This report was prepared by a Fiscal Affairs Department (FAD) team comprising Messrs. J. Davis (mission chief), I. Lienert, and A. Mati (all FAD) and W. Allan, P. Desai, and K. Meyers (consultants).Messrs. S. Schwartz and A. Morales (IMF Resident Representatives) participated in many meetings and provided support. World Bank and Asian Development Bank (ADB) staff also attended a number of meetings, and the report draws on work by these institutions in several key areas. Discussions with the authorities, under the direction of the Minister of Finance, Mrs. Sri Mulyani Indrawati were open and frank. Meetings were coordinated by Messrs. Anggito and Maurin (both BAPEKKI), and the mission met with senior representatives of the following public and private sector organizations: BAPEKKI, BAPPENAS, BI, BPHMIGAS, BPK, BPKP, BPMIGAS, BPS, British Petroleum, DG TAX, DPR (Commission XI), FITRA, Garuda, Indonesia Petroleum Association, KADIN, Ministry of Defense, MOEMR, MOF, MOHA, MSOE, Pertamina, PLN, Price water house Coopers, and Jogjakarta province.
In 2004, the GAFS balance sheet recorded net assets for the revolving funds, but details were not included in the notes to the accounts.
The (growing) deposits of the housing fund, which are held in commercial banks, provide a lending base and gives benefits to the general public, which constitutes a quasi-fiscal activity.
Law 16/2001 regarding Foundations prescribes governance structures and financial reporting requirements. Inspection is authorized, but only if an unlawful act is suspected and it is under a court order (Article 53).
Law 34/2004 on the TNI requires that the military should be funded entirely by the state through the budget (restating a provision already included in an earlier law, Law 3/2002 on defense).
Chaired by the secretary-general of the ministry of state-owned enterprises (MSOE) and including the secretary-generals of the ministries of justice, finance and defense.
There have been 219 businesses identified so far, but more foundations and cooperatives may be found.
The commission is awaiting a presidential decree that would allow the transformation of military foundations into public enterprises or a sell-off of its assets. The commission is envisaging the creation of an institution that will help in transferring the foundations’ assets (as was done by the Indonesian Bank Restructuring Agency during the banking crisis).
GAFS 2004, records a value of Rp 395.7 trillion for central government state equity, while MSOE reports Rp 388.6 trillion.
The size of the portfolio could be understated as some SOEs are excluded. Government shares vary from 15 percent to 100 percent of total equity. More than 90 percent of assets, equity and net income are held by the 22 largest SOEs.
Law 19/2003 includes provisions regarding rules of conduct for conflicts of interest of directors or commissioners, requirements for a supervisory unit, regulations on audit committees, and compulsory audits of the annual financial statements of SOEs. Steps have been taken to remove directors where policy or regulatory responsibilities created a clear conflict of interest. However, audits of SOEs are not always produced and are sometimes delayed (e.g., Pertamina’s financial statements for 2004). The government does not explicitly set wages for nonfinancial public enterprises nor affect hiring decisions by the board of directors.
Profit transfers increased to Rp 12.8 trillion in 2005, up from Rp 9.8 trillion in 2004. These are expected to significantly increase in 2006 to Rp 23.2 trillion, reflecting higher profit transfers from Pertamina. Pertamina provides about two-thirds of SOE profit transfers and dividends received by the central government.
SOEs that cannot be privatized include sectors related to defense and security, and those designated as special public interest by the government.
Article 82 of Law 19/2003 and Ministerial Decree 33 only require that parliament be consulted, whereas the State Finance Law 17/2001 requires parliamentary approval.
Privatization targets in 2002–04 were met. The main sales route was through initial public offerings and strategic partnerships.
An activity is designated as a QFA if it is of a fiscal nature but financed by a public (or in some cases private) corporation rather than by the budget. PSOs of state enterprises are generally explicitly financed by the budget, but may give rise to QFAs if costs are not fully covered.
In 2005, explicit subsidies reached 3.7 percent of GDP for Pertamina and 0.5 percent of GDP for PLN. Fuel subsidies were higher than the entire central government’s health and education budget, despite the substantial increase in domestic fuel prices in October 2005 (which brought fuel prices for industry to market price level and doubled the average price for gasoline, diesel and kerosene for households).
For example, subsidy payments only partially compensated Pertamina for the cost of its fuel (which included a fixed additional fee per barrel). This is being solved in 2006 with the introduction of a new PSO that defines retail fuel prices as Singapore MOPS (Mean of Platts) prices plus 15 percent margin and VAT and regional taxes.
