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26570300
THE IMPLEMENTATION OF
FIS IN INDONESIAN
REGIONAL
GOVERNMENTS
Petersons Three Framework of Financial Reform Model
Students name
Wibowo
ID number
26570300
Phone
+61435008368
Unit name
Unit code
MGF5440
Title of
assignment
Lecturer/tutor
Gabrielle Buchholz
Yes
All work must be submitted by the due date. If an extension of time to submit work is required, a Special
Consideration Application (In-semester Assessment Task) must be submitted.
Has an extension been approved?
.
X
Yes
No
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Updated: July 2014
Table of Contents
Title Page
Assignment Cover
Sheet
Table of Contents
1
2
A.
Introduction
B.
1.
2.
3.
4.
5.
Reform Drivers
Context
Ownership
Purpose
Strategy
The Link Between the
Weakness and the
Objective
5
5
9
10
11
12
C.
1.
2.
3.
Reform Platforms
Legislation
Policy
Transaction
13
14
15
15
D.
1.
2.
3.
4.
5.
Implementation Phases
Translation
Development
Pilot
Rollout
Operation
15
16
17
19
20
20
16
21-22
List of Pictures
Report Framework
Indonesian Regional
18
2
3
4
List of Tables
Indonesian Government
Expenditure Outturn
Budget Year 2013 (in
trillion rupiahs)
Supreme Audit Boards
(BPK) Audit Opinion
Phases Framework
Summary
COPS Driver and
Reform Platform
Summary
Governments FIS
Design
References
23
A. Introduction
The 1999 Financial Crisis provides the impetus for financial management reform in Indonesia
(Marijan, 2010). This reform is established in the form of the Trilogy of Financial Laws
(Siallagan, 2012). In 2007 and 2011 the World Bank had done an assessment on Indonesian
financial management reform performance using the Public Expenditure and Financial
Accountability (PEFA) framework (World Bank, 2007a; 2011). The authors first assignment
titled Indonesian PFM Condition Through Assessment of PEFAs PI-18 and PI-19 Indicators
assessed the PEFAs (2011) predictability and control in budget execution dimension, specifically
the effectiveness of payroll control indicator (PI-18) and the competition and value for money,
and controls in procurement indicator (PI-19). One of the findings of this assessment is the
weakness in Aggregate Fiscal Discipline (AFD) that was caused by the non-existent salary
expenditure system in the regional government.
This report aims to identify the reform drivers using Petersons (2015) Context, Ownership,
Purpose and Strategy (COPS) framework to explain the regional governments expenditure
problems that arises from non-existent expenditure system, use these reform drivers to select the
most appropriate reform platform from Petersons (2015) transaction, policy, and legislative
platforms of Public Financial Management and suggest strategies to implement the reform.
Picture 1 shows the framework of this report
Reform
Drivers
Context
Ownership
Purpose
Strategy
Reform
Platfor
m
Legislative
Policy
Transaction
Reform
Strate
gy
Translation
Development
Pilot
Rollout
Operation
From 2008-2013 Indonesias salary expenditure grows 15.6% per annual (Ariyanti, 2013). On
2013, the central governments salary expenditure budget realization is 134 trillion rupiahs, 28%
from the overall expenditure realization (Government of Indonesia, 2013). The increase in salary
expenditure was caused by the performance pay and and increasing staff of the regional
government (World Bank, 2012). Although salary expenditure outturns are under its planned
budget from 2008-2013 (Asril, 2015), inefficient administration of salary expenditure arising
from nonexistent payroll system for the public servant of the regional government and irregular
payroll control still pose a potential risk (World Bank, 2012). However, salary expenditure
outturn is not the only problems that is faced by Indonesian regional government.
Table 1: Indonesian Government Expenditure Outturn Budget Year 2013 (in trillion rupiahs)
Budget Classification
Government Revenue and
Grants
Government Expenditure
Central Government
Expenditure
Transfer to Regional
Government
Budget Surplus/(Deficit)
Net Financing
Budget Financing Surplus/
(Deficit) (SiLPA/SiKPA)
Budget Year
2008
2009
2010
2011
Appropriation
Budget %
1,502.00
1,438.89
95.80
1,338.11
1,726.19
1,650.56
95.62
1,491.41
1,196.83
1,137.16
95.01
1,010.56
529.36
513.26
96.96
480.65
(224.19)
(211.67)
94.42
(153.30)
224.19
237.39
105.89
175.16
25.72
21.86
Total
485
504
522
524
Table 1 shows that in 2012 the transfer to regional government is 480.65 trillion rupiahs or 32%
of the overall government expenditure. Table 2 shows that in 2011 from the 524 regional
government audited by the Supreme Audit Board only 12% present a qualified financial
statement. This shows the inefficiency of regional government in using the transfer to regional
government expenditure. BPK determined the difference between regional government that
achieve unqualified opinion and the other regional government was an internal control system
that comes from an excellent expenditure system (Badan Pemeriksa Keuangan, 2014).
b. Political context
The promulgation of Laws No. 22/1999 (UU No. 22/1999) on Regional Governance and No. 25/
1999 (UU No. 25/1999) on Fiscal Balance between the Central and Regional Governments,
which were further revised with UU No. 33/2004 and UU No. 34/2004, marked a massive
devolution of fiscal and political power from the centre to regional government areas, known as
kabupaten (districts) and kota (municipalities) (Fitrani, Hofman, & Kaiser, 2005). The massive
devolution of authority from the central government purported to allow the regions to manage
their own affairs. Districts or municipalities became responsible for delivering public services in
several areas (such as, education, health, and public work), whereas the Central Government still
retained six areas of control (external politic, defense, security, and judicial, national monetary
and fiscal, and religious affairs) (Siallagan, 2012). Regional government regulation cannot
supersede central government and national regulation including the Trilogy of Financial Laws
that consists of Laws No. 17/2003, Laws No. 1/2004, and Laws No. 15/2004 (Siallagan, 2012).
In essence, the regional government have the same financial management system as the central
government. However, the duality of financial system regulation between the Ministry of
Finance (MoF) and the Ministry of Home Affairs (MoHA) that controlled the regional
government confuses and complicate matters for regional government (Siallagan, 2012).
Regional government must implement the Ministry of Home Affairs system in practice but they
are also required to use the MoF financial system.
The main objective of the Indonesian decentralization program was to accelerate democratization
in the regions through improved service, civil empowerment and engagement in public policy
(Financial Management Reform Committee, 2001). In the context of a vast country with a wide
diversity of political, religious, ethnic and social groups, decentralization aimed not only to
promote economic growth and equity, but also to promote broader participation in development
planning and management (Rondinelli & Nellis, 1986). However, these changes heightened the
tension between the top-down control exercised by the MoF, and the capacities and priorities of
the districts and municipalities (Siallagan, 2012).
c. Bureaucratic context
As a former Dutch colony, Indonesia inherited a colonial legacy in government characterized by
strong bureaucratic rule (Cheung, 2005). Some commentators have argued that this, along with a
strong military tradition and authoritarianism, has facilitated the institutionalization of corruption
(Cheung, 2005). Comprising 4.7 million employees or 1.9 % of the 2010 population, the
Indonesian bureaucracy has been characterized as slow, corrupt and ineffective, with low
capacity, and a lack of transparency and accountability (Buehler, 2011). Civil servants hold
permanent tenure in Indonesian government institutions; and therefore, even in the context of the
results-oriented approach embedded in the financial management reforms, they cannot easily be
removed or sacked for poor performance (Siallagan, 2012). Furthermore, Siallagan (2012) in her
assessment of financial management reform in Tobasa District Government and Tangerang
Municipal Government found that in the eastern region of Indonesia where infrastructure is not
well-developed there are less educated civil servants
2. Ownership
There are three reasons why government in the developing countries must have their own
financial systems (Peterson, 2015). First, the management of public money goes to the heart of
sovereignty, and no government should relinquish its control over the operation and reform of its
finances. Second, governments must have flexibility. Third, weakness in public finances is often
the result of poor execution, not of inadequate systems or procedures, execution cannot be
outsourced to foreigners or contractors; it must be done by the government, which ensures
adequate resources and stewardship. This is also true in the case of Indonesian regional
governments.
