ASIAN DEVELOPMENT BANK

Transcription

1 ASIAN DEVELOPMENT BANK TAR: INO TECHNICAL ASSISTANCE TO THE REPUBLIC OF INDONESIA FOR FISCAL DECENTRALIZATION November 2001

2 CURRENCY EQUIVALENTS (as of 31 October 2001) Currency Unit Rupiah (Rp) Rp1.00 = $ $1.00 = Rp10,430 ABBREVIATIONS ADB BAPPENAS Asian Development Bank Badan Perencanaan Pembangunan Nasional (National Development Planning Agency) Badan Pusat Statistik (Central Bureau of Statistics) BPS COS country operational strategy DAU GTZ Dana Alokasi Umum (General Allocation Fund) Deutsche Gesellschaft für Technische Zusammenarbeit (German Agency for Technical Cooperation) Ministry of Home Affairs and Regional Autonomy MOHARA MOF Ministry of Finance RPER regional public expenditure review TA technical assistance USAID United States Agency for International Development NOTES (i) (ii) The fiscal year (FY) of the Government ends on 31 December. In this report, "$" refers to US dollars.

3 I. INTRODUCTION 1. The 2001 program for Indonesia includes an advisory technical assistance (TA) to help the Government decentralize the country s fiscal administration. Successful implementation of decentralization can facilitate poverty reduction by making public services more demand driven through strong public participation. To this end, setting up new intergovernmental fiscal relations, that guarantee a balance between the revenue and expenditure assignments is highly critical to protect the poor from basic service delivery disruptions. 2. Good governance is the main anchor of the country operational strategy (COS), 1 and supporting successful implementation of decentralization is essential to ensure balanced regional development to achieve regional equity, which is one of the five strategic focuses under the COS. The COS also emphasizes the need to adopt a geographical focus in Asian Development Bank (ADB) operations in Indonesia. 3. At the request of the Government, the Fact-Finding Mission visited Indonesia in July 2001 and reached an understanding with the Government on the objectives, scopes, costs, financing, implementing arrangements, and terms of reference for the TA. 2 The TA framework is given in Appendix 1. II. BACKGROUND AND RATIONALE 4. Effective 1 January 2001, Indonesia started implementing a major program of decentralization. A key principle of decentralization is to move decisions closer to the people to make public service delivery more responsive through strong public participation. The legal framework for the decentralization was laid down by the Regional Governance Law No. 22/1999 and the Fiscal Decentralization Law No. 25/1999 issued in May The former eliminates the hierarchical relationship between the provincial and the district governments called kota (municipality or city) and kabupaten (district), and makes all district governments autonomous. The provinces act concurrently as autonomous regions, and administrative areas, and retain a hierarchical relationship with the central Government. Government Regulation No. 25/2000 delineates the roles of national, provincial, and district governments in decentralized sectors. Over 360 districts became responsible for planning, management, financing, and delivery of public services in 11 areas. 3 At the same time, with the decentralization, about 2 million civil servants who had worked in the regional offices of the central departments are to be transferred administratively to regional governments Law No.25/1999 on the fiscal decentralization alters the transfers received by regional governments from the central Government. The routine transfer that was mainly used to pay the salaries of local civil servants (subsidi daerah otonom) was eliminated; also eliminated was the general development transfer known as blok instruksi presiden, or blok Inpres. These two central transfers were combined into a general allocation fund (dana alokasi umum, or DAU), the total amount of at least 25 percent of the central Government's domestic revenues is earmarked for DAU. Government Regulation No. 14/2000 provides the allocation formula for the DAU, which incorporates financial needs and capacity of all regions. The law also introduced revenue sharing for provincial and district governments, assigning each level of government its share of revenues from taxes on personal income, land and building, transfer of land and 1 Endorsed by the Board on 15 March The TA was listed in ADB Business Opportunities in July Public works, health, education and culture, agriculture, communication, industry and trade, investment, life environment, land matters, cooperatives, and human resources. 4 The regional governments consist of provincial and district (kabupaten, kota) governments.

