Concepts And Technical Steps For Program Restructuring

PROGRAM RESTRUCTURING NATIONAL MEDIUM TERM DEVELOPMENT PLAN 2010 - 2014

Draft

CONCEPT AND TECHNICAL STEPS for PROGRAM RESTRUCTURING

Benny M. Chalik Danya D. Hakim

August 2008

TABLE OF CONTENTS

I.

Introduction 1.1. Background 1.2. Objective and Aim 1.2.1. Objective 1.2.2. Aim 1.3. Scope

II.

Framework for RPJMN Program Restructuring 2.1. Principles for Preparing the National RPJM 2.1.1. Elaboration of the National Development Policy Direction 2.1.2. Resource Allocation Projections 2.1.3. Implementation of Aggregate Fiscal Discipline in the Medium Term Budget Framework 2.1.4. Macro Economic and Fiscal Projections 2.2. Framework for the National RPJMN Program Restructuring 2.2.1. Elaboration of the Medium Term Development Plan into the National Development Program Architecture 2.2.2. Projecting the Medium Term Development Plan into Yearly National Development Priorities 2.2.3. Guidance for the Preparation of New Initiatives as prepared by Ministries and Agencies 2.2.4. Elaboration of the Function of Performance Indicators as Measures in Program and Activity Implementation 2.2.5. Elaboration of the National Medium Term Development Plan based on Results Based Budgeting 2.2.6. Implementation of the Performance Based Budgeting Approach in the Medium Term Expenditure Framework (MTEF)

III.

Approaches for Preparing the RPJMN Programs 3.1. Medium Term Fiscal Framework 3.2. Program Architecture 3.3. Management of Performance Aims Achievement 3.4. Comprehensive Cost Structure 3.5. Medium Term Expenditure Framework 3.6. Proposing and Reviewing RPJMN Programs

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IV. Guidance for the Preparation of the Draft National RPJM 4.1. Preparation of the Medium Term Development Policy Framework 4.2. Preparation of the Medium Term Macro Economic, Fiscal, Expenditure and Budget Framework 4.3. Preparation of the National RPJM Programs and Budget 4.4. Monitoring and Evaluation

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V.

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Recommendations

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TABLE OF DIAGRAMS

Diagram 1.

Elaboration of the National Development Policy Direction

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Diagram 2.

Flow Diagram for the Preparation of the draft 2010-2014 RPJMN

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Diagram 3.

RPJMN Program Architecture, built on the basis of the Government’s Organizational Structure, the Budget Classification Structure, the Policy Priority Structure and the Performance Management Structure

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Diagram 4.

Typology of Performance Indicators

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Diagram 5.

Medium Term Expenditure Framework

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Diagram 6.

Policy Direction, Priorities and the National RPJM Program-Activities

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Diagram 7.

Computation of the Medium Term Expenditure Framework based on the Forward Estimates

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I.

INTRODUCTION

1.1. Background Consistent with Article 12 Line (2) of Law 17/2003 on State Finances, which states that the preparation of the draft budget (APBN) will be implemented with reference to the government work plan (RKP) in the effort to achieve government objectives, the preparation of the draft budget is thus an undivided process between program and activity planning on the one side and budget planning on the other side. In addition, Article 4 Line (3) of Law 25/2004 on the National Planning System, states that the government work plan (RKP) is an elaboration of the RPJM (the national medium term development plan). These stipulations directly place the RPJM as a critical and strategic planning effort in the endeavour to achieve national objectives. The problem which then needs to be addressed is how to formulate a medium term expenditure approach and framework for the comming years which ensures sustainable efficiency and effectiveness of yearly development programs and activities. In other words, in order to form an MTEF, a medium term fiscal framework is needed which can be implemented in a disciplined manner and is coupled with efficient and effective resource allocation. Further, the effort to achieve efficient and effective resource allocation will be established by government decisions on the phasing and improvement of programs and activities, and through the achievement of fiscal targets related to the resource envelope for the coming years. Based on these initial thoughts, planning and budgeting efforts require a form of program architecture which structurally can project government objectives into the objectives of the long term, medium term and annual development plans. With the formation of the program architecture, sustainability and integration of program phases can be obtained to support the achievement of program and activity objectives. Despite all this, the effort to achieve government objectives will still not be optimal unless it is coupled with an effort to establish development priorities, through which alternative programs can be established, which would then be adjusted to urgent community needs, program phases and budget availability. The high disposition of community needs to urgent aid-type programs and activities requires each government activity to include accountability and transparency in planning and budgeting excercises, which have as consequence the need to include performance indicators as a measure of successfull program and activity implementation. In other words, the preparation of programs and activities should include performance indicators that require careful program implementation through strengthened coordination, monitoring and evaluation.

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During technical and operational implementation, coordination, monitoring and evaluation activities will need to take into consideration the performance indicator characteristics of programs and activities, specifically the inputs, outputs, outcomes and impact obtained from program and activity implementation of a program in itself or as a joint effort with other programs and activities. The inclusion of performance indicators in program based budgeting will have the same effect as if implemented through performance based budgeting, wherein both approaches produce basic data and information for management and are results-based. Based on the above, the 2010-2014 program restructuring effort which will be implemented through the program architecture, MTEF, MTFF, PBB and results based management, will result in a change in costing techniques in accordance to the development sector and or the ministry/agency at different structural levels. Further, focus priorities will be established as program and activity endeavours to provide substantial stimulation to the achievement of national development objectives. 1.2.

Objective and Aim

1.2.1. Objective The 2010-2014 RPJM Program Restructuring effort has as objective to: a. To establish a guidance for preparing programs and activities in development planning documents. b. Implement a multi-year performance accountability system through the detailing of government priorities and performance indicators within development programs and activities. 1.2.2. Aim The aim of the 2010-2014 program restructuring effort is to form a planning and budgeting system which is able to ensure a clear and sustainable development direction through improved efficient and effective resource allocation and aggregate fiscal discipline in the implementation of development policies. 1.3.

Scope The 2010-2014 RPJM Program restructuring effort will review the following:

a. The detailing of national objectives in the long, medium term and annual development plans into the national development program architecture in order to ensure more meaningful and sustainable development.

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b. The elaboration of the national medium term development plan into the ministry/agency strategic plans and work plans, as an effort to support results based planning and budgeting. c. Project the medium term development plan into yearly national development priorities as a government effort to tackle yearly threats, constraints, challenges and development opportunities. d. Provide reference to program and activity preparation for the ministry/agency Renja, the RKP, and for the implementation of efficiency initiatives as well as new initiatives in the effort to enhance efficient and effective resource use and to implement aggregate fiscal discipline in multi-year planning and budgeting. e. Implement a performance based development approach within a medium term development framework. f.

Detail the function of performance indicators as measures used in program and activity implementation at every planning and budgeting phase, including monitoring and evaluation.

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II.

2.1.

FRAMEWORK FOR RPJMN PROGRAM RESTRUCTURING

Principles for Preparing the National RPJM

2.1.1. Elaboration of the National Development Policy Direction As mentioned previously, the elaboration of the national direction and objectives into the long term development plan (RPJP), which is then elaborated into the medium term development plan (RPJM), and which is in turn detailed into the annual government work plan (RKP), reflects a continuing development structure. Through the application of a vertically structured development direction and objectives, it will be possible to achieve objectives in a partial and phased manner towards stated goals in a sustainable manner, as expressed in Diagram 1. This sustainable development structure can ensure that all activity objectives lead to the achievement of sectoral program objectives, which in turn lead to the achievement of multi-sectoral program objectives at the national level. In line with the endeavour to achieve yearly program and activity objectives and aims, it will be possible to achieve development objectives in the medium term using a rolling system during the five years of development program and activity implementation. The achievement of the medium term development objectives in a rolling fashion is based on the assumption that yearly development plans are projections of medium term program plan implementation. The question that naturally arises is, if development is to be implemented in a rolling fashion from year to year throughout the five year time frame, is the medium term development plan still relevant? The answer is yes, it is. The RPJM not only provides a development direction and clear objectives in the medium term which can guide towards the attainment of more direct impact through joint cummulative effort, it can also be used as a basis for efficient and effective resource allocation during the medium term. In order to position the RPJM as a planning document which can be used as reference in the preparation of the Government Work plan (RKP), the elaboration of development program objectives needs to be conducted in detail vis a vis constraints that may emerge during the next five years. In addition, based on the medium term strategic development plans, it will be possible to establish various development goals and priorities which include alternative development programs and activities.

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Diagram 1. Elaboration of the National Development Policy Direction

After the development goals and priorities have been established, the preparation of the RPJMN will require a review of planned policies which in the medium term time frame can contain and delineate various new policy plans as a form of policy adjustment and updating process, in response to emerging yearly development constraints. The policy adjustment and updating process is a critical step in minimizing planning biases that may have occurred, such that it will be possibe to continue positioning the RPJM as a reference point during medium term development. In the RPJMN, the policy adjustment and updating process is a scenario simulation excercise of various changing development situations which could affect implementation in the medium term. Based on the results of these simulation excercises, the government can anticipate development constraints in the comming years. Besides the results of the simulation excercises for the medium term, data and information obtained from coordination, monitoring and evaluation activities can also be used as basis for establishing development policies for which the adjustment and updating excercise for the preparation of the next RPJM can be based upon. In order to obtain adequate data and information for policy planning, performance indicators which can provide data and information on program and activity targets need to be used. Performance indicators in program and activity preparation act as performance measures for which relevant data and information can be produced as inputs to decision making processes. Input, output, outcome and process performance indicators can be used to measure development performance in terms of current and future development goals and objectives. In order to review and assess development performance, the use of indicators is not limited to one or two types of indicators as measures for analyzing program and activity performance. It is common to find the use of key performance indicators (KPIs), which aim to reflect key performance characteristics of a program or activity. KPIs can be effective if they can capture essential characteristics of programs and activities, either quantitatively or qualitatively as program and activity aims and targets. 2.1.2. Resource Allocation Projections a.

