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German TechnicalCooperation

CAPACITY BUILDING NEEDSASSESSMENT FOR LOCAL

GOVERNMENTS ANDLEGISLATURES CLEAN

Urban Project

Regional Finance

31 August 2000

GTZ Office, Deutsche Bank Building, Jl. Imam Bonjol No. 80, Jakarta 10310Tel +62-21-324 007 Ext. 124 and 126; Fax +62-21-324 070

Support for Decentralisation Measures (SfDM), Tel +62-21-351 1584, +62-21-351 2609; Fax +62-21-386 8167

Email: [email protected]: www.gtzsfdm.or.id/capacity/cb_index.htm

Report No. FR/5

Capacity Building Needs Assessment for Local Governments and Legislatures - Regional Finance (August 2000)

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Foreword

This Thematic Report on Regional Finance is one of the final thematic reports prepared by theCapacity-Building Needs Assessment Study which was jointly carried out by GTZ (GermanTechnical Cooperation) and the USAID CLEAN-Urban Project. The objective of this report isto identify and prioritize the capacity-building needs to help local governments competentlyimplement the new local government finance system envisaged under Law No. 22/1999, Law No.25/ 1999 and their supporting regulations.

The report stresses that the new local government finance system represents a fundamentalreform which provides the opportunity for meaningful decentralization including enhanced localdecision-making authority, transparency and local accountability. However, it places extensivenew demands on the local DPRD members, local government officials and communities toeffectively capitalize upon these opportunities. The existing system of local government financialmanagement which is dictated in great detail by central government regulations and guidelineswith intrusive supervision by central and provincial governments will be replaced by a systemof general guidance from the central government supported by central monitoring, evaluation andfacilitation. The local governments will themselves be largely responsible for the detailed designand implementation of systems for budgeting, accounting, reporting and other aspects of financialmanagement. This has a profound impact on the new capabilities required of DPRD members,local government officials and the communities.

The capacity-building needs to support this reform are extensive; especially as many localgovernments have serious deficiencies in their capacity to implement even the existing system.Thus, to support rapid decentralization of local government finance, capacity-building efforts bythe GOI and support from donors must be strategically prioritized.

This report has been prepared by Adam Nugroho and Bill Kugler of the CLEAN-Urban Project.During the final stages of preparing the report, the former State Ministry for Regional Autonomy(MNOD) was merged with the Ministry of Home Affairs and Regional Autonomy. Reference toMNOD should therefore be read as referring to the latter. The views expressed in this report arethe views of the authors, and do not necessarily represent the views of GTZ, USAID or of theGovernment of Indonesia.

31 August, 2000

Rainer Rohdewohld

Team Leader (GTZ)Capacity Building Needs Assessment forLocal Governments and Legislatures


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Executive Summary

Law No. 22/1999 regarding Local Governance, Law No. 25/1999 regarding Central-Local FiscalBalance and the supporting government regulations represent a fundamental reform of theexisting local government finance system which provides the opportunity for meaningfuldecentralization. This includes enhanced local decision-making authority, transparency and localaccountability.

Under the existing system, the central government has dominated the sources of regional financeas well as the permissible uses of such finance. Law No. 25/1999 regarding Central-Local FiscalBalance and the supporting Government Regulation on Equalization Funds introduces the moreflexible General Allocation Grant (Dana Alokasi Umum –DAU ) to replace both the SubsidiDaerah Otonom (SDO), which previously paid all local government staff salaries, and theprevious INPRES grants for development expenditures. This change will make it possible forlocal governments to make better decisions regarding the appropriate balance between operationsand maintenance allocations versus those for new development projects. In replacing the SDOsystem, DAU will also allow local governments to design their own organizations for serviceprovision and will finally give them incentives for achieving labor productivity in the provisionof services. With the introduction of the new DAU and the widening of local governmentresponsibilities, local governments will have to make much more difficult decisions regardingthe allocation of funds between different sectors under their responsibility. This means thatDPRD members and local government officials will need new and increased capabilities to makesuch decisions on budgetary allocations. In making these decisions, local governments must becapable of better understanding the priorities of the local communities. This also places newdemands on the DPRD, local government officials and the communities.

Until now, the systems and procedures for local government financial management have beendictated in great detail by central government regulations and guidelines, especially PP 5/1975and PP 6/1975, which have been enforced by intrusive supervision from the central andprovincial governments. These are now being replaced by a system of general guidance from thecentral government supported by central monitoring, evaluation and facilitation. The localgovernments will themselves be largely responsible for the detailed design and implementationof systems for budgeting, accounting, reporting and other aspects of financial management. Thishas a profound impact on the new capabilities required of DPRD members and local governmentofficials. The draft Government Regulation on Local Government Financial Managementencourages full cost recovery for service provision, where appropriate. It also specifies that localgovernments will use a performance-oriented budgeting approach for both budgeting andfinancial performance reporting in order to make a clear linkage between inputs and expectedoutputs. This performance measurement and reporting to the executive, the local parliament andto the community will help improve transparency and accountability. All of these have hugeimplications for the new types of capabilities that are required of local governments.

The study team has taken these new systems and approaches that are emerging in the legalframework for Regional Finance and combined them with international best practices to formwhat we call the Normative Framework for Regional Finance. From the framework, capacitiesthat are needed by local parliaments, local government officials, local communities and centralgovernment ministries were identified. Instruments were then developed to gauge the existing


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capacities and identify those for which capacity-building support is needed. During thedevelopment of the Normative Framework, a three dimensional approach of capacity was used,whereby capacity of a local government is recognized as dependent not only on the capacity ofindividuals (individual level) or the local government management tools (entity level), but alsoon the enabling framework of national and local policies and regulatory systems (systems level).

Based on the Normative Framework, instruments such as in-depth interview formats andquestionnaires were developed and used in the field survey work to evaluate the existing andneeded capacities. Extensive interviews were conducted with concerned central government stafffollowed by in-depth field surveys conducted in Kota Makassar, Kabupaten Bima, Kota Malangand Kabupaten Kutai Induk; as well as the related provincial offices in Propinsi Sulawesi Selatan,Propinsi Jawa Timur, and Propinsi Kalimantan Timur.

The general findings of the field surveys indicate that existing capabilities of local governmentsfor local government financial management vary greatly; ranging from those that are competentto implement the existing centrally-dictated systems to those with substantial deficiencies. Thenew regional finance system requires a quantum leap of capabilities such that even the fairlycompetent local governments will require substantial and sustained capacity-building support inorder to fully implement the new system. With such huge needs for capacity-building at all levels(system, entity and individual), there is a very urgent need for the Government of Indonesia toadopt a clear, phased strategy to support the capacity-building needs. Toward that end, this reportprovides recommendations grouped by priority as follows: those immediate priority activities thatmust be completed if decentralizations will substantially start as of January 2001, those that mustbe started now but implementation will take time, those whose start-up can be delayed and thoseactivities of secondary priority.

In order to support the effective implementation of decentralized regional finance in January2001, the most immediate capacity-building need is to issue and fully socialize the GovernmentRegulation on Local Government Financial Management (PP Pengelolaan danPertanggungjawaban Keuangan Daerah) and the Government Regulation on Equilibrium Funds(PP Dana Perimbangan) which will have a serious impact on the local government budgetingprocess and availability and allowable uses of transfers from central to local governments. Thissocialization must be in sufficient depth that local governments can fully comprehend theoperational implications of the new system and can act upon this knowledge. Such socializationmust not be limited to the local government executive and finance officers but also DPRDmembers on Komisi C, all senior local government officials with budget responsibility and thelocal communities. This broad and in-depth socialization will at least allow local governmentsto effectively employ their existing financial expertise to adapt and implement the new system.

Next, capacity-building activities should focus on those new systems and skills that are neededunder the new local government finance system; especially an APBD budgeting process whichis responsive to priorities of the local communities and the introduction of performance-orientedbudgeting and reporting to improve accountability and transparency. At the same time, attentionshould be paid to correcting critical deficiencies of the less capable local governments. This canbe accomplished through targeted technical assistance and training support, as request by thelocal governments and communities themselves.


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In the medium-term, there is a critical need to introduce a career path system for localgovernment finance complete with job descriptions tied to minimum qualifications and training.The training systems is deficient and must be upgraded, building first upon improving theexisting training institutions, courses and training materials.


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Ringkasan Eksekutif

Undang-Undang No. 22 tahun 1999 tentang Pemerintahan Daerah dan Undang-Undang No. 25tahun 1999 tentang Perimbangan Keuangan antara Pusat dan Daerah serta Peraturan Pemerintahlainnya, memberikan dampak perubahan besar dalam penataan sistem keuangan daerah yangsedang berjalan saat ini yang mana dapat menghasilkan arti desentralisasi. Hal ini termasukmendorong pembuatan keputusan, kewenangan, transparansi, dan akuntabiliti Daerah.

Pada sistem yang ada saat ini, Pemerintah Pusat mendominasi terhadap sumber-sumber keuangandaerah serta mengarahkan penggunaan dana tersebut. Undang-Undang No.25 tahun 1999 tentangPerimbangan Keuangan antara Pusat dan Daerah serta Rancangan Peraturan Pemerintah tentangperimbangan keuangan mengatur lebih fleksibel mengenai Dana Alokasi Umum (DAU) sertamenggantikan mekanisme Subsidi Daerah Otonom (SDO) yang mengalokasikan dana gajipegawai daerah, serta menggantikan mekanisme pemberian dana INPRES.

Perubahan tersebut dimungkinkan Pemerintah Daerah dapat menetapkan dengan baikkeseimbangan alokasi dana operasi dan pemeliharaan dengan belanja pembangunan yang baru.Dalam menggantikan mekanisme SDO, Pemeritah daerah juga dapat menggunakan DAU untukmendesain organisasinya agar dapat memberikan pelayanan yang lebih baik dan pada akhirnyadapat memberikan insentif untuk mencapai pemenuhan padat karya. Dengan menerapkanmekanisme DAU dan perluasan tanggung jawab Pemerintah Daerah, Daerah akan mendapatkankesulitan dalam menetapkan alokasi dana sektoral sesuai dengan tanggungjawabnya. Dengandemikian anggota Dewan dan aparat Pemerintah Daerah perlu menambah kemampuannya dalammenetapkan alokasi dana. Dalam menetapkan keputusan, Pemerintah Daerah harus mempunyaikemampuan yang lebih baik untuk mengerti prioritas masyarakat. Hal ini juga menempatkankeinginan baru dari DPRD, Pemerintah Daerah dan Kelompok Masyarakat.

Saat ini, sistem dan prosedur pada pengelolaan keuangan daerah diatur secara terinci melaluiperaturan dan pedoman, khususnya pada PP No 5 tahun 1975 tentang pengurusanpertanggungjawaban dan pengawasan keuangan daerah dan PP No 6 tahun 1975 tentang carapenyusunan APBD, pelaksanaan tata usaha keuangan daerah dan penyusunan perhitungan APBD,yangmana telah diatur dengan pengawasan yang ketat dari Pemerintah Pusat dan Propinsi. Halini telah mulai digantikan dengan pedoman umum dari Pemerintah Pusat dengan dukunganpemantauan, evaluasi dan fasilitasi dari Pusat. Pemerintah Daerah akan memperluastanggungjawabnya lebih rinci dan melaksanakan sistem penganggaran, akuntansi, pelaporan, danaspek-aspek lainnya dalam pengelolaan keuangan. Hal ini memberikan dampak terhadapkemampuan baru yang diperlukan bagi anggota DPRD dan aparat Pemerintah Daerah. Pada RPPPertanggungjawaban dan Pengelolaan Keuangan Daerah diamanahkan tentang pemulihan biaya(cost recovery) dalam pemberian pelayanan. Dan juga mengamanahkan kepada PemerintahDaerah untuk menggunakan pendekatan anggaran kinerja dan pelaporan kinerja keuangan daerahagar terlihat secara jelas antara input dan output yang akan dicapai. Ukuran kinerja dan laporankepada Eksekutip, Dewan dan masyarakat akan dapat membantu meningkatkan transparansi danakuntabilitas. Secara keseluruhan sebagaimana diutarakan diatas akan membuat implikasi yangbesar pada kemampuan yang diperlukan oleh Pemerintah Daerah.


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Tim studi telah mempersiapkan sistem dan pendekatan baru yang dapat terlihat pada kerangkahukum keuangan daerah serta menggabungkan dengan praktek-praktek yang baik dan diakuisecara internasional yang diberi nama Kerangka Normativ bagi Keuangan Daerah. Dari KerangkaNormativ tersebut, kapasitas yang diperlukan oleh anggota dewan, aparat daerah, masyarakat danPemerintah Pusat telah diidentifikasi. Instrumen dirancang untuk memperlihatkan kapasitas saatini dan mengidentifikasi pengembangan kapasitas yang dibutuhkan. Selama pengembangankerangka normativ, digunakan pendekatan tiga dimensi, dimana kapasitas pemerintah daerahdiketahui banyak tergantung tidak saja pada kapasitas tingkat individu, perangkat daerah (entitylevel), akan tetapi juga pada tingkat sistem, kebijakan, peraturan-peraturan pusat dan daerah.

Melalui Kerangka Normativ, instrumen seperti wawancara secara lebih mendalam, questionaredikembangkan dan digunakan dalam survey lapangan guna mengevaluasi keadaan sekarang dankebutuhan akan kapasitas. Wawancara lebih luas dilakukan dengan pihak aparat PemerintahPusat yang dilanjutkan pada saat kunjungan lapangan di Kota Makassar, Kabupaten Bima, KotaMalang dan Kabupaten Kutai induk termasuk juga beberapa propinsi antar lain; di PropinsiSulawesi selatan, Propinsi Jawa Timur dan Propinsi Kalimantan Timur.

Temuan umum pada survey lapangan atas kemampuan yang ada pada Pemerintah Daerah dalampengelolaan keuangan keuangan daerah sangat bervariasi; Daerah kompeten dalam melaksanakansistem yang diatur oleh Pusat. Pada sistem keuangan daerah yang baru diperlukan kemampuanPemerintah Daerah secara substansial dan didukung dengan pengembangan kapasitas yangberkesinambungan dalam rangka pelaksanaan keseluruhan sistem keuangan daerah yang baru.Dengan diperlukannya pengembangan kapasitas pada seluruh tingkatan (sistem, entity, danindividu), maka Pemerintah Indonesia perlu menetapkan secara jelas, penahapan strategi dalammendukung kebutuhan pengembangan kapasitas. Selanjutnya, laporan ini menyajikanrekomendasi yang dikelompokan berdasarkan prioritas sebagai mana berikut ini ; yangmanakegiatan-kegiatan dalam skala prioritas segera serta harus selesai bila desentralisasi akan dimulaiJanuari 2001, yangmana harus dimulai saat ini akan tetapi pelaksanaannya membutuhkan waktu,yangmana mulai pelaksanaannya dapat mundur dan yangmana kegiatan-kegiatan tersebut adalahprioritas kedua.

Dalam mendukung pelaksanaan secara efektiv desentralisasi keuangan daerah pada Januari 2001,kebutuhan pengembangan kapasitas yang harus segera adalah mengesahkan danmensosialisasikan Peraturan Pemerintah tentang Pengelolaan dan Pertanggungjawaban Keuangandaerah dan Peraturan Pemerintah tentang Perimbangan Keuangan yang mana akan memberikandampak serius pada proses penganggaran Pemerintah Daerah dan tersedianya sertadiperbolehkannya daerah menggunakan dana transfer dari Pusat ke Daerah. Sosialisasi haruscukup mendalam dimana Pemerintah Daerah secara komprehensip mengetahui implikasioperasional dari sistem baru dan dapat melaksanakan berdasarkan pengetahuan yang dimiliki.Sosialsasi tersebut tidak harus terbatas pada para pejabat daerah dan aparat keuangan, akan tetapijuga anggota DPRD pada komisi C, seluruh pejabat pada unit kerja yang bertanggungjawab padabidang anggaran dan kelompok masyarakat. Pengembangan dan pendalaman sosialisasi palingtidak Pemerintah Daerah akan secara efektif mengaktivkan para ahli keuangan guna menetapkandan melaksanakan sistem baru.


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Selanjutnya, kegiatan pengembangan kapasitas harus difokuskan pada sistem baru dan keahlianyang dibutuhkan sesuai dengan sistem pengelolaan keuangan daerah yang baru; khususnya padaproses APBD yang dapat menjawab prioritas kebutuhan masyarakat yang sesuai kebijakananggaran yang ditetapkan oleh DPRD dan dengan partisipasi masyarakat serta memperkenalkanpendekatan anggaran kinerja dan pelaporan guna meningkatkan akuntabilitas dan transparansi.Secara bersamaan, perhatian perlu diutamakan dalam perbaikan masalah yang sangat kritiskarena kurangnya kemampuan daerah. Hal ini dapat dilakukan melalui dukungan technicalassistance dan pelatihan, sesuai dengan permintaan Pemerintah Daerah.

Dalam jangka menengah, dibutuhkan sistem karier pegawai Pemerintah Daerah dibidangkeuangan daerah yang sesuai dengan tugas pokok dan fungsi yang berkaitan dengan kwalifikasiminimum dan pelatihan. Sistem pelatihan bidang keuangan daerah sudah tidak cocok lagi danperlu diperbaiki, diawali dengan meningkatkan kelembagaan pelatihan, kursus dan bahanpelatihan.


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TABLE OF CONTENTSForeword 2

Executive Summary 3

Ringkasan Eksekutif 6

Table of Contents 9

Abbreviations and Glossary 10

1. Review of Previous and Existing Key Regulations and Policies 15

1.1. General 15

1.2. Sources / Uses of Funds 15

1.3. Local Government Financial Management Systems and Procedures 17

2. Assessment of the Emerging Framework for Regional Finance 20

2.1. Key features of the new framework (policies, legal regulations) 20

2.2 The Normative Framework 24

3. Capacity Assessment and Capacity Building Initiatives for Regional Finance Undertaken by Others 34

3.1. Past, current and planned initiatives for capacity assessment, results and findings 34

3. 2. Past, current and planned initiatives for capacity building, results and findings 38

4. Capacity assessment for Regional Finance 44

4.1. Our Methodology 44

4.2. General Observations from Each Field Visit Location 45

5. Findings and Recommendations from the Current Study (According to Level) 50

5.1. System Level 50

5.2 Entity Level 63

6. Recommendations by Priority and Possible Donor Support 69

6.1 Immediate Priorities (Should be completed by Jan, 2001) 69

6.2 Must be Started Now but Implementation will Take Time 73

6.3 Important but Start-up can be delayed 79

6.4 Secondary Priority (Impact will only be realized in medium-to long-term) 81


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ABBREVIATIONS AND GLOSSARY

ADB Asian Development Bank

APBD Anggaran Pendapatan dan Belanja Daerah (annual budget of theautonomous regions)

APBN Anggaran Pendapatan dan Belanja Nasional (central governmentannual budget)

BAPPEDA Badan Perencanaan Pembangunan Daerah (Regional DevelopmentPlanning Board)

BAPPENAS Badan Perencanaan Pembangunan Nasional (NationalDevelopment Planning Board)

BPKP Badan Pemeriksa Keuangan dan Pembangunan (GovernmentAgency for Audit of Finance and Development)

BUMD Badan Usaha Milik Daerah (public enterprise owned by aautonomous regional government)

BUMN Badan Usaha Milik Negara (public enterprise owned by the centralgovernment)

BUILD Break-Through Urban Initiatives for Local Development (BUILD)

Bupati Regent. Head of an autonomous Regency ( kabupaten ) localgovernment

CIP Capital Improvement Planning

DAU Dana Alokasi Umum or General Allocation (block grants fromcentral government to autonomous regions)

DAK Dana Alokasi Khusus or Special Allocation (specific grants fromcentral government to autonomous regions)

DG BANGDA Directorate General for Regional Development, Ministry of HomeAffairs

DIP Daftar Isian Proyek (List of projects implemented in the regionsby central government technical ministries and financed from thecentral government budget)

Daerah Autonomous Region. Can refer to autonomous provinces, cities(kota) or regencies (kabupaten)


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Dinas Technical unit of the autonomous regional government; essentiallyoperated as a cost center.

