An International Conference on Budgeting for Performances

An International Conference on Budgeting for Performances – Modernizing Public Financial Management in Indonesia Jakarta, May 26, 2008

Presentation Content: I. What are the nation goals and how could budget achieve them ? II. What circumstances which generate budget reform ? III. What are the objectives of reform ? IV. How to implement reform ? V. What achievement has been reached and what are the next Challenges?

I. What are the nation goals and how could budget help to achieve them ? v As mandated in the Constitution, the nation goals are to increase people’s welfare, to enlight nation’s dignity, and to actively participate in universal orderliness based on freedom, peace and social justice. v It is necessary to establish credible economy in order to achieve these goals. v The most essential effort in setting up robust economy is by implementing credible budget. In this case, budget has very significant role. v On the other hand, credible budget needs suitable planning that guide budget policy to achive national goals. v Thus, planning and budgeting system plays significant role in determining the success of government policy performance

II. What circumstances generate budget reform (1) ? 1) The willingness to change the Indonesian Treasury Law inherited from Colonial Administration in order to increase checks and balances in budget preparation and to raise nation dignity • The existing Indonesian Treasury Law (comes from Colonial Rule ICW, IAR) has been out of date and incapable of ruling the whole aspects of public finance expected by constitution. • The changing of the old law to the new one, in this case Public Finance Law, can strengthen the implementation of checks and balances budget preparation process as well as to raise national dignity.

II. What circumstances generate budget reform (1) ? 2) The awareness of having dual budget classification causes inefficiency. § Dual budget classification creates ambiguity on the use of development budget, and it is eventually causing duplication and distortion on activity resource allocation § To obtain efficiency needs unification § The use of GFS system which provides single table of account, therefore, prevents the creation of ambiguous activity resulting distortion on resource allocation as well as duplication on activity budget allocation.

II. What circumstances generate budget reform (2) ? 3) Strong demand to implement good governance • Demand to implement good governance necessitates reform on budget management. • To assure the implementation of good governance in the budget operation, the budget should be managed in discipline, sustainable, transparent, efficient, and accountable manner. The new laws and regulations on public finance, treasury, and planning which have been ratified and performed as legal basic for implementing new budget system include: • • • Law No 17 / 2003 on Public Finance Law No 1 / 2004 on Treasury Law No 15 / 2004 on Auditing of Public Finance Account Law No 25 / 2004 on National Development Planning Regulation No 20 / 2004 on Government Work Plan Regulation No 21 / 2004 on Line Ministry and Agency Budget Work Plan.

II. What circumstances generate budget reform (3) ?

III. What are the objectives of the reform (1) ? 1. To assure the implementation of checks and balances in the budget preparation process. § The principle of checks and balances in the budget process implies equal role between the government and the parlement in determining budget. § The present of Law No 17/2003 which regulates the rule above gives the assurance on the implementation of checks and balances in budget preparation. 2. To raise self confidence and national dignity by replacing traditional Indonesian Treasury Law with new Public Finance Law • Long lasting implementation of traditional Indonesian Treasury Law may delegitimate national confidence and dignity. The ratification of Public Finance Law Year 2003, therefore, becomes the starting point to raise self confidence and national dignity.

III. What are the objectives of the reform (2) ? 3. To improve the quality of decision making process on budget allocation and hold budget users accountable for outputs /outcomes through the utilization of performance information 4. In broad sense, the objective of reform is to establish credible and sustainable budget, which apparently determines the performance of economy

IV. How to implement reform (1) ? The reform involves the transformation of traditional budgeting to performance budgeting which hypothetically can be outlined as follows: Value for money Economically efficient Technically efficient economy COST INPUTS traditional budgets PROCESS output focus budget effectiveness OUTPUTS OUTCOMES outcomes based budget Performance budgeting Shifting the direction by means of GIVEN CIRCUMSTANCES Implementing Unified budget, performanced based (oriented) budget and medium term expenditure framework • increase checks and balances in budget preparation • awareness of the need of unified programs & activities • the demand to implement good governance

