1

BUDGETING SYSTEM BUDGETING SYSTEM

REFORMS:REFORMS: ANANINDONESIA INDONESIA CONTEXTCONTEXT

Presented for Singapore – Asian Development BankPresented for Singapore – Asian Development BankThird Country Training Program inThird Country Training Program in

PERFORMANCE BASED BUDGETING IN GOVERNMENTSPERFORMANCE BASED BUDGETING IN GOVERNMENTSSingapore, Oct 6 – 17, 2008Singapore, Oct 6 – 17, 2008

2

Outline :Outline :

1. Reforms Background

2. Progress in Reforms

3. Analyses

4. Some Challenges & Strategic Issues.

3

Reforms BackgroundReforms Background

Lesson learnt from previous systems

(dual budget and line item system)

• Lack of Budget Discipline

• Economic development sustainability in questions

• Lack of Transparency

• Inefficient

• Lack of Accountability.

4

Progress in Legal FrameworkProgress in Legal Framework

• Law No. 17/2003 on State Finances

• Law No. 1/2004 on State Treasury

• Law No. 15/2004 on Audit of State Finance Accountability

• Law No. 25/2004 on National Development Planning System

• Government Regulation No. 20/2004 on Government Work Plan

• Government Regulation No. 21/2004 on Line Ministries/Agencies Work Plan and Budgeting Formulation

5

Progress in Budgeting SystemProgress in Budgeting System

a. Budget System Approaches

b. Budget Classifications

c. Budget Process

d. Budget Documentations

e. IT System

6

a. Budget System Approachesa. Budget System Approaches

• Unified Budget :– merged Routine and Development Budget;

– Integrating : budget documents, program/activity within line ministry/agency, and standard chart of accounts.

• Medium Term Expenditure Framework :– Setup planning and budgeting based on policy and its

financial implication in multi-year perspective;

– Develop fiscal discipline to ensure better allocation and operational efficiency.

• Performance-Based Budget :– Clearly linkage between budget and output/outcome;

– Increasing transparency and accountability of public service;

– Flexibility and responsibility arrangement.

Gra

nd D

esig

n S

yste

m

7

ROUTINE

Unified Budget FrameworkUnified Budget FrameworkB

ud

get

Str

uct

ure

Bu

dg

et S

tru

ctu

re

Sector

Sub sector

Sector

Sub sector

Program

Activity

Type of Expenditure

Office

Program

Project

Type of Expenditur

e

Project Unit

ROUTINE DEVELOPMENT

Function

Sub function

Program

Activity

Chart of Accounts

Spending Unit

BUDGET

8

StateBudget

MTEF FrameworkMTEF Framework

Long-term Dev. PlanningLong-term Dev. Planning

Mid-term Plan

Govt. Work Plan

OutcomesOutputsActivitiesProgram

Strategic Plan

Work PlanAgency Budget

MTEF

National Goals

President Vision

To achieve

National Ministry/Agency

20

5

1

9

MTEFMTEFObjectivesObjectives

To enhance

planning unit in line

ministry/agency

becomes easier to

prepare next year

budget

To ensure the sustainability of program/activity

financing

To increase public trust on

Govt. services : more focus and

efficient

To direct resources

allocation more strategic and

realistic

To strengthen

linkage : policy,

planning, and

budgeting

To develop fiscal discipline

Fiscal SustainabilityTo encourage line ministry/agency

performance in delivering public services

MTEF FrameworkMTEF Framework

10

MTEF IllustrationMTEF Illustration

201020092008

2007

Policy decided as

baseline

BudgetForward EstimateForward Estimate

Budget implications :

MTEFMTEF

Forward EstimateForward Estimate

11

SA

PBB FrameworkPBB Framework

Govt. Work PlanGovt. Work Plan

Ministry/AgencyEchelon I

Unit

Program

National Outcomes

Outcome OutcomeOutcomeProgram Program

Program

Program

Program

Echelon I Unit

Echelon I Unit

ProgramProgram

OutcomeOutcome

Outcome

Program

Act. Act.Act. Act.

Act. Act.

OutputOutput

Output

OfficeSpending

UnitSpending Unit

Act.Act.Act. Act.

Act. Act.Act.

Output Output Output

SASA

12

b. Budget Classificationsb. Budget Classifications

Based on Law No 17/2003 on State Finances:

• Article 11, section (5) clearly stated:

“State expenditures shall be detailed in accordance with organization, function, and type pf expenditure”.

• Article 15, section (5) clearly stated:

“The budget that is approved by House of Representatives shall give details of organizational units, functions, programs, activities, and types of expenditure”.

13

OfficeOffice

Office

BudgetBudgetClassificationsClassifications

By Function

Activity

By Organization

Ministry/Agency

Echelon I

Office/SU

Others

Capital

Subsidy

Personnel

Grants

SocialAid

Interest

Goods

Function

Sub Function

Program

Echelon I

By Economic

14

REFLECTS MAIN DUTIES OF SPENDING UNIT

REFLECTS MAIN BUSSINES OF ECHELON I UNIT

REFLECTS MINISTRY/ AGENCY OBLIGATION AS PART OF GOVT.

