Brr book series book 2 - finance


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Brr book series book 2 - finance

  1. 1. FINANCEThe Seven Keys to Effective Aid Management
  2. 2. THE EXECUTING AGENCY OF REHABILITATION AND RECONSTRUCTION FOR ACEH AND NIAS(BRR NAD–NIAS)April 16, 2005 - April 16, 2009Head Office Nias Representative Office Jakarta Representative OfficeJl. Ir. Muhammad Thaher No. 20 Jl. Pelud Binaka KM. 6,6 Jl. Galuh ll No. 4, Kabayoran BaruLueng Bata, Banda Aceh Ds. Fodo, Kec. Gunungsitoli Jakarta SelatanIndonesia, 23247 Nias , Indonesia, 22815 Indonesia, 12110Telp. +62-651-636666 Telp. +62-639-22848 Telp. +62-21-7254750Fax. +62-651-637777 Fax. +62-639-22035 Fax. +62-21-7221570www.e-aceh-nias.orgknow.brr.go.idAdvisor : Kuntoro Mangkusubroto Photography : Arif AriadiAuthor : Amin Subekti Bodi ChandraEditor : Cendrawati Suhartono (Coordinator) Graphic Design : Bobby Haryanto (Chief) Harumi Supit Em Samudra Margaret Agusta (Chief) Edi Wahyono Erwin SantosoCopy Editor : Margaret Agusta MistonoWriter : Aichida Ul-Aflaha Wasito Hal Sullivan Final Reviewer : Aichida Ul–Aflaha Hendro Prasetyo Heru Prasetyo Margaret Mockler Intan Kencana Dewi Roy Rahendra Maggy Horhoruw Terry O’Donnell Ricky Sugiarto (Chief) Ratna Pawitra TrihadjiTranslation to IndonesianEditor : Harumi SupitCopy Editor : Ihsan Abdul SalamTranslator : Harry Bhaskara Prima RusdiDevelopment of the BRR Book Series is supported by Multi Donor Fund (MDF)through United Nations Development Programme (UNDP) Technical Assistance to BRR ProjectISBN 978-602-8199-48-3
  3. 3. With this BRR Book Series, the Indonesian government, its people, and BRR wish toexpress their deep gratitude for the many kind helping hands extended from all over theworld following the December 26, 2004, earthquake and tsunami in Aceh and the March28, 2005, earthquake in the islands of Nias. Four years on, the once devastated landscapes are again vibrant with the sporadicrhythm of human life. This achievement is the result of a steadfast commitment of thelocal, national and international community, combined with the resilience of the peoplewho lost so much. The dynamics and challenges encountered during the massive undertaking ofrebuilding homes, hospitals, schools and other infrastructure, while striving to empowerthose who survived to reshape their future and redevelop their way of life, provide animportant understanding of the disaster-recovery process in Aceh and Nias. In light of this, within the pages of this book, BRR would like to share those experiencesand the lessons learned as a small contribution to return the favor to the world for theinvaluable support it contributed to building Aceh and Nias back better and safer; as ahistory of the humanitarian journey of a united world.
  4. 4. I am proud, that we can share the experiences, knowledge, and lessonswith our fellow countries. I do hope that what we have done can be a standard, a benchmark, for similar efforts at the national and international levels. Speech of President Susilo Bambang Yudhoyono at the Official Closing Ceremony of BRR at the State Palace, April 17, 2009 about the BRRs trip to the Tsunami Global Lessons Learned Conference at the United Nations Headquarters in New York, April 24, 2009
  5. 5. The Aceh-Nias post-tsunami recovery effort involves more than 900 national and internationalorganizations representing 55 countries. More than two-thirds of the funds come from theinternational community. Photo: BRR/Arif Ariadi
  6. 6. ContentsChapter 1. Turning Pledges into Commitment 1 Unprecedented Generosity 1 External Factors that Influenced the Scope and Shape of Giving 3 The Creation of BRR 4 The Challenge Ahead 5 Building Credibility 6 Maintaining Engagement with Donors and Implementing Agencies 8 Conclusion and Observations 12Chapter 2. Matching Allocations with Real Needs 17 Large Scale Damage and Large Scale Response 17 Initial strategy 20 Persistent Gaps 23 Shifting to a Guided Facilitation Model 27 Ingredients of the guided facilitation approach 28 Mid-Term Review (MTR) 31 Coordination Mechanisms 33 Conclusion 35Chapter 3. Overcoming Disbursement Hurdles 37 Dissatisfaction with a Slow Beginning 37 The Shortfall of High Expectations 38 Two Types of Constraints on Progress 39 Breakthroughs & Solutions 47 Net Effects on Disbursement 55
  7. 7. Chapter 4. Delivering Results: Modality of Fund Channeling and Performance 57 Generous External Support 57 Nearing the End the Reconstruction Phase 58 Different Fund Channeling Mechanisms 59 Conclusion 69Chapter 5. Achieving and Upholding Accountability 71 Getting to Trust 71 Mandatory Accountability 73 Value Added Accountability Systems 82 Conclusion 84Chapter 6. Maintaining Integrity Along the Road 87 A Single Incident, Deadly Consequences 87 Establishing Business Process Integrity 89 Personnel Integrity 91 Integrity Enforcement 92 Proactive Reporting on Integrity Allegations 95 Rigorous Integrity Review and Evaluation 96Chapter 7. Ending the Game and Leaving a Lasting Legacy 99 Strategic Choice: To Close or Extend BRR? 99 General Principles Applied 104 Handing Over Finished Projects 106 Transition of Unfinished Projects 111 Risk Management – Ensuring the Process Stayed Critically On Track 116 Conclusion & Achievements 118Notes 120Bibliography 123Glossary of Abbreviations 125Fact Sheet 129