The massive devolution of authority mandated by Laws No. 33/2004 and Laws No. 34/2004
(Fitrani et al, 2005) provide the legitimization of a financial system owned by regional
governments. Although transfer to regional governments from the central government is a major
part in regional government revenue (Badan Pemeriksa Keuangan, 2014), other sources of
revenue that is part of the Original Regional Revenue (PAD) such as regional commodity and
regional taxes are produced by the regional governments sovereignty. The obligation of districts
or municipalities to take responsibility for delivering public services in several areas (such as,
education, health, and public work) (Siallagan, 2012) also provide the justification to have
flexibility in managing their own financial system. Government Regulation No. 71/ 2010
mandated a shift from a cash towards accrual or modified cash accounting system into a full
accrual system. However, even with a simpler cash towards accrual accounting system that is
mandated by Government Regulation No. 24/2005, from 2008 to 2012, on average, only 10% of
the audited regional government achieve an unqualified audit opinion as shown by Table 2. This
provides a further justification of an inappropriate execution of an existing system. Furthermore,
the regional governments know best of their financial management further justifying the need of
a financial system owned by the regional government. In addition, a system owned by the
regional government resolve the tension between regional government and the MoF.
3. Purpose
Peterson (2015) stated that the starting end of a financial reform is establishing external control,
which is public financial administration (PFA), while the other end is establishing internal
control, which is public financial management (PFM). The trilogy of Financial Laws established
the PFA system of the Indonesian financial management (Siallagan, 2012). The external control
is evident by the obligation to provide an audited financial report to the parliament six month
after the end of the current budget year (Government of Indonesia, 2003). In addition, Laws No.
15/2004 mandated the BPK with the authority to be the governments external auditor
(Government of Indonesia, 2004b). Furthermore, Laws No. 1/2004 guides budget execution
(Government of Indonesia, 2004a), while Laws No. 17/2003 provide the budgeting cycle, budget
year, and budgetary authority as an organic budget law (Government of Indonesia, 2003). These
are evidence of an established PFA system in the Indonesian government. The regional
governments are obligated to carry out these regulations, therefore an established PFA system is
available in the regional government.
However, PFM for the regional government is an entirely different matter. Siallagan (2012)
commented that the establishment of a PFM system is entirely dependent to the commitment of
the regional governments. Tangerang Municipal Government for example, faced success in its
financial management reform due to their commitment to implement their own FIS, however
Tobasa District Government that uses a FIS that is established by the Financial Supervisory and
Development Board (BPKP), the internal auditor of the Indonesian government, experience
failure in its financial management reform due to its dependence to BPKP to implement the FIS.
This dependence portrays the lack of desire in learning to implement the FIS that describes the
lack of commitment. Therefore, in the regional governments, improvement of the PFM is more
important than the PFA. Furthermore, a financial system that is supported by a FIS as a backbone
is what Indonesian regional governments needed.
4. Strategy
There are four possible strategies of reform: recognize what exists; improve what exists; change
what exists; sustain the improvements and changes that have been introduced (Peterson, 2015).
However, Peterson (2015) also stated that in most cases a combination of these strategies are
required. For the Indonesian regional governments case a combination of recognize, improve,
and sustain is needed.
a. Recognize
Peterson (2015) stated that recognition is needed to ensure that financial reform fits with the
nature of the stateweak administration or strong management. The implementation of the
Trilogy of Financial Laws clearly describe a strong administration, however the lack of financial
system that is supported by FIS proved the weak management.
b. Improve
The Trilogy of Financial Laws have already set the basics of the financial system in Indonesia
(Siallagan, 2012). The weak management in the regional governments needs to be improved.