Prior to 2005, the government owed more subsidies than taxes owed by Pertamina. In 2005, it is estimated that Pertamina owes the government about Rp 17 trillion (about 0.6 percent of GDP) by end-2005, while all fuel subsidies owed by central government to Pertamina were paid.
The oil and gas sector remains a significant part of the economy (about 10 percent of GDP) despite falling oil production. The government relies heavily on oil and gas revenues (29 percent of total revenues in 2006).
The PSC specifies the portion of total production that can be retained by the contractor to recover costs (“cost oil”). The remaining oil (including any surplus of “cost oil” over the amount needed for cost recovery) is termed “profit oil” and is divided between the government and the contractor according to a formula set in the PSC.
They are not administratively dependent on the ministry of energy and heads of both agencies are directly appointed by the president.
For example, DG oil and gas selects contract areas, and negotiates PSCs, including production sharing terms with the contractor and the division of production between local and central governments. DG electricity and energy prepares policy on electricity and energy formulation, and is also involved in the setting of fuel prices and electricity tariffs.
In effect, three categories of PSC have been created—those signed before Law 22/2001 came into effect (where refund delays have been prevalent), those signed in 2002/03 (the first PSCs post 2001 law, under which BPMIGAS is expected to authorize tax refunds within 120 days), and PSCs signed in 2004 (where the contractor is only required to pay import duties and taxes).
The after-tax split is generally weighted 85/15 towards the government in oil contracts and 70/30 in gas contracts. For older contracts, however, the oil split can be as much as 90/10 when the contractor’s obligation to sell some oil at a discount for the domestic market is included. Newer contracts are more generous to the contractor because international prices are applied to domestic market obligations for oil.
Fiscal stability clauses specify the duration of taxation arrangements in PSCs, which may supersede tax laws. Law 22/2001 also gives assurance for previous contracts that they remain valid until the end of the contract term.
The authorities indicate that there were no important payment delays in 2006, whereas the industry estimated that a substantial amount still had to be paid. DG Tax audits contractors only to ensure correct VAT payments have been made. Profit shares are subject to cost audit by BPMIGAS without involvement of DG Tax. Contractor spending is audited by joint venture partners, BPMIGAS, and BPKP.
Law 22/2001 specified that Pertamina was to retain its downstream domestic market obligation to supply local fuel for a period of four years (to November 21, 2005—though they still remain in place).
Companies must publish their annual financial statements (including public accountants’ opinion) no later than the end of the third month after the date of the financial statement. Up until now, Pertamina has not respected this requirement.
If a bank experiences financial difficulties that have a systemic impact, BI may provide an emergency financing facility funded by the government. BI still has on its balance sheet a redeemable note, which replaced the BI liquidity support bonds provided during the crisis.
Although Treasury Law 1/2004 envisages remuneration of government deposits, as a transitional measure, Article 71 states that the remuneration should be at the same rate of interest as that paid on non-marketable government bond notes held by BI (most of these bear a rate of 0.1 percent per annum).
However, this share is higher than the average for the entire banking sector. State-owned banks hold 70 percent of the banking system’s nonperforming loans. A large increase in banks’ NPLs was observed in 2005 as tighter regulations on NPLs classification were introduced and new problem loans emerged (including new NPLs as well as previously misclassified loans), particularly at Bank Mandiri and BNI.
This section draws on the Country Governance Assessment Report: Republic of Indonesia, ADB, 2004.
The DPR and the Regional Representative Council (DPD) form the People’s Consultative Assembly (MPR), which deals with constitutional amendments and consideration of the accountability reports of constitutional bodies, such as the president, DPR, DPD, BPK and the supreme court. The DPD was created through a constitutional amendment in 2001, but only began operations in October 2004 after the first election of its council members. It advises the DPR on intergovernmental relations and can give its views on the macro-fiscal framework, but has no powers over legislation or the budget.
Since 2004, the use of Presidential and Ministerial Decrees has been mainly replaced by Presidential and Ministerial Regulations.
Laws 32/2004 and 33/2004 made substantial revisions to the two original decentralization laws adopted in 1999. In an effort to improve coordination, MOF and MOHA jointly developed regulation 58/2005 to reconcile differences between Laws 32 and 33 of 2004.
