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The Implementation Gap: Financial Management Reform in Indonesia 2003-2010

Windraty Ariane Siallagan

A thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy University of New South Wales August 2012

ORIGINALITY STATEMENT

‘I hereby declare that this submission is my own work and to the best of my knowledge it contains no materials previously published or written by another person, or substantial proportions of material which have been accepted for the award of any other degree or diploma at UNSW or any other educational institution, except where due acknowledgement is made in the thesis. Any contribution made to the research by others, with whom I have worked at UNSW or elsewhere, is explicitly acknowledged in the thesis. I also declare that the intellectual content of this thesis is the product of my own work, except to the extent that assistance from others in the project's design and conception or in style, presentation and linguistic expression is acknowledged.’

Signed …………………………………………….......... Date ……………………………………………..............

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Abstract In the mid-1990s, the Asian financial crisis provided a strong impetus to democratising reforms in Indonesia. A major component of reform was the drive towards more efficient, effective and accountable government, based on the principles of New Public Management (NPM) and associated financial management reform. So far, while some progress has been achieved, there remain considerable shortfalls in the implementation of change.

On the basis of a literature review of NPM, financial management reform and implementation of public policy, this study investigates factors affecting implementation outcomes of the financial management reform in Indonesian Government institutions. This is an important research gap since research on NPM and financial management reform has tended to focus on policy design with less focus on how the reform is converted into action at organisational level. This study employs a multiple case study design using four cases of Indonesian Government institutions and gathered data through interviews with key informants from the four case study institutions.

This thesis argues that the reasons for shortfall in the implementation of change lie in the fact that a uniform implementation strategy was employed by the Indonesian government. This strategy overlooked the varied nature of the problem, the lack of capacity and knowledge in financial management and the need for more effective political and bureaucratic leadership in the process. More fundamentally, it is argued that advanced financial and accounting reforms may

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not represent a realistic reform emphasis for a developing country such as Indonesia, where governance capacity is limited. In transplanting the reforms, advocates overlooked the fact that successful implementation in western countries rested upon pre-existing practices of sound financial management and accountability, which were lacking in Indonesia. This resulted in an implementation gap that will take many years to surmount.

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Dedication

To my mother Emma Ambarita who died on 5 October 2010

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Acknowledgements Although this intellectual endeavour bears my name, it is not the fruit of my effort alone. My gratitude goes to my supervisors, Prof. Jenny Stewart and Prof. Michael Hess, whose collaboration and support have taken me a long way. I am also greatly thankful to Dr. Marian May for her support during my study at UNSW Canberra. Mostly, I am indebted to my father Sahata Siallagan, especially to my late mother, Emma Ambarita, who always supported me in every decision I have made in this life including my decision to pursue a PhD degree miles away from home. Funding for this research was provided through AusAID’s Australian Development Scholarship, which sources are gratefully acknowledged.

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Table of Contents Originality Statement ................................................................................ ii Abstract ……………………………………………………………. ...... iii Dedication ................................................................................................ v Acknowledgements .................................................................................. vi Table of Contents ................................................................................... vii List of Tables ........................................................................................ xvii List of Figures ..................................................................................... xviii List of Abbreviations and Terms ........................................................... xix

Chapter 1 Background to the Study .................................... .................... 1 Introduction

........................................................................................... 1

Background to the Reforms ..................................................................... 2 Research Themes ...................................................................................... 9 Research Questions ................................................................................. 11 Methodological Issues ............................................................................. 13 Outline of the Study ................................................................................ 15

Chapter 2 Literature Review .................................................................. 18 Introduction

......................................................................................... 18

NPM and Financial Management Reform ............................................. 19 Effectiveness of NPM Reforms ................................................ 21 Performance Budgeting, and Output and Outcomes Focus ... .. 23 Accrual Basis ............................................................................ 26 vii

Factors Influencing the Implementation of Budget and Accounting Reforms ...................................................................................................28 Experience of Developed Countries.......................................... 29 NPM-inspired Reforms in Developing Countries ..................... 35 Outcomes of Reform in Developing Countries ......................... 39 Specific Challenges of NPM in the Developing Country Context ......... 41 Weak Market and Informality ................................................... 42 Capacity and Motives ................................................................ 45 Corruption ................................................................................. 48 Political Commitment and Leadership ...................................... 50 Administrative Tradition ........................................................... 52 Implementation: Analytical Framework ................................................. 56 Diverse Approaches to Public Policy Implementation ............. 58 Communication Model ............................................................. 60 Statutory-Coherence Approach ................................................. 62 Implementation Regime Framework......................................... 64 Inter-organisational Approach .................................................. 63 Implementation of Reform Policy or Change ........................... 69 Conclusion .............................................................................................. 73

Chapter 3 Budget and Accounting Reforms in Indonesia .......................... 76 Introduction ................................................................................................ 76 Indonesian Administrative System ............................................................ 77 Review of Financial Management Practice Prior to Reform ..................... 79

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Major Drivers for Reform .......................................................................... 81 Economic Crisis ........................................................................... 81 Demand for Democratization and Political Changes ................... 82 Role of International Agencies..................................................... 84 Key Reform Documents Introduced by International Agencies ................ 87 Institutional Reforms: Strengthened Parliamentary Role .......................... 88 Decentralisation Program ........................................................................... 89 Reform Agenda and Structure.................................................................... 94 Preparation of Financial Legal Framework and the White Paper............................................................................................. 94 Trilogy of Financial Laws ............................................................ 97 Subsequent Legal Reforms .......................................................... 99 Reforms to Budget Institutions .................................................... 99 Reorganisation Program ............................................................. 102 Planning and Budgetary Cycle ................................................... 103 Budget Formulation and Enactment .......................................... 105 Financial Reporting and Accountability .................................... 106 New Accounting Standards ........................................................ 107 Audit........................................................................................... 108 Human Resource Reforms ......................................................... 109 Conclusion ............................................................................................... 112

Chapter 4 Methodology............................................................................ 122 Introduction .............................................................................................. 122

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Research Design and Approach ............................................................... 122 Theory Testing ........................................................................... 122 Qualitative Strategy as the Main Approach ............................................. 126 Multiple Case Studies .............................................................................. 128 Rationale for Employing Multiple Case Studies........................ 128 Limitations and Strategy ............................................................ 131 Case Selection ............................................................................ 133 Data Collection......................................................................................... 140 Data Analysis ........................................................................................... 144 Ethical Issues ............................................................................................ 146 Conclusion ............................................................................................... 146

Chapter 5 Tangerang Municipality Government Case Study .................. 148 Introduction .............................................................................................. 148 Background to the Budget and Accounting Reforms in the Tangerang Municipality Government ........................................................................ 149 Tangerang Municipality Government: Institutional Profile..................... 150 Regional Parliament: Strengthened Role and New Accountability Framework ............................................................................................... 150 Budget Overview ..................................................................................... 151 Political Context for Reform .................................................................... 152 Leadership by the Mayor .......................................................... 155 Performance Management ......................................................... 157 Measures to Minimize Resistance towards Change ................... 158

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Communication .......................................................................... 160 Organisational Dynamics of the Reforms ................................................ 163 Reorganisation............................................................................ 163 Compliance ................................................................................ 165 Implementing Centralised Mandates.......................................... 166 Dissemination and Training Program: Enhancing Bureaucratic Capacity ................................................................ 167 Facilitation Activities: Assisting Task Force (Tim Pembina)........................................................................... 170 Financial Management Systems ................................................. 173 Feedback and Evaluation ........................................................... 174 Incentives, Rewards and Sanctions ............................................ 175 Stability in Human Resources .................................................... 177 Key Issues in the Reform ......................................................................... 178 Strong Values-based Leadership ................................................ 178 Integrated Incentives and Sanctions ........................................... 179 Resources ................................................................................... 179 Conclusion ............................................................................................... 179

Chapter 6 Ministry of Communication and Informatics Case Study

.................................................................................................... 187

Introduction .............................................................................................. 187 Political Context of Reform ..................................................................... 188 Leadership .................................................................................. 191

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Budget Overview ....................................................................... 193 Organisational Change and Structure ........................................ 194 Organisational Dynamics of the Reforms ................................................ 195 Structuring Decision Making ..................................................... 197 Strategic Planning ...................................................................... 198 Budget Preparation ..................................................................... 198 Budget Implementation .............................................................. 199 Asset Management ..................................................................... 201 New Accounting Practice and Financial Report ........................ 201 Internal Control System ............................................................. 202 Performance Reporting .............................................................. 203 Key Issues in the Reform ......................................................................... 204 Capacity...................................................................................... 204 Training and Dissemination Programs ....................................... 207 Information Technology............................................................. 208 Communication and Coordination ............................................. 209 Leadership .................................................................................. 210 Conclusion ............................................................................................... 211

Chapter 7 Tobasa District Government Case Study ................................ 219 Introduction .............................................................................................. 219 Background to the Budget and Accounting Reform in the Tobasa District Government ................................................................................. 220 Tobasa District Government ...................................................... 221

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Regional Parliament ................................................................... 222 Budget Overview ....................................................................... 223 Political Context of Reform ..................................................................... 224 Cultural Context of Reform ..................................................................... 227 Organisational Dynamics of the Reforms ............................................... 228 Relations between the TDG and the Regional Parliament ......... 229 New Organisational Structures .................................................. 231 Implementing Decentralised Financial Rules and Regulations ................................................................................. 232 Delays in Integrating Changes to the Planning and Budgeting Processes .................................................................................... 234 Participation Issues..................................................................... 236 Timeframe for the Budget Process ............................................. 237 Performance-based Budgeting and Reporting ........................... 238 Internal Control System ............................................................. 240 Accounting Information ............................................................. 242 Audited Financial Statements .................................................... 244 Public Availability of Information ............................................. 245 Implementation: Underlying Issues and Problems .................................. 246 Human Resource Capacity ......................................................... 246 Training Programs ...................................................................... 247 Role of Leaders .......................................................................... 248 Communication .......................................................................... 249 Commitment............................................................................... 250

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Conclusion ............................................................................................... 251

Chapter 8 Constitutional Court Case Study ............................................. 257 Introduction .............................................................................................. 257 Political Context of Reform ..................................................................... 258 Background to the Budget and Accounting Reforms in the Constitutional Court ................................................................................. 259 Budget Overview ..................................................................................... 260 Organisational Dynamics of the Reforms ................................................ 261 Leadership .................................................................................. 263 Financial Transparency and Accountability............................... 265 Budget Implementation .............................................................. 267 Financial Reporting and Accountability .................................... 267 Performance Reporting .............................................................. 269 Asset Management ..................................................................... 269 Internal Control System ............................................................. 270 Features of the Implementation................................................................ 271 Facilitators .................................................................................. 271 Standard Operating Procedures .................................................. 272 Advanced Information Technology Support .............................. 272 Integrity and Workplace Behaviour ........................................... 273 Adequate Human Resource Capacity......................................... 274 Conclusion ............................................................................................... 276

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Chapter 9 Cross-Case Analysis ................................................................ 286 Introduction .............................................................................................. 286 Overview .................................................................................................. 286 Analysis of Research Findings ................................................................. 288 Implementation Strategy ............................................................ 291 Leadership .................................................................................. 295 Projection of Ethical Values....................................................... 299 Monitoring, Incentives and Evaluation ...................................... 301 Role of Facilitators in the Implementation Process .................. 303 Communication .......................................................................... 305 Commitment to the Reform Process ......................................... 307 Capacity and Capacity Building................................................. 310 Applying Analytical Framework.........................................................314 Conclusion ............................................................................................... 320

Chapter 10 Conclusion ............................................................................. 323 Implementation Strategy .......................................................................... 324 Leadership ................................................................................................ 326 Facilitation and the Role of Fixers ........................................................... 328 Communication ........................................................................................ 329 Commitment to Reform ........................................................................... 331 Capacity for Reform ................................................................................. 332 Overcoming Barriers ............................................................................... 335 Corruption .................................................................................. 338

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Governance and Administrative Tradition ................................. 341 Implications for the Study of NPM .......................................................... 343 Implications for Practice .......................................................................... 352 Conclusion ............................................................................................... 358

Appendices ............................................................................................... 361 Appendix 1: Location of the Four Cases, Indonesia ................................ 361 Appendix 2: Letters to Case Study Organisations ................................... 362 Appendix 3: Organisational Consent ....................................................... 363 Appendix 3.1: Example of Organisational Consent................................. 364 Appendix 4: Individual Consent .............................................................. 365 Appendix 5: Interview Questions ............................................................ 370 Appendix 6: Ethics Approval ................................................................... 372 Appendix 7: List of Respondents of Semi-Structured Interviews ........... 373 References ................................................................................................ 380

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List of Tables Table 3.1: Main Laws and Regulations Affecting Government Financial Management since the Reform both at the Central and Regional Governments, Indonesia ........................................................ 117 Table 4.1: Selected Characteristics of Case-Study Institutions ............ 137 Table 5.1: Regional Budget of the Tangerang Municipality Government, 2007-2010 ...................................................................... 182 Table 5.2: TMG Reform Timeline ........................................................ 184 Table 6.1: MoCI Reform Timeline ....................................................... 214 Table 6.2: Ministry of Communication and Informatics after 1998 Political Reforms: Chronological Changes .................................. 217 Table 7.1: TDG Reform Timeline......................................................... 254 Table 8:1: CC Reform Timeline ........................................................... 278 Table 8.2: The Constitutional Court Budget, 2005-2009 ...................... 282 Table 8.3: Planning Documents ............................................................ 284 Table 9.1: Summary of Findings of the Implementation of the Budget and Accounting Reform ........................................................................ 290

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List of Figures Figure 3.1: Government of Indonesia Planning and Budgetary Cycle since the Reform ................................................................................... 116 Figure 4.1: Research Design ................................................................. 124 Figure 5.1: Organisational Chart for the Tangerang Municipality Government, 2010 ................................................................................. 183 Figure 6.1: Organisational Chart for the Ministry of Communication and Informatics, 2010............................................................................ 216 Figure 7.1: Organisational Chart for the Tobasa District Government, 2010 ....................................................................................................... 256 Figure 8.1: Organisational Chart for the Constitutional Court, 2008 ... 283

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List of Abbreviation and Terms A ADB Adverse Opinion

Akhlaqul Karimah APBN APBD Apel Aspirasi

Asian Development Bank Opinion given by the Auditor when the financial report has not been presented and disclosed fairly in all material issues, hence the financial information in the financial report cannot be used by financial report users An Islamic-based principle meaning ‘high noble morality’ Anggaran Pendapatan dan Belanja Negara (Budget of State Income and Expenditure) Anggaran Pendapatan dan Belanja Daerah (Budget of Regional Income and Expenditure) Daily meeting Opinions and feedback

B BAKD Bappeda Bappenas BIKN BKN BPK BPKP BTIP

Bupati

Badan Administrasi Kepegawaian Daerah (Regional Personnel Administration Agency) Badan Perencanaan Pembangunan Daerah (Regional Development Planning Agency) Badan Perencanaan Pembangunan Nasional (National Development Planning Agency) Badan Informasi dan Komunikasi Nasional (National Information and Communication Agency) Badan Kepegawaian Nasional (State Personnel Agency) Badan Pemeriksa Keuangan (Supreme Audit Agency) Badan Pengawasan Keuangan dan Pembangunan (Financial and Development Supervision Agency) Balai Telekomunikasi dan Informatika Pedesaan (Village Telecommunication and Informatics Institute), a Public Service Agency under the MoCI Head of District Region (Kabupaten)

C CC CEO CFAA CFO

Constitutional Court (Mahkamah Konstitusi) Chief Executive Officer World Bank Report on Country Accountability Assessment Chief Financial Officer

Financial

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CGI COO CoA CPAR

Consultative Group on Indonesia Chief Operational Officer Chart of Accounts World Bank Report on Country Procurement Report

D DAK DAU

Dana Alokasi Khusus (Special Allocation Fund) Dana Alokasi Umum (General Allocation Fund) Dana Dekonsentrasi Deconcentrated Spending Dana Tugas Pembantuan Assistance Task Spending Deppen Departemen Penerangan (Department/ Ministry of Information) Desa Village DG Directorate General DIPA Dokumen Isian Pelaksanaan Anggaran (Budget Implementation Document) Disclaimer The Auditor declines to give an opinion because the financial report cannot be audited according to audit standards, hence financial information in the financial report cannot be used by financial report users DPA Dokumen Pelaksanaan Anggaran (Regional Budget Implementation Document) DPPKKD Dinas Pendapatan, Pengelolaan Keuangan dan Kekayaan Daerah (Regional Revenue, Financial and Asset Management Services (RRFAMS)) DPR Dewan Perwakilan Rakyat (National Parliament/People’s Representative Council) DPRD Dewan Perwakilan Rakyat Daerah (Regional Parliament) F FMIP

Financial Management Improvement Program

G GOI Golkar

GPF-AIP

Government of Indonesia Golongan Karya, one of political parties In Indonesia, a ruling party during Suharto regime (1966-1998) Government Partnership Fund-Australia Indonesia Partnership

I IAR

Instructie en verdere bepalingen voor de Algemeene Rekenkamer xx

IBW ICW IMF IRF IT

Indische Bedrijvenwet Indische Comptabiliteitswet International Monetary Fund Implementation Regime Framework Information Technology

K Kecamatan Kelurahan KemenPAN KemenPAN & RB

Kepmendagri KIP KKN Kominfo

KPK KPMK KUA

Sub-district Sub-village Kementerian Pendayagunaan dan Aparatur Negara (Ministry of Administrative and State Apparatus) Kementerian Pendayagunaan dan Aparatur Negara dan Reformasi Birokrasi (Ministry of Administrative and Civil Service Reform) Keputusan Menteri Dalam Negeri (Decree of the Minister for Home Affairs) Keterbukaan Informasi Publik (Freedom of Public Information) Korupsi, Kolusi dan Nepotisme (Corruption, Collusion and Nepotism) Kementerian Komunikasi dan Informatika (Ministry of Communication and Informatics) Komisi Pemberantasan Korupsi (Corruption Eradication Commission) Komite Penyempurnaan Manajemen Keuangan (Financial Management Reform Committee) Kebijakan Umum Anggaran (General Budget Policy)

L LAKIP

LIN LoI

Laporan Akuntabilitas Kinerja Instansi Pemerintah (Government Agency Performance Accountability Report) Lembaga Informasi Nasional (National Information Institute) Letter of Intent

M MA MoCI

MoF

Mahkamah Agung (Supreme Court) Ministry of Communication and Informatics (Departemen/Kementerian Komunikasi dan Informatika) Ministry of Finance (Departemen/Kementerian Keuangan) xxi

MoHA MPR MTEF Musrenbang

Ministry of Home Affairs (Departemen/Kementerian Dalam Negeri) Majelis Permusyawaratan Rakyat (People’s Consultative Assembly) Medium-Term Expenditure Framework Musyawarah Perencanaan Pembangunan (Development planning deliberation or community participation process)

N NPM NGO

New Public Management Non Government Organisation

O OECD

Organisation for Development

Economic

Co-operation

and

P PAN P-APBD

PD PDI-P Peraturan Bupati Perda Pergub Permendagri Perwal PP PPAKP

PPAS

PPP

Perhitungan Anggaran Negara (State Budget Calculation) Perubahan Anggaran Belanja Daerah (Revision on the Budget of Regional Income and Expenditure) Partai Demokrat (Democrat Party) Partai Demokrasi Indonesia-Perjuangan (Indonesian Democratic Party for Struggle) Head of District Regulation Peraturan Daerah (Regional Regulation) Peraturan Gubernur (Gubnatorial Regulation) Peraturan Menteri Dalam Negeri (Ministry of Home Affairs Regulation) Peraturan Walikota (Mayoral Regulation) Peraturan Pemerintah (Government Regulation) Program Percepatan Akuntabilitas Keuangan Negara (Government Financial Accountability Acceleration Program) Prioritas dan Plafon Anggaran Sementara (Temporary Priorities and Budget Ceilings) Partai Persatuan Pembangunan (United Development Party)

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Q Qualified opinion

Opinion given by the Auditor when the financial reports are true and fairly presented in accordance with the financial reporting framework but with exceptions

R RAB Renstra RFAMS RKA RKA K/L

RKP RKPD RPJMN

RPJMD

RPJPN

RPJPD

RRFAMS

Reglement voor het Administratief Beheer Rencana Strategis (Strategic Plan) Regional Financial and Asset Management Services Rencana Kerja Anggaran (Budget Working Plan or Annual Plan Document) Rencana Kerja Anggaran Kementerian Negara/Lembaga (Spending Agency Budget Working Plan) Rencana Kerja Pemerintah (Government Working Plan) Rencana Kerja Pemerintah Daerah (Regional Government Working Plan) Rencana Pembangunan Jangka Menengah Nasional (National MediumTerm Development Plan) Rencana Pembangunan Jangka Menengah Daerah (Regional MediumTerm Development Plan) Rencana Pembangunan Jangka Panjang Nasional (National Long-Term Development Plan) Rencana Pembangunan Jangka Panjang Daerah (Regional Long-Term Development Plan) Regional Revenue Financial Asset Management Services

S SAI SAK SAP Satker SBY SIMAK-BMN

Government Agency Accounting System Financial Accounting System Government Accounting Standards Satuan Kerja (Working Agency or Unit) Susilo Bambang Yudhoyono, President of the Republic Indonesia (2004-to date) Sistem Manajemen Akuntansi Keuangan Barang Milik Negara (State-owned Asset Financial Accounting Management System)

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SIMDA SIMTOR

SMS SOP STAN

Sistem Manajemen Keuangan Daerah (Regional Government Financial Management System) Sistem Informasi Manajemen Perencanaan dan Realisasi Anggaran (Planning and Budget Management Information System) Short Message System Standard Operating Procedure State Accounting School

T TAPD TDG Tim Pembina TMG

Tim Anggaran Pemerintah Daerah Government Budget Team/Task Force) Tobasa District Government Assisting Team/Task Force Tangerang Municipality Government

(Regional

U UU Unqualified Opinion

Undang-Undang (Law) Opinion given by the Auditor when financial reports present fairly in all material respects, or give a true and fair view in accordance with the financial reporting framework

W Walikota

Head of municipality region (kota)

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Chapter 1 Background to the Study

Introduction This research emerged from concerns regarding the current efforts pursued by the Indonesian government to enhance its performance through budget and accounting reform initiatives. Although previous studies have contributed insight into the nature and characteristics of financial management practices, none of these studies investigates the organisational process of carrying out the reform mandate. The research undertaken for this thesis seeks to explore the implementation process of the budget and accounting reforms in Indonesian Government institutions both at the Central and regional level.

The present study was also driven by personal observations of the researcher as an Indonesian Ministry of Finance (MoF) (Departemen Keuangan) 1 staff member, regarding the implementation of the reforms. The decision to implement the reforms was made under considerable pressure from International Agencies and Organisations (such as the International Monetary Fund (IMF), and the Asian Development Bank (ADB)). In many instances, reform initiatives and subsequent technicalities proposed by the International Agencies seemed to go unchallenged, because the Government was not able to provide the necessary critical assessment 1

Throughout this thesis, shortened forms are used to refer to many institutions and documentation. Where the Bahasa Indonesia term is well-known, this is used, otherwise an English abbreviation is often used.

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on the reform initiatives and the suitability of the reform ideas to Indonesian contexts. Consequently, the ability of the MoF effectively to lead the reform process was constrained.

As revealed in this thesis, for reforms to take place, the challenge is implementation, which is more complicated than merely ensuring compliance of implementers to the reform mandate. The focus on compliance with new financial regulations is prominent in the current implementation process taking place across Government of Indonesia spending agencies. However, many other issues that profoundly affected the implementation outcomes were largely overlooked. This research offers a more comprehensive understanding of the reform process, through which the Indonesian Government might gain more knowledge to equip itself following through the journey of the reforms.

Background to the Reforms The impetus for the Indonesian Government to embark on a series of reforms, including the budget and accounting reforms, was clearly linked with the 1997 economic crisis, which marked the transition from an autocratic to a democratic era. The economic and political crises resulted in the downfall of the Suharto regime that was in power for 32 years (1966-1998). The demise of Suharto in turn led to the major political and institutional reform initiatives which aimed to invigorate the democratization process as well as to improve economic conditions (Marijan 2010). These major reforms, among others, were the introduction of a new political structure, the division and clarification of authority to

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institutionalize democratic politics, and the decentralisation process (Marijan 2010; Kingsbury 2005).

Following the massive political and institutional changes, the Indonesian Government embarked on the budget and accounting reforms that primarily aimed to promote good governance by reducing opportunities and incentives for pervasive corruption and rent-seeking practices. After a long deliberation process, in 2003/2004 under the Megawati administration, the Government enacted the Finance Law packages to replace the Dutch financial rules marking the commencement of the budget and accounting reforms (Ginting 2003). These laws consisted of three laws (trilogy of Financial Laws), namely Law No. 17/2003 on State Finance, Law No. 1/2004 on State Treasury, and Law No. 15/2004 on State Audit. In essence, the budget and accounting reforms were efforts to shift the traditional public administration paradigm into modern practices of financial management underpinned by a result-oriented approach. These financial changes have been implemented, among other ways, through the integration of the routine and development budgets into a unified budget, the shift from input-budgeting to more output-oriented budgeting system, the introduction of a medium-term expenditure framework in the budget process (Financial Management Reform Committee 2001; Pemerintah Republik Indonesia 2003a).

From the Government perspective, reasons for introducing changes to the budget and accounting process emanated from the fact that the implementation of the existing budget system which was guided by Dutch Colonial rules, such as the

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dual budget and line-item system, could not accommodate the rapid economic development and the dynamic changes to financial management that this required (Pemerintah Republik Indonesia 2003a, 2004c). The existing system of financial practices in Indonesia was characterized by a lack of budget discipline, a lack of transparency, and inefficiency. More importantly, the absence of accounting standards and practices had encouraged public servants to use taxpayers’ money with little regard to issues of accountability.

The 2003/2004 trilogy of Financial Laws has massively transformed the whole body of financial management procedures and processes, encompassing planning, budgeting, reporting and auditing. The new Financial Laws mandated the implementation of best practice in the budget and accounting reforms that were based on market-type practices and principles such as performance-based budgeting, and called for a unified and more comprehensive budget including a medium-term expenditure framework, as well as the introduction of accounting standards and systems (Pemerintah Republik Indonesia 2003a). In general, the implications of these new principles in Indonesia’s financial practices, both at the Central and regional government, represented a shift of focus more towards accountability based on results, professionalism, proportionality, openness in state financial management and financial audit by an independent auditor (Pemerintah Republik Indonesia 2003a).

Although major initiatives have been undertaken in the Indonesian Government budget and accounting process to promote good financial governance, in 2007 the

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World Bank reported that the new budget system continued to rely on detailed documents, the input-focused budget documents were still in place, the budget execution process remained slow and tended to be disbursed towards the end of the fiscal year, and the audit process was still complex and dependent (World Bank 2007b). The flaws in the budget system despite the reforms can be partly explained by the prevalent corruption in Government financial practices as well as limited capacity arising from a flawed recruitment system, the lack of promotion based on performance, and poor reward and punishment mechanisms (World Bank 2007b). Previous studies have indicated that corruption and lack of rulebased government pose challenges for successful New Public Management (NPM) reform (Yang 2007; Haque 2007a; Schick 1998; Dunleavy & Hood 1994; Cheung 2005).

This is not surprising because the prevalent corruption in Indonesia has long been well-documented. Data from Transparency International’s Corruption Perception Index 2007 shows that Indonesia ranked 143rd out of 180 countries, and in the World Bank’s Doing Business 2008 Report where Indonesia was also low on the list (123rd out of 178 countries) on ease of doing business (World Bank 2007a; Transparency International 2007). In the context of corruption, therefore, the consideration of the risk of embarking on the NPM-inspired reforms gained importance for developing countries because corruption can not only pose formidable challenges to the reform, but it may also exacerbate the NPM reform (Dunleavy & Hood 1994; Pollitt 1995).

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Although studies have shown the success of NPM reform particularly in terms of transparency and accountability improvement, in many countries including some developing countries, some scholars casted doubts on the effectiveness of NPM reforms in those developing countries with corruption problems (Haque 2007a; Schick 1998; Therkildsen 2001; Yang 2007). In these countries, corruption was found to exacerbate the NPM reform and to damage democratic accountability promoted by NPM. One of the reasons is that NPM shifted the accountability modes from top-down hierarchical modes to a more flexible horizontal model which may worsen a corruption problem that should have necessitated more control and monitoring (Haque 2007a). In particular in Indonesia, initiatives based on NPM logic in the bureaucracy, such as cutting the size of the bureaucracy was more rhetoric than practice because patronage for political support persisted in thwarting the overall reform effort (Cheung 2005).

In addition, the limited success of NPM reform in developing countries has been due to limited capacity derived from weak institutionalization of the administrative structure, politicisation of organisational hierarchy and low pay (Polidano & Hulme 1999). In essence, the sceptical view on NPM universality highlighted control of corruption and capacity building as necessary reforms for NPM reform to succeed, which were unrelated to NPM reform. A careful examination of how NPM-inspired reforms are converted into practice in the Indonesian context sheds light on the appropriateness and robustness of NPM reforms in the developing country context.

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The weaknesses in the Indonesian budget process as indicated in the World Bank (2007b) report created problems in achieving the reform goals of promoting efficiency, effectiveness, and transparency in government financial practices. Although some progress in accounting reforms was evident, such as the publication of the Central Government Financial Report for the fiscal year 2004 in 2005, 60 years after the Indonesian Independence, problems in accountability still persisted. These were acknowledged in a number of important official documents. Badan Pemeriksa Keuangan’s (BPK) (Supreme Audit Agency) opinions on the Central Government Financial Reports for four sequential years (2004-2008) were ‘disclaimers’ caused by issues such as inadequate internal control system and noncompliance with the laws and regulations (Pemerintah Republik Indonesia 2009; Badan Pemeriksa Keuangan 2009a). It was therefore clear that agencies had failed to comply with the new financial rules and regulations indicating implementation issues facing the agencies.

More importantly, since the Government launched the budget and accounting reform initiatives in 2003/2004, the sweeping budget and accounting reforms have resulted in variations in the outcomes of the implementation across Indonesian Government agencies, suggesting problems in putting the reform mandates into practice (Badan Pemeriksa Keuangan 2009a; von Luebke 2009). These variations were manifested in the BPKAudit Report and the auditors’ opinion on each agency financial report. The BPK finding reports allow for four levels of ‘opinion’ on the value of the agency financial reports: ‘unqualified opinion’, which indicates that the financial report has been presented fairly in all material

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issues, and that financial information in the financial report can be used by financial report users; ‘qualified opinion’, which indicates that the financial report has been presented and disclosed fairly in all material issues, with some exceptions, and therefore financial information in the financial report, apart from the exceptions can be used by financial report users; ‘adverse opinion’, which suggests that the financial report has not been presented and disclosed fairly in all material issues, hence the financial information in the financial report cannot be used by financial report users; and ‘disclaimer opinion’, which indicates that the BPK declines to give an opinion because the financial report cannot be audited according to audit standards, hence financial information in the financial report cannot be used by financial report users (Badan Pemeriksa Keuangan 2008a).

In 2008, of 83 line ministries, 35 ministries received the ‘unqualifiedopinion’ on their financial reports for the year 2008, 30 ministries the ‘qualified opinion’, and 18 ministries the‘disclaimer opinion’(Badan Pemeriksa Keuangan 2008a, 2008e, 2009a).Although the audit opinions on the central ministry or agency financial reports have been improved over time, the BPK opinion on the financial reports of regional governments (pemerintah daerah) still indicated a number of fundamental flaws. Of 478 regional governments, only 293 financial reports for the year 2008 were audited, with only eight regional governments receiving an ‘unqualifiedopinion’. Of the remainder, 217 received ‘qualified opinions’, 21 ‘adverse opinions’ and 47 ‘disclaimer opinions’ (Badan Pemeriksa Keuangan 2009a). The opinions have raised the public’s awareness of the quality of financial management practices in managing public money, reflecting issues in the

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implementation process. The quality of opinion is important because it also reflects accountability of the government agencies. Because of this, the issue of financial management reform has become a national political issue rather than just one of interest to public managers and policy makers.

Research Themes Financial management reform in Indonesia has been examined in a number of studies (Blöndal, Hawkesworth & Deok Choi 2009; Harun 2007; World Bank 2007b; Kristiansen, Dwiyanto, Pramusinto & Putranto 2008). 2 These studies have contributed insight into the nature, and characteristics of reforms. They have also to a limited extent identified the obstacles to improving financial management practices. None of these studies, however, investigates the organisational process of carrying out the reform mandate.

These reforms were informed by NPM approaches aiming at enhancing government performance (Pollitt & Bouckaert 2004). A key premise of NPM is that adoption of private-sector management techniques and market mechanisms can increase public sector efficiency and performance (Hood 1991). Given the fact that there is strong evidence of a link between budget and accounting reforms and performance of institutions, developing countries, including Indonesia have attempted to emulate their developed counterparts in improving government performance by embarking on the so-called NPM-driven reforms (Hughes 2003).

2

In this thesis, the term ‘financial management reform’ is used interchangeably with ‘budget and accounting reform’.

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In general, the research on NPM has two main perspectives. On one hand, researchers have described and assessed NPM or ‘intervention’ and its technicalities, while on the other hand, investigators have attempted to look at the implementation process. Of these two perspectives, this thesis is mainly concerned with the implementation aspect and process of budget and accounting reforms in the Indonesian government institutions, which commenced in 2003/2004.

Focusing on the implementation process, this research explores how the budget and accounting reforms have been implemented by Indonesian Government agencies. Specifically, it aims to explore and explain the variations in the implementation outcomes. The experience of Indonesian Government officials is brought out in this respect and use of made of specific case studies to illustrate the process of reform implementation. The case studies cover four Indonesian Government agencies: two government agencies within the Central Government and two government agencies at the regional level.

Implementation is generally defined as ‘what happened between the policy advice and the policy outcome’ (O'Toole 2000; Hill & Hupe 2009); therefore the study of implementation seeks to find out how the policy or statute is put into action by the implementing agencies. The implementation theory that emphasises the interactive nature of policy implementation is developed further in this thesis by identifying more clearly than in the past the nature of the ingredient factors for its success.

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Accordingly, this thesis argues that a successful implementation process is a necessary condition for successful budget and accounting reforms. Focusing on the implementation aspect, this present study provides an understanding of the key ingredients for successful implementation within the Indonesian Government, and therefore developing countries, and adds to the limited knowledge in the implementation field.

Research Questions The research addresses to the following research questions: 1. How has the task of reform been approached? 2. Why has the achievement of reform been so uneven? 3. Is Indonesia heading in the right direction in its efforts to improve government performance? The above research questions were formulated based on the literature review in Chapter 2 to enable the researcher to identify reasons for variation in the implementation outcomes. Research Question 1 sought to describe and analyse how Indonesian government agencies approached the reform task and how the approach dictated the implementation outcomes. Research Question 2, the central question of the research, sought to analyse the reasons for variations. Each of the factors or reasons within each case study is described and, arising from this analysis, the main implications for the implementation process have been identified. The central argument of the thesis is that an implementation gap occurs when financial management reform modelled along NPM lines is introduced into a different context than found in the countries where NPM originated. Therefore,

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the success of the implementation of NPM-style reform relies heavily on how far recipient countries can either change the context or the reform being imported. This is in line with Andrew’s (2011) findings that reforms imported from elsewhere are implemented best when there is little difference between the country of origin and the adopting country in terms of institutions, political structures and processes, level of development and culture. The empirical work of this thesis supports this view that given the considerable differences between the nature and context of government organisations in the Anglo-Celtic countries that initiated NPM and Indonesia, there will be severe challenges in implementing NP reforms in Indonesia. Research Question 3 builds on the results of the first two questions. They are aimed at gathering and analysing large amounts of data relating to the NPM-style reforms that have been introduced in Indonesia. Drawing on these data and analysis one can then investigate whether Indonesia is on track with its reform program, whether further adjustment is needed, and what sort of adjustment should that be.

The research design addresses the three research questions in the following ways. Question 1, the characterisation of the Indonesian approach (the ‘how’ of change), is pursued by showing how the theory and practice of NPM were shaped, through the implementation process, by the rules, values and processes of the Indonesian government (chapters 2, 3 and 4). Question 2, the reasons for the patchiness of implementation success, is addressed by comparing instances of success and failure in a multiple-case study design. The reasons for differential reform performance in Indonesia are then related to factors that influence implementation that have been

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identified in the literature (chapters 5-9). The third research question, on the appropriateness of the approach to reform, is addressed by considering the problems that have occurred, and the kinds of steps that might be taken to address them (chapters 9 and 10).

Methodological Issues The research employs a multiple case design in four government institutions to investigate a contemporary phenomenon namely the implementation process of the budget and accounting reforms, in depth and within their real-life context (Yin 2009). Another reason for employing case study research is because it is deemed to be the best strategy to investigate contemporary rather than historical events (Yin 2009).

The cases were carefully selected using maximum variation sampling (Creswell 1994). The choice of cases is significant. In this study, they were selected for factors evident at macro, meso and micro levels. At the macro level, Indonesia was chosen because it is a country among other developing countries which is currently implementing major financial reforms. Because this started in 2003/2004 Indonesia has some years of experience with the process. Being one of the most corrupt countries in the world over recent decades, the investigation of Indonesia explores the implementation of financial management reforms in a challenging context. In a relatively short period of implementation (seven years), an evaluation of these reforms is feasible. At the meso level, cases chosen were located in regions selected for the diversity of stakeholders, as well as the

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willingness of the decision makers and gatekeepers to support the research. At the micro level, the cases selected emphasised different aspects such as representation of important differences in size, location, financial resources and organisational structure and level to cover the various types of offices in Indonesia both at the Central and Regional level as well as the current performance that is assessed by their financial reports prior to 2007/2008. These four cases are: (1) the Tangerang Municipality Government, (2) the Ministry of Communication and Informatics, (3) the Tobasa District Government, and (4) the Constitutional Court.

Primary data were obtained from fieldwork carried out in Indonesia in 2009, 2010 and 2011. Most of this field research was conducted at the four case institutions. Semi-structured interviews were employed with participating public servants drawn from senior, middle, and junior levels in the four case institutions to acquire perspectives from different levels within the organisations. Interviewing this broad range of public servants facilitated a fuller understanding of the implementation of the budget and accounting reforms than if interviews had only been with senior personnel. Additional in-depth interviews were undertaken with staff of relevant institutions such as the Parliament, the World Bank, and Badan Perencanaan Pembangunan Nasional (Bappenas) (National Development Planning Agency). A considerable amount of data was also derived from official government documents. Analysis of government policy documents, such as laws and regulations as well as reports, was undertaken to gain a contextual understanding of the budgeting and accounting reforms in the Indonesian context.

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Outline of the Study This current chapter has reviewed the nature of the problem that the thesis aims to research; described the research themes, questions and aims, and given an overview of the thesis. The remainder of the thesis is divided into nine chapters.

Chapter 2 Literature Review The aim of this chapter is to addresses issues relating to the implementation process within the framework of public management reform, budget and accounting reform as well as implementation. The chapter situates studies and identifies factors suggested by the literature that influenced the implementation process. The key sets of research questions are also arrived at from this literature review.

Chapter 3 Budget and Accounting Reforms in Indonesia One of the main arguments of the thesis is that the nature of Indonesian budget and accounting reforms to some extent has influenced the implementation of reform process at an institutional level. The chapter demonstrates how and why this is so by examining the historical and chronological events as well as underlying ideas as to how the Indonesian government approached the budget and accounting reforms which set the context for the analysis of the implementation process of the budget and accounting reforms in Chapters 4-8. Chapter 4 Methodology

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This chapter discusses the rationale for engaging the chosen methodology and methods. It reviews the strengths and weaknesses of the various approaches, as well as the strategy conducted to obtain compelling and robust research findings. Phases of data collection and analysis methods are detailed in the chapter to allow replication of the research. Chapters 5, 6, 7, 8 Case Studies on the Tangerang Municipality Government, the Ministry of Communication and Informatics, the Tobasa District Government, and the Constitutional Court These chapters show how the actual implementation has been undertaken in Indonesian government institutions. Each of these chapters shows different key factors affecting implementation in each case institution. This thesis argues that the difference stemmed among other things from specific contextual issues in each institution. Chapter 9 Cross-Case Analysis This chapter addresses the themes and sub-themes that emerged from the research. It aims to show how the task of reform has been approached by each case institution and to explain why the achievement of reform has been so uneven. In general it brings out key empirical findings of each of the four government institutions and generates cross-case analysis. Chapter 10 Conclusion This chapter draws together the previous examination of the implementation and exploration in order and links this to the literature in order to make some coherent claims about the implementation of the reforms. The chapter highlights important

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points in answering the research questions, confirming the propositions and meeting the objectives of this research as outlined in the introductory chapter.

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Chapter 2 Literature review

Introduction This chapter reviews the theoretical literature that is relevant to analysing the implementation of the budget and accounting reform policy, paying particular attention to contextual and conceptual matters relating to the central research question that is, why the achievement of reform has been so uneven. Findings from this review also highlight gaps in the literature that this and future studies will address.

The review of the literature is organized into two parts. The first section of the first part contextualizes the reforms in relation to New Public Management (NPM) and financial management reform. This is followed by two more detailed sections describing the experience of developed and developing countries, respectively, in relation to the financial management aspects of NPM. The second part of the chapter deals with the implementation literature, a literature that will be used in the thesis to analyse case-study data. Despite the fact that the implementation literature has lain dormant for a decade ago or so, the literature is of prime importance in assessing the reforms because of the significant effect of implementation on policy outcomes. A multiple-case-study approach based around the four government institutions or agencies provides an opportunity to

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study how the NPM-type reforms were implemented at an organisational level, and thus sheds more light on the reform process and implementation outcomes.

NPM and Financial Management Reform Characterising the task of reform is one of the key research questions of the present project (see research questions p12). The reform program in Indonesia was strongly shaped by the tenets of New Public Management (NPM), which constituted both the rationale and the objectives for change. A key factor in implementation, therefore, was the relationship and interaction between NPM and the existing Indonesian administrative traditions and practices.

NPM is a paradigm in the public sector that emerged in the 1980s and 1990s, the chief objective of which was to improve public service delivery (Hood 1991; Ferlie & Steane 2002). NPM has been manifested in different models for public agencies, including in the widespread financial reforms, such as a shift from inputs and process to outputs and outcomes, output performance orientation and the adoption of accrual accounting (Ferlie & Steane 2002).

Rubin and Kelly (2007) note that around the world public budgeting and accounting reforms underpinned by NPM have transformed the rules and processes of the whole financial management process including budget formulation, authorisation, implementation and reporting, as well as wider public expenditure management and public service delivery. They further contend that the main elements of the budget and accounting reforms, among others, are output

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and outcome budgeting or the shift from the detailed line-item budget to the output and outcomes budget along with the introduction of performance contracts, and the move away from cash-based accounting and budgeting into accrual-based accounting and budgeting (Rubin & Kelly 2007).

In most developed countries, similar strategies have been pursued in budget and accounting reforms that comprise what Diamond (2006) calls a three-track strategy: (1) to increase flexibility in the budget; (2) to provide more certain resourcing to ensure certainty; (3) to exert pressure to improve performance. The three-track strategy, among other things, takes form in the reduction of line of item specificity in the budget, introduction of contractual arrangements, the move towards a medium-term expenditure framework, the move away from cash accounting to the use of accrual accounting and budgeting as well as systems where good performance is rewarded and poor performance is penalised. In essence, the pursuit of the three-track strategy enables the possibility to use scarce budget flexibly and effectively while also setting up an accountability framework for budget usage.

The vanguard of budget and accounting reforms seems to belong to Australian and New Zealand reform. In Australia, as part of broader public sector reform, the Financial Management Improvement Program (FMIP) introduced in 1983 has provided a well-developed principle of ‘management for results’ in the financial management realm during the last three decades. The overall objective of the program was to improve public service management and accountability. The basic

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tenet of FMIP was program budgeting that shifted the focus on input to results achievement. FMIP, an important part of public sector reform, has several underlying principles which include devolution of control from central agencies and within departments to increase managerial flexibility –‘letting the managers manage and making them manage’; the user pays principle; public accountability; effective performance; risk management; and results orientation (Parliament of the Commonwealth of Australia 1990). FMIP aimed to fortify the expenditure control framework and to create a firmer link between budget and outputs through Program Management and Budgeting (Bouckaert & Halligan 2008).

In the 1990s, New Zealand in particular became the ‘centre of attention’ in the reforms with its coherence of conceptual theories that were lacking in other countries (Boston, Martin, Pallot & Walsh 1996). The key analytical concepts in New Zealand’s reforms were Transaction Cost, Public Choice and Principal Agent Theory which resulted in a contractual relationship within the Government, giving the Government two roles either as purchaser or owner, thereby further shaping the new accountability framework (Boston et al. 1996; Scott 2001).

Effectiveness of NPM Reforms Is Indonesia headed in the right direction with its reforms? A large literature from developed countries suggests some shortcomings in relation to NPM.While some proponents argue that NPM has brought about improvement in the public sector in terms of efficiency, effectiveness and accountability (Hood 1991; Ter Bogt, Budding, Groot & van Helden 2010), some scholars view NPM

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as generally incompatible with the public sector because of the conceptual difference between the public sector and the private sector (Hughes 2003; Curristine, Lonti & Joumard 2007). One source of conceptual problems, for example, lies in the difficulties of measurement in the public sector. The public sector performs a wide variety of functions, some of which, particularly intangible activities (such as, policy advice), are more difficult to measure in terms of outcomes and outputs (Curristine et al. 2007). Furthermore, there has been some concern as to the politicization of the public sector emerging from greater flexibility of political leaders in selecting the agency head (Hughes 2003). This is seen as undermining the neutrality and non-participant characteristics of the old administration. Andrews (2011) states that there has been meagre empirical evidence supporting the claim for efficiency gains in NPM reforms and thus considers that further research is needed to assess NPM results.

Because reforms are generally aimed to improve accountability, critics of NPM and its corresponding reforms have stressed the accountability issue in the bureaucracy (Hughes 2003; Parker & Gould 1999; Behn 2001). Although improved accountability has been the main aim of NPM reforms, critics generally argue that in the new managerial culture it is hard to see how a citizen might call a public servant to account. There is also an issue of the democratic problem in which the short-term vision is heightened by contract rather than the longer term or public interest focus (Chapman & Duncan 2007). In general, while proponents of NPM tend to put emphasis on management implementation process and output, critics are mainly concerned with social and equity dimensions derived from the

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unique public sector characteristics that differ from the private sector (Parker & Gould 1999).

NPM covers broad areas in the public sector; however, this research is particularly concerned with a number of specific aspects of NPM reforms which are relevant to the study of the implementation process of financial management reforms such as performance-based budgeting, accrual basis, and factors affecting the implementation of NPM with specific focus on the experiences of the developing countries. Each of these will be dealt with individually in the following sections.

The thesis was not intended to make an ‘explicit and independent assessment of the NPM reforms’. Rather the implementation of the reforms was the focus. For the purposes of the research, the objectives of the reforms were accepted as given.

Performance Budgeting, and Output and Outcomes Focus At the heart of the effort to improve budget allocation and value for money is performance-based budgeting, which has encountered several issues in its implementation. Curristine et al. (2007) note some common challenges facing most Organisation for Economic Co-operation and Development (OECD) countries in performance-budgeting. These include improving measurement, finding appropriate ways to integrate performance information into the budget process, attracting the key decision makers, and improving the quality of information. As Curristine et al. (2007, p. 171) contend: Despite the widespread introduction of performance information in the budget process over the past 15 years, OECD countries continue to

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struggle with its implementation. There has been a significant increase in the volume of PI [performance information] produced; however, this has not been matched by a corresponding increase in use, especially in budgetary decision making. Curristine et al. (2007) go on to argue that one source of these problems stems from the fact that outputs and outcomes are difficult to measure partly because of the nature and wide variety of government functions. In particular, problems generally arise in intangible activities such as policy advising. In addition, they contend that focusing either on outputs or on outcomes has a different set of challenges. While the focus on output might lead to goal displacement, the focus on outcomes is challenged by technical difficulties. Kettl (1997) notes the difficulties that stem from not only methodological problems but also from the fact that many factors in measuring outcomes cannot be controlled by government officials. Despite these difficulties, outcomes have a stronger appeal for the public and politicians because outcomes measurement can gauge broader social objectives (Kettl 1997).

Similarly, Hawke (2007) in his analysis of performance budgeting in Australia notes these difficulties when he argues that the main challenges of the practice are to ensure that the links between program, outputs, and outcomes are clear and measured effectively, and to ensure that performance information is integrated into the budget decision making process. In a similar line of argument, Halligan (2008) identifies that outcomes focus in Australia is problematic. Information needed for making decisions has been lacking which led ministers to drop programs under the outcomes/outputs framework. Furthermore, the relative lack of information provided by the accrual-based financial management information

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system, compared to the cash system, was raised by Parliament which called for further refinements of the financial framework and information management system. This is very much in line with Rubin and Kelly’s (2007) observation that the outcomes system in Australia is found to be difficult by Parliament and Cabinet because of a lack of clarity on how to apportion funding or responsibility related to the outcomes, particularly those that are to be achieved by more than one agency. As such, the ultimate goal of performance budgeting for accountability is not effective.

Halligan (2008) argues that, in both Australia and New Zealand, outcome policies have not achieved their goals because of the variable influence of this information on decisions and resource allocation during the process. A lack of commitment to outcomes as opposed to short-term output, and the focus on efficiency which ignored long-term maintenance of capacity and a lack of managerial discipline have been reported as problems in the New Zealand model (Chapman & Duncan 2007; Pallot 2001; Gregory 2003). Schick (1996) in his review of New Zealand reforms has identified several problems pointing to issues of focusing on output rather than outcomes. Although conceptually the reform has emphasised outcomes, in its actual practice, it encounters difficulties in specifying and measuring outcomes. In essence, while the focus on output might jeopardize the whole of the program because of its lack of attention to overall program outcomes, and the adverse possibility of improving efficiency of the unintended products and services, an outcomes focus seems to be more difficult to achieve (Berry 2008).

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Even in Sweden, which is one of the most advanced countries in the use of performance management, challenges in performance management occurred. In Sweden performance management is strongly linked to the budget process; however, agencies encountered difficulties in measuring the results of their activities. This was made more difficult because the Parliament demanded more relevance of performance information to the goal set by the Government (Küchen & Nordman 2008). One result was that performance information reported was not suitable for negotiations on future resources and could not be effective as the sole basis for accountability of agencies. This was partly due to the inadequacy of performance reports provided by agencies in measuring the overall activities of agencies, and the diffuse goals set for measuring performance. Having assessed the difficulties of Sweden in specifying results and monitoring performance, Blöndal(2001) states that difficulty in upholding accountability based on results has also been reported in all OECD member countries.

Accrual Basis The accrual basis in government financial management recognises a transaction when revenue is generated or expenses takes place without taking into consideration the time when cash is received or paid (Blöndal, 2004). This differs from cash based accounting, which recognises a transaction when the cash is received or paid out.

Accrual basis accounting and budgeting systems are

perceived to support efficiency,transparency and accountability (Blöndal, 2004).

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Accrual basis in government accounting system bears some political and distributional implications in government activity by which efficiency and effectiveness of government financial activity may be improved. Blöndal, 2004 underscores two objectives of the implementation of accrual accounting. First, an accrual basis in financial reporting can make the true cost of government more transparent. Second, accrual accounting may enhance the quality of information by capturing the full cost, hence it improves the quality of decision making.

Despite the proponents of full accrual accounting who argue that it might improve the efficiency of resource allocation (Joint Committe on Public Accounts and Audit 2002), some scholars refute the claims of successful implementation of accrual accounting (Pallot 2001; Rubin & Kelly 2007). One source of debates seems to come from the conceptual issues identified by Blöndal (2003) who states that governments have a range of unique issues such as types of assets that are not found in the private sector. Blöndal(2003) basically notes conceptual issues in the implementation of the accrual system such as the fact that certain types of assets and liabilities owned by the government are absent in the private sector. This calls into question the methods of valuation the government has to use (historical cost or current cost) as well as the necessity of setting up accounting standards because with the accrual system, a good number of judgments need to be made.

Others also argue that accrual accounting is not suitable for the public sector in general. Rubin and Kelly (2007) suggest that accrual accounting in New Zealand encountered some conceptual problems such as unclear valuation impeding accrual accounting and the possibility of cost manipulation. Likewise, the 27

implementation of accrual accounting in Australia was aggravated by Cabinet ministers and parliamentarians who were perplexed by the new information, leading to suggestion of the reincorporation of cash-based information (Rubin & Kelly 2007). By the same token, Guthrie (1998)claims that despite its potential to improve government performance, accrual accounting reforms still need further debate and research, and the adoption of the private sector practice of accrual system into the public sector should be reconsidered due to some conceptual issues.

Factors

Influencing

the

Implementation

of

Budget

and

Accounting Reforms Numerous papers have focused on specific issues in budget and accounting and reforms, mainly coming from OECD sources (Steger 2010; Blöndal & Ruffner 2004; Anderson, Curristine & Merk 2006; Blöndal 2001, 2006, 2010). Although these studies generally offer an overview of budget and accounting reforms focusing more on general and technical issues of budget, which are beyond the scope of the current research, some studies are useful in providing insights into success and failure factors in the implementation of budget and accounting reforms around the world. This section outlines some of these insights. Given the similar reform tasks underpinned by NPM, these studies are relevant for analysing the implementation process of the budget and accounting reforms in Indonesian government agencies.

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Experience of Developed Countries Despite the different contexts in which reforms are taking place, the experiences of the developed countries in implementing reforms serve as lessons learnt to assist the analysis of the implementation of the financial management reform in Indonesia, particularly in identifying success factors in the implementation of NPM reform.

Australia and the United Kingdom are two frontrunners of results-oriented financial management reform. Scheers, Sterck and Bouckaert (2005) cite several success factors shared by these two countries. These include a results-oriented culture demonstrated by political and administrative staff, available resources for the implementation of reform, persistent heed towards cash information, and cooperation between Central agencies and line agencies as well among levels of governments. A results-oriented culture in both countries, exemplified by strong interest from politician as well as top civil servants, was seen by these researchers as expediting the implementation of the reform. Availability of resources was also critical for making heavy investments in the development of a results-oriented framework, and to promote capacity needed in the reform. Maintaining cash information was seen as advantageous for promoting the reform to support macroeconomic and sound fiscal control, while co-operation was necessary particularly to avoid and solve technical problems. In particular, they argue that, in Australia, specific factors promoting successful reforms were a strong connection between the financial cycle and the policy and management cycle, as well as the existence of periodic evaluations and adjustments. The findings of this

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study mirror several studies on Australian budget reforms that have claimed that periodic evaluations and adjustments have enabled Australia to make refinements and anticipate unintended effects which in turn contributed to the success of budget reform (Halligan 2008; Hawke 2007).

