PUBLIC SECTOR REFORM IN INDONESIA

ITS’ CHALLENGES AND OPPORTUNITIES

Case study prepared for Commonwealth Advance Seminar in Wellington, New

Zealand. 24th February to 7th March 2003

I. Objectives

To help governments to achieve results focused public management with

sustainable performance improvement, defined in terms of effective and
efficient use of public resources in pursuit of public policy objectives.
The public services organization will be responsible for :

1) Ensuring that public services are delivered to meet the needs of the
relevant people, especially the poor, with the right quality in the right
place at the right time.

2) Ensuring that public services are delivered in a clean and cost effective
way, transparent to the public.

II. Measures

1) Quality of services delivered at least meet the Standard of Minimum

Services

2) Continues improvement in the quality of services delivered are noted

and perceived better by the public, based on periodic independent
evaluation /survey.

3) Gradual Cost Effectiveness Programs are delivered in line with plan.

III. Achievements

1) Government Decision to implement Decentralization so that authority

is held and decision is made closer to the public.

2) Availability of policy and systems to improve the quality and capacity

of public servants , prepared by Ministry of Control of Machinery of
State , Ministry of Home Affairs, Ministry of Finance.

3) Some regions have started and implemented initiatives which clearly

improve the quality, transparency and accountability of the public
servants for instance implementation of double entry reporting system
in line with International Standard Public Sectors Accounting, open
recruitment system , one stop office for public services etc.

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IV. Challenges and Opportunities

1) Slow progress of civil service reform

The promulgation of Law 22 of 1999 concerning Regional

Administration and Law 25 of 1999 concerning the Financial
Balance between central government and the regions established a
framework; but substantive changes in the structure and function
of the civil service have not been materialized.

The decentralization laws mentioned above were aiming at promoting

implementation of good governance, by bringing key decisions closer
to the public. Eleven (11) key authorities were shifted from Central
Government to districts and municipalities, nine (9) were shifted to
Provincial Governments, and only five (5) authorities are kept by
Central Government.
Authority to deliver public services, which is the main thrust of civil
servants, is held by Districts or Municipalities Government. Central
Government holds the authority to define related policies, while
Provincial Government is responsible for defining Standard of
Minimum Public Services.
The laws have led to major changes in civil service organization and its
ways of working. Following the shifting of the authorities, some 2.7
million civil servants were transferred from Central Government to
both Provincial and Districts/Municipalities Government. This created
numbers of issues which hinder the implementation of more efficient
and effective delivery of public services.
Instead of promoting slimmer organization, it has created reasons to
maintain big organization in the centre for transition process and much
bigger organization in the districts and municipalities because they
need new expertise.
Decentralization has not given local governments much scope in
ensuring that the staff that have been transferred from central
government establishment are needed. The present institutional
arrangements for the management of local government civil service
establishment are inadequate, and fail to recognize the need to give
local governments authority over the management and compensation
of their staff. Without such authority, local governments cannot be
called upon to improve public services, which is a major objective of
the decentralization strategy. The center still maintains control over the
“ rules of the game” according to which local government staff are
hired , promoted, demoted or fired. As a result, local governments do
not have the flexibility to adjust the composition, skills and size of
their personnel establishments. In addition, the central government still
establishes wage and pension policies, which must be absorbed by
local government budgets. This undermines the hard budget constraints

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 under which local governments have been placed, which are key to
forcing improvements in efficiency and to ensuring that
decentralization remains fiscally sustainable. Since the wage policies
fostered by the central government must be financed somehow, they
have been accommodated so far through top ups in Allocation of
General Funds resources ( FY 2001) and changes in the Allocation of
General Funds distribution system (FY 2002) , which creates a bias in
the allocation of funds towards financing local governments wage bills.
In turn, this creates disincentives in local governments to maintain
affordable civil service establishment in the regions. Finally, the
policies whereby local governments are expected to absorb future
pension obligations are unclear at this juncture.

The absence of a policy for right-sizing the central government

establishment has severe consequences on :

• The sustainability of decentralization process. With a larger

than needed contingent of civil servants remaining in the
center, there continues to be a tendency in government to claw
back many decentralized functions, if only to give central
bureaucrats something to do, continue to provide them control
over public resources, and maintain patronage opportunities. In
addition, the central government continues to impede
improvements in fiscal arrangements for decentralization,
including decentralizing the development budget and arriving at
an appropriate policy for channeling development resources to
local governments through Allocation of Special Funds grants.
• The efficiency of government. With many government officials
providing zero value- added to society, the efficiency of central
government is undermined.
• Effectiveness of government. The current large civil service
establishment in the central government creates an obstacle for
staff renewal, i.e., acquiring new skills that are urgently needed
to improve policy making, regulate the economy and manage
decentralization. Existing staff with redundant skills and which
are kept on the payroll are impeding the mobilization by the
government of urgently needed skills.

2) Competencies and Skills

With the implementation of decentralization laws, local governments

suddenly got 11 new authorities and additional 2.7 million civil
servants. They were not properly prepared to face this change. They
are still lacking a lot of competencies and skills needed to hold the new
authorities.

The same challenges are also faced by local parliaments, for two
reasons:

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 • Their recruitment was not based on competencies and skills
criteria, but based on their ranking in their respective political
party.
• The new authorities of local governments give the local
parliament higher responsibility to asses more complex issues
facing by local governments

3) Human Resources Development System

Recruitment and Promotion system of the civil servants are still based
on patronage and nepotism. The idea to implement a merit based
system has not been materialized.

4) Political Outlook

The groundswell for political reform has lost some momentum as

vested interests have begun to fight back.

For 32 years Indonesia experienced an over concentration of power

during President Soeharto’s New Order regime. Economic crisis in
1998 had destroyed the strengths and credibility of this regime, and
public forces led by students successfully threw out Soeharto from
Presidency.

Enthusiasm for reform was very high at that time and people believed
that was the right moment to build new Indonesia.

Unfortunately after 5 years of the Reform Order, the dream has not
come through. What the country got is a weakened executive and an
increasingly assertive but divided Parliament. The resulting political
competition both among the political parties and among branches of
government led the political instability and prevented consensus on
political reforms. Four cabinets and two presidents have marked the
short period of democracy since the 1999 elections. The political
competitions overflowed into a complete breakdown between President
Abdulrachman Wahid and Parliament leading to his impeachment in
July 2001. Efforts to bring the armed forces under civilian control and
to hold them accountable for past abuses have met with some success,
but produced a backlash from dissident elements within the military,
accounting for some of the lawlessness and regional conflicts that have
preoccupied successive governments. Further revisions in the
Constitution and the rules of the game are planned, but their outcome is
uncertain. That the country has held together as the Indonesian state
attempts to reinvent itself is a remarkable achievement. The transition
from President Wahid to President Megawati Soekarnoputri went
smoothly, however after one and half year of the new regime, people
has not seen positive results. This has increased political temperature
which give negative impacts to reform initiatives.

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5) Pay and Pension Policies

Key question is can Indonesia afford to maintain in place a system

that contributes little value added to society compared to its costs.
The costs to society of the wage and pension bill, leakages of public
funds in the pockets of public officials and missed development
opportunities as a result of weak governance may have raised the
costs to Indonesia to unbearable level, measured in significant
percentages of GDP.

Since the 1997-1998 crisis, civil service wages and pensions have more
than kept pace with inflation. In the central government, the real wage
bill, adjusted for inflation, has barely declined since decentralization
was initiated in 2001. During the same period, critical expenditures for
operations and maintenance (O&M) and development have declined
significantly, in real terms – 29 percent for O&M and 52 percent for
development. While the sharp rise in other non compressible
expenditures (debt, subsidies and transfers) has been the main cause of
real reductions in O&M and development expenditures since 1996,
rising wage and pension payments have added to this pressure. Public
officials and pensioners have largely been protected against the ravages
of inflation over the past five years. Table below illustrates this for the
central government.

APBN ( State Revenue and Expenditures Budget ) 1996-2002

( In Rupiah trillions adjusted for inflation )

96-97 99-00 2001 2002 % incr 96-02

Revenues 87.6 86.1 99.5 100.5 14.6

Wages 14.5 16.0 13.4 13.5 - 6.4

O&M 9.8 7.1 7.0 7. 0 -28.7
Development 32.9 24.5 16.5 15.7 -52.3

Debt Service 9.9 20.7 32.5 28.9 192.3

Subsidies 1.4 30.2 24.0 15.4 986.8
Transfers to LGU 9.4 8.6 29.6 31.6 237.5

Inflation index 1.000 2.102 2.757 3.005

Consolidated wages and pensions of central and local governments

In Rp. billions 99-2000 2001 2002

Total consolidated wages and pensions 69,299 97,253 105,056

As percentage of GDP 6.2 6.5 6.2

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 Source: A Fiscal Hammer to drive civil service reform, June 2002, by
KPMG (LP)-HICKLING

6) Financial reporting System

Most Governments at all levels, central-provincial-districts and

municipalities, are still implementing single entry cash bases
accounting system. The decree from Ministry of Home Affair and
separate guidelines from Ministry of Finance to implement double
entry accounting have been implemented only in limited number
of regions.

Current single entry accounting does not provide means to record

assets and liabilities. This made difficulties to start with double entry
system, since the later need opening balance of assets and liabilities.
Some regions started to do inventory taking and evaluation of assets,
with limited expertise and limited supporting documents.

The guidelines from Ministry of Finance and Ministry of Home Affair

are not fully compatible and in some instances conflicting each other,
which creates confusions in the local levels.

Most local governments do not have the competencies and skills

required to understand and to implement the double entry accounting
system.

7) Law enforcement

For numbers of reasons, law enforcement in Indonesia is very

weak. As a result it is very difficult to attack corruptions,
collusions and nepotisms practices within civil service
establishments.

Legal framework in this country has been developed in a piecemeal

manner. There are often areas of duplication or confusion between
pieces of primary legislation, which are often replicated or contain
omissions within the enabling legislation. This causes confusion and
presents opportunities for the judiciary and legal profession to become
selective in their use of legislation and this leads to opportunities for
corruptions.

Within civil service establishment, overly complex procedures and

bureaucratic red tapes interfere with service delivery. Under the weak
legal framework, efforts to attack those practices are very difficult to
succeed.

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 8) Election

The attention and efforts to do public service reform will be likely

slowing down because all attention will be focused on preparing
next election which will be conducted in May 2004.

Governors , Regents and Majors are political positions, as such they

are highly depends on the results of the elections. Since election time is
very close now, government attention will most likely be focused on
preparing for the next election.

Support and attention to do civil service reform will likely be slowing

down, unless there is a synergistic link with efforts to prepare for the
election.

V. Strategy to meet the challenges

1) To focus on hard outcomes at regional level in terms of generating

increasing level of regional demand for comprehensive public sector
reform and applying those demands.

2) To focus the reform into a more holistic model of results focused

public sector performance management

3) To adopt a functional program based model of service delivery that is

geared to assistance with reform design in the regions and provincial
government

4) To adopt performance budgets for functional programs with clearly

defined subprograms with outcomes, outputs and resources and
financed action programs defined in details

5) To define resource requirements to deliver overall PSM reform

outcomes over the year program based on team approach

6) To establish monitoring frame and evaluation system.

Jakarta 23rd February 2003

Written by Piet Soeprijadi
Civil Service Advisor
Partnership for Governance Reform in Indonesia.