 2010, the TII’s Bribery Index, which measures corrupt interaction with the public service, put the national tax administration as the lowest (best) among all government institutions. The national tax administration also rates the second best PI-14. Effectiveness of measures for taxpayer registration and tax assessment among all government institution in the Service Performance Index. Rating 2007 Rating 2011 Performance Change A credible tax appeals system has been established under Law No. 14/2002 regarding the Tax Court. C+ C+ Despite efforts to improve taxpayer registration and assessment weaknesses and compliance rates remain low, which significantly reduces revenue. If a taxpayer disagrees with the tax office decision, the first step is for the taxpayer to file an objection with the DGT. If the taxpayer is not satisfied with the decision, the next step is to file an appeal with the Tax Every taxpayer must register and obtain a Taxpayer Identification Number (TIN).27 Since the enactment Court, which is part of the judicial system and is independent of DGT. Administrative procedures for the of Law No. 28/2007, the implementation of the Sunset Policy (soft amnesty program) in 2008/09, and the appeals process are in place. The status of an appeals case can be obtained from the website of the Tax Court abolition of the departure tax for going abroad, the number of a registered taxpayer (taxpayers with a TIN) Secretariat. increased, from 4.8 million at end-2006 to about 18.6 million by end-2010, of which about 1.8 million were The Objections Office at DGT is short of qualified staff and the Tax Court also has severe capacity corporate taxpayers. However, during the FY 2009 and 2010 only about 55 percent of the registered taxpayers problems. The backlog of cases at the Tax Court have grown from 832 in 2002 to almost 10,000 in 2009, filed annual tax returns. and is reportedly still growing.25 The statistics from the Tax Court also show that out of 2,270 cases filed in While DGT maintains a central registration database for all taxpayers about 50 percent of the 331 2007 the DGT only won 406 of them. In 2008, there were 3,027 cases, and 2,777 judgments were in favor of tax offices across the country are still operating off line. For these off-line tax offices, DGT Headquarters taxpayers.26 This problem is primarily due to the low quality of audits reports, inability of the Objection Officers allocates a range of taxpayer IDs to be issued by the specific tax office when a walk-in taxpayer applies for a TIN. to confidently accept or reject the taxpayers’ objections, and difficulties in obtaining tax payers data. In the However, problems remain with duplicate TINs, complicated by the long standing practice of requiring each review process, rather than evaluating the arguments presented by the tax auditors and the taxpayer, the branch of a firm to register separately at the local tax office and file tax returns separately, unless specifically objection officers typically repeat the audit process using the same techniques and background information. authorized by DGT to file a consolidated tax return. When a branch moves from one tax office to another, a 23 The relevant central government tax laws include: General Tax Provisions and Procedures Law, Income Tax Law, VAT on Goods and Services and new branch code will be assigned to the TIN of the taxpayer, and it is not monitored centrally. Consequently, Sales Tax on Luxury Goods Law, Stamp Duty Law, Customs Law, Coerce Warrant Law, and Tax Court Law. some taxpayers maintain multiple registrations. Nonetheless, walk-in taxpayers can now be issued a TIN within 24 See the paying taxes section of the World Bank and IFC Doing Business 2010 survey: www.doingbusiness.org 10-15 minutes, provided that all documentations are complete, and some areas have an option to register 25 Tax Court Secretariat website: http://www.setpp.depkeu.go.id/Ind/Statistik/statberkas.asp. 26 http://entertainment.kompas.com/read/2010/03/29/15543682/whos.the.biggest.loser.in.indonesia.tax.court 27 Pursuant to the Law No. 6/1983 regarding the General Tax Provisions and Procedures as amended by the Law No. 28/2007. 34 35 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators online. The definitive taxpayer ID card will be issued once the documents are verified. During the registration After the final notices are sent to the taxpayers, the headquarters or regional office will do further process, the systems do not automatically check for duplication if the taxpayer is already registered. The tax “peer review” on few selected audits. Results of peer reviews will be used for the evaluation of audit policy administration relies on the taxpayers to report multiple registrations. and procedures, and for imposition of disciplinary sanctions. In some cases, the DGT Internal Audit Office (KITSDA) also conducts an independent review based on internal or external tips. The taxpayer registration, either new or updated, is not verified or validated against other Government registration systems such as the national identification (KTP) or business registration/licensing systems. Indicator Score 2007 Score 2011 Performance Change At present, individual taxpayers and small and medium enterprises are not required to provide their TIN PI-14. Effectiveness of measures when opening bank accounts. DGT is currently in the process of trying to clean-up the taxpayer registration for taxpayer registration and tax C C+ database, improving the TIN structure, and strengthening the business controls for taxpayer registration assessment. [M2] processes and information systems. The TIN is administered centrally, but not sufficient business (i) Controls in the taxpayers control to prevent duplication. The taxpayer registration is C C Law No. 28/2007 provides for the structure, levels, and administration penalties for noncompliance registration system. not validated and verified against other government registry or third-party database. with tax regulations. For example, failing to file tax return due to negligence is punishable by imprisonment between 3 months to 1 year, or fine between 100-200 percent of the unpaid tax. The penalty for late filers Penalties for non-compliance exist and sufficiently effective of periodic VAT returns is Rp 500,000 (US$55). The penalty for late filers of annual corporate tax returns is (ii) Effectiveness of penalties for to encourage voluntary registration. Compliance for tax non-compliance with registration C B declaration is still relatively low, but the correct compliance Rp 1 million (US$111). Self-corrected under-reporting is charged with a penalty of 2 percent of the under- and tax declaration figures can only be known after the registration database is reported amount per month up to 24 months. Under-reporting voluntary revealed after the audit process completely cleaned up. is subject to a penalty of 50 percent of the under-reported amount. If there is an indication of fraud, the Audit selection criteria are defined and national planning penalty is 150 percent of the underpaid tax. (iii) Planning and monitoring of tax and monitoring of tax audit programs exist. However, C C less than 5 percent of the tax audits are selected based on audit programs. taxpayers’ risk profiles and the allocation of audit resources Non-registration that inflicts a loss on the state revenue may be sentenced to imprisonment for a is not aligned with the potential revenue risks. maximum of six years and fined as much as twice of the amount of the unpaid tax. The law stipulates that all tax obligations, including penalties, of the newly registered taxpayers could be looked back up to five years prior to the issuance of the TIN. According to the law, the tax obligations start from the PI-15 Effectiveness in collection of tax payments moment when the taxpayers fulfill the subjective and objective requirements regardless of when the Rating 2007 Rating 2011 Performance Change TIN is actually issued. Despite some improvements in the reconciliation process for tax payments tax arrears remain relatively D+ C+ Registration and filing compliance has improved since the enactment of Law No. 28/2007 and the high, with low debt collection ratios. implementation of Sunset Policy in 2008. The number of registered taxpayers by the end of 2010 has increased more than threefold to about 18.6 million as compared with that at the end of 2006, which was Tax arrears remain relatively high, with low debt collection ratios. The total amount of non-oil and around 4.8 million. The returns filing compliance rate, measured by the number of filed tax returns divided by gas income and value-added tax arrears at the end of 2008 is reported at 8.3 percent of the total annual the total number of registered taxpayers, has increased from 32 percent in 2006 to about 58 percent in 2010. tax revenues, compared with 7.5 percent at end-2006. However, by the end of 2010, the percentage of The filing compliance rate could effectively be higher considering duplication still exists in the taxpayer tax arrears was reduced to 6.7 percent of the total annual tax revenues and the collection ratio for gross registration master file. tax arrears for the past two years averaged 52 percent,28 compared with 66 percent at end-2006, based on figures recorded by DGT. The DGT operates a structured national audit plan as a part of the self-assessment process. The national audit strategy, priorities, and targets are set in annual DGT regulations, and considered The tax administration uses the banking system to receive tax payments. As indicated in the previous as national audit plans. About 65,000 audits were conducted each year in 2009 and 2010. This is only PEFA, taxpayers pay their taxes through commercial banks authorized by the Treasury or—in the case of about 1 percent of the total annual tax returns received by DGT. Of the total number of audits, less government units—directly to the Treasury office through a book-entry settlement. Tax offices do not accept than 5 percent were selected based on the taxpayers’ risk profiles (special audits). The majority of the any tax payments. However, all tax payments must be received and processed by a teller. The MoF is now audits were involving tax refunds (routine audits), which were required to be audited irrespective of the designing a new system that allows tax payments to be made electronically through the internet eliminating risks criteria. Moreover, the allocation of audit resources is not aligned with the potential revenue risks. the needs for conducting a manual, time consuming reconciliation process. Only about 3 percent of the total auditors are located at the Large Taxpayer Offices and Large Taxpayer Commercial banks transfer revenue collections into the Treasury bank account at the regional office Regional Office. of Bank Indonesia and report the receipts to the local Treasury field office on a daily basis. The Tax audit monitoring and review programs exist in DGT for audits selected based on the taxpayers’ computerized government revenue accounting system, the MPN, validates each tax payment transaction at risk profiles through the top-down and bottom-up mechanisms. Selected risk-based audit reports are the bank and sends the data electronically to the central MPN database in real time. Both the Treasury and reviewed by the headquarters or regional office before they are sent to the taxpayers to obtain feedback DGT have access to the central MPN database as the MPN is jointly administered by the Treasury and DGT. from the taxpayers. 28 The collection ratio in 2009 was about 46 percent, while in 2010 it was 58 percent. 