A Project Governance Assessment

Draft for Discussion Only: Not for Quotation, Attribution or Citation

GOVERNMENT FINANCIAL MANAGEMENT AND REVENUE ADMINISTRATION PROJECT (GFMRAP)

DRAFT PROJECT GOVERNANCE ASSESSMENT1

A. Background

As eloquently summarized in a recent report on corruption in Indonesia, Indonesia’s public financial management system is highly dysfunctional and fraught with many weaknesses that foster inefficiency and lead to considerable opportunities for fraud, bribery, and other illicit forms of leakage.2 Not surprisingly then the Country Assistance Strategy (CAS) has highlighted poor public financial management as a core issue that needs urgent attention and whose improvement is necessary for promoting a better climate for investment and more responsive delivery of public services to the poor. The CAS emphasizes that the selection of Bank activities “will be determined less by sectoral priorities than by the opportunity to make progress in” this and other key areas in governance, e.g. judicial reform.

It was hoped that the country’s 1999 elections, its first democratic government in 44 years, would herald in dramatic political and bureaucratic reforms. However, as developments have panned out, these hopes have failed to be realized; a factor of unrealistic expectations, lack of political will, and an extremely short time period. The first round of the 2004 Indonesian election cycle, the legislative elections, has seen a reaction to this with a backlash against the ruling Indonesian Democratic Party of Struggle (PDI-P). Whist still far too premature to predict the reconfiguration of the Indonesian political landscape, the change in dynamics between the political parties - both among the old and between the old and the new - will almost certainly impact the reform process moving forward.

Public financial management covers three major areas, budget formulation, budget execution, and budget oversight, and, as in this case, its assessment is often paired with an assessment of revenue administration. In many developing countries, reforms in former depend in part on the quality of the latter.

In Indonesia, budget formulation is weakly coordinated, with the development budget prepared in one agency, BAPENNAS, and the recurrent budget in another, the Ministry of Finance (MOF), and sorely lacks strategic focus. Parliamentary procedures for budget deliberations are disorganized and not particularly transparent and the capacity of the relevant Parliamentary Commissions and the Budget Committee for ex- ante and ex-post budget review has been particularly weak. These institutional deficiencies have led to systematic under funding of ministry budgets, insufficient allocations for maintenance and operations, unpredictability in the flow of funds to ministries throughout the fiscal year, incoherence between budgetary allocations and national priorities, and ultimately a fertile environment within which to concoct schemes to skim funds illegally.

1 This assessment was prepared by Ed Campos (PRMPS), Amitabha Mukherjee (EASPR) and James Sheppard (consultant) with valuable inputs from Naseer Rana, Eiji Ojimaya, Steve Burgess, Rajiv Sondhi, Bert Hofman, Joel Hellman, Anne-Lise Klausen, Agnes Cusack and a large number of external stakeholders interviewed for this assessment (see Annex 1 : Partial list of persons met) 2 The World Bank, 2003. Combating Corruption in Indonesia: Enhancing Accountability for Development, EAP PREM.

1 Draft for Discussion Only: Not for Quotation, Attribution or Citation

Budget execution is equally weak, if not weaker, with processes that aggravate the already opaque and vulnerable environment governing the preparation stage. The Government procurement system encourages collusion and corruption throughout the procurement chain. Non-competitive and non-transparent bidding procedures, poor contract implementation, including lack of record-keeping and ex-post physical verification of project completion, have resulted in leakages that raise the effective cost to the government of goods, supplies, infrastructure, and consulting services and ultimately to less and/or poorer quality of public services. Further exacerbating these weaknesses is the prevalence of hundreds of off-budget accounts, the absence of a Treasury Single Account, poor record keeping, and weak cash management, all of which have made financial controls and audits difficult to implement or undertake. The result: an even more hospitable environment for corruption.

Revenue administration is even more problematic. Tax administration and enforcement remain key weaknesses in the investment climate. Weaknesses include an undermining of the self-assessment system by excessive audits, arbitrary tax assessments, and an inefficient refund systems for the VAT and income taxes. Access to tax courts is cumbersome and costly, while most cases in the end are decided in favor of the tax payer. A recent corruption survey of government agencies conducted by Transparency International rated these two agencies (as well as the Ministry of Public Works which handles procurement of large infrastructure projects) as the most corrupt in government. Time and again the media has reported harassment of businesses and individuals by tax auditors and threats of goods embargoes by Customs officials. Local business associations, e.g. KPEN, foreign chambers of commerce, and anti corruption watchdogs, e.g. TI Indonesia, have constantly lamented the deleterious effects of these practices on investment and business activity.

The combined efforts of the Directorate of Tax (DGT) and the Directorate of Customs (DGCE) account for __% of total revenue collections. Consequently, deficiencies in revenue administration will constrain the investment climate and jeopardize the success of reforms in public financial management: the ability to provide a predictable stream of revenues and to finance development programs (and thus to address poverty) is heavily dependent on the efficiency and effectiveness of these agencies.

B. Project Components and Potential Governance Risks

In response to the above need and at the request of the Ministry of Finance, the Bank has proposed an adaptable program loan (APL) to support key reforms in public financial management and revenue administration. The loan will support the planned reorganization of the MOF, the reengineering of budget formulation and execution processes and systems to enhance the transparency, accountability, and effectiveness of public spending, and the on-going internal institutional reforms within the Directorate of Tax and the Directorate of Customs and Excise. These activities embody potential corruption and reputational risks to the Bank which are summarized below:

Budget Formulation

The project intends to support the implementation of the recently passed State Finance Law which, for budget formulation, includes the modernization of the budget classification system, the introduction of a medium term expenditure framework (MTEF), and the adoption of performance budgeting system. It will also support capacity building of Parliament to effectively engage with the Government in annual budget deliberations. There are two major risks that could arise in this context:

. Historically, BAPPENAS has prepared the capital budget while MOF the recurrent budget. Both ministries are powerful and each has effectively acquired a “property right” to their respective areas of responsibility. By changing the historical power arrangements between these two ministries, the State Finance Law will almost certainly create institutional friction between them, which will need to be resolved for there to be any real progress on the reforms.

. Both the MTEF and performance budgeting require major shifts in thinking and orientation for civil servants, particularly those in the line ministries. Even in developed countries where these reforms have been undertaken, efforts were first focused on one until it was sufficiently infused into day-to-day operations and only then were efforts turned to the other. There is a danger that the Government may move simultaneously on both reforms. Given the current capacity in the line ministries (less so in the MOF and BAPPENAS), this may lead to reform overdrive and subsequently to a dissipation of the energy needed to sustain the reform process.

Additionally, because the Parliament’s performance on budgetary deliberations and oversight have been sorely weak,3 the proposed reforms are unlikely to have much of an impact – and may even be derailed - unless legislators are themselves exposed and trained in the new processes and are given adequate incentives to acquire the necessary skills to make full use of them.

Potential Stakeholders

Against: MOF officials who will be moved because of the reorganization, BAPPENAS officials since they will lose their hold on the development budget For: Budget Committee of Parliament because they gain more influence over the budget, anti-corruption NGOs since the budget will be more transparent, and peak business associations for the same reason.

Budget Execution

The procurement assessment and the financial management assessment for this project have identified the potential corruption risks involved in budget execution. But it is worthwhile to highlight the key risks: (i) the danger that business processes which currently encourage corruption are not reengineered towards greater transparency and accountability to limit rent-seeking opportunities, and are “modernized” simply through the application of ICT and (ii) the many opportunities for corruption that are potentially associated with the procurement of IT systems (and the associated training in their use) for the planned modernization of the Treasury system and the switch to e-procurement in government purchasing and contracting. 3 See Robinson, Marc and Sherlock, Stephen “An assessment of the capacity building needs for Parliament” prepared specifically for this project.

Experience with the application of ICT to large-scale government projects has not been particularly encouraging.4 The main problem has been that the new technology is simply applied to processes which are fundamentally flawed—they discourage transparency, cloud accountability, and perpetrate inefficiency. Under these circumstances, the government often ends up with a high-cost system that fails to provide the benefits that were expected. Sometimes in fact none of the benefits occur. In Indonesia, a particularly telling example is the Bank-financed Second Accountancy Development Project.

As surveys in many countries and countless case studies have shown, public procurement is generally prone to corruption. In Indonesia, this problem is quite severe even in Bank projects with generally higher safeguards than domestically financed projects. The recent fiduciary review of the Bank’s Department of Institutional Integrity (INT) on the Sulawesi Urban Development Project attests to the very high risk of corruption and collusion in the procurement and contract implementation process. Collusion was evident in the contracts reviewed and contract implementation – record keeping, disbursements, accounting, reporting, and auditing – was shoddy resulting among others in under or over invoicing, poor quality construction, and, worst of all, ghost delivery of outputs.5

When the procurement involves the purchase of complex information technology packages – hardware, software, training -- a layer of complexity is added to the process which increases the risk even more. Because of the complexity, it becomes easier to hide over pricing, substitute inferior quality components for those specified in the contract, or charge extra-legal costs to training. Moreover, even in the unlikely event that no illegal activities occur, the weak capacity of the government to assess the quality of the outputs can potentially lead to a poorly working system.

Potential Stakeholders

Against: MOF officials currently engaged in operating the Treasury system since the system will eliminate the rents that are currently built into the current system; procurement officials in spending ministries, particularly those in public works because opportunities for skimming funds throughout the procurement process will be reduced; contractors who have historically been favored by the old system and have benefited from collusive arrangements.

For: Anti-corruption NGOs (TI Indonesia, ICW, MTI, IPW), progressive media such as Tempo and Kompass), religious organizations (such as NU and Mahammadiya) that have explicitly criticized the government for corruption, end users (general public), business community, progressive officials within the government (there is some indication that a few can be found for instance in BAPPENAS), progressive local elected officials.

4 See Chapter 9, Development Lessons from the 1990, draft manuscript, PREM, World Bank, March 2004. For a comparison of what works and what does not, see Bhatnagar, Subbash, 2003. ______, unpublished manuscript, PRMPS, The World Bank. 5 In fact, possible problems that have arisen in the short-listing for the consulting firm to be tasked with preparing the RFP for the procurement of the Treasury IT system under the GFMRAP suggest that procurement for this project may in fact involve a very high risk.

Revenue Administration

(to be expanded to include 2-3 sentence background, summary of the components, information on revenue performance – James, please add from the PCN and CAS). The main risk under this component arises from the fact that there is a highly robust internal market for the so-called wet positions in the DGT and DGCE, including in particular the most lucrative post of director general. Many of those posted to these positions have paid for the de-facto right to use their positions to extract bribes from end users e.g. taxpayers, exporters, and must at the very least “recoup their investment or complete installment payments.”6 (Also add specific example of contract killing in newspaper report to show how desperate staff can become to obtain a lucrative position) Because these positions also carry authority and thus influence within the organization, there is likely to be a natural and strong built in resistance to any reform that would undermine the informal market system. Moreover, because of the possible link of this system to campaign finance, powerful politicians can and are likely to use their influence to derail such reform efforts.7

Potential Stakeholders:

Against: Most Tax and Customs officials as their rents will be reduced if not eliminated; ruling party politicians since a key part of the arrangement that perpetrates the corruption is for the DGT and DGCE to fork out a substantial amount of money to support the campaign of the party.

For: Foreign chambers of commerce; local business associations such as KADIN and KPEN; freight forwarders, exporters association, association of large manufacturers (note: individually, firms may not be willing to support the reforms for fear of reprisals; but associations are willing to do so and have expressed a keen interest); anti-corruption NGOs; individual taxpayers.

C. Managing the Risks

In a country where corruption is widespread, controlling project risks is a major undertaking as institutionalized corrupt practices almost always “invade” micro level activities. The major challenge in such circumstances is often about how to create sufficient checks and balances in an environment where the institutions of restraint – judiciary, external and internal audit agencies, the ombudsman, the anti-corruption commission, etc. – are very weak or even captured by selfish interests. In such environments, the only potential bastion of restraint lies outside the State – in external third party groups, i.e. the media, NGOs, business associations, religious organizations, research/policy institutes, student organizations, university councils, and other CSOs.8

6 This phenomenon in fact appears to be more widespread across the civil service. See for instance, Yoyoh Hulaiyah Hafids, “The High Cost of Becoming A Civil Servant,” The Jakarta Post, Vol. 21, No. 345: p.1, April 18, 2004. 7 Interviews with senior members of the business community suggest that both agencies are used as sources of funds for political campaigns and that extraction runs into millions of dollars. 8 Close political ties and affiliations of numerous NGO/CSOs, business associations and public policy research bodies must be investigated to ensure credibility and protect the integrity of the reforms as well as the reputation of the Bank. Despite the introduction of freedom of association in the post-New Order society, not all civil society groups have reasserted their independence from the government. What is more, the situation has perhaps even deteriorated with the proliferation of political parties. Given the possibility of political affiliations, and thus conflict of interest, careful selection of such groups is essential to provide

Ranked among the most corrupt countries in the world, Indonesia has little to offer by way of formal checks and balances on the abuse of public authority and thus on the misuse of public funds. Hence, for this project, an external monitoring based approach is recommended as the means for enhancing transparency and strengthening accountability in the implementation process.

While the potential for corruption often dominates project risks, other governance problems may just as well create risks of project failure and thus, like corruption, impose reputational costs on the Bank. In particular, for this project, the weak capacity of the Parliament and the oversight agencies and the lack of internal arrangements to resolve potential disagreements among the oversight agencies undermine the accountability of each for the successful implementation of the project. Again in these instances an external third party approach is recommended.

Suggested risk minimizing mechanisms for each component of the project are described below:

Budget Formulation

Risk #1: The MOF – BAPPENAS divide

Based on interviews with government officials, consultants, and other close observers, the potential friction between MOF and BAPPENAS on the implementation of the State Finance Law has now become real. The problem stems in part from (i) an inadequate understanding of the institutional reforms required by the law, e.g. MTEF, performance budgeting, (ii) an uncertainty as to what roles each will play in the new environment and what kinds of authority (and thus power) each will have, and, more fundamentally, (iii) a mistrust between officials from the two agencies particularly at the technical or working level.

To address this risk, we recommend that a mechanism be created to enable officials from both agencies to continuously and frequently engage in a productive dialog over the length of the project. Such a mechanism would help build trust among the officials and can be structured to specifically address the first two issues.

Specifically, we suggest that a workshop series involving policy and working level officials from both agencies (those who are likely to be involved in the implementation of the project), facilitated by a budget advisor, be launched beginning with a “back to basics” workshop on public expenditure management, the MTEF, and performance budgeting. This first workshop should be designed to bring every one of the officials on the same page and the same footing vis-à-vis the aforementioned reforms. This will help build confidence among the officials, especially those from MOF, on their ability to shepherd the reforms.9 This workshop could then be used to establish working level sub committees, each with membership from both agencies, who would meet regularly at objective project oversight and to maintain the credibility of reforms. This is perhaps more significant given the substantial skepticism towards the Bank’s commitment to promoting the reform agenda and addressing, head on, the issue of governance, as outlined in the current CAS. 9 Interviews with MOF officials indicate that their working level officials feel threatened by the possibility that their BAPENNAS counterparts will dominate the process since the latter are technically better equipped to understand and thus implement the reforms.

“working level” workshops to resolve emerging problems/bottlenecks and to strategize on how best to continue implementing the reforms. The first “working level” workshop could then be used to get the said officials to prepare an actionable work plan whose implementation the officials would monitor and report on at succeeding workshops.

The selection of an appropriate budget advisor – a neutral third party -- is critical to the success of this approach. The said advisor must not only be well versed in the technical aspects of the proposed reforms but must be able to (a) clearly explain concepts in simple terms and (b) stimulate a productive interchange and interaction among participants in these workshops. It would be highly desirable to hire an Indonesian professional acceptable to officials from both agencies and with the right background and experience, assuming one can be found, as the budget advisor or as a deputy advisor responsible for the workshop series.

Risk #2: Oversight capacity and sequencing

The above mechanism can also be used to address the sequencing problem. The actionable work plan could just as well be an implementation plan that breaks up the reforms into chewable bites over a long period: (phase i) preparation of a new budget classification system, (phase ii) the transition to an MTEF based process broken down into several sub-phases each with milestones to be achieved within periods deemed reasonable by the working group, and then (phase iii) a gradual switch to performance budgeting again broken down into several doable phases. It is of course possible to switch (ii) and (iii); the key is to break each down into tractable sub-phases with little or no overlap.

Risk #3: The capacity gap in Parliament

Based on early discussions with consultants hired for the component on capacity building in Parliament, it has become clear that there is a huge capacity gap in Parliament and that institutional deficiencies will make it more difficult to move capacity building initiatives. In particular, the staff of the technical secretariat to the Parliament (which in theory is a unit to which Parliamentarians can turn for advice in policy issues) are civil servants and thus officially are employees of the Executive branch. Their promotion is based on criteria set by the Executive and that typically biases their incentives towards completing tasks that are at best only faintly related to the needs of Parliament. (We need to be more specific in these cases – James, please could add a couple of sentences on the LIPI accreditation process?) So in effect Parliamentarians have no technical staff to turn to for analysis and advice.

Given that budget deliberations are among the most important of routine activities that Parliament must engage in each year, it is critical for legislators to acquire a reasonably good understanding of budget management practices (and thus the budget reforms that are coming on line) and to have some technical support from individuals or groups without a potential conflict of interest. Ideally, providing in-depth training to staff of the technical secretariat would have been the best way to proceed. But given their accountabilities are directed primarily to the Executive -- perhaps a carry-over from the “New Order” days – they perhaps should not be the first choice unless there are structural reforms in the management and accountability arrangements for such staff.

To address this capacity gap, a think tank or other credible civil society organization could be engaged to (a) develop its own technical capability to undertake high-quality budget analysis, (b) provide technical assistance to the Parliament, especially its Budget Committee, in the conduct of annual budget deliberations, and (c) prepare an exit plan (for the organization) that could include the establishment of a formal technical support unit for Parliament that is funded by Parliament.10

Based on meetings and interviews with a number of non-governmental organizations, business associations, policy institutes, and other civil society organizations, we suggest that the NGO, The Indonesia Society for Transparency (Masyarakat Transparansi Indonesia or MTI for short), be seriously considered for this task.11 MTI’s philosophy is to acquire technical expertise in its areas of engagement and to use that expertise to work productively with reform minded officials in government and legislators in Parliament. It has had a good track record in providing inputs to Parliament on the drafting of laws and appears to have a good reputation among CSOs.12 Moreover, the chairman of MTI’s executive board, Pak Sudirman Said, expressed keen interest in this type of engagement as this falls very much in line with its philosophy of “working with and not against government/parliament.”

Conceivably, it is possible that Parliament itself may resist the budget reforms, even if provided with technical assistance. To create pressure on it (as well as the Executive), the Bank could explore the development of comic series that explains the budget reforms in simple language that the average citizens can easily understand. This approach was used in South Africa to great effect, with the series translated into all the major local dialects. Here again, MTI perhaps in collaboration with the Rectors Forum and a reputable media group, e.g. Tempo, could be engaged to develop and distribute the comic series.13

Budget Execution

The procurement and financial management assessments for this project offer recommendations on reducing corruption risks that could arise during the procurement process and in the disbursement of funds as the project is implemented. For the major risk activity, the procurement of complex IT systems, the following actions are recommended:

. Hire a reputable consulting firm with the appropriate technical expertise to prepare the terms of reference and other materials needed for the RFP for the contract to provide the system solution for the Treasury component of this project. This will help the GOI prepare the necessary and appropriate criteria for identifying and eventually contracting the right firm.14

10 A well functioning model of this can be found in South Africa. There, an NGO IDASA, provides technical expertise on budget analysis to the Parliament and helps the Parliament with the annual budget deliberations. 11 A list of CSOs, business associations, and the like who were interviewed for this assessment is attached hereto as Annex A. 12 In an interview with Transparency International Indonesia, they acknowledged in fact that MTI is a good alternative to TI. 13 The Rectors Forum is an organization of university heads in the country and is said to be quite active. It would be a good vehicle for disseminating information and generating discussion nation wide. 14 We note that potential problems have already cropped up in the short-listing of consulting firms to undertake this task (Quest Research Report, March 12, 2004). Based on Quest’s findings, the team has

. Hire another consulting firm to help the GOI verify the authenticity and conformity (to specifications and requirements) of the outputs that the firm contracted to provide the Treasury system solution is supposed to provide, e.g. business process re-engineering, hardware, software, and training.

. It may be advisable to enter into similar arrangement to the above for (a) preparation of the terms of reference for the system design for the pilot e- procurement system, (b) for installation of the system and (c) for validation and authentication of outputs under the contract to provide the e-procurement system.

. The MOF could set up a website specifically for this component of the project and require that all documentation be posted on the website. The website should be organized according to activities, e.g. hiring of consulting services for RFP, hiring of consulting services for verification, procurement of the Treasury system solution, procurement of e-procurement system, etc. All relevant documents and materials associated with each specific activity could be posted on this website under the appropriate portion of the website – timetable, advertisements, all bid proposals, name of the winning bidder, reason for the award, progress reports and relevant documentation on contract implementation. The MOF Project Management Unit and the Communications Unit in the Bank Office in Indonesia will inform reputable media organizations, NGOs, CSOs, business associations, policy institutes and the like about the launching of this website. A full-time staff will be hired as part of the PMO to maintain this website and keep information up to date. Responsibility for the maintenance of the site could ultimately be lodged with an official monitoring committee (see below).

. A committee consisting of representatives from the MOF, BAPPENAS, and civil society could be formed to (a) oversee the project as a whole including the public reporting and information dissemination activities, (b) monitor the various procurement processes in this project and (c) the implementation of the awarded contracts. In terms of the civil society representation, a number of reputable organizations have expressed some interest in participating in such a committee: Indonesia Corruption Watch, Transparency International Indonesia, KPEN, Indonesia Procurement Watch. Further discussion will be needed to work out an agreement with any one of these organizations. Both ICW and TI Indonesia will not accept funding from the World Bank but may be willing to participate in the Committee without compensation. IPW’s mandate is the best aligned for this monitoring but, given that its membership includes current government officials, it may not be the most objective. If it is to be included, it should be in addition to

already amended the standard RFP to include further documentation and certification intended to facilitate verification of antecedents and track record, and discourage the possibility of fraud and collusion in the award of contracts. The team intends to extend and refine this approach to all contracts under the project, through e.g. preparation of a standard checklist of required documents to be completed for each candidate firm to a procurement contract. The documents required should include among others the complete address and telephone numbers of the firm, the names and contact information for all senior officers and board members of the firm, any required license certificates such as registration with the Securities and Exchange Commission or annual tax returns, and be attached to the completed checklist. In place of a typically onerous pre-qualification process, the checklist would serve to determine whether a candidate firm is eligible to participate in the bidding. Authentication of the documents should be done during post qualification.

either ICW or TI Indonesia and on condition that it takes steps to define its membership such that there is no conflict of interest.

Revenue Administration

Given the strong entrenched interests within the DGT and DGCE, it is unlikely for these agencies to agree to have a third party directly monitor progress in the implementation of their respective institutional reforms. However it is possible to engage such third parties indirectly. Client surveys targeted specifically to these two agencies and whose questions are aligned to the expected improvements in services that would result from the said reforms can be undertaken on a regular basis. A policy or research institute or a CSO in collaboration with business associations (who are the main beneficiaries from such reforms) could be tasked with conducting the surveys and having the results published in reputable print media and covered in TV and radio. The said organization could also sponsor regular half-day workshops with the two agencies to discuss the results of each survey. The expectation is that through the surveys, the media coverage, and the corresponding workshops, sufficient pressure could be brought upon the agencies to implement the reforms. The experience with such sustained periodic surveys in other countries indicates that this could be a promising route.15

Among business associations, both KPEN and KADIN have expressed interest in the surveys and workshops. Transparency International Indonesia indicated it might be willing to conduct the surveys and manage the workshops as they are already doing some work on tax policy with KADIN. CSIS, a reputable think tank, is also a possible alternative to TI Indonesia as it has good relations with the business community and has the in house capability to manage client surveys.

Officials in DGCE responsible for the institutional reforms indicated that DCGE may be willing to conduct the client survey and engage the business community in a dialog around the results of the survey. Ideally, this indeed should be the case since government agencies should aim to improve the quality of services to their clients, in this case businesses. This has the advantage that DCGE would fund the periodic surveys. However given the potential for public criticism that such surveys might likely generate, DCGE may at some point stop doing the surveys. For sustainability, It may thus be better for an external party to conduct the surveys. Further discussions are needed with KADIN, TII, and CSIS to determine sustainable funding arrangements for this activity.

