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INDONESIA PUBLIC EXPENDITURE REVIEW
Spending forBetter Results
2020
Supported by funding from the Governments of Canada and Switzerland and the European Union under the Public Financial Management Multi-Donor Trust Fund (PFM MDTF) and by the Government of Australia (Department
for Foreign Affairs and Trade) under the Support for Enhanced Macroeconomic and Fiscal Policy Analysis (SEMEFPA) program
Swiss Confederation
II
I ND O NES IA PU BLIC
E XP E N D ITU RE REVIEW:
Spending for
Better Results
The findings, interpretations, and conclusions Rights and Permissions
expressed in this report do not necessarily
reflect the views of the Ministry of Finance or The material in this work is subject to
the Government of Indonesia, the Executive copyright. Because The World Bank encourages
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Foreword
by Country Director
budget management processes and finan-
cial management information system. The
government also continued implementing
prudent fiscal management with strict ad-
herence to fiscal rules.
However, Indonesia still faces large
human capital and infrastructure gaps that
impede its competitiveness, and its ability
to create jobs and reduce poverty in the me-
dium term.
The ongoing COVID-19 pandemic will
have profound adverse impact on Indonesia’s
economy, put pressures on the fiscal sector,
and threaten achieved gains in development
outcomes. GDP growth in 2020 is project-
ed to be the lowest since the 1997 financial
crisis which risks reversing the progress
Indonesia made in poverty reduction in re-
cent years. Revenue collection is projected
to fall sharply on the back of lower growth
and measures to support the economy, and
will remain challenging in the medium term
amidst projected weak commodity prices.
Rising interest payments will crowd out pri-
ority spending within the reduced budget
envelope. Thus, closing human capital and
infrastructure gaps has become more dif-
ficult with lower fiscal space and emerging
fiscal challenges. This underscores the im-
portance of accelerating much-needed tax
policy and expenditure reforms to create
fiscal space for development spending.
Satu Kahkonen This Public Expenditure Review
(PER) aims to help the Government of In-
donesia (GoI) identify key constraints to
C O U N TRY DIRECTOR,
efficient and effective public spending and
WOR LD BANK IND ONE S I A
offer ways to improve the quality of spending
AND TIMOR LE STE
T
to achieve Indonesia’s development objec-
tives. It is a result of a joint programmatic
he largest economy in 9.4 percent in 2019. With higher incomes review and close collaboration between the
Southeast Asia, Indo- and better access to services on average, In- World Bank and the Government of Indone-
nesia, has undergone donesians have become healthier and more sia’s Ministry of Finance between 2016 and
remarkable develop- educated resulting in improved human de- 2019 led by Directorate General of Budget,
ment transformation velopment outcomes and life expectancy. and comprised Fiscal Policy Agency (FPA),
over the past two Indonesia has also continued making Directorate General Fiscal Balance of the
decades. Indonesia recorded a robust and progress in improving fiscal policy making. Ministry of Finance, Ministry of Planning/
sustained economic growth despite external Fiscal policy has become more effective in re- BAPPENAS.
shocks, averaging 5.3 percent between 2000 ducing inequality and poverty, though there We hope this report will help the de-
and 2019. It has emerged as vibrant mid- is still room for improvement. In 2015, the sign and implementation of public policies
dle-income country, with its Gross National government took bold policy decisions to as Indonesia prepares policy responses to
Income (GNI) per capita nearly reaching reallocate resources from regressive energy the COVID-19 pandemic and gears towards
upper-middle income threshold in 2019. As subsidies toward development priorities. recovery, through better allocation of public
a result, Indonesia made enormous gains in Further, the government has strengthened resources, enhanced budgetary institutions,
poverty reduction; cutting poverty levels by its budgetary institution and public financial and improved sectoral policies to achieve In-
more than half in the same period reaching management system through modernizing donesia ambitious development goals.
Foreword
The Ministry of Finance is embarking on
a multi-year program to improve the per-
formance orientation of the budget and
by the Minister of Finance the subnational transfers. These includes
health reforms to improve the effectiveness
of Jaminan Kesehatan Nasional and achieve
an integrated health system at the central
and regional level. We will also continue
to strengthen the social protection system
particularly by synergizing programs and
preparing a social safety net that is adaptive
to disasters and shocks. In the education
program, we will reinforce our efforts to
improve the digitization of education infra-
structure and teachers’ competency. Early
childhood education and better coordination
between the central and local levels will still
become a core to this aspect too. Promoting
more effective and result-based transfers to
regions is also a key priority.
Indonesia´s expenditure and fiscal
reforms spirit are in line with the findings
and recommendations in this report. Sus-
tainability, efficiency, and effectiveness
(result-based) are basic pillars in designing
the budget. We will also improve coordi-
nation and data for better targeting espe-
cially in the implementation of the budget
and programs. Last but not least, creating
a bigger fiscal space has always been a
central reform in our effort to escape the
middle-income trap. We are committed to
reforms in improving revenue mobiliza-
tion capacity as well as promoting budget
reallocation towards more productive and
effective programs.
This report is also very timely. It high-
lights reform areas in responding to the
unprecedented COVID-19 pandemic that
H.E. Sri Mulyani has severely impacted Indonesia and the
Indrawati government efforts for the recovery. The
Government has introduced measures to
MINIST E R OF F I N ANCE
slow down the spread of the outbreak and
OF IND ON E SI A
I
support the economy through the revision of
the 2020 Budget. This will have an impact on
t is my pleasure to welcome subnational government. The subnational Indonesia’s fiscal position for years to come
this publication of the In- transfers are important as subnational gov- including a higher level of public debt, higher
donesia Public Expenditure ernments are responsible for a large share of interest payments, which could crowd out
Review (PER) report. This spending in key sectors, to close our human development spending within a more con-
report is a result of close col- capital and infrastructure gaps, and meet our strained resource envelope. But meeting In-
laboration between the World development targets. donesia’s development targets means that we
Bank and the Ministry of Finance, the Ministry The report makes many useful recom- have to spend more and better, by creating
of National Development Planning/National mendations that are aligned with the Govern- more, not less fiscal space. This means that
Development Planning Agency, and the line ment’s agenda for spending reforms in line post-COVID-19, we will continue our effort
ministries over the last few years. The pre- ministries. The Government has implement- to increase revenue collection for develop-
liminary findings of this report and technical ed several key reforms, which are in line with ment spending.
workshops have already served to provide this report, leading to important improve- My appreciation to the team from the
inputs for the preparation of the Government ments in the pro-poor orientation of spend- Government and the World Bank that con-
Budget since 2017. This is an important report ing through targeted cash transfers after the tributed to this important report, and to the
that shows how we can improve the quality energy subsidy reform, increased budget allo- governments of Switzerland, Canada, EU,
of spending across government institutions, cations for early childhood education, and the and Australia for their generosity that has
improve the performance of the budget not introduction of performance-based transfers supported the production of this high-qual-
only in the central government but also in the in health and education, to name a few. ity report.