4 2 buildings, forestry, mining, fisheries, oil, and gas. Another newly introduced central transfer was special allocation fund (dana alokasi khusus, or DAK), which aims at supporting regional governments to implement nationally prioritized projects. 6. In the national budget for FY2001, 5 central transfers to regional governments (revenue sharing, DAU, and DAK) will total Rp81.7 trillion, or 82.7 percent increase on a year-on-year basis from Rp33.5 trillion during FY2000. At the aggregated level, regional governments acquired higher financial capacities. However, some regions are in fact suffering from financial gaps in their budgets, despite the drastic increase in their revenues. The key cause of the problem is the imbalance between the new revenue assignments and expenditure responsibilities in determining the DAU allocation to each region. Although the DAU should have been allocated based on the formula, the Government has taken into account the total amount of SDO and block Inpres allocated to each district in the previous year to guarantee that no districts would be worse off, so that all districts would receive more than the previous year. However, additional costs of central staff transfers to regions were not appropriately incorporated into the calculation. As a result, in some regions, major parts of the increased revenue needs to be allocated to cover the increased salary expenditures. 7. To guarantee a reasonable balance between expenditure responsibilities assigned and revenue instruments available in the regional governments, the cost implication of the expenditure responsibilities and the revenue must be estimated. In this context, the intergovernmental transfer system, the expenditure assignments, and the local taxation and user charge should be reviewed and rearranged. The Government fully recognizes this issue and is taking necessary actions such as allocating contingency funds after evaluating regional budgets and initiating process to revise the DAU allocation formula. However, such adjustments are being made on a case-by-case basis, without any comprehensive cross-district analysis. 8. Another limitation is the lack of revenue-raising capacities of regional governments. Although the Government has revised the Law No. 18/1997 on regional taxes and levies by Law No.34/2000, in order to strengthen regions own revenue sources, locally controlled tax instruments are needed. In their absence, major parts of local expenditures need to be financed by the central transfer, which makes it difficult to increase public awareness of the costs and responsibilities of providing improved services. The Government must assess impacts of the revised local tax law and keep encouraging regional governments to improve local tax collection. 9. The process by which increased financial resources are managed will be a key for development outcomes in the regions. The lack of experience of the regional governments in analyzing their own development challenges and formulating budgetary policy to meet the challenges is a serious concern. They were compelled to prepare their budgets for FY2001 with limited capacity in an environment in which intergovernmental fiscal relations are not settled, their own revenue capacity not fully known, and access to borrowing unclear. Accordingly, priority must be given to analyzing existing development planning and budgetary process, and clarifying major constraints for regional governments in their financial management. 10. With the implementation of the decentralization law, the Government is also required to prepare a new grant-transfer and/or on-lending policy for projects assisted by development agencies and international financial institutions. Under Law No. 25/2000, regional governments are allowed to borrow, but their borrowing is limited by a formula for total debt amount, and each individual loan requires specific Ministry of Finance (MOF) approval (Government Regulation No. 207/2000). For FY2001, the Government prohibited borrowing by regions from both 5 Based on the national budget revised in December 2000.