On the other hand, the failure factors found by these researchers include low quality data, lack of transparency, Information Technology problems, and lack of expertise and know-how (Scheers et al. 2005). Low quality data was seen as undermining the usefulness of performance data. Information Technology issues also played an important role in the implementation of reform particularly regarding the development of new systems. The lack of expertise and know-how posed challenges because introduction of the reform necessitated new competence at all levels of governments.

Bale and Dale (1998) argue that the conceptual framework underpinned by Public Choice Theory, Agency Theory and Transaction Cost Theory has been valuable for New Zealand reform. Among the reasons for this are the possibility that it allows a focus on problems rather than symptoms. They conclude that to assist consistent decision making, public managers need to be free to focus on comprehensive approaches that can address all aspects of reform, and guide the sequencing and the implementation of reform. As such, the application of a rigorous conceptual framework to the reform is viewed as a significant factor for increasing the chance of successful reform.

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Blöndal(2003) notes several similar implementation issues in OECD countries that arise in the introduction of accrual budgeting reform. These include cultural change, implementation model, communication, accountancy skills and major investment in or selection of Information Technology system. Accrual accounting had to be promoted to implementers, and this involved cultural changes. In Blöndal’s argument the introduction of accrual budgeting reform has to consider a proper implementation model if it is to be successful. While cultural change can be easily achieved through the ‘big bang’ implementation model, it might increase the risk of losing opportunities for handling mistakes properly. On the other hand, the incremental model of implementation might solve immediate problems but can neglect opportunities to gain momentum for implementation. As experienced by the frontrunner countries in moving to accruals, communication is viewed as the biggest factor which has been underestimated in the implementation accruals. More importantly, some considerations should be made in relation to acquiring accountancy skills beyond the training programs, and focusing on commercial software and making necessary adjustment of the information technology to avoid mounting costs in the implementation of accrual budgeting.

Anderson et al.(2006) review budgeting in Norway and claim that Norway’s annual budget process is characterised, among other things, by a high degree of managerial flexibility aiming at improving efficiency and performance while holding the managers accountable for results, and the use of performance information. Despite the annual budget process that has promoted overall financial health, they observed slow progress in the implementation of the

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government-wide system of performance budgeting and management. There has been variation in agencies’ progress in developing performance measurement and using performance information in the budget process, a problem encountered by many OECD countries. In Norway, the slow progress in developing performance measures was perceived to be caused by the lack of capacity, poor quality information and the lack of incentives.

In his review of budget reforms in Austria, Steger (2010) explains how the initiative to introduce a new legal basis for the budget in 2006 was part of the initial problem with the reform because of the opposition it aroused. Because of this opposition, it was necessary to take steps to ensure support from across the political constellation (such as, an informal parliamentary reform committee and informal public participation in the reform process). Although the problems have now been resolved, Steger (2010) raises the importance of necessary cultural change in Austrian politics and administration which might be strengthened for the sustainability and success of the reform. This study mirrors the conclusions reached in a broader study of 13 OECD jurisdictions on the implementation of financial management reforms that also note the importance of political factors and administrative traditions in achieving successful budget reforms (Pollitt & Bouckaert 2004).

In reviewing the Danish budget process, Blöndal & Ruffner (2004) claim that the high-standing budgeting practice in Denmark was made possible by the unique characteristics of the Danish political and administrative contexts. Among the

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unique characteristics were a high degree of trust between the Ministry of Finance and spending agencies, and the history of Danish coalition minority government which has given advantages to the budget process, particularly in gaining consensus with political parties. Blöndal(2006) contends that Singapore’s financial management is well developed with an advanced top-down system, accrual accounting, a performance management system and results information utilisation in the decision making process for resource allocation. Performance and results information manifest in several venues, including ministry reports that include the past year’s performance and results achievement, key performance indicators, resource management and strategies for initiatives for five years or further. The role of the Parliament in the budget process is limited due to the nature of the political situation and constitutional restrictions. While appropriation is still on a cash basis, the accrual information in the budget is used for internal measures for projected resources that are expected to be used by ministries on a recurrent basis.

In assessing the impact of NPM on the state of accountability in Singapore which has been embarking on NPM-inspired reforms, Samaratunge, Alam and Teicher (2008) argue that a high level of economic development, strong political leadership and a commitment to eradicate corruption have promoted the accountability measures. Furthermore, in this country, accountability was seen as being improved because of a strong results-oriented corporate culture, which is evidenced in the public sector, and a meritocracy that has been the main feature of the public service. Similarly, Fritzen (2007) states that the strong capacity of

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Singapore’s bureaucracy for reform can be explained by informal norms and practices reinforcing the meritocracy in the public sector as well as corruption eradication measures. Their research complemented Blöndal(2006) who claims that the civil service in Singapore features meritocracy, impartiality and incorruptibility.

In his general study on NPM reform in Asia, Cheung (2011, 2005) reports that Hong Kong and Singapore are the vanguard, whereas Japan, Korea and Taiwan are among the laggards of NPM reform in Asia. It is important to note that Hong Kong and Singapore are among the most developed economies in Asia. Although these two countries are the vanguard, domestic political development objectives and civil-society conditions, as well as social policy and tradition have created differences in achievement in three areas of governance (Lee & Haque 2006).In comparing Hong Kong and Singapore NPM reform, Lee and Haque (2006) further conclude that Singapore is more advanced in relation to the scale of NPM reform and its effectiveness in the areas of economic and administrative governance, while Hong Kong is more advanced in the areas of social governance which can be accounted for by different political and social conditions. Specifically, the successful reform in Singapore can be attributed to the compatibility of Singapore’s state tradition and administrative culture with the logical thinking of NPM reform (Lee & Haque 2006; Samaratunge et al. 2008). In contrast, the rigid administrative and organisational cultures have contributed to the slow reforms in the three laggard countries in Asia (Cheung 2011). In Japan, for instance, the strong politician-bureaucrat alliance under the former liberal Democratic Party

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rule appears to be the reason for the slow progress, and top-down and bureaucratic-driven reforms.

NPM-inspired Reforms in Developing Countries The experiences of developing countries in implementing NPM reforms are of particular importance because, as one of developing countries, Indonesia encountered a similar context in which to implement the reform. Therefore, insights from developing country counterparts, which will be elaborated in this section, are likely to assist in the analysis of the implementation process in Indonesia. The literature suggests that the origins and ‘ownership’ of reform will be critical in shaping the trajectory of change.

There are various drivers of public management reform in developing countries. They include the pursuit of international competitiveness, the push for sustainable human development, the weakening or even breakdown of administrative systems and democratization (UNDP 2005). The required response to all these drivers is to build effective, efficient and responsive systems of public sector management. A variety of actors have pushed the cause of public sector management reform including international donors, recipient governments, elements of the private sector, political leaders and civil society organisations (UNDP 2005). However, there has been concern that NPM reforms have been pushed particularly hard by international financial institutions (IFIs), other multilateral organisations and some bilateral aid agencies from OECD countries. It has been characterised as part of the overall transfer of neoliberal policies to developing countries and an

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associate of the good governance agenda(Kothari and Minogue 2002; Batley 1999; Cheung 2011, 2005; Polidano & Hulme 1999).

In East Asia, NPM reforms were often linked with the 1997 Asian Financial Crisis and,in cases such as Thailand and Indonesia, substantially driven by international organisations or developed donor countries as integral components of loan conditionalities(Cheung 2005). Where such conditionalities have been imposed, the policy transfer of NPM has taken on a coercive character (Dolowitz and Marsh 1998). This contributed to a lack of questioning of the appropriateness of NPM-style reforms for developing countries yet the circumstances for reform in developed and developing countries differs markedly. For example, Turner and Hulme (1997) set out the many contrasts in the economic, cultural, demographic and political environments of developing and developed countries. They argue that such distinctiveness makes the application in poor countries of policies derived from rich countries a very risky business as the organisational environmentsin the origin and recipient countries can be vastly different. As Andrews (2013, p. 1) puts it, ‘square peg reforms in round hole governments’. Even between developing countries there are vast differences in organisational environments such as in GDP per capita, political system, the rule of law and education levels.In its review of trends and challenges for public administration reform in Asia and the Pacific, the UNDP (2005) noted ‘diversity’ as the region’s ‘leading characteristic’.

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The typically external drivers for NPM-style reforms in developing countries had several implications for the implementation of reforms. First, international organisations generally financed the reforms in developing countries and as such played major roles in determining the design of the reforms. This has been seen as creating lack of ‘ownership’ of reforms among the developing country recipients(Polidano & Hulme 1999; Polidano 2001). This situation leads to diminished developing country interest in implementation. Politicians and bureaucrats are at best lukewarm to reforms and results fail to match initial expectations. As Batley (1999, p. 762), ‘where reform policy is ventriloquized through national politicians, the reforms will be inappropriate and/or have no real support’.

Laking and Norman (2007) argue that some reform initiatives in Africa which were conceived, developed and implemented by international agencies have resulted in a low level of ownership leading to failed reforms. They argue that sustainability of reforms, among other things, necessitates active and ongoing support from the senior civil servants and adequate local participation to indigenise reform initiatives. Thus, the literature clearly demonstratesthat reform ownership is a critical element contributing to reform success, and chances of that success are likely to be higher in countries where there is a significant ‘home grown’ element in the reform (Pollitt & Bouckaert 2004).

Second, Polidano (2001) argues that, related to the ownership problem, another important implication of the involvement of international agencies is the

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possibility of distorting government decisions. Governments may adopt unnecessary initiatives just for the sake of bringing in the aid money rather than initiatives that they see as being the most necessary for the particular country. His argument is supported by Ohemeng (2010) who found that the role of external actors in Ghanaian reforms created a condition in which the government lost or even sold its independence to formulate and implement its own policies in return for resources that they received. Sarker (2006)presents similar findings for Bangladesh where international donor agencies to some extent contributed to failed reforms. Bangladesh was susceptible to external IFI pressure in formulating its reforms leading to them being comprised of international donor agencies’ prescriptions. While the prescriptions which did not adequately consider local conditions undermined the implementation, the reforms were also aggravated by lack of understanding of the prescriptions by local elites.

One further consideration of NPM-type reforms in developing countries is their uneven distribution. The reforms have been imported different amounts to developing countries whose officials have received them with varying degrees of enthusiasm. Thus, Turner (2002, p. 1494-95) likens NPM to ‘a menu of practical initiatives’ and then contrasts Southeast Asian countries in terms of ‘their knowledge of and reaction to the NPM dishes on offer’. He finds ‘enthusiastic diners’ in Singapore and Malaysia, countries that have experimented with many NPM-style reforms. ‘Cautious diners’ are exemplified by the Philippines, a country that has taken some items from the NPM menu but still ‘feels more secure with the traditional dishes’ (Turner 2002, p. 1502). The final category of

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reformers such as Laos and Myanmar are countries which have largely rejected NPM innovations. They have been seen to derive from an unfamiliar menu and inappropriate for the context.

Outcomes of Reform in Developing Countries Like studies of NPM undertaken elsewhere, studies focusing on developing countries have also reported mixed outcomes of reforms in their emulating process to implement NPM. It is beyond the scope of this research to evaluate the outcomes of budget and accounting reforms; however, it is necessary to review the studies on the outcomes of reforms to facilitate analysis of the implementation outcomes.

Samaratunge et al.(2008) argue that, in Malaysia, moderate improvement of public accountability has been reported due to a sustainable institutional capacitybuilding program. They also report some weaknesses and ineffectiveness of parliamentary and judicial means to improve accountability. The institutional capacity building has been actualized through public service training and remuneration policies, monitoring the implementation of reforms, promoting information technology in the public sector, and developing guidelines to improve the quality of the public service. In contrast, these researchers claim that the inability to improve accountability through NPM reform has been exhibited by Sri Lanka and Bangladesh where commonalities such as lack of political commitment, dysfunctions of a pluralist political system, low level economic development, and the existence of patronage system are characteristic.

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Evaluating managing for results policy that involves human resource reform and budgetary and financial management reform in Malaysia, Siddiquee (2010) contradicts Samaratunge et al.(2008) by arguing that the implementation of managing for results policy for improving performance of the bureaucracy has been hampered. He concludes that some generic factors that are found elsewhere, such as conceptual difficulties in linking input and outputs, as well as other contextual factors, have inhibited the reforms. This, he argues, is because political and administrative traditions are against the NPM notion. A highly centralised bureaucracy has negated the devolutions and managing for results, while affirmative action which has long predominated in Malaysian personnel management has weakened the meritocracy and other principles for managing for results. Given the somewhat conflicting findings, it is difficult to pass firm judgementon the outcomes of Malaysian reforms.

In his assessment of the degree to which the NPM initiatives have been implemented in the public sector in Bangladesh, Sarker (2006) contends that the absence of an advanced level of economic development, a formal market economy, the rule of law, and an advanced level of administrative infrastructure and state efficiency have become identifiable failure factors for the implementation of

NPM reforms. Being influenced by international donor

agencies, most reform initiatives resembling NPM in this country remain unimplemented. This study has been supported by others elaborating the fact that most reforms in developing countries have not achieved the intended outcomes

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such as accountability and efficiency (Yang 2007; Samaratunge et al. 2008; Ohemeng 2009).

Macro studies have also reported poor outcomes for public management reforms. The UK’s Department for International Development (DFID 2010)) found civil service reform to have the lowest performance ranking among all its governance sub-sectors while in 2009, the World Bank’s review of its global portfolio of public sector reform projects found that there had been civil service improvement in fewer than half the borrowing countries (IEG 2009). By contrast, another more recent review of the Bank’s public sector reform initiatives found a ‘relatively high success rate of about 75, (operations rated as moderately satisfactory or better)’ (Bunse and Fritz 2012, p. 5). Despite this bright spot the bulk of the literature leans towards ‘a lack of success or or partially fulfilled goals’ (DFID 2013, p. 5).

Specific Challenges of NPM in the Developing Country Context As mentioned earlier, the context in which the implementation of NPM and financial management reform took place in developing countries is different from that in developed countries. A number of papers have sought to describe and summarise the specific challenges of NPM and financial management reforms in the developing world. These have been reviewed above, and the general conclusion is that these differences which have adversely affected the implementation of the budget and accounting process. Context embraces social, political and economic factors. But it also includes many factors that are integral

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to implementation, such as institutional cultures, administrative capacity and political leadership (Turner and Hulme 1997).

This next five sub-sections examine the major contextual issues that are relevant for analysing the implementation process of budget and accounting reforms in the developing country context.

Weak Market and Informality The attempt to apply New Zealand’s reform model in developing countries has been described in several studies (Bale & Dale 1998; Wallis & Dollery 2001; Schick 1998). One of the most influential contributions was made by Schick (1998) who argues that it is too risky for developing countries to adopt the New Zealand model since most developing countries have weak market forces and a high degree of informality in the public sector. Informalityrefers to the actual practices that characterise the operations of public sector organisations as distinct from the formal rules, regulations and structures. The actual practices frequently do not conform with the formal prescriptions and are evident in lack of accountability, unpunished misdemeanours, ghost workers on the payroll, nepotism, budgets that are not followed, and corruption. Rather than demonstrating the characteristics of a Weberian bureaucracy the informal public management practices have a basis in affective relationships and are most evident in developing countries with poor records of development (Evans & Rauch 1999). Informality in the market is often mirrored by informality in public sector managementand this creates difficulties in enforcing reforms. As Schick (1998, p.

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127) puts it: ‘it is highly unlikely that government will operate by the book when rules and regulations are routinely breached in private transactions.’

Schick further suggests that a robust market and formal public sector are preconditions for reforms, which are largely absent in developing countries. Therefore, he argues that developing countries should avoid adopting the New Zealand model of reforms unless they can fulfil the preconditions. In summary, his conclusion is that: It is a much longer step for them [developing countries] to adopt New Zealand-style reforms, and a much riskier one. No country should move directly from an informal public sector to one in which managers are accorded enormous discretion to hire and spend as they see fit’ (Schick 1998, p.129). He further proposes that before introducing NPM, developing countries should undertake basic reforms to strengthen rule-based government and establish robust markets that have similar logic for the development of NPM.

Wallis and Dollery (2001) echo Schicks’s view that for developing countries to make progress in reform, they need to undergo a logical sequence of steps to diminish the scope of informality, as well as building managerial capacity, confidence and experience. Taking a similar line, Hughes (2003) also explains the importance of an effective market before reform is implemented in order to ensure that managerialism based on market principles might work. For example, efforts to ensure compliance with contracts are likely to be ineffective in an inefficient market which lacks the rule of law.

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Informality in the public sector is also found in Indonesia; this appears to be a factor inhibiting the capacity for undertaking reform. Informality takes the form, for example, of non-merit based recruitment to the bureaucracy, informal payment for promotion, patronage, performance management that rewards loyalty and income supplementation (see, for example, World Bank 2007b; Cheung 2005; Thoha 2005; Turner et al. 2009; Nugroho 2011). Researchers have argued that civil servant recruitment in Indonesia was heavily influenced by a high level of corruption and established patronage networks (von Luebke 2009; Cheung 2005; Blunt et al. 2012a, 2012b). In a similar fashion, Buehler (2011) argues that recruitment tended to be implemented in a mechanistic fashion without proper needs assessment, while the payment mechanism for civil servants is generally not transparent and includes a large variety of official and unofficial allowances which are not made public.

While most studies suggest the inappropriateness of the New Zealand reforms in developing countries, in contrast, Bale and Dale (1998) take a middle position stating that under certain conditions, it is still possible for developing countries to extrapolate from the New Zealand experience, despite the contexts in which they are operating. Among pre-requisites needed if reforms are to be successful in developing countries are the necessary governance and managerial skills, institutional design which focuses on output as a medium for increasing transparency and accountability, and financial performance as well as personnel management improvement to create incentives to perform.

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Capacity and Motives Capacity and motives may also have implications for the implementation of reforms, some of which have been paid scholarly attention. For example, Polidano and Hulme (1999) contend that low pay is a major cause ofthe lack of public sector management capacity in developing countries. However, as they further argue, other sources of capacity can also derive from weak institutionalisation of administrative structure and politicisation of organisational hierarchy. Taking those issues into consideration, they conclude that NPM reforms in developing countries have necessitated other reforms, such as capacity building. Considerable evidence has been gathered by researchers demonstrating how state capacity has become the stumbling block for market-driven reforms in developing countries (Wallis & Dollery 2001; Sarker 2006; Turner & Hulme 1997). As emphasised by Sarker (2006, p. 191), ‘the message is like this: we need “government” before we “reinvent it”’.

To explain why the impact of NPM has been so modest in developing countries, Manning (2001) identified motive and capability for reform as the main factors determining the success.Using these concepts he established a typology with four categories relating to

government capacity for NPM reforms in developing

countries: (1) incapable and unmotivated government in which NPM reforms are of little value and have no chance of success; (2) incapable and motivated government in which raising public awareness is relevant to generating support for the reforms; (3) capable but unmotivated government in which capacity there is adequate capacity but state capture and corruption mean there is little incentive

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for officials to engage in reform and (4) capable and motivated government where NPM and other administrative reforms can be adopted with reasonable hopes of success. Manning’s (2001) typology was based on the degrees of state capture, administrative

corruption,

administrative

competence,

and

participatory

governance evident in particular countries. For example, the incapable and motivated government is characterized by high state capture, high administrative corruption, little administrative competence and non-participatory governance. In essence, the typology demonstrates that the main issues in NPM reforms are government motivation and capability, and therefore that NPM tends to be successfully implemented where there are capable and motivated governments.

More importantly, the arguments on limited capacity have also been raised by some studies on Indonesian public sector accounting provided by Harun (2007) on the public sector accounting in Indonesia and McLeod and Harun (2009) on the role of public sector reform in improving governance in Indonesian municipality governments. These researchers share a similar view when identifying limited capacity of the Government as one factor hampering the budget and accounting reforms in Indonesia. However, as they argue, the root cause of the lack of capacity has been the rigid and odd system of Indonesian human resource management, which was partly due to the reluctance of the central government to relinquish power in personnel management. As a result, flexibility of the spending agencies or regional governments was limited, and this made it impossible for them to acquire the necessary skills to undertake the reform tasks.

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A similar finding was identified by Turner, Imbaruddin and Sutiyono (2009) who argue that Indonesian practice of human resource management which is not in line with strategic and organisational goals has undermined efforts for improving performance of government agencies particularly at the regional level. This view has also been supported by other scholars (Kuncoro, Widodo & McLeod 2009; McLeod 2005b) who highlight personnel management reforms as the key to other reforms in Indonesia. Specifically, low salaries in the Indonesian bureaucracy have often been cited as the cause for low capacity because salary inadequacy among bureaucrats has hindered efforts to create strong incentives for performance (McLeod 2005b; 2008). The practical importance, then, of the capacity of human resources in Indonesian budget and accounting reforms is immense. A reform policy simply cannot be implemented properly in the absence of skilled human resources. Consequently, several studies contend that public sector reforms giving emphasis to capacity improvement need to be undertaken in parallel with the budget and accounting reforms (Harun 2007; McLeod & Harun 2009). However, Blunt et al. (2012b) urge caution in placing too much emphasis on the need for capacity building in the Indonesian public sector. They acknowledge the need for capacity building but argue that it is not a sufficient condition for national development. They note that considerable resources have been invested in capacity building over many years but that patronage networks ‘distort or prevent the utilization of capacity and hence have serious adverse effects on the production and delivery of services’ (Blunt et al., 2012b, p. 215).

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Corruption Of particular importance for the reform of financial management with which this research is concerned, has been the argument that corruption has been the main challenge of developing countries in adopting NPM (Schick 1998; Manning 2001; McCourt 2008). Endemic corruption has been reported as a factor impeding successful reforms in various countries such as Bangladesh, Cambodia, China, Ghana, and Sri Lanka (McCourt 2003; Samaratunge et al. 2008; Brinkley 2011; Sarker 2006). By contrast, Quah

(1995)shows how Asian countries can be

successful in addressing corruption. The countries he uses as examples are Singapore and Hong Kong. However, these countries do have very high levels of development as reflected in their GDPs per capita and other development indicators.. As explained earlier, in these two countries, NPM initiatives have been relatively well implemented.

The fact of corruption as the main obstacle for reform has been raised by some scholars who cast doubt on the effectiveness of NPM in mitigating corruption, and conclude that corruption has implications for the NPM reforms (Schick 1998; Dunleavy & Hood 1994; Pollitt 1995). Dunleavy and Hood (1994) explain several sources of critique of NPM, some of which pertain to corruption. One source of critiques of NPM comes from fatalists who hold the view that the basic problems in public sector management, including corruption, are ubiquitous and therefore NPM cannot eliminate these problems. The rationale behind this argument is that the underlying problems in public administration are hard to solve and there are no quick fixes for them. Another critique from the egalitarian point of view

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suggests that NPM might promote corrupt behaviour because of the dominance of senior public servants’ interests rather than service users’ interests under decentralised accountability frameworks, resulting in weakened accountability. While the fatalist view offers no solution for these problems, the egalitarian view suggests increased public empowerment and anti-corruption machinery as ways to solve the issues. In a similar line of argument, Pollitt (1995) argues that in contexts in which corruption is rampant, the pursuit of NPM should be reconsidered. These studies raised the consideration that, despite its goal of reducing inefficiency and ineffectiveness, NPM is not a panacea for corruption.

In developing countries, corruption thrives where patronage is embedded in government and society. Khan (2005, p. 714) has identified the current patronage practices as ‘the personailization of power’ in which the state is treated as an extension of the property of the leader, and the leader rules with the help of clients who get a pay-off for their support’. The practice of patronage is evident in many developing countries (Berman 2004: McCourt 2006; Grindle 2010). Writing about Indonesia, Blunt et al (2012a; 2012b) observe that the effects of patronage systems are not benign. The results are less services of lower quality to citizens. Public officials meanwhile use the patronage networks to engage in corrupt activities. Thus, Hadiz & Robison (2005, p. 232) have noted the reformation in Indonesia of ‘predatory control over public institutions and resources, and the replication of old relationships more strongly at the local level’.

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Political Commitment and Leadership A good number of studies highlight the inadequacy of political will and commitment as the result of failed reforms in developing countries. For example, Samaratunge et al.(2008) claim that leadership is the most important factor in different implementation outcomes in Bangladesh, Sri Lanka, Singapore, and Malaysia. The absence of political commitment of leaders in Sri Lanka and Bangladesh has left the reforms without vision and clear direction. By contrast, Samaratunge et al.(2008) further contend that successful reforms in Singapore and Malaysia were assisted by strong political commitment and leadership. In Malaysia, for example, leadership roles were strong, particularly in introducing initiatives promoting innovation, productivity and an accountability culture that invigorated reform initiatives.

Ohemeng’s (2009) research on the implementation of a performance management system in Ghana raises the issue of political commitment and leadership as the critical failure factors in Ghanaian reforms. According to Ohemeng (2009), the leadership role which needs to be manifested in directing the reform process and in managing the recruitment process has been absent. In his view, the inadequacy of leadership direction aggravated by fragmented decision making has confused implementers. Likewise, lack of political will and commitment exhibited by the President and ministries which could have motivated institutions for reforms have added to the difficulties in establishing the performance management system in the country. In his further research, Ohemeng (2010) argues that political legitimacy and commitment might determine the way government implements the

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reforms, and the nature of government institutions also affects responses by the bureaucracy to government policies.

McCourt (2003) established a model of the sort of political commitment that leads to the implementation of reforms. According to McCourt (2003), antecedent factors (political and administrative capacity) along with elements of the strength of commitment (to some extent whether voluntary, explicit, challenging, public or irrevocable) determine whether reforms are implemented or not. He argues that political legitimacy is embedded in the political system which subsequently affects the capacity of government to implement reform. Applying his model to the Swaziland public service reform, he claims that the implementation appeared to be a question of commitment rather than capacity. He saw ownership as an element of commitment which required particular attention in creating a successful reform strategy. For the purpose of this research, this study is useful in identifying commitment as one of the predictors of implementation outcomes because this has important implications in the Indonesian context.

Interestingly, the role of leadership in Indonesian government agencies was also raised by von Luebke (2009) who provided a comprehensive explanation of variation in the quality of governance in Indonesian district governments. The results of his study demonstrate that the role of leadership in regional areas seemed to be more dominant in explaining this variation, rather than pressures coming from local citizens. Similarly, Rosser et al (2011) have identified the crucial role of transformational leadership in initiating and maintaining

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innovations in service delivery at the district level in Indonesia. Although budget and accounting reforms were not the main concern of both studies, the results provide relevant information and context for analysing the implementation of the budget and accounting reforms in Indonesia.

Administrative Tradition Rather than generalising across a large number of developing countries and focusing on specific success factors or challenges in the similar contexts, some studies have focused on the particular impacts on the implementation of reforms brought about by what researchers see as a typical Asian administration tradition. General observations made by these studies have essentially been that the Asian administrative tradition to some extent has imposed adverse impacts on reform practices and outcomes (Haque 2004; Cheung 2005).

Cheung (2005) argues that Asian administrative systems, which may be characterized as bureaucratic, static, or state led, are not compatible with NPM. He concludes that, in this situation, reform has meant that the old public administration regime coexists with the NPM approaches and tools. He adds some explanation about the paradox of Asian administrative reforms promoted by the authoritarian governments which are supposed to be the targets of reforms. With inherited legacies of colonial rule, military rule, one-party authoritarianism or dictatorship, most bureaucratic elites exhibit problems of governance such as patronage, corruption and collusion. For them to lead reforms inverts the logic of reforms and often produces countervailing forces to reform.

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In analysing the administrative changes taking place in Southeast Asia, Haque (2004) explains the changing role of the bureucracy from a state-centred perspective occurring during colonial and post-colonial periods to a market-driven approach during the last two decades. The force of neoliberalism on public managment reform may, however, have lessened somewhat with the rise of governance approaches by IFIs and other donors. There has been a rising acknowledgment that the market cannot be relied upon to provide the services citizens need and are entitled to. The state has been brought back in under the realisation ‘that capable states are central for development’ (Fritz & Menocal 2006, p. vi). This is in great part due to the recognition of the state’s role in the East Asian developmental states such as Korea, Taiwan, Hong Kong and Singapore, and more recently Malaysia and Thailand (Ghani et al. 2005; Leftwich 2000). Strong systems of public administration were evident in each of these cases. The argument that ‘institutions matter’ for development has been forcefully reiterated recently by Acemoglu and Robinson (2012) in their treatise on ‘why nations fail’ and Andrews (2013)in his advocacy of a new approach to institutional reforms.

Haque (2007b) claims that the imposed concepts of NPM were not reflected in the actual practices and the implementation of reforms in various countries in South East Asia. He identifies the major reason for the significant chasm between theory and practice of NPM in Southeast Asia countries as deriving from the distinctive Asian social-political context. Like Turner’s (2002) earlier account of NPM

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reforms in South East Asia Haque (2007b) explains inter-country variations in patterns of administrative reforms in terms of the difference in colonial backgrounds, socio-cultural formations, and political structure. In fact, most countries in the region, he argues, have experienced three types of public administration model, namely the colonial-bureaucratic model, the developmental state model and the NPM model. While the colonial bureaucratic and development state models were characterised by the strong role of the state, NPM has imposed the notion of ‘hollowing-out the state’. Haque concludes that since all three administrative models originated in Western developed nations, Asian countries encountered several external and internal forces or vested interests which caused a greater theory-practice gap in Southeast Asian public administration than in developed countries.

Cheung (2011) echoes Haque’s (2007b) views, contending that several contextual issues (eg administrative traditions) have made administrative reforms in Asia different from those of Western Europe, North America and Australia and that these differences have some implications for reform. Unlike reform experiences in other jurisdictions that have determined and shaped the rationale and substance of NPM and defined the prescriptions for good governance, reforms in Asia were more influenced by global trends of administrative reform, and were closely linked to political evolution processes such as decolonisation, democratisation and nation building.

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Andrew (2011) contends that successful NPM reform tends to take place in national contextsthat are similar to the vanguard countriesfrom originated. He says that in

where NPM

reforming countries where there are many

dissimilarities of context with the country of NPM origin, the reform success will depend on how well the country can fit the new context to align with the original context. This may involve some selection of particular reforms and omission of others from the NPM menu and even with the selected items there may be a strong requirement to re-engineer them to fit their new environment.

There are also some concerns on the limits of accountability brought about by NPM due to the administrative traditions of Asian countries. Haque (2007a) argues that, besides the problematic new accountability modes of NPM which have been under debate, accountability improvement in developing countries is hard to demonstrate largely because it is complicated by some characteristics that may include the nature of state formation, the extent of bureaucratic power, the pattern of state-society relations, and citizen entitlements to public sector services.

The impact of administrative traditions on the financial reform in Indonesian regional governments is also identified by Kristiansen et al.(2008). They have concluded that national systems and traditions of politics and bureaucracy have been the main obstacles to improving transparency in financial management. The nature of the Indonesian administrative system and the current decentralisation process have been thought by a number of researchers to be the main cause of conflicting, changing and wasteful directives from central agencies (the Ministry

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of Finance (MoF) and the Ministry of Home Affairs (MoHA)), hampering the implementation of financial management reform (McLeod 2008; Kuncoro et al. 2009; Kristiansen et al. 2008). This finding is interesting as it also confirms various other studies in the developed world (Peters & Painter 2010; Pollitt & Bouckaert 2004; Ongaro 2010) that note the influence of administration tradition in the implementation of reforms. The different traditions in both developed and developing countrieshave considerable implication for the success of NPM-style reforms.

Implementation: Analytical Framework The previous section contextualized the research in terms of how NPM and its associated financial management reforms have affected the implementation process. This section establishes the framework for analysis of the implementation process in the four case-study institutions in this research. As the four cases showed varied outcomes, identifying factors contributing to the success or failure of implementation in each case is vital both to the understanding of process, and the improvement of practice, in Indonesia.

The implementation literature facilitates the identification of issues affecting the outcomes of budget and accounting reforms. Implementation in public management comprises two components: (1) getting people to implement the mandate, and (2) ensuring the achievement of the ultimate target (O'Toole & Montjoy 1984). Although policy success requires these two components to be fulfilled, this current research focuses on the former.

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The rationale for selecting the implementation literature as a framework for this study is threefold. First, implementation is considered to be a major impediment in the policy process and therefore implementation processes are of significance to reform policy. Implementation is so important in public management that some commentators find that its success or failure is predictive of policy outcomes and can inform future policy design (Matland 1995; Hill & Hupe 2009).

Second, the assumptions underpinning implementation can focus attention on organisational aspects as an explanation of the reform phenomenon but have often been neglected when other approaches in analysing the implementation of NPMtype reforms are preferred. Schofield (2001) argues that studies on NPM tend to focus on policy design with less focus on how to convert the ideas into action. This literature review also reveals that the literature on financial management reform has utilized different approaches in drawing out insights from comparative studies on country-level perspectives. While some studies have also touched on implementation aspects (Pollitt & Bouckaert 2004; Siddiquee 2010), they have not made a clear link between NPM or budget and accounting reforms on one hand and implementation on the other hand. Given this fact, the current research has the potential to fill a gap in the literature by linking the NPM reform ideas with implementation to illuminate findings on successful implementation of reform.

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Third, from the review, it can be noted that research on implementation has largely been drawn from the American and developed world experiences (O'Toole & Montjoy 1984; Mazmanian & Sabatier 1983; Pressman & Wildavsky 1984; Ryan 1996; Hill & Hupe 2009). It has been the goal of this research to analyse the implementation of budget and accounting reforms in the Indonesian context which is expected to have implications for other developing country contexts.

Diverse Approaches to Public Policy Implementation There is a considerable diversity in the ways in which implementation is portrayed. Overall, the body of implementation work has contributed to the knowledge and understanding of the policy process; however, this review identifies a lack of consensus on research findings. A plethora of implementation approaches used to assess the implementation of public policy has not shown clear consensus on the relative importance of variables affecting successful implementation. A general conclusion which might be reached from this is that implementation experiences are likely to demonstrate different findings because of their different contexts. It is therefore necessary to navigate through them in order to find pointers to guide the analysis of empirical work on this research.

In general, the implementation literature may be divided into first, second and third-generation literature (Schofield 2001; Ryan 1995). The first-generation literature arose in the 1970s and is considered to be represented in the work of Pressman and Wildavsky (1973), Derthick (1972) and Murphy (1971)(Schofield 2001). The first generation of implementation study attempted to understand the

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impact of implementation on policy outcomes and was heavily influenced by the case-study method. This literature came to be viewed as being too pessimistic because of its focus on policy failure and its inability to establish models to predict policy outcomes.

The second-generation study emerged in the 1980s and was more theoretical, concentrating on variables affecting the success of implementation by developing conceptual models of implementation. The second generation of study is represented in the work of Mazmanian and Sabatier (1983) and Barret and Fudge (1981)(Goggin, Bowman A. O' M, Lester & O'Toole 1990a; Schofield 2001). The second-generation literature, which is dominated and has benefited from organisational study, has been criticized because the literature employs too many case studies without adequate validation and replication and hence fails to provide comprehensive synthesis (Matland 1995; Ryan 1995; Schofield 2001).

The third-generation literature emerging in the 1990s consequently addressed the weaknesses observed in the first and second generation that failed to render a synthesis or unifying approach to implementation analysis (Goggin et al. 1990a; Goggin, Bowman A. O' M, Lester & O'Toole 1990b). Goggin et al.(1990b) introduced the term of ‘third generation’ of implementation study and called for more scientific approaches to implementation. Influenced by the developments in institutional theory, the third-generation literature makes a contribution to methodology by using a wide range of approaches, such as network analysis, content analysis, social experimentation, qualitative regression techniques, elite

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interviews and questionnaires, and integrates themes suggested by the previous literature (Goggin et al. 1990b; Schofield 2001). The following analysis examines some of the implementation approaches that seem to be useful as a basis for analysing the implementation process of the budget and accounting reforms in Indonesian government agencies. These approaches include the communication model (Goggin et al. 1990a), the statutory-coherence model (Mazmanian & Sabatier 1983), and the implementation regime framework (Stoker 1989). In general, they are relevant to this study because these approaches are able to illuminate the analysis of the implementation taking place in the context of diffuse authorities as in Indonesia. Furthermore, experience cited in the literature in the implementation of changes that are relevant to this study is elaborated in the following section.

Communication Model Communication is one of the implementation variables that is not contentious among researchers as it is an important factor for success (Cline 2000). Given its significant function, the communication model (Goggin et al. 1990a) seemed to fit the analysis of the implementation process in Indonesia especially because of the complex nature of implementation taking place in the three-tier government in Indonesia.

The communication model developed by Goggin et al. (1990a) is one of the most developed synthesizing approaches as it consciously aims to further a more scientific approach to the study of implementation(Cline 2000). The research

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literature on communication model is preoccupied with federal/state relations in the United States within the context of intergovernmental policy implementation. According to Goggin et al. (1990a), implementation is conceptualized as ‘an implementation subsystem full of messages, messengers, channels, and targets operates within a broader communication system’(Goggin et al. 1990a, p. 33). As such, the nexus for communications coming from both national and local level is the state-level implementers. A significant point for this research is the finding that the implementation messages communicated are interpreted based on the context in which the message is transmitted. Accordingly, three clusters of variables are argued in the literature as affecting implementation: inducements and constraints from the top (the federal level), inducements and constraints from the bottom (state and local levels), and state-specific factors such as decisional outcomes and state capacity (Goggin et al. 1990a).

Although Indonesia is a unitary, decentralised state in which the main characteristics differ from federal systems, to some extent it has similarities with federal governments, particularly because of the existence of intergovernmental relations. Indonesia has a three-tier administrative system, and the new budget and accounting reforms have introduced a new business process in financial management with an increased interdependence between units in an agency or between agencies and levels of governments. In essence, the budget process is not self-executing, creating layers in its implementation. The implications of this are prominent since communication in the implementation process has to be nurtured, not only between agencies at the same level of government but also between

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levels of government. The decentralisation process of 2001 has also increased interdependence between agencies, particularly between levels of governments in managing the budget, and has raised the need for the Central Government to synchronize its policy and programs with the many involved actors. Particularly, the Central Government which is large, with around 74 spending agencies (in 2009) and the regional level of government consisting of 468 sub-national or regional governments (in 2008) were now managed their own budgets (Pemerintah Republik Indonesia 2010; Badan Pemeriksa Keuangan 2008a). The communication model or approach to implementation therefore fits the current research, because the graduated levels of government financial processes demand good communication and coordination to reach an optimal outcome.

Statutory-Coherence Approach The statutory-coherence approach is another synthesizing approach, proposed by Mazmanian and Sabatier (1983). Starting from a top-down view which is then improved to address the bottom-up issue of capacity of policy deliverers in the implementation, this framework has been frequently used by others (see, for example, McFarlane 1989; Browning, Marshall & Tabb 1980). The framework is central to explaining implementation outcomes and is fully supported by the current research.

This approach assumes that implementation depends on the degree to which a statute can coherently structure the implementation process (Mazmanian & Sabatier 1983). The approach encompasses three variables: tractability of the

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problem, the capacity of legislation to structure implementation, and the net effect of political variables to support statutory objectives. The three variables are synthesized into six conditions of effective policy implementation: (1) clarity and consistency of program objectives; (2) the extent to which the implementation program incorporates adequate causal theory; (3) the extent to which the implementation structures support the achievement of objectives; (4) the commitment and management skills of implementing officials and agencies; (5) the commitment and active support of organized interest groups, the public, politicians and/or senior officials; and (6) changes in socio-economic, public policy or technological conditions which do not frustrate program objectives, negate causal theory, or diminish political support (Mazmanian & Sabatier 1983).

Some of these variables and conditions have been suggested by the earlier research of Bardach (1977). This introduced the notion of a ‘fixer’ which is similar to the idea of commitment and active support of organized interest groups, the public, politicians and/or senior officials used by Mazmanian and Sabatier (1983). According to Bardach, the fixer functions as a facilitator or change agent who owns organisational resources to negotiate among interested parties. The strength of the Mazmanian and Sabatier (1983) framework seems to be in its comprehensiveness and the combination of top-down and bottom-up factors (Ryan 1995). However, it has been mostly criticized for its lack of parsimony and its predominant focus on central control (Ryan 1995; 1996; Matland 1995). Despite its limitation, this framework is useful as it permits an interpretation of implementation success or failure, and given its comprehensiveness, for this

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research its utility is that it can offer a richer explanation for implementation outcomes.

Implementation Regime Framework Similar to Goggin et al. ’s (1990a) approach in its federal policy context of implementation in the United States, is Stoker’s (1991, 1989) implementation regime framework (IRF). Stoker argues that if other synthesizing approaches tended to build frameworks from selected elements of the top-down and bottomup perspectives, IRF is different because it proposes uniting the two. Implementation regime is ‘an arrangement among implementation participants that identifies the values to be served during the implementation process and provides an organisational framework to promote those values’ (Stoker 1989, p. 2).

A large part of the usefulness of Stoker’s IRF approach for this research is that his model integrates an understanding of conflict within a regime as legitimate. At the organisational level, Stoker (1991, 1989) further defines a regime as a system of rules, norms and procedures that governs the interaction of participants to some collective decisions. In the context of implementation among shared authority, ‘reluctant partners’ are likely to exist and need to be drawn into the process. Therefore, the IRF assumes that conflict is legitimate as it arises out of the process itself. The ‘reluctant partners’ are defined as ‘implementation participants who enjoy substantial autonomy and whose cooperation is uncertain and may be difficult to achieve’ (Stoker 1991, p. 4). In that context, he argues that cooperation

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is essential to achieve any national goal. He further contends that the regime is crucial in successful implementation because of its ability to sustain cooperation by creating a more regular and predictable relationship among implementers.

The implementation analysis using the IRF stresses two contexts of implementation: the strategic context and the institutional context. The strategic context focuses on the degree of conflict that exists between participants in the reforms, and the institutional context focuses on the mechanism or arrangements in the reforms process that promote cooperation. Therefore, the IRF focuses on creating a cooperative context to achieve the goals stated in the policy. Given that Indonesia is a hugely diverse country with so many varied interests, reform is likely to involve ‘reluctant partners’. The IRF provides a framework to analyse implementation in Indonesian government agencies where the possibility exists to oppose the national central mandate.

As a framework for implementation analysis, the IRF has several strengths and weaknesses. One of its strengths is its limitation on cooperation between actors, thus avoiding too broad a framework like other unifying approaches proposed (Ryan 1995). This also allows the implementation analysis to be more focused. A second strength is its definition of implementation problem as achieving cooperation that facilitates better understanding of the implementation process, as noted by Cline (2000). Cline (2000) bases his evaluation on four criteria: the treatment of both top-down and bottom-up approaches, the role of communication in the implementation process, the level of conflict or cooperation in the

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implementation process and applicability to the concept of networks. Based on his evaluation, Cline (2000) contends that the IRF is superior to Goggin et al.’s (1990a) communication model for analysing the implementation process. The first reason is the fact that the IFR has put implementation in the larger social and political context and thus enables a clearer identification of important variables, as compared to the problem of organisational management that focuses on the ability of a single authority structure. Secondly, the IRF utilizes the function of communication in a broader context, which is to resolve conflict, and not merely to inform policy makers. The third reason is that by seeing that conflict as a legitimate process, the IRF makes policy development inseparable from policy process. The fourth reason is that the IRF fits a network setting because of its concern with strategic and institutional context in implementation. The communication model, by contrast, assumes that there is one steering actor in the implementation process, that is the policy formulator. The IRF assumes that there is dispersed authority in policy implementation, and therefore the IRF takes into consideration other actors and issues of interaction in the context of network settings. This means that the IRF offers more benefits than other approaches in the analysis of implementation particularly in defining implementation problems and their solutions.

The weaknesses of the IRF are also observable. First, the framework impedes analysis by increasing the number of implementation participants. The increase in the number of implementation participants leads to an increase in transaction and information costs that make it harder to organize for the pursuit of common

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interest (Stoker 1991; Rothstein 2000; Ryan 1995). Second, the IRF is unclear about the standard of implementation evaluation because of the existence of two contradictory values: the national government’s inducement for parties to work together and the diffusion of authority (Stoker 1991). Third, as a synthesizing approach, the framework is not adequate because it precludes external factors affecting implementation such as economic and social conditions (Ryan 1995).

Cooperation in the context of a federal government is of significance owing to the existence of ‘reluctant partners’. Although, the Indonesian context is different from a federal context, resistance to reform might occur, thus making the analysis of implementation using the IRF suitable for the Indonesian government context. In the context of the sweeping implementation of reform initiated by the Indonesian Central Government, as well as the diverse Indonesian administration, there is the possibility for ‘reluctant partners’ to appear. Reluctance might come from the line ministries or regional governments because conflict of interest might arise in the implementation process. Therefore, as suggested by the IRF in such a complex relationship, cooperation seems to be the dominant factor in accomplishing common goals.

Inter-organisational Approach The fact that almost all policy implementation requires the involvement of two or more agencies has resulted in implementation efforts focusing on interorganisational aspects. The inter-organisational approach to implementation seems to be influenced most by O’Toole’s work (O'Toole & Montjoy 1984;

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O'Toole 1983,

1995,

2003). This approach views cooperation and possibly

coordination as essential problems in the implementation process as a result of the specific challenges, such as lack of authority and efficient channels, in the interorganisational implementation context. The literature on inter-organisational cooperation suggests several antecedent factors for joint action besides resource dependence. These include goal congruence and trust (O'Toole & Montjoy 1984; Lundin 2007) and the role of inter-organisational facilitators (O’Toole, 1983). The studies identify at least three forms of inducements essential to promoting cooperation: authority, common interest and exchange. For example, in his multiple case study of four organisations responsible for labour market training program in Sweden and Germany, O’Toole (1983) found that common interest in the policy, an active facilitator (fixer), regional union strength, and formal coordinating roles were determining factors for successful implementation in the context of inter-organisational implementation.

Later development of the inter-organisational approach has broadened the variables influencing implementation of policy that needs joint action. For example, while mutual interest and mutual dependence seem to be the most important factors in driving cooperation, Lundin (2007) concludes that interaction among factors promoting cooperation is also significant. Using a quantitative approach in his analysis of 203 dyads (two-tiers of government) of central and regional government agencies implementing active labour market policies, he argues that mutual interest is inadequate for joint actions, and suggests that mutual

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trust will only take effect in promoting cooperation if the parties have similar objectives.

The inter-organisational approach might be useful for analysing implementation pursued in this current research given the fact that the implementation of budget and accounting reforms in Indonesia involves more than two agencies. The interdependencies among agencies both at central and regional levels are obvious, and with the promulgation of the new financial framework, it is even more complicated due to the graduated nature of budget process introduced in the reforms.

Implementation of Reform Policy or Change There is a plethora of empirical literature on implementation in a range of public policy areas including criminal justice policy, immigration policy, education, workforce, labour market training policy, and employment policy (Pressman & Wildavsky 1984; Winfree, Lynskey & Maupin 1999; Bastien 2009; O'Toole 1983; Howard, Wrobel & Nitta 2010; Pitts 2007). Furthermore, some significant studies on implementation related to changes or reforms have also been conducted (Ryan & Lewis 2007; Stewart & O'Donnell 2007; Stewart & Kringas 2003; Turrini, Cristofoli, Nasi & Soscia 2010). Despite much literature devoted to understanding change or reform policy implementation, there are only few studies on the implementation of financial management reforms. As explained earlier, many of the empirical studies on implementation of financial management reforms have not focused on implementation perspectives to explain how a policy is

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implemented and what factors have impeded or promoted implementation. In spite of that, previous studies on implementation related to financial management reforms or other related changes are instrumental in this current research to assist the understanding of the implementation of change.

A multiple-case study of six municipalities in Germany on the implementation of accrual accounting has found that successful implementation depends largely on the strategic orientation of top managers, involvement of middle managers and the capability to develop new structural routines in managing change (Ridder, Bruns & Spier 2006). Thisstudy suggests that a comprehensive strategic direction which links the implementation of accrual accounting with an overall reform strategy that has strategic, administrative and operational orientation is more favourable to implementation success than a piecemeal or even a technical orientation. However, regardless of the strategic direction, Ridder et al. (2006) note that it is crucial to regard middle managers as change agents, and to empower them with the capacity because of their crucial role in transforming the strategic plans into routines, procedures, rules and routines.

Various studies on Italian financial management reforms also seem to have the capacity to inform research questions to be addressed in this research. First, research on the implementation of the management budget (Executive Management Plan) inspired by NPM in Italy in 2004 suggested that despite uniform legislation applied to all local governments, different actual behaviours could be observed (Anessi-Pessina & Steccolini 2005). Annessi-Pessina and

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Steccolini (2005) note that the influence of bureaucratic culture dominated by formal compliance and a top-down approach has limited the effectiveness of reforms. They also underscore the need for coherence between personnel and strategic focus, such that reform becomes a managerial budgeting tool, rather than an empty formality or a tool to delimit individual managers’ spending authority. Second, a study on the implementation of accrual accounting conducted in 273 local governments in Italy found that after ten years of reform, the accrual-based reporting was only marginally implemented (Nasi & Steccolini 2008). This was due to various factors, including lack of resources, inertia, lack of training to enhance the understanding of the new system, and lack of trust in the new accounting tools.

In the study of public management reform in Italy, an implementation gap (the difference between what is prescribed by reform law and actual existence of a management tool) or NPM-ness of Italian reforms was argued to be derived from the politico-administrative context such as a decentralised system, majoritarian governance, rechtsstaat culture of governance, conception of citizen and modes of implementation (Ongaro & Valotti 2008). The study adds to confidence regarding the importance of the politico-administrative context in the implementation of public management reform (Pollitt & Bouckaert 2004).

An interesting study of the implementation of public sector reforms conducted by Ryan & Lewis (2007) on three state road agencies in Australia found that different change outcomes are determined by change management methods. Ryan & Lewis

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(2007) argue that successful change seemed to be achieved from cultural change as well as the existence of strong leadership. This study underscores the importance of change management methods and the impact of organisational design on the outcomes of changes.

O’Donnell and Turner (2005) revealed several implementation issues in performance agreements in Vanuatu. They concluded that suspicion, lack of incentives, an unreceptive environment, and possible identification as being donor-driven have contributed to the limited success of reform. In this case, the unreceptive political environment was exemplified, among other things, by inertia due to poor management skills and a low level of shared understanding of organisational goals as the precondition of the performance agreements caused by a low level of trust between ministers, political advisers and senior public servants. In such circumstances, the researchers argue, regular and effective communication needs to be present. They also point out that a lack of commitment owing to the strong influence of donors in Vanuatu, mirrors the finding of Polidano (2001) that the chance of reform success is lower where ownership is lacking.

In a case study of the implementation of a new IT system in a public agency, Stewart and O’Donnell (2007) identified the sequence of change and varied levels of resilience as an indication of both capacity to endure external shocks and adaptation and learning. They contend that good policy design is not adequate to enhance the odds of success because implementation plays an important role in

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policy success. Problems in implementation demonstrated in their research, such as the lack of training and the lack of employee involvement before the change was introduced, seem to be key factors that need to be tackled for a policy change to succeed. Stewart and O’Donnell (2007) further argue that leadership is of importance to empower organisational learning and that capacity building is necessary to promote policy success. This study is useful in that deficits in organisational learning and leadership in Indonesian government agencies may offer a way to explain the implementation of budget and accounting reforms. Overall, in relation to the successful implementation of change, evidence has been found for the importance of factors relating to the complexity of the implementation task, the degree of commitment present in the implementing environment and at the organizational level the presence of positive process and personnel factors (O’Toole 1986). Work on transitional economies, such as Russia, highlights the significance of leadership in bringing these factors together (Struyk 2007).

The case studies reported in chapters 5-8 will help to determine which of these potentially numerous factors are of most significance in explaining the Indonesian outcomes.

Conclusion Understanding implementation outcomes in relation to Indonesian financial reforms is an important and a complex task. The relevant literature suggests a number of factors – and leadership in particular – will be significant in determining the success of the implementation process.

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This chapter commenced by examining studies underpinned by NPM and budget and accounting reforms both in developed and developing countries which revealed that much is known about budget and accounting reforms based on principles embedded in NPM. However, generally these studies have been focused on developed countries and put much emphasis on the country level (Pollitt & Bouckaert 2004; Bouckaert & Halligan 2008; Cheung 2011). By contrast, there is a lack of comparable data regarding budget and accounting reforms in developing countries particularly at an organisational level. This literature review also made specific reference to the implementation of financial management reform in Indonesia. The second part of this chapter constituted a review of the implementation literature and provided a discussion on how policy has been implemented in order to learn lessons on converting policy into action. While many studies on budget and accounting reforms were noted, most of the literature utilized approaches which paid scant attention to the implementation aspects.

The current research aims to address this gap by investigating what factors have influenced the implementation outcomes of budget and accounting reforms in government agencies in distinctive Indonesian contexts. The focus at an organisational level pursued in this research is therefore of importance in gaining more in-depth understanding on the NPM-inspired reforms and their corresponding factors of success and failure.

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In the research devoted to NPM-inspired reforms in developing countries, few scholars have contributed to particular aspects pertaining to organisation, policy and people issues. Like studies on NPM-type reforms in developed countries, most of the literature focuses on cross-country analysis, while studies on NPM from an implementation perspective are generally lacking. The literature seems to focus on the policy intervention aspects that limit the understanding of how the ‘intervention’ or reform was converted into action. In particular, the research covering general reforms in Indonesia is immense; however, only a few studies have contributed to particular aspect of financial management. Among these studies, an even smaller number are directly linked to budget and accounting reforms. Despite these limitations, the literature assists the current research in investigating the factors influencing implementation outcomes of the budget and accounting reforms in Indonesian government institutions. These may be summarized as: •

The limited capacity of the Government seemed to be one major factor hampering the reform initiatives in Indonesia.

•

The overall institutional capacity as the major impediment in the reform process derived from the specific nature of the Indonesian administrative system inherited from the Dutch Colonial legacy.

•

As a results of the specific contextual issues, overall improvement in transparency and accountability was thwarted.

Chapter 3 will provide context for discussion of the financial management reform taking place across government agencies in Indonesia.

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Chapter 3 Budget and Accounting Reforms in Indonesia

Introduction The analysis of the implementation literature presented in chapter 2 suggested that no one model offered a clearly superior ‘fit’ to the circumstances of the Indonesian administrative system. The regime framework and communication models pointed to the importance of inter-organisational processes and effects, while the top-down models highlighted the importance of control mechanisms and hierarchy. Overall, the literature suggested that the rules, norms and procedures of the Indonesian state shaped both the task of implementation and the approach to it. Given the interaction between centralised and decentralised aspects of the state, a ‘layering’ of implementation effort was to be expected.