DIPENDA Dinas Pendapatan Daerah ( Local Tax office)

DPOD Dewan Pertimbangan Otonomi Daerah or Regional AutonomyAdvisory Council

DPRD Dewan Perwakilan Rakyat Daerah (Regional House ofRepresentatives)

GOI Government of Indonesia

IBRD International Bank for Reconstruction and Development (WorldBank)

INPRES Instruksi Presiden or Presidential Instruction (previous system ofboth block and specific central government grants to autonomouslocal governments which were decided annually at the discretionof the President)

IIUD Institutionalizing Integrated Urban Development Project

IUIDP Integrated Urban Infrastructure Development Program

IUIDP-PJM IUIDP-Medium Term Investment Program for Urban Infrastructure

Kepala Daerah (KDH) Head of an autonomous region (Governor for Province, Regent forregency or Mayor for city)

Ka Bag Kepala Bagian or Head of Bagian

KaDinas Kepala Dinas or Head of a dinas

KANDEP Kantor departmen (deconcentrated office of a central governmentministries located at the local government level).

KANWIL Kantor wilayah (deconcentrated office of central governmentministries located at provincial level).

KEPPRES Keputusan Presiden or Presidential Decision (executive order fromthe President to the administration).

KEPMEN Keputusan Menteri or Ministry decree

KKD Kursus Keuangan Daerah (Regional Finance Course)


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KKN Korupsi, Kolusi, Nepotisme

RIAP Revenue Improvement Action Plan (part of IUIDP)

LKD Latihan Keuangan Daerah (Regional Finance Training)

LIDAP Local Institutional Development Action Plan (part of IUIDP)

MAKUDA Manual Keuangan Daerah (Regional Finance Manual)MAPATDA Manual Pendapatan Daerah (Local Government Revenue Manual)

MENPAN Menteri Negara Pendayagunaan Administrasi Negara or StateMinister for Administrative Reform

MOF Ministry of Finance

MOHA Ministry of Home Affairs

MNOD Menteri Negara Otonomi Daerah or State Ministry for RegionalAutonomy

OSR Own Sources Revenue

PAD Pendapatan Asli Daerah. Own source revenues of the autonomousregional governments

PBB Pajak Bumi dan Bangunan or Property Tax on Land and Buildings

PDAM Perusahaan Daerah Air Minum or Local Government-OwnedWater Enterprise

Perda Peraturan Daerah (local regulation)

Permendagri Peraturan Menteri Dalam Negeri or Ministry of Home affairregulation

PERPAMSI Persatuan Perusahan Air Minum Seluruh Indonesia (Associationof Indonesian Water Enterprises)

PDPP Program Dasar Pembangunan Perkotaan (new medium-term, all-sector investment planning tool for local governments)

POB Performance Oriented Budgeting

POMMS Performance-Oriented Maintenance Management System


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PP Peraturan Pemerintah or Government Regulation (legal instrumentwhich is one level below a law)

REPELITADA Rencana Pembangunan Lima Tahunan Daerah or regionalgovernment five-year development plan

RPP Rancangan Peraturan Pemerintah or draft government regulation

RPD/RDA Rekening Pembangunan Daerah or Regional Development Accountof the Ministry of Finance for subsidized loans to localgovernments for infrastructure and services with cost recovery

RIAP Revenue Improvement Action Plan (part of IUIDP)

UIMDS Urban Institutional and Manpower Development Study

SDO Subsidi Daerah Otonom. Central government grants to theautonomous regions primarily to cover routine expenditure forcivil service salaries

Sekjen Sekretaris Jenderal or Secretary-General.

SIKD Sistem Informasi Keuangan Daerah (Local GovernmentInformation System)

SK Menteri Surat Keputusan Menteri or Ministerial decision (previously hadbinding effect on regional governments).

SKB Surat Keputusan Bersama or joint ministerial decision between twoor more ministers (previously had binding effect on regionalgovernments)

SAPA Sistem Akuntansi dan Pengendalian Anggaran or System forAccounting and Budget Control (pilot project conducted in 1990’sto introduce modified-accrual accounting and double-entry bookkeeping)

SAJM Sistem Anggaran Jangka Menengah or medium-term budgetsystem (pilot project conducted in 1990’s)

SLA Subsidiary Loan Agreements. (Main channel for IBRD and ADBlending through the central government to local governments forIUIDP urban infrastructure investments).

SP3 Sistem Pelaporan dan Pengendalian Pendapatan (Revenue’sControl and Reporting System)


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Surat Edaran Letter of suggestion (without binding effect on regionalgovernments)

UNDP United Nation Development Program

UPTD Unit Pelaksana Teknis Daerah or Local Unit for TechnicalImplementation (semi-autonomous sub-unit of a dinas )

UU Undang-undang (Law)

Walikota Mayor Head of Autonomous City (Kota) Local Government


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1. Review of Previous and Existing Key Regulations and Policies

1.1. General

Until now, the central government has dominated the sources of regional1 finance as wellas the permissible uses of such finance and the systems and procedures for regionalgovernment financial management. The limited decentralization of selected governmentalfunctions/services to the municipalities and regencies in the 1987 - 1999 time frame (seediscussion under B3 - Urban Services) was accompanied by limited devolution ofsupporting financial resources to the local governments. This devolution of financialresources generally consisted of increasing central-local transfers rather than throughdevolving revenue generating authority to local governments themselves. Greater discretionwas also provided to local governments by gradually increasing the proportion of moreflexible block grants in relation to the tied specific grants. Local government financialmanagement systems and procedures have also been rigidly prescribed by the centralgovernment. Almost all decisions regarding local government finance (budgeting,accounting, tariff setting, etc) have been regulated by detailed central governmentregulations and almost all local decisions required prior approval by provincial and/orcentral officials prior to implementation. The central and provincial governments providedvery rigorous, if not necessarily effective, supervision. While such control and supervisionmay have been appropriate in the early stages of the decentralization effort (starting inearnest in 1987) due to a lack of capacity of local governments, the very substantialinvestments in local government financial management capacity building in the 1987-1999period made fiscal decentralization more practical and desirable in order to increase publicexpenditure effectiveness, efficiency and transparency.

1.2. Sources / Uses of Funds

The Government did not produce a new fiscal decentralization law to accompany Law No.5 of 1974 on Local Government Administration2. Thus, the totally inadequate Law No.32 of 1956 regarding Fiscal Balance between Central Government and RegionsResponsible for Implementation of Own Tasks3 remained officially in effect, although itwas never elaborated through supporting implementing regulations. Therefore, the structureand amount of local government financing was largely determined on an annual basis bydecisions of the President, based on recommendations of the Ministry of Finance andBAPPENAS as contained in the national annual budget.

1 In the following, the term “regional” includes provincial (propinsi) , municipality (kota) and regency(kabupaten) governments while the term “local government” refers only to the municipality and regencygovernments.2 UU No. 5 / 1974 tentang Pokok-Pokok Pemerintahan Di Daerah3 UU No. 32 tahun 56 tentang Perimbangan Keuangan Antara Negara Dengan Daerah-daerah yang BerhakMengurus Rumah-Tangganya Sendiri


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As of 1994/954, of the total amount of government spending to provide governance,infrastructure and services in the regions, approximately 50 percent was channeled to andspent by the deconcentrated offices of central ministries located in the regions (throughsectoral DIKs and DIPs). Only 50 percent was spent through the regional governmentbudgets; and most of this spending was done within a strict regime of central controls and“tops-down” planning.

The sources of the 50 percent spent through the regional government budgets and undertheir administration in 1994/95 were as follows :

- 39 percent from Subsidy Daerah Otonomi (SDO) Grants Under the SDO system, the Ministry of Home Affairs controlled the detailedauthorized structure of each provincial and local government and provided a subsidyto the regional governments for the authorized personnel. Regional governments hadno control over their organizational structure or hiring-and-firing decisions and noincentives for improved labor productivity.

- 16 percent from Block INPRES (Instruksi Presiden) GrantsBlock INPRES grants were provided to provincial (Level I) and local (Level II)governments based on annual instructions of the President. While the allocation ofthese grants was based on formulae (which could change each year) and localgovernments had sectoral discretion in their allocation, these grants could only beused for development expenditures and were not predictable. This led to poor abilityof local governments to plan for the future and a very poor balance betweendevelopment and operations/maintenance expenditures.

- 13 percent from Specific INPRES GrantsThese were highly specific sectoral grants with the priority and allocation decisionsessentially being made by central government ministries (BAPPENAS, MOF, MOHAand concerned technical ministries). Under this system of specific grants (for health,education, urban infrastructure, re-greening, etc), the local governments essentiallyaccepted those grants as the amounts to be dedicated to those sectors and did not havemuch discretion with regard to inter-sectoral allocations based on locally-definedpriorities.

- 10 percent from Property Taxes (PBB), Fees for Transfer of Land and Buidlings(BPHTB) and Natural Resource RevenuesPBB, BPHTB and natural resource revenues are administered and collected by centralgovernment with a portion of the official proceeds being redistributed to the localgovernments. Local governments have no control over the tax rates although theycould assist the central government in identifying new tax objects to expand the taxbases.

4 Source: Monitoring Indictors of Repelita VI Urban Policy Action Plan Implementation Results, MunicipalFinance Project/BAKD, April 1997.


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- 20 percent from Local Own Source Revenues (OSR)Prior to 1997, local governments were given substantial flexibility in establishinglocal taxes and user charges and, as a result, total OSRs grew at over 10 percent peryear in real terms during the early 1990s. However, many local governmentsimplemented a number of unproductive and inefficient taxes and user charges whichthreatened local economic development and allowed some abuses. Law No 18 of1997 regarding Local Taxes, Fees and User Charges5 was implemented toregularize the framework for allowable local taxes and user charges before thesituation got out of control. This law helped to eliminate the most egregious nuisancetaxes and user charges but seriously impacted local OSRs and local revenuegenerating initiative. Law No. 18/1997 was supported by Government RegulationNo. 19 of 1997 regarding Local Taxes6; Government Regulation No. 20 of 1997regarding Local Fees and Charges7; and Government Regulation No. 21 of 1997regarding Vehicle Fuel Tax8.

- 2 percent from loansThese were primarily heavily-subsidized Subsidiary Loan Agreements (SLA) andRegional Development Account (RDA) loans for urban infrastructure and services.Both systems were heavily dominated by central government ministries.

The above figures demonstrate the serious vertical fiscal imbalance wherein the regionalgovernments are dependent upon central government grants for about 70 percent of theirtotal funding and have very limited own responsibility/authority to raise revenues.

In the 1987 -1999 period, substantial progress was gradually made in channeling anincreasing proportion of central funds for development projects to local governmentsthrough the INPRES mechanism rather than through central technical ministries using theDIP mechanism. However, the channeling of funds to match functions/services nominallytransferred to local governments through government regulations generally laggedsubstantially behind the nominal transfer of functions. The proportion of total spendingbeing executed by central technical ministries was still extraordinarily large as of 1999.

1.3. Local Government Financial Management Systems and Procedures

As stated above, local government financial management systems and procedures havebeen rigidly prescribed by the central government. Almost all decisions regarding localgovernment finance (budgeting, accounting, tariff setting, inspection, etc) were regulatedby detailed central government regulations and most financial decisions required priorapproval by provincial and/or central officials who provided very strict supervision. Thefollowing list of major centrally-generated regulations and guidelines which localgovernments were compelled to follow as of 1999 gives an indication of the extent andintrusiveness of central regulation:

5 UU No. 18 / 1997 tentang Pajak Daerah dan Retribusi Daerah6 Peraturan Pemerintah No. 19/1997 tentang Pajak Daerah7 Peraturan Pemerintah No. 20/1997 tentang Retribusi Daerah8 Peraturan Pemerintah No. 21/1997 tentang Pajak Bahan Bakar


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- Government Regulation 5 of 1975 regarding Management, Accountability andSupervision of Regional Finance (Peraturan Pemerintah No. 5 tahun 1975 tentangPengurusan, Pertanggungjawaban dan Pengawasan Keuangan Daerah).

- Government Regulation 6 of 1975 regarding Procedures for Drafting APBD,Implementation of Regional Financial Administration, and FinancialAccountability Reporting of APBD (Peraturan Pemerintah No. 6 tahun 1975 tentangCara Penyusunan APBD, Pelaksanaan Tata Usaha Keuangan Daerah dan PenyusunanPerhitungan APBD).

- MOHA Regulation No. 2 of 1996 regarding APBD Implementation (PerMenDagriNo. 2 tahun 1996 tentang Pelaksanaan APBD) to comprehend KEPPRES No. 16 /1996 regarding implementation of changes to the APBN budget structure which hadimplications for the implementation of the APBD revenue, routine expenditure,development expenditure and procurement of goods and services.

- MOHA Regulation No. 11 of 1975 regarding Examples for Drafting of APBD,Implementation of Regional Financial Administration, and Financial AccountabilityReporting of APBD (PerMenDagri No. 11 tahun 1975 tentang Contoh-Contoh CaraPenyusunan Pelaksanaan Tata Usaha Keuangan Daerah dan Penyusunan PerhitunganAPBD).

- MOHA Decree No. 110 of 1998 regarding Form and Composition of Local RevenueBudget (KepMen No. 10 tahun 1998 tentang Bentuk dan Susunan AnggaranPendapatan Daerah) to comprehend changes needed for implementation of Law No.18/1997.

- MOHA Decree 5 of 1982 regarding Guidance for Regional Development Planning(P5D /Rakorbang Process) (KepMen No. 5 tahun 1982 tentang P5D).

- MOHA Decree No. 570-360, dated 28 October 1981 regarding Program for RegionalBudgets and Control of Borrowing.

As a further example of the level of detailed guidelines which were previously prescribedby central government, the following more detailed guidelines were promulgated byMOHA for the implementation of the previously discussed Law No. 18 / 1997 andGovernment Regulations 19/1997, 20/1997 and 21/1997:

- Decision of the MOHA No. 170 of 1997 regarding Tax Collection Guidance,

- Decision of the MOHA No. 171 of 1997 regarding the Procedure for Adoption ofLocal Government Regulations for Taxes and Charges

- Decision of the MOHA No. 172 of 1997 regarding Criteria for Tax Payment(Includes detailed bookkeeping and accounting guidance)

- Decision of the MOHA No. 173 of 1997 regarding Local Government Tax Inspection


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- Decision of the MOHA No. 174 of 1997 regarding the Administration of LocalGovernment Charges

- Decision of the MOHA No. 175 of 1997 regarding Local Government ChargesInspection Guidance.

Of particular note is the extent of central and provincial control and “tops-down”intervention in the local government budgeting processes. Development planning followedthe P5D Process of “Bottom-up / Top-Down” planning coordination. However, the centraland provincial governments controlled the grants associated with the process and, therefore,had a commanding role in defining the investment priorities in the local developmentbudgets. The draft annual budget (routine and development) was typically developed by thewalikota/bupati and executive staff. The combined routine/development budget was thenreviewed by the Provincial Biro Keuangan prior its submission to the local DPRD. TheDPRD was then expected to approve the APBD budget after some token modifications.


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2. Assessment of the Emerging Framework for Regional Finance

2.1. Key features of the new framework (policies, legal regulations)

2.1.1. Sources / Uses of Funds

In order to protect macro-economic stability during the economic crisis and recoveryperiod, compounded by the potentially destabilizing effects of rapid decentralization,Law No. 25/1999 regarding Central-Local Fiscal Balance9 does not delegate additionalrevenue generating authority to local governments in order to address the existingvertical fiscal imbalance, except in a small number of local governments which willreceive vastly increased shared natural resource revenues. However, the new law and thesupporting Government Regulation on Equilibrium Funds (RPP Dana Perimbangan)do embody many significant reforms of the grants / transfers system as follow:

- General Allocation Grant (Dana Alokasi Umum or DAU):The general allocation grant will essentially replace the previous SDO, BlockINPRES Grants and some portion of the previous Specific INPRES Grants withthe following probable impacts:- minimum floor amount of 25 percent of APBN domestic revenues will

improve predictability of transfers;- formula-based approach, based on expenditure needs less local revenue

potential of each local government will improve both targeting of grantsand transparency;

- administration of DAU by the Sekretariat DPOD with participation oflocal government associations and DPRD representatives on the DPODwill improve transparency and participation;

- elimination of SDO system will give local governments control over theirorganizations and hiring-and-firing decisions and incentives for laborproductivity;

- as DAU can be used for either routine or development expenditure, morerational decision can be made regarding priorities for operations andmaintenance versus new development spending.

- local government will have more authority to allocate the budget betweenmore sectors based on local priorities.

The biggest problem in implementing DAU is to ensure that DAU allocations areconsistent with functions/services that will ultimately be accepted by localgovernments under Government Regulation No. 25/2000 regarding Functionsof Central Government and Autonomous Provincial Governments (PP 25/2000tentang Kewenangan Pemerintah dan Kewenangan Propinsi Sebagai DaerahOtonom). While the general principles of the DAU calculation formula is

9 UU No. 25/1999 tentang Perimbangan Keuangan Pusat dan Daerah


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specified in the RPP Dana Perimbangan (to be resubmitted to SekKab in mid-September, 2000) the detailed formula and factors embodied in the formula areto be further specified and approved by the DPOD by the end of October, 2000.Achieving this deadline is crucial so that local government can complete theirAPBD budgets in time for the 2001 fiscal year starting on 1 January.

- Special Allocations ( Dana Alokasi Khusus or DAK):The mechanisms for determination and allocation of DAK are still not welldefined. They will be further specified by Decision of the Minister of Financeregarding Special Allocation Grants (KepMen Keuangan tentang Dana AlokasiKhusus). It is expected that DAK funds will be made available to localgovernments for investments in specific sectors of national priority which are notgiven adequate priority by local governments unless incentives and/or access toadditional funds are provided. These funds would be made available on amatching-grant basis for projects that originate from the local governments whichmeet the nationally pre-determined sectoral priority criteria.

