LAKE TOBA IN SAMOSIR REGENCY, NORTH SUMATRA – PHOTO BY DANIEL MORRIS

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APPLIED POLITICAL ECONOMY ANALYSIS OF USAID PRIORITY PROVINCES IN INDONESIA

North Sumatra

Sept.-Oct. 2020

This publication was produced for review by the United States Agency for International Development. It was prepared independently by Social Impact, Inc.

APPLIED POLITICAL ECONOMY ANALYSIS OF USAID PRIORITY PROVINCES IN INDONESIA

North Sumatra

Monitoring, Evaluation, and Learning (MEL) Support to USAID/Indonesia Mechanism Number: AID–486–I–14-00001 (IDIQ); Task Order 72049719F00001

Prepared for: Elizabeth Mendenhall (COR) United States Agency for International Development/Indonesia (USAID) American Embassy Jl. Medan Merdeka Sel. No.3-5, RT.11/RW.2 Gambir, Kecamatan Gambir, Kota Jakarta Pusat, Daerah Khusus Ibukota Jakarta 10110 Indonesia

Prepared by: Social Impact, Inc. Contact: Valentine J Gandhi, Chief of Party 2300 Clarendon Blvd., Suite 1000 Arlington, VA 22201

This report was prepared by Aditya Alta (Social Impact); Cininta Pertiwi (Social Impact); Basab Dasgupta (Social Impact) Valentine J Gandhi (Social Impact), Ester Manurung (USAID, Study Team Leader); Dondy Sentya (USAID); Angga Rachmansah (USAID); Fitria Wahid (USAID), Daniel Bellefleur (USAID) and Tety Rachmawati.

ACKNOWLEDGEMENTS The contributions from the following individuals are critical to this PEA report.

PEA Field Work Team Ester Manurung – Team Leader Rizal Usman – SI Researcher Dondy Sentya – USAID Researcher Angga Rachmansah – USAID Researcher Daniel Bellefleur – USAID Researcher Fitria Wahid – USAID Researcher Tety Rachmawati – USAID Researcher

PEA Management, Analysis and Reporting Team Basab Das Gupta – Team Leader Valentine Gandhi – MEL COP and Project Director and Reviewer Rizal Usman – SI Researcher Aditya Alta – SI Researcher Cininta Pertiwi – SI Researcher Christine Thomas – Project Manager Leslie Hodel – MEL TFP and Reviewer Alexandra McMullin – Copy Editor Fina Hastuti – Contracts and Financial Support Lucia Monalisa – Procurement Support

USAID Program Office Management Support Elizabeth Mendenhall – COR, and Director Program Office Marunga Manda – PEA Co Lead, M&E Advisor Fitria Wahid – ACOR, GIS Specialist Yasmeen Thomason – ACOR, Deputy Director, Programs Office

CONTENTS ACRONYMS ...... II EXECUTIVE SUMMARY ...... IV INTRODUCTION ...... 1 SUMMARY OF DESK REVIEW FINDINGS ...... 2 PEA THEMES ...... 2 METHODOLOGY ...... 3 DATA SOURCES AND SELECTION ...... 3 ANALYSIS ...... 3 LIMITATIONS ...... 4 FINDINGS ...... 5 THEME 1: INTER-GOVERNMENTAL RELATIONSHIP ...... 5 THEME 2: GOVERNANCE AND ACCOUNTABILITY ...... 7 CONCLUSIONS ...... 15 THEME 1: INTER-GOVERNMENTAL RELATIONSHIP ...... 15 THEME 2: GOVERNANCE AND ACCOUNTABILITY ...... 16 THEME 3: SERVICE DELIVERIES ...... 16 THEME 4: INCLUSIVE MARKET DRIVEN GROWTH ...... 17 THEME 5: DONOR COORDINATION ...... 18 RECOMMENDATIONS ...... 19 REFERENCES...... 20 ANNEX 1: BACKGROUND FOR EACH THEME, BASED ON DESK REVIEW ...... 21 ANNEX 2: CORE AND SUPPORTING PEA QUESTIONS ...... 23 ANNEX 3: INTERVIEW SCHEDULE & KEY INFORMANTS ...... 25

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ACRONYMS

AMARTA Agribusiness Market and Support Activity APBD Provincial Revenues and Expenditures Budget (Anggaran Pendapatan dan Belanja Daerah) APBN National Government Budget (Anggaran Pendapatan dan Belanja Negara) APINDO Employers Association of Indonesia (Asosiasi Pengusaha Indonesia) BDCF Bilateral Development Cooperation Framework BLK government-run training facilities (Balai Latihan Kerja) BPK Financial Supervisory Agency (Badan Pengawas Keuangan) BPODT Lake Toba Tourism Authority BOS School Operational Funds (Bantuan Operasional Sekolah) BOSDA Local School Operational Funds (Bantuan Operasional Sekolah Daerah) CDCS Country Development and Cooperation Strategy CLA collaborating, learning, and adapting COP Chief of Party COR Contracting Officer’s Representative COVID-19 Coronavirus disease CSO Civil Society Organization CTL Contextual Teaching and Learning D Dynamic DAK Specific Allocation Funds (Dana Alokasi Khusus) DAU General Allocation Funds (Dana Alokasi Umum) DBH Revenue Sharing Funds (Dana Bagi Hasil) DO development objective DP Balancing Budget (Dana Perimbangan) DPRD Local House of Representatives (Dewan Perwakilan Rakyat Daerah) FF Foundational Factors GDP Gross Domestic Product GDI Gender Development Index GOI Government of Indonesia HIPMI Indonesia Young Entrepreneurs Association (Himpunan Pengusaha Muda Indonesia) HN Here and Now HQ headquarters ICW Indonesia Corruption Watch IDR Indonesia Rupiah KADIN Indonesian Chamber of Commerce and Industry (Kamar Dagang dan Industri) KII Key Informant Interviews KM knowledge management KPK Corruption Eradication Commission (Komisi Pemberantasan Korupsi) LFP Labour Force Participation MEL monitoring, evaluation, and learning MSMEs Micro, small, and medium enterprises Musrenbang Development Planning Deliberation (Musyawarah Perencanaan Pembangunan) NGO Non-Governmental Organization NRM National Resource Management PDAM Local Government-Owned Water Utility (Perusahaan Daerah Air Minum) PEA Political Economy Analysis PKB Mobile health services (Pleayanan Kesehatan Bergerak) PLN State-owned electricity company (Perusahaan Listrik Negara) PMDPP Village Community Empowerment and Population Control Office (Pemberdayaan Masyarakat Desa, Perempuan, dan Perlindungan Anak) PPP Public-Private Partnership

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PTSP Integrated one-stop service (Pelayanan Terpadu Satu Pintu) PUSKESMAS Community Health Centers (Pusat Kesehatan Masyarakat) POSYANDU Integrated health posts (Pos Layanan Terpadu) RG Rule of the Game RGDP Regional Gross Domestic Product RPJMD Regional Medium-Term Development Plan (Rencana Pembangunan Jangka Menengah Daerah) RPJMN National Medium-Term Development Plan (Rencana Pembangunan Jangka Menegah Nasional) SD Elementary School (Sekolah Dasar) SI Social Impact, Inc. SMA Senior High School (Sekolah Menengah Atas) SMK Vocational High School (Sekolah Menengah Kejuruan) SMP Junior High School (Sekolah Menengah Pertama) TPMP Education Quality Assurance Team (Tim Penjaminan Mutu Pendidikan) USAID United States Agency for International Development USD United States Dollar WASH Water, Sanitation, and Hygiene

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EXECUTIVE SUMMARY

INTRODUCTION Between July and October 2020, USAID Indonesia together with Social Impact implemented the Political Economy Analysis to better understand the local political economy contexts of eight selected provinces in Indonesia, including North Sumatra, using the USAID Applied PEA Framework. The result of the research is intended to better inform the USAID Mission in Indonesia for the implementation effectiveness of the Mission’s Country Development Cooperation Strategy 2020-2024 in the eight priority focus provinces, and this particular study in North Sumatra. This research addresses three primary areas, dynamics, potential implementation challenges, and opportunities by applying analytical components of the PEA Framework: foundational factors, rules of the game, here and now, and dynamics underlying each of the PEA selected themes including, inter-governmental relationship, governance and accountability, service deliveries, inclusive market driven growth, and donor coordination.

METHODOLOGY The study applied the PEA framework in examining power relations, government accountability, social forces, economic forces, and environmental challenges that influence development effectiveness. The findings of the study were analyzed using four analytical dimensions of the PEA Framework: Foundational Factors, Rules of the Game, Here and Now, and Dynamics, as described by USAID (Menocal 2018). The primary data for the study was collected by applying key informant interviews using the virtual interview technique. The evaluation team analyzed and transcribed data from the interviews, and presented it in the Findings, Conclusions, and Recommendations matrix under each PEA selected themes: inter-governmental coordination, governance and social inclusion, service deliveries, inclusive market-driven economic growth, and donor coordination. The report of the study presents the synthesized data analysis in a coherent framework.

FINDINGS

INTERGOVERNMENTAL RELATIONSHIP Policy deliberation and implementation: Informants unanimously agreed that the relationship between the province and the national governments has been harmonious, indicated for example by several national strategic projects being planned for development along the eastern coast of the province. In education, Merdeka Belajar (Freedom of Learning) policy has so far been implemented in Medan only, with Binjai still in the planning process. This shows the implementation of national policy in North Sumatra is determined by the capacity of each province and district or city. Bilateral coordination between government agencies at the same level is running well, indicated by a joint approach in programming. Some informants, including those from the government, called Musrenbang a “guided process” and reported that certain contents of planning documents are simply a replication from the previous fiscal periods, evoking longstanding concerns over participatory quality of the planning process.

Resource and revenue sharing: The provincial government has established continued communication with the central government on strategic policies, especially related to the contribution of regional revenue from state-owned plantation profit sharing. The provincial government frequently advocates that the central government increase palm oil plantation profit sharing to North Sumatra. Natural resource management: Agrarian conflict related to land ownership is an ongoing issue in natural resource management. The central government is attempting to resolve the conflict through the recent land redistribution program, which has reportedly seen about 7,500 hectares of plantation written off from the possession of PT Perkebunan Nusantara, a state-owned company. However, issues remain regarding Indigenous communities’ claim of the redistributed lands. Palm oil plantations operated by both private and state-owned companies have continued to operate in North Sumatra

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and contributed significantly to the province’s GDP. Despite its huge contribution to the economy,1 revenues (such as in taxes on income and value-added) from the plantation sector only go to the central government and are not shared with the producing regions.

