PBG in Indonesian Intergovernmental Grants

The first effective ‘grants’ project were traditional input-based grants, which came from foreign loans in 2009 for the development of mass rapid transit (MRT) system in Jakarta. In 2010 and 2011 several ‘grants’ projects followed, all of them are performance-based. The

‘grants’ projects are summarized in the following table:

Table 5.4

‘Grants’ Projects

Projects Executing agency

Disbursement mechanism

Grants period

Source of funds

Total amount

(IDR)

Number of recipients

Targeted Output Jakarta Mass

Rapid Transit

Ministry of Transportation

Input based 2009 – 2014

Foreign loan (Japan)

5.3 trillions

1 (The loan is used to acquire tender assistance services, construction, and vehicles) Local Basic

Education (L-BEC)

Ministry of Education

Performance-based (PBG)

2009 – 2012

Foreign grants (European Commission and Netherlands)

125 billions

50 Improvement of education capacity

Drinking water (completed)

Ministry of Public Works

Performance-based (PBG)

2010 – 2011

Foreign grants (Australia)

35 77,000 house connections for piped water Waste Water

(completed)

Ministry of Public Works

Performance-based (PBG)

2010 – 2011

Foreign grants (Australia)

35 billions

5 4,826 waste water connections Water and

Sanitation Program (WASAP-D)

Ministry of Public Works

Performance-based (PBG)

2010 – 2012

Foreign grants (Netherlands)

18 billions

6

Community-based and institution-based sanitation system Accelerated

Sanitation Development

Ministry of Public Works

Performance – based (PBG)

2010 – 2012

Foreign grants (Australia)

48 billions

22 Sanitation and waste water infrastructure (Source: Indonesian Ministry of Finance)

5.9.1. PBG Approval Process

The process is mainly driven by line ministries. Unlike DAK which uses a formula-based approach in its allocation, as a part of ‘grants’, PBG is based on certain considerations and policies. According to Government Regulation No. 2/2012, general considerations used to determine grants recipients (including PBG recipients) and the allocated amount are:

- Low fiscal capacity

- Regions requested by foreign grantor

- Regions which meet criteria determined by line ministries - Regions decided by central government to be recipient

The considerations above are not the only points that count for recipient selection. Other eligibility criteria for PBG recipients can be customized according to the design and target of each project. Figure 5.7 below summarizes PBG approval process.

Upon choosing the potential recipients and the projected amount, line ministries submit the proposal to the Ministry of Finance. Based on this, the Ministry of Finance prepares ‘grants’

agreement to be signed by the Ministry official and the head of subnational governments (governor, mayor, or regent) or their representatives. Before the signing of ‘grants’ agreement, the Ministry of Finance can ask subnational governments to provide additional documents confirming their willingness to comply with terms and conditions of the grants, e.g. local regulation on capital investment, local budget containing allocation for counterpart funds, and other documents as necessary.¹⁷

17 Based on interview with Yuddi Saptopranowo, Section Head Regional Grants III, Indonesian Ministry Figure 5.7.

PBG Approval Process

Line Ministries

Proposing potential PBG recipients and projected amount

Ministry of Finance

Endorsing PBG recipients and projected amount

Ministry of Finance and Subnational Government Signing Grants Agreement

PBG allocation to each recipient

Considering fiscal capacity, grantor’s request, line ministry’s criteria, and government policies

Additional documents can be asked from potential recipients

5.9.2. PBG Implementation and Funds Disbursements

Line ministries issue guidelines on PBG implementation. The activities conducted by subnational governments are strictly limited to those determined in the guidelines and must comply with the grant agreement. Monitoring and supervision are conducted by related line ministries. Periodical reports must be submitted to line ministries and the Ministry of Finance.

The detailed arrangement on implementation, supervision, monitoring, and reporting are described in the guidelines. As in the case of PBG allocation, the arrangement for these aspects can also be customized according to the projects.

Disbursement of PBG funds is subject to administrative and technical requirements.

The administrative requirement includes submission of certain documents. Technical criteria include verification result of the attainment of a certain standard/target in project implementation. The standard/target may differ for each project, and are explained in the project guideline. Disbursement can only be made if both administrative and technical requirements are satisfied. Failure to meet the standard/target results in ineligibility to receive PBG funds.¹⁸

of Finance, March 2012.

18 ibid.

CHAPTER VI

CASE STUDY: PBG FOR DRINKING WATER

This research uses PBG for drinking water in Indonesia as a case study to evaluate the impacts of PBG implementation on local governments’ accountability in delivering public services. As a consequence of functions sharing in decentralization, Indonesian local governments are responsible for the provision of drinking water service. To deliver the service, most local governments assign water supply companies as service providers, while a small percentage of local governments exercise the provision themselves. Beside the companies and local governments, private sectors also provide this service by retail sales, delivering the water on a door-to-door basis rather than through water pipes network, but the number is insignificant compared to water supply companies.

The research selects PBG for drinking water for two reasons. First, drinking water is a monopolistic public service, and the delivery of the service is predicted to follow the long-route of accountability suggested by the theoretical framework in Figure 3.4. In drinking water service, a complete set of actors in the long route of accountability are present: citizens that demand water service, local governments as policy makers who are responsible to ensure the service delivery, and service providers (water supply companies) who exercise the delivery based on assignment from local governments.

Second, drinking water is a sector with high importance in the national agenda, but it is in relatively poor condition. Drinking water has been assigned a national priority sector since 2005, and is included in the targets of Millennium Development Goals (MDG) 2015. However, according to the data of the Indonesian Central Bureau of Statistics, drinking water is one of the public services with decreasing indicators post decentralization. The performance of this sector is also relatively low. In 2010, The Indonesian Ministry of National Development Planning classified drinking water service as“needs special attention”, the lowest of three categories used

by the central government to monitor the progress of MDG targets. Compared to neighboring South East Asian countries of comparable income, in 2008 the performance of drinking water service in Indonesia is among the lowest, according to the World Bank in its World Development Indicators 2010.¹⁹

The situation raises interest of why drinking water service in Indonesia is still in a poor condition despite its importance to citizens (water is one of the vital basic needs) and the national policy that puts it as a priority. Why does this happen and how can this be changed?

This makes the drinking water sector an ideal case study since the research can observe whether there’s a difference between the condition before and after PBG implementation, and how the incentives feature in PBG work to improve local governments’accountability in this service.

This chapter explains the condition of drinking water before PBG implementation, the background of PBG for drinking water, how PBG is implemented, and the impact of PBG implementation on local governments’accountability in drinking water service delivery. In this chapter, the research tries to find the answer of whether the incentives feature in PBG makes positive improvement in local governments’accountability, and if it does, how it works. Finally, this chapter describes the results of the survey conducted to investigate local governments’

response to PBG implementation.