Indonesia: Local Government Financial...

Indonesia:Local Government Financial Management

A Measurement Framework

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THE WORLD BANK OFFICE JAKARTA

Jakarta Stock Exchange Building Tower II/12th Fl.Jl. Jend. Sudirman Kav. 52-53Jakarta 12910Tel: (62-21) 5299-3000Fax: (62-21) 5299-3111Webside: www.worldbank.or.id

THE WORLD BANK

1818 H Street N.W.Washington, D.C. 20433, U.S.A.Tel: (202) 458-1876Fax: (202) 522-1557/1560Email: [email protected]: www.worldbank.org

Printed in November 2005

This report is a product of the staff of the World Bank. The fi ndings, interpretations and conclusions expressed herein do not necessarily refl ect the views of the Board of Executive Directors of the World Bank or the governments they represent.

Indonesia:Local Government Financial Management

A Measurement Framework

iv | Indonesia: Local Government Financial Management

A Measurement Framework | v

vi | Indonesia: Local Government Financial Management

Acknowledgements

The task team that developed this Measurement Framework would like to express their gratitude for the cooperation afforded to them by various stakeholders, including the Ministry of Home Affairs and the Ministry of Finance. The team specifi cally expresses its gratitude to two local governments (Municipality of Blitar and District of Sleman) who provided excellent support to the team during initial testing of the Framework. We would like to thank the Mayor of Blitar and the Regent of Sleman for their personal interest in and support of this work and the cooperation and assistance of their staff.

Many international donor organisations operating in Indonesia provided us with valuable insights arising from their own ongoing work in the fi eld of Public Financial Management at both the center and sub-national levels, including Asian Development Bank (ADB) Canadian International Development Agency (CIDA) and GTZ. We are thankful to them for this assistance. We would like to especially thank the USAID project LGSP (Local Governance Support Program) for the valuable inputs and comments on this measurement framework.

The Task Manager for the preparation of this report was Rajiv Sondhi, Senior Financial Management Specialist at the World Bank. The framework was developed by a team of consultants that comprised Guy Janssen, John Leonardo, Jessica Ludwig and Bapak Sugiyarto from the Ministry of Finance. Valuable comments and advice were also received from a large number of other World Bank colleagues.

Comments on this report may be directed to [email protected]

A Measurement Framework | vii

Foreword

In recent years there has been an increasing interest in the important role local governments play in the delivery of public services and the realization of development outcomes in Indonesia. This is not at all surprising considering the increasing fi nancial authority that has been devolved to elected local governments. Improvements in development outcomes frequently require sustained changes in the composition and levels of public expenditure. Achieving these changes, in turn, depends on effi cient, transparent and effective management and accountability of public resources from whichever source. How well the processes underlying these are managed at the district and provincial levels is therefore of considerable interest to both the Central Government as well as the donor community.

Commensurate with this increased interest in the role of local governments is the realization among policy makers and other stakeholders, including donors, that local governments need large amounts of technical assistance and capacity building, to help them discharge their new fi duciary responsibilities and improve their performance. What is needed is a framework that allows a systematic evaluation of the needs of each local government, as a guide to capacity building efforts by all interested stakeholders. Such a framework could also service as a useful guide to those local governments that embark on a journey to introduce fi nancial management reforms in their jurisdictions, and provide ways of benchmarking themselves against best practices.

We hope that the work described in this report is able to serve this need. The Measurement Framework for Local Government Financial Management included in this report has been developed by the World Bank with the cooperation of the Ministry of Home Affairs and with inputs from several other donors. This instrument will support the World Bank’s development objectives outlined in the Country Assistance Strategy by helping to identify strengths and weaknesses in regional public fi nancial management systems, and seeking a common understanding on these matters among the government, the World Bank and other development partners. This common understanding will help to identify priorities for action and inform the design and implementation of the decentralization reform agenda and capacity-building programs.

Similarly, at the Ministry of Home Affairs, such a framework is seen as a basis to more accurately assess the progress and performance of local governments, and to guide the strategies and actions needed to support local governments from the Center. The Ministry intends to apply this framework in a large number of local governments, and it is hoped that we will continue to update this framework in the years ahead with the experience gained.

Jakarta, October 2005

Daeng Mochamad Nazier Andrew SteerDirector General – Regional Financial Administration Country Director for IndonesiaMinistry of Home Affairs The World Bank Republic of Indonesia Jakarta

viii | Indonesia: Local Government Financial Management

ADB Asian Development Bank

CAS Country Assistance Strategy (World Bank)

CIDA Canadian International Development Agency

FM Financial Management

FY Fiscal Year

GTZ Gesellschaft fuer technische Zusammenarbeit (German Technical Cooperation)

MDG Millenium Development Goals

MoF Ministry of Finance

MoHA Ministry of Home Affairs

MTEF Medium-Term Expenditure Framework

PFM Public Financial Management

USAID US Agency for International Development

Acronyms

A Measurement Framework | ix

Acknowledgments vi

Foreword vii

Acronyms viii

1. INTRODUCTION 1

Why do we need this Measurement Framework?

1

Who is this Measurement Framework for?

2

Structure of this Report 3

2. FACTORS INFLUENCING THE DESIGN OF THE FRAMEWORK

5

Desired Financial Management Outcomes for Local Governments

5

Incomplete and Under-Developed National Legal Architecture

5

Cross-cutting Issues 6

3. THE MEASUREMENT FRAMEWORK 9

Overall Structure 9

The Cascade of Core Modules within the Framework

9

Scorecard Methodology 12

Development and Initial Testing 12

Limitations of this Framework 14

4. THE DIAGNOSTIC TOOL KIT 15

Diagnostic Work Sheets 15

Scoring and Evaluation Sheets 33

5. INTERPRETING THE SCORING RESULTS OF THIS FRAMEWORK

35

Assessing Local PFM Standards 35

Capacity Building Implications 35

Scoring and Interpreting Capacity Building Needs

38

Table of Contents

APPENDIX

Appendix 1. Results of District of Sleman 39

Appendix 2. Results of Municipality of Blitar 41

FIGURES

Figure 1. Example of Drill Down Approach 11

Figure 2. Blitar Municipality Results 13

Figure 3. Sleman District Results 13

TABLES

Table 1. Strategic Areas and Outcomes 10

Table 2. Scorecards: Results of the Pilots 13

Table 3. PFM Outcomes and Implications for Capacity Building

37

Table 4. PFM Capacity Building Needs Scorecard Methodology

38

Table 5. Blitar and Sleman PFM Capacity Building Needs by PFM Strategic Area

38

BIBLIOGRAPHY 43

x | Indonesia: Local Government Financial Management

Chapter 1.Introduction

Why do we need this Measurement Framework?

Over the last few years, Indonesia has been undergoing fundamental transitions in a number of arenas simultaneously, including political, economic and fi scal. Of these, the on-going decentralization has been particularly challenging. While the political transition is played out daily in the newly free media, and the economic transition is being closely monitored by multilateral institutions and investors, the full impact of the ‘Big Bang’ decentralization – the transition of power and responsibility over public resources from the center to over 440 local governments of varying capacity– is still largely unknown. Fiscal decentralization is a key dimension of this change as local and provincial governments now manage about a third of total public expenditures, and this is expected to be higher in subsequent years.

The absence of systematic qualitative and quantitative information on how this fi scal decentralization is being actually managed raises some very basic questions with regard to what this change might mean for the design and implementation of development activities, the integrity of decentralized government processes and the impact these might have on the daily lives of Indonesians. Improvements in priority human development outcomes (such as national and provincial sector goals and, at the international level, the Millennium Development Goals) frequently require sustained changes in the composition and levels of public expenditure. Achieving these changes is, in turn, dependent on adapting government budget allocations in line with both overall sector strategies and plans, accompanied by expenditure and procurement processes to ensure that the priorities refl ected in the budget allocations are faithfully executed. The internal

integrity and consistency of this entire chain becomes particularly important given weak capacities of many of the local governments to effi ciently and effectively manage large amounts of public resources, which is likely to exert negative infl uences on the delivery of public services.

Among basic questions that need to be addressed are: how transparently are local governments exercising their newly acquired power and how protected are these processes from local elite capture and collusion? How are they raising local public revenues – more equitably and with greater predictability or through more regressive and more burdensome taxes and levies? How effectively and effi ciently are public resources spent and accounted for, and with how much integrity and oversight from stakeholders? Answers to these and other similar questions would naturally vary widely across local governments, but it is this variation that we need to diagnose, measure and understand. We need to identify which local public institutions and processes are robust in which regions, and where capacity building efforts should be targeted. A comprehensive measurement framework is therefore needed to help determine how well this systemic integrity is being maintained at the local governments across the country, and how well it is evolving over time.

As the World Bank’s operations are responding to decentralization by focusing increasingly on the local and provincial levels, the Country Assistance Strategy for Indonesia (The World Bank) for the period FY 2004-FY 2007 proposes that approximately 40 per cent of the World Bank’s new lending operations would be directed towards the local or provincial level. Some operations are being designed to specifi cally encourage reforms in the areas of public fi nancial management, procurement and planning, at selected local governments. To be successful, the World

2 | Indonesia: Local Government Financial Management

Bank’s operations at the sub-national level will need to be based on a constantly evolving understanding of the dynamics of public fi nancial management and accountability processes at this level: what works and doesn’t work; how decentralization is being implemented on the ground; how different provinces and local governments respond to changing incentives; and how experience is shared and disseminated across regions.

This Measurement Framework attempts to assist precisely this understanding. The development of this framework was undertaken by the Local Services Platform Group of the World Bank in Jakarta and refl ects the need among task managers at the World Bank for a comprehensive framework to measure and analyse local Public Financial Management (PFM) processes and outcomes. Such an analysis can feed back into the design of new World Bank programs and interventions, as well as serve as a basis for our ongoing policy dialogue with governments both on the sub-national level and at the center

Who is this Measurement Framework for?

This fi nancial management measurement framework for local governments in Indonesia has been designed to measure and analyse PFM processes and outcomes at the local government level. This measurement framework is the fi rst of its kind in Indonesia and provides a comprehensive approach that allows the identifi cation of relative strengths and weaknesses of PFM sub-systems in specifi c local governments and a quick and easy comparison of PFM outcomes between regions. It also allows monitoring of progress over time in the implementation of fi nancial management reforms among districts and municipalities that embark on a journey to improve fi nancial management and accountability practices in their jurisdictions.