  8. 8. FINANCE: The Seven Keys to Effective Aid Management x Introduction For a period of three days, beginning on December 27, 2004, the Indonesian flag was drawn to half mast, and a nation was in mourning. A national disaster was declared and the world watched in disbelief. An earthquake, followed by a series of tsunamis, struck the western-end of Indonesia, causing an unprecedented loss of life and the obliteration of whole communities. For those who survived, their homes, livelihoods, and prospects for the future were swept out to sea. The earthquake, one of the largest in recent history measuring 9.1 on the Richter scale, was the result of a convergence between two tectonic plates beneath the ocean floor. Although dormant for over 1,000 years, with the buildup of pressure caused by one plate slowly sliding under the other at an estimated rate of 50 mm per year, on December 26, 2004, these two tectonic plates ruptured along a 1,600 km length of what is known as the Sunda mega-thrust. The epicenter of this earthquake was located 250 km south-west of the Indonesian province Nanggroe Aceh Darussalam. Its rupture - a slippage of up to 10 meters, resulted in the ocean floor being (permanently) lifted and dropped, pushing the entire water column up and down, and generating a series of powerful waves. Tsunamis swept violently up to 6 km inland over the shorelines of Aceh and surrounding islands, beginning less than half-an-hour after the earthquake. A total of 126,741 lives were lost and, in the wake of the disaster, an additional 93,285 people declared missing. Some 500,000 survivors lost their homes, while as many as 750,000 people lost their livelihoods. In the private sector, which constituted 78 percent of the destruction wrought by the earthquake and tsunamis, up to 139,195 homes were destroyed or severely damaged, along with 73,869 ha of land with varying degrees of productivity. A total of 13,828 fishing
  9. 9. boats vanished, up to 27,593 ha of brackish fish ponds disappeared, and 104,500 small-to-medium businesses ceased to exist. In the public sector, 669 government buildings, 517health facilities, and hundreds of educational facilities were either destroyed or renderednon-functional. The loss to the environment included 16,775 ha of coastal forests andmangroves, and 29,175 ha of reefs. The loss and damage of these regions did not end there and, on March 28, 2005,another major earthquake measuring 8.7 on the Richter scale struck the nearby islands ofNias in the Indonesian province of North Sumatera. This second natural disaster resultedin the death of 979 people and the displacement of 47,055 survivors. The proximity of thisearthquake, a result also of two tectonic plates rupturing, slipping a length of 350 km, Introductiondirectly beneath the Simeulue and Nias islands, resulted in massive damage to the islands’infrastructure. The eyes of the world once again watched in disbelief as the devastation of these xiregions unfolded, and helping hands began arriving from all corners of the globe toassist in the rescue and relief operations. Individuals of every race, religion, culture andpolitical persuasion across each and every continent worldwide, along with governments,the private sector, non-government organizations and other national and internationalbodies, reacted in an unprecedented show of human concern and compassion. From the scale of the devastation wrought by both disasters, it was clear that it wouldnot be enough to simply replace the homes, schools, hospitals and other infrastructure.The rehabilitation and reconstruction program would need to embrace the rebuildingof the social structures that once thrived along the shores of Aceh and within thehinterlands of Nias. The trauma of losing friends, family and a means to support thosewho survived required that the recovery program focused not only on physical, but alsonon-physical, development, and on rebuilding an economy to a level that would ensure afirm foundation for future (re)development and growth. On April 16, 2005, the Government of Indonesia, through the issuance of GovernmentRegulation in Lieu of Law No. 2/2005, established the Agency for the Rehabilitation andReconstruction (Badan Rehabilitasi dan Rekonstruksi, BRR) to coordinate and jointlyimplement a community-driven recovery program for Aceh and Nias. BRR’s mandate wasto design policies, strategies and action plans, within an atmosphere of transparency andaccountability, and to implement them through effective leadership and coordination ofthe combined domestic and international effort to rebuild Aceh and Nias back better andsafer. The rehabilitation and reconstruction of Aceh and Nias have constituted a challengenot only for the people and Government of Indonesia but for the entire internationalcommunity. That this challenge was overcome successfully is reflected in theconclusions drawn in evaluations concerning the recovery program. In the final months
  10. 10. of the program, the World Bank among others concluded that the recovery was anFINANCE: The Seven Keys to Effective Aid Management unprecedented success story and a model for international partnership - outcomes which were realized through effective government leadership. The nation’s management of the recovery program gained the confidence of donors, both institutions and individuals, and through BRR’s anti-corruption policies and processes, the trust of the international community. And without the cooperation of the international community, the post-disaster situation in Aceh and Nias - the unparalleled devastation - could never have been reversed. In recording this humanitarian achievement, BRR has produced the BRR Book Series containing 15 volumes that detail the processes, challenges, solutions, achievements and lessons learned during the rehabilitation and reconstruction program in Aceh and Nias. It is hoped that these books will function to capture and preserve the experience of the xii recovery, and to establish guidelines for future disaster-recovery programs across the world. As its title suggests, this book, “The Seven Keys to Effective Aid Management”, focuses on the financial aspects of the rehabilitation and reconstruction program in Aceh and Nias. It is not unusual to see large sums of money pledged following a horrendous natural disaster, but it is unusual to see most of those pledges converted into real commitments. In the case of the Aceh and Nias disasters, a remarkable 93 percent of the total US$7.2 billion pledged was committed - a remarkable achievement for what was an unimaginable series of disasters.
