Operating in a decentralizing Indonesia What will happen, what can we do

Operating in a decentralizing Indonesia Features of Indonesia’s decentralization The New Business Environment Questions for the Bank What’s Next?

Indonesia’s decentralization The current legal framework (Laws 22 and 25 of 1999) will give Indonesia substantial decentralization. The districts/cities will manage most of the Government services we care about, including health, education, and infrastructure The Government has decided for a “Big Bang” implementation in 2001

Indonesia’s decentralization Regional governments will spend about 40-45 percent of total (8-9 percent of GDP) Central government will mainly spend on: Interest payments (6 percent of GDP) Subsidies (2-3 percent of GDP) Central civil service (1.5 percent of GDP) Exact division not yet known

Regional Finance Alokasie Umum (>25 percent of revenues, 3.5 percent of GDP) Alokasie khusus (unknown) Revenue sharing (oil, gas, forestry, fishery, mining, 1.2 percent of GDP) Own revenues (1 percent of GDP) Borrowing

90 percent to District/City; 10 to Province Distribution per formula Alokasie Umum 90 percent to District/City; 10 to Province Distribution per formula Grant=f(Needs-/-Revenue capacity)*a Needs=g(population, area, #poor, east) Revenue=h(regional GDP) a=adjustment factor, to ensure at least FY00 allocation

Alokasie Khusus & Borrowing Distribution Umum-Khusus unknown Line Ministries determine factors for Khusus Approval control of foreign borrowing Formula-control of total borrowing Total debt Debt service

Debate on level of autonomy not settled Risks Debate on level of autonomy not settled Macro-economic neutrality not guaranteed Political accountability in regions shaky Many appointed bupati’s & governors Inexperienced DPR No local tax rate control weak links to service users Big Bang will be messy

Opportunities Better tailored service delivery Experimentation Competition Participation Using diversity of regions Challenge:How to minimize risk, maximize benefits

The New Business Environment 350 potential clients 1/3 of “regions” has 86 percent of the poor 4 themes 3 lines of business 2 types of financing Shrinking operational budgets

Questions for the Bank Which regions? What level of government? What process? What products? What role for the center?

Which regions? Focus on the poor regions …that face natural resource management issues …are well governed …and are developing a competitive and just economy So which ones?

What process? How to use competition among regions How to get cross-sectoral focus How to catalyze democratic, participatory planning processes How to promote innovation & experimentation How to operate cost-effectively How to monitor our impact

What products? Lending or knowledge? Projects or Programs? IBRD or IDA?

What level of Government The district has most of the money The district responsible for most of the services The district is small spill-overs small operations/high costs The district has little planning/design capacity (for now) The Bank could catalyze the right level of cooperation

“Earmarked transfer” business Financial Intermediary Central Business Policy Advice Decentralization design National Projects “Earmarked transfer” business Financial Intermediary

Next steps Do more analysis on regions Design feasible operations Design analytical tools to select regions Agree with center on administrative tools & processes Continue advice to center on policy