Institutional Analysis of the RPJMN Development Policies

Logically speaking, the RPJM framework should embody the extrapolation results of program and activity implementation data and information during the five years of the previous RPJM period. The development pattern of policies from year to year throughout the five year period of the previous RPJM programs and activities, should be the basis for establishing policies for program and activity preparation in the next medium term. In terms of the link between the previous RPJM and the future one,

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the current RPJM embodies the existing performance, whereas the next RPJM should embody the expected performance. In this context, the next question that arises is whether the expected RPJM can enhance resource allocation more efficiently and effectively than the previous RPJM. In order to answer this question, an institutional analysis of organizational performance and rules of the game is necessary, within which each institution is analyzed in terms of capacity to achieve development goals and targets efficiently and effectively in terms of resource allocation. Organizationally, an institutional analysis will review the main roles, responsibilities and functions of the ministry/agency, which includes an analysis of the roles and functions of each echelon in the civil service related to program and activity preparation and implementation. An institutional analysis is also required to analyze the rules of the game for enhancing efficient and effective resource allocation. Once the institutional analysis has been conducted it will be possible to minimize projection biases during the preparation of the new RPJMN. Efforts to further reduce extrapolation biases in development planning preparation will be conducted through annual policy adjustment and updating efforts. Assuming that the medium term policy direction is established consistently, then factors that influence RPJM program size, based on an institutional analysis for enhancing efficient and effective resource allocation, can be controlled and developed into program aims and activity targets in a rolling fashion throughout the five planning years. The said factors are: (1) service levels during the medium term period; (2) prioritization; (3) the establishment of performance indicators; and (4) policy adjustment and updates. (1) Service Levels in the Medium Term Policy development in the medium term is usually reflected in program and activity target area expansion, increase in the size of the target beneficiary group, as well as an increase in the scope of the activities in accordance to program development from year to year. In addition, there will be an increased demand for better program and acivity services. In other words, the type and quality of services will tend to continue to increase as development proceeds. In the implementation of programs and activities, an increase in the number, type and quality of services will be affected by program and activity targets for the upcomming year. On the other hand, the size of program and activity targets will be directly affected by budget availability in the indicative, temporary and definitive ceilings. The fact that there is a resource constraint forces planning in the RPJMN to proportionally distribute program and activity targets throughout the planning years without affecting those programs and activities that are categorized as indiscretionary. During implementation, the process of resource distribution will be 10

affected by the level of synchronicity of program and activity preparation processes, which should reflect consistency between planning and budgeting. Program activity synchronization in the distribution of development resources is a critical point in efficient and effective resource allocation. Program and activity synchronization includes, among others, the effort to align and adjust programs to ministry/agency functions and subfunctions, the formulation of activity outputs that support program results, outcomes and outputs, and to establish simple activity and sub-activity nomenclature able to reflect the outputs to be achieved. Similar to the RKP and RKA-KL preparation processes, the formulation of the national RPJM requires ministries/agencies to prepare programs and activities that are comprehensive and consequential, and in line with the roles and responsibilites of each ministry/agency. Based on this performance committment, the RPJM document can be used as a reference in the formulation of program and activity targets for a more efficient and effective budget preparation process. (2) Establishing Priorities Using the assumption that costing is based on indexed standard general costs (SBU), standard specific costs (SBK) and detailed budget costs (RAB) which use types, specifications and market prices, the resource allocation policy guiding the RKA-KL preparation is thus largely affected by policy prioritization as stated in the RKP, ministry/agency roles and responsibilities, the ministry/agency ceilings and discussions between ministries/agencies and the DPR (legislative body). (a)

Annual Government Work Plan (RKP) The Government Work Plan includes development programs and activities which have been selected from ministry/agency work plans (renja K/L) for the same year. Programs and activities in the Renja K/L are specific work plans based on the ministry/agency strategic plans (Renstra K/L) whose strategies have been reviewed in terms of capacity to respond to medium term development constraints. In the RKP, program activity budget allocation prioritization is provided to those policies that anticipate urgent development program and activity needs, those programs, with estimates, that can stimulate faster development, and those that increase the size, type and quality of services.

(b)

Ministry/Agency Organizational Roles, Responsibilties and Functions Prioritization that is conducted based on organizational roles and responsibilities is an effort to allocate program resources based on the responsibilities of the various echelons within the government functions and sub-functions for which they are responsible for. Prioritization that is based

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on miniistry/agency organizational roles and responsibilities will position each government function and sub-function into proportional roles in program and activity implementation. (c)

Ministry/Agency Budget Ceilings Government effort to constrain program and activity budget requests to ensure that they do not exceed the resource envelope starts with a joint effort by MoF and Beppenas in isssuing the indicative, temporary and definitive ceilings, which reflect the highest allowable budget allocation per ministry/agency. The establishment of the budget ceilings is a policy effort to enhance resource allocation within ministries/agencies in line with the constraints of the resource envelope.

(d)

Agreement between Ministry/Agencies and the DPR In accordance with the budgeting rights accorded to the legislative body, ministry/agency work plans are required to obtain DPR approval. The DPR, together with the government, delineates the development policy direction of the country. Agreements with the DPR require ministries/agencies to submit work plans to the DPR for review, discussion and approval with regards to key aspects of planning and budgeting, in accordance to national priorities and agendas, as well as projected resource envelopes.

(3) Establishing Performance Indicators Performance indicators in programs and activities act as measures of successful resource distribution. Each type of indicator reflects a specific aspect of performance: input use, levels of outputs and outcomes, appropriateness of processes and impact of program and activity implementation. Above all in terms of resource allocation and distribution, performance indicators should reflect optimal resource allocation. Optimal resource allocation can only be expressed comprehensively through the use of the impact performance indicator. Impact can be used to analyze the integral and cumulative effect of development in the medium term in terms of aggregate distribution of resources among programs, sectorally and intersectorally. As such, it will be possible to analyze the extent of efficient and effective resource allocation in the medium term at the national level. (4) Adjusting and Updating Development Policies Capacity to project yearly RPJMN resource allocation projections in a rolling fashion into the RKP, is affected by policy adjustment and policy updating capacity on a yearly basis.

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As discussed above, the preparation of the RPJMN should take into account the policy flexibility factor, which will allow future policy development to occur as a result of adjustments and updates. The policy flexibility factor includes the policy capacity of the RPJMN to conduct policy adjustments in response to the interactive effect of the implementation of programs and activities. Often it is difficult to foresee the interactive effect of development programs and activities, as a myriad of factors need to be taken into account during yearly implementation. By using the planning and budgeting system of the last budget year of the current RPJMN period, the preparation of the budget for the next RPJMN programs and activities can be projected more efficiently and effectively into resource allocation from year to year. Moreover, these estimates can be used as basis for minimizing bias in resource allocation. b.

Basis for Calculating the RPJMN Program Budget Plan

The calculation of RPJMN program financing needs is based on stipulations in current regulations affecting the preparation of the yearly RKA-K/L, except that the RPJMN is in addition, based on the perspective of a rolling 5 year budget framework. Adjustments of the yearly RKA-K/L budget plans into the RPJMN budget plan is conducted based on: (1) the development of program objectives/aims and activity targets; (2) forward estimates for the comming five budget years; and (3) budgeting based on performance management. (1) The Development of Program Objectives/Aims and Activity Targets Based on the Minister of Finance Regulation No. 55/2007 on the Guidelines for Preparing and Reviewing Ministry/Agency Work Plans and Budgets (RKA/K/L), the approaches of unified budgeting, MTEF and PBB will be implemented through the preparation of two forward estimates. The implication is that in order to prepare the budget plan for 2010 and 2011, the year 2009 will be used as base year. With the assumption of no policy change, the calculation of the forward estimates is based on the use of the same standard cost and the same level of services as in the budget year. As such the factors that affect the size of the budget plan based on the forward estimates (2010 and 2011) are the program objectives/aims and activity targets for each budget year. In this sense, program objectives and activity targets will be affected by parameter changes which affect the unit cost and the quantity of services. The parameter which often directly affects unit cost is inflation, while the parameter which usually directly affects the number of services is the growth characteristic of the population, or the demographic factor. As an example, in order to maintain the same level of services in the outyears, then the standard cost used should be revised for inflation and the activity object ratio should be revised for population growth. 13

(2) Forward Estimates in the Five Budget Years In line with the requirement to estimate two forward estimates when calculating the baseline, then the calculation of the forward estimates for the five budget years is conducted through six phases of forward estimate calculation. During each phase, the calculation of the forward estimate is conducted based on the assumption of no policy change. The assumption of no policy change implies that the policy which underlies the preparation of the next two forward estimates is the same as the policy which affects the calculation of the base year. The difference between this forward estimate phase and the other forward estimate phases within the framework of the five budget years, is in the use of the base year. In the 2010-2014 RPJMN, the difference between the use of the 2009 base year for calculating the first set of forward estimates, and the use of 2010 as the starting point for the second set of forward estimates is going to be in the policies that affect the preparation of the budget and the forward estimates. As an example, the calculation of the 2010 and 2011 budget years is based on the development policies used in the preparation of the 2009 budget plan. Subsequently, to calculate the forward estimates of the next phase, that is the budget plans for 2011 and 2012, the starting point will be 2010, and so forth untill the calculation of the sixth phase for the year 2014. Changes in policy application affecting every base year and the forward estimates is influenced by policy changes and the cost drivers. Policy changes affecting the first base year and all the other forthcomming years will affect program aims and activity targets due to changes in levels of services. (3) Budget Policies based on Performance Management Budgeting based on performance management is a form of policy formulation that takes into account monitoring and evaluation data and information from program and activity performance implementation. Data and information is used as basis for revising programs and activities, both for the planning as well as budgeting aspects. The application of budget planning based on performance management will result in activity output unit costs. This policy can be used as a basis for comparing one activity budget plan with another, or it can be used directly as a basis for the preparation of new activities. The benefits obtained from policies based on performance management is that it simplifies the process of calculating complex activity costs for identifying standard unit costs. On the other hand, weaknessess in the application of such policies can be found in the fact that even though outputs can be calculated efficiently, budget planning as a whole can be inefficient.

