Spending for Reconstruction and Poverty Reduction

Aceh Public Expenditure Analysis

Banda Aceh, September 12, 2006APEA Team

APEA: OBJECTIVES & PROCESS

n OBJECTIVEs:n Gaining a better understanding of Aceh’s revenues,

expenditures, and financing management;n Developing policy recommendations to support local budget

implementation and processes;n Leaving behind a better system for the Acehnese to analyze

and monitor local budgets.

n PROCESS:n Participatory Public Expenditure Review with strong

participation from Aceh’s Universities: UNSYIAH, UNIMA, IAIN, and Politeknik Lhokseumawe

n Joint analytical work by joint team of World Bank and Acehuniversities, with USAID, supported by Provincial Government and BRR

Key messages

n Aceh has seen an extreme increase in its fiscal resources. These resources can be used to boost economic development and improve the quality of public services.

n Aceh’s fiscal position will only get stronger. Decreasing revenues from oil and gas will be more than compensated by new Dana Otsus(Law 11/2006).

n Province and Local governments have spent low shares of their budgets in core sectors (health, education and infrastructure); most of the spending was on routine and government apparatus.

n Public service provisions still needs major improvements. The quality of schooling is poor; the health sector has an insufficient number of staff.

n Local government capacity in budget planning and implementation needs substantial upgrading. Timely budget process, integration of development and strategic plans in budget process, filling regional and sectoral reconstruction gaps.

ACEH WILL HAVE SUFFICIENT RESOURCES TO SPEND

Even before reconstruction funds started to flow, Aceh had the 3rd largest budget

(Per capita regional revenue, 2004)

Source: WB/SIKD (MOF), 2004

0

1

2

3

4

Papua

Kaltim

NA

D

Riau

Kalteng

Maluku

Gorontalo

Bangka B

elitung

Jambi

Sulteng

Bali

Kalsel

NT

T

Sulut

Sum

bar

Bengkulu

Sulsel

DI Y

ogyakarta

Sum

sel

Sum

ut

NT

B

Lampung

Jatim

Jateng

Banten

JabarM

illio

n ru

piah

Province Kab/kota

Aceh

In 2006, Aceh has 6 times more resources than in 1999

2.62.1 2.8

1.54.9

8.0

1.0

16.4

0

5

10

15

20

25

30

1999 2002 2006

Rp

h B

illi

on

Deconcentrated Province Kab/Kota Reconstruction budget

Reconstructionbudget

0.51.2

Gas production and revenue will declining significantly…

0

50

100

150

200

25019

94

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

*

2006

*

2007

*

2008

*

2009

*

2010

*

2011

*

2012

*

2013

*

2014

*

Car

go/y

ear

…but will be compensated by 2% of DAU allocation after implementation of

Aceh’s new law (Law 11/2006)

0

2

4

6

8

10

12

14

16

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Trill

ion

rupi

ah

Total revenue without 2% DAU ($60/brl) Total revenue under law 18/2001 ($60/brl) Total revenue with 2% DAU ($50/brl)

Total revenue with 2% DAU ($60/brl) Total revenue with 2% DAU ($75/brl)

Gains from Law 11/2006

However, fiscal disparity among local governments remains

(revenue per capita, 2004)

-

1,000

2,000

3,000

4,000

5,000

Kota S

aban

g

Gayo Lu

es

Aceh

Utara

Kota L

hokse

umaw

e

Nagan

Raya

Aceh

Barat

Daya

Aceh

Barat

Aceh

Teng

gara

Aceh

Selata

n

Kota L

angs

a

Aceh

Besa

r

Kota B

anda

Aceh

Aceh

Teng

ah

Aceh

Tamian

g Pidie

Bireue

n

Rp

h T

ho

usa

nd

Revenue sharing per capita Revenue (other than revenue sharing per capita)

Oil and gas do not seem to have had a positive impact on poverty reduction

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Indonesia AcehTamiang

Aceh province Aceh Timur Aceh Utara

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Per capita GDP (times the national average)Poverty headcount, %

Source: WB/MOF/BPS, 2004

Aceh is the 4th poorest province in the country

n Tsunami has potentially increased the poverty rate by 7 percent, making Aceh the 2nd poorest in the country

0

5

10

15

20

25

30

35

40

45

Pro

v. P

apua

Pro

v. M

aluk

u

Pro

v. G

oron

talo

Pro

v. N

AD

Pro

v. N

TT

Pro

v.

NT

B

Pro

v.

Ben

gkul

u

Pro

v.

Lam

pung

Pro

v.

Sul

teng

g

Pro

v.

Sul

teng

Pro

v. J

awa

Ten

gah

Pro

v.

Sum

sel

Pro

v.

Jaw

a T

imur

Pro

v. D

IY

Ave

rage

Pro

v.

Sum

ut

Pro

v. S

ulse

l

Pro

v. K

alba

r

Pro

v.

Jam

bi

Pro

v.

Mal

uku

Uta

ra

Pro

v.

Jaw

a B

arat

Pro

v.

Ria

u

Pro

v. K

altim

Pro

v.

Sum

bar

Pro

v.

Kal

teng

Pro

v. B

angk

a B

elitu

ng

Pro

v.

Sul

awes

i Uta

ra

Pro

v.

Ban

ten

Pro

v. K

alse

l

Pro

v. B

ali

Pro

v.

DK

I Jak

arta

National average

Aceh

THE KEY TO REDUCE POVERTY IS MANAGING ACEH’s FISCAL RESOURCES WELL

Regional spending has tripled since decentralization

Source: SIKD/MOF & BPS-SK (constant 2005 prices)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Rp

h B

illio

n

Province Kab/Kota

Local governments are responsible for the majority of spending in the region

after decentralization

0

20

40

60

80

100

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

% o

f to

tal c

entr

al+r

egio

nal

exp

Central/Deconcentrated Province Kab/Kota

Routine expenditure has an increasing share in district and provincial spending

Province Kabupaten/Kota

0

1,000

2,000

3,000

4,000

5,000

6,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Rph

Billi

on

Routine Development

0

1,000

2,000

3,000

4,000

5,000

6,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Rph

Bil

lion

Routine Development

Investment in key sectors is extremely low(Total regional expenditures, 2004)

Education&culture10%

Infrastructure10%

Others7%

Government Apparatus

16%

Personnel34%

Operational & Maintenances

1%

Official Travel1%

Unexpected expenses

1%

Goods & Services5%

Financial Assistance 15%

Routine Financial Assistance DevelopmentSource: WB/SIKD(MOF), 2004

Development spending: government apparatus is getting priority – infrastructure is declining

0

10

20

30

40

50

60

1999 2000 2001 2002 2003 2004 2005

%

Government Apparatus Health, Social Welfare Education and Culture Infrastructure Others

HEALTH SECTOR

Health spending has not increased after special autonomy

276

439 435358

410

6%

7%6%

5%

6%

0

100

200

300

400

500

2001 2002 2003 2004 2005

Rp

(Bln

Rp)

0%

1%

2%

3%

4%

5%

6%

7% % of total regional budget

Some districts have extremely low budgets for health spending

0

2

4

6

8

10

12

14

Ace

h B

esar

Sim

elue

Bire

uen

Ace

h B

arat

Ace

h Ten

gah

Ace

h Tim

ur

Pid

ie

Sab

ang

Ace

h T

amia

ng*

Ace

h S

elat

an*

Ace

h U

tara

Ace

h T

engg

ara*

Lhok

seum

awe*

Ace

h S

ingk

il

Nag

an R

aya

Ban

da A

ceh

Ace

h B

arat

Day

a*

Ace

h Ja

ya

Lang

sa*

%

Source: SIKD MOF/WB, 2004* & 2005

% of health spending in 2004 kab/kota

budget)

Routine expenditure is dominant in the health sector

0

100

200

300

400

2001 2002 2003 2004 2005

Bln

Rp

(cpi

200

5)

routine development

Province Kabupaten/Kota

0

100

200

300

400

2001 2002 2003 2004 2005

Bln

Rp

(cpi

200

5)

routine development

Resources are not optimally allocated, contributing to poor outcomes

n Aceh has higher population without access to on-site (within village) health facilities (38%) than national average (23%) (HDI-2002).

n Aceh has higher share of undernourished children (under age five) (35.2%) than national average (25.8%) (HDI-2002).

n But life expectancy is still better than national average: 67.7 years in Aceh vs 66.2 years average in Indonesia.

Key Issues in Health Sector

n The conflict and tsunami worsened an already bad situation

n A large number of health facilities is not functioningdue to lack of maintenance and insufficient and absence of staff

n There is an urgent need to improve health information systems, so that the monitoring of health needs and coverage can be improved

EDUCATION SECTOR

Regional expenditure on education increased after special autonomy, but has been decreasing since then.