36 37 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators The reconciliation of the MPN data and the daily transactions reports from the banks is done at PI-16 Predictability in the availability of funds for commitment of expenditure the Treasury on a daily basis and a reconciliation report is produced semi-annually. Nevertheless, Rating 2007 Rating 2011 Performance Change the reconciliation, which validates the transactions and cash deposited at Bank Indonesia, is still a lengthy While the availability of funds for the commitment of expenditure remains predictable, new procedures process. The reconciliation of transactions is practically done by three parties (the Treasury, banks, and MPN C+ C+ for improving cash forecasting and monitoring are in the process of being implemented. Administrator) at two levels: (i) at the central level between the bank headquarters and MPN Administrator; and (ii) at the district level between the bank branches and the district Treasury office (KPPN). At the central As described in the previous PEFA, the funds available for MDAs to commit spending within one level, the reconciliation is done electronically, and the bank produces reconciled Daily Revenue Report. At fiscal year are provided in the detailed budget allotment documents (DIPAs). The DIPA imposes a the district level, KPPN examines the validity of transactions in the Daily Revenue Report using Daily Transfer ceiling for each spending unit (Satker), which is guaranteed by law, and includes the function/sub-function, Report, Credit Notes, and other computer records submitted by bank branches to KPPN. The reconciliation of program, activity, outcome and output classification as well as the cash flow plan for both inflows and cash is done at KPPN by comparing the MPN data, daily Cash Position Report (aggregate transfers) submitted outflows projected by each spending unit in a monthly basis. For FY2011, there were 23,692 DIPAs issued by banks, and the account at Bank Indonesia. Un-reconciled transactions often occur due to duplications to all Satker across Indonesia with total value of Rp 432.77 trillion. The law requires that the DIPA be issued created by failed electronic transactions already recorded at MPN, but not completed by the bank. Because by end-December of the previous year, which is generally adhered to, and in 2010 it was even issued earlier the Cash Position Report submitted by the banks does not list each individual transaction, the reconciliation or by December 20 following the data integration between the detailed budget (appropriation) and DIPA with the MPN data becomes a time consuming process. For un-reconciled transactions, DGT must rely on (allotment) processes. Indonesia also retains large cash surpluses throughout the year and the Treasury has the MPN data and the payment slips submitted by the taxpayer as proof of tax payments to post a payment been able to pay claims as they fall due into the taxpayer account, and ensure that an enforced collection process is not initiated for paid taxes. While the above ensures predictability in the availability of funds, regular cash flow forecasting and Differences in the tax revenue collections reported by the MPN and the banks occur and have been monitoring remains a challenge despite recent initiatives. In November 2009, the MoF issued a new reported by external auditors (BPK). However, the discrepancy has decreased significantly since the last regulation (PMK192) on cash forecasting that requires Satkers to submit in-year cash withdrawal/receipt plans PEFA assessment in 2007. In 2006, BPK reported that tax revenues as determined by DGT were higher than to the Treasury offices (Kantor Pelayanan Perbendaharaan Negara, or KPPNs) to periodically update their that reported by Treasury by Rp 1.9 trillion (about 0.5 percent of aggregate revenues). By the end of 2010, the disbursement plans included in their DIPA. The Satkers are required to submit their updated daily, weekly, and discrepancy identified by the Treasury and DGT went down to about Rp 236.4 billion (about 0.04 percent of the monthly cash plan at least three days before the end of each month, or risk being limited to their unrevised aggregate tax revenues)-and the receipts reported by the banks were higher than those captured by the MPN.29 ceiling plan. A new IT application, ‘Aplikasi Forecasting Satker’ (AFS) has been developed to support this initiative, and is being rolled out mainly in 2011. However, up to the end of 2010, the process is incomplete, Tax re-assessment through audits and arrears records are not formally shared with the Treasury. with many Satker not complying with the new regulation. Consequently, reliable and comprehensive forward The MPN system only captures and shares with the Treasury information of payments made to the central cash plans are not regularly updated. government through commercial banks. The tax assessment and arrears information are administered separately by DGT. Since 2010, DGT maintains tax assessment and arrears records posted in the taxpayer The budget is usually revised half way through the year to reflect changes in macroeconomic and accounts in the DGT information systems (SIDJP). However, older information is administered manually fiscal assumptions. This Budget Revision (APBN-P) process is discussed and endorsed by the Parliament, outside the systems, and it is relatively unreliable. According to the prevailing laws, DGT will administer and and involves all MDAs in formulating revised budget estimates. Over the past three years (2008-10), very collect tax arrears for up to 10 years. few MDAs had their budget reduced and the system is considered open and transparent system. The poor disbursement rates of many MDAs over the past few years is attributed not to a lack of predictability in the Indicator Score 2007 Score 2011 Performance Change availability of funds, but to factors such as delays in procurement, cumbersome procedures for appointing PI-15. Effectiveness in collection D+ C+ Satker or for budget virement etc. of tax payments. [M1] (i) Collection ratio for gross tax Indicator Score 2007 Score 2011 Performance Change The proportion of outstanding tax arrears to the total non-oil arrears, being the percentage of and gas tax revenue declined from 7.5 percent in 2006 and PI-16 Predictability in the tax arrears at the beginning of a C C 8.3 percent in 2008 to 6.7 percent in 2010. The average tax availability of funds for C+ C+ fiscal year, which was collected collection ratio for tax arrears for the last 2 years is 52 percent, commitment of expenditure. [M1] during that fiscal year (average of down from 66 percent in 2006 (source: DGT). the last two fiscal years). (i) Extent to which cash flows are Annual cash forecasts are prepared based on budget C C Taxpayers pay their taxes directly into Treasury bank accounts forecast and monitored authorizations (DIPAs) but updated infrequently during the year. (ii) Effectiveness of transfer of tax or at commercial banks that are authorized by Treasury to collections to the Treasury by the A A (ii) Reliability and horizon of periodic MDAs have maintained their authority to commit expenditures receive such funds, and which then remit these to Treasury, on revenue administration. in-year information to MDAs on A A within the full extent of the annual appropriation reflected in the a daily basis. ceilings for expenditure commitment DIPA Reconciliation of tax payments is done centrally at the Treasury (iii) Frequency of complete (iii) Frequency and transparency of on a daily basis and reported bi-annually. Payments are not accounts reconciliation between adjustments to budget allocations, The procedures for the mid-year budget revision continue to be automatically updated in the taxpayer accounts. Differences A A tax assessments, collections, D C which are decided above the level of transparent and predictable. in the revenue collections between the Treasury and DGT are arrears records, and receipts by management of MDAs. identified. Old arrears data is maintained manually, and it is the Treasury. not linked to the taxpayer accounts or reported to the Treasury. PI-17. Recording and management of cash balances, debt and guarantees 29 Source: DGT. 38 39 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators Rating 2007 Rating 2011 Performance Change Indicator Score 2007 Score 2011 Performance Change Government debts are now more regularly reported and reconciled and the management objectives are PI-17. Recording and management of D+ B+ D+ B+ detailed in a new debt strategy. Most government accounts have been identified and consolidated. New cash balances, debt and guarantees. [M2] arrangements have also strengthened the control over guarantees, particularly for PPPs. Debt management and reporting has improved (i) Quality of debt data recording and D B significantly, records are now complete, with minor reporting Significant progress has been made in the recording and management of government debt. In reconciliation problems. addition to the debt and deficit rules outlined in the previous PEFA, DG Debt Management was created in the In practice the cash balances of nearly all government (ii) Extent of consolidation of the MoF to manage all public domestic and foreign debt, with standard operating procedures approved in 2007. C B accounts have been identified with most consolidated, government’s cash balance albeit with the ‘virtual pooling’ of some balances. DG Debt Management has been issuing regular reports on their website with full information about debt amounts, lenders, borrowing cost, maturity dates and a new strategy that covers 2010-1430 that describes in The MoF has exclusive authority to enter in to loans and (iii) Systems for contracting loans and to provide guarantees on behalf of the Government. detail the objectives for debt management and the mechanism / procedures for contacting foreign loans and issuance of guarantee C A The budget exposure is now disclosed and limited for grants, which must be approved by the MoF.31 By 2009, the quality of the Government’s debt management PPPs by the creation of PII. and reporting (notably the reconciliation between flows and stocks) had improved to the point where the external auditor, BPK, upgraded its audit opinion from a “disclaimer” to be “qualified”, with relatively minor PI-18. Effectiveness of payroll control reconciliation problems continuing for foreign loans.32 Rating 2007 Rating 2011 Performance Change The MoF has made significant progress in consolidating government balances into the Treasury Single New IT systems and procedures have strengthened the management of personnel and payroll at the Account (TSA). Following the issuance of PP No. 39/2007 on cash management in July 2007, the MoF has D+ C+ MDA and KPPN level, although weaknesses remain in reconciling the information at the center and issued various decrees33 that enable it to gather data on bank accounts opened by MDAs and close accounts with procedures at the SNG level. that lack justification-as of end 2010, from 41,396 accounts opened by MDAs, 7,499 MDAs accounts had been closed, 31,197 accounts (mostly used for spending units operations both of revenue and expenditure accounts) The Government Employee Administration Agency (Badan Kepegawaian Negara or BKN) endorses the were approved to be continuously used while the MoF was still deliberating on 2,700 accounts (these represent appointment, recruitment, promotion, demotion, and retirement of staff at MDAs and all local governments a relatively insignificant amount of the total, around Rp 132.7 billion). Additional measures have included: (i) a and maintains central personnel records reflecting these authorizations. The formal authorization letter for daily sweep of all revenue accounts into the TSA; (ii) zero based balances maintained by end of each day for these changes is issued by the MDA’s secretary general, except for senior staff that are approved by the all 178 KPPN accounts; (iii) virtual pooling of all expenditure accounts maintained by the spending units to President, and the change is then recorded by the MDA’s personnel bureau in its own system. compute the Government’s daily cash balance; and (iv) a MoF-BI MOU requiring interest to be paid on cash Generally there is a delay of about 2-3 months for the BKN in updating records of new personnel after the balances in the TSA, providing incentives to optimize the use of such balances. Although the income generated Secretary General’s authorization is received. Retroactive adjustments (rapel) to the personnel database from the cash balance in the TSA should not be considered as a main source of income of the Government, the indicate frequent delays in processing. The records at BKN and those at MDAs are not regularly reconciled so data of FY 2010 shows that the implementation of TSA has generated a relatively significant amount of income that the accuracy of employee data held by BKN is questionable. However, since the last PEFA the following with around of Rp 3.47 trillion rupiah was collected. changes have been introduced to strengthen personnel and payroll management: New regulations and the creation of a state owned infrastructure company have also strengthened the • MoF Regulation No. 133/2008 transferred the management of salary administration for government management of guarantees. As noted in the previous PEFA, the Minister of Finance has sole authority to provide employees (including military and police) to the MDAs to increase their accountability and responsibility financial guarantees and/or direct support to PPP infrastructure projects that satisfy criteria described in the in managing their own salary expenses. The MDAs must verify their data, charging the salary cost burden PMK No. 38/2006. To avoid bureaucratic delays in providing guarantees and to reduce the burden on the state to their budget, managing employee administration, updating their employee database, supervising, budget, the Government, in December 2009, established a state-owned company, PT Penjaminan Infrastruktur and taking responsibility for any faults/mistakes; Indonesia (PII) to provide services that include the provision of guarantees to