Acknowledgements
he team was led by Cut Dian Agustina, Ahya Ihsan and website and launch event. Rodrigo Chaves (former
Ralph van Doorn, and consisted of Pui Shen Yoong Country Director), Satu Kahkonen (Country Direc-
(leading sectoral reviews); Hilda Choirunnisah, Angella tor), Rolande Pryce (Program Operations Manager),
Lapukeni, Yus Medina Pakpahan, Ratih Rahmadanti, Ndiame Diop (Practice Manager Macroeconomics,
Michael Steidl, Andhyta Firselly Utami (Overview and Trade and Investment), Alma Kanani (Practice Man-
overall report production); Francis Darkko, Anissa Rah- ager Governance), Frederico Gil-Sander (Lead Econ-
mawati, Imam Setiawan, Sailesh Tiwari (poverty and dis- omist) and Yongmei Zhou (Program Leader Equitable
tributional impact analysis); Arun Arya, Hari Purnomo Growth, Finance and Institutions) provided overall
(Public Financial Management); Jurgen Blum, Ahmad and technical guidance.
Zaki Fahmi, Ihsan Haerudin, Danya Hakim, Nick Men- Officials from the Ministry of Finance, Nation-
zies, Michael Roscitt, Kathleen Whimp, (Intergovern- al Development Planning Agency/Bappenas and the
mental Fiscal Transfer System); Reem Hafez, Pandu Ministries of Health, Education and Culture, Religious
Harimurti, Eko Pambudi, Vikram Rajan (Health and Nu- Affairs, Social Affairs, Public Works and Housing,
trition); Rythia Afkar, Tazeen Fasih, Javier Luque (Edu- Home Affairs, the Toll Regulatory Authority and the
cation); Juul Pinxten, Changqing Sun, Pablo Ariel Acosta, President’s Office participated in workshops discussing
Putri Agnesia, Nurzanty Khadijah, (Social Assistance); each chapter. The team would like to thank especially
Elena Chesheva, Elisabeth Goller, Tomás Herrero Diez, Ibu Sri Mulyani Indrawati (Minister of Finance), Pak
Willian D. Paterson (National Roads); Dao Harrison, Suahasil Nazara (Vice Minister of Finance), and Pak
Chris Crowe, Harish Khare (Housing); Jun Matsumoto, Askolani (Director-General Budget, MoF) for their
Tarasinta Perwitasari, Deviariandy Setiawan, Marcus J. overall guidance and feedback, and Pak Kunta Nugraha
Wishart (Water Resources Management); Fook Chuan (Expert Staff State Expenditure and former Director
Eng, Irma Magdalena Setiono, Risyana Sukarma (Water for Budget Formulation - DG Budget), Pak Made Arya
Supply and Sanitation). Wijaya, Pak Agung Widiadi, Pak Langgeng Suwito, Pak
The report benefitted from comments from En- Adi Nugroho, Pak Agung Lestanto, (DG Budget), Pak
rique Blanco Armas, Fernando Im, Andrew Mason, Er- Sudarto (Expert Staff for Organization, Bureaucracy,
gys Islamaj, Francesca de Nicola (overall report); Tracey and IT), Pak Ubaidi Socheh Hamidi (Director for the
Lane, Habib Rab (Overview); Lewis Hawke, Fabian Sei- State Budget Center, Fiscal Policy Agency), Pak Farid
derer (Public Financial Management); Jamie Boex (Duke Arif Wibowo (Head of Sub-directorate of Government
University), Gabe Ferrazzi (University of Guelph), Ya- Support, DG Budget Financing and Risk Management),
suhiro Matsuda, Min Zhao (Intergovernmental Fiscal Pak Adriyanto (Director DAU), Pak Putut Hari Satyaka
System); Owen Smith (Health and Nutrition), Pedro (Director DAK, DG Fiscal Balance, MoF) and Pak Er-
Cerdan-Infantes, Toby Linden (Education); Pablo Acos- win Dimas (Director for Development Fund Allocation,
ta (Social Assistance); Mustapha Benmaamar (National Bappenas)
Roads); Simon Walley (Housing); Joop Stoutjesdijk (Wa- This report was produced with financial sup-
ter Resources Management); Luis Alberto Andres and port from the European Union and the Governments
Fook Chuan Eng (Water Supply and Sanitation). of Canada and Switzerland under the Public Financial
Yulita Soepardjo provided excellent administra- Management Multi-Donor Trust Fund (PFM MDTF)
tive support to the workshops and report production. and from the Government of Australia (Department
Peter Milne edited the report text. Muhammad Kamal for Foreign Affairs and Trade) under the Support for
designed the report. Lestari Boediono, Nugroho Sun- Enhanced Macroeconomic and Fiscal Policy Analysis
joyo and Jerry Kurniawan provided support on the (SEMEFPA) program.
Contents
Executive
Summary
1 – 8
1
Overview
& Institutional
Environment
About
the Report
01
This report is structured into
three parts presenting different
Overview
Contents
levels of analysis.
The Overview Chapter 9 – 68
serves as a stand-alone chapter
that consolidates the analysis
02
and recommendations across the
chapters in Parts 1, 2 and 3.
Part 1 focuses on the
institutional environment, which PFM: Improving
is key to effective expenditure
management, comprising
Expenditure
the following chapters public
financial management, the
Management for
intergovernmental fiscal system,
and data for better policy making.
Better Quality of
Part 2 discusses the Spending
efficiency and effectiveness of 69 – 102
sectoral expenditure focusing
on human capital, comprising
the following chapters: health
education, social assistance, and
nutrition.
03
Part 3 discusses the
efficiency and effectiveness of
Reforming the
sectoral expenditure focusing Intergovernmental
Fiscal Transfer System
on infrastructure, comprising
the following chapters: national
roads, housing, water resources
management, and water supply for Better Services
and sanitation. 10 3 – 1 24
Each chapter starts with a
summary of the key messages
and recommendations.