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2.1.3. Implementation of Aggregate Fiscal Discipline in the Medium Term Budget Framework Besides discreet resource allocation from year to year, the RPJMN includes a multi-year budget framework which connects all yearly development policies to the medium term development policy on a continuous basis. In order to maintain and at the same time enhance the current levels of development on a continuous basis, a policy is needed which can sustainably maintain and enhance revenues and at the same time adjust policies vis a vis expenditures that potentially can cause a budget deficit. Such a policy to maintain and enhance revenues and which at the same time can adjust multi-year expenditures is often called the policy of aggregate fiscal discipline. a.

Yearly Expenditure Planning within the Multi-Year Framework

Calculations of the first budget year plan (T+1) based on the forward estimates within the five year framework is a cost assessment of national expenditure needs based on the results of implementing development policies in the previous year (T0). Using the assumption that the results of the forward estimates are results of cost estimates of expenditures from the implementation of policies based on a specific level of services (baseline), then an effort that the government can do to maintain and enhance the level of services is to implement new policies in the next budget year. Policies that can be implemented by the government include completely new policies or policy developments from previous policies. In this context, in order to minimize the gap between revenue and expenditure, then the plan to implement new policies needs to take into consideration available fiscal head-room as established in the fiscal target projections. Difficulties that may arise from the implementation of policies that are developments from previous policies is that there may be links among and between cost variables of programs and activities with other cost variables from other programs and activities, resulting in expenditure increases that exceed the available fiscal headroom. Maintaining aggregate fiscal discipline while introducing new policies into each budget year plan requires the process of adjusting expenditures as a whole after the introduction of new policies, which are constrained by the projected resource envelope. In an MTEF approach, expenditures for the implementation of new policies which have been authorized are referred to as new initiatives. On the other hand, if it is estimated that a new initiative will face financing challenges, it is instead possible to implement savings on the one hand and propose new activities on the other hand, through what would be called an efficiency initiative.

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b.

Yearly Revenue Plans within the Multi-Year Framework

The preparation of yearly revenue plans, based on the results of yearly forward estimates within the five year framework, position the forward estimates as a fiscal revenue target under a pessimistic (baseline) scenario. With the assumption that the fiscal projection scenario is to be divided into three scenarios: pessimistic, optimal and optimistic, then the pessimistic scenario is the minimal fiscal target projection scenario which needs to be achieved for the financing of next year’s budget plan under a situation of no significant policy changes. In other words, the results of the forward estimates, with respect to expenditures, is equal to the lowest fiscal revenue target that needs to be obtained in the fiscal projection for the next budget year. An optimistic fiscal projection scenario is prepared based on the possibility of achieving maximum fiscal targets, such that significant fiscal headroom becomes available for new policies. On the other hand, an optimal fiscal projection scenario is a scenario wherein multiple policy adjustments will be implemented on the forward estimates as a result of policy implementation. In the implementation of aggregate fiscal discipline, the three fiscal projection scenarios are a reflection of maximum and minimum expenditures that need to be observed during program and activity preparation as related to the implementation of policies for improving the level of services. 2.1.4. Macro-Economic and Fiscal Projections The preparation of the macro-economic and fiscal framework in the RPJMN is based on a review of past macro-economic and fiscal projections, whose result is established as the new medium term macro-economic and fiscal framework. The review of past macro-economic projections, besides being based on estimates of macro-economic variables which affect revenues, expenditures, the deficit and financing, should also be based on a review of opportunities to enhance revenue generation and for enhancing efficiency and effectiveness of spending and financing. The results of such a review would resemble a strategic plan to enhance revenue on the one side and enhance efficiency and effectiveness of spending on the other hand in the medium term. Besides the review of macroeconomic projections, the medium term macroeconomic framework should also be complimented with a review of policy impact and feedback from all aspects of development. In order to establish the basis of medium term development planning and budgeting, the RPJMN should include a medium term fiscal framework which includes the fiscal policy direction and targets in the medium term, among others, the tax ratio, or tax revenues to gross domestic product (GDP), total expenditure to GDP ratio, the budget deficit to GDP ratio, and the debt to GDP ratio, which should be consistent with the macroeconomic framework. 16

2.2. Framework for National RPJM Program Restructuring Based on the preparation principles of the national RPJM, the RPJM is a planning document which includes a detailed national development policy direction, resource allocation projections, and guarantees the implementation of aggregate fiscal discipline, as well as being based on macroeconomic and fiscal projections in the medium term. In its preparation, the national RPJM is developed based on the forward estimates. The preparation of the forward estimates is based on six phases of forward estimates preparation, within which the first phase uses as base year the last year of the previous RPJM period in order to calculate the first year of the RPJM under preparation. This iterative approach is used for preparing the second to the fifth budget years. In the diagram below (Diagram 2), the forward estimates still have to be adjusted to policies to enhance the level of services, and further have to be tested by the program architecture framework in order to ensure consistency with policy planning and performance and organizational management.

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Diagram 2.

Flow Diagram for the Preparation of the draft 2010-2014 RPJMN

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2.2.1. Elaboration of the Medium Term Development Plan into the National Development Program Architecture The program architecture is a structured program and activity construct which is formed hierarchically so that it is possible to explain the logical relationship between planning priorities, organizations, programs, activities, performance indicators and financing. In other words the program architecture is a framework for analyzing the relationship between program and activity funding with program and activity performance, including performance achievements, and organizational accountability. The elaboration of national objectives and direction in the long term development plan, which is in turn elaboraterd into the medium term development plan and in the annual government work plan, is often referred to as the elaboration of the continuing development program structure. The program architecture acts as a processor to test programs and activities from the perspective of links to government organizational structures, the budget structure, the policy priority structure and the performance management structure. The government organizational structure which consists of ministries and agencies can be categorized on the following lines: (a) departments/ministries; (b) state ministries; (c) agencies; (d) comissions; (e) legislative agencies, within which are civil servants with echelons 1 to 4 ranking positions. Responsibilities are in accordance with positions; the echelon 1 position holding the director-general position and in charge of programs; the echelon 2 position holding the director position and in charge of activities; the echelon 3 position holding the head of sub-directorate position is in charge of sub-activities. In other words, the echelon 1 is accountable for planning, implementation, and program performance monitoring conducted by the DG within a ministry or agency, while accountability for activity and sub-activity planning and implementation rests with the echelon 2 and 3. If reviewed from the basis of functions and sub-functions as stated in the budget classification (Law No.17/03 and GR No. 21/04), there are 11 functions and 79 subfunctions. Programs and activities include costs that are established based on spending types using the approach of input and output unit costing. The input unit costing approach is used in the process of current budget year performance evaluation, while output unit costing is used as an input for future budget preparation, based on established targets. Within this context, the establishment of targets is based on an elaboration of the policy planning and organizational performance accountability structures. The policy planning structure consists of: (a) priorities; (b) focus priorities; (c) program objectives; and (d) priority activities, while the organizational performance accountabiity consists of: (a) outcome areas; (b) strategic outcomes; (c) ministry/agency objectives/mission statements; (d) program KPIs; and (e) activity KPIs. (Diagram 3). 19

In Diagram 3 a relationship between priorities and outcome areas, and focus priorities with strategic outcomes can be observed, which shows that programs and focus priorities are prepared by taking into consideration outcome areas and strategic outcomes as development objectives. A close relationship between policy planning and performance management is also an effort to enhance accountability and program and activity transparency, based on the alignment (with development objectives) and congruence (with organizational structures) principles.

Diagram 3. The RPJMN Program Architecture, built on the basis of Government Organizational Structures, Budget Classification Structure, Policy Planning Structure and the Organizational Performance Accountability Structure

2.2.2. Projecting the Medium Term Development Plan into Yearly National Development Priorities In the RPJMN, government objectives are projected into programs and outputs which are estimated to produce cummulative outcomes and outputs which are expected to enhance the achievement of government objectives. The results of program and activity projections in the medium term will result in a collection of alternative programs and activities which can be used as the basis for planning in the next five years. Due to the resource constraint, and due to urgent community needs and demand for specific programs, the government will have to undertake policy analysis to establish strategic programs that can solve problems in the short and medium time frame. Even though it is likely that priority programs will not change in the short term, if there is a need to change a priority, then the government

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should undertake a performance analysis of program and activity monitoring and evaluation results on a yearly basis before enacting a priority change. Policy enactment that is established based on yearly program and activity results is often referred to as results based management. The key factor that can directly affect a change in program priorities is fiscal headroom availability and the need to undertake spending targets. With the assumption that the fiscal target is fulfilled, then the resource envelope should provide a spending baseline and fiscal headroom that is adequate enough for the preparation of new initiatives. In addition, if a ministry/agency views that one of its strategic programs can act as a stimulus to the development process, then the ministry can internally propose that program as a focus priority program. 2.2.3. Guidance for the Preparation of New Initiatives as prepared by Ministries and Agencies As mentioned above, the availability of adequate fiscal headroom can be used for proposing activities as new initiatives, allowing ministries/agencies to have the opportunity for further developing/completing activities in the future years. The type of activities that can be proposed as new initiatives are those that are alrady part of an existing program but which have not been undertaken before, and those that are assumed to contribute significantly in terms of impact through the achievement of program targets. The requirement that new iniaitiatives should be activities that are already part of existing programs it to ensure that there is support for the achievement of existing program objectives. Moreover, it is expected that together with existing activities, new initiatives can provide a joint impact to program implementation. The preparation of new initiatives can be categorized as an effort to further develop programs and activities based on the expected impact from the interaction of existing programs and activities. 2.2.4. Elaboration of the Function of Performance Indicators as Measures in Program and Activity Implementation Performance indicators function as measures to the achievement of program and activity objectives. Performance indicators are used as tools in periodical monitoring and evaluation activities to measure efficiency, effectiveness and other parameters of success. Basically, monitoring and evaluation activities have as objective to establish the performance extent and use of inputs, the levels of outputs and outcomes produced and achieved, and the impact resulting from programs and activities as well as their costs. Through the use of performance indicators in monitoring and evaluation activities, data and information will be produced that can be used as: (a) basis for establishing 21

efforts to enhance organizational and development performance; (b) basis for decision making; and (c) valuing the implementation of accountability and transparency in program and activity management. In techncial and operational terms, the establishment of performance indicators is an undivisible element of program and activity preparation. During program and activity preparation, as an effort to elaborate on national development priorities, performance indicators act as weights to government work plan (RKP) program activity objectives and targets. In this context, performance indicators are the planning technical ceilings which provide a quality standard to planning criterias such as suitability, capability and adaptability of programs and activities, for replication under specific temporal and physical characteristics. 2.2.5. Elaboration of the National Medium Term Development Plan based on Results Based Budgeting Viewed from an elaboration perspective of the RPJMN priorities into ministry/agency programs and activities, costing is technically conducted based on required input costs. Among the factors that affect program and activity costing is the use of unit costs based on geographical characteristics and the development of spatial economics within a particular regional development area. The geographical characteristics factor often differentiates between the required unit cost in program and activity input procurement, such as in the case of distance between the program location and the source of the input which results in high transportation costs, or as in the case of limited availability of human resources, for program implementation. The spatial economic factor affects program and activity costs through the enactment of minimum regional wages and through the level of comparative advantage an area may have vis a vis other regions. In order to overcome those problems, the establishment of specific indexes for program activity costing is a necessary requirement. Other factors that also affect program and activity costing include: (1) Demographic/Population Factors – Changes in target beneficiary population. (2) Internal Technical Factors – Index of civil servant wages and other indexes related to program and activity costing. (3) External Technical Factors – Changes in foreign exchange values, inflation, regional wage increases. (4) Political Factors – Policy changes that have implications on program and activity costs, such as a change in student teacher ratio from 40:1 to 30:1, requiring an increase in teacher availability as well as an increase in numbers of school classrooms. (5) Demand Factors – Policy changes established based on a request by target beneficiaries. 22