public-private partnerships (PPPs) and set a limit on the Government’s contingent liability (i.e. to ring-fence the exposure from a guarantee). The • Treasury Regulation No. 37/2009 requires each Satker to appoint a Salary Expenditure Treasurer Government provides equity in PII (though few guarantees have been provided for PPP projects to date due to (Bendaharawan Gaji) who is responsible to record the employee data, managing all authorization implementation delays). The Government still makes guarantees from the annual budget, but only for limited letters for each employee, preparing the payroll (gross salary amount and deductions), maintaining activities-e.g. in FY2011 the Government allocated Rp 1 trillion for a “full guarantee” to creditors for the state- employee data, and managing other salary related tasks. owned electricity company (PLN) and the water providers (PDAMs). The Risk Management Unit in MoF remains responsible for recording, monitoring and reporting on the guarantees, which are disclosed in the financial • DG Treasury has also distributed a new IT application, called “GPP Satker”, to each Satker to manage their notes submitted to the Parliament, starting from the 2008 Budget. employee expenditure administration data. Each Treasury Office (KPPN) also uses a new “GPP KPPN” application to backup and verify the Satker data. Prior of the beginning of each month, each Satker 30 See MoF Regulation No. 380/KMK.08/2010: www.dmo.or.id/ supported by Finance Minister Decree No. 514/2010 and Government Regulation No. 10/2011. submits a payment request (SPM) to the KPPN, which is verified by checking the consistency of the two 31 Despite of the issuance of a regular monthly report, a formal reconciliation is only made once a semester when the Government produces its semi-annual and end of year financial statement reports. systems, with regular reconciliations between the two applications. Following verification, the KPPN 32 Reflecting improvements in the country’s public and external positions, as well as confidence in its management, Standard & Poor’s raised its long- usually transfers payments directly to each employee’s bank account—many civil servants (mostly term foreign currency credit rating for sovereign debt to BB in March 2010, while Fitch Ratings has upgraded its rating to BB+ (one notch below low-ranking staff ) are paid salaries and allowances in cash through the Satker, but the information is investment grade). regularly updated and reconciled by both the Satker and KPPN. 33 PMK 57 (amended by PMK 5/2010); 58/2007; 67/2007; and DG Treasury regulation 01/2010. 40 41 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators With the regular reconciliation of personnel records and controls in the automated payroll system for central standard bidding documents; (iv) drafting a new procurement law ; (v) increasing the use of e-tendering; government it is possible to more systematically identify and reduce ghost workers. However, significant risks and (vi) establishing procurement service units. The reforms cover procurement of goods and services by all remain at the SNG where these systems do not apply. A BKN report to the DPR in early 2007 estimated that government entities (including line ministries, SNGs, Bank Indonesia, state-owned enterprises, SNG-owned out of 240,000 assistant teachers, 102,000 were fictitious: these salaries are paid by district/city governments enterprises, state-owned legal entities [BHMN] and other related government institutions). New Regulation No. from the general allocation transfer (DAU). 54/2010) is supplemented by various decrees and circulars issued by MDAs. Indicator Score 2007 Score 2011 Performance Change The current regulations mandate open competition for procurement of goods and services costing Rp50 million or more. Exceptions to this rule are allowed if justified in writing and in specific kinds of PI-18. Effectiveness of Payroll Control. [M1] D+ C+ procurement (i) emergency situations or natural disasters; (ii) procurements of goods or services for which prices are regulated by government, such as electricity; and (iii) national security purposes such New IT applications at the Satker and KPPN level are directly linked (i) Degree of integration and and reconcile personnel and payroll databases to ensure data as defense equipment. In general, procuring entities try to adhere to procurement procedures indicated reconciliation between personnel D C in the regulations. However, there is no comprehensive data that can provide information on a country consistency on a monthly basis. However, MDA data is not integrated records and payroll data nor regularly reconciled at the central BKN level. level. It is expected that experienced line ministries will have high compliance with procedures, while Up to 3 months’ delay occurs in updating changes to the personnel compliance is expected to decrease at the local level due to low experience and weak oversight. For records and payroll, but affects only a minority of changes-e.g. an (ii) Timeliness of changes to increased allowance for rice was meant to start in January 2010, but example, figures published by MoPW indicate that 95 percent of procurement packages in 2009 followed personnel records and the C B a delay in issuing the decree resulted in a delay of up to 3 months competitive methods, down from around 89 percent for 2010. However, in the absence of comprehensive payroll and a retroactive payroll payment. Also, allowances (that should national data, it is difficult to determine the extent to which public procurement contracts are awarded stop) are often still paid to staff when they take leave and need to be recouped. on a competitive basis. (iii) Internal controls of changes New regulations and systems provide for clear authority for changes The regulation, and to a reasonable extent practice, encourages transparency and disclosure of to personnel records and the A A to pay and personnel records with the MDAs, albeit with delays, and payroll. results in a clear audit trail. information. All regulations and standard bidding documents are published on the LKPP website, which is easily accessible.34 All government bidding opportunities and information on awards of contracts are Internal auditors rarely perform separate payroll audits, while (iv) Existence of payroll audits to external audits are conducted on request or when irregularities are required to be published. However, there is no requirement for publication of procurement plans and data identify control weaknesses and/ C C or ghost workers. suspected. While new automated systems and regular reconciliations on complaints handling. should improve controls, payroll audits remain partial. The regulation outlines procedures for submitting and addressing complaints on the procurement process. Complaints generally appear to be resolved in a timely manner, except when taken to a higher level or when PI-19 Transparency, competition and complaints mechanisms in procurement legal recourse is sought. All complaints are received by the tender committee (procurement units under Rating 2007 Rating 2011 Performance Change new regulation) and are referred to a higher authority within the spending agency. While under the new New regulations and a National Public Procurement Agency (LKPP) have recently been introduced, though regulation, a complainant can copy the LKPP, the final decision will still be within the agency. As it currently C C it is likely to take time to be able to verify significant improvements in performance. stands, this process lacks sufficient independence as there are no members drawn from the private sector and civil society. The operation of the complaints system may also be weakened by the absence of public Improvements in public procurement have taken place over the past few years. Keppres No. 80/2003 disclosure of data on complaints received and resolved. Complainants may use an arbitration process or provided a national public procurement regulation that meets most of what is generally regarded as accepted seek redress through the judicial system. Indonesia has an arbitration legal system that is consistent with international practice, including basic principles: transparency, open competition, economy and efficiency. the generally accepted practices of neutrality, due process, etc. In addition, procedures exist through the This Decree also paved the way for establishing a regulatory body for public procurement, and established judicial system to enable the winner of any dispute to seek enforcement of the outcome. However there the basis for sanctions, complaint-handling and requirements for certification of users. is no formal monitoring process of dispute resolution and its enforcement, and associated costs are likely to limit the practical use of this remedy. Perpres No. 106/2007 was signed in December 2007 establishing an independent agency, the Lembaga Kebijakan Pengadaan Barang/Jasa Pemerintah (LKPP) or National Public Procurement Agency. LKKP is responsible for sustainable, integrated, focused and coordinated planning and development of strategies/ policies/regulations associated with the procurement of goods/works/services using public funds. LKKP reports directly to the President. In addition to the Chairman, who heads LKPP, and an Executive Secretary, there are four departments, each headed by a Deputy with responsibilities for (i) Strategy and Policy Development, (ii) Monitoring, Evaluation and Information Systems, (iii) Human Resources Development, and (iv) Legal Affairs and Settlement of Objections. The LKPP has been working on several fronts to improve the public procurement reform. Some of the accomplishments and activities, in addition to other reform measures, that have been achieved over the last two years, include: (i) consolidation of Keppres No. 80/2003 and its amendments in 2009: (ii) issuing of a new presidential regulation Perpres No. 54/2010, effective as of January 2011; (iii) issuing a set of national 34 www.lkpp.go.id 42 43 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators Indicator Score 2007 Score 2011 Performance Change encumbrance will also be used for carry forward over multi-year contracts. By the time SPAN is rolled out in 2013, comprehensive commitment controls should be in place, effectively limiting commitments to actual PI-19. Competition, value for money and controls in C C cash availability and approved budget allocations. procurement.1 [M2] As discussed in PI-17, BPK gave a “qualified” opinion on government financial statement for 2009 (improving From January 2011, new PP No. 54/2010 is applicable for all public procurement under the national budget. Many SOEs issue their own regulations which follow from “disclaimer”) for the first time in the past five years. The FY 2009 BPK audit report shows improvement in the the presidential decree with some modifications to allow them more flexibility. number of opinions issued in both central governments (audit of ministries) and local governments compared (i) Use of open competition There is a separate presidential decree that governs PPPs. Implementing for award of contracts with FY 2007 and 2008 audits. This shows progress on the accountability and capacity to prepare reliable agencies such as MDAs and SNGs can issue further decrees that would address that exceed the nationally D B public procurement; however these have to be consistent with the presidential financial statements. However, the FY 2010 BPK audit report still records a number of instances of weaknesses established monetary threshold for small purchases. decree and are considered at a lower legal level. PP No. 54/2010 indicates in internal controls and non-compliance with the existing regulations. open competitive procurement as the default method. It clearly defines other methods and the thresholds and conditions for which these methods can be used (see: www.lkpp.go.id). Indicator Score 2007 Score 2011 Performance Change PP No. 54/2010 is clear on having open competition as the default PI-20. Effectiveness of internal (ii) Justification for use of less procurement method and the need to provide justifications in case of use controls for non-salary D+ C+ competitive procurement B D of other methods. It is expected that compliance rates are high in MDAs expenditure. [M1] methods. with the possibility of these rates dropping in most SNGs. With the absence Commitment controls are in place at Satker level and effectively of data on these sub-criteria, the indicator is ranked D. limit commitments to actual cash availability and approved (i) Effectiveness of expenditure C B budget allocations (as revised). In the near future, with the Not all key procurement information is made available to the public through commitment controls. implementation of SPAN, the commitment might be effectively appropriate means. PP No. 54/2010 is clear that it requires the publication (iii) Public access to controlled and managed. of all bidding opportunities and recommendations for contracts awards complete, reliable and timely C (and these can be found on many MDA websites). However, there is no MoF Regulation No. 134/PMK.06/2005 and DG Treasury procurement information requirement for publication of government procurement plans and data (ii) Comprehensiveness, Regulation No. PER-66/PB/20052 are still in place. Regulation and on the resolution of procurement complaints. relevance and understanding procedures incorporate a comprehensive set of controls, which B B of other internal control rules/ are widely understood, but may in some areas be excessive (e.g. The structure of this criterion enforces a scoring of D as the current (iv) Existence and operation procedures. through duplication in approvals) and lead to inefficiency in staff complaint handling mechanism does not include an independent body of a procurement complaints C D use and unnecessary delays. and there is no participation of members from the private sector and civil mechanism. society. BPK audits gave a qualified opinion on the government financial (iii) Degree of compliance statement for the first time in five years; however the audit report with rules for processing and D C still records a number of instances of weaknesses in internal recording transactions PI-20. Effectiveness of internal controls for non-salary expenditure control. Rating 2007 Rating 2011 Performance Change PI-21. Effectiveness of internal audit Commitment controls are in place at Satker level that effectively limit commitments to actual cash D+ C+ availability and approved budget allocations. BPK audits provided a ‘qualified’ audit opinion on GOI Rating 2007 Rating 2011 Performance Change financial statements for the first time in FY 2009 after a ‘disclaimer’ for five years. Despite improving the clarity of the institutional responsibility for internal audit, there has been little D+ D+ improvement in actual performance of internal auditors in line ministries. Commitment controls are in place at Satker level and effectively limit commitments to actual cash availability and approved budget allocations (as revised). The Government issued Government Regulation PP No. The issuance of Government Regulation PP No. 60/2008 read with Presidential Instructions Inpres No. 4/2010 60/2008 adopting COSO as its control framework in August 2008. clarifies the country’s institutional structure for internal audits. Under the regulation, four types of institutions share BPKP has been appointed as the agency responsible to assist MDA and local governments in implementation the responsibility for conducting the Government’s internal audit function,35 namely, the BPKP, Inspectorates of PP No. 60/2008. In FY 2009 and 2010, PP No. 60/2008 has been socialized to 28 MDAs, 87 vertical institutions General, provincial inspectorates and district/city inspectorates. Each of these is assigned different roles. and 345 district/city governments. Training has been conducted in 16 ministries and 105 district/city BPKP performs supervision over the state accountability, which consists of: (i) cross sectoral activities; (ii) governments. Diagnostic assessment is underway in 13 ministries and 50 district/city governments. BPKP has state treasury activities based on requests from the minister of finance as the state treasurer; and (iii) other collaborated closely with the Inspectorates General in line ministries to ensure they are providing support to activities based on the president’s request. The inspectorate general36 performs supervision over the MDAs executive in strengthening controls. function and roles which are funded by the APBN. The provincial inspectorate performs supervision over DG Treasury, in its effort to strengthen internal controls, introduced a formal commitment control system at all activities of the regional spending units’ functions and roles which are funded by the provincial APBD. the line ministries through development of SPAN application. This should ensure adherence to the budget District/city inspectorates perform supervision over all activities of the regional spending units’ functions and ceiling, reduce the time lags in processing payments and revising budgets, and maintain an electronic trail of roles which are funded by the district/cityAPBD. all modifications to source data. In the future, SPAN is expected to be able to record the committed budget balance to provide better budget control (i.e., funds available = budget - encumbrance/commitment -actual). The payment schedule information from the summary of the contract will also be linked to the 35 Based on Article 49 of PP No. 60/ 2008. 36 IGs generally use Indonesian Audit Standards (SPKN) issued by Ministry of State Apparatus, while IG MoF uses Standard Audit Inspektorat Jenderal cash plan in the DIPA so that the available cash balance can always be updated. The new system to apply (SAINS) for its internal audit practice. SAINS has been adopted from Professional Standard Audit issued by IIA. 44 45 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators The current internal audits conducted by IGs mostly consist of compliance audits on the operational aspects Monthly reconciliation is carried out for suspense accounts and advances, and is completed by the 10th of the respective MDAs. Although risk-based audit is practiced in a number of ministries, reviews of internal of every month. The external auditor (BPK) noted in their FY 2010 audit report that there are still a few control systems are rarely carried out; this conclusion is based on a BPKP survey37 of all IGs and SNG (provincial reconciliation issues on revenue accounts. An integrated revenue collection system is being piloted since and districts/cities) inspectorates. The survey findings reveal that 74 percent of IGs are at level 1of IA-CM model, June 2011. However, it is not clear yet if it has addressed the issue. the internal audits are conducted mainly for the purpose of verifying transaction accuracy and compliance. Indicator Score 2007 Score 2011 Performance Change Starting in 2006, IGs have also reviewed the MDAs’ annual financial statements38 to ensure their reliability and PI-22.Timeliness and integrity, prior to their submission to DG Treasury at the MoF. IG audit reports are mainly submitted to the regularity of accounts B B relevant minister. There is requirement under Law No. 15/200439 for IGs to submit their audit reports to BPK for reconciliation use during the external audit. However, this provision is not enforced; therefore in practice not all IGs submit their Monthly reconciliations take place for revenue and expenditures account audit reports to the BPK. Furthermore, there is no special unit within BPK tasked with receiving and analyzing IG within 10 days after the period closed. Reconciliation takes place by comparing SAI data and revenue and expenditures module in KPPN data. reports, although the BPK audit team generally requests the internal audit report before starting an audit. There There was insignificant un-cleared account in FY 2011.There was less than (i) Regularity of Bank are no audit committees within the MDAs in charge of assisting with follow-up on IG reports. IGs are expected reconciliations B B 0.5 percent un-reconciled transaction in the revenue account and less to themselves monitor the follow-up action taken on the basis of their audit findings. However such action than 0.02 percent in the expenditures account for FY 2011. often takes a significantly long time. The majority of the IGs monitor the action taken based on audit findings Source: http://www.perbendaharaan.go.id/new/index.php?pilih=news& through special units that are specifically tasked with following up on audit findings. aksi=lihat&id=2139 Monthly reconciliation occurs with the clearance of suspense accounts and BPKP’s survey findings for IGs using IA-CM model indicate that 93 percent of the respondents: (i) conducted advances to be completed by the 10th of every month. Otherwise, it will be transactional audits for accuracy and compliance purposes only; (ii) audit plans were not prepared based on cleared in the following month. There has been an effort to close unofficial stakeholder priorities; and (iii) audit output was based on the capacity of certain individuals. 7.499 accounts in 2010. This effort will be continued in 2011 which should (ii) Regularity of reconciliation improve bank reconciliation and clearance of suspense accounts. and clearance of suspense B B Indicator Score 2007 Score 2011 Performance Change accounts and advances DG Treasury Regulations No. 36/2008: No. 47/2009; and No. 62/2010; and: PI-21.Effectiveness of D+ D+ http://www.bi.go.id/web/en/Peraturan/Sistem+Pembayaran/ internal audit. [M1] se_101208.htm Most audits are confined to compliance and technical issues. BPKP Coverage and quality of the application of IA-CM model indicates that most IGs conduct mainly D D internal audit function transactional reviews on accuracy and compliance, rather than reviewing the system in place. PI-23. Availability of Information on resources received by service delivery units The audit reports are submitted to the minister, and BPK has access to Rating 2007 Rating 2011 Performance Change the reports. Under the law, IGs have to submit their audit reports to BPK. Information on total funds provided to or spent by primary schools is not readily available from the Frequency and distribution D D C C However, this regulation is not enforced and in practice not all IGs submit accounting system. Nor for primary health centers of reports their reports to BPK. There is no regulation requiring submission of IG reports to the MoF. There have been no significant changes to the SAI (Sistem Akuntansi Instansi) and SIKD (local government Extent of management Management’s actions on audit findings often take a long time to complete. response to internal audit C C IGs monitor action taken on audit findings through special units that are information system) since 2007. For several front line service units, the accounting is carried out by local findings tasked with following up on audit findings. government unit (Dinas) offices. However, complete information on funds received by front line delivery units is currently not available. Section 3.5 Accounting, Recording, and Reporting Indicator Score 2007 Score 2011 Performance Change PI-23. Availability of Information PI-22. Timeliness and regularity of accounts reconciliation on resources received by service D D delivery units Rating 2007 Rating 2011 Performance Change Funds from central government (APBN) are captured by KPPN There has been an extensive closing down of unofficial MDA accounts. Monthly reconciliation is carried B B i. Collection and processing of system. While funds from local government are captures in local out clearing suspense accounts and advances information to demonstrate the treasury office. Separate sources of funding also have separate resources that were actually received lines of reporting. There is no evidence that a unified version of There has been an extensive closing down of unofficial MDA accounts. The target is that these unofficial/ (in cash and kind) by the most these report(s) is to be found at any government agency level, i.e. common front-line service delivery Education Dinas records sources of fund from central as well as local suspense accounts would cease to exist by the end of 2011 and Treasury would have full control of all of units (focus on primary schools and budget, but not revenue received by school directly (off treasury D D the Government’s accounts. The audit report for 2011, expected by June 2012 would provide an update primary health clinics) in relation to system). Government Accounting System (SAI) does not capture the overall resources made available off treasury transactions. This demonstrates that the collection on this issue. to the sector(s), irrespective of which and processing of information on resources that were actually level of government is responsible received by most front-line service delivery units, in relation to the for the operation and funding of overall resources made available to the sector, difficult. 