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Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
The state finance law: overlooked and
undervalued
Edimon Ginting
To cite this article: Edimon Ginting (2003) The state finance law: overlooked and undervalued, Bulletin of Indonesian Economic Studies, 39:3, 353-357, DOI: 10.1080/0007491032000142791 To link to this article: http://dx.doi.org/10.1080/0007491032000142791
Published online: 03 Jun 2010.
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Introduction
Recently, after a lengthy process of deliberation, the Indonesian parlia-ment passed Law 17/2003 on State Finance. It is one of a package of three public finance laws first proposed in September 2000. The other two—the State Treasury and State Audit bills— are still being debated by a special par-liamentary committee and government representatives.
The law marks a major step forward in Indonesia’s drive to establish a sound system of public finance man-agement and realise good governance. It will also play a key role in the coun-try’s effort to devise a comprehensive anti-corruption strategy. For the 58 years since independence, Indonesia has continued to rely on colonial-era legislation to carry out government budgetary management. The Indone-sian Treasury Law (ICW, Indische Comptabiliteits Wet) was designed for a colonial regime that had no
demo-cratic legitimacy, and did not insist on accountability for government expen-diture. The ICW was very narrowly conceived to focus solely on treasury management. While it may have been appropriate for a small government carrying out a narrow range of tasks, it has not been able to accommodate the changes in institutional and financial arrangements that have taken place in Indonesia over the past half-decade. Although the law remains in force, for many years some of its articles have not been implemented in practice. This weakness has been a main cause of widespread abuse in the management of state finance.
During the early years of the New Order regime, the ICW remained in place because economic conditions were stable and there was no pressure for change. Later it was preserved to maintain the status quo. Until the approval of Law 17/2003 by President
THE STATE FINANCE LAW:
OVERLOOKED AND UNDERVALUED
Edimon Ginting
University of Indonesia, Jakarta
After a lengthy process of deliberation, the Indonesian parliament recently passed Law 17/2003 on State Finance. The prime objective of the legislation is to ensure that public finances are managed in an efficient, effective, transparent and account-able manner. To achieve this objective, the law stipulates the implementation of a number of reforms in the management of state finance. It therefore marks a major step forward in Indonesia’s drive to establish a sound system of public finance management and realise good governance. This paper highlights some of the salient features of the new law and discusses its potential contribution to address-ing Indonesia’s chronic problems of corruption. It also highlights several problems that could affect the capacity of government to implement the new law effectively.
ISSN 0007-4918 print/ISSN 1472-7234 online/03/030353-5 © 2003 Indonesia Project ANU DOI: 10.1080/0007491032000142791
Megawati Sukarnoputri, all post-Soeharto governments continued to operate under the same paradigm of state finance management, with only a few minor modifications. This paper highlights some of the salient features of the new State Finance Law and dis-cusses its potential contribution to addressing Indonesia’s chronic prob-lems of corruption.
The Main Articles and Goals of Law 17/2003
Article 3 of Law 17/2003 states that the prime objective of the legislation is to ensure that public finances are man-aged in an efficient, effective, transpar-ent and accountable manner. To achieve this objective, the new law stipulates the implementation of a number of reforms in the management of state finance.
First, it provides a comprehensive definition of the role and scope of state finance. All public monies and assets that fall within the prescribed defini-tion must be managed in accordance with the new law, which encompasses all government institutions, central and regional, as well as other institu-tions such as state-owned enterprises. If enforced effectively, it should elimi-nate off-budget financing, one of the major sources of public sector corrup-tion during the New Order period (Ginting 2003).
Second, to ensure accountability in public finance management, article 35 of the law states that the Supreme Audit Agency (BPK, Badan Pemerik-saan Keuangan) must audit every transaction related to state finance. All officials responsible for receiving, handling and transferring public monies, government securities or state property will now be obliged to submit accountability reports to BPK. This suggests that auditing activities will no
longer be merely a formality, as was the case under the New Order regime. The law also requires that more effec-tive audit procedures and mechanisms be legislated separately in a new State Audit Law, which is expected to define the scope of audits to be conducted by BPK as well as procedures for carrying out, reporting on and following up on audits.
Third, to improve budget execution, the law clarifies the allocation, within the executive, of responsibility for state finance. The finance minister, as the president’s representative, is to act as the chief financial officer (comptable), with each line minister playing the role of chief operations officer ( ordonna-teur). The law recognises that this will require the establishment of a more professional, transparent and effective system of treasury management. The procedures and mechanisms to create such a system are to be legislated sepa-rately in a new State Treasury Law, the provisions of which are expected to cover areas such as budget allocation, payment and accounting systems, cash management and financial planning, debt management, government pro-curement and internal control systems. To support the effort to eliminate extra-budgetary funding, a new Directorate General Treasury in the Ministry of Finance will be put in charge of man-aging the government’s consolidated account.
