Indonesia - Practical guidelines for analyzing public expenditure at the sub-national level

49691 PRACTICAL GUIDELINES for Analyzing Public Expenditure at the Sub-National Level Public Disclosure Authorized Public Disclosure Authorized Workshop edition The WORLD BANK OFFICE JAKARTA Indonesia Stock Exchange Building, Tower II/12-13th Fl. Jl. Jend. Sudirman Kav. 52-53 Jakarta 12910 Tel: (6221) 5299-3000 Fax: (6221) 5299-3111 The WORLD BANK The World Bank 1818 H Street N.W. Washington, D.C. 20433 USA Tel: (202) 458-1876 Fax: (202) 522-1557/1560 Email : feedback@worldbank.org Website : www.worldbank.org Printed in May 2010  Table of Contents Glossary of Terms ii Chapter 1. Introducing Public Expenditure Analysis 1 1.1 What is Public Expenditure Analysis (PEA)? 1 1.2 Why is the PEA useful? 1 1.3 Who will use the PEA? 2 1.4 What is included in the PEA? 2 Chapter 2. Doing a Public Expenditure Analysis 5 2.1 Writing the research proposal 5 2.2 Collecting the data 5 2.3 Entering the data into a formal that is useful for analysis 6 2.4 Analyzing the data, formulating conclusions and recommendations 6 2.5 Writing the report 6 Chapter 3. Research Proposal 7 Chapter 4. Data Collection and Preparation for Analysis 9 4.1 Collecting data 9 4.2 Preparing the data for analysis 10 Chapter 5. Data Analysis, Conclusions and Recommendations 13 5.1 Overview chapter 13 5.2 Planning and budgeting chapter 20 5.3 Revenue chapter 21 5.4 Expenditure chapter 32 5.5 Strategic sectors 39 Chapter 6. Writing the PEA Report 43 6.1 Know your audience 43 6.2 Common mistakes in report writing 43 6.3 Consistent format, clear structure 44 6.4 Writing the PEA report as a team 45 6.5 Further references 45 6.6 Extra tips : some lessons learned 45 APPENDICES Appendix 1: PEA Standard Outline 47 Appendix 2: Data Requirements 65  Glossary APBD Regional Government Budget (Anggaran Pendapatan dan Belanja Daerah) APBN State Budget (Anggaran Pendapatan Belanja Nasional) Bappeda Regional Development Planning Agency (Badan Perencanaan Pembangunan Daerah) Bappenas National Development Planning Agency (Badan Perencanaan Pembangunan Nasional) Bawasda Regional Monitoring Agency (Badan Pengawasan Daerah) BKD Regional Civil Service Agency (Badan Kepegawaian Daerah) BKN State Civil Service Agency (Badan Kepegawaian Negara) BMT Budget Master Table BPHTB Land and building transfer fee (Bea Perolehan Hak atas Tanah dan Bangunan) BPS Central Bureau of Statistics (Badan Pusat Statistik) BPS-SK Financial statistics from Central Bureau of Statistics (Statistik Keuangan Badan Pusat Statistik) Bupati District Head CPI Consumer Price Index CSO Civil Society Organization DAK Special Allocation Fund (Dana Alokasi Khusus) D&L Damage and Loss DAU General Allocation Fund (Dana Alokasi Umum) Desa Village Dinas Local Technical Agency Office DPRD Provincial House of Representatives (regional parliament) (Dewan Perwakilan Rakyat Daerah) GDP Gross Domestic Product GER Gross Enrollment Rate GoI Government of Indonesia GRDP Gross Regional Domestic Product HDI Human Development Index Kabupaten District (regency) Kecamatan Subdistrict Kelurahan Urban village Kepmen Ministerial Decree (Keputusan Menteri) Keppres Presidential Decision (Keputusan Presiden) Km Kilometer Kota City (urban district) LG Local Government MDG Millennium Development Goal MoF Ministry of Finance MoHA Ministry of Home Affairs MoNE Ministry of National Education MSS Minimum Service Standard NGO Non-Governmental Organization NR Natural Resources O&M Operations and Maintenance PAD Own-Source Revenue (Pendapatan Asli Daerah) PBB Land and Building Tax (Pajak Bumi dan Bangunan) PDAM Local Water Supply Utility (Perusahaan Daerah Air Minum) Perpu Regulation in Lieu of Law (Peraturan Pemerintah Penggati Undang-Undang) Perda Regional Regulation (Peraturan Daerah) ii Practical Guidelines for Analyzing Public Expenditure at the Sub-National Level PFM Public Financial Management Podes BPS Village Potential Survey (Potensi Desa) Polindes Village Maternity Center (Pos Persalinan Desa) Puskesmas Community Health Center at Sub-district Level (Pusat Kesehatan Masyarakat) Posyandu Integrated Health Service Unit (Pusat Pelayanan Terpadu) Pustu Sub-community Health Center (Puskesmas Pembantu) Regional Budget Consolidated Budget consisting of Central Government Budget (Deconcentrated), Provincial Budget and District Budget. Renstra Ministry/Agency Medium-Term Strategic Plan (Rencana Strategis) RGDP Regional GDP RKPD Regional Government Work Plan (Rencana Kerja Pemerintah Daerah) RPJMD Regional Medium-Term Development Plan (rencana Pembangunan Jangka Menengah Daerah) Sakernas Labor Force Survey (Survei Tenaga Kerja Nasional) SDO Subsidy for Autonomous Region (Subsidi untuk Daerah Otonom) SIKD Regional Finance Information System (Sistem Informasi Keuangan Daerah) SKPD Regional Government's Working Unit (Satuan Kerja Pemerintah Daerah) SME Small/Medium Enterprise STR Student Teacher Ratio Sub-National Budget Consolidated Budget consisting of Provincial and District Budgets, but excluding Central Government. Susenas BPS National Socio-Economic Survey (Survei Sosial Ekonomi Nasional) TKD Regional Performance Bonus (Tunjangan Kinerja Daerah) WB World Bank Practical Guidelines for Analyzing Public Expenditure at the Sub-National Level iii  Chapter 1 Introducing Public Expenditure Analysis Chapter 1 Introducing Public Expenditure Analysis 1.1 What is Public Expenditure Analysis (PEA) Public expenditure analysis (or PEA) is a method of analyzing how governments allocate and manage their financial resources. The purpose of doing the analysis is to provide recommendations on how governments can manage public finances more efficiently and effectively in the future. 