Mataram Lombok Indonesia 8 May 2015 Session 3: Latest fiscal reforms of SNGs in Indonesia and tasks for the new administration Marcelino Pandin, PhD OECD Korea Policy Center and MOHA on 1st Asian Public Governance Forum on LFM Mataram Lombok Indonesia 8 May 2015

Brief intro to fiscal reforms of SNG in Indonesia in a simplied continuum 1999-2014 1999 2004 2014 2001 Deconcentration, delegation and selected devolution................. Toward full-scale devolution.......... Centralized ..... ..... Decentralized ..... expenditure led (dependence on transfer) at city/regency level mostly deconcentration strong inertia ---- central vs decentralized LG low capacity and trust toward performance based and specific target innovative revenue enhancement (OSR) a mix arrangement Province-City/regency-village linking fiscal and performance Under Ministries through Presidential instructions wider devolution incentive & punishment further fiscal & governance reform new gov mechanism/direct election Abolish hold harmless principle Revised fiscal transfer formula detailed devolved functions of LGs Law 22 Law 25 Law 32 Law 33 Law 23 A new bill Law 6 on devolution at village level

Latest fiscal reforms as of 2015 Provinces Previous New arrangement strengthening provincial govts’ role in monev cities and regencies lead the coordination of cross-border development between cities-regencies lead land acquisition for major public infrastructure new own source revenues Central Govt Central Govt Provinces Provinces Cities and regencies devolved land and building taxes incld stamp duty special presidential infrastructure transfer MIDF (in progress) – creditworthiness & governance PERA (public expenditure andreview analysis) more accountability on performance Cities / Regencies Cities / Regencies Sub districts Villages new governance structure and mechanism e.g. Village council, village collaboration etc. village transfer (separated to cities/regencies transfer village owned enterprises (BUM Desa) room for exploring new sources of income for villages need be equipped with public finance mgt and audit Villages & Subdistricts Villages

Future direction for current administration (1) At central govt: address the classic problems: coordination failure among ministries and appetite in authorities apply widely performance-based transfer and performance benchmark promote creditworthiness to access external financing and improved governance (anticipate municipal bond market and LG bankrupcy law) provide intellectual and substatial inputs into village law 6/2014 and regulations amend relevant laws to clearly separate mandates for resource allocation, program implementation and independent external audit and monev streamline procurement system and accommodate innovative undertakings incld PPP consider the use of external and independent auditors revive municipal contracts and actualize real and significant penalties to underperformers set up an independent commission on grant allocation and evaluation on budget appropriation support cities’ significant contribution to national economic growth

Future direction for current administration (2) At subnational government levels: link fiscal devolution and delivered performance contract enhance quality of data for planning and control (incld spatial data) sharpen revenue mobilization strategies to service dellivery adopt innovative revenue enhancement: pro-growth, pro-poor, pro-job, and pro-environment run strategic cost reduction and smart budget allocation improve modeling capacity that link budget and performance (e.g. job and growth) - expand voice into choice and control

Thank you