For example, the high oil price used for the 2006 budget is expected to increase subnational revenues by about 47 percent and represents a significant administrative challenge given the surpluses that will result, the lack of absorption capacity, and overlapping expenditure responsibilities of central and subnational governments.
For example, while the decentralization law devolves some authority over fisheries to subnational units, sectoral legislation posits that all public service functions related to fisheries are located at the center.
Fiscal management capacity varies greatly in provinces and districts. Some have made considerable advances in applying the principles of the state finance law. Jogjakarta is an example of a province that is relatively advanced in improving fiscal transparency. It has adopted a comprehensive approach and is simultaneously undertaking reforms in organizational arrangements, and financial and human resource management. Results so far include: the introduction of a rolling 3-year plan for budget preparation, the participation of civil society in local parliamentary budget discussions, publication of financial statements that include balance sheets (e.g., in Sleman district—see www.sleman.go.id), a significant reduction in provincial administration staff, and the provision of relatively comprehensive provincial information to the public (see http://www.pemda-diy.go.id). Other provinces and districts have yet to develop such practices.
Regulations on subnational borrowing, fiscal balance (tax sharing), grants, regional financial information system and public financial management were issued in 2005. A revised regulation on expenditure assignment is expected to be issued in 2006 although it is unlikely to solve the current weaknesses as: (i) it leaves many details on service assignment to future ministerial decrees; (ii) and does not distinguish between obligatory and non-obligatory functions.
A temporary ban on long-term subnational borrowing, which was introduced every year by ministerial decree, was lifted at end-2004. This ban, and the non-possibility for borrowing prior to 2001, made Indonesian subnational governments default free.
Law 6/1983 on general provisions and procedures for taxation (as amended by Law 16/2000; also referred as KUP law) and Law 19/2000 on enforced collection of tax arrears.
For example, the VAT law was criticized in the past by the business community because of long delays for VAT refunds. These delays have been considerably reduced in the past two years, except for the oil and gas industry.
For example, the customs law provides for a wide range of fines as penalties but leaves specifics to regulations.
The tax package proposes revisions to the income tax law, VAT and luxury sales tax law, and the laws governing general administration procedures. Some of its provisions, notably on tax administration, continue to generate a considerable debate with the business community. The amendment draft of the Customs Law 10/1995 and the Tariff Law 11/1995 are also being discussed in parliament.
DG Tax uses a single taxpayer identification number (TIN) for income tax and VAT. A different TIN is used for customs and excise taxes. Plans are being made to create one single identity number per taxpayer.
Recent taxpayer survey showed an 85 percent satisfaction level.
These are recorded as additional revenues and expenditures (tax subsidy). The information is not included in the original budget, as higher revenues would lead to additional transfers to provinces.
These include penalties foregone for PLN, PT Indonesia power, VAT for Pertamina in 2003 and 2004, and imports of spare parts by Garuda.
Law 19/2000 concerning Tax Collection with Coerce Warrants provides some safeguards to prevent arbitrariness.
Article 26 of the KUP law states that a taxpayer can appeal a tax assessment to the tax court after a decision on the case has been issued by the DG Tax. However, DG Tax is allowed 12 months to reach such a decision.
The proposed headquarters organizational structure would include a separate tax appeals unit.
Currently, cases are handled by one of the operational sections: either the VAT section for VAT assessments or the income tax section for income tax assessments.
While the need to apply sanctions to tax officials that do not adhere to the code is explicitly stated, specific sanctions are still left to future regulations (and are not in the tax law or proposed amendments).
Recent proposals include (i) the introduction of an indirect assessment method; and (ii) the modification of the procedures on the objection process, which allows the taxpayer to initially only pay the tax amount it does not contest.
Titled: On The State Organizer Who Is Clean And Free From Corruption, Collusion And Nepotism.
The IGs should also ensure observation of ethics codes, but cite lack of resources as a factor impeding their effectiveness in this area.
See Law 30/2002 establishing the Commission for the Eradication of Criminal Acts of Corruption.
See “Indonesia: Report on the Observance of Standards and Codes—Data Module,” IMF Country Report No. 05/255, July 2005, http://www.imf.org/external/pubs/ft/scr/2005/cr05255.pdf.
There were about 19,500 budget users (satker) covered by the 2006 budget appropriations.
The Elucidation of the State Finances Law 17/2003 states, however, that “the setting out of development targets in a five-year plan is widely considered to be an unrealistic endeavor and increasingly out of line with the needs of government.”
