PROGRAM RESTRUCTURING

NATIONAL MEDIUM TERM DEVELOPMENT PLAN

2010 - 2014

Draft

CONCEPT AND TECHNICAL STEPS

for
PROGRAM RESTRUCTURING

Benny M. Chalik
Danya D. Hakim

August 2008
 TABLE OF CONTENTS

I. Introduction 6
1.1. Background 6
1.2. Objective and Aim 7
1.2.1. Objective 7
1.2.2. Aim 7
1.3. Scope 8

II. Framework for RPJMN Program Restructuring 9

2.1. Principles for Preparing the National RPJM 9
2.1.1. Elaboration of the National Development Policy Direction 9
2.1.2. Resource Allocation Projections 12
2.1.3. Implementation of Aggregate Fiscal Discipline in the Medium
Term Budget Framework 18
2.1.4. Macro Economic and Fiscal Projections 20
2.2. Framework for the National RPJMN Program Restructuring 20
2.2.1. Elaboration of the Medium Term Development Plan into the
National Development Program Architecture 22
2.2.2. Projecting the Medium Term Development Plan into Yearly
National Development Priorities 23
2.2.3. Guidance for the Preparation of New Initiatives as prepared by
Ministries and Agencies 24
2.2.4. Elaboration of the Function of Performance Indicators as
Measures in Program and Activity Implementation 25
2.2.5. Elaboration of the National Medium Term Development Plan
based on Results Based Budgeting 25
2.2.6. Implementation of the Performance Based Budgeting
Approach in the Medium Term Expenditure Framework (MTEF) 27

III. Approaches for Preparing the RPJMN Programs 29

3.1. Medium Term Fiscal Framework 29
3.2. Program Architecture 30
3.3. Management of Performance Aims Achievement 32
3.4. Comprehensive Cost Structure 33
3.5. Medium Term Expenditure Framework 34
3.6. Proposing and Reviewing RPJMN Programs 36

IV. Guidance for the Preparation of the Draft National RPJM 38

4.1. Preparation of the Medium Term Development Policy Framework 38
4.2. Preparation of the Medium Term Macro Economic, Fiscal, Expenditure
and Budget Framework 42
4.3. Preparation of the National RPJM Programs and Budget 51
4.4. Monitoring and Evaluation 60

V. Recommendations 61

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 TABLE OF DIAGRAMS

Diagram 1. Elaboration of the National Development Policy Direction 10

Diagram 2. Flow Diagram for the Preparation of the draft 2010-2014 RPJMN 21

Diagram 3. RPJMN Program Architecture, built on the basis of the Government’s

Organizational Structure, the Budget Classification Structure, the
Policy Priority Structure and the Performance Management Structure 23

Diagram 4. Typology of Performance Indicators 33

Diagram 5. Medium Term Expenditure Framework 36

Diagram 6. Policy Direction, Priorities and the National RPJM Program-Activities 40

Diagram 7. Computation of the Medium Term Expenditure Framework based on

the Forward Estimates 59

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 I. INTRODUCTION

1.1. Background

Consistent with Article 12 Line (2) of Law 17/2003 on State Finances, which
states that the preparation of the draft budget (APBN) will be implemented with
reference to the government work plan (RKP) in the effort to achieve government
objectives, the preparation of the draft budget is thus an undivided process between
program and activity planning on the one side and budget planning on the other side.
In addition, Article 4 Line (3) of Law 25/2004 on the National Planning System, states
that the government work plan (RKP) is an elaboration of the RPJM (the national
medium term development plan). These stipulations directly place the RPJM as a
critical and strategic planning effort in the endeavour to achieve national objectives.

The problem which then needs to be addressed is how to formulate a medium

term expenditure approach and framework for the comming years which ensures
sustainable efficiency and effectiveness of yearly development programs and activities.
In other words, in order to form an MTEF, a medium term fiscal framework is needed
which can be implemented in a disciplined manner and is coupled with efficient and
effective resource allocation. Further, the effort to achieve efficient and effective
resource allocation will be established by government decisions on the phasing and
improvement of programs and activities, and through the achievement of fiscal targets
related to the resource envelope for the coming years.

Based on these initial thoughts, planning and budgeting efforts require a form of
program architecture which structurally can project government objectives into the
objectives of the long term, medium term and annual development plans. With the
formation of the program architecture, sustainability and integration of program phases
can be obtained to support the achievement of program and activity objectives.
Despite all this, the effort to achieve government objectives will still not be optimal
unless it is coupled with an effort to establish development priorities, through which
alternative programs can be established, which would then be adjusted to urgent
community needs, program phases and budget availability.

The high disposition of community needs to urgent aid-type programs and

activities requires each government activity to include accountability and transparency
in planning and budgeting excercises, which have as consequence the need to include
performance indicators as a measure of successfull program and activity
implementation. In other words, the preparation of programs and activities should
include performance indicators that require careful program implementation through
strengthened coordination, monitoring and evaluation.

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 During technical and operational implementation, coordination, monitoring and
evaluation activities will need to take into consideration the performance indicator
characteristics of programs and activities, specifically the inputs, outputs, outcomes
and impact obtained from program and activity implementation of a program in itself or
as a joint effort with other programs and activities. The inclusion of performance
indicators in program based budgeting will have the same effect as if implemented
through performance based budgeting, wherein both approaches produce basic data
and information for management and are results-based.

Based on the above, the 2010-2014 program restructuring effort which will be
implemented through the program architecture, MTEF, MTFF, PBB and results based
management, will result in a change in costing techniques in accordance to the
development sector and or the ministry/agency at different structural levels. Further,
focus priorities will be established as program and activity endeavours to provide
substantial stimulation to the achievement of national development objectives.

1.2. Objective and Aim

1.2.1. Objective

The 2010-2014 RPJM Program Restructuring effort has as objective to:

a. To establish a guidance for preparing programs and activities in development
planning documents.
b. Implement a multi-year performance accountability system through the detailing of
government priorities and performance indicators within development programs and
activities.

1.2.2. Aim

The aim of the 2010-2014 program restructuring effort is to form a planning and
budgeting system which is able to ensure a clear and sustainable development
direction through improved efficient and effective resource allocation and aggregate
fiscal discipline in the implementation of development policies.

1.3. Scope

The 2010-2014 RPJM Program restructuring effort will review the following:
a. The detailing of national objectives in the long, medium term and annual
development plans into the national development program architecture in order to
ensure more meaningful and sustainable development.

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b. The elaboration of the national medium term development plan into the
ministry/agency strategic plans and work plans, as an effort to support results
based planning and budgeting.
c. Project the medium term development plan into yearly national development
priorities as a government effort to tackle yearly threats, constraints, challenges and
development opportunities.
d. Provide reference to program and activity preparation for the ministry/agency
Renja, the RKP, and for the implementation of efficiency initiatives as well as new
initiatives in the effort to enhance efficient and effective resource use and to
implement aggregate fiscal discipline in multi-year planning and budgeting.
e. Implement a performance based development approach within a medium term
development framework.
f. Detail the function of performance indicators as measures used in program and
activity implementation at every planning and budgeting phase, including
monitoring and evaluation.

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II. FRAMEWORK FOR RPJMN PROGRAM RESTRUCTURING

2.1. Principles for Preparing the National RPJM

2.1.1. Elaboration of the National Development Policy Direction

As mentioned previously, the elaboration of the national direction and objectives

into the long term development plan (RPJP), which is then elaborated into the medium
term development plan (RPJM), and which is in turn detailed into the annual
government work plan (RKP), reflects a continuing development structure. Through
the application of a vertically structured development direction and objectives, it will be
possible to achieve objectives in a partial and phased manner towards stated goals in a
sustainable manner, as expressed in Diagram 1.
This sustainable development structure can ensure that all activity objectives
lead to the achievement of sectoral program objectives, which in turn lead to the
achievement of multi-sectoral program objectives at the national level. In line with the
endeavour to achieve yearly program and activity objectives and aims, it will be
possible to achieve development objectives in the medium term using a rolling system
during the five years of development program and activity implementation.
The achievement of the medium term development objectives in a rolling fashion
is based on the assumption that yearly development plans are projections of medium
term program plan implementation. The question that naturally arises is, if
development is to be implemented in a rolling fashion from year to year throughout the
five year time frame, is the medium term development plan still relevant? The answer
is yes, it is. The RPJM not only provides a development direction and clear objectives
in the medium term which can guide towards the attainment of more direct impact
through joint cummulative effort, it can also be used as a basis for efficient and
effective resource allocation during the medium term.
In order to position the RPJM as a planning document which can be used as
reference in the preparation of the Government Work plan (RKP), the elaboration of
development program objectives needs to be conducted in detail vis a vis constraints
that may emerge during the next five years. In addition, based on the medium term
strategic development plans, it will be possible to establish various development goals
and priorities which include alternative development programs and activities.

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Diagram 1. Elaboration of the National Development Policy Direction
 After the development goals and priorities have been established, the
preparation of the RPJMN will require a review of planned policies which in the medium
term time frame can contain and delineate various new policy plans as a form of policy
adjustment and updating process, in response to emerging yearly development
constraints. The policy adjustment and updating process is a critical step in minimizing
planning biases that may have occurred, such that it will be possibe to continue
positioning the RPJM as a reference point during medium term development.
In the RPJMN, the policy adjustment and updating process is a scenario
simulation excercise of various changing development situations which could affect
implementation in the medium term. Based on the results of these simulation
excercises, the government can anticipate development constraints in the comming
years.
Besides the results of the simulation excercises for the medium term, data and
information obtained from coordination, monitoring and evaluation activities can also be
used as basis for establishing development policies for which the adjustment and
updating excercise for the preparation of the next RPJM can be based upon. In order
to obtain adequate data and information for policy planning, performance indicators
which can provide data and information on program and activity targets need to be
used.
Performance indicators in program and activity preparation act as performance
measures for which relevant data and information can be produced as inputs to
decision making processes. Input, output, outcome and process performance
indicators can be used to measure development performance in terms of current and
future development goals and objectives.
In order to review and assess development performance, the use of indicators is
not limited to one or two types of indicators as measures for analyzing program and
activity performance. It is common to find the use of key performance indicators
(KPIs), which aim to reflect key performance characteristics of a program or activity.
KPIs can be effective if they can capture essential characteristics of programs and
activities, either quantitatively or qualitatively as program and activity aims and targets.