This copy of the report only
04
includes the Executive Summary
and the Overview chapter. To
Data for better
read the remaining chapters,
please go to www.worldbank.
policy making
org/idper, or follow the clickable 1 2 5 – 1 36
chapter links
Contents
2
05
Health
1 39 – 166
06
Education
Human 167 – 190
Capital
07
Social
Assistance
191 – 204
08
Nutrition
205 – 210
Infrastructure
3
09
National
10
Housing
11
Water Resources
12
Water Supply
Roads 2 29 – 248 Management & Sanitation
21 3 – 2 28 249 – 266 267 – 281
1 Executive Summary
Executive
Summary
PAGE 1—8
Executive Summary 2
I
ndonesia’s development trajec- will only be 53 percent as productive when ness and proper monitoring and evaluation
tory has been remarkable over she grows up as she could be if she enjoyed of COVID-19 related expenditure.
the past 20 years, supported by complete education and full health. 3 Years Recovering from the COVID-19
macroeconomic stability and of underinvestment have led to a large in- shock and closing Indonesia’s develop-
prudent fiscal management. The economy frastructure deficit. Indonesia’s per capita ment gaps will require significant resourc-
grew on average by 5.3 percent annually be- public capital stock is only a third of other es. The overall level of public spending is low
tween 2000 and 2018, while gross national emerging economies, implying an estimated relative to the country’s needs. Indonesia
income (GNI) per capita rose six-fold from gap in infrastructure assets of around US$1.6 therefore needs to urgently increase fiscal
US$580 in 2000 to US$3,840 in 2018.1 As trillion.4 There are also large geographic and space and the overall resource envelope by:
a result, Indonesia has made huge gains in income-related disparities in service deliv-
poverty reduction, from 19.1 percent of the ery and outcomes. Only 49 percent of In- 1 Enhancing domestic revenue mobiliza-
population in 2000 to 9.4 percent of the donesians in the lowest-expenditure quintile tion, particularly tax collections; and mo-
population by March 2019. Prudent fiscal have access to improved sanitation facilities, bilizing infrastructure financing from the
management has played an important role compared with 87 percent in the top quin- private sector
in supporting macroeconomic stability and tile. 5 Poor households still have infant and
growth. child mortality rates that are double those 2 Improving the efficiency and effective-
With higher incomes and better ac- of richer households, while there are large ness of public expenditure to maximize its
cess to services on average, Indonesians disparities in stunting prevalence among impact on development outcomes--which 1 Using the Atlas method.
have become healthier and more educat- children under five. is the focus of this report-; and 2 See http://www.
ed. Access to basic services has improved: The ongoing COVID-19 Pandemic worldbank.org/en/
publication/human-capital
between 2000 and 2016, the electrification in 2020 puts these gains in development 3 Allowing prudent borrowing by central
3 The Human Capital
rate increased from 86.3 to 97.6 percent. outcomes at risk and will make closing the and subnational governments (SNGs).
Index quantifies the
Households’ access to improved drinking human capital and infrastructure gaps contribution of health and
water and improved sanitation services also more difficult with lower fiscal space. GDP This Public Expenditure Review education to the
productivity of the next
increased from 49 and 34 percent, respec- growth in 2020 is projected to be the lowest (PER) aims to help the GoI identify key
generation of workers.
tively, in 2001, to 73 and 69 percent, respec- since the 1997 financial crisis and risks undo- constraints to efficient and effective pub- Countries can use it to
tively, in 2018. As a result, human develop- ing all the progress Indonesia made in pover- lic spending and offer ways to improve the assess how much income
they are foregoing because
ment outcomes have also improved. Between ty reduction in the past seven years. Cuts to quality of spending to achieve Indonesia’s
of human capital gaps, and
2000 and 2017, life expectancy increased public infrastructure spending to accommo- development objectives. Public expendi- how much faster they can
from 66 to 69 years. Over the same period, date the response to the COVID Pandemic ture is a key contributor to closing Indone- turn these losses into gains
if they act now. http://
under-five mortality declined from 52 to 25 will lead to delays in infrastructure develop- sia’s development gaps, both through direct
www.worldbank.org/en/
per 1,000 live births. The Government of ment. The wide fiscal deficit and additional spending and through creating the right publication/human-capital
Indonesia (GoI) has successfully ramped up below-the-line spending is expected to lead environment to attract private investment 4 Using IMF PIMA
database at https://www.
access to education, increasing net enroll- to a significant jump in the debt-to-GDP to help close the gaps. This PER covers the
imf.org/external/np/fad/
ment rates at primary and secondary levels. ratio from 2020 onwards, while revenue following topics: public financial manage- publicinvestment/. It is
However, Indonesia still faces large is projected to remain well below its 2018 ment, the intergovernmental fiscal transfer defined as the difference
in per capita public capital
human capital and infrastructure gaps level in the absence of significant revenue system, and data for better policy making
stock between average of
that impede its competitiveness, and its reforms. Rising interest payments will com- (institutional environment), and sectors: emerging markets and
ability to create jobs and reduce poverty pete for the reduced budget envelope with health, education and social assistance (hu- Indonesia multiplied by
Indonesia’s population.
in the medium term. Indonesia’s level of hu- priority spending on health, social assistance man capital); national roads, housing, wa-
man capital is far below its aspirations and and infrastructure. Given the wide-ranging ter resource management, and water supply 5 The World Bank staff
below those of its peers. According to the powers given the Government to reallocate and sanitation (infrastructure). The analysis calculations based on
National Socio-Economic
World Bank Human Capital Index (HCI)2 funds across programs and line ministries, it evaluates the quality of Indonesia’s public Survey (Susenas), (BPS,
for Indonesia, a child born in Indonesia today is important to ensure efficiency, effective- spending using the following framework: 2017).
