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

Operating in a decentralizing Indonesia zFeatures of Indonesia’s decentralization zThe New Business Environment zQuestions for the Bank zWhat’s Next?

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

Indonesia’s decentralization zRegional governments will spend about percent of total (8-9 percent of GDP) zCentral government will mainly spend on: yInterest payments (6 percent of GDP) ySubsidies (2-3 percent of GDP) yCentral civil service (1.5 percent of GDP) zExact division not yet known

Regional Finance yAlokasie Umum (>25 percent of revenues, 3.5 percent of GDP) yAlokasie khusus (unknown) yRevenue sharing (oil, gas, forestry, fishery, mining, 1.2 percent of GDP) yOwn revenues (1 percent of GDP) yBorrowing

Alokasie Umum z90 percent to District/City; 10 to Province zDistribution per formula zGrant=f(Needs-/-Revenue capacity)*a yNeeds=g(population, area, #poor, east) yRevenue=h(regional GDP) ya=adjustment factor, to ensure at least FY00 allocation

Alokasie Khusus & Borrowing zDistribution Umum-Khusus unknown zLine Ministries determine factors for Khusus zApproval control of foreign borrowing zFormula-control of total borrowing yTotal debt yDebt service

Risks zDebate on level of autonomy not settled zMacro-economic neutrality not guaranteed zPolitical accountability in regions shaky yMany appointed bupati’s & governors yInexperienced DPR yNo local tax rate control yweak links to service users zBig Bang will be messy

Opportunities zBetter tailored service delivery zExperimentation zCompetition zParticipation zUsing diversity of regions zChallenge:How to minimize risk, maximize benefits

The New Business Environment z350 potential clients y1/3 of “regions” has 86 percent of the poor z4 themes z3 lines of business z2 types of financing zShrinking operational budgets

Questions for the Bank yWhich regions? yWhat level of government? yWhat process? yWhat products? yWhat role for the center?

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

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

What products? zLending or knowledge? zProjects or Programs? zIBRD or IDA?

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

Central Business zPolicy Advice yDecentralization design zNational Projects z“Earmarked transfer” business zFinancial Intermediary

Next steps zDo more analysis on regions zDesign feasible operations zDesign analytical tools to select regions zAgree with center on administrative tools & processes zContinue advice to center on policy