5 3 domestic and foreign sources except for those obtained through subsidiary loan agreements and short-term borrowing for cash flow management (Finance Minister Decree No. 99/2001). However, for loans for critical projects to regional governments to continue, a new criteria-based grant transfer and/or on-lending policy needs to be developed. In preparing this system, the Government will need to pay due attention to financial capacities of regional governments with a view to providing special support to financially weak regions as appropriate. 11. Lack of consensus between the central and regional governments and also within the central Government on decentralization is a serious problem. Although several laws and government regulations regarding decentralization have already been issued, regional governments have not yet fully recognized the implications of the new regulations on their budgets. To address this issue, the Government must make continuous efforts to provide more guidance to regional governments and clarify constraints that regional governments need to address. In addition, information sharing and consensus among development partners will be essential to set clear directions for their activities in support of decentralization and to avoid overlap of their activities. 12. ADB has provided two TAs in the area of fiscal decentralization: TA 3178 aimed at preparing prototype of regional budgets and audit mechanisms; 6 and TA 3394 provided a series of training on public expenditure management. 7 These TAs supported fiscal decentralization at a conceptual and/or central level. Among other development partners, the World Bank and United States Agency for International Development (USAID) lead supports for fiscal decentralization. 13. The World Bank has initiated regional public expenditure reviews (RPERs) in West Nusa Tenggara, North Sumatra, and West Java in its TA, Fiscal Decentralization Strategy. USAID, through the Performance-Oriented Regional Management (PERFORM) Project is providing support for revenue sharing and fiscal balance, regional government taxation, regulations for local government budgeting, and financial management. III. THE TECHNICAL ASSISTANCE A. Objectives 14. The overall objective of the TA is to support successful implementation of fiscal decentralization. The TA specifically aims at supporting the Government in identifying key constraints in the current intergovernmental fiscal relations by providing districtwide fiscal profiles and conducting detailed RPERs in some selected areas. The TA will also support the Government in developing a new grant-transfer and/or onlending policy for projects assisted by external funds. B. Scope 15. The TA will comprise four closely interrelated components: (i) preparation of district financial profiles; (ii) implementation of RPERs in selected regions; (iii) support for the Government in formulating a new grant-transfer and/or onlending policy; and (iv) national and regional workshops to facilitate consensus building and dissemination of information. 6 TA3178-INO: Capacity Building to Support District Level Budgetary Systems, for $460,000, approved on March TA3394-INO: Public Expenditure Management and Implications of Decentralization, for $225,000, approved on January 2000.

6 4 16. District Fiscal Profiles. By reviewing and utilizing existing databases on regional budgets and socioeconomic indicators in various ministries and government agencies [MOF, National Development Planning Agency (Badan Perencanaan Pembangunan Nasional - BAPPENAS), Ministry of Home Affairs and Regional Autonomy (MOHARA), and Central Bureau of Statistics (Badan Pusat Statistik - BPS)], the TA will prepare a database on provincial and district-city budgets and socioeconomic data covering both before and after the decentralization as a baseline to analyze the differential impact of fiscal decentralization on regions budgets and on their social sector investments. To check the revenue and expenditure balance, the TA will carefully analyze the changes in the regional budgets including not only revenue but also expenditure after the implementation of decentralization. Based on the analyses, the TA will develop indicators to measure financial capacities of regions and prepare regional government mappings based on their financial capacities. 17. Regional Public Expenditure Reviews. To clarify major constraints for regional governments in their financial management, the RPERs will be conducted in Bali, East Nusa Tenggara, and South Sumatra. The RPERs will (i) comprehensively analyze regional budgets of FY2001 compared with those before decentralization, and review of the allocation of increased revenues between routine and development expenditures, and sectoral budget allocation; (ii) review how regional governments are coping with the transfer of central civil servants, and the impacts on personnel expenditures and also overall budgets; (iii) review existing budget policy and budgeting process; (iv) review the existing local taxes, charges, and levies; identify what measures were already taken after the amendment of the regional tax law, and explore a possible revenue mobilization strategy; and (v) review regional governments demand for regional borrowing. 18. While Bali is among the more developed provinces, the financial capacity of its districts vary considerably. The hotel and restaurant sector is the major source of regional revenues, in some districts, but agriculture is the main sector in others. East Nusa Tenggara, as a whole, is a poor province with limited human and natural resources and financial capacity. South Sumatra consists of some resource-rich districts, which are major beneficiaries of the new revenuesharing system, and poor districts. The RPERs will be conducted in close coordination with the World Bank, which is currently conducting similar RPERs in West Nusa Tenggara, North Sumatra, and West Java. For RPERs in East Nusa Tenggara, the TA will coordinate with the Support for Decentralization Measures in the Nusa Tenggara Provinces of German Agency for Technical Cooperation (Deutsche Gesellschaft für Technische Zusammenarbeit GTZ), which has been supporting regional governments in developing their own revenues. 19. Grant Transfer and/or Onlending Policy: Based on the district fiscal profile and RPERs in the selected regions, the TA will provide baseline information for the Government to formulate a new grant-transfer and/or onlending policy. The TA will deal with the mode of onlending, grant: loan ratio, terms, and conditions. The TA will provide relevant information derived from other countries experience in this area. The basic approach will be a grant-transfer and/or onlending mix based on (i) a region's financial capacity, and (ii) type of project (revenue generating or nonrevenue generating). The grant component would become larger in cases where regional governments have less financial capacity to undertake nonrevenue generating projects. 20. All outputs of the TA will be discussed in regional workshops in the selected regions for the RPERs, and in a national level workshop to disseminate relevant findings to all stakeholders and identify areas that need further assistance. C. Cost Estimates and Financing Plan

