CORRUPTION PREVENTION IN VILLAGE FINANCE

CORRUPTION PREVENTION IN VILLAGE FINANCE GOVERNANCE Mohammad Novrizal and Owen Podger October 2014 This paper was presented at the International Conference on Eradicating Corruption: an Inter-Disciplinary Perspective sponsored by Universitas Andalas, Utrecht University, KPK, UNODC and TII, in Padang in June 2014. Selected papers from that conference were to be published in a book by Utrecht University, with this paper as one chapter of it. Contained here is the manuscript finalised in October 2014. In January 2017 the authors were informed that Utrecht had reneged on its plans to publish. The authors regret that it has not yet formally contributed to the debate on the law on villages.

ABSTRACT The setting of villages in Indonesia has entered a new phase with the passage of the new Village Law at the beginning of 2014. Amongst other things, each village shall receive funds from the government through state and regional budgets in an amount far greater than under previous legislation. This paper argues that this may lead to rampant corruption. The law leaves regulation of financial management of these funds to a government regulation. An omnibus government regulation to implement the law was passed in early June 2014, and a second government regulation specifically regulating national funds for villages was passed in mid-August 2014. A list of regulations of ministers, regents and mayors on various aspects of financial management are still to be prepared. The government is also rushing to train villagers throughout Indonesia in the new village financial management system to manage the large funding increase next year. The further implementing regulations must include a complete and clear package of stipulations so as to avoid corruption, and the training should be so comprehensive, that the greater amount of funds that is to be received by villages can be used properly to serve the best interests of village communities. The authors of this chapter will argue that even if the implementing regulations can be prepared and the village personnel trained, the law still creates a situation which is not based on principles of good public management, and is thus at risk of generating wide-spread corruption. The law fails to create appropriate relationships between government and villages, provides funds to villages without consideration of the needs or capabilities of villages, establishes a framework for planning development in villages with inconsistent links to higher level planning, fails to establish checks and balances that reflect the checks and balances in government, and leaves most regulation of instruments of allocation of funds, accounting and accountability to ministerial and regional regulations, thus it relies on implementing legislation to prevent financial abuse that may cause losses to the state and society. This paper takes the position that several provisions that are fundamental to financial management should be regulated in a law. The authors propose that the law should be amended at the earliest opportunity to clarify the position of villages in relation to government, link funding to needs and capabilities, simplify the development planning system within the unitary state, create appropriate checks and balances in village government, and establishes professional financial management, and a rigorous system of accountability. Keywords: village finance, government finance, checks and balances, corruption.

CORRUPTION PREVENTION IN VILLAGE FINANCE GOVERNANCE Mohammad Novrizal and Owen Podger

1. Introduction: the risk of corruption under the new law on villages The term village (desa) in Indonesia does not just refer to a rural settlement with rural land used around it, but, broader than that, also to the community and the whole territory that it possesses.1 It is the smallest formal and legal institution that has its own territory and community where its citizens live together and organize their common needs and interests. The Indonesian constitution uses the term government (pemerintah) to refer to the national government and regional governments of provinces and of regencies and municipalities within provinces.2 It makes no reference to either villages or village government. At the beginning of 2014, Indonesia adopted a new law regulating villages (the Village Law) replacing old legislation. 3 The Village Law espouses to put the villages – numbering approximately seventy three thousand across Indonesia 4 – on a correct position, 5 but by mid2014, there are still significant matters that are not yet clearly regulated, and need to be considered in implementing regulations if the intention to encourage rapid improvement in the people’s welfare is to be achieved. The Village Law provides for greater funding for villages than the previous legislation in ways detailed below. In order to implement the law, Indonesian President Susilo Bambang Yudhoyono

1

Pusat Bahasa, Kamus Besar Bahasa Indonesia [Great Dictionary of Indonesian], (Jakarta: Gramedia Pustaka Utama, 2008). In article 1 of the Village Law, village is defined as a single community within certain borders that is authorized to regulate and manage government affairs, the interests of local community based on community initiatives, the right of the origin and/or traditional rights recognized and respected in the system of the government of the Unitary State of the Republic of Indonesia.

2

The constitution refers to Undang-Undang Dasar 1945 as amended in 1999 – 2002. Article 18 of the constitution regulates regional governments. According to this article, Indonesia is divided into autonomous regional governments of provinces, and every province is divided into autonomous governments of regencies and municipalities or cities. Currently, in Indonesia, there are 34 provinces, 412 regencies and 93 municipalities. Jakarta, as special province for capital city, is divided into 5 municipalities and one regency that are not autonomous regions. See .

3

UU no 6 tahun 2014 tentang Desa [law no 6 of 2014 on villages], replacing articles 200 – 216 UU no 32 tahun 2004 tentang Pemerintahan Daerah the (current) regional governance law 2004).

4

The data of Ditjen Kependukan dan Catan Sipil Kemendagri (Directorate General of Demography and Civil Registration of the Ministry of Interior) of 2012 indicates that there were 72.944 villages.

5

See general elucidation of the Village Law.

2


has adopted two government regulations (PPs). 6 In early June 2014, the President signed an omnibus implementing government regulation, i.e. PP no 43 of 2014 on the implementation of the Village Law (PP43)7 that includes articles on regional finance. Two months later, a second PP, i.e. PP no 60 of 2014 on the village fund financed by the national budget (PP60), has also been adopted in mid-August,8 indicating an intention for the greater funds to become available to villages in 2015. Yet, many ministerial and regional regulations must be prepared for the law to be implementable. This chapter questions whether the policy of giving vastly greater funding to villages has been complemented with adequate instruments for implementation, particularly in terms of financial governance to assure that these funds will be spent wisely (that is, efficiently, effectively and with integrity) for the benefit of the community. In this study, we, the authors of this chapter, will present their research on the following questions: does the Village Law and its implementing government regulations include provisions that will ensure that (i) funds are allocated according to needs of the village, (ii) funds are allocated according to the capacity of village government to perform, and manage their finances, (iii) planning of village development and regional development will be complementary, (iv) appropriate checks and balances are in place at policy and operational levels, and (v) proper audits are carried out and followed up, and if not, what other measures can be taken? 9 Based on our professional experience with national policy on villages and the issue of corruption, we assess that without assurances to establish such good governance, there will be a high risk of abuse of the funds.10

6

According to UU no 12 tahun 2011 tentang Pembentukan Peraturan Perundang-undangan [law no 12 of 2011 concerning the making of laws and regulations], a government regulation (peraturan pemerintah or PP) is legislation set by the president to implement laws

7

. Peraturan Pemerintah no 43 tahun 2014 tentang Peraturan Pelaksanaan Undang-undang nomor 6 tahun 2014 tentang Desa [government regulation no 43 of 2014 on the implementation of the Village Law] is an omnibus regulation covering the many articles in the Village Law that are to be further regulated by government regulation.

8

Peraturan Pemerintah no 60 tahun 2014 tentang Dana Desa yang Bersumber dari Anggaran Pendapatan dan Belanja Negara [government regulation on the village fund financed by the national budget]

9

These provisions are drawn from UU no 17 tahun 2003 tentang Keuangan Negara (the financial management law 2003) which states in article 2 that public finance is to be managed efficiently, economically, effectively, transparently and responsibly, with consideration of fairness and appropriateness and from the Village Law which states at article 4 that the purpose of regulating villages includes creating professional, efficient, effective, open and accountable village government, and assuring the public has improved services, greater resilience, improved economy, as the subject of development.

10

This experience includes a year when both authors were advisers to the senate on village governance. Senators from every province were concerned that village governments have the highest standards of integrity in both good governance and avoiding corruption.

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The authors have tested the adequacy of instruments for implementing the Village Law by comparing provisions in the law together with its implementing regulations and other prevailing laws and regulation, with modern public management principles, particularly in terms of finance. A review of legislation of other non-government institutions that receive public funding has also been made to compare the adequacy of provisions for assuring proper utilisation of public money. This paper starts with a review of the government’s approach to village financial management, and then makes an analysis of the potentials for corruption. The main reasons for the problem are identified. The proposed solutions are to establish a rigorous system of checks and balances, consistent with those in government, and the establishment of a ‘villages commission.’ This chapter then compares how financial management is regulated in the Village Law with two other laws on non-government institutions that receive public funds, and finds comparative problems, before setting out its conclusions.

