Delivering Results in Post-disaster Recovery through Effective Financial Management: The Case of Aceh and Nias

Transcription

1 International Disaster and Risk Conference Davos, Switzerland August 2008 Delivering Results in Post-disaster Recovery through Effective Financial Management: The Case of Aceh and Nias Amin Subekti Agency for the Rehabilitation and Reconstruction of Aceh and Nias (BRR) Abstract: The 2004 earthquake and tsunami in Aceh and Nias wrought massive damage and triggered a generous response by the international community. Both the large scale of the devastation and the high level of response posed enormous challenges for the recovery efforts, including the management of the large - scale flow of funds. In response, the Government of Indonesia established the Agency for Rehabilitation and Reconstruction (BRR) of Aceh and Nias, tasked with restoring livelihoods by executing reconstruction activities and coordinating projects by other delivery partners. In managing post-disaster reconstruction finance, accountability and integrity needs to be upheld as an utmost importance while ensuring swift implementation and monitoring of recovery programs. This paper illustrates the financial management model undertaken by BRR as the single leading agency to (i) directly execute reconstruction work, and (ii) facilitate the implementation of other players to deliver programs according to urgent needs on the ground. Through clear yet flexible planning, effective resource allocation, regular evaluations, and adjustments to the reconstruction plans BRR exemplifies the Government of Indonesia s initiative in leading the recovery efforts. By implementing innovative breakthroughs in the country s regulatory framework, BRR effectively coordinates the diversity in financing vehicles of the multiple players to effectively manage reconstruction financing that allows for speed in delivery and flexibility in response, while upholding accountability. This paper also shares the lessons learned in the financial management of reconstruction in Aceh and Nias. Key Words: post-disaster financial management, reconstruction, aid effectiveness 1 of 22

2 1. Introduction a. Setting On December 26, 2004, the most powerful earthquake in 40 years struck the Indian Ocean, 150 km off the coast of the Indonesian Province of Aceh. Of the 12 nations hit by the resulting Tsunami, Indonesia suffered the greatest losses. In Aceh province, 131,000 persons have been confirmed dead, another 37,000 remain missing, while 500,000 survivors were displaced. The physical damage stretched 800 km of coastline and as far as 6 kilometers inland, obliterating entire villages. The disaster was compounded by another tragedy on March 28, 2005, when an earthquake hit off the coast of Sumatra near the island of Nias. This earthquake killed nearly 900 people and destroyed the vast majority of buildings and infrastructure on Nias, leaving around 20,000 people displaced. As the regions moved from the emergency relief stage to the rehabilitation and reconstruction stage the scale of devastation and challenge at hand became more apparent. Initial assessment estimated the vast needs in reconstruction: 139,000 new houses needed in Aceh and Nias, over 2,000 school buildings damaged, 3,000 km of roads impassable, and 60,000 ha agricultural land destroyed. The Aceh and Nias disasters wrought massive damage to multiple sectors- infrastructure, schools, hospitals, the environment, the economy and cross-sectors. The scale of the devastation and the inherent challenges was compounded by the legacy of thirty years of conflict in Aceh. At the time of the tsunami, the social situation in Aceh was already disconcerting with the high trauma caused by the conflict (at the time, the Civil Emergency status had not been lifted) along with the low level of education and healthcare. Furthermore, the economic conditionsamong others the increasing rate of inflation, the low and stagnant economic productivity, high unemployment rate and poverty 1, minimum investments- all have factored into the low economic capacity at the time of recovery. The devastation of the December 2004 Tsunami coupled with the preceding years of civil unrest contributed to high unemployment and poverty in Aceh. BPS data reports that 28.4 percent of the population in Aceh was living below the poverty line in The World Bank estimates that poverty went up slightly after the tsunami (to 32.6 percent). The tsunami not only caused tremendous loss of life, but ended the prospects of long term employment for many people. It is estimated that 80,000 small and medium sized enterprises, providing employment to 140,000 people, were destroyed. The decades of conflict had weakened Aceh s economy. The large aid influx and initial supply side constraints have resulted in high inflation levels, at over 40% year-on-year in December The impact has been compromising the competitiveness of Aceh s products, while different economic sectors experienced a different growth due to the impact of the influx of reconstruction works in the area. Table 1 illustrates Aceh's economic growth before and after the tsunami. Moreover, Aceh's economy contracted in 2004 (pre-tsunami) by 10 percent and experienced a further 10 percent decline in 2005 (post-tsunami). The contraction in the economy has been reported to have been the result of the declining mining and related manufacturing sectors, and the impact of the tsunami, which further accelerated the decline of the manufacturing and agricultural sectors. 1 According to the World Bank s Aceh Poverty Assessment (2008), the poverty in Aceh increased slightly in the aftermath of the tsunami from 28.4 percent in 2004 to 32.6 percent in Although poverty fell in 2006 to 26.4 percent, suggesting the reconstruction activities as facilitating this decline, the poverty level in Aceh remains significantly higher than in the rest of Indonesia. 2 of 22