If viewed from the point of view of the fiscal targets that are required to establish the resource envelope for the next budget year, then costing for programs will be based on the available resource envelope which results from a fiscal projection of revenue and financing for the next year. The said fiscal projection will be revised by fiscal targets for state financing, based on current baseline spending. At the start of the budgeting phase, the establishment of the resource envelope for the implementation of priority programs will be constrained by the indicative ceiling. The indicative ceiling is prepared to provide guidance for program and activity planning so that proposals do not exceed the highest point of the temporary fiscal projections. Once the resource envelope has been established, then the annual government workplan (RKP) and the working unit work plans and budget (RKA) become more definitive documents for budget preparation. Based on this last explanation, it is clear that the process of establishing program activity revenue and expenditures is conducted based on results based budgeting, wherein decisions are made based on data and information obtained from program and activity implementation in the previous years. 2.2.6. Implementation of the Performance Based Budgeting Approach in the Medium Term Expenditure Framework (MTEF). The implementation of performance based budgeting is an approach which uses data and information from program implementation to produce more efficient and effective implementation and budgeting practices. The performance based budgeting system is based on an application of aggregate fiscal discipline, resource allocation to strategic priorities and the technical operational implementation of programs. To date the government of Indonesia has implemented aggregate fiscal discipline through the establishment of regulations that start the purpose of aggregate fiscal discipline. In the meantime, resource allocation to strategic program priorities is conducted based on assessments of urgent community needs towards particular programs and activities, as well as their joint impact on development. Resource allocation to strategic programs is often characterized by less than efficient and effective resource allocation, resulting in low accountability and transparency in program and activity implementation. The lack of attention to resource allocation efficiency and effectiveness is often caused by the fact that there are large volumes of activities to be undertaken, which unfortunately are not complemented by an appropriate costing system. Further, the establishment of input use for the production of outputs and outcomes should be complemented by the application of a technical operational system which can guarantee improved implementation of programs and activities. Without the application of such system, the implementation of aggregate fiscal discipline becomes meaningless to development.

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These three components of the performance based budgeting system are adopted in an MTEF and are matched by projections of program and activity revenue and spending based on the forward estimates. These take into account the factors that affect revenue and spending. Implicitly, the budget estimate which is a result of the forward estimates is an indicative ceiling which can be used by the ministries and agencies for priority program and activity preparation for the next year. Even though the indicative ceiling is not yet properly implemented, technically and operationally, it will provide guidance towards more efficient and effective financial resource allocation in program and activity budgeting in the next years. Theoretically, the forward estimates are a rough estimate of the process of establishing fiscal targets, which are based on the medium term fiscal framework. In the MTEF approach, the MTFF is a process for establishing the resource envelope and the fiscal headroom for program and activity planning in the next budget year. With the objective of supporting program and activity planning in the next budget year, the forward estimates are established as hypothetical amounts reflecting an unbiased resource envelope. Even though it is possible to have significant bias in the resource envelope, changes to program and activity proposals should not take up too much time and should not disturb other policy and budgeting processes. Further, the implementation of the MTEF will provide an opportunity for the preparation of new initiatives which can be proposed based on the available fiscal headroom.

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III.

APPROACH FOR PREPARING THE RPJMN PROGRAMS

3.1. The Medium Term Fiscal Framework The medium term fiscal framework is built consistently from macro-economic factors, revenue projections and policy committments to achieve the strategic objectives of fiscal policies. As such the MTFF is a first step in the MTEF approach which provides a construct to the budget process of establishing the hypothetical budget financing requirements up to the establishment of the resource envelope for the next year. In other words, the MTFF approach has characteristics of top down budgeting, implemented by the government in establishing the overall resource envelope which will then be divided into priority development programs through the budget classification system. Furthermore, the budget for priority development programs will be used by the ministries/agencies as reference point for establishing line ministry ceilings for ministry/agency programs and activities. As a consequence of implementing the MTEF approach which estimates required yearly financing (through the forward estimates) for the three to five year period, a multi-year budget estimate is required. Budget margin estimates are obtained from a calculation of the factors which affect fiscal target achievements, with the assumption of no policy change affecting spending in the outyears. Such an assumption proposes the minimum fiscal target achievement scenario within an MTFF, which is characteristically pessimistic. On the other hand, the estimation of fiscal target achievements should be prepared using the optimistic scenario, which includes government policy changes in the next budget years, so as to produce maximum fiscal targets. Challenges during implementation include complex processes and significant biases. Based on an estimation of yearly fiscal target achievements during the three budget years period, government policies on aggregate fiscal discipline can be implemented in a sustainable fashion. Even though every year an updating process is undertaken, the temporary projections of the resource envelope can be used as indicative references in the establishment of indicative ceilings for program planning at the ministry level. As such, the results of the fiscal estimates in the multi-year time frame can function as both an input for revising the forward estimates and act as the total resource ceiling for the government and the ministries/agencies.

3.2. Program Architecture During implementation, the preparation of development plans using the program architecture approach will go through several phases of program structure formulation, which integrally will form a new program architecture. The elaboration of the Long Term Development Plan into the Medium Term Development Plan which will then be further elaborated into the Ministry Strategic Plan, the Ministry Work Plan as well as the 25

Annual Government Work Plan is a reflection of the attempt to elaborate high level objectives into smaller, simpler and more focused objectives. Based on such an elaboration a new program hierarchical structure will be formed wherein long term development programs will be at the top, followed by programs in the medium term development plans, ministry strategic plans and the annual government work plan. The formation of a hierarchical program structure will function as a reference for establishing program direction and objectives for plans at a more detailed level. As such program and activity implementation in the short term will be consistent and provide more significant development impact in cummulative terms, particularly for achieving development objectives in the medium and long term time frame. Furthermore, the development direction and objective hierarchy within each planning document will be used for the implementation of the performance based budgeting approach through the use of performance indicators in programs and activities during the various planning document phases. With the formation of a development program structure, a program and activity “bank” is thus prepared, allowing choices from a source of alternative programs and activities which can be proposed by a ministry and agency with ease. Even so, the integration of planning and budgeting which is entirely based on a program structure will be difficult to implement if that structure in the program architecture is not complemented with an organizational structure for sectoral implementation, in line with government functions and the performance management structure. The ministry organizational structure which functions as the main responsible point for the formation of program accountability has to be established at two levels, the Echelon I level and the Echelon II level. Related to the roles structure and the government function, the Echelon I is responsible for the preparation and implementation of programs and activities at the directorate general or comparable level, wherein activity implementation is delegated to the Echelon II. The Echelon II then distributes program implementation according to the roles, functions and subfunctions of its directorates. In program and activity preparation, the echelon I functions to elaborate national priority programs into ministry programs, in accordance with sectoral functions and ministry vision-missions as well as objectives. The elaboration of ministry programs consists of ministry programs which are a direct elaboration of priority programs, and focus priority programs which reflect specific policies related to urgently requested programs or if there is an explicit understanding that such a program can stimulate and support a faster achievement of development objectives in the medium term. Furthermore, both regular and focus priority programs are elaborated into activities and sub-activities which support the achievement of the program objective. Up until recently there has been some misunderstanding about how activities should be elaborated into sub-activities, particularly in relation to the use of performance indicators which are used in the performance management structure. In principle, the elaboration of activities into sub-activities will not cause problems as long as both 26

activities and sub-activities produce different outputs, but which are still related in the larger overall frame of the objective tree and the objective hierarchy of the program architecture. The application of the organizational structure and the government functions is part of an elaboration of the budget classification. In this particular context, the economic classification which includes spending types and is a part of the budget classification, is not included in the program architecture due to the fact that the eight spending types are, in actuality, characteristics of program spending, and are thus part of the organizational structure as well as government functions. With the establishment of the program architecture which has as pillars the organizational structure, the budget classification structure, the policy planning structure and the performance management structure, it is possible for ministries and agencies to prepare program and activity budget plans. The establishment of a performance based management structure is a necessary element for the program architecture, wherein through its implementation program and activity data can be obtained which can be used for policy planning. The availability of this policy planning data and information fulfills the accountability and transparency criteria in program and activity preparation. Such data and information, obtained from the implementation of program monitoring and evaluation activities, will be used to enhance program and activity efficiency and effectiveness in the comming years. In the performance based management structure, the achievement of strategic outcomes of priority development programs is measured through the use of the impact performance indicator. The implementation of priority programs and focus priorities, reflects a joint impact or cummulative impact of outcome indicators, which result from ministry and agency sectoral or intersectoral program impementation. On the other hand, those performance indicators which measure reguler programs are intangible outcome indicators, which reflect a qualitative element of program and activity impementation. Furthermore, the success of program implementation can be measured through the use of program outputs, particularly an increase in the program context, such as the cummulative number of target beneficiaries. Performance based management at the level of activities and sub-activities uses program activity inputs and outputs as measures of performance. Activities and subactivities can be analyzed from the effectiveness aspect of inputs to produce specific outputs. It must, however, be clarified that activities and sub-activities will produce different outputs. From the above explanation, it is clear that the establishment of a program architecture which is based on ministry/agency structural organizations, the budget classification structure, the policy planning structure, and the performance based management structure will result in a program architecture which can ensure program sustainability from the aspect of phased program and activity implementation, from the aspect of the implementation of aggregate fiscal discipline, as well as from the aspect of achieving efficiency and effectiveness in resource allocation in the medium term. 27