7 5 21. The total cost of the TA is estimated at $625,000 equivalent, comprising $382,500 in foreign exchange and $242,500 equivalent in local currency. ADB will provide a grant of $500,000 equivalent to cover the entire foreign exchange cost and $117,500 equivalent of the local currency costs. The TA will be financed by ADB on a grant basis from the ADB-funded TA program. The Government will finance $125,000 equivalent of the local costs, through the provision of office accommodation and use of equipment, counterpart staff remuneration and transportation, and organization of regional workshops. Appendix 2 provides the detailed cost estimates and financing plan. D. Implementation Arrangements 22. MOF will be the Executing Agency under the direction of the director general of centrallocal fiscal balance. MOF is the lead agency to design and implement fiscal decentralization. In the process of implementing the TA, support of MOF, MOHARA, BAPPENAS, and BPS is essential for data and information collection and analyses, and conducting RPERs in the selected regions. Staff participation from the different ministries will be required to utilize all existing regional data in these ministries and to share major outputs within the Government to facilitate interministerial consultation, coordination, policy clarifications, and decisions. As the most pertinent data is available in various ministries/offices but is not carefully compiled; the TA will provide limited resources for the survey. MOF will provide appropriate office space and staff to support the consultants. The Government will facilitate the work of the consultants, and ensure their access to relevant data and documents. 23. For TA implementation, an international consulting firm in association with a domestic firm is to be engaged in accordance to ADB s Guideline on the Use of Consultants using the simplified technical proposal. A total of person-months of consulting services will be required, consisting of 10.0 person-months of international consulting and person-months of domestic consulting. The outline terms of reference for the TA consultants are provided in Appendix 3. Equipment for the use of the TA consultants will be purchased in accordance with the ADB s Guideline for Procurement and transferred to MOF at TA completion. 24. A national and three regional workshops will be held to improve the quality of the research, and to disseminate TA outputs. In the regional workshops, the Government officials will serve as resource persons in close coordination with the consultants and ADB staff. 25. The TA will be implemented over six months to be completed by September ADB and the Government will monitor TA implementation progress through regular reports submitted by consultants. Regular review missions including inception, and draft final review meetings will also monitor the progress. IV. THE PRESIDENT S DECISION 26. The President, acting under the authority delegated by the Board, has approved the provision of technical assistance, on a grant basis, to the Government of Indonesia in an amount not exceeding the equivalent of $500,000 for the purpose of Fiscal Decentralization, and hereby reports such action to the Board.

8 Appendix 1, page 1 TECHNICAL ASSISTANCE FRAMEWORK Design Summary Goal 1. To develop and strengthen capacity within the Indonesian Government to guide fiscal decentralization reforms Purpose 1. To better assess regional fiscal capacities against the background of increased expenditure responsibilities under the decentralization program Performance Indicators/ Targets More decisions are taken and more projects are financed at a decentralized level in the future The Government will utilize outputs of the Technical Assistance (TA) for their budgeting exercise and formulation of a new grant transfer/onlending policy. Regional governments financial capacity to supply newly devolved public services Intergovernmental fiscal relations that can guarantee revenue and expenditure balance in regions Monitoring Mechanisms Actual and future central and regional budget reports Actual and future central and regional investment reports Evaluation by the Government, Asian Development Bank (ADB) loan processing and missions Assumptions and Risks The Government is serious about undertaking public sector reforms in general and decentralization reforms in particular. The political and economic situation in Indonesia remains stable. The Government and the International Monetary Fund (IMF) support the transfer of funds from the central to the regional level. Outputs 1. A district fiscal profile that will be developed from existing database and FY2001 regional government budgets Establish a grant transfer and/or onlending policy for externally supported projects. An informative database is completed by July Sufficient data are available at central level. Commitments of Ministry of Home Affairs and Regional Autonomy (MOHARA), National Development Planning Agency (BAPPENAS), and Central Bureau of Statistics (BPS) to provide existing information. (Reference in text: page 1, para.1)

