This work stream aims to undertake a feasibility study on the opportunities, limitations, and possible strategies to clarify roles and functional assignments across various central departments and between levels of government. The study is conducted in cooperation between the Ministry of Home Affairs, Bappenas, GTZ(ASSD), and DSF.

A comprehensive study report clearly maps out the functional assignment issues faced by the Government of Indonesia has been produced by an international consultant. In supporting the study, a national consultant from FISIP-UI has produced a desktop comparative study on assignment of government function systems from ten countries.

The later study titled Perbandingan Sistem Pembagian Urusan Pemerintahan Antara Pemerintah Pusat dan Daerah Otonom (in Indonesian language). The Functional Assignment study results were presented to and discussed with the donor community at DSF in November 2007. This has also been presented and discussed with the group of experts supporting the revision of Law 32/2004 who were invited by the Ministry of Home Affairs, on November 26, 2007 at Hotel Alila, Jakarta.

It is hoped that the report will provide valuable inputs for the formulation processes of revision law 32/2004 and the implementation of the government regulation on assignment of functions (PP 38/2007).

Documents produced within this work stream are available for download from the links below:

• Exploring Reform Options in Functional Assignments
  
• Pembagian Urusan Pemerintahan: Penjajakan Opsi Untuk Penyempurnaan (Temuan Awal dan Implikasi)
• Functional Assignment Study Preliminary Findings and Implications
• Assignment of Governmental Functions in Indonesia: Reforms and Prospects
• Perbandingan Sistem Pembagian Urusan Pemerintahan antara Pemerintah Pusat dan Daerah Otonom

Since the issuance of Government Regulation 65/2005 on Guidance for Preparing and Application of Minimum Service Standards (MSS) and followed by Minister of Home Affairs Decree 5/2007 on technical instruction for the formulation and decision of MSS, the ministries have started to develop minimum service standards for each sector.

GTZ has long supported the development of minimum service standards and, in cooperation with DSF, is supporting the Ministry of Health and the Ministry of National Education to develop a number of consistent and clear service standards. GTZ and the DSF also support the ministries to detail the potential costs of realizing MSS in health and education sectors and to develop simple methods that regional governments can adopt to determine the cost implications of various standards.

DSF, assisted by University of Indonesia’s LPEM department, has conducted empirical study to assess data availability, with a special focus on health issues, and to track potential MSS. An alternative method to calculate the cost of potential MSS and to integrate MSS into planning and budgeting has also been developed based on the field data and practices.

The results were presented and reviewed during the workshops in Kupang in October 2007 and Yogyakarta in November 2007. Participants showed a keen interested in the method and seeked further cooperation with DSF to facilitate the regions on implementing such method.

Another study publication titled ”Minimum Service Standards in Indonesia’s primary school education: Inputs, Outputs, Costs, and Efficiency” has been contributed by a DSF senior advisor in December 2007.

A roundtable discussion on “Costing, Financing, and Monitoring Improvements in Service Delivery” was jointly conducted by the Ministry of Home Affairs, the Ministry of Finance, GTZ (ASSD), CIDA (GRSII) and DSF, with the support from the University of Indonesia in March 2008.

Further information can be found in the following documents:

• Pengintegrasian SPM kedalam Anggaran di Pemerintah Daerah: Seberapa Jauh Hal ini Bisa Dilakukan?
• Menentukan besar anggaran untuk pelaksanaan SPM: Mungkinkah?(presented in the Roundtable Discussion :Perhitungan Biaya dan Pembiayaan untuk Penyediaan Pelayanan Publik dan Standar Pelayanan Minimal, Hotel Borobudur, Jakarta 25 March 2008)
• Report on the Results of the Roundtable Discussion on Costing, Financing, and Monitoring Improvements in Service Delivery, March 25, 2008 by Prof. Bambang Brodjonegoro, Dr. Robert Simanjuntak, Dr. Raksaka Mahi, and Dr. Suahasil Nazara
• Minimum Service Standard in Indonesian Primary School Education: Inputs, Outputs, Cost and Efficiency
• The Cost of Public Primary Education in Indonesia: A Stochastic Frontier Analysis

One of the essential purposes of decentralization is to improve provision of public service delivery. The GOI has made great efforts to encourage regional governments to deliver better services to the public by, among others, defining minimum service standards, promoting one stop services, and providing premium services (pelayanan prima). Some regional governments have also initiated provision of service delivery based on local needs in a transparant and effective manner.