GOVERNANCE AND ACCOUNTABILITY Corruption: North Sumatra is notorious for its massive corruption, with most informants claiming that the province has always been listed among provinces with the most corruption cases.2 These series of high-profile arrests and allegations have prompted the Corruption Eradication Commission (KPK) to provide special assistance and supervision to North Sumatra. KPK’s accountability measures for the province are focused on corruption prevention and include the introduction of an e-procurement system for public projects, an e-admission procedure for new students to prevent bribery and fraud, a close supervision by KPK officials including at the technical level, asset safeguarding, integrity training for Inspectorate staffs, a whistleblowing mechanism to report bribery attempts, and a new Anti- Extortion Task Force with members from the Inspectorate, police, and the attorney office. Development disparities: Development disparities are observed between more developed urban areas (such as Medan, Tebing Tinggi, Binjai, Pematangsiantar), moderate development in the districts (such as Asahan, South Tapanuli, Mandailing Natal), and underdevelopment in the remote districts in Nias Island. To minimize the development gap between districts, the provincial government has started to apply different approaches specifically tuned to each district’s leading sectors. Accountability was an issue in the early days of Village Fund implementation in North Sumatra where most village communities had little administrative knowledge and capacity. However, the central government reportedly acted swiftly through a national program which mandated several cities and districts to cooperate with local universities to educate village communities of the administrative procedures and reporting mechanism for the Village Fund. As a result, no misallocation or other legal offenses related to Village Funds have been reported as of late.

SERVICE DELIVERIES Health: Prevention of stunting and maternal and child mortality are a priority at district, city and provincial levels, as they are also priorities at the national level. Informants noted several programs to address these including ‘flying doctors’, Pelayanan Kesehatan Bergerak (PKB) or moving health services, education of midwives, and continued education and increasing public awareness for mothers to regularly bring their children for medical checkups. Issues in healthcare delivery were identified in human capacity of healthcare personnel, lack of funds, and disparity in healthcare facilities. During the pandemic, health service delivery and the community-based Indonesia Sehat program have been run following the current health protocols as well as the national SOPs to maintain regular health service delivery. Several Community Health Centers (Puskesmas) and hospitals were found to be affected by COVID-19 and had to undergo lockdown due to their healthcare personnel testing positive. In such cases, services were moved to the nearest Puskesmas or hospitals. Education: A provincial government informant admits that education delivery still lacks innovation, exemplified by the absence of information technology and telecommunication to facilitate learning. The same informant also noted that education access and quality for elementary and middle schools have varied by district or city and depend on how progressive the district/city is and how committed the district head or mayor is to education. Another government informant also identified change in leadership as a challenge, which greatly affects the continuity of programs despite the existence of regulations and best practices. The informant also noted the provincial government does not

1 According to the desk review, agriculture, forestry, and fishing sectors contribute the largest share in North Sumatra’s GDP at 20.84 percent. 2 According to the Indonesian Corruption Watch (ICW), North Sumatra ranked third among the provinces with the most corruption cases in 2020, a slight improvement after it topped the list in 2010. (Indonesia Corruption Watch, 2020, “Laporan Pemantauan Tren Penindakan Kasus Korupsi Semester I 2020,” https://antikorupsi.org/id/article/tren-penindakan-kasus-korupsi-2020-semester-i; Jakarta Post, 2011, “N. Sumatra is Most Corrupt Province: ICW,” https://www.thejakartapost.com/news/2011/02/24/n-sumatra-most-corrupt-province- icw.html).

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sufficiently fund or provide logistical support to the provincial level education council, which inhibits efforts to innovate education activities. Meanwhile, a provincial house of representative informant also mentioned that a current barrier to education quality is the status of school principals. Many schools have principals that are still under pelaksana tugas PLT status, which means that they do not definitively hold the position of school principal. This hampers the operational aspects of the schools, including aspects of funding allocation. WASH: Informants from government and a former USAID implementing partner noted a disparity in access to clean water and sanitation facilities across the province. Communities living along the western coast of the province, such as South Tapanuli, reportedly depend on the river for all domestic needs, including waste disposal. Piped water supply is scarce even in highland areas with significant groundwater reserves such as Barisan Mountains. According to a provincial Health Office (Dinas Kesehatan) informant, access to sanitation varies between 50 to 90 percent. In areas such as Mandailing Natal and Nias, access to sanitation is at 50 to 60 percent while for cities it is usually over 90 percent. An informant from the provincial house of representative noted that WASH programs from the provincial government is still dependent on national government programs, such as the Penyediaan air minum dan sanitas berbasis masyarakat or Pamsimas program. Energy: Electricity in North Sumatra has reportedly improved considerably although there are still several regions that only receive electricity until 9 PM and beyond that there is no electricity. Meanwhile, a CSO informant regarded unstable electricity as the most critical issue as it affects people’s daily activities, including any economic activities of the public.

INCLUSIVE MARKET-DRIVEN GROWTH Civic participation in development: Despite the presence of Musrenbang, CSO, academia, and provincial government informants perceived that public and civil society participation are still lacking in development deliberations. A CSO informant stated that the provincial government needs to provide more space for civil society participation, including for NGOs, and provide better access to data and public information which would enable them to advocate for the needs of the public. A private sector informant noted an example of an NGO working to expand coffee planting and providing capacity building to farmers four or five years ago, but since then the informant had not observed any other form of civil society participation. Some felt the heterogenous population in North Sumatra dampened public attention to policy issues that didn’t have a clear tie to one’s own ethnic or religious group. COVID-19 is one issue that has garnered attention, and the public sought updates from both provincial and district level government. Cultural influences still shape the perception of women’s participation in North Sumatra, according to informants from academia and the local house of representatives. The academia informant explained that although research has shown that women are better academically, it is still difficult, culturally, for the North Sumatran public to accept that women can have roles other than being in the house and taking care of the family. Consequently, the North Sumatran public are not as happy to see women active in politics. Outlook of economic development: Multiple informants shared a perception that between agriculture and tourism, agriculture was a clear priority sector for North Sumatra’s economic development. While tourism has potential, its economic impact is still yet still to be seen. A Bappeda informant mentioned that the integrated one-stop service or Pelayanan Terpadu Satu Pintu (PTSP), which is the system that can be used to register enterprises and investments, currently provides an easier process for investing. The Provincial Investment Office reported that they are currently pushing for investors and entrepreneurs to invest in the agricultural sector, specifically in providing added value to commodities. A private sector informant argued that the Sei Mangke special economic zone represents a failed industrial strategy imposed by the national government, as the zone is far from any port. Furthermore, during the implementation there was a disconnect between the district heads involved, land tenure issues arose, and the supporting infrastructure was expensive to build. The informant stated that

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North Sumatra is now trying to invite investors to invest in energy. An informant from an organization that works with micro, small, and medium enterprises (MSMEs) noted that they are currently pushing for more investments towards MSMEs so that the enterprises can have legal status and stand on their own. The informant voiced that COVID-19 significantly affected MSMEs in North Sumatra, and they need investments now more than before. Several informants called for improved connectedness between youth workforce, the government, and the industry sector for the purpose of matching workforce with the job market.

DONOR COORDINATION Multiple informants offered several channels of engagement, including cost-sharing approaches, formulation of pilot or demonstration programs, and deeper engagement with the governments at the district or city levels. They also suggested engaging with the provincial Bappeda, those known as ‘local champions’, and through CSOs or NGOs. Specified methods and areas of intervention for donors were also mentioned, including capacity building and training in governance accountability, advancing public service delivery in strategic areas like Toba Lake and Nias Island such as for clean and potable water and waste management, renewable energy, and digitalization of governance monitoring systems. Donors were also advised to support adoption of successful activities and their lessons learned into policies and local budgets (APBD).

CONCLUSIONS Intergovernmental relationship: North Sumatra’s relationship with the national government is marked by continued advocacy of the agenda to increase local share of the plantation sector, an important Foundational Factor in the province. There is a significant gap in the Rules of the Game between formal laws and regulations and actual policy implementation, exemplified in the suboptimal implementation of several national policies in North Sumatra and the criticism of Musrenbang. The COVID-19 situation as a significant Here and Now factor has reportedly reduced effectiveness of the teacher’s training programs. These conditions create a Dynamic in which the provincial government is more eager to lobby the national government for projects in infrastructure or procurement of goods, allegedly due to the substantial monetary value of the projects, which invites officials to engage in corruptive practices in cooperation with local contractors. Governance and accountability: Geography and natural resources are a Foundational Factor that drive disparities in economic growth. The main Rule of the Game with prospects to improve accountability and transparency in North Sumatra comes from KPK’s assistance and close supervision of the province. KPK’s approach in North Sumatra stresses preventive measures through increased monitoring and accountability reporting as opposed to their usual emphasis on prosecution and investigation. However, possibility for change may be limited by the North Sumatra government’s emphasis on a clean audit rating as the main accountability measure. Here and Now, the COVID-19 situation has reportedly affected government’s programming for underdeveloped districts, thereby potentially increasing district disparity as budgets for service provision were cut. Better channels for oversight from civil society and academics could improve the Dynamic of the government’s approach to accountability. Service deliveries: Unequal resources were the single most cited Foundational Factor affecting access and quality of services. This refers not only to the districts’ widely ranging financing capacity, but also the size of the workforce available in each district to deliver basic services such as health. North Sumatra also shows a classic Indonesian issue when it comes to provision of basic services: lack of institutionalized measures to guarantee inclusive access and standardized quality. Such Rule of the Game means that service provision could vary widely across different administrations since there is no regulatory mechanism to warrant that best practices and innovation under one leader will carry over to the next. Despite considerable findings of recent innovative programs, questions loom over sustainability of these initiatives since commitment of leaders is an important differentiating factor between good programs for the Here and Now or an indication of institutional improvements

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underway. A possible future Dynamic in the financing of government services comes from the provincial government’s active lobbying of the national government to increase their revenue share from the plantation sector. Donor coordination: The usual Rules of the Game in engaging the local government include cost-sharing arrangement between donors and local government, pilot or demonstration programs as a way to convince local governments of program replication, and a deeper engagement with the governments at the district or city levels. Local actors to engage with include the provincial Bappeda and the Province or District Secretary, local champions in the bureaucracy, and local CSOs. Multiple informants recommended specific methods and intervention areas for donors to explore Here and Now include capacity building and training in governance accountability, and advancing public service delivery in strategic areas like Toba Lake and Nias Island such as for clean and potable water and waste management, renewable energy, and digitalization of governance monitoring systems. Donors are encouraged to improve Dynamics by engaging at the grassroots level to facilitate better program implementation from the higher level.