3 Table 1 - Aceh's Economic Growth, Sector * Agriculture, Forestry, & Fishery * Mining and quarrying Oil & Gas Quarrying Manufacturing Industry Oil and gas Industry ,2-17,3-16,7 Non oil and gas industry ,3-5,1 1,1 8.6 Electricity, Gas & Water Supply Construction Trade, Hotel and Restaurant Transport & Communication Financial, ownership and business Services GDP GDP w/o oil & gas Preliminary figures; Source : BPS Attention was needed to lay the foundation to improve the post-tsunami economy in Aceh and to ensure sustainable economic development. However, the three decades of violence left 15,000 dead and more wounded leaving behind an impaired Local Government with limited administrative and service delivery capacity when the region needed it most. A post-election survey of Aceh's citizens by International Foundation for Election Systems conducted in February 2007 identified their concerns across a number of socio-economic conditions that seem to support the broader view of the need for more to be done to sustain economic development: % Security Conditions Political Freedom Free Movement Harassment Reconstruction Program Economic Conditions Availability of Jobs Good Bad Figure 1: IFES Survey Specific Conditions in Aceh (%) The result of the IFES survey in conjunction with the economic growth only serve to provide justification that a coordinating body in Aceh is needed to lead the reconstruction efforts whilst the economic and political situations improve. Initial estimates to rebuild Aceh and Nias came in at USD4.9 billion, which adjusted for current level of inflation is the equivalent of USD6.1 billion. Despite the conflict situation, the global community responded swiftly and generously. More than 600 organizations from over 40 countries responded to the needs for reconstruction. Of the USD11 billion donors poured for relief and reconstruction in the countries affected by the Indian Ocean Tsunami- Indonesia, Sri Lanka and Thailand- over USD7 billion of aid was pledged to respond to the needs in Aceh and Nias. The Government of Indonesia, touched by the sincerity of donors in contributing to the recovery efforts, surprised most observers by 3 of 22

4 deciding to let international NGOs work in Aceh despite the province having been largely closed to aid for many years. The GOI acknowledged that the situation was urgent. The scale of damage and the high level of response posed enormous challenges in rehabilitation and reconstruction. Yet, investing in reconstruction bridges relief and development. The capital from the generous grants provided from tsunami reconstruction can help jumpstart the economy toward sustainable development. An effective and efficient coordination of the recovery effort is necessary. In Indonesia, the GOI aware of the need to impose some quality control, to coordinate the numerous reconstruction initiatives, cleverly capitalized on the generosity of the international world and managed the large flow of funds by establishing a novel agency with the strong authority and flexibility to swiftly implement works. b. Response The GOI acknowledged that the situation was so urgent that addressing the needs using a businesses as usual approach would not be adequate. Under the extra ordinary circumstances of the massive damage, the associated impacts, along with a number of factors present long before the tsunami truck, the GOI considered it too risky to hand over the responsibilities of reconstruction to existing institutions with normal bureaucratic approach. The government bureaucracy at the time was so complex and disposed to corruption that the GOI s flexibility and commitment to respond to the needs of recovery were in question. For these reasons, an agency with an anti-bureaucracy bureaucracy was needed to respond in speed and with the flexibility to adapt to the dynamics on the ground. Additionally, in Aceh, the Central Government was far from a welcomed entity. The recovery of Aceh provided an opportunity for the Central Government to improve its reputation. It was imperative to set up an agency that can bridge the agenda of the Central and Provincial Governments, particularly after the conflict had diminished trust toward both levels of government, newcomers, and among the community members themselves. To obtain the trust of the stakeholders and national and international donors, this agency must also possess idealism, work standards, professionalism and accountability to truly put into practice the principles of good governance. The international community highly supported the establishment of such an agency. In response to the disaster and the impaired condition of the local government, on 16 April 2005, the Government of Indonesia (GOI) established the Agency for Rehabilitation and Reconstruction (BRR) of Aceh-Nias as the primary agency in reconstruction coordination through Law (UU) No.10/2005. BRR's mandate is defined by Government Regulation in Lieu of a Law (Perpu) No. 2/2005 issued by Susilo Bambang Yudhoyono, President of the Republic of Indonesia. The Law stated that BRR is composed of three bodies: the Supervisory Board, the Advisory Board, and the Implementing Agency. BRR was established as the central coordinating body for rehabilitation and reconstruction in Aceh and Nias for a period of four years. Henceforth in this paper, the term "BRR" will refer to the Implementing Agency. The Government Regulation in Lieu of Law No.2/2005 outlined BRR's tasks that include the following: formulate strategies and operational policies; prepare agency's working plans and budget; develop detailed plans for reconstruction based on the guidelines in the Master Plan and with consideration of the needs of those living in the post-disaster areas; execute reconstruction projects funded by the national budget and coordinate the rehabilitation and reconstruction program in collaboration with other stakeholders; organize and coordinate the implementation of rehabilitation and reconstruction by the central government, provincial government and projects funded by donors, international agencies, NGOs or other parties; 4 of 22