561

2,250 2,3192,053

1,70411%

34% 33%

26% 25%

0

500

1,000

1,500

2,000

2,500

2001 2002 2003 2004 2005

Bln

Rp

0%

10%

20%

30%

40%

Education expenditures Share education expenditures

Some districts have very low education budgets

0

10

20

30

40

50

Ban

da A

ceh

Pid

ie

Bire

uen

Ace

h S

elat

an *

Ace

h T

engg

ara

*

Lang

sa *

Ace

h B

esar

Ace

h Tam

iang

*

Ace

h B

arat

Day

a *

Ace

h Ten

gah

Ace

h B

arat

Lhok

seum

awe

*

Ace

h U

tara

Nag

an R

aya

Ace

h U

tara

Ace

h Tim

ur

Ace

h Ja

ya

Sab

ang

Sim

elue

Ace

h S

ingk

il

%

% of education spending in 2004 kab/kota

budget

Routine education expenditure is taking an increasing share, leaving little room for development.

Province Kabupaten/Kota

0

300

600

900

1,200

1,500

1,800

2,100

2001 2002 2003 2004 2005

Bln

Rp

Total routine (Bln Rp) Total development (Bln Rp)

0

300

600

900

1,200

1,500

1,800

2,100

2001 2002 2003 2004 2005

Bln

Rp

Total routine (Bln Rp) Total development (Bln Rp)

Key Issues in Education

n Net and gross primary school enrollment rates of 4 districts fall below national average (Aceh Barat Daya, Nagan Raya, AcehBarat, and Aceh Jaya);

n Higher trained teachers are selected for government apparatus position, thus left less trained teacher to teach

n The conflict and tsunami had a severe impact on education; poor condition of school building (esp. primary school) further decreases the quality of education (only 44 percent of classroom is in good condition)

n Distribution of an otherwise relatively sufficient number of teachers has been inefficient; urban areas have more teachers than rural areas, there is no incentive structure to encourage teachers to move to rural/ isolated areas.

INFRASTRUCTURE SECTOR

Regional government spending on infrastructure increased substantially following decentralization and special autonomy, but has declined since 2003

0

200400

600800

1,0001,200

1,400

1999 2000 2001 2002 2003 2004 2005

Rph

Bill

ion

Transport, Water and Irrigation Housing and SettlementTelecommunication&Tourism

Regional budget allocation on operational and maintenance for infrastructure is extremely low (average 2001-2004)

91%

1%

1%0%

0%

7%

Personnel GoodsOperational&Maintenance TravelOthers Development

Infrastructure indicators

n About 23 percent of road network is qualified as being in poor condition.

n Aceh irrigated land as a percentage of arable land is lower (57%) than Indonesian average (71%).

n Percentage of households connected to piped water in Aceh is lower (9%) than the national average (17%).

n Percentage of households with access to electricity is higher (74%) than national average (57%).

Key Issues

n Provincial and local government lack prioritization of infrastructure spending

n Capacity varies between local government units; lack of skills and technical expertise

n Monitoring and evaluation systems should be strengthened

LOCAL GOVERNMENT LEADERSHIP WILL BE ESSENTIAL IN IMPROVING PUBLIC SERVICE DELIVERY

0%

20%

40%

60%

80%

100%Local Regulatory Framework

Planning and Budgetting

Cash Management

Procurement

Accounting and ReportingInternal Audit

Public Debt and Investment

Asset Management

External Audit and Oversight

The capacity of local governments to manage increasing fiscal flows remains weak (Average score of 9 kabupaten/kota)

80-100% Excellent/Fully Acceptable

60-79% Very good/ Substantially acceptable

40-59% Good/Fairly acceptable

20-39% Moderate/Partially acceptable

0-19% Poor/Not Acceptable

The capacity of local governments to manage increasing fiscal flows remains weak (average score of 9 PFM Framework Modules)

0%

20%

40%

60%

80%

100%

AcehUtara

BandaAceh

AcehTimur

AcehBesar

Pidie Bireuen AcehBarat

NaganRaya

AcehJaya

Key Issues

n Allocation of budget on capacity building is very low; a large share of the budget goes to buildings and equipment.

n Proliferation of districts is costly; newly created district there are high setting-up costs for new districts, diverting investment from public services.

n The capacity of local government in public financial management is low, on average LGs scored partially acceptable.

RECOMMENDATIONS

n Better allocation of resources; spending on the government apparatus needs to be kept on a leash and increase spending on development

n The issue of weak local government capacity to manage public funds needs to be urgently adressed

n Improve data analysis and information system for better policy making, planning and budget allocation

n Develop a better coordination between province, local government, BRR, and BRA in managing reconstruction, reintegration, and long-term development.

THANK YOU