This chapter provides vital contextual information for understanding the case studies by setting out in detail the history of financial management reform in the Indonesian bureaucracy and indicating the elements of those reforms that have greatest relevance to the case studies. Budget and accounting reforms began in Indonesian public administration in 2003/3004. The legislated mandate for reform introduced modernized public spending to support prudent and efficient financial management. Spending agencies that once relied on input-based budgeting are

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now trying to revitalize the budget process by incorporating modern financial management including output-based budgeting and modern treasury practice. This chapter sets the context for a discussion of the budget and accounting reforms implemented in each of the four case institutions with detailed accounts of each case following in Chapters 5-8. The first section provides a general review of the Indonesian administrative system. This is then followed by a review of financial management practice before the reforms commenced. The following section elaborates the impetus for reform, which were mainly driven by economic crisis, and the massive political changes in the country. The next section discusses the strengthened role of Parliament as introduced by the reform and the decentralisation program, which played a critical role in the implementation process. This is followed by a summary of the reform agenda and structure. The chapter concludes by drawing out important issues pertaining to the budget and accounting reforms gathered from the previous sections.

Indonesian Administrative System From the 1950s to 2000, Indonesia was a highly centralised multi-tiered unitary state (Marijan 2010). Efforts to decentralize had been attempted since colonial times, but without success. In particular, the Government attempted to decentralize by raising the issue of regional autonomy in Law No. 5/1974 on Main Issues of Regional Government. However, the law to implement this regulation, only enacted in 1990, was never successfully put into practice (Hofman & Kaiser 2002). In 2001, the Central Government launched the decentralisation policy, changing the centralised country to become one of the most decentralised

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countries in the world (Hofman & Kaiser 2002; World Bank 2003). While the 2001 decentralisation is not considered to be the first attempt made by the Government to decentralize (Hofman & Kaiser 2002), it is considered to be the first time the Indonesian Government implemented a decentralisation process through which the Government transferred one-third of Central Government expenditure to the regions (World Bank 2007b). The decentralisation process had some implications for financial management reform particularly those taking place in the regional governments. A brief overview of the decentralisation and its implications for financial management reform will be elaborated further in this chapter, which will shed some light to the second research question developed in this thesis: Why has the reform process been so uneven? In summary, decentralisation complicates the reform task as it poses more challenges for the Central Government to ensure compliance from the regional government regarding the central mandate of financial management reforms.

The Central Government forms the first of three tiers of Indonesian government, followed by the Provincial and District/Municipality Governments. Over the years the number of regional governments has been continuously changing through the creation of new regions or the consolidation of existing regions (Fitrani, Hofman & Kaiser 2005). Spanning over 5,000 kilometres and with more than 13,000 islands, nowadays Indonesia is divided into 33 provinces and 478 regional governments, encompassing districts and municipalities (World Bank 2003; Hofman & Kaiser 2002). Given the large number of governmental levels accompanied by diverse characteristics between regions, the implementation of

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financial management reform in Indonesia encountered more challenges compared to smaller and less complex countries.

As a former Dutch colony, Indonesia inherited a colonial legacy in government characterized by strong bureaucratic rule (Cheung 2005). Some commentators have argued that this, along with a strong military tradition and authoritarianism, has facilitated the institutionalization of corruption

(Robertson-Snape 1999;

Cheung 2005). Comprising 4.7 million employees or 1.9 % of the 2010 population, the Indonesian bureaucracy has been characterized as slow, corrupt and ineffective, with low capacity, and a lack of transparency and accountability (Buehler 2011; Tjiptoherijanto 2008; McLeod 2005b). Civil servants hold permanent tenure in Indonesian government institutions; and therefore, even in the context of the results-oriented approach embedded in the financial management reforms, they cannot easily be removed or sacked for poor performance. For the purposes of this research, it is important to note that these two factors, first the authority and permanency of the civil service and second the rigid, hierarchical, large and fragmented Indonesian administrative system, combine to impose significant challenges to the implementation of reforms.

Review of Financial Management Practice Prior to Reform Prior to 2004, public financial practices in Indonesia were articulated in the Dutch colonial administration system comprising Indische Comptabiliteitswet (ICW), Indische Bedrijvenwet (IBW), Reglement voor het Administratief Beheer (RAB) and Instructie en verdere bepalingen voor de Algemeene Rekenkamer (IAR)

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(Pemerintah Republik Indonesia 2003a; Kristiansen et al. 2008). Developed for a colonial regime, the rules that regulated budget formulation were very traditional, cash-based, highly legalistic and input-oriented. Well after Indonesia’s independence in 1945, standard treasury practice that included asset management, cash management, debt management, and accounting practice was overlooked, and a legal framework for budgeting was largely absent. Given the lack of budget framework, significant off-budget activities characterized the Indonesian budget (International Monetary Fund 2006; Blöndal et al. 2009). More importantly, there was no formal accountability mechanism of the Government to the Parliament and transparency remained lacking (Ginting 2003) .

The Dutch colonial laws (ICW, IBW, RAB and IAR) were considered to fall short of the requirements of modern financial practices, and were also presumed by the Central Government to be the cause of deeply-rooted corrupt practices and obstacles to a sound system of public financial management (Pemerintah Republik Indonesia 2003a). Surprisingly, although the Indonesian Treasury Law or the ICW was apparently unable to accommodate the dynamics of state financial management, it was still in place during the Suharto regime (Ginting 2003). This was because pressure for change was lacking, partly as a result of the stable economic conditions under the New Order Regime and the acceptance of the status quo (Ginting 2003; Financial Management Reform Committee 2001).

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Major Drivers for Reform Economic Crisis The severe 1997 Asian financial crisis that struck Indonesia became the major reason that pushed Indonesia to embark on democratization and broader political and institutional reforms (Marijan 2010). The financial crisis turned the Indonesian economy upside-down. The average economic growth rate of 7% decreased steeply to 3.4 % in the third quarter of 1997 (Soesastro & Basri 1998). The Rupiah was significantly depreciated, while national banks and the stock market collapsed and high numbers of local companies ceased to operate because of the difficulties in meeting debt obligations arising from the crisis-related changes in fundamental economics (Soesastro & Basri 1998). Triggered by the crisis, in May 1998, student-led unrest put an end to the New Order Regime under Suharto and profoundly changed the Indonesian political landscape (Kingsbury 2002). Soon after the demise of Suharto, the Government introduced massive political reforms followed by major reform in many aspects including financial management reform.

Apart from the financial crisis, other reasons that forced Suharto to step-down were rampant corruption, collusion and nepotism in the New Order Regime (Kingsbury 2002; Fitrani et al. 2005). Under the Suharto regime, KKN (Korupsi, Kolusi dan Nepotisme-the Bahasa Indonesia acronym for corruption, collusion and nepotism) had been pervasive, while emerging efforts to tackle them was futile (Robertson-Snape 1999). The eradication of KKN, thus, has been the main agenda of the financial management reform in which the goal is to enhance good

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governance in state administration (Pemerintah Republik Indonesia 2003a). In essence, the financial crisis of 1997 along with corrupt government have served as major catalysts to massive political and institutional reforms, including budget and accounting reforms. The reforms therefore confirmed the argument that the perception of a crisis situation allowed the government to initiate major changes (Grindle & Thomas 1991).

Demand for Democratization and Political Changes The push for budget and accounting reforms can also be viewed in the context of increasing public demand for democratization after the downfall of Suharto. Major political changes, such as the ambitious decentralisation program, free and fair general elections, a new electoral system, loosening of controls on the press, and a more limited role of the military in politics and economy (Kingsbury 2002), have all impacted on the Indonesian government budget and accounting reforms.

After the resignation of Suharto in 1998, Vice President Habibie took office as an interim president for a relatively short period from May to October 1999. The period of Habibie was important for reform, because many initial efforts towards democratization particularly in loosening control of media were started at that time. Soon after the transition period, the first free and fair general election was held on 7 June 1999, followed by the appointment of Abdurrahman Wahid as the fourth President by the People’s Consultative Assembly (MPR) in October 1999 (Mietzner & Aspinall 2010). This election was the first election with a multi-party

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system and was widely regarded as the fairest election since the New Order Regime took power in 1966 (Kingsbury 2002).

Impeached by the MPR in July 2001 because of public lack of confidence, Abdurrahman Wahid was forced to step down with his Deputy, Megawati Soekarnoputri as his successor (Manan 2008). In the 2004 election, Susilo Bambang Yudhoyono (SBY) was successful and became the nation’s sixth President. The 2004 election was the first direct democratic election held in Indonesia. Strongly supported by the Democrat Party, SBY brought a new notion of democratization to Indonesian politics. In the 2009 election, SBY was also successful and was appointed to become President for a second term.

The presidency periods of Abdurrahman Wahid, Megawati and SBY (1999 to date) are critical in the analysis of the budget and accounting reforms. Abdurrahman Wahid pursued democratic freedoms and civil rights, and made efforts to reduce the military role in politics and the economy (World Bank 2001b). Although during Abdurrahman Wahid’s presidency efforts to uphold democratization achieved much, the implementation of the budget and accounting reforms was considered slow (World Bank 2001a). In Megawati’s period, implementation progressed a little better. Despite various sources of resistance, the State Finance Law as the foundation for the budget and accounting reforms was eventually promulgated in 2003. In addition, the Corruption Eradication Commission (Komisi Pemberantasan Korupsi (KPK)), an institution independent of government, was established in 2002 through promulgation of Law 30/2002

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(Butt 2011). The main programs of KPK are not only to prevent corruption but also to combat corruption and monitor state governance (International Monetary Fund 2006). This has clear implications for budget and accounting reforms. The measures to eradicate corruption may greatly assist the implementation of the budget and accounting reforms that share a similar goal in promoting good financial governance. Despite remarkable progress with the passing of the State Finance Law during the Megawati period of government, not much change was obtained because governments still preserved the old paradigm of state financial management (Ginting 2003).

The administration of President SBY has also played a significant role in the financial management reforms particularly with his vision of making Indonesia an independent, secure, just and democratic country concerned with the welfare of its citizens (Presiden Republik Indonesia 2004). The SBY administration fortified the reform that had been commenced earlier by putting strong emphasis on democratization, good governance, law enforcement and civil-service reform (Marijan 2010). Of particular importance, was that his intention to eradicate rampant corruption in the country was formalized in the 2004 Presidential Instruction on Acceleration of Corruption Eradication (Buehler 2011).

Role of International Agencies Similar to reforms occurring in other developing countries, many of the specifics of the Indonesian budget and accounting reforms were driven by international agencies or organisations such as the International Monetary Fund (IMF), World

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Bank (WB), Asian Development Bank (ADB) and other external agencies, from which the Indonesian government sought support particularly in the aftermath of the Asian financial crisis. Commentators have also pointed to the significant role played by international consultants who were aligned with the agenda of the international agencies (Turner 2002; Haque 2007b). On 31 October 1997, the Indonesian Government signed a Letter of Intent (LoI) with the IMF for a total financial package of $43 billion, and agreed to implement comprehensive economic programs (MacIntyre & Resosudarmo 2003; Soesastro & Basri 1998; Soesastro, Aswicahyono & Narjoko 2007). Besides providing funds, these international agencies also provided joint or individual policy advice on several aspects of public expenditure management and economic reform in Indonesia (Financial Management Reform Committee 2001; Hamilton-Hart 2006). All in all, the agreement with the international agencies marked the starting point of the whole economic and financial management reform process.

In early 1998, two IMF fiscal and budget advisors assisted the Indonesian Ministry of Finance (MoF) to find solutions to the current crisis and initiate reform of the financial management system in Indonesia (Financial Management Reform Committee 2001). Following this, in January 2000, under President Wahid’s administration, the Indonesian government committed to reform by signing an agreement with the IMF, supported by the World Bank and ADB (Financial Management Reform Committee 2001). This agreement, which was subsequently renewed until 2003, included conditions for the use of IMF funds (Hamilton-Hart 2006).

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Strong involvement of major international agencies in solving the economic problems in Indonesia resulted in the recommendation for reform resembling New Public Management (NPM) principles (Haque 2004; Marijan 2010). Haque (1998, 2004) observes that Indonesia is among the Southeast Asian countries that followed the line of other NPM-inspired reforms similar to that described in Chapter 2 in developed countries such as Australia, New Zealand, Denmark, Italy and the UK. Moreover, having considered that governments in developing countries lacked effective public administrative systems, international agencies described their assistance in terms of pushing developing countries to improve their public sector management in the name of good governance (Turner & Hulme 1997; Cheung 2005). This good-governance paradigm has become a mission of reform promoted by international agencies in many developing countries to improve efficiency, accountability and transparency (Cheung 2005). As such, the involvement of the international agencies not only influenced the direction of reforms but also pushed to pursue good governance in Indonesia.

These tensions had important implications for the ‘implementability’ of the reforms. While NPM has spread internationally, including in the Asian region, countries have exhibited certain deviations from the basic features of NPM. Turner and Hulme (1997) argue that in spite of a ‘one size fits all’ approach to public sector reforms promoted by the international lobby, the outcomes of planned changes in organisations are conditional on many contingent factors, especially those in the organisational environment. Haque (2007b) suggests that these variations in practice of NPM were mainly due to the external origin of the new bureaucratic

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changes rather than the indigenous local context. Cheung (2005) similarly notes that the NPM model is incompatible with politico-economic contexts characterized by state dominance particularly in South East Asia. Thus, it seems that Indonesian reforms might lend support to this view. The logic of NPM appears to contradict state tradition in Indonesia, particularly with inherited colonial and patron-client practice in its administrative culture leading to difficulties in managing performance-based bureaucracy.

Key Reform Documents Introduced by International Agencies The significant involvement of international agencies in the reform process was exhibited with the publication of key reform documents in March 2001: (1) the ADB and the World Bank Report on Country Financial Accountability Assessment (CFAA) and (2) Country Procurement Report (CPAR) (World Bank 2001b,

2001c). The two reports identified weaknesses in public financial

management and procurement systems and proposed some recommendations to be undertaken

by

the

Indonesian

Government

to

address

these.

These

recommendations clearly reflect principles underpinning NPM, which include rationalizing and streamlining fragmented financial responsibilities, introducing performance budget and management, improving treasury management, promoting competition and initiating reforms to develop a professional civil service

with

a

public

sector

accounting

and

auditing

stream.

The

recommendations received a positive response from the Government, with the further commitment to reforming financial management along the lines of the

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CFAA and CPAR given at the Consultative Group on Indonesia (CGI) meeting in Tokyo in October 2000 (Financial Management Reform Committee 2001).

Institutional Reforms: Strengthened Parliamentary Role During the New Order Period, although the Dewan Perwakilan Rakyat (DPR) (National

Parliament/People’s

Representative

Council)

and

the

Dewan

Perwakilan Rakyat Daerah (DPRD) (Regional Parliament) could amend and reject the national budget, the role of the DPR and DPRD in formulating and implementing as well as supervising state policy was small (Blöndal et al. 2009).

The role of the DPR and DPRD in the budget process was strengthened in 2003 with the State Finance Law providing a legislative foundation for the DPR and DPRD in the budget process. Under this legislation, the strong formal role of the DPR and DPRD is exemplified in its involvement in every stage of the budget process, from budget formulation, budget implementation, and budget accountability. With its newly assumed power the DPR and DPRD shifted its role from a rubber-stamp body to a more influential institution.

Figure 3.1 shows the relationship between the DPR and DPRD and the budgetary cycle. One particular aspect to note in respect of its impact on budget and accounting reforms is that although this strengthened role was aimed to improve accountability of public budget use, the lack of capacity seemed to pose challenges to the realisation of this role (Blöndal et al. 2009).

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Decentralisation Program The current decentralisation program is a critical point in the whole process of budget and accounting reforms, particularly in regional government institutions throughout Indonesia. The main objective of the Indonesian decentralisation program was to accelerate democratization in the regions through improved service, civil empowerment and engagement in public policy (Financial Management Reform Committee 2001). In the context of a vast country with a wide diversity of political, religious, ethnic and social groups, decentralisation aimed not only to promote economic growth and equity, but also to promote broader participation in development planning and management (Rondinelli & Nellis 1986). In implementation terms, these changes heightened the tension between the top-down control exercised by the MoF, and the capacities and priorities of the districts and municipalities.

The promulgation of Laws No. 22/1999 (UU No. 22/1999) on Regional Governance and No. 25/ 1999 (UU No. 25/1999) on Fiscal Balance between the Central and Regional Governments, which were further revised with UU No. 33/2004 and UU No. 34/2004, marked a massive devolution of fiscal and political power from the centre to regional government areas, known as kabupaten (districts) and kota (municipalities) (Fitrani et al. 2005). The massive devolution of authority from the centre purported to allow the regions to manage their own affairs. Districts or municipalities became responsible for delivering public services in several areas (such as, education, health, and public work), whereas the

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Central Government still retained six areas of control (external politic, defence, security, and judicial, national monetary and fiscal, and religious affairs).

It is important to note that decentralisation of functions and resources from the Central Government was focussed more on districts and municipalities than provincial governments (Fitrani et al. 2005). The provincial government only acted as coordinator on issues surpassing district boundaries or performs functions which could not be performed by regional governments, and also provided guidance and supervision in the districts and municipalities (Hofman & Kaiser 2002; Soesastro & Atje 2005). Despite being at the same level in the Government hierarchy, districts and municipalities differ in economic capacity and size of area, as well as in political, social, and economic conditions that allow the possibility for autonomy. In general, districts that cover rural areas are larger than municipalities, which are more urban and where activity is generally not driven by agriculture.

A major implication of the division of authority is the obligation of the regional government to enact regional regulations related to the delegated functions or the division of affairs. With the delegated authority, regional governments are required to prepare legal instruments, which provide regional-level regulation as the basis for implementing autonomy in their territory. Nevertheless, as part of an integrated legal system in a unitary state, the regional regulation may not contravene other higher-level laws and regulations. As enshrined in the two decentralisation laws (UU No. 32/2004 and UU No. 33/2004), the Central

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Government (Ministry of Home Affairs) has the right to annul regional regulations that conflict with national or higher level laws and regulations, although the regions can appeal against such decisions to the Supreme Court (Zuhro, Mulyani & Fitria 2010).

Besides serving the purpose of autonomy, regional regulation should be made to elaborate higher laws and regulations (Zuhro et al. 2010). In terms of financial regulation, the regions are required to enforce Central Government laws and regulations by producing regional regulations in accord with national policy (Gubnatorial Regulation/Peraturan Gubernur, Mayoral Regulation/Peraturan Walikota, and Head of District Regulation (Peraturan Bupati). It is also necessary for the regions to prepare derivative regulations or implementing decrees in accordance with the Central Government laws and regulations. This means that most financial practices in regional governments should be dictated by decentralisation laws and suggests that a considerable adjustment regarding the suitability of financial laws to decentralisation problems is needed. As a result, financial management reforms in regional governments seem to be more complicated than those at the Central Government as they demand further synchronization and harmonization with Central Government regulations.

Law 25/1999 further spelled out a new intergovernmental fiscal framework, namely the implementation of a single block grant, known as the general allocation grant (Dana Alokasi Umum (DAU)) and revenue-sharing mechanisms for provincial and district governments (Alm, Robert & Bahl 2001). The

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underlying ideas of fiscal balance are to support funding for the delegation of a part of Central Government affairs to regional government to apply the principles of ‘money follows function’, minimize vertical and horizontal fiscal imbalance, to increase regional service quality and to increase resource utilization, as well as to uphold good governance and fiscal sustainability (Kementerian Keuangan 2010). With the fiscal balance arrangement, the coordination between levels of government has been increasingly important. The Government underscores the necessity to carefully manage the fiscal balance arrangement to avoid disincentives to the regional governments where it may only lead to increasing reliance of regional government institutions on the Central Government (Kementerian Keuangan 2010).

Apart from fiscal balance to fund decentralisation, the fiscal transfer from the Central Government to the regional government can take the form of Central Government spending channelled through a line-ministry budget. The Central Government budget channelled to the region focuses on deconcentrated spending (dana dekonsentrasi) and assistance task spending (dana tugas pembantuan) (Kementerian Keuangan 2010; Direktur Jenderal Perimbangan Keuangan 2011). Deconcentrated spending follows the delegation of authority from the Central Government to the representative of the Central Government in the region or to the province (Governor). Assistance task spending, on the other hand, can go directly to districts or municipalities. Reports of the spending are embedded in the Central Government financial report. The other implementing mechanism of decentralisation is regional taxing power from which the regional governments

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generate their own-source revenues that include charges and fees (World Bank 2007b).

The new decentralisation laws have also created a new accountability framework under which the heads of regions are no longer responsible to the higher level of government (the governor or head of province) but are held accountable to the regional parliament (DPRD). With the reforms, the DPRD also assumed a stronger role in the budget process. However, as with the Central Government, the strengthened role of the DPRD was contradicted by the lack of the capacity of the DPRD in law making, budgeting and oversight (Antlöv, Brinkerhoff & Rapp 2010). The main changes introduced by the revised decentralisation law (UU No. 32/2004 and UU No. 34/ 2005) were the introduction of direct elections for the provincial governors and heads of regional governments (districts and municipalities) and clarification of some provisions in the previous law (World Bank 2007b).

The decentralisation program, however, was aggravated by long-standing human resource problems in Indonesia. This has particular implications for budget and accounting reform. Decentralisation does not automatically solve shortages of skilled personnel (Rondinelli & Nellis 1986). Turner et al. (2009) argue that human resource management is the forgotten dimension of Indonesian radical decentralisation measures. In transferring many functions, including finance, Indonesian reform processes have largely overlooked this most important issue. A lack of awareness of human resource management issues has hampered not only

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the potential benefit of decentralisation but also the implementation of the budget and accounting reforms where technical expertise of a high standard is required. This situation indicates the possibility of increasing problems occurring during the implementation process.

Reform Agenda and Structure This section outlines the historical background to the financial management reform, and the agenda and structure of the reform as enshrined in the trilogy of Financial Laws. It also provides an account of the nature of intended changes in relation to the budget and accounting reforms.

In stark contrast with Australia which embraced an incremental reform process by developing gradual reform and continuous refinement (Wanna, Kelly & Forster 2000), the Indonesian budget and accounting reform was a large-scale of reform reflected in the massive legislative changes with the promulgation of the trilogy of Financial Laws. The large-scale of reforms, which the Government opted for under international and national pressure, confirms the argument that the perception of a crisis situation allowed the government to initiate major changes (Grindle & Thomas 1991).

Preparation of Financial Legal Framework and the White Paper In April 2001, the Ministry of Finance (MoF) established the Financial Management Reform Committee (Komite Penyempurnaan Manajemen Keuangan (KPMK)) to guide the financial reforms (Financial Management Reform

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Committee 2001). KPMK, which was the fourteenth task force established by the Government since 1945 to prepare drafts of financial management law, consisted of practitioners, politicians, and academics in Indonesian public realms (Suminto 2004). It played a critical role in the early stage of the reform process as it continuously gave recommendations for improving organisations, procedures and systems and facilitating dialogue between the Central Government and the DPR (National Parliament) in the process of passing the State Finance, State Treasury and State Audit Law Drafts.

The Government further endorsed the idea of reform by promulgating the White Paper on Indonesian Public Financial Management in 2001, which laid the foundation for pursuing a sound financial management system through its broadbased discussion of financial management. The White Paper clarified shortcomings in the financial management system in Indonesia at the time which had led to inefficiency and ineffectiveness of Government financial management as follows (Financial Management Reform Committee 2001): 1. In budget preparation: a. Planning function was not clarified and clearly defined against budget function; b. Budget institutions were divided between the MoF that controlled routine budget and Badan Perencanaan Pembangunan Nasional (Bappenas) (the National Development Planning Agency) that controlled development budget. This dual budget authority caused overlapping and inefficiency;

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c. The input-oriented budget system generated little information on program results; d. The legislative body did not have an operational foundation for its role in budget.

2. In budget execution : a. Financial management function and operational function were fragmented. This included the intermingling of the budget process and treasury management in the hands of several units within the MoF, inadequate focus on several financial functions, and lack of an integrated financial information system; b. Duplication and overlapping of spending due to separation of routine and development budget; c. Inadequate

treasury

function

that

undermined

operational

efficiency of budget execution. 3. In accounting and reporting : a. Unclear budget accountability framework for line ministries and inadequate financial reports; b. Non-existence of government accounting standards; c. Ineffective and overlapping audit function, especially between internal and external audit institutions.

It is clear that the effort to pursue the changes entailed in reform was a lengthy process in the Indonesian government. After 1945 shortly after the Indonesian

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Independence, the Indonesian Government attempted to formulate new financial practices by establishing a task force. However, the attempt was only successful through the efforts of the fourteenth task force made by the KPMK, which further paved the way of reforms by successfully endorsing the White Paper in 2001 further to the promulgation of the trilogy of Financial Laws in 2003/2004.

Trilogy of Financial Laws An essential step in solving the shortcomings in financial management practices and promoting sustainable financial management and good governance was the trilogy of Financial Laws, which was enacted to underpin public financial management in an open, professional, efficient, transparent, and accountable manner (Pemerintah Republik Indonesia 2003a, 2004c, 2004d).

On 15 April 2003, Law 17/2003 on State Finance came into being (Sistem Perbendaharaan dan Anggaran Negara 2009). The State Finance Law spells out a clear shift from a traditional line-item budget system to a system that focuses on outputs and outcomes. This shift has been supported by the development of performance indicators, an accrual accounting system, and internationally recognized financial and procurement systems. The Law also stipulates the Government’s intention to unify the dual budget system to mitigate duplication and overlapping in spending, and to implement the Medium-Term Expenditure Framework to ensure that the resources are available to line ministries. The State Finance Law also strengthens the role of Parliament (DPR and DPRD) in the budget process, thus establishing a new accountability framework within the

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Indonesian Government. The Law also makes clear that the audited financial report should be submitted to the DPR or DPRD within six months of the end of fiscal year as a means of government accountability.

On 14 January 2004, the Law on State Treasury was approved by the DPR. The State Treasury Law was a complementary law mandated in the State Finance Law (Sistem Perbendaharaan dan Anggaran Negara 2009). It recognized the need to establish a modern treasury system. The Treasury Law broadly defined the coverage of treasury functions within the financial management as budget allocation, payment, accounting systems, cash management and financial planning, debt management, government procurement and internal control systems.

On 19 July 2004, Law No. 15/2004 on State Audit was enacted (Sistem Perbendaharaan dan Anggaran Negara 2009). The State Audit Law paves the way to more accountable and transparent government institutions obligating each ministry and each regional government to submit a financial report to Badan Pemeriksa Keuangan (BPK) (Supreme Audit Agency) to be audited before being presented to the DPR or DPRD. The law establishes the operational foundation for the BPK as an independent auditor to audit the management of and responsibility for state finance (Pemerintah Republik Indonesia 2004d).

The trilogy of Financial Laws is the hallmark of the financial management reform that massively transformed the entire financial management in Indonesian

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government agencies. The trilogy was further elaborated and detailed in implementing decrees and regulations through subsequent legal reforms in financial management. These will be elaborated in the next section.

Subsequent Legal Reforms Indonesian legislation commonly only provides a general principle statement which requires further details in implementing regulations, decrees, and instructions (Booth 2010). This governance structure is manifested in the proliferation of regulations that are of central importance as they are points of reference for executive, legislative, auditor and other reform stakeholders. Details of the main government laws and regulations affecting financial management are provided in Table 3.1. The table shows at least 14 regulations dictating financial management reforms both at the Central and regional government level, for which further details were to be provided in various forms of implementing regulations. A brief account of the various elements of the subsequent reforms will provide an overview of the tasks which had to be completed to lay the basis for budget and accounting reforms as they applied to particular ministries and agencies.

Reforms to Budget Institutions Clarification of roles and functions in the budget process to maintain a ‘check and balance mechanism’ underpinned the institutional reforms. The main feature of the clarification of roles and functions is the separation between the Chief Financial Officer (CFO) from the Ministry of Finance and the Chief Operational Officer (COO) from other ministries for their own jurisdictions (Pemerintah

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Republik Indonesia 2003a). While the CFO supports the President in finance matters, the COO has authority in specific matters of government functions. This clarification of function also applies to the regional governments. Unlike the centralised financial processes that operated before reforms started, run by the MoF within the Central Government and by the Regional Financial Asset and Management Services (RFAMS) at the regional government level, the budget process was now delegated to the COO, based in a line ministry, working agency or budget unit at the regional level. 1 This reflects the NPM spirit of ‘let the managers manage’ underpinning the reforms (Pemerintah Republik Indonesia 2003a; Kettl 1997).

As the COO, each line ministry or working agency now has full authority to manage its own finance from planning, budgeting, and executing, to reporting. The MoF, previously the direct budget authority, had now shifted to a role as coordinator of budget activities and process. In other words, the MoF’s role is now only to control a single consolidated budget for the entire Government operationalised in all spending agencies (Booth 2010).

Although managers are now given flexibility in their choice of input in the budgeting process, other flexibility mechanisms as found in other forefront reform countries were not widely applied. The carry-forward mechanism (as in Sweden and Australia) was only utilized to a limited extent in Indonesia and efficiency dividends (as in Australia) were not acknowledged. The result, according to

1

In regional governments, the nomenclature for the CFO varies.

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Blöndal (2009), is that managerial flexibility has been limited despite the devolution of financial tasks. Under the new system, the appropriated budget must be used in a given fiscal year and lapses at the end of fiscal year. This seems to fit the ‘use it or lose it’ scheme that to some extent can explain the tendency of rushing the spending at the end of fiscal year which might undermine the quality of spending (Blöndal et al. 2009). Incentives such as flexibility in budget revision could have enhanced a more equal distribution of disbursement across the months which avoids ineffectiveness and inefficiency of public spending (World Bank 2010).

In return for the flexibility given, each spending agency has to be accountable for its own budget, thus applying the NPM spirit of ‘make the managers manage’ by increasing incentive to manage better by subjecting managers to market forces (Kettl 1997). Spending agencies are now obliged to report their financial activities which are subject to the parliamentary supervision of their budget spending. Each spending agency has to prepare and submit its annual financial report to the CFO (the MoF at the Central Level and the RFAMS at the regional level), to then be consolidated, audited by the BPK and presented to the Parliament.

This clarification of roles and functions has in turn created complex relationships between institutions, thus suggesting increased interdependence between agencies. Each spending agency faces a more complex and odd relationship, in which activities are contingent upon other agencies’ performance. In many cases, activities cannot proceed into the next stage unless other agencies have finalized

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their work. For example, in consolidating the budget to be submitted to the MoF, each line ministry has to receive all documents from entities or working units under its authority and then move on to the consolidation process. This typical situation applies to all stages in the financial management process. This means that with increased interdependence, the implementation of reforms has become more complicated, with communication, coordination and cooperation gaining importance in ensuring finalization of the reform tasks.

Reorganisation Program The Government further embarked on a massive restructuring or reorganisation program across government institutions. Initially, in 2005 the Government restructured the Ministry of Finance (MoF) by a merging and splitting process, as well as abolishing and establishing units (Financial Management Reform Committee 2001; Departemen Keuangan 2005). The restructuring process in the MoF was primarily geared to integrating similar functions that have been scattered across Echelon 1. 2 For example, the budget allocation process was previously spread across the Directorate General (DG) of Budget (Direktorat Jenderal Anggaran (DJA)), the DG of Regional and Fiscal Balance (Direktorat Jenderal Perimbangan Keuangan dan Daerah (DJPKD)) and the Fiscal Analysis Agency (Badan Analisis Fiskal (BAF)). These various functions were merged into a new DG of Budget (Financial Management Reform Committee 2001). The reorganisation program involved the introduction of modern treasury functions in the government sector through the creation of a new DG of Treasury (Direktorat 2

The Indonesian bureaucracy is divided into five levels consisting of four structural (managerial) positions (eselon, echelon) starting from Echelons 1, 2, 3 and 4; and non-structural (nonmanagerial) positions. There are also some functional positions.

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Jenderal Perbendaharaan (DJPB)) as well as a new Fiscal Policy Office (Badan Kebijakan Fiskal (BKF)) within the MoF (Blöndal et al. 2009).

In a similar fashion, reorganisation took place throughout all government institutions, including regional governments. At the time of writing, the Government was still undertaking restructuring to keep abreast with the dynamics of reform implementation by creating right function and right sizing for government organisations as an integral part of the 2008 public service reform (Kementerian Negara Pendayagunaan Aparatur Negara 2008). This points to the extreme level of difficulty the reform process has entailed, and therefore to ease the complexity of the implementation process, sufficient capacity has been increasingly important.

Planning and Budgetary Cycle The Indonesian planning and budget cycle runs from January to December and involves participation of the COO, CFO and the DPR or DPRD (Figure 3.1). Prior to reform the budget cycle ran from April to March of the following year. The new timetable for the budget cycle was introduced by the trilogy of Financial Laws to promote efficiency, effectiveness, and accountability of public finance.

The 2004 Law on National Development Planning System (UU No. 25/2004) or the Planning Law which is a new foundation for the national planning system complements some of the provisions spelled out in the trilogy of Financial Laws on the relationship between planning process and budget process. Major changes

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introduced in the Planning Law are as follows. First, the statute clarified that the new planning function is led by the National Development Planning Agency (Bappenas), whereas the MoF focuses on the budget process. This addressed the previous problem of dual function in budgeting held by Bappenas and the MoF. In some countries under NPM inspired reforms, the Central Budget Agency’s role was retained either by a single or dual agency (Wanna, Jensen & de Vries 2003). In Indonesia, there is a dual Central Budget Agency, which is performed by the MoF (budget and reporting) and the Bappenas (planning function). The national development planning function, coordinated by the Bappenas, is separated from the budget function without parallel planning and budgeting structures. Thus, this is markedly different from most OECD countries, where there is an integrated planning and budget function in a single budget office (Blöndal et al. 2009).

Second, the 2004 Planning Law lays down major principles for the national development planning process that need to be accomplished in a comprehensive and integrated manner across government departments and agencies, as well as through levels of government. In relation to this, the Government further makes a distinction among three types of development planning that consist of long-term plans (a 20-year period), medium-term plans (a 5-year period), and annual plans that are to be drawn up by all government agencies in Indonesia both at the central and regional level.

Third, the Government also endorsed participatory planning processes to encourage involvement of community, public, and government institutions at both

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executive and legislative levels in the preparation of all planning documents (Pemerintah Republik Indonesia 2004e). This is exemplified through the implementation of Musyawarah Perencanaan Pembangunan (Musrenbang) or development planning deliberation, held on a periodic basis. Musrenbang is an open and bottom-up planning process intended to yield community proposals and to collect aspirations for the subsequent budget process. This type of community consultation meeting, which had also been conducted in the Suharto era in relation to the planning process, was further fortified in the financial management reforms through enforcement by regulations (Venning 2009).

Budget Formulation and Enactment As stated in the 2003 State Finance Law, the budget proposal was to be prepared based on the government-wide medium-term planning document to ensure that the budget would be embedded in the strategic plan of the Government. Since then, the budget has been elaborated in terms of government programs prioritized in the government-wide development program, organisation and function to meet the new budget classification based on international best practice.

The new budget process also introduced three pillars of budgeting: a unified budget, a medium-term expenditure framework (MTEF), and performance-based budgeting. The unified budget aims to avoid budget duplication, overlapping and deviation and to facilitate the implementation of performance-based budgeting. The MTEF approach purports to achieve sustainable fiscal discipline by linking planning and budgeting, as well as balancing needs for, and capacity of, state

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expenditure. MTEF also has a mandate to identify possible alternative funding and considerate opportunity cost for executing programs and activities so as to use funds in the best possible way. By giving emphasis to output or outcome, performance-based budgeting aims to optimize benefits from use of limited resources, and to increase efficiency, transparency, and accountability.

Financial Reporting and Accountability Prior to reform, particularly from 1969 to 2003, the State Budget Calculation (Perhitungan Anggaran Negara (PAN)) was the only accountability report on budget implementation (Departemen Keuangan 2008). The PAN, however, only presented the allocated budget and actual spending of the Government, while information on the Government financial position (assets, debt and equity) was largely absent, undermining transparency and accountability in government financial operation (Departemen Keuangan 2008). In 2005, 60 years after the Independence despite the absence of the Government accounting standards, the Government published the first Central Government Financial Report for the Fiscal Year 2004. This shows progress in improving accountability despites difficulties in introducing changes in government financial management in the first place, as evidenced by the long deliberation process over the new Financial Laws (Ginting 2003).

Under the new system, each spending agency had an obligation to prepare a complete financial report which was based on the Government Accounting Standards (Government Regulation on Government Accounting Standards or PP

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No. 24/ 2005), and which was subject to audit (Pemerintah Republik Indonesia 2003a, 2004c). The financial report was then to be submitted to the DPR or DPRD before six months at the latest, after the end of the fiscal year. The financial report was to consist of the Budget Actual Report, Cash Flow Report, Balance Sheet and Notes to the Financial Statement, and became the prime vehicle for line ministries and working agencies in reporting results intended to promote accountability and transparency in financial management. 3

New Accounting Standards In 2005, the Government enacted the Government Accounting Standards (Standar Akuntansi Pemerintahan) followed by the introduction of the Government Accounting System, which were jointly necessary to enforce other elements of the budget reforms. The Government Accounting Standards entail accounting principles applied in preparing and presenting government financial reports such as a double-entry system, a modified cash-accrual basis and the presentation of a complete financial report.

To date, the Indonesian Government’s accounting basis is still in transition from a cash basis towards accrual, in which revenue, expenses, and funding is recorded on a cash basis while assets, debt and equity are recorded based on an accrual basis. Although there was provision in the State Finance Law to implement accrual-based accounting five years after the Law came into being the preparation to implement accrual-based accounting was still under way at the time of this

3

The Cash Flow Report was prepared by the CFO.

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research. In 2010, the Government also introduced the new Government Accounting Standards based on an accrual system with the promulgation of PP No. 71/2010. After reaching agreement with the National Parliament (DPR), the Government officially stated that full implementation of the accrual basis may not be in place until 2015 (Direktorat Jenderal Perbendaharaan 2010c). This suggests that the development of accounting standards and a system for their implementation has been slow in Indonesia.

Audit The 2005 Audit Law strengthened the role of the Supreme Audit Agency (BPK) by promoting the independence of the audit function. Furthermore, the Law also fortified the role of Inspectorate General in each government agency as part of the internal control system. The BPK is now obliged to conduct financial audit, performance audit and specific-purpose audit. The financial audit results in the BPK are to arrive at an ‘opinion’. As mentioned in Chapter 1, various options are open to the BPK here. Four opinions are possible: ‘unqualified’ when the financial reports present fairly in all material respects, or give a true and fair view in accordance with the financial reporting framework; ‘qualified’ when the financial reports are true and fairly presented in accordance with the financial reporting framework with exception; a ‘disclaimer’ when the BPK declines to give an opinion; or ‘adverse’ where the financial reports are unfairly presented or materially misstated.

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The opinion is, therefore, the auditors’ professional statement on the fairness of financial information based on its conformity with the Government Accounting Standards, adequate disclosure, compliance to rules and regulations and the effectiveness of the internal control system, which has been applied by the particular ministry or agency. The BPK has audited the consolidated Central Government Financial Report since 2004, and the financial reports of all line ministries and regional agencies since 2006. The opinion on the Central Government Financial Report audit report during the period 2004-2009 was disclaimer, reflecting significant problems in the implementation of the budget and accounting reforms. This may be taken as an indication that BPK’s auditing processes were a difficult and challenging undertaking, finding much misconduct in Government financial practices.

Human Resource Reforms Human resource management for all government administration is centralised but fragmented in several Central Government agencies (Tjiptoherijanto 2008). The responsible agencies in this area include the Office of the President for overall government policy in relation to human resource management, the Ministry of Finance for civil-service pay and pensions, the Ministry of Administrative Reforms for supervision, coordination, monitoring, and evaluation of all civilservice matters, the National Agency for the Civil Service for appointments and promotions, except at the highest level, where these are managed by the Presidential Team, and the National Institute of Public Administration for education, training and organisational design (Tjiptoherijanto 2008).

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In practical terms, this means that all government agencies have to adhere to the Central regulations. Rigidity in human resource management exists particularly in the requirements for recruitment, transfer, and salary standards, imposing constraints on flexibility in recruiting and transferring officials from one ministry to another. With the decentralisation process, the situation changed slightly, with some regional governments having the ability to give higher remuneration in order to increase performance (Tjiptoherijanto 2008). Nonetheless, decentralisation could not solve the fundamental problems of the civil service in Indonesian government agencies as a whole. In other words, the complex state of human resources remained a formidable obstacle in increasing the capacity of bureaucracy. The Government also recognized specific weaknesses in human resource management particularly at the regional level; for examples, recruitment and selection did not meet real needs; competence standards focusing on education and experience were absent; training was not related to real need; and rewards and punishment related to performance were lacking (Menteri Dalam Negeri 2010). This also reflected a difference between the budget and accounting reforms in Indonesia and the reforms in most developed countries, in which the centralised employment decisions were devolved to the CEO(s) (Chief Executive Officer) to give them incentive to perform (Wanna et al. 2003). Given the fragmented nature of Indonesian bureaucracy, training and education have been partial, incremental and unintegrated in nature.

Although not explicitly mandated in the key legislation on financial management reform, since the reform began the MoF has been recurrently declaring its

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intention to pursue human resource reform in tandem with the massive changes in budget and accounting procedures. The most important measures in this regard were the 2007 initiatives of the MoF in organizing a government-wide financial management training program. This was the Government Financial Accountability Acceleration Program (Program Percepatan Akuntabilitas Keuangan Negara (PPAKP)) which aimed to train all government bureaucrats, both at central and regional level, on financial management issues. The PPAKP was organized by the MoF to conduct training on new financial management process and was initially launched in 2007. Since then, training has been implemented regularly. By 2010, the Government had trained more than 16,000 bureaucrats across government agencies (Direktorat Jenderal Perbendaharaan 2010b).

In summary, the seriousness with which the Indonesian Government has approached the reform task has been evident at least since 2008, with general civil-service reform designed to restructure organisations, business process and human resource management. The reform has aimed to develop high integrity, high productivity and responsibility, and the ability to give the best service. It has also focused on efforts to establish clean, efficient, effective, productive, transparent, accountable and service-oriented bureaucracy (Kementerian Negara Pendayagunaan Aparatur Negara 2008). The Central Government carried out the civil-service reform with a pilot project undertaken in three line ministries or agencies: the Ministry of Finance, the Supreme Court, and the Supreme Audit Agency (BPK). The reform will be extended gradually throughout the whole

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government bureaucracy (Marijan 2010; Kementerian Negara Pendayagunaan Aparatur Negara dan Reformasi Birokrasi 2011a).

The civil-service reform also includes the introduction of a new remuneration system or performance for rewards which will be extended to regional government agencies. The management of civil-service reform is headed by the Vice President as the Chief of the Directing Committee and the Minister for CivilService Reform as the Head of National Civil-Service Reform Task Force, supported by two teams; the Independent Team and Quality Assurance Team (Kementerian Negara Pendayagunaan Aparatur Negara dan Reformasi Birokrasi 2011c). In 2010, the Central Government launched an implementing foundation embodied in the documents Grand Design of Civil-Service Reform 2010-2025 and Road Map for Civil-Service Reform 2010-2014 as the foundation for implementing the government-wide civil-service reform (Kementerian Negara Pendayagunaan Aparatur Negara dan Reformasi Birokrasi 2011a). Reform of budget and accounting practices has been seen as an integral part of this general reform process.

Conclusion This chapter has introduced the context of government reform and in particular budget and accounting reform as it has developed in Indonesia. The financial crisis of 1997 was the main catalyst for reform in Indonesia, marked by the downfall of Suharto’s autocratic regime and the transition to democratization. Rampant corruption, collusion and nepotism culminating in inefficiency of public

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money management, long lamented by the public, also served as another driver to introduce new budget and accounting practice.

In the context of the crisis, International Agencies came in to assist the nation with advice under the guise of good governance, resulting in New Public Management principles becoming embedded in the reform. The external-driven reform to some extent exerted more pressure for change by implementing modern financial management practices, mainly inspired by the ideas of New Public Management (NPM). It was in this context that the Indonesian government embarked on massive reform in many areas, including the shift from an input-based budget to a more output-oriented result, and the introduction of accrual-based accounting.

Major reforms have been conducted in successive periods of administration. The main focus began in 1999 when Abdurrahman Wahid was in office, and was still under way at the time of this research. The implementation of reform under different administration has resulted in varying degrees of success. Financial management reform was officially introduced through the trilogy of Financial Laws of 2003/2004. The prime objective of these laws was to manage public money in an efficient, transparent and accountable manner. The laws have introduced new rules and procedures in financial management that seek to eliminate opportunities for rent-seeking practices and uphold good governance principles. To enable the laws to take effect, the Government further translated the principles of financial management into three pillars of reform: institutional, business process and human resource reform.

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The government intention to reform can be characterized as ambitious and radical, particularly given the far-reaching nature of the changes that the Central Government has been attempting to introduce. By and large, the ‘big-bang’ decentralisation program has further complicated the reform with its increased complexity in the implementation process, particularly at the regional government level.

Despite the ambitious intention, the implementation has been progressing slowly. The revised due date to 2015 for the implementation of the accrual system is one major example in this regard: the flexibility given to the managers was arguably limited, while the performance expected in return for flexibility was not largely in place owing to technical difficulties in implementing it. Furthermore, full-fledged performance-based budgeting was far from complete, as many necessary steps had not yet been accomplished.

The slow progress of implementation might be accounted for by the nature of the Indonesian bureaucracy derived from the colonial legacy. The different underpinning ideology between this inherited hierarchical structure and NPM might be considered a cause of the difficulty in implementing NPM-inspired reform. As highlighted by Andrew (2011), this is a reflection of the fact that the successful NPM reform tends to take place in contexts that are similar to the countries in the vanguard of reform. Consequently, in reforming countries that have dissimilar contexts with the countries of NPM origin, the reform success

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would further depend on how well the recipientcountry can change the context to align with the original context or perhaps adjust the innovation to fit with the new context.

This research investigates how this reform has been put into practice in four case study organisations. The next chapter elaborates the methodology employed in undertaking the research.

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Figure 3.1: Government of Indonesia Planning and Budgetary Cycle since the Reform

Finalisation of implementation

Budget document (DIPA)- December) Finalisation of detailed budget implementation guidelines

Start of Fiscal year

January

February Parliament reviews budget proposal

Government working plan and indicative allotment

October

March

April Parliament reviews budget proposal

September May State and Regional Budget Draft (RAPBN/D) Fiscal Policy and Macroeconomic Framework (mid May) President delivers budget speech

June July

Parliament reviews budget proposal

Pre-budget report

Temporary allotment by the MoF

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Source: Pemerintah Republik Indonesia (2003), Pemerintah Republik Indonesia (2004c; 2004d; 2004e; 2004a; 2004b)

Table 3.1: Main Laws and Regulations Affecting Government Financial Management since the Reform both at Central and Regional Governments, Indonesia Law/Regulation

Main details

Level

Stage

in

budget process Law 17/2003 State Introduced Finance

paradigm

new National in

Finance,

State Law namely

financial system based on

Budget preparation, execution, reporting

performance,

transparency

and

accountability,

and

replaced the former system under Dutch Law. Law 1/2004 State Laid Treasury

out

the National

management of state Law

Budget execution

treasury both in the central and regional governments,

and

replaced the former system under Dutch Law. Law 15/2004 State Determined the audit National

Budget

Audit

reporting and

function

and Law

mechanism for audit in

the

accountability

Government

area, and replaced the former system under Dutch Law.

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Law

25/2005 Described the national National

National

development planning Law

Development

system, the procedure

Planning System

for

the

Budget planning

local

stakeholders’

forum

(musrenbang) progressively through to the preparation of the

Central

Government’s annual work plan. Law

32/2004 Revised Law 22/1999 National

Regional

on

regional Law

Governance

governance,

and

introduced

direct

Budget planning, preparation, execution,

election of the district

reporting and

manager or mayor.

accountability

Law

33/2004 Revised Law 25/1999, National

Budget

Fiscal

Balance described more detail Law

preparation,

between Central

the of and

the

sharing

the income

tax

of

execution and

and

reporting and accountability

Regional

additional

revenue

Governments

from

the

Specific

Allocation

Fund

(DAK) Law 25/1999

Defined distribution

the National

(revised)

of law

resources across the regions restructured

and some

revenue sources for regional government.

118

Law 22/1999

Determined

the National

structural

(revised)

Law

changes for regional government autonomy, especially in the municipalities and districts. Government Regulation No

Defined

and Government Budget

(PP) elaborated

Regulation

reporting

24/2005 Government

Government

Accounting Standards.

Accounting

It serves as guidance

Standards

for

Central

and

regional governments in

recording

and

reporting

their

financial transactions PP

58/2005 An

omnibus Government Budget

Regional

regulation

that Regulation

preparation,

Financial

described

and

execution and

Management

elaborated

public

accountability

finance as set out in Law

No.

17/2003,

Law 1/2004, Laws 32 and 33/3004, and Law 25/2005. It stipulated the planning, budget, budget administration, reporting, accountability process and

procedure,

and

their interrelation.

119

MoHA Regulation Revises Kepmendagri Ministry of Budget (Permendagri)

29/2002 and followed Home

preparation,

13/2006

on PP 58/2005. It Affairs

execution and

on provided the chart of Regulation

accountability

Guidelines

Regional Financial accounts Management

with

program and activity codes as well as forms and

procedures

implementing also

for

it.

divided

It the

expenditure side into direct

and

indirect

categories

and

introduced

the

obligatory

and

selected functions for regional governments. Permendagri

No. Revised Permendagri Ministry of Budget

59/2007

13/2006

Guidelines

on

Regional Financial

Home

preparation,

Affairs

execution and

Regulation

accountability

Management MoHA

Decree Provided guidance on Ministry of Revised

(Kepmendagri)

the

preparation, Home

29/2002

implementation reporting

and Affairs using Decree

performance-based budgeting and double entry

bookkeeping.

When this regulation was issued, there were still

no

accounting

120

standards set out by the government PP No. 105/2000

Determined how to Government implement

regional Regulation

government financial management based on laws No 22/1999 and 25/1999. Source: USAID and LGSP (2007)

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Chapter 4 Methodology

Introduction This chapter elaborates the methodology underlying the research. The central objective of this chapter is to explain and justify the research methods used in the study for addressing the research questions. This research mainly employs a multiple case study design covering four Indonesian government institutions as part of a broader qualitative approach. The research uses interviews and documentation as its main data collection techniques.

The chapter commences with a review of the research design. This review explains in general how the research was undertaken and the main approach it employs. The next section deals with multiple case study design, elaborating the rationale for employing multiple case studies, limitations, strategies and case selection. Following this, data collection, data analysis and ethical issues are discussed. The chapter concludes with a summary of the entire methodology.

Research Design and Approach Theory Testing Social research is categorised as either ‘theory testing’ or ‘theory construction’ (Lewins 1993). The theory testing approach starts with a specific theory and then

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proceeds to test it, whereas the theory construction approach gathers evidence and concludes the research by constructing theory. Lewins (1993) labels the theory testing approach as a “type Y” thesis and the theory construction approach as a “type X” thesis (Figure 4.1.).

This study has been developed as a type Y thesis following several steps: (1) propositions were developed from the literature review on budget and accounting reforms, public management reforms and implementation; (2) data collection was conducted through fieldwork to obtain data from various sources; (3) these data were analysed and results determined; and (4) the conclusions were tested against the propositions and confirmed or, at least, qualified. For this research, a literature review of existing theories and concepts was first conducted. Research questions were formulated after the review of the literature and prior to fieldwork. The fieldwork was undertaken to enhance understanding of theories and concepts. The multiple case studies of the four Indonesian government institutions then highlighted areas where these theories had explanatory power or not.

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Figure 4.1: Research Design Theory Construction Emphasis

Theoretical problem/question

Conjecture to be tested

Type X Thesis

Collection of evidence

Conclusions, generalisations and generation of theory or explanations

Broad theoretical interests and assumptions

Specific theory to be tested

Hypothesis/es to be tested

Theory Testing Emphasis

Collection of evidence

Conclusions, confirmation or rejection of hypotheses

Type Y Thesis

Source : Lewins (1993, p. 21)

The research design chosen for this study was decided upon after evaluating two main traditions of research known as the positivist and interpretivist approaches. Lin (1998, p.162) argues that ‘the aim of positivist work is to identify qualitative data with propositions that can be tested or identified in other cases’. This marks the difference with interpretive work that ‘seeks to combine those data with propositions into systems of belief whose manifestations are specific to a case’ (Lin 1998, p. 162). Lin (1998) further contends that the major difference between the two approaches can be judged from the data and the types of conclusions one wishes to draw. While a positivist approach seeks to identify general patterns, interpretivist work tries to show how the general pattern looks in practice or to 124

understand what general concepts mean in their specific operation and to unravel the meaning of what people do or believe. Another difference between the two traditions is that while the positivist approach investigates larger samples, interpretivist research employs a small number of samples (Easterby-Smith, Thorpe & Jackson 2008; Amaratunga & Baldry 2001).

Qualitative research can subscribe to both positivist and interpretivist approaches (Lin 1998). As there is no hard and fast line of distinction between the two research approaches, the present study has drawn upon features of both positivist and interpretative research. It is largely consistent with the positivist approach in relation to the central focus of testing propositions about the implementation of budget and accounting reforms and in its attempt to identify general patterns of implementation process that hold across different venues and with different actors within Indonesian government agencies. On the other hand, this research falls between the two extremes of positivist and interpretivist work in terms of its intent not only to identify causal relationships by identifying which factors should be addressed by policy, but also to understand how to address those factors (Lin 1998). This can be done through the richness of the qualitative multiple-case study design that the research employs. The research also differs from the positivist in terms of employing small samples.

Lin (1998) suggests that a combination of positivist and interpretivist approaches is important in policy implementation. This is because policy implementation research not only needs to identify the causal relationships but it is necessary that

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the research to go beyond that to find out the impact of policy solutions. The combination of the two approaches has therefore become prominent in order to avoid common problems in the implementation research by considering the ancillary problems that policy solutions can cause (Lin 1998). This research on the implementation of budget and accounting reform processes in Indonesia supports this combination approach, as it not only documents practices, in order to identify common characteristics related to implementation of reforms and to find strategic patterns, but also investigates budget and accounting reforms within the broader contexts in which the reforms have taken place.

Qualitative Strategy as the Main Approach The current research which investigates budget and accounting reforms is qualitative in nature. If the implementation process is crucial to implementation outcomes and policy success, then the experience of the implementers of the budget and accounting reform will be significant in identifying variables affecting implementation, as well as in understanding the reform policy. This current research focuses on this experience of the implementers in putting the reform mandate into practice, that is mainly obtained from data collection during fieldwork. While much has been written on budget and accounting reforms, surprisingly little attention has been given to the implementation aspect of those reforms (see, for example, Blöndal et al. 2009; Kristiansen et al. 2008). This logic has become the prime reason for conducting qualitative research because in Indonesia, problems or issues of implementation still need to be investigated. The rationale is similar to that provided by other researchers who argue that one major

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reason for engaging in qualitative inquiry is because little is known about the issue (Creswell 2007; Gillham 2000).

