LIST OF CONTENTS CHAPTER 2 BASIC ASSUMPTIONS OF MACROECONOMICS

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2 List of Contents LIST OF CONTENTS List of Contents... List of Tables... List of Graphs... List of Boxes... List of Charts... CHAPTER 1 INTRODUCTION 1.1 General Basic Assumptions for the Macroeconomics Fiscal Policy Highligths APBN 2013 Posture Summaries Brief Description of Chapters v v111 xv1 xv CHAPTER 2 BASIC ASSUMPTIONS OF MACROECONOMICS 2.1 General The Economic Trend and Realization Projection Global and Regional Economy National Economy Economic Projection in Global and Regional Economy National Economy Challenges and Targets of Macroeconomic Policies in Global and Regional Economic Challenges Domestic Economic Challenges Macroeconomic Policy Targets in Economic Growth Rupiah Exchange Rate Inflation

3 List of Contents Page Month SPN Rate Indonesian Crude Oil Price (ICP) Oil and Gas Lifting... CHAPTER 3 REVENUES AND GRANTS 3.1 General Revenues Trend in and the Estimated Revenue in Domestic Revenue Tax Revenues Challenges and Opportunities of Goverment Revenue Policies Target Goverment Revenues in Domestic Revenue Grant Proceeds... CHAPTER 4 CENTRAL GOVERNMENT EXPENDITURE BUDGET 4.1 General The Trends of Policy and Implementation of Budget Allocation for Central Goverment Expenditures, The Trend of Central Goverment Expenditure Budget Allocation by Functions The Trend of Budget Implementation of Central Goverment Expenditures by Organizations The Trends of Budget Implementation for Central Goverment Expenditures by Types The Highlights of Goverment Work Plan Policies and Central Goverment Expenditure Budget in APBN Budget of Central Goverment Expenditure by Functions Budget of Central Goverment Expenditure by Organizations Ministries/ Agencies Budget Section (BA K/L) Central Goverment Expenditure Budget by Types ii

4 List of Contents Page CHAPTER 5 FISCAL DECENTRALIZATION POLICY 5.1 General Fiscal Decentralization Implementation Trend The Implementation of Transfer to Regions Policy The Implementation of Transfer to Regions Budget The Implementation of Regional Taxes and Service Charges Supervision and Revocation The Transfer of BPHTB and PBB-P2 into Regional Taxes The Implementation of BPHTB Transfer The Implementation of PBB-P2 Transfer The Implementation of Loans and Grants to Regions Regional Loans Grants to Regions Problems and Challenges around Fiscal Decentralization Implementation APBD Implementation Enchanced Quality in Regional Financial Management Implications to Regional Economic Development Budget of Transfer to Region in Budget Policy for Transfer to Regions in APBN Fiscal Balance Revenue Sharing General Allocation Fund (DAU) Special Allocation Fund (DAK) Special Autonomy and Adjustment Fund Special Autonomy Fund Adjustment Fund Grant to Regions Policy iii

5 Page CHAPTER 6 BUDGET FINANCING AND FISCAL RISK 6.1 General Budget Deficit and Financing Trend from Budget Deficit Budget Financing Non-Loan Financing Domestic Banks Domestic Non-Banks Loan Based Financing Goverment Bond (SBN) Foreign Loans Domestic Loan The Trend of Goverment Debt Portofolio Budget Financing Plan for Non-Loan Financing Domestic Banking The Installment of SLA Payment Budget Surplus Domestic Non-Banking Asset Management Proceeds (HPA) Goverment Investment Fund National Education Development Fund Guarantee Obligations Financing Reserve for the Takeover of PT Inalum Loan Financing General Debt Management Strategies Economic Condition and FinancialMarket Projection in iv

6 Page The Latest Issues of Debt Management Loan Financing Flexibility The Roles of Standby Loans in Securing APBN Financing Maintaining and Improving Investment Grade Status Loan Financing Policy in Goverment Bond (SBN) (Net) Foreign Loans (Net) Domestic Loans (Net) Fiscal Risk Macroeconomics Risks APBN 2013 Deficit Sensitivity to Macroeconomic Assumption Changes Fiskal Risk Sensitivity to SOEs againts the Changes of Macroeconomic Variable Central Goverment s Debt Risks Conigency Obligation of the Central Goverment Goverment s Supports and/or Guanrantees to Infrastructure Development Projects The 10,000 MW Power Generation Development Acceleration Project Stage I The 10,000 MW Power Generation Development Acceleration Project stage II Toll Road Development Project Water Supply Provision Acceleration Public Private Partnership Project Through Infrastructure Guarantee Agency Goverment Support for Model PPP Project of Soekarno Hatta Airport Railways Track Construction v

7 Page The Provision of Infrastructure Guarantee Facility through PT Penjaminan Infrastructure Indonesia (Persero) Social Security Obligation of Maintaining Minimum Capital of Certain Finance Institutions Legal Claims to the Goverment Membership in International Financial Organizations Institutions (LKI) and Others Natural Disaster Mandatory Spending CHAPTER 7 APBN MEDIUM-TERM BUDGET PROJECTION 7.1 General Medium-Term APBN Projection Basic Macroeconomics Goverment Revenue Projection Goverment Expenditure Projection Budget Financing Projection Medium-Term Expenditure vi

8 List of Tables Table 2.1 Table 2.2 Table 2.3 GDP Distribution and Contribution to Economic Growth, Economic Growth by Sectors... The Economic Growths of Countries Around The World Table 2.4 Global Commodity Price Fluctuation... Table 2.5 Balance of Payment, Table 2.6 Economic Growth by Use, Table 2.7 Economic Growth by Sectors, Table 3.1 Goverment Revenue Trend, Table 3.2 Oil and Gas PPh Revenue Trend, Table 3.3 Oil and Gas PPh Revenue Trend, Table 3.4 PPN and PPnBM Revenue Trend... Table 3.5 PBB and BPHTB Revenue Trend, Table 3.6 Excise Revenue Realization Trend, Table 3.7 Tabacco Product Excise Tariff Policy Trend, Table 3.8 Other Tax Revenue, Table 3.9 LIST OF TABLES Export Tax Tariff for Coconut Oil, CPO and The Derivative Products... Table 3.10 PNBP Trend For The Largest K/L, Table 3.11 Goverment Revenue, Table 4.1 Central Goverment Expenditure by Function, Table 4.2 Central Goverment Expenditure Trend, Table 4.3 Personel Expenditure Policy Trend, Table 4.4 Loan Interest Expenditure Trend, Table 4.5 The Trend of Subsidies for Certain Fuel and 3-kg Gas, Table 4.6 The Trend of Retail Price of Subsidy Price, Table 4.7 Electricity Subsidy Trend, Page vii

9 List of Tables Table 4.8 Subsidy Trend, Table 4.9 Priority Programs of Social aid Expenditure, Table 4.10 Some Strategic Development Targets Table 4.11 Central Goverment Expenditure By Function, Table 4.12 Expenditure Budget For Ministries/ Agencies, Table 4.13 Central Goverment Expenditure Trend, Table 4.14 Loan Interst Payment, Table 4.15 Subsidy For Certain Fuel and 3-KG Gas... Table 4.16 Electricity Subsidy, Table Food Subsidy, Table 4.18 Fertilizer Subsidy, Table 4.19 Seed Subsidy, Table 4.20 PSO Subsidy, Table 4.21 Program Credit Interst Subsidy, Table 4.22 Tax Subsidy (DTP), Table 5.1 Revisions To Adjustment Fund, Table 5.2 Transfer to Regions Trend, Table 5.3 The Readiness of Regions in Collecting BPHTB... Table 5.4 The Readiness of Regions in Collecting PBB-P2... Table 5.5 Grants to Regions, Table 5.6 Provincial APBD by Type of Expenditure, Table 5.7 District/ City APBD by Type of Expenditure, Table 5.8 Provincial APBD Ratio, Table 5.9 District/ City APBD by Type of Expenditure, Table 5.10 Investment Realization Trend in Indonesia, Table 5.11 Williamson Index for GRDP, Table 5.12 APBD per Capita to People Welfare Ratio, Table 5.13 Annual Inflation Rate in 66 Cities, Table 5.14 Transfer to Regions, Page viii

10 List of Tables Page Table 6.1 Budget Deficit and Financing Trend, Table 6.2 Non-Loan Based Financing Trend, Table 6.3 PT PPA Managed Asset Trend, Table 6.4 The Goverment Security Fund Allocation Trend, Table 6.5 Loan Based Financing Trend, Table 6.6 SBN Issuance Realization Trend, Table 6.7 Tradble SBN Ownership Trend, Table 6.8 Outstanding Goverment Loan Trend by Currency, Table 6.9 Outstanding Government Loan Trend By Instruments, Table 6.10 Budget Financing, Table 6.11 Non-Loan Based Financing, Table 6.12 Government Investment Fund, Table 6.13 PMN To SOE, Table 6.14 PMN To Organization/LKI, Table 6.15 Table 6.16 Other PMN... Revolving Fund... Table 6.17 Government Guarantee Obligation, Table 6.18 Table 6.19 Standby Loan Plan... Efforts To Promote Credit Rating... Table 6.20 Loan Financing, Table 6.21 Subsidiary Loan Agreement, Table 6.22 Table 6.23 Table 6.24 Macroeconomic Assumption And Realization Trend, Deficit Sensitivity of APBN 2013 To The Changing Macroeconomic Assumptions... Aggregate SOE Fiscal Risk Scenario Analysis Fiscal Transaction Position With SOE, ix

11 List of Tables Table 6.25 Stress Test For The Changing Exchange Rate, Oil Price, And Interest Rate And Economic Growth To SOE Fiscal Risks, Table 6.26 Loan Portfolio Risk Indicator Trend, Table 6.27 Financing Acquired For Power Generation, Table 6.28 Table 6.29 List Of Secured Projects... State Capital Participation And Contribution To Internatioanl Organizations/Agencies And Other Institusion in Table 7.1 APBN 2013 and Baseline Estimates For Table 7.2 Mid-term Basic Macroeconomic Assumption, Table 7.3 (Baseline) K/L Budget Allocation List, Table 7.4 Baseline Budget Allocation List, Page x

12 List of Graphs Graph 2.1 European Economic Growth, Graph 2.2 Global Trade Volume Growth Trend, Graph 2.3 Indonesian Economic Growth, Graph 2.4 Economic Growth by Expenditure, Graph 2.5 Rupiah Exchange Rate Tremd To USD, Graph 2.6 Inflation Trend, Graph Month SPN Rate Trend Graph 2.8 International Crude Oil Production, Consumption And Price, Graph 2.9 Indonesia Oil Lifting, Grap2.10 Graph 2.11 Graph 2.12 Graph 2.13 Graph 2.14 Purchasing... International Trade Indicator... Global Trade Volume Trend... Export-Import Growths Of The Developed And Developed And Developing Countries... Commmodity Price Index And Global Infkation Trend Graph 2.15 Rupiah Exchange Rate Trend To USD, 2012 Graph 2.16 Inflation Trend, Graph 2.17 Inflation Trend By Components, Graph 2.18 Global Crude Oil, Production, Consumption And Price Trend, 2012 Graph 2.19 Indonesian Oil Lifting Trend Graph 2.20 LIST OF GRAPHICS Economic Growt And Global Trade Volume Trend Graph 2.21 Indoneseian Econoomic Growth, Graph 3.1 TaxRevenue Trend, Graph 3.2 Deomestic Tax Revenue Trend, Graph 3.3 Average Contribution Of Demestic Tax Revenue, Graph 3.4 VAT And PPnBM Revenue Trend, Page xi

13 List of Graphs Page Graph 3.5 Import Tax And Dutiable Import Revenue Trend Graph 3.6 International CPO Price And Export Tax Trends, Graph 3.7 Oil And Gas Revenue Trend, Graph 3.8 Non Oil And Gas Revenue, Graph 3.9 SOE Accounting Performance Graph 3.10 SOE Contribution To APBN Graph 3.11 Non Oil And Gas Revenue, Graph 3.12 Other Non Tax Revenue Trend, Graph 3.13 PNBP Trend Og Kemenkominfo, Graph 3.14 PNBP Trend Of Kemendikbud, Graph 3.15 PNBP Of Trend Kemenkes, Graph 3.16 PNBP Trend Of Polri, Graph 3.17 PNBP Trend Of Kemenkumham, Graph 3.18 PNBP Trend Of BPN, Graph 3.19 PNBP Trend Of Kemenhub, Graph 3.20 BLU Revenue Trend, Graph 3.21 Grant Revenue Trend, Graph 3.22 PPh Non Oeil ANd Gas Revenue, Graph 3.23 VAT And LST Revenue, Graph 3.24 Land And Building Tax Revenue, Graph 3.25 Excise Revenue, Graph 3.26 Other Tax Revenue, Graph 3.27 Import Tax Revenue, Graph 3.28 Export Tax Revenue, Graph 3.29 Oil And Gas PNBP Revenue, Graph 3.30 Non Oil And Gas Revenue, Graph 3.31 Government Portion From SOE Profits, Graph 3.32 Non Income Tax Of Kemenkominfo, Graph 3.33 PNBP Of Kemendikbud, II-31 xii

14 List of Graphs Page Graph 3.34 PNBP Of Kemenkes, Graph 3.35 PNBP Of Polri, Graph 3.36 Non Income Tax Of Kemenkumham, Graph 3.37 PNBP Of BPN, Graph 3.38 Non Income Tax Of Kemenhub, Graph 3.39 General Services Agency Revenue, Graph 3.40 Grant Revenue, Graph 4.1 Central Government Expenditure Trend By Function, Graph 4.2 Public Service Function Expenditure, Graph 4.3 Defence Function Expenditure, Graph 4.4 Law And Order Function Expenditure, Graph 4.5 Economic Function Expenditure, Graph 4.6 Environment Function Expenditure, Graph 4.7 Housing And Public Facility Function Expenditure, Graph 4.8 Health Function Expenditure, Graph 4.9 Tourism And Culturee Function Expenditure, Graph 4.10 Religion Function Expenditure, Graph 4.11 Education Function Expenditure, Graph 4.12 Sosical Protection Function Expenditure, Graph 4.13 K/L Expenditure Trend, Graph 4.14 K/L Expenditure Absorption, Graph 4.15 Graph 4.16 Graph 4.17 Graph 4.18 Graph 4.19 The Expenditure Trend Of The Ministry Of Education And Culture The Expenditure Trend Of The Ministry Of Public Works The Expenditure Trend Of The Ministry Of Defence Expenditure Trend Of National Police Expenditure Trend Of The Ministry Of Religions xiii

15 List of Graphs Graph 4.20 Expenditure Trend Of The Ministry Of Transportation Graph 4.21 Expenditure Trend Of The Ministry Of Health Graph 4.22 Expenditure Trend Of The Ministry Of Agriculture Graph 4.23 Expenditure Trend Of The Ministry Of Finance Graph 4.24 Expenditure Trend Of The Ministry Of Home Affair Graph 4.25 Central Government Expenditure Trends By Types, Graph 4.26 Personnel Expenditure Trends By Types, Graph 4.27 Take Home Pay Trend Of The Lowest Rank Of Public Civil Servant Graph 4.28 Material Expenditure, Graph 4.29 Capital Expenditure Trend, Graph 4.30 Weight Average Yield Trend Of 3-Month SPN Bids, Graph 4.31 Amortization Composition Trend, Graph 4.32 Subsidy Trend, Graph 4.33 BPP And Power Sold Trend, Graph 4.34 Non Energy Subsidy Trend, Graph 4.35 Social Aids Trend, Graph 4.36 Other Expenditure Trend, Graph 4.37 Development Target And Realization Trend, Graph 4.38 K/L expenditure Budget Trend, Graph 4.39 Top 10 K/L With Larget Budget Allocation, Graph 4.40 Top 10 K/L With Larget Budget Allocation, 2013 Graph 4.41 Central Government Expenditure Composition By Economic Classification, 2013 Graph 4.42 Central Government Expenditure Composition By Mandotory/Non Mandotory Spending, 2013 Page xiv

16 List of Graphs Page Graph 5.1 Transfer To Regions Tremd (Fiscal Balance, Special Autonomy, and Adjustment Fund), Graph 5.2 DAU Fund Distribuition To Provinces Throughout Indonesia, Graph 5.3 Tax Revenue Distribution Map Per Province In Indonesia Graph 5.4 Natural Resources Revenue Distribution Map Per Province In Indonesia, Graph 5.5 DAK Fund Distribution To Provinces Throughout Indonesia, Graph 5.6 Transfer To Region Trend (Special Autonomy Fund, Adjustment Fund) Graph 5.7 National Fiscal Dependency Ratio, Graph 5.8 Economic Growth, 2010 Graph 5.9 Economic Growth, 2011 Graph 6.1 Budget Deficit Trend, Graph 6.2 Budget Financing Trend, Graph 6.3 Domestic Banking Financing Trend, Graph 6.4 SOE Privatization Proceeds Trend, Graph 6.5 Asset Management Proceed Trend, Graph 6.6 Government Investment Fund PMN Trend, Graph 6.8 SBN Issuance Trend, Graph 6.9 The Trend Of Net SBN Issuance And Outstanding Domestic SBN, Graph 6.10 The Trend Of Foreign Currency SBN Issuance And Outstanding Foreign Currency SBN, Graph 6.11 Foreign Loan Drawing Trend, Graph 6.12 SLA Drawing Trend, Graph 6.13 Domestic Loan Drawing Trend xv

17 List of Graphs Graph 6.14 Government Loan To GDP Trend Graph 6.15 Indonesia Rating Trend, Graph 6.16 The Trend Of Government Revenue From SOE, Graph 6.17 The Trend Of Government Expenditure To SOE, Graph 6.18 Net SOE Loan Trend, Graph 6.19 SOE Capital Expenditure And Long Term Loans Trend, Graph 6.20 Analysis Of Aggragate SOE S Fiscal Risk Scenario Graph 6.21 The Trend Of Pension Benefit Payment For Civil Public Servants, Graph 6.22 The Trend Of Capital And Capital Ratio Of Bank Indonesia, Graph 6.23 The Trend Of Secured Saving Fund Capital And Guarantee Claim Reserve, Graph 6.24 The Trend Of Export Financing Activities And LPEI Capital Position, Graph 6.25 Natural Disaster Contigency Fund Trend, Graph 6.26 The Trend Of Mandatory Spending, Graph 6.27 The Trend Of Binding and Non-Binding Spending Composition, Graph 7.1 Tax Revenue And Protection, Graph 7.2 PNBP Trend And Projection, Graph 7.3 Grant Revenue Trend And Projection, Graph 7.4 Central Government Expenditure Trend And Projection, Graph 7.5 Transfer To Regions Trend And Projection, Graph 7.6 Budget Financing Trend And Projection, Page xvi

18 List of Graphs Page Graph 7.6 Budget Financing Trend And Projection, Graph 7.7 Debt Ratio To GDP, xvii

19 List of Boxes Box 2.1 Box 3.1 Box 3.2 Box 4.1 Box 4.2 Box 6.1 Box 6.2 Box 6.3 Box 6.4 Box 6.5 Box 6.6 Box 6.7 Box 6.8 Manpower And Poverty Tax Ratio LIST OF BOXES Export Tax For Mineral Ores Infrastructure Budget In APBN Capital Expenditure And Government Investment Expenditure Government Guarantee For Acceleration Of Power Generation Development Program Using Renewable Energy, Coals And Gas The Conversion of Non-Tradable State Securities to Tradable SBN (Government Bonds) State Sukuk Instrutment Development For Activity/Project Financing Maximum Limit of SBSN Emission for Project Financing Maximum Limit of Foreign Loans Potential Financing With Domestic Loans Fiscal Risks of Some Large SOEs Public Private Oartnership in Infrastructure Provision Page xviii

20 List of Matrix LIST OF MATRIX Page Matrix 4.1 Summary of Programs, Performance Indicators and Outcame of Ministries/Agencies Fiscal Year xix

21 Introduction Chapter I 1.1 General CHAPTER 1 INTRODUCTION As a reflection of constitutional obligation, the Government has been required to prepare and propose Draft Law on State Budget (RUU APBN) including its Financial Notes to the House of Representatives (DPR). This mandate is prescribed in article 23 paragraph (1) of 1945 Constitution as subsequently amended into article 23 paragraph (1), paragraph (2) and paragraph (3) of the fourth Amendment of 1945 Constitution, which reads as: "(1) the Government Revenue and Expenditure Budget (APBN) as the reflection of state financial management shall be enacted on yearly basis under a law and shall be exercised in transparent and accountable fashion solely in the pursuit of people's welfare; (2) Draft State Budget (RUU APBN) must be proposed by the President for joint discussion with House of Representatives (DPR) with due attention to the recommendations of Regional Representative Council (DPD); (3) in the event that the House of Representatives (DPR) rejects the Draft State Budget proposed by the President, the Government shall use the last year's state budget". The preparation of this Draft State Budget 2013 (RAPBN 2013) is to comply with mandate of article 23 of the said fourth Amendment to 1945 Constitution. In addition, the preparation of RAPBN 2013 has also referred to provisions as spelled out in Law Number 17 of 2003 concerning State Finance. Moreover, this RAPBN 2013 is formulated with reference to the National Medium-Term Development Plan (RPJM) for , Government Work Plan (RKP) 2013 and Macro Economic Framework as well as Fiscal Policy Highlights 2013 that had been mutually agreed during preliminary discussion of the Government and House of Representatives of the Republic of Indonesia (DPR RI) from 29 May 2012 to 3 July The process and mechanism for the preparation, formulation and discussion of RAPBN 2013 are also in observance to the Law Number 27 of 2009 concerning MPR (People's Consultative Assembly), DPR (the House of Representatives), DPD (Regional Representative Council), and DPRD (Regional House of Representatives). This State Budget (APBN) 2013 has special nuisance if compared with the previous years. The design of the last round of economic policies and development in National Medium- Term Development Plan (RPJMN) for period is getting more visible. Fund requirements for the preparation of general election to be held in 2014 have been earmarked in RAPBN On the other side, public demands and expectations on successful development and the associated results are started to be realized, perceived and enjoyed by more social components with broader outreach and targets. Under this circumstance, the roles and contribution of APBN as reflected in activity and program allocations exclusively aiming to augment the welfare of people are much more crucial than ever before. The key is how to manage the limited resources in a manner that can satisfy a wide variety of needs with high quality results. Under such demanding conditions capability of observing, analyzing, assessing and responding economic progress both at global and domestic level on top of the presently encountered problems and challenges become primary elements in APBN 2013 preparation. All of these, in turn, will be conclusive to the qualities of policies, program plans Financial Notes and Indonesian Budget

22 Chapter I Introduction and budget allocations, and the outputs expected from the implementation of RAPBN Nevertheless, sound macroeconomic conditions and positive responses of people are also equally paramount. From global perspective, uncertain economic conditions in Europe; political tension in some regions around the world, such as in Middle East; climate change and natural disaster; and the trend of soaring prices of commodities and oil in global markets remain major obstacles that may hamper domestic economic growth in However, the reviving global and domestic economic performance toward positive trend has buoyed up the optimism to step forward in maximizing all potentials and opportunities of this Country to boost the wellbeing of Indonesian people. Besides, it is deemed necessary to take anticipative and responsive policies through sound and prudent fiscal management in order to maintain national economic stability. From internal wise, the challenges to be dealt with will concern initiatives of how to accelerate and enhance the distribution of development and its results to augment the prosperity of people. Poverty alleviation and unemployment rate reduction remain the main problems that must be ironed out. In this respect, since 2011 the Government has prepared two major development strategies as key policies, i.e. Master Plan for the Acceleration and Expansion of Indonesia's Economic Development (MP3EI) and Master Plan for Poverty Alleviation Acceleration and Expansion (MP3KI). It is expected that these two strategies will be synergic in the implementation. The launching of MP3KI program in tandem with MP3EI program is to develop strong synergy in the pursuit of: (a) high, inclusive, equitable and sustainable growth; (b) economic development equitably distributed throughout the Country; (c) employment generation; and (d) poverty alleviation. Without vilifying RPJMN, MP3EI program will serve as an umbrella for all infrastructure development in Indonesia. It is a breakthrough. The development of main corridors as driving motors and supports of economic activities in the surroundings and domestic connectivity improvement are expected capable of integrating markets around the Country that will embrace overall villages. With the adoption of such strategies, the results of development and [economic] growth can be further optimized. Likewise, their impacts to employment generation will improve and be more equitably distributed to regions throughout Indonesia. In this context, MP3KI program is to accelerate poverty alleviation programs. This program is focused on the provision of basic needs and income generation with integrated and synergic poverty alleviation programs subject to the local conditions of the regions concerned. These two initiatives, i.e. MP3EI and MP3KI alongside the latest global and domestic economic performance trends and their prospects in future as well as problems and challenges that are likely to encounter in 2013 have been referred to in working out the Government Work Plan (RKP) 2013, and this RPK 2013 has been thereafter used as reference in RAPBN 2013 preparation. In view of vision RPJMN , i.e. "To Realize Prosperous, Democratic and Just Indonesia", the existing potentials and the current and future challenges and problems the theme of RKP 2013 is as follows: "Reinforcing Domestic Economy for People's Welfare Augmentation and Expansion". To support the realization of such theme, RKP 2013 set 11 national priorities and other 3 priorities consisting of: (1) Bureaucracy and Governance 1-2 Financial Notes and Indonesian Budget 2013

23 Introduction Chapter I Reform; (2) Education; (3) Health; (4) Poverty Alleviation; (5) Food Resilience; (6) Infrastructure; (7) Investment Climate and Business Climate; (8) Energy; (9) Environment and Disaster Management; (10) the Development of Underdeveloped Regions, the Frontiers, Outer Regions and Conflict-Torn Regions; (11) Culture, Creativity, Technology Innovation; (12) Other Politics, Law and Security Affairs; (13) Other Economic Affairs; and (14) Other People Welfare Affairs. The preparation and determination of priority programs and activities in 2013 have take various aspects into consideration inclusive of: (1) inter-regional linkage in terms of social, economy, culture, and politics as reflection of archipelago concept within Unitary State of Republic of Indonesia; (2) development performance and strategic issues of each region; (3) development objectives and goals of individual region according to the objectives and goals of RPJPN and RPJMN ; (4) spatial planning of island areas and optimum spatial use; (5) MP3EI implementation; and (6) poverty alleviation acceleration program, to wit, (a) household-based social assistance program (Cluster 1), (b) community empowerment programs (Cluster 2), (c) micro and small scale enterprises empowerment programs (Cluster 3), and (d) pro-people programs (Cluster 4). With reference to theme of RKP 2013 and the existing resources capacity, the focus of 11 national priority activities and other 3 priorities in RKP will be stressed on the management of several strategic issues including 4 (four) major aspects, i.e.: (1) competitiveness improvement; (2) economic resilience reinforcement; (3) people's welfare augmentation and expansion; and (4) social-political stability strengthening. The strategic issues relating to competitiveness improvement include: (a) improving investment and business climate (ease of doing business); (b) accelerating infrastructure development for domestic connectivity; (c) intensifying industrial development in various economic corridors; and (d) generating employment opportunities, especially for young workforce. As to strategic issues relevant to economic resilience reinforcement, they are inclusive of: (a) reinforcing food resilience toward 10 million tons rice surplus by 2014; and (b) increasing electrification ratio and energy conversion. Meanwhile, issues concerning people's welfare augmentation and expansion are (a) developing human resources; and (b) accelerating poverty alleviation by synergizing Cluster 1 through Cluster 4. Strategic issues for social and political stability strengthening concern, among other things, (a) anticipation for the preparation of 2014 general election; (b) bureaucracy performance improvement and corruption eradication; and (c) reaching minimum essential force (MEF). These strategic issues are then reflected in fiscal policy directions and APBN 2013 posture. 1.2 Basic Assumptions for the Macroeconomics 2013 Basic assumptions underlying the macroeconomics cover variables expected to have significant influence over APBN posture. While the said assumptions are just predictions to calculate APBN posture, under certain conditions they turn into targets that must be realized. In this respect, maintaining stable macroeconomic is a must to safeguard the implementation of APBN. The said basic macroeconomic assumptions for 2013 are prepared in view of the latest development and its prospect in future. With relatively promising economic performance for Financial Notes and Indonesian Budget

24 Chapter I Introduction the last five years, Indonesia's macroeconomic prospect is relatively sound with potential upward trend in future. Thanks to gross domestic product (GDP) that increases 5.9 percent per year on the average from , the national economy is expected to grow in excess of 6 percent in 2012 and The inflation rate is curbed at moderate level consistent with the target inflation set by Bank Indonesia. Interest rate is to steadily decrease. Rupiah exchange rate is relatively stable despite weakening trend since 2011 as a result of global economic crisis. Other variables adopted as basic macroeconomic assumptions in 2013 include oil and gas calculation, either in terms of revenues or expenditures. These variables are Indonesian Crude Price (ICP), oil lifting and gas lifting. Variable of gas lifting is just adopted as basic assumption in this RAPBN 2013 to enhance transparency in natural gas revenue calculation. The Indonesian Crude Price (ICP) is considerably dependent on external factors, which are very difficult to predict. Oil lifting and gas lifting are actually dominated by internal factors. However, this issue is very complicated in the planning since the realization of oil lifting is always lower than the target, particularly for the last few years. Upon attentive examination of the foregoing facts, the basic assumptions underlying the national macroeconomy for the preparation of this APBN 2013 posture will be as follows: 1. The economic growth is expected to chalk up 6.8 percent. In terms of expenditures, this 2013 economic growth will be primarily attributed to public and government consumptions, and the accumulation of gross fixed capital (PMTB)/investment. From production wise, agriculture sector, processing sector, construction sector, trade, hotel and restaurant sector along with transportation and communication sector will be the main driving sectors for the said economic growth. 2. Inflation rate is predicted controllable at 4.9 percent range. It can be realized with smooth supplies and distribution of goods and services, better fiscal, monetary and real sector policy coordination coupled with higher awareness of the regional governments in controlling inflation. 3. Average rupiah exchange rate to US dollar in 2013 is set at Rp.9.300/US$. The pressure against rupiah exchange rate is predicted to come from the deminishing surplus of Indonesian balance of trade and economic slowdowns in China, India, and Brazil that may deteriorate the attractiveness of investments in emerging market countries and potential to spark fligth to quality. 4. The 3-month SPN rate (State Treasury Bill) in 2013 is projected to range at 5.0 percent. Some factors that have been taken under consideration are inclusive of controllable inflation rate, exchange rate and capital inflows to Indonesia. 5. The Indonesian Crude Price (ICP) in international markets is expected to reach US$100 per barel. This expectation is fortified with oil demand growth projection and lower oil supply growths of non-opec countries. 6. Oil lifting and gas lifting of Indonesia in 2013 is forecasted at 2,260 thousand barrel of oil equivalent per day consisting of oil lifting of 900 thousand barrels per day and natural gas lifting 1,360 thousand barrel of oil equivalent per day. Starting from APBN 2013, gas 1-4 Financial Notes and Indonesian Budget 2013

25 Introduction Chapter I lifting assumption is merged with oil lifting assumption for the harmonization with alternative energy intensification program and more rational calculation of government revenues and expenditures. The latter is more obvious due to the facts of more natural gas reserves found during oil and gas exploration in the recent years. The trend of realized basic macroeconomic assumptions from 2007 to 2011 and their projection in is presented in Table 1.1. TABLE 1.1 BASIC MACROECONOMIC ASSUMPTION, Economic Indicators Real. Real. Real. Real. Real. APBNP Outlook *) APBN 1. Economic Growth (%) 6,3 6,0 4,6 6,2 6,5 6,5 6,3 6,8 2. Inflation (%) 6,6 11,1 2,8 7,0 3,8 6,8 4,8 4,9 3. Exchange Rate (Rp/US$) Month SPN Rate (%) 8,0 9,3 7,5 6,6 4,8 5,0 3,9 5,0 5. ICP (US$/barrel) 72,3 97,0 61,6 79,4 111,5 105,0 110,0 100,0 6. Oil Lifting (thousand barrel/day) 904,0 871,0 944,0 953,9 898,5 930,0 900,0 900,0 7. Gas Lifting (mboepd) ,0 *) A ccor din g to t h e ou t look in A PBN im plem en ta tion repor t sem est er I Sou rce: t h e Min istr y of Fin an ce 1.3 Fiscal Policy Highlights Fiscal policy as the main policy of the Government implemented through APBN plays crucial and strategic roles to the national economy, especially in the pursuit of development targets. The said roles relate to three primary functions of the Government, i.e. allocation function, distribution function, and stabilization function. APBN must be designed in a manner that can support such functions with ultimate goals of accelerating high and quality economic growths. Allocation function concerns the Government's interventions in economic resources allocation. Distribution function deals with the distribution of goods that have been produced by the communities, and stabilitation function is how to maintain the stability of and accelerate economic performance at full employment level and relatively stable prices. Of these three functions, stabilization function is aimed at minimizing the volatility or fluctuation of the economy. It is the essence of APBN policy. From this stabilization role, fiscal policy has been regarded as an effective tool to simplify business cycle. The history of fiscal policies in Indonesia showed that during economic crisis in 1997/1998 and crisis 2009, expansive fiscal policy with fiscal stimulus allocation in 2009 was able to reinforce the Indonesian economy against crisis impacts, and even recorded distinctive positive growth amid the faltering global economic growth. The economic stability was well maintained and sound fiscal conditions were established. Of course, it is not only due to appropriate fiscal policy, but also the synergy of monetary policy and other policies. Eclipsed under relatively unrecovered global economy and in view of potential revenue sources and budget requirements in future, fiscal policy in 2013 is predicted to remain of expansive character, in which the Government expenditures will outnumber the revenues. This approach is necessary notably to stimulate economic growth. In future it is expected that the economic growth will accelerate toward higher growth coupled with the optimism of the Government Financial Notes and Indonesian Budget

26 Chapter I Introduction about the bolstering economic conditions in future. The challenges that must be coped with are to foster more quality economic growth, i.e. capable of complying with these three requirements: (a) generate employment and reduce unemployment and poverty; (b) supported with equality dimension; and (c) the structure proportionally reinforced with various supporting sectors, either in terms of aggregate demands or aggregate supplies. In 2013, with the anticipated economic growth at 6.8 percent it is expected that such growth can reduce unemployment rate and poverty rate to percent and percent respectively. Consistent with the development theme for 2013: "Reinforcing Domestic Economic for People Welfare Augmentation and Expansion", the fiscal policy in 2013 will be established as follows: "to boost Sustainable Economic Growth with Fiscal Restructuring". The substance of this theme is focused on the importance of building sound fiscal condition to reach sustainable economic growth. Four (4) strategies to maintain the economic sustainability are inclusive of: (a) optimizing Government revenues while maintaining business climate conducive for investments, business world expansion and environment preservation; (b) enhancing the quality of Government expenditures with efficiency for un-productive expenditures and increasing infrastructure revenues to expedite the growth; (c) maintaining budget deficit at safe limit (below 3 percent of GDP); and (d) decreasing debt ratio to GDP at controllable rate. Generally speaking, fiscal policy in 2013 remains expansive in order to maintain growth momentum while curbing the deficit at tolerable threshold. This policy will be exercised with: (1) Government revenue policy; (2) Government expenditure policy; and (3) financing policy. The Government revenue policy in 2013 will be directed to optimize the revenue from tax and non-tax (PNBP) sector. In the former, some significant policies and steps to take in 2013 are: (1) to continue basic taxation policies that have been introduced in 2012; (2) to intensify tax potential exploration; and (3) to improve supervision and services in customs and excise sector. The highlights of PNBP policy in 2013 include: (1) increase non tax revenue from both oil and gas and non-oil and gas sectors; (2) enhance the performance of state-owned enterprises (SOEs) with greater dividend contributions; and (3) to continue inventory, intensification of K/L (Ministries/Agencies) Non-Tax Revenue (PNBP). This PNBP optimalization will be carried out along with revenue optimalization from Public Service Agencies (BLU). From the Government expenditure side, the essense of expenditure strategies in 2013 both for ministries/agencies (K/L) or non K/L will remain focused on 4 (four) pillars: (1) maintain high level economic growth (pro-growth), (2) increase productivity for employment expansion (pro-job); (3) improve and maintain poverty alleviation program (pro-poor); and (4) support eco-development (pro-environment). These development priorities are expected capable of reinforcing the domestic economy for people welfare augmentation and expansion as prescribed in the foregoing national development theme for In the mean time, to enhance the quality of Government expenditures, in 2013 the Government will increase the allocation of expenditure budget to stimulate economic growth at higher level. In this context, the Government plans to rise electricity tariff rate and reallocate the saved electricity subsidy to infrastructure budget. 1-6 Financial Notes and Indonesian Budget 2013

27 Introduction Chapter I General policies from financing aspect to be taken by the Government in 2013 are: to spend budget surplus (SAL) for the anticipation of SBN (Government Bond) market crisis and finance budget deficit; (2) to direct the spending of Government investment fund especially for infrastructure development, and build investment capacity of the Government, notably for the takeover of PT Inalum; (3) to allocate the State Capital Participation (PMN) to fortify the security capacity of people entrepreneurship credit program (KUR), initial capitals for Social Security Agency (BPSJ), SOE restructuring and revitalization, and to meet the obligations of Indonesia as the member of international organizations/institutions and of ASEAN Infrastructure Fund; (4) to maintain net negative policy of foreign loans; (5) to achieve debt ratio to GDR at percent by end of 2013; and (6) to improve the flexibility of loan financing with relatively low-cost and controllable risk debt instruments From the above mentioned measures, it is expected that APBN be managed in efficient and productive fashion and in turn provide optimum contribution for fiscal sustainability and rise the competitiveness of domestic economy and ultimately support national development with end of view of augmenting the prosperity of all Indonesian people. 1.4 APBN 2013 Posture Summaries RAPBN 2013 posture is prepared based on public economic principles aimed to optimize revenue sources while introducing efficiency and effectiveness in expenditures and budget financing allocation. Aside from basic macroeconomic assumptions, the amounts set in APBN 2013 posture also take good governance practices, policies to be taken in future and APBN realization trends of previous years under consideration. During , APBN realization recorded fluctuated budget deficits following the realization of revenue and expenditure during the said periods. In the realizations of revenues and grants ranged from 15.1 to 19.8 percent of GDP with realized expenditure for the same period at 16.2 to 19.9 percent range, and deficit realization at 0.1 percent to 1.6 percent of GDP. In APBNP 2012 the Government revenues are expected to reach Rp.1,358.2 trillion with Rp.1,548.3 trillion of expenditures and as such the deficit is predicted to record Rp trillion (2.23 percent) of GDP. The expansive budget policy taken by the Government until the enactment of APBNP 2012 will be maintained in Based on the directions and strategies of fiscal policy, APBN 2013 posture will have figures as highlighted below: a. The Government revenues are planned to reach Rp.1,529.7 trillion composing of tax revenues Rp.1,193.0 trillion, PNBP (non-tax) revenue Rp trillion and grants Rp.4.5 trillion. b. The Government expenditures are predicted to amount Rp.1,683.0 trillion consisting of Central Government Expenditures Rp.1,154.0 trillion and Transfer to Regions Rp trillion. c. Budget deficit is set at Rp trillion (1.65 percent) of GDP. d. Budget financing for APBN 2013 is from domestic financing sources Rp trillion and foreign financing (net) Rp.19.5 trillion. Financial Notes and Indonesian Budget

28 Chapter I Introduction The summary of RAPBN 2013 posture is presented in Table 1.2. TABLE 1.2 APBN TREND, (trillion rupiah) DESCRIPTION Real. Real. Real. Real. Real. APBNP Outlook *) APBN A. GOVERNMENT REVENUE , , , ,529.7 I. Domestic Revenue , , , , Tas Revenue , , , Non Tax Rev enue II. Grant Revenue B. GOVERNMENT EXPENDITURE , , , , ,683.0 I. Central Government Expenditure , , , Ministries/Agencies (K/L) Non K/L II. Transfer to Regions Fiscal Balance Special Fund and Adjustment Fund C. PRIMARY BALANCE (72.3) (67.2) (40.1) D. BUDGET SURPLUS/(DEFICIT) (49.8) (4.1) (88.6) (46.8) (84.4) (190.1) (179.1) (153.3) % deficit to GDP (1.26) (0.08) (1.58) (0.73) (1.14) (2.23) (2.16) (1.65) E. FINANCING I. Domestic Financing Domestic Banking Domestic Non-Banking II. Foreign Financing (Netto) (26.6) (18.4) (15.5) (4.6) (17.8) (4.4) (9.1) (19.5) 1. Foreign Loan Drawing (Gross) SLA (2.7 ) (5.2) (6.2) (8.7 ) (4.2) (8.4) (8.1 ) (7.0) 3. Amortization (57.9) (63.4) (68.0) (50.6) (47.3 ) (49.7 ) (50.5) (58.4) Financing Surplus (Deficit) (7.4) *) A ccor din g to ou tlook in A PBN Im plem en ta tion Repor t Sem est er I Sour ce: th e Min istry of Fin an ce 1.5 Brief Description of Chapters This Financial Note and APBN 2013 composes of 7 (seven) chapters initiated with Chapter 1 - Introduction - detailing the general description including short notes to RKP (the Government Work Plan) and legal basis underlying the preparation of APBN 2013, basic assumptions of macroeconomics, fiscal policy highlights, summary of APBN 2013 posture, and brief description of Chapters. Chapter 2 of Basic Assumptions of Macroeconomics points out the economic trends from 2007 to 2011 and economic projection for 2012 as basis in forecasting the economic prospects in 2013, challenges and targets of macroeconomic policy in 2013, and closed with basic assumptions of macroeconomics for APBN Chapter 3 deals with the Government Revenues. This chapter discusses the trends of revenue realizations from and revenue estimates in 2012; challenges and opportunities of Government revenues; and targets of Government revenues in 2013, which include domestic revenues and grants. Chapter 4 of Central Government Expenditures concerns the progress of policy and implementation of Central Government Expenditure Budget in ; RKP (the Government Work Plan) highlights for 2013; and central government expenditure policy and budget in RAPBN 2013 by functions, organizations and types. 1-8 Financial Notes and Indonesian Budget 2013

29 Introduction Chapter I Chapter 5 concerning Fiscal Decentralization Policy details the progress of policy and implementation of fiscal decentralization in ; problems and challenges in fiscal decentralization; and transfer to regions policy and budgeting in Chapter 6 of Deficit, Budget Financing and Fiscal Risk concerns the trends of budget deficit and financing in , and budget financing plan in 2013 covering non-loan and loan financing sources. This chapter also underlines fiscal risks. Chapter 7 of Medium-Term APBN Projection discusses the projections of basic assumptions of macroeconomics, the Government revenues, the Government expenditures, and budget financing in medium-term wise ( ), and medium-term expenditure framework. Financial Notes and Indonesian Budget

30 Macroeconomic Trend and Fiscal Policy Highlights 2013 Chapter 2 CHAPTER 2 BASIC ASSUMPTIONS OF MACROECONOMICS 2.1 General Global economic recovery trend after financial crisis and global recession since 2008 remains an issue garnering great attention from various parties around the world. However until the mid of 2012 such recovery phase fails to proceed as expected. It is mainly attributed to prolonged fiscal crisis and debt settlements in Europe, which are unfortunately predicted still a grave challenge that must be coped with in this The exceeding debts have impeded stimulus efforts required by these western countries. Besides, investments and capital flows have been aggravated by lower credit rating of some European countries in Under such circumstance, more attention must be given to the fickle prices of global energy commodities. This is particularly evident from the wildly fluctuating prices of crude oil in international markets for the last few years. For example, the crude oil price at global level has skyrocketed in the last two years. While it is then to drop, the price, which easily fluctuates will disrupt economic stability and incite negative sentiment in many countries. This condition also has influence over the Indonesian economy, despite insignificant impacts according to the data. It is indicated with the capability of Indonesian economy to record 4.6 percent growth in The key lied on the anticipative policies against crisis impacts adopted in the time. Likewise, in 2012, the Government has prepared a number of measures for critical management protocol. The Government is optimistic that amid uncertain global economic growth the national economic performace in 2012 and 2013 can reach growth of more than 6.0 percent. The challenge to deal with in future concerns of how to record more quality economic growth, i.e. capable of reducing poverty rate and unemployment rate in faster and synergic manner for more equally distributed development outcomes. Apart from impacts to economic growth, global economic trends and international commodity prices in 2012 can affect the performance of balance of payment in the same year, which is projected to record deficit in current transactions, even though such deficit can be covered from capital and financial transaction surplus. In 2013, the balance of payment is expected to book relatively high surplus from capital and financial transaction surplus and enormous foreign capital inflows. Nevertheless, the current transactions are predicted to make deficit as a result of strong domestic demands, in which the import will outnumber the export. The immediate impact of the foregoing situation is more obvious to rupiah exchange rate, which remains under pressure in 2012 and As to inflation rate and interest rate, they can be controlled at lower level. Thus, in general the macroeconomic conditions in future are relatively promising. The above trends have been applied as basis in preparing and setting macroeconomic targets. These targets constitute basic assumptions as references in calculating APBN posture. They consist of economic growth, inflation, exchange rate, interest rate, oil price and oil lifting. Since 2013, these basic assumptions have been added with gas lifting due to the fact of the increasingly gas production and upward contribution of oil and gas sector. Financial Notes and Indonesian Budget

31 Chapter 2 Macroeconomic Trend and Fiscal Policy Highlights The Economic Trend and Realization Projection Global and Regional Economy Global economy during shows ups and downs phenomenon as experienced in some developed countries and global markets. In period , subprime mortgage crisis in US financial market not only exerted great pressure to real sector but also spread to other countries, particularly in European region. The crisis then turned into global crisis that may lead to global economic contraction. The economic growth at global level in 2007 reached 5.4 percent, and started to constantly slow down in 2008, until recorded a dismal negative 0.6 percent in Thanks to varying responsive policies either taken individually or collectively in many regions, the global economy was recovering in 2010 and chalked up 5.3 percent growth. In the following years, the global economy again faces new challenges as a result of exceeding debts of European countries. Stimulus policy package launched as a response to crisis in 2009 was not followed with prudent fiscal management. In 2011, new pressure started to exert from the consequences of enormous debts that must be complied with by the majority of European countries. Their liquidities and financial sectors had to shoulder unbearable pressure. This calamity further spread to real sector and incited economic crisis in European regions. In the same time, the leading countries in the world were entangled with their domestic economic challenges. US stimulus policy package was not sufficient to encourage decent growth. Meanwhile, Japan suffered economic contraction. This country, which in 2011 was ravaged by tsunami, was also disrupted with nuclear reactor leak crippling its production and trading activities. The crumpling economy of developed countries brought adverse implications to the developing countries. The export volumes of the latter had drastically dropped since they more destined their exports to these troubled rich countries. The faltering economy of developed countries has decreased export demands on various products from developing countries. This phenomenon becomes new pressure to the national economy of developing countries, notably those considerably dependent on exports such as China, India and Singapore. %, yoy ,4 2,8 GRAPH 2.1 GLOBAL ECONOMIC GROWTH ,7 2,8 0,0 6,0 2,8-0,6-3,6 5,3 6,2 3,9 3,2 1, Source: World Economic Outlook - IMF, Juli ,5 Global Dev'ed Countries Dev'ing Countries GRAPH 2.2 GLOBAL TRADE VOLUME GROWTH TREND %, yoy 20 14, ,2 7,9 2,4 2,9 12, ,5 Goods -11,7 Goods and services Source: World Economic Outlook - IMF, July2012 5,9 6,3 2-2 Financial Notes and Indonesian Budget 2013

32 Macroeconomic Trend and Fiscal Policy Highlights 2013 Chapter 2 These insistent pressure and challenges have slowed down the global economic growth. After recovery in 2010, the global economy started to falter again with lowly 3.9 percent growth. The similar diminishing pattern is also found in trade volume growth, which in 2011 just recorded 5.9 percent, half of 2010 performance (see Graph 2.1. and Graph 2.2.) National Economy Economic Growth The national economy is relatively strong enough to face the occuring global crisis. It can be seen from high economic growth of Indonesia in While the other countries either suffer economic slowdown or even negative growth. For the last five years ( ), the Indonesian economy managed to constantly grow at 5.9 percent (yoy) on the average. This percentage is higher than the average rate of previous five year period ( ), which only reached 5.1 percent (yoy). In 2007, the national economy of Indonesia grew by 6.3 percent (yoy). However, in 2008 this growth was a little bit decreasing as a result of global crisis. Even though, in this difficult condition Indonesia recorded a distinctive economic growth of 6.0 percent (yoy). This economic downward continued until 2009 when the national economi was to grow by 4.6 percent (yoy). The economic recovery was just started in 2010 when the national economy was to grow by 6.2 percent (yoy). In 2011 the national economy starts to revive with a growth of 6.5 percent (yoy) amid glooming global crisis in Europe (see Graph 2.3). Indonesia s economy in 2011 recorded favorable growth at 6.5 percen (yoy). Debt crisis in USA and Europe exerted insignificant impacts to national economy. Domestic demands remained high to hold external slowdown. The sources of economic growth in 2011 came from gross fixed capital formation (PMTB), which grew by 4.7 percent (yoy), and government consumption which raised by 3.2 percent (yoy). As to export-import, it experienced a downturn if compared with last year s realization, i.e percent and persen persen GRAPH 2.3 INDONESIAN ECONOMIC GROWTH, (%, YOY) Domes. Consump Gov. Consum PMTB Export Import Source: Central Bureau of Statistics GRAPH 2.4 ECONOMIC GROWTH BY EXPENDITURE, (%, YOY) 13.3 percent (yoy) respectively. (Graph 2.4). From sector wise, the economic growth in 2011 was attributable to processing industry sector, which recorded relatively high growth, i.e. 6.2 percent (yoy), and trade, hotel and restaurant sector for its 9.2 percent (yoy) contribution. 6,3 6,0 4,6 6,2 6, Source: Central Bureau of Statistics Financial Notes and Indonesian Budget

33 Chapter 2 Macroeconomic Trend and Fiscal Policy Highlights 2013 In 2011, public consumption was to rise 4.7 percent (yoy) same as realization in As from the first quarter to the final quarter 2011, this public consumption showed upward trends. It indicated better purchasing power of people along 2011 coupled with low inflation in the year. Public consumption growth was due to food and non-food consumptions, recording 3.8 percent (yoy) and 5.5 percent (yoy) respectively. This kind of consumption was the largest contribution to economic growth or GDP, i.e percent. Significant increase was recorded in government consumption in 2011 with 3.2 percent (yoy), which was higher than 2010 s realization reaching 0.3 percent (yoy) only. This government consumption was from material and personnel expenditures recording 3.6 percent (yoy) and 5.4 percent (yoy) respectively. Higher personnel expenditure came from remuneration to some ministries/agenciess. Despite significant increase, the contribution of government consumption to economic growth was relatively small, i.e. only 9.0 percent to total GDP. Investment expenditure (gross fixed capital formation/pmtb) in 2011 shows a little bit higher growth than in 2010, i.e. from 8.5 percent (yoy) to 8.8 percent (yoy). This better performance was driven by more investments in import machines and equipment. Domestic consumption growth had increased demands on new machines to assure production capacity in future. With regard to high investments on import transport modes, it was due to the purchase of some aircrafts to respond the reviving economic activities, from which more intensive interregion transporation was generated. Investments on construction was slightly to decrease because of relatively stagnant growth in this sector. Despite relatively small contribution to GDP if compared with public consumption s investment expenditure this sector gave high contribution to economic growth. Expenditure Distribution (%) Contribution (%) Public Consumption 56,6 54,6 2,7 2,7 Government Consumption 9,0 9,0 0,0 0,3 PMTB 32,1 32,0 2,0 2,1 Export 24,6 26,3 6,5 6,3 Import 22,9 24,9 5,6 4,8 Sector Agriculture 15,3 14,7 0,4 0,4 Mining 11,2 11,9 0,3 0,1 Industry 24,8 24,3 1,2 1,6 Electricity, Gas and Water Supply 0,8 0,7 0,0 0,0 Construction 10,3 10,2 0,4 0,4 Trade, Hotel and Restaurant 13,7 13,8 1,5 1,6 Transportation and Communication 6,6 6,6 1,2 1,0 Finance, Real Estate & Corporate Services 7,2 7,2 0,5 0,7 Services 10,2 10,5 0,6 0,6 Source: the Ministry of Finance TABLE 2.1 GDP DISTRIBUTION AND CONTRIBUTION TO ECONOMIC GROWTH Financial Notes and Indonesian Budget 2013

34 Macroeconomic Trend and Fiscal Policy Highlights 2013 Chapter 2 At variance with other components, export and import growth for goods and services in 2011 indicated a downturn if compared with realization in Global economic pressure had decreased Indonesia s export performance i.e. from 15.3 percent (yoy) in 2010 to 13.6 percent (yoy) in Accordingly import growth had been also dropped from 17.3 percent (yoy) in 2010 to 13.3 percent (yoy) in However, import slowdown, which was higher than the export had caused net export to reach 14.4 percent (yoy) in 2011 from previously 8.7 percent (yoy). The downturn of export import growth for goods was just evident in quarter IV However, the direct impacts of crumpling European economy to Indonesia s exports were relatively insignificant because of low direct export composition to these crisis hit countries (see Table 2.1.). From demand side, all economic sectors recorded positive growths in 2011, despite lower rates for some of them. Processing industry sector, trade, hotel and restaurant sector, financial sector and service sectors chalked up positive growth. Meanwhile, four sectors recording lower growths were mining sector, electricity, gas and water supply sector, and transport and communication sector. On the other side, agriculture sector reached constant growth. The highest growth was found in transport and communication sector thanks to its double digit growth, i.e percent (yoy). However, this performance was a decrease if compared in 2010 when this sector reached 13.4 percent (yoy) growth. This growth was particularly from communication sub-sector growing by 12.7 percent (yoy) due to increase of communication equipment, either in terms of types or intensity of their uses. Transport sub-sector was to grow by 7.6 percent (yoy) coming from the increases of land transport sub-sector, sea transport sub-sector and other supporting transport sub-sector recording growths by respectively 6.6 percent (yoy), 2.8 percent (yoy), and 6.8 percent (yoy). The increasing number of passengers and varying land and sea transport modes had supported this bolstering sub-sector. Processing industry sector in 2011 was to significantly grow by 6.2 percent (yoy). This realization reflected a great increase in comparison with previous year s performance of 4.7 percent (yoy). This upsurge was due to growth in non-oil and gas sub-sector reaching 6.8 percent (yoy). Meanwhile, oil-gas industry sub-sector experienced contraction of 0.9 percent (yoy). The growth of non-oil and gas sub-sector was supported by basic metal, iron and steel industries, food, beverage and tobacco industries and textile, leather made items and footwear industries. These three sub-sectors contributed by respectively 13.1 percent (yoy), 9.2 percent (yoy) and 7.5 percent (yoy). Contraction in non-oil and gas sub-sector was particularly due to minus growth of liquid natural gas industry (see Table 2.2). Trade, hotel and restaurant sector experienced growth from 8.7 percent (yoy) in 2010 to 9.2 percent (yoy) in Such growth was attributed to sound performance of large trades and retail sectors, which grew by 10.0 percent (yoy). Meanwhile, hotel sub-sector and restaurant sub-sector recorded growths of 9.0 percent (yoy) and 4.1 percent (yoy) respectively. Agriculture, livestock, forestry and fishery sectors in 2011 were relatively stagnant to previous year s performance, i.e, 3.0 percent (yoy). The largest contribution for this agriculture sector growth was from fishery sector of 6.7 percent (yoy). In the mean time, food crop sub-sector was the main contribution for this sector, which experienced slowdown if compared with 2010 s performance, i.e. from 1.6 percent (yoy) to 1.3 percent (yoy). This lower growth of food crop sub-sector was because of climate factors causing decrease in agriculure production, notably paddy. Financial Notes and Indonesian Budget

35 Chapter 2 Macroeconomic Trend and Fiscal Policy Highlights 2013 Rupiah Exchange Rate Sector Agriculture 3,5 4,8 4,0 3,0 3,0 Mining 1,9 0,7 4,5 3,6 1,4 Industry 4,7 3,7 2,2 4,7 6,2 Electricity, Gas and Water Supply 10,3 10,9 14,3 5,3 4,8 Construction 8,5 7,6 7,1 7,0 6,7 Trade, Hotel and Restaurant 8,9 6,9 1,3 8,7 9,2 Transportation and Communication 14,0 16,6 15,8 13,4 10,7 Finance, Real Estate & Corporate Services 8,0 8,2 5,2 5,7 6,8 Services 6,4 6,2 6,4 6,0 6,7 Sou r ce: Cen tr a l Bu r ea u of Sta tistics (BPS) TABLE 2.2 ECONOMIC GROWTH BY SECTORS (percent) In 2007, the rupiah exchange rate was relatively stable at Rp.9,136 per US dollar on the average. The fluctuation followed strengtening trends in previous years. Until the third quarter of 2008, rupiah exchange rate remained stable at Rp.9,051 to Rp.9,500 range per US dollar. Entering the fourth quarter 2008, this exchange rate sufferred great pressure arising from global economic slowdown as a result of global financial crisis and commodity price upheavals in international markets. During such period, rupiah volatility showed upward trend and ranged at Rp.9,500 to Rp.12,400 per US dollar. As of the end of 2008, the rupiah exchange rate to US dollar was at Rp.9,678.3 per US dollar on the average implying a decrease of around 5.9 percent to the last year s rate. Until quarter I 2009, depreciation to rupiah exchange rate continued and hit the lowest rate on 6 March 2009 at Rp.12,065 per US dollar due to worries of spreading global financial crisis. In gradual fashion, starting from Quarter II 2009, the rupiah exchange rate was strengthening and reached Rp.9,985 per US dollar on 8 June This stronger rupiah was supported with the bolstering economic foundations and balanced supply and demand of foreign currencies in domestic markets. In addition, the amount of foreign reserves was also to hike and yield of rupiah was relatively high if compared with peer countries that gave positive signals to investors on the economic resilience of Indonesia against international market turmoils. As of the end of 2009, rupiah exchange rate was at Rp.10,399 per US dollar on the average or to decrease by 7.4 percent compared with previous year. The intense inflow of foreign capital and proportional demands and supplies of foreign exchange in domestic markets had maintained the stability of rupiah exchange rate during 2-6 Financial Notes and Indonesian Budget 2013

36 Macroeconomic Trend and Fiscal Policy Highlights 2013 Chapter Rupiah, in quarter I, received great pressure from negative sentiment of market actors against Greek s fiscal deficit, which was worried to spread to other Europen countries. However, with the bouyance of optimism on global economic recovery, the conditions of economic foundations in Asian regions starting to improve marked with attractive rupiah yields, and the influx of foreign capitals to domestic markets. Rupiah exchange rate to US dollar in 2010 was at Rp.9,085 per US dollar on the average reflecting an increase of 12.7 percent higher than previous year s average rate. Positive trend of strengthening rupiah GRAPH 2.5 exchange rate during 2010 continued in RUPIAH EXCHANGE RATE TREND TO USD The ongoing economic recovery Rp per US$ process in US and uncertain economic recovery in Europe had forced investors to switch their investments to emerging markets, including Indonesia Competitive rupiah yield coupled with higher Indonesia s credit rating to investment grade level became attractive factors of investments and more foreign capitals entered to domestic markets. On Source:: Bank Indonesia the average rupiah exchange rate in 2011 was at Rp.8,779 per US dollar, indicating an increase of 3.4 percent higher than average rate in previous year (see Graph 2.5). To maintain the stability of rupiah exchange rate, the Government together with Bank Indonesia continually attempted to improve the coordination and synergy of monetary, fiscal and sector policies and prudent monetary policy introduction and tight supervision over foreign currencies traffics. These policies were expected capable of maintaining the stability of rupiah exchange rate and preventing excessive volatility and assuring the adequacy of foreign exchange reserve to meet economic foundation requirements. Policy of maintaining stable rupiah exchange rate was as anticipative measure to prevent sudden reversal that might incite Asian economic crisis as once in In addition, improved policy coordination and more effective regulations and foreign currencies traffic monitoring were maintained to fortify monetary policies. These policies were simultaneously applied by accomodating more flexible rupiah exchange rate policy while paying attention to exchange rates of currencies in neighboring regional countries so as to maintain rupiah competitiveness. At international and regional level, commitment to accelerate economic activities was exercised with the signing of agreement on financial sector to reinforce global and regional economic recoveries. Inflation Inflation rates in Indonesia for the last few years are considerably subject to the volatility of energy and food commodity prices in international markets. The volatility of such commodity prices are due to disrupted production in producting countries by climate anomaly, natural disaster and geopolitical conflicts. This disturbed production has exerted pressure to output gap in international markets and in turn incite price turmoil of similar commodities in domestic markets. Inflation rate in 2007 was relatively stable at 6.6 percent (yoy), which JFMAMJ JASONDJFMAMJ JASONDJFMAMJJASONDJFMAMJ JASONDJFMAMJJASOND Financial Notes and Indonesian Budget

37 Chapter 2 Macroeconomic Trend and Fiscal Policy Highlights 2013 was consistent with stable prices of energy and food commodities in global markets. The government policies in pricing were minimum. In 2008, the soaring energy and food commodity prices in international markets had forced the Government to rise fuel price in June The pressure of energy and food commodity prices at international and domestic markets increased the inflation rate in 2008 at percent (yoy) (see Graph 2.6). In 2009, the inflation rate showed sharp downturn to 2.78 percent (yoy), attributed to, among others, the plummeted prices of international energy commodities, especially crude oil. This condition forced the Government to decrease the fuel price by end of 2009 when the fuel price was continually dropping since the end of The rise of prices for food and energy commodities in international markets in 2010 increased again the inflation rate until hitting 6.96 percent (yoy). Inflation pressure came from external sources 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% -0,5% J FMAMJ J A SONDJ FMAMJ J A SONDJ FMAMJ JA SONDJ FMAMJ J A SONDJ FMAMJ J A SOND Source: Central Bureau of Statistics GRAPH 2.6 INFLATION TREND, generated additional burden to domestic inflation rate since in the same time, the domestic markets experienced disrupted supplies of food and energy due to the immediate impacts of a series of natural disaster in some production centers. This pressure had sparked price upsurge for food and energy commodities in domestic markets and increased inflation in In 2011, pressure from external factors was to abate. On the other side, domestic production was to rise coupled with improved distribution flow and stable rupiah exchange rate. Inflation rate in 2011 was at 3.79 percent (yoy) because of lower inflation in food commodities. It further decreased causing the largest deflation for the last 10 years to 0.32 percent (mtm) in March SBI-3 month Rate (Bank Indonesia Certificate) and SBN-3 Month Rate (Government Bonds) In 2007, Bank Indonesia relaxed its monetary policies by lowering BI rate in phases consistent with the decreasing interest rate for SBI-3 month. In 2007 SBI rate reached 8.04 percent on the average. High inflation in the mid 2008 forced BI to increase BI rate with immediate consequence of higher SBI-3 month rate hitting 9.47 percent on the average. In 2009 when the inflation rate was to drop, BI rate decreased from 8.75 percent in early year to 6.5 percent by end of year. With this declining BI rate, the average BI-3 month rate was also to drop at 7.49 percent. This decrease continued until 2010 when reached 6.57 percent, even though Bank Indonesia maintained BI rate at 6.5 percent in the whole year. The auction of SBI-3 month in 2010 was until October only as anticipation of BI against sudden capital reversal, which was worried to spark excessive fluctuation of rupiah exchange rate. The stoppage of SBI-3 month auction was expected to attract foreign capitals to investment instruments with longer tenors. With such SBI-3 month auction stoppage by Bank Indonesia, pursuant to the terms and conditions, the Government must issue another bonds with auction system equal to SBI-3 month as basis in calculating the interest rate of Government Bonds (SUN) with variable mtm yoy (RHS) % 12% 10% 8% 6% 4% 2% 0% 2-8 Financial Notes and Indonesian Budget 2013

38 Macroeconomic Trend and Fiscal Policy Highlights 2013 Chapter 2 rate. In March 2011, the Government started to issue State Treasury Bill (SPN) with 3- month tenor as basis to calculate the interest rate of Government Bonds (SUN) with variable rate. In the first auction in March 2011, 3-Month SPN rate reached 5.19 percent and thereafter steadily to rise until hitting 5.44 percent in June. This upward trend was due to uncertain global market compounded with the escalating issue of Greek s debt crisis. In the next month, the interest rate of 3-Month SPN was to decline until the lowest point in 2011, i.e percent in August. This decrease was mainly because of market optimism about Greek s debt crisis settlement through budget saving and IMF s European Union assistance package (see Graph 2.7). Entering October 2011, the interest rate of 3-Month SPN showed upward trend until hitting the highest level in 2011 at 5.45 percent. This increase was primarily due to operation twist policy of US that encourage liquidity transition from emerging market to US Treasury instrument with long tenor. The said Federal Reserve policy was a measure to recover the economic conditions of USA suffering fiscal crisis. In November 2011, the interest rate of 3-Month SPN was to plummet at lowly 4.47 percent. Additional assistance package for European crisis salvation, from 440 billion to 1.0 trillion from European Financial Stability Facility (ESFS), brought positive sentiment to global and domestic market. European Financial Stability Facility (EFSF) provided additional assistance package for European crisis salvation leaving a total 1.0 trillion from previously 440 billion. During 2011, the Government had offered 3-Month SPN for 15 times with interest rate 4.81 percent on the average. The interest of investors was relatively high as indicated with oversubscribed during the offering. These enthusiastic investors were inseparable from robust domestic economic foundation and sound fiscal management that would assure wellmaintained fiscal sustainability. Higher credit rating from international credit rating agencies reflected the confidence of international communities to Indonesia s economy. In the mid December 2011, the Fitch promoted the position of Indonesia to Investment Grade level. Indonesian Crude Oil Price persen 6,0 5,5 5,0 4,5 4,0 3,5 3,0 From early 2007 through the mid of 2008 the crude oil price at global markets indicated significant increase. This soaring price was consistent with the increasingly global oil demands. The average price of Brent crude oil in 2007 reached US$74.7 per barrel and further increased to USD$96.7 per barrel in During 2008, Brent crude oil recorded upsurge in price and hit USD$139.3 per barrel in June Approaching the second semester, the price of Brent crude oil showed plummenting trend to US$41.8 per barrel in December ,19 5,02 5,19 4,88 Source: the Ministry of Finance GRAPH MONTH SPN RATE TREND ,44 4,63 4,18 3,75 5,47 5,23 4,81 4,72 4,47 Financial Notes and Indonesian Budget

39 Chapter 2 Macroeconomic Trend and Fiscal Policy Highlights 2013 In the next years, the crude oil price indicated a strengthening trend as a result of higher crude oil consumption. For the last four years, the average global oil consumption was to rise from 85.4 million barrel per day in 2008 to 88.0 million barrels per day in This phenomenon was notably recorded in non-oecd countries following the recovering economy of non-oecd countries in Asia, South America and Russia. Consequently, the crude oil price at global level was steadily to rise until the end of Brent crude oil in 2009 was at US$63.1/barrel on the average and further increased in 2010 to US$79.8/barrel. Thereafter, the average price of Brent crude oil was constantly moving upward and hit US$111.3/barrel in It was attributed to exceeding crude oil demands in Japan after the shutdown of nuclear power plants around Japan following tsunami. (See Graph 2.8). GRAPH 2.8 INTERNATIONAL CRUDE OIL PRODUCTION, CONSUMPTION AND PRICE TREND, US$/narrel Juta Barel/hari 20 Konsumsi (RHS) Produksi (RHS) WTI Brent ICP Jan Feb Mar Apr Mei Jun Jul Ags Sep Okt Nov Des Jan Feb Mar Apr Mei Jun Jul Ags Sep Okt Nov Des Jan Feb Mar Apr Mei Jun Jul Ags Sep Okt Nov Des Jan Feb Mar Apr Mei Jun Jul Ags Sep Okt Nov Des Jan Feb Mar Apr Mei Jun Jul Ags Sep Okt Nov Des Source: Bloomberg & the Ministry of ESDM The fluctuation of global oil price during such period was offset by global oil supply increase especially from non-opec countries. The average global crude oil supply in 2008 recorded 85.3 million barrel per day and then increased to 87.0 million barrel per day in In addition, geopolitical factor in Middle East and European debt crisis had considerably affected the volatility of global oil price. Indonesian Crude Price (ICP) was fluctuating to the global oil price trends, when in early 2007 oil price at global level increased significantly until the second half of The average ICP rate during these two years reached respectively US$72.3 per barrel and US$97.0 per barrel. After a drastic upsurge, the ICP then plummented until the lowest point for the last four years at USD38.5 per barrel in December With the reviving global crude oil price, the ICP in 2010 and 2011 indicated the same trends. Average ICP in 2010 was US$79.4 per barrel, and increased to US$111.5 per barrel in It was due to the skyrocketing crude oil demands especially for Minas, which was adopted as the main reference in setting ICP Financial Notes and Indonesian Budget 2013

40 Macroeconomic Trend and Fiscal Policy Highlights 2013 Chapter 2 Indonesian Lifting The realization of Indonesian Lifting during showed upward trends with average production of 899 thousand barrels per day in This lifting volume then increased to 931 thousand barrels per day in 2008, and steadily to rise for the next two years from 944 thousand barrels per day (2009) to 954 thousand barrels per day (2010). This increasingly lifting was reached after introducing a number of policies in oil sector including more equitable investment and funding policies, improved partnership system and 1000 mechanism of business actors in oil and gas provision and usage, tax incentives, suspended VAT payment, and import tax exemption for oil and gas equipment (see Graph 2.9). In 2011, the realized lifting was to decrease to 898 thousand barrels per day. The contributing factors of this declining oil production were diminishing natural production of the existing oil fields compounded with license-related problems, overlap licenses and troubled lease-use agreement with the related institutions, hampered floating facility procurement, and lots of repair and maintenance works to production facilities following some occupational accidents and extreme weather, such as the broken gas pipeline supplying team generator facility in Duri field managed by PT Chevron Pacific Indonesia (CPI), burned production collection facility of Lentara Bangsa used to store production of China National Offshore Oil Corporation (CNOOC) in Jakarta bay and production platform collision of Pertamina Hulu Energi-West Madura Offshore (PHE-WMO) in Madura strait. All of these had contributed in the loss of oil production opportunity reaching around 40 thousand barrels per day Economic Projection in Global and Regional Economy Source: the Ministry of ESDM GRAPH 2.9 INDONESIA OIL LIFTING, (thousand barrel per day) Entering 2012, the global economic performance moves with unpredicted changes. US economy shows positive progress and heads to recovery direction. In the first quarter, the US economy in 2012 records positive growth of 1.9 percent (yoy), with downward unemployment rate until 8.2 percent as of May With such positive trend, US economy is expected to grow by 2.0 percent (yoy). At variance with USA, Europe starts to suffer recession with minus 0.1 percent (yoy) growth during the first quarter 2012 or much lower than the performance of the fourth quarter 2012 recording 0.7 percent (yoy). The changing political constellation in some European countries has threatened fiscal discipline and economic recovery around Europe. By end of 2012 the European economy is predicted to experience contraction by 0.3 percent. Economic growths in China and India being the pillars of Asian growth are expected to slightly slow down. In the first quarter 2012, China and India grow by respectively 8.1 percent (yoy)and 5.3 percent (yoy) much lower than the records chalked up in the previous year. As APBN-P Realization Financial Notes and Indonesian Budget

41 Chapter 2 Macroeconomic Trend and Fiscal Policy Highlights 2013 of the end of 2012, China s economy is predicted to grow by 8.0 percent (yoy) and India to rise by 6.1 percent (yoy). This condition will bring impacts to other developing countries being the trade partners of these two countries. In quarter I 2012, the Indonesian economic is expected to grow by 6.3 percent (yoy), Malaysia 4.7 percent (yoy), Thailand 0.3 percent (yoy), the Philippine 6.4 percent (yoy) and Vietnam 4.0 percent (yoy). (see Table 2.3). TABLE 2.3 THE ECONOMIC GROWTHS OF COUNTRIES AROUND THE WORLD (y-o-y, percent) Country/Region 2012 Q1 Q2 Q3 Q4 Q1 USA 2,2 1,6 1,5 1,6 2,0 Europe 2,4 1,7 1,3 0,7-0,1 Japan -0,2-1,8-0,5-0,6 2,8 Singapura 9,1 1,2 6,0 3,6 1,6 China 9,7 9,5 9,1 8,9 8,1 India 9,2 8,0 6,7 6,1 5,3 Indonesia 6,4 6,5 6,5 6,5 6,3 Malaysia 5,1 4,3 5,7 5,2 4,7 Thailand 3,2 2,7 3,7-8,9 0,3 Phillipine 4,9 3,6 3,2 4,0 6,4 Vietnam 5,4 5,6 5,8 5,9 4,0 Souce: Bloom berg 2011 Based on the indicators of global economic and trade activities during 2011 it is evident that the global economy is to slump and this trend is expected to continue in Purchasing Manager s Index (PMI) as the indicator of supplies and prospective demands of people to manufacture products records downward trend. Until June 2012, PMIs for Europe and USA still indicate contraction in manufacture sector with index below 50, i.e and 49.7 respectively. Meanwhile, China s PMI experiences expansion 50.2 (see Graph 2.10). Baltic Dry and IATA indices as indicators of transport service activities for the products relating to international trading, which suffer decreasing trend since the mid of 2010 are expected to continue in This decrease is due to, among others, lower global demands and uncertain global and European economy. Until the mid of 2012, such indicators will remain weakening. Baltic Dry index is to drop to 923 and IATA index to decrease reaching lowly minus 2.2 in May 2012 (see Graph 2.11). 65,0 60,0 55,0 50,0 45,0 40,0 Jan-11 Feb-11 Mar-11 Source: Bloomberg GRAPH 2.10 PURCHASING MANAGER'S INDEX (PMI) Apr-11 Mei-11 Jun-11 Global China USA Europe Jul-11 Agust-11 Sep-11 Okt-11 Nop-11 Des-11 Jan-12 Feb-12 Mar-12 Apr-12 Mei-12 Jun Financial Notes and Indonesian Budget 2013

42 Macroeconomic Trend and Fiscal Policy Highlights 2013 Chapter 2 Global trade volume in 2012 is expected to record low growth. Conditions and development in many countries will affect the global trade pattern during such period. It is understandable since the global trades are considerably subject to international demands and purchasing power. The decreasing global trade volume has been detected since It is obvious from the indicator of global trade, which only grows 5.9 percent as a result of unrecovered European countries. Export and import volumes of developed countries in 2012 are also predicted to slow down by 2.3 percent (yoy) and 1.9 percent (yoy) respectively. Meanwhile the volumes of exports and imports of developing countries are expected to reach 5.7 percent (yoy) and 7.8 percent (yoy) respectively. Subject to the existing conditions, the global trade volumes are projected to grow by 3.8 percent in 2012 (see Graph 2.12 and Graph 2.13) GRAPH 2.11 INTERNATIONAL TRADE INDICATOR Jan-10 Mei-10 Sep-10 Jan-11 Mei-11 Sep-11 Jan-12 Mei-12 Source: Bloomberg Baltic Dry Index IATA Index (RHS) 15,0 10,0 5,0 GRAPH 2.12 GLOBAL TRADE VOLUME TREND (%) 7,9 2,9 12,8 5,9 3,8 5, GRAPH 2.13 EXPORT-IMPORT GROWTHS OF THE DEVELOPED AND DEVELOPING COUNTRIES (%) 0,0-5,0-10,0-15, * 2013* -10, Trade Volume Export Import -15 Dev'd Country Export Dev'ing Country Import Dev'd Country Import Dev'ing Country Export *) Projection Source: WEO - IMF, July2012 Source: WEO-IMF, Juli 2012 On the other side, the prices of international commodities in 2011 recorded upsurge and expected to decline in The higher prices of international commodities in 2011 were attributable to less foreign supplies as a result of faltering global trade activities. The oil price at global level was to rise by 30.6 percent with the prices of food and beverage commodities to increase by 21.6 percent. These two commodities record price hike higher than in The increase of commodity prices had forced global inflation rate in 2011 to reach 4.6 percent (yoy), higher than previous year, which was only 4.2 percent (yoy). The trends of commodity prices in international prices are expected to decline in 2012 as a result of the slumping demands. It will exert pressure to inflation rate in 2012, which is predicted to record 4.0 percent (yoy). However, geopolitical situation in countries supplying world oil will be potential to raise the global oil price and global inflation rate (see Graph 2.14). Financial Notes and Indonesian Budget

43 Chapter 2 Macroeconomic Trend and Fiscal Policy Highlights 2013 Consistent with such conditions, the economic growth at global level in 2012 is predicted to reach 3.5 percent (yoy), lower than previous year 3.9 percent (yoy). This global economic downturn is due to slumping economy in developed countries and developing countries, which are expected to grow by 1.4 percent (yoy) and 5.6 percent (yoy) respectively in GRAPH 2.14 COMMODITY PRICE INDEX AND GLOBAL INFLATION TREND 5,03 4,35 3,13 4,19 4,45 3,98 3,0-3, *) 2012**) 6,00 5,00 4,00 3,00 2,00 1,00 - TABLE 2.4 GLOBAL COMMODITY PRICE FLUCTUATION Oil Food Agriculture Metal ,7% 15,1% 5,0% 17,4% ,4% 23,3% -0,8% -7,8% ,3% -13,1% -17,0% -19,2% ,9% 11,8% 33,2% 48,2% ,6% 19,4% 22,7% 13,5% 2012 *) 10,3% -9,1% -13,2% -10,5% *) WEO April 2012 **) WEO July 2012 Source: WEO-IMF, April & July 2012 Global Inflation (%, yoy) (RHS) Oil Food Agriculture Metal 2012 **) -2,1% n.a n.a n.a *) Estim ate WEO-A pr il **) Estim ate WEO-July Sou r ce: IMF National Economy Economic Growth Entering 2012 the impacts of global economic slowdown are expected to start affecting the domestic conditions through exports. Since the mid of 2011 the exports shows downward performance. However, with relatively high purchasing power of people and customers confidence, and responsive fiscal and monetary policies, domestic demands are predicted capable of supporting GDP growth. In light of that, as of semester I 2012, the Indonesia s economy is to grow by 6.3 percent (yoy), slightly lower than performance in semester I 2011 reaching 6.4 percent (yoy). The economic growth for semester I 2012 is particularly supported by sound performance of domestic demands, i.e. consumption and investments. Meanwhile, external performance (net export) is still under pressure of lowering global demands. From production wise, the growth is driven by agriculture sector, mining sector, electricity, gas and water supply sector and construction sector. In semester I 2012, the household consumption is to grow by 5.0 percent (yoy), higher than the same period in last year, which only recorded 4.5 percent (yoy). This condition is due to well-controlled inflation at low rate capable of enhancing the purchasing power of people. Household consumption increase is supported by higher food and non-food consumption. Food consumption grows by 4.0 percent and 5.8 percent for non-food consumption. The role or distribution of household consumption is relatively high, i.e percent with contribution share to growth 2.8 percent. Meanwhile during the same period, government consumption grows by 6.5 percent (yoy), higher than the growth recorded in semester I 2011 reaching 3.7 percent (yoy). This growth is the highest rate since early It correlates with budget acceleration and absorption program by the Government with the formation of Budget Expenditure Evaluation and 2-14 Financial Notes and Indonesian Budget 2013

44 Macroeconomic Trend and Fiscal Policy Highlights 2013 Chapter 2 Supervision Team (TEPPA). The government consumption comes from material and personnel expenditures, which grow by 9.6 percent and 2.7 percent respectively. The role or distribution of government consumption remains small, i.e. only 8.0 percent with contribution 0.4 percent only. Gross Fixed Capital Formation (PMTB) / investment also shows better performance in semester I 2012, i.e. to rise by 11.2 percent (yoy), higher than last year s performance of 8.3 percent (yoy). Nearly types of PMTB/investments positively grow, except for other investments from domestic sources, which experience contraction. The main factors contributing for PMTB/Investment growth are construction investment, foreign transportation and other investments from overseas sources. Investments in construction is to grow by 7.2 percent (yoy) consistent with widespread infrastructure development by the Government following additional budget allocation for government capitals and the continuation of MP3EI program. Investments on foreign transport modes are to hike by 46.4 percent (yoy) with the purchase of aircrafts by some Indonesian air carriers and trains by PT KAI. The bolstering investments are also reflected from the realization of PMA-PMDN (foreign domestic) investments, which grow at 28.1 percent. Investments play leading roles in economic growth by 32.3 percent with contribution 2.6 percent. Export performance is stalled during I 2012 at 4.8 percent (yoy), lower than its performance in semester I 2011 of 14.7 percent (yoy). The declined exports are followed with import decrease in semester I 2012 when the import is to grow at 9.5 percent (yoy), much lower than its realization in semester I 2011 of 14.9 percent (yoy). In nominal terms, total export values of Indonesia amount US$96.8 billion or to grow negative 1.76% (ytd). Commodities playing significant roles in non-oil and gas export are coals, CPO, rubber, and electronics. Exports from manufacture sector still dominates total non-oil and gas exports by around 60 percent, followed by mining sector with 17.1 percent and agriculture sector for the remaining portion. Countries as the main destinations of non-oil and gas export are China, Japan, USA, India, ASEAN and South Korea. Meanwhile, in the same period, total imports of Indonesia reach US$96.4 billion or to grow by 15.3 percent (ytd) with the main non-oil and gas commodities of machines, electronics, and metal-steel. The majority of import commodities comes from China, Japan, USA and South Korea. The overwhelming majority of Indonesian imports (93 percent) consist of raw materials/supporting materials and capital goods, with consumption goods of some 7.0 percent. In terms of production, all economic sectors record positive growths in Semester I Of nine economic sectors, four sectors chalk up higher growths than their realization in semester I 2011, with the other sectors experience slowdowns or standstill. Five sectors recording increases are: agriculture, livestock, fishery and forestry sector; mining sector; electricity, gas and water supply sector; and construction sector. Trade, hotel and restaurant sector achieves relatively unchanged performance. For sectors suffering slowdown they include processing industry sector; transport and communication sector; finance, real estate and corporate service sector; and service sector. Agriculture sector in semester I 2012 is to grow by 4.0 percent (yoy), higher than its performance in semester I 2011 of 3.6 percent (yoy). Great harvest season in this semester has increased the growth of food crop farming sub-sector by 3.9 percent. Other sub-sectors contributing the growth of agriculture sector are plantation sub-sector and fishery sub-sector with respectively 4.4 percent and 6.2 percent growths. Meanwhile, forestry sub-sector is just Financial Notes and Indonesian Budget

45 Chapter 2 Macroeconomic Trend and Fiscal Policy Highlights 2013 to grow at dismal 0.4 percent. The role or distribution of agriculture sector is at the second rank with 15.0 percent and contribution of 0.5 percent. Processing industry sector in semester I 2012 grows by 5.5 percent (yoy), slightly lower than realization in the same period of last year reaching 5.6 percent (yoy). This non-oil and gas industry remains the main driving motor of industrial sector and grows by 6.1 percent (yoy). Some industries contributing in the growth of non-oil and gas industries include food, beverage and tobacco industry (growing by 7.0 percent); fertilizer, chemical and rubber made items industry (growing by 5.6 percent); and cement and non-metal quarry materials industry (growing by 6.9 percent). Processing industry sector is at the first rank to economic growth, i.e percent with contribution 1.4 percent. Trade, hotel and restaurant sector is to grow 8.6 percent (yoy) in semester I 2012, relatively same as the last year s period. This growth is mainly from large scale trade and retail subsector, which grows by 9.4 percent. Hotel sub-sector records 9.0 percent growth, same as its performance in semester I Restaurant sub-sector is relatively stalled at 3.2 percent growth. The growth of large trade and retail sub-sector is reflected from widespreas modern retail shops. The roles of trade sector in economic growth reaches 13.7 percent with contribution 1.5 percent. Transport and communication sector in Semester I 2012 is to grow by 10.2 percent (yoy), lower than the same period of previous year recording 12.1 percent (yoy). This growth is supported with communication sub-sector growing at 12.5 percent (yoy) and transport subsector records 6.4 percent (yoy) growth. The negative trend since quarter II 2011 continues in railways transport. This sub-sector suffers contraction (minus 8.2 percent). It is due to the revocation of tickets for unseat passengers in business and economic classes. Transport and communication sector plays role or distribution of 6.5 percent with contribution 0.98 percent. In view of realization in semester I 2012, the economic growth in 2012 is expected to reach percent (yoy), with supports from domestic demands i.e. consumption and investments. In 2012, public consumption is predicted to solidly grow at percent, higher than its realization in 2011 of 4.7 percent. This growth comes from higher real income of people as reflected with revision to minimum wage rates (UMP) in some provinces and salary increase of public servants and private employees. Stable inflation rate is also a contributing factor for the well-maintained purchasing power of people. Various government-sponsored programs will be instituted especially for low-income people. They are contained in MP3KI program divided into 4 clusters, i.e. cluster 1 of schoolarship provision, health insurance (Jamkesmas) for low-income peoples, rice for poor people (Raskin), Prosperous Family Program (PKH), etc.; cluster 2 of community empowerment program (PNPM); cluster 3 of people s business credits (KUR); and cluster 4 of very affordable houses, low-cost transport, clean water for people, low-cost and saving electricity, living condition improvements for fishermen, and living condition improvement for people in urban outskirts. The Government also takes policy to highten threshold of non-taxable income so as to increase the disposible income of people. In addition, intensive infrastructure development by the Government and private companies is expected to create more employment opportunities, and in turn augment the income of people Financial Notes and Indonesian Budget 2013

46 Macroeconomic Trend and Fiscal Policy Highlights 2013 Chapter 2 The Government consumption is expected to grow by percent (yoy), much higher than previous year, which only reached 3.2 percent (yoy). This Government consumption growth stems from policy aimed at promoting effective budget expenditures. Generally speaking, fiscal policy in 2012 is prepared with reference to Government Work Plan (RKP) 2012, i.e. to stimulate economic growth (fiscal stimulus) while maintaining fiscal stability and sustainability. Investments are expected to hit a double digit growth, i.e percent (yoy), higher than performance in 2011 at 8.8 percent (yoy). Factors supporting investment growth in 2012 include the buoyed confidence of investors to Indonesia after the inclusion of this country in investment grade category, well-maintained macroeconomic stability, increased government capital expenditure especially for infrastructure projects. In addition, the Government also provides PPh facility for capital investors as set out in Government Regulation (PP) Number 52 of 2011 concerning the Second Revision to PP 1 of 2007 concerning The Provision of PPh Facility for Cetain Business Sectors and/or Certain Regions. The provision of tax holiday tax is also applicable for capital investments in five pioneer industries. Various policies to support such investments have been issued so as to enhance legal certainty, which constitutes determinant factor for investors to make investments and business expansion. To establish more optimum APBN, Budget Expenditure Evaluation and Supervision Team (TEPPA) has been established to supervise and evaluate the implementation of budget and expenditures in individual Ministries/Agencies. It is expected that the expenditures and implementation of budget be more focussed and timely according to the specified plan. Efforts to improve budget spending and expenditure performance will be coupled with the issuance of presidential regulation (Perpres Number 54 of 2010 as a measure to improve and accelerate goods and services procurement by government institutions. TEPPA formation and Perpres Number 54 of 2010 are not only directed to material expenditure and personnel expenditure (government consumption components) but also to capital expenditure and government investments (PMTB components). From international trade aspect, the exports and imports are expected to grow by respectively percent and percent (yoy), implying a slowdown if compared with their growths in previous year recording 13.6 percent and 13.3 percent (yoy) respectively. The unrecovered global economy especially in USA and Europe will decrease demands on export commodities from Indonesia through the main export destination countries of China, Japan, and India. However, since the prices of non-oil and gas export commodities of Indonesia still show upward trends, it is expected that pressure to Indonesia s export is not so significant. Consistent with such export conditions, the imports, which in majority consist of raw materials and capital goods will also suffer a slowdown. From production side, the economic growth of percent in 2012 is particularly supported by agriculture sector, processing industry sector, construction sector, and trade, hotel and restaurant sector. Agriculture sector is expected to rise by percent (yoy), higher than the last year s performance 3.0 percent. (yoy). As one of priority targets in food resilience program, policies in agriculture sector will be directed: (a) to increase food supplies especially paddy, corn, soybeans, sugar cane, meat and fish so as to achieve 10 million ton rice surplus in 2014; (b) to improve the access of people to basic needs including the provision Financial Notes and Indonesian Budget

47 Chapter 2 Macroeconomic Trend and Fiscal Policy Highlights 2013 of reserves for food stabilization as anticipation of commodity price hike; (c) to enhance the quality of food consumption; and (d) to provide rice reserve for the Government in case of market operation and food shortages as a result of disaster. Various government programs on agriculture will be continued, including non-energy subsidy consisting of (a) fertilizer subsidy to meet the demands of farmers on fertilizer at affordable price, to increase productivity and revitalize agriculture products, and support food resilience program; and (b) seed subsidy to assist in the provision and distribution of quality seeds at affordable price through SOE responsible for seedling. Processing industry sector is expected to rise by percent (yoy), lower than last year s growth, 6.2 percent (yoy). It is due to less exports. The development of industrial sector will be focused on: (a) industrial revitalization (especially fertilizer and sugar) and other priority industrial branches according to National Industry Policy (PP Number 28 of 2008); (b) supporting MP3EI program; especially the development of 6 (six) economic corridors of downstream oil coconut based industry cluster, general machine and equipment industry cluster, and steel industry cluster; (c) supporting the acceleration of Papua, West Papua and Nusa Tenggara Timur development with the provision of development facilities such as cement industry, urea and petrochemical factories, salt processing industry, and small and medium scale enterprises development, and seaweed processing; and (d) assisting in elevating the competitiveness of domestic industries agains import products with promotion on the consumption of national production by providing data on local contents of domestic industrial products, SNI strenghening coupled with capacity building for metal testing infrastructure in training centers and research and development centers and standardization, and the promotion of oil coconut based industry branches (oleochemical) and oil and gas condesate based industry branches. In addition, fiscal support will be provided consisting of tax subsidy for strategic national industry development. Construction sector is expected to grow at percent (yoy), higher than last year s realization at 6.7 percent (yoy). This increase is supported by widespread property construction of housing complexes and shopping centers in a number of regions. In addition, this growing construction sector is attributed to intensive infrastructure development to be executed by the Government for MP3EI program and additional capital expenditure budget allocated in Trade, hotel and restaurant sector is projected to rise at percent (yoy), implying a decrease if compared with previous year s performance reaching 9.2 percent (yoy). It is because of lower exports and imports. The said growth is due to relatively well-maintained purchasing power of people, sound performance demonstrated by industry sector, the mushrooming retail trades in the society, and more domestic and foreign tourists. The relatively crippled global economy has pushed to exporters to switch their export targets to domestic markets. Balance of Payment Despite a slowdown and soaring prices of primary commodities in international markets during 2007, the global economy demonstrates high growth. The performance of Indonesia s Balance of Payment (NPI) is subject to such conditions. In 2007, the NPI recorded enormous surplus, i.e. US$12.7 billion. This surplus was from the surplus of current transaction reaching 2-18 Financial Notes and Indonesian Budget 2013

48 Macroeconomic Trend and Fiscal Policy Highlights 2013 Chapter 2 US$10.5 billion and surplus of capital and financial transactions of US$3.6 billion. Compared with the previous year s realization, this current transaction surplus was a little bit lower, i.e. by US$0.4 billion. As to capital and financial transaction surplus, it was higher by US$0.6 billion. As a reflection of NPI surplus, the foreign exchange reserve was to rise by US$56.9 billion as of the end of The worsening global financial crisis since September 2008 exerted significant pressure to NPI performance. In 2008, NPI recorded deficit of US$1.9 billion, which was completely different from its performance in 2007 booking surplus US$12.7 billion. However, the current transactions recorded surplus US$0.1 billion, despite lower than surplus of 2007 (US$10.5 billion). Meanwhile, capital and financial transactions made deficit US$1.8 billion after in 2007 recorded surplus US$3.6 billion. In light of foregoing, the foreign exchange reserve was to drop to US$51.6 billion by end of such period. Entering 2009, the performance of Indonesia s Balance of Payment (NPI) either from current transactions or capital and financial transactions improved from previous year. The former recorded surplus US$10.6 billion attributed to balance of trade surplus. As for the latter, it booked surplus US$4.9 billion coming from exceeding surplus of direct and portfolio investments. In overall, this balance recorded surplus US$12.5 billion and the foreign exchange reserve was to reach US$66.1 billion. With the bolstering global and domestic economic prospects, the performance of balance of payment in 2010 further improved, which was much better than previous year. It was due to high export demands while the imports were also to rise. In addition, the inflow of foreign capital, either direct or portfolio investments had enhanced this NPI performance. Current transactions in 2010 recorded surplus US$5.1 billion, lower than 2009 reaching US$10.6 billion. This decrease was mainly because of lower surplus of balance of trade and higher deficit of balance of income. Capital and financial transaction in 2010 booked surplus US$26.6 billion. This surplus was primarily from direct investments, portfolio investment and other investments thanks to the relatively stable investment climate and macroeconomic conditions. Based on the foregoing balance of payment, surplus US$30.3 billion was garnered in 2010 and the foreign exchange reserve was to amount US$96.2 billion. The decreased global demands and weakening commodity prices as negative impact of European debt crisis had affected NPI performance in 2011 that amid such unfavorable condition made surplus US$11.9 billion. The current transactions and capital and financial transaction contributed to such surplus by respectively US$1.7 billion and US$14.0 billion. The surplus of current transactions was from excellent export performance. The exports recorded high growth despite crumpling global demands and commodity prices. Meanwhile, the imports were steadily to rise as a response to the strong domestic demands. Surplus of capital and financial transactions was from the inflow of direct foreign investment, portfolio investments and withdraw of private foreign loans. This was supported with favorable investment climate and stable macroeconomy. With such progress, foreign exchange reserve was to increase from US$96.2 billion by end of 2010 to US$110,1 billion by end of Year 2012 is opened with balance of payment deficit in quarter I 2012 amounting US$1.0 billion, or better than deficit recorded in quarter IV 2011 of US$3.7 billion. This improvement was from the inflow of foreign portfolio investments as a result of postive perception to domestic markets. This condition has made capital and financial transactions record surplus US$2.2 billion, after in the previous quarter booked decifit US$1.0 billion. On the other side, current transaction in quarter I 2012 still suffers deficit US$2.9 billion, attributed Financial Notes and Indonesian Budget

49 Chapter 2 Macroeconomic Trend and Fiscal Policy Highlights 2013 to increased domestic demands that in turn promotes import activities. Meanwhile, the weakening global economy exerts adverse pressure to Indonesian export performance. However, better performance of balance of payment brings implication to foreign exchange reserve, i.e. US$110.5 billion. The realization trends of Balance of Payment from 2007 to Quarter I 2012 are presented in Table 2.5. Rupiah Exchange Rate Early 2012, the rupiah exchange rate was again under pressure as the continuation in quarter IV The pressure was from higher risks in European regions exerted from uncertain economic recovery and crisis management process in Greek, Italy, Portugal, Spain and Ireland (GIPSI), and indication of economic downturn in China, India and Brazil, which thus far become main driving motors of international economy. Moreoever, the reviving US economy has incited flight to quality, which increases pressure to 2012 Trw-I A. CURRENT TRANSACTIONS 10,5 0,1 10,6 5,1 1,7-2,9 1. Blance of Trade 32,8 22,9 30,9 30,6 33,9 3,5 a. Export, fob 118,0 139,6 119,6 158,1 200,6 48,2 b. Import, fob -85,3-116,7-88,7-127,4-166,6 44,7 2. Services -11,8-13,0-9,7-9,3-10,6-2,0 3. Revenue -15,5-15,2-15,1-20,8-25,8-5,3 4. Transfer 5,1 5,4 4,6 4,6 4,2 1,0 B. CAPITAL AND FINANCIAL TRANSACTION 3,6-1,8 4,9 26,6 14,0 2,2 1. Capital Transactions 0,5 0,3 0,1 0,0 0,0 0,0 2. Financial Transactions 3,0-2,1 4,8 26,6 14,0 2,2 a. Direct Investment 2,3 3,4 2,6 11,1 11,1 2,0 b. Portfolio Investment 5,6 1,8 10,3 13,2 4,5 2,8 c. Other Investment -4,8-7,3-8,2 2,3-1,6-2,6 0,0 C. TOTAL (A+B) 14,1-1,7 15,5 31,8 15,7-0,7 D. NET CALCULATION DIFFERENCE -1,4-0,2-3,0-1,5-3,9-0,3 E. OVERALL BALANCE SHEET (C+D) 12,7-1,9 12,5 30,3 11,9-1,0 Foreign Exchange Reserve 56,9 51,6 66,1 96,2 110,1 110,5 Source: Bank Indonesia ITEM TABLE 2.5 BALANCE OF PAYMENT, (US$ billion) GRAPH 2.15 RUPIAH EXCHANGE RATE TREND TO USD, 2012 Rp per USD Jan-12 Feb-12 Mar-12 Apr-12 Mei-12 Jun-12 Source: Bank Indonesia regional currencies. Some sources of this pressure have hampered the non-resident fund flows to domestic financial instrument. Consequently rupiah exchange rate is weakening 2-20 Financial Notes and Indonesian Budget 2013

50 Macroeconomic Trend and Fiscal Policy Highlights 2013 Chapter 2 consistent with the plummeting regional currencies to US dollar. During two quarters in early 2012, rupiah tends to weaken at Rp.9,203 per US dollar on the average or depreciated by 5.21 percent if compared with its average rate during the same period in Owing to strong economic foundation coupled with positive economic growth outlook, the inflation rate is relatively controllable with adequate foreign exchange reserve and higher rating of Indonesia. These indicators are expected capable of maintaining the stability of rupiah exchange rate along However, amid this optimism buoyance the Government and Bank Indonesia need to take attention on global economic recovery process, especially in Europe, and the increasingly prices of food and energy commodities in international markets. With such progress, rupiah exchange rate in 2012 is expected at Rp.9,250 per US dollar on the average. Inflation For the first six months in 2012, inflation rate is relatively controllable consistent with minimum Government policies in prices and well-maintained food and energy supplies. Despite no deflasion as happened in previous year, inflation rate during such first six month period in 2012 is well controlled. Cummulative inflation rate as of June 212 is at 1.79 percent (yth), slightly higher than the same period in previous year at 1.06 percent (yth). On annuity basis, inflation rate as of June 2012 is 4.53 percent (tyh), lower than in the same period of previous year, i,e, 5.54 percent (yoy). Until semester I 2012, the prices are generally controllable, except for rice, which shows increase since early In terms of components forming inflation, through June 2012, component inflation of volatile foods reach highest rate following price hikes of rice and spices commodities in domestic markets. In June 2012, the annual inflation of volatile foods component reaches 7.52 percent (yoy), implying a decrease if compared with the same period in previous year, i.e percent (yoy). Rise in rice price is sparked by worries about scarcity of national rice supplies from domestic sources GRAPH 2.17 INFLATION TREND BY COMPONENTS, (yoy) 20% Inti 18% 16% Volatile 14% Administered 12% 10% 8% 6% 4% 2% 0% Source: BPS Jan Feb Mar Apr Mei Jun Jul Ags Sep Okt Nov Des Jan Feb Mar Apr Mei Jun as the impacts of exceeding agriculture land conversion to non-agriculture purposes. Meanwhile, the anxieties of shortage of spices (chilli, onions and garlics) relate to horticulture importation policy that increases prices of spices in domestic markets. 1,0% 0,8% 0,6% 0,4% 0,2% 0,0% -0,2% -0,4% Source: BPS GRAPH 2.16 INFLATION TREND mtm Jan Feb Mar Apr Mei Jun Jul Ags Sep Okt Nov Des Jan Feb Mar Apr Mei Jun yoy (RHS) 8,0% 7,0% 6,0% 5,0% 4,0% 3,0% 2,0% 1,0% 0,0% Financial Notes and Indonesian Budget

51 Chapter 2 Macroeconomic Trend and Fiscal Policy Highlights 2013 Meanwhile, the components of core inflation are 4.15 percent (yoy), which is lower if compared with the realization during the same period of previous year reaching 4.63 percent (yoy). Worries about economic recovery process in European regions and geopolitical conflict settlement in Middle East have exerted pressure from external factors (imported inflation). To reduce such pressure and high inflation expectation of people, the Government along with Bank Indonesia continually forge synergy to maintain the stability of rupiah exchange rate. In addition, the acceleration of transport facility and infrastructure development through MP3EI initiative is expected capable of improving regional distribution flows (intra-island and inter-island). Inflation component of administered prices reaches 2.90 percent (yoy), or lower than the rate of same period in previous year, 5.61 percent (yoy). This relatively low inflation component is due to minimum changes of Government policy on price setting, especially the cancellation of price rise for subsidized fuel per 1 April By expenditure groups, food group, clothing group and processed food group are the main three groups sparking increase of annual inflation, On annuity basis, as of June 2012, food group records inflation 7.19 percent (yoy) following price hike of staples in domestic markets. Clothing group also makes an increase of 6.06 percent (yoy) mainly contributed by gold price fluctuation in international markets. Meanwhile, food group records an increase of 5.39 percent (yoy). As to other expenditure group, it is relatively stable. Inflation rate in semester II 2012 is expected to experience a little bit pressure. The source of pressure that should cause concern includes from seasonal factors such as tuition fees during the start of academic year and price hike of staples during the observance of religious days (e.g. fasting month, Ied-dul Fitr, Christmast and New Year). From external side, inflatory pressure is shadowed by worries about price turmoils of food and energy commodities and the prospect of international economic recovery as the impacts of occuring financial crisis in Europe. In this respect, the Government attempts to secure food stocks and supplies and maintain well-advanced food distribution flows to curb inflation rate in semester II In view of the foregoing factors and inflation realization as of June 2012, according to outlook of APBN 2012 Implementation Report for Semester I inflation rate in 2012 is assumed at 4.8 percent. 3-Month SPN Rate During semester I 2012, the 3-month SPN rate is fluctuating. In the first offering in 2012, the rate of this 3-month SPN was at 3.87 percent or lower than average rate in 2011 reaching 4.81 percent. This decreaseing rate is continuing until early February when hit the lowest rate, i.e percent. This signficant decrease is mainly due to buoyed confidence of investors with the inclusion of Indonesia in investment grade level by Fitch in the mid of December 2011 and Moody s in the mid of January In the next months, the interest rate suffers pressure and reaches 3.08 percent during offering of 20 March This higher interest rate is attributed to inflation expectation from subsidized fuel price increase plan to be exercised in April Investors prefer to take wait and see stance. The subscription is then to decrease. The pressure continues in April from negative sentiment to the limitation of subsidized fuel consumption Financial Notes and Indonesian Budget 2013

52 Macroeconomic Trend and Fiscal Policy Highlights 2013 Chapter 2 Through June 2012, the Government has offered 3-Month SPN for 9 times with average interest rate of 2.87 percent. The interest rate of 3-month SPN is subject to both external and internal factors. The external factors include capital inflows, global interest rate, and prices of international commodities. Pressure to the interest rate is basically from sentiment arising out of prolonged crisis in Europe. Uncertain economic conditions of Europe is magnified with the demotion of debt rating of Greek and Spain banks aggravated by no government in Greek. Meanwhile, the maturity date of Greek s debts is in June As to internal factors they come from expectation to the inflation. Given the above external and internal factors, the interest rate of 3-month SPN in 2012 is projected at 3.9 percent range on the average. Indonesian Crude Oil Price (ICP) US Energy Information Agency estimated that oil consumption at global level in 2012 would grow by % with the global oil supply to rise 120 higher, i.e. 2.1%. International Monetary Fund (IMF) in World 60 Economic Outlook (WEO) of July has revised the economic growth 20 0 in 2012 to 0.1%. With such plummeting global oil demand, crude oil Brent in 2012 is predicted at Source: Bloomberg & the Min/ EDSM US$106.3 per barrel or a little bit decline from its average in 2011 reaching US$111.3 per barrel. US$/barel GRAPH GLOBAL CRUDE OIL PRODUCTION, CONSUMPTION AND PRICE TREND 2012 Jan Feb Mar Apr Mei Jun Production (RHS) Consumption (RHS) WTI Brent ICP The Indonesian crude oil price in 2012 is projected high. As of the first six months in 2012, the ICP records US$117.3 per barrel on the average implying an increase if compared with previous year s performance, i.e. US$111.0 per barrel. With such progress, the oil price in 2012 is estimated to amount US$110.0 per barrel on the average (see Graph 2.18) million barrel/day Indonesian Lifting The realization of oil lifting in semester I 2012 (December 2011 May 2012) reaches 868 thousand barrels per day, slighly lower than the same period of last year reaching 879 thousand barrels per day. Oil lifting in 2012 (December 2011 November 2012)as indicated in the outlook of APBN 2012 Implementation Report for Semester I is predicted to reach 900 thousand barrels per day (see Graph 2.19) ,4 Source: the Ministry of ESDM GRAPH 2.19 INDONESIAN OIL LIFTING TREND 2012 (million barrel/day) 790,5 884,4 862,2 860,8 842,9 Des-11 Jan-12 Feb-12 Mar-12 Apr-12 Mei-12 Financial Notes and Indonesian Budget

53 Chapter 2 Macroeconomic Trend and Fiscal Policy Highlights Challenges and Targets of Macroeconomic Policies in Global and Regional Economic Challenges Global economic conditions in 2013 are predicted to be better than its situation in This prediction stemps from global economic indicators and development in some countries demonstrating positive trends during the first semester 2012, notably USA and Japan. However, this global economic recovery process in 2013 remains under glooming shadow of uncertain economic revival in Europe. After recording slowdown in 2012, global economy in 2013 is projected to grow by 3.9 percent (yoy). This is attributed to higher growths in both developed and developing countries by respectively 1.9 percent and 5.9 percent. Out of regions around the world, the developing countries in Asia will record the highest growth with 7.5 percent. The reviving global economy will be coupled with the bolstering trade activities across the world, which is expected to rise by 5.1 percent, or higher than previous year of 3.8 percent (see Graph 2.20). These active trade activities are evident both in developed and developing countries, however the margin of export-import activities will be more significant in industrial countries. It is understandable since the recession pressure is more perceived in developed countries. Their economic recovery 14% 12% 10% 8% 6% 4% 2% 0% GRAPH 2.20 ECONOMIC GROWTH AND GLOBAL TRADE VOLUME TREND (yoy) 12,8% will increase demands and intensify economic and trading activities. Export and import of developed countries in 2013 is expected to rise by 4.3 percent and 4.2 percent respectively, or higher than previous years of 2.3 percent and 1.9 percent respectively. In the mean time, exports in developing countries in 2013 are projected to grow by 6.2 percent or higher than 5.7 percent of previous year s performance. The imports of developing countries will slightly decrease, i.e. from 7.8 percent in 2012 to 7.0 percent in Global economic recovery in 2013 is expected to face challenges arising from the relatively high government debts in European regions. These exceeding debts will hamper stimulus attempts required by the countries in such region. In addition, investments and capital inflows will not be fully recovered as the impacts of credit rating degradation for some European countries in The potential risks against global economy include price fluctuation of global energy commodity. For the last few years, the price of global crude oil commodity shows grave fluctuation. Unbalanced supply and demand compounded with speculation and geopolitics have soared the price of global crude oil to exceeding rate. While it is then decreasing, this unmanageable fluctuation can disrupt economic stability and spark negative sentiment in various countries including Indonesia. 5,3% Source: WEO-IMF, July ,9% 3,8% 5,1% 3,9% 3,5% 3,9% Global Eco. Growth Trade Vol. Growth 2-24 Financial Notes and Indonesian Budget 2013

54 Macroeconomic Trend and Fiscal Policy Highlights 2013 Chapter 2 Such potential upheavals can hamper global economic recovery process that in turn disturb domestic economic conditions and the implementation of development program. Pressure on global demands will become barrier to Indonesia s export performance. Meanwhile, any turmoil in capital traffic in global markets will shatter the stability of exchange rate and fund inflows to the domestic markets Domestic Economic Challenges Apart from external challenges, some problems will arise from domestic side. The first domestic challenge concerns with high fuel consumptions. Exceeding fuel consumptions are the logical consequence of increased income and better purchasing power of people and intensifying economic activities. The problem will raise if this increased consumption is not followed with more oil production. Consequently, oil import must be opened and APBN subsidy will be necessary to cover the disparity of buying price of oil in international markets and selling price of fuels in domestic markets. Amid uncertain global economy, the price of global price tends to rise and fuel subsidy in APBN will swell up. This can disrupt fiscal sustainability and in turn may aggravate national development process. In this respect, challenges to cope with are needs of breakthrough to encourage energy saving in domestic fuel consumption and diverification on the use of non-fuel energy sources. In this context, APBN 2013 the Government proposes the inclusion of gas lifting asumption as alternative instrument in lieu of fuel. The second challenge concerns infrastructure development. In 2013, infrastructure development has been set as one of priority national development program and directed to reinforce the competitiveness of real sector to bolster climate, which is conducive for investment and business. Reinforcing the competitiveness of real sector will require smooth domestic product distribution to various regions. Well-managed distribution network and inter-region traffic will lessen pressure of price disparity. It will also support the realization of economic scale and enhance production efficiency. Under this context, national connectivity acceleration will become another challenge. To address such challenges, the development policies in 2013 will be directed to accelerate infrastructure development in transporation sector in order to establish an integrated transportation infrastructure networks at national level capable of connecting various regions throughout the country. Infrastructure development will be supported with national information system strengthening using technology consisting of broadband infrastructure network that will be able to connect all regions in Indonesia into a national optical fibre network. Another challenge is inadequate energy support causing inequal distribution throughout Indonesia and overal social components. Needs on energy supply, especially electricity are mounting in line with the ever-increasing production activities and national economy. To date, the national electrification is just percent with ratio of electrified villages percent. In addition, there are some problems relating to infrastructure development to support energy self-contain program, including: (a) energy mix, which to date has yet to give optimum results, (b) limited national energy supplies, either in terms of quantity and quality, and their reliability, (c) foreign domination over national technology and exceeding financing, Financial Notes and Indonesian Budget

55 Chapter 2 Macroeconomic Trend and Fiscal Policy Highlights 2013 (d) regulations that must be further improved to follow the latest energy development and must be consistently followed with technical policies in the field, (e) needs of revising pricing policy, (f) needs of enhancing energy efficiency and conservation, and (g) lack of local government participation in energy provision for their citizens. For infrastructure development financing scheme under Public Private Partnership (PPP) its realization to date is relatively minimum. Some challenges to be dealt with in 2013 with regard to this PPP include: (a) reluctance of ministries/agencies or regional governments to allocate budget for the preparation and transaction of PPP projects, (b) low commitment of Government Contracting Agency (PJPK) in PPP projects. Some PJPK officials switch PPP projects to government projects under APBN and PHLN and assignment to SOEs, and (c) projects proposed for PPP scheme consisting of non-priority projects with low financial feasibility. Lastly, with regard to Indonesian Economic Development Acceleration and Expansion Master Plan (MP3EI), since its launching to end of December 2011, groundbreaking had been made to 94 investment projects in real sectors and infrastructure development with total investments Rp trillion. In 2012 it is planned to conduct groundbreaking for 84 investment projects in real sector and infrastructure development totalling Rp trillion. In view of the realization of infrastructure projects under MP3EI in 2011 and 2012, it implies that in 2013 more infrastructure projects should be executed under MP3EI. However a challenge that should cause concern is that of certainty and facilitation in land acquisition. The past experience in MP3EI infrastructure projects implied the needs of deregulation on land acquisition affairs Macroeconomic Policy Targets in 2013 Macroeconomic policy in 2013 will be focused on national development theme for 2013 as mentioned in the Government Work Plan (RKP) 2013, i.e. Reinforcing Domestic Economy for People s Welfare Augmentation and Expansion. This RKP theme is further elaborated into 4 (four) strategic issues, i.e.: (a) to fortify the competitiveness, (b) to buttress economic resilience, (c) to augment and expand people s welfare, and (d) to strengthen social political stability. Within this framework, the basic assumptions of macroeconomy adopted as reference for the preparation of APBN 2013 are planned as follows: (a) economic growth 6.8 percent, (b) rupiah exchange rate Rp.9,300/US$, (c) inflation rate 4.9 percent, (d) 3-Month SPN bond 5.0 percent, (e) oil price US$100/barrel, and (f) oil and gas lifting million oil equivalent barrels Economic Growth One development target set in RKP 2013 is to assure higher national economic growth in 2013 when the global economy is anticipated to start recovering. This recovery will bring about positive impacts to global trade volume that will increase indirectly demands on export goods by some countries being the export destinations of Indonesia. Better coordination of fiscal, monetary and real sector policies are expected capable of curbing inflation at stable rate that in turn will elevate the purchasing power of people and augment public consumptions. These higher export volumes and public consumptions will enhance investment and import performance Financial Notes and Indonesian Budget 2013

56 Macroeconomic Trend and Fiscal Policy Highlights 2013 Chapter 2 In view of macroeconomic policies and external-internal environment, the economic growth in 2013 is projected to record 6.8 percent (yoy). This growth is supported with public and government consumptions and PMTB/ investments. From production side, agriculture sector, processing industry sector, construction sector, trade, hotel and restaurant sector and transportation and communication sector will remain the primary driving motors for economic growth. %, yoy 8 Fundamental change to the economic growth in 2013 concerns with potential shifting of the primary driving motors of economic growth. It is expected that in 2013 investments will be the primary driving motors in promoting Indonesia s economy. It is obvious from the contributions of investments in 2013, which record enormous increase much higher than public consumption s contribution. The latter is always the largerst contributor for economic growth. However in 2013 its role will be replaced by Investments/PMTB. Sources of Economic Growth by Expenditures GRAPH 2.21 INDONESIA'S ECONOMIC GROWTH, According to agreement between the Government and Parliament (DPR) during preliminary discussion of RAPBN 2013, the target economic growth in 2013 is set at percent. Due to national and international economic growths as of semester I 2012, the target economic growth for 2013 is predicted to reach 6.8 percent. This growth will be achieved through public and government consumption increase, and investment performance improvement (see Table 2.6). 6,2 *) Estimate Source: BPS & Min. Finance 6,5 6,3-6,5 6, * 2013* TABLE 2.6 ECONOMIC GROWTH BY USE (percent, yoy) Use 2012 * 2013 * Public Consumption 4,8-5,0 4,9 Government Consumption 6,8-7,0 6,7 PMTB (Investment) 10,5-10,8 11,9 Export 7,0-7,2 11,7 Minus Import 8,5-8,7 13,5 PDB 6,3-6,5 6,8 *Estim ate Source: the Min istry of Fina nce Public consumption is predicted to rise by 4.9 percent (yoy). The relatively stable inflation rate is expected capable of maintaining purchasing capacity of people that will boost this Financial Notes and Indonesian Budget

57 Chapter 2 Macroeconomic Trend and Fiscal Policy Highlights 2013 public consumption. Some government expenditure policies have been directed to maintain such purchasing capacity of people, including: (a) the payment of the 13th salary and pension and the increase of basic salary and pension for public servants/armed Forces Police (PNS/ TNI-Polri), and the increase of salary for judges; (b) social program improvement and expansion, i.e. operational assistance for schools (BOS), schoolarship for students and universtity students of low income households, prosperous family program (PKH), pro-people program strenghtening for cluster 4 as prescribed in Poverty Alleviation Acceleration and Expansion Master Plan (MP3KI); and (c) continuing community empowerment program through PNPM Mandiri. Besides, policy of increasing the limits for non-taxable income (PTKP) is expected to give incentive for higher purchasing capacity of people. Efforts to bolster people s purchasing capacity are aimed at maintaining public consumption with some policies: (a) to maintain the price stability of domestic goods, notably to meet the basic needs; (b) to empower small and medium scale enterprises; (c) to improve goods supply flows including the distribution system to assure their supplies, especially commodities for basic needs; and (d) to enhance domestic business climate so as to expand business opportunities and to protect national customers. Government consumption is expected to grow by 6.7 percent (yoy). This growth comes from increase in personnel and material expenditures. In 2013 the personnel expenditure policy will include: (a) to increase the basic salary of PNS/TNI-Polri and of judges, (b) to continue the payment of the 13th salary, (c) to accommodate budget requirements for K/L (Ministries/Agencies) remuneration for bureaucracy reform, and (d) to restructure the number and distribution of PNS personnel with reference to zero growth and competency based mechanism. Material expenditure policy is (a) to maintain well-advanced governance operation to enhance quality of public service delivery, (b) to enhance efficiency and effectiveness of material expenditure through flat policy for office operational goods procurements, efficiency in the expenditures of duty travels, seminars and working committee meeting, maintain the allocation according to the needs in view of the expected output and budget capacity with the introduction of reward and punishment, and (c) to maintain state assets with routine maintenance to roads/bridges/other infrastructure assets, and capacity building to support national development programs. In addition, the Government will continue Budget Expenditure Evaluation and Supervision Team (TEPPA) tasked to supervise and evaluate the implementation of budget and expenditure in K/L to be more guided and timely. This effort will be coupled with more transparent goods and service procurement process under Perpres Number 54 of Investment/PMTB (Gross Fixed Asset Formation) is estimated to rise by 11.9 percent (yoy). The Government gives supports to any initiative of improving investment and business climate with the inclusion of this strategic issue as a priority target in RKP The bolstering investment climate and ease of doing business are carried out by a number of activities such as: (a) the development of electronic investment information and licensing service system (SPIPISE) with target of developing 1 capital investment master data package, regional one-stop integrated service instruments (PTSP) connected to SPIPISE (50 districts/cities), the development of 1 Geography Information System (GIS) package and data recovery center (DRC), and provinces and districts/cities following socialization and training (60 districts/cities); (b) regional economic growth improvement with targets of 530 provinces/ districts/cities establishing one-stop integrated services (PTSP), the application of electronic investment information and licensing service system (SPIPISE) by regional PTSP 2-28 Financial Notes and Indonesian Budget 2013

58 Macroeconomic Trend and Fiscal Policy Highlights 2013 Chapter 2 (256 province/districts/cities), 318 provinces/districts/cities capable of reducing business costs; (c) the development of trade distribution facilities with targets of developing pilot markets (23 units) and distribution centers (3 units), (d) export and import facilitation management with targets of issuing export-import facilitation policies (2 regulations), developing electronic system for public service facilitation (2 activities), 4000 companies using online export/import licenses served through INATRADE application, 5 activities of technical assistance in trade facilitation affairs, 60 coordination activities in trade facilitation, 17 participation activities in domestic and overseas meeting on trade facilitation, and 5 evaluation reports of the implementation of monitoring to trade facilitation with regard to automatic issuance of origin notices (SKA) (850 thousand SKA notices); (e) facilitation for public-private partnership investment acceleration with targets of masterplan proposals for 5 infrastructure projects under PPP schemes, 1 infrastructure investment package to support Indonesian economic corridor, facilitation of 5 infrastructure projects ready to offer to investors, and 10 marketing activities of ready for offer infrastructure projects. The investment growth is also supported by improved APBN structure that will further encourage the quality of Government expenditures. In 2013, the Government plans to refine expenditure budget allocation in a manner that will be capable of pushing economic growth to higher level. With such policy, the Government expects on additional funds for allocation as capital expenditure especially for infrastructure development. Meanwhile, investment climate and business facilitation improvement will be focused on (a) simplifying and accelerating investment and business procedures, (b) simplifying regulations in project implementation, (c) enhancing national logistic system efficiency through expanded national single window (NSW), (d) developing special economic zones (KEK) in economic corridors benefiting geoeconomy and geostrategic advantages, and (e) improving manpower climate and strengtening industrial relationship institution. This investment growth is also due to infrastructure development acceleration to improve domestic connectivity. The sustainability of MP3EI program focusing on infrastructure development is expected to be a driving motor in this investment performance. In addition, investment grade rating attached to Indonesia since 2011 will be potential to attract more investors to make their investment in this country. The contribution of investments in 2013 is predicted to replace the position of public consumption as the main contributor for economic growth of Indonesia. In 2013, the investments are expected to give contribution 3.03 percent to national economic growth, which is higher than public consumption contribution of 2.69 percent. The sources of investments are from foreign and domestic investment (PMA/PMDN) realization, government capital expenditures, capital expenditures (capex) of SOEs, retained profits, and bank loans. From international trade aspect, export-import performance records growths of respectively 11.7 percent (yoy) and 13.5 percent (yoy). The condition of global economy in 2013 is predicted to recover. With such reviving global economic growth, the global trade volume will increase that will indirectly promote Indonesia s export to some countries being the export destinations. With such export performance improvement, the import will be also to rise. The import of capital goods and raw materials is necessary to support investment activities and production sector. Meanwhile, some public consumption still needs of import consumption goods, despite small percentage. Financial Notes and Indonesian Budget

59 Chapter 2 Macroeconomic Trend and Fiscal Policy Highlights 2013 The focus of export policy is divided into 3 (three) aspects, i.e. (1) export market diversification consisting of (a) enhancing the quality of export promotion and institution, (b) developing export market and information, (c) improving the roles and capacity of international trade diplomacy, (d) fostering cooperation and negotiation at ASEAN region, (e) reinforcing bilateral cooperation and negotiation, and (f) intensifying promotion and image; (2) enhancing the quality and diversity of export products by (a) developing creative export and economic products, (b) establishing trade standardization, (c) developing human resources in export affairs, and (d) intensifying coordination for export promotion and development; and (3)improving export facilitation by (a) supporting trade sector with the development of special economic zones, (b) export and import facilitation management, (c) market acess security and protection, (d) international and regional trade facilitation development, (e) policy formulation and development on customs and excise information technology, (f) policy formulation and technical assistance for customs facilitation, (g) coordination for the development and introduction of national single window (NSW) sysem and ASEAN single window (ASW), (h) coordination for economic and financing cooperation with Europe, Africa and Middle East, (i) coordination on economic and financing cooperation in Asia, and (j) coordination on regional economic and financing cooperation (ASEAN and APEX). Economic Growth by Sector In terms of production, all sectors will demonstrate better performance than Agriculture sector, processing industry sector, construction sector and trade, hotel and restaurant sector will remain the main contributors for GDP growth. Agriculture sector in 2013 is projected to grow by 3.7 percent, This sector will be improved by strengthening national food resilience to reach the target of 10 million ton rice surplus in 2014 and to increase the production of other commodities, food diversification and price stabilization of domestic foods, and welfare augmentation of farmers and fishermen. Food resilience policies include: (a) increasing food production notably to reach 10 million rice surplus per year starting from 2014, and fishery production of million tons in 2014; (b) price stabilitation especially for domestic foods, i.e. rice; (c) strengthening local resources based food diversification; and (d) farmer protection and empowerment and farmers welfare augmentation. As a strategic issue in food resilience, some activities to pursue 10 million tons rice surplus will include: (a) the provision and development of crop farm, horticulture and plantation statistics with target of 100 percent data and information of farmer households, agriculture commodities, small-scale farmers and farm land distribution in 2013 put in place; (b) agriculture land expansion and management with targets of 100 thousand has of paddy fields established, 16,238 ha of horticulture/planation/livestock farming areas, 146,770 ha of lands optimized, converted, rehabilitated and reclaimed, and 200 thousand ha of lands for system of rice intensification; (c) irrigation water management for agriculture with targets of 524,084 ha for water network development and optimalization (with irrigation network development/rehabilitation at farmer level (JITUT), village irrigation network (JIDES), and micro water management (TAM) to support food crops, horticulture, livestock and plantation, institutional development for 710 units of Water User Association (WUA) (with WUA empowerment and participatory irrigation development) to support food crops, horticulture, livestock and plantation, 485 thousand hectares of optimized tertiary irrigation networks (JITUT, JIDES and TAM); (d) cereal farming production management with targets of 4,625 thousand hectares of integrated cropping management field schools (SLPTT) for paddy to 2-30 Financial Notes and Indonesian Budget 2013