DSF supports the GOI, primarily the Director General of Public Administration (Ditjen. PUM), in developing a blue print for rationalizing and strengthening the role of different types of local service providers, including BUMD, BLUD, and PT. DSF will also work with at least two local governments on using service contracts between local governments and service providers—such as PDAM, local public health clinics (puskesmas), and schools—and outsourcing service deliveries to private organizations.

DSF has started to develop such concept of provision of service with its partner institutions.. Nevertheless some assesments have been done by the Hickling’s consultants.

To learn more about this work stream, please refer to the following documents:

• Inception Reports: Alternative Mechanism for Service Delivery
• Theory and Practice: Alternative Mechanism for Service Delivery
• Initial Assessment of the Main Regulatory Instruments of Alternative Mechanisms for Service Delivery

Ever since Law 22/1999 came into effect in 2001 until early 2008, 179 regions have been formed, comprising of seven provinces, 141 districts and 31 cities. Many more proposals for the establishment of new regions are still in the pipeline.

There are many arguments for establishment of new regions. Among others, such move will allow provision of better services, bring decision making processes closer to people, and enable better regional economic development. The process, however, is often faced with various on the ground challenges, power play among the political elites. Appropriate procedures and application criteria therefore need to be put in place based on practice.

DSF, through its implementing agencies RTI and UNDP, aims to assist the government to develop and implement an evaluation process for newly created regions that is agreed upon by all stakeholders involved. This includes the carrying out of a benefit/cost assessment of the creation of new regions or the splitting of a region, as well as the identification of improved processes and methodologies for such creation, which includes the proposal approval processes, general methods in proposal’s administrative review, and indicators to determine the proposal’s viability.

DSF bilateral discussions with direct partners, such as UNDP and Bappenas, DRSP/RTI with DPD, MoHA and DPOD, and the World Bank and MoF, have run effectively. Numbers of studies have been conducted and reports have been produced, including:

• Case studies report on investigating socio-political impacts of establishment of new regions.
• Studies report to estimate national and sub national fiscal costs and benefits of establishment of new regions.
• Report on comparative case studies of territorial reform in Ghana, Nigeria, and Pakistan.

DSF study teams was given the opportunity to present the preliminary findings to the Working Group 1 of DPOD on 31 July 2007. This led to more discussions on the formulation of guidelines on monitoring new regions and the revision of government regulation in terms of its criteria for territorial reform.

DSF, in collaboration with Percik Foundation and DRSP, has also conducted three focus group discussions (FGDs) on the establishment of new regions and the revision of Law 32/2004, which involved government officials, civil society and some team members from universities in selected regions of Kendari (November 2007) as well as Singkawang and Medan (January 2008). The FGDs and study results have contributed to the process of formulating the revision of Law 32/2004.

Main documents produced within this work stream can be downloaded from the links below:

• Territorial Restructuring: Country Case Studies
• Proses dan Implikasi Sosial-Politik Pemekaran: Studi Kasus di Sambas dan Buton
• Cost and Benefit of New Region Creation in Indonesia
• Costs and Benefits of Pemekaran: Summary of Finding
• International Experiences in Territorial Reform: Implications for Indonesia
• Studi Evaluasi Pemekaran Daerah
• Territorial Administration in Indonesia: a Review of Regulations
• Summary Report Pemekaran Wilayah Kabupaten/Kota
• Input Paper Pemekaran Wilayah Kabupaten/Kota
• Usulan Perubahan Kebijakan Penataan Daerah

Monitoring and evaluation process requires complete, accurate and up-to-date data. The existence of regional data is an important element for development planning, provision of basic services, such as health and education, and reporting of regional government to central government.