5 responsible for the procurement of goods and services in accordance with the prevailing legislation; and determine that the use of funds for the rehabilitation and reconstruction program is carried-out with the highest integrity and free from corruption. In carrying out its mandate, BRR must act in accordance to Law 18/2001 regarding the Special Autonomy of Nanggroe Aceh Darussalam Province, Law 44/1999 on the Special Status of Nanggroe Aceh Darussalam Province and the Helsinki Peace Agreement (MoU Helsinki). Rarely in the history of GOI are ad hoc agencies legally established- a clear indication of the seriousness of the ruling government to take ownership of the reconstruction. The formation of BRR allowed the GOI to integrate and manage the multiple sectors impacted by the tsunami. c. Planning In the wake of the disaster, the GOI quickly conducted assessments to estimate the damage, loss, and needs in the affected areas. The findings were legally formalized through the Presidential Regulation (Perpres) No. 30/2005, better known as the Master Plan. This Master Plan was composed as a guideline in the rehabilitation and reconstruction efforts outlining detailed reconstruction plans in Aceh and Nias. It aimed to, among others, (i) build a consensus and commitment among central and local governments, donors, and other stakeholders involved in reconstruction; (ii) coordinate and synchronize plans of various sectors and stakeholders to create an integrated action plan based on clear time frame, locations, and identify sources of funding and delegate implementation responsibilities; (iii) socialize and disseminate data and information to local, national and international counterparts on the damage, loss and needs assessments; (iv) develop an effective, transparent, and accountable system and mechanism to mobilize funding from APBN, APBD and donors in accordance with the principles of good governance 2. The implementation of the Master Plan was estimated between three to five years, the results of which will feed into the Provincial Medium-Term Development Plan (RPJMD) that will be composed of more sustainable programs. The GOI Master Plan provided an initial guideline with clear key performance indicators (KPIs) for the implementing agency. However, because it was produced in haste (within a three month period), the Master Plan surely contained limitations in comprehensively assessing the damages and identifying the needs that must be addressed in the reconstruction period. For this reason, flexibility to refine the plan periodically as real demands on the ground become clearer over time was acknowledged from early on. d. BRR's Role As determined by its mandate, BRR has a dual role in reconstruction: (i) to directly implement reconstruction projects funded by the national budget, and (ii) to coordinate the implementation of the rehabilitation and reconstruction by line ministries, local government and donors/ngos. a. Implementation - BRR is tasked with executing its own reconstruction program based on the national budget implementation document. At the onset, BRR was solely a coordinating agency that did not implement projects - this was the responsibility of other stakeholder organizations, such as local government, line ministries, NGOs, donors and the private sector. Over time there was a growing necessity to assume the responsibility to execute as alternative implementation mechanisms were nonexistent or insufficient for government agencies who operated under "business as usual" mechanisms to fulfill urgent needs on the ground. Hence BRR became responsible in developing, refining and implementing the overall Master Plan for reconstruction, approving projects, and managing available human and natural resources along with the financial and technological resources funded by the Government of Indonesia's National Annual Budget, or APBN (Anggaran Pendapatan Belanja Negara). As an 2 Bappenas, The Master Plan for the Rehabilitation and Reconstruction of Aceh and Nisa, Main Book, of 22

6 implementing agency BRR directly oversee more than 25,000 projects. These projects range from small soft programming at the village level to large housing settlement projects. b. Coordination - Despite the unresolved political situation in Aceh, aid from around the world arrived in the area and in Nias. In most natural disaster NGOs play a key role in the relief phase but in Aceh and Nias, they are also central in reconstruction. Reconstruction players including, 49 donor countries and over 600 NGOs, have assisted in the recovery of Aceh and Nias during the emergency and continued their work through to the reconstruction phase. These agencies are implementing over 7,500 projects in Aceh and Nias. Apart from implementing works in Aceh and Nias, BRR is the coordinating and facilitating body for post-disaster reconstruction. The agency applies a facilitation model that leverages the main groups of stakeholders, bilateral donors, multilateral donors, NGOs and the private sector. The role of each stakeholder group varies in accordance with the reconstruction need and the type of project. Bilateral and multilateral donors mostly cover large-scale projects in infrastructure, housing sectors covering a wide area, whereas NGOs mainly carry out small - scale projects in specified locations. BRR's role in projects not funded by the national budget, or off-budget projects, is that of a coordinating body. Whenever possible, BRR seeks not to implement projects directly, but to facilitate and monitor other implementing organizations financed by non - government agencies. Thus, BRR assist other stakeholders deliver projects effectively and promptly. Projects executed by BRR aim at filling the gaps in sectors that are under funded by off-budget projects. Maximum flexibility is required if the government funds are to effectively fill gaps and not duplicate the constantly evolving non-government projects of NGOs and donors. The government acknowledged that the situation was so urgent that "rules had to broken" (i.e. financing mechanisms, procurement etc.) and that the coordination needed to be flexible. With the amount of funds required for the recovery, however, the "breaking of rules" and "flexibility", needed to be implemented with extreme care: care that the financial assistance reached the people; care that Indonesia's international reputation was maintained; and care that donors, through trust, continued their support. In this respect it was prudent to establish an ad-hoc agency to "institutionalize flexibility" - institutionalize to ensure that extreme care is maintained, while "flexible" to ensure that the urgency of the situation can be addressed. Hence, GOI's establishment of BRR as the single-government agency responsible for implementation and coordination of reconstruction signified a far-reaching step by the GOI to take a leading role in the reconstruction efforts. Moreover, with the high frequency of disasters in Indonesia, BRR was also expected to become the role model for the flexibility needed in a government disaster management institution. 2. Achievements After its establishment BRR implemented and coordinated projects using the Master Plan as the initial guidance for planning. In three years, although much work still remains to be done, BRR along with its partners have made significant progress in several areas (see Table 2). The recovery effort continues to meet vital needs. Item Table 2: Reconstruction Progress as of June 2008 Damage/Needs (early estimates) Targets (revised Master Plan) Progress (as of July 2008) New houses 120,000 units 139,135 units 114,281 units Agricultural land 60,000 ha 93,787 ha 96,981 ha Road 3,000 km 3,615 km 2,596 km Seaports of 22