60 Macroeconomic Trend and Fiscal Policy Highlights 2013 Chapter 2 reach productivity ku/ha, 260 thousand ha of SLPTT for corns to reach productivity 0.3 ku/ha;(e) food crop seed provision system management with targets of 112,625 tons superior seed assistance (BLBU) for paddy, 3,900 tons BLBU for corns, 18,200 tons BLBU for soybeans, 13 thousand ha of seed nursery; (f) subsidized fertilizer distribution, with targets of 7.3 million tons of subsidized fertilizer; and (g) the development and management of irrigation networks, marsh areas and other irrigation networks with targets of 482,250 ha of irrigation network services improved and rehabilitated, 2,336 thousand of irrigation networks operated and maintained, 163,075 ha of marsh irrigation network built/improved and rehabilitated, 950,102 ha of marsh irrigation networks operated and maintained, 896 groundwater wells built, rehabilitated, operated and maintained, 56,342 ha of pond water irrigation networks services built/improved, rehabilitated, operated and maintained. Processing industry sector is projected to record steadily growth in line with reindustrialization program. In 2013, this sector is predicted to rise at 6.5 percent (yoy). Industrial development aims to increase the added value of various specialty commodities from many regions in Indonesia, especially from economic corridors within MP3EI framework. Industrialization will be accelerated through the development of: (a) mining product processing industries; (b) agriculture product processing industries; (c) intensive labor industries and domestic requirement supplies; and (d) strong, sustainable and self-reliant small and medium scale industries (IKM). Policy in industri sector is intended to intensify industrial development in economic corridors such as: (a) metal basic material industry revitalization and development; (b) textile and miscellaneous industry revitalization and development; (c) forest and plantation product revitalization and development; (d) food, marine and fishery product industry revitalization and development; (e) land transport mode industry development; (f) strengthening industrial research and standardization; and (g) small and medium scale distribution and promotion. Priority activities in industry sector include: (a) machinery revitalization of 165 textile industries and 25 sugar factories, and the development of their industrial cluster; (b) coconut oil processing industry cluster development; and (c) affordable public transport industry development; and (d) new entrepreneurs in industrial sector. The policy of industry sector and its development focus will be directed as follows: (1) the development of natural resources processing industries as the main employment generators with priority focus given to industrial development, including: a) mine product based industries, i.e. aluminum industry in Kuala Tanjung of North Sumatra and alumina industry in West Kalimantan; steel industry in Kulonprogo of DIY and Batulicin of South Kalimantanl nickel, copper, coal, petrochemical and oil and gas based industries; b) agriculture product processing industries, i.e. oil coconut industry in KEK Sei Mangke of North Sumatra, Maloy of East Kalimantan and Dumai of Riau; rubber, cacao, pulo and paper processing industries; sugar cane based industries; and vegetable oil and fat industries; c) human resources based industries to meet domestic market demands, i.e. in textile, garments, footwear; electronic components and motor vehicles accessories, and ship making; domestic wares, furniture and rattan industries; medicine and health equipment industries; (2) strong, viable and self-reliance small and medium industries (IKM) with focus given to the development of priority industries, i.e.: the promotion of small and medium enterprises evident from increased IKM population, IKM innovation, creative industries, and IKM as the suppliers for large scale industries. Financial Notes and Indonesian Budget

61 Chapter 2 Macroeconomic Trend and Fiscal Policy Highlights 2013 Construction sector in 2013 is predicted to grow by 7.5 percent (yoy). This growth is supported with various infrastructure projects as the continuation of MP3EI and one of national priorities. The infrastructure development is accelerated to buttress national connectivity, energy and food resilience through government financing, business world and public-private partnership. Infrastructure development, institutional capacity building and health and education improvement are crucial to magnify economic productivity. Infrastructure development acceleration is carried out with: (a) capacity maintainance and expansion of national roads; (b)the development and management of infrastructure and facilities to support railways transporation; (c) the development, rehabilitation and maintainance of airport infrastructure; the development of river, lake and ferry transport (ASDP) facilities and infrastructure and their management; (e) the management and operation of ports and dredging; (f) the management and conservation of dams, embungs, situ and water collector structures; (g) the development of low-cost multi-storey houses; (h) the promotion of selfhelp housing development; and (i) home quality improvement. National infrastructure development is a priority with the largest budget allocation. Activities relating to domestic connectivity and economic corridor development will be the main focus. The completion of Semarang-Surabaya double tracks, capacity expansion of Bakauheni-Merak ports, airport and seaport capacity expansion for Western and Eastern Regions of Indonesia and capacity expansion of national links are expected capable of escalating national economic growth. Trade, hotel and restauran sector in 2013 is estimated to rise by 8.9 percent (yoy). The purchasing capacity of people is expected to be well-maintained as the driving motor of this sector. In addition, the performance of this sector is also subject to the performance of industry and import sectors. Retail trades either local or modern, are projected to mushroom in line with the growing people s needs. The number of foreign and domestic tourists are expected to hike that will promote tourism sector and occupancy rate of hotels and restaurant. In detail, the estimated economic growth from sector side can be seen in Table 2.7. Sector 2012 * 2013 * Agriculture, Livestock 3,5-3,7 3,7 Mining and Excavation 2,9-3,1 2,8 Processing Industries 5,7-5,9 6,5 Electricity, Gas and Water Supply 6,2-6,4 6,6 Construction 7,6-7,8 7,5 Trade, Hotel and Restaurant 7,1-7,3 8,9 Transport and Communication 11,6-11,8 12,1 Finance, Real Estate & Corporate Services 6,6-6,8 6,1 Services 6,6-6,8 6,0 Gross Domestic Product 6,3-6,5 6,8 *Estim ate Source: the Ministry of Finance TABLE 2.7 ECONOMIC GROWTH BY SECTORS, (percent, yoy) 2-32 Financial Notes and Indonesian Budget 2013

62 Macroeconomic Trend and Fiscal Policy Highlights 2013 Chapter Rupiah Exchange Rate The Government and Bank Indonesia continually take any measure to maintain the volatility of rupiah exchange rate by strengthening the synergy of fiscal and monetary policies, the introduction of prudent monetary policy, foresign exchange traffic control, and domestic financial market development and expansion. These policies are expected capable of maintaining the stability of rupiah exchange rate, preventing excessive volatility and assuring the adequacy of foreign exchange reserve to meet economic foundation. The introduction of mixed prudential macro policies with the application of term deposit instrument is to attract the incoming capitals to Indonesian financial markets that in turn will generate favorable impacts to economic development. In future, pressure to rupiah exchange rate will come from the declining surplus of balance of trade and economic downturn in China, India and Brazil, which are worried to abate the attractiveness of capital inflows to emerging markets and to encourage flight to quality. With such domestic and international economic development, rupiah exchange rate to US dollar is estimated to fluctuate at Rp to Rp.9,300 per US dollar with upper cap at Rp per US dollar on the average during the whole Inflation Low and stable inflation is pre-requisite for people s welfare augmentation and sustainable economic growth. To realize this condition, amid strong inflation pressure coming from both external and internal sources, it is deemed necessary to set out proper policies to maintain macroeconomic stability and to curb the inflation in future. Coordination of monetary, fiscal and real sector policies must be improved both at national and regional level. Such coordination may consist of monitoring to price trends, supply trends and distribution of several strategic commodities, and establishing fast and appropriate anticipative policy and measures to deal with the potential price upheavals. With such broader and more integrated coordination, the stability of goods and services prices can be reached and maintained. The national economic development must be focused to increase production capacity in line with the bolstering investments and as such national needs can be complied with and output gap can be minimized. To support production capacity increase, the Government plans to introduce strategy of accelerating infrastructure development. This infrastructure development acceleration is necessary to ascertain well-advanced distribution of basic needs either at domestic or inter-island level in Indonesia. In this respect, the Government will increase the allocation of infrastructure budget by, among other things, refining expenditure budget allocation of subsidized expenditure for realocation to infrastructure development. With well-controlled price pressure from demand and supply sides, improving infrastructure and distribution of basic needs and relatively stable rupiah exchange rate, it is expected that the inflation rate be maintained at low and stable rate, convergent with inflations of other regional countries. Thanks to such policy synergy of the Government and Bank Indonesia coupled with sound coordination and in view of domestic and global economic trends, inflation in 2013 is predicted at 4.9 percent range. Financial Notes and Indonesian Budget

63 Chapter 2 Macroeconomic Trend and Fiscal Policy Highlights Month SPN Rate The trend of 3-month SPN rate in 2013 will remain vulnerable to both internal and external factors. From external side, it is expected that global economic recovery still continues despite gloom shadow of European crisis. In line with such recovering economy, the capital inflows will go to the developing countries, including Indonesia despite less intensity. More synergic coordination of Bank Indonesia and the Government is expected capable of establishing interest rate at tolerable level so as to maintain domestic inflation at controllable rate in Given such factors, the 3-month SPN rate in 2013 is estimated at 5.0 percent on the average Indonesian Crude Oil Price (ICP) The recovering global economy will spark high global demands on oil in On the other side, the global oil supplies and distribution are predicted to show stable trend due to disciplined stance taken by OPEC members in controlling their oil production capacity. According to Energy International Agency (EIA), the oil prices of WTI and Brent in 2013 are to range respectively at USD$88.5 per barrel and US$98.3 per barrel on the average, which are slightly lower than estimates in 2012 at US$92.8 per barrel and US$106.3 per barrel respectively. This high estimate is attributed to higher demand growth projection and lower supply growth of non-opec countries. In view of such factors, ICP in 2013 is set at US$100 per barrel Oil and Gas Lifting One variable used to calculate oil and gas revenue thus far is oil lifting. In reality, in Indonesia this oil revenue is also subject to gas lifting. While taking challenges inherent to production capacity and crude oil lifting of Indonesia, the Government plans to propose additional variable in 2013 to offset potential revenue decrease from crude oil resources. The preference to natural gas is due to the fact that Indonesia as one of largest gas exporters, the crucial position of gas as alternative energy to oil, and efforts that have been taken to optimize the consumption of gas energy throughout the country. At variance with the depleting oil reserves, gas reserves in Indonesia are relatively abundant. According to data 2010, total gas reserves around the country reached trillion standard cubic feet/tscf) or about 3.0 percent of total gas reserve in this world, consisting of proved reserves tscf and potential reserves tscf. These total gas reserves are distributed in some regions in Indonesia, with the largest portions found in Natuna (51.46 tscf) and Papua (24.32 tscf). Gas production of Indonesia records relatively stable trend. In 2010, gas production reached 1,577 thousand oil equivalent barrel per day (mboepd), implying an increase of 159 mboepd from 1,418 mboepd in This production increase is attributed to the operation of new field and optimized production. However, in 2011 the natural gas production of Indonesia decreased to 1,461 thousand oil equivalent barrel per day. This declining gas production trend continued in 2012, which is expected to reach 1,348 thousand oil equivalent barrel per day. Oil and gas projects to boost gas production until 2016 consist of 12 project. Priority projects in 2012 include Peciko field with gas production 170 million standard cubic feet per day (MMSCFD), Gajah Baru and Terang Serasun (300 MMSCFD). For 2013 the priority projects are Sumpal (74 MMSCFD) and Sebuku (100 MMSCFD) Financial Notes and Indonesian Budget 2013

64 Macroeconomic Trend and Fiscal Policy Highlights 2013 Chapter 2 In view of the above progress, gas lifting in 2013 is predicted at 1,360 thousand oil equivalent barrel per day. Today, there are 56 Production Sharing Contractors (KKKS) that will support the realization of such gas lifting. Five dominant KKKS to pursue the above target gas lifting are Exxon Mobil Oil Indonesia, Chevron Indonesia Company, Premier Oil Natuna Sea B.V, Santos (Madura Offshore) Pty. Ltd, and PHE West Madura Offshore. On the other side, oil lifting in 2013 is expected to reach 900 thousand barrel per day. Thus, in cumulative wise, oil and gas lifting in 2013 is projected to reach 2,260 thousand barrels. BOX 2.1 MANPOWER AND POVERTY In National Mid-Term Development Plan (RPJMN) , which is implemented in RKP and RAPBN every year, it is mentioned that one of macroeconomic policy goals is to push quality economic growth. Quality economic growth is a growth capable of generating employment and thereafter lessening unemployment and poverty. Unemployment and poverty are two issues always garnering great concern from the Government in designing every development program. EMPLOYMENT COMPOSITION BY ECONOMIC SECTORS (% to Total) Others Social Service Finance Transport & Comm Trade Hot & Rest. Construction Elect. Gas Water Industry Mining Agriculture Source: Central Bureau of Statistics Manpower % 10% 20% 30% 40% 50% The Government is always attempting to push the economy not only to grow but must be quality growth to augment people s welfare. In this sense the growth must give broader room for the creation and expansion of employment to reduce poverty rate and more Indonesian households will enjoy the outcomes of development. With economic growth 6.8 percent as set in APBN 2013, the Government is expecting that open unemployment rate be decreased at percent and poverty rate be dropped to percent. The relatively sound domestic economic performance is able to bring about positive impacts for employment generation and unemployment reduction. During 2007 to February 2012, total population at productive age had surged by 9.5 percent, i.e. from million persons in 2007 to million persons in February During such period, this exceeding productive population is coupled with enormous productive population, i.e. to rise from million persons to 112,8 million persons. It implies that the employment opportunities have increased by 12.9 percent. With such progress, the unemployment is to drop from 9.11 percent in 2007 to 6.32 percent in February Based on the main employment fields from 2007 February 2012, the employee composition was dominated by workforce in agriculture sector 36.5 percent, followed by trade sector 21.3 percent. During such period, the largest employment increase was in public service sector. Total workforce engaged in this sector in 2007 recorded million persons, and to jump to million persons in February Significant employment rise was also identified in trade and industry sector, which recorded respectively from 20.6 million persons and 12.4 million persons in 2007 to 24.0 million persons and 14.2 million persons in Meanwhile, employment capacity of agriculture sector suffered downward trend. Financial Notes and Indonesian Budget

65 Chapter 2 Macroeconomic Trend and Fiscal Policy Highlights 2013 In 2012 amid global economic slowdown, economic stimulus policy and infrastructure development programs are expected to give pushing force for national development, from which new employment opportunities can be generated. In February 2012, the open unemployment rate reaches 6.32 percent. This percentage surpasses the target set by the Government, i.e. at percent. By end of 2012 it is predicted that this open unemployment rate will further drop to 6.32 percent. Consistent with the economic growth target in 2013 and infrastructure development support and agriculture and industry revitalization, the generated employment opportunities are expected to bring greater impacts. MP3EI program focusing on economic corridor development in a number of regions across the country supported with better domestic connectivity will be able to broaden employment opportunities in more equitable manner. With such Government work program, the target unemployment of percent in 2013 can be realized, even though it is lower than last year s target. The lowering unemployment will give positive impacts for income generation and equitable people s welfare. Poverty The bolstering domestic economy coupled with more employment generation in had reduced poverty rate. In 2007 total poor people in Indonesia recorded million persons or percent of total population. These number and percentage were further declining in Based on survey in March 2011, poor people in urban areas and rural areas reached million persons or in other words, the poverty rate was decreased to percent. If compared with poverty reduction trend during such period between urban areas and rural areas rural areas recorded higher poverty alleviation rate than in urban areas. Poverty rate in villages dropped from percent in 2007 to percent in 2011 or to decrease by 4.65 percent. Meanwhile, poverty rate in the cities decreased from percent in 2007 to 9.23 percent in ,4 4,6 15,2 1,6 35,9 4,6 2,5 15,4 1,7 36,5 Agriculture Industry Elect. Gas Water Construction Trade Hot & Rest. 21,3 5,8 13,3 21,3 5,4 12,6 Transport & Comm Finance Others Better welfare of poor people is not only evident from the decreasing poverty rate but also higher living standard quality. Poverty Depth Indicator (PI) indicating average consumption of population living below poverty line is to constantly decreasing. It shows that while remain in below poverty line status; the income and welfare of low-income households are improving. The same is also evident from poverty severity indicator (P2). These two indicators confirm that poor people experience welfare improvement implying more equitable development. People s welfare augmentation not only relates to income, but also access to education and health. Better living quality of Indonesian people, which is obvious from higher Human Development Index (HDI), i.e. from in 2007 to in This higher IPM is attributed to improved education, health, income and life expectancy indices Financial Notes and Indonesian Budget 2013

66 Macroeconomic Trend and Fiscal Policy Highlights 2013 Chapter 2 Survey in March 2012 revealed that the national poverty rate had reached percent, an indication of further reduction if compared with poverty rate in March 2011 recording 12.49%. In line with improving economic growth in semester II 2012 and lower unemployment rate, poverty rate by end of 2012 is expected to decrease at 10.5 percent to 11.5 percent. Poverty Level, ,0 This lower poverty rate is attributable to 16,0 17,75 the decreasingly number of poor people 16,58 15,97 15,42 in urban areas as well as in rural areas. In 14,2 11,5 12,0 13,33 10,5 12,36 March 2011, total poor people in cities 10,5 dropped by around 0.4 million persons, 8,0 9,5 i.e. from million to million persons. Likewise, during the same 4,0 period, poverty rate in rural areas was 0,0 also to drop around 0.48 million persons or from million to million persons. Thus in percentage wise, poor population in urban areas as of March 2012 is to decrease from 9.23 percent to 8.78 percent and the percentage of poor people in villages was to decline from percent to percent. Success in coping with poverty is due to the relatively high economic growth as the consequence of pro-poor empowerment programs and fervent efforts to satisfy the basic rights of people. It must be admitted however that some external and internal problems have hampered the effective implementation of poverty alleviation policies. Given that, the Government will attempt to tune poverty alleviation programs with MP3EI in order to achieve the target poverty reduction in 2013 set at 9.5 percent to 10.5 percent. These poverty alleviation initiatives will be focused on several aspects. One of them, which is the most important concerns with the assurance of food provision to poor people. In this case, the Government will take any measure to meet the food supplies for low-income people with price stabilization policy and rice allocation for the poor. These attempts will be coupled with data update and distribution system improvement to ensure that such policy will reach the appropriate targets. PNPM policy will be further improved to bring about more Region/Year THE PERCENTAGE OF POOR PEOPLE Total Poor People (million) Percentage of Poor People Urban Mar-11 11,05 9,23 Sep-11 10,95 9,09 Mar-12 10,65 8,78 Rural Mar-11 18,97 15,72 Sep-11 18,94 15,59 Mar-12 18,48 15,12 Urban + Rural Mar-11 30,02 12,49 Sep-11 29,89 12,36 Mar-12 29,13 11,96 Source: Central Bureau of Statistics (BPS) Source: BPS POOR PEOPLE AND POVERTY RATE ,58 15,42 14,15 13,3 12,49 11,96 23,61 22,19 20,62 19,93 18,97 18,48 13,56 12,77 11,91 11,1 11,05 10, million poor persons - urban million poor persons - rural Poverty Rate impacts for the neediest people and capable of developing the capacity and prosperity of people in self-reliant fashion. In this respect, the activities will be focused on capacity building, Financial Notes and Indonesian Budget

67 Chapter 2 Macroeconomic Trend and Fiscal Policy Highlights 2013 employment expansion and broader access to basic services and sustainable business. To support employment and business expansion, loan/financing programs for micro, small and medium enterprises (UMKM) and People Credit Program (KUR) will be intensified. In addition, the Government will launch low-cost house provision programs for low-income people including the supporting facilities and infrastructure Financial Notes and Indonesian Budget 2013

68 Government Revenues Chapter General CHAPTER 3 GOVERNMENT REVENUES Government revenues as the primary sources for State Budget (APBN) funding consist of revenues earned from taxes, non-taxes and grants. The sums of these Government revenues are subject to the targets achievable from the respective sources, while meticulously taking into consideration various policies to be taken by the Government and economic indicators trends reflected in basic assumptions of macroeconomy such as economic growth, inflation rate, rupiah exchange rate to US dollar and other macroeconomic indicators. In line with the efforts of optimizing these Government revenues so as to fortify self-reliance in development funding, in nominal wise, the realization of Government revenues for the last five years demonstrates significant increase. During period the Government managed to record revenue increase of 14.4 percent per annum on the average, which come from taxes raising 15.5 percent per annum on the average, non-taxes increasing 11.4 percent per annum on the average and grants showing an average growth of 32.6 percent per annum. The development and dynamics of people s needs in nation and state life require budget allocation, which is increasing from time to time. Given that, the sources of revenues must be continually optimized. In this respect, optimizing revenues become a great challenge that must be dealt with. To address this issue, the Government has taken a number of measures including policy measures and administrative measures with regard to these Government revenues raising both from tax and non-tax sources. 3.2 Revenue Trend in and the Estimated Revenues in 2012 The Government revenues during period showed steady increase. In such period, in nominal terms, the revenues earned by the Government was to rise 14.4 percent per annum on the average, i.e. from Rp trillion in 2007 to Rp. 1,210.6 trillion in They consisted of domestic revenues with contribution 99.7 percent on the average and grants with contribution 0.3 percent on the average. The trend of revenue realization from 2007 to 2011 is presented in Table 3.1. In APBNP 2012, the Government revenues are targeted to garner Rp.1,358.2 trillion. In view of realization in semester 2012 collecting Rp trillion (43.7 percent of target set in APBNP 2012), the realization of Government revenues in 2012 is predicted to amount Rp.1,372.4 trillion (101.0 percent of the target). This sum comprises estimated domestic revenues Rp.1,366.4 trillion (100.7 percent of the target in APBNP 2012) and estimated grant revenue Rp.6.0 trillion (732.6 trillion of the target) Domestic Revenues Financial Notes and Indonesian Budget

69 Chapter 3 Government Revenues Domestic revenues were to rise by 14.3 percent on the average from 2007 to During this period, these domestic revenues coming from taxes and Non-Taxes (PNBP) contributed respectively 71.1 percent and 28.9 percent on the average. This increase was attributed to relatively high economic growth and tax and non-tax policies exercised in consistent and sustainable manner. In APBNP 2012, the target of domestic revenues is set at Rp.1,357.4 trillion. Owing to realization in semester I 2012 reaching Rp trillion (43.7 percent of the target), the domestic revenues in 2012 are expected to amount Rp.1,366.4 trillion (100.7 percent of the target in APNBP 2012). This sum consists of realized tax revenues Rp.1,021.8 trillion (100.5 percent of the target) and non-tax revenue (PNBP) Rp trillion (101.0 percent of the target). The trend of domestic revenue from 2007 to 2011 is presented in Table Tax Revenues TABLE 3.1 GOVERNMENT REVENUE TREND, (trillion rupiah) Description 2007 Real Real Real Real Real APBNP Outlook*) I DOMESTIC REVENUE 706,1 979,3 847,1 992, , , ,4 1. Tax Revenue 491,0 658,7 619,9 723,3 873, , ,8 a. Domestic Tax 470,1 622,4 601,3 694,4 819,8 968,3 970,9 1) Income Tax 238,4 327,5 317,6 357,0 431,1 513,7 499,0 a) Oil and Gas 44,0 77,0 50,0 58,9 73,1 67,9 76,6 b) Non Oil and Gas 194,4 250,5 267,6 298,2 358,0 445,7 422,4 2) Value Added Tax 154,5 209,6 193,1 230,6 277,8 336,1 347,3 3) Land and Building Tax 23,7 25,4 24,3 28,6 29,9 29,7 31,7 4) BPHTB 6,0 5,6 6,5 8,0 0,0 0,0 0,0 5) Excice 44,7 51,3 56,7 66,2 77,0 83,3 87,9 6) Other Tas 2,7 3,0 3,1 4,0 3,9 5,6 5,0 b. International Trade Tax 20,9 36,3 18,7 28,9 54,1 47,9 50,9 1) Import Tax 16,7 22,8 18,1 20,0 25,3 24,7 26,1 2) Export Tax 4,2 13,6 0,6 8,9 28,9 23,2 24,8 2. Non Tax Revenue 215,1 320,6 227,2 268,9 331,5 341,1 344,6 a. Naturan Resources Revenue 132,9 224,5 139,0 168,8 213,8 217,2 220,2 1) Oil and Gas 124,8 211,6 125,8 152,7 193,5 198,3 201,1 a) Oil 93,6 169,0 90,1 111,8 141,3 150,8 144,5 b) Gas 31,2 42,6 35,7 40,9 52,2 47,5 56,6 2) Non Oil and Gas 8,1 12,8 13,2 16,1 20,3 18,8 19,0 a) General Mining 5,9 9,5 10,4 12,6 16,4 15,3 15,3 b) Forestry 2,1 2,3 2,3 3,0 3,2 3,1 3,1 c) Fishery 0,1 0,1 0,1 0,1 0,2 0,2 0,2 d) Geothermal 0,0 0,9 0,4 0,3 0,6 0,3 0,5 b. Gov. Portion from SOE profit 23,2 29,1 26,0 30,1 28,2 30,8 30,8 c. Other Non Tax Revenue 56,9 63,3 53,8 59,4 69,4 72,8 73,2 d. BLU Revenue 2,1 3,7 8,4 10,6 20,1 20,4 20,4 II GRANT REVENUE 1,7 2,3 1,7 3,0 5,3 0,8 6,0 Total 707,8 981,6 848,8 995, , , ,4 *) According to Outlook in APBN 2012 Implementation Report Semester I Source: the Ministry of Finance 3-2 Financial Notes and Indonesian Budget 2013

70 Government Revenues Chapter 3 Tax revenues from domestic tax and international trade tax with contributions of respectively 95.4 percent and 4.6 percent on the average showed an increase of 15.5 percent on the average from 2007 to Domestic tax revenue for the said period was to rise by 14.9 percent per annum on the average with the international trade revenue recording average rise of 26.8 percent per annum. Domestic tax revenues are composing of income tax (PPh), Value Added Tax and Sales Tax of Luxury Goods (PPN and PPnBM), Land and Building Tax (PBB), Excise and Other Taxes. The domestic tax revenues in were primarily from PPh tax (oil and non-oil) with contribution 52.0 percent on the average and PPN and PPnBM with average contribution 33.2 percent. Meanwhile, revenues from international trade tax during period were from import tax. For excise revenues, they were basically still low. However, as from 2011, the revenues of export tax showed significant rise, which equalled the import tax revenues as a result of soaring CPO price to which higher export tax tariff was applied. Tax revenues in APBNP 2012 is targeted to reap Rp.1,016.2 trillion. With their realization in semester I 2012 reaching Rp trillion (44.9 percent of the target in APBNP 2012), the realization of tax revenues in 2012 is projected to hit Rp.1,021.8 trillion (100.5 percent of the target). This realization is mainly supported by PPN and PPnBM, PBB, Excise and International Trade Tax. Some factors contributing the rise of tax revenues include soundly-maintained economic growth, domestic consumption growth and the introduction of excise tariff increase to tobacco at 16.3 percent on the average. The trend of tax revenues in can be seen in Graph 3.1. General Taxation Policies percent (%) Tax Revenue Tax revenues in were supported with various policies taken by the Government in taxation sector, including: (a) tax administration reform; (b) regulation and law reform; and (c) potential [tax] supervision and exploration reform. The reforms that have been carried out in tax administration are inclusive of establishing modern tax office and launching project for Indonesia tax administration report (PINTAR) program. In regulation and law sector, during the said period, the Government has amended three tax laws, i,e, General Provision and Tax Procedure in 2007, Law on Income Tax in 2008, and Law on Value Added Tax of Goods and Services and Sales Tax of Luxury Goods in According to the new laws, PPh tariff for corporation is to decrease from 28 percent in 2009 to 25 percent in Special for public companies, which minimum 40 percent of their shares are owned by public they shall receive incentive of PPh corporation tariff cut of 5 percent below normal rate. In potential [tax] supervision and exploration, the Government has established a structured, measurable, standardized, systematic and accountable tax revenue potential supervision and exploration method. This method has been developed since early 2007 covering mapping, profiling and 12,4 491,0 13,3 658,7 619,9 11,0 723,3 11,3 873,9 11, , ,8 11,9 12, APBNP Outlook 2012 Source: the Ministry of Finance GRAPH 3.1 TAX REVENUE TREND, Tax Ratio trillion Rp Financial Notes and Indonesian Budget

71 Chapter 3 Government Revenues benchmarking. Box 3.1 Tax Ratio The Ratio of Tax Revenue to Gross Domestic Product/GDP (Tax Ratio) of Indonesia in is to range from 11.0 percent to 12.3 percent. The calculation of this tax ration only takes into account the tax revenue collected by the Central Government, and excludes regional tax and revenue earned from oil and gas. Should the said regional tax and oil and gas revenue be included in tax ratio calculation, the tax ratio of Indonesia in will record higher percentages, i.e. ranging from 14.1 percent to 15.8 percent. Tax ration calculation that includes regional tax and oil and gas revenue is known as tax ratio in broader sense. In customs and excise, the policies taken by the Government in attempt to increase their Indonesia Tax Ration Trend (triliun Rupiah) Tax Revenue (1) 619,9 723,3 873, ,8 Oil and Gas (2) 125,8 152,7 193,5 201,1 Regional Tax (3)* 45,1 47,7 63,6 81,6 PDB (4) 5.613, , , ,0 Tax Ratio (narrow meaning) = 1 : 4 11,0% 11,3% 11,8% 12,3% Tax Ratio (broad meaning)=( ) : 4 14,1% 14,4% 15,2% 15,8% Source: the Ministry of Finance Nore: *) Regional tax revenue in is derived from APBN data. revenue include: (a) developing automated customs and excise service system; (b) facilitation in custom services (pre entry classification, customs advice, valuation ruling, and prenotification); (c) facilitation to import substitution industries and export oritented industries; (d) primary service office and medium Customs and Excise Supervision and Service Office (KPPBC); (e) tight supervision to import and export traffics; (f) supports to international trade cooperation either bilateral and regional or mulitalteral; (g) the introduction of national single windows (NSW) and Indonesian portal of national single windows (INSW); (h) improved custom services through major partner lines (MITA) and priority lines; (i) law enforcement in customs affairs through risk management, risk assessment, profiling, and targeting; and (j) compliance of customs service users in fulfilling their obligations. Tax revenue policy is introduced in sustainable manner to support the realization of targets. In 2012, the non-oil and gas tax policies include: (a) PPN system and regulation restructuring with electronic SPT (e-spt) and re-inventory of WP corporation performing PPN collection; 3-4 Financial Notes and Indonesian Budget 2013

72 Government Revenues Chapter 3 (b) revisions to some policies on PPh that in future will be tailored to the progress of business; (c) maximum use of data to optimize tax potential exploration with the operation of external data processing office (KPDE); (d) improved tax receivable administration for better tax payable management; (e) improved WP compliance especially WP of APBD treasurers; (f) tax base expansion with improved national tax census strategy (SPN) that had been started in September 2011; (g) enhanced effectiveness of verification and investigation to improve the compliance of WP; (h) WP reallocation to certain KPP; (i) the appointment of certain independent survey agencies as experts of DJP (Directorate General of Taxes); and (j) the operation of Mining and Oil and Gas Tax Office (KPP) (per April 2012). In customs and excise sector, the policies introduced in 2012 include: (a) improving the physical custom verification accuracy, classifiction and assessment; (b) optimizing the use of land and sea operation/patrol facilities, especially in border areas; (c) intensifying the supervisory functions with risk management; (d) increasing excise tariff; (e) proposing new excisable goods; (f) intensifying patrol or supervision to excisable goods; (g) organizational transformation with the establishment of 76 new modern offices in 2012; (h) 24-hours and 7-Day customs service in some ports; (i) automated customs and excise service in KPPBC; and (j) export tax extensification with the charge of export tax to mineral mining products consisting of raw materials (ores). Apart from introducing policies aiming to boost tax revenue, the Government provides tax facilities to further develop certain sectors. In 2012, the Government grants tax facility of Government-borne tax (DPT) with allocation Rp.4.2 trillion consisting of PPh DPT for geothermal mining Rp.0.8 trillion, PPh DPT for Government Bonds (SBN) Rp.2.8 trillion, and import tax DPT for certain sectors Rp.0.6 trillion. In addition to tax and BM DTP facilities, the Government provide facility of uncollected PPN and PPnBM for taxable goods receiving tax exemption facility, for example for the import of goods used in upstream oil and gas and geothermal exploration activities. This policy is a replacement to the revoked PPN DTP facility of import tax for oil and gas exploration (PDRI) in Thereafter, to augment the welfare of manpower, in 2012 the Government plans to revise non-taxable revenues (PTKP), which remain unchanged since This PTKP revision has been decided under Regulation of Finance Minister Number 162/PMK.011/2012 that takes into effect as from 1 January Domestic Tax Revenue Domestic tax revenue is to rise by 14.9 percent per annum on the average during Reviewed from its contribution to domestic tax revenue, the non-oil and gas PPh revenue becomes the largest contribution with 42.5 percent on the average, followed by PPN and PPnBM with contributions respectively 33.2 percent on the average. The trends of these two taxes exert significant influence to domestic tax growth. Revenue from non-oil and gas PPh is to rise 16.5 percent per annum on the average with PPN and PPnBM record average growth of 15.8 percent per annum. Meanwhile, excise as the third largest contributor with 9.2 percent contribution on the average is to rise by 14.6 percent. The average growth and contribution of each tax under domestic tax category can be seen in Graph 3.2 and Graph 3.3 respectively. Financial Notes and Indonesian Budget

73 Chapter 3 Government Revenues In APBNP 2012, the revenues from domestic tax are targeted to amount Rp trillion. In view of their realization in semester I 2012, which amounted Rp trillion or 44.6 Persen (y-o-y) , GRAPH 3.2 DOMESTIC TAX REVENUE TREND, ,7 28, , , , , PPh Oil and Gas PPh Non Oil and Gas Source: the Ministry of Finance VAT Land and Building Tax Revenue Land Rights and Building Tax Excise Other Tax percent of the target, the realization of domestic tax revenues in 2012 is expected to hit Rp trillion or percent of the target. This projection is supported with increases in PPN and PPnBM, PBB and Excise revenues. Income Tax (PPh) Income tax revenue was to rise by percent per annum on the average during period PPh revenue consists of oil and gas PPh and non-oil and gas PPh with average contributions 18.2 percent and 81.8 percent respectively. In APBNP 2012, PPh revenue is targeted to reach Rp trillion composing of oil and gas PPh Rp.67.9 trillion and non-oil and gas PPh Rp trillion. Considering its realization in semester I 2012 reaching Rp trillion or 45.5 percent of the target in APBNP 2012, the realization of PPh revenue in 2012 is predicted to amount Rp trillion (97.1 percent of the target in APBNP 2012). Oil and Gas PPh GRAPH 3.3 AVERAGE CONTRIBUTION OF DOMESTIC TAX REVENUE, Revenue Land Rights and Building Tax 0,9% 0,5% Oil and Gas IT 9,5% Non Oil and Gas IT 42,5% The revenue of Oil and Gas PPh was to increase by 13.5 percent per annum on the average during Oil and Gas PPh consists of Oil PPh and Gas PPh with contribution of respectively 37.3 percent and 62.7 percent on the average. Oil and Gas PPh revenue is considerably subject to ICP, rupiah exchange rate to US dollar and oil lifting. The trend of oil and gas PPh revenue realization from 2007 to 2012 can be seen in Table 3.2. In APBNP 2012, revenue from oil and gas PPh is set to reach Rp.67.9 trillion. This oil and gas PPh revenue consists of oil PPh revenue Rp.27.6 trillion and gas PPh revenue Rp.40.4 trillion. In view of its realization in semester I 2012 reaching Rp trillion or 51.2 percent of the LBT 4,2% VAT 33,2% Excise 9,2% Other Tax 3-6 Financial Notes and Indonesian Budget 2013

74 Government Revenues Chapter 3 TABLE 3.2 OIL AND GAS PPh REVENUE TREND, (trillion rupiah) Description Real. % to Real. % to Real. % to Real. % to Real. % to APBNP % to Outlook *) % to Total Total Total Total Total Total Total PPh Oil 16,3 37,0 29,6 38,5 18,4 36,7 22,8 38,8 25,9 35,5 27,6 40,6 27,6 36,1 PPh Gas 27,3 62,0 47,4 61,5 31,7 63,3 36,0 61,2 47,2 64,5 40,4 59,4 49,0 63,9 PPh other oil and gas 0,4 1,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Total 44,0 100,0 77,0 100,0 50,0 100,0 58,9 100,0 73,1 100,0 67,9 100,0 76,6 100,0 *) Accordinto Outlook in APBN 2012 Implementation Report Semester I Source: the Ministry of Finance target, realization of oil and gas PPh revenue in 2012 is expected to hit Rp.76.6 trillion or percent of the target in APBNP This high projection for oil and gas PPh revenue is due to ICP estimate, which exceeds its assumption in APBNP Non-Oil and Gas PPh Revenue The revenue from non-oil and gas PPh was to rise by 16.5 percent per annum on the average during period This non-oil and gas PPh revenue was mainly from PPh Pasal 25/ 29 Corporation and PPh Pasal 21 with average contribution of 43.3 percent and 19.5 percent respectively. The revenue of PPh Pasal 25/29 Corporation increased by 17.6 percent per annum on the average, with revenue of PPh Pasal 21 to rise at 141 percent per annum on the average. The trend of non-oil and gas PPh revenue can be seen in Table 3.3. In APBNP 2012, the target of non-oil and gas PPh revenue is set at Rp trillion. Considering its realization in semester I amounting Rp trillion (44.6 percent of the target), in 2012 the realization of non-oil and gas revenue is expected to reach Rp trillion (94.8 percent of the target in APBNP 2012). This projection is based on economic growth, which is assumed lower than the target set in APBNP Value Added Tax (PPN) and Luxury Sales Tax (PPnBM) Revenue Revenue from PPN and PPnBM during was to rise at 15.8 percent per annum on the average. During such period, PPN revenue contributed 95.0 percent on the average with the average constribution of PPnBM 5.0 percent. PPN and PPnBM revenue can be differentiated into two categories, i.e. domestic PPN and PPnBM and Import PPN and PPnBM. The domestic PPN and PPnBM increased 13.9 percent per annum on the average with import PPN and PPnBM to rise 18.8 percent per annum on the average. In APBNP 2012, PPN and PPnBM revenue is planned to record Rp trillion. This sum consists of domestic PPN and PPnBM revenue Rp trillion and import PPN and PPnBM revenue Rp trillion. In general, public and government consumption growths in 2012 are expected to be driving force in achieving such domestic PPN and PPnBM target. Meanwhile, the relatively high import realization in 2012 is the main factor that will increase Financial Notes and Indonesian Budget

75 Chapter 3 Government Revenues TABLE 3.3 OIL AND GAS PPh REVENUE TREND, (trillion rupiah) Description % thd % to % to % to % to % to % to Real. Real. Real. Real. Real. APBNP Outlook *) Total Total Total Total Total Total Total PPh Pasal 21 39,4 20,3 51,7 20,6 52,1 19,5 55,3 18,6 66,8 18,6 89,2 20,0 90,6 21,4 PPh Pasal 22 4,0 2,0 5,0 2,0 4,4 1,6 4,7 1,6 4,9 1,4 7,9 1,8 4,3 1,0 PPh Pasal 22 Impor 16,6 8,6 25,1 10,0 19,2 7,2 23,6 7,9 28,3 7,9 38,2 8,6 33,5 7,9 PPh Pasal 23 15,7 8,1 18,1 7,2 16,0 6,0 16,3 5,5 18,7 5,2 28,5 6,4 19,4 4,6 PPh Pasal 25/29 Pribadi 1,6 0,8 3,6 1,4 3,3 1,3 3,6 1,2 3,3 0,9 5,6 1,3 5,7 1,4 PPh Pasal 25/29 Badan 80,8 41,6 106,4 42,5 120,3 45,0 131,5 44,1 157,9 44,1 191,1 42,9 190,8 45,2 PPh Pasal 26 14,6 7,5 14,9 5,9 18,4 6,9 23,0 7,7 27,2 7,6 29,8 6,7 22,9 5,4 PPh Final dan Fiskal 21,6 11,1 25,8 10,3 33,8 12,6 40,1 13,5 50,8 14,2 55,4 12,4 55,3 13,1 PPh Non Migas Lainnya 0,01 0,01 0,02 0,01 0,02 0,0 0,03 0,0 0,04 0,0 0,04 0,0 0,02 0,0 Jumlah 194,4 100,0 250,5 100,0 267,6 100,0 298,2 100,0 358,0 100,0 445,7 100,0 422,4 100,0 **) Accordinto Outlook in APBN 2012 Implementation Report Semester I SSource: the Ministry of Finance Import PPN and PPnBM revenue. Given that, as of the end of 2012 PPN and PPnBM revenue is expected to outpace the target, i.e. Rp trillion or percent. The trend of PPN and PPnBM in can be seen in Table 3.4 and Graph GRAPH 3.4 VAT AND PPnBM REVENUE TREND, ( trillion Rp ) ( miilon US$) DOM VAT & PPnBM VAT & PPnBM Import Import Value PBB (Land and Building) Revenue PBB revenue is to rise by 5.9 percent on the average during During APBNP Outlook this period, this PBB revenue is mainly from Mining PBB, Urban PBB and Rural PBB. These three types of PBB revenue give average contribution of respectively 69.7 percent, 21.4 percent and 5.4 percent. Starting 2011, the revenue of Urban PBB and Rural PBB has been transferred to the regions provided that the local governments are ready to collect such PBB tax. Thus, urban and rural PBB revenue in APBN will constantly decrease and reach nil when all regional governments collect this kind of revenue by With such urban and rural PPB revenue transfer to regions, starting from 2014 PBB revenue managed by the Central Government will only consist of mining PBB, forestry PBB and plantation PBB Financial Notes and Indonesian Budget 2013

76 Government Revenues Chapter 3 TABLE 3.4 PPN AND PnBM REVENUE TREND, (trillion rupiah) Description % to % to % to % to % to % to % to Real. Real. Real. Real. Real. APBNP Outlook *) Total Total Total Total Total Total Total a. PPN 147,4 95,4 198,2 94,5 184,2 95,4 218,2 94,6 264,4 95,2 318,5 94,8 327,9 94,4 Domestic PPN 93,3 60,3 116,7 55,7 120,4 62,4 133,9 58,1 157,2 56,6 195,7 58,2 179,6 53,4 Import PPN 53,9 34,9 81,1 38,7 63,4 32,9 84,2 36,5 107,0 38,5 122,3 36,4 148,1 44,1 Other PPN 0,3 0,2 0,3 0,1 0,3 0,1 0,2 0,1 0,2 0,1 0,4 0,1 0,3 0,1 b. PPnBM 7,1 4,6 11,5 5,5 8,9 4,6 12,4 5,4 13,4 4,8 17,6 5,2 19,4 5,6 Domestic PPnBM 4,7 3,0 7,5 3,6 6,1 3,2 7,6 3,3 8,0 2,9 11,4 3,4 10,4 3,1 Import PPnBM 2,4 1,6 4,0 1,9 2,8 1,5 4,8 2,1 5,4 1,9 6,2 1,8 9,0 2,7 Other PPnBM 0,021 0,01 0,012 0,01 0,015 0,01 0,00 0,002 0,008 0,003 0,018 0,005 0,001 0,000 Total (1+b) 154,5 100,0 209,6 100,0 193,1 100,0 230,6 100,0 277,8 100,0 336,1 100,0 347,3 100,0 **) Accordinto Outlook in APBN 2012 Implementation Report Semester I SSource: the Ministry of Finance In APBNP 2012, the Government revenue from PBB tax is expected to reach Rp.29.7 trillion. The realization of PBB revenue as of semester I 2012 records Rp. 2.3 trillion (7.7 percent of the target). The relatively low realization is due to unrealized oil and gas PBB payment in Quarter I and Quarter II Despite only 7.7 percent of the target, the realization of PBB revenue in 2012 is expected to reach Rp.31.7 trillion (106.9 percent of the target). This is because of the mining PBB that will be only realized in the second semester of The trend of PBB revenue realization fro, 2007 to 2011 can be seen in Table 3.5. Excise Revenue During , the excise revenue grows by 14.6 percent per annum on the average. From its contribution, the excise revenue is dominated by tobacco excise, i.e, 96.7 percent on the average. Meanwhile, excise from ethile alcohol (EA) contributed 0.6 percent and excise of ethile alcohol contained beverage (MMEA)had contribution 2.7 percent. The trend of excise revenue realization from can be seen in Table 3.6. The increase of excise revenue in is mainly subject to policy of rising excise tariff for tobacco products every year. In general, basis underlying excise tariff setting includes: (a) baseline excise tariff of retail selling price (HJE) layer applicable during previous period; (b) the amount of increase, which takes economic growth, inflation growths and tobacco consumption into account; (c) the priority of excise tariff policy consistent with the roadmap of tobacco product industries (Government revenue, health and manpower); and (d) the Financial Notes and Indonesian Budget

77 Chapter 3 Government Revenues Description % to % to % to % to % to % to % to Real. Real. Real Real APBNP Outlook *) Total Total Total Total Total Total Total PBB Rural 1,7 7,3 1,4 5,6 1,4 5,9 1,2 4,3 1,2 3,9 0,7 2,5 1,8 5,6 PBB Urban 4,9 20,5 5,0 19,6 5,5 22,7 6,4 22,3 6,6 22,1 5,1 17,3 6,5 20,4 PBB Plantation 0,4 1,7 0,6 2,4 0,7 2,9 0,9 3,2 1,0 3,3 1,3 4,3 1,1 3,6 PBB Forestry 0,1 0,5 0,2 0,6 0,2 0,7 0,2 0,8 0,3 0,8 0,3 1,0 0,2 0,5 PBB Mining 16,6 69,9 18,2 71,6 16,5 67,8 19,8 69,4 20,5 68,5 22,3 75,0 22,2 69,9 Other PBB 0,03 0,1 0,02 0,1 0,00 0,0 0,00 0,0 0,4 1,3 0,0 0,0 0,0 0,0 Total Real. 23,7 100,0 25,4 100,0 24,3 100,0 28,6 100,0 29,9 100,0 29,7 100,0 31,7 100,0 **) Accordinto Outlook in APBN 2012 Implementation Report Semester I TABLE 3.5 PBB AND BPHTB REVENUE TREND, (trillion rupiah S Source: the Ministry of Finance TABLE 3.6 EXCISE REVENUE REALIZATION TREND, (trillion rupiah) Description % to % to % to % to % to % to % to Real. Real Real. Real. Real. APBNP Outlook *) Total Total Total Total Total Total Total Tobacco Product Excise 43,5 97,4 49,9 97,4 55,4 97,6 63,3 95,7 73,3 95,1 79,9 95,9 84,4 96,1 Ethyle Alcohol Excise (EA) 0,4 1,0 0,4 0,8 0,4 0,7 0,1 0,2 0,2 0,2 0,1 0,1 0,1 0,1 Ethyl Alcohol containing beverage excise (MMEA) 0,7 1,5 0,9 1,7 0,9 1,6 2,7 4,1 3,6 4,7 3,3 3,9 3,3 3,7 Excise administration fine 0,005 0,01 0,012 0,02 0,016 0,03 0,013 0,02 0,011 0,01 0,000 0,00 0,024 0,03 Other excise 0,028 0,1 0,015 0,0 0,010 0,0 0,015 0,0 0,011 0,0 0,000 0,0 0,018 0,0 Total 44,7 100,0 51,3 100,0 56,7 100,0 66,2 100,0 77,0 100,0 83,3 100,0 87,9 100,0 *) Accordinto Outlook in APBN 2012 Implementation Report Semester I Source: the Ministry of Finance simplification of specific excise tariff by reducing layer of each HT type. From the structure aspect, excise tariff policy will be changed every year to control revenue from tobacco product excise and to support tobacco product industry roadmap. The said changing tariff policy can be seen in Table 3.7. The revenue of international trade tax comes from import tax and export tax. In , the international trade tax revenue recorded increase of 26.8 percent on the average Financial Notes and Indonesian Budget 2013

78 Government Revenues Chapter 3 TABLE 3.7 TABACCO PRODUCT EXCISE TARIFF POLICY TREND TYPE SKM SPM SKT Notes CLASS Adv (%) Spesific (Rp) Adv (%) Spesific (Rp) Full Spesific (Rp) Full Spesific (Rp) Full Spesific (Rp) Full Spesific (Rp) I more than 2 billion 40% 7 36% II not more than 2 billion 36% 5 35% III less then 0.5 billion 26% 3 22% 35 I more than 2 billion 40% 7 34% II not more than 2 billion 36% 5 30% III less then 0.5 billion 26% 3 15% 35 I less then 0.5 billion 22% 7 18% II PRODUCTION LIMITS (piece) more than 500 million but less then 2 billion AVERAGE EXCISE TARIFF 16% 5 10% III less than 500 million 8% 3 0% delete delete Year 2012, the production limits for Type SK Class II was revised to >300 million but < 2 billion In the meantime, cigarette production in recorded average growth of 5.8 percent. In 2012, the cigarette production is expected to rise 1.8 percent if compared last year s production. Given the said cigarette production and excise tariff, the excise revenue in APBNP 2012 is expected to amount Rp.83.3 trillion. In view of realization in semester I 2012 reaching Rp.44.5 trillion or 53.5 percent of APBNP 2012 target, the realization of excise revenue in 2012 is projected to reach Rp.87.9 trillion or percent of APBNP 2012 target. The revenue of tobacco products excise is expected to amount Rp.84.4 trillion or percent of APBNP 2012 target. The main factor for the realization of such tobacco product excise is the introduction of excise tariff increase by 16.3 percent and eradication of illegal cigarettes with tight supervision to excisable goods distribution. Meanwhilse excise revenue from EA and MMEA in 2012 is predicted to record Rp.0.1 trillion and Rp.3.3 trillion respectively. Other Tax Revenue The revenue from other taxes is to rise by 9.4 percent during In such period, this revenue is particularly from stamp duty reaching 92.4 percent on the average. The trend of other tax revenue from can be seen in Table 3.8. In APBNP 2012, the revenue of other tax is targeted to reach Rp.5.6 trillion. In view of its realization in semester I 2012 hitting Rp.2.1 trillion, the realization of other tax revenue in 2012 is expected to reach Rp.5.0 trillion or 88.6 percent of APBNP 2012 target. International Trade Tax Financial Notes and Indonesian Budget

79 Chapter 3 Government Revenues TABLE 3.8 OTHER TAX REVENUE TREND, (trillion rupiah) Description Real. %to Real. %to Real. %to Real. %to Real. %to APBNP %to Outlook *) %to Total Total Total Total Total Total Total Duty stamp 2,6 95,0 2,8 93,3 3,0 97,4 3,3 84,2 1,1 27,0 5,2 91,5 4,8 96,3 Other Indrect Tax 0,02 0,7 0,001 0,04 0,001 0,04 0,001 0,02 2,6 64,9 0,002 0,0 0,007 0,1 Tax collection interest 0,1 4,3 0,2 6,7 0,1 2,5 0,6 15,8 0,3 8,1 0,5 8,5 0,2 3,6 Total 2,7 100,0 3,0 100,0 3,1 100,0 4,0 100,0 3,9 100,0 5,6 100,0 5,0 100,0 **) Accordinto Outlook in APBN 2012 Implementation Report Semester I SSource: the Ministry of Finance Based on its composition, the import tax contributed 71.1 percent on the average with the contribution of export tax reaching 28.9 percent on the average. The trend of international tax revenue is considerably subject to external economic conditions, especially global trades and commodity price fluctuation, notably crude palm oil (CPO) in international market. In addition, this international tax is dependent on the applicable import tax tariff structure. In APBNP 2012, the revenue of international trade tax is expected to record Rp.47.9 trillion. According to realization in semester I 2012 recording Rp.24.6 trillion, the revenue earned from international trade tax as of the end of 2012 is projected to amount Rp.50.9 trillion or percent of APBNP 2012 target. The trend of international trade tax revenue during can be seen in Table 3.1. Import Tax Revenue The realization of import tax revenue in period was to grow by 10.9 percent on the average. The main factor contributing the revenue of import tax is that of higher value of import foreign exchange and extra efforts in customs and excise sector. In APBNP 2012 the revenue of import tax is expected to reach 24.7 trillion. Based on its realization for the first six months, the revenue of import tax in 2012 is projected to amount Rp.26.1 trillion or 105,5 percent of the target. It is mainly due to import increase during Furthermore, to exercise commitment to international trade agreements, the Government will decrease import tariff as aggreed in international cooperation agreement, including: (a) ASEAN Trade In Goods Agreement (ATIGA) for AFTA; (b) ASEAN-China Free Trade Area (ACFTA);(c) ASEAN-Korea Free Trade Area (AKFTA); (d) Indonesia-Japan Economic Partnership Agreement (IJEPA); and (e) ASEAN-India Free Trade Area (AIFTA). In addition, 3-12 Financial Notes and Indonesian Budget 2013

80 Government Revenues Chapter 3 to foster trade cooperation between ASEAN-Australia-New Zealand (AANZ), the Government has agreed on AANZ cooperation agreement that has been in force since December The trend of revenue reaped from import tax and dutiable import from can be seen in Graph 3.5. Export Tax Revenue Trillion Rp 30,0 25,0 20,0 GRAPH3.5 IMPORT TAX AND DUTIABLE IMPORT REVENUE TREND ,7 Bea Masuk 22,8 Dutiable Impor 18,1 20,0 25,3 24,7 26,1 billion US$ ,0 10,0 5,0 0, APBNP Outlook 2012 Source: the Ministry of Finance The export tax revenue in recorded average growth of 61.5 percent. The highest export tax was collected in early 2008 and 2011 when CPO price in international market hit US$1,200.0 per ton. In 2009, the revenue from export tax was to decline following the downward CPO international price. The trend of CPO international price and export tax US$/Ton 1400 CPO Price GRAPH 3.6 INTERNATIONAL CPO PRICE AND EXPORT TAX TRENDS, Export Tax billion Rp Source: the Ministry of Finance (processed) Financial Notes and Indonesian Budget

81 Chapter 3 Government Revenues revenue in can be seen in Graph 3.6. In 2012, the Government revenue from export tax is set to reach Rp.23.2 trillion. In view of its realization in semester I and the introduction of policy on the extensification of export tax to mineral ore under PMK Nomor 75/PMK.011/2012, which takes into effect since May 2012, it is estimated that export tax revenue in 2012 reach Rp.24.8 trillion or percent of APBNP target. In the mean time, in setting export tax for oil coconut, CPO and the derivative products, the Government devides the goods chargeable with export tax into 5 (five) groups according to the downstream hierarchies of oil coconut based products, CPO and the derivative products, to wit: (a) export tax charged to primary oil coconut products with the highest tariff 40 percent; (b) export tax charged to raw coconut oil with the highest tariff 22.5 percent; (c) export tax charged to coconut oil processed products (requiring further processing) with the highest tariff 15 percent; (d) export tax charged to raw materials for upstream oil coconut industries with the highest tariff 13 percent; and (e) export tax charged to coconut oil based ready to consume products (cooking oil and biodiesel) with the highest tariff 7.5 percent. The export tax tariff for oil coconut, CPO and the derivative products can be seen in Table 3.9. Downstream oil coconut industry policy aims to enhance the added value and competitiveness TABLE 3.9 EXPORT TAX TARIFF FOR COCONUT OIL, CPO AND THE DERIVATIVE PRODUCTS (PMK NOMOR 75/PMK.011/2012) GROUP TYPE OF COMMODITY 750 > > > > EXPORT TARIFF (%) > > > > > > >1250 Palm fruits, seeds, kernel I Oil case and other solid residue from palm fruits, seed and kernel Crude Palm Oil (CPO) 0 7,5 9 10, , , , ,5 II Other Group 2 0 7,5 9 10, , , , ,5 III Group , ,5 15 RBD Palm Olein ,5 13 IV Hydrogenated RBD Palm Olein, not including packed with gross weight 25 kg with Iodine Value 49 Wijs ,5 13 Other Group V Source: the Ministry of Finance RBD Palm Olein in branded packing 20kg Biodeisel from crude palm oil (fatty Acid Methyl Esters ) ,5 of upstream oil coconut industries in domestic markets. This policy is an attempt to compensate global market treatment which imposes import tax to CPO and crude palm kernel oil (CPKO) at low level. Meanwhile, import tax for downstream CPO products and the derivative products is charged at the highest rate causing the utilization of domestic or 3-14 Financial Notes and Indonesian Budget 2013

82 Government Revenues Chapter 3 national downstream CPO industries and the derivative products just to operate at around 50 percent per annum from the installed production capacity. To control mineral ore export and highten the added values of domestic processing industries, the Government has issued policy on the charge of export tax to mineral ores as indicated in Box 3.2. It is in conformity with mandate of Law Number 4 of 2009 concerning Mineral and Coal Mining regulating the obligations on raw material or mineral ore processing management for domestic mines that will be applicable no later than Box 3.2 Export Tax for Mineral Ores Mineral is a non-renewable resource controlled by the State and exploited maximally for the prosperity of people. Its management must generate added values for the national economy. To realize this objective, the management of mineral mining must be based on benefit, justice and proportionality principles solely for the sake of nation and state interests as prescribed in Law Number 4 of 2009 concerning Mineral and Coal Mining. As the immediate impacts of soaring prices of mining commodities in international markets, Thousand Ton Export Volume of Some Mining Commodities, Bijih besi dan konsentratnya Bijih nikel dan konsentratnya Bijih alumunium dan konsentratnya the export volumes of some mineral commodities records significant increase in period In the mean time, the development of domestic processing and smelting industries for mineral products not yet shows promising progress for the last few years. Added values from mining processing industries to national economy remain insignificant. In attempt to control raw material or ore sales abroad and to augment the added values and supplies of mineral resources in domestic markets, the Government has introduced policy on export tax charged to raw material or ore commodity export as established under the Financial Notes and Indonesian Budget

83 Chapter 3 Government Revenues Regulation of the Minister of Finance Number 75/PMK.011/2012 concerning the Establishment of Export Goods Chargeable with Export Tax and Duty, which is effective as from 16 May Legal basis for the charge of export tax to export commodities refers to Article 2A paragraph (2) Law Number 17 of 2006 concerning Amendment to Law Number 10 of 1995 concerning Customs with a view to: (1) securing domestic demands; (2) protecting natural resources; (3) anticipating drastic price hike of certain export commodities in international market; or (4) maintaining price stability of particular commodities in domestic markets. Export tax tariff charged to mineral ore commodity export is established under flat advolarem system of 20 percent so as to control raw material export in effective way and to assure that the mining companies has augmented their added values from the processing and smelting of domestic mining commodities. EXPORT TAX TARIFF GROUP FOR MINERAL ORES Tariff Charge Group Export Tax Tariff (percent) A. Metallic Mineral 20 B. Non-Metallic Mineral 20 C Rocks Non-Tax (PNBP) Revenue As a source of Government revenue, PNBP always plays leading role. In APBN structure, PNBP is classified into: (a) natural resources revenue of oil and gas and non-oil and gas including general mining, forestry, fishery and geothermal; (b) Government revenue for SOE profit sharing; and (c) other PNBP; and (d) revenue from public service body (BLU). During , PNBP in general experienced fluctuated growth at 11.4 percent on the average. In 2011, the realized PNBP revenue amounted Rp trillion or to rise by 23.3 percent from its realization in In terms of composition, this higher realization in 2011 was due to more revenue earned from natural resources of oil and gas recording 26.7 percent. It is particularly because of soaring ICP price following the skyrocketing oil price in global markets. In APNBP 2012, the PNBP revenue is targeted to reap Rp trillion. With its realization in semester I 2012 reaching Rp trillion, the realization of PNBP in 2012 is expected to amount Rp trillion (101.0 percent of APBNP 2012). This is consistent with the estimate of weakening rupiah exchange rate to US dollar and higher ICP. Based on such estimated realization, PNBP will contribute 28.9 percent to domestic revenues. The trend of PNBP revenue during can be seen in Table Financial Notes and Indonesian Budget 2013

84 Government Revenues Chapter 3 Natural Resources Revenues Natural resources revenues garnered from oil and gas and non-oil and gas are the main sources of PNBP revenues. In these natural resources revenues contributed 64.0 percent on the average to total PNBP with average growth of 12.6% per annum. The highest growth was in 2008 at 68.9% with nominal value reaching Rp trillion. In APBNP 2012 revenues from natural resources are expected to reach Rp trillion. Based on the realization in semester I 2012, the natural resources revenues in 2012 are predicted to amount Rp trillion or percent of APNBP 2012 target. Natural Resources Revenues of Oil and Gas Oil and gas are the main sources for revenues collected from natural resources sector with contribution 91.9 percent on the average during In such period, this kind of revenue was to show fluctuated growths with average of 11.6 percent. This performance is subject to ICP and crude oil production fluctuation. In APBNP 2012, the natural resources revenues from oil and gas is predicted to reach Rp trillion consisting of Rp trillion from oil and Rp47.5 triliion from gas. With realization in semester I 2012 recording Rp.68.7 trillion, it is expected that revenues of natural resources from oil and gas reach Rp trillion or of the target. This increase is due to higher ICP realization target and rupiah depreciation to US dollar in In addition, optimizing oil and gas revenue is dependent on cost recovery efficiency by decreasing cost recovery ratio to gross revenue of downstream oil and gas sector. The trend of natural resources from oil and gas during can be seen in Graph 3.7. Natural Resources Revenues of Non-Oil and Gas Revenue earned from non-oil and gas natural resources is non tax revenue reaped from the management of natural resources for activities GRAPH3.8 in general mining, forestry, fishery and Trillion Rp NON OIL AND GAS REVENUE, geothermal. During revenue 25,0 collected from non-oil and gas natural 20,3 20,0 resources was to grow by 25.8 percent on the 16,7 18,8 19 average. It was mainly from general mining 15,0 12,8 13,2 and forestry. The trend of this revenue of nonoil and gas natural resources during is presented in Graph ,0 5,0 8,1 As the largest source of revenue from non-oil and gas natural resources, general mining constantly increased. In 2007 this sector was 0,0 trillion Rp ,8 GRAPH3.7 OIL AND GAS REVENUE TREND, APBNP Outlook Oil Revenue Gas Revenue Source: the Ministry of Finance APBNP Outlook General Mining Forestry Fishery Geothermal Source: the Ministry of Finance Financial Notes and Indonesian Budget

85 Chapter 3 Government Revenues to rise by 29.2 percent on the average. In APBNP 2012 its revenue is set to amount Rp15.3 trillion. In view of its realization in semester I 2012, revenue from general mining sector is projected to meet the specified target. It will be pursued by tightening mineral and coal production supervision and the management of mineral and coal commodity exports. As to the revenue collected from forestry sector, in it showed upward trend with average growth of 11.1 percent. In APBNP Forestry revenue is projected to meet the set target, mainly from reforestation fund Rp.1,504.6 billion, forest resource rent provision (PSDH) Rp.1,304.9 billion, Right of Forest Exploitation (HPH) Licence Fee (IHPH) Rp.38.1 billion and forest area utilization fee Rp billion. As another non-oil and gas revenue source, fishery sector in showed average increase of 12.1 percent. The main factor supporting this fishery revenue is more intensive collection of PNBP liabilities to the license holders of capture fishing boats. In APBNP 2012, revenue from fishery sector is expected to reach Rp.150 billion consisting of fishery exploitation fee (PPP) Rp.9.5 billion and fishery extraction levies (PHP) Rp billion. Based on realization in semester I 2012, it is predicted that fishery sector can meet its revenue target with improved fishery farming, more domestic fishing boat fleets to replace foreign boats and better licensing services (mobile unit) and collection administration. The revenue of geothermal mining comes from Government s 34 percent portion of net operating income (NOI) energy/power generation minus tax liabilities and other charges as set out in laws. Geothermal mining is primarly to support the development of renewable energy. It is expected that in future this geothermal give greater contribution since Indonesia is bestowed with enormous geothermal potentials. In APBNP 2012, the revenue earned from geothermal mining is projected to amount Rp.0.4 trillion. In view of its realization in semester I 2012, revenue from goethermal mining sector will reach Rp.0.5 in 2012 or percent of APBNP target. This increase is attributed to: (a) accelerated payment from Star Energy; (b) improved NOI from Chevron Geothermal Indonesia (CGI) after the award of Certified of Emission Reduction (CER); (c) higher selling price of steam from PLTU Kamojang plant; and (d) lower drilling costs of CGI. Government s Portion of SOEs Profits During , the performance of state owned enterprises (SOEs) shows positive trend in terms of assets, equity, operating income and profitability and capitalization of the listed SOEs. In the same period, total assets of SOEs are to rise by 14 percent on the average with the equity to grow by 11 percent on the average, and operating income and profitability to increase by respectively 14 percent and 22 percent on the average. Data on the capitalization of listed SOEs in Indonesian Stock Exchange (BEI) indicates market capitalization values from 18 SOEs per 30 Source: the Ministry of Finance December 2011 worth Rp trillion or 23.0 percent of total BEI capitalization. Some SOEs chalked up remarkable achievements and Rp trillion (sale, assets) ,6 GRAPH 3.9 SOE ACCOUNTING PERFORMANCE Sales Assets Equities Net Gain (loss) 1725,1 1161,7 1977,8 985,7 2234,4 1077,7 2505,5 1387,7 Rp trillion (equities, G/L) 2962, Financial Notes and Indonesian Budget 2013

86 Government Revenues Chapter 3 listed in Forces Global 2000 of They include Bank BRI, Bank Mandiri, PT Telkom, Bank BNI, PT Perusahaan Gas Negara, and PT Semen Gresik. In general, as of January 2012, there are 141 SOEs consisting of SOEs of Perum, 109 SOEs of Persero, and 18 SOEs of Listed Perseroan. Besides, the Government holds minority shares in 15 limited liabilities companies. The trend of SOEs accounting performance in is shown in Graph 3.9. With the bolstering SOEs performance, their contribution to APBN is steadily increasing at 7.9 percent growth on the average. Of such amounts, 20.4 percent is from dividends, 78.8 percent from tax revenue, and 0.8 percent from privatization proceeds. SOEs contribution to APBN during 2007 to 2011 can be seen in Graph During , the Government revenue earned from SOEs profit sharing was to rise by 5.0 percent on the average. The highest sharing was received in 2010 at Rp.30.1 trillion or 15.5 percent of total PNBP. This exceeding Government revenue from SOEs profit sharing in 2010 was mainly attributed to price increase of mining commodities in global markets that augmented the profitability of SOEs engaged in mining sector. The trend of Government revenue from SOEs profit sharing is presented in Graph In APBNP 2012, the revenue of SOEs profit sharing is set to reach Rp.30.8 trillion. The revenue of SOEs dividends in 2012 based on realized profit increase in 2011 and higher price of mining commodities in international markets that in turn will boost the business turnover of SOEs in mining sector. With such promising performance, and in view of realization in semester I reaching 47.2 percent, it is predicted that the target of Government s revenue from SOEs profit sharing in 2012 be realized. Other Non-Tax Revenue (PNBP) Rp trillion The main source of other Non-Tax revenue (PNBP) comes from services rendered by the ministries/agencies (K/L) respective of their major tasks and functions. Generally speaking, other non-tax revenue is divided into several types, namely: (a) income earned from the management of state owned assets (BMN) and from sales proceeds; (b) service income; (c) interest income; (d) attorney general office and court institutions; (e) education fees; (f) gratification and confisticated corruption money; (g) levies and fines; and (h) other incomes. During , the revenue collected from other non-tax sources was to grow by 11.2 percent on the average. During such period, incomes from sales and leasing (now income earned from the management of state owned assets (BMN) and sales proceeds) and service fees recorded the highest growth by respectively 50.4 percent and 24.7 percent on the average. The trend of other non-tax revenue from can be seen in Graph ,0 160,0 140,0 120,0 100,0 80,0 60,0 40,0 20,0 0,0 106,2 Privatization Tax Dividend 125,5 162,4 132,9 144, Source: the Ministry of Finance Rp trillion 35,0 30,0 25,0 20,0 15,0 10,0 5,0 0,0 23,2 GRAPH 3.10 SOE CONTRIBUTION TO APBN, ,1 26,1 30,1 28,2 30,8 30, APBNP Outlook Source: the Ministry of Finance GRAPH 3.11 GOVERNMENT PORTION OF SOE PROFITS, Financial Notes and Indonesian Budget

87 Chapter 3 Government Revenues To optimize Non-Tax Revenue of K/L (Ministries/Agencies), in 2012 the following actions will be taken: (a) improving service delivery and administration of Non-Tax Revenue of K/L (Ministries/Agencies); (b) revising some regulations on types and tariff of Non-Tax Revenue of K/L (Ministries/Agencies); and (c) monitoring, evaluation and coordination of K/L (Ministries/Agencies) non-tax revenue management. With such policies, other non-tax revenue in 2012 is expected to record Rp.0.4 trillion or percent of APBNP 2012 target. For the last few years, there are seven K/L with significant contribution to this non-tax revenue. They are inclusive of the Ministry of Communication and Informatics (Kemenkoinfo), the Ministry of National Education (now Kemendikbud), the Ministry of Health (Kemenkes), The Police of Republic of Indonesia (Polri), the Ministry of Laws and Human Rights (Kemenhkumham), National Land Agency (BPN), and the Ministry of Transportation. The trend of other non-tax revenue from such ministries can be seen in Table trillion Rp ,9 GRAPH 3.12 OTHER NON TAX REVENUE TREND, ,3 53,8 59,4 69,4 72, No Ministries/Agencies (K/L) The Ministry of Comm. & Informatics 4,4 7,0 9,0 10,9 9,5 10,1 2 The Ministry of National Education 3,6 1,6 0,3 2,6 2,4 1,9 3 The Ministry of Health 3,0 2,9 3,3 0,4 0,4 0,2 4 National Police 1,5 1,7 1,8 2,6 3,4 4,6 5 National Land Agency 0,8 0,9 1,0 1,2 1,3 1,7 6 The Ministry of Laws and Human Rights 0,9 1,2 1,4 1,8 2,1 2,2 7 The Ministry of Transportation 0,4 0,5 0,9 0,8 1,2 0,7 Total Source: various ministries/agencies TABLE 3.10 PNBP TREND FOR THE 7 ;ARGEST K/L, (trillion rupiah) APBNP 14,6 15,8 17,7 20,3 20,3 21,3 In , the Non-Tax revenue of the Ministry of Communication and Informatic recorded average rise of 21.2 percent. In 2012, the non-tax revenue from this Kemenkominfo is expected to amount Rp.10.1 trillion. To support its realization, the Government will take some attempts, including: First, prepare new regulation to accelerate the opening of new opportunities in the utilization of frequencies; Second, comprehensive review of formula and rate of new variables in User Right Cost (BHP) of certain frequency band allocation; Third, restructuring and updating database system; Fourth, licensing process automatization/ 3-20 Financial Notes and Indonesian Budget 2013

88 Government Revenues Chapter 3 modernization; Fifth, intensifying non-tax collection to frequency spectrum users, telecommunication Rp. trillion equipment vendors, and telecommunication 12 operators; Sixth, verification and examination of 10 telecommunicaion BHP payments along with BPKP 8 auditors as counterparts; Seventh, intensive 6 socialization to telecommunication operators; Eighth, 4,4 4 law enforcement to illegal telecommunication, post 2 and broadcasting operators and frequency users; 0 Ninth, simplifying licensing process; and Tenth, improving the competency of non-tax revenue managers to be more effective and efficient. The trend of Kemenkominfo Non-Tax revenue can be seen in Graph Meanwhile, non-tax revenue of the Ministry of National Education (now the Ministry of Education and Culture) during was to record diverse growth fluctuated at 9.6 percent on the GRAPH 3.14 PNBP TREND OF KEMENDIKBUD, average. In APBNP 2012, the Kemendikbud s nontax revenue is targeted to amount Rp.1.9 trillion. To Rp trillion ,6 4 pursue such target, several attempts will be taken: (a) 3 2,6 2,4 socialization of BLU financial management to state 3 1,9 2 universities (PTN); (b) developing non-tax revenue 1,6 2 management for PTNs; (c) dealing with findings 1 relating to the direct use of non-tax revenue with BPK, 1 0,3 BPKP, Inspectorate General of Kemendikbud, and 0 other law enforcement officers; (d) recommending Source: Kemendikbud revisions to regulations on non-tax revenue for PTNs; and (e) not increasing tuition fees for universities. The trend of Kemendikbud s non-tax revenue can be seen in Graph Non-tax revenue from the Ministry of Health during was to record negative growth of 39.6 percent on the average. It was due to changing management pattern of state owned general hospitals into BLU (Public Service Agency). In APBNP 2012, the non-tax revenue of Kemenkes is set to reach Rp.0.2 trillion. To pursue this target the following actions will be taken: (a) improving the quality of services and human resources; (b) enhancing the integration of health facilities and infrastructure according to the specified standards; (c) augmenting hospital cost recovery toward self-reliant and computerized financial administration; and (d) Rp trillion 3,0 2,9 developing safe, effectual and quality health service model. The trend of non-tax revenue from the Ministry of Health can be seen in Graph During the non-tax revenue collected by the National Police (Polri) was to rise by 23.1 percent on the average. Meanwhile, the target of Polri s non-tax revenue in 2012 is set 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 GRAPH 3.13 PNBP TREND OF KEMENKOMINFO, ,0 9,0 GRAPH 3.15 PNBP TREND OF KEMENKES, ,3 10,9 0,4 0, APBNP Source:Kemenkes 9,5 10, Source: Kemenkominfo APBNP 0,2 Financial Notes and Indonesian Budget

89 Chapter 3 Government Revenues Rp trillion 5,0 4,5 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 1,5 GRAPH 3.16 PNBP TREND OF POLRI, ,7 1, APBNP Source: Kepolisian RI 2,6 3,4 4,6 Rp trillion 2,5 2,0 1,5 1,0 0,5 0,0 GRAPH 3.17 PNBP TREND OFKEMENKUMHAM, ,9 1,2 1, Source: Kemenkumham APBNP 1,8 2,1 2,2 at Rp.4.6 trillion that will be achieved with: (a) introducing SSB services (Driving License, STNK and BPKB) and fast, proper, simple, low-cost, humane and transparent services with the main targets of 15 minute services for Driving License and STNK renewals without any middleman service during the whole process; (b)intensifying traffic law enforcement operation to educate motorists who are still lack of traffic laws; (c) establishing online transparency access with online SSB information system services; (d) mobile service facilities for reporting notice (SKLD); (e) enhancing human resources quality and functional training on traffic; and (f) low enforcement for traffic offenders to establish legal certainty and safety, security, law and order and smooth traffics. The trend of Polri s non-tax revenue can be seen in Graph During , the non-tax revenue of the Ministry of Laws and Human Rights experienced growth of 23.6 percent on the average with the main factor contributing for this increase was revenue from imigration and legal services. In APBNP 2012, the non-tax revenue of the Ministry of Laws and Human Rights is set at Rp.2.2 trillion. To achieve this target, the Government will take some measures including: (a) improving services with more immigration offices; (b) increasing the number of visa on arrival (VKSK) immigration verification venues (VKSK); (c) developing technology equipment in immigration affairs; and (d) automatization of intellectual right service system. The trend of Non-Tax Revenue for the Ministry of Laws and Human Rights can be seen in Graph In , the non-tax revenue of National Land Agency (BPN) was to rise by 12.9 percent on the average. In APBNP 2012, the target non-tax revenue of BPN is set at Rp.1.7 trillion. To attain this target, the Government will take some actions, such as: (a) introducing pro-active service model with Mobile Land Office for Land Certification (Larasita); (b)developing the service capacity with additional serveyors and judicial data collection officials, including involving licensed surveyors; and (c) increasing non-tax service tariff according to PP No. 13 of 2010 concerning Tariff and Types of Non-Tax Revenue applicable for BPN. The trend of non-tax revenue of BPN can be seen in Graph The non-tax revenue of the Ministry of Communication during recorded average increase of 30.7 percent. In APBNP 2012, the non-tax revenue to be reaped by the Ministry of Communication is set at Rp.0.7 trillion. To realize such target, the Government will take several attempts of: (a) optimizing the facilities generating non-tax revenue; (b) enhancing the quality and capacity of research activities; and (c) intensifying cooperation, coordination 3-22 Financial Notes and Indonesian Budget 2013

90 Government Revenues Chapter 3 Rp trillon 1,8 1,6 1,4 1,2 1,0 0,8 0,6 0,4 0,2 0,0 0,8 GRAPH 3.18 PNBP TREND OF BPN ,9 1, Source: BPN APBNP 1,2 1,3 1,7 Rp trillion 1,4 1,2 1,0 0,8 0,6 0,4 0,2 0,0 GRAPH 3.19 PNBP TREND OF KEMENHUB, ,4 0,5 0, Source: the Ministry of Transportation 0,8 1,2 0,7 and socialization with users, customers or other stakeholders relating to non-tax revenue from transportation sector. The trend of non-tax revenue of the Ministry of Transportation can be seen in Graph Revenue from Public Service Agency (BLU) Pursuant to PP Number 23 of 2005 concerning BLU for Finance Management, one target to pursue from the establishment of BLU is to improve public services to the communities so as to enhance public welfare and educate the nation. BLU revenue is considerably subject to the volume of service activities, tariff of the services provided and rendered as established by the Minister of Finance, quality of services and management administration of BLU. During , BLU revenue showed constant increase at 75.3 percent on the average. This realization was attributed to more working units (satker) changed into BLU. In 2007, BLU was executed by nine K/Ls (ministries/agencies) engaged in goods/services sector and financing sector. In 2012, BLU are carried out by 19 K/Ls in health sector, financing sector, telecommunication sector, education sector, technology sector, regional management, etc. Target of BLU revenue in APBNP 2012 is set at Rp.20.4 trillion. To achieve such target, some efforts will be taken, i.e. to enhance public services with better human resources quality, to improve effectiveness and efficiency of BLU finance management, and to promote transparency and accountability in finance management of Government institutions. The trend of BLU revenue can be seen in Graph Grant Proceeds The realization of grant proceeds in recorded an average growth of 32.6 percent. In ABPNP 2012, revenue of grant proceeds is expected to amount Rp.0.8 trillion. In view of its realization in semester 2012, grant proceeds expected to receive in 2012 can meet the Rp trillion ,1 GRAPH 3.20 BLU REVENUE TREND, ,7 8,4 10,6 20,1 20, APBNP 2012 Financial Notes and Indonesian Budget

91 Chapter 3 Government Revenues specified target. Factors contributing the realization of grants include Government policy that facilitate the donor agencies in granting their assistance to the Government of Indonesia, i.e. the grant that will be channelled in well-planned mechanism or consist of direct grants. In addition, this kind of revenue is dependent on policy taken by the Government in introducing grant accounting system and grant management mechanism. In this case, K/L being the beneficiaries must record all grant proceeds in APBN. The trend of grant proceeds in can be seen in Graph trillion 6,0 5,0 4,0 3,0 2,0 1,0 0,0 1,7 2,3 GRAPH 3.21 GRANT REVENUE TREND, , APBNP 2012 Source: the Ministry of Finance 3,0 5,3 0,8 3.3 Challenges and Opportunities of Government Revenue Policies In 2013, policies of Government revenue mobilization are expected to be more complicated. On one side, demands on budget allocation will mount for the preparation of the last round of RPJMN On the other side, some macroeconomic development may be not always positive to the accumulation of Government revenues. Opportunities and challenges in tax collection as the primary sources in financing national development concern with tax extensification and intensification to various tax sources, especially from informal sectors, which have yet to give significant contribution to overall Government revenue thus far. In addition, many challenges potential to bring about negative impacts to Government revenue from international trade sector are expected to emerge. In addressing free trade challenges, Indonesia has inked some international trade agreements with other countries, either at regional level such as ASEAN Trade In Goods Agreement (ATIGA) for AFTA, ASEAN- China Free Trade Area (ACFTA), ASEAN-Korea Free Trade Area (AKFTA), and ASEAN- India Free Trade Area (AIFTA), or bilateral agreement like Indonesia-Japan Economic Partnership Agreement (IJEPA). The signing of such agreements will affect Indonesian policy with regard to import tax tariff, which tends to lower. However, international trade agreements will open broader markets for Indonesian products that in turn revenue from import tax of raw materials will rise and foresign exchange from Indonesian products will be also expected to boost. From export side, the charge of export tax for Indonesian export commodities, which are downstream character or raw materials, is potential to hamper the export and as such generate negative impacts to export tax revenue collection. However, foreign exchange from export will increase when the Indonesian products are exported in processed goods, instead of raw materials. Based on the latest conditions, it is identified that domestic upstreaam industrial development has showed some successes, especially for CPO commodity. Now the export of CPO has been shifted to the export of its derivative products. Another challenge is export tax revenue that may fluctuate with the prices of export goods in international markets. This happens because the objective of export tax is not an instrument to support Government revenues but more aimed at: (a) satisfying domestic raw material requirements; (b) preserving natural resources; (c) maintaining the stability of prices for 3-24 Financial Notes and Indonesian Budget 2013

92 Government Revenues Chapter 3 certain domestic commodities; and (d) anticipating the exceeding price hike for certain export commodities in international market. Challenges in Non-Tax Revenue mobilization in 2013 concern with the improved development and supervision of non-oil and gas natural resources to optimize revenues from these sectors. In addition, the Government will revise regulations on non-tax revenue and improve nontax revenue management mechanism, especially for non-tax revenue of K/L. Especially for SOEs dividend policy, the Government has to deal with challenge of setting the most appropriate pay out ratio in optimizing SOEs dividends. 3.4 Target Government Revenues in 2012 The Government revenues will play more leading roles in financing Government expenditures, either for Central Government Expenditures or Transfer to Regions. This more significant role is consistent with Government s initiatives of cutting budget deficit and loans. In 2013, the Government Revenues are projected to amount Rp.1,529.7 trillion. They consist of domestic revenue Rp.1,525.2 trillion and grant proceeds Rp.4,5 trillion. These projections are based on macroeconomic assumptions such as economic growth, inflation, rupiah exchange rate to US dollar, oil and gas liftings, and oil price on top of policies taken by the Government in 2013 can be seen in Table TABLE 3.11 GOVERNMENT REVENUE, (trillion Rupiah) Description APBNP 2012 Outlook *) 2013 APBN I. DOMESTIC REVENUE 1.357, , ,2 1. Tax Revenue 1.016, , ,0 a. Domestic Tax 968,3 970, ,3 1) Income Tax 513,7 499,0 584,9 a) Oil and Gas 67,9 76,6 71,4 b) Non Oil and Gas 445,7 422,4 513,5 2) Value Added Tax 336,1 347,3 423,7 3) Land and Building Tax 29,7 31,7 27,3 4) Excise 83,3 87,9 92,0 5) Other Tax 5,6 5,0 6,3 b. International Trade Tax 47,9 50,9 58,7 1) Import Tax 24,7 26,1 27,0 2) Export Tax 23,2 24,8 31,7 2. Non Tax Revenue 341,1 344,6 332,2 a. Natural Resources Revenue 217,2 220,2 197,2 1) Oil and Gas 198,3 201,1 174,9 a) Oil 150,8 144,5 120,9 b) Gas 47,5 56,6 54,0 2) Non Oil and Gas 18,8 19,0 22,3 a) General Mining 15,3 15,3 17,6 b) Forestry 3,1 3,1 4,2 c) Fishery 0,2 0,2 0,2 d) Geothermal 0,3 0,5 0,4 b. Gov. Portion of SOE's proft 30,8 30,8 33,5 c. Othe Non Tax Revenue 72,8 73,2 78,0 d. BLU Revenue 20,4 20,4 23,5 II. GRANT REVENUE 0,8 6,0 4,5 *) Accordinto Outlook in APBN 2012 Implementation Report Semester I Source: the Ministry o Total 1.358, , ,7 Financial Notes and Indonesian Budget

93 Chapter 3 Government Revenues Domestic Revenue Domestic revenue, which composes of tax and non-tax revenues are considerably dependent on policies concerning Government revenues presently applied or to be applied by the Government in 2013 and the prospect of domestic and international economic development. In 2013, tax revenue is set at Rp.1,193.0 trillion with non-tax revenue projected to reach Rp trillion Tax Revenue Target of tax revenue in 2013 is set at Rp.1,193.0 trillion consisting of domestic tax revenue Rp.1,134.3 trillion and international tax revenue Rp.58.7 rillion. The domestic tax revenue composes of income tax Rp trillion, value added tax Rp trillion, land and building tax Rp.27.3 trillion, excise Rp.92.0 trillion, and other taxes Rp.6.3 trillion. On the other side, revenue from international trade tax consists of import tax Rp.27.0 trillion and export tax Rp.31.7 trillion. These targets will be supported with relatively stable macroeconomic foundation in 2013 as reflected in economic growth, which is expected to rise by 6.8 percent, and improved quality in tax administration and extra efforts. In narrow sense, (tax revenue divided by GDP), tax ratio in 2013 will record 12.9 percent. In broad sense, tax ratio will include tax revenue plus revenue from oil and gas natural resources and regional tax divided by GDP that will produce tax ratio of 15.8 percent in The Government will take any measure to boost tax revenue without disrupting economic growth and investment climate and business world. In general, the highlights of tax policy to take in 2013 are (a) to continue basic tax policies that have been introduced in 2012; (b) to intensify potential tax sources; (c) to enhance the quality of verification and investigation; (d) to improve tehnology information system; (e) to revise tax policy aimed at expanding tax base; (f) to intensify national tax census; (g) to strengthen customs and excise supervision and services; (h) excise extensification; (i) to increase PPnBM tax tariff for taxable luxury goods other than motor vehicles; and (j) to provide fiscal incentives for strategic economic activities, such as PPnBM exemption or cut for low-cost and hybrid and low carbon emission motor vehicles, and facility of uncollected VAT and PPnBM tax for taxable goods receiving import tax exemption under certain criteria. To support the realization of tax revenue target in 2013, apart from generic policies, the Government will exercise the following policies: 1. Revising policies on the exploration of potential tax sources from high-profile sectors, including (a) strengthening major tasks and functions (tupoksi) of Special Tax Office (KPP) for Mining and Oil and Gas Sector;(b) hiring surveyor agencies to reinforce primary database in mining and plantation sector; and (c) actively participating in renegotiation process of tax aspects on mining, oil and gas and other mineral exploitation sharing agreements. 2. Developing quality assurance unit to enhance the quality of verification and investigation to establish legal certainty, including firmer and more equitable law enforcement. 3. Optimizing the adoption of information technology with: (a) integration of DJP information system into project for Indonesia tax administration reform (PINTAR); (b) using approweb (web based profile application); and (c) introducing tax collection dashboard application Financial Notes and Indonesian Budget 2013

94 Government Revenues Chapter 3 4. Revising national tax census program and integrating with other program tax base expansion. 5. Improving international tax aspect to reinforce the national interest and to prevent tax evasion. 6. Reinforcing tax revenue by synchronizing national clearance system (SKN) between Bank Indonesia and Government Revenue Module (MPN). To secure the target revenue from customs and excise in 2013, the Government will continue technical policies in customs affairs or in service and supervision sectors. For the former, the technical policies to take include: (a) improving the accuracy of custom value verification and classification; (b) enhancing the effectiveness of physical examination to goods; and (c) optimizing the collectability of customs and excise receivables. In service and supervision sector, the technical policies to be adopted are: (a) developing customs and excise service automatization; (b) consistent customs services, i.e. 24 hours per day and 7 days in a week for some ports; (c) implementing integrated customs service regions (KPPT) to abate goods accumulation in ports; (d) revising the implementation of Indonesia National Single Window (INSW); (e) restricting work relation of supervisory units; (f) developing systematic profiling pattern for risk management; (g) continuing the adoption of operation facilities; (h) optimazing documentation and reporting standardization; (i) supervisory process automatization either vertically or horizontally; (j) development an integrated complaint resolution infrastructure; (k) macroeconomic review and fiscal policy to FTA scheme; (l) automated customs and excise receivable administration; and (m) introducing billing system for excise services. With regard to the policies on international trade, the Government plans to maintain its commitments to international goods trade cooperation agreements by decreasing import tax tariff in 2013 as agreed in international agreements such as: (a) Indonesia-Japan Economic Partnership Agreement (IJEPA); (b) ASEAN-India Free Trade Area (AIFTA); and (c) ASEAN-Australia-New Zealand Free Trade Area (AANZFTA). In addition, to secure supplies for domestic demands. To protect natural resources, to anticipate drastical price rise of certain export commodities in international markets and to maintain price stability of certain commodities in domestic markets, the Government will propose policies on the extensification of goods taxable for export tax in Policies in tax sector are not only aimed at increasing tax revenue but also to promote the economy with fiscal incentives, such as PPnBM exemption and cut to encourage Government program in motor vehicle industry development at affordable price, and the production of hybrid and low carbon emission vehicles. The Government remains committed to grant tax facilitation consisting of tax charged to the Government (DTP) for: (a) PPh DTP for geothermal commodities; (b) PPh DTP for interest, yields and income of the third parties for services rendered to the Government with regard to the offering of SBN (Government Bonds) in international markets; and DTP for import tax. Income Tax Revenue Revenue garnered from income tax (PPh) in 2013 is expected to amount Rp trillion consisting of oil and gas PPh Rp.71.4 trillion and non-oil and gas PPh Rp trillion. Oil Financial Notes and Indonesian Budget

95 Chapter 3 Government Revenues and gas PPh contributes 12.2 percent with non-oil and gas PPh 87.8 percent. For the latter, it includes PPh DTP (tax charged to the Government) Rp.3.8 trillion. Target oil and gas PPh Rp.71.3 trillion is subject to several economic factors such as: ICP assumption and oil and gas lifting. As to the estimated on-oil and gas PPh at Rp trillion in 2013 it will be vulnerable to economic growth and inflation. In addition, policies in tax sector will be carried out in sustainable manner with a view of boosting PPh revenue in 2013 so that the target PPh revenue from non-oil and gas natural resources can be achieved. To optimize PPh revenue in 2013, the Government has prepared a policy directed to expand tax base and at the same time to increase the purchasing capacity of low-income people and small and medium enterprises with: (a) simplifying PPh charge method for certain sector; and (b) revising and restructuring policy on final PPh charge; The projection of PPh revenue in 2012 and 2013 can be seen in Graph PPN and PPnBM Revenue trillion Rp 600,0 55,4 55,3 89,2 90,6 191,1 190,8 230,5 The Government revenue from PPN (VAT) and PPnBM (Sales Duty for Luxury Goods) is set to achieve target of Rp trillion consisting of PPN Rp trillion, PPnBM Rp.20.9 trillion, domestic PPN and PPnBM Rp trillion and Import PPN and PPnBM Rp trillion. This relatively exceeding target is due to high assumption of economic growth supported with household consumption and import growths. To attain such target, the Government will revise policies in PPN collection directed to PPN system administration restructuring, including: (a) improving corporate taxpayers confirmation (PKP) mechanism with re-registration program; (b) revising PPN information and monitoring system with e-invoice system and tax invoice format mentioning the goods applying harmonized system/hs code; and (c) restructuring PPN charge and collection system with input tax recording mechanism that can be used as deemed tax. In addition, the Government will intensify PPnBM. It is to increase the contribution of PPnBM in total tax revenue, to protect small or traditional producers, and to assure proportional consumption tax charge between high income customers and low income customers. Some regulations adopted as legal basis in PPnBM collection intensification are Law Number 42 of 2009 concerning PPN (VAT), PP Number 1 of 2012 concerning the Implementation of VAT Law, and PP Number 12 of 2006 concerning the seventh amendment of PP No. 145 of 2000 concerning Groups of Taxable Goods (BKP) as Luxury Items, which are chargeable for Sales Duty for Luxury Goods. This PPnBM intensification is carried out by increasing PPnBM tariff for taxable goods categorized as luxury goods other than motor vehicles. Besides, the taxable luxury goods chargeable with PPnBP tax will be expanded. The projection of PPN and PPnBM revenue in 2012 and 2013 can be seen in Graph ,0 400,0 300,0 200,0 100,0 0,0 GRAPH 3.22 PPh NON OIL AND GAS REVENUE, ,7 110,0 85, APBNP Source: the Ministry of Finance Other IT Final and Fiscal IT article , Outlook 513,5 111,8 67,5 103, APBN 3-28 Financial Notes and Indonesian Budget 2013

96 Government Revenues Chapter 3 Land and Building (PBB) Tax Revenue Revenue from PBB tax in 2013 is expected to record Rp.27.3 trillion. This target has taken into account the transfer of PBB collection for urban and rural sectors to the regional governments. Of such target, PBB tax revenue from oil and gas mining, plantation and forestry contributes respectively Rp.22.3 trillion, Rp.1.3 trillion and Rp.0.3 trillion. Meanwhile, PPB from urban and rural sectors is expected to amount Rp.0.4 trillion and Rp.2.6 trillion respectively. In 2013, the Government will continue policy of transfering the administration of PBB revenue from urban and rural sectors, which is previously considered as Central Government tax to regional tax. It conforms with the mandate of Law Number 29 of 2009 requiring the transfer of PPB tax from urban and rural sectors into regional government tax that has been commenced since 2011 and planned to be accomplished in The projection of PPB revenue in 2012 and 2013 can be seen in Graph Triliun Rp 450,0 400,0 350,0 300,0 250,0 GRAPH 3.23 VAT AND LST REVENUE, VAT/LST Import Domestic VAT/LST 128,5 157,1 164,3 33,0 32,0 31,0 30,0 29,0 29,7 GRAPH 3.24 LAND AND BUILDING TAX REVENUE, ,7 200,0 150,0 100,0 50,0 0,0 207,6 190, APBNP Source: the Ministry of Finance 2012 Outlook 259, APBN 28,0 27,0 26,0 25, APBNP Sumber: Source: the Kementerian Ministry of Keuangan Finance 2012 Outlook 27, APBN Excise Revenue Excise revenue in 2013 is targeted to reach Rp.92.0 trillion, consisting of excises from tobacco products Rp.88.0 trillion and MMEA and EA excise of Rp.4.0 trillion. Despite tobacco excise tariff increase, revenue from this tobacco excise will not experience significant rise. It is expected that cigarette productions suffer light slowdown in On the other side, extra efforts on the eradication of illegal banderoles will decrease in line with the deminishing illegal banderole distribution and less filtered cigarettes. To optimize the Government revenue from excise, the Government will propose policy on the extensification of excisable goods and excise intensification with excise tariff increase for tobacco products in 2013 to the Parliament (DPR). The excise extensification policy will refer to Article 2 paragraph (1) Law Number 39 of 2007 concerning Excise, regulating that for certain goods, excise may be charged if the said goods contain the following properties or characteristics: (a) their consumption must be controlled; (b) their distribution must be supervised; their consumption can bring about negative impacts to human beings or environment; or (d) their consumption is liable for duty charges. The projectionf of excise revenue for 2012 and 2013 can be seen in Graph Financial Notes and Indonesian Budget

97 Chapter 3 Government Revenues Other Tax Revenue The revenue collected from other tax in 2013 is predicted to record Rp.6.3 trillion. This target is based on high economic growth in 2013 that will stimulate transactions requiring duty stamps. Duty stamps are the largest source for other tax revenue. Its contribution for the last five years was 79.4 percent on the average. The projection of other tax revenue in 2012 and 2013 can be seen in Graph GRAPH 3.25 EXCISE REVENUE, GRAPH 3.26 OTHER TAX REVENUE, trillion Rp trillion Rp , APBNP 87, Outlook 92, APBN 7,0 6,0 5,0 4,0 3,0 2,0 1,0 0,0 5, APBNP 5, Outlook 6, APBN Source: the Ministry of Finance Source:the Ministry of Finance Import Tax Revenue In 2013 it is targeted that the import tax revenue will amount Rp.27.0 trillion including tax charged to the Government (DPT) Rp.1.0 trillion. Import tax is prone to the volume and value of imports, which follow international trade volumes. The projection of import tax in 2012 and 2013 can be seen in Graph trillion Rp , APBNP GRAPH 3.27 IMPORT TAX REVENUE, , Outlook 27, APBN Export Tax Revenue The revenue from export tax in 2013 is set to amount Rp.31.7 trillion. This target is however subject to the charge of export tax to mineral ore export and average CPO price in 2013 at international markets. The projection of export tax revenue in 2012 and 2013 can be seen in Graph trillion Rp , GRAPH 3.28 EXPORT TAX REVENUE, ,8 31, Non Tax Revenue (PNBP) In 2013, Non Tax Revenue (PNBP) will be more optimized to give greater contribution as domestic revenue source. At present, natural resources remain dominant sources for this Non Tax Revenue (PNBP), especially from oil and gas sector. The Government will further APBNP Source: the Ministry of Finance 2012 Outlook 2013 APBN 3-30 Financial Notes and Indonesian Budget 2013

98 Government Revenues Chapter 3 intensify revenue of non-oil and gas natural resources especially from general mining. Target PNBP revenue in 2013 is Rp trillion based on the established macroeconomic assumptions, notably oil price, rupiah exchange to US dollar and oil and gas liftings. Natural Resources Revenue In 2013, revenue from natural resources is expected to record Rp trillion. As the main source of PNBP revenue, natural resources give contribution 59.4 percent. The majority of natural resources revenue comes from oil and gas, i.e percent and the other 11.3 percent from non-oil and gas resources. Oil and Gas Revenue In 2013, the Government revenue from oil and gas resouces is predicted to reach Rp trillion. It comes from oil Rp trillion and natural gas Rp.53.9 trillion. This target is mainly subject to oil price, oil and gas lifting as basis for the calculation of oil and gas revenue, and policies to be taken in Some policies that will be taken are: (a) to achieve target crude oil lifting and gas lifting; (b) efficient cost recovery and to decrease cost recovery ratio to gross revenue; and (c) to intensify the collection of Government portion from oil and gas sales. The projection of oil and gas revenue in 2012 and 2013 can be seen in Graph trillion Rp 150,8 144,5 To achieve oil lifting taget, some efforts will be taken, i.e. (a) to optimize production of the existing fields including the introduction of enhanced oil recovery (EOR); (b) to accelerate the development of new fields and idle structure; (c) more attractive terms and conditions for work areas in remote area and/or deep seas; (d) to improve coordination with the related institution for dispute settlement on license regulation and overlap sites so as to increase the national oil production; and (e) to exercise Inpres No. 2 of 2012 concerning National Oil Production Increase GRAPH 3.29 OIL AND GAS PNBP REVENUE, ,5 56, APBNP Outlook Source: the Ministry of Finance Oil Gas 54,0 120, APBN Non-Oil and Gas Revenue The revenue of non-oil and gas resources in 2013, which comes from general mining, forestry, fishery and geothermal is expected to record Rp.22.3 trillion. The revenue of general mining is still dominating with contribution 78.8 percent. The projection of non-oil and gas revenue in 2012 and 2013 can be seen in Graph In 2013, the revenue of general mining is set to achieve Rp.17.6 trillion. It comes from land rent Rp.0.7 trillion and royalty Rp.16.9 trillion. trillion Rp ,8 19,0 22, APBNP 2012 Outlook 2013 APBN Source: the Ministry of Finance GRAPH 3.30 NON OIL AND GAS PNBP REVENUE, General Mining Forestry Fishery Geothe rmal Financial Notes and Indonesian Budget

99 Chapter 3 Government Revenues This target has taken domestic market obligation (DMO) under consideration to supply the upward domestic coal demands. To optimize general mining revenue, the Government will take some policies, i.e.: (a) to adjust types and tariffs of PNBP applicable for mining activities; (b) to improve mineral and coal production and marketing supervision, national mineral and coal production inventory; and (c) PNBP potential inventory and verification from general mining sector. The revenue from forestry sector in 2013 is planned to record Rp.4.1 trillion. It is from HPH (Right of Forest Exploitation) License Fee (IHPH) Rp.12.6 billion, Forest Resource Rent Provision (PSDH) Rp.1.9 trillion, reforestation fund Rp.1.8 trillion and forest area use Rp billion. This target for forestry revenue in 2013 is mainly supported with higher PSDH revenue from the increasingly forest products. The said target has taken into account the impacts of policy on the moratorium of new IHPH license award. The Government will continually attempt to increase revenue from forestry sector while preserving the environment with the following policies: (a) developing information technology based forest product management system (PUHH); (b) increasing production and diversification of natural forest enterprises; (c) issuing Commercial Timber Forest Products Utilization Permit Natural Forests/Ecosystem Restoration at logged over area/loa); and (d) expanding reserve areas for plant forest utilization. Revenue from fishery sector in 2013 is expected to reach Rp.0.18 trillion (0.1 percent of total PNBP revenue) coming from fishery exploitation fee (PPP) including foreign fishing fee (PPA), and fishery product levy (PHP). While the revenue of fishery sector is relatively small, in national economic scale this sector is expected to increase. Such improving role is evident from more intensive economic activities in fisherman activity centers at fishery ports and fish markets, widespread fishery culture in many fish farming centers, and fish processing, and regional revenue from marine and fishery charges. Some policies to be taken by the Government to optimize revenue from fishery sector are: (a) to improve services and administer business permits; (b) to intensify marine and fishery resources supervision; (c) to increase facilities and infrastructure; (d) to rise PNBP tariff to give certainty to the users of marine and fishery service sectors; (e) to increase the standard price of fish (HPI); and (f) to assure business operation in marine and fishery sector. Revenue from geothermal in 2013 is set at Rp.0.4 trillion. Some efforts to optimize geothermal revenue include the introduction of income tax charged to the Government (PPh DTP) for geothermal operators, whose licenses, concession permits or contracts are signed before the enactment of Law Number 27 of 27 of 2003 concerning Geothermal. Other attempts are intensification and extensification, regulation drafting and revision, and fiscal and non-fiscal policy supports for investments in geothermal sector. The Government s Portion of SOEs Profit Sharing In 2013 the Government s portion of SOEs profit sharing is expected to amount Rp.33.5 trillion. This target comes from high profitability estimate in financial year 2012 as a result of the bolstering performance of some SOEs. To optimize this revenue, the Government will take some policies as follows: (a) pay out ratio (POR) 0 percent to 25 percent for SOEs in forestry sector, insurance, and SOEs suffering loss accumulation; (b) POR 5 percent to Financial Notes and Indonesian Budget 2013

100 Government Revenues Chapter 3 percent for SOEs booking profits without loss accumulation; (c)por 40 percent to 45 percent for PT Pertamina; (d) POR 30 percent for PT PLN; and (e) no dividend withdrawal for SOEs suffering cash flow difficulties. In addition, SOEs are expected to optimize investments (capital expenditure) notably from the allowance of retained profits to improve their performance. The projection of Government s portion of SOEs profit sharing in 2012 and 2013 can be seen in Graph trillion Rp , APBNP Source: the Ministry of Finance GRAPH 3.31 GOVERNMENT PORTION FROM SOE PROFITS, , APBN Other Non Tax (PNBP) Revenue Other non-tax revenue in 2013 is planned to book Rp.78.0 trillion. This target is mainly from contribution of K/L non tax revenue for their services rendered to the communities. Of Ministries/Agencies (K/L) contributing in other non-tax revenue, seven K/L with the most significant contribution are: (a) the Ministry of Communication and Telecommunication, (b) the Ministry of Education and Culture; (c) the Ministry of Health,(d) The National Police of Republic of Indonesia, (e) the Ministry of Laws and Human Rights, (f) National Land Agency, and (g) the Ministry of Transportation. trillion Rp 12 10,1 9,9 Non-Tax revenue (PNBP) of the Ministry of Communication and Information is planned to reach Rp.9.9 trillion. Efforts taken to realize this target include: (a) Intensify collection to telecommunication operators and radio requrency specturm users in association with BPKP tasked to audit the taxpayer; (b) law enforcement in telecommunication operation and radio frequency useage; and (c) autmoatization/modernization of license processing to accelerate and facility public service delivery. The projection of non-tax revenue from the Ministry of Communication and Informatics in 2012 and 2013 can be seen in Graph Non-tax (PNBP) revenue of the Ministry of Education and Culture is planned to reach Rp.2.0 trillion. To achieve such target, the Government will: (a) introduce transparent and accountable budget system and activity based budgeting; (b) optimize assets to augment the added value of institutions according to the vision, mision and objectives of tertiary education; (c) not increase tuition fee for state unversities; (d) adopt single tuition tariff state universities starting from 2012, i.e. the tariff calculated based on unit price of all components relating to learning process in universities; (e) provide operation aid for the state universities; and (f) contribution without any connection with the recruitment process of new students in state universities. The projection of non-tax revenue (PNBP) from the Ministry of Education and Culture for 2012 and 2013 can be seen in Graph GRAPH 3.32 NON INCOME TAX OF KEMENKOMINFO, APBNP Source: the Ministry of Finance 2013 APBN Financial Notes and Indonesian Budget

101 Chapter 3 Government Revenues trillion Rp 2 1 GRAPH 3.33 PNBP OF KEMENDIKBUD, ,9 2,0 trillion Rp 0,3 0,3 0,2 0,2 0,2 GRAPH 3.34 PNBP OF KEMENKES, ,3 0,1 0, APBNP 2013 APBN 0, APBNP 2013 APBN Source: the Ministry of Finance Source: the Ministry of Finance The non-tax revenue (PNBP) of the Ministry of Health is predicted to amount Rp.0.3 trillion. Without belittling the main tasks of this ministry to render health services to people, the said target will be achived with the following efforts: (a) to improve non-tax revenue (PNBP) management; (b) to enhance the quality of health services as required; and (c) to increase the professionalism of human resources and science and technology. The projection of nontax revenue (PNBP) for the Ministry of Health in 2012 and 2013 can be seen in Graph The non-tax revenue of Polri (Police) is planned to reap Rp.4.8 trillion. This target will be optimized with the following measures: (a) reinforcing the police precinct (polres) as the spearheads of police services delivering one-stop service (samsat), driving license administration unit (satpas) service, BPKB service and accident service and bringing the service access closer to the communities; (b) developing human resources of the Police with traffic technical and functional training and education; (c) developing online one-stop service network in all police station (Polda) for online system national traffic management center (NTMC); (d) preparing the development of traffic management centre (TMC) in regions, which is integrated starting from Police Head Quarter to precint level so as to established sound law and order and smooth traffics; (e) launching open government information (OGI) for information disclosure to public in respect of SIM, BPKB, STNK and TNKB (SBST), with participation in public service competition organized by working unit of the President in development supervision and control affairs (UKP4); (f) supplying forms for service provision in traffic functions and security intellegent function and paying electricity bills, telephone bills of administration service unit (satpas) and honorarium for officers tasked in Police s non-tax revenue collection; and (g) expanding police certificate provision services (SKCK) up to sub-district level as the spearheads of police services to the public. The projection of non-tax revenue from Police in 2012 and 2013 can be seen in Graph trillion Rp 5,0 4,0 3,0 2,0 1,0 0,0 GRAPH 3.35 PNBP OF POLRI, , APBNP Source: the Ministry of Finance 4, APBN 3-34 Financial Notes and Indonesian Budget 2013

102 Government Revenues Chapter 3 Non-tax revenue (PNBP) from the Ministry GRAPH 3.36 of Laws and Human Rights is projected to NON INCOME TAXOF trillion Rp KEMENKUMHAM, record Rp.2.5 trillion. The target will be 2,8 reached with some measures, including: (a) 2,5 2,4 2,2 introducing electronic limited residency 2,0 permit cards (E-Kitas) and electronic 1,6 permanent residency permit cards (E- 1,2 KITAP); (b) developing immigration 0,8 0,4 management information system (SIMKIN) 0,0 in sustainable manner; (c) socializing 2012 APBNP 2013 APBN intellectual rights; (d) establishing legal Source: the Ministry of Finance service desk (fiducia) to bring the services closer to the people; (e) facilitating fiducia payment via banks and at the same time promoting transparent transactions; and (f) developing IT based services. The projection of non-tax revenue from the the Ministry of Laws and Human Rights can be seen in Graph National Land Agency (BNP) is expected to garner non-tax revenue (PNBP) in amount of Rp.1.7 trillion. This target will be pursued with: (a) building public trust to BPN through tariff socialization for land certificate processing via printed media; (b) improving land registration and certification services; (c) ensuring the reinforcement of people s rights on lands; (d) resoluting land related problems in disaster and conflict torn regions; and (e) developing national land information and management system (SIMTANAS) and land document security system throughout ttrillion Rp 2,0 1,6 1,2 0,8 0,4 0,0 GRAPH 3.37 PNBP OF BPN, ,7 1, APBNP Source: the Ministry of FInance Indonesia. The projection of non-tax revenue expected to reap from BPN in 2012 and 2013 can be seen in Graph The non-tax revenue (PNBP) from the Ministry of Transportation is expected to amount Rp.0.8 trillion. To pursue such a target, the Government will take some actions such as: (a) improving the safety and quality of river lake and ferry traffics (LLASDP); (b) conducting motor vehicle testing according to Euro-2 standard for petroleum fueled cars and motorcycles; (c) making investment in public service facilities and infrastructure; (d) providing business certainty in sea transport in order to develop and empower the economy of islands throughout Indonesia, to serve and promote national economic growth with uninterrupted goods supplies; (e) developing sound business climate to protect the sustainability and development of navigation business, including the development of traditional and small scale entreprises; (f) PNBP intensification with intensive collection to taxpayers; (g) reviewing service tariff as established in PP 6 of 2009 concerning Types and Tariff of PNBP of the Ministry of Transportation; and (h) PNBP extensification with optimizing state owned assets (BMN) and enhancing the quality of facilities and infrastructure. The Projection of PNBP revenue from the Ministry of Transportation in 2012 and 2013 can be seen in Graph APBN Financial Notes and Indonesian Budget

103 Chapter 3 Government Revenues BLU (Public Service Agency) Revenue In 2013, the revenue expected from BLU is planned to amount Rp.23.5 trillion. It is particularly due to more working units (satker) in K/L (Ministries/Agencies) introducing BLU financial management pattern to enhance their service quality. BLU Financial Management Pattern is demoninated by working units (Satker) serving education and health services. The majority of BLU revenue in 2013 come from education services, which are predicted to reach Rp.11.5 trillion and hospital services projected to amount Rp.5.8 trillion. In addition, revenue from telecommunication operation is projected to record Rp.1.7 trillion with revenue from other sector is planned to reap Rp.4.4 trillion. The projection of revenue from BLU in 2012 and 2013 can be seen in Graph trillion Rp 0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0,0 GRAPH 3.38 NON INCOME TAX OF KEMENHUB, ,7 Source the Ministry of Finance 0, APBNP 2013 APBN trillion Rp GRAPH 3.39 GENERAL SERVICES AGENCY REVENUE, ,4 Source: the Ministry of Finance 23, APBNP 2013 APBN Grant Proceeds Grant revenue in 2013 is expected to record Rp.4.5 trillion, This target is however considerably subject to commitments of trillion Rp donor countries to grant their assisance and 6,6 6,0 commitments of K/L (Ministries/Agencies) 5,4 4,8 being the beneficiaries in reporting and 4,2 3,6 ratifying the grants they receive. In addition, 3,0 2,4 the Government is highly committed to 1,8 1,2 improve the management of grant proceeds 0,6 - with better accountability and transparancy through recording system and administration for the received grants in APBN. The projection of grant proceeds to be earned in 2012 and 2013 can be seen in Graph GRAPH 3.40 GRANT REVENUE, , APBNP 6, Outlook Source:the Ministry of Finance 4, APBN 3-36 Financial Notes and Indonesian Budget 2013

104 Central Government Expenditure Chapter IV CHAPTER 4 CENTRAL GOVERNMENT EXPENDITURE BUDGET 4.1 General Normatively, the Government plays two groups of normative functions, i.e. non-economic functions and economic functions. The non-economic functions that must be played by the Government include defense and security function, justice function and public service function; as to the latter, i,e. Economic functions as the result of market failure, they consist of allocation function, distribution function, and stabilization function. With regard to attempts in augmenting social welfare, the economic functions of the Government are more focused on the quantity aspects of the welfare (e.g. income rate and growth rate). While non-economic functions are more directed to quality aspects of the welfare (e.g. security, law and order and environmental quality). Given that, in achieving the ideal social welfare, these two aspects should receive great concerns. Consequently, budget allocation in State Budget (APBN) must give equal treatment to these two aspects of welfare. In line of that, budget for the Central Government Expenditure, as part of overall Government spendings, should at least play two roles, which are paramount to pursue the national goals, especially in enhancing people s prosperity. First, the sums and composition of Central Government expenditure in fiscal operation will have great influence over aggregate demands being the determinant factors of national output, and the allocation and efficiency of economic resources. The second role relates to fund allocation for the execution of the three economic functions of the Government, i.e. allocation function, distribution function and stabilization function. The quality of policy and allocation of Central Government expenditure are in a very strategic position in supporting the realization of the envisaged national goals, either expressed in long-term development, mid-term development or short-term development plan. In fiscal operation, the allocation function role of Central Government expenditure is exercised through funding to various productive investment programs and activities, such as expenditure for infrastructure provision or financing to a wide variety of spendings, or goods and services expenditure (consumption) in order to increase aggregate demands. Role of stabilization function is carried out with the provision of subsidies, either price subsidy for basic coommodities or targeted subsidy to certain objects. This is role is crucial to abate the burdens of people in satisfying their basic needs, and at the same time to maintain the productivity of producers, especially for products being the basic needs of people at affordable prices. Role in distribution function is to support the empowerment of low-income community groups, including those who are marginalized or have limited economic capacity. The supports are given in the form of transfers comprising direct assistance as found in Prosperous Family Program (PKH), budget allocation for programs and activities to support poverty alleviation initiatives such as the National Community Empowerment Program (PNPM) or other programs aiming to expand access to basic services in education and health sectors like School Operation Aids (BOS) and Public Health Insurance (Jamkesmas). In light of foregoing, the policy on budget allocation for Central Government expenditure may also play role as stabilizator for the economy or as effective countercyclical policy in calming down business cycles or economic upheavals. When the business is slumping and economic activities are slowing down due to recession or depression, the magnitudes and Financial Notes and Indonesian Budget

105 Chapter IV Central Government Expenditure policy of government spending, including Central Government expenditure must be designed in more expansive manner to stimulate economic growth and maintain the stability while reinforcing macroeconomic foundations. This approach has been particularly taken by Indonesia with fiscal stimulus policy in 2009 and relatively successful. In contrast, under overheating economy, which is too expansive, policy and allocation of budget for Central Government expenditure can be used as an effective policy tool to cooling down the economic activities toward more favorable conditions. Synergic implementation of the three economic functions of the Government will not only play strategic roles in bolstering macroeconomic performance, but also support in improving and strengthening the economic foundations, such as to promote sustainable economic growth; to control inflation and to maintain economic stability especially price stability; to generate and expand productive employment so as to reduce unemployment rate; and to improve income distribution in order to lessen poverty rate. For 2013, the preparation of budget policy and allocation for the Government expenditures will refer to the priorities, programs and activities set out in the Government Work Plan (RKP) 2013, which constitutes a chain of National Medium Term Development Plan (RPJMN) Budget policy and allocation of the Government expenditures in 2013 are also directed to achieve the main priorities and strategies of RPJMN to buttress the restructuring of Indonesia in all sectors focusing on human resources quality enhancement including capacity development in science and technology and economic competitiveness. These main priorities and strategies will be attained with five national development agendas, being the mid-term development policy directions, i.e.: (1) economic development and people welfare augmentation; (2) governance restructuring; (3) democratization; (4) law enforcement and corruption eradication; and (5) inclusive and equitable development. These five agendas will be carried out in sustainable manner to deal with various challenges of national development either in mid-term or annual basis. In 2013, the challenges are mainly relating to global economic conditions which are predicted still uncertain. Debt crisis of developed countries especially Europe, political tension in Middle East, North Africa and Korean Peninsula, climate change and potential natural disasters throughout the world, and the soaring energy price can affect the global financial stability and global economic recovery and in turn national economy. In addition, the potential of introducing protection approach and unfair measures to win domestic and export market by many countries, due to lower global economic growth estimate in 2013 (3.9 percent) than in 2011 (5.3 percent) is much more likely. This will spur bitter competition of countries to win trade and investment markets. Under such circumstance, domestic economy and competitiveness must be reinforced in synergic fashion either at global or domestic scales. Social welfare augmentation is another challenge that must be coped with amid economic development. Hence, the acceleration and expansion of initiatives to reduce open unemployment and poverty rate which in 2011 recorded respectively 7.7 million persons and 29.9 million persons will be carried out while taking into account prosperity gap reduction of social components or regions. In view of challenges and problems to face, and performance achieved and potentials owned and development targets to pursue, the theme of national development in RKP 2013 as mutually agreed by the Government and DPR (House of Representatives) during preliminary discussion of RAPBN 2013 will be: Reinforcing Domestic Economy for People Welfare Augmentation and Expansion. 4-2 Financial Notes and Indonesian Budget 2013

106 Central Government Expenditure Chapter IV Consistent with such theme and as part of RPJMN implementation, RKP 2013 sets national development priorities: (1) Bureaucracy Reform and Good Governance; (2) Education; (3) Health; (4) Poverty Alleviation; (5) Food Resilience; (6) Infrastructure; (7) Investment Climate and Business Climate; (8) Energy; (9) Environment and Disaster Managemen; (10) Underdeveloped Regions, the Frontier and Conflict-Torn Regions; (11) Culture, Creativity and Technology Innovation; and (3) 3 (three) priority sectors, i.e. (1) Political, Law and Security; (2) The Economy; and (3) People s Welfare. To achieve such development objectives, and in view of the latest dynamics, either at domestic or global scales, the Government needs to take breakthroug and strategic measures to expedite the realization of development vision. These breakthrough and strategic measures are set out in: (1) Master Plan for the Acceleration and Expansion of Indonesia s Economic Development (MP3EI) ; (2) Master Plan for the Acceleration and Expansion of Poverty Alleviation (MP3KI); (3) Development Acceleration for Papua Province and West Papua Province; and (4) sustainable development mainstreaming of the National Green House Gas Emission Reduction Action Plan (RAN-GRK) and (Reducing Emissions from Deforestation and Forest Degradation (REDD+). As a breakthough and strategic measure, MP3EI has been prepared as a reflection of national economic transformation with orientation based on strong, inclusive, quality and sustainable economic growth. MP3EI is expected to play as driving force for economic growth and employment generator and at the same time promoting equitable development throughout the country. MP3EI is carried out with three major strategies, i.e. (1) developing six economic corridors of Indonesia consisting of: Sumatra, Java, Kalimantan, Sulawesi, Bali-Nusa Tenggara economic corridors and Papua-Maluku economic corridor; (2) strengthening national connectivity, which is domestically and internationally integrated; and (3) accelerating human resources capacity and science and technology prowess to support the development of main programs by way of fortifying the added value of individual economic corridors. MP3EI is a product of cooperation and partnership of the Government, Regional Governments and SOEs, Regional SOEs, private sectors, and academicians. Meanwhile, the funding of MP3EI comes from funding integration of APBN, APBD, SOEs, Regional SOEs and private sectors and communities. MP3KI is an affirmative policy to expedite and expand poverty alleviation initiatives in Indonesia by specifically elaborating the concept and design, policy direction and strategies of the long-term poverty alleviation program ( ) while illustrating the transformation of the existing poverty alleviation programs toward a comprehensive social security system. MP3KI also points out the concept and design of sustainable livelihood development to achieve sustainable living standard and prosperity augmentation. Under MP3KI poverty alleviation programs in Cluster I IV will be carried out in synergic manner with well-cut targets. In addition, the strategic measures that have been and will be taken are to speed up the development of Papua province and West Papua province. This strategy is obvious in view of the backwardness of local citizens in these two provinces, which is much left behind other regions. The most important issue that must be coped with in the development of Papua province and West Papua province concerns the exceeding poverty rate and low quality education and health services. Such unfavorable conditions lead to low quality human resouces in these easternmost provinces. The situation is aggravated with isolation. Even land transport can t access these provinces. Measures to take in 2013 include: (1) poverty reduction with food resilience and local economic empowerment; (2) the provision of quality and certified teachers and assurance on the fullfillment of basic needs of teachers assigned in these two provinces; (3) development and improvement of some road links extending from southern Financial Notes and Indonesian Budget

107 Chapter IV Central Government Expenditure coast to middle mountain range; and (4) the implementation of pro-indigenous people programs (affirmative actions), i.e. the recruitment of local people in the best tertiary education institutions outside Papua, and in strategic government institutions such as Police and Military establishments, and in apprenticeship programs of various government institutions outside Papua. As for sustainable development mainstreaming strategic measures, i.e. RAN-GRK and REED+ they will be implemented as follow up actions of national commitment in green house gas emission reduction (GRK) in five main sectors, to wit: (1) forestry and peat soils; (2) agriculture; (3) energy and transportation; (4) industries; and (5) waste. As the largest part of this GRK movement,i.e. the forestry and peat soil sectors, a National Strategy for Emission Reduction from Deforestation and Forest Degradation (Stranas REDD+) has been worked out. Actions to take include new license moratorium for two years coupled with forestry and peat soil governance improvement. Still in this respect, biodiversity management as part of the most important part of ecosystem and assets for green economic development in future, will be strengthened. Indonesian Biodiversity Strategy and Action Plan (IBSAP) will be updated to follow the latest dynamics in domestic and abroad. With reference to the development targets to achieve as established in RKP 2013 and fiscal policies and economic projections in 2013, the budget for Central Government expenditure in APBN 2013 has been allocated in amount of Rp.1,154.4 trillion (12.5 percent of GDP). This budget allocation aims to support Government policy, including: (1) basic salary increase for public servants (PNS) and Armed Forces/Police (TNI/Polri) by seven percent on the average (including for the judges), and the payment of the 13th salary and pension; (2) infrastructure budget increase to support domestic connectivity, energy resilience and food resilience and tourism destinations; (3) intensifying social protection programs to reduce poverty rate by reinforcing pro-people programs (cluster 4 poverty alleviation) and synergy between the clusters to support the Master Plan for the Acceleration and Expansion of Poverty Reduction (MP3KI); (4) providing efficient subsidy allocation with well-targeted beneficiaries, and improving electricity subsidy efficiency with electricity rate (TTL) rise at 15 percent on the average; (5) strengthening social safety net in education and health; and (6) anticipating the preparation of 2014 general election. 4.2 The Trends of Policy and Implementation of Budget Allocation for Central Government Expenditures, For the last six years ( ) the Government has taken numerous policies in Central Government expenditures including their budget allocation in APBN. Such policies and budget allocation of Central Government Expenditures in APBN are directed to buttress governance operation and public service delivery to the communities, to suppport national economic stability and activities to boost economic growth, generate and expand employment and reduce poverty (either in absolute term or in percentage). Some measures taken by the Government in Central Government Expenditures during can be classified into policy measures and administrative measures. The former is a substantive approach aiming to optimize people welfare, with among other things refining budget allocation in various priority activities to give greater and more sustainable multiplier effects consisting of economic growth, employment expansion and poverty reduction. Such policy covers: (1) increasing infrastructure spending to support debottlenecking, domestic connectivity, food resilience, self-contained energy, and people welfare; (2) improving social protection program, community empowerment, and disaster management; (3) reinforcing 4-4 Financial Notes and Indonesian Budget 2013