RECOMMENDATIONS Findings from these stakeholder interviews have led to several recommended approaches USAID should consider when engaging in North Sumatra during its CDCS: 1. Provide anti-fraud and corruption trainings to prevent and detect corruption potentials to public officials and internal control units. 2. Identify and engage reform-minded officials who are eager to champion an anti-corruption cause in their respective organizations. 3. Explore ways to support anti-corruption messages in religious communications and work with Islamic clerics, preachers, and mosque youth groups to spread the message in congregations and sermons. 4. Build CSOs’ understanding of planning and accountability processes in the province to be able to better evaluate policy outcomes and government’s performance. 5. Support the expansion of best practices of good quality service delivery in some districts to other districts that still lack them. 6. Investigate ways to facilitate investment allocation that balances macroeconomic needs with local community and environmental needs. 7. Promote programs with significant lessons learned and advocate for their inclusion in local agenda setting in order to promote replication.

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Politics and the political economy affect whether and how reforms happen in developing and developed countries (The World Bank, 2009). Political economy analysis (PEA) is an analytical approach to indicate how political thinking can be applied more systematically to “understand the underlying reasons why things work the way they do and identify the incentives and constraints impacting the behavior of actors in a relevant system” (Menocal, 2018). Armed with a clear understanding of these complex dynamics, USAID/Indonesia will be better equipped to identify appropriate, sustainable solutions that enhance self-reliance. This PEA study aims to produce operationally relevant findings and implications to inform project and activity design for the upcoming Country Development Cooperation Strategy (CDCS) by better understanding the local dynamics, potential implementation challenges, and opportunities associated with working in the eight provinces. USAID and the Government of Indonesia (GOI), represented by the National Development Planning Agency (Bappenas), signed the Bilateral Development Cooperation Framework (BDCF) for July 23, 2020, to September 30, 2025, to implement USAID’s CDCS goal: “Indonesia is an advanced, just, prosperous, and self-reliant Indo-Pacific partner.” Aligning the CDCS with the GOI’s 2020–2024 National Medium-Term Development Plan (RPJMN) goal, USAID will concentrate and integrate at least two-thirds of CDCS funding on national-level policy work in eight priority provinces, including North Sumatra. To advance its self-reliance goal, the GOI has identified four priority areas for USAID support: government effectiveness, human capital development, inclusive economic growth, and environmental sustainability. Under the new CDCS, USAID/Indonesia will contribute to GOI priorities through the following CDCS development objectives (DOs): DO 1: Effective, Democratic Governance Strengthened, DO 2: Inclusive Market-Driven Economic Growth Increased, DO 3: Environmental Sustainability Improved, and DO 4: Priority Health Outcomes Improved. To feed into its CDCS programming, USAID undertook a “deep dive” into eight priority provinces through a PEA initiative that will allow the DO teams to understand the local context better, resulting in more tailored project activity designs. The advantage of using PEA in this regard is that it fits more systematically into this particular operational work to better address risks and respond to demands for an appropriate approach tailored to specific situations in the target areas to enhance development effectiveness.

ASSESSMENT PURPOSE AND AUDIENCE USAID/Indonesia tasked the monitoring, evaluation, and learning (MEL) support team to provide support to each provincial team from USAID’s eight target provinces and guide them to complete each phase of the study—contextual and desk review, data collection tool and protocol development, interviews, and analysis and report writing. The purpose of this study is to use USAID’s applied PEA methodology to better understand the local dynamics, potential implementation challenges, and opportunities associated with working in all eight provinces USAID/Indonesia selected as priority focus provinces under its new CDCS. The two key objectives of the PEAs are to: 1. Help USAID/Indonesia better understand the provincial-level context and the likelihood of change in priority development sectors. 2. Inform activity design in support of CDCS implementation, including suggestions of programmatic approaches to address key findings specific to each province. Additionally, the PEAs should support USAID/Indonesia staff in understanding the elements at the local level required to support Indonesia on its journey to self-reliance. The result of this PEA is expected to better inform the USAID Indonesia Mission about the political economy context at the issue and sector levels in North Sumatra and the potential cooperation with the local governments and non-

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government institutions/organizations in addressing the development challenges in the province. Besides, it provides some operable recommendations that may be one of the references in project and activity design.

SUMMARY OF DESK REVIEW FINDINGS

Figure 1 North Sumatra Province, Indonesia (featured in red) As a preliminary basis for understanding the political economy context of North Sumatra, desk review was conducted as a separate study and its key findings are presented here as a summary. Geographically, North Sumatra, the fourth biggest province in Indonesia, is located in Sumatra Island directly bordering Aceh, Riau, and West Sumatra, and proximate to Singapore, Malaysia, and Thailand, making the province an important hub for international trade. The administrative division of the province is divided into city, district, sub-district, and villages. It consists of 25 districts and eight cities, and its capital is Medan City. The population of the province, heterogeneous in ethnicity and religion, is the highest among other provinces in Sumatra. The economy of the province is dominated by agriculture and the manufacturing industry that contributes significantly to the economic growth of the province. Palm oil plantations are a major segment of agriculture in the province. Currently, the province is benefiting from national development projects for road and port infrastructure, manufacturing industry expansion, and integrated tourism. Despite making progress in some development sectors, the desk review identified major development challenges facing the province of North Sumatra. Corruption is rampant in the province which has broader implications specifically related to deforestation and basic service deliveries, especially in the health sector. Implementation of agrarian reform has been met with multiple issues including persistent land conflicts and low realization of redistribution of the targeted nine million hectares of land with only 545,425 plots with an area of 412,351 hectares distributed. Meanwhile, high rates of deforestation in the province, at 7319.1 hectares between 2017-2018, is due to land clearing activities as a process of opening production forests.

PEA THEMES Building on the identified gaps gathered in the desk review process, the PEA fieldwork in North Sumatra covers five major themes: (1) Inter-governmental Relationship, (2) Governance and Accountability, (3) Service Deliveries, (4) Inclusive Market Driven Growth, and (5) Donor Coordination.

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METHODOLOGY

This study uses a combination of contextual review, desk review, and fieldwork for its PEA analysis. The contextual and desk review, previously submitted as standalone pieces, assist in identifying relevant questions for fieldwork and hence feed into the analysis as a background document identifying drivers of inclusive economic growth, better governance and accountability, and sustainable development of the priority sectors such as environment and health. The study uses the PEA framework, described by USAID (Menocal 2018) as a structured approach for examining power dynamics, economic forces, and social forces that influence development effectiveness. To respond and adapt to these realities, the approach guides stakeholders in understanding the inherent challenges for operationalizing political thinking and rigorous collaborating, learning, and adapting (CLA). Following the PEA framework, the study identifies and breaks down the contributing factors to development (or lack of it) by examining four areas into which most constraints fit: (1) Foundational Factors: deeply embedded, longer-term socioeconomic structural factors that shape the nature and quality of a given political system, sector, or problem and inform why it works or looks the way it does; (2) Rules of the Game: formal and informal institutions, such as rules and norms, that shape the quality of governance and influence actors’ behavior and their incentives, relationships, power dynamics, capacity for collective action, and the extent to which public and private actors behave and interact in ways that are widely known and accepted; (3) Here and Now: how current events and circumstances influence the objectives and behavior of key actors or stakeholders and how they respond to opportunities and impediments to change; and (4) Dynamics: ways in which the analytical components of the framework interact, addressing how they affect each other and how they influence prospects for change. Data collection involved key informant interviews (KIIs) with resources with different affiliation backgrounds. The interview questions covered information gaps identified in the desk review. Following health protocols during the COVID-19 pandemic, the interviews were done virtually through several possible virtual meeting platforms. The interviewers informed key informants that the study team would protect their identities and only use their responses for this specific PEA initiative.

DATA SOURCES AND SELECTION For the purpose of good representation of informants, the research team selected key informants from various backgrounds that represent provincial government, private sector, academia, civil society organizations, and the US Consulate General in Medan. The North Sumatra team conducted 21 key informant interviews, comprising 18 KIIs and three group interviews, involving 26 men and 13 women. The selected informants were from provincial government offices (11 sessions), academia (one session), CSOs (three sessions), private sector (four sessions), donor-based project (one session), and US Consulate General in Medan. A complete list of informants, descriptions, and timelines are included in Annex 3. Organizational attributes and contact details were collected from each informant but not disclosed to protect their identity. Findings will only reflect informant views in summary form. A timeline of the data analysis and report writing phases are in Annex 4.

ANALYSIS Following the completion of data collection at the beginning of October 2020, the North Sumatra PEA team proceeded with the data analysis using the analytical framework of the PEA and applied the framework for the selected themes: inter-governmental coordination, governance and social inclusion, service deliveries, inclusive market-driven economic growth, and donor coordination. The data from

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the interview transcription was fragmented under each theme and presented in the Findings, Conclusions, and Recommendations matrix.

LIMITATIONS Dealing with sensitive questions. The questions related to the issue of corruption did not receive sufficient responses from the informants in the same way as other non-sensitive questions. Some informants declined to respond to specific questions related to corruption issues though the questions were rephrased in a more sensible parlance. Dealing with Technical Issues. Some parts of interviews were disrupted due to unstable internet connection causing incomplete messages from both interviewer and informant. As a result, some questions or responses were difficult to understand completely. Also, it causes poor quality of recordings that might cause an incomplete understanding of the informant’s responses.