7 Airports/airstrips Teachers 2,500 died 25,000 trained 26,538 attended trainings Schools 2,006 units 1,139 units 1,090 units Health facilities 127 units 757 units 810 units Religious facilities 3,183 units 2,013 units 1,649 units These tangible outputs can clearly quantify the achievements delivered by all reconstruction players. They indicate the amount of physical reconstruction progress thus far. Progress in some sectors, such as health, have even surpassed the targets laid out in the Master Plan. Further, the KPIs outlined in the Master Plan has provided an effective indicator of the progress thus far. As seen in Figure 2, as per August 2008, from the total 678 KPIs laid forth in the Master plan, 603, or 89 percent, have been achieved; 72 have not yet been achieved; while 3 of them will be achieved through the 2009 Annual Government Work Plan (RKP 2009). Figure 2: Achieved KPIs as per August 2008 The work being done will rebuild Aceh and Nias back better than the conditions before the tsunami and prepare the foundation for more sustainable development as determined by the Provincial Government s Medium Term Development Plan (RPJM). Yet more investment can be provided in quality assurance and in incorporating environmental and disaster risk concerns in all settlements. Recovery partners, however, have contributed more to the recovery of Aceh and Nias than what is measurable by these (physical) indicators. As reconstruction projects are being implemented, many intangible achievements have contributed to the development of the people of Aceh and Nias. These are the residual impacts immeasurable by KPIs or other units of measurement. One positive residual result of the reconstruction is the capacity building indirectly given to the government and communities in Aceh and Nias through the implementation of projects and working along side national and international experts. Knowledge was directly or indirectly transferred to locals during the implementation of the small- and large-scale projects. This transfer of knowledge contributes to providing a foundation for an enabled community progressing toward sustainable development. Along side that, a hefty intangible achievement brought by the reconstruction is the trust of the international world to the GOI. The reconstruction efforts brought with it a high amount of funding. At the time of the tsunami, the perception of corruption ingrained in the GOI bureaucratic system raised doubts on the part of international donors to commit their funds into the recovery. To ensure accountability is upheld, BRR established an autonomous and independent Anti-Corruption Unit (SAK), the first Indonesian government agency to do so. With the support of the national anticorruption commission, KPK- which opened its first representative office in Aceh, BRR set up an Integrity Pact to fight systemic corruption. Transparency and accountability standards must be 7 of 22

8 upheld. Through the SAK and the KPK regional office, GOI engendered credibility among its international counterparts. This trust has translated the USD 7.2 billion into USD 6.7 billion in commitment (Figure 3). In other words, delivery partners have committed 93 percent of their pledges. This historically high contribution reflects the trust the international world has in the reconstruction efforts underway in Aceh and Nias; a previously challenging feat given the perceived lack of credibility in the GOI. Figure 3: Overall Funding Status 3. Delivering Results By taking ownership of reconstruction the GOI was able to coordinate the reconstruction efforts to deliver real results. BRR s assertion of leadership allowed them to determine priority program in recovery. Moreover the authority bestowed on the agency allowed it to make aid more effective and efficient by reducing transaction costs and misdirected aid, in step with the agenda of the Paris Declaration on Aid Effectiveness of March Essentially, the Paris Declaration is a commitment by donors to support developing countries governments formulate and implement their own national development plans, using their own prioritization, planning and implementation. The five partnership commitments of the Paris Declaration are as follows: Ownership- Partner countries exercise effective leadership over their development policies and strategies, and co-ordinate development actions. Alignment- Donors base their overall support on partner countries national development strategies, institutions and procedures. Harmonization- Donor s actions are more harmonized, transparent and collectively effective. Managing for results- Managing and implementing aid in a way that focuses on the desired results and uses information to improve decision-making Mutual Accountability- Donors and partners are accountable for development results Aid is sometimes perceived as generally aligned with countries priorities yet there is insufficient flexibility at the sector level where donors tie their support to specific activities. In line with the principles of the Paris Declaration, if the volume of aid and the limited resources are to work effectively in the recovery period, GOI through BRR must take ownership of the reconstruction and ensure the alignment of the GOI reconstruction strategy and programs with that of stakeholders to manage for the desired results while upholding accountability. Further, financial management of a post-disaster situation demands different treatment than the regular budgetary system. The sense of urgency in delivering projects signifies the need for swift and efficient project preparation, and shortened budget approval and procurement process. Conditions of post-disaster environments change so rapidly that establishing fast-track funding is necessary to 8 of 22

