Decentralisation

1. Decentralisation An Action Plan from a PEM perspective

2. Plan Introduction A. Short Term (during 2000 for the 2001 budget) • policy decisions on aspects of expenditure allocation • treatment of transferred responsibilities • general aligning of expectations • info to local governments B. Medium Term (2001 and beyond) • budget reform • fiscal discipline • allocative efficiency • operational efficiency • central control • external audit Decentralisation: Action Plan

3. Introduction • Importance • Probably biggest transfer of staff ever in the world • Covers nearly all the major government functions and over half of government spending • Expectations are high for more accountable, more efficient and more effective spending Decentralisation: Action Plan

4. Introduction: cont. • Unusual • Functions virtually all transferred to Dati II, not provinces • Breadth of functions • No positive list • Big bang approach not transitional period • Difficulties • Political pressures for separatism • A time of fiscal tightness • Timetable for preparation constrained • Constraining decisions on revenue sharing Decentralisation: Action Plan

5. A1. Determine treatment of Shared Resources Options • Define fiscal capacity to include all income sources. • Define fiscal capacity to exclude shared income sources. • Define fiscal capacity to include a proportion (say, half) of shared resources. Ultimately a political decision informed by modelling results Decentralisation: Action Plan

6. A2. Determine Policy on “Losers” Issues • what is the benchmark for current spending • any allowance made for inflation • applies to both Dati I and Dati II or just Dati II? We suggest definition must allow for • All staff inflation • All responsibilities i.e. current plus new • Possibly some permitted loss against this figure e.g. 5% Decentralisation: Action Plan

7. A3. Determine aggregate DAU and model DAU (plus shared resources) should cover • current routine responsibilities • current development responsibilities • allow policy on equalisation and losers to be met • be consistent with required law that 2.5 % of funds go to provinces • be consistent with minimum 25% rule in total Decentralisation: Action Plan

8. A4. Set responsibilities to be met from DAU • if DAU at 25% is insufficient:- • need extra DAU or • change policy on equalisation or losers • if there are surplus funds:- • transferred proportion of APBN staff (assume 10%?) • transfer all deconcentrated non-staff responsibilities • extra development funds we suggest transferring non-salary routine costs • gives budget certainty • gives some real freedom to Dati II • allows managed transfer of salary responsibilities Decentralisation: Action Plan

9. A5. Separate financial and physical transfers Options 1. Hold back all transfers of routine funds until 2002. 2. Hold back only staff-related costs until 2002. 3. Transfer funds during 2001 as blocks of transferred staff and responsibilities are identified (either by region or by function). We suggest option 2 • Allows budget certainty • Allows time for managing staff transfers whilst retaining certainty over salary payments Decentralisation: Action Plan

10. A6: General - Aligning Expectations • Align expectations with reality for 2001 • Limited opportunities for resource-reallocation • Growth in local resources will be small • No time to plan resource-use or reorganise? • The benefits of decentralisation will not be experienced much in 2001 • This is a de facto transition period and real benefits will take 4-5 years Decentralisation: Action Plan

11. A7: Better Info to Daerah • Issue copies of draft PP immediately • issue guidance figures on transfers quickly Decentralisation: Action Plan

12. B1: Budget Reform Processes Treat 2001 as a year for testing reforms to budget preparation at daerah level • e.g. budget classification and multiyear budget reforms • supported by central team/TA • aimed at preparation of 2002 budget Refocus the aid mobilisation and resource allocation role of Bappenas • consistent with a unified resource allocation and budget planning process • a multiyear budget framework Decentralisation: Action Plan

13. B2: Budget Reform Processes cont. Redefine processes of external assistance mobilisation (consistent with decentralisation) • direct loans to local governments • voluntary consortia of Dati II facilitated by provinces • still need some central involvement if a central guarantee Decentralisation: Action Plan

14. B3: Budget Reform Processes cont. Complete analysis of future potential development budget flows • over three year period • disaggregate the projected new spending between central and daerah level • distinguish between rupiah and foreign financing • Determine discretionary spending gap available for allocation between central and daerah; Decentralisation: Action Plan

15. B4: Budget Reform Processes cont. Monitor local project delivery arrangements for central controlled projects • Monitor the performance of implementation of central financed and managed projects • define scope for further redesign to focus on decentralised delivery • link this assessment to results of technical assistance in daerah budget reform processes; Decentralisation: Action Plan

16. B5: Fiscal Discipline • Dati II lack control over revenue sources • switch PBB to local tax & allow local tariff-setting • further sources? • Shift provincial sources to Dati II? • Local Governments need help in • early notification of provisional grant figures • certainty of dates of cash transfers • monthly/quarterly • in advance/in arrears • Better accountability of DPRD • public hearings • involve NGOs • transparent budget/reporting process Decentralisation: Action Plan

17. B6: Allocative Efficiency • Reform staff remuneration • switch funding to basic wages from honoraria • increase basic wages • reconsider differentials • Reform Development/Routine budget split • promote integrated decisions on investments, running costs, maintenance etc. • Develop local capacity for… • inter-sectoral planning • programme evaluation • Need guidelines on Dati II allocations to desa Decentralisation: Action Plan

18. B7: Operational Efficiency • Review procurement • need sufficient competition • Develop performance indicators/benchmarking systems • to be mediated through auditors? Decentralisation: Action Plan

19. B8: Central Control Issues Resolve responsibilities for control & monitoring • Sectoral ministries responsible for sector specific standards • But do they have field staff, skills • What controls on competing standards, priorities • Central ministry (DDN, Meneg OTDA, Dep Keu?) responsible for general administrative control • But capacity? • Split of responsibilities • Mechanisms for feedback unclear Decentralisation: Action Plan

20. B9: Central Control cont. Suggestions • Specify indicators not standards and publish results • Use them to identify good performance • emphasise performance audit rather than detailed sectoral control Decentralisation: Action Plan

21. B10: External Audit • Continuance of multiple agencies • BPK/BPKP • Sectoral ministries • Auditor appointed by DPRD • IrWilProp • new anti-corruption agency Decentralisation: Action Plan

22. B11: External Audit: cont. • Need clarity of mandates • Need public reporting • External auditor should • be independent of local executive, DPRD and centre • Have capacity in performance auditing • develop comparative performance studies, best practice etc. • Have local government as their priority This suggests:- • no role for BPK/BPKP, IrWilProp and DPRD-appointed auditors • Creating new specialist agency Decentralisation: Action Plan