1.2 Why is the PEA useful? All governments have limited resources. This means there is a need to carefully decide how those financial resources will be allocated in order to achieve the maximum public benefits. However, in order to make these decisions, governments need accurate and timely information and analysis in order to answer key questions, such as: 1. How much money does the government have to spend? Where does the revenue come from? What is the potential, if any, for increasing the government's financing envelope? 2. What has the government spent its resources on previously? 3. What sort of public services have been provided with the current budget? Which sectors have good service provision and which sectors need improvement? 4. Who are the main beneficiaries of government spending? For example, is it the rich or the poor? Women or men? Rural or urban areas? Are the benefits spread evenly? Do the beneficiaries have equal access to services? Are there disadvantaged strata of the population who need special attention? 5. Have the services provided resulted in better human development outcomes for the population? For instance, have literacy rates, education levels, morbidity rates, life expectancy etc. improved? 6. How effective is the current planning and budgeting framework and process? Is the budget approved on time? Are the funds available in a timely manner? Are the planning priorities reflected in the budget? 7. What is the capacity of the civil service in public financial management? Are there areas that could be improved? If so, through what means could improvements be made? The answers to questions such as these will help governments to identify priorities that need to be tackled through government spending and help them make informed decisions on how best to allocate funds. 1.3 Who will use the PEA? Many widely differing groups of people will find PEA of use: Local Government (executive branch) The executive branch of the government, as the party responsible for initially setting the development priorities and allocating budget to meet development objectives, can use the analysis to help it in the allocating process. If Practical Guidelines for Analyzing Public Expenditure at the Sub-National Level 1  Chapter 1 Introducing Public Expenditure Analysis the PEA is conducted on a regular basis (e.g. annually or every two years), it can also be used as a monitoring tool to evaluate whether development targets have been met. The PEA report also identifies capacity development needs, providing a platform for various programs to support local governments. Local Government (legislative branch) The legislature is responsible for approving both the medium-term expenditure plan (RPJMD) and the budget (APBD). Therefore, it needs analysis to help in the evaluation of the submitted budget, especially to establish whether it is in accordance with the development objectives and priorities identified in the RPJMD. The PEA can also serve as a monitoring tool for the legislature in evaluating the performance of the executive. . Central Government The PEA report provides a foundation for the central government (GoI) to observe how local governments have spent their money and the extent to which local governments have implemented regulations and followed guidelines laid down in the regional finance and autonomy sectors. Lobbyists Individuals and organizations (for example, CBOs and CSOs) with specific interests and advocacy aims can use the PEA to help them in their advocacy and lobbying work. Advocacy policies are developed based on sound analytical work and the PEA serve as one source for this analytical work. Researchers and Academics Researchers can also use the PEA methodology as a framework for their own research. It is a method for analyzing how governments allocate their resources and can supplement their existing research. PEA reports can also be used as an information source for researchers and students interested in sub-national public finance issues. Other Donors and Local Government Programs Other donors and local government programs can use the capacity development needs identified in the PEA report as a basis to assist them in developing their own programs. Private Sector Entities from the private sector already with investments, or interested in investing in a certain province or kabupaten/kota, can use the PEA to increase their knowledge of the locality. The PEA is a source of general information on economic structure, sources of revenue, the local government's spending priorities, and public service delivery successes and challenges. The PEA also reflects local government's capacity, as well as the level of transparency in its activities. Public Publishing a PEA is one important way for governments to be transparent with regard to their use of public resources. A PEA presents financial information compiled from long and often complex budget documents in a format that is far easy to understand. Furthermore, a PEA contains a clear analysis of spending trends that the public can then use to hold politicians and governments accountable for their promises and responsibilities. 1.4 What is included in the PEA? PEA is a dynamic methodology that should be regularly revised to meet the needs of the users (section 1.3). However, as a minimum, any PEA should include all of the following: Chapter 1: Overview This chapter should introduce the reader to the geographic area researched. It should include information about its history, geography, population, government structure, economic structure and trends on important macroeconomic indicators, such as poverty level, growth rate, employment levels, human development index (HDI) and minimum service standards (MSS). 2 Practical Guidelines for Analyzing Public Expenditure at the Sub-National Level  Chapter 1 Introducing Public Expenditure Analysis Chapter 2: Planning and Budgeting This chapter should provide the reader with an overview of the planning and budgeting process at the national level and how the regional level contributes to the national framework. The analysis should include analysis on whether the sub-national government is following the national framework. Furthermore, the chapter should establish the level of consistency between planning documents (RPJMD, Renstra, RKPD etc) and whether the priorities set in those planning documents are reflected in the budget. Chapter 3: Revenue The purpose of this chapter is to provide a comprehensive picture of revenue at the sub-national level. This includes calculating the total revenue envelope, including an analysis of revenue-source trends. For example, does the sub- national government derive its revenue predominantly from own-sourced revenue (PAD) or transfers from central government? This chapter also includes calculations of the deficits and surpluses of the sub-national government, and its financing policy. Finally, this chapter includes analysis of how the sub-national government records its revenue and financing, and whether there are discrepancies. Chapter 4: Expenditure The purpose of this chapter is to provide a comprehensive picture of expenditure at the sub-national level. This includes calculating total expenditure and analyzing spending trends across time, sector, economic classification and by which level of government (province, kabupaten/kota or central governments). This chapter also looks at ability of the sub-government to absorb its budget by analyzing realization rates. The purpose of this chapter is to provide recommendations on how governments can improve the effectiveness and efficiency of public spending. Chapter 5: Strategic Sectors: Education, Health and Infrastructure The purpose of this chapter is to provide sharper analysis of those sectors most important for public service delivery: health, education and infrastructure. For each of these three sectors, this chapter analyzes spending and compares it with what the spending has achieved, both in terms of outputs such as staff, buildings and services, and also whether the spending has achieved an improvement in outcomes. For example, has health spending increased? If so, has this resulted in improved services (access, quality etc) and, if better services have been delivered, has this resulted in lower illness or mortality rates. Recommendations from this analysis may include identifying priority areas of health or education that the government should target, or how the government can improve its spending within a specific sector (e.g. more funds should be allocated to maintaining existing infrastructure rather than building new infrastructure). Attached in Appendix 1 is the PEA Minimum Standard Outline that provides the key chapters, sections and questions that all PEAs must include. Practical Guidelines for Analyzing Public Expenditure at the Sub-National Level 3  Chapter 2 Doing a Public Expenditure Analysis Chapter 2 Doing a Public Expenditure Analysis The following briefly describes the main steps in conducting a PEA: 2.1 Writing the Research Proposal Before starting any research activities, it is important to have a comprehensive research proposal. The purpose of the research proposal is to set out what the research will be about, why it is important, who will do it, who are the target audiences, and the timing and scope of the research. This preparatory step is important in avoiding undertaking irrelevant work and, if working in a team, ensuring that there is a common understanding between team members. This step is important because defining the scope of research also defines the scope of data that will need to be collected. Chapter 3 provides further guidance on writing a research proposal. 2.2 Collecting the Data Once the proposal is completed, the researcher (or research team) can start the data collection. This is one of the most crucial stages of the research, as the quality of research is directly correlated to data quality. There are four important characteristics of data quality: data should be detailed, comparable, accurate and timely. The more detailed the data the better the analysis. If data are very broad and general, the researcher will experience difficulties in finding explanations for trends and drawing conclusions. In order to make comparisons across time, or with different kabupaten/kota, the data used must be comparable. For example, if the expenditure in the agriculture sector for kabupaten 1 includes fisheries but does not include fisheries in kabupaten 2, this means the agriculture information is not comparable unless the fisheries information is removed from kabupaten 1. It is important that the researcher examine the data carefully to ensure that they are comparable. Accuracy of data is also important, although this may not always be within the control of the researcher and may depend on the methodology used by those who responsible for primary data collection (e.g. BPS). For example, there are often many different versions of the APBD (pre-audit, post-audit, etc) and it is important that the data used are the most accurate available. There are two aspects to whether data are timely: first, conclusions on public finance can only be based on data from multiple years. A general rule of thumb is that data must be collected over a minimum of five years. The longer timeframe the data are available the better the analysis and its conclusions. Furthermore, in order for the research to be relevant, the most recent data are required. Gaining access to financial information is not always a smooth process and the researcher will need to be creative in finding different ways of ensuring that data collected are complete. Furthermore, the researcher may find inconsistent data from difference sources and will need to make judgments on which source is more appropriate (based on the principles of detailed, comparable, accurate and timely). Chapter 4, Section 4.1 will provide further guidance on the process of data collection. Practical Guidelines for Analyzing Public Expenditure at the Sub-National Level 5  Chapter 2 Doing a Public Expenditure Analysis 2.3 Entering the data into a format that is useful for analysis Raw data (for example, found in the APBD or RPJMD) are often in a format unsuitable for analysis. Some common problems include: a) the data are only available in hardcopy; b) the data are not comparable because the budget format has changed; and c) the sectoral and economic classifications vary between governments. Therefore, in order to ensure consistency in the usage of data across the analysis, it is essential that data are entered into a format that allows the information to be compared and analyzed. This may include entering the information into a common table. This manual includes a suggested master table that all budget information should be entered into prior to analysis. Chapter 4, Section 4.2 provides further guidance on entering data into a format that is useful for analysis. 2.4 Analyzing the data, formulating conclusions and recommendations Once data collection has been completed and the data entered into one location and format, the researcher(s) are ready to conduct the analysis. While Chapter 5 sets out a variety of methodologies needed to analyze the data in order to write a PEA report, below are some broad suggested steps for conducting the data analysis: (a) Based on the available data, what trends can be seen? Has the indicator remained steady, increased or decreased? (b) Why has the trend happened? Is there a reason for the trend? Components (a) and (b) form the conclusion of the analysis? (c) Based on the reason explaining the trend, is there something that the government can do to improve the situation? This becomes the recommendations. Overall, the hallmark of good analysis is that the trends, conclusions and recommendations are linked to each other, and that these in turn stem from the available data. Further guidance on analyzing data is found in Chapter 5 2.5 Writing the report Based on the analysis and conclusions drawn in Step 4, the researcher(s) will consolidate the most important research and messages into a final written report. While strong analysis based on quality data is essential for the integrity and validity of the conclusions and recommendations, a well-written concise report is the medium by which the main messages are delivered to its audience. There are several characteristics to a well-written report: a) It has a clear and consistent structure. This manual has provided a general structure (see Section 1.4) that which most PEA reports to date have followed. While researchers should be free to add additional relevant material in order to make comparisons with other PEA research, this manual recommends that researchers remain faithful to the overall structure; b) all content included in the PEA report is relevant to its overall message; and c) sentences should be concise and free of jargon. Chapter 6 provides further guidance on writing a PEA report. 6 Practical Guidelines for Analyzing Public Expenditure at the Sub-National Level  Chapter 3 Research Proposal Chapter 3 Research Proposal Before starting data collection or conducting any analysis, it is important to have a comprehensive research proposal. The purpose of the research proposal is to set out what the research will be about, why it is important, who will do it, who are the target audiences, and the timing and scope of the research. This preparatory step is important in avoiding undertaking irrelevant work and, if working in a team, ensuring that there is a common understanding between team members. As a minimum, a PEA research proposal needs to cover the following: Background: What circumstances have led to the need for a PEA? Has anyone asked for the PEA? If so, who? Purpose of research: Outline what the PEA is trying to achieve. As mentioned in section 1, the main purpose of the PEA is to provide recommendations to government on how budgets can be allocated more effectively. Are there supplementary goals that the PEA is trying to achieve? For example, is it trying to build the capacity of team members to work in a team? Is it trying to collect budget and planning documents for university libraries or a database? Key audience: Identify who this research is primarily intended to reach and how the audience(s) is expected to use the research. Scope of research: This should include identifying the key research questions that need to be answered; an agreed time frame that this research will cover (e.g. years and data needed); geographic scope of the research (e.g. how many kabupaten/ kota will the PEA cover?); content scope of research (e.g. type of data required); an overview of the report structure, although this may change over time depending on the data collected and analysis conducted so the structure should remain flexible; and discuss generally the type of conclusions and recommendations expected. Timing: Provide a Gantt chart on the timing of the research, including key milestones (data collection completed, first draft completed etc). Research team