IV. How to implement reform (2) ? KEY ELEMENTS OF UNIFIED BUDGET APPROACH v Restructuring Programs and Activities within LM/GA v Using GFS Economic Classification as a policy instrument for budget allocation:

IV. How to implement reform (3) ? v. Flow chart: The Implementation of Unified Budget: GFS CLASSIFICATION ORGANIZATION FUNCTION LM/GA WP (FUNCTIONAL APPROACH) PUBLIC POLICIES UNIFIED BUDGET PLAN ALLOCATED DIRECTLY TO LM/GA ECONOMIC LM/GA PROGRAMS/ACTIVITIES PROVIDE MINIMUM SERVICES (recurrent/repetitive/non discretionary) A. PERSONNEL B. MATERIAL C. CAPITAL LM/GA PROGRAMS/ACTIVITIES PROVIDE SOCIAL & ECONOMIC INVESTMENT (specific purposes/ policy/discretionary) GWP (SECTORAL APPROACH) ALLOCATED INDIRECTLY TO LM/GA/ REGIONAL GOVT. D. SOCIAL SUPPORT E. SUBSIDY F. GRANT G. INTEREST H. CONTINGENCY GOVERNMENT PROGRAMS/ACTIVITIES PROVIDE § SOCIAL SAFETY NET §FISCAL BALANCE §CONTINGENCIES

IV. How to implement reform (4) ? v Restructuring Programs and Activities within LM/GA: 1. Each program should have clear linkage with Government Work Plan (RKP); 2. Each Unit Organization (echelon I within LM/GA ) should have one program that reflects its function; 3. Activities within program could represent both functional and sectoral approach; 4. Activities representing LM/GA functions (Renja K/L) provide standardized minimum services which tend to be repetitive (e. g. , road maintenance as a function of DG Highways (Bina Marga); 5. Activities representing government policy as mandated by Government Work Plan (Rencana Kerja Pemerintah) provide certain purposes (e. g. , to develop 3. 000 km national road executed by DG Highways (Bina Marga);

IV. How to implement reform (5) ? v GFS Economic Classification as a policy instrument for budget allocation: 1. Activities which provide standardized minimum services, which tend to be repetitive, will be financed by personnel and material expenditures. 2. Activities representing government policy, as mandated by Government Work Plan (Rencana Kerja Pemerintah), provide certain purposes will be financed by material, capital and social support expenditures 3. Note: capital expenditure is used to finance activities which generate government assets. 3. For certain programs and activities which are executed by LM/GA indirectly will be financed by subsidy, grant, interest and contingency expenditures.

IV. How to implement reform (6) ? KEY ELEMENTS OF PERFORMANCED ORIENTED BUDGET APPROACH v Integrating National Priority (as national strategic levels) to Programs Outcome (as Strategic Level for Line-Ministries / Govt Agency) into Activities (as an Operational Level within Line-Ministries / Govt Agency) v Determining Key Performance Indicator of Program and Activity, as consequence, government will focus on output & outcome rather than control the input v Developing Budget Preparation Template which provides appropriate Performance Information v Developing Performance Evaluation Template which provides Performance Achievement Information v Building costing methodology by utilizing standardized input and activity costs to achieve allocative and operational efficiency

IV. How to implement reform (7) ? KEY ELEMENTS OF MEDIUM TERM EXPENDITURE FRAMEWORK APPROACH v Preparing medium term macro economic assumption v Preparing medium term fiscal targets (tax ratio, deficit, debt ratio etc) v Developing medium term budget (revenue, expenditure, financing) which yields total government resource envelope. v Medium term resource envelope performs as a baseline for preparing LM/GA’s budget forward estimates. v Adjusting a LM/GA’s budget forward estimates with current standard unit cost and government policy in preparing budget preparation.

V. What achievement has been reached and what are the next Challenges (1) ? No 1. REFORMS AGENDAS CURRENT ACHIEVEMENTS Restructuring 1. Rearrange programs and activities by activities within compiling existing LM/GA in order to programs and enhance eliminating acountability by duplication of shifting from programs across the sectoral approach ministries. to functional budget 2. Redefine activities in approach. order to have outputs that clearly reflect the achievement o ftargetted objectives of GWP (RKP) NEXT CHALLENGES 1. Designing each echelon I to have one program in order to enhance accountability. 2. Introduce two types of activity, i. e. , “recurrent activity” in which it’s output reflects the achievement of standardized minimum service delivery, and “determined activity” which provides certain purposes designed in the GWP.

V. What achievement has been reached and what are the next Challenges (2) ? No 2. REFORMS AGENDAS Using GFS classification as an instrument for budget allocation CURRENT ACHIEVEMENTS NEXT CHALLENGES Replacing dual budget document by single budget document based on GFS classification. Using GFS classification as a tools to enhance budget expenditure dicipline in the sense that budget allocation policy should be in line with expenditure classification.

V. What achievement has been reached and what are the next Challenges (3) ? No 3. REFORMS AGENDAS CURRENT ACHIEVEMENTS NEXT CHALLENGES 1. Integrating • Introducing Budget National Priority (as Document / Template national strategic that reflected the link levels) to Programs between budget Outcome (as Strategic allocation with Level for Linetargetted outputs Ministries / Govt Agency) into Activities (as an Operational Level within Line-Ministries / Govt Agency) • Improving existing Budget Document / Templates that provide comprhensive performance information, i. e, program objectives, program strategy, target output & Outcome & key performance indicators 2. Determining Key Performance Indicator of Program and Activity • Six Line-Ministries are designed to adopt this template for preparing their 2009 budget as pilot.

V. What achievement has been reached and what are the next Challenges (4) ? No REFORMS AGENDAS 4. CURRENT ACHIEVEMENTS 1. Performance Evaluation Mechanism which provides Performance Achievement Information 2. Building costing methodology by utilizing standardized input and activity costs to achieve allocative and operational efficiency • NEXT CHALLENGES § Developing Standardized Budget Evaluation Form that provide Performance Achievement Information as a Feedback for Policy Improvement Introducing standardized input & § Clarify business activity cost in order to process in activites, raise allocative and for further operational efficiency improvement in in budget allocation costing methodology process for further resource allocation efficiency

V. What achievement has been reached and what are the next Challenges (5) ? No REFORMS AGENDAS 5. 1. Preparing medium term macro economic assumption 2. Preparing medium term fiscal framework (tax ratio, deficit, debt ratio etc) 3. Developing medium term budget framework (revenue, expenditure, financing) which yields total government resource envelope. 4. Prepareing Framework for identified Standardized Minimum Services as Govt Policy baseline CURRENT ACHIEVEMENTS NEXT CHALLENGE • Establish a credible 1. Introducing the Macro-Fiscal models for concept of MTEF within medium term projection Budget Planning process 2. Provide a basic templates for MTEF in LM/GA budget document • Establish MTEF as a policy framework, separate from existing and proposed budget document

V. What achievement has been reached and what are the next Challenges (6) ? No REFORMS AGENDAS 6. 5. Medium term resource envelope performs as a budget baseline for preparing LM/GA’s budget forward estimates. 6. Adjusting a LM/GA’s budget forward estimates with current cost and government policy in preparing budget preparation. CURRENT ACHIEVEMENTS NEXT CHALLENGE

Other Challenges • Legal Aspect – Revised the Government Regulation to accommodate proposed budgeting system reform • Shifting the government control paradigm from tight input cost to performance – From “compliance and stewardess” to “let the managers manage, but keep them accountable”

Thank You For Your Kind Attention

III. What are the objectives of the reform (2) ? 3. To avoid duplication and distortion on budget allocation • Dual budget classification creates ambiguity on the use of development budget, eventually causing duplication and distortion on activity resource allocation • The use of GFS system which provides single table of account, therefore, prevents the creation of ambiguous activity resulting distortion on resource allocation as well as duplication on activity budget allocation. 4. To establish appropriate costing methodology by providing standardized the cost of input and output. § The use of standardized input cost gives certainty and uniformity in utilizing economical input for producing output, while the use of standardized output cost allows the use of “baseline cost” rather than “zero based cost” for activity resource allocation. § This costing methodology is considered as an instrument appropriate to achieve allocative and operational efficiency.