Anticipating P4R? Innovative operations in support of a rising Indonesia

1. Anticipating P4R? Innovative operations in support of a rising Indonesia Mae Chu Chang Lead Education Specialist and Indonesia Human Development Country Sector Coordinator Chris Hoban Indonesia Operations Manager ShubhamChaudhuri Indonesia Lead Economist March 01, 2011 Emerging Indonesia Seminar Series World Bank, Washington, DC

2. OutlineWhat we’ll be talking about • Three innovative operations that have defined the first two years of the CPS • A quick overview of the three operations • Public Expenditure Support Facility--DPL-DDO (with a difference) • Strengthening fiscal transfers using an output-based approach: the Local Government and Decentralization Project (DAK-refinancing)—SIL • Strengthening school-based management: BOS-KITA--SIL • What made these operations innovative: • From the perspective of Indonesia’s development agenda • From the perspective of the World Bank • Mainstreaming these sorts of operations • What will it take

3. Indonesia Public Expenditure Support FacilityA DPL-DDO with a difference • What it was • Development Policy Loan (DPL) with Deferred Drawdown Option (DDO) in the amount of USD2 billion approved by the World Bank’s Board on March 3, 2009 • Genesis • in the aftermath of Lehman Brothers’ collapse and the turmoil in global financial markets in the last quarter of 2008, concern that Indonesia would have difficult meeting its gross financing needs (about USD 23 billion) from market sources in 2009 • Aim • to ensure that Indonesia would be able to sustain critical public expenditures and maintain the momentum on structural and institutional reforms even if adverse global financial market conditions limit Indonesia’s ability to meet its gross financing needs from market sources

4. Indonesia Public Expenditure Support FacilityA DPL-DDO with a difference • Implementation • loan was prepared, appraised, and negotiated in a period of 4 months starting early October 2008 • government also requested the Bank’s assistance in facilitating additional financing from other bilateral and multilateral sources, which the Bank was able to do, resulting in commitments of an additional USD 3.5 billion from the Governments of Japan and Australia and the ADB. • A set of confidence-boosting policy measures aimed at: • reassuring financial markets and maintaining financial system stability • sustaining critical public expenditures while maintaining budget discipline and • facilitating private investment and supporting exports • Key feature: • Structured as CONTINGENT budget support that would be available ONLY if Indonesia were unable to meet financing needs from market sources

5. STATE A Liquidity conditions in markets eased, access to finance available at reasonable cost, macroeconomic situation stable STATE B Tight liquidity conditions and access to finance restricted but macroeconomic situation otherwise stable STATE C Tight liquidity conditions, no access to finance, imminent or ongoing BOP crisis, macroec situation unstable Indonesia Public Expenditure Support FacilityThe basic idea • Three potential scenarios Indonesia faced in 2009 • Aims of the Indonesia PESF (DPL-DDO): • By reassuring markets on GoI’s ability to meet its financing needs, raise the probability of state A • Provide back-up financing in case state B is realized • The PESF (DPL-DDO) was NOT intended to, and could not, given its limited size and the World Bank’s mandate, provide BOPsupport GoI should be able to no need for drawdown GoI unable to meet financing targets, possible drawdown of DPL-DDO GoI unable to meet financing targets and needsBOP support, no disbursement possible of DPL-DDO

6. Indonesia Public Expenditure Support FacilityWhat made it innovative • Timing • timing of the PESF, the fact that it was conceptualized as a precautionary step and put together rapidly enough for it to be in place before Indonesia was in a crisis, enabled the PESF to play an useful preventive role • the announcement of a contingent support package, backed up by a program of confidence-boosting policy measures sent a strong positive signal to the markets, making it more likely that Indonesia would be able to meet its financing needs for CY2009 from market sources • Market commentary in the lead-up to the Board’s approval of the loan and subsequently suggests that the PESF did contribute to boosting market confidence in Indonesia’s creditworthiness. Indonesia was able, in early March, to raise USD 3 billion in global capital markets—the largest issuance by an emerging market since September 2008 • The contingent market-oriented design of the PESF • the fact that Indonesia would only draw down the facility in the event that market conditions deteriorated and it was unable to meet its financing needs from market sources—was perhaps its most innovative feature and in effect made it a new financial instrument • The contingent nature of the PESF provided LEVERAGE, helping the GoI mobilize more resources from the market than might have been realized if the facility had been disbursed immediately

7. Local Government & Decentralization Project (DAK) • $ 220 million over four years • Pilot in five provinces • Specific Investment Loan: Output-Based Disbursement triggered by achievement of results • Focus on local infrastructure (roads, irrigation, water & sanitation) • Incentives for compliance

8. Context: Resources shifted to LGs • Since decentralization, substantial increases in funds to provincial & districts • Local Govts now manage 40% of total public expenditures & 50% of public investments.