- PBB, BPHTB and natural resource revenue distributions:PBB was not transferred to local government administration in Law No. 25/1999.However, in the Letter of Intent between the GOI and IMF in July 2000, it wasspecified that further review will be undertaken to evaluate the feasibility of suchtransfer. The law did specify the transfer by formula of much larger specificshares of natural resource revenues (oil, gas, forestry, marine resources, etc.). Thischange will have a very positive revenue impact for a small number of localgovernments, but an unavoidably negative impact on the ability of the centralgovernment to provide the existing level of equalization grants to other localgovernments in the future.

In order for central government agencies (especially DPOD, MOF and MOHA) tocollect the local government financial and other information required to supportcalculation of DAU and in order to monitor and evaluate the performance of localgovernments in implementing decentralization, a local government financial informationsystem must be established at central government. This system will be regulated by aGovernment Regulation (RPP Informasi Keuangan Daerah) and a more detailedDecision of the Minister of Finance (KepMen Keuangan tentang SIKD).

Revisions to Law No. 18 /1997 regarding Local Government Taxes, Fees and UserCharges (RUU tentang Perubahan atas Undang-Undang No. 18 / 1997 tentang PajakDaerah dan Retribusi Daerah) will allow local governments to continue the existingregime of taxes, fees and user charges. In addition, they will be allowed to implementnew taxes, fees and user charges which conform to general criteria that will be specifiedin the new law. This will allow local governments to use their own initiative to applytaxes, fees and user charges that are appropriate to the special conditions andopportunities that exist in the local environment.


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2.1.2. Local Government Financial Management Systems and Procedures

The new laws and supporting draft Government Regulations apply a fundamentallydifferent approach to the regulation and implementation of local government financialmanagement systems and procedures. Under the new approach, the central governmentwill promulgate only the minimum level of regulations needed to establish the basicprinciples and general requirements for local government budgeting, accounting andfinancial accountability reporting. The central government will also promulgate moredetailed guidelines which will be in the form of suggested model approaches ( perhapsby Surat Edaran or Letter of Suggestion) which the local governments are not requiredto follow but may find useful in designing their own systems and procedures. The roleof central government will be to generate such general guidelines and then to monitor,evaluate and facilitate their implementation. It is envisaged that professional associationsof local government finance and accounting professionals will eventually play asubstantive role in establishing generally accepted government accounting and auditingstandards as well as generally accepted budgeting and financial accountability reportingguidance.

The local governments are themselves responsible for establishing the detailed localgovernment financial management systems by local regulation (Perda), within the broadguidelines established by central government. Within the guidance of these Perdas, theWalikota / Bupati will be responsible for establishing the detailed procedures byissuance of Decisions of the Head of Local Government (Surat Keputusan KDH).

The essential Government Regulations to support implementating Law No. 22/1999 andLaw No. 25/1999 with respect to local government financial management systems andprocedures are as follows:

1) Government Regulation on Local Government Financial Management andAccountability for Autonomous Task (RPP Pengelolaan danPertanggungjawaban Keuangan Daerah)

One fundamental change under the new laws and this regulation is the greatlyenhanced role of the DPRD in participating fully with the executive in thedevelopment of the budget policy and in the subsequent approval process.Whereas the DPRD previously acted more as a “rubber-stamp” approval of thedraft APBD prepared by the executive, the DPRD is now expected to participatein the developmend of the budget policy and general budget guidance incooperation with the Walikota/Bupati as an early step of the budgeting process.Based on this agreed budget policy and general guidance, the executive will thenprepare the detailed draft APBD budget. The draft APBD is then submitted by theWalikota/Bupati to the DPRD for a meaningful review and approval process andthe final budget is to be disseminated to the public. As a result of the broaderscope of local government responsibilities and the new flexibility offered with theDAU, local government planning, programming and budgeting will require newcapabilities especially in the area of establishing inter-sectoral priorities based onmeaningful input from the community.


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Other fundamental changes reflected in the draft Government Regulation are theintroduction of Performance-Oriented Budgeting and Financial AccountabilityReporting which will be disseminated to the public.

According to Law No. 22/1999, all Perdas regarding the establishment offinancial management systems, as well as the approval of the APBD budget, maybe implemented by the local government with immediate effect, not requiring theprior approval of central/provincial authorities. The local government must,however submit all Perdas to the Minister of Home Affairs (with copy to theGovernor in his deconcentrated capacity) within 15 days of promulgation. TheMOHA/Governor may then rescind the Perda if and only if it is not accordingwith existing regulations and/or violates the public interest. If a Perda is rescindedby the MOHA, local governments now have the right to appeal such decisionthrough the Supreme Court.

2) Government Regulation on Local Government Financial Management forImplementation of Deconcentrated and Co-Administration Responsibilities(RPP Pengelolaan dan Pertanggungjawaban Keuangan dalam PelaksanaanDekonsentrasi dan Tugas Pembantuan)

This regulation covers the financial management systems and procedures to beused for central government tasks implemented as deconcentrated tasks byprovincial level of government and as assistance tasks by local governments. Itdoes not depart substantially from existing systems and procedures except for therequirement that local governments will have meaningful authority to negotiatewith central government to ensure that adequate resources are provided to thelocal governments for execution of any tasks performed as co-administrationtasks.

3) Government Regulation on Local Government Borrowing (RPP PinjamanDaerah)

This regulation reiterates Law No. 25/1999 regarding (1) the ability of localgovernments to borrow domestically without the prior approval of centralgovernments; and (2) the role of the Minister of Finance in controlling allinternational borrowings. It establishes borrowing ceilings on total long-termlocal government debts (at 75 percent of local government revenues excludingborrowings) and total short-term debt (at 25 percent of local government annualrevenues excluding borrowings) as well as minimum debt-coverage ratio (DCR)requirements (2.5). The draft regulation does not regulate borrowing of regionalgovernment owned enterprises (BUMDs) so another regulation will be needed forthis purpose.


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2.2 The Normative Framework

Based on the newly emerging framework for Regional Finance as described above, alongwith best practices in the sector, a Normative Framework has been developed whichforms the basis for the capacity assessment. This framework consists of three interrelatedcolumns which address the underlying principles, operational implications and the typesof competencies that DPRD members, local government officials and the localcommunities must have to make decentralization successful.

The Normative Framework is based on the following principles:

1) Local governments should employ user charges to finance those services forwhich it is possible to measure household consumption. Local government shouldattempt to implement full-cost recovery tariffs, where practical and to the extentpossible. Where full-cost recovery is not practical, local governments shouldprovide targeted subsidies through mechanisms that still require adequateoperational performance by the service provider.

2) To the extent possible, local governments should finance those services whoseprimary benefits accrue to the local populations (but for which householdconsumption cannot be measured) by local taxes.

3) Local services that provide substantial benefit spillovers (or that are of nationalinterest) should be financed (at least in part) by specific grants from the center.

4) Local government should be provided with access to general transfers in order tomeet expenditure needs ( after own-source revenues and other transfers areaccounted for) and redress fiscal inequalities.

5) Local governments should have access to credit to finance investment ininfrastructure that is required for the provision of local services.

6) Local government budget reflects the aspirations of the public, as channeledthrough the local parliament.

7) In order to improve budget effectiveness, efficiency and transparency, the budgetshould be prepared (to the extent practical) using a performance-orientedbudgeting approach which clearly links inputs (costs) to expected outputs /outcomes.

8) Local parliaments formally participate in the review and adoption of localbudgets.

9) Financial Accountability Reporting will also be based on the performance-oriented approach.


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10) Local government financial management systems adhere to principles oftransparency and accountability.

11) Local government accounting is performed in accordance with generally acceptedprinciples and practices of public sector accountancy.

12) Local governments oversee local government enterprise operations

13) Local governments must plan and implement organizational and manpowerdevelopment to support regional finance functions.


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NORMATIVE FRAMEWORK FOR REGIONAL FINANCE

General Principles Operational Considerations Target Groups/Competencies

1. Local governments should employ usercharges to finance those services forwhich it is possible to measurehousehold consumption.

(⇒ B 3)

• User charges are set to recover full costs ofservice delivery, where appropriate; in caseswhere subsidies are warranted, they are usedin a transparent and accountable manner.

Central ministries:• able to set guidelines on tariff setting and review process DPRD:• believes full-cost recovery principles are important and sees the need

to balance its desire to minimize tariffs with the need of utilities to besustainable and to operate on commercial principles.

• able to communicate this policy to the public• able to set an objective tariff review process• able to determine priorities for service subsidies within the financial

limitations of the kota/kab• able to allocate such subsidies through APBD

BUMD / Dinas• able to prepare and communicate tariff recommendations to DPRD

and the public.• able to quantify and recommend specific subsidies required for

services to targeted recipients• able to measure performance of service units in providing subsidized

services


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2. To the extent possible, localgovernments should finance thoseservices whose primary benefits accrueto the local population (but for whichhousehold consumption cannot bemeasured) by local taxes.

(⇒ B 3)

• Other measures to strengthen the local taxbase are identified and implemented (i.ePBB, PPH).

• [GOI/IMF Letter of Intent]• Tax laws (including UU 18/1997) are

amended as necessary.

DepKeu / DDN / MenegOD• able to evaluate impact, risks, and opportunities• able to conduct research for revenue improvement. Dipenda / Bagian Keuangan (and DPRD)• able to set the local tax rates in accordance with local service demands

and willingness to pay• able to adjust tax rates concurrent with improving service delivery.• able to prepare studies of revenue improvement• able to measure the efficiency of revenue collection . Sekwilda/Dipenda• able to administer taxes, valuation, rate-setting proposals, collection.

3. Local services that provide substantialbenefit spillovers (or that are of nationalinterest) should be financed (at least inpart) by specific grants from the center.

(⇒ B 3)

• Appropriate sectors for specific transfers areidentified and matching grants aredeveloped.

DepKeu / MenegOD / Technical Ministries• able to develop and monitor appropriate matching grantsDipenda / Bagian Keuangan• able to determine financing needs, allocate resources, and manage

matching transfers


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4. Local governments should be providedwith access to general transfers in orderto meet expenditure needs (after own-source revenues and other transfers areaccounted for) and redress fiscalinequalities.

(⇒ B3)

• Services to be decentralized to localgovernments should be “costed out” with aview to determining expenditure needs.

• Dana Alokasi Umum is allocated acrosslocal governments positively according toexpenditure needs and negatively accordingto fiscal capacities.

Sekretariat PKPD• able to establish Dana Alokasi Umum system with clear and simple

allocation principles• able to monitor and evaluate DAU performanceDipenda / Bagian Keuangan• able to allocate and manage block transfer resources

5. Local governments should have accessto credit to finance investment ininfrastructure that is required for theprovision of local services.

(⇒ B3, B4)

• Full range of debt financing instrumentsavailable.

• Timely and full repayment of loans is asolemn obligation of the local governmentand its enterprises.

DepKeu / Other Ministries• Assist in the development of debt financing mechanisms DPRD / KDH• able to establish general policy regarding indebtedness of the local

government and willingness to borrow for selected purposes.• able to evaluate and decide on specific borrowing proposals Sekwilda / KaBagKeu / BAPPEDA• able to project debt-carrying capacity of the local government and

enterprises• able to prepare competent project borrowing proposals• able to negotiate rescheduling of debt, where unavoidable.


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6. Local government budget reflects theaspirations of the public, as channeledthrough the local parliament.

(⇒ B 1)

• In the initial stage of APBD budgetpreparation, the KDH and DPRD agreeupon the general Budget Policy.

• The Budget Policy becomes the generaldirection for the executive in preparing thedetailed draft annual budget (RAPBD).

• There should be a direct relationshipbetween the annual budget (APDB) and amulti-year budget (Rencana AngggaranMulti-Tahun)

DPRD:• aware of the new annual budget process guidelines and, in coopertion

with the KDH, able to establish an appropriate budget process byPERDA.

• capable of understanding the community needs and priorities throughcoordination mechanisms with community leaders, private sectorleaders, and other groups.

• able to define and communicate the general inter- and intra-sectoralpriorities for budget allocation.

• able to communicate the agreed upon Budget Policy to the public.KDH / Sekwilda / BAPPEDA:• able to competently evaluate general trade-offs involved in

prioritizing inter- and intra-sectoral activities and programs .• aware of the new annual budget process guidelines and, in coopertion

with the DPRD, able to establish an appropriate budget process byPERDA.

• Capable of understanding the community needs and priorities throughcoordination mechanisms with community leaders, private sectorleaders, and other groups

DPRD / KDH / Sek / BAPPEDA / KaBagKeu/Dinas:• able to develop and implement an all-sector medium-term planning

mechanism for setting medium-term spending priorities (both routineand investment) within financial constraints of the kota/kab.


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7. In order to improve budgeteffectiveness, efficiency, andtransparency, the budget should beprepared (to the extent practical) usinga performance-oriented budgetingapproach which clearly links inputs(costs) to expected outputs / outcomes.

(⇒ B 5)

• Preparation of a competent performance-oriented kota/kab budget requires:• adoption of an appropriate budget

structure which matches theorganizational assignment ofresponsibilities of the local government

• development of performance budgetingmeasurements and standard spendingassessments for each unit/activity

• estimates of local government revenueand expenditures, clearly linked toresponsibilities for specific, measurableoutputs/outcomes.

DDN/ DepKeu• able to establish guidance on structure and content of mandatory

financial reporting requirements under UU 22/1999 and UU 25/1999Sekwilda/ KaBag Keuangan• able to recommend budget structure to be established by PERDA in

accordance with general guidelines and based on organizationalstructure and functions of Pemda.

Sekwilda / KaBagKeu / KaDinas / BAPPEDA:• able to define detailed performance targets and measures that link

inputs (budgeted costs) to outputs. Sekwilda / KaBagKeu / KaDinas / BAPPEDA:• able to produce budget estimates and communicate the input vs.

output linkages during budget review process.• if expenditures proposed by service units are reduced in the budget

development process, then reductions in outputs must also be clearlydocumented.

8. Local parliaments formally participate inthe review and adoption of localbudgets.

(⇒ B 1)

• Review and acceptance of the RAPBD isunder the control of DPRD.

KDH / Sekwilda / Bagian Keuangan• able to communicate the performance-oriented RAPBD budget to the

DPRD. DPRD• able to review and evaluate the contents of the RAPBD (as submitted

by KDH) for conformance with the Budget Policy.• able to conduct meaningful public hearings• able to communicate APBD to public


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9. Financial Accountability Reporting willalso be based on the performance-oriented approach.

• To ensure accountability and transparency,performance reporting must demonstrateclear linkage of actual inputs (costs) andoutputs versus planned inputs and outputs.Both for purposes of:• internal management reporting and• reporting to DPRD and the public

KDH / SekDa / KaBagKeu / KaDinas / BAPPEDA• able to design and implement appropriate reporting systemDPRD / Sekretariat DPRD• able to define Financial Accountability Reporting requirements by

PERDA; and• able to design and implement less detailed but meaningful reporting to

the public.

10. Local government financialmanagement systems adhere toprinciples of transparency andaccountability.

• This will require that local governments:• improve transparency of procurement

processes• improve transparency of cash management

processes• ensure transparency of managing the new

reserve funds (dana cadangan)

Sekwilda/Bagian Keuangan/KaDinas:• able to implement the compulsory competitive bidding process.• able to design and implement competent dana cadangan management

system


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11. Local government accounting isperformed in accordance with generallyaccepted principles and practices ofpublic sector accountancy.

New approaches which must be adopted in themedium term include:• modified accrual basis for budgeting,

accounting, and reporting.• double entry book-keeping system• internal (management) audits will be used to

improve the performance and accountabilityof local governments

• where appropriate, external audits by BPKPmay be augmented by independent publicaudits commissioned by the DPRD.

Bagian Keuangan/Sekwilda• understands the accounting system double entry and modified accrual

basis• understands the process of accountability and financial statement

forms.• able to evaluate budget accountability Local Government Finance and Accounting Professionals:• able to establish generally accepted accounting and financial

management standards for local governments• able to enforce the professional standards• Public Accountants able to perform audits of local governments and

municipal enterprises.

12. Local governments oversee localgovernment enterprise operations.

(⇒ B2, B3)

• Local governments establish objectives formunicipal enterprises and monitor andevaluate their operational and financialperformance vis-à-vis those objectives.

DPRD / KDH• able to decide on the establishment or disestablishment of BUMD• able to provide general objectives and annual performance targets (for

full-cost recovery services, for subsidized services and for PAD).• able to ensure sustainability of BUMDs through approval of

appropriate full-cost recovery tariffs Sekwilda / KaBagKeu:• able to effectively monitor and evaluate operational and financial

performance of BUMDsBUMD• able to provide necessary information and cooperate in monitoring

and evaluation exercises


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13. Local government must plan andimplement organizational andmanpower development to supportregional finance functions.

(⇒ B 7)

This entails:• improved organizational design and

development planning• improved individual carrier planning in

finance• improved job description linked to

qualifications• improved recruitment mechanisms• improved mechanisms for staff motivation• systematic training program

Bagian Keuangan/Dipenda/Bagian Kepegawaian• recruitment mechanism can be implemented by the higher level within

this unit and can get the professional staff.• promotions are based on knowledge and professionalism of the staff.• job description not overlapping with other units, the staffs can work at

their tasks without confusion.• establish income, social guarantees, and other work facilities to

improve staff motivation.• measurements and standard-of-work appraisal are implemented.• increase training course volume and quality.


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3. Capacity Assessment and Capacity Building Initiatives for RegionalFinance Undertaken by Others

3.1. Past, current and planned initiatives for capacity assessment, results andfindings

3.1.1 Urban Institutional and Manpower Development Study (UIMDS); December1988

This was a very ambitious study under the guidance of the MOHA and financedby an IBRD Urban Sector Loan. Its objective was to evaluate the capacity andcapacity-building needs of the Level II local governments (municipalities andregencies) to accept additional responsibilities for urban management asenvisioned in the Urban Policy Action Plan and PP 14/1987. The objective of thisstudy was to make recommendations regarding reorganization of responsibilities,human resources management systems and training priorities primarily in theareas of urban spatial planning, urban infrastructure planning and localgovernment financial management. Extensive survey work was conductedincluding:

- evaluation of institutional designs in 18 local governments and theirprovincial governments.

- Detailed manpower survey using self-assessment questionnaires with 25.000local government and 55.000 provincial respondents.

- Survey of central and provincial training institution.

The recommendations of this study specifically related to Regional Financeincluded reorganization of Bagian Keuangan, Dipenda and BAPPEDA at localgovernment level into one organization to allow for the consolidated budgetingof revenue and combined, better coordinated routine / development expenditure.The study recommended improving the content of existing governmentmanagerial training programs and that a priority be put on training in financialmanagement and urban spatial planning.