  11. 11. 4-Year Achievement Rehabilitation and Reconstruction 635,384 people displaced 127,720 people killed and 93,285 missing 104,500 155,182small-medium enterprises (SME) destroyed laborers trained xiii 195,726 SMEs received assistance 139,195 140,304 houses destroyed permanent houses built 73,869 69,979 hectares of agricultural land destroyed hectares of agricultural land reclaimed 1,927 39,663 teachers killed teachers trained 13,828 7,109 fishing boats destroyed fishing boats built or provided 1,089 3,781 religious facilities destroyed religious facilities built or repaired 2,618 3,696 kilometers of road destroyed kilometers of road constructed 3,415 1,759 schools destroyed schools built 517 1,115 health facilities destroyed health facilities constructed 669 996 government buildings destroyed government buildings constructed 119 363 bridges destroyed birdges constructed 22 23 ports destroyed ports constructed 8 13 airports or airstrips destroyed airports or airstrips constructed
  12. 12. Chapter 1. Turning Pledges into CommitmentTurning Pledgesinto Commitment 1Unprecedented Generosity The unprecedented scale of the December 2004 tsunami disaster catalyzed animmediate response of massive proportions, both from within Indonesia and from theinternational community. By January 2005, in the weeks following the Consultative Groupfor Indonesia (CGI) meeting, US$7.2 billion had been pledged to support reconstruction.1 The US$7.2 billion pledged to Aceh was nearly evenly sourced from the Government ofIndonesia (GOI), bilateral and multilateral donors, and Non-Governmental Organizations(NGOs). Communities in and outside of Indonesia contributed additional funds. This was Different with those in otherunprecedented: typically, multilateral donors provide the leading contribution of aid, places, the Multi Donor Fundsurpassing amounts committed by national authorities and NGOs. In the case of Aceh (MDF) for Aceh-Nias is anand Nias however, ‘good donorship’ was not limited to multilateral donors. effective mechanism due to the Co-chairmanship scheme. This response was not the largest ever; but it was notable for the number of countries The scheme places the hostthat contributed and the speed at which pledges were made. One hundred thirty-three government as a decisioncountries provided assistance to the humanitarian mission (Masyrafah and McKeon 2008), maker level to the donor groupmany of these whom had never contributed to a disaster before. It is also notable that a so that alignment between donor projects and government priorities is achieved. Photo: BRR/Arif Ariadi
  13. 13. substantial portion of this aid was generated at the grass-roots level. The New York TimesFINANCE: The Seven Keys to Effective Aid Management reported on November 27, 2008, that grass-roots donations for victims of the tsunami broke all fund-raising records for an international humanitarian crisis. Private giving to NGOs and the United Nations (UN) exceeded pledges by the Organization for Economic Cooperation and Development’s Development Assistance Committee (OECD DAC) members, traditionally the world’s major givers. The onslaught of money was so robust that it made the historically generous response to the earthquake in Pakistan--US$73.4 million, according to data collected by the Center on Philanthropy at Indiana University- -seem practically miserly. Few international agencies halted fundraising upon reaching targets and as a result, NGOs, including organizations such as the Red Cross, wound up with overall more funds than donor administrations or multilateral organizations (TEC 2006). Indonesia was also given welcome breathing room 2 The economic landscape: by the Paris Club of wealthy creditor nations, who decided to let it and other affected countries suspend Standard and Poor’s Rating debt repayments. Some criticized the decision to grant Indonesia a debt moratorium since at the time the Standard and Poor’s (S&P) is a leading provider of financial tsunami hit, Indonesia had a sound macro-economic market intelligence. The company publishes financial environment. On a national scale, interest rates, research and analysis on credit ratings, indices, investment currency exchange and inflation levels were stable. research, risk evaluation and data. Indonesia had become a lower middle income country Just days before the tsunami hit, S&P raised its rating with an improving fiscal economy.2 Nonetheless, the on Indonesia’s creditworthiness, saying that the improving debt moratorium provided welcome breathing room.3 economy had raised the government revenue and foreign reserves, reduced the country’s debt burden and improved Clearly there was no lack of willingness to help. its ability to weather shocks. However, while the international climate was favorable, S&P raised Indonesia’s long-term foreign currency past experience has shown that goodwill does not sovereign credit rating from B to B-plus to reflect the necessarily translate into concrete commitment. Often country’s successful elections and positive economic outlook, and increased its currency rating from B-plus to BB. donors hold back from making good on pledges due These upgrades reflected ongoing progress in Indonesia’s to a lack of confidence that the money will be well- macro-economic stability, steadfast fiscal management, used. It was crucial to instill donor trust and confidence declining debt and favorable external liquidity, despite in order for Indonesia to receive the funds. a widening state budget deficit. In addition, successful legislative and presidential elections in 2004 sent a message The following sections examine in detail the process of stability that resulted in a better flow of investment. by which donors were encouraged to make good on their pledges, a process which holds potentially useful lessons for future disaster management and fundraising exercises.