Another reason for adopting a qualitative approach to conducting this research was due to the fact that this current study conducts research into the process leading to results rather than into the ‘significance of the results’ themselves (Gillham 2000). In other words, in investigating the implementation of reform (the process) and not the ‘significance’ of the reform (the results), it is more appropriate to use qualitative, rather than quantitative methods. Furthermore, this study seeks to view the case from the perspective of those involved in the reforms (Gillham 2000). The understanding of reform can be gained through exploration of the experiences and perceptions of people in dealing with reforms. In the methodological literature, it is argued that a qualitative approach is theoretically more practicable in order to investigate and explore the complexities of reforms as well as to find out the informal reality that can only be portrayed from inside the process (Gillham 2000). Qualitative research investigates the context of existing daily life in which meaning perceived by individuals can be captured. Given the complexity of reform phenomenon and its contexts, it is appropriate to analyse the reform from the point of view of how people perceive the truth of the facts of reform, and not only from an external observer construction of the facts per se.

The reasons explained above also serve as the justification that quantitative research is not suitable for this present study. Consequently, this research supports de Graaf and Huberts (2008) who provide a succinct explanation of the advantage

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of qualitative over quantitative research. Though quantitative research adds much knowledge, it does not seem to tell the whole story of a phenomenon under research. In this case, for instance it could lead to ignoring the characteristics and details of contexts under which the budget and accounting reforms are taking place in Indonesian government institutions. The literature suggests that budget and accounting reform might work under certain specific conditions, and thus qualitative research acknowledging context is important.

Multiple Case Studies Rationale for Employing Multiple Case Studies Within the qualitative approach, this present research employs multiple case studies for several reasons. First, the research investigated a contemporary phenomenon: budget and accounting reform within its real-life context. Methodological literature points out that multiple case studies are particularly useful in this type of situation in which the boundaries between phenomenon and context are not clear (Yin 2009). Given the nature of budget and accounting reform, it is obvious that the dynamics of budget and accounting reform cannot be understood without considering the context (such as, the Indonesian political and economic settings) within which it occurred.

Second, the approach of using multiple case studies is appropriate for researching complex phenomena because it has the capacity to draw from different data sources and to employ multiple levels of analysis to understand the dynamics present within a single setting (Eisenhardt 1989). The richness of case studies

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allows in-depth understanding of a phenomenon that cannot be obtained through statistical analysis (Lee, Collier & Cullen 2007). Multiple case studies are in line with the attempts made by this research to explain differences in the implementation outcomes of the budget and accounting reforms in four Indonesian government agencies, primarily because multiple case studies allow for comparison, especially in explaining variation. This can be done by undertaking analysis within each case or institution and across institutions (Baxter & Jack 2008). Essentially, by employing multiple case studies, the researcher was able to gain a deeper understanding of the reform process and answer the main research question: why has the achievement of the reform been so uneven?

Third, multiple-case-study design was adopted because this research fulfils several conditions (circumstances) proposed by Yin (2009) relating to the type of research questions, the extent of control an investigator has over events, and the focus on contemporary as opposed to historical events. Regarding the study’s questions, the research seeks to answer questions in terms of ‘how’ and ‘why’, and this can be appropriately answered using a case study strategy (Yin 2009). This research seeks to understand how the tasks of the budget and accounting reform have been approached. The current study is also an explanatory case study to elucidate the uneven implementation outcomes achieved by Indonesian government institutions. In this research, factors of causation have been addressed through the literature review (Chapter 2) which discusses predicting factors affecting the implementation process. Multiple case studies can provide understanding of how something happened as it did, and about issues that need to

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be looked at by conducting further research. Case studies provide a systematic way of looking at events, collecting data, analysing information and reporting results.

In contrast to experimental study that is also able to answer the ‘how’ and ‘why’ questions, Yin (2009) argues that the necessity of using case studies rather than experiments is strongly associated with inability to control behavioural events and access to those behavioural events. In the context of reforms in Indonesia, there is no manipulable variable. The characteristics of reform along with its connection to leadership, culture and the values people uphold rule out experimental design. Although experiments can also be used to research contemporary phenomena, the inability to control behaviour is the main reason why case study is preferred for investigating contemporary phenomena rather than experiment.

Fourth, multiple case studies provide more a robust analysis than a single case study (Yin 2009; Herriott & Firestone 1983). While a single case study may be appropriate if the case represents the ‘critical case’, ‘extreme case’ or a ‘unique case’, multiple case studies serve to better illuminate phenomena by replicating findings across cases in order to understand differences within and between cases (Yin 2009; Baxter & Jack 2008).

The multiple case study approach adopted in the present research has been successfully employed by other researchers investigating financial management reform and also by other public policy researchers (Ryan & Lewis 2007; Stewart

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& O'Donnell 2007; Pressman & Wildavsky 1984; Ridder et al. 2006). In particular, case study research has been common in analysing the implementation of public management reform (Ridder et al. 2006; Nasi & Steccolini 2008). Case study design has also been applied in many studies on public sector change and reform (Boston et al. 1996; Stewart & Kringas 2003). In the context of Indonesia, however, qualitative inquiry and case study of governance have rarely been conducted. Exceptions include von Luebke (2009) and Kristiansen et al. (2008). Using qualitative inquiry through case study, this study seeks to understand the contemporary budget and accounting reform in Indonesia in an in-depth manner to understand more about the process of implementation.

Limitations and Strategy Case study design has indeed some limitations that have been taken into consideration through several strategies when conducting this current research. Some of the weaknesses and strategies to tackle them are now elaborated.

First, the weaknesses in generalization from case studies (external validity) have been acknowledged by many scholars. As Gerring (2007, p. 43) contends that: ‘Case study research suffers problems of representativeness because it includes, by definition, only a small number of cases of some more general phenomenon.’ Nonetheless, in order to redress problems of generalization, particularly if a single case study was employed, a strategy of increasing the number of cases has been employed in the present research (Yin 2009; Bryman 2008). More importantly, multiple case studies aim to expand and generalize theories (analytic

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generalisation) rather than to enumerate frequencies (statistical generalization) (Yin 2009). Therefore, case studies do not yield to the confidence levels obtained by the use of statistical logic and tests of probability in survey methods that make generalization significant for the whole population (Lee et al. 2007).

Second, it has been asserted that the case study approach is lacking in rigour because of equivocal evidence or bias that might occur (Amaratunga & Baldry 2001). In other words, construct validity is thought to be problematic in case studies (Yin 2009). A strategy of triangulation of data has been pursued in the current study to ensure sufficient operational measures as well as to minimise subjective judgment by drawing on evidence from the primary field (interview) which further was cross-checked with secondary data, namely documents. All sources of data have been triangulated on the same set of research questions. This process entailed utilising multiple resources to clarify meaning and verify the reliability of an observation (Stake 2005).

Third, another limitation of case studies is the need for more time and resources because a large amount of data needs to be collected (Yin 2009). This was not in fact the case with the present research. In contrast with ethnographic research or participation-observation research both of which require longs periods in the field (Creswell 2007), this research did not rely only on field data but also on other sources of data.

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Case Selection Case study selection for this research followed Yin’s (2009) holistic multiple-case study design because this study of reform focuses on the global nature of the budget and accounting reform in four case institutions rather than focusing on the embedded units or projects as part of the broader reform programs. In order to investigate this, four cases comprising government institutions implementing budget and accounting reforms at the central and regional level were selected (Table 4.1).

The four cases in this research were selected based on maximum variation sampling (Sandelowski 1995; Patton 1990) to enable the researcher to explore how different government institutions with different socio-economic, political and structural contexts approached the implementation of reform and how these different characteristics affected implementation outcomes. This strategy avoids the problem of overly-constraining selection on the dependent variable,

a

potential problem in this type of research (King, Keohane and Verba 2001). Selection on the basis of maximum variation sampling focused mainly on the difference in the current performance of each institution, as assessed by the BPK Audit Reports on their financial reports prior to investigation. Furthermore, the cases selected emphasized different aspects, so as to enable representation of important differences in size, location, financial resources, organisational structure and level, to cover the various types of offices in Indonesia (Table 4.1 and Appendix 1). The case institutions were also chosen based on the diversity of stakeholders, and the willingness of the decision makers and gatekeepers to

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support the research, since the research would require several visits to their offices.

In this research, the unit of analysis was the dynamics of implementation of budget and accounting reforms during the period from 2003 to 2010. The unit of analysis was governed by the research questions and by the propositions developed in the research design so that the tendency to collect ‘everything’ could be avoided (Yin 2009). In other words, the unit of analysis derived from the propositions and the identified scope of the study; and thus, it increased the feasibility of the study (Baxter & Jack 2008). These propositions are: (1) wellmanaged implementation of the budget and accounting reforms leads to better implementation

outcomes,

and

(2)

factors

explaining

the

success

of

implementation are determined in part by the general variables suggested by the implementation literature and by the contexts within which implementation is taking place, which need to be taken into consideration if the Indonesian budget and accounting reforms are to be sustainable and successful.

The selection of two cases where implementation was successful allowed the investigation of factors promoting the good outcomes of implementation: the Constitutional Court at the Central Government and the Tangerang Municipality Government at the regional level. Furthermore, the two less successful implementation cases: the Ministry of Communication and Informatics at the Central Government and the Tobasa District Government at the regional level were chosen not merely based on prediction of the absence of key factors that led

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to less successful outcomes but also to ensure that unbiased conclusions can be drawn because understanding of success factors can also be gained from exploring the unsuccessful cases. This selection process aimed to produce one of two conditions: literal replication (each case predicts similar results) or theoretical replication (each case produces contrasting results but for predictable reasons) (Yin 2009). It is important to consider that an important step in these replication procedures is the development and elaboration of a theoretical framework (Yin 2009). Before the fieldwork, a rich theoretical framework was established which further became a means for generalization in order to ascertain the conditions under which a particular phenomenon is likely to be found and the conditions when it is not likely to be found (Yin 2009).

Regarding the issue of ‘how many’ cases should be included, it is argued that no more than four cases is typical (Glesne & Peshkin, 1992 as cited in Creswell 1994). As Glesne and Peshkin noted, ‘the more cases an individual studies, the greater the lack of depth in any single case.’ (Glesne & Peshkin, 1992 as cited in Creswell 1994, p. 63). These cases are as follow: 1. Tangerang Municipality Government (TMG), Tangerang The TMG was chosen because, apart from being one of the regional government institutions, the TMG has set a good example of budgeting and accounting reforms being implemented in the region. This was partly justified by the ‘unqualified’ opinion on its 2007 Financial Report given by the BPK (Badan Pemeriksa Keuangan, 2008d).

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2. Tobasa District Government (TDG), North Sumatera The TDG is a district government located in Sumatra that came into being in 1999. Its remote location and its low capacity are the major reasons for selecting it as one of the cases. The Tobasa Regional Government Offices experienced many problems in complying with the new rules and regulations introduced by the reforms. This was reflected by the ‘disclaimer’ opinion from the BPK for its 2007 Financial Report (Badan Pemeriksa Keuangan 2008c) . 3. Constitutional Court (CC), Jakarta The Constitutional Court financial management was chosen because it was successful in gaining the ‘unqualified opinion’ on its Financial Report 2008 (Badan Pemeriksa Keuangan, 2009d) and is a small institution. The opinion from the BPK can be used as an indication of progress in budget and accounting practice in the Constitutional Court. 4. Ministry of Communication and Information (MoCI), Jakarta The major reason for selecting MoCI was because it is one of the Central Government departments which experienced many constraints in its financial management. Issues in financial management were evident as stated in the audit result of its financial report 2007, in which the BPK’s opinion was ‘adverse’ meaning that the financial report was not presented fairly in all material issues (Badan Pemeriksa Keuangan, 2008b). Permission was sought before the fieldwork from the four case study institutions and other related institutions in order to conduct interviews and gain access to Government and related reports (Appendix 2 and 3). The process of obtaining

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permission from all institutions was finalized in approximately three months. In some cases, permission had to be sought several times due to strict bureaucratic requirements.

As shown in Table 4.1, the four case agencies differed in a number of criteria (for example, type of organisation, number of employees, and number of working agencies). The TMG is the largest agency among the four cases. Its bureaucracy is divided into 44 working agencies (satuan kerja or satker). On the other hand, the Constitutional Court, employing only 216 staff, is the smallest agency operating in only one working agency. The TDG is a relatively large agency employing around 4,559 staff in 45 working agencies. The MoCI operates through 56 working agencies with around 8,217 employees.

Table 4.1: Selected Characteristics of Case-Study Institutions Type of Organisation

Annual Budget (Billion Rupiah) 996.67 (2008 )

Number of Employees

Date of Establishment

Number of Respondents

2001 (as part of proliferation program 1999

6

13

Tangerang Municipality Government (TMG)

Municipality government (regional government)

Tobasa District Government (TDG)

District government (regional government)

383.84 (2007)

4,559 (2009)

Constitutional Court (CC)

High institution (central government) Ministry (central government)

177.08 (2008)

216 (2008)

1 (2010)

2003

7

2,262.10 (2008)

8,217 (2008)

56 (2008)

2005

15

Ministry of Communication and Informatics (MoCI)

9,615 (2008)

Number of Unit (Satuan kerja) 44 (2010)

45 (2009)

Others 15 Sources: Mahkamah Konstitusi (2009a), Departemen Komunikasi dan Informatika (2009c), Badan Pemeriksa Keuangan (2008c), Badan Pusat Statistik Pemerintah Kabupaten Tobasa (2007), Badan Pusat Statistik Toba Samosir (2010), Pemerintah Kota Tangerang (2010a)

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The varied amounts of the budgets shown in table 4.1 represent variation in several factors such as the characteristic and complexity of the task performed by the institutions, and differences in employee numbers and levels and regional populations. In terms of the complexity of the task, at the Central level, the large number of the nominal amount of MoCI budget was arguably caused by the costly high-technology nature of the tasks performed by the institution. As an institution responsible for policy making in communication and informatics realms, the MoCI is responsible for massive procurement and maintenance of technologyrelated assets across Indonesian government institutions. Also, the organizational complexity of MoCI with offices fragmented across the nation (both at national and local level) was reflected in its relatively large budget. Overall, the MoCI consists of 56 budget entities across Indonesia. On the other hand, the relatively low budget of the CC signified the CC was a simple organization with only 1 budget entity based in Jakarta.

At the regional level, although the TMG and the TDG performed similar devolved service delivery tasks,, the TMG budget was almost double that of the TDG. The different types of the local government and capacity to generate revenues seemed to explain this substantial nominal difference. While the TMG is responsible for municipality function, as a district government, the TDG has some differences in scope and focus of work. The regional budget is generated from a both Central and local sources, and therefore the amount of the regional budget is subject to the amount of transfer from the Centre and the capacity of the region to generate its own source revenues. The adequacy of resource in the TMG reflects the

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successful implementation of reform in the region and also the possession of adequate resources to make reform happen.

In terms of number of employees, it is obvious that the CC budget is the largest budget per employee, followed by the budget of the MoCI, the TMG and the TDG. Although employing much smaller number of employees, the CC allocated more budget on some employees. The rationale for this might be its specific nature, in the context of Government program focused on democratization and upholding law and enforcement in the country. Strong Government support is reflected in the budget allocated for the CC, which was meant to eradicate corruption. Another reason for its higher budget per employee is the strong incentives in terms of additional income given by the CC to its staff. At the local level, factors that explained the higher proportion of budget allocated to employees included incentives in terms of additional income given to the TMG employees. These additional incentives were not given to the TDG’s staff.

At the local level, although the TMG budget is higher than that of the TDG, on a per head of population- basis, the TDG budget is higher than that of the TMG. The size of the regional budget not only depends on the fiscal capacity of the region but also on the size of the Central Government transfer. The higher per capita TDG budget signified the Central Government’s commitment to mitigate the developmental gaps between regions through the allocation of additional funds in the Central Transfer. The TDG’s reliance on the Central transfer (90% of its total revenue) mirrored its high poverty levels that the Central Government aims

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to reduce. By contrast,the TMG’s central transfer accounted for only 65% of its total revenue.

Data Collection The data collection was structured around the research questions. The bulk of data were derived from semi-structured interviews, government documents, official websites and other related documents. Government policy documents such as laws, regulations and reports were analysed to gain understanding of the budgeting and accounting reforms in the Indonesian context. Additional data was also collected from the official website run by the Central Government ministries at the Centre or municipality/district governments at the regional level.

Semi-structured interviews were employed for several reasons. First, the nature of the reform is quite sensitive in terms of recognizing the proponents of the reform and the resistance to it. For this quite sensitive issue, semi-structured interview is suitable because it allows respondents to express and convey their views and opinions more easily and freely (Bryman 2008). Second, rather than providing respondents with definite answers to choose from, as in structured interviews, that limit them from responding more from their perception and prevent them from going too much off at a tangent, the semi-structured interview will inevitably give some room for their aspirations and understanding to be captured and allow perception-based information to be collected (Bryman 2008; Stewart & Kringas 2003). The semi-structured interview specifically fits Indonesia’s bureaucratic context because it minimizes pressures that might arise from the superior of the

140

respondent creating biases in responses that might easily occur with other methods such as focus group interview. This is especially the case in a bureaucracy which is currently predominantly influenced by the Javanese culture of patrimonialism (Robertson-Snape 1999; Kingsbury 2002). In this research, attention has been paid to ensuring the reliability of data. The researcher was fully aware that in the Indonesian bureaucracy, it is difficult for respondents to speak freely especially on sensitive matters. Although this issue has been solved with sufficient triangulation of interview material and other data, the researcher since the beginning of the research opted for individual interviews rather than focus group discussions. This was done to minimize the situation where the interviewees might face discomfort when asked to talk before his/her superior or colleagues (Bryman, 2008). Deference to superiors’ views is expected in the culture of the Indonesian bureaucracy. More importantly, confidentiality was emphasised to the individual interviewees who were clearly informed of this so as to increase their confidence to convey their views.

The sampling process followed a combination of snowball sampling and theoretical sampling procedure. In the first process, the interview process proceeded to other people who were referred or recommended by the first respondent. With theoretical sampling, the interview process was guided by theoretical propositions and terminated when saturation was reached. Reaching saturation when no new or relevant data seem to emerge concerning a category is important to ensure that adequate data is obtained (Strauss & Corbin, 1998 as cited in Bryman 2008, p. 416).

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An important aim of the research was to capture a range of different types of participants in the reform process in different institutions. Therefore, in order to investigate the implementation process comprehensively from all perspectives, the ‘multi-level’ data collection technique developed by Stewart and Kringas (2003) was also employed. In so doing, care was taken so that interviews covered staff at various levels in the bureaucracy hierarchy. The vertical slice data collection technique expects responses from different levels in each agency: high level, middle level, and operational level officers. This includes key figures during the implementation period and change agents, before and during change. At each level, a semi-structured interview at four case institutions, and at three levels in the organisations (namely Echelon 3, Echelon 4 and staff) were conducted in a variety of organisational units responsible for finance in the planning, budget, execution and accounting divisions. In addition to that, the key figures in the implementation process in the Ministry of Finance, the National Development Planning Agency (Bappenas), the DPR/DPRD, and the World Bank were also approached to gain understanding of the policy maker perspectives. In the four case institutions, interviews covered implementers dealing with the financial management process including planning, budgeting, executing and reporting.

Fifty interviews were conducted during the fieldwork of three and a half months from mid- September 2009 to January 2010. Additional fieldwork was conducted in December 2010-January 2011 for the purpose of interviewing an additional six participants from the Central Government agencies (the MoF, the MoCI and the CC). Interviews mostly lasted for 45-90 minutes. Discussion during the interview

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was recorded using a digital voice-recorder with consent from the respondents. In addition, during the interview process, notes were taken by the researcher. Originally, 65 people were approached to be interviewed. However, owing to an access issue, the interviews conducted in one case, the TMG, only covered five people out of the 14 targeted. Therefore, the interviews were conducted with a total of 56 people.

Before the visits, permission was sought to gain access to each institution. Permission was relatively easy to obtain in the Central Government institutions, while it was more difficult in the regional government institutions. The participant information statement and consent form (Appendix 4) were delivered before the interview process to ensure that the participant was willing to be interviewed voluntarily and not forced.

From 56 tape-recorded interviews, the researcher made transcripts following the questions covered in the interview guide. Interviews were conducted in Bahasa Indonesia. Approximately, eight main questions were asked of the respondents with some follow-up questions on planning, budgeting, executing and reporting (Appendix 5). Interviews took place mostly in the respondent’s office. In one of the cases located in a quite remote area, offices were not suitable as an interview venue. The location and the condition of the office distracted the interview process significantly. For example, one small office ideally accommodating five or six people based on the researcher’s observation, was occupied by more than 30 staff. This problem was overcome with follow-up interview sessions which

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were organized to cover the remaining questions but were conducted in other places (such as in a café).

The main problem in the interview process was to make an appointment with the respondents. Because the first (main) fieldwork took place at the end of the fiscal year (September 2009-January 2010) when the workload for finance officers was usually heavy in Indonesia, several appointments were cancelled necessitating rearrangement. This was the case even with agreed appointments, with the result that sometimes the researcher, who came on the date of the appointment, had to return on another day because respondents were unavailable.

Data Analysis To make sense out of the data, the research employed both a deductive process of analysis based on propositions and an inductive process of analysis. The main strategy of analysis employed in this research follows to one of the analytical strategies proposed by Yin (2009) by relying on theoretical propositions and developing case descriptions. Besides following the theoretical framework and propositions to be tested, the research also allowed themes to emerge inductively from the interview process. It is important to note that, like other qualitative studies, the data collection and analysis occurred concurrently and were an ongoing process during the qualitative research (Yin 2009). In analysing the interview data, the first thing was to obtain direct interpretation of each of the 56 interviews. In conducting this task, besides referring to the transcription of the

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taped interviews, the researcher also relied on case study notes which were taken at the time of the particular interview.

Furthermore, a succession of conceptual matrices of each case were drawn up to generate themes and factors (Miles & Huberman, 1994). This process enables the researcher to establish themes by increasing the level of abstraction with which the data is treated. Based on these matrices, cross-case analysis was conducted. In order to generate a cross-case matrix, the analysis was aided by pattern-matching analysis to establish patterns and seek a correspondence between two or more categories (Creswell 2007). Pattern matching was done by comparing the patterns with the propositions to either claim internal validity or not, which is an essential part of the case study design of linking data to propositions (Yin 2009). The process was conducted iteratively through case study writing and cross-case analysis to enable the researcher to identify themes and factors that emerged from the data. The key objective was to elicit explanatory factors that were associated with the different outcomes (in terms of implementation success) across the four case-institutions. This comparative approach has been shown to be particularly useful in management and governance-related research (Stewart 2011). The effects of contingent or conditioning variables (such as size and complexity of organisation concerned) could not be formally controlled-for. In assessing ‘success’, therefore the degree of difficulty of the implementation task had to be taken into account in each case.

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The propositions underlying the current research have shaped the data collection and analysis, and therefore have been instrumental in deciding what data should be focused on or otherwise ignored. The emphasis of the analysis was on the description of meanings of the implementation of the budget and accounting reform from the data. Subsequently, the research data were compared with extant theory and existing empirical information.

Ethical Issues Research ethics were considered throughout the research process in line with the University of New South Wales requirements for PhD student research (Appendix 6). The main objective of this consideration was to ensure that participation was voluntary and that consent was informed. Consideration was also given to minimising any harm to the participating institutions, the researcher and the University. Participants who were interested in the study agreed to be interviewed and to be observed.

Conclusion This chapter has explained why multiple case studies within broader qualitative research have worked well for this research. It is an explanatory multiple case study design aimed to elucidate presumed causal links between the implementation process and implementation outcomes of the budget and accounting reform in Indonesian government institutions.

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As explained earlier, the choice of the methodology was mainly derived from the importance of understanding a phenomenon which is the implementation of the budget and accounting reform within its real-life contexts. Some strength points of the multiple case studies are their holistic point of view, which allows in depthstudy without divorcing it from contexts where it is not possible using survey or experimental design. The complexity of the budget and accounting reform (such as the organisational aspects, the technical issues of reform such as accrual accounting and performance-based budgeting, and the conceptual aspects) can be explained by the multiple case study design, and would have been difficult to address by survey methods.

Regardless of its weaknesses, the multiple case study approach has frequently been utilised in the research on the implementation of public policy. Care has been taken to minimize limitations in the multiple case study design using strategies such as developing the research design, triangulation of data sources, and replication logic. The researcher also undertook careful data analysis by relying on propositions, and triangulation to gain compelling findings. The most difficult aspect of my fieldwork was gaining entry to institutions and arranging an appropriate schedule for conducting interviews.

Chapters 5, 6, 7, and 8 will examines the actual implementation in the four case institutions.

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Chapter 5 Tangerang Municipality Government Case Study Introduction The Tangerang Municipality Government (TMG) (Pemerintah Kota Tangerang) has proved one of the most successful government institutions in implementing the budget and accounting reforms. Tangerang was recognised as a frontrunner in reform implementation by the Central Government in 2006 and in addition, secured an ‘unqualified opinion’ for each of its financial reports between 2007 and 2010 (Badan Pemeriksa Keuangan 2010a, 2009c, 2008d; Pemerintah Kota Tangerang 2012). Among achievements reflected in the BPK audit reports are an improved internal control system, a good policy in communicating expected ethical standards and moral behaviour, and an appropriate division and clarification of roles and responsibility (Badan Pemeriksa Keuangan 2010a). This makes the TMG a suitable case study for this research because it illuminates factors in successful implementation and provides lessons learnt for achieving better implementation outcomes in Indonesian government agencies.

This chapter is divided into five major sections. It commences by outlining the background to the case study with a brief institutional profile of the TMG. The next section elaborates further the context of reforms, followed by a section on the organisational dynamics of the reforms taking place in the TMG. This is followed by a section which identifies key issues in the reform. The final section highlights 148

the elements and issues in the implementation of reforms. This chapter not only sheds lights on the research question of how the task of reform has been approached in the Indonesian context but as one of the successful cases, it also helps to explain reasons for variation in the implementation outcomes between government agencies. Subsequent chapters 6 to 8 will be the subject of the three further case studies from the research.

Background to the Budget and Accounting Reforms in the Tangerang Municipality Government The TMG is one of eight districts and municipalities comprising the province of Banten (Pemerintah Provinsi Banten 2012). 1 It is located in Tangerang, in the western part of Jakarta, the capital city of Indonesia. Home to over 1,500,000 residents, Tangerang’s population is heterogeneous, comprising Sundanese, Betawi and Chinese communities (Pemerintah Kota Tangerang 2007b, 2007a).

Tangerang is one of the hinterland cities supporting Jakarta and part of the development of five cities, known collectively as Jabodetabek (Jakarta, Bogor, Depok, Tangerang, Bekasi), that were established to reduce population growth in Jakarta, support trade and industrial development, provide housing, and preserve and promote harmony in the development taking place in Jakarta and its surrounding areas (Pemerintah Kota Tangerang 2007c). This location has been advantageous to the region, allowing it to attract investors and transform itself into one of the most successful industrial cities in Indonesia (Halim 2005b). The 1

Banten Provincial Government consists of four districts (Tangerang, Serang, Lebak, and Pandeglang) and four municipalities (Tangerang, Serang, Cilegon and Tangerang Selatan).

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main drivers of the economy are manufacturing, housing, trade, and the hospitality industry. Indonesia’s main airport, Soekarno-Hatta International Airport, is located in Tangerang. Tangerang’s economy is one of the fastest growing in Indonesia, with local economic growth reaching 7.03% in 2008 (Badan Pemeriksa Keuangan 2010a). As a rapidly growing city, major issues facing the TMG have included environmental problems, land availability, infrastructure deficits, traffic congestion, disposal of waste, and social issues such as poverty, commercial sex workers and gambling (Halim 2005a).

Tangerang Municipality Government: Institutional Profile The history of Tangerang dates back to 1950 when the Central Government established Tangerang Administrative City (Pemerintah Kota Tangerang 2007c). The City was promoted to a municipality in 2001 (Pemerintah Kota Tangerang 2007c). In 2008, the TMG employed 9,615 officials, employed in 44 working agencies (Pemerintah Kota Tangerang 2012, 2010a). The TMG is responsible for public services, such as public works, education, and health, delegated by the Central Government.

Regional

Parliament:

Strengthened

Role

and

New

Accountability

Framework As with other parliaments, both central and regional, the Regional Parliament in Tangerang (Dewan Perwakilan Rakyat Daerah (DPRD) Kota Tangerang) assumed formal budget oversight and legislation functions, beginning in 2003. This involved presentation of a complete government financial report to the

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DPRD Kota Tangerang. Prior to reform, this accountability mechanism had been absent, undermining good financial governance in the region.

Before the budget can be approved, it must be discussed by the TMG and the DPRD Kota Tangerang, and consensus reached between these two institutions regarding the budget. In addition, the 2004 decentralisation laws explicitly state that the walikota, mayor (head of municipality region) is held accountable to the regional parliament rather than to the Central Government. The accountability of the TMG for the budget is further ensured through the audited budget accountability report submitted to the DPRD Kota Tangerang at the latest six month after the end of fiscal year.

Budget Overview The TMG budget indicates the strong fiscal position of the region, which in large part has given an advantage to the region in flexibly executing government programs and activities, including the current financial management reform. The TMG enjoys a strengthening budgetary position (Table 5.1). From 2007 to 2009, the TMG enjoyed a budget surplus, giving the Municipality sufficient flexibility not only to deliver services but also to carry out the reform mandate.

The highest priority within the TMG’s obligatory functions was assigned to education, which was also well-articulated as the TMG development foundation of ‘Education for All’ (Halim 2005a). In relation to its discretionary expenditures, the TMG has set its priority on agriculture affairs, to which it allocates the highest

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proportion of the budget compared to other discretionary budget outlays (Badan Pemeriksa Keuangan 2010a).

The TMG relies heavily on the Central Government and the Banten Provincial Government for funding its programs and activities. According to the 2008 TMG actual budget report, of the total revenue the proportion of fiscal transfer from the Central Government budget was more than 65%, while revenue generated from its own sources and other official revenues accounted for 35% (Badan Pemeriksa Keuangan 2009c). This reliance, however, was relatively low compared to other regions across the country where dependence on Central Government revenue averaged 85% (Kementerian Keuangan 2010). This implies a greater than average economic capacity in the region and highlights progress towards greater fiscal autonomy.

This encouraging trend is also reflected in the TMG policy of increased regional revenue since 2009. This policy aims to lift both taxes and charges by 5% per annum (Badan Pemeriksa Keuangan 2010a), and was among several measures implemented by the TMG to increase its level of financial independence. This has been supported by strong fiscal capacity, exemplified by the increases in revenue from its own sources from Rp 131.22 billion in 2006 to Rp 193.75 billion 2009.

Political Context for Reform The political context for reform is also positive in the TMG because the Mayor has been widely supported by the DPRD Kota Tangerang and the public, easing the overall reform process in the region. The political nature of the budget and 152

accounting reforms has made the political support gained by the Mayor critical in the overall implementation process in the region. The Mayor, Wahidin Halim, is the head of the municipality region who also serves as the highest authority in financial management. As an incumbent from the Golongan Karya (Golkar) Party, Halim assumed power in 2003, because he enjoyed support from the majority of parties in the DPRD Kota Tangerang (Ech-wan 2009; Fidrus 2003). In 2008, Halim was re-elected, gaining an absolute majority in the election to head the government for the second term of five years (Ech-wan 2009; Fidrus 2008).

The influence of the political context on financial management change in the government has been reported in many reforming countries (Pollitt & Bouckaert 2004; Steger 2010; Blöndal & Ruffner 2004). To understand how this has come about, it is necessary to understand the overall political context of Indonesia’s multiparty system (Marijan 2010). In the multiparty system, when the legislative has not yielded a one-party majority, it is possible for the government to form a coalition between two or more political parties, giving room for the government to give cabinet positions to almost all represented parties (Diamond 2009; Marijan 2010). In such a context, when majority parties in the DPR or DPRD formed coalition, the Central or regional governments are more stable than a government without majority party support from the DPR or DPRD. In other words, the characteristics of coalition result in a degree of stability for the Government. It is also easier, under these circumstances, for the government in power to push the idea of reforms and gain support from the DPR or DPRD.

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The impact of the characteristics of the Indonesian political system on reform also applies to the TMG, because of the characteristics of the regional coalition. Administration under Wahidin Halim, the TMG Mayor, the prime mover of the reform, was supported not only by Golkar which promoted him, but also by majority of parties in the DPRD Kota Tangerang. When he was re-elected in the first direct poll in 2008, he formed coalition with majority parties in the parliament including Golkar Party, the Indonesian Democratic Party for Struggle (PDI-P), the Democratic Party (PD), and the United Development Party (PPP) (Fidrus 2008).

The multiparty political context has made it possible to promote the stability of his administration, as well as to enable the Mayor to push the reform efforts. In particular, given that the budget process has involved a series of discussions between the TMG and the DPRD Kota Tangerang, the stability in relations between the two arms of government has expedited the TMG in implementing the reform process.

Major support for his government not only enabled Halim to expedite the implementation of the budget and accounting reforms but also to build a strong foundation for good governance in the region. Shortly after he gained power, Halim put forward his vision to make Tangerang City an industrial trade city and a residential area founded on Islamic ethical values (Halim 2005d).

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The stability of administration in association with an appropriate administrative culture in the TMG has shaped the way the reforms were implemented and thus expedited the reforms in the region. This is in line with several studies that indicate policy reforms undertaken by Government are dependent for success on the administrative culture, structure and function and the larger social and political order (Nef, 2008 in Peters & Pierre, 2001; Haque, 2007). There are contrasts and similarities between the successful and less successful cases in this thesis particularly, the different levels of democratic progress between the subnational regions and the development of distinctive bureaucratic cultures closely related to regional political and social environments. As the reflection of Indonesia’s fledgling democracy, the local political context and the level of administrative stability greatly account for the varied outcomes of the reform. Apart from the key role of the political context in the reform process, the TMG case also mirrors some studies in developing countries that highlight capacity for public administration as a determining factor for successful financial management reform (MacCourt, 2003; Bale and Dale, 1998).

Leadership by the Mayor From the beginning, the implementation process was driven by Mayor Wahidin Halim. The Mayor consolidated his political position and drove the reforms forward, by communicating a broad vision of the purpose of the reform; and by implementing a strong form of performance management. Halim also introduced a new ethical value Akhlaqul Karimah– an Islamic-based principle meaning ‘high noble morality’. Even before he took power, noble morality has been a slogan

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continuously voiced by the Mayor as he envisaged Tangerang City as an Akhlaqul Karimah. Akhlaqul Karimah has also been instilled in the TMG bureaucracy as the slogan being reminded in weekly meeting.

Halim emphasized that the overall purpose of the new budget processes was to curb rampant rent-seeking practices. As he wrote in his book 1001 Persoalan Kota Tangerang: Ga Gampang Mengurus Kota (1001 Problems of Tangerang Municipality: Not Easy to Manage a City): The traditional orientation is that regional government investment is focused not on developing and increasing public welfare, but on how to earn money. That practice should be changed (Halim 2005a, p. 12). 2 The Mayor consistently argued that rigidity in the budget process should be abolished and shifted to a more flexible budget that focused more on people’s welfare (Halim 2005a). A more flexible budget could mitigate ineffective and inefficient budget management. Halim underscored the view that regional revenue regulation should serve not only as a means for boosting revenue, but should also be viewed in relation to the broader objectives of achieving the welfare of society. Halim emphasised the importance of qualitative improvements in this regard. It was important for the reform process and is significant in the context of this research that he saw the process of budget and accounting reform as an integral part of his high vision for the future of the city and the welfare of its inhabitants (Halim 2005a) .

2

Unless otherwise noted, translations have been made of excerpts in Bahasa Indonesia to English for the purposes of this thesis. This includes excerpts from interview data.

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Performance Management The new budget practice introduced by the Mayor in 2004 featured a political contract between the Mayor and the heads of all working agencies to raise performance. Under the contract, each working agency was held accountable for achieving targets and for correct utilisation of the budget. Halim’s electoral success was part of a political contract which authorised the Mayor to direct all staff in the TMG agencies concerning the accomplishment of task and responsibility. For this reason, the Mayor conducted evaluation of the achievement of annual, medium and long-term targets of working agencies through a comprehensive assessment taking place in a monthly meeting. The monthly evaluation meeting was a compulsory meeting for all bureaucrats from Echelon 4 and above.

In addition to administrative supervision, the Mayor also personally visited, on a regular basis, development project locations where government programs had been undertaken (Halim 2005a; Pemerintah Kota Tangerang 2011). The Mayor also imposed a strict monitoring program for contracts with service providers. As a result, termination frequently occurred of working contracts between the TMG and those vendors whose output did not match the commitment or specifications stated.

To motivate staff in working, the Mayor balanced punishment and reward. As he expressed, ‘the punishment and reward approach, based on experience, produces better performance of government apparatuses’ (Halim 2005a, pp.15-16). Halim

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further argues that this method of balancing punishment and reward works well with the strict supervision method.

It can be seen, therefore, that the role of the Mayor as a champion of reform was integral to his political activity. His achievement in gaining majority re-election shows that people supported his strategy and this in turn gave him and the reform process great authority. The role of the ‘champion of reform’ is well known in research on public management reform in many national contexts (see, for example, Mackay 2011) and Halim seems to fit this picture.

Measures to Minimize Resistance towards Change When the new budget practices were initially introduced, it faced public and political resistance (Halim 2005a). In practice, the media had often been utilised by the society or public as a means for submitting complaints against the new budget practices. Furthermore, bureaucrats who liked to exhibit opportunistic behaviour showed their resistance by shirking or acting against the regulations. The Mayor and those supporting reform chose to see this resistance in terms of ‘a lack of understanding’ and combated it with a series of measures designed to both win and force compliance such as daily meetings, disclosure of misconduct, and strong sanctions or punishment (Halim 2005a).

The TMG regularly held a daily meeting, the so-called apel, which was directly led and supervised by the Mayor. In the apel, most information revolving around organisational tasks and functions was disseminated and the Mayor always

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personally announced his decision and direction, such that, apel became a place where the Mayor frequently delivered his messages to bureaucrats in the TMG. This enabled him to minimize resistance by leaving bureaucrats in no doubt as to his intent or determination. The implementation of apel appears to have been a fruitful means by which the Mayor has been successful in imposing appropriate behaviour and applying sanctions to all bureaucrats so that they came around to supporting his reforms.

This strategy is also articulated in the BPK Audit Report on the TMG Financial Report for Fiscal Year 2008: Leaders in the Tangerang Municipality Government have successfully set good examples to employees by communicating them through the apel forum on daily basis. The employees’ awareness of breaching laws and regulations has also been conveyed in the training, technical assistance and evaluation meeting forum (Badan Pemeriksa Keuangan 2009c, p.4). Strict sanctions for non-compliance in the implementation of reform tasks were imposed on all staff, including high-level officers who demonstrated resistance. Failure to attend a daily meeting, for example, led to the transfer of high-level officers to another post. In addition, with the reform, more and more rent-seeking practices were disclosed. Following the disclosure of inappropriate behaviour publicly in the apel or other meetings, some government officials were caught and prosecuted for non-compliance to rules and regulation (see, for example, Handoyo 2009). Furthermore, replacement of high officer, is frequently occurred in the TMG, suggesting efforts from the Mayor to improve the TMG performance (see, for example, Dira 2010).

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Communication In another departure from previous practice, the progress of the budget reform program was reported through media, particularly newspapers. The media also reported opinions of people on the reform process, and the TMG responded through the same media, thus engaging in direct public debate. The Mayor’s stated purpose of delivering a public progress report via the media was to meet people’s right to know what the government had been doing and how far the activities had met public expectation (Halim 2005a).

Another innovation initiated by Mayor Halim pertained to cultural change that aimed to promote openness in government financial management practices. In 2004, the Mayor instituted a unique practice by opening access for people from all walks of life to government agencies through a Short Message Service (SMS) or text messaging. SMS was a democratic device chosen by the Mayor to open public communication between the people and those in authority in the TMG.

As Wahidin Halim suggests in his book titled Demokrasi SMS “… Suara Rakyat Jangan Dicurigai!” (Short Message System Democracy “ … Don’t Suspect the People’s Voices!”), reformers can take advantage from: … the availability of public infrastructure to communicate opinion … directly without editing, without cut-off or distortion ... as direct-line, and in some cases like a free hotline where all people from all walks of life or government officials at all levels can talk directly (Halim 2005c, p. 1). According to Halim, the purpose of the direct line was to keep public feedback and opinions distortion to zero by allowing decision makers (at the executive level) to listen to these feedback and opinions, known in Bahasa Indonesia as

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aspirasi, and take the opportunity to obtain a second opinion (Halim 2005a; 2005c). Especially for TMG bureaucrats, the SMS was intended to motivate them to give their best service to the public. With SMS, people could directly send their message to say ‘anything’ such as posing a question, putting an opinion, and expressing criticism. The message would be responded to directly by the Mayor. This use of SMS appears to have motivated the implementers of reform but also to have provided the TMG with indications of significant issues faced by the people. For example, issues raised by people through SMS ranged from public services such as transport, road improvements, traffic jam problems, and trash collection, to reports of public servant behaviour such as corruption or an act of collusion. Essentially, through the SMS channel, the Mayor obtained information related to inappropriate behaviour of individuals and institutions, which assisted him in conducting a monitoring program.

The Mayor also followed up each SMS message with responses delivered through the various media (Halim 2005c). First, the text was responded to in a local newspaper called Satelit News (Satellite News). The Satellite News carries a column or program titled Halo Pak Wali (Hello Mr. Mayor) that can be accessed by all people. Second, the Mayor’s responses to all messages were packaged in another column titled Saudaraku Rakyat Kota Tangerang (My Relatives, the People of Tangerang Municipality) and were published in the same local news each Monday. Third, the TMG provided a guest book (buku tamu) for all TMG residents on the official website of the TMG (Pemerintah Kota Tangerang 2012).

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In this, people could pose questions regarding TMG policy as well as express their opinions and complaints that would be responded to by the TMG.

Furthermore, in 2009, the TMG also added other aspirasi channels for feedback and opinions that included a 24-hour hotline service, a community access point service in several government buildings and a free SMS gateway (Pemerintah Kota Tangerang 2009a). Lastly, the views and feedback, received in these ways were followed up with action, such as terminating a contract with a vendor, and replacing staff to improve performance (Pemerintah Kota Tangerang 2009a; Halim 2005c). In terms of quality, all the aspirasi channels seemed to fulfil some aspect of people’s needs. A study on users’ satisfaction with this mobile government program in the TMG concluded that SMS senders were satisfied with the Hello Mr. Mayor program, although the level of satisfaction differed on each issue (Mulyasari 2007).

The more open culture with the introduction of these aspirasi channels to government was seen by the Mayor as assisting the the implementation process in the TMG because it served as feedback to improve government performance, to measure and evaluate implementation progress and achievement, to detect inefficiency of resources, as well as to minimize opportunistic behaviour in the government (Halim 2005b, 2005c).

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Organisational Dynamics of the Reforms An early start in implementing the budget and accounting reforms was among key features of the implementation process that served as a rationale for the farreaching reform in the TMG. The early start of the TMG reform in 2001 as compared to other regional government agencies in 2006 not only suggests strong motivation of this government but has given some advantages to the TMG as it allowed for a longer learning time that supported better outcomes of the implementation. The TMG took a head start, which was clearly described by some implementers who perceived that the reform in the regions had been started even before the mandate was promulgated. For example, one respondent who had been working for the institution for more than 10 years and experiencing the change management process commented, In terms of budget reforms, we have already started integrating financial management since 2001, so we are quite advanced. So, when the trilogy of Financial Laws was enacted, we were even ensured knowing that what we have started was right (TMG#1). 3

Reorganisation Following the promulgation of regional government regulations, in 2008 the TMG reorganized its structure. This involved merging, splitting and creating functions in several institutions aimed to ensure the operation of the check and balance mechanism in financial management, and also to enable coordination (Badan Pemeriksa Keuangan 2010a). This reorganisation was a significant step in facilitating implementation of reform in the municipality, partly because overlapping functions occurring in the previous organisational structure were 3

List of Respondents for semi-structured interview cited in this thesis is provided in Appendix 7.

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rectified in the new structure with a clear separation of financial roles and responsibilities.

The new financial functions were performed by the Administrative Secretary as the coordinator of financial management in the region, the Regional Financial and Asset Management Services (RFAMS) with the function of the Chief Financial Officer (CFO) and other spending agencies with the function of the Chief Operational Officer (COO). The CFO is the financial manager responsible for preparing the draft regional budget and its revision, approving budget implementation documents, collecting regional revenue and implementing the general treasurer function. The COO, on the other hand, is the budget user or working agency obliged to prepare the budget implementation documents, implement the budget within its jurisdiction, implement revenue collection and deposit revenue with the state cashier, manage assets, and prepare, as well submit, the financial report of its institution. This change was also followed by a change in agency nomenclature to ensure consistency with the Central Government regulations and to publicly indicate the agency function through its name (for example, Dinas (Services), Badan (Agency or Institution), and Kantor (Office)).

The TMG also restructured the CFO in order to cover the whole range of financial functions: budget, treasury, and accounting functions, which were absent in the old structure. This restructuring process facilitated the implementation of the reform. Of particular importance was the creation of an Inspectorate as a substitute for the regional supervision body to invigorate the oversight function of

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government bodies including in financial matters. The organisational structure of the TMG is charted in Figure 5.1.

Compliance Ensuring employees adhered to regulations governing their own behaviour was important in countering corruption. For example, the TMG had been able to significantly minimize a common ‘opportunistic behaviour’ practice in the area of official travel, where staff could get personal gain at the expense of public money. As a senior manager who experienced the pre-and post reform process observed, … in the past, official travel could be done freely, sometimes people did not go for that travel, but they still got the money. Now, in here, we cannot do it anymore … each money disbursed even a cent must be reported (TMG#2).

Deviations from the regulations had also been kept to a minimum in the area of revenue collection, especially in areas where there was an opportunity for corrupt behaviour because bureaucrats were dealing directly with tax payers. With the reforms, procedures and systems relating to revenue collection have been made clearer and better, and this has generally eased tax payers’ anxieties in fulfilling their obligation in depositing tax. New procedures were clarified in terms of documents, time frames, and account codes that enabled tax payers to do the depositing themselves. As this senior official further explained: … deviation [from regulations] has been kept to minimum, for example when we accompany the working agency [to see taxpayers] to get data, and we get money from taxpayers to be deposited…now we direct all tax payers to deposit it themselves (TMG# 2). He further mentioned, ‘there is no revenue directly used any more, so we should deposit it to the regional cash office first’ (TMG#2).

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Implementing Centralised Mandates In 2007, the TMG promulgated the Regional Regulation (Peraturan Daerah) on Regional Financial Management (Perda No. 9/ 2007) and the Mayoral Regulation (Peraturan Walikota) on Systems and Procedures for Regional Government Financial Management

(Perwal No. 10A/ 2007 and Perwal No 8A/2008).

Similarly, within each department in each agency or spending unit, the implementation of new financial changes has largely been dictated by a specific regulation on the main tasks and functions which were further elaborated in the form of Standard Operating Procedure (SOP).

Despite the progress in enforcing the Central Government regulations through regional regulations, respondents reported problems with conflicting regulations, particularly those that were issued by the MoF and the MoHA (TMG#1, TMG#3). For example, to generate its financial report, the TMG, like other regional governments, had to reconcile the MoHA regulations concerning accounting policy with the 2005 Government Accounting Standards (Government Regulation (Peraturan Pemerintah) (PP No 24/2005)) issued by the MoF (Badan Pemeriksa Keuangan 2010a). In the TMG, however, this additional work was well managed, as pointed out by a senior manager with expertise in the accounting system: Government Accounting Standard rules, the presentation and preparation of the financial system as well as the accounting system is mandated down to the lower levels of government. Therefore, we use the Ministry of Home Affairs (MoHA) regulations and then convert them to the Ministry of Finance (MoF) accounting standards [Government Accounting Standards]. The manual accounting system has provided another advantage in this conversion task. In the TMG this has been running well since 2007 (TMG#1).

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The conflict between different sets of regulations was aggravated by rapid changes in the regulations concerning financial management issues. As the senior official further commented: Regional government regulations are changing over and over, so a learning process is needed especially for the working agencies. Especially with regard to the plan to implement the accrual basis, here the implementation of cash toward the accrual basis has left working agencies gasp for breath, so what will happen if we implement accrual?, So we need a learning period of at least five or three years (TMG#1).

There were at least two reasons for these rapid changes. First, the Indonesian government was still in the position of learning about financial management reform and thus the revisions made were intended to improve this implementation of reform. Second, the Central Government differed from regional governments (for example, in the budget structure); therefore considerable adjustment and continued revision were needed to be conducted. Nonetheless, the fact is that those implementing the changes found this difficult, and it created some resistance to the process even where the implementers supported the reforms in a general sense.

Dissemination and Training Program: Enhancing Bureaucratic Capacity One way of overcoming these difficulties was training that also had the benefit of empowering bureaucrats in the reform process by adding to their financial knowledge and skills. To this end, the TMG ran dissemination and training programs from time to time. Dissemination programs aimed to disseminate new regulations or policy to implementers, whereas training programs were organized to empower financial staff in charge of planning, budget, treasury, and reporting

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with skills and competency on technical issues. The TMG also conducted other similar capacity enhancement programs such as seminars and workshops to improve knowledge and skills. The high frequency of training was a major factor affecting the capacity of human resources in adapting to the dynamics of change and interpreting regulations.

Both dissemination and training programs were facilitated by the institutions in charge of particular tasks. For example, regulations issued by the MoF were normally followed by a dissemination or training program headed by the MoF; whereas training related to planning was facilitated by the National Development Planning Agency (Bappenas) or the Regional Development Planning Agency (Bappeda). The dissemination and training facilitation included providing speakers and arranging the venue. As a normal practice in TMG as well as other regions, funding for travel was borne by the office from which the participant came.

Besides training held internally by the TMG agencies, training programs were also held and coordinated by the Tangerang Regional Personnel Administration Agency (Badan Administrasi Kepegawaian Daerah (BAKD)). BAKD training related generally to governance and to public service technical, functional and leadership training. In addition, the TMG also participated in dissemination and training programs related to financial management held by the Central Government (such as the MoF, and the MoHA) and the Provincial Government.

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The frequency of dissemination and training programs was high in the region. Dissemination programs were held every time new regulations were issued and were organised for all strata in the bureaucracy. For example, in June 2010, the TMG held technical training on financial administration and accounting systems for 49 treasurers and 41 heads of finance sub-departments from all working agencies (Bataviase 2010).

The point in terms of the process of implementing reforms is that training was well-resourced, with sufficient budgetary support available for the tasks at hand. One middle manager explained that training and dissemination programs were supported through a specific assisting program with a routine budget allocated for that purpose. As this respondent who was knowledgeable in planning and budget preparation processes commented: … in general, the RFAMS runs sosialisasi (dissemination) programs for working agencies, which is part of their main task, that is the assisting activities. …there is budget for these assisting activities (TMG#4).

Change was also introduced through dissemination of hard copies of regulations, memos, and circular letters hierarchically within the bureaucracy from higher levels to lower level staff. Another means of dissemination was extensive utilization of the internet provided by the TMG for its officials. All respondents mentioned the internet (mainly the official website of Indonesian Central Government institutions) as a means to obtain necessary information such as current regulations and updated systems and to upload information (TMG#1, TMG#2, TMG#3, TMG#4, TMG#5, TMG#6). The TMG set up its official website with well-described and elaborated government activities, including the

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Municipality

Budget

that

can

be

accessed

by

the

public

(www.tangerangkota.go.id). The website received an e-government Award for the best website from Majalah Warta Ekonomi (Economic News Magazine) in 2008 (Pemerintah Kota Tangerang 2010b).

Along with the dissemination and training program, bureaucrats with financial and economic backgrounds have supported and became the backbone of the implementation of reforms. As one respondent who had been working for more than 10 years mentioned, ‘most of the staff here has a financial background’ (TMG#4). He further noted that several leading figures in the RFAMS had also graduated from Sekolah Tinggi Akuntansi Nasional (STAN) (the State Accounting School), the government accounting school in Indonesia. From this it can be seen that the human resource capacity, particularly in terms of financial expertise, was quite strong in the TMG, which positively impacted on the overall process of the implementation of the financial management reforms.

Facilitation Activities: Assisting Task Force (Tim Pembina) The implementation process in the region was driven by facilitation activities headed by task forces. The Tim Pembina (Assisting Task Force) is the central task force responsible for guiding spending agencies on how to observe and implement rules and regulation. The Tim Pembina was composed of qualified RFAMS officials who were always kept abreast of current issues, changes and dynamics of the reforms. They attended meetings, visited working agencies, and invited working agencies to work on particular issues or problems. The Tim Pembina was required to submit an activity report on a monthly basis concerning assisting

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activities it has undertaken. One of the respondents in this research, who was involved in the assisting activities, holds the view that this guidance and assisting activity is important for working agencies in dealing with the budget (TMG#4). Another respondent expressed the view that the Tim Pembina acted as coordinator in solving problems that arose in the implementation process (TMG#3). These views show that those directly involved in the process have benefited from this assistance in practical ways. The Tim Pembina has assisted the implementers to manage the reform task at hand.

The TMG also set up a number of task forces which worked for a particular period of time within the fiscal year. These task forces include the Budget Preparation Task Force, the Financial Reporting Task Force, and the Review Task Force (Sekretaris Daerah Kota Tangerang 2009). The Budget Preparation and Financial Reporting Task Forces were established internally at the working agency level for budget and financial report preparation. The Review Task Force, on the other hands, involved several officials from the Inspectorate and the CFO (RFAMS) responsible for the preparation and finalization of the financial report. It is composed of staff from the Inspectorate, which, as mentioned above, is a supervision agency. The Review Task Force is considered to be the dominant team or task force also in the financial process where its function is to examine the suitability of systems, content and the Government Accounting Standards used in the consolidated government financial report.

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The Tim Pembina and other task forces were established and formalized by the Mayoral Decree. All of these task forces regularly publish guidance, in the form of a circular letter, for the implementation of reform, stating the requirements for a particular task, the timeframe for task accomplishment and giving technical detail on that task. This guidance has assisted implementers in converting the reform mandate into practice. The effectiveness of these task forces might be partly explained by the additional income or bonuses given to all task forces. As explained by one respondent who involved intensively in assisting activities: … assisting activity performed by the Tim Pembina is one of the central tasks of the CFO and there has been a regular budget allocated annually for these activities since 2008 (TMG#4). In addition, at the TMG Administrative Secretary level, the so-called Tim Anggaran Pemerintah Daerah (TAPD) or Regional Government Budget Team or Task Force, was set up as the coordinator for budget processes, and in particular acted as representative of the TMG in the budget discussion process with the Regional Parliament (the DPRD Kota Tangerang). The Regional Government Budget Task Force is chaired by the Secretary of the TMG, with members from all agencies within the TMG, and has the role of discussing the budget with the DPRD Kota Tangerang. Team members have run joint workshops, shared and facilitated knowledge, information and resources. This shows that task forces have been the driving forces of the reform to take place in each government agency in the region. Empowered by qualified personnel in financial issues, their existence is of particular importance in assisting implementers to manage the implementation tasks.

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Financial Management Systems Since 2006, the TMG has received several awards for financial management from the MoF and Badan Pemeriksa Keuangan (BPK) (Supreme Audit Agency). In particular, in 2008, the TMG received an Award for Effort for Achieving Good Financial Report 2007 (Penghargaan atas Upaya Pencapaian Pelaporan Keuangan yang Baik tahun 2007) from the BPK (Pemerintah Kota Tangerang 2007c). However, there are still some deficits in the implementation of reform. For instance, the TMG had not utilized an integrated computerized accounting system in its financial reporting process, as advised by the Central Government (Badan Pemeriksa Keuangan 2009c). At the time of research in 2010, the integrated computerized accounting system only covered the budget without covering the accounting phase. As explained by a respondent that the development of this computerized accounting system was under the auspices of the MoHA assistance to TMG (TMG#1). The aim of having an integrated computerized accounting system is to create an internal control system in order to maintain checks and balances. However, the internal control system is still maintained using the unintegrated system because all transactions are recorded not only at the agency level but also at the RFAMS level. Each working agency records transactions based on their actual expenditure and revenue, and the RFAMS compiles records based on working agencies’ daily report to the RFAMS. At the end of month, these two records are reconciled before further consolidation.

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Despite this lack of a computerized system, the TMG is at the forefront in terms of managing its overall financial tasks particularly in preparing a good qualified financial report. This not only suggests the overall capacity to implement the reform mandate but also the success of the implementation process derived from that capacity.

Feedback and Evaluation Bureaucrats in this study referred to regular meetings, in which in-depth evaluation of each working unit was conducted, as one of the strong mechanisms of implementing reform. Agendas of meetings included discussions about progress, obstacles or problems related to the budget and financial issues. As one senior manager put it, ‘there is feedback because [the meetings are] directly led by Mr. Mayor, so it [anything raised] is for sure responded to’ (TMG#2). Along with the meetings, the TMG also used reporting mechanisms on a daily, weekly, and monthly basis. This kind of framework seemed to work very well in the TMG. As explained by a respondent who had worked long term in the TMG explained, The evaluation meeting is directly led by Pak Walikota … Concerning the revenue target and its realization, we are directly told or reprimanded by Walikota and then it is followed-up by all working agencies (TMG#2).

The monitoring practice was intended to ensure that working agencies spent their funding according to the budget and had earned revenue as targeted in the budget documents.

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Incentives, Rewards, and Sanctions Balancing sanctions and rewards was a salient feature of reform implementation in TMG. The provision of incentives to all implementers motivated them to convert the reform mandate into action. The incentives were given in the form of organisational incentives, such as adequate office space and equipment as well as individual incentives, such as financial bonuses. Additional income was given to financial managers (including the established task forces) at all working agencies and was allocated in each working agency budget. As one respondent, who was also a member of the Tim Pembina mentioned: Incentives are given for all Tim Pembina members. For each point of progress based on the monthly report (assisting task force activity), we are given additional income (TMG#4). The incentives were provided in return for performance elaborated in the compulsory monthly report of the Tim Pembina. These incentives seemed to work very well in the TMG because officials were motivated to achieve their objectives. The majority of respondents who dealt with budget, assets, and accounting in the TMG noted that sanctions were also in place (TMG#1, TMG#2, TMG#3, TMG#4). For example, there was strict sanction in respect of the failure of conducting reconciliation process of financial transactions recorded by the spending agencies and the RFAMS.

Interestingly though, when asked about type of sanctions, most respondents answered by saying that this would be decided by the Mayor. One senior manager commented specifically that ‘sanctions depend on Mr. Mayor’ (TMG#1). This comment suggests a strong role on the part of the leader in imposing the sanctions

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on implementers. Sanctions imposed by the Mayor took the form of a warning (verbal sanction) or a letter of reminder, demotion and dismissal. In an official ceremony, the Mayor said, ‘If there are high-level officials lazy about attending the weekly official ceremony, I will replace them’ (Pemerintah Kota Tangerang 2009c). This specifically applied to those who breached the accountability contract. This is a document that states the target to be achieved and specifies input and output by an organisation (budget document) or third party (contract document).

The implementation of reform in the TMG has been also characterized by quick feedback and an ability to meet the deadline of financial tasks set by the laws and regulations. These characteristics indicate the willingness of participants to work together in implementing the reforms. In the views of respondents directly involved in implementation this seemed to be caused by the accompanying sanctions. For example, the RFAMS issued a regulation that a budget disbursement proposal from working agencies would not be preceded with unless the reconciliation process (relating to the financial report) was done. In essence, the sanction has motivated working agencies to work together towards finalizing their financial reports. As noted by a senior official, ‘the working units will certainly come for the reconciliation process, because if they do not reconcile, their budget cannot be disbursed’ (TMG#2).

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Stability in Human Resources Reform in the TMG has been facilitated by a high degree of stability in the workforce. Respondents say this reflects the strong commitment of the TMG to the reform process, because relatively infrequent rotation helped them to cope with the new tasks better. This distinctive feature has created an environment in which joint action has been relatively easier to achieve. Most bureaucrats dealing with finance have dealt with each other on related issues for a long time as they were working on the same issues even before the reform began. One senior manager who is also in charge of coordinating the assisting task force commented: Here, we are different from other working agencies. We are here for years. So, they [the assisting task force] have been involved even before the reforms, so they know what used to happen and what should happen now (TMG#1). A rotation process operates within the municipality’s workforce and does so in ways which seem to fit the nature of reforms. This rotation process helps retain employees who have been sent to join training programs related to their current job, thus making it easier for them to implement reforms. More frequent rotation might lead to confusion for some bureaucrats particularly because of the technical difficulties in budget and accounting reforms; therefore, it is somehow necessary to allow particular staff to be in the same position for several years, before they are replaced, especially after participating a training or dissemination program. This finding was confirmed by the BPK audit report that articulated the view that within the accounting and asset management function, staff rotation had not been conducted frequently; this was seen as a manifestation of the commitment to

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financial report reliability and asset protection (Badan Pemeriksa Keuangan 2010a).

Key Issues in the Reform A favourable political and administrative context underpinned the positive results in the TMG. The Mayor’s political skills formed a working bridge between the executive and the evolving role of the legislature. In terms of resolving implementation issues, leadership, and a powerful combination of incentives, sanctions and adequate resources, were critical.

Strong, Values-based Leadership The head of the TMG, the Mayor, Wahidin Halim was a prime mover in the reform process. This was confirmed by respondents, who were likely to refer to the leader as a figure who made things happen (TMG#1, TMG#2). They believed that it was the good example set by the Mayor that motivated them to follow him.

The TMG vision and mission affected individual performance in a positive way. The principle of Akhlaqul Karimah, coupled with strong supervision, supported positive interactions among implementers, as well as deterring regulation breaches and corrupt acts. Loyalty and discipline were harnessed in support of a new culture oriented towards the public interest.

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Integrated Incentives and Sanctions A key feature of the reform program in the TMG were the incentives, rewards and sanctions given to implementers, backed up by monitoring and evaluation. Officials knew that corrupt behaviour was likely to be uncovered and if uncovered, sanctions would result. The top-down change also involved formalization of rules and procedures, followed by dissemination of regulations, and training in the new techniques. A clear understanding of what was required of them facilitated cooperation between implementers, both within and between organisations in the TMG. In addition, the emphasis on ethical values smoothed the implementation process.

Resources The TMG devoted adequate resources to the implementation task. In addition, its proximity to Jakarta gave it ready access to MoF assistance. Task forces operating at the agency level were effectively used to resolve problems and to disseminate learning. Stability on the human resource front was also important, in the sense that knowledge was retained in key areas, and augmented by training and dissemination programs.

Conclusion The lesson to be learned from this case study is that leadership can be fundamental to the successful implementation of a government policy. Even when resistance towards implementation occurs, strong leadership backed up by a strong vision is able to direct implementation towards positive achievement. The

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leverage of leadership in the reform process looms large in developing nations with high power distance such as Indonesia (Hofstede, 1984). Practical measures such as clear communication and the use of facilitation teams were also important in helping implementers to accomplish their tasks.

A key question for the future is the extent to which the leader-induced changes will be sustained in the TMG. By articulating and mandating desired behaviours within an over-arching ethical framework, the TMG leadership has instituted a climate of reform. But the real test will be the extent to which cultural change becomes embedded within the bureaucracy.

In terms of the research questions set for this research, this case study of the TMG provides some answers about factors influencing the good implementation outcomes. It also shows how the political and related contexts affected the Motivation of the TMG to implement the reforms followed McCourt’s (2003) argument that political capacity and administrative capacity are the antecedent factors for implementation. In the TMG, political capacity was derived from the strong political base built by the Walikota, Wahidin Halim. It was further fortified by culture.The effectiveness of leadership in the TMG during the implementation process was influenced by the national culture with high ‘power distance’ as suggested by Hofstede (1984). In instances of high power distance, leaders play major roles in many aspects in life, including implementing successful reform. The TMG case study thus revealed that contexts matter in the implementation process.

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The implications of the case for the study of implementation reinforce the importance of (on the one hand) a favourable political context and (on the other) the importance of organizational factors and incentives. This perspective, when considered in relation to the mainstream implementation literature, highlights the extent to which this literature appears to take for granted various aspects of regime stability and administrative capacity, which are problematic in developing country contexts.

If ‘leadership’ is often a means for overcoming these deficits in developing countries, it may, nevertheless be a more significant factor in developed countries than is generally allowed. Tangerang focuses attention on the idea of ‘capacity for reform’, which highlights the importance of human resource attributes, and of having skilled people to work alongside and to train those who are not so skilled.

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Table 5.1: Regional Budget of the Tangerang Municipality Government 2007-2010 2007

2008

2009

(billion Rupiah)

(billion Rupiah)

(billion Rupiah)

Revenue

926.87 (actual)

1,115.50(actual)

1,182,82 (actual)

Expense

821.14 (actual)

996.67 (actual)

1,103.60 (actual)

Surplus

105.73 (actual)

118.83 (actual)

79.22 (actual)

Source: Badan Pemeriksa Keuangan (2010a, 2008d, 2009c)

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Figure 5.1 Organisational Chart for the Tangerang Municipality Government, 2010

Walikota (Mayor)

Municipality Administrative Secretary

Chief Operational Officer (COO)

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29.

Secretary of Regional Parliament Regional Personnel Education and Training Agency Regional Development Planning Agency Community Empowerment and Family Planning Agency Agency for Environmental Control Agency Agency for Integrated Licensing Services Inspectorate Police Corps Secretary for Regional Elections Commissions Office Secretary for National Civil Service (Corps) Education Services Health Services Social Services Manpower Services Transport Agency Information and Communication Services Population and Civil Registration Services Youth, Sport, Tourism and Culture Services Public Works Services City Interior Services Sanitation and Parks Services Fire Brigade Services Industry, Trade and Cooperatives Services Agriculture Services Regional Archive Office Library Office Office for National Unity and People’s Protection Office for Research, Development and Statistics Sub-Districts (13)

Chief Financial Officer (CFO)

Regional Financial and Asset Management Services (RFAMS)

Source: Adapted from Pemerintah Kota Tangerang (2012)

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Table 5.2: TMG Reform Timeline

2001

o Tangerang Administrative City was promoted to the municipality level

2003

o The head of Tangerang region election. Wahidin Halim was elected as Mayor

2004

o The Mayor introduces new practice in the budget process o The Mayor introduces the new ethical value of Akhlaqul Karimah o The Mayor introduces the Mobile Government Program (Short Message Service Democracy), Satellite News program Hello Mr. Mayor and My Relatives, the People of Tangerang Municipality

2006

o Main changes introduced by the MoHA in the implementation process o Budget and accounting reforms in line with the Central Government are officially implemented in the TMG (MoHA regulation)

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2007

o The Tangerang Municipality Government (TMG) promulgates Mayoral Regulation (Peraturan Walikota) on Regional Government Financial Management o The TMG receives ‘unqualified’ opinion for its 2007 financial report

2008

o First direct election for the head of region is held. Wahidin Halim, is reelected for the second period. o The TMG reorganizes its structure based on the mandate of the Financial Law Package o The TMG receives an Award for Effort for Achieving Good Financial Report 2007 (Penghargaan atas Upaya Pencapaian Pelaporan Keuangan yang Baik tahun 2007) from the BPK o The TMG receives ‘unqualified’ opinion for its 2008 financial report

2009

o The TMG receives ‘unqualified’ opinion for its 2009 financial report o The TMG holds technical training on financial administration and accounting system for financial officials. o The TMG added new aspirasi channel of a 24-hour hotline service, a community access point service, and a free SMS gateway

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2010

o The TMG receives ‘unqualified’ opinion for its 2010 financial report

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Chapter 6 Ministry of Communication and Informatics Case Study

Introduction The case study of the Ministry of Communication and Informatics (MoCI) (Kementerian Komunikasi dan Informatika) is one of the more complex of the four covered in this study, given specific political contexts pertaining to democratization and frequent policy changes that affected the overall process of the implementation of the budget and accounting reforms. The MoCI achieved mixed success in implementing the reforms. The BPK opinion on the MoCI Financial Report was a ‘disclaimer’ in 2006, ‘adverse’ in 2007, and ‘qualified’ in 2008. The MoCI was the only central government ministry to receive an ‘adverse’ opinion in 2007, meaning that the report had not been prepared according to accounting standards and therefore the Auditor had been unable to form an opinion on the information presented.

The frequent restructuring process as a result of policy changes affected the implementation of the reforms. First, the frequent restructuring process affected the overall capacity of the institution. Second, the reform task itself formed part of the intended creation of a new organisational culture which was difficult to progress in an environment of constant structural change.

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The case is also of interest because in spite of strong Government support to the MoCI in the context of promoting Indonesia’s fledgling democracy, the MoCI experienced similar problems to those reported in the other case studies. These included the challenges of asset management and performance-based reporting, and finding ways of combating underspends while also ensuring financial accountability. For these reasons investigating the implementation of the budget and accounting reform in the MoCI, will reveal factors affecting implementation outcomes in general.

In order to achieve this, this chapter commences with a review of the institutional profile of the MoCI and other related contexts that affected the outcomes of the implementation of the budget and accounting reforms. The next section deals with the task of reform, followed by a description of the implementation processes taking place in the MoCI. Following this, a discussion of problems and issues is undertaken, suggesting the reasons for implementation problems. The chapter concludes with a summary regarding the research questions addressed.

Political Context of Reform The MoCI is a medium-sized Indonesian Central Government ministry employing around 8,217 staff in 2008 (Departemen Komunikasi dan Informatika 2009c). The MoCI is a policy-making and regulatory agency, responsible for conducting government affairs in the field of communication and informatics. These roles encompass the authority to formulate and implement national policy in a number of fields: the management of the radio frequency spectrum; oversight of postal,

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telecommunication and information technology services; management of tariffs for network interconnection; licensing of the broadcast media; and the development of telematics applications (Departemen Komunikasi dan Informatika 2008b). Telematics include e-government, e-business, their associated software and content, and the empowerment of telematics in social and economic development (Departemen Komunikasi dan Informatika 2008b). Among these functions, the primary task of the MoCI relates to postal and telecommunication affairs to which most of the MoCI total budget is allocated (60.22 % in 2008) (Departemen Komunikasi dan Informatika 2009d). Postal and telecommunication affairs encompass the post and telecommunication restructuring process, and policy and regulation for the postal and telecommunication industries.

The predecessor of the MoCI, the Ministry of Information (Departemen Penerangan (Deppen)) was created after the Independence of Indonesia in 1945 (Kingsbury 2002; Marijan 2010). In the Suharto Era, the Deppen was one of the most powerful ministries, becoming the main vehicle for Suharto to achieve his political goals and serving the regime’s interests through government control over the media (Kingsbury 2005). The downfall of the New Order Regime in 1998 ushered in a new era of freedom of communication in the Indonesian political system.

Subsequently, under the Habibie administration in 1999, the Deppen was abolished and replaced by two government institutions with broader responsibilities, not only in communications but also in the field of informatics:

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the National Information Institute (Lembaga Informasi Nasional (LIN)) and the State Minister of Communication and Informatics (Menteri Negara Komunikasi dan Informatika) (Kementerian Komunikasi dan Informatika 2010a). In the same year, the Central Government also enacted the New Press Law aimed to increase freedom of information in the country (Kingsbury 2005).

The abolition of the Deppen along with the enactment of the New Press Law has been the hallmark of the media reform particularly to enforce democratization of the nation (Kingsbury 2002). The New Press Law of 1999 was further strengthened in 2002 when the Government promulgated the Law on Broadcasting (UU No. 32/2002 tentang Penyiaran) which aimed to ensure a just, even and balanced national information structure to create social justice for all Indonesian people (Kingsbury 2005).

The National Information Institute and the State Ministry for Communication and Informatics operated from 1999 until 2005; then at end of January 2005, under the SBY administration three institutions namely the National Information Institute, the State Ministry of Communication and Informatics, and one Directorate General under the Ministry of Transportation (Directorate General of Post and Telecommunication) were merged into the new Department of Communication and Informatics (now the Ministry of Communication and Informatics (MoCI)) (Kementerian Komunikasi dan Informatika 2010a).

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A period of remarkable progress in Indonesia’s media was taking place in 2008, with the promulgation of UU No. 14/2008 or the Law on Freedom of Public Information (Keterbukaan Informasi Publik (KIP)) which came into effect in April, 2010 (Kementerian Komunikasi dan Informatika 2011). This was also a crucial step in the Indonesian process of democratization and the country’s remarkable progress towards openness and transparency. Importantly for this research, under a different minister (Tifatul Sembiring) who was appointed in 2009, the MoCI made some progress that is important for the implementation of reform. For example, in May 2010, the MoCI introduced a Pact of Integrity in the implementation of good government service and the avoidance of corrupt conduct. The pact encourages all members of the general public not to give presents in any kind directly or indirectly to any officials of MOCI in regard to the implementation of working programs and licensing services within the ministry (Kementerian Komunikasi dan Informatika 2010d).

Leadership As a result of frequent policy changes taking place since 1998, there have been more than five ministerial leadership changes in the MoCI (Table 6.2). The appointment of the first minister after the abolishment of the Deppen, Yunus Yosfiah, marked the formalization of free media in Indonesia due to his achievement in simplifying the media license application procedure, a major issue during the Suharto regime (Kitley 2008; Kingsbury 2005). In October 1999, under the Abdurrahman Wahid administration, the Government established the National Information and Communication Agency (Badan Informasi dan Komunikasi

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Nasional (BIKN)) which was renamed the National Information Institute (Lembaga Informasi Nasional (LIN)) (Kementerian Komunikasi dan Informatika 2012).

Following the subsequent presidential change under the Megawati Sukarnoputri administration in 2001, Syamsul Mu’arif was appointed to become the State Minister for Communication and Informatics for a period of three years (20012004). In 2004, SBY assumed power and appointed the first ministers for the MoCI, Sofyan Djalil, who was in power until May 2007 to further take up the new duty as the Minister for State Owned Enterprise. Following this, SBY reshuffled his cabinet and replaced Sofyan Djalil with Mohammad Nuh whose official terms lasted from May 2007 to October 2009. SBY reshuffled his cabinet again in 2009 and appointed Tiffatul Sembiring as the Minister for Communication and Informatics. His predecessor Mohammad Nuh was then appointed Minister for National Education.

Frequent policy changes emerged from the broader political context of presidential changes. Of particular importance, frequent reshuffles under the SBY administration were widely believed to be part of the plan to include supporting parties in the Government, since the incumbent government embraced the socalled wide coalition by appointing to the ministry individuals from most parties represented in the parliament (Diamond 2009). Nonetheless, around one-third of ministers were not representative of the political parties (Wicaksono 2008), including Sofyan Djalil and Mohammad Nuh who were technocrats. In terms of

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reform this should have been an advantage to the MoCI despite the fact that support from political parties is also of importance. Nonetheless, no remarkable progress seemed to be achieved in the reform of financial management in the MoCI at least until 2008.

Budget Overview The MoCI budget has several aspects which are relevant to its implementation of financial reform. Due to the fundamental nature of its role in promoting a more democratic climate in the country, the MoCI was one of the program priorities of the SBY administration. The Government’s 2008 budget of Rp 2,262.10 billion was allocated to seven divisions, each of which headed by Echelon 1, with the largest amount going to programs devoted to the development, equalization, and quality enhancement of the postal and telematics infrastructure (Departemen Komunikasi dan Informatika 2009d).

In addition to its institutional budget of Rp 1.39 billion, the MoCI also managed the subsidy and transfer funds authorized by the MoF (Badan Pemeriksa Keuangan 2009b). The subsidy and transfer funds are the portion of the Central Government budget that is not allocated to specific agency budgets for activities, generally because it is not closely related to their main function. This type of budget is classified in the so-called unallocated expenditure that has been identified to be the cause of reduced transparency (International Monetary Fund 2006). With the reform, the Government has been attempting to conform to best practice in budget classification to improve financial governance.

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Two other sources of funding have enabled the MoCI to achieve a degree of income security which many agencies envy. The first is that the MoCI also received grants from several donors for the construction of buildings and the provision of expert assistance for supporting e-government at the regional level. The second is from non-tax revenues such as building rentals, licensing rights, and revenue from telecommunication services (Badan Pemeriksa Keuangan 2009b, 2008b).

Organisational Change and Structure Major organisational changes in MoCI took place in 2005, 2008 and 2010, designed to align structures with Government priorities and programs (Kementerian Komunikasi dan Informatika 2010a). The reorganisation that took place in 2010 was intended to streamline the organisation and to prepare for the implementation of the civil-service reform in the MoCI. As explained in Chapter 3, civil-service reform has been implemented gradually, and by 2010, the reform had only been implemented in several line ministries while the MoCI had only started to prepare to embark on similar reform.

The current structure of the MoCI is divided into seven Budget Units (Echelon 1) and four expert staff groups (Figure 6.1). Under this structure, the MoCI consists of 13 Central Offices and 43 Regional Offices dealing with communication and informatics as well as one of public service agencies (PSAs) in Indonesian Government-Village Telecommunication and

Informatics

Institute (Balai

Telekomunikasi dan Informatika Perdesaan (BTIP)) under the Directorate

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General of Post and Telecommunications. 1 Regional Offices are responsible for coordinating with other related offices to ensure that policies meet the actual needs of the region. The main aim is to equalize access to communication and informatics among regions in Indonesia.

An additional level of complexity in the case of reform in the MoCI is that its structure was more fragmented and complex than many other Indonesian government institutions. First, offices were spread across Indonesia, requiring strong coordination with the Central Office for managing financial tasks. Second, there was a significant variety of tasks in the MoCI, both within and between its divisions. Together with policy-related changes, these conditions brought about greater challenges in the implementation of the budget and accounting reforms.

Organisational Dynamics of the Reforms The broad aims of the reforms, as described in Chapter 3, were twofold – firstly, to devolve the budget function from the MoF to spending agencies; and secondly, to move away from line-item to performance-based budgeting (Blöndal et al. 2009). The reform emphasised the establishment of a new legal framework for budgeting as the basis for reform. This covered the clarification of roles and responsibilities, creation of new treasury functions including accounting for 1

Public Service Agencies (PSAs) were introduced by the Government in 2005 as the implementation of the ‘enterprising government’ concept and performance management in the government with the promulgation of the Law No. 23/2005 on Financial Management of Public Service Agency (Pengelolaan Keuangan Badan Layanan Umum). PSAs aim to provide goods and service to the public without seeking profit based on efficiency and productivity principles. The PSAs were given flexibility in financial management to implement healthy business practices to improve people’s welfare. While the general government institutions (such as, ministries and local government agencies) adhere to state budget mechanisms, the PSAs obtain flexibility in financial management, particularly in relation to directly using their revenue to support productivity, efficiency and effectiveness of the public service but not for profit.

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improved accountability and audit reform, as well as providing implementing foundation for the parliamentary budget role (Pemerintah Republik Indonesia 2004c, 2004d, 2003a; Blöndal et al. 2009).

Under these reforms, there was significant financial devolution from the Ministry of Finance to other agencies. This meant that the MoCI now assumed the status of an operating department, coming under the Chief Operational Officer of the President. The MoCI was now responsible for its entire financial management including planning, budgeting, budget implementation, treasury functions and reporting. In this regard, the Ministry and its spending agencies gained autonomy in managing financial tasks and had to be accountable for the use of their respective budgets. The MoF’s role was now that of Chief Financial Officer (CFO) to the President, responsible for policy making and coordinating financial management. Reflecting these changes, in 2005 the MoCI issued its first financial report.

The new MoCI’s role in financial management was further delegated and cascaded down to all 56 working or budget units, each of which was responsible for financial process within its jurisdiction. One of these budget units, that of the Secretary General, assumed an additional role as the financial management coordinator (reporting entity) for all working agencies in the MoCI.

These changes meant that within each budget unit, new functional positions – budget authoriser, treasurer, procurement official, and reporting official – had to

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be delineated and filled. The delegated power clarified functions and responsibilities and established check and balance mechanisms in the financial management process. Officials were moved internally to fill the new positions, necessitating the introduction of new financial training and certification programs. The changes also produced stronger requirements for communication of financial information and coordination within the financial system, both between units within the MoCI and between the MoCI and the MoF.

Structuring Decision Making As with other government agencies, the reform mandate was carried out in a topdown fashion, dictated by external regulations (such as, regulations enacted by the MoF and the National Development Planning Agency (Bappenas)) and supplemented by internal regulations and guidelines (for example, Standard Operating Procedures (SOPs), circular letters, and decision letters). These guidelines were to be further disseminated to all working units within the MoCI. As with many other agencies, however, there were difficulties in translating the regulations into specific SOP. Interviews conducted in 2009 revealed that a SOP had been prepared for the Inspectorate General within the MoCI, but not for most other financial management functions (MoCI#1, MoCI#2, MoCI#3). Confirming this, the preparation of the SOP on several financial issues (for example, receivables) was among BPK’s recommendations in its 2008 audit report (Badan Pemeriksa Keuangan 2009b).

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Strategic Planning Strategic planning proved easier to implement than budget methodology. The purpose of strategic planning was to embed Central Government priorities into the budget process to improve outcomes and to support the implementation of government programs. From 2005, the MoCI issued a strategic planning document every five years as the basis for its budget process (Departemen Komunikasi dan Informatika 2005, 2010c). The strategic planning document (Rencana Strategis (Renstra)), based on the government’s National Medium-Term Development Plan (Rencana Pembangunan Jangka Menengah Nasional (RPJMN)), stipulated the MoCI’s vision, mission, goals, and policies, as well as programs and activities for the period of five years.

There were, however, complaints from implementers about the strongly top-down nature of the planning process. There was little opportunity for implementers to participate in shaping the planning process, as this took the form of a formal planning meeting controlled by the Bappenas. A senior official (MoCI#3) who was usually involved in the planning process observed that there were frequent complaints from spending agencies concerning their allocated budget which did not match with their expectations.

Budget Preparation As part of the budget preparation cycle under the reform, agencies were required to produce an annual Budget Working Plan (Rencana Kerja Anggaran (RKA)) which was then converted into the agency’s official budget implementation

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document (Dokumen Isian Pelaksanaan Anggaran (DIPA)) (Departemen Komunikasi dan Informatika 2009d). To facilitate the consolidation of the agencylevel with the government-wide budget or Budget of State Income and Expenditure (Angggaran Pendapatan dan Belanja Negara (APBN)), the MoCI in concert with the MoF formed a team or task force responsible for preparing budget

documents,

conducting

budget

revisions

and

coordinating

the

consolidation process of the entire budget proposal as one Ministry-wide budget planning proposal (Departemen Komunikasi dan Informatika 2009b, 2009a). The process signified the increased interdependence between the MoCI and the MoF in preparing all budget documentation and highlighted the significance of communication and coordination among the institutions involved in the budget process.

Budget Implementation In executing the budget, budget underspends were a major problem. In the MoCI’s case, underspends worsened as the financial reforms were implemented. For example, in 2006 the actual budget spending accounted for 60.37% of total allotment, and in 2007 it reached only 41.32%. By 2008 the percentage of the budget expended had increased to 44.03%, as a result of enhanced employee capacity in procurement (Badan Pemeriksa Keuangan 2009b). The budget underspends reflected three key issues: shortcomings in the budget planning process; bureaucratic procedures in tender and approvals processes; and fear of violating the new rules.

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Shortcomings in budget planning were signified by a substantial number of budget document revisions. Budget revisions inevitably resulted in delays in the tender processes (Badan Pemeriksa Keuangan 2009b). Despite the move towards devolution, as one respondent who is knowledgeable and has some years of experience in dealing with the entire financial process remarked, ‘the MoF blocked a number of spending agencies’ budget plans by issuing a bintang (asterix or star) within the Dokumen Isian Pelaksanaan Anggaran (DIPA) (Budget Execution Document)’ (MoCI#4). The bintang sign given by the MoF meant that further discussion with the MoF had to be undertaken for approval in using the allocated budget. One reason for the block was the failure of agencies to submit all required documentation (for example, Cost Budget Detail or Rincian Anggaran Biaya (RAB)). The bintang sign inevitably delayed budget execution.

Several points can be made with regard to the bintang signs. First, they indicated that strong control was retained by the MoF in the budget process. Second, the block sign reflected coordination problems between the MoCI and MoF during the discussion process. Furthermore, the practice of marking some activities with a bintang creates room for ‘non-formal negotiation’ leading to a cumbersome approval process (World Bank 2010).

Another reason for budget underspends were continuing excessive bureaucratic procedures in procurement processes. Cumbersome tender processes resulted in significant delays. As one respondent, with knowledge of the process explained, ‘budget execution was problematic because although the budget implementation

200

document (DIPA) was received in time (normally in January), disbursement from agencies started only in April’ (MoCI#4). A third factor related to measures designed to reduce corruption. There was a reluctance to participate in the procurement system on the part of many employees, due to increased sanctions imposed on financial officers. Officials were afraid that actions taken in good faith might contravene the new rules in some way (Blöndal et al. 2009).

Asset Management Asset valuation posed particular challenges for MoCI, the assets of which were complex and wide-ranging. MoCI’s first published balance sheet (2005), failed to acknowledge the fair value of assets (Badan Pemeriksa Keuangan 2009b). There were problems relating to internal controls, asset revaluations and asset sales and write-offs. In concert with the Financial and Development Supervision Agency (Badan Pengawasan Keuangan dan Pembangunan (BPKP)), and the MoF, the MoCI began identifying and valuing its assets in a systematic way in 2006 (Badan Pemeriksa Keuangan 2009b). However, progress was less rapid than anticipated, due to limited resources owned by the Task Force on Asset Identification and Evaluation of the MoF.

New Accounting Practice and Financial Report From 2005, the MoCI prepared its financial report comprising the Actual Budget Report, the Balance Sheet and the Notes to the Financial Report as a consolidation report of all financial reports of budget units within the MoCI. The Financial Report was a by-product of the Government Agency Accounting System (Sistem

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Akuntansi Instansi (SAI)) which consisted of Financial Accounting System (Sistem Akuntansi Keuangan (SAK)) and State-owned Asset Financial Accounting Management System (Sistem Manajemen Akuntansi KeuanganBarang Milik Negara (SIMAK-BMN)) (Badan Pemeriksa Keuangan 2009b). Like other Government spending agencies, the MoCI’s progress towards accrual accounting was represented by its balance sheet. The actual budget report continued to be prepared on a cash basis.

As with other spending agencies, respondents reported difficulties in applying the new Chart of Accounts (CoA) across the entire financial cycle. Differences in classifications between planning and reporting activities were widespread. In addition, it was difficult to ensure that classifications were observed uniformly across MoCI. As one respondent who is involved in many assisting activities to spending agencies within the MoCI argued, The CoA is important; the problem in the preparation of the financial report is that we cannot ensure that other working agencies also understand [the CoA]. For example, they classified in the budget preparation as honorarium for drivers, but in fact it should be inserted into another classification (MoCI#1).

Internal Control System Weaknesses in the internal control system in the MoCI have been identified by the BPK in its audit report since 2005. While the role of the Inspectorate General had been boosted at the policy level, this was not backed-up with practical resources within the MoCI. In 2009, there were only 93 Inspectors responsible for supervising financial activities across budget units within the MoCI (Departemen

202

Komunikasi dan Informatika 2010b). An increase in the number of audit and financial officers placed in the Inspectorate General would have been a viable solution for strengthening the internal control system. In addition, the BPK indicated that the follow-up measures on the BPK Audit Report were not all observed. Of findings from 2004 regarding internal control systems, the BPK gave 43 items of recommendation; however, only 33 were met while 10 were still under monitoring (Badan Pemeriksa Keuangan 2009b).

Performance Reporting In 2005, the MoCI issued a Performance Report, the Laporan Akuntabilitas Kinerja Instansi Pemerintah (LAKIP). 2 However, the LAKIP was not yet prepared according to the principles of performance-based budgeting. The MoCI’s LAKIP elaborated targets in aggregate terms without providing a clear link with the amount of the budget spent on achieving the targets. These targets were articulated in qualitative terms reflecting that the MoCI still struggled in fulfilling the mandate of performance-based budgeting. For example, in 2008, the MoCI reported performance achievement in relation to public accessibility of communication information and infrastructure in a qualitative manner without linking it to the budget figures. In a similar fashion, the budget formulation process did not utilize information presented on the LAKIP. However, it should be noted that the highly-detailed input-oriented structure of Indonesian budget-

2

LAKIP was first prepared in 1999 based on Presidential Instruction No. 7/1999. With the reform, the Government intended to improve the report by preparing the Government Agency Performance Accountability System (Sistem Akuntabilitas Kinerja Instansi Pemerintah (SAKIP)) that is integral to planning, budget, treasury and government accounting system. To date, the SAKIP preparation has been under way.

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making makes the implementation of performance-based budgeting and reporting extremely difficult (Blöndal et al. 2009).

All of the factors listed in the discussion in the last few pages indicate that the process of implementing reform was complex. This had particular significance in respect of achieving good implementation outcomes. The main reasons for this will be elaborated further in the next section.

Key Issues in the Reform The complex nature of the MoCI organisational structure and the frequent restructuring process also contributed to the slow reform process. Implementers had to focus not only on the financial tasks but also on the new tasks that corresponded to the new organisational structure. A particularly significant issue here was that there were significant human resource issues, relating to two factors: (1) capacity issues; (2) deficiencies in training and dissemination programs.

Capacity The findings of the MoCI case mirror the difficulties of reform in developing countries, in which the state’s capacity as precondition for successful implementation of NPM is lacking (McCourt, 2003; Bale and Dale, 1998). While retaining the ‘old guard’ who used to work for the Deppen, the MoCI also undertook recruitment processes in 2005, 2007, 2008, 2009 and 2010 in order to fill vacant positions in the new structure (Departemen Komunikasi dan Informatika 2010a). However, these new officials rarely had financial

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qualifications. Given that they were coming into a policy department focused on the field of information and informatics, their positions demanded a technical expertise they simply did not have. This significantly affected overall institutional capacity in carrying out the reforms.

Complicating the issue was the nature of lifetime tenure of officials within the Ministry. One senior official at the middle manager level who had been working for more than 25 years highlighted this issue when she commented: … we originally were officers of the Ministry of Information (Departemen Penerangan under Suharto regime) … to manage old officers is rather difficult especially in driving them to move forward, … but for new officials, we do not have problems, it works as it is, although we also encountered problems with some of these new officials. For example, new officials with higher educational background are placed in a department led by an ‘old guard’, creating problems with their leader to teach them. It was hard to manage them, mostly because these new officials lacked experience (MoCI#5). Managing ‘the old guard’ posed further problems. In some cases, old guard employees were placed in administrative sections, to do data entry or typing. Cultural change was difficult. As mentioned by a middle manager who had been working for more than 19 years: … not all implementers are willing to be placed as asset managers. This was due to the old paradigm, because they tended to argue: “why we need to manage assets?” They just did not realise the role of state assets is now significant (MoCI#6).

There were persistent shortages of officials with financial qualifications or background. As observed by a senior official, ‘in our place we lack human resource capacity; many of them [officials] do not have a financial background’ (MoCI#7). Another respondent commented, ‘Most of the financial officers in the

205

MoCI do not have a financial background especially at the regional level; many officers with a technical background are responsible for financial management’ (MoCI#1).

Consequently, in finalizing their tasks, spending agencies of the MoCI relied heavily on external agencies, particularly the MoF. The majority of respondents illustrated the heavy reliance of MoCI officials on the MoF Assisting Task Force (Tim Pembina) in preparing their financial reports, and resolving other technical issues concerning the financial system (MoCI#1, MoCI#2, MoCI#3, MoCI#4, MoCI#6, MoCI#7). However, the role played by the MoF was inadequate because, in a large and fragmented agency, the implementation process necessitated the existence of facilitators to cascade training down the organisation. The limited number of Tim Pembina from the MoF could not be solely relied on to fix the entire range of internal problems within the MoCI, such that, an internal facilitator that played a similar role to the MoF Tim Pembina was important in order to follow through on the reform.

Another complicating factor in terms of human resource capacity was that rotation patterns initiated and determined by leaders at spending agency level undermined the facilitation effort. As one middle manager commented, Sometimes we have done assisting activities [with spending agencies], and they [spending agencies] have been progressed well enough, but sometimes they are rotated to other units or even promoted so that we need to redo the assisting activities (MoCI#6).

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Training and Dissemination Programs In coping with the changes, the MoCI pursued capacity building programs through various training programs. However, the training programs could not meet the actual need of the organisation in carrying out the reforms. These difficulties in effective capacity building reflected similar situations in many developing countries where capacity building tended to be limited to training. However, this is not a sufficient response to ensure proper implementation of reforms as there are many causes that limit capacity, such as politicization in the bureaucracy, weak financial control, poor accountability and low pay (Polidano & Hulme, 1999; Blunt et al. 2012a). In essence, training programs cannot be viewed as panaceas for capacity improvement.

The Pusat Pendidikan dan Pelatihan Pegawai intensively organized training programs for budget units in the MoCI. For example, in 2008 training was held for 314 staff. The number was increased in 2009 to 696 staff (Kementerian Komunikasi dan Informatika 2010b). Paradoxically, despite the level of penetration for both structural and technical training reaching over 90 percent of the target (Kementerian Komunikasi dan Informatika 2010b), financial training was not prioritized within the budget unit. Out of ten sorts of training program offered in 2008, only one was directed towards financial issues, namely the Budget Preparation Planning Training (RKA-K/L) (Kementerian Komunikasi dan Informatika 2010b). Financial training was broadened in 2009 to include procurement training, financial management training, and financial administration (Kementerian Komunikasi dan Informatika 2010b).

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Even when training programs were undertaken, whether inside or outside the MoCI, they were often not considered to be relevant or adequate. As one employee commented, I have taken part in procurement training. My job is in reporting, but I am also asked to do other tasks. In relation to my main job, there is no training provided (MoCI#8). A lack of follow-up training was mentioned by a number of those interviewed (MoCI, #1, MoCI#2, MoCI#6, MoCI#8, MoCI#9). Likewise, concerns about the ineffectiveness of dissemination programs, or sosialisasi, were expressed by several respondents, suggesting the importance of improving the frequency and substance of training and sosialisasi programs.

However, as earlier stated training on its own, no matter how good or appropriate, is not a panacea for reform implementation. In Indonesia then, as this case shows, there are other organizational matters that must also be attended to such as the promotion of meritocracy in the public sector and a more comprehensive anticorruption program.

Information Technology The budget and accounting reforms in the MoCI were also affected by the lack of capacity to operate the new accounting system. First, the mandate for implementing computer-based systems such as the State-owned Asset Financial Accounting Management System (SIMAK-BMN) for asset management as well as the Financial Accounting System (SAK) and the Government Agency Accounting System (SAI) for reporting, inevitably required that all implementers

208

be computer-literate. As revealed in the interviews (MoCI#8), the regular updating of computer applications also complicated the implementation of the computer-based system itself which suggested that a continuous learning process was indeed needed by both the computer designer (the MoF) and implementers. In this context, organisational learning that encourages information sharing and knowledge creation is of importance (Stewart & O'Donnell 2007). Issues in the implementation of the new computer-based system as indicated in the BPK audit report reflected the lack of time to allow organisational learning to take place and lack of coordination between the MoF and the MoCI. Research on public management reform has indicated that computer-based systems designed from the top necessitate pre-planned change and constant communication between the implementers and the planner, as well as organisational learning by providing exposure to the new working environment (Stewart & O'Donnell 2007).

Communication and Coordination Effective communication and coordination between implementers across budget units, within the MoCI and between the MoCI and other agencies, was not a feature of the implementation process. Some respondents (MoCI #2, MoCI#6, MoCI#8) suggested that communication focused only on formal reporting. A monthly financial monitoring meeting facilitated by the Secretary General, and a quarterly general monitoring meeting facilitated by the Minister were among the regular meetings conducted. However, when those who had taken part were asked further about the usefulness of these meetings, responses were mixed. One particular problem was that meeting records were not widely disseminated to

209

implementers. As a result, these meetings could not be used as an effective means for organisational learning.

Leadership Another barrier to implementation arose at the level of leadership. Constant change at the ministerial level led not only to difficulties in acquiring strong leadership, but also adversely affected the implementation process down the hierarchy. At managerial level, leaders were often under pressure to manage tasks for which they had no training. As mentioned by one respondent, … most financial managers have no accounting background; especially in the regions … the problem is the different level of understanding, lack of awareness of importance of financial reports, and lack of knowledge of the leaders (MoCI#1). Closely related to the role of the leader was the non-existence of sanctions in ensuring that rules and regulations had been put into practice. In this regard, control varied across spending units. Most respondents stated that there was no clear sanction imposed, or if there was a sanction, it took the form of an informal warning (MoCI#4, MoCI#6, MoCI#7, MoCI#8).

MoCI struggled to emulate the powerful role played by leadership in other contexts (for example, the Constitutional Court). As the MoCI Strategic Planning Document put it, Several bureaucratic problems have occurred this time, among other things are the non-existence of a strong working culture, the absence of an oversight function of program execution, and weak coordination between institutions; hence overall the situation affects performance achievement, which has not been optimal (Kementerian Komunikasi dan Informatika 2010c, p. 23).

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Conclusion The finding of the MoCI case mirrors the difficulties of reform in developing countries, in which the state’s capacity as a precondition for successful implementation of NPM is lacking (McCourt, 2001; Bale and Dale, 1998). The case also indicates that efforts to improve capacity are difficult in the context of complex organization with many competing demands. The case thus suggests that the Indonesian administrative context of MoCI played a dominant role in determining the outcomes of the reform implementation process. These adverse administrative contexts created barriers for leaders to take up action and also limited the operation of other implementation variables necessary for success. Thus, the MoCI case reveals that a prime task of reform leaders is to ensure that the administrative context is in line with the reform goal (Cheung, 2005).

For the MoCI, implementing the budget reforms formed part of a much larger process of organisational and cultural change. As a result of multiple restructuring processes beginning in 1998, the MoCI evolved as a complex organisation. However, the need to bring together officials from different backgrounds and environments complicated the technical aspects of the reform process. The cultural changes needed to implement the values promoted by the budget and accounting reforms proved even more difficult.

The most adverse factor in the implementation process was the lack of human resource capacity in tackling the transformation. This confirmed the central argument of the thesis that the specific characteristics of the administrative system

211

in Indonesia had a major impact on the reforms. But lack of capacity is not amenable to a quick training fix. Rather, effective capacity will require attention to other aspects of the bureaucracy such as governance and corruption.

The MoCI attempted to address capacity deficits through recruitment and, to some extent, through training programs. However, these attempts were offset by other factors. The capacity-building efforts, for example, were aggravated by the varied commitment exhibited by leaders in the institution, as well as a lack of communication and coordination. Despite the overall adequacy of the budget, control of the implementation of financial tasks seemed to be weak. As a result, it was hard for leaders to drive the reform process.

For the purposes of investigating the questions addressed in this research, the significant points arising from the MoCI case is that human resource capacity is important for successful implementation outcomes. The complex nature of the Ministry heightened the necessity for effective communication for implementation to succeed.

The MoCI case highlights the relationship between implementation and change management. It suggests that, at the bureaucratic level, implementing new financial management practices in an agency undergoing major policy change, poses challenges of both a technical and a cultural nature. The case does not challenge the existing literature on implementability, so much as suggest that it may insufficiently emphasise the importance of organization-level factors. The case suggests that

212

implementation outcomes, particularly where policies of management are involved, depend upon an organizational politics of capacity, as well as of self-interest.

213

Table 6.1: MoCI Reform Timeline

2005

Three state institutions are merged into a Department of Communication

and

Informatics

(now

Ministry

of

Communication and Informatics) with Sofyan Djalil as the Minister The introduction of new institutional arrangements and budget processes Government Agency Accounting System (Sistem Akuntansi Instansi (SAI)) is first implemented First financial report is published Strategic Planning (Rencana Strategis (Renstra)) is published Major recruitment process Restructuring process

2006

State-owned Asset Identification and Evaluation Process commences

2007

Recruitment process

2008

Restructuring process

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Implementation of State-owned Asset Financial Accounting Management System (SIMAK-BMN) The Government passes the Act on Freedom of Public Information Recruitment process

2009

New minister, Tifatul Sembiring is appointed Recruitment process

2010

Restructuring process The issue of a MoCI Pact of Integrity in implementing good government service and avoidance of corrupt conduct Recruitment process

215

Figure 6.1: Organisational Chart for the Ministry of Communication and Informatics, 2010 coordination line command line

Minister Expert Staff

Inspectorate General

Secretary General

Secretariat for Inspectorate General

Inspectorate I

Inspectorate II

Directorate General Post for and Telecommunications

Inspectorate III

Centre for Technical Infrastructure for Telematics

Data Center

Inspectorate IV

Directorate General for Telematics Application

Planning Bureau

Bureau for Civil Service and Organisation

Centre for Education and Training for Telematics

Centre for Information and Public Relation

Financial Bureau

Directorate General for Communication Infrastructure and Dissemination of Information

Agency for Human Resource Research and Development

Bureau for Legal and Foreign Cooperation

General Bureau

Agency for Public Information

Secretariat for Directorate General

Secretariat for Directorate General

Secretariat of Directorate General

Secretariat of Directorate General

Secretariat of Directorate General

Directorate for Post

Directorate for E-Government

Directorate for Broadcasting Media and Standardization

Centre for Research and Development for Post and Telecommunications

Centre for Information Politics, Legal and Security

Directorate for Telecommunications

Directorate for E-Business

Directorate for Business Broadcasting

Directorate for of Management of Radio Frequency Spectrum

Directorate for Information Systems, Software and Content

Directorate for Infrastructure for Communication Technology

Directorate for Standardization of Post and Telecommunication

Directorate for International Institutions for Post and Telecommunication

Directorate for Telematics Empowerment

Directorate for Standards and Telematic Audit

Directorate for Government Communication Institutions

Directorate for Social Communications Institutions

Centre for Research and Development of Telematics Applications, Communication Infrastructure and Information Dissemination

Centre for Economic Information

Centre for People’s Welfare Information Centre for Research and Development Literacy Communication and Informatics Centre for General Opinion Management Centre for Research and Development Profession Communication and Informatics

Source: Kemtenterian Komunikasi dan Informatika (2010a) 216

Table 6.2: Ministry of Communication and Informatics after 1998 Political Reforms: Chronological Changes No

Minister

Year

Presidency

Official Name of Ministry

1

2

Letjen TNI Yunus May

Habibie

Departemen

Yosfiah

1998-

(Kabinet

Penerangan

Oct

Reformasi

(Ministry

1999

Pembangunan)

Communication)

Abdurrahman

Replaced with the

Wahid

National

was abolished and August

(Kabinet

Information

replaced with the 2001

Persatuan

Communication

National

Nasional)

Agency

Ministry

of Oct

Communication

Information

1999-

and

of

and

(Badan

Informasi

dan

Communication

Komunikasi

Agency

(Badan

Nasional (BIKN)

dan

which was further

Informasi Komunikasi Nasional

renamed (BIKN)

as

National

which was further

Information

renamed

Institute

as

the

the

National

(Lembaga

Information

Informasi

Agency (Lembaga

Nasional (LIN))

Informasi Nasional/LIN) 3

H.

Syamsul August

Mu’arif, B.A

Megawati

Menteri

Negara

2001-

Sukarnoputri

Komunikasi

Oct

(Kabinet

Informatika (State

2004

Gotong

Ministry

Royong)

Communication

dan

of

217

and Informatics) 4.

5.

Dr. Sofyan Djalil, Oct-

Susilo

Menteri

SH, MA, MALD

2004-

Bambang

Komunikasi

May

Yudhoyono

Informatika

2007

(Kabinet

(Ministry

Indonesia

Communication

Bersatu)

and Informatics)

Prof. Dr. Ir. H. May

Susilo

Menteri

Mohammad

Bambang

Komunikasi

Oct

Yudhoyono

Informatika

2009

(Kabinet

(Ministry

Indonesia

Communication

Bersatu)

and Informatics)

Oct

Susilo

Menteri

2009-

Bambang

Komunikasi

Yudhoyono

Informatika

(Kabinet

(Ministry

Indonesia

Communication

Bersatu II)

and Informatics)

Nuh, 2007-

DEA

6.

Tifatul Sembiring

dan

of

dan

of

dan

of

Source : Departemen Komunikasi dan Informatika (2008a, 2006, 2007)

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Chapter 7 Tobasa District Government Case Study

Introduction Established in 1999, the Tobasa District Government (TDG) (Pemerintah Kabupaten Tobasa) is one of 33 municipality and district governments under the North Sumatra Provincial Government 1 (Pemerintah Provinsi Sumatera Utara 2012; Pemerintah Kabupaten Tobasa 2012). An unconducive political situation coupled with numerous contextual issues made a difficult start for the TDG to enforce the budget and accounting reforms in the region. Badan Pemeriksa Keuangan (BPK) (Supreme Audit Agency) reported and criticised the TDG in relation to financial management issues reflecting challenges and obstacles facing the TDG in the implementation process (Badan Pemeriksa Keuangan 2008c). The report highlighted some major issues such as the inaccuracy of the presentation of the financial report, the inability to meet the budget timeline, and non-compliance with financial rules and regulations. Understanding this case will reap valuable lessons about how reforms should be implemented to bring about positive implementation outcomes, particularly in the similar context facing other

1

The TDG came into being in March 1999, following the promulgation of Law No 12 Tahun 1998 on the Establishment District Level II Region Toba Samosir and District Level II Region Mandailing Natal in the Level I Region North Sumatera. North Sumatera Province consists of eight municipalities (Binjai, Gunung Sitoli, Medan, Padang Sidempuan, Pematang Siantar, Sibolga, Tanjung Balai, Tebing Tinggi) and 25 districts (Asahan, Batubara, Dairi, Deli Serdang, Humbang Hasundutan, Karo, Labuhanbatu, Labuhanbatu Selatan, Labuhanbatu Utara, Langkat, Mandailing Natal, Nias Barat, Nias, Nias Selatan, Nias Utara, Padang Lawas, Padang Lawas Utara, Palpak Bharat, Samosir, Serdang Bedagai, Simalungun, Tapanuli Selatan, Tapanuli Tengah, Tapanuli Utara and Tobasa).

219

Indonesian government institutions. In particular, this case study was chosen because of its less successful implementation outcomes.

This chapter starts with a background to the budget and accounting reforms in the TDG. This is then followed with the task of reform and the contexts in which the reform took place. The next section deals with the dynamics of the budget and accounting reforms and other features of implementation in the TDG. The chapter ends by highlighting the main issues and problems encountered by the TDG in the implementation of reforms.

Background to the Budget and Accounting Reforms in the Tobasa District Government The TDG is located in Tobasa, North Sumatra. Tobasa, the capital of the Tobasa District and the centre of the Tobasa District Government is geographically remote from Jakarta, the capital of Indonesia, covering a total area of about 2,021.8 km2 (Badan Pusat Statistik Pemerintah Kabupaten Tobasa 2007). In 2009, Tobasa District territory covered 16 sub-districts (kecamatan), 213 villages (desa) and 13 sub-villages (kelurahan) (Badan Pusat Statistik Toba Samosir 2010). With a population in 2009 of 175,325 people, Tobasa’s economy stresses home industries and agriculture (Badan Pusat Statistik Pemerintah Kabupaten Tobasa 2007; Badan Pusat Statistik Toba Samosir 2010). A major social problem facing the region is its high level of poverty (Badan Pusat Statistik Pemerintah Kabupaten Tobasa 2007).

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Tobasa District Government The head of the region and the head of Tobasa District Government (TDG) is the Bupati who holds full authority in regional financial management and acts as a representative of the Central Government in the Tobasa region in the ownership of separated regional assets. As explained in Chapter 3, as a result of the decentralisation program, regional governments, including the TDG, are no longer responsible to higher levels of a hierarchy or a Provincial Government or the Central Government, but are now responsible to Dewan Perwakilan Rakyat Daerah (DPRD) (regional parliament). The Provincial government now only functions as the coordinator of regional governments (district and municipality governments), and manages functions that have influences on more than one regional government (World Bank 2007b).

The TDG consists of 45 working agencies. Figure 7.1 provides an organisational chart which mainly shows the separation of function between the Chief Financial Officer (CFO) and the Chief Operational Officer (COO) introduced in the financial management reform (Badan Pusat Statistik Toba Samosir 2010; Pemerintah Kabupaten Tobasa 2010). This institutional reform aimed to facilitate the implementation of the changes in the entire financial management process. Being a relatively large regional government composed of 4,559 officers in 2009, the TDG is responsible for the provision of various services delegated by the Central Government such as health, education, environment, and infrastructure services (Badan Pusat Statistik Pemerintah Kabupaten Tobasa 2007; Badan Pusat Statistik Toba Samosir 2010).

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Regional Parliament A timeline of the reform process is given in Table 7.1. This shows that despite the relatively slow progress in terms of implementation outcomes, the TDG has already made some efforts to put into practice the mandate of reforms set by the Central Government.

