Anticipating P4R?Innovative operations in support of a rising Indonesia
Mae Chu ChangLead Education Specialist and Indonesia Human Development Country Sector CoordinatorChris HobanIndonesia Operations ManagerShubham ChaudhuriIndonesia Lead Economist
March 01, 2011Emerging Indonesia Seminar SeriesWorld Bank, Washington, DC
OutlineWhat we’ll be talking about Three innovative operations that have defined the first two years of the
CPS
A quick overview of the three operations
Public Expenditure Support Facility--DPL-DDO (with a difference)
Strengthening fiscal transfers using an output-based approach: the Local Government and Decentralization Project (DAK-refinancing)—SIL
Strengthening school-based management: BOS-KITA--SIL
What made these operations innovative:
From the perspective of Indonesia’s development agenda
From the perspective of the World Bank
Mainstreaming these sorts of operations
What will it take
Indonesia Public Expenditure Support FacilityA DPL-DDO with a difference What it was
Development Policy Loan (DPL) with Deferred Drawdown Option (DDO) in the amount of USD2 billion approved by the World Bank’s Board on March 3, 2009
Genesis in the aftermath of Lehman Brothers’ collapse and the turmoil in global
financial markets in the last quarter of 2008, concern that Indonesia would have difficult meeting its gross financing needs (about USD 23 billion) from market sources in 2009
Aim to ensure that Indonesia would be able to sustain critical public expenditures
and maintain the momentum on structural and institutional reforms even if adverse global financial market conditions limit Indonesia’s ability to meet its gross financing needs from market sources
Indonesia Public Expenditure Support FacilityA DPL-DDO with a difference Implementation
loan was prepared, appraised, and negotiated in a period of 4 months starting early October 2008
government also requested the Bank’s assistance in facilitating additional financing from other bilateral and multilateral sources, which the Bank was able to do, resulting in commitments of an additional USD 3.5 billion from the Governments of Japan and Australia and the ADB.
A set of confidence-boosting policy measures aimed at:
reassuring financial markets and maintaining financial system stability
sustaining critical public expenditures while maintaining budget discipline and
facilitating private investment and supporting exports
Key feature:
Structured as CONTINGENT budget support that would be available ONLY if Indonesia were unable to meet financing needs from market sources
STATE BTight liquidity conditions and
access to finance restricted but macroeconomic situation
otherwise stable
STATE ALiquidity conditions in markets
eased, access to finance available at reasonable cost,
macroeconomic situation stable
STATE CTight liquidity conditions, no access to
finance, imminent or ongoing BOP crisis, macroec situation unstable
GoI should be able to no need for drawdown
GoI unable to meet financing targets, possible drawdown of DPL-DDO
GoI unable to meet financing targets and needs BOP support, no disbursement possible of DPL-DDO
Aims of the Indonesia PESF (DPL-DDO):
By reassuring markets on GoI’s ability to meet its financing needs, raise the probability of state A
Provide back-up financing in case state B is realized
The PESF (DPL-DDO) was NOT intended to, and could not, given its limited size and the World Bank’s mandate, provide BOP support
Indonesia Public Expenditure Support FacilityThe basic idea Three potential scenarios Indonesia faced in 2009
Indonesia Public Expenditure Support FacilityWhat made it innovative Timing
timing of the PESF, the fact that it was conceptualized as a precautionary step and put together rapidly enough for it to be in place before Indonesia was in a crisis, enabled the PESF to play an useful preventive role
the announcement of a contingent support package, backed up by a program of confidence-boosting policy measures sent a strong positive signal to the markets, making it more likely that Indonesia would be able to meet its financing needs for CY2009 from market sources
Market commentary in the lead-up to the Board’s approval of the loan and subsequently suggests that the PESF did contribute to boosting market confidence in Indonesia’s creditworthiness. Indonesia was able, in early March, to raise USD 3 billion in global capital markets—the largest issuance by an emerging market since September 2008
The contingent market-oriented design of the PESF the fact that Indonesia would only draw down the facility in the event that
market conditions deteriorated and it was unable to meet its financing needs from market sources—was perhaps its most innovative feature and in effect made it a new financial instrument
The contingent nature of the PESF provided LEVERAGE, helping the GoI mobilize more resources from the market than might have been realized if the facility had been disbursed immediately
Local Government & Decentralization Project (DAK)
$ 220 million over four years
Pilot in five provinces
Specific Investment Loan: Output-Based Disbursement triggered by achievement of results
Focus on local infrastructure (roads, irrigation, water & sanitation)
Incentives for compliance
Since decentralization, substantial increases in funds to provincial & districts
Local Govts now manage 40% of total public expenditures & 50% of public investments.
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 -
200
400
600
800
1,000
0%
10%
20%
30%
40%
50%
16%
19% 20%
27%
37%
40%
35%
33%35%
40%
35%37%
Central Govt (excluding transfers) Provincial Govt (excluding transfer to Kab/Kota)
Kabupaten/Kota Govt % SNG to All (including transfers)
Trends of Central, Province & District Spending
IDR
Tri
llion
s (c
on
stan
t p
rice
20
07
)
Context: Resources shifted to LGs
9
DAK Engagement Approach
Lack of transparency and accountability
Inadequate and cumbersome reporting
Weak monitoring and evaluation
Very little verification
BANK DUNIA │THE WORLD BANK
Strengthen Country Institutions
Target large set of LGs
Improve LG internal controls
Work through existing transfer system
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 & technical reporting
RF: Output verification of projects financed by DAK funds
BANK DUNIA │THE WORLD BANK
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Output Eligibility Criteria for Reimbursement
Physical Realization of
Outputs
• Construction Completion Certificates.