D. Implications of the Changing Political Landscape

The 2004 Indonesian legislative elections has demonstrated a considerable dissatisfaction among the Indonesian electorate with the current “ruling” party, with emerging voting patterns suggesting an even more fragmented political landscape beginning October 2004. President Megawati Sukarnoputri’s PDI-P has suffered a significant drop in support, loosing around 12 percent of the popular vote, having failed to deflect criticism towards (a) a number of unpopular policies, (b) a perceived lack of commitment to reform, and (c) a failure to tackle the pertinent issue of corruption. The other main parties – Golkar, the National Awakening Party (PKB), the United Development Party (PPP), and National Mandate Party (PAN) – have managed to retain 15 See Sam Paul, 2004, “The Report Card Survey in Bangalore, India: A Ten Year Retrospective,” Public Affairs Center, Bangalore, India.

10 Draft for Discussion Only: Not for Quotation, Attribution or Citation their relative standings from 1999. The Democrat Party, spearheaded by the prominent profile of the former Coordinating Minister for Social and Security Affairs, Bambang Susilo Yudhoyono’s as well as the Prosperous Justice Party with its strong anti- corruption campaign, have been the main winners, each with around 7 percent of the vote. Hence, the composition of the new parliament will be divided between seven parties: two holding around 20 percent each, one around 12 percent, and four parties hovering about 7-8 percent each.

The ability of the smaller parties to capitalize on their gains and for new reform minded parties to translate their vote into tangible results remains unclear. No one party will command a majority share, making multi-party coalitions the name of the game in Indonesian politics. Whilst the smaller, religious parties may try to pool together amongst themselves or with one of the larger parties, such coalitions have proven extremely tenuous in the past. The absence of any clearly defined political platforms beyond the broad banners of reform, anti corruption and economic revitalization, also works against this, setting the stage for a continuation of coalitions forming on a case-by-case basis. Furthermore, any coalition must also contend with the sheer gravity of PDI-P and Golkar joining forces to protect their established political and economic interests, as has occurred more frequently in recent years, despite the antagonism between the two at local levels.

Nonetheless, widespread dissatisfaction of the status quo in the legislature has created new-found confidence amongst a number of parties that a real challenge could be staged for the Presidency. The issue here remains as to whether Megawati can successfully draw upon her ancestry as daughter of Indonesia’s charismatic and flamboyant first president, as well as effectively negotiate a complementary strong vice- presidential candidate from amongst her limited allies. All of this is against the popularity and political acuteness of Bambang Susilo Yudhoyono or other presidential want-to-bes. Law 23/2003 (regarding the Election of the President and Vice President), which makes a single round presidential election virtually unattainable, could emerge to play a decisive role with the potential of galvanizing support for or against Megawati in the second round.

The 2004 legislative and presidential election results raise significant implications for the status of current public financial management (PFM) reforms, including the project as a whole. These implications could manifest themselves through: (i) the timing and shape of the reorganization of MOF; (ii) the appointment of line ministers, including Minister of Finance and influence the appointment of echelon I staff; and (iii) the support of further legislation supportive of the current PFM reforms, such as the long awaited laws regarding procurement and audit for example.

The current MOF reorganization plans may be further delayed until the appointment of the new president in October 2004. This may undermine the implementation of the new Laws on State Finances and State Treasury. Failure to restructure and streamline MOF around its core functions will result in the continuation of the status quo, and the duplication of the treasury function amongst highly fragmented financial reporting systems of different government units.

Delays to the reorganization will also raise the possibility of the revenue administration agencies being hived off from MOF and potentially weaken their resolve to pursue the planned reforms. Implementation of the reorganization, as outlined in the

11 Draft for Discussion Only: Not for Quotation, Attribution or Citation government’s time-bound Economic Policy Package (the “White Paper”), was meant to commence with the issuance of a presidential decree in early February 2004. However, a second proposal, reportedly independently forwarded by the Director General of Taxation to the President’s Office without the knowledge of the Minister or Ministry of Finance (again reportedly drawing on his close relations with the Office of the President), to hive off the revenue administration and create an independent revenue ministry, has delayed this process. Although this second proposal was vetoed by the Ministry and the original proposal resubmitted for the President’s assent, it appears that this issue is still alive and the debate could be reopened under the existing or a new administration (in the former case as a price for the support of the politically powerful individuals in the DG Tax and if the price offered was appropriate). If this were to happen, the fate of the tax administration reforms will depend on the head of this new powerful ministry. Given the internal market that is likely to emerge for this post, the likelihood that a reform minded head will be appointed is very slim, unless a reform-minded President is elected and a like-minded Minister of Finance is appointed.