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FINDINGS

THEME 1: INTER-GOVERNMENTAL RELATIONSHIP

POLICY DELIBERATION AND IMPLEMENTATION Informants unanimously agreed that the relationship between the province and the national governments has been harmonious, indicated for example by several national strategic projects being planned for development along the eastern coast of the province. As is the case with the rest of Indonesia, local policies in North Sumatra largely follow the directions set by national-level regulations while simultaneously being adjusted to the capacity of each province and district/city. Variations in policies and programs across districts and cities are therefore a reflection of the different capacity and political willingness of each local leader. In education, for example, Merdeka Belajar (Freedom of Learning) is a national policy enacted in 2019 which aims to diversify education assessments and evaluations to better reflect each child’s strengths and interests. However, so far only Medan has implemented this policy in North Sumatra, with Binjai still in the planning process. The other districts and cities reportedly still lack the commitment and capacity to implement the policy. In Medan, schools under the Merdeka Belajar policy have started to implement diversified and inclusive assessment methods that assess literacy, character development, and environmental consciousness among students, in addition to paper-based tests. Coordination between regional government agencies at the same level is running well, indicated by a joint approach in programming. For example, the Tourism Office in a region would coordinate with the Highway and Transportation Offices in another region to construct roads and provide transit options to increase accessibility to a developing tourist destination. As in the rest of Indonesia, the planning process starts at the local level with public consultations involving community and religious figures, academics, and CSOs, and culminates in the national Musrenbang3 (Musrenbangnas) where representatives of local government sit together with the national government to align their priorities. However, our government informants explicitly called Musrenbang a “guided process” in which public aspirations are accommodated based on pre-existing priorities in the five-year local development plan (RPJMD). Some other informants even reported that certain contents of planning documents are simply replicated from the previous fiscal periods. These findings evoke the long-held concern over the quality of participation in the Musrenbang process. Moreover, policy practice sometimes deviates from the plan, allegedly as a result of rent seeking and lobbying from businesses to legislators and mayors. Outside of the Musrenbang processes, the provincial government also establishes a proactive communication with the central government on strategic policies, such as lobbying to increase the province’s share of revenue from the plantation sector, the upcoming election, and preparation for National Sports Week in 2024. The results of proactive communication can be observed in the frequent ministerial visits to the province in 2020 as a response to the provincial agenda. In general, the province-district coordination in policy deliberation is exercised through a communication forum during the formal process of development planning or coordination meeting. In a certain area of the development sector, the province-district coordination needs to be improved. There is a gap concerning the socialization of top-down regulations by the national government to the district level. In this matter, the roles of the provincial government are expected to be more proactive

3 Musrenbang is an annual process during which residents meet together to discuss the issues facing their communities and decide upon priorities for short-term improvements. Once a list of priorities is made, it is submitted to the local government planning department, Bappeda, which will then assign resources to each neighborhood depending upon the available funds and according to need. Musrenbang is a bottom-up process which starts with public consultations at the community or village level (Musrenbangdes) and goes up to the national forum (Musrenbangnas) participated by representatives from all provinces and the national government.

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in socializing new regulations to the district administration. This gap may be due to the availability of funds to implement these national regulations. For regulations that need to be implemented at the lowest level, there should be clear communication and coordination between local and national government officials. Governed specific communication processes and protocols to ensure consistent implementation. Some informants consider the Communication and Information Office as the focal point for local transparency, as it integrates the data and information from other government agencies. Additionally, the Information and Documentation Management Officer facilitates information and data openness, a function that should be present in every government agency. Public complaints and feedback on governance may be directed through LAPOR!, a centrally managed and nationally integrated complaint system accessible through a website and mobile applications. North Sumatra provincial government has reportedly integrated its complaint system to LAPOR!.

RESOURCE AND REVENUE SHARING The provincial government has established a continued communication with central government on strategic policies, especially related to the contribution of regional revenue from the profit sharing of the state-owned plantation. The government has started the political communication for the revenue sharing since 1998. Education aid funds have now been transferred directly to each school in North Sumatra through the flagship School Operational Assistance (BOS) program from the national government. There is, however, a concern that the amount allocated per student is still too low at IDR 900,000 (a little over USD 60) per year. Additionally, the province may also allocate aid to schools from the Special Allocation Fund (DAK) it receives from the central government. Some provinces and cities/districts such as North Kalimantan have also raised additional BOS funds from their own budget (called BOSDA, or Local BOS), but North Sumatra provincial and city/district governments have yet to show interest to conduct a similar program.

NATURAL RESOURCE MANAGEMENT North Sumatra is known for its production of palm oil, coffee, and tea plants, which can be traced back to the Dutch colonial time. However, agrarian conflict related to land ownership is an ongoing issue in natural resource management. The central government is attempting to resolve the conflict through the recent land redistribution program which has reportedly seen about 7500 hectares of plantation written off from the possession of PT Perkebunan Nusantara, a state-owned company. However, an academic informant noted that issues remain regarding indigenous communities’ claims of the redistributed lands. On the one hand, the same informant argues, the government’s land redistribution program is a welcome move to improve local economies by privatizing land management, thus allowing smallholder farmers to own lands. On the other, this solution relies on market mechanism, therefore ignoring indigenous claims of their customary lands (tanah ulayat) historically managed as a collective property. Palm oil plantations operated by both private and state-owned companies have continued to operate in North Sumatra and contributed significantly to the province’s GDP. Despite its huge contribution to the economy,4 revenues (such as in taxes on income and value-added) from the plantation sector only go to the central government and are not shared with the producing regions. This has been a longstanding concern of the North Sumatran government and the main talking point in their communications with the central government.

4 According to the desk review, agriculture, forestry, and fishing sectors contribute the largest share in North Sumatra’s GDP at 20.84 percent.

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THEME 2: GOVERNANCE AND ACCOUNTABILITY

CORRUPTION North Sumatra is notorious for its massive corruption with most informants claiming that the province has always been in the top list of provinces with the most corruption cases.5 Most notably, 38 provincial legislators were arrested in 2018 for taking bribes from former governor Gatot Pujo Nugroho. In the last five years, arrests reported by informants include those of Medan City Mayor, Pakpak Bharat District Head and the Head of Public Works and Public Housing Office, Labuhan Batu District Head, a public hospital director in South Labuhan Batu District, and the Head of Langkat Education Office together with several school principals in Langkat District for embezzling education aid funds. The arrest of Pakpak Bharat officials came as a surprise since the district is known for its transparency and clean audit rating. The list may become longer as several cases involving North Labuhan Batu District Head, officials in Tanjung Balai water company (PDAM), and Central Tapanuli District Head, are currently under investigation. An anti-corruption informant even claimed that all cities and districts in North Sumatra have had their leaders arrested for corruption. These series of high-profile arrests and allegations have prompted the Corruption Eradication Commission (KPK) to provide special assistance and supervision to North Sumatra. KPK’s accountability measures for the province are focused on corruption prevention and include the introduction of an e-procurement system for public projects, an e-admission procedure for new students to prevent bribery and fraud, a close supervision by KPK officials including at the technical level, asset safeguarding, integrity training for Inspectorate staffs, a whistleblowing mechanism to report bribery attempts, and a new Anti-Extortion Task Force with members from the Inspectorate, police, and the attorney office.

DEVELOPMENT DISPARITIES Respondents noted development disparities, between more developed urban areas (such as Medan, Tebing Tinggi, Binjai, Pematangsiantar), moderate development in the districts (such as Asahan, South Tapanuli, Mandailing Natal), and underdevelopment in the remote districts in Nias Island. To minimize the development gap between districts, the provincial government has started to apply different approaches specifically tuned to each district’s leading sectors. Districts in Nias Island, for example, have great tourism potential and thus receive a larger tourism budget and a development master plan focused on reducing inequality through tourism. Village Funds are allocated from the central government based on direct planning and budgeting by each village. The provincial government’s only role related to the Village Fund is to give training or capacity building programs to empower village communities in the planning and use of the funds. Informants reported that Village Funds are mostly allocated for infrastructure such as roads, irrigation, and water pumps. Accountability was an issue in the early days of Village Fund implementation in North Sumatra, where most village communities had little administrative knowledge and capacity. However, the central government reportedly acted swiftly through a national program which mandated several cities and districts to cooperate with local universities to educate village communities on administrative procedures and reporting mechanisms for Village Fund. Additionally, each sub-district has a Village Community Empowerment and Population Control Office (PMDPP) involved in assisting villages in preparing the accountability reports. As a result of these measures, according to the government informants, no misallocation or other legal offenses related to village funds have been reported as of late.

5 According to the Indonesian Corruption Watch (ICW), North Sumatra ranked third among the provinces with the most corruption cases in 2020, a slight improvement after it topped the list in 2010. (Indonesia Corruption Watch, 2020, “Laporan Pemantauan Tren Penindakan Kasus Korupsi Semester I 2020,” https://antikorupsi.org/id/article/tren-penindakan-kasus-korupsi-2020-semester-i; Jakarta Post, 2011, “N. Sumatra is Most Corrupt Province: ICW,” https://www.thejakartapost.com/news/2011/02/24/n-sumatra-most-corrupt-province- icw.html).

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THEME 3: SERVICE DELIVERIES

HEALTH SECTOR Priority programs. A provincial Health Office informant stated that programs preventing stunting and maternal and child mortality are priorities at both district/city and province levels, as they are also priorities at the national level. Both the informant and a provincial Bappeda informant noted programs to address these include ‘flying doctors’, pelayanan kesehatan bergerak (PKB) or moving health services, education of midwives, and continued education and increasing public awareness for mothers to regularly bring their children for medical checkups. The ‘flying doctors’ program brings specialists to public hospitals that still lack them. The province gives specialists an IDR 2 million incentive per visit. The PKB program identifies 4 districts in hard-to-reach areas annually and brings healthcare services to these districts. Barriers to health service delivery. According to the provincial Health Office informant, the main challenges in healthcare delivery are human capacity of healthcare personnel, lack of funds, and disparity in healthcare facilities. For human capacity, there is still disparity in both the number of healthcare personnel and the quality of care. The informant noted an example of the high disparity in health personnel between Medan, Nias, and Mandailing Natal. Healthcare personnel are also moved around between locations, to other divisions, or to work on other programs. Such reorganization requires considerable time (sometimes up to 2 years) to provide specialized training, yet these professionals are then moved elsewhere. Regarding lack of funds, at the provincial level, the health sector is allocated 4-5 percent of APBD, which is still not sufficient to reach performance indicators. At the district level this percentage may be less. Disparity in availability of health facilities is still evident, especially in underdeveloped areas. A provincial house of representative informant also noted a lack of health infrastructure and provincial hospitals as a main health challenge. Health service during COVID-19. A provincial Health Officer recalled that there was concern COVID- 19 would cause disruption to regular health service delivery and also to the community-based Indonesia Sehat national program. The informant mentioned that SOPs and guidance were then provided by the national level. Health service delivery and the Indonesia Sehat program thus during COVID-19 follows the current health protocols as well as the national SOPs to maintain regular health service delivery. The informant noted that there have been Puskesmas and hospitals that were affected by COVID-19 and had to undergo lockdown due to their healthcare personnel being confirmed with COVID-19. In cases such as these, services were then moved to the nearest Puskesmas or hospital.