Prior to reform, the Regional Parliament or DPRD Kabupaten Tobasa acted as a rubber stamp body. With the 2003 Finance Law, the DPRD, to which the TDG is held accountable, assumed a strengthened role in exercising its legislation, oversight and budget functions. The old budget practice under the Ministry of Home Affairs (MoHA) regulation (Kepmendagri 29/2002) stipulated that the role of the DPRD in the budget process was only to approve a broad regional budget policy (strategies and priorities), the new regulation, derived from the MoHA regulation (Permendagri 13/2006) makes it clear that a formal discussion on the budget process between the Regional Government and the DPRD must take place in order to discuss the budget in more detail including priorities and budget ceilings.

Since it came into being to date, there have been three legislative elections and three District Government elections (Pemerintah Kabupaten Tobasa 2012). During the majority of the period of this study (2003-2010), the Tobasa District Parliament was the legislature which had been elected in 2004. This district election was the first to be undertaken under a multi-party system. In 2009, the legislative election for 2009-2014 was conducted with the Toba Bersatu Faction

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winning the largest number of seats – eight out of 25 (Pemerintah Kabupaten Tobasa 2011). Since its beginning, the DPRD Kabupaten Tobasa has had difficulty in establishing its credibility as a democratically elected and responsible parliament. Public complaints have focused on an invalid elector list, as well on conflicts within or between parties in appointing candidates (Editor 2009). As a consequence of this, lack of public trust in the legislative body is an increased difficulty in establishing accountability.

Budget Overview In terms of financial reform, the difficulties of DPRD credibility were increased by poor budget performance. In 2007, the TDG ran a deficit budget. The total budget was Rp383.84 billion which had been realised at Rp 339.22 billion (88.37%) (Badan Pemeriksa Keuangan 2008c). Most of the TDG budget had been allocated for employee expenditure (44.71%), followed by capital expenditure (30.53%), goods expenditure (20.76%), subsidy expenditure

allocated to

institutions or enterprises to support production cost so that the selling price was affordable to the public, (2.62%) and social support (1.17%).

In 2007, total revenue was Rp 355.59 billion, realised at Rp 353.17 billion or 99.31%. The TDG generated regional revenue from four sources: Central Government transfer, Provincial Government transfer, own-resource revenue and other official revenue. Although the TDG assumed the authority to raise revenues through local taxation, levy and charges, in funding programs and activities, it still relied heavily on the Central Government transfer which in 2007 accounted for

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more than 90% of total revenue. This heavy reliance reflected two issues. First, it indicated the huge gap between the TDG and other regions, since the Central Government transfer aimed to mitigate the fiscal gap between the regions. Second, the reliance highlighted the lack of TDG capacity to generate its own sources of revenue as part of the overall revenue.

Political Context of Reform Tobasa’s political traditions have been widely portrayed as posing major impediments in achieving good governance. For instance, since assuming power, the first head of region, Sahala Tampubolon, elected in 2000 for the period of 2000-2005, had become the main target of the media’s allegations of longstanding illicit and corrupt financial dealings. In his period of government, not much progress was achieved in relation to the budget and accounting reforms. This can be partly explained also by the fact that most new regional financial regulations in financial planning, execution and accountability were only effective after 2006, following the MoHA regulations on Regional Financial Management.

Nonetheless, the distraction created by accusations of Tampubolon’s corruption seriously impeded financial reform. Active campaigns in the media and by whistleblowers such as Non Government Organisations (NGOs) focused public attention and allowed further investigation on Tampubolon as the person responsible for regional finance malfeasance. In 2008, Tampubolon was sentenced for embezzlement (Sibodil 2008). Although this took place after the end of his official term, it reflected a remarkable demonstration of progress towards the promotion of good financial governance in the region. 224

The TDG held the first direct election for the head of the District Government in 2005, and subsequently elected its second Bupati, Monang Sitorus, for the period 2005-2010 (Pemerintah Kabupaten Tobasa 2012). With the direct election system, the Bupati as the head of District Government should gain a majority of votes and should be supported by the majority of representatives from the political parties in the Regional Parliament (DPRD Kabupaten Tobasa) in order to gain power. Supported by a three-party coalition which gained 47.5% votes of the 24 participating parties in the election (Suwardiman 2008), Sitorus campaigned on a noble vision of establishing Tobasa as a well-advanced, independent, just and prosperous region. Although not much progress in reform has been achieved during his administration, the period of Sitorus is of importance in analysing the implementation of the reforms, since it was in his period as the head of the TDG, that new procedures in regional financial practice were first introduced.

Similar to his predecessor, Sitorus also encountered widespread public criticism of his leadership. During his term in office, numerous criticisms were levelled at his government with local media continuously broadcasting allegations of corruption in his administration, as well as disclosing an increased number of prosecutions of and allegations against high-level officials in the region (see, for example, Star Berita 2010; Bersama Toba 2009; Panjaitan 2011).

Interviews with a senior official who was usually involved in the budget plenary meeting between the TDG and the DPRD confirmed that this was a serious impediment to reform. As he stated:

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… many high-level officers and politicians were put in prison because of the non-compliance with financial regulations mostly taking place in the tender process. This has occurred almost every year (TDG#1). In 2010, Sitorus himself was convicted for corruption concerning mismanagement of the budget, an enormous amount of which was disbursed for personal gain in the form of travellers’ cheques (Panjaitan 2011). In one sense this conviction was a result of the budget and accounting reforms because the BPK audit report on the TDG Financial Report played an important role in detecting these actions and providing evidence for his conviction (Panjaitan 2011). After a series of investigations and a trial, Sitorus was sentenced in 2011 to one year in gaol and fined Rp 50 million (Panjaitan 2011).

The widespread financial corruption during his term in office seemed to stem from money politics which had driven the electoral process resulting in his assuming power. One official told the researcher that this was not unusual in the region, ‘… here a position needs capital. Here, everyone makes use of anything (menghalalkan segala cara) to gain or get a position’ (TDG#1).

After the end of Sitorus’s term in office, on May 12, 2010, the TDG ran its second direct election to elect a Bupati, resulting in the appointment of Kasmin Simanjuntak as the new Bupati for the period 2011-2015 (Pemerintah Kabupaten Tobasa 2012). Simanjuntak is from the Democrat Party and was supported by a five-party coalition gaining 43% of the vote during the election (Sibuea 2010). Although the progress in financial reform during his period is not yet clear, there have been some indications that some measures aligned with the spirit of the

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reforms are being undertaken. For example, in 2011, the TDG introduced the Pact of Integrity (Pakta Integritas) to all spending agencies under its purview (Humas Pemkab Tobasa 2011). Although there has been no clear evidence on the impact as yet, the Pact of Integrity was intended to fulfil the requirements of the Central Government mandated Presidential Instruction on Action Plan on Corruption Avoidance and Eradication (Kementerian Negara Pendayagunaan Aparatur Negara dan Reformasi Birokrasi 2011b). Simanjuntak’s term as Bupati is also of relevance to this present research, which was in progress during the first years of his term of office.

Cultural Context of Reform Tobasa is a homogeneous region in which a large majority of the population is of Batak ethnicity. This ethnic and cultural context is reflected in the political discourse of Tobasa, as well as in managerial and organisational implementation. A salient characteristic of the Batak people is a strong reliance on kinship, suggesting a broad social emphasis on loyalty rather than merit in decisionmaking. Clan-based issues affect political rivalry and discourse in Tobasa (Silitonga 2005; Simanjuntak 2010). The importance of Batak ethnicity aligns with theories of the Indonesian neo-patrimonial state, reflecting the salience of ethnicity in political terms, and in the operations of communal patronage networks (Angerler 2005; Brown 1996). The manifestation of neo-patrimonial culture was exemplified for example, when making decisions and working in groups, people tend to rely on personal bond rather than more objective drivers of organisational attainment (Brown 1996).

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Organisational Dynamics of the Reforms Arguably, Tobasa had one of the most difficult tasks to accomplish, in terms of the starting-point and desired end-points of change. The TDG case reflects issues found in many developing countries that where the institutional conditions needed to implement the changes, such as effective organizational structures and procedures, are not evident then the reform will have little impact (Polidano & Hulme, 1999). In the TDG, the region’s capacity as a precondition for successful reform implementation was largely absent (Sarker, 2006). However, the literature also suggests that regional capacity was not the sole factor influencing reform implementation but that other institutional, technical, administrative and political factors also exert influence (McCourt, 2003). All of these factors seemed to be weak in the TDG. In many ways, the TDG was unable to undertake even basic administrative functions to deliver services to its people, to uphold the authority of government, to legislate and implement law, and to hold public officials accountable.

Prior to reform, the TDG financial practice constituted traditional line-item budgeting, underdeveloped treasury function, and the absence of government reporting mechanisms. In 2006, the TDG embarked on the budget and accounting reforms that transformed budget procedures and developed new accounting practices which aimed to invigorate public finance governance, thus promoting efficiency, effectiveness, transparency and accountability.

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As was made clear in Chapter 3, the basic tenets of the reforms have been relaxing input control and putting greater emphasis on output. The budget must state output targets that should be achieved by spending agencies. Spending agencies are now given flexibility over financial management in their jurisdictions. In return for the flexibility, their financial and performance reports are subjected to audit and submitted to the DPRD annually as an accountability mechanism for using public money.

It is important to note that the budget process starts after the planning process is finalised in which the Government prepares the Regional Government Working Plan (Rencana Kerja Pemerintah Daerah (RKPD)) comprising Regional General Budget Policy (Kebijakan Umum APBD (KUA)) and Temporary Priorities and Budget Ceilings (Prioritas dan Plafon Anggaran Sementara (PPAS)). Integration between the planning documents (Rencana Kerja Pemerintah Daerah (RKPD)), containing the vision and mission of the Bupati, and the budget aims to embed the political objectives into the budget.

Relations between the TDG and the Regional Parliament From 2005, a series of discussion took place between the Bupati and the DPRD in formulating General Budget Policy (Kebijakan Umum Anggaran (KUA)) and establishing the Temporary Priorities and Budget Ceilings (Prioritas Plafon Anggaran Sementara (PPAS)). The discussion resulted in a Note of Agreement between the Bupati and the Chairman of the DPRD. This represented a considerable strengthening of the role of the DPRD in the reform process.

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As revealed in the interview, in many cases, in preparing the regional budget, the TDG encountered challenges, resulting from frequent dismissals of DPRD members, recurrent deadlocks, and suspensions for failing to gain a quorum during budget hearing sessions (TDG#1). One major example of suspension took place during the hearing process in the Plenary Assembly meeting on the Budget Revision 2007 when this important process had to be delayed because of conflicts occurring among parliamentarians (Siahaan 2007).

The frustration this caused for officials trying to implement reform was confirmed by a respondent who was a close observer of the process, stating that: Most of the time budget discussion (budget, budget revision and accountability) was delayed … The vision and mission of the Bupati, for example, was basically for the welfare of people, but what had been put on the table for discussion was not in accordance with the vision and mission. In the plenary meeting members of the parliament were very often absent and thus a quorum could not be achieved. As a result, oftentimes discussion was delayed (TDG#1). Deadlocks and suspensions often culminated in the failure of the TDG to reach consensus with the DPRD. In 2007, for example, they resulted in the Revision on Regional Budget for Fiscal Year 2007 (Perubahan Anggaran Pendapatan dan Belanja Daerah (P-APBD)) being left unapproved. This was formally noted as having seriously undermined regional institutional accountability (Badan Pemeriksa Keuangan 2008c).

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New Organisational Structures In 2007, to accommodate the clarification of financial roles and responsibility and to abolish overlapping financial functions, the incumbent government revised its 2004 organisational structure. The main change introduced to this structure was the establishment of the Regional Revenue, Financial Management Services (RRFAMS) (Dinas Pendapatan, Pengelolaan Keuangan dan Kekayaan Daerah (DPPKKD)) headed by the Chief Financial Officer (CFO) whose functions were to assist the Bupati in implementing regional government affairs in regional financial and asset management. 2 The creation of the RRFAMS was of particular importance in integrating financial activities which used to be fragmented across several units. The structure also clarified the function of spending agencies as the Chief of Operational Officer (COO) or budget or asset user under its jurisdiction. These divisions of responsibility are further delineated in the organisational chart provided in Figure 7.1.

Furthermore, the new organisational structure clarified the financial process within the region as being coordinated by the Administrative Secretary to support the head of region, the Bupati. The Administrative Secretary also acts as the head of the Regional Government Budget Team (Tim Anggaran Pemerintah Daerah (TAPD)). Comprising regional planning officials (Bappeda), RRFAMS officials and other necessary organisations, the TAPD is responsible for coordinating the budget process by ensuring conformity between working agencies’ budgets and

2

The DPPKKD (RRAFAMS) was established based on Regional Regulation (Peraturan Daerah) Kabupaten Tobasa No. 1/2007 on First Amendment on Regional Regulation No. 14/2004.

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regional budget policy. It also plays the role of representative of the TDG when dealing with the DPRD.

The new organisational structure indicates that the budget process in the TDG operates on three ascending levels. The first level constitutes financial management in the spending agencies. The second level represents compilation and consolidation of spending tasks into regional government-wide tasks with the Bappeda as the coordinator for planning and the RRFAMS as the coordinator for financial management. At the third level, the TAPD acts as the coordinator of the budget process and ensures conformity of spending agency programs and activities with regional government policy.

Implementing Decentralised Financial Rules and Regulations In the context of Indonesian decentralisation, regional governments such as the TDG must endorse applicable laws and regulations to enforce the national reform mandate at the regional level. In 2008, the TDG made remarkable progress by promulgating a regional regulation on the Main Issues in Regional Financial Management (Peraturan Daerah No. 6 tahun 2008) which details the MoHA regulations on Regional Financial Management. In essence, this regulation introduced a new authority in regional financial management, new budget principles and structure, budget cycle and procedures, administration and treasury processes, and accountability. In the same year, the TDG enacted the head of District regulation (Peraturan Bupati) on the Account Codes as mandated by the MoHA regulation (Permendagri 13/2006). The specific purpose of this regulation

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was to meet objective needs for accommodating regional characteristics such as the types of regional government expenditures that differ from the types of national government expenditure and harmony in data collection for the preparation of State financial statistics.

However, other significant regional regulations on financial areas were largely absent in the TDG. For example, until 2010, regulations on accounting policy and minimum service delivery that were fundamental for the implementation of performance-based budgeting had not yet been prepared. The non-existence of regional regulations on finance-related issues was also indicated in the Audit Report of the TDG Financial Report for the fiscal year 2007, which stated that the absence of implementing or derivative regulations had given rise to deviation in financial practices (Badan Pemeriksa Keuangan 2008c). This report also noted that the TDG had not yet enacted several Peraturan Bupati (Head of District regulations), which BPK considered central to budgeting and disbursement practices, such as the regulations on the Procedure of Proposal and Accountability of Social Grant Expenses and the regulations on Housing Support for DPRD members (Badan Pemeriksa Keuangan 2008c).

In general, the implementation of the budget and accounting reforms in the TDG has been primarily driven by the Central Government regulations. When asked about the new financial regulations governing the reform process, a majority of respondents mentioned Central Government regulations (Permendagri 13/2006) instead of Regional government regulations (Peraturan Daerah No. 6/2008). This

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suggests the unfinished work of the TDG in issuing necessary technical and implementing financial regulations mandated by the Central Government, but also the strong role of the MoHA in regional financial management.

Respondents involved in the reform process also noted that implementation was made more difficult because of frequent changes of regulations, particularly by the Central Government. As one official who was considered to be one of the proreformers in the region commented, … regulations were changed rapidly, while the capacity [of implementers] to absorb regulations is varied. We should have gone through at least two years [of implementing the regulations] before the regulation was changed. In our case, we should make many efforts in adapting to new regulations (TDG#2). Albeit less obviously, this interview also suggested that the confusion called for a longer learning period for implementers before a new regulation was enforced. The phenomenon identified by this respondent was quite common across agencies in Indonesia. Problems caused by conflicting, changing and wasteful directives from the centre have been identified in several studies of public sector accounting reform in the regional government (Kuncoro et al. 2009; Kristiansen et al. 2008).

Delays in Integrating Changes to the Planning and Budgeting Processes The 2003 Finance Law enshrines the protocol that the regional budget should be prepared according to the regional government working plan (Rencana Kerja Pemerintah Daerah (RKPD)). Based on the 2004 Planning Law, the regional governments therefore are required to prepare planning documents in accordance with national planning documents as an integral process of the national planning

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system. In addition, the planning process also attempted to align regional priorities articulated in the regional planning documents with the political objectives stated in the vision of the head of region.

One important point to be taken into consideration is that until 2010, four years after the start of the reform process in the regional governments, not all planning documents that should have become the basis for the budgeting process had been prepared in the TDG. This fact consequently hampered the subsequent budget preparation process. As revealed in the interview process, preparing the regional medium-term development plan (Rencana Pembangunan Jangka Menengah Daerah (RPJMD)) 2005-2009 was impeded because the regional long-term development plan (Rencana Pembangunan Jangka Panjang Daerah (RPJPD)) was not yet in place. This meant that the preparation of the RPJMD could only follow the national long-term development plan (Rencana Pembangunan Jangka Panjang National (RPJPN)) while neglecting the regional long-term development plan or RPJPD as the expected main guideline.

Although, as suggested by one respondent (TDG#2), the delay in preparing the RPJPD was a result of the delay of the Central Government in preparing the RPJPN, the delay could also be accounted for by the transition phase. The preparation against the guidelines eventually hampered the subsequent budget process. The TDG itself prepared the annual planning document or the regional government working plan (Rencana Kerja Pemerintah Daerah (RKPD)) that

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elaborated the political direction or vision of the head of region based on the regional medium-term development plan (RPJMD).

Despite its intention to enhance the linkage between planning and budgeting, the graduated fashion of the planning process has been neglected. Theoretically, the planning documents serve as guidance for the budgeting process. However, this was not the case in the TDG, as indicated by one respondent who pointed out that, … planning documents should guide the budgeting process; however, not all officials understand strategic planning. In the end the problem was that what had been planned was not matched with what had been budgeted (TDG#2).

Participation Issues The 2004 Planning Law also mandated that planning documents should be prepared in an open, bottom-up and participatory planning approach - so-called ‘development planning deliberation’ or ‘community participation process’ or Musyawarah Perencanaan Pembangunan (Musrenbang) - at the Central and regional levels. The Musrenbang was envisaged as increasing public participation through stakeholder involvement, embedding groups such as public figures, young people, non-government organisations, members of the executive and members of the legislature in the planning process and, through this, embedding their concerns in the budget. In the TDG, the Musrenbang process as mandated in the 2004 Planning Law started in 2005 at village, sub-district, and district/municipality/provincial levels. Meetings were organised by the Regional Development Planning Agency (Bappeda) from time to time.

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As one respondent commented, ‘Many working agencies and people complained about the Musrenbang process’ (TDG#3). This respondent focused on failures in the process, such as the fact that working agencies were not capable of completing prerequisite documents, with the result that their proposals were rejected. This might also have occurred as a result of deviation from priorities, with the respondent noting that, … the priority scale of the village, sub-district and district governments depended heavily on the legislative body. So if the legislative body was involved, the priorities tended to be deviated from (TDG#3). He also saw the main issues as lying with public education and explained that, The public lacked knowledge and data, so their proposals were never good enough. While the top side [the Bappeda] do not try to understand the proposals and just set the proposals aside (TDG#3).

The main message arising from the interview data was that the Musrenbang, which was supposed to be an open, bottom-up participatory budget-planning process seemed to be a mere ceremonial activity, primarily because strong intervention from the top still remained and also because of lack of capacity among the public and their local representatives.

Timeframe for the Budget Process While the old regulations had no specific timeframe for the budget process, the new financial derivative regulation on regional government financial management (PP No. 58/2005) introduced a new timeframe to promote transparency in the budget process (Figure 3.1 in Chapter 3).

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Over the years, the TDG tended to fail in meeting the stated budget timeframe, which caused delay in the subsequent process (that is, budget execution and reporting). For example, the 2007 Regional Budget was approved in April 2008, four months after its stated deadline (Badan Pemeriksa Keuangan 2008c). The delay could have been avoided if the TDG had managed to enact the 2008 Regional Budget according to the stated timeline (December 2007) or before the new fiscal year began. Subsequently, the TDG also failed to meet the deadline for submitting the accountability report which was supposed to be finalised at the latest six months after the fiscal year (Badan Pemeriksa Keuangan 2008c).

It appears that the inability of the TDG to reach consensus with the DPRD influenced the budget enactment and approval process leading to unpunctual or tardy finalisation of the budget and accountability report. As pointed out by one respondent involved in the process: … in Tobasa the time frame of the presentation of the accountability report from the government to the parliament [six months after the end of fiscal year] has never been met (TDG#1).

This respondent concluded that this has ‘undermined accountability in the region’ (TDG#1).

Performance-based Budgeting and Reporting When asked about performance-related budgeting and reporting, some respondents stated that the new budgeting process had facilitated their jobs by identifying targets to be achieved in the regional budget implementation document or Dokumen Pelaksanaan Anggaran (DPA). In general, however, the

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identification of performance targets remained contentious. As revealed in the interviews, while cost-related data had been prepared, other prerequisites regarding performance-based budgeting, such as setting minimum standards for acceptable levels of service delivery, remained unresolved in the region (TDG#4). This meant that those charged with implementing the reforms faced an almost impossible task.

Obstacles in the implementation of performance-based budgeting might also derive from existing regulations. An illustrative example is that of cost standards, which were included in the reforms to limit the possibility of corrupt action through over- or under-stating prices. Although cost standards in the TDG have been issued since December 2008, the application of the standard has been aggravated by conflicting cost standards issued by the national and provincial levels. One respondent said: … here the cost standard method is not clear in terms of who is in charge for it. If the Central Government issued cost standards, and also the provincial and district governments, we found that the standards were not in harmony. In practice, we found difficulties in determining which costs among these three cost standards should be used (TDG#4).

In the audit report for the 2007 Financial Report, the BPK also stated that the failure to strictly implement cost standards has resulted in quite substantial losses for the region. For example, the Head of District Regulation (Peraturan Bupati) on the enactment of a rent price for the Parliament House was overstated as compared to the real price, ignoring the financial management principles stipulated in the regulation (Badan Pemeriksa Keuangan 2008c).

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Coding of expenditures also caused difficulty. In 2008, the TDG enacted the Head of District Regulation (Peraturan Bupati) relating to the Account Codes intended to form a new basis for budget preparation, implementation and reporting in the region. However, the lack of skills and knowledge among public servants was generally viewed as one contributing factor to difficulties in applying the new, yet complex, Account Codes in the budget process. As a result, errors in registering expenditure were commonly found in the auditing process (Badan Pemeriksa Keuangan 2008c). The tendency of officials to ignore the importance of the Account Codes has a considerable effect on the quality of the financial reporting, thereby weakening public accountability.

Internal Control System Major issues in internal control revolved around expenditure that was inconsistent with the initial objective stated in the budget documentation (Badan Pemeriksa Keuangan 2008c). In addition, some budget spending was executed after the end of the fiscal year, and this clearly undermined budget discipline (Badan Pemeriksa Keuangan 2008c). In many cases, when making spending or conducting bookkeeping in recording revenue, the TDG agencies neglected financial regulations. For example, in 2008, the BPK reported that the 2007 budget on goods and services expense had been executed, but it did not conform to its original intent.

Furthermore, budget allocations had frequently been spent without valid supporting documentation as the basis for disbursement, and often these were not

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in line with its original intent in any case (Badan Pemeriksa Keuangan 2008c). In some cases, cash was delivered to an unauthorised person. More importantly, reengineering supporting documents for budget disbursement purposes (false documents) was uncovered in several working agencies (Badan Pemeriksa Keuangan 2008c). All of these practices, caused by a lack of internal control, also implied that the old budget practices which may have led to opportunistic behaviour seemed to persist, despite the new financial regulations.

Internal control was also jeopardized due to the dearth of periodic data reconciliation between the agencies in the TDG, and between the TDG and the banks (Badan Pemeriksa Keuangan 2008c). Although financial reports had been prepared, the role of the Inspectorate in ensuring the operation of the internal control system by reviewing financial reconciliation had been neglected (Badan Pemeriksa Keuangan 2008c). It was further found that the inability of the Inspectorate to fully exercise its supervision functions, including monitoring the finalization of issues related to regional loss, was due to the limited number and capacity of audit and review officials (Badan Pemeriksa Keuangan 2008c).

Consequently, increasing control and supervision on budget spending across spending agencies, which should be performed by the Regional Secretary as the Coordinator of Regional Financial Management, the Head of RRFAMS, and the Head of Spending Agencies, had been one of the BPK’s main recommendations (Badan Pemeriksa Keuangan 2008c).

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Accounting Information The new financial regulation (Permendagri 13/2006) has mandated the application of double entry bookkeeping with a cash basis for the budget realisation report and an accrual basis for the balance sheet for the preparation of financial report. However, by 2007 the mandate was not yet implemented, working agencies had not recorded their journals and ledgers, and single entry was still in place (Badan Pemeriksa Keuangan 2008c). The double entry system only started in 2009 after the implementation of the regional accounting system.

In 2009 the TDG introduced a regional government financial management system known as Sistem Manajemen Keuangan Daerah (SIMDA). As an essential part of the accounting reforms, the SIMDA was prepared by the Financial and Development

Supervision

Agency

(Badan

Pengawasan

Keuangan

dan

Pembangunan (BPKP)) and served to facilitate the budget disbursement and reporting process which was planned to cover the whole financial management aspect.

Despite marking a move from a manual system of recording to a computerised system, the implementation of SIMDA in the region continued to suffer from major inadequacies and limitations, and its application has been far from completed. First, the SIMDA was not supported with adequate provision of technology infrastructure. The implementation of the SIMDA required that each working agency have at least one computer unit with a standardised specification, and therefore adding the need for a substantial number of new resources. Many

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working agencies, particularly sub-district offices (kecamatan), experienced difficulties in fulfilling the required specification. As mentioned by one respondent: Individuals were not well prepared to implement the SIMDA but we are just forced by the situation. The implementation of the SIMDA has brought a considerable impact, for example each sub-district office has to have one computer for that. It seems to add burdens, but because it has been part of the government policy we should do it (TDG# 4). Second, as an accounting system, the SIMDA has not been fully developed. Instead of operating under an online system, it operates in an export and import system. The export and import system from softcopy is a way to transfer data from and to working agencies by the RRFAMS (CFO). The export and import system created its own complications in the practice because in requesting budget disbursement, each working agency could not submit its proposal online; the proposal prepared through SIMDA needed to be further submitted to the CFO (RRFAMS) in the form of softcopy. The task therefore required a much longer time and process. The request was further processed by the RRFAMS based on the softcopy of the request attached in the formal documents. As argued by one respondent: ‘The problem with SIMDA came from the system which was not online’ (TDG#5). Another respondent stated, We need to bring the softcopy form of the request to RRFAMS, we find obstacles in doing this due to distance. We need to go there [to RRFAMS]. Within our Agency, we have technical working agencies such as Puskesmas [Public Health Centres] who are primarily affected by this process (TDG#6).

Third, the apparent lack of human resource capacity undermined the implementation of the SIMDA. The majority of respondents who complained about the difficulties in implementing the SIMDA reported that they were due to

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lack of skills and training (TDG#7). Not only was it evident that computer and internet illiteracy have been common among staff, but the complexity of the new processes meant that many could not see beyond the additional burden it placed on them and were unmotivated to make the necessary changes to how they did their work.

Audited Financial Statements Since 2006, the TDG has prepared and submitted financial statements (reports) that were subjected to audit. 3 Some challenges faced the TDG in undertaking this task. First, in 2008, the BPK reported that the TDG failed to meet the required timeline for its submission (Badan Pemeriksa Keuangan 2008c). Second, by 2010, the preparation of the Regional Financial Report had not been tackled by respective working agencies who were supposed to prepare their financial reports. The preparation of each working agency’s financial report was made possible by the assistance of the BPKP, suggesting capacity constraints facing the TDG in accomplishing the reform task. In addition, the BPK reported that reports prepared by working agencies could not be used for consolidation purposes, as they did not fully comply with the Government Accounting Standards (Badan Pemeriksa Keuangan 2008c). Third, the RRFAMS as the reporting entity in the region found difficulties in consolidating the financial reports of 45 working agencies, particularly in gathering documents from villages (desa) and sub-districts (kecamatan) located quite far from the office of the RRFAMS. This was due to lack of both infrastructure and technological support. 3

Although some local governments had prepared their balance sheets since 2005, most reports had not yet conformed to the new financial regulations introduced in the reforms. This was so because in the same year, some provisions of the Trilogy of Financial Laws had still been prepared.

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As a result of these problems, as informed by a respondent (TDG#1) that the Auditor gave a ‘disclaimer’ opinion for TDG’s financial reports from 2006 to 2008, which meant that the BPK could not give assurances on the accuracy of the financial report. This did not preclude the information being used by financial report users so it did fulfil the need for the existence of a report. The opinion suggested, however, that there was a serious lack of government accountability in managing public money.

Public Availability of Information To uphold the accountability and transparency principles, the TDG developed an official website (http://www.tobasamosirkab.go.id/) that elaborated the TDG task, function and activities. However, the website did not provide or post much information related to finance, let alone the TDG financial report. The difficulty in obtaining the financial report information even from the DPRD was evident. This fact suggested that transparency in terms of public availability of information has been extremely lacking. Furthermore, for several months in 2010 the TDG official website was not accessible, and was only available again after the coming to office of the new head of region.

The newly elected government improved the content of the website by including the annual budget of 2011, albeit in a highly aggregated form. Despite the scant information on financial practice provided by the official website, the re-opening of the website underpinned improvements in transparency in the region.

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Implementation: Underlying Issues and Problems The implementation of the financial management reform in the TDG was beset by problems mainly derived from the incapacity of the regional government to perform its mandated tasks. This was in line with the classic World Development Report (World Bank, 1997) that highlighted lack of capacity as the main impediment of many developing nations to undertake reform. Nowadays more than a decade since the report was first published, the finding is still valid, such as in the TDG, where there was great difficulty providing minimal public services, let alone attending to more complex operations such as financial management reforms.

Human Resource Capacity In 2008, as part of its audit report, the BPK noted the weak capacity of officials working for the RRFAMS and working agencies in managing financial tasks (Badan Pemeriksa Keuangan 2008c). The lack of capacity was also indicated by a low level of education in the region where most bureaucrats had only obtained undergraduate qualifications (Badan Pusat Statistik Pemerintah Kabupaten Tobasa 2007). All in all, limited capacity has hindered the overall process of the budget and accounting reforms in the region.

When asked about the main problems they encountered during the implementation of reform, the majority of respondents, all of whom had been personally involved in the process, suggested human resource capacity as a major obstacle facing the TDG in carrying out the reforms. One respondent stated, ‘… there is lack of

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understanding at all levels of Government in Tobasa District on financial management regarding the procedure stated in the new regulations’ (TDG#1). Moreover, most bureaucrats responsible for financial tasks lacked financial qualifications. The senior official in one working agency stated that in the agency where he worked, of 52 staff only two had financial skills and knowledge (TDG#4).

Training Programs Efforts to enhance capacity were inhibited by the ineffectiveness of the training and placement process for officials. Interviews revealed that the finance-related training undertaken by the respondents included the following: strategic planning training for the planning function, SIMDA training and performance report training for the reporting function, and preparation of regional cost standards for the budget function. However, respondents reported that the programs they attended lacked substance, were difficult to absorb, or were conducted too infrequently.

In addition, one respondent reported that training effectiveness could be compromised by unclear human resource practices, relating to replacement programs and rotation patterns (TDG#3). In some cases, officials who had participated in a particular training program were placed in a post in which the particular skills gained from the training were not required. This issue was also identified by the BPK Audit report (Badan Pemeriksa Keuangan 2008c).

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Role of Leaders Both capacity and contextual issues inhibited the leadership roles in several aspects, such as assigning, cascading and delegating financial tasks to lower levels, marshalling resources at the disposal of the TDG, and coordinating the complex relationships which emerged in the reform process. In particular, leaders often failed to make appropriate appointments to key positions.

No official interviewed mentioned the role of leaders in their jurisdiction as supporting the reform. This suggests that top officials were not playing a strong leadership role in the reform process. When asked about activities facilitated by the leader, most respondents either said that there had been none, neglected to answer or gave general responses indicating a lack of willingness to give more detailed information. Of particular importance, the Administrative Secretary as the coordinator of financial management in the region during the period 2005-2010, was not mentioned as playing a part in the reform. His weak managerial control and supervision of regional financial management was, however, indicated by the BPK audit report 2007 (Badan Pemeriksa Keuangan 2008c).

Interview revealed the lack of management control which was supposed to be part of the leadership role (TDG#3). The lack of leadership can also be judged from the lack of sanctions imposed for behaviour contravening regulations. Imposing sanction on various members of staff, especially those who failed to observe regulations, was one of the major recommendation in the 2007 BPK audit report (Badan Pemeriksa Keuangan 2008c).

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Communication Respondents also indicated that there had been problems with access to information, which closed off important avenues of communication, and thus impeded the reform process. Access to information could serve as a medium through which to educate implementers in handling new tasks, gaining knowledge, and learning new techniques, as well adopting change as soon as they could. It seems that access to information was not easy. Neither officials, documentation, nor interviews with those involved gave any indication of a regular pattern of disseminating new rules and regulations, regular meetings or reporting mechanisms. As suggested by some respondents, information was obtained by officials either being told by their superiors, or asking questions, or by undertaking their own research on the RRFAMS or the Central Government websites.

Interviews revealed that most information was not obtained in time. As pointed out by one respondent, … information was able to be obtained mostly from my own initiative. In the district and sub-district level, information was not obtained optimally. For example, we did not have [access to the] internet network. Many times we were always left out of knowing about any new regulation if there was one (TDG#3).

The main message arising from this interview data is that there have been serious constraints in gaining information pertaining to the reform task, and that this might derive from the lack of resources in utilising technology. Interviews also revealed that barriers to information emerged from the location or from the

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distance between spending agencies within the TDG, because information sharing between spending agencies that were geographically diffused was hard to sustain.

Responses gained from the interviews concerning meetings were varied. While some respondents suggested that the TDG rarely conducted regular formal meetings (TDG#2, TDG#7, TDG#8), others indicated there was a meeting either weekly or monthly (TD#3, TDG#4, TDG#6). However, those who suggested that meetings did exist also complained about their effectiveness (TDG#4). Irregular meetings and the unavailability of minutes of what had been discussed suggested that meetings were only of little value for implementers.

The interviews also revealed that there were no formal reporting mechanisms. Most respondents agreed that there was a monthly reporting mechanism in the TDG, especially vertical reporting, but that there was no horizontal reporting mechanism (TDG#4). On the other hand, some other respondents also argued that reports were only prepared if asked for or were rarely prepared (TDG# 8). The irregular pattern of meetings and reporting mechanisms was an indication of lack of communication to disseminate information necessary to the reform process.

Commitment It is also evident in the research on the DPRD that commitment to systematically driving change across spending agencies to reach the intended reform goal was inconsistent. One respondent described the lack of follow-up action taken by the TDG to address DPR or BPK recommendation, ‘… the DPRD or the BPK

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recommended …..the TDG followed-up … improvements were made and issues were expected not to recur in the following year’ (TDG#1). But this respondent concluded that in practice some recommendations were followed-up but others not.

This reluctance to act following DPRD or the BPK recommendation was compounded by the issue of appointments that beset the implementation process. As this respondent further complained: Since 2007, the issue of appointment of the head of agency has been the main topic during the discussions (between the DPRD and the TDG), particularly regarding a request to the Bupati that the appointment process considers the educational background and skill. For example, the Head of the Regional Revenue, Financial and Asset Management Services (RRFAMS) (CFO) only has an engineering background. As a result, every time we prepare the financial report we have to ask for assistance from the BPKP. … because the Bupati was elected by people, he has the right to appoint the head of agency. As a result, for example, a teacher was appointed to be the Head of RRFAMS. Most of the time, the appointment was not matched with expertise (TDG#1).

Conclusion The research into the TDG case shows that the political context, dominated by illicit financial practices in the region, slowed down the implementation of budget and accounting reforms in the TDG. Long-standing corrupt practices, rooted in all levels of government, created institutional hurdles for the implementation.

However, organisational factors were also important. A major constraint in making the implementation happen was insufficient resources to accomplish the task at hand. Regulations made at the Central and Provincial Governments could

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not be shared and understood by staff because the dissemination process was not carried to all levels of the TDG organisation. Overall, there was a lack of communication because the information necessary for reform was not widely shared. In addition, the persistence of human-resource practices based on patronclient relations tended to undermine the effectiveness of training, which in turn impeded the dissemination of the new processes.

To sum up, the adverse implementation outcomes were mainly caused by the political and cultural context impeding the attainment of organisational task such as mobilising resources, enhancing commitment, as well as promoting communication, cooperation and coordination in the reform process. In terms of addressing the questions posed in this research, this case study sheds light on the factors affecting the implementation process, including the significance of human resource capacity in supporting the reform process. This case study also shows that political and organisational contexts determined the outcomes of implementation.

As elaborated in this chapter, most problems facing the TDG resulted from dysfunctions in the regional government and ranged from governance issues to administrative capacity difficulties and commitment. Recommendation from the World Bank (1997) to enhance state capacity by reinvigorating public institutions remains relevant to the TDG case. Bale & Dale (1998, p. 113) argue that ‘a broad, system wide perspectives that focuses on the causes, not the symptoms, of dysfunctionality’ is important for developing countries embarking on reforms.

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In terms of implementation theory, Tobasa dramatizes the nature of the problems caused by corruption, in that officials were focused on the minutiae of reform regulations, while being unable to influence the unstable political and bureaucratic environment around them. Tobasa highlights (by their absence) the same factors as were found in Tangerang, such as commitment, resources and leadership. Once again, the preoccupations of the mainstream developed-country implementation literature with characterising implementation processes, seem to miss the importance of enabling pre-conditions, such as an absence of corruption.

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Table 7.1: TDG Reform Timeline

1999

Tobasa District Government (TDG) is established

2000

Election for Bupati. Sahala Tampubolon is elected as the Bupati for the period 2000-2005

2005

First direct election of the head of district region in Tobasa. Monang Sitorus was elected as the Bupati for the period 2005-2010 Musrenbang (development planning deliberation or community participation process) is first implemented following the 2004 Planning Law. The community participation process in the budget planning was ineffective as widespread complaints emerged from the general public.

2006

The TDG publishes its first financial report for the fiscal year 2005

2007

The TDG reorganises its structure, with the separation of function between the CFO and COO of the TDG as the main change

2008

The TDG regulation (Peraturan Daerah) on Main Issues in Regional Financial Management is enacted The TDG enacts a regulation (Peraturan Bupati) on Account Codes

2009

A regional government financial management system (Sistem Manajemen Keuangan Daerah (SIMDA)) is first introduced across working agencies in the TDG. The TDG starts the implementation of the double-entry accounting system.

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2010

The region holds its second direct election for the head of region. Kasmin Simanjuntak was elected as the Bupati for the period 20112015

2011

The TDG introduces the Pact of Integrity in all spending agencies as mandated by the 2011 Presidential Instruction on Action Plan on Corruption Avoidance and Eradication.

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Figure 7.1: Organisational Chart for the Tobasa District Government, 2010

Bupati (Head of District)

Regional Administrative Secretary

Chief Operational Officer (COO) (Head of Working Agency)

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27.

Education Services Inspectorate Health Services Agriculture, Fishery and Livestock Services Regional Development Planning Agency Culture and Tourism Services Agency for Community Empowerment and Village Development Forestry and Plantation Services Agency for Women, Children Empowerment and Family Planning Public Works Services Agency for National Unity, Politics and Community Protection City Administration Planning and Residential Services Environment and Mining Agency Communication and Informatics Services Office for Food Security Manpower and Transmigration Services Police Corps Unit Social Services Regional Public Hospital Cooperatives, Industry and Trade Services Sanitation and Parks Services Population and Civil Registration Services Secretary of Regional Parliament Regional Civil Service Agency Regional National Disaster Agency Youth and Sport Services Sub-District (16)

Chief Financial Officer (CFO)

Regional Revenue, Financial and Asset Management Services (RRFAMS)

Source: Adapted from Pemkab Tobasa (2010) 256

Chapter 8 Constitutional Court Case Study

Introduction The case of the Constitutional Court (CC) (Mahkamah Konstitusi) is of interest because, although it is a newly established institution within the Indonesian Central Government institutions, the CC has made good progress in implementing the mandate of the budget and accounting reforms. The good progress in implementation was reflected in the BPK Audit Report on the CC Financial Report for four sequential years (2006-2010) in which the BPK gave an ‘unqualified opinion’ on the court’s financial management (Mahkamah Konstitusi 2010). Achievements noted in the BPK’s report included preparation of the financial report in accordance with the Government Accounting Standards, the ability to spend the budget optimally, the promotion of modern cash management through closure of all illegal accounts, and strong enforcement of internal controls (Badan Pemeriksa Keuangan 2009d). For the purposes of this thesis, the case study of the CC is useful in identifying ingredient factors for successful implementation of the financial management reform.

The chapter starts with the contextual background that establishes the setting for the analysis of the implementation of the budget and accounting reforms elaborated later in this chapter. The following section details the dynamics of the implementation of the budget and accounting reforms in the CC. Furthermore, the 257

chapter elaborates specific features affecting implementation outcomes in the CC. This chapter ends by explaining how this case study contributes to addressing the research questions.

Political Context of Reform The role of the Constitutional Court should be viewed in the broader context of the legal and constitutional reforms that have underpinned democratisation in Indonesia since 1998 (Mahkamah Konstitusi 2004). The reforms introduced a new law on political parties, abolished oppressive press regulations, and strengthened judicial independence in order to cement the separation of powers of the judiciary from the executive (Marijan 2010; Kingsbury 2005).

On 9 November 2001 the Government announced its intention to establish the CC as an integral part of the constitutional reform that took place during the People’s Consultative Assembly (Majelis Permusyawaratan Rakyat (MPR)) Annual Meeting, resulting in the third amendment to the 1945 Constitution. The constitutional reform aimed to build democratic government with checks and balances between branches of government, to establish the supremacy of law and justice, and to ensure human rights (Mahkamah Konstitusi 2004). Following the announcement of CC, the Supreme Court (Mahkamah Agung (MA)) conducted the function of the CC from August 2002 until the establishment of the CC on 13 August 2003, based on Law No 24/2003 on the Constitutional Court. Following this, on 16 August 2003, the function of the CC was further formalised when the President appointed nine Constitutional Judges (Hakim Konstitusi).

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The major reason for undertaking legal reforms was to tackle persistent problems in the Indonesian judiciary. During the Suharto regime, the Central Government intervened heavily in the judiciary and commitment to the rule of law was largely absent (McLeod 2008). The performance of judicial institutions was widely perceived by the Indonesian public as ineffective, with corrupt practices corroding the rule of law. Discriminatory law enforcement, abuse of power, and complex, high-cost and time-consuming judicial processes alienated the public (Mahkamah Konstitusi 2004; Ghosal 2004).

Background to the Budget and Accounting Reforms in the Constitutional Court A complete timeline for the reforms in the CC is set out in Table 8.1. As a newly established institution, in its early days in August 2003 the CC obtained administrative support from the MPR with the transfer of 77 Secretariat General officials to the CC (Mahkamah Konstitusi 2006b). Apart from the close institutional relationship between the MPR and the CC, which was a by-product of the Constitutional Amendments from the MPR, the assistance from the Secretariat General of the MPR was sought because of the experience and expertise of the Secretariat General of the MPR in providing support services to the members of the MPR (Mahkamah Konstitusi 2006b). Following this, the CC recruited 95 officials from other government or non-government institutions to support the Secretariat General function (Mahkamah Konstitusi 2006b).

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In September 2003, the CC drafted the organisational structure of the Court which was formalised by the President in December 2003 (Mahkamah Konstitusi 2006b). The simple organisational structure (Figure 8.1) consists of the nine Constitutional Judges, including the Chairman and Vice Chairman (Mahkamah Konstitusi 2006a). The Constitutional Judges were to be supported by two administrative units: the Registrar and the Secretariat General (Mahkamah Konstitusi 2006b).

To complete the formal structure, the CC carried out its first recruitment of staff and managers from 24 to 26 September, 2003. Following this, the CC began implementing its functions in October 2003 by starting to accept cases under its jurisdiction (Mahkamah Konstitusi 2008). The CC has also been developing its human resources through subsequent recruitment in 2006 and 2010. By 2008, besides the nine Constitutional Judges, the CC employed around 216 officials (Mahkamah Konstitusi 2009a).

Budget Overview The CC budget is provided in Table 8.2. Due to the simple structure of the CC, the budget was articulated in only one budget implementation document (Dokumen Isian Pelaksanaan Anggaran (DIPA)) under the responsibility of the Secretary General. This made the implementation of the budget and accounting reforms much easier to coordinate, particularly in relation to proposing, revising, and reporting.

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For example, a sum of Rp 158.06 billion as the actual budget for the year 2008 was spent mostly on capital expenditure (50.12%), and goods expenditure (44.97%) (Mahkamah Konstitusi 2009b). Of the Rp 158.06 billion, 47.52% was expended on the implementation of good governance, the enhancement of the state apparatus infrastructure (31.96%), the enhancement of judicial institution performance (18.43%), human resource management (1.78%), and the enhancement of the quality of the legal profession (0.32%) (Mahkamah Konstitusi 2009b). The percentage of budget spending on its various programs reflected the CC’s priorities and strategies, which in turn have made possible the promotion of good governance, through transparency, accountability, and the rule of law.

Organisational Dynamics of the Reforms Being established in 2003, one year prior to the official commencement of government-wide reform in 2003/2004, the CC was not faced with the task of changing prior financial practices. This advantage expedited the reform process, because reform tasks such as the implementation of output-based budget processes and the introduction of new cash management and accounting practices, were undertaken as part of the CC’s development phase. This supports the argument that new organisations, especially simply structured ones, favouring reforms such as the CC may greatly expedite the reform process (Sabatier, 1986). However, the CC data also reveal that support for reform may not occur by depending on this characteristic alone.

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At the beginning of November 2003 (31 October – 2 November), the CC held a strategic planning meeting in Jakarta. In addition to formulating the vision and mission of the CC, the meeting recommended the preparation of a blueprint as guidance for the institution to manage its tasks. In December 2004, the CC formalised the blueprint as a strategic plan for 2004-2009 titled Cetak Biru: Membangun Mahkamah Konstitusi sebagai Institusi Peradilan Konstitusi yang Modern dan Terpercaya (Blueprint: Building the Constitutional Court as a Modern and Trustworthy Constitutional Judicial Institution). The blueprint, which stipulated policies and programs, was prepared according to the Planning Law of 2004,

with

the

National

Medium-Term

Development

Plan

(Rencana

Pembangunan Jangka Menengah Nasional (RPJMN)) as guidance. A second strategic planning document for the years 2010-2014 was prepared in 2009. This document differed from the blueprint in its identification of clear main performance indicators as the basis on which to measure performance (Mahkamah Konstitusi 2009d).

The CC’s development plan covered three stages. The first stage (from 20052006) focused on organisational capacity building, and acquiring facilities and infrastructure. The second stage (2006-2007) was planned to focus on friendly, open, and modern services for stakeholders and the public. The third stage promoted professionalism in administrative work, supporting the development of the CC’s reputation as a modern and a trustworthy institution (Mahkamah Konstitusi 2006b).

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Leadership The leadership of the Secretary General of the CC, Janedjry Gaffar, was crucial in the functioning of its financial system. Appointed on 19 August 2004, Gaffar drove the implementation of reforms through a number of key initiatives (Mahkamah Konstitusi 2006b,

2008). These initiatives included a Pact of

Integrity (introduced in 2004) and the endorsement of the Commitment to Maintaining Unqualified Opinion on the Financial Report from the Supreme Audit Agency (Komitmen Mempertahankan Opini Wajar Tanpa Pengecualian atas Laporan Keuangan dari BPK).

The Pact of Integrity spelled out the obligations of staff, under the civil servant oath, to avoid engaging in corruption, collusion and nepotism (KKN), and to maintain the image and credibility of the CC through transparent, accountable and integrated performance (Tresna 2010). The early implementation of the Pact of Integrity in the CC preceded the government-wide obligation to sign the Pact, announced by the President in 2011 through the Presidential Instruction on the Action Plan on Corruption Avoidance and Eradication (Kementerian Negara Pendayagunaan Aparatur Negara dan Reformasi Birokrasi 2011b). In 2007, Gaffar initiated the declaration of a statement for Maintaining Unqualified Opinion on the Financial Report from the Supreme Audit Agency. The statement acted as an incentive to observe financial regulations and underlined the importance of the reforms in the institutional context.

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The importance placed on the success of the CC was reflected in the fact that Gaffar was able to recruit staff to suit the organisation’s needs. For example, unlike the conventional recruitment process, which was centralised by the Ministry of Administrative and Civil-Service Reform (Kementerian Negara Pendayagunaan Aparatur Negara dan Reformasi Birokrasi (KemenPAN & RB)) and tended to recruit fresh graduates, Gaffar recruited experienced officials from other government institutions. These included officials from the MoF, the BPK and the BPKP who were recruited to perform as financial administrators in the CC. This was possible because of the strong support of the Government for the CC, widely believed to be one of the ‘cleanest’ organisations in the Central Government.

Gaffar built communication internally, using intensive regular meetings and reporting to convey the organisational mission. He was also instrumental in motivating officials to enhance their capacity to adapt to change by introducing both rewards and sanctions. Participants for this research revealed regular reporting mechanisms which encouraged sharing of knowledge and information. One respondent who was experienced in the financial process mentioned, ‘there is activity reporting by which immediate corrective measures during the implementation phase can be tackled’ (CC#1).

Respondents also mentioned that the CC held regular meetings, both internally and with other institutions such as the MoF. As one senior staff member who had been working long-term in public service confirmed this: ‘meetings are conducted

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regularly’ (CC#2). Another respondent mentioned: ‘internal meetings are frequently held, a meeting can even be held every night, sometimes during the weekend … on average, though, it is twice a week’ (CC#3). A junior official also mentioned: ‘we hold a formal regular meeting with the MoF once every six months; we are also invited by them to do reconciliation’ (CC#4).

This pattern of reporting and meeting helped to forge administrative discipline. In addition, respondents revealed that leaders frequently imposed punishments (ranging from verbal reprimands to dismissal) for failures in fulfilling task and functions. By invoking strongly stated expectations and backing them up through administrative action, Gaffar was promoting a clearly-defined corporate culture.

Respondents generally believed that the strong commitment of the leader was the main driver of reforms. As a senior manager who had strong financial background commented: Both the Chairman [of the CC] and Secretary General are very aware of accountability and transparency. The leaders are very committed to reform; for example, we are obliged to prepare reports on time, we are obliged to obtain an unqualified opinion, and each working unit has a performance target with a performance contract (CC#2).

Financial Transparency and Accountability The CC has produced an annual report regularly since 2004. The obligation to issue an annual report was articulated in the Law on the Constitutional Court: ‘The Constitutional Court is obliged to publish a periodic report to the public in an open manner regarding: a. registered and examined cases, rulings on cases; b.

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financial management and other administrative tasks’ (Pemerintah Republik Indonesia 2003b). The obligation was one of the manifestations of financial transparency in the CC that has underpinned the implementation process. The CC also made it possible to obtain its financial report, not only through its website but also through its library, which has provided wide information on its functions to the public, including minutes of court proceedings.

A new procurement system to promote competition and transparency was introduced by the Government in 2003 (Keppres 80/2003). As a result of the resources made available to it, the CC invested strongly in its website, and from 2010 was able to provide comprehensive information on procedures, processes, and outcomes of the CC tasks (Mahkamah Konstitusi 2010).

It is important for the CC to be seen to be at the forefront of financial transparency. In order to promote good practice in cash management, in 2008 the CC reported an off-budget account to the BPK, and closed the account in 2009 (Badan Pemeriksa Keuangan 2009d). In doing so, the CC was conforming to a Government regulation to put in order all government accounts. Prior to the reforms, it was common practice among government ministries to run off-budget accounts, called rekening liar (illegal accounts), owned by line ministries and used to manage revenue outside the state budget mechanism. 1 The substantial number of these accounts (in 2006 around 5,591 accounts) reflected a potential

1

The illegal account, which was an indication of lack of budget discipline, was initially disclosed in the BPK Audit Report on the Central Government Financial Report 2004.

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loss of state money, but also the difficulties of achieving efficient financial management.

Budget Implementation Budget implementation and reporting, formerly centralised in the MoF, were delegated to the line ministries following the principle of ‘let the managers manage’ (Pemerintah Republik Indonesia 2003a). As confirmed by some respondents, in 2006 the CC Secretary General’s Decree on the Appointment of Financial Officials was issued, clarifying tasks and responsibilities. As one respondent mentioned: ‘clarification of tasks and jobs including a system for applications has been prepared comprehensively’ (CC#1).

As a result of this, the CC has been able to spend 89.26% of its total budget, indicating its ability to spend its budget according to its tasks and functions (Badan Pemeriksa Keuangan 2009d). Related to this, in 2010 the CC obtained an award from the Directorate General (DG) of Treasury as the Best State Financial Working Agency in 2009 (Satuan Kerja Pengelolaan Keuangan Negara Terbaik tahun 2009) for the accuracy of its payment order proposals and financial reporting (Mahkamah Konstitusi 2010).

Financial Reporting and Accountability Beginning in 2005, the CC submitted its financial report to be consolidated by the MoF and audited by the BPK; however, it is only since 2007 that the financial report has been successfully prepared in accordance with the Indonesian

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Government Accounting Standards. The financial report was a by-product of the Government Agency Accounting System (Sistem Akuntansi Instansi (SAI)) which was first implemented in the CC in 2005 and improved after 2007 as compared to previous years (Badan Pemeriksa Keuangan 2009d). 2 In 2008, the CC obtained an ‘Award for Highest Standard Achievement in Government Financial Accounting and Reporting for 2007’(Penghargaan Capaian Standar Tertinggi dalam Akuntansi dan Pelaporan Keuangan Pemerintah tahun 2007) (Mahkamah Konstitusi 2008, 2009c).

The CC did, however, encounter problems in applying the prescribed Chart of Accounts (CoA). The aim of the CoA was to ensure that the budget plan, the actual budget, and the financial report were presented in the same terminology, to enhance quality of financial information, and to ease the financial oversight process. However, the CoA was not considered to be user friendly, as it comprised a substantial number of accounts, many of which were open to differing interpretation. 3 In the CC, for example, the budget for goods expenditures was frequently used for or recorded by financial officers as capital expenditures, creating problems in the reliability of data presented in the financial report (Badan Pemeriksa Keuangan 2009d).

The progresss in the financial accounting and reporting seemed to derive from active measures in following up all the BPK’s findings in the Audit report. In the

2

The SAI consists of two subsystems, namely the Finance Accounting System (SAK) and the State-owned Asset Financial Accounting Management System (SIMAK-BMN). 3 In February 2009, the MoF (DG Treasury) promulgated a Directorate General Regulation to revise the initial CoA to ensure similar perceptions among budget users in implementing the CoA.