2. Government’s Approach to Financial Management 2.1. Provisions for financial management in the Village Law and its implementing government regulations According to article 19 of the Village Law, villages have authority over traditional affairs, over affairs “of a village scale”, and over affairs assigned by the central, provincial, or regency/municipality government. Article 34 of the government regulation on villages provides a minimum list of affairs ‘of a village scale’ which the minister of home affairs may add to. 11 Article 22 of the Village Law provides that assignment of authority from central, provincial, or regency/municipality government must be accompanied by financial support. Article 90 of PP43 requires that such financial support from national agencies be channelled through a regency/municipality agency. In the chapter on financial management of Village Law, articles 71 and 72 define village finance and sources of income (which are analysed further below), and articles 73 and 74 require budgets to be prepared and agreed to by the Village Consultative Council (BPD12 hereinafter called the village council) in consultation with the community. Priority in expenditure is to be placed on development needs in accordance with priorities of the regency/municipality, province and

11

The list is fishing boat landings, village markets, public bathing facilities, irrigation channels, environmental management of settlements, community health, arts and study posts, local libraries, village paths and roads, and village water supply. The definitive list of traditional and village-scale affairs is to be prepared for each regency/municipality in a regulation of the regent/mayor (article 37 of PP43).

12

BPD stands for Badan Permusyawaratan Desa.

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national government. Article 69 requires the draft village budget to be evaluated by the regent/mayor before being passed, and obliges the village to improve the budget accordingly. Article 101 of PP43 clarifies the timing of the evaluation, requiring the draft budget be agreed in October each year and submitted within three days to the regent/mayor for the evaluation. Article 75 gives authority to the head of the village to manage finances, enabling him to delegate some of that authority to the village bureaucracy. Two articles limit the amount that the village government can spend on administrative overheads. Article 81 specifies the source and maximum amount of remuneration of the village head and staff (referred to below) and article 100 requires the village government to spend no more than 30% of its budget on such remuneration, remuneration of village council members, payments made as incentives to villages to contribute their labour, and for village government operations. Articles 76 and 77 define village assets, and require them to be properly registered and managed for the benefit of the village community. Assets may be procured from regional government budgets or village budget, or provided as gifts, and allows government assets in villages that are of ‘village scale’ to be transferred to the village. Village assets previously taken over by regional government are to be returned to villages. 13 The management of assets is to be discussed with the village council, based on arrangements for managing village assets that are regulated in a government regulation.14 The PP43 adds little more about asset management, other than requiring ministerial regulations on managing assets (article 110) and further regulation on managing assets (article 113).15 The chapter in the Village Law on village finance does not include any references to financial statements let alone certified and audited accounts. However, article 27 requires the village head to submit a report to the regent/mayor on village government performance at the end of each financial year, with a written explanation of village government performance presented to the community. PP43 requires the village government to supply semester budget realisation reports to the regent/mayor by the end of each July and January.

13

This presumably is included to rectify a past loophole in policy. Under New Order’s laws and under UU no 22 tahun 1999 tentang Pemerintahan Daerah (the regional governance law 1999) many village governments were converted into local government units known as kelurahan and their assets transferred to the regency/municipal government. Under the 2004 regional governance law villages could be restored but where they were restored not all assets were restored.

14

The wording of article 77 paragraph (3) of the Village Law does not comply with legal drafting regulations. The implication is that regulation of assets will be included in the government regulation on village finance rather than a separate government regulation.

15

The elucidation of article 113 of PP43 provides the scope of the ministerial regulation as planning, procurement, utilisation, benefit, security maintenance, annulment, transfer, accounting, reporting, evaluation, guidance and supervision.

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The chapter on village development has a paragraph on oversight. Article 82 stipulates that the village community is entitled to monitor the implementation of the village development, and the village government is obliged to inform the community on development plans and budgets and their implementation in community consultations held at least once a year, where the community are given the opportunity to provide feedback. And in the chapter of the Village Law on guidance and supervision: a. Article 112 stipulates that the central government, provincial government and regency/municipality government foster and supervise the village, and following articles detail the function of each level of government; b. Amongst the functions of provincial government in guidance and supervision, article 114 point h stipulates that the provincial government shall provide guidance and oversight in the determination of the draft budget of regencies/municipalities in their financing of villages; c. Amongst the functions of the regency/municipal government article 115 point d stipulates that the regency/municipal government evaluate and supervise village regulations; article 115 point e stipulates that they supervise village financial management and the utilisation of village assets; and article 115 point n stipulates they give sanctions to heads of villages for any transgressions, in accordance with legislation. This latter is the only reference to sanctions in the law. PP43 adds little more about oversight, other than a list in article 154 of functions of the heads of regency/municipality districts (through camat) 16 in providing guidance and supervision. PP60 includes special provisions for oversight of the national village fund, as discussed below. These do provide assurance that this source of funds should be under some control. 2.2. Plans for capacity building. At a national meeting of heads of villages with the president of Indonesia in March 2014, the director general for guiding local finance in the ministry of home affairs stated that the government would conduct training in financial management for all village governments during 2014, by implication so that they will be able to manage the additional funds in 2015.17

16

Camat is the territorial administrator who is positioned directly under a regent/mayor. Article 126 of the regional governance law 2004 regulates that the territory of a regency or a city is divided into several kecamatan.

17

‘Desa Dinilai Belum Siap Kelola Dana Miliaran’ [villages considered not yet ready to manage billions of rupiah] Koran Tempo 27 March 2014 p12.. This is equivalent to almost 4 billion Euro.

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3. Assessment: this is not enough, the problem is in the law These measures are not considered adequate for assuring that additional funds will be free from corruption. The government’s achievement in preparing the two government regulations on villages is a rare exception to the government’s poor track record in preparing implementing regulations.18 But for the Village Law to be applied in villages the government must yet produce ministerial regulations responding to 20 references in the government regulation, and to oversee the preparation of a series of regulations by regents/mayors. It is also doubted that the government has the capacity to conduct the training it has proposed. Assuming that the government regulation has been prepared by the end of May and the training curriculum can be developed in the month of June, the training on trainers can commence in July. Assuming just two months are required to train trainers in 34 provinces, and over 500 regencies/municipalities, training of villagers can begin in September. In two months, a two day course in village government finance can be taught to 3 persons in each village in the whole country by November leaving two months to prepare 2015 budgets. But if villagers need three months of training in order to deserve some form of certification, for them to be held accountable for financial management then they may be ready by 2020.19 Nevertheless, even if the government can prepare the best regulation under the Village Law, and conduct excellent training, the risk of corruption is still high, because – as will be demonstrated below – the lack of provisions in this law to ensure good governance. 3. Potential for Corruption The following sections analyse the potentials for corruption in the Village Law.

18

The state secretariat and the ministry of law and human rights are responsible for overseeing the preparation of government regulations, but there is apparently no overall register or system for monitoring of progress of drafting. The authors’ (unpublished) research into implementation preparation of implementing regulations prepared while consultants to the Indonesian senate showed that in a broad sample of laws dating back over 20 years less than half the implementing regulations had been passed. See TBTPK 2012, Usulan tentang reviu peraturan perundang-undangan (recommendations for the review of legislation in Memberi Inspirasi Bagi Pembaharu Birokrasi, Kompilasi Catatan dan Memo dari Tim Bantuan Tata Kelola Pemerintahan 2011-2012 [giving inspiration to bureaucratic reformers, a compendium of notes and memos from the Governance Assistance Team 2011-2012].

19

Besides, it is also necessary to bear in mind that this year, the attention of Indonesian political atmosphere is being directed to the activities of presidential election and the current government will end its term in October 2014. Therefore, the succession of government could be a big obstacle in implementing such innovative and expensive development program.

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3.1. Potentially too much money Article 72 of the Village Law defines sources of village income, and PP43 provides further details. These are summarized in the following tables with the authors’ estimates of the amount of funds where this is possible, and comments on each. 3.1.1. Original village income Source

Amount

Purpose

Variables and method of allocation

From village businesses, use of assets, self-effort and community participation and contributions, mutual assistance, etcetera.

Highly variable

Unregulated

Unregulated

Authors’ comment: Will the people still be willing to pay village taxes20 and levies when there are such large funds provided by government, or will additional funding lead to a drop in own revenues and a greater dependence on external funding? 3.1.2. Village fund (dana desa) Source

Amount

Purpose

From national budget, channelled through regency/municipality budget

Total no less than 10% of fiscal balance funds. Based on 2014 data this would average at least Rp 585 million per village, channelling on average about Rp 887 billion through each regency/municipality budget.

From Village Law: Article 72(2): to make effective village-based programs equally and fairly’; Elucidation to article 72(1): ‘to improve welfare and evenly distribute development’; Elucidation to article 72(2) “for running of government, development, community empowerment and social affairs.’

Variables and method of allocation Variables: Village population, level of poverty, village area, and ‘geographic difficulty. Method: to be defined in a government regulation not yet prepared.

Authors’ comments: The purpose of this fund is mentioned in different terms in three different places within the law. The one in the body of the law refers to village-based programs, an issue discussed further in the discussion on village functions below. The other two references are in the introduction and the elucidation. PP60 regulates the national village fund, covering how it is formulated, channelled, reported and overseen, and how defaults in its use are dealt with. It provides a formula for calculating how much is granted to each province and each regency/municipality in it (article 11), and for each village in each regency/municipality (article 12), based on national statistical data. Allocations to

20

Villages do not have formal taxing authority, though village governments levy community contributions for a range of services.

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the regency/municipal level and on-funding to the village level are based 30% on population, 20% on physical area, and 50% on the proportion of population living in poverty. Without being given an example it is hard to determine the impact of these, but certainly it would indicate that villages will have a major incentive to assure that its poor citizens are registered. An additional variable is included for geographic difficulty. The variable for the regency/municipality allocation is based national statistical data, thus should not be prone to abuse. The variables for village allocations within a regency/municipality are availability of basic services, condition of infrastructure and transportation, and communications from the village to the regency/municipality. The regent/mayor determines how the allocation is to be made in a regulation that is submitted to the minister and governor for oversight. The ability to manipulate data, or to use the allocation process as a source of corruption has yet to be seen. PP60 regulates how the minister of home affairs may set priorities (article and sectoral ministers and regents/mayors may set guidelines on the use of these funds, indicating they must be firstly expended on national priorities before used for anything else. Article 25 requires villages to report each semester to the regency/municipality government on the use of the national village fund,21 and for the regent/mayor to make a consolidated report each year to the governor and various ministers. Article 26 requires the central government to oversee and evaluate the allocation, channelling and use of the national funds, with particular attention to the use of unspent funds at the end of the year. It also regulates the treatment of noncompliance. Thus it would appear that the use of the national funds on their own is relatively well regulated. The impact of this degree of regulation on the remaining allocations has yet to be determined. 3.1.3. Regency/municipality tax revenues and levees Source Regency/municipality budget

Amount Total no less than 10% of regency/municipality income from local taxes and levees Based on 2013 data this would average Rp 65 million per village.

Purpose Not regulated

Variables and method of allocation  60% shared pro-rata  40% based on revenues collected the village

Authors’ comment: This third source of village revenue is relatively small, but includes potential problems. Sixty percent is divided equally among villages. This will be of concern in cities where there a few villages, as there is no provision that the funds can be allocated to 21

Villages receive 40% of the village fund in the first semester and 60% in the second semester (article 16 of PP60), thus the second semester report will cover most of the expenditure.

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communities where there are no villages. It will also be a concern where there is a large disparity between small and large villages, as smaller villages will get a disproportional amount per capita. Forty percent is allocated based on where revenues are collected. This has potential data collection problems, and deserves further investigation. 3.1.4. Village Fund Allocation (alokasi dana desa) Source Regency/municipality budget

Amount Total no less than 10% of regency/municipality income from fiscal balance funds received from national government excluding 22 special allocations. Based on 2013 data, this would average Rp 460 million per village, taking on average almost Rp 70 billion from the average regency/municipality budget.

Purpose Sole source of remuneration of the village head and village government staff (article 81(1) of PP43. Other purposes are not regulated.

Variables and method of allocation  Remuneration of the village head and village government staff.  Village population, level of poverty, village area, and ‘geographic difficulty

Authors’ comment: The village fund allocation is not new; it was introduced in a government regulation in 2005 but was slow to be adopted.23 The amount in the national guideline was 10% of the regency/municipal budget, after the payment of regency/municipality staff costs. As the mean proportion of budget in 2013 spent on staff was 46%24, and fiscal balance funds were 83%, the village fund allocation is expected on average to be over twice as much as it was under the old regulation.

22

Most funding from national government to regions is allocated as ‘fiscal balance funds’ one of which is called dana alokasi khusus (special allocation fund). Special allocations are currently about 10% of the fiscal balance fund.

23

Peraturan Pemerintah.no 72 tahun 2005 tentang Desa [government regulation no 72 of 2005 on villages] at article 68 (1)c. issues in its implementation are discussed positively at http://bpdcidenok.blogspot.com/2013/07/faq-seputar-alokasi-dana-desa-add.html, accessed on 4 July 2013.

24

Calculated by the authors from ministry of home affairs data on 2013 regional budgets. See accessed on 10 April 2014.

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3.1.5. Financial assistance Source

Amount

Purpose

Provincial budget and/or regency/municipality budget

Not regulated Assistance is not required to be paid in instalments as with the village fund and the village fund allocation (implementing government regulation article 99)

Implementing government regulation  A general allocation for helping villages to carry out regional affairs in villages  A special allocation for speeding up village development and empowering the community (article 98(4))

Variables and method of allocation Not regulated

Authors’ comment: The fifth source of funding is ‘financial assistance’ from the budget of province and the budget of regency/municipality, and in both cases it is divided into a general and special allocation. Thus it is in fact four sources of finance. The term for ‘assistance’ (bantuan) implies that the funding is to help villages to carry out their functions, but in fact the general allocation is to help the village carry out regional functions, making it overlap entirely with funding for assigned functions mentioned in section 3.1.8 below. The authors consider that the government should not use the term ‘assistance’ to mean payments by government for carrying out government’s own functions. The special purpose assistance is for assisting village development and community empowerment. This purpose is the same as in one of the elucidations for the national village fund except that it does not include social affairs. The reason for precluding special assistance on matters that would include welfare is not explained. 3.1.6. Non-binding grants and donations from third parties Source Any source

Amount Whatever granted or donated

Purpose


Not to be binding

Authors’ comment: The sixth source is non-binding grants and donations from third parties. Many villages have benefitted from corporate social responsibility funds, and international humanitarian support. According to the authors, this is a source of funds that is likely to reduce when grantees discover the wealth of villages from new government sources.

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But there is a real risk that this source of revenue may become the object of abuse. The budget committee of the Indonesian house of representatives (DPR)25 used ‘social welfare assistance’ (bansos)26 as a political slush fund and when this source of slush fund was removed, replaced it with special grants to regional government, as widely reported in the media. A blanket provision such as this risks becoming a means for money politics at each level of government. 3.1.7. Other legitimate revenues The seventh and final source in article 72 of the Village Law is other legitimate village revenues, including income from joint enterprises and assistance from enterprises located in the village. 3.1.8. Funds for assigned functions Source National government, provincial government and/or regency/municipality government

Amount Sufficient to cover village costs

Purpose


Any part of any function of national, provincial or regency/municipality government that may be assigned to villages to execute. May include organising village governance, implementing of village development, guidance of village society (pembinaan kemasyarakatan), and community empowerment.

Article 22 of the Village Law provides that national government and regional government (province and regency/municipality) may assign parts of their authority to village government, and such assignment must be accompanied by financial support. We could anticipate that the articles in the chapter of the Village Law on finance would place emphasis on funding for specific assignments of authority, but this is not the case. There is no reference in the chapter on finance to the provision on article 22. The government regulation only partially rectifies this situation, by indicating national assistance is to be included in the budget of the national agency concerned, and channelled through a work unit of the regency/municipality government.27 This would indicate an intention of the national government to assign work and channel funds for it outside of regency/municipality and village budgets.

25

DPR stands for Dewan Perwakilan Rakyat.

26

Bansos stands for bantuan sosial .

27

Article 90 (4) of PP43.

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There is no mention of how funds are channelled from provincial government or regency/municipality government. As noted in section 3.1.5, this source of funds overlaps with general assistance funding from provinces and regency/municipality. 3.1.9. Comment on total village funds in the regency/municipality budget The total of funds from the three sources from regency/municipality government is no less than 7.5% of their budget. 28 In a study by KINERJA, 29 on average 44% of regency/municipality budgets in their sample was spent on regency/municipality education and health services, leaving 56% of the budget for all other uses.30 Cutting over 7.5% of this remainder to allocate to villages will prove to be quite difficult. 31 For the 46% of regions that spent more than 50% of their budget on personnel in 2013, providing the cuts may prove to be impossible.32 3.2. Overlaps and gaps in functions 3.2.1. Overlaps In the regional governance law 2004, affairs of government are divided between three levels of governments (national, provincial and regency/municipality) according to “scale”, 33 without a separate division between affairs of a regency/municipality scale and a village scale. The items on the list of village scale affairs in the elucidation of article 113 of the government regulation on villages remain regency/municipal affairs in subdistricts where there are no villages.34 Article 79(6) states that national or regional programs of a ‘local village scale’ are to be coordinated with or delegated to the village, indicating that all levels of government may have village-scale functions.

28

At least 7% from share of fiscal balance fund (calculated from ministry of home affairs data on 2013 regional budgets), at least 0.5% from local taxes and revenues, and an unspecified amount in assistance.

29

KINERJA is a USAID-funded program to promote performance improvement in selected regencies and municipalities. The word kinerja in Indonesian language means performance.

30

KINERJA 2012,Laporan Analisis Anggaran Daerah 2011, Temuan-temuan Hasil Studi Pengelolaan Anggaran di 20 Kabupaten/Kota Partisipan Program KINERJA [report on the analysis of regional budgets in 2011, findings on the study of budget management in 20 regencies/municipalities participating in KINERJA].

31

Unless of course the regency/municipality transferred education and health services to villages. Neither current sectoral legislation would allow this, nor would teachers and doctors willingly relinquish their civil service status.

32

Calculated by the authors from ministry of home affairs data on 2013 regional budgets.

33

UU no 32 tahun 2004 tentang Pemerintahan Daerah (the regional governance law 2004) chapter III.

34

Under previous regional government laws, villages in cities and towns were converted to subdistricts of regency/municipal government.

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Furthermore article 72(2) which regulates national funding to villages refers to ‘village-based programs’ which in the elucidation of article 72(1) point b are to be channelled through regency/municipal budgets and used for running of government, development, community empowerment and social affairs. It is not clear here whether the village-based programs are in budget terms national programs, regency/municipality programs, or village programs. That clarity comes in article 119 of PP43 where villages may propose village development needs to regency/municipality government and to provincial and national government; the elucidation explains this applies where provincial and national government have allocated funds, and particularly where national government agencies have ‘village-based programs’, making it clear the intention of central government to have national programs based in villages. Separately a whole section of the government regulation regulates ‘rural development’ programs which would appear to be different to either ‘village scale’ programs or ‘village based’ programs. 35 The authors anticipate that the determination of who is responsible for which affairs may become a political commodity, with the coordination instruments in the government regulation becoming the vehicle for such bargaining.36 Villages may not wish to take responsibility for affairs which are funded by the regency/municipality government in subdistricts, regency/municipality governments may wish to add to the list of village scale affairs to reduce budget responsibilities, and agencies at all levels of government may continue to carry out village scale programs. It can also create overlapping functions between village and local government. On the one hand rich village governments may create activities, which they think that they can do themselves efficiently and quickly. Meanwhile the activities may have actually been covered in budget of the local government.37 On the other hand, the local government may budget and contract items that, when they are to be implemented, are found to have been covered already by a village initiative. 3.2.2. A gap in functions regulated: non-formal justice One aspect of regulation of functions that has not yet received due consideration is traditional justice. A 2008 report from the World Bank states that: The vast majority of legal grievances are in fact resolved out of court through communitybased mechanisms. The sole experience of justice for most citizens is not a courthouse, but 35

The Indonesian term for rural is perdesaan which by construction means ‘related to villages’.

36

Article 122 of the implementing government regulation of the Village Law requires government agencies to inform villages when they have programs so they can be included in village plans in order to avoid overlapping, and the village government is to append such programs to their budget.

37

This is equivalent to a problem found in special allocation funds, where the local government prepares its budget before it knows the special allocation allowances. The authors believe Indonesia’s supreme audit institution is currently examining the potential overlapping of budget allocations here.

14


village meeting halls, customary law councils and mediation practiced by religious leaders and village heads.38 The report concluded that ‘the absence of a clear interface between informal and formal justice, particularly with respect to jurisdictional authority, creates legal ambiguity and opens up scope for rent-seeking and manipulation of disputes.’39 It recommended the establishment of a regional regulatory framework, without mentioning any legal instrument to do so, in order that regency/municipality governments would pass regulations covering respective jurisdiction of informal and formal justice systems, representation, basic procedures, mechanisms for resolving trans-communal disputes, appeals and sanctions. This opinion is based on an understanding that regional governments possess the authority to regulate the structure of non-state justice mechanisms, while the supreme court has the jurisdiction to establish regulations and policies that facilitate formal and informal engagement.40 The authors believe that this understanding is incorrect and the recommendation unwise. The authors can find nothing in the regional governance law which could be construed as a basis for regulating informal justice, whereas it clearly states that judicial affairs are not transferred to regions, and the constitutions states that institutions with functions related to justice are to be regulated by laws.41 The authors believe it would be unwise for regency/municipality governments to regulate and oversee non-formal justice carried out by villages, particularly when the regency/municipality government itself can be seen to have a vested interest in disputes that are most prone to corruption, such as land disputes. 3.3. Relationship between funding and function 3.3.1. Budget restrictions on village administration The implementing government regulation PP43 restricts funding for village administration in two ways. The first is that the proportion of the budget that can be spent on administration is

38

World Bank Indonesia Social Development Unit Justice for the Poor Program 2008, Forging the Middle Ground: Engaging Non-State Justice in Indonesia p iii.

39

Ibid p 67

40

Ibid p 72

41

Article 24 (3) of the constitution, and article 10(3) of UU no 32 tahun 2004 tentang Pemerintahan Daerah (the regional governance law 2004) which states that judicial affairs (yustisi) belong to the national government and its elucidation includes in the scope of judicial affairs the creation of courts and appointment of judges, which are clearly not government affairs. Despite this irregularity it would seem the intention of the law is that issues of justice are not intended to be regulated by regions.

15


limited to a maximum of 30%.42 This is to cover remuneration of the head of village and his staff, village operations, allowances and expenses of the village council, and incentive pay for volunteers who are heads of neighbourhoods.43 The authors are unable to assess whether this one-proportion-fits-all approach will promote good village management, but suspect that where villages cannot manage their affairs with this restriction, they will seek ways around it. The second way is that the remuneration of the village head and village government staff is to be paid from the village fund allocation from regency/municipality government (as mentioned in section 3.1.4 above) with a limit to the proportion of the allocation that can be spent on remuneration, depending on the amount of allocation. 44 The implementing government regulation also restricts the remuneration of the village head and secretary as follows:  The secretary must be paid no less than 70% of the pay of the village head.  Village staff must be paid no less than half the pay of the village head.45 These restrictions have significant impacts on the capacity of the village government, and create dysfunctional incentives, as can be seen in the accompanying figure and the following explanation. The figure shows the total remuneration of village head and staff allowed for different amounts of village fund allocation. Where a village receives a village fund allocation below Rp 500 million, 60% of this can be spent on remuneration of the village head and staff. Above Rp 500 million, this drops to 50%, then above Rp 700 million to 40%, then above Rp 900 million to 30%. This is shown by a solid line in the figure. The authors have added a series of horizontal dotted lines, representing estimates of the number of staff that a typical village size might employ based on the assumption that staff earns the national average minimum wage. 46 These provide the basis for the following comments on different points on the graph:

42

Article 100 of PP43.

43

Rukun tetangga (small scale neighbourhoods of up to around 100 households) and rukun warga (neighbourhoods made up of three to six or seven rukun tetangga). Neighbourhood heads help coordinate neighbourhood services programs and act as liaison between the neighbourhood and government agencies

44

Article 81 of the implementing government regulation.

45

Ibid.

46

The average minimum wage of Rp 1,463,825 was calculated from minimum wages of each province for 2014, taken from http://www.bps.go.id/tab_sub/view.php?kat=2&tabel=1&daftar=1&id_subyek=19¬ab=13 accessed on 26 June 2014.

16


(1) Villages with village fund allocation of Rp 200 million can afford to pay three staff the minimum average wage. (2) Villages with an average village fund allocation of Rp 460 million can afford to pay 12 staff.47 (3) When villages meet the threshold of Rp 500 million village fund allocation, their capacity to remunerate staff immediately drops. (4) The same situation occurs when the amount of allocation received by a village crosses the threshold of Rp 700 million. (5) The capacity of a village to pay remuneration is the same when it receives Rp 900 million as for a village with half the allocation. The authors conclude that the amount allowed by the regulation to pay for village heads and staff are not related to a logical concept of work load or productivity. There is a risk that villages will strive to falsify data in order to circumvent these requirements.

47

Average based on 2013 data is taken from the table in section 3.1.4

17


3.3.2. No match between funds and other functions There is great variation in the condition of villages across Indonesia, and their opportunities and needs for development also vary greatly. Villages may have declining population due to lack of economic potential or may have population growth of over 10% per annum due to a high potential to provide economic benefit to newcomers. Villages may have well-established infrastructure, or almost none; and villages may be prone to environmental degradation or be fertile and well-irrigated. Villages may be spread over large areas of low density or be so dense they need particular attention to issues of sanitation. They may have a vibrant cultural heritage, or cultural diversity, or be void of any significant cultural activity. It appears to the authors that the greatly increased funds to villages mentioned in section 3.1 above are provided without reference to needs, except as may be included in national priorities, ministerial guidelines or regency/municipality guidelines, and without reference to capacity except for the restrictions on funding operations discussed in the previous section. This condition may result in large unspent balances in villages that have more money than they need, or can spend, or can conceive of how to spend wisely. It may also be that other villages have pressing needs and not enough resources unless they can lobby for the many sources of additional funds that can be allocated from almost any agency in three levels of government. Considering the varied conditions of villages, any funds received by the villages that are not based on their needs and capability open up opportunities for waste and corruption, unless there is good governance and integrated planning systems. For example, village government may create programs that are not needed by the villagers just in order to spend all amount of the budget provided, or programs can easily be duplicated at the regency/municipality government level. Thus, funds can be used for inappropriate uses and both village organisers and regional government officials can 'play' with their excessive budget for their personal or group benefit.48 3.4. Lack of obligation for competence, particularly in financial management There is no provision in the Village Law for a transition period for the money to flow to villages. By 2015, villages are expected to be able to plan and budget for work potentially worth on

48

This situation can be compared with the use of special autonomy funds in Papua, where the auditors are unable to determine where much of the funding has gone. See . For some other villages, this fix amount, which is 'mandatory quota', can also bring the opposite result, namely the shortage of the amount actually needed.

18


average about 20% of the budgets of their parent regency/municipality budget according to the author’s estimations.49 Providing funds to villages beyond their capability opens up opportunities for waste and corruption. For example, village government may budget works beyond their capacity to implement. Efforts to raise budget absorption rates can lead to wastage and abuse.50 What is meant by the capability of the village, among others, is the availability of qualified or competent human resources, who shall properly plan and perform the village management tasks, including its financial management. The availability of substantial amount of funds that are not overseen by qualified human resources may enable embezzlement to be hidden from view, or even to procedural violations that can be classified as corruption or embezzlement. The Village Law does not require competence in financial management in villages. It only stipulates that the authority over finance, namely the head of village, can delegate his/her power to one of village’s apparatus, without mentioning any competence that is required for a person in charge in financial management. Some minimal competence in financial knowledge is needed in order to assure that the person responsible for public funds can perform them and take responsibility for the security of village finances. 3.5. Lack of synchronisation in political and planning cycle due to diverging office terms The election of the head of village can be considered as a prototype of public elections and thus democracy in Indonesia. Long before legislative elections took place in Indonesia, heads of village in many regions were elected directly by the vote of its citizens. As the consequence of democratic election, a head of village shall have a period of tenure. Article 39 of the Village Law stipulates that the tenure of the head of the village is 6 years.51 This is different from the tenure of the head of district (governor, regent, and mayor), which is 5 years according to article 91 of the regional governance law. The following diagram illustrates a hypothetical village in a hypothetical regency where the next village head will be elected late 2016 (indicated by the symbol 1 ), eighteen months after the next regent, who is elected one year after the president in 2014. For reasons of good integration of planning, this is an excellent arrangement for regent and village head elections.

49

Until more specific information on formulae are made available, it is not possible to calculate for any one regency/municipality, nor the amount for any one village.

50

Anecdotal evidence in government shows the potential corruption of rushing expenditure. The best known case was when the house of representatives (DPR) approved additional infrastructure funds mid-year in 2010 which was the source of many cases of corruption.

51

The period of 6 years was introduced in the regional governance law 2004.

19


next regent

regent +2

regent +3

regent +4

regent +5

late 2046

village head +5

4

village head +6

2044 presidential election 2045 regent election

3

late 2040

village head +4


2

late 2034

village head +3



1

late 2028

village head +2


2014 presidential election 2015 regent election current regent

late 2022

next village head


late 2016 current village head

regent +6

regent +7

The policies of the regent can be based on the medium term plan of the incoming president, and village development policies can be based on the medium term planning of the next regent. But this fortuitous gap of eighteen months between election of regent and election of village head will not be repeated until 2046. The following village head will prepare his six year plan in early 2023, but in late 2025 (marked by the symbol 2) he may have to revise his plans to integrate with the plans of the regent elected earlier that year. The potential need for such changes in plans is not considered in the Village Law.52 In 2028 and 2034 (marked by the symbol 3), the village head will be elected in the run-up to national and regional elections, and may easily be influenced by party politics. An incumbent candidate could potentially take an advantage of elections of village heads by making political deals with candidates to influence the success of the incumbent candidacy to win the election. The new head of village prepares his six year plan, knowing that his plan may only be relevant for a year when a new regent/mayor can introduce contrary policies. Then in 2040, the village elections will be held before the new regent has endorsed his plans. This may give associates of the regent an unfair advantage in the elections by knowing what the new regent is planning, creating another potential source of political collusion. The regent elected in 2040 will be elected after the current village head, and will complete his term in office before the next village head is elected. Once in every 25 years, the regent/mayor will not oversee any village head elections or receive reports of accountability of outgoing village heads. This is bound to create friction in the development and implementation of new policies.

52

The authors do not argue for a massive effort for aligning plans of villages and regency/municipality, rather that over time with a matching policy and planning cycles there can be a reduction in points of conflict between village plans and regency/municipality plans, especially in land-use and efforts to assure economic development

20


Thus the difference of tenure will make it difficult to integrate the medium term planning of villages and regencies/municipalities. A matching problem will be created in proving the accountability of leaders. 3.6. Lack of checks and balances in village organisation The Village Law provides that the village organisation consists of several institutions that run the governance of village, amongst others the head of village, the village council and the village bureaucracy. Unfortunately this law does not sufficiently provide a system of checks and balances among them. For instance, in point 5 of the general elucidation, it is mentioned that the village council cannot dismiss the head of village, but no explanation contrariwise is given for what the village council or the public can do when the head of village is grossly negligent in his obligations. In articles 103 and 104 of the implementing government regulation, the village head submits a village budget report to the regent/mayor half way through the year and after closing of the books. There is no mention of providing financial reports to the village council. Without proper checks and balances, abuse of public management can go unchecked, whether by individuals or by collusion. Checks and balances that we consider appropriate are discussed later in this paper. 3.7. Lack of definition of appropriate audit Although there are a few provisions in the Village Law concerning general supervision, there is no direct regulation regarding financial reporting or audit as required in the state finance audit law,53 nor are there any special sanctions provided that take into account that village government officials do not hold public office and are not public servants that are covered by the provisions of the financial management laws. As mentioned above, PP43 requires that the village head submits budget reports to the regent/mayor, and PP60 that special reports be prepared for the national village fund. The unstated implication is that someone in the regency/municipality government will conduct an audit. According to the authors, supervision of the village budget by the regency/municipality government cannot be considered as an independent audit, considering the extent of regency/municipality government involvement in village affairs, and the potentials for conflict of interest.

53

UU no 15 tahun 2004 tentang Pemeriksaan Pengelolaan dan Tanggung Jawab Keuangan Negara [Law no 15 of 2004 on audit and accountability for state finance]

21


Without proper auditing defined in the Village Law, the supreme audit institution (BPK) 54 is limited to existing legislation in its methods of auditing every one of about 80,000 villages. 4. Reasons for the problem In section0 above, the authors demonstrated that the Village Law does not provide clarity in several aspects of how good governance principles should be implemented. This begins with the status given to villages within the constitutional structure of the state and its financial governance. This section 4 describes matters that are not regulated in the Village Law but that – in the view of the authors –should be included in the law to avoid lack of order in public services, development process. 4.1. Definition of village Villages and village government are not mentioned in the constitution,55 thus villages cannot be considered as smallest level of regions. Village government could only be considered as ‘government’ if it was part of regency/municipal government, with the implication that its paid employees would be made civil servants. The government has understandably not promoted this option, preferring to continue recognising villages as self-governing communities with the special rights and obligations that are set out in this Village Law. The first consideration in the Village Law to justify its existence is that villages have traditional rights based on the constitution to regulate and manage the interests of their communities, even though the constitution makes no explicit mention of villages. Article 1 paragraph (1) of the Village Law defines a village as an organisation that has authority to regulate and manage governmental affairs and local community interests autonomously.56 This is in line with the principle of recognition and the principle of subsidiarity adopted in the law.57 54

BPK stands for Badan Pemeriksa Keuangan, which is a state institution defined in the constitution to be governed by law and independent of other state institutions.

55

The constitution refers to Undang-Undang Dasar 1945 as amended in 1999 – 2002.

56

Article 1 paragraph (1) of the Village Law stipulates that ‘A village is a traditional village or a village or called by another name, hereinafter referred to as the Village, is a public entity that has the legal authority within boundaries to govern and manage the affairs of government, public interest of local community, based on initiatives, the origin of rights, and/or traditional rights recognized and respected in the system of government of the Republic of Indonesia’. The authority may be traditional or transferred from government.

57

Article 3 of the Village Law. The general elucidation explains that ‘recognition’ is the acknowledgement original traditional rights, and ‘subsidiarity’ is determining authority on a local scale and local decisionmaking for the benefit of the village community. The Oxford English Dictionary (1989) defines subsidiarity as the idea that a central authority should have a subsidiary function, performing only those tasks which cannot be performed effectively at a more immediate or local level.

22


But the existence of these principles in the law does not necessarily provide clarity on the position of the village as a non-government institution, because in many other articles of the law, the village is made sub-ordinate to both central and local government. One case is in the definition of affairs discussed above, where villages can be ‘assigned’ functions, giving the village no choice but to accept and implement the ‘assignments’ that are given, regardless whether or not the villagers want to or can carry them out, even if they are provided with considerable funds. Basically a village is a civil society institution that is independent from the administrative structure of the state, and exists in order to manage a wide range of common interests and needs of its citizens. The interests and needs include matters that are regarded as governmental and others that are communal. The governmental matters may include providing assistance to government in carrying out its functions,58 and villages should be free to decide whether they need, want or have the capacity to accept and carry out such assistance. Thus, the relationship between village and the government should be the same as a non-government organisation, that is, contractual, an equal partnership based on mutual agreement, without any party pressing or having the feeling of being more powerful than the other. A relationship between government and a non-government organisation cannot be hierarchical. If it was hierarchical, it would be part of government. This kind of relationship is not clearly mentioned in the Village Law.59 4.2. No link between funds, functions and capabilities The authors believe that needs and capabilities should be used as the basis for determining the amount of money given to the village, with an eye to the money being used as intended and used effectively and efficiently. The lack of consideration on the needs and capabilities leaves the funding from government at risk of waste, under-utilization, fraud and corruption. Given the varied conditions of so many villages along with the variety of activities undertaken by its citizens, it is not appropriate if the regulations on villages are made uniformed in terms of their affairs and the calculation of money that they should be entitled to receive from the government. Each village should be given the freedom to determine its own affairs, in consultation with government, according to the needs, resources and capabilities of its

58

This may include helping the running of elections. In many other areas, the boundary between village affair and government affair is vague. For example, only government builds roads, but villages also have roads. There is no legal basis for village rights in spatial planning, but every village adjudicates on land use.

59

Article 3 and the general elucidation of the Village Law mentions the principle of equivalence but they are not clearly defined, whether it is related to equal positions between the village and the government. The authors would prefer a condition of being classified as a village as the acceptance of reasonable assignments from government.

23


community. They should determine their annual budget according to their capabilities and needs, with government setting principles and standards to assure equity and efficiency. Villages that have the capability to manage affairs that are considered by law to be affairs of government 60 could manage them by means of a mutual agreement. In addition, the authors recommend that some affairs that are non-governmental could also be able to obtain financial assistance from the state, through central or regional budget, as long as the objective is to meet the needs of the villagers in general and in the interests of the state or region, such as cultural events, cultural education and efforts to increase food production and productivity. Then the channelling of the funds would also be on the same basis of agreement. The amount of money needed and able to be accounted for will vary greatly from one village to another, because the needs, resources potentials and capabilities of each are also different. Village affairs also should be able to be increased or decreased from year to year based on the conditions of each village, particularly planned improvement in capability and willingness, which are determined by many factors, such as the physical condition of the village development and the availability of human resources who will take care of them. 4.3. Lack of public managerialism The Village Law has a list of principles for village government. The principles on which villages are based (article 3) include the good civil behaviour, principles of mutual self-help, fraternalism, consensus, participation, and empowerment, and the principles on which village government is based (article 24) include management principles of orderly management (meaning regulated and controlled), openness (meaning informative and non-discriminatory), proportionality (meaning a balance between the rights and obligations of managing village affairs), professionalism (meaning competence and ethics), accountability (meaning all activities and their results are answerable to the villagers), and effectiveness and efficiency. But there is little on how these principles are applied, and the authors argue that there many aspects in the law that are working against these principles, such as: 1. Lack of incentives in the funding system or elsewhere to continually improve performance and efficiency 2. Complexity with so many parties with different political and business cycles involved in the plan preparation process 3. No competence requirements for positions, particularly the key position of financial manager 4. Lack of checks and balances in managerial decisions

60

Currently government regulation no 38 of 2007 itemises what are considered affairs of each level of government.

24


5. Lack of clear relationship to national law and regulations concerning the state budget, which includes the standardized mechanisms of budgeting, accounting, supervision, as well as accountability. 4.4. No reference to the potential of modern technology in financial management The technology exists now for all village financial management to use cloud technology with levels of transparency and control over inputs and transfers to achieve a high level of integrity. Modern electronic technology enables all financial records to be held within a national accounting system accessed through the internet, much in the way that all bank accounts and ATMs (Automatic Teller Machines) are linked within an integrated electronic banking system.61 While it would not be appropriate to put this in the law, it would be appropriate in the general elucidation or in government regulation as a guide to how the government should go about it.

5. Checks and Balances 5.1. Checks and balances in village justice The non-formal justice function of villages should be recognized by regulation of the supreme court with district courts active in the oversight of village non-formal justice systems and execution of justice by village leaders. This should not be a function of regency/municipality government who may have conflicts of interest. 5.2. Checks and balances in government The principle of checks and balances was a critical element of the revisions to the Indonesian constitution after the downfall of Soeharto’s dictatorship regime in 1998, with its division of powers between state institutions. Amongst these institutions are government (president of Republic of Indonesia), the house of representatives (DPR), the senate (DPD),62 and the supreme audit institution (BPK). Elements of this division of power are also reflected in the constitutional provisions for regional governance, with regional governments (heads of regions) and regional councils (DPRD)63. The regional government law further specifies the separation of the regional government apparatus, and a new civil service law specifies its professional independence and

61

For a general discussion on use of IT in anti-corruption, see Chapter…. written by Zulheri’s ‘Increasing a Greater Role of the Information and Communication Technology to Eradicate Corruption in Indonesia’.

62

DPD stands for Dewan Perwakilan Daerah, which literally means the Regional Representatives Council

63

DPRD stands for Dewan Perwakilan Rakyat Daerah, which literally means the Regional People Representatives Council.

25


neutrality.64 There is no regional audit institution, as regional government finance in Indonesian financial management law is considered part of state finance and subject to audit by BPK.65 As in most countries adopting modern public management, Indonesia has extended the principle of checks and balances to separation of duties within the bureaucracy. The principle of separation of incompatible duties requires a system of appropriate checks and balances to implement good financial governance, by separation of certain duties, a control method in business and accounting used to prevent fraud and limit the consequences of errors.66 Separation of duties means that more than one person should be required to complete certain tasks in which there may be inherent conflict of interest if completed only by one person. Indonesian law applies this separation of duties at two levels, the level of policy implementation through program management and the level of financial transactions. Firstly, immediately under the president there is a division between the minister responsible for finance and other ministers responsible for the implementing policy through programs of government. 67 Line ministers responsible for the performance of government divide their responsibilities amongst their directors-general and directors who manage programs, consolidate financial reporting on them under a financial officer, and also conduct internal audits under an inspector-general. 68 This principle is considered important to drive improvements in performance, as any savings identified by the minster responsible for finance, financial officers or the inspectors-general can be used to implement new programs in the interests of the people.

64

See article 3(2) of the regional government law 2004, and articles 3 and 4 UU no 5 tahun 2014 tentang Aparatur Sipil Negara (the civil service law 2014).

65

Article 2 of UU no 17 tahun 2003 tentang Keuangan Negara (the state finance law 2003) specifies regional income, expenditure and assets are part of state finance, and article 2 of UU no 15 tahun 2004 tentang Pemeriksaan Pengelolaan dan Tanggung Jawab Keuangan Negara (the audit and accountability for state finance law 2004) empowers BPK to audit all state finance.

66

http://www.businessdictionary.com/definition/incompatible-duties.html accessed on 16 May 2014.

67

UU no 17 tahun 2003 tentang Keuangan Negara (the state finance law 2003) article 8 on the role of the minister of finance and article 9 on the role of ministers and heads of government institutions as uses of state finance and assets.

68

Ibid article 11 (5) of the state finance law states that the budget is divided according to organisations, functions and types. Perpres no 47 tahun 2009 tentang Pembentukan dan Organisasi Kementerian Negara [presidential regulation no 47 of 2009 on the formation and organisation of ministries] defines directors-general and inspectorates general and their organisation. PP no 21 tahun 2004 tentang Penyusunan Rencana Kerja dan Anggaran Kementrian Negara/Lembaga [government regulation no 21 of 2004 on compilation of work plans and budgets of ministries and government institutions] defines the breakdown of the budget into programs.

26


The same principle has been applied in regional government legislation, with local government agencies (SKPD) responsible for operational programs, a financial management agency and a regional inspectorate.69 Secondly, the principle of separation of incompatible duties in financial transactions has been adopted in procurement regulations since 2003, where the decisions of a commitment-maker (pejabat pembuat komitmen) are examined by an appraiser (penilai) before contracts are agreed or transactions made. 70 .Prior to this decree most procurement was managed by ‘project managers’, who were responsible for a development budget prepared and implemented separately from a routine budget. The 2003 state finance law integrated all government activity into a single budget.71 Budgets were prepared for every work unit where the head of the work unit would be accountable for implementing its budget. The procurement regulations required unit heads to appoint commitment-makers and appraisers. In 2013 a new government regulation was introduced that fills a number of gaps in the implementation of the 2004 treasury law, including better regulation of checks and balances including the role of commitment-makers and appraisers.72 At the time the government placed priority on improving checks and balances to keep the government honest, the matter was ignored in the framing of the Village Law. 5.3. Checks and balances in village financial governance It may be argued that the principle of checks and balances is most important at the village level, because the village government is closest to the people, where the need for improved services is most easily determined. It is also the level where most of the community is likely to have inadequate competence to question the authority or decisions of those in power, unless the

69

SKPD stands for Satuan Kerja Perangkat Daerah or regional apparatus work unit. UU no 17 tahun 2003 tentang Keuangan Negara (the state finance law 2003) articles 10 defines the separate roles of the financial management and operational management in regions (including the creation of a financial management agency). PP no 41 tahun 2007 tentang Organisasi Perangkat Daerah (the government regulation no 41 of 2007 on the organization of regional government apparatus) defines the role of the inspectorate, but does not regulate the financial management agency.

70

Keppres no 80 tahun 2003 tentang Pengadaan Barang/Jasa Pemerintah [presidential decree no 80 of 2003 on supply of government goods/services]. The current regulation on procurement is Perpres no 70 tahun 2012 tentang Perubahan Kedua atas Perpres Nomor 54 tahun 2010 tentang Pengadaan Barang dan Jasa Pemerintah [presidential regulation no 70 of 2012 on the second revision of presidential regulation no 54 of 2010 on supply of goods and services].

71

See general elucidation of UU no 17 tahun 2003 ttg Keuangan Negara (the state finance law 2003).

72

The new government regulation is PP no 45 tahun 2013 tentang Tata Cara Pelaksanaan Anggaran Pendapatan dan Belanja Negara [government regulation no 45 of 2013 on methods for implementation of the state budget] and was introduced in June 2013. This regulation was not mandated by its parent law; the general elucidation explains that it was introduced because the 2004 treasury law could not be operationalized without it, and starts with further regulation of checks and balances.

27


system itself is created to demand a dialogue on program effectiveness and efficiency. Unlike their equivalents at the regional government level, village heads and members of village councils are not well-paid professional politicians, but just concerned and respected members of their communities. They rely on the ‘operational managers’, that is the staff responsible for providing services, for advice on planning village performance, and rely on the professionalism of the village financial manager to assure that funds from all sources are adequate, timely and properly allocated. None of the work of village government is highly technical. Anyone employed to work as a village manager should be able to do her job if appointed on the principle of merit. And yet the simple expedient of adopting the national system at the village level has not been applied. In fact, back in 2004, villages were regulated in the regional governance law which required the village secretary to be a public servant in order that a government official would be responsible for the use of government funds. This was a policy directly against the principle of separation, as it gave the same person responsibility for both performance and funding. Yet even after this experience, the new Village Law fails to address the issue of separation of competencies at the managerial level of villages, by creating a position of financial manager under the village head as a check on the operational managers.73 This paper recommends that proper checks and balances be introduced in villages, consistent with checks and balances in government. 5.4. Checks and balances between the village head, village council and auditor The Village Law (as did the previous legislation) applies separation of powers in village governance by creating complementary roles for the village head and the village council. While the law specifies reporting responsibilities of the village head (to the regency/municipal government and to the people through the council), it does not specify audit arrangements and fails to state village responsibility to respond to any auditor report. The lack of regulation to the contrary indicates that implementation of the Village Law will probably continue the previous practice of auditing by the regency/municipal inspectorate. It also leaves unresolved the way in which the BPK might handle its oversight of village expenditures, either at the village level or overall. This might be addressed in the proposed government regulation, and if so, the regulation should be discussed and agreed with the BPK to assure that it complies with its audit standards.

73

This policy was adopted despite the knowledge that the population of villages ranged from around 100 to around 14,000. There was no consideration of work load in the decision. The government failed to place redundant public servants as village secretaries, train them in village management and move them to villages. Instead, village secretaries were appointed as public servants.

28


The Village Law lacks any mention of audit. This raises questions of intent of its authors to abide by the principles set out in the article24 of the Village Law for openness and accountability of village government. 5.5. Checks and balances in senior management At the level of senior management in the village, the application of checks and balances, as defined in the financial management law would result in the separation of operations management and financial management, so that under the head of village, there are managers in charge of work programs, and one person responsible for the finance. The authors believe the person in charge of finance should be a person certified as a village accountant qualified to sign all village financial reports and verify they are true. The authors believe the job of village financial management most importantly requires the ability (1) to help the village compose a budget that clearly defines funding resources and planned performance, (2) to assure that after the budget is approved, managers have detailed budget breakdowns, (3) to oversee the preparation of credible accounts, (4) to prepare clear and accountable financial statements and reports, and (5) to assist the head of village respond to questions on fiduciary matters. In view of the authors, it would not be difficult to implement checks and balances at the program management level of village government. The work of village government is relatively simple, and with modern technology the accounting is relatively easy. The job of most village financial managers would be part time, easily taken on by someone in the community. Most villages have schools and small businesses where there will be people with basic competencies in financial management who can easily be trained and certified in village financial management. In view of the authors, there will also be adequate people in the wider community who could conduct internal audits from time to time, to confirm the work of the financial manager, and support the financial manager in seeking improvements in productivity. Most villages are close to other villages, and associations of qualified village financial managers can readily arrange for such internal audits. These simple expedients may be regulated in the government regulation on village financial management, though they would definitely be regulated if the law had endorsed national checks and balances in villages. 5.6. Checks and balances in procurement and payments If the principle of separation of incompatible duties was applied to villages, one village official would make a commitment on behalf of the village, and a different official (the treasurer) would make the payment after a separate official judged the legality of a financial claim. The principle aims to prevent any direct relation between those who will receive some right from the state (the official who decides the payment is due) and the official who delivers the right, and the official 29


who verifies that it is appropriate. This principle also prevents subjective assessments, which can potentially be beneficial to such officials personally to the detriment of the state. In other words, on this level, we can simply say that one person is responsible for deciding on payments, another one checks before payment is made, before giving to the treasurer to pay. Again, it is at the village level that community is most likely to have inadequate competence to question the authority or decisions of those in power, unless the system itself is created that will demand an evaluation of contracts before they are signed and claims for payment before they are made. Within the community, the inclusion of an appraiser of financial transaction decisions does not necessarily require the appointment of new staff. There are many options for checking such decisions before being passed to the treasurer for payment. The government regulation on village financial management may yet endorse the principle of incompatible duties, on the principle that villages are primarily financed by public funds. It is far better if the Village Law had required the government regulation to be prepared on the basis of the national financial management principles defined in the financial management laws.

6. A ‘Villages Commission’ for performance oversight? In 2009 a committee of the Indonesian senate proposed the establishment of ‘Villages Commissions’ in each regency/municipality in draft village law. The authors of this paper were consultants to the Senate for this process, and Mohammad Novrizal was the author of the academic paper.74 The following was the argumentation. If villages had the freedom to decide whether they need, want or have the capacity to accept and carry out an assignment from the government, the government could only delegate its authority to a village after having an approval from the village, through the village governance institutions; and vice versa the village can only offer and undertake a government authority after obtaining an approval from the government, after the government confirms that the village has the capability. The ‘take and give’ process to be agreed by both parties would need to take into account the needs and capabilities of the village. However, in this process there could be a conflict of interest or an impasse. Therefore, the academic paper argued it would be appropriate to have an independent party who will be the mediator between the villages and the government, and

74

PAH I Senate (DPD) of the Republic of Indonesia, Draft Bill on Village, (DPD-RI 2009) and Senate (DPD) of the Republic of Indonesia, Academic Paper of Bill on Village (Part One), (Jakarta: Senate (DPD) of the Republic of Indonesia, 2009). The Senate agreed to the academic paper but not all aspects of the draft law. The academic paper was sent to the house of representatives (DPR) in September 2009 with a draft law substantially different to the draft passed by PAH I and inconsistent with the academic paper.

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independent assessor of capabilities and value of work proposed to be done by villages on behalf of government. It would be some form of ‘villages commission’. The duties of this villages commission would include, on one side, to encourage villages to prepare to take on more self-governance and make proposals according to their needs and capabilities, then assess and justify those proposals from villages and, on the other side, to assess the performance of villages and give advice on village policy to the regent/mayor and DPRD, including advice on reasonable funding required by villages to carry out functions. It was proposed that the principles which the villages commission would have to follow and to apply in evaluating village government performance would be similar to ‘best value’ principles: a) Services provided by village government be responsive to the needs of its community, and be accessible to those members of the community that need it; b) Services provided by village government must meet agreed quality standards, be based on the results of a program of regular consultation with the community, and be within agreed cost standards; c) Village government must achieve continuous improvement in the provision of its services to its community; d) Village government must report regularly to its community on its achievements in relation to the above principles. The best value principles cited are based on those for Victoria Australia.75 Victoria established a Best Practices Commission to review local government performance. The Indonesian senate applied the best value concept to its villages commission concept, adding authority for it to advise on functions and funding of villages. The village commission would review the best value reports of villages, speak with stakeholders, and review budget performance, discuss potential performance improvements and capability development with the village government, as the basis for their reports. The evaluations from village commissions would be fed into a provincial and national system to evaluate the comparative performance of commissions across the country, and feed into national policy-making. The president would be able to table an annual report on the performance of villages in the whole country. Cost and performance data collected from village governments can feed into a national data-base on performance and productivity. The members of the commission would need to be free of vested interests in villages, government and politics, people who care about the development of the villages within their regency/municipality and selected in a democratic process to be determined, in accordance with

75

Local Government Best Value Principles Act 1999 Victoria Australia.

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their competences. It can be designed that every regency and municipality has one villages commission. If a region does not have many villages, this commission can be formed and/or work temporarily any time needed. As the Village Law now stands, the provisions, such as article 19 and article 22 may lead to funds flowing to the village that is neither based on needs or capabilities of the village, as mentioned above, risking waste, under-utilization, fraud and corruption. With a village commission, needs and capabilities and performance evaluations can be used as the basis for determining the amount of money given to the village, with an eye to the money being used as intended and used effectively and efficiently. The authors also consider that the village commission might under certain situations determine that a village government does not have enough capacity even for the minimum requirement for a village. They may recommend consolidation of small villages into larger villages. They may recommend special support be provided to isolated villages to fill gaps in their competencies, for example in preparing plans and budgets.

7. Comparative study on the finance governance of public institutions Our analysis above criticises the Village Law for failing to provide adequate regulation of the use of public money sourced from the state and local budgets. In this section, we will compare the legislation on village government, which is not a government institution, with legislation on other non-government institutions that also use public money sourced from the state, and may be expected to comply with the principles of financial management and modern and professional accounting standards as required by the state finance laws. Our comparison will demonstrate that there are two other laws that fail to regulate financial management in accordance with the financial principles and standards as mentioned in section V above. However, there is a difference between these two other laws and the Village Law, namely that they do not provide a formulation for the amount of public money that shall be transferred to the institutions concerned; there is no indication that they are provided funds without reference to the purpose those funds are to be used for, so that regulating their financial management through implementing regulations should not be a serious matter. 7.1. The law on community based organisation (CBO) The law on community based organisations (CBO Law)76 in article 37 stipulates that financial resources of a CBO are amongst others the national and regional (provincial or 76

UU no 17 tahun 2013 tentang Organisasi Kemasyarakatan [law no 17 of 2013 on community based organisations (CBO law)].

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regency/municipality) budgets. The CBO Law obligates a CBO to conduct its financial management transparently and accountably.77 However, there is no detailed elaboration of this in the provisions of the law. The law merely stipulates that a CBO shall make an accountability report and publish it to the public.78 This law does not regulate in detail the financial governance in the event that a CBO receives financial resources from government. This law simply says that any CBO that receives financial resources from government shall undertake its financial management in accordance with the provisions of the prevailing laws and legislations.79 Currently the government is preparing seven government regulations to implement the CBO Law, but none of them relate to financial governance and accountability.80 7.2. The laws on political parties Under the Political Party Law two financial sources of a political party are national and regional (province and regency/municipal) budgets.81 The Political Party Law regulates financial accountability but not financial management other than stipulating that financial management of a political party shall be done transparently and accountably.82 In order to implement the transparency and accountability, a political party must make an accountability report examined by a public accounting firm which can then be viewed by the public through mass media.83 The law together with government regulation no 5 of 2009 on financial assistance to political parties provide that if funds are sourced from the state, BPK has the authority to inspect the report of the public accounting firm, 84 that should contain a

77

Article 21e of the CBO Law

78

Article 38 (1) and (2) of the CBO Law

79

Article 38 (3) of the CBO Law

80

Government has prepared seven government regulations as implementing regulations of the CBO Law concerning registration, foreign organisation, empowerment, system information, monitoring procedure, procedure for sanction, and further regulