Managing Resources to Build Back and Create a Better Future for Nias

Nias Public Expenditure Analysis

World Bank Office Jakarta

Jakarta, August, 2007

Key Messages

Nias and Nias Selatan have experienced a significant increase in financial resources from reconstruction and decentralization. These resources provide opportunity to address poverty and human development issues in the region;

Despite having two of the highest poverty rates and lowest social outcomes, Nias and Nias Selatan continue to receive among the lowest per capita revenues of all districts in North Sumatra;

Public service delivery in the Island has been lagging behind the province and national averages. The two districts have the highest poverty rates and have some of the lowest education, health, and infrastructure outcomes in North Sumatra;

Key Messages

Spending patterns have improved in some respect but there remain areas of serious concern;

Spending on education absorbs the largest share of expenditures; Sectoral spending on government apparatus is increasing, while

infrastructure spending has been decreasing; Spending toward routine expenditure has been increasing.

Local government capacity in budget planning and implementation needs substantial upgrading. The increase in responsibilities and fiscal resources needs a better capacity from local government to effectively and efficiently manage its resources.

Local Govenrments’ Revenues

The island received substantial increase of revenue by almost four times after decentralization and reconstruction

0200,000400,000600,000800,000

1,000,0001,200,0001,400,0001,600,0001,800,0002,000,000

1999 2002 2006

Mill

ion

rupi

ah

Deconcentrated Nias & Nias Selatan LG revenue Reconstruction

BRR

Donors & NGOs

The increase in local government’s revenue is mainly driven by DAU, while PAD’s contribution is very small

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1999 2001 2002 2003 2004 2005

Lain-lain

DAK

DAU

Bagi Hasil Bukan Pajak

Bagi Hasil Pajak

PAD

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2005

Lain-lain

DAK

DAU

Bagi Hasil Bukan Pajak

Bagi Hasil Pajak

PAD

Note:

•DAU (Dana Alokasi Umum) is general block grant

•PAD (Pendapatan Asli Daerah) is local government own source revenue

Nias Nias Selatan

However, the two districts have among the lowest public resources in North Sumatera

(revenue per capita 2004)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Kota S

ibolga

Kab. P

akpak Bharat

Kota T

ebing Tinggi

Kota P

adang Sidem

puan

Kota T

anjung Balai

Kota P

ematang S

iantar

Kota B

injai

National

Kab. T

apanuli Utara

Kab. T

oba Sam

osir

Kab. T

anah Karo

North S

umatera average

Kab. T

apanuli Tengah

Kab. D

airi

Kab. H

umbang H

asundutan

Kab. M

andailing Natal

Kota M

edan

Kab. T

apanuli Selatan

Kab. S

imalungun

Kab. N

ias

Kab. Langkat

Kab. Labuhan B

atu

Kab. A

sahan

Kab. D

eli Serdang

Kab. N

ias Selatan

Mill

ion

rupi

ah Nias Nias Selatan

Nias and Nias Selatan have the highest poverty rates in North Sumatera

Source: BPS, 2004

0

25,000

50,000

75,000

100,000

125,000

150,000

175,000

200,000

Kot

a B

inja

i

Kot

a M

edan

Kab

. Del

i Ser

dang

Kot

a S

ibol

ga

Kot

a T

ebin

g T

ingg

i

Kot

a P

emat

ang

Sia

ntar

Kot

a T

anju

ng B

alai

Kab

. Asa

han

Kot

a P

adan

g S

idem

puan

Kab

. Lab

uhan

Bat

u

Kab

. Sim

alun

gun

Kab

. Tap

anul

i Uta

ra

Kab

. Lan

gkat

Kab

. Tan

ah K

aro

Kab

. Tob

a S

amos

ir

Kab

. Man

daili

ng N

atal

Kab

. Dai

ri

Kab

. Tap

anul

i Sel

atan

Kab

. Tap

anul

i Ten

gah

Kab

. Nia

s

Kab

. Nia

s S

elat

an

0%

5%

10%

15%

20%

25%

30%

35%Number of poor Poverty rate

Reconstruction spending

By December 2006, US$ 495 million had been allocated to the reconstruction effort in the region, slightly higher than the core minimum needs

Million USD

Donors(204)

D & L (392)

GoI(131)

NGOs(160) Inflation (31)

0

100

200

300

400

500

600

1 2ProgramNeeds

However, regional imbalance persist- Nias Selatan remains under-funded (December, 2006)

Million USD

(231)

(161)

(353)

(142)

0

100

200

300

400

Nias Nias Selatan

Needs Program

Reconstruction in Nias is showing some sign of progress, but the lack of progress in Nias Selatan is alarming (December, 2006)

Program(142)

Program(353)

Disbursement

18%

Disbursement

(43%)