3 Executive Summary
1
to SNGs, and data management to better improvement from 2012, when these fiscal
manage the quality of public spending. The policy instruments reduced the Gini coef-
Sustainability analysis and summary in Part 1 draw on the ficient by 2.9 points. Several policy chang-
& Adequacy analysis of efficiency and effectiveness of
spending in seven sectors: health, education,
es contributed to these improvements: (i)
the reduction of budgetary expenditures
social assistance with a spotlight on nutrition on poorly-targeted and regressive energy
Is the level of Indonesia’s public spending and stunting (human capital), national roads, subsidies; (ii) the expansion of coverage
sustainable and adequate to address Indo- housing, water resources management and and increase in the benefit level of Program
nesia’s development challenges, both on water supply and sanitation (infrastructure). Keluarga Harapan (PKH) or the Family
aggregate and within sectors? Low revenue-raising capacity con- Hope Program conditional cash transfer;
strains the overall spending envelope. (iii) the ongoing transformation of Rastra,
2 Indonesia’s prudent fiscal management has the poorly-targeted rice subsidy program,
contributed to improved fiscal policy cred- and its subsequent conversion to Sembako
Efficiency ibility, as recognized by several sovereign (Affordable Food Program), formerly known
credit rating upgrades to investment grade. as BPNT, a direct voucher-based transfer sys-
Have public resources been used efficiently The fiscal deficit averaged 1.5 percent of tem for food assistance; and (iv) maintaining
in delivering public services, i.e., allocated GDP between 2000 and 2019, and the public the relative progressivity of education and
to the ‘right’ interventions, with the ‘right’ debt-to-GDP ratio declined from 83 percent health in-kind benefits that are received by
mix of inputs and at an optimal per unit cost? of GDP in 2000 to 30.2 percent of GDP in individuals who access publicly-provided
2019. These averages are well below the legal education and health services.
3 thresholds for the fiscal deficit (3 percent of Energy subsidy reform, and the
GDP) and public debt (60 percent of GDP). consequent reallocation of spending to-
Effectiveness However, at 16.6 percent of GDP (2018), In-
donesia’s general government spending is
ward infrastructure and social assistance,
has improved the allocative efficiency of
about half of the average of other emerging spending across sectors, but spending re-
Have public resources been used effectively
markets. This is because Indonesia’s tax- mains inadequate in many areas. The ener-
to achieve Indonesia’s development objec-
to-GDP ratio is low, at 9.8 percent of GDP gy subsidy reforms of 2014-15 enabled a crit-
tives?
in 2019, leading to overall low revenue col- ical shift in expenditure away from regressive
lections. Furthermore, the central govern- energy subsidies toward higher investment
ment’s budget flexibility is limited by rigid in human and physical capital. Spending in
The report is divided into three expenditure rules on non-discretionary priority areas increased from 8.5 percent of
parts: Part 1 covers the aggregate level spending, which account for two-thirds of the general government budget (2012-14) to
of Indonesia’s public finances and the in- the central government’s budget. In addi- 9.8 percent (2018) for infrastructure, from
stitutional environment, providing the tion, a sizeable share of revenues (14 per- 2.8 to 4.8 percent for health, and from 1.9
instruments to improve the quality of cent) and expenditures (8 percent) are still to 2.3 percent for social assistance. Despite 6 Using an alternative,
spending; Part 2 covers spending on hu- exposed to the volatility of oil and gas prices. these increases, spending remains inade- wider definition of tax
revenue adopted by the
man capital and Part 3 covers spending Overall, fiscal policy has had a pos- quate and low relative to Indonesia’s targets
Ministry of Finance, which
on infrastructure (Figure ES.1). It starts itive impact on the reduction of poverty and development needs and compared with includes non-tax revenue
with an analysis of the adequacy and sus- and inequality. After accounting for vari- Indonesia’s peers. In health, for example, In- from the oil and gas sector,
the ratio would be 11.4
tainability, efficiency, and effectiveness of ous instruments of fiscal policy—transfers, donesia spends just 1.4 percent of GDP, half
percent, which is still low.
aggregate fiscal spending, then it analyzes indirect taxes and subsidies, and in-kind of what the average lower middle-income
7 The definition of social
the key institutional instruments for the GoI transfers, such as health and education— country spends. In social assistance, Indonesia
assistance does not include
to improve the quality of spending: public the Gini coefficient declined by 3.4 points spends 0.7 percent of GDP,7similarly much less subsidies and the Village
financial management and fiscal transfers in 2017 (from 40.3 to 36.9). This was an than the average lower middle-income country. Fund transfer.
FIGURE ES.1. Structure of the report
PA RT 1
1 Overview: aggregate spending, sustainability, efficiency and effectiveness
2 PFM: Improving expenditure management for better quality of spending
Overview &
3 Reforming the intergovernmental fiscal transfer system for better services
Institutional
environment 4 Data for better policy making
PA RT 2 H UMAN CAPITAL I N F RASTRU CTU RE PA RT 3
5 6 7 9 10 11 12
Health Education Social National Housing Water Water supply
assistance roads resources & sanitation
Human Capital 8 Nutrition Infrastructure
Source: authorsExecutive Summary 4
Spending on social assistance programs benefits of investments in early childhood the progress in development outcomes, as
has become more efficient, but efficiency education and development (ECED), re- shown by the lack of performance orien-
of spending remains a challenge in other sources spent for ECED within the educa- tation in education, weak spending coor-
priority areas. Better-targeted, more effec- tion sector remain low. In the health sec- dination in the water supply sector, poor
tive programs such as the PKH (condition- tor, at both the central and district levels, housing planning decisions, and contingent
al cash transfer) have received increased spending and service delivery are geared liabilities in the infrastructure sector, espe-
spending, while less effective programs toward curative episodic care instead of cially in the roads sector. However, efforts
such as the Rastra (subsidized rice for the cost-effective preventive interventions. are underway to improve sectoral policies,
poor) are being phased out. However, re- In infrastructure subsectors, spending on in education (with more performance-ori-
sources are not always allocated to the most new construction and administration takes ented programs) and water supply, and
effective interventions in other sectors. In priority over operation and maintenance there have been improvements in budget
education and health, interventions with (O&M), particularly in irrigation and water execution and system delivery in social as-
the highest impact have not received high and sanitation. Furthermore, less efficient sistance, and the roads sectors thanks to
priority. For example, despite the proven sectoral policies and system delivery limit performance-based contracts.
SYSTEMIC CONSTRAINTS
Furthermore, the impact of public spending for achieving better results are limited by systemic constraints across
sectors. While each sector has unique programs and challenges, there are several cross-cutting issues that generally
impede the efforts to improve the quality of spending in Indonesia. These are:
1 Public financial management While there has been commendable progress in many aspects of PFM, for example, a strong
(PFM) challenges. five-year planning process and concerted efforts to improve accuracy in budget revenue esti-
mation, there are still systemic constraints observed in all sectors. The systemic constraints
start with inconsistency between planning architecture, budget architecture, performance
management framework, and organization structure of the government. The concept of
money follow program cannot be fully implemented because programs in planning structure
are based on national plan priorities and those under budget are based on the organizational
structure. The constraint continues with the implementation of the logic framework that
remains suboptimal, despite the existence of intervention logic framework in the regulation.