108 Central Government Expenditure Chapter IV pro-people programs; (4) capacity building in mitigation and adaptation to climate change; and (5) providing supports for Public Private Partnership (PPP). The administrative measures taken to optimize budget from spending wise, are particularly with the improved budget allocation system and implementation. Administrative measure that has been taken by the Government is that of reform policy in fiscal sector with regard to the preparation and implementation of Central Government Expenditure budgeting. Law Number 17 of 2003 concerning State Finance mandated the introducion of government expenditure budgeting reform covering: (1) unified budget; (2) performance based budgeting; and (3) medium term expenditure framework. To exercise such government expenditure budgeting system reform, the Government has established several strategies ranging from introduction strategy from ; enforcement strategy from ; and revision strategy in Unified budgeting approach has been applied since It is reflected from the preparation of expenditure budget allocation made in integrated manner between programs and activities and types of expenditures within the ministries/agencies (K/L) including the working units. Under this integrated budgeting system, the allocation of Central Government expenditure budget is detailed by organizations, functions and types. The introduction of performance based budgeting requires the preparation of expenditure budget allocation for individual working units while taking the relationship of input and the expected output and/or outcome into consideration including efficiency in attaining the said output and outcomes. The adoption of medium term expenditure framework demands on the preparation of expenditure budget allocation for each working unit based on budget requirements within more than one year perspective. Thus, the attention of the Government will be more focused on priority policies to be financed with sound fiscal discipline, on the expectation that in turn public resources be utilized in much more effective and efficient. Another administrative measure is the introduction of policy on budget implementation, i.e. reward and punishment policy. This reward and punishment system is an effort of the Government to enhance the quality of Central Government expenditure planning and implementation. The system has been applied since Basically, in reward and punishment system the ministries/agencies (KL) succeeding in optimizing budget utilization, or achieving the targets with lower budget than previous year shall receive additional budget ceilings for their expenditure in the following year (reward). As for ministries/agencies (K/L) that in the last year failed to absorb their budgets or achieve the targets on unacceptable grounds their budget for the coming year will be reduced (punishment). Moreover, the Government will enhance the quality of spending, especially to increase the effectiveness of Central Government expenditure. It is important since the majority of Central Government expenditure are nondiscretionary expenditures such as personnel, operational materials, loan interest payment, and subsidies. Such immense nondiscretionary expenditures have limited the space of the Government to make fiscal intervension in the form of sitmulus to people s economic activities, either to raise economic growth, create productive employment or reduce poverty. Ratio of mandatory expenditures to total Central Government expenditures in reaches 68.8 percent on the average with the remaining 31.2 percent consisting of discretionary expenditures. With regard to budget allocation of Central Government expenditures, during its proportion to total Government Expenditures shows upward trend, i.e. from 66.6 percent (Rp trillion) in 2007 to 68.2 percent (Rp trillion in 2011, and 69.1 percent (Rp.1,069.5 trillion in APBNP This trend of Central Government expenditure volumes in the said period is subject to external and internal factors. External factors with significant Financial Notes and Indonesian Budget

109 Chapter IV Central Government Expenditure effects are Indonesian Crude Price (ICP), rupiah exchange rate to US dollar, and global economic conditions. For internal factors that have influence over APBN, they include budget allocation for operational spendings to run the governance and the implementation of policy measures in Central Government Expenditure as established in APBN. The trend of Central Government Expenditure in by functions, organizations, and types of spendings can be described as follows: The Trend of Central Government Expenditure Budget Allocation by Functions Law Number 17 of 2003 concerning State Finance, notably Article 11 paragraph (5) spells out that the Central Government Expenditures shall be also classified by functions. There are 11 (eleven) functions illustrating various aspects of governance in public service delivery and people s welfare augmentation. These elevent functions are: (1) public service function; (2) defense function; (3) law and order function; (4) economic function; (5) environmental function; (6) housing and public facility function; (7) health function, (8) tourism and cultural function; (9) religion function, (10) education function; and (11) social protection function. In the overwhelmingly majority of budget for Central Government Expenditures are allocated for public service function, i.e percent on the average of total realized Central Government Expenditure. About 35.0 percent of the realization of Central Government Expenditures during the same period have been spent to 2012 APBN-P ,7 693,4-200,0 400,0 600,0 800, , ,0 perform other functions. Illustration on the trend of budget implementation for Central Government Expenditures by functions is presented in Graph 4.1 and Table 4.1 and as pointed out in detail below ,5 697,4 628,8 504,6 GRAPH 4.1 CENTRAL GOVERNMENT EXPENDITURE TREND BY FUNCTION, PUBLIC SERVICES 2 DEFENSE 3 LAW AND ORDER 4 ECONOMY 5 ENVIRONMENT 6 HOUSING AND PUBLIC FACILITIES 7 HEALTH 8 TOURISM AND CULTURE 9 RELIGIONS 10 EDUCATION 11 SOCIAL PROTECTION Trillion Rupiah TABLE 4.1 CENTRAL GOVERNMENT EXPENDITURE BY FUNCTION, (trillion rupiah) NO. FUNCTIONS LKPP % to GDP LKPP % to GDP LKPP % to GDP LKPP % to GDP LKPP % to GDP APBNP 2012 % to GDP 01 PUBLIC SERVICES 316,1 8,0 534,6 10,8 417,8 7,5 471,6 7,3 508,9 7,2 659,1 7,7 02 DEFENSE 30,7 0,8 9,2 0,2 13,1 0,2 17,1 0,3 51,1 0,7 73,9 0,9 03 LAW AND ORDER 28,3 0,7 7,0 0,1 7,8 0,1 13,8 0,2 21,7 0,3 33,4 0,4 04 ECONOMY 42,2 1,1 50,5 1,0 58,8 1,1 52,2 0,8 87,2 1,2 120,1 1,4 05 ENVIRONMENT 5,0 0,1 5,3 0,1 10,7 0,2 6,5 0,1 8,6 0,1 10,7 0,1 06 HOUSING AND PUBLIC FACILITIES 9,1 0,2 12,4 0,3 14,6 0,3 20,1 0,3 22,9 0,3 29,5 0,3 07 HEALTH 16,0 0,4 14,0 0,3 15,7 0,3 18,8 0,3 14,1 0,2 15,4 0,2 08 TOURISM AND CULTURE 1,9 0,0 1,3 0,0 1,4 0,0 1,4 0,0 3,6 0,0 3,2 0,0 09 RELIGIONS 1,9 0,0 0,7 0,0 0,8 0,0 0,9 0,0 1,4 0,0 3,6 0,0 10 EDUCATION 50,8 1,3 55,3 1,1 84,9 1,5 90,8 1,4 97,9 1,4 115,0 1,3 11 SOCIAL PROTECTION 2,7 0,1 3,0 0,1 3,1 0,1 3,3 0,1 3,9 0,1 5,6 0,1 XX NO FUNCTION (0,1) (0,0) - - (0,0) (0,0) 0,9 0,0 62,3 0,9 0,0 0,0 Source: the Ministry of Finance T O T A L 504,6 12,8 693,4 14,0 628,8 11,2 697,4 10,9 883,7 12, ,5 12,5 4-6 Financial Notes and Indonesian Budget 2013

110 Central Government Expenditure Chapter IV Public Service Function The realization of budget for Central Government Expenditures in public service function is allocated through the ministries/agencies (K/L) and non-ministries/agencies (non K/L), especially used to deliver services to the people. In period , expenditure budget in public service function, in terms of nominal, demonstrates steady increase of 15.8 percent per annum on the average, i.e. from Rp trillion in 2007 to Rp trillion in The rise of budget for public service function in such period reflects the Government s commitments to improve public services to the people both in terms of quality and quantity. This public service function is further divided into several sub-functions, which in period the proportions are as follows: (1) executive and judicial, financial and fiscal, and international affairs sub-function (17.3 percent of total public service function); (2) public service sub-function (1.0 percent); (3) basic research and science and technology development sub-function (0.4 percent); (4) government loan sub-function (21.1 percent);(5) regional development sub-function (0.3 percent); (6) public service of research and development sub-function (0.01 percent); and (7) other public services sub-function (59.9 percent). In , other public service sub-function dominates the budget allocated for public service function. It is due to Government s policy to maintain the price stability of certain commodities through various subsidies. Some significant sub-functions of public service function during can be illustrated as follows: (1) other public service sub-function records increase of 10.0 percent per annum on the average, i.e. from Rp trillion in 2007 to Rp trillion in 2012, especially to finance subsidy spending and other transfers; (2) government loan sub-function during the same period experiences average rise of 17.3 percent per annum, i.e. from Rp.79.2 trillion in 2007 to Rp trillion in 2012, especially to pay loan interest; and (3) executive and judicial, financial and fiscal institutions and international affairs sub-function in is to rise by 49.9 percent per annum on the average, i.e. Rp.15.0 trillion in 2007 to Rp trillion in Budget allocated for this sub-function during such period is mainly used to finance several programs including: (1) support program for the management and implementation of other technical tasks of the Police; (2) tax revenue improvement and safeguarding; (3) supervision, service and revenue program in customs and excise sector; and (4) state treasury management program. The trend of budget realization fof public service function in is presented in Graph 4.2. Trillion Rp 700,0 600,0 500,0 400,0 300,0 200,0 100,0 - Source: the Ministry of Finance GRAPH 4.2 PUBLIC SERVICE FUNCTION EXPENDITURE, APBN-P Public Services Other Public Services Basic Research and Science and Technology Dev. Regional Development Government Loans Exectuive, Legislative, Financial, and Fiscal and Foreign Affairs The realization of various programs and activities in public service function in include: (1) fuel subsidy distribution with target volume 40.0 million kilo liter of subsidized fuel every year; (2) electrical supply at affordable rate to the people; (3) food subsidy and the provision of subsidized rice for 17.5 million poor people (RTS), i.e. 15 kg per TRS; (4) the distribution of subsidized fertilizers and high quality seeds at affordable price for farmers; (5) public transport subsidy for passengers of economic class of railways and sea transport (6) debt service compliance to the Government loans, i.e. the payment of loan interests; and (7) human resources development for Public Servants (PNS) to improve service delivery to people. Financial Notes and Indonesian Budget

111 Chapter IV Central Government Expenditure Defense Function Budget for defense function is used to finance the improvement of national defense capacity and power, which is consistent with one of main target of national agendas, i.e. to achieve safe and peaceful Indonesia and to reinforce the Unitary State of Republic of Indonesia based on Pancasila and UUD 1945 and Bhineka Tunggal Ika. This function is obvious from the success of thwarting separatist movement and the improved preventive and deterrent power of the state against terrorism to maintin the sovereignty of the Unitary State of Republic of Indonesia (NKRI) both against domestic or foreign threats. The realization of budget for defense function in Central Government Expenditure is allocated to the Ministry of Defense consisting of Armed Forces Head Quarter (Mabes TNI), Indonesian Army (TNI AD), Indonesian Navy (TNI AL), and Indonesian Air Force (TNI AU). During the allocation of budget for Central Government Expenditures in Defense Function has been further allocated for: (1) national defense sub-function (42.6 percent of total Defense Function budget); defense support function (51.4 percent); and (3) defense research and development sub-function (12.2 percent). Owing to defense function reclassification, in 2008 there was program restructuring and reallocation, i.e. good governance program reallocated to personnel spending, which was previously as part of defense function now shifted to public service function. The realization of budget for defense function in records steady rise of 19.2 percent per annum on the average, i.e. from Rp.30.7 trillion in 2007 to Rp.74.0 trillion in Meanwhile, budget realization of national defense sub-function in is to increase by 42.6 percent per annum on the average, i.e. from Rp.9.0 trillion in 2007 to Rp.53.1 trillion in The budget is mainly to finance defense development program of the army, navy and air military forces and integrated military force defense development program. Meanwhile the realization of budget in defense support sub-function in is to rise by 51.4 percent per annum on the average, i.e. from Rp.2.6 trillion in 2007 to Rp.29.7 trillion in Such budget realization is to finance defense industry development program and defense system and strategy development program. As to budget realization of defense research and development sub-function in , it increases by 12.2 percent per annum from Rp.93.4 billion in 2007 to Rp billion in This realization is to finance national defense program and defense research and development program. The outcomes of programs and activities financed under defense function budget in include: (1) the prosperity of Indonesian Armed Forces (TNI) augmented, especially in terms of housing, basic education for their families and post-service prosperity insurance; (2) number and conditions of defense equipment improved toward modern and ready to operate weaponry system; (3) people potentials in national defense as part of component in national defense maximized; (4) the success of the Government in revealing, preventing and detaining terrorism perpetrators and networks; roles of domestic defense industries improved and empowered; (6) policy on science and technology based defense industry development formulated;(7)219 border posts erected; (8) integrated defense force realized capable of dealing with any threat in integrated and timely manner; (9) security disturbance Trillion Rp 80,0 70,0 60,0 50,0 40,0 30,0 20,0 10,0 - Source: the Ministry of Finance GRAPH 4.3 DEFENSE FUNCTION EXPENDITURE, National Defense Defense Support Defense Research and Development APBN-P 4-8 Financial Notes and Indonesian Budget 2013

112 Central Government Expenditure Chapter IV and legal violation in sea decreased; and (1) number and conditions of defense equipment toward modern and ready to operate weaponry system realized. The trend of budget realization for defense function in is presented in Graph 4.3. Law and Order Function Budget of law and order function is to finance law and order enforcement under the responsibility of the Government. This function is further divided into several sub-functions, namely: (1) police sub-function (49.5 percent of total budget of law and order function); (2) natural disaster management sub-function (3.3 percent); (3) legal development sub-function (18.9 percent); (4) justice sub-function (8.8 percent); (5) law and order research and development sub-function (0.04 percent); and (6) other law and order sub-function (19.5 percent). Similar to defense function, law and order function was also restructured in 2008, i.e. good governance introduction program was switched from law and order function to public service function. Budget realization of law and order function from was to raise 3.4 percent per annum on the average, i.e. from Rp.28.3 trillion in 2007 to Rp.33.5 trillion in The most significant budget realization of the above sub-functions during can be described as follows: budget realization for police sub-function increased 18.0 percent per annum on the average from Rp.8.9 trillion in 2007 to Rp.29.5 trillion in Such realization is to finance police human resources development, law and order strategy development program, and narcotics abuse and illegal drug distribution prevention and eradication program. As to natural disaster management sub-function, its budget realization from is to rise 71.8 percent on the average, i.e. from Rp.90.6 billion in 2007 to Rp.1.4 billion in Budget for natural disaster management sub-function is for search and rescue while attempting to mitigating disaster risks. The trend of budget realiation for law and order function in is presented in Graph 4.4. The outcomes of programs and activities performed under law and order function during include: (1) law violations and crime index decreased; (2) terrorism acts within the territories of Indonesia reduced; (3) safe, orderly and favorable conditions in the society established; (4) law awareness and and public participation in dealing with social problems and security disturbance increased; (5) security Trillion Rp 35,0 30,0 25,0 20,0 15,0 10,0 GRAPH 4.4 LAW AND ORDER FUNCTION EXPENDITURE, ,0 - Source: the Ministry of Finance APBN-P Other Law and Order disturbance along water corridors using sea transport modes, coastal areas and national/ international ports reduced by 11 percent; (6) narcotic abuse and illegal drug distribution decreased; (7) good governance and professional services within police establishments; (8) public services as quick wins in intellegent affairs provided; and (9) crime rate decreased and settled (conventional crimes, transnational crimes, crimes with contingency implications and crimes agains state assets) without impairing human rights. Justice Legal Development Disaster Management Police Financial Notes and Indonesian Budget

113 Chapter IV Central Government Expenditure Economic Function In the realization of budget for economic function is to record an average increase of 23.3 percent per annum, i.e. from Rp.42.2 trillion in 2007 to Rp trillion in This increased budget realization in economic function is particularly attributed to the attempts of the Government in accelerating quality economic growth. Realization and proportion of Central Government Expenditure budget in economic function during consist of: (1) trade and business, cooperative and SME development sub-function (3.0 percent of total economic function budget); agriculture, forestry, fishery and marine sub-function (17.5 percent); (3) irrigation sub-function (7.9 percent); (4) fuel and energy sub-function (7.7 percent); (5) mining sub-function (2.0 percent); (6) transportation (51.2 percent); (7) industry and construction (2.5 percent); (8) manpower sub-function (2.0 percent); (9) telecommunication sub-function (0.9 percent); (10) economic research and development sub-function (1.4 percent); and (11) other economic sub-function (4.0 percent. Great attention of the Government dedicated to infrastructure development, either for transportation infrastructure, or agriculture infrastructure is evident from huge budget allocated for transportation sub-function and agriculture, forestry, fishery and marine sub-function. It is consistent with the Government s objectives of addressing infrastructure bottleneck and reinforcing food resilience. Some significant budget realization in some sub-functions of economic function in is as described below. In the realization of budget for transport sub-function is to rise 33.1 percent per annum on the average, i.e. from Rp.16.6 trillion in 2007 to Rp.59.5 trillion in Budget for transportation sub-function is for: (1) road operation program and (2) sea, land, air and railways transport management and operation program. Some outcomes of programs and activities from transportation sub-function in 2007 to 2012 are: (1) national road preservation of 36,319 km long and bridges 217,076 m long accomplished; (2) road capacity expansion/wideing of 3,586 km long and bridges of 8,382 m along the main corridors achieved; (3) Bus Rapid Transit (BRT) development program in 13 cities realized; (4) type A terminals (inter-province) and trans-national border terminal developed in five locations; (5) railway track of km sp improved and rehabilitated including the development of new construction of double railways track of 140,9 km sp; (6) 18 new ports developed and the development of the other 133 ports continued; (7) the development of strategic airports, i.e. Juanda airport, Kuala Namu airport and Samarinda Baru airport; and (8) the development of urban and rural transport system in remote areas and frontier regions. Meanwhile, during the same period, budget realization for agriculture, forestry, fishery and marine sub-fuction records an average rise of 21.2 percent per annum, i.e. from Rp.7.6 trillion in 2007 to Rp19.8 trilion in The said budget is used for: (1) food resilience development program; (2) agriculture infrastructure and facility development program; (3) production, productivity improvement program including the quality of food crops to achieve self-fulfilled foods in sustainable manner; (4) self-fulfilled beef program and the provision of safe, hygienic, and halal animal foods; and (5) human resources development program in agriculture and fishery sectors and farmers and fishermen/fish farmers empowerment. The outcomes of various programs and activities under agriculture, forestry, fishery and marine sub-function in include: (1) the supplies of basic needs from domestic production maintained and increased; (2) stability of prices for food commodities maintained; (3) public food consumption increased in terms of quantity and quality toward local food identification (PPH); (4) the added value and competitiveness of agriculture, fisher and forestry products increased; (5) GDP growth 3.0 percent from agriculture sector and farmer 4-10 Financial Notes and Indonesian Budget 2013

114 Central Government Expenditure Chapter IV exchange rate index (NTP) above and fishermen exchange rate (NTN) achieved; (6) fish consumption socialization (Gemarikan) promoted; and (7) fish production with superior quality and competitive in domestic and international markets increased. Budget realization of fuel and energy sub-function in records average increase of 33.3 percent per annum, from Rp.2.9 trillion in 2007 to Rp.12.2 trillion in The said budget is for: (1) electricity management program; (2) accessibility improvement program for regional governments, cooperatives and communities to energy services and infrastructure; (3) renewable energy and energy conservation management program; (4) natural resources and coal mining development and management program; and (5) oil and gas management and supply program. The outcomes of programs and activities under fuel and energy sub-function in include: (1) the production of renewable energy resources increased such as from hydro power, geothermal, solar cells, biomass, biofuel and vegetable oil; (2) oil and gas supllied and distributed throughout the country and national fuel reserve allocated; (3) the development of urban gas distribution for 16,000 house connections in five cities; (4) electrification ratio increased to around 75.9 percent; and (5) village electricity ratio increased to 96.7 percent. The trend of budget realization for economic function in is presented in Graph 4.5. Environmental Function Trillion Rp 120,0 100,0 80,0 60,0 40,0 20,0 - Source: the Ministry of Finance GRAPH 4.5 ECONOMIC FUNCTION EXPENDITURE, APBN-P Industry and Construction Transportation Budget realized for Central Government Expenditure in environmental function allocated through ministries/agencies (K/L), is primarily used to enhance the quality and preservation of living environment. Budget allocation of this environmental function is distributed to several sub-functions as follows: (1) waste management sub-function 15.2 percent; (2) pollution management sub-function 2.2 percent; (3) natural resources conservation subfunction 48.0 percent; (4) spatial and land sub-function 22.7 percent; and (5) other environmental sub-function 11.9 percent. Portions of budget allocation to natural resources conservation sub-function show greate concern of the Government in maintaining and enhancing the quality of living environment. In , budget realization for environmental function is to rise by 16.7 percent per annum on the average, from Rp.5.0 trillion in 2007 to Rp.10.7 trillion in This increasingly budget realization for environmental function during such period reflects serious attempts of the Government in maintaining and enhancing the quality of environment. Budget realization of some significant sub-functions in environmental function during can be illustrated as follows: (1) waste management to rise by 51.6 percent per annum on the average, from Rp billion in 2007 to Rp. 2.8 trillion in 2012, especially to finance settlement infrastructure development and expansion program and sanitation and solid waste management, development, supervision and implementation program; (2) natural resources conservation sub-function to increase 4.9 percent on the average from Rp.3.2 trillion in 2007 to Rp.4.0 trillion in 2012 for primarily community empowerment-based watershed Mining Fuel and Energy Irrigation Agriculture, Forestry, Fishery, Marine Manpower Trade, Cooperative and SME Development Financial Notes and Indonesian Budget

115 Chapter IV Central Government Expenditure function and supporting capacity improvement program, forest and land rehabilitation planning and management program, wastershed institutional development and evaluation program, and biodiversity conservation and forest protection program; (3) spatial and land subfuction to record average increase of 27.4 percent from Rp.1.0 trillion 2007 to Rp.3.2 trillion in 2012 mainly to finance national land management program; spatial planning program and national survey and mapping progra. The trend of budget realization for environmental function in is presented in Graph 4.6. The outcomes of programs and activities executed in environmental function during are:(1) forest and land rehabilitation implemented for 705,562 ha; (2) the development of Community Forests and Village Forests reaching 508,170 ha; (3) monitoring and supervision to 1,005 companies through corporate performance improvement program (PROPER); (4) monitoring and supervision to 100 industries under clean water program mechanism (PROKASIH); (5) water conservation areas established for 15.4 million ha, which of them 2.5 million ha consist of effectively managed water areas; (6) coral reef management and rehabilitation in 16 district/cities of 8 provinces; (7) number of hotspots reduced to 28,474 points or to decrease by percent from average hotspot (58,890 points) for forest fire control in Kalimantan, Sumatera and Sulawesi; and (8) four island spatial planning and four national strategic zones established to support infrastructure development in 2011 and early Housing and Public Facility Function Trillion Rp 12,0 10,0 8,0 6,0 4,0 2,0 GRAPH 4.6 ENVIRONMENT FUNCTION EXPENDITURE, Source: the Ministry of Finance APBN-P Other Environment Spatial and Land Affairs Natural Resouces Conservation Pollution Management Waste Management Budget realization of Central Government Expenditure for housing and public facility function is used to develop houses and public facilities being the responsibility of the Government to people. Housing and public facility function consists of several sub-functions with budget proportion for each sub-function as follows: (1) housing development sub-function 10.9 percent; (2) settlement community empowerment sub-function 16.8 percent; (3) water supply sub-function 15.1 percent; (4) other housing and public facility sub-function 57,1 percent. In the realization of budget for housing and public facility function is to increase by 26.4 percent per annum on the average, from Rp.9.1 trillion in 2007 to Rp.29.5 trillion in It indicates serious attention of the Government to satisfy the needs of people, especially in in the provision of liveable housing environment. Illustration of budget realization in of housing and public facility function is as follows: (1) housing development sub-function to raise 31.2 percent per annum on the average, from Rp.1.1 trillion in 2007 to Rp.4.4 trillion in 2012, particularly to finance housing and settlement area development program and rental apartment (rusunawa) development program; (2) settlement community empowerment sub-function to increase 10.9 percent on the average from Rp.2.4 trillion in 2007 to Rp.4.1 trillion in 2012, which is primarily used for settlement infrastructure development and expansion program and housing and settlement area development program; (3) water supply sub-function to rise 21.2 percent on the average from Rp.1.4 trillion in 2007 to Rp.3.7 trillion 2012 used to finance water supply system management, development, supervision program; and (4) other housing and public 4-12 Financial Notes and Indonesian Budget 2013

116 Central Government Expenditure Chapter IV facility sub-function, which is to record average increase of 33.0 percent from Rp.4.1 trillion in 2007 to Rp.17.2 trillion in 2012, which is mostly used to finance community empowerment and village governance program and self-reliance improvement program for villagers. The outcomes of programs and activities in housing and public facility function in include: (1) the development of 585 twin blocks of simple multi-storey block (rusunawa); (2) self-help house development facilitated for 14,353 units; (3) quality of self-help houses enhanced for units; (4) housing loans facilitated for 201,202 units; (5) outcomes in 2012, 223 twin Block of Rusunawa, facilitation of self-help house development for 20,000 units, facilitation for self-help house quality improvement for 48,750 units, and slum-areas rehabilitation for 150 ha and 170 areas, and (6) for NTT management, facilitation for self-help house development of 2,020 units and self-help house quality improvement of 13,160 units. The trend of budget realization of housing and public facility function in is presented in Graph 4.7. Health Function Trillion Rp GRAPH 4.7 HOUSING AND PUBLIC FACILITY FUNCTION EXPENDITURE, ,0 25,0 20,0 15,0 10,0 5, APBN-P Source: the Ministry of Finance Other Housing and Public Facilities Water Supply Settle ment Community Empowe rment Housing Development Budget for health function allocated through Central Government Expenditures aims to highten public health rate. In , budget of health function is to drop by 0.8 percent per annum on the average, from Rp.16.0 trillion in 2007 to Rp.15.4 trillion in Health function is further divided into serveral sub-function, i.e.: (1) medicine and health logistic sub-function (9.7 percent); (2) individual health service sub-function (59.1 percent); (3) community health service subfunction (14.3 percent); (4) demography and family planning sub-function (7.2 percent); (6) health research and development sub-function (1.5 percent); and (6) other health subfunction (8.0 percent). The proportion of budget allocation for individual health service subfunction is due to the launcing various health service program as attempts of enhancing the quality of life of people. Budget realization of some sub-function in health function during can be illustrated as follows. In , budget allocated for medicine and health logistic sub-function to raise 25.2 percent per annum on the average, i.e. from Rp.0.9 trillion in 2007 to Rpp.2.7 trillion in The budget is mostly used for pharmautical and health tool development program and medicine and food supervision program. Meanwhile, budget for individual health service sub-function on the same period is to increase 1.6 percent per annum on the average, from Rp.8.1 trillion in 2007 to Rp.8.7 trillion in Budget of individual health service sub-function is mainly allocated to carry out health development program. Budget for demography and family planning during is to record average increase of 37.5 percent per annum from Rp.0.4 trillion in 2007 to Rp.2.1 trillion in Budget of this sub-function is mostly to finance demographic and family planning program. The trend of budget realization for health function during is presented in Graph 4.8. Financial Notes and Indonesian Budget

117 Chapter IV Central Government Expenditure The outcomes of program and activities of health function in are: (1) service to pregnant mothers improved in terms of the visit of pregnant women K1 to percent, K4 coverage to percent; (2) health status of child health improved with coverage of full immunization (DPT, Polio, DPT- HB, DPT-HIB and measles) to 0-11 month babies increased to 84.7 percent and measles immunization 87.3 percent (2011); (3)first neonatal visit increased to 71.4 percent in 2010, baby health service coverage to rise to percent, and under five infant health service to reach percent in 2011; (4) contegious disease control notably HIV and AIDS, tuberculosis, and malaria improved; (5) integrated preventive health services enahanced supported with Health Operation Assistance; (6) health operators increased in terms of quantity and quality in 9,321 puskesmas, health promotion intensified, community based health initiatives (UKMB) promoted through posyandu and poskesdes; (6) health operators tasked in normal areas, remote areas and isolated areas increased in terms of quality and quantity reaching 32,978 person consisting of specialist doctors, dentists, general doctors, and midwives; (7) health insurance coverage expanded, number of Jamkesnas participants and hospitals serving Jamkesnas patients increased evident from more III-class wards, Jamkesnas patient services in puskesmas enhanced, and services for maternal mothers and delivery through Jampersal improved; (8) affordability of communities to medicine, medicine and vaccine supplies in health facilities increased; and (9) number of new KB (family planning) program increased to 9,58 million with active KB participants persons. Tourism and Culture Function Trillion Rp 20,0 18,0 16,0 14,0 12,0 10,0 8,0 6,0 4,0 2,0 - GRAPH 4.8 HEALTH FUNCTION EXPENDITURE, APBN-P Source: the Ministry of Finance Other Health Health Research and Development Demography and Family Planning Community Health Services Individual Health Services Medicine and Health Logistics The budget of toursim and culture function allocated through Central Government Expenditures are to augment the prosperity of people by way of toursim and culture promotion. In budget for tourism and culture function is to rise 11.3 percent per annum on the average, from Rp.1.9 trillion in 2007 to Rp.3.2 trillion in This budget increase reflects the seriousness of the Government in augmenting people s welfare through policy diversification including in tourism and culture sector. Budget allocated to this tourism and culture function is distributed in some sub-functions: (1) tourism and culture development sub-function (42.9 percent of tourism and cultural function), (2) publication and broadcasting sub-function (6.6 percent), (3) tourism and culture research and development sub-function (1.1 percent); (4) other tourism and culture sub-function (12.6 percent). The vision brought by the Government to promote tourism and culture is obviously reflected from the relatively enormous proportion of budget allocation to tourism and cultural development sub-function. Budget realization during of some significant sub-functions in tourism and culture function can be illustrated as follows: (1) budget of tourism and culture development subfunction to rise by 26.6 percent on the average per annum, i.e. from Rp.0.5 trillion in 2007 to Rp.1.6 trillion in 2012, especially used to finance tourism development program; and (2) budget of other tourism and culture sub-function in which increases 17,0 percent per annum on the average, i.e. from Rp billion in 2007 to Rp billion in 2012 to run some programs namely: (1) support program for the management and implementation of other technical tasks of the Ministry of Tourism and Culture; (2) cultural, art and film 4-14 Financial Notes and Indonesian Budget 2013

118 Central Government Expenditure Chapter IV value development program; (3) human resources management program; (4) tourism marketing development program; and (5) history, archeology and museum development program. The trend of budget realization for tourism and culture function in is presented in Graph 4.9. The outcomes of programs and activities in tourism and activities under tourism and culture function in include: (1) in 2011, the foreign tourists recorded 7.65 million to increase 9.24 percent if compared with 2010 and reaped foreign exchange worth USD8.55 million or to rise percent from last year s realization at USD 7.60 billion; (2)elevated competitiveness of Indonesian tourism at global level in 2011 at 74th rank of 139 countries from previously 81st rank of 133 countries in 2009; (3) integrated cultural site management (Borobudur temple compound, Prambanan temple compound, and Sangiran Primordial Man Site); (4) library and information service improvement in 33 provincial libraries, 300 district/city libraries, 3,120 village libraries and the provision of 55 mobile library cars; (5) facilitation for the provision of art and cultural facilities in 14 provinces and 247 districts/cities; (6) the implementation of 21 researchers in cultural fields and 155 archeological researchers; and (7) facilitation for creativity and capacity building in science and technology and Imtaq for 3,180 persons in art, culture and creative industries for 3,180 persons. Religion Function Trillion Rp 3,5 3,0 2,5 2,0 1,5 1,0 0,5 - GRAPH 4.9 TOURISM AND CULTURE FUNCTION EXPENDITURE, APBN-P Source: the Ministry of Finance Other Tourism and Culture Competition Sport Development Publication and Broadcasting Development Youth and Sport Development Tourism and Culture Promotion Budget realization of Central Government Expenditures for religion function is to comply with the Government s obligations in religious affairs and to maintain the harmony and communion of relious life. In budget of religion function records average increase of 13.7 percent per annum, from Rp.1.9 trillion in 2007 to Rp.3.6 trillion in Such realization is allocated for several sub-functions, to with: (1) religious life promotion subfunction (44.5 percent); (2) religious communion sub-function (2.4 percent); (3) religion research and development (20.0 percent); and (4) other religious service sub-function (33.0 percent). The illustration of budget realization of some significant sub-function within religion function during is as follows. Budget of religion research and development sub-function in to rise percent per annum on the average, from Ro.20.0 billion in 2007 to Rp.1.7 trillion in This realization is mostly for Islamic Community Development Program and Non-Islamic Community Development Program. For the same period, budget realized for religious life promotion sub-function to increase 15.3 percent per annum on the average, i.e. from Rp billion in 2007 to Rp932.2 billion in The latter is particularly to promote the harmony and tolerance of religious life within the communities. The trend of budget realization of religious function during is presented in Graph The outcomes of programs carried out by the Government in Religion Function aiming to foster harmonious religious life and improve religious services include: (1) harmonized social and religious life in conflict-torn regions, improved capacity in dealing with post-conflict trauma, local leader empowerment, enhanced effectiveness of mediation through religion harmony forum (FKUB) established in all provinces and 421 districts/cities, and conflict prevention development in conflict-prone regions; (2) hajj pilgrim management system Financial Notes and Indonesian Budget

119 Chapter IV Central Government Expenditure restructuring and improvement with laws, operational procedure and management, advocacy to the pilgrims and service and protection of the pilgrims starting from the registration to hajj rites in Saudi Arabia and their return to Indonesia; and (3) assistance for the rehabilitation of worship places after disaster, allowances for religion counselors, and the provision of facilities and infrastructure for religius affairs. Education Budget Trillion Rp 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0, APBN-P Source: the Ministry of Finance GRAPH 4.10 RELIGION FUNCTION EXPENDITURE, Other Religious Services Religion Research and Development Religious Life Harmony Religious Life Development Budget of Central Government Expenditures in education function is used to support education services under the responsibility of the Government. In budget of education function records an average increase of 17.7 percent per annum, from Rp.50.8 trillion in 2007 to Rp115.0 trillion in This budget realization and proportion of education function consist of several sub-functions: (1) basic education subs-function (34.5 percent of total education function), (2) secondary education sub-function (8.1 percent); (3) tertiary education sub-function (29.7 percent); (4) education service assistance sub-function (12.4 percent); (5) non-formal and informal education sub-function (2.5 percent); (6) religion education sub-function (1.6 percent); (7) other education sub-function (7.9 percent); (8) early childhood education sub-function (0.6 percent); (9) service education sub-function (0.4 percent); (10) education research and development (1.0 percent); and (11) youth and sport development sub-function (0.9 percent). High proportion of budget allocation for basic education sub-function in shows support to Government s policy in accomplishing 9-year compulsory education program. Budget realization for some significant sub-functions of education function in can be illustrated as follows. In budget allocated to basic education sub-function is to increase 7.6 percent per annum on the average or from Rp.22.5 trillion in 2007 to Rp.32.4 trillion in This realization is particularly for intensive campaign of 9-year compulsory basic education program. During the same period, budget for secondary education sub-function records an average increase of 17.6 percent per annum, from Rp.4.1 trillion in 2007 to Rp.9.3 trillion in Such budget realization is to run secondary education program either general education or religious education. Meanwhile, budget realization for tertiary education is to rise by 43.4 percent per annum on the average, i.e. from Rp.6.9 trillion in 2007 to Rp.41.9 trillion in This budget of tertiary education sub-function is mostly for the provision of tertiary education services covering administration, operation or supports to run tertiary education services. Budget realization for religious education sub-function in is to increase by 76.6 percent on the average per annum, i.e. from Rp billion in 2007 to Rp.3.3 trillion in This budget realization is particularly used for: (1) Islamic education program; (2) Christian community counseling program (3) Hindu community counseling program; and (4) Budda community counseling program. The outcomes of various programs and activities in education function during include: (1) School Operation Aids (BOS) increased evident from: (1) school operation aids (BOS) for around 35.2 million students in 2007 to around 44.7 million students in 2012; (2) schoolarship for 3.6 students of low-income people at basic, secondary and tertiary degrees in 2008 and predicted to reach 8.2 million students in 2012; (3) higher education at 4-16 Financial Notes and Indonesian Budget 2013

120 Central Government Expenditure Chapter IV community level indicated with higher school participation average of schooling-age people of 15-years old and above, i.e years in 2010; (b) decreased illiteracy rate of population at 15-years old and over to 5.0 percent in 2012; increased school participation for (APM) SD/ SDLB/MI/Paket A to 95.6 percent in 2011; (d) increased APM SMP/ SMPLB/MTs/Paket B to 77.7 percent in 2011; (e) increased rough participation rate (APK) SMA/SMK/ MA/Paket C to 76.5 percent in 2011; (f) increased APK PT of years old to 27.1 percent in 2011; and (4) increased proportion of teachers qualifiying minimum S1/S4 degree to 58.0 percent and certified teachers to 45.9 percent in The trend of budget realization for education function in is presented in Graph Social Protection Function Budget realization of Central Government Expenditures in Social Proctection Function is allocated to meet the obligations of the Government in providing social protection to the people. In budget of social protection function is to rise by 16.0 percent per annum on the average i.e. from Rp.2.7 trillion in 2007 to Rp.5.6 trillion in This realization is to run for several sub-functions: (1) social protection and services sub-function to ailing persons and the disabled (2.6 percent of total social protection function); (2) social protection and services sub-function for the elderly (1.1 percent); (3) social protection and services sibfunction to children and families (17.7 percent); (4) women empowerment sub-function (3.0 percent); (5) social assistance and insurance sub-function (28.2 percent); (6) social protection research and development sub-function (3.5 percent); and (7) other social protection sub-function (34.5 percent). The illustration of budget realization for some significant subfunctions of social protection function during is as follows. Budget allocation to social protection research and development sub-function in is to increase by 22.7 percent per annum on the average, i.e. from Rp.87.0 billion in 2007 to Rp billion in The proceeds of this budget are to execute people s welfare policy development coordination program. In the same period, budget realization of women emplowerment sub-function drops 1.5 percent per annum on the average, from Rp billion in 2007 to Rp billion Meanwhile, budget realized for other social protection sub-function records an average increase of percent per annum from Rp.98.0 billion in 2007 to Rp. 4.3 trillion in The trend of budget realization for social protection function in is presented in Graph Trillion Rp 100,0 90,0 80,0 70,0 60,0 50,0 40,0 30,0 20,0 10,0 - GRAPH 4.11 EDUCATION FUNCTION EXPENDITURE, APBN-P Source:the Ministry of Finance Trillion Rp 6,0 5,0 4,0 3,0 2,0 1, APBN-P Source: the Ministry of Finance Education Research and Development Religiousity Education Assistance Services to Education Tertiary Education Non-Formal and Informal Education Secondary Education Basic Education GRAPH 4.12 SOCIAL PROTECTION FUNCTION EXPENDITURE, Other Social Protection Social Protection Research and Development Social Assistance and Insurance Social Guidance and Counseling Women Empowerment Social Protection and Services to Children and Families Social Protection and Services to the Elderly Financial Notes and Indonesian Budget

121 Chapter IV Central Government Expenditure The implementation of programs under social protection function in promoting gender equality has resulted in some outcomes at national and regional level such as: (1) eleven ministries/ agencies (K/L) have prepared Gender-Responsive Planning and Budgeting (PPRG), and in 2012 such PPRG will be applied in 28 K/L; (2) three provinces have introduced PPRG at their own initiatiaves, and in 2012 PPRG will be applied in 10 provinces. To serve women and children suffering violation some assistances have been provided inclusive of: (1) Integrated Service Center for Women and Children Empowerment (P2TP2A) in 24 provinces and 157 districts/cities; (2) Women and Childred Service Unist (UUPA) in police precints throughout Indonesia; (3) twenty two (22) integrated crisis center (PKT) in Regional and Vertical General Hospital (RSUD) and 43 integrated service centers (PPT) in Police Hospitals; and (4) thirty three (33) Traumatic Protection Center (RPTC), fifteen (15) Social Protection Shelters for Children (RSPA) and one (1) Social Protection Center of women The Trend of Budget Implementation of Central Government Expenditures by Organizations Pursuant to Law Number 17 of 2003 concerning State Finance, every year the Government is required to present its fiscal policy highlights on State Finance and macroeconomic framework for the coming fiscal year to the House of Representatives (Parliament). In this respect, Law No. 17 of 2003 stipulates that the government expenditures are detailed by organizations, functions and types of spendings. Then, the Government along with the House of Representatives (DPR) discuss general policy and priority budget as reference for the ministries/agencies (K/L) in preparing their budget. Based on the above policy, K/L as the users of budget and/or goods must prepare work and budget plan of their ministries/agencies (RKA-K/L) respective of their tasks and functions. Thereafter, K/L must also implement, account for and report the realization of budget and performance achieved. According to evaluation against the trend of budget implementation of Central Government Expenditures by Organizations during it can be concluded that at least there 3 aspects that must be considered. First, the budget realization of K/L experiences significant increase in nominal wise, i.e. 19,6 percent per annum on the average, from Rp trillion (5.7 percent of GDP) in 2007 to Rp trillion (6.4 percent of GDP) in APBNP 2012 (see Graph 4.13). Second, budget absorption of K/L records an average of 90.9 percent per annum with relatively stable trend at 90 percent. (See Graph 4.14). Third, the portion of K/L budget to total Central Government Expenditures is to surge up from 44.6 percent in 2007 to around 51.2 percent in The main contributing factors of this higher portion trillion rupiah GRAPH 4.13 K/L EXPENDITURE TREND, ,7 5,2 5, Source: the Ministry of Finance 5,2 5,6 APBNP LKPP % LKPP to GDP 6,4 percent 7,0 GRAPH 4.14 K/L EXPENDITURE ABSOPRTION, trillion rupiah 92,0 percent ,5 91,8 90,9 90, Source: the Ministry of Finance APBNP LKPP % LKPP to APBNP Average Absoprtion 6,0 5,0 4,0 3,0 2,0 1, Financial Notes and Indonesian Budget 2013

122 Central Government Expenditure Chapter IV of K/L budget to total allocation of Central Government Expenditures are due to: (1) basic salary and meal allowance increase; (2) additional K/L budget as directed by the president; (3) budget allocation of 20 percent for education; and (4) reallocation of State General Treasurer Budget (BA BUN) to K/L budget section for transparency and accountability. To carry out five main national development agendas for , i.e. (1) economic development and people s welfare augmentation; (2) governance improvement; (3) democracy pillar enforcement; (4) law enforcement and corruption eradication; and (5) inclusive and sustainable development reflecting the president s platform during the implementation of RPJMN (Mid-Term National Development Plan) ) and the second year of the implementation of RPJMN expenditure budget for K/L is allocated to 86 K/L which have had their separate budget section, i.e.: (1) 33 ministries; (2) 3 coordinating ministries; (3) 6 agencies; (4) 38 government institutions; and (5) six commissions. Of budget K/L allocation in 2012, which amounts Rp trillion, these ministries/agencies (K/L) can be classified into: (1) K/L under the Coordinating Ministry for Economy (31 K/L with budget proportion 37.3 percent of total K/L budget); (2) K/L under the Coordinating Ministry of Politics, Laws, and Security (30 K/L with budget proportion 31.0 percent of total K/L budget); and (3) K/L under the Coordinating Ministry of People s Welfare (22 K/L with budget proportion 31.7 percent of total K/L budget). K/L under the Coordinating Ministry of the Econmy include: (1) the Ministry of Public Works; (2) the Ministry of Transportation; (3) the Ministry of Agriculture; (4)the Ministry of Finance; (5) the Ministry of Energy and Mineral Resources; (6) the Ministry of Forestry; (7) the Ministry of Marine and Fishery; (8) the Ministry of Manpower and Transmigration; (9) Central Bureau of Statistics; and (10) the Ministry of Communication and Informatics. K/L under the Coordinating Ministry of Politics, Laws and Security are: (1) the Ministry of Defense; (2) Police of Republic of Indonesia; (3) the Ministry of Home Affairs; (4) the Ministry of Laws and Human Resources; (5) the Ministry of Foreign Affairs; (6) Supreme Court; (7) National Land Agency; (8) Attorney General Office; (9) House of Representatives (DPR); and (10) The Ministry of State Secretariat. K/L under the Coordinating Ministry of People s Welfare include: (1) the Ministry of Education and Culture; (2) the Ministry of Religions; (3) the Ministry of Health; (4) the Ministry of Social Affairs; (5) the Ministry of People Housing; (6) Demography and Family Planning Agency; (7) Sidoarjo Hot Mud Mitigation Agency; (8) the Ministry of Toursim and Creative Economy; (9) the Ministry of Youth and Sports; and (10) National SAR Agency. With reference to budget allocation in 2012, there are 10 K/L receiving the largest allocations, i.e.: (1) the Ministry of Education and Culture (14.1 percent of K/L budget); (2) the Ministry of Public Works (13.7 percent of K/L budget); (3) the Ministry of Defense (13.3 percent of KL/Budget); (4) Police of Republic of Indonesia (7.6 percent of K/L Budget); (5) the Ministry of Religions (7.2 percent of K/L budget); (7) the Ministry of Health (5.7 percent of K/L budget); (8) the Ministry of Agriculture (3.1 percent of K/L budget); (9) the Ministry of Finance (3.1 percent of K/L budget); and (10) the Ministry of Home Affairs (3.1 percent of K/L budget). The next illustration on the trend of K/L expenditure will be presented in narrative manner for K/L with the largest budget sections and/or K/L with the largest budget absorptions. Financial Notes and Indonesian Budget

123 Chapter IV Central Government Expenditure The Ministry of Education and Culture In the Ministry of Education and Culture, the trend of expenditure budget from experiences average increase of 13.7 percent per annum, from Rp.40.5 trillion (1.0 percent to GDP) in LKPP 2007 to Rp trillion (0.9 percent of GDP in APBN 2012). This budget allocation is to support the mission carried by the Ministry of Education and Culture through several program, including: (1) research and development program of the Ministry of Education and Culture; (2) basic education program; (3) secondary education program; (4) tertiary education program; and (5) profession education program for teachers and pedagogical staff and education quality supervisors. The trend of budget for the Ministry of Education and Culture during is presented in Graph Output of the above mentioned programs are: (1) 2,432 new school units (USB) at junior secondary degree (SMP) built; (2) 283 new school units (USB) at senior secondary degree (SMA) built; (3) 2,338 and 607 libraries for respectively SMA and SMK (Vocational School) provided; (4) BOS channeled to 38.3 million elementary (SD) and junior secondary (SMP) students; and (5) teachers with S1/DIV qualifications as established in Law No. 14 of 2005 concerning Teachers and Lecturers reaching 71.0 percent in 2012, which significantly increases from realization in 2007 that only recorded 41.7 percent. In addition, the achievements of the Ministry of Education and Culture during can be classified into three main performance, i.e.: (1) access expansion to education; (2)equal access to education; and (3) education quality and competitiveness improvement. Outcome expected from budget allocation to various programs and activities executed by the Ministry of Education and Culture during the said period include: (1) Bahasa Indonesia as science and technology language and pillar to reinforce nation union and unity; (2) broader and equal access to quality TK/TKLB, SD/SDLB, and SMP/SMPLB, gender equality in all provinces, kabupten and cities; (3) broader and equal access to quality Senior Secondary Schools (SMA), Senior Vocational Schools (SMK), Extraordinary Senior Secondary Schools (SMLB)and relevant to community needs, gender equality in all provinces, kabupaten and cities; (4) broader and equal access to quality and internationally competitive universities, gender equality and relevant to the needs of nation and state; and (5) improved professionalism of teachers and pedagogical staff and higher education quality toward national education standards. The Ministry of Public Works ttrillion rupiah 90,0 80,0 70,0 60,0 50,0 40,0 30,0 20,0 10,0 - GRAPH 4.15 EXPENDITURE TREND OF THE MINISTRY OF EDUCATION AND CULTURE In the Ministry of Public Works, budget allocation for period shows average incraease of 28.1 percent per annum, i.e. from Rp.22.8 trillion (0.6 percent of GDP) in LKPP of 2007 to Rp trillion (0.9 percent of GDP) in APBNP Consistent with such trend, the budget portion of the Ministry of Public Works to total K/L budget is also to rise from 10.1 percent in 2007 to 13.7 percent in APBNP Budget allocation for the Ministry of Public Works during such period is mostly used to support the Government s initiatives in 101,0 96,1 98,8 93,6 90, Source: the Ministry of Finance APBNP LKPP % LKPP to APBNP percent 120,0 100,0 80,0 60,0 40,0 20, Financial Notes and Indonesian Budget 2013

124 Central Government Expenditure Chapter IV realizing one of national development agendas as proclaimed in RPJMN i.e. economic development and people s welfare augmentation through improved regional accessibility and mobility with the existing, integrated and sustainable networks to support economic growth, to improve governance, and inclusive and impartial development. The realization of budget in the Ministry of Public Works is mainly allocated to finance infrastructure development and provision acceleration so as to boost economic growth in various programs, including: (1) construction development program; (2) settlement development and expansion program; (3) road operation program; (4) spatial management program; and (5) water resources management program. The trend of expenditure budget in the Ministry of Public Works during is presented in Graph Output produced from the implementation of such various program in 2011 are: (1) cooperation in construction skill training/certification with private education/training institutions/construction service communities consisting of 15 cooperation reports; (2) emergency response infrastructure/urgent needs of 16 packages; (3) low-cost apartment (rusunawa) including the supporting infrastructure of 65 twin blocks; (4) road expansion capacity at the main traffic corridors 3,292 km long; (5) national road preservation 35,358 km long and bridge 223,734 m long; (6) new and improved irrigation networks 66,249 ha; (7) new/improved swamp reclamation networks 70,510 ha; and (8) development program harmonization with RTRW (Regional Spatial Planning) in 32 provinces. Outcome generated from the allocation of expenditure budget to the Ministry of Public Works during the said period are: (1) capacity and performance of central and regional construction service providers improved; (2) more cities introducing norms, standards, procedures and criteria in settlement area development according to regional spatial planning, and more areas receiving settlement infrastructure service access; more links categorized in good conditions, i.e percent and more kilometers of national links to 98,318 km; (4) harmonious development plan with spatial planning, consistent infrastructure development program (especially public work and settlement infrastructure) with national regional spatial planning, and enhanced management quality; and (5) performance in water resources management improved. The Ministry of Defense 70,0 60,0 50,0 40,0 30,0 20,0 10,0 GRAPH 4.16 THE EXPENDITURE TREND OF THE MINISTRY OF PUBLIC WORKS trillion rupiah 80,0-91,5 93,5 Budget allocation to the Ministry of Defense in records steady increase at 21.1 percent per annum on the average, i.e. from Rp.30.6 trillion (0.8 percent of GDP) in LKPP 2007 to Rp.72.9 trillion (0.9 percent of GDP). Such budget allocation is to support the realization of mission of the Ministry of Defense, i.e. to realize safe and peaceful Indonesia with defense development target toward minimum essential force (MEF). The realization of budget allocation of the Ministry of Defense during are mainly reflected in the following programs: (1) defense technology and industry development program; (2) integrated denfense power use program; (3) land military force preparedness support program; (4) modernization program for primary weaponry system and non-primary weaponry system 102,6 90,7 90, Source: the Ministry of Finance APBNP LKPP % LKPP to APBNP percent 120,0 100,0 80,0 60,0 40,0 20,0 - Financial Notes and Indonesian Budget

125 Chapter IV Central Government Expenditure and facility and infrastructure development for sea military force; and (5) modernization program for primary weaponry system and non-primary weaponry system and facility and infrastructure development for air military force. The realization of expenditure budget in the Ministry of Defense during such period is used to support the following activities: (1) power and capacity development and expansion of Indonesian Armed Forces system, personnel, materials and facilities; (2) defense capacity building at MEF scale to reach primary weaponry system preparedness of percent by 2012; and (3) new procurement, repowering of primary weapons that are economically operatable. In addition, such budget realization for the Ministry of Defense is expended for the financing of Indonesian Armed Forces facility, infrastructure and services with the output of, among other things, the development/renovation of houses/accommodation for the soldiers, officiers, headquarters and maintenance facilities. In some significant achievements in defense sector have been attained such as: (1) MEF at 28.7 percent; (2) 219 border posts erected; (3) self-reliance in defense industry achieved at 15.8 percent of Indonesian Armed Forces primary weaponry system; (4) lowering security disturbance and legal offenses at seas; (5) number and conditions of defense equipment toward primary weaponry system modernization and operation preparedness; (6) anticorruption declaration of the Ministry of Defense and Indonesian Armed Forces (TNI) issued in 2011; and (7) Regulation of the Minister of Defense Number 21 of 2010 concerning Internal Control System within the Ministry of Defense and Indonesian Armed Forces (TNI) as elucidation of Government Regulation Number 60 of 2008 concerning Government Internal Control System issued. The trend of expenditure budget of the Ministry of Defense in is presented in Graph ,0 70,0 60,0 50,0 40,0 30,0 20,0 10,0 GRAPH 4.17 EXPENDITURE TREND OF THE MINISTRY OF DEFENCE trillion rupiah - Output of the above programs are inclusive of: (1) primary weaponry system procurement for weapons, small calibre munitions (MKK), big calibre munitions (MKB), and special munitions (MK) reaching 100 percent; (2) primary weaponry sytem procurement for weapons and optical equipment, tactical vehicles reaching 100 percent; (3) PC-40 me fiber glass developed in fasharkan Mentigi and fasharkan Manokwari, and sea hunter; (4) floating equipment, RI s ships (KRI), marine combat equipment (heavy equipment and zeni), ammunition and explosive procured; and (5) aircraft procurement for fighter jets, transport aircrafts, helicopters and training aircrafts procured at 100 percent. From such programs and activities, the outcome achieved include: (1) the production of domestic primary weaponry system complied with in phases; (2) the adoption of integrated defensive power capable of identifying, preventing, quelling threaths in integrated, effective and timely manner; (3) the preparedness of primary weaponry system and the facilities and infrastructure to reach the target of military power and capacity of the Indonesian Army (TNI AD) toward MEF realized; (4) improved capacity and power of Indonesian Navy (TNI AL) ready to operate and support task implementations according to the standards and 102,8 95,4 107,3 98,8 102, Source: the Ministry of Finance APBNP LKPP % LKPP to APBNP percent 120,0 100,0 80,0 60,0 40,0 20, Financial Notes and Indonesian Budget 2013

126 Central Government Expenditure Chapter IV requirements with high supporting capacity, preventive capacity and combating capacity; and (5) modernization and improvement of primary weaponry system and the associated facilities and infrastructure to reach the military power and capacity of Indonesian Air Force (TNI AU) at MEF level. The National Police of Republic of Indonesia As to the National Police of Republic of Indonesia (Polri), the trend of its expenditure budget during records average increase of 17.2 percent per annum, i.e. from Rp.19.9 trillion (0.5 percent of GDP) in LKPP 2007 to Rp.41.9 trillion (0.5 percent of GDP) in APBN Such budget allocation is to support the attainment of Polri s mission, i.e.: (1) give protection, defense and service to prevent the public from any physical or psychological disturbances; (2) provide guidance to the people through preemptive and preventive measures that will elevate the awareness and power and legal compliance of people; (3)uphold laws in professional and proportional manner while highly respecting law supremacy and human rights to establish legal certainty and justice; (4) maintain law and order while respecting norms and values applicable within the integrated jurisdiction of the Unitary State of Republic of Indonesia; (5) manage human resources within the Polri in professional fashion to pursue the envisaged goal, i.e. to establish sound domestic security that will encourage performance of the Police to support people s welfare augmentation; (6) intensify internal consolidation so as to build same vision and mission of Polri in future; (7) maintain solidarity within Police institution against any external interest that may be detrimental to the organization; (8) continue security restoration operation in some conflict torn regions to maintain the unity of Unitary State of Republic of Indonesia; and (9) enhance awareness of legal compliance and nation life within diverse society (berbhineka tunggal ika). The realization of Polri s budget during is mostly used to run various programs: (1) Police research and development program; (2) law and order strategy development program; (3) public law and order maintainance program; (4) criminal investigation and probe program; and (5) domestic security maintenance program against highly serious threats. The trend of Polri s expenditure budget in is presented in Graph Output produced from the said programs are: (1) 31 documents of prototype and reviews; (2) 2,455 regional security strategy services; (3) equipment provision for law and order maintainance consisting of 28,590 units; (4) the settlement of regional crimes of 33,725 cases; and (5) 82 domestic security disturbance management reports. trillion rupiah 45,0 40,0 35,0 30,0 25,0 20,0 15,0 10,0 GRAPH 4.18 EXPENDITURE TREND OF NATIONAL POLICE 20,0 Meanwhile, the outcomes of programs 5,0 financed under Polri s budget during - - such period are: (1) technology based Polri s equipment capable of dealing APBNP LKPP % LKPP to APBNP Source: the Ministry of Finance with various crimes; (2) early identification of potential security disturbances that may spark public anxieties; (3) wellmaintained public law and order capable of protecting all communities; (4) decreasing crime rates of various types (conventional crimes, transnational crimes, crimes with contingency implications and crimes against state assets) without violating human rights; and (5) safety 108,1 99,5 105,0 96,4 110,0 percent 120,0 100,0 80,0 60,0 40,0 Financial Notes and Indonesian Budget

127 Chapter IV Central Government Expenditure to the communities from any law and order disturbance, especially massive threaths (e.g. riots, organized crimes, etc.). The Ministry of Religions Expenditure budget of the Ministry of Religions during increases by 26.9 percent per annum on the average, from Rp.13.3 trillion (0.3 percent of GDP) in LKPP 2007 to Rp.39.4 trillion (0.5 percent of GDP) in APBNP With such progress, budget portion for the expenditures of the Ministry of Religions to total K/L budget is to rise from 5.9 percent in 2007 to 7.2 percent in Such allocation increase is mainly attributable to initiatives of enhancing the quality of religious life, creating clean and dignified governance, and improving public access to quality education. The budget realization of the Ministry of Religions during such period is particularly to advocate the believers of all religions to understand their respective religious tenets, either vertically or horizontally and to look for same points on religious teachings advocating peace, tolerance and caring among the others through various program, such as: (1) hajj and umrah pilgrimage development and management; (2) Islamic education program; (3) Islamic society development program; (4) Christian society development program; (5) Catholic society development program; (6) Hindu society development program; (7) Buddha society development program. The trend of budget realization of the Ministry of Religions from 2007 to 2012 is presented in Graph Output produced from budget allocation of the Ministry of Religions in 2011 is inclusive of: (1) more hajj pilgrims enjoying excellent services i.e. 221,000 persons; (2) 3,494 quality pondok pesantren schools and religion education institutions developed; (3) assistance for the development and empowerment of 270 religion social and education institutions; (4) the development of 477 Christian religion and religiosity education institutions; (5) the development of 297 Catholic students; (6) the development of 2,786 teachers of Hindu teaching education; and (7) 7 Buddha religious events. Outcome produced from budget allocated to the Ministry of Religions on such period are: (1) the quality of hajj and umrah information development and services enhanced; (2) access, quality and competitiveness of Islamic education improved; (3) the quality of counseling, services, empowerment and potential development of religious believers fortified; (4)quality of Christianity social and education services increased; (5) quality of Catholic social and education services improved; (6) quality of Hindu social and education services increased; and (7) quality of Buddha social and education services enhanced. The Ministry of Transportation trillion rupiah 45,0 40,0 35,0 30,0 25,0 20,0 15,0 10,0 5,0 - GRAPH 4.19 EXPENDITURE TREND OF THE MINISTRY OF RELIGIONS Expenditure budget of the Ministry of Transportation in records average increase of 36.2 percent per annum i.e. from Rp. 9.1 trillion (0.2 percent to GDP) in LKPP 2007 to Rp.38.1 trillion (0.4 percent of GDP) in APBNP This allocation is to support the realization of mission carried by the Ministry of Transportation, i.e. to realize transportation 99,4 93,0 99,6 93,0 93, Source: the Ministry of Finance APBNP LKPP % LKPP to APBNP percent 120,0 100,0 80,0 60,0 40,0 20, Financial Notes and Indonesian Budget 2013

128 Central Government Expenditure Chapter IV sector as core public service, which is determinant in fostering welfare society, and the success of national development in general. The said mission stems from the notion believing that transportation is the backbone of infrastructure development and in turn will augment the nation and state lives in politics, economy, social-culture and defense-security sectors. Given that, the development of transportation sector will be focused on reliable and competitive transport services capable of generating added values. Reliable transportation is indicated with safe, secured, comfortable, timely, well-maintained, sufficient, affordable transportation operation embracing the entire regions throughout the country and capable of supporting national development. The realization of expenditure budget for the Ministry of Transportation shows upward trend during The overwhelmingly allocation is to finance the acceleration of infrastructure development and provision so as to boost economic growth, which is executed in various programs, including: (1) human resources development program in transportation; (2) land transportation management and operation program; (3) railways transportation management and operation program; (4) sea transportation management and operation program program; and (5) air transportation management and operation program. The trend of expenditure budget of the Ministry of Transportation in is presented in Graph trillion rupiah 45,0 40,0 35,0 30,0 25,0 20,0 15,0 10,0 5,0 - GRAPH 4.20 EXPENDITURE TREND OF THE MINISTRY OF TRANSPORTATION 89,9 88,1 Output produced from budget allocated to the Ministry of Transportation during the said period is: (1) pioneer bus transport services consisting of 344 units to serve pioneer highway routes; (2) the kilometers of railways double tracks increased, with the construction of railways double tracks Yogyakarta-Kutoarjo (64 km), Cikampek-Cirebon (48 km), Duri-Tangerang (20.19 km), Cirebon-Kroya at Patuguran-Purwokerto route (24.48 km), Tegal-Pekalongan at Pemalang-Surodadi-Larangan route (22.7 km), Serpong-Maja (22.90 km), Lamongan- Duduk-Cerme at Bojonegoro-Surabaya Pasar Turi route (13.9 km), Brebes-Cirebon (62.85 km), Pekalongan - Semarang (89.9 km); (3) railways tracks improvement/rehabilitation from km in 2007 to 2,501.4 km in 2012 and the procurement of 193 trains and 199 units of diesel trains/electrical trains and diesel-electrical trains; (4) the construction of 361 ferry ports (new and continuation) during ; (5) 23 unit of passenger ship fleets of PT Pelni and 61 pioneer passenger ship fleets; (6) sea transport service network for cargos and passengers that until 2011 reaching around 181 routes for domestic cargo transports, 28 routes of PT Pelni s passanger transport for PSO economic class service transport, 93 routes of private passenger transport (non- Pelni) and 61 routes of pioneer sea transport; (7) the development and construction of ports to support navigation such as public port (managed by PT Pelindo) in 614 locations, special terminals in 546 locations, private terminals in 795 locations across the country; (8) construction and development of strategic airports including Airport Hasanuddin Makassar, Airport Soekarno-Hatta (terminal II expansion), Airport Kualanamu Medan Baru, Airport Lombok Baru, and Airport Komodo Labuan Bajo; and (9) improved pioneer air transport 83,6 88,6 86, Source: the Ministry of Finance APBNP LKPP % LKPP to APBNP percent 100,0 90,0 80,0 70,0 60,0 50,0 40,0 30,0 20,0 10,0 - Financial Notes and Indonesian Budget

129 Chapter IV Central Government Expenditure services to the local people from 91 routes and 83 cities in 2007 to 132 routes and 124 cities in From the implementation of such varying programs, the outcomes produced from transport infrastructure development are: (1) the quality of research and development results and their uses in formulating transportation policy enhanced; (2) the performance of land transport services improved; (3) the performance of railways transport services improved; (4) the performance of sea transport services improved; and (5) air transport service and management improved, which are more timely scheduled, integrated, safer and comfortable and more efficient movements of passengers and goods and reduced air transport service gap of regions. The Ministry of Health In the Ministry of Health, the expenditure budget during shows average increase of 17.1 percent per annum, i.e. from Rp.15.5 trillion (0.4 percent of GDP) in LKPP 2007 to Rp.31.2 trillion (0.4 percent of GDP) in APBNP This allocation is to finance initiatives of augmenting the people s welfare with improved access to quality health services. The realization of such expenditure budget during the said period is mainly used to support infrastructure development and provision acceleration so as to elevate public health rate, which is elaborated into several health development programs: (1) support program for the management and implementation of technical tasks of the Ministry of Health; (2) supervision and accountability improvement program to the officials of the Ministry of Health; (3) research and development program of the Ministry of Health; (4) nutrition and health improvement program for mothers and children; (5) health initiative development program; (6) disease control and sanitation program; (7) pharmautical and health equipment development program; and (8) human resources development and empowerment program in health sector. Output of such programs are: (1) the status of 86 puskesmas promoted to Patient Care Unit status (Puskesmas Perawatan) in inhibited border areas and small outer islands and 9,323 puskesmas delivering basic health services to poor households as of 2012; (2) 820 health operators maximized and receiving incentives for their services in isolated, border areas and small outer islands and other regions suffering health problems; (3) higher percentage of pregnant mothers served by trained health operators (childbirth services by health operators)from percent in 2007 to percent in 2011, and higher complete immunization rate from 92.1 percent in 2009 to 93.4 percent in 2011; (4) medicine and vaccine supplies reaching 90 percent in 2012; and (5) complete basic immunization package for infants of 0 11 months reaching 97.3 percent, and number of villages performing community based total sanitation recording 11,000 villages as of The illustration of expenditure budget trend of the Ministry of Health from is presented in Graph GRAPH 4.21 EXPENDITURE TREND OF THE MINISTRY OF HEALTH trillion rupiah 35,0 30,0 25,0 20,0 15,0 10,0 5,0-92,0 86,2 95,3 94,4 91, APBNP LKPP % LKPP to APBNP Source: the Ministry of Finance percent 120,0 100,0 80,0 60,0 40,0 20, Financial Notes and Indonesian Budget 2013

130 Central Government Expenditure Chapter IV From such budget allocation to the Ministry of Health some outcomes have been gained including: (1) basic health initiatives, reference, traditional, alternative and complementary health services, occupational health, sports and exercises, and standardization, accreditation and health services improved; (2) health human resources improved in terms of quality and quantity up to health service standards; (3) provision and access to quality health service expanded for all social components; (4) pharmacy and health equipment supplies complying with standards increased and affordable to common people; and (5) the lowering morbidity, mortality and disability rates due to diseases. The Ministry of Agriculture Within the Ministry of Agriculture, the expenditure budget during shows upward trend with average increase of 24.2 percent per annum from Rp.6.5 trillion in LKPP 2007 to Rp.17.1 trillion in APBNP Budget absorption of the Ministry of Agriculture during the same period is accodingly to rise, i.e. from 80.9 percent of budget ceiling allocated for the Ministry of Agriculture in APBNP 2007 to 90.1 percent of its ceiling in APBNP Such budget allocation is to support the realization of Health Ministry s mission, particularly in efforts to augment the welfare of people, especially farmers with employment generation in villages and economic growth, and to achieve national food resilience through agriculture revitalization. The budget realization during the said period is mostly used to support the capacity building of farmers to produce highly competitive commodities and maintain domestic rice production at minimum 90.0% of total domestic needs to secure food selfsufficiency. This effort is carried out in several programs, including: (1) food crops production, productivity and quality improvement programs to reach sustainable food self-sufficiency and food resilience; (2) agriculture facility and infrastructure provision and development program; (3) beef selfsufficiency program to safeguard the provision of safe, healthy, wholesome and halal (religiously legal) beefs; (4) technology and competitive superior variety development program; (5) agriculture human resources and farmer institution development program; and (6) sustainable plantation production, productivity and quality improvement program. The trend of expenditure budget of the Ministry of Agriculture in is presented in Graph trillion rupiah 20,0 18,0 16,0 14,0 12,0 10,0 8,0 6,0 4,0 2,0 - GRAPH 4.22 EXPENDITURE TREND OF THE MINISTRY OF AGRICULTURE During period, the output produced from such varying programs are: (1) rice production increased, from 57.2 million tons of ground dry unhulled paddy (GKG) in 2007 to million tons GKG in 2012 and corn production increased from 13.3 million tons dry corn grains in 2007 to million tons of dry corn grains in 2012; (2) more budget allocation for direct assistance of superior seeds and national seed reserves from Rp billion in 2006 to Rp.1.85 trillion in 2012; (3) sugar production increased by 2.5 percent per annum, cacao production increased 1.83 percent per annum, tabacco production increased 0.31 percent per annum, rubber production increased 4.0 percent per annum, coffee production increased 1.85 percent per annum; (4) beef production increased 5.01 percent per annum, lamb 80,9 86,7 112,7 90,2 90, Source: the Ministry of Finance APBNP LKPP % LKPP to APBNP percent 120,0 100,0 80,0 60,0 40,0 20,0 - Financial Notes and Indonesian Budget

131 Chapter IV Central Government Expenditure production increased 1.36 percent per annum, fowl production increased 7.65 percent per annum, and milk production increased percent per annum; (5) chilli commodity production increased 4.64 percent per annum, manggo commodity production increased percent per annum, durian commodity production increased 3.87 percent per annum; (6) farmer exchange rate increased from 100 in 2007 to in 2011; (7) agriculture infrastructure improvement and development as of 2011 covering tertiary irrigation networks 541,298 ha, village irrigation networks 355,361 ha, micro water management 170,761 ha, agriculture paths and production paths 6,512 km, upstream watershed conservation 30,050 ha, paddy field expansion 144,664 ha, shallow wells (embung) 2,141 units, infiltration wells 2,674 units and ditches 295 units; (8) food pattern score increased from 74,0 in 2006 to 89.8 in 2012; (9) technology innovation inventing 201 superior varieties of paddy, 46 superior varieties of corn, 71 superior varieties of beans, seven varieties of donkeys, goats, chicken and ducks, 13 vaccine technologies; eight antigens, 10 diagnostic kits and disease testing techniques, 25 superior varieties of horticulture, and 21 new superior varieties of sugar canes; and (10) the development of integrated waste free planting-livestock raising pattern, bio fertilizer product, biotechnology, integrated pest control, agriculture machines and post-harvest. Outcome of budget allocation to the Ministry of Agriculture during the said period include: (1) the expansion of proper food crop farming introduction supported with sound post-harvest management system and seed provision and efficient production safeguarding to achieve adequate and sustainable food crop production; (2) agriculture facility and infrastructure provision and development with land expansion and management; irrigation water management; agriculture financing facilitation, fertilizer and pesticide facilitation; and agriculture equipment and machines facilitation; (3) animal food supplies (meat, eggs, milk) and improved contribution of domestic livestock in animal food provision (meat and eggs) from domestic sources; (4) technology innovation and dissemination in agriculture; and (5) food resilience with the empowerment, distribution, consumption and safety of fresh food supplies at community level, and soundly coordinated food resilience policies. The Ministry of Finance Expenditure budget allocation in the Ministry of Finance during records steady increase of 24.0 percent per annum on the average, i.e. from Rp.7.0 trillion in LKPP 2007 to Rp.16.9 trillion in APBNP Likewise, the realization of budget absorption of the Ministry of Finance during the same period is also to rise from 78.8 percent to total budget ceiling set for the Ministry of Finance in APBNP 2007 to 85.1 percent in APBNP The realization of expenditure budget for the Ministry of Finance in the said period has been allocated for: (1) tax revenue improvement and safeguarding program; (2) custom and excise supervision, service and revenue program; (3) state treasury management program; (4) state asset management program, the settlement of state receivables and auction services; (5)education and training program for the officials of the Ministry of Finance; (6) fiscal policy formulation program; (7) fiscal balance management of Central Government and Regional Governments program; (8) state budget management program; (9) accountability supervision and improvement program for the officials of the Ministry of Finance; and (10) loan management and financing program. In 2011, the output produced from the above programs are: (1) 110 documents of recommended policy formulation and audit supervision accomplished; (2) one document of licensing policy and recommendation of custom facilities; (3) 32 review/monitoring and 4-28 Financial Notes and Indonesian Budget 2013

132 Central Government Expenditure Chapter IV evaluation reports of state finance; (4) five regulations/manuals on Governance Accounting Standards accomplished; (5) two laws on state owned assets completed; (6) 4 implementation regulations on budgeting finished; and (7) two documents of financial notes and Draft Law on APBN and Draft Law on APBNP finalized. Outcome from budget allocation for the expenditures of the Ministry of Finance in include: (1) more optimum tax revenue; (2) custom and excise administrator capable of facilitating the industries, trade sectors and communities and optimizing revenue; (3) more professional, transparent and accountable state treasure management according to the applicable regulations; (4) state asset management, settlement of government loans and auction services in professional, orderly, well-targeted and optimum manner and able to fortify good image to the stakeholders; (5) highly integrated and competent human resources; (6) sustainable fiscal policy with measurable fiscal risks for stabilization and economic growth; (7) enhanced effectiveness and efficiency in the management of financial relation between the Government and Regions; (8) budgeting functions exercised according to the laws and policies outlined by the Government; (9) supervision capable of generating added value with more effective risk management, controlling, governance and accountability of officials within the Ministry of Finance; and (10) more optimum management of government securities and loans to save APBN financing. The trend of expenditure budget in the Ministry of Finance during is presented in Graph The Ministry of Home Affairs GRAPH 4.23 EXPENDITURE TREND OF THE MINISTRY OF FINANCE trillion rupiah 20,0 18,0 16,0 14,0 12,0 10,0 8,0 6,0 4,0 2,0-78,8 80,6 81,4 84,3 85, Source: the Ministry of Finance APBNP LKPP % LKPP to APBNP percent 90,0 Expenditure budget for the Ministry of Home Affairs in records an average increase of 62.9 percent per annum, i.e. from Rp.3.1 trillion in LKPP 2007 to Rp.16.7 trillion in APBNP With such increase, the portion of expenditure budget of the Ministry of Home Affairs to total K/L budget is also to surge up from 1.4 percent in 2007 to 3.1 percent in APBNP Missions to support the vision of the Ministry of Home Affairs i.e. to establish democratic political system, decentralized governance, sustainable regional development and participatory community empowerment supported with professional human resources within the Unitary State of Republic of Indonesia are expressed in several programs: (1) accountability supervision and improvement program to the officials of the Ministry of Home Affairs; (2) research and development program within the Ministry of Home Affairs; (3) education and training program for the officials of the Ministry of Home Affairs; (4) regional development program; (5) decentralization and regional autonomous management program; (6) public administration reinforcement program; (7) financial capacity building program for regional governments; and (8) demographic administration program. The trend of expenditure budget for the Ministry of Home Affairs during is presented in Graph ,0 70,0 60,0 50,0 40,0 30,0 20,0 10,0 - Financial Notes and Indonesian Budget

133 Chapter IV Central Government Expenditure Outputs produced from the above program include: (1) higher compliance percentage of officials in performing the tasks and functions in working units of the Ministry of Home Affairs such as in Directorate General of Regional Autonomy, Education and Training Center, Institute of Home Affairs Governance (IPDN) and National Border Management Agency (BNPP) reaching 80 percent in 2011; (2) independent review of the affects of awareness level of SMA (Senior Secondary School) students and equal students on the ownership of ID Cards (KTP) (case study in SMAN 69 and SMK61 in Kabupaten GRAPH 4.24 EXPENDITURE TREND OF THE MINISTRY OF HOME AFFAIRS trillion rupiah 18,0 16,0 14,0 12,0 10,0 8,0 6,0 4,0 2,0 - Kepulauan Seribu); (3) 30 of 90 target norms, standards, procedures and criteria (NSPK) of substantive education and training centers of regional governments prepared as of 2011; (4) regional infrastructure social and economics (RISE) program facilitated in 9 provinces, 34 kabupaten; (5) number of regions conducting regional head election reaching 8 provinces for the election of governor and vice governor; 80 kabupaten for the election of regent and vice regent and 12 cities for the election of mayor and vice mayor; and (6) number of regions establishing one stop integrated services (PTSP) reaching 444 provinces/kabupaten/cities. Outcome of budget allocation for the expenditures of the Ministry of Home Affairs during the said period include: (1) improved performance in executing the tasks and functions as government officials, and more transparent and accountable financial management; (2) the utilization of research results as recommendations in policy formulation; (3) more number of alumni, suitability of participants with education and training requirements and education and training reform for officials within the Ministry of Home Affairs and regional governments; (4) quality of regional development planning enhanced, the availability of growth map of the region concerned in view of local and regional gaps as basis in formulating fiscal balance (DAK, DAU and DBH) and quality in spatial planning, protection and environmental management improved; (5) better implementation of governance affairs and minimum service standard in regions, better performance of regional governments, new autonomous regions evaluated; and basic strategies for regional management prepared, and Law Number 32 of 2004 revised; and (6) poor people and villagers empowered. In terms of average absorption from , there are ten K/L with the largest budget absorption, to wit: (1) National Police of Republic of Indonesia (103.8 percent of the ceiling); (2) National Disaster Management Agency (101.8 percent of the ceiling); (3) The Indonesian Institute of Sciences (101.6 percent of the ceiling); (4) the Ministry of Defense (101.3 percent of the ceiling); (5) State Intelligent Agency (99.8 percent of the ceiling); (6) Central Bureau of Statistics (99.3 percent of the ceiling); (7) National Cryptogram Agency (99.2 percent of the ceiling); (8) the Ministry of Youth and Sports (99.0 percent of the ceiling); (9) Demography and National Family Planning Agency (98.0 percent of the ceiling); and (10) Attorney General Office of Republic of Indonesia (97.9 percent of the ceiling). The output and outcome of some K/L with the largest budget absorption as indicated above are as follows: 80,1 92,8 103,3 90,4 79, Source: the Ministry of Finance APBNP LKPP % LKPP to APBNP percent 120,0 100,0 80,0 60,0 40,0 20, Financial Notes and Indonesian Budget 2013

134 Central Government Expenditure Chapter IV National Disaster Management Agency (BNPB) Expenditure budget for the National Disaster Management Agency (BNPB) in is to rise percent per annum on the average, from Rp.46.7 billion in LKPP 2007 to Rp.1.1 trillion in APBNP With such progress, the portion of expenditure budget for BNPB to total K/L budget increases from 0.02 percent in 2007 to 0.2 percent in APBNP Accordingly, the realization of BNPB budget in the same period is also to rise, from 84.4 percent of APBNP 2007 to percent of its ceiling in APBNP Budget realization of BNPB in such period is to support: (1) support program for the management and implementation of other technical tasks of BNPB; (2) facility and infrastructure improvement program for BNBP officials; (3) supervision and accountability improvement program for BNPB officials; and (4) disaster management program. From , output produced from various programs above are inclusive of: (1) two international cooperations in disaster management; (2) five ambulance cars; (3) four socialization reports of financial supervision guidelines; (4) disaster risk mitigation facilitated in 74 locations; (5) rehabilitation and reconstruction in disaster ravaged regions; and (6) disaster risk mitigation implemented in 33 provinces. Outcome produced from budget allocation for BNPB in such period are including: (1) coordination and integration of planning, development and controlling of program, administration and facilities and infrastructure and cooperation within BNPB improved; (2) accountable supervision and inspection of tasks performed by internal units within BNPB; (3) post-disaster rehabilitation and reconstruction in coordinated and integrated manner; and (5) coordination and emergency management in disaster ravaged regions improved. The Indonesian Institute of Sciences (LIPI) Expenditure budget for the Indonesian Institute of Sciences (LIPI) in experiences average increase of 13.5 percent per annum, i.e. from Rp billion in LKPP 2007 to Rp billion in APBNP Accordingly the realized absorption of LIPI expenditure budget also records an increase, i.e. from 96.0 percent to APBNP 2007 to percent of its ceiling in APBNP Budget realization for LIPI expenditures is used to support: (1) management support program for the implementation of other technical tasks of LIPI; (2) science and technology research, mastery and utilization program. In period, output of the foregoing program are: (1) cooperation between research and development (RD) centers and between RD centers and universities; (2) dissemination and application of applied technology to increase technology based business productivity in regions; (3) characterization and valuation of ecosystem functions and anticipation to climate change of 20 reports; and (4) capitalization and utilization of LIPI s patents and invention with economic values and beneficial to the people. Outcome produced from expenditure budget allocated to LIPI in the said period are: (1) core competency fortified; (2) efficient and effective research and development governance; (3) capacities in scientific research, development and application improved; and (4) broader public access to sciences. National Intelligent Agency (BIN) Expenditure budget allocated for the National Intelligent Agency (BIN) in records an average increase of 7.5 percent per annum, i.e. from Rp.1.0 trillion in LKPP 2007 to Financial Notes and Indonesian Budget

135 Chapter IV Central Government Expenditure Rp.1.5 trillion in APBNP The realization of expenditure budget for BIN is particularly to support: (1) investigation development program for national security and safeguarding; (2) support program for the management and implementation of other technical tasks in national intelligent; and (3) supervision and accountability improvement program for BIN officials. Through 2011, output produced from the foregoing programs are: (1) 12 overseas intelligent operation planning and implementation and operation supports; (2) terrorism counter operation (prevention and deterrence) of 12 reports; (3) education and training for the government officials; and personnel investigation and supervision. Outcome of budget allocation for BIN expenditures in the above period are: (1) improved investigation for national security and safeguarding; (2) better technical and administrative service support to national intelligent; and (3) more technical and administrative support to the national intelligent. Central Bureau of Statistics (BPS) Expenditure budget of Central Bureau of Statistics (BPS) in is to rise by 37.4 percent per annum, i.e. from Rp.1.2 trillion in LKPP 2007 to Rp.2.3 trillion in APBNP Budget realization of BPS expenditures is used to support: (1) statistical information provision and service program; (2) supervision and accountability improvement program to BPS officials; (3) support program for the management and implementation of other technical tasks of BPS; and (4) facility and infrastructure improvement program for BPS officials. In 2011, the output produced from such programs are: (1) ten titles of publication on statistical analysis development accomplished; (2) three titles of publication on social resilience statistics accomplished; (3) one monitoring report of follow up actions of audit findings Region I; and (4) 28 PR service, legal and institutional relation meetings convened. Outcome produced of budget allocation for BPS in period are including: (1) improved data and information supplies in complete, accurate and timely manner; (2) enhanced quality of financial and material management accountability; (3) good governance and clean government; and (4) infrastructure and facilities to support the performance of technical activities. National Cryptogram Agency Expenditure budget for the National Cyptogram Agency in records an average increase of 29.7 percent per annum, i.e. from Rp.1.0 trillion in LKPP 2007 to Rp.1.8 trillion in APBNP The realization of expenditure budget of this agency is particularly to support: (1) national cryptogram development program; and (2) support program for the management and implementation of other technical tasks of the National Cryptogram Agency. In 2011, output produced from these varying programs include: (1) signal analysis of five activities; (2) cryptogram communication network infrastructure in 24 points; (3) 38 university graduates (sarjana) majoring in applied technology; and (4) administrative services in public relation of 3 activities. Outcome produced from the allocation of expenditure budget for the National Cryptogram Agency include: (1) cryptogram carried out consistent with national policies; (2) support to classified communication; and (4) office administrative service of National Cryptogram Agency in accountable manner Financial Notes and Indonesian Budget 2013

136 Central Government Expenditure Chapter IV The Ministry of Youth and Sports Budget allocation for the Ministry of Youth and Sports during is to rise by 44.7 percent per annum from Rp billion in LKPP 2007 to Rp.1.8 trillion in APBNP The realization of such expenditure budget for the Ministry of Youth and Sports is mainly allocated for: (1) support program for the management and implementation of other technical tasks of the Ministry of Youth and Sports; (2) infrastructure and facility improvement program for the officials of the Ministry of Youth and Sports; (3) youth and sport development program; and (4) competition sport development program. In 211, the output produced from these programs are: (1) 48 publications and documentations; (2) the development/rehabilitation of sport facility and infrastructure, 5,978 m2; (3) number of youth facilitated as enterpreneurs reaching 11,072 persons; and (4) facilitation to 350 coaches of competition sport branches. The outcome of expenditure budget allocated to the Ministry of Youth and Sport during the said period include: (1) financial and personnel planning, supervision and administration and public service quality within the Ministry of Youth and Sports enhanced, (2) facility and infrastructure management quality improved; (3) participation and active roles of youths in various development sectors increased; and (4) participation of community in sports and their achievements both at regional and international level elevated. Demography and National Family Planning Agency (BKKBN) Expenditude budget for the Demography and National Family Planning Agency (BKKBN) in records an increase of 25.6 percent per annum, i.e. from Rp billion in LKPP 2007 to Rp.2.1 trillion in APBNP The realization of expenditure budget for BKKBN during such period is to support: (1) demography and famility planning program; (2) BKKBN training and development program; (3) BKKBN official accountability supervision and development program; and (4) management and implementation support program for other technical tasks of BKKBN. In 2011, output produced from such various programs are: (1) family planning services delivered; (2) advocacy and family planning services intensified; (3) family resilience improvement and empowerment; (4) competency of human resources engaged in family planning fortified; (5) general supervision and administration; and (6) program management supports. Outcome of expenditure budget allocation to BKKBN include: (1) proportional population growth in 2015 evident from the lower population growth rate and birth rate, higher family planning participation rate, and lower un-fulfilled family planning requirement rate; (2) quality in the implementation of human resources training and researches on demographic and family planning program enhanced; (3) accountability in program, personnel and general, financial and logistic administraion management (good governance) improved; (4) management supports for demographic and family program implementation. Attorney General Office of Republic of Indonesia (Kejaksaan RI) Expenditure budget for the Attorney General Office of Republic of Indonesia (Kejaksaan RI) in 2007 to 2012 records an increase of 19.8 percent per annum, i.e. from Rp.1.6 trillion in LKPP 2007 to Rp.3.8 trillion in APBNP Accordingly the realized absoprtion of expenditure budget to Kejaksaan RI in the said period is also to rise by percent of APBNP 2007 to percent of its ceiling in APBNP Financial Notes and Indonesian Budget

137 Chapter IV Central Government Expenditure Budget realization of Kejaksaan RI s expenditures is mostly to support: (1) supervision and accountability improvement program to the officials of Kejaksaan RI; (2) intelligent case investigation/safeguarding/mobilization program; (3) general criminal case management and settlement program; and (4) special criminal case management and settlement program, including grave human right violation and corruption crimes. In 2011, output produced from these programs are: (1) public complaints in intelligent operation dealt with; (2) intelligent reports of ideology, social, politic, security defense and public laws and orders; (3) general criminal cases settled in accussation proceedings in General Attorney; and (4) grave human right violation case settled in investigation proceedings. Outcome of budget allocation for Kejaksanaan RI s expenditures in the said period are: (1) quality in the supervision against routine and development task implementation by all elements within the attorney general office according to the applicable laws and policies established by the General Attorney enhanced; (2) quality in the implementation of judicial intelligent activities in social, political, economic, financial, defense-security and public laws and orders sectors enhanced; (3) quality in pre-accusation, additional investiation, judge determination and court decisions, supervision to conditional aquittal decision and other legal actions in general criminal cases enhanced; and (4) quality in pre-accusation, additional investigation, judge determination and court decisions, supervision to conditional aquittal decision and other legal actions in economic crimes enhanced The Trends of Budget Implementation for Central Government Expenditures by Types Pursuant to Article 11 paragraph (5) Law Number 17 of 2003 concerning State Finance, the breakdowns of Central Government Expenditures by Types comprise: (1) personnel expenditure; (2) material expenditure; (3) capital expenditure; and (4) loan interest payment; (5) subsidy; (6) grant expenditure; (7) social aids; and (8) other expenditure. In nominal terms, the expenditure of Central Government in shows upward trend, i.e. from Rp trillion (12.8 percent of GDP) in 2007 to Rp.1,069.5 trillion (12.5 percent of GDP) in APBNP Reviewed from its composition by type, spendings record significant increase are that of material expenditure and capital expenditure. The proportion of material expenditure to total Central Government expenditures is to rise from 10.8 percent in 2007 to 15.1 percent in APBNP Meanwhile, the proportion of capital expenditure to total Central Government Expenditures increases from 12.7 percent in 2007 to 16.5 percent in APBNP The trend of Central Government Expenditures by Types can be seen in Table 4.2 and Graph Personnel Expenditure GRAPH 4.25 CENTRAL GOVERNMENT EXPENDITURE TREND BY TYPES, trillion rupiah In period, the budget realization of personnel expenditure in nominal wise has increased 18.6 percent per annum on the average, i.e. from Rp.90.4 trillion (2.3 percent of GDP) in 2007 to Rp trillion (2.5 percent of GDP) in Likewise, the proportion of 12,8 14,0 11,2 10,8 11,9 11,9 LKPP LKPP LKPP LKPP LKPP APBN APBN-P Personnel Material Capital Loan Interest Payment Subsidy Grant Social Aids Other Expenditure Additional Budget Source : the Ministry of Finance % GDP 12,5 % 16,0 14,0 12,0 10,0 8,0 6,0 4,0 2, Financial Notes and Indonesian Budget 2013

138 Central Government Expenditure Chapter IV No. Description LKPP % to GDP LKPP personnel expenditure to total government expenditures is also to rise from 11.9 percent in 2007 to 13.7 percent in Meanwhile, the budget absorption performance of personnel expenditure to APBNP in is always higher than 90 percent, i.e percent in 2007 and 96.1 percent in In 2012 this budget absorption performance is expected to reach 96.2 percent of the ceiling set in APBN The majority of such personnel spending realization is to pay salaries and allowances and honorarium, vacation, overtime (around 66.1 percent) with the remaining (some 33.9 percent) for social contribution, i.e. health insurance premium and pension benefits. Illustration on the trend of personnel spending trend in the said period is presented in Graph The increase of allocation and realization of personnel expenditure in such period is due to policy measures taken by the Government to rise the salaries and prosperity of public servants (PNS), members of TNI/Polri and the retired persons. The said policies are: (1) the rise of basic salaries for PNS and TNI/Polri on periodic basis; (2) the payment of the 13th salary; (3) rise in functional and structural allowances; (4) rise in meal allowance for members of TNI/Polri; (5) meal allowance for PNS starting from 2007; and (6) rise of basic pension and the payment of the 13th pension. In addition, the increase of personnel expenditure is due to the provision of remuneration for bureaucracy reform since 2007, which is then expanded its implementation. Bureaucracy reform, which is originally covered 3 (three) K/L in 2007 is expected to embrace around 50 K/L in Illustration on personnel expenditure policies is presented in Table 4.3. With personnel expenditure policies taken during the said period, the income % to GDP LKPP 1. Personnel Expenditure 90,4 2,3 112,8 2,3 127,7 2,4 148,1 2,3 175,7 2,4 215,9 2,7 212,3 2,5 2. Material Expenditure 54,5 1,4 56,0 1,1 80,7 1,4 97,6 1,5 124,6 1,7 188,0 2,3 186,6 2,2 3. Capital Expenditure 64,3 1,6 72,8 1,5 75,9 1,4 80,3 1,2 117,9 1,6 152,0 1,9 168,7 2,0 4. Loan Interest Payment 79,8 2,0 88,4 1,8 93,8 1,7 88,4 1,4 93,3 1,3 122,2 1,5 117,8 1,4 5. Subsidy 150,2 3,8 275,3 5,6 138,1 2,5 192,7 3,0 295,4 4,0 208,9 2,6 245,1 2,9 6. Grant Expenditure ,1 0,0 0,3 0,0 1,8 0,0 1,8 0,0 7. Social Aids 49,8 1,3 57,7 1,2 73,8 1,3 68,6 1,1 71,1 1,0 47,8 0,6 55,4 0,6 8. Other Expenditure 15,6 0,4 30,3 0,6 38,9 0,7 21,7 0,3 5,5 0,1 28,5 0,4 68,5 0,8 9. Additional Budget ,5 0,2 Total Souce: the Ministry of Finance TABLE 4.2 CENTRAL GOVERNMENT EXPENDITURE TREND, (trillion rupiah) % to GDP trillion Rp 250,0 200,0 150,0 100,0 50,0 0,0 GRAPH 4.26 PERSONNEL EXPENDITURE TREND, ,4 112,8 127,7 148,1 175,5 215, social contribution 28,5 37,3 48,5 52,8 61,8 69,2 honorarium & vacation 11,5 7,8 8,5 14,3 22,5 41,8 salary & allowance 50,3 67,8 70,7 81,0 91,5 101,3 Source: the Ministry of Finance LKPP % to GDP LKPP % to GDP APBN % to GDP APBNP 504,6 12,8 693,4 14,0 628,8 11,2 697,4 10,8 883,7 11,9 965,0 11, ,5 12,5 in rupiah 2012 GRAPH 4.27 TAKE HOME PAY TREND OF THE LOWEST RANK OF PUBLIC CIVIL SERVANTS, PNS (Rank. Ia unmarried) Teacher (Gol. IIa unmmaried) TNI/Polri (Tamtama/Bintara) Source: the Ministry of Finance % to GDP Financial Notes and Indonesian Budget

139 Chapter IV Central Government Expenditure and prosperity of state officials are increasing as reflected with the rise of real take home pay (equivalent to the volume of rice affordable to buy). The Take Home Pay for PNS officials of the lowest rank (rank I/a unmarried) is to surge up from Rp.1,285,400 in 2007 to Rp.2,256,100 in 2012 (equivalent to 455 kg rice). Special for the teachers, the take home pay of teachers at the lowest rank (II/a unmarried) is to rise from Rp.1,784,000 in 2007 (equivalent to 314 kg of rice) to Rp.2,993,000 in 2012 (equivalent to 603 kg of rice). As to members of TNI/Polri, the lowest rank soldiers (Tamtama/Bintara) have take home pay Rp.2,912,200 in 2012 (equivalent to 587 kg of rice), which increases from Rp.1,843,400 in 2007 (equivalent to 412 kg of rice). The trend of take home pay for state officials from can be seen in Graph TABLE 4.3 PERSONNEL EXPENDITURE POLICY TREND, Description Policy of the 13th Salary Payment 1 x gaji Juni 1 x gaji Juni 1 x gaji Juni 1 x gaji Juni 1 x gaji Juni 1 x gaji Juni 2Basic Salary and Basic Pension Increase 15% 20% 15% 5% 10% 10% 3Average Structural Allowance Increase 40% Echelon I 23,6% Echelon II 32,5% Echelon III 42,5% Echelon IV 52,5% Echelon V 60,0% Average Functional Allowance Increase 20% Meal Allowance Meal Allowance for Armed Forces/Police - Meal Allowance for Armed Forces/Police Meal Allowance for Public Servants - Meal Allowance for Public Servants Addition Personnel for Central Government Period (month) Renumeration Implementation Trend 3 K/L - 2 K/L 9 K/L 2 K/L 51 K/L Source: the Ministry of Finance Material Expenditure Material expenditure is spending for the purchase of consumable goods and/or services to produce goods and/or services either marketable or not and the procurement of goods intended to be delivered or sold to the communities/regional governments beyond the criteria of social aids and travel spendings. Material expenditure consists of: (1) operational goods; (2) nonoperational goods; (3) goods for Public Service Agency (BLU); and (4) goods for delivery to the communities. In , the realization of budget for material expenditure is to rise by 24.3 percent per annum on the average, i.e. from Rp.54.5 trillion in 2007 to Rp trillion in The absorption performance of material expenditure during the same period is also to increase from 83.5 percent of APBNP 2007 to 90.4 percent of its ceiling in Meanwhile, the trend of material expenditure proportion to total Central Government Expenditure is to surge from 10.8 percent in 2007 to 13.9 percent in trillion rupiah GRAPH 4.28 MATERIAL EXPENDITURE TREND,, APBN-P 65, , , , , ,01230 Realisasi 54, , , , , , Financial Notes and Indonesian Budget 2013

140 Central Government Expenditure Chapter IV The increasingly realization of material expenditure budget in such period is consistent with more tasks and functions of governance that must be performed, such as: (1) new working units requiring more assets and inventory goods for which operational maintenance will be necessary; (2) more infrastructure and facilities to support the increasingly administrative tasks in various institutions, including the allocation of operational spendings for such new working units; and (3) the rise of goods and service prices significantly affecting the maintenance costs and duty travel costs. Some policies of material expenditure allocation that have been taken are: (1) improved efficiency and effectiveness of material expenditure allocation and utilization for K/L, especially for duty travel spendings; (2) well-advanced operational governance activities, services to public and asset maintenance; and (3) capacity building for the personnel and preparation/evaluation for bureaucracy reform. The trend of material expenditure budget realization is presented in Graph Capital Expenditure Capital expenditure is spending for the payment of acquiring assets and/or added value to other fixed assets that will generate benefits more than one accounting period and exceeding the minimum threshold of fixed assets/other assets capitalization as established by the Government. The said fixed assets/other assets are used to support the day-to-day operation of a working unit or used by the communities/public, and recorded as the assets of the K/L concerned and not for sold/transferred to the public/regional government. Capital expenditure consists of: (1) land capital; (2) equipment and machines; (3) office and building; (4) roads, irigation and networks; (5) other capitals; (6) added value generation to fixed assets/other assets; and (7) Public Service Agency (BLU). In the realization of capital expenditure in nominal wise has recorded average increase of 21.3 percent per annum, i.e. from Rp.64.3 trillion in 2007 to Rp trillion in APBNP If compared with with total Central Government Expenditure, realization of such capital expenditure in 2007 reaches 12.7 percent and expected to increase in 2012 at 15.1 percent. This higher capital expenditure realization during such period is consistent with the Government s policies of increasing investment spendings to stimulate economic growth. Such huge capital expenditure budget allocation is also to reflect serious attention of the Government on infrastructure development. Apart from improving public access to basic services, this higher allocation for capital expenditure aims to support and promote economic growth, minimize inflation and improve goods distribution. In , most of capital expenditure are allocated to several K/L for infrastructure development. They include: (1) the Ministry of Public Works, (2) the Ministry of Transportation; (3) the Ministry of Defense; (4) the Ministry of Energy and Mineral Resources; and (5) the Ministry of Education and Culture. Budget realization for capital expenditure to these 5 K/Ls during the said period has been expended to perform a wide variety of programs, such as: (1) defense development program; (2) electricity facility and infrastructure quality improvement program; (3) railways facility and infrastructure improvement and development program; (4) sea transport development program; (5) air transport development program; (6) higher education development program; (7) river, lake trillion Rp 180,0 160,0 140,0 120,0 100,0 80,0 60,0 40,0 20, APBN-P 75,1 79,1 73,4 95,0 141,0 176,1 LKPP 64,3 72,8 75,9 80,3 117,9 159,1 Source: the Ministry of Finance GRAPH 4.29 CAPITAL EXPENDITURE TREND, Financial Notes and Indonesian Budget

141 Chapter IV Central Government Expenditure and other water resources management and conservation program; (8) irigation network, swamp and other water networks development and management program; (9) road and bridge rehabilitation/maintenance program; (10) road and bridge improvement/development program; (11) flood control and coast safeguarding program; and (12) drinking water and wastewater management performance development program. In line with great attention of the Government on the importance of infrastructure, which its provision was severely hampered during economic crisis in 1998, the Government is now attempting to add the volume of capital expenditure for the last few years. Illustration on the trend of capital expenditure realization from 2007 to 2012 is presented in Graph Payment of Loan Interest The enormous financing requirements from loans, which tend to increase from year to year will affect the budget allocation for the payment of loan interest. During its expenditure records steady increase in terms of nominal, i.e. 8.1 percent per annum on the average, from Rp trillion (2.0 percent of GDP) in 2007 to Rp trillion (1.4 percent of GDP) in APBNP However, with more efficient Government loan management and favorable domestic economic conditions the debt ratio to total government expenditure shows downward trend. In 2007 the portion of loan interest reached 10.5 of total Government expenditure. This ratio is further decreasing and expected to record 7.6 percent in (See Table 4.4). TABLE 4.4 LOAN INTEREST EXPENDITURE TREND, (trillion rupiah) Description APBN APBNP Loan Interest Payment 79,8 88,4 93,8 88,4 93,3 122,2 117,8 i. Domestic Loans 54,1 59,9 63,8 61,5 66,8 88,5 84,7 ii. Foreign Loans 25,7 28,5 30,0 26,9 26,4 33,7 33,0 % to Outstanding 5,7 5,4 5,9 5,3 5,2 6,2 5,9 Outstanding 1.389,4 1636, , , , , ,3 % to Government Expenditure Loan Interest Payment 10,5 9,0 10,0 8,5 7,2 8,5 7,6 i. Domestic Loans 7,1 6,1 6,8 5,9 5,2 6,2 5,5 ii. Foreign Loans 3,4 2,9 3,2 2,6 2,0 2,3 2,1 % to GDP Loan Interest Payment 2,0 1,8 1,7 1,4 1,3 1,5 1,4 i. Domestic Loans 1,4 1,2 1,1 1,0 0,9 1,1 1,0 ii. Foreign Loans 0,7 0,6 0,5 0,4 0,4 0,4 0,4 Assumption and Parameter - Avg. Exchange Rate (Rp/US$) 9.140, , , , , , ,0 - Avg. 3-Month SBI rate (%) 8,0 9,3 7,6 6,6 4,8 6,0 5,0 Loan Financing (Netto) 30,6 67,5 84,0 86,5 102,7 133,6 156,2 i. SBN Issuance (netto) 57,2 85,9 99,5 91,1 119,9 134,6 159,6 ii. Domestic Loan Drawing (netto) ,6 0,9 1,0 iii. Foreign Loan Drawing (netto) (26,6) (18,4) (15,5) (4,6) (17,8) (1,9) (4,4) Source: the Ministry of Finance In line with the Government s policy to give more priority for loans coming from domestic financial markets, the payment of domestic loan interest will increase accordingly. This interest payment for domestic loans in 2007 amounted Rp.54.1 trillion (67.8 percent of total loan interest) and to rise by Rp.30.7 trillion or in total Rp.84.7 trillion (72.0 percent of total loan interest) in In addition, during the same period, the average payment of domestic loan interest reached 69.4 percent to total loan interest payment. The majority of such loan interest payment is to pay the interest of domestic SBN (Government Bonds). In 2011, with the withdraw of domestic loans, the payment of domestic loan interest also includes the payment of interest of domestic loans. However, the proportion of domestic loan interest payment is relatively lower than allocation for the payment of interest of domestic SBN. Budget allocation for the payment of Domestic SBN interest is generally for the payment of interest component and noncash item component covering discount of SBN issuance, costs 4-38 Financial Notes and Indonesian Budget 2013

142 Central Government Expenditure Chapter IV for SBN issuance and loss on bonds redemption when the Government conducted debt switch or buyback. The interest of SBN consists of several components, among other, interest for the issued SBN, issuance discount and costs. SBN issuance discount and costs are non-cast items as compensation charged to the interest in order that the values of SBN issuance remain unchanged in nominal wise. The rate of SBN interest is subject to outstanding SBN, number of bonds issued during the current year, the proceeds of 3-month SPN auction, yield earned on SBN issuance, and rupiah exchange rate to foreign currencies. Variables affecting the payment of loan interest show bolstering trend. Yield of 3-Month SPN as interest reference for SBN Series VR as indicated in Graph 4.30 that follows is relatively stable. This stable yield of 3-Month SPN is due to the relatively controllable inflation expectation during , favorable domestic economic conditions, and SPN issuance in measurable manner in view of demands and costs of its issuance. Through June 2012, auction of 3-Month SPN has been made 9 times with weighted average yield (WAY) of 2.7 percent. Meanwhile, the rupiah exchange rate to USD during is relatively fluctuating. In 2007, the average exchange rate of rupiah to USD ranged at Rp.9,140.0 per USD, and strengthened at Rp.8,779.0 per USD in Likewise in 2012, the rupiah exchange rate to USD is expected at Rp.9,250.0 range per USD. The trend of domestic SBN yield during is predicted to drop consistent with the bolstering economic conditions and domestic security. Interest of foreign loans consists of interest for the withdrawn foreign loans, and loan fees such as commitment fee, front end fee, insurance premium, etc. The rate of foreign loans are mainly subject to outstanding foreign loans, the amount of foreign loans withdrawn during current year, reference interest rate (Libor, Euribor, Sibor), and rupiah exchange rate to foreign currencies. During , the payment for foreign loan interest is usually lower than that of for domestic loans. It is consistent with the policy taken by the Government to abate dependency on foreign loans by prioritizing loan financing from domestic SBN. Financing with foreign sources now records negative (the widthraw of foreign loans smaller than the payment of foreign loan principal). Meanwhile International SBN will be issued as complementary to domestic SBN while caustiously taking costs and risks under consideration. The trend of realized payment for foreign loan interest records average increase of 5.1 percent per annum in nominal term, i.e. from Rp.25.7 trillion (0.7 percent of GDP in 2007 to Rp.26.4 trillion (0.4 percent of GDP) in 2011, and expected to reach Rp.33.0 trillion 6,0 5,0 4,0 3,0 2,0 1, GRAPH 4.30 WEIGHT AVERAGE YIELD TREND OF 3-MONTH SPN BIDS, ,0 Mar-11 Mei-11 Jul-11 Sep-11 Nop-11 Jan-12 Mar-12 Mei-12 Source:the Ministry of Finance GRAPH.31 AMORTIZATION COMPOSITION TREND, (trillion Rupiah) Source: the Ministry of Finance Domestic loans Foreign loans APBN APBNP Financial Notes and Indonesian Budget

143 Chapter IV Central Government Expenditure (0.4 percent of GDP) in The contributing factors for the increase of such realization of foreign loan interest payment in such period are attributed to higher outstanding international SBN and the effect of rupiah exchange rate. The outstanding international SBN as of the end of 2007 was USD5.5 billion, that increased to USD20.4 billion and JPY95 billion by end of The Trend of overall loan interest is presented in Graph Subsidy Subsidy is budget allocation channelled through companies/institutions producing, selling goods and services crucial for the life of people and as such their prices must be maintained at affordable rates. Subsidy expenditure consists of energy subsidy (fuel subsidy, 3-kg LPG and LGV and electricity subsidy) and non energy subsidy (food subsidy, fertilizer subsidy, PSO subsidy, program credit interest subsidy, and tax subsidy /tax charged to the Government (DTP). While budget allocation for subsidy by the Government for the last few years shows a relatively significant increase, such subsidy budget allocation must subject to the financial capacity of the Government. During , the realization of subsidy budget is to fluctuate, and in nominal terms it increases to Rp.94.9 trillion or 10.3 percent per annum on the average. This high rise is due to: (1) changing subsidy paramters, such as Indonesian Crude Price (ICP), rupiah exchange rate to USD, volume of subsidized fuel, quantum of rice for the poor (raskin), number of target households (RTS), volumes of subsidized fertilizer and seed; and (2) various Government policies such as domestic fuel price and electricity rate setting and policy to support 10 million tons rice surplus program by The trend of subsidy expenditure realization in is presented in Graph Energy Subsidy trillion Rp 350,0 300,0 250,0 200,0 150,0 100,0 50,0 - Source: the Ministry of Finance GRAPH 4.32 SUBSIDY TREND, APBNP Subsidy % to GDP Energy subsidy is budget allocation channelled through companies/institutions providing and distributing fuel of certain type (oil and biofuel), 3-kg liquefied petroleum gas (LPG) and liquefied gas for vehicle (LGV) and electrical power to be affordable by the majority of people. The realization of subsidy expenditure budget in in nominal wise records increase of Rp.85.5 trillion or 11.6 percent per annum on the average, i,e, from Rp116.9 trillion (3.0 percent of GDP) in 2007 and expected to reach Rp trillion (2.4 percent of GDP) in This significant rise in energy subsidy during the said period is attributed to: (1) changing energy subsidy parameter, including ICP, rupiah exchange rate to USD, volume of subsidized fuel consumption, energy mix of electrical power generation and selling; and (2) policy of subsidized fuel and electrical power price setting. Subsidy for fuel, 3-kg LPB and LGV is granted to control the selling price of subsidized fuel as a basic need of people. With such subsidy it is expected that the fuel is affordable at the purchasing power of people, especially low-income people. It is because the domestic market (economic) price of fuel is considerably subject to various external factors, including crude oil price at global markets and rupiah exchange rate to USD. At present, fuel subsidy is given for several certain type of duel (kerosene, gas oil and premium). In addition, the Government extends subsidy for 3-kg LPG and LGV to promote the non fuel energy consumption. 6,0 5,0 4,0 3,0 2,0 1,0 - % to GDP 4-40 Financial Notes and Indonesian Budget 2013

144 Central Government Expenditure Chapter IV In , the realization of subsidy budget for fuel, and 3-kg LPS records an increase of Rp.53.6 trillion in nominal terms or 10.4 percent per annum, i.e. from Rp.83.8 trillion (2.1 percent of GDP) in 2007 to Rp trillion (1.6 percent of GDP) in (see Table 4.5). In the realization prediction, subsidy for fuel and 3-kg LPG and LGV is expected to amount Rp trillion. The trend of budget realization for subsidy expenditure during the said period is subject to the trend of ICP when in it increases USD32.7 per barrel (50.7 percent), i.e. from USD72.3 per barrel in 2007 to USD105.0 per barrel in In addition, increase in fuel subsidy expenditure is also dependent on volume of subsidized fuel consumption. In 2012, the realization of subsidized fuel consumption volume is expected to reach 40.0 million kiloliter, or to rise by 1.3 million kiloliter if compared with the realized volume of subsidized fuel consumption in 2007 recording 38.7 kiloliter. The rise of this fuel consumption volume is particularly due to increasingly motor vehicle population. TABLE 4.5 THE TREND OF SUBSIDIES FOR CERTAIN FUEL AND 3-KG GAS, Description APBNP Fuel Subsidy (trillion rupiah 83,8 139,1 45,0 82,4 165,2 137,4 % to GDP 2,1 3,0 0,8 1,3 2,2 1,6 Assumption and Parameter - ICP Jan-Des (US$/barrel) 72,3 97,0 61,6 79,4 109,9 105,0 - Rupiah Exchange Rate (Rp/UD$) 9.140, , , , , ,0 - Fuel Volume (thousand kiloliter) , , , , , ,0 > Premium , , , , , ,3 > Kerosene (Kerosene) 9.851, , , , , ,0 > Solar , , , , , ,7 - LPG (thousand kiloliter) - 506, , , , ,1 - Alpha (Rp/liter) 14,1% 9,0% 8%-536,9 *) 556,0 595,5 613,9 * ) APBN 2009: 8% to MOPS, APBNP 2009 Rp536,9 per liter The change is to anticipate ICP fluctuation that will affect fuel MOPS and alpha Source: the Ministry of Finance (processed) With such upward fuel subsidy trend, it is necessary to control this kine of subsidy so as to abate its burden to APBN. In light of that, during the Government has taken some policy measures, such as: (1) to convert the consumption of subsidized kerosene to 3- kg LPG in phases starting from 2007; (2) to encourage the consumption of alternative energy and energy diversification; (3) to limit the users of subsidized fuel with closed distribution mechanism in phases and to revise regulation. In addition, other policies introduced by the Government in curbing the burdens of fuel subsidy are to rise the retail price of subsidized fuel. However, increasing the retail price of subsidized fuel will be the last option of the Government, i.e. when this fuel subsidy exerts unbearable burdens to APBN that will compromise fiscal sustainability either in short-term or medium-term. In , the Government has increased fuel price 4 (four) times, i.e. in May 2008, early December 2008, mid of December 2008 and January In May 2008, the price of subsidized fuel was increased by 28.7 percent on the average as a result of increasing ICP, which in Jan-May 2008 reached USD104.8 per barrel on the average, or USD44.8 per barrel higher than its assumption in APBN 2008 set USD60.0 per barrel. Meanwhile, with the declining ICP until USD38.5 per barrel, from December 2008 to January 2009, the price of subsidized fuel was decreased three times by respectively 8.3 percent in early December 2008, 10.9 percent in the mid of December 2008, and 8.1 percent in January 2009 (see Table 4.6). Meanwhile, budget for electricity subsidy is granted to make the selling price of electricity affordable by customers at certain tariff class. Electricity subsidy is allocated because the average selling price of electricity is lower than its production cost (BPP) of the said tariff class. The allocation of electricity subsidy budget is expected capable of securing facility and Financial Notes and Indonesian Budget

145 Chapter IV Central Government Expenditure TABLE 4.6 THE TREND OF RETAIL PRICE OF SUBDISY PRICE, (Rupiah/Liter) Description 1 Jan May May - 30 Nov Dec - 14 Dec Dec Jan Jan Present 1. Premium Solar Kerosene Source: ESDM Ministry infrastructure investments and rehabilitation programs in power generation sector. To lessen the burdens of the increasingly electricity subsidy, the Government and PT PLN (Persero) attempt to decrease BPP (power production cost) of electricity with: (1) network lossess reduction program; and (2) diversification of primary energy in power generation by optimizing the consumption of gas, geothermal, coal, biodiesel and the replacement of high speed diesel (HSD) with marine fuel oil (MFO), promoting the consumption of coals, biofuel and geothermal. Apart from improvement in demand and supply sides, the Government also makes restructuring in PT PLN (Persero). To prevent PT PLN (Persero) from suffering liquidity and funding shortages, the Government gives business margin. The latter is an attempt to boost the financial conditions of PT PLN to be more bankable, which will be evident from indicator of consolidated interest coverage ratio (CICR) above two percent. This more than two percent CICR is required by PT PLN (Persero) to comply with requirements for global bond issuance in international market. Funding coming from bonds (loans) in international market is necessary for the development of power generation as important factor in assuring power supply and sales growth to deal with the ever-increasing demands on electrical power. TABLE 4.7 ELECTRICITY SUBSIDY TREND, No PARAMETER APBNP 1 ICP (US$/bbl) 78,0 96,8 61,5 79,4 111,5 105,0 2 Exchange Rate (Rp/US$) 9.419, , , , , ,0 3 TTL (%) Growth Sales (%) 5,7 3,8 4,3 9,4 4,1 7,0 Energy sales (TWh) 119,0 124,3 134,9 145,7 151,7 167,2 5 Losses (%) 11,11 10,45 9,96 9,74 9,44 8,5 6 Fuel Mix - High Speed Diesel/HSD (million KL) 7,9 8,1 6,3 6,9 8,0 5,5 - IDO (million KL) 0,01 0,03 0,01 0,01 0, Marine Fuel Oil/MFO (million KL) 2,8 3,2 3,3 2,43 2,5 1,7 - Coal (million ton) 21,5 21,0 21,6 23,96 29,1 38,1 - Gas (million BBTU) 0,2 0,2 0,3 0,28 0,3 0,3 - Geohermal (TWh) 3,2 3,4 3,5 3,40 3,4 3,4 - Bio Diesel (million KL) ,01 7 Margin (%) - - 5% 8% 8% 7% Subsidy of the Year (Miliar Rp) , , , , , ,6 Underpayment of previous year (miliar Rp) , , , , ,8 Subsidy (accrued and cash) (Miliar Rp) , , , , , ,4 Carry over to coming years (7.000,0) TOTAL SUBSIDY(Miliar Rp) , , , , , ,4 Source: the Ministry of Finance 4-42 Financial Notes and Indonesian Budget 2013

146 Central Government Expenditure Chapter IV During , the realization of electricity subsidy expenditure in nominal terms shows increase of Rp.31.9 trillion or 14.5 percent per annum on the average, i.e. from Rp.33.1 trillion (0.8 percent of GDP) in 2007 and Rp.65.0 trillion (0.8 percent of GDP) in The realization of electricity subdidy expenditure in 2012 is expected to hit Rp.89.1 trillion. This higher electricity subsidy realization during such period is due to: (1) higher power generation costs (BPP) as a result of dominant fuel consumption in national power generation system; (2) fluctuating exchange rate and ICP; and (3) increasingly power sales hitting tera watt hour (Twh) in 2012 if compared with power sales in 200 recording TWh (see Table 4.7.). To control electricity subsidy, the Government along with House of Representatives (DPR-RI) agree to cut electricity subsidy in phases without necessarily sacrifying low-income households. In this respect, the Government has increased electrical rate (TTL) by 10 percent on the average since July Nonetheless, the Government remains pro to the low income people, i.e. not to rise the electrical rate for the customers of 450 watt and 900 watt (see Graph 4.33). Non Energy Subsidy Rp/Kwh Source:PT PLN GRAPH 4.33 BPP AND POWER SOLD TREND, Power sold (Twh) Avg. BPP (Rp/Kwh) Non energy subsidy is budget allocation to companies/institutions producing and/or selling particular goods and/or services established by the Government other than certain type of fuel, 3-kg LPG, LGV and electricity to be affordable for low-income people. In nominal terms, during this non-subsidy allocation is to rise by Rp.9.4 trillion or 5.1 percent per annum on the average, i.e. from Rp.33.3 trillion (0.8 percent of GDP) in 2007 and expected to record Rp.42.7 trillion (0.5 percent of GDP) in 2012 (see Graph 4.34). Such non-energy subsidy realization during the said period is attributed to: (1) changing subsidy parameters, i.e. volumes of subsidized fertilizer and seeds, number of target households (RTS) and production costs; and (2) reallocation to K/L budget section. In nominal wise, the realization of food subsidy budget in records an increase of Rp.14.3 trillion or to grow by 26.0 percent per annum on the average, from Rp.6.6 trillion (0.2 trillion of GDP) in The realization of food subsidy budget is subject to some parameters, including: (1) number of target households (RTS) entitled to rice for poor (raskin); (2) quantum of rice for poor (raskin) distributed per RTS per month; (3) duration of rice for poor (raskin) distribution; and (4) subsidized price of rice for poor (raskin)(the difference of rice purchase (HPB) by Perum Bulog and the selling price of raskin per kg). The increase of food subsidy budget realization in the said period is attributed to: (1) more quantum of raskin distributed, from 1.7 million ton in 2007 and expected to record 3.7 million ton in 2012; (2) more target beneficiaries of raskin, from 15.7 million in 2007 to 17.5 million in 2012; and (3) higher price subsidy for raskin, from Rp.3,620.0/kg/RTS in 2007 to Rp5,698/ kg/rts in Meanwhile, in , the realization of fertilizer subsidy channeled through SOE producing fertilizer shows upward trend reaching Rp.7.7 trillion or 17.4 percent per annum Tera Watt Hours Financial Notes and Indonesian Budget

147 Chapter IV Central Government Expenditure on the average from Rp.6.3 trillion (0.2 percent of GDP) in 2007 to Rp.14.0 trillion (0.2 percent of GDP) in The realization of fertilizer susbidy in is due to: (1) higher volume of subsidized fertilizer from 5.7 million ton in 2007 to 11.3 million ton in 2012; (2) more budget for underpayment of fertilizer subsidy in previous year; and (3) increasing fertilizer price subsidy (the difference of production cost (HPP) and the highest retail price (HET). trillion Rp 60,0 40,0 20,0 - Source: the Ministry of Finance GRAPG 4.34 NON-ENERGY SUBSIDY TREND, APBNP NonEnergy Subsidy The budget increase of subsidized fertilizer is consistent with attempts of supporting, maintaining and improving national food resilience with agriculture production, productivity and product quality improvement (notably rice). To reduce budget for fertilizer subsidy, the Government will allocate fertilizer subsidy based on Definitive Group Needs Plan(RDKK) of farmer groups in every region. In addition to fertilizer subsidy, as part of supports to agriculture revitalization program, the Government has allocated budget for seed subsidy. This seed subsidy aims to provide seeds of paddy, corn, and beans at affordable price to the farmers. In , seed subsidy not only accommodates price subsidy but also expenditure budget for direct aids of superior seeds (BLBU) and national seed reserve (CBN). In nominal terms, the realization of seed subsidy budget in such period records an increase of Rp.1.7 trillion, or to grow by 65.7 percent per annum on the average, from Rp billion in 2007 to Rp2.2 trillion in However in 2011, the allocation of seed subsidy budget was to significantly decrease from 2010 to Rp.96.9 billion, as to 2012 it is expected that this seed subsidy budget will to reach Rp billion. It is because since 2011, the seed subsidy only accomodated price subsidy, meanwhile budget allocation for BLBU and CBN were realloated to K/L budget section and other expenditures. Such reallocation is to enhance accountability of budget section management of General State Treasurer (BA BUN) and as a follow up action of BPK findings. Apart from providing food, fertilizer and seen subsidies, the Government allocates budget for Public Service Obligation (PSO) to certain SOEs so that the selling price of their services will be affordable by public. In , the realization of subdisy budget for PSO, in nominal terms, is to rise by Rp.1.1 trillion or to grow 16.0 percent per annum on the average, from Rp.1.0 trillion in 2007 to Rp.2.2 trillion in Such PSO subsidy budget allocation is mainly relating to the increase of production costs for goods/services receiving subsidy/pso. Budget for PSO subsidy is allocated to PT Kereta Api Indonesia (Persero) for passenger railways transport service of economy class; PT Posindo (Persero) for post services in isolated regions; and Perum Lembaga Kantor Berita Nasional (LKBN) Antara for news services of texts, photos, radio, multimedia, english news and television. Meanwhile, in nominal wise, the realization of progam loan interest subsidy in records an increase of Rp billion or to grow by 30.1 percent per annum on the average, from Rp billion in 2007 to Rp.1,293.9 billion in This significant realization of program loan interest subsidy is subject to loan interest rate fluctuation and outstanding program credits coming from food and energy resilience credit scheme (KKP-E), including % to GDP percent 1,2 0,8 0, Financial Notes and Indonesian Budget 2013

148 Central Government Expenditure Chapter IV risk sharing KKP-E and credits for the development of vegetable energy and plantation revitalization (KPEN-RP). In addition, such realization increase of program credit interest subsidy is attributed to additional credit schemes, i.e. Business Empowerment Program for Entrepreneurs in NAD Nias (KPP NAD Nisa), Business Credit for Cow Seeds (KUPS), and Warehouse Receipt Subsidy Scheme (SSRG) and security yield for People s Business Credit (KUR) to support micro, small and medium scale enterprises (UMKM). Besides, the Government allocates budget for tax subsidy to support price stabilization of basic needs and the development of national strategic industries. The trend of tax subsidy realization is considerably subject to the types of commodities or sectors given with tax facility consisting of tax charged to the Government (DTP). In , in nominal terms the realization of tax subsidy (DTP) records a decrease of Rp.2.3 trillion or to drop 4.7 percent per annum on the average, from Rp.17.1 trillion (0.4 percent to GDP) in 2007 to Rp.14.8 trillion (0.2 percent of GDP) in 2010 and expected to record Rp.4.3 trillion (0.1 percent of GDP) in In 2012, tax subsidy is to decline significantly compared with previous year. It is due to the revocation of value added tax facility (PPN DTP), meanwhile VAT for subsidized fuel of certain type and 3-kg LPG is reallocated from tax subsidy to fuel subsidy item. This measure is a follow up action of BPK s findings. The trend of subsidy realization in is presented in Table 4.8. TABLE 4.8 SUBSIDY TREND, (billion rupiah) Description APBNP A. E ENERGY , , , , , ,2 - Fuel , , , , , ,8 - Electricity , , , , , ,4 B. NON ENERGY , , , , , ,1 - Food 6.584, , , , , ,3 - Fertilizer 6.260, , , , , ,6 - Seed 479,0 985, , ,5 96,9 129,5 - PSO 1.025, , , , , ,4 - Program Credit Loan 347,5 939, ,0 823, , ,9 - Cooking Oil 24,6 103, Soybeans - 225, DTP (Tax charged to the Gov , , , , , ,4 - Other Subsidy 1.514, TOTAL , , , , , ,3 SSource: the Ministry of Finance Grant Expenditure Grant expenditure is a spending of Central Government in the form of money, goods or services from the Government to the governments of other countries, international agencies/ organizations, and regional governments, especially foreign loans and/grants that will be further extended to regions under SLA. Grant expenditure has non-repayment character, uncompulsory and non-binding, not continuous, voluntary with right transfer and executed under agreement between the grant provider and grant recipient. In the next progress, the Government started to allocate budget of grant expenditure in APBNP 2009 in amount of Rp.31.6 billion, however such budget was not totally absorbed due to failure in issuing disbursement documents until the end of year. In 2010, the realization of grant expenditure amounted Rp.70.0 billion or 28.8 percent of its ceiling in APBNP 2010 Financial Notes and Indonesian Budget