9. DAK Engagement Approach thEchallenGes • Lack of transparency and accountability • Inadequate and cumbersome reporting • Weak monitoring and evaluation • Very little verification • Strengthen Country Institutions • Target large set of LGs • Improve LG internal controls • Work through existing transfer system thEApproach BANK DUNIA │THE WORLD BANK

10. Project Development Objectives (DO) and Results Framework (RF) PDO: Improve the accountability and reporting of the central government’s Specific Purpose Grants (DAK) for the infrastructure sectors. RF: Improve financial & technical reporting RF: Output verification of projects financed by DAK funds BANK DUNIA │THE WORLD BANK

11. Output Eligibility Criteria for Reimbursement BANK DUNIA │THE WORLD BANK

12. Results focused Reward Performance with grants Reimburse eligible outputs based on standard costs Strengthen Government Systems Central government ownership & control Strengthen oversight by internal audit & public works Strengthen LG Internal Controls Web-based Monitoring and Reporting Systems Next phase: Scale up to more Provinces Promote improved accountability downwards Improve efficiency and effectiveness of expenditures Key Features of DAK Program BANK DUNIA │THE WORLD BANK

13. Indonesia – Education Statistics • Population : 230 million • Islands: 16,000 plus Education • Total number of students: 50 million • Total number of teachers: 3 million • Total number of schools: 258,000 • Primary Completion Rate: 99% • Secondary Net Enrollment rate: 72.1% (2009) • Tertiary Gross Enrollment rate : 26.6% (2008) • Primary Age Children Out of School: 686,000 • Public Education Expenditure : 3.8% of GDP or 20 % of Gov. Spending • Average Teacher Salary, Primary: US$ 2,012 per annum

14. BOS • BantuanOperasionalSekolah (BOS) or School Grants Program • Launched in 2005 by Government of Indonesia using savings from a reduction in fuel subsidies • BOS aims to: • Strengthen school based management through provision of discretionary block grants to schools for school operations • Reduce school fees, eliminate school fees for the poor • Increase enrollment, especially for the poor. • Coverage: All (over 200,000) public/private, religious and non religious, primary and junior secondary schools, 41.3 million students

15. BOS • Capitation Grant (per student basis) • $ 44 per student per year (primary) • $ 63 per student per year (junior secondary) • Largest non-salary education Finance program of the GoI • Edu. Budget: US$ 20 billion/annum (2010) • BOS Spending: US$ 2 billion/annum (2010) • Implementation: MoNE and MoRA

16. Innovation in BOS (Gov. of Indonesia) • BOS is a transformational concept • BOS transitioned the education system towards an improved SBM system • Changes who controls school spending: From central Government to local school + involving beneficiaries for greater accountability and less corruption. • Per-student formula = alignment of needs of school with provisions. • Responsibility for the schools shifts from the Education Ministry to the schools.

17. BOS-KITA (Our – BOS) • A program SIL by the World Bank to support the Government of Indonesia’s BOS program • Provided $ 600 million in 2008 and additional financing of $ 500 million in 2010 to the BOS (approx 20% of the total, re-financing GOI funds) • Dutch Grant: $ 20 million in 2008, AusAID Grant: $ 20 million in 2011 • Is governed by the BOS operational manual which meets Bank standards

18. Innovation in BOS-KITA (World Bank) • Support ongoing Government program = authorities and local communities have sense of ownership. • Government welcomed Bank’s reorientation towards blending Bank financing more smoothly and directly into support of successful, ongoing government programs. • Not a traditional SIL. No NOLs, no procurement. • Independent monitoring of spending, plus local community involvement. • Parallel grant financing managed by the Bank for technical assistance, information campaign: • Bank’s ability to respond quickly to most pressing issues with analytical work to complement loan.

19. Before BOS After BOS

20. Before BOS After BOS

21. What makes these operations innovativeFrom Indonesia’s perspective • DDO • Respond to a key need identified by government • Bring in other international partners who could not have joined without Bank leadership • Programmatic instruments • Support key government services already being delivered • Strengthen existing government procedures • No need for the very unpopular Bank no-objection letters • No more micro-management of individual transactions by the Bank which detract from developmental objectives • Key feature is strong monitoring of expenditures & outcomes • Build on Bank’s reputation for ensuring good budget utilization • DAK • Includes substantial procurement using NCB & post review • Payment based on agreed costing of outputs

22. What makes these operations innovativeFrom The Bank’s perspective • DDO • Conditional use of DDO based on government’s objective • Influence markets without disbursement • Enabled by very strong policy engagement under trust funds • Programmatic instruments • Capacity building based on services already being delivered rather than adopting outside practices • Operating procedures all based on government nation-wide guidance • Helping to change the “rules of the game” through enhancement to the Operations Manuals—a small change leading to major impact, e.g. BOS reaches 250,000 schools • Parallel technical assistance and analytical support through grant trust funds • Shift from disbursing against inputs to disbursing against output • Substantial procurement using NCB & post review

23. Mainstreaming these sorts of innovationsWhat will it take • Relax the Bank’s procurement guidelines for programmatic assistance • focus on outcomes & value for money rather than transaction process steps • Recognize the development value of bringing better transparency & accountability to existing programs • Programs need to be ‘good enough’ with will & potential to improve • Bank’s ‘trademark’ is effective government spending • Governments also need to appreciate loan assistance for programs rather than identifiable projects