Task teams of the World Bank, as well as other donors who are engaged in designing development projects in provinces and local level might fi nd this framework

useful by helping identify those local governments that have a reasonable measure of reliability in PFM processes and are achieving reasonable PFM outcomes, and by helping identify those aspects of PFM processes and institutions that need donor support and assistance. This measurement framework will facilitate comparisons of regions across the country with varying track records in public fi nancial management. It can be used to identify local governments that have achieved a measure of success in the fi eld of PFM, that are able to deal effectively with resources made available to them, and governments that have already achieved better PFM outcomes or those that are making rapid progress. These are the governments that can then serve as good examples for others to emulate. Furthermore, this analysis will help the World Bank better serve its fi duciary objectives by identifying fi duciary risks to the use of World Bank loan proceeds posed by weaknesses in the decentralized PFM arrangements and inform the discussion on how to address these risks best across the portfolio and in individual lending operations. Finally, this framework can help to develop a common understanding on these developments among the government, the World Bank and development partners, which will in turn help identify priorities for action and inform the design and implementation of the decentralization reform agenda and capacity-building programs.

At the level of the central government, this measurement framework would be useful, with some modifi cation, to monitor the progress local governments are making in improving PFM outcomes and determine the appropriate central government regulatory interventions that may be needed to guide this process. Such government interventions may be in the form of a revision of existing PFM regulations or the development of new ones. After all, under the current inter-government fi scal framework, the central government is probably the largest donor to the regions, and would therefore have a direct stake in improving local fi nancial governance and outcomes.

At the level of regional governments, this measurement framework could serve as guidance on what might be one way forward in improving PFM outcomes, especially for those who decide to venture onto the

A Measurement Framework | 3

journey towards reforming their PFM processes. It will also allow local governments to monitor their own progress and that of their peers against what are considered as acceptable benchmarks.

Finally, the application of the framework may generate information on areas where the decentralization framework is still incomplete or lagging in implementation and thus requiring further effort.

Structure of this Report

This report is structured as follows:• Chapter 2 discusses the factors that have

infl uenced the design of the framework and the underlying methodology.

• Chapter 3 introduces the structure of the framework, including the cascade of core modules, the scorecard methodology and a summary of the results of initial testing.

• Chapter 4 includes the diagnostic work sheets and the scoring and evaluation sheets.

• Chapter 5 provides some guidance for interpreting the testing results from this framework.

• The Appendix presents the detailed scorecards of the pilots.

Chapter 2.Factors Infl uencing the Design of the Framework

While PFM issues at the national level are well researched and reported on, moving from the national to the local canvas requires some adaptation and recognition of certain contextual infl uences. These include an articulation of the link between PFM outcomes and development outcomes, recognition of what is within the powers of local governments under a legal architecture that is itself evolving and some cross cutting issues. These are discussed below.

Desired Financial Management Outcomes for Local Governments

The development of a PFM measurement framework for local governments in Indonesia was undertaken in the context of the challenging development situation facing local governments. The targeted achievement of development outcomes, such as economic growth, poverty reduction and improvement in health and education provided the wider context within which PFM outcomes need to be measured. While it was important to identify whether or not local PFM systems are working well, it was equally important for this framework to establish if local governments are deploying their resources in a way that contributes to the achievement of the above mentioned overall development outcomes. Therefore, the development of this measurement framework started off with the development of a set of PFM outcomes that were considered necessary to achieve overall development outcomes and to increase accountability of local governments to stakeholders.

Desired long-term local government PFM outcomes associated with the achievement of overall development outcomes by Indonesian local governments were initially identifi ed as follows (in no particular order):

• Effective governance structures and processes• Prudent fi nancial management• Accountability and transparency• Community participation in the budgeting process• Reduced corruption

Following the determination of these desirable outcomes, a further analysis suggested a range of impediments to the realization of these outcomes. These include, amongst others, inadequacies in central regulations on PFM, inadequate guidance and training inputs being provided to local governments, incentive structures that were not supportive of good PFM practices and weak control environments in fi nancial administration. Some of these are discussed in more detail below. The team has acknowledged these and considered how these could be incorporated into the measurement framework.

Incomplete and Under-Developed National Legal Architecture

The existing regulatory framework for public fi nancial management at national as well as sub-national levels is incomplete. Within the national regulatory framework, local governments are expected to issue local decrees that adopt national regulations where these have been issued and further expand on the implementation procedures. These have been included in this measurement framework. There are other areas where fi nancial management national regulations do not exist but are expected to be issued at some point in future. There are also others, such as civil service regulations, where a reform of central rules may not be imminent yet which are relevant for realizing PFM outcomes. This framework has recognized these as binding constraints on PFM


outcomes, and therefore not included an assessment of these regulations. Finally, there are areas where local governments are within their right to issue local regulations, for instance, those relating to public participation and transparency. Such areas provide room for local initiative among local governments to advance the reform of PFM practices and better.

The reform of the legal architecture for PFM at the center is being orchestrated by the Indonesian Ministry of Finance (“MoF”) and still evolving. In recent years, legislation on fi nancial management has been passed, such as the State Finance Law (Law 17/2003), State Treasury Law (Law 1/2004), the State Audit Law (Law 15/2004) and Budget Guidelines (Ministerial Decree 29/2002). Some other pieces of legislation are still missing, such as the government regulations on Accounting Standards, treasury management and other supporting government regulations for the above mentioned laws.

To date, the Ministry of Home Affairs (“MoHA”) and the MoF have been the principal ministries sponsoring legislation affecting local government PFM. Guidelines issued by MoHA in 2002 (Ministerial Decree 29/2002) prescribed rules and formats for local government budgets that later proved inconsistent with subsequent legislation issued by MoF; it is not surprising that this situation has created considerable confusion amongst local government fi nancial practitioners and a decline in the standard of fi nancial reporting by local governments.

Although MoHA and MoF are currently preparing legislation and regulations that will complete the present proposed legislative framework and address some of the identifi ed problem areas, the results of previous work undertaken by the World Bank and feedback provided by other prominent donors suggest that the overall output from these changes is likely to be a framework that, for the foreseeable future, is not commensurate with international best practice. Consequently, the pending legal framework for local government fi nancial management is expected to undermine the achievement of PFM outcomes that

are consistent with international best practice. In turn, this outcome is expected to have an adverse impact on the delivery of public services.

The above-mentioned factors represent major hurdles to be overcome in the medium to long term to secure sustainable improvements in local government fi nancial management in Indonesia. The Measurement Framework therefore focuses substantially on what was clearly within the legal mandate and authority of local governments, and on measuring the consistency of local regulations with national legal requirements.

Cross-Cutting Issues

The realization of PFM outcomes at local level are dependant on a number of other cross cutting issues that in effect seem to inhibit the effectiveness of what would normally be good fi nancial management practices. This measurement framework needed to carefully consider some of these and measurement of these has been included in several modules in the toolkit. Some principal ones are briefl y mentioned below:

Accountability Structures

The limited defi nition of roles and responsibilities for local government fi nancial management activities weakens accountability in local government fi nancial governance as some key responsibilities either do not exist or are alternatively suffi ciently blurred to make them ineffective. Good fi nancial management is not possible when such basic accountability mechanisms do not exist. In addition, oversight roles for the local parliament, mayor/regent, local government secretary and senior offi cials are not always rigorously defi ned, further undermining accountability. This aspect has been included in the toolkit, to the extent that these were explicitly within the authority of local governments, or where local initiatives were considered feasible under national laws. Overall organizational performance is often impeded by the


absence of a performance management culture in local government. Poor performance is frequently not addressed by using prevailing sanctions and penalties. Sub-national governments in Indonesia may need to await a substantial reform of central civil service regulations before overcoming this. This measurement framework has therefore not included this issue.

Human and Institutional Capacity

Relatively weak human and institutional capacity levels in local governments represent major impediments to improving their overall performance. Local governments often fi nd it diffi cult to employ adequate numbers of qualifi ed staff in fi nance functions due to constraints imposed by national regulations on salary levels and recruitment procedures. However, there are examples of local governments who have found solutions to attract better qualifi ed staff within the existing national regulations. Thus, the toolkit contains indicators to assess the quality of staff in various modules.

Extensive and more effective training in fi nancial management functions is fully within the local government authority and is required for most local government fi nancial management offi cials. This has been recognized in this measurement framework in several modules.

Institutional capacity in fi nancial management is often weakened due to the limited guidance provided to local governments by national government departments in respect of new legislation. Guidance has often not been provided for either the content of existing legislation or the application of the prevailing legislative framework in local governments. However, the local governments are fully authorized to familiarize all relevant staff with the obligations resulting from new legislation. The framework takes this into account by inquiring in several modules about the availability of manuals and documented procedures.

Transparency and Public Participation

The current overall level of transparency in local government fi nancial management is relatively low refl ecting the under-developed legislative framework mentioned earlier. This result, in turn, acts as a barrier to increased public participation in key PFM processes, particularly the budgeting process. However, transparency is gradually increasing under the pressure from civil society and the media and many local governments are genuinely striving to improve transparency levels. A measure of this practice has been included in the toolkit at appropriate places.

Chapter 3.The Measurement Framework

Overall Structure

Throughout this framework, we have used the term “Public Financial Management” as an easy reference to the range of building blocks that traditionally apply to government fi nancial management, from Planning and Budgeting to Budget Execution and External Oversight. In the context of a weak governance and control environment in Indonesia, the term PFM has been used here in a somewhat broader sense to include all elements that are relevant to better accountability of governments to stakeholders and that help identify fi duciary risks. The latter includes questions assessing whether goods and services have been procured competitively, public expenditure is properly accounted for and whether it is used for its intended purposes.

This framework comprises a set of strategic areas from the PFM cycle, each with a selection of key PFM outcomes, a diagnostic tool kit of selected indicators to help assess the outcomes and a scorecard. The selected PFM outcomes, presented in a modular structure, are those that were considered important and relevant in the Indonesian context. The scorecard conveys the state of public fi nancial management systems and practices of the assessed local governments. Brief notes have been provided for guidance of enumerators. Taken together, these would help identify those processes that are weak and not likely to support positive outcomes and helps identify strengths and weaknesses of PFM systems, institutions and processes at the local level.

The diagnostic instrument has deliberately focused on a manageable scope of the PFM cycle, so as to make it easy to apply across a wide variety of local governments in Indonesia. The framework takes into account the wide variations of performance across local governments. The task team recognizes that

some local governments in the country are at a very early stage in developing good practice PFM systems, some not at all, and therefore the question of identifying best practices and integrating these into the measurement framework has had to be handled very carefully and selectively. Local governments need to get their basics right fi rst. Therefore, many PFM processes that would be considered “best practices” by international standards have not been included in this framework.

A scoring methodology has been developed that sensitizes this framework to both the high performer and the low performer local governments, yet allowing a reasonable degree of variation between the two ends. The measurement framework was tested in two districts that are commonly regarded as “well performing” in the context of local Indonesian governments, to enable the team to set a rough benchmarking of what is clearly achievable here. Both these local governments are located on Java Island; the municipality of Blitar (East Java) and the district of Sleman (Central Java). Results of this pilot are summarised in the appendix of this report.

The Cascade of Core Modules within the Framework

The methodology draws on the conventional PFM processes employed at the national level, comprising segments of budget outturns, budget planning and formulation, cash and treasury management, procurement, accounting and reporting, internal controls and oversight. The adopted methodology differs slightly from generally accepted national PFM assessments as it has been modifi ed to refl ect current PFM trends, desired short-term outcomes in PFM processes and binding constraints at the local government level in Indonesia.


In order to achieve these long-term PFM outcomes and with the aim of making the measurement framework workable, nine core “strategic areas” (or modules) of PFM were identifi ed, representing the core dimensions of an open and orderly PFM system at local level. For each of these strategic areas, a strategic objective was articulated to help defi ne the benchmark of good practice for each area, thereby providing a logical link between the larger objectives sought to be achieved and the related outcomes that are to be measured. Further, for each such strategic area, desirable outcomes were selected that would logically contribute to the achievement of the strategic objective and needed to be measured. A total of 27 such outcomes were developed across the entire framework. Finally, for each of these 27 outcomes, a set of selective indicators has been defi ned that will help measure if the outcomes are likely to be achieved.

This downward cascade, from strategic areas to outcomes to indicators, is embedded in this measurement framework, and provides the basis for an assessment of the state of affairs at each level of this framework. Outcomes in PFM strategic areas are designed to collectively contribute to the achievement of strategic objectives through the attainment of particular PFM outcomes; the drill-down indicators provide the tools for assessing the overall level of performance associated with each PFM outcome and within each strategic area.

Table 1 lists the strategic areas in this framework, together with the respective outcomes. The cascade to outcomes and indicators has been further illustrated in table 2 below:

Table 1. Strategic Area and OutcomesStrategic Area Outcome

1. Local regulatory framework

1. A comprehensive local regulatory framework required by nationallegislation on local fi nancial management exists

2. The local regulatory framework provides for an effective lawenforcement and organizational structure

3. The local regulatory framework includes measures to increasetransparency and public participation

2. Planning and Budgeting

4. Consistent link between bottom-up planning process, localdevelopment plans, sector plans and budget exists

5. Budgets are based on a medium-term time horizon

6. Budget outturns are reasonable and indicate realistic budget making processes

7. Budget to be pro-poor

8. Comprehensive participatory monitoring and evaluation system for planning and budgeting process is established

3. CashManagement

9. Policies, procedures and controls to promote effi cient cashmanagement are in place

10. Cash receipts, cash payments and temporary cash surpluses aremanaged and controlled effi ciently

11. Effi cient system for billing and collecting local revenues is established

4. Procurement 12. Policies, procedures and controls to promote effi cient andcompetitive procurement of goods and services are established and implemented

13. A complaint handling system is operating

5. Accounting and Reporting

14. Adequate human and institutional capacity for accounting and fi nance functions exists

15. Accounting and management information systems are integrated

16. All local government fi nancial transactions and balances arerecorded promptly and accurately

17. Reliable fi nancial and management information reports are produced

6. Internal Audit 18.The local government’s internal audit agency is organized andempowered to operate effectively

19. Internal audit standards and procedures applied are acceptable

20. Internal audit fi ndings are followed up adequately

7. Public Debt and Investment

21. Risk-based policies, procedures and controls for management of local borrowings and investments are established and implemented

8. AssetManagement

22. Procedures and mechanisms for ensuring effective governance of local enterprises are established

23. Policies, procedures and controls for acquisition of new assets andeffective management of existing long-term physical assets areestablished and implemented

24. Supporting asset management information base is established and maintained

25. Asset management is linked to plans and budgets

9. External Audit and Oversight

26. External audits provide effective accountability of local government

27. Effective independent oversight of local government fi nancialmanagement exists


Figure 1. Example of Drill-Down Approach

Strategic Area I: Local Regulatory Framework

Strategic Objective: Creation of supporting local regulatory frameworks to promote effective fi nancial governance that are consistent with national legislation

A comprehensive local regulatory framework required by national legislation on local fi nancial management exists

The local Regulatory framework provides for an ef-fective law enforcement and organizational structure

The local regulatory framework includes measures to increase transparency and public participation

1. Local legislation on compilation of planningdocuments and public consultation processes exists

1. local legislation on fi nancial management issupported by technical working guidelines.

1. Procedures for public participation elements in the bottom-up planning process are adopted in local legislation

2. Local legislation on Local Medium TermDevelopment Plan exists

2. Local legislation on fi nancial management is internally socialized in a timely and comprehensive manner

2. Budgeting for public includes some participatory elements

3. Local legislation on guideline for sectoral work plan, sectoral budget and implementation exists

3. Responsibility for implementation of local legislation clearly defi ned and confi rmed in annual statement of accountability by Regent / Mayor to local parliament

3. Participatory elements in policy makingprocesses are established

4. Local legislation on annual budget and budget revision exists

4. Clear delineation of fi nancial management roles, responsibilities and delegations for local parliament, Regent/Mayor and local offi cials in local legislation with specifi ed with fi nancial limits where appropriate

4. Local legislation on consultations processes includes consultation processes in development planning, budgeting, policy decisions and evalua-tion of implemented activities

5. Local legislation on Budget ExecutionAccountability Report exists

5. An integrated organizational structure for FM is implemented (BPKD format)

5. Local legislation on transparency exists

6. Local legislation on guideline for budgetcompilation, execution, monitoring, reporting,auditing and accountability exists

6. Staff performance is being monitorized based on measurable indicators

6. The public has access to budget sessions in the local parliament

7. Local legislation on local fi nancialmanagement exists

7. Incentive and sanction structure for staff is institutionalized

8. Local legislation on reserve funds exists

9. Local legislatin on local procurement exists

10. Local legislation on local-owned enterprises exists

11. Local legislation on local taxes, tax share for villages, tax tariffs and local fees exists

12. Local legislation on local obligation exists

13. Local legislation on local private / publicinvestment exists

Out

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e 1

Out

com

e 2

Out

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Scorecard Methodology

The determination of a scorecard methodology represented the fi nal step in the construction of the local government PFM measurement framework. The chosen scoring approach allows rating for each strategic area, each district/municipality, and each outcome to identify where the PFM strengths and weaknesses lie.

The diagnostic toolkit seeks a true-false response to each question. The results are recorded into a worksheet (see Chapter 4) and then the total number of “true” or “Yes” answers are tabulated to get a score against the maximum potential. To evaluate the scores and facilitate comparison, a grading system has been developed to provide an overview of the value of scores achieved for individual outcomes and strategic areas. Although scores are aggregated for each strategic area, these scores would not represent the extent to which those strategic objectives are likely to be achieved, since only selective outcomes for each area have been included in this framework.

The grading system incorporates a set of fi ve grades. A linear ranking approach has been chosen for the initial fi eld testing. Percentages are calculated based on the actual “Yes” scores gained against the maximum possible for each Strategic Area.

100-80 % Excellent/Fully acceptable 79-60 % Very Good/Substantially acceptable 59-40 % Good/Fairly acceptable 39-20 % Moderate/Partially acceptable 19- 1 % Poor/ Non-acceptable The scoring and evaluation sheet is presented in chapter 4 of this report. The grading scale above is designed more to give an indication of the strengths and weaknesses of each strategic area, not a very precise and absolute measure. Analysing and interpreting the scores realized would normally require a degree of care and reference to the context in which

the toolkit is being applied. For instance, an overall score for each strategic area can be easily derived from this toolkit. However, deriving such an aggregate score for a district/municipality and interpreting the overall score would present some challenges, as the issue of weighting of each area would need to be carefully considered.

The scorecard grading system noted above has been based on testing in only two locations so far, and may need to be revisited once the results of more testing have come in, to see if the model reasonably refl ects variations in the fi eld

Development and Initial Testing

Two local governments were selected for undertaking initial testing of the preliminary PFM measurement framework; these comprised the municipality of Blitar (East Java) and the district of Sleman (Central Java). The latter two local government units are widely regarded as being relatively progressive in promoting fi nancial management reforms. The scorecard confi rmed this: Municipality of Blitar recorded scores of “Good” or better in 6 of the 9 strategic areas, whilst the district of Sleman, recorded “Good” or better in 8 of the 9 areas. In addition, more recently, staff from the Ministry of Home Affairs have also tested this framework in 8 other local governments, including Kabupaten Takalar, Kebumen, Bantul, Magelang, Kutai Kertanegara, Klungkung and Kota Samarinda and Pare Pare.

It became evident during the testing that the primary focus of the PFM model should be to promote effective fi nancial management at a relatively modest level of achievement compared with international best practices. Consequently, the retention of more advanced PFM indicators could not be justifi ed as this approach was resulting in inconsistencies across different strategic areas.


Table 2. Scorecards: Results of PilotsTable 1 Municipality of Blitar District of Sleman

1. Regulatory Framework 73% 65%

2. Planning and Budgeting 70% 55%

3. Cash Management 55% 100%

4. Procurement 78% 85%

5. Accounting and Reporting 38% 100%

6. Internal Audit 47% 89%

7. Public Debt and Investment 0% 0%

8. Asset Management 55% 64%

9. External Audit and Oversight 33% 78%

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Figure 2. Blitar Municipality Results

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Figure 3. Sleman District Results

The results of the fi eld testing in Blitar and Sleman are presented in the Appendix, and a summary of scores is presented below (3 more indicators were added after the initial fi eld testing resulting in a different number of indicator scores between the template and the scoring results):


• Just as it is important to have the right procedures and policies in place, it is important to ensure that these are actually applied in practice. This framework is inclined more towards assessing the adequacy of the policies and procedures as laid down, and relies generally on discussions between the enumerators and local government offi cials. Some indicators could indeed be tested on live samples, but many may not have the opportunity to be tested with live data. This framework could of course be equally applied for more comprehensive testing of actually practices, though this would require more time and additional resources.

• It is important to note that the measurement framework has been prepared in the absence of any extensive supporting information regarding current PFM processes employed across a signifi cant number of Indonesian local governments as such information is not yet available. Further fi eld testing would therefore help sharpen this framework to smaller variations in outcomes.

• Whilst different functions and responsibilities are imposed on provincial governments under laws 32/2004 and 33/2004 compared with those applicable to local governments, the measurement framework could nevertheless serve as a preliminary framework for measuring PFM processes in provincial government. The framework therefore needed to be customized to the evolving competences of the provinces.

Limitations of This Framework

Even though this measurement framework tries to be as comprehensive as possible, certain shortcomings could not be avoided:

• This framework does not claim to be capable of measuring all there is to measure with respect to fi nancial management and accountability of local governments. To that extent it would not tell the entire story. It takes into account what is feasible and realistic to achieve in the Indonesian context. Therefore, the indicators would not always imply best international practices, but rather refer to the “basics” required and considered achievable. This has been done to sensitize the model to more modest improvements in PFM that are likely to be realized in many of the local governments we expect to deal with.

• In developing this framework we have also tried to bear in mind the ease of use. A degree of selectivity has therefore been applied in including certain outcomes, indicators and diagnostic questions and leaving others out, so that the framework can be easily applied by surveyors who may not be fully conversant with all intricacies involved.

• Internal control environments at some of the key PFM institutions may not be fully captured in this model. Assessing internal controls can be an intricate exercise, and therefore in key regional PFM institutions, such as accounting and local treasury offi ces, only some leading questions have been included that would give broad indicators of the control environments.

Chapter 4.The Diagnostic Tool Kit

DIAGNOSTIC WORK SHEETS

Strategic Area 1: Local Regulatory FrameworkStrategic Objective: Creation of supporting local regulatory frameworks to promote effective fi nancial governance that are consistent with national Legislation

INDICATOR YES NO GUIDANCE

OUTCOME NO. 1 A COMPREHENSIVE LOCAL REGULATORY FRAMEWORK REQUIRED BY NATIONAL LEGISLATION ON LOCAL FINANCIAL MANAGEMENT EXISTS

Confi rm if the local legislation have been issued (compliance with national legislative framework will be tested in respective strategic area)

1. Local legislation on compilation of planning documents and public consultation processes exists

Local legislation might be: Perda, SK/Peraturan Kepala Daerah (Decree)

2. Local legislation on Local Medium Term Development Plan exists

3. Local legislation on guideline for sectoral work plan, sectoral budget and implementation exists

4. Local legislation on annual budget and budget revision exists

5. Local legislation on Budget Execution Accountability Report exists

6. Local legislation on guideline for budget compilation, execution, monitoring, reporting, auditing and accountability exists

Check if legislation includes all of the mentioned issues

7. Local legislation on local fi nancial management exists

8. Local legislation on reserve funds exists

9. Local legislation on local procurement exists

10. Local legislation on local-owned enterprises exists

11. Local legislation on local taxes, tax share for villages, tax tariffs and local fees exists

12. Local legislation on local obligations exists

13. Local legislation on local private/public investment exists

OUTCOME SCORE



OUTCOME NO. 2 THE LOCAL REGULATORY FRAMEWORK PROVIDES FOR AN EFFECTIVE LAW ENFORCEMENT AND ORGANIZATIONAL STRUCTURE

1. Local legislation on fi nancial management is supported by technical working guidelines

Check for technical guidance (juknis/juklak)

2. Local legislation on fi nancial management is internally socialized in a timely and comprehensive manner

• Timely: within 2 months after passing, or any other reasonable period.• Comprehensive: all related working units were included in socialization

3. Responsibility for implementation of local legislation clearly defi ned and confi rmed in annual statement of accountability by Regent/Mayor to local parliament

Does the accountability report provide for information on implementation of local legislation?

4. Clear delineation of fi nancial management roles, responsibilities and delegations for local parliament, Regent/Mayor and local offi cials in local legislation with specifi ed with fi nancial limits where appropriate

Check local legislation on fi nancial management for EXPLICIT delineation of roles etc.

5. An integrated organizational structure for PFM is implemented (BPKD format)

BPKD format includes integration of Expenditure Unit (Finance unit), Revenue Unit (Revenue unit), Treasury (Kas Daerah) and Accounting

6. Staff performance is being monitored based on measurable indicators Measurable: Qualitative and quantitative indicators that refl ect performance levels

7. Incentive and sanction structure for staff is institutionalized Review local legislation for incentives/sanctions

OUTCOME SCORE

OUTCOME NO. 3 THE LOCAL REGULATORY FRAMEWORK INCLUDES MEASURES TO INCREASE TRANSPARENCY AND PUBLIC PARTICIPATION

1. Procedures for public participation in the bottom-up planning process are adopted in local legislation

2. Budgeting process includes some participatory elements Examples of these elements might include consultation with civil society, stakeholder forums etc.

3. Participatory elements in policy making processes are established This could include public consultation for draft local regulation through institutions such as stakeholder forums

4. Local legislation on consultations processes includes consultation processes in development planning, budgeting, policy decisions and evaluation of implemented activities

Check comprehensiveness of local legislation on consultation processes- in order to tick “YES”, all listed activities must be included. Activity could also be a newspaper publishing on draft budgets where inputs and comments can be made

5. Local legislation on transparency exists Examples of this could include availability of documents on planning, budgeting, procurement etc.

6. The public has access to budget sessions in the local parliament This access could be of physical nature or through radio etc.

OUTCOME SCORE

STRATEGIC AREA 1 TOTAL SCORE TOTAL ACHIEVABLE SCORE: 26


Strategic Area 2: Planning and BudgetingStrategic Objective: Creation of rigorous regional multi-year budgets clearly linked to regional plans


OUTCOME NO. 1 CONSISTENT LINK BETWEEN PARTICIPATORY BOTTOM-UP PLANNING PROCESS, LOCAL DEVELOPMENT PLANS, SECTOR PLANS AND BUDGET EXISTS

1. Bottom-up planning process is based upon development plans and priorities

Check if any information on plans/priorities has been provided to villages before bottom-up starts

2. Bottom-up planning outcome does not include an unrealistic number of proposals (“Shopping List”)

Unrealistic – more than 3 proposals per village for bottom-up planning outcome

3. The medium-term local development plan is a realistic document and strategies, programs (and activities) relate to the objectives

Can the objectives be achieved by these activities and programs? Or are they very broad and general? Check with planning documents

4. Sector plans are based on the medium-term development plan and refl ect development priorities

5. Budgets are based on adopted minimum service standards set out in plans Are the Minimum Service Standards considered?

6. Plans and activities in the budgets employ a consistent structure Is the consistency clear? Check working unit budget document of selected agencies and plans

7. Annual budget policy includes measurable outcome indicators

8. Budgets include measurable outcome indicators that refer to programs/ strategy

Do the outcomes defi ned relate to respective programs? Check DASK of selected agencies and plans

9. Development plans include cost projections and take overall budget constraints into account

10. Development plans and budgets include activities funded by non local budget funds

Check if “deconcentration” funds are documented and included in plans and budget

11. Plans and budget ceilings are based on the same set of realistic on common fi nancial revenue projections

Check with Finance Unit if budget ceilings exist at all and what is its basis

12. Budget ceilings for each sector are determined before the budgeting process starts that are in line with planning and budget priorities

When are budget ceilings determined? Check with selected sector

13. Consistency between plans, budget and accountability report is evident Evident:: consistency in format and substance can be seen at glance

14. Integrity review is being done between plans/budget/accountability report in accordance with specifi ed assignments

Are Bappeda/respective sectors conducting any reviews of integrity?

15. Local legislation regulates clear compulsory working guidelines for the Executive Budget Committee for the budgeting process

Check the working basis for Executive Budget Committee

16. Local parliament has been informed about sector programs and sector priorities

This is important in order to assess the quality of budget sessions. Does the parliament know about sector programs and priorities that were not passed as local legislation?

17. Local parliament discusses promised outcomes when accountability speech by Regent/Mayor is delivered

Check with legislative/executive if discussion is outcome oriented

OUTCOME SCORE



OUTCOME NO. 2 BUDGETS ARE BASED ON A MEDIUM-TERM TIME HORIZON

1. Medium-term expenditure framework (MTEF) is implemented Stipulated by law 17/2003, basis for multi-year budgeting

2. A multi-year time horizon is used in plans and budget forecasts Is there any medium-term budget consideration at all? Check with Finance Unit

3. 5-year accountability report to local parliament also refers to planned and realized revenue and expenditures

OUTCOME SCORE

OUTCOME NO. 3 BUDGET OUTTURNS ARE REASONABLE AND INDICATE REALISTIC BUDGET MAKING PROCESSES

1. Budget is approved within time limit specifi ed in budget calendar Approval by Dec. 31 at the latest

2. Monthly and quarterly revenue projections are provided in the budget Check local budget

3. Strategy for revenue increase exists that is in line with national legislation Is there actually a strategy on how to increase Local revenue?Many local governments introduce taxes and fees that are illegal according to national law. Local legislation might have been approved by MoHA or MoF

4. Variation of total expenditure as % of budgeted expenditure is less than 10%

Off-budget funds-especially deconcentration funds

5. Variation of total revenue as % of budgeted revenue is less than 10% Check for years 2003-2005 as new budget format has been introduced for 2003, making comparison with older data diffi cult

6. Average budget defi cit over the past 3 years is less than 5% Check local budget and consult with Finance Unit

7. The rules for governing the use of contingency funds is clear Is there any guideline on contingency funds? Check with Finance Unit

8. The actual use of contingency funds is accounted for adequately Any reporting? Check local budget, accountability report

9. Clear rules for in-year budget fl exibility exist Only possible with permission of local parliament?

10. Authorization of use of funds outside the budget is clearly regulated Who is keeping track of off-budget funds, especially deconcentration funds?

11. Subsidies related to locally owned enterprises (PDAM, BUMD) are explicit in the Local Government operating budget

Check with Finance Unit

OUTCOME SCORE



OUTCOME NO. 4 BUDGET TO BE PRO-POOR

1. Poverty assessment has been conducted using qualitative and quantitative data and households, groups and localities that are poor, vulnerable or have unequal access to public services are identifi ed

Basis for poverty programs if any?

2. Participatory methods and approaches were used to collect data and input from low income households, groups and localities that are poor, vulnerable or have unequal access to public services

Is there any medium-term budget consideration at all? Check with Finance Unit

3. Specifi c reliable data on the multi-dimensional aspects of poverty is available and refl ected in the priorities of development plans, especially for sectors like health and education

Various sources of poverty data on local (Dinas, BKKBN, NGO’s etc) and national level exists (SUSENAS, PODES) and is produced upon different formulas. What data has been used?

4. Pro-poor policy exists and is refl ected in sector plans Local poverty reduction strategy is required by national government, but local governments have different approaches (Renstra miskin etc.) Check carefully

5. Budget priorities refl ect pro-poor policies and priorities Check in budget policy (AKU) and annual plan

6. Pro-poor expenditure can be explicitly identifi ed as such in the budget Check if activities in the budget are earmarked as pro-poor

7. Expenditure for public services have increased over the past three years The ratio between apparatus expenditure and public expenditure has increased over the past three years

8. Budgeted expenditure on health, education and infrastructure account for the largest share in the budget (in aggregate)

% of overall expenditure per sector in aggregate

9. Relevant village block grants have been established How big are the grants per village? Relevant - At least Rp. 10-20 Mill. available for development activities (depending on the size and population of the village)

OUTCOME SCORE

OUTCOME NO. 5 COMPREHENSIVE PARTICIPATORY MONITORING AND EVALUATION SYSTEM FOR PLANNING AND BUDGETING PROCESS IS ESTABLISHED

1. Planned activities not taken up in the budget are reviewed and are included during budget revisions or the subsequent budget year

What happens with the planned activities not being budgeted?

2. Each sector holds record of planned and realized activities, including realized budget vs. planned budget

Check with selected sectors if they keep track of expenditure developments

3. Budget outcome indicators are measured at least every six months Verify with Finance Unit

4. Sector performance reports and responsibility reports are verifi ed by Internal Audit Agency

Ask internal audit unit for report and their audit plan

5. Record of activities being budgeted that what is decided upon during bottom-up process is brought back and made public to villages and sub- districts

Any evaluation?

6. Planning and budgeting documents are publicly disclosed and easily accessible by the public

Where announced?

7. Comprehensive budget progress reports are compiled and submitted to the Regent/Mayor

Do budget progress reports exist?

8. Planning and budgeting monitoring and evaluation system is authorized by local legislation

Consult with Bappeda, Finance Unit and/or Legal Offi ce

9. The public is involved in the monitoring and evaluation of implemented activities and this participation is institutionalized

Check for participatory elements in the M&E and its institutionalization

OUTCOME SCORE



Strategic Area 3: Cash ManagementStrategic Objective: Implementation of effective cash management practices to ensure effi cient management of funds for service delivery


OUTCOME NO. 1 POLICIES, PROCEDURES AND CONTROLS TO PROMOTE EFFICIENT CASH MANAGEMENT ARE IN PLACE

1. Written guidelines on cash management policies and procedures exist Cash management policies exist; these require collecting and banking receipts promptly, making payments when they are due and providing accurate cash fl ow forecasts

2. Local legislation has assigned specifi c cash management duties to particular offi cials

Check whether the institutional arrangements in sections 2 to 4 have been established in local legislation

3. Delegations of authority are made for approving cash payments Accommodated in local legislation?

4. Procedures for authorization of signatories to bank accounts are specifi ed Accommodated in local legislation?

5. Procedures for establishment of bank accounts are specifi ed Accommodated in local legislation?

6. Procedures for operation of bank accounts are specifi ed Accommodated in local legislation?

7. Procedures for making payments to suppliers of goods and services are specifi ed

Accommodated in local legislation?

8. Local cash management legislation is consistent with national policy framework

Check if local legislation is consistent with Law 1/2004

9. Regular relevant training for cash management staff is conducted Regular: at least annuallyRelevant: training on new national legislation

10. Internal Audit Agency undertakes annual cash management compliance review

Any report existing? Check with internal audit unit

OUTCOME SCORE

OUTCOME NO. 2 CASH RECEIPTS, CASH PAYMENTS AND TEMPORARY CASH SURPLUSES ARE MANAGED AND CONTROLLED EFFICIENTLY

1. All receipts are deposited into a single bank account or alternatively funds are pooled in the Treasury

Check with treasury

2. All cash receipts are banked on day of receipt Check with treasury staff and ask for proof

3. Daily reconciliation of cash receipts and cash deposits Ask for reconciliation sheet

4. Basis for assessment of local revenues is determined by revenue department (this does not apply to street lighting tax)

Check with revenue department or Financial Management Unit

5. All payments in excess of 5 million rupiah are generally made by bank transfer

Check whether the following features of good accounts payable management are applied

6. Payments to contractors are made in accordance with contractual terms and conditions

Check if contracts include payment modes

7. Record keeping for payments and receipts at the treasury are computerised Is there any software or manual input?

8. Cash fl ow forecasting undertaken for rolling periods and variances analysed Review the frequency with which cash fl ow forecasts are prepared

9. Regular reconciliations of bank accounts, short-term deposits, accounts receivable and accounts payable records with general ledger balances

Check for timing of reconciliations

10. Cash surpluses are regularly identifi ed and placed in short-term investments in accordance with stated policy

Is there any action on cash surpluses? Bank deposit? Check if there is a policy on this

11. Regular reports on cash balances provided to the Regent/Mayor, local treasurer and head of fi nance

Is head of region informed about cash balances? Ask for report

OUTCOME SCORE



OUTCOME NO. 3 EFFICIENT SYSTEM FOR BILLING AND COLLECTING LOCAL REVENUES IS ESTABLISHED

1. Policies for local levies and taxes are set out in local legislation Check content of local legislation on taxes and fees

2. Details of arrangements for the administration of local levies and taxes are set out in a revenue manual

Does a revenue manual exist at all? Check with Revenue unit or fi nancial management unit

3. Local revenue management legislation is consistent with national policy framework

Is the local legislation on taxes and fees approved by MoHA and MoF?

4. Detailed supporting billing information is available on each local taxpayer Details of the name, address, reference number and amount billed is recorded for each local taxpayer

5. Local revenue tax base is verifi ed and analysed annually to calculate revenue capacity more rationally for each type of revenue

Check with Revenue unit or fi nancial management unit whether annual verifi cation is undertaken

6. Accurate account notices are produced on a timely basis and delivered promptly to local taxpayers

Ask for copy of notices at revenue unit or fi nancial management unit

7. Local levy and tax account notices are checked prior to being delivered to local taxpayers

Verify with the person in charge

8. A sound receipting system is used to prevent fraud and ensure clarity in the event of disputes

Computerized and comprehensive? Easy to fraud? Check receipts and look at revenue unit or fi nancial management unit

9. Payments from customers are collected relatively promptly Promptly: at the latest within one 1 week after the due date Verify with staff from revenue unit, fi nancial management unit and ask for documentation

10. Billing and collection systems are integrated Verify at revenue unit or fi nancial management unit

11. Management information about outstanding debtors is able to be produced promptly

Promptly: immediately and at all times. Verify at revenue unit or fi nancial management unit

12. Penalties are imposed on late payments of local levies and taxes Verify at revenue unit or fi nancial management unit

13. A fi rm approach is employed in following up outstanding debtors Any penalties or commonly applied procedure? Verify at revenue unit or fi nancial management unit

14. A service for addressing taxpayer queries is provided Verify at revenue unit or fi nancial management unit

15. Monthly reconciliations of bank deposits and revenue collection fi gures is conducted by accounting offi cials

Verify at revenue unit or fi nancial management unit

16. Appropriate training given to revenue staff Appropriate: Training on computer, revised legislation?

17. Internal audit unit annually reviews revenue administration procedures Check with internal audit unit and ask for report

18. The local government has analysed the costs of the collection for each type of revenue

Check with Financial Management Unit or Revenue Unit

OUTCOME SCORE



Strategic Area 4: ProcurementStrategic Objective: Increase the effi ciency in regional procurement activities that foster increased competition, provide improved value for money in regional expenditure, create more transparency and result in greater accountability


OUTCOME NO. 1 POLICIES, PROCEDURES AND CONTROLS TO PROMOTE EFFICIENT COMPETITIVE PROCUREMENT OF GOODS AND SERVICES ARE ESTABLISHED AND IMPLEMENTED

1. Adopted local legislation on procurement consistent with Presidential Decree 80/2003; Presidential Decree 61/2004 exists and no contrary procurement legislation exists

Check legal basis of procurement local legislation

2. Local legislation has assigned specifi c responsibilities and duties for the commissioning and undertaking of procurement and for the exercising of overall responsibility for procurement to particular offi cials

Check procurement local legislation

3. Local parliament members do not participate in procurement committees in any manner

Check whether local legislation prevents local parliament members from participating in procurement committees

4. Procurement committees have the minimum required number of members prescribed in local legislation on procurement and the members are certifi ed

Check whether the procurement committee is operating effectively

5. Procurement committee members are selected using a process prescribed in local legislation

Does the local legislation include regulations on committee members?

6. A local procurement manual that provides guidance on all procurement forms, mechanisms, procedures and processes has been prepared

Check whether a procurement manual exists and addresses these matters

7. Contracts are only signed after proposed expenditure has been included in the latest approved budget

Procurements are linked to approved budgets and available funding

8. All work units purchasing external goods and services compile annual procurement plans for approved budgeted activities

Check scope of procurement planning

9. Estimated prices (unit costs) prepared for all planned procurements are prepared and at least annually revised

Check with Public Works on this practise

10. At least 75% of procurements by number are completed using public bids Check that most procurements are completed using public bids

11. Where public bids are not used in procurements, it meets the conditions specifi ed in Presidential Decree 80/2003 and Presidential Decree 61/2004

Check if local legislation on procurement provides for this issue

12. Format for presenting and evaluating bids is specifi ed in procurement documentation

The practise of this issue needs to be checked with public works or other agency that is heavily involved in procurement. Check with Financial Management Unit

13. Briefi ng sessions held for all public bid procurements and attendance record kept


14. All bid documents are kept confi dential in a secure environment prior to opening


15. Contracts that are not awarded to lowest bidder comply with procurement rules




16. Contractor performance is monitored and reported back to the procurement committee for future reference


17. Records kept of all communications seeking clarifi cation of tenders The practise of this issue needs to be checked with public works or other agency that is heavily involved in procurement. Check with Financial Management Unit

18. Records are maintained of all procurement decisions to assist conduct of procurement audits

Any procurement audits undertaken?

19. Details of the information provided in the debriefi ng process to unsuccessful bidders is recorded and held on fi le

The practise of this issue needs to be checked with public works or other agency that is heavily involved in procurement. Check with Financial Management unit

20. At least six monthly reports summarising procurement activities are submitted to Regent/Mayor

Check whether these procurement reports are issued

21. All procurement activities are audited by Internal Audit Agency, and results of audit included in regular audit report

Check with Internal audit unit and ask for report

22. No serious issues have been raised relating to procurement in Internal Audit Agency reports in the proceeding years

Ask for access to the reports. Cases of Corruption, Collusion, Nepotism or other illegal practises?

23. All procurement internal controls and Internal Audit Agency audit reports are followed-up and resolved

Check report and documentation on follow-up

24. Local legislation specifi es sanctions where procurement offi cials do not comply with procurement policy

Confi rm if any sanctions have been applied

25. Rules requiring members of procurement committee and procurement offi cials to have no family relationship with the offi cial appointing them, are enforced

Does this rule exist in a written form? Check local legislation on procurement , code of ethics etc

26. Guidance is provided to offi cials on minimizing confl icts of interest Are the offi cials aware on confl icts of interest at all?

27. Non-compliant bids rejected and bids associated with irregular actions are rejected

Check sample of procurement transactions to confi rm whether action has been taken in respect of bidding irregularities

28. Bids made by blacklisted goods and services providers are rejected

29. Action is taken against suppliers found guilty of collusive practices after contracts have been issued

Such instances may be evident form Internal Audit Agency audit reports and the register of public complaints

30. Asset disposals are conducted in line with approved local legislation Check whether local legislation contains these obligations in respect of asset disposal practices

31. Immovable property to be sold at market prices except when public interest demands otherwise

Check randomly, at which price immovable goods have been sold and ask for price assessment

32. Movable property to be sold principally on basis of competitive bids or at auction


33. Proposed contract fi nancial obligations are disclosed in bidding documents Verify with staff from public works or other agency

34. Proposed process for awarding contracts is disclosed in bidding documents

Verify with staff from public works or other agency



35. Pre-qualifi cation results are publicized in local media and on offi cial announcement boards

Is there any announcement board? Check local media clippings

36. Public bid tenders are opened in public Verify with staff from public works or other agency

37. Announcements on procurements are made in local media and on offi cial announcement boards

Is there any announcement board? Check local media clippings

38. Briefi ngs provided to unsuccessful bidders for public bids and attendance records are kept

Verify with staff from public works or other agency

OUTCOME SCORE

OUTCOME NO. 2 A COMPLAINT HANDLING SYSTEM IS OPERATING

1. Formal complaints process and procedures is provided for in local legislation Check whether the local legislation on procurement includes complaint procedures

2. Complaints are registered Check whether the local legislation on procurement includes complaint procedures

3. Complaints are processed in accordance with procedures set out in local legislation

Check whether the local legislation on procurement includes complaint procedures

OUTCOME SCORE



Strategic Area 5: Accounting and ReportingStrategic Objective: Establishment of an accounting system that ensures prompt accounting of all fi nancial transactions and produces reliable, fair and timely external and internal fi nancial reports


OUTCOME NO. 1 ADEQUATE HUMAN AND INSTITUTIONAL CAPACITY FOR ACCOUNTING AND FINANCE FUNCTIONS EXISTS

Indicators 1-3 only apply for local governments who have implemented BPKD. Others automatically score 0

1. The Financial management unit (BPKD) exists, functions and has suffi cient qualifi ed staff

Exists: BuildingFunctions: institutional capacityQualifi ed staff: Accountants as staff?Check for comprehensiveness of legal basis for Financial Management Unit? Offi ce available? Staff assigned?

2. An integrated organizational structure for FM is implemented (BPKD format) BPKD format includes integration of Expenditure Unit (Bagian Keuangan), Revenue Unit (Dispenda), Treasury (Kas Daerah) and Accounting

3. The Financial management unit has clear descriptions for all its functions Local legislation on fi nancial management unit? Technical regulations?

4. Manual on accounting procedures and processes exists Check with head of fi nancial management unit

5. The Heads of each department in the Financial management unit have an accounting or fi nance degree

Check with head of fi nancial management unit

6. At least 10 percent of the Financial management unit staff have a diploma or a higher degree in accounting

Check with head of fi nancial management unit

7. The Financial management unit has adequate computer resources to fulfi l its mandate

Suffi cient software, hardware?

OUTCOME SCORE

OUTCOME NO. 2 ACCOUNTING AND MANAGEMENT INFORMATION SYSTEMS ARE INTEGRATED

1. The accounting and management information reports are produced on the same system

Check whether the integrated fi nancial information system covers the following activities (budgeting, treasury, revenue, cash, investment, fi xed asset, debt, accounting and reporting)

2. Accounting and managerial reports are produced using integrated fi nancial management information system

Reports can be produced on either a user need or user-defi ned basis. Performance and external reports can be produced quarterly, semester and yearly

3. Managerial and ad-hoc reports are produced regularly Check whether there are processes to ensure that fi nancial reports are reviewed and action taken when necessary; usually fi nancial reports are just documented

OUTCOME SCORE



OUTCOME NO. 3 ALL LOCAL GOVERNMENT FINANCIAL TRANSACTIONS AND BALANCES ARE RECORDED PROMPTLY AND ACCURATELY

1. Supporting documents for ownership of assets exist Check for • Cash & bank deposit documents • Investment documents• Land, building and vehicle ownership documents

2. Documents for bank and government loan agreements and grants exist Check with Financial Management Unit for existence

3. Tangible assets and external liabilities are verifi ed and valued to provide a basis for determining opening balance sheet balances

Check for inventory of • Cash, land, building, investment, infrastructure and machinery assets and supporting valuations• Check for inventory of borrowings from banks and central government

4. Double entry bookkeeping practices are applied and accounting trial balances are matched

Check this practise with Financial Management Unit staff

5. Opening balance sheet has been made Check this practise with Financial Management Unit staff

6. Cash revenue journals have been made Check this practise with Financial Management Unit staff

7. Cash expenditure journals have been made Check this practise with Financial Management Unit staff

8. Periodic reconciliations of accounting records with bank records. External party records requiring confi rmation or reconciliation include investments, deposits, debtors and account payables

Modest differences: Less than 5% of reported balances

OUTCOME SCORE


OUTCOME NO. 4 RELIABLE FINANCIAL AND MANAGEMENT INFORMATION REPORTS ARE PRODUCED

1. Expenditures are classifi ed by organization, function and economic category Check local budget randomly

2. Internal fi nancial management reports are regularly reviewed by the Regent/ Mayor and initiate corrective action where required

Check for:• Internal reports present budgeted and actual fi gures and any deviation • Internal reports are presented to manager or decision maker on a timely basis • Managers review internal reports and make decisions based on internal reports

3. Reports on targeted and actual budget inputs, outputs, outcomes, benefi ts, and impacts are produced regularly and in time

Regularly: at least every 6 monthsIn Time: within 1 month after period has ended Check this practise with Financial Management Unit staff

4. Balance sheet is prepared Should be prepared at least six-monthly

5. Budget realization report is prepared Should be prepared at least six-monthly

6. Cash fl ow report is prepared Should be prepared at least six-monthly

7. Notes are included in the fi nancial statements Should be prepared at least six-monthly

8. Annual fi nancial statements for audit are submitted in a timely manner Local government submits annual report to Supreme Audit Agency within 4 months after the end of fi scal year

OUTCOME SCORE



Strategic Area 6: Internal AuditStrategic Objective: Establishment and maintenance of an effective and effi cient internal audit function


OUTCOME NO. 1 THE LOCAL GOVERNMENT’S INTERNAL AUDIT AGENCY IS ORGANIZED AND EMPOWERED TO OPERATE EFFECTIVELY

Most of the following indicators need to be clarifi ed with Internal audit unit

1. The roles and responsibilities of all internal audit agency offi cials are clearly defi ned in local legislation

Check whether Local legislation on internal audit exists and if regulates this issue

2. Internal audit agency has the necessary authority for conducting its operations

Check whether the internal auditors are authorized to have full, free and unrestricted access to all functions, property, personnel, records, accounts, fi les and other documentation

3. Internal Audit Agency has adequate qualifi ed staff that include some certifi ed auditors and accountants

Check with Internal audit unit staff, any staff take-over from fi nancial management unit? Ask for audit certifi cation

4. Regular relevant trainings are conducted Check with Internal audit unit staff. Any training plan?

5. Internal audit agency has adequate supporting operating resources Cars, computers etc.

OUTCOME SCORE

OUTCOME NO. 2 INTERNAL AUDIT STANDARDS AND PROCEDURES APPLIED ARE ACCEPTABLE

1. The internal audit is conducted according to the internal audit plan Ask Internal audit unit staff for Audit plan

2. Internal audit reviews all activities of the local government including any commercial activities

Are regional owned drinking water enterprise and other regional-owned enterprises included in the audit?

3. Internal Audit regularly examines the internal controls of all signifi cant accounting operations that affect fi nancial reports

Check with Internal audit unit staff, does audit also include accounting issues.

4. Internal audit programs exist for all local government asset and liability categories and activities

Check with Internal audit unit staff

5. Internal audit standards/procedures are documented in an internal audit manual

Check whether this manual exists

6. Audit programs are regularly revised and reviewed Verify with Internal audit unit staff

7. Internal auditors maintain independence Check if Internal Audit Agency staff has no family relationship with the Regent/Mayor, local secretary, and head of working units

8. Internal audit reports require fi ndings on deviations from procedures, internal control weaknesses, ineffi ciencies and fraud and make recommendations for improvement

Check audit reports randomly

9. Internal audit reports state scope of work prior to opinion/conclusion Including what was audited, procedures followed, time frame of activities covered, duration of assignment, clarifi cations or qualifi cations if any, procedures and tests that could not be carried out, limitation in scope, compliance with applicable legislation

10. Internal audit reports are sent to Regent/Mayor Check with head of region

11. Internal audit reports are available to the external auditor Has Supreme Audit Agency (BPK) audited these reports?

12. General internal audit reports (summaries) are made available to the public Newspaper-clippings or other proof available?

OUTCOME SCORE



OUTCOME NO. 3 INTERNAL AUDIT FINDINGS ARE FOLLOWED UP ADEQUATELY

1. Internal audit reports are addressed to managers who have the immediate responsibility for these operations

Check audit reports randomly

2. Sanctions have been imposed by regent/mayor following receipt of adverse internal audit fi ndings

Check with head of region

OUTCOME SCORE



Strategic Area 7: Public Debt and InvestmentStrategic Objective: Establishment of prudent management of regional borrowings, regional investments and interests in regional enterprises


OUTCOME NO. 1 RISK-BASED POLICIES, PROCEDURES AND CONTROLS FOR MANAGEMENT OF LOCAL BORROWINGS AND INVESTMENTS ARE ESTABLISHED AND IMPLEMENTED

1. Local borrowing and investment management policies, consistent with the national policy framework, are implemented

Check for existence and implementation with fi nancial management unit staff

2. Accountability is promoted by defi ning roles and authorities of local parliament members and government offi cials, procedures and processes for borrowing and investment management activities together with delegations of authority for borrowing and investment management activities

Does the local legislation on Financial Management include roles and responsibilities in the fi eld of borrowing and investment? Or does a separate local legislation exist?

3. Proposed borrowing transactions and long term investments in local enterprises are disclosed in annual budget

Check local budget

4. Policies specify purposes for which loans and guarantees can be made Check with policy (if existent)

5. Specifi c controls are introduced that limit the total level of external borrowing outstanding

What is the policy on external borrowing? Any controls introduced?

6. Investment policies specify objectives associated with new portfolio investments and long-term investments in local enterprises

Check with Financial Management Unit staff

7. Local parliament must approve local government long-term investment transactions by local parliament resolution

Check with local legislation on fi nancial management

8. Debt and investment transactions are promptly reported in fi nancial reports to the Regent/Mayor

Debt and investment transactions reported to local treasurer on day of transaction

OUTCOME SCORE



Strategic Area 8: Asset ManagementStrategic Objective: Effective management of regional assets by utilising long-term asset management plans to ensure that these assets best support regional service delivery objectives


OUTCOME NO. 1 PROCEDURES AND MECHANISMS FOR ENSURING EFFECTIVE GOVERNANCE OF LOCAL ENTERPRISES ARE ESTABLISHED

1. Proposed activities of local enterprises are consistent with local governments’ strategic plans

Check medium-term development plan if local enterprises are included

2. Detailed draft business plans are considered by local governments when evaluating merits of establishing new local enterprises

Do local business plans exist? Does the local government intend to establish a new enterprise?

3. Local legislation on fi nancial management is expanded to include fi nancial management and reporting of local enterprises

Check local legislation on Financial Management

4. Annual fi nancial statements on local enterprises are audited by external auditors appointed by local governments

Check with head of randomly chosen local-owned enterprise on this issue and verify with Financial Management Unit staff

5. Transactions of local enterprises are reviewed by internal auditors Verify with Internal audit unit

6. Remuneration of commissioners, directors and senior offi cials of local enterprises must be approved by parent local governments

Check with regional secretary and/or head of local enterprise

7. Budgets of local enterprises include supporting performance indicators and measures

Check budget of local enterprise

8. Budgets/business plans of local enterprises are approved by parent local governments and boards of commissions


9. Local government appoint non-political appointees as commissioners and directors in all local enterprises that are either wholly or partly owned by local governments in accordance with process prescribed in local legislation


10. Local government has established processes for monitoring performance of local enterprises by regent/mayor


OUTCOME SCORE

OUTCOME NO. 2 POLICIES, PROCEDURES AND CONTROLS FOR ACQUISITION OF NEW ASSETS AND EFFECTIVE MANAGEMENT OF EXISTING LONG-TERM PHYSICAL ASSETS ARE ESTABLISHED AND IMPLEMENTED

1. Adopted local legislation prescribes policies and plans for the management of local property including non-current physical assets

Check local legislation on fi nancial management for inclusion of asset management. Or separate local legislation?

2. The duties of the offi cials who have been assigned specifi c asset management responsibilities are prescribed in local legislation

Check local legislation on fi nancial management for this issue. Or separate local legislation? Ask Financial Management Unit for practise

3. Comprehensive asset management policy and procedure manual has been prepared that provides detailed guidance on local asset management activities

Verify with Financial Management Unit

OUTCOME SCORE



OUTCOME NO. 3 SUPPORTING ASSET MANAGEMENT INFORMATION BASE IS ESTABLISHED AND MAINTAINED

1. Assets physical description is described Check this practise with Financial Management Unit and ask for sample

2. Asset is given unique identifi cation number Check this practise with Financial Management Unit and ask for sample

3. Purchase details is recorded Check this practise with Financial Management Unit and ask for sample

4. Location of asset is recorded Check this practise with Financial Management Unit and ask for sample

5. Name of offi cial responsible for asset is recorded Check this practise with Financial Management Unit and ask for sample

6. Current asset condition is recorded Check this practise with Financial Management Unit and ask for sample

7. Accounting information is recorded (book value) Check this practise with Financial Management Unit and ask for sample

8. Movable assets are physically verifi ed at least once a year and results compared with the records

Check this practise with Financial Management Unit and ask for sample

OUTCOME SCORE

OUTCOME NO. 4 ASSET MANAGEMENT IS LINKED TO PLANS AND BUDGETS

1. District plans and budgets refl ect maintenance expenditures recorded in maintenance plans

Check annual plan and local budget

OUTCOME SCORE



Strategic Area 9: External Audit and OversightStrategic Objective: Increase of accountability for fi nancial management through effective and independent oversight


OUTCOME NO. 1 REGULAR EXTERNAL AUDITS PROVIDE EFFECTIVE ACCOUNTABILITY OF LOCAL GOVERNMENT

1. Annual fi nancial statements are submitted for audit to Supreme Audit Agency within legally required time frame

Verify with fi nancial management unit if fi nancial statements have been sent to BPK

2. If existent, audit reports are publicized in the local mass media and on the offi cial announcement board

If no external audit has been conducted in the last two years, no ratings are to be given

3. The public is able to attend local parliament session when audit reports are discussed

Verify with local parliament members

4. The external audit report contains an unqualifi ed audit opinion Check audit report if possible, easily accessible?

OUTCOME SCORE

OUTCOME NO. 2 EFFECTIVE INDEPENDENT OVERSIGHT OF LOCAL GOVERNMENT FINANCIAL MANAGEMENT EXISTS

1. Local parliament monitors and evaluates local governments’ performance based on fi nancial reports, audit reports and accountability reports

Check with local parliament members

2. Local parliament has approved the last annual report without reservations Are minutes of meeting available?

3.a. No sanctions against offi cials were recommended by Supreme Audit Agency

Answer only question a OR b (whichever is applicable)

3.b. In case sanctions were recommended by Supreme Audit Agency, sanctions were enforced

Check with regional secretary

4. No payment of penalty is imposed as consequence of audit fi nding Ask for Supreme Audit Agency report

5. External audit reports do not suggest to initiate investigations into public sector corruption

Ask for Supreme Audit Agency report

OUTCOME SCORE



SCORING AND EVALUATION SHEETS

A. Scoring and Evaluation Guideline

• Give a tick for each “yes” answer of the respective indicator• Sum up all “yes” answers for each outcome• Sum up all “yes” answers for each strategic area (Total achieved score per strategic area)• Conduct rating of achieved score against total achievable score per strategic area in %• Conduct ranking according to section B (below)

B. Overall Ranking Methodology

100-80 % Excellent/Fully acceptable 79-60 % Very Good/Substantially acceptable 59-40 % Good/Fairly acceptable 39-20 % Moderate/Partially acceptable 19- 1 % Poor/ Non- acceptable

C. Ranking Results

STRATEGIC AREA SCORE %

1. Local Regulatory Framework /26

2. Planning and Budgeting /49

3. Cash Management /39

4. Procurement /41

5. Accounting and Reporting /26

6. Internal Audit /19

7. Public Debt and Investment /8

8. Asset Management /22

9. External Audit and Oversight /9


D. Scoring and Evaluation Matrix

STRATEGIC AREA OUTCOMESTotal

Achievable Score

Total Achieved

Score

StrategicArea

Grade

1. LOCAL REGULATORY FRAMEWORK

1. A comprehensive local regulatory framework required by national legislation on local fi nancial management exists

13

2. The local regulatory framework provides for an effective law enforcement and organizational structure

7

3. The local regulatory framework includes measures to increase transparency and public participation

6

TOTAL 26 %

2. PLANNING AND BUDGETING

1. Consistent link between bottom-up planning process, local development plans, sector plans and budget exists

17

2. Budgets are based on a medium-term time horizon 3

3. Budget outturns are reasonable and indicate realistic budget making processes 11

4. Budget to be pro-poor 9


9

TOTAL 49 %

3. CASH MANAGEMENT

1. Policies, procedures and controls to promote effi cient cash management are in place 10

2. Cash receipts, cash payments and temporary cash surpluses are managed and controlled effi ciently

11

3. Effi cient system for billing and collecting local revenues is established 18

TOTAL 39 %

4. PROCUREMENT 1. Policies, procedures and controls to promote effi cient and competitive procurement of goods and services are established and implemented

38

2. A complaint handling system is operating 3

TOTAL 41 %

5. ACCOUNTING AND REPORTING

1. Adequate human and institutional capacity for accounting and fi nance functions exists 7

2. Accounting and management information systems are integrated 3

3. All local government fi nancial transactions and balances are recorded promptly and accurately

8

4. Reliable fi nancial and management information reports are produced 8

TOTAL 26 %

6. INTERNAL AUDIT

1. The local government’s internal audit agency is organized and empowered to operate effectively

5

2. Internal audit standards and procedures applied are acceptable 12

3. Internal audit fi ndings are followed up adequately 2

TOTAL 19 %

7. PUBLIC DEBT AND INVESTMENT


8

TOTAL 8 %

8. ASSET MANAGEMENT


10

2. Policies, procedures and controls for acquisition of new assets and effective management of existing long-term physical assets are established and implemented

3

3. Supporting asset management information base is established and maintained 8

4. Asset management is linked to plans and budgets 1

TOTAL 22 %

9. EXTERNAL AUDIT AND OVERSIGHT

1. External audits provide effective accountability of local government 4

2. Effective independent oversight of local government fi nancial management exists 5

TOTAL 9 %

Chapter 5.Interpreting the Scoring Results

of this Framework

As stated elsewhere in this report, the framework is designed to provide information for the needs of a variety of stakeholders. Although the scorecard methodology presented in section 3 helps summarize the results and identifi es the broad strengths and weaknesses in the local government, interpreting these scores for different purposes would require some care. Some guidance on interpretation is presented below.

Assessing Local PFM Standards

Overall capacity levels of local governments are of interest to central government agencies that are in charge of monitoring and evaluating local government PFM performance. Compliance with reform agendas is likely to be phased when there are marked variations in PFM capacity levels across local governments and/or there are a relatively large proportion of local governments with relatively low PFM capacity. In view of the current absence of organized and reliable information about current PFM outcomes across local governments in Indonesia, the provision of such information through the application and interpretation of this framework would be helpful to policy makers. The results of the initial testing of the measurement framework (table 2, fi gures 2 & 3) provide an opportunity to demonstrate how the measurement framework results could provide helpful information to a variety of users of the framework, namely the World Bank, other development partners, central government agencies and regional governments for assessing local PFM standards and planning capacity-building activities. The summary of results presented in Table 2 above helps identify the relative strengths and weaknesses of the activities in the nine Strategic Areas of Public Financial Management.