The definition of outputs and outcomes are often not clearly stated. The MTEF practice
is also still not complemented with a top-down medium-term budget ceilings from MoF
to line ministries, which can be used as a guidance for them to prepare the spending plans.
Clear visibility of fiscal constraints could have led to competition for resources, challenges
to proposals and strategic allocation of resources. Finally, although monitoring takes place,
it is fragmented, often duplicative and predominantly focused on budget absorption rates,
rather than on measuring the impact of spending.
2 Coordination challenges Coordination challenges and fragmentation among central agencies limit the effectiveness
across agencies and between of major government programs such as JKN (national health insurance) and social assistance
levels of government programs in achieving their objectives. Decentralization poses additional challenges for
central line agencies’ accountability and monitoring. Coordination problems are exacerbated
for programs that are the joint responsibility of local and central governments.
Fiscal transfers to SNGs do Despite incremental improvements, fiscal transfers are still not allocated in a manner that
3
not incentivize performance reduces inequality between provinces and districts, or drives improvements in service de-
livery. The GoI has laid the foundations to strengthen the “fiscal social contract” between
citizens and SNGs, but needs to further increase SNGs’ autonomy in raising own-source
revenues while holding them accountable to spending efficiently and effectively
4 Inadequate data and Fiscal data and sector-specific output and outcome data are key to measuring and driving
information systems effective government performance. However, consistent and credible SNG spending data by
functions are lacking, making it difficult to evaluate subnational spending efficiency within
sectors. Data on outputs and outcomes are available in some sectors, but not consistently
used and of poor quality. Even at the central government level, there are limitations in
tracking the quality of spending in priority sectors such as health and education, as data are
not necessarily shared across key agencies and ministries, nor sufficiently disaggregated
for meaningful analysis.5 Executive Summary
5 Constraints to private Despite the establishment of a public-private partnership (PPP) regulatory and organization-
sector participation al framework, the private sector faces challenges when looking to invest in infrastructure.
In the water supply sector, most local water companies (Perusahaan Daerah Air Minum
or PDAM) face regulatory constraints in applying cost-recovery tariffs and do not have
adequate capacity to invest in new infrastructure. Central-local coordination challenges
also affect local governments’ efforts to mobilize private sector investment into PDAM.
In the housing sector, current subsidy programs crowd out the private sector by offering
significantly lower interest rates. In the national roads sector, the GoI has mostly relied on
state-owned enterprises (SOEs) to expedite the delivery of the Expressway Development
Program. While this strategy has helped the toll road authority (BPJT) to exceed its target
for toll roads, it is not the most financially sustainable nor efficient option for developing
the remaining tranches of expressways, which are not as financially viable.
The
WAY
FORWARD
To further improve the outcomes Indonesia seeks from Government spending, the GoI can consider the following
broad policy options: (i) increase fiscal space to enable higher spending on priority sectors; (ii) address systemic
constraints to the efficiency and effectiveness of spending, and iii) address sector-specific constraints to the efficiency
and effectiveness of spending.
1 Increase fiscal To achieve development targets in priority areas, as stated in the National Medium-Term
space to enable Development Plan (RPJMN), Indonesia needs to increase fiscal space for additional spending
increased public of more than 4 percent of GDP by 2024 (pre-COVID scenario). It is important to create fiscal
expenditure on space for priority spending within the fiscal rule through tax and expenditure reforms. Mea-
priority sectors sures to widen fiscal space are even more critical, since revenue-to-GDP ratio risks remaining
stagnant well below its 2018 level in the medium term, due to an expected sluggish recovery
of commodity prices post-COVID-19 and the permanent impact of the corporate income tax
rate cuts from 25 percent to 22 percent in 2020 and a further cut to 20 percent in 2022. These
reforms, which require sustained efforts in the medium term, will lead to additional fiscal
space for spending on priority sectors, would make the budget less exposed to commodity
price fluctuations and less rigid.
Collect better and more tax revenues. To collect more revenue, the GoI should prioritize
reforms that broaden the tax base for the main consumption and income taxes, and increase
tax rates to improve tax progressivity and achieve health goals. The GoI should also improve
tax administration to ease the burden of paying taxes, which will encourage higher volun-
tary compliance. Boosting own-source revenues of local governments will provide them
with additional financing for their spending. Reforms of the non-tax revenue system can
mobilize additional revenues.
Further reallocate spending away from inefficient energy and fertilizer subsidy pro-
grams to free up fiscal space. It is estimated that the poor and vulnerable only receive
about 21 percent of the kerosene and LPG subsidies, 3 percent of the diesel subsidy and
15 percent of the electricity subsidy. Eliminating these energy subsidies could save 0.7
percent of GDP (using 2017 data). Eliminating fertilizer subsidies could create space for
more efficient, effective and balanced spending in the agriculture sector, as the subsidies
have a high opportunity cost.
Compensate the bottom 40 percent of the population to offset the impact of these re-
forms. An illustrative simulation of energy subsidy reforms (cutting spending by 0.7 percent
of GDP per year), eliminating VAT exemptions and raising tobacco excises (raising revenue
by 1.1 percent per year), while offsetting the impact of VAT exemptions and energy subsidy
reform on the bottom 40 percent of the population with targeted cash transfers (costing
0.5 percent of GDP), would leave a net positive fiscal impact of 1.3 percent of GDP per year.Executive Summary 6
2 Address systemic To increase efficiency and effectiveness of spending, the GoI could consider the following measures to address sys-
constraints to temic constraints:
the efficiency and
effectiveness of Emphasize quality of outputs and outcomes rather than only the quantity in designing development targets
spending across in national and sector planning and monitor along the results chain so that underperformance can be identified
sectors and addressed, which would make it more likely that sector outcomes are achieved.
Prioritize more effective programs and interventions within each sector by reallocating spending away from
less productive interventions. In the health and education sectors: shift resources toward preventive care and ECED,
respectively; water resources management, and water and sanitation: focus more on maintenance to avoid costly
rehabilitation and safety concerns later; and the housing sector: shift resources to more efficient and better targeted
programs. Strengthening monitoring and evaluation (M&E) systems is critical in supporting the evidence-based
evaluation of which programs are performing and which are not.
