Overview In the absence of accurate and timely data and analysis of public expenditure, it is very hard for policy-makers to plan and allocate public finances effectively. Even worse, the lack of accurate data may lead to erroneous policy decisions and the waste of valuable resources.While much progress has been made over the past decade in developing budget planning and financial reporting systems at both national and sub-national levels of government, effective public financial management also depends on high quality analysis of public spending trends. A crucial public expenditure challenge for Indonesia, given the large financial resources now being channeled to district governments, is to make such data available to policy-makers and stakeholders. At the national level of the public finance system, this means providing policy-makers with national spending diagnostics and recommendations based on public expenditure and sectoral spending analyses. Recent analysis has revealed some startling facts: for instance, total public health spending remains below 1.0 percent of GDP, the lowest level in the region, and less than half of what Thailand or Vietnam spend as a share of GDP. Similarly, Indonesia is still spending far too little on infrastructure. As a percentage of GDP, total (public and private) spending on infrastructure, at 4.1 percent in 2007, still remains well below the pre-crisis level of 7 percent of GDP. Only with such valuable insights into the true picture of current public spending in Indonesia can public finance professionals start to design policies to address inequities and achieve national poverty reduction objectives. In Indonesia, fragmented budgets and excessive focus on inputs are undermining the effectiveness of budget systems in policy-making and performance feedback.
The World Bank’s Role and Objectives The Public Finance and Regional Development team of the World Bank works with a consortium of key government ministries, Indonesian universities and other stakeholders, under the umbrella of the Initiative for Public Expenditure Analysis (IPEA), to produce high quality analysis of public expenditure in Indonesia. This close collaboration, especially with the Ministry of Finance, the National Development Planning Agency (Bappenas) and the Coordinating Ministry for the Economy, provides valuable public financial analysis in the form of Public Expenditure Reviews (PERs) at the national, sub-national and sector levels.
The IPEA, initially supported by the Dutch government, was subsequently expanded through the Indonesia Multi Donor Trust Fund on Public Finance Management Reforms supported by the Dutch government and the European Commission. About IPEA
In June 2004, the Government of Indonesia, local research institutions, and the international community (including the World Bank) launched the Initiative for Public Expenditure Analysis (IPEA) to meet the growing demand for public expenditure analysis and capacity-building in public financial management.
With the return of macroeconomic stability, the implementation of decentralization going more smoothly than anticipated and with significantly increased budgetary flexibility both now and going forward, this is an opportune time to explore options for the best possible use of Indonesia’s public resources. Demand for public expenditure analysis is likely to increase given :
(i) the growing role of fiscal policy in supporting economic growth, and
(ii) the changes the decentralization has brought about in the public finance architecture.
IPEA aims to formalize existing good practice and to provide an umbrella, as well as channel for the effective dissemination of existing activities, in the field of public expenditure analysis and public financial management. IPEA envisions
(i) the creation of products that are tailor-made and flexible to respond to the country’s needs,
(ii) the implementation of processes supported by key policy-makers, and
(iii) effective capacity-building while maintaining a clear focus on results and impact. | Management structure of IPEA
The establishment of a strong and committed steering committee is an important aspect in the success of the IPEA program. This committee held its first meeting on 6 April 2005 and has held meetings every two months since. It is composed of a core group consisting of representatives from the Coordinating Ministry for the Economy, the Ministry of Finance, Bappenas and the Public Finance and Regional Development team of the World Bank | Objectives of IPEA
The World Bank, through IPEA, has two main objectives with regard to strengthening Public Expenditure Analysis in Indonesia. - Move from good analytics to good policy: The World Bank’s Public Finance and Regional Development team, through the IPEA umbrella, seeks to provide a better understanding of actual government expenditures across administrative levels and sectors, and to feed the results of these analyses into the national debate on public expenditure for more accountable and service-oriented public services.
- Capacity-building for stakeholders in public expenditure: The Bank, through IPEA, aims to build the capacity of Indonesian institutions so that they can conduct expenditure analysis effectively on a regular basis and work towards reducing barriers between different government units. The main targets for capacity-building are central and local policy makers, including analysts, in government and parliament, as well as local research centers and other key stakeholders. In particular, IPEA aims to provide the following capacity-building support activities:
- Targeted training and technical assistance for staff at ministries, local government and research institutions.