3.1.2 Local Government Institutional Development Study (LGISD); 1990

This was essentially a follow-up study to the UIMDS and was also conductedunder the guidance of MOHA. The primary objective of the study was toamplify the UIMDS and provide detailed recommendations for a program oflocal government training to be implemented over a 10 year period. The studyproduced an extensive database of existing training activities andrecommendations for training priorities to support decentralized localgovernment finance as well as provision of urban infrastructure and services.The recommendations of the study were to be used to design a program to befinanced by a second policy-based IBRD Urban Sector Loan which, however,was ultimately not implemented. Nevertheless, many of its recommendationswere adopted by subsequent GOI and donor financed training projects.


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3.1.3. Local Institutional Development Action Plans (LIDAP), Integrated UrbanInfrastructure Development Program (IUIDP); 1988 to present

Almost every local government in Indonesia with an urban area population ofover 20,000 has implemented an Integrated Urban Infrastructure DevelopmentProgram (IUIDP). These all contain an IUIDP-PJM (or multi-year investmentplan) and about 50 percent have included the associated Local InstitutionalDevelopment Action Plan (LIDAP). The LIDAP consisted of an assessment ofthe capacity building needs of local governments to competently implement theIUIDP investment program. The focus of the LIDAP was primarily on theorganization, manpower, training and support systems and equipment needs ofthe local governments to specifically support the IUIDP program implementation.The LIDAP thus focused exclusively on the units of local governmentimplementing IUIDP investments projects (BAPPEDA, Dinas PU, DinasKebersihan, PDAM, etc) and the Bagian Keuangan and Dipenda which wereresponsible for planning and implementation of the taxes, fees and chargesrequired to repay the IUIDP program loans. After the detailed assessment wascompleted, the LIDAP proposed a multi-year Action Plan to be implementedconcurrent with the infrastructure investment plan.

The major criticism of the LIDAP was that it was largely prepared by consultantsmanaged by DG BANGDA / MOHA and not under the control and supervisionof the local governments themselves. The local governments, therefore, had a lowsense of ownership for the LIDAP and rarely implemented the action planssatisfactorily once the consultants finished the studies.

Because of the poor results from the comprehensive LIDAPs prepared in the past,the ADB has decided to discontinue the comprehensive LIDAP approach andfocus only on LIDAP-like assessment and action planning to support improvedlocal government revenue generation (See RIAP below.)

3.1.4. Revenue Improvement Action Plan (RIAP), Integrated Urban InfrastructureDevelopment Program; 1988 to present.

Most local governments which have implemented IUIDP investment programshave also implemented the associated Revenue Improvement Action Plan orRIAP which is designed to help local governments increase their revenues fromlocal taxes, fees and user charges in order to repay the IUIDP loans. The RIAPprocess includes an assessment of the local regulations, organization, manpower,systems and procedures related to revenue generation and proposes an action planof needed capacity building. The RIAP also provides local governments amethodology for targeting specific, high-potential revenue enhancements thatshould be given a priority and a methodology for making multi-year revenueprojections. A RIAP Manual was developed by the Institutionalizing IntegratedUrban Development Project (IIUD) Phase I, funded by UNDP, in cooperationwith Badan Diklat / Ministry of Home Affairs which is continuing to conducttraining of the trainers on RIAP for Diklat Propinsi in the provinces.


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3.1.5. Urban Management Training Program (UMTP); Municipal Finance Project,1993.

The USAID-financed Municipal Finance Project, in cooperation with a inter-ministerial committee (MOF, MOHA, DGCK/PU, BAPPENAS) conducted alimited needs assessment specifically for Urban Financial Management Training.Using the database and recommendations from the UIMDS and LGISD studiesand extensive interviews at central, provincial and local governments, the MPFassessment concluded there was already a vast amount of sub-managerial leveltraining in regional finance available in the GOI system. This included the KKD,LKD, and various Bendaharawan training courses for Eselon 4 and below. Whatwas missing was strategic financial management training more appropriate forsenior financial managers like KaBag Keuangan, Ka Dipenda and BAPPEDA.This assessment resulted in the design and implementation of the two week UrbanFinancial Management Course which continues to be provided to senior localgovernment financial managers by UI (see below). The priority contents of thecourse as defined by the assessment were: Strategic planning, revenueimprovement, loan mechanisms, expenditure priorities and multi-year CapitalInvestment Planning.

3.1.6. UNDP Break-Through Urban Initiatives for Local Development (BUILD)

The objective of the first phase of this UNDP grant-funded project was tostrengthen the capacity of selected local governments (Kota Kendari, KotaMataram and Kota Metro) through introduction of “best practices” in urbanmanagement such as management that is responsive, accountable, innovative,transparent and participatory.The needs assessment” phase consisted of:- a workshop of all of the local government units to determine the most

important problem areas in urban management and the selection of alimited number of priority areas on which to focus BUILD support (e.g.revenue generation);

- next, meetings were conducted between BUILD project staff and relevantservice unit officials to break-down the problem area into more specificbuilding blocks that could be addressed by the limited resources of theBUILD Project (e.g. focus on increasing solid waste revenues throughimplementing joint billing with PLN or the PDAM); and

- finally, BUILD technical assistance was provided to assist the localgovernment to address both the technical aspects as well as identify andaddress the detailed capacity-building needs.

To-date, one of the most successful innovations tested in the three pilot localgovernments and subsequently disseminated to other local governments has beenin increasing local government revenues through simplification of the localgovernment permits into a one-stop permit facility.


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3.1.7. Community and Local Government Support- Sector Participation Project (CLGS-SPP); ADB Loan 1677-INO

Of the three TA grants associated with this loan, only one contains a capacity -building needs assessment specifically related to Regional Finance:

- Capacity Building for Setting Up District Level Financial andBudgetary Systems (TA 3178-INO)

Short-term technical assistance to the Directorate for LocalGovernment Revenues and Financial Management, DG PUMDA,Ministry of Home Affairs to recommend a revised local governmentbudgeting processes consistent with Laws No. 22 /1999 and 25/1999and to conduct a local government capacity-building needs assessmentfor decentralized local government financial management with a heavyemphasis on detailed training requirements. This activity iscomplimentary to this Regional Finance section of this GTZ/CLEAN-Urban needs assessment.

Thie ADB project started in March, 2000 and will continue untilNovember, 2000. Needs assessment field suverys were conducted in theBagian Keuangan, Dipenda, Irwil and BAPPEDA of 4 localgovernments; Kabupaten Bandung, Kabupaten Cianjur, Kota Tegal andKota Metro. Detailed findings are documented in the Interim Report. Asof the Interim Report Workshop on 31 August, 2000, it appears that themain outputs of the project will be:

- detailed recommendations of a new local government budgetingprocess that is consistent with the new RPP Pengelolaan danPertangunggawaban Keuangan Daerah. These may be a usefulinput for the current activities of MNOD / MOHA to prepareAPBD budgeting guidelines and example Perda.

- detailed recommendations for regional finance courses requiredin the medium term to implement the new regional financesystem. However, this study does not have the resources toprepare a detailed analysis of the existing training system andexisting training courses. Such an analysis is needed tocompetently develop a practical strategy and action plan forgetting from where we are today to the desired goal.

3.1.8. Urban Environmental Management Program: Support for Decentralization andDemocratic Local Governance in Indonesia - USAID/UEM, March, 2000.

This was a short-term consultancy by International City Managers Association(ICMA) to the USAID Office of Urban Environmental Management (UEM) toidentify priority activities for a future program of technical assistance to besupported by USAID/UEM starting at the end of 2000. The capacity buildingneeds assessment activities consisted primarily of interviews with key GOI


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officials, short site visits to three local governments (Kabupaten Barito Kuala,Kabupaten Bandung and Kabupaten Pasir) and four regional focus groupmeetings in Kota Bandung, Kota Pekanbaru, Kota Mataram and KotaMakassar.

The recommendations of the report drew heavily upon and were largelyconsistent with recommendations of previous reports and focused mainly onlocal government finance, non-technical urban management, and association-building issues in which ICMA is most competent. The report recommendedthat USAID/UEM support a program to include (1) participation of 12Indonesian cities in the ICMA Resource Cities Program of twinning activities;(2) training of 12 local governments in Local Government Budgeting andFinancial Management; and (3) support for development of the Associations ofCities, Regencies and Provinces; and (4) technical assistance to key centralgovernment ministries critical to decentralization.

3. 2. Past, current and planned initiatives for capacity building, results and findings

3.2.1. Main Existing GOI Training Programs for Regional Finance

The following are the main, regularly delivered courses that form the backboneof the GOI regional finance training system:

- Kursus Keuangan Daerah (KKD)

University of Indonesia, University of Hasanudin, Andalas University andUniversity of Gajah Mada currently conduct the regional finance course(KKD). This course is for local government officials of echelon 4 andbelow; primarily those working in Bagian Keuangan and Dipenda. Thecourse has duration of 4 months and is financed by local governmentspaying tuition to the university offering the course.

- Latihan Keuangan Daerah (LKD)

University of Indonesia currently conducts the Regional Finance Training(LKD). This training is a 10 week course targeted to Eselon 3 and 4 localgovernment officials. Attendees are typically mid-level officials who havefinancial responsibilities, not limited to Bagian Keuangan and Dipenda.This would include service unit (dinas) officials with managementresponsibilities for budgeting, accounting, reporting, revenue collectionand/or asset management.

- Kursus A (Bendaharawan Barang) - Course A (Asset Management )

This one-week training course is for local government officer of Eselon3 and below who are responsible on managing local government assets(Bendaharawan barang). This would especially include officials from the


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various service units (dinas) which manage and/or use local governmentowned assets in the provision of infrastructure and services. The courseis conducted on a regular basis by the Diklat Propinsi.

- Kursus B (Bendaharawan Uang) - Course B (Financial Treasurer)

This one month course is for local government officials of Eselon 3 andbelow who responsible for regional finance and treasury functions. Thatwould include officials from almost all of the units of local governmentswho have any financial and or treasury responsibilities. The course isprovided on a regular basis by the Diklat Propinsi.

- Kursus C (kursus Pengawasan) - Course C (Oversight / Control)

This course is targeted to local government officials who are responsiblefor oversight/control of local government finance and local governmentassets. It is offered by the Diklat Propinsi on an irregular basis because ofthe low demand for the course.

- Pemses (Pemberdayaan ekononomi strategi) - Local economicdevelopment.

This two week course on local government economic development istargeted participants wh0 are typically heads of local government units(Kepala Dinas, KaBag Keuangan, KaBidang BAPPEDA). This trainingcourse was developed by Gajah Mada University on a project basis,starting 1995. It continues to be provided by Gajah Mada with funding bylocal government budgets of the participants.

3.2.2. MAPATDA (Manual Pendapatan Daerah) - Manual for Local GovernmentRevenues

Manual Pendapatan Daerah is a manual for revenue collection using the taxpayer self-assessment approach. Under this approach, tax payers are requiredto have a unique regional tax registration number (Nomor Pokok Wajib PajakDaerah). Implementation of this approach has had a very positive effect on taxcollections. MAPATDA also proposed reorganization of the Dipenda structuredepending on the type of the local government. The system was developed andpilot tested under the IBRD Urban Sector Loan through the Ministry of HomeAffairs. It has already been implemented in 99 local governments. Theimproved manual and computerized taxpayer data system continues to beimplemented in new local governments with both APBN and APBD fundingwith the ultimate target of reaching all local governments.

3.2.3. MAKUDA (Manual Keuangan Daerah or Regional Finance Manual)

This was developed as a detailed manual and training program to provideinstruction on implementation of PP 5/1975 and PP6/1975 and supporting


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regulations, as continuously improved. MAKUDA is currently used, with varyingdegrees of proficiency, in all local government.

3.2.4 POMMS (Performance-Oriented Maintenance Management System)

The POMMS system was designed to provide local governments a methodologywith which to plan the expenditures required to provide adequate maintenanceand operations of existing local government assets in better balance withrequirements for expenditures for new investments. Initial installation of thePOMMS methodology has been conducted on a project-financed basis inassociation with IUIDP loan projects and continuing operation of the system istypically financed from the local routine budget. POMMS has already beenapplied in conjunction with Sulawesi-Irian Jaya IUIDP (18 local governments),East Java IUIDP (36 local governments), Bali UDP (8 local governments),Semarang/Surakarta UDP, Central Jawa IUIDP. It is still being implemented inKalimantan UDP (5 local governments).

3.2.5 RIAPs (With LIDAPs, only to support revenue generation)

Under IBRD and ADB IUIDP loan programs, RIAPs have already beenimplemented in 36 local governments in East Java, 10 local governments in Bali,14 local governments in West Java, 5 local governments in 4 provinces inKalimantan;, in Kota Semarang, Kota Surakarta and Daerah IstimewahYogyakarta in Central Java, 6 local governments in the Eastern Island, and 8 localgovernments in Sulawesi and Irian Jaya.

Currently, Ministry of Home Affairs is continuing RIAP implementation(together with limited LIDAP) in tandem with implementing IUIDP investmentprograms for the 52 local governments in 8 provinces on Sumatra Island (exceptAceh). This training and technical assistance, funded by ADB loan, will becompleted in the Year 2001. The scope of work focuses on preparing projectionsof the local government revenue improvements for which the Dipenda and otherrelated unit are responsible.

3.2.6 SAPA (Sistem Akuntansi Pengendalian Anggaran) - IBRD financed projectstarted in 1990.

This was a project to develop and pilot test a methodology to introduce modified-accrual based accounting and double entry book-keeping. Ministry of HomeAffairs implemented pilots test in cooperation with Kabupaten Sidoarjo andKabupaten Bogor funded by the IBRD loan. SAPA has already been implementedin 19 Biro Keuangan Propinsi and is now being implemented in the remaining7 Provinces (DIY, Maluku, sulawesi Tenggara, Kalimantan Timur, Bengkuku,Papua and Kalimantan Barat) using SDO funds. The main constraints ofimplementing the SAPA have been that (1) officials who have been trained areoften moved to other positions or are assigned too many other tasks to properlymaintain SAPA; and (2) standard accounting reporting formats have not beendeveloped and disseminated.. Experience wih the pilot testing of the associated


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methodologies SAJM (System Anggaran Jangka Menengah) and SP3 were notsuccessful and were, therefore, discontinued.

3.2.7 CBUIM

The CBUIM Project is currently contracting consultants for implementation ofthree short-term technical assistance projects related to Regional Finance capacitybuilding for implementation in 2000-2001.

• TA for Regional Financial Development: This is a two year technicalassistance project to design and pilot test a system of meaningful service unitperformance indicators. The performance indicators for various servicesprovided by kota local governments could be used for comparative evaluationof performance between local governments and over time in specific localgovernments to measure improvement or deterioration of performance. Thesystem will be tested in 6 pilot cities.

• TA for Institutional Development: Using the results of the above performance

indicators, this two year TA project will assist local governments to preparedetailed capacity building programs. This pilot project will be conducted in thesame 6 pilot cities.

• TA for Regional Budgeting System: Also linked to the development of theperformance indicators system mentioned above, this two year TA will pilottest the implementation of new local government budgeting practices whichintroduce Performance-Oriented Budgeting and Financial AccountabilityReporting in two pilot cities. The introduction of a revised local governmentbudgeting system, including the introduction of POB practices, are specifiedin the draft Government Regulation regarding Local Government FinancialManagement of Decentralized Functions (RPP Pengelolaan Keuangan Daerah- Tugas Decentralisasi).

3.2.8 BUILD (Breakthrough Urban Initiatives for Local Development)

The second phase of this UNDP grant-funded project, which started in June 1999,is a continuation of BUILD phase I but with an added focus on the changesintroduced by reform and the autonomy laws. Hence, more focus will be givento good governance and empowerment of the local parliaments. Specific activitiesinclude: increasing the role of DPRD in planning, programming and monitoringthe local government budget, implementaion of the draft government regulationin regional finance management. The additional local government pilot projectare in the following locasl governments: Gorontalo, Sawah Lunto, Bogor,Sukabumi, Surakarta, Probolinggo.

The BUILD Project currently has a Municipal Finance Advisor who is assistingthe 9 participating local governments to prepare evaluations of the localgovernment financial condition and financing capacity and helping to identifyalternative sources of long-term finance ( community participation, private sectorparticipation, bonds, etc)


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3.2.9 UMTP Courses continuing (Urban Management Core Course/Badan Diklat)

The UMTP core course for senior local government urban management teams,was developed and pilot tested under the Municipal Finance Project. ExtensiveTraining of trainers was conducted. It has been fully institutionalized at BadanDiklat /MOHA where it continues to be regularly taught and financed from theannual budget of Badan Diklat.

3.2.10 CLEAN-Urban Project, USAID (on-going 1997 – 2000 )

The USAID-funded CLEAN-Urban project has the primary objective ofdeveloping of a decentralized, self-sustaining system of local governmentinfrastructure finance. To accomplish this goal, it supports development ofappropriate central government policies and direct capacity-building of localgovernments and communities. Specifically related to Regional Finance, thisincludes:

• Technical assistance to MOF/MOHA/MNOD to prepare and socialize thegovernment regulations for regional finance to support Law No. 25/1999, therevision of Law No. 18/1997, the draft Law on BUMD and the RPP onManagement of Urban Areas.

• Direct technical assistance and training to 8 local governments in East Jawato develop all-sector, annually updated Capital Improvement Plans (knownas Program Dasar Pembanguan Perkotaan – PDPP). This is an extension ofthe IUIDP-PJM methodology which only covered 7 urban infrastructurecomponents. Under Laws No. 22/1999 and 25/1999, where local governmentswill have much broader responsibility for planning and programming in allsectors under their responsibility, the introduction of the PDPP all-sectorcapability is crucial. Also crucial is the introduction of mechanisms forcommunity participation in establishing priorities for investments in thePDPP. MOHA issued a General Guideline for PDPP implementation to alllocal governments in June, 2000. Further assistance to MOHA, extensivetraining of a small number (8-10) of additional local governments and lessextensive training to a large number of local governments (100-150) isenvisaged by USAID in the next phase of the project.

• Supporting the Ministry of Home Affairs (DG PUMDA) and PERPAMSI toprovide guidance and training to PDAMs in Corporate Planning and thepreparation of Customer Satisfaction Surveys (CSS). MOHA issuedguidelines for both PDAM Corporate Planning and CSS to all localgovernments and PDAMs in July, 2000. Pilot projects and workshops fortrainers in both topics are currently being conducted.

• Assistance to MNOD/MOHA to prepare guidelines and examples forpreparation of Perda for Local Government Financial Management, for


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implementation of the new APBD budgeting process, and for introduction ofPerformance-Oriented Budgeting. Pilot training activities will be conductedbased on the new guidelines with broader training program envisaged byUSAID in the extension of the project.

3.2.11. Capacity Building for Decentralization on Indonesia (Infrastructure Planningand Capital Budgeting) (2000-2001)

This is a two year USAID-funded cooperation between the University of SouthernCalifornia and Bandung Institute of Technology to provide 6 week trainingcourses to 50 participants per year (3 local officials and 2 university ”consultants”from each of 10 selected local governments) in urban infrastructure planning,programming and budgeting.