Strengthen PFM to raise the quality and effectiveness of government spending by improving coordination
between the MoF and Bappenas to align planning and budgeting, strengthening implementation of the ‘money
follows program’ approach, strengthening the medium-term perspective in planning and budgeting, improving
the “intervention logic” concepts in program/performance design, continuing to move to smaller and fewer in-year
budget revisions, both for the mid-year budget revision (APBN-P) and self-blocking budget cuts, strengthening a
‘performance management environment’ that will encourage and support higher-quality spending by the public
sector, and enabling a performance-based budgeting system that is adapted to the requirements of a significantly
decentralized fiscal process. Since a large part of FY 2020 Budget has been reallocated to combating COVID-19,
there is a need to track allocation, expenditure and results of expenditure related to COVID-19. The Ministry of
Finance should introduce a new sub-economic classification and a program code for COVID-19 expenditure to
enable such tracking. A digital dashboard can be established to provide real-time information on the expenditure
and outputs related to the COVID-19 response.
Improve coordination among central agencies, and between central and subnational governments to deliver
better services, by improving program integration and convergence, and data sharing among key national priority
programs such as social assistance and national health insurance (JKN), and by strengthening central-local coordi-
nation in policymaking, investment decision-making, and program implementation.
Reform the fiscal transfer system so that it drives improvements in service delivery, using the following guiding
principles: vertical balance (aligning districts’ revenue autonomy with their spending responsibility, and incentiv-
izing districts to exert more tax effort ), horizontal balance (e.g., moving the fiscal equalization formula toward a
per-client basis with a transition strategy to limit the impact of losing districts, make the DAK conditional transfers
more integrated in the local budget process and predictable) and efficiency (experimenting with performance-ori-
ented transfers).
Collect better data and improve the management of information systems. This will require improving the collec-
tion of data and the management of information systems, together with implementing the new subnational budget
Charts of Accounts, which will lay a fundamental foundation for better evaluation of subnational spending in the
future. However, implementing these reforms is a huge task. At the central level, line ministries should collect and
report data on pre-defined outputs and outcomes across sectors and integrate these data into common platforms
that can be used to improve delivery of services and the targeting of programs by all levels of government. Finally,
data should be used to drive better performance, enabling improved top-down and bottom-up accountability.
Improve the environment to attract more private sector financing for infrastructure. This will require imple-
menting the recommendations from the InfraSAP8 to strengthen the PPP regulatory framework, changing SOE
incentives, improving pricing mechanisms and deepening capital markets. In addition, sector-specific reforms are
needed: in roads, leveraging private sector investment for expressway development; in the housing sector, supporting
the development of a PPP framework for affordable housing to support access to affordable and well-located land for
affordable housing development in urban centers, and integrating affordable housing as a part of the GoI’s current
infrastructure strategic planning and land development by crowding in affordable housing in Transit-Oriented
Development (TOD); in the water supply and sanitation sector, supporting adequate revenue for PDAM through
full cost-recovery tariffs and different financing sources for capital investment. In the water resources sector, intro-
ducing SOE-Public-Partnership (SPP) to identify revenue mechanisms to provide alternative long-term financing
mechanisms to maintain irrigation systems.
8 "Indonesia Sector Infrastructure Assessment Program”, World Bank, June 2018. Forthcoming7 Executive Summary
3 Address sector-specific Addressing sectoral constraints is also necessary to improve the effectiveness and ef-
constraints to the efficiency ficiency of spending by improving the design and implementation of major sectoral
and effectiveness of spending programs (Table ES.1.)
TABLE ES.1. Summary of sector-specific recommendations
Emphasize quality over Improve coordination across/ Collect better data and Address shortcomings in
quantity / prioritize more between levels of government improve information systems financing
effective programs
Health Introduce explicit Address fragmentation of Invest in health information Increase health sector
benefit package for JKN financing across central and systems to improve M&E of spending by implementing
commensurate with available SNGs health spending performance financing reforms on revenues
resources & expenditure, e.g.:
Improve governance and Monitor and track legally - Raising revenues for health
Target resources (human accountability by introducing a mandated health spending through tobacco tax reforms
resources for health or HRH) to health annual sector review - Extending premium subsidy
populations that would benefit Use JKN claims data to inform for informal workers to bring
most such as low public density Reinforce performance- and improve service delivery additional resources to BPJS
area where private sector does based financing to drive and increase efficiency Healthcare
not seem to be operating improvements in health service - Update JKN premiums based
delivery on sound actuarial analysis.
Transform the health-care - Address open-ended hospital
system to deal with the long- payments
term care needs of older and - Introduce cost-sharing for
chronic condition patients non-essential services
Education Launch a National Education Ensure that districts have Improve collection/availability Ensure that more resources
Quality Initiative, backed at sufficient financial and of fiscal data related to flow toward ECED as resources
the highest political levels to institutional capacity to education, including to better to the workers increase (in
improve the accountability of implement education policy monitor the use of TPG funds absolute terms)
the education sector
Strengthen coordination on Improve SNG civil servants’
Ensure that all teachers have early childhood education and capacity to utilize data for
the right pedagogical and development (ECED), including evidence-based policymaking
technical competencies (MoEC villages
for hiring civil servant teachers,
and SNGs and schools for Strengthening the role of SNGs
hiring contract and honorarium in helping BOS to reach its full
teachers) potential.