>1.500 ACTIVITIES

221 PROGRAMS

79 SUB FUNCTIONS

REFLECTS GOVERNMENT OBLIGATION TO THE PEOPLE

SHOWS COMPONENT OF ACTIVITY, PRODUCE OUTPUT

11 FUNCTIONS

Functional ClassificationsFunctional Classifications

15

Organization ClassificationOrganization Classification

MINISTRY/ AGENCY

73 PORTFOLIO

ECHELON I UNIT

VERTICAL OFFICES

SPECIAL UNIT

LOCAL GOVT. UNIT

NON VERTICAL OFFICES

TEMPORARYUNIT

ECHELON II UNIT

TOTAL SPENDING UNITS IN 2008 : 20.000

16

Economic ClassificationsEconomic Classifications

PERSONNEL

GOODS & SERVICES

CAPITAL

SOCIAL AID

GRANT

SUBSIDY

INTEREST

OTHERS

BUDGET ALLOCATED TO PAY GOVERNMENT EMPLOYEES AS COMPENSATION IN DELIVERING GOVERNMENT SERVICES

BUDGET ALLOCATED TO PURCHASE GOODS AND SERVICES TO SUPPORT GOVERNMENT OPERATIONS

BUDGET ALLOCATED TO PROVIDE ASSET OR GOVERNMENT PROJECT

BUDGET ALLOCATED TO PROTECT PEOPLE FROM SPECIFIC SOCIAL RISK AS AN IMPACT OF GOVERNMENT POLICY OR OTHER SPECIFIC REASONS

BUDGET ALLOCATED AND TRANSFERRED TO LOCAL GOVERNMENTS, SOE, OTHER COUNTRY OR INTERNATIONAL ORGANIZATION IN WHICH NOT MANDATORY

BUDGET ALLOCATED TO SUBSIDIZE THE MARKET PRICE OF GOODS AND SERVICES PRODUCED BY SOE, PRIVATE COMPANY, OR OTHER INSTITUTIONS, TO ACHIEVE THE AFFORDABLE LEVEL FOR CERTAIN TARGET OF PEOPLE

BUDGET ALLOCATED TO REPAY THE INTEREST OF THE OUTSTANDING LOANS - DOMESTIC AND FOREIGN

BUDGET ALLOCATED TO COVER OTHER GOVERNMENT EXPENDITURES

17

January - April- May - August- September - December-

Pparliament

Cabinet/President

Ministry of Planning

MinistryOfFinance

LineMinistry/Agency

Local Govt

Pembahasan Pokok -pokok Kebijakan Fiskal & RKP

Pemba -hasan RKA - KL

Pembahasan RAPBN

UU APBN

Kebijakan Umum & Prioritas Anggaran

Nota Keuangan RAPBN dan Lampiran

Keppres tentang Rincian RAPBN

SEB Prioritas Program dan Indikasi Pagu

Penelaahan Konsistensi dengan RKP

SE Pagu Sementara

Lampiran RAPBN (Himpun an RKA -KL)

Penelaahan Konsistensi dengan Prioritas Anggaran

Renstra KL

Rancangan Renja KL

RKA - KL

Rancangan Keppres tentang Rincian APBN

Pengesa -han

Konsep Dokumen Pelak -sanaan Anggaran

Dokumen Pelaksanaan Anggaran

(1)

(2)

(3 )

(5)

(12 ) (1 4)

(1 0) (1 3)

(6)

(11 ) (7)

(4) (8) (9)

c. Budget Processc. Budget Process

18

National Forum

DG

Bu

dg

et

MO

F

Department

/ Agency

Trilatera

l

Meeting Prepare Work Plan

Budget Process : Jan - AprilBudget Process : Jan - April

Indicative Ceiling

Ministry of Finance

Min/ Agency

- Setting priority- Exercise budget

needed- Prepare draft RKP

- Set up macro economic assumption

- Determine fiscal policy- Exercise resource

envelopes

National Development

Planning Agency

Ministry of Finance

Cabinet Meeting

Planning Agency

Planning Agency

Govt. Working Plan

President

Govt. Working Plan

Gub. Gov. Gov.

Min. Min.

Parliament

19

Scrutiny & Validate

Scrutiny & Validate

Supporting documents

Prepare WP&Budget

Budget Process : May - AugustBudget Process : May - August

PARLIAMENTGovt.

Working Plan

Ministry of Finance

Planning Agency

•Govt. Priority & targets;

•Macroeconomic assumptions;•Fiscal Policy.

Circular letter on Temporary Ceiling

Ministry of Finance

Department/ Agency

RKA-KL

Ministry of Finance

PARLIAMENT

Commissions

Planning Agency

PARLIAMENT

*The Budget Bill;*Financial Notes;

*President Speech;*Compilation of RKA-KL.