149 Chapter IV Central Government Expenditure of Rp billion with the following breakdowns: (1) Local basic Education (L-BCE)program Rp.24.5 billion; (2) water supply grant program Rp.37.4 billion; and (3) wastewater treatment grant program Rp.8.1 billion. Such realization totally consisted of grant expenditure to the regional governments. Meanwhile, realization of grant expenditure in 2011 was not only to finance grants to the regional governments, but also grants to foreign country, i.e. the Palestine. Grant expenditure realization in 2011 reached Rp billion or 74.1 percent of its ceiling in APBNP 2011 recording Rp billion. This realization reflected an increase of 28.8 percent higher than last year s realization. Grant expenditure realized in 2001 was for: (1) Mass Rapit Transit (MRT) Project Rp.6.8 billion; (1) L-BEC program Rp.45.9 billion; (3) water supply grant program Rp billion; (4) wastewater treatment grant program Rp.16.0 billion; (5) water and sanitation program, Sub-program D-Sanitation (WASAP-D) Rp. 6.3 billion; (6) Infrastructure Enhancement Grant Sanitation (IEG) Rp.43.4 billion; and (7) grant to the Government of Palestine Rp.20.0 billion for the development of Cardiac Centre at Shifa Hospital Gaza. In APBNP 2012, the grant expenditure is set at Rp.1,790.9 billion with breakdowns as follows: (1) MRT Project Rp.1,570.6 billion; (2) L-BEC program Rp.54.5 billion; (3) WASAP-D Rp.11.7 billion; (4) IEG-Transportation Rp.6.4 billion; and (5) Water Resources and Irrigation Sector Management Project Phase II (WISMP-2) Rp billion. From such grant expenditure realization in 2010 and 2011 some public services in regions had been improved either in terms of activities or infrastructure development, for example, capacity building for basic education in 691 activities in 50 kabupaten/cities and Tender Assistance Services-1 for consulting services of MRT project. In addition, there are pipeline infrastructure development activities consisting of 77,000 house connections to expand the service coverage of piped water services, which were prioritized for low-income people; infrastructure development for wastewater treatment system consisting of 4,826 house connections; the development of sanitation infrastructure for poor households in 6 kabupaten/ cities; and the development of solid waste and wastewater facilities in 21 kabupaten/cities. With such expanded piped water service coverage, wastewater management, sanitation facility and solid waste management facility for particularly low income households, it is expected that the health rates of residents in the benefiary regions be enhanced. Social Aids In budget of social aids increases 11.6 percent per annum on the average, i.e. from Rp.49.8 trillion (1.3 percent of GDP) in 2007 to Rp.86.0 trillion (1.0 percent of GDP in GDP) in APBNP This higher realization for social aids budget during such a period is particularly allocated through K/L due to more target beneficiaries of social aids and higher amount of aid value to protect the beneficiaries from social risks (see Graph 4.35). A wide variety of priority program under this social aid program include: (1) in education sector dedicated for: School Operation Aids (BOS) of the Ministry of Religions and aids for students/university students of low- trillion rupiah ,8 GRAPH SOCIAL AIDS TREND, ,7 73,8 68,6 71,1 86, Through K/L Non K/L APBN-P Source: the Ministry of Finance 4-46 Financial Notes and Indonesian Budget 2013

150 Central Government Expenditure Chapter IV income households; and (2) in health sector for the provision of basic health services to lowincome people in Puskesmas and their networks and referential health services of class III in General/Private Hospitals under Public Health Insurance program (Jamkesnas), including maternity services (Jampersal). The other programa are (3) in social protection sector with the implementation of prosperous family building program (PHK) aiming to enhance the quality of resources of poor households by empowering the mothers to encourage their children to live hygienically and to attend schools; (4) in community empowerment program with PNPM Mandiri such as: PNPM in Rural Areas; PNPM in Urban Areas, Development Program in Underdeveloped and Special Regions (P2DTK); Rural Infrastructure Development Program (PPIP); and Regional Social Economic Infrastructure Development (PISEW) and (5) natural disaster management aid ranging from pre-disaster, response emergency to post-disaster. In the realization of social aid budget for BOS program is to rise by 23.9 percent per annum on the average. i.e. from Rp.10.4 trillion in 2007 to Rp.19.8 trillion in Starting from 2011 budget allocation to social aids for BOS program was only channeled through the Ministry of Religions for the students of Madrasah Ibtidaiyah (MI)/Ula and Madrasah Tsanawiyah (MTs)/Wustha, thus its budget allocation was to decrease to Rp.3.0 trillion. It is mainly due to BOS program reallocation which was previously accommodated in DIPA of the Ministry of Education and Culture and then switched to Transfer to Regions. Therefore the implementation of BOS is fully under the responsibility of the regional governments. In 2012, allocation of BOS budget in the Ministry of Religions increases 36.2 percent to Rp.4.1 trillion. Aids for the students/university students of low-income households, which have been budgeted since 2008 have objectives of: (1) increasing the passing possibility of poor students/university students; (2) reducing dropout rates as a result of tuition fee difficulties; and (3) lessening financial burdens of students/university students from low-income households so that they can continue their education in schoolds/universities. Aids for poor students/university students record an average increase of 28.6 percent per annum, i.e. from Rp.2.3 trillion in 2008 to Rp.6.2 trillion in This student aid program is dedicated for the students of SD/SDLB, SMP/SMPLB, MI, MTs, SMA, SMK, MA, universities (PT), and religion university (PTA). Budget of social aids in health sector is particularly to implement basic health service provision program for the poor in Puskesmas and their networks and referential health services class III in General/Private Hospitals assigned by the Government under Jamkesmas program (including Jampersal that has been introduced since 2011). In , budget allocation for Jamkesnas program is to rise by 10.1 percent per annum on the average, i.e. from Rp.4.4 trillion in 2007 to Rp.7.2 trillion in in This higher realization is mainly relating to the more varying services to the communities to provide optimum health services consistent with the specified standards. Social aids in other social protection sector are inclusive of prosperous prosperous family program (PKH). In budget for PKH program increases 17.1 percent per annum on the average, i.e. from Rp.0.8 trillion in 2007 to Rp.1.9 trillion in This budget increase for PKH program is primarily attributed to more beneficiaries, i.e. from some 501 thousands RTSM (household beneficiaries) in 2007 to around 1.5 million RTSM in In community empowerment, during budget for the implementation of PNPM Mandiri is to increase at 30.2 percent per annum on the average, from Rp.3.7 trillion in 2007 to Rp.14,0 trillion in Such PNMP Mandiri budget is allocated to improve the capacity of communities, either individually or in group in dealing with problems, particularly in efforts to enhance the quality of living standards, self-reliance and prosperity. Financial Notes and Indonesian Budget

151 Chapter IV Central Government Expenditure TABLE 4.9 PRIORITY PROGRAMS OF SOCIAL AID EXPENDITURE, (trillion rupiah) No. Program School Operation Aids (BOS) - Budget 10,4 12,5 19,1 19,8 3,0 4,1 - Target (million student) 35,2 41,9 42,8 44,1 7,3 6,4 - Allocation per student (rupiah) SD/MI Kabupaten SD/MI Kota SMP/MTs Kabupaten SMP/MTs Kota Scholarship for Poor Students/Uni. Students - Budget - 2,3 3,0 3,7 4,7 6,2 - Target (million student/uni. student) - 3,6 4,9 5,8 8,2 9,5 3. Jamkesmas - Budget for basic health service in Puskesmad and the network 1,0 1,0 0,9 1,0 1,0 1,0 - Budget for referential health services in Class III Hospitals 3,4 3,7 3,6 4,1 5,3 6,2 - Target (million persons) 76,4 76,4 76,4 76,4 76,4 76,4 4. PNPM Mandiri a. PNPM Rural - Budget 1,5 3,6 6,0 9,4 9,5 10,3 - Target (kecamatan) b. PNPM Urban - Budget 1,5 1,6 1,8 1,5 1,6 1,5 - Target (kelurahan) c. PNPM PPIP - Budget 0,5 0,6 0,9 1,0 1,2 1,8 - Target (kelurahan) d. PNPM PISEW - Budget - 0,05 0,47 0,50 0,52 0,42 - Target (kecamatan) Prosperous Family Program (PKH) - Budget 0,8 1,0 1,1 1,3 1,6 1,9 - Target (thousand RTSM) Reserve fund for disaster management 2,7 3,0 3,0 3,8 4,0 4,0 7. Other social aids 27,6 28,2 33,7 22,2 38,7 48,8 T O T A L 49,8 57,7 73,8 68,6 71,1 86,0 Notes Source 1. Starting from FY 2011 BOS for the Ministry of Education and Culture reallocated to Transfer to Regions 2. As from FY 2011 Referential Health Services include also Jampersal services the Ministry of Finance In addition, social aids given for disaster management in record an average increase of 8.2 percent per annum, from Rp.2.7 trillion in 2007 to Rp.4.0 trillion in Fund reserve for natural disaster management is social aid allocated through BA BUN for emergency condition when a natural disaster occurs. The aids will be provided from: (1) predisaster stage; (2) during response emergency stage; and (3) post-disaster stage. Priority programs under social aids expenditures are presented in Table 4.9. Other Expenditure In the allocation for other expenditure records fluctuation following the dynamic policies taken by the Government and so does its realization, In 2007, the realization of other expenditure budget was mainly for rehabilitation and reconstruction of the earthquakeravaged DI Yogyakarta and Central Java. In 2008, the realization of this other expenditure budget was to rise significantly if compared with the previous realization. This increase 4-48 Financial Notes and Indonesian Budget 2013

152 Central Government Expenditure Chapter IV comes from ad-hoc Government policy, such as Cash Direct Aids (BLT), fund requirements for 2009 general election, and other programs, inclusive of the procurement of facility and infrastructure for the conversion of kerosene to LPG. In the mean time, budget realization for the Government s priority programs in 2009 were the dominant contributors in the absorption of other expenditure budget. These priority activities included the funding for general election, the procurement of facility and infrastructure for energy conversion, BLT and rehabilitation and reconstruction of NAD province and Nias island of North Sumatra province after the end of mandate of NAD and Nias Rehabilitation and Reconstruction Agency (BRR). The realization of other expenditure budget in 2010 was particularly consisted of expenditure realization due to different of exchange rate and budget realization for working units not yet to have their own Budget Section (BA). In 2011, the realization of other expenditure budget mostly comprised the realization of operational expenditure of working units without separate BA codes, the Government s rice reserve (CBN), and for emergency spendings. In 2012, the realization of budget for CBP and CBN, reserve for food price stabilization, risk of land capping, treasury services, and emergency spendings are expected to be the largest contributors for the realization of other expenditure. Illustration on the trend of other expenditures in is presented in Graph trillion Rp 4.3 The Highlights of Government Work Plan , APBN 18,8 25,0 65,3 30,7 15,3 28,5 APBNP 17,0 32,1 53,3 32,9 15,6 68,5 Realization 15,6 30,3 38,9 21,7 5,5 - % Realisasi 91,9 94,5 73,0 65,8 35,0 As mandated in Article 12 Law Number 17 of 2003 concerning State Finance, the preparation of National Budget (APBN), apart from reference to the funding requirements for governance operation and the capacity in raising revenues, the Government Work Plan (RKP) must be also referred to. Development programs and the targets set in RKP of a certain year, as long as relevant to budget intervention will be elaborated and receive funding priority in APBN of the same year. In view of problems and challenges that must be dealt with by the Government every year, RKP must be prepared with development theme tailored with the challenges to be coped with in the year and action plans to be taken in the next coming year. The development plan is then further elucidated into priority focuses and priority activities to pursue the development targets established in RKP. In light of that, every single working unit will be required to prepare work and budget plan for its ministry/agency (RKA-KL) respective of their tasks and functions in running governance tasks. In general, Indonesia records a lot of meritorious achievements in many sectors amid uncertain global situation. Inclusive and sustainable development is advocated in four tracks, i.e. pro-growth, pro-job, pro-poor and pro-environment solely for people s welfare augmentation and human resources quality enhancement. In 2011, the national economy of Indonesia grew at 6.5 percent despite global economic downturn and political tension in Middle East and North Africa. The economic stability is controlled with well-maintained inflation at 3.8 percent, the relatively stable rupiah exchange rate and robust fiscal resilience, which is evident from budget deficit 1.2 percent of GDP and the lowering loan stocks to ,0 80,0 70,0 60,0 50,0 40,0 30,0 20,0 10,0 Source: the Ministry of Finance - GRAPH 4.36 OTHER EXPENDITURE TREND, (%) 100,0 90,0 80,0 70,0 60,0 50,0 40,0 30,0 20,0 10,0 0,0 Financial Notes and Indonesian Budget

153 Chapter IV Central Government Expenditure percent of GDP. The performance of people s welfare augmentation also shows promising trend, which is obvious from the declining poverty rate from 16.7 percent in 2004 to 12.4 percent in 2011 with broader spread. As to open unemployment it dropped from 9.9 percent in 2004 to 6.6 percent in In 2012, the development efforts are continually intensifying to attain the specified development targets. In economic sector, the priorities are aimed to maintain economic growth and fiscal resilience, to expand employment, to accelerate infrastructure development, and to increase food supplies. In people s welfare, the priorities are focused on efforts to improve education and health services and to acclerate the realization of Millenium Development Goals (MDG) and to alleviate poverty. In politics, law and security sector, the priorities are to eradicate corruptions, to accelerate bureaucracy reform, and to deal with hortizontal conflicts and the impacts of regional election. Meanwhile in 2013 the global conditions are predicted still glooming. Debt crisis suffered by developed countries especially in Europe, compounded with intensifying political tension in Middle East, North Africa and Korean peninsula, climate change and potential disaster at global level and the soaring energy price can compromise the global financial stability and economic recovery that in turn affect national economy. Potential protection and unfair measures to win domestic and export markets by many countries as a result of lower global economic growth prediction in 2013 (4.1 percent) than 2011 prediction (3.9 percent) will intensify. This condition will spur bitter competition of countries to win trade and investment markets. Amid such conditions, domestic economy must be bolstered and competitiveness at global and national level must be fortified. People s welfare augmentation is another major challenge in economic development. Thus, acceleration and expansion will be enhanced to reduce open unemployment rate to 7.7 million persons and poor peoples of 29.9 million person in 2011, while taking prosperity disparities under consideration either among social groups or regions. In view of the achieved performance, potentials owned, challenges and problems to cope with and determination to attain the targets of RPJMN i.e. to Realize Democratic, Prosperous, and Just Indonesia, the theme of RKP 2013 is: REINFORCING DOMESTIC ECONOMY FOR PEOPLE S WELFARE AUGMENTATION AND EXPANSION. Such development theme in RKP 2013 are then elucidated into four tracks of development strategies, i.e. to increase economic growth (pro-growth), to expand employment (pro-job), to alleviate poverty (pro-poor) and to respond climate change related problems (pro-environment). Given that. The main targets of national development for to pursue in 2013 are: (1) for the augmentation of people s welfare, the economic growth must be at percent range, open unemployment at percent, poverty rate at percent; (2) to foster democracy, Indonesia Democracy Index must be at range; and (3) for law awareness development, the Indonesian Corruption Perception Index must reach 4.0. Indonesian Democration Index (IDI) , *) minimum preferred GRAPH 4.37 DEVELOPMENT TARGET AND REALIZATION TREND, Corruption Percention Index (IKP) 3,0 3,0 3,2 4,0 Source: the Ministry of Finance, RKP 2011, RKP 2012, RKP 2013 Economic Growth (%) ,2 6,5 6,5 6,8-7,2 Poverty Rate (%) Unemployment Rate (5) , ,6 *) , ,8-6,1 *) 13,3 12,4 10,5-11,5 9,5-10, Financial Notes and Indonesian Budget 2013

154 Central Government Expenditure Chapter IV Subject to the problems and challenges to be dealt with in the pursuit of development goals, in 2013, 11 national strategic issues have been set that can be further classified into four main challenges. The first main challenge is how to fortify competitiveness with strategic issues of: (1) investment and business climate improvement; (2) infrastructure development acceleration; (3) industrial development in various economic corridors; and (4) employment generation, especially for young workforce. The second major challenge is to bolster economic resilience with strategic issues: (1) food resilience toward 10 million tons rice surplus; and (2) electrification and energy convertion ratio acceleration. The third main challenge concerns people s prosperity augmentation and expansion with strategic issues: (1) human resources development; and (2) poverty alleviation acceleration with the synergy of cluster I IV. The fourth main challenge deals with social political stability with strategic issues of: (1) 2014 general election preparation; (2) bureucracy performance improvement and corruption eradication; and (3) Minimum Essential Force development acceleration. Based on the targets to achieve in 2013, and development success chalked up in 2011 and the expected development output in 2012 and other various problems and challenges to be addressed and dealt with in 2013, RKP 2013 sets 11 (eleven) national development priorities. These eleven priorities are: (1) bureaucracy reform and good governance; (2) education; (3) health; (4) poverty alleviation; (5) food resilience; (6) infrastructure; (7) investment and business climates; (8) energy; (9) environment and disaster management; (10) [the development of] underdeveloped regions, the frontiers, outer islands and conflict-torn regions; and (11) culture, creativity and technology innovation. In addition there are three other priorities, i.e.: (1) politic, law and security affairs; (2) economic affairs; and (3) people s welfare affairs. Targets to achieve with budget allocation for bureaucracy reform and good governance priority in 2013 are: (a) the implementation of good governance in all government institutions improved in integrated, full integration, accountable, law abiding manner; (b)the quality of public services enhanced supported with professional service delivery, highly integrated human resources, and the application of minimum service standards (SPM); and (c) the effectiveness of regional autonomy improved supported with sound governance management and regional development, intensified SPM introduction, enhanced quality of special allocation fund (DAK) application, improved quality of regional spendings, and timely APBD enactment and accountability. To attain these targets, the policies on bureaucracy reform and good governance development in 2013 will be directed to: (1) institutional bureaucracy restructuring respective of their tasks and function, bureaucracy reform quality enhancement, procedure improvement, human resources management development; (2) regional autonomy restructuring by accelerating the introduction of 15 SPMs in regions to support decentralization management, and financial capacity building of regional governments to the applications of such SPM; (3) accelerating the harmonization and synchronization of laws and regulations at central and regional level; (4) the enactment and application of key performance indicators of public services; and (5) improved integration and integrity of law enforcement. Targets to achieve in education priority in 2013 are: (1) to encourage education participation at all levels with school participation rate (APM) for elementary schools (SD)/madrasah ibtidaiah (MI)/equal reaching 95.8 percent, APM of junior secondary schools (SMP)/ madrasah tsanawiyah (MTs)/equal recording 80.1 percent and APM of Senior Secondary Schools (SMA)/Vocational School (SMK)/madrasah aliyah (MA)/equal reaching 82.0 percent and APK of state/private universities of 28.7 percent; and (2) to enhance education Financial Notes and Indonesian Budget

155 Chapter IV Central Government Expenditure quality by increasing the proportion of certified teachers holding S1/D4 degrees to 68.0 percent for SD/MI, 92.3 percent for SMP/MTs and SMA/MA and 95.4 percent of SMK. To achieve these varying targets, the policies on education development in 2013 will be directed: (1) to enhance the distribution of nine-year compulsory basic education program; (2) to improve access, quality and relevancy of secondary education started with the introduction of universal secondary education policy; (3) to expand access, quality, relevancy and competitiveness of tertiary education; (4) to elevate professionalism and equalize distribution of teachers and pedagogical staff; (5) to expand access and enhance quality of childhood education (PAUD); non-formal education and informal education; (6) to improve the quality of religion and religiosity education; (7) to strengthen national education system implementation; (8) to enhance efficiency and effectiveness of education service management; (9) to reinforce education governance; and (10) to fortify character building. Targets to achieve in health priorities in 2013 are (1) to expand the coverage of childbirth service by well-trained health operators to 89 percent; (2) to increase the number of Puskesmas receiving Health Operation Aids (BOK), i.e. 9,323 puskesmas; (3) to facilitate water supply development in 417 areas, 1,610 villages and 157 kecamatan capital (IKK) and sanitation development in 737 areas and 70 kabupaten/cities; (4) to increase the number of health operators and to maximize their services with incentive provision particularly for those who are assigned in isolted regions, border areas and islands (DTPK) and other regions experiencing health troubles (DBK) to 5,320 persons; (5) to increase the number of puskesmas delivering Jamkesmas facility to 9,323 units and Jampersal facilities to 2,663 units; (6) to increase the percentage of home health equipment products and logistics (PKRT) complying with the established safety, quality and benefits to 90 percent; and (7) to increase new family planning (KB) participants to 7.5 million with active KB participants to rise to 29.0 million. To pursue these targets, policies on health development in 2013 will be focused: (1) to expand access to quality health services and nutrition for mothers and children; (2) to control contagious and non-contagious diseases and sanitation; (3) to fortify professionalism and maximize health operators notably with regard to equal distribution of their assignments; (4) to increase health insurance; equality, affordability, security insurance, efficacy and quality of medicine, health equipment and foods, and the competitiveness of domestic products; and (6) to improve access to KB services. In view of policies and programs implemented, and the realized outcomes, and problems to be addressed, the targets of poverty alleviation priority in 2013 are to reduce poverty rate at percent of total population. Thus, the policies to attain such poverty alleviation target in 2013 will be as follows: (1) to promote inclusive and labor intensive economic growth (pro-growth & pro-job), especially in sectors involving poor people (propoor); (2) to maintain production stability and food supply availability; (3) to enhance the power and self-reliance of people to participate actively in inclusive and just development; (4) to enhance the effectivness of pro-people programs; and (5) to improve the quality of social insurance services particularly health insurance for poor people and vulnerable groups. To exercise such policies, poverty alleviation initiatives will be focused on five issues, namely: (1) to improve and to enhance the quality of household-based social protection policy; (2) to improve and to enhance the effectiveness of PNPM Mandiri; (3) to expand the access of micro and small enteprises to productive resources; (4) to improve and expand pro-people programs; and (5) to improve the synchronization and effectiveness of poverty alleviation coordination and harmonization of its actors. Targets to achieve in food resilience priority in 2013 are: (1) to improve paddy production by 6.25 percent, or production rate of 72.1 million tons of ground un-hulled paddy grains 4-52 Financial Notes and Indonesian Budget 2013

156 Central Government Expenditure Chapter IV (GKG), especially with productivity improvement and cropping areas expansion; corn production 26 million tons, beans production 2.25 million tons, sugar production 3.21 million ton, beef production 566 thousand ton, fish production million ton (capture fish 5.47 million ton and fish farming million ton), and higher production of miscellaneous meats; (2) maintained good price stability especially domestic rice. (3) reduced rice consumption by 1.5 percent per annum; (4) better quality of food consumption pattern with Ideal Dietary Pattern (PPH) to around 91.5; and (5) farmer exchange rate index (NTP) and fishermen exchange rate index (NTN) above 105. To pursue the targets of food resilience priority, the policies on food resilience development in 2013 will be directed as follows: (1) food production improvement toward 10 million ton rice surplus starting from 2014 by increasing the productivity of food crops, especially paddy and secondary crops with the application of Field Schoold of Integrated Cropping Management (SL-PTT) and Corporate Based Food Production Improvement Movement (GP3K) and livestock and fishery productivity improvement; agriculture and fishery area expansion, with the creation of 100 thousand hectares of paddy fields under GP3K program by SOEs; agriculture and fishery production protection from pests and diseases; production input provision improvement (parents, seeds, food and fertilizers) and agriculture and fishery infrastructure including the procurement of fishing boats and fishery jetties, especially in Eastern Regions of Indonesia; food production quality enhancement including fishery; capacity building in counseling, researches and development to support food production; water supply and irrigation infrastructure service improvement with synchronization of irrigation infrastructure at various government levels ranging from primary, secondary to tertiary networks and at farmer level and agriculture lands; and national irrigation network revitalization acceleration particularly irrigation under the management of regions through irrigation management partnership of the Government and regions; (2) access expansion of people to foods and price affordability with domestic food price stabilization; efficiency improvement in inter-region and inter-season food distribution and logistics; and food export import control; (3) food consumption quality enhancement by accelerating the diversification of food consumption including food shortage management improvement; and quality and type enhancement of animal protein based processed foods for nutrition quality promotion especially for low income people with livestock raising other than cows and buffalos such as poultry, goats/donkeys, rabbits and pigs and fish; (4) farmer protection and empowerment and farmers welfare augmentation by protecting the prices of agriculture commodities at farmer level, the provision of capital sources for farmers coupled with broader access of the farmers to capital sources, and capacity building for the farmers with training and education and extension services, and improved access of the farmers to information, markets and technology. Targets to pursue from infrastructure priority in 2013 are inclusive of: (1) to expand the capacity of infrastructure supporting the development in terms of quality and quantity; focused on the Eastern Regions of Indonesia and economic growth centers; (2) to accelerate the development, rehabilitation and maintenance of irrigation infrastructure and dams to support national food resilience; (3) to accelerate the provision of raw water; (4) flood control at economic growth centers; (5) rehabilitation and reconstruction of regions vulnerable to disasters; (6) to improve national connectivity so as to support the development of 6 national economic corridors; (7) to reinforce virtual domestic interconnectivity (Indonesia connected); (8) to expand the access of households to liveable, safe, affordable houses and settlement environment with adequate infrastructure, facilities and utilities; (9) to bolster energy resilience with electrical power generation; (10) to enhance the quality of infrastructure construction to meet their service/economic life; and (11) to accelerate infrastructure development under public private partnership (PPP) scheme. Financial Notes and Indonesian Budget

157 Chapter IV Central Government Expenditure To attain the above targets in infrastructure development priorities in 2013, generally speaking, policies on infrastructure development as established in RPJMN will be focused on: (1) improving infrastructure services according to minimum standard service (SPM); (2) elevating the competitiveness of real sector; and (3) fostering public private partnership (PPP). Targets to be achieved from investment climate and business climate priorities in 2013 are: (1) investment growth consisting of gross fixed capital formation (PMTB) in 2013, which is expected to grow 12.1 percent; and (2) ease of doing business. To support the realization of such targets in investment climate and business climate priority in 2013, the policies will be directed: (1) to simplify and accelerate investment and business procedures; (2) to deregulate the implementation of PPP projects; (3) to enhance efficiency of national logistic system with National Single Window (NSW) expansion and distribution routes and facilities development; (4) the development of special economic zones (KEK) in economic corridors having geo-economic and geo-strategic advantages; and (5) to improve manpower climate and strengthen the institution of industrial relationship. Targets to attain in energy priority in 2013 are; (1) to increase oil production to thousand barrels of oil per day (BOPD); (2) to increase the production of natural gas to 1,325-1,390 thousands of barrels of oil equivalent per day (BOEPD); (3) to increase the production of coals to 337 million tons; (4) primary energy mix: geothermal, hydro and other New and Renewable energy (EBT) 11.5 percent, coal 56.7 percent, gas 22.1 percent and oil 9.7 percent; (5) energy saving: industries 2.9 percent, commercial 2 percent, transportation 6 percent and domestic 5.6 percent; (6) to increase the capacity of power generation by 3,000 megawatt, either by the Government or business entities; and (7) to raise electrification ratio to 77.6 percent. To support the realization of targets set for energy development priority in 2013, the policies of energy development will be generally focused: (1) to increase the production of oil and gas; (2) to increase the production and consumption of domestic coals; (3) to promote the consumption of natural gas for domestic demands; (4) to increase the installed capacity of geothermal; (5) to reduce fuel and electricity subsidies in phases; (6) to encourage behavior of energy saving among the government apparatus, business entities and people; and (7) to increase the consumtion of new and renewable energies. Targets to attain from environment and disaster management priorities in 2013 are: (1) to control the destruction rate of natural resources and environmental pollution; (2) to improve information system of climate change and disaster mitigation; and (3) disaster emergency management. Policies to support the realization of targets set for environmental development and disaster management priority are: (1) to rehabilitate forests and critical watersheds (DAS) 500 thousand ha and 500 thousand ha in people s forests and village forests; (2) to finalize border demarcation of 19 thousand km long and the operation of 30 Forest Management Units (KPH); (3) Disaster and Climate Change Information system; (4) the provision of logistics in disaster prone regions; and (5) anticipation of earthquake and tsunami threats with capacity building in preparedness and reduction of disaster risks, the provision of early warning system and temporary evacuation shelters (TES). Development targets to reach from [the development of] underdeveloped regions, frontiers, outer islands and conflict-torn regions priority in 2012 are: (1) to increase average economic growth in underdeveloped regions by 6.9 percent in 2013; (2) to reduce the percentage of poor population in underdeveloped regions by 15.4 percent on the average 4-54 Financial Notes and Indonesian Budget 2013

158 Central Government Expenditure Chapter IV in 2013; (3) to enhance the quality of human resources in underdeveloped regions indicated with average human development index (HDI) in ; (4) to open the isolation of kecamatan in border areas and small outer islands (PPKT); (5) to improve access to quality education and health service in kecamatan of border areas and small outer islands (PPKT); (6) to prepare strategic plans based on priority border location (blue print); (7) to implement livestock raising enterprises in Pegunungan Tengah, Bomberai and Kebar; (8) to provide free education service until senior secondary level for all districts and kampongs in Papua province and West Papua province; (9) to provide alternative renewable energy sources (microhydro power generator (PLTMH), solar power generation (PLTS) and the construction of cement factory in Timika and Manokwari; and (10) special quota for Papua young generation. To attain the above targets, the policies will be exercised to support priority programs of [the development of] underdeveloped regions, outer islands and conflict-torn regions in 2013, i.e.: (1) to develop local economy of underdeveloped regions by optimizing their potentials with cluster approach; (2) to improve infrastructure and facility, to deliver quality education and health services and affordable in underdeveloped regions; (3) to provide transport facilities and services connecting kecamatan in border areas; (4) to prepare strategic plan (blue print) and detail spatial plan of kecamatan being the priority locations and PPKT; (5) to develop decent schools including the associated teaching-learning facilities with qualified teachers and their incentives (houses, special allowances) in kecamatan of outer islands and PPKT, and the development of boarding schools in kecamatan of outer island and PPKT (priority locations); (6) to strengthen food resilience in Papua and West Papua; and (7) great attention to indigenous people in Papua and West Papua. Targets to be achieved from culture, creativity and technology innovation priority in 2013 are: (1) to establish and enact integrated cultural reserve management; (2) museum and library revitalization; (3) facilitation for cultural art development, exploration and performance in big cities and kabupaten capitals; (4) research and development on culture and archeology to support culture development policies; (5) to elevate appreciation, creativity and productivity of art actors; (6) to enhance national film production and film censorship agency services both in terms of quality and quantity; (7) to fortify the capacity and creativity of youth in science and technology, religious faiths and devoutness, arts, culture and creative industry; and (8) to implement basic research packages, applied researches, and incentive research packages. To achieve these targets, the policies to support culture and science and technology development priority in 2013 will be directed to: (1) magnify the awareness and understanding of people on the importance of character and national identity building; (2) cultural heritage development and exploration; (3) elevate public appreciation to art and culture diversity; (4) build cultural capacity; and (5) advance and development technology and creativity of youth. Targets to achieve from other priority in politics, laws and security affairs in 2013 are: (1) to enhance the quality of democracy in Indonesia; (2) to improve the capacity in monitoring, early detection of terrorism attack threaths and to enhance the effectiveness in deradicalization process; (3) to maximize national defense industries to establish a self-reliant defense; (4) to promote the roles of Indonesia in maintaining national security and establishing peaceful world; and (5) to intensify corruption prevention and eradication measures, and to respect, protect and comply with human rights in various sectors. To realize the foregoing targets, the policies to support the realization of other priorities in politics, laws and security affairs in 2013 will include: (1) revising terrorism acts prevention Financial Notes and Indonesian Budget

159 Chapter IV Central Government Expenditure and anticipation coordination management, and empowering people in terrorism acts prevention; (2) delivering political education to implant democracy values and nationality to people in general; (3) maximizing national defense industries toward self-reliant defense with the procurement of primary weaponry system for the Armed Forces and National Police (TNI/Polri); (4) reinforcing coordination of law enforcers in corruption crime management and salvaging assets accumulated from corruption; and (5) fortifying the respect, protection and compliance of human rights. Targets to achieve from other priority in economic sector in 2013 are: (1) non-oil and gas processing industries to grow at percent; (2) to buttress the commitment of Indonesia in Asean Economic Community 2015 with the compliance of MEA Scorecard until 90 percent; (3) to succeed WTO Ministerial Conference IX and APEC chairing and hosting in 2013; (4) open unemployment to drop percent in 2013; (5) migrant workers (TKI) registered according to their Single Identity Number (NIK)for 600,000 persons in 2013; (6) competitive of UMKM (micro small and medium enterprises) elevated evident from increased UMKM productivity by 5.0 percent; employment absorption 2.0 percent, contribution of UMKM for GDB formation 6 percent, and export values of UMKM products 15.0 percent; (7) capacity and quality of cooperatives enhanced. To realize these targets, the policies to introduce to support other priorities in economic sector in 2013 will be directed to: (1) assure regulation certainty and more effective bureucracy services in non-oil and gas processing industries; (2) establish mutual and non-discriminatory multilateral and regional trade system; (3) expand business opportunities for young generation; (4) establish one-stop migrant worker service post at kecamatan level in 123 kabupaten/cities of migrant workers enclaves; and (5) promote cooperative and UMKM business activities with integrated business service centers, cooperative revitalization and national KUMKM survey. Targets to achieve from budget allocation to other priority in people s welfare sector in 2013 are: (1) to increase the number of foreign tourists to 9.0 million persons and domestic tourist travels of 250 million travels; (2) to augment the tourism contribution in national employment absorbtion to 8.35 million persons; (3) to promote the roles of youths in economic, political, social and cultural development; (4) to enhance the quality and capacity of guidance and counseling on religious tenets application in families and societies; (6) to prepare policies on the implementation of gender mainstreaming (PUG) in political and decision making and manpower affairs; (7) to facilitate the introduction of PUG (Gender Mainstreaming) policies and women protection against any and all violences; (8) to introduce gender segragated data system; and (9) to facilitate policies on violation eradication to children. To attain these targets, the policies to take to support other priorities in people s welfare sector in 2013 will be: (1) to promote 10 tourism destination objection in Indonesia with creative and effective marketing and promotion channel and to to enhance the quality of tourism supporting facilities and services networks; (2) to encourage the participation and active roles of youths in full range of cultural development and enhancement and sports both at regional and international level; (3) to fortify the understanding, comprehension, application and development of religious values and to advocate harmonious religious life; and (5) to integrate gender perspective in planning and budgeting cycles within overall ministries and agencies; and to reinforce protection for women and children against any and all violences. Some strategic targets of national development in 2013 as indicated in RKP 2013 can be seen in Table Financial Notes and Indonesian Budget 2013

160 Central Government Expenditure Chapter IV FORTIFYING COMPETITIVENESS 1. Boltering Climate for Investment and Business a. Investment Promotion (%) 8,8 10,9 11,1 b. Ease of Doing Business, including: - Time to commence business (days) License to build Building (days) Infrastructure Development Acceleration: Domestic Connectivity a. National Links in Good Condition (%) 88,50 90,50 92,50 b. District/City Capital served by broadband service (%) Industrial infrastructure development in various economic corridors a. Processing Industry Improvement (%) 6,2 6,1 6,7 b. Non-Oil and Gas Processing Industry Improvement (%) 6,8 6,6 7,2 4. Employment Generation especially for young workforce - Open unemployment rate (%) 6,6 6,4-6,6 5,8-6,1 REINFORCING ECONONIC RESILIENCE 5. Food Resilience: toward 10 million ton rice surplus a. Paddy production (million tons og GKG) 65,7 67,8 72,1 b. New Paddy Fields (thousand ha) 62, Electrification and Energy Conversion Ration increased a. PElectrification Ration increased - Electrification Ration (%) 72,95 75,90 77,60 - Generator Capacity (MW) b. PGas Conversion - Gas connection to houses AUGMENTING AND EXPANDING PEOPLE WELFARE 7. Human Resources Development Education a. Average School Attendance of 15 years old and over population 7,92 *) 7,85 8,25 b. APM SD/SDLB/MI/Paket A (%) 95,55 95,7 95,8 c. APM SMP/SMPLB/MTs/Paket B (%) 77,71 75,4 81,0 Health a. Improve access to health and quality nutrition for mothers and childred - Percentage of 0-11 month infants receiving complete basic immunization 84, b. Contagious and non contagious disease control and sanitation improvement - Number of villages performing Community Based Total Sanitation (STBM) c. Professional improvement of and maximizing the health operators - Number of health operators maximized and granted with incentives in DTPK and DBK d. Helath Financing Insurance improvement - Number of TT Class III used to deliver health services (new initiative) e. Improving the supplies, distribution, affordability, safety, efficacy and quality of medicine, health equipment and food and competitive domestic products - Percentage of medicine and vaccine supplies f. Access to quality KB (Family Planning) services improved and equlized - Number of new KB participants from poor households (KPS and KS-II) receiving contraception (1 million contraceptors) 4,29 3,89 3,97 8. Poverty alleviation acceleration: Cluster I-IV synergy a. Poverty Rate Decrease (%_ 12,5 10,5-11,5 9,5-10,5 i. Culster I PKH (million RTSM) 1,116 1,516 2,4 17,5 Raskin (million RTS) (Jan-Jun) 17,5 15,5 (Jul-Des) 15,5 Jamkesmas (million jiwa) 76,4 76,4 86,4 ii. Cluster II PNPM Rural (Kecamatan) PNPM Urban (Desa/Kelurahan) iii. Cluster III - Number of UMKM advocated to access KUR credit facility (KUMKM) iv. Cluster IV The Development of self-help houses/very low cost houses (thousand units) ,25 REINFORCING SOCIAL POLITICAL STABILIZATION 9. Preparing 2014 General Election - Political participation in 2014 (%) 75**) 10. Improving Bureaucracy Performance and Corruption Eradication - Corruption Perception Index 3,0 3,2 4,0 11. Development Acceleration toward Minimum Military Force Weaponry (Alutsista) improvement (%_ - Land military force Sea military force Air military force Note: *) realization in 2010 Source: RKP 2013 TABLE 4.10 SOME STRATEGIC DEVELOPMENT TARGETS 2013 STRATEGIC ISSUES **) targets to achieve in 2014 General Election. Year 2013 is for preparation to pursue such targets Financial Notes and Indonesian Budget

161 Chapter IV Central Government Expenditure 4.4 Policies and Central Government Expenditure Budget in APBN 2013 As a component of State Budget (APBN), budget allocated for government expenditures is designed and prepared for the reflection of state finance management enacted on yearly basis under a law and implemented in transparent and accountable fashion solely dedicated for the prosperity of people, as mandated in Article 23 of 1945 Constitution (UUD 1945). In light of that, as one of fiscal policy pillars, policy on government expenditure plays very strategic roles, notably in pursuing the main targets of national development, either for medium term targets or annual targets. To get maximum results, policy management, including in respect of budget allocation, the government expenditure must be prepared in professional, meticulous manner subject to the targets to pursue as established in Medium- Term National Development Plan (RPJMN) and Government Work Plan (RKP). As an integral part of government expenditure budget, policy and allocation of budget for central government expenditure in draft state budget (RAPBN) 2012 have been worked out with reference to the policy directions and development priorities established in RKP 2012, fiscal policy highlights, and macro-economic framework 2012 as mutually agreed between the Government and House of Representatives of Republic of Indonesia (DPR-RI) during preliminary discussion on RPJMN Consistent with the directions of development spelled out in RPJMN and RKP 2013, the policy of Central Government Expenditure Budget will be aimed at supporting the realization of development targets according to the missions of RPJMN , i.e.: (1) Continuing the development toward prosperous Indonesia; (2) reinforcing democracy pillars; and (3) strengthening justice dimensions in all sectors. Based on policy directions and strategic targets to pursue in 2013, and in view of problems and challenges that are likley to deal with in the coming 2013, the Government along with DPR during preliminary discussion forum on RAPBN 2013 agreed to set a National Development Theme in RKP 2013 saying: Reinforcing Domestic Economy for People s Welfare Augmentation and Expansion. Consistent with this theme and as a series of RPJM implementation, RKP 2013 establishes 11 (eleven) national development priorities, to wit: (1) Bureucracy Reform and Good Governance; (2) Education; (3) Health; (4) Poverty Alleviation; (5) Food Resilience; (6) Infrastructure; (7) Investment Climate and Business Climate; (8) Energy; (9) Environment and Disaster Management; (10) [the Development of] Underdeveloped Regions, the Frontiers, Outer Islands and Conflict-Torn Regions; (11) Culture, Creativity and Technology Innovation; and other three priorities, namely: (1) Politics, Laws and Security Affairs; (2) Economic Sector; and (3) Welfare Sector. To support the realization of targets of each priority and other program targets in RKP 2013 the policies of Central Government expenditure in APBN 2013 will directed to the following measures: (1) to maintain the payment of the 13th salary and pension and to increase basic salary and basic pension of TNI/Polri by 7 percent on the average, and to rise the salaries of judges; (2) to finalize Bureaucracy Reform program within the Ministries/Agencies, and evaluation of K/L remuneration budget policies for Bureaucracy Reform with regard to their implementation especially public services still needed improvement; (3) to establish more efficient governance operation with flat policy in office operational material spendings; and (4) to revise the introduction of Performance Based Budgeting (PBB) and Medium Term Expenditure Framework (MTEF) so as to enhance the quality of spendings Financial Notes and Indonesian Budget 2013

162 Central Government Expenditure Chapter IV Meanwhile to support the implementation of development programs in order to achieve the specified economic growth and poverty alleviation targets, the policies of Central Government expenditure will be directed: (1) to increase infrastructure budget to improve domestic connectivity, energy resilience and tourism destination promotion; (2) to support MP3EI program on infrastructure development at 6 (six) economic corridors; (3) to build the capacity in climate change mitigation and adaptation with budget supports of environmental conservation and renewable energy development; and (4) to strenghten social protection program in order to reduce poverty rate including to reinforce pro-people program (cluster 4) and the synergy of clusters under Master Plan for the Acceleration and Expansion of Indonesia s Economic Development (MP3KI). In addition, policy of Central Government expenditure will be exercised to buttress Government programs with regard to the provision of subsidies and certain activities executed in 2013 inclusive of: (1)efficient subsidy policy, i.e. allocated to the most needy beneficiaries coupled with subsidy control either for energy or non-energy sectors; (2)to provide additional budget for the introduction of well-targeted subsidy; (3) to enhance efficiency of fuel subsidy allocation, i.e. to the target beneficiaries with subsidized fuel consumption control, socialization of fuel consumption conversion program, city gas development and the consumption of BBN; (4) to enhance efficiency of electricity subsidy allocation, i.e. to the target beneficiaries with electricity rate increase while keeping the provision of affordable electrical power for low-income households and other needy groups, and promoting the consumption of renewable energy; (5) to anticipate global economic uncertainty with fiscal risk reserve supports; (6) to allocate budget for Social Security Providers (BPJS), SJSN implementation and efficiency in the implementation of Social Aids budget; (7) to anticipate the preparation of fair, well-planned and democratic general election in 2014 so as to maintain national stability; (8) to provide budget allocation for the formation and operational activities of Financial Service Authority (OJK); (9) to allocate budget for the construction of protection shelters against disasters, disaster prone area mapping, and housing development for new citizens in border areas with East Timor; (10) to allocate budget for the preparation of APEC Meeting host in 2013; and (11) to support research activities on low cost green car, low carbon emission, superior paddy seeds and researches on disease and health issues. As for initiatives to enhance the quality of spendings, especially Central Government expenditure, the Government is continually attempting to revise the introduction of performance based budgeting (PBB). The main principles for PBB application are that of well-cut linkage of policies established in national planning document and budget allocation managed by K/L respective of their tasks-functions. The said planning documents are Government Work Plan (RKP), and K/L Work Plan; meanwhile budget allocation managed by K/L is reflected in K/L Work and Budget Plan (RKA KL) and Budget Allocation List (DIPA). In 2013, the introduction of PBB is focused on output restructuring and confirmation of output cost standard (SBK) roles in planning-budgeting process. Output restructuring aims to direct the achieved performance more consistent with the established performance indicators. Meanwhile, SBK which reflects the amounts of costs required to produce activity output plays function of making budget allocation in planning stage more efficient. Thus, it is expected that the set targets can be materialized with optimum budget spendings. Financial Notes and Indonesian Budget

163 Chapter IV Central Government Expenditure Based on strategic targets, development priorities, general policies and budget planning process as previously noted, the budget allocation for Central Government expenditure in APBN 2013 is to amount Rp.1,154.4 trillion (12.5 percent of GDP). This allocation in APBN 2013 will be spent to support a wide range of development programs, either executed by the ministries/agencies (K/L expenditure) respective of their tasks and functions or cross-sector programs, and/or non-k/l expenditure according to development priorities prescribed in RKP Of such sums, 51.5 percent (Rp trillion) will be allocated for K/L for governance operation and the implementation of various development programs. Meanwhile, the other 48.5 percent (Rp trillion) is for state general treasury budget (Non-KL budget), which in majority will be expended for subsidies and payment of Government loan interests. Pursuant to Article 11 paragraph (5) Law Number 17 of 2003 concerning State Finance, budget for central government expenditure will be proportioned by functions, organizations and types of spendings Budget of Central Government Expenditure by Functions Based on function classification, the allocation of Central Government expenditure budget will be brokendown into 11 (eleven) functions. This classification aims to illustrate the tasks of the Government in the pursuit of national development objectives. These functions are: (1) public service function; (2) defense function; (3) laws and order function; (4) economic function; (5) environmental function; (7) health function; (8) tourism function; (9) religion function; (10) education functions; and (11) social protection function. These budget allocations of Central Government expenditure are further elaborated into various subfunctions, which are basically the compilation of budgets for programs and activities in every K/L. Activities are the elaboration of program which its formulation reflects the tasks and functions of echelone II/working unit or particular assignments of K/L containing one or more activity components to realize the output with measurable performance indicators. In addition, activities comprise some actions of resources mobilization, either human resources, materials, including equipment and technology, and fund or in other words, activities are combination of some or all types of resources as input to produce output in the forms of goods/services. Working Unit is a business unit performing budget cycle from the planning and budgeting to reporting. In 2013, the allocation of central government expenditure by functions is still dominated by public service function, i.e percent of total budget allocated for Central Government expenditure, and the remaining 37.6 percent is distributed in several functions such as economic function, education function, defense function, housing and public facility function, environmental function, tourism function, religious function and social protection function. The relatively high portion of budget allocation to public service function indicates that the implementation of public service function to the people is the main function of the Government, which includes, among other things, subsidy provision, payment of loan interest, management and implementation supports of other technical tasks of the Government, diplomacy, and international cooperation, demographic administration restructuring community empowerment, regional development and science and technology research and development. The comparison of budget allocation for Central Government expenditures by functions in is presented in Table Financial Notes and Indonesian Budget 2013

164 Central Government Expenditure Chapter IV TABLE 4.11 CENTRAL GOVERNMENT EXPENDITURE BY FUNCTION, (trillion rupiah) NO. FUNCTION APBN-P % to GDP APBN % to GDP 01 PUBLIC SERVICES 659,1 7,7 720,1 7,8 02 DEFENSE 73,9 0,9 81,8 0,9 03 LAW AND ORDER 33,4 0,4 36,5 0,4 04 ECONOMY 120,1 1,4 122,9 1,3 05 ENVIRONMET 10,7 0,1 12,4 0,1 06 HOUSING AND PUBLIC FACILITIES 29,5 0,3 30,7 0,3 07 HEALTH 15,4 0,2 17,5 0,2 08 TOURISM 3,2 0,0 2,5 0,0 09 RELIGIONS 3,6 0,0 4,1 0,0 10 EDUCATION 115,0 1,3 118,5 1,3 11 SOCIAL PROTECTION 5,6 0,1 7,4 0,1 T O T A L 1.069,5 12, ,4 12,5 Source: the Ministry of Finance Budget Allocation of Public Service Function In 2013, the allocation of budget for public service function reaches Rp trillion implying an increase of some 9.2 percent if compared with its allocation in APBN 2012, which amounted Rp trillion. This sum is for: (1) executive and legislative institutions, finance, fiscal and foreign affairs sub-function Rp trillion (18.7 percent of total public service function); (2) public service sub-function Rp.12.3 trillion (1.7 percent); (3) basic research and science and technology development sub-function Rp.2.6 trillion (0.4 percent); (4) Government loan sub-function Rp trillion (15.7 percent); (5) regional development sub-function Rp2.9 trillion (0.4 percent); (6) public service research and development sub-function Rp billion (0.1 percent); and (7) other public service sub-function Rp trillion (63.0 percent). Budget allocation to other public services in 2013 is particularly for subsidies and other transfers. In government loan sub-function, the budget will be used to pay loan interests. As to executive and legislative institution, financial and fiscal and foreign affairs sub-function the budget will be used to finance some programs including: (1) support program for the management and implementation of other technical tasks of the National Police (Polri); (2) tax revenue improvement and safeguarding program; (3) institutional capacity building program of House of Representatives of Republic of Indonesia (DPR RI); and (4) statistical information provision and service program. The development targets expected to achieve from public service function in 2013 include: (1) public service quality enhanced with professional service management, integrated human resources, the introduction of minimum standard service, and comprehensive demographic data; (2) fuel subsidy channeling with target volume 46 million kilo liter; (3) electrical power Financial Notes and Indonesian Budget

165 Chapter IV Central Government Expenditure supply at affordable rate to people; (4) food subsidy and subsidized rice supplies for 15.5 million poor households with 15 kg per target households (RTS); fertilizer subsidy and seed subsidy consisting of high quality and affordable fertilizers and seeds for farmers; (6) public transport subsidy for the economic class passengers of railways and sea transport modes; and (7) improved good governance implementation within government institutions in integrated, accountable manner and in compliance with and respect to laws. Budget Allocation for Defense Function Budget allocation to defense function concerns with the efforts of Government to magnify the defense capacity of nation to pursue one of national objectives as prescribed in the preamble of 1945 Constitution, i.e. to protect the nation and Indonesian people. In 2013, budget allocation to defense function reaches Rp.81.8 trillion for various defense programs implemented by the Ministry of Defense (including Armed Force Head Quarter, Army, Navy and Air Force), National Defense Agency and National Defense Council. If compared with its allocation in APBN 2012 reaching Rp.73.9 trillion, budget allocation for defense function in 2013 reflects an increase of 10.6 percent. This sum can be further detailed as follows: (1) national defense sub-function Rp.57.7 trillion (70.6 percent of total budget for defense function); (2) defense support sub-function Rp.22.9 trillion (28.0 percent); and (3) defense research and development sub-function Rp.1.2 trillion (1.4 percent). Budget allocation to national defense sub-function in 2013 can be used to develop integrative defense, army military force development, navy military force development and air military force development, maintaining the sovereign and union of the Unitary State of Republic of Indonesia. In defense support sub-function the allocated budget will be spent to develop defense system and strategy, and defense technology and industry development. Meanwhile, in defense research and development sub-function, the budget will be used for defense research and development and nation defense development. Budget allocation in defense function in 2013 is expected capable of recording some achievements including: (1) national defense industries maximized for defense self-reliance with improved primary weaponry system of Indonesian Armed Forces and National Police (TNI/Polri) in terms of quantity, quality and variation; (2) more leading roles of Indonesia in maintaining national security and global peace; (3) primary weaponry system and non primary weaponry system enhanced including the facilities and infrastructure of army, navy and air military forces; (4) bolstering defense industries, facilities and infrastructure complying with the standard qualities and the latest progress of science and technology in self-help manner; (5) the preparedness of primary weaponry system and non-primary weaponry system, organization, doctrines, facilities and infrastructure and other supporting power enhanced coupled with firmer law enforcement and well-secured national sea jurisdiction; and (6) primary weaponry system modernization and improvement including the associated facilities and infrastructure to reach the targets set for Air Force power and capacity development toward minimum essential force (MEF). Budget Allocation for Laws and Orders Function Meanwhile, budget for laws and order function reflects the sum of budget allocated to deliver services to the people in public laws and orders. This allocation relates to the attempts of the Government in exercising the constitutional mandate, i.e. to protect the nation and Indonesial 4-62 Financial Notes and Indonesian Budget 2013

166 Central Government Expenditure Chapter IV people. In 2013, budget allocation for laws and orders function is to amount Rp.36.5 trillion or 9.1 percent higher than its allocation in APBN 2012 recording Rp.33.5 trillion. Budget for laws and orders function in 2013 consists of: (1) police sub-function Rp.22.8 trillion (62.6 percent); (2) disaster management sub-function Rp.1.4 trillion (3.7 percent); (3) law development Rp.3.3 trillion (9.1 percent); (4) justice sub-function Rp.5.4 trillion (14.8 percent); (5) laws and orders research and development sub-function Rp.20.8 billion (0.06 percent); (6) other laws and orders sub-function Rp.3.6 trillion (9.8 percent). Budget allocation for police sub-function in 2013 will be used to finance several program, including: (1) public laws and orders maintenance program; and (2) Police human resources empowerment program. Budget in justice sub-function will be spent to finance some programs such as: (1) constitutional case management program; and (2) general judiciary management improvement program. Budget of law development sub-function will be expended for the financing of several programs, i.e.: (1) facility and infrastructure development program for Attorney General Office; and (2) general criminal case handling and settlement program. Meanwhile, allocation for other laws and orders sub-function will be used to finance some programs inclusive of: (1) investigation and national protection and security development program; and (2) national encryption development program. Development targets expected to achieve from budget allocation in laws and orders function in 2013 are: (1) monitoring and early detection capacity of terrorism attack threats improved; (2) the efficiency of deradicalization process enhanced; (3) Police performance management function increased in optimum manner to foster Police image; (4) public laws and orders condition bolstered capable of protecting all Indonesian people in performing their activities so as to augment living standards, free of any risk, threat and disturbance that may lead to bodily injuries; (5) public confidence to Police establishments buoyed up as reflected with police services provided according to Excellent Standard Services of Public Laws and Orders; (6) crime rates dropped (conventional crimes, transnational crimes, crimes with contingency implication and crimes to state assets) without impairing human rights; and (7) strategic measures developed, and potential security disturbance prevented in terms of quality or quantity until reaching the roots of crimes, disruption and conflicts within the society and social, political and economic sectors in a manner that will lessen public laws and orders disturbance. Budget Allocation to Economic Function Efforts to accelerate quality economic growth by strengthening economic resilience coupled with transportation, agriculture, infrastructure and energy development will be funded under budget allocation to economic function. In 2013, budget allocated for this economic function amount Rp122.9 trillion, implying an increase of 2.3 percent if compared with its allocation in APBN 2012 at Rp trillion. This sum is for some sub-functions: (1) trade, business, cooperation and SME development Rp.3.8 trillion (3.1 percent); (2) agriculture, forestry, fishery and marine sub-function Rp.19.9 trillion (16.2 percent); (3) irrigation sub-function Rp821.2 billion (0.7 percent); (4) fuel and energy sub-function Rp.13.2 trillion (10.8 percent); (5) mining sub-function Rp.2.1 trillion (1.7 percent); (6) transportation sub-function Rp.66.3 trillion (54.0 percent); (7) industry and construction sub-function Rp.2.8 trillion (2.3 percent); (8) manpower sub-function Rp.2.3 trillion (1.9 percent); (9) telecommunication sub-function Rp.3.2 billion (0.003 percent); (10) economic research and development sub-function Rp.4.0 trillion (3.3 percent); and (11) other economic sub-function Rp.7.6 trillion (6.2 percent). Financial Notes and Indonesian Budget

167 Chapter IV Central Government Expenditure Budget allocation to transport sub-function in 2013 will be used to finance some programs, to wit: (1) road operation program; (2) sea transport management and operation program; (3) air transport management and operation program; (4) land transport management and operation program; (5) railways transport management and operation program;(6) policy coordination program in economic sector. Targets to achieve from budget allocation in transportation sub-function in 2013 include: (1) capacity and quality of transportation networks enhanced and integrated in supporting domestic connectivity at national economic corridors and logistic systems, either connecting production centers and national outlet or in isolated regions, hinterlands, border areas and frontiers and outer islands; (2)road transport safety enhanced evident from lower fatality rate in transport accidents; (3) the quality of transport services in urban areas enhanced with sound transportation network system in 6 big cities; (4) 92.5 percent of national links in good conditions; and (5) efficiency of passenger and cargo movements enhanced and inter-regional transport service disparities abated. Meanwhile, budget allocation for agriculture, forestry, fishery and marine sub-function in 2013 will be used to perform various programs, including: (1) agriculture facility and infrastructure provision and development program; (2) beef self-sufficiency and safe, hygienic, wholesome and halal animal foods provision program; (3) food crop production, productivity and quality improvement program for sustainable food self-sufficiency and self-resilience; (4) capture fishing development and management program; and (5) fish farming production and fish product competitiveness improvement program. The targets expected to achieve from budget allocation to agriculture, forestry, fishery and marine sub-function in 2013 are: (1) basic food self-sufficiency attained and improved toward 10 million ton rice surplus per annum; (2) the stability of domestic food commodity prices maintained; (3) domestic rice stocks secured; (4) foodstuff imports controlled, especially rice; (5) inter-region and interseason food distribution improved; (6) farmer exchange rate (NTP) and fishermen exchange rate (NTN) above 105.0; and (7) fishery production from fish farming and capture fishing increased. Budget allocation for fuel and energy sub-function in 2013 will be used to finance some programs, including: (1) electrical power management program; (2) renewable energy management and energy conservation program; and (3) oil and gas management and supply program. Targets expected from budget allocation to fuel and energy sub-function in 2013 are: (1) electrification ratio to rise to percent with service coverage expansion and the construction of transmission network and substation development; (2) electrified village ratio to reach percent; (3) gas fuel infrastructure (SPBG) development in Bali and FEED in Medan, Cilegon, and Balikpapan; (4) natural oil production to hike to 900 thousand BOPD; (5) natural gas production to rise to 1,360 thousand BOPD; (6) coal production to increase to 337 millions tons; and (7) green energy initiatives promotion with intensified renewable energy consumption. Budget Allocation for Environmental Function In 2013, budget allocation to environmental function amounts Rp.12.4 trillion or 15.9 percent higher than its allocation in APBN 2012 at Rp.10.7 trillion. This sum is further allocated to: (1) waste management sub-function Rp.3.2 trillion (25.3 percent); (2) pollution mitigation sub-function Rp billion (1.2 percent); (3) natural resources conservation sub-function Rp.4.7 trillion (38.0 percent); (4) spatial planning and land affairs Rp.3.5 trillion (28.3 trillion); and (5) other environmental sub-function Rp billion (7.2 percent) Financial Notes and Indonesian Budget 2013

168 Central Government Expenditure Chapter IV Illustration of budget allocation in 2013 for some significant sub-functions within environmental function can be depicted as follows. Budget allocation of waste management sub-function is mainly used for Settlement Infrastructure Improvement and Development Program. Budget of natural resources conservation sub-function is particularly to finance some programs, such as: (1) community empowerment based whatershed (DAS) function and carrying capacity development program; and (2) biodiversity conservation and forest protection program. Meanwhile, allocation to spatial planning and land affairs sub-function is mostly for: (1) national land management program; and (2) spatial planning program. The implementation of programs under this function is designed to enhance the quality of environment as parts of climate change impact mitigation and adaption. Consistent with the allocated budget, the targets expected from environmental function in 2013 are: (1) spatial information improved in terms of quality and quantity with greater priority given to the provision of spatial data to support regional development along economic corridors and other priority development zones (KEK and KAPET); (2) access to spatial data and information improved; (3) operational regulation for Law Number 26 of 2007 concerning Spatial Planning finished and complete; (3) land asset legalization charged to the Government for around 884,050 parcels of land realized; (4) forest resources conservation and rehabilitation improved with the completion of forest demarcation (outer and functional boundaries) 19,000 km, and the operation of 30 Forest Management units, forest and land rehabilitation of 500,000 ha, and the preparation of Integrated Watershed (DAS) management Plans in 11 priority DAS; (5) the population of endangered priority species population increased to 0.5 percent; (6) hotspots in Kalimantan, Sumatra and Sulawesi to decrease by 59.2 percent and burned forest areas to lower by 40 percent from avarage rate in ; (7) social problems beyond the affected area maps dealt with based on review of integrated team as established in Perpres Number 37 of 2012; and (8) frontage development for the relocation of arterial links and Kota Surabaya PDAM pipelines. Budget Allocation for Housing and Public Facility Function In 2013, budget for housing and public facility function of Central Government expenditure reaches Rp.30.7 trillion or 4.3 percent higher than its realization in APBN 2012 of Rp.29.5 trillion. This sum consists of: (1) budget allocation for housing development sub-function Rp.4.1 trillion (15.2 percent); (2) settlement community empowerment sub-function Rp.3.8 trillion (12.3 percent); (3) water supply sub-function Rp.5.5 trillion (18.0 percent); and (4) other housing and public facility Rp.17.3 trillion (56.3 percent). Budget allocation in some significant sub-function of housing and public facility function in 2013 can be illustrated as follows. Budget for housing development sub-function is mainly for housing and settlement zone development program. Meanwhile, allocation to the settlement community empowerment sub-function has been particularly expended for settlement infrastructure improvement and development and housing and settlement zone development program. As to budget proceeds allocated to water supply sub-function, they have been mostly used to finance settlement infrastructure improvement and development program. Budget allocated to other housing and public facilities is for community empowerment program and settlement infrastructure improvement and development program. Financial Notes and Indonesian Budget

169 Chapter IV Central Government Expenditure Targets expected from housing and public facility function in 2013 include: (1) the construction of 183 multi-storey blocks (rusunawa); (2) facilitation and simulation for the construction of 20,000 units of self-helf houses; (3) facilitation and stimulation for quality improvement of 230,000 units of self-help houses; (4) facilitation for the construction of 60,000 housing and settlement complexes; (5) the development of rural SPAM (water Supply System) in 1,610 villages; (6) the development of waste water infrastructure in 567 areas; (7) the expansion of national raw water supply capacity by 12.2 M3/second extracted from: BREGAS, Telaga Waja of Kabupaten Karangasem, Kabupaten Tanjung Jabung Timur; (8) the construction of raw water reservoir in Galang Batang of Bintan island; (9) acceleration for water conveyance development preparation in Jatiluhur, Karian, Bandung, Semarang and Cilegon; (10) the development of Ground Water Pump Irrigation Networks in West Java, Aceh, West Kalimantan, and NTT; and (11) improved accessibility of low-income households to decent and affordable settlement facilities. Budget Allocation to Health Function Budget allocation of health function in 2013 is to amount Rp.17.5 trillion implying an increase of 13.8 percent higher than the allocation in APBN 2012 at Rp.15.4 trillion. Budget for health function comprises: (1) medicine and health logistics sub-function Rp.2.8 trillion (16.2 percent of total Health Function budget); (2) individual health service sub-function Rp.10.0 trillion (57.2 percent); (3) public health service sub-function Rp.1.4 trillion (7.7 percent); (4) demography and family planning sub-function Rp.2.6 trillion (14.9 percent); (5) health research and development sub-function Rp billion (2.5 percent); and (6) other health sub-function sub-function Rp billion (1.4 percent). Targets expected from budget allocation to health function in 2013 include: (1) access to quality health and nutrition services for mothers and children improved; (2) contagious and non-contagious disease control and neighborhood sanitation improved; (3) health operators professionalism fortified and maximized; (4) health insurance improved; (5) the safety, efficacy and quality of domestic medicine and food and health equipment enhanced; and (6) access to quality family planning service expanded. Budget Allocation for Tourism Function In 2013, budget allocation for tourism function is to reach Rp.2,5 billion. This sum is an increase of around 3.2 percent if compared with its allocation in APBN 2012 Rp3,2 trillion. The said proceeds are further expended to: (1) tourism promotion sub-function Rp.714,4 billion (28,5 percent of total tourism function); (2) publication and broadcasting development sub-function Rp.9.6 billion (0.4 percent); (3) competition sport development sub-function Rp billion (22.3 percent); (4) tourism research and development Rp.15.7 billion (0.6 percent) and (5) other tourism sub-function Rp.1.2 billion (48.2 percent). Budget allocation for tourism promotion sub-function in 2013 is mainly for tourism destination development progam and tourism marketing program. As to budget to competition sport development sub-function this allocation aims to elevate the achivements in sport competition. Meanwhile for other tourism sub-function the budget is allocated to some programs including: (1) Management and Implementation Support Program for other Technical Tasks of the Ministry of Tourism and Creative Economy and (2) History, Archeology and Museum Program Financial Notes and Indonesian Budget 2013

170 Central Government Expenditure Chapter IV Targets to pursue from tourism function in 2013 are inclusive of: (1) number of foreign tourists to increase to 9.0 million persons and number of domestic tourist movements to rise at millions travels; (2) the contribution of tourism sector to the employment of national workforce to reach 8.4 million persons; (3) the contribution of tourism sector to GDP to increase to 4.2 percent; (4) investment value to total national investment to augment to 4.6 percent; (5) foreign exchange earned from foreign toursist to surge up USD10.4 billion; (6) the spendings of domestic tourists to rise to Rp trillion; and (7) research resources capacity to elevate. Budget Allocation to Religion Function The Government has great concerns on the religious life among varying social groups. The majority of people has passion and strong desire to understand, comprehend and implement their own religious tenets, while it must be admitted that some other groups have yet to do that. In addition, the varying religions and beliefts is potential to spark conflicts that may disrupt religious life harmony and concord. In addition, the obligation of the Government to provide decent and non-discriminatory worship facilities is manifested with budget allocation to religion function. Budget allocated to religion function in 2013 is to reach Rp.4.1 trillion. It implies an increase of 14.6 percent higher that its allocation in APBN 2012 at Rp.3.6 trillion. The proceeds are further distributed to: (1) religious life improvement sub-function Rp.1.3 trillion (32.9 percent of total religion function budget); (2) religious life harmony sub-function Rp.65.5 billion (1.6 percent); (3) religion research and development sub-function Rp.2.0 trillion (48.3 percent); and other religious service sub-function Rp billion (17.2 percent). In 2013, budget allocation for religious life improvement sub-function is used to advocate religious development and guidance to the communities. Budget allocated to religious life harmony sub-function has been totally used to support the management and implementation of other technical tasks of the Ministry of Religions. In other religious service sub-function, the budget is allocated for Islamic community development program. As to budget allocation of religious research and development sub-function the proceeds are expended to perform: (1) Islamic community development program; (2) hajj pilgrimate development and management program; and (3) research and development, education and training program for the Ministry of Religions. Budget allocation to religion function 2013 is aimed to pursue the following targets: (1) quality and capacity of guidance and counseling on the implementation of religious tenets in families and society enhanced; (2) social harmony evident from intensive inter-faith dialogue and cooperation improved; (3) quality and professionalism in hajj pilgrimage management enhanced; and (4) better religious development governance. Budget Allocation of Education Function Budget allocated to education function reflects the earnest attention of the Government in delivering services to the communities in education sector. Budget allocation of education function relates to the Government s attempt in exercising constitutional mandate of allocating minimum 20 percent of APBN in education sector. In 2013, this budget is to reach Rp trillion or 3.0 percent higher than its allocation in APBN 2012 of Rp trillion. These proceeds are then further allocated to: (1) elementary education sub-function Rp.29.0 trillion Financial Notes and Indonesian Budget

171 Chapter IV Central Government Expenditure (24.5 percent of total education function budget); (2) secondary education sub-function Rp.8.2 trillion (6.9 percent); (3) tertiary education sub-function RP.38.2 trillion (32.2 percent); (4) aid service sub-function to education sector Rp.11.9 trillion (10.0 percent); (5) non-formal and informal education sub-function Rp3.7 trillion (3.1 percent); (6) religious sub-function Rp.2.8 trillion (2.3 percent); (7) other education and culture sub-function Rp.19.3 trillion (16.3 percent); (8) childhood education sub-function Rp.1.2 trillion (1.0 percent); (9) official education sub-function Rp billion (0.7 percent); (10) education research and development sub-function Rp.1.2 trillion (1.0 percent); (11) youth and sport development sub-function Rp.1.1 trillion (0.9 percent); and (12) culture development sub-function Rp.1.3 trillion (1.1 percent). In 2013, budget allocation to elementary education sub-function will be spent to perform compulsory education program at elementary level. For the budget allocated to secondary education, it is expended to carry out secondary education level. Accordingly budget procceds for tertiary education is used to fund the implementation of tertiary education. In nonformal and informal education sub-function the allocated budget is used to finance library development program. In case of aid service sub-function to education sector, the budget will be used to finance: (1) PTK profession and education quality assurance program; and (2) language and letter improvement and development program. Targets expected from budget allocation to education function in 2013 are inclusive of: (1) access rate to quality education service enhanced evident from: (i) higher average school participation rate of 15 years old and over population to 8.25 years; (ii) lower illiteracy rate among the 15 years old and over population to 4.4 percent; (iii) higher APM SD/SDLB/MI/ Package A to 95.8 percent; (iv) higher APM SMP/SMPLB/MTs/package B to 80,1 percent; (v) higher APK SMA/SMK/MA/Package C to 82.0 percent; and (vi) higher APK university for years old population to 28.7 percent; (2) national education standard (SNP) for religious and religiousity education in elementary and secondary education units achieved; (3) nation character building education in education units implemented; (4) the relevance of secondary and tertiary education graduates and development demands increased; and (5) professionalism and distribution of teachers and pedagogical staff augmented marked with more teachers holding qualification minimum S1/D4 degree and higher percentage of certified teachers. Budget Allocation of Social Protection Function Budget allocation for social protection function in 2013 is to amount Rp.7.4 trillion implying an increase of 33.5 percent if compared with its allocation in APBN 2012 at Rp.5.6 trillion. This budget is further allocated to: (1) social protection and service sub-function for ailing persons and the disabled Rp billion (4.4 percent of total social protection function budget); (2) social protection and services to the elder Rp billion (2.0 percent); (3) social protection and services sub-function to children and households Rp billion (6.8 percent); (4) women empowerment sub-function Rp billion (2.6 percent); (5) social aids and insurance sub-function Rp.33.9 billion (0.5 percent); (6) social protection research and development sub-function Rp billion (3.6 percent); and (7) other social protection sub-function Rp.5.9 trillion (80.2 percent). Targets expected from the allocation of budget to social protection function in 2013 are: (1) Gender Mainstreaming implementation policy in political and decision making and manpower 4-68 Financial Notes and Indonesian Budget 2013

172 Central Government Expenditure Chapter IV affairs established; (2) Gender Mainstreaiming implementation policy and women protection to any and all violence facilitated; (3) gender segregated data system applied; (4) policy on the eradication of violence to children facilitated; social insurance service quality for the poor and vulnerable people enhanced Budget of Central Government Expenditure by Organizations Of budget proceeds allocated for Central Government expenditure worth Rp. 1,154.4 trillion, allocation to the ministries/agencies (K/L) reaches Rp trillion or 51.5 percent of total Central Government Expenditure. Meanwhile, the other Rp trillion or 48.5 percent are for non-kl spending (State General Treasurer Budget Section = BA SUN) Ministries/Agencies Budget Section (BA K/L) Trillion (Rp) In 2013, there are 86 ministries/agencies with separate budget sections. They consist of: (1) 33 ministries; (2) three coordinating ministries; (3) six state institutions; (4) 38 government agencies; and (5) six commissions. Out of them, 10 (ten) K/L are the recipients of the largest budget sections. It is consistent with the changing fiscal policy orientation in , which is more focused on stimulation aspects to the economy (pro-growth, pro-job, dan propoor) than fiscal consolidation as adopted in previous period. In ABPN 2013, ten K/L with the largest budget allocations form 75.5 percent of total K/L budget. They are: (1) the Ministry of Defense (13.8 percent of K/L budget); (2) the Ministry of Public Works (13.1 percent of K/ L budget); (3) the Ministry of Education and Culture (12.3 percent of K/L budget); (4) the National Police of Republic of Indonesia (7.7 percent of K/L budget); (5) the Ministry of Religions (7.4 percent of K/L budget); (6) the Ministry of Transportation (6.2 percent of K/ L budget); (7) the Ministry of Health (5.8 percent of K/L budget); (8) the Ministry of Energy and Mineral Resources (3.2 percent of K/L budget); (9) the Ministry of Finance (3.1 percent of K/L budget); (10 The Ministry of Agriculute (3.0 percent of K/L budget). 700,00 600,00 500,00 400,00 300,00 200,00 100,00-5,7 225,0 GRAPH 4.38 K/L EXPENDITURE BUDGET TREND, ,2 259,7 5,5 5,2 307,0 332,9 5,6 417,6 6,4 547, APBNP 2012 Source: the Ministry of Finance K/L Expenditure % to GDP 6,4 594, Percent 7,00 6,00 5,00 4,00 3,00 2,00 1,00 - Triliun (Rp) 90,00 80,00 70,00 60,00 50,00 40,00 30,00 72,9 82,0 51,2 51,3 GRAPH 4.39 TOP 10 K/L WITH LARGEST BUDGET ALLOCATION, ,0 75,0 61,1 77,2 73,1 45,6 44,0 41,9 39,4 34,4 33,2 38,1 36,7 34,6 31,2 26,9 GRAPH 4.40 TOP 10 K/L WITH LARGES BUDGET ALLOCATION, 2013 Min.Religion 07% Min.Transport 06% Police 08% Min.Health 06% Min.EDSM 03% Min.Finance 03% Min.Edu&Culture 12% Min.Agriculture 03% Min. Public Work 13% Others 25% 20,00 10,00 20,1 18,8 18,2 16,9 16,3 17,1 17,8 14,9 16,0 9,0 Min. Defense 14% - Min. Defense Min. PW Min.Edu&Cul Police Min.Religions Min.Transport Min.Health Min.ESDM Min.Finance Min.Agriculture LKPP 2011 APBNP 2012 APBN 2013 Source: the Ministry of Finance Source: the Ministry of Finance Financial Notes and Indonesian Budget

173 Chapter IV Central Government Expenditure According to policy directions and strategic targets to pursue in 2013 and in view of problems and challenges to be dealt with in 2013 the theme of national development in RKP 2012 is: Reinforcing Domestic Economy for People s Welfare Augmentation and Expansion. From such theme, 11 national priorities are established in RKP 2013, to wit: (1) Bureaucracy and Governance Reform; (2) Education; (3) Health; (4) Poverty Alleviation; (5) Food Resilience; (6) Infrastructure; (7) Investment Climate and Business Climate; (8) Energy; (9) Environment; (10) Underdeveloped Regions, the Frontiers, Outer Islands and Conflict Torn Regions with focus directed to development acceleration in Papua, West Papua and NTT; and (11) culture, creativity and technology innovation. In addition there are other three priorities, i.e.: (1) politic, law and security affairs; (2) economic affairs; and (3) people s welfare affairs. Such priorities, programs and activities prescribed in RKP 2013 will serve as references in working out development policies including the work and budget plan of ministries/agency (RKA K/L). In 2013, K/L Work Plan is prepared with the adoption of performance based approach, integrated medium term expenditure and budgeting framework containing policies, programs and activities including for subsidies, public service obligation (PSO) and other special spendings, which are not inseparable from the said K/L policies. To support the realization of various development targets in 2013 coupled with efficiency and effectiveness, the allocation of K/L budget is made with reference to K/L expenditure policies in 2013 including: (1) to enhance the efficiency of K/L expenditure with the introduction of flat policy for operational spendings and refining the composition of priority spendings; (2) to improve the effectiveness in budget allocation for Armed Forces primary weaponry system so as to achieve minimum essential force (MEF) subject to the financial capacity of the Government; (3) to reinforce the synergy of Central Region on funding and regulation affairs including DAK (Special Allocation Fund), deconcentration fund, and co-administration tasks; and (4) to implement affirmative actions, especialy for the development of underdeveloped regions/outer islands, and small and creative industries and support to the development of traditional pilot markets including village markets. In addition, K/L expenditure policies will be focused to support the implementation of president directives consisting of: (1) Masterplan for the Acceleration and Expansion of Indonesian Economic Development (MP3EI); (2) Masterplan for the Acceleration and Expansion of Poverty Alleviation (MP3KI); (3) domestic connectivity acceleration; (4) the strengthening of four development clusters; (5) the attainment of energy resilience; and (6) the reinforcement of food resilience, including to achieve 10 million tons rice surplus by To support the realization of strategic targets, policy directions and national development priorities, budget allocation to K/L is planned to hit Rp,594.6 trillion. These proceeds will be used to give funding support for various development programs of K/L respective of their tasks and functions within development priority framework established in RKP One problem hampering effective K/L spendings concerns the lackluster performance in budget absorbtion. To cope with this low budget absorption, the solutions proposed by the Government are: (1) revising goods and service procurement mechanism with amendment to Keppres Number 80 of 2003 to Perpres Number 54 of 2010; (2) improving budget implementation mechanism with the amendment of Keppres Number 42 of 2002 to Perpres Number 53 of 2010; (3) simplifying budget revision procedure with the issuance of Regulation Financial Notes and Indonesian Budget 2013

174 Central Government Expenditure Chapter IV of Finance Minister (PMK) Number 49 of 2012 concerning Procedure for Budget Revision in 2012; (4) accelerating project activity invoicing by contractors with the issuance of PMK Number 170 of 2010 concerning the settlement of State Budget (APBN) Liabilities at Working Units; (5) simplifying DIPA (Budget Allocation List) format to enhance flexibility of K/L in implementing budget; and (6) integrating K/L Work Plan (RKA-K/L) database and DIPA to speed up DIPA release. Thereafter, to apply planning and budgeting reform, the Government has introduced planning and budgeting reform in phases executed in three stages, to wit: (1) introduction stage ( ); (2) maintenance stage ( ) and (3) improvement stage (2015 and beyond). To buttress the implementation of such budgeting reform, for APBN 2013 preparation, the Government has revised the costing methodology and introduced efficiency dividend that will make budget in 2013 more efficient. Moreover, during the preparation of APBN 2013, review of forward estimate in 2012 has been made as baseline figures in 2013 budget. To support the implementation of Article 108 Law Number 33 of 2004 concerning Fiscal Balance of Central Government and Regional Governments with regard to deconcentration fund and co-administration tasks that have been delegated to regions under Special Allocation Fund (DAK), some initiatives have been made in phases to transfer such funds until For 2013, budget for deconcentration and co-administration of the Ministry of Agriculture had been transferred to DAK of APBN The transfer of K/L programs and activities into DAK will be established under a Presidential Regulation (Perpres), which its drafting is still underway. This Perpres will contain regulations on technical supervision and directives of K/L to regions to assure that the national priority targets under the responsibility of K/L concerned to regions can be accomplished, for which reward and punishment mechanism will be applied. Regions fail to execute the DAK as specified in the regulations will be liable for sanctions. To fortify discipline and performance of K/L in 2013 based on Presidential Regulation (Perpres) Number 39 of 2012 concerning Reward and Punishment for the Implementation of Ministries/Agencies Expenditure Budget, the Government will continue introducing such reward and punishment system. The Government will give reward of additional ceiling to K/L if they are able to optimize the use of budget or to reach the specified targets at lower costs than that planned in 2012 budget. Otherwise, K/Ls that fail to absorb the budget and unable to meet the specified targets with unacceptable grounds will be punished with lower ceiling. It is expected that this reward and punishment mechanism will increase K/L performance either in terms of planning or implementation and the APBN becomes more efficient. Based on the above mentioned K/L expenditure policy directions and in view of the available fiscal room, activity focuses and targets to pursue in 2013, budget allocation plan including the programs and targets of 10 (ten) K/L with the largest allocations will be presented in narration. As for other K/L budget allocation, program and target plans they can be seen in Matrix 4.1. The Ministry of Defense In RAPBN 2013, the Ministry of Defense will receive budget allocation Rp.82.0 trillion. The proceeds will be used to reach the vision of the Ministry of Defense, i.e. Realizing Sturdy National Defense and the associated missions, i.e. to maintain the sovereignty and union of the Unitary State of Republic of Indonesia (NKRI) and nation safety. The said budget is Financial Notes and Indonesian Budget

175 Chapter IV Central Government Expenditure to increase by Rp.9.0 trillion or 12.4 percent if compared with budget ceiling allocated for the Ministry of Defense in APBNP 2012 at Rp.72.9 trillion. This budget allocation comes from rupiah of Rp.68.6 trillion, foreign and domestic loans Rp.13.4 trillion to carry out some programs including: (1) defense technology and industry development program; (2) integrative use of defense force program; (3) Army Military Force readiness support program; (4) Modernization Program on Alutsista and Non Alutsista / Navy Military Force Facility and Infrastructure; and (5) Modernization Program on Alutsista (Main Equipment for Defense System) and Non Alutsista And Air Military Force Facilities and Infrastructure Development. Performance indicators of the foregoing programs are: (1) number of the domestically produced main weapons for the Armed Forces increased by 30 percent; (2) the percentage of laws and orders operation increased in terms of quality and quantity by 46 percent; (3) percentage of personnel, material and documentary safety operation and early warning detection effectiveness and efficiency increased to reach 58 percent; (4) percentage of additional material for strategic primary weaponry system of the Armed Forces increased in accountable and timely manner to reach 12 percent; and (5) MEF of air military force reached at 28 percent. Based on policies and programs to be performed by the Ministry of Defense in 2013, the outcomes expected from policies, programs and activities of the Ministry of Defense in 2013 include: (1) demands on domestically produced main weaponry syatem met in phases; (2) the use of integrative defense force capable of identifying, deterring, preventing threaths in integrated, effective and timely manner; (3) the readiness of main weaponry system and the associated facilities and infrastructure to achieve the targets of Army Force strenght and capability development toward MEF; (4) Navy military strenght and capability increased and ready to operate to support the given tasks according to the specified standards and demands, with high supporting, deterrent and combating capabilities; and (5) main weaponry system modernization and improvement including the facilities and infrastructure to reach targets of Air Force Military strenght and capability development toward MEF. The Ministry of Public Works National infrastructure development with sound supporting and driving capacities to just and pro-people economic and social growth throughout the archipelago with active participation of all Indonesian people is the theme advocated in RKP 2013 and serving as reference for the Ministry of Public Works in establishing some development priorities i,e, poverty alleviation, food shortage management, investment climate and business climate, energy, environment and disaster management and the development of under developed regions, the frontiers, outer isaland and conflict torn regions. Development policy directions of the Ministry of Public Works in 2013 is focused to pursue its vision, i.e. to provide reliable public works and settlement infrastructure to support Prosperous Indonesia The Ministry of Public Works in APBN 2013 is planned to receive budget Rp.78.0 trillion coming from rupiah sources Rp.70.1 trillion, non-tax revenue and public service agencies Rp.45.6 billion and foreign loans and grant Rp. 7.8 trillion used to execute a number of programs including: (1) construction development program; (2) settlement infrastructure improvement and development program; (3) road operation program; (4) spatial planning program; and (5) water resources development program Financial Notes and Indonesian Budget 2013

176 Central Government Expenditure Chapter IV The performance indicators for the implementation of the said program are: (1) regional construction service developed in 33 regions; (2) rural settlement area infrastructure developed in 185 village with the number of villages served by water supply infrastructure to record 1,610 villages; (3) toll road of 19 km long constructed and the other 34,368 km long of roads and 226,500 m long of bridges preserved; (4) spatial planning synchronized to its development program in 32 provinces; and (5) irrigation networks serving 111,729 ha areas constructed/ improved and 46,061 ha of swamp networks developed/improved. Based on policies and programs to be performed by the Ministry of Public Works in 2013, the expected outcomes are to include: (1) capacity and performance of central and regional construction service providers enhanced; (2) number of cities introducting the norms, standards, procedure and criteria of settlement area development according to the specified spatial planning and the number of areas served with settlement infrastructure increased; (3) facilitation for regional road operation improved toward 60 percent in good condition; (4) consistency of development plans (national and regional) with regional spatial planning, consistency of infrastructure development program and national spatial planning (especially for public works and settlement infrastructure); and (5) water resources management performance improved. The Ministry of Education and Culture Theme promoted in education sector as indicated in RKP 2013 is improving access to quality, affordable, relevant and efficient education toward prosperity, self-reliance, lofty and strong nation characters. Education development is focused to attain economic growth coupled with the proportional balance of educated workforce and capacity of: (1) creating employment or promoting enterpreneurship and (2) responding challenges of manpower demands. To reach the vision of the Ministry of Education and Culture, i.e. to deliver excellent national education services to forge smart and comprehensive Indonesian people, in APBN 2013, the Ministry of Education and Culture is planned to receive budget allocation of Rp.73.1 trillion. The budget will come from rupiah sources Rp.58.6 trillion, non-tax revenue/public service agency Rp.12.5 trillion, and foreign loans Rp.1.9 trillion to conduct various programs, inclusive of: (1) research and development program within the Ministry of Education and Culture; (2) basic education program; (3) secondary education program; (4) tertiary education program; (5) profession development program for teachers and pedagogical staff and education quality supervisors; and (6) culture preservation program. Performance indicators for the implementation of such programs are: (1) the percentage of curriculum development and application effectiveness through monitoring, evaluation and controlling to reach percent; (2) the percentage of districts/cities having minimum one extraordinary elementary school (SDLB), 82.4 percent, and the beneficiaries of school aids for students of poor households to record 9.6 million students of elementary/extraordinary elementary and junior secondary/extraordinary junior secondary schools (SMP/SMPLB) and 1.6 million of senior secondary/vocational schools (SMA/SMK); (3) SMA/SMK students to receive quality management operation aids (BOOM)/pioneer BOS; (4) 5 new universities established and 98 working units (satker) receiving community fund set up; (5) certified teachers for SD/SDLB to reach 57.5 percent and certified teachers for SMP/SMPLB 60.0 percent; and (6) 1,000 documented museums Financial Notes and Indonesian Budget

177 Chapter IV Central Government Expenditure Based on policies and programs to be executed by the Ministry of Education and Culture in 2013, the expected outcomes are: (1) learning model, data and information and PAUD quality standards, basic education, secondary education and tertiary education and adult education and their accreditation available; (2) coverage and distribution of access to quality TK/TKLB, SD/SDLB, and SMP/SMPLB without any gender based discrimination and relevant to the needs of communities in all provinces, kabupaten (districts), and cities expanded; (3) coverage and distribution of access to quality SMA, SMK, SMLB without any gender based discrimination and relevant to the needs of communities in all provinces, districts and cities expanded; (4) coverage and distribution of access to quality and internationally competitive higher education without any gender based discrimination and relevant to the needs of nation and state expanded; (5) professionalism of teachers and pedagogical staff enhanced and education quality assured according to national education standards (SPN); and (6) inventory and protected cultural works increased. The National Police of Republic of Indonesia The National Police of Republic of Indonesia (Polri) in performing their strategic plan promotes vision: Realizing excellent public laws and orders services, firm law enforcement and solid domestic security and pro-active police synergy. In efforts to materialize such vision, Polri carries some missions, i.e.: early detection and warning through investigation, safeguarding and mobilization activities/operation; (2) delivering simple, responsive and non discriminatory protection, caring and services; (3) maintaining public laws and orders and traffic flows to assure safe passenger and goods movements; (4) securing in the maintenance of domestic security; (5) developing public police based on law abiding communities; (6) professional, objective, proportional, transparent and accountable law enforcement to assure legal certainty and justice; (7) managing overall Polri s resources in professional, transparent, accountable and modern manner to support operational tasks of the national police; and (8) developing inter-departmental and international policy synergy system as well as with social components to foster partnership building/networking. In the pursuit of such vision and missions, the National Police of Republic of Indonesia (Polri) in APBN 2013 is planned to receive budget of Rp.45.6 trillion. This sum implies an increase of Rp.3.7 trillion or 8.9 percent higher than its allocation of Polri s budget in APBNP 2012 recording Rp.41.9 trillion. The said budget comes from rupiah sources Rp.38.7 trillion, PNBP (non-tax revenue) and BLU (Public Service Agency) Rp.4.7 trillion, PLN/PDN (Foreign and Domestic Loans) Rp.2.2 trillion to execute several programs, including: (1) research and development program within the Polri; (2) public laws and security strategy development program; (3) public laws and security maintenance program; (4) criminal probe and investigation program; and (5) domestic serious security threat mitigation program. With such budget support and program plan, performance indicators for the implementation of the foregoing programs are: (1) 12 prototype and review review reports prepared; (2) 12 services of each strategic public laws and orders services and regional laws and orders services provided; (3) lower percentage of security disturbance along public activity routes notably in sea transport: coast guard and national/international ports security, by 11 percent and policy operations being the priority needs of public to record 12 operations; (4) terrorism criminal cases and clearance rate at national level to reach 102 percent and criminal case and clearance rate at national level to reach 57 percent; and (5) 12 regional domestic security management reports; Financial Notes and Indonesian Budget 2013

178 Central Government Expenditure Chapter IV Based on programs and activities to be executed by Polri in 2013, the expected outcomes are: (1) technology based police equipment capable of dealting with various criminal trends; (2) early detection of potential security disruption that may spark public unrest as earlier anticipation can be made; (3) well-maintained and improved public law and order conditions to protect overall citizens in performing their activities for living standard augmentation free from any and all risks, threaths and disruptions that may cause bodily injuries; (4) various types of crimes coped with and decreased (conventional crimes, transnational crimes, crimes with contingency implications and crimes against state assets) without violating human rights; and (5) peaceful people from any law and order disturbance, particularly the serious criminal threats (mass riots and organized crimes). The Ministry of Religions Development objectives to pursue from religious affairs by the Ministry of Religions are to realize Indonesian citizens who are religiously pious, modern, prosperous, well-educated and mutually respect with others in social, nation and state life within the Unitary State of Republic of Indonesia. These objectives are focused to reach the vision of the Ministry of Religions, i.e. to forge religiously pious, harmonious, well-educated, self-reliant and spiritually and materially prosperous Indonesian citizens. To materialize such vision, the Ministry of Religion in APBN 2013 will receive budget allocation of Rp.44.0 trillion. This sum is Rp.4.6 trillion of 11.6 percent higher than allocation ceiling for the Ministry of Religions in APBNP 2012 recording Rp.39.4 trillion. This budget comes from rupiah sources Rp.42.8 trillion, non-tax revenue/public service agency (PNBP/BLU) Rp billion, and foreign loans Rp billion to execute several programs of, among other things: (1) hajj and umrah pilgrimage management program; (2) Islamic education program; (3) Christian community development program; (4) Catholic community development program; (5) Hindu community development program; and (6) Buddha community development program. Performance indicators of the above mentioned programs include: (1) hajj dormitory facility/ information and public relation center for embarkartion and information and public relation center (PPIH) in Saudi Arabia consisting of 15 locations and 1,534 persons rehabilitated; (2) the beneficiaries of School Operation Aids (BOS) for Madrasah Ibtidaiyah (MI) students and Madrasah Tsanawiyah (MTs) to reach respectively 3,310,000 persons and 2,762,000 persons; (3) the benefiaries of scholarship facility for university students from low-income households to reach 1,000 persons and certified teachers of Christianity to reach 1,000 persons; (4) the beneficiaries of scholarship facility for university students from low-income households to reach 2,000 persons and aids for 215 Catholic worship places; (5) the benefiaries of scholarship facility for university students from low-income households to reach 2,500 persons and certified Hindu teachers to reach 1,500 persons; and (6) the benefiaries of scholarship facility for university students from low-income households to reach 100 persons and certified Buddha teachers to reach 510 persons. Based on policies and program to be executed by the Ministry of Religions in 2013, the expected outcomes will include: (1) the quality of hajj and umrah pilgrimate services and its information system enhanced; (2) access, quality and competitiveness of Islamic education improved; (3) quality of social counseling for Christian communities and Christian education enhanced; (4) quality of social counseling for Catholic communities and Catholic education enhanced; (5) quality of social counseling for Hindu communities and Hindu education enhanced; and (6) quality of social counseling for Buddha communities and Buddha education enhanced. Financial Notes and Indonesian Budget

179 Chapter IV Central Government Expenditure The Ministry of Transportation Programs and activities of the Ministry of Transportation will be directed to reach its vision, i.e. to deliver reliable, competitive and added value generating transportation services. Reliable transport services are indicated with safe, timely, well-maintained, adequate transport operation covering regions accross the country and able to support national development within the Unitary State of Republic of Indonesia (NKRI). To pursue such vision, the following missions are then formulated: (1) to increase transportation safety and security in attempt to improve transport services; (2) to improve the accessibility of public to transportation services to support inter-region connectivity; (3) to enhance the performance of transportation services; (4) to continue consolidation with restructuring and reform in regulations, institutions and human resources, and consistent law enforcement; and (5) to develop ecotransportation technology as anticipation to climate change. To realize the Government program consistent with Government Development Plan (RKP) 2013 i.e. Reinforcing Domestic Economy for People s Welfare Augmentation and Welfare and to implement development stages as formulated in the fourth RPJMN focusing on NKRI strengthening, human resources quality enhancement, and science and technology development to fortify economic competitiveness, the Ministry of Transportation will take leading roles in national development priorities for the building of competitive domestic economy through agriculture, infrastructure and energy development, particularly to enhance the quality and capacity of transporatation infrastructure development according to the established minimum service standard, to buttress the support of transportation infrastructure to the competitiveness of real sector and to promote investments on transportation infrastructure development and expansion under Public Private Partnership. In light of that, the Workd Plan of the Ministry of Transportation in 2013 is prepared with focuses directed on transporation improvement and development policies as an effort to support new initiatives as leverage for the acceleration and expansion of national economic growth covering: (1) Masterplan for the Acceleration and Expansion of Indonesia s Economic Development (MP3EI) ; (2) Masterplan for Indonesia s Poverty Alleviation Acceleration and Expansion (MP3KI) ; (3) Development Acceleration for Papua and West Papua; (4) sustainable development mainstreaming with national action plan of Reducing Emissions from Deforestation and Forest Degradation; and (5) employment generation. In view of the foregoing conditions, the strategic targets of transportation development according to Perpres 45/2012 on RKP 2013 concern with strategic issues of fortifying competitiveness with infrastructure development acceleration that will support domestic connectivity, i.e.: (1) to realize national navigation fleet segment for domestic routes reaching 100 percent; (2) to reach railway cargo transport segment of 3 percent and railway passengger transport segment of 10 percent; and (3) domestic air passenger transport to grow by 11.5 percent/annum and 13 percent/annum for international air transport. Budget allocation of the Ministry of Transportation will be used to support transportation facility and infrastructure service improvement to reach minimum service standard and to elevate the competitiveness of real sector. In APBN 2013 the Ministry of Transportation is planned to receive budget in amount of Rp.36.7 trillion. This sum is from rupiah sources Rp.33.7 trillion, non-tax revenue (PNBP) and Public Service Agency (BLU) Rp billion and foreign loans Rp.1.4 trillion to execute a number of programs including: (1) human Financial Notes and Indonesian Budget 2013

180 Central Government Expenditure Chapter IV resources development program in transportation sector; (2) land transportation management and operation program; (3) railway transportation management and operation program; (4) sea transportation management and operation program; and (5) air transportation management and operation program. The performance indicators from the implementation of such programs are: (1) participants and graduates of degree transportation education program to reach 164 persons per annum and number of certified graduates of transportation human resources development program to reach 5,292 persons per annum; (2) three packages of urban transport masterplan, urban traffic information master plan, evaluation reports prepared, automatic traffic control system (ATCS) operated, 32 urban transport safety and land traffic safety facilities provided; (3) 84 units of locos, KRDI, KRDE, KRL, railbus, trams and new railways tracks including double tracks of km long procured; (4) 78 routes of pioneer sea transport served and 20 pioneer ships and passenger ships built to support the operation of pioneer sea transport; and (5) 132 pioneer air transport routes served and 120 airports developed and rehabilitated. Based on policies and programs adopted by the Ministry of Transportation in 2013, the expected outcomes will include: (1) human resources with reliable, skilled, expert competency in land, sea, air and railways transport and and highly competitive in supporting the programs and activities of transportation sector; (2) land transportation service performance improved; (3) railways transportation service performance improved; (4) sea transportation service performance improved; and (5) air transportation service performance improved, which are timely scheduled, integrated, safe and comfortable to enhance the efficiency of passenger and cargo movements and to minimize inter-region air transport service and to boost national economy. The Ministry of Health The theme of action program in health sector in RKP 2013 is Emphasizing Health Development through Preventive Approach on Top of Curative Approach, Improving Public Health and Sanitation with Water Suppply Expansion, Slum Area Improvement so as to Elevate Life Expectancy from 70.7 years in 2009 to 72.0 years in 2014, and Realizing the Entire Millennium Development Goals (MDGs) by The vision of the Ministry of Health in Strategic Plan Document is to develop Healthy Population in Self-Reliance and Just Manner. To pursue this vision the Ministry of Health carries missions as follows: (1) to improve public health rate through community empowerment including the participation of private parties and civil society groups; (2) to protect public health with assurance on the provision of complete, equal, quality and just health services; (3) to ensure the provision and distribution of health resources; and (4) to establish good governance. To support such development priorities in health priorities, the Ministry of Healt in APBN 2013 is planned to receive budget Rp.34.6 trillion. This sum reflects an increase of Rp.3.4 billion or 10.8 percent if compared with budget allocation in APBNP 2012 of Rp.31.2 trillion. This budget comes from rupiah sources Rp.28.4 trillion, non-tax revenue/general public agency (PNBP/BLU) Rp.6.0 trillion and foreign loans Rp billion to implement various programs, including: (1) health development program; (2) human resources development and empowerment program in health sector; (3) nutrition and mother and children health development program; (4) pharmateutical and health equipment program; and (5) disease control and sanitation improvement program. Financial Notes and Indonesian Budget

181 Chapter IV Central Government Expenditure Performance indicators of such programs are: (1) 91 puskemas established in inhibited border areas and small islands and 9,323 puskemas delivering basic health services for poor population; (2) 5,320 health operators assigned in isolated, border areas and island and other disease prone regions maximized and granted with incentives; (3) 100 percent of under five malnourished babies treated and 89 percent of maternal mothers served by skilled health operators; (4) 95 percent of medicine and vaccines provided and 90 percent of health equipment and logistics in the markets comply with safety, quality and efficacy requirements; and (5) 99 percent of 0 11 month infants receiving complete basic immunization and 85 percent of zoonosa case found handled according to the standards. Based on policies and programs to be carried out by the Ministry of Health in 2013 the expected outcomes are: (1) basic, referential, traditional, alternative, complementary health initiatives, occupational, sport and matra health improved including the standardization, accreditation and quality of health services; (2) health human resources supply and quality enhanced according to the specified health service standards; (3) supply and affordability of quality health services for all citizens improved; (4) supply of pharmautical and health equipment complying with the standards and affordable by the people improved; and (5) lower prevalence rate, mortality rate and disability rate as a result of diseases. The Ministry of Energy and Mineral Resources In line with the theme and targets of National Development 2013 as prescribed in Government Work Plan 2013, energy and mineral resources mineral plays leading roles in national priorities in terms of two aspects, i.e.: bureaucracy and governance and energy reform with priority theme Realizing National Energy Resilience to Assure National Growth with Institutional Restructuring and Optimun and Broad Consumption of Alternative Energy. It is consistent with the vision of the Ministry of Energy and Natural Resources (ESDM) i.e. realizing energy relisience and self-sufficiency and augmenting the added value of energy and mineral to generate maximum benefits for people. Based on the strategic plan of the Ministry of ESDM and according to the theme of RKP in 2013 and in view of problems and challenges in energy and natural mineral sector, the policies and strategies to take by the Ministry of ESDM in 2013 will be focused on: (1) fuel and electricity subsidy reduction through intensified gas consumption for transportation (gas station development), and for domestic purposes (urban gas distribution networks) and fuel substitution for power generation; (2) increasing electrification ratio by expanding distribution networks and sub-stations in villages, the provision of affordable and saving electricity for the residents of underdeveloped regions and fishermen households, and the construction of renewable energy plants; (3) increasing lifting and oil and gas reserve by evaluating oil and gas reserves and CBM, exploration to look for new oil and gas reserves, improving oil and gas and CBM production sharing contracts; (4) energy diversification with Energy Independent Village (DME) development; geothermal development, geothermal consumption promotion; (5) energy conservation with energy audit, education and socialization of energy conservation; (6) energy infrastructure improvement with the resumption of power generation development, transmission network and sub-station development, Gas station (SPBG) development, urban gas distribution network development and mini LPG plant development; (7) increasing the added values of minerals and coals by augmenting the added values of mine minerals; (8) mineral and coal development and supervision by intensifying production supervision and mineral and coal marketing, national Financial Notes and Indonesian Budget 2013

182 Central Government Expenditure Chapter IV mineral and coal production inventory preparation, potential non-tax revenue inventory and verification from general mining. Budget ceiling of the Ministry of ESDM in 2013 is set at Rp.18.8 trillion. This sum reflects an increase of Rp.2.5 trillion or 15.5 percent higher than allocation of the same ministry in APBNP 2012 earmarked at Rp.16.3 trillion. The said budget comes from rupiah sources Rp.17.1 trillion, non-tax revenue (PNBP) and Public Service Agency (BLU) Rp.1.7 trillion for the execution of some programs including: (1) electricity management program; (2) new renewable energy management program; (3) geological research, mitigation and service program; (4) oil and gas management and supply program; and (5) oil fuel supplies and distribution arrangement and supervision and piped gas transport program. The performance indicators for the implementation of such various programs are: (1) power generation with cap. 188 megawatt, 3,625 kilometer circuit (kms) of transmission networks, main sub-station with cap. 4,740 mega volt ampere, 9.319,8 kms of distribution networks and distribution sub-station with cap mva; and 16,204 customers of affordable and saving electricity program realized; (2) 12 investments and cooperation in bioenergy sector realized and 5 renewable power generator plants developed; (3) geologic information used by 4,000,000 people and more intensive use of regional resources prospects data in 42 mining work areas (WKP) and 74 locations; (4) oil production of thousand BOPD, gas 1,325-1,390 thousand BOEPD and Coalbed Methane (CBM) thousand BOEPD realized; and (5) three special rights for transmission routes and gas distribution network areas and the coverage of fuel distribution supervision system embracing 30 percent of NKRI territories awarded. Based on policies and programs to be carried out by the Ministry of Energy and Mineral Resources in 2013, the expected outcomes are: (1) electrical energy consumption in reliable, safe and environmentally friendly manner; (2) new renewable energy management program and energy conservation realized; (3) the status of database, geological resources, geology based spatial planning and geological disaster mitigation improved; (4) oil and gas production sustainability improved, including the national capacity, fuel supply reliability and efficiency and industrial raw materials, infrastructure reliability and lower occupational accidents and environmental impacts of oil and gas activities; and (5) fuel supplied and distributed throughout NKRI and national fuel reserves allocated. The Ministry of Finance In APBN 2013 the Ministry of Finance is planned to receive budget of Rp.18.2 trillion. This allocation will be used to pursue the vision advocated by the Ministry of Finance i.e. toward trustable and accountable state finance and asset manager for prosperous, democratic and just Indonesia and to materialize the mission of developing sound, sustainable, prudent, responsible fiscal policies; realizing optimum asset management based on functionality principle, legal certainty, transparency, efficiency and accountability; building capital market industries and non-banking institutions as driving and reinforcing force to forge globally competitive national economy, to foster and develop public administration based organizations suitable to the public demands; to build and develop trustable, professional, highly integrated and responsible human resources; and to build and develop modern, integrated financial information system and other strategic facilities and infrastructure. Financial Notes and Indonesian Budget

183 Chapter IV Central Government Expenditure Budget allocated to the Ministry of Finance in 2013 is to rise by Rp.1.3 trillion or 7.8 percent higher than allocation in APBNP 2012 set at Rp.16.9 trillion. The said budget is from rupiah sources Rp.17.8 trillion, public service agencies (BLU) Rp billion and foreign loans Rp billion used to finance the implementation of various programs, inclusive of: (1) tax revenue improvement and safeguarding program; (2) customs and excise collection supervision and service program; (3) state treasury management program; (4) state asset management, state receivable settlement and auction service program; (5) education and training program for the officials of the Ministry of Finance; (6) fiscal policy formulation program; (7) fiscal balance of the Government and regional government management improvement program; (8) state budget management program; (9) accountability supervision and improvement program for officials of the Ministry of Finance; and (10) loan management and financing program. Performance indicators from the implementation of these programs are: (1) percentage of the proposed PP (Government Regulation) and PMK (Regulation of Finance Minister) preparation and revision in taxation I to reach 100 percent; (2) percentage of regulation formulation finalization in custom facility sector to reach 100 percent and the average percentage for the realization of committed custom facility services to reach 85 percent; (3) the timely finalization of 3 documents, i.e. LKPP and draft PP on APBN and APBN-P and remuneration revenue for the short-term savings, deposits and investments (idle cash KUN) to amount Rp.4.0 trillion; (4) the utilized state assets to reach Rp trillion and recovery proceeds from APBN expenditures to amount Rp billion; (5) the percentage of STAN diploma program graduates with minimum academic achievement good to reach 87.5 percent; (6) rupiah exchange rate deviation of 5 percent and the percentage of fiscal risk budget reserve used to reach 90 percent; (7) the percentage of accurate amount of transfer to regions proceeds to reach 100 percent and the percentage of Regional Regulation (Perda) on PDRD in accordance with laws and regulations to reach 90 percent; (8) draft Financial Notes, APBN and Bill APBN (APBNP) timely prepared with accurate amounts (100 percent); (9) the percentage of proven investigation to reach 90 percent and 30 policy recommendations from supervision; and (10) the percentage of timely financial and BMN reconciliation and of integrated debt database development to reach respectively 100 percent. Based on policies and programs to be executed by the Ministry of Finance in 2013, the expected outcomes include: (1) more optimum tax revenues; (2) custom and excise administrator providing facilitation to industries, trades and communities and revenue optimizing; (3) state treasury management in professional, transparent and accountable fashion according to the laws; (4)professional, sound, maximum and optimum state asset management, state receivable settlement and auction services capable of building good image to stakeholders; (5) human resources with high integrity and competency; (6) sustainable fiscal policies with measurable fiscal risks for stabilitation and economic growth; (7) effectiveness and efficiency of financial relation management of the Government and regional governments enhanced; (8) budgeting function excercised according to the laws and Government s policy; (9) added value generating supervision through efficiency enhancement in risk management process, controlling and governance and accountability of officials within the Ministry of Finance; and (10) optimum management of Government Bonds (SBN) or loans to secure APBN financing Financial Notes and Indonesian Budget 2013

184 Central Government Expenditure Chapter IV The Ministry of Agriculture In the fourth stage of RPJMN ( ) agriculture development remains to play strategic roles in national economy. These strategic roles are evident from concrete contribution for capital formation, food supplies, industrial raw material supplies, foods and energy, employment absorption, soucers of foreign exchange and income sources, and environmental preservation with environmentally friendly farming practices. The theme of action program in agriculture sector as prescribed in RKP 2013 is Bolstering Food Resilience and Continuing Agriculture and Fishery Revitalization toward Food Sufficiency, Competitiveness Improvement of Agriculture Products; Farmer Income Augmentation; and Environmental and Natural Resources Preservation; GDP of agriculture sector to grow by 3.9 percent; Farmer Exchange Rate index above 105 and Fishermen Exchange Rate index above 105. Based on evaluation to agriculture development that has been made to date, there are still many fundamental issues requiring more careful and proper management including: (1) the increasing food demands in line with the growing population and income of people; (2) fluctuation of prices and good supplies due to international market impacts; (3) the depleting land, water and energy resources; (4) global climate change, (5) small status and area of lands, (6) limited capacity in national hutchery and seedling system, (7) limited farmer access to capital, and (8) weak institutional capacity of farmers and extension agents. With the ratification of ASEAN-China Free Trade Area since 2010, and to face ASEAN- India Free Trade Area in 2011, ASEAN Economic Community in 2015, and global trade agreement set up by WTO that will take into effect starting in 2010, the distribution of goods and services will be more freely flowing between the countries ratified such agreements including agriculture products. Indonesia should not deemed this issue as a challenge only but at the same time as an opportunity to expand its specialty products. It is consistent with the vision of the Ministry of Agriculture i.e. Developing Superior Sustainable Industrial Agriculture based on Local Resources to Fortify Food Sufficiency, Added Values, Competitiveness, Export and Farmers Welfare. The Ministry of Agriculture has proclaimed four agriculture development targets knows as three success targets, namely: (1) sustainable food resilience and self sufficiency; (2) food diversification; (3) added value, competitiveness and export building; and (4) farmers welfare augmentation. To support the vision and missions of the Ministry of Agriculture, in APBN 2013, the Ministry of Agriculture is planned to receive budget Ro.17.8 trillion. This sum is Rp billion or 4.2 percent higher that the agriculture budget allocated in APBNP 2012 of Rp.17.5 trillion. The said budget comes from rupiah sources Rp.17.5 trillion, non-tax revenue (PNBP)/Public Service Agency (BLU) Rp.91.6 billion, and foreign loans Rp billion used to execute a number of programs such as: (1) food crop production, productivity and quality improvement program to achieve sustainable food resilience and food self-sufficiency; (2) agriculture infrastructure and facility provision and development program; (3) beef self-sufficiency and safe, healthy, wholesome and hala animal food supplies; (4) technology development and highly competitive superior agriculture varieties development program; (5) agriculture human resources and farmer institution development program; and (6) sustainable plantation plant production, productivity and quality improvement program. Performance indicators for the implementation of these programs are: (1) 112,625 tons of high quality seeds under direct aid mechanism distributed to integrated plant management Financial Notes and Indonesian Budget

185 Chapter IV Central Government Expenditure field schools (SLPTT) and non SLPTT schools (paddy) and 703 units of post harvest facilities; (2) 146,770 ha of lands optimized, conserved, rehabilitated and reclaimed and million tons of fertilizer subsidized; (3) cattle breeding to produce 3.1 million heads of young cattle and the control, prevention and eradication of zoonosis contagious diseases attacking animals (PHMSZ), viral, bacteria, parasite and reproduction disruption of 8.98 million doses; (4) 13 new high quality varieties of food crops and 10 high quality variety of plantation plants invented; and (5) coffee export development in 3,540 ha of land. Based on policies and programs to be performed by the Ministry of Agriculture in 2013, the expected outcomes are: (1) food crop farming expanded supported with post-harvest management system and seed supplies and efficient production safeguarding to realize sustainable and adequate food crop production; (2) agriculture facility and infrastructure provision and development realized with land expansion and management, agriculture financing facility, fertilizer and pesticide facilitation, and agriculture equipment and machine facilitation; (3) animal food supplies improved (meat, eggs, milk) and higher contribution of domestic livestock in the provision of animal food supplies (meat and eggs); (4) agriculture technology innovation and dissemination; and (5) sustainable plantation plant production, productivity and quality. In addition, to support the policy of deconcentration fund reallocation and co-administration tasks that have been delegated to regions to DAK (Special Allocation Fund), in APBN 2013 the Ministry of Agriculture is planned to transfer its activities to DAK worth of Rp billion. TABLE 4.12 EXPENDITURE BUDGET FOR MINISTRIES/AGENCIES, (miliar rupiah) NO BA CODE MINISTRIES/AGENCIES (K/L) APBNP 2012 APBN PEOPLE'S ASSEMBLY COUNCIL (MPR) 623,2 732, HOUSE OF REPRESENTATIVES (DPR) 2.706, , SUPREME AUDITOR (BPK) 2.674, , SUPREME COURT (MA) 5.055, , ATTORNEY GENERAL'S OFFICE (KEJAKSAAN AGUNG) 3.789, , STATE SECRETARIATE MINISTRY 1.977, , THE MINISTRY OF HOME AFFAIRS , , THE MINISTRY OF FOREIGN AFFAIRS 4.996, , THE MINISTRY OF DEFENSE , , THE MINISTRY OF LAWS AND HUMAN RIGHTS 6.949, , THE MINISTRY OF FINANCE , , THE MINISTRY OF AGRICULTURE , , THE MINISTRY OF INDUSTRIES 2.443, , THE MINISTRY OF ENERGY AND MINERAL RESOURCES , , THE MINISTRY OF TRANSPORTATION , , THE MINISTRY OF EDUCATION AND CULTURE , , THE MINISTRY OF HEALTH , , THE MINISTRY OF RELIGIONS , , THE MINISTRY OF MANPOWER AND TRANSMIGRATION 4.101, , THE MINISTRY OF SOCIAL AFFAIRS 4.549, , THE MINISTRY OF FORESTRY 5.686, , THE MINISTRY OF MARINE AND FISHERY 6.014, , THE MINISTRY OF PUBLIC WORKS , , THE COORDINATING MINISTRY FOR POLITICS, LAWS AND SECURITY 405,1 518, THE COORDINATING MINISTRY FOR ECONOMY 212,0 281, THE COORDINATING MINISTRY FOR SOCIAL WELFARE 222,3 298, Financial Notes and Indonesian Budget 2013

186 Central Government Expenditure Chapter IV TABLE 4.12 EXPENDITURE BUDGET FOR MINISTRIES/AGENCIES, (miliar rupiah) NO BA CODE MINISTRIES/AGENCIES (K/L) APBNP 2012 APBN THE MINISTRY OF TOURISM AND CREATIVE INDUSTRIES 2.672, , THE MINISTRY OF STATE OWNED ENTERPRISES 111,3 143, THE MINISTRY OF RESEARCH AND TECHNOLOGY 639,8 653, THE MINISTRY OF ENVIRONMENT 738,6 921, THE MINISTRY OF COOPERTIVE, SMALL AND MEDIUM ENTERPRISES 1.387, , THE MINISTRY OF WOMEN EMPOWERMENT AND CHILD PROTECTION 150,9 234, THE MINISTRY OF STATE APPARATUS PERFORMANCE IMPROVEMENT AND BUREAUCRACY REF 131,4 201, STATE INTELLIGENCE AGENCY 1.484, , STATE CRYPTOGRAM AGENCY 1.758, , NATIONAL DEFENSE AGENCY 31,1 38, CENTRAL BUREAU OF STATISTICS 2.272, , THE MINISTRY OF NATIONAL DEVELOPMENT PLANNING 755, , NATIONAL LAND AGENCY 3.881, , NATIONAL LIBRARY 348,0 478, THE MINISTRY OF COMMUNICATION AND INFORMATICS 3.090, , NATIONAL POLICE , , DRUG AND FOOD SUPERVISION BODY 1.079, , NATIONAL RESILIENCE BODY 174,2 235, CAPITAL INVESTMENT COORDINATING BODY 650,7 705, NATIONAL NARCOTICS BODY 841, , NATIONAL NARCOTICS BODY 1.153, , NATIONAL DEMOGRAPHY AND FAMILY PLANNING BODY 2.110, , NATIONAL COMMISSION FOR HUMAN RIGHTS 53,7 72, METEOROLOGY, CLIMATOLOGY AND GEOPHYSICS BODY 1.284, , KOMISI PEMILIHAN UMUM 1.625, , MAHKAMAH KONSTITUSI RI 221,8 199, PUSAT PELAPORAN DAN ANALISIS TRANSAKSI KEUANGAN 73,1 79, LEMBAGA ILMU PENGETAHUAN INDONESIA 761,7 891, BADAN TENAGA NUKLIR NASIONAL 637,1 668, BADAN PENGKAJIAN DAN PENERAPAN TEKNOLOGI 808,6 888, LEMBAGA PENERBANGAN DAN ANTARIKSA NASIONAL 491,9 526, BADAN KOORDINASI SURVEI DAN PEMETAAN NASIONAL 535,9 602, BADAN STANDARDISASI NASIONAL 74,2 98, BADAN PENGAWAS TENAGA NUKLIR 72,0 159, LEMBAGA ADMINISTRASI NEGARA 243,6 247, ARSIP NASIONAL REPUBLIK INDONESIA 130,3 154, BADAN KEPEGAWAIAN NEGARA 486,9 535, BADAN PENGAWASAN KEUANGAN DAN PEMBANGUNAN 1.050, , KEMENTERIAN PERDAGANGAN 2.441, , KEMENTERIAN PERUMAHAN RAKYAT 5.928, , KEMENTERIAN PEMUDA DAN OLAH RAGA 1.757, , KOMISI PEMBERANTASAN KORUPSI 634,5 706, DEWAN PERWAKILAN DAERAH (DPD) 589,8 595, KOMISI YUDISIAL REPUBLIK INDONESIA 77,4 91, BADAN NASIONAL PENANGGULANGAN BENCANA 1.128, , BADAN NASIONAL PENEMPATAN DAN PERLINDUNGAN TENAGA KERJA INDONESIA 265,9 392, BADAN PENANGGULANGAN LUMPUR SIDOARJO (BPLS) 1.533, , LEMBAGA KEBIJAKAN PENGADAAN BARANG/JASA PEMERINTAH 183,4 211, BADAN SAR NASIONAL 992, , KOMISI PENGAWAS PERSAINGAN USAHA 113,5 119, BADAN PENGEMBANGAN WILAYAH SURAMADU 268,2 399, OMBUDSMAN REPUBLIK INDONESIA 58,8 67, BADAN NASIONAL PENGELOLA PERBATASAN 197,7 274, BADAN PENGUSAHAAN KAWASAN PERDAGANGAN BEBAS DAN PELABUHAN BEBAS BATAM 735,3 885, BADAN NASIONAL PENANGGULANGAN TERORISME 92,8 152, SEKRETARIAT KABINET 197,2 213, BADAN PENGAWAS PEMILIHAN UMUM 53,1 856, LEMBAGA PENYIARAN PUBLIK RADIO REPUBLIK INDONESIA 769,0 985, LEMBAGA PENYIARAN PUBLIK TELEVISI REPUBLIK INDONESIA 753,2 864, BADAN PENGUSAHAAN KAWASAN PERDAGANGAN BEBAS DAN PELABUHAN BEBAS SABANG - 392,2 JUMLAH , ,6 Source: the Ministry of Finance Financial Notes and Indonesian Budget

187 Chapter IV Central Government Expenditure State General Treasury Budget Section (BA BUN) Apart from budget allocation through Ministries/Agencies (K/L) Budget Section, the Central Government Expenditure is allocated under State General Treasury Budget Section (BA BUN 999) managed by the Minister of Finance in the capacity of fiscal manager. In APBN 2013 allocation for BA BUN is earmarked at Rp trillion (48.5 percent of Central Government Expenditure). This budget will be allocated for, among other things,: (1) the compliance of Government s obligations to other parties such as pension payment to the retired persons, health insurance for public servants, and loan interest payment; (2) the distribution of various types of subsidies; and (3) reserve fund allowance for emergency such as for the anticipation of risks arising from the mismatch of macroeconomic assumptions and their realization, and reserve fund for naturan disaster management. BA BUN in Central Government Expenditure is recorded into several budget section classification as follows. BA BUN of the Government Loan Management collects loan interest payment as debt services that must be complied with by the Government for the withdraw of loans in the past. This interest payment is an instrument to maintain economic stability from which the investors, foreign and domestic creditors, and other international agencies can assess the credibility of the Government from its capacity in complying with the debt services in timely fashion. In view of some relevant variables loan interest payment in APBN 2013 has been allocated to amount Rp trillion. This allocation is for the payments of domestic loan interest Rp.80.7 trillion and foreign loan interests Rp.32.5 trillion. BA BUN for Grant Management collects the allocation of budget for grant spending, which in APBN 2013 is earmarked Rp.3.6 trillion. This grant spending budget is to support grant spending policy to regions in 2013 aiming to augment the capacity of regional governments in providing basic public services in transportation sector, water supply facility development, waste water management, irrigation, sanitation, and geothermal exploitation. Budget allocation through BA BUN, which is very significant is for subsidies collected in BA BUN for subsidy spending management. Subsidy spending aims to maintain the price stability of domestic goods and services, to give protection to low-income people, to increase agriculture production and to provide incentive for business world and the communities in general. In APBN 2013 budget for subsidies amounts Rp trillion. This allocation is planned to be extended for energy subsidy Rp trillion, i.e. fuel subsidy Rp trillion and electricity subsidy Rp.80.9 trillion. Meanwhile, the other Rp.42.5 trillion is planned for non-energy subsidy including: (1) food subsidy Rp.17.2 trillion; (2) fertilizer subsidy Rp.16.2 trillion; (3) seed subsidy Rp.1.5 trillion; (4) PSO subsidy Rp.1.5 trillion; (5) program credit interest subsidy Rp.1.2 trillion; and (6) tax subsidy Rp.4.8 trillion. Meanwhile in APBN 2013, BA BUN for Other Spending Management is to collect sosical contribution for the premium of health insurance of public servants Rp.3.0 trillion, reserve fund for natural disaster management Rp.4.0 trillion, and other spendings Rp trillion. Reserve fund for natural disaster management will be used to protect the affected people against impacts of natural disaster. The activities to perform are pre-disaster stage, for example, prevention and preparedness in dealing with the disaster, response emergency stage and post-disaster recovery with rehabilitation and reconstruction activities. Other spendings in BA BUN for Other Spending Management in 2013 is to collect all Central Government expenditures allocated to finance certain activities, i.e. for the operation of 4-84 Financial Notes and Indonesian Budget 2013

188 Central Government Expenditure Chapter IV agencies not yet have separate budget section code, ad-hoc activities, fiscal risk reserve fund, and anticipation of urgent needs for governance operation. The allocation of other spending budget in BA BUN of Other Spending Management consists of fiscal risk reserve fund (policy measures) Rp.5.5 trillion; (2) other spendings Rp trillion. Fiscal risk reserve fund is for the anticipation of the Government against deviation as a result of changing macroeconomic assumptions from the previously set parameters, which is expected to affect the APBN posture such as assumptions of economic growth, rupiah exchange rate to US dollar, and target oil lifting. In light of that the Government will allocate budget for food price stabilization to anticipate the impacts of soaring food prices in global markets, which are worried to hamper national food resilience, and reserve fund for land capping risks as Government s financing support for land acquisition in toll road development. Other spendings are budget allocation to meet ad-hoc spending necessities, which are expected not to repeat in future, operational spendings for agencies not yet have separate Budget Section (BA), and other unexpected spendings required to run the governance. Pursuant to PMK (Regulation of Finance Minister) Number 234/PMK.05/2011 concerning Special Transaction Accounting System, as from fiscal year 2012, spendings for international cooperation and pension payments will be part of BA BUN for Special Transaction Management. In APBN 2013 this BA BUN receives budget allocation in amount of Rp trillion, which in majority consists of social constribution to comply with the Government s obligations on pension payment Rp trillion and the remaining Rp billion is contribution to international agencies not yet accommodated in BA K/L Central Government Expenditure Budget by Types In APBN 2013, the Central Government expenditure budget is to rise by Rp.1,154.4 trillion (12.5 percent of GDP) higher than its allocation in APBNP 2012 Rp.1,069.5 trillion (12.5 percent of GDP). According to Law Number 17 of 2003 concerning State Finance, this sum shall be allocated into 8 types of spendings subject to their economic characters, i.e. personnel expenditure, material expenditure, capital expenditure, loan interest payment, subsidies, grant spending, social aids and other spendings. The composition of Central Government expenditure allocation in 2013 by economic classification is presented in Table 4.13 and Graph TABLE IV.13 CENTRAL GOVERNMENT EXPENDITURE TREND, (trillion rupiah) No. Description APBN % thd PDB APBNP % thd PDB APBN % thd PDB 1. Personnel expenditure 215,9 2,7 212,3 2,5 241,6 2,6 2. Material expenditure 188,0 2,3 162,0 1,9 200,7 2,2 3. Capital expenditure 152,0 1,9 176,1 2,1 184,4 2,0 4. Loan interest expenditure 122,2 1,5 117,8 1,4 113,2 1,2 5. Subsidies 208,9 2,6 245,1 2,9 317,2 3,4 6. Grants expenditure 1,8 0,0 1,8 0,0 3,6 0,0 7. Social Adis 47,8 0,6 86,0 1,0 73,6 0,8 8. Other expenditure 28,5 0,4 68,5 0,8 20,0 0,2 Total 965,0 11, ,5 12, ,4 12,5 Source: the Ministry of Finance Financial Notes and Indonesian Budget