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Monitoring on Follow-up Measure Report, the BPK stated that four findings in relation to the internal control system and 12 findings in compliance with regulations

were

tackled

comprehensively

based

on

BPK

advice

or

recommendation (Badan Pemeriksa Keuangan, 2009d) .

Performance Reporting As with other government institutions, performance reporting had not yet been finalised in the CC by 2010 (Departemen Keuangan dan Bappenas 2009). The Central Government had been working on this particular issue and in 2010 it started a pilot project based on performance-based budgeting within a mediumterm expenditure framework, in six line ministries. The performance-reporting regime operating in 2010, the Laporan Akuntabilitas Kinerja Instansi Pemerintah (LAKIP) (Government Agency Performance Accountability Report), did not fully link budgeted activities with programs. Respondents reported that the LAKIP was prepared based on the budget-planning figures, while the output and outcomes did not yet provide a clear link to the figures as mandated by the reforms (CC#1, CC#5). Nevertheless, in 2008 the CC reported that key performance indicators relating to budget accuracy, evaluation and financial accountability reporting, had been achieved (Mahkamah Konstitusi 2009a).

Asset Management As with all agencies, asset management proved to be a hurdle in the implementation process in the CC. In 2006, the BPK reported that the manual process for managing assets, and the absence of asset revaluations, were among

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the reasons for miss-representation in the financial report (Badan Pemeriksa Keuangan 2006).

In 2006, the BPK reported that one of the contributing factors to the problems of implementation was the limited number of capable officials available to operate the asset management system

(Badan Pemeriksa Keuangan 2006). The CC

responded to this issue by intensifying training and dissemination programs and by emphasising the importance of financial system qualifications when making appointments. For example, in 2008 the CC sent seven officials to participate in financial-related training including one staff member who undertook assetmanagement system training held by the MoF (Mahkamah Konstitusi 2009c). In 2009, the CC’s successful finalisation of asset identification, administration and assessment was recorded (Pemerintah Republik Indonesia 2010).

Internal Control System The CC was relatively slow to establish an internal control unit (Badan Pemeriksa Keuangan 2006). In response to the non-existence of an internal control unit, in 2006, the CC formed an ad-hoc internal control unit to supervise and evaluate managerial control, consisting of three officials of the CC along with assistance from the BPKP.

A fully independent internal control unit was eventually formalised in the CC in January 2010 (Mahkamah Konstitusi 2010). The main job of the unit was to supervise the implementation of tasks and functions, including finance, within all

270

working units of the CC. This demonstrated commitment of the institution to continuous development of the internal control unit was clearly stipulated in the CC’s annual report of 2010: The competence and effectiveness of the internal unit control will be continually enhanced so the task implementation of all working units and officials is in accordance with the regulations to avoid corrupt practice. As a matter of routine, the internal control system or audit in the institution should be strong, because if the internal control unit has implemented its functions optimally, the CC will be free from corruption, bribery, inefficiency and other misconduct (Mahkamah Konstitusi 2010, p. 77).

Features of the implementation Relative to the other cases in this research, the CC had the easiest pathway to implementation success. However, it is useful to draw out the factors internal to the CC that paved the way for the development of an organisation representing a new type of organisational culture.

Facilitators The MoF’s Assisting Task Force (Tim Pembina) intensively supported the implementation of the reforms. The Tim Pembina support for the CC since 2003 encompassed six officials who regularly visited the CC to give presentation on new regulations, or system updates, and to solve problems facing the CC. The strong cooperation with Tim Pembina fostered knowledge building. Interviews confirmed that the CC intensively consulted the MoF regarding the CoA as the main problem in the budgeting process. As stated by one respondent, ‘We are always in touch with the MoF Assisting Task Force; for example, if we face problems we ask them, they are our Liaison Officers’ (CC#2). This was confirmed

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by another respondent who commented on the relationship with the Tim Pembina, ‘Our interdependence with MoF Assisting Task Force to consult on new problems and things that need special treatment’ (CC#4). Internally, the Tim Pembina worked very well with leading figures (internal facilitators) from the Planning and Financial Bureaus in easing the overall implementation process.

Standard Operating Procedures Standard Operating Procedures (SOPs) played a major role in shaping the implementation process in the CC.

Prior to the reforms, most work in the

bureaucracy was governed by general descriptions of main tasks and functions that led to a lack of clarity in expectations and to variations in working procedures. The reforms, and in particular the government-wide civil-service reforms starting in 2008, encouraged all ministries to prepare SOPs. The SOP in the CC was formalised in 2010, as part of the civil-service reforms (Mahkamah Konstitusi 2010). Interviews confirmed that the SOPs had played a major role in guiding the implementers in doing their job. One respondent emphasised, ‘each unit has SOP. SOP is made based on each unit’s respective tasks and functions ... here everything should be related to SOP’ (CC#3). Likewise, another respondent commented: ‘We have SOP, who does what, output and input, and it is clear. Without SOP, it is impossible [to manage the tasks]’ (CC#2).

Advanced Information Technology Support The implementation of reforms in the Court was strongly supported by the provision of advanced information technology (IT) both in judicial and financial

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areas. This was possible because the budget was adequate, reflecting strong commitment to the organisational achievement.

In judicial matters, the CC developed e-court technology to ease access to justice. E-court software included a case management system to enable people to register cases online, and to access the progress of the case anytime and anywhere. It also included a court recording system and video conference facility. In the financerelated area, the Planning and Budget Management Information System (Sistem Informasi Manajemen Perencanaan dan Realisasi Anggaran (SIMTOR)) was successfully implemented.

Integrity and Workplace Behaviour To promote integrity in the institution, the CC promoted a Code of Ethics. The Code of Ethics aimed to instil good norms and values, and to sustain officials’ compliance. One respondent mentioned, ‘We have code of conduct and it has been socialized to all employees, including direct briefing, and a pocket book on ethical conduct’ (CC#3). The Code of Ethics, serving as an effective deterrent to the breaching of financial regulations, gives some advantage to the ongoing financial management practice. In October 2005, a new Code of Ethics for Constitutional Judges was issued, followed in 2007 by an endorsement of the Code of Ethics for officials (Mahkamah Konstitusi 2007). These two Codes of Ethics added to the existing service-wide Code of Professional Ethics for Civil Servants that had been in existence since 1980. To remind both the judges and employees of the ethics issues, the CC displayed the Codes on every level of the

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building. Furthermore, the Codes of Ethics have been widely published in the form of a pocket book, and frequently publicized on any possible occasion or in briefing sessions. This was also confirmed by one respondent: We have code of conduct … and it is posted on the wall on every level in the office in front of the elevator … it is based on PP 30 [Code of Professional Ethics for Civil Servants 1980] (CC#4). Another distinctive feature of the CC was demonstrated through longer working hours, as officials’ presence at work was recorded through a hand-punch system. This additional workload was, however, accompanied by additional incentives given to all employees. In general, the CC officials received a higher salary than the majority of Central Government officials. In essence, integrity upheld in the institution as well as the conducive workplace behaviour served as as incentive for implementers to follow through on the reform process, and became a means to minimise resistance.

Adequate Human Resource Capacity The CC was advantaged in its recruitment practices. This was confirmed by one respondent who had been involved in the recruitment process: We conduct inter-departmental cooperation for acquiring and developing our staff. This cooperation with other agencies enables financial officials to be recruited from finance-related institutions such as the MoF and the Supreme Audit Agency (CC#2). For example, the head of the CC’s Financial and Planning Bureau was a former long-standing MoF employee. One respondent observed that ‘in the Financial and Planning Bureau we have around 10 staff who used to work for the MoF’ (CC#1). In addition, CC officials were eligible for incentives that were not available to other public servants. This attractive offer was one of the reasons behind the

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ability of the CC to acquire the best people. The prestige of the CC as one of the most credible and clean institutions in Indonesia was undoubtedly another attractant.

Besides the quality of the recruitment process, high-level capacity in the Court was maintained through a capacity building program (such as the holding of training and dissemination programs). In running the training, the CC encountered few budget constraints, which allowed flexibility in running relevant courses that were not only related to judicial but also financial issues. After 2006 intensive training was conducted where implementers actively participated in financerelated training programs such as e-procurement, financial reporting, SAI, SIMAK-BMN, and the MoF PPAKP (Mahkamah Konstitusi 2006b, 2008). All respondents confirmed that they had participated in at least one internal or external training program since joining the agency. As one middle manager mentioned, … training is adequate; our organisation is concerned. Training is held for employees such as treasury and procurement training … we do not have any constraints in terms of funding to do the training (CC# 6). The adequacy of training was also confirmed by another respondent: Training is held such as agency accounting system, asset management system. We always send employees to join the training … We face no budget constraints … usually we send one or two people from our department (CC#2).

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Conclusion As a symbol of far-reaching judicial reform in Indonesia, the CC enjoyed the privilege of strong Government support. This had an enormous impact on the pace and the success of the reforms. The congruence of goals of the incumbent Government and the CC in promoting good governance resulted in the provision of a generous budget, which gave flexibility in managing the organisation.

Through this flexibility, the CC was able to acquire highly skilled and experienced personnel. A virtuous cycle was established, in which well-conceived programs and activities strengthened organisational capacity, which in turn assisted implementers in converting the new financial rules into practice. Furthermore, external facilitation from the MoF was readily available. The implementation process was also made more manageable by the small structure of the institution, which made coordination easier.

The leading figure, Secretary-General Gaffar, actively created and supported an organisational culture that was conducive to the adoption of change. This organisational culture was shaped by strict sanctions and by the promotion of a Code of Ethics. Nonetheless, despite its advantages, the CC had yet to achieve full-fledged performance-based budgeting and accrual accounting.

For the purposes of this thesis, this case study has shown that leadership is the most significant determining factor for successful implementation outcomes. Although the CC enjoyed the advantages of being a small institution that made

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implementation easier, its human resource capacity was the backbone of the reform process.

Many of the preconditions for the successful implementation of the NPM model in developing countries were present in the CC. The newly established judicial institution was characterised by adherence to the rule of law and the existence of an adequately functioning administrative system as fundamental bases for reform (Sarker, 2006). The building blocks for successful NPM reform were largely present such as a formally correct, rule-based and honest administration as well as effective governance. In terms of the implementation literature, the CC case shows, not only the importance of resources, but also the significance of the starting point for change. As a relatively new institution, the CC did not have the weight of established practice, or of entrenched self-interest, to hinder change. Chapter 9 will draw together factors affecting implementation outcomes identified in Chapters 58.

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Table 8.1: CC Reform Timeline

2001 9 November

The Government formalises the idea of establishing the Constitutional Court (CC) in Indonesia in the third amendment to the 1945 Constitution.

2002 August

The Supreme Court (Mahkamah Agung (MA)) takes up the CC function until it is established

13 August

The CC is established based on the 2003 Law No. 24/2003 on the Constitutional Court

16 August

Nine Constitutional Judges (Hakim Konstitusi) are appointed by the President

September

Organisational structure of the CC approved

24-26 September

First staff recruitment process

31 October- 2 November

The CC prepares and formalises its first strategic planning

in

the

Blueprint:

Building

the

Constitutional Court as a Modern and Trustworthy Constitutional Judicial Institution. October

the CC commences its functions and starts accepting cases under its jurisdiction Assisting Task Force of the MoF (Tim Pembina) supports the financial management process in the Constitutional Court for the first time

278

2004 19 August

The Secretary General, Janedjri Gaffar is appointed The Secretary General Introduces the Pact of Integrity The CC produces its first annual report

2005

The CC issues a Code of Ethics for Constitutional Judges First preparation of budget based on new procedures First

implementation of

Government

Agency

Accounting System (Sistem Akuntansi Instansi (SAI)) 2006

The CC forms an ad-hoc internal control unit to supervise and evaluate managerial control.

2007

The endorsement of Commitment to Maintaining Unqualified Opinion on the Financial Report from the

Supreme

Audit

Agency

(Komitmen

Mempertahankan Opini Wajar Tanpa Pengecualian atas Laporan Keuangan dari BPK) Full implementation of the Government Agency Accounting System (Sistem Akuntansi Instansi (SAI)) Endorsement of Code of Ethics for the CC officials

279

2008 16 July

The CC obtains an award for ‘Highest Standard Achievement in Government Financial Accounting and Reporting for 2007’ (Penghargaan Capaian Standar Tertinggi dalam Akuntansi dan Pelaporan Keuangan Pemerintah tahun 2007) The MoF, BPKP, and MenPAN conduct financerelated training The

CC

finalises

its

asset

identification,

administration and assessment as program towards asset management reform 2009

The CC closes its illegal accounts to conform with new government regulations

2010

A fully independent Internal Control Unit is established SOP for the CC civil servants, including financial officers, is officially announced. The SOP is intended to be the guidelines for implementation for all civil servants in the CC. The CC obtains an award as the Best State Financial Working Agency in 2009 (Satuan Kerja Pengelola

280

Keuangan Negara Terbaik tahun 2009) for the accuracy of payment order proposal and the financial reporting from the DG Treasury of the MoF

281

Table 8.2: The Constitutional Court Budget, 2005-2009 Year

Revenue

Expense

(Rupiah)

(Rupiah)

Projected

Actual

Projected

Actual

2005

9,500,000

331,950,431

180,547,500,000

110,739,234,528

2006

NA

1,307,104,000

237,839,382,000

204,632,441,842

2007

40,332,000,000

681,656,894,000

196,756,131,000

149,715,980,627

2008

133,940,000,000

266,951,803,000

177,080,445,000

158,064,485,493

2009

162,843,600,000

298,724,309,000

193,173,425,000

162,609,584,013

Sources: Badan Pemeriksa Keuangan (2006), Badan Pemeriksa Keuangan (2007), Badan Pemeriksa Keuangan (2009d).

282

Figure 8.1: Organisational Chart for the Constitutional Court, 2008 Key coordination line command line

Chairman and Vice Chairman of the Constitutional Court

Constitutional Judges

Secretary General

Bureau of Planning and Finance

Bureau of General Affairs

Registrar

Bureau of Public Relations and Protocol

Bureau of Case Hearings and Administration

Centre for Research and Development

Planning Section

Case Administration Section

Public Relations Section

Case Administration Section

Administration Section

Finance Section

Human Resources Section

Section for Administration of Protocol and Leadership

Hearings Section

Functional Positions Group

Equipment Section

Clerical Functional Position

Resume Services and Case Decisions Section

Source: Adapted from Badan Pemeriksa Keuangan (2009d) 283

Table 8.3: Planning Documents Document

National Level

Regional Level

National Long-term

Elaboration of national

Regional Long-term

Development Plan

goal according to the

Development Plan)

(Rencana Pembangunan

Preamble of the 1945

(Rencana Pembangunan

Jangka Panjang Nasional Constitution

Jangka Panjang Daerah

(RPJPN))-20 years

(RPJPD)) refers to the National Long-Term Development Plan (RPJPN)

National Medium-term

Based on the RPJPN

Regional Medium-term

Development Plan

Development Plan

(Rencana Pembangunan

(Rencana Pembangunan

Jangka Menengah

Jangka Menengah

Nasional (RPJMN))-5

Daerah (RPJMD)) is

years

based on the RPJPD and taking into consideration the RPJMN

Strategic Plan-line

Strategic Plan-Line

Strategic Plan of

ministry (Rencana

ministry (Rencana

Regional Working

Strategis (Renstra))-5

Strategis (Renstra K/L))

Agency (Renstra SKPD)

years

is based on the RPJMN

is based on the RPJMD

Government Working

National Government

Regional Government

Plan (Rencana Kerja

Working Plan (RKP

Working Plan (RKPD) is

284

Pemerintah (RKP))- 1

National) is an

an elaboration of the

year

elaboration of the

RPJMD and refers to the

RPJMN

National RKP

Working Plan (Rencana

Working Plan-line

Working Plan of

Kerja (Renja))-1 year

ministry (Renja K/L) is

Working Agency (Renja

based on the line ministry SKPD) is based on the strategic plan (Renstra)

Renstra SKPD and refers

and refers to the national

to the RKPD

development priority and indicative allotment Sources : Pemerintah Republik Indonesia (2004e)

285

Chapter 9 Cross-Case Analysis

Introduction Following the case studies of the four government institutions in Chapters 5-8, this chapter draws together the previous examination of the implementation process in order to make some more general observations about the implementation of the reform. As mentioned earlier, there are some interesting variations across government institutions in Indonesia, both at the central and regional level with regard to the outcomes of the implementation. While the case studies form a small sub-set of the total number of agencies and institutions, by comparing more successful with less successful outcomes, it is possible to draw out themes that help to explain the variations.

The structure of this chapter is as follows. The next section overviews the context for the analysis (as elaborated in detail in each case study chapter). The following section analyses findings from the case studies and compares one case to another. The chapter concludes with reflections on the factors influencing successful implementation that might improve understanding of the implementation process of the budget and accounting reforms in practice.

286

As mentioned in Chapter 4, both deductive and inductive approaches were used to analyse the data. In particular, the inductive approach was beneficial in implementation research in the Indonesian situation, where the impact of context was significant, and, given the large variety of available implementation models, it is difficult to build a testable model ex ante (Hill & Hupe 2009).

An iterative process was pursued, combining the deductive and inductive approaches. As patterns emerged, they were related back to the literature, which was then used to generate and test further propositions. From the implementation literature, a number of candidate variables were identified as being important to the Indonesian situation, and to the financial reform program. These variables related to Mazmanian and Sabatier’s view of the importance of strong structuring variables emanating from legislation (including the capacity to use an integrated top-down approach); the availability of resources for implementation; and the existence (or otherwise) of groups opposed to the policy (Mazmanian & Sabatier 1983). Other theories highlighted inter-organisational behaviour, and the emergence of cooperation and coordination (Stoker 1991). At the organisational level, support was found for Ryan and Lewis’s (2007) finding that public sector reform involved, and often highlighted, cultural change, with leadership emerging as one of the key factors. The research was also informed by Ryan’s (1996) overarching observation of the importance of context in shaping the implementation task.

287

Qualitative ‘readings’ were applied to the variables in each case. Relative success needs to be carefully unpacked. All the changes were of relatively recent origin, and the absence of qualification of financial statements by the BPK picks up only non-conformance to the letter of the new financial regulation and effectiveness of internal control system. Wherever possible, other indicators were included in the assessment, including the extent to which overall cultural change appeared to have been achieved.

The

successful

Tangerang

Municipality

Government

(TMG)

and

the

Constitutional Court (CC) implementation outcomes were reflected in the ‘unqualified’ opinion given by Badan Pemeriksa Keuangan (BPK) (Supreme Audit Agency) on their financial reports. In addition, the TMG attracted nationwide attention for its successes. By 2009 at least 150 regional governments and parliamentary institutions had visited the TMG to acquire knowledge on how to achieve good reform outcomes (Pemerintah Kota Tangerang 2009b). In contrast, the Tobasa District Government (TDG) and the Ministry of Communication and Informatics (MoCI) struggled to meet audit standards.

Analysis of Research Findings Eight themes emerged as important in explaining successful implementation of the budget and accounting reforms (Table 9.1 below). Initially, ‘pairwise’ comparisons of the two Central Government agencies with each other, and the two regional governments with each other were conducted. However, as can be seen, when comparing the two more successful with the two less successful outcomes,

288

the pattern remained the same, with the key characteristics for successful implementation being found in the two success cases, whereas in the less successful cases these characteristics were absent or lacking.

289

Table 9.1: Summary of Findings of the Implementation of the Budget and Accounting Reform Variables/Factors

TMG

TDG

CC

MoCI

(successful)

(less

(successful)

(less

successful)

successful)

top-down

top-down

top-down

Strong

weak

strong

mixed

High

low

high

mixed

Good

weak

good

mixed

Role of facilitator

Strong

weak

strong

mixed

Role of

Strong

weak

strong

mixed

Commitment

Strong

weak

strong

mixed

Resources or

Strong

weak

strong

weak

Implementation

top-down

strategy Leadership

Projection of ethical values Monitoring, incentives and evaluation

communication

capacity for Reform

290

Implementation Strategy The case studies revealed that many efforts in putting the reform into action were strongly driven from the top, especially from the Central Government. The sweeping reform mandate followed up by the proliferation of rules and regulations in each government institution was the dominant feature used by the Government to restructure the whole budget and accounting process to align with principles embedded in the New Public Management (NPM). Although the main financial changes were carried out, including the delegation of the financial tasks to implementing agencies, evidence demonstrated that the Central Government still retained its power to dictate the overall reform process. The salient feature of the implementation process was the enforcement of laws and regulations to introduce new procedures and systems to financial management, such as an integrated planning process and output-based budgeting standards, as well as new government accounting standards and systems.

The top-down implementation approach with strong control benefited the Government in mandating compliance on the part of implementers of reform at an agency level. However, evidence also suggests that that the top-down implementation approach was only successful in institutions, such as the TMG and the CC (Chapters 5 and 8), where control from the top was complemented by strong efforts to secure and to sustain behavioural change. In these two cases, direct supervision and regular evaluation served as the main control and evaluation mechanisms employed by the leaders. Unlike the successful case of the CC, the MoCI approach to top-down implementation seemed to be ineffective

291

(Chapter 6). At least in part, the complex nature of the organisation contributed to the inefficacy of the strategy.

The case of the TDG illustrates the importance of the political context of change (Chapter 7). The TDG issued implementing regulations on public budget and accounting following the 2006 Central Government (Ministry of Home Affairs) laws and regulations from 2008, albeit incompletely. Yet it was difficult to pursue an implementation strategy in an unstable political environment; the TDG encountered many problems putting the reform policy into practice because of the adverse factors deriving from the unconducive political situation in the region.

One of the weaknesses in the top-down approach was conflicting and inconsistent regulations, which had to be borne by implementing institutions. The conflicting implementing and technical regulations devised by different leading institutions (for example, the MoF, MoHA and regional governments) frustrated the implementation particularly at the regional level. This was aggravated by rapid changes in the main financial regulations dictating reforms at the regional level, because some regulations were issued before previous regulations were completely implemented (USAID & LGSP 2007). This included Government Regulation PP No. 58/2005 that superseded Government Regulation PP No. 105/2000 and MoHA Regulation Permendagri No. 13/2006 that superseded MoHA Decree Kepmendagri No. 29/2002. As a result, as shown in Chapter 7, implementers experienced difficulties in conducting various financial tasks based

292

on a good number of regulations dictating financial management from different ministries and different layers of government.

Interestingly, the plethora of regulations, including inconsistent ones, did not necessarily perplex implementers in the successful institutions, particularly the TMG, because of their capacity to manage the tasks (Chapter 5). Nonetheless, the conflicting regulations inevitably complicated the reform undertaking. For instance, the conversion policy to reconcile the MoHA and the MoF accounting regulations on the Chart of Accounts, developed respectively by regional government institutions during the financial report preparation, appeared to be burdensome for implementers. Obviously, while this conversion seemed to be effectively conducted by the successful agency TMG (Chapter 5), in the less successful agency TDG (Chapter 7), the additional burden and complexity of conversion was entirely neglected, giving rise to problems in presenting financial reports that reached an acceptable standard of relevance, reliability, comparability and comprehensiveness.

In the top-down approach to implementation, the increased number of veto points and the enlarged span of control intensified the complexity of the reform process. This research supports this view, as it has demonstrated that in the less complex organisational structure, implementers managed issues at hand much better than those in a more complex structure. The MoCI represented one of the most complex organisations with 56 working agencies, each responsible for its own budget management. In contrast, the CC was the simplest organisation with only

293

one working agency, and this was seen to benefit the institution with a streamlined implementation process (Chapter 8).

The Central Government also tended to a ‘one-size-fits all’ implementation approach by applying similar procedures, timeframes, and systems at all levels of government. Given the variation across government institutions in terms of budget and capacity, which were further complicated by the historical, political and cultural contexts under which the implementation occurred, it is hardly surprising that this ‘one-size-fits-all’ approach resulted in variation in implementation outcomes. Findings of this research therefore suggest that this blanket approach was inappropriate, and that a more gradual, and customised approach, especially in terms of timeframe and systems, could have produced better implementation outcomes. In essence, the findings are in line with Andrew (2010) who refutes the view that one-size-fits all approach can explain what good government looks like and suggests the importance of examining and considering context to investigate further what kind a system a country needs. He underscores that applying a onesize-fits all approach to achieve reform aims is

difficult even for so-called

effective government. This thesis extends this view suggesting that applying onesize-fits all reform approach to developing countries characterised by ineffective government and lack of capacity could eventually result in

worsening

performance. One-size-fits all initiatives that are found in the NPM menu may be inappropriatefor improving governance because the principles are hard to instill in specific developing country contexts such as Indonesia. Under dysfunctional administrative conditions. NPM reform might jeopardise the overall reform effort

294

conducted by the Government. As this thesis has shown, under an ineffective basic administrative system in the TDG, giving more autonomy to the region only resulted in the proliferation of corruption rather than improved governance. In general, this thesis challenges the current literature that tends to treat NPM as a one-size-fits-all approach to solve a good number of financial management problems across nations.

Leadership Leadership in the implementation process refers to the ability of the leader to influence people, in the sense of motivating and empowering them to put the reform intention into action through a range of mechanisms. Among the variables pertaining to the implementation outcomes, leadership was the most important discriminating factor in determining the success or otherwise of the policy implementation outcomes discussed in the individual case studies. This is best illustrated in the cases of the TMG and the CC (Chapters 5 & 8) where the leaders were instrumental in creating a conducive ethical climate in the reform processes and imposing strong sanctions to deter financial regulatory breaches and corrupt acts, and thus expedite implementation process.

The TMG case demonstrated how the strong support of regional political leaders for the incumbent government made further investigation of breaches against government regulations possible, and how this actually led to dismissal and discharge of corrupt officials. By the same token, an early initiative on the Pact of Integrity undertaken in 2004 by the Secretary General of the CC, encouraged avoidance of corrupt behaviour, and minimized occurrence of various abuses in

295

financial management. The Pact of Integrity was only formalized centrally by the Presidential Instruction in 2011. This research shows that those agencies in which leaders acted early gained a head start in this area. This included the CC in 2004, whereas the MoCI only acted on the Pact of Integrity in 2010 and the TDG in 2011.

The attitudes of individual leaders of agencies were significant. For instance, the head of region (walikota) in the TMG, Wahidin Halim, successfully projected an active approach to financial management and implemented a number of reform strategies that were innovative in the Indonesian context (Badan Pemeriksa Keuangan 2010b). These innovations included political contracts between the Walikota and high-level officials, coupled with ‘naming, blaming and shaming’ for poor performance, along with incentives for good performance (Chapter 5).

Similarly, the case of the CC (Chapter 8) provided evidence on the effect of the leadership role played by the ‘clean’ figure of the Secretary General, Janedjri Gaffar. His successful leadership was recognised by the Central Government, with the institution receiving a good number of awards for its performance in a range of aspects of public service including financial management (Mahkamah Konstitusi 2010, 2009c). Gaffar’s intelligence enabled him to introduce major innovations in the organisation such as the endorsement of Commitment to Maintaining Unqualified Opinion on the Financial Report from the Supreme Audit Agency, and the Pact of Integrity. In addition, his ability to articulate the organisational vision to all implementers and to build an excellent relationship

296

with the MoF were among significant factors in driving the implementation process.

Unlike the successful cases, the TDG case (Chapter 5) provided no evidence for the role of leaders in pushing the reform efforts from the top level to the next level in the hierarchy. In this case the research showed that it was lower level officials rather than higher level officers who initiated and droved the reform process in the first place. In the absence of leaders’ direction as well as lack of capacity and resources, the implementation process was seriously hampered. In this case a lack of clear leadership allowed myriad issues to develop in pushing the reform effort at the political level in the region. This flowed down to the agency where lack of political direction created difficulties at every stage.

In the MoCI, the absence of leaders both at the departmental level and satuan kerja (satker) (working agency) level aggravated effective cascading of the reform task down through the hierarchy (Chapter 6). Clearly, the complex nature of this particular organisation and the uneven capacity of its leaders, as a result of frequent restructuring, were contributing factors and created additional difficulties in the implementation process in the MoCI.

It is also important to compare the leadership style at the same level of government (Central or regional) given the similar nature of the reform task. In both regional government cases, the highest leaders (Walikota and Bupati) were directly elected by the people. The fact that the TMG had since its beginning

297

enjoyed a good reputation and trust from the public provided stable political conditions which supported the leader Halim in performing and pushing the reform process. For example, when he assumed power, Halim secured support from both external and internal stakeholders. This was crucial to the success of the TMG in implementing the reform process. On the other hand, the TDG struggled in the face of public distrust because of perceived corruption and conflicts among political elites (as explained in Chapter 8), which in turn inhibited the agency leadership in playing an effective role in the reform process.

In essence, the lack of political will in the TDG for reform had become a disincentive for bureaucrats to align their behaviours with the reform goals. In the TDG in general, the was no evidence of incentives to support reform, unlike in the CC and the TMG. In the case of the CC, since its beginning the institution’s existence has always been linked with the promotion of justice and democratisation. This provided a good cultural setting for the acceptance of reform. The capacity of leaders to induce reforms varied between regions according to the leadership strategy (populist versus patron-client) and the local political context (Rosser et al. 2011). The young Indonesian democracy is still dominated by corruption, clientelism and intimidation particularly due to entrenched or emerging local elites that stymie the democratic process (Choi, 2009). As such, although the push for deepening democracy has been made by direct election and decentralisation, the major issue that dominated the local elections was corruption or money politics.

298

It is obvious that despite the blanket approach to reform implementation across agencies, democracy and the eradication of corruption are the widespread justification behind the ideological agendas carried by the Government, in some agencies such as the Constitutional Court these ideological agendas are evident; while in others particularly at the local level they are largely obscured.

For the Central Agencies (the MoCI and the CC), the leadership situation was different because of the way in which the leader was appointed. In these two cases, the leaders were directly appointed by the President, and thus were subject to political influence. This has provided some advantages for some institutions. For example, the Presidential appointment of the leaders in the CC was subject to stiff competition with the ‘fit and proper’ test successfully producing competent leaders who were committed to reform (Mahkamah Konstitusi 2004). The key point is that the research undertaken for this thesis reveals the importance of highcalibre, ethical leadership in implementation of reform.

Projection of Ethical Values In the context of the implementation of reform in financial processes, a significant part was played by the capacity of the implementing agencies to project the ethical values which underpinned the reform process. In the research conducted for this thesis on the successful cases of reform, both the CC and the TMG derived advantages from having established a relationship between ethical values and reform.

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The CC was established in the context of democratization and clean governance (Chapter 8). This gave it a clear advantage from the start in terms of the projection of ethical values. Furthermore, the Pact of Integrity and Code of Ethics, which were established early in its existence, were followed up with strong enforcement and developed good working cultures among the CC bureaucrats. Similarly, the new organisational culture of Akhlaqul Karimah in the TMG (as mentioned in Chapter 5) minimized the possibility of financial management misconduct. In both of these successful cases of implementation, changes through reform in turn have served as an active deterrent for misconduct and regulatory breaches. The corruption abolition measures were supported by evaluation meetings that appeared to be effective for people to report on conduct breaching laws and regulations. These breaches were usually forwarded to the Inspectorate General for further investigation.

In contrast, in the TDG there was no evidence suggesting promotion of ethical values (Chapter 7). In the TDG, lack of ethical values in particular can be argued as the reason for a good number of financial breaches that led to further investigation. In the MoCI, the situation was somewhat mixed because failure to conform to rules and regulations was more about the lack of capacity to conform to the new financial regulations than about a lack of ethical underpinning of the reform process.

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Monitoring, Incentives and Evaluation The case studies in this research show that the promotion of accountability was very likely to occur in a circumstance where stringent monitoring and evaluation mechanisms applied. The monthly monitoring in the TMG through the evaluation meetings and reporting mechanisms facilitated by Wahidin Halim himself paved the way for strengthening accountability in the region (Chapter 5).

Similarly, rigorous sanctions accompanying regular meetings and reporting mechanisms along with the formalization of the Internal Control Unit promoted accountability in the CC (Chapter 8). Moreover, the annual report was used as a tool for the institution to explain to the public about its programs and activities. More importantly, the strengthened accountability was reflected in the ‘unqualified opinion’ on the CC financial reports from 2006 to 2010. In the 2008 Performance Accountability Report, for instance, the CC reported that financial accountability targets of 2007 were achieved (Mahkamah Konstitusi 2009a).

On the other hand, in the TDG there was evidence of a lack of monitoring and evaluation mechanisms that might have enabled implementers to contravene the financial rules and regulations (Chapter 7). Likewise, in the MoCI strict sanctions were rarely imposed for failure in accomplishing the task at hand (Chapter 6). While some sanctions existed, they were not formally delivered and therefore were unlikely to result in incentives for future performance.

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In the TDG, the lack of monitoring and evaluation mechanisms was aggravated by lack of scrutiny and oversight of financial management. The lack of parliamentary capacity constrained the TDG’s capacity for budget scrutiny and oversight, which in turn undermined the transparency and accountability of the TDG in its use of public money. Despite the stronger role of the Inspectorate General in the MoCI (Chapter 6), the lack of accountability there was also revealed in the lack of internal control of financial operations. One reason for this might be the limited number of inspectors in the institution. Furthermore, monitoring and evaluation programs were not conducted in all MoCI spending agencies, and follow-up measures on the BPK Audit Report, which were only observed in several areas, indicated a weak accountability.

At the Central Government, to enforce accountability, the MoF introduced sanctions against spending agencies that failed to finalize reconciliation processes or failed to submit a financial report. As one official who was one of the prime movers of reform in the MoF mentioned, ‘sanctions regarding the compliance of spending agencies in doing reconciliation in order to prepare their financial reports were introduced’ (OTH#1). This was confirmed by a senior official in the MoF who observed, ‘…there are now sanctions enforced related to compliance with the accounting rules and procedures’ (OTH#2). The sanctions included a delay in the budget disbursement process by the State Cashier Office at the MoF. The budget would only be disbursed when the reconciliation process had been finalised. Nonetheless, the MoF sanction only applies to the line ministries at the Central level and not the regional government agencies, and in some cases, it

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seemed not to be strictly implemented in TDG. The MoF plan to impose sanction to the incomplied regional government agencies by reducing the amount of Central Transfer seemed to be ineffective. On the other hand, for agencies within the MoF which were responsible for consolidating reports, the MoF created assessment mechanisms that seemed to motivate the implementers to complete their tasks. These mechanisms appeared to work very well in motivating implementers to ensure the job got done and to hold them accountable if it did not. Monitoring and evaluation mechanisms were effective given the presence of strong leaders, for example in the TMG. Conversely, monitoring, evaluation and sanction in the TDG and the MoCI could not be imposed strictly in the absence of strong leaders and conducive political environment. Among the four case institutions in this research, financial incentives in terms of additional income were given to implementers (Chapter 8) and those who acted as the facilitators or taskforce or workteam members (Chapter 5), whereas bureaucrats in the less successful cases seemed to obtain only the relatively low standard civil servants’ salary (Chapters 6 and 7).

Role of Facilitators in the Implementation Process Facilitation is paramount to the implementation process because it assists implementers to manage financial tasks especially those of a highly technical nature (O'Toole 1983). The influential role of facilitators was evident in the more successful institutions covered in this research. The role of the facilitator was to fix problems which occurred during the implementation process by visiting the spending agencies, dealing with problems, giving explanations on general and

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specific issues of reform, running training, education and dissemination programs, as well as holding other meetings to assist the implementers to accomplish financial tasks.

In the TMG, the Tim Pembina of the Regional Financial and Asset Management Services (RFAMS) acted as a place of consultation for troubleshooting. This facilitation also involved the financial skill and technical expertise of the Tim Pembina. A similar situation existed in the CC where the role of facilitator was played by the Tim Pembina of the MoF and leading figures from the Bureau of Planning and Finance. Their expertise gave them the capacity to provide a concerted push for the implementation of reform, encouraging feedback for finetuning the changes during implementation. In the TDG, however, the CFO (RRFAMS) who was supposed to be the leading facilitator in the implementation did not have the necessary technical capacity or standing. Likewise, despite the great contribution made by the MoF in guiding implementers with new financial regulations in the MoCI, the actual implementers still experienced difficulties in managing finance because of a lack of technical capacity. Obviously, the external fixer, seen in the role of the MoF, was inadequate by itself and needed to be accompanied by an internal facilitator. The nature of the MoCI tasks, focusing on policy and implementation on specific technical matters, meant that the financial jobs tended to be ignored, and thus needed a stronger push factor especially by internal facilitators. This was especially the case because of the many issues and stakeholders involved in the more structurally complex organisation.

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Communication Communication is critical in the implementation process, and hence considerable effort to build it is seen as part of reform processes internationally (Cline 2000). In the Indonesian case considerable effort was put into promoting communication as integral to the implementation of reform. Communication can build the capacity of implementers to finalise the reform task and to solve problems arising during the implementation process. This research found that a range of communication tools or devices, including circular letters, the internet, SMS, newspapers, reports and meetings were used by case institutions. These communication media purported to transmit the policy to implementers and to exchange necessary knowledge and information in the reform process.

As shown in Chapter 5, communication between Walikota Halim and implementers in the TMG was built through announcement of regional regulations (such as, circular letters and decrees), compulsory daily meetings, the so-called apel, regular monitoring and evaluation meetings, and regular reporting. The internet was widely used by implementers for accessing relevant financial information, such as new financial regulations and system updates from the central and regional government websites. Furthermore, SMS and newspapers opened access for the wider public to raise their concerns relating to government performance. The regular evaluation meetings in particular allowed implementers to share information and to identify emerging problems and potential hurdles in the implementation of the reform. Such mechanisms empowered the government

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and implementers with the information necessary to make immediate rectifications.

Similarly, in the CC, the regular evaluation meetings facilitated by the Secretary General forged communication among implementers (Chapter 8). Seemingly, promoting good communication was much easier in the CC because of the availability of advanced information technology (IT). Not only did this massively cut the red tape in service provision, but the IT also supported the information transmission process from managers to implementers, and from implementers to the public. The massive use of the internet in the CC certainly eased the communication flow among implementers.

In contrast to the successful institutions, ineffective communication resulted in the inability of the TDG and the MoCI to pass on the reform policy and necessary information to officials at all levels, which in turn created confusion about the direction and technicalities of the reform. Implementers in the MoCI found formal meeting mechanisms to be of limited use and did not gain encouragement from informal meetings. Formal meetings were seen as a rhetorical use of the communication medium, rather than a productive two-way communication resulting in practical solutions to problems of implementation. In addition, in both the TDG and the MoCI, information provided to general public was limited or even non-existent.

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Because implementation pertains to the dynamics of change, communication achieved better results if it was regarded as a series of repeated efforts, rather than as a one-off occurrence. The experience of the MoCI (Chapter 6) showed that, to be effective, communication had to be built at each level across the institution. In other words, a communication flow established and maintained at one level (for example, the departmental level), needed to be followed by similar efforts at the lower level (for example, the spending agency level). In the MoCI, communication blockages seemed to occur frequently between the departmental and the lower levels, resulting in messages from the departmental level not been being completely transmitted or received or followed-up by the lower levels. Efforts to build communication were also hindered by geographical distance between spending agencies. For example, in the TDG, distance between spending units (COO) and the RRFAMS (CFO) created difficulties in communication and coordination. Compounding the communication problem in the region was a lack of resources to solve the problem. The internet was not widely used as a way of disseminating new information and regulations because not all spending agencies could afford to buy computers.

Commitment to the Reform Process Another significant factor recognised in international research on implementing reform is the character of commitment to the reform process (McCourt 2003; Polidano 2001). Organisational commitment to the reforms in the four case studies manifests itself in three dimensions: (1) priority in the budget; (2) efforts to maintain and enhance official skills in realising reform objectives; and (3) other

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major activities aligned to reform objectives. In the cases covered in this research organisational commitment varied.

Being a new institution benefited the CC. It had a fresh start with strong government support in a broader policy framework of democratization and good governance, which was aligned with the goals of the budget and accounting reform (Chapter 8). In the case of the TMG, budget adequacy and priority were evident, together with many other manifestations of organisational commitment which supported the implementation (Chapter 5). The budget surplus also gave the region substantial flexibility to implement programs and activities to support reform.

Commitment, however, was difficult to create where resources were constrained. The TDG’s high reliance on Central Government transfers meant less flexibility to devote resources to the reforms (Badan Pemeriksa Keuangan 2008c). The challenge was aggravated by the inefficiency of its disbursement as disclosed in the Audit report on its 2007 financial report (Badan Pemeriksa Keuangan 2008c).

Commitment from the spending ministries was evidenced by their willingness to consistently communicate the policy intention through internal repeated training programs. In the cases covered in this research, despite a good start within the Central Government, the absence of follow-up measures at the lower levels hampered the effectiveness of the training programs. This was best illustrated in the case of the MoCI where the close relationship built between staff of the MoCI

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and the MoF as a way to train central staff was not followed up seriously at the regional level with internal training programs (Chapter 6). The human resource problems were anticipated quite well in the success cases of the TMG and the CC (Chapters 5 and 8), with distinct methods of recruitment, placement, and rotation being put in place. These were integral to the effectiveness of capacity building programs in these two institutions.

Another aspect of commitment can be assessed from the commitment of the case institutions to use competent implementers to realize the reform objectives. In the TMG, there was a clear policy to retain implementers who had participated in financial training programs in the same place for a particular time. In so doing, the TMG ensured that officials had the chance to optimize their capacity in implementing the reform and ensure its sustainability. Another manifestation of the commitment of the CC was its willingness to follow up the BPK recommendations as stated in the Audit Report within a reasonable timeframe. These actions showed the commitment of both successes cases to the implementation of the budget and accounting reform. The Audit Report on the TMG Financial Report 2009 stated that keeping moderate staff turnover, particularly for accounting and supervision functions was an important aspect of commitment to effective implementation. The BPK also saw this commitment from the TMG as having an impact on its financial report reliability and asset security (Badan Pemeriksa Keuangan 2010a). This was in stark contrast to the TDG where recommendations from both the BPK and the DPRD (regional

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parliament) on the implementation process had been rarely responded to in a situation of lack of commitment (Chapter 7).

Capacity and Capacity Building Capacity building is widely acknowledged in the research literature as a key to successful reform implementation (Polidano & Hulme 1999). Capacity for reform in the successful cases covered in this research was demonstrated by: (1) existence of highly skilled and well-trained bureaucrats; and (2) appropriate training programs.

The TMG and the CC met fewer obstacles in managing their human resources, and their implementers of reform were well able to adapt to the change (Chapters 5 and 8). The decision of the CC Secretary General to opt out from centralised human resources enabled the institution to recruit competent and skilled people (Chapter 8). The approach was different from conventional public servant recruitment in Indonesia which used a mechanistic approach (Buehler 2011), which was less able to respond to the needs of particular organisational environments. In a similar fashion in the TMG, the ability to maintain better qualified human resources was achieved with a systemic and localised approach to managing staff (Chapter 5). In the region, the training program met the need because the stability of the workforce was maintained with the result that benefits of training stayed in the organisation.

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In the TDG, officials with financial backgrounds were scarce; their bureaucrats were people with undergraduate qualifications, but little specific-job related training, and this affected their overall capacity. The fact that the limited capacity led to problems in financial management was admitted by the TDG (Badan Pemeriksa Keuangan 2008c). In the MoCI, a large variation in capacity was due to the frequent merging and splitting of the organisation, placing people of different backgrounds in one ministry. The impact on reform was that capacity varied among implementers, giving rise to difficulties in such a large organisation in following through on the reform process.

Limited numbers of skilled of implementers slowed down the implementation process. As shown in Chapter 7, a gap between the capacity requirement and the real capacity of implementers in certain posts in the TDG occurred because human resource planning was conceived in isolation from the training policy. The process of implementation in the TDG would have been facilitated

if the

institution had synchronized the placement and training programs to allow implementers to optimize their capacity to support the reform process.

In the case of the MoCI, the presence of a strong ‘old guard’ dating from the New Order regime affected capacity, because many people faced difficulties in adapting to the new working culture introduced by the reforms (Chapter 6).

In the case of the TMG, the presence of highly skilled people with financial qualifications alongside staff who had been in the organisation for a relatively

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long time benefited the institution because together they served as the backbone for the reforms (Chapter 5). Likewise in the CC, a good number of experienced financial staff, mostly recruited from the MoF, BPK and BPKP together bolstered the capacity for reform in both institutions (Chapter 8).

Apart from the existence of highly skilled bureaucrats, capacity was regularly enhanced through training programs. The CC, in particular, was distinctive among the cases covered in this research in its articulation of three stages of institutional development (as explained in Chapter 8). The first stage, which took place in the period 2005-2006 and focused on capacity, organisational, managerial, and facility building eased the path of the institution in implementing the reform (Mahkamah Konstitusi 2006b).

Albeit with diverging results, all four case institutions took intensive training and dissemination programs to enhance the capacity of implementers. This was important, particularly in Indonesia where implementation was carried out in the context of high interdependence and a complex decentralised structure, and thus required capacity at all levels in the hierarchy, including the spending agency levels. Consequently, a piecemeal and tactical approach to conducting training programs offered less successful outcomes than a comprehensive and integrated training programs undertaken at all levels.

The ineffective training programs in the TDG could be attributed to several factors. First, limited resources (experts or trainers and financial resources)

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limited the coverage, frequency and duration of the training programs. As a result, only a limited number of implementers had the opportunity to participate in the training programs, while those who did participate found that the training had limited impact on their capacity. Second, the ineffectiveness of training programs was aggravated by patterns of appointment, and placement and rotation of staff which did not reflect real need or capacity.

This situation in the CC is paralleled by that of the MoCI, where noncomprehensive approach to training produced substantial deficiencies in the training programs. As reported by MoF staff, the lack of follow-up training programs at the agency level, especially after the massive dissemination and sosialisasi program undertaken at the Central Government offices, weakened the benefits of the training programs (OTH#2). In addition, the MoCI’s case suggests that the lack of competent staff, able to properly manage the financial resources resulted in the distorted implementation of reform policy. The old MoCI system practices indeed fulfilled a certain function needed in the organisation; however, they seemed to be ineffective especially regarding staff performing as financial administrators and managers. The capacity would have been boosted if the Government had opted for a more decentralised or flexible approach to the recruitment process, allowing spending agencies to recruit based on knowledge of their own needs.

The distinction made by the CC in its recruitment system which was no longer restricted to fresh graduates, as was the case in the centralised Indonesian

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recruitment system controlled by the MenPAN-RB and BKN, fostered the implementation of the budget and accounting reform (Chapter 8). The CC even recruited its high-level financial officers from the MoF, BPK and BPKP, which made a great contribution to driving the financial management reform.

Empowered with adequate resources, the TMG managed to conduct frequent and regular training and dissemination programs and therefore covered overall organisational needs for enhancing the capacity of implementers (Chapter 5). Strong coordination with other leading institutions such as the Regional Personnel Administration Agency (Badan Administrasi Kepegawaian Daerah (BAKD)) as the institution responsible for training and education programs in the region and the MoF was a key feature of effective and comprehensive training programs.

Applying the Analytical Framework To answer the three research questions set out in Chapter 1, there was a review of relevant literature in Chapter 2 from which emerged a broad analytical framework. This framework helped to guide the questions posed to the interviewees in the organisations studied. The methodological approach subsequently adopted for the case studies involved both deductive and inductive methods. As has been seen in this chapter, this resulted in the generation of themes and factors which could then be placed on matrices for comparative analysis. But we can also return to the earlier analytical framework that came from the literature review to check the emergent themes and factors against the models and general observations presented in Chapter 2.

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The analytical framework from Chapter 2 can be seen as having two components. First, there were items relating to the design and implementation of NPM reforms in developing countries. These included items concerning the origin and ownership of NPM reforms and items that affected the implementation and outcomes of NPM although the boundaries between the two were somewhat indistinct.

Second,

there

were

established

theoretical

perspectives

on

implementation that were set out in anticipation that they would assist in analysing the data produced from the case studies and their appropriateness for application to Indonesia could be ascertained.

The first set of analytical items that emerged from the literature included reform ownership, variable adoption of reforms, informal aspects of bureaucracy, organisational capability and motivation, corruption, leadership and commitment, and administrative tradition. In terms of ownership, NPM-style financial management reform was top-down. Primary ownership was by Central Government and central agencies within that government. The significance of this was whether leaders in the case study organisations became supporters of the reform and actively engaged their staff in the pursuit of reform. How deeply was the old administrative culture of patronage and process embedded? As can be seen from the data, there was no questioning of the legitimacy of the top-down reform. That would have been dangerous politically. But, there was variable uptake between the case study organisations. This shows that observations by researchers such as Turner (2002) and Manning (2001) on differential adoption between

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countries may also apply within countries in the sense that some organisations will more enthusiastically adopt and implement the reform while others, for whatever reasons, may be foot-draggers. Variable adoption is also related to informal aspects of bureaucracy. The evidence from the cases appears to show that the greater the incidence of informal structures and processes, the greater the difficulty of implementation and the more weakly the NPM reform was established.

Capability was important for reform implementation with the successful case study organisations demonstrating greater capacity for reform than the two ‘less successful’ ones. However, the data revealed that motivation, leadership and commitment were more important and that capability may in part be derivative of these factors. Leadership was reported as a significant factor in generating commitment and hence motivation, and in promoting ethical values through the organisation. This corresponds with observations made by Rosser et al., (2011) on innovations in Indonesian regional governments and to themes explored by Andrews et al.,(2010) on leadership-led change in development.

Corruption is widely regarded as a major and longstanding problem for Indonesia as was demonstrated in Chapter 2. It has certainly been a major consideration in the top-down approach to financial management reforms with the centre of government reacting to strong pressure from citizens, civil society and the private sector for corruption eradication. Such pressure brought about the top-down approach from the centre of government. From the case study data it could be seen

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that the issue was of major public interest in the less successful reform region. It emerged as an issue in the two successful cases due to the considerable attention paid to its prevention. The subject of corruption is of course problematic in interviews such as those conducted for this research, as interviewess will often be reluctant to talk about such matters either through loyalty to patronage networks or fear of reprisals.

The second part of the analytical framework was comprised of four different approaches to policy implementation: communications model, statutory-coherence approach, implementation regime framework and inter-organisational approach. While there is some overlap between the approaches, each has some distinctive attributes that were set out in Chapter 2. No one of the perspectives captures the full Indonesian reality as revealed in the case study data and validates a major message from the literature review that context is all important.

Particular

environments will facilitate or impede the implementation of imported NPM-style reforms. While it has been shown that there is not an existing mainstream theoretical perspective that has explanatory power to encompass all of the diverse Indonesian experiences, each of the perspectives can provide insights into those experiences.

The data presented in this thesis emphasises the main message of the communications model, that good communications are central to effective implementation. The data from the four cases illustrate in different ways how good communications are not only between different levels or organisations of

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government but also within organisations,

between different sections and

different categories of staff. Application of the communications model thus focuses attention on the complexity of communications in implementation. It also highlights the importance of leadership communication in generating the motivation and commitment among staff for reform.

The statutory-coherence approach is of interest because it can be used to capture the copmplexity of public administration in Indonesia. A multitude of laws, rules and regulations makes it challenging to negotiate the labyrinth of Indonesian public sector organisations. The six conditions of effective policy implementation as set out by Mazmanian and Sabatier (1983) can be used with effect to draw out insights into the implementation of NPM-style financial management reforms in such complex environments as were found in the Indonesian case studies. For example, the different case study organisations had different perceptions of the clarity and consistency of program objectives; the cause of failure was often not apparent in the less successful reform cases; implementation structures did not necessarily follow strategy; and the commitment and management skills of different organisations varied. Using the six conditions of effective policy implementation is a useful way to examine reform implementation in Indonesian organisations and gain comparative insight. However, the application of the model will not cover all relevant aspects of the implementation.

The implementation regime framework claims to unite both top-down and bottom-up perspectives of policy implementation by investigating ‘the values to

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be served during the implementation process’ (Stoker 1989, p. 2). One of the perspective’s prime insights for Indonesian reform studies is its identification of ‘reluctant partners’. Such partners with whom cooperation is uncertain were to be found in the less successful organisations and even to a small degree in the successful ones. Having identified them, one can investigate the reasons for such attitudes and the effects of their behaviour. Also, the implementation regime framework provides an opening examining the role of leadership in creating values or culture that support reform and that eliminate the ‘reluctant partners’.

The inter-organisational approach as its name suggests looks particularly at policies involving more than one organisation and which concern cooperation and coordination between those organisations. These conditions applied to the financial management reforms in Indonesia as the reforms were top-down, presided over by the MoF but implemented in organisations, such as the case study ones, at the national and subnational levels. This approach has potential for gaining insights into the nature of organisational inter-action and was seen in each of the cases in terms of implementing centralised mandates. Problems of interagency coordination were identified in all the cases such as delays in the production of the national development plan having a knock-on effect to agency plans, reliance on Central Government transfers, conflicts between different sets of regulations and the alignment of human resources to fit central demands. While the focus of the inter-organisational approach is more restricted than the other approaches, this research has shown that it does give valuable insight into the crucial relationship in Indonesia between the central organisations issuing

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instructions and demanding compliance and those organisations implementing the reforms.

In summary, the two components of the analytical framework derived from the literature review in Chapter 2 gave vital assistance to this research both in guiding and informing the the questions asked to the interviewees and in gaining analytical insights from the data acquired. However, this analytical framework was a broad and perhaps loosely coupled instrument that aimed for wide coverage rather than focusing on particular issues. In this way it assisted in gathering data, organising them and analysing them to give enhanced understanding of the implementation of NPM-style reforms in financial management in Indonesia.

Conclusion The case studies show that good implementation outcomes were associated with effective leadership, the projection of ethical values, monitoring, incentives and evaluation, facilitation, communication, commitment and capacity. However, many of these factors were in turn associated with the contextual situation of the institutions involved, which impacted on the difficulty of the implementation task. The availability of resources and of skilled personnel was critical in this respect.

Many of the organisational factors were interdependent. Effective leadership, for example, was associated with the projection of ethical values by the leader, and with overall commitment to the reform task. Corruption at the leadership level undermined the general progress of reform. Commitment manifested itself in the

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prioritisation of training programs, which in turn positively affected capacity. In the top-down path of implementation, this research suggests that a balanced combination of incentives and sanctions is essential for implementation success. The research also demonstrates that the implementation process is harder to tackle when the number of agencies is larger and the organisation is complex. Capacity and, even more importantly, capacity building become significant in managing successful reforms.

It has been shown how pervasively the Indonesian context of reform impacted the prospects for change. Within this context, findings relating to the importance of leadership, commitment and resources, reinforce much existing literature. However, the empirical work suggests that ‘capacity for reform’, may be a key factor for implementation theory that has previously been insufficiently recognized. How this capacity, which was most obviously visible in parts of the Tangerang bureaucracy and in the Constitutional Court, assists implementation is not entirely clear. It may be that having the right people in the right place unblocks obstacles to communication. Further research is needed on this point.