Fourth, the law clarifies the power of the executive and legislative branches of government with respect to state finance. It stipulates a clear role in all stages of the budgetary process— drafting, deliberation, approval, imple-mentation and accountability—for both the national and the regional gov-ernments. By reinstating the constitu-tionally mandated role of parliament (national and regional) in the budget
354 Edimon Ginting
process, the law should make the budget process more democratic. It will no longer be possible for a presi-dent to obtain rubber-stamp approval for the budget from parliament, as was the case under Soeharto.
Fifth, the law regulates the financial relationship between the central gov-ernment and regional govgov-ernments; between the central government and the central bank; and between regional governments and foreign governments and financial institutions. The fiscal relations between the central govern-ment and regional governgovern-ments are to be governed in accordance with the regional autonomy legislation passed in 1999. The independence of the cen-tral bank is preserved by the Cencen-tral Bank Law of 1999. However, given the impact of budget transactions on the money supply, the law requires the central government to coordinate the implementation of its fiscal policies with the central bank.
The new law leaves authority for managing foreign grants and loans in the hands of the central government, which can then pass the funds on to regional governments. To impose fiscal discipline on both levels of government, Government Regulation 23/2003, which contains the imple-mentation guidelines for the law, places limits on the size of the state budget deficit and on government bor-rowing. The size of the central govern-ment’s budget deficit may not exceed 3% of GDP, while the government debt to GDP ratio may not exceed 60%. The same rule applies to regional govern-ments: the size of the regional budget deficit may not exceed 3% of regional GDP, while the regional government debt to regional GDP ratio may not exceed 60%. This cap on budget deficits is in line with the Maastricht Treaty, which sets a limit of 3% of GDP
on national deficits as a precondition for admission to the European Mone-tary Union.
As well as meeting the above condi-tions, regional governments must comply with a number of other requirements before gaining approval for any new borrowing. First, existing debt plus any new borrowing may not exceed 75% of the regional govern-ment’s total revenue in the previous year, as set out in the budget. In addi-tion, the regional government’s debt service coverage ratio (DSCR)1should not be lower than 2.5; its financial reports for the last two years must have been audited by BPK; and it must not be in arrears in its payments to the central government or any overseas donor agency or institution.
A new element is the involvement of parliament in the foreign borrowing process. Article 23 of the law states that all grants and new foreign borrowing must be approved by parliament. Par-liamentary approval is also required for privatisations, at both the national and regional levels. These provisions should make the foreign borrowing and privatisation processes more dem-ocratic, but they may also encourage drawn-out and/or populist decision making.
Finally, the law requires the govern-ment to provide more comprehensive information at all steps of the budget-ary process, including performance indicators for each budget item in addition to the financial information itself. For example, the development budget for education should state both the nominal value of funds to be com-mitted to a region and a range of expected outcomes, such as a reduc-tion in the school drop-out rate or an increase in school capacity. This increased emphasis on performance measures should help to:
• make budget outcomes more trans-parent, making it easier to assess whether program objectives are being met;
• clarify government objectives and responsibilities;
• allow the wider community to become better informed about gov-ernment performance;
• encourage ongoing improvements in performance;
• facilitate comparison between agen-cies, programs and regions; and • encourage more efficient public
service delivery and accountability in the management and deployment of public funds.
Potential Problems of Implementation
Law 17/2003 undoubtedly represents a significant break with the past. It introduces a stronger system of checks and balances that, if applied consis-tently, should promote professionalism in the management of public finances in Indonesia. In turn, this should go some way towards curing the coun-try’s chronic disease: corruption. By itself it will not be sufficient to over-come the huge problems in public finance that face Indonesia, however. As with all laws, its impact will depend on the capacity to implement it effectively. Several problems may arise in this respect.
First, as noted above, effective implementation will require the enact-ment of a workable State Treasury Law and a strong State Audit Law. It will also require the improvement of gov-ernment accounting standards and completion of a number of implement-ing regulations. If any of these is delayed, this would severely limit the effectiveness of Law 17/2003.
Second, the law requires each spending unit not only to provide a
financial report on relevant parts of the budget but also to report on budget outcomes. The aim of this provision is to reverse the incentives of bureau-crats. Many civil servants do not regard their interactions with the pub-lic as occasions to deliver services but as opportunities to levy informal taxes (Sherlock 2002); for them, enforcement of a stronger performance regime will mean more work with less overall income. It is therefore hard to imagine successful enforcement of this policy without an improvement in civil serv-ice salaries. Another area of concern is the quality of the civil service. As a consequence of inappropriate recruit-ment and promotion practices in the past, many civil servants may simply be unable to cope with the new per-formance requirements. The imple-mentation of performance-based pub-lic service delivery must therefore be backed by bureaucratic reforms to improve the quality of the civil service. Similar policy reforms have been pro-posed in the past, but were not imple-mented because of political and budg-etary constraints.