EDUCATION SECTOR Delivery, quality, and access. According to a provincial government informant working in the education sector, education quality in North Sumatra is somewhere in the middle and has not yet reached high quality. Delivery of education is still normative and is lacking innovation. The informant gave an example that the curriculum still does not accommodate prevalent use of information technology and telecommunication in learning. Another example is that active learning methods and contextual teaching and learning (CTL) have not been applied uniformly for all education levels. The informant noted that when the USAID PRIORITAS program introduced innovative teaching and learning methods to elementary and middle schools, they and the schools disseminated the techniques to expand the benefit, however, the techniques did not transfer over to senior and vocational high schools. As for access, the same informant also noted that access to education, and its quality, for elementary and middle schools vary by district or city and is dependent on how progressive the district or city is, and also how committed the district head or mayor is to education. As explored in Theme 1, an example of this is the Merdeka Belajar national policy, which only Medan city has implemented and is only now being implemented in one other city, Binjai. Two informants, a provincial government informant in the education sector and a provincial house of representatives’ informant stated that there are varying levels of quality in education delivery dependent on both education level and district or city. Elementary (SD) and middle schools (SMP) are

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under the authority of the district or city government while senior (SMA) and vocational (SMK) high schools are under authority of the provincial government. There is disparity in development between urban and rural areas. An example given by the house of representative informant is that in Nias Island, a majority of schools do not have their own buildings, which affects the level of quality that it can offer. Barriers in advancing education quality and delivery. The provincial level government informant identified change in leadership as a challenge. This is because they perceived that although regulations and best practices are in place, when authorities change, it greatly affects the continuity of a program. The informant provided an example from when they were involved in implementing the USAID PRIORITAS program. The informant recalled that the program did not continue due the change in government leadership, both at the province and district levels. The informant also noted the provincial government lacked funds and logistical support for the provincial level education council, which inhibits efforts to innovate in education activities. Meanwhile, a provincial house of representatives informant also mentioned that a current barrier to education quality is that many schools have principals that are still under pelaksana tugas PLT status, which means that they do not definitively hold the position of school principal. According to the informant, this hampers the operational aspects of the schools, including aspects of funding allocation. This problem of school principal status has not yet been resolved since obtaining definitive school principal status requires the signature of the governor. There are many steps that need to be taken to get to this point, and although in some districts this formalization can be done by the district head, what is more commonly found in North Sumatra is that the governor still needs to sign to formalize the status.

WASH SECTOR Informants from government and a former USAID implementing partner stated that North Sumatra has disparities in access to clean water and sanitation facilities. Communities living along the western coast of the province, such as South Tapanuli, reportedly depend on the river for all domestic needs, including waste disposal. Piped water supply is scarce even in highland areas with significant groundwater reserves such as the Barisan Mountains. According to a provincial Health Office (Dinas Kesehatan) informant, access to sanitation varies between 50 to 90 percent. In areas such as Madina and Nias, 50 to 60 percent have access to sanitation while for cities it is usually over 90 percent. An informant from the provincial house of representatives noted that WASH programs operated by the provincial government are still dependent on national government programs, such as the Penyediaan air minum dan sanitasi berbasis masyarakat or Pamsimas program. An example of the Pamsimas program is the provision of facilities such as pipe networks, boreholes, and towers and tanks in several districts and cities. The informant perceived Pamsimas implementation to be quite good, although piped water has not reached every household, indicating suboptimal implementation by the district/city governments. The informant also noted another provincial program to build community wells, for every drilling of which the provincial government has spent around IDR 196 million (around USD 13,600). More than 30 percent of the wells, however, were reportedly built in locations where there is little need for a community well. A provincial legislator informant suggested that fictitious claims of substantial water needs might have been used during the planning or survey to convince policymakers to select certain drilling locations. It was not clear, however, who might have benefited from the alleged fraud.6

ENERGY SECTOR Access to electricity. A former donor implementing partner perceived that electricity in North Sumatra has much improved although there are still several regions that only receive electricity until 9 PM. Meanwhile, a CSO informant regarded unstable electricity as the most critical issue as it affects people’s daily activities, including any economic activities of the public. The informant mentioned one

6 These interview accounts on wells drilling and the possible fraud are checked against a news report from Tribun News (Tribun News, 2019, “Pengamat Anggaran Sebut Pembangunan Sumur Bor Oleh Dinas PKP Sumut Harus Transparan,” https://medan.tribunnews.com/2019/08/12/pengamat-anggaran-sebut-pembangunan-sumur-bor-oleh-dinas-pkp-sumut-harus-transparan).

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example in which the head of Tapanuli Selatan district continued to request solar panels from the national government and recently successfully installed 600 units for public use (e.g. for children to use for studying) in areas with unstable electricity. This is particularly relevant during the COVID-19 pandemic since children do not go to school and need electricity to complete their assignments.

THEME 4: INCLUSIVE MARKET DRIVEN GROWTH

CIVIC PARTICIPATION IN DEVELOPMENT Mechanisms of public participation in development. As also previously explored under Theme 1 Findings, the Musrenbang mechanism was cited by multiple provincial-level government informants and one academia informant as the avenue for public participation in deliberations on planning and budgeting development programs. An academia informant noted that there is an existing SOP and governance procedure for public participation in planning and budgeting for development, with Musrenbang being one of these avenues. From the public side of the process, the informants described that the Musrenbang includes a tiered public input collection mechanism starting at the village or neighborhood level. Musrenbang is done at the village level, then brought to the sub-district level, the district and city level, and finally the provincial level. At the provincial level, inputs and aspirations from the public are not directly delivered to the province but instead sourced from the lower level Musrenbangs. An academia informant, however, pointed out that although it is a popular mechanism to encourage public participation, it has limitations. For example, they have done several studies of Musrenbangs in sub- districts and other locations where they found those that attend the forum have no knowledge or familiarity on what is actually needed for the area’s development, and the documents that supposedly contain results from the discussions are already pre-prepared. The informant noted that when the latter is the case, documents resulting from Musrenbangs are often just copy-pasted, so these documents end up being the same year to year. Another obstacle in collecting public inputs through Musrenbang, as noted by a provincial level government informant, is that often the opinions and suggestions from the public are received as criticism and even opposition. The informant mentioned that in the past, the USAID PRIORITAS program was able to mitigate such sentiments, as these as it had the capability to bridge and facilitate between many stakeholders. Despite the presence of Musrenbang, there were perceptions gathered from CSO, academia, and provincial government, that public and civil society participation is still lacking in development deliberations. A CSO informant stated that the provincial government needs to provide more space for participation of civil society, including for NGOs, and provide better access to data and public information which would enable them to advocate for the needs of the public. A private sector informant noted an example for the agriculture sector four or five years ago where an NGO participated in expanding coffee planting and providing capacity building to farmers. Since then the informant had not observed any other form of civil society participation in economic development. The informant specified, however, that some civil society participation does occur, though typically just for disaster mitigation. An academia informant similarly noted that civil society participation has decreased. CSOs tend to only be involved in specific projects. Causes of low civic participation. Noting the heterogeneous civil society of North Sumatra, a former donor implementing partner believed many CSOs lack interest in policy issues that do not clearly impact their own ethnic or religious group affiliation. COVID-19 is one issue that garnered broad interest and participation, where the public sought pandemic updates from both provincial and district level government. Meanwhile, a provincial Bappeda informant provided an example in the health sector that may indicate a possible reason for lack of public participation. They noted that there has been a shift in involving the public in health-related activities. For example, during the New Order era, at integrated health posts (Posyandu) midwives would regularly call for and encourage children and pregnancy checkups at public places such as churches, mosques, and village offices, making it a community event with snacks and beverages. These community-intertwined activities are no longer done, although now technology such as social media messaging like WhatsApp could likely spread faster information if community events such as these were to happen.

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Women’s participation in development. Cultural influences still shape the perception of women participation in North Sumatra according to informants from academia and the local house of representatives. The academia informant explained that although research has shown that women perform better academically, it is still difficult culturally, for the North Sumatran public to accept that women can have roles other than being in the house and taking care of the family. Consequently, the North Sumatran public are not as happy to see women active in politics. The house of representative informant cited that only 12 legislative seats at the province level occupied by women out of 100 seats. This is still much below the 30 percent mandate for female-held seats. Both informants suggested the need for a local government leader push for more opportunities for women to participate both in government leadership and politics. The academia informant noted that in 2020, there were 16 female district head and mayor candidates, which was quite good considering that this number spanned 23 districts/cities.

OUTLOOK OF ECONOMIC DEVELOPMENT Agriculture and tourism as priority sectors. A recurring perception gathered from multiple informants is that between the identified priority sectors of agriculture and tourism, agriculture was the clear choice as a priority sector for North Sumatra’s economic development. While tourism has potential, its economic impact is yet to be seen. Several informants mentioned agriculture as an important, if not the most important, sector for economic development, noting its impact on the economic development is already visible: it absorbs the largest number of workforce, it contributes significantly to the RGDP, and it is a sector that many of the local communities are already involved in, whether it be through farming, plantations, or fisheries. Meanwhile, informants viewed that the selection of tourism as a priority sector was mainly due to its potential, referring to North Sumatra having many locations and local attractions that can be potentially developed into tourism sites with economic weight. An informant from the provincial Bank of Indonesia noted that tourism is a sector that can be quickly developed to gain economic benefits, unlike industry or manufacturing where time is needed to first build the factories or plants. To support the tourism industry in North Sumatra, the central government has established the Lake Toba Tourism Authority (BPODT) for the comprehensive management of Lake Toba as a super-priority tourism destination in Indonesia7. It is a top-down agenda from the central government, and due to this, several informants have noted that its implementation on the ground has generated pros and cons among the community and governments due to lack of local engagement. Several local governments and CSO informants viewed that the BPODT more likely needs to reform its approach and concept for the development of Lake Toba. Meanwhile, the COVID- 19 impact on the tourism industry has led some informants to be more skeptical on developing tourism as a priority sector. According to these informants, it would require new measures and approaches during and after the pandemic. Investment situation and outlook. A Bappeda informant mentioned that the integrated one-stop service or Pelayanan Terpadu Satu Pintu (PTSP), which is the system that can be used to register enterprises and investments, currently provides an easier process for investing. As explained by the informant, roles in relation to managing and handling investments are held not only by the province but also at the national and district/city level. A provincial government informant from the Investment Office (Dinas Penanaman Modal) noted that the province does not have specified targets for investment value and only have realized investment values. The informant recalled that in 2018, two thirds of investments in the province were from foreign direct investment (FDI) while in 2019 it was the opposite with two thirds of investments being from domestic direct investments (DDI). The informant cannot say for sure what it is for 2020 but noted that likely there will be more DDI realized. An informant from the chamber of commerce and industry noted that foreign investments have been