189 Chapter IV Central Government Expenditure Personnel Expenditure 21% GRAPH 4.41 CENTRAL GOVERNMENT EXPENDITURE COMPOSITION BY ECONOMIC CLASSIFICATION, 2013 Material Expenditure 17% Other Expenditure 02% Social Adis 06% Grant Expenditure 00% Source: the Ministry of Finance By composition, subsidy allocation in 2013 is the highest portion of central government expenditure by 27.5 percent, followed with personnel expenditure (20.9 percent), and material expenditure (17.4 percent), and capital expenditure (16.0 percent). The lower proportion of capital expenditure than that of material expenditure in central government expenditure is not indicating favoritism to goverment apparatus and less attention of the Government in pushing economic growth. These proportions have been classified according to the universally accounting system and not fully reflected the implementation of Government s programs. For example, not all proceeds of capital expenditure will be used to finance infrastructure development, and similarly material expenditure budget will not be expended totally to pay Government s apparatus. Some parts of capital expenditure proceeds will be expended to support the Government s apparatus such as for the procurement of computer. On the other side, some material expenditure will be allocated to purchase assets for transfer to the people that will generate significant impacts to the economy. The roles of the Government in economy can be seen from Government s investment expenditure analysis (which is not completely similar to capital expenditure) as pointed out in Box The sum of Central Government expenditure in APBN 2012 is in majority or around 65.0 percent (Rp trillion) consists of compulsory expenditures that must be met (personnel, operational material, subsidies, loan interest payment and social aids for natural disaster management reserve); with the other 35.0 percent (Rp trillion) for discretion spendings of the Government (non-operational materials, part of social aids, grant spending and other spendings) as presented in Graph It indicates that efforts taken to enhance efficiency and effectiveness of government expenditures must be continued. Elucidation of Central Government expenditure budget for individual types of spendings is presented below. Personnel Expenditure Capital Expenditure 16% Interest Payment 10% Subsidy 27% GRAPH 4.42 CENTRAL GOVERNMENT EXPENDITURE COMPOSITION BY MANDOTARY/NON- MANDATORY SPENDING, 2013 Non- Mandatory Spending 35% Source: the Ministry of Finance Mandatory Spending 65% Personnel expenditure is spending used to finance compensation in the form of money or goods to government officials, either still active or retired as compensation and reward of their services. Budget allocated for personnel expenditure in APBN 2013 is planned to reach Rp trillion or 2.6 percent of GDP. In nominal wise, this sum is to increase by 13.6 percent (Rp.29.4 trillion) if compared with allocation in APBNP 2012 reaching Rp trillion (2.5 percent of GDP). It particularly relates with policy measures taken by the Government in bureaucracy reform either to improve and maintain the welfare of Government officials and the retired 4-86 Financial Notes and Indonesian Budget 2013

190 Central Government Expenditure Chapter IV officials or to enhance the quality of public services. This budget increase for personnel expenditure in APBN 2013 takes place in all personnel expenditure components, i.e. salaries and allowances, honorarium, vacation, overtime, etc., and social contribution. Budget for salary and allowance in APBN 2013 is earmarked at Rp trillion or 46.6 percent of total personnel expenditure. This allocation is to rise by Rp.11.4 trillion or 11.2 percent higher than the ceiling of APBNP 2012 recording Rp trillion. This increase is particularly due to policy of increasing basic salary by 7.0 percent on the average and the budget reserve allowance to anticipate salary payments of new officials in various Central Government institutions in order to enhance the quality of public services and replace officials entering pension age. For honorarium, vacation, overtime etc. APBN 2013 has allocated a budget of Rp.51.6 trillion or 21.4 percent of total personnel expenditure. This budget is Rp.9.9 trillion or 23.7 percent higher than APBNP 2012 recording Rp.41.7 trillion. The increase is mainly attributed to budget allocation for remuneration to some ministries/agencies as the implication of total bureaucracy reform in Budget allocated to social contribution, which will be used, among others, to pay pensions and health insurance, in APBN 2013 is planned to reach Rp.77.3 trillion or 32.0 percent of total personnel expenditure. This budget is in nominal term to increase Rp.8.1 trillion or 11.7 percent higher than its allocation in APBNP The increase is due to higher basic pension of 7.0 percent on the average. Material Expenditure Material expenditure is spending for the purchase of consumable goods and/or services for the production of tradable and/or non-tradable goods/services for the transfer or sold to the public other than social aids spending and duty travel spending. Material expenditure consists of: (1) operational good spending, (2) non-operational good spending, (3) Public Service Agencies (BLU), and (4) good spending for transfer to the public. Budget allocation for material expenditure in RAPBN 2013 is planned to reach Rp trillion or 2.2 percent of GDP. The allocation of material expenditure budget in 2013 is more focused on Government s initiatives to: (1) maintain well-advanced governance operation to enhance the quality of public services to the communities; (2) improve efficiency and effectiveness of K/L material expenditure; (3) maintain state assets with routine maintenance to roads/bridges/other infrastructure assets; and (4) capacity building to support national development program. This material expenditure of Rp trillion is also to collect some spendings of capital character or classified as Government investment spending. Material expenditure of this Governmet investment spending include: (1) the procurement of other physical goods for co-administration tasks; (2) consultant fees for intellectual rights; (3) professional services for capacity building; (4) maintenance cost to maintain asset values; and (5) the procurement of goods for transfer to the public or other entities, not classified as social aids (see elucidation in Box 4.2). Financial Notes and Indonesian Budget

191 Chapter IV Central Government Expenditure Capital Expenditure Capital expenditure is budget used to acquire or add fixed assets or other assets generating benefits more than one accounting period and exceeds the minimum capitalization threshold of fixed assets and other assets established by the Government. The said fixed assets will be used for the operation of day-to-day activities of a working unit, but not for sales. Budget for capital expenditure along with material expenditure will be allocated to various development programs according to the theme and priorities of development as prescribed. Budget allocation for capital expenditure in APBN 2013 is set at Rp trillion or 2.0 percent of GDP. Nominally, this sum shows an increase of Rp.8.3 trillion or 4.7 percent higher than allocation in APBNP 2012 recording Rp trillion (2.1 percent of GDP). capital expenditure budget in APBN 2013 is planned to: (1) support funding for basic infrastructure development (energy, transporation, irrigation, food resilience, housing, water supply and communication infrastructure); (2) improve the roles of capital expenditure, especially in infrastructure provision to support MP3EI progra and promote Government s investments; (3) support security stability with accelerated achievement to Minimum Essential Force (MEF); (4) support funding for multiyear activities to maintain the sustainability of program and development financing; and (5) increase the mitigation and adaptation capacity to the negative impacts of climate change. In addition, on top of budget allocation for capital expenditure Rp trillion there is BA BUN budget allocation for: (1) shelter mapping and development in disaster prone regions; (2) livestock raising development (cow ranches in Nusa Tenggara Timur and West Papua); (3) development acceleration in Madura; (4) development acceleration in Papua Province and West Papua Province (P4B); (5) the completion of housing development in Nusa Tenggara Timur. The said BA BUN budget is potential to increase the capital expenditure budget. In line with the increasingly allocation for capital expenditure, the Government consistently attempts to raise budget allocation for more productive activities, especially in infrastructure development. This Government s attempt is reflected from the trend of budget earmarked for infrastructure development/improvement. In 2013, this effort is focused on the development of infrastructure with strong driving force to economic growth such as electricity, roads, ports, and infrastructure in 6 (six) economic corridors. Further description on infrastructure budget can be seen in Box 4.1. Apart from capital expenditure budget of Rp trillion there is expenditure budget of capital character or classified as Government investment spending, which according to Government Accounting Standard is recorded as material expenditure or social aid spending. This material expenditure include: (1) the procurement of other physical goods for coadministration tasks; and (2) the procurement of goods for transfer to the public or other entities, not classified as social aids (see elucidation in Box Financial Notes and Indonesian Budget 2013

192 Central Government Expenditure Chapter IV Box 4.1. INFRASTRUCTURE BUDGET IN APBN Law Number 17 of 2003 concerning State Finance spells out that the Central Government Expenditures shall be also classified by organization, functions and types of spending. expenditure classification by organization is to break down expenditure by K/L (ministries/agencies) or general treasury budget section (BA BUN). Meanwhile expenditure classification by function details 11 functions illustrating various aspects of governance in public service delivery and people s welfare augmentation. These elevent functions are: (1) public service function; (2) defense function; (3) law and order function; (4) economic function; (5) environmental function; (6) housing and public facility function; (7) health function, (8) tourism and cultural function; (9) religion function, (10) education function; and (11) social protection function. Economic classification is the breakdowns of central government expenditure in eight types of spending inclusive of personnel spending material spending; capital spending; interest payment; subsidies; grant spending; social aids; and other spending. However, during the discussion of national development programs and their budget, data on the trend of budget allocation and realization in APBN for activities in certain sectors will be also necessary to take decision. Budget information in certain sectors in APBN which is relatively significant is budget to support infrastructure development (hereinafter referred to as infrastructure budget). Since infrastructure is a terminology of one of development output, information on infrastructure budget must be prepared as an attempt to support the introduction of performance based budgeting, in a sense that budget that has been or will be prepared must be attached with the realization and target to achive in infrastructure sector. In addition, information of infrastructure budget can be also used to express accountability and/or commitment of the Government for national development targets in infrastructure, including economic growth, workforce employment. In terms of economic substance, apart from the urgent need, infrastructure development is believed as the most effective driving force for overal economic development. Moreover, information on infrastructure budget is expected capable of enriching and expanding public perception on the roles and efforts of the Government in stimulating the economy that thus far is more viewed from the sum of capital expenditure, in which budgeting performance is more assessed based on input (input based). For example, not all capital expenditure budget will be used to develop infrastructure, such as computer procurement, on the other side, not all proceeds for non-capital expenditure (e.g. material spending) will be used for infrastructure development, let s say consulting services. The logical consequence, seriour efforts by the Government in pushing infrastructure development will not only increase capital expenditure but also can create additional types of spending. Likewise, significant increase in capital expenditure allocation will not always rise significatnly budget for infrastructure development. Infrastructure development covers the construction of facilities and services for water resources, irrigation, transportation, housing and settlement, communication and informatics, and lands and spatial planning. Infrastructure budget in APBN will be comprehensively compiled not only cover government expenditure but also budget financing. For central government expenditure, infrastructure budget may come from central government expenditure either through ministries/agencies (K/L) or Non-K/L. As to transfer to regions, infrastructure budget may be from special allocation fund in sectors related to infrastructure. For budget financing, the infrastructure spending may consist of Government investments in infrastructure, revolving fund for land acquisition, and State Capital Participation in PT Sarana Multi Infrastruktur (PT SMI) or PT Penjaminan Infrastruktur Indonesia (PT PII). Financial Notes and Indonesian Budget

193 Chapter IV Central Government Expenditure Infrastructure budget through K/L is mainly allocated to some K/Ls with the primary function in infrastructure sector and/or supporting the implementation of infrastructure development. For example, the Ministry of Public Works, the Ministry of Transportation (for road and transportation infrastructure) and the Ministry of Energy and Mineral Resources (for energy infrastructure) will be categorized under infrastructure budget through K/Ls. For non-k/l budget, the infrastructure budget will be allocated for the development of Bintan and Karimun areas and land capping risks in other expenditure post. The allocation orientation of infrastructure budget is expected to more secure the realization of development targets and at the same time to respond various challenges in infrastructure sectors as set out in Government Work Plan (RKP). For example, in RKP 2013, one challenge that must be addressed in national development in the exceeding logistic costs between regions throughout Indonesia causing inefficiency. In dealing with this challenge and supporting the focused infrastructure development priority, support for real sector competitiveness improvement and the provision of basic infrastructure for people welfare augmentation, sustainable infrastructure provision and domestic connectivity will garner great attention from the Government with regular restructuring and revision. The trend of infrastructure budget in APBN from is presented in Graph. Budget Allocation for Loan Interest Payment For the last few years, the Government has introduced deficit budget policy aimed at achieving economic growth up to the specified target. Such policy requires adequate financing sources to cover the predetermined deficit either from loans or non-loans. However, the non-loan financing sources are getting scarcer. Thus, the Government has to use loans to finance the deficit. Consequently, the outstanding loans are steadily increasing from year to year with immediate consequence of heavier loan burders that must be shouldered by the Government. This upward burden comes from higher interests of outstanding loans and expenses for new loan procurement. Loan interest is part of debt services that must be complied with by the Government, apart from the principal on due. Besides, the investors, foreign and domestic creditors and other international agencies will assess the credibility of the Government from its timely compliance to debt services. Given that, it is deemed necessary to plan loans in prudent and meticulous manner to assure that financial liabilities of debt services in future will remain within the economic capacity without exerting excessive pressure to ABPN and Balance of Payment. In calculating the loans, some variables should be taken under considerations, including: (1) the assumption of rupiah exchange rate to US dollar and some other hard currencies; (2) 3- Month SPN rate used as reference for variable rate SBN; (3) the assumption of Libor rate as reference in calculating loan instruments; (4) outstanding loans; and (5) the estimate of new loans in Based on the foregoing variables, the Government will allocate budget for loan interest expenditure in APBN 2013 worth of Rp trillion or 1.2 percent of GDP. The payment of loan interest in 2013 can be seen in Table (Rp trillion) Infrastructure Budget Trend, , ,6 6, ,5 6, Infrastructure Budget Source: the Ministry of Finance Economic Growth, RHS 8,00 6,00 4,00 2,00,00 (%) 4-90 Financial Notes and Indonesian Budget 2013

194 Central Government Expenditure Chapter IV TABLE 4.14 LOAN INTEREST PAYMENT, (billion rupiah) Description APBN APBNP APBN Loan Interest Payment , , ,8 i. Domestic , , ,3 ii. Foreign , , ,5 Factors influencing: - Average rupiah exchange rate (Rp/US$) 8.800, , ,0 - Average 3-Month SBN Rate (%) 6,0 5,0 5,0 Loan Financing: (trillion rupiah) 133,6 156,2 161,4 i. SBN issuance (netto) 134,6 159,6 180,4 ii. Domestic loan drawing (netto) 0,9 1,0 0,5 iii. Foreign loan drawing (netto) (1,9) (4,4) (19,5) These loan interest liabilities are for the payments of domestic loan interests Rp.80.7 trillion and foreign loan interests Rp.32.5 trillion. As to the former it decreases by Rp.4.0 trillion if compared with the previous year s allocation. In nominal wise, the payment of domestic loan interest is a little bit higher than that of foreign loan interest. It is because of higher domestic loans on due, and Government s policy more prioritizing loans from domestic sources. Consequently the outstanding domestic loans are increasing, especially Domestic SBN and other domestic loans. Another factor concerns with soft loans with lighter terms and conditions that will minimize the percentage of foreign loan interest. In the mean time, domestic loan interest liabilities are anticipated to fall by Rp.0.5 trillion, It is attributed to lower costs for International SBN issuance and lower foreign loan interest references. The issuance of International SBN is consistent with the Government s policy of preventing crowding out effect and abating dependency on foreign creditors. Generally speaking, the Sovereign Credit Rating dan Country Risk Classification (CRC) of Indonesia is constantly bolstering from year to year and positively affecting loan procurement by the Government, which is getting more efficient, either during SBN issuance or loan withdraw. Rating promotion of 1 notch is potential to reduce the yield of new International SBN around bps, with a decrease of 1 level CRC will be potential to cut expenses of foreign loans, especially new export credit facilities at bps. The Indonesia s rating position in 2012 was at BBB- (Fitch), BB+ with positive outlook (S&P) and Baa3 (Moody), and lastly level3 (CRC). Budget Allocation for Subsidy Expenditure Subsidy in the Government expenditure is allocated to abate people s burden in accessing basic needs, and to maintain the productivity of producers, especially those producing basic necessities at affordable rate. Subdity is granted to maintain price stability of domestic goods and services, to protect low-income people, to increase agriculture production, and to give incentives for business world and communities. It is expected that with such subsidy the basic needs can be supplied in adequate quantity with stable prices and affordable by people. Financial Notes and Indonesian Budget

195 Chapter IV Central Government Expenditure For subsidy budget allocation in 2013, the subsidy expenditure policy will be focused to: (1) control subsidy so as to increase significantly capital expenditure in medium term and fortify competitiveness; (2) reduce fuel consumption in power generation plants by intensifying the consumption of coals, gas, geothermal, water and biodiesel including solar energy; (3) bolster food resilience; and (4) fortify business competitiveness and access to UMKM capital sources with interest subsidy aid of program credits such as KKPE, KPEN-RP, and KUPS. With such policies, budget allocated for subsidy in APBN 2013 is earmarked at Rp trillion (3.4 percent of GDP). This sum is to rise by Rp.72.1 trillion if compared its ceiling in APBNP 2012 recording Rp245.1 trillion. The majority of budget allocation for subsidy in APBN 2013 will be channelled as energy subsidy Rp trillion, i.e. fuel subsidy, 3-kg LPG and LGV subsidy totalling Rp trillion, and electricity subsidy Rp80.9 trillion. As to nonenergy subsidy, it amounts Rp.42.5 trillion consisting: (1) food subsidy Rp.17.2 trillion; (2) fertilizer subsidy Rp.16.2 trillion; (3) seed subsidy Rp.1.5 billion; (4) PSO subsidy Rp.16.2 trillion; (5) interest subsidy for program credits Rp.1.2 trillion; and (6) tax subsidy Rp.4.8 trillion (see Graph 4.43). Energy Subsidy Subsidi BBM; Rp193,8 T GRAPH 4.43 SUBSIDY SPENDING COMPOSITION 2013 Subsidi Energi; Rp274,7 T Subsidi Listrik; Rp80,9 T Subsidi Nonenergi; Rp42,5 T Source: the Ministry of Finance Food Subsidy; Rp17,2 T Fertilizer Subsidy; Rp16,2 T Seed Subsidy Rp1,5 T PSO; Rp1,5 T KP Subsidy; Rp1,2 T Tax Subsidy; Rp4,8 T In APBN 2013, the Government still allocates budget for fuel subsidy for certain types, i.e.: (1) kerosene; (2) premium and bio premium; and (3) solar and biosolar. In addition, the Government provides subsidy for 3-kg LPG and LGV. With such subsidy it is expected that fuel of particular types, 3-kg LPS and LGV be supplied at affordable rate. The amount of subsidy for fuel, 3-kg LPG and LGV in APBN 2013 is considerably subject to parameters used in calculating such subsidy, which include: (1) ICP US$100.0 per barrel; (2) the consumption of subsidized fuels estimated to reach 46.0 million kiloliter (kl) and 3-kg LPG 3.9 metric ton; (3) fuel alpha Rp.642.6/liter; and (4) rupiah exchange Rp.9,300.0/US$. In view of these parameters, budget earmarked for fuel of certain types, 3-kg LPG and LGV in APBN 2013 is expected to amount Rp trillion (2.1 percent of GDP) or to increase by Rp.56.4 trillion if compared with subsidy for fuel, 3-kg LPG and LGV in APBN 2012 recording Rp trillion (1.6 percent of GDP). In 2012 realization, subsidy for fuel, 3-kg LPG and LGV is expected to reach Rp trillion. Since APBNP 2012, the proceeds of fuel subsidy have included VAT of subsidized fuel for certain type and 3-kg LPG. It is to follow up BPK s findings and expected that the implementation of APBN in future be more transparent and accountable. With the soaring ICP price recently and the increasingly volumes of subsidized fuel, it is deemed necessary to take policy measures to control the hike of fuel subsidy burden. In light of that, in 2013 the Government will take a number of policies including: (1) to enhance the efficiency of fuel subsidy allocation; (2) to control the consumption of subsidized fuel; (3) to promote fuel to BBG (gas) conversion program, particularly for public transport in big cities; (4) to continue kerosene to 3-kg LPG conversion program Financial Notes and Indonesian Budget 2013

196 Central Government Expenditure Chapter IV TABLE 4.15 SUBSIDY FOR CERTAIN FUEL AND 3-KG GAS No DESCRIPTION 2012 APBNP 2013 APBN Subsidty of the Year (billion Rp) , ,2 - Subsidy for Fuel and BBN (billion Rp) , ,8 - Premium and BBN , ,1 - Kerosene 7.882, ,1 - Solar and BBN , ,7 - Subsidy for 3-kg LPG (billion Rp) , ,0 - Subsidi LGV (billion Rp) 54,0 100,0 - PPN (billion Rp) , ,4 - Underpayment in 2010 (billion Rp) 706,9 - - Estimated under payment for 2012 (billion Rp) 3.500, ,0 Parameter : 1 ICP (US$/barrel) 105,0 100,0 2 Exchange rate (Rp/US$) 9.000, ,0 3 Alpha BBM (Rp/liter) 641,94 642,64 4 Fuel volume + Bio BBM (thousand KL) , ,0 - Premium and Bio Premium , ,0 - Kerosene 1.700, ,0 - Solar and Bio solar , ,0 5 Volume Elpiji (million kg) 3.606, ,0 Source: the Ministry of Finance In APBN 2013, electricity subsidy is still needed since the electricity rate tariff remains lower than the production costs of electrical power. For the last few years, the realization of electricity subsidy budget records significant increase. Thus, to control electricity subsidy, the Government together with PT PLN (Persero) will take measures to decrease the production costs of electrical power in phases. This initiative has been commenced in 2012 by minimizing losses and optimizing energy mix for the fuel of power generation plants by particularly minimizing fuel consumption while assuring and maintaining adequate supplies of geothermal, coals and other energy sources. Moreover, the Government will restructure PT PLN (Persero). It is to make sure than PT PLN (Persero) will suffer liquidity and funding difficulties, for which the Government will provide business margin 7 percent in It is also to increase the financial condition and bankability of PT PLN (Persero) as evident from Consolidated Interest Coverage Ratio (CICR) above 2 percent a requirement that must be complied with by PT PLN (Persero) for global bond issuance in international markets. With margin 7 percent in 2013, proceeds collected from the bonds (loans) in international markets will be used to finance development investments in 2013, which in the majority consist of transmission, distribution and sub-station development. Impacts expected from this development are: (1) the volume of power sold increased; (2) electrification ratio increased; and (3) fuel consumption in power generation plants decreased by intensifying the efficiency and consumption of coals, gas, geothermal, water and biodiesel including solar energy. Apart from the above policies, electricity subsidy in 2013 is also based on assumptions and parameters as follows: (1) ICP US$100.0 per barrel; (2) rupiah exchange rate Rp per US dollar; (3) increase of electrical rate tariff at around 15 percent on the average; (4) business margin of PT PLN 7 percent; (5) higher volume of power sold; and (6) losses 8.5 percent. Based on these policies and parameters, budget allocated to electricity subsidy in APBN 2013 is planned to amount Rp.80.9 trillion (0.9 percent of GDP) or Rp.16.0 trillion Financial Notes and Indonesian Budget

197 Chapter IV Central Government Expenditure TABLE IV.16 ELECTRICITY SUBSIDY, No PARAMETER 2012 APBNP 2013 APBN 1 ICP (US$/bbl) 105,0 100,0 2 Exchange Rate (Rp/US$) 9.000, ,0 3 TTL (%) - 15,0 4 Growth Sales (%) 7,0 9,0 Energy sales (TWh) 167,2 182,3 5 Losses (%) 8,50% 8,50% 6 Fuel Mix - High Speed Diesel/HSD (million KL) 5,5 4,3 - IDO (million KL) 1,4 - Marine Fuel Oil/MFO (million KL) 1,7 - - Coal (million ton) 38,1 48,8 - Gas (million BBTU) 0,3 0,4 - Geohermal (TWh) 3,4 4,2 - Bio Diesel (million KL) 0,01 0,01 7 Margin (%) 7% 7% Subsidy of the Year (Miliar Rp) , ,1 Underpayment of previous year (miliar Rp) 4.506, ,7 Subsidy (accrued and cash) (Miliar Rp) Carry over to coming years , ,8 (5.000,0) TOTAL SUBSIDY(Miliar Rp) Source: the Ministry of Finance , ,8 higher than its allocation in APBNP 2012 reaching Rp.64.9 trillion (0.8 of GDP). In the estimated realization 2012, electricity subsidy is expected to reach Rp.89.1 trillion. Non-Energy Subsidy Non-energy subsidy expenditure in APBN is to collect budget allocated for food subsidy, fertilizer subsidy, seed subsidy, PSO subsidy, interest subsidy of program credits, and tax charged to the Government (DTP) subsidy. In APBN 2013, this non-energy subsidy is planned at Rp.42.5 trillion (0.5 percent of GDP) or Rp.0.2 trillion lower than its budget allocation in APBNP 2012 for non-energy subsidy, which reached Rp.42.7 trillion. Budget for food subsidy in APBN 2013 is planned to reach Rp.17.2 trillion (0.2 percent of GDP). This sum is Rp.3.7 trillion lower than expenditure ceiling for food subsidy in ARPB 2012 recording Rp.20.9 trillion (0.2 percent of GDP). This food subsidy is provided by selling TABLE 4.17 FOOD SUBSIDY, DESCRIPTION APBNP APBN 1. Raskin Quantum(ton) , ,5 a. Target (RTS) , ,0 b. Distribution 14,0 12,0 c. Allocation (kg/rts/distribution) 15,0 15,0 2. Price Subsidy 5.698, ,9 a. HPB (Rp/kg) 7.298, ,9 b. Selling Price (Rp/kg) 1.600, ,0 TOTAL (trillion rupiah) 20,9 17,2 Source: the Ministry of Finance 4-94 Financial Notes and Indonesian Budget 2013

198 Central Government Expenditure Chapter IV rice to the target households (RTS) at affordable price for low-income people. It aims to give access to foods, either physically (rice available at the nearest distribution points) to the target households. In 2013 this food subsidy program is expected to cover 15.5 million target households (RTS) with the provision of 2.8 million ton affordable rice by Bulog. These supplies will be distributed in 12 batches with allocation of 15 kg per RTS per month and the selling price of this rice for the poor (raskin) of Rp.1,600 per kg. The number of 15.5 million RTS (target households) is acquired from social protection program survey (PPLS) 2011 by Central Bureau of Statistics (BPS), and lower than RTS number in 2012 recording 17.5 million. To support food resilience with the target of 10 million ton of rice surplus for the next 5 10 years, facilitation of agriculture input with the distribution of subsidized seeds and fertilizer must be intensified. According to RKP 2013 targets to pursue with respect to food resilience improvement are: (1) GDP of agriculture, fishery and forestry sector to increase by 3.9 percent, (2) rice production to increase by 6.25 percent, corn by 8.3 percent, soybean by 18.4 percent, sugar by 9.2 percent, cow/ buffalo meat by 9.5 percent; and fish by percent; (3) Government s food reserve to rise to minimum 1 million ton of rice and more food reserves of regional governments and communities; (4) quality of food consumption enhanced with the realization of Good Dietary Pattern (PPH) score 91.5; (5) quality of agriculture, fishery and forestry products enhanced according to the established quality and standards; (6) coverage of agriculture, fishery and forestry extension services broadened; and (7) institutions of agriculture, fishery and forestry actors widespread. To realize the expected food resilience, budget allocation for fertilizer subsidy in APBN 2013 is estimated to amount Rp.16.2 trillion (0.2 percent of GDP) or Rp.2.3 trillion higher than the ceiling of fertilizer subsidy set in APBNP 2012 recording Rp.13.9 trillion (0.2 percent of GDP). Budget allocation of fertilizer subsidy in 2013 has included budget to offset under payment of fertilizer subsidy in 2010 reaching Rp.84.2 billion. (see Table 4.18) and the planned direct subsidy provision to farmers worth Rp billion. Meanwhile, to increase agriculture production and food resilience program, the Government has allocated seed subsidy. This subsidy is to provide seeds of paddy, corns and soybeans at affordable prices for the farmers. The allocation of No Description TABLE 4.18 FERTILIZER SUBSIDY, Type of Fertilizer Urea Thousand ton 4.755, ,2 Non Urea Thousand ton 3.742, ,4 Organik Thousand ton 426,0 468,6 HPP Fertilizer Urea Thousand ton 3.281, ,0 Non Urea Thousand ton 3.826, ,5 Organic Thousand ton 1.863, ,2 HET Fertilizer Urea Thousand ton 1.800, ,0 Non Urea Thousand ton 1.900, ,0 Organic Thousand ton 500,0 500,0 Subsidi Urea Billion Rp 5.685, ,5 Non Urea Billion Rp 7.702, ,0 Organic Billion Rp 571,2 670,0 Fertilizer Direct Subsidy Billion Rp 314,0 Underpayment Year 2010 Billion Rp - 84,2 Total Subsidy Billion Rp , ,8 Source: the Ministry of Finance Volume (ton) Unit Price Subsidy (thousand/to n) Total (billion Rp) 2012 APBNP Volume (ton) Price Subsidy (thousand /ton) 2013 APBN Total (billion Rp) 1 Non-Hybrid Paddy , , , ,0 2 Hybrid Parry , ,5 3 Composite Corn 1.000, , , ,4 4 Hybrid Corn 2.500, , , ,5 5 Soybean 2.500, , , ,8 6 Water consumption fee from PT Jasa Tirta (M3) , ,5 - Source: the Ministry of Finance DESCRIPTION TOTAL TABLE 4.19 SEED SUBSIDY, APBNP 2012 APBN , ,2 Financial Notes and Indonesian Budget

199 Chapter IV Central Government Expenditure seed subsidy budget in APBN 2013 is expected to amount Rp.1,454.2 billion. This sum is Rp.1,324.7 billion higher than its subsidy ceiling in APBNP 2012 recording Rp billion. This increase is mainly attributed to budget reallocation of Agriculture Ministry BA to seed subsidy Rp.1,316.2 billion. To give financial compensation to SOEs assigned to perform Public Service Obligation (PSO), such service provision in certain regions and/or the charge of lower prices than market prices (e.g. sea transport and railways transport of economy class), in APBN 2013 budget allocation for PSO subsidy is to amount Rp.1.5 trillion. This sum is lower than the ceiling of PSO subsidy expenditure set in APBNP 2013 of Rp.2.2 trillion. The lower PSO budget in 2013 is due to the reallocation of PSO subsidy budget for PT Pos to other expenditure budget starting from fiscal year This PSO subsidy budget in will be allocated to respectively PT Kereta Api (Persero) Rp billion for assignment of railway transport service provision for passengers at economy class; PT Pelni Rp billion for assignment of sea transport service provision for passengers at economy class; and Perum LKBN Antara Rp.89.8 billion for assignment of news services consisting of texts, photos, radio, multimedia, English news and television. To support food resilience and energy diversification program, the Government will continue its policy of granting interest subsidy for program credits in the forms of: (1) credit interest subsidy for food and energy resilience program (KKP-E); (2) including the provision of budget for risk sharing to the problem KKP-E charged to the Government; and (3) credits for bio-energy development and No No 2012 APBNP plantation revitalization (KPEN-RP). Apart from allocation to these three schemes, the subsidy for program credit interests, which aims to lessen the burdens of people in satisfying their funding requirements with relatively low interest rate, is allocated for (1) program credits of ex-bi Liquidity Credits managed by PT Permodalan Nasional Madani (PNM); (2) entrepreneur empowerment credits in NAD, North Sumatra, West Sumatra, Jambi, and West Java; (3) Yield of Security Services of People s Business Credits (KUR); (4) Cow Hatchery Credits (KUPS); (5) warehouse receipt subsidy scheme; (6) interest subsidy for water supply; and (7) subsidy for non-subsidized fuel facility and service credits. With these policy measures it is expected that budget allocation for subsidy of program credit interest in APBN 2013 amount Rp.1,248.5 billion. This sum is lower by Rp.45.4 billion if compared with its expenditure ceiling of interest subsidy for program credits in APBNP 2012 set at Rp.1,293.9 billion APBN 1 Ex-KBLI Pattern (PNM) 7,8 4,9 2 Food & Energy Resilience Credit (KKPE) 224,9 213,3 3 Risk Sharing KKP-E 3,2 5,2 4 Credit for Bio-Energy Development and Plantation Revitalization (KPEN-RP) 88,1 96,7 5 Interest Subsidy for Enterpreneurs in NAD and NIAS 5,0 2,5 6 Service Fee for People Business Credit Insurance (KUR) 801,1 824,7 7 Cow breeding credit 42,6 38,2 8 Warehouse receipt scheme subsidy 1,1 1,1 9 Interest Subsidy for Non Subsidy Fuel Facility and Infrastrucure 116,0 42,1 10 Interest Subsidy for water 4,3 20,0 Source: the Ministry of Finance PSO SUBSIDY, (billion rupiah) TABLE 4.21 PROGRAM CREDIT INTEREST SUBSIDY (billion rupiah) DESCRIPTION TOTAL 2012 APBNP 2013 APBN 1 PT KAI 770,1 704,8 2 PT Pelni 1.024,0 726,5 3 PT Posindo 272,5-4 LKBN Antara 84,8 89,8 Total Source: the Ministry of Finance 2.151, , , , Financial Notes and Indonesian Budget 2013

200 Central Government Expenditure Chapter IV Like in previous years, in 2013 the Government also allocates budget for tax subsidy consisting of tax charged to the Government (DTP) in amount of Rp.4.8 trillion comprising income tax (PPh) subsidy and import duty facility. This sum is higher than budget allocated for tax subsidy in APBNP 2012 reaching Rp.4.3 trillion. In 2013, budget allocation of tax subsidy of income tax charged to the Government (PPh DTP) is planned to reach Rp.3.8 trillion. It consists of PPh DTP for geothermal Rp.0.8 trillion and PPh DTP for yield of SBN issued in international markets Rp.3.0 trillion. Meanwhile, as to subsidy for import duty facility charged to the Government in 2013 is expected to record Rp.1.0 trillion. Budget Allocation for Grant Expenditure No 2012 APBNP 2013 APBN 1. Income Tax (PPh) 3,7 3,8 - PPh for geothermal commodities 0,8 0,8 PPh for yields of SBN issued in international - 2,8 3,0 markets 2. Import Tax Facility 0,6 1,0 - Import Tax Facility 0,6 1,0 Source: the Ministry of Finance TABLE 4.22 TAX SUBSIDY (DTP) (trillion rupiah) DESCRIPTION 4,3 4,8 In APBN 2013 budget allocation for grant expenditure is anticipated to record Rp.3.6 trillion, which implies an increase of Rp.1.8 trillion if compared its ceiling set in APBNP 2012 that only reached Rp.1.8 trillion. Policy of grant expenditure budget allocation in 2013 will be directed to support capacity building of regional governments in delivering public basic services such as in transportation, water supply facilities, wastewater treatment plants, irrigation, sanitation and geothermal exploration. The fund of grants to regions come from foreign sources that may consists of loans for further subsidiary (SLA) with the following breakdowns: First, grant expenditure from foreign loans: (1) Mass Rapid Transit (MRT) program Rp.3.1 trillion from Japan International Cooperation Agency (JICA); and (2) Water Resources and Irrigation Sector Management Project-Phase II (WISMP-2) Rp166.9 billion from World Bank. Second, grant expenditure coming from foreign subsidiary grant, i.e.: (1) Water Supply Grant Rp billion from Australias Government; (2) Wastewater Grant Rp.9.4 billion from Australian Government; (3) (3) Development of Seulawah Agam Geothermal in NAD Province Rp61.2 billion from Germany Government; and (4) Australia Indonesia Grant for Sanitation Development Rp93.6 billion from the Australian Government. Further elucidation of projects/activities financed under grant expenditure budget is as follows. MRT project is expected capable of dealing with traffic congestion in Jakarta, supporting and bolstering economic growth of Jakarta with efficient urban transportation system, generating employment opportunities, and enhancing the quality of Jakarta environment and supporting the mitigation of climate change impacts. WISMP-2 has objectives of building the performance capacity of water resources/watershed management units and irrigation management units and increasing irrigated agriculture productivity in some provinces and districts (kabupaten). Water Supply and Wastewater Grant Program aims to develop drinking water connections for low-income households and to improve access to piped wastewater system to realize Millenium Development GOals (MDGs). Development of Seulawah Agam Geothermal in Total Financial Notes and Indonesian Budget

201 Chapter IV Central Government Expenditure NAD Province is to finance geothermal exploration in Seulawah of Nangroe Aceh Darussalam province and expert services consisting of training activities to Seulawah geothermal team. Australia-Indonesia Grant for Sanitation Development is grant to accelerate developmental activities in sanitation sector (solid waste and wastewater) granted to regional governments that have prepared their sanitation development plans. Budget Allocation of Social Aids To augment the quality of living standards of people, for the last few years, the Government assures and commits to intensify the implementation of social security for overall Indonesian people, especially to meet their basic needs, i.e. education and health. In education sector, the Government continually performs BOS program and aids for students of poor households to promote inclusive education. In health sector, the Government has instituted Jamkesmas and Jampersal programs to enhance the quality of health services to public. Starting from 2014, the Government will introduce national social security scheme (SJSN) program aiming to give protection and social welfare for all Indonesian people, especially the implementation of social insurance in health sector in 2014 as mandated in Law Number 40 of 2004 concerning National Social Security Scheme (UU SJSN) and Law Number 24 of 2011 concerning Social Security Organizing Body (UU BPJS). In APBN 2013, budget allocation for social aids is expected to record Rp.73.6 trillion (0.8 percent of GDP). This sum reflects an decrease of Rp.12.4 trillion (14.4 percent) if compared with its budget ceiling of social aids earmarked in APBNP 2012 set at Rp.86.0 trillion (1.0 percent of GDP). This decrease is particularly due to the reallocation of social aids of capital character to capital expenditure such as State Capital Participation (PNPM) in infrastructure sector. However to improve the economic capacity and prosperity of people, the scole of social aid beneficiaries and their value will be also increased. Budget allocated to social aids in APBN 2013 consists of: (1) social aids allocation channeled through K/L Rp.69.6 trillion, and (2) reserve fund allocation for natural disaster management through BA BUN Rp.4.0 trillion. Some priority programs including in social aid category in 2013 are: (1) BOS program coordinated by the Ministry of Religions with budget allocation planned to amount Rp.4.0 trillion and BOS for Secondary Education coordinated by the Ministry of Education and Culture Rp.1.1 trillion; (3)schoolarship facilities for poor students and university students with budget allocation Rp.6.5 trillion; (4) Jamkesnas and Jampersal with budget allocation of Rp.8.1 trillion consisting of basic helath service program in Puskemas and thier networks of Rp.1.0 trillion, referential health service program at class III in general hospitals and private hospitals as assigned by the Government with budget allocation of Rp.5.5 trillion and Jampersal (childbirth) service with budget allocation of Rp.1.6 trillion; (5) PNPM Mandiri consisting of, among other things, PNPM Perkotaan Rp.1.7 trillion and regional socialeconomic infrastructure development (PISEW) Rp.77.0 billion; and (6) PKH or conditional cash aids with budget allocation of Rp.2.8 trillion. BOS program is a mandate of Article 34 Law Number 20 of 2003 concerning National Education System stating that the Government and Regional Government must ensure compulsory education minimum affordable basic education. The objective of BOS program is to exempt tuition fees for poor students and lessen the burdens of other students so that all students can access more quality basic education services and graduate. BOS program is awarded to education units at SD/MI/Ula and SMP/MTs/Wustha aiming to abate the 4-98 Financial Notes and Indonesian Budget 2013

202 Central Government Expenditure Chapter IV burdens of people, notably low-income households in respect of education fees with a view to lowering dropout rate. BOS budget in 2013 coordinated by the Ministry of Religions is dedicated to around 6.3 million MI/Ula and MTs/Wustha students. The Government is also promoting the 9-Year Compulsory Education Program and plans to expand this program up to universal middle education with BOS Program for Middle Education dedicated to some 8.9 million students of SMA, SMK and MA to expand and augment equal access to quality middle education services, which concern about gender mainstreaming and relevant to the needs of people. For education quality improvement, the Government also allocated budget of education aids for poor students from basic education to higher education. Education aid program for poor students in 2013 will be allocated for respectively some 5.2 million students of SD/SDLB and SMP/SMPLB and for some 2.4 million students of MI/Ula and MTs/Wustha, and for some 1.2 million students of SMA and SMK, and for some 393 thousand students of MA, and for some 142 thousand students of universities, and for some 68 thousand students of Religion Colleges. To broaden public access to basic health services, especially for the poor, some health insurance schemes that have been launched in previous years under Jamkesmas and Jampersal programs will be continued and expanded. In 2013, Jamkesmas program is targeted to around 86.4 million persons consisting of improved access of poor and low-income people to referencial class III health services in certain general hospitals and private hospitals as assigned by the Government and maternal services (Jampersal) for some 2.7 millions pregnant mothers. This Jamkesmas program is the embryo of of SJSN scheme in health sector that will be fully performed by the Government in To improve social protection scheme and as an attempt to accelerate the realization of Millenium Development Goals (MDGs), especially for poor people, in 2013, the Government plans to resume PKH program for some 2.4 million RTSM with budget allocation of Rp.2.8 trillion. PKH is a program of distributing cash assistance to RTSM being PKH participants and have complied with requirements and committment in human resources quality improvement through better education and health. PKH aids are granted to the beneficiaries in phases, i.e. 4 times of payments in a year. The sum of PKH aids for RTSM per year is as follows:(1) permanent aids for RTSM Rp.200,000; (2) for pregnant mothers/mothers in chilbed who have under five babies Rp.800,000; (3) for RTSM with children at SD/MI school age Rp.400,00; (4) for RTSM with children at SMP/MTs age school Rp.800,000. Thus the minimum aids per RTSM will be Rp.600,000 and maximum Rp.2,200,00 (with 3 children). The targets entitles to receive this aid are: (1) pregnant women and mothers in chilbed; (2) children/under five babies (0 6 years old) of RTSM who will receive health services; (3) 5 7 years old children not yet attending basic education; and (4) years old children of RTMS not yet accomplish basic education. To maintain the sustainability of poverty reduction program with the empowerment of overall social components that have been carried out in previous years, in 2013 this program will be continued with the harmonization of various community empowerment based poverty alleviation programs involving many sectors into PNPM Mandiri. The revision and expansion of community based development program will made through empowerment activities in 10,922 kelurahan and regional social-economic infrastructure development (PISEW) by empowering 79 kecamatan (sub-districts). Financial Notes and Indonesian Budget

203 Chapter IV Central Government Expenditure Meanwhile, budget of social aids allocated through General State Treasury Budget Section (BA BUN) is reserve fund for natural disaster management. In 2013, the allocation is earmarked to amount Rp.4.0 trillion. This fund is to protect people from various impacts of natural disasters with the following activities: (1) pre-disaster stage for prevention and alertness to deal with the disaster; (2) response emergency stage after the disaster; and (3) post-disaster recovery stage with rehabilitation and reconstruction process. Total budget for social aids in 2013 has included expenditure budget of capital character producing assets or classfied as Government investment spending but according to Government Accounting Standard recorded as social aids such as for community empowerment and post-disaster rehabilitation and reconstruction. (see Box 4.2.). Budget Allocation of Other Expenditure Policy of other expenditure in APBN 2013 is to accomodate: (1) anticipation to the changing macroeconomic assumptions with the provision of fiscal risk reserve fund, such as: changes in macroeconomic assumptions and lan capping risk; (2) the provision of operational costs for agencies not yet having their own budget section (BA) code and contribution to international agencies; (3)operational costs for state agencies not yet having their own budget section (BA) code; (4) contribution to international agencies; (5) support to food resilience with the allocation of reserve fund for Government s rice reserve (CBP), national seed reserve (CBN), and food price stabilization reserve; (4) the provision of budget allocation for transport fees of rice for public servants assigned in the hinterland districts of Papua Province and West Papua Province; (7) budget allocation for assignment to PT SMI in facilitation of Project preparation under Public Private Partnership scheme for the Development of Railway Track connecting Soekarno Hatta Airport Manggarai and Umbulan Waster Supply Project; (8) budget allocation for shelter construction as part of disaster management; (9) budget allocation for development acceleration program in Nusa Tenggara Timur (NTT) and economic empowerment for low-income people (MBR) 2013; (10) the provision of preliminary fund for the operation of Financial Service Authority (OJK); (11) budget reserve for socialization/education/advocacy to the public with regard to National Social Security Scheme (SJSN) and Social Security Organizing Body (BPJS); (12) budget allocation for the host of APEC Meeting 2013; (13) budget allocation for hitech researches; (14) budget allocation for development acceleration in Madura and Papua and West Papua (P4B); (15) budget allocation for livestock development; (16) budget allocation for viability gap fund (VGF) for Umburan Water Supply (SPAM) project and SPAM Bandar Lampung; (17) operational assistance for universal post services; and (18) fund reserve for Special Region of Yogyakarta (DIY). With regard to VGT, this allocation is Government s support to promote investment in infrastructure sector that may consist of fiscal contribution in cash for part of costs of project developed under Public Private Partnership scheme in effort to provide infrastructure services affordable by the communities. The objectives of VGF are: (1) to encourage the interests of business entities to participate in PPP projects, which are economically feasible but not financially viable; (2) to ensure the implementation of infrastructure projects with reference to the established quality and time; and (3) to improve the provision of infrastructure at affordable tariff according to the capacity of people. Meanwhile, feasibility support is granted under the following principles: (1) the projects must comply with eligibility criteria to get this feasibility support; and (2) approval of feasibility support must be mentioned in bid documents Financial Notes and Indonesian Budget 2013

204 Central Government Expenditure Chapter IV Universal Post Services (LPU) are special post services that must be secured by the Government to reach overall regions within the Unitary State of Republic of Indonesia that will enable the citizens to send and/or receive post from one place to another across the world (Law Number 38 of 2009 concerning Posts). The use of LPU allocation in 2013 is to provide/ maintain post service capacity in 2,357 units of Branch LPU offices in 11 areas of Indonesia. The assignment of universal post services from the Government to PT Post Indonesia aims to assure the people will receive services in: (1) letters, warkat post, printed materials and small packages (containing goods) up to 2 (two) kilograms; (2) secogram until 7 (seven) kilogram); (3) printed goods sent in special bags sent to the recipients until 20 (twenty) kilogram; and (5) instant cash transfer services insofar supported with telecommunication networks. The expected outcome is that all people living outside the cities will receive post services in sustainable manner at affordable price. For fund reserve budget for Special Region of Yogyakarta (DIY), the allocation is as the continuation of Law Number 13 of 2012 concerning the Speacialities of Special Region of DIY, particularly Article 42 paragraph (1) stipulating that the Government will allocated fund for the governance of Special DIY in APBN as needed by DIY and financial capacity of the Government. The authorities of DIY in this special governance include: (1) procedures in the election, status, tasks and authorities of Governor and Vice Governor; (2) intitutions within DIY government; (3) culture; (4) spatial planning. The implementation of this reserve fund for DIY to run the governance of Special DIY will be further established according to the applicable laws and regulations. Budget allocation for other expenditure in APBN 2013 is planned to record Rp.20.0 trillion (0.2 percent of GDP) consisting of allocation for fiscal risk reserve Rp.5.5 trillion, other expenditure Rp.14.5 trillion. This allocation shows a decrease of Rp.48.6 trillion or 70.8 percent if compared with its ceiling in APBNP 2012 recording Rp.68.5 trillion (0.8 percent of GDP). This lower allocation in 2013 is attributed to no allocation of some items budgeted in 2012 but not in Such as energy risk reserve, which in 2012 is allocated Rp.23.0 trillion, compensation of fuel price increase in 2012 allocated Rp.25.6 trillion, and fuel conversion to gas for the development of compressed natural gas (CNG) and liquified gas for vehicle (LGV) infrastructure, which in 2012 receiving budget allocation Rp.2.1 trillion. However, on the other side there are some budget items in APBN 2013 not allocated in They include preliminary budget for the operation of Financial Service Authority (OJK) of Rp.1.7 trillion, shelter construction as part of disaster management Rp.1.0 trillion, higtech research Rp.1.0 trillion, development acceleration in Papua and West Papua Province (P4B) Rp.1.0 trillion, livestock development Rp.1.0 trillion and NTT development acceleration and economic empowerment for low-income people in 2013 of Rp billion. Budget allocation for fiscal risk reserve in APBN 2013 is to deal with changing macroeconomic assumptions, food price stabilization, and land capping risk. Fiscal risk reserve fund is to anticipate possible deviation of macroeconomic indicator trend and the specified macroeconomic assumption that is expected to generate negative impacts to APBN posture, for example economic growth assumption and rupiah exchange rate to US dollar. The Government also allocates reserve fund for food price stabilization aiming to lessen the impacts of soaring food prices to poor people and can spark inflation. Moreover, the Government provides reserve fund for land capping risk to show the Government s support on land acquisition financing for toll road construction. To promote investment climate in toll road development in Indonesia, the Government has set the limits of land acquisition costs that Financial Notes and Indonesian Budget

205 Chapter IV Central Government Expenditure must be shouldered by business entities, i.e. at the highest values with the provisions as follows: a. One hundred and ten (110) percent of land acquisition costs as provided for in toll road operation agreement (PPJT). b. One hundred (100) percent of land acquisition costs in PPJT plus two (2) percent of investment costs in PPJT. This Government s support is provided in the form of funding to land acquisition costs exceeding land acquisition costs that must be borne by business entities. Based on such policies, busget allocation for fiscal risk reserve in APBN 2013 is planned to amount Rp.5.5 trillion (0.06 percent of GDP). This sum is to rise by Rp.22.4 trillion or 80.3 percent if compared with its ceiling set in APBNP 2012 at Rp.27.9 trillion (0.3 percent of GDP). This decrease of budget allocation for fiscal risk reserve in 2013 is due to the no Box 4.2 CAPITAL EXPENDITURE AND GOVERNMENT INVESTMENT EXPENDITURE The Core Message: The adoption of terminology Capital Expenditure in various national development policy formulation events should be appropriately replaced with Investment Expenditure. During the discussion of national development programs and budgeting (APBN) it is frequently found out the adoption of same terminologies to refer different meanings and definitions. The most frequently misinterpreted words are capital expenditure, which actually refer to investment expenditure. An example of inappropriate statement says that capital expenditure in APBN must be increased so as to bolster economic growth and augment the welfare of people. The context of capital expenditure in such statement is more appropriate to be interpreted as investment expenditure. In view of worries about potential impacts to policy formation that may bias from the expectation, it is therefore deemed necessary to correct the adoption of such terminologies and definitions. The following brief explanation will point out the meanings and definitions of capital expenditure and investment expenditure. Capital expenditure has different meaning and definition from those of investment expenditure. The former is the classification of a type of expenditure transactions in budget management under accounting principles. Types of expenditure transactions normally referred to as types of expenditures consist of personnel spending, material spending, capital spending, interest, subsidies, grant, social aids and other expenditure. The accounting principles said that a type of expenditure transaction can be classified as capital expenditure if the said type of expenditure transaction complies with criteria of asset generation and used and recorded by K/L. Meanwhile, investment expenditure more refers to the use of expenditure based on its longterm impacts to the economy (e.g. economic growth and employment) ignoring the types of transactions as established under accounting principles and asset recording aspect. Capital expenditure according to accounting principle is defined as the expenditure spent to pay the acquired assets and/or to increase the values of fixed assets/other assets established by the Government. The said fixed assets/other assets are used to support the day-to-day operational activities of a working unit or dedicated for the public but recorded in asset registration of K/L Financial Notes and Indonesian Budget 2013

206 Central Government Expenditure Chapter IV concerned and not for sales/transfer to the public/local government. Under this definition, there are some fundamental issues relating to capital expenditure, i.e.: (1) assets generated, (2) the outcomes of assets extending more than one accounting period, (3) beyond minimum capitalization limit, and (4) assets used and recorded by K/L. Having different perspective from capital expenditure, the Government investment expenditure is part of overall Government Expenditure (Government or G element) in macroeconomic concept, which is expressed in equation GDP = C + I + G + (X I). Government Expenditure in such macroeconomic concept is further classified into Government Consumption Expenditure (G) and Government Investment Expenditure (G I E). Consumption expenditure aims to finance the routine and consumable operation of Government with short-term multiplier effects. As for investment expenditure, it is intended to form assets (capital stock) in future, which is expected to exert greater and more sustainable multiplier effects for the economy. Investment expenditure is classified into productive investment expenditure, which is either direct or indirect character. Direct productive investment expenditure includes land purchase and physical goods/equipment procurement that will increase physical capital stocks and enhance output in future. This kind of productive investment must be backed with various supporting investments such as road construction, power generation, water supply and sanitation, communication facilities, etc., which all of them are absolutely necessary to support and integrate any and all productive economic activities. Whilst, indirect productive investment expenditure includes, for example, investment in human resources development expected to generate positive impacts to manpower productivity that in turn will extend the production scale and enhance output growth in sustainable manner for long-term period. Thus, investment expenditure relates to: (1) all types of expenditures under accounting principles, which is not only capital expenditure, used for asset formation in future, (2) expenditure generating great and more sustainable multiplier effect for the economy. Based on the above definition, there is similarity and difference of capital and investment expenditures. Their similarity concerns that these two expenditures are to generate assets with sustainable impacts and used and recorded in K/L. This sameness is further narrowed to expenditure producing capital goods with outcomes extending more than one accounting period such as cars, buildings, equipment and machines, road development, bridge development and airport development. Apart from similarity, these two expenditures record/classify the types of expenditure in different way in APBN. Types of expenditure transactions classified as investment expenditure are: (1) expenditure used for research and capacity building, (2) administration for national development priorities, or (3) capital goods not used and recorded by K/L but transferred to other parties. According to accounting principles, expenditure transactions of this type are recorded as material expenditure for point (1) and (2) and as social aids for point (3). The conclusion is that the use of terminology of expenditure by type of expenditure transactions and by macroeconomics is not always 100 (one hundred) percent parallel due to different point of view. Accordingly, the use of data on capital expenditure can t be adopted to represent investment expenditure and vice versa. Referring to the history of state finance management, the consumption and investment expenditure of the Government adopted in old APBN (before fiscal year 2005) composed of routine and development expenditures. The former is to represent Government consumption expenditure and the latter is the representation of Government investment expenditure. Consistent with state finance management reform as mandated in Law Number 17 of 2003, APBN (starting from 2005) is classified by organizations, functions and types of expenditure. This expenditure classification is no longer made under routine and development approach, but under 8 (eight) types of expenditure as prescribed in the internationally accepted GFS Manual 2001 as best practices. They include: Personnel Expenditure; Material Expenditure; Capital Expenditure; Loan Interest Expenditure; Subsidies; Grants; Social Aids; and Other Expenditure. The adoption Financial Notes and Indonesian Budget

207 Chapter IV Central Government Expenditure of this type based expenditure classification is a new paradigm in APBN preparation. It aims to provide objective and proportional illustration with regard to Government activities and to maintain consistency with public sector accounting system and to facilitate the presentation and to enhance the credibility of Government financial statistics. The change or transfer from old paradigm to new paradigm is evident from the changing APBN posture as illustrated in diagram that follows. In other words, investment expenditure spent by the Government has broader scope or definition than capital expenditure. Today, the types of expenditure transactions in APBN categorized in investment expenditure include government expenditure group (e.g. central government expenditure and transfer to regions) or financing expenditure group consisting of: 1. Central Government Expenditure - Physical assets procurement under the control of the Government; - Costs for deconcentration and co-administration; - Costs for consulting services on intellectual rights; - Costs for profession services on capacity building; - Costs for the maintenance of asset values; - Coast for the procurement of assets for transfer to public. Thus far, these costs are classified into capital expenditure, material expenditure, social aids and other expenditure. 2. Transfer to Region - The transfer of Special Allocation Fund (DAK) per sector that can produce infrastructure in regions according to the purpose of its allocation; - The transfer of adjustment fund such as Facility and Infrastructure Fund (which its code and description is to change every year subject to agreement reached by the Government and DPR). 3. Financing Expenditure State Capital Participation (PMN) that will produce investments of the Government either in State Owned Enterprises (SOEs) or other agencies including guarantee secured by the Government. The trend of capital expenditure and investment expenditure in APBN 2013 is presented in table and graph that follow. Based on the said table, the investment expenditure composes of: 1. Central Government Expenditure - Overall capital expenditure can be classified into investment expenditure, - Material expenditure that can be categorized as investment expenditure includes non-binding and non-operational expenditure such as maintenance costs and goods procurement not for the transfer to public/local government, - Social aid that can be categorized as investment expenditure includes budget with physical output or classified as assets if recorded by the Government, such as budget for Community Empowerment National Program (PNPM), - Other expenditure that can be categorized as investment expenditure include: land capping risk, the development of Sabang Free-Trade Area, the development of Karimum and Bintan Areas, Merauke Integrated Food and Energy Estate, and the Assignment to PT Sarana Multi Infrastruktur (SMI) on Public Private Partnership (PPP) Financial Notes and Indonesian Budget 2013

208 Central Government Expenditure Chapter IV 2. Transfer to Regions - Transfer to Regions that can be classified as investment expenditure include: special allocation fund for road infrastructure, irrigation infrastructure, water supply infrastructure, and sanitation infrastructure; additional special autonomy fund for infrastructure. 3. Financing - Financing that can be classified as investment expenditure include: Government investment for infrastructure, State Capital Participation (PMN) for Infrastructure, Home Credit for Healthy and Simple Houses (KPRSh) and Rusunami, Contingency Fund for State Electricity Company (PLN), Contingency Fund for Water Enterprises (PDAM), and Revolving Fund for Investments (Toll Road). The foregoing table also indicates that capital expenditure in 2013 is to record Rp trillion (11.0 percent of total Government Expenditure in APBN and 2.0 percent to GDP) implying a growth of 19.2 percent per annum on the average from period If the definition of capital expenditure is broadened into Government investment expenditure, in 2013 the said expenditure has reached Rp trillion (21.2 percent of total Government Expenditure in APBN and 3.8 percent of GDP) implying an increase of 21.0 percent per annum on the average from period The trend of capital expenditure and investment expenditure during is presented in the graph that follows. Financial Notes and Indonesian Budget

209 4-106 Financial Note and Budget 2013 Matrix 4.1 Summary of Programs, Performance Indicators and Outcome of Ministries/Agencies Fiscal Year 2013 Chapter 4 Central Government Expenditure No. Program *) Performance Indicator *) People's Consultative Assembly (MPR) (Rp732,7 billion), including: 1 MPR consitutional task implementation program including the organs - Number of review and analysis of constitutional concept and implementation for MPR and its organs - Number of socialization campaigns of Pancasila, 1945 Constitution, Unitary State of Republic of Indonesia and Bhinneka Tunggal Ika. Target Constitutional tasks implemented in accorandce with laws and regulations Outcome House of Representatives (DPR) (Rp2.998,3 billion), including: 1 Support Program for the Management and Implementation of Other Technical Tasks of DPR RI - Percentage (%) of session, technical and administration according to the specified standards and timely in planery meeting - Percentage (%) of inter-parliamentary cooperation services at 2 Facility and Infrastructure Improvement Program for DPR RI apparatus international scale according to the specified standard and timely - Percentage of (%) maintenance, storage and distribution of office supplies and equipment and transport modes complying with the standard - Percentage (%) security services within MPR/DPR/DPD RI, housing compound and guest house of DPR RI members complying with the standard 100% - 98% 95% - 95% All activities receive reliable management support Planning, implementation, controlling and reporting mechanisms apply management integrated with up to date and accurate data 3 Legislature Function Implementation Program of DPR RI - Percentage of review/analysis, academic draft, bills in economic and financial affairs complying with standards and timely - Persentase reviews/analisis hukum/penyiapan keterangan DPR yang sesuai standar and tepat waktu 100% - Law drafting facilitated 100% - Legal certainty for people in running their life with quality legal products ensured Supreme Auditor (BPK) (Rp2.903,4 billion), including: 1 Support Program for the Management and - Percentage of complaints followed-up 80% - Human resources competency improvement and management supports Implementation of other Technical Tasks of - Percentage of personnel complying with the required competence 65% BPK standard 2 Quality Improvement Program for the - Percentage of realized program and activities to the plan 90% - Institutional, aparatus and administration quality enhanced Institution, Official and Audit of State Finance - Percentage of consideration materials issued by BPK 100% - The quality of opinion and consideration expressed enhanced. 3 State Finance Audit Program - Percentage of recommendations followed-up 60% - - Number of state compensation settlement monitoring reports issued 839 Investigation follow-up action effectiveness improved

210 Financial Note and Budget No Target Program *) Performance Indicator*) Outcome Supreme Court (MA) (Rp5.325,9 billion), including: 1 Support Program for the Management and - Standardized public services for public institutions/agencies 12 Implementation of Other Technical Tasks of Supreme Court - Quality of financial reports presented according to GOvernment Accounting System (SAP), comments on findings of internal and external auditors, follow-up action of auditor's findings, guiandce and supervision, evaluation and reporting 12 Support for the management and technical tasks in judiciary function 2 Facility and Infrastructure Improvement Program for Supreme Court - Number of facilities and infrastructure provided in administrative division 1 Facilities and infrastructure for officials in Supreme Court and the lower judiciary bodies provided - Number of technical and general facility and infrastructure 815 at appeal court and district court. 3 Accountability Supervision and - Number of technical, administration supervision of courts and general Quality supervisory function enhanced. Improvement Program administration and complaint resolutions in Supreme Court and the lower judiciary bodies and socialization of complaint management - Standard complaint management system to court officials and communities 4 Education and Training Program for Supreme Court Officials - Number of performance supervision and assessment report and the The quality of human resources in Supervisory Body (Bawas) improved bahavior of judges and other court officials - Quantity of Bawas official sufficient - Spacious building rooms - Number of training and certification for judges and clerks and other Professional and competent justice human resources available latest materials - Number of research and development activities in laws and justice 16 - Research reports for legal and justice development as references for the according to the needs of judiciary bodies and recommendation of other Supreme Court in making decision available working units 5 Supreme Court Case Settlement Program - Number of criminal cases, industrial relationship court (PHI) with value less than 150 million including HHsN case and Human Rights case settled timely - Number of cases settled including high-profile case (HHsN and HAM cases) Case settlement administration at first instance degree, appeal degree and cassasion and juidicial review accelerated Accurate, effective, accountable, transparent and accessible case information technology management applied - Human resources quality in case settlement enhanced - Adequate budget to support cassasion and judicial review cases allocated Central Government Expenditure Chapter 4 - Management and technical support for clerk office

211 4-108 Financial Note and Budget 2013 No Target Program *) Performance Indicator*) Outcome Attorney General's Office (AGO) (Rp4.362,2 billion), including: 1 Accountability Supervision and Improvement Program for AGO Officials - Number of public complaint reports followe-up and settled and power abuse settled, routine tasks, discipline infringements and case management by AGO officials in regions - Number of activities in secretarial affairs within junior AGO for supervision actions for the coordination, evaluation and monitoring in following-up the reported complaints report Quality of supervision to routine and development activities in all AGO elements enhanced consistent with laws and policies underlined by the General Attorney. 2 Education and Training Program for the Officials of AGO 3 Intelligence Case Investigation/Security/Management Program - Technical functional education and training 37 Professional capacity, personal intgrity and discipline within AGO improved - Number of management and leadership education and training 11 - Number of Intelligence activities in state finance salvation and criminal act management. - Legal counseling and advocacy to enhance the legal awareness of people 512 working units in preventing corruption criminal acts. 4 General Criminal Case Settlement and - Number of general criminal act cases accomplished by AGO official at cases Management Program Kejati, Kejari and Cabjari level - Number of legal actions, pardon and examination to other general 40 criminal acts 5 Special Criminal Case, Grave Human Right - Number of corruption cases settled in pre-prosecution state. 80 Violation and Corruption Crime Case Settlement and Management Program - Number of grave human right violation cases settled Quality in judicial Intelligence in social, political, financial, economic, defense and public law and order enhanced. Quality in pre-prosecution, additional investigation, prosecution, verdic fixing and court decision, supervision to conditional release and other legal actions in criminal cases enhanced Quality in pre-prosecution, additional investigation, prosecution, verdic fixing and court decision, supervision to conditional release and other legal actions in economic criminal cases enhanced Chapter 4 Central Government Expenditure

212 Financial Note and Budget No Target Program *) Performance Indicator*) Outcome The Ministry of State Secretariat (Rp2.473,2 billion), including: 1 Support Program for the Management and Implementation of Other Technical Tasks of the Ministry of State Secretariat - Percentage of official/personnel competency assessment reports accomplished - Percentate of witness and victim protection according to the laws and regulations 100% - Budget planning and implementation in transparent and accountable and administration, filing and public relation services according to the established service standards 100% - Human resources development within the Ministry of State Secretariat, institutional restructuring and administation and accountability improvement in the Ministry of State Secretariat - Effective inspection and supervision - Quality of analysis and speed in providing informatics support enhanced Central Government Expenditure Chapter 4 2 Facility and Infrastructure Improvement - Percentage of building and structure supports in compliance with the Program for the Ministry of State Secretariat standard - Percentage of facility and infrastructure in compliance with the standard 100% 100% - General service support to state officials and aparatus of the Ministry of State Secretariat at high quality level and assets maintenance and management in the Ministry of State Secretariate 3 Policy Service Support Program to the President and Vice President - Percentage of facility to host state/government leaders during international sessions/conferences in Indonesia 100% - Initiative permit and bill, draft government regulation, RPP, draf presidential regulation, law authenticification, government regulation in lieu of law, Government Regulation and legal opinions and legal problem analysis and administration, ratification, prerogrative, naturalization and laws and regulation - Percentage of security services for the President and Vice President and the families and other state gusts equal to State/Government Leaders 100% - Quality of analysis and speed in domestic and foreign policy support, material preparation and policy support data enhanced (VVIP) according to the specified standard - Harmonious and synergi institutional relation between the President/Minister of State Secretary and state institutions, regional institution, political organizations and community organization established

213 4-110 Financial Note and Budget 2013 No Target Program *) Performance Indicator*) Outcome The Ministry of Home Affairs (Rp15.782,6 billion), including: 1 Accountability Supervision and Improvement Program within the Ministry of Home Affairs - Percentage of compliance of officials in performing tasks and functions in the Ministry of Home Affairs including: Directorate General of Regional Autonomy, Education and Training Center, Domestic Administration Institute (OPDN) and National Body for - Percentage of success in implementing coordination, development and supervision of regional governance 2 Research and Development Program in the Ministry of Home Affairs 3 Education and Training Program for the Officials of the Ministry of Home Affairs - Research, review and development reports in Regional Development and Finance affairs presented in seminars and/or published and/or followedup - Number of research, review and development results in Village Governance and Community Empowerment presented in seminars and/or published and/or followed up - Percentage of quality education and training in Development Management, Demography and Regional Finance - Percentage of monitoring and evaluation documents, financial, asset and audit reports accomplished and LHP follow-up to Education and Training Center at Regional level 4 Regional Development Program - Percentage of regions facilitated in the preparation of Regional Regulation (Perda) on Spatial Planning as reference in One-Stop Integrated Services - Percentage of regions implementing guidance/policy on spatial use and control 90% The performance of tasks and functions in governance operation increased and financial transparency and accountability improved 100% 17 research/review reports 17 research/review reports 80% 100% 75% 85% The adoption of researh outcomes as recommendations for policy formulation increased Number of alumni, suitability of participants with education and training requirements increased and education and training for officials within the Ministry of Home Affairs and Regional Government reformed Quality of regional development planning enhanced, growth maps for individual regions, areas and zones availiable, and regions considering their region, area and zone gaps as basis in formulating fiscal balance (DAK, DAU and DBH) increased and quality of spatial planning, environmental protection and management enhanced Chapter 4 Central Government Expenditure 5 Decentralization and Regional Autonomy Management Program - Number of regions organizing regional head election 13 prov faciliated in governor/vice governor election, 91 kab facilitated in regent/vice regent election, 37 kota faciliated in mayor/vice mayor election. PP and DPRD Code of Ethics socialized in 33 provinces - Number of dismissal and appointment of regional heads and DPRD accomplished and decided 13 Governors 91 Regents, 37 Mayors The implementation of governance affairs and Minimum Service Standard (SPM) in regions, the performance of regional governance improved, the progress of New Autonomous Regions evaluated and Basic Regional Management Stategies prepared, and Law 32 of 2004 revised

214 Financial Note and Budget No Target Program *) Performance Indicator*) Outcome The Ministry of Foreign Affairs (Rp5.590,1 billion), including: 1 facility and infrastructure improvement program for officials of the Ministry of - Service level in complying with facility and infrastructure requirements at central and representative level Foreign Affairs - Number of development/procurement/rehabilitation of offices/emisary guest house and other building 2 Foreign Relation and Politic Improvement - Number of session/discussion for implementation of cooperation in Program under ASEAN cooperation political, economic, social and cultural sectors 100% The quality of infrastructure and facility for the Ministry of Foreign Affairs enhanced Roles and leadership of Indonesia in the formation of ASEAN community in political and security, economic and social-cultural affairs augmented Central Government Expenditure Chapter 4 - Number of activities to maintain the centrality of ASEAN in economic relation with partner forum (session with partner forum) 3 Indonesia Role and Diplomacy Improvement - Program in Multilateral Cooperation Number of Indonesia's initiatives to advocate the reform of Security Countil in UN - Number of technical coordination for human right advocacy and protection and human related issue management 4 Foreign Relation and Political Strengthening - The position of Indonesia's diplomacy in preventing the inclusion of Program and Diplomacy Optimising in Asia separatism in Indonesia in the end of session Pacific and Africa Regions 20 4 Roles and diplomacy of Indonesia in multilateral issue management augmented % Cooperation of RI and other countries in Asia Pacific Region and Africa fortified 5 Diplomacy Optimizing Program in - Acoen policy document prepared 6 Diplomacy in international laws and agreement reinforced International Law and Agreement - Number of publi, private and administrative legal service provision, 9 kali Management relating to the Ministry of Foreign Affairs and RI's representatives The Ministry of Defense (Rp81.963,6 billion), including: 1 Defense Technology and Industry Development Program - Number of Primary Weaponry System of Indonesia's Armed Forces (TNI) domestically produced 2 Integrative Defense Force Use Program - Percentage of Law Enforcement and Application in terms of quality and 46% quantity - Number and coverage of Combat Military Operation (OMP) 85% 3 Land Military Force Preparedness Support - Percentage of adequacy of personnel, material and document security 43% Program operation and effective and efficient early detection - Percentage of operation preparedness of Army (TNI AD) in weapon and munition support aspect 48% 4 Primary Weaponry System (Alutsista) and - Percentage of additional materials for strategic Alutsista of Indonesian 5% - Non Alutsista and Sea Military Force Facility Navy (TNI AL) in accountable and timely manner and Infrastructure Modernization Program - Percentage of preparedness and addition of weapons, electronics and munition of 12% Indonesian Navy (TNI AL) in accountable and timely Manner 5 Alutsista and Non Alutsista Modernization and Air Military Force Infrastructure and Facility Development Program - Percentage of achieved MEF for air military force 28% - Percentage of capacity and additional number of aircraft fleet to achieve MEF 30% - Number of domestically produced Alutsista increased 24% - Policy for defense industry development accouding to science and tehnology progress formulated The use of integrative defense force capable of identifying, deterring, and destroying threaths in integrated, effective and timely fashion Alutsista and facility and infrastructure preparedness to reach power and capacity of Indonesian Army (TNI AD) toward Minimum Essential Force (MEF) The capacity and power of Indonesian Navy (TNI AL) increased and more operational to support the assigned tasks according to the specified standard and requirement with high supporting, deterrent and combating force Alutsista and facility and infrastructure of Indonesian Air Force (TNI AU) toward MEF modernized and improved

215 4-112 Financial Note and Budget 2013 No Target Program *) Performance Indicator*) Outcome The Ministry of Laws and Human Rights (Rp. 575,3 billion), including: 1 Accountability Supervision and Improvement Program for Officials of the - Percentage of working unit region I reaching the specified standard service and performance Ministry of Law and Human Rights - Percentage of working unit region I introducing financial accountability according to the standards to get good opinion of BPK, i.e. WTP (unqualified opinion) Education and Training Program for Officials of the Ministry of Laws and Human Rights 50 Quality of supervision to the performance of tasks and functions of the Ministry of Laws and Human Rights improved Percentage of graduates in correctional science and techniques 95 Performance of officials within the Ministry of Laws and Human Rights increased Chapter 4 Central Government Expenditure - Percentage of graduates in imigration science and techniques 95 3 Legal drafting program - Percentage of Province, District/City mapped and their regional 80 - Quality of laws and regulations and judicial review enhanced regulations published in accurate and up-to-date manner. Regional Regulation Information System according to the plan and facilitation request. - Percentage of Requests of bill harmonization at central level in Political, Law and Security Affairs accomplished 80 4 Correctional Development Program - Percentage of correntional participants and clients integrated and classified in timely and accountable manner - Percentage of detainees, convicts and correctional participants receiving health maintenance according to the standads 5 Imigration Service and Supervision - Percentage of visit visa, visit visa on arrival, visa for limited residency Improvement Program and visa for certain countries in compliance with the standard and based on accurate data - Percentage of normal passport issuance in compliance with the standard and based on accurate data 77% - 40% 80% - Satisfaction of people on imigration service and supervision and legal certainty increased 80% Quality of correctional system management improved

216 Financial Note and Budget No Target Program *) Performance Indicator*) Outcome The Ministry of Finance (Rp18.234,4 billion), including: 1 Tax Revenue Improvement and Safeguard - Percentage of proposals and revisions of PP and PMK in Taxation 100% Program Regulation I settled - Percentage of tax receivables paids 30% 2 Customs and Excise Revenue Supervision, Service and Collection Program - Percentage of regulation formulation in customs facility sector accomplished 100% - Average percentage of realization of the promosed customs facility 85% services 3 State Treasury Management Program - LKPP and Draft Law on PP APBN accomplished timely 3 Remuneration for the deposit, placement and short terms investment Rp4,0 trillion (Idle Cash KUN) 4 State Asset, Receivable Settlement and - State assets utilized Rp103 T Auction Service Management Program - The recovery coming from APBN expenditure Rp350 billion Optimum state tax revenue Customs and excise administrators of DG Customs and Excise capable of providing facilitation to industries, trades and community and optimizing revenue State treasury management in professional, transparent and accountable manner according to the laws State asset management, state receivable settlement and auction services in professional, orderly, timely and optimum manner capable of developing good image to stakeholder Central Government Expenditure Chapter 4 5 Education and Training Program for Officials - Percentage of STAN Diploma Program granduates with minimum 87,5% The development of integrated and highly competent human resources within the Ministry of Finance Satisfactory predicate 6 Fiscal Policy Formulation Program - Exchange rate projection deviation 5% Sustainable fiscal policy with measurable fiscal risk for stabilization and - Percentage of fiscal risk budget reserve used 90 economic growth promotion 7 Fiscal Balance Improvement Program - Percentage of transfer to region timely distthousandted 100% between Central Government and Regional Governments - Percentage of Perda PDRD consistent with laws and regulations 90% 8 State Budget Management Program - Timely and efficient Central Government Expenditure allocation 100% - Draft NK and RAPBN and RUU APBN (APBN-P prepared in accurate and 100% timely manner 9 Accountability Supervision and - Percentage of proved investigations 90 Improvement Program for Officials of the Ministry of Finance - Number of Policy Recommendations from supervision Debt Management and Financing Program - Percentage of timely financial and BMN reconciliation 100% Percentage of integrated debt database development 100% Effectiveness and efficiency of financial relation management between the Central Government and Regional Governments enhanced Budgeting function according to the laws and regulation and Government Policy implemented Supervision generating added value with effectiveness approach to risk management, controlling and administration process and improved accountability of officials within the Ministry of Finance Government Bond (SBM) and loan management optimized to secure APBN financing

217 4-114 Financial Note and Budget 2013 No Target Program *) Performance Indicator*) Outcome The Ministry of Agriculture (Rp17.819,5 billion), including: 1 Food crop production, productivity and - Direct Aids of Superior Seeds (BLBU) for SLPTT and Non SLPTT areas ton quality Improvement program to reach (BLBU Padi) sustainable food self-sufficiency and selfresilience - Number of Post-Harves Facility Aids 703 units The expansion of proper food crop farming introduction supported with sound post-harvest management system and seed provision and efficient production safeguarding to achieve adequate and sustainable food crop production 2 Agriculture facility and infrastructure provision and development program - Number (ha) of land optimized, conversed, rehabilitated and reclaimed Quanity of subsidized fertilizer (million tons) 11,08 Agriculture facility and infrastructure provision and development with land expansion and management; irrigation water management; agriculture financing facilitation, fertilizer and pesticide facilitation; and agriculture equipment and machines facilitation 3 Beef self-sufficiency program to safeguard - More livestock breedings 3,1 million heads Improved animal food supplies (meat, eggs, milk) the provision of safe, healthy, wholesome - Controlling, prevention and eradication of Contagious Zoonosis Animal ,4 doses Improved contribution of domestic livestock in animal food provision and halal (religiously legal) beefs Disease, Viral, bacteria, parasites and reproduction problems (dose) (meat and eggs) from domestic sources Chapter 4 Central Government Expenditure 4 Technology and competitive superior variety - Number of new superior varieties of food crops 13 development program - Number of superior variety/clones of plantation trees 10 5 Sustainable plantation production, - Export commodity development: coffee 1331 productivity and quality improvement - National sugar cane self-sufficiency: sugar cane 692 program Technology innovation and dissemination in agriculture Sustainable plantation trees production, productivity and quality The Ministry of Industries (Rp3.269,9 billion), including: 1 Manufacturing Industry Based Revitalization - Textile and Micellaneous Industrial Cluster growing and developing 2 Manufacture based industry recovered and developed and Growth Program 2 Agro industry Revitalization and Growth Program 3 Hightech based Industry Development Program - Indonesia's National Standard (SNI) prepared 31 - Agriculture Based Industry Cluster Development, 3 - Agro industry performance improved Oleochemical in industrial estates - Facilitated sugar factories (PG) 25 - Agro industries spread beyond Java island - Standardization in Electronics and Telematics 45 - Industrial added value realized based on high technology - Improved competency of Human Resources in Electronics and Innovation and industrial technology proficiency Telematics Industries - Professional and pro-business organization developed 4 Small Medium Industry Revitalization and - Number of locations developed with cluster approach 14 - Access to raw material sources and financing sources for IKM improved Development Program - Number of IKM following machine/equipment restructuring 30 - Technology capacity and HR, the introduction of standardization and HKI, access to domestic and international markets, institutional cooperation and business climate for IKM improved 5 International Industrial Cooperation Program - Industrial resilience information system development 1 - Access to market, investment sources and technology and international cooperation improved, national industry interests to access industrial resources in efficient manner facilitated, national industrial resilience improved and protected - Number of investment promotion, industrial products and services 3 - National industrial interests to access industrial resources in efficient manner (5M) fasilitated

218 Financial Note and Budget No Program *) The Ministry of Energy and Mineral Resources (Rp18.803,9 billion), including: 1 Electricity Management Program - Capacity of generators, length of transmission networks, capacity of substation, length of distthousandtion and capacity of distthousandtion stations 2 New renewable energy management and energy conservation Program 3 Geological Research, Mitigation and Service Program 4 Oil and Gas Management and Supply Program 5 Piped Fuel and Gas Supply and Distthousandtion Management and Supervision Program Performance Indicator*) Target ; 3625; 4740; 9319,76; 213,46 - Customers of low-cost and saving electricity program customers Investment and bioenergy development 12 - Increased utilization of prospective resources regions and 74 - Gas supply for industries, transportation and power generation 70 - Oil and gas and coalbed methane (CBM) production oil MBOPD, gas MBOEPD and CBM 61.34MBOEPD - Special rights granted for transmission route and gas distribution network 3 - Fuel supplied and distributed throughout NKRI - Percentage of fuel distribution supervision system 30% from NKRI - National fuel reserves allocated Outcome Electrical energy consumption in reliable, safe and environmentally friendly manner New renewable energy management program and energy conservation realized the status of database, geological resources, geology based spatial planning and geological disaster mitigation improved Oil and gas production sustainability improved, including the national capacity, fuel supply reliability and efficiency and industrial raw materials, infrastructure reliability and lower occupational accidents and environmental impacts of oil and gas activities Central Government Expenditure Chapter The Ministry of Transportation (Rp36.679,2 billion), including: 1 Transportation Sector Human Resources - Participants and graduates of Pioneer Degree Education for 164 Development Program Transporation Officials per year Participants and certified graduate of HR Training for Transportation Officials per year 2 Land Transportation Management and - Packages of urban transport master plan, urban traffic information 3 Operation Program master plan, evaluation reports, ATCS, urban transportation safety facilities - Traffic safety facilities 32 3 Railways transportation management and - Units of procured locomotive, KRDI, KRDE, KRL, railbus, trams 84 operation program - Km of new railways tracks including double tracks 383,37 Human resources with reliable, skilled, expert competency in land, sea, air and railways transport and and highly competitive in supporting the programs and activities of transportation sector Land transportation service performance improved Railways transportation service performance improved 4 Sea transportation management and operation program program - Pioneer port locations developed/improved/rehabilitated 20 - More Indonesian ship fleets reliable to support navigation operation 182 Sea transportation service performance improved 5 Air transportation management and operation program - Pioneer routes served Air transportation service performance, which are timely scheduled, integrated, safe and comfortable, - Airports developed and rehabilitated Efficiency of passenger and cargo movements and to minimize interregion air transport service and to boost national economy enhanced

219 4-116 Financial Note and Budget 2013 No Program *) Performance Indicator*) Target 2013 Outcome The Ministry of Education and Culture (Rp73.087,5 billion), including: 1 Research and development program within the Ministry of Education and Culture - Percentage of effectiveness in curriculum/sylabus development and application through monitoring, evaluation and controlling 78,67% Education evaluation analysis and national and international surveys 22 Learning model, data and information and PAUD quality standards, basic education, middle education and higher education and adult education and their accreditation available 2 Basic education program - The percentage of districts/cities having minimum one extraordinary 82,4% elementary school - Jumlah students SD/SDLB penerima subsidi students miskin Secondary education program - SMA/SMK students to receive quality management operation aids 100% (BOOM)/pioneer BOS Secondary Students of Extraordinary Schools (SMLB) receiving genderresponsive 90% schollarship facilities 4 Tertiary education program - New universities established 5 - Working units collecting community funds 98 5 Profession development program for - Percentage of Certified SD/SDLB teachers 57,5% teachers and pedagogical staff and education quality supervisors - Percentage of Certified SMP/SMPLB 60,0% Coverage and distribution of access to quality TK/TKLB, SD/SDLB, and SMP/SMPLB without any gender based discrimination and are relevant to the needs of communities, all provinces, kabupaten, and cities expanded Coverage and distribution of access to quality SMA, SMK, SMLB without any gender based discrimination and relevant to the needs of communities in all provinces, districts and cities Coverage and distribution of access to quality and internationally competitive higher education without any gender based discrimination and relevant to the needs of nation and state Professionalism of teachers and pedagogical staff enhanced and education quality assured according to national education standards (SPN) Chapter 4 Central Government Expenditure The Ministry of Health (Rp34.582,0 billion), including: 1 Health development program - Puskesmas turned into patient-care puskesmas in inhabited border areas and outer small islands 2 Human resources development and empowerment program in health sector (PPSDMK) 3 Nutrition and mother and children health development program - Puskusmas delivering basic health services to poor people Districts/cities of 33 provinces capable of planning their SDMK needs 70 Health operators maximized either domestic and abroad Percentage of malnourished under five babies receiving medical 100% treatment - Percentage (5) of pregnant mothers helped by skilled health operators 89% 91 Basic, referential, traditional, alternative, complementary health initiatives, occupational, sport and matra health improved including the standardization, accreditation and quality of health services Health human resources supply and quality enhanced according to the specified health service standards Supply and affordability of quality health services for all citizens improved 4 Pharmateutical and health equipment program 5 Disease control and sanitation improvement program - Percentage (%) of medicine and vaccine supplies 95% - Percentage (5) of health equipment products and PKRT in distthousandtion complying with safety, quality and efficacy requirements 90% - Percentage (%) of 0-11 month infants receiving complete basic 88% immunization - Percentage of zoonosa cases found, handled according to the standard 85% Supply of pharmautical and health equipment complying with the standards and affordable by the people improved Lower prevalence rate, mortality rate and disability rate as a result of diseases

220 Financial Note and Budget No Target Program *) Performance Indicator*) Outcome The Ministry of Religions (Rp43.960,5 billion), including: 1 Hajj and umrah pilgrimage development and - Rehabilitation of hajj accommodation facilities/ Information and Public 15 location management Program Relation Center (PIH) at embarkation - Information and Public Relation Center officials (PPIH) in Saudi Arabia 1534 persons The quality of hajj and umrah pilgrimate services and its information system enhanced 2 Islamic education program - MI students receiving BOS students - Access, quality and competitiveness of Islamic education improved - MTs students receiving BOS students - Secondary equalization, expansion and quality improvement 3 Christian society development program - University students of low-income households receiving scholarship Quality of social counseling for Christian communities and Christian facility education enhanced Certified Christian Teachers Catholic society development program - University students of low-income households receiving scholarship Quality of social counseling for Catholic communities and Catholic facility education enhanced - Worship Place Assistance for Catholic Believers 215 pieces 5 Hindu society development program - University students of low-income households receiving scholarship Quality of social counseling for Hindu communities and Hindu education facility enhanced - Education staff compentent in their fields Buddha society development program - University students of low-income households receiving scholarship 500 Quality of social counseling for Buddha communities and Buddha facility education enhanced - Religion and Religiosity education development and promotion (operational aids) 40 locations Central Government Expenditure Chapter The Ministry of Manpower and Transmigration (Rp4.863,1 billion), including: 1 Manpower Competence and Productivity - Certified manpower workers Workers competitiveness and productivity enhanced Improvement Program - Indonesia s National Competency Standards (SHHsNI) established and competency based training programs prepared 50 SHHsNI and 234 program 2 Manpower Placement and Expansion Program - Worker Placement through AKAD (Interprofessional and Inter Region)/AKL (Local Interprofessional, and manpower institutions 80rb persons/33prov Employment placement and expansion with worker placement service facilitation enhanced - (a) Unemployment receiving temporary jobs; (b) districts/cities introducing temporary unemployment reduction program 84rb persons/414 Kab/Kota 3 Industrial Relation and Manpower Social Insurance Improvement Program - Workers under Employment Contracts (DHK) and registered as participants of Jamsostek - Remuneration policy harmony developed (KHL and remuneration setting) 4 Manpower Protection and Supervision System Development Program - Companies introducing SMK3 (Occupational Health and Safety Management Standard) - (a) Child workers withdrawn from their workplace; (b) child workers returned to education world and/or undertaking skill training 5 Transmigrant Site Development Program - Areas in underdeveloped regions/border areas where facilities and infrastructure to be built 350 thousand persons socialization and consolidation with Reg. Gov. naik 10% 11 thousand childred, 100% 36 ares (7.849 Units & 228 Km) - Lands provided in underdeveloped regions/border areas 25 areas ( Ha) Industrial Relationship Development and Worker Sociel Insurance established in Employment Requirements, Prosperity and Discrimination Analysis, Remuneration System, Industrial Relationship Dispute Settlement improved The introduction of manpower laws in work place intensified Liveable dwelling places and decent business place within the transmigration site provided

221 4-118 Financial Note and Budget 2013 No Program *) The Ministry of Social Affairs (Rp5.605,6 billion), including: 1. Social Empowerment and Poverty Alleviation - Households having access to business through Joint Economic Business 8.931HHs Program Groups (KUBE) - Poor households receiving empowerment assistance HHs 2. Social Rehabilitation Program - Abandoned childred and under five babies, street children, disabled persons children, children under legal prosecution, and childred requiring special protection, who are served, protected and rehabiliated either in or out of orphanage - The disabled persons who are served, protected and rehabilitated either persons in or out the rehabilitation center 3. Social Protection and Insurance Program - Victims of natural disasters receiving assistance in KSB (Disaster Alert persons Kampong) - Very poor households (RTSM) receiving conditional cash aids of 2,4 million RTSM Prosperous Family Program (PKH) 4. Social Prosperity Education, Training, - Trained and certified community human resources in social welfare persons Research and Development Program - Certified social and social welfare operators 400 persons 5. Accountability Supervision and - Verified DIPA Deconcentration, Co-Administration (TP) fund and central Improvement Program for officials of the Ministry of Social Affairs Performance Indicator*) office within DG Social Empowerment and Poverty Alleviation - Social empowerment and poverty alleviation planning/programming/budgeting documents prepared Target Irregularities in program and activity implementation decreased 2 documents Outcome Social function of socially troubled residents (PMKS) being the beneficiaries of basic need empowerment and fulfillment program improved Social functions of PMKS (socially troubled residents) being the beneficiaries improved with social service, protection and rehabilitation Social functions of PMKS (socially troubled residents) being the benerifiaries improved with social services, protection and insurance The number of competent social workers, and social agents and sosial prosperity improvement motivators increased Chapter 4 Central Government Expenditure The Ministry of Forestry (Rp6.717,5 billion), including: 1. Macro Planning and Forest Area - Forest borders of 63,000 km secured consisting of outer boundaries and km Strengthening Program functional boundaries of forest areas - Data and information on the use of forest areas in 33 province 3 provinces 2. Biodiveristy Conservation and Forest Protection Program - Forest area squatter management in 12 priority provinces (North Sumatra, Riau, Jambi, South Sumatra, West Sumatra, Lampung, East Kalimantan, Central Kalimantan, South Kalimantan, South East Sulawesi - Hotspots in Kalimatan island, Sumatra island, and Sulawesi island to reduce 20 percent (%) every year on the average from provinces 3. Community based watershed function and - Rehabilitation plants for critical lands, mangrove forests, peat soil, 399thousand ha supporting capacity improvement program swamps, and coastal lines in priority whatershed (DAS) extending - Integrated DAS management plan in 108 units of priority DAS 11 DAS 4. Forestry Research and Development - Basic and applied science and technology produced in forestry 80% Program engineering and forest product processing of 5 titles - Basic and applied science and technology applied by the users in forest 80% productivity of 6 titles 5. Accountability Supervision and - Violation to laws and regulations within inspectorate work areas to 40% Improvement Program for Officials of the reduce by 50% from 2009 Ministry of Forestry - Potential loss to reduce until 25% from % 59,2% Forest area allocation to assure optimum forestry resources management secured Biodiversity and ecosystem playing significant roles as buffer zone for ecological resilienace and real sector driving force and leverage for the dignity of nation in global world Critical lands as priority watershed (DAS) decreased Minimum 60% of forestry research and development can be used in policy making, technical forestry development and science enrichment including policy and technical development in climate change related issues Accountability supervision and improvement to the officials of the Ministry of Forestry and bureaucracy reform and good governance in the ministry realized

222 Financial Note and Budget No Program *) Performance Indicator*) Target 2013 Outcome The Ministry of Marine and Fishery (Rp7.077,4 billion), including: 1. Fishery and Marine Science and Technology Research and Development Program - Technology package/innovation, engineering design/design/information and data of applied science and technology on marine and fishery 6 packages The output of science and technology research and innovations in marine and fishery sector utilized Central Government Expenditure Chapter 4 - Technology package/innovation, HKI proposals/rewards, data and information for aquaculture finshery production and productivity 13 packages 2. Capture Fishery Development and Management Program - Fish port developed, including potential ports beyond the borders 816 ports - Territorial water and islands which their fishery resources soundly managed (WPP = Fishery Management Region) 11 locations Productivity of capture fishery and fishermen prosperity augmented 3. Aquaculture Fishery Production Improvement Program - Aquaculture production centers controlled and rehabilitated in terms of their waters - Acquaculture fishery regions having adequate facilities and infrastructure 71 centers 449 areas Aquaculture fishery production increased 4. Fishery Product Competitiveness Improvement Program 5. Marine, Coastal and Small Island Resources Management Program - Promotion and cooperation development and expansion for domestic fishery products - Large Scale Fish Processing Unit (UPI) developed and expanded to meet fishery product standard quality - Islands facilitated for their infrastructure provisions including outer small islands - Groups being the beneficiaries of traditional salt processing and salt production volumes (PKN = Fishermen Welfare Augmentation) 33 provinces 219 UPI (40 Baru; 179 Lanmillionn) 60 island 800; 700 million ton Primary fishery products highly competitive in domestic and international markets improved Marine, coastal and small island management and the exploration of their resources managed in sustainable manner for the prosperity of people The Ministry of Public Works (Rp77.978,0 billion), including: 1 Construction development program - The development of regional construction service providers 33 - The development of business management 15 2 Settlement infrastructure improvement and - Rural area infrastructure 185 regions development program - Villages served with water supply infrastructure 1610 villages Capacity and performance of central and regional construction service providers enhanced Number of cities introducting the norms, standards, procedure and criteria of settlement area development according to the specified spatial planning and the number of areas served with settlement infrastructure increased 3 Road operation program - Toll road developed 19 km - Facilitation for regional links improvement toward 60% in sound conditions - Road links received routine maintenance km - Road structure increased/widened 4 Spatial planning program - Spatial planning that has been synchronized with local development plan 17 provinces Consistency of development plan with regional spatial planning, consistency of infrastructure development program and national spatial Inter-province coordination of 7 islands and other small islands 7 island planning 5 Water resources development program - Irrigation network service coverage developed/improved ha - Swamp network service coverage developed/improved ha Water resources management performance improved

223 4-120 Financial Note and Budget 2013 No Program *) Performance Indicator*) Target 2013 Outcome Coordinating Ministry for Politics, Laws and Security (Rp518,2 billion), including: 1. Politics, Laws and Security Coordination Improvement Program - Coordination meeting held for legal material synchronization and harmonization 12 Effectiveness in Domestic Political Policy Formulation and Implementation enhanced - Coordination meeting held for international policy and laws 12 Chapter 4 Central Government Expenditure 2. Sea Security and Safety Improvement Program - Intelligence operations (domestic & foreign) for sea security operation 9 - Joint sea security operation in Indonesian water jurisdiction 9 Institutional capacity building, security facilities and infrastructure, formulation of sea safeguarding policies, integrated sea safeguard operation and law enforcement in Indonesian water jurisdiction intensified 3. Facility and Infrastructure Improvement Program for Officials in the Coordinating Ministry of Politics, Laws and Security 4. Support Program for the Management and - Percentage (%) of Timely General Administration Management 90% Implementation of other Technical Tasks of Coordinating Ministry of Politics, Laws and Security - Development and building construction packages 12 Adequate facilities and infrastructure for the officials - Percentage (%) of Accountable and Timely Work Plan Implementation Supervision 90% Administrative support and operational activities of the Coordinating Ministry of Politics, Laws and Security increased The Coordinating Ministry for Economy (Rp281,1 billion), including: 1. Economic Policy Coordination Program - Percentage of recommendations from reponsive macroeconomic policy coordination and synchronization - Percentage of recommendations for the implemented Regional Economy Potential Development Policy Coordination and Synchronization 80% 85% Effectiveness in macroeconomic and financial policies coordination enhanced 2. Facility and Infrastructure Improvement Program 3. Support Program for the Management and Implementation of Other Technical Tasks of the Coordinating Ministry of Economy - Percentage (%) of quality facility and infrastructure provided for all personnel 100% Personnel productivity increased - Percentage of quality planning management documents 95% Performance and competency based organizational culture and sound organizational management improved The Coordinating Ministry for People's Welfare(Rp298,9 billion), including: 1 People's Welfare Policy Coordination Program - Regional Poverty Alleviation Coordination Team (TKPKD) to perform community empowerment based poverty alleviation program integration 2 Support Program for the Management and Implementation of other Technical Tasks of the Coordinating Ministry for People's Percentage of Social Insurance Provider Body (BPJS) for Health, BPJS for Manpower and Roadmap of Universal Coverage for Health Insurance (UC JK) 75% - BPK s opinion to financial statements Unqualified Opinion (WTP) - Percentage (%) of BKP and BPKP findings followed up 25 - Coordination in developing and harmonizing people prosperity policies in attempt to reduce poverty and unemployment rates and as quick respond for public prosperity problems so as to augment the welfare of people intensified All supporting activities for coordination activities in people werlfare affairs implemented

224 Financial Note and Budget No Target Program *) Performance Indicator*) Outcome The Ministry of Tourism and Creative Economy (Rp2.053,0 billion), including: 1 Tourism Destination Promotion Program - Regions facilitated/supported to be national tourism destination 10 - Variety of tourism destination increased - Destination design facilitation for tourism investment 10 - Investments in tourism sector promoted 2 Tourism Marketing Development Program - Foreign markder information development 16 - Tourism promotion both in domestic and abroad intensified in terms of quality and quantity - Participation in international tourism markets 52 - Total foreign and domestic tourists increased 3 Tourism Resources and Creative Economic Development Program - Human Resouces participating in tourism and creative economic Human resources capacity and professionalism in tourism and creative coaching economic sector developed - Policy notes in creative economy prepared 26 - Policy research and developmnet in creative economic sectors intensified Central Government Expenditure Chapter 4 4 Art and Culture based Creative Economic Development Program 5 Media, Design and Science and Technology Based Creative Economic Development Program - Actors in art-culture based creative economic sectors (EKSB) to improve their creativity and productivity capacities in entertainment and musical art sectors - Actors of EKSB to improve their creativity and production capacities in quality films - Actors of media, design and science and technology based creative economic sectors (EKMDI) to improve their creativity and production capacities in producing media based creative works - Creative enterpreneurs receiving supports Economic contribution of art and culture based economic sector increased Economic contribution of media, design and science and technology based creative economic sectors increased The Ministry of State Owned Enterprises (Rp143,6 billion), including: 1 SOEs Development Program - Good corporate (CGC) scores for SOEs Good - SOEs contribution to national economy improved - Maximixing and synergizing SOEs assets approved 30 - Transparency, accountability and independency of SOE management improved 2 Support Program for the Management and - SOE Satisfaction Index 78 - SOEs' satisfaction to the policies of SOEs Ministry increased Implementation of Other Technical Tasks of - Government Performance Accountability System Score (SAKIP) 60 - Goor corporate government principles introduced The Ministry of Research and Technology (Rp653,0 billion), including: 1 Science and Technology Proficiency - Incentive package for national innovation system (Sinas) Science and technology resources increased Improvement and National Innovation Strengthening Program - Science and technology intermediation to support Indonesia Science Technology Park (I-STP) on Sciece and Technology Application for small and medium industries 2 Support Program for the Management and - Percentage (%) of service quality improvement in legal, human resources Implementation of Other Technical Tasks of and protocol, data and information, licensing for foreigh researches the Ministry of Research and Technology - Percentage (%) of recommendations from evaluation results implemented 10 - Science and tehnology application to enhance economic competitiveness, people welfare and self-reliance of nation intensified Management support for the implementation of tasks aiming to improve organizational performence provided

225 4-122 Financial Note and Budget 2013 No Program *) Performance Indicator*) The Ministry of Environment (Rp921,5 billion), including: 1 Natural Resources and Environmental - Locations for Hazardous Waste (B3) management supervision in ports 46 - Environmental pollution decreased Management Program and the recovery of polluted environmental media - Districts participating in Toward Greed Indonesia Program (MIH) Natural resources and environmental management capacity increased Target 2013 Outcome 2 Support Program for the Management and Implementation of Other Technical Tasks of - Monitoring and evaluation reports of programs and activities 2 - Financial management of the ministry to get unqualified opinion (WTP) from the auditor the Ministry of Environment - Evaluation report of Working Units Government Institution Performence Accountability Report (LAKIP) 1 - Bureaucracy reform implementation accelerated The Ministry of Cooperative and Small and Medium Enterprises (Rp1.810,7 billion), including: 1 Cooperative and SME Empowerment Program - Facilitation for funding scheme for micro and small enterprises 1 scheme - The institutional quality of KUMKM and understanding of coopratives among officials and communities concerning a) the humber of quality cooperatives; b) the number of participants in cooperative advocacy; c) the number of participants of technical guidance improved - Provinces providing financing supports for KUMKM in APBD 7 provinces - Revitalization/development of traditional market facilities and infrastructure facilitated, KUMKM gathering to promote their products and sidewalk vendors (PKL) management Information System to enhance the quality of information services to public with regard to Cooperative and SME empowerment Chapter 4 Central Government Expenditure 2 Support Program for the Management and Implementation of Other Technical Tasks of the Ministry of Cooperative and SME - Human Resources with self-stimulation capability to be more innovative and creative by introducing various approaches in problem solving 3 systems - Quality and coordination of program/activity planning of the Ministry of Cooperatives and SME enhanced 19 activities - Quality of Evaluation and reports and data and information services on KUKM enhanced - Quality of budget implementation and state asset management (BMN) enhanced - Bureucracy restructuring, effective, efficient and accountable governance intensified - Quality of central and regional budget audit and supervision enhanced 3 Facility and Infrastructure Improvement - Data and communication management equipment maintenance and 12 months - Quality of facilities and infrastructure for officials of the Ministry of Program for the Ministry of Cooperative and procurement Cooperatives and SME enhanced SME - Office supply improvement within the Ministry of Cooperative and SME 4 activities

226 Financial Note and Budget No Program *) Performance Indicator*) The Ministry of Women Empowerment and Child Protection (PP&PA) (Rp234,7 billion), including: 1 Gender Mainstreaming and Women - Manuals for wowen protection from violence 1 manuals - Gender Mainstraiming Policies in economic sector increased Empowerment Program - Ministries/Agencies (K/L) and Regional Government facilitated in improving their gender data processing capacity 5 K/L and 12 provinces - Gender Mainstreaming Policies in social, political and legal affairs increased - Women Protection Policies against violences increased 2 Child Protection Program - Manuals for education right fulfillment for the children 1 manuals - Child Protection policies increased - Ministries/Agencies (K/L) and Regional Governments facilitated in 5 K/L and 7 - Child development policies increased protecting childred from social problems provinces 3 Support Program for the Management and - Gender and child based planning policies 3 activities - Human resources and budgeting documents, plans, development and Implementation of Other Technical Tasks of evaluation reports on KPP and PA prepared timely, monitored and - Child protection supervision in provinces 16 provinces the Ministry of PP&PA evaluated according to the latest data and in integrated and harmonious manner Target 2013 Outcome Central Government Expenditure Chapter 4 - Gender and child development performance evaluation reports based on the lastest data accomplished in timely and harmoniously manner - Facility and infrastructure, financial support and HR development according to the needs provided in accountable manner The Ministry of State Apparatus Empowerment and Bureaucracy Reform (PAN and RB) ( Rp201,3 billion), including: 1 State Apparatus Empowerment and Bureaucracy Reform Program - Regulations/policies in Government Administration Supervision 1 RUU - Proportional, effective and efficient government organizations established - Percentage of Government agencies performing and reporting Inpres of Corruption Eradication Acceleration, which is evaluated according to the 77 agencies - Professional, highly performed, accountable and prosperious human resources established - Effective, efficient and accountable governance realized - Accountable and highly performed government agency - Quality of public services enhanced - Integrated, efficient and effective government supervision realized 2 Support Program for the Management and Implementation of Other Technical Tasks of the Ministry of PAN and RB - Well-planned, systematic and comprehensive national bureaucracy reform realized - Percentage of cultural campaigns in printed and electronic media 70% Internal management performance for the implementation of tasks of the ministry increased - Government agencies as Pilot Project for Work Culture Improvement 8 agencies 3 Facility and Infrastructure Improvement Program for Officials of the Ministry of PAN and RB - Ratio of facility and infrastructure in compliance with the needs of personnel and Service Quality Standard 100% Quality of internal facility and infrastructure for the implementation of tasks of the ministry enhanced

227 4-124 Financial Note and Budget 2013 No Target Program *) Performance Indicator*) Outcome State Intelligence Agency (BIN) (Rp1.551,4 billion), including: 1 State Security Investigation, Safeguard and - Percentage of counter Intelligence monitoring 0,32 Improved investigation for national security and safeguarding Mobilization Program - Percentage of Foreign Intelligence Operation adequacy 30% 2 Support Program for the Management and - Support adequacy 31% Better technical and administrative service support to national Implementation of Other Technical Tasks of - Budget allocation 31% Intelligence State Intelligence 3 Accountability Supervision and Improvement Program for the Official of State Intelligence Agency - Supervision findings to decrease 31% More technical and administrative support to the national Intelligence Chapter 4 Central Government Expenditure National Cryptogram Agency(Rp.593,5 billion) including: 1 National cryptogram development program - Signal analysis services 12 services - Cryptogram carried out consistent with national policies - Encryption material policies/manuals 1 policy - Support to classified communication - Self-reliant cryptogram technology 2 support program for the management and - Supervisory activity audit documents 23 documents Office administrative service of National Cryptogram Agency in implementation of other technical tasks of - Students graduating per year 40 students accountable manner the National Cryptogram Agency The National Security Agency (Rp38,9 billion) including: 1 National Security Policy Development Program - Cyclic reviews, dynamic reviews and kirpat reviews focussing on crisis prevention and resolution 110 reviews Materials for decision making to set National Security Development Policy focusing on defense and security and crisis prevention and resolution available 2 Support Program for the Management and Implementation of Other Technical Task of - Infomation technology system implemented and complete and data 85% presentation - Sound personnel administration and development 90% - Complete and up-to-date references to give supports for review activities and reproduction of review results 90% Well-advanced management and adequate operational support for National Resilience Council Central Bureau of Statistics (BPS) (Rp3.741,7 billion), including: 1 Statistic Information Supply and Service Program - Percentage of 2013 Agriculture Census according to Standard Operating Procedure (SOP) - Percentage of National Balance Sheet Statistics (GDP) and Regional Balance Sheet Statistics (GRDP) by expenditures 2 Accountability Supervision and - Accountability supervision to the officials of BPS Region I according to Improvement Program for Officials of BPS SOP 100% Complete, accurate and timely statistic data and information provision increased 100% 100% The quality of accountability in financial and material administration management enhanced 3 Support Program for the Management and Implementation of Other Technical Tasks of 4 Facility and Infrastructure Improvement Program for Officials of BPS - Accountability supervision to the officials of BPS Region II according to SOP 100% - Percentage of Working Units performing bureaucracy reform 85% Good governance and clean governance realized socialization - Percentage of Tertiary Statistical Science Education Services 100% - Output of various tasks 1500 units Facilities and infrastructure to support the performance of technical activities complied with

228 Financial Note and Budget No Target Program *) Performance Indicator*) Outcome The Ministry of National Development Planning/BAPPENAS (Rp1.055,1 billion), including: 1 National Development Planning Program - Law and regulation development policies prepared - Quality of National Development Plan Design on Human Resources and Culture enhanced - Percentage of suitability of policies on development plants of regions to National Development Planning System Law increased - Quality of National Development Plan Design on Regional Development and Regional Autonomy enhanced - Quality of National Development Performance Evaluation enhanced 2 Accountability Supervision and Improvement Program for Officials of Bappenas 3 Facility and Infrastructure Improvement Program for Bappenas 4 Suppport Program for the Management and Implementation of Other Technical Tasks for Bappenas - Effective internal control system available and applied Quality of Internal Government Control System (SPIP) in the Ministry of PPN/Bappenas enhanced - Level of Satisfaction to Consultation Services - Percentage of facility and infrastructure provided to the officials of the Ministry of PPN/Bappenas - Percentage the suitability of Education and Training Review Results and Functional Position Planning (JFP) used in formulating Education and Training and JFP policies - Planning, institutional and administration documents Facilities and infrastructure for officials in the Ministry of PPN/Bappenas improved The implementation of institutional management tasks to support the main tasks and functions of the Ministry of PPN/Bappenas intensified Central Government Expenditure Chapter National Land Agency (Rp4.390,2 billion), including: 1 National Land Management Program - Land dispute management (cases) 80% - A condition capable of stimulating, dynamizing and facilitating land infrastructure development at national, regional and sector level established 2 Accountability Supervision and Improvement program for Officials of BPN - Inventory of Coastal Areas, Small Islands, Border Areas and Certain Regions (WP3WT) (National Priority 10) - Reports of supervision intensity improvement activities in attempt to increase public services (%) 1 package - Land asset legalization, sound land administration and complete information for land asset legality realized - Land management and arrangement and land titling and optimum land use improved - Land occupation, ownership, use and exploration control and community empowerment in access improvement to economic resources realized - Land disputes, conflics and cases reduced and the new land related disptures, conflicts and cases prevented 27% Performance accountability for tasks implementation in all working units within BPN RI - Reports of performance and case verification 44 3 Facility and Infrastructure Improvement Program for BPN - Land service facility and infrastructure development 62 working units Facilities and infrastructure of BPN RI increased in terms of quality and quantity 4 Suppport Program for the Management and - Organizational and personnel development 1 Quality of coordination, synchronization and integration of tasks and functions of BPN RI and public services in land affairs enhanced Implementation of Other Technical Tasks for BPN - National land data and information on National Land Information and Management System (Simtanas) (%) 12%

229 4-126 Financial Note and Budget 2013 No Target Program *) Performance Indicator*) Outcome National Library (Rp.478,7 billion), including: 1 Library Development Program - National and international publication collected and managed entry Library services, physical and content preservation of old manuscripts and reading culture in the society improved - National publication recorded in Indonesia s National Bibliographies entry (BNI) and National Master Catagoue (KIN) 2 Facility and Infrastructure Improvement Program for National Library - National Library service facilities (units) 561 units Quality of building and office equipment in Perpusnas (national library) enhanced 3 Suppport Program for the Management and - Regulations on library prepared 13 drafts Implementation of Other Technical Tasks for - Libary promotion and inter-agency coordination 21 times National Library Quality of services, management, planning and implementaion supported with sound administration anf financial management in national libary enhanced The Ministry of Communication and Informatics (Rp3.807,4 billion), including: 1 Informatics Application Development - Policies and regulations on e-government 1 document - Quality of e-government application enhanced Program - Draft Regulation of Minister of Communication and Informatics on E- 1 document - e-business for SME Government master plan - SME applying e-business application 250 UKM - E-business service centers 2units 2 Public Information and Communication - Policies, regulations and standardization in public communication and 3 - Public information dissemination, equalization and utilization Development Program information - Complete and functional media centers in compliance with the specified 20 standards at provinces/districts/cities in outer regions/the frontiers/conflict-torn regions 3 Post and Informatics Operation Program - Percentate (%) of villages served by telecommunication access or 33, % - Post and informatics services available villages (0f total 72,800 villages throughout Indonesia) - Percentage (%) of sub-dictrict served by internet access 100% - Safe national internet network - Percentage (%) of national internet network security especially for 65% internet service providers, internet exchange, government agencies and critical infrastructure - Percentage (%) of informatic and calibration equipment testing services 65% Chapter 4 Central Government Expenditure 4 Post and Informatics Resources and Equipment Management Program - Percentage (%) of the use of radio frequency spectrum complyin with the regulations and troubleshooting for radio frequency spectrum, satellite orbit, post, telecommunication and broadcasting facilities 90% - Optimum informatic resources management to support the realization of internet penetration 50%, broadband services 30% and TV digital broadcasting 35% - Percentage (%) of timely processed licensing processing 85% - Technically feasible informatic industry developed - Certified radio operators 75% Communication and Informatics Research - Research and Development works in literation and profession 6 - and Development Program - Eliteration of communities in border areas, isolated regions, 2 underdeveloped regions and conflict-torn regions - Participants of education and training on media (official) Participants of education and training on media (self-funded) Research as reference in public policy making in communication and informatics sector Percentage of certified education and training participants

230 Financial Note and Budget No Program *) Performance Indicator*) Target 2013 Outcome National Police of Republic of Indonesia (Polri) (Rp45.622,0 billion), including: 1 Research and development program within - Prototypes and policy reviews 12 the Polri Education and training office services 12 2 Public laws and security strategy - Law and order strategy services 12 development program Regional law and order services 12 3 Public laws and security maintenance - Percentage of declined law and order disturbances along public activities 11% program routes using sea transport mode; coastal and national/international port securities - Policy operations being the public priority needs 12 Technology based police equipment capable of dealing with various criminal trends Early detection of potential security disruption that may spark public unrest Well-maintained and improved public law and order conditions to protect overall citizens in performing their activities for living standard augmentation free from any and all risks, threaths and disruptions that may cause bodily injuries Central Government Expenditure Chapter 4 4 Criminal probe and investigation program - Percentage (%) of terroristm case and clearance rate at national level 102% 5 Domestic serious security threat mitigation program Percentage (5) of general criminal case and clearance rate at national 57% level - Domectic and Regional law and order disruption management reports 12 - Domestic security disruption management reports 12 Various types of crimes coped with and decreased (conventional crimes, transnational crimes, crimes with contingency implications and crimes against state assets) without violating human rights Peaceful people from any law and order disturbance, particularly the serious criminal threats (mass riots and organized crimes) Drug and Food Supervision Body (BPOM) (Rp1.188,3 billion), including: 1 Drug and Food Supervision Program - Percentage of MD food production facilities complyin with the latest GMP standards (in relation to 1000 facilities checked) 60% - Effectiveness in drug and food supervision enhanced to protect the people 2 Facility and Infrastructure Improvement Program for BPOM 3 Suppport Program for the Management and Implementation of Other Technical Tasks for - Cases in medicine and food investigation Percentage (%) of performance supporting facilities and infrastructure 90 - Facilities and infrastructure required by BPOM provided including the maintenance - Percentage of working unit capable of managing BMN (in relation to working units) - Draft regulations and laws prepared Participation of BPOM in bilateral, regional, multilateral and international personsanization cooperation 43 Coordination in planning, development and control of programs, administration and resources within BPOM intensified according to standard quality management system

231 4-128 Financial Note and Budget 2013 No Target Program *) Performance Indicator*) Outcome National Resilience Institute (Rp235,0 billion), including: 1 National Resilience Development Program - Number and types of revisions to curriculum and syllabus documents for short-education program and regular education programs 80 - Quality of national leadership education in efficient, effective, accountable and optimum manner enhanced Chapter 4 Central Government Expenditure - Total participants, schedule and type of education and key note speakers according to education studies in Lemhanas RI - Number and types of research and strategic review documents in economic empowerment, geography, natural resources and environment. - Number and types of research and strategic review documents in ideology, politics, democratization, archipelago insights, national resilience, national management system and leadership Quality of conceptual and strategic review to various national, regional and international issues enhanced 2 Accountability Supervision and Improvement program for Officials of National Resilience Institute (Lemhanas) - Working units complying with laws and regulations in performing their major tasks and functions - Working units applying reliable internal control systems Performance and financial accountability with reliable internal control system toward good governance and clean governance within Lemhannas RI 3 Suppport Program for the Management and - Tamnas magazine and review journals published Main tasks and functions of Lemhanas RI published to the public Implementation of Other Technical Tasks for - Lemhannas Foreigh guests protocol 12 - Lemhanas RI's protocol services to support the main tasks and functions and activities of leaders and documentations of activities performed by the leaders and institutions Capital Investment Coordination Body (BKPM) (Rp705,1 billion), including: 1 Capital Investment Competitiveness Improving Program - Formulated recommendations for capital investment procedure simplification - Training on entrepreneurship capacity improvement for Micro, Small, Medium Enterprises and Cooperatives (UMKMK) 1-5 locations Quality of reviews and proposed policies, potential information and facilitation for business development to fortify the competitiveness in capital investment improved - National business empowerment communication forums implemented 5 locations - Quality of promotion oriented to fortify the competitiveness of capital investment enhanced - Effective capital investment promotion facilities with the development of representative offices for Capital Investment Coordination Body (BKPM) in abroad or Indonesian Investment Promotion Center (IIPC) 2 Suppport Program for the Management and Implementation of Other Technical Tasks for BKPM - Licensing and non-licensing applications under BKPM, One Stop Integrated System (PTSP) Province, PTSP District/City developed in Electronic Investment Information and Licensing Service System (SPIPISE) Indonesian Investment Promotion Center (IIPC) in 11 countries 1 packages masterdata of capital investment - Local PTSP connected to SPIPISE 50 Kab/Kota - Quality of management support and implementation of other technical tasks of BKPM enhanced

232 Financial Note and Budget No Target Program *) Performance Indicator*) Outcome National Narcotics Body (BNN) (Rp1.072,6 billion), including: 1 Illegal Drug Abuse and Distthousandtion - Education institutions empowered in P4GN Prevention and Eradication Program (P4GN) education institutions - P4GN information dissemination media 913 media - Government Institution Rehabilitaion Agency (LRIP) acquiring strengthening, stimulus or facilitation/capacity building - Community component rehabilitation institutions (LRKM) acquiring 80 LRKM strengthening, stimulus, or facilitation/capacity building 2 Suppport Program for the Management and - P4GN data and information reports prepared 13 data reports - Implementation of Other Technical Tasks for BNN - P4GN research and development reports prepared 3 l research reports Secondary students, tertiary students and workers possessing knowhow, understanding and awareness on drug abuse and illegal narcotics distribution increased 210 LRIP - Institutional rehabilitation capacity improved according to Minimum Standard Quality (SPM) Institutional, administrative information communication system and state owned asset management system applied Central Government Expenditure Chapter The Ministry of Underdeveloped Region Development (Rp2.048,8 billion), including: 1 Underdeveloped Region Development - Percentage (%) of underdeveloped regions receiving stimulants in 20% - Regional balance supported with sufficient investment inflows Acceleration Program promoting economic investments - Districts in underdeveloped regions manage to increase the investments 50 in terms of quantity and values - Districts preparing production center development business plans 10 - Integration of production center, growth center, SME and investment in - Underdeveloped districts receiving stimulants for production center development 10 underdeveloped regions accelerated so as to improve regional revenue and income per capital higher than or equal to national rate 2 Suppport Program for the Management and - Personnel attending structural education and training 25 - Professionalism and effectiveness improvement to the human resources Implementation of Other Technical Tasks for of the Ministry of Underdeveloped Region Development (KPDT) in the Ministry of PDT - Personnel attending technical education and training 50 optimum manner - Procedure system, work method, occupational analysis and management information system development accomplished 10 - Organizational and administrative development policies within KPDT - Percentage (%) of organizational and administration outputs from organizational restructuring performed by KPDT 90

233 4-130 Financial Note and Budget 2013 No Program *) Demography and National Family Planning Agency (BKKBN) (Rp2.601,9 billion), including: 1 Demography and Family Planning Program - Percentage of families raising under five years old babies and children understanding and implementing sound baby and children raising and development - Provinces receiving household resilience program for families with under five years old babies and children 2 Training and Development Program for BKKBN Performance Indicator*) Target 2013 Outcome 79,6 (of 3,9 million active members - Proportional population growth in Demographic development policies provided and docialized - Policies, strategies and information on access and quality of Family 5 Planning services (quality small families), special regions and special targets operated - Partners receiving facility in reinforcing participation in Family Program (KB) for quality small families (galcitas), special regions and special targets 4 - Curriculum, materials/media developed and used 6 - Quality in the implementation of human resources training and researches on demographic and family planning program enhanced Chapter 4 Central Government Expenditure - Partners actively establishing cooperation in HR education and training program 6 3 Accountability Supervision and Improvement Program for the Officials of BKKBN 4 Suppport Program for the Management and Implementation of Other Technical Tasks for BKKBN - Percentage of personnel and general administration supervision Accountability in program, personnel and general, financial and logistic administraion management (good governance) improved - Monitoring, evaluation and development in financial and logistic supervision - Policies, straegies and materials of legal information, administration personsanization and public relation that can be used by all stakeholders and parners - Percentage of working units performing financial accountability at accountable accuracy rate 1 center 33 provinces 5 - Management supports for demographic and family program implementation National Commission on Human Right (Komnas HAM) (Rp72,8 billion), including: 1 Suppport Program for the Management and - Percentage of resolution for the complaints addressed to Komnas HAM 80 - Supports for the management of technical task implementation of Implementation of Other Technical Tasks for Komnas HAM increased Komnas HAM - Intitutional function of National Commission for Women increased to establish independent, transparent and accountable institution in implementing mandates of National Commission for Women 70 98

234 Financial Note and Budget No Target Program *) Performance Indicator*) Outcome Meteorology, Climatology and Geophysic Agency (BMKG) (Rp1.392,3 billion), including: 1 Meteorology, Climatology and Geophysis Development and Improvement Program - Provinces receiving information on weather forecast at district scale every day via electronic and printed media - Technical Implementing Unit (UPT) BMKG disseminating early information of air quality (Air Quality Monitoring System (AQMS) 30-6 Satisfaction of users for early extreme climate information and routine wheather information to support transportation safety and disaster management improved Central Government Expenditure Chapter 4 - Locations capable of provising strong seismic quake inforamtion Meteorology and Climatology Station of Air Quality and Geophysics 164 (MMKuG) which the equipment has been calibrated according to the specified schedule 2 Support Program for the Management and - Draft government regulations 3 - Implementation of Other Technical Tasks of - Personnel educated and trained 910 BMGK Satisfaction of users for earthquake, tsunami, technical seismology and geophysics information to support national development and disaster management improved Planning, legal, financial and asset, HR, supervision, education and training and research and development management services to support services and information of MHHsuG improved General Election Commission (KPU) (Rp8.492,0 billion), including: 1 Democracy Institutional Strengthening and Political Process Improvement Program - Accuracy of analysis preparation in legal administration for the management of political parties, individuals participating in general election and campaign fund of general election participants - Percentage (%) of manuals and technical guidelines on general election timely and accountably accomplished 80% - 75% Capacity and credibility of general election and regional election implementing organizations (KPU, KPU Provinces, and KPU Kabupaten/Kota) increased 2 Facility and Infrastructure Improvement Program for KPU 3 Support Program for the Management and Implementation of Other Technical Tasks of KPU - Accuracy and compliance in financial services 40 units - Adequate operational facilities and infrastructure for KPU - Accuracy and compliance in financial services 100% - Quality of management support and implementation of other technical tasks enhanced - Accuracy in general election need information management 85% Constitution Court (MK) (Rp199,8 billion), including: 1. Suppport Program for the Management and Implementation of Other Technical Tasks for - Judiciary administration development and expansion 6 General administration and judiciary administration support increased, which is modern and trustable MK - Constitutional publication materials of MK Facility and Infrastructure Improvement - Facility, infrastructure and building development 1 Program for MK - Office supplied and equipment 1 3. Constitutional Case Handling Program - Judicial Reviews, Government Agency Power Disputes Constitution Awareness Program Program Kesadaran Berkonstitusi - Cases of the election of Head of Region Constitutional and procedure understanding on MK to increase 34 Constitutionality of people and constitutional culture enhanced - The dissemination of information on MK case and decision management 114 Quality of services supported with adequate facilities and infrastructure enhanced Consitutional cases settled in timely, transparent and accountable manner