37 Based on Internal Audit Capability Model (IA-CM) for the Public Sector issued by The Institute of Internal Auditors those units. Re: Government Regulation No. 21/2010 38 Based on DG Treasury Circular No 27/Pb/ 2004 MoF Regulation No. 171/2007 39 Based on article 9 (2) of the State Audit Law (No. 15/2004) 46 47 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators PI-24. Quality and timeliness on in-year budget reports The FY 2010 unaudited financial statements (LKPP) were submitted to BPK for audit on January 2011 with the Rating 2007 Rating 2011 Performance Change audit completed by May 2011. The audited statements were submitted to the DPR on June 2011. BPK’s audit report was also submitted to the DPR on June 2011. First semester report for FY 2011 was released in July 2011, 4 weeks after the end of the semester. This C+ C+ report follows the structure of the annual financial statements, presenting the actual against the budget for The LKPP are considered comprehensive although BPK expressed some concerns on the application of all budget items. Quarterly reports are also being issued within 6 weeks of the end of the quarter. the Government Accounting Standards, compliance towards rules and regulations, and weaknesses in the government internal controls. There have not been significant changes to the Indonesian Government Indicator Score 2007 Score 2011 Performance Change Accounting Standards since FY 2005, which are based on IPSAS. PI-24. Quality and For the first time, BPK’s opinion on the Government’s annual financial statements for FY 2009 was a “qualified” timeliness on in-year C+ C+ budget reports [M1] opinion after five consecutive years (2004-08) of a Disclaimer audit opinion. Some exceptions in application of standards have been reported by auditors, such as assets depreciation and receivable amortization. This report follows the structure of the annual financial statements, presenting (i) Scope of reports the actual against the budget for all budget items. Since FY 2006 there has not Indicator Score 2007 Score 2011 Performance Change in terms of coverage C C been any change to the format of the report. It does not include commitment and compatibility with PI-25. Quality and and payment stages which is not required in the current regulation. However, budget timeliness of annual C+ B+ when SPAN is effective in the future, it will record these commitment(s). financial statements The line ministry is required to submit a quarterly report to DG Treasury, the MoF The annual financial statement (LKPP) is considered comprehensive. Major and the system is able to produce a quarterly report. improvements towards the omissions found in previous fiscal years have been Sources: made in FY2009 and FY 2010, especially on expenditures reporting and assets http://www.anggaran.depkeu.go.id/2009a/web-konten-list.asp?id=567 registration. The consolidated statements provide full information on revenue, (ii) Timeliness of the http://w w w.anggaran.depkeu.go.id/Content/08-07-16,%20Lap%20 expenditure and financial assets/liabilities with some exceptions. B B issue of reports Semester%20I_APBN2008_RevisiBabV.pdf (i) Completeness of the ftp://ftp1.perbendaharaan.go.id/produk/dia/lkpp/LKPP_SEMESTER_I_2008.pdf C B financial statements Sources: ftp://ftp1.perbendaharaan.go.id/produk/dia/lkpp/LKPP_SEMESTER_I_2009.pdf http://www.bpk.go.id/doc/hapsem/2008i/disk1/Pdf_IHPS/IHPS_I_TA_2008. PMK 171/PMK.05/2007 on Central Government Accounting and Financial pdf Reporting System and DG Treasury Regulation No. 65/PB/2010 http://www.bpk.go.id/doc/hapsem/2009i/IHPS/IHPS.pdf http://www.bpk.go.id/web/?p=6208 Un-reconciled differences between the Treasury and the MDA records and http://www.bpk.go.id/web/?p=3896 transactions from unreported bank accounts are still a source of concern on reliability and accuracy of information in the Treasury reports. However, there (ii) Timeliness of The FY 2008 - FY 2010 financial statements were submitted by the Government have been some improvements on this area as the amount of suspense accounts submission of the A A to BPK and the DPR (with the audit report) in within six months of the close of (iii) Quality of has been decreasing from year to year. Data issues are generally highlighted in financial statements the fiscal year. C B information the report and do not compromise overall consistency. Sources: Indonesian Government Accounting Standards (GAS) are based on IPSAS, • http://www.perbendaharaan.go.id/new/index.php?pilih=news&aksi=lih and applied, with some exceptions reported by auditors, such as for asset at&id=2358 (iii) Accounting depreciation and receivable amortization. B B • http://www.bpk.go.id/web/?p=4106 standards used Source: Government Regulation No.71/2010 http://www.bpk.go.id/web/files/2009/06/01_LKPP_2008.pdf The line ministry is required to submit a quarterly report to DG Treasury, MoF with the system capable to produce a quarterly report. The purpose of the report remains to facilitate the comparison of actual expenditure with budget. In addition, the expenditure reports for FY 2008-10 do not cover both Section 3.6 External Scrutiny and Audit commitment and payment stages. However, when SPAN is effective in the near future, it will record these commitments. PI-26. Scope, nature and follow-up of external audit Un-reconciled differences between the Treasury and MDA records and transactions from unreported bank Rating 2007 Rating 2011 Performance Change accounts are still a source of concern on reliability and accuracy of information in the Treasury reports. The quality of the external audit process is improving gradually. There has been a significant improvement C+ B+ However, there have been some improvements in this area as the amount of suspense accounts has been in BPK’s access to tax information and hence the coverage of the audit. decreasing from year to year. Data issues are generally highlighted in the report and do not compromise overall consistency. A peer review for BPK conducted by the Dutch Court of Auditors in 2009 pointed out that BPK had made major strides in its mandate, capacity and practices in the past five years. The total annual budget of BPK PI-25. Quality and timeliness of annual financial statements increased from Rp 690 billion in 2006 to Rp 2,30040 billion in 2009. The number of regional offices increased from 17 (2006) to 33 (2011): BPK now has regional offices in all provinces. All expenditures, revenues, and Rating 2007 Rating 2011 Performance Change assets/liabilities of the Government are subject to audit. BPK audit manual framework, consisting of rules The quality of the financial statement (LKPP) has improved as evidenced by the first ‘qualified’ audit and regulations, manuals and guidelines, complies with international standards. Moreover, a quality control C+ B+ opinion for FY2009 and continued in FY 2010. system is in place and a quality assurance system has been designed. 40 FY2010 BPK Budget Realization Report 48 49 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators Indicator Score 2007 Score 2011 Performance Change detailed procedures specified for matters such as the conduct of negotiations during budget discussions, whereas it appears that in practice negotiations do occur. PI 26. Scope, nature, and follow-up of C+ B+ external audit [M1] Article 27 of Law No. 17/2003 clearly states rules for in-year budget amendments. These cover changes in budget appropriations caused by changes in the macro-economic assumptions and main fiscal policies and Law No. 15/2006 formally grants BPK unrestricted access to such information. However, there were issues with BPK access to tax by inter-unit budget transfers. The law allows for reallocation of budget classifications and budget codes information. The access to tax information has considerably across approved programs and administrative units subject to approval by the MoF. Reallocation between improved since 2008. In the Audit Report for LKPP 2008 different sectors requires parliamentary approval. Furthermore, an increase in aggregate expenditure, for paragraph 3, BPK has stated that the Government does not Scope/Nature of instance due to a budget surplus, is allowed when an excess budget balance (saldo anggaran lebih) occurs, restrict the audit scope of tax revenue any longer. BPK have audit performed (incl. adherence to auditing C A also not raised the issue of restricted access to tax information which requires parliamentary approval. In practice, these rules have been consistently respected. Ministerial in their audit findings for 2009 and 2010. Furthermore, there is standards) MoU between the MoF and BPK regarding access to documents regulations prescribe intra-agency in-year transfer within specified authority limits. and information necessary to audit state tax (MoU No. 50/ NK/X-XIII.2/2/2011- MoU-454/SJ/2011 on Development and Indicator Score 2007 Score 2011 Performance Change Management of data access information system in the MoF for audit purpose). PI 27. Legislative Scrutiny of the Annual Budget Law C+ B+ The audit reports on the annual financial statements were [M1] Timeliness of submission submitted to the legislature within two months of the receipt of audit reports to A A of the finance statements for the past three years, in compliance The review undertaken by Parliament covers macro economic framework, legislature with the law. main fiscal policies and expenditures and revenues. A detailed discussion Scope of the legislative of the annual work plans of line ministries and AGAs takes place directly A formal response is generally made to audit recommendations scrutiny B B with the relevant parliamentary sectoral budget commissions. A complete and their implementation. The extent of follow up is regularly medium term fiscal framework is being developed at the program and monitored by BPK and reported in its interim audit reports. MDA level (but is not yet in place for this review). However, there is little evidence of a systematic follow-up. Between FY2005 and the first semester of FY2010 only 46 percent Extent to which the Procedures for legislature review are broadly defined and are generally Evidence of follow up on of recommendations had been followed up in accordance with legislature’s procedures B B C B respected. However, there are no detailed procedures for matters such as audit recommendations the recommendation, 21 percent had been followed up, but still are well established and review guideline and negotiations during budget discussions. not in accordance with the recommendation, and 33 percent respected had not been followed-up.3 BPK regulation No. 2/2010 regarding monitoring of audit follow up was issued on July 2010 and is Adequacy of time for the expected to allow BPK to have a more systematic and structured legislature to provide follow-up mechanism. a response to budget The budget review is undertaken over a period of about seven months. proposals both the detailed Parliament has some 8-10 weeks (compared to 6-8 weeks before) to review estimates and, where C A the draft budget once it is tabled in mid-August until it is formally adopted applicable, for proposals in October. PI-27. Legislative scrutiny of the annual budget law on macro-fiscal aggregates earlier in the budget Rating 2007 Rating 2011 Performance Change preparation cycle The review undertaken by Parliament covers macro economic framework, main fiscal policies and Rules for in-year expenditures and revenues. Procedures for legislature review are broadly defined and are generally amendments to the budget Clear rules exist for both inter and intra unit budget amendments and C+ B+ A A respected. Parliament has 8-10 weeks (compared with 6-8 weeks before) to review the draft budget. without ex-ante approval by reallocations. In practice these rules have been consistently respected. However, the scrutiny process still lacks detailed procedures for negotiations during budget discussions. legislature PI-28. Legislative scrutiny of external audit reports The review undertaken by Parliament covers the macro economic framework, main fiscal policies and expenditures and revenues. Starting from 2011, MDAs budgets include a medium term Rating 2007 Rating 2011 Performance Change expenditure framework covering three years forward estimates as set out in MoF Decree No.104/ In 2009 Parliament established a State Finance Accountability Committee (BAKN), which reviewed C+ C+ the audit reports for FY 2009 and prepared an analysis which was shared with sectoral commissions. PMK.02/201041. A detailed discussion of the annual work plans of MDAs takes place directly with the However, not all sectoral commissions followed up with the MDAs on the analysis relevant parliamentary sectoral budget commissions. These discussions take place during June and August, as set out in Article 14 of Law No. 17/2003. A final review of budget appropriations, which Parliament is required by Article 21 of Law No. 15/2004 to review the implementation of interim and final includes appropriations classified by organizational units, functions, programs, activities, and types of audit recommendations with MDAs. In 2008 and 2009, the reviews were done through various parliamentary expenditure, is undertaken at a plenary session of the Parliament in accordance with Article 15 of Law sectoral budget commissions. The law does not set out the period within which the review process should No. 17/2003. In practice, parliamentary committees are often involved in details, down to the level of be completed and it can take up one year in practice. individual line items in the budget. In 2009, Parliament established a State Finance Accountability Committee (BAKN) to lead the review Procedures for the legislature’s review are broadly defined in Articles 14 and 15 of Law No. 17/2003 and process. Its roles and responsibilities are set out in Law No.27/200942 and the organizational structure and its Parliament Standing Orders Chapter VII. The procedures are generally respected. However, there are no 41 PMK no.104/PMK.02/2010 article 2 42 Law no.27 year 2009 on BAKN Article 110 - 116 50 51 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators governance arrangements in the Parliamentary Standing Orders.43 BAKN has a mandate to review the audit The Government therefore continues to have good information on the likely amount of direct budget support reports received from BPK, distribute the review results to relevant commissions, conduct follow up actions for the coming year. However, generally difficulties exist in predicting the disbursement of tranches based on based on commissions’ request, and provide input to BPK for its annual audit plan, audit challenges, and project as opposed to policy performance as they utilize progress of given projects for loan effectiveness. This quality of audit reports. BAKN records show that in 2010, the scrutiny of audit reports was completed within explains the minor deviations in the above table, and for the timing of in-year disbursements. two months of receipt of the audit report from BPK. Some of the commissions followed up the analysis from BAKN with hearings with related MDAs. However, not all commissions have followed up on the analysis. Indicator Score 2007 Score 2011 Brief Explanation D-1 Predictability of Direct Budget D+ B+ Indicator Score 2007 Score 2011 Brief Explanation Support. [M1] PI 28. Legislative scrutiny of (i) Annual deviation of actual budget external audit reports [M1] C+ C+ support from the forecast provided by Rating continued to be high as in no more than one out of the donor agencies at least six weeks A A the three years 2007-09 did direct budget support outturn prior to the government submitting fall short of the forecast by more than 5 percent. In 2008 and 2009, the legislature completed its review of audit reports within its budget proposals to the legislature. 12 months and discussed the issues directly with MDAs. Starting in 2010, Timeliness of examination BAKN completed its review of audit reports within 3 months and distributed The rating has improved for 2007-09, as quarterly of audit reports by the C C the analysis results to relevant sectoral commissions. Commissions followed (ii) In-year timelines of donor disbursement estimates have been agreed and complied legislature up the analysis from BAKN with hearings with related MDAs although this is disbursements (compliance with D B with before the beginning of the fiscal year for the not yet done timely by all commissions with all MDAs. aggregate quarterly estimates). majority of policy-based disbursement. Project based budget support is small, but are subject to some delays. Parliamentary commissions hold hearings to discuss audit findings with responsible officials of MDAs though this is not always done as a routine with Extent of hearings on key findings undertaken by the C B formal procedures. The rigor with which this is done varies from commission For 2007-09, development partners provided detailed and accurate estimates of amounts and the quarterly to commission. The hearings may involve not only the MoF but also other timing of budget support for tranches based on the implementation of agreed policies, and did so at least legislature entities and their officials. Eleven major MDAs were covered by April 2011 and the process continues to be underway. two months before the budget was presented to Parliament. However, no detailed quarterly estimates were provided for tranches conditional on project performance. Rather, quarterly breakdowns for such funds The audit report on the subsequent year provide information on audit findings and legislature’s recommendations that have been followed up by were estimated by the Government pro rata, based on the annual disbursement plans attached to the loan Issuance of recommended the MDAs agreements. But shares of such project based funds are relatively negligible, and no in-year disbursement actions by the legislature Evidence provided: B B a. FY2010 first semester BPK audit report delays occurred for funds for which forecasts were received. and implementation by the executive b. Sample of minutes of hearing between DPR commission with 3 MDAs that includes recommendation from DPR commission related to audit D2. Financial Information provided by donors for budgeting and reporting report Rating 2007 Rating 2011 Performance Change C+ D+ Donor reporting of annual work plans to the Government has deteriorated slightly. Section 3.7. Development-Partner Practices D-1. Predictability of direct budget support For fiscal year 2010, less than half, and not all major development partners, provided annual work plans Rating 2007 Rating 2011 Performance Change to the Government containing budget estimates for the disbursement of project aid flows in the previous year. However, these were mostly in line with the Government’s budget calendar and consistent with the D+ B+ The timeliness of donor disbursements has improved, particularly for policy-based budget support. Government’s budget classification.44 Government Regulation No. 2/2006 on Foreign Grants and Loans, as revised with PP No.10/2011, requires In the three years from 2007 to 2009, the Government received external financial assistance by way of direct all development partner projects, including development partner-executed projects, to be included in budget support from the World Bank, Asian Development Bank (ADB), the Japanese Bank for International the Government’s accounting system. This is also reflected in MoF Regulation No. 171/ 2007 regarding the Cooperation (JBIC), France and the Islamic Development Bank (IDB). Direct budget support thereby contributed Government’s Financial Accounting and Reporting System and subsequent regulations.45 In 2010, 81 percent about 2.6 to 3.3 percent of total central government expenditure. Similar to 2004-06, as reported in the previous of disbursed aid to Indonesia that was reported in the 2011 Paris Declaration Survey was accurately recorded PEFA, budget support funds disbursed by donors closely align with development-partner projections. by the Government.46 Thus, the overall trend is good, but some development partners still failed to notify the Government about disbursements or were late in doing so. Where national procedures are not used, Aid Disbursements frequency and coverage of development partner reports continues to vary, although most of them report   2007 2008 2009 on a real-time basis, generally within 30 days after the disbursement transaction and in the form of a Notice Projections (US$ million) 2,100 2,900 2,994 of Disbursement (NoD). Standardized reporting arrangements still need to be established, ensuring that Outturns (US$ million) 2,100 2,727 2,953 reporting is also consistent with the Government’s budget classification. % difference 0 5.97 1.36 44 Source: MoF, DG Debt Management, 2011. Source: MoF, DG Debt Management, 2011. 45 For example Ministry of Finance Regulation No. 40/ 2009 on the Government’s Grant Accounting System and No. 255/2010 on Direct Grants. 46 Source: Data Sheet Paris Declaration Survey 2011, available at www.aims-indonesia.org. Note that not all Indonesian donors contributed to the 43 Parliament’s Standing Orders (Tata Tertib DPR) article 67 – 72. survey. However, the sample can be considered representative. 52 53 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators Indicator D-2 Financial Information provided by Score 2007 Score 2011 Brief Explanation SECTION 4. development partners for budgeting and C+ D+ reporting. [M1] (i) Completeness and timeliness of budget Not all major development partners provide budget GOVERNMENT REFORM PROCESS estimates by development partners for B D estimates for the disbursement of project aid for the project support Government’s coming fiscal year. Most development partners provide actual (ii) Frequency and coverage of reporting by disbursement reports, but the frequency and Section 4.1. Recent and ongoing PFM reforms donors on actual development partner flows C C coverage for development partner-executed projects for project support continue to vary and are generally not consistent with the Government’s budget classification. The reforms have their roots in the MoF White Paper issued in 2002, which articulated the need for comprehensive PFM reforms covering budget development and execution, revenue administration, D-3. Proportion of aid that is managed by use of national procedures public accounting and auditing. The White Paper laid the foundation for enacting various landmark laws to Rating 2007 Rating 2011 Performance Change modernize the country’s financial management system, in particular: (a) Law No. 17/2003 on State Finance C C Development partner reporting of annual work plans to the Government has deteriorated slightly. (2003), (b) Law No. 1/2004 on State Treasury, and (c) Law No. 15/2004 on State Financial Audit. Implementing regulations and additional laws have followed in subsequent years, e.g. progress in streamlining the regulatory According to data collected at Bappenas for the 2011 Paris Declaration Survey,47 in 2010 the total proportion framework for public procurement continued with the establishment of the National Public Procurement of aid disbursed to the government sector — Indonesia’s budget execution, financial reporting, and auditing Agency (LKPP) in 2008, and the issuance of Presidential Regulation No. 54/2010 on Public Procurement. procedures — amounted to 75.1 percent. The volume of aid using Indonesia’s procurement systems was recorded at 69.7 percent. The latter was recorded separately, and the proportion of funds that applied national In recent years, Indonesia has made significant strides in the way its public finances are managed and systems in all respects, including also in the area of procurement, was therefore not evident for a smaller in increasing transparency and independent oversight.48 In almost all areas of PFM, changes in the legal group of development partners. However, given the data available, especially for World Bank, Japan, ADB, and regulatory architecture are now largely complete and the momentum has shifted towards implementation IDB, EC/EU, France and Germany, the latter could be estimated to lie between 65 percent and 70 percent. of new PFM practices. As highlighted in the PEFA, advances have been made in budget preparation with the introduction of MTEF and PBB, government accounting standards have been formally established and are Indicator Score 2007 Score 2011 Performance Change being adhered to in several respects to produce comprehensive annual financial statements, and the internal There is no change in rating, compared with 2007. The overall and external audit functions have made significant progress in the past few years. A Government Financial D-3 Proportion of aid that is Management Information System (GFMIS) to provide information for budget management at all levels of proportion of aid funds that use national systems for each of the managed by use of national C C procedures. [M1] four areas of procurement, authorization/accounting, auditing and government is expected to be rolled out in 2012. However, internal controls in the execution of budget by reporting is estimated to lie between 65 and 70 percent. spending agencies need improving and have the potential to jeopardize the gains from the reforms. The Government remains strongly committed to sustaining the reform momentum. It is expected that for 2011, overall emphasis will continue to be put on reforms in revenue administration, budget planning using PBB and the MTEF; closer integration of budget planning with legislative oversight, and results monitoring and evaluation; overall improvement in public expenditure management through continued development of an automated budget and treasury system (SPAN), and public procurement reforms. The main priorities for reform are set out in the current national development plan (RPJM) for 2010- 2014, and in the related strategic plans of the government ministries/agencies. The MoF produces an annual strategy note (ASN) that sets out its immediate priorities and particularly those supported by PFM MDTF. The 2011 ASN supports implementation of the MoF’s strategic plan for 2010-14, which has six main objectives: (a) optimizing state revenue through increased taxpayer compliance and revenue collection, combined with increased level of trust and enhanced taxpayer services; (b) effective and efficient allocation and management of state expenditure, with adequate safeguards for accountability and transparency; (c) efficient and adequate funding of the state budget, including establishment of an optimal debt portfolio structure; (d) improved cash management and accountability through a modernized state treasury system; (e) optimal utilization of state assets including establishment of an effective assets database; and (f ) further development of capital markets and non-bank financial institutions, combined with strengthened supervision. 