2.1.2. Resource Allocation Projections

a. Institutional Analysis of the RPJMN Development Policies

Logically speaking, the RPJM framework should embody the extrapolation

results of program and activity implementation data and information during the five
years of the previous RPJM period. The development pattern of policies from year to
year throughout the five year period of the previous RPJM programs and activities,
should be the basis for establishing policies for program and activity preparation in the
next medium term. In terms of the link between the previous RPJM and the future one,

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the current RPJM embodies the existing performance, whereas the next RPJM should
embody the expected performance.
In this context, the next question that arises is whether the expected RPJM can
enhance resource allocation more efficiently and effectively than the previous RPJM. In
order to answer this question, an institutional analysis of organizational performance
and rules of the game is necessary, within which each institution is analyzed in terms of
capacity to achieve development goals and targets efficiently and effectively in terms of
resource allocation.
Organizationally, an institutional analysis will review the main roles,
responsibilities and functions of the ministry/agency, which includes an analysis of the
roles and functions of each echelon in the civil service related to program and activity
preparation and implementation. An institutional analysis is also required to analyze the
rules of the game for enhancing efficient and effective resource allocation. Once the
institutional analysis has been conducted it will be possible to minimize projection
biases during the preparation of the new RPJMN. Efforts to further reduce
extrapolation biases in development planning preparation will be conducted through
annual policy adjustment and updating efforts.
Assuming that the medium term policy direction is established consistently, then
factors that influence RPJM program size, based on an institutional analysis for
enhancing efficient and effective resource allocation, can be controlled and developed
into program aims and activity targets in a rolling fashion throughout the five planning
years. The said factors are: (1) service levels during the medium term period; (2)
prioritization; (3) the establishment of performance indicators; and (4) policy adjustment
and updates.

(1) Service Levels in the Medium Term

Policy development in the medium term is usually reflected in program and activity
target area expansion, increase in the size of the target beneficiary group, as well
as an increase in the scope of the activities in accordance to program
development from year to year. In addition, there will be an increased demand for
better program and acivity services. In other words, the type and quality of
services will tend to continue to increase as development proceeds.

In the implementation of programs and activities, an increase in the number, type

and quality of services will be affected by program and activity targets for the
upcomming year. On the other hand, the size of program and activity targets will
be directly affected by budget availability in the indicative, temporary and definitive
ceilings.

The fact that there is a resource constraint forces planning in the RPJMN to
proportionally distribute program and activity targets throughout the planning years
without affecting those programs and activities that are categorized as
indiscretionary. During implementation, the process of resource distribution will be

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 affected by the level of synchronicity of program and activity preparation
processes, which should reflect consistency between planning and budgeting.

Program activity synchronization in the distribution of development resources is a

critical point in efficient and effective resource allocation. Program and activity
synchronization includes, among others, the effort to align and adjust programs to
ministry/agency functions and subfunctions, the formulation of activity outputs that
support program results, outcomes and outputs, and to establish simple activity
and sub-activity nomenclature able to reflect the outputs to be achieved.

Similar to the RKP and RKA-KL preparation processes, the formulation of the
national RPJM requires ministries/agencies to prepare programs and activities
that are comprehensive and consequential, and in line with the roles and
responsibilites of each ministry/agency. Based on this performance committment,
the RPJM document can be used as a reference in the formulation of program and
activity targets for a more efficient and effective budget preparation process.

(2) Establishing Priorities

Using the assumption that costing is based on indexed standard general costs
(SBU), standard specific costs (SBK) and detailed budget costs (RAB) which use
types, specifications and market prices, the resource allocation policy guiding the
RKA-KL preparation is thus largely affected by policy prioritization as stated in the
RKP, ministry/agency roles and responsibilities, the ministry/agency ceilings and
discussions between ministries/agencies and the DPR (legislative body).

(a) Annual Government Work Plan (RKP)

The Government Work Plan includes development programs and activities

which have been selected from ministry/agency work plans (renja K/L) for
the same year. Programs and activities in the Renja K/L are specific work
plans based on the ministry/agency strategic plans (Renstra K/L) whose
strategies have been reviewed in terms of capacity to respond to medium
term development constraints.
In the RKP, program activity budget allocation prioritization is provided to
those policies that anticipate urgent development program and activity
needs, those programs, with estimates, that can stimulate faster
development, and those that increase the size, type and quality of services.

(b) Ministry/Agency Organizational Roles, Responsibilties and Functions

Prioritization that is conducted based on organizational roles and

responsibilities is an effort to allocate program resources based on the
responsibilities of the various echelons within the government functions and
sub-functions for which they are responsible for. Prioritization that is based

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 on miniistry/agency organizational roles and responsibilities will position
each government function and sub-function into proportional roles in
program and activity implementation.

(c) Ministry/Agency Budget Ceilings

Government effort to constrain program and activity budget requests to

ensure that they do not exceed the resource envelope starts with a joint
effort by MoF and Beppenas in isssuing the indicative, temporary and
definitive ceilings, which reflect the highest allowable budget allocation per
ministry/agency. The establishment of the budget ceilings is a policy effort
to enhance resource allocation within ministries/agencies in line with the
constraints of the resource envelope.

(d) Agreement between Ministry/Agencies and the DPR

In accordance with the budgeting rights accorded to the legislative body,

ministry/agency work plans are required to obtain DPR approval. The DPR,
together with the government, delineates the development policy direction of
the country. Agreements with the DPR require ministries/agencies to
submit work plans to the DPR for review, discussion and approval with
regards to key aspects of planning and budgeting, in accordance to national
priorities and agendas, as well as projected resource envelopes.

(3) Establishing Performance Indicators

Performance indicators in programs and activities act as measures of successful

resource distribution. Each type of indicator reflects a specific aspect of
performance: input use, levels of outputs and outcomes, appropriateness of
processes and impact of program and activity implementation. Above all in terms
of resource allocation and distribution, performance indicators should reflect
optimal resource allocation.
Optimal resource allocation can only be expressed comprehensively through the
use of the impact performance indicator. Impact can be used to analyze the
integral and cumulative effect of development in the medium term in terms of
aggregate distribution of resources among programs, sectorally and inter-
sectorally. As such, it will be possible to analyze the extent of efficient and
effective resource allocation in the medium term at the national level.

(4) Adjusting and Updating Development Policies

Capacity to project yearly RPJMN resource allocation projections in a rolling

fashion into the RKP, is affected by policy adjustment and policy updating capacity
on a yearly basis.

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 As discussed above, the preparation of the RPJMN should take into account the
policy flexibility factor, which will allow future policy development to occur as a
result of adjustments and updates. The policy flexibility factor includes the policy
capacity of the RPJMN to conduct policy adjustments in response to the
interactive effect of the implementation of programs and activities. Often it is
difficult to foresee the interactive effect of development programs and activities, as
a myriad of factors need to be taken into account during yearly implementation.
By using the planning and budgeting system of the last budget year of the current
RPJMN period, the preparation of the budget for the next RPJMN programs and
activities can be projected more efficiently and effectively into resource allocation
from year to year. Moreover, these estimates can be used as basis for minimizing
bias in resource allocation.

b. Basis for Calculating the RPJMN Program Budget Plan

The calculation of RPJMN program financing needs is based on stipulations in

current regulations affecting the preparation of the yearly RKA-K/L, except that the
RPJMN is in addition, based on the perspective of a rolling 5 year budget framework.
Adjustments of the yearly RKA-K/L budget plans into the RPJMN budget plan is
conducted based on: (1) the development of program objectives/aims and activity
targets; (2) forward estimates for the comming five budget years; and (3) budgeting
based on performance management.
(1) The Development of Program Objectives/Aims and Activity Targets
Based on the Minister of Finance Regulation No. 55/2007 on the Guidelines for
Preparing and Reviewing Ministry/Agency Work Plans and Budgets (RKA/K/L),
the approaches of unified budgeting, MTEF and PBB will be implemented through
the preparation of two forward estimates. The implication is that in order to
prepare the budget plan for 2010 and 2011, the year 2009 will be used as base
year.
With the assumption of no policy change, the calculation of the forward estimates
is based on the use of the same standard cost and the same level of services as
in the budget year. As such the factors that affect the size of the budget plan
based on the forward estimates (2010 and 2011) are the program objectives/aims
and activity targets for each budget year. In this sense, program objectives and
activity targets will be affected by parameter changes which affect the unit cost
and the quantity of services.
The parameter which often directly affects unit cost is inflation, while the
parameter which usually directly affects the number of services is the growth
characteristic of the population, or the demographic factor. As an example, in
order to maintain the same level of services in the outyears, then the standard
cost used should be revised for inflation and the activity object ratio should be
revised for population growth.

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(2) Forward Estimates in the Five Budget Years
In line with the requirement to estimate two forward estimates when calculating
the baseline, then the calculation of the forward estimates for the five budget
years is conducted through six phases of forward estimate calculation. During
each phase, the calculation of the forward estimate is conducted based on the
assumption of no policy change. The assumption of no policy change implies that
the policy which underlies the preparation of the next two forward estimates is the
same as the policy which affects the calculation of the base year.
The difference between this forward estimate phase and the other forward
estimate phases within the framework of the five budget years, is in the use of the
base year. In the 2010-2014 RPJMN, the difference between the use of the 2009
base year for calculating the first set of forward estimates, and the use of 2010 as
the starting point for the second set of forward estimates is going to be in the
policies that affect the preparation of the budget and the forward estimates. As an
example, the calculation of the 2010 and 2011 budget years is based on the
development policies used in the preparation of the 2009 budget plan.
Subsequently, to calculate the forward estimates of the next phase, that is the
budget plans for 2011 and 2012, the starting point will be 2010, and so forth untill
the calculation of the sixth phase for the year 2014.
Changes in policy application affecting every base year and the forward estimates
is influenced by policy changes and the cost drivers. Policy changes affecting the
first base year and all the other forthcomming years will affect program aims and
activity targets due to changes in levels of services.
(3) Budget Policies based on Performance Management
Budgeting based on performance management is a form of policy formulation that
takes into account monitoring and evaluation data and information from program
and activity performance implementation. Data and information is used as basis
for revising programs and activities, both for the planning as well as budgeting
aspects.
The application of budget planning based on performance management will result
in activity output unit costs. This policy can be used as a basis for comparing one
activity budget plan with another, or it can be used directly as a basis for the
preparation of new activities.
The benefits obtained from policies based on performance management is that it
simplifies the process of calculating complex activity costs for identifying standard
unit costs. On the other hand, weaknessess in the application of such policies can
be found in the fact that even though outputs can be calculated efficiently, budget
planning as a whole can be inefficient.

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2.1.3. Implementation of Aggregate Fiscal Discipline in the Medium Term Budget
Framework

Besides discreet resource allocation from year to year, the RPJMN includes a
multi-year budget framework which connects all yearly development policies to the
medium term development policy on a continuous basis. In order to maintain and at
the same time enhance the current levels of development on a continuous basis, a
policy is needed which can sustainably maintain and enhance revenues and at the
same time adjust policies vis a vis expenditures that potentially can cause a budget
deficit. Such a policy to maintain and enhance revenues and which at the same time
can adjust multi-year expenditures is often called the policy of aggregate fiscal
discipline.

a. Yearly Expenditure Planning within the Multi-Year Framework

Calculations of the first budget year plan (T+1) based on the forward estimates
within the five year framework is a cost assessment of national expenditure needs
based on the results of implementing development policies in the previous year (T0).
Using the assumption that the results of the forward estimates are results of cost
estimates of expenditures from the implementation of policies based on a specific level
of services (baseline), then an effort that the government can do to maintain and
enhance the level of services is to implement new policies in the next budget year.
Policies that can be implemented by the government include completely new
policies or policy developments from previous policies. In this context, in order to
minimize the gap between revenue and expenditure, then the plan to implement new
policies needs to take into consideration available fiscal head-room as established in
the fiscal target projections.
Difficulties that may arise from the implementation of policies that are
developments from previous policies is that there may be links among and between
cost variables of programs and activities with other cost variables from other programs
and activities, resulting in expenditure increases that exceed the available fiscal head-
room.
Maintaining aggregate fiscal discipline while introducing new policies into each
budget year plan requires the process of adjusting expenditures as a whole after the
introduction of new policies, which are constrained by the projected resource envelope.
In an MTEF approach, expenditures for the implementation of new policies which have
been authorized are referred to as new initiatives. On the other hand, if it is estimated
that a new initiative will face financing challenges, it is instead possible to implement
savings on the one hand and propose new activities on the other hand, through what
would be called an efficiency initiative.

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b. Yearly Revenue Plans within the Multi-Year Framework

The preparation of yearly revenue plans, based on the results of yearly forward
estimates within the five year framework, position the forward estimates as a fiscal
revenue target under a pessimistic (baseline) scenario. With the assumption that the
fiscal projection scenario is to be divided into three scenarios: pessimistic, optimal and
optimistic, then the pessimistic scenario is the minimal fiscal target projection scenario
which needs to be achieved for the financing of next year’s budget plan under a
situation of no significant policy changes. In other words, the results of the forward
estimates, with respect to expenditures, is equal to the lowest fiscal revenue target that
needs to be obtained in the fiscal projection for the next budget year.
An optimistic fiscal projection scenario is prepared based on the possibility of
achieving maximum fiscal targets, such that significant fiscal headroom becomes
available for new policies. On the other hand, an optimal fiscal projection scenario is a
scenario wherein multiple policy adjustments will be implemented on the forward
estimates as a result of policy implementation.
In the implementation of aggregate fiscal discipline, the three fiscal projection
scenarios are a reflection of maximum and minimum expenditures that need to be
observed during program and activity preparation as related to the implementation of
policies for improving the level of services.

2.1.4. Macro-Economic and Fiscal Projections

The preparation of the macro-economic and fiscal framework in the RPJMN is

based on a review of past macro-economic and fiscal projections, whose result is
established as the new medium term macro-economic and fiscal framework.
The review of past macro-economic projections, besides being based on
estimates of macro-economic variables which affect revenues, expenditures, the deficit
and financing, should also be based on a review of opportunities to enhance revenue
generation and for enhancing efficiency and effectiveness of spending and financing.
The results of such a review would resemble a strategic plan to enhance revenue on
the one side and enhance efficiency and effectiveness of spending on the other hand in
the medium term.
Besides the review of macroeconomic projections, the medium term
macroeconomic framework should also be complimented with a review of policy impact
and feedback from all aspects of development.
In order to establish the basis of medium term development planning and
budgeting, the RPJMN should include a medium term fiscal framework which includes
the fiscal policy direction and targets in the medium term, among others, the tax ratio,
or tax revenues to gross domestic product (GDP), total expenditure to GDP ratio, the
budget deficit to GDP ratio, and the debt to GDP ratio, which should be consistent with
the macroeconomic framework.

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2.2. Framework for National RPJM Program Restructuring

Based on the preparation principles of the national RPJM, the RPJM is a planning
document which includes a detailed national development policy direction, resource
allocation projections, and guarantees the implementation of aggregate fiscal
discipline, as well as being based on macroeconomic and fiscal projections in the
medium term.
In its preparation, the national RPJM is developed based on the forward
estimates. The preparation of the forward estimates is based on six phases of forward
estimates preparation, within which the first phase uses as base year the last year of
the previous RPJM period in order to calculate the first year of the RPJM under
preparation. This iterative approach is used for preparing the second to the fifth budget
years.
In the diagram below (Diagram 2), the forward estimates still have to be adjusted
to policies to enhance the level of services, and further have to be tested by the
program architecture framework in order to ensure consistency with policy planning
and performance and organizational management.

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Diagram 2. Flow Diagram for the Preparation of the draft 2010-2014
RPJMN

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2.2.1. Elaboration of the Medium Term Development Plan into the National
Development Program Architecture

The program architecture is a structured program and activity construct which is

formed hierarchically so that it is possible to explain the logical relationship between
planning priorities, organizations, programs, activities, performance indicators and
financing. In other words the program architecture is a framework for analyzing the
relationship between program and activity funding with program and activity
performance, including performance achievements, and organizational accountability.
The elaboration of national objectives and direction in the long term development
plan, which is in turn elaboraterd into the medium term development plan and in the
annual government work plan, is often referred to as the elaboration of the continuing
development program structure. The program architecture acts as a processor to test
programs and activities from the perspective of links to government organizational
structures, the budget structure, the policy priority structure and the performance
management structure.
The government organizational structure which consists of ministries and
agencies can be categorized on the following lines: (a) departments/ministries; (b) state
ministries; (c) agencies; (d) comissions; (e) legislative agencies, within which are civil
servants with echelons 1 to 4 ranking positions. Responsibilities are in accordance
with positions; the echelon 1 position holding the director-general position and in
charge of programs; the echelon 2 position holding the director position and in charge
of activities; the echelon 3 position holding the head of sub-directorate position is in
charge of sub-activities. In other words, the echelon 1 is accountable for planning,
implementation, and program performance monitoring conducted by the DG within a
ministry or agency, while accountability for activity and sub-activity planning and
implementation rests with the echelon 2 and 3.
If reviewed from the basis of functions and sub-functions as stated in the budget
classification (Law No.17/03 and GR No. 21/04), there are 11 functions and 79 sub-
functions.
Programs and activities include costs that are established based on spending
types using the approach of input and output unit costing. The input unit costing
approach is used in the process of current budget year performance evaluation, while
output unit costing is used as an input for future budget preparation, based on
established targets. Within this context, the establishment of targets is based on an
elaboration of the policy planning and organizational performance accountability
structures. The policy planning structure consists of: (a) priorities; (b) focus priorities;
(c) program objectives; and (d) priority activities, while the organizational performance
accountabiity consists of: (a) outcome areas; (b) strategic outcomes; (c)
ministry/agency objectives/mission statements; (d) program KPIs; and (e) activity KPIs.
(Diagram 3).

19
 In Diagram 3 a relationship between priorities and outcome areas, and focus
priorities with strategic outcomes can be observed, which shows that programs and
focus priorities are prepared by taking into consideration outcome areas and strategic
outcomes as development objectives. A close relationship between policy planning
and performance management is also an effort to enhance accountability and program
and activity transparency, based on the alignment (with development objectives) and
congruence (with organizational structures) principles.

Diagram 3. The RPJMN Program Architecture, built on the basis of Government

Organizational Structures, Budget Classification Structure, Policy
Planning Structure and the Organizational Performance
Accountability Structure

2.2.2. Projecting the Medium Term Development Plan into Yearly National
Development Priorities

In the RPJMN, government objectives are projected into programs and outputs
which are estimated to produce cummulative outcomes and outputs which are
expected to enhance the achievement of government objectives.
The results of program and activity projections in the medium term will result in a
collection of alternative programs and activities which can be used as the basis for
planning in the next five years. Due to the resource constraint, and due to urgent
community needs and demand for specific programs, the government will have to
undertake policy analysis to establish strategic programs that can solve problems in the
short and medium time frame. Even though it is likely that priority programs will not
change in the short term, if there is a need to change a priority, then the government

20
should undertake a performance analysis of program and activity monitoring and
evaluation results on a yearly basis before enacting a priority change.
Policy enactment that is established based on yearly program and activity results
is often referred to as results based management. The key factor that can directly
affect a change in program priorities is fiscal headroom availability and the need to
undertake spending targets.
With the assumption that the fiscal target is fulfilled, then the resource envelope
should provide a spending baseline and fiscal headroom that is adequate enough for
the preparation of new initiatives. In addition, if a ministry/agency views that one of its
strategic programs can act as a stimulus to the development process, then the ministry
can internally propose that program as a focus priority program.

2.2.3. Guidance for the Preparation of New Initiatives as prepared by Ministries

and Agencies

As mentioned above, the availability of adequate fiscal headroom can be used for
proposing activities as new initiatives, allowing ministries/agencies to have the
opportunity for further developing/completing activities in the future years. The type of
activities that can be proposed as new initiatives are those that are alrady part of an
existing program but which have not been undertaken before, and those that are
assumed to contribute significantly in terms of impact through the achievement of
program targets.
The requirement that new iniaitiatives should be activities that are already part of
existing programs it to ensure that there is support for the achievement of existing
program objectives. Moreover, it is expected that together with existing activities, new
initiatives can provide a joint impact to program implementation.
The preparation of new initiatives can be categorized as an effort to further
develop programs and activities based on the expected impact from the interaction of
existing programs and activities.

2.2.4. Elaboration of the Function of Performance Indicators as Measures in

Program and Activity Implementation

Performance indicators function as measures to the achievement of program and

activity objectives. Performance indicators are used as tools in periodical monitoring
and evaluation activities to measure efficiency, effectiveness and other parameters of
success. Basically, monitoring and evaluation activities have as objective to establish
the performance extent and use of inputs, the levels of outputs and outcomes produced
and achieved, and the impact resulting from programs and activities as well as their
costs.
Through the use of performance indicators in monitoring and evaluation activities,
data and information will be produced that can be used as: (a) basis for establishing

21
efforts to enhance organizational and development performance; (b) basis for decision
making; and (c) valuing the implementation of accountability and transparency in
program and activity management.
In techncial and operational terms, the establishment of performance indicators is
an undivisible element of program and activity preparation. During program and
activity preparation, as an effort to elaborate on national development priorities,
performance indicators act as weights to government work plan (RKP) program activity
objectives and targets. In this context, performance indicators are the planning
technical ceilings which provide a quality standard to planning criterias such as
suitability, capability and adaptability of programs and activities, for replication under
specific temporal and physical characteristics.