0

100

200

300

400

Nias Nias Selatan

US

$ M

illio

ns

Reconstruction progress in Nias Island, December 2006

Sectors Damage/Needs Progress by March 2006 Progress by December 2006

Housing

13,500 unit houses

1448 permanent house

5440 permanent houses built/repaired

350 non permanent houses/transitional house

Education

755 out of 879 schools

damaged/destroyed

12 new schools built, 98 under construction

200 schools tents

124 permanent schools built/repaired

214 temporary schools Health 2 hospitals

170 health facilities required repair Revitalization of Gunung

Sitoli hospital 16,000 children immunized

against measles

1 hospital rebuilt 19 health facilities repaired

Infrastructure

3 bridges. 800 km district roads damaged 266 km provincial roads damaged 12 large and small ports/jetties

destroyed

Upgrading 130 km provincial road and 126 km district roads

Preparation 12 ports

37 bridges built 309 km road built, 250 km

under repaired 3 ports/jetties and 2

airports under development

Source: BRR NAD-Nias

Local Governments’ Expenditure

Local governments’ spending has tripled since decentralization

Nias

Nias & Nias Selatan

0

100

200

300

400

500

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006_planR

ph

Bill

ion

Routine spending has an increasing share particularly after decentralization

Routine Expenditure

Development Expenditure

0

25

50

75

100

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Sh

are

of

tota

l exp

end

itu

re (

%)

Sectoral spending on government apparatus is getting priority –infrastructure is declining

0

20

40

60

80

100

2001 2002 2003 2004 2005

Rph

Bill

ion

General govt adm. Infrastructure HealthEducation & culture Other sectors Subsidy & other exp.Unexpected exp.

Personnel expenses is taking a large share of routine spending, leaving little for operational and maintenance

Personnel Expense

80%

Goods Expense7%

Operational/Maintenance Expense

2%

Travelling Expense

4%

Financial Assistance to the Lower Level Govt

6%

Unexpected Expenses

1%

Personnel Expense

67%Goods Expense

10%

Operational/Maintenance Expense

2%

Travelling Expense

3%

Financial Assistance to

the Lower Level Govt

16%

Unexpected Expenses

2%

Kabupaten Nias, 2005 Kabupaten Nias Selatan, 2005

Nias and Nias Selatan allocate most of their budget for apparatus expenditure (2005)

Nias Nias Selatan Total Expenditure % % %

Apparatus Expense 159.2 71 31.5 36 190.7 61

General Administration 141.3 63 25.4 29 166.7 54

Operational & Maintenance 12.4 6 4.1 5 16.4 5

Capital 5.6 2 2.0 2 7.5 2

Public Expense 52.8 24 45.0 52 97.9 31

General Administration 2.0 1 22.2 26 24.2 8

Operational & Maintenance 31.6 14 20.2 23 51.8 17

Capital 19.3 9 2.6 3 21.9 7

Unexpected Expenses 2.1 1 0.9 1 3.0 1 Financial Assistance & Sharing Exp 9.8 4 9.6 11 19.4 6

Total 224.0 100 87.0 100 311.0 100

*Local government budget classification based on Ministerial Decree No. 29/2002

Education Sector

Unlike the national average, Nias and Nias Selatan allocate a large share of their budget to education

0

20

40

60

80

100

2001 2002 2003 2004 2005

Bill

ion

ru

pia

h

0%

10%

20%

30%

40%

50%

Total education expenditure % total expenditure

However, the two districts have among the lowest per capita spending on education – resulted from a relatively low total budget (2004)

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

Kota

Padang S

idem

puan

Kab. T

apanuli U

tara

Kota

Sib

olg

a

Kab. T

oba S

am

osir

Kab. T

anah K

aro

Kab. D

airi

Kota

Tebin

g T

inggi

Kota

Pem

ata

ng S

ianta

r

Kab. S

imalu

ngun

Kota

Bin

jai

North

Sum

ate

ra a

verg

a

Kab. T

apanuli T

engah

Kab. T

apanuli S

ela

tan

Kota

Tanju

ng B

ala

i

Natio

nal a

vera

ge

Kab. N

ias

Kab. H

um

bang H

asunduta

n

Kab. A

sahan

Kab. L

abuhan B

atu

Kab. D

eli S

erd

ang

Kab. L

angkat

Kota

Medan

Kab. N

ias S

ela

tan

Nias Nias Selatan

Key Issues in Education Given a large share of current allocation on education,

the most effective way to improve the outcomes is to use the existing level of spending more efficiently;

Gross Enrollment Rate in junior and senior high school is below North Sumatera and Indonesia average;

Literacy rates for the two districts are the lowest among districts in North Sumatera;

Insufficient and unequal distribution of teachers accross sub-districts, particularly in Nias Selatan;

Unequal distribution of primary schools among sub-districts of Nias and Nias Selatan;

Poor condition of school building and classrooms. The tsunami and earthquake had a severe impact on education and further decreases the quality of education.