9 Appendix 1, page 2 Design Summary Performance Indicators/ Targets Monitoring Mechanisms Assumptions and Risks 2. Regional public expenditures reviews in selected provinces Regional public expenditure review completed by August 2002 Consultant reports, workshops, and ADB missions Regional government officials contribute actively to the studies and provide the requested information. 3. A basic framework of the new grant transfer and/or onlending policy for externally supported projects within the overall context of decentralization. Activities 1-1. Review all existing databases and FY2001 regional government budgets. Proposal for a new grant-transfer and/or onlending policy provided to the Government by September 2002 Complete database of regional budgets before and after the decentralization Consultant reports, workshops, and ADB missions Willingness of the Government to incorporate regions financial capacity as a component that determines a new grant transfer and/or onlending mechanism. Data availability 1-2. Develop some indicators to measure financial capacities of regional governments. Consultant reports Consultants ability 1-3. Hold dissemination workshop Completion of the workshop All stakeholders participation 2-1. Prepare a standard framework of regional public expenditure reviews. Consultant reports Consultant reports Consultants ability 2-2. Prepare a detailed regional public expenditure reviews in selected regions. Consultant reports Commitments of MOHARA, BAPPENAS, and BPS, and targeted regions Hold dissemination workshops Completion of workshops All stakeholders participation 3-1. Review of international experience of grant transfer and/or onlending policy and provide recommendations to the Government. Consultant reports Willingness of the Government to prepare a new grant transfer and/or onlending mechanism

10 Appendix 1, page 3 Design Summary Performance Indicators/ Targets Monitoring Mechanisms Assumptions and Risks 3-2. Hold dissemination workshops Completion of workshops All stakeholders participation

11 Appendix 2 COST ESTIMATES AND FINANCING PLAN ($'000) Foreign Local Total Item Exchange Currency Cost A. Asian Development Bank Financing a 1. Consultants a. Remuneration and Per Diem i. International Consultants ii. Domestic Consultants b. International and Local Travel c. Reports and Communications Equipment b Workshops c Surveys Miscellaneous Administration and Support Costs 6. Representative for Contract Negotiations Contingencies Subtotal (A) B. Government Financing 1. Provision of Office Space Furniture and Equipment Remuneration and Per Diem of Counterpart Staff Transportation contingency Subtotal (B) Total a Financed from the ADB-funded TA program. b Equipment to be purchased includes two desktop computers and two printers. c A national and three regional workshops will be held. Source: Staff estimates. (Reference in text page 5, para.21)