- Secondment of ministry staff and /or think-tank staff to the World Bank for stints of several months to work on public expenditure analysis
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Outputs and OutcomesÂ
Analyzing public expenditure can be a powerful tool for government policy-making, and should become a natural and routine process. Many governments around the world, often with World Bank support, conduct PERs every couple of years. Since decentralization in 2001, the Indonesian government and the World Bank conducted a PER in 2003 and several more in-depth analyses of sectoral and regional expenditure. These include: Investing in Indonesia’s Education (World Bank, 2007); and the most recent Indonesia Public Expenditure Review 2007 ─ Making the Most of Indonesia’s New Opportunities (World Bank, 2007), together with several regional public expenditure analyses. (See the Supporting Decentralization Through Regional Autonomy section).
These products offer comprehensive information and recommendations in key sectors at national and sub-national levels on which policy decisions can be based. They can be accessed and downloaded below or from the "Publications" page. -- PUBLIC EXPENDITURE REVIEWÂ -- | Indonesia Public Expenditure Review 2007:
Making the Most of Indonesia’s New Opportunities | | |
The 2007 PER seeks to establish the facts about Indonesia’s public expenditures, presenting trends over time and analyzing the composition of public spending across sectors and levels of government. This report presents comprehensive information on key sectors, including spending from sub-national governments and state-owned enterprises in infrastructure. Based on these facts, the report asks: Who benefits from these substantial amounts of public resources? Are public expenditures efficient and equitable? Where are the expenditure gaps? Which regions are well-endowed and which are lagging behind? In addition, this report also tries to respond to key concerns that are in the minds of many ordinary Indonesians and friends of Indonesia, such as:
| 1. | Can Indonesia afford to spend more? | | 2. | Are the current levels of education and health spending sufficient? | | 3. | How to revitalize infrastructure investment, and which sectors are the priorities? | | 4. | Why is it so difficult to disburse funds through the government budget system? | | 5. | How unequal is Indonesia and how should fiscal transfers be structured to address disparities? |
This report addresses seven critical expenditure areas. The first two chapters discuss how much money is available to the government and how it is allocated across sectors and levels of government. The following three chapters focusing on education, health, and infrastructure analyze how resources are currently allocated within these critical sectors and how effectively they are used. The final two chapters highlight institutional and cross-cutting issues for effective public expenditure management and improved intergovernmental fiscal relations.  Â Download the Full Report (english)Â  | Â Download the Full Report (bahasa)Â
| Note: This bahasa version of the PER 2007 was published in February 2005 and is based on estimated 2005 national and sub-national expenditure data and central government budget data for year 2006. The English edition of the report has been substantially updated to incorporate data for realized expenditures at the sub-national level for year 2005, and preliminary realization of central government expenditures for year 2006, and was republished in July 2007. As a consequence, there are differences in the data between the two versions. Please refer to the English version of the PER 2007 for the most up-to-date data |
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More Resources:
-- SECTORAL EXPENDITURE REVIEWS --Â
| Investing in Indonesia’s Education at the District Level:
An Analysis of Regional Public Expenditure and Financial Management | | |
More than half of all public spending on education now takes place at the district level, and this district level expenditure increased from Rp 26 trillion in 2001 to Rp 52 trillion in 2006. However, despite this increase in education spending and responsibilities at the district government level, there are still some issues faced by the districts in terms of the transition from primary to secondary education, infrastructure quality, and regional gaps in outputs and human resources. In order for the significant allocation of spending at the district level to translate into improved education quality, it is necessary to better understand the spending patterns of district governments. This in turn will help to lead to a better assessment of the efficiency of district government education sector spending. The analysis contained in this report aims to support such an assessment and help district governments to plan and budget for better education spending decisions in the future.
| Investing in Indonesia’s Education:
Allocation, Equity and Efficiency of Public Expenditures | | |
Indonesia ’s education system is one of the largest in the world with 51 million pupils enrolled in over 270,000 schools and employing over 2.3 million teachers. Indonesia is close to achieving universal primary education enrollment. Therefore, extendingaccess to primary school education is no longer the main development challenge.The share of education spending in total national expenditures increased steadily over the past five years, up to 16.5 percent in 2006. With increasing fiscal space, Indonesia will have even more resources in the near future. The current challenge is how to spend this money in the best possible ways. The priorities are to increase the transition of students to junior secondary education and to improve the quality and geographic equity of education at all levels.
This report analyzes the composition of education expenditures and the feasibility of a government mandate to reach a target of 20 percent budgetary spending on education. The study also reviews the adequacy of teacher salaries against that of other paid workers, the existence of under/oversupply of teachers, new estimates of social returns on education, and factors that determine net education enrollment rates.
| Investing in Indonesia’s Health:Â
Challenges and Opportunities for Future Public Spending | | |
The Health - Public Expenditure Review is an expanded follow-up of the 2007 Indonesia Public Expenditure Review (2007 PER), which highlights a number of different facets of public expenditure on health in Indonesia and prompts a series of fundamental questions about the futute.The report intends to provide analysis to support the Government of Indonesia in the development and implementation of its health strategy and forms an important input for the next Medium-Term National Development Plan (2009-14), particularly the publication's nine ideas aimed at making the health system more efficient and effective. The paper further describes some challenges on overall adequacy of funding, the role of public versus private expenditures in health sector, the roles of central and regional budgets and appropriate mechanisms for mobilizing resources and services in the health sector.
| Black Hole or Black Gold?Â
The Impact of Oil and Gas Prices on Indonesia’s Public Finances | | |
Indonesia’s oil revenues and fuel subsidies dominate the nation’s economic policy agenda. This paper estimates the impact of higher international oil prices on the Indonesian government’s fiscal position in 2008 and beyond. It analyzes the interactions between government revenues and expenditures, as well as international oil prices, energy subsidies, and inter-governmental transfers.
Looking at the impact of oil prices over US$100 per barrel, the paper presents five main findings. First, despite record high oil prices, the government’s oil and gas revenues have been decreasing relative to non-oil and gas revenues since 2001. Second, fuel subsides will reach record levels in 2008 while electricity subsidies have been increasing even faster. Third, the paper finds that most of the fuel subsidy that directly benefits households goes to the richest 20 percent. Fourth, even at levels above US$100 per barrel, the government receives more revenues from oil and gas than it spends on energy subsidies. However, due to significant revenue-sharing with sub-national governments, high oil prices are net negative for the central government, while they create fiscal windfalls for many regions. Finally, the oil sector’s positive impact on Indonesia’s public finances declines as oil prices rise, because subsidies and other expenditures outgrow oil and gas revenues.
-- OTHER IPEA OUTPUTS AND OUTCOMES -- | | Policy notes, long-term policy advice and diagnostics | | |
The longer-term policy advice and analysis provided by IPEA since its inception in June 2004 have contributed to a lively national discussion on fiscal policy. Important examples of where IPEA provided inputs to policy changes include : the reduction of fuel subsidy in 2005 and the increase in infrastructure and health spending in the 2008 budget proposal.IPEA has also delivered reports and policy notes jointly with Indonesian partners. This constitutes an additional aspect of the capacity-building dimension of the program. The initiative notably tackled the following issues: - Public investment, fiscal space and expenditure allocation: (i) Fuel Subsidy Strategies; (ii) Aggregate Spending Patterns across Time, Sectors, and Levels of Government; (iii) Central Government Civil Service Wage Bill Management; and (iv) The Timing and Impact of Recent Fiscal Policy Measures: Implications for Real Growth in 2005-06.
- Sectoral expenditure: (i) Infrastructure Finance in Indonesia; (ii) Incidence of the Electricity Subsidy in Indonesia; (iii) Investing in Indonesia’s Education: Allocation, Quality and Efficiency or Public Expenditures.
- Decentralization and inter- governmental fiscal relations.
- Regional public expenditure.
- Public financial management.
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