Third, if the finance minister is to act as chief financial officer, with the line ministers playing the role of chief oper-ations officers, the Ministry of Finance will need to transfer some of its powers (such as the authority to issue payment orders) to the line ministries. The law also requires a clearer division of authority within the Ministry of Finance. Currently, many of its direc-torates general perform both budget-ary and treasury functions (Ministry of Finance 2001), a practice that reduces transparency and thus increases the potential for abuse of power in budget execution. International best practice suggests that separation of the two functions is essential in creating reli-able internal controls, and will also
356 Edimon Ginting
help with the implementation of a Treasury Single Account (TSA) system in which all government accounts are consolidated. Any failure or delay in implementing this part of the reform package in response to resistance from vested interests may adversely affect implementation of the law.
Finally, as with any other law, the credibility of Law 17/2003 will depend on the capacity of the judicial system to enforce it properly. Without improve-ment in the scope and quality of law enforcement, it will not of itself guar-antee the sound management of public finances. With the passage of Law 30/2002, which authorised the estab-lishment of an Anti-Corruption Com-mission, parliament demonstrated that it does have the political will to improve the capacity of the judicial system to deal with corruption and the misuse of public funds. Under article 6 of Law 30/2002, the Anti-Corruption Commission is charged with co-ordinating and supervising all govern-ment institutions in charge of fighting corruption. The commission has the power to investigate and prosecute cases of corruption, including those that it has reason to suspect may not have been properly handled by other authorities such as the police (article 8). Under this legislation, a special court is to be established to deal with cases of corruption, first in Jakarta and then in other regions. Any delay in
implementing Law 30/2003 will hurt the implementation of Law 17/2003.
Historically, many excellent and important reform initiatives have failed to fulfil their promise through lack of effective implementation. In view of the problems mentioned above, there is a risk that Law 17/2003 could suffer the same fate. It is to be hoped, however, that the lessons of the past have been learned, and that the same mistakes will not be repeated in the implementation of this important new law.
Note
1 DSCR = (TR – CS)/DS, where TR is total regional government revenue from all sources; CS is compulsory spending by regional governments on wages and salaries; and DS is debt serv-ice payments (including principal, interest and fees).
References
Ginting, Edimon (2003), ‘State Finance Law, Overlooked and Undervalued’, Jakarta Post, p. B.2, 25 April.
Ministry of Finance (2001), Reform of the Public Finance Management System in Indonesia: Principles and Strategy, White Paper, Financial Management Reform Committee, Jakarta.
Sherlock, Stephen (2002), ‘Combating Cor-ruption in Indonesia? The Ombudsman and the Assets Auditing Commission’, Bulletin of Indonesian Economic Studies 38 (3): 367–83.
INDONESIA UPDATE 2004
Natural Resources and Development
in Indonesia: Current Challenges
The Australian National University
Friday and Saturday, 24 and 25 September 2004
Indonesia has one of the most diverse and complex ecosystems in the world. Its tropical forests are third only to those of Brazil and the Congo in terms of area. As the world’s largest archipelagic nation, its maritime boundaries and resources are enormous. Its hydro-carbon and mineral reserves are among the largest in Asia.
The challenges in using and managing these resources are immense: ensuring that resource utilisation benefits most people in the country; optimising the rate of exploitation of mineral reserves, bearing in mind the interests of future gener-ations; achieving sustainable forest and maritime exploitation; and much else.
Historically, the granting of rights to exploit Indonesia’s natural resources has played a key role in strengthening the regime in power, with little or no concern for considerations such as sustainability and a fair return to the general public.
Recent rapid political change (reformasi) and decentralisation may seem to have provided opportunities for a long-term development path that embraces both resource sustainability and equity issues. However, these changes have also generated an environment of political uncertainty, weak law enforcement, increased insecurity of property rights and local conflict. This situation, together with the post-crisis imperative of restoring rapid socio-economic progress, cre-ates an ever more pressing need to address the challenges of proper utilisation and management of natural resources.
The 2004 Indonesia Update and the proceedings volume in the Indonesia Update Series will examine these and related issues from a political, socio-economic and environmental standpoint.
Conference convenor
Budy P. Resosudarmo, ANU (budy.resosudarmo@anu.edu.au)
The annual Indonesia Update is presented by the Indonesia Project, Economics Division, Research School of Pacific and Asian Studies (RSPAS), and the Department of Political and Social Change (RSPAS) at The Australian National University (ANU). Support from the Aus-tralian Agency for International Development (AusAID) and ANU is gratefully acknowl-edged.
Enquiries: Indonesia.Project@anu.edu.au or: The Administrator, Indonesia Project
Division of Economics, RSPAS Ph +61 2 6125 3794 The Australian National University Fax +61 2 6125 3700 Canberra ACT 0200, Australia http://rspas.anu.edu.au/economics/ip/
