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Indonesia:
Supporting Local Governance
Reform in the era of
Decentralization
Erman A. Rahman
World Bank Office, Jakarta

Presented in
Seminar on Decentralization
Inter-Regional Learning Series on Community Driven Development

April 13, 2007
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Since 1999 Indonesia has been going through
democratization and decentralization processes
Democratization
Freedom of press
Freedom to establish political
parties
Free elections (1999 and 2004)
Direct presidential election (2004)
and provincial governor, district
head and mayor elections (starting
June 2005)

Decentralization
Autonomy at district/municipal
level
Block grant to provincial and
district/municipal governments
Budgeting and local legislation
power
New structure of village
government
Greater power of local legislative
bodies
which provide opportunities for a more transparent,
accountable governance
Context
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The Indonesian administration system changed as results
of decentralization and democratization
President
Ministry/Agency
Governor
National Parliament
Provincial
Parliament
Deconcentrated
Agencies
Provincial
Agencies
Head of District/
Mayor
District/ Municipal
Parliament
District/Municipal
Agencies
Village
Head
Sub District Head
Village Community
Council
= Directly elected legislative
= Directly elected executive
= Appointed executive
National
(220 million
people)
Provincial
(average 6.9
million people)
District/
Municipality
(average 0.5
million people)
Sub-District (average 43,400 people)
Village
(average 3,100
people)
Context
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Central government transfers to the regions have been
increased significantly
0
20
40
60
80
100
120
140
160
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Transfers to
Regions
Source: PER 2007, World Bank
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0
0

p
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Subsidies
Central Govt
Development
Expenditures
Interest
Payment
Decentralization
Context
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There are several challenges to improve governance at local
level
New structure of local governance: from accountability to central
government to the people local executive and legislative need support
Good governance has been a national discourse bad governance was
considered a major contributor to the 1997 economic crises. But,
operationalization of good governance is still a challenge
Some reform-minded local governments have already taken reform
initiatives. However, need to deepen reforms and further support the LGs
Wide windows of opportunities to test out reforms and to create model
local government can do anything except those against national laws and
regulations
Democratization at community/village level, particularly through the work of
NGOs and CDD-type donor-funded projects yet to reach the supra-village
level (districts)
Context
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Significant results from CDD implementation and a lot of
lessons to learn
Improved access to markets, town
centers, education & health facilities,
and clean water supply 116,300
infrastructure have been built
Expanded business opportunities
and employment: 39 million
workdays generated, 751,500 loan
beneficiaries participating in KDP
credit and business activities
Improving local governance:
almost half of Indonesian villages
experienced participatory budgeting,
high participation of women (26-
45%)
Low rates of corruption: less than
1% of village sub-projects showed
deviations
KDP Results
Intensive Facilitation, Technical Assistance
and Capacity Building (30% of total
budget)
Well controlled democratic and transparent
steps and mechanism
Quick disbursement increase trust of the
community
Direct flow of funds reduce fund leakage
Working directly with the community
trying to avoid local elite capture
Certainty and sustainability of budget
resources
Extensive monitoring: community radio,
independent journalist and NGOs
monitoring
Relatively isolated from LG interventions
Key Success Factors
Context
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At district level ILGR Project supports improvement of
governance to address those issues & to complement CDD
Project Development Objectives
Pilot support to district governments in improving
transparency, accountability and public
participatory practices and in undertaking reforms
in financial management and procurement.
Project Components
Local Governance Reform
Poverty Targeted Investments
Implementation Support and
Monitoring
Transparency
Public
Participation
Accountability
Better Public
Service
Local Economic
Development
Poverty
Reduction
ILGRs interventions
Brief Description of ILGR
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ILGR is implemented in phases: districts can access annual
investment fund only if they meet the reform requirements
Component A.
Local
Governance
Reform
Governance
Reforms
(Pre-
Investment)
Participatory
Poverty
Strategy
Formulation
Component B.
Poverty-targeted
Investment
Component C.
Implementation
Support
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ILGR
Investment
Year 1
Technical
Support &
Monitoring
Technical
Support &
Monitoring
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ILGR
Investment
Year 2
Technical
Support &
Monitoring
ILGR
Investment
Year 3
Technical
Support &
Monitoring
Governance
Reforms
(Year 1)
Governance
Reforms
(Year 2)
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PRE-INVESTMENT
PHASE
(18-24 months)
INVESTMENT PHASE
(3 years)
Brief Description of ILGR
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ILGR Local Governance Reform Framework (transparency
& participation, financial management, procurement)
Transparency and Participation
Public information disclosure; public complaint handling; public
participation in decision making process; preparation of Local
Regulation on Transparency & Participatory
Financial Management
Preparation of Local Regulation on principals of Regional Financial
Management; transparent budgeting; revenue management; financial
reporting and accountability; development of Regional Financial
Information System
Procurement
Establishment of Procurement Anchor Unit; preparation of Head of
District Decree on Regional Procurement System and Procedure;
enhance procurement information system; improvement of control, audit
and feed-back system in procurement.
Brief Description of ILGR
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Where is ILGR now?
Results of Project Preparation:
Local regulations on access to information (transparency) and to decision-making process
(participation) were formulated through participatory process and enacted in 13 districts
District-level poverty reduction strategies were formulated through participatory processes
and issued in all 14 districts
Two districts enacted local regulations on Village Block Grant with specific target (5-10% of
local budgets)
All districts have fulfilled entry and pre-investment requirements of the Local
Governance Reform Framework
12 districts started implementing Year 1 poverty target investment in 2006 (utilizing
about 80% of total budget ceiling)
Through JSDF-Participatory Budgeting and Expenditure Tracking (PBET), capacity of
district-level civil society in analyzing and disseminating budget information and in
monitoring budget execution is being enhanced, executed by National Democratic
Institute (NDI) and 8 national NGOs

Brief Description of ILGR
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Challenges for future ILGR implementation
Evolving regulatory framework in decentralization. E.g., unclear mechanism for on-
granting to the regions and inefficient budgeting process has significantly delayed the
project implementation
Highly dependent on local politics
Local government leadership is still the key success factor change of
leadership in the middle of implementation significantly impede the reform
processes
Need to align reform agenda with political leaders
Investment fund is certainly an incentive for reforms, but not sufficient national-
level recognition, capacity building also create incentives for LGs
Limited numbers (and lack of capacity) of local civil society, particularly outside
regional centers. Need to specifically build the capacity of linking, linking community
leaders to involve in district-level process
Building on the existing initiatives one size fits all clearly does not work
Several aspects of public services are not necessarily impacted from enhanced
budgeting processes, need direct interventions as well
Competition among LGs (with rewards) promotes innovation among regions, and also
learning from peer encourages and convinces others to initiate reforms
Challenges
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Challenges to both LG & CDD programs to institutionalize
good governance practices that have been introduced
Need to link community to supra community/village level players (LLI
Study). Most resources rest with LGs and need to work with them.
A lot of districts (endorsed by Central Government) have allocated
significant amount of funds as a Block Grant to Village. However, most of
them have not adopted CDD key success factors, such as intensive
facilitation, promotion of participation of women, transparent management of
funds, etc.
Adopt CDD principles in LGs regular processes
CDD and LG programs need to work together to make this happened:
Supporting community leaders to participate district-level processes
Supporting LG to adopt CDD principles for their regular project cycle
Blending CDD project funds with LGs Village Block Grant

Challenges