• Compliance with Technical Specifications of Technical Guidelines
BANK DUNIA │THE WORLD BANK
Compliance with National Procurement Regulations
• National Regulations
require competitive
procedures in hiring
of contractors.
Compliance with
Environmental & Social
Safeguards:
• Indicators listed in the
Project Operations
Manual.
• Minister Issue
Supplement to Public
Works Technical
Guidelines.
Results focused• Reward Performance with grants
• Reimburse eligible outputs based on standard costs
Strengthen Government Systems• Central government ownership & control
• Strengthen oversight by internal audit & public works
Strengthen LG Internal Controls
Web-based Monitoring and Reporting Systems
Next phase:• Scale up to more Provinces
• Promote improved accountability downwards
• Improve efficiency and effectiveness of expenditures
Key Features of DAK Program
BANK DUNIA │THE WORLD BANK
Indonesia – Education Statistics
Population : 230 million Islands: 16,000 plus
Education Total number of students: 50 million Total number of teachers: 3 million Total number of schools: 258,000
Primary Completion Rate: 99% Secondary Net Enrollment rate: 72.1% (2009) Tertiary Gross Enrollment rate : 26.6% (2008) Primary Age Children Out of School: 686,000
Public Education Expenditure : 3.8% of GDP or 20 % of Gov. Spending Average Teacher Salary, Primary: US$ 2,012 per annum
BOS
Bantuan Operasional Sekolah (BOS) or School Grants Program
Launched in 2005 by Government of Indonesia using savings from a reduction in fuel subsidies
BOS aims to:
Strengthen school based management through provision of discretionary block grants to schools for school operations
Reduce school fees, eliminate school fees for the poor
Increase enrollment, especially for the poor.
Coverage: All (over 200,000) public/private, religious and non religious, primary and junior secondary schools, 41.3 million students
BOS
Capitation Grant (per student basis) $ 44 per student per year (primary) $ 63 per student per year (junior secondary)
Largest non-salary education Finance program of the GoI Edu. Budget: US$ 20 billion/annum (2010) BOS Spending: US$ 2 billion/annum (2010)
Implementation: MoNE and MoRA
Innovation in BOS (Gov. of Indonesia)
1. BOS is a transformational concept
BOS transitioned the education system towards an improved SBM system
2. Changes who controls school spending: From central Government to local school + involving beneficiaries for greater accountability and less corruption.
3. Per-student formula = alignment of needs of school with provisions.
4. Responsibility for the schools shifts from the Education Ministry to the schools.
BOS-KITA (Our – BOS)
A program SIL by the World Bank to support the Government of Indonesia’s BOS program
Provided $ 600 million in 2008 and additional financing of $ 500 million in 2010 to the BOS (approx 20% of the total, re-financing GOI funds)
Dutch Grant: $ 20 million in 2008, AusAID Grant: $ 20 million in 2011
Is governed by the BOS operational manual which meets Bank standards
Innovation in BOS-KITA (World Bank)
1. Support ongoing Government program = authorities and local communities have sense of ownership.
2. Government welcomed Bank’s reorientation towards blending Bank financing more smoothly and directly into support of successful, ongoing government programs.
3. Not a traditional SIL. No NOLs, no procurement.
4. Independent monitoring of spending, plus local community involvement.
5. Parallel grant financing managed by the Bank for technical assistance, information campaign:
Bank’s ability to respond quickly to most pressing issues with analytical work to complement loan.
Before BOS After BOS
Before After
No or little money for schools
• All schools receive funds based on per capita formula• Funds delivered in full amounts to all schools every quarter• Household spending on books has halved since pre-BOS.
No planning at school level
School development plans linked to use of funds required
No sharing of information with stakeholders at school level
Schools now displaying expenditures publicly
No functional school committees
• All schools have school committees• Over 85% of schools report on BOS fund usage to school committees
Before BOS After BOS
Before After
Inputs provided by district governments expensive. Costs 40% higher than now
• Schools manage inputs• 97% of funds are used properly
No or little oversight • Nearly 70% of all schools surveyed were monitored by either Central, Provincial or District BOS Management teams. • Complaint handling at all levels of government.
JSec NER for poorest: 52% JSec NER for poorest: 59%
Low parental involvement in school performance
• School Committee must have parent members• More parents aware of BOS and therefore responsibilities of school
What makes these operations innovativeFrom Indonesia’s perspective DDO
Respond to a key need identified by government
Bring in other international partners who could not have joined without Bank leadership
Programmatic instruments
Support key government services already being delivered
Strengthen existing government procedures
No need for the very unpopular Bank no-objection letters
No more micro-management of individual transactions by the Bank which detract from developmental objectives
Key feature is strong monitoring of expenditures & outcomes
Build on Bank’s reputation for ensuring good budget utilization
DAK
Includes substantial procurement using NCB & post review
Payment based on agreed costing of outputs
What makes these operations innovativeFrom The Bank’s perspective
DDO
Conditional use of DDO based on government’s objective
Influence markets without disbursement
Enabled by very strong policy engagement under trust funds
Programmatic instruments
Capacity building based on services already being delivered rather than adopting outside practices
Operating procedures all based on government nation-wide guidance
Helping to change the “rules of the game” through enhancement to the Operations Manuals—a small change leading to major impact, e.g. BOS reaches 250,000 schools
Parallel technical assistance and analytical support through grant trust funds
Shift from disbursing against inputs to disbursing against output
Substantial procurement using NCB & post review
Mainstreaming these sorts of innovationsWhat will it take Relax the Bank’s procurement guidelines for programmatic assistance
focus on outcomes & value for money rather than transaction process steps
Recognize the development value of bringing better transparency & accountability to existing programs
Programs need to be ‘good enough’ with will & potential to improve
Bank’s ‘trademark’ is effective government spending
Governments also need to appreciate loan assistance for programs rather than identifiable projects
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