DSF support in this work stream involves a number of sub-activities engaging Indonesia’s Central Statistics Bureau (Biro Pusat Statistik-BPS) at both the central and sub-national levels in a series of activities designed to improve the quantity and quality of sub-national statistics and to formulate policy recommendations on data transfer mechanisms.

These activities include:

• Assessing reporting requirements of the main central departments (many of which seem redundant) and the burden of such reporting at the local level (which local officials complain is onerous).
• Examining the degree to which local populations are satisfied with health, education, and administrative service delivery and analyzing local willingness to pay for higher quality services. Results from this activity will serve as a baseline against which future progress in local service delivery might be consistently measured.
• Bringing the World Bank sub-national fiscal/financial/service outcome database into the DSF domain to be used by both donors and government.

DSF advisors have presented data derived from the Governance and Decentralization Survey (GDS2), related to health and education sectors, showing satisfaction with education and health services. GDS and sub-national fiscal bases will be put online so more clients can use the data and the analyzed information.

Surveys have been conducted on local government’s reporting requirements as well as laws and regulations on sub-national statistics conducted by DSF implementing agency, Lembaga Demography University of Indonesia. Preliminary findings have been presented at DSF before the stakeholders in December 2007 and presented at the Ministry of Home Affairs early May 2008.

DSF, the World Bank, and the implementing agency, Hickling Coorporation, are to assess the availability of the data and to pilot a sub-national data transfer mechanism, especially in the health, education, public works, agriculture and public administration sectors. Indicators used in the assessment include the minimum service standards, MDG and the capacity of regional government in implementing regional autonomy as dictated in Government Regulation 6/2008.

The assessment will be jointly conducted in selected regions by DSF, ADB supported project LGPMS and UNDP, in coordination with the Ministry of Home Affairs.

Documents within this work stream can be downloaded from the links below:

• Pelayanan Kesehatan dan Pendidikan di Provinsi Nusa Tenggara Timur (NTT): Temuan GDS Tahun 2006
• Support to Data for Monitoring & Evaluation (Presentation DSF/WB to MoHA)
• Support to Data for Monitoring & Evaluation (Presentation DSF/WB to MoHA in Bahasa Indonesia)
• Determining Citizen Satisfaction with Local Public Education in Indonesia: the Significance of Actual Service Quality and Governance Conditions
  
• Citizen Satisfaction with Local Health and Education Services in Indonesia: Results from the Governance and Decentralization Survey 2
• Regulations on Sub-National Statistics and Reporting: Preliminary Findings
• The Cost of Public Primary Education in Indonesia: A Stochastic Frontier Analysis

This work stream aims to assist the government in the preparation, socialization, and implementation of its Law on Disaster Management and other pertinent regulatory instruments and procedures.

DSF together with working partner UNDP supported The National Coordination Agency (Badan Koordinasi Nasional-Bakornas) in preparing recommendation on implementing regulations for disaster management law. This work has been completed in October 2007.

In cooperation with Bappenas and regional governments, DSF conducted workshops and focus group discussions regarding the development of disaster reduction action plans in two provinces (Central Java and Yogyakarta) and three districts (Bantul, Gunung Kidul and Kulon Progo), which have been completed in November 2007.