9 reallocate funds accordingly to support immediate recovery. Meanwhile, most governments lack procedures to accelerate funding process in emergency-recovery situations. What s more, many governments and non-government actors want to engage in reconstruction following large-scale disasters. Coordination is needed to ensure every institution supporting the reconstruction effort, regardless their budget mechanism, channel their funds in a transparent way. With significant time pressures and finite duration inherent in post-disaster, financial management must provide for these three pillars in post-disaster (i) speedy response, (ii) flexibility in procedures, (iii) transparency. In the recovery of Aceh and Nias, BRR is in favor of government and non-government mechanisms that support those three pillars. Through appropriate management of recovery projects and putting into practice the principles for aid effectiveness, BRR strengthens governance and delivers a strong performance in reconstruction. This section presents the framework and mechanisms BRR applies to accelerate implementation and enhance coordination. BRR follows a four step project cycle framework to manage reconstruction delivery: (i) strategic planning, (ii) resource allocation, (iii) implementation, and (iv) monitoring and evaluation. Described below, it is by using this framework to implement its own projects and coordinate the projects of numerous players that BRR is able to deliver results. Figure 4: Framework for managing reconstruction a. Strategic Planning In response to the enormous task of rebuilding the areas affected by the tsunami, the GOI generated the Master Plan. As mentioned above, this top down approach provided clear targets in the recovery efforts with clear time frame and clear KPIs. The Master Plan provided BRR with priorities in the reconstruction program. Effective aid relationship requires donor and partner governments to build working consensus on objectives and strategy. This is more feasible when the partner government has a definite strategy. Albeit rushed, the Master Plan provided BRR and its international partners with an initial strategy and allowed for adjustments to be made in the implementation period through the Mid-Term Review (more below). Good planning incorporates three elements: (i) clear time frame, (ii) clear KPIs, and (iii) room for adjustments. Yet a balance with a solid bottom up approach is also necessary. Coordination with the local government through the Joint Secretariat (local government, BRR and the UN), the BRR regional office, and the active participation of local community members in the planning and execution of projects have strengthened the bottom up approach to planning in Aceh and Nias. As many changes in the targets set by the Master Plan were modified over time as BRR relied to a greater extent on the needs on the ground to steer the direction of recovery, the Master Plan was just the same the guideline needed to initially structure the reconstruction plans. 9 of 22

10 b. Resource Allocation The reconstruction effort in Aceh introduced a new paradigm of financing, whereby the host government, official donors and NGOs are involved in equal measure. In Aceh and Nias, NGOs are almost as significant contributors as classical reconstruction agencies (Figure 4). Figure 5: Out of the total commitment of USD6.6 million, the percent committed by the GOI, donors and NGOs is nearly the same. Due to the nearly equivalent contribution of reconstruction players GOI had some leverage in determining the reconstruction program. After clearly identifying sector objectives, strategies and defining policies and regulations in the planning and policy process, BRR must organize all implementing agencies in generating projects to meet the demands of recovery. As the agency responsible for facilitating the implementation of reconstruction, BRR must also coordinate the financing of projects in accordance to donor procedures and systems. As mentioned, BRR is in favour of any financing schemes that cater to the three pillars of financial management. Delivery partners have their own preference in financing projects - through on- or offbudget mechanisms. Figure 6 presents a simplified process of how BRR facilitates on- and off-budget fund channelling. Figure 6: Fund Channeling Route The term on-budget refers to the registration of the expenditure into the GOI national budget through the DIPA, or Issuance of Spending Authority (Daftar Isian Pengeluaran Anggaran). The project preparation process for Government begins with the development of a ministry's annual work-plan and budget (RKA-KL), which is informed by the Annual Government Work Plan (RKP) and budgetary ceilings. Implementing agencies submit draft-budget plans to the Ministry of Finance for review and approval (Figure 7). With an approved budget plan, the implementing agency then prepares a budget execution document, the DIPA, against which all disbursements are to be authorized and processed through the State Treasury Offices (KPPN). On-treasury refers to disbursements through the Directorate General of Treasury or KPPN office in Aceh. 10 of 22

11 Figure 7: GOI Budget Processes Under the regular GOI budgetary system, before the DIPA can be processed by the Line Ministry, it must be registered by the Ministry of Finance (MOF) and the National Planning and Development Agency (Bappenas). For swift budget preparation, GOI has given BRR flexibility wherein the agency has no obligation to register their DIPA in Bappenas. They may develop their own DIPA and submit it directly to the MOF for approval. Further, a KPPN has been established specifically to speed up the disbursement of reconstruction projects (more below). These two factors lend to increase the speed of delivery. The management of on-budget funds, in accordance to Law No.17/2003 on State Finances, is carried out by Satker, or Work Units. Upon completion of the DIPA and appointment of signatory authorities project Satker can enter into commitments for the provision of various goods and services. Meanwhile, off-budget projects are those financed through loans or grant agreements that are not registered in the GOI budgetary system, instead reported to the foreign donor's parliament. Offbudget projects are managed directly by the donors or NGOs, while BRR s role is to facilitate their implementation and monitor the output. For the allocation of funds originating outside the GOI, at its onset BRR predominantly adopts a "free market" approach, with appropriate regulation, wherein 'demand' from the Local Government and BRR is met with 'supply' from donors. BRR enables NGOs, donors and the private sector to fund projects that match their priorities and skills, as long as the projects meet real needs, have high standards, and are not duplicative. In this manner, the proportion of pledges converted to actual disbursement in sectors in need is maximized. As time reveals gaps in priorities of recovery actors and the needs on the ground, BRR took on a guided market approach by steering partners to fill the identified gaps. BRR juxtaposes proposed projects with the sector and regional demands through the Project Concept Note Approval Process (more below), and match donor s or NGO s skills and interests with demands on the ground. In so doing, funds are guided to address the real needs while maintaining the buy-in of the donors and NGOs. To facilitate the different needs of donors with regard to project implementation, BRR set up three reconstruction funding mechanisms: (i) on-budget, on - treasury, (ii) on-budget, off treasury, and (iii) off-budget, off - treasury. These three different arrangements have their own benefits and drawbacks. 11 of 22