235 4-132 Financial Note and Budget 2013 No Target Program *) Performance Indicator*) Outcome Financial Transaction Reporting and Analysis Center (PPATK) (Rp79,3 billion), including: 1. Suppport Program for the Management and Implementation of Other Technical Tasks for - Percentage of quality and timely executive planning document preparation, accounting systems and reporting with reference to the 100% Quality support for the management and implementation of technical tasks of PPATK PPATK applicable regulations - Percentage of BPK s findings followed up 100% Chapter 4 Central Government Expenditure 2. Facility and Infrastructure Improvement Program for PPATK - Percentage of Disaster Revovery Center (DRC) and archive office (2, % Facilities and infrastructure to support the implementation of main tasks m2 and land 6,000m2) and the furniture and functions of PPATK provided - Percentage of suitability of DRC completion and its design 100% 3. Money Laundering and Terrorism Funding Prevention and Eradication Program - Analysis reports submitted to the police and other agencies, for which no further clarification is necessary - Legal opinion and aids in respect of TPPU and terrorism funding and other related problems 300 Participation of the related parties in TPPU and terrorism prevention and eradication in Indonesia increased 32 documents Indonesia Institute of Science (LIPI), including: 1. Suppport Program for the Management and - International and inter-discipline researh cooperations 6 - Core competency fortified Implementation of Other Technical Tasks for - LIPI Quality improvement and research facility development package for LIPI Cibinong Science Center 6 - Efficient and effective research and development governance 2. Science and Technology Research,Mastery and Application Program - Intellectual Rights (HKI) registered 45 - Capacities in scientific research, development and application improved - Scientific publications facilitated by Media and Reproduction Center (BMR) 30 - Broader public access to sciences National Nuclear Agency (BATAN) (Rp668,9 billion), including: 1. Suppport Program for the Management and Implementation of Other Technical Tasks for - Documents of nuclear science and technology standardization 1 Institutional management performance increased to support nuclear, isotop and radiation energy research and development Batan - Documents of nuclear technology education 1 2. Nuclear Energy, Isotop and Radiation Development and Application Program - Varieties as the results of isotop and radiation application development 3 The roles of nuclear science and technology to support national development program intensified - Infrastructure preparation package for nuclear power generation plant development 1

236 Financial Note and Budget No Target Program *) Performance Indicator*) Outcome Technology Review and Application Agency (BPPT) (Rp888,7 billion) including: 1. Suppport Program for the Management and Implementation of Other Technical Tasks for BPPT - Accountability supervision reports 1 - General administrative service development with SOP, measurement and evaluation to work and budget plan, governance administration and accountable technology services - Information system and standardization service management reports 1 - Technology services to fortify the competitiveness of industries 2. Facility and Infrastructure Improvement Program for BPPT - BPPT laboratory to support national innovation system and Science and 1 Laboratory and office building of BPPT constructred in Serpong Technology Improvement, Mastery, Development and Application (BPPT) - BPPT facility development Recommendations for the application of technology in IT, defense and (BRDST) security, food, health, energy, transportation, natural resources and - Pilot Geothermal Power Plant (PLTP) 3 MW 1 - Technology intermediation in natural resources for government public service agencies and disaster management technology to improve the competitiveness of industries 3. Technology Review and Application Program - Laboratory for Design Engineering and Technology Design Center Central Government Expenditure Chapter National Aviation and Space Agency (LAPAN) (Rp526,1 billion), including: 1 Aviation and Space Technology Development - Airborne RS aircrafts developed 1 - Capacity in mastering rocket, satellite and aviation technology increased Program to suport the self-reliance and union of NKRI and national development 2 Suppport Program for the Management and Implementation of Other Technical Tasks for LAPAN - Remote sensing technology research and application for terrestrial resources - Space mindedness activity implementation (open houses, exhibition, socialization, counseling, workshop, olympiads, competition, press conference 4 - Self-reliant capacity and production and services in remote sensing data and information provision for users in various development sectors 11 - Quality of management support for coordination and services in planning, personnel, assets, finance, supervision and communication and public services enhanced to support LAPAN performance Geospatial Information Body (Rp602,1 billion), including: 1 National Survey and Mapping Program - Dynamic and diffusion spatial model review documens, atlas dissemination and regional development review - Regions (provinces and districts) nominated for the implementation of data and information access and utility on resources atlas and regional development review 2 Support Program for the Management and Implementation of Other Technical Tasks of Bakosurtanal 1 - The use of base maps to support national development intensified 14 - The use of thematic spatial data and information from survey resuls on natural resources and environment for natural resources and environmental management and sustainable environmental function protection intensified - Capacity building for personnel, infrastructure and administration 6 - Good govenance, clean governance for respected, professional, accountable, efficient and effective government through human resources planning, supervision, legislation, research and development

237 4-134 Financial Note and Budget 2013 No Target Program *) Performance Indicator*) Outcome National Standardization Body (BSN) (Rp98,5 billion), including: 1 National Standardization Development Program - Products labelled with SNI in compliance with SNI requirements and their certifications traceable 8 - SNI complying with the needs of stakeholders increased Chapter 4 Central Government Expenditure 2 Support Program for the Management and Implementation of Other Technical Tasks of BSN 3 Facility and Infrastructure Improvement Program for Officials of BSN - Industries/personsanizations receiving facilitation in standard/sni 70 - Application of standards and accreditation increased application - Human resources training according to training need assessment 3 - Quality of the implementation of BSN's main tasks and functions enhanced - Percentage (%) of physical facilities and infrastructure provided 80% - Facilities and infrastructure provided for the officials to carry out their main tasks and functions Nuclear Supervisory Body (Bapeten) (Rp159,4 billion), including: 1 Nuclear Supervision and Application Program - Nuclear plant inspection management system documents 6 - Standard safety and security in nuclear exploration according to national and international regulation achieved - Nuclear facility and activity management system documents 1 - Compliance of users to standard safety and security of nuclear energy use 2 Support Program for the Management and Implementation of Other Technical Tasks of Bapeten 3 Facility and Infrastructure Improvement Program for Officials of Bapeten - Education and training quality management system documents 7 - Good governance realized - One Bapeten office constructed 1 - The capacity of facilities and infrastructure to support nuclear energy application supervision increased State Administration Institute (LAN) (Rp247,0 billion), including: 1 State Administration Review Program - Academic drafts and draft Law on Civil Service Servants 1 - The suitability of reviews and research and development with the needs - Personnel education and training reform reports 1 - Quality of education and training for officials enhanced 2 Support Program for the Management and - Documents/manuals/reports in supervision and inspection 4 - Performance based organization development within LAN Implementation of Other Technical Tasks of LAN - Reports of Head of Land Regulation socialization/technical guiandce 1 - Integrated LAN product publication and dissemination 3 Facility and Infrastructure Improvement Program for Officials of LAN - Building constructed 5483,2 m2 - Improved quality of facilities and infrastructure National Archive (ANRI) (Rp154,2 billion), including: 1 National Archive Program - Prov/District/City governments receiving technical capacity building in asset archive management according to laws and regulations 23 - Effective and efficient national archive development 2 Support Program for the Management and Implementation of Other Technical Tasks of ANRI 3 Facility and Infrastructure Improvement Program for ANRI - Institutions, which their archives are saved 25 - State documents/archives salvation and protection in efficient and effective manner - Socialization of Government Regulation on the Implementation of Law 5 - Effective coordination of program and activity planning, regulations and No.43/2009 concerning Archives laws, archives, and development and administrative services and resources management within ANRI - Tsunamy Center Archive depots developed in Aceh 1 - Effective provision of office facilities and infrastructure for support archive services

238 Financial Note and Budget No Target Program *) Performance Indicator*) Outcome Civil Service Agency (BKN) (Rp535,1 billion), including: 1 Civil Service Management Program - Institutions acting as pilot projects for Public Servant restructuring 9 - Policies on personnel planning and development formulated Central Government Expenditure Chapter 4 2 Support Program for the Management and Implementation of Other Technical Tasks of BKN 3 Facility and Infrastructure Improvement Program for BKN - NSP and supervisory manuals on personnel affairs 1 - Policies on performance development formulated and regulations and laws on personnel drafted - Activity management documents 14 - Effective coordination in program and activity, resources planning and - Percentage of education and training center building constructed (final stage) administrative management within BKN 60% - Development, procurement and improvement of facilities and infrastructure in BKN Financial and Development Supervision Body (BPKP) (Rp1.250,4 billion), including: 1 Internal State Finance Accountability and Internal Government Control (SPIP) Program - Investigation audit report, state loss calculation and expert opinion as requested by the investigating agencies 2 Support Program for the Management and Implementation of Other Technical Tasks of BPKP 3 Facility and Infrastructure Improvement Program for BPKP 65 - Quality of internal supervision to state finance accountability and SPIP development within the ministries/agencies in economic affairs enhanced More ministries/agencies and regional government introducing SPIP according to the applicable regulations - K/L and regional governments implementing auditor functional positions - Participants of sustantive education and training Quality of management support and capacity in internal supervision to state finance accountability and SPIP development enhanced - Facility and infrastructure provided Facilities and infrastructure of officials in BPKP provided The Ministry of Trade (Rp3.105,7 billion), including: 1 Domestic Trade Development Program - SME developed and facilitated (technical guiandce, markenting, facility support, partnership and financing) SMEs - Effectiveness of policies to support domestic trade development enhanced 2 Foreign Trade Improvement Program - Users of online export/import licensing served through INATRADE companies - Effectiveness in foreign trade development enhanced 3 International Trade Cooperation Improvement Program 4 Commodity Market Efficiency Enhancement Program - Socialization of international trade cooperation results 9 - International trade cooperation for export market access expansion intensified - Results of international trade negotiations 37 - International trade cooperation to secure national trade policies in international forums intensified - Percentage of compliance in submitting time commodity trades reports (PBK) 89% - Development, regulation and supervision of time commodity trades, warehouse receipt system and auction market intensified. 5 National Export Development Program - Total market intelligence 14 - Access to export markets improved and export facilitation increased - Total marketing points 2 - Export competitiveness fortified

239 4-136 Financial Note and Budget 2013 No Target Program *) Performance Indicator*) Outcome The Ministry of People's Housing (Rp5.168,1 billion), including: 1 Housing and Settlement Area Development Program - Total prosperous houses developed with the provision of neighborhood facility, infrastructure and utility (PSU) units - Decent settlement neighborhoods of 1,020,000 units realized, and slum areas decreased by 655 ha with PSU provision in housing compounds Chapter 4 Central Government Expenditure 2 Housing and Settlement Area Financing Development Program 3 Support Program for the Management and Implementation of Other Technical Tasks of the Ministry of People's Housing - Facilitation and stimulation of new housing development under self-help fashion - Documents of technical input, policy formulation, program and budget for housing financing and settlement areas units - Self-help communities established in developing liveable and affordable houses/shelters for 130,000 MBR in safe, hygienic, well-arranged and harmonious neighborhoods 9 - Total low-income households (MBR) living in liveable and affordable houses increased with home financing facility - Data and evaluation documents on housing and settlement areas 14 - Management support and the implementation of other technical tasks of the Ministry of People's Housing The Ministry of Youth and Sports (Rp1.956,7 billion), including: 1 Support Program for the Management and - Publication and documentation 48 - Financial and personnel planning, supervision and administration and Implementation of Other Technical Tasks of - Documents of budget implementation verification processed according 100% public service quality within the Ministry of Youth and Sports enhanced the Ministry of Youth and Sports to SOP 2 Facility and Infrastructure Improvement - Areas of facilities and infrastructure developed/rehabilitated Facility and infrastructure management quality improved Program for Youth and Sports - Equipment and machine facility and infrastructure procurement and distthousandtion Youth and Sports Program - Youth facilitated as enterpreneur cadres Participation and active roles of youths in various development sectors increased - Total young university graduates (sarjana) as rural development cadres Participation of community in sport activities 4 Competition Sport Development Program - Sport industrial actors receiving facility of technical capacity building in production or management for sport events Participation of community in sports and their achievements both at regional and international level elevated - National sportmen Corruption Eradication Commission (KPK) (Rp706,5 billion), including: 1 Support Program for the Management and - Investigation personnel for KPK provided 70 - Percentage of bureaucracy component compliance increased Implementation of Other Technical Tasks of - The management of confiscated and seized goods 75 - Percentage of Human Resources according to focus areas increased KPK - KPK investigators increased - Percentage of KPK building increased - Percentage of operational budget allocation for KPK increase 2 Corruption Eradication Program - Cases supervised by KPT to go to the next stage Law enforcement index (survey, 1-10) - Decision of KPK leaders with regard to gratification Corruption eradication performance by KPK (scale 1-10) - Grand corruption cases handled - Conviction rate of the supervised cases - Number of violations to code of ethics and code of conduct

240 Financial Note and Budget No Target Program *) Performance Indicator*) Outcome Regional Representative Council (DPD RI) (Rp595,5 billion), including: 1 Support Program for the Management and - Support frequency for sessions/meeting of DPD RI 12 months - Performance of Administration Bureu, Planning and Finance Bureau, Implementation of Other Technical Tasks of Data and Information Center, Regional Review Center, Policy and Legal DPD RI - Frequency of scientific journal publication of DPD RI 12 months Review Center of Secretariate General of DPD improved 2 Facility and Infrastructure Improvement - Facilities for DPD office in national capital (Jakarta) 12 months - General Affairs bureau performance improved Program for DPD RI - Facilities for DPD in provincial capitals 12 months Central Government Expenditure Chapter 4 3 DPD institutional strengtening program in democracy system - Draft Laws of DPD concerning regional autonomy, the relationship of center and regions, the establishment, subdivision and amalgamation of regions - Frequency of meeting with regional governments, regional house of representatives (DPRD) and local social elements 6 UU - Legislation, considerant and supervisory functions of DPD exercised and public aspirations accomodated, and performance accountability of DPD representatives 33 report Judiary Commission (KY) (Rp91,9 billion), including: 1 Support Program for the Management and - Judges investigation reports in first instance degree/appeal/supreme 325 reports - Implementation of Other Technical Tasks of KY Court - Participants of capacity and professionalism building training of judges 200 judges Improved technical administrative support to Judiciary Commission(KY) in activity financing, HR Development, accountability and public services 2 Facility and Infrastructure Improvement Program for KY 3 Supreme Judge Selection Performance Improvement and Judge Behavior - Internal and external application systems implemented 6 aplications - - Integrated judge s track record database 400 data - Reports of communities managed and settled completely 120 reports - - Participants of candidate judges passing the selection 210 persons Office facilities and infrastructure to support the implementation of tasks and functions of KY improved Capacity of supreme judges in handing down quality decisions improved and public complaints fully settled

241 4-138 Financial Note and Budget 2013 No Target Program *) Performance Indicator*) Outcome National Disaster Management Agency (BNPB) (Rp1.345,5 billion), including: 1 Support Program for the Management and - International personsanization cooperation in natural disaster 5 - Implementation of Other Technical Tasks of management BNPB - Technical training 15 Coordination and integration of planning, development and controlling of program, administration and facilities and infrastructure and cooperation within BNPB improved Chapter 4 Central Government Expenditure 2 Facility and Infrastructure Improvement - Office building/education training center constructed 2 - Program for BNPB - Facilities and infrastructure procured 12 Coordination and integration of planning, development and controlling of program, administration and facilities and infrastructure and cooperation within BNPB improved 3 Accountability Supervision and Improvement Program for Officials of BNPB - Audit within the Deputy for Prevention and Emergency, Deputy for Rehabilitation and Reconstruction, Disaster Management Education and Training Center and Data and Information and Public Relation Center 28 - Accountable supervision and inspection of tasks performed by internal units within BNPB - Reports of Supervisory Activities (LHP) Inspectorate II according to the standard in terms of quality and quantities 4 Natural Disaster Management Program - Logistics distthousandtion in disaster prone areas 33 - post-disaster rehabilitation and reconstruction in coordinated and integrated manner - Equipment provision for disaster prone areas 33 Prov/ 200 Kab- Kota 28 - Emergency management in fast, proper, integrated and comprehensive manner - post-disaster rehabilitation and reconstruction in coordinated and integrated manner - Logistic and equipment provision and distribution for disaster management National Body for Indonesian Migrant Workers and Protection (BNP2TKI) (Rp392,7 billion), including: 1 Support Program for the Management and - Supervision and control of officials within BNP2TKI 24 working units - Implementation of Other Technical Tasks of BNP2TKI 8 topics - Quality of services to Indonesian Migrant Workers (TKI) based on reviews, research and development and information increased Institutional strengthening to support Indonesian Migrant Worker (TKI) placement and protection provided 2 Indonesian Migrant Worker Placement and Protection Facilitation Program - Indonesian Migrant Workers (TKI) services, placement, protection and safeguarding implemented - Formal Indonesian Migrant Workers (TKI) increased complete with CTKI potential maps by competency TKI - Formal employment opportunities in the countries where Indonesian Migrant Workers (TKI) are placed Migrant worker placement increased in terms of quality and quantity - Quality of migrant worker protection enhanced

242 Financial Note and Budget No Program *) Performance Indicator*) Sidoarjo Hotmud Management Body (BPLS) (Rp2.256,9 billion), including: 1 Support Program for the Management and - BPLS information system and media management 5 reports - Annual performance of Bapel BPLS achieved Implementation of Other Technical Tasks of - BPLS work area security 1 areas - BPK's opinion to financial statements of Bapel BPLS maintained BPLS Target 2013 Outcome 2 Sidoarjo Hotmud Management Program - The drainage of hotmud to Kali Porong river 48 million m3 - Secured feeling to residents in areas affected by Sidoarjo hotmud - Social aids for residents beyond the affected area maps persons - Basic rights of the affected residents according to provisions set up in Perpres complied with - Capacity and security of Kali Porong in draining hotmud and flood maintained - Capacity of embankment to retain the mud maintained - Alternative road and relocation road infrastructure functional Central Government Expenditure Chapter Government Goods/Service Procurement Review Institute (LKPP) (Rp211,5 billion), including: 1 Support Program for the Management and - Public relation and media actors knowing Government Goods/Service 40 - Function and organizational structure of LKPP revised Implementation of Other Technical Tasks of Procurement (PBJP) LKPP - New LKPP organization structure establishment documents 2 - Competent Human Resources - Effective work system within LKPP 2 Facility and Infrastructure Improvement - Office building construction stage I Program for LKPP - Land and building construction stage I Facilities and infrastructure of LKPP complied with 3 Government Goods/Service Procurement System Development Program - PBJ human resources trained (international bidding certification) 60 - Corruption cases, civil cases, business competition cases and administration court in goods/service procurement affairs settled - Government goods/service profession certification Coordination and synchronization of procurement monitoring and evaluation based on goods/service procurement principles - Electronic government goods/service procurement toward one national market - Transparent, consistent, efficient and accontable goods/service procurement policies established and supports for anti-monopoly principles to improve the roles of SME and domestic products - Strategy, policy and regulation on procurement sector socialized

243 4-140 Financial Note and Budget 2013 No Target Program *) Performance Indicator*) Outcome National SAR Body (Rp1.666,4 billion), including: 1 Support Program for the Management and - Information system development and SAR data and information 2 packages - Implementation of Other Technical Tasks of provision National SAR Body - Internal supervision and development for National SAR Body (Basarnas) 2 packages Management support and the implementation of other technical tasks of Badan SAR Nasional Chapter 4 Central Government Expenditure 2 Facility and Infrastructure Improvement Program for National SAR Body - Logistics management 30 packages - Facilities and infrastructure provided for officials within Badan SAR National 3 Search and Rescue Management Program - SAR training and education and socialization 30 packages - Optimum search, rescue and salvation management - SAR communication management 30 packages Anti-Monopoly Supervisory Commission (Rp119,8 billion), including: 1 Business Competition Supervision Program - Business competition socialization and education Cooperation between KKPU and external agencies 16 Effective and credible business competition supervision to augment the prosperity of people Suramadu Region Development Body (BPWS)(Rp399,6 billion), including: 1 Support Program for the Management and - Information system and the supporting equipment 2 Implementation of Other Technical Tasks of - Facilitation support reports for BPWS activities in Jakarta 2 BPWS Management support and the implementation of other technical tasks to accelerate the development of Suramadu region 2 Suramadu Region Development Acceleration Program - Study document and one-stop licensing system reinforcement 3 - Suramadu development plan prepared and implementable and one-top licensing system established - Areas of land purchased (ha) 24 - Efficient and effective regional development control RI's Ombudsman (Rp67,7 billion), including: 1 Support Program for the Management and Implementation of Other Technical Tasks of - Percentage of timely prepared planning documents and reports 100% - Quality of management of working units, which is highly integrated, accurate, and performance based character enhanced RI's Ombudsman - Percentage of mediation producing agreement acceptable by all parties 60% - Quality of public services at national level in the introduction of good governance principles enhanced National Body for Border Management (BNPP) (Rp274,1 billion), including: 1 Suppport Program for the Management and Implementation of Other Technical Tasks for - Coordination and capacity building for regional officials with regard to international border management BNPP - Priority Location Based Master Plan documents for prepared 2 State Border and Border Area Management - Facilities and infrastructure priority supports for defense and security Program affairs and law enforcement in sea and air borders provided 16 reports 111 documents 2 unit Speedboat survey; 10 unit communication and monitoring tool Management support and other technical support for the implementation of tasks of BNPP secretariat Transnational border and border areas effectively managed covering the clarify and confirmation of international borders, potential infrastructure development in border areas - Transnational Post (PLBN) facility and infrastructure developed 5 PLBN

244 Financial Note and Budget No Target Program *) Performance Indicator*) Outcome Batam Free Trade and Port Area Management Body (BPKPB and PB Batam) (Rp885,0 billion), including: 1 Support Program for the Management and - Reports of inter-governmental agency coordination 19 Implementation of Other Technical Tasks of BPKPB and PB Batam - Percentage (%) of using data center management 50% Management suport and the implementation of other technical tasks in Batam free trade and port area development and management Central Government Expenditure Chapter 4 2 Batam Free Trade and Port Area Management and Operation Program - Visits of ships Integrated and one-stop investment services to support investment services - Capital investment licensing services National Body for Terrorism Combat (Rp152,2 billion), including: 1 Terrorism combat program - Prevention and counter propaganda task force for terrorism combat 12 Improved capacity in monitoring, early detecting of terrorism attacks and enhanced effectiveness in deradicalization process - Percentage (%) of legal protection for the victims, witnesses, and law enforcers with regard to terrorism threats Cabinet Secretariat (Rp213,4 billion), including: 1. Suppport Program for the Management and Implementation of Other Technical Tasks for Cabinet Secretariat - Percentage of progress in the preparation of Presidential Decree concerning the Installment and Dismissal of governance positions and ranking and pensions for public civil servants in timely manner 100% 95% - Quality of administrative services to officials whose are appointed by the President 2. Policy Support Service Program to the President and Vice President - Percentage of data and information dissemination in the website of Cabinet Secretary - Percentage of government program policy analysis in political and international relation affairs accomplished timely 100% 100% Quality of policy and program analysis in political, legal and security affairs enhanced - Percentage of draft presidential regulation (Perpres), draft presidential decree (Kepres), draft presidential instruction (Inpres) in political, law and security affairs followed up into Presidential Regulation (Perpres), Presidential Decree (Keppres) and Presidential Instruction (Inpres) 100% Quality of Perpres, Keppres, and Inpres in political, legal and security affairs enhanced General Election Supervisory Body (Bawaslu) (Rp856,6 billion), including: 1. Suppport Program for the Management and Implementation of Other Technical Tasks for Bawaslu - Percentage (%) of planning and budgeting documents and General Election evaluation reports prepared - Percentage (%) of data, information and public relation management implemented 2. General Election Supervision Program - Percentage (%) of inter-agency relation coordination and public participation services in general election implementation 100% Administrative support and operational activities of Bawaslu increased 100% 100% General election supervision intensified - Percentage (%) of manual and technical guideline for General Election supervision prepared 100%

245 4-142 Financial Note and Budget 2013 No Target Program *) Performance Indicator*) Outcome Radio Public Broadcasting Agency (LPP RRI) (Rp985,2 billion), including: 1. Suppport Program for the Management and Implementation of Other Technical Tasks for LPP RRI - Percentage (%) of program, budget planning documents, LPP RRI reports timely accomplished 100% Coordination in program, activity and budget plan preparation and evaluation and reporting improved and timely accomplished Chapter 4 Central Government Expenditure 2. Public Radio Broadcasting Management and Operation Program - Percentage (%) of program implementation monitoring and evaluation on periodic basis - Percentage (%) of broadcasting infrastructure and facility covering overall territories of Republic of Indonesia and domestic population - Broadcasting package production models of information, education, environmental preservation, positive entertainment, social control and nation image building 100% 60 percent areas,70 percent population 10 packages LPP RRI as the largest and world class radio broadcaster for nation building Television Public Broadcasting Agency (LPP TVRI) (Rp864,2 billion), including: 1. Suppport Program for the Management and Implementation of Other Technical Tasks for LPP TVRI - Public aspiration accommodation relating to institutional policies 5 Good governance service administration within LPP TVRI 2. TV Public Broadcasting Management and Operation Program - Database and information development 4 - Broadcasting packages of information, positive entertainment, social LPP TVRI as media to educate nation and strengtening the Unitary State control and nation image building of Republic of Indonesia (NKRI) - Broadcasting program and production and news for local, regional and national broadcasting either via terresterial, digital or new media Sabang Free Trade and Port Area Management Body (BPKPB and PB Sabang) (Rp392,2 billion), including: 1. Suppport Program for the Management and Implementation of Other Technical Tasks for - Documents of regional and connectivity development planning with the surroundings BPKPB and PB Sabang 2 documents Supports for the management and implementation of other technical tasks in the management and development of Sabang free trade and port areas - Information application and system development 1 aplication 2. Sabang Free Trade and Port Area - Port and Yacht/Marina terminal development implemented 100 Ha Management and Operation Program - Licenses signed by BPKPB and PB Sabang 2 license documents Increased investments and one-stop services with fasility and infrastructure planning and development supports and technology, spatial planning, environmental management, promotion, business development and local asset utilization Note *) Program and Performance Indicator of Ministries/Agencies are parts of overall Program and Performance Indicator of the ministries/agencies concerned

246 Fiscal Decentralization Policy Chapter General CHAPTER 5 FISCAL DECENTRALIZATION POLICY Fiscal decentralization policy framework stems from 1945 Constitution mandating that the Unitary State of Republic of Indonesia consists of provinces and further subdivided into districts (kabupaten) and cities (kota). These regions have rights and obligations to manage and execute their governance affairs as delegated respective of their financial capacities. For the implementation of regional autonomy toward efficient finance management, some authorities which were previously held by Central Government have been devolved to regions through fiscal decentralization policy. Fiscal decentralization policy apart from focusing on regional revenue is also directed to regional expenditure. In terms of revenue, pursuant to Law Number 28 of 2009 concerning Regional Tax and Service Charges, the regions have been granted with broader authority to collect such regional taxes and services charges. They also reserve the right to take policies on the imposition of these regional taxes and service charges, the management of central tax switched into regional tax, and exploration of new tax sources so as to expand tax base in regions. The transfer of central tax to regional tax has been carried out under regional tax management process. According to Law Number 28 of 2009, duty of land and building right transfer (BPHTP), which was previously managed as central tax is now delegated to regions since Meanwhile, the transfer of Land and Building Tax from Rural Sector and Urban Sector (PBB-P2) will be implemented no later than To expedite the transfer of PBB-P2 as regional tax, the Government has taken a number of preparation steps including socialization, technical guidance and facilitation to the regional governments (Pemda). In addition, the Government has also established Team for the Preparation of BPHTB and PBB-P2 Tax Transfer with a help desk function to assist the regions in dealing with various problems relating to the transfer of such BPHTB and PBB-P2 to the regions and provide sample Regional Regulations, organization structure and procedure, standard operating procedure, and data/ information that can be used as reference by regions. Some regions that have managed PBB-P2 as regional tax are successful in improving their own regional tax as evident from increase of revenue from PBB-P2 if compared with the revenue of DBH PBB-P2 when the same tax was managed by the Central Government. Apart from reinforcing regional taxes, another fiscal policy instrument, which is more important and dominant is through Transfer to Regions allocation in APBN. For the last three years, budget earmarked for Transfer to Regions is relatively enormous, i.e. around 30 percent of total Government Expenditure on the average. This transfer of regions consists of Fiscal Balance and Special Autonomy Fund (Dana Otsus), and Adjustment Fund. Fiscal Balance comprises Revenue Sharing (DBH), General Allocation Fund (DAU) and Special Allocation Fund (DAK) that will be allocated to regions within unified fund transfer system from the Government to regions so as to lessen vertical imbalance and horizontal imbalance. Meanwhile the proceeds of Dana Otsus and Penyesuaian are allocated to finance the implementation of special autonomy in Aceh Province, Papua Province and West Papua Financial Note and Indonesia Budget

247 Chapter 5 Fiscal Decentralization Policy Province and progams having objectives of enhancing the quality of education, including the Provision of Profession Allowances for PNSD teachers, Additional Fund of PNSD Teachers Incomes, and School Operation Aids (BOD). In general, Transfer to Regions budget allocation policy is focused to: (1) fortify the fiscal capacity of regions and lessen vertical and horizontal imbalances, (2) harmonize funding requirements of regions according to governance allocation, (3) enhance the quality of public services in regions and reduce service gaps of regions, (4) develop the capacity of regions in promoting local economy, (5) support national fiscal sustainability, (6) enhance efficiency on the spendings of national resources, and (7) improve synchronization of national development plan and regional development plan. To supplement APBD funding sources, the regions can use proceeds from regional loans and grants. These regional loans may be from Central Government, other regional governments, banking institutions and non-banking institutions and communities with the issuance of municipal bonds. The regional governments are, though, not allowed to look for foreign loans, except for foreign loans relating to the transactions of municipal bonds in domestic markets. Regional loans may be used to finance activities being the initiatives and authorities of regions and/or to cover deficits of regional cash. However, these regional loans are only one of several financing sources for the regions. Given that, they must be managed properly according to criteria, requirements and mechanism established in laws and regulations. In addition, regional loans must be controllable within the limits that will not generate negative impacts to APBD and regional and national economy. Meanwhile, grants from the Central Government is used to finance activities under the authority of regional governments especially with regard to public service provision. Apart from Transfer to Regions as APBD revenue, there are some types of APBN proceeds that can be allocated through ministries/agencies to finance some activities in regions. These proceeds may consist of deconcentration and co-administration fund and fund for the implementation of National Community Empowerment Program (PNPM) and various subsidies managed by the assigned ministries/agencies and not parts of APBD revenue. APBN proceeds used to finance activities in regions either comprising Transfer to Regions or ministries/agencies budget allocation reach nearly 60 percent of total Government expenditure in APBN. Transfer to Regions allocation and discretion to regions in managing regional taxes, loans and grants reflect strong commitment of the Government in introducing fiscal decentralization. This Government commitment must be followed with the seriousness of the Regional Government in managing APBN in sound manner based on good governance principles stressing accountability by overall officials in regions. APBD expansion as a result of more funding sources must be followed with quality of spendings so that the existing fund sources can be used to finance programs and activities with great added values to the communities. 5-2 Financial Note and Indonesian Budget 2013

248 Fiscal Decentralization Policy Chapter Fiscal Decentralization Implementation Trend The Implementation of Transfer to Regions Policy Since the introduction of regional autonomy in 2001, the implementation of fiscal decentralization policy shows steady improvements from year to year. This progress is following the objectives, conditions, and dynamics of regional autonomy. One fiscal decentralization policy instrument is Transfer to Regions Policy. In 2012, Transfer to Regions Policy is exercised through funding system, which give more attention to fiscal gap aspect of central government and regions and between the regions, the governance task allocation of Central Government, provinces and districts/cities, quality and gap of public services in regions, economic potential development in regions, efficient national resources spendings, and synchronization of national development plan to regional development plan, development acceleration for underdeveloped regions, the frontiers and conflict-torn regions. This funding system consisting of Transfer to Regions allocation in APBN composes: (1) Fiscal Balance, i.e. DBH, DAU, and DAK, and (2) Special Autonomy and Adjustment Fund. DBH is allocated to regions based on APBN revenue to satisfy the needs of regions for the implementation of decentralization. DBH is from the shared government revenue, i.e. tax revenue and natural resources revenue. DBH tax consists of income tax Pasal 21 (PPh Pasal 21) and income tax Pasal 25 and Pasal 29 for Domestic Individual Tax Payers (PPh Pasal 25/29), Land and Building Tax (PBB) and Tobacco Product Excise (CHT). Meanwhile, DBH from natural resources is from forestry, general mining, fishery, oil, gas and geothermal sectors. DAU is allocated to minimize horizontal imbalance in financing governance affairs under the authority of regions. DAU is funneled to provinces and districts/cities based on total DAU (national DAU), which its final sum is established in APBN, i.e. at least 26 percent of net Domestic Revenue (PDN). The proportion of DAU between provinces and districts/cities is set based on the authorities of provincial governments and districts/cities. DAU proportion for province is set at 10 percent with the other 90 percent for districts/cities. Meanwhile, DAK is allocated to assist the regions in financing programs/activities under their authorities and of national priorities. This allocation aims to ensure that the regions can afford to provide adequate public infrastructure and services at minimum standard service level. DAK is earmarked upon three criteria, i.e.: (1) General Criteria, which is formulated based on the financial capacity of regions concerned reflected from the general revenue of APBD minus regional personnel expenditure; (2) Special Criteria, which is formulated according to the laws and regulations and local characteritics of regions; and (3) Technical Criteria established based on the indicators of special activities to be financed under DAK, which are formulated under technical index set by the related technical ministries. These criteria will not limit the scope of sectors to be financed under DAK. Given that in the next progress, sectors financed with DAK tend to increase/change i.e. from 9 sectors in 2006 to 19 sectors in Owing to such increasing sectors financed with DAK, the objectives of DAK allocation are expanding proportionally, which deviate from the original philosophy, i.e. as specific grant Financial Note and Indonesia Budget

249 Chapter 5 Fiscal Decentralization Policy to assist in public service provision acceleration in regions. In light of that, in future DAK needs reformulation including the acceleration of the transfer of deconcentration and coadministration fund, which is used to finance governance affairs under the authority of regions as DAK proceeds. It is important to take because according to BPK s audit findings, parts of ministries/agencies budget have been used to finance government affairs being the authorities of regions. However, these proceeds can t be immediately transferred into DAK due to some problems/constraints including worries about the losing operational control of the ministries/agencies to activities performed in regions if the said ministries/agencies proceeds are changed into DAK. This condition will also exert greater financial burderns to the regions since they must allocate counterpart fund. Moreover, some non-physical activities can t be executed with DAK becuase DAK is more focused to finance physical activities. In 2012, the policy priorities on DAK allocation are more focused on the transfer of some programs/activities, which are previously implemented by the ministries/agencies to programs/activities executed by regions. With such transfer, the proceeds previously managed by the ministries/agencies to finance governance affairs being the authorities of regions can be allocated to regions in the forms of DAK or other transfer proceeds. Aside from these three funds, to support the implementation of special autonomy in Aceh and Papua, pursuant to Law No. 21 of 2001 concerning Special Autonomy for Papua jo Law No. 35 of 2008 and Law No. 11 of 2006 concerning Aceh Governance, APBN also allocates Otsus (Special Autonomy) fund. Otsus fund allocated for Papua Province and West Papua Province is equivalent to 2 percent of national DAU ceiling with distribution of 70 percent for Papua Province and 30 Percent for West Papua Province. On top of Otsus fund, these two easternmost provinces receive Additional Infrastructure Fund in amount subject to the financial capacity of the Government and additional portion of DBH (Revenue Sharing) from Oil and Gas at respectively 55 percent and 40 percent of PNBP (Non-Tax) revenue reaped from Oil and Gas extracted from these provinces. Otsus fund allocation for Aceh Province will continue for 20 years as from The allocation is divided into two tranches, i.e.: (1) for the first year to the fifteenth year, the sum is equivalent to 2 percent of national DAU ceiling, and (2) for the sixteenth year to the twentieth year the sum will be equivalent to 1 percent of national DAU ceiling. There is also additional DBH proceeds from oil and gas in proportions same as to those received by Papua Province and West Papua Province, i.e. 55 percent and 40 percent respectively from PNBP (non-tax revenue) collected from Oil and Gas extracted from Aceh province. The allocation of Adjustment fund aims to support the implementation of national education system and to accelerate infrastructure and facility provisions in regions. In line with APBN policy, the scope of Adjustment Fund has changed from year to year. In 2007 this Adjustment Fund was allocated in the form of Balance Fund granted to regions receiving DAU smaller than previous year s allocation (non-holdharmless principle). However, this non-holdharmless principle was revoked in Adjustment Fund in 2009 collected fund allocation to finance certain programs in infrastructure sector for particular term (ad hoc). The nomenclature of Adjustment Fund for infrastructure is also changing in several fiscal years. The components of Adjustment Fund allocated in education sector has same nomenclature. In 2009 the components of Adjustment Fund consisted of Fiscal Decentralization Strengthening Fund and Regional Development Acceleration Fund (DPDF and PPD), Additional DAU Fund, Additional Fund for PNSD Teachers Incomes and DAK Underpayment and Infrastructure 5-4 Financial Note and Indonesian Budget 2013

250 Fiscal Decentralization Policy Chapter 5 Adjustment Fund. In 2010 the Adjustment Fund for Infrastructure renamed to Regional Infrastructure and Service Strengthening Fund (DPIPD), Education Infrastructure Development Acceleration Fund (DPPIP), and Fiscal Decentralization Strengthening Fund and Regional Development Acceleration Fund (DPDF PPD), and in 2011 it was changed again to Regional Infrastructure Adjustment Fund (DPPID). In 2012, Adjustment Fund is only budgeted for programs related to education, i,e, School Operation Aids (BOS), Teacher Profession Allowance, Additional Fund for Teachers Incomes, Regional Incentive Fund and Regional Government Project and Decentralization Fund. The trend of Adjustment Fund from can be seen in Table 5.1. TABLE 5.1 REVISIONS TO ADJUSTMENT FUND, No Nomenclature DAU Adjustment Fund 2 DAU Balance Fund 3 Education Allowance Fund 4 Additional DAU Fund 5 Adjustment Fund for Road Infrastructure 6 Adjustment Fund for Facilities and Infrastructure 7 Fiscal Descentralization Strengthening and Regional Development Acceleration Fund (DPDF and PPD) 8 Dana penguatan Infrastruktur dan Prasarana Daerah (DPIPD) 9 Education Infrastructure Development Acceleration Fund (DPPIP) 10 Regional Incentive Fund 11 Additional Fund for Teacher Salaries 12 DAK and DISP Underpayment 13 Allowance for Teacher Profession 14 Regional Infrastructure Adjustment Fund 15 School Operation Aids (BOS) 16 Underpayment for West Papua Infrastructure and Facility Fund FY Regional Government and Decentralization Program Source: the Ministry of Finance The allocation of Adjustment Fund in APBN has increased the proceeds transferred to regions that exceed the sums established in Law Number 33 of 2004 concerning Fiscal Balance of the Government and Regional Governments. To address these dynamics Law No. 33 of 2004 should be revised with the inclusion of provisions concerning the reformulation of Fiscal Balance scope, revision to DBH (revenue sharing) more focusing on the introduction of by origin principle, and strengthening the roles of governors in the distribution of DBH proceeds to districts/cities within their provinces. Budget of Transfer to Regions that has been allocated in APBN will be funnelled to regions in view of cash performance of the Government, cash requirements of regions, and the objectives of individual types of fund. DBH will be granted on quarterly basis taking into account the realized government revenue to be shared. DAU is channelled to regions on monthly basis, i.e. at one twelfth of DAU allocation to the respective regions subject to the enactment of Financial Note and Indonesia Budget

251 Chapter 5 Fiscal Decentralization Policy Regional Regulation (Perda) on APBD. DAK is distributed in three tranches based on the commitments and capacity of regions in realizing activities and absorbing the proceeds. Regions are required to furnish Regional Regulation (Perda) on their APBD, to allocate counterpart fund, and to submit fund absorption report as basis for DAK funneling. Special Autonomy (Otsus) Fund is also released in stages. Adjustment Fund for education sector, i.e. Teacher Profession Allowances, Additional Fund for Teachers Incomes, and BOS will be granted on quarterly basis to finance activities in attempts of enhancing the quality of education including the payment of allowances to PNSD teachers. Special for BOS proceeds, their disbursement pattern in 2012 has been simplified, i.e. directly from government cash to general cash of provinces for further distribution to basic education units in districts/cities in the form of grant. In the past, BOS was channelled from the government cash account to general cash account of districts/cities, and further distributed to schools. Since Transfer to Regions proceeds plays leading role in APBD, its distribution mechanism and pattern will be continually improved from time to time. In 2008, when it had nomenclature of expenditure for regions, the distribution was made per region at payment office of the region concerned. However, when this nomenclature renamed to Transfer to Regions in 2008, the proceeds were directly transferred to general cash account of regions. This change generates positive impacts to regional financial management including faster enactment of Perda APBD, the introduction of treasury single account, certainty to the revenue of regional cash, accelerated implementation of regional activities/spendings, and less budget surplus at the end of fiscal year The Implementation of Transfer to Regions Budget With the increasingly funding requirements for public service infrastructure provision in regions, budget of Transfer to Regions has constantly increased from year to year. In 2007, Transfer to Regions consisting of Fiscal Balance and Otsus and Adjustment Fund amounted Rp trillion (6.4 percent of GDP) and in 2012 this sum was to hike Rp trillion (5.6 percent of GDP). The allocation of Transfer to Regions in 2012 is 16.4 percent higher than last year s allocation at Rp trillion. During period the total budget for Transfer to Regions is to increase by 13.7 percent per annum on the average. The relatively exceeding rise was recorded in 2011, i.e. by Rp.66.6 trillion or 19.3 percent from the allocation of Transfer to Regions in The trend of Transfer to Regions from is presented in Table 5.2. and Graph 5.1. TABLE 5.2 TRANSFER TO REGIONS TREND, (billion Rupiah) Description 2007 LKPP 2008 LKPP 2009 LKPP 2010 LKPP 2011 LKPP 2012 APBN-P I. Fiscal Balance , , , , , ,1 a. Revenue Sharing (DBH) , , , , , ,7 b. Special Allocation Fund (DAU) , , , , , ,4 c. Special Allocation Fund (DAK) , , , , , ,9 II. Special Auto & Adjust Fund 9.296, , , , , ,9 a. Special Autonomy Fund 4.045, , , , , ,6 b. Adjustment Fund 5.250, , , , , ,3 Total , , , , , ,9 Source: the Ministry of Finance 5-6 Financial Note and Indonesian Budget 2013

252 Fiscal Decentralization Policy Chapter 5 In nominal wise, the increase of Transfer to Region budget allocation covers overall types of fund. For transfer of block grant character, DAU records the highest upsurge, i.e. from Rp trillion (4.2 percent of GDP) in 2007 to Rp trilion (3.2 percent of GDP) in 2012 or 10.8 percent per annum on the average. This higher DAU is subject to the increase of net domestic revenue (PDN) and higher ratio of DAU allocation to Net PDN to 26 trillion rupiah 450,0 400,0 350,0 300,0 250,0 200,0 150,0 100,0 50,0 0,0 GRAPH 5.1 TRANSFER TO REGIONS TREND (FISCAL BALANCE, SPEC. AUTONOMY & ADJUST. FUND), Spec. Auto. & Adjust. Fund 244,0 9,3 13,7 21,3 percent during the period Consistent with the increasing national DAU ceiling, the distribution of DAU per region also records increase, despite varying rate. In 2011 and 2012, regions being the recipients of the largest DAU alloactions are respectively regions in East Java Province, Central Java Province, West Java Province, North Sumatra Province and Papua Province. As to the regions receiving they least DAU allocation, they are respectively regions in DKI Jakarta provinces, Riau Island Province, West Sulawesi Province, Gorontalo Province and Bangka Belitung Province. The trend of DAU allocation for provinces throughout Indonesia in can be seen in Graph ,7 287,3 30,3 314,4 347,2 64,1 70,4 408,4 APBN-P Note: Realization 2007 to 2011 based on LKPP (audited) Source: the Ministry of Finance Fiscal Balance GRAPH 5.2 DAU FUND DISTRIBUTION TO PROVINCES THROUGHOUT INDONESIA, *) Billion Rupiah *) DAU allocated to Provinces and Districts/Citieis of the province concerned Source: the Ministry of Finance Financial Note and Indonesia Budget

253 Chapter 5 Source : Ministry of Finance Fiscal Decentralization Policy In addition to DAU, other transfer fund consisting of block grant, which its allocation is steadily to rise is DBH (revenue sharing). In nominal wise, DBH is to go up from Rp.62.9 trillion (1.6 percent of GDP) in 2007 to Rp trillion (1.3 percent of GDP) in 2012 or to rise by 11.9 percent per annum on the average. This increase is attributed to higher realization of shared revenue, both from tax or natural resources. In 2012, the realization of DBH sharing by end of semester I reaches Rp.35.6 trillion or 32.8 percent of ceiling established in APBN at Rp trilion. This realization consists of DBH Taxes Rp.18.4 trillion (35.6 percent of allocation ceiling) and DBH Natural Resources Rp.17.2 trillion (30.3 percent of allocation ceiling). Pursuant to Law Number 33 of 2004, the Government revenue from taxes and natural resources shall be shared to regions under by origin principle in amount set according to the realized revenue (by revenue). In 2011 and 2013 the largest DBH Tax is allocated for DKI Jakarta province, i.e percent and 27.6 percent respectively of total national DBH tax. Other regions receiving significant DBH tax allocation are East Java province, West Java province, East Kalimantan province, and Central Java Province. Meanwhile the regions receiving the least DBH tax allocation are respectively Gorontalo province, West Sulawesi province, Bangka Belitung province, Bengkulu province and DI Yogyakarta province. The distribution of DBH tax allocation can be seen in Graph , ,0 GRAPH 5.3 TAX REVENUE DISTRIBUTION MAP PER PROVINCE IN INDONESIA *) billion rupiah 8.000, , , ,0 - *) Total DBH allocated for province and district/city in the province concerned Source: the Ministry of Finance In 2011 and 2012, regions receiving significant DBH Natural Resources (SDA) allocation are respectively East Kalimantan province, Riau province, South Sumatra province, Riau Island province and Aceh province. In 2011 and 2012 regions in East Kalimantan province receive DBH SDA allocation 37.5 percent and 42 percent respectively of total national DBH SDA. Meanwhile, regions in Riau province during the said 2 years receive DBH SDA allocation at respectively 21.7 percent and 23.1 percent of total national DBH SDA. Regions with the 5-8 Financial Note and Indonesian Budget 2013

254 Fiscal Decentralization Policy Chapter 5 smallest DBH SDA allocation are respectively DI Yogyakarta province, West Sulawesi province, Bali province, Gorontalo province and Nusa Tenggara Timur province. The distribution of DBH SDA allocation can be seen in Graph , , ,00 GRAPH 5.4 NATURAL RESOURCES REVENUE DISTRIBUTION MAP PER PROVINCE IN INDONESIA, *) ,00 billion rupiah , , , ,00 DBH SDA 2011 DBH SDA , , ,00 0,00 *) Total Natural Resources Revenue (DBH SDA) allocted to Province and Districts/City of the Province concerned Source: the Ministry of Finance Apart from block grant proceeds, there is also specific grant of DAK (Special Allocation Fund), which its amount is constantly increasing despite a decrease in DAK allocation at national scale in 207 reached Rp.16.2 trillion (0.4 percent) (0.4 percent of GDP) and increased to Rp.20.8 trillion (0.4 percent of GDP) in 2008 and Rp.24.7 trillion (0.5 percent of GDP in In 2010 DAK allocation was to drop to Rp.21.0 trillion (0.3 percent of GDP) as a result of limited financial capacity of the Government. DAK allocation was to rise again to Rp.24.8 trillion (0.3 percent of GDP) in 2011 and Rp.26.1 trillion (0.3 percent of GDP) in This DAK increase is due to (1) the bolstering financial capacity of the Government, (2) more sectors financed under DAK, (3) new autonomous regions, and (4) transfer of parts of ministries/agencies budget, which were previously used to finance governance affairs being the authority of regions to DAK. As for sectors financed under DAK, their number has increased from 9 sectors in 2007 to 11 sectors in 2009, 14 sectors in 2010 and 19 sectors in 2011 and They include education, health, roads, irrigation, governance infrastructure, marine and fishery, water supply, agriculture, environment, family planning, forestry, trades, rural infrastructure, drinking water, sanitation, rural electricity, housing and settlement, land transport safety, rural transportation, and infrastructure and facilities for border areas. Accordingly the regions being the beneficiaries of DAK are also to raise, i.e. from 438 regions in 2007 to 476 regions In 2011 and 2012 the benecifiaries of largest DAK allocation are respectively regions in Central Financial Note and Indonesia Budget

255 Chapter 5 Fiscal Decentralization Policy Java, East Java, Papua, West Java and North Sumatra. As to the regions receiving the smallest portions of DAK allocation are respectively regions in DKI Jakarta province, Riau Island province, DI Yogyakarta province, Gorontalo province and Bangka Belitung province. DAK allocation in 2011 and 201 by province can be seen in Graph GRAPH 5.5 DAK FUND DISTRIBUTION TO PROVINCES THROUGHOUT INDONESIA, *) billion rupiah DKI Kepri Yogayakarta Gorontalo Babel Kaltim Sulbar Bali Riau Bengkulu Jambi Kalsel Banten Malut Maluku Kalteng NTB Papua Barat Sulteng Sultra Sulut Sumsel Sumbar Aceh Kalbar Lampung Sulsel NTT Sumut Jabar Papua Jatim Jateng *) Total DAK allocated in Province and districts/cities of the province concerned n Source: the Ministry of Finance With higher ceiling of national DAU allocation and changing components of Adjustment Fund, in nominal terms, the allocation of Otsus (Special Autonomy) and Adjustment Fund in period is also to change significantly. In 2007, budget for Special Autonomy (Otsus) and Adjustment Fund was worth Rp.9.3 trillion (0.2 percent of GDP) and then increased to Rp.28.0 trillion (0,4 percent of GDP) in 2010 and Rp.64.1 trilion (0.9 percent of GDP) in 2011 and futher rose at Rp.70.4 trillion (0.8 percent of GDP) in The increase of Otsus and Adjustment Fund, which was relatively significant in 2011 is driven by Adjustment Fund policy for Regional Infrastructure and additional ceiling of BOS allocation and professional allowance for PNSD Teachers. As to Otsus and Adjustment Fund increase in 2012 is due to higher ceiling of BOS fund, professional allowance of PNSD teachers. The trend of Otsus and Adjustment Fund Allocation can be seen in Graph Financial Note and Indonesian Budget 2013

256 Fiscal Decentralization Policy Chapter 5 60,0 50,0 GRAFIK 5.6 TRANSFER TO REGION TREND (SPECIAL AUTONOMY FUND, ADJUSTMENT FUND) ,0 trillion rupiah 30,0 20,0 Special Auto. Fund Adjustment Fund 10,0 0,0 APBN-P Note: realization fro, based on LKPP (audited) Source: the Ministry of Finance The Implementation of Regional Taxes and Service Charges One instrument for the implementation of fiscal decentralization is that of authority delegation to the regional governments to collect taxes (taxing power). This policy of awarding taxing power to regions is in conformity with Law Number 28 of 2009 stipulating that: 1. The changing assessment of regional taxes and service charges from open-list system to closed-list system. One aspect considered in adopting closed-list system is to give certainty for the communities and business world on types of regional duties that must be paid, and to enhance efficiency in regional tax and service charge collection. With this closedlist system, the regional governments can collect regional taxes and service charges as established in the laws. 2. The grant of greater authority to regions in regional tax and service charge (local taxing empowerment) under several policies: a. The expansion of the existing regional tax base and service charge, such as tax base for motor vehicles, motor vehicle right transfer, hotel tax, Restaurant Tax and Nuisance Charge. b. Expanding the types of regional tax and service charge, such as cigarette tax, swallow bird nest tax, transfer of land right (BPHTB)tax, Rural and Urban Land and Building Tax (PBB-P2), Calibration/Re-Calibration Service Charge, Education Service Charge, Telecommunication Tower Charge and Fishery Business Permit Fees; c. The introduction of maximum tariff for several types of regional taxes, such as motor vehicles tax, motor vehicle name transfer, motor vehicle fuel tax, entertainment charge, Financial Note and Indonesia Budget

257 Chapter 5 Fiscal Decentralization Policy parking fees, non-metalic and rock mineral tax; and d. Discretion for tax tariff setting to the regions except for cigarette tax. Regions have full discretion to set the tariff of regional tax insofar not exceeding the minimum and maximum rates set in Law Number This taxing power is expected capable of improving regional revenues from regional taxes and service charges as a result of closed-list system. In this case, the regions are encouraged to optimize the collection of their regional taxes and service charges based on valid legal basis and not to impose new tax with insignificant potential and in violation with the laws and regulations. 3. Improving the management system of regional tax and service charges with better and well-cut sharing of provincial taxs to districts/cities and earmarking policy for particular types of regional tax. This tax sharing revenue reflects the accountability of provincial governments in shouldering costs required by districts/cities to perform their functions in delivering services to the citizens. Meanwhile, with earmarking policy, parts of revenue collected from certain regional taxes will be allocated for the financing of activities that can be immediately perceived by taxpayers. 4. Enhancing the effectiveness of regional tax collection supervision by changing the supervision mechanism from repressive system (based on Law No. 34 of 2000) to preventive and corrective system. With regard to the implementation of fiscal decentralization, this policy change is expected to bring about positive impacts, especially to the regional governments. The positive impacts are, among other things, more room for the regional government to tailor their tax policies to the local conditions, competitiveness between the regions in fostering investment climates, better partnership between the regional governments and entrepreneurs/investors and communities in development with clearer, more certain and simplier regulations. In addition, this approach is expected to generate impacts to economic growth in regions supported with adequate funding sources for the development of economic facilities and infrastructure Supervision and Revocation The Government will oversee Regional Regulation (Perda) on PDRD issued by the Regional Government. This oversight is carried out in preventive and corrective manner. Preventive supervision is to evaluate Draft Perda PDRD that has been mutually approved between the Head of Region and DPRD (Regional Parliament) before enacted into a Regional Regulation (Perda). According to the laws, Draft Provincial Perda must be proposed to the Minister of Home Affairs and for Draft District/Municipal Perda, it must be forwarded to the Government no later than 3 working days after mutual approval. The Minister of Home Affairs and the Governor will evaluate the Draft Perda in coordination with the Minister of Finance to approve or reject the said Perda. Meanwhile, corrective supervision is made to Perda on PDRD that has been enacted by the regional government. Perda PDRD promulgated by head of region is submitted to the Minister of Finance no later than 7 (seven) days after its enactment. If the said Perda is in contradiction with public interests and/or higher laws and regulations, the Minister of Finance will recommend the cancellation of the said Perda to the President, c.q. the Minister of Home Affairs. This Perda cancellation recommendation by the Finance Minister to Home Affairs Minister must be forwarded no later than 20 working days as from the receipt of Perda. At 5-12 Financial Note and Indonesian Budget 2013

258 Fiscal Decentralization Policy Chapter 5 the recommendation of Finance Minister, the Home Affairs Minister will propose the cancellation of the said Perda to the President. Decision on the cancellation of Perda shall be established in a Presidential Regulation no later than 60 working days since the receipt of Perda as previously noted. Within 7 working days as from the decision of cancellation, the Head of Region must halt the implementation of the affected Perda and then the local parliament (DPRD) along with head of region revoke such Perda. If the province/district/ city rejects the revocation of Perda on justifiable ground, Head of Region has right to file objections to the Supreme Court. If this objection is ruled either in part or in whole, the verdict of Supreme Court will declare the Presidential Regulation void with no legal authority. If the Regional Government breaches procedure for the enactment of Perda PDRD or continues collecting regional taxes and service charges, which according to the Perda revoked by the Central Government the same regional government shall be liable for sanction of DAU and/or DBH pending and/or cut The Transfer of BPHTB and PBB-P2 into Regional Taxes One continuous improvement taken by the Government is evident from the consistent efforts in strengthening and revising fiscal decentralization policies to support goals of better public services in regions. This consistency is not only reflected from fiscal decentralization strengthening from spending side but also from revenue side with broader local taxing power. A real reflection of this commeitment is the transfer of BPHTB and PBB-P2 into regional taxes. The switch of these two taxes is a fundamental step to reinforce financial structure in regions. From its characteristics, i.e. the majority of beneciaries, these two taxes are deemed regional taxes. However, authorities for the setting of tax base, tariff and tax sharing and administration remain in Central Government. With the introduction of Law 28 of 2009 all power in tax collection has been granted to the regional governments. It is expected that BPHTB and PBB-2 become a potential source of local revenue on top other regional taxes at present. The main justification and premise of transfering BPHTB and PBB-P2 into regional taxes are: first theoretically, property tax has the following character, i.e. more local origin, visibility, immobile tax object and close correlation of tax payers and the beneficiaries (the benefit taxlink principle). Second, the transfer of these two taxes are expected to improve Own Source Revenue (PAD) and at the same time fortify APBD structure. Third, it aims to improve public services, accountability and transparency in BPHTB and PBB-P2 management. Fourth, based on practices in many countries, BPHTB and PBB-P2 are classified as local tax. The transfer of BPHTB and PBB-P2 to regions is not only to strengthen the capacity of regions in satisfying spendings required to run their governance, but more importantly to make BPHTB and PBB-P3 management more effective. The regional governments are supposed much more well-informed about the characteristics of their regions and know better the needs of local citizens. With the transfer of BPHTB and PBB-P2 into regional tax it is expected that the service to tax payers become more effective, efficient and accountable. To maintain the quality of services to Taxpayers and other stakeholders during transitional period, the process of transfering BPHTB and PBB-P2 to Regional Government should be carried out in compliance with the following conditions: 1. Process of transfering taxing power for BPHTB and PBB-P2 must be in smooth manner Financial Note and Indonesia Budget

259 Chapter 5 Fiscal Decentralization Policy at minimum costs either for the transferor or the transferee; 2. The stability of BPHTB and PBB-P revenue for regional government must be soundly maintained with minimum deviation to prevent excessive revenue loss to the regional governments resulting from this transfer; 3. Citizens as the taxpayers must feel no change of service quality but enjoy significant improvement in service quality and delivery The Implementation of BPHTB Transfer Pursuant to Law Number 28 of 2009, BPHTB has been effectively transferred as district/city tax as from 1 January Similar to other regional taxes, BPHTB can be only collected by the regional government under a Regional Regulation (Perda). BPHTB Perda is a legal base concerning BPHTB policies of a region covering the object, subject and taxpayers, tariff, tax assessment and other provisions as necessary to collect PBHTB according to the local conditions and characteristics of the region concerned. Thereafter, the regional government must set out Regulation of Head of Region with regard to the implementation of such Perda, which further elaborates BPHTB collection procedure, prepare human resources and establish cooperation with other related parties and open account to collect BPHTB proceeds. A number of efforts have been launched by the Government to encourage regions to immediately enact their Perda BPHTB. During the socialization of BPHTB and PBB-P2 and other activities relating to the regional governments, such as regional consultation and technical assistance, the Government always urges the regions to lay down their Perda BPHTB as soon as possible and remind the implications of their failure of enacting the said regional regulations. However, some regions have yet to set up their Perda PBHTB due to various constraints and considerations, such as the absence or minimum potential of BPHTB revenue, prolonged discussion of draft Perda BHPTB with the local parliament (DPRD) and some heads of regions engaged in legal cases and the preparation of regional elections or the transition of head of region replacement. The latest progress as of 31 July 2012 shows 476 regions or 96.6 percent have enacted their Perda BPHTB. These regions have BPHTB potentials percent of total BPHTB revenue in Meanwhile, 16 regions or 3.4 percent are still preparing their Perda PBHTB. They have BPHTB revenue potential of No (before the transfer) (after the transfer) 1. Perda enacted , ,71 2. Raperda (in process) 16 0,02 0 Source: the Ministry of Finance TABLE 5.3 THE READINESS OF REGIONS IN COLLECTING BPHTB (Position: 31 July 2012) The Readiness of Regions Total Regions , ,71 around percent of total PBHTB revenue in Data on the preparedness of regions in collecting BPHTB can be seen in Table 5.3. Total BPHTB Revenue (billion 5-14 Financial Note and Indonesian Budget 2013

260 Fiscal Decentralization Policy Chapter 5 One success indicator of BPHTB transfer into regional tax is the capacity of regions in collecting overall BPHTB potentials in their regions. Since BPHTB potentials are considerably dependend on economic activities, the benchmark for comparison is therefore the realized BPHTB revenue in previous year before the transfer. In terms of revenue, at nationwide scale, the transfer of BPHT gives significant contribution to regional revenue, i.e. around Rp.8.2 trillion or to rise by 4 percent higher than pre-transfer realization, albeit 16 regions not yet collect PBB-P2 in The Implementation of PBB-P2 Transfer The transfer of PBB-P2 is designed not to be introduced simultaneously to all regions, but subject to the preparedness of the regions in laying down a implementation regulation as legal umbrella, software and hardware and human resources so that the transfer of PBB-P2 will not cause new problems and burdens to taxpayers and the regional governments. Legal basis for the implementation of PBB-P2 transfer is as follows: 1. Law Number 28 of 2009 concerning Regional Tax and Service Charges. 2. Government Regulation Number 69 of 2010 concerning Procedure for Award and Use of Regional Tax and Service Charge Collection Incentives. 3. Government Regulation Number 91 of 2010 concerning Regional Taxes that can be collected based on assessment by the Head of Region or paid personally by the taxpayers. 4. Joint Regulation of Finance Minister and Home Affairs Minister Number 213/PMK.07/ 2010 and Number 58 of 2010 concerning Preparation for the Transfer of PBB-P2 as Regional Tax. 5. Regulation of Finance Minister Number 148/PMK.07/2010 concerning Bodies or International Agency Representatives Exempted from PBB-P2. 6. Regulation of Home Affairs Minister Number 56 of 2010 concerning Amendment to the Regulation of Home Affairs Minister Number 57 of 2007 concerning Technical Guidance for the Organizational Structure of Regional Institutions. 7. Regional Regulation on PBB-P2. 8. Regulation of Head of Region on Procedure for PBB-P2 collection. The preparation stage of PBB-P2 transfer is regulated under Joint Regulation of Finance Minister and Home Affairs Minister Number 213/PMK.07/2010 and Number 58 of This joint ministerial regulation allocates the tasks and responsibilities of the Ministry of Finance, the Ministry of Home Affairs and Regional Government. The tasks and responsibilities of the Ministry of Finance are: a. Compile, reproduce and submit to districts/cities some documents including: (1) Implementation Regulation on PBB-P2; (b) standard operation procedure (SOP) for PBB-P2, (c) organizational structure, tasks and function of Directorate General of Tax on PBB-P2 collection, (d) data on PBB-P2 receivable and the supporting documents, (e) Decree of Finance Minister on the assessment of Sales Value of Non Taxable Object (NJOPTKP) valid for 10 years before the transfer, (f) copies of villages/kelurahan, blocks and land pricing zones, (g) PBB-P2 database, and (h) application system on PBB-P2; Financial Note and Indonesia Budget

261 Chapter 5 Fiscal Decentralization Policy b. Monitor and develop the implementation of taxing power transfer on PBB-P2 to district/ municipal governments; and c. Provide technical training on PBB-P2 collection to district/municipal governments. The tasks and responsibilities of the Ministry of Home Affairs are to prepare guide on organizational structure and procedure of regional government, and to deliver advocacy, consultation, and technical education and training as well as supervision with regard to the transfer of PBB-P2 taxing power. Meanwhile, tasks and responsibilities assumed by the regional government are to prepare facilities and infrastructure, organizational structure and procedures, human resources, regional regulation and regulation of head of region, SOP, and foster cooperation with other related parties including Tax Office, Land Office, Land Deed Officials (PPAT), and banking institutions for PBB-P2 collection. To provide guidance in respect of organizational structure and procedures within the regional governments, Regulation of Home Affairs Minister Number 56 of 2010 concerning Amendment to the Regulation of Home Affairs Minister Number 57 of 2007 concerning Technical Implementation of Organizational Structure within Regional Institutions can be referred to. Based this regulation, the regions can add some functions for PBB-P2 collection. Besides, with such additional functions new Agency s Technical Implementation Units (UPTD) can be established as necessary. In Law Number 28 of 2009 and Joint Regulation of Finance Minister and Home Affairs Minister Number 213/PMK.07/2010 and Number 58 of 2010 there is a room for regions to collect PBB-P2 ahead of If the regions are ready to collect this tax before 2014, they must notify to the Minister of Finance and the Minister of Home Affairs no later than 30 June before the year of PBB-P2 transfer attached with Perda on PBB-P2. As of 31 July 2012, 245 regions or 49.8 percent have laid down their Perda PBB-P2. They cummulatively have PBB-P2 potential 91.2 percent of total PBB-P2 revenue in As to the other 64 regions or 13.0 percent, their Perda PBB-P2 is under preparation. They have PBB-P2 revenue potential reaching 2.3 percent of total PBB-P2 revenue in Meanwhile, 183 regions or 37.2 percent have yet to establish their Perda PBB-P2. They represent around 6.5 percent of PBB-P2 revenue potential if compared with total PBB-P2 revenue reaped in Of 245 regions that have enacted their Perda PBB-P2, 1 region, i.e. Kota Surabaya has collected PBB-P2 in 2011 and other 17 regions start to collect their PBB-P2 in Around 110 regions plan to gather PBB-P2 in Data on the preparedness of regions in collecting PBB-P2 can be seen in Table 5.4. To speed up the transfer of PBB-P2, in 2011 the Government together with the House of Representatives (DPR) conduct socialization on PBB-P2 transfer as regional tax in 160 districts/cities. This socialization will be replicated in all districts/cities around the countries until 2013 involving local parliament (DPRD), the related SKPD (agency working units) Camat, Village/Kelurahan Heads, Land Office (BPN), KPP Pratama, Notary/PPAT, academicians, and local leaders. The campaign is to arouse awareness and motivation of regions to immediately prepare facilities and infrastructure required for PBB-P2 collection, and as public announcement to the people and local officials who will be held responsible for the collection of PBB-P2 as a regional tax Financial Note and Indonesian Budget 2013

262 Fiscal Decentralization Policy Chapter 5 TABLE 5.4 THE READINESS OF REGIONS IN COLLECTION PBB-P2 (Position: 31 July 2012) Total Percentage (%) No. The Readiness of Regions Regions PBB-P2 Revenue (2010) No. Regions PBB-P2 Revenue (2010) 1. Perda enacted 245**) ,8 91,2 2. Raperda (in process) ,3 3. Raperda not yet prepared ,2 6,5 Total Source: the Ministry of Finance Note: *) PBB-P2 collection by districts/cities no later than 1 January 2014 **) start collecting PBB-P2: : 1 region (Kota Surabaya); : 17 regions; : 110 regions; and : 117 regions. Another initiative of the Government to assure well-advanced PBB-P2 transfer, especially in relation to human resources, State Accounting College (STAN) in association with the Directorate General of Taxes and Directorate General of Fiscal Balance open D1 program in Finance with concentration tax specialization in PBB-P2 appraisal and DI program in Finance with concentration tax specialization in operator console (OC). Regions can send some of their officials to be assigned to manage PBB-P2 collection to take these highly specialized DI programs so as to assure sound PBB-P2 management The Implementation of Loans and Grants to Regions Regional Loans At nationwide terms, the majority of regions have to face financial shortages. They are considerably dependent on fiscal balance with relatively limited Own Source Revenue (PAD). The great portion of revenue has been used to finance personnel expenditure and material expenditure. This condition has limited funding sources for infrastructure development in regions. It is estimated that the national infrastructure development in will require budget around Rp.1,923.0 trillion, which are planned to be covered from three sources, i,e, APBN, APBD and Private/SOEs. The funding capacity for infrastructure development from APBN is around Rp tillion, APBD Rp trillion and Private/SOEs Rp Financial Note and Indonesia Budget

263 Chapter 5 Fiscal Decentralization Policy trillion. Thus there is deficit Rp trillion that must be provided to finance public service infrastructure development. To cover such funding decifit, new breakthroughs are deemed necessary including the issuance of Municipal Bonds as financing source for infrastructure development. The Government will encourage the regions to have sound fiscal capacity and financial management performance to be eligible for municipal bond issuance. This is carried out with, among other thing, faciliation and advocacy to regions in municipal bond issuance and revision of laws and regulations concerning municipal bonds. The regulatory revisions include provisions with regard to: 1. Maximum threshold of regional loans including Municipal Bonds, in which the outstanding loans plus loans to withdraw may not exceed 75 percent of total last year s APBD revenue. 2. Debt Service Coverage Ratio Maximum limit of APBD deficit for the next coming year shall be set by the Government, i.e. in August of previous year with a view to controlling cummulative APBN and APBD deficits not exceeding the rate set by the laws at 3 percent of Gross Domestic Product. 4. The issuance of municipal bond is subject to consent of DPRD and decided into a regional regulation (Perda) concerning Municipal Bonds to ensure the commitment of regional government in complying with debt services arising from the issued bonds. 5. The obligation of the region to allocate reserve fund for municipal bond redemption in order to lessen default risk. 6. The regional government proposing the issuance of municipal bonds must meet the requirement that its Financial Statements have been assessed with unqualified opinion or unqualified opinion with explanatory paragrah. 7. The municipal bond can be only used to finance facility and infrastructure investments to deliver public services that can generate revenue for APBD (revenue bond). 8. Municipal Bonds must follow regulations issued by capital market authority while highly respecting good governance principles. 9. Municipal Bonds must be issued in domestic markets in rupiah currency to avoid exchange rate risk and other risks relating to foreign currencies arising from the issuance of Municipal Bonds Grant to Regions Grant to regions is allocated to assist the regions in performing their governance affairs under the authority of regions. Grant allocation to regions thus far is from SLA and foreign exchange. In period grant to regions has been used to finance multi-year activities in several strategic service sectors such as water supply, transportation, irrigation, agriculture, sanitation and basic education, In 2010 the Government funneled Rp.70.0 billion of grant to regions for Local Basic Education Capacity (L-BEC), Water Supply Grant and Waste Water Grant. L-BEC is the continuation of activities executed in 2009 and plans to end in Grant for water supply and waste water sector was commenced in 2010 and ended in For MRT and Water and Sanitation Project D (WASAP-D) no realization has been 5-18 Financial Note and Indonesian Budget 2013

264 Fiscal Decentralization Policy Chapter 5 made due to delayed tender process in regions being the beneficiaries. They have yet to propose grant application. The realization of grant to regions in 2010 resulted output of 265 capacity building in education sector (L-BEC), 15,441 house water connections, and 1,620 house wastewater connections. For fiscal budget 2011, the realization of grant to regions recorded significant increase to Rp billion. Grant to regions in 2011 was basically the continuation of activities performed in previous years, i.e. L-BEC, MRT, Water Supply Grant, Waste Water Grant and WASAP- D. In addition, there is new activity, i.e. Infrastructure Enhancement Grant (IEG) from the Government of Australia for sanitation sector. The said realization of Grant to Region reaching Rp billion has produced output of 416 capacity building in basic education sector (L- BEC), 61,559 house water connections, 3,206 house waste water connections, solid waste and waste water facilities in 21 districts/cities, Tender Assistance Services 1 for MRT project consultation services, and physical development of community and institution based sanitation. In 2012, grant allocation to regions receives two new activities, i.e. IEG Transporation and Water Resources and Irrigation Sector Management Project Phase II (WISMP-2). Some old activities that still continue in 2012 are L-BEC, MRT and WASAP-D. Budget allocation for these five activities reaches Rp.1.8 trillion. This increase is particularly due to MRT activities that will be made by end of The trend of grant to regions can be seen in Table 5.5. TABLE 5.5 GRANTS TO REGIONS, (billion rupiah No. Activities Realization Realization APBNP 1 L-BEC 24,5 45,9 54,5 2 Wastewater 8,1 16,0-3 Water Supply 37,4 161,7-4 WASAP-D - 6,3 11,7 5 IEG Sanitation - 43,4-6 MRT - 6, ,6 7 IEG Transportation - - 6,4 8 WISMP ,8 Total 70,0 280, ,9 Source: the Ministry of Finance Financial Note and Indonesia Budget

265 Chapter 5 Fiscal Decentralization Policy 5.3 Problems and Challenges around Fiscal Decentralization Implementation APBD Implementation APBD plays crucial role in regional development. APBD is the implementation of fiscal policies and at the same time the operationalization of programs launched by the regional governments. From fiscal policy terms, APBD is an instrument to facilitate economic growth and people s welfare augmentation. Meanwhile from the program operationalization side, expenditure allocation in APBD can be directed to provide facilities and and infrastructure for public services, goods and service procurement, and employment generation. In view this significant role of APBD, the potential revenue sources must be managed in optimum fashion. As to divisions/functions being the priority funding of regional spending must be set based on real demands subject to the authorities of regional government. One local revenue source is that of regional tax and service charge. This tax, however, is greatly subject to economic development of the region concerned. Empiric phenomenon shows that the more developed the economy of the region, the greater tax potential can be explored from the communities. To assess the effectiveness of tax revenue against potential tax, tax ratio and tax per capital calculation can be adopted. In 2012, the tax ratio of regions is expected at 1.08 percent or to increase if compared with 2011 s tax ratio at 0.94 percent. Meanwhile tax per capital ratio is to record Rp.333,407/capita or higher than its performance in 2011 at Rp.264,520/capita. While in nominal terms it indicates steady increase, such tax ratio and tax per capita ratio are still lower than regional economic scale (GDRP) and total population. It indicates a relatively immense tax potential that can be further explored from regions as their local revenue sources. To give more room in optimizing potential local revenue from regional tax, according to Law No. 28 of 2009 the regions have been granted with broader discretion to collect and manage regional tax and service charge to improve their Own Source Revenue (PAD). For the last 5 years, the ratio of Own Source Revenue (PAD) to Transfer to Regions tends to increase with the ratio of Transfer to Regions to total revenue records diminishing trend. In 2007, the ratio of Own Source Revenue (PAD) to total revenue was 16.8 percent and increase to 19.5 percent in In contrast, during the same period, the ratio of Transfer to Regions to total revenue was to drop from 81.8 percent in 2007 to 74.8 percent in 2012 despite increase to 79.0 percent in The trend of the ratio of Own Source Revenue (PAD) to total revenue and ratio of Transfer to Regions to total revenue can be seen in Graph 5.7. percent GRAPH 5.7 NATIONAL FISCAL DEPENDENCY RATIO, ,84 79,73 79,61 78,48 79,05 16,82 17,69 17,80 18,88 19,62 19,54 74, PAD/Pendptn Transfer/Pendptn Linear (PAD/Pendptn) Linear (Transfer/Pendptn) Note: shows realized figures and shows budget figures Source: the Ministry of Finance (data processed) 5-20 Financial Note and Indonesian Budget 2013

266 Fiscal Decentralization Policy Chapter 5 Apart from granting power to manage revenue sources, the regions also have right to spend the said revenue sources to finance the implementation of governance affairs according to the local needs, priorities and characteristics of the regions concerned. Funding to such governance affairs is expressed in material spending, capital spending and personnel spending to run the local governance. Allocation to capital spending is for the provision of public services with the budget allocated to personnel spending of human resources required to run the governance and as for material spending it is used to provide public services and run the governance. According to APBD data from 2007 to 2012, the composition of personnel spending, material spending and capital spending record some changes. In nominal wise, the allocation of material spending in provincial APBD is to rise by percent per annum on the average or higher than the increase chalked up by capital spending and personnel spending that only recorded rise of respectively percent and percent per annum on the average. For the allocation to other spending covering interest subsidiy, grant, social aids, financial aids and contingency it also records a relatively high increase, i.e percent per annum. The trend of budget allocation for regional spending in provincial APBD can be seen in Table 5.6. TABLE 5.6 PROVINCIAL APBD BY TYPE OF EXPENDITURE, (million rupiah) Type of Expenditure Avg. Growth (%) Personnel , , , , , ,87 11,88 Material , , , , , ,83 21,55 Capital , , , , , ,75 11,8 Others , , , , , ,42 25,47 Total , , , , , ,86 17,68 Note: denotes realization and denotes budget Source: the Ministry of Finance (data processed) For district/city, allocation for personnel spending in APBD 2008 to 2012 is to significantly increase at percent per annum on the average with material spending to rise by percent per annum on the average. For the allocation of capital spending and other spending they increase respectively by 8.93 percent and 8.45 percent per annum on the average. The trend of allocation by type of spending in district/municipal APBD can be seen in Table 5.7. Type of Expenditure Personnel , , , , , ,51 17,5 Material , , , , , ,38 14,5 Capital , , , , , ,74 8,93 Others , , , , , ,57 8,45 total , , , , , ,20 12,35 Note: denotes realization and denotes budget Source: the Ministry of Finance (data processed) TABLE 5.7 DISTRICT/CITY APBD BY TYPE OF EXPENDITURE, (million rupiah) Avg. Growth (%) In provincial APBD, the relatively high increase in the allocation for material spending and other spending has caused the portion of goods and service spending to surge up from percent in 2007 to percent in Accordingly the portion of other spending to total expenditure increased from percent in 2007 to percent in 2012 albeit in fluctuating Financial Note and Indonesia Budget

267 Chapter 5 Fiscal Decentralization Policy figures from 2009 to As to the portion of capital spending it is relatively to decline and so is the portion of personnel spending despite insignificant rate. The trend of portions of personnel spending, material spending, capital spending and other spending can be seen in Table 5.8. For district/municipal APBD, the relatively high increase of personnel spending allocation has also surged the porting of personnel spending more than 50 percent to total APBD expenditure, while during 2010 to 2012 the figures are a little bit lower. The portion of capital spending in 2007 used to record percent and then dropped to percent in 2010 and again rose to percent and percent in 2011 and 2012 respectively. The portions of material spending and other spending are relatively to fluctuate at percent and 7 9 percent range. Likewise, APBD proceeds allocated for activities in the provision of public service facilities and infrastructure are relatively smaller than those expended for governance operation spending including for the payment of teachers salaries and Type of Expenditure Personnel 26,04 25,18 24,12 24,41 24,67 20,41 Material 20,40 21,27 22,99 23,90 26,45 24,14 Capital 23,86 21,21 23,74 22,51 20,70 18,28 Others 29,69 32,34 29,15 29,19 28,18 37,16 Total 100,00 100,00 100,00 100,00 100,00 100,00 Note: denotes realization and denotes budget Source: the Ministry of Finance (data processed) Type of Expenditure TABLE 5.8 PROVINCIAL APBD RATIO, (percent) Personnel 42,74 45,37 47,41 53,29 51,11 50,94 Material 17,58 17,14 17,07 16,33 18,21 18,11 Capital 30,69 28,42 25,84 20,77 22,52 23,85 Others 8,99 9,06 9,68 9,61 8,15 7,11 Total 100,00 100,00 100,00 100,00 100,00 100,00 Note: denotes realization and denotes budget Source: the Ministry of Finance (data processed) TABLE 5.9 DISTRICT/CITY APBD RATIO BY TYPE OF EXPENDITURE, (percent) medical operators directly engaged in public service delivery. The trend of ratio of district/municipal APBD by type of spending can be seen in Table 5.9. The uses of local revenue sources are also evident from the allocation of spending by function. Provincial APBD expenditure earmarked to education and health functions in 2011 was to rise by percent and percent respectively if compared with their realization in As to allocation for public service spending it increased percent. Special for other functions including economic, environmental, law and order, housing and public facilities, tourism and culture and social protection functions they only increase percent. The trend of allocating more APBD expenditure to education function is also found in district/ municipal APBD. The relatively high portion of spending allocation for education function is due to payments of teachers salaries including profession allowances and additional allowance to PNSD teachers income Enhanced Quality in Regional Financial Management The quality of regional expenditure has been a hot issue during the last decade. It is due to the fact that a few regions received poor audit opinions from BPK for their financial statements compounded with insolvent spending structure, which is more expended for apparatus 5-22 Financial Note and Indonesian Budget 2013

268 Fiscal Decentralization Policy Chapter 5 spending and non-optimum budget absorption generating excessive Budget Surplus (SILPA), meanwhile needs on public service facilities and infrastructure are not yet fully satisfied. According to BPK s audit to the Financial Reports of Regional Government (LKPD), the LKPDs receiving WTP (unqualified opinion) and WDP (unqualified opinion with explanatory note) are to go up from 287 LKPDs in 2007 to 375 LKSPs in Meanwhile, LKPDs with disclaimer and adverse assessment are to decline from 182 LKPDs in 2007 to 141 LKSPs in While the number of regions with WTP and WDP opinion is to significantly hike, the regions with poor opinion remain high, i.e. around 27 percent of total regions. To enhance the quality of financial management in regions, the Government has improved budgeting system, regional financial implementation and accountability supported with human resources development within the regional governments. This system improvement is carried out with the revisions of various laws and regulations on financial management such as government accounting standard standars and provisions on goods and service procurement. To develop human resources in regions, training has been delivered to financial managers in regions with Regional Accounting Course (KKD) and Special Accounting Course on Regional Financial Administration/Accounting (KKDK). In addition the Government is also contemplating the introduction of certification to regional financial management position. APBD proceeds, which are more expended in government officials, are also an aspect requiring further restructuring to enhance the quality of regional expenditure. The restructuring include moratorium of public servant recruitment while administering the existing personnel according to the real needs and workloads of individual institutions. To abate personnel spending burden in APBD, the revised Law Number 33 of 2004 proposes limitation of personnel spending in APBD so that it can be controlled at the financial capacity of APBD. The quality of financial management in regions can be seen from budget absorption. During the budget absorption rate is to rise from 99.5 percent in 2008 to 93.8 percent in 2009 and 99.0 percent in 2010 and Despite constantly increasing absorption, on the other side the realization of capital spending remains low since it is more accumulated in the end of fiscal year. For the last 4 years the realization of capital spending is to reach 92.9 percent on the average or lower than the realization of personnel spending, material spending and other spending that record 98.7 percent on the average. Viewed from spending pattern, more than 60 percent of spending ceiling, especially capital spending is implemented in the fourth quarter of the year. It is worried that the high realization of capital spending in the last months approaching the end of fiscal year will affect the quality of output produced, which is not consistent with the specified SPM (minimum service standard). To deal with this problem, the Government must urge the timely prepared APBD so that the regional spending can be implemented in the early fiscal year. This is more obvious for the implementation of spending requiring tender process. Regions failed to submit Perda APBD within the specified time will receive sanctions of postponed DAU and DAK distribution. For those capable of submitting Perda APBD punctually they will be awarded with Regional Incentive Fund Implications to Regional Economic Development APBD exerts significant influence to the local economic progress with policies on regional revenue and expenditure. From revenue side, the policies on regional tax and service charge will have great influence over investment climate and economic activities in regions. Financial Note and Indonesia Budget

269 Chapter 5 Fiscal Decentralization Policy Meanwhile in terms of expenditure, APBD proceeds allocated for material spending and capital spending will influence to investment and economic activities in regions. Capital spending will produce output of public service facilities and infrastructure that in turn will attract the interests of investors to make investments. Meanwhile, material spending will stimulate local economic activities. Investments in regions for the last few years show upward trend. Based on data of Capital Investment Coordination Body (BKPM), total investments of both foreign investments (PMA) and domestic investments (PMDN) in 2011 were to surge up by 20.3 percent, i.e. from Rp trillion in 2010 to Rp trillion in Reviewed by regions, the majority of investments of PMA and PMDN are still concentrated in Java, Sumatra and Kalimantan. For other regions such as in Sulawesi, Maluku, Papu and Bali and Nusa Tenggara the investments are relatively small. The trend of investments can be seen in Table PMA (billion rupiah) PMDN (billion rupiah) No. Province I SUMATERA II JAVA III BALI & NUSA TENGGARA IV KALIMANTAN V SULAWESI VI MALUKU VII PAPUA TOTAL Source: Capital Investment Coordinating Body (2012) TABLE 5.10 INVESTMENT REALIZATION TREND IN INDONESIA, To arouse the interests of investors, promotion and policy facilitation from the Government are necessary. The Central Government with Master Plan for the Acceleration, Expansion and Development of Indonesia s Economy (MP3EI) proclaimed since 2011 gives clear guidance for investors wishing to make investments in regions for medium and long terms. MP3EI concept underlines that the success of economic development is not only dependent on the Government but also joint collaboration between the Government, Regional Government, BUMN (State Owned Enterprises = SOEs), BUMD (Regional SOEs) and private sectors. The Government and regional governments are responsible to give security assurance, licensing facilitation, and fiscal and non-fiscal incentives with regulation system improvement. Meanwhile SOEs, Regional SOEs and private parties are to perform investments, manage production/distribution and create employment. In line with the bolstering investments, Indonesia records distinctive economic growth. In 2010, the national economic growth was at 6.1 percent placing this country as the third Asian country with highest economic growth after China and India. In 2011 this figure further increased at 6.5 percent. By regions in 2011 most provinces recorded strong economic growth. Of them 14 provinces chalked up economic growth higher than national rate. Only two provinces recorded negative growth, i.e. Papua and Nusa Tenggara Barat. The trend of economic growth in 2010 and 2011 can be seen in Graph 5.8 and Graph 5.9 respectively. Disparity in economic growth among the provinces shows economic gap and inequal development. According to Willamson s Index , it is evident that the inequality of economic activities as reflected from Inter-Province GDRP (not including DKI Jakarta 5-24 Financial Note and Indonesian Budget 2013

270 Fiscal Decentralization Policy Chapter 5 percent GRAPH 5.8 ECONOMIC GROWTH 2010 National Economic Growth: 6,1% Di atas Pertumbuhan Ekonomi Nasional 1 NTB 6.29% 9 Jambi 7.31% 2 Sumut 6.35% 10 Gorontalo 7.63% 3 Kalteng 6.47% 11 Sulteng 7.79% 4 Maluku 6.47% 12 Malut 7.96% 5 DKI Jakarta6.51% 13 Sulsel 8.18% 6 Jatim 6.68% 14 Sultra 8.19% 7 Sulut 7.12% 15 Sulbar 11.91% 8 Kep. Riau 7.21% 16 Papbar 26.82% Source: Central Bureau of Statistics (data processed) ) GRAPH 5.9 ECONOMIC GROWTH National Economic Growth: 6,5% Source: Central Bureau of Statistics (data processed) province) still exists despite diminishing trend. Table 5.11 shows that in 2006 according to Williamson s Index the economic activity is to reach 0.59 and to drop to 0.43 in TABLE 5.11 WILLIAMSON INDEX FOR GRDP, Indonesia Sumatra Aside from economic growth Java indicator, the success of Bali and Nusa Tenggara economic developmet in regions Kalimantan can be seen from poverty rate, Sulawesi regional income per capita, and Maluku and Papua unemployment rate. For the last * not including DKI 3 years, regions with relatively Source: Central Bureau of Statistics (BPS) (data processed) high poverty rate like Papua, West Papua, Maluku, Gorontalo, managed to cut their poverty rate faster than in Java Bali where the poverty reduction is lower. It indicates catching-up process in welfare Financial Note and Indonesia Budget

271 Chapter 5 Fiscal Decentralization Policy augmentation by the regions, which are relatively backward. Regional income per capita indicator shows significant disparity between the provinces. In 2011, province with the lowest regional income per capita was West Java at around Rp.945,000/person with the highest regional income per capita found in West Papua at Rp.12,795,000/person. In addition there are some provinces with relatively high regional income per capita. They include Papua, East Kalimantan and North Maluku. Unemployment indicator was to drop from 7.79 percent in 2009 to 7.14 percent in 2010 and 6.56 percent in In 2011 regions with relatively high unemployment rate is Banten province and DKI Jakarta province by 13.6 percent and percent respectively. The trend of people welfare indicators can be seen in Table TABLE 5.12 APBD PER CAPITA TO PEOPLE WELFARE RATIO, Province APBD per Capital (thousand rupiah) Poverty Rate Unemployment W. Java ,96 11,27 10,65 10,96 10,33 9,83 Banten ,64 7,16 6,32 14,97 13,68 13,06 C. Java ,72 16,56 15,76 7,33 6,21 5,93 E. Java ,68 15,26 14,23 5,08 4,25 4,16 DIY ,23 16,83 16,08 6,00 5,69 3,97 Lampung ,22 18,94 16,93 6,62 5,57 5,78 NTB ,78 21,55 19,73 6,25 5,29 5,33 N. Sumatra ,51 11,31 11,33 8,45 7,43 6,37 S. Sulawesi ,31 11,60 10,29 8,90 8,37 6,56 Bali ,13 4,88 4,20 3,13 3,06 2,32 NTT ,31 23,03 21,23 3,97 3,34 2,69 S. Sumatra ,28 15,47 14,24 7,61 6,65 5,77 W. Kalimantan ,30 9,02 8,60 5,44 4,62 3,88 W. Sumatra ,54 9,50 9,04 7,97 6,95 6,45 Jambi ,77 8,34 8,65 5,54 5,39 4,02 C. Sulawesi ,98 18,07 15,83 5,43 4,61 4,01 DKI Jakarta ,62 3,48 3,75 12,15 11,05 10,80 W. Sulawesi ,29 13,58 13,89 4,51 3,25 2,82 S. Kalimantan ,12 5,21 5,29 6,36 5,25 5,23 Gorontalo ,01 23,19 18,75 5,89 5,16 4,26 Babel ,46 6,51 5,75 6,14 5,63 3,61 SE Sulawesi ,93 17,05 14,56 4,74 4,61 3,06 Sultra ,79 9,10 8,51 10,56 9,61 8,62 Bengkulu ,59 18,30 17,50 5,08 4,59 2,37 Riau ,48 8,65 8,47 8,56 8,72 5,32 Kep. Riau ,27 8,05 7,40 8,11 6,90 7,80 Maluku ,23 27,74 23,00 10,57 9,97 7,38 Aceh ,80 20,98 19,57 8,71 8,37 7,43 C. Kalimantan ,02 6,77 6,56 4,62 4,14 2,55 N. Maluku ,36 9,42 9,18 6,76 6,03 5,55 E. Kalimantan ,73 7,66 6,77 10,83 10,10 9,84 Papua ,53 36,80 31,98 4,08 3,55 3,94 W. Papua ,71 34,88 31,92 7,56 7,68 8,94 Souce: the Ministry of Finance and BPS (data processed) 5-26 Financial Note and Indonesian Budget 2013

272 Fiscal Decentralization Policy Chapter 5 Intensified economic activities in regions, which are stimulated by Government expenditure and private investments, have increased the sum of outstanding money and price fluctuation for both goods and service (inflation) in regions. In 2011 data of inflation acquired from 66 cities as shown in Table 5.13 indicates diminishing trend if compared with inflation rate in To maintain price stablibility since 2011 Regional Inflation Controlling Team has been established (TPID) in several cities of such 66 cities. Their inflation rates will be monitored by BPS. To curb inflation, TPID and the regional government will focus to deal with structural problems relating to shortages of basic need supplies as a result of limited food production, poor distribution infrastructure, long distribution chains, illegal stock and levies and seasonal effects. No. City No. City Lhokseumawe 15,04 3,92 7,19 3,55 34 Probolinggo 5,63 3,50 6,68 3,78 2 Banda Aceh 11,97 3,49 4,64 3,32 35 Madiun 5,99 3,37 6,54 3,49 3 Padang Sidempuan 10,70 1,86 7,42 4,66 36 Surabaya 10,41 3,34 7,33 4,72 4 Sibolga 13,78 1,62 11,83 3,71 37 Serang 13,69 4,49 6,18 2,78 5 Pematang Siantar 10,25 2,72 9,68 4,25 38 Tangerang 6,23 2,49 6,08 3,78 6 Medan 9,94 2,67 7,65 3,54 39 Cilegon 4,55 3,08 6,12 2,35 7 Padang 13,09 2,06 7,84 5,37 40 Denpasar 10,52 4,29 8,10 3,75 8 Pekanbaru 10,54 1,93 7,00 5,09 41 Mataram 12,43 3,14 11,07 6,38 9 Dumai 8,04 0,84 9,05 3,09 42 Bima 8,85 4,03 6,35 7,19 10 Batam 8,59 1,88 7,40 3,76 43 Maumere 6,31 5,16 8,48 6,59 11 Jambi 11,09 2,50 10,52 2,76 44 Kupang 10,47 6,33 9,97 4,32 12 Palembang 13,30 1,83 6,02 3,78 45 Pontianak 11,58 4,86 8,52 4,91 13 Bengkulu 14,53 2,89 9,08 3,96 46 Singkawang 5,68 1,20 7,10 6,72 14 Bandar Lampung 14,35 4,17 9,95 4,24 47 Sampit 8,32 2,83 9,53 3,60 15 Pangkal Pinang 18,40 2,17 9,36 5,00 48 Palangkaraya 12,16 1,38 9,49 5,28 16 Tanjung Pinang 6,95 1,45 6,17 3,32 49 Banjarmasin 11,03 3,80 9,06 3,98 17 DKI Jakarta 11,11 2,32 6,21 3,97 50 Balikpapan 11,14 3,54 7,38 6,45 18 Bogor 3,98 2,13 6,57 2,85 51 Samarinda 12,78 3,99 7,00 6,23 19 Sukabumi 7,51 3,43 5,43 4,26 52 Tarakan 8,78 7,01 7,92 6,43 20 Tasikmalaya 11,68 4,10 5,56 4,17 53 Manado 9,00 2,34 6,28 0,67 21 Bandung 9,85 2,09 4,53 2,75 54 Palu 10,67 5,60 6,40 4,47 22 Cirebon 13,87 4,06 6,70 3,20 55 Watampone 10,11 6,67 6,74 3,94 23 Bekasi 5,05 1,93 7,88 3,45 56 Makassar 12,23 3,21 6,82 2,87 24 Depok 6,09 1,30 7,97 2,95 57 Parepare 7,35 1,39 5,79 1,60 25 Purwokerto 12,30 2,81 6,04 3,40 58 Palopo 7,77 4,12 3,99 3,35 26 Surakarta 8,26 2,58 6,65 1,93 59 Kendari 15,97 4,52 3,87 5,09 27 Semarang 11,15 3,13 7,11 2,87 60 Gorontalo 7,88 4,26 7,43 4,08 28 Tegal 8,63 5,69 6,73 2,58 61 Mamuju 8,52 1,77 5,12 4,91 29 Yogyakarta 10,03 2,89 7,38 3,88 62 Ambon 10,07 6,41 8,78 2,85 30 Jember 10,12 3,71 7,09 2,43 63 Ternate 12,17 3,83 5,32 4,52 31 Sumenep 5,47 2,71 6,75 4,18 64 Manokwari 14,54 7,36 4,68 3,64 32 Kediri 10,11 3,54 6,80 3,62 65 Sorong 11,01 3,28 8,13 0,90 33 Malang 11,93 3,33 6,70 4,05 66 Jayapura 15,51 1,95 4,48 3,40 Source: Central Bureau of Statistics (BPS) (data processed) TABLE 5.13 ANNUAL INFLATION RATE IN 66 CITIES, (in percent) Financial Note and Indonesia Budget

273 Chapter 5 Fiscal Decentralization Policy 5.4 Budget of Transfer to Region in Budget Policy for Transfer to Regions in APBN 2013 Budget for Transfer to Regions is an instrument of fiscal decentralization policy aiming to finance governance tasks under the authority of regions in the context of regional autonomy. The implementation of budget policy on Transfer to Regions will not only take funding requirements for the implementation of governance tasks in regions into account but also the financial capacity of the Government and objectives to pursue in the fiscal year concerned based on programs/activities set as national development priorities. Budget policy of Transfer to Region in 2013 will be directed to support development sustainability in regions and to enhance the quality of programs/activities being priorities in regions based on Minimum Service Standard (SPM) established for individual sectors. In detail, the objectives of budget allocation for Transfer to Regions in 2013 are as follows: 1. Develop the fiscal capacity of regions and reduce fiscal vertical and horizontal imbalances; 2. Harmonize the funding requirements of regions according to the governance tasks allocation of the Government, provinces and districts/cities; 3. Enhance the quality of public services in regions and reduce public service disparities between the regions; 4. Support national fiscal sustainability; 5. Develop the capacity of regions in exploring their local economic potentials; 6. Enhance efficiency in utilizing national resources; 7. Improve synchronization of national development plan and regional development plan; 8. Fortify the competitiveness of regions; and 9. Give more attention to the development of under-developed regions, outer regions and the frontiers. To support the implementation of the foregoing policies, APBN 2013 allocates budget for Transfer to Regions at Rp trillion (5.7 percent of GDP), which composes 84.1 percent of Fiscal Balance and the other 15.9 percent of Special Autonomy and Adjustment Fund. The said ceiling of budget allocation for Transfer to Regions implies an increase of 10.4 percent if compared with its ceiling in APBNP 2012 at Rp trillion Fiscal Balance In APBN 2013, Fiscal Balance is planned to amount Rp trillion (4.8 percent of GDP), which of this sum 22.9 percent is DBH, 70.0 percent DAU and 7.1 percent DAK. This ceiling reflects an increase of 8.9 percent from the ceiling set in APBNP at Rp trillion Revenue Sharing Revenue Sharing is proceeds coming from APBN revenue allocated to regions based on certain percentage to finance the needs of regions in the context of decentralization implementation. Policies for the implementation of DBH allocation in 2013 refers to provisions set forth in 5-28 Financial Note and Indonesian Budget 2013

274 Fiscal Decentralization Policy Chapter 5 Law Number 33 of 2004, Law Number 11 of 2006 concerning Aceh Government, Law Number 35 of 2008 concerning the Enactment of Perpu (Presidential Regulation in lieu of Law) Number 1 of 2008 concerning Amendment to Law Number 21 of 2011 concerning Special Autonomy for Papua Province into a law, and Law Number 39 of 2007 concerning Amendment to Number 11 of 1995 concerning Excise, and Government Regulation Number 55 of 2005 concerning Fiscal Balance. In 2013, DBH policies are directed to: (1) revise calculation and enactment process of DBH allocation in more transparent and accountable manner; (2) revise budgeting and implementation system of PNBP shared to regions; (3) improve data accuracy through coordination with institutions managing non-tax revenue (PNBP) and tax revenue; (4) maintain the sustainability of timely and accurate proceeds distribution system with reconcialization system of data from the Government and revenue producing regions; and (5) settle DBH underpayment. In APBN 2013, DBH allocation is planned to reach Rp trillion (1.1 percent of GDP), which of this sum 49.0 percent is from DBH Tax and the other 51.0 percent from DBH Natural Resources. This ceiling reflects a decrease of 6.0 percent from its ceiling in APBNP 2012 set at Rp trillion. The lower DBH ceiling in 2013 is attributed to smaller PBB revenue plan resulting from the transfer of PBB-P2 to regional tax and the declining non-tax revenue from oil and gas sector, and the absence of budget for PPh underpayment in APBNP DBH Tax DBH Tax consists of Income Tax (PPh) Pasal 21 and PPh Pasal 25/29 for Domestic Individual Taxpayers (WPOPDN), Land and Income Tax (PBB), and Tobacco Product Excise (CHT). The allocation of DBH PBB (Land and Building Tax) is set in view of implications of Law Number 28 of 2009 with regard to the transfer of PBB-P2 into regional tax that will be carried out according to the preparedness of the regions concerned. In 2013 it is expected that there will be around 107 regions collecting PBB-P2 as their regional tax. Then no later than 2014, all regions will manage PBB tax in rural and urban sectors. As the consequence of transferring PBB-P2 into regional tax there will be no longer DBH allocation for PBB in such sectors in APBN. The allocation of DBH PPh will refer to Article 13 Law Number 33 of 2004 and Article 8 Government Regulation Number 55 of According to these provisions, the sum of DBH PPh Pasal 21 and PPh Pasal 25/29 WPOPDN (Domestic Individual Taxpayers) shall be 20 percent of revenue reaped from the PPh concerned. DBH PPh Pasal 21 and Pasal 25/29 WPOPDN transferred to regions shall be proportioned by 12 percent for district/city and 8 percent for province. The portion of district/city is further apportioned 8.4 percent for the producing region and the other 3.6 shall be distributed equally to all districs/cities within a province. The producing region is the place where the taxpayers registered and/or where the taxpayers run their business activities. For DBH PBB, the allocation ceiling in APBN 2013 will refer to Article 12 paragraph (1), (2), and (3) Law Number 33 of 2004 and Article 5 and Article 6 Government Regulation Number 55 of Under these regulations: (a) the portion of regions for PBB shall be set at 90 percent of total PBB revenue with further breakdowns as follows: 64.8 percent for districts/ cities, 16.2 percent for province, (b) collection fee 9 percent of PBB revenue, and (c) the Financial Note and Indonesia Budget

275 Chapter 5 Fiscal Decentralization Policy portion of the Government 10 percents of PBB revenue. The said collection fees 9 percent shall be divided between the Government, province and district/city with different percentage for each PBB sector. Meanwhile, for the portion of the Government at 10 percent, it shall be further distributed as follows: 6.5 percent equally apportioned to districts/cities and the other 3.5 percent as incentive to districts/cities which the realization of PBB-P2 in previous year reaches or exceeds the estimated sums. In the mean time, allocation ceiling for DBH CHT (Tobacco Product Excise) in 2013 is decided in compliance with Article 66A Law Number 39 of 2007 and Decision of Constitution Court of Republic of Indonesia Number 54/PUU-VI/2008 of 14 April According to these provisions, DBH CHT shall be distributed to province producing the excise of tobacco products and province producing tobacco at 2 percent of revenue from tobacco products. Such DBH CHT revenue is then distributed to districts/cities of the province with the following proportion: 30 percent for province and 70 percent for districts/cities. The portion of districts/cities are further apportioned by 40 percent for the producing district/city and the other 30 percent equally distributed to other districts/cities. At variance with DBH Tax, which is block grant, DBH CHT is specific grant, i.e. used to (a) enhance the quality fo raw materials; (b) develop industries; (c) develop social environment; (d) socialize provisions on excise; and/or eradicate illegal excisable goods. According to tax revenue sharing and in view of provisions on DBH tax including CHT, in APBN FY 2013, the allocation of DBH Tax is planned to amount Rp.50.0 trillion (0.5 percent of GDB), or to drop by 3.3 percent if compared with the allocation of DBH Tax in APBNP 2012 of Rp.51.7 trillion. Such DBH allocation in APBN FY 2013 consists of: (a) DBH PPh Rp.22.1 trillion; (b) DBH PBB Rp.26.0 trillion, including DBH PBB underpayment Rp billion, and (c) DBH CHT Rp.1.9 trillion including DBH CHT underpayment Rp.91.6 billion DBH Natural Resources DBH coming from natural resources (SDA) consists of oil mining, gas mining, forestry, general mining, fishery and geothermal mining. According to Article 14 letter a and letter f and Article 106 paragraph (1) Law Number 33 of 2004, starting from 2009 the allocation of revenue sharing to regions from oil and gas will be respectively 15.5 percent and 30.5 percent of total revenue minus tax components and other charges. The portion of 5 percent from such DBH Oil and Gas will be used to increase basic education budget and apportioned to the allocation of education budget of minimum 20 percent in APBN. The portion of 0.5 percent of DBH Oil and Gas in question will be exempted for provinces and districts/cities regulated under special autonomy laws. The implement the mandate of Law Number 21 of 2001 as amended with Law Number 35 of 2008 concerning Special Autonomy for Papua and Law Number 11 of 2006 concerning Aceh Goverment, APBN 2013 allocates additional DHB Natural Resources of Oil and Gas for West Papua Province and NAD province. The breakdowns of the said additional allocation are oil 55 percent and gas 40 percent leaving total revenue proportions of oil and gas 70 percent respectively. To meet the mandate of Law Number 33 of 2004 and Government Regulation Number 55 of 2005, the portions of regions from Natural Resources of General Mining, Forestry, Geothermal and Fishery are set at 80 percent of total revenues. The allocation of DBH Natural Resources is based on the estimated revenue established in APBN. For the distribution, the 5-30 Financial Note and Indonesian Budget 2013

276 Fiscal Decentralization Policy Chapter 5 calculation of DBH Natural Resources in the current year will undergo reconciliation mechanism on quarterly basis between the data in central institutions and producing regions. Based on non-tax revenue plan from oil and gas, general mining, forestry, geothermal and fishery sectors and in view of provisions with regard to the distribution of DBH revenue sharing, in APBN 2013, DBH Natural Resources (SDA) is allocated at Rp.52.0 trillion (0.6 percent of GDP). This ceiling is 8.3 percent lower than its allocation in APBNP 2012 reaching Rp.56.7 trillion. Such DBH Natural Resources in APBN 2013 consists of DBH Oil Sector Rp.18.7 trillion, DBH Gas Sector Rp.16.5 trillion, DBH General Mining Sector Rp.14.1 trillion, DBH Forestry Sector Rp.2.3 trillion, DBH Fishery Sector Rp billion and DBH Geothermal Sector Rp billion General Allocation Fund (DAU) DAU is fund from APBN revenue allocated to equalize the financial capacity of regions in meeting their needs in the context of decentralization implementation. The sum of National DAU is considerably dependent on net Domestic Revenue collected in APBN. Net Domestic Revenue (PDN) policy will at all time take reduction elements of PDN while increasing the real DAU allocation every year. Total DAU is set at minimum 26 percent of net PDN established in APBN. DAU allocation to regions is calculated using formula prepared with reference to DAU calculation database. The adoption of this formula is to change since the introduction of Law Number 33 of 2004 and Government Regulation Number 55 of 2005 that have been effectively taking into effect as from This change concerns the components of minimum allocation (AM) and fiscal imbalance (KF). Before 2006, DAU formula was divided into two main components, i.e. the minimum allocation (AM) and fiscal imbalance (KF). AM is calculated based on lumpsum components and personnel expenditure proportion. As from 2006, these AM and KF components have been revised into basic allocation (AD) and fiscal gap (CF). This CF based DAU allocation is a component for the equalization of financial capacity of regions while taking the difference of fiscal needs and fiscal capacity of the region concerned into account. Based on DAU distributed to provinces and districts/cities in APBN 2013: 1. Basic Allocation (AD) is calculated according to the sum of PNSD salaries including basic salary plus family allowance and occupational allowance as set out in public servant remuneration regulation and in view of other policies on remuneration and public servant recruitment; and 2. Fiscal Gap (CF) is the difference of fiscal needs and fiscal capacity. a. Fiscal needs are reflected from variables of total population, areas, construction price index, human development index, and GRDP per capita, and b. Fiscal capacity is represented by variables of Own Source Revenue (PAD), DBH Tax, and DBH Natural Resources not including DBH Reboisation Fund. Meanwhile, to expand the equality of fund allocation to regions and deal with horizontal imbalance, any measure to improve data accuracy in DAU calculation covering fiscal needs and fiscal capacity and basic allocation data will be continued. To assess the best equalization, Williamson Index (WI) is adopted. WI is standard parameter to assess the equality of financial Financial Note and Indonesia Budget

277 Chapter 5 Fiscal Decentralization Policy capacity of regions. It implies that the smaller figure of WI indicator, the narrower fiscal variation or imbalance and the better financial capacity of regions will be. Thereafter, the improve DAU function as a tool to minimize horizontal fiscal imbalance, analysis to horizontal fiscal imbalance can be formulated by determining the proportions of DAU components, which among other thing can be made by reducing AD proportion to CF. The smaller role of AD in DAU formula the greater role of CF based formula will be. The latter have more flexibility in correcting horizontal fiscal imbalance. The stronger CF role in DAU formula by limiting AD can produce better equalization with the adoption of fiscal gap benchmark. To improve horizontal equalization, the application of DAU formula may give a region with smaller DAU than the last year s allocation, since the said region records significant fiscal capacity improvement. It is consistent with the basic concept of DAU as equalizing grant, i.e. DAU allocation proportional to DBH revenue and Own Source Revenue (PAD) as benchmarks in assessing the financial capacity of a region. This non holdharmless policy is consistent with the objective of minizing horizontal fiscal imbalance. To support the application of DAU formula in APBN 2013, DAU will be focused to (1) fortify the function of DAU as horizontal financial capacity equailization; (2) improve the accuracy of database for DAU calculation from the competent ministries/agencies; (3) Basic Allocation in view of policies on the increase of basic salary, public servant vacancies, and other related policies on remuneration; (4) DAU proportion of 10 percent for all provinces and 90 percent for all districts/cities of national DAU; and (5) continue non hold harmless policy. According to such DAU policy and the target set for domestic revenue in APBN 2013, which is to amount Rp.1,525.2 trillion, minus revenue sharing (DBH) to regions Rp trillion, Non-Tax Revenue (PNBP) planned to be redistributed to the producing ministries/agencies Rp.36.9 trillion, tax subsidy Rp.4.8 trillion, and parts (60 percent) of several subsidy portions, i.e. electricity subsidy, Rp.80.9 trillion, fuel subsidy Rp trillion, fertilizer subsidy Rp.16.2 trillion, food subsidy Rp.17.2 trillion and seed subsidy Rp.1.5 trillion so that these miscellaneous subsidies that can apportioned to net domestic revenue (PDN) total Rp trillion, the net PDN revenue in APBN 2013 is therefore set at Rp.1,196.7 trillion. In view of Law Number 33 of 2004 and with reference to discussion of House of Representatives (DPR) and the Government during the Discussion Level I/Draft Law on APBN FY 2013, DAU allocation in 2013 is set at 26 percent of Net PDN revenue or Rp trillion (3.4 percent of GDP). This sum, nominally, is Rp.37.3 trillion higher if compared with DAU allocation in APBNP 2012 at Rp trillion. Of such DAU allocation, i.e. Rp trillion, Rp.31.1 trillion will be distributed to provinces (10 percent of National DAU) and Rp trillion to districts/cities (90 percent of total National DAU) Special Allocation Fund (DAK) Pursuant to Law Number 33 of 2004, DAK is allocated to finance special activities being the affairs of regions and in compliance with national priorities in the context of regional development acceleration and the realization of national goals. DAK allocation to regions are established based on three criteria, i.e. general criteria, special criteria and technical criteria. In 2013, the Government will more focus the distribution of DAK proceeds to under-developed regions in synergic manner with central proceeds (ministries and agencies), while continuting 5-32 Financial Note and Indonesian Budget 2013

278 Fiscal Decentralization Policy Chapter 5 the transfer of deconcentration fund and co-administration fund into DAK. The directions of DAK policies in 2013 are as follows: a. Assist regions with relatively low financial capacity in financing their public services to achieve SPM level (minimum service standard) with the provision of physical facilities and infrastructure for the delivery of basic services to the public and enhance the effectiveness of regional spending; b. Strengthen DAK planning with output/outcome based approach as indicated in RPJM; c. Improve coordination in Technical Guidelines preparation; d. Improve the accuracy of technical data and avoid duplication of activities in DAK sectors; e. Give more attention to under-developed regions in respective DAK sectors; f. Improve performance and quality of DAK management; g. Encourage the ministries/agencies to transfer deconcentration/co-administration fund being parts of the ministries/agencies budget, which remain to be used to implement governance affairs under the responsibility of regions to DAK in phases; h. Improve coordination in DAK management to support the synchronization of DAK activities with those financed under other sources (APBN and APBD); i. Introduce sanctions (disincentive) to regions not reporting DAK activities using the specified performance reporting system that will be deemed as a factor of technical criteria for DAK allocation calculation. DAK policy in 2013 has objectives of: (1) supporting the realization of national priorities set in RPJMN and RKP 2013; (2) DAK policies in RPJMN , which is outcome oriented; and (3) supporting the acceleration of regional development; and (4) supporting the provision of infrastructure and facility for basic public service until minimum service standard (SPM) level. In light of foregoing, to support theme of RKP 2013 sectors planned to be financed with DAK in 2013 are as follows: (1) Education, (2) Health, (3) Road Infrastructure, (4) Irrigation Infrastructure, (5) Water Supply Infrastructure, (6) Sanitation Infrastructure, (7) Regional Government Infrastructure, (8) Marine and fishery, (9) Agriculture, (10) Environment, (11) Family Planning, (12) Forestry, (13) Trade Facility and Infrastructure, (14) Facility and Infrastructure for Under-Developed Regions, (15) Rural Energy, (16) Housing and Settlement, (17) Land Transport Safety, (18) Rural Transportation, and (19) Facilities and Infrastructure for Border Areas. Consistent with the directions of DAK general policies, the scope of DAK financed activities for individual sectors is as follows: 1. Education, focused to support the completion of quality and equitable nine-year compulsory basic education program complying with the specified minimum service standard (SPM) level. In addition, activities financed under DAK for education sector in 2013 will be also directed to support the implementation of universal secondary education with the provision of adequate education facilities and infrastructure in terms of quality and quantity. DAK activities in Education Sector in 2013 will be prioritized to rehabilitate the damaged class rooms and/or studying rooms of SD/SDLB and SMP/SMPLB, the Financial Note and Indonesia Budget

279 Chapter 5 Fiscal Decentralization Policy heavily damaged studying rooms of SMA/SMK/SMLB, to develop New Class Rooms (RKB) and Other Studying Rooms including the associated furniture for SMP/SMPLB, to develop libraries, laboratories for SMA/SMK/SMLB, and to provide education equipment. Schools receiving DAK in Education Sectors in 2013 will include SD/SDLB, SMP/SMPLB and SMA/SMK/SMLB either public or private schools. The scope of activities will be prioritized to execute: (1) the rehabilitation of moderately damaged class rooms for SD/SDLB; (2) the rehabilitation of moderately damaged class rooms for SMP/SMPLB; (3) the development of studying rooms for SMP/SMPLB; (4) the rehabilitation of the heavily damaged studying room for SMA/SMK/SMLB; (5) the development of new class rooms for SMP/SMPLB; (6) the development of libraries for SD/SDLB, SMP/SMPLB and SMA/SMK/SMLB; (7) the development of laboratories for SMA/SMK/SMLBl (8) the procurement of education equipment for SD/SDLB, SMP/ SMLB and SMA/SMK/SMLB; and (9) the procurement of books/references for SMP/ SMPLB and SMA/SMK/SMLB. 2. Health, focused to improve access to and quality of health services so as to speed up the realization of MDGs i.e. lower mortality rate of mothers, babies and children, nutrition enhancement and disease prevention and sanitation notably health services rendered to low income people and population in under-developed regions, isolated regions, border areas and islands (DTPK) and other regions suffering health problems (DBK) with the provision of childbirth assistance and health insurance in basic and referential health service providers, the improved facilities and infrastructure for basic and referential health services, including accommodation of class III wards in hospitals, medicine supplies and management, effective, safe, quality and beneficial health logistic and vaccines for the preparation of Social Security Organizing Body (BPJS) in The scope of activites is: (1) basic health service, i.e. the provision of facilities, infrastructure and equipment for puskesmas (health centers) and their networks including: (a) the development of Secondary Puskesmas/Puskemas in DTPK/Patient Caring Puskesmas and PONED/Puskesmas Waste Treatment Plant/Poskesdes/posbindu, (b) the improvement of Puskesmas into Patient Caring Puskesmas in DTPK, (c) the rehabilitation of puskesmas, official houses of doctors/dentists/paramedics (couples), (d) the provision of sanitation facility and infrastructure/ukbm Kit; (2) referential health services, i.e. the provision/procurement of facilities, infrastructure and equipment for Regional General Hospitals (RSUDP) with: (a) the procurement of facilities and infrastructure for RS Siap Ponek, (b) the provision of Class III wards in hospitals, (c) Waste Treatment Plant in hospital, (d) the procurement of equipment for UTD RS/ BDRS, (e) the procurement of facilities and infrastructure for ICU and Emergency Unit; (3) pharmautical services, i.e.: (a) medicine and health logistic provision, (b) new development or rehabilitation, provision of supporting facilities for District/Municipal Pharmacy Plant, (c) new development of satellite Pharmacy Plants and the associated facilities. 3. Road Infrastructure, focused to maintain and improve the performance of provincial, district and municipal road infrastructure and to support domestic connectivity in the context of regional economic corridor development. The scope of activities is: (1) periodic maintenance of roads and bridges by province/ district/city, (2) road improvement and development by province/district/city, (3) bridge replacement and development by province/district/city Financial Note and Indonesian Budget 2013

280 Fiscal Decentralization Policy Chapter 5 4. Irrigation Infrastructure, focused to maintain and improve the performance of irrigation/swamp services by province and distric/city to support the realization of national priorities in Food Resilience, particularly National Rice Production Improvement toward 10 million ton rice surplus in The scope of activities is to rehabilitate irrigation networks by province/district/city that may be used to improve irrigation networks. To optimize the use of DAK for irrigation, SID and operation and maintenance activities of irrigation network will be under the responsibility of Regional Governments as complementary activities. 5. Water Supply Infrastructure, focused to expand the scope of water services to accelerate the realization of MDGs so as to enhance the quality of public health and meet minimum service standard (SPM) in water supply sectors in urban and rural areas including under-developed regions. The scope of activities is: (1) piped house connection expansion and improvement for urban low-income people. The target regions are districts/cities with adequate idle capacity for piped house connection development; (2) master meter installation for urban low income people notably those living in urban slum areas. The target regions are districts/ cities with adequate idle capacity for piped house connection development; and (3) the development of rural water supply system (SPAM) with the target regions of villages having relatively abundant raw water sources. 6. Sanitation Infrastructure, focused to improve the scope and reliability of sanitation services, especially in wastewater and solid waste treatment in communal/decentralized manner to enhance the quality of public health and to meet minimum service standard (SPM) in sanitation service provision for regions deprived from sanitation services including under-developed regions. The scope of activities is: (1) wastewater sub-sector: the development and construction of communal wastewater facility and infrastructure; and (2) solid waste sub-sector: the development and construction of solid waste management with 3R pattern (reduce, reuse and recycle) at community level connected with solid waste management system at city level. 7. Regional Governance Infrastructure, focused to improve the performance of regional governance in delivering public services. The priority is given to the newly established regions and under-developed regions to enhance the quality of their public services. Scope of activities is: (1) the development/expansion of Regent/Mayor office, (2) the development/expansion of District/Municipal Secretariat, and (3) the development/ expansion of District/Municipal DPRD office, and (4) the development/expansion of District/Municipal SKPD office. 8. Marine and Fishery, focused to improve facilities and infrastructure for production, processing, quality improvement, marketing, supervision, advocacy, statistical data to support marine and fishery industrialization and fishery town development, and the provision of facility and infrastructure for marine and fishery development in small islands. Financial Note and Indonesia Budget

281 Chapter 5 Fiscal Decentralization Policy The scope of activities is that for DAK KP Province to procure fishing boat > 30 GT and for DAK KP District/City: (1) the development of fishery facilities and infrastructure for capture fishing, (2) the development of fishery facilities and infrastructure for aquaculture, (3) the development of facilities and infrastructure for the processing, quality improvement and marketing of fishery products, (4) the development of basic facilities and infrastructure in coastal areas and small islands, (5) the development of facilities and infrastructure for marine and fishery resources supervision, (6) the development of facilities and infrastructure for fishery advocacy, and (7) the development of facilities for the provision of marine and fishery statistical data. 9. Agriculture, focused to support the development of water facilities and infrastructure, land facilities and infrastructure, agriculture development center development and rehabilitation and community based food center development to increase domestic food production in order to reinforce national food resilience. Scope of activities: (1) for province: (1) the development/rehabilitation of PTD/Centers/ Seedlings/Nurseries, (2)the development/rehabilitation of UPTD/Plant Protection, (3) the development/rehabilitation of Animal Health Laboratories; (b) for district/city: (1) the development of water facilities and infrastructure, (2) the development of land facilities and infrastructure, (3) the development/rehabilitation of agriculture development center at kecamatan (sub-district) level; and (4) the development of community based food centers. 10. Environment, focused to assist district/city in financing activities for the realization of minimum service standard in environmental sector under the responsibility of regions, and to prevent climate change, (2) to support the acceleration of environmental problem management in regions, (3) to strengthen the institutional capacity in environmental management, (4) to encourage commitment of regional officials in improving and/or maintaining the quality of environment, (5) to encourage the leaders of environmental establishments in regions to develop the capacity and performance of their institutions, (6) to advocate the development of output and outcome environmental management orientation as an attempt to deal with environmental problems, (7) to realize major performance indicators (IKU) for District/City, Province and Ministry of Environment, and (8) encourage the roles of Ecoregion Management Center (PPE) and province in the development and supervision of DAK implementation in environment sector in district/ city level to improve DAK performance in environment sector. The scope of activities is: (1) environmental monitoring and supervision with: the procurement of laboratory equipment (for laboratory in operation) and operational vehicles, (2) environmental pollution control equipment with: the development of SME WWTP, Medical WWTP, Communal WWTP and 3R (reduce, reuse and recycle) solid waste treatment unit in public facilities, (3) climate change prevention with: the development of green parks and biogas plants and (4) environmental function protection with: infiltration wells/biopori, weed control, landslide prevention/embankmen, shallow wells and tree planting. 11. Family Planning, focused to support access, quality and equality improvement of family planning services with: (a) improving the outreach and quality of counseling, movement, development of Family Planning program in the field, (b) developing facilities and 5-36 Financial Note and Indonesian Budget 2013

282 Fiscal Decentralization Policy Chapter 5 infrastructure of Family Planning services, (c) improving advocacy service, communication, information and education facilities in Family Planning program, (d) improving facilities for child growth; and (e) improving IT based data and information reporting and processing. The scope of activities is: (1) the provision of working facilities and mobility and IT based data and information infrastructure for field agents, (2) Family Planning services in Family Planning clinics (static) and mobile Family Planning Services and the development of contraception aids/medicine, (3) the provision of facilities and infrastructure of mobile family planning advocacy, public address and KIE kit, (4) the provision of BKB kits (Under-Five Year Old Babies Development), (5) the development/renovation of Family Planning Center at sub-district level. 12. Forestry, focused to enhance the functions of watershed (DAS) especially in upstream to maintain and improve the regional supporting capacity and to support the commitment of President in the green house emission reduction by 26% with internal support and 41% with international support by 2020 as prescribed in Presidential Regulation Number 61 of 2011 concerning Green House Emission Reduction Action Plan (RAN-GRK). In addition, DAK in Forestry Sector will be focused to improve forestry management with the formation, operationalization and strengthening of KPHP and KPHL under the responsibility of districts/cities. The scope of activities is: (1) rehabilitation of protected forests and critical lands outside forest areas (including people forests, environment reforestation, path stakes), mangrove areas, coastal forests, People Forest Park (Tahura) and City Forest, (2) the management of People Forest Park (Tahura) and City Forest including forest security, (3) the maintenance of plants rehabilitated in previous years, (4) the development and maintenance of technical civil structure (land and water conservation building/kta) covering retaining dams, control dam, gully plug, infiltration wells, shallow wells, and other land and water conservation structure, (5) forest security facilities and infrastructure, (6) forest advocacy facility and infrastructure improvement; and (7) the provision of facility for the operation of Indonesian Forest (KPH). 13. Trade Facilities and Infrastructure, focused to enhance the quality and quantity of trade facilities to support: (1) goods supplies and availabilities (specially basic staples) so as to increase the purchasing power of people, especially those living in under-developed regions, border areas, newly established regions, and/or regions with minimum trade facilities, and (2) the sound calibration for customer protection with regard to assurance of accurate measurement especially in regions with relatively high UTTP potentials but not yet appropriately managed. The scope of activities is: (1) the development and expansion of trade distribution facilities (markets), (2) the development and improvement of legal metrology facility with the construction of Legal Metrology Laboratory and the procurement of calibration equipment (e.g. standard equipment, four-wheel calibration unit, four-wheel supervision functional unit and motorcycle mobility units); and (3) the development of agriculture commodities for warehouse receipt system. 14. Facilities and Infrastructure for Under-Developed Regions, focused to support policies on the development of under-developed regions as mandated in RPJMN 2010 Financial Note and Indonesia Budget