This improvement is introduced in the form of a FIS that increase internal control. However, the
design of this FIS must still within the legal framework of the Trilogy of Financial Laws.
c. Sustain
The context assessment has pointed out that Indonesian bureaucrats are underperformed, lack
motivation, and under educated especially in the eastern regions. Therefore, a continuous training
after the implementation FIS is needed. Siallagan (2012) determined the failure of numerous
training programs on financial management for the Indonesian regional government is due to the
centralized nature of the training. A system owned by the user simplify the training needs of the
user and training is done by the regional governments.
In order for a reform to work Peterson (2015) stated the importance of trust, need, help, and
urgency. The state of regional government financial system described in the economic context
assessment provides the sense of urgency. The purpose assessment outlines the need of a PFM
reform to supplement the established PFA set out by the Trilogy of Financial Laws. The
bureaucratic context assessment points out the underperformance, lack of motivation and
education in regional governments civil servants describe the need of an outside help to improve
regional governments financial system. The political context assessment outlines the need of a
financial system owned by the regional government due to training simplification and to resolve
the tension between MoF and the regional governments. This points out the trust issue suffered
by Indonesian regional governments.
5. The Link Between the Weakness and the Objectives
The Indonesian PFM Condition Through Assessment of PEFAs PI-18 and PI-19 Indicators
identified the weakness in the PI-18 indicator as the nonexistent payroll expenditure system in
the regional government. This affects the AFD through the unpredictability of the budget
outturns and a risk that is posed by ghost workers. However, upon closer inspection, the
economic context assessment has found that the expenditure problem does not only happen in the
payroll expenditure, but also in all of regional governments expenditure due to a nonexistent
expenditure system. The political and bureaucratic context have identified the duality of financial
system regulation between the MoF and the MoHA and the lack of educated civil servants. These
factors clearly call for an improvement in the business process of Indonesian regional
governments. One of the lesson that can be taken from Petersons (2015) reform in Ethiopia is
that FIS improves the business process and the relationship between organizations. Furthermore,
experiences in employing FIS in Tanzania, Uganda, Malawi, and Kenya taught that the
implementation of a FIS system improve the internal control of transactions in an environment
where regulations are conflicting and education is lacking by simplifying transaction recording
process and its conversion to a financial report (Diamond & Khemani, 2005). Given the
weakness and the Indonesian context, implementing a transaction based FIS will solve the
weakness coming from the nonexistent expenditure system in regional system. Thus, the focus
of this report is to implement a transaction based FIS in Indonesian regional governments. The
following chapters points out what reform platforms reform are needed to support FIS
implementation and the strategy to implement it.
C.
Reform Platforms
Platforms define the menu of reform. A good public finance system performs three functions
(Peterson, 2015). One, it handles a myriad of transactions. Two, it ensures that transactions are
legal. Three, it ensures that transactions implement policy. Peterson (2015) stated that these three
functions overlap with each other. The implementation of a FIS that focuses on a transaction
platform cannot be done without the coherence of legislative and policy platform.
1. Legislation
The COPS had pointed out that a PFA system is well established in the Indonesian by the
promulgation of the Trilogy of Financial Laws. It also mandated that central and regional
governments provide an appropriation in the start of the budget year (Government of Indonesia,
2003). An appropriation is a government commitment on money spent for a particular institution.
The regional governments have follow suit with this mandate and promulgate a regulation for
their appropriation on a yearly basis (Siallagan, 2012).
