INDONESIA

Incentivizing Local Government Deliveryby Rewarding Results in Indonesia

Peter D. EllisSenior Urban EconomistEASIS

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Local Government (LG) Engagement Approach

Lack of transparency and accountability

Inadequate and cumbersome reporting

Weak monitoring and evaluation

Very little verification

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Strengthen Country Institutions

Target large set of LGs

Improve LG internal controls

Work through existing transfer system

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Dana Alokasi Khusus (Specific Purpose Grants)

Dana Alokasi Khusus (Specific Purpose Grants) allocated from national budget to local governments (LGs) to finance specific activities which are determined by the central government but under the jurisdiction of LG.

DAK allocation amount is determined on annual basis within the national budget, with LGs satisfying specific criteria to qualify

Total DAK allocation for 2010 is about US$2.32 billion.

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The Project will be a pilot with a proposed size of US$ 220 million over four years.

Focused in five provinces: Jambi, East Java, Central Kalimantan, West Sulawesi, and North Maluku.

Will be designed as Specific Investment Lending and the mechanism will be Output-Based Disbursement (OBD) triggered by achievement of results.

The project will focus on the infrastructure sector (road, irrigation, water and sanitation), which makes up about 21% of DAK allocations

Overview of DAK Reimbursement Program

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Five Pilot Provinces

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MoF BAPPENAS MoHA MPW

NATIONAL STEERING COMMITTEE

Executing Agency

DGFB

MPW

Secretariat General

LG

PROV KAB KOT

BPKP

WB

Integrated Financial and Output Verification Reports

Outputs

DINAS/SKPDDGBM

DGSDA

DGCK

OVR

Reimbursement

ItJen

Monitoring & Evaluation of DAK Program

Institutional Arrangements

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Project Development Objectives (DO)and Results Framework (RF)

PDO:

Improve the accountability and reporting of the central government’s Specific Purpose Grants (DAK) for the infrastructure sectors.

RF: Improve financial and technical reporting

RF: Conduct output verification of projects financed by DAK funds

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Results focused• Reward Performance with grants• Reimburse eligible outputs

Strengthen Government Systems• Central government ownership and control

Strengthen LG Internal Controls

Web-based Monitoring and Reporting SystemsIndependent Verification of Outputs and Compliance

• Government internal auditor, BPKP

Key Features of DAK Program

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Output Eligibility Criteria for Reimbursement

Physical Realization of Outputs

• Construction Completion Certificates.

• Compliance with Technical Specifications

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Compliance with National

Procurement

• National Procurement

Law and Regulations

through competitive

procedures in hiring of

contractors.

Compliance with Environmental &

Social Safeguards:

• Compliance with

Indicators listed in the

Project Operations

Manual.

• MPW Minister Issue

Supplement to Technical

Guidelines.

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Fiduciary and Safeguards Aspects

•Follow national procurement procedures

Procurement

•BPK as auditor of program

Financial Managem

ent

•Comply with Bank policies on social and environment

•Environmental AMDAL acceptable

•Social Addendum to Technical Guidelines for compliance with Involuntary Resettlement and Indigenous People

Safeguards

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The State Finance and Development Supervisory Board (BPKP) will carry out the output verification process on a representative sample basis for projects in LGs.

Verification of Outputs (VO)

BPKP will finance the VO function.

BPKP will report its finding and recommendations in an Output Verification Report (OVR).

OVR will be the only basis to request Bank disbursements.

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Delivering Institutional Strengthening (TA) to LGs.Delays in the delivery of TA due to restructuring in

MoF.

Compliance with Technical Guidelines. LGs lack capacity to deliver DAK outputs and to

submit reports.

Coordination within Central Government. Multiple GoI stakeholders have overlapping roles.

Monitoring & EvaluationUnclear on who should conduct M&E.

Challenges in Project

Implementation

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Advance Payment. Made on July 5, 2011 and covers 64 percent of eligible districts.

Verification Arrangement. BPKP has finalized verification guidelines and started verification test-run with LGs.

Development of WBRS. Developing a new web-based system for financial and technical reporting.

Improved Coordination. GoI has held several coordination meetings to define the role of each stakeholder in the project implementation.

What Has Improved So Far

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Scale up existing project to more Provinces or sectors

Deepen reforms within LGs Promote improved accountability

downwards Greater transparency in budgeting Strengthen LG annual planning and

execution Improve efficiency and effectiveness of

expenditures

WHAT’S NEXT?