Documents produced within this work stream could be downloaded from link below:

• Laporan Kajian Perumusan Rekomendasi bagi Penyusunan Peraturan Pelaksanaan Undang-Undang No.24 Tahun 2004 tentang Penanggulangan Bencana (UU PB)
• Pertemuan Pakar Menggagas Penyusunan Peraturan Pelaksanaan UU 24/2007 yang Akomodatif terhadap Kepentingan Daerah (Kebijakan Otonomi, Kelembagaan & Anggaran)
• Beberapa Usulan Terkait dengan Pelaksanaan Undang-Undang Nomor 24 Tahun 2007 tentang Penanggulangan Bencana: Perspektif Desentralisasi dan Otonomi Daerah
• DSF Presentation on October 25, 2007 (Budgeting for Disaster Management in Indonesia)
• DSF Presentation on October 25, 2007 (Institutional Arrangements)
• DSF Presentation on October 25, 2007 (Recommendations: Issues Related to Law 24/2007...)

Transfer to regions makes up a large share of the central government budget. Intergovernmental transfers comprise, most importantly, revenue sharing (tax and non-tax transfers), general purpose transfers (Dana Alokasi Umum-DAU) and specific purpose transfers (Dana Alokasi Khusus-DAK). In addition, there are also emergency grants (Dana Darurat), transfers derived from on-granting arrangements linked to donor finance, and a special autonomy transfer for Papua and Aceh.

Intergovernmental transfers dominate sub-national budgets. DAU is by far the most important transfer for local governments; it constitutes around two-third of total intergovernmental transfers. At the provincial level, shared taxes (property tax and personal income tax) and DAU are the most significant transfers; together they comprises about three-quarters of the total.

An important function of the transfer system is to fill the vertical fiscal gap created by the incongruent tax and expenditure assignment. In addition, the intergovernmental transfer system is to address horizontal fiscal imbalances, i.e. across sub-national governments at a particular level. DAU is the government’s main tool to encourage fiscal equalization among provinces and districts/cities separately. Most researches on DAU conclude that while it does succeed in equalizing fiscal across local governments to a certain extent, its performance could be much improved. DAK, which is a matching grant to support capital development in fiscally poor regions, while is still relatively small, is likely to become even more important in years to come. Despite this, there is a significant lack of clarity surrounding the objectives of DAK. One concern is that the grant will become fragmented across many sectors and regions.

This objective of this work stream is three-fold: (1) to improve the fiscal equalization of the intergovernmental transfer system, (2) to rationalize and better monitor the utilization of DAK, and (3) to incorporate performance incentives into the grant system.

A background study on incorporating incentives into intergovernmental transfers has been completed. The study covers issues on fiscal incentives and local performance, performance-based grants, and design of fiscal structure as incentive. Another study on Dana Perimbangan intercept has just started in March 2008 and is still on-going. Technical assistance for this work is also provided through contribution of the DSF senior advisors.

Documents produced within this work stream can be downloaded from the links below:

• Decentralized Service Delivery Performance in Indonesia
• Fiscal Incentives and Local Performance

Most borrowing by provinces, districts/cities, and PDAMs has been done through the central government on-lending mechanisms: the Regional Development Account (RDA) and the Subsidiary Loan Agreements (SLA). These borrowings are mostly used for public infrastructure.

There has only been a very small amount of borrowing from other financial institutions, such as regional development, state, or commercial banks. Most of these have been to assist provinces, regional governments, and PDAMs in cash flow management.

In the aggregate, borrowing by sub-national units from RDA and SLA has not been particularly significant. The amount of borrowing has varied significantly over time and, since the start of decentralization, it has been near zero.

Repayment of RDA and SLA loans has generally been weak. PDAM loans, which make up nearly two-third of the total, are substantially weaker than those of provinces and districts/cities. Arrears rates for PDAMs are 62 percent.

Arrangements concerning security of sub-national loans are problematic. According to law, sub-national governments are explicitly prohibited from pledging their revenues and/or assets to secure loans, except in the case of revenue bonds. In addition, sub-national governments may not guarantee the loans of third parties, including, in particular, their PDAMs. Finally, although the government has at its disposal a mechanism to encourage RDA and SLA loan repayment—the intergovernmental transfer intercept—it has so far chosen not to employ it.