The case studies in this thesis concurred with Andrew (2011) who argues that reforms are implemented best when there is not much difference between the country of origin and the adopting country. The empirical work of this thesis demonstrates howthe considerable contextual differences between the Indonesian government agencies and those in Anglo-Saxon NPM origin countries have rendered difficulties in implementing NPM in Indonesia. These contextual

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differences were mainly manifested in the politico-administrative, institutional and governance context. Even between Indonesian government agencies, there have been considerable contextual differences under which reform was taking place resulting in different outcomes of implementation.

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Chapter 10 Conclusion

Since 2003/2004 the Indonesian Government has embarked on an ambitious program of democratisation and broad governance changes. While changes in public sector financial management comprise only one part of these broader changes, important lessons can be learned from this experience about ‘what works’ in the Indonesian public management reform context. The research questions articulated in chapter 1 focused attention on how these changes were implemented, why the outcomes varied and what these outcomes revealed about the appropriateness of the overall trajectory of change. Implementation theory was used to direct the inquiry and the results, in turn, have implications for the study

of

implementation

itself.An

implementation

perspective

enables

connections to be drawn between legislated policy and the organisational level of change. This is significant because it is at the actual level of organisations that reform has a real impact on how government agencies do business.

Variations in implementation outcomes between agencies suggest opportunities and barriers to success and this in turn can add to understanding of practical measures that might be considered to improve the implementation record. The final chapter in this thesis revisits the reforms in the context of New Public Management, suggesting areas where there is evidence of convergence and others where there is evidence of divergence from the model developed within developed

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countries. Some speculative conclusions are offered as to the likely future of the reforms in the Indonesian context.

Implementation Strategy Chapter 3 showed that the Central Government implementation strategy combinedkey

national

legislation

and

centralised

human

resources

management.This top-down strategy indicated the Central Government’s goals of ensuring compliance, and minimising the resistance of all spending agencies. However, there were a number of drawbacks to this approach.

A key deficiency was that the reforms were put into practice in a ‘one-size-fits-all’ manner which ignored the significance of many aspects of diversity between government agencies. From the beginning of the reform program, the Central Government did not acknowledge different timeframes, systems or stages of reform to be carried out by the agencies. Instead of gradually being implemented in different agencies, the reforms started at the same time in 2003/2004 for all Central Government agencies, while implementation in all regional government agencies was officially implemented in 2006. The blanket approach neglected participation in decision making and undervalued the significance of communication in the implementation process.

The case studies covered in this thesis show that, in explaining outcomes at an organisational level, it is important to put adequate emphasis on the appropriateness of the implementation strategy as an avenue for putting the

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mandate for reform into practice. The legalistic approach adopted by the Government, while reflecting its administrative tradition, provided inadequate guidance to implementers at the regional level. As Ryan et al.(2008) argue, one of the weaknesses of the top-down strategy was not only that it failed to deliver highlevel support to front-runner implementers, butit was not capable of sustaining change in the implementation process. This holds particularly true in institutions where communication was neglected; especially in large organisations as the case study of the MoCI showed, information necessary in the reform, was not passed on to implementers (Chapter 6).

The top-down approach, in spite of being envisaged as a uniform approach, sometimes led to confusion among implementers, especially at the regional level. Conflicting and inconsistent financial regulations coming from different agencies of the Central Government perplexed implementers. This confusion clearly stemmed from the large number of implementing agencies in the context of divergent authorities and created severe difficulties in securing the desired implementation outcomes (Chapters 5, 6, 7, 8). This confusion was aggravated by variation in a number of characteristics of implementing organisations, including their starting point (capacity and enabling environment), size, financial position and the nature of the services they provided.

Compounding the confusion was a coordination problem which occurred between Central agencies (for example, between the MoF and MoHA) in directing the reform for regional government. This particularly affected accounting matters.

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Indeed, the MoHA’s enormous body of regulations was inconsistent with the MoF regulations; and its requirement for the regional governments to develop an accounting system which complied with Central standards was ineffective. This thesis therefore supports McLeod and Harun’s (2009) argument that it would have been more efficient if such an accounting system was developed at the Central Government while gaining input from regional governments, rather than giving the task to the regional governments.

Overall, the research findings demonstrate that the top-down strategy successfully promoted the implementation process when the strategy was supported by the presence of leaders, effective communication and capacity. This was the situation in the cases of the TMG and the CC covered in Chapters 5 and 8. In contrast, the top-down strategy was not effective when leaders, communication and capacity were largely absent. This was the situation in the case of the MoCI and the TDG covered in Chapters 6 and 7.

Leadership The findings of this research on organisational level reform in Indonesia suggest that leadership was among the most important factors in explaining the implementation outcomes. In the cases covered in this thesis it was found that some other implementation variables noted in the literature, such as commitment, implementation strategy, and capacity can be attributed to the leadership role (Ryan et al. 2008; Sabatier 1986).

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Halim, the Mayor of the TMG, best illustrated how transformational leadership, the term firstly coined by Burns (1978), could facilitate the implementation process. Halim was able to motivate staff by changing their attitudes and assumptions, aligning these to his vision. At the broader level, he was able to promote public awareness about the significance of the budget and accounting reforms. This facilitated a commitment by staff to greatness and vision by adopting a long-run perspective, focusing organisational issues from a broad public good rather than a narrow technical perspective. Becoming a role model in the implementation process was part of the transformational character of his leadership.

The experience in Tangerang was paralleled in other contexts. For example, Furuholt and Wahid (2008) found that the implementation of e-government in Sragen, one of the leading regional governments in Indonesia had also been championed by a strong, committed,political leader. In the case of Sragen, this type of leadership was also based on the vision and capacity to mobilise commitment, through which elements needed for implementation, such as support, resources, management and initiative, can be gleaned. In essence, Furuholt and Wahid (2008)found that the challenges to implementing egovernment that include management, infrastructure, and human factors can be tackled by the qualities brought to the process by strong and committed political leaders.

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The importance of leadership, as found in this research, is also confirmed by other studies that highlight the importance of leaders in the Indonesian context in general. Hofstede (1984,

2009) noted that Indonesian national culture is

characterized as one of high power distance where capacity for leadership and initiative is highly valued. His conclusions have similarities with the findings of Neher (1994) and Cheung (2005), who elaborate some characteristics of Asian cultures which could be argued as providing a major explanation for the dominance of leaders in the community. In addition, von Luebke (2009)found that leadership or supply-side pressures, rather than demand-side pressures such as pressures from local citizens, explained variations in the level of governance achieved in Indonesian regional government.

Facilitation and the Role of Fixers This

research

confirms

the

finding

noted

by

Levin

and

Ferman

(1986)whosuggested the prominent role of the ‘fixer’ in the implementation of reform, both in the context of inter-organisation (involving more than one organisation) and intra-organisation implementation. The role of fixer varied considerably across the cases covered in this research, with most activity of this sort being evident in the more successful cases (Chapters 5, 8). In these cases the process specifically involved a nominated facilitator who played a role in resolving many emerging problems during the implementation process, which was similar to the notion of ‘fixer’ noted in international research (Bardach 1977; O'Toole 1983).

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In the successful cases of reform covered in this research, facilitators were empowered by both managerial and technical skills that enabled them to find solutions when problems emerged. The MoF, in particular, played a dominant role within the Central Government as the facilitator for all spending agencies, particularly. Internal facilitators were also required in order to support the efforts of external facilitators in facilitating the implementation process.

The importance of the role of the fixer was substantial in the Indonesian context, given the interdependence among implementers in managing the budget and accounting reform tasks. This confirms the similar line of argument based on research by O’Toole and Montjoy (1984)that supported the significance of fixers, particularly where sequential or reciprocal interdependence occurred in working to achieve an outcome. In the Indonesian cases, prior to reform, the spending agencies tended to work alone in managing their own budgets; however, with the new business process introduced in the reforms, new types of interdependence were established among agencies in managing new changes in the financial process.

Communication Communication has been agreed by many scholars to be a factor in successful implementation. The findings in this research have reinforced this consensus by demonstrating that frequent and effective communication enabled agencies to transmit the reform mandate, to ensure that implementers understood how to

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accomplish the tasks at hand, to find proper solutions to the encountered problems, and to encourage joint action.

More generally, the study supports Goggin, Bowman, Lester, & O’Toole Jr ’s (1990a) communication model perspective on implementation that stresses the importance of communication in transmitting reform messages to implementers. As demonstrated in two of the case studies (Chapters 6, 7), some messages transmitted by the agency or regional government were distorted and perceived differently by spending units within their jurisdiction. Likewise, the Central Government orders were also interpreted differently by government spending agencies (Chapters 6, 7). This happened because both the Central and regional governments failed to create the inducements for and remove the barriers to effective communication. In the case of the Central Government, formidable obstacles were observed around clarity of goals, consistency, provision of coercion, and finance. On the other hand, for regional governments, challenges for communication emerged because of lack inducement, such as capacity of the state and local officials, and the implementing state agency.

In contrast, as demonstrated in the TMG case (Chapter 5) and the CC case (Chapter 8), where repeated communicationoccurred to produce clear and consistent policy and to ensure that appropriate recipient receiving that policy, the received message was successfully implemented.

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Commitment to Reform Agencies’ commitment to reform was important in the implementation process in two ways: first, in relation to commitment within the implementing agency, and second, in relation to the overall political climate. The successful cases, the TMG and CC, exhibited a positive attitude in determining priorities in line with reform objectives and maintained the specific skills necessary for realizing those priorities (Chapters 5, 8). In contrast, lack of commitment in the less successful cases was manifested in the inability of agencies either to undertake major initiatives in line with reform objectives or to maintain and enhance implementers’ skills (Chapters 6, 7). It is important to note that in the successful cases (Chapters 5, 8), commitment was found to be primarily exercised by leaders, as manifested in budget, programs and other consequential activities in line with the reform goals, and this was successfully transferred to followers.

The case findings particularly at the regional level of government, fit very closely with Pollitt and Bouckeart’s (2004) description of the impact of the political system on the implementation of public financial reform. For example, the TMG Mayor, Wahidin Halim, formed coalitions with other dominant parties, and it was thus relatively easy for his government to push the reform process and ease the budget process (Chapter 5).

Findings of this study are also in line with McCourt (2003) who argues that commitment is subject to political and administrative capacity. Without administrative capacity, it was impossible for agencies to follow through on the

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reforms. However, this research also found that where there was evidence of political commitment as in the TMG, it was possible for this commitment to energise the bureaucracy.

Capacity for Reform Capacity was an explanatory variable in the four case studies which highlighted the fact that the more resources in terms of qualified personnel and budget that were owned by the agencies, the better the capacity they had to achieve better implementation outcomes (Chapters 5,6,7,8). The observed lack of skilled personnel in the less successful cases of this study supports the argument that a major challenge facing the Government in implementing accounting reform was ‘the shortage of accounting skills’ (Harun 2007), or ‘the lack of suitable human resources’(Kuncoro et al. 2009). The general conclusion drawn from these earlier studies, that successful reform tended to be found in an agency which had marshalled adequate resources and skilled human resources, is confirmed by the findings from the cases covered in this research.

Adequacy of training programs has been cited as a key factor in successful financial management reform (Nasi & Steccolini 2008). However, this research in Indonesia also indicates not only that the existence of training is important but that its effectiveness is a key to successful reforms. This held true in particular in the MoCI (Chapter 6) where, despite the existence of frequent training and other similar

programs

in

enhancing

financial

capacity

such

as

frequent

332

sosialisasi(dissemination programs), the effectiveness of training programs was largely lacking because the programs were not followed up by subsequent internal training programs and were not accompanied by an effective pattern of appointments, placements and rotation to maintain the capacity of implementers. Consequently, this research from Indonesia emphasizes the critical point of adopting a more strategic, rather than piecemeal, approach to capacity building.

In relation to the capacity of personnel, this study found that inadequacy of salary in the less successful cases adversely affected personnel performance. In the more successful cases, higher salaries and additional income appeared to serve effectively as incentives for improved performance (Chapters 5, 8). This study, argues like McLeod (2005b), that improving a bureaucrat’s salary is of importance in creating strong incentives. McLeod’s (2005b) view is that this can be done by introducing a new salary structure comparable to private-sector employee remuneration, while avoiding the existing system of automatic salary increases which is not based on performance. As suggested by the case studies, in the absence of additional income, the low level of civil-service salary was not adequate to motivate implementers to work on the reform tasks (Chapters 6, 7). Incentives, however, could be provided not only by increasing salary level but also through additional incomeawarded to implementers, such as incentives for undertaking finance-related jobs (Chapters5,8).

The results of the study in Indonesia support the need to reform human-resource management including recruitment, promotion and discipline, already noted by

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previous research(Harun 2007; Turner et al. 2009). Nonetheless, as suggested above, despite the common practice of mechanistic recruitment which was rarely based on need, effective functioning of leaders played a major role in enhancing implementers’ capacity in successful cases. In other words, even when centralised management is inefficient and ineffective, hampering agencies’ flexibility to recruit or sack inefficient employees, in the presence of effective leaders the capacity issue within an organisation can still be tackled through innovation in this area and also through the ability of the leaders to communicate and create incentives for performance. In the successful cases covered in this research, the leaders brought about remarkable progress in the human resource area and their efforts were more effective than any focus on changing the system of personnel management could have been.

Despite the reform process, Indonesia’s budget process remained rigid (Chapter 3). Unlike other reforming countries, carry-forward mechanisms had limited implementation, while mechanisms such as efficiency dividends and budget virement (reallocation) at the hands of managers, were largely absent (Chapter 3). These observations are in accord with Blöndal et al.(2009), who argue that the Indonesian budget still lacks flexibility. In the absence of flexibility, significant challenges remain in making the budget system more effective in implementing approved expenditures.

Besides capacity, motivation has been cited as a factor determining the success of NPM reforms, and as a variable in NPM categorization (Manning 2001). With

334

regard to the categorization of the NPM in developing countries, this study indicates the importance of motivation, coupled with capacity. In organisations where bureaucracy is characterized by corruption, weak governance and poor administration, the greatest challenges were evident. Even the high motivation and commitment demonstrated in the MoCI budget were, however, not adequate to push the reform process forward because of skilled implementers.On the other hand, more successful implementation was exemplified by the motivated and capable institutions, such as the TMG and the CC (Chapters 5, 8).

Overcoming Barriers Organisational barriers in the implementation process were many, but the findings illustrated the most significant barrier was the limited capacity of implementers to convert the policy intent into action. This limited capacity was generally caused by the rigid human resource management embedded in the Indonesian administrative tradition inherited from colonial rule. As reported in Chapter 3, decentralisation slightly changed human resource management practice in Indonesia, allowing the regions flexibility to give different levels of salary; however, some other aspects, such as the requirements for entering the bureaucracy, seniority and career-based bureaucracy,clearly indicate that the legacy of rigidity remained intact. The bureaucratic-driven reforms and the legacy of hierarchical structure remained intact creating difficulties in attracting, retaining and producing skilled bureaucrats. This study supports those by Harun (2007) and McLeod & Harun (2009) which suggested that centralised human resource management was a factor impeding the effort to enhance the capability

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of the spending agencies to attract suitable personnel to support the reforms. However, as will be argued below, further devolution of human resource management should be undertaken with caution.

The problem created by centralised human-resource management in Indonesiawas further aggravated by the ineffectiveness of human resource management conducted at the agency level. This was best exemplified in the MoCI case study (Chapters 6, 9) where the link between organisational goals and human resource management was clearly absent, reducing the effectiveness of the current training programs aiming at enhancing capacity.

Compounding the influence of the hierarchical structure of government, low salaries were seen in the cases in this research as a more important contributing factor to the limited capacity evident in Indonesian agencies. This finding parallels those of several earlier studies, suggesting that improvement in Indonesian human resource management, including remuneration program is necessary to tackle capacity problems (McLeod 2005a; Turner et al. 2009; Harun 2007). It also supports the implementation of the on-going, yet unfinished civilservice reform initiated in 2008 that enforces the improvement of public servants’ remuneration(Kementerian

Negara

Pendayagunaan

Aparatur

Negara

dan

Reformasi Birokrasi 2011a).

The research shows that although some of the Central Budget Agencies’ tasks (for example, those of the MoF and Bappenas) were devolved to spending agencies,

336

the Central Budget Agency remained powerful relative to spending agencies, a similar phenomenon observed in other countries where the Central Budget Agency acted as a guardian, assuming coordination, consolidation and monitoring roles in the reform process (Wanna et al. 2003). However, in Indonesia, spending agencies’ reliance on the Central Budget Agency or Chief Financial Officer (CFO) in their jurisdiction was dominant, not only because of the coordination function played by the Central Budget Agency or CFO but also because of the limited capacity of spending agencies in managing their newly acquired financial autonomy. Despite a clarification of roles and functions at all administrative levels in Indonesia, because of limited capacity, power structures have not been radically changed.

Crash courses for civil servants in financial matters, as proposed by McLeod and Harun (2009), have served as a short-term solution for enhancing capacity, particularly to enable agency staff to undertake the tasks of reform. However, this research also suggests that these kinds of programs, such as the Government Financial

Accountability

Acceleration

Program

(Program

Percepatan

Akuntabilitas Keuangan Pemerintah (PPAKP)), need to be fitted to the overall organisation of human resource management. There is a need for spending agencies’ willingness to place those who have participated in the PPAKP training program in appropriate functions.

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Corruption In improving the public financial management system, the reforms have formed part of a concerted effort to fight corruption, an effort begun with the change of regime in 1998. Of prime importance in this area was the invigoration of the external and internal audit function of the BPK and the Inspectorate, as well as the strengthened role of the DPR and DPRD (Chapter 3). The strengthened roles of these institutions have paved the way in detecting corrupt behaviour and prosecution.

However, three years after the reform commenced, corruption in financial matters remained a critical issue. In the 2007, the World Bank reported: Fighting corruption is one of the government’s most important priorities and curbing corruption involving public funds remains one key area. Corruption both distorts spending decisions and budget execution at the same time (World Bank 2007b, XV-XVI).

The logic underpinning the reform process suggests that the reforms aiming at improving governance will in turn mitigate corruption. However, the evidence from this research shows that this has not always been the case, because systemically entrenched corruption posed considerable challenges for institutions in carrying out the reforms. As demonstrated in the case studies, although budget and accounting reforms were meant to improve governance and minimize financial corruption, particularly in the area of budget process, procurement and the audit system, the presence of corruption and the lack of governance inevitably impeded the reform. As shown in the TDG case study (Chapter 7), recent prosecution of its high officials, which pertained to the larger political context of

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the nature of direct election,further revealed the common practices of gaining power through the vehicle of money politics. Political corruption affected the administrative capacity to carry out the reform mandate. As a result of the pervasiveness of money politics, the continued broadcastingby local media of corruption allegations against political elites and leaders frustrated the reform thrust, which accordingly impacted on how the administration and implementation process was taken up by implementers.

Hamilton-Hart (2001) contends that anti-corruption measureswere incomplete because the anti-corruption strategy tended to focus more on external monitoring and sanctioning mechanisms rather than building internal discipline. The TMG case (Chapter 5) confirms this argument by showing how improved organisational self-discipline served as an effective deterrent to opportunistic behaviour in the government spending agencies. Strong projection of ethical values and strong monitoring, as well as incentives and evaluation were among the mechanisms utilized in the TMG to build organisational self-discipline. In such reform processes,relying on external measures was not enough and thus modifying strategies for anti-corruption measures by focusing more on internally-driven strategies seemed to be a reasonable approach to accelerating the corruption eradication measures.

In contrast, where there was little projection of ethical values and lack of monitoring, incentives and sanctions, it was hard to build organisational selfdiscipline, which in turn became another challenge for promoting governance and

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mitigating corruption. The TDG case (Chapter 7) illustrated best that financial malfeasance was pervasive in the bureaucracy, especially in the absence of the projection of ethical values and lack of monitoring, incentives and evaluation mechanisms in the bureaucracy. The findings of the study also demonstrate that the lack of enforcement of ethical behaviour has implications for the promotion of accountability measures, and this confirms the claim in the wider research literature that ethical behaviour in bureaucracy underpins measures in maintaining accountability(O'Faircheallaigh, Wanna & Weller 1999).

The dynamic of Indonesian NPM-inspired reform was also affected by rampant corruption, a phenomenon that is largely absent in the country of origin. There are two main paradigms in the literature concerning anti-corruption approaches: one which recommends anti-corruption bodies to exist to tackle the rampant corruption and the other considers general governance reform as prerequisite before anti-corruption bodies can function effectively. Schütte (2012) argues that this dichotomized approach to eradication corruption cannot explain the pervasive corruption phenomenon in Indonesia. This thesis supports this view by refuting approach on emphasizing one approach to another. It adds to the small literature dealing with the relationship between corruption and reform by suggesting that NPM reform alone is not enough to combat corruption. This literature suggests instead that both reform to improve governance and anti-corruption measures should be done in tandem for successful reform in countries where government is captured by corrupt elites. Focusing on either one would be insufficient to tackle pervasive corruption across agencies.

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Governance and Administrative Tradition The implementation of NPM-inspired budget and accounting reforms in Indonesian were to some extent affected by the administrative tradition and colonial legacy which posed challenges to implementing accountability-driven principles in financial management. This study follows a similar line of argument to Pollitt and Bouckaert’s (2004)research on the implications of the administrative tradition for public management reforms. The influence of the administrative legacy in Indonesia can be observed in the reform agenda, the receptivity of agency staff to the reform ideas, the pace of reform, the capacity to implement reforms and the outcomes of reform.

The most profound impact of administrative tradition, however, was the influence of a strong tradition of bureaucratic rule inherited from the colonial regime. As explained earlier, the top-down approach adopted by the Government was characterised by a centralised bureaucratic culture influenced by the colonial administrative tradition and continued by post-colonial regime. As found in this research, the Government of Indonesiaprovides rules and regulations as the first point of reference for implementers charged with the task of following through on reform (Chapters 3,5,6,7,8). Consequently, implementation necessitates not only the existence of the regulations per se, but also relies on the quality of the regulations. These characteristics of regulation can be put forward as explanatory factors for the slowness of the reform process because every modification or change required the promulgation of new rules and regulations. Furthermore, the characteristics of a centralised bureaucracy imply that despite the new

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administrative culture introduced with the reforms, the legacy of colonial rules embodied in centralised decision making would still have a significant impact on administrative practice in Indonesia. The findings of this study complement the views of Turner and Hulme (1997) and Haque (2006) who contend that many developing nations embraced a state-led approach to government to pursue development and nation-building following colonial rule. The implication of this ‘strong state’ administrative tradition which is still practiced and embedded in contemporary administration of NPM reforms has been considerable. As Cheung (2005) points out, this is especially the case where such an administration is called on to drive the market-driven type of reforms of NPM. NPM reforms do not sit logically in the context where ‘old public administration’, primarily defined by centralised culture, still exists.

The bureaucratic characteristics of the administrative system aggravated by a lack of institutional capacity may be seen as the reason why the move to market-driven principles of NPM model has been more difficult to implement in Indonesia than in the developed countries where the model first evolved. Furthermore, bureaucratic culture and institutionalised corruption have imposed formidable challenges to the adoption of a meritocratic system or performance-based human resource management, hindering the overall capacity of agencies to implement reforms. This has also negated the devolution of power and the establishment of a managing-for-results culture. A logical consequence of the bureaucratic culture in Indonesia has been lifelong tenure in employment for civil servants which hinders performance, despite current progress towards developing a meritocracy. Unless

342

the Government of Indonesia resolves these issues through efforts such as the civil-service reform initiatives, the Government will still face challenges in introducing a meritocracy. A likely motive for maintaining the low-performance employment practice of the Indonesian bureaucracy is suggested by Cheung (2005) when he links public-sector employment with opportunities of patronage for political supporters.

This research found that Indonesian Government agencies encountered challenges in promoting transparency. This had its historical roots in the Dutch colonial administration which did not support openness, and created an environment which encouraged collusion and corruption. This finding confirms that of Kristiansen et al.(2008)who contend that national systems and traditions of politics and bureaucracy inherited from colonial rule have imposed challenges in improving transparency in Indonesia. However, this study found that the leaders of reform initiatives made major improvements in the state of transparency and accountability at the agency level (Chapters 5, 8), and thus supporting the finding of von Luebke (2009) that leadership played a major role in the quality of governance practices in regional governments in such areas as taxation, licensing and corruption.

Implications for the Study of NPM As shown in the literature review in Chapter 2, NPM research has tended to focus on policy initiatives, while not much is known about the implementation aspects of NPM-inspired reform. Yet it is implementation success (or failure) that

343

determines whether reform actually takes place. In general, research on NPM has conducted analysis at a country level focusing on policy interventions but neglecting a focus on how the intervention was put into action at organisational level. Through its case-study focus, this research has attempted to gain in-depth understanding of the factors affecting implementation success and failure at this organisational level that are important for the sustainability of reforms.

The general reform intentions of the Indonesian government are not in doubt. The significant influence of NPM ideology on Indonesian budget and accounting reforms can be traced from the impetus for reform that predominated in international agencies especially at the time when the Indonesian Government started its reform processes. These international agencies made the adoption of the NPM approach a condition of the loans that allowed the Indonesian Government to continue to operate. Most of the elements of reform elaborated in Chapters 3, 5, 6, 7 and 8 reflect NPM tenets which draw on private-sector management practice in the pursuit of public-sector efficiency, effectiveness and accountability. The conditions imposed by international agencies have some implications for the budget and accounting reforms. First, these conditions limited flexibility for the Indonesian Government in choosing the direction of the reforms. Second, the conditions eventually hindered capacity to achieve an adequate level of reform ownership by implementing agencies.

Under the reforms, Central and regional government agencies made efforts to transform their budget and accounting practices, by utilizing modern financial

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management practices such as: (1) the unification of budgets to avoid duplication and overlap; (2) a stronger planning function and greater clarity on government priorities for budget spending; (3) medium-term expenditure framework; (4) modern treasury practices (cash management, debt management, accounting and audit practice); and (5) performance-based budgeting. The changes were meant to link budgetary allocation to output and outcomes by providing more flexibility and greater autonomy for spending agencies in managing their own budgets.

As a result of reform, the overall state of accountability has slowly improved (International Monetary Fund 2006; World Bank 2007b). The Indonesian Government has introduced various measures for pushing accountability through the reform, particularly through strengthening the role of audit agencies such as the BPK and BPKP (Hamilton-Hart 2001). The difficulty in improving accountability in the Indonesian context, however, has been exacerbated by the extent of bureaucratic power (Haque 2007a). Although since 1998 Indonesia has been shifting from an autocratic to a democratic polity, the strong formal structure inherited from colonial rule is still embedded in the bureaucracy, creating difficulties for the Government in implementing the NPM-inspired reform which has a different ideological underpinning and conflicts with the nature of the strong bureaucratic culture. At the higher level, accountability lies in the parliamentary role, which in Indonesia has been undermined by the lack of capacity. At the Centre, despite its strengthened role in the budget process, there has been a lack of parliamentary

345

capacity to consider Government proposals and to carry out law-making, budgeting and oversight functions (Blöndal et al. 2009). As this research showed, with the increased difficulty and complexity of the new budget process, the limited capacity of parliament particularly at the regional level militated against the promotion of accountability. This research therefore confirms Blöndalet al.’s(2009) argument that the weak capacity of the Indonesian Parliament stems from substantial turnover, limited resources, and insufficient specialist expertise. It also confirms the view of McLeod and Harun (2009) that not many members of the Parliament have the capacity to undertake the task of analysing financial reports. This similar situation found in other countries where the plan to introduce accrual accounting has also been noted as perplexing for parliament (Blöndal 2003). In the cases covered in this research the issue which emerged in this respect was not only the importance of building parliamentary capacity, but also the significance of a public communication strategy to maintain the implementation of accrual accounting and budgeting.

The weak role of the media in Indonesia clearly contributes to the slow progress of overall accountability. The role of the media has been strengthened since 1999; and more importantly, the promulgation of the Law on Freedom of Public Information in 2008 invigorated the role of media in providing public scrutiny(Chapter 6).Despite the audit reform and the strengthened parliamentary role in analysing it, in Indonesia the public has still relied more on the media as the main reference for reporting corruption (McLeod & Harun 2009). The cases covered in this research,however,provided little evidence that the role of the

346

public scrutiny of the media was being performed successfully. This confirms Kristiansen et al.’s(2008) view that there is an extreme lack of the political will needed to implement the Law on Freedom of Public Information.

Another higher level limitation to implementing reform referred to in the research is the absence of a performance-oriented culture in the bureaucracy which is aggravated by the lack of merit-based selection, meaning that political neutrality as the basic prerequisite for public accountability has not been achieved(Haque 2000). Instead, bureaucratic behaviour has been characterised by the dominance of strong loyalty derived from a patronage culture. The fact that civil servants’ tenure is for a lifetime and that public-sector employment provides opportunities for patronage for political supporters adds to the difficulties in re-deploying and sacking inefficient staff and in enforcing meritocracy and professionalism as well as developing a managerial culture in the bureaucracy. The spoils system in the bureaucracy is a major reason why the move to governance-driven principles of the NPM model is more difficult to implement in Indonesia than in developed market-oriented democracies. The implementation perspective advanced in Chapter 2 and applied in the case studies takes these higher level factors into account but also explains finer-grained differences in agency implementation outcomes. One issue identified in crosscountry analysis of NPM reforms in Asian countries which was strongly reflected in the cases covered in this research is the importance of leadership and political commitment (Samaratunge et al. 2008). In Indonesia, also, cultural attitudes have increased the significance of the leaders in the reform process with the result that

347

the performance of particular leaders inevitably made significant differences in improving the state of accountability in specific circumstances. At the level of the organisations dealt with in this research, leaders were important in establishing internal formal and informal accountability mechanisms such as instilling organisational culture, ethics, and a code of conduct. The reforms were much more likely to succeed where the relevant political or organisational leaders enjoyed a reputation for integrity.

However, the implementation perspective is less successful in explaining the overall nature of outcomes, many of which did not conform to the original NPM model. The Indonesian NPM reform has not yet led to convergence with models of public administration found in the original NPM countries. In Pollitt’s (2001) terms, some of the reforms observed at the institutional level might be categorized as ‘practice convergence’ while other elements only reached its ‘decisional stage’. The different level of convergence appears to reflect the importance of preexisting conditions, such as the characteristics of Indonesia’s colonial administrative model, its complex politico-administrative regime and the culture of governance.

Despite the lack of parliamentary capacity, the accountability aspect at an organisational level has been strengthened with the obligation to present the audited financial report to the DPR or DPRD. Overall, however, outcomes suggest the partial accomplishment of accountability aims, reaching ‘decisional convergence’ in laggard agencies, and ‘practice convergence’ in more successful

348

agencies. Even in the front-runner institutions, some elements of reforms have still been far from converging with anticipated outcomes under the NPM model. For example, the development of performance reporting in Indonesian budget reform was only progressive in identifying targets without linking them to the budget, and thus the reports could not be used in influencing decision making and budget processes nor as a means for pursuing efficiency. Slow progress in this regard was caused not only by organisational barriers but also by conceptual issues pertaining to the difficulties of implementing performance-based budgeting. The current practice of a full performance report without clear linkage with the budget has weakened the ability to judge agencies’ performance.

While the budget and accounting reforms supposedly shifted the traditional hierarchical accountability to a more managerial accountability, in the Indonesian bureaucracy hierarchical or traditional forms of accountability still predominate. The absence of performance reports with clear linkage to the budget was the major cause of difficulties in imposing the new form of accountability introduced by NPM. Thus traditional accountability was replaced by the new managerial accountability which underpins NPM reform, indicating the low convergence of Indonesian reform with NPM reforms. Overall it can be concluded that the practice is converging, while output or outcome convergence is not yet in place.

This study suggests that ‘path dependency’, as proposed by Pollitt (2000), provides an explanation. This concept allows in-depth understanding of contexts in which different outcomes seem to derive and in this case adds to the overall

349

understanding of the implementation of the budget and accounting reform process in Indonesia. The cases covered in this research confirm the view that while preexisting conditions are significant in explaining the reforms, they do not determine everything in relation to the outcomes of the reform. The Indonesian pattern of reform has followed its own trajectory and, within that particular trajectory, organisations will also chart different courses. Nevertheless, there are strong factors pointing towards greater practice convergence, such as the cooperation established with the Australian Government, an early adopter of NPM reforms, through the framework of the Government Partnership Fund-Australia Indonesia Partnership (GPF-AIP) (Direktorat Jenderal Perbendaharaan 2009, 2010a).

Like in many reforming countries where NPM reforms have been implemented differently with differing goals and emphases (Pollitt & Bouckaert, 2004), NPM in Indonesia has also been carried out differently from its original precepts. It is evident, from the empirical work of this thesis, that some items of NPM have not worked very well in Indonesian context. These can be seen in several aspects. First, there has been little evidence on the application of market principles into public policy and management in Indonesia. It can be argued that the unwelldeveloped basic infrastructure of management contributed to the challenges in applying market principles (Sarker, 2006). Second, the autonomy principle by giving flexibility while putting pressure on accountability did not suit to the strong government that still retains centralized decision making and is reluctant to relinquish power while at the same time lack capacity. Without flexibility, it is

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hard to push agencies to become accountable. In addition, lack of capacity pose another challenge for organization in exercising its autonomy, mirroring research in developing countries that demonstrate that lack of state capacity as the main hindrance of NPM reform (Sarker, 2006). Without adequate capacity, NPM reform on the other hand only mushroomed corrupt practices. The TDG case confirmed the argument that NPM can breed corruption. Third, low adequate public expectations of government may have contributed to the slow process of NPM reform in many developing countries (Manning, 2001). High expectation of government as commonly found in developed nations is in fact needed to push the NPM reform by allowing complaints about local service from the citizens (Manning, 2001). As the case studies demonstrates that the successful TMG case might happened because the leaders have created room for complaints that have forged the implementation of reform in the region.

In relation to the view of choosing priorities among NPM elements rather than applying the wholesale reform, there is also a debate whether NPM is applicable in the developing country context. There are at least three mainstream views regarding the applicability of NPM reforms to developing countries (Bale & Dale, 1998, Schick, 1998). First, developing countries should avoid NPM reform because of the significant contextual differences between New Zealand and developing world. Second, NPM reform for better governance should be adopted critically by developing countries to mirror success from developed world. And third, to extrapolate from the experience of New Zealand reform because some elements and principles are still relevant. This thesis concurs with evidence that it is still possible for Indonesia to gain benefit by adopting reform originating in

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developed countries, albeit large dissimilarities of contexts exist. Is possible for developing countries to transfer some relevant general and specific elements of reform under certain conditions. The TMG resonates this very well. Despite its diverging context with New Zealand, some of implementation problems could be resolved by applying principles of New Zealand reform that focused on the root cause rather than the symptoms of organizational problems. The TMG case has built appropriate incentives to make the NPM reform work well in a specific Indonesian context. In particular, strong monitoring and evaluation built institutionally by the leaders have motivated implementers to behave in line with the organizational goals. Consequently, appropriate political and organizational incentives become remedies for other implementation problems in the TMG such as capacity, and compliance issues. The thesis further provides empirical evidence and thus supports Andrew’s (2010) suggestion to choose structural items from the menu rather than implementing the wholesale model. Choosing items that fit to the context may assist understanding why different agencies have different outcomes in place. In Indonesian context, particularly in agencies captured by corrupt elites, rather than adopting structural innovation in government, more basic system is more important as clearly depicted in the TDG case.

Implications for Practice Most literature on NPM provides no clear link between reform agenda, implementation and outcomes. Even if the link to implementation is made, it was attempted by using proxies rather than actual implementation (Goldfinch et al., 2012). This thesis fills the gap in most NPM literature by looking at the actual 352

implementation of NPM reform in Indonesia. Like other countries, this thesis also found that in Indonesia specific contextual issues have limited the implementation of NPM financial management reforms (Goldfinch et al., 2012).

This thesis generally argues that the probability of achieving better implementation outcomes could have been increased if analysis at the organisational level as well as of the overarching contexts was undertaken to tease out the most important factors for improving the implementation outcomes. This implies that the chances of success are greater if reform models are appropriate to each agency context. Nevertheless, a number of more general lessons can also be drawn from the thesis findings.

First, this thesis suggests that the implementation framework should give more emphasis to the role of leadershipin giving direction, introducing innovation, minimizing resistance, and in making use of incentives in the implementation process. This research reveals that a top-down approach, particularly if employed at the institutional level could be useful if effective leaders are in place. This supports Ryan, et al.’s (2008)

view that strong leadership can contribute

positively to the outcomes of implementation where a top-down change is envisaged.

Second, given the diverse context of reform in Indonesia, this thesis also found that a focused approach to communication was a key to structuring the implementation process in ways which facilitated regional and organisational level ownership and thus sustained the reform process. Communication is

353

necessary because of the limitations of the top-down approach, such as failing to recognize the complexity and uncertainty of organisational change by adopting a one-size-fits-all model. In the case of Indonesia, the top-down approach was inadequate to sustain reform, to tackle the problem of uneven employee commitment and to instil ownership of change, a communication strategy could have been used to overcome these problems.

Third, given the importance of leaders in the implementation process and the fact that the Indonesian government agencies lacked effective leadership, the reform process at organisational level could have been improved by an effective strategy to recruit leaders as well as develop leaders’ competency to facilitate the reform process. Two aspects of leadership emerge from this research as being important but having different roles to play. They are political and organisational leadership. Both aspects require leaders who are able to drive the reform process. Leaders at the regional government level emerged against the backdrop of political conditions because, despite their status as the head of the government, they were initially supported by party members at the DPR or DPRD.By the same token, at the Central level, the President directly appoints the ministers who subsequently appoint the executive bureaucrats (Echelon 1, 2). Consequently, the political situation can substantially determined success in developing the talents and expertise required of competent leaders. This study therefore suggests that a more open reform process with greater engagement from outside government might not only have produced better political conditions and fostered governance, but also could have served as a more sustainable solution for nurturing reform-minded and

354

capable leaders. Similarly, an effective strategy to recruit and nurture leaders could have been achieved by establishing objective standards required for recruitment to the executive level. Leadership training particularly at spending agency level might be a plausible short-term solution for obtaining organisational leaders.

Fourth, the budget and accounting reforms would probably have been more successful if the Indonesian government had implemented reforms at a slower pace. Tight targets stymied the reform effort because they did not allow sufficient time for implementers to adapt to the dynamic of change and to customize behaviours aligned with reform goals. Consequently, since the reforms are still underway at the time of writing this thesis, a more gradual approach to reform might have allowed adaptation and customization while at the same time focusing on capacity building as a major issue in the implementation process. This might have been done, for example, by introducing a pilot project in some spending agencies that were presumed to have met certain standards for launching the reforms before implementation was attempted at all administrative levels. The top-down approach meant not only that every agency was expected to act according to the same timetable but they were all expected to perform to the same standard.This research has shown that an approach which modified expectations according to the capacity of each agency would have had more chance of success. 1Therefore, if the degree of success in implementation outcomes is to be

1

It is important to note that reform process has not finished even by the time of writing in mid2012. The process is expected to be ongoing.

355

increased in the future, a more customized reform design would be necessary instead of following the one-size-fits-all approach.

Fifth, as suggested by the findings, the issue of capacity has been the most crucial and profound problem facing Indonesian government agencies in implementing the budget and accounting reforms. Reforming the current personnel system by delegating this task to government agencies is likely to a greater extent to be useful for sustaining reforms. Given the fact that flexibility in managing human resources was evident in the more successful case, this thesis argues that more freedom for spending agencies in recruiting the necessary people could be considered. This might seem to be a paradox, because it is harder to devolve authority to spending agencies whose capacity is limited. As such, this practice is only a viable solution for agencies that possess capacity to manage their personnel. Encouraging agencies to transfer or recruit people from finance-related institutions cannot be viewed as a good solution for the capacity issue because eventually it might denigrate the capacity of Central Government agencies; however, with careful consideration it can be one alternative for boosting capacity.

Sixth, the reform process, particularly at the regional level where most agencies struggled with the capacity issue, would probably have been more successful if capacity was built first before conducting reform, rather than building it in tandem with the reform. While in some institutions, the budget and accounting reform was able to go hand in hand with capacity building, it seemed to be difficult for some

356

agencies where capacity had been a persistent issue even prior to the reform process. This study suggests that short courses or training to accelerate capacity (such as the Government Financial Accountability Acceleration Program (Program Percepatan Akuntabilitas Keuangan Pemerintah (PPAKP)) would have been fruitful for particular organisations. Particularly given the budget constraints, however, even strong training programs found it difficult to keep up with the speed demanded by the reforms. Less costly programs, such as the production of a reform manual containing key details of reforms could be opted forby government agencies in the future. The reform manual could be a significant contribution to capacity building but would need to be accompanied by massive recruitment of accountants to make a serious impact on the sustainability of reforms.

Seventh, this research suggested that budget and accounting reforms in Indonesia needed to be pursued in tandem with corruption eradication efforts and initiatives to improve governance. In Indonesia, some of these efforts had been initiated before or after the budget and accounting reforms by the Central Government (such as, corruption eradication measures, civil-service reform) and they would likely have been invigorated if other parallel measures to improve capacity, such as developing a meritocracy, had also been introduced. This finding is similar to that of Quah (2009)who suggests that abolishing corruption could be achieved by a comprehensive approach with the establishment of an anti-corruption body empowered with power and budget, a meritocracy system and other human resource strategies.

357

Finally, a strong finding is that the implementation of the reforms would have been expedited if communication had been continuously promoted. Strong interdependence was found between communication and the reform process because the reform mandate had to be carried out in concert with other parties (parliament, other spending agencies, MoF, stakeholders). Accordingly, in order to nurture antecedent factors which enable concerted action, the incentive structure needed to be changed.

Conclusion To sum up, Indonesia’s financial management reform can be viewed as partial and sporadic at best. However, it has moved beyond traditional practice further towards NPM principles for improved transparency and accountability as compared to the state prior to reform. The new budget and accounting practices aligned with international best practice have paved the way for improved transparency and accountability in government financial management. As revealed by this research, it is beyond doubt that the reform underway has offered opportunities for improvement in government budget and accounting practices.

The financial management reforms have inevitably been beneficial for Indonesia. However, the prevalence of corruption as a result of post-colonial legacy make clear that the financial management reforms should be done in tandem with anticorruption reforms along with public sector reforms aiming at fortifying functional institution. Despite signs of improvement through a growing number of initiatives directed to the movement towards increased capacity-building,

358

improved public service delivery and anti-corruption program, the benefit of financial management reforms has been mixed. On the one hand, there have been examples of prosecution of officials as a result of follow up action of auditor reports introduced in the financial management reform. But other cases point to the continued fraud in finance that need to be eradicated even in the Ministry of Finance, as the prime mover of reforms (IMF, 2010). Given Indonesia is still a long way to achieve the notable benefit of financial management reforms. The patchy record of the financial management reforms is also illustrated by the lack of capacity of dysfunctional institutions, such as the TDG. In that case, unless the systemic corruption is eradicated, it is very unlikely that the reforms would succeed. It is also important to note that along with anti-corruption programs, movement towards increased capacity-building is not adequate on its own without improvingthe incentives for high performance. This includes creating stronger incentives for implementing meritocracy in the bureaucracy. In Indonesia, meritocracy is more rhetoric than practice because ofnumerous political obstacles. The introduction of clearer policy goals supporting reform by political leaders, along with human resource management improvements, are among the measures that can be introduced (Sulistiyani, 2010).

Nonetheless, it is hard to judge some elements of the overall reform because progress varied widely, as the case studies suggested. The thesis explores the interaction between the implementation of the reforms and the effect (on implementation) of problems such as corruption. The question of the desirability of the overall NPM ‘package’ for Indonesia remains an open question. Recent

359

research has pointed to the risks of reform, when there is insufficient alignment between the assumed context of reform and the administrative traditions of the adopting country (Andrew 2011). On the other hand, the empirical work of the thesis suggests that these obstacles can be overcome where there is sufficient political will and appropriate incentives. Beyond this, the main issue is that of capacity for reform, which depends upon technical skill and flexible human resource practices.

However, while improvements to practice will continue to be made, these findings also raise questions about the extent to which the financial tenets of NPM can be implemented in a developing country such as Indonesia,

at

least

in

the

short

term.

There is

a

paradox

of

implementation at work. NPM rests on an assumption of adequate levels of governance to sustain implementation of managerial and financial reform.

Where governance

and

capacity

are

lacking,

implementation will also suffer. The future trajectory of reform in Indonesia will reflect the working out of this paradox.

360

Appendices

361

Appendix 2. Letters to Case Study Organisations 1 Jakarta, Subject : Request for Research Permit To. Head of Agency for ………. Jakarta I would like to inform that I am, Windraty Ariane Siallagan, a PhD candidate at the University of New South Wales@Australian Defence Force Academy (UNSW@ADFA), an employee of the Directorate General of Treasury, Ministry of Finance, Jakarta, have been taking study leave from the Government of Indonesia with the support of the Australian Government through the Australian Development Scholarship. This research is part of fulfilling my PhD dissertation on the Implementation of the Budget and Accounting Reform in Indonesian Government Institutions. The main aim of my research is to investigate factors affecting the reforms in the Indonesian Government agencies. The main locus of this research is the line ministries and spending agencies at the Central and regional level. The result of this research is expected to contribute to knowledge of state financial reforms that have been under way in Indonesia and public policy realms in general. In relation to that, I would like to kindly ask assistance from you to give me a research permit at your institution. In general, I will undertake individual interviews and observations. I also would like to inform that I have been granted ethics approval from the UNSW@ADFA Ethics Committee to ensure confidentiality of data or information and to ensure respondents’ and organisations or agencies’ privacy. I am prepared to provide other supporting documents or further information if necessary. Thank you very much for your kind assistance. Best regards, Windraty Siallagan PhD Candidate, UNSW@ADFA e-mail: [email protected]

1

This letter is the template for letters to organisations translated from Bahasa Indonesia to English. Varieties of this template were submitted to all organisations covered in this research. Different organisations required different levels of detail.

362

Appendix 3. Organisational Consent 2

Subject : Research Permit To Windraty Ariane Siallagan In responding to your request dated ….. subject of research permit request, we would like to inform you that we will facilitate you on the research on the Implementation of the Budget and Accounting Reforms in Indonesian Government Agencies in ……….. Thank you

Head of Agency

2

This letter is the template of organisational consent translated from Bahasa Indonesia to English. The letters varies based on the requirement given by the organisations. All organisations or agencies approached granted permit to the researchers.

363

Appendix 3.1. Example of Organisational Consents

364

Appendix 4. Individual Consent

Approval No (when available) THE UNIVERSITY OF NEW SOUTH WALES

PARTICIPANT INFORMATION STATEMENT AND CONSENT FORM

The Implementation of Budget and Accounting Reforms in Indonesian Government

You (……………………………_) are invited to participate in a study of The Implementation of the Budget and Accounting Reforms in the Indonesian Government. I (Windraty Ariane Siallagan) hope to learn about factors that have influenced the implementation of the budget and accounting reforms within the Indonesian agencies. You were selected as a possible participant in this study because you are involved in the implementation of the budget and accounting reforms within the Indonesian Government agencies and stakeholders. If you decide to participate, I will interview you by asking several questions related to the budget and accounting reforms. The questions will revolve around your main jobs and tasks in your institution. You will be interviewed once for about 20-30 minutes and your responses/answers will be treated confidentially and will be used only for the research purposes only. Your name will not be notified and confidentiality will be kept. There will be no possible risks expected during the interview as it will be conducted in a safe place in your office. The information you provide during the interview will be useful for the improvement of the current budget and accounting implementation reforms either in your institution in particular or in Indonesia in general.

365

We cannot and do not guarantee or promise that you will receive any benefits from this study. Any information that is obtained in connection with this study and that can be identified with you will remain confidential and will be disclosed only with your permission, except as required by law. If you give us your permission by signing this document, we plan to discuss/publish the results in the Indonesian Government agencies and UNSW for the feedback to the Government and to the knowledge development. In any publication, information will be provided in such a way that you cannot be identified. Complaints may be directed to the Ethics Secretariat, The University of New South Wales, SYDNEY 2052 AUSTRALIA (phone 9385 4234, fax 9385 6648, email [email protected]). Any complaint you make will be investigated promptly and you will be informed out the outcome. The results of this study will be given if participants wish to see the result of the research. All the interview record will be stored in a password protected computer at the university and the password protected personal computer of the researcher. The data will be treated according to the UNSW guidelines.

[Your consent] Your decision whether or not to participate will not prejudice your future relations with the University of New South Wales and other Indonesian Government agencies. If you decide to participate, you are free to withdraw your consent and to discontinue participation at any time without prejudice. If you have any questions, please feel free to ask us. If you have any additional questions later, please contact :

Investigator : Windraty Ariane Siallagan PhD Candidate +61431280522 Or Chief Investigator: Prof. Jenny Stewart Supervisor +61418139102 366

will be happy to answer them. You will be given a copy of this form to keep.

367

THE UNIVERSITY OF NEW SOUTH WALES (AND THE OTHER PARTICIPATING ORGANISATION[S] ) PARTICIPANT INFORMATION STATEMENT AND CONSENT FORM (continued) (The Implementation of Budget and Accounting Reforms in Indonesian Government)

You are making a decision whether or not to participate. Your signature indicates that, having read the information provided above, you have decided to participate.

…………………………………………………… .……………………………………………………. Signature of Research Signature of Witness

…………………………………………………… .……………………………………………………. (Please PRINT name) name)

Participant

(Please PRINT

…………………………………………………… .……………………………………………………. Date Nature of Witness

REVOCATION OF CONSENT (Title of project) I hereby wish to WITHDRAW my consent to participate in the research proposal described above and understand that such withdrawal WILL NOT jeopardise any treatment or my relationship with The University of New South Wales, or Indonesian Government agencies.

368

…………………………………………………… .……………………………………………………. Signature

Date

…………………………………………………… Please PRINT Name

The section for Revocation of Consent should be forwarded to (INSERT name and address of Chief Investigator).

369

Appendix 5. Interview Questions

1. What do you think about the importance of the budget and accounting reforms in your institution in relation to the achievement of organisational goals? 2. Do

you

find

any

interdependence

with

other

units/agencies/bodies/ministries in accomplishing your role? If yes, what is it and in which part of the budget process is it? 3. Which part of agency/body/ministry/etc play a significant role in the implementation of the budget and accounting reforms in Indonesia? What is the nature of your relationship with them? 4. Is there any vertical (from and to upper/lower level) or horizontal (between units/agencies/bodies/ministries) reporting mechanism applied in your institution? Are the reports useful? Are there any sanctions/incentives applied to the non-compliance/compliance of the reporting mechanism? 5. How do you get necessary information related to your job such as regulation/technical direction/system up-dates? Is the necessary information always provided in time and well accessible? 6. Have you had any training to increase your professional development and skills related to the budgeting and accounting activities? Do you think training is adequate for you to conduct your job?

370

7. What difficulties/problems do you experience in your tasks and responsibilities in implementing the budget and accounting reforms? How do you communicate your problems?

371

Appendix 6. Ethics Approval

372

Appendix 7. List of Respondents for Semi-Structured Interviews 3 Tangerang Municipality Government Respondent No 1

Organisation/ Position TMG#1

2

TMG#2

3

TMG#3

4

TMG#4

5

TMG#5

6

TMG#6

Position or Role • senior manager • experienced the preand post-reform process • had been working for more than 10 years • involved in assisting activities and knowledgeable in accounting areas • senior manager • experienced the preand post- reform process • long-term civil servants • senior official • involved in assisting activities • middle manager • knowledgeable in planning and budget preparation process • had been working for more than 10 years • involved in assisting activities • junior official • had been working for about two years • dealt with administration and reporting process • junior official • Work for more than

Date of Interview 19-Nov-2009

20-Nov-2009

20-Nov-2009

19-Nov-2009

20-Nov-2009

20-Nov-2009

3

To protect respondent confidentiality, descriptions of role and position are intentionally very broad.

373

five years • involved in assisting team activities

374

Ministry of Communication and Informatics Respondent No 1

Organisation/ Position MoCI#1

2

MoCI#2

3

MoCI#3

4

MoCI#4

5

MoCI#5

6

MoCI#6

Position or Role • junior official • had been working for 5 years • experienced in assisting spending agencies and conducting internal auditing • senior official • had been involved in supervising the implementation of financial management reform within the MoCI • senior official • middle manager • had been working for more than 20 years • usually involved in the planning process • senior official • had been working for more than 20 years • knowledgeable on the entire financial management or process • used to be a treasurer • senior official • middle manager • had been working for more than 25 years • senior official • middle manager • had been working for more than 19 years

Date of Interview 30-Nov-2009

9-Nov-2009

4-Nov-2009

4-Nov-2009

10-Jan-2011

28-Oct-2009

375

7

MoCI#7

8

MoCI#8

10

MoCI#9

• knowledgeable on asset management (process) • senior official • middle manager • had been working for more than 20 years • junior official • had been working for around 10 years • involved in the reporting process • middle manager • senior official • knowledgeable on the financial reporting process

2-Nov-2009

2-Nov-2009

4-Nov-2009

376

Tobasa District Government Respondent No 1

Organisation/ Position TDG# 1

2

TDG#2

3

TDG# 3

4

TDG#4

5

TDG#5

6

TDG#6

7

TDG#7

8

TDG#8

Position or Role • senior official • involved in the budget discussions between the TMG and the Regional Parliament • knowledgeable on planning and financial process • middle manager • one of the proreformers • middle manager • one of the proreformers • senior manager • experienced various tasks in the region • junior official • knowledgeable on planning and financial process • junior official • knowledgeable on operating system within an agency • middle manager • responsible for managing finance • junior official • treasurer

Date of Interview 20-Oct-2009

6-Oct-2009

20-Oct-2009

8-Oct-2009

8-Oct-2009

12-Oct-2009

15-Oct-2009

377

Constitutional Court Respondent No 1

Organisation/ Position CC# 1

2

CC# 2

3

CC#3

4

CC#4

5

CC#5

6

CC#6

Position or Role • middle manager • had been working for several years since the establishment of the CC • had worked in finance areas in other ministries previously • senior manager • had been working long term • had strong financial background • junior official • university qualification • duties included broad technical and finance function • junior official • experienced in preparing financial report and system implementation • accounting qualification • middle manager • had worked in finance areas in other ministries previously • middle manager • experienced longterm civil servants • accounting qualifications

Date of Interview 5-Nov-2009

22-Jan-2010

5-Nov-2009

5-Nov-2009

12-Jan-2010

11-Dec-2009

378

Others

Respondent No 1

Organisation/ Position OTH#1

Position or Role • • •

2

OTH#2

• • •

Date of Interview worked for more 15-Jan-2010 than 20 years experienced the pre- and postreform process prime mover of reform 17-Jan-2010 senior official had been working for more than 30 years knowledgeable on budget and accounting tasks

379

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