  14. 14. External Factors that Influenced the Scope andShape of Giving Chapter 1. Turning Pledges into Commitment Before discussing the process by which pledges were turned into commitments, it isworth noting that the following external factors distinctly influenced the size, scope andform of donations. These types of factors may profoundly alter the donor landscape infuture disaster management scenarios and should be taken into account. (i) Donor “Freshness” At the time of the the tsunami, the world had not witnessed a natural disaster ofcomparable proportions for some time. Only one natural disaster had attracted significantinternational attention in the previous year, the December 2003 earthquake in Bam, Iran,with 28,000 casualties. Thus, the tsunami was not in competition for aid with 3other disasters, nor were givers suffering from “donor fatigue.” (Note thatin the year following the tsunami, calamities in New Orleans, Kashmir, and Why was the public soYogyakarta, put at risk the transference of pledges for Aceh and Nias due to generous?commitment elsewhere.) What impelled the public to give so (ii) Timing and Media Coverage generously? A study by the Tsunami Evaluation Coalition (2006) that The international scope of the disaster, holiday timing and the resulting looked at funding from the Spanishintensity of media coverage played a meaningful role in catalyzing pledges. public listed the following reasons for private giving, in order of decreasing First, during this time there was a lack of other news stories to be covered, importance:resulting in repetitive and intense media coverage. The fact that several • 64.2% always donate afterinternational celebrities were involved also contributed to the media such an eventfascination. • 28.7% the media coverage Second, by 2004, technological advances—most prominently, the internet- • 17.3% Christmas spirit-were sufficiently well-developed and widespread to provide real-time, widely • 8.7% presence of touristsavailable updates on the devastation. Information on the climbing death tolland the damage was available at one’s fingertips. The tsunami was the most • 2.4% familiarity with the affected areareported disaster to date (TEC 2006). Third, the international context of the disaster was a key factor. The tsunami (Source: TEC Funding Response/hit several countries and as mentioned above, involved a number of well- General Public/Spain Report, 2006)known celebrities, creating a universal dimension to the disaster. The tsunamikilled people in 14 countries from 40 different nationalities. Reinforced bydramatic media images of the destruction, people everywhere felt a sense ofconnection and sympathy with the victims.
  15. 15. (iii) Recent Shifts in the International Aid LandscapeFINANCE: The Seven Keys to Effective Aid Management As it happened, the receipt of funds by the Government of Indonesia (GOI) was positively affected by fortuitous recent developments on the international aid landscape. Trends in global aid had showed for some time what appeared to be an aggregate shift away from low-income countries toward middle-income countries (Harford, Hadjimichael, and Klein 2004), of which Indonesia was one. Then, just three months after the tsunami, the Paris Declaration on Aid Effectiveness officially laid the foundation for development aid to become more influenced by national authorities. This paradigm shift resulted from an examination of the political and institutional incentives that shape the way in which aid is both delivered and received. Leading up to the Paris Declaration, discussion in development circles had been focused on developing an international aid architecture that would more suitably 4 address a broad range of emerging issues. Debates had revolved around the role of aid in: encouraging better development, reducing the need for emergency relief, reducing the risk of recurrent natural disasters, and supporting fragile states. They also focused on the role of new aid donors in Asia and Europe. In general, the prevailing sentiment was that Paris Declaration on Aid aid delivery should be recast to be more responsive to the frequent emergence of both Effectiveness natural and man-made disasters, and that aid should also serve the agenda of the national The Paris Declaration on Aid Effectiveness of March 2005 was an authority. Such was the background of the international commitment by over one hundred country Ministers, Paris Declaration. Heads of Agencies and other Senior Officials to harmonize and align aid management, to help developing-country governments formulate The resulting aid architecture was thus and implement their own national development plans, using their propitiously conducive to a government- own national priorities, planning and implementation systems. The driven reconstruction program. It enabled five principles of the Paris Declaration are as follows: various breakthroughs and arrangements • Ownership-Patner countries exercise effective leadership over to take place, as the GOI moved into the their development policies and strategies, and coordinate reconstruction phase of the recovery. development actions. • Alignment-Donors base their overall support on partner countries’ national development strategies, institutions and procedures. The Creation of BRR • Harmonization-Donor actions are more harmonized, Taking ownership of the reconstruction, transparent and collectively effective. the GOI took the cardinal step of establishing • Managing for Results-Managing and implementing aid in a BRR. This new agency had the dual role way that focuses on the desired results and uses information of implementing its own projects while to improve decision-making. coordinating the works of others. Donors • Mutual Accountability-Donors and partners are accountable appreciated the GOI’s move to create a for development results. separate government agency expressly to