12 Figure 8: Reconstruction Financing Mechanisms i. On-budget, on-treasury - In line with strengthening government partnership and involvement in the recovery process, many traditional reconstruction players such as multilateral agencies and banks, such as the World Bank and the Asian Development Bank, traditionally work with the government and execute their programs according to the government budget regulations. For this reason, many multilateral agencies sign grant or loan agreements to finance their projects using the on-budget, on-treasury mechanism. The benefit of having donors use the on-budget mechanism is the accountability of their projects under the national budgetary system. However, the regular budgetary system can be time consuming and lack the speed necessary to rapidly respond to the needs of reconstruction. ii. On-budget, off-treasury - There are other donors who similarly, traditionally work with the government. However, they have their own implementing agencies already in mind. These donors, mainly bilateral doors such as the Government of Germany and the Government of Japan, opt to use an on-budget, off-treasury financing scheme. In this scheme, while donor projects are accountable in the national budgetary system, BRR lacks the full authority to influence the implementation process. iii. Off-budget, off-treasury - NGOs and UN agencies typically have implementation tools on the ground. In this context, BRR allows them to finance their projects using the off-budget, offtreasury mechanism. The upside to this mechanism is the swift implementation process of most agencies, as they do not have to follow long, rigorous national budgetary system. However, these agencies are not legally accountable to the GOI, making it difficult to monitor and evaluate their contributions. BRR guides the use of funds to ensure resources are allocated efficiently and appropriately. Offering delivery partners the liberty of choosing one of these three financing schemes provide them the comfort of implementing projects by using the mechanisms that are aligned with their own procedures and system. These three different arrangements provides comfort to donors, NGOs and other delivery partners, which has yielded the 93% commitment in the reconstruction efforts in Aceh and Nias. These financing schemes exemplify GOI s capacity to adapt to the changing dynamics of a postdisaster situation and to assert leadership while ensuring alignment between donors, NGOs and GOI projects. c. Implementation In a post-disaster environment, the integrity of reconstruction, abiding by existing regulations for "normal" conditions, cannot supersede the sense of urgency. Establishing implementation arrangements that allow for rapid project implementation process during post-disaster reconstruction is crucial in responding to the urgent needs of those whose lives were disrupted by the disaster. A flexible, fast-track set of procedures for spending on reconstruction projects in Aceh and Nias with appropriate fiduciary controls is required to ensure swift implementation. The "normal" pace of 12 of 22

13 project implementation is simply not good enough to address the urgent needs of the people affected by the tsunami and earthquakes. Given the post-disaster situation in Aceh and Nias, BRR must be able to quickly respond to the changing needs on the ground. In order to do so, GOI engaged in institutional flexibility and created innovative breakthroughs to facilitate the swift implementation and coordination of reconstruction efforts. i. On-budget Implementation Breakthroughs - In the immediate aftermath of the tsunami, relief funds from all sources were mobilized and disbursed rapidly. However, funds for reconstruction activities faced many delays. While these implementation delays were often a function of the sheer complexity and scope of the reconstruction, there were a number of administrative bottlenecks that further exacerbated these delays. As an extension of the Central Government, BRR has created innovative breakthroughs to accelerate implementation, ensure effective budget allocation and improve reconstruction performance. The following are some of the critical reforms that enabled BRR to mobilize funds where it is needed the most. a. Performance based budgeting Effective budget allocation begins in the initial planning process. In preparing its budget, BRR has shifted to a performance based budgeting wherein budget allocation is based on the output of the sector or Satker. As opposed to preparing a budget based on the previous year s budget, as commonly practiced by other government agencies, BRR develops its budget based on a sector s capacity to implement. The constantly changing needs on the ground simply demanded a more flexible standard for budget allocation that can cater to those needs. The Master Plan provides clear targets with clear KPIs through which the performance of each sector can be measured accordingly to ensure projects are on the right track.. As a clear linkage between the funding allocation and output is the justification for additional budget allocation, this performance based budgeting engenders a system of incentives for Satkers to reach project target since it is based on a sector s capacity to implement. b. Performance Accountability System- BRR s task to implement over 25,000 projects is not an easy one. Yet it is one the agency must be held accountable for on all levels from planning to execution. To do so, BRR has laid down a system that enables all Satkers to report their disbursements directly and to BRR. The BRR Perfomance Accountability Report (LAKIP) is based on a Performance Accountability System (SAKIP) that has been implemented since Since 2006, the LAKIP, a mandatory documentation for all government agencies in Indonesia, submitted by BRR has received the Award for Excellence by the Ministry of State s Apparatus for its timeliness and exemplary display of a proper government system of accounting. This award was given to BRR because the LAKIP is based on financial reports, performance report and disbursements according to the initial budgetary and strategic plans. In 2007, BRR with its 118 Satkers reported their LAKIP with a rate of 76% and again received an award from the Ministry of State s Apparatus because although the financial reporting system changed, the adjusted activities on the ground continued to be executed expeditiously. The system of evaluation covers a proper internal monitoring system, and BRR composed the LAKIP based on the standardized form for Government Accounting. In addition, issues and findings on the field were followed up immediately. c. Block allocation - Initially, BRR, Line Ministries and all on-budget donors followed the regular national budgeting process. However, this process proved to be a great encumbrance in quickly implementing projects. As a result, in late 2005 BRR was the officially designated the Implementing Agency for almost half of Government's rehabilitation and reconstruction funds; from 2006 onwards it fulfils this role for all the government funds. Further, to facilitate faster fund disbursement and for more flexibility, as the sole implementing agency BRR began following a more flexible block allocation system wherein the national parliament approves broad budget allocations by sector or district as indicated by the performance based budgeting system; project proposals are submitted to BRR; BRR reviews and approves 13 of 22