Clarify the responsible party for
teacher training & development
Social assistance Consolidate overlapping social Enhance institutional Invest in the capacity of the Increase spending on targeted
assistance programs (e.g., PIP coordination between central DTKS to expand in coverage social assistance spending by
and PKH) and re-design the and subnational governments and to minimize exclusion reducing remaining spending
combined program, and in the (e.g., coordinating demand and inclusion errors through on untargeted subsidies
long term foster integration of and supply side, co-finance a reliable dynamic updating
SA programs to support implementation, mechanism with the local Mitigate several neglected risks
integrated social welfare government and related along the lifecycle through
Strengthen key delivery database (DTKS)9 updating via external institutions additional budget particularly
systems for core social MoSA’s updating exercise via the elderly and young children
assistance programs a social registry information
system (SIKS NG) and among
Adapt core SA programs for central agencies to improve
rapid response to natural implementation performance
disasters and epidemic shocks
Mitigate several neglected risks
along the lifecycle through
additional budget, particularly
for the elderly and young
children
9 Data Terpadu Kesejahteraan Sosial, formerly known as Unified Data Base (Basis Data Terpadu or BDT).Executive Summary 8
Emphasize quality over Improve coordination across/ Collect better data and Address shortcomings in
quantity / prioritize more between levels of government improve information systems financing
effective programs
National roads Redefine strategic transport Revisit the structure of DGH to Monitor expenses more closely Increase the pool of funding
indicators to include efficiency improve the concentration of to ensure the higher costs of for national roads and
and road safety indicators technical skills and better focus road treatments and lifecycle expressways, including by
the responsibilities of staff on costs are justified leveraging private sector
Establish new, internationally asset management investment; however, when
aligned roughness thresholds insufficient fiscal resources are
available, it is recommended
Focus on longer-term that the GoI prioritizes
objectives (e.g., higher asset preservation over new
geometric standards, safer investment.
infrastructure)
Develop a robust long-term
(about 50-year) funding
and phased strategy for
Expressway Development
Program (EDP)
Housing Ensure subsidized homes are of Review and revise the Develop a Housing and Real Shift funding toward more
good construction quality and regulatory framework to Estate Information System to efficient, progressive, and
built in well-located areas and clearly assign a role for local improve the planning processes better-targeted subsidies
with access to basic services governments in providing for managing affordable
affordable housing, while housing development Develop a housing micro-
Develop alternative housing building their capacity to do so finance subsidy program to
typologies that are cost- finance home improvements
effective and meet the and incremental home
heterogeneous needs of the extensions
low-income underserved
consumer segment Support the development of
a Public-Private Partnership
(PPP) framework for affordable
housing
Water resources Realign the sector objective Scale up and institutionalize Create incentives for
management to focus on outcomes, such as participatory irrigation at the subnational governments
improved irrigation efficiency subnational level including (SNGs) to increase budget for
and agricultural productivity by strengthening the role of O&M.
(“more crop per drop”). irrigation commission and
water resource boards as local/ To cope with increased O&M
Infrastructure development multi-stakeholder platforms needs, convert River-Basin
target needs to consider Organizations into revenue-
institutional capacity and Build capacity of technical staff receiving entities, such as
the implementation of asset in River-Basin Organizations General Service Bodies (BLUs)
management to ensure (RBOs) and in subnational
effectiveness and sustainability governments for O&M
of services
Dedicate more attention
to O&M rather than new
construction
Water and sanitation Change incentives to Improve coordination and Reform the regulatory
discourage the use of channeling of funds between environment of PDAM to
groundwater (and encourage different layers of government enhance their financial
the use of piped water) and to improve service delivery sustainability and ability to
enforce regulations to limit such as a binding agreement cover O&M and to invest
groundwater exploitation that CG investment will be in improved and expanded
complemented by adequate services
Central government should funding for downstream
undertake stronger measures infrastructure investment Incentivize LGs/PDAM to
to discourage proliferation of play their part in developing
PDAM, as well as to encourage Enhance community-based network facilities through
the merger of PDAM that are development for rural water performance based grants
below an economically viable supply and sanitation, such as through expanding the
size especially for rural areas Water Hibah model.
Source: authorsOverview 12
12—68
1.1 1.2 1.3 1.4 1.5
Overview
Why does How sustainable Is public spending What are How can the
Indonesia need a is public finance in in Indonesia the systemic government
public expenditure Indonesia? adequate, efficient constraints improve the quality
review? and effective? to improving of spending?
the quality of
spending?1.1
13 Chapter 01
fiscal deficit at 3 percent of GDP and the
Why does
general government public debt ratio at 60
percent of GDP. Between 2000 and 2018, fis-
cal deficits averaged 1.5 percent of GDP. The
Indonesia need a public debt-to-GDP ratio declined sharply
from 83 percent in 2000 to 30 percent of
public expenditure
GDP in 2018. Four major credit ratings agen-
cies13 consider Indonesia’s sovereign credit
investment grade, corroborating the coun-
review?
try’s improved economic environment, fiscal
management, and overall creditworthiness.
Fiscal policy also played a role in re-
ducing poverty and inequality in recent
years. Fiscal policy, and the spending side
A Indonesia’s development trajectory has been remarkable in particular, can be an important lever in
reducing poverty and inequality, and in driv-
B But there are large human capital and infrastructure gaps ing faster growth. In Indonesia fiscal policy
reduced the poverty rate and the Gini co-
C Making spending more efficient and effective can efficient by 1.6 percent and 3.4 Gini points,
help close the gaps respectively, in 2017.14 However, the magni-
tude of this impact is limited compared with
A Indonesia’s development
other emerging country peers. In Brazil and
South Africa, for example, highly progres-
sive direct taxes, social spending and in-kind
trajectory has been transfers in health and education reduced
the Gini coefficient by 12 and 17 points, re-
remarkable… spectively.
This has translated into improve-
ments in access to basic services and in-
frastructure. While only under half of the
O
population (48.8 percent)15 had access to 10 The average lower
middle-income country
ver the past 20 years, Indo- donesia made huge gains in poverty reduc- basic services such as clean drinking water, grew by 4.9 percent per
nesia has displayed a solid tion: the poverty rate fell from 19.1 percent of sanitation, health and education in 2001, this year on average during this
record of macroeconomic the population in 2000 to 9.4 percent of the share rose to 75.1 percent in 2018. More re- period.
stability, growth and poverty population by March 2019. Gross national cently, the GoI is close to meeting several 11 The standard deviation of
reduction. The Indonesian economy grew income (GNI) per capita12 rose more than of its targets under the 2015-2019 National GDP growth declined from
by an average 5.3 percent annually between six-fold from US$580 to US$3,840 over the 2.0 percent over 1979-1996
Medium-Term Development Plan. About 82
to 0.7 percent over 2000-18.
2000 and 2018, faster than the average low- same period, ushering millions of Indone- percent of Indonesians now have access to
er-middle income country.10 The volatility sians into the middle class. health insurance, an increase from 52 percent 12 Gross national income
(GNI) converted to U.S.
of growth also declined.11 At the same time, Prudent fiscal management has in 2014. Net enrolment rates in lower and dollars using the World
the economy created over 30 million service played a crucial role in supporting mac- upper secondary school have increased to 78 Bank Atlas method divided
and industrial jobs over this period, replac- roeconomic stability and growth. Since and 60 percent, respectively. In infrastruc- by the mid-year population.
