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

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;

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.

Local Govenrments’ Revenues

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

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

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

Nias and Nias Selatan have the highest poverty rates in North Sumatera Source: BPS, 2004

Reconstruction spending

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

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

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

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

Local Governments’ Expenditure

Local governments’ spending has tripled since decentralization

Routine spending has an increasing share particularly after decentralization

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

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

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

Education Sector

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

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

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.

Health Sector

Health spending has increased after decentralization

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

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.

Infrastructure Sector

Spending on infrastructure has declined sharply after decentralization

Local governments allocation on infrastructure maintenance is worrying Nias Nias Selatan

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

Local Governments’ Capacity

Local governments capacity to manage public finance is still poor

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.

Recommendations SectionRecommendation Revenue  Improve transfer allocations (DAU) among districts by taking into account poverty and other social indicators. The DAU allocation formula should be more sensitive to poverty and fiscal gap, as opposed to benefiting districts with large civil servant salary bills;  District governments should focus on stimulating economic activities rather than seeking to maximize short-term own source revenue. Expenditure  Scrutinize the increase in routine spending and set appropriate shares for operational and maintenance;  Allocation of development expenditure on government apparatus should be scrutinized, public services and infrastructure should be priority of development spending. Education  Provides incentives for qualified teachers to teach in remote area;  Accelerate rehabilitation of schools, but restrain the building of additional schools until there are sufficient numbers of teachers and adequate funding to maintain current school buildings.

Recommendations SectionsRecommendtions Health  Increase budget allocation on health by focusing more on quality of health personnel and improved health outcomes;  Provide appropriate incentives mechanism to improve the number of health personnel in Nias island;  Ensure that the investments made by BRR are focused on meeting well- defined health outcomes targets. Infrastructure  Local governments involvement should be strengthened to develop a sense of ownership of the projects as well as to improve the skills and capacity in future planning;  Develop short-term and long-term development program on infrastructure;  Improve budget allocation on maintenance to sustain the current reconstruction progress. LGs capacity  Improve local government financial management capacity ie. by having a joint-funded capacity training with BRR, donors, and NGOs;  The creation of new districts/sub-districts should be under adequate preparation and ensure that physical infrastructure and human resources are in place to manage a new administration.

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