COUNTRY GOVERNANCE ASSESSMENT REPORT REPUBLIC OF INDONESIA ASIAN DEVELOPMENT BANK Asian Development Bank 2004 All rights reserved This publication was prepared by staff and consultants of the Asian Development Bank. The analyses, perspectives and judgments do not necessarily reflect the views of the Asian Development Bank, or its Board of Directors or the governments they represent. The Asian Development Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequences of their use. The term “country” does not imply any judgment by the Asian Development Bank as to the legal or other status of any territorial entity. The Asian Development Bank encourages use of the material presented herein, with appropriate credit. Publication Stock No. Published by the Asian Development bank P.O. Box 789 0980 Manila, Philippines FOREWORD The achievement of higher economic growth and sustainable development, as set out in the Millennium Development Goals (MDGs), is a challenge for any developing country. Indonesia, in particular, faces this challenge while in the midst of fundamental changes to its political and economic milieu. Learning from the lessons of the Asian financial crisis of 1997 and the fall of Soeharto in 1998, Indonesia embarked on a new age, the era reformasi. Decentralization, public administration and financial reform, reallocation of government power, and judicial reform are just a few of its many wide-ranging and radical reforms. These changes are clearly driven by a desire to achieve higher economic growth and sustainable development, as well as poverty reduction that can be achieved only if governance structures are sound. Good governance requires sound economic management; the enforcement of the rule of law; and participation, transparency, accountability, and predictability in public administration. These factors are necessary to combat the widespread and systemic corruption that drain the economy. In line with the broad thrust of era reformasi, Indonesia has progressed in improving the legal and regulatory framework in selected areas, providing a greater role and voice to regional governments in the delivery of services, developing a framework for fiscal and public expenditure management, and developing a blueprint for the reform of the judiciary and audit institutions. The challenge for a new Government is how to manage expectations and accelerate the implementation of the governance agenda, given the results so far. While reforms have taken off in some segments of the economy, public and foreign confidence in the investment climate continue to be eroded by a lack of clarity on policy and the legal environment, and uncertainties regarding the enforcement of the rule of law. Better alignment of resources and expenditure obligations and greater accountability of public institutions are necessary to ensure that resources are properly harnessed to construct the physical infrastructure needed for economic growth. Finally, an efficient civil service—driven by the right incentives framework, a strong sense of professionalism, and high ethical standards—is indispensable to the implementation of Indonesia’s economic and social agenda. The Asian Development Bank (ADB) is committed to support Indonesia in achieving the MDGs in this era reformasi. Over the recent years, ADB has assisted Indonesia with various programs and projects that aim to foster good governance in one form or another. Of immediate significance are ADB’s support for (i) the governance partnership; (ii) initiatives for anticorruption; (iii) decentralization programs that aim to develop local government capacities for efficient and effective delivery of services; (iv) effective governance through improved accounting, audit and procurement systems; (v) active policy dialogue and assistance for regional governance policies; and (vi) improvement of the State audit function. This Country Governance Assessment Report is a snapshot of the state of governance in Indonesia. It reflects both the achievements and the reform gaps. As such it provides a basis for further dialogue and work on the reform initiatives and their effective management. The report was prepared drawing upon ADB’s extensive economic and sector work, as well as reports from other institutions. It has been extensively discussed with national and regional government institutions and nongovernment stakeholders. This report will hopefully encourage Indonesia’s citizens, as well as its development partners to work together with the Government in facing and successfully overcoming the many challenges that lie ahead for Indonesia. Shamshad Akhtar Director General Southeast Asia Department Asian Development Bank ACKNOWLEDGMENT This Country Governance Assessment