48 A discussion of the achievements and future challenges for reform can be found in the World bank document for the Eighth Development Policy Loan (DPL 8) for 2010: see www.worldbank.org 47 Source: www.aims-indonesia.org. 54 55 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators The MoF has also launched a new initiative, launched in 2011, to create a more effective, efficient, Section 4.2. Institutional Factors Impacting Reform Planning and Implementation transparent, and accountable MoF to manage state finance and assets and to become role model for bureaucracy reform in Indonesia. A blueprint of this ‘Institutional Transformation Program’ is being prepared and will contain the following: (i) the future vision, mission (role) and function of the MoF; (ii) The Government has recognized that the main constraints to improving public sector performance the restructuring and development of Human Resources, Information and Communication Technology, include the rigid, hierarchical institutional and bureaucratic structures. The MoF began its bureaucratic and Business Processes; (iii) the steps to be conducted under this institutional transformation; (iv) an reform program in 2006, focused on reforming organizational structures and standard operating procedures, implementation plan, transitional plan and clear activities and schedule; and (v) some quick win initiatives. At creating an ethics code for staff, and increasing staff pay through a performance allowance. In 2009, the the end of 2014, it is expected that this institutional transformation program may support the realization of Minister of Finance announced the second chapter of reform, with a focus on human capital development and the following ambitious high-level targets: information system for human resources as key priorities. More broadly, the Government has commenced the process of implementing an agency by agency reform, guided by an overarching policy framework set out in a • An increase in the tax ratio from 12 percent of GDP to about 18 percent; Grand Design for Bureaucracy Reform (BR) for 2010–25 along with a Road Map for 2010–14 that were eventually • An increase in the ratio for the absorption of the Annual State Revenue and Expenditure Budget (APBN) approved in December 2010. These will extend the reforms to the other K/Ls and eventually to SNGs, where to about 95 percent; and capacity constraints are often particularly acute. • An unqualified audit opinion, i.e. Without Exception, for the Government’s Financial Statement from the State Audit Agency. Decentralization has provided SNGs with significant resources and responsibilities. More than one- third of overall public spending is now executed by SNGs. This requires an adequate regulatory framework, The Government is also working on a wide range of reforms and the key areas for attention and monitoring together with sufficient PFM capacity in the SNGs if it is to be fully effective. In order to address this, in 2005 include: the central government passed comprehensive legislation on PFM reforms at the SNG level, with the aim of mirroring reforms already being implemented at the center. However, the results have been limited due • Deepening the reforms of the central government budgetary systems to strengthen policy orientation to lack of technical and human resources. For example, many SNGs still struggle to meet the deadlines for and medium term planning in budget preparation with a particular focus on improving the quality of financial reporting or even to spend their increasing budgets performance data, fine-tuning the MTEF/PBB and costing system; Challenges in addressing the constraints in PFM at the sub-national level include: (i) providing timely • Ensuring greater integrity and more effective management of public funds through further extension estimates from the sectoral ministries of revenue-sharing transfers; (ii) building the capacity of SNGs to better and fine-tuning of the TSA, increasing the quality of cash management; estimate their fiscal resources and manage accumulated reserves; and (iii) improving and streamlining the • Enhancing the Government’s budget analysis capacity, primarily by developing a consolidated M&E budget approval process. The Government has an ongoing program to address the financial management system that integrates financial and non-financial data in accordance with PBB; issues and challenges at the sub-national level, including capacity building, developing new IT systems and • Building the procurement management function as well as the capacity of procurement committee streamlining procedures. members based on a comprehensive human resources development strategy, and by improving transparency in the procurement process, for example, through the development of a national There is also strong demand for more accountable and transparent government. Following the e-procurement system; elections in 2009, the President created a special unit, UKP4 (Presidential Working Unit for Supervision and • Ensuring relevant and reliable financial reporting by strengthening human resources in government Management of Development), to reduce bottlenecks — including governance related issues — and to accounting and reporting, especially at the line ministry level and with regards to accrual accounting; expedite the delivery of government programs. Among its priorities is the acceleration of civil service and • Strengthening the internal audit function in the country by rolling out the treasury payment system tax reforms. The Law on Access to Public Information has also been passed and Anti-Corruption Courts have as planned, implementing the COSO framework, conducting capacity building for government been created in seven provinces under the auspices of the Supreme Court that support the high profile Anti- inspectorate auditors, especially with a view to risk-based audit, and identifying an agency to assume Corruption Commission (KPK). coordination of the internal audit function; • Detailing and implementing BPK’s strategic plan 2011-15 for improving the quality of external audit Development-partner support is another important factor in bolstering the PFM reform agenda. The reports; Government works closely with the Bank and development partners, particularly those contributing to a PFM • Continuing civil service reform in the MoF in the context of the second chapter of the national MDTF, along with significant support from the Australian Government. bureaucracy reform initiative; • Addressing constraints in PFM at the sub-national level by (i) providing timely estimates from the sectoral ministries of revenue-sharing transfers; (ii) building the capacity of sub-national governments to better estimate their fiscal resources and manage accumulated reserves; and (iii) improving and streamlining the budget approval process; and • Developing a coherent and well-focused strategy for corruption prevention within the state administration. 56 57 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators Annex A: Sources of Information and Main References • Law 6/1983, Law 16/2000 & Law 28/2007 on General Provisions & tax Procedures Indicator Specific Information Sources Used • Law 7/1983 & Law 17/2000 on Income tax • Law 8/1983 & Law 18/2000 on Value Added Tax & sales tax for Luxury 1. Aggregate expenditure out-turn compared to LKPP 2004-2009 Goods original approved budget • Law 12/1994 on Land & Building Tax 2. Composition of expenditure out-turn compared • Tax Brief (August 2007) by Center for Investment & Business Advisory - LKPP 2004-2009 KADIN to original approved budget 13. Transparency of taxpayer obligations and • Briefing Material prepared by KADIN for IMF - FAD Mission liabilities 3. Aggregate revenue out-turn compared to original • Aide Memoire - Improving VAT Administration. IMF - FAD - January 2007. LKPP 2004-2009 approved budget • Discussion Notes with DG Tax. • 2007 Taxpayers Education Program from DG Tax 4. Stock and monitoring of expenditure payment • Law 14/2002 LKPP 2004-2009 arrears • Discussion with the Tax Court and DG Tax on the statistical data of cases PMK PMK 91/2007 (Chart of Accounts) handled by the Court. • DG Tax Circular Letter (SE)-37/PJ/2007 dated 14 August 2007 on Standard 5. Classification of the Budget Operating Procedures for filing an objection within the DG Tax. IMF FAD/World Bank Report on Budget Reform Strategy Priorities IMF Fiscal ROSC 2005 • DG Tax Circular Letter (SE)-37/PJ/2007 dated 14 August 2007 on Standard Nota Keuangan 04, 05, 06 Operating Procedures for registering TIN LKPP 04,05,06 • Presentation on Satisfaction Survey - Medium tax Payers’ office, March 6. Comprehensiveness of information included in 2007. AC Nielson. budget documentation • Discussion Notes with the Indonesian Chamber of Commerce. IMF FAD/World Bank Report on Budget Reform Strategy Priorities 2007 14. Effectiveness of measures for taxpayer registration IMF Fiscal ROSC 2005 • Discussion with the DG Tax on the TIN Database. and tax assessment • Summary of Type of Penalties Applied In Accordance to the Existing Laws 7. Extent of unreported government operations LKPP 2009 (Internal Document from the DG Tax). • Summary of Planning and Monitoring Mechanism of Tax Audit and Fraud Law 33/2004 on Fiscal Balance Investigation Program from DG Tax. PP 3/2004 on General Allocation Grant • Risk Management Model of DG Tax for Risk Based Audit Approach. Nota Keuangan 05/06/07/08 8. Transparency of Inter-Governmental Fiscal Relations • Reconciliation Process of Tax Revenue Public Expenditure Review 2007 • Statistical Data of Tax Revenue (5 years) and Arrears (3 years) from DG Tax Eckardt/Shah 2007 Local Government Finance and Organization in Indonesia, 15. Effectiveness in collection of tax payments • Discussion Note with Directorate of Cash Management in: Local Government Finance and Organization in Developing Countries. • Discussion Notes with DG Tax • Report: Update on Govt. Financial reports - Richard Evans. Sept 2007. Nota Keuangan 2008 9. Oversight of aggregate fiscal risk from other public sector entities. • Law 13/2005 on Government Budget for 2006 IMF FAD Technical Assistance Report Statement of Fiscal Risks 2007 • Law 14/2006 on Revision of Government Budget for 2006 LKPP 04, 05, 06. • Law 36/2004 on Government Budget for 2005 Nota Keuangan APBN 2004 and UU 28/2003 • Law 1/2005 on Revision of Law 36/2004 on Government Budget for 2005 Nota Keuangan APBN 2005 and UU 9/2004 • Law 9/2005 on Second Revision of Law 36/2004 on Government Budget 10. Public access to key fiscal information Nota Keuangan APBN 2006 and UU 13/2005. for 2005 16. Predictability in the availability of funds for • Law 28/2003 on Government Budget for 2004 commitment of expenditures IMF FAD/World Bank Report on Budget Reform Strategy Priorities 2007 • Law 35/2004 on Revision of Law 28/2003 on Government Budget for 2004 Open Budget Index Indonesia 2006 • 2006 Central Government Financial Report (audited) • Finance Minister regulation No 134/PMK.06/ 2005 on Guidelines for Law 17/2003 on State Finances Budget Execution 11. Orderliness and participation in the annual • Circular Letter of Director General Treasury No. SE 02/PB/2006 budget process Public Expenditure Review 2007 • Interview with MPW-Head of Finance Bureau IMF FAD/World Bank Report on Budget Reform Strategy Priorities 2007 • 2006 Central Government Financial Report (audited) Law 17/2003 on State Finances • Draft SOP on Debt Management PP 21/2004 on Budget Request Templates • BPK’s Audit Report on Central Government Internal Control as at 31 Nota Keuangan APBN 2004 and UU 28/2003 December 2006 Nota Keuangan APBN 2005 and UU 9/2004 • Government Regulation 76/2005 on the accountability and publication of Nota Keuangan APBN 2006 and UU 13/2005 SUN Management 12. Multi-year perspective in fiscal planning, Nota Keuangan APBN 2008 • Government Regulation 39/2007 on Government funds in commercial expenditure policy and budgeting 17. Recording and management of cash balances, banks Public Expenditure Review 2007 debt and guarantees • Joint Regulation of Minister of Finance and Minister of National Planning IMF FAD/World Bank Report on Budget Reform Strategy Priorities 2007 regulation 185 /KMK.03 /1995 and KEP.031 /KET/5/1995 (which was Indonesia: PFM Reforms - Next Steps (IMF Sept. 2003) amended by Joint Regulation No 459 / KMK. 03/1999 Indonesia – Action Plans to Improve Public Expenditure Management (IMF April • Finance Minister Regulation 77/PMK.06/2006 on SUN Management Report 2003). • Press release from Ministry of Finance - 20 Aug. 2007 on Govt. bank accounts • Indonesia: Capacity Building to support Treasury Modernization & related Reforms: (IMF 2004) 58 59 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators • Interview with the MOH-General Affairs Bureau • Law No. 17/2003 • Interview with MOF-IG • Law No. 25/2004 18. Effectiveness of payroll controls • Parliament website : 27. Legislative scrutiny of the annual budget law • Government Regulation No. 21/2004 (http://www.dpr.go.id/buletinparlementaria/berita_isi.php?id=106&ed=12) • Decree of Finance Minister No. 54/PMK.02/2005 • MoF Decree No. 104/PMK.02/2010 • Govt Regulation No. 80/2003. • MPH Guidelines for Procurement Process. 