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Indonesia Public Expenditure and Financial Accountability (PEFA) Assessment Report 2017 Summary

Core Content Overview

This document presents the 2017 Public Expenditure and Financial Accountability (PEFA) Assessment Report for Indonesia, conducted by the World Bank in collaboration with the Indonesian government and international partners. The report evaluates the performance of Indonesia's Public Financial Management (PFM) system across multiple pillars and indicators, highlighting strengths, weaknesses, and reform progress.

Main Objectives

• To establish a new baseline using the upgraded 2016 PEFA framework for measuring PFM progress.
• To provide a basis for dialogue with the government on future PFM reform needs.
• To support development partners in planning their programs of assistance.

Key Information and Structure

Fiscal and Economic Context

• Indonesia's average annual growth rate was 5.6% (2001–2012), with a GDP per capita of about US$3,500.
• The national poverty rate was reduced by half (from 27% in 1999 to 11.2% in 2015), but poverty reduction stagnated in 2015 and inequality increased, measured by the Gini coefficient (from 30 to 41 points between 2000 and 2014).
• The fiscal year runs from January 1 to December 31.
• Exchange rate (October 2017): US$1.00 = IDR 13,500.

PFM Legal and Institutional Framework

• Indonesia has a new legal framework for PFM, including:
  • Law No. 17/2003 on State Finance
  • Law No. 1/2004 on State Treasury
  • Law No. 15/2004 on State Finance Accountability and Audit
• These laws created a new institutional framework for budget management and reorganized the Ministry of Finance (MOF).
• A Treasury Single Account (TSA) was consolidated, and improvements were made in cash and debt management, cash-flow forecasting, and asset management.

PFM Performance Assessment

Pillar One: Budget Reliability

• PI-1: Aggregate Expenditure Outturn – Performance is moderate, with some discrepancies between approved and actual expenditure.
• PI-2: Expenditure Composition Outturn – Some inconsistencies in budget allocation by function and economic classification.
• PI-3: Revenue Outturn – Revenue mobilization has improved, but compliance and collection of taxes and non-tax revenues remain a challenge.

Pillar Two: Transparency of Public Finances

• PI-4: Budget Classification – Consistency between budget and accounting classifications is observed.
• PI-5: Budget Documentation – The annual budget documentation is comprehensive but needs improvement in clarity and accessibility.
• PI-6: Central Government Operations – Some non-financial operations are not fully documented.
• PI-7: Transfers to Subnational Governments – Transfers are well-structured, but transparency and accountability in their use need improvement.
• PI-8: Service Delivery Performance – Performance information is available, but it is not fully aligned with results-based reporting.
• PI-9: Public Access to Fiscal Information – Access is limited, and public engagement in PFM remains weak.

Pillar Three: Management of Assets and Liabilities

• PI-10: Fiscal Risk Reporting – Risk management is in place, but mitigation plans are not fully implemented.
• PI-11: Public Investment Management – Capital expenditure is being managed more effectively, but guidelines and oversight are still evolving.
• PI-12: Public Asset Management – An automated asset management system is under development, and asset appraisal is ongoing.
• PI-13: Debt Management – Debt sustainability analysis is conducted, but debt monitoring and forecasting require further enhancement.

PFM Reform Process

• Indonesia initiated PFM reforms over a decade ago, focusing on:
  • Consolidation of TSA
  • Improvement of cash and debt management
  • Asset management systems
  • Unification of recurrent and development budgets
  • Procurement efficiency
  • Audit and accounting strengthening
• The 2017 PEFA assessment includes an analysis of recent and ongoing reform actions, such as:
  • Introduction of fiscal rules for major development initiatives
  • Implementation of e-procurement systems (LPSE, SPSE)
  • Strengthening of internal audit and accountability mechanisms
• The assessment period covers 2014–2016, with audited accounts for 2016 and a cut-off date of August 2017.

PFM Performance Score

• The average PEFA score is slightly below B, indicating performance that is above the basic level but still has room for improvement.
• The PFM system is aligned with most international standards, but effectiveness and performance monitoring remain areas for enhancement.

Key Strengths and Weaknesses

Strengths

• Strong legal and regulatory framework
• Improved financial management systems (FMIS)
• Better budget forecasting and planning
• Established TSA and consolidated budget management

Weaknesses

• Strategic resource allocation needs improvement
• Accountability in budget implementation is limited
• Efficiency in public service delivery is not yet fully realized
• Transparency and public access to fiscal information remain inadequate
• Internal control systems are not fully integrated or effective

Conclusion and Recommendations

• The PFM reform agenda is critical to maintaining service delivery effectiveness amid economic challenges.
• The assessment provides a basis for future reforms and dialogue with the government and development partners.
• The government is making progress in several areas, but full implementation of reforms and system-wide improvements are still needed to achieve good international PFM practices.

Key Terms and Abbreviations

• PEFA: Public Expenditure and Financial Accountability
• PFM: Public Financial Management
• TSA: Treasury Single Account
• FMIS: Financial Management Information System
• LPSE: Layanan Pengadaan Secara Elektronik (Electronic Procurement)
• SPAN: Sistem Perbendaharaan dan Anggaran Negara (Government Financial Management System)
• LKPP: National Public Procurement Agency
• BPKP: Badan Pengawasan Keuangan dan Pembangunan (Finance and Development Supervisory Agency)
• APBN: Anggaran Pendapatan dan Belanja Negara (State Budget)
• APBN-P: Revised State Budget
• LRA: Laporan Realisasi Anggaran (Statement of Budget Realization)
• K/Ls: Line ministries
• DIPA: Daftar Isian Penggunaan Anggaran (Budget Documentation)
• SPA: Strategic Performance Architecture
• GFSM: Government Finance Statistics Manual
• GAAP: General Accepted Accounting Principles
• IPSAS: International Public Sector Accounting Standards
• ISSAI: International Standards of Supreme Audit Institutions
• SAI: Supreme Audit Institution
• BPK: Badan Pemeriksa Keuangan (Supreme Audit Institution)

Appendices and Supporting Data

• Annex 1: Summary of PEFA performance indicators
• Annex 2: Observations on internal control framework
• Annex 3: Sources of information used
• Annex 4: Detailed data and calculations for PI-1, PI-2, PI-3
• Annex 5: Comparison of Indonesia PEFA 2017 and 2011 results

List of Tables and Figures

• Tables: Cover budget outcomes, revenue classification, audit findings, and performance metrics.
• Figures: Include a summary of PEFA scores by indicator and a depiction of the planning and budgeting process.

Summary of Findings

• Indonesia has a robust legal and institutional framework for PFM, but implementation and monitoring are still lacking.
• PFM performance is slightly below B, which is above basic international standards.
• Reform efforts are ongoing, particularly in budget forecasting, public investment, and audit and internal control.
• Transparency, accountability, and public access to fiscal information remain key areas for improvement.