3.2.12. International City Managers Association Project, USAID (end 2000 – 2003)

This is a three year project designed to:

• Provide extensive direct technical assistance and training to up to 12 localgovernments in order to fully implement Law 25/1999 and the supportinggovernment regulations.

• Support the participation of 12 local governments in the Resource CitiesProgram, a twinning program between Indonesian and US cities.

• Provide technical assistance and training to help build the capabilties oflocal government associations; especially the new Asosiasi PemerintahKota and Asosiasi Pemerintah Kabupaten.


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4. Capacity assessment for Regional Finance

4.1. Our Methodology

The methodology was developed by first, answering the question “Capacity to do what?”.The team used the capacities that were identified in the Normative Framework as thecapacities that local governments must have to make decentralization successful. Duringthe development of the Normative Framework, a three dimensional approach of capacitywas used, whereby capacity of a local government is recognized as dependent not onlyon the capacity of individuals (individual level) or the local governments (entity level),but also on the enabling or constraining framework such as the national policy andregulatory system (system level).

Because many of the approaches emerging from the new framework for regional financewill be new and unfamiliar to the local governments, the team felt that reliance on self-assessment of capacity building needs by local governments alone would not besufficient. Experiences of other capacity assessments, such as those carried out by therecent CBUIM Career Mapping System and Training Needs Identification, supported theteam’s opinion. Interviews with central government and provincial governments on theirperspective of local government capacity building needs were necessary to complementthe results of the self-assessment. Interviews with provincial governments, especially theBiro Keuangan, were particularly beneficial because they have more direct experiencewith local governments and they were also be able to provide opinions on capacitybuilding needs in other local governments in their province. The team is cognizant of therisk of self-interested biases in the opinions of provincial and central government officialsand will take it into consideration accordingly.

In addition to local governments perspectives of capacity building needs, extensiveinterviews with central government officials have been conducted to obtain informationon new policies and regulations that are being developed, to receive feedback on theNormative Framework, and to understand plans for transfer of personnel and assets to theregions. Interviews with central government officials were also used to gauge the levelof consensus on the implications of and plans for implementation of the autonomy lawsamong the central government officials and ministries.

For assessment at the local level, the team felt that quantitative instruments and closed-ended questions would not be too useful because a lot of discussion would be needed totake place up-front to explain what the new approaches to regional finance entail. Hence,the team envisioned focus group discussions and interviews with individuals, especiallyin the Bagian Keuangan and Dipenda, whereby the Normative Framework and itsoperational implications were explained first, to be followed by responses from therespondents on their capacities to implement such approaches and their perceptions ofcapacity building needs.

Open-ended questionnaires were used to complement the discussions. Thesequestionnaires were useful to increase the number of respondents, because meetings canbe dominated by one or two individuals; and also if given in advance, to give an idea to


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the respondents what the team want to discuss and therefore give time to the respondentsto prepare their initial reactions. Questionnaires will be given to individuals in BagianKeuangan, Dipenda, BAPPEDA, Sekwilda, Kepala Daerah, Biro Keuangan Propinsi,and members of local parliaments having an interest in local government financialmanagement. The main target group for discussion and questionnaire respondents isupper management (KaBag Keuangan, KaDipenda and Kepala Seksi).

Even though the focus of the capacities to be assessed are capacities to implement newapproaches to regional finance, some resources were dedicated to identify capacitybuilding needs to implement functions under the previous system. This was done byreviewing existing capacity needs assessments, interviewing local government officialson their current problems and capacity building needs and asking questions on theseissues in the questionnaires.

4.2. General Observations from Each Field Visit Location

Nobody (at central, provincial or local government level) has a consistent concept ofthe implications of decentralization on capacity-building needs. Even among centrallevel ministries, there are differing perceptions on the impacts of decentralization.Therefore, this current study is needed to allow GOI to set priorities and coordinate allrelated activities (rather than just accepting individual ministry recommendationsand/or donor offers of specific projects).

Even though it appears that some local governments are aware of the contents of LawsNo. 22/ 1999 and 25 /1999, the implications are not clear to them because they do nothave the Government Regulations and supporting guidelines for implementation. Theseregulations and more detailed implementing guidelines are still being developed. Thus,local government officials are not in a position to competently anticipate the real impactsof decentralization. As a result, self-evaluation of capacity-building needs by localgovernment officials can only provide useful inputs on capacity-building needs that stillexisted under the old system.

Between 1987 and the present, there has been a large investment in establishing andexecuting technical training for local government financial management. However, thetraining has been built around the existing heavily top-down planning approaches andhighly specified and regulated financial management systems. The new approaches tolocal governance and local government financial will require large investments in trainingto support these new responsibilities for autonomous regional finance.

Caution is required in assessing the scope of the numerous capacity-building programsand projects that have been implemented, are being implemented and are planned to beimplemented versus the real needs. In particular, very small scale technical assistanceprojects tend to have grand names that mislead the evaluator into thinking that aparticular aspect of capacity-building is already being provided for when, in fact, theneeds are vast by comparison.

The following are very brief overviews of the general environment and main capacity-building issues in the management of Regional Finance which were observed in each of


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the four local governments surveyed by the team during June and July, 2000. Detailedobservations/findings by each location may be found in the accompanying Field VisitReports.

Kota Makassar

Kota Makassar is a metropolitan city of about 1.1 million people, the provincial capitalof South Sulawesi and a strategic gateway to Eastern Indonesia with a fairly buoyantagricultural export-driven economy. The APBD budget for the Year 2000 is about Rp.166 billion, with a routine expenditure budget of Rp. 125 billion and developmentexpenditures of Rp. 41 billion. Income from Own Sources Revenues is only Rp. 30billion, or 18 percent of total revenues, with the remaining revenues coming from centraland provincial government grants.

Kota Makassar is normally considered to have a competent, well-informed and pro-active executive and staff for managing regional finance in compliance with the existingsystem dictated by PP 5/1975 and PP 6/1975. Given the level of competence of the localgovernment, it was surprising to find a general lack of familiarity (by the DPRD and alllevels of the executive) with both the contents and operational implications ofPP25/2000, the draft government regulations related to local government finance andthe operational implications of these new regulations. This highlighted the criticalweakness to-date in socialization of the new regulations (which until now has notpenetrated to the level of practical operational implications); with weakness observedboth in the central-to-local government communication as well as within the localgovernment. Partly as a result of this lack of clear guidelines and other accessible andabsorbable information, Kota Makassar’s efforts to take a pro-active approach toanticipate the impacts of decentralization have been limited. They have taken theinitiative to create a Tim Koordinasi Otonomi Daerah which has made some progressin designing a Local Government Finance Board (Lembaga Keunagan Daerah) but theseefforts are not supported by a clear understanding of the content and operationalimplications of the draft regulations, especially for local government finance. Theexecutive and legislature are not yet prepared to draft the Local Regulation regardingLocal Government Finance Management (Perda tentang Pokok-Pokok PengelolaanKeuangan Daerah) as required under Law No. 25/1999 and RPP Pengelolaan danPertanggungjawaban Keuangan Daerah nor have they taken any initiative to anticipatethe new local revenue opportunities which are provided under the draft revision of LawNo. 18/1997.

The financial staff is competent in executing the current budgeting, accounting,reporting and revenue systems dictated by PP 5/1975 and PP 6/1975 and supportingregulations and guidelines. They have adequately implemented existing programs likeMAPATDA, MAKUDA. The first Revenue Improvement Action Plan (RIAP) wasprepared in 1997 and is being implemented although there has been no updating since1997. Managers generally feel confident that senior and mid-level financial staffadequately understand the contents of the existing financial management trainingprograms KKD and/or LKD which 4 of the existing staff have attended. The totalnumber of staff is adequate and includes 3 formally trained accountants (S1), a rarity inlocal governments in Indonesia. However, in detailed discussions of the new types of


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tasks that will be required of the financial staff under the new local government financesystem, it is clear that there will be extensive needs for capacity-building in making thetransformation from the existing centrally dictated system with strict supervision fromprovincial level government.

In the interviews, the lack of career paths in local government finance was identified asa major constraint in developing a more professional staff as was the lack of jobdescriptions linked to minimum qualifications including training courses, certificationsand experience requirements. Other constraints mentioned were the lack of competenttraining at the Diklat Prop in regional finance, the inadequacy of local governmentbudgets for training and resistance to paying for staff to attend training at localuniversities (especially UNHAS which provides LKD/KKD). The incentives of theexisting promotion system encouraged officials take structural training to the neglect offunctional training.

Kabupaten Bima

Kabupaten Bima is a financially relatively poorly endowed local government with a totalpopulation of around 540,000; of which around 110,000 reside in the only majorurbanized area, previously Kotip Bima. The APBD budget for the Year 2000 is Rp 108billion with routine expenditures budget of Rp. 62 billion and the developmentexpenditures budget of Rp 46 billion. Income from Own Sources Revenue is only Rp.4 Billion, or less than 4 percent of total revenues with the remaining fund sourcescoming from the central government grant or a small portion from provincial grants.

Largely due to the fact that the new Bupati was previously a senior official of the DKIJakarta Biro Keuangan, there was some appreciation of the new PP 25/2000 and someof the contents of the draft government regulations for regional finance. However, thatunderstanding was fairly superficial and did not penetrate to the level of the operationalimplications of the new local government finance system nor was the mid- to lower levelstaff aware of the contents and implications of these draft regulations, even though theyhad attended the socialization workshops conducted by MOF/MNOD/MOHA. Theexecutive and legislature are not yet prepared to draft the Perda regarding the localgovernment finance management (Pokok-pokok Pengelolaan Keuangan Daerah) asrequired under Law No. 25/1999 and RPP Pengelolaan dan PertanggungjawabanKeuangan Daerah. However, due to the extremely high priority now given by the Bupatito increasing OSR’s (PAD), there was a very high level of awareness of the draftrevision of Law No. 18/1997. Kabupaten Bima, in cooperation with the province NTBand other local governments within the province, has already identified nine new taxesand user charges and has prepared draft Perda to implement them immediately uponapproval of the revision of the law.

The capacity to implement even the existing budgeting, accounting, reporting andrevenue systems as dictated by PP 5/1975 and PP 6/1975 is very weak. Especially in theDipenda, the MAPATDA system was being used without the requisite organizationalchanges being made and there was almost no real attempt to coordinate revenuegenerating activities and provide adequate data. Although the total number of staff wasreportedly adequate, the level of training was extremely low with the exception of


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having two formally trained accountants (S1) on the staff. There is no competent trainingfor regional finance available locally, nor is the training available at Diklat Prop inMataram considered by local government officials to be of adequate quantity or quality.Local government officials in the survey emphasized that local training budgets weretotally inadequate and that the incentives of the existing promotion system encouragedofficials take structural training to the neglect of functional training.

Kota Malang

Kota Malang, a fairly prosperous city of 810,000 people and seat of higher educationinstitutions, generally has a capable, progressive and pro-active local government (bothDPRD and executive). The APBD budget for Year 2000 is Rp. 88 billion, with routineexpenditure budget of Rp 71 billion and development expenditures of Rp 17 billion.Own source revenues are Rp 15 billion, or 17 percent of total revenues, with the balancecoming from transfers from the central government and provincial government.

Senior local government officials were relatively aware of the recent regulations andtheir implications; especially with respect to the RPP Pengelolaan danPertanggungjawaban Keuangan Daerah where senior finance officials had activelyparticipated in MNOD workshops in East Jawa to prepare early drafts of the RPP andin subsequent socializations workshops by MOF/MNOD/MOHA. Kota Malang has beenpro-active in establishing a functioning Coordinating Team for Regional Autonomy.This Team has been instrumental in Kota Malang anticipating decentralization bysharing information throughout the local government, starting to clearly define theresponsibilities of the Kota and proposing reorganization of the local government. Thisincludes the creation of a Local Government Finance Board. They are aware of the draftrevision of Law No. 18/1997 and are trying to anticipate new opportunities for localgovernment revenue generation, although these are focused largely on schemes to tapinto duties on cigarettes (cukai rokok) which may not be appropriate. Kota Malang hasalso recently committed to implement the PDPP medium-term all-sector, rollingdevelopment planning approach and have already implemented the PDAM CorporatePlan.

The (admittedly too large) staff is generally competent to implement the existingsystems dictated by PP 5/1975 and PP 6/1975 and MAPATDA and MAKUDAprograms are fully operational. A RIAP was prepared by the Bagian Keuangan ratherthan the Dipenda, which should have been responsible, so the action plan was neverimplemented. Recent changes in the KaBag Keuangan and retirement of the KaDipendaplace a heavy reliance on the mid-level staff which seem quite competent. After detaileddiscussions with the senior staff regarding the new requirements and operationalimplications of the new regulations on local government system, they were not only ableto grasp the concepts and implications, but able to frankly discuss the limitations of theexisting systems and staff to operationalize the new system. They were alreadyexperiencing difficulties with the lack of definition of the appropriate role of the DPRDand the executive in the APBD budget preparation process and their lack ofcommunications/negotiation skills which were previously not needed.

As in Kota Makassar, the local officials identified the lack of career paths in localgovernment finance as a major constraint in the developing a more professional staff as


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well as the lack of job descriptions linked to minimum qualifications including trainingcourses, certifications and experience requirements. They complained of the lack ofcompetent training at the Diklat Prop in regional finance, the inadequacy of localgovernment budgets and resistance to paying for staff to attend training at localuniversities. In Malang, there is ready access at the local universities to excellent trainingin finance and many of the staff are themselves paying for such training; especially S1in economics and finance. The private and university training resources should be betterused by the local government.

Kabupaten Kutai Induk

In Year 2000, the original Kabupaten Kutai with a population of about 575,000 peoplewas divided into Kab. Kutai Barat, Kab. Kutai Induk, Kabupaten Kutai Timur and KotaBontang. The residual Kab. Kutai Induk has about 200,000 residents of which about40,000 live in the only major urbanized area of Tenggarong. Kab. Kutai Induk hassubstantial revenues from shared income on gas, oil, forest products and coal whichincrease 4-5 fold in 2001. At the same time, it has a large population of poor ruralresidents (40 percent).

While the senior executives were not well informed on PP 25/1999 or the majority ofthe draft government regulations on regional finance, they were very up-to-date onportions of Law 25/1999 and the RPP Dana Perimbangan that related to sharedrevenues on natural resources. The Dipenda was extremely active and apparentlycompetent in preparing revenue projections which is a very challenging task given thelimited information on natural resources revenues currently available to localgovernments. However, the capacity of the Bagian Keuangan in executing even thecurrent system under PP 5/1975 and PP 6/1975 has some obvious deficiencies; mostnotably in coordination of the revenue and development sides of the budget. The BagianKeuangan does not appear to be taking a pro-active approach to anticipating thesystematic changes needed under the new system of regional finance. Both the executiveand the legislative are not yet prepared the draft Perda regarding the local governmentfinance management (Pokok-pokok Pengelolaan Keuangan Daerah) as mentioned inLaw No. 25/1999. Of particular concern is the lack of anticipation of how toproductively use the windfall from shared natural resource revenues in Year 2001. Thekabupaten has not yet given consideration to the needs for reorganization, including thecreation of a Local Government Finance Board.

The number of trained finance officers and capabilities to handle the financial management arevery limited. The kabupaten should clearly invest some of their new revenue windfall to therecruitment of trained professional financial staff (probably available in Samarinda) and trainingof existing staff.


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5. Findings and Recommendations from the Current Study(According to Level)

5.1. System Level

5.1.1. National policies, regulations and guidelines:

1) Lack of awareness and understanding of Law No. 25/1999 and draftsupporting regulations; especially the draft Government Regulationregarding Management and Accountability for Regional Finance (RPPPengelolaan dan Pertanggungjawaban Keuangan Daerah).

Most local government DPRD members and executives, including the financeofficers, do not fully comprehend the fundamental changes in the system of localgovernment finance embodied in this new law and supporting regulations. LawNo. 25/ 1999 is not, in itself, sufficiently detailed so that the local governmentofficials can understand the operational implications of the new system. Thesupporting RPPs have not yet been finalized and socialized in a way that allowslocal governments to anticipate the new decentralized system of local governmentfinancial management.

In particular, local government executives and finance officers are not aware thethat new RPP for Management and Accountability for Regional Finance willreplace the existing PP 5/ 1974 regarding Arrangement, Accountability andSupervision of Local Government Finances and PP 6/1974 regardingImplementation of Local Government Finances and Calculations of the AnnualBudget and the related detailed KepMen, InMen, etc. Of utmost urgency is thatlocal governments be made aware of the need to prepare a local governmentregulation (Perda) to regulate the system of local government financialmanagement and that they be made aware of the new recommended APBDbudget preparation process meaningful DPRD participation and practical stepsfor the transition between the existing system under PP5/1975 and PP 6/1975 andthe new system.

Recommendation:

(1a) Highest priority should be given to the completion, acceptance and broadsocialization of the RPP for Management and Accountability of RegionalFinance. The other 5 RPPs related to regional finance should follow asshortly thereafter as possible.

(1b) Guidance (in the form of suggestions only) should be provided to regionalgovernments on how to make the transition from PP 5/1974 and PP 6/1974 to the decentralized system embodied in the RPP regardingManagement and Accountability for Regional Finance based on localpriorities and capacity to implement the new RPP.


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(1c) Socialization of the RPP regarding Management and Accountability ofRegional Finance should consist of:

- an immediate program to socialize the main aspects of the newregional finance system (and the operational implications) toDPRD Komisi C members, all senior executives of the localgovernment with substantial budgeting and/or financeresponsibilities (e.g. all KaDinas) , local universities, communitygroups and tokoh masyraakat.

- a more in-depth program of training of all senior and mid-levelfinancial officials should be conducted in all local governments (±400 Local Governments) to explain the impact of each chapter ofthe RPP, their operational implications and strategies for phasedimplementation.

- more in-depth training program should be available on demand to

support those regional governments with limited capacities toimplement the approaches embodied in the RPP.

(1d) MOHA should immediately prepare and disseminate an example LocalGovernment Regulation on Financial Management (Perda PengelolaanKeuangan Daerah) as general guidance to assist local governments inpreparing their own Perda.

(1e) MOHA should prepare and disseminate more detailed guidance onpractical approaches to implement the new APBD budgeting process

(1f) MOHA should prepare and disseminate guidance on implementingPerformance-Oriented Budgeting (POB) in the local governments. Suchguidance should include useful information regarding minimum servicestandards (which will theoretically need to be complied with in order tocontinue to receive DAU ) and standard spending assessments.

2) Government Regulation No. 25/2000 regarding the Functions of Central andProvincial Governments (PP 25/2000 tentang Kewenangan Pemerintah danKewenangan Propinsi sebagai Daerah Otonom) needs clarification andsocialization

PP 25/2000 specifies the functions and responsibilities of the central governmentand of autonomous provinces. Responsibility for all “residual” functions isdevolved to the local governments. The lack of a clear “positive list” of localgovernment responsibilities, while consistent with the spirit of meaningfuldecentralization, is causing confusion at the local government level. While somelocal governments (e.g. Kota Malang) are taking the initiative to clearly definetheir own responsibilities, others are not taking this initiative and are still waitingfor further guidance from central government (even though that is not inaccordance with the clarification of PP 25/ 2000).


