Suggested Strategic Directions

							Operating in a decentralizing
Indonesia

   What will happen, what can
   we do
Operating in a decentralizing
Indonesia


Features of Indonesia’s decentralization
The New Business Environment
Questions for the Bank
What’s Next?
Indonesia’s decentralization


 The current legal framework (Laws 22 and 25 of 1999)
  will give Indonesia substantial decentralization.

 The districts/cities will manage most of the Government
  services we care about, including health, education, and
  infrastructure

 The Government has decided for a “Big Bang”
  implementation in 2001
Indonesia’s decentralization



 Regional governments will spend about 40-45 percent of
  total (8-9 percent of GDP)

 Central government will mainly spend on:
   Interest payments (6 percent of GDP)
   Subsidies (2-3 percent of GDP)
   Central civil service (1.5 percent of GDP)


 Exact division not yet known
Regional Finance


  Alokasie Umum (>25 percent of revenues,
   3.5 percent of GDP)
  Alokasie khusus (unknown)
  Revenue sharing (oil, gas, forestry, fishery,
   mining, 1.2 percent of GDP)
  Own revenues (1 percent of GDP)
  Borrowing
Alokasie Umum


90 percent to District/City; 10 to Province
Distribution per formula
Grant=f(Needs-/-Revenue capacity)*a
  Needs=g(population, area, #poor, east)
  Revenue=h(regional GDP)
  a=adjustment factor, to ensure at least FY00
   allocation
Alokasie Khusus & Borrowing


Distribution Umum-Khusus unknown
Line Ministries determine factors for
 Khusus
Approval control of foreign borrowing
Formula-control of total borrowing
  Total debt
  Debt service
Risks


Debate on level of autonomy not settled
Macro-economic neutrality not guaranteed
Political accountability in regions shaky
  Many appointed bupati’s & governors
  Inexperienced DPR
  No local tax rate control
  weak links to service users

Big Bang will be messy
Opportunities


Better tailored service delivery
Experimentation
Competition
Participation
Using diversity of regions
Challenge:How to minimize risk, maximize
 benefits
The New Business Environment


350 potential clients
  1/3 of “regions” has 86 percent of the poor
4 themes
3 lines of business
2 types of financing
Shrinking operational budgets
Questions for the Bank


  Which regions?
  What level of government?
  What process?
  What products?
  What role for the center?
Which regions?


Focus on the poor regions
…that face natural resource management
 issues
…are well governed
…and are developing a competitive and
 just economy
So which ones?
What process?


How to use competition among regions
How to get cross-sectoral focus
How to catalyze democratic, participatory
 planning processes
How to promote innovation & experimentation
How to operate cost-effectively
How to monitor our impact
What products?


Lending or knowledge?



Projects or Programs?



IBRD or IDA?
What level of Government


The district has most of the money
The district responsible for most of the services
The district is small
  spill-overs
  small operations/high costs
The district has little planning/design capacity
  (for now)
 The Bank could catalyze the right level of
  cooperation
Central Business


Policy Advice
  Decentralization design
National Projects
“Earmarked transfer” business
Financial Intermediary
Next steps


Do more analysis on regions
Design feasible operations
Design analytical tools to select regions
Agree with center on administrative tools &
 processes
Continue advice to center on policy