7 The national government is also encouraging private sector to contribute to the development of Lake Toba as a tourism destinastion. Pemerintah Ajak Swasta Kembangkan Pariwisata Danau Toba. https://www.bkpm.go.id/id/publikasi/detail/berita/pemerintah-ajak-swasta- kembangkan-pariwisata-danau-toba

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coming from Korea and China in the energy sector and the Middle East such as Yemen in the palm oil sector which they then export back to their countries. The same provincial Investment Office informant noted that they are currently pushing for investors and entrepreneurs to invest in the agricultural sector, specifically in providing added value to commodities. An example given by the informant is palm oil and how investors can support products from palm oil other than just the oil but also as raw material for cosmetics and other derivatives. Informants from CSO and private sector also supported this view. A private sector informant specified that they are now only investing in the agriculture sector as it is an active sector, and many crops can grow well in North Sumatra. They added that this not the case for manufacturing North Sumatra as it will be difficult to compete with Java when it comes to the manufacturing sector. Meanwhile, a private sector informant from the chamber of commerce and industry provided an example of past infrastructure investments and the difficulties in its implementation. According to the informant, during Jokowi’s first term the focus for investments was on infrastructure and to have all regions develop infrastructure. Investments were also sought to develop industrial zones, but decisions related to industrial zones were made at the national level. Meanwhile, there is often a disconnect between national and local government on what should be developed and what should receive investments. The informant provided the example of Sei Mangke, which was developed as an industrial zone and to gain investments. Until now, however, the development does not attract investors. The informant viewed that from the beginning of the development, the strategy was already amiss, as the region was far from a port. Then during the implementation, there was a disconnect between the district heads involved, land tenure issues, and the supporting infrastructure was expensive to build. The informant stated that they are now inviting investors to invest in energy. In North Sumatra there are many hydropower plants and power plants for other energy sources, but the regulations are not yet suited for them. These plants only sell to the state-owned electricity company (PLN) and at a loss. The informant suggested there are opportunities to build the energy sector through investments. An informant from an organization that works with MSMEs noted that they are currently pushing for more investments towards MSMEs so that the enterprises can have legal status and can stand on their own. The informant voiced that COVID-19 significantly affected MSMEs in North Sumatra and investments are needed for them now more than before. Prior to COVID-19, there were facilities provided by the government for MSMEs and now these forms of help from the government do not exist anymore. Many entrepreneurs must start from scratch due to COVID-19. According to the informant, MSMEs that are significantly impacted are those in textile convection, tourism, hotel, and restaurant sectors. An informant from the Investment Office meanwhile noted that data currently does not exist for MSMEs and there is not data that can inform how many MSMEs are in North Sumatra. Human capacity and employment. Several informants called for improved connectedness between youth workforce, the government, and the industry sector for the purpose of matching workforce with the job market. Informants viewed that skills of the workforce do not match with the requirements from the industry sector. Efforts such as government-run training facilities or Balai Latihan Kerja (BLK) exist in North Sumatra and according to a Bappeda informant, some are under the authority of the province while others are under the district or city. The informant noted that not only are they pushing for these BLKs to be centers to develop skill sets required by industries, but also as a place to develop entrepreneurship skills. According to a provincial government informant in the education sector, there is also push to align vocational high schools (SMK) with industry workforce needs and since vocational high schools are under the authority of the province, the provincial government would need to put effort into facilitating between SMKs and the industry sector. The informant noted that this facilitation task should not only be done by the Education Office (Dinas Pendidikan) but also by the Education Council (Dewan Pendidikan) and with the help and support of industry groups and associations, such as the Chamber of Commerce and Industry (KADIN).

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THEME 5: DONOR COORDINATION

EFFECTIVE DONOR ENGAGEMENT Engagement avenues. Informants from various stakeholder groups offered multiple avenues for which donors can seek effective engagement with both the government and associated civil society actors such as CSOs and NGOs. Among these avenues, some that were mentioned by multiple informants included cost-sharing approaches, formulation of pilot or demonstration programs, and deeper engagement with the governments at the district or city levels. Cost-sharing approaches were mentioned by an informant from the provincial Bappeda and an informant from the private sector, to synergize the needs of government and the needs of the donor. These two informants were also the ones that separately suggested engagement in pilot or demonstration programs. The reasoning behind this is that pilot or demo programs can (i) serve as a model and shown as visible proof to the public that the program can be replicated and (ii) when they are completed, they can be returned back to the local government for any further continuity. As for suggestions on strengthening engagement with the district and city governments, these were noted by an informant that was a former donor implementing partner and by a CSO informant. Engagement and bridging with district or city government should be from the onset of the program and donors should use the local development plan, both short and long term, and Rencana Tata Ruang Wilaya Nasional (National spatial planning), as absolute reference materials for program design. Actors to engage with. As to which actors could likely be approached by donors for effective engagement, those suggested by informants included the provincial Bappeda, those known as ‘local champions’, and through CSOs or NGOs. Engagement with Bappeda is preferred according to a former implementing partner for USAID AMARTA for programs that are at province level and particularly those that address environmental issues. This is because the informant perceived that the current provincial Bappeda and secretary seem to want to achieve good governance of balancing economic needs with environmental needs. As for the ‘local champions’, according to a CSO informant also working within the environment sector, there is typically a local ‘champion’ within the government and donor engagements are dependent on this local champion starting from the agreement stages to the implementation stages of the project. Similar to the suggestion on having a local champion, another environmental CSO informant specified that in the past donor programs typically place a liaising officer into the government to connect the program with the government and the success of this approach varies with government as some local governments are more welcome than others. The suggestion that effective engagement with government can be through CSO/NGO was provided by an informant from the local house of representatives (DPRD). The informant noted an example where a donor- funded local NGO provided support and accompaniment in overseeing the implementation of the Perda on workforce in which their efforts were synergized with the Manpower Office (Dinas Tenaga Kerja) and also with the DPRD so that all could oversee the process together. Areas of intervention. In addition to ways of engagement, multiple informants from various stakeholder groups also specified methods and areas of intervention which donors can explore in North Sumatra. These included capacity building and training in governance accountability, advancing public service delivery in strategic areas like Toba Lake and Nias Island such as for clean and potable water and waste management, renewable energy, and digitalization of governance monitoring systems. Two informants, one from Bank of Indonesia and one a former donor implementing partner, additionally noted that for programs on agriculture and environment, donors could increase their engagement at the grassroots level. According to these informants, excluding engagements at this level and only engaging at the higher level can cause implementation of programs on the ground to not run well. Sector-specific engagement. Specific to sectors, a Bank of Indonesia informant mentioned that for agriculture, capacity building of farmers is needed at the grassroots level on good agricultural practices and how to cut the value chain so farmers can receive more from their production. Meanwhile in vocational education, according to an informant in the education sector, donor engagement can

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address the following: (i) provide techniques or programs to support facilitation of stakeholders to push for policy in matching SMK/SMA with industry, (ii) act as third party to facilitate between SMK/SMA with industry and have both explore suitable methods and steps for both to converge, and (iii) help build awareness for the industry to care more about improving the quality of SMK/SMA. Consideration of program continuity during engagement. Donors should also factor in continuity of programs in their engagement, according to two environmental CSO informant. Donors should seek to provide support in pushing for activities with significant lessons learned into policy which would then enable for such activities to be budgeted into APBD. It should be explored how can donors also engage in convincing both DPRD and Pemda to embed proven activities into policy so that funds are allocated from APBD towards the activity’s continuity. The government does have the money, it is a matter of advocating to them that activities that were initially donor-funded are valuable to warrant funds for their continuation. Engagement should be done in ways that the donor can support pushing projects that were initially donor-funded to be formally recognized into Perda as a form of commitment by the government to the continuity of the activities.

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CONCLUSIONS

THEME 1: INTER-GOVERNMENTAL RELATIONSHIP

FOUNDATIONAL FACTORS North Sumatra’s economy relies heavily on the plantation sector, mostly oil palms, coffee, and tea. Despite significant contribution to economic outputs (local GDP), the sector is known to make up only a small portion in local revenue. State revenues from plantation come in the form of income tax, value-added tax, and land and property tax—among these taxes, only land and property tax are shared with the producing districts or cities. Therefore, huge economic gains from plantations are mostly enjoyed by companies and the national government without considerable contribution in improving the local government’s capacity to finance development and basic services. The North Sumatra government has long advocated for new local tax items for plantation products to increase their share. Their relationship with the national government is therefore marked by continued communication of this agenda.

RULES OF THE GAME The interview findings indicate a significant gap between formal laws and regulations and actual policy implementation. These mismatches may be attributed to limited resources that constrain implementation as well as the dynamics that comes from the participation of diverse stakeholders in the policy stages between planning and implementation. Examples include, first, the Merdeka Belajar program that has been implemented only in Medan despite being mandated nationwide. Second, some national policies, including peatlands mapping and the Indonesian Sustainable Palm Oil (ISPO) initiative, have yet to be disseminated and implemented until the district/city level. The provincial government’s budget constrain has been cited as a reason for its suboptimal role as policy coordinator that bridges national policy and implementation at the lower level. In the ISPO case, sustainable palm oil policy and certification have been briefed to the government and other stakeholders at the province through visits by the ISPO Director General and their team from the Ministry of Agriculture. However, follow- up actions from the province have reportedly been minimal. Third, although Musrenbang has been touted as the main channel for public participation in development planning of bottom-up participatory planning: grassroot voices may be muffled down as they are joined by other stakeholders and existing policies along the planning process.

HERE AND NOW Some policy modifications due to the COVID-19 situation have reportedly reduced program effectiveness. For example, teacher’s trainings have moved online with more emphasis on independent learning through online modules. Independent learning, however, is an alien concept to most teachers who are used to face-to-face training. Only a handful of teachers evaluated the new format favorably, with most preferring to receive training courses from the government or other traditional providers.

DYNAMICS As one CSO informant noted, the provincial government is more eager to lobby the national government for projects in infrastructure or procurement of goods, allegedly due to the substantial monetary value of the projects which invites officials to engage in corruptive practices in cooperation with local contractors. This explains the persistence of the Rule of the Game above regarding suboptimal implementation of national policies at the local level. Programs in environment, sanitation, or education are not financially attractive for contractors and thus local governments are less interested to put their attention into. Such Dynamics may translate to smaller opportunities for change as local governments prefer the existing intergovernmental arrangements.

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THEME 2: GOVERNANCE AND ACCOUNTABILITY

FOUNDATIONAL FACTORS District disparity seems to primarily emanate from natural endowment which, in North Sumatran context, determines economic growth. Fastest-growing areas are the cities and the highland districts where cultivation and production activities from the plantation sector take place. Districts located along the western and eastern coasts of the province, where agricultural activities are less ideal, are in the second tier. This leaves the offshore districts in Nias and Batu Islands as the most underdeveloped areas.

