Managing Resources to Build Back and Create a Better Future for Nias

1. Managing Resources to Build Back and Create a Better Future for Nias Nias Public Expenditure Analysis World Bank Office Jakarta Jakarta, August, 2007

2. Key Messages • Nias and Nias Selatan have experienced a significant increase in financial resources from reconstruction and decentralization. These resources provide opportunity to address poverty and human development issues in the region; • Despite having two of the highest poverty rates and lowest social outcomes, Nias and Nias Selatan continue to receive among the lowest per capita revenues of all districts in North Sumatra; • Public service delivery in the Island has been lagging behind the province and national averages. The two districts have the highest poverty rates and have some of the lowest education, health, and infrastructure outcomes in North Sumatra;

3. Key Messages • Spending patterns have improved in some respect but there remain areas of serious concern; • Spending on education absorbs the largest share of expenditures; • Sectoral spending on government apparatus is increasing, while infrastructure spending has been decreasing; • Spending toward routine expenditure has been increasing. • Local government capacity in budget planning and implementation needs substantial upgrading. The increase in responsibilities and fiscal resources needs a better capacity from local government to effectively and efficiently manage its resources.

4. Local Govenrments’ Revenues

5. The island received substantial increase of revenue by almost four times after decentralization and reconstruction

6. The increase in local government’s revenue is mainly driven by DAU, while PAD’s contribution is very small Nias Nias Selatan • Note: • DAU (Dana Alokasi Umum) is general block grant • PAD (Pendapatan Asli Daerah) is local government own source revenue

7. However, the two districts have among the lowest public resources in North Sumatera (revenue per capita 2004) Nias Nias Selatan

8. Nias and Nias Selatan have the highest poverty rates in North Sumatera 200,000 35% Poverty rate Number of poor 175,000 30% 150,000 25% 125,000 20% 100,000 15% 75,000 10% 50,000 5% 25,000 0 0% Kab. Dairi Kab. Nias Kota Binjai Kota Medan Kota Sibolga Kab. Langkat Kab. Asahan Kab. Simalungun Kab. Tanah Karo Kab. Nias Selatan Kab. Deli Serdang Kota Tebing Tinggi Kota Tanjung Balai Kab. Toba Samosir Kab. Labuhan Batu Kab. Tapanuli Utara Kab. Mandailing Natal Kab. Tapanuli Selatan Kab. Tapanuli Tengah Kota Pematang Siantar Kota Padang Sidempuan Source: BPS, 2004

9. Reconstruction spending

10. By December 2006, US$ 495 million had been allocated to the reconstruction effort in the region, slightly higher than the core minimum needs

11. However, regional imbalance persist- Nias Selatan remains under-funded (December, 2006)

12. Reconstruction in Nias is showing some sign of progress, but the lack of progress in Nias Selatan is alarming (December, 2006)

13. Reconstruction progress in Nias Island, December 2006 Source: BRR NAD-Nias

14. Local Governments’ Expenditure

15. Local governments’ spending has tripled since decentralization

16. Routine spending has an increasing share particularly after decentralization

17. Sectoral spending on government apparatus is getting priority –infrastructure is declining

18. Personnel expenses is taking a large share of routine spending, leaving little for operational and maintenance Kabupaten Nias, 2005 Kabupaten Nias Selatan, 2005

19. Nias and Nias Selatan allocate most of their budget for apparatus expenditure (2005) *Local government budget classification based on Ministerial Decree No. 29/2002

20. Education Sector

21. Unlike the national average, Nias and Nias Selatan allocate a large share of their budget to education

22. However, the two districts have among the lowest per capita spending on education – resulted from a relatively low total budget (2004) Nias Nias Selatan

23. Key Issues in Education • Given a large share of current allocation on education, the most effective way to improve the outcomes is to use the existing level of spending more efficiently; • Gross Enrollment Rate in junior and senior high school is below North Sumatera and Indonesia average; • Literacy rates for the two districts are the lowest among districts in North Sumatera; • Insufficient and unequal distribution of teachers accross sub-districts, particularly in Nias Selatan; • Unequal distribution of primary schools among sub-districts of Nias and Nias Selatan; • Poor condition of school building and classrooms. The tsunami and earthquake had a severe impact on education and further decreases the quality of education.

24. Health Sector

25. Health spending has increased after decentralization

26. However, per capita spending was still lower than districts and national average (2004) Nias Nias Selatan

27. Key Issues in Health • Health outcomes on Nias Island still lag behind provincial and national averages: • Infant mortality rates on the Island is higher (36.1%) than North Sumatera (33.5%) and Indonesia rates (32.8%); • A large number of deliveries are attended by traditional midwives (dukun); • Immunization coverage is relatively low (33.3% in Nias and 15.8% in Nias Selatan respectively) compared with provincial (49.9) and national coverage (64.3). • Insufficient supply of health personnel and unequal distribution of health workers among sub-districts across the island need to be addressed; • The availability of health facilities in Nias was above provincial average, but lacking in Nias Selatan. A large number of health facilities were severely damaged after the earthquake; • Spending on operational and maintenance is very low (3 percent of routine expenditure) - insufficient to effectively maintain medical equipment and health facilities.

28. Infrastructure Sector

29. Spending on infrastructure has declined sharply after decentralization

30. Local governments allocation on infrastructure maintenance is worrying Nias Nias Selatan

31. Key Issues in Infrastructure • Local government low priorities on infrastructure resulted in poor outcomes: • Households in Nias and Nias Selatan have among the lowest access to clean water and electricity in North Sumatra; • 81 percent and 78 percent of road in Nias and Nias Selatan is badly damaged; • Only 22 percent of the rice fields in Nias island are irrigated, compared to 50 percent in North Sumatera and 60 percent of Indonesia average. • Local governments involvement in reconstruction still insufficient: • Local governments has declining trend of infrastructure spending, probably as a result of the increased investment by BRR and donors; • The capacity of local governments to continue the reconstruction process after BRR mandate finished remains a major challenge; • Operational and maintenance budget will probably have to increase to properly maintain and run the new reconstruction assets

32. Local Governments’ Capacity

33. Local governments capacity to manage public finance is still poor

34. Key Issues • The capacity of local governments in public financial management is weak and needs substantial up-grading; • The educational level of attainment of most civil servant (70 percent) is only senior high school; • Further proliferation of districts needs to be scrutinized – it could reduce efficiency and economies of scale in public service delivery, with a concurrent rise in routines expenditures; • The delays in budget approval processes could disturb the planning and cash flow of the related fiscal year.

35. Recommendations

36. Recommendations

37. THANK YOU