Indonesia: Supporting Local Governance Reform in the era of Decentralization

1. Indonesia:Supporting Local Governance Reform in the era of Decentralization Erman A. Rahman World Bank Office, Jakarta Presented in Seminar on Decentralization Inter-Regional Learning Series on Community Driven Development April 13, 2007

2. Context Since 1999 Indonesia has been going through democratization and decentralization processes… Democratization Decentralization • Freedom of press • Freedom to establish political parties • Free elections (1999 and 2004) • Direct presidential election (2004) and provincial governor, district head and mayor elections (starting June 2005) • Autonomy at district/municipal level • Block grant to provincial and district/municipal governments • Budgeting and local legislation power • New structure of village government • Greater power of local legislative bodies … which provide opportunities for a more transparent, accountable governance

3. Context The Indonesian administration system changed as results of decentralization and democratization President National Parliament National (220 million people) Ministry/Agency Governor Provincial Parliament Provincial (average 6.9 million people) Deconcentrated Agencies Provincial Agencies Head of District/ Mayor District/ Municipal Parliament District/ Municipality (average 0.5 million people) District/Municipal Agencies Sub District Head Sub-District (average 43,400 people) Village(average 3,100 people) Village Head Village Community Council = Directly elected legislative = Directly elected executive = Appointed executive

4. Context Central government transfers to the regions have been increased significantly Transfers to Regions Decentralization IDR Trillion, constant 2000 price Subsidies Central Gov’t Development Expenditures Interest Payment Source: PER 2007, World Bank

5. Context There are several challenges to improve governance at local level • New structure of local governance: from accountability to central government to the people – local executive and legislative need support • Good governance has been a national discourse – bad governance was considered a major contributor to the 1997 economic crises. But, operationalization of good governance is still a challenge • Some reform-minded local governments have already taken reform initiatives. However, need to deepen reforms and further support the LGs • Wide windows of opportunities to test out reforms and to create model– local government can do anything except those against national laws and regulations • Democratization at community/village level, particularly through the work of NGOs and CDD-type donor-funded projects yet to reach the supra-village level (districts)

6. Context Significant results from CDD implementation and a lot of lessons to learn KDP Results Key Success Factors EXAMPLE • Improved access to markets, town centers, education & health facilities, and clean water supply – 116,300 infrastructure have been built • Expanded business opportunities and employment: 39 million workdays generated, 751,500 loan beneficiaries participating in KDP credit and business activities • Improving local governance: almost half of Indonesian villages experienced participatory budgeting, high participation of women (26-45%) • Low rates of corruption: less than 1% of village sub-projects showed deviations • Intensive Facilitation, Technical Assistance and Capacity Building (30% of total budget) • Well controlled democratic and transparent steps and mechanism • Quick disbursement – increase trust of the community • Direct flow of funds – reduce fund leakage • Working directly with the community – trying to avoid local elite capture • Certainty and “sustainability” of budget resources • Extensive monitoring: community radio, independent journalist and NGOs monitoring • Relatively isolated from LG interventions

7. Brief Description of ILGR At district level ILGR Project supports improvement of governance to address those issues & to complement CDD ILGR’s interventions Better Public Service Transparency Poverty Reduction Accountability Public Participation Local Economic Development Project Development Objectives Project Components Pilot support to district governments in improving transparency, accountability and public participatory practices and in undertaking reforms in financial management and procurement. • Local Governance Reform • Poverty Targeted Investments • Implementation Support and Monitoring

8. Brief Description of ILGR ILGR is implemented in phases: districts can access annual investment fund only if they meet the reform requirements PRE-INVESTMENT PHASE (18-24 months) INVESTMENT PHASE (3 years) Governance Reforms (Pre-Investment) Governance Reforms (Year 1) Governance Reforms (Year 2) Component A. Local Governance Reform Participatory Poverty Strategy Formulation Minimum Pre-Investment Requirements Minimum Entry Requirements Minimum Investment Year 1 Requirements Minimum Investment Year 2 Requirements Component B. Poverty-targeted Investment ILGR Investment Year 1 ILGR Investment Year 2 ILGR Investment Year 3 Component C. Implementation Support Technical Support & Monitoring Technical Support & Monitoring Technical Support & Monitoring Technical Support & Monitoring

9. Brief Description of ILGR ILGR Local Governance Reform Framework (transparency & participation, financial management, procurement) • Transparency and Participation Public information disclosure; public complaint handling; public participation in decision making process; preparation of Local Regulation on Transparency & Participatory • Financial Management Preparation of Local Regulation on principals of Regional Financial Management; transparent budgeting; revenue management; financial reporting and accountability; development of Regional Financial Information System • Procurement Establishment of Procurement Anchor Unit; preparation of Head of District Decree on Regional Procurement System and Procedure; enhance procurement information system; improvement of control, audit and feed-back system in procurement.

10. Brief Description of ILGR Where is ILGR now? • Results of Project Preparation: • Local regulations on access to information (transparency) and to decision-making process (participation) were formulated through participatory process and enacted in 13 districts • District-level poverty reduction strategies were formulated through participatory processes and issued in all 14 districts • Two districts enacted local regulations on “Village Block Grant” with specific target (5-10% of local budgets) • All districts have fulfilled “entry” and “pre-investment” requirements of the Local Governance Reform Framework • 12 districts started implementing “Year 1 poverty target investment” in 2006 (utilizing about 80% of total budget ceiling) • Through JSDF-Participatory Budgeting and Expenditure Tracking (PBET), capacity of district-level civil society in analyzing and disseminating budget information and in monitoring budget execution is being enhanced, executed by National Democratic Institute (NDI) and 8 national NGOs

11. Challenges Challenges for future ILGR implementation • Evolving regulatory framework in decentralization. E.g., unclear mechanism for on-granting to the regions and inefficient budgeting process has significantly delayed the project implementation • Highly dependent on local politics • Local government leadership is still the key success factor  change of leadership in the middle of implementation significantly impede the reform processes • Need to align reform agenda with political leaders • Investment fund is certainly an incentive for reforms, but not sufficient  national-level recognition, capacity building also create incentives for LGs • Limited numbers (and lack of capacity) of local civil society, particularly outside regional centers. Need to specifically build the capacity of linking, linking community leaders to involve in district-level process • Building on the existing initiatives  “one size fits all” clearly does not work • Several aspects of public services are not necessarily impacted from enhanced budgeting processes, need direct interventions as well • Competition among LGs (with rewards) promotes innovation among regions, and also learning from peer encourages and convinces others to initiate reforms

12. Challenges Challenges to both LG & CDD programs to institutionalize good governance practices that have been introduced • Need to link community to supra community/village level players (LLI Study). Most resources rest with LGs and need to work with them. • A lot of districts (endorsed by Central Government) have allocated significant amount of funds as a “Block Grant to Village”. However, most of them have not adopted CDD key success factors, such as intensive facilitation, promotion of participation of women, transparent management of funds, etc. • Adopt CDD principles in LG’s regular processes • CDD and LG programs need to work together to make this happened: • Supporting community leaders to participate district-level processes • Supporting LG to adopt CDD principles for their regular project cycle • Blending CDD project funds with LG’s “Village Block Grant”