12 Appendix 3, page 1 A. Scope of Work OUTLINE OF TERMS OF REFERENCE FOR CONSULTANTS 1. International consultants, working is association with domestic consultants and the Ministry of Finance (MOF) will undertake the following work, under the guidance of the director general of central-local fiscal balance (DGCLFB), MOF. 2. District Fiscal Profiles. By reviewing and utilizing existing databases on regional budgets and socioeconomic indicators in various ministries and government agencies [MOF, National Development Planning Agency (Badan Perencanaan Pembangunan Nasional - BAPPENAS), Ministry of Home Affairs and Regional Autonomy (MOHARA), and Central Bureau of Statistics (Badan Pusat Statistik - BPS)], the Technical Assistance (TA) will prepare a database on provincial and district/city budgets and socioeconomic data covering both before and after the decentralization as a baseline to analyze differential impact of fiscal decentralization on regions budgets and on their social sector investments. To check the revenue and expenditure balance, the TA will carefully analyze the changes in the regional budgets including not only the revenue side but also the expenditure side after implementation of decentralization. Based on the analyses, the TA will develop indicators to measure financial capacities of regions and prepare regional government mappings based on their financial capacity. 3. Regional Public Expenditure Reviews (RPERs). To clarify major constraints for regional governments in their financial management, the RPERs will be conducted in Bali, East Nusa Tenggara, and South Sumatra. The RPERs will focus on the following issues: (i) comprehensive analysis of regional budgets of FY2001 compared with those before decentralization, reviewing the allocation of increased revenues between routine and development expenditures, and sectoral budget allocation, (ii) review how regional governments are coping with the transfer of central civil servants, and the impact on personnel expenditures and also overall budgets; (iii) review existing budget policy and budgeting process; (iv) review existing local taxes, charges, and levies; identify what measures were already taken after the amendment of the regional tax law; and explore a possible revenue mobilization strategy; and (v) review regional governments demand for regional borrowing. 4. Grant Transfer and/or Onlending Policy: Based on the district fiscal profile and RPERs in the selected regions, the TA will provide baseline information for the Government to formulate a new grant-transfer and/or onlending mechanism. The TA will deal with the mode of onlending, grant loan ratio, terms, and conditions. The TA will provide relevant information derived from other countries experience in this area. The basic approach will be a grant transfer and/or onlending mix based on (i) regions financial capacities, and (ii) type of project (revenue generating or nonrevenue generating). The grant component would become larger in cases where regional governments have less financial capacities to undertake nonrevenue generating projects. 5. Four international consultants (estimated total 10.0 person-months) and 11 domestic consultants (estimated total person-months) will be engaged in the TA activities. All consultants must have thorough understanding of public expenditure management (PEM). Based on the highly specialized needs of the study, all consultants also must be familiar with Indonesia s regional budget system, the intergovernmental fiscal relations before and after the decentralization, and recent developments of the ongoing decentralization. (Reference in text page 5, para.23)

13 Appendix 3, page 2 B. Terms of Reference of the Consultant 1. International Consultants a. Team Leader: Consultant on Public Finance and Fiscal Decentralization (4.0 person-months) 6. The team leader will be a public finance specialist with particular specialization in regional government finance; and should have relevant experience working in, and advising on, regional budget system and intergovernmental fiscal relations in developing countries; and experience and knowledge of Indonesia s regional government finance, intergovernmental fiscal relations, and recent developments in fiscal decentralization will be required. The team leader will work closely with counterpart staff of the Government and other consultants, and will take principal responsibility for preparing district wide fiscal profile and regions fiscal capacity mappings, and to consolidate outputs prepared by other consultants. The tasks of the team leader will include (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) reviewing existing databases on regional budgets and socioeconomic indicators in various ministries including MOHARA, BAPPENAS, and BPS and preparing a database on provincial and district/city level budget data and socioeconomic indicators covering both before and after the decentralization as a baseline to analyze differential impact of fiscal decentralization on regions budgets, and considering fluidity and uncertainty surrounding the ongoing decentralization, ease of updatability, and expandability; analyzing regional budgets for FY2001 to identify regional differences in revenue structure, budget allocation between routine and development expenditures, and sectoral allocation of the development expenditures; based on the analysis, developing indicators to measure fiscal capacity of regions, and preparing regional governments fiscal capacity mapping based on the indicators developed; assessing impacts of Law No.34/2000 on revenue raising capacities of regional governments; analyzing the results of RPERs in target regions with other consultants, listing problems/constraints that regional governments are facing, and preparing recommendations to the Government to resolve the issues; organizing a national and three regional workshops to disseminate major findings of the TA; monitoring new developments of the fiscal decentralization and analyzing their possible impacts on intergovernmental fiscal relations and regional budgets; and consolidating all outputs by other consultants and prepare required documents to the Government and Asian Development Bank (ADB). b. Consultants on Regional Budget System (2.0 person-months) 7. The consultant on regional budget system should have a specialization in Indonesia s fiscal system, especially in regional budget systems, and should possess enough knowledge of

14 Appendix 3, page 3 Indonesia s laws and government regulations for fiscal decentralization. The consultant will take principal responsibility for undertaking a survey of the current district financial and budgetary systems and intergovernmental fiscal relations, analyzing regional budgets, developing indicators to measure fiscal capacity of regions, and preparing regional governments fiscal capacity mapping based on the indicators developed in close coordination with the team leader. c. Consultant on RPERs (2.0 person-months) 8. As a leader of three regional teams for the RPERs, the consultant will take primary responsibility to conduct RPERs in Bali, East Nusa Tenggara, and South Sumatra. The consultant will lead and supervise domestic consultants (each regional team will consist of three domestic RPER experts) and consolidate results of the RPERs. 9. The RPERs will be conducted in close coordination with the World Bank, which is currently conducting similar RPERs in West Nusa Tenggara, North Sumatra, and West Java. For the RPER in East Nusa Tenggara, the consultant will coordinate with the Support for Decentralization Measures in the Nusa Tenggara Provinces of German Agency for Technical Cooperation (Deutsche Gesellschaft für Technische Zusammenarbeit GTZ), which has been supporting regional governments in developing their own revenues. The consultants will be required to share common understanding of the basic concept of the RPERs with the World Bank team. 10. The RPERs will focus on the following issues: (i) (ii) (iii) (iv) (v) conducting a comprehensive analysis of regional budgets of FY2001; and identifying major changes in FY2001 budgets compared with those before decentralization, especially, budget allocation between routine and development expenditures and sectoral allocation of development expenditures; identifying how regional governments have been, and are coping with the transfer of central civil servants, and the impacts on personnel expenditures and also overall budgets; reviewing the existing local taxes, charges, and levies; identifying what measures were already taken after the amendment of the regional tax law; and exploring a possible revenue mobilization strategy; reviewing existing development planning and budgetary processes, and clarifying what strategy/principle was adopted in preparing FY2001 budgets, and will be adopted in the following years; and reviewing regional governments demand for regional borrowing. d. Consultant on Grant Transfer and/or Onlending Policy (2.0 personmonths) 11. The consultant will review experiences of other countries that implemented fiscal decentralization, and summarize grant transfer and/or onlending policies adopted. Based on this review, the consultant will prepare a proposal of a basic concept/principle of the grant transfer and/or onlending policy to the Government. The regions fiscal capacity mappings prepared in this TA should be fully utilized in preparing the proposal. The consultant will identify potential issues and risks such as handling foreign currency, and reducing operational efficiency, capacity, and capability of local officials associated with the decentralization.

15 Appendix 3, page 4 2. Domestic Consultants a. Institutional Expert/ Regional Budget Analysis Expert (3 personmonths) 12. The consultant will provide expertise on regional budget data, and laws and regulations for the fiscal decentralization. The consultant will have full knowledge of Indonesia s intergovernmental fiscal relations, regional budget system, and its changes with the implementation of decentralization. The consultant will provide assistance and support to the team leader in all aspects of the team leader s work. 13. The consultant will also support the team leader and the consultant on regional budget systems in preparing regional budget data, analyzing regional budgets, developing some indicators to measure fiscal capacity of regions, and preparing regional governments fiscal capacity mapping based on the indicators developed. b. RPER Experts (9 experts, total person-months, 3.75 personmonths for each target region) 14. As a member of each regional team, the consultants will conduct a RPER in three target regions under the direction of the international consultant for RPERs. Each regional team will consist of three RPER experts. The consultants will also take primary responsibilities to arrange RPERs in each region, and to plan and organize regional workshops to disseminate major findings of the RPREs. Close coordination with the government officials who will join the RPERs will be required. c. Grant Transfer and/or Onlending Policy Expert (total 1.5 personmonths) 15. The consultant will provide expertise on grant transfer and/or onlending policy. The consultant will have full knowledge of current onlending systems in Indonesia, review all laws and government regulations regarding fiscal decentralization and clarify implications on grant transfer and/or onlending policy, and provide assistance and support to the consultant on grant transfer and/or onlending policy in preparing a proposal of a basic concept/ principle of the grant transfer and/or onlending policy to the Government. 3. Reporting Requirements 16. The inception report will be submitted approximately 1 month after the starting data. The report will summarize the initial findings and present any proposed modifications to the work plan for the duration of the consultancy. 17. The draft final report, to be submitted about 5 months after inception, will report on the outputs of the consultant s work. The final report will be submitted after incorporating comments from MOF and ADB, about 6 months after the TA inception. 18. Monthly reports providing progress on the Project will be submitted to both MOF and ADB.