RULES OF THE GAME Prospects for accountability and transparency improvements mainly come from KPK’s close supervision of the province. KPK’s approach in North Sumatra stresses preventive measures through increased monitoring and accountability reporting as opposed to their usual emphasis on prosecution and investigation. In addition to the formal accountability and transparency institutions, religious institutions may also offer a means to discourage corruption. A civil society informant reported that framing corruption as a religious offense and spreading this message in Islamic congregations and sermons are effective to dissuade people from accepting vote-buying offer from a candidate.

HERE AND NOW The COVID-19 situation has reportedly affected government’s programming for underdeveloped districts, thereby potentially increasing district disparity as budgets for service provision were cut. A legislator reported that government offices at the districts, especially those responsible for women empowerment and child protection, population control, and family planning, had to hand over up to 80 percent of their budget to COVID-19 response. These offices reportedly have no program budget left until the end of 2020.

DYNAMICS Several CSOs reported that the North Sumatra government still understands accountability strictly in terms of financial reporting as demonstrated by the governor’s frequent messaging to the districts and cities to achieve or maintain a clean audit rating. The national government apparently contributes in perpetuating the emphasis on financial reporting, given that the Ministry of Finance and the Financial Supervisory Agency (BPK) offer a reward of IDR 4 to 16 billion (USD 270,000 to 1 million) for every government with a clean audit. This presents a possible perverse incentive as government’s attention is lured away from the prevention and detection of under-the-table arrangements such as bribery, fraud, and extortion, the practices of which are invisible from any financial audit. What seems to be missing and seriously needed in the government’s approach, our civil society informants added, is the available channels for oversight from civil society and academics.

THEME 3: SERVICE DELIVERIES

FOUNDATIONAL FACTORS Resource disparities were the single most cited foundational barrier to improving access and quality of services. This refers not only to the districts’ widely ranging financing capacity, but also the size of a qualified workforce available to each district to deliver basic services such as health. The agrarian North Sumatra relies heavily on plantations—a natural endowment that is not available throughout the entire province and contributes directly to revenue-making ability. This is further exacerbated by the fact that the industries mostly depend on further processing of agricultural products such as oil

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palm, therefore creating a direct link from natural endowment to value creation to unequal economic growth and government services.

RULES OF THE GAME North Sumatra shows a classic Indonesian issue when it comes to provision of basic services: lack of institutionalized measures to guarantee inclusive access and standardized quality. This is shown by the informants almost unanimously citing local government commitment as a factor behind suboptimal and unequal services. When there is an innovation, as in the case of South Tapanuli’s provision of solar panels to make up for the lack of power grids, it is not the result of earlier minimum service level policies but rather an individual local leader’s initiative. Such institutional setting means that service provision could vary widely across different administrations since there is no regulatory mechanism to warrant that best practices and innovation under one leader will carry over to the next.

HERE AND NOW Recent initiatives to improve access and quality of services include the Merdeka Belajar, PKB, and flying doctors’ programs. Some of these have been negatively affected by COVID-19, as in the case where teachers have had difficulty adapting to the new independent learning concept required by the shift to online trainings. Despite quite a few mentions of recent innovative programs, questions loom over sustainability of these initiatives since, as explained as a Rule of the Game above, commitment of leaders is an important differentiating factor between good programs for the Here and Now or an indication of institutional improvements underway.

DYNAMICS A possible driver of change comes from the provincial government’s active lobbying of the national government to increase their revenue share from the plantation sector. If granted, we can expect better capacity of the provincial government to coordinate implementation of national programs down to the district level, an issue highlighted by most informants.

THEME 4: INCLUSIVE MARKET DRIVEN GROWTH

FOUNDATIONAL FACTORS Economic growth is unanimously viewed to be tied to the agricultural sector. Agriculture’s high importance in North Sumatra’s economic structure is obvious: it absorbs a large workforce, contributes significantly to local GDP, and involves local communities substantially in farming, plantations, and fisheries. Tourism emerged in several interviews as a potential economic driver, although some informants noted that its economic impact has not been entirely recognized. One informant also noted that manufacturing industries may need more time take off and are thus not recommended. These accounts show that economic drivers in the province depend heavily on the cultivation and processing of natural resources.

RULES OF THE GAME Informants perceive a disconnect between national and local priorities when it comes to industrial development. Specifically, Sei Mangkei, a special economic zone in Simalungun District, is seen as a failed attempt at understanding the province’s industrial characteristics. Built as a processing zone for oil palm and rubber commodities, Sei Mangkei is part of President Jokowi’s emphasis on investment and industrial development in the outermost areas of Indonesia. With the logistical challenge of being located far from any airport or seaport, the industrial zone has so far failed to take off, as indicated by the small number of firms reportedly operating in the zone. Sei Mangkei’s example also seems to show the ongoing limitation of any plan to further develop the downstream industry of North Sumatra’s plantation sector. The province’s lack of hinterland means that agricultural products are mostly

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intended for sending out to external markets, a process that relies on logistical connections. Since the latter is in short supply, North Sumatra’s reliance on upstream agricultural activities is unlikely to change soon. Inclusive women participation in economic activities seems to be obstructed by strong patriarchal view of women belonging in family and domestic affairs. This is indicated for example by the low number of female legislators in the province at only 12 percent of the allocated seats, far below the 30 percent quota mandated nationally.

HERE AND NOW COVID-19’s economic impact has significantly affected MSMEs in the province with informants in the business sector reporting a dire need of capital injection for the small businesses. Worst impacted MSMEs are reportedly those in textile convection, tourism, hotel, and restaurant sectors. Agrobusinesses being missing in the informants’ account might point to the conclusion that they are more resilient during crisis.

DYNAMICS Still related to the Rule of the Game above, there seems to be an ongoing, dynamic experimentation with industrial policy for the province by both the central and local governments. For example, there are mentions about local initiatives to attract value-added investment in the agricultural and energy sectors despite the local government’s awareness of the immense challenges in terms of logistics and market size. On the other hand, with the pandemic and looming economic crisis, the central government’s plan for North Sumatran industry is left unclear. Given these uncertainties, industrial development in the province is likely destined to be a trial-and-error affair in the foreseeable future.

THEME 5: DONOR COORDINATION

RULES OF THE GAME To ensure replication, donors are encouraged to promote programs with significant lessons-learned and push for their adoption into local policies. This would then enable local governments to propose budget for the adopted programs. The usual ways of engaging the local government include cost- sharing arrangement between donors and local government, pilot or demonstration programs as a way to convince local governments of program replication, and a deeper engagement with the governments at the district or city levels. Local actors to engage with include the provincial Bappeda and the Province or District Secretary, local champions in the bureaucracy, and local CSOs.

HERE AND NOW Multiple informants recommend specific methods and intervention areas for donors to explore. These include capacity building and training in governance accountability, advancing public service delivery in strategic areas like Toba Lake and Nias Island such as for clean and potable water and waste management, renewable energy, and digitalization of governance monitoring systems. Some of these recommended program areas may be conducted in line with the ongoing accountability improvements by KPK. Increasing engagement at the grassroots for programs on agriculture and environment is also advised by several informants.

DYNAMICS As indicated by several informants, donors sometimes have limited engagement at the grassroots. This has been seen as not ideal since engagements at the grassroots can actually facilitate better program implementation from the higher level.

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RECOMMENDATIONS

1. Anti-corruption and accountability training. To combat massive corruption, USAID is advised to provide anti-fraud and corruption trainings for public officials and internal control units. While KPK has provided serious assistance to North Sumatra in corruption prevention, informant accounts show that it has been geared toward creating accountability and monitoring systems such as the e-procurement. Capacity building of officials to prevent and detect corruption potentials seems to be missing from KPK’s initiative, thus creating an opportunity for USAID to fill in the gap. One informant specifically mentioned that modules on forensic, investigative, and state-loss audits are most needed. Given their high-profile presence in the province, KPK is an important partner to engage and align efforts with. 2. Anti-corruption champions and reformists. Identify and engage reform-minded officials who are eager to champion an anti-corruption cause in their respective organizations. According to a civil society informant, they currently include the Head of Bappeda and Serdang Bedagai District Head. Anti-corruption champions also come from CSOs that have received anti-corruption training such as Hapsari and Mitra Indonesia, and the youth movement Gerakan Mahasiswa Desa (Germades) consisting of college students from North Labuhan Batu and Asahan Districts dedicated to anti-corruption activism. 3. Religious approach in anti-corruption campaign. Explore ways to support anti-corruption messages in religious communications and work with Islamic clerics, preachers, and mosque youth groups to spread the message in congregations and sermons. This method is employed by Salam Center, a CSO in Serdang Bedagai District focusing on imparting corruption prevention messages to Islamic missionaries and preachers. It may not be enough to prevent high-profile corruption, but an informant claims the messages resonate well among the common people to prevent vote buying. 4. Capacity building for civil society. Build CSOs’ understanding of planning and accountability processes in the province to be able to better evaluate policy outcomes and government’s performance. Moreover, the capacity building should be designed to enable civil society to hold officials accountable through more sophisticated and informed mediums, such as public evaluation reports or scorecards, instead of relying solely on demonstrative forms of activism. 5. Scaling and distribution for service delivery. Support the expansion of best practices in good quality service delivery from successful districts to other districts that still lack them. Seek to address barriers in scaling or distribution of public services, including human capacity, lack of uniform distribution of health personnel, and infrastructure, such as facilities and equipment to channel clean water or to provide stable electricity. 6. Facilitation of investment allocation. Investigate ways to facilitate investment allocation that balances macroeconomic needs with local community and environmental needs. Such efforts must avoid noted disconnects between governments in strategy, planning, and implementation of investments. 7. Program replication. To address challenges with continuity, promote programs with significant lessons learned and advocate for their inclusion in local agenda setting in order to promote replication. A level of formality, such as a Perda or an MoU could strengthen the bargaining power of such activities to be considered for funds post program.

