1. INDONESIA BUDGET REFORM (Priorities and Challenges) International Conference Budgeting for Performance-Modernizing PFM in Indonesia May 26 2008, Hotel Grand Hyatt, Jakarta Mulia P. Nasution Secretary General of Ministry of Finance

2. 2 Outline Introduction Public Financial Management Indonesia Budget Reform Existing Budget Mechanism Priorities and Challenges Ministry of Finance Bureaucratic Reform Ministry of Finance Budget Reform Conclusions

3. 3 Introduction: Proper Public Financial Management system is a key element to realize Good Governance in Public Sector. Transparency in budget preparation, implementation and accountability in treasury management facilitates: a.collection of sufficient resources from the economy in appropriate manner, and b.allocation or use of resources efficiently and effectively. Modern Budget System has to aim at supporting budget process that: a.has a medium-term framework in line with government’s macroeconomic management priorities; b.includes a set of governmental agencies spending limits that reflects government priorities; c.establishes clear responsibilities to ensure an effective in management and accountability; d.provides for reporting to the people through the parliament; e.requires an independent auditor of the legal compliance as well as the performance in achieving state objectives. Budget Formulation Process should aim at: a.ensuring the budget fits macroeconomic policies and resources constraints; b.allocating resources in conformity with national goals; c.providing conditions for operational management.

4. 4 Public Financial Management refers to the legal and organizational framework for supervising all phases of the budget cycle, including :  the preparation of the budget,  the budget implementation, include:  procurement,  monitoring,  and reporting arrangements,  internal control and audit,  external audit. The broad objectives of public financial management:  overall fiscal discipline,  allocation of resources to priority needs, and  efficient and effective utilization of public resources. Public Financial Management

5. 5 Budget Realism : Is the budget realistic; is it implemented as intended in a predictable manner? Budget Realism : Is the budget realistic; is it implemented as intended in a predictable manner? Accountability and Transparency : Are arrangements for external transparency and external scrutiny operating effectively? Accountability and Transparency : Are arrangements for external transparency and external scrutiny operating effectively? Comprehensive, Policy-based, budget: Does the budget capture all relevant fiscal transactions, and is the process giving regard to government policy? Comprehensive, Policy-based, budget: Does the budget capture all relevant fiscal transactions, and is the process giving regard to government policy? Fiscal Management : Are the aggregate fiscal position and risk monitored and managed? Fiscal Management : Are the aggregate fiscal position and risk monitored and managed? Information: Is adequate fiscal, revenue and expenditure information produced and disseminated to meet decision- making and management purposes? Information: Is adequate fiscal, revenue and expenditure information produced and disseminated to meet decision- making and management purposes? Control : Are arrangements in place for the exercise of control and stewardship in the use of public funds? Control : Are arrangements in place for the exercise of control and stewardship in the use of public funds? Six critical objectives of PFM system The PFM Performance Report would review key aspects of the PFM system

6. 6 Indonesia Budget Reform The Law No.17/2003 Unified Budget Performance Based Budgeting (PBB) Medium Term Expenditure Framework (MTEF)

7. 7 Existing Budget Allocation Mechanism National Planning Agency/Bappenas Ministries/Other Public Institutions (as COOs-Chief Operating Officers) Ministries/Other Public Institutions (as COOs-Chief Operating Officers) Ministry of Finance (as CFO-Chief Financial Officer On behalf of President as CEO-Chief Executive Officer) Ministry of Finance (as CFO-Chief Financial Officer On behalf of President as CEO-Chief Executive Officer) Indonesian Parliament National Priority Program And Ceiling Budget National Priority Program And Ceiling Budget Proposed to be revised approved Government Proposal National Budget Availability rejected

8. 8 Integrating PBB and MTEF into the Budget Process Defined Key Performance Based Appropriate Standard Costing Consistency between Planning Program and Budget Allocation ‘Budget Disciplinarians’ Integrating PBB and MTEF into the Budget Process Defined Key Performance Based Appropriate Standard Costing Consistency between Planning Program and Budget Allocation ‘Budget Disciplinarians’ Actions Plan Time Frame Person In Charge Modern Budget System Priorities and Challenges

9. 9 Organizatio n Developmen t Ministry of Finance Bureaucratic Reform Remuneration Good Governance and Public Services Delivery Improvement Business Process Improveme nt Key Performance Indicator Human Resources Improveme nt

10. 10 Ministry of Finance Budget Reform BSCPBB PBB BUDGET PLAN BSCMANAGEMENT Program Kegiatan Sub Kegiatan Strategic Goals Strategic Objectives Initiatives/Action Plan KPI

11. 11 Conclusions: Budget is a tool of accountability, a tool of management and an instrument of economic policy. As an economic policy instrument, government budget has three main functions: a.indicates the direction of economy and expresses intention regarding utilization of the economic resources. b.as a vehicle for reducing inequalities; c.as a tool for achieving and maintaining macroeconomics stability. Budget as a tool and policy instrument

12. End of Session Thank You