Australia Indonesia Partnership for Decentralisation (aipd) Delivery Strategy 2010 2015 Contents

Decentralisation and improved Public Financial Management

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2.3Decentralisation and improved Public Financial Management

As noted in Section 2.2 above, there are a broad range of factors that impact on the delivery of essential services at district level. Nevertheless, one issue stands out as being of particular strategic importance to effective decentralisation in Indonesia, namely improved resource allocation and management, at the heart of which is Public Financial Management (PFM).

The reasons why PFM is considered of particular importance are as follows:

  • Significant resources are available to both provincial and district governments, but are not being optimally allocated or managed.

  • Improved PFM is a ‘public good’, in that it supports systemic improvements that impact on all areas/sectors of government activity.

  • Improved PFM is a key platform for good governance, including increased transparency and accountability.

  • Both supply and demand side stakeholders need to be engaged in improved PFM. This includes the executive, the legislature and CSOs.

  • Improved PFM directly supports the aid/development effectiveness agenda, in that it builds P/LG capacity to effectively allocate and manage resources from any source, including donor funds; and

  • There is both a clear capacity building need and (at least in those provinces and districts with reform minded leadership) a demonstrated demand for support.

The definition of PFM (used in this document) is aligned with that used in the ‘Local Government Public Financial Management Measurement Framework’. This tool has been developed jointly by the Ministry of Home Affairs and the World Bank.21 PFM is broken down into nine strategic sub-areas, mainly referring to processes and procedures.

The main elements of PFM are profiled in Figure 2 below:

Figure 2 – Main elements of PFM

This then begs the next question, ‘Are there particular elements of PFM which should be given particular attention/priority’?

While it is recognised that all elements of PFM are important, AIPD needs to focus its attention/resources on priority areas with the highest likely returns in terms of supporting improved service delivery. Lessons learned from previous governance projects which address PFM have also shown that a focus on specific sub-areas is needed to achieve tangible results.

As shown by the results from Public Expenditure Analysis (PEA) already conducted, lack of strategic resource allocation across sectors, poor spending prioritisation within sectors, low absorption rates, and lack of sound planning/management information are key constraints to improving service delivery, rather than the availability of financial resources as such. The development returns can thus be high from reviewing public expenditures to identify those with high potential returns, and on-going, low-return expenditures that could be usefully re-prioritized toward high-return uses. Where this process works well, the fiscal space opened up for new investment or more productive current expenditures can be large. One goal of public expenditure management reforms is thus to put into place systems that routinely review and recalibrate priorities.

Also, without first tackling planning and budgeting issues, the other elements of PFM will not by themselves lead to improved service delivery outcomes.

This therefore suggests that a natural strategic entry point for AIPD support will be on supporting improvements in planning and budgeting (resource allocation/spending mix), budget execution and monitoring, and establishing a clearer link to service delivery priorities and targets. This will include support to improving access to relevant planning/management/service delivery information (for both government and community), and strengthening the (demand side) mechanisms through which the public can participate in policy formulation, plan and budget preparation and service delivery monitoring.

While planning, budgeting and the monitoring of budget execution will therefore be a primary focus for AIPD support, where there is demonstrated need/demand and links to priority service delivery outcomes, AIPD will also be responsive to providing capacity building support to strengthen other PFM elements, such as for procurement and audit processes. Indeed, there is a high level of demand for general PFM knowledge/skill development at the P/LG level, which AIPD plans to address through a number of strategies, including the expansion of the MOF/Universities PFM network. Also, through the use of a number of existing analytical and measurement tools (such as the PFM measurement framework and PEA), AIPD will support ongoing analysis and monitoring of progress/change in all PFM sub-systems, not just planning and budgeting.

However, it may then be asked ‘why’ will AIPD support be any more effective than past (often unsuccessful) attempts to strengthen P/LG PFM capacity? The answer lies in the fact that the AIPD support strategy specifically takes into account (and addresses) some of the main reasons why many previous efforts have had limited impact, namely:

  • PFM capacity building has often been approached largely as a technical task, without adequate focus on the institutional and political dynamics involved in the planning and budgeting process;

  • The legislature has often been left out of the equation, and the deeply political process of planning and budgeting thus not adequately accounted for.

  • Inadequate attention has been given to promoting CSO/demand side participation in improving PFM systems;

  • Technical Assistance has often been supply, rather than demand, driven;

  • Assistance has often been provided through short-term technical inputs, rather than through supporting long-term strategic partnerships between P/LGs and local sources of technical support/expertise; and

  • Assistance has often not adequately integrated work ‘on the ground’ (in districts / provinces) with work on improving the policy and regulatory framework at the national level.

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