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REFERENCES

BKPM. “Pemerintah Ajak Swasta Kembangkan Pariwisata Danau Toba”. (September 2018). https://www.bkpm.go.id/id/publikasi/detail/berita/pemerintah-ajak-swasta-kembangkan-pariwisata- danau-toba Indonesia Corruption Watch. “Laporan Pemantauan Tren Penindakan Kasus Korupsi Semester I 2020”. (September 2020). https://antikorupsi.org/id/article/tren-penindakan-kasus-korupsi-2020- semester-i Hudson, D. and A. Leftwich (2014), “From political economy to political analysis”, DLP Research Paper, No. 25, DLP, University of Birmingham, UK, www.dlprog.org/publications/frompolitical- economy-to-political-analysis.php. Jakarta Post. “N. Sumatra is Most Corrupt Province: ICW”. (February 2011). https://www.thejakartapost.com/news/2011/02/24/n-sumatra-most-corrupt-province-icw.html Tribun News. “Pengamat Anggaran Sebut Pembangunan Sumur Bor Oleh Dinas PKP Sumut Harus Transparan”. (August 2019). https://medan.tribunnews.com/2019/08/12/pengamat-anggaran-sebut- pembangunan-sumur-bor-oleh-dinas-pkp-sumut-harus-transparan Menocal, Alina Rocha, et al. (2018). “Thinking and Working Politically Through Applied Political Economy Analysis: A Guide for Practitioners.” USAID. https://usaidlearninglab.org/sites/default/files/resource /files/pea_guide_final.pdf World Bank 2009: Problem-driven governance and political economy analysis good practice framework, The International Bank for Reconstruction and Development / The World Bank.

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ANNEX 1: BACKGROUND FOR EACH THEME, BASED ON DESK REVIEW

THEME 1: INTER-GOVERNMENT COORDINATION Background: Historically, the Government of North Sumatra has been dominated by military background. According to the desk review, the military influence on politics in North Sumatra has existed since 1963, and seven out of 18 North Sumatra governors have come from the military. The incumbent Governor is the former Commander in Chief of the Army Strategic Command, Kostrad. Democracy in the province is also influenced by identity politics as demonstrated during the last Governor Election in 2018. Chinese Indonesians in North Sumatra play significant roles and possess the most power in the sector of the economy and to some extent in the current politics. Some Chinese Indonesian politicians have successfully won a legislative election for DPR RI and DPRD.

THEME 2: GOVERNANCE AND SOCIAL INCLUSION Background: According to the desk review, North Sumatra is one of the provinces with a high rate of corruption and bribery (top five in Indonesia). Corruption in North Sumatra increased between 2011 and 2015. The Indonesian Corruption Watch (ICW) reported that North Sumatra was engaged in 236 corruption cases among 10 sampled provinces in 2015. In 2018, there was a bribery case that involved 38 members of the Provincial House of Representatives (DPRD) who received money from the ex-governor of North Sumatra to stimulate the DPRD for the approval of 2013, 2014, and 2015 financial reports of North Sumatra. Concerning the development budget at the sub-national level, the national government allocates funding for districts and cities through Anggaran Pendapatan Belanja Negara (State Budget - APBN) to complement through Dana Perimbangan (Balancing Budget - DP). Law No. 33 from 2004 introduced General Allocation Funds (DAU), Revenue Sharing Funds (DBH), and Specific Allocation Funds (DAK) to improve the rural-urban disparity in poverty, unemployment, and economic growth. However, the rural-urban disparities remain a challenge for the provincial government to deal with.

THEME 3: SERVICE DELIVERIES Background: Decentralization in Indonesia has granted broader authority to the sub-national governments to run their administrative affairs in accordance with the local need and context. As the consequence, public service delivery becomes the mandatory affairs of the province and district/city governments. According to the desk review, the North Sumatra province received IDR 752.85 trillion (USD 51 billion) from January to November 2019, of which IDR 689.21 trillion was TKD and IDR 63.63 trillion was Village Fund, DD. The province received a 21.5 percent increase in the provincial budget from APBN in 2019. However, the service delivery in the province remains problematic for the governments to deal with as reflected by some key indicators: Health - malnutrition 5.4 percent (2018), stunting 32.3 percent (2018), under-five mortality rate 950 (2018), maternal mortality rate 186 (2018); Education - net enrolment rate 71.19 (2018), graduation rate 98.27 percent (2018); Access to Water - access to proper drinking water 88.51 percent (2018); Employment - Labour Force Participation 66-71 (2014-2018), unemployment rate 5.56 percent (2018).

THEME 4: INCLUSIVE MARKET-DRIVEN ECONOMIC GROWTH Background: The North Sumatra population is dominated by the patriarchal Batak ethnic group. Most women in North Sumatra with Batak ethnic group have been marginalized within their own families, and they tend to interpret marginalization as the implementation of the cultural values and traditions. While formal laws are in place for gender equality in jobs, parallel dominant social norms hinder inclusive growth in North Sumatra.

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Civic participation in the province, especially women’s participation, is noticeably low. In politics, for example, despite Law No. 2 of 2008 states that women must make up 30 percent of the legislature, only 11.87 percent of provincial legislative members in North Sumatra are women. Also, a major component of inclusive growth is gender parity in labor force participation. Labor force participation, particularly among women, is low in the province. Only one in every three working-age women are out of the labor force mostly due to factors such as – social norms, or discouragement to join the LFP. It is important to note that the province saw the highest increase in women's development index over the last five years at the rate of 69.35 percent in 2018, which is below the national GDI at 71.76 (2018).

THEME 5: DONOR COORDINATION Background: Donor agencies, international development partners, and INGOs constitute important supports to the improvement of health, education, economic growth, and environmental management in the North Sumatra province. However, the effective mechanism for better coordination between donors and the government in supporting the provincial government to achieve the development goals need to be improved.

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ANNEX 2: CORE AND SUPPORTING PEA QUESTIONS

THEME 1: INTER-GOVERNMENT COORDINATION 1. Could you describe the interaction between national and subnational governments in terms of (a) policy deliberation and implementation, (b) resource and/or revenue sharing process? [note for interviewer: if the respondent brings up about any disconnect between the different government levels, probe on what are the main reasons for such disconnect.] a. What is the nature of policy-making processes? What are the main drivers and challenges do you think that exist to provide accountable and transparent public information to support decision-making processes? b. What are the most influential formal and informal institutions that shape the policy process and how? c. Do you think that some of these rules and regulations need to be changed to improve the coordination between different levels of government? d. What is needed to improve the coordination between different government offices and agencies at the sub-national levels? 2. What is the landscape of natural resources management (NRM) in North Sumatra? [RG] [HN] [D] a. Are there any social conflicts that are closely related to natural resource management? Who are the actors engaged in the conflicts? b. What implication to the local development has been caused by the conflict? c. How have the provincial/district governments dealt with the social conflict related natural management?

THEME 2: GOVERNANCE AND SOCIAL INCLUSION 3. Could you explain how the government of North Sumatra deals with the issue of corruption? [RG] [HN] a. What are the factors (drivers) of corruption in North Sumatra? b. Is there any provincial government policy put in place to reduce the corrupt practices? c. What are some good achievements by the provincial government in reducing the corrupt practices? 4. How does the provincial government see the development disparities in the province? [RG] [HN] [D] a. What is the government approach to address the disparities? b. Why are some districts are underdeveloped as in Nias Island, Dairi, Batu Bara, Tanjung Balai, and Gunungsitoli compared to the other districts in the province? c. At the village level, how has the village funds contributed to the village development? What is the accountability of village funds management?

THEME 3: SERVICE DELIVERIES 5. How do you describe the conditions of basic services delivery (health, education, water, sanitation, electricity) in the North Sumatra province? [FF] [RG] [HN]

a. What is the access and utilization of basic services? b. How does the provincial government coordinate and collaborate with the district government in the provision of the basic services? c. What are some innovations that the provincial/district governments have made in the provision of basic services? d. What are the major challenges do you think the government is facing in the provision of basic services?

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THEME 4. INCLUSIVE MARKET-DRIVEN ECONOMIC GROWTH 6. Could you describe civic participation in the government development programs and politics in North Sumatra? [FF] [RG] [HN]

a. What are the underlying factors that cause low civic participation in North Sumatra? b. What is the existing policy of the provincial government to increase civic participation, including women participation? c. Does civil society have provision to participate in public policy deliberations?

7. Could you describe the outlook of economic development in the North Sumatra province? [RG] [HN]

a. In the North Sumatra RPJMD 2019-2023, one of the priorities in the economic sector is to increase the competitiveness in agriculture and tourism sectors. Why do the two sectors become the priority? Does the government have a new strategy in developing the sectors? b. What is the current situation of private investments in the province? Are there any private investments in the government prioritized sectors? c. What are the supports from key actors (particularly local government) to strengthen PPP investment/economic development? d. What are the most promising economic/investment opportunities in North Sumatra? e. What is the socio-economic impact of the COVID-19 to the economic development in general?

THEME 5: DONOR COORDINATION 8. What is the most effective way for the donor community to engage with the provincial government to implement a program that also supports provincial goals and objectives? a. What do you think should be the role of the civil society to facilitate the process? b. What are the existing Incentives and constraints around improving public participation in this process? c. If there are multiple donors in your sector, what do you think is the best way to engage them?

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ANNEX 3: INTERVIEW SCHEDULE & KEY INFORMANTS

KEY INFORMANT INTERVIEWS SCHEDULE NO DATE OF KEY INFORMANT INTERVIEWS INTERVIEW 1 04/09/2020 Education Quality Assurance of North Sumatra (TPMP) 2 08/09/2020 Indonesian Chamber of Commerce and Industry (KADIN) of North Sumatra 3 08/09/2020 Coffee Exporter in North Sumatra 4 09/09/2020 Province Development Planning Agency (BAPPEDA) of North Sumatra 5 09/09/2020 Leuser Conservation Partnership – North Sumatra 6 11/09/2020 Indonesia Young Entrepreneurs Association (HIPMI) 7 11/09/2020 Dean of Political and Social Science Faculty of the University of North Sumatra 8 12/09/2020 Inspectorate of North Sumatra 9 14/09/2020 Commission E DPRD North Sumatra 10 15/09/2020 Sumatran Rainforest Institute 11 15/09/2020 Commission B DPRD North Sumatra 12 16/09/2020 Province Manpower Office of North Sumatra 13 16/09/2020 Province Environment Office of North Sumatra 14 16/09/2020 Province Health Office of North Sumatra 15 17/09/2020 FITRA North Sumatra 16 17/09/2020 Province Office for Investment, License, and One-Stop Services 17 18/09/2020 Employers Association of Indonesia (APINDO) North Sumatra 18 23/09/2020 Information Center of National Geopark Kaldera Toba 19 25/09/2020 Deputy Chairman of Bank of Indonesia in North Sumatra 20 25/09/2020 Former Program Manager to USAID’s Agribusiness Market and Support Activity (AMARTA), North Sumatra 21 09/10/2020 US Consulate General in Medan

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U.S. Agency for International Development usaid.gov