The objectives of this work stream is to assist government to (1) diversify sub-national borrowing sources, (2) improve sub-national government and PDAM creditworthiness, (3) enhance security attendant to sub-national borrowing, and (4) develop better sub-national debt monitoring mechanism.

On going activities in this work stream include technical assistance on local government and PDAM’s debt restructuring and on bond finance to the government of DKI. In addition, a workshop on socialization of revenue bonds and an in-house training on project benefit-cost had been undertaken. Furthermore, this work stream is currently implementing activities related to the development and socialization of roadmap for local government insolvency.

Documents produced within this work stream could be downloaded from link below:

• Bond Market as a Source of Municipal Finance
• On-lending in Indonesia: Past Performance and Future Prospects

Tax revenues remain heavily centralized in Indonesia. It is typical across countries around the world for revenues to be less decentralized to lower level of governments than expenditures are. However, Indonesia would seem to be an extreme case in this regard. While property tax is a local tax across the vast majority of countries, for example, it is a central tax in Indonesia. The central government defines the tax bases, sets tax rates (across all property tax sectors) and administers the tax (with some assistance from local government on collections).

Currently, local government own-source revenue comprises local taxes, user charges and fees and various other types of revenue. The main local taxes include those on electricity, hotels, and restaurants. The most significant charges are those for health services provided by local public health clinics (puskesmas), the issuance of building permits, and public market fees. Provinces also have authority over a variety of taxes, charges, and other own-revenues. The most important taxes are those for motor vehicles—transfer of title and registration. The main user charges are for health, building permits and fees for the use of public assets.

Perhaps the most frequently mentioned phenomenon regarding post-decentralization taxation at the sub-national level concerns the creation of new taxes and charges. Local governments were given the authority to create their own taxes and charges and provinces were awarded the authority to create new user charges under government’s decentralization program. The conventional wisdom in Indonesia is that many of the newly established local revenues have proven to be economically harmful.

A reasonable tax assignment policy agenda over the medium term would be to (1) devolve authority over a significant local tax base to districts/cities for use in discerning increases in demand for public services (at the margin) and to encourage local accountability and (2) claw back sub-national government authority to create their own revenue instruments in order to reduce currently existing nuisance and harmful taxation.

The DSF plans to carry out a few rapid field assessment of local governments to assess the extent to which revision to Law 34/2000 (especially as related to the creation of new charges and taxes) are actually being implemented. At the moment, the DSF is supporting for APBD tax as well as other data entry.

Sub-national governments have saved a sizeable amount of the revenues at their disposal since the onset of decentralization. The amount of sub-national surplus fluctuated ever since, from just over 9 percent in 2001, down to a small deficit in 2003 to an increased to around 8 percent in 2005. As expected, not all sub-national governments have saved a similar amount of funds. Sub-nationals in resource rich areas have saved relatively morel while provinces and local governments in Java, for example, have saved comparatively less.

In 2006, the DAU pool of finance increased by 65 percent relative to the previous year’s amount. The rise was largely a function of more realistic central government budget assumptions for the price of oil. As the budgeted price of oil increases, planned domestic revenues (the pool of finance for DAU) also grow. The question naturally arises concerning the extent to which sub-national governments were able to spend such a large increase in revenue.

The objectives of this work stream are to (1) document in as detailed a manner as possible the buildup of sub-national reserves since decentralization, (2) determine the causes of large increases in surplus and reserves, (3) develop guidelines for the proper accumulation and use of reserves, and (4) develop mechanisms to better monitor surplus and reserves in real time.

Completed works within this work stream include database on sub-national reserves at provincial level 2001-2006 as well as related empirical examination of determinants of sub-national surplus at provincial level. In addition, case studies of underlying causes of high surpluses at district/city-level were also carried out.

Documents produced within this work stream could be downloaded from link below:

• A Note on the Indonesian Sub-National Government Surplus, 2001-2006
• End of Year Outstanding Regional Government Deposits in Commercial and Rural Banks by Province