Source: World Bank World
ing lower-productivity agricultural jobs and the enactment of State Finance Law in 2003, ture, the GoI has exceeded its target for road Development Indicators,
raising household incomes. As a result, In- Indonesia has adhered to legal limits on the construction, delivering about 3,387 km of updated July 2019.Overview 14
BOX 1.1. The government’s response to the COVID-19 Pandemic
T
he Government has declared Social Registry (DTKS) that do not yet receive
COVID-19 a national emergen- either of these programs; approximately 8 mil-
cy, and is implementing mea- lion households, will receive a temporary cash
sures to cushion the expected transfer worth approximately 30 percent of the
adverse economic effects, including interven- national poverty line. In addition, full electricity
tions to enhance healthcare, expand social pro- subsidies have been announced for households
tection and prevent mass bankruptcies in the using 450 Volt-Ampere (VA) connections and
private sector. The Government has announced a 50 percent subsidy for those on 900VA con-
three packages of policy responses to the cri- nections between April and June.
national roads and 380 km of expressways
sis amounting to a total of IDR 434 trillion (2.7 Several of the social protection mea-
between 2014 and 2018. The housing oc-
percent of GDP) (Table 4). The first package sures announced by the government protect
cupancy backlog declined from 7.6 million
revealed in late February valued at IDR 8 trillion both people and firms. Key amongst them is the
households in 2014 to 5.9 million house-
and focused on protecting the tourism sector announcement of the full financing of employ-
holds in 2017, in part through the Satu Juta
and affected households. The second package er and employee contributions to the national
Rumah initiative.
valued at IDR 21 trillion announced in mid-March health insurance scheme for 30 million salaried
With higher incomes and better
focused on protecting supply chains by giving workers. In addition, Indonesia’s Kartu Pra-Kerja,
access to services, Indonesians have on
tax relief and facilitating imports and exports a program that provides subsidized vouchers
average become healthier and better
through non-fiscal measures. The third pack- for unemployed workers for skilling and re-skill-
educated. Between 2000 and 2017, life
age, announced on March 31, valued at IDR 405 ing, has doubled in its allocated budget and
expectancy increased from 66 to 69 years.
trillion, focused on implementing a response to will be launched in April. The program will be
Over the same period, under-five mortality
the COVID crisis expanding health, social pro- accessible to an estimated 5.6 million informal
declined from 52 to 25 per 1,000 live births.
tection and industry support. These measures workers and small and micro enterprises. who
The quality of education, as measured by
will be implemented through a revised budget have been affected by COVID-19.
student performance on the OECD Pro-
for 2020. While the fiscal costs in terms of budget
gram for International Student Assessment
In response to expected welfare losses reallocations and an increased debt burden are
(PISA), has also improved. Between 2003
for poor and vulnerable households, the gov- becoming clearer, it is too early to tell if the
and 2015, Indonesian students’ PISA scores
ernment has adjusted several of its social pro- measures are adequate. To create space for the
improved along all dimensions, by 15 points
13 Standard and Poor’s tection programs. Given the reduction in labor health, social assistance and industry support
in reading and mathematics, and by about (BBB), Fitch (BBB), Moody’s income through lower consumption, poor and response, nearly all ministries and subnational
8 points in science. (Baa2), and the Japan Credit
vulnerable households will likely face shocks transfers will see reduced budgets compared
The ongoing COVID-19 Pandemic Rating Agency (BBB).
to their welfare over 2020. In anticipation and to the original 2020 budget. In particular, public
in 2020 puts these gains in development 14 Estimates from
to mitigate those shocks, the government an- spending on infrastructure will fall sharply by
outcomes at risk and will make closing the Commitment to Equity
Update, World Bank Poverty nounced in March that 15.2 million food assis- around 23 percent at all levels – central gov-
human capital and infrastructure gaps
Global Practice. The tance e-voucher program (Sembako) benefi- ernment (manly the Ministries of Public Works
more difficult with lower fiscal space. The estimates for inequality
ciary households would receive a 33 percent and Housing and of Transport), subnational
projected growth slowdown in 2020 could reduction account for
direct transfers, indirect higher benefit for the coming nine months. The transfers (DAK infrastructure) and below-the-
lead to sharp increase in the poverty rate
subsidy, indirect taxes, adjustment brings the value of this social assis- line financing of infrastructure. Moreover, sub-
reversing many years of poverty reduction and, in-kind education
tance program to comprise 10 percent of the national government have been allowed to use
compared to the pre-COVID projection, and health transfers.
While the estimates for national poverty line and will cost an estimat- the mandate to spend 25 percent of revenue
even after taking into account the impact of
poverty reduction are ed IDR 4.5 trillion. In addition, the government sharing and the General Allocation Transfer
additional social assistance measures (Box only accounting for direct
announced the program would be expanded on infrastructure for COVID-19 mitigation. The
1.1). Cuts to infrastructure spending will lead transfers, indirect subsidy,
and, indirect taxes. to reach 20 million households approximately debt-to-GDP ratio is projected increase to 37
to delays in infrastructure development. The
30 percent of the population. Furthermore, for percent of GDP in 2020, and increased inter-
widening fiscal deficit and additional below- 15 Simple average of five
indicators, measured from the flagship conditional cash transfer program est payments will compete with non-interest
the-line spending is expected to lead to a
Susenas household survey (PKH), the government has decided to increase spending going forward. It is too early to tell if
significant jump in the debt-to-GDP ratio data: (i) net enrolment rate
benefits by 25 percent for nine months for 10 the measures are adequate to strengthen the
from 2021 onwards, while revenue is pro- for junior high school, (ii)
net enrolment rate for senior million households, approximately 15 percent health care system in response to the COVID-19
jected to remain well below its 2018 level in
high school, (iii) access to of the population, and bring forward payment Pandemic and mitigate its impact of the poor,
the absence of significant revenue reforms. protected water, (iv) access
schedule forward from April to March. Besides vulnerable and informal sectors workers and
Rising interest payments will compete for to protected sanitation,
and (v) proportion of births PKH and Sembako, all households in Indonesia’s on firms.
the reduced budget envelope with priority
attended by a skilled health
spending on health, social assistance and worker. See World Bank Note: status as of April 15, 2020.
infrastructure. (2017). Source: authors"You can also read