2.2.5. Elaboration of the National Medium Term Development Plan based on

Results Based Budgeting

Viewed from an elaboration perspective of the RPJMN priorities into

ministry/agency programs and activities, costing is technically conducted based on
required input costs. Among the factors that affect program and activity costing is the
use of unit costs based on geographical characteristics and the development of spatial
economics within a particular regional development area.
The geographical characteristics factor often differentiates between the required
unit cost in program and activity input procurement, such as in the case of distance
between the program location and the source of the input which results in high
transportation costs, or as in the case of limited availability of human resources, for
program implementation. The spatial economic factor affects program and activity
costs through the enactment of minimum regional wages and through the level of
comparative advantage an area may have vis a vis other regions. In order to
overcome those problems, the establishment of specific indexes for program activity
costing is a necessary requirement.
Other factors that also affect program and activity costing include:
(1) Demographic/Population Factors – Changes in target beneficiary population.
(2) Internal Technical Factors – Index of civil servant wages and other indexes related
to program and activity costing.
(3) External Technical Factors – Changes in foreign exchange values, inflation,
regional wage increases.
(4) Political Factors – Policy changes that have implications on program and activity
costs, such as a change in student teacher ratio from 40:1 to 30:1, requiring an
increase in teacher availability as well as an increase in numbers of school
classrooms.
(5) Demand Factors – Policy changes established based on a request by target
beneficiaries.

22
 If viewed from the point of view of the fiscal targets that are required to establish
the resource envelope for the next budget year, then costing for programs will be
based on the available resource envelope which results from a fiscal projection of
revenue and financing for the next year. The said fiscal projection will be revised by
fiscal targets for state financing, based on current baseline spending.
At the start of the budgeting phase, the establishment of the resource envelope for
the implementation of priority programs will be constrained by the indicative ceiling.
The indicative ceiling is prepared to provide guidance for program and activity planning
so that proposals do not exceed the highest point of the temporary fiscal projections.
Once the resource envelope has been established, then the annual government
workplan (RKP) and the working unit work plans and budget (RKA) become more
definitive documents for budget preparation.
Based on this last explanation, it is clear that the process of establishing program
activity revenue and expenditures is conducted based on results based budgeting,
wherein decisions are made based on data and information obtained from program and
activity implementation in the previous years.

2.2.6. Implementation of the Performance Based Budgeting Approach in the

Medium Term Expenditure Framework (MTEF).

The implementation of performance based budgeting is an approach which uses

data and information from program implementation to produce more efficient and
effective implementation and budgeting practices. The performance based budgeting
system is based on an application of aggregate fiscal discipline, resource allocation to
strategic priorities and the technical operational implementation of programs.
To date the government of Indonesia has implemented aggregate fiscal discipline
through the establishment of regulations that start the purpose of aggregate fiscal
discipline. In the meantime, resource allocation to strategic program priorities is
conducted based on assessments of urgent community needs towards particular
programs and activities, as well as their joint impact on development. Resource
allocation to strategic programs is often characterized by less than efficient and
effective resource allocation, resulting in low accountability and transparency in
program and activity implementation.
The lack of attention to resource allocation efficiency and effectiveness is often
caused by the fact that there are large volumes of activities to be undertaken, which
unfortunately are not complemented by an appropriate costing system. Further, the
establishment of input use for the production of outputs and outcomes should be
complemented by the application of a technical operational system which can
guarantee improved implementation of programs and activities. Without the application
of such system, the implementation of aggregate fiscal discipline becomes
meaningless to development.

23
 These three components of the performance based budgeting system are adopted
in an MTEF and are matched by projections of program and activity revenue and
spending based on the forward estimates. These take into account the factors that
affect revenue and spending. Implicitly, the budget estimate which is a result of the
forward estimates is an indicative ceiling which can be used by the ministries and
agencies for priority program and activity preparation for the next year. Even though
the indicative ceiling is not yet properly implemented, technically and operationally, it
will provide guidance towards more efficient and effective financial resource allocation
in program and activity budgeting in the next years.
Theoretically, the forward estimates are a rough estimate of the process of
establishing fiscal targets, which are based on the medium term fiscal framework. In
the MTEF approach, the MTFF is a process for establishing the resource envelope and
the fiscal headroom for program and activity planning in the next budget year. With the
objective of supporting program and activity planning in the next budget year, the
forward estimates are established as hypothetical amounts reflecting an unbiased
resource envelope.
Even though it is possible to have significant bias in the resource envelope,
changes to program and activity proposals should not take up too much time and
should not disturb other policy and budgeting processes. Further, the implementation
of the MTEF will provide an opportunity for the preparation of new initiatives which can
be proposed based on the available fiscal headroom.

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 III. APPROACH FOR PREPARING THE RPJMN PROGRAMS

3.1. The Medium Term Fiscal Framework

The medium term fiscal framework is built consistently from macro-economic

factors, revenue projections and policy committments to achieve the strategic
objectives of fiscal policies. As such the MTFF is a first step in the MTEF approach
which provides a construct to the budget process of establishing the hypothetical
budget financing requirements up to the establishment of the resource envelope for the
next year. In other words, the MTFF approach has characteristics of top down
budgeting, implemented by the government in establishing the overall resource
envelope which will then be divided into priority development programs through the
budget classification system. Furthermore, the budget for priority development
programs will be used by the ministries/agencies as reference point for establishing line
ministry ceilings for ministry/agency programs and activities.
As a consequence of implementing the MTEF approach which estimates required
yearly financing (through the forward estimates) for the three to five year period, a
multi-year budget estimate is required. Budget margin estimates are obtained from a
calculation of the factors which affect fiscal target achievements, with the assumption
of no policy change affecting spending in the outyears.
Such an assumption proposes the minimum fiscal target achievement scenario
within an MTFF, which is characteristically pessimistic. On the other hand, the
estimation of fiscal target achievements should be prepared using the optimistic
scenario, which includes government policy changes in the next budget years, so as to
produce maximum fiscal targets. Challenges during implementation include complex
processes and significant biases.
Based on an estimation of yearly fiscal target achievements during the three
budget years period, government policies on aggregate fiscal discipline can be
implemented in a sustainable fashion. Even though every year an updating process is
undertaken, the temporary projections of the resource envelope can be used as
indicative references in the establishment of indicative ceilings for program planning at
the ministry level. As such, the results of the fiscal estimates in the multi-year time
frame can function as both an input for revising the forward estimates and act as the
total resource ceiling for the government and the ministries/agencies.

3.2. Program Architecture

During implementation, the preparation of development plans using the program

architecture approach will go through several phases of program structure formulation,
which integrally will form a new program architecture. The elaboration of the Long
Term Development Plan into the Medium Term Development Plan which will then be
further elaborated into the Ministry Strategic Plan, the Ministry Work Plan as well as the

25
Annual Government Work Plan is a reflection of the attempt to elaborate high level
objectives into smaller, simpler and more focused objectives. Based on such an
elaboration a new program hierarchical structure will be formed wherein long term
development programs will be at the top, followed by programs in the medium term
development plans, ministry strategic plans and the annual government work plan.
The formation of a hierarchical program structure will function as a reference for
establishing program direction and objectives for plans at a more detailed level. As
such program and activity implementation in the short term will be consistent and
provide more significant development impact in cummulative terms, particularly for
achieving development objectives in the medium and long term time frame.
Furthermore, the development direction and objective hierarchy within each planning
document will be used for the implementation of the performance based budgeting
approach through the use of performance indicators in programs and activities during
the various planning document phases.
With the formation of a development program structure, a program and activity
“bank” is thus prepared, allowing choices from a source of alternative programs and
activities which can be proposed by a ministry and agency with ease. Even so, the
integration of planning and budgeting which is entirely based on a program structure
will be difficult to implement if that structure in the program architecture is not
complemented with an organizational structure for sectoral implementation, in line with
government functions and the performance management structure.
The ministry organizational structure which functions as the main responsible
point for the formation of program accountability has to be established at two levels, the
Echelon I level and the Echelon II level. Related to the roles structure and the
government function, the Echelon I is responsible for the preparation and
implementation of programs and activities at the directorate general or comparable
level, wherein activity implementation is delegated to the Echelon II. The Echelon II
then distributes program implementation according to the roles, functions and sub-
functions of its directorates.
In program and activity preparation, the echelon I functions to elaborate national
priority programs into ministry programs, in accordance with sectoral functions and
ministry vision-missions as well as objectives. The elaboration of ministry programs
consists of ministry programs which are a direct elaboration of priority programs, and
focus priority programs which reflect specific policies related to urgently requested
programs or if there is an explicit understanding that such a program can stimulate and
support a faster achievement of development objectives in the medium term.
Furthermore, both regular and focus priority programs are elaborated into
activities and sub-activities which support the achievement of the program objective.
Up until recently there has been some misunderstanding about how activities should be
elaborated into sub-activities, particularly in relation to the use of performance
indicators which are used in the performance management structure. In principle, the
elaboration of activities into sub-activities will not cause problems as long as both

26
activities and sub-activities produce different outputs, but which are still related in the
larger overall frame of the objective tree and the objective hierarchy of the program
architecture.
The application of the organizational structure and the government functions is
part of an elaboration of the budget classification. In this particular context, the
economic classification which includes spending types and is a part of the budget
classification, is not included in the program architecture due to the fact that the eight
spending types are, in actuality, characteristics of program spending, and are thus part
of the organizational structure as well as government functions.
With the establishment of the program architecture which has as pillars the
organizational structure, the budget classification structure, the policy planning
structure and the performance management structure, it is possible for ministries and
agencies to prepare program and activity budget plans.
The establishment of a performance based management structure is a necessary
element for the program architecture, wherein through its implementation program and
activity data can be obtained which can be used for policy planning. The availability of
this policy planning data and information fulfills the accountability and transparency
criteria in program and activity preparation. Such data and information, obtained from
the implementation of program monitoring and evaluation activities, will be used to
enhance program and activity efficiency and effectiveness in the comming years.
In the performance based management structure, the achievement of strategic
outcomes of priority development programs is measured through the use of the impact
performance indicator. The implementation of priority programs and focus priorities,
reflects a joint impact or cummulative impact of outcome indicators, which result from
ministry and agency sectoral or intersectoral program impementation. On the other
hand, those performance indicators which measure reguler programs are intangible
outcome indicators, which reflect a qualitative element of program and activity
impementation. Furthermore, the success of program implementation can be
measured through the use of program outputs, particularly an increase in the program
context, such as the cummulative number of target beneficiaries.
Performance based management at the level of activities and sub-activities uses
program activity inputs and outputs as measures of performance. Activities and sub-
activities can be analyzed from the effectiveness aspect of inputs to produce specific
outputs. It must, however, be clarified that activities and sub-activities will produce
different outputs.
From the above explanation, it is clear that the establishment of a program
architecture which is based on ministry/agency structural organizations, the budget
classification structure, the policy planning structure, and the performance based
management structure will result in a program architecture which can ensure program
sustainability from the aspect of phased program and activity implementation, from the
aspect of the implementation of aggregate fiscal discipline, as well as from the aspect
of achieving efficiency and effectiveness in resource allocation in the medium term.

27
3.3. Management of Performance Objectives/Aims Achievement

The management of performance objectives/aims achievement is an approach

that can be used to assess performance and is based on the use of performance
indicators in the process of data and information collection. It can also be used as
basis for assessing and evaluating target/objectives achievement in relation to the
efficiency and effectiveness of program and activity implementation. Performance
indicators used in such assessments and evaluation excercises are inputs, outputs,
outcomes and process indicators (Diagram 4).
The management of performance objectives/aims achievement is often divided
into two processes: the process of managing the achievement of performance
indicators based on the use of specifically chosen indicators; and the process of
managing the achievement of performance indicators based on the use of the impact
performance indicator. The management of performance aims achievement based on
the use of specific indicators is conducted through the specification of one or more
performance indicators – input, otput, outcome or process as basis for assessing the
achievement of performance indicators.
The achievement of performance targets at the activity level can be measured by
using the input and output indicators. Specifically for internal service activities, process
performance indicators can be used. Performance achievement at the program level
can be assessed through output and outcome indicators.

Diagram 4. Typology of Performance Indicators

The management of performance objectives/aims achievement that uses the

impact indicator is only used to assess program objectives that have a wide scope.

28
This is what differentiates small objective scope programs from large ones. As an
example, the achievement of food security can only be assessed through the impact
indicator, while water source development programs can be assessed through
outcome indicators.
Simply put, large objective scale programs are often those that are intersectoral or
are focus priority programs. Impact assessments are based on an analysis of the
cummulative effect of all program and activity elements within that larger program.

3.4. Comprehensive Cost Structure

A comprehensive cost structure is an approach to establishing program and

activity costs in a structured way within a multi-year framework which is flexible in
terms of modelling and technique use. The use of this costing approach is needed in
order to fulfill the unified budgeting, MTEF and performance based budgeting
requirements.
In line with the unified budgeting approach, the program cost establishment
approach is able to accomodate all the requirements of unified budgeting in terms of
flexibility in modelling and technique use for enhancing efficient allocation. By fulfilling
the requirement to establish the yearly budget in the unified budgeting system and with
the requirement to establish budgets for the achievement of specific objectives (PBB),
then the policy to roll-over the annual budget throughout the next three years in a multi-
year framework fulfills the MTEF requirement.

3.5. The Medium Term Expenditure Framework

An MTEF is a yearly spending flow within a multi-year cycle which is built based
on: (a) a method to estimate the government spending resource envelope so that it is
supportive of macro economic stability, based on a top down budgeting approach, (b) a
method for estimating the costs of a policy, current or new, and for estimating spending
requests for new initiatives or for increasing spending for existing activities (bottom-up
planning), and (c) an iterative process in policy enactment which tries to reconcile costs
and new policies in the resource envelope for the next three to five budget years. From
the use of these three methods, it is clear that the MTEF approach is prepared from
two key sub-processes, the establishment of fiscal targets and resource allocation
based on strategic priorities.
In order to implement the MTEF approach, the following elements are required:
a. Macro Economic Policies
The implementation of an MTEF requires the support of a comprehensive macro
economic analysis and forecasting excercise which will be used as the basis for
preparing the MTEF.
b. The Establishment of Fiscal Policy Instruments

29
 The MTEF approach is based on a fine link between macro economic policies and
fiscal policies. As such, expenditure plans in the next budget years must be
based on a logical framework for estimating macro economic and fiscal resources
in a prospective manner.
c. Reallocation and Prioritization
The MTEF approach has an in-built mechanism which is able to enhance
prioritization and use of resource allocation, which needs the support of adequate
policies.
d. Budget Discipline
Internal budget allocation to ministries and agencies should be based on an
acceptable upper limit for budget distribution, within which continuous efforts to
ensure program and activity effective and efficient implementation are undertaken.
e. Institutional Support
Decision-making in relation to the establishement of budget envelopes prepared
based on an MTEF approach require political support especially in terms of
budget allocation needs established based on an MTEF.
f. Conformity to Parameters Established in the MTEF Approach
The MTEF approach is prepared based on a common understanding of key
terminology such as aggregate spending, the elaboration of organizational and
government roles and functions, potential allocation based on the resource
envelope, unit costs in the costing of expenditures, sectoral and inter-sectoral
coordination related to the process of yearly budget preparation, and the use of
scenarios as established by the government.
g. Accountability and Transparency
The implementation of fiscal policies and scenarios in a transparent fashion will
enhance accountability of all stakeholders involved in preparing a budget based
on an MTEF approach.
In order to estimate the indicative resource envelope for the year 2010, the current
budget allocation which reflects government priority new policies and the macro
economic situation must be taken into account. Similarly estimating the resource
envelope for the year 2011 will be conducted by adjusting for established new policies
and the macro economic situation in the year 2010. Estimating the indicative resource
envelope for 2012 is to be conducted based on the forward estimates (also 2013) by
using macro economic data and policies in the year 2011. An illustration of how the
indicative budget allocation is established using an MTEF approach is in Diagram 5.

30
 Forward Estimate

2009 2010 2011

Policy Adjustment
And the macroeconomic situation

Agreement
2010 2011 2012
with the DPR

Policy Adjustment
And the macroeconomic situation

Agreement
2011 2012 2013
with the DPR

Policy Adjustment
And the macroeconomic situation
Iterative
Process Agreement
2012 2013 2014
with the DPR

Policy Adjustment
And the macroeconomic situation

Agreement 2013 2014 2015

with the DPR

Policy Adjustment
And the macroeconomic situation

Agreement 2014 2015 2016

with the DPR

Diagram 5. Medium Term Expenditure Framework

3.6. Proposing and Reviewing RPJMN Programs

After the RPJMN program materials have been discussed internally within the
ministries/agencies, then the program materials will be reviewed and compiled by
Bappenas. Results from the discussions in Bappenas will be inputs for further
discussions at the cabinet level for eventually enactment by the president.
In the first phase, the interal ministry discussions will review program elaboration
into activities and their distribution in terms of directorates, the use of performance
indicators, as well as plans for program monitoring and evaluation. In the next step,
discussions will focus more on establishing the unit costs of programs and activities
within the multi-year framework, reviewing the whole of ministry budget requests as
related to program priority and focus priority costs which need to be distributed.
The review of RPJMN ministry/agency proposals by Bappenas will include the
participation of the MoF, and includes the review of all other ministry/agency programs
and activities, the distribution of all ministry/agency programs and activities by focus

31
priority program category and the draft RPJMN for cabinet review. Discussions at the
cabinet level will review national priorities and RPJMN program distribution.

32
 IV. GUIDANCE FOR THE PREPARATION OF THE
DRAFT NATIONAL RPJM

The preparation of the draft National RPJM is conducted in various phases,

which are: (a) the preparation of the policy framework; (b) the preparation of the macro
economic, fiscal, expenditure and medium term budget frameworks; (c) the RPJM
program work plan and budget; and (d) monitoring and evaluation.

4.1. Preparation of the Medium Term Development Policy Framework

The preparation of the medium term development policy framework is conducted

by taking into account the roles and functions of policy affecting factors. In terms of a
medium term policy framework, the components affecting policy formulation are among
others: (a) the basis for establishing the development policy direction; (b) the
elaboration of development policies into development priorities; and (c) the continual
review of program objectives and activity targets.

a. Basis For Establishing the Development Policy Direction

The policy direction of the National RPJM is developed and prepared based on
the long term development direction, the current National RPJM, the president’s vision
and mission statements and the draft ministry/agency Renstra.

(1) The National Long Term Development Plan

The review and continuous adjustment of the development direction in the RPJM
which uses as reference the long term development plan, is intended to enhance
the attainment of national development objectives as well as to ensure that the
policy direction in the medium term plan is consistent and sustainable.

(2) The Current National RPJM

The preparation of the National RPJM which uses as reference the current
RPJMN, has as objective to review the application of the medium term fiscal and
budget framework, the medium term expenditure framework, performance based
budgeting as well as the application of unified budgeting as related to the
establishment of priorities, focus priorities, program objectives and activity targets.

(3) The President’s Vision and Mission Statement

The president’s vision and mission statement which is prepared based on the
ministry Renstra, the National Long Term Development Plan and the current
National RPJMN, embodies alternative policies which offer opportunities for

33
 enhancing the efficient and effective attainment of program objectives and activity
targets in the medium term.

The preparation of the National RPJM which uses as reference the president’s
vision and mission has as objective to accomodate alternative policies through the
implementation of adjustment and improvement efforts on basic policies used in
past development programs and activities.

(4) The Draft Ministry/Agency Renstra

The preparation of the RPJMN which is based on the draft ministry/agency

Renstra has as objective to obtain inputs from assessment and evaluation results
on the performance of implemented policies in terms of achieving development
objectives and targets. Input from the ministry/agency Renstra is alike a policy
updating process which is necessary for the preparation of the national RPJM.

b. The Elaboration of Development Policies into Development Priorities

From the elaboration of the policy direction in the long term development plan and
the president’s vision and mission, it is possible to obtain an analysis of the Principle
Challenges as well as the medium term Development Agenda, which henceforth would
be used as basis for establishing national development priorities. Based on these
national development priorities, the development and establishment of development
programs and activities will be affected by the government functions and sub-functions,
the focus priorities, the outcome areas and the budget allocation by ministry/agency
(Diagram 6).
(1) Government Functions and Sub-Functions
Development programs and activities are prepared based on the government
functions and sub-functions by ministerial organizational unit. Programs and
activities are to reflect the roles, responsibilities and authority of each
organizational unit.
(2) Focus Priorities
Programs and activities which are prepared and implemented in order to achieve
development objectives and targets are part of an established development
strategy. A review of programs and activities from the perspective of growth and
development stimulation, as well as capacity to respond to urgent development
needs are classified as strategic programs and activities.
(3) Outcome Areas
In the process of elaborating development priorities into development programs,
an estimation of the cummulative impact of program implementation should be
made in terms of achievement of national development goals. These
development goals are often mentioned as outcome areas, which are a measure

34
 of development and are further detailed in the performance management
structure. Next, in the performance management structure, each program
objective and activity target will be measured by using performance indicators.

Diagram 6. Policy Direction , Priorities and the National RPJM Program-

Activities

(4) Budget Allocation

With the availability of a resource constraint, funding allocation to programs and
activities will be controlled by the budget ceilings. In this context, the
establishment of the budget ceiling is a form of budget policy to allocate resources
in an optimal fashion in order to achieve development targets in accordance to
established development priorities.
In program and activity preparation, the elaboration of national development
priorities into the medium term budget allocation needs to take the following
factors into consideration: (a) programs and activities should support the
objectives of the national development priorities, and or ministry priorities; (b)
indiscretionary budget requirements; (c) counterpart financing for activities that are
financed through foreign loans and grants; (d) budget requirements for continuing
activities in a multi-year context; and (e) financing for implementing specific
purpose directives related to post-conflict and post-disaster recovery in key areas.
In order to obtain an accurate estimation of the budget allocation, a
comprehensive assessment of the resource envelope in line with the medium term

35
 budget, expenditure, fiscal and macro economic framework as established in the
draft RPJM needs to be prepared.

c. The Continual Review Of Program Objectives And Activity Targets

The 2010-2014 National RPJM policy development plan is a further development

of the 2005-2009 National RPJM. In the preparation of the National RPJM there is the
possibility of a change or no change in policies, depending on the capacity of
ministries/agencies to elaborate national development priorities into their plans based
on the performance reports and evaluations of the previous RPJMN.
Based on the performance reports and evaluations of the previous RPJMN, a
development policy can be maintained if program and activity implementation has
achieved efficiency and effectiveness levels as stated in the program objectives and
activity targets statements. On the other hand, if implementation results show that
program and activity objectives and targets have not been achieved or there is a
request for new programs and activities, then the preparation of the RPJMN requries a
change in policies.
In this context, policy changes can be understood as changes to government
service levels through the implementation of programs and activities with established
objectives and targets.
(1) No Development Policy Change

• A no development policy change in the new RPJM vis a vis the previous
RPJM, means that service levels of programs and activities are the same as
the service levels in the previous RPJMN period.
• In order to maintain the same service levels in terms of target beneficiaries, a
change in the size of the target beneficiary group as a result of changes in
population characteristics will imply a change in program and activity targets.
• Up to certain target beneficiary levels, wherein service units will still be able to
provide specific service levels in an efficient and effective manner, then a
policy change to increase the number of service units is not needed.
• An increase in the number of service units will be required if a change in
target beneficiary numbers is so high that it affects service levels. In this
context, an increase in the number of service units in order to maintain service
levels is not categorized as a policy change.
(2) Development Policy Change

• A policy change from the previous RPJM vis a vis the forthcomming RPJM’s,
or even from one budget year to another budget year, occurs when policies
are established to increase service levels through program development, or
through the implementation of new programs and activities.

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 • The implementation of new policies is characterized by different program
objectives/aims and activity targets from past policies. Even though the target
beneficiary group does not change, if the new policy includes changes in
approach or methodology, then it is a policy change.
• The application of new approaches and methodologies that characterize new
policies is conducted based on the results of performance assessments
showing that the new approaches and methodologies will allow for improved
implementation.

Despite it all, a decision to implement a policy change in the new RPJMN is

always based on the achievement of program objectives and activity targets. As such
development policies that show efficient and effective performance will be maintained,
whereas policy changes will be applied to programs and activities that cannot achieve
efficiency and effectiveness levels as established in the program objectives and activity
targets statement.

4.2. Preparation of the Medium Term Macro Economic, Fiscal,

Expenditure and Budget Framework

In line with the function of the National RPJMN as reference in the preparation of
integrated planning and budgeting, then the preparation of National RPJM programs
and activities needs to be complemented by macro economic, fiscal, expenditure and
budget projections, which can be used as consideration in program and activity
planning in the medium term.

a. The Medium Term Macro Economic Framework

The medium term macro economic framework is a framework from a system
which is formed by national macro economic factors and characteristics, and functions
as a reference point in projecting forecasting results of key macro economic variables
which affect revenue, expenditures, deficit levels and financing in the medium term.
(1) National Macro Economic Factors and Characteristics

• The national macro economic factors which function as economic variables in

forecasting, include the GDP factor, economic growth, inflation, the foreign
exchange value, SBI interest rates, ICP oil price, and Indonesian oil
production (lifting).
• In foreacasting the various macro economic factors, it is necessary to prepare
policy scenarios which will be simulated into the medium term macro
economic factors. The policy development scenario includes scenarios with
no policy change (baseline), with policy change and a mix of both.
• Preparing a policy development scenario requires an accurate detailing of
program objectives and activity targets, for the no policy change scenario, the
policy change scenario as well as the mixed case scenario.

37
 • The policy scenarios should be complemented with analysis of changes in the
highest and lowest values of the macro economic variables.

• The preparation of the policy scenarios is an attempt to elaborate changes in

the characteristics and patterns of the national macro economic situation in
terms of endogenous and exogenous factors.
(2) Adjusting and Updating the Medium Term Macro Economic Framework

• The medium term macro economic framework is a model that is built by using
macro economic variables and scenarios of possible policy changes and
effects from the world economy.
• The adjustment of the medium term macro economic projections in yearly
work plan preparation can be conducted by adjusting development policies in
the medium term development policy scenario.
• Updating development data and information as related to the macro economic
variables can be conducted based on the basic assumptions used in yearly
budgeting processes.
(3) References in Fiscal and Budget Forecasting

• The medium term macro economic framework is an approach which is built

specifically for the national RPJM against the forecasting model and system
of national macro economic characteristics, which can be used as reference
in medium term fiscal and budget forecasting.

b. The Medium Term Fiscal Framework

The medium term fiscal framework is a system which is built consistently from
each macro economic factor, revenue projections, policy committments as efforts to
achieve strategic objectives of the fiscal policy.
(1) National revenue and grant projections

• National revenue and grants play a significant role in enhancing fiscal

capacity, financing the state budget, controlling the budget deficit, and for
maintaining fiscal resilience.
• In order to enhance fiscal capacity and resilience, the medium term fiscal
framework should include the medium term fiscal policy direction and targets,
which includes the tax ratio, that is the ratio of revenues from tax to gross
domestic product (GDP), total expenditures to GDP ratio, the budget deficit to
GDP ratio and the debt to GDP ratio, which should be consistent with the
macro economic framework.
• Fiscal projections include projections on planned revenues and state
expenditures under various medium term economic scenarios, such that
information on the medium term fiscal capacity and resilience are obtained.

38
 • The medium term fiscal capacity and resilience is a reflection of fiscal
capacity and resilience vis a vis alternative budget financing scenarios, which
can minimize financial risk in the medium term and can ensure budget
financing sustainability in a consistent fashion.
(2) Fiscal Policy Committment

• The fiscal policy committment is a strategy to achieve fiscal consolidation and

create a fiscal stimulus within national financial capacity.
• Fiscal consolidation is an attempt to optimize the assembly of state revenue
sources, enhancing efficient and effective state spending, and choosing
between alternative financing in order to minimize financial risk in the medium
term.
• A fiscal stimulus is a fiscal policy committment for enhancing the economy
which is based on a capacity to increase state revenue sources. A fiscal
stimulus can take the form of: (a) tax incentives; (b) increasing state
expenditures for improving development infrastructure; (c) enhancing people’s
spending capacity; and (d) enhancing support for the development of the
private sector.
(3) Medium Term Fiscal Projections
• Medium term fiscal targets are yearly fiscal revenue targets within the five
year budget plan which are estimated based on the simulation results of
policies and using macro economic assumptions for comparison with the
medium term fiscal projections.
• If yearly fiscal target projections are smaller than the yearly expenditure
projections in the five year budget plan, then a review must be undertaken of
the possibilities for increasing fiscal revenue in the forthcomming years
through a simulation of policy changes.
• If the policy change simulations show results that it will still be difficult to
increase revenues, then program and activity changes need to be simulated
including implementing spending targets, till the projected fiscal revenue is
equal to or greater than the expenditure plan.
• Fiscal revenue targets are often identified as resource envelope projections
which function as the maximum limit (budget ceiling) of the total ceiling.
Based on this budget ceiling, line ministry ceilings are distributed.
• Calcuations of the resource envelope against the expenditure projections are
temporary values which need to be constantly updated.

c. The Medium Term Expenditure Framework

The medium term expenditure framework is an expenditure approach based on

policies, with policy decisions undertaken within the perspective of more than one year,

39
that is, by taking into consideration the policy implications of decisions in the outer
years through the forward estimates.
(1) Policy Based Expenditures

• Expenditure projections can be used as tools for decision making processes

in national financial management, because the MTEF can provide an
indication on the necessary steps that need to undertaken for adjusting
expenditures as early as possible in order to maintain fiscal sustainability.
These projections can also provide an indication of the degree of flexibility
that the government has in adjusting the size and composition of its
expenditures in the forthcomming years.
• In the preparation of the yearly work plan and budget within the five year
budget frame, it is possible to conduct policy adjustments during each budget
year, which basically try to improve on the previous year’s implementation of
policies.
(2) Multi-year Calculations of Revenues and Expenditures
• Multi-year calculations of revenues and expenditures are an indication of
program and budget planning in the medium term which from the start need to
take into account the framework for achieving development objectives in a
sustainable manner.
• In calculating multi-year revenues and expenditures, the possibility of
introducing strategic new policies should be cautiously undertaken as these
need to be fully costed for the outyears.
• The introduction of new policies should be undertaken by taking into
consideration the budget ceiling and the requirement to maintain aggregate
fiscal discipline.
(3) Application of Aggregate Fiscal Discipline

• Through the calculation of the forward estimates of all programs and

activities, which will be implemented in the next budget years, and with the
possible addition of new policies, then the requirement to implement
aggregate fiscal discipline should be undertaken assiduously by keeping in
perspective the fiscal target projections and the development policies which
will be implemented in the medium term.
• The application of aggregate fiscal discipline is an interaction between the
implications of fiscal target projections and expenditure projections which will
result in the budget ceiling for program and budget planning for the next
years.

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d. The Medium Term Budget Framework

The medium term budget framework is a medium term budget preparation

approach which takes into account the government balance-sheet and budget
realization. The factors which need to be taken into account in the government
balance sheet are: assets, debts, and equity. Factors which need to be observed in
under budget realization are revenues, spending and financing.
With the assumption that the medium term plan is prepared based on the
implementation of budget years on a continuous basis for the five year budget period,
then the preparation of the medium term budget framework will be formed based on the
yearly mechanisms within the five year budget frame. As such, the implementation of
the National RPJM can be elaborated into yearly budget planning.
To date, the medium term budget structure has not been affected by the program
restructuring effort. Basically the medium term budget structure is formed based on:
(a) the budget classification; (b) budget preparation approaches; and (c) budget
allocation.
(1) Budget Classification
The budget classification is a technique for classifying budgets based on
organizations, functions and economic groups.
(a) Organizations

• The budget classification based on organizations indicates the grouping

of budget details within the ministry/agency organization, which consists
of budget users and the accountable budget users.
• The understanding of organizations is related to ministries/agencies
which undertake their duties as delineated in the constitution and in
other key laws and regulations. The organizational unit is a part of a
ministry/agency which is responsible for coordinating and or
implementing a program. A Work Unit is a part of an organizational unit
within a ministry/agency which implements one or more activities within
a given program.
(b) Functions
• The budget classification based on functions indicates the grouping of
budget details into 11 main functions and 79 sub-functions (Annex IA of
GR No. 21/2004)
• Functions reflect government responsibilities within specific fields which
are implemented within the frame to achieve national government
objectives. Sub-functions are a more detailed elaboration of functions.
• The use of functions/sub-functions is adjusted to the roles,
responsibilities and functions of each ministry/agency

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 • Programs and activities are an elaboration of government policies in the
form of one or more activities by using resources that are made
available to achieve measurable results in accordance to mission
statements and which are implemented by agencies or communities in
coordination with ministries/agencies.
(c) Economic Groups

• A budget classification based on economic groups indicates the

grouping of budget details into eight spending types of categories, that
is, civil service wages, goods, assets, social assistance, interest,
subsidies, grants and other spending.
• Civil service spending or monetary or goods compensation provided to
government civil servants within or outside of the country.

• Spending for goods includes the purchase of goods and services for the
production of goods and services which are marketed and not marketed.
This type of spending is used for the procurement of goods and
services, maintenance as established in the Standard General Cost
index and travel spending.
• Asset spending is an expenditure which is incurred through asset
formation whose nature is to increase assets/inventory of
ministries/agencies who are endowed with the responsibility for
maintenance.
• Interest is a payment that is undertaken on the basis of debt principal
outstanding, both domestic and foreign debts which are calculated
based on the loan position. This type of spending is specifically used by
the Budget Calculation and Financing Unit (BAPP).
• Subsidies are budget allocations which are provided to
companies/institutions which produce, sell, export or import goods and
services for the public, such that the selling price is affordable to the
general public. This type of spending is used among others for subsidy
distribution to state companies and private companies. This type of
spending is specifically used by the Budget Calculation and Financing
Unit (BAPP).
• Social Assistance are monetary or goods transfers which are provided
to the public to protect them from a possible social risk. Social
assistance can be provided directly to community groups or the
community institutions including assistance for non-government
organizations working in the field of education and religion.
• Grants or routine/asset transfers whose characteristic is not obligatory to
other countries or to international organizations. This spending is used

42
 among others for grants to foreign governments and international
organizations.

• Other types of spending, such as central government spending which

cannot be classified into any of the above types of spending. This type
of spending is specifically used by the Budget Calculation and Financing
Unit (BAPP).
(2) Budget Preparation Approach
The approaches used in budget preparation include the use of the unified
budgeting approach, the medium term expenditure approach and the performance
based budgeting approach.
(a) Unified Budgeting

• The implementation of unified budgeting is divided into five budget

components, that is budgeting based on the work units, activities, types
of spending, outputs and budget documents.
• The work units formed based on specific roles and responsibilities have
at least one activity whose implementation must produce expected
outputs.
• Activities describe the work area based on the work units’ roles and
responsibilities, such that there is no duplication of activities among
different work units. Similar activities can only be implemented based
on differing location.
• Budgeting based on spending types is a detailing of expenditures for an
activity and is not duplicated in other activities.
• Outputs are results from the implementation of activities by a work unit
with specific characteristics, such that there are similar outputs
produced by different activities.
• The budget document is a planning and activity implementation report
which includes budget details based on work units, activities, types of
spending, and outputs produced.
(b) Medium Term Expenditure Frameworks

• A budgeting approach with a medium term perspective is meant to

provide a comprehensive framework, improve the link between the
planning and budgeting processes or in other words, prepare budgets
based on policies, improve fiscal discipline, direct resource allocation so
that it is more rational and strategic through the formulation of priorities
through a more tighter, diciplined, and consistent process, which
eventually will increase public faith in the government through the
provision of optimal and efficient services.

43
 (c) Performance Based Budgeting
• Performance based budgeting requires the preparation of budgets
through the use of performance indicators, standard costs, and
performance evaluation.
• The implementation of performance based budgeting is conducted
based on work synchronization as an effort to revise the link between
sub-activities, activities and programs based on the policies which
underlie it.
• Work synchronization which is integrated into the program architecture
has as objective to ensure that proposed activities and sub-activities will
produce outputs which support the achievement of program
performance targets, which in the end will support the attainment of
policy objectives.
(3) Budget Allocation
Budget allocations are implemented by taking into consideration the basics,
instruments and types of budget allocations.
(a) Basics of Budget Allocation

• Budget allocations by ministries/agencies is undertaken by taking into

consideration the ministry/agency vision and mission statements, priority
scales, activities and use of cost indexes.
• Budget allocations that take into consideration ministry/agency vision
and mission statements are set in order to ensure alignment and
appropriateness of budget allocations based on ministry/agency policies
which will then be translated into programs, activities, results and
outputs to be achieved.
• Budget allocations which take into consideration priority scales
(prioritization) are in order to ensure alignment and appropriateness of
budget allocations based on the organizational roles and
responsibilities, the government work plan, the budget ceilings, and
results from discussions with the parliament.
• Budget allocations which take into consideration activities are in order to
ensure alignment and approapriateness of budget allocations in
accordance to directives wherein program budgets will not displace
other programs, indiscretionary spending as well as affect changes in
ceilings by budget source (Rupiah, Loans, Grants, others).
• Budget allocations that take into consideration activities are in order to
ensure alignment and approapriateness of budget spending in
accordance to the use of indexed costs as established in the Specific
Unit Cost (SBK) and the General Unit Cost (SBU). Costs that cannot be

44
 valued through the SBK and the SBU will be valued based on the
Budget Cost Plan (RAB), by taking into consideration market prices as
well as required types and specifications.
(b) Budgeting Instruments
Budget allocations are conducted by taking into consideration regulations
related to minsitry/agency budget preparation and supporting data.
(c) Types of Budget Allocations
Budget allocations include budget allocations based on programs and
activities, work units, types of spending, activity implementation, either
contractual or self-managed, and limited activity and sub-activity
implementation.

4.3. Preparation of the National RPJM Programs and Budget

A review of programs and activities includes a review of results of: (a) Planned
development programs and activities, (b) the use of performance indicators, (c) costing
used, and (d) calculation of the forward estimate in the medium term.

a. Review of Development Programs and Activities

A review of programs and activities includes a review of program and activity

components, that is the establishment of program objectives and activity targets, the
basis for proposing the program activity, and extent to which synchronization has been
undertaken.
(1) Establishment of Program Objectives and Activity Targets
• Program objectives are the result of an elaboration of strategic outcomes and
outcome areas. The fact that there is a relationship starting from strategic
outcomes all the way to activity targets within an objective structure, then the
performance for achieving an outcome area, and strategic outcomes can be
assessed through a cummulative impact review of program outcomes and
outputs within that particular outcome area structure.
• The fact that there is a strong link between outcome areas, national strategic
outcomes, ministry/agency strategic outcomes, program objectives till activity
targets shows that program and activity planning is structured into government
functions and sub-functions, priorities, objectives and aims, performance
indicators and budget allocation.
• A policy change at the national and ministry/agency level will cause a change
in program objectives and activity targets, which implies a change in
performance indicators and budget allocation.

45
 • The establishment of accurate program objectives and activity targets is
needed for the preparation of different scenarios under the medium term
macro economic, fiscal, expenditure, and budget framework.
• A review of program objectives and activity targets by taking into consideration
RPJM performance assessment and evaluation reports should also be
undertaken, in tandem with a review of national financial reports, and the draft
ministry/agency Renstra.
• The draft Renstra which includes program objectives and activity targets is an
effort to revise and further develop program and activity proposals, is a result
of a review of program activity implementation in the medium term.
(2) Basis for Proposing a Program Activity

• Programs and activities that are proposed by each ministry/agency

organizational unit can be the same programs and activities as in the previous
year or they can be new programs as a reflection of the implementation of new
policies.
• Proposing the same programs and activities as in the past requires a full
performance assessment and evaluation of all past program and activity
implementation.
• The same programs and activities as in the past can be re-proposed if there is
demonstration of efficient and effective performance implementation.
• In order to enhance program and activity performance it is necessary to
undertake improvements on various components and working mechanisms
with the objective of increasing performance efficiency and effectiveness.
• New proposals can be proposed as a result of policy changes which are
elaborated into activities which have strategic targets that support the
achievement of program objectives.
• Proposing new programs and activities in the medium term is a process of
distrbuting priority, supporting and basic programs and activities into the five
year medium term budget.
(3) Program Activity Synchronization

• Program and activity synchronization is an effort to review the relationship

between functions-subfunctions and roles and responsibilities with programs
and activities in a structured manner so that it is possible to direct
development results in line with the development policy direction in the short
and medium term.
• Synchronization is an effort to:
(a) Place programs and activities according to their functions/sub-functions.

46
 (b) Adjusting/adding ministry/agency programs so that they are more
consistent with the roles and responsibilities of the ministry/agency.
(c) Placing activities to programs appropriately, such that activity outputs
will support the achievement of program outcomes/objectives/outputs.
(d) Simplify activity and sub-activity nomenclature.
(e) Group activities into: (i) activities that are related to a specific program
and (ii) activities that are related to all programs.
• The application of program and activity synchronization into the process of
establishing development policies and budgets is a mechanism of the
program architecture which includes the balancing of programs and activities
based on organizational structures, functions and sub-functions, policy
planning and performance management.
• Proposals that have undergone the synchronization process will result in the
implementation of policies and budgets which can be references for the
preparation of the ministry/agency Renja, the annual Government Work Plan,
as well as the ministry/agency Work Plan and Budget (RKA).

b. Performance Indicators

Performance indicators are performance measures which are used to assess

program implementation performance. A development performance assessment is
directed towards measuring program and activity efficiency and effectiveness, as well
as the achievement of strategic outcomes and objectives through an impact analysis of
strategic program implementation and national programs.
The use of performance indicators is based on the assumption that the
preparation of program and activity budgets has fulfilled the performance criteria
characterized by economy and is planned and implemented in the process of achieving
program objectives and activity targets.
(1) Assumptions in the Use of Performance Indicators
(a) The preparation of medium term programs and activities based on the
performance criteria of economy.
• The preparation of programs and activities based on the performance
criteria of economy reflects a process of program and activity costing
which uses the lowest standard unit cost to produce a specific output.
• The process of costing programs and activities by using the lowest
standard unit cost reflects a preparation process of programs and
activities based on economical inputs.
• The performance indicator criteria based on the use of inputs in an
economical fashion is the result of a review of factors which affect

47
 standard unit costs, including inflation and foreign exchange rates
(rupiah to the US dollar).

• The establishment of costs based on a review of factors affecting

standard unit costs will prove that the standard unit cost for a spending
object in the previous year is relatively similar to the standard unit cost
that is used for program and activity preparation in the next year.
(b) The preparation of medium term programs and activities based on the
process performance criteria
• The preparation of programs and activities which fulfill the process
criteria for achieving program objectives and activity targets reflects the
assumption that program and activity preparation has undergone steps
in preparation approach and methodology which have been perviously
established.
• The process criteria for program and activity target achievement is a
process for directly and indirectly proving that programs and activities
were planned based on a request by stakeholders.
(2) Assessing Efficiency of Medium Term Performance

• Assessing the efficiency performance of new programs and activities can be

implemented if the preparation of programs and activities has been based on
the performance assumption of indicators of economy and has been prepared
by taking into consideration of required processes.
• Program and activity performance can be said to be efficient if in
implementation programs and activities are undertaken by using the lowest
cost to produce established outputs.
• The efficiency assessment of performance of programs and activities in the
medium term is undertaken in order to compare spent cost for producing a
program output with the same in the previous budget year.
• By fulfilling the alignment and congruence principles in the calibration process
of costing output unit costs, the performance efficiency of programs and
activities can be compared from year to year in the medium term.
• Assessing and comparing the level of performance efficiency of programs and
activities can be undertaken by using the relationship curve of outputs to
output unit costs or by establishing indexes which are a function of outputs,
inflation, foreign exchange rate and other factors.
(3) Assessing Effectiveness of Medium Term Performance

• Assessing the effectiveness performance of programs is undertaken through

an evaluation of impact characteristics, among others coverage area, intensity
and program impact sustainability.

48
 • With the assumption that activity objectives are prepared as an elaboration of
the program objectives, then the simultaneous achievement of activity
objectives and implementation of other activities within the same program and
the same organizational unit will result in a joint impact as an interaction
between various development activities.
• The outcome performance indicator criteria is a direct impact of program
implementation and the interaction between various development programs.
The impact performance criteria is a continuing impact of direct and indirect
impact as a result of program implementation and the interaction between
various development efforts.
• Development performance evaluation in the medium term needs to be based
on the assessment results of the impact performance criteria which indicates
the yearly development impact on a continuous basis for the five budget years.
• The effectivess assessment of medium term performance can be undertaken
through the use of a tabulative matrix method or any other qualitative method.
• In order to simplify assessments of the effectiveness of development
performance, a method for assessing performance needs to be established
which is then to be socialized to ministries/agencies.

c. Establishing a Costing Technique

Establishing a costing technique includes a process of adjusting and updating

standard unit costs which can be conducted by updating data, and using cost drivers in
calculating expenditure plans of programs and activities. The adjustment and updating
process is conducted based on program and activity characteristics, the grouping of
types of spending and spending objects and other factors.
(1) Program and Activity Characteristics

• Program and activity characteristics which need to be observed during an

adjustment and updating process are among others, whether a program
activity is going to be implemented continuously in the medium term, or
whether a program tends to act like a project which will be completed within a
specific time frame, or whether activities will be added or reduced in
accordance to program activity implementation and or whether there will be a
replacement of activities on a gradual basis.
• For those programs which will be implemented on a continuous basis and
within which activities will not change, the adjustment and updating process
will be conducted based on changes to the target beneficiary group in
accordance to demographic changes and to affecting macro economic factors.
• For those programs which are similar to projects, the standard cost factor by
spending types will need to be carefully reviewed in addition to macro

49
 economic factors and changes in target populations and which need to take
into consideration yearly budget distribution throughout the medium term
period.
(2) Grouping Types of Spending and Spending Objects
• The grouping of spending types and objects in line with existing decrees is to
ensure the easy implementation performance based budgeting processes by
ministries/agencies.
• The calculation of subsidies in budgeting should be based on a subsidy model
whose correlation with the factors affecting the model can be gradually
reviewed against the subsidy objective.
(3) Other Factors

• The calcultion of the DAK transfers to the regions should be based on detailed
program or activity plans which include the Cost Budget Plan (RAB) and use
updated data.
• The calculation of the contingency fund should be based on a model with
factors that can be changed in accordance to established policies on a yearly
basis.

d. Calculating the Forward Estimates

The calculation of the forward estimates is undertaken using the following

assumptions: (a) without policy changes, (b) with policy changes.
(1) Forward Estimates with No Policy Changes
(a) First iteration in the Calculation of the Forward Estimates with 2009 as
the Baseline (TA-0).
• The forward estimates for 2010 (TA+11) and 2011 (TA+12) are
prepared by using the 2009 base year. This implies that the
development policies used as reference for calculating the forward
estimates are the 2009 policies (TA-0). In other words, the
calculation of the forward estimates for the budget years 2010 and
2011 are prepared using the assumptions of no policy changes.
• Based on the assumption of no development policy change, then
adjustments to the budget year 2010 (TA+11), only include changes
in program and activity targets as a result of changes in the target
beneficiary group which require services similar to the service levels
in the previous year. An example is an expected increase in the
numbers of students enrolling in primary schools in the year 2010
and 2011, which will require an increase in the level of services for
the nine year basic education program.

50
 • Factor changes which affect the standard costs, such as inflation
and the rupiah exchange rate, under the assumption of no policy
change situation, will directly increase the budget requests.
• A graphic illustration of the calculation of the forward estimates
under the assumption of no policy changes is available in Diagram
7a.
(b) Second to the Sixth Iteration in the Calculation of the Forward Estimates
based on the 2010 base year (TA+11), 2011 (TA+22), 2012 (TA+33), 2013
(TA+44), and 2014 (TA+55)
• The calculation of the forward estimates during the second iteration
is prepared using the 2010 (TA+11) based year, for the budget
years 2011 (TA+12) and 2012 (TA+13). In other words, the forward
estimates for the budget year 2011(TA+12) and 2012 (TA+13) are
based on the policies affecting expenditure in the base year 2010
(TA+11).
• In the same way as the first and second iteration, the third till the
sixth iteration will produce forward estimates for every year during
the next 5 budget years (Diagram 7b). In other words, during every
iteration the calculation of the forward estimates is conducted based
on the assumptions of base year policies.
(2) Forward Estimates with Policy Changes
Technically, the calculation of the forward estimates with policy changes is
reflected in the use of differently calculated base years. In Diagram 7b the
difference in policy implementation can be seen in the variance of service levels
for every budget year.
With an increase in service levels during every budget year, then the size of
budget requests for the 2010 (TA+01) and 2010 (TA+11) will be different. This
difference is caused by a change in development policies, either partial or whole
changes, affecting the level of services from year to year within the program
activity.
(3) Forward Estimates with a Mix of No Policy and Policy Changes
In practice, development planning and budgeting is a combination of the
application of no policy and policy changes. For specific programs which are
viewed as capable of achieving development objectives and activity targets in an
efficient and effective manner will usually not be affected by policy changes. Policy
changes are undertaken to ensure efficiency and effective within a sustainable
budget framework.

51
Diagram 7. The Medium Term Expenditure Framework based on the Forward
Estimates

52
4.4. Assessments and Evaluation

Monitoring is a set of connected management activities whose purpose is to

ensure that program activities are implemented as planned. Evaluation on the other
hand, is a set of connected activities for comparing the realization of inputs, outputs
and outcomes against plans and standards.
(1) Performance Assessments

• The monitoring of development plans implementation is to ensure the

achievement of objectives and development targets as stated in the plans,
through monitoring and controlling activities.
• Monitoring is observing developments on plans implementation, identifying
and anticipating constraints that could emerge, in order to prepare, in
advance, for required responses.
• Monitoring the implementation of programs and activities is undertaken based
on budget realization (absorption), acheivement of outputs, and constraints
faced.
(2) Performance Evaluations
• Evaluations are undertaken of National RPJM implementation to assess
program efficiency, effectiveness, benefits, impact, and sustainability.
• Evaluations are undertaken of resources used, indicators and output
performance targets of implemented activities as well as outcome performance
targets of implemented programs.
• Evaluations are undertaken once a year, in a systematic, objective and
transparent manner.

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 V. RECOMMENDATIONS

This Concept and Guide for RPJMN 2010-2014 Program Restructuring was
directed towards the formulation of a medium term planning and budgeting system
which could ensure a sustainable national development direction through the
implementation of efficient and effective resource allocation and aggregate fiscal
discipline in development policies.
Based on this Concept and Program Restructuring Guide it is recommended that:
a. The elaboration of National RPJM principles uses an approach and methodology
that is appropriate to the current national development situation.
b. In the preparation of National RPJM programs, the unified budgeting approach,
the medium term expenditure framework approach, and the performance based
budgeting approach needs to supported by the preparation of a medium term
macro-economic framework, a medium term fiscal framework, and a medium term
budget framework which can provide accurate projections and estimates, such
that bias can be minimized during the preparation of yearly development pans.
c. In order to enhance the accuracy of preparing estimates and projections of
medium term development targets, an approach for the management of
performance targets’ achievement is needed to provide inputs for the development
of performance based policies which are directed towards faster national
development growth.
d. The management of performance targets’ achievement is based on the use of
yearly assessment and evaluation results of performance indicators which are
used as inputs for program and activity revision as efforts to maintain or enhance
service levels.
e. In order to synchronize budget planning with policy decisions, a program
architecture is needed which functions as a tool for synchronizing budgeting and
policies based on an organizational structure, functions and sub-functions,
development priorities and performance management.

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