A similar but more detailed analysis of relative strengths and weaknesses of PFM activities may also be undertaken at the PFM outcome level in the measurement framework. This would facilitate a more comprehensive analysis of exactly which outcomes are not being fully realized in the district, and why. For instance, in Blitar, while the aggregate score in the Strategic Area of Accounting and Reporting is “moderate”, a review of the underlying scores for outcomes in this Strategic Area shows that while the systems for recording of fi nancial transactions meets acceptable standards (high score), the reliability of fi nancial and management reports do not do so (low score), in part due to the lack of integration of accounting and management information systems (low score).

Aggregation of relatively poor scores in the Strategic Area and outcome levels across regions where measurement information is available would permit provincial or regional comparisons to be made relatively quickly. For example, the distribution of the number of “poor”, “moderate” or “good” scores in either a Strategic Area or outcome level across regions would provide a useful overview of the relative PFM standards currently being practiced by regions, and thereby indicate areas for policy interventions.

Capacity Building Implications

Capacity building initiatives for Public Financial Management are generally conducted at three levels:

• Developing national PFM norms and standards that collectively specify the overall system of fi nancial governance in the country;


• Promoting effective organisational capacity within local government units to ensure that adopted national norms and standards are correctly applied

• Enhancing individual capacities and skills to support the attainment of more effective outcomes

It is important to stress again that this measurement framework does not attempt to assess the appropriateness or quality of current national PFM norms and standards for local governments in Indonesia; rather, it seeks to assess the degree of application of these norms and standards to promote the achievement of a relatively basic level of PFM across all Indonesian local governments. It would therefore be inappropriate to use this measurement framework to make assessments of national norms and standards. This measurement framework is also not intended to serve as a basis for making detailed assessments of individual skills that are required for identifying individual capacity building needs.

Consequently, the measurement framework is best able to assist with the identifi cation of PFM capacity building requirements at an organizational level. The table below distinguishes between two streams of possible capacity building interventions – PFM system processes and PFM practices. Individual PFM outcomes included in this framework can be analyzed to examine any signifi cant relationships these may have with organizational capacity. Human capacity being the common underlying issue for organizational capacity and therefore cross-cutting for all PFM outcomes, is not considered separately in this analysis. A generic analysis of organizational capacity is summarized in Table 3 below. This analysis will help direct readers of the framework scorecards to those outcomes that are most relevant to their needs, and help correctly interpret the scores when constructing capacity building programs within and across local governments.


Table 3: PFM Outcomes and Implications for Capacity Building

Public Financial Management Outcomes

Organisational Capacity for Financial Governance

System processes

Practices


X

2. The local regulatory framework provides for an effective law enforcement and organizational structure X

3. The local regulatory framework includes measures to increase transparency and public participation X


X

5. Budgets are based on a medium-term time horizon X

6. Budget outturns are reasonable and indicate realistic budget making processes X

7. Budget to be pro-poor X


X

9. Policies, procedures and controls to promote effi cient cash management are in place X

10. Cash receipts, cash payments and temporary cash surpluses are managed and controlled effi ciently X

11. Effi cient system for billing and collecting local revenues is established X X

12. Policies, procedures and controls to promote effi cient and competitive procurement of goods and services are established and implemented

X

13. A complaint handling system is operating X

14. Adequate human and institutional capacity for accounting and fi nance functions exists X

15. Accounting and management information systems are integrated X X

16. All local government fi nancial transactions and balances are recorded promptly and accurately X

17. Reliable fi nancial and management information reports are produced X

18. The local government’s internal audit agency is organized and empowered to operate effectively X X

19. Internal audit standards and procedures applied are acceptable X X

20. Internal audit fi ndings are followed up adequately X


X X

22. Procedures and mechanisms for ensuring effective governance of local enterprises are established X X


X

24. Supporting asset management information base is established and maintained X

25. Asset management is linked to plans and budgets X

26. External audits provide effective accountability of local government X

27. Effective independent oversight of local government fi nancial management X

NB “X” indicates possible areas for capacity building for the respective PFM outcome


Scoring and Interpreting Capacity Building Needs

When the results get analyzed at the level of outcomes to determine organizational capacity building implications, it will be helpful to re-arrange the PFM score value ranges into a simpler range of values. Four grades of capacity building needs can be derived from the scores generated by the PFM measurement framework, as summarized below, using a set of score value ranges to identify the relative level of capacity building needs in strategic areas and also within required outcome areas.

By way of illustration, if this scorecard methodology is applied to the scores derived from the pilots in the local governments of Blitar and Sleman, the results at a broad level would lead to the following interpretation:

Table 5. Blitar and Sleman PFM Capacity Building Needs by PFM Strategic AreaLevel of PFM

capacitybuilding needed

Blitar Sleman

Very signifi cant capacity improvements are required



Signifi cant capacity improvements are required

3. Cash Management5. Accounting &

Reporting6. Internal Audit8. Asset Management9. External Audit &

Oversight

2. Planning & Budgeting

8. Asset Management

Modest capacity improvements are required

1. Local Regulatory Framework

2. Planning & Budgeting

4.Procurement

1. Local Regulatory Framework

9. External Audit & Oversight

Capacity is currently at required level

3. Cash Management4. Procurement5. Accounting &

Reporting6. Internal Audit

Table 4. PFM Capacity Building Needs Scorecard Methodology

PFM Score Overall PFM Capacity Building Requirement

85 - 100% Capacity is currently at required level

65 - 84% Modest capacity improvements are required

35 - 64% Signifi cant capacity improvements in capacity are required

0 - 34% Very signifi cant capacity improvements are required

Having identifi ed the broad areas where capacity building is needed, a further analysis would be needed to identify more specifi c capacity constraints or weak practices that need to be addressed. Such an analysis can be done within this framework by referring to individual indicators in outcomes that have scored low. Targeted responses to address these could then be developed, such as improving organizational structures, improving existing PFM systems, methods and practices, eliminating physical resource constraints and improving human resource capacity.

Appendix 1.District of Sleman (Central Java)





100-80 % Excellent/Fully acceptable 79-60 % Very Good/Substantially acceptable 59-40 % Good/Fairly acceptable 39-20 % Moderate/Partially acceptable 19- 1 % Poor/ Non-acceptable

C. Ranking Results


1. Local Regulatory Framework 17/26 65

2. Planning and Budgeting 26/47 55

3. Cash Management 38/38 100

4. Procurement 35/41 85

5. Accounting and Reporting 26/26 100

6. Internal Audit 17/19 89

7. Public Debt and Investment 0/8 0

8. Asset Management 14/22 64

9. External Audit and Oversight 7/9 78


D. Scoring and Evaluation Matrix District of Sleman


Achievable Score

Total Achieved

Score

StrategicArea

Grade



13 8


7 7


6 2

TOTAL 26 17 65%



17 9

2. Budgets are based on a medium-term time horizon 3 2

3. Budget outturns are reasonable and indicate realistic budget making processes 10 6

4. Budget to be pro-poor 8 5


9 4

TOTAL 47 26 55%

3. CASH MANAGEMENT

1. Policies, procedures and controls to promote effi cient cash management are in place 10 10


11 11

3. Effi cient system for billing and collecting local revenues is established 17 17

TOTAL 38 38 100%


38 34

2. A complaint handling system is operating 3 1

TOTAL 41 35 85%


1. Adequate human and institutional capacity for accounting and fi nance functions exists 7 7

2. Accounting and management information systems are integrated 3 3


8 8

4. Reliable fi nancial and management information reports are produced 8 8

TOTAL 26 26 100%

6. INTERNAL AUDIT


5 5

2. Internal audit standards and procedures applied are acceptable 12 10

3. Internal audit fi ndings are followed up adequately 2 2

TOTAL 19 17 89%



8 8

TOTAL 8 0 0%

8. ASSET MANAGEMENT


10 4


3 3

3. Supporting asset management information base is established and maintained 8 6

4. Asset management is linked to plans and budgets 1 1

TOTAL 22 14 64%


1. External audits provide effective accountability of local government 4 2

2. Effective independent oversight of local government fi nancial management exists 5 5

TOTAL 9 7 78%

Appendix 2.Municipality of Blitar (East Java)





100-80 % Excellent/Fully acceptable 79-60 % Very Good/Substantially acceptable 59-40 % Good/Fairly acceptable 39-20 % Moderate/Partially acceptable 19- 1 % Poor/ Non- acceptable

C. Ranking Results


1. Local Regulatory Framework 19/26 73

2. Planning and Budgeting 33/47 70

3. Cash Management 21/38 55

4. Procurement 32/41 78

5. Accounting and Reporting 10/26 38

6. Internal Audit 9/19 47

7. Public Debt and Investment 0/8 0

8. Asset Management 12/22 55

9. External Audit and Oversight 4/9 44


D. Scoring and Evaluation Matrix Municipality of Blitar


Achievable Score

Total Achieved

Score

StrategicArea

Grade



13 9


7 5


6 5

TOTAL 26 19 73%



17 13

2. Budgets are based on a medium-term time horizon 3 1

3. Budget outturns are reasonable and indicate realistic budget making processes 10 6

4. Budget to be pro-poor 6 7


9 6

TOTAL 47 33 70%

3. CASH MANAGEMENT

1. Policies, procedures and controls to promote effi cient cash management are in place 10 9


11 7

3. Effi cient system for billing and collecting local revenues is established 17 5

TOTAL 38 21 55%


38 29

2. A complaint handling system is operating 3 3

TOTAL 41 32 78%


1. Adequate human and institutional capacity for accounting and fi nance functions exists 7 2

2. Accounting and management information systems are integrated 3 0


8 2

4. Reliable fi nancial and management information reports are produced 8 6

TOTAL 26 10 38%

6. INTERNAL AUDIT


5 2

2. Internal audit standards and procedures applied are acceptable 12 5

3. Internal audit fi ndings are followed up adequately 2 2

TOTAL 19 9 47%



8 0

TOTAL 8 0 0%

8. ASSET MANAGEMENT


10 4


3 0

3. Supporting asset management information base is established and maintained 8 7

4. Asset management is linked to plans and budgets 1 1

TOTAL 22 12 55%


1. External audits provide effective accountability of local government 4 0

2. Effective independent oversight of local government fi nancial management exists 5 4

TOTAL 9 4 44%

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