The overall balance, excluding oil revenues and direct oil expenditures, as a proportion of non-oil GDP, removes the effects of variability due to oil price fluctuations and allows a clearer focus on the impact of fiscal stance of the non-oil sector. For further discussion, see IMF Guide on Resource Revenue Transparency, paragraphs 106–109.
MOF Regulation 96/PMK.06/2005 governs DIPA administration and Regulation 134/PMK.06/2005 governs KPPN payments. Government accounting standards cover transactional level recording, consolidation of accounts, and the generation of financial statements.
Decree of Ministry of Residence and Regional Infrastructure No. 339/KPTS/2003 provides guidelines for implementing the presidential decree.
See ADB/OECD, “Thematic review on provisions and practices to curb corruption in public procurement” available on http://www1.oecd.org/daf/ASIAcom/pdf/trpp_indonesia.pdf.
See “Baseline Benchmarking of Indonesia’s Public Procurement System,” World Bank, July 2005.
Civil Service Reforms at the regional level: opportunities and constraints?, World Bank, 2005.
Sanctions for untimely reporting have not been applied.
It also includes forward estimate information on nontax revenues and expenditures per program and work unit.
Table 8 of “Budget Statistics” http://www.djapk.depkeu.go.id/apbn/Data%20Pokok%20APBN%202006%20-%20Eng.pdf.
BPMIGAS is responsible for metering oil lifting and monitoring actual costs and revenues for each contract area. BPMIGAS also approves the budget plan for each contractor. The actual outcomes are reconciled against the budget plans on a quarterly basis in reviews between BPMIGAS and each contractor and between BPMIGAS and MOHA and regional government representatives from the producing areas.
For example, the second quarter report for 2005 was available on http://www.perbendaharaan.go.id in March 2006.
Indonesia has also completed a Data Module ROSC, which includes information on conformity with SDSS. See especially paragraph 1 of http://www.imf.org/external/pubs/ft/scr/2005/cr05255.pdf.
The budget used to consistently include a low oil price so as to limit DAU transfers to provinces.
Preliminary numbers for 2005 indicate that a higher than expected oil price and a low execution rate on capital expenditures and goods and services will lead to a high variance between budgeted and actual outturns.
The budget use futures oil price of US$57 a barrel in the 2006 budget (consistent with World Economic Outlook projections) and an oil lifting assumption of 1.05 mbpd. The latter assumption appears optimistic in light of the recent decline in production and the production number reported in 2005 by DGMIGAS (oil lifting of about 0.9 mbpd for 2005).
The elements of the accounting policies are: cash basis for recognition of revenue, spending, and financing in the report on budget realization, and accrual basis for recognition of assets, liabilities, and net worth in the balance sheet. Assets are recorded at historical cost or at reasonable cost where historical cost is not available. Liabilities are recorded in terms of cash expected to be paid to meet them.
For the most part, government accounts are defined in the same way as in monetary statistics, but some discrepancies may arise because of the unclear treatment of certain extrabudgetary funds, such as the Investment Fund. For example, a large discrepancy was found prior to the reconciliation in 2004 because of the investment fund account. The statistical discrepancy for 2005 monetary and fiscal data was initially found to be about 0.8 percent of GDP. The authorities have indicated that, from 2006 onwards, reconciliation will be done every quarter.
BAPPENAS currently performs a number of roles, such as helping set broad development priorities and tackling crosscutting issues such as the recent development of a compensatory package following the reduction of the fuel subsidies.
An analysis of the rationale, mandate, and operations of fiscal agencies is described in a forthcoming IMF publication entitled “Promoting Fiscal Discipline.”
Given the substantial involvement of Parliament in the budget process, a model based on the U.S. Congressional Budget Office, but adapted to the Indonesian environment, could be considered.
For example, by specifying in the tax law how the oil and gas industry should be taxed, given the existence of PSCs.
Costing should be carefully done to ensure that the full impact of PSOs is measured. For example, the previous cost and fee approach used to calculate the compensation owed to Pertamina for its sale of domestic fuel products at regulated prices did not take into account what would have been owed if market prices were charged.
For example, by strengthening BPK’s operational, managerial and budgetary independence. A review of the relationship between the Board of Audit and BPK’s operational managers may also be useful in improving BPK’s effectiveness.
This would differ from the existing Regional Autonomy Advisory Council (DPOD), as the forum would issue directives on decentralization issues, which could then be implemented at a more technical level by DPOD.