3.3. Management of Performance Objectives/Aims Achievement The management of performance objectives/aims achievement is an approach that can be used to assess performance and is based on the use of performance indicators in the process of data and information collection. It can also be used as basis for assessing and evaluating target/objectives achievement in relation to the efficiency and effectiveness of program and activity implementation. Performance indicators used in such assessments and evaluation excercises are inputs, outputs, outcomes and process indicators (Diagram 4). The management of performance objectives/aims achievement is often divided into two processes: the process of managing the achievement of performance indicators based on the use of specifically chosen indicators; and the process of managing the achievement of performance indicators based on the use of the impact performance indicator. The management of performance aims achievement based on the use of specific indicators is conducted through the specification of one or more performance indicators – input, otput, outcome or process as basis for assessing the achievement of performance indicators. The achievement of performance targets at the activity level can be measured by using the input and output indicators. Specifically for internal service activities, process performance indicators can be used. Performance achievement at the program level can be assessed through output and outcome indicators.

Diagram 4.

Typology of Performance Indicators

The management of performance objectives/aims achievement that uses the impact indicator is only used to assess program objectives that have a wide scope.

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This is what differentiates small objective scope programs from large ones. As an example, the achievement of food security can only be assessed through the impact indicator, while water source development programs can be assessed through outcome indicators. Simply put, large objective scale programs are often those that are intersectoral or are focus priority programs. Impact assessments are based on an analysis of the cummulative effect of all program and activity elements within that larger program.

3.4. Comprehensive Cost Structure A comprehensive cost structure is an approach to establishing program and activity costs in a structured way within a multi-year framework which is flexible in terms of modelling and technique use. The use of this costing approach is needed in order to fulfill the unified budgeting, MTEF and performance based budgeting requirements. In line with the unified budgeting approach, the program cost establishment approach is able to accomodate all the requirements of unified budgeting in terms of flexibility in modelling and technique use for enhancing efficient allocation. By fulfilling the requirement to establish the yearly budget in the unified budgeting system and with the requirement to establish budgets for the achievement of specific objectives (PBB), then the policy to roll-over the annual budget throughout the next three years in a multiyear framework fulfills the MTEF requirement.

3.5. The Medium Term Expenditure Framework An MTEF is a yearly spending flow within a multi-year cycle which is built based on: (a) a method to estimate the government spending resource envelope so that it is supportive of macro economic stability, based on a top down budgeting approach, (b) a method for estimating the costs of a policy, current or new, and for estimating spending requests for new initiatives or for increasing spending for existing activities (bottom-up planning), and (c) an iterative process in policy enactment which tries to reconcile costs and new policies in the resource envelope for the next three to five budget years. From the use of these three methods, it is clear that the MTEF approach is prepared from two key sub-processes, the establishment of fiscal targets and resource allocation based on strategic priorities. In order to implement the MTEF approach, the following elements are required: a.

Macro Economic Policies The implementation of an MTEF requires the support of a comprehensive macro economic analysis and forecasting excercise which will be used as the basis for preparing the MTEF.

b.

The Establishment of Fiscal Policy Instruments

29

The MTEF approach is based on a fine link between macro economic policies and fiscal policies. As such, expenditure plans in the next budget years must be based on a logical framework for estimating macro economic and fiscal resources in a prospective manner. c.

Reallocation and Prioritization The MTEF approach has an in-built mechanism which is able to enhance prioritization and use of resource allocation, which needs the support of adequate policies.

d.

Budget Discipline Internal budget allocation to ministries and agencies should be based on an acceptable upper limit for budget distribution, within which continuous efforts to ensure program and activity effective and efficient implementation are undertaken.

e.

Institutional Support Decision-making in relation to the establishement of budget envelopes prepared based on an MTEF approach require political support especially in terms of budget allocation needs established based on an MTEF.

f.

Conformity to Parameters Established in the MTEF Approach The MTEF approach is prepared based on a common understanding of key terminology such as aggregate spending, the elaboration of organizational and government roles and functions, potential allocation based on the resource envelope, unit costs in the costing of expenditures, sectoral and inter-sectoral coordination related to the process of yearly budget preparation, and the use of scenarios as established by the government.

g.

Accountability and Transparency The implementation of fiscal policies and scenarios in a transparent fashion will enhance accountability of all stakeholders involved in preparing a budget based on an MTEF approach.

In order to estimate the indicative resource envelope for the year 2010, the current budget allocation which reflects government priority new policies and the macro economic situation must be taken into account. Similarly estimating the resource envelope for the year 2011 will be conducted by adjusting for established new policies and the macro economic situation in the year 2010. Estimating the indicative resource envelope for 2012 is to be conducted based on the forward estimates (also 2013) by using macro economic data and policies in the year 2011. An illustration of how the indicative budget allocation is established using an MTEF approach is in Diagram 5.

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Forward Estimate

2009

2010

2011 Policy Adjustment And the macroeconomic situation

Agreement with the DPR

2010

2011

2012 Policy Adjustment And the macroeconomic situation

Agreement with the DPR

2011

2012

2013 Policy Adjustment And the macroeconomic situation

Iterative Process

Agreement with the DPR

2012

2013

2014 Policy Adjustment And the macroeconomic situation

Agreement with the DPR

2013

2014

2015 Policy Adjustment And the macroeconomic situation

Agreement with the DPR

2014

2015

2016

Diagram 5. Medium Term Expenditure Framework

3.6. Proposing and Reviewing RPJMN Programs After the RPJMN program materials have been discussed internally within the ministries/agencies, then the program materials will be reviewed and compiled by Bappenas. Results from the discussions in Bappenas will be inputs for further discussions at the cabinet level for eventually enactment by the president. In the first phase, the interal ministry discussions will review program elaboration into activities and their distribution in terms of directorates, the use of performance indicators, as well as plans for program monitoring and evaluation. In the next step, discussions will focus more on establishing the unit costs of programs and activities within the multi-year framework, reviewing the whole of ministry budget requests as related to program priority and focus priority costs which need to be distributed. The review of RPJMN ministry/agency proposals by Bappenas will include the participation of the MoF, and includes the review of all other ministry/agency programs and activities, the distribution of all ministry/agency programs and activities by focus

31

priority program category and the draft RPJMN for cabinet review. Discussions at the cabinet level will review national priorities and RPJMN program distribution.

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IV. GUIDANCE FOR THE PREPARATION OF THE DRAFT NATIONAL RPJM

The preparation of the draft National RPJM is conducted in various phases, which are: (a) the preparation of the policy framework; (b) the preparation of the macro economic, fiscal, expenditure and medium term budget frameworks; (c) the RPJM program work plan and budget; and (d) monitoring and evaluation.

4.1. Preparation of the Medium Term Development Policy Framework The preparation of the medium term development policy framework is conducted by taking into account the roles and functions of policy affecting factors. In terms of a medium term policy framework, the components affecting policy formulation are among others: (a) the basis for establishing the development policy direction; (b) the elaboration of development policies into development priorities; and (c) the continual review of program objectives and activity targets. a.

Basis For Establishing the Development Policy Direction

The policy direction of the National RPJM is developed and prepared based on the long term development direction, the current National RPJM, the president’s vision and mission statements and the draft ministry/agency Renstra. (1) The National Long Term Development Plan The review and continuous adjustment of the development direction in the RPJM which uses as reference the long term development plan, is intended to enhance the attainment of national development objectives as well as to ensure that the policy direction in the medium term plan is consistent and sustainable. (2) The Current National RPJM The preparation of the National RPJM which uses as reference the current RPJMN, has as objective to review the application of the medium term fiscal and budget framework, the medium term expenditure framework, performance based budgeting as well as the application of unified budgeting as related to the establishment of priorities, focus priorities, program objectives and activity targets. (3) The President’s Vision and Mission Statement The president’s vision and mission statement which is prepared based on the ministry Renstra, the National Long Term Development Plan and the current National RPJMN, embodies alternative policies which offer opportunities for

33

enhancing the efficient and effective attainment of program objectives and activity targets in the medium term. The preparation of the National RPJM which uses as reference the president’s vision and mission has as objective to accomodate alternative policies through the implementation of adjustment and improvement efforts on basic policies used in past development programs and activities. (4) The Draft Ministry/Agency Renstra The preparation of the RPJMN which is based on the draft ministry/agency Renstra has as objective to obtain inputs from assessment and evaluation results on the performance of implemented policies in terms of achieving development objectives and targets. Input from the ministry/agency Renstra is alike a policy updating process which is necessary for the preparation of the national RPJM. b.

The Elaboration of Development Policies into Development Priorities

From the elaboration of the policy direction in the long term development plan and the president’s vision and mission, it is possible to obtain an analysis of the Principle Challenges as well as the medium term Development Agenda, which henceforth would be used as basis for establishing national development priorities. Based on these national development priorities, the development and establishment of development programs and activities will be affected by the government functions and sub-functions, the focus priorities, the outcome areas and the budget allocation by ministry/agency (Diagram 6). (1) Government Functions and Sub-Functions Development programs and activities are prepared based on the government functions and sub-functions by ministerial organizational unit. Programs and activities are to reflect the roles, responsibilities and authority of each organizational unit. (2) Focus Priorities Programs and activities which are prepared and implemented in order to achieve development objectives and targets are part of an established development strategy. A review of programs and activities from the perspective of growth and development stimulation, as well as capacity to respond to urgent development needs are classified as strategic programs and activities. (3) Outcome Areas In the process of elaborating development priorities into development programs, an estimation of the cummulative impact of program implementation should be made in terms of achievement of national development goals. These development goals are often mentioned as outcome areas, which are a measure

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of development and are further detailed in the performance management structure. Next, in the performance management structure, each program objective and activity target will be measured by using performance indicators.