  16. 16. handle the reconstruction, and were reassured by its dual-role function. The Economistreported on May 26, 2005, that BRR was “a promising new government body like no other:i.e., clean, efficient, well managed and results-oriented.” Chapter 1. Turning Pledges into Commitment The GOI made the crucial choice of appointing Kuntoro Mangkusubroto to head theagency. Kuntoro had a strong reputation and was known for his incorruptibility. As Headof BRR Executing Agency, Kuntoro’s leadership was inspiring. Early on, his openness toconsidering unconventional solutions to get things done as opposed to a ‘business asusual approach’ set a tone of urgency which trickled down through management levels. His appointment greatly contributed to the agency’s success. Under Kuntoro, BRR waseventually able to pressure the Central Government to change the way the latter worked(see Chapter 3). “Kuntoro Mangkusubroto had operated an open relief effort despite Indonesia’shistory of secrecy and corruption at all levels of government,” stated former United States 5President Bill Clinton during a visit to Aceh almost a year after the tsunami as reported inthe New York Times on December 1, 2005. Four years later, Pieter Smidt, Head of the Asian Development Bank (ADB)’s ExtendedMission in Sumatra, remarked in a similar vein, “It’s difficult to imagine that anybody elsecould have done a better job.”4The Challenge Ahead The challenge in front of BRR was enormous. As mentioned earlier, the first task was totranslate pledges into real commitments. To do so, it was imperative to demonstrate BRR’sown commitment to the task. Commitment can be defined as a function of credibility and involvement, whereascredibility rests on two key elements: trustworthiness and capability. BRR had todemonstrate that it was trustworthy, that it had the necessary capability, and that it wasinvolved. This would be fundamental to BRR’s success. The sheer amount of funds committed represented a huge responsibility. Pledges madeto Aceh and Nias were so great that they surpassed the minimum required to rebuild topre-tsunami levels by US$1.3 billion (Figure 1.1). This supplemental funding provided acushion for the rapidly increasing inflation rate and an opportunity to “build back better”beyond replacing the damaged goods and services to propel the long closed-off provinceand isolated islands to a development phase in step with the rest of the nation. But such aprocess would have to be carefully managed and came fraught with liability. Making things more difficult, a decades-long conflict between the central governmentand local separatist movements had been ongoing in the Aceh disaster area. To build trustand execute in a former conflict zone would not be easy.
  17. 17. Meanwhile, BRR had to contend with Indonesia’s reputation for corruption. Out of theFINANCE: The Seven Keys to Effective Aid Management 145 countries ranked by Transparency International’s 2004 Corruption Perception Index, Indonesia came in at 133rd with a dismal score of 2.0 out of 10. Among the countries in the Asia-Pacific region, Indonesia ranked second worst just above Myanmar. The New York Times reported in January 2005 that as the United States and other world governments prepared to channel hundreds of millions of aid dollars to Aceh, Indonesia’s perceived culture of corruption had emerged as a major concern. BRR as the GOI’s agent in reconstruction had to find a way to overcome these hurdles and convince donors of the country’s credibility and commitment. Faced with these factors, the full enormity of BRR’s task became apparent. Despite all the challenges, in the case of Aceh and Nias, 93 percent of these pledges were eventually converted into real funding, a historically high conversion rate and a most 6 impressive achievement. How was the GOI, through the BRR, able to achieve this? Building Credibility Among the infant agency’s first tasks was to convince its international partners that BRR was able to competently lead and manage the funding. Faced with limited resources, a short timeframe and high expectations, BRR appealed to established Figure 1.1 - Aceh and Nias Reconstruction Needs, Pledges and Commitment Total Fund USD Billion 93% 0.5 USD 2.4B NGO USD 2.2B Donor Agencies 4.9 7.1 7.2 6.7 USD 2.1B Government of Indonesia Damage Build Back Pledged Committed Assessment
  18. 18. world-class organizations for assistance. Management consultants McKinsey & Companywere engaged early in the process on a pro-bono basis to prepare organizationalstrategy, while ADB and Ernst & Young agreed to assist the set-up of a strong fiduciary Chapter 1. Turning Pledges into Commitmentmanagement structure. BRR’s credibility received an enormous boost from its associationwith these organizations, helping engender international confidence in the agency’sability to deliver. It was equally important to gain credibility in the eyes of the Acehnese. Threedecades of conflict between the local Free Aceh Movement (GAM) and the CentralGovernment had created lasting distrust. BRR was seen as an extension of the Jakarta-based administration, instead of as an organization championing local interests. Tocounter these perceptions and establish itself as a trustworthy body in Aceh, BRR tookthe unprecedented decision of decentralizing its operations to the regional level andlocating its headquarters in Banda Aceh. It was the first ministerial-level agency to do so 7in Aceh. BRR also welcomed locals, including ex-GAM members into its ranks. These stepseffectively altered the perception of BRR, casting it as a non-Jakarta-centric governmentbody. Finally, BRR had to overcome the aforementioned perception of corruption associatedwith Indonesia. BRR had to prove from the onset that it was committed to preventing anymisuse of funds provided by the Indonesian government and donors worldwide. Anysign of irregularities could decrease future funding. The agency established an autonomous, Anti-Corruption Unit (SAK­­­­) to guard againstmisconduct in BRR itself, as well as in any reconstruction projects,becoming the first Indonesian government agency to do so. TheAnti-Corruption Unit strategy was to simultaneously educateagainst, prevent and monitor for corruption, with an eye towards A Silver Liningensuring clean and transparent reconstruction. With the support In the midst of the destruction, the tsunamiof the Corruption Eradication Commission (KPK­), which opened brought an unexpected legacy of peace to the conflicted region of Aceh. Disputes quietedits first branch office with full enforcement authority in Aceh, BRR in the face of shared disaster, and the long-also established an Integrity Pact to fight systemic corruption. closed society opened up to a flood of foreignThrough the Anti-Corruption Unit and the Corruption Eradication aid workers. Against this landscape, PresidentComission regional offices, BRR was able to take a strong stance Yudhoyono’s attempts at reconciliation unexpectedly worked in Aceh’s favor and inspiredagainst corruption. Chapter 6 elaborates more on the corruption trust.risk and the steps BRR took to mitigate that risk. Altogether, the combination of these steps--including the Source: Sengupta and Mydans, The New York Times, December 25, 2005appointment of a credible leader in the person of Kuntoro--reassured the international commitment that their willingness togive was matched by a real commitment to reconstruction. Wheninterests are aligned, trust is a reasonable response (Hurley 2006),and so it was with the donors. In this way BRR built the foundations of credibility.