Report for the Republic of Indonesia was prepared under the overall coordination and supervision of Staffan Synnerstrom, Governance Advisor, ADB Indonesia Resident Mission, who also edited the report. Staff consultant Owen Podger originally prepared most chapters, former ADB staff member Richard Allen originally prepared chapter IV and staff consultant Kastorius Sinaga originally prepared chapter VII. Ramesh Subramaniam, Senior Economist, ADB Indonesia Resident Mission, helped with the final updating of the report ADB thanks all those who helped assure the accuracy and quality of this Country Governance Assessment Report and contributed to its wide acceptance. The Institute of Science of Governance, the Ministry of Finance, and the National Law Commission cosponsored workshops on the report and the findings. Many senior officials and academics generously gave comments. CONTENTS Page EXECUTIVE SUMMARY I I. INTRODUCTION 1 A. Objectives of the Assessment 1 B. Scope and Methodology 1 C. Country Background 2 D. Ongoing Reforms 3 E. ADB Support for Reforms 5 II. LAWS AND INSTITUTIONS 7 A. The 1945 Constitution 7 B. Regulatory Hierarchy 9 C. Main Institutions of the Indonesian State 12 D. The Legislature 12 E. The Executive 13 F. The 1999 Elections—Lessons Learnt 15 G. Managing Legal and Institutional Framework Reform 16 III. POLICY MAKING AND REGULATORY FUNCTIONS 17 A. Policy Making 17 B. Development Planning 23 C. Regulatory and Monitoring Agencies 24 IV. FINANCIAL MANAGEMENT 30 A. Introduction 30 B. Legal and Regulatory Framework 30 C. Oversight of the Budgetary Process 33 D. Public Expenditure Management 34 E. Fiscal Decentralization 36 F. Procurement 43 G. Treasury 44 H. Internal Audit 47 I. External Audit 49 J. Other Reform Needs 51 K. Financial Management Reform to Combat Corruption 53 V. THE PUBLIC ADMINISTRATION AND THE CIVIL SERVICE 56 A. Introduction 56 B. Background, the Context of Decentralization 56 C. The National System of Administration 57 D. The Civil Service 57 VI. DECENTRALIZED GOVERNMENT 70 A. Background and Introduction 70 B. National Government Responsibilities 70 C. Responsibilities of Regional Governments 73 D. Decentralized Public Service Delivery: The Case of Education 80 E. Indonesian Decentralization in Perspective 83 F. Reforms Needs for Improved Decentralized Government 84 VII. LAW ENFORCEMENT 89 A. Introduction 89 B. The National Police 89 C. The Public Prosecution Service 98 D. The Commission for Eradication of Corruption 102 E. Other Law Enforcement Institutions 103 F. Law Enforcement Reforms 104 VIII. THE JUDICIARY AND THE COURTS 107 A. Introduction 107 B. The Judiciary in the Reformasi Period 107 C. The Court System 108 D. The Judiciary 111 E. Court Administration 113 F. Corruption in the Justice System 115 G. Reform Needs 116 ABBREVIATIONS ABRI – Angkatan Bersenjata Republik Indonesia (Armed Forces of the Republic of Indonesia, term used from 1960 to 2000) ADB – Asian Development Bank AGO – Attorney General’s Office (Kejaksaan Agung) Bakun – Badan Akuntansi Negara (State Finance Accountancy Agency, in Ministry of Finance) Bappeda – Badan Perencanaan Pembangunan Daerah (Regional Development Planning Board) Bapepam – Badan Penanaman Pasar Modal (Capital Market Supervisory Board) Bappenas – Badan Perencanaan Pembangunan Nasional (National Development Planning Board) Bawasda – Badan Pegawas Daerah (Regional Supervision Agency) BI – Bank Indonesia BKN – Badan Kepegawaian Negeri (National Civil Service Board) BPHN – Badan Pembinaan Hukum Negara (National Legal Assistance Service) BPK – Badan Pemeriksa Keuangan (Supreme Audit Institution) BPKP – Badan Pengawasan Keuangan dan Pembangunan (Comptroller of Finance and Development ) BPN – Badan Pertanahan Negara (National Lands Board) BPS – Biro Pusat Statistik (Central Bureau of Statistics) CEDAW – Convention on Elimination of Discrimination Against Women CGA – Country Governance Assessment Report CGI – Consultative Group on Indonesia CSO – civil society organization CIDA – Canadian International Development Agency DAK – Dana Alokasi Khusus (Specific Allocation Fund) DAU – Dana Alokasi Umum (General Allocation Fund) DJLK – Direktorat Jenderal Lembaga Keuangan (Directorate General of Financial Institutions, in the Ministry of Finance) DPC – Data Processing Center (in the Ministry of Finance) DPD – Dewan Perwakilan Daerah (House of Representatives of Regions) DPOD – Dewan Pertimbangan Otonomi Daerah (Regional Autonomy Assessment Council) DPR – Dewan Perwakilan Rakyat (House of Representatives) DPRD – Dewan Perwakilan Rakyat Daerah (Regional Representative Council) FSN – Financial Safety Net GAS – Government Accounting System GBHN – Garis-garis Besar Haluan Negara (Broad Guidelines of State Policy) GFS – Government