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Without a clear definition of a local government’s functions, preparation of acompetent annual budget for Year 2001 cannot proceed effectively.

Recommendations

(2a) Central government (previously MNOD, now MOHA) should prepare anddisseminate general, non-binding information regarding a "Positive List"of candidate "residual responsibilities" that local governments couldtheoretically accept all or part of. This would be very helpful for localgovernments in defining their own responsibilities in accordance withLaw No. 22/1999 and PP 25/2000. Direct short-term (2-3 day) assistancefrom teams of central/provincial officials could be provided to localgovernments which request such assistance to assist them to define theirresidual responsibilities; especially responsibilities in providing basicservices that must not be interrupted.

3) Lack of clarity of PP 25 / 2000 regarding reallocation of local governmentown source revenues by provinces

Local governments are profoundly confused by PP 25/ 2000 (articles 2.21 and3.19) which give the autonomous Provinces the authority to collect“concentrated” own source revenues (Pendapatan Asli Daerah) from all localgovernments in their province and reallocate them to the local governmentswithin the province. Local government in the field survey with any substantialOSRs argued that this concept was totally contrary to the concept ofdecentralization to the local government level and that such a system would killany incentives for local governments to continue to collect own source revenues,much less try to increase them.

Recommendation:

(3a) Central Government should review this policy and its practicalimplications. Should central government proceed with this policy, it mustclarify the criteria to be used to identify local governments with unfairly“concentrated” potential for owns source revenues that will be subject toredistribution by the provincial governments under PP 25/2000. In thoseeffected local governments, the central government must socialize therationale for such reallocation in order to gain acceptance of the fairnessand justice of such reallocation.

4) Lack of clarity and specificity of the draft Government Regulation regardingEquilibrium Funds (RPP tentang Dana Perimbangan)

Regarding shared revenues, local governments are concerned that the formulaefor sharing revenues be clear and the local governments have adequate access tonecessary information to ensure the transparency of the calculation of shares. Particular concerns were expressed related to shares of gas and oil revenues


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(which are calculated net of tax, dividends and other costs which are not clear),cigarette duties (for which there is no locally available data) and personal incometaxes (PPH Perorangan for which there is no locally available data).

Recommendations:

4a) The exact methods of calculation and the data sources to be used forcalculation of all shared revenues should be specified in detailedregulations (prepared by MOF and/or Sekretariat PKPD/DPOD) , agreedupon by the DPOD and socialized as soon as possible. Although suchdetailed regulations will reduce the flexibility of the system, it will ensuretransparency and acceptance by the regional governments.

4b) Data bases used to perform the calculations of the shared revenues mustbe made available to the local governments; perhaps through an internetwebsite which local governments can access. The Sistem InfomasiKeuangan Daerah (SIKD), now generally conceived as a system for localgovernments to report specified data to central government, should bemodified to provide information flow back to the local governments onsuch topics as shared revenue calculations.

4c) Training of local governments finance officers on the detailed allocationmethods and systems must be provided so that local governments acceptthe fairness and transparency of the system and so local governmentfinance officers can act as watchdogs of the system.

4d) The allocations, or at least estimates of the final allocations of sharedrevenues should be provided to local governments by October, 2000 tosupport preparation of the 2001 APBD.

Local governments in the field survey were very confused by the terminology“Dana Alokasi Umum (DAU)” and “Dana Alokasi Khusus (DAK)”. Under theexisting grants system, the Dana Pembangunan Kota / Kabupaten is divided intotwo portions; the block grant portion called DAU and the specific grants lumpedtogether as DAK. Thus, local governments have difficulty grasping that the newDAU will consist of a combination of the old SDO, the old DAU and a largeportion of the funds that previously flowed through the old DAK portion of DanaPembangunan Kota/Kabupaten. As the new DAK mechanism is not yet clearlydefined even at central level, one can easily understand the lack of comprehensionby local government officials.

Regarding the new Dana Alokasi Umum, socialization of the RPP to-date hasbroadly disseminated the general concept of the DAU and the major variables thatwill be used for calculation of DAU allocations (population, area, number of poorand local cost factors to calculate needs for funds; less local potential to generateown source revenues based on gross regional domestic product or some proxy).However, local government finance officials remain concerned that theweightings of these factors will not be done in a transparent or absorbablemanner, thus leading to a lack of credibility of the fairness of the system. In


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particular, they remain skeptical of whether the three representatives of the localgovernment associations and the six representatives of the DPRDs who sit on theDPOD will be competent to participate fully in the review of recommendationsto be submitted by the Sekretariat PKPD to the DPOD and to represent theinterests of regional governments.

Recommendations:

4e) Completion, approval and socialization of the RPP Dana Perimbanganshould be give second priority after the RPP Pengelolaan danPertanggungjawaban Keuangan Daerah.

4f) There must be early and open dissemination of the detailed rationale andformulae for DAU once they are proposed by the Sekretariat PKPD to theDPOD. Open access to technical reports on the options and supportingscenarios must be provided to all concerned.

4g) Technical assistance should be provided to the Association and DPRDrepresentatives on the DPOD to conduct independent analyses so they canparticipate as equals and have a voice in the meetings.

4h) Broad socialization of the finally accepted rationale and formulae forDAU and open access to the supporting data base. Again, the SistemInformasi Keuangan Daerah and/or an internet website could provide themechanism for this information flow from Sekretariat PKPD to theregional governments.

4i) DAU allocations, or at least estimates of the final allocations, should beprovided to local governments by October, 2000 to support preparationof the 2001 APBD.

In addition to a lack of clarity in the methods of calculating the sharedrevenues and dana alokasi umum, local government are not yet aware ofany guidelines for the exact mechanisms for the transfer of funds from theMinistry of Finance to the Kas Daerah.

4j) Guidelines for the exact mechanisms for transfer of shared revenues andDAU / DAK allocations and any associated reporting requirements shouldbe issued as soon as possible so local governments can prepare themechanisms for implementation prior to January, 2001.

5) Lack of clarity of the draft Government Regulation regarding RegionalBorrowing ( RPP tentang Pinjaman Daerah)The RPP regarding Regional Borrowing is also not widely disseminated to localgovernments or well understood by those who have received it. In particular, therationale for increasing the Pemda minimum debt coverage ratio (DCR) from 1.3to 2.5 appears to them to be unfairly constraining their future ability to use debtfinancing for infrastructure investments. In fact, while the new formula forcalculating the DCR appears almost identical to the old formula, the new system


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of grants has the effect of increasing the DCR from 1.3 to 2.5 for an equivalentlevel of constraint of indebtedness. This needs to be socialized.

Of greater concern is the fact that this RPP does not cover BUMD borrowingwhich in the past comprised a major portion of local SLA and RDA borrowing.There does not yet appear to be another draft in circulation to regulate BUMDborrowing.

Recommendations:

5a) Given the small number of debt-worthy local governments at the present,completion and socialization of this RPP regarding Regional GovernmentBorrowing could be given a lower priority.

5b) The new Law on BUMD currently being drafted should specify thatBUMD borrowing will be regulated by an RPP regarding BUMDBorrowing and such an RPP should then be prepared. The RPP shouldclearly address the role of the regional government (DPRD and/or KDH)in approving any borrowing by their BUMDs. As with the RPP tentangPinjaman Daerah, this RPP tentang Pinjaman BUMD should provide thepossibility for BUMDs to issue bonds.

6) Lack of specificity of the draft Government Regulation regardingInformation on Regional Finance (RPP tentang Informasi Keuangan Daerah)

Local government finance officials observe that this RPP essentially leaves thedetailed types and format of financial and other information that must be reportedto the central government up to the discretion of the Minister of Finance who willregulate the requirements by KepMen. Their concern is that such requirements,if overly burdensome, may have a negative effect on the local budgeting,accounting an reporting systems. These systems should be designed primarily tomeet local management needs, not central government reporting requirements. In the past local governments were compelled to structure their budgets andreporting systems in order to report development spending by 20 sectors whichwas not useful for local management purposes.

Recommendation:

(6a) APBD data that local governments will be required to report to centralgovernment should not be in excess of those data elements alreadyspecified by the RPP regarding Management and Accountability forRegional Finance

(6b) Design of the Sistem Informasi Keuangan Daerah should comprehend theneed for “two-way” exchange of data; while local government must reportspecified data to central government, central government must make dataavailable to local government regarding calculations of shared revenuesand DAU allocations.


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7) Conflicting central government guidance related to local government finance

All local governments in the field survey commented upon the lack of centralcoordination in issuing regulations and guidelines, including guidance on localgovernment finance. Specifically, conflicting instructions from MOHA andMNOD regarding allocations of Dana Rutin Daerah for Year 2000 confused thelocal governments in budget preparation for Year 2000.

Recommendation:

(7a) Strengthen the role of the KEPPRES 52 Tim Koordinasi Pokjas (orwhatever will replace Tim Koordinasi under the new Cabinet structure)in coordinating draft regulations including both RPPs and any supportingKepMen.

(7b) KepMen and SK (which the local governments are compelled to followor at least feel compelled to follow) must by strictly minimized in favorof Surat Edaran or suggestions/general guidelines. Thus, even if differentministries issue conflicting Surat Edaran, it is up to the autonomous localgovernments to decide which suggestions are most appropriate for themto follow or not to follow.

(7c) In the medium-term, laws and PPs should clearly define which ministriesare responsible for exactly which functions. The existing practice (forexample in PP 25 /2000 of specifying central government responsibilitieswithout clearly assigning these responsibilities to specific ministries)encourages an unproductive and confusing competition among concernedministries to try to control and/or regulate these functions. This results inthe issuance of conflicting KepMen and other ministerial instructionswhich confuse local governments. Capacity building to support thedrafting of more effective laws and government regulations should focuson SekKab, SekNeg and the DPR legislative staff and consist ofinternational study tours for very senior officials as well as in-depth legaldrafting training courses based on international standards for mid-levelstaff.

(7d) Specifically with regard to guidance for local government finance, a cleardivision of responsibilities between MOF, MOHA and the DPOD(Sekretariat PKPD) must be established regarding detailed responsibilitiesfor:- preparing, announcing and transferring central government

allocations (shared revenues, DAU, DAK) to local governments

- providing further implementation guidance for the new localgovernment finance system based on the RPPs


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- monitoring, evaluation and facilitation of local governments inimplementing the various aspects of the new regional governmentfinance system.

8) System for channeling foreign loan-financed project funds to localgovernments must be changed to conform with regional autonomy

Both central officials and local governments in the field survey highlighted thatthe existing Subsidiary Loan Agreement mechanism used to channel ADB andIBRD funds to local governments for IUIDP programs, essentially under thecontrol of central ministries (BAPPENAS, MOF, Kimbangwil), was notappropriate for a decentralized system. The Regional Development Account,while originally designed to provide a responsive and transparent source of loanfunds for qualifying projects that originate from local governments, becamedominated by central ministries who controlled the allocation of scarce subsidizedloan funds.

Recommendation:(8a) A new mechanism for central government on-lending to regional

governments and their enterprises should replace the existing SLA andRDA systems. Under the new mechanism, the central government wouldbe responsible for defining the sectors and/or types of projects which areof national priority and therefore should be supported by centrallysubsidized loan funds and define transparent criteria for evaluation ofprojects. All project proposals would originate from the regionalgovernments and would be processed on a “first-come/first-served” basis.Such a system would support national priorities, be accessible to localgovernments without central ministry intervention and would betransparent.

Many of the existing multi-year projects financed with foreign loans (especiallythose in the urban infrastructure sector -- P3KT, P3DT, CLGS) haveimplementation plans which do not conform to the new structure ofresponsibilities under Law No. 22/ 1999 and Law No. 25/1999. In particular,procurement of goods and selection of consultants previously done by central andprovincial authorities should clearly be done by the local governments. As manyof these projects represent a substantial proportion of local government spendingprograms and the projects are scheduled to last for 3-5 more years, continuing touse the existing implementation modalities (as typically contained in the loanagreements with ADB, IBRD, OECF, etc.) represents a risk to meaningfuldecentralization and local autonomy.

Recommendations

(8b) The implementation modalities for existing foreign loan-financed projects(e.g. P3KT, P3DT, CLGS, etc.) should be reviewed and altered to complywith the new assignment of responsibilities.


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(8c) The remaining funds for foreign loan-financed activities under theseprojects (previously budgeted as Dana Pembangunan Kota/Kabupaten -Alokasi Khusus from BLN and Rupiah Murni Dana Pendamping) shouldbe allocated directly to the local government through the new DanaAlokasi Khusus mechanism.

9) Need to ensure adequacy of transfers to fund salaries of transferred centraland provincial staff and to fund operations and maintenance of transferredassets.

Local governments are uniformly apprehensive that the DAU allocations in 2001will not be sufficient to cover the salaries of additional central and provincial staff(PNS) they may be compelled to employ or pay for operations and adequatemaintenance of transferred assets.

Recommendation:

(9a) For a transitional period of 2-3 years, the central government shouldprovide “on top” funds to local governments in addition to the DAU inthose cases where local government can demonstrate that they have beencompelled to accept unneeded staff and provide maintenance to unwantedassets. This would give the local governments 2-3 years to address theproblem of reducing staff (a problem that is now being thrust upon themby central government) and rationalizing/liquidating assets in aneconomically sensible fashion.

5.1.2. Local Government level Policies and Regulation

10) Need to immediately prepare Perda for Local Government FinanceManagement

Under the new system, each local government must prepare a Perda in order toestablish the local financial management system including the new budgetprocess, accounting system, the reserve fund mechanism and loan management,among others. When approved, this Perda will replace the PP 5/1975 and PP6/1975 as the legal basis for the local government financial management system.It appears extremely unlikely that many local governments will be able tocompetently prepare and implement such Perdas before Year 2001. Therefore, itis necessary to provide adequate capacity-building so that all local governmentscan prepare the Perda and implement crucial portions of the new system duringYear 2001 so that they will in-place for Year 2002.

Recommendation:

(1d, above) MOHA should prepare and disseminate an example LocalGovernment Regulation on Financial Management (PerdaPengelolaan Keuangan Daerah) as general guidance to assist


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local governments in preparing their own Perdas.

(10 a) MOHA should conduct training courses on Perda preparation andprovide on-site consultations with local governments, asrequested, to assist local government to adapt the example Perdato local conditions, priorities and capabilities.

11) Local Policies regarding Cost Recovery versus Subsidy for services are notclear

Clear local policies regarding cost recovery and subsidies for services has beenabsent in the past partly because the central government’s policy has also not beenclear. With decentralization, authority for setting this long-overdue policy willclearly rest with the local governments. Local governments (KDH and DPRD)should decide which services and which segments of the population can pay thefull cost recovery tariffs and which cannot. When subsidies are provided , theymust be provided through transparent subsidy mechanisms which ensure thatservice providers are held accountable for their performance.

Partly as a result of this unclear policy, urban service tariffs are typically too lowto ensure the sustainable provision of the services without continuing subsidies.Even if service providers were performing reasonably efficiently (which many arenot) they would legitimately need tariff increases to be closer to cost recoverylevels. Obtaining DPRD approval for these tariff increases has usually beenperceived as one of the main obstacles for cost recovery in urban services.Therefore, it was surprising that in four of the five locations visited, the majorityof DPRD members interviewed agreed with the importance of cost recovery asmuch as possible. Many of the DPRD members said only the poor should besubsidized and some even had suggestions on how the poor could be identifiedand targeted.

However, there were feelings of dissatisfaction and distrust; particularly regardingthe performance of PDAMs. This is understandable as requests for tariff increasesoriginate from the management of PDAMs and are based on historical costswhich include inefficiencies and KKN. DPRD members often said that thereshould be improvements in service first before tariffs are increased.

Recommendations

(11a) Each local government should have a clearly stated policy regarding costrecovery and subsidies for each service provided by the local government.Customers who are able to pay the full cost of services should pay the fullcost. Cross-subsidy should be used to the extent practical withoutdistorting economic activities. When subsidies still need to be providedby the local government, subsidies should be provided throughmechanisms that ensure that service providers are accountable for theperformance of these subsidies (e.g. performance contracts to PDAMs toprovide specified service to poor areas).


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(11b) Training should be provided as follows:

- to DPRD members and local government staff regarding the need forimplementing full cost recovery tariffs and practical guidelines fordeveloping a cost recovery/ subsidy policy;

- training of financial officers and all service units providing cost recoveryservices regarding strategies and methodologies to calculate and apply fullcost recovery tariffs (especially PerMenDargi No. 2 / 1998 andInMenDagri No. 8 / 1998 on Water Tariffs)

- pilot projects, documentation and dissemination of subsidy mechanismthat provide transparent subsidies to targeted recipients (e.g. Vouchersystems, performance contracts to provide specified services to poorresident, etc.) should be implemented.

- outreach activities to the communities should be undertaken to getmeaningful input from the communities in the development of costrecovery/subsidy policies and the policies adopted should be clearlysocialized to the communities.

(11c) Tariff increases should be tied to improvements in performance. In PDAMs forexample, tariff increases could be tied to reductions in Unaccounted Water(UAW) which is a serious problem in most PDAMs (typically 35 – 50 percent).Effort should be given firstly to low cost, visible service improvements that donot require tariff increases and investments in distribution networks to generateadditional revenues from existing water production capacity. This is intended toconvince the DPRD and the public of the seriousness of service units inimproving services. The preparation of a PDAM corporate plan with a medium-term plan which clearly links service improvements and reductions in UAW toperiodic tariff increases to compensate for inflation (as piloted in PDAM KotaMalang) can be a valuable tool. A training program to introduce PDAMCorporate Planning to a large number of PDAMs (as now being planned by DGPUMDA and PERPAMSI) should be given a priority.

12) Need for Performance Measurement and Accountability

Except for PDAMs, which already report on their performance based on a set ofMOHA indicators, none of the other dinases have applied performanceorientation in their programming, budgeting, or reporting. In the APBD, there istypically no clear linkage between inputs and physical outputs to be achieved withthose inputs, except for the development side of the budget where theconstruction of specific infrastructures may be specified. With no clear linkageof inputs to outputs in the APBD, it thus becomes impossible to report theperformance in executing the APBD in a manner which relates expenditure ofinputs to accomplishment of physical outputs . In this environment, localgovernments typically report the percent of the routine budget expended with


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absolutely no relationship to outputs achieved. However, they are able to reportdevelopment expenditures versus completion of physical activities for a portionof the development program.

None of the officials interviewed in any of the local governments surveyed wereaware of the new requirement in the RPP Pengelolaan dan PertanggungjawabanKeuangan Daerah to implement Performance-Oriented Budgeting and reportingapproaches in the future. Based on the team's discussions on how performance-oriented budgeting and related performance indicators might be developed andimplemented, it is clear that the financial officers and dinas need capacitybuilding on this matter.