Diagram 6. Policy Direction , Priorities and the National RPJM ProgramActivities (4) Budget Allocation With the availability of a resource constraint, funding allocation to programs and activities will be controlled by the budget ceilings. In this context, the establishment of the budget ceiling is a form of budget policy to allocate resources in an optimal fashion in order to achieve development targets in accordance to established development priorities. In program and activity preparation, the elaboration of national development priorities into the medium term budget allocation needs to take the following factors into consideration: (a) programs and activities should support the objectives of the national development priorities, and or ministry priorities; (b) indiscretionary budget requirements; (c) counterpart financing for activities that are financed through foreign loans and grants; (d) budget requirements for continuing activities in a multi-year context; and (e) financing for implementing specific purpose directives related to post-conflict and post-disaster recovery in key areas. In order to obtain an accurate estimation of the budget allocation, a comprehensive assessment of the resource envelope in line with the medium term

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budget, expenditure, fiscal and macro economic framework as established in the draft RPJM needs to be prepared. c.

The Continual Review Of Program Objectives And Activity Targets

The 2010-2014 National RPJM policy development plan is a further development of the 2005-2009 National RPJM. In the preparation of the National RPJM there is the possibility of a change or no change in policies, depending on the capacity of ministries/agencies to elaborate national development priorities into their plans based on the performance reports and evaluations of the previous RPJMN. Based on the performance reports and evaluations of the previous RPJMN, a development policy can be maintained if program and activity implementation has achieved efficiency and effectiveness levels as stated in the program objectives and activity targets statements. On the other hand, if implementation results show that program and activity objectives and targets have not been achieved or there is a request for new programs and activities, then the preparation of the RPJMN requries a change in policies. In this context, policy changes can be understood as changes to government service levels through the implementation of programs and activities with established objectives and targets. (1) No Development Policy Change •

A no development policy change in the new RPJM vis a vis the previous RPJM, means that service levels of programs and activities are the same as the service levels in the previous RPJMN period.

•

In order to maintain the same service levels in terms of target beneficiaries, a change in the size of the target beneficiary group as a result of changes in population characteristics will imply a change in program and activity targets.

•

Up to certain target beneficiary levels, wherein service units will still be able to provide specific service levels in an efficient and effective manner, then a policy change to increase the number of service units is not needed.

•

An increase in the number of service units will be required if a change in target beneficiary numbers is so high that it affects service levels. In this context, an increase in the number of service units in order to maintain service levels is not categorized as a policy change.

(2) Development Policy Change •

A policy change from the previous RPJM vis a vis the forthcomming RPJM’s, or even from one budget year to another budget year, occurs when policies are established to increase service levels through program development, or through the implementation of new programs and activities.

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•

The implementation of new policies is characterized by different program objectives/aims and activity targets from past policies. Even though the target beneficiary group does not change, if the new policy includes changes in approach or methodology, then it is a policy change.

•

The application of new approaches and methodologies that characterize new policies is conducted based on the results of performance assessments showing that the new approaches and methodologies will allow for improved implementation.

Despite it all, a decision to implement a policy change in the new RPJMN is always based on the achievement of program objectives and activity targets. As such development policies that show efficient and effective performance will be maintained, whereas policy changes will be applied to programs and activities that cannot achieve efficiency and effectiveness levels as established in the program objectives and activity targets statement.

4.2. Preparation of the Medium Term Expenditure and Budget Framework

Macro

Economic,

Fiscal,

In line with the function of the National RPJMN as reference in the preparation of integrated planning and budgeting, then the preparation of National RPJM programs and activities needs to be complemented by macro economic, fiscal, expenditure and budget projections, which can be used as consideration in program and activity planning in the medium term. a.

The Medium Term Macro Economic Framework

The medium term macro economic framework is a framework from a system which is formed by national macro economic factors and characteristics, and functions as a reference point in projecting forecasting results of key macro economic variables which affect revenue, expenditures, deficit levels and financing in the medium term. (1) National Macro Economic Factors and Characteristics •

The national macro economic factors which function as economic variables in forecasting, include the GDP factor, economic growth, inflation, the foreign exchange value, SBI interest rates, ICP oil price, and Indonesian oil production (lifting).

•

In foreacasting the various macro economic factors, it is necessary to prepare policy scenarios which will be simulated into the medium term macro economic factors. The policy development scenario includes scenarios with no policy change (baseline), with policy change and a mix of both.

•

Preparing a policy development scenario requires an accurate detailing of program objectives and activity targets, for the no policy change scenario, the policy change scenario as well as the mixed case scenario. 37

•

The policy scenarios should be complemented with analysis of changes in the highest and lowest values of the macro economic variables.

•

The preparation of the policy scenarios is an attempt to elaborate changes in the characteristics and patterns of the national macro economic situation in terms of endogenous and exogenous factors.

(2) Adjusting and Updating the Medium Term Macro Economic Framework •

The medium term macro economic framework is a model that is built by using macro economic variables and scenarios of possible policy changes and effects from the world economy.

•

The adjustment of the medium term macro economic projections in yearly work plan preparation can be conducted by adjusting development policies in the medium term development policy scenario.

•

Updating development data and information as related to the macro economic variables can be conducted based on the basic assumptions used in yearly budgeting processes.

(3) References in Fiscal and Budget Forecasting •

b.

The medium term macro economic framework is an approach which is built specifically for the national RPJM against the forecasting model and system of national macro economic characteristics, which can be used as reference in medium term fiscal and budget forecasting.

The Medium Term Fiscal Framework

The medium term fiscal framework is a system which is built consistently from each macro economic factor, revenue projections, policy committments as efforts to achieve strategic objectives of the fiscal policy. (1) National revenue and grant projections •

National revenue and grants play a significant role in enhancing fiscal capacity, financing the state budget, controlling the budget deficit, and for maintaining fiscal resilience.

•

In order to enhance fiscal capacity and resilience, the medium term fiscal framework should include the medium term fiscal policy direction and targets, which includes the tax ratio, that is the ratio of revenues from tax to gross domestic product (GDP), total expenditures to GDP ratio, the budget deficit to GDP ratio and the debt to GDP ratio, which should be consistent with the macro economic framework.

•

Fiscal projections include projections on planned revenues and state expenditures under various medium term economic scenarios, such that information on the medium term fiscal capacity and resilience are obtained. 38

•

The medium term fiscal capacity and resilience is a reflection of fiscal capacity and resilience vis a vis alternative budget financing scenarios, which can minimize financial risk in the medium term and can ensure budget financing sustainability in a consistent fashion.

(2) Fiscal Policy Committment •

The fiscal policy committment is a strategy to achieve fiscal consolidation and create a fiscal stimulus within national financial capacity.

•

Fiscal consolidation is an attempt to optimize the assembly of state revenue sources, enhancing efficient and effective state spending, and choosing between alternative financing in order to minimize financial risk in the medium term.

•

A fiscal stimulus is a fiscal policy committment for enhancing the economy which is based on a capacity to increase state revenue sources. A fiscal stimulus can take the form of: (a) tax incentives; (b) increasing state expenditures for improving development infrastructure; (c) enhancing people’s spending capacity; and (d) enhancing support for the development of the private sector.

(3) Medium Term Fiscal Projections

c.

•

Medium term fiscal targets are yearly fiscal revenue targets within the five year budget plan which are estimated based on the simulation results of policies and using macro economic assumptions for comparison with the medium term fiscal projections.

•

If yearly fiscal target projections are smaller than the yearly expenditure projections in the five year budget plan, then a review must be undertaken of the possibilities for increasing fiscal revenue in the forthcomming years through a simulation of policy changes.

•

If the policy change simulations show results that it will still be difficult to increase revenues, then program and activity changes need to be simulated including implementing spending targets, till the projected fiscal revenue is equal to or greater than the expenditure plan.

•

Fiscal revenue targets are often identified as resource envelope projections which function as the maximum limit (budget ceiling) of the total ceiling. Based on this budget ceiling, line ministry ceilings are distributed.

•

Calcuations of the resource envelope against the expenditure projections are temporary values which need to be constantly updated.

The Medium Term Expenditure Framework

The medium term expenditure framework is an expenditure approach based on policies, with policy decisions undertaken within the perspective of more than one year, 39

that is, by taking into consideration the policy implications of decisions in the outer years through the forward estimates. (1) Policy Based Expenditures •

Expenditure projections can be used as tools for decision making processes in national financial management, because the MTEF can provide an indication on the necessary steps that need to undertaken for adjusting expenditures as early as possible in order to maintain fiscal sustainability. These projections can also provide an indication of the degree of flexibility that the government has in adjusting the size and composition of its expenditures in the forthcomming years.

•

In the preparation of the yearly work plan and budget within the five year budget frame, it is possible to conduct policy adjustments during each budget year, which basically try to improve on the previous year’s implementation of policies.

(2) Multi-year Calculations of Revenues and Expenditures •

Multi-year calculations of revenues and expenditures are an indication of program and budget planning in the medium term which from the start need to take into account the framework for achieving development objectives in a sustainable manner.

•

In calculating multi-year revenues and expenditures, the possibility of introducing strategic new policies should be cautiously undertaken as these need to be fully costed for the outyears.

•

The introduction of new policies should be undertaken by taking into consideration the budget ceiling and the requirement to maintain aggregate fiscal discipline.

(3) Application of Aggregate Fiscal Discipline •

Through the calculation of the forward estimates of all programs and activities, which will be implemented in the next budget years, and with the possible addition of new policies, then the requirement to implement aggregate fiscal discipline should be undertaken assiduously by keeping in perspective the fiscal target projections and the development policies which will be implemented in the medium term.

•

The application of aggregate fiscal discipline is an interaction between the implications of fiscal target projections and expenditure projections which will result in the budget ceiling for program and budget planning for the next years.

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d.