Health Sector

Health spending has increased after decentralization

02468

101214161820

2001 2002 2003 2004 2005

Bill

ion

rupi

ah

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Total health expenditure % total expenditure

However, per capita spending was still lower than districts and national average (2004)

020,00040,00060,00080,000

100,000120,000140,000160,000180,000200,000

Kota

Sib

olg

a

Kota

Tebin

g T

inggi

Kota

Bin

jai

Kab. T

anah K

aro

Kota

Pem

ata

ng S

ianta

r

Kota

Padang S

idem

puan

Kab. D

airi

Kab. T

apanuli U

tara

North

Sum

ate

ra a

vera

ge

Kota

Tanju

ng B

ala

i

Natio

nal a

vera

ge

Kab. T

oba S

am

osir

Kota

Medan

Kab. L

abuhan B

atu

Kab. N

ias

Kab. T

apanuli T

engah

Kab. H

um

bang H

asunduta

n

Kab. T

apanuli S

ela

tan

Kab. L

angkat

Kab. S

imalu

ngun

Kab. A

sahan

Kab. D

eli S

erd

ang

Kab. N

ias S

ela

tan

Nias Nias Selatan

Key Issues in Health

Health outcomes on Nias Island still lag behind provincial and national averages:

Infant mortality rates on the Island is higher (36.1%) than North Sumatera (33.5%) and Indonesia rates (32.8%);

A large number of deliveries are attended by traditional midwives (dukun); Immunization coverage is relatively low (33.3% in Nias and 15.8% in Nias

Selatan respectively) compared with provincial (49.9) and national coverage (64.3).

Insufficient supply of health personnel and unequal distribution of health workers among sub-districts across the island need to be addressed;

The availability of health facilities in Nias was above provincial average, but lacking in Nias Selatan. A large number of health facilities were severely damaged after the earthquake;

Spending on operational and maintenance is very low (3 percent of routine expenditure) - insufficient to effectively maintain medical equipment and health facilities.

Infrastructure Sector

Spending on infrastructure has declined sharply after decentralization

0

10

20

30

40

50

60

70

2001 2002 2003 2004 2005

Bill

ion

ru

pia

h

0%

5%

10%

15%

20%

25%

30%

35%

Total infrastructure expenditure % total expenditure

Local governments allocation on infrastructure maintenance is worrying

2001 2002 2003 2004 2005

Others

Official travel

Operational &maintanance

Goods/services

Personnel

2004 2005

Others

Official travel

Operational &maintanance

Goods/services

Personnel

Nias Nias Selatan

Key Issues in Infrastructure

Local government low priorities on infrastructure resulted in poor outcomes:

Households in Nias and Nias Selatan have among the lowest access to clean water and electricity in North Sumatra;

81 percent and 78 percent of road in Nias and Nias Selatan is badly damaged;

Only 22 percent of the rice fields in Nias island are irrigated, compared to 50 percent in North Sumatera and 60 percent of Indonesia average.

Local governments involvement in reconstruction still insufficient: Local governments has declining trend of infrastructure spending,

probably as a result of the increased investment by BRR and donors; The capacity of local governments to continue the reconstruction

process after BRR mandate finished remains a major challenge; Operational and maintenance budget will probably have to increase to

properly maintain and run the new reconstruction assets

Local Governments’ Capacity

Local governments capacity to manage public finance is still poor

0

20

40

60

80

100Local regulatory framew ork

Planning and budgeting

Cash management

Procurement

Accounting and reporting

Internal audit

Public debt and investment

Asset management

External audit and oversight

Average Score

Nias Nias Selatan

Key Issues

The capacity of local governments in public financial management is weak and needs substantial up-grading;

The educational level of attainment of most civil servant (70 percent) is only senior high school;

Further proliferation of districts needs to be scrutinized – it could reduce efficiency and economies of scale in public service delivery, with a concurrent rise in routines expenditures;

The delays in budget approval processes could disturb the planning and cash flow of the related fiscal year.

Recommendations

Section RecommendationRevenue Improve transfer allocations (DAU) among districts by taking into account

poverty and other social indicators. The DAU allocation formula should be more sensitive to poverty and fiscal gap, as opposed to benefiting districts with large civil servant salary bills; District governments should focus on stimulating economic activities rather than seeking to maximize short-term own source revenue.

Expenditure Scrutinize the increase in routine spending and set appropriate shares for operational and maintenance; Allocation of development expenditure on government apparatus should be scrutinized, public services and infrastructure should be priority of development spending.

Education Provides incentives for qualified teachers to teach in remote area; Accelerate rehabilitation of schools, but restrain the building of additional schools until there are sufficient numbers of teachers and adequate funding to maintain current school buildings.

RecommendationsSections RecommendtionsHealth Increase budget allocation on health by focusing more on quality of health

personnel and improved health outcomes; Provide appropriate incentives mechanism to improve the number of health personnel in Nias island; Ensure that the investments made by BRR are focused on meeting well-defined health outcomes targets.

Infrastructure Local governments involvement should be strengthened to develop a sense of ownership of the projects as well as to improve the skills and capacity in future planning; Develop short-term and long-term development program on infrastructure; Improve budget allocation on maintenance to sustain the current reconstruction progress.

LGs capacity Improve local government financial management capacity ie. by having a joint-funded capacity training with BRR, donors, and NGOs; The creation of new districts/sub-districts should be under adequate preparation and ensure that physical infrastructure and human resources are in place to manage a new administration.

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