28. Legislative scrutiny of external audit reports • Law No. 15/2004 • Minister of Public Health Decree No. 323/2005 on Public Complaint and Handling for Procurement Process • Statistical Data of Direct Budget Support Funds Projections and Actual • Procurement Data for Contract above Rp 50 million from MoH, MoNE and Disbursement for 2004, 2005 and 2006 (From Directorate of Debt D-1 Predictability of Direct Budget Support MPW Management). • Minister of Public Health Decree No. 604/2005 on Procurement Audit. • Data of the Disbursement Schedules of the Direct Budget Support. 19. Competition, value for money and controls in • Discussion Notes with MoNE and MoH on the Procurement Process procurement including complaints and handling. • Discussion Notes with Directorate of Debt Management on Donor’s • Discussion Notes with MoNE on the Procurement Process including D-2 Financial information provided by donors for budg- Annual Work Plan (AWP), Donor’s Reporting format, schedules and complaints and handling. eting and reporting on project and program aid frequency. • Discussion notes with Bappenas on the implementation of the Govt. • Government Regulation No. 2/2006; Regulation No. 80/2003 • Snapshot Assessment of Indonesia’s Public Procurement System– OECD / • Government Regulation No. 2/2006; DAC Baseline Indicator Benchmarking Methodology. (June 2007) • Statistical Data on the Direct Budget Support (three years) D-3 Proportion of aid that is managed by use of national • Statistical Data on Government Budget (2005-07) procedures • MoF, with the letter S-551/MK.06/2005 informed that 2006 DIPA was • Discussion Notes with Bappenas and the State Secretariat on the process issued to all line ministries on January 2006 and recording of the external loans. 20. Effectiveness of internal controls for non-salary • 2006 Central Government Financial Report (audited) expenditure • President Decree No. 80/2003 on Procurement of Goods and Services • BPK Audit Reports on Central Government Financial Reports (2005, 2006) 21. Effectiveness of internal audit • Government Regulation (Peraturan Pemerintah) No. 60/2008 • Ministry of Finance Regulation No 59/PMK.06/2005 on Central Government Accounting System 22. Timeliness and regularity of accounts • DG Treasury Regulation No. 36/2008 reconciliation • DG Treasury Regulation No. 47/2009 • DG Treasury Regulation No. 62/2010 • 2008 Central Government Financial Report (audited) 23. Availability of information on resources received • MoF regulation no. 59 year 2004 by service delivery units • MoF regulation no 171 year 2007 • Law 17/2003 on State Finance • Ministry of Finance Regulation No. 59/PMK.06/2005 on Central Government Accounting System • 2006 First Semester Budget Realization report 24. Quality and timeliness of in-year budget reports • Treasury Circular No. 66/PB/2006 on reconciliation accounting records at the KPPN and DG Treasury’s Regional Office levels • Sample of Accounting Records Reconciliation Report (BAR-Berita Acara Rekonsiliasi) : Temporary and Final BARs • Law No. 17/2003 on State Finance • Law No. 1/2004 on State Treasury 25. Quality and timeliness of annual financial • PP No. 71/2010 statements • BPK-RI Audit Reports for 2008,2009 • Audit report date data from BPK-RI Audit Reports 2008,2009 • Letter from the President to DPR RI No. R-37/Pres/06/2007 • Law No. 15/2004 on Audits of the State Finance Management and Accountability • Law No. 15/2006 on the BPK Roles and Responsibilities • Decree of the BPK Secretary General No. 34/2007 and No. 39/2007 on the BPK Organizational Structure. 26. Scope, nature and follow-up of external audit • Law No. 1/2004 on State Treasury • Statistical data of BPK audited entities (2004-06). • BPK Interim Audit Report (HAPSEM) 2006 • Statistical data on follow up of the audit findings for year 2005 and 2006. • Statistical data on the submission of audit report (audited LKPP) to Parliament (DPR). 60 61 Repeat Public Expenditure Repeat Public Expenditure and Financial Accountability (PEFA) Report and Financial Accountability (PEFA) Report & Performance Indicators & Performance Indicators Annex B: Deviations by Budget Heads Table 4 Data for year = 2009 Table 1 - Fiscal years for assessment Year 1 = 2007 functional head budget actual difference absolute percent Year 2 = 2008 SUBSIDI DAN LAIN LAIN 292,401,149,046,000 228,030,818,035,053 -64,370,331,010,947 64,370,331,010,947 22.0% Year 3 = 2009 DEPARTEMEN PENDIDIKAN NASIONAL 62,098,268,498,000 59,558,589,918,948 -2,539,678,579,052 2,539,678,579,052 4.1% DEPARTEMEN PEKERJAAN UMUM 34,987,435,382,000 40,082,677,858,082 5,095,242,476,082 5,095,242,476,082 14.6% Table 2 DEPTARTEMEN PERTAHANAN 33,667,629,267,000 34,332,488,718,146 664,859,451,146 664,859,451,146 2.0% Data for year = 2007 KEPOLISIAN NEGARA REPUBLIK INDONESIA 24,816,713,972,000 25,633,304,823,750 816,590,851,750 816,590,851,750 3.3% DEPARTEMEN AGAMA 26,656,600,559,000 24,957,591,909,951 -1,699,008,649,049 1,699,008,649,049 6.4% functional head budget actual difference absolute percent DEPARTEMEN KESEHATAN 20,273,526,562,000 18,001,531,831,232 -2,271,994,730,768 2,271,994,730,768 11.2% SUBSIDI DAN TRANSFER LAINNYA 134,939,800,000,000 179,654,408,301,489 44,714,608,301,489 44,714,608,301,489 33.1% DEPARTEMEN PERHUBUNGAN 16,977,783,257,000 15,557,263,504,160 -1,420,519,752,840 1,420,519,752,840 8.4% DEPARTEMEN PENDIDIKAN NASIONAL 44,058,392,664,000 40,475,796,860,038 -3,582,595,803,962 3,582,595,803,962 8.1% DEPARTEMEN KEUANGAN 15,369,624,126,000 12,816,020,012,804 -2,553,604,113,196 2,553,604,113,196 16.6% DEPTARTEMEN PERTAHANAN 32,640,058,467,000 30,611,147,947,963 -2,028,910,519,037 2,028,910,519,037 6.2% DEPARTEMEN DALAM NEGERI 8,702,202,952,000 8,315,123,155,522 -387,079,796,478 387,079,796,478 4.4% DEPARTEMEN PEKERJAAN UMUM 24,213,446,000,000 22,769,463,681,901 -1,443,982,318,099 1,443,982,318,099 6.0% DEPARTEMEN PERTANIAN 8,170,774,535,000 7,676,466,027,262 -494,308,507,738 494,308,507,738 6.0% BELANJA LAIN-LAIN 26,745,200,000,000 20,756,907,712,830 -5,988,292,287,170 5,988,292,287,170 22.4% DEPARTEMEN ENERGI DAN SUMBER DAYA MINERAL 6,745,135,328,000 6,577,243,585,812 -167,891,742,188 167,891,742,188 2.5% KEPOLISIAN NEGARA REPUBLIK INDONESIA 20,041,477,955,000 19,922,419,927,573 -119,058,027,427 119,058,027,427 0.6% DEPTARTEMENT LUAR NEGERI 5,221,033,652,000 4,106,844,446,326 -1,114,189,205,674 1,114,189,205,674 21.3% DEPARTEMEN KESEHATAN 17,236,284,411,000 15,530,611,914,709 -1,705,672,496,291 1,705,672,496,291 9.9% MAHKAMAH AGUNG 5,473,085,231,000 3,950,543,643,721 -1,522,541,587,279 1,522,541,587,279 27.8% DEPARTEMEN AGAMA 13,799,301,100,000 13,298,944,935,016 -500,356,164,984 500,356,164,984 3.6% DEPARTEMEN HUKUM DAN HAK ASASI MANUSIA 4,391,401,465,000 3,903,936,998,086 -487,464,466,914 487,464,466,914 11.1% DEPARTEMEN PERHUBUNGAN 10,467,787,919,000 9,070,420,840,209 -1,397,367,078,791 1,397,367,078,791 13.3% DEPARTEMEN SOSIAL 3,427,220,777,000 3,255,088,649,454 -172,132,127,546 172,132,127,546 5.0% DEPARTEMEN KEUANGAN 9,607,714,400,000 6,999,198,838,888 -2,608,515,561,112 2,608,515,561,112 27.2% 9,998,812,800,000 BADAN REHABILITASI DAN REKONSTRUKSI NAD - NIAS 6,532,842,711,896 -3,465,970,088,104 3,465,970,088,104 34.7% DEPARTEMEN KELAUTAN DAN PERIKANAN 3,447,593,645,000 3,205,574,324,396 -242,019,320,604 242,019,320,604 7.0% DEPARTEMEN PERTANIAN 8,789,618,068,000 6,532,289,973,846 -2,257,328,094,154 2,257,328,094,154 25.7% 2,828,110,011,000 DEPARTEMEN TENAGA KERJA DAN TRANSMIGRASI 2,837,780,616,754 9,670,605,754 9,670,605,754 0.3% 6,458,155,483,000 DEPARTEMEN ENERGI DAN SUMBER DAYA MINERAL 5,141,583,349,400 -1,316,572,133,600 1,316,572,133,600 20.4% BADAN PERTANAHAN NASIONAL 2,858,376,088,000 2,121,211,795,312 -737,164,292,688 737,164,292,688 25.8% DEPARTEMEN HUKUM DAN HAK ASASI MANUSIA 4,039,943,898,000 3,574,325,082,003 -465,618,815,997 465,618,815,997 11.5% DEPARTEMEN KEHUTANAN 2,616,925,735,000 2,110,183,245,125 -506,742,489,875 506,742,489,875 19.4% DEPTARTEMENT LUAR NEGERI 5,447,188,302,000 3,376,213,508,269 -2,070,974,793,731 2,070,974,793,731 38.0% 21 (= sum of rest) 6,928,231,915,325 -2,334,083,721,814 -9,262,315,637,139 9,262,315,637,139 133.7% DEPARTEMEN DALAM NEGERI 3,839,096,054,000 3,118,191,893,355 -720,904,160,645 720,904,160,645 18.8% total expenditure deviation 588,058,822,003,325 504,696,199,378,082 -83,362,622,625,243 83,362,622,625,243 14.2% DEPARTEMEN SOSIAL 3,347,121,600,000 2,766,030,552,571 -581,091,047,429 581,091,047,429 17.4% composition variance 588,058,822,003,325 504,696,199,378,082 96,535,349,394,707 16.4% MAHKAMAH AGUNG 3,091,726,309,000 2,663,597,451,234 -428,128,857,766 428,128,857,766 13.8% 2,882,613,339,000 DEPARTEMEN TENAGA KERJA DAN TRANSMIGRASI 2,451,144,572,970 -431,468,766,030 431,468,766,030 15.0% DEPARTEMEN KELAUTAN DAN PERIKANAN 3,265,878,510,000 2,343,111,336,492 -922,767,173,508 922,767,173,508 28.3% 21 (= sum of rest) 8,081,527,397,000 11,676,568,223,268 3,595,040,826,268 3,595,040,826,268 44.5% Table - Results Matrix total expenditure 392,991,144,676,000 409,265,219,615,920 16,274,074,939,920 16,274,074,939,920 4.1% for PI-1 for PI-2 composition variance 392,991,144,676,000 409,265,219,615,920 80,345,223,315,594 20.4% variance in excess of year total exp. deviation total exp. variance Table 3 total deviation Data for year = 2008 2007 4.1% 20.4% 16.3% functional head budget actual difference absolute percent 2008 27.9% 50.1% 22.2% SUBSIDI 97,874,575,400,000 275,291,454,173,929 177,416,878,773,929 177,416,878,773,929 181.3% 2009 14.2% 16.4% 2.2% BELANJA LAIN-LAIN 72,243,515,768,000 70,842,005,534,705 -1,401,510,233,295 1,401,510,233,295 1.9% DEPARTEMEN PENDIDIKAN NASIONAL 49,701,004,473,000 43,546,943,727,032 -6,154,060,745,968 6,154,060,745,968 12.4% DEPTARTEMEN PERTAHANAN 36,398,848,096,000 31,348,665,330,913 -5,050,182,765,087 5,050,182,765,087 13.9% __________________________ DEPARTEMEN PEKERJAAN UMUM 36,108,741,658,000 30,670,015,528,197 -5,438,726,129,803 5,438,726,129,803 15.1% KEPOLISIAN NEGARA REPUBLIK INDONESIA 23,347,438,539,000 21,099,959,792,193 -2,247,478,746,807 2,247,478,746,807 9.6% 1 To assess the performance of a country’s procurement system on the basis of PI-19 could result in a rating that may be misleading and may DEPARTEMEN KESEHATAN 19,704,176,592,000 15,871,890,053,677 -3,832,286,538,323 3,832,286,538,323 19.4% result potentially in an incorrect perception as to the status of a country’s procurement system. DEPARTEMEN AGAMA 17,593,070,897,000 14,874,691,016,841 -2,718,379,880,159 2,718,379,880,159 15.5% 2 Detailing procedures for payment of salary and non salary expenditures DEPARTEMEN PERHUBUNGAN 16,687,042,697,000 13,477,147,372,545 -3,209,895,324,455 3,209,895,324,455 19.2% DEPARTEMEN KEUANGAN 16,118,678,621,000 12,051,098,275,474 -4,067,580,345,526 4,067,580,345,526 25.2% 3 BPK FY2010 first semester audit report Page 181 par.6 7,000,401,140,000 BADAN REHABILITASI DAN REKONSTRUKSI NAD - NIAS 7,619,073,816,152 618,672,676,152 618,672,676,152 8.8% DEPARTEMEN PERTANIAN 9,195,340,768,000 7,203,909,419,940 -1,991,431,348,060 1,991,431,348,060 21.7% 5,964,200,507,000 DEPARTEMEN ENERGI DAN SUMBER DAYA MINERAL 5,442,547,453,718 -521,653,053,282 521,653,053,282 8.7% DEPARTEMEN DALAM NEGERI 6,196,362,230,000 5,302,973,009,469 -893,389,220,531 893,389,220,531 14.4% MAHKAMAH AGUNG 6,454,081,211,000 4,001,154,231,551 -2,452,926,979,449 2,452,926,979,449 38.0% DEPARTEMEN HUKUM DAN HAK ASASI MANUSIA 4,846,106,983,000 3,845,901,422,900 -1,000,205,560,100 1,000,205,560,100 20.6% DEPTARTEMENT LUAR NEGERI 5,614,609,220,000 3,706,969,104,917 -1,907,640,115,083 1,907,640,115,083 34.0% DEPARTEMEN SOSIAL 3,716,074,792,000 3,213,526,468,376 -502,548,323,624 502,548,323,624 13.5% DEPARTEMEN KEHUTANAN 4,284,947,151,000 3,174,736,194,056 -1,110,210,956,944 1,110,210,956,944 25.9% DEPARTEMEN KELAUTAN DAN PERIKANAN 3,353,358,939,000 2,398,872,816,547 -954,486,122,453 954,486,122,453 28.5% 21 (= sum of rest) 13,643,479,746,000 8,429,460,306,839 -5,214,019,439,161 5,214,019,439,161 38.2% total expenditure deviation 456,046,055,428,000 583,412,995,049,971 127,366,939,621,971 127,366,939,621,971 27.9% composition variance 456,046,055,428,000 583,412,995,049,971 228,704,163,278,191 50.1% 62 63 Repeat Public Expenditure and Financial Accountability (PEFA) Report & Performance Indicators 64