Another problem that needs to be resolved in the legislation process is the duality of financial
system in regional governments. Currently, Indonesian regional governments used two financial
systems. The first financial system is mandated by the MoHA as a caretaker of regional
governments using the Minister of Home Affairs Regulation No. 13/2006 (Government of
Indonesia, 2006). This guideline provides budget classification and chart of accounts for regional
government expenditure. The second financial system is mandated by the MoF as the caretaker
of the national financial system using the Trilogy of Financial Laws that is supported by The
Minister of Finance Regulation No. 101/PMK.02/2011 on Budget Classification and Ministry of
Finance Regulation No. 91/PMK.05/2007 on Chart of Accounts. Regional governments must use
the MoHAs budget classification and chart of accounts in their daily operation, however for
consolidation purposes with the national financial report they must convert this into the MoFs
budget classification and chart of accounts (Siallagan, 2012). This is a duplication of effort and
must be eliminated. Given that the PFA system established by the MoF is going to be used as a
framework for this reports FIS PFM transaction reform and judging that the national report used
MoFs budget classification and chart of accounts, using the MoF system is recommended. The
decision of using MoFs budget classification and chart of accounts must be pledged in the form
of a legislation by the regional governments. The last problem that must be resolved in
legislation is a commitment in the form of a regulation in establishing FIS.
2. Policy
The assessment on indicator PI-18 and PI-19 have revealed a weakness in regional governments
salary expenditure. However, upon further inspection this is not limited to salary expenditure but
also other expenditure. The primary reason of this is the lack of internal control employed by the
regional governments on their expenditure (Badan Pemeriksa Keuangan, 2014). To resolve this, a
FIS that integrates the planning, executing and reporting functions of budgeting must be
introduced (Siallagan, 2012). Thus, a budgeting policy and a Medium Term Expenditure
Framework (MTEF) needs to be employed.
3. Transaction
To resolve the lack of an internal control in the regional governments expenditure a transaction
based FIS set rules for the disbursement of each budget classification and is also connected by
the appropriation data to provide warnings if appropriation is exceeded.
In conclusion, the reform menu for the regional governments lack of internal control is a
transaction based FIS. However, to employ this FIS, a legislative commitment in the form of a
regulation is needed on a regional government organic budget law, annual appropriation, the
choice to employ only the MoF budget classification and chart of accounts, and the
establishment of the needed FIS. A policy platform in the form of a budgeting cycle and MTEF
are also needed.
D. Implementation Phases
Peterson (2015) classified implementation phases into translation, development, pilot, rollout,
and operation. Furthermore, Peterson (2015) also stated that there are 5 important elements in
this phase framework, the processes of the reform, the roles that reformers perform, personnel
who deliver the roles, the resources personnel can provide, and phases of the reform. The
interconnection of these five elements will be explained in this section. Table 3 provide a
summary of the phases framework.
Table 3: Phases Framework Summary
Phases
Translation
Development
Pilot
Rollout
Operation
1. Translation
Process
Design
Roles
User
Personnel
Government
Officials
Architect
Consultant
Design
User
Government
Officials
Implementation Architect
Consultant
Builder
Technical
Assistance
Design
User
Government
Officials
Implementation Architect
Government
Officials
Utilization
Builder
Government
Officials
Implementation User
Government
Officials
Utilization
Builder
Technical
Assistance
Architect
Consultant
Utilization
User
Government
Officials
Architect
Consultant
Builder
Technical
Assistance
Source: Own Design Based on Peterson, 2015
Resources
Experience
Expertise
Experience and
Funding
Management
Expertise
Learning
Experience
Learning
Experience
Learning
Experience
Feedback
Training
Training
Feedback
Training
Training
Peterson (2015) explained that a reform begins with the declaration of a policy. A design phase
follows, which translates the policy into a strategy and specific activities of a program of work
(Peterson, 2015). The context assessment has provided problems that are faced by the regional
governments in the form of lack of internal control in expenditure, decentralization that provides
the impetus to manage its own financial system and the tension it caused to the relationship
between regional governments and MoF, the duality of budget classification and chart of
accounts between MoF and MoHA, and the undertrained and undereducated public servants.
This frames the ownership, purpose, and strategy reform drivers. Ownership of the system must
be given to the regional governments to support training and identify the needs if regional
governments.