  19. 19. Maintaining Engagement with Donors andFINANCE: The Seven Keys to Effective Aid Management Implementing Agencies It was crucial to establish effective collaboration platforms between BRR and donors, and among the donors themselves. The perceived fairness of a process is as important to participants as the outcome itself, and a key principle in creating this fair process is engagement, or involving individuals in the decisions that affect them (Kim and Mauborgne 1997). Bearing this in mind, BRR was careful to design model financing mechanisms that would maintain donors’ governance in the process, while also maximizing outputs and minimizing transaction costs. Several ways of channeling donations were established by BRR, each catering to a different group of players. The focus was to provide flexibility, create a hassle-free process 8 insofar as possible and accommodate the varied needs of donors. It was up to the donors to pick what financing channel they wanted to use. The overall goal was to create mechanisms that encouraged and enabled funding flows from donors. By doing so, the GOI and BRR demonstrated their respect for the reconstruction players’ needs and their concern that players remain engaged. This was particularly important given the vast amounts pledged to Aceh and Nias and the large number of players involved, with 992 organizations hailing from over 50 countries, which had made the process of converting pledges into commitments challenging from the start. The Multi-Donor Fund For better coordination of the reconstruction, the GOI and donors agreed to form the Multi-Donor Fund (MDF), pooling donor contributions with the World Bank serving as trustee. MDFs were conceived as the main body for coordination and donor harmonization in line with the best-practice approaches established by the Paris Declaration on Aid Effectiveness. According to a Scanteam report (2007), MDFs can reduce transaction costs and mitigate fiduciary and political exposure in high-risk, post-crisis environments.5 MDFs allow for the harmonization of donors by ensuring that all procedures follow regulations set by the administrator. Thus, MDFs simplify the tasks of the national authority in coordinating planning, implementation, reporting and quality assurance. Given the high-risk environment stemming from the political conditions in Aceh, the MDF was considered a good risk management vehicle taking into consideration the World Bank’s tested ability and capacity to work in such an environment. The Aceh-Nias MDF was co-chaired by BRR as the GOI representative, the World Bank as trustee, and the European Commission as the largest donor. As of December 2008, the MDF had a total of US$692 million in pledges from 15 different donors as illustrated in Table 1.1.
  20. 20. Figure 1.2 offers a summary of donor preferences between the three financing options.As shown, players chose the financing mechanism that they deemed best suited for theimplementation of their projects. Chapter 1. Turning Pledges into Commitment For the GOI and donors alike, the MDF provided an opportunity to simplifycoordination, information flow, administrative and access costs associated with thereconstruction effort. For donors, moreover, the MDF created a forum for their voices.Certain major donors, such as the United States and Germany, still chose to channel amajority of their resources outside the MDF (i.e., directly to their own projects or to otherimplementing agencies), typically because they wished their agenda not be moderatedwithin the MDF. Nonetheless these donors continued to participate in the MDF, regardlessof the amounts they channeledthrough the MDF itself. In any one Table 1.1 - MDF Fund Pledges and Contributions as of December 2008MDF Steering Committee meeting, Amount * of Total Pledges Donor 975 percent of the top contributors (US$ million) %were present. In this way, the MDF European Commission 272.62 39%helped harmonize donor programs Netherlands 171.60 25%and facilitate alignment with United Kingdom – DFID 73.71 11%country priorities. Canada 25.55 3.7%Three Financing Options World Bank 25.00 3.6% Sweden 20.72 3.0% Three types of financingoptions were established by BRR Norway 19.57 2.8%in recognition of the considerable Denmark 18.03 2.6%diversity among donors in Aceh Germany 13.93 2.0%and Nias: 1) on-budget/on-treasury, Belgium 11.05 1.6%2) on-budget/off-treasury, and 3) Finland 10.13 1.5%off-budget/off-treasury. No one Asian Development Bank 10.00 1.4%mechanism is superior; each has USA 10.00 1.4%benefits and drawbacks (more inChapter 4). New Zealand 8.80 1.3% Ireland 1.20 0.2%(a) On-budget/on-treasury – In line with strengthening Total Contribution: 691.92 100% government partnership and * Based on World Bank foreign exchange rates as of December 2008. Source: MDF 2009 involvement in the recovery process, many traditional bilateral and multilateral donors channeled their funds through the government budget by signing a grant or loan agreement. Under the on-budget/on-treasury mechanism, donors use the GOI budgetary system and regulations to disburse their funds. The advantage is that the projects are then accountable under the national budgetary system. However, the regular budgetary process was initially slow in responding to reconstruction needs.
  21. 21. Figure 1.2 Reconstruction Fund Channeling MechanismsFINANCE: The Seven Keys to Effective Aid Management 10 Definition of (b) On-budget/off-treasury – Some donors who traditionally worked with the government preferred that the disbursement of on- and off-budget, their funds be done outside the Special Purpose Treasury Office, or KPPN-K. These donors, such as the Governments of Germany and and on- and off- Japan, had identified certain sectors and projects to be carried out by their own implementing agencies. In this scheme, while donor treasury projects were accounted for in the national budgetary system, BRR lacked the full authority to influence the implementation process. (c) Off-budget/off-treasury – NGOs including UN agencies On-budget funds refer to donor funds channeled through the government budget, typically have implementation mechanisms on the ground. In these while off-budget funds refer to funds channeled cases, BRR allowed them to finance their projects using the off- directly to the project. The on-budget project budget/off-treasury mechanism. The upside is a potentially swifter expenditures are registered into the GOI national implementation process since agencies can bypass the long national budget through the Issuance of Spending Authority (DIPA). budgetary system process. However, these agencies are not then legally accountable to the GOI, making it difficult to monitor and evaluate their contributions.
  22. 22. When choosing among Table 1.2 - Types of Rreconstruction Players and the Implications of Their Preferred Funding Mechanismsthese mechanisms, the donors,mainly bilateral ones, weighed Fund Type Source of Funding Implications mechanism Chapter 1. Turning Pledges into Commitmentadvantages and challenges to Funds were channeledassess which would work best in accordance towith their strategy, capabilities, the prevailing GOI Indonesian taxpayersand their own development Government of regulations created and Paris Club debt On-budget Indonesia for normal conditions.agendas. Most players wound moratorium Bureaucratic systemsup maintaining the fund with lengthy timechanneling mechanisms that frames impeded swift implementation.they were accustomed to. Aid given by theTable 1.2 outlines the types of government of one Aid is often tied toplayers, their sources of funding, country directly to specific sectors or to Bilateral Donor another. Many dedicated On- and off-budgetpreferred method of channeling governmental aid specific implementing 11funds, and implications attached agencies to serve donor agencies dispense country’s their choice of funding bilateral aid, for example AusAID.mechanism. Aid is given from the Ultimately, it was hoped government of a country to an international Streamlined transactionthat BRR could coordinate and agency, such as the cost of multiplemonitor all efforts. However, World Bank or the Asian actors. Accountability Multilateral Donor On- and off-budgetby being flexible with the Development Bank, to multiple nations which in turn distributes created proceduresfinancing mechanisms, donors the aid. Multilateral that limit speed andwere more comfortable as aid agencies are flexibility.they could channel their funds usually governed by the contributing countries.using processes they felt safe NGOs, have played anwith. These mechanisms also increasingly activeallowed them to implement role in distributing Faster speed of aidusing their own procedures aid from donations distribution but limited NGO from the private* and Off-budget control as actorsand implementation systems, public sectors. Many function independentlyif deemed appropriate. NGOs conduct their of government systems. own internationalConsequently donors, NGOs humanitarian work.and other delivery partners * The term ‘private’ covers both the general public and private entities,were able to maintain their such as companies, religious groups or associations–i.e., all non-governance in a way that they institutional donors.were accustomed to.Working with Implementing Agencies BRR did not stop at creating a collaborative platform for donors. It also developednew or used existing coordination platforms to facilitate coordination with majorimplementing partners.
  23. 23. The United Nations Office of the Recovery Coordinator (UNORC) was one such platform.FINANCE: The Seven Keys to Effective Aid Management UNORC is a facility of the United Nations System whose main role was to coordinate UN and aid agencies and also provide strategic policy advice to BRR and the local government. Another such platform was the International Federation of the Red Cross and Red Crescent Societies (IFRC). Similar to the function of UNORC to UN agencies, the IFRC worked to assist the coordination of the Red Cross and Red Crescent Societies active in the reconstruction efforts in Aceh and Nias. Seventeen out of 27 Red Cross Organizations joined the umbrella organization of the IRFC, helping to streamline coordination efforts. BRR further made use of the powers bestowed by a Presidential decree to provide an alternative funding channel to on-budget fund flows and the MDF. This alternative funding channel was called the Recovery of Aceh and Nias Trust Fund (RANTF). The 12 RANTF funding facility was designed to provide flexibility of execution, with an emphasis on speedy response to program needs. It was meant to accommodate non-traditional and smaller donors, both public and private. The Trust Fund included both ‘open’ funds to be allocated by BRR to the most pressing program needs, and ‘closed’ funds earmarked by donors for particular projects. BRR had oversight of program and fund allocation, while the RANTF was responsible for all aspects of financial management including accounting and fund administration services. A procurement agent was engaged to manage the delivery of services to ensure the transparent process of project activities. Conclusion and Observations The generous response to the disaster demonstrated the willingness of the international community to give and showcased the best of the human spirit. The GOI welcomed the outpouring of sympathy of all forms, opening its doors to contributions around the world regardless of origin. This decision was not without drawbacks as the proliferation of agencies hampered coordination and increased the fragmentation of aid. The bulk of the funding came from the Indonesia taxpayers, and in return GOI was given leverage to determine the allocation of funds. However, the large amount of private funding channeled through NGOs and the Red Cross did impact the allocation of funds (more in Chapter 2). Early on BRR expended considerable effort and time on both large and small donors as well as on non-traditional donor countries, in order to get a rounded perspective on donor concerns. This was a labor-intensive and time-consuming task. In hindsight, the amount of time and energy spent with donors should have been more balanced to increase efficacy overall. Good relationships with donors large and small must be maintained. The ideal balance is to be inclusive yet strategic in allocating time and resources to cater to donors.
  24. 24. Over the course of reconstruction, BRR had to ensure commitments were maintainedand if possible, increased. To do this, BRR provided concrete data that the beneficiarieswere benefiting from donor contributions. These periodic reports demonstrated progress Chapter 1. Turning Pledges into Commitmentbeing made on the ground. This transparency encouraged some donors to give morethan they initially pledged. Furthermore, some donors transferred pledges from othertsunami struck areas to Aceh and Nias. A key takeaway was that significant funds should be channeled through the nationalgovernment budget. Bringing donor funds on-budget can help coordination and effectiveimplementation of the recovery strategy (TEC 2006). As the Paris Declaration stated, itis essential for partner countries to exercise leadership over their development policiesand strategies, although the role of aid remains contested on the absorptive capacity ofrecipient governments.6 Strong ownership of the arrangements for the flow of funds, andeffective coordination among donors in line with a unified recovery plan and budget, 13is essential. These conclusions are backed by the experiences of countries which haveexperienced significant aid inflows; such experiences have generally underscored theimportance of country ownership, coordination, and of reinforcements to governmentalbudget and accounting systems. By contrast, experiences with off-budget support have been more complex becauseeach project has its own accounting, financial management, and procurementarrangements, resulting in fragmented recovery efforts. As NGOsoperate outside of government authority, there is also a lack offormal political accountability that in the case of Aceh, arguablyaffected pledges: the lack of political accountability meant The DIPA Processthat pledges not turning into commitment were more a factor The project preparation process forof concern for the NGOs than for the traditional bilateral and government begins with the development of a ministry’s annual work-plan andmultilateral donors. budget (RKA-KL), which is informed by the In Indonesia’s case, a government management structure Annual Government Work Plan (RKP) and budgetary ceilings. Implementing agencieswas in place that could review bilateral programs, co-financed submit draft budget plans to the Ministrymultilateral programs and MDF decisions for consistency with of Finance for review and approval. WithIndonesia’s own recovery plan and evolving priorities (TEC 2006). an approved budget plan in hand, theDespite this fact, the GOI elected not to impose an overarching implementing agency then prepares a budget Issuance of Spending Authoritygovernment-led management and structure. It also decided not to (DIPA), against which all disbursementscompel donors to deliver funds through the government budget. are to be authorized and processedInstead, it created BRR as a separate agency to take ownership of through the Office of State Services andthe overall program and assist coordination. Treasury (KPPN). On-budget projects may be authorized and processed through the BRR’s role at the helm of reconstruction did not come easily. It KPPN. On-treasury refers to disbursementsfirst had to earn trust and credibility from donors, partners and through the Directorate General ofthe community. Steps such as the establishment of the Anti- Treasury, or KPPN-K, office in Aceh.Corruption Unit and the Selection of a respected leader helped
  25. 25. create trust. Meanwhile, BRR hired consultants with respected industry credentials tobolster the agency’s experience. Their experience substituted for the organization’s own,establishing a foundation of credibility. Chapter 1. Turning Pledges into Commitment Cognizant that donors and NGOs have their own reconstruction objectives, theirown procedures and, at times, their own implementing agencies, BRR established threedifferent fund channeling mechanisms for donors to choose from. BRR acknowledgedthe various needs of donors and implementing partners, facilitated donor engagementin the financial process, and provided comfort to donors who were able to pick theoption they felt most secure with. Donors were also able to weigh the strategicadvantages and disadvantages of each option. The formation of MDF and RANTF asfacilitating instruments for coordination further demonstrated the GOI’s commitmentto, and appreciation of, the international communitys reconstruction efforts. The sumtotal of these steps fostered an environment that was conducive to channeling aid and 15implementing reconstruction projects. In retrospect, BRR’s success and the overall effectiveness of the steps and processesdescribed in establishing credibility can perhaps best be judged by the unprecedentedamount of pledges made good. Eddy Purwanto, Chief Operating Officer, in discussion with JICA representatives during a field visit to a proposed Final Waste site. Photo: BRR/Arif Ariadi
  26. 26. Chapter 2. Matching Allocations with Real NeedsMatching Allocationswith Real Needs 17Large Scale Damageand Large Scale Response One thing was clear from the rush of goodwill: Indonesia was not alone inrehabilitating and reconstructing its shattered parts. The outpouring of generosity fromcitizens around the world brought a large number of NGOs, agencies and institutionsinto the tsunami-affected areas. This high level of commitment demonstrated a universalspirit to answer the call of humanity. The challenging task ahead of the BRR was evident. Lives must be rebuilt, communitiesprotected, local economies revived, and the massive inflow of relief, rehabilitation andreconstruction funds must be managed with transparency and accountability to providemodernized civil administration and infrastructure. Adding to the complexity of this taskwas the coordination of a large number of actors and a high volume of funds that were The Saman Dance is a traditional Acehnese dance that symbolizesoff-budget and outside official development assistance flows. a harmonious relationship This chapter explores how in developing a recovery strategy, BRR sought a balance among humans. In a high-pacedbetween responding rapidly to the needs of the people and coordinating the numerous and bold rythm, the dancersinternational actors. As time revealed the changing needs on the ground, BRR responded form an impressive coherence of movement. Photo: BRR/Arif Ariadiaccordingly to the dynamics of the environment.