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Spending for Development in Papua

Presentation for the Tangguh Independent Advisory Panel (TIAP)

World Bank

Poverty Reduction and Economic Management, Jakarta

Jakarta, April 2009

Social, Economic and Fiscal Trends

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Spending for Development in Papua: Key Messages

Main message Papua’s key challenge is not to generate additional resources but to use the existing

resources wisely.

Poverty and the economy Papua and West Papua (or Papua Barat) are provinces of extremes, with high poverty,

relatively high GDP, the lowest population density and the highest fiscal resources in Indonesia.

Since 2002, poverty declined from 46 percent to 37 percent. However, Papua and West Papua remain Indonesia’s poorest regions.

The district of Teluk Bintuni, where the new Tangguh plan is located, is lagging in most social and economic indicators, with the exception of regional GDP and child immunization.

Revenues, expenditures and fiscal projections Since 2000, Papua’s revenues have increased fivefold (in real terms). Since 2002, when

special autonomy started, revenues have increased 2.5 times (in real terms). Spending on government administration has traditionally dominated Papua’s expenditures.

However, since 2006, infrastructure spending has increased substantially and overtaken government administration.

After modest increases in the next 5 years, Papua’s overall revenues are expected to double by 2020 but only partly due to revenues from Tangguh LNG. However, the province of Papua Barat will substantially increase its revenues due to Tangguh.

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A note on the use of the term “Papua”

Papua refers to both Papua province and Papua Barat province.

Papua province refers to the Province of Papua after splitting with Papua Barat.

Papua Barat refers to the Province of Papua Barat (West Papua), which was established in 2004.

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Poverty and the Economy

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Since 2002, poverty declined from 46 percent to 37 percent but Papua remains Indonesia’s poorest region

Source: Central Bureau Statistic (BPS)Source: Central Bureau of Statistics (BPS), various publications.

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Papua’s regional GDP is high; Papua province is even 50% higher than the national average, mainly due to mining

Source: Central Bureau of Statistics (BPS)

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However, excluding mining, both provinces are below the national average, and Papua Barat is richer than Papua

Source: Central Bureau of Statistics (BPS)

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Mining dominates the economy of Papua province …

Note: * Government administration mainly consists of salaries. Public investment, including for administration (e.g. cars offices) is part of the other economic categories. Excluding mining, the share of core government administration would raise to above 15% of GDP, one of the highest in Indonesia.** Includes sectors such as manufacturing, financial services, electricity, gas, and water supply.Source: Central Bureau of Statistics (BPS)

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Agriculture, 11%

Mining, oil, and gas, 69%

Transportation and communication, 4%

Trade, restaurant, and hotel, 4%

Government administration*, 5%

Construction, 4%

Others**, 3%

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…while Papua Barat’s economy is much more diversified

Note: * Government administration mainly consists of salaries. Public investment, including for administration (e.g. cars offices) is part of the other economic categories. Excluding mining, oil, gas and related manufacturing the share of core government administration would raise to 11% of GDP, also one of the highest in Indonesia.** Includes sectors such as financial services, and electricity, gas, and water supply.Source: Central Bureau of Statistics (BPS)

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Agriculture, 27%

Construction, 8%

Trade, restaurant, and hotel, 10%

Transportation and communication, 7%

Government administration*, 8%

Mining, oil, and gas, 17%Manufacturing

(related to oil and gas), 19%

Others**, 2%

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The district of Teluk Bintuni is lagging in most social and economic indicators, with the exception of regional GDP and child immunization.

Source: Central Bureau of Statistics (BPS) and Ministry of Health

Teluk Bintuni Value Rank in Papua

(out of 29)

Rank in Papua Barat (out of 9)

Human Development Index (BPS) 2006 60.1 21 8

Population (BPS) 2006 50,766 20 6

Gross Regional Domestic Product per capita (BPS) 2006 10,504,400 8 3

Net Enrollment Rate for Primary % (Susenas) 2007 86.7 21 8

Net Enrollment Rate for Junior % (Susenas) 2007 47.2 14 5

Net Enrollment Rate for Senior % (Susenas) 2007 23.8 20 7

Children<5 yrs with immunization % (MoH Survey) 2008 48.4 6 2

Household with access to safe water % (MoH Survey) 2008 20.8 19 9

Household with access to electricity % (Susenas) 2007 47.6 16 7

Source: Susenas, BPS and Ministry of Health statistics.

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Revenues, Expenditures and Fiscal Projections

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In 2002, Papua’s revenue per capita was the second highest in Indonesia …

Note: Consolidated data (province + districts) per capita. Source: Regional Information Financial System (SIKD) Ministry of Finance and BPS.

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…and by 2009, Papua and the new Papua Barat province have become Indonesia’s fiscally richest provinces…

Note: Consolidated data (province + districts) per capita. Source: Regional Information Financial System (SIKD) Ministry of Finance and BPS.

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Special Autonomy Fund (Otsus) per capita (2009)

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… which is partly due to additional transfers through the special autonomy fund, which only Papua, Papua Barat and Aceh are receiving

ProvinceOil and Gas Revenue

Shares[1]

Special Autonomy allocation (Dana Otsus)

Papua 2001-2008 70% 2% of total DAU[2]

from 2009 70% 1.4% of total DAU[3]

Papua Barat 2004-2008 70% 0[4]

from 2009 70% 0.6% of total DAU

Other provinces

Acehpre 2008 70% 0

from 2008 70% 2% of total DAU

Rest of Indonesia Oil: 15%, Gas: 30% 0[1] The revenues will be allocated to the provincial government, producing districts, and other districts within the province.[2] DAU: General allocation funds[3] Starting from 2009, the Papua and West Papua provinces got 70% and 30%, respectively, of the Otsus funds for the whole Papua Island.[4] West Papua was established in late 2003. However, until 2008, the Otsus funds for all districts in the province were managed by the Papua provincial government, and the West Papua provincial government did not get any Otsus funds.