The Medium Term Budget Framework

The medium term budget framework is a medium term budget preparation approach which takes into account the government balance-sheet and budget realization. The factors which need to be taken into account in the government balance sheet are: assets, debts, and equity. Factors which need to be observed in under budget realization are revenues, spending and financing. With the assumption that the medium term plan is prepared based on the implementation of budget years on a continuous basis for the five year budget period, then the preparation of the medium term budget framework will be formed based on the yearly mechanisms within the five year budget frame. As such, the implementation of the National RPJM can be elaborated into yearly budget planning. To date, the medium term budget structure has not been affected by the program restructuring effort. Basically the medium term budget structure is formed based on: (a) the budget classification; (b) budget preparation approaches; and (c) budget allocation. (1) Budget Classification The budget classification is a technique for classifying budgets based on organizations, functions and economic groups. (a)

(b)

Organizations •

The budget classification based on organizations indicates the grouping of budget details within the ministry/agency organization, which consists of budget users and the accountable budget users.

•

The understanding of organizations is related to ministries/agencies which undertake their duties as delineated in the constitution and in other key laws and regulations. The organizational unit is a part of a ministry/agency which is responsible for coordinating and or implementing a program. A Work Unit is a part of an organizational unit within a ministry/agency which implements one or more activities within a given program.

Functions •

The budget classification based on functions indicates the grouping of budget details into 11 main functions and 79 sub-functions (Annex IA of GR No. 21/2004)

•

Functions reflect government responsibilities within specific fields which are implemented within the frame to achieve national government objectives. Sub-functions are a more detailed elaboration of functions.

•

The use of functions/sub-functions is adjusted responsibilities and functions of each ministry/agency

to

the

roles,

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•

(c)

Programs and activities are an elaboration of government policies in the form of one or more activities by using resources that are made available to achieve measurable results in accordance to mission statements and which are implemented by agencies or communities in coordination with ministries/agencies.

Economic Groups •

A budget classification based on economic groups indicates the grouping of budget details into eight spending types of categories, that is, civil service wages, goods, assets, social assistance, interest, subsidies, grants and other spending.

•

Civil service spending or monetary or goods compensation provided to government civil servants within or outside of the country.

•

Spending for goods includes the purchase of goods and services for the production of goods and services which are marketed and not marketed. This type of spending is used for the procurement of goods and services, maintenance as established in the Standard General Cost index and travel spending.

•

Asset spending is an expenditure which is incurred through asset formation whose nature is to increase assets/inventory of ministries/agencies who are endowed with the responsibility for maintenance.

•

Interest is a payment that is undertaken on the basis of debt principal outstanding, both domestic and foreign debts which are calculated based on the loan position. This type of spending is specifically used by the Budget Calculation and Financing Unit (BAPP).

•

Subsidies are budget allocations which are provided to companies/institutions which produce, sell, export or import goods and services for the public, such that the selling price is affordable to the general public. This type of spending is used among others for subsidy distribution to state companies and private companies. This type of spending is specifically used by the Budget Calculation and Financing Unit (BAPP).

•

Social Assistance are monetary or goods transfers which are provided to the public to protect them from a possible social risk. Social assistance can be provided directly to community groups or the community institutions including assistance for non-government organizations working in the field of education and religion.

•

Grants or routine/asset transfers whose characteristic is not obligatory to other countries or to international organizations. This spending is used

42

among others for grants to foreign governments and international organizations. •

Other types of spending, such as central government spending which cannot be classified into any of the above types of spending. This type of spending is specifically used by the Budget Calculation and Financing Unit (BAPP).

(2) Budget Preparation Approach The approaches used in budget preparation include the use of the unified budgeting approach, the medium term expenditure approach and the performance based budgeting approach. (a)

(b)

Unified Budgeting •

The implementation of unified budgeting is divided into five budget components, that is budgeting based on the work units, activities, types of spending, outputs and budget documents.

•

The work units formed based on specific roles and responsibilities have at least one activity whose implementation must produce expected outputs.

•

Activities describe the work area based on the work units’ roles and responsibilities, such that there is no duplication of activities among different work units. Similar activities can only be implemented based on differing location.

•

Budgeting based on spending types is a detailing of expenditures for an activity and is not duplicated in other activities.

•

Outputs are results from the implementation of activities by a work unit with specific characteristics, such that there are similar outputs produced by different activities.

•

The budget document is a planning and activity implementation report which includes budget details based on work units, activities, types of spending, and outputs produced.

Medium Term Expenditure Frameworks •

A budgeting approach with a medium term perspective is meant to provide a comprehensive framework, improve the link between the planning and budgeting processes or in other words, prepare budgets based on policies, improve fiscal discipline, direct resource allocation so that it is more rational and strategic through the formulation of priorities through a more tighter, diciplined, and consistent process, which eventually will increase public faith in the government through the provision of optimal and efficient services.

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(c)

Performance Based Budgeting •

Performance based budgeting requires the preparation of budgets through the use of performance indicators, standard costs, and performance evaluation.

•

The implementation of performance based budgeting is conducted based on work synchronization as an effort to revise the link between sub-activities, activities and programs based on the policies which underlie it.

•

Work synchronization which is integrated into the program architecture has as objective to ensure that proposed activities and sub-activities will produce outputs which support the achievement of program performance targets, which in the end will support the attainment of policy objectives.

(3) Budget Allocation Budget allocations are implemented by taking into consideration the basics, instruments and types of budget allocations. (a)

Basics of Budget Allocation •

Budget allocations by ministries/agencies is undertaken by taking into consideration the ministry/agency vision and mission statements, priority scales, activities and use of cost indexes.

•

Budget allocations that take into consideration ministry/agency vision and mission statements are set in order to ensure alignment and appropriateness of budget allocations based on ministry/agency policies which will then be translated into programs, activities, results and outputs to be achieved.

•

Budget allocations which take into consideration priority scales (prioritization) are in order to ensure alignment and appropriateness of budget allocations based on the organizational roles and responsibilities, the government work plan, the budget ceilings, and results from discussions with the parliament.

•

Budget allocations which take into consideration activities are in order to ensure alignment and approapriateness of budget allocations in accordance to directives wherein program budgets will not displace other programs, indiscretionary spending as well as affect changes in ceilings by budget source (Rupiah, Loans, Grants, others).

•

Budget allocations that take into consideration activities are in order to ensure alignment and approapriateness of budget spending in accordance to the use of indexed costs as established in the Specific Unit Cost (SBK) and the General Unit Cost (SBU). Costs that cannot be 44

valued through the SBK and the SBU will be valued based on the Budget Cost Plan (RAB), by taking into consideration market prices as well as required types and specifications. (b)

Budgeting Instruments Budget allocations are conducted by taking into consideration regulations related to minsitry/agency budget preparation and supporting data.

(c)

Types of Budget Allocations Budget allocations include budget allocations based on programs and activities, work units, types of spending, activity implementation, either contractual or self-managed, and limited activity and sub-activity implementation.

4.3. Preparation of the National RPJM Programs and Budget A review of programs and activities includes a review of results of: (a) Planned development programs and activities, (b) the use of performance indicators, (c) costing used, and (d) calculation of the forward estimate in the medium term. a.

Review of Development Programs and Activities

A review of programs and activities includes a review of program and activity components, that is the establishment of program objectives and activity targets, the basis for proposing the program activity, and extent to which synchronization has been undertaken. (1) Establishment of Program Objectives and Activity Targets •

Program objectives are the result of an elaboration of strategic outcomes and outcome areas. The fact that there is a relationship starting from strategic outcomes all the way to activity targets within an objective structure, then the performance for achieving an outcome area, and strategic outcomes can be assessed through a cummulative impact review of program outcomes and outputs within that particular outcome area structure.

•

The fact that there is a strong link between outcome areas, national strategic outcomes, ministry/agency strategic outcomes, program objectives till activity targets shows that program and activity planning is structured into government functions and sub-functions, priorities, objectives and aims, performance indicators and budget allocation.

•

A policy change at the national and ministry/agency level will cause a change in program objectives and activity targets, which implies a change in performance indicators and budget allocation.

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•

The establishment of accurate program objectives and activity targets is needed for the preparation of different scenarios under the medium term macro economic, fiscal, expenditure, and budget framework.

•

A review of program objectives and activity targets by taking into consideration RPJM performance assessment and evaluation reports should also be undertaken, in tandem with a review of national financial reports, and the draft ministry/agency Renstra.

•

The draft Renstra which includes program objectives and activity targets is an effort to revise and further develop program and activity proposals, is a result of a review of program activity implementation in the medium term.

(2) Basis for Proposing a Program Activity •

Programs and activities that are proposed by each ministry/agency organizational unit can be the same programs and activities as in the previous year or they can be new programs as a reflection of the implementation of new policies.

•

Proposing the same programs and activities as in the past requires a full performance assessment and evaluation of all past program and activity implementation.

•

The same programs and activities as in the past can be re-proposed if there is demonstration of efficient and effective performance implementation.

•

In order to enhance program and activity performance it is necessary to undertake improvements on various components and working mechanisms with the objective of increasing performance efficiency and effectiveness.

•

New proposals can be proposed as a result of policy changes which are elaborated into activities which have strategic targets that support the achievement of program objectives.

•

Proposing new programs and activities in the medium term is a process of distrbuting priority, supporting and basic programs and activities into the five year medium term budget.

(3) Program Activity Synchronization •

Program and activity synchronization is an effort to review the relationship between functions-subfunctions and roles and responsibilities with programs and activities in a structured manner so that it is possible to direct development results in line with the development policy direction in the short and medium term.

•

Synchronization is an effort to: (a)

Place programs and activities according to their functions/sub-functions.

46

b.

(b)

Adjusting/adding ministry/agency programs so that they are more consistent with the roles and responsibilities of the ministry/agency.

(c)

Placing activities to programs appropriately, such that activity outputs will support the achievement of program outcomes/objectives/outputs.

(d)

Simplify activity and sub-activity nomenclature.

(e)

Group activities into: (i) activities that are related to a specific program and (ii) activities that are related to all programs.

•

The application of program and activity synchronization into the process of establishing development policies and budgets is a mechanism of the program architecture which includes the balancing of programs and activities based on organizational structures, functions and sub-functions, policy planning and performance management.

•

Proposals that have undergone the synchronization process will result in the implementation of policies and budgets which can be references for the preparation of the ministry/agency Renja, the annual Government Work Plan, as well as the ministry/agency Work Plan and Budget (RKA).