To help ensure accountability, information on the performance of service unitshas to be made public. The RPP Pengelolaan dan PertanggungjawabanKeuangan Daerah requires that limited information on performance be publishedat the end of the fiscal year as part of the organization's report to the head of theregion and head of region's accountability report to the DPRD. But none of thefinancial officers or dinas surveyed knew of this requirement. Interestingly,several DPRD members interviewed did not find this requirement to beparticularly useful; reasoning that the Indonesian public does not like to read andthis information would be better channeled to the public through them. Althougha patronizing opinion, there might be a reason for it. The public has been deniedaccess to information for a long time and is, therefore, not used to seekinginformation.

Recommendations

(12a) In the local government APBD budgeting process, the budget committee(panitia anggaran) should require all dinases making budget requests toclearly link physical outputs to requested inputs (funds). If the dinasrequest for funds is subsequently cut by the budget committee during thebudget development process, the related physical outputs must also be cutto maintain the linkage between inputs and outputs in the APBD.

(12b) The central government should issue guidelines on how to develop usefulperformance indicators, starting with the easiest to measure (typicallyurban services). The guidelines would also recommend the use of nationalstandard indicators in addition to locally developed indicators. Thesestandard indicators could be tied to services that are required by theminimum standards of service. National standard indicators will allow thepublic, the central government, and local governments themselves tocompare performance between regions.

(12c) To allow for regional comparisons, develop a system of informationexchange of performance and, ideally, a data base. This system could bedeveloped by the central government, university networks, and/or localgovernment associations.


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(12d) In the longer term, develop benchmarks for all major local governmentservices similar to those now being developed for PDAMs under theIBRD/PERPAMSI Benchmarking Project. Such benchmarks should allowlocal governments to make meaningful comparisons of their ownperformance versus local governments with similar topography, city sizes,technical systems for service provision and cost structures.

(12e) Make the availability of information on performance widely known. Makeavailable the information in easily accessible places. The InformationCenter for Social Safety Net Programs that are now available in all localgovernment BAPPEDAs have been providing information on budgets,implementation guidelines, and performance and could be expanded toinclude information on performance and budgets of public services.Consumer groups, NGOs, and City Forums should be encouraged toaccess the information and review it.

13) Need for Upgraded Local Government Accounting Systems

Under PP5/1975 and PP6/1975 which establish local government accountingprinciples and practices, local governments still use the cash basis of accountingand single-entry book keeping. The main weakness of the cash basis ofaccounting is that it does not provide for the recognition of substantialexpenditure commitments already incurred but not paid, thus giving an inaccurateportrayal of the financial performance and condition of the local government. Therefore, the RPP Pengelolaan dan Pertanggungjawaban Keuangan Daerahrecommends that local governments adopt the modified-accrual basis ofaccounting in which selected expenditures can be recognized as commitments areincurred. In the modified-accrual system, a limited balance sheet must bemaintained with linkage to the income statement. This limited balance sheet alsoprovides information which is not readily available now regarding selected assetsand liablilities of the local government.

The main advantage of the double-entry book keeping system over the currentsingle-entry system is that the double entry system is self-correcting. Errors areimmediately recognized and can be more easily identified.

However, the implementation of both the modified-accrual system of accountingand the double-entry book keeping practice require that some of the localgovernment finance staff have a sound understanding of accounting. Of the fieldvisit sites, only Kota Malang appeared to have existing staff capable ofimplementing these improved systems without extensive training. Therefore,local governments should be made aware of the advantages of the new principlesand systems and encouraged to implement them based on the their own prioritiesand capabilities. Clearly, some local governments are interested in introducingthese approaches while others do not think it is a priority or worth the sizeableinvestment.


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Recommendations:

(13a) Stimulate the development of an association of local government financeofficers which would undertake to promulgate and maintain GenerallyAccepted Accounting Principals and standards for local government.

(13b) Conduct workshops for local government finance professionals tointroduce the concepts of modified-accrual accounting and double-entrybook keeping practices and provide more in-depth training course to localgovernment finance officers who plan to implement these approaches inthe near future.

14) Need to introduce a transparent and participative APBD budgeting process

The DPRD members at the local governments surveyed were particularly awareof the need to implement a new APBD budget preparation process withmeaningful participation of the DPRD from the beginning of the process in orderto elaborate general policy guidance. The local government senior officialsinterviewed (including the financial officers) were uniformly worried that DPRDmembers would become inappropriately involved in preparation of the detaileddraft budget (RAPBD) , which should be the task of the executive.

Recommendations:

(14a) MOHA should prepare and disseminate more complete guidelines for thenew APBD preparation process outlined in the RPP Pengelolaan danPertanggungjawaban Keuangan Daerah. These guidelines should be inthe form of a suggestion only and should clearly define the appropriaterole of the DPRD members, executive staff and the community in thebudgeting process.

(14b) MOHA should provide training for DPRD members, local governmentexecutives and community representatives on the recommendedbudgeting process and provide on-site consultations (as requested by localgovernments) in designing a tailored process to be included in the localPerdas regarding Financial Management.

5.2 Entity Level

5.2.1 Organization

15) Local Tim Koordinasi Otonomi Daerah Needed for Advance Preparations forRegional Autonomy

Local governments who have established Tim Koordinasi Otonomi Daerah havevisibly made more progress in preparations for regional autonomy than those whohave not. Some of the preparations include identification of functions that result


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from PP 25/2000 and proposals for new organizations to merger dinas withdeconcentrated agencies and/or to eliminate overlaps.

Recommendations

(15a) Disseminate information on success of the Tim Koordinasi OtonomiDaerah to stimulate all local governments to establish a similar team.

(15b) Within Tim Koordinasi Otonomi Daerah, the Walikota/Bupati shouldunambiguously empower the Bagian Ortala to recommendreorganizations to implement the new tasks of local governments andaddress the existing organizational overlaps.

16) Need to introduce Local Government Finance Board

Under the existing organizational structure of local government, financialmanagement functions are segmented in a manner that hinders effective overallfinancial management. The function of revenue collection is executed by theDipenda; the functions of routine budgeting, expenditure control and accountingare executed by the Bagian Keuangan; the function of development budgeting isexecuted by the BAPPEDA; and the function of treasury is executed by the KasDaerah. Both the segmentation of these functions and the lower Eselon of theKaBagKeuangan relative to the KaDipenda and KaBAPPEDA contribute to thepoor coordination of financial management functions.

For this reason, the RPP Pengelolaan dan Pertanggungjawaban KeuanganDaerah suggests the consolidation of these financial functions under a LocalGovernment Finance Board (Lembaga Pengelola Keuangan Daerah) structurein the local government.

Of the four local governments surveyed, Kota Malang and Kota Makassarwelcomed the opportunity offered by the new RPP and had already started todesign a new Local Government Finance Board. Kabupaten Bima and KabupatenKutai, upon learning of the new organizational option were enthusiastic about itsapplicability but did not feel competent to implement such an organizationalstructure without external support.

Recommendation:

(16a) In addition to explaining the concept of the Local Government FinanceBoard during socialization of RPP Pengelolaan dan PertangunjawabanDaerah, MOHA should provide short on-site consultations to localgovernments, on request, to assist them to design the appropriate structurebased on local financial management systems and capabilities.


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17) Need for consolidation of the budget functions in one organization

Currently, preparation of the routine budget is the responsibility of the SubBagian Anggaran (Belanja Rutin) while the development budget inputs are theresponsibility of the BAPPEDA (Belanja Pembangunan). This segmentation hasbeen a serious constraint in creating budgets with optimal coordination betweenthe routine and development sides of the budget. Especially with the introductionof the new DAU which can be spent flexibly on O&M or development, and therequirement for performance-oriented budgeting, the consolidation of thebudgeting functions is needed more than ever.

Recommendation:

(17a) In those local governments which do not implement a Local GovernmentFinance Board, they should still seriously consider consolidation of atleast the routine and development budgeting functions.

18) Need for Local Government Finance Officers’ Association

Within the spirit of regional autonomy, intervention from central government willbe limited. Local government professionals themselves should develop andmaintain a system of generally accepted financial and accounting principles andstandards (e.g. pubic sector accounting standards, local government auditstandard, etc). Many of the local government finance officers interviewedexpressed an interest in the formation of such an association in order to providethe much needed technical standards and to enhance professionalism and aprofessional image.

Recommendation:

(18a) Local government finance professionals should create a professionalassociation. This could be facilitated, but not dominated by MOHA MOF,Association of Public Accountants and others.

5.2.2. Management Systems

19) Enhance the role of Dipenda as Coordinator of Tax Collection.

Although Dipenda are officially charged with the responsibility for coordinationof all taxes and user charges of the local government, they often focus only on thecollection of selected taxes and charges and neglect their role of coordination.Ideally, Dipenda would assist all service units to enhance their identification ofrevenue generating opportunities as well as enhancing the collection performanceof these service providers. One aspect that is particularly neglected is Dipendamaintenance and dissemination of data bases that would be of value to differentservice units in their efforts to increase revenues.

Recommendation:


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(19a) Workshops and training should be conducted to enhance the role ofDipenda in coordinating collection of taxes and charges; especially inmaintaining and disseminating data related to taxes and charges.

20) Need for Medium-Term Financial/Investment Planning Systems10

With the centrally-controlled planning system greatly diminished and theintroduction of the DAU, development and adoption of local government all-sector, medium-term financial/investment planning systems that can be updatedannually by the local governments themselves becomes more important than everbefore.

A medium- term investment planning system was developed under IUIDP(Integrated Urban Infrastructure Development Program). However, this systemwas limited to the 7 Cipta Karya components only and focused on urbaninfrastructure projects to be financed by foreign borrowing. Because the level ofdetail required, not only to program investments but also to evaluate feasibilityof each sub-project to substantiate applications for SLA financing, the localgovernments developed a dependency on consultants to prepare and even updatethe IUIDP-PJMs.

The Ministry of Home Affairs, with assistance from USAID's Clean UrbanProject, has issued Program Dasar Pembangunan Perkotaan/Daerah (PDPP), aguideline on all-sector medium-term investment planning that is simpler, updatedannually, and is based on an analysis of financial capacity of the localgovernment.

In the local governments surveyed, there was a general recognition of thelimitations of the existing IUIDP-PJM to meet the new needs of the localgovernment under the new local government financing system. However, theirunderstanding of future needs was limited due to the lack of clarity of the exactfinancial system to be adopted (especially the DAU mechanism, the DAKmechanism, and whatever will replace the obviously inappropriateP5D/Rakorbang process.) In Kota Malang, however, the local governmentexecutive and DPRD had already made a commitment to implement the newPDPP process.

Related to the PDPP is the parallel PDAM Corporate Planning process, for whichan improved technical guideline on the process and content was recently issuedby MOHA. The objective of the PDAM Corporate Plan is to introduce integratedmedium-term planning of all important aspects of the PDAM (technicaloperations, environmental protection, organization, HRD, customerservice/marketing, finance and investment) which is linked to the policy of thelocal government and the annual work program and budget of the PDAM. PDAMKota Malang has already prepared an extremely competent Corporate Plan and

10 See also the Report No. FR/4 on Local Development Planning.


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is implementing it. PDAM Kab. Kutai Induk and PDAM Kota Makassarrecognized the urgency of implementing this management tool.

Recommendations

(20a) Broad dissemination of the new PDPP guideline and targeted training(including a large component of on-the-job training) to local governmentsrequesting such support.

(20b) Broad dissemination of the new PDAM Corporate Planning guideline andtargeted training to PDAMs requesting such support. (PERPAMSItraining program for PDAM corporate planning will need external supportto be disseminated broadly and quickly.)

5.2.3 Human Resources Management

21) Career system

There is total lack of career system for local government finance officers. Inparticular, there are no clear career promotion paths/ladders, no position analysis(analisa jabatan) for each officer, no linkage between job descriptions andminimum qualifications , nor are promotions linked with the minimum trainingcourses completed or certifications.

Recommendation:

(21a) Clear career paths/ladders should be established within the environmentof local government finance. Especially with the introduction of the LocalGovernment Finance Boards, there should be ample opportunities forfinancial staff to seek promotions within the financial environment.

(21b) Each local government finance position should have a job descriptionlinked with minimum qualifications for that position.

(21c) Bagian Kepegawaian should reactivate the system of analisa jabatan thathad previously been in use in several local governments to evaluate (atleast annually) the level of skills and responsibility of each officer in orderto determine eligibility for promotions.

(22d) Use the completion of selected functional training course and/orcertifications as a prerequisite for promotions.

22) Local government finance Training and TOT availability

The level of existing training modules and training materials for local governmentfinance available at Diklat Prop is typically quite poor if compared to the needs.Competent trainers for local government finance in Diklat Prop are very rare.Thus, the main source of existing competent training for local government


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finance are the Kursus Keuangan Daerah (KKD) and Latihan Keuangan Daerah(LKD) taught at four regional universities. However, these courses are expensiveand lengthy (2-4 months) and not able to provide training to the massive numberof local government officials which will need training to implement the newapproaches to local government finance. The KKD and LKD courses themselveswill require substantial updating to make them conform to the needs of the newlocal government finance system.

In addition to the lack of locally available training of adequate quantity andquality, local government officials in the survey emphasized that the incentivesof the existing promotion system encouraged officials to take structuraltraining to the neglect of functional training.

There is a clear need to develop a national strategy; first, to address the priorityneeds to make sure that decentralization can proceed as of January, 2001 and,second, to develop a more competent local government training system overthe medium-term.

To support decentralization starting in January 2001, the short-term trainingactivities recommended in the above sections of this report should generally begiven a precedence over medium-term activities.

The medium-term strategy to develop a more competent training system shouldbuild upon the existing training institutions, training capacities, and trainingmodules and materials to the extent possible in order to make improvements asrapidly and economically as possible.

Recommendations:

(22a) Short-term training to socialize the new local government finance systemand its operational implications should be given clear priority over longer-term skills-building training.

(22b) Review existing KKD and LKD training materials and update to be inaccordance with the new laws and regulations.

(22c) Develop revised training modules and training materials for localgovernment finance training at Diklat Prop. This will require detailedreview of existing materials and updating to be in consistent with the newlaws and regulations and the skills/capabilities implied by the new localgovernment finance system.

(22d) Invest in Training of Trainers, especially at Diklat Prop, to quicklyimprove of the number and quality of the trainers for local governmentfinance.

(22e) Due to the lack of competent trainers at Diklat Prop, local governmentfinance training should be conducted jointly with local universities, thelocal government finance officer’s associations or other institutions


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6. Recommendations by Priority and Possible Donor Support

In this section, the recommendations from Section 5 are prioritized and suggestions ofpossible donor support are provided for each recommendation.

6.1 Immediate Priorities (Should be completed by Jan, 2001)

6.1.1 Systems Level

National policies, regulations and guidelines:

(1a) Highest priority should be given to the completion, acceptance and broad socializationof the RPP for Management and Accountability of Regional Finance. The other 5 RPPsrelated to regional finance should follow as shortly thereafter as possible.

(1b) Guidance (in the form of suggestions only) should be provided to regional governmentson how to make the transition from PP 5/1974 and PP 6/ 1974 to the decentralized systemembodied in the RPP regarding Management and Accountability for Regional Financebased on local priorities and capacity to implement the new RPP.

(1c) Socialization of the RPP regarding Management and Accountability of Regional Financeshould consist of:

- an immediate program to socialize the main aspects of the new regional financesystem (and the operational implications) to DPRD Komisi C members, all seniorexecutives of the local government with substantial budgeting and/or financeresponsibilities (e.g. all KaDinas) , local universities, community groups andtokoh masyarakat.

- a more in-depth program of training of all senior and mid-level financial officialsshould be conducted in all local governments (± 400 Local Governments) toexplain the impact of each chapter of the RPP, their operational implications andstrategies for phased implementation.

Donor support: At a minimum, MOF/MOHA socialization teams should(for 1a,1b,1c) conduct 1-2 day training sessions for local government staff on the

detailed contents and implications of the PP for LocalGovernment Financial Management as soon as possible after thepassage of the PP. Local staff should include members of DPRDKomisi C, Sekda and staff from Bagian Keuangan, Dipenda, andall service units with substantial budgets. This could be followedup later with 1-2 day team visits to each local governmentrequesting additional short term support. Donor support would beuseful for training of team members and support of travelexpenses.


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(1d) MOHA/MOF should immediately prepare and disseminate an example LocalGovernment Regulation on Financial Management (Perda Pengelolaan KeuanganDaerah) as general guidance to assist local governments in preparing their own Perda.

(10 a) MOHA/MOF should conduct training courses on Perda preparation and provide on-siteconsultations with local governments, as requested, to assist local government to adaptthe example Perda to local conditions, priorities and capabilities.

Donor support:(for 1d and 10a) Technical assistant already being provided by Clean-Urban to

develop and pilot test an example Perda and guideline. Donorsshould support dissemination workshops and on-site 1-2 daytechnical assistance for all requesting local governments andprovinces.

(1e) &(14a) MOHA/MOF should prepare and disseminate more complete guidelines for the new

APBD preparation process outlined in the RPP Pengelolaan dan PertanggungjawabanKeuangan Daerah. These guidelines should be in the form of a suggestion only andshould clearly define the appropriate role of the DPRD members, executive staff and thecommunity in the budgeting process.

(14b) MOHA/MOF should provide training for DPRD members, local government executivesand community representatives on the recommended budgeting process and provide on-site consultations (as requested by local governments) in designing a tailored process tobe included in the local Perdas regarding Financial Management to all requesting localgovernments and provinces.

Donor support: (for 1e, 14a,14b) USAID/CLEAN Urban and ADB TA-3178 already providing

inputs to MOHA/MNOD/MOF to develop guidelines. Donorsshould support dissemination workshops and on-site 1-2 daytechnical assistance for Technical assistance already beingprovided by USAID/CLEAN Urban.

(2a) Central government (previously MNOD, now MOHA) should prepare and disseminategeneral, non-binding information regarding a "Positive List" of candidate "residualresponsibilities" that local governments could theoretically accept all or part of. Thiswould be very helpful for local governments in defining their own responsibilities inaccordance with Law No. 22/1999 and PP 25/2000. Direct short-term (2-3 day) assistancefrom teams of central/provincial officials could be provided to local governments whichrequest such assistance to assist them to define their residual responsibilities; especiallyresponsibilities in providing basic services that must not be interrupted.

Donor support: Immediately expand donor support to the Facilitations Teamsrecently formed in each Province by the former MNOD withUNDP funding. In order to expedite the rapid expansion offacilitation, the teams need funding now of honorariums and


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travel expenses of the Facilitation Teams.(see Final Report UrbanServices B 3.1 6.1.1 system level)

4a) The exact methods of calculation and the data sources to be used for calculation of allshared revenues should be specified in detailed regulations (prepared by MOF and/orSekretariat PKPD/DPOD) , agreed upon by the DPOD and socialized as soon as possible.Although such detailed regulations will reduce the flexibility of the system, it will ensuretransparency and acceptance by the regional governments.