283 Chapter 5 Fiscal Decentralization Policy 2014 and RKP 2013, i.e. local economic development in under-developed regions with capacity building, specialty commodity based productivity and industrialization in sustainable manner including the supporting facilities and infrastructure that will enable the said backward regions to grow and develop in faster manner to catch up other regions, which are relatively more developed. The scope of activities is: (1) the provision of land and water public transport facilities to support local economic development, (2) the development/rehabilitation of small jetties, (3) shallow wells (embung) in regions suffering water scarcity. 15. Village Energy, focused for energy diversity: use local renewable energy sources to improve the access of villages including the residents of under-developed regions and border areas, to modern energy. The scope of activities is: (1) the development of new PLTMH (Mini-Hydro Power Plant), (2) rehabilitation of damaged PLTMH, (3) expansion/improvement of power service from PLTMH, (4) Centralized Solar Power Plant (PLTS) and Distributed Solar Power Plant (SHS); and (5) biogas plant development. 16. Housing and settlement, focused to improve facilities, infrastructure and utility (PSU) of housing and settlement sector to stimulate housing and settlement development for medium and low income people (MBM/R) in districts/cities including under-developed regions, water scarcity and poor sanitation suffering regions. Scope of activities is to assist the regions in financing their physical housing and settlement infrastructure to reach minimum service standard (SPM) including: (1) the provision of piped water connection, (2) communal wastewater treatment plant, (3) integrated solid waste management site (TPST), (4) power distribution networks, (5) public street lighting. 17. Land Transportation Safety, focused to enhance the quality of services especially the safety of land transport users in provinces, districts/cities to reduce fatalities (death toll) of traffic accidents at 20% in phases by end of 2014 and injured victims at 50% by end of The scope of activities is: (1) provision and installation of land transportation safety facilities; and (2) procurement and installation of motor vehicle testing equipment. 18. Rural Transportation, focused to: (1) improve mobility services to people and other resources that can promote economic growth in rural areas, and expected capable of eradicating the isolation and providing stimulant toward further development in all sectors in villages, (2) develop rural facilities and infrastructure with strategic values and prioritized to support growth centers in fast-growing and strategic areas in agriculture, fishery, tourism, industry, energy and mineral resources, forestry and trade sectors. The scope of activities is: (1) the development, improvement and maintainance of village corridors; (2) procurement of rural transport facilities. 19. Facilities and Infrastructure of Border Areas, focused to support the development of border areas as prescribed in RKP 2013, i.e. to deal with the isolation of regions that may impede the security in regional borders, basic social service and the development of local economy in sub-districts (kecamatan) in sustainable manner as prioritized in Decision of Head of National Border Area Management Agency Number 2 of Financial Note and Indonesian Budget 2013

284 Fiscal Decentralization Policy Chapter 5 concerning Master Plan for State Boundaries and Border Areas. The scope of activities is: (1) the development/improvement of pavement conditions of non-status links connecting priority border sub-districts with the surrounding growth centers, (2) the development and rehabilitation of jetties to support passenger and cargo transport especially in coastal areas not yet managed by the Ministry of Transportation; and (3) the provision of water/interisland transport mode to intensify passenger, cargo and service flows. According to Law Number 33 of 2004 and in view of policy directions, the activities of each scope in DAK is planned to receive budget allocation Rp.31.7 trillion (0.3 of GDP) in APBN This ceiling of DAK allocation includes additional DAK Rp.2.0 trillion for distribution to 183 under-developed regions to finance their DAK activities in Road Infrastructure Rp.1.0 trillion and Education Infrastructure Rp.1.0 trillion and the transfer of deconcentration and co-administration fund from the Ministry of Agriculture into DAK in amount of Rp billion. If compare with DAK allocation in APBNP 2012 Rp.26.1 trillion, this ceiling of DAK allocation in APBN 2013 is to rise by 21.4 percent. Policy direction and scope of additional DAK for Education and Road sectors are as follows: a. The calculation of Additional DAK Allocation: Regions eligible for Additional DAK must be categorized in under-developed regions as prescribed in Presidential Regulation Number 5 of 2010 concerning Medium-Term National Development Plan (RPJMN) The sum of additional DAK allocation for each benefiary region will be calculated using index calculation based on general criteria, specific criteria and technical criteria. b. Technical indicators of Additional DAK are as follows: For education infrastructure sector the combination of four technical indicators applied in DAK for Education Sector will be considered. For road infrastructure sector, technical indicators of DAK for road infrastructure will be adopted. c. Counterpart fund for additional DAK will be set based on financial capacity of region, which is under-developed according to the following criteria: Very low financial capacity, the corresponding region must provide counterpart fund minimum 0%. Low financial capacity, the corresponding region must provide counterpart fund minimum 1%. Medium financial capacity, the corresponding region must provide counterpart fund minimum 2%. High financial capacity, the corresponding region must provide counterpart fund minimum 3%. Financial Note and Indonesia Budget

285 Chapter 5 Fiscal Decentralization Policy Special Autonomy and Adjustment Fund Special Autonomy Fund Special Autonomy Fund is a mandate of Law Number 35 of 2008 concerning the Enactment of Perpu Number 1 of 2008 concerning the Amendment to Law Number 21 of 2001 in Special Autonomy for Papua Province into Law. In APBN 2002 to 2012 Special Autonomy Fund in amount equivalent to 2 percent of national DAU has been allocated for Papua Province and West Papua Province. The proceeds of this Special Autonomy Fund are particularly used in education and health sectors. Special Autonomy Fund is also mandated in Law Number 11 of 2006 concerning Aceh Government in amount of equivalent to 2 percent of national DAU, which will be used to mainly develop and maintain infrastructure, people economic empowerment, poverty alleviation, and education, social and health sectors. In addition, for the implementation of special autonomy in Papua Province and West Papua it is also allocated additional fund for infrastructure in amount as mutually agreed by the Government and House of Representatives (DPR), for particularly infrastructure development. In this respect, allocation of Special Autonomy Fund in APBN 2013 is planned to reach Rp.13.4 trillion (0.1 percent of GDP). This Special Automony Fund allocation ceiling implies an increase of Rp.1.5 trillion (12.5 percent) if compared with its allocation in APBNP 2012 at Rp.12.0 trillion. The allocation of Special Autonomy Fund at Rp.13.4 trillion consists of: a. Special Autonomy Fund for Papua Rp.6.2 trillion. According to Law Number 35 of 2008, this Special Autonomy Fund for Papua will be distributed to Papua Province Rp.4.3 trillion and West Papua Province Rp.1.9 trillion. b. Special Autonomy Fund for Aceh Province Rp.6.2 trillion. c. Additional Special Autonomy Fund for Infrastructure for Papua and West Papua Rp.1.0 trillion. Pursuant to Law Number 35 of 2008, this Additional Special Autonomy Fund for Infrastructure for Papua and West Papua will be distributed respectively Rp billion and Rp billion. To accelerate the development of Papua Province and West Papua Provinve, the Government sets up unit tasked to coordinate and oversee the use of budget that has been granted including Special Autonomy Fund to assure their sound performance Adjusment Fund Aside from Special Autonomy Fund, APBN 2013 also allocates Adjustment Fund aiming to support certain programs/activities launched by the Government, which subject to laws and regulations such programs/activities have been delegated as regional affairs. In APBN 2013 this Adjustment Fund consists of Profession Allowance for PNSD Teachers, School Operation Aids (BOS), Additional Fund for PNSD Teachers Salaries, and Regional Government Projects and Decentralization (P2D2). The ceiling of Adjustment Fund allocation in 2013 is planned to amount Rp.70.4 trillion (0.8 percent of GDP) or to increase by Rp.11.9 trillion (20.4 percent) from its allocation in APBNP 2012 at Rp.58.5 trillion Profession Allowance for the Teachers This profession allowance for teachers is provided for teachers being public servants in regions (PNSD) who have gained certificates as educators and complied with requirements as 5-40 Financial Note and Indonesian Budget 2013

286 Fiscal Decentralization Policy Chapter 5 established in laws and regulations in amount of 1 (one) monthly basic salary of the teachers concerned. In APBN 2013, profession allowance for PNSD teachers is planned to reach Rp.43.1 trillion or Rp.12.5 trillion (40 percent) higher than its allocation in APBNP 2012 set at Rp.30.6 trillion Additional Salary for PNSD Teachers Additional Salary for Teachers being Public Servants in Regions (PNSD) will be granted to teachers who not receive profession allowance for PNSD teachers in amount of Rp.250, per month and paid for 12 months in a year. In APBN 2013, this Additional Salary for PNSD Teachers is allocated at Rp.2.4 trillion or to drop by Rp billion (16.8 percent) if compared with allocation for Additional Salary Fund for PNSD Teachers in 2012 set at Rp.2.9 trillion School Operation Aids (BOS) To implement 9-year compulsory basic education program as stipulated in Law Number 20 of 2003 concerning National Education System, the Government allocates School Operation Aids (BOS) aiming to abate the burden of people in tuition fees for the financing of their basic education. In 2013, BOS will be allocated as adjustment fund since basic education provision constitutes a regional affair that must be dealt with by the local government as prescribed in Government Regulation Number 38 of 2007 concerning The Allocation of Governance Affairs. BOS proceeds are funnelled from State Cast account to general cash account of provinces for further distribution to schools under grant mechanism. BOS is fund primarily used to finance non-personnel spending in basic education in the context of compulsory education program, and may be used for the financing of other activities as indicated in technical directives of the Minister of Education and Culture. BOS allocation has objective of freeing students of low-income households, who can t afford to pay their tuition fees and relieving other students from this tuition fee burden so that they can access to more quality education service under 9-year compulsory basic education program. BOS aid is stimulus for regions and not the subsitute of obligations of the local government in the allocation of education budget. Given that, the provision of BOS aids will be followed with monitoring and evaluation to prevent any irregularity that may arise and at the same time ensure that the regions will not reduce their budget allocation for local BOS aids (BOSDA). BOS will be managed by a Central Team, Provincial Team, and District/Municipal Team that will coordinate regularly to assure the well-advanced BOS implementation ranging from planning, budgeting, allocation, funnelling, reporting, monitoring to evaluation and to minimize problems. BOS allocation in APBN 2013 is planned to amount Rp.23.4 trillion or to drop by Rp billion (0.6 percent) from its allocation in APBNP 2012 at Rp.23.6 trillion Regional Incentive Fund (DID) Regional Incentive Fund (DID) particularly aims to support the implementation of education function subject to certain criteria. In 2012, DID is allocated to amount Rp.1.4 trillion for Provinces, Districts and Cities in running their education function in view of the performance of regions in complying with main criteria, performance criteria and minimum passing grade. The main criteria include Regional Financial Statements (LKPD) that must receive minimum WDP (unqualified opinion with explanatory note). Performance criteria cover financial performance, education performance and economic and welfare performance. In APBN 2013, DID allocation is planned to reach Rp.1.4 trillion or equal to its ceiling in APBNP Financial Note and Indonesia Budget

287 Chapter 5 Fiscal Decentralization Policy Regional Government Projects and Decentralization Regional Government Project and Decentralization (P2D2) is part of Government s program loan scheme from World Bank to fortify transparency and accountability of DAK implementation, especially in infrastructure sector with DAK implementation monitoring and evaluation system reform. The main objective of P2D2 is to enhance the accountability and reporting of the Government in DAK implementation notably for infrastructure sector in pilot regions. This objective will be pursued with: a. Budget support from APBN; b. Monitoring, reporting improvement and DAK output verification strengthening in infrastructure sector; c. DAK verification mechanism; and d. Institutional capacity building for DAK implementation in regions. P2D2 implementation is expected capable of generating impacts to regions including: a. DAK accountability and reporting in infrastructure sector improved; b. Financial and technical reporting and output verification improved; and c. The percentage of physical output of verified infrastructure increased. Pilot regions for P2D2 implementation are distributed in 5 provinces and 75 regional governments as follows: 1. Jambi Province (1 province, 6 districts, 2 cities); 2. East Java Province (1 province, 28 districts, 8 cities); 3. Central Kalimantan Province (1 province, 12 districts, 1 city); 4. West Sulawesi Province (1 province, 5 districts); 5. North Maluku Province (1 province, 6 districts, 2 cities). During P2D2 preparation stage since 2009, the Government and World Bank have discussed issues relating to the selection of pilot regions as participants in P2D2 program. As a preliminary step, it was agreed to select 5 (five) provinces in view of the following criteria: (1) geographical diversities, i.e. to represent western, central and eastern parts of Indonesia; (2) DAK reporting performance during previous years; (3) capacity in absorbing DAK allocation; and (4) success rate in producing output financed under DAK. Thereafter, for the selection of eligible provinces/districts/cities, the criteria are: (1) regions receiving DAK during the years of P2D2 implementation; and (2) regions submitting express of interest to participate (commitment letter). To realize the objectives of P2D2, programs will be carried out under 3 (three) funding components, i.e.: (1) DAK Reimbursement and Incentive for Regional Government from World Bank; (2) Institutional Capacity Building for the Government and Regions; and (3) output verification. The last two components will be financed with rupiah. DAK reimbursement is reimbursement scheme to the Government for DAK proceeds channeled to infrastructure projects in provinces/districts/cities according to the specified requirements. Approach taken in this financing is that of Output-Based Disbursement (OBD). Under this 5-42 Financial Note and Indonesian Budget 2013

288 Fiscal Decentralization Policy Chapter 5 approach, World Bank will pay part of DAK for infrastructure development (roads, irrigation and water supply) based on reports and physical output verification of pilot provinces/districts/ cities in the form of loan disbursement. Apart from DAK reimbursement to the Government, the pilot regional governments will receive incentive/reward of fund in amount of 10 percent of total output value of DAK in infrastructure complying with the established output quality standards, which are timely executed and submitting DAK report to the Government. If in APBNP 2012, the allocation of P2D2 is to reach Rp.30.0 billion, in APBN 213 the Government proposes P2D2 allocation at Rp.81.4 billion derived from 10 percent of total DAK allocation for infrastructure in 2012 for P2D2 pilot regions. Breakdowns of Transfer to Regions allocation in 2013 can be seen in Table Grant to Regions Policy As from its effective introduction in 2009, the regional grant has become alternative funding for infrastructure development by regional governments either from SLA or foreign grants from the Government. The proceeds are used to finance governance affairs under the responsibilities of regional governments and prioritized to provide public services. Grant allocation to region policy in 2013 is directed to develop the capacity of regions in providing basic public services in transportation sector, water supply development, wastewater management, sanitation, irrigation, and geothermal exploration. An example implementation of grant allocation policy in the provision of public services is the grant of the Government for Mass Rapid Transit (MRT) program in DKI Jakarta province. This program gets funding support from Japan International Cooperation Agency (JICA). Cost sharing of this loan is 42 percent to the Government and the other 58 percent to JICA loan as SLA to DKI Jakarta government. Physical construction of MRT program consists of 3 stages, with stage I to be started in Consistent with such grant to region policy, APBN 2013 has earmarked budget allocation for grant to regions in amount of Rp.3.6 trillion. This allocation consists of: (1) MRT grant Rp.3.1 trillion, (2) WISMP-2 Grant Rp billion, (3) Water Supply Grant Rp billion, (4) Wastewater Management Grant Rp.9.4 billion, (5) Development of Seulawah Agam Geothermal Grant in NAD province Rp.93.6 billion. Financial Note and Indonesia Budget

289 Chapter 5 Fiscal Decentralization Policy TABLE 5.14 TRANSFER TO REGIONS, (billion rupiah) 2012 APBNP % thd PDB 2013 APBN % thd PDB I. FISCAL BALANCE ,1 4, ,8 4,8 A. REVENUE SHARING (DBH) ,7 1, ,4 1,1 1. Tax ,8 0, ,7 0,5 a. Income Tax ,3 0, ,9 0,2 i. article ,0 0, ,3 0,2 ii. article 25/29 personal 1.123,2 0, ,7 0,0 b. Land and Building Tax (PBB) ,8 0, ,8 0,3 i DBH PBB ,9 0, ,7 0,3 ii. Underpayment of DBH PBB FY ,0 0,0 - - iii. Underpayment of DBH PBB FY 2010 to ,1 0,0 c. BPHTB 238,8 0,0 - - i. Underpayment DBH BPHTB 238,8 0,0 - - d. Excise for Tobacco Products (CHT) 1.645,9 0, ,0 0,0 i. CHT 1.597,2 0, ,4 0,0 ii. Underpayment of CHT 48,7 0,0 91,6 0,0 2. Natural Resources ,9 0, ,6 0,6 a. Oil and Gas ,8 0, ,2 0,4 i. Oil ,3 0, ,3 0,2 ii. Gas ,5 0, ,9 0,2 iii. Underpayment of Oil and Gas 3.838,0 0,0 - - b. General Mining ,3 0, ,2 0,2 i. Land Rent 562,2 0,0 583,7 0,0 ii. Royalty ,1 0, ,5 0,1 iii. Underpayment of DBH General Mining for FY ,0 0,0 - - c. Forestry 1.700,7 0, ,4 0,0 i. Forest Resources Provision 1.043,9 0, ,8 0,0 ii. Forest Resources Exploitation Permit Fee (IIHPH) 30,5 0,0 10,0 0,0 iii. Reforestation Fund 601,8 0,0 739,6 0,0 iv. Underpayment of SDA (Natural Resources) Forestry 24,5 0,0 - - d. Fishery 126,5 0,0 144,0 0,0 i DBH Fishery 120,0 0,0 144,0 0,0 ii Underpayment of Fishery FY ,5 0,0 - - e. Geothermal (PPB) 303,6 0,0 322,8 0,0 i. DBH PPB 279,0 0,0 322,8 0,0 ii. Underpayment of DBH ,6 0,0 - - B. GENERAL ALLOCATION FUND (DAU) ,4 3, ,3 3,4 C. SPECIAL ALLOCATION FUND (DAK) ,9 0, ,1 0,3 II. SPECIAL AUTONOMY AND ADJUSTMENT FUND ,9 0, ,5 0,9 A. SPECIAL AUTONOMY FUND ,6 0, ,6 0,1 1. Special Autonomy Fund ,6 0, ,6 0,1 a. Special Autonomy Fund for Papua and West Papua 5.476,3 0, ,8 0,1 - Papua Province 3.833,4 0, ,0 0,0 - West Papua Province 1.642,9 0, ,8 0,0 b. Special Autonomy Fund for Aceh 5.476,3 0, ,8 0,1 2. Additional special autonomy fund for infrastructure for Papua and West Papua 1.000,0 0, ,0 0,0 a. Papua 571,4 0,0 571,4 0,0 b. West Papua 428,6 0,0 428,6 0,0 B. ADJUSTMENT FUND ,3 0, ,9 0,8 1. Teacher Profession Allowance ,8 0, ,8 0,5 2. School Operation Aids (BOS) ,8 0, ,9 0,3 3. Additional Fund for PNSD Techer Incomes 2.898,9 0, ,0 0,0 4. Regional Incentive Fund 1.387,8 0, ,8 0,0 5. Regional Government and Decentralization Fund (P2D2) 30,0 0,0 81,4 0,0 T O T A L ,9 5, ,2 5,7 Source: the Ministry of Finance (data processed) 5-44 Financial Note and Indonesian Budget 2013

290 Budget Deficit Financing and Fiscal Risk Chapter 6 CHAPTER 6 BUDGET DEFICIT FINANCING AND FISCAL RISK 6.1 General Deficit and budget financing are the components of State Budget (APBN), which their conditions are inseparable from the trends of external factors. After global financial crisis, which reached its peak in 2008, the economic foundations of Indonesia record upward progress. This is evident from the relatively high economic growth, controllable inflation rate, better sovereign credit rating, more foreign exchange reserve, and soundly-controlled rupiah exchange rate. While the debt crisis in Euro zone is not yet satisfactory dealt with in 2011 and 2012, the global economic condition in 2013 is anticipated rosier. Nevertheless it is also expected that in 2013 some developed countries will require more funds to recover their economy, to support the liquidities and to set interest rate. To reinforce and provide fiscal stimulus for the national economy and to abate the impacts of debt crisis in Euro zone, fiscal policies taken by the Government in 2013 will be directed toward expansive fiscal policy with target budget deficit set at 1.65 percent of GDP. This target can be realized under macroeconomic conditions with basic assumptions of 3-month SPN yield 5.0 percent, rupiah exchange rate to US dollar Rp9.300 and economic growth 6.8 percent. To meet financing requirements of APBN 2013 deficit, the Government will capitalize on loan and non-loan sources. However, in view of minimum capacity of non-loan financing sources, the financing sources of loans remain dominant in covering budget deficit of APBN Non-loan financing sources come from Budget Surplus (SAL), the payment of SLA installments, and asset management proceeds (HPA). As to financing sources from loans, they include Government Bonds (SBN), foreign loans and domestic loans. Budget deficit financing with loans in APBN 2013 will be carried out in measurable manner using both foreign and domestic loans as financing sources subject to the Government s financing capacity, and potential liabilities and risks to be borne. In the implementation, the Government will prioritize and optimize budget deficit financing from domestic loans because of their relatively lower risks than those of foreign loans. In addition, maximizing domestic financing sources will give opportunity to the Government in developing domestic financial markets and augment the multiplier effects of national economy. Financial Note and Indonesian Budget

291 Chapter 6 Budget Deficit Financing and Fiscal Risk 6.2 Budget Deficit and Financing Trend from Budget Deficit During the Government subject to consent of House of Representatives (DPR) has set deficit budget policy to give stimulus and promote domestic economic growth with a series of Government s programs and activities. The deficit of APBN is set in view of various aspects, inclusive of priority activities that must be financed in the year concerned, budget financing capacity, economic conditions and financial markets, and laws and regulations in force. The trend of budget deficit realization in as presented in Graph 6.1 is always lower the deficit set in APBNP. Some contributing factors of this phenomenon are: 1. The realization of Government revenue and grant outnumbers the specified target. It is the impact of optimizing Government revenue sources and macroeconomic progress augmenting the sources of Government revenue. 2. The realization of Government expenditure is lower than budget allocation, particularly as a result of expenditure efficiency taken by the Government, notably operational spending or non-investments, and lower budget absorption by K/L (Ministries/Agencies) including those financed under foreign loans. GRAPH 6.1 BUDGET DEFICIT TREND, ,0 (40,0) (80,0) (120,0) * (4,1) 0,1 (46,8) (49,8) (58,3) 1,1 0,7 1,3 (94,5) (88,6) (84,4) 1,5 1,6 0,0 0,5 1,0 1,5 (160,0) (200,0) 2,1 (129,8) (133,7) 2,4 2,1 (150,8) 2,1 2,2 (190,1) 2,0 2,5 (240,0) APBNP Deficit LKPP Deficit % APBNP Deficit % LKPP Deficit (RHS) 3,0 *APBNP Source: the Ministry of Finance Budget Financing Financing requirements in nominal and ratio to GDP terms records steady increase, i.e. from Rp42.5 trillion or 1.1 percent of GDP in 2007 to Rp190.1 trillion or 2.23 percent of GDP in APBNP During this period, the financing requirements from loan sources are to reach 81.0 percent of total financing needs on the average. In general, this loan based 6-2 Financial Note and Indonesian Budget 2013

292 Budget Deficit Financing and Fiscal Risk Chapter 6 financing uses two instruments, i.e., SBN (Government Bonds) and loans of both domestic and foreign. Illustration of budget financing trend is presented in Graph 6.2. GRAPH 6.2 BUDGET FINANCING TREND, (trillion rupiah) ,1 159,6 130,9 119,9 112,6 99,5 85,9 84,1 91,1 91,6 57,2 42,5 33,9 28,7 28,3 11,9 16, ,44,6 0,6 1,0 (4,6) (4,4) (18,4) (15,5) (17,8) (26,5) * *APBNP SBN (neto) Foreign Loan (Net) Domestic Loan (Net) Non-Loan Budget Financing Apart from financing the deficit, the financing components also cover financing expenditure components, either in components under non-loan financing or loan financing. Expenditure components of non-loan financing consist of the Government s investment fund and PMN, national education development fund and security obligations. Expenditure of non-loan financing in nominal terms shows steady increase from year to year. In 2007 this spending recorded Rp4.7 trillion and in 2012 it hikes to Rp23.0 trillion. Meanwhile loan financing expenditure components includes principal installments of foreign loans, which are relatively enormous, i.e. Rp57.9 trillion in 2007 and Rp49.7 trillion in APBNP In 2007 to 2011, the realization of budget financing is a little bit lower than the target. In percentage wise, the ratio of realization to target of budget financing in 2007 to 2011 is respectively 72.8 percent, 89.0 percent, 86.7 percent, 68.8 percent and 86.8 percent. In terms of instrument, non-loan financing is closer to the targets than that of loan financing. It is consistent with policy of optimizing the use of budget to meet financing needs from nonloan soources. Loan financing realization will be adjusted to budget financing needs with, among other things, reduction of SBN issuance. The latter is evident from lower SBN issuance, which was in 2008 recorded Rp31.9 trillion, and then respectively 2010 Rp16.1 trillion and in 2011 Rp6.8 trillion. In 2012 APBNP discussion has been accelerated to accomodate the changing basic macroeconomic assumptions in line with the soaring crude oil price in global markets. In the said APBNP, budget financing requirements are set at Rp190.1 trillion. Such financing will come from non-loan and loan sources by Rp33.9 trillion and Rp156.2 trillion respectively. Financial Note and Indonesian Budget

293 Chapter 6 Budget Deficit Financing and Fiscal Risk If the financing realization exceeds the specified requirements, there will be Unused Budget (SilPA), in contrast if the financing realization is lower than the financing requirements, Budget Use Shorfall (SiKPA) will happen. Illustration on the trend of budget deficit and financing is presented in Table 6.1. TABLE 6.1 BUDGET DEFICIT AND FINANCING TREND, (in trillion rupiah) APBNP LKPP APBNP LKPP APBNP LKPP APBNP LKPP APBNP LKPP APBN APBNP A. GOVERNMENT REVENUE , , , ,358.2 B. GOVERNMENT EXPENDITURE , , , , , , ,548.3 C. BUDGET SURPLUS/DECIFIT (A - B0 (58.3) (49.8) (94.5) (4.1) (129.8) (88.6) (133.7) (46.8) (150.8) (84.4) (124.0) (190.1) % Surplus/Deficit to GDP (1.5) (1.3) (2.1) 0.1 (2.4) (1.6) (2.1) (0.7) (2.1) (1.1) (1.5) (2.2) D. BUDGENT FINANCING (I + II) I. Non-Loan (10.2) (9.5) 33.9 II. Loan FINANCING EXCESS/SHORTFALL - (7.4) Source: The Ministry of Finance Non-Loan Financing Needs of budget financing from non-loan sources in APBN are covered from various sources with different types and proportions every year. These varying financing sources and types are subject to the availability of the said financing sources and fund allocation capacity as well as outcomes and profits gained. Budget financing from non-loan sources consists of domestic banking and non-banking sources. The trend of non-loan financing is presented in Table 6.2. Description TABLE 6.2 NON-LOAN BASED FINANCING TREND, (trillion rupiah) Realization APBNP 2012 A. Domestic Banks Installment of SLA Budget Surplus Balance Forest Development Account Other Government Accounts (15.1) Ex. NAD, Nias and North Sumatra Moratorium B. Domestic Non-Banks (12.4) (17.6) (20.7) (26.6) 1. Privatization (net) Asset Management Proceeds) Government Investment Fund and PMN (4.7) (2.5) (13.1) (12.3) (19.6) (19.3) a. Government Investment (2.0) 0.0 (0.5) (3.6) (1.6) (3.3) i. Government Investment Center (Regular) (1.0) (1.3) ii. Government Investment Credit Financing (0.6) 0.0 iii. PT Inalum Takeover (2.0) b. State Capital Participation (PMN) (2.7) (2.5) (11.7) (6.0) (9.3) (8.9) c. Revolving Fund (0.9) (2.7) (8.8) (7.0) 4. National Education Development Fund (1.0) (2.6) (7.0) 5. Guarantee Obligations (0.6) 6. Loans to PT PLN (7.5) Source: The Ministry of Finance Total Financial Note and Indonesian Budget 2013

294 Budget Deficit Financing and Fiscal Risk Chapter Domestic Banks Non-loan financing from domestic banks is collected from the installments of SLA, Forest Development Account (RPH), Budget Surplus (SAL) and other Government s accounts. The uses of non-loan financing from domestic banks is dependent on the accumulated cash money/balance in the Government s accounts and policies on the preference of financing sources that will be decided based on the availability of financing sources and expenses to get such financing sources. Non-loan financing from domestic banks to cover APBN deficit from is fluctuating from year to year according to the amounts of Budget Surplus (SAL) used. The realization of budget deficit financing from domestic banks in 2007 amounted Rp11.1 trillion, which covered 94.0 percent of total non-loan financing. In 2011, the realization of non-loan financing from domestic banks recorded Rp48.9 trillion, which mostly came from SAL (Budget Surplus) Rp40.3 trillion. In APBNP 2012, non-loan financing of domestic banks is allocated to reach Rp60.6 trillion. This target is mainly from SAL, which is expected to reach Rp56.2 trillion. The use of SAL is because of: (1)limited financing sources from loans due to the relatively high targets of SBN issuance and expenses that must be spent by the Government [for such bond issuance]; and (2) relatively immense *APBNP 2012 Source: the Ministry of Finance amounts of SAL proceeds.. The trend of financing coming from domestic banks in is presented in Graph Domestic Non-Banks Non-loan financing from domestic non-banks consists of: privatization, asset management proceeds, the Government Investment Fund, and State Capital Participation (PMN), National Education Development Fund, Security Obligations, and Loans to PT PLN in A. Privatization 70,0 60,0 50,0 40,0 30,0 20,0 10,0 0,0 GRAPH 6.3 DOMESTIC BANKING FINANCING TREND, (trililon rupiah) 11, * According to Law Number 19 of 2003 concerning State Owned Enterprises (SOEs), privatization is the sales of Company Shares, either in part or in whole, to other parties so as to improve the performance and values of the Company, to magnify the benefits of Company 16,2 41,1 22,2 48,9 60,6 Financial Note and Indonesian Budget

295 Chapter 6 Budget Deficit Financing and Fiscal Risk to the State and people, and to expand share ownership to public. Privatization as a form of SOE restructuring is not only to mobilize fresh fund, but also to arouse corporate culture and professionalis, with among other things, management restructuring and supervision based on good corporate governance principles. Privatization is no longer construed in narrow interpretation, i.e. to sell the Government s shares to non-government parties, instead it is an attempt to pursue some targets, including: (1) to improve financial and added value of the company; (2) to enhance the financial and management structure; (3) to establish sound and competitive industrial structure; (4) to forge competitive SOEs with global orientation; (5) ownership distribution to the public; and (6) to develop domestic capital markets. From this privatization program, part of the collected proceeds can be used as a source of APBN financing, and the others deposited in company s cash that can be used to elevate the capacity of company. In 2007, the realization of privativation prceeds recorded Rp3.0 trillion coming from the prevatization of Bank BNI. In 2008 the Government agreed privatization to 44 SOEs. They included those, which engaged in public works, industrial, plantation estates, and financial sectors. However, due to unfavorable financial market conditions, privatization program in 2008 was not implemented. Realization of privatization proceeds in 2008 was just to amount Rp82.3 billion from balance payment of Bank BNI privatization in In 2009 the Government set no target from privatization. This related to the Government s policies in SOE management and external factors, such as stagnant global financial crisis, unexpected commodity price fluctuation, and uncertain geopolitical factors. In 2010, the realization of privatization proceeds was to record Rp2.1 trillion from the sales of greenshoe shares of PT Bank BNI in amount of Rp1.35 trillion, Right Issue of PT Bank BNI Rp741.6 billion, Government s share divesture in PT Kertas Blabak Rp0.5 billion, and Government s share divesture in PT Intirub Rp6.3 billion. Meanwhile privatization proceeds realized in 2011 amounted Rp425.0 billion from Right Issue of PT Bank Mandiri, PT Basuki Rahmat, underpayment of Bank BNI, PT Atmindo, and Jakarta International Hotels Development. In trillion rupiah 2012, the Government sets no target of budget financing from privatization proceeds. The trend of privatization proceeds in is presented in Graph 6.4. B. Asset Management Proceeds (HPA) 5,0 4,0 3,0 2,0 1,0 0,0 4,7 GRAPH 6.4 SOE PRIVATIZATION PROCEEDS TREND, Pursuant to Regulation of the Minister of Finance Number 32/PMK.06/2006 concerning State Assets Management from National Banking Restructuring Agency by PT Perusahaan Pengelola Aset (Persero) as amended with Regulation of Finance Minister Number 92/ PMK.06/2009, Asset Management Proceeds (HPA) are any cash received from restructuring, 3,0 0,5 0,1 0,0 0, Source: the Ministry of Finance APBNP Realization 1,2 2,1 0,4 0,4 0,0 0,0 6-6 Financial Note and Indonesian Budget 2013

296 Budget Deficit Financing and Fiscal Risk Chapter 6 cooperation with other parties, receivable collection, sales, rental, dividends, coupon/interest and/or other business income from the managed assets derived from completed transactions. Apart from cash fund saved in the Government s accounts, cash budget deficit financing from non-loan sources in APBN is also from management proceeds of assets controlled by the Government. In , assets management by the Government that can be used to finance APBN deficit are the properties managed by Directorate General of State Assets (DJKN) of the Ministry of Finance, and those under the management of PT Perusahaan Pengelola Aset (PT PPA). Since 2007 to date, assets managed by DJKN that can be used to finance APBN are credit assets, property assets and shares of ex-bppn or ex-pt PPA (Persero) that had been managed by way of: (1) collection by State Receivable Collection Committee (for credit assets); (2) sales (of property and share assets); (3) utilization (of property assets); (4) determination of utilization status (of property assets) to K/L); and (5) right waiver with compensation for property assets used for public interest, and assets trasferred to PT PPA (Persero) for the management under Asset Management Agreement of the Ministry of Finance and PT PPA (Persero) every year, covering share assets, non-banking share assets and credit/receivable collection assets. Asset sales made by the Government are carried out through auction mechanism initiated with open announcement in national newspapers of the assets that have been verified and assessed to set the values to be used in determining the limits of their selling prices and to comply with requirements of auction as established in laws and regulations. Legal basis of the auction is set out in Regulation of the Minister of Finance Number 93/PMK.06/2009 concerning Asset Management of ex-pt perusahaan Pengelola Aset by the Minister of Finance as amended with Regulation of Finance Minister Number 190/PMK.06/2009, and Regulation of Finance Minister Number 93/PMK.06/2010 concerning Auction Procedures. For the management of assets consisting of account receivables, state receivable collection of ex-bppn, it will be dealt with by Official responsible for State Receiviable Management (PUPN) of State Asset Service and Action Office (KPKNL), DG State Assets of the Ministry of Finance. This is in conformity with the Regulation of Finance Minister Number 128/PMK.06/ 2007 concerning State Receivable Management as amended with Regulation of Finance Minister Number 88/PMK.06/2009. Meanwhile, PT PPA performs asset management based on assignment from the Ministry of Finance. Assets managed by PT PPA include bank share assets, non-bank share assets, and credit/receivable collection assets, and share and credit assets. The proceeds of asset management by PT PPA will be evaluated on annual basis by the Ministry of Finance, and then decided into asset management agreement on yearly basis between the Ministry of Finance and PT PPA to decide the types and number of assets to be managed by PT PPA. Some constraints hampering this asset management are: (1) assets entangled with legal problems requiring long time for the execution; (2) the assets controlled by the third parties which impair the interests of prospective investors; (3) unscheduled sales; (4) NJOP rate of the assets higher than the market price of the assets concerned; (5) unfavorable market conditions; and (6) the absence or lack of supporting infrastructure, including legal Financial Note and Indonesian Budget

297 Chapter 6 Budget Deficit Financing and Fiscal Risk instruments on properties. The trend of assets managed by PT PPA from 2007 to 2012 is presented in Table 6.3. TABLE 6.3 PT PPA MANAGED ASSET TREND, NO. JENIS ASET Beginning Balance Beginning Balance Beginning Balance Beginning Balance Beginning Balance Balance Unit Asset Value Unit Asset Value Unit Asset Value Unit Asset Value Unit Asset Value Asset Value Aset (Rp. Million) Aset (Rp. Million) Aset (Rp. Million) Aset (Rp. Million) Aset (Rp. Million) (Rp. Million) 1 Bank Shares Non-Bank Shares Collection Rights 388 1, Properties 3,890 1, ,568 1, Securities Shares and Credit , , , ,911.0 Total Source:PT PPA 4,322 4, ,990 3, , , , ,511.0 In , contribution of asset management proceeds in budget deficit financing recorded respectively Rp2.4 trillion and Rp2.8 trillion. Meanwhile, HPA proceeds in 2009 was worth of Rp690.3 billion. In 2010, the realization of asset management proceeds recorded Rp1.1 trillion. The contribution of asset management proceeds is going down in line with the deminishing number of assets management by DJKN. and PT PPA. In 2011, proceeds from asset management contributed Rp1.2 trillion. In APBNP 2012, it is expected that its contribution will reach Rp280.0 billion. The trend of asset management proceeds from 2007 to 2012 is presented in Graph ,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 GRAPH 6.5 ASSET MANAGEMENT PROCEEDS TREND, (trillion rupiah) 1,7 2,4 3,9 2,8 0,8 0, *) 1,2 APBNP 1,1 1,2 1,0 Realization 0,3 0,7 *) APBNP and Outlook 2012 Source: the Ministry of Finance 6-8 Financial Note and Indonesian Budget 2013

298 Budget Deficit Financing and Fiscal Risk Chapter 6 C. Government Investment Fund and PMN (State Capital Participation) Government Investment Fund and PMN consist of some components, i.e.: (1) Government Investment; (2) PMN (State Capital Participation); and (3) revolving fund. On each fiscal year, not all of these components are allocated in APBN. Government Investment Fund and PMN are financing expenditure spent not on regular basis, instead subject to Government policy, and as such has ad-hoc character according to the needs of Government policy during certain period, for example Government support to infrastructure development, the establishment of an SOE to execute Government policy, and supports to KUMKM (cooperative, micro, small and medium enterprises). The trend of Government Investment Fund in is presented in Graph 6.6. Government Investment Government Investment is the placement of a sum of fund and/or assets for long term period for investment, i.e. to buy securities and direct investment to gain economic, social benefits and other advantages. Government Investment is fund allocated by the Government in APBN, which its spending shall refer to Law Number 1 of 2004 concerning State Treasurey, juncto Government Regulation Number 1 of 2008 concerning Government Investment that may comprise: (1) capital participation in business entities with ownership entitlement, including the establishment of a limited liability company and/or takeover of a limited liability company; (2) loan extension to business entities, Public Service Agency (BLU), province/ kabupaten/city governments and regional general public agency (BLUD) with compensation rights of loan principal, interest and/or other expenses; and (3) investment of securities through the purchase of shares and/or bonds. In , the components of Government Investment are (regular) Government investments managed by Public Service Agency for Central Government Investment (BLU PIP) of the Ministry of Finance. However, in 2010, these components are to increase with the allocation of Housing Financing Liquidity Facility (FLPP). In 2011, the components of Government investments was further increased with the allocation of Government Investment Credit, meanwhile FLPP was allocated to Revolving Fund. In 2012, Government Investment component is to rise with the fund allocation for PT Inalum aquisition. State Capital Participation (PMN) GRAPH 6.6 GOVERNMENT INVESTMENT FUND AND PMN TREND, (trillion rupiah) Revolving Fund PMN Government Investment * * APBNP 2012 Sumber: Kementerian Keuangan Under PP Number 6 of 2006 concerning State/Regional Asset Management, PMN is defined as the transfer of ownership of goods owned by state/region, which were originally inseparable to separable assets as state/region capital/shares in SOEs, Regional SOEs or other legal entities owned by the State. Financial Note and Indonesian Budget

299 Chapter 6 Budget Deficit Financing and Fiscal Risk Meanwhile, according Law No. 10 of 2010 concerning APBN 2011, the definition of PMN has been expanded not only to SOEs, Regional SOEs and Limited Liability Companies, but also to international financial organization/institution (LKI). This expanded definition relates to the allocation of PMN to international financial organization/institution (LKI) in APBN 2011 through financing, since it has been part of permanent investment of the Government. PNM allocation to international financial organization/institution (LKI) through financing is consistent with BPK RI s recommendations. This allocation was previously extended through other expenditure. Under Law Number 22 of 2011 concerning APBN 2012, the definition of PMN is further expanded not only to SOEs and international financial organization/institution (LKI) but also to other PMN. This is due to the allocation of PMN to ASEAN Infrastructure Fund (AIF), which is not either SOEs or international financial organization/institution (LKI). The allocation and use of PMN fund in was as follows: (1) 2007 Rp2.7 trillion for PT Sarana Pengembangan Usaha, PT Asuransi Kredit Indonesia, and PT Pusri; and (2) 2008 Rp2.5 trillion for PT PPA for SOE Restructuring Rp1.5 trillion, and limited liability companies engaged in infrastructure financing sector (PT Sarana Multi Infrastruktur/SMI) Rp1.0 trillion. Meanwhile, the amounts and allocations of PMN in are as follows: (1) 2009 RpRp11.7 trillion for PT Perkebunan Nusantara II, PT PPA, PT Penjaminan Infrastruktur Indonesia (PT PII), PT Askrindo and Perum Jamkrindo (KUR), and PT Pertamina; (2) 2010 Rp6.0 trillion for LPEI, PT PII, PT Askrindo and Perum Jamkrindo (KUR), PT SMI, Perusahaan Penerbit SBSN II, PT Askrindo and PT BPUI (grant of Bank Indonesia s shares); (3) 2011 Rp9.3 trillion, for PT PII, PT Askrindo and Perum Jamkrindo (KUR), PT Dirgantara Indonesia, PT Pupuk Iskandar Muda, Perusahaan Penerbit SBSN Indonesia III, PT Sarana Multigriya Finansial, PT Geo Dipa Energi, PT Inhutani I, PT PAL (Persero), PT Merpati Nusantara Airlines (Persero), international financial organization/institution (LKI), and other PMN, i.e. ASEAN Infrastructure Fund (AIF), and (4) 2012 Rp8.9 trillion for PT PII, PT Askrindo and Perum Jamkrindo (KUR), PT SMI, PT Dirgantara Indonesia, Perusahaan Penerbit SBSN Indonesia III and IV, strategic SOEs, international financial organization/institution (LKI), and other PMN, i.e. to AIF. Not all PMN allocated to the Government during consists of fresh money. Some PMM to SOEs are allocated in the form of conversion of SLA loan and RDI principal and PNBP dividends of grants or shares from other parties (in-out) in APBN. For example, (1) PMN to PT Pertamina in 2009 as a result of reconciliation of Pertamina s PNBP (no-tax revenue) receivable and payable to the Government as basis in determining the opening balance sheet of Pertamina in 2003; and (2) PMN to PT Askrindo and PT BPUI in 2010 from the grant of Bank Indonesia s shares. PMN consisting of fresh money, is more to support Government s policies in particular affairs, such as PMN to PT PII, and PT SMI aiming to reinforce infrastructure guarantee and development, and PMN to PT Askrindo and Perum Jamkrindo to support capacity building and expansion of KUR Financial Note and Indonesian Budget 2013

300 Budget Deficit Financing and Fiscal Risk Chapter 6 In the meantime, PMN realization to international financial organization/institution (LKI) in 2011 was Rp611.3 billion. This PMN was to: (1) Islamic Development Bank (IDB); (2) The Islamic Corporation for the Development of Private Sector; (3) Asian Development Bank (ADB); (4) International Bank for Reconstruction and Development (IBRD); (5) International Fund for Agricultural Development (IFAD); (6) Credit Guarantee and Investment Facility (CGIF); (7) International Monetary Fund (IMF). In 2012, the amounts of PNM is to reach Rp541.9 billion for: (1) The Islamic Corporation for The Development of Private Sector; (2) Asian Development Bank (ADB); (3) International Bank for Reconstruction and Development (IBRD); (4) International Finance Corporation (IFC); (5) International Fund for Agricultural Development (IFAD); and (6) International Development Association (IDA). PMN to international financial organization/institution (LKI) is to maintain and fortify the voting power in LKI. In 2012, another PNM is allocated to ASEAN Infrastructure Fund (AIF) of Rp380.0 billion. It is planned that Indonesia will pay participation fund of USD120 million in 3 tranches from Revolving Fund Revolving fund is fund, which is lent to the communities for the management and revolving by budget user or proxy of budger users aiming to bolstering people s economy and other objectives. A fund will be categorized as revolving if complying with the following criteria: (1) part of state finance; (2) indicated in APBN and/or government financial statements; (3) owned, controlled and/or managed by Budget User (PA)/Proxy of Budget User (KPA); (4) channelled to communities/groups of communities, collected with or without added values, and revolved to other communities/groups of communities (revolving fund); (5) aimed to reinforce the capital structure of cooperatives, micro, small and medium enterprises and other business enterprises; and (6) collectible in some times. Before 2009, the revolving fund was classified as government expenditure. In the next progress, the Government deemed that this revolving fund was not longer liable for classification in government expenditure because of its revolving characteristics. Based on Presidential Instruction Number 6 of 2007 concerning Policy for Real Sector Development Acceleration and Micro, Small and Medium Enterprise and Presidential Instruction Number 5 of 2008 concerning Economic Program Focuses in , the Minister of Finance issued PMK Number 99 of 2008 concerning Guidelines for Revolving Fund Management in the Ministries/Agencies. To follow the said PMK, starting from 2009 the Government allocated revolving fund in budget financing. During , the realization of revolving fund allocated by the Government in every fiscal year was varying dependent on Government s policy, and needs of fund to be revolved to the communities. In 2009, budget realization for revolving fund was Rp911.0 billion used to finance revolving fund in Revolving Fund Management Agency (LPDB) for KUMKM Rp290.0 billion and revolving fund for Public Service Agency (BLU) for Forest Development Financing Center (P3H) Rp621.0 billion. Meanwhile, in 2010 budget for revolving fund was allocated at Rp2.7 trillion consisting of revolving fund for LPDB KUMKM Rp0.4 trillion and revolving fund of BLU for Housing Financing Center (PPP) Rp2.3 trillion. In 2011, the Financial Note and Indonesian Budget

301 Chapter 6 Budget Deficit Financing and Fiscal Risk realization of revolving fund was to rise to Rp8.8 trillion consisting of revolving fund for LPDB KUMKM Rp0.3 trillion, 5,0 4,5 BLU P3H LPDB KUMKM BLU PPP Rp3.6 trillion, Toll Roal 4,0 BLU PPP Ge othermal Regulatory Body (BPJT) Rp3.9 trillion 3,5 BLU BPJT 3,0 and Geothermal Rp1.1 trillion. In 2,5 2,3 APBNP 2012, the revolving fund is to 2,0 1,5 record Rp7.0 trillion. This sum is 1,0 0,6 allocated for LPDB KUMKM Rp ,5-0,0 billion, BLU PPP Rp4.7 trillion, BLU BPJT Rp900 billion and Geothermal Rp876.5 billion. The trend of revolving * APBNP 2012 Source: the Ministry of Finance fund realization from 2009 to 2012 is presented in Graph 6.7. D. National Education Development Fund (DPPN) National Education Development Fund is education budget allocated to establish endowment fund to assure education program for the next generation, which consists of intergenerational equity, and education reserve fund to anticipate the needs of rehabilitation for the damaged education facilities as a result of natural disaster managed by BLU responsible for education fund management. The Government just allocated national education development fund through budget financing in 2011 with Rp1.0 trillion and 100% realized. In 2011, this national education development fund allocation also realized 100%, i.e. Rp2.6 trillion. In APBNP 2012, the allocation of national education development fund is Rp7.0 trillion. In early stage, this national education development fund is managed by Government Investment Center, and by end of 2011 the management is transffered to working unit (Satker) BLU for Education Fund Management Agency (LPDP). E. Guarantee Obligations To support the acceleration of infrastructure project development, the Government has provided guarantee to banking creditors/business entities to participate in the construction of some projects including: 1. Coal fired Electrical Power Generation Development Acceleration (10,000 MW Project Stage I); 2. Water Supply Acceleration; GRAPH 6.7 REVOLVING FUND TREND, (trilllionrupiah) 0,6 0,3 0,4 0, * 3. Renewable Energy, Coal and Gas Fired Electrical Power Generation Development Acceleration (10,000 MW Project Stage II); 4. Infrastructure Development under Public Private Partnership (PPP) Scheme. Guarantee to 10,000 ME Project Stage I is provided in conformity with Presidential Regulation Number 86 of 2006 as amended with Presidential Regulation Number 91 of Through June 2012, 33 Government s guarantee letters have been issed for electrical power generation projects and other 4 guarantee letter for transmission projects leaving a total guarantee value Rp35.1 trillion and USD4.0 billion. 3,6 1,1 3,9 4,7 0,9 0, Financial Note and Indonesian Budget 2013

302 Budget Deficit Financing and Fiscal Risk Chapter 6 To accelerate Water Supply Program, the Government extends guarantee to banking creditors. The guarantee includes 70.0 percent of debt services of PDAMs investment credits to banks. Of this 70.0 percent of Government s guarantee, the Central Government shall bear 40.0 percent that will be further converted into PDAM loans, and the other 30.0 percent will be shared to Regional Government for total liabilities of default PDAMs. Until June 2012, the Central Government has issued three Guarantee Letter with total value Rp50.2 billion for PDAM projects in Ciamis, Lombok Timur and Bogor. In addition, under Presidential Regulation Number 4 of 2010, the Government assigns PT PLN (Persero) to develop electrical power generation using renewable energi, coals and gas. For this program, the Government provides guarantee to private power generation contractors with regard to business feasibility. PT PLN (Persero) will buy the power under Electrical Power Sales Purchase Agreement. As of June 2012, the Government has issued two Guarantee Letters of this Business Feasibility, i.e. for PLTP Rajabasa and PLTP Muaralaboh. In effort to accelerate and expand Indonesia s economic development, the Government together with PT Penjaminan Infrastruktur Indonesia/PT PII (Persero) also gives guarantee for infrastructure project development executed under PPP scheme as established in Presidential Regulation Number 78 of For the first time, on 6 October 2011, the Government along with PT PII signed guarantee agreement for PLTU Project in Central Java under PPP scheme. The provided guarantee was that of amount sharing, in which PT PII shall guarantee maximum Rp billion and the remaining portion shall be secured by the Government. PLTU Project in Central Java with cap. 2 x 1,000 MW is an infrastructure project showcase executed with PPP scheme. Total project values guaranteed is around Rp30.0 trillion. The guarantee is anticipated to take effective by end of 2012 when the project is expected to reach its financial close. As the consequence of the issued guarantee, the Government has allocated budget for this guarantee obligation. Budget of guarantee obligation allocated for 10,000 MW project by PT PLN and Water Supply Acceleration Project by PDAMs from is presented in Table 6.4. TABLE 6.4 THE GOVERNMENT SECURITY FUND ALLOCATION TREND, (billion Rupiah) Penjaminan Coal fuelled power generation acceleration by PT PLN (Persero) , , Water Supply Acceleration by PDAM Total Source: the Ministry of Finance , , In the implementation, the realization of guarantee obligation budget from 2008 to semester I 2012 remains nil or not yet used, since PT PLN and PDAMs can afford to meet their debt Financial Note and Indonesian Budget

303 Chapter 6 Budget Deficit Financing and Fiscal Risk services and there is no claim of guarantee payment to the Government from creditor. In addition, the Government continually monitors potential default of PT PLN and PDAM, and take mitigation measures to prevent default. F. Loan to PT PLN To increase electrification ratio and accelerate low-cost power general development the Government has assigned PT PLN (Persero) to execute coal fired power generation development acceleration project under Perpres No. 71 of 2006 concerning the Assignment to PT Perusahaan Listrik Negara to accelerate the development of electrical power generation with coals. To finance the equity funding portion of 10,000 MW project, recovery and electricity system improvement and investors to serve natural loads, funds required by PT PLN (Persero)2010 exceeded the funding capacity of PT PLN (Persero) in corporation wise. Measures taken by the Government to cover such financing shortage of PT PLN were to extend loans to PT PLN (Persero) in amount of Rp7.5 trillion. Under Prepres Number 9 of 2011 concerning Assignment to Government Investment Center (PIP) to extend soft loans to PT PLN (Persero), the Government has assigned PIP to grant soft loans to PT PLN as follows: 1. The term of loan: 15 (fifteen) years; 2. Grace period of repayment: 5 (five) years; and 3. Interest rate based on Bank Indonesia rate Loan Based Financing Loan Based Financing consists of SBN (Government Bonds), foreign loans and domestic loans. In period, SBN plays leading role as the source of loan based financing. The trend of this financing with loans from 2007 to 2012 is presented in Table 6.5. TABLE 6.5 LOAN BASED FINANCING TREND, (trillion Rupiah) Description Realization APBNP 2012 A. Government Bond (SBN) (Net) B. Foreign Loan (Net) (26.5) (18.4) (15.5) (4.6) (17.8) (4.4) 1. Foreign Loan Drawing (Net) a. Program Loan b. Project Loan SLA (2.7) (5.2) (6.2) (8.7) (4.2) (8.4) 3. Foreign Loan Amortization (57.9) (63.4) (68.0) (50.6) (47.3) (49.7) C. Domestic Loan (Net) Source: the Ministry of Finance Total Financial Note and Indonesian Budget 2013

304 Budget Deficit Financing and Fiscal Risk Chapter Government Bond (SBN) During , SBN emission (net) shows significant increase. See Graph 6.8. SBN (net) is to rise Rp57.2 trillion in 2007 to Rp159.6 trillion in Factors contributing the increase of SBN (net) emission are: (1) needs of prioritizing domestic financing sources in rupiah currency, (b) needs of flexibility in portfolio and loan risk management, and (c) (40) (90) 116,9 (59,7) GRAPH 6.8 SBN ISSUANCE TREND (NET), (trillion rupiah) 57,2 132,7 needs of developing domestic financial markets. Graph 6.8 shows that the realization of principal payment for SBN on due and buyback records upward trend from year to year that will increase the target of SBN (gross) emission. The target of SBN (gross) emission is complied with through two instruments, namely SUN (Government Securities) and Government Syariah Based Security (SBSN). SUN instrument consists of Government Bonds (ON) with (1) fixed rate (FR) and Government Retail Bond (ORI); (2) variable rate, i.e. variable rate (VR) series; (3) without interest, i.e. state treasury bill (SPN) and Zero Coupon Bond (ZC), and (4) foreign currency ON. Meanwhile, SBSN instrument comprises Ijarah Fixed Rate (IFR), Sukuk Ritel (SUKRI), Sukuk Dana Haji Indonesia (SDHI), Syariah Based Treasury Bill (SPNS), Project Based Sukuk (PBS) and foreign currency sukuk. The preference to the type of SBN instrument to be issued refers to debt management strategies of either annual strategy or medium-term strategy. Generally speaking, based on debt management strategies, the issuance of SBN will be prioritized in domestic financial markets. It aims: (1) to minimiz debt risks, especially relating to exchange rate fluctuation, (2) to develop domestic financial market, and (3) to set benchmark for the emission of private bonds in domestic markets. Nevertheless SBN emission in domestic markets must be carried in carefull and prudent manner in view of the absorption capacity of domestic financial markets. It is necessary to avoid crowding out effect in domestic financial market when private sectors wish to look for financing sources from capital markets. With such various considerations, it is expected that target of debt financing with SBN emission can be met with measurable and efficient costs and risks. The increasingly SBN emission in domestic markets from year to year has affected the outstanding domestic SBN. Graph 6.9 shows that outstanding domestic SBN is to rise from Rp737.1 trillion in 2007 to Rp992.0 trillion by end of During period. The 85,9 148,5 (46,8) (49,1) 99,5 167,6 (76,5) 91,1 207,1 (87,3) 176,6 119,9 117,6 (59,0) * *Realization up to semester I 2012 Source: the Ministry of Finance Issuance On Due and Buyback SBN Neto Financial Note and Indonesian Budget

305 Chapter 6 Budget Deficit Financing and Fiscal Risk proportion of GRAPH 6.9 o u t s t a n d i n g THE TREND `OF NET SBN ISSUANCE AND OUTSTANDING DOMESTIC SBN, domestic SBN to total outstanding ,1% 56% 54,4% debts is higher 53,8% than 50 percent on 53,1% 54% 52,6% the average, 992, % 902,4 except in ,9 836,3 The declined % 1.057,5 proportion of 47,9% outstanding SBN % 737,1 was due to ,6 depreciation of 85,9 99,5 119,9 46% 91,1 57,2 rupiah exchange 0 44% rate so that the * portion of debts in foreign currencies s i g n i f i c a n t l y SBN Netto Outstanding Domestic SBN Proportion of Domestic SBN to total Loans (RHS) increased. The proportion of outstanding domestic SBN to toal debts by end of 2012 is expected to reach 54.4 percent, higher than proportion per end of 2007 at Rp53.1 percent. (billion USD) GRAPH 6.10 THE TREND OF FOREIGN CURRENCY SBN ISSUANCE AND OUTSTANDING FOREIGN CURRENCY SBN, ,7% 7,0 1,5 7,5% 11,2 9,0% 15,2 9,7% 18,0 10,8% 21,6 3,9 3,5 2,7 3,5 4,3 12,7% * *per June 2012 Source: the Ministry of Finance Foreign Currency SBN Issuance Outstanding foreign currency SBN Meanwhile, the realization of foreign currency SBN issuance in international markets from 2007 to 2011 included foreign currency SBN in USD amounting USD15.5 billion and in Japanese Yen JPY95.0 billion. SBN issuance in JPY was made by the Government in 2009 and 2010 with nominal values respectively JPY35.0 billion and JPY60.0 billion. The consequence of this SBN issuance, the outstanding foreign currency SBN was to rise from USD7.0 billion in 2007 to USD21.6 billion in With such nominal value increase, the ratio of outstanding foreign currency SBN to total Government debts had increased from 4.7 percent in 2007 to 10.8 percent by end of 2011 as presented in Graph SBN issuance in 2012 is expected subject to numerous issues ranging from positive trend of the bolstering Indonesia s debt rating to negative impacts of uncertain solution to debt crisis in Euro Zone and inflation rise expectation. However, based on the realization of SBN issuance as of end of June 2012, in general, SBN offering experiences oversubscribe, either for domestic or foreign issuance. During the auction of domestic SBN in January-June 2012, the incoming bids recorded Rp295.1 trillion with the winning sums of Rp101.8 trillion. Thus there is oversubcribe 2.9 times on the average. This condition is attributed to relatively low average 24,6 14% 12% 10% 8% 6% 4% 2% 0% 6-16 Financial Note and Indonesian Budget 2013

306 Budget Deficit Financing and Fiscal Risk Chapter 6 bond yield with term 5 and 10 years, i.e. 5.2 percent and 5.6 percent respectively. This average yield is lower than the same period in 2011 recording 7.8 percent and 8.1 percent respectively. The realization of domestic SBN issued in January-June 2012 period covers domestic SUN and SBSN with fixed rate consisting of SPN, FR, SPNS, islamic fixed rate (IFR), PBS, Sukuk ritel, and SDHI. In January 2012, the Government for the first time circulated to the market project/activity based sukuk (PBS). In 2011, the issuance of this PBS was hampered by the minimum interests of investors and on the other side they expected on exceeding yields. The realization of PBS issuance until June 2012 is Rp12.9 trillion with total bids Rp29.3 trillion or experiences oversubcribe 2.3 times. It indicates that this instrument is soundly acceptable by the investors. It is expected that this instrument expand the base of state sukuk investors and at the same time capable of financing Government s projects. To develop SBSN instrument, at present the Government is preparing infrastructure and suprastructure for the emission of PBS instrument under project financing scheme. The issuance of this project financing sukuk is expected capable of assisting the Government in financing priority activities in APBN. To assure the adequacy of debt financing needs, SBN issuance is also made for foreign markets in foreign currencies aiming to: (1) avoid crowding out effect of domestic financial market; (2) set benchmark for Indonesia s financial assets in international markets, and (3) manage Government debt portfolio. The volume of foreign currency SBN to be circulated in the market is subject to the financing needs and risk profile and debt management strategies. To date, the Government has issued foreign currency SBN in US dollar (USD) with global bond and global sukuk, and in Yen currency (JPY) with JBIC (shibosai) backed samurai bond. During January-June 2012 foreign currency SBN has been issued twice. Total incoming bids reach USD11.5 billion for two series of foreign currency bonds with term 10 and 30 years respectively. From these bids, the Government absorbs USD4.3 billion or experiences oversubcribe 2.7 times on the average. The lowest yields recorded during the issuance of foreign currency SBN series 10 and 30 years are respectively 3.9 percent and 5.4 percent. These low yields reflect improving perception of markets to Indonesia s economic risks, either in line with the bolstering Indonesian debt rating to investment grade by rating agency Fitch and Moddy s. The emission of foreign exchange SBN uses Global Medium Term Notes (GMTN) format since it can reach broader base of investors with faster offering and execution. Generally speaking, as of the end of June 2013, the Government has circulated SBN (gross) Rp176.6 trillion consisting of issuance in domestic markets Rp137.5 trillion and foreign markets USD4.3 billion or equivalent to Rp39.0 trillion. Meanwhile the realization of payments for principal on due and buyback has reached Rp59.0 trillion. In netto term, the SBN emission has recorded around Rp117.6 trillion or 73.7 percent of target net issuance set in To meet the remaining target of SBN (net) issuance until the end of 2012, the Government will use all SBN instruments available both in domestic or foreign markets. The issuance of domestic SBN will include regular SBN with fixed rate, retail SBN, and short-term SBN. However, this foreign currency SBN issuance plan is dependent on the conditions of global financial markets, risks and costs to bear. This foreign currency SBN issuance covers the circulation of foreign currency sukuk and samurai bond aiming to create benchmark in Financial Note and Indonesian Budget

307 Chapter 6 Budget Deficit Financing and Fiscal Risk international market, to meet the expenditure needs of the Government in foreign currencies, and to buttress national foreign exchange reserves. More comprehensive illustration on the realization of proceeds acquired from SBN issuance by instruments during is presented in Table 6.6. To identify potential absorption of domestic SBN markets, the Government divides the ownership of tradable domestic SBN by types of investors that can be categorized in general into banking investors and non-banking investors. Banking investors are recapitulated SOE banks, recapitulated private banks, syariah bank, and Bank Indonesia. As to non-banking investors they include pension fund, insurance, foreign investors, individual investors, mutual fund, and securities. In detail, the ownership of each investor to tradable domestic SBN is presented in Table 6.7. Table 6.7 shows that until the end of June 2012, the ownership of banking invetors is to rise by 10.5 percent from Rp268.7 trillion by end of 2007 to Rp297.0 trillion as of June The ownership of Bank Indonesia on SBN is also to increase by 36.9 percent, i.e. from Rp14.9 trillion by end of 2007 to a. b. Type of Instrument Domestic Obligation (trillion Rp) * - SPN/ SPNS ZC FR ORI VR IFR/ PBS SRI SDHI Foreign Currency Bond - USD denomination (billion USD) (trillion Rp) JPY denomination (billion JPY) (trillion Rp) *) Per end of June 2012, the new issuance not taken into account due to debt switch Source: the Ministry of Finance Owners TABLE 6.6 SBN ISSUANCE REALIZATION TREND, Dec Dec Dec Dec Dec Jun I. Bank II. Bank Indonesia III. Non-Banks Reksadana Insurance Foreign Pension Fund Security Others Total Source: the Ministry of Finance TABLE 6.7 TRADABLE SBN OWNERSHIP TREND, (trillion rupiah) Rp20.4 trillion per June This increased ownership of central bank is for the interests of investment and for SBN market stabilization and monetary operation. Meanwhile, the ownership of non-banking investors records relatively significant increase, i.e. to reach percent, from originally Rp194.2 trillion by end of June 2012 to Rp472.8 trillion per end of June Increase in the ownership of non-banking investors is contributed by higher ownership of mutual fund institution by 84.8 percent, insurance percent, and pension fund 35.7 percent, and ownership of individual investors and securities percent. As to the ownership of foreign investors to tradable SBN, it is also to rise by percent, i.e. from Rp78.2 trillion by end of 2007 to Rp224.4 trillion in June In overall, the portion of foreign investor ownership reaches 28.4 percent of total tradable SBN Financial Note and Indonesian Budget 2013

308 Budget Deficit Financing and Fiscal Risk Chapter 6 This significant ownership of foreign investors indicates that they have high confidence about the fundamental economic conditions of Indonesia. On the other side, high foreign ownership is also vulnerable to risks of sudden reversal that may spark systemic impacts to national economy. To anticipate the said sudden reversal, the Government has taken a number of policies including to elevate the alertness against domestic and global economic conditions, to revise crisis management protocol/cmp in SBN markets, and to prepare SBN market stabilization mechanism scheme with Bond Stabilisation Framework (BSF) Foreign Loans During , budget financing with foreign loans is smaller than the payment of principals (net negative flow). With the implementation of this policy, credit rating of the Government and the inclusion of Indonesia in middle income country has decreased the portion of foreign loans, especially for soft loans. This lowering portion of foreign loans is also attributed to the increasing cost of borrowing as a result of unfavorable international financial market conditions. In , the realization of foreign loan withdraw reaches 84.4 percent on the average consisting of project loans 73.5 percent and program loans 98.8 percent. Until June 2012, the realization of foreign loan withdraw is to record 12.5 percent of the target set in APBNP, consisting of project loans 11.7 percent and program loans 14.4 percent. The low realization of foreign loan withdraw, especially project loans is due to some factors as follows: 1. For new project loans, the low absorption is mainly attributed to: a. K/L or the beneficiaries of SLA not yet allocates downpayment or rupiah counterpart fund; b. Problems in goods and services procurement including land acquisition; c. Administration preparation in early stage of project sometimes longer than the specified time; and d. Lender s fiscal year not synchronized with Government s fiscal year. 2. In case of on-going project loans, the low absorption is because of: a. Relatively prolonged issuance of No Objection Letter (NOL) for the project; b. Changing design and scope of project; and c. Problems encountered during project implementation especially infrastructure projects, for example extreme wheather. During the same period, the realization of program loan withdraw is generally consistent with the target set in APBN. This target fullfilment is thanks to policy matrix as requirement for program loan release. Policy matrix contains Government s priority activities or programs that must be carried out in the current year. However, in 2011, the realization of program loan withdraw in lower than the target of APBN. It is because program loan with theme climate change was not consistent with the Government s policy and therefore cancelled. The omitted program loans amounted USD600.0 million coming from World Bank USD200.0 Financial Note and Indonesian Budget

309 Chapter 6 Budget Deficit Financing and Fiscal Risk million, ADB USD100.0 million, Japanese Government equivalent to USD100.0 million, and France Government USD100.0 million. Illustration of realization for foreign loan withdraw is presented to Graph GRAPH 6.11 FOREIGN LOAN DRAWING TREND, (trillion rupiah) ,3 29,4 19,2 15,3 28,9 15,6 29,0 19,0 26,4 30,1 19,6 15,3 39,0 41,4 37,0 39,0 38,1 29,7 23,2 21,8 25,8 20,1 14,5 18,5 APBNP LKPP APBNP LKPP APBNP LKPP APBNP LKPP APBNP LKPP APBN APBNP Source: the Ministry of Finance Project Loan Program Loan With regard to subsidiary loan agreement (SLA), it can be elaborated as follows. SLA is foreign loan or domestic loans received by the Central Government for relending to regional governments or SOEs and must be paid back under certain terms and conditions. SLA is a facility granted by the Government to the regional government and SOEs to get loans especially for the financing of particular activities. Under this SLA mechanism, the loan procurement must be made in exhaustive manner, since: (1) its withdraw is potential to increase the outstanding loans despite in-out character in APBN; (2) lender will classify this loan as Government s loan; (3) potential mismatch of debt service payment from the beneficiary of SLA with debt service payment to lender; and (4) similar to project loans, low loan absorption is potential to increase loan fees. Loan extension for activities or project to the regional governments or SOEs will be carried out under subsidiary loan agreement (SLA) mechanism since these two institutions are different entities with Central Government. In addition, pursuant to Government Regulation No. 10 of 2011 concerning Foreign Loan and Grant Procurement Procedures, the Ministries/ Agencies (K/L), Regional Governments and SOEs are not allowed to make any agreement whatsoever that may arise liabilities from foreign loan procurement. In the realization of SLA recorded 45.2 percent to its ceiling in APBNP on the average. Then, in 2012, the realized SLA as of semester I is to reach 9.2 percent of its ceiling set in APBNP 2012, i.e. 8.4 percent. The low realization of SLA absorption is attributed to: (1) slow land acquisition for project sites; (2) delayed implementation from the original schedule; (3) slow tender approval process, i.e. the issuance of NOL for bid proceedings; and (4) unfinished SLA discussion process in the related commission of DPR RI (Parliament). The trend of SLA realization during is presented in Graph Financial Note and Indonesian Budget 2013

310 Budget Deficit Financing and Fiscal Risk Chapter 6 In terms of the user composition of SLA proceeds from , SOEs are the largest borrowers, and followed by the regional governments. Of SOEs borrowing SLA, PT PLN (Persero) is the most dominant borrowing enterprise if compared with other state owned enterprises. SLA to PT PLN (Persero) is maintly used to finance power i n f r a s t r u c t u r e development projects such as the development of new power generation plant, transformator procurement, construction of transmission networks, etc. Some other SOEs being the recipients of SLA proceeds include PT PGN, PT SMI, PT Pelindo II, PT PII, and PT Pertamina. Meanwhile, SLA to the regional governments is normally to finance Urban Sector Development Reform Project (USDRP), Urban Water Supply And Sanitation Project (UWSSP), and Jakarta Urban Flood Mitigation Project (JUFMP)/Jakarta Emergency Dredging Initiative (JEDI). Some regional governments receiving SLA include Pemkot Palopo, Pemkot Sawahlunto, Pemkot Banda Aceh, Pemkab Morowali, Pemkot Bogor, Pemkab Kapuas, Pemkab Muara Enim, and Pemprov DKI Jakarta Domestic Loan Domestic loan is a loan based financing instrument to procure the domestically produced goods, to enhance productivity of domestic strategic industries, and to push domestic i n f r a s t r u c t u r e development acceleration. The adoption of domestic loan as an APBN financing instrument has been started since 2010 with maximum ceiling Rp1.0 trillion per annum. Thus trillion rupiah 18,0 16,0 14,0 12,0 10,0 8,0 6,0 4,0 2,0-13,0 0,48 6,2 far, this domestic loan has been used to support the financing of main weaponry system procurements for Armed Forces and Police (TNI/Polri). Graph 6.13 shows that the average realization of domestic loan withdraw for the last two years is relatively low, i.e percent. In 2012, the realization of domestic loan withrdraw as of June has reached Rp167.0 billion or 14.7 percent of total domestic loan withdraw budget set at Rp billion. 16,8 0,52 8,7 11,7 0,36 4,2 8, *) *) Realization Semester I Source: the Ministry of Finance ,0 GRAPH 6.12 SLA DRAWING TREND, APBNP Realization % Realization GRAPH 6.13 DOMESTIC LOAN DRAWING TREND billion rupiah) 1.452,1 39,4% 42,7% 393,6 619, , *) APBNP *Per June 2012 LKPP % Realization (RHS) Source: the Ministry of Finance 0,09 0,8 14,7% 167,0 percent 0,60 0,50 0,40 0,30 0,20 0,10 0,00 50% 40% 30% 20% 10% 0% Financial Note and Indonesian Budget

311 Chapter 6 Budget Deficit Financing and Fiscal Risk Constraints hampering the optimum domestic loan withdraw are long time required to build coordination and communication among the institutions engaged in planning through implementation of a domestic goods and service procurement process. In addition, limited technology and production capacity of BUMNIS in complying the completion target of activity is also another obstacle. However, with the improving coordination and familiarity of stakeholders involved in domestic loan financing, it is expected that the absorption of this loan will be higher in future The Trend of Government Debt Portfolio SBN issuance, loan withdraw, payment of principal on due, debt restructuring, and exchange fluctuation are some factors that will affect outstanding Government debts. This fluctuating outstanding Government debts must be curbed and managed in a manner that will bolster economic growth. The correlation of debt increase and economic growth is crucial to maintain fiscal sustainability. Well-controlled and managed debts are evident from the lower debt ratio to GDP in phased as shown in Graph The ratio of Government debts to GDP by end 2012, which is projected to reach 23.2 percent, much lower than the last position in 2007 at 35.2 percent, and this ratio is expected to further decline by end of Based on original currency, the Government prefers to take new debts in rupiah and US dollar. For Yen, this currency is more used to pay back the loans than to procure new loans. However, from outstanding debts in Rupiah, it is obvious that debts in Yen record an increase. It is due to the w e a k e n i n g R u p i a h exchange rate to Yen. In detail, the trend of o u t s t a n d i n g G o v e r n m e n t debts currency presented Table 6.8. by is in ,2% 3.950, ,4 33,1% 4.951,4 28,3% 5.613, , , ,6 26,1% 24,3% 23,2% 1.636, , , , , * *) projection by end of 2012 source: the Ministry of Finance GRAPH 6.14 GOVERNMENT LOAN TO GDP TREND GDP Outstanding Loan Ratio to GDP * Original Currency - IDR (in trillion) , USD (in billion) JPY (in billion) 2, , , , , , EUR (in billion) Other currencies Multiple Currencies Equivalent to trillion Rp. - IDR , USD JPY EUR Lainnya Total 1, , , , , ,938.6 *) per end of June 2012 Source: the Ministry of Finance TABLE 6.8 OUTSTANDING GOVERNMENT LOAN TREND BY CURRENCY, % 30% 20% 10% 0% 6-22 Financial Note and Indonesian Budget 2013

312 Budget Deficit Financing and Fiscal Risk Chapter 6 For the last three years, the Government debts portfolio is more dominated by SBN instrument especially domestic SBN. The issuance of foreign currency SBN will be taken as complement to the increasingly financing needs that can t be obtained from domestic sources. Details of Government debt position by instruments are presented in Table 6.9 that follows. TABLE 6.9 OUTSTANDING GOVERNMENT LOAN TREND BY INSTRUMENTS Type of Instrument * a. Loans ). Foreign Loan Bilateral Multilateral Commercial Suppliers ). Domestic Loan b. Government Bond (SBN) , , ,314.1 Foreign currency denomination Rupiah denomination ,069.6 Total Central Government Loan 1, , , , , ,938.6 *) position per June 2012 Source: the Ministry of Finance 6.3 Budget Financing Plan for 2013 In APBN 2013, the budget deficit is set at Rp153.3 trillion or 1.65 percent of GDP. Budget financing to cover such deficit comes from loan and non-loan sources. Financing from nonloan sources is expected to record negative Rp8.1 trillion in netto. Meanwhile net financing from loans will reach Rp161.5 trillion. Since non-loan financing sources in 2013 are relatively limited, the Government will still rely on loan sources to cover budget deficit in APBN Details of budget financing by non-loan financing sources are presented in Table APBNP APBN A. GOVERNMENT REVENUE 1, ,529.7 B. GOVERNMENT EXPENDITURE 1, ,683.0 C. BUDGET DEFICIT/SURPLUS (A - B0 (190.1) (153.3) % Deficit to GDP (2.23) (1.65) D. BUDGET FINANCING (I + II) I. Non-Loan 33.9 (8.1) II. Loan Source: the Ministry of Finance TABLE 6.10 BUDGET FINANCING, (trillion rupiah) Description Financial Note and Indonesian Budget

313 Chapter 6 Budget Deficit Financing and Fiscal Risk Non-Loan Financing Budget Financing from non-loan sources in 2013 will come from: (1) domestic banks, i.e. from the installments of SLA payment and Budget Surplus (SAL); and (2) non-domestic bank, i.e. from asset management proceeds, Government investment fund, national education development fund, guarantee obligations, and financing reserves. These non-loan financing sources in 2013 are a little bid different from the previous years. This difference is from the availability of funds of individual financing sources and policy taken by the Government in spending such funding sources. In 2013, policies on non-loan financing are including: 1. The use of SAL proceeds, especially to anticipate potential SBN market crisis and to finance budget deficit; 2. Focus the use of Government investment fund, notably to develop the investment capacity of the Government including the rights of Government derived from agreements/ cooperations, such as from the the takeover of PT Inalum; 3. The allocation of PMN fund to SEOs aimed at SOEs performing assignments/policies for the provision of public interests such as the provision of high quality goods and/or services to serve the lives of people in general and to support the Government s policies in promoting infrastructure development; 4. PMN to international financial organizations/agencis is aimed at maintaining the percentage of share ownership and to increase capital in international financial agencies, where Indonesia plays relatively significant roles/influence; 5. Other PMM is to meet the obligations as a member of ASEAN Infrastructure Fund (AIF) in order to get maximum outcomes for national interests and to maintain the ownership of shares and voting rights and the opening capital for BPJS establishment; 6. Improve governance and investment allocation and PMN to SOEs in selected manner; 7. Additional revolving fund to reinforce business capital of cooperatives, micro, small and medium enterprises, assist low-income people to access affordable houses, and support exploration activities for geothermal power plant development to be built under Public Private Partnership (PPP) scheme; 8. Fund allocation of obligation guarantee to the credits secured by the Government. Budget financing from non-loan sources in APBN 2013 is planned to reach negative Rp8.1 trillion. This negative non-loan financing shows that the expenditure of financing from nonloan sources outnumbers its revenue. The non-loan based budget financing in APBN 2013 composes of: (1) installment of SLA payment Rp4.3 trillion; (2) SAL proceeds Rp10.0 trillion; (3) asset management proceeds Rp475 billion; (4) Government investment fund negative Rp12.2 trillion; (5) national education development fund negative Rp5.0 trillion; (5) guarantee obligations negative Rp706.0 billion; and (6) financing reserves negative Rp5.0 trillion. Comparison of budget financing with non-loan sources in APBNP 2012 and APBN 2013 is presented in Table Financial Note and Indonesian Budget 2013

314 Budget Deficit Financing and Fiscal Risk Chapter 6 TABLE 6.11 NON-LOAN BASED FINANCING, (trillion Rupiah) DESCRIPTION APBNP 2012 APBN Domestic Banks a. SLA installment b. Budget surplus balance Domestic Non-Banks (26.6) (22.5) a. Asset Management Proceeds b. Government Investment Fund (19.3) (12.2) i. Government Investment Center (PIP) (3.3) (1.0) ii. State Capital Participation (PMN) (8.9) (6.4) iii. Revolving Fund (7.0) (4.8) c. National Education Development Fund (7.0) (5.0) d. Guarantee Obligations (0.6) (0.7) e. Investment financing reserve for the takeover of PT Inalum - (5.0) Source: the Ministry of Finance Total 33.9 (8.1) Domestic Banking Non-loan financing from domestic banking comes from the installment of SLA payment and Budget Surplus (SAL) The Installment of SLA Payment Payment from SLA installment for budget financing in APBN 2013 is anticipated to reach Rp4.3 trillion. This sum is 30.1 percent of total budget financing of APBN 2013 from domestic banking. To optimize the financing revenue from SLA installment, the loan repayment will be collected according to the maturity dates of loans concerned. This effort is supported with routine loan data management and reconciliation system with other related units to get the most accurate date on revenue. In addition, revenue from SLA repayment will be also optimized with state receivable settlement program in SOEs, Regional Governments and PDAMs. This State Receivable Settlement Program policy is not only to optimize the revenue, but also for debtor restructuring (SOEs. Regional Governments, and PDAMs) so that they can perform their business/service activities to the communities in more optimum manner. With the bolstering financial conditions after following restructuring program, these debtors are expected to comply with their debt services according to the agreed commitments Budget Surplus (SAL) The use of budget surplus (SAL) in APBN 2013 is expected to amount Rp10.0 trillion or 69.9 percent of total domestic banking. It is subject to budget financing needs and cash in Government s accounts. Financial Note and Indonesian Budget

315 Chapter 6 Budget Deficit Financing and Fiscal Risk Domestic Non-Banking Non-loan financing from domestic non-banking consists of Asset Management Proceeds, Government Investment Fund, National Education Development Fund, Guarantee Obligations and Investment Financing Reserve for the takeover of PT Inalum Asset Management Proceeds (HPA) Target of asset management proceeds to be used for budget financing in APBN 2013 is planned to reach Rp475.0 billion. This target will be met from asset management proceeds of Directorate General of State Assets (DJKN) of the Ministry of Finance Rp375.0 billion and PT PPA Rp100.0 billion or 78.9 percent and 21.1 percent of total HPA respectively. The targeted asset management proceeds in 2013 are especially coming from assets managed by DJKN as a result of management optimizing and the plan of obligor transfer under Shareholders Obligation Settlement (PKPS) to State Receivable Committee (PUPN). Asset management policies taken in 2013 are: (1) asset management in accountable, transparent, free-of-interest and corruption manner; (2) to take legal actions for default and uncooperative obligors; (3) to optimize asset management proceeds while taking legal certainty into consideration; and (4) asset management under the available mechanism and instruments. To exercise these policies, activities to be performed are: (1) collection of credit assets by State Receivable Committee; (2) sales of property and share assets; (3) use of property assets; (4) status on the use of proterty assets in the Ministries/Agencies (K/L); and (5) right waiver with compensation to the property assets used for public interests. Meanwhile, asset management by PT PPA will be made under Asset Management Agreement effective since 1 January to 31 December and renewed for the next period. The assets of ex- BPPN transferred to PT PPA for the management in 2013 will consist of share assets and credits of Tuban Petro group, i.e. the payment of coupons and parts of principal installments on due in Semester I (February) and Semester II (August) HPA revenue from PT PPA is dependent on process and settlement/restructuring within Tuban Petro Group Government Investment Fund Financing of Government Investment Fund is cash outflow character implying financing expenditure. Fund expended for Government investment in APBN 2013 is expected to amount Rp12.2 trillion or 54.4 percent of total domestic nonbanking. The allocation of Government investment fund in APBN 2013 will be used for: (a) Government Investment Center 1. Government Investment Center (PIP) (3.3) (1.0) a. Government Investment Center (Regular) (1.3) (1.0) b. PT Inalum Takeover (2.0) - 2. State Capital Participation (PMN) (8.9) (6.4) a. PMN to SOEs (8.0) (4.5) b. PMN to International Finance Organization / (0.5) (0.5) Institution (LKI) c. Other PMN (0.4) (1.4) 3. Revolving Fund (7.0) (4.8) Source: the Ministry of Finance TABLE 6.12 GOVERNMENT INVESTMENT FUND, (trillion rupiah) DESCRIPTION APBNP 2012 APBN 2013 (19.3) (12.2) Rp1.0 trillion; (b) PMN Rp6.4 trillion; and (c) revolving fund Rp4.8 trillion. The comparison of Government Investment Fund in APBNP 2012 and APBN 2013 is presented in Table Financial Note and Indonesian Budget 2013 Total

316 Budget Deficit Financing and Fiscal Risk Chapter 6 A. Government Investment Fund (PIP) In APBN 2013, the Government allocates budget for Government Investment Center (PIP) Rp1.0 trillion or 8.2 percent of total Government Investment Fund. This regular Government Investment Center channelling in 2013 are, among other things, (1) to give support for projects indicated in Public Private Partnership (PPP) Book, including land acquisition projects under MP3EI; (2) to extend loans to SOEs, private and other loans for eco-investments; (3) to grant working capital and investments to infrastructure sectors being the priorities of the Government, i,e, energy/hydro power, transportation, irrigation, roads and bridges and to eco-sectors; (4) loans to regional government to accelerate the development of basic infrastructure in regions including roads, bridges, market, general hospitals, water supply and terminal; (5) capital participation consisting of subsidiary capitals in eco-investment, biomass project and waste to energy. B. State Capital Participation (PMN) In APBN 2013, the Government will allocate budget for PMN Rp6.4 trillion or 52.3 percent of total Government Investment Fund. PMN in APBN 2013 consists of: (1) PMN to SOEs Rp4.5 trillion; (2) PMN to International Financial Organizations/Institutions (LKI) Rp507.6 billion; and (3) Other PMN Rp1.4 trillion. PMN to SOEs In APBN 2013 the Government will allocate budget for PMN to SOEs Rp4.5 trillion or 70.4 percent of total PMN. These proceeds will be further distributed to PT Askrindo and Perum Jamkrindo (KUR) Rp2.0 trillion, PT Perusahaan Pengelola Aset (PT PPA) Rp2.0 trillion and PT Geo Dipa Energi Rp500.0 billion. The breakdowns of PMN to SOEs in 2012 and 2013 are presented in Table TABLE 6.13 PMN TO SOE, (billion rupiah) NAME OF SOE APBNP 2012 APBN PT Penjaminan Infrastruktur Indonesia (1,000.0) - 2. PT Sarana Multi Infrastuktur (2,000.0) - 3. PT Askrindo dan Perum Jamkrindo (KUR) (2,000.0) (2,000.0) 4. PT Dirgantara Indonesia (Persero) (1,000.0) - 5. Perusahaan Penerbit SBSN Indonesia IV (0.1) - 6. Perusahaan Penerbit SBSN Indonesia V (0.1) - 7. BUMN strategis lainnya (2,000.0) - 8. PT Perusahaan Pengelola Aset - (2,000.0) 9. PT Geo Dipa Energi - (500.0) Total (8,000.2) (4,500.0) Source: the Ministry of Finance Financial Note and Indonesian Budget

317 Chapter 6 Budget Deficit Financing and Fiscal Risk PMN to PT Askrindo Perum Jamkrindo in APBN 2013 is planned to record Rp2.0 trillion with a view to improving business capacity, and reinforcing capital structure of PT Askrindo and Perum Jamkrindo, for KUR (People s Business Credit) Guarantee to assure the sustainability and development of real sectors by micro, small and medium enterprises (UMKM). Additional PMN to PT Askrindo and Perum Jamkrindo is an attempt to continue KUR program revitalization that had been commenced in This KUR program revitalization is crucial in view of great contribution of UMKM to the national economy. At present UMKM still faces a lot of constraints and limitations, such as: (1) human resources capacity; (2) marketing network and coverage; (3) technology capacity; (4) access to credit/financing sources from banks; and (5) capacity in providing collaterals. Inpres No. 6 of 2007 concerning Real Sector Development Acceleration and UMKM Empowerment was issued for UMKM empowerment, employment generation and poverty alleviation. UMKM empowerment policy covers: (1) broader access to financing sources; (2) enterpreneurship development; (3) UMKM product marketing expansion; and (4) UMKM regulation reform. KUR is a program to broaden access to financing sources of banking institutions with guarantee scheme. KUR channelling in 2012 significantly increased, hitting Rp29.0 trillion, or to rise by 68.6 percent than last year s performance at Rp17.2 trillion or 45 percent higher than target set in 2011 at Rp20 trillion with total UMKM debtor 1.9 million. To assure well-targetted beneficiaries, the Government will allocate PMN to guarantee KUR program based on the performance/achievement and conditions of PT Askrindo andperum Jamkrindo. PMN to PT PPA in APBN 2013 is allocated to amount Rp2.0 trillion. PT PPA was established by the Government on 27 February 2004 under Government Regulation No. 10 of 2004 tasked to manage the assets of ex-indonesia Banking Restructuring Agency (IBRA), which were free from legal disputes. In the next progress, under Government Regulation No. 61 of 2008, the Government expanded the objectives and purposes of PT PPA with additional scopes consisting of new tasks assigned to PT PPA including: (1) the management of assets of ex-ibra; (2) SOE restructuring and/or revitalization; (3) investment activities; and (4) SOE asset management. To perform SOE restructuring and revitalization tasks, the Government allocated PMN proceeds to PT PPA in 2008 and 2009 of restpectively Rp1.5 trillion and Rp1.0 trillion. Through end of May 2012, PT PPA has extended these SOE restructuring and revitalization proceeds worth Rp1.7 trillion in the form of loans and capital participation to 5 SOEs, namely, PT Merpati Nusantara Airlines, PT PAL Indonesia, PT Waskita Karya, PT Dirgantara Indonesia, and PT Industri Gelas. In addition, PT PPA also provides bridging capital to 7 SOEs for restructuring/revitalization purposes to assure their well-advanced business operation in ammount of Rp268.5 billion. These SOEs are PT Kertas Kraft Aceh, PT Industri Sandang Nusantara, PT Industri Kapal Indonesia, PT Djakarta Lloyd, PT Survey Udara Penas, and PT PAL Indonesia. In view of the limited fund of PT PPA, in 2013, the Government plans to allocate additional PMN proceeds to PT PPA. The proceeds will be used to reinforce the capital structure and budiness capacity of PT PPA. For SOEs retructuring/revitalization, asset and investment management PT PPA needs capital reinforcement for among other things, the revitalization 6-28 Financial Note and Indonesian Budget 2013

318 Budget Deficit Financing and Fiscal Risk Chapter 6 of SEOs engaged in construction, shipbuilding and navigation business development, financial service development, aviation industry business development, including the maintainance, repair and overhaul, and investments in the assets of SOEs engaged in property sector. PMN to PT Geo Dipa Energi in APBN 2013 has been set at Rp500.0 billion. PT Geo Dipa Energi was established since 2002 and engaged in geothermal power generation sector. PT Geo Dipa Energi was originally a subsidiary of PT PLN (Persero) and PT Pertamina (Persero). In later progress, to more focus on geothermal development in Indonesia, PT Geo Dipa Energy was changed to SOE in For the next 5 years, PT Geo Dipa Energi will build 2 units of geothermal power generation plants (PLTP) in Patuha and two units of PLTPs in Dieng. These four PLTPs will have capacity of 55 MW each. Total funds required for the development of the said four PLTPs reach more than USD670 million. This fund requirement is expected to be covered from various sources inclusive of internal cash, grant proceeds, participation of strategic investors and commercial loans. To start this development, PT Geo Dipa Energi needs internal cash of nearl USD102 million for initial preparation (2 percent), land acquisition (14 percent) and production well boring and injection wells (84 percent). PMN proceeds in PT Geo Dipa Energy will be used to support PLTP Dieng and PLTP Patuha. State Capital Participation to International Financial Organizations/ Institutions (LKI) Apart from some SOEs, the Government also plans to allocate PMN proceeds in 2013 to several international financial organizations/institutions (LKI) in amount of Rp507.6 billion or 7.9 percent of total PMN with breakdowns as presented in Table TABLE 6.14 PMN TO ORGANIZATIONS/LKI, (billion rupiah) DESCRIPTION APBNP 2012 APBN The Islamic Corporation for the Development of Private Sector (ICD) (9.0) (9.0) 2. Asian Development Bank (ADB) (353.3) (353.3) 3. International Bank for Reconstruction and Development (IBRD) (147.8) (108.6) - Promisory note disbursement (39.2) - - IBRD GCI (General Capital Increase) (66.8) (66.8) - IBRD SCI (Selected Capital Increase) (41.8) (41.8) 4. International Finance Corporation (IFC) (8.2) (8.2) 5. International Fund for Agricultural Development (IFAD) (19.0) (28.5) 6. International Development Association (IDA) (4.6) - Total (541.9) (507.6) Source: the Ministry of Finance The Islamic Corporation for the Development of Private Sector (ICD) was established with objectives of identifying opportunities in private sectors that can be used to boost their growth and provide a full range of productive financial and service products. In addition, ICD also moblizes resources for syariah and capital market development. Financial Note and Indonesian Budget

319 Chapter 6 Budget Deficit Financing and Fiscal Risk The benefits enjoyed by Indonesia from ICD membership are: (1) loan USD10 million to PT Mandala Multifinance and USD20 million for finance institutions; (2) the signing of Mou between ICD and PT Jamsostek and PT SMI for the establishment of Islamic Invesment Fund dan Islamic Infrastructure Invesment; and (3) fund allocation of USD13 million to Powertel to build backbone of telecommunication infrastructure. To support this private sector financing, Indonesia also participates in increasing the ICD capital. Pursuant to article agreement of ICD, Indonesia has opportunity to subscribe 475 shares or equivalent to USD4.75 million that can be repaid in five installments or USD950.0 thousand per installment starting from The Minister of Finance with a letter Number S-739/MK.011/2009 of 2 December 2009 agreed to participat in augmenting ICD capital. The payment by the Government was made through APBNP in amount of Rp28.5 billion as the first instalmment until the third installment in period. The fourth installment was Rp9.0 billion allocated in APBN 2012, and the fifth or the final installment of Rp9.0 billion will be allocated in APBN Asian Development Bank (ADB) is a multilaterial financial institution for regional development dedicated for poverty alleviation in Asia and Pacific countries. ADB is the largest financial institution after World Bank with total assets USD143.9 billion. Indonesia holds 5.4 percent shares (USD292 million) as the sixth largest shareholder after Japan and USA (respectively percent), China (6.4 percent), India (6.3 percent), and Australia (5.7 percent). As a large shareholder, Indonesia gains some benefits from ADB membership consisting of loans extended by this institution to developing countries. Indonesia is the largest borrower along with China and India. Dominant sectors receiving ADB loans are public sector management 17.2 percent, agriculture 15.3 percent, energy 14.5 percent and financial sector 14.4 percent. Some advantages of financing from ADB are: (1) ADB has comparative advantages in provising low-cost loans for transport and communication, social infrastructure, and financial sectors; (2) focus of financing on public sector of fostering environment conducive for private investments; and (3) grants and capacity building provision. Based on Decision of Board of Governor (BoG) during the 42nd ADB Annual Meeting in Bali, BoG agreed to increase the capital (general capital increase) of 200 percent. Of this increase, 4 percent would be paid in cash (paid in). Indonesia is obliged to add capital participation worth USD million or equivalent to Rp1.9 trillion that would be paid in 5 years since 1 April With regard to this respect, in 2013, the Government plan to earmark PMN proceeds as the fourt installment of such ADB general capital increase, i.e. Rp353.3 billion. International Bank for Reconstruction and Development (IBRD) is an international financial institution under World Bank providing loans for the development and progress of developing countries. Along with ADB, World Bank is the largest multilateral institution in Indonesia. Moreover, IBRD is also the largest creditor for Indonesia to cover budget deficit at multilateral cooperation. As of 2011, Indonesia has received loans from IBRD totalling USD9.97 billion Financial Note and Indonesian Budget 2013

320 Budget Deficit Financing and Fiscal Risk Chapter 6 During the summit of World Bank members in April 2010 it was agreed to increase the capital of World Bank. Indonesia would participate in this General Capital Increase (GCI) with capital participation worth USD35.5 million and Selected Capital Increase (SCI) of USD22 million. The Government plans to pay this committed capital participation in 5 installments from 2012 to GCI is a capital increase charged to all country members to fortify IBRD capital. SCI is capital increase charged to certain countries becuase of their economic growth or increasing wealth. Indonesia is one of countries with rapid economic growth and as such qualifies to receive additional capital participation/voting rights in SCI. In 2013, Indonesia will allocated the second installment of GCI and SCI worth of respectively USD7.03 million or Rp66.8 billion and USD4.4 million or Rp41.8 billion. Given that, in 2013 the Government plans to allocate PMN proceeds ti IBRD totalling Rp108.6 billion. International Finance Corporation (IFC) is a financial institution engaged in private sector financing under World Bank group. The objectives of establishing IFC are: (1) to develop open and competitive markets in development countries; (2) to support corporate and private sector financing; (3) to assist in generating productive employment; and (4) to catalize and mobilize fund sources for private company development. On 9 March 2012, during Spring Meeting IMF-World Bank, Board of Government adopted the Resolution Number 256 titled Amendment to the Articles of Agreement and 2010 Selective Capital Increase (SCI Resolution) that would take into effect since 27 June The resolution increased the authorized capital IFC by USD130 million with the emission of 130,00 shares at par value USD1,000/share. To date the Indonesia s capital participation in IFC reaches USD28.54 million or 1.20 percent. With such increase, the Indonesia s shares will be potentially to drop to 1.11 percent. To prevent it, Indonesia must pay more capital worth USD3.06 million. This capital participation can be paid in installments but may not exceed 3 years time since the effective date of the above resolution of IFC s BoG. Indonesia will pay in three installments from 2012 to The first and second installments are respectively USD1.4 billion. Thus, in 2013 Indonesia plans to pay the second installment of USD858 thousand or Rp8.2 billion. International Fund for Agricultural Development (IFAD) is a special agency of United Nation established as a financial institution tasked to finance agriculture development. In performing its activities, IFAD will work together with the Government, donors, nongovernment organizations and other parties. IFAD focuses on country specific solutions aiming to improve the access of poor people to financial services, markets, technology, lands and natural resources. IFAD activities will refer to Strategic Framework that will be updated every four years with a view to: (1) strengthening the capacity of isolated people including their institutions; (2) improving access to productive natural resources; and (3) expanding access of poor people to financial services and production markets. Until 2011, total capital participation of Indonesia to IFAD has amounted USD million. During IFAD meeting in December 2011, the Government of Indonesia agreed and committed to increase contribution in IFAD by USD10 million that would be paid in three years time from 2013 to 2015, i.e. USD 3 million in 2013 and 2104 and the other USD4 million in This new commitment has been forwarded during the fourth meeting Financial Note and Indonesian Budget

321 Chapter 6 Budget Deficit Financing and Fiscal Risk replenishment IX in December 2011 in Rome. In 2013, the Government has allocated the first installment of replenishment IX by USD3 million or Rp28.5 billion. Other State Capital Participation (PMN) Other State Capital Participation (PMN) is PMN that can t be classified as PMN to SOEs, and PMN to LKI. In 2013, the Government will allocate other PNM in amount of Rp1.4 trillion or 21.6 percent of total PMN with breakdowns as presented in Table TABLE 6.15 OTHER PMN, (billion rupiah) DESCRIPTION APBNP 2012 APBN Social Security Provider (BPJS) - Health - (500.0) 2 Social Security Provider (BPJS) - Manpoer - (500.0) 3 ASEAN Infrastructure Fund (AIF) (380.0) (380.0) Source: the Ministry of Finance Total (380.0) (1,380.0) PMN to Social Security Organizing Agency (BPJS) for Health Sector in APBN 2013 is planned to amount Rp500.0 billion and another Rp500.0 billion for BPJS for Manpower Sector. BPJS is a legal entity estabished to run social security program to provide social protection and to assure the all people can meet their decent basic needs. According ot Law No. 24 of 2011 concerning BPJS, BPJS shall consist of BPJS for Health Sector delivering health insurance program and BPJS for Manpower Sector running occupational accident insurance program, old day program, pension insurance and life insurance. BPJS of Health Sector and BPJS of Manpower Sector are planned to operate their social security program starting from 1 January In thier operation, BPJS will manage BPJS assets and social scurity fund assets in separate manner. One of BPJS assets is from opening capital of the Government as a separated state asset, and not consists of shares. PMN to ASEAN Infrastructure Fund (AIF) in APBN 2013 is planned to reach Rp380.0 billion. AIF is a private company established by ASEAN countries and ADB as financing source for infrastructure projects in ASEAN benefiting domestic resources and liquidity surplus in Asian region. Of opening capital USD800 million, Indonesia plans to contribute USD120.0 million as capital participation that will be paid in three times starting from 2011 to However, payment to AIF through APBN 2011 was not realized due to delayed AID account opening and provision. In light of that, in 2013 Indonesia will allocate PMN for the second installment. C. Revolving Fund The Government allocates budget for revolving fund in APBN 2013 in amount of Rp4.8 trillion or 39.6 percent of total Government Investment Fund with the breakdowns as presented in Table Financial Note and Indonesian Budget 2013

322 Budget Deficit Financing and Fiscal Risk Chapter 6 TABLE 6.16 REVOLVING FUND, (billion rupiah) URAIAN APBNP 2012 APBN Revolving Mangement Body for Cooperative, Micro, Small and Medium Enterprises (LPDB KUMKM) (557.7) (1,000.0) 2. Toll Road Regulator Body (BPJT) (900.0) - 3. Housing Finance Center (4,709.3) (2,709.3) 4. Geothermal (876.5) (1,126.5) Total (7,043.4) (4,835.8) Source: the Ministry of Finance The allocation of revolving fund for LPBD KUMKM in APBN 2013 is expected to reach Rp1.0 trillion, or 47.0 percent of total revolving fund. This KUMKM revolving fund will be used to give stimulus for cooperatives and micro, small and medium enterprises (KUMKM) to reinforce their capital. Revolving fund of LPBD KUMKM is extended to primary cooperatives, secondary cooperatives, banks and strategic UMKM. Policies adopted for the extension of LPDB KUMKM revolving fund in 2013 are as follows: (1) the proportion of revolving fund through cooperatives to reach 90 percent, and the remaining 10 percent to be distributed via non-cooperative intermediary institutions. The proportion of revolving fund distributed through cooperatives in a province will be based on the number of active cooperatives in the province concerned as support to micro, small and cooperative enterprises; (2) supporting priority programs developed by the Ministry of Cooperative and SME (Small and Medium Enterprises), such as SME centers/clusters, One Village One Product (OVOP), and other programs that have been assessed successful and entering development stage; (3) supporting Government s policy in the promotion of superior commodities, exports, creative industries, productivity improvement and people s economic competitiveness enhancement, new entrepreneurs, employment generation, and people s income augmentation. These policies are to show: (1) great concern of the Government in promoting people s economy through KUMKM sector; (2) the distribution of revolving fund via cooperatives will generate immediate impacts of prosperity augmentation to the members and employment; (3) improved cooperatives in terms of quality and quantity thanks to numerous active cooperatives that as of 31 December 2011 record 133,237 units with 30,849,913 members; (4) cooperatives distributed throughout the country and as economic forum for the overwhelming rural communities; and (5) reducing social and economic gaps of regions. The Government allocate revolving for Home Financing Center (PPP) in APBN 2012 in amount of Rp2.7 trillion or 56.0 percent of total revolving fund. This PPP revolving fund will be used to finance home financing liquidity facility program (FLPP). With this FLPP policy Financial Note and Indonesian Budget

323 Chapter 6 Budget Deficit Financing and Fiscal Risk it is expected that the credit interest for home financing to low-income people (MBR) will be lower (one digit) and applicable during the term of credits. Thus, the interest rate and installment of home loans will be more affordable and the purchasing power of low-income people (MBR) will increase so that they can access decent houses at affordable price. FLPP program is the revision to KPR interest subsidy applied in the past. Under interest subsidy scheme, MBR only received low interest rate during the installment periods. With FLPP program at certain period the home financing aids allocated from APBN can be decreased and even stopped, while the shelter need of MBR can be fulfilled in better way. Because under this scheme, the fund revolved to the people and has been returned will be redistributed to other benecifiaries requiring the same aid. Some policies taken by the Government to expedite PPP revolving fund are: (1) to lower KPR (Home Loan) interest rate charged to MBR from originally 8.15 percent to 7.25 percent; (2) to increase the portion of Government s fund blended with the implementing banks with composition previously 60 percent : 40 percent to 70 percent : 30 percent; (3) to adjust the price of houses financed under FLPP program subject to construction cost index applicable for each region; (4) to extend the term of KPR installments from 15 years to 20 years; (5) to adjust the price of houses free from PPN tax subject to the limits of house prices applicable for each region; (6) to develop Affordable KPR scheme policy for the target groupts deprived from access to financing institutions and banks (nonbankable); (7) to intensify socialization of FLPP program policy to the communities or financing intitutions/implementing banks channeling FLPP. In APBN 2013 the Government will allocate revolving fund for geothermal to support exploration of geothermal power generation plant development in amount of Rp1.1 trillion or 23.3 percent of total revolving fund. The fund is to finance preliminary activities to exploration stage of geothermal power generation plant development under Public Private Partnership (PPP) schme. Indonesia keeps the largest geothermal reserve aroung the world, i.e. 40 percent. However, of 29,000 MW geothermal reserves in this country only 4 percent have been exploited to date. Geothermal power generation plant (PLTP) has a lot of advantages if compared with fossil fueled power generation plants including more environmentally friendly, and stable geothermal price during concession period and not sensitive to the fluctuation of oil price. During the Government has introduced a number of policies so as to support the acceleration of geothermal development with, for example, the issuance of some regulations. However, this effort of speeding up geothermal development is not yet fully particularly due to uncertain data as a result of no complete geothermal exploration activity. With this exploration it is expected the comprehensive, valid and adequate initial survey findings will be collected. The data are then used as basis in preparing bid documents of Mining Work Area (WKP) especially to set the selling price of electricity. Geothermal exploration will require time of more than one year. Given that, Government funding scheme that can accommodate multi year funding requirement is deemed necessary and however must be skillfully maintained in a manner that will not generate excessive financial burdens to APBN. Funding scheme that meets such requirements is that of revolving fund managed by a working unit (satker) of BLU. According to Decree of Finance Minister 6-34 Financial Note and Indonesian Budget 2013

324 Budget Deficit Financing and Fiscal Risk Chapter 6 Number 286/MK.011/2011, the Government Investment Center has been assigned as institution responsible for the management of geothermal revolving fund. The allocation of geothermal revolving fund aims to: (1) abate electricity subsidy fluctuation; (2) enhance the bargaining position of the Government in offering WKP geothermal to investors; and (3) encourage the interests of investors in geothermal development in Indonesia, especially outside Java National Education Development Fund In APBN 2013, budget allocated for National Education Development Fund is expected to reach Rp5.0 trillion. National Education Development Fund (DPPN) is part of 20 percent of education budget to accumulate endowment fund for the sustainability of education program for the next generation as an expression of inter-generation accountability, and education reserve fund to anticipate rehabilitation requirements for the damaged education facilities due to natural disaster and carried out by Public Service Agency (BLU) responsible for the management of fund in education sector. The management of education fund starting from the end of 2011 has been performed by Education Fund Management Agency (LPDP) constituting a working unit (satker) within the Ministry of Finance introducing BLU financial management pattern. LPDP according to Regulation of Finance Ministry Number 252/ PMK.01/2011 concerning the Organization and Procedure of LPDP has been granted with mandate to manage and channel National Education Development Fund. As the ultimate shareholders responsible for the formulation of policies as foundation for LPDP, LPDP is equipped with Board of Patrons consisting the Minister of Finance, the Minister of Education and Culture, and the Minister of Religions and as the longarm of shareholders Board of Supervisors will be established to ensure that LPDP runs the tasks and functions according to the established regulations. Board of Supervisors of LPDP consists of the Secretary General of the Ministry of Finance, the Secretary General of the Ministry of Education and Culture and independent elements. The National Education Development Fund to be granted to the communities either to finance education program or rehabilitation of damaged education facilities by natural disaster will be only the yield earned from DPPN management. It is in comformity with Regulation of Finance Minister Number 238/PMK.05/2010 concerning Procedure for the Provision, Disbursement, Management and Accountability of Endowment Fund and Education Reserve Fund. The proportion of DPPN proceeds to be used to finance education program and to rehabilitate the damaged education facilities shall be established by Board of Patrons. Meanwhile, DPPN obtained from APBN every year will become principal fund as endowment fund. Thus, the amount of DPPN proceeds will never reduce, and even constantly accumulate in line with additional fund allocation from APBN Guarantee Obligations In APBN 2013, budget for Government guarantee obligations is allocated to amount Rp706.0 billion for the implementation of several activities as presented in Table Financial Note and Indonesian Budget

325 Chapter 6 Budget Deficit Financing and Fiscal Risk Guarantee 1. PT. PLN (Persero) Coal Fuelled Power Generation Development Acceleration for 10,000 MW Project Stage I TABLE 6.17 GOVERNMENT GUARANTEE OBLIGATION, (billion rupiah) Activity Legal Basis APBNP 2012 APBN 2013 Perpres No.86 tahun 2006 (623.3) (611.2) 2. PDAM Water Supply Acceleration Project 3. PLTU Jawa Tengah Public - Private Partnership Based Projects for Infrastructure Guarantee Total Source: the Ministry of Finance Perpres No.29 tahun 2009 (10.0) (35.0) Perpres No.78 tahun (59.8) (633.3) (706.0) In 100,000 MW project stage I, the Government will give full guarantee for the payment of PT PLN (Persero) s liabilities to banking creditors extending loans/credits. At such Government s guarantee, if PT PLN (Persero) commits default, the Government as the guarantor will pay the liabilities of PT PLN (Persero) to creditors. Thereafter, the realized payments by the Government will be charged as Government loans to PT PLN (Persero). For water supply acceleration program, the Government will provide guarantee of 70 percent to the repayment of PDAM investment credits to banking creditors. However, this 70 percent guarantee will be shared between the Government and regional government, in which 40 percent will become PDAM s debts and the other 30 percent of total PDAM liabilities will be charged to the regional government in case of default by PDAM. This guarantee aims to encourage national banks in extending investment credits to PDAM. Budget for gurantee obligations for infrastructure projects under PPP scheme is allocated to enhance credit worthiness of the projects so that participation of private sectors in infrastructure development in Indonesia will increase. In infrastructure project with PPP scheme, i.e. PLTU in Central Java, the guarantee is provided with co-guarantee of the Government and PT Penjaminan Infrastruktur Indonesia (PT PII). The guarantee is made by sharing the claims (amount sharing) with first loss basis, in which PT PII shall first pay the claims up to Rp300,0 billion, and the rests will be charged to the Government. This kind of guarantee is provided in view of potential default by PT PLN (Persero) to Independent Power Producers. The realization of gurantee payment by the Government will be calculated as regress rights of the Government to PT PLN (Persero) Financing Reserve for the Takeover of PT Inalum The take over of PT Indonesia Asahan Aluminium (Inalum) in 2013 is planned to amount Rp5.0 trillion. On 7 July 1975 the Government of Indonesia and Japanese investors signed Master Agreement (MA) for Asahan Project with the establishment of PT Inalum and capital composition of Government of Indonesia USD378 million (41.1 percent) and Japan USD542 million (58.9 percent). Based on the said Master Plan, the cooperation would expire on 31 October The Government decides not to extend the cooperation with Japanese investor. The proceeds required by the Government for this takeover are around USD709 million for the purchase of assets USD549 million (tentative appraisal) and contingency USD500 million, 6-36 Financial Note and Indonesian Budget 2013

326 Budget Deficit Financing and Fiscal Risk Chapter 6 and operational costs of the company during transition USD110 million. Fund requirements for PT Inalum takeover are expected to reach USD709 million or Rp 7.0 trillion will come from APBNP 2012 Rp2.0 trillion, and APBN 2013 Rp5.0 trillion. From this takeover process, the Government will receive yields from capital participation in PT Inalum, which is expected to amount USD402 million and anticipated to receive in Loan Financing In APBN 2013, loan financing has been earmarked at Rp161.5 trillion. This loan financing plan has taken the following aspects into account: (1) general debt management strategy; (2) economic condition and financial market projection in 2013; (3) the latest issues on debt management; and (4) debt financing policy in Box 6.1 Government Guarantee for the Acceleration of Power Generation Development Program using Renewable Energy, Coals and Gas To meet electrical power demands and to diversify the energy with non-fuel power generation, the Government needs to speed up the development of power generators consuming renewable energy, coal and gas. This acceleration is carried out by assigning PT PLN (Persero) in two schemes: a) The development is performed by PT PLN (Persero) with funding coming from APBN, internal budget of PT PLN (Persero) and other fund sources. b) The development under partnership with Independent Power Producers with power sales purchase scheme. For the development under partnership with Independent Power Producers, the Government will give business feasibility guarantee of PT PLN (Persero). This business feasibily guarantee is to attract the interests of Independent Power Producers in non-fuel power generation development and to reach the target of efficient fuel mix, and to realize energy resilience. Under this program, the Government will encourage private investors to participate in reducing carbon emission as an attempt to abate greenhouse effect with the development of power generators consuming renewable energy, i.e. geothermal power generation plant (PLTP) and Hydro Power Plant (PLTA). Business feasibility guarantee will be granted subject to evaluation of project feasibility and risk so that fiscal risk of the granted guarantee can be minimized. The guarantee is for specific risks in Power Purchase Agreement (PPA) between PT PLN (Persero) and Independent Power Producers, and not a banket guarantee as found in previous policy. The term of guarantee will be based on evaluation to the project investment return to ensure that the term of guarantee will be shorter than PPA period General Debt Management Strategies As an attempt to manage the debts in prudent, accountable and transparent manner, the Government in this case the Ministry of Finance has prepared state debt management Financial Note and Indonesian Budget

327 Chapter 6 Budget Deficit Financing and Fiscal Risk strategies. These strategies are then adopted as reference for financing based on loans. By periods, the debt management strategies are divided into two parts, i.e. medium term debt management strategy (five years) and annual debt management strategy. The former is prepared as guidelines in preparing the former, macro policy harmonization so as to establish certainty to public, notably investors in loan based financing. In this case the Government will take professional and prudent actions. The medium debt management strategy as set out by the Minister of Finance in Decree of Finance Minister Number 514/KMK.08/2010 has period of time starting from 2010 through At present, this medium debt management strategy is entering its third year. In general debt management strategies in can be pointed out as follows: 1. Optimizing loan funding potential from domestic sources with the issuance of SBN Rupiah or withdraw of foreign loans; 2. Developing debt instrument to get flexibility in selecting the most cost efficient and minimum risk instrument; 3. Procuring foreign loans as long as used to meet priority needs with fair (favorable) terms and conditions for the Government without any political agenda of creditors; 4. Maintain foreign loan reduction in medium term; 5. Enhancing coordination with monetary authorities and capital market authorities especially to promote financial deepening; and 6. Improving coordination and communication with various parties to enhance efficiency in debt management and sovereign credit rating. As for specific strategies in state debt management, they include: 1. Increase liquidity and market absorption of domestic SBN; 2. Reduce loan fees by selectively choosing the lenders, enhancing quality of loan absorption, and debt portfolio management; and 3. Enhance the quality of business process, communication and coordination with debt management stakeholders Economic Condition and Financial Market Projection in 2013 Generally speaking, financial markets in 2012 receive enormous pressure from the worsening financial crisis in Europe and global economic slowdown. These two factors cause unfavorable conditions of global financial markets for investors due to exceeding investment risks. The investors prefer to put their capitals in safe haven instruments or assets. It considerably affects the domestic financial markets, which are greatly dependent on external factors, since the domestic factors exert relatively insignificant pressure thanks to stable national economic foundation. The prospect of global financial markets in 2013 is expected a little bit rosier that 2012 under assumptions that the leaders of European countries are capable of initiating a proper and 6-38 Financial Note and Indonesian Budget 2013

328 Budget Deficit Financing and Fiscal Risk Chapter 6 effective decision in dealing with the occuring debt crisis in Europe. While it is anticipated that this European debt crisis will not be fully settled in 2013, but some progressive measures to prevent the spread of financial crisis would be likely obvious in If this debt crisis continues in European zone in 2013 debt management activities in Indonesia must attentively observe the followings: 1. If the countries of Euro zone suffering the crisis fail to get bridging funds, uncertainty will follow with immediate impact of the soaring debt risk premium, including in Indonesia, as evident from the increasing credit default swap (CDS). This higher CDS will spark the increasing SBN yields, especially foreign currency SBN; 2. Despite stable economic foundation, negative sentiment of global financial markets may affect domestic financial market. One impact of negative sentiment to domestic financial markets is the reversal of foreign investors capitals, either in stock or bond markets; 3. Rupiah depreciation to foreign currencies will increase debt services of the Government in foreign currencies; and 4. The current low interest rate is potential to incite reversal that will raise the Government s debt services. The economic conditions of reference countries such as USA, China, Japan and some Europen countries in 2013 are expected to head toward bullish, while may be still much lower than pre-debt crisis conditions in Europe. Fiscal consolidation in some countries severely affected by debt crisis such as Greek, Spain, Italy, Portugese and Ireland are expected capable to recovering investors confidence to their fiscal profiles. The next expectation is that the bolstering global and domestic financial market conditions will promote investments in line with the lessening investments risks in capital markets. IMF predicts the real GDP growth around to world in 2012 will be at 3.5 percent range or to fall if compared with last year s performance recording 3.9 percent, and will increase to 3.9 percent in It is expected that this prediction encourage the recovery of global financial markets, albeit still vulnerable to some risks, which are potential to hamper such global financial market recovery such as the capacity of countries suffering crisis in complying significant refinancing requirements, European banking recapitulation process and the release of important economic data of USA, Europe, China and Japan as benchmarks of global economy The Latest Issues of Debt Management When preparing loan financing in APBN 2013 the Government has considered the latest issues around debt management including: Loan Financing Flexibility Thus far the financing of priority activities more uses foreign loan instruments. However, in the implementation, the absorption realization of such foreign loans is generally low. One condtributing factor concerns the relatively long time required to procure the financing that may go beyond the corresponding fiscal year. Delayed implementation of priority activities on one side can generate additional loan fees, and on the other side compromise the realization of development targets that have been designed in APBN. In light of that, it is deemed Financial Note and Indonesian Budget

329 Chapter 6 Budget Deficit Financing and Fiscal Risk necessary to take initiatives so that the financing of priority activities can be met within the specified targets to assure the soundly implemented APBN law. To enhance efficiency and effectiveness of financing from loan sources, the Government needs to introduce debt financing flexibility policy. With this policy, the Government can change the composition of loan financing instruments without altering the total loan financing. The changing loan financing instrument composition covers the changing SBN issuance that may increase or decrease the net amounts, the withdraws of domestic and/or foreign loans. The introduction of debt financing flexibility is a guarantee of activity financing (financing guarantee) since financing instrument can t be limited to certain financing instrument, instead various financing instruments (financing flexibility). Thus, the implementation of activities will not be disrupted by problems relating to the financing procurement process. Loan financing flexibility can be applied if there is more profitable loan financing instrument and/or the absence of one of debt financing instrument. This consideration is relevant amid unfavorable international financial market condition leading to the absence of foreign loan instruments or, if available, charged with high cost of borrowing. In addition, debt crisis crumbling some countries in Europe also spreads effects of the declining financing market capacity, especially in US dollar currency. This condition will have influence over foreign loan instrument supplies and incite higher cost of borrowing. Under this circumstance, the option to replace financing instruments coming from foreign loans into SBN will make sense. Loan based financing flexibility policy may turn into a solution for the problems relating to financing issues, especially for activity financing. However, for its implementation some actions should be taken to maintain such financing flexibility, inclusive of: 1. Need of confirmation on the activities to be performed in the corresponding fiscal year; 2. Effective requirements of contract should not be correlated with financing, but it must be specified that the activities have been approved by DPR in APBN Law; 3. With this financing guarantee, budget blocking (star marked) is no longer necessary; and 4. K/L implementing the activities must ensure that such activities can be carried out in early of the corresponding fiscal year. In the end, the introduction of debt financing flexibility policy should not be only intended to assure financing provision but also as a tool to manage debt portfolio The Roles of Standby Loans in Securing APBN Financing Amid vulnerable financial market conditions as the result of faltering USA s economy and debt crisis in European zone, the Government of Indonesia prepares some initiatives to maintain its economic growt and macroeconomic stability in comprehensive manner. Learning from the experience of financial crisis hitting Asia in , and global financial crisis in , the Government of Indonesia has worked out pro-active measures to 6-40 Financial Note and Indonesian Budget 2013

330 Budget Deficit Financing and Fiscal Risk Chapter 6 ensure APBN financing to deal with the increasingly volatility of global financial markets and to maintain solid macroeconomic foundation. One pro-active measure prepared by the Government is that of standby loan (contingency financing facility) supported by international development partners, in which the Government can use such facility if fails to meet financing requirements from financial markets, i.e. SBN (Government Bonds). This pro-active measure aims to anticipate external risks that may arise due to export downturn, soaring global oil price, and turbulence in financial markets with immediate impacts of financing shortage in the market and exceeding cost of borrowing. This contingency financing facility is akin to insurance, i.e. to back-up the financing to the Government, especially during 2012 and This facility will be only withdrawn in the event of extreme conditions in financial markets, from which the Government will get difficulties in looking for financing sources and can be used after the other pro-active measures have been exercised, such as the activation of Bond Stabilization Framework (BSF) and the use of other financing sources like SAL (budget surplus). This standby loan is expected capable of transmitting positive strong positive signs to the actors of financial markets that the Government is ready to anticipate crisis of financing difficulties and to assure that fiscal anticipation measures will be put in place. In 2009 and 2010 the Government of Indonesis used to receive similar facilities from development partners, which proved very helpful in encouraging the confidence of markets to Indonesia s economy. During the procurement process of such contingency financing facilities, the Government has conducted intensive discussion with development partners of multilateral institutions (World Bank and ADB) and bilateral countries (Australia and Japan) asking their supports in economic cooperation. Thanks to solid n a t i o n a l m a c r o e c o n o m i c foundations, these development partners are available to make TABLE 6.18 STANDBY LOAN PLAN Commitment Contribution No Creditor (%) Program (billion USD) (billion Rp) 1 World Bank , Program for Economic Resilience, Investment and Social Assistance in Indonesia (PERISAI) 2 Asian Development Bank 0.5 4, Precautionary Financing Facility 3 The Government of Australia 1.0 9, Contingency Facility 4 The Government of Japan (JBIC) , Contingent Loan Facility Total Note: exchange rate assumption Rp.9,300/USD Source: the Ministry of Finance , multiateral and bilateral cooperations with Indonesia. They will provide financing in parallel manner in the form of contingency facility. Illustration of commitments indicated by individual development partners is presented in Table Maintaining and Improving Investment Grade Status Sovereign credit rating reflects investment risks in a country as a reference for investors before making investment in the said country. The higher credit rating of a country, the higher confidence of investors to make investments. The increasing credit rating will give positive impacts to economic growth, since the confidence of investors will bouy up and capital inflow will intensify either in the form of direct investments or investment portfolio in financial markets. This condition will decrease debt costs either for Government debts and private debts, and improve balance of payment. Financial Note and Indonesian Budget

331 Chapter 6 Budget Deficit Financing and Fiscal Risk On 15 December 2011 the rating agency Fitch promoted the credit rating of Indonesia from previously BB+ to BBBand followed by Moody s on 18 January 2012 to Baa3 rating with outlook stable from Ba1. It means the Indonesian obligations are classified in Investment Grade. Increase of Indonesian credit rating had been actually initiated by Japan Credit Rating (JCRA) B B B B B B B B B- C C C C R/ SD /D GRAPH 6.15 INDONESIA'S RATING TREND, Investment Grade Non Investment Grade S&P's Fitch's Moody's (RHS) on 10 July Better credit rating can arouse positive perception of investors and people in general that the economic foundations of Indonesia are relatively strong to cope with global financial crisis. The trend of such credit rating is presented in Graph Some variables normally adopted by the rating agencies in their assessment are: (1) institutional effectiveness and political risks, which are evident from the effectiveness of institutions in taking policy measures; (2) economic structure and economic growth prospect reviewed from resilience capacity in dealing with political/external shocks, economic reform and GDP quality; (3) fiscal performance and flexibility including Government debts, which are obvious from long-term fiscal trend, debt structure, funding access, and contingent liabilities; (4) external liquidity and international investment position, which are expected capable of providing illustration of esternal liquidity and external indebtedness; and (5) monetary flexibility assessed from the impacts of monetary impacts to economic growth. From assessment made by some rating agencies with reference to the foregoing variables, a relatively good score is obtained and the Indonesia s credit rating is to upgrade. There are some reasons why such rating agencies increase the rating of Indonesia. First, economic performance improvement supported with strong external liquidity, low public debt ratio with downward trend and prudent macro policies. Second, it relates to the capacity of Indonesia in covering structural weaknesses and in maintaining sustainable economic growth without causing external imbalance or exceeding inflation pressure. However, this rating upgrade alone is not sufficient. The Indonesian position is not yet maximum (i.e. at BBB- level implying lower investment grade). Even, Standard & Poor rating agency has yet to include Indonesia at investment grade level. Given that, there are still many efforts with sound coordination with other related institutions that must be taken in order to push up the country rating of Indonesia to higher position. These rating agencies give two notes with regard to rating upgrade bid. First, it concerns with weak structure such as the relatively low income per capital and fiscal revenue if compared with peer countries, shallow domestic financial markets, and infrastructure problems, and corruption eradication that must be further maximized. Second, it relates to monetary policies in controlling inflation, policies in anticipating external shock that may affect the fiscal position of the Government, public debts, and foreign exchange reserves. Efforts with regard to the above assessment variables subject to notes of rating agencies are presented in Table With regard to debt management, there are some follow-up actions tha must be carried out to upgrade the above assessment variables, to wit: 6-42 Financial Note and Indonesian Budget Baa1 13 Baa2 12 Baa Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca C