Performance Indicators

Performance indicators are performance measures which are used to assess program implementation performance. A development performance assessment is directed towards measuring program and activity efficiency and effectiveness, as well as the achievement of strategic outcomes and objectives through an impact analysis of strategic program implementation and national programs. The use of performance indicators is based on the assumption that the preparation of program and activity budgets has fulfilled the performance criteria characterized by economy and is planned and implemented in the process of achieving program objectives and activity targets. (1) Assumptions in the Use of Performance Indicators (a) The preparation of medium term programs and activities based on the performance criteria of economy. •

The preparation of programs and activities based on the performance criteria of economy reflects a process of program and activity costing which uses the lowest standard unit cost to produce a specific output.

•

The process of costing programs and activities by using the lowest standard unit cost reflects a preparation process of programs and activities based on economical inputs.

•

The performance indicator criteria based on the use of inputs in an economical fashion is the result of a review of factors which affect

47

standard unit costs, including inflation and foreign exchange rates (rupiah to the US dollar). •

The establishment of costs based on a review of factors affecting standard unit costs will prove that the standard unit cost for a spending object in the previous year is relatively similar to the standard unit cost that is used for program and activity preparation in the next year.

(b) The preparation of medium term programs and activities based on the process performance criteria •

The preparation of programs and activities which fulfill the process criteria for achieving program objectives and activity targets reflects the assumption that program and activity preparation has undergone steps in preparation approach and methodology which have been perviously established.

•

The process criteria for program and activity target achievement is a process for directly and indirectly proving that programs and activities were planned based on a request by stakeholders.

(2) Assessing Efficiency of Medium Term Performance •

Assessing the efficiency performance of new programs and activities can be implemented if the preparation of programs and activities has been based on the performance assumption of indicators of economy and has been prepared by taking into consideration of required processes.

•

Program and activity performance can be said to be efficient if in implementation programs and activities are undertaken by using the lowest cost to produce established outputs.

•

The efficiency assessment of performance of programs and activities in the medium term is undertaken in order to compare spent cost for producing a program output with the same in the previous budget year.

•

By fulfilling the alignment and congruence principles in the calibration process of costing output unit costs, the performance efficiency of programs and activities can be compared from year to year in the medium term.

•

Assessing and comparing the level of performance efficiency of programs and activities can be undertaken by using the relationship curve of outputs to output unit costs or by establishing indexes which are a function of outputs, inflation, foreign exchange rate and other factors.

(3) Assessing Effectiveness of Medium Term Performance •

Assessing the effectiveness performance of programs is undertaken through an evaluation of impact characteristics, among others coverage area, intensity and program impact sustainability.

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c.

•

With the assumption that activity objectives are prepared as an elaboration of the program objectives, then the simultaneous achievement of activity objectives and implementation of other activities within the same program and the same organizational unit will result in a joint impact as an interaction between various development activities.

•

The outcome performance indicator criteria is a direct impact of program implementation and the interaction between various development programs. The impact performance criteria is a continuing impact of direct and indirect impact as a result of program implementation and the interaction between various development efforts.

•

Development performance evaluation in the medium term needs to be based on the assessment results of the impact performance criteria which indicates the yearly development impact on a continuous basis for the five budget years.

•

The effectivess assessment of medium term performance can be undertaken through the use of a tabulative matrix method or any other qualitative method.

•

In order to simplify assessments of the effectiveness of development performance, a method for assessing performance needs to be established which is then to be socialized to ministries/agencies.

Establishing a Costing Technique

Establishing a costing technique includes a process of adjusting and updating standard unit costs which can be conducted by updating data, and using cost drivers in calculating expenditure plans of programs and activities. The adjustment and updating process is conducted based on program and activity characteristics, the grouping of types of spending and spending objects and other factors. (1) Program and Activity Characteristics •

Program and activity characteristics which need to be observed during an adjustment and updating process are among others, whether a program activity is going to be implemented continuously in the medium term, or whether a program tends to act like a project which will be completed within a specific time frame, or whether activities will be added or reduced in accordance to program activity implementation and or whether there will be a replacement of activities on a gradual basis.

•

For those programs which will be implemented on a continuous basis and within which activities will not change, the adjustment and updating process will be conducted based on changes to the target beneficiary group in accordance to demographic changes and to affecting macro economic factors.

•

For those programs which are similar to projects, the standard cost factor by spending types will need to be carefully reviewed in addition to macro

49

economic factors and changes in target populations and which need to take into consideration yearly budget distribution throughout the medium term period. (2) Grouping Types of Spending and Spending Objects •

The grouping of spending types and objects in line with existing decrees is to ensure the easy implementation performance based budgeting processes by ministries/agencies.

•

The calculation of subsidies in budgeting should be based on a subsidy model whose correlation with the factors affecting the model can be gradually reviewed against the subsidy objective.

(3) Other Factors

d.

•

The calcultion of the DAK transfers to the regions should be based on detailed program or activity plans which include the Cost Budget Plan (RAB) and use updated data.

•

The calculation of the contingency fund should be based on a model with factors that can be changed in accordance to established policies on a yearly basis.

Calculating the Forward Estimates

The calculation of the forward estimates is undertaken using the following assumptions: (a) without policy changes, (b) with policy changes. (1) Forward Estimates with No Policy Changes (a)

First iteration in the Calculation of the Forward Estimates with 2009 as the Baseline (TA-0). •

The forward estimates for 2010 (TA+11) and 2011 (TA+12) are prepared by using the 2009 base year. This implies that the development policies used as reference for calculating the forward estimates are the 2009 policies (TA-0). In other words, the calculation of the forward estimates for the budget years 2010 and 2011 are prepared using the assumptions of no policy changes.

•

Based on the assumption of no development policy change, then adjustments to the budget year 2010 (TA+11), only include changes in program and activity targets as a result of changes in the target beneficiary group which require services similar to the service levels in the previous year. An example is an expected increase in the numbers of students enrolling in primary schools in the year 2010 and 2011, which will require an increase in the level of services for the nine year basic education program.

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(b)

•

Factor changes which affect the standard costs, such as inflation and the rupiah exchange rate, under the assumption of no policy change situation, will directly increase the budget requests.

•

A graphic illustration of the calculation of the forward estimates under the assumption of no policy changes is available in Diagram 7a.

Second to the Sixth Iteration in the Calculation of the Forward Estimates based on the 2010 base year (TA+11), 2011 (TA+22), 2012 (TA+33), 2013 (TA+44), and 2014 (TA+55) •

The calculation of the forward estimates during the second iteration is prepared using the 2010 (TA+11) based year, for the budget years 2011 (TA+12) and 2012 (TA+13). In other words, the forward estimates for the budget year 2011(TA+12) and 2012 (TA+13) are based on the policies affecting expenditure in the base year 2010 (TA+11).

•

In the same way as the first and second iteration, the third till the sixth iteration will produce forward estimates for every year during the next 5 budget years (Diagram 7b). In other words, during every iteration the calculation of the forward estimates is conducted based on the assumptions of base year policies.

(2) Forward Estimates with Policy Changes Technically, the calculation of the forward estimates with policy changes is reflected in the use of differently calculated base years. In Diagram 7b the difference in policy implementation can be seen in the variance of service levels for every budget year. With an increase in service levels during every budget year, then the size of budget requests for the 2010 (TA+01) and 2010 (TA+11) will be different. This difference is caused by a change in development policies, either partial or whole changes, affecting the level of services from year to year within the program activity. (3) Forward Estimates with a Mix of No Policy and Policy Changes In practice, development planning and budgeting is a combination of the application of no policy and policy changes. For specific programs which are viewed as capable of achieving development objectives and activity targets in an efficient and effective manner will usually not be affected by policy changes. Policy changes are undertaken to ensure efficiency and effective within a sustainable budget framework.

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Diagram 7. The Medium Term Expenditure Framework based on the Forward Estimates

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4.4.

Assessments and Evaluation

Monitoring is a set of connected management activities whose purpose is to ensure that program activities are implemented as planned. Evaluation on the other hand, is a set of connected activities for comparing the realization of inputs, outputs and outcomes against plans and standards. (1) Performance Assessments •

The monitoring of development plans implementation is to ensure the achievement of objectives and development targets as stated in the plans, through monitoring and controlling activities.

•

Monitoring is observing developments on plans implementation, identifying and anticipating constraints that could emerge, in order to prepare, in advance, for required responses.

•

Monitoring the implementation of programs and activities is undertaken based on budget realization (absorption), acheivement of outputs, and constraints faced.

(2) Performance Evaluations •

Evaluations are undertaken of National RPJM implementation to assess program efficiency, effectiveness, benefits, impact, and sustainability.

•

Evaluations are undertaken of resources used, indicators and output performance targets of implemented activities as well as outcome performance targets of implemented programs.

•

Evaluations are undertaken once a year, in a systematic, objective and transparent manner.

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V. RECOMMENDATIONS This Concept and Guide for RPJMN 2010-2014 Program Restructuring was directed towards the formulation of a medium term planning and budgeting system which could ensure a sustainable national development direction through the implementation of efficient and effective resource allocation and aggregate fiscal discipline in development policies. Based on this Concept and Program Restructuring Guide it is recommended that: a.

The elaboration of National RPJM principles uses an approach and methodology that is appropriate to the current national development situation.

b.

In the preparation of National RPJM programs, the unified budgeting approach, the medium term expenditure framework approach, and the performance based budgeting approach needs to supported by the preparation of a medium term macro-economic framework, a medium term fiscal framework, and a medium term budget framework which can provide accurate projections and estimates, such that bias can be minimized during the preparation of yearly development pans.

c.

In order to enhance the accuracy of preparing estimates and projections of medium term development targets, an approach for the management of performance targets’ achievement is needed to provide inputs for the development of performance based policies which are directed towards faster national development growth.

d.

The management of performance targets’ achievement is based on the use of yearly assessment and evaluation results of performance indicators which are used as inputs for program and activity revision as efforts to maintain or enhance service levels.

e.

In order to synchronize budget planning with policy decisions, a program architecture is needed which functions as a tool for synchronizing budgeting and policies based on an organizational structure, functions and sub-functions, development priorities and performance management.

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