The appointment of a less reform-minded Minister will weaken the commitment and pace of the implementation of any reforms. Indeed, Minister Boediono and several of his Echelon I officials have been described as fighting a lone battle in championing PFM reforms. Ownership and commitment to the reforms at lower levels, particularly amongst the wet positions/agencies remains weak owing to insufficient incentives and, for that matter, even interest in light of the status quo. Many individuals, including those of high rank, have paid high bounties for their positions for which they remain focused on extracting sufficient rents to recuperate their outlays and yield a surplus. Specifically in relation to tax revenues, this may imply a continuation of the current lackluster performance of the DGT or even a further deterioration – with attendant negative implications for the government’s ability to both finance development expenditures as well as its transfer obligations in the future.

The fragmentation of the legislature and entrenched interests of the larger parties may limit discussion on long awaited legislation complementary to the strengthening of PFM, such as laws on procurement and audit. As discussed above, the impact of the smaller reform minded political parties on the national political agenda could be limited by the need for multi-party coalitions to govern and the possibility of PDI-P-Golkar joining forces. The absence of clear political platforms may mean parties have to make further compromises on policies or packets of policies.

Annex A : Partial List of People Met (April 5-19, 2004)

Government

1. Dr. Mulia Nasution, Chairperson, State Financial Accounting Agency 2. Mr. Agus Rohardjo, Indonesian National Planning Agency (BAPPENAS) 3. Mr. Tarjani, Ministry of Finance 4. Mr. Heri Kristiono, Head, DG Customs Reform Team 5. Mr. Novrial, Head, DGCE at Soekarno-Hatta International Airport and former Head, DG Customs Reform Team 6. Mr. Ambang Priyonggo, Secretary, DG Customs Reform Team 7. Ms. Rahayu Puspasari, Head, State Accounting Standard Committee

NGO/CSOs

8. Mr. Tetan, Executive Director, Indonesian Corruption Watch (ICW) 9. Mr. Danang, Program Manager, ICW 10. Mr. Agung, Executive Director, The Indonesian Society for Transparency (MTI) 11. Ms. Emmy, Secretary General, Transparency International Indonesia (TII) 12. Mr. Rustam, Senior Researcher, LP3ES 13. Mr. Budihardjo, Executive Director, Indonesian Procurement Watch (IPW) 14. Mr. Imran, Program Manager, IPW

Business Associations and Others 15. Mr. Sofyan Wanandi, Chair, National Economic Recovery Committee (KPEN) 16. Mr. , KPEN 17. Mr. , KPEN 18. Mr. , KPEN 19. Mr. , Indonesian Chamber of Commerce (KADIN) 20. Mr. , KADIN 21. Mr. , KADIN 22. Mr. , KADIN 23. Mr. Philip Shah 24. Mr. Geoffrey Forrester 25. Mr. Prijono Tjiptoherijanto

Donor Partners

26. Mr. David Hawes, Team Leader, Technical Assistance Management Facility (TAMF) III 27. Mr. Stephen Sherlock, Consultant, TAMF III 28. Mr. Maurice Gervais, 29. Mr. Abdul Malik 30. Mr. David Deziel 31. Mr. James Lamont 32. Mr. Yougesh Khatri, Resident Representative, International Monetary Fund (IMF) 33. Mr. Staffan Synnerstrom, Asian Development Bank (ADB) 34. Mr. Julian Murray, CIDA 35. Mr Jeffrey Ong, Project Office, CIDA 36. Mr. Bill Baker, DFID

World Bank

37. Mr. Bert Hofman, Lead Economist 38. Mr. Rajiv Sondhi, Senior Financial Management Specialist 39. Mr. Naseer Rana, Lead Procurement Specialist 40. Mr. Joel Hellman, Governance Advisor 41. Mr. Scott Guggenheim 42. Ms. Anne-Lise Klausen, Consultant (Governance) 43. Ms. Agnes Cusack, Communications 44. Mr. Eiji Ojimaya, Consultant 45. Mr. Steve Burgess, Consultant 46. Ms. Mila Gregorio, Consultant 47. Mr. Marc Robinson, Consultant, DPR Diagnostic Study, GFMRAP

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