332 Budget Deficit Financing and Fiscal Risk Chapter 6 Main Factors in Sovereign Rating Institutional effectiveness and political risks Economic structure and economic growth prospect TABLE 6.19 EFFORTS TO PROMOTE CREDIT RATING Mid-Term Follow-Up Actions Improving the institutional function and quality in governance succession by way of quality general election in 2014 Consisten corruption eradication Transparent and consistent Government policies Sustainable GDP increase mainly with domestic consumption and investments Giving more priority to real sectors supported with infrastructure development Fiscal performance and flexibility including Government Loans External liquidity and international investment position Monetary flexibility Source: the Ministry of Finance a. Maintaining prudent Government debt management: Measures to take are: (1) to maintain the quality of portfolio and risk management according to international sound practices; (2) to control Government debts, especially in foreign currency denomination by maintaining net negative flow policy on foreign loans and issuing foreign currency SBN as complement in controllable manner; and (3) to enhance transparency and accountability of debt management by maximizing the preparation of consolidated public debt report. b. Strengthening the liquidity and depth of SBN markets with: (1) sustainable actions to expand and reinforce domestic investor basis and develop SBN instruments; (2) intensifying communication with market actors; (3) providing supportive market infrastructure and suprastructure; and (4) intensifying coordination between fiscal managers and monetary managers. c. Optimizing the quality of contingent liability management with assessment mechanism to project proposal so as to prevent default, preparing comprehensive contingent management policy, intensifying internal coordination within the Government, and enhancing the quality of data management Loan Financing Policy in 2013 From government side, increasing capital expenditure portion Enhancing the quality of investment climate Improving fiscal sustainability with deficit control Government loan management in prudent manner with portfolio and risk management according to international sound practice, and controlling the government loan in foreign currency denomination Contingent liability management including policy establishment and institutional capacity building Improving the competitiveness in international markets supported with quality diversifying export commodities, international trade and quality HR Reaching safe foreign exchange position Synchronizing fiscal and monetary policies to support economic growth Inflation control In 2013, the Government still relies on financing sources of loans, due to limited non-loan financing sources. Budget financing from loans in APBN 2013 is anticipated to amount Rp161.5 trillion with breakdowns as presented in Table In view of huge financing requirements from loans in 2013, the Government attempts to meet such requirements with prudent principles and considering various factors including debt costs and risks, the trend of financial market conditions, absorption capacity of SBN markets, country ceiling/single country limit of individual lenders, and cash requirements. Loan based financing policies in 2013 are as follows: (1) using foreign loans in meticulous Financial Note and Indonesian Budget

333 Chapter 6 Budget Deficit Financing and Fiscal Risk manner especially for project financing and their procurement process without involving any political agenda with acceptable requirements; (2) maintaining net negative flow policy for foreign loans; (3) attempting to reach debt ratio to GDP at range by end of 2013; (4) developing SBSN instrument or state sukuk for infrastructure financing; (5) attempting the APBNP 2012 APBN 2013 A. Government Bond (SBN) (Net) 159, ,439.9 B. Foreign Loans (Net) (4,425.7) (19,454.2) 1. Foreign Loan Drawing (Gross) 53, ,919.1 a. Program Loan) 15, ,510.0 b. Project Loan 38, , SLA (8,431.8) (6,968.3) 3. Amortization (49,724.9) (58,405.0) C. Domestic Loans (Net) Domestic Loan Drawing (Gross) 1, Amortization (141.3) (250.0) Source: the Ministry of Finance TABLE 6.20 LOAN FINANCING, (billion rupiah) Description 156, ,485.7 flexibility of loan financing with relatively low-cost and controllable risk debt instruments; (6) converting State Securities in BI, from non-tradable SBN to tradable SBN; and (7) if K/ L wish to use financing source of tied loan character it must be consultated first to the related Total Box 6.2 The Conversion of Non-Tradable State Securities to Tradable SBN (Government Bonds) The conversion of (non tradable) State Securities into tradable SBN aims to improve the performance of balance sheet management the Republic of Indonesia under assets-liabilities management (ALM) framework. This performance improvement is pursued by reducing assetsliabilities mismatch in BI balance sheet and at the same time BI can optimize the use of SBN as BI s monetary operation instrument in line with the increasingly ownership of tradable SBN. Assetsliabilities mismatch happens because interest rate received by BI for State Securities (assets) is lower, on the other side the monetary liability refers to interest rate applicable in the market, which is higher. The use of SBN in monetary operation has been set out in monetary operation effectiveness improvement framework starting from March This improvement is carried out by, among other things, extending the maturity date profile of SBI from weekly to monthly and prioritizing SBI emission with longer tenor. At present BI has been actively using SBN in monetary operation consisting of: (1) SBN outright sell/buy; and (2) repo/reverse repo SBN. However, the ownership of SBN by BI is limited compared to the values of monetary operation taken. To achieve optimum and effective use of SBN as monetary operation instrument by BI, the latter must possess tradable SBN in significant number. The use of SBN in monetary operation will increase the depth of domestic SBN markets since the transactions will not only take place during underlying position but also their derivative such as repo/reverse repo. Discussion on the plan of converting State Securities into tradable SBN between the Ministry of Finance and BI has been made at technical level with reference to guiding principles and highlights of terms and conditions. The highlights and mechanism of conversion have been established into draft Joint Agreement between the Minister of Finance and BI Governor. Today, the said draft is under finalization process before submitted for approval to DPR (House of Representatives) Financial Note and Indonesian Budget 2013

334 Budget Deficit Financing and Fiscal Risk Chapter 6 commission in DPR (House of Representatives). Elucidation of State Security Conversion in BI is presented in Box Government Bond (SBN) (Net) In attempt to meet the target of SBN (net) emission Rp180.4 trillion in 2013, the Government will issue domestic and foreign currency SBN. The preference of instrument and tenor shall be made in view of some factors such as the short-term and medium-term debt management strategies, SBN issuance costs, risks of domestic and global financial markets, investors preference and investors absorption capacity. The issuance of domestic SBN will be prioritized for SBN with medium and long tenors, but it is not impossible to issue SBN with short tenor to make debt costs more efficient. The issuance of SBN in domestic markets will be made using SUN instruments consisting of SPN, ON regular and retail bonds. The issuance of SPN, especially 3-month SPN will be carried out in measurable manner to minimize debt refinacing risk in short term. The issuance of SPN such tenor is still necessary as benchmarking in setting the interest rate of variable rate series bonds since this 3-month SBI, which was previously adopted as reference in setting interest rate is not longer issued by BI. The issuance of SBSN in domestic markets will be Box 6.3 State Sukuk Instrument Development for Activity/Project Financing As part of financing program, in APBN 2013 it is planned to finance projects/activities with SBSN issuance. According to Law Number 19 of 2008 concerning State Syariah Securities and Government Regulation Number 56 of 2011 concerning Project Financing with State Syariah Security Issuance, projects/activities qualified for financing under SBSN must comply with the following criteria: a. being priority activities as set out in RPJM; b. Receive funding allocation in APBN; and c. Proposed by K/L and receive approval of Bappenas. The scope of projects/activities qualified for financing under SBSN emission are projects of (a) infrastructure development, (b) public service provision, (c) domestic industry empowerment, and/or (d) other development consistent with the Government s strategic policies. From SBSN emission for project financing, the Government is not only expected to support infrastructure development acceleration, but also to gain some benefits such as support to financial market development (notably syariah financial markets), better public service delivery, domestic industry empowerment and transparency of activity implementation by K/L since the progress of project execution will be monitored by investors and public. made with the intruments of, among other things, project based sukuk/sukuk project financing, SPN syariah, SDHI and retail sukuk. The trend of state sukuk instruments to finance activities/projects is presented in Box 6.3. Specifically, sukuk project financing will be attempted to be realized in Some efforts taken to ensure its realization are to set indications in detecting the capacity of providing Financial Note and Indonesian Budget

335 Chapter 6 Budget Deficit Financing and Fiscal Risk Box 6.4 Maximum Limit of SBSN Emission for Project Financing To improve loan financing capacity and efficiency in debt management, some diversification initiatives with instrument development and expansion of SBN investor base are necessary. They include the emission of SBN for certain projects. Pursuant to Law Number 19 of 2008 concerning State Syariah Securities and Government Regulation Number 56 of 2011 concerning Project Financing with the Emission of State Syariah Securities, the Government carries out project financing by issuing SBSN. In line with this spreading loan financing instrument, the Government is demanded to use the instrument in more effective and efficient manner that will support debt diversification attempts and in turn can produce more optimum debt portfolio. In light of foregoing the Government will try to accelerate the implementation of SBSN emission for project financing. One effort that has been taken is to set the indications of project financing provision capacity with SBSN emission as set out in Maximum Limit of SBSN Emission for Project Financing (BMP SBSN Proyek). For fiscal year 2013, the Government sets this BMP SBSN Proyek at Rp1.0 trillion. The setting of such amount has taken the real financing demands, repayment capacity, maximum limit of cumulative debts, and debt risks under consideration. In SBSN financing portfolio perspective in 2013, there is still more space for this instrument, however projects complying with syariah requirements for financing under SBSN in 2013 are limited. Given that the maximum limit (BMP) is set at Rp1.0 trillion. Thereafter the said BMP SBSN Proyek will be taken into account when conducting the feasibility assessment of a project to be financed. The maximum limit for SBSN emission will continue for 1 fiscal year period. This duration is decided in view of SBN market dynamics, flexibility requirements of SBN issuance, and flexibility in assessing and deciding projects to be financed in the next coming fiscal year. Compliance and suitability to syariah principles are criteria that must be met by project for financing under SBSN. In addition, the projects must meet readiness criteria as specified in the applicable regulation while maintaining the quality of their preparation. The success of SBSN emission with project financing scheme requires intensive coordination in financing provision and discipline in timely implemented projects. The projects may run for one or more fiscal years. If the completion of a project financed under SBSN exceeds the corresponding fiscal year, the said project must become a priority in the coming fiscal year. In setting the maximum limit of SBSN emission in the next fiscal year, multiyear projects must be considered. project financing with SBSN issuance in These indications of project financing provision capacity are contained in the document concerning Maximum Limit of SBSN Emission for project financing. Elucidation of this maximum limit of SBSN emission for project financing is presented in Box 6.4. To enhance the efficiency of debt costs and to support market development, the Government will take any effort to maintain the liquidity of domestic SBN market with the provision of varying instruments in terms of tenors and types, to establish active communication with market actors, to actively manage the portfolio, and to encourage the awereness of public about bond instrument as an alternative investment. In addition, the Government will also coordinate with BI of the use of SBN as monetary instrument and tool to stabilize SBN market in case of upheaval Financial Note and Indonesian Budget 2013

336 Budget Deficit Financing and Fiscal Risk Chapter 6 The circulation of foreign currency SBN in international market will be made in measurable number and as complement only to the SBN that have been issued in domestic markets. The emission of foreign currency SBN is necessary on the ground of potential crowding out effect in domestic financial markets if all SBN are circulated in domestic markets. Foreign currency SBN issuance will be made as benchmarking for foreign currency bond instruments issued by private sectors. Moreover, this foreign currency SBN issuance can be also used to comply with the Government s foreign currency liabilities and to reinforce national foreign exchange reserves. Market conditions, emission fees and exchange rate risks will be taken under consideration when deciding the tenor and currency of such foreign currency SBN emission Foreign Loans (Net) Loan management strategy will be directed to use the loans either from domestic or foreign sources in effective and efficient fashion. This approach is expected capable of lessening cost burdens that must be borne by the Government. For 2013, foreign loans (net) are anticipated to record negative Rp19.5 trillion consisting of loan withdraw (gross) Rp45.9 trillion and the payment of foreign loan principal installment, Box 6.5 Maximum Limit of Foreign Loans Today, needs of activity financing under foreign loans show upward trend, however the capacity of foreign lenders is getting limited. In addition, foreign loan fees are to steadily increase as a result of unfavorable international financial market conditions. Risks of using foreign loan instrument are also aggravating. To anticipate the swelling foreign loan financing in order to maintain fiscal sustainability, the Government has formulated foreign loan control concept. This concept is prepared in the form of Maximum Limit of Foreign Loans covering the needs of APBN financing from foreign loans including for SLA financing based on loan withdraw projection in 3 (three) to 5 (five) years period. This maximum limit of foreign loans will be reviewed every year according to the trend of annual needs. At present, the Maximum Limit of Foreign Loans has been prepared for period of 2013 through The preparation of such maximum limit of foreign loans has taken some variables under consideration, i.e. repayment capacity, maximum limit of cumulative debts, debt risk and real financing demand. In addition, this Maximum Limit of Foreign Loans also applies net negative flow policy implying that the withdraw of foreign loans every year will be attempted lower than the repayment while observing the real financing demands, anticipating rupiah strengthening/ appreciation to foreign currencies and maintaining net negative flow policy. Maximum limit of foreign loan withdraw will be the highest threshold of withdraw that can be allocated in APBN. Thus, its allocation will refer to the real demand subject to the loan absorption capacity of activity implementer. With such limitation to foreign loan withdraw, the commitment for new foreign loan procurement can be controlled. This maximum limit of loan withdraw will be prioritized for the on-going foreign loans. However, it is not impossible to apply new foreign loan to finance the activities. The use of new foreign loan must be more selective and focused on priority activities, especially infrastructure development. Financial Note and Indonesian Budget

337 Chapter 6 Budget Deficit Financing and Fiscal Risk which is negative Rp58.4 trillion. The said loan withdraw (gross) consists of program loan Rp6.5 trillion and project loan Rp Rp39.4 trillion. The withdraw of project loan is further divided into the financing of K/L activities Rp29.2 trillion, grant SLA to regional governments (Pemda) Rp3.2 trillion, and borrowing SLA to SOEs and Pemda Rp7.0 trillion. The said loan withdraw has basically undertaken financing planning process. One stage of financing planning is the setting of indications of foreign loan withdraw every year set out in document of Maximum Limit of Foreign Loans. For 2013, the foreign loan withdraw is set lower than the established Maximum Limit of Foreign Loans. Nevertheless, such withdraw plan in 2013 remains in conformity with the Government policy of controlling foreign loan based financing. Program loan as the cash source of loan based financing is expected from World Bank and ADB. Even though, the loan extension capacity of these institutions is impaired by single country limit/country lending limit. Apart from program loan withdraw, the Government also still relies foreign loan financing for priority activities (project loan). The financing of project loan is obtained from multilateral agencies like World Bank and ADB, bilateral institutions with Japan, and Korea, and export credit and commercial agencies. In 2013, export credit and commercial loans will be mainly used to finance the procurement of main weaponry system (Alutsista) of Indonesia s Armed Forces (TNI) and special weaponry system (Almatsus) of National Police (Polri) to develop minimum essential force. In its procurement process, project loan requires longer time than program loan. The procurement of export credit and commercial loans is carried out in one package with goods/ services procurement by K/L. Meanwhile, commercial loan will be procured separately from goods/service procurement. Commercial loan is procured by the Ministry of Finance through selection process so as to get more competitive costs and risks. As to foreign loan withdraw for SLA to SOEs and Pemda (Regional Government), in APBN 2013 it is planned to amount Rp7.0 trillion. Around 98 percent of such SLA allocation will be used to finance various projects to be executed by SOEs. For the remaining 2 percent, it is allocated for project to be performed by Pemda. To optimize SLA management in 2013, SLA extension will be made in selective manner based on the purposes, which are prioritized for infrastructure development, especially for energy, intrastructure financing facility, flood control and water supply. For cost efficiency of SLA withdraw and extension, the following measures will be taken: (i) accelerating discussion and approval process of SLA allocation; (ii) expediting DIPA issuance; and (iii) setting more accurate loan withdraw schedule. Like in 2012, PT PLN (Persero) is the largest user of SLA proceeds in 2013 reaching Rp5.5 trillion or 79.3 percent. SLA allocation to PT PLN (Persero) will be used to finance vital projects in electricity infrastructure such as Java Bali Power Sector Restructuring And Strengthening Project, Renewable Energy Development Sector Project, Power Transmission Improvement Sector Project, Ulubelu Geothermal Power Plant Project etc. Apart from PT PLN (Persero), some SOEs are planned to receive SLA allocation. They include PT SMI and PT Pertamina. For the regional governments (Pemda) expected to receive SLA in 2013 they are Pemkot Bogor, Pemkab Kapuas, Pemkab Muara Enim, and Pemprov DKI Jakarta. SLA 6-48 Financial Note and Indonesian Budget 2013

338 Budget Deficit Financing and Fiscal Risk Chapter 6 Beneficiaries APBNP APBN PT Perusahaan Listrik Negara 6, , PT Perusahaan Gas Negara PT Sarana Multi Infrastruktur 1, PT Pelabuhan Indonesia II PT Penjaminan Infrastruktur Indonesia PT Pertamina Pemkot. Bogor Pemkot. Sawahlunto Pemkot. Banda Aceh Pemkot. Palopo Pemkab. Muara Enim Pemkab. Kapuas Pemkab. Morowali Pemprov. DKI Jakarta Total 8, ,968.3 Source: the Ministry of Finance allocation to these regional governments will be expended to finance projects of, among other things, Urban Water Supply And Sanitation Project (UWSSP) and Jakarta Urban Flood Mitigation Project (JUFMP)/Jakarta Emergency Dredging Initiative (JEDI). Breakdowns of SLA by users in APBN 2013 is presented in Table To augment the realization of loan withdraws; the following actions will be necessary: a. Enhance the effectiveness in introducing readiness criteria through review and evaluation of their application. b. Increase the ownership of K/L/Pemda/SOE as the implementing agencies with, among other things, consistent activity planning and implementation, proportional and timely fund allocation, and compliance of readiness criteria. c. Improve the understanding of all stakeholders on activity implementation mechanism and transaction structure so as to accelerate the implementation. d. Cancel slow disbursement activities, because of their poor absorption performance in view of legal aspects, state loss and financial aspects. The payment of installment for the principal of foreign loans in APBN 2013 is planned to record negative Rp58.4 trillion. This sum is calculated based on payment projection according to foreign loan payment schedule in 2013 and installment payment projection for new loan withdraw and the trend of rupian exchange rate to foreign currencies, notably US dollar, which is expected to range at Rp9.300 per USD. The payment of foreign loan installment is made to Japan, ADB, World Bank and Germany Domestic Loans (Net) TABLE 6.21 SUBSIDIARY LOAN AGREEMENT, (billion rupiah) In addition to foreign loans, the Government also plans to use domestic loans to meet its financing requirements from fund source of SOEs, regional governments (Pemda), and local Financial Note and Indonesian Budget

339 Chapter 6 Budget Deficit Financing and Fiscal Risk Box 6.6 Potential Financing with Domestic Loans Domestic loan was just introduced as new debt instrument for APBN financing in A new instrument, the target of withdraw of domestic loans is set at maximun Rp1.0 trillion every year from 2010 to In this early stage, the domestic loan proceeds will be used for the procurement of main weaponry system (Alutsista) of Indonesia s armed forces (TNI) and special weaponry system (Alumatsus) of the National Police (Polri) produced by domestic industries (BUMNIS). The sum and use of these proceeds are decided in consideration of the estimated activities needed by the Ministry of Defense/Polri qualified for financing, the estimated BUMNIS capacity in producing the required goods, and potential funding capacity of banks. In terms of debt portfolio, this target is relatively safe since it bears no exchange rate risk, and only requires costs that will not generate financial burden to APBN or spark idle cash since it has been earmarked to the specified activities. In the implementation, the realization of domestic loan absorption from 2010 to Semester I 2012 was not yet optimum. As a new instrument, the performance of domestic loan financing needs times to develop intensive coordination of the related parties involved in planning to implementation process of good and financing procurement. This dull performance is also hampered by the limited technology and production capacity of BUMNIS is providing the required goods. Nonetheless, the quality of domestic loan absorption during the said period shows upward trend in line with the optimum coordination and familiarity of stakeholders in domestic loan financing. Based on the current conditions, the potential target of financing with domestic loans can be increased to more than Rp1.0 trillion per year. Conditions that have been considered in setting the sum of domestic loan based financing are relatively better than in the past. In terms of demands, types and values of activities eligible for financing are getting varying, especially of the financing of infrastructure development. From the capacity of creditor aspect, the nominal values of domestic loans that can be provided to finance the activities are increasingly proportional to the improving banking liquidity and bolstering economic conditions of Indonesia and funding potential from non-banking SOEs. From debt portfolio management wise, financing with domestic loans can be broadened, for example, as substiture of foreign loans subject to conditions, though, that the capacity of K/L in absorbing the loans according to the established target is improving to assure efficient APBN. Meanwhile, from debt policy side, the increasingly loan financing earmarked to the activities has been in consistency with the debt management policy so that the roles of loans in economic growth become more measurable. If this expanding potential of domestic loan financing can be capitalized on and the implementation of activities and loan absorption are consistent wit the targets, it can lessen dependency on foreign loans, especially tied loans. In addition, efforts to promote the roles of domestic industries in national development can be further intensified that will generate greater multiplier effect for economic growth. enterprises. Policy on domestic loans will be directed to promote domestic production. In APBN 2013, domestic loans (net) are planned to amount Rp500.0 billion consisting of domestic loan withdraw (gross) Rp750.0 billion and the payment of installment for the principal of domestic loans, which is negative Rp250.0 billion. The withdraw of domestic loans is prioritized to finance activities within the Ministry of Defense and Polri Financial Note and Indonesian Budget 2013

340 Budget Deficit Financing and Fiscal Risk Chapter Fiscal Risk Fiscal risk is defined as any matter in future that can exert fiscal pressure to APBN. However, this definition is changing. It is now understood as potential APBN deficit increase due to factor beyond the control of the Government. This changing definition is because APBN no longer consists of additional deficit relating to Government revenue and expenditure, but also pressure from financing side. Realizing that fiscal risk may cause additional burden to APBN and compromise the realization of fiscal policy objectives, the Government decides to manage such fiscal risk and point out in Financial Note proposed along with APBN to the House of Representatives (DPR) every year. The disclosure of fiscal risk is important to pursue four strategic objectives, i.e.: (1) arousing awareness of all stakeholders in fiscal policy management; (2) encouraging fiscal transparency; (3) promoting fiscal accountability; and (4) fostering fiscal sustainability. The disclose of fiscal risks in Financial Note has been initiated since 2008 and maintained in the subsequent years. In 2013, fiscal risk is classified in four categories, i.e.: (1) macroeconomic risk; (2) Central Government debt risk; (3) Central Government contingency liabilities; and (4) mandatory spending risk Macroeconomic Risks Economic dynamics either domestic or external will generate impacts to APBN through macroeconomic indicators used as main assumptions in preparing APBN. Macroeconomic indicators used as basis for APBN preparation are economic growth, inflation rate, interest rate of 3-month SPN (State Treasury Bill), rupiah exchange rate to US dollar, Indonesian Crude Oil Price (ICP), oil lifting and gas lifting. The latter is just used as a macroeconomic indicator in Financial Note and APBN These indicators are basic assumptions as references in calculating the magnitudes of revenues, expenditures, and financing in APBN. If the realization of such variables is different from the assumptions, the magnitudes of revenues, expenditures and financing in APBN will also change accordingly. The effect of macroeconomic dynamics to APBN can be illustrated in a sensitivity analysis. Under this analysis the changing macroeconomy will directly affect to APBN, i.e. at revenue, expenditure and financing posts and finally to the deficit of APBN APBN 2013 Deficit Sensitivity to Macroeconomic Assumption Changes Should the realization of macroeconomic assumption variables be different from their assumptions, the magnitudes of revenues, expenditures and financing in APBN will change accordingly. In light of that, variation of uncertainties of macroeconomic indicators is a fisk factor that can alter APBN. Table 6.22 shows the difference of initial estimates of macroeconomic assumptions used in APBN preparation and their realization for , causing disparities of target deficit and the realization. If the realized deficit outnumbers the target deficit established in APBN, financing sources to cover this fiscal risk must be sought after. Financial Note and Indonesian Budget

341 Chapter 6 Budget Deficit Financing and Fiscal Risk TABLE 6.22 MACROECONOMIC ASSUMPTION AND REALIZATION TREND, * Description ** Economic Growth (5) Inflation (%) Month SBI Rate (%) *** Exchange Rate (Rp//USD) ICP (USD/barrel) Lifting (million barrel per day) * Positive implies higher realization than assumption in APBNP. For exchange rate, the positive figure indicates depreciation. ** The difference of APBNP and APBN *** Since APBNP 2011 the interest rate of 3-month Treasury Bill (SPN) has been adopted Source: the Ministry of Finance Fiscal risk as a result of macroeconomic assumption variation can be illustrated in partial sensitivity analysis to baseline deficit in APBN. Partial sensitivity analysis is to see the impacts of changes to a variable of macroeconomic assumptions with the other variables of macroeconomic assumptions unchanged (ceteris paribus). Economic growth will affect the magnitudes of APBN, either in revenue side or expenditure side. In terms of revenue, economic growth will determine the tax revenue, especially PPh and PPN (Income Tax and VAT respectively). From expenditure aspect, the economic growth will determine the amounts of fiscal balance for transfer to regions as a result of changing tax revenue. In 2013, if the realization of economic growth is one percent lower than the assumed figure, additional deficit to APBN 2013 is expected at Rp3.69 trillion to Rp5.75 trillion. Rupiah depreciation to US dollar will have impacts to overall sides of APBN, either revenue, expenditure or financing. In revenue side, rupiah depreciation will affact the sum of incomes earned from oil and gas, income tax (PPh) and VAT of oil and gas. In expenditure wise, the depreciated rupiah will have great influence over: (1) spendings in foreign currencies; (2) the payment of foreign loan interests; (3) fuel and electricity subsidy; and (4) transfer to region consisting of oil and gas profit sharing; In financing aspect, the weakening rupiah will generate impacts to: (1) foreign loans both program and project loans; (2) payment of principal installment of foreign loans; and (3) privatization and sales of assets under banking restructuring program made in foreign currencies. In 2013, if the rupiah exchange rate is depreciated Rp100.0 per year on the average to its assumptions, the additional decifit to APBN 2013 is expected to record Rp1.05 trillion to Rp1.32 trillion. The interest rate used in setting the assumptions underlying APBN preparation is that of 3- month SPN (State Treasury Bill) rate. The changing 3-month SPN rate will only have effect to expenditure side. In this case, higher 3-month SPN rate will raise payment of domestic loan interest. In 2013, if this 3-month SPN rate increases by 0.25 percent of its assumption, it will generate addition deficit to APBN 2013 approx. Rp0.26 trillion to Rp0.32 trillion. Indonesian Crude Oil Price (ICP) is influential to revenue and expenditure sides. In revenue wise, the increasing ICP will raise revenue from production sharing contracts (KPS) in oil and gas by the nature of non-tax revenue (PNBP). Higher oil price in global markets will 6-52 Financial Note and Indonesian Budget 2013

342 Budget Deficit Financing and Fiscal Risk Chapter 6 also hike the revenue collected from oil and gas PPh tax (Income Tax) and other oil and gas revenue. On expenditure side, higher ICP will raise fuel subsidy spending and reveneu sharing to regions. In 2013, if the average ICP is USD1 per barrel higher than the assumption, the decifit in APBN 2013 is anticipated to increase Rp0.33 trillion to Rp0.68 trillion. Decrease in domestic oil lifting will also affect APBN in both revenue and expenditure sides. In the former, lower domestic oil will drop oil and gas PPh and PNBP. In expenditure side, the fall of domestic oil lifting will decrease revenue sharing to regions. In 2013, if the realization of domestic oil lifting is 10,000 barrel per day less than the assumption it will cause additional deficit to APBN 2013 by Rp1.82 trillion to Rp1.91 trillion. Domestic oil lifting decrease will have influence over APBN in revenue and expenditure sides. From revenue wise, the declining domestic gas lifting will decrease oil PPh (Income Tax) and PNBP (non-tax revenue from oil and gas sector). In terms of expenditure, the lower domestic gas lifting will cut revenue sharing to regions. In 2013, if the realization of domestic gas lifting is 10 thousand barrel of oil equivalent per day lower than the assumption, additional deficit to APBN 2013 is expected to hit Rp0.82 trillion to Rp0.98 trillion. Based on the foregoing sensitivity analysis, the magnitudes of fiscal risk of additional deficit, which are potential to arise from variations of macroeconomic variable assumptions adopted for APBN 2013 preparation is presented in Table No. Macro Economic Assumptio n Potential Deficit Increase (trillion rupiah) 1 Economic Growth (%) ,69 s. d. 5,75 2 Inflation Rate (%) Tidak langsung 3 Average Exchange Rate (Rupiah/USD) 100 9,300 1,05 s.d. 1, month SBN Rate (%) ,26 s.d. 0,32 5 ICP (USD/barrel) ,33 s.d. 0,68 6 Lifting oil (thousand barrel per day) ,82 s.d. 1,91 7 Lifting gas (thousand barrel oil equivalent/day -10 1,360 0,82 s.d. 0,98 Source: the Ministry of Finance TABLE 6.23 DEFICIT SENSITIVITY OF APBN 2013 TO THE CHANGING MACROECONOMIC ASSUMPTIONS Description Assumption Change Unit Fiscal Risk Sensitivity to SOEs against the Changes of Macroeconomic Variables Fiscal risk from SOEs is reflected in three indicators: (1) the position of fiscal transaction to SOEs; (2) SOEs net debts; and (3) SOEs gross financing requirements. These three indicators are set based on cash transactions made between the Government and all SOEs. The position of fiscal transactions with SOEs is the difference of state revenue from all SOEs (e.g. tax revenue, dividend and privatization) and state expenditure to SOEs (e.g. PSO compensation/subsidy, state capital participation and loans to SOEs). The trend of fiscal transaction position with SOEs during is presented in Graph 6.16 and Graph Financial Note and Indonesian Budget

343 Chapter 6 Budget Deficit Financing and Fiscal Risk GRAPH 6.16 THE TREND OF GOVERNMENT REVENUE FROM SOE, (trillion rupiah) GRAPH 6.17 THE TREND OF GOVERNMENT EXPENDITURE TO SOE, (trillion rupiah) , ,1 201,3 202, ,7 108,6 101,8 130,9 75,8 102,4 103,3 134,0 137,8 109,2 97,6 128, ,6 142, ,8 29,1 26,1 29,5 28,2 30, APBNP ,7 1,5 1,5 6,0 8,2 6,0 7,5 8, APBNP 2012 Tax Dividend Privatization Total Revenue for SOEs PSO/Subsidy PMN Loan Total Governme nt expenditure Source : the Ministry of Finance and the Ministry of SOEs (data processed) Source: the Ministry of Finance and the Ministry of SOEs (data processed) Generally speaking the revenue for APBN from SOEs records increase despite slowdown since On the other side, the expenditure of the Government to SOEs is higher than the collected revenue so that the fiscal transaction position with SOEs record deficit. This condition is mainly due to increased subsidy/pso from APBN through SOEs. The net debt value of SOEs shows the liquidity capacity of SOEs in complying with their debt services on due, which constitutes the difference of total SOEs short term liabilities and cash and current assets. This indicator has indirect impact to APBN but may turn into contingency liability to the Government in case of SOE failing to meet the debt services. The realization of contingency liability may consist of additional PMN proceeds to SOEs or the Government pays the liabilities of SOEs, when no guarantee has been given. The trend of total net debt value of SOEs in 2007 to 2011 is presented in Graph Gross financing requirements of SOEs is funding needs to finance the assets. When the SOEs internal funding sources are insufficient, the SOEs concerned may apply loans, issue securities or new shares. In general, this will not directly affect APBN, unless the state owned enterprises need Government s direct supports like additional PMN or indirect support of Government guarantee. The trend of capital expenditure and SOEs long term loans from is presented in Graph GRAPH 6.18 NET SOE LOAN TREND,, (trillion rupiah) 1.073, , , ,3 905,5 723, , , , ,7 343, ,0-167,8-422,9 Curre nt Liabilities Curre nt Asse ts Ne t Loans 597, GRAPH 6.19 SOE CAPITAL EXPENDITURE AND LONG TERM LOANS TREND, (trillion rupiah) 65,7 158,5 104,3 107,5 68,7 294,7 171,2-257,7 111, Capital Expenditure Long Term Loan Drawing 218,2 Source: the State Ministry of SOEs (data processed) 6-54 Financial Note and Indonesian Budget 2013

344 Budget Deficit Financing and Fiscal Risk Chapter 6 Macro stress test of SOEs The changing magnitudes of SOEs fiscal risk are subject to macroeconomic variable fluctuation such as economic growth, rupiah exchange rate, and oil price. To identify the extent of such variations, the Government conducts macro stress test against three SOEs fiscal risk indicators aiming to provide information with regard to the magnitudes of fiscal risks generated from the transanctions made by the Government with SOEs, and sector risk illustration, from which early and ancitipative actions to the said phenomenon can be taken. Since 2009, macro stress test has been made using 22 SOEs as the samples with criteria: (1) SOEs contributing the largest fiscal revenue; (2) SOEs with the largest fiscal expenditure; and (3) SOEs representing sectors of Indonesian economy. These 22 sample SOEs are expected capable of representing 141 SOEs. Thus, the findings can represent fiscal risk exposure of SOEs. Macro stress test model to SOEs fiscal risk presents two main findings, i.e. scenario analysis and stress test. Scenario analysis illustrates uncertainty of fiscal risk indicators of invidiual SOEs or their aggregation in three scenarios, i.e. (1) baseline scenario to illustrate marcoeconomic conditions according to the APBN assumptions; (2) optimistic scenario depicting macroeconomic conditions, which are assumed at optimum position; and (3) pessimistic scenario assuming macroeconomic conditions at worst position. Under the latter scenario, there is pressure to fiscal expenditure especially the increasing PSO/subsidy paid by the Government through SOEs. In addition, the SOEs operational production costs will rise that will reduce fiscal revenue as a result of declining tax and dividends. Fiscal risk also emerges from the rising net debt value of SOEs since the majority of operational costs and debt composition of SOEs are in foreign currencies. The scenario of aggragate SOEs fiscal risk is presented in Graph 6.20 and Table GRAPH 6.20 ANALYSIS OF AGGRAGATE SOES FISCAL RISK SCENARIO (trillion rupiah) Transactions Fiscal Position With SOE Net Loan Enterprises Optimistic Baseline Pessimistic Optimistic Baseline Pessimistic Gross Financing Need Enterprises Optimistic Baseline Pessimistic Financial Note and Indonesian Budget

345 Chapter 6 Budget Deficit Financing and Fiscal Risk Cash paid Tax 147, , , PPH Corporation 49, , , PPN Output 96, , , PPN Input Other Tax , Cash paid subsidy (304,733.5) (309,942.1) (333,659.8) 3. Dividend to the Government (cash) 35, , , Interests to the Government for Loans to SOEs Government Loan Position (6,633.6) (5,942.6) (5,289.1) 6. Others 1, , ,026.8 Source: the Ministry of Finance TABLE 6.24 AGGREGATE SOE FISCAL RISK SCENARIO ANALYSIS FISCAL TRANSACTION POSITION WITH SOE, (billion rupiah) Description Total (125,404.1) (110,637.0) (120,796.1) Macro stress test presents relative changes to SOEs fiscal risk indicators should risk factor unpheaval or pressure exert. Stress test to several main macroeconomic variables to aggregate SOEs fiscal risk is made in partial manner, i.e. to see the impacts of changes to one macroeconomic variable to SOEs fiscal risk indicators, while assuming that the other macroeconomic variable remain unchanged (ceteris paribus). Under this approach, macroeconomic variable with the most significant impact to SOEs fiscal risk in APBN 2013 can be identified. Depreciation to rupiah exchange rate to US dollar by 20 percent (from Rp9,300.0 to Rp11,160.0) will bring about significant impact to APBN expenditure funnelled to SOEs especially for subsidy/pso. This vulnerability is because the formula of subsidy/pso calculation uses foreign currency and the composition of operational costs and debts in foreign currencies is also enormous. The rise of global oil price by USD25 per barrel (from USD100 to USD125/barrel) will significantly hike the production costs of notably SOEs engaged in energy, transportation and fertilizer sectors, and more subsidy of the Governement so that the net contribution to APBN will be further negative. This increased subsidy/pso is primarily resulting from additional fuel and electricity subsidies allocated to PT Pertamina and PT PLN. The increase of 3-month SPN (State Treasury Bill) by 3 percent (from 5 percent to 8 percent) will augment the costs that must be borne by SOEs and will drop the fiscal transaction position with SOEs. The fall of economic growth by 1 percent (from 6.8 percent to 5.8 percent) will decrease the sales volumes of SOEs and in turn drop the fiscal transaction position with SOEs. The results of stress test to some main macroeconomic variables to aggregate SOEs fiscal risk is presented in Table Financial Note and Indonesian Budget 2013

346 Budget Deficit Financing and Fiscal Risk Chapter 6 TABLE 6.25 STRESS TEST FOR THE CHANGING EXCHANGE RATE, OIL PRICE AND INTEREST RATE AND ECONOMIC GROWTH TO SOE FISCAL RISKS, (billion rupiah) Stress test to rupiah depreciation against USD by 20 percent from Rp.9,300 to Rp.11,160 No Fiscal Risk Indicators Dampak Fiscal Transaction Position with SOEs (171,605) (156,748) (172,455) 2 SOEs' Loan Values 496, , ,885 3 Gross Financing Requirements 103, , ,562 Stress test to oil price rise by USD25 per barrel from USD100 to USD125 No Fiscal Risk Indicators Dampak Fiscal Transaction Position with SOEs (201,809) (180,855) (206,291) 2 SOEs' Loan Values 478, , ,767 3 Gross Financing Requirements 104, , ,803 Stress test to the increase of SPN rate by 3 percent from 5 percent to 8 percent No Fiscal Risk Indicators Dampak Fiscal Transaction Position with SOEs (128,415) (108,718) (114,644) 2 SOEs' Loan Values 470, , ,935 3 Gross Financing Requirements 105, , ,207 Stress test to the decrease of economic growth by 1 percent from 6.8 percent to 5.8 percent No Fiscal Risk Indicators Dampak Fiscal Transaction Position with SOEs (125,006) (112,342) (125,057) 2 SOEs' Loan Values 481, , ,342 3 Gross Financing Requirements 105, , ,198 Source: the Ministry of Finance Box 6.7 Fiscal Risks of Some Large SOEs Pertamina, since this company has been assigned by the Government to provide and distribute subsidized fuel to people, will bear the largest risk and very sensitive to the fickle oil price and rupiah exchange rate especially with regard to fuel supplies and the increasingly volume of domestic fuel demands. Marcro stress test to some macroeconomic variable to fuel subsidy in PT Pertamina shows the following impacts: (billion rupiah) Variabel Shock Rupiah depreciation by 20 percent of USD 34,257 36,589 39,370 ICP rose USD25 per barrel 67,871 72,959 78,821 Economic Growth feel 1 percent (2,045) (2,142) (2,285) PT PLN (Persero) assumes assignment of the Government to provide electrical power at affordable rate for public in general including the acceleration of PLTU MW development. Risks faced by PT PLN (Persero) are inclusive of fluctuations of rupiah exchange rate, interest rate, primary energy price and project risks. The Government s policies in fortifying the financial performance of PT PLN (Persero) to support the implementation of 10,000 MW project include to increase the margin in subsidy calcultation components since Macro stress test to several macroeconomic variables to electricity subsidy in PT PLN indicates impacts as follows: Financial Note and Indonesian Budget

347 Chapter 6 Budget Deficit Financing and Fiscal Risk (billion rupiah) Variabel Shock Rupiah depreciation by 20 percent of USD 32,561 35,286 37,138 ICP rose USD25 per barrel 25,151 26,211 27,081 interest rate rose 3 percent 3,594 4,943 5,781 Economic Growth feel 1 percent 953 2,425 4,179 PT Askrindo and Perum Jamkrindo have been appointed by the Government as KUR guarantors. They bear significant risks with regard to Non Performing Guarantee (NPG) that will bring about of declining financial performance and decrease of equity value and in turn decline KUR guarantee capacity with immediate consequence of disrupted KUR program sustainability. The realization of KUR guarantee as of 31 December 2011 is as follows. Description PT Askrindo Perum Jamkrindo Total KUR Guarantee Accummulation (billion Rp) 22, , ,513.0 PMN Accummulation (billion Rp.) 2, , ,750.0 Gearing ratio (times) UMKM Accummulation (units) 2,985,666 2,162,600 5,148,266 Manpower Accummulation (persons) 6,603,440 2,695,839 9,299,279 Claims in 2012 (billion Rp.) Claim Accumulation (billion Rp.) ,227.7 Non Performing Guarantee (%) Central Government s Debt Risks In general, the Government s debt risks can be categorized into 3 (three) types, to wit, interest rate risk, refinancing risk and exchange rate risk. These three risks has been used as indicators to determine whether the Government s debt portfolio has been managed in optimum manner or not, expecially from financial side. The Government s Debt Risks Interest rate risk is additional budget burdens from the fickle interest rate in markets potential to increase debt service of the Government loans. The indicators of interest rate risk are the ratio of variable rate (VR) and refixing rate to total debts and Average Time to Refix (ATR). Refinancing risk is potential of increasing debt cost when refinancing. Even this risk is latent despite no refinancing. It may totally block refinancing with immediate impacts of soaring Government s burdens or failing to satisfy the Government s financing requirements. Exchange rate risk is potential of increasing Government s debt services as a result of higher exchange rate of foreign currencies to Rupiah. Apart from the above financial risks, there is also risk coming from internal organization, i.e. operational risk of debt management. The trend of debt portfolio risk indicator realization is presented in Table Financial Note and Indonesian Budget 2013

348 Budget Deficit Financing and Fiscal Risk Chapter 6 Description TABLE 6.26 LOAN PORTFOLIO RISK INDICATOR TREND, June 2012* Outstanding (trillion rupiah) - Government Bond (SBN) , , , Foreign Loan Total 1, , , , , , Interest Rate Risk - Variable Rate Ratio (%) Refixing Rate (%) Average Time to Refix (tahun) Exchange Rate Risk - Loan Risk FX - GDP (%) Loan Risk FX - Total Loan (%) Loan Currency Composition (%) IDR USD JPY EURO Others Refinancing Risk (portion in %) - Portion of loan on due in < 1 year Portion of loan on due in < 3 years Portion of loan on due in < 5 years Average Time to Maturity /ATM (year) - Government Bonds (SBN) Foreign Loans Total * Data of realization and GDP use the realization achieved as of June 2012 Source: the Ministry of Finance Interest Rate Risk. The realization of ratio of variable rate (VR) and refixing rate to total debts as of semester I 2012 is lower than the previous years realization. This ratio is showing downward trend because of policies setting financing strategies prioritizing the emission of SBN and the procurement of foreign loans with fixed interest. Another contributing factor for the declining VR ratio to total debts concerns World Bank s loan restructuring, when the floating interest rate was converted into fixed interest in 2009, and the cancellation for SBN emission with floating interest rate in recent years. Meanwhile, the ATR of Government s debts during 2011 indicates improvement if compared with the previous years, implying more controllable refinancing risk, since the average time requires by the portfolio in establishing the interest rate becomes longer. It is because in 2011 the Government issued SBN, which in majority had long tenors. Exchange Rate Risk. For the last decade, the Government s exchange rate risk is bolstering in line with the strengthening rupiah exchange rate. This stronger rupiah exchange rate is evident from lower debt ratio in foreign currency denomination (FX debt) to GDP. This lowering ratio shows the lessening exchange rate risk relative to the economy. It is thanks to stable rupiah exchange rate during semester I 2012 with strengthening trend if compared with the previous years. FX debt ratio to total debts is expected to be corrected until percent in Semester I This percentage reflects significant drop from record in 2008 during global financial crisis. Financial Note and Indonesian Budget

349 Chapter 6 Budget Deficit Financing and Fiscal Risk Refinancing Risk. Average Time to Maturity (ATM) is an indicator of refinancing risk, which as of semester I 2012 the realization is around 9.7 years. This realization is to rise if compared with previous years, showing the longer tenors of Government s debts. It is because financing made in semester I from SBN emission in majority has tenor more than 10 years on the average. Another indicator of refinancing risk is the portion of debts on due in the next 1, 3 and 5 years. Consistent with longer ATM, the portion of debts on due less than 5 years is decreasing. To maintain this trend, in future the debts with maturity date less than 3 5 years can be boughtback or switched. By end of Semester I 2012, it is projected that the outstanding debts will reach Rp trillion consisting of SBN around Rp1,314.1 trillion and Loans Rp624.5 trillion. This projection will bring about impact of improved debt portfolio risk condition, i.e. interest rate risk will be improving with the diminishing debt ratio projection of variable rate and refixing rate. This improved debt risk rate will also take place in exchange rate risk when the foreign exchange debt ratio decreases either to GDP or total debts. Such foreign currency debt ratio will further improving and be maintained as interval less than 43.0 percent consistent with medium term financing strategy Meanwhile for refinancing risk it is expected to aggravate due to higher portion of debts with shorter maturity, and shorter tenors of the Government s debts. Efforts to maintain and improve debt portfolio risk that has been achieved as presented in Table 6.26 can be carried out with the folloring strategies. 1. Prioritizing debts with fixed rate and convert debts with variable rate into fixed rate debts to abate interest rate risk; 2. Prioritizing the emission of securities in domestic markets with rupiah currency to abate interest rate risk; 3. Select foreign currency with low volatility to rupiah in debt procurement; 4. Procure new loans with more favorable terms and conditions, with reducing/eliminating commitment fee for undirsbursed loans; 5. Perform buyback and switching in sustainable manner for SBN portfolio and risk management so as to lessen refinancing risk; 6. Monitor effective loan procurement so that commitment fee for inefficient loans can be immediately covered; 7. Draft implementation regulation on the use of financial derivative instrument for hedging. From debt management operation side, risks that may arise during debt management should be controlled. Some efforts that can be taken by the Government are: (1) developing and introducing standard operating procedure on debt management either for internal debt management unit or between debt management units with stakeholders; (2) enforcing code of ethics to officials of debt management units; (3) improving the competency of officials of debt management units; (4) developing information technology system to support effective, efficient, safe, transparent and accountable debt management; (5) preparing and revising regulations on debt management as legal basis to perform debt management in transparent, 6-60 Financial Note and Indonesian Budget 2013

350 Budget Deficit Financing and Fiscal Risk Chapter 6 safe, and accountable manner; and (6) introducing risk management consisting of risk identification, risk analysis, risk evaluation, risk mitigation plan, and monitoring risks in debt management Contingency Obligation of the Central Government Contingency obligation is potential obligation of the Government that emerges from the past events and its existence is obvious with the occurrence or not occurrence of an event, which is beyond full control of the Government. The realization of contingency obligation is fiscal risk for the Government since it will increase expenditure. Contingency obligation comes from support and/or government of the Government to infrastructure projects, national social security programs, Government s obligations to increase state capital to certain financial institutions, legal demands to the Government by the third parties; participation in international financial organizations and institutions and natural disasters Government s Supports and/or Guarantees to Infrastructure Development Projects Fiscal risks relating to infrastructure development come from supports and/or guarantees provided by the Government to some projects, i.e. 10,000 MW power generation development acceleration project Stage I and Stage II, toll road development project, water supply provision acceleration, and PPP projects. The provision of guarantee as mentioned above brings fiscal consequence to the Government, i.e. higher contingency obligations of the Government that may cause additional burdens to APBN. To highten economic competitiveness, Indonesia needs to speed up infrastructure development. However, due to the fact of relatively limited financial capacity of the State in infrastructure provision, the roles of private sectors in infrastructure development in future will be much more obvious. In this respect, the Government can grant guarantee for the funding participation of private parties used to construct infrastructure. What is guaranteed is that of potential loss/declining return because of risks coming from the Government (sovereign risks). Apart from guarantee policy in infrastructure projects, the Government also grants support for land acquisition, which frequently becomes major obstacle in infrastructure development. For toll road project the Government support in land provision is expressed in Land Capping, Land Revolving Fund (LRF), and Land Acquisition. Land Capping is funding support from the Government against risk of land price rise in toll road development. LRF is a revolving fund for land acquisition in toll road development. The Government will also pre-finance land acquisition and thereafter will be charged to Business Entity determined as concession right holder. Land acquisition is fund provided by the Government for land acquisition to improve the feasibility of infrastructure provision projects executed under PPP scheme. In addition, to speed up infrastructure development, the Government will provide cash support (Viability Gap Fund/VGF) for infrastructure projects developed in cooperation with Financial Note and Indonesian Budget

351 Chapter 6 Budget Deficit Financing and Fiscal Risk business entities. This support is for infrastructure projects, which are economically feasible but financially marginal. The sources of this fund support come from APBN and will be funneled to business entities set as successful bidder of project. For green energy development, the Government has prepared supports to business entities engaged in geothermal power generation project development, which one of them consist of Geothermal Fund Facility (FGD). FDG is facility support of the Government to abate business risks in geothermal enterprise and on the other side to promote geothermal consumption for electrical power generation. With such FDG it is expected that this geothermal power generation can more maintain the financial sustainability of the Government against the negative impacts of fickle oil and coal prices The 10,000 MW Power Generation Development Acceleration Project Stage I Based on Presidential Regulation Number 71 of 2006 and Presidential Regulation Number 86 of 2006 as subsequently amended with Presidential Regulation Number 91 of 2007, the Government gives supports in the form of full guarantee to the liabilities of PT PLN (Persero) to banking creditors providing funds/credits for the development of power generation projects (10,000 MW Stage I). This guarantee is to highten the feasibility of PT PLN (Persero) in obtaining credits (credit worthiness) and at the same time reduce capital fees for project funding. This policy is expected capable of accelerating the completion of 10,000 MW power generation development project Stage I so that problem of electrical supply shortage can be ironed out. This project is financed under budget of PT PLN (Persero) and financing from banks. The portion of banking financing reaches around 85 percent of total fund requirement for the said power generation project. As of 30 June 2012, financing sources that have been obtained (signed and determined as successful bidder) and received Government s guarantee are presented in Table Fiscal risk from the Government guarantee (full guarantee) will emerge when PT PLN (Persero) fails to comply with debt services to the creditors in the specified time and thereby the Government will be required to meet such debt services. The debt service compliance by the Government is carried out under APBN mechanism. Some risk factors that will lessen the capacity of PT PLN (Persero) in satisfying their debt services to creditors in timely manner are including high electrical energy sales growth, tariff policy, exchange rate fluctuation, fuel price rise, and coal supply shortages. Until June 2012 the Government has issued 35 Government s Guarantee Letters including for three transmission projects of rupiah portion and one transmission project of US dollar portion with total credits guaranteed reaching Rp71.8 trillion. The debt services of PLN to creditors in 2012 consist of payments for interests and principals. To anticipate potential default of PT PLN (Persero) to creditors the Government has allocated budget for debt service guarantee in amount of Rp611.2 billion in APBN Financial Note and Indonesian Budget 2013

352 Budget Deficit Financing and Fiscal Risk Chapter 6 TABLE 6.27 FINANCING ACQUIRED FOR POWER GENERATION 10,000 MW Stage I (per 30 June 2012) No. PLTU Capacity (MW) Loan Value Rupiah Portion (billion) USD Portion (million) 1 Banten Suralaya 1 x Jawa Timur Paiton 1 x Jawa Tengah - Rembang 2 x 315 1, Banten - Labuan 2 x 315 1, Jawa Barat Indramayu 3 x 330 1, Jawa Timur Pacitan 2 x 315 1, Banten Teluk Naga 3 x 315 1, Jawa Barat Pelabuhan Ratu 3 x 350 1, Lampung Tarahan 2 x Sumatera Utara Pangkalan Susu 2 x NTB Lombok 2 x Gorontalo 2 x Sulawesi Utara Amurang 2 x Kepulauan Riau Tj. Bale 2 x NTT Kupang 2 x Sulawesi Tenggara Kendari 2 x Kalimantan Tengah Pulang Pisau 2 x Tanjung Awar-Awar 2 x 350 1, Sulawesi Selatan Barru 2 x Bangka Belitung Bangka Baru 2 x Papua Jayapura 2 x Kalimantan Selatan Asam-Asam 2 x Aceh Meulaboh 2 x NTT Ende 2 x 16, NTB Bima 2 x Sumatera Barat Teluk Sirih 2 x Kalimantan Barat Bengkayang 2 x 27, Bangka Belitung 2 x 16, Maluku Utara Tidore 2 x Jawa Tengah Adipala 1 x 660 1, Riau Bengkalis 2 x Riau Selat Panjang 2 x Kalimantan Barat Parit Baru 2 x Transmission Packages - 4, Transmission Package Total , ,047.8 Source: the Ministry of Finance Financial Note and Indonesian Budget

353 Chapter 6 Budget Deficit Financing and Fiscal Risk The 10,000 MW Power Generation Development Acceleration Project Stage II To exercise the commitment of the Government of Indonesia to international world to the concensus reached during G20 summit meeting with regard to carbon emission reduction and to mitigate the impacts of soaring oil price to electricity subsidy in future, the Government issues Presidential Regulation Number 4 of 2010 concerning the Assignment to PT PLN (Persero) on the Acceleration of Power Generation Development Using Renewable Energy, Coal, and Gas. This Presidential Regulation Number 4 of 2010 is as legal basis and foundation in providing guarantee support to business feasibility of PT PLN (Persero) for power generation development with renewable energy, coal and gas. List of projects entitled to this guarantee is attached in the Annex of Regulation of ESDM Minister Number 15 of 2010 as subsequently amended with Regulation of ESDM Number 1 of 2012 concerning Amendment to Regulation of ESDM Minister Number 15 of 2010 concering List of Power Generation Development Acceleration Projects using Renewable Energy, Coal and Gas, and the Related Transmissions. As of June 2012, the Government has issued 3 (three) PT PLN (Persero) Business Feasibility Guarantee Letters as presented in Table6.28. No. Project Name Capacity (MW) Location 1 PLTP Muaralaboh 2 x 110 West Sumatra 2 PLTP Rajabasa 2 x 110 Lampung 3 PLTA Wampu 3 x 15 North Sumatra Source: the Ministry of Finance TABLE 6.28 LIST OF SECURED PROJECTS Toll Road Development Project Fiscal risk of toll road development project comes from Government support in shouldering parts of excessive land acquisition costs (land capping) resulting from land price hike during land acquisition. This Government supports are given to 28 links of toll roads, to expedite the slow-progressing toll road development. The obstacle is exceeding prices of lands acquired for the construction of toll roads. In addition, this support is also to maintain the financial feasibility of toll road project so as to encourage investors to accomplish the projects. Funding support of the Government from the rise of land price (land capping) in APBN 2013 is allocated at Rp500.0 billion Water Supply Provision Acceleration To accelerate water supply provision for people and to reach Millenium Development Goals (MDGs), the Government is of opinion that investments to PDAMs must be intensified. This can be realized with the broadened access of PDAMs to investment credits from national 6-64 Financial Note and Indonesian Budget 2013

354 Budget Deficit Financing and Fiscal Risk Chapter 6 banks, for which the Government will introduce guarantee and interest subsidy provision policy. This policy is set out in Presidential Regulation Number 29 of Guarantee and Interest Subsidy by the Central Government for the Acceleration of Water Supply Provision, and the implementation regulation established in the Regulation of Finance Minister Number 91/ PMK.011/2011 concerning Procedure for the Grant of Guarantee and Interest Subsidy by the Central Government for Water Supply Provision Acceleration. The guarantee of Central Government is allocated to reach 70 percent of total principal of PDAM investment credit on due, with the remaining 30 percent under the risk of bank extending the credit. Interest rate of investment credit granted by bank to PDAM is set equal to BI rate plus a maximum of 5 percent. Of such rate, BI rate will be borne by PDAM and the difference of BI rate to maximum 5 percent will be the subsidy charged to the Central Government. Guarantee to the PDAM liabilities and interest subsidy will be funneled by the Government through APBN scheme. If the gurantee is disbursed, the amount of such guarantee will turn into the liabilities of PDAM and Local Government to the Central Government. Fiscal risk that may arise from this guarantee is when PDAM fails to meet its debt service on due to the bank, from which the Government will guarantee 70 percent of the principal of investment credit received by PDAM. Factors that may incite this default include exceeding non revenue water (NRW), unreliable PDAM internal management, and water tariff (set by the local government/head of region) below the economic rate. In APBN 2013, the Government allocates budget for contingency obligations to anticipate fiscal risks for PDAM liabilities in complying with their debt services to banks in amount of Rp35.0 billion Public Private Partnership Project Through Infrastructure Guarantee Agency The Government has received proposal for Government Support Request submitted by PT PLN (Persero) for Independent Power Producer (IPP) model for Steam Power Plant (PLTU) in Central Java in Semester I This project is one of projects nominated by the Government during the Indonesia Infrastructure Conference and Exhibition (IICE) 2006 as model project to be executed under PPP scheme as prescribed in Presidential Regulation Number 67 of 2005 concerning Public Private Partnership in Infrastructure Provision, and the subsequent amendment, i.e. Presidential Regulation Number 13 of 2010 and Presidential Regulation Number 56 of Bid process for IPP PLTU Jawa Tengah has been implemented and the successful bidder has been determined by PT PLN (Persero). On 6 October 2011 project implementation and guarantee documents was signed. This project receives guarantee under joint guarantee of the Government and PT Penjaminan Infrastruktur Indonesia (PT PII) in accordance with Presidential Regulation Number 78 of 2010 concerning Infrastructure Guarantee for PPP Projects provided through infrastructure guarantee agency. The said project is expected to commercially operate (Commercial Operation Date/COD) in As for this Guarantee Obligation, the Government in APBN 2012 has allocated a budget for PPP projects in amount of Rp59.8 billion. Financial Note and Indonesian Budget

355 Chapter 6 Budget Deficit Financing and Fiscal Risk Government Support for Model PPP Project of Soekarno Hatta Airport Railways Track Construction The Government, c.q. the Minister of Transportation in the capacity of Government Contracting Agency (PJPK) has decided that this Soekarno Hatta Railways Track Development Project as a show case project financed under PPP scheme as prescribed in Presidential Regulation Number 67 of 2005, and the subsequent regulation, i.e. Presidential Regulation Number 13 of 2010 and Presidential Regulation Number 56 of The objective of this project is to provide special transport facility for public service users to and from Soekarno Hatta Airport. The project was prepared by PT Sarana Multi Infrastruktur (Persero) under the assignment of the Minister of Finance pursuant to Decree of Finance Minister Number 126/KMK.01/ 2011 of 2 May 2011 concerning the Assignment to Limited Liability Company (Persero) PT Sarana Multi Infrastruktur for Facilitation of PPP Project Preparation for Soekarno Hatta Airport - Manggarai Railway Track Construction and PPP Umbulan Water Supply Project The Provision of Infrastructure Guarantee Facility through PT Penjaminan Infrastruktur Indonesia (Persero) To provide sufficient infrastructure in Indonesia, the Government has attempted to develop infrastructure under PPP scheme as resources in infrastructure provision. This PPP based infrastructure development policy has been prescribed in Presidential Regulation Number 67 of 2005 jo Presidential Regulation Number 13 of 2010 jo Presidential 56 of For this infrastructure provision under PPP scheme, the Government needs to extend infrastructure guarantee aiming to highten the credit worthiness of the said PPP project to get financial close and set infrastructure costs, which are not only efficient but also competitive. To mitigate the fiscal risk from the implementation of infrastructure guarantee, this kind of guarantee will be extended by the Government through PT Penjaminan Infrastruktur Indonesia (PT PII). PT PII, which was established under Government Regulation Number 35 of 2009 aims to give ring fencing to APBN from contingency obligation arising from the implementation of infrastructure guarantee. The provision of infrastructure guarantee by PT PII is provided for in Presidential Regulation Number 78 of 2010 and Regulation of Finance Minister Number 260/PMK.011/2010. Box 6.8 Public Private Partnership in Infrastructure Provision Adequate infrastructure in terms of quality and quantity is a main factor in augmenting and supporting sustainable economic growth. However, to provide infrastructure will need immense budget. On the other side, the financial capacity of State in infrastructure investments is very limited. Such financial limitation has forced the Government to look for a breakthrough of different infrastructure development scheme or model. A model of infrastructure provision currently developed by the Government is to encourage the participation of private parties. This initiative is performed under the so-called Public Private Partnership (PPP) Financial Note and Indonesian Budget 2013

356 Budget Deficit Financing and Fiscal Risk Chapter 6 To reinforce this breakthrough, the Government has issued Presidential Regulation Number 56 of 2011 concerning the Second Amendment to Presidential Regulation Number 67 of 2005 concerning Public Private Partnership in Infrastructure Provision. Under this regulation, PPP is defined as Partnership Project in Infrastructure Development decided in an Agreement or the grant of Operation License between the Minister/Head of Agency/Head of Region and Business Entity. In the implementation of PPP scheme, the Government in the capacity of PJPK (Government Contracting Agency) will enter into a contract with private party in infrastructure provision at the specified specifications, and risk sharing to the party most capable of performing the said project. To arouse the interest of private parties, the Government can provide support and guarantee for PPP projects. The Government in this case the Minister of Finance can approve the provision of Government support consisting of tax incentives and/or fiscal contribution in financial form, based on proposal of the Minister/Head of Agency/Head of Region. The Minister of Finance will also launch some instruments to support the implementation of PPP projects. This facility is granted with the following instruments to support the implementation of PPP projects: a. The allocation of bridging fund as Government support in PPP projects through Government Investment Center (PIP); b. Infrastructure risk guarantee through infrastructure guarantee agency [PT Penjaminan Infrastruktur Indonesia (Persero)]. c. PPP Project preparation during preparatory and execution statges through infrastructure financing agency [PT Sarana Multi Infrastruktur (Persero)] under Project Development Services (PDS)scheme. Project preparation with PDS scheme is support provided by the Government to PJPK (GCA) to enhance the attractiveness of PPP project and ready to offer to investors. Today there are two projects receiving supports under this scheme, i.e. Soekarno Hatta Manggari Railways Track Construction Project and Umbulan Water Supply Project (SPAM) in East Java. In addition to such facility, the Government c.q. the Minister of Finance is preparing Government financial support under Viability Gap Fund (VGF) scheme. VGF is cash support from the Government to PPP project with a view to ensuring the tariff of services generated by the said PPP project affordable to the users. Moreover, VGH has objective of giving broad access in infrastructure provision under PPP scheme with subsidy to capital cost, especially for PPP projects, which are economically feasible but not financially viable. A PPP project model, which at present records significant progress is that of power generation plant development with cap. 2 x 1000 MW in Central Java (IPP Jawa Tengah) or more popularly known as Central Java Power Plant (CJPP). The successful bidder of this project has been determined and agreement has be entered into. The project is expected to start its construction works by end of 2012 and to operate in This PPP CJPP project is anticipated capable of supplying electrical power in near future and promoting other PPP projects in other regions across the Country. Financial Note and Indonesian Budget

357 Chapter 6 Budget Deficit Financing and Fiscal Risk Social Security National Social Security Program Pursuant to Law Number 49 of 2004 concerning National Social Security Program (SJSN), Law Number 24 of 2011 concerning Social Security Organizing Body (BPJS) has been enacted. To perform this BPJS law, the Government is now working out health insurance program and manpower security program including the formation preparation of BPSJ Health and BPJS Manpower. Fiscal risk that may emerge from the implementation of such social security program comes from the operational aspects and economic aspects that will affect the financial solvency of BPJS and Government contingency loads as the consequence of social security program transformation. In addition, contingent fiscal risk may arise from the roles of Government as set out in Article 48 Law No. 40 of 2004 concerning SJSN stipulating that the Government may take special actions to maintain the financial solvency of BPJS and in Article 56 paragraph (2) and (3) BPJS Law in case of financial crisis and particular conditions aggravating the economy, for which the Government may take special measures to maintain the financial solvency and sustainability of Social Security Program Pension and Old Age Saving Program for Public Servants The Government has introduced pension and old-age saving program for Public Servants (PNS) and Armed Forces/Police (TNI/Polri) to compensate their services. Fiscal risk of pension program for public servants are mainly from the increasingly number of pension beneficiaries. Since 2009, pension fund for these public servants has been totally (100 percent) charged to APBN. Some factors influential to the increase of pension benefit payments are, among other things, the number of officials reaching pension age, basic salary increase, and Honorary Fund payment as established in PP Number 24 of 2008 concerning Honorary Fund for the Veterans of Republic of Indonesia. Budget of APBN required to pay pension benefits is steadily increasing, i.e. from Rp50.9 trillion in 2010, Rp59.6 trillion in 2011 and Rp66.5 trillion in Under assumption that the number of retired officials and basic salary increase of GRAPH 6.21 THE TREND OF PENSION BENEFIT PAYMENT FOR CIVIL PUBLIC SERVANTS, (trillion rupiah) 80,0 70,0 60,0 50,0 40,0 30,0 20,0 10,0-27,8 Source: the Ministry of Finance respectively 10 percent, in 2013, budget allocation for pension benefits is expected to hike to Rp74.3 trillion. The trend of pension benefits for public servants (including TNI/Polri) is presented in Graph ,1 46,6 50,9 59,6 66,5 74, Financial Note and Indonesian Budget 2013

358 Budget Deficit Financing and Fiscal Risk Chapter 6 Meanwhile, fiscal risk coming from old-age saving program for Public Servants especially comes from unfunded past service liability being the obligation of the Government as the consequence of welfare augmentation policy to the public servants with basic salary increase. PT Taspen records the accumulation of unfunded past service liability resulting from the policy of Government in increasing the basic salaries of Public Servants since 2007 to At recommendation of BPK, the Government records unfunded past service liability in amount of Rp11.8 trillion in old-age saving program of Public Servants. Meanwhile in 2012 and 2013 it is anticipated that such liability will increase by Rp3.0 trillion to Rp5.0 trillion unless this old-age saving program for public servants is revised. To improve the implementation of this old-age saving program in future, the Minister of Finance has asked the Finance and Development Supervisory (BPKP) to conduct due diligence against this program. Since the calculation of unfunded past service liability closely relates to assumptions, the Government continually urges PT Taspen (Persero) to adopt phased fair assumptions starting from This phasing is made in a manner that will maintain the financial solvency of PT Taspen (Persero) and provide the Government more room to pay the installments of unfunded past service liability. Moreover, the Ministry of Finance will conduct evaluation and monitor such phasing every year to ensure its consistent implementation to the plan Obligation of Maintaining Minimum Capital of Certain Finance Institutions Contingency obligations of the Government in financial sectors are primarly coming from the obligation to increase the capitals of certain finance institutions, i.e. Bank Indonesia (BI), Deposit Surety Agency (LPS), and Indonesian Export Financing Agency (LPEI), when the capital of such finance institutions drops below the capital limits as established in laws. Bank Indonesia (BI) As provided for in Article 6 paragraph (1) Law Number 23 of 1999 concerning Bank Indonesia as lastly amended with Law Number 6 of 2009, BI capital is set minimum Rp2.0 trillion. In the event of risk from the implementation of tasks and duties of BI that causes the said capital drop below Rp2.0 trillion, the surplus of current year must be allocated either in part or in whole as general reserve to cover such risk. When the allocation of current surplus as general reserve has been made and BI capital remains less than Rp2.0 trillion, the Government must GRAPH 6.22 THE TREND OF CAPITAL AND CAPITAL RATIO OF BANK INDONESIA, cover the deficit subject to consent of House of Representatives (DPR). However, in contrast, if the capital ratio to monetary liabilities of BI recorded higher than 10 percent, BI will allocate part of its surplus to the Government as established in Law on BI. According to Article 6 paragraph (1) Law on BI, the nominal value of BI capital according to ratio calculation from 2007 to 2012 is presented in Graph , , , , ,71 2, (Est) Sumber : Bank Indonesia Capital (trillion) Capital Ratio (percent) Financial Note and Indonesian Budget

359 Chapter 6 Budget Deficit Financing and Fiscal Risk Deposit Surety Agency (LPS) According to Law Number 24 of 2004 concerning Deposit Surety Agency (LPS) as amended with Law Number 7 of 2009, the function of LPS is to secure the deposits of customers in banks and actively maintain banking system stability respective of the given authorities. Deposits secured by LPS since 13 October 2008 reach maximum Rp2.0 billion per customer per bank (previously Rp100 million). Meanwhile, bank under restructuring process of LPS since 24 November 2008 is PT. Bank Mutiara, Tbk. (formerly PT. Bank Century, Tbk.). To perform its functions, LPS in its early establishment in 2005 received opening capital from the Government in amount of minimum capital for LPS, i.e. Rp4.0 trillion. As of the end of 2011, the capital (equity) of LPS has increased to Rp16.7 trillion. LPS also allocates reserve for this surety claim for the estimated risk of claim payment for next year. Graph 6.23 illustrates the trend of deposits in banks secured by LPS, total capital, and surety claim reserve of LPS. According to Article 85 paragraph (1) Law Number 24 of 2004 concerning LPS it is stipulated that if the capital of LPS drops to lower than the opening capital, the Government subject to consent of House of Representatives shall cover the deficit. Article 85 paragraph (2) also sets out that when LPS experiences liquidity shortages, LPS may obtain loans from the Government. LPS has reserved allocation in a sum as estimated to pay surety claims of desposits saved by customers in banks in 2013 reaching Rp11.23 trillion. If the claimed surety is less than such reserves, LPS equity won t decrease and the Government is not necessary to provide additional capital for LPS. However, for other LPS function, i.e. maintaining banking sysem stability, LPS can t estimate costs for the salvage of default banks in Thus, LPS is not able to estimate the total costs to be released to pay claims and save the bank in The possibility of decreasing LPS capital lower than the opening capital can t be determined and it is not necessary for the Government to allocated additional budget for LPS in APBN Indonesia Export Financing Agency (LPEI) GRAPH 6.23 THE TREND OF SECURED SAVING FUND, LPS CAPITAL AND GUARANTEE CLAIM RESERVE, (trillion rupiah) , ,0 100,0 10,0 1,0 512,2 624, , , , , ,5 Notes: 1. Data for 2012 based on Work and Budget Plan of LPS The position of LPS secured saving fund in 2012 and 2013 is estimate 3. The position of capital (equity) and Surety Claim Reserve as of 2011 is total after audit 4. The position of capital (equity) 2013 not yet estimated. The Indonesian Export Financing Agency (LPEI) was established by the Government of Indonesia under Law No. 2 of 2009 concerning Indonesian Export Financing Agency aiming to support Government policy of promoting national export program. LPEI provides financing, surety, insurance, and consulting services to exporters. 7,0 3,2 24,5 16,7 8,7 10,4 11,3 11,1 10,7 11,23 7,3 5, (Est.) 2013 (Est.) Secured Saving Fund Capital Surety Rese rve 6-70 Financial Note and Indonesian Budget 2013

360 Budget Deficit Financing and Fiscal Risk Chapter 6 LPEI previously named PT. Bank Ekspor Indonesia (Persero), is a special financial institution with function of supporting the national export program with the provision of financing, surety, insurance and consulting services for exporters. LPEI has relatively more flexible financing room than general banks. This agency can support the acceleration of national export growth with financing from supply (domestic) side and demand (foreign) side. The financing is granted in conventional or syariah system to corporations and SMEs. According to Law Number 2 of 2009 concerning LPEI, the opening capital of LPEI is set at minimum Rp4.0 trillion. Should the LPEI capital drop below Rp4.0 trillion, the Government will cover the deficit from APBN under the applicable mechanism. The trend of LPS capital position from 2008 to 2012 is presented in Graph In 2012, the LPEI equity is expected to amoung Rp7.4 trillion. This capital is sufficient 35,0 to support export financing of 30,0 Rp24.5 trillion, surety of 25,0 Rp675.4 billion and insurance 20,6 20,0 of Rp120.0 billion. While export 15,7 15,0 13,0 growth records slowdown but 11,2 9,5 9,3 10,0 needs of export financing and 4,3 4,4 5,0 export supporting sectors - including domestic infrastructure shows increase. (Audited) (Audited) Based on the above LPEI financial condition projection, the Government is not yet necessary to allocate additional capital for LPSEI in APBN Legal Claims to the Government GRAPH 6.24 THE TREND OF EXPORT FINANCING ACTIVITIES AND LPEI CAPITAL POSITION, (trillion rupiah) 0,3 0,3 0,0 0,3 0, (Audited) Legal claims that may arise fiscal risk to the Government will consist of civil and administration demands. The fiscal risk may comprise potential expenditure from APBN and potential land and building assets losses, which their ownerships are under dispute or those in the form of revenue. Based on data collected in the Ministry of Finance, of 19 Ministries and 1 Agency as of 2012, the legal claims to the Government amount Rp trillion, USD million, and 1.1 million. Of this sum, Rp33.7 trillion consists of potential joint claims filed to some ministries/ agencies. In addition, there are land and building assets under disputes. Of these disputed properties, those that have received final and conclusive court decisions will be charged to APBN. 26,3 20,5 31,8 24,5 6,5 7,0 7, (Audited) Total Assets Export Financing Surety Insurance Equity 2012 (Estimated) Financial Note and Indonesian Budget

361 Chapter 6 Budget Deficit Financing and Fiscal Risk Membership in International Financial Organizations/ Institutions (LKI) and Others The membership of Indonesia in LKI and other organizations may incite fiscal risks coming from: a. Government committments to provide contribution and capital participation to the said LKI and other Organizations. b. Delay in the issuance of laws and regulations with regard to the said contribution and capital participation to LKI and other organizations. Total contribution and capital participation in LKI and other organizations in 2013 reach Rp923.2 billion. This sum includes budget allocation for ASEAN Infrastructure Fund for Rp380.0 billion under other PMN post. State capital participation and contribution in LKI and other Organizations are presented in Table TABLE 6.29 STATE CAPITAL PARTICIPATION AND CONTRIBUTION TO INTERNATIONAL ORGANIZATIONS/AGENCIES AND OTHER INSTITUTION IN 2013 (billion rupiah) No. Description Total A. State Capital Participation 1. The Islamic Corporation for the Development of Private Sector (ICD) International Bank for Reconstruction and Development (IBRD) - General Capital Increase (GCI) Selected Capital Increase (SCI) Asian Development Bank (ADB) International Fund for Agriculture and Development (IFAD) International Finance Corporation (IFC) ASEAN Infrastructure Fund (AIF) Total State Capital Participation B. Contribution 1. USAID Trust Fund Islamic Solidarity Fund for Development (ISFD) OPEC Fund for International Development (OFID) 1.8 Total Contribution 35.6 Total State Capital Participation and Contribution Source: the Ministry of Finance Natural Disaster Indonesia is located on one of the most vulnerable points to natural disasters, which is evident from frequent earthquakes, tsuanami, volcanic eruption, flood, landslide, draught and forest fire. Indonesian Disaster Data from National Disaster Management Agency (BNPB) shows 6-72 Financial Note and Indonesian Budget 2013

362 Budget Deficit Financing and Fiscal Risk Chapter 6 that from 2007 to 2010 Indonesia suffers 2,912 natural disasters composing flood (44.7 percent), typhoon (18.5 percent), landslide (15.0 percent), and draught (12.1 percent). Law Number 24 of 2007 concerning Natural Disaster Management has assigned the Government to deal with natural disaster management including protection to people, postdisaster recovery, and budget allocation for natural disaster mitigation in APBN. This allocation is to finance activities during pre-disaster state, response emergency stage and post-disaster stage. Costs for the rehabilitation or recovery of public infrastructure and households who have no financial protected has generated enermous financial loads to public expenditure. For example, Tsunami in Aceh/Nias in 2004 caused damage and loss worth more than Rp40.0 trillion, meanwhile loss from eartquake in Yogyakarta in 2006 claimed costs of more than Rp29.0 trillion. The Government has expended reconstruction budget of Rp37.0 trillion for Aceh and Nias and around Rp1.6 trillion for Yogyakarta. In APBN 2013, the Government allocates reserve fund for natural disaster management in amount of Rp4.0 trillion. This allocation is set based on historical trend of Government aids for regions frequently suffering natural disaster despite relatively small scale (e.g. flood, insignificant earthquake, or landslides). Experience on major disaster during the recent years shows rehabilitation and reconstruction financing, which is steadily increasing and can t be no longer covered from 5,0 4,0 3,0 2,0 1,0 - GRAPH 6.25 NATURAL DISASTER CONTINGENCY FUND TREND, (trillion rupiah) 2,7 1,9 Ceiling Source: the Ministry of Finance Realization 3,0 2,9 3,0 contingency budget for natural disaster management only. The trend of contingency fund for natural disaster mitigation from is presented in Graph Natural disaster is potential to exert pressure to APBN sustainability. In future, it is deemed necessary to diversify natural risk financing either in terms of sources or allocation pattern. In view of higher disaster occurrence probability, greater damage and loss and climate change and rapid urbanization, the Government is presently reviewing the possibility of varying natural risk financing options including disaster insurance. Efficient risk financing is an optimum combination of retained and transferred risk. This combined financing is expected capable of developing greater resilience for APBN sustainability. In light of foregoing, the Government has formulated National Disaster Management Plan , which one of its programs is the development of capacity and participation of communities and other stakeholders in natural risk management. A focus activity of this program is the establishment of natural risk funding mechanism (disaster insurance). 2,2 3,8 2,7 4,0 4,0 4,0 4,0 4, * 2013** Financial Note and Indonesian Budget

363 Chapter 6 Budget Deficit Financing and Fiscal Risk Mandatory Spending Mandatory spending is spending to certain programs as mandated or required under the applicable laws and regulations. Some regulations on this mandatory spending are: (1) the obligation of allocating 20 percent of APBN/APBD for education as prescribed in the Fourth Amendment of 1945 Constitution Article 31 paragraph (4) concerning the Allocation of Education Budget from APBN/APBD; (2) obligation of allocating General Allocation Fund (DAU) minimum 26 percent of domestic revenue (net), and Revenue Sharing Fund (DBH) according to Law No. 33 of 2004 concerning Fiscal Balance of the Health 24,52 24,41 27,82 31,58 43,81 48 Transfer to Region 253,3 292,4 308,6 344,7 411,3 470,4 Education 142,21 154,19 208,29 225,23 266, ,97 Source: the Ministry of Finance GRAPH 6.26 THE TREND OF MANDATORY SPENDING, (trillion rupiah) Government and Regions; (3) the allocation of health budget at 5 percent of APBN as provided for in Law No. 36 of 2009; (4) the allocation of special autonomy fund according to Law of Special Autonomy for Aceh and Papua Provinces by respectively 2 percent of national DAU. The trend of Mandatory Spending from is presented in Graph The increasingly mandatory spending as the consequence of the applicable laws and regulations sparks worries about fiscal space. Fiscal space is room, where the Government allocates fund for investment and development purposes, i.e. 60 percent for material expenditure, capital expenditure, social expenditure minus reserve fund for natural disaster management Rp4.0 trillion, and grant expenditure (discretion). The existing room is limited since the Government expenditure is more focused on the financing of tied spendings consisting of routine expenditure such as personnel expenditure, subsidy expenditure and loan interest payment. Fiscal risk due to mandatory spending is more limited fiscal space. Consequently, budget allocation to productive expenditures is getting scarcer. Meanwhile, this kind of spendings are crucial to boost economic growth and reach development priorities such as for infrastructure development, people welfare augmentation, poverty alleviation, social aids, etc. In addition, the function of APBN as stabilizator of economy, which is countercyclical character will become less flexible in anticipating the changing global economic assumptions. As fiscal policy tool, APBN must be able to take flexible maneuvers, particularly when the economy is in stable condition the Government can introduce surplus budget, but during crisis, the Government can make fiscal expansion with deficit budget. The composition of mandatory and untied spending from is presented in Graph In future it is expected the effectiveness in expenditure sector, especially non-discretion spending as the main contributing factor for limited fiscal space be enhanced. Subsidy expenditure as the largest deduction factor to fiscal space can be curbed with subsidized fuel and electricity consumption control Financial Note and Indonesian Budget 2013

364 Budget Deficit Financing and Fiscal Risk Chapter 6 GRAPH 6.27 THE TREND OF BINDING AND NON-BINDING SPENDING COMPOSITION, ,0 percent 100,0 80,0 60,0 40,0 20, Non-Binding 19,7 17,8 23,0 19,6 20,0 27,2 Binding 80,3 82,2 77,0 80,4 80,0 72,8 Source: the Ministry of Finance Apart from subsidy expenditure, other deduction factors are personnel expenditure, interest payment of foreign loans, and transfer to region. Besides, expenditure policy needs restructuring by accelerating the introduction of performance based budgeting, which is more oriented to output and outcome. Regulations to be issued should avoid any new mandatory spending, instead give more space for the Government in increasing multiplier effects of the economy, for example in infrastructure sector. Financial Note and Indonesian Budget

365 APBN Medium-Term Budget Projection Chapter 7 CHAPTER 7 APBN MEDIUM-TERM BUDGET PROJECTION 7.1 General In medium term, the magnitudes of APBD is considerably subject to the trend and prospect of global and national economy, especially with regard to the prospects of various economic indicators of economic assumptions that have been adopted in calculating the APBN. In addition, numerous demands, challenges and problems on the economic development, which are either currently encountered or expected to face by the Government in future have been also attentively taken under considerations in working out APBN policies for medium term period. In relation with the global economic prospect, crisis that hits european countries has yet to show recovery signs. The crisis indeed will retard the economic performance of other leading industrial countries such as USA and Japan. Generally speaking, the prospect of global economic growth performance is still eclipsed with uncertainty and markedly dependent on crisis recovery process in Europe. Due to the relatively open Indonesia s economy, the prospect of national economy is inseparable from global economic performance prospect. Despite unfavorable external conditions, it is anticipated that the performance of national economic growth remains high. Domestic demands are strong with the increasing number of middle upper class communities that in turn will boost the national economy to higher rate. In addition, infrastructure projects promoted by the Government will be able to enhance the national production capacity, which is thus far being the impeding factor. On the other side, in medium-term period, Indonesia still have to cope with a number of challenges including unemployment management, poverty alleviation and economic disparity reduction, and economic competitiveness enhancement through infrastructure strenghtenting. In view of external economic performance prospect, domestic economic performance, and a wide variety of challenges to deal with, the APBN prospect in medium-term period is expected to serve as an anchor for national economic stabilization and at the same time to provide stimulus in measurable manner for national economic activities. In light of that, fiscal policy strategy in medium term is focussed on maintaining fiscal sustainability with Government revenue improvement and efficient expenditure. This policy is aimed to control budget deficit so that the debt ratio to GDP can be consistently decreased. However, the Government is fully aware about the needs of expansive fiscal policy with prudent management to maintain the momentum of national economic growth. In medium term, APBN will be directed in phases to reach balanced budget. The medium-term APBN policy basically refers to the implementation of medium-term development plan according to vision and missions of national development. Thus, for the medium-term, APBN policy will be aimed at supporting the execution of such mediumterm national development plan and achieving the specified targets of national development. Financial Notes and Indonesian Budget

366 Chapter 7 APBN Medium-Term Budget Projection In terms of revenue, this medium-term policy is directed to optimize revenue while maintaining investment climate and business world sustainability. The Government will continually attempt to increase tax ratio. It will be pursued with tax base expansion and tax administration reform. In line with the prediction of boltering national economic growth performance, in medium-term, tax revenue, in nominal term, is expected to grow higher than its natural rate. On the other side, PNBP (Non-Tax Revenue) is also predicted to steadily increase, notably those coming from SOE profit sharing to the Government, thanks to the improving performance of SOEs and natural oil and gas resources. In tax sector, the policies to be taken by the Government are to continue: (a) tax administration reform, (b) tax supervision and potential exploration reform, and (c) law and regulation reform. In PNBP (Non-Tax Revenue) policies to be introduces are: (a) to increase oil and gas production, especially to reach higher lifting target, i.e. more than one million barrels per day, (b) optimizing the revenue from oil and gas resources with higher production volume while preserving the environment and developing business potential of geothermal mining sector, (c) enhancing the the performance of SOEs and adjusting pay out ratio of SOEs dividends, and (d) harmonizing policies and regulations, and intensification and extensification of PNBP K/L sources. In terms of expenditure, for the medium-term period, the Government will further enhance the quality of Government spendings to create more productive, anticipative and responsive expenditures. It is to respond economic upheavals, to address the challenges and at the same time to optimize the realization of development targets set by the Government. In tandem with this approach, the Government expenditure policy in medium-term will be directed to, among other things, (1) maintain the purchasing power of people and enhnacing the quality of public services to reach bureaucracy efficiency and to fortify competitiveness, (b) maintain economic stability with price stabilization of basic commodities, stable politics coupled with fair, honest and transparent democratization, and advocate national stability through the realization of minimum essential force (MEF), (c) fortify competitiveness to boost inclusive and sustanaibale growth, and to reinfoce domestic economy with, such as, MP3EI, (d) enhance the efficiency of expenditure structure with the reallocation of unproductive spendings to productive activities, including the limitation of unproductive activities, subsidy redesign to be more efficient and well-targeted, (e) anticipate the uncertainty with the allocation of fiscal risk reserve; (f) enhance effectiveness of and expand poverty alleviation programs with, inter alia, MP3KI, and (g) reduce vertical and horizontal imbalances, and strengthen the self-reliance of regions. Through such full range of initiatives, it is expected that the Government expenditure become more productive and efficient and in turn will promote economic efficiency and strengthen domestic competitiveness in future. From financing aspect, to support expansive fiscal policy, the the policy to take in mediumterm will be more focused to: (a) explore financing sources, which are efficient and low risk, (b) use the loan proceeds for productive activities and domestic economy reinforcement, (c) take net negative flow policy to promote economic self-reliance and minimize risks. In light of foregoing, the loans will be more prioritized to: (a) provide public services, (b) promote the consumption of domestic goods and services, (c) for projects with broad and innovative benefit range that can be adopted as model for replication and further development under rupiah funding or other funding, and (d) create economic growth, which is pro-job, propoor and/or pro-environment. 7-2 Financial Notes and Indonesian Budget 2013

367 APBN Medium-Term Budget Projection Chapter Medium-Term APBN Projection Medium-Term Budget Framework (MTBF) covers revenue, expenditure and financing framework for medium-term period, which is accessible to the public. MTBF present summaries with regard to: (a) the projection of basic macroeconomic assumptions underlying APBN preparation; (b) APBN priorities; (c) targets and goals to achieve by the Government from fiscal policies in future; and (d) the projection of financing sources available in the next 3 5 years. The projected figures contained in MTBF will be updated every year to reflect the actual macroeconomic conditions, and other various fiscal policies exercised by the Government. With the introduction of the said MTBF, the Government can harmonize the planning and budgeting including harmonization of demands and expenditure policy and the alternative funding, so that the budget allocation will be efficient and effective to assure fiscal sustainability. This medium-term budget framework (MTBF) is prepared based on the projection of basic macroeconomic assumptions and targets of fiscal policies in medium-term period. During this period, the targets and directions and macroeconomic framework and fiscal policies will be at all times directed to assure the realization of national development targets, i.e.: (a) people welfare with quality economic growth; (b) high and sustainable economic growth; and (c) solid economic stability. In addition, the projection of APBN posture in mediumterm refers to fiscal targets as prescribed in RPJMN and RPJP (Medium-Term and Long- Term National Development Plan respectively). In general, the preparation of comprehensive MTBF will require a medium-term planning process stage; (1) medium-term macroeconomic framework (assumption) projection/plan; (2) medium-term fiscal projection/planning/targets (e.g. tax ratio, deficit and debt ratio); (3) medium-term budget framework (revenue, expenditure, and financing that will produce total ceiling of Government expenditure (resources envelope); (4) distribution of total ceiling of medium-term budget to ministries/agencies (line ministries ceilings). The indicated line ministries ceilings for medium-term period are the highest medium-term budget estimate; and (5) elucidation of medium-term expenditure of the line ministries ceiling for individual programs and activities based on the established medium-term ceiling indications. Projection/planning stages from (1) to (4) are top-down processes, with the stage (5) constitutes bottom-up process. Normally, the bottom-up estimate processes are separated by projections of on-going policies and their revisions as a result of program/activity rationalization with program/activity evaluation process, and the estimated costs of new policies. For the preparation of RKA-K/L with medium-term expenditure framework approach (KPJM), K/L needs to harmonize the activities/programs with the medium-term national development plan (RPJMN) and strategic plan (Renstra) of the Ministries / Agencies, which in the previous stage have been also adopted as reference in preparing Government and K/L work plans. With regard to APBN projection, the targets and policies on APBN during such period are still within fiscal consolidation framework, while providing fiscal stimulus for the national economy in controllable and measurable manner to promote investment, and assure the provision of basic services to people. Primary balance will be maintained in a manner that will ensure fiscal sustainability. Consistent with the efforts taken to pursue fiscal targets Financial Notes and Indonesian Budget

368 Chapter 7 APBN Medium-Term Budget Projection set in RPJMN , the medium-term budget projection is expected to record deficit decrease and even book surplus in The estimated figures of mediumterm budget plan can be seen in Table 7.1. TABLE 7.1 APBN 2013 and BASELINE ESTIMATES FOR (trillion rupiah) DESCRIPTION APBN 2013 Baseline Estimates A. GOVERNMENT REVENUE 1.529, , , ,5 I. DOMESTIC REVENUE 1.525, , , ,1 1. TAX REVENUE 1.193, , , ,1 a. Domestic Tax 1.134, , , ,4 b. International Trade Tax 58,7 49,9 50,8 51,7 2. NON - TAX REVENUE 332,2 352,7 358,3 356,1 a. Natural Resources (SDA) 197,2 225,4 227,8 223,3 b. Profit Shares from SOEs 33,5 33,3 33,9 34,6 c. Other Non-Tax 78,0 70,5 72,3 73,2 d. BLU Revenue 23,5 23,6 24,3 25,0 II. GRANTS 4,5 4,4 2,3 1,3 B. GOVERNMENT EXPENDITURE 1.683, , , ,3 I. CENTRAL GOVERNMENT EXPENDITURE 1.154, , , ,9 1. K/L (Ministries/Agencies) 594,6 602,1 644,7 686,6 2. Non - K/L 559,8 676,1 683,1 714,4 II. TRANSFER TO REGIONS 528,6 585,9 666,4 744,4 1. Fiscal Balance 444,8 487,3 556,5 623,4 2. Special Autonomy and Adjustment Fund 83,8 98,6 109,9 121,0 C. PRIMARY BALANCE (40,1) (20,9) 75,9 174,3 D. BUDGET SURPLUS/DEFICIT (A - B) (153,3) (149,2) (53,6) 42,2 % surplus/deficit to GNP (1,65) (1,44) (0,46) 0,32 E. BUDGET FINANCING (I + II) 153,3 149,2 53,6 (42,2) I. DOMESTIC FINANCING 172,8 167,3 77,1 (18,1) II. FOREIGN FINANCING (Netto) (19,5) (18,1) (23,6) (24,1) Source: the Ministry of Financie Basic Macroeconomic Assumption Projection The preparation of medium-term basic macroeconomic assumptions is a crucial stage in overall formulation and enactment process of medium-term budget framework. Basic macroeconomic assumptions are a basis in shaping the medium-term budget posture and fiscal policies to take in future. As widely understood the medium-term basic macro-economic assumptions serve as the foundation in calculating the projected revenue, expenditure, deficit/ surplus, and financing in the next three years. Moreover, the medium-term basic macroeconomic assumption framework has been also adopted by the Government as reference in deciding fiscal policy measures, particularly in the pursuit of national development targets as formulated in medium-term development plan (RPJM). As pointed out the foregoing Chapter II, as from 2013 the basic macroeconomic assumptions will consist of seven main economic indicators with significant influence to APBN posture. They are economic growth, rupiah exchange rate to US dollar, inflation, interest rate, Indonesian Crude Price (ICP) and oil lifting and gas lifting. The trends of these seven basic 7-4 Financial Notes and Indonesian Budget 2013

369 APBN Medium-Term Budget Projection Chapter 7 macroeconomic assumptions are inseparable from fiscal policies in future, such as budget deficit, debt ratio to GDP, tax ratio and revenue, as well as subsidy policy and other policies aiming to attain the targets of RPJMN and to maintain fiscal sustainability in mediumterm. As a country with open economy, Indonesia s economy is closely related to the economic progress of other countries around the world. Any movement in global economy will become important factor and should cause concern in establishing the domestic economic trend in future. Given that, in setting up the projections of medium-term basic macroeconomic assumptions , apart from targets that have been decided in RPJMN , the Government will also take the latest progress of global economy in various regions under consideration. Based on the latest global economic projection of World Economic Outlook (WEO) IMF, the global economic growths in various regions for are projected to close to the normal conditions. The economic performance of developed countries will recover and become the driving force of global economy. USA economy in is predicted to growth 3.0 percent on the average. On the other side, the bolstering economic conditions of European countries after financial and fiscal crisis will push these countries to grow at 1.6 percent in the next three years. Meanwhile, the economy of developing countries is anticipated stable with upward trend. In the developing countries is predicted to chalk up economic growth at 6.2 percent on the average, notably contributed by Asian countries, which are estimated to grow by 7.9 percent on the average. In aggregate wise, the global economic growth from 2014 to 2016 is projected at around 4.8 percent on the average as indicated by IMF in World Economic Outlook (WEO) July This recovering global economy in the next three years will bring about impacts of increasing global demands and in turn the prices of commodities will rise either for oil and gas commodities or non-oil and gas commodities. However, this price hike is expected still within moderate rate thanks to well-maintained supplies. Special for crude oil commodities, the oil producing countries have committed to maintain balance of supply and demand on global oil. Fundamentally, the oil price at global level is predicted relatively stable provided that there is no upheaval from non-fundamental side such as geopolitical factors. The exceeding global commodity demand and price projection will exert pressure to global inflation. In medium-term, global inflation particularly in developed countries will rise in phases following Europe recovery from crisis. The USA inflation from 2014 to 2016 is estimated at 1.8 percent on the average. Meanwhile, in developing countries the average inflation is projected at 4.8 percent during the same period. In aggregate wise, global inflation in is expected to record 3.4 percent on the average (WEO July 2012). Based on such global inflation, it is anticipated that the domestic inflation be maintained on controllable rate and within the target rate for medium-term. This controllable domestic inflation in is supported with robust domestic economic foundation. The higher domestic demands can be dealt with higher supply capacities of domestic production sectors. On the other side, macroprudential policies in maintaining the stability of exchange rate will become another contributing factor for the controllable domestic inflation rate. In mediumterm, the domestic inflation rate in is predicted at 4±1 percent range. Financial Notes and Indonesian Budget

370 Chapter 7 APBN Medium-Term Budget Projection The strengthening economic foundation of Indonesia and global economy in future will be unarguably capable of intensifying the inflows of investment to Indonesia especially in the form of Foreign Direct Investment (FDI). In addition, the current portfolio capital inflows will continue because of the relatively attractive domestic interest rate. This capital inflow is expected to create surplus in Indonesia s balance of payment and in turn will reinforce the national foreign exchange reserve. The improving performance of balance of payment, coupled with stronger foreign exchange reserve and positive perspective of global investors are positive factors, which are conducive for stable rupiah exchange rate in future. Rupiah exchange rate stability will be also supported with Bank Indonesia s policies in capital and foreign exchange traffic management. In view of these varying factors, rupiah exchange rate to US dollar in is estimated to be stable at Rp.8,700 Rp per US$. Accordingly as to domestic financial markets, the bolstering economic fundamental will be also a positive factor for the performance of financial markets, especially for Government Bonds (SBN). It is predicted that demands on SBN for medium-term remains high with more competitive interest rate. It is consistent with intensifying economic activities and better investment rating as the consequence of positive perception of investors to the economic foundation of Indonesia and well-controlled fiscal conditions. Particularly for 3-month State Treasury Bill (SPN) as a basis in calculating the debt services of loan interest with variable rate in APBN posture, the interest rate in 2014 to 2016 is predicted to range at 4.5 percent to 5.5 percent. The promising global economic prospect and stable domestic macro economy for mediumterm are expected capable of fostering positive environment for the improvement of real sector performance and economic growth acceleration. In line with the target economic growth set in RPJMN, the economic growth of Indonesia in will go through with acceleration, i.e. to grow above 7 percent on the average. This growth is particularly due to domestic demands, i.e. consumption and investment. The reviving business world in future will augment revenue and purchasing power of people and in turn will increase public consumption. Great portion of productive population with lower dependency ratio is also a factor that will boost the purchasing power and consumption of people. Government s contribution in economic growth is also predicted to rise proportionally to the increasing Government s spending. Meanwhile, from investment aspect, the incoming foreign capitals of direct investments to various sectors, and intensive infrastructure development for the next few years will push domestic investment performance. On the other side, the sources of growth from external side, especially export, are expected to grow positively consistent with the global demand increase despite relatively limited growth since the global economic performance is not yet to maximally recover. On the other side, import in future is expected relatively high since the domestic infrastructure projects still need import capital goods. In terms of supply, economic sectors in medium-term are predicted to expand following the increasing production capacity and demands. This upward consumption demand and bolstering investment and export performance will exert multiplier effects to other production sectors, especially those relating to the commodities oriented to public consumption, investment and export including agriculture sector, industrial sector, food and beverage sector, trade, hotel and restaurant sector and transport and communication sector. 7-6 Financial Notes and Indonesian Budget 2013

371 APBN Medium-Term Budget Projection Chapter 7 Another indicator that should garner serious attention in the preparation of medium-term budget posture is oil and gas price and lifting. The fluctuation of global oil price is subject to fundamental factors and non-fundamental factors such as geopolitical factors and speculation. This price is extremely fluctuating. This makes global oil price including the ICP difficult to predict. However, the commitment of oil producing countries in maintaining balance of supply and demand can be logically used as reference. It is predicted that for medium-term the global oil price is relatively stable. Based on the present oil price trend and its fluctuation pattern in the past and potential upheaval risk of geopolitical factors, ICP in is projected to range at US$100 to US$120 per barrel on the average. To optimize revenue, the target global oil lifting in future will be attempted to rise. In mediumterm, the oil lifting is expected to reach optimal volume in view of the existing capacity. In , this oil lifting is anticipated to record at least 940 thousand 1.03 million barrels per day. This target is set based on the realization trend thus far and efforts taken to optimize the existing oil fields to prevent their declining production coupled with technology adoption to extract more oil, to improve the reliability of production equipment and to develop new fields. From natural gas production side, the natural gas reserve position of Indonesia as of 2010 is predicted to reach around trillion standard cubic feet (tscf) or around 3 percent of total gas reserves across the world. Meanwhile, gas production in 2012 is expected to record 1,348 thousand barrels of oil equivalent per day and 1,290-1,360 thousand barrels of oil equivalent per day in Revenue reaped from natural gas in comes from 12 gas exploration projects, which constitute high-profile projects such as in Peciko field (East Kalimantan), Gajah Baru (Riau Island), Terang Serasun (East Java), Sumpal (South Sumatra) and Sebuku (South Kalimantan). These projects will start to produce in optimum capacities in the next few years. Under this circumstance and the anticipated exploration of new fields in near future, the gas lifting in is targeted to record 1,360 1,520 thousand barrels of oil equivalent per day. In brief, the projections of medium-term basic macroeconomic assumptions can be seen in Table 7.2. TABLE 7.2 MID-TERM BASIC MACROECONOMIC ASSUMPTION, URAIAN RAPBN APBN Range Range Range - Economic Growth (%) 6,8 6,8 7,0-7,6 7,3-7,8 7,4-7,9 - Inflation Rate (%) 4,9 4,9 3,5-5,5 3,0-5,0 3,0-5,0-3-Month SPN Rate (%) 5,0 5,0 4,5-5,5 4,0-5,0 4,0-5,0 - Rupiah Exchange Rate (Rp//USD) Indonesian Crude Price (barrel/usd) Oil Lifting (thousand barrel per day) Gas Lifting B15(MBOEPD) Source: the Ministry of Finance Financial Notes and Indonesian Budget

372 Chapter 7 APBN Medium-Term Budget Projection Government Revenue Projection Apart from basic macroeconomic assumptions, the projection of Government revenue in is also considerably dependent on policies taken to optimize the Government revenue during the said period. In view of these factors, the Government revenue in period is projected to record constant increase, i.e. from Rp.1,714.9 trillion in 2014 to Rp.2,187.5 trillion in Further perusal will reveal that tax revenue will contribute 81.6 percent on the average of total revenue earned in such period. This significant contribution indicate tax revenue as the primary domestic revenue source. Meanwhile, the non-tax revenue (PNBP) is anticipated to contribute 18.3 percent. Tax Revenue Projection As the main source of domestic revenue, tax revenue is expected to provide more optimum contribution. In the next three years, this tax revenue is predicted to rise 15.8 percent per annum on the average supported with solid economic foundation and consistent tax policies. As an indication of Indonesia s economic conditions, this tax revenue growth will be capable of offsetting economic growth which as of 2016 is targeted to record 7.6 percent. In addition to economic growth, success in intensifying tax revenue is also markedly subject to the implementation of policies in taxation affairs. In general, tax policies in medium-term will be focused on efforts of optimizing revenue without disrupting investment and business world atmosphere. As the continuation of previous years, the grand design of tax policies remains to focus on: (1) tax administration reform; (2) tax potential supervision and exploration reform; and (3) law and regulation reform. In addition, the medium-term tax policies are still to give tax incentives consisting of tax and import tax charged to the Government for certain sectors. In detail, the targets set for tax revenue in medium-term ( ) are to rise from Rp.1,357.8 trillion in 2014 to Rp.1,830.1 trillion in The main components of tax revenue are income tax (PPh), VAT and PPnBM. PPh revenue is expected to grow by 17.3 percent on the average, i.e. from Rp trillion in 2014 to Rp trillion in Meanwhile, tax revenue coming from VAT (PPN) and PPnBM (Sales Tax on the Luxury Goods) is expected to increase from Rp507.7 trillion in 2014 to Rp trillion in 2016 or 18.7 percent on the average. Pursuant to Law No. 28 of 2009 concerning Regional Tax and Service Charges, the revenue from PBB (Land and Building Tax) of urban and rural sectors has been fully transferred to the regional governments as from Thus, PBB revenue from these two sectors is recorded nil in This will cause a little bit slowdown of PBB revenue starting in 2014, where this PBB tax is projected to amount Rp.25.7 trillion and further increases to Rp.27.1 trillion in 2016 with the largest contribution of PBB tax from mining and plantation sectors. The expanding areas and production increase in these two sectors are the contributing factors for the rise of PBB revenue. While it is expected that excise tariff of tobacco increase, revenue collected from tobacco excise will record insignificant increment. It is attributed to lower cigarette production growth as from The excise reaped from 2014 to 2016 is predicted to grow at 1.9 percent on the average, i.e. from Rp.90.5 trillion in 2014 to Rp.93.9 trillion in It is due to slowdown in cigarette production in the next few years. In addition, potential revenue from extra effort, i.e. eradication of illegal banderols is also decreasing as a result of much lower distribution of illegal banderols and white cigarettes. However, the Government will keep introducing policy of increasing tobacco excise tariff every year. This policy is to apply single rate for tobacco excise as established in tobacco product industry roadmap. 7-8 Financial Notes and Indonesian Budget 2013

373 APBN Medium-Term Budget Projection Chapter 7 Revenue from other tax is targeted to rise from Rp.7.7 trillion in 2014 to Rp.11.4 trillion in 2016 or 21.3 percent on the average. The relatively high economic growth assumptions in will be followed with more intensive economic transactions that in turn will increase revenue from other tax sources, especially from duty stamps. In 2014, revenue earned from income Tax Revenue % to GDP tax is expected to amount Rp.25.4 trillion and Rp.26.0 trillion in It is because of lower income tax tariff as the consequence of committed free trade with other countries. This import tax revenue will be substantially dependent on the price trend of CPO and its derivative products in international markets and tariff policy for CPO and its derivative products in Indonesia. As from 2011, the Government starts to introduce downstream policies for oil coconut production, CPO and the derivative products. This policy is to set lower tariff for processed products of oil coconuts, CPO and the derivative products. It aims to fortify the added value and competitiveness of domestic downstream oil coconut based industries. Under this circumstance, the export tax for mineral goods in ore will become nil in 2014 and onwards. It is due to ban of exporting mineral products in ores starting from 2014 as established in Law No. 4 of 2009 concerning Mineral and Coal Mining. The trend and projection of tax revenue from 2007 to 2016 can be seen in Graph 7.1. Non-Tax Revenue Projection Similar to the projection of tax revenue, during , the non-tax revenue (PNBP) is also projected to increase. Basically, the medium-term PNBP projection is considerably subject to basic macroeconomic assumptions such as international crude oil price, exchange rate and oil and gas lifting. It is because the overwhelmed majority of PNBP comes from oil and gas, from which this revenue is highly dependent on such assumptions. PNBP in ,000 1,800 1,600 1,400 1,200 1, is projected to rise 0.5 percent on the average. The trend and projection of PNBP in is presented in Graph GRAPH 7.1 TAX REVENUE TREND AND PROJECTION, GRAPH 7.2 PNBP TREND AND PROJECTION, PNBP from oil and gas consisting of revenue earned from oil and gas and domestic market obligation (BMO) is projected to slightly drop from Rp trillion in 2014 to Rp trillion in This revenue is subject to oil lifting, which is projected to rise, rupiah exchange rate, which is projected to depreciate against US dollar, and global crude oil price, which is projected relatively high. In addition, intensive cost recovery control by BP Migas will have influence over PNBP revenue from oil and gas in medium-term. PNBP % to GDP Financial Notes and Indonesian Budget

374 Chapter 7 APBN Medium-Term Budget Projection As to revenue from non-oil and gas resources consisting of general mining, forestry, fishery and geothermal it is projected to surge up at 3.3 percent on the average. General mining is predicted to rise from Rp.18.3 trillion in 2014 to Rp.19.5 trillion in It is attributed to the medium-term policy taken by the Government on mineral and coal improvement and supervision through mineral and coal production increase and marketing. The Government will also promote investments in mining sectors and verify PNBP potentials from general mining sector. Revenue from forestry is projected to rise at 2.6 percent on the average, i.e. from Rp.4.2 trillion in 2014 to Rp.4.4 trillion in To reach target of forestry revenue the Government will continually develop technology-based forest product administration system (PUHH). Another policy is to isssue business permits for the use of wood products of natural forests and or ecosystem restoration (IUPHHK-HA/RE) in logged over area (LOA). On the other side, the medium-term revenue from fishery and geothermal sectors is projected stable. However, the Government will introduce some policies in these two sectors such as intensive marine and fishery resources supervision for fishery sector and in geothermal sector, the Government will continue the grant of tax charged to the Government (DTP) facility for geothermal sector so as to promote investments in geothermal development. Moreover, the Government will intensify the monitoring of geothermal exploration activities to optimize revenue from geothermal sector. The revenue of Profit Transfer from SOEs for medium-term is projected to record constant increase in line with the bolstering economic growth. Revenue from SOE s profits is expected to reach Rp.33.3 trillion in 2014 and further rise to Rp.34.6 trillion in This increase is particularly due to Government s efforts of optimizing payout ratio of SOE dividends while taking the financial conditions of SOEs concerned under consideration. In medium-term ( ), the revenue of other non-tax revenue and BLU (General Public Agency) is projected respectively Rp.70.5 trillion and Rp.23.6 trillion in 2014 and then to go up at Rp.73.2 trillion and Rp.24.9 trillion in In general, the policies to take by the Government on PNBP K/L and BLU in medium-term are: (a) improving laws and regulations in PNBP including BLU within K/L to reflect the latest conditions; (b) socializing PNBP and BLU regulations to K/L to fortify the compliance of PNBP collection and payment in accordance with applicable regulations; and (c) revising PNBP and BLU management mechanism to be more accountable with regard to PNBP collection and payment to State Cash. Grants The medium-term projection of grants in APBN is dependent on the commitments of donor countries, and K/L receiving the grant to report the proceeds they receive. Grant proceeds are used to finance some program and projects that have been mutually agreed by the Government of Indonesia and donor country under Memorandum of Understanding. To enhance the accountability and GRAPH 7.3 GRANT REVENUE TREND AND PROJECTION, Financial Notes and Indonesian Budget 2013

375 APBN Medium-Term Budget Projection Chapter 7 transparency in grant management, the Government will consistently improve the management of grant proceeds with sounder grant recording system and administration in APBN. Based on tentative report of grants planned to be received by K/L, in , it is identified that the sum of grant proceeds is to drop, i.e. from Rp.4.4 trillion (2014) to Rp.1.3 trillion (2016). The trend and projection of grants in 2007 to 2016 are presented in Graph Government Expenditure Projection Central Government Expenditure Policies In medium-term ( ), the Central Government Expenditure Policies will remain to refer to the medium-term national development plan (RPJMN) and the long-term national development plan (RPJPN) , i.e. to increase expenditures for the financing of aspects important for national development, especially in education, health and infrastructure and to optimize the expenditures in productive activities. In addition, the expenditure policies of the Government will also refer to President s directives, which have medium-term timeframe, including support to the implementation of Master Plan for the Acceleration of Indonesia s Economic Development (MP3EI) and Master Plan for the Acceleration and Expansion of Indonesia s Poverty Alleviation (MP3KI). These mediumterm central government expenditure policies are taken as initiatives of sustainable economic development that will assure growth with equity. In general, the Central Government expenditure policies in are as follows: First, to enhance the quality of budget planning; second to improve the quality of expenditures (efficiency and effectiveness) with measurable output (performance based budgeting); third to increase to proportion of discretionary expenditures; fourth to continue the sustainability of people s welfare programs (4 clusters); fifth to increase the allocation of human resources and research development; sixth to elevate the multiplier effect of budget; seventh to support the implementation of 11 priority national programs and other 3 priorities in RPJMN covering: bureaucracy reform and good governance; education; health; poverty alleviation; food resilience; infrastructure; investment climate and business climate; energy; environment and disaster management; the development of under-developed regions, the frontiers, conflict-torn regions; culture, creativity and technology innovation; and priorities in politic, law and security sectors; economic sector; and people s welfare sector; eight to maintain the allocation of education budget at 20 percent of total national budget; ninth to reach minimum essential force (MEF). To enhance the effectiveness of expenditures, especially Central Government expenditure, the Government is committed to take the following measures: (1) increasing the quality of expenditures by strengthening the implementation of Medium-Term Expenditure Framework (MTEF) and performance based budgeting through, among other things, program and activity restructuring, and accurate and measurable performance indicator setting; (2) improving and strengthening the linkage of Central Government planning and budgeting by revising RPJMN, strategic plan (Restra), Government Action Plan (RKP), K/L Work and Budget Plan (RKAKL), etc., (3) preparing more well-aimed expenditure budget and prioritizing funding for activities that will be able to generate multiplier effects to domestic activities and employment and enhance the quality of services; (4) intensifying monitoring and evaluation Financial Notes and Indonesian Budget

376 Chapter 7 APBN Medium-Term Budget Projection of planning, implementation and budgeting process; (5) revising budget administration and disbursement mechanism to be faster and more accountable. The trend and projection of Central Government expenditures in can be seen in Graph 7.4. (trillion Rp) % 1, ,400 1,200 1, GRAPH 7.4 CENTRAL GOVERNMENT EXPENDITURE TREND AND PROJECTION, Generally speaking, expenditure policies for the Ministries/Agencies in K/L NON K/L % Central Gov. Expenditure to GDP consist of: First, to Source: the Ministry of Finance increase the absorption and quality of K/L expenditures through: (1) sounder budget document settlement in terms of time, completeness and budget rivision mechanism; (2) earlier auction process; (3) more intensive project and activity monitoring; (4) reward and punishment policy in transparent, professional and consistent manner; Second, monitoring and evaluation of K/L performance to enhance the quality of budget planning and implementation; third, improving budgeting system with the introduction of performance based budgeting and medium-term expenditure framework; fourth, K/L expenditures must be used by K/L officials for: (1) perform the main tasks of K/L to achieve the development targets established by the Government; (2) to enhance the accountability of financial report of K/L; (3) education budget efficiency especially in duty travel expenditure; fifth refocusing programs and budget; sixth preventing program duplication. Meanwhile, to improve the function, role and quality of APBN, the Government will take administrative measures, consisting of: (1) continuing bureaucracy reform (including in remuneration) to improve the performance of Government apparatus and to highten the quality of public services; (2) enhancing efficiency and effectiness of Government expenditures including education spending; (3) reallocating activity from BA 999 to K/L for accountability purpose; (4) efficiency in overhead spending/flat policy implementation; and (5) budget implementation acceleration. Personnel expenditure policies in are focussing to improve personnel management system and wealth of public servants and the retired persons with, among other things: (1) maintain the real value of income with basic salary increase against inflation rate, i.e. 7 percent in 2013 and 6 percent on the average for 2014, 2015 and 2016; meal allowance increase for Public Servants (PNS) and Armed Forces/Police (TNI/POLRI) by Rp.5,000 in 2014; the provision of the 13th salary and pension; and (2) provide total remuneration budget for all K/L starting from 2013 to support bureaucracy reform so as to create clean buraucracy, efficient and low-cost bureaucracy, transparent bureaucracy, serving bureaucracy, and decentralized buraucracy. Material Expenditure Policies during include: (1) maintaining governance operation and services to the public: (2) supporting routine maintenance to secure the asset values, and capacity building (education and training); (3) enhancing efficiency and effectiveness of allocation and spending of K/L goods and service expenditures with the introduction of flat policy to operational goods expenditures and efficiency in duty travel, work committee meeting and workshops; and (4) considering the price increase of goods and services, and organizational development Financial Notes and Indonesian Budget 2013

377 APBN Medium-Term Budget Projection Chapter 7 Capital expenditure policies in include: (1) increasing the allocation of capital expenditure to support the funding of basic infrastructure development including energy, transportation, irrigation, foods resilience, housing, water supply and communication infrastructure; and infrastructure development to support MP3EI particularly for the development of economic corridors, domestic connectivity and science and technology; (2) supporting in maintaining security stability and national defense system reinforcement with the realization of minimum essential force (MEF); (3) supporting the funding of multiyear activities to maintain development financing sustainability; and (4) developing mitigation and adaptation capacity against the negative impacts of cimate change. Grant expenditure policies in are directed to support capacity building of regional governments in providing basic services in transportation, water supply, sanitation, waste water treatment, irrigation and geothermal exploration. Subsidy expenditure policies in are as follows: (1) restructuring subsidy policy to be more equitable and better-aimed to the targets; (2) preparing tight selection system in setting up the targets of subsidy beneficiaries; (3) using subsidy calculation method based on transparent database; (4) restructuring subsidy channeling system to be more accountable; (5) controlling fuel subsidy budget for certain types, 3-kg LPG and LGV and electricity subsidy by: (a)controlling the consumption volume of subsidized fuel; (b) increasing electricity tariff rate (TTL); and (c) promoting the consumption of alternative energy such as gas, geothermal, biofuel and coal for power generation (in lieu of fuel). Social assistance policies in are: (1) improving and expanding the coverage of social protection programs through: (a) school operation aids (BOS) within the Ministry of Religions in more equitable manner for all religions and to expand the 9-year compulsory basic education program to universal secondary education with BOS program for middle education; (b) schoolarship for poor students and university students; (c) people health insurance (Jamkesmas) and continued with SJSN program as from 2014; and (d) prosperous family program (PKH); (2) continuing the sustainability of community empowerment programs with PNPM Mandiri; and (3) mitigating social risks of natural disasters with the allocation of fund reserve for natural disaster management. Other current expenditure policies in are: (1) anticipating the changing macroeconomic assumptions with the allocation of fiscal risk reserve fund; (2) supporting active role of Indonesia in international forums with the allocation of budget for contribution in international agencies; (3) supporting foods resilience with the allocation of Government rice reserve fund (CBP), national seed reserve (CBN), and food price stabilization reserve; (4) allocating budget for General Election in 2014; (5) allocating opening budget for the operation of OJK; (6) allocating budget for high-tech research programs; (7) allocating budget for development acceleration program in Madura; (8) allocating budget for development acceleration program in Papua Province and West Papua Province (P4PB); (9) allocating budget for shelter development as part of disaster management; (10) allocating budget for development acceleration program in Nusa Tenggara Timur (NTT) and economic empowerment for low-income people (MRB) in 2013; (11) providing budget allocation for livestock development program; and (12) providing budget allocation for viability gap fund (VGF), which is temporarily in MTEF accommodated in other expenditures and in the next fiscal year will be reallocated to material expenditure or grant expenditure according to the characteristics. Financial Notes and Indonesian Budget

378 Chapter 7 APBN Medium-Term Budget Projection Transfer to Regions Policies Transfer to Regions policies in the medium-term is still focused to maintain the consistency and sustainability of fiscal decentralization process as an attempt to strengthening the implementation of regional autonomy. These trasfer of regions policies are prioritized to: (1) develop the fiscal capacity of regions and reduce the vertical and horizontal fiscal imbalances; (2) harmonize funding requirements of regions according to the devolved governance affairs; (3) enhance the quality of public services in regions and reduce public service gaps of regions; (4) support the national fiscal sustainability; (5) develop the capacity of regions in exploring local economic potentials; (6) enhance efficiency in utilizing national resources; (7) synchronize the national development plan and regional development plan; (8) fortify the competitiveness of regions; and (9) give more attention to the development of under-developed regions, outer regions and the frontiers. In Transfer to Regions is projected to constantly increase. It relates with the macro assumption projection, which is then translated into APBN posture. The Government revenue is projected to rise during the said period. Such higher Government revenue will increase the allocation of Transfer to Regions during the said period. The trend of allocation for Transfer to Regions in and the projection for are presented in Graph Budget Financing Projection Need of budget financing for medium-term reflected in ratio to GDP from is expected to decline. This lower budget financing relates to efforts of maintaining the fiscal resilience and sustainability and declining debt ratio to GDP. The trend and projection of budget financing from are presented in Graph 7.6. Budget financing is from loan and nonloan sources. In general, loan financing policy in refers to mediumterm loan management strategies, as follows: (1) optimizing loan-based funding potentials from domestic sources with the issuance of Rupiah SBN (Government Bonds) or withdraw of domestic loans; (2) developing debt instruments to get flexibility in selecting the most suitable, cost efficient and minimum risk instruments; (trillion Rp) Source: the Ministry of Finance (trillion rupiah) (3) procuring foreign loans insofar used to cover the priority needs with favorable terms and conditions to the Government, without any political agenda of creditors; (4) maintaining GRAPH 7.5 TRANSFER TO REGIONS TREND AND PROJECTION, TRANSFER TO REGIONS % to GDP GRAPH 7.6 BUDGET FINANCING TREND AND PROJECTION, Source: the Ministry of Finance BUDGET FINANCING % to GDP (%) (%) Financial Notes and Indonesian Budget 2013

379 APBN Medium-Term Budget Projection Chapter 7 foreign loan cut policy in mediumterm; (5) improving coordination with monetary authorities and capital market authorities, especially to intensify financial deeping; and (6) improving coordination and communication with various parties to enhance efficiency in loan management and sovereign credit rating. As to special strategies in state loan management, they include: (1) strengthening the liguidity and absoprtion of domestic SBN markets; (2) reducing loan fees by selecting the (trillion Rp) 16,000 14,000 12,000 10,000 most favorable lenders, enhancing the quality of loan absorption, and loan portfolio structure management; and (3) enhancing the quality of business process and communication and coordination with debt management stakeholders. As for non-loan financing policies in they are planned as follows: (1) supporting infrastructure development through PMN (State Capital Participation) and Government Investment Center (PIP) and the allocation of revolving fund; (2) supporting the empowerment of cooperatives, micro, small and medium enterprises (KUMKM) with State Capital Participation (PMN) and the allocation of revolving fund; (3) supporting education development with the allocation of national education development fund; (4) supporting the Government s guarantee for the acceleration of power plant development, water supply acceleration, and Public Private Partnership (PPP) projects through infrastructure guarantee agency; and (5) using the installments of SLA and asset management proceeds for budget financing. To meet budget financing, the strategies will be directed to achieve three main targets, i.e.: (1) reducing debt ratio to GDP; (2) expending the loan proceeds in selective manner; and (3) optimizing loan uses. Better Government loan management is aimed at cutting foreigh loan stocks, either in absolute or percentage terms to GDP. Foreign financing (nett) in is planned to maintain net negative flow policy. In 2014 debt ratio to GDP is expected to reach 22 percent, and will further drop to 18 percent in The trend and projection of debt ratio to GDP in are presented in Graph Medium Term Expenditure Framework 8,000 6,000 4,000 2, Source: the Ministry of Finance GRAPH 7.7 DEBT RATIO TO GDP, According to law package in finance affairs (Law Number 17 of 2003 concerning State Finance, Law Number 1 of 2004 on State Treasury, and Law Number 15 of 2004 on State Finance Management and Accountability Audit, the management of state finance since fiscal year 2005 has experienced fundamental changes, including: (a) the introduction of unified budget; (b) medium-term expenditure framework; and (c) performance-based budgeting. This budgeting system reform is expected capable of augmenting the quality of Government expenditure to be more effective, efficient, transparent and accountable. GDP Debt Ratio to GDP (%) 60% 50% 40% 30% 20% 10% 0% Financial Notes and Indonesian Budget

380 Chapter 7 APBN Medium-Term Budget Projection Approach with medium-term perspective is able to give more comprehensive budgeting plan with optimum expected outcomes, i.e.: 1. Allocative efficiency; 2. Improve quality of planning; 3. Best policy option; 4. Fiscal discipline; and 5. Fiscal sustainability. In medium-term budgeting projection, the uncertainty of budget allocation in future can be minizimed, either in terms of fund requirements to finance the implementation of various new priority policy initiatives or assurance to the on-going policies so that the policy makers can present budget planning oriented to the realization of targets in complete, comprehensive manner and within the appropriate context according to the established policy planning framework. By concentrating the attention to priority policies, fiscal discipline will be forged. This fiscal discipline is key for effective uses of public resources. Thereafter, the Government s accountability in macro fiscal policy can be achieved. MTEF is an approach of policy-based budgeting with budget implication of more than 1 (one) fiscal year. The objectives and conceptual foundation of MTEF can be seen in Diagram 7.1. DIAGRAM 7.1 AIMS AND BASIS OF MID-TERM EXPENDITURE POLICY (KPJM) 1. More budget resources allocation (allocative efficiency) 2. AIMS to improve quality of planning 3. best policy option 5. fiscal sustainability 4. fiscal dicipline Adjustment Mechanism for Baseline Figure Parameter Setting 5. additional budget for new initiatives CONCEPTUAL BASIS Source: the Ministry of Finance 2. Have Baseline 1. The introduction of rolling budget system 7-16 Financial Notes and Indonesian Budget 2013