Donor support: Technical Assistance already being provided to MOF. Donorscould support dissemination workshops.

4d) The allocations, or at least estimates of the final allocations of shared revenues should beprovided to local governments by October, 2000 to support preparation of the 2001APBD.

Donor support: Technical assistance already being provided.

4e) Completion, approval and socialization of the RPP Dana Perimbangan should be givesecond priority after the RPP Pengelolaan dan Pertanggungjawaban Keuangan Daerah.

Donor support: Technical assistance already being provided.

4f) There must be early and open dissemination of the detailed rationale and formulae forDAU once they are proposed by the Sekretariat PKPD to the DPOD. Open access totechnical reports on the options and supporting scenarios must be provided to allconcerned.

Donor Support: Not applicable

4g) Technical assistance should be provided to the Association and DPRD representativeson the DPOD to conduct independent analyses so they can participate as equals and havea voice in the meetings.

Donor support: Technical assistance could be provided by the donors to(for 4f and 4g) the associations and /or DPRD representatives. Better if done

independently from existing donor assistance to MOF/MOHA.

4i) DAU allocations, or at least estimates of the final allocations, should be provided tolocal governments by October, 2000 to support preparation of the 2001 APBD.

Donor support: Current technical assistance can support

4j) Guidelines for the exact mechanisms for transfer of shared revenues and DAU / DAKallocations and any associated reporting requirements should be issued as soon aspossible so local governments can prepare the mechanisms for implementation prior toJanuary, 2001.


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Donor support: Current technical assistance can support.

(7d) Specifically with regard to guidance for local government finance, a clear division ofresponsibilities between MOF, MOHA and the DPOD (Sekretariat PKPD) must beestablished regarding detailed responsibilities for:

- preparing, announcing and transferring central government allocations (sharedrevenues, DAU, DAK) to local governments

- providing further implementation guidance for the new local government financesystem based on the RPPs

- Monitoring, evaluation and facilitation of local governments in implementing thevarious aspects of the new reqional government finance system

Donor support: Not applicable.

(12a) In the local government APBD budgeting process, the budget committee (panitiaanggaran) should require all dinas making budget requests to clearly link physicaloutputs to requested inputs (funds). If the dinas request for funds is subsequently cut bythe budget committee during the budget development process, the related physicaloutputs must also be cut to maintain the linkage between inputs and outputs in the APBD.

Donor support: Not applicable

6.1.2 Entity Level

(15a) Disseminate information on success of the Tim Koordinasi Otonomi Daerah to stimulateall local governments to establish a similar team.

Donor support: Ongoing donor activities (projects and programmes) in theregions should be used as additional channels of information.

(15b) Within Tim Koordinasi Otonomi Daerah, the Walikota/Bupati should unambiguouslyempower the Bagian Ortala to recommend reorganizations to implement the newtasks of local governments and address the existing organizational overlaps.

Donor support: Not Applicable

6.1.3 Individual Level

None


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6.2 Must be Started Now but Implementation will Take Time

6.2.1 Systems Level

(1c) Detailed socialization of the RPP regarding Management and Accountability of RegionalFinance should (in addition to the activities listed under Immediate Priorities above)consist of:

- more in-depth training to be available on demand to support those regionalgovernments with limited capacities to implement the approaches embodied inthe RPP.

Donor support: Support to training programs specifically designed to train localgovernments in the new approaches such as the new budget process.This is not basic financial skills training but rather training that isdesigned to support existing capacity to implement new approaches.

(1f) MOHA should prepare and disseminate guidance on implementing Performance-OrientedBudgeting (POB) in the local governments. Such guidance should include usefulinformation regarding minimum service standards (which will theoretically need to becomplied with in order to continue to receive DAU ) and standard spending assessments.

Donor support: Technical assistance to design a practical methodology, pilot testin several local government, assist MOHA to develop guidelines,disseminate concepts and provide broad training after the systemis accepted. This is a medium-term undertaking, not a short termTA activity.

4b) Data bases used to perform the calculations of the shared revenues must be madeavailable to the local governments; perhaps through an internet website which localgovernments can access. The Sistem Informasi Keuangan Daerah, now generallyconceived as a system for local governments to report specified data to centralgovernment , should be modified to provide information flow back to the localgovernments on such topics as shared revenue calculations.

Donor support: Support capacity-building of the Sekretariat PKPD/DPOD. Investin information system at central and local governments.

4c) Training of local governments finance officers on the detailed allocation methods andsystems must be provided so that local governments accept the fairness and transparencyof the system and local government finance officers can act as watchdogs of the system.

Donor support: Support workshops and 1-2 day training courses.

4h) Broad socialization of the finally accepted rationale and formulae for DAU and openaccess to the supporting data base. Again, the Sistem Informasi Keuangan Daerah and/oran internet website could provide the mechanism for this information flow fromSekretariat PKPD to the regional governments.


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Donor support: See 4b, above.

5a) Given the small number of debt-worthy local governments at the present, completion andsocialization of this RPP regarding Regional Government Borrowing could be given alower priority.


5b) The new Law on BUMD currently being drafted should specify that BUMD borrowingwill be regulated by an RPP regarding BUMD Borrowing and such an RPP should thenbe prepared. The RPP should clearly address the role of the regional government (DPRDand/or KDH) in approving any borrowing by their BUMDs. As with the RPP tentangPinjaman Daerah, this RPP tentang Pinjaman BUMD should provide the possibility forBUMDs to issue bonds.

Donor support: Technical assistance already being provided byUSAID/CLEAN Urban.

(6b) Design of the Sistem Informasi Keuangan Daerah should comprehend the need for“two-way” exchange of data; while local government must report specified data tocentral government, central government must make data available to local governmentregarding calculations of shared revenues and DAU allocations.

Donor support: see 4b, above

(7a) Strengthen the role of the KEPPRES 52 Tim Koordinasi Pokjas (or whatever will replaceTim Koordinasi under the new Cabinet structure) in coordinating draft regulationsincluding both RPPs and any supporting KepMen.

Donor support: Donors should provide technical and management support to therelevant central government team coordinating theimplementation of Laws No. 22 and 25 /1999.

(7b) KepMen and SK (which the local governments are compelled to follow or at least feelcompelled to follow) must by strictly minimized in favor of Surat Edaran or suggestions/ general guidelines. Thus, even if different ministries issue conflicting Surat Edaran, itis up to the autonomous local governments to decide which suggestions are mostappropriate for them to follow or not to follow.


(7d) Specifically with regard to guidance for local government finance, a clear division ofresponsibilities between MOF, MOHA and the DPOD (Sekretariat PKPD) must beestablished regarding detailed responsibilities for:

- monitoring, evaluation and facilitation of local governments in implementing thevarious aspects of the new regional government finance system.


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(8a, 8b,8c)


(8a) A new mechanism for central government on-lending to regional governments and theirenterprises should replace the existing SLA and RDA systems. Under the newmechanism, the central government would be responsible for defining the sectors and/ortypes of projects which are of national priority and therefore should be supported bycentrally subsidized loan funds and define transparent criteria for evaluation of projects.All project proposals would originate from the regional governments and would beprocessed on a “first-come/first-served” basis. Such a system would support nationalpriorities, be accessible to local governments without central ministry intervention andwould be transparent.

(8b) The implementation modalities for existing foreign loan-financed projects (e.g. P3KT,P3DT, CLGS, etc.) should be reviewed and altered to comply with the newassignment of responsibilities.

(8c) The remaining funds for foreign loan-financed activities under these projects (previouslybudgeted as Dana Pembangunan Kota/Kabupaten - Alokasi Khusus from BLN andRupiah Murni Dana Pendamping) should be allocated directly to the local governmentthrough the new Dana Alokasi Khusus mechanism.

Donor support: All donors supporting such existing programs (IBRD, ADB, OECF,etc) should pro-actively address this problem with existing loanprograms as well as designing new mechanisms for near termfuture loans. In particular, IBRD and ADB loans programs for theurban sector and water sector currently being designed must bedesigned appropriately. Donors should work actively with therelevant GOI agencies (like BAPPENAS, MOF, MOHA-OD) indeveloping new cooperation mechanisms between regions anddonor agencies.

(9a) For a transitional period of 2-3 years, the central government should provide “on top”funds to local governments in addition to the DAU in those cases where local governmentcan demonstrate that they have been compelled to accept unneeded staff and providemaintenance to unwanted assets. This would give the local governments 2-3 years toaddress the problem of reducing staff (a problem that is now being thrust upon them bycentral government) and rationalizing/liquidating assets in an economically sensiblefashion.

Donor support: Technical assistance for preparing the studies of impact /problems of transferring central and provincial staff and assetsto local governments.

(11a) Each local government should have a clearly stated policy regarding cost recovery andsubsidies for each service provided by the local government. Customers who are able topay the full cost of services should pay the full cost. Cross-subsidy should be used to theextent practical without distorting economic activities. When subsidies still need to be


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provided by the local government, subsidies should be provided through mechanisms thatensure that service providers are accountable for the performance of these subsidies (e.g.performance contracts to PDAMs to provide specified service to poor areas).

(11b) Training should be provided as follows:- to DPRD members and local government staff regarding the need for

implementing full cost recovery tariffs and practical guidelines fordeveloping a cost recovery/ subsidy policy;

- training of financial officers and all service units providing costrecovery services regarding strategies and methodologies to calculateand apply full cost recovery tariffs (especially PerMenDargi No. 2 /1998 and InMenDagri No. 8 / 1998 on Water Tariffs)

- pilot projects, documentation and dissemination of subsidymechanism that provide transparent subsidies to targeted recipients(e.g. Voucher systems, performance contracts to provide specifiedservices to poor resident, etc.) should be implemented.

- outreach activities to the communities should be undertaken to getmeaningful input from the communities in the development of costrecovery/subsidy policies and the policies adopted should be clearlysocialized to the communities.

Donor support: (11a and 11b) Technical assistance and sponsorship of extensivetraining, starting with training and technical assistance for watertariff reform based on the new water tariff regulations.

(11c) Tariff increases should be tied to improvements in performance. In PDAMs for example,tariff increases could be tied to reductions in Unaccounted Water (UAW) which is aserious problem in most PDAMs (typically 35 – 50 percent). Effort should be givenfirstly to low cost, visible service improvements that do not require tariff increases andinvestments in distribution networks to generate additional revenues from existing waterproduction capacity. This is intended to convince the DPRD and the public of theseriousness of service units in improving services. The preparation of a PDAM corporateplan with a medium-term plan which clearly links service improvements and reductionsin UAW to periodic tariff increases to compensate for inflation (as piloted in PDAM KotaMalang) can be a valuable tool. A training program to introduce PDAM CorporatePlanning to a large number of PDAMs (as now being planned by DG PUMDA andPERPAMSI) should be given a priority.

Donor support: Technical assistance and sponsorship of extensive training.

(13a) Stimulate the development of an association of local government finance officers whichwould undertake to promulgate and maintain Generally Accepted Accounting Principalsand standards for local government.


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Donor support: Seed-funding for start up of the association and/or contract theassociation (once founded) to conduct donor-sponsored trainingcourses. Technical assistance on generally accepted accountingprinciples and standards.

.6.2.2. Entity Level

(16a) In addition to explaining the concept of the Local Government Finance Board duringsocialization of RPP Pengelolaan dan Pertanggungjawaban Daerah, MOHA shouldprovide short on-site consultations to local governments, on request, to assist them todesign the appropriate structure based on local financial management systems andcapabilities.

Donor support: Support 1-2 day on-site training/technical assistance sessions ofMOHA/MOF staff to assist local governments to designappropriate Local Government Finance Board organizationalstructures.

(17a) In those local governments which do not implement a Local Government Finance Board,they should still seriously consider consolidation of at least the routine and developmentbudgeting functions.

Donor support: Where donors work directly with local governments, theyshould support improving the local budget process accordingly.

(18a) Local government finance professionals should create a professional association. Thiscould be facilitated, but not dominated by MOHA MOF, Association of PublicAccountants and others.

Donor support: see 13a, above

(20a) Broad dissemination of the new PDPP guideline and targeted training (including a largecomponent of on-the-job training) to local governments requesting such support

Donor support: While USAID is planning to extend the PDPP pilotimplementation from the current 8 local governments in East Jawato provide extensive training to up to 8 additional localgovernments on 2001-2, the needs for additional donor support toother local governments are huge. Only limited resourcescurrently available under Clean-Urban to expand in East Java.

(20b) Broad dissemination of the new PDAM Corporate Planning guideline and targetedtraining to PDAMs requesting such support. (PERPAMSI training program for PDAMcorporate planning will need external support to be disseminated broadly and quickly.)

Donor support: Provide support to PERPAMSI to conduct broad trainingprogram.


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(22) Upgrade Local Government Finance Training System:

(22a) Short-term training to socialize the new local government finance system and itsoperational implications should be given clear priority over longer-term skills-buildingtraining.

(22b) Review existing KKD, LKD and other training materials and update to be in accordancewith the new laws and regulations.

(22c) Develop revised training modules and training materials for local government financetraining at Diklat Prop. This will require detailed review of existing materials andupdating to be in consistent with the new laws and regulations and the skills/capabilitiesimplied by the new local government finance system.

Donor support: To build upon this report and the Interim Report of ADB TA-3178report on Training Needs Assessment, technical assistance of amedium-term duration is required to assist the GOI to developan inter-ministerial strategy to upgrade the deficient system thatcurrently exists. This would require an initial in-depth review ofthe existing regional finance training institutions and courses inorder to identify what parts of the exisiting system can beupgraded and expanded in oreer to quickly and efficieintlyimprove the system.

There are massive needs for donor support in implementing suchtraining but there must first be a rational strategy for making thisinvestment so that it does not negatively effect the near-termdissemination of the new laws and regulations.


(21a) Clear career paths/ladders should be established within the environment of localgovernment finance. Especially with the introduction of the Local Government FinanceBoards, there should be ample opportunities for financial staff to seek promotions withinthe financial environment.

Donor support: Support pilot project to develop career paths (similar to theCBUIM career mapping project in Urban Services)

(21c) Bagian Kepegawaian should reactivate the system of analisa jabatan that had previouslybeen in use in several local governments to evaluate (at least annually) the level of skillsand responsibility of each officer in order to determine eligibility for promotions.

Donor support: There is a need to strengthen skills and expertise of localgovernments to use analisa jabatan and other instruments oforganisational analysis as a basis for making more rational


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decisions regarding their organisational structure.11

(22d) Use the completion of selected functional training course and/or certifications as aprerequisite for promotions.

Donor support: see 22c, above

6.3 Important but Start-up can be delayed

6.3.1 System Level

(3a) Central Government should review this policy and its practical implications. Shouldcentral government proceed with this policy, it must clarify the criteria to be used toidentify local governments with unfairly “concentrated” potential for owns sourcerevenues that will be subject to redistribution by the provincial governments under PP25/2000. In those effected local governments, the central government must socialize therationale for such reallocation in order to gain acceptance of the fairness and justice ofsuch reallocation.

Donor support: Technical assistance to evaluate the risks of implementing thispolicy.

(6a) APBD data that local governments will be required to report to central governmentshould not be in excess of those data elements already specified by the RPP regardingManagement and Accountability for Regional Finance

Donor support: see 1a,1b,1c, above

(12b) The central government should issue guidelines on how to develop useful performanceindicators, starting with the easiest to measure (typically urban services). The guidelineswould also recommend the use of national standard indicators in addition to locallydeveloped indicators. These standard indicators could be tied to services that are requiredby the minimum standards of service. National, standard indicators will allow the public,the central government, and local governments themselves to compare performancebetween regions.

Donor support: Technical assistance to MOHA to develop and pilot test practicalindicators that are tied to the performance-oriented budgetingconcept. Following successful pilot test, support development ofguidelines and training.

(12c) To allow for regional comparisons, develop a system of information exchange ofperformance and, ideally, a data base. This system could be developed by the centralgovernment, university networks, and/or local government associations.

11 See also Report FR/7 on Organisational Development.


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Donor support: A medium term technical assistance and training project is neededto support the design of a practical and useful performanceindicators system based on some work already done in this fieldand appropriate to the needs and capacities of local governments.After pilot testing, training should be supported to introduce theconcepts in a number of local governments interested toparticipate. (see Final Report Urban Services B3.1 donor supportno 11c)

12d) In the longer term, develop benchmarks for all major local government services similarto those now being developed for PDAMs under the IBRD/PERPAMSI BenchmarkingProject. Such benchmarks should allow local governments to make meaningfulcomparisons of their own performance verses local governments with similar topography,city sizes, technical systems for service provision and cost structures.

Donor support: The next phase after 12c would be to support the establishment ofa database at some sustainable institution.

(12e) Make the availability of information on performance widely known. Make available theinformation in easily accessible places. The Information Center for Social Safety NetPrograms that are now available in all local government BAPPEDAs have been providinginformation on budgets, implementation guidelines, and performance and could beexpanded to include information on performance and budgets of public services.Consumer groups, NGOs, and City Forums should be encouraged to access theinformation and review it.

Donor support: Expansion of 12c, if warranted

(13b) Conduct workshops for local government finance professionals to introduce the conceptsof modified-accrual accounting and double-entry book keeping practices and providemore in-depth training course to local government finance officers who plan toimplement these approaches in the near future.

Donor support: The next phase after 13a, the technical assistance should introducethe concept of modified-accrual basis and double-entry bookkeeping practices and more in-depth training .

(22d) Invest in Training of Trainers, especially at Diklat Prop, to quickly improve of thenumber and quality of the trainers for local government finance.

Donor support: The next phase of 22c, technical assistance should continue tocreate the trainer in each Diklat Prop, Universities and otherassociations.


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(22e) Due to the lack of competent trainers at Diklat Prop, local government finance trainingshould be conducted jointly with local universities, the local government finance officer’sassociations or other institutions

Donor support: see 22d, above.

6.3.2 Entity Level

(19a) Workshops and training should be conducted to enhance the role of Dipenda incoordinating collection of taxes and charges; especially in maintaining and disseminatingdata related to taxes and charges.

Donor support: see 22c. above especially in maintaining and updating the datarelated to taxes and charges.

(21b) Each local government finance position should have a job description linked withminimum qualifications for that position.



None

6.4 Secondary Priority (Impact will only be realized in medium-to long-term)

6.4.1 Systems Level

(7c) In the medium-term, laws and PPs should clearly define which ministries are responsiblefor exactly which functions. The existing practice (for example in PP 25 /2000 ofspecifying central government responsibilities without clearly assigning theseresponsibilities to specific ministries) encourages an unproductive and confusingcompetition among concerned ministries to try to control and/or regulate these functions.This results in the issuance of conflicting KepMen and other ministerial instructions whichconfuse local governments. Capacity building to support the drafting of more effective lawsand government regulations should focus on SekKab, SekNeg and the DPR legislative staffand consist of international study tours for very senior officials as well as in-depth legaldrafting training courses based on international standards for mid-level staff.

Donor support:Support legislative training programs, as describe above.

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