President

20Scrutiny &

Validate

Budget docs

Scrutiny & Validate

Supporting documents

Adjust WP&Budget

Budget Process : Sept - DecBudget Process : Sept - Dec

PARLIAMENT

CommissionBudget

Committee

Ministry of Finance

Min/Agency

BudgetBill

Circular letter on Definitive Ceiling

Ministry of Finance

Min/ Agency

DG Budget of MOF

SAP-SK

DG Treasury of MOF

Min/ Agency

Budget Docs

Presidential Decree

21

d. Budget Documentsd. Budget DocumentsNational National • Government Work Plan• The Budget Bill• Financial Notes• President Speech• Compilation of Line Ministries/Agencies

Working Plan and Budgeting documents

Line Ministries/AgenciesLine Ministries/Agencies• Annual Working Plan• Working Plan and Budgeting Documents• Budget Implementation Document

22

• Line Ministry/ Agency

Working Plan;• Government Working Plan.

e. IT System e. IT System

Ministry of Planning/National Dev Planning Agency

DG Budget DG Treasury

Ministry of Finance

• Indicative Ceiling;• Temporary Ceiling;• Definitive Ceiling;• WP&Budget• SAP-SK;• Presidential decree.

* Budget Docs;* Payment;

* Reporting and Accounting.

Each system stands alone!!!

23

Current ConditionCurrent Condition

Implementation of Unified Budget :Implementation of Unified Budget :• Unifying Routine and Development Budget;

• Unifying budget documents (planning)

• Unifying budget documents (implementation)

• Unifying implementing unit: project unit/office to spending unit;

• Improving type of expenditure classification

• Introducing chart of accounts based on GFS

Gre

at s

ucc

ess

24

Implementation of MTEFImplementation of MTEF ::

• Setup macro economic assumptions to perform medium term fiscal framework (MTFF);

• Setup tax ratio, deficit target, revenue target, expenditure limit to formulate medium term budget framework (MTBF);

• Put the figures produced in Financial Notes since 2008 budget.

Still away from targets

25

ANALYSES

• Concepts, Regulations ok

• Implementation ?:– Lack of agency leadership commitments– Lack of coordination among agencies, since

agencies vary in comprehension– Fiscal policy, in some extent, was not linked to

agency budget– Cabinet is ready, some agencies are not

26

Medium Term Expenditure Framework:Medium Term Expenditure Framework: • Setup baseline;

• Determine the parameters;

• Formulate 3-year forward estimates;

• Forward estimates adjustment;

• Strategic review of Policy/Program.

Some Challenges:Some Challenges:

27

Performance-Based Budget :Performance-Based Budget : • Restructure the programs;

• Determine the outcomes and outputs;

• Formulate measurements (performance indicators for programs and outputs);

• Develop costing methodology (model);

• Simplify the operational/running cost components;

• Define standard cost or indexation;

• Flexibility arrangements;

• Performance Review technique.

28

a. Level of agency autonomy is to be improved

b. Budget Documents are to be simplified

c. Legislative & Executives imbalance

d. Huge amounts of units (both central & local)

Strategic Issues:Strategic Issues:

29Set-up 3-year

FE

Apply per Program

Forward Estimate

Parameter Index :2010, 2011, 2012

• Existing Policy : Actual, trend analysis, adjustment;

• New Policy : Assessment.

a. MTEF Context : a. MTEF Context :

Costing Process

Existing Govt. Policies

Re-priorities

Total = Existing + New

• Continued;• Terminating;

• Lapsing.

• Continued;• Lapsing;

• New Policy.

Set-up Parameters

Set-up Baseline

2010 2011

2012

Review

Decide

Evaluate &

Assess

Determine

Take into account

Let start!!

30Task & function

Core business &

function

b. PBB Context : b. PBB Context :

Min/ Agency

Echelon I Unit

Echelon II/ Spending Unit

Vision & Missions

Activity

Outcomes

Indicators:• Quantity;• Quality;• Price.

KPI based on :• Efficiency focused;• Customer focused;• Customer, employee and

outcome focused;• Efficiency and

effectiveness focused;• Effectiveness and customer

focused;• Outcome focused;

State Define

vDesign

O-1 O-2 O-3

Program

Directly support

vFormulate

Reflects part of

mission

Directly support

Ref

orm

ula

te P

rog

ram

Reformulate!!!

31

Criteria :• output specific• reflects unit function

• basic service delivery

Criteria :• output specific• directly support national outcome

Criteria :• index per employee• table benchmark

Criteria :• database emplyee• table salary & allowance

Min/Agency Priority

National Priority

Sim

plif

y C

ost

ing

Activity 3Activity 4

Personnel expenses Operational,

Maintenance, and Travel expenses

Activity 1Activity 2

Flexibility – managed by Manager Controlled by Parliament & MOF

PROGRAM

Running cost Administered

32

Criteria :• output specific• reflects unit function

• basic service delivery

Criteria :• output specific• directly support national outcome

Criteria :• index per employee• table benchmark

Criteria :• database employee• table salary & allowance

Min/Agency Priority

National Priority

Bu

dg

et A

lloca

tio

n P

roce

ss

Activity 3Activity 4

Personnel expenses Operational,

Maintenance, and Travel expenses

Activity 1Activity 2

Allocated by MOFAllocated by Planning Agency

PROGRAM

33

THANK THANK YOU !!!YOU !!!