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Transfers to Papua increased significantly in 2006. Since then, they remained stable for Papua province but continue to increase

for Papua Barat’s due to higher Special Autonomy allocations

Source: SIKD and Balancing Fund Allocation (Ministry of Finance). Note: - Consolidated data (province + districts) for Papua and Papua Barat, in constant 2007=100. In 2006, shared tax data only for income tax. - Since 2009, the central government “shares the burden” of energy and fertilizer subsidies with sub-national governments. Approximately

26% of the estimated subsidies will be deducted from the DAU-pool of sub-national governments.

Papua BaratPapua

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2003 2004 2005 2006 2007* 2008* 2009**

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DAU Revenue sharingSpecial autonomy funds DAKTotal transfer Without burden sharing policy

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2004 2005 2006 2007* 2008* 2009**R

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DAU Revenue sharingSpecial autonomy funds DAKTotal transfer Without burden sharing policy

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Spending in Papua continues to be dominated by districts which provide approximately 75% of expenditures since 2006

Note : 2004-2006: Realization, 2007: Realization (Central) and Plan (others), 2008: Unaudited Realization (Central) and Estimation (others), 2009: Estimation

Source : DG Budget, Regional Finance Information System (SIKD), Min of Finance.Note: Consolidated data (province + districts) for Papua and Papua Barat in constant 2007=100. The central government spending does not include line ministries spending through their representative offices in the regions.

Source: SIKD, Ministry of Finance, provinces budget data.

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2004 2005 2006 2007* 2008** 2009***

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Central Province Districts

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Since 2005, infrastructure spending increased substantially and became Papua’s main expenditure; government

administration remains high in second place

Note : - Consolidated data (province + districts) for Papua and Papua Barat province in constant 2007=100. - * Plan budget data. Source : SIKD, Ministry of Finance and provinces’ budget data.

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General Government Administration InfrastructurePublic Health Education and CultureHousing, Labor, and Social Affairs Agriculture, Forestry, Plantation, Fishery, and CooperativesIndustry, Trade, and Mining

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Assumptions for future revenue projections, particularly consi-dering additional revenues from Tangguh LNG (see next two slides)

General revenue projection:• Central government growth projections: 4.7% (2009), 5.6% (2010), 6.3% (2011), 6.40% (2012), 6.7% (2013), 7.0% (2014), 7.0% (2015), 7.0% (2016), 7.0% (2017), 7.0% (2018)

• Revenue/GDP (for US$ 40 per barrel, for other oil prices proportionately higher): 15.9% (2010), 15.7% (2011),

16.0% (2012), 16.6% (2013), 16.8% (2014), 16.9% (2015), 16.7% (2016), 16.6% (2017), 16.3% (2018)

• Ratio of Papua DAU to total national DAU: 5%

• Ratio of special autonomy fund to total national DAU: 2%.

• Ratio of Papua revenue sharing to total national revenue sharing: 4.4%

• Ratio of Papua DAK to total national DAK: 8.4%

Revenue projection from Tangguh LNG:• Annual production: gradually increase from 2.6 in 2010 to 7.6 million ton in 2015.

• Investment cost plus interest: USD 9.6 billion.

• Ratio of investment credit and cost recovery to gross revenue: 80%.

• Ratio of cost recovery to gross revenue: 30%.

• Contractor share of equity to be split: 71% (before tax).

• Effective tax rate: 44%.

• Regional tax: 13.6%.

• Revenue sharing to central government: 30%.

• Revenue sharing to Papua: 70%.

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Note: For more details on the relationship between oil prices and the Indonesian budget as well as revenue sharing with the regions see Agustina et al “Black hole or black Gold? The impact of oil and gas prices on Indonesia’s Public Finances, Policy Research Working Paper (4718), World Bank.

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Based on these assumptions, Papua’s revenues are expected to double by 2018, even though revenues from Tangguh would only add another 8-12% (Rp 3-5 trillion) in extra revenues

Note: Consolidated data (province + districts) for Papua and Papua Barat, in constant price 2007=100. Source: MoF and WB staff estimation.

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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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40 60 80 40 (No Tangguh)

Beginning of decentralization

Start of Papua Special Autonomy funding

Substantial increase in transfer across Indonesia

Start of subsidy "burden sharing"

End of Tangguh investment recovery

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However, for Papua Barat the increase will be significant because it would incur all of Tangguh’s shared revenue:

By 2018, at US$40 per barrel, revenues would increase by almost 30% compared to the baseline; at US$80 per barrel, revenues would increase by more than 50%

Note: Consolidated data (province + districts) for province and districts in Papua Barat, in constant price 2007=100. Source: SIKD/MOF and WB staff estimation.

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40 60 80 40 (No Tangguh)

Wolfgang Fengler (wfengler@worldbank.org)Dian Agustina (cagustina@worldbank.org)

Adrianus Hendrawan (ahendrawan@worldbank.org)

For information please contact the Public Finance and Regional Development team of the World Bank in Indonesia: