##1.b. pkrmmp phase 2 ntb workshop hibah & policy draft 2 tyt-geoff 1


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##1.b. pkrmmp phase 2 ntb workshop hibah & policy draft 2 tyt-geoff 1

  1. 1. Review of funding to the regions and a potential Roads Hibah funding mechanism<br />Tyrone Toole<br />Geoff Dixon<br />Aberor Dachwan<br />
  2. 2. Background<br />Budget votes by some local governments substantially underfund their own planning targets for road stability<br />This tendency to ‘plan-inconsistent’ budget preparation reflects a combination of <br />volatile year to year movements in each PLGs finance envelope (attributable to year on year variations in National Government grants), combined with <br />PLG prioritisation (in recent years) of spending on education and health ahead of roads, leaving spending on road maintenance as a ‘swing factor’ in the budget<br />In this environment there is a case for looking at specific purpose grants for roads to increase and smooth spending on road maintenance<br />
  3. 3. Output based aid (OBA)<br />How does OBA differ from a traditional grant?<br />Example of the World Bank Local Government and Decentralisation project<br /><ul><li> OBA through the GoI DAK system
  4. 4. Uses existing national AND local budget systems</li></ul>Example of the INDII Water Program<br /><ul><li>to connect dwellings of low income families to reticulated water
  5. 5. operates through local budget systems but NOT the national budget system</li></ul>. <br />Commitment to<br /><ul><li> Paris Declaration
  6. 6. Jakarta Commitment</li></li></ul><li>Using output based assistance (OBA)<br />Used by the World Bank and the INDII Water Program (WP)<br />The IndII WP provides general budget support to participant regional governments<br />Disbursement conditional on completion of pre-agreed set of water connection<br />Grant based on the estimated cost of contracted outputs to the PLG, less a PLG co-payment<br />Recipient must pre-finance each connection<br />Grant paid following physical verification<br /><ul><li>Jakarta Commitment is met
  7. 7. General Budget Support for the regional government
  8. 8. Development partner assistance based on results </li></ul>This presentation looks at applying similar OBA principles to grants for maintaining roads<br />
  9. 9. How could this work for a road maintenance grant?<br />Separate O-B agreement between MoF and each regional (provincial or local) government<br />Example<br /><ul><li>100 kms of local roads receive an agreed routine maintenance package, at a cost of RP per km
  10. 10. total grant based on technical and cost parameters
  11. 11. payment after completion and physically verification
  12. 12. cost of works pre-financed by the regional government
  13. 13. requires specific road links to be identified in the grant agreement</li></ul>Compliance ensured by verification of the output, <br />…..but no specific requirement that the recipient government spend the grant on the road sector <br />The grant takes the form of General Budget Support (GBS)<br />
  14. 14. Key issues<br />Ensuring additionality<br />2. What is the evidence for ability to spend a grant?<br />3. Should the grant agreement include capacity building?<br />
  15. 15. Issue 1. Problem of additionality<br />What if the regional government responds to the grant by diverting some of its own road maintenance to other uses?<br />Possible solution:<br />Local governments are required by MoHA regulation to develop forward estimates of their budget spending (ie local MTEFs)<br /><ul><li> the grant agreement could require the regional government to develop and implement forward estimates of spending on routine maintenance over the next three years
  16. 16. this would be as a pre-condition for grant disbursement
  17. 17. disbursement of the grant would be conditional on the local government implementing its non-grant maintenance program as well as the outputs agreed under the grant agreement
  18. 18. this would however complicate the process of physical verification</li></li></ul><li>Issue 2. Ability of the local government to spend road Hibah funds?<br />There is a widespread view that local governments are already generously funded through the national grant system<br /><ul><li> since 2006 Indonesian district governments have not been short of funds due to generous transfers from the national budget
  19. 19. they have built substantial reserves
  20. 20. however, they it is argued that they lack the capacity to spend them efficiently and effectively due to late passage of the local budget, poor operational planning to spend budget allocations, slow procurement processes and leakages</li></ul>Lewis and Oosterman state "The major constraints to increasing capital spending at the sub-national level are not related to a dearth of finance, but regulatory rigidities in budget preparation and implementation and, most importantly, a lack of capacity to plan, design and implement investment projects."<br />
  21. 21. Issue 2 continued<br />Under the GoI’s generous grant system many local governments have accumulated substantial reserves and arguably don’t need more grants from development partners<br />If this is true prior conditions for a grant agreement with a local government should include the absence of large reserves and the absence of any underspends of annual budget votes which reflect weaknesses in budget execution<br />However, review work for the preparation of a Roads Hibah suggests a different story<br />
  22. 22. Issue 3 Should the grant agreement include capacity building?<br />Capacity building may be needed for two reasons<br /><ul><li> to achieve the best strategy for road maintenance
  23. 23. to ensure that budget funds for road maintenance are fully spent
  24. 24. an underspend suggests that a Roads Hibah disbursed through the local budget may not fully deliver the contracted road maintenance package due to underspends of the budget
  25. 25. the reasons for the budget underspends need to be reviewed to determine whether they were one off or whether a grant agreement should also include a capacity building package to help ensure that budget votes are fully spent</li></ul>For most local governments road maintenance budgets are fully spent but the allocations themselves were too small to implement their road maintenance plans<br /><ul><li>for these local governments a parallel capacity building program may not be needed</li></li></ul><li>Thank You<br />