Indonesia – The Challenges of Implementing a Performance-based Budget System
Posted by Ian Lienert
At the 2007 Annual Meeting of the IMF and World Bank, while some delegates were escaping from the high-security barriers and benefiting from a walk during the wonderful October weather of Washington, D.C., other delegates were spending their Saturday afternoon crammed into a conference room to learn more of the challenges of implementing a Performance-based Budget System (PBS).
Mrs. Sri Mulyani Indrawati, Indonesia's Minister of Finance, had kindly taken time from her hectic schedule to accept an invitation from the IMF to participate in a seminar, brief delegates of the progress so far in changing budget practices in her country and outline the challenges ahead for implementing a PBS.
Progress to date. The Minister informed the seminar participants that in Indonesia:
- A new legal framework for public management, including for a PBS, had been laid in 2003-05. New laws were adopted for budgeting, planning, treasury operations, and external audit respectively.
- National priorities are clearly stated. The National Priority Goals document is used by the Cabinet of Ministers for discussing budget priorities, prior to submission of the draft annual budget to Parliament.
- The political leadership supports budget reforms.
- Technical leadership. The Directorate General of Budget of the Ministry of Finance has been assigned to design Indonesia's specific PBS, in collaboration with other agencies.
- Pilot ministries have been selected. Besides the Ministry of Finance itself, which is to be a pilot for PBS, the Education and Health ministries are being considered.
Challenges ahead. The Minister outlined the challenges for implementing a PBS:
- Role of Parliament. The Indonesian Parliament now plays an active role in discussing budgetary policies and making independent decisions on revenues and expenditures in the annual budget. Since the Executive is not the only budget decision-maker, the government needs to be able to interact with the Legislature in fruitful ways.
- The budget is very detailed. Specialized parliamentary commissions discuss details of the budget directly with spending ministries. In the meantime, the Ministry of Finance discusses with parliament's budget commission. Broad-banding of budget appropriations has not yet begun.
- Link between budget priorities and budget programs. It would be very difficult to draw up a single program that covers “poverty reduction”, “employment creation” or “infrastructure improvement”—the three key national priorities. Many budget programs could be devised to support government goals in these areas.
- Addressing rigidities. The mandates and structures of existing government ministries/agencies, as well as remuneration structures, would need to change. As in other countries, existing institutional arrangements are ingrained.
- Measuring performance. While performance can be measured and quantified in some sectors, it cannot be easily quantified in others. "Who can refuse requests for increases in the Defense budget?", the minister asked. More generally, "Who will judge the relevancy of performance indicators?"
- Change management. "Socializing" major changes to win acceptance of all actors will be essential prior to, and during, the introduction of the new budget system. At the moment, participants in the budget system are familiar with a detailed input-based budget system, and time will be needed to bring about change.
Various questions were asked
The Director of the IMF's Fiscal Affairs Department, Mrs. Ter-Minassian, who chaired the meeting, asked questions concerning whether the budget was already program based (the answer is 'yes', although the Indonesian budget classification structure has other dimensions, including functional, administrative, and economic) and how well prepared spending ministries are to benefit from a PBS. Participants in the seminar also asked a number of questions, including those related to the extent to which parliament had initiated the new budget-related laws in 2003-05 and the role that decentralized governments may play in a PBBS.
Indonesia is in the early stages of implementing a PBS. The Minister noted that her country could benefit from learning about other countries' experiences with implementing such budget systems.