14 projects based on knowledge of gaps in reconstruction activities; and funds are transferred from the broad block allocation to individual, fully-prepared projects. This approach has a number of advantages over the normal budgetary process: It enables BRR to compare individual government project proposals with the evolving project catalogue, specifically with off-budget projects. This improves coordination. It gives BRR the time to review proposals more rigorously and ensure that they follow BRR guidelines - that is, that they are community - driven, benefit from expert input, follow the highest professional standards, etc. It gives BRR the flexibility to allocate resources according to changing needs and funding gaps - it does not 'lock in' all activities of that year in the middle of the previous year. It maintains greater transparency for stakeholders throughout the process. The block allocation budget system proved to be a more effective mechanism. The detailed budget allocation modality entailed a lengthy administrative process that provided limited flexibility in addressing gaps on the field. Grouping budget allocation by sector allowed more flexibility, bear a smaller administrative burden, and afford faster implementation. d. Procurement - The implementation programs through the APBN mechanism face a number of problems; the administrative bottlenecks exacerbated the delay of implementation. For one, the procurement regulations and procedures referred to in Presidential Decree No. 80/2003 caused difficulties in launching an expedient procurement and implementation process. These difficulties are understandable considering that such regulations are designed for "normal" circumstances. Under "normal" situations, it is common that serious reconstruction works would require a much longer lead time for project development, planning, review and impact assessment, procurement, and mobilization; a process that usually takes one to two years in Indonesia. The conditions in Aceh and Nias, however, are far from normal. To alleviate the administrative burden of the procurement process, after its first year, special powers under a Presidential Regulation allow BRR to bypass normal procurement procedures to speed up engagement with contractors and obtainment of other goods- enhancing expedient delivery of the recovery program. A shorter procurement period should not be at the expense of a transparent process. BRR introduced an e-procurement system whereby goods and services needed are advertised and winners and contract values are announced online. This system allowed for transparency during the swift procurement process. e. DIPA Luncuran - In response to the delays in the budget system, the GOI approved a carry - over of unspent funds from one year's budget into the following year for reconstruction projects along with other national projects. Normal procedures require unspent funds at the end of the year to be returned to the Ministry of Finance. The approval to carry - over unspent budget, using the DIPA Luncuran mechanism, provided space to implement projects slated for one year to be stretched into the following year if necessary. The DIPA Luncuran mechanism was especially advantageous in the second year of BRR. In 2005, BRR only disbursed 10% of its budget largely due to the long procurement process. The remaining 90% was approved to be carried over into the following year as the 2006 DIPA Luncuran. Extending the budget for one year into the next gave reconstruction projects more time to disburse their funding in the event of delays in implementation. f. BRR Trust Fund When the DIPA Luncuran mechanism was suspended by the GOI, BRR was approved to implement another innovative funding scheme to utilize remaining onbudget funding that was not disbursed from the previous year through the formation of a Trust Fund. The BRR Trust Fund account was formed through the Director General of 14 of 22