The purpose of the system is to provide a transaction based PFM to support the existing PFA,
and a strategy of recognize-improve-sustain is employed. As a part of a recognize strategy a well
established PFA system is used as a framework for the transaction based FIS system. As an effort
to establish an internal control on the PFA system, a FIS is employed to improve the system.
Sustaining the system will be done through training. To employ this, a legislative commitment
must be achieved, a policy, and a transaction based FIS are selected as reform platforms.
In accordance with Petersons (2015) five elements that is important in the phases framework.
Builder and user are involved in this design phase. User provide the data for the context
assessment using their experience. Subsequently, the user and architect agrees upon the
ownership, purpose, strategy, and reform platforms that translates into the development phase.
2. Development
Implementation begins in earnest with the commitment of significant resources to system
realization, based typically on the approval of a design and its execution as embodied in a project
document (technical and financial proposal) (Peterson, 2015). One of the reason of the Ethiopian
reform success is that it correctly identifies a FIS that is needed by the government. (Peterson,
2015). This is done through involving all three roles, which is the user, architect, and builder.
Furthermore, involving the user in the system development amplify the feeling of involvement
for government officials that will encourage them to learn the system. The purpose of this system
is to implement a transaction based FIS within the current PFA budgeting and MTEF framework.
Therefore, the suggested design can be seen in Picture 2.
Picture 2: Indonesian Regional Governments FIS Design
The most important thing is the system connectivity between these three application. An online
connection can be used, however judging that not all regional governments have a reliable
internet connectivity an offline data transfer through data backup can be performed.
3. Pilot
In this phase, design, implementation, and utilization roles mix together (Peterson, 2015). The
primary focus of this phase is the learning process of the government officials (Peterson, 2015).
Thus, the government officials act as a user, builder, and architect by providing feedback to the
system and managing its work process around the sequence of the FIS.
4. Rollout
The design role end in this phase. The focus of this phase is implementation and utilization
(Peterson, 2015). Due to Indonesias decentralization again the three roles of user, architect and
builder is needed. The role of user is to provide continuous feedback, while the builder and
architects provide training for the government officials to run the system.
5. Operation
The focus of this phase is to sustain the system by providing the utilization role (Peterson, 2015).
This is done through training and a continuous feedback by user.
is so vast an overlapping with each other, even a simple reform must identify the coherence
between the COPS drivers, reform platform and reform phases.
Due to the wide scope of PFM, limitations must be stated. Due to the shift in the accounting
systems of the Indonesian government, this report does not comment on which accounting
system is used in the reporting. This report also assumes that before the FIS implementation, the
initial system has been repaired, thus providing explanation on the provision of the planning data
for the system. A summary of the COPS reform drivers and the reform platforms can be seen in
Table 4.
Context
Ownership
Strategy
Economic
Owned by regional
governments
Recognize,
Improve the
existing system,
and Sustain
Inefficient
salary
expenditure
A PFM financial
information
system within
the PFA
framework
determined by
the Trilogy of
Financial Laws
Transaction Platform
Legislativ
e
Policy
Transaction
Resolve
Use
the
existing
duality
PFA
between
policy
MoF and
such as
MoHA
unified
financial
budget,
system
MTEF
and
eternal
auditor
supervisi
on
Use FIS
A
legislative
commitm
ent for
the
financial
informatio
n system
Increase in
salary
expenditure
Potential risk
of ghost
worker
Laws 33 and
34/2004 provide
justification for
managing its own
financial system
To manage revenue
that is produce by
their sovereignty
Ineffective
use of public
money
To be more flexible in
managing own
expenditure
Lack of an
expenditure
system
Political
Decentralizati
on
Duality of
MoF and
MoHA
financial
system
Evidence of poor
execution of existing
system
Provide a financial
information system to
manage transaction to
improve PFM's internal
control
Tension
between MoF
and regional
government
to determine
expenditure
priority
Bureaucrati
c
Underperform
ed
Lack
motivation
Less
educated
Source: Own Assessment Based on Peterson, 2015
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