15 Treasury of the Ministry of Finance authorization letter 3 and Director General of Treasury Regulation 4 in 2006 and 2007 respectively, that contain technical guidelines for the use of funding from the said Trust Fund. Subsequently, Director General of Treasury Regulation 5 was released designating the closure of the Trust Fund on September A similar account was created to expedite post-disaster financing process in Yogyakarta. These Ministry of Finance (MOF) regulations provided a legal basis for the formation of the BRR Trust Fund- an account for the 2006 APBN budget to be used the following year. Similar to the DIPA Luncuran, the Trust Fund allows unspent funding to be disbursed the following year to secure funding for delayed projects. The establishment of the Trust Fund shifts function of the KPPN-Khusus treasury to BRR with specific guidelines outlined by the MOF. Projects funded through the Trust Fund are not exempt from the national standards of transparency and integrity; BRR maintains its commitment to comply with legal standards. The Trust Fund account was established to provide speed, sustainability and flexibility to projects in the post-disaster area. g. KPPN Khusus - To facilitate the flow of any government budget funds for rehabilitation and reconstruction activities, the Ministry of Finance formed a special Treasury Office (KPPN Khusus) for reconstruction activities in Aceh and Nias. The KPPN Khusus allowed for a reduction in funding disbursement process through decentralized spending decisions. Further, the KPPN Khusus is only in operation during BRR's tenure in Aceh. Once BRR closes, KPPN Khusus and the swift disbursement the office facilitates will cease also. Aware of the sense of urgency, GOI welcomed these regulatory reforms to rapidly respond to the changing needs. These seven breakthroughs in the budgetary framework provided BRR with the necessary means to expedite the recovery program from the budget preparation process through the performance based budgeting to disbursement by the establishment of the KPPN-Khusus. Removing bottlenecks of the regular budgetary framework for normal situations made possible the flexibility to carry out swift and accountable implementation. Further, BRR s reporting of the progress and how the agency has handled issues on the ground has received national acknowledgement. ii. Off-budget Coordination Breakthroughs - BRR's mandate extends to coordinate activities implemented by donors, NGOs and the private sector as funded through off-budget mechanisms. In facilitating the off-budget activities, BRR has applied coordination tools to ensure there are no overlapping activities and projects are aligned with the interests of the people of Aceh and Nias. BRR has undertaken the following breakthroughs a. Coordination Forum for Aceh and Nias (CFAN) and Nias Islands Stakeholder Meeting (NISM) - To ensure that challenges faced by stakeholders working for the recovery are addressed, the Coordination Forum for Aceh and Nias (CFAN) and Nias Islands Stakeholder Meeting (NISM) are held annually. Led by BRR, CFAN and NISM became the vehicles to bring together delivery partners in one room, receive partner recommendations, and enhance coordination through open dialogue and collaboratively identifying gaps and needs. Each year, CFAN and NISM focus on a different theme relevant to the changing needs in the reconstruction process. This forum for stakeholder coordination proved to be effective in aligning priorities, filing sector and regional gaps, and enhancing coordination among players and the government. b. Project Concept Note Approval Workshop - As a part of a natural coordination and quality assurance process to make sure the smooth flow and effective spending of funds, BRR must approve of every project prior to its implementation. As a result, various non - government organizations regularly send BRR Project Concept Notes (PCN), which the agency must catalogue, rigorously review and approve or reject. The objective of the project approval 3 No. S /Pb/2006 on 22 December Perdirjen No. 03/PB/ Perdirjen No. 30/PB/ of 22

16 process is to approve projects thoroughly, consistently, transparently, justly and quickly to ensure that the reconstruction is coordinated, meets minimum standards, and is driven by local community needs. During early recovery, the workshop agenda was conducted once a week, then every three weeks and currently it is conducted monthly with an average of up to projects per workshop. To date, through 44 batch workshops the Pusdatin (BRR Data and Information Center) has approved 1,540 programs/ projects out of 1,700 proposed. BRR holds regular PCN Approval Workshop wherein BRR sector experts, the local government and relevant external stakeholders are invited to evaluate a batch of submitted PCNs in a transparent fashion and rated - unconditional approval, conditional approval, holding bay, or turned down. The criteria used to evaluate project includes alignment with the Master Plan and sector vision, local community involvement, and project sustainability. A single approval process allows for maximum coordination between government and non - government projects. The PCN Approval Workshop is also a forum to match urgent projects with funds if needed. Moreover, the PCN provides a basis for BRR to track the projects implemented through off-budget mechanisms as PCNs are registered into the RAN Database. c. Recovery of Aceh and Nias (RAN) Database To collect and analyze data on reconstruction projects implemented by delivery partners, Recovery of Aceh and Nias (RAN) Database, a relatively low - tech, robust ICT system was devised. For each, submitted PCN, critical information on key performance indicators, funding source, sector, location, budget allocation is registered into the RAN Database. The RAN Database system automatically captures all data as supplied by PCNs to the database; it contains information on approval and progress of all projects based on the BRR PCN approval system, plus monitoring data based on KPIs. The RAN Database contain some valuable information including: 965 NGOs and donor agencies have been or are still involved in the Aceh and Nias recovery. Up until now, 1,540 projects are being carried out in 23 districts, 266 sub-districts, and 2688 villages. Fund commitment has reached USD 3.6 million or IDR 35 billion. Over 1,100 donor and implementing partners participate in this online data sharing, directly providing up-to-date, transparent and accountable information on the progress of reconstruction works. With the RAN Database, BRR and anyone else in the world have a consolidated picture of who is doing what where, in particular for off-budget projects. This labour - intensive system allowed BRR to track and monitor progress at regular intervals and to coordinate more effectively, by pinpointing gaps and overlaps. The three aforementioned coordination mechanisms help to facilitate donors in implementing their projects, and further, ensuring that their projects are in line with the overall recovery program. The PCN approval workshop allows BRR a systematic process to approve projects, and complimentary to that, the RAN Database provides a tool to monitor progress on-the-fly for both BRR and its partners. Meanwhile, CFAN and NISM provides the forum to bring together players to discuss the collective progress and challenges as well as provides a critical avenue for sharing information and creating strategies for moving forward. The involvement of delivery partners in PCN Approval Workshop, RAN Database, CFAN, and NISM enable BRR and partners to plan and coordinate their projects with other actors working in the same sectors and locations. The effectiveness and success of these three mechanisms, though owned or largely led by BRR, indicates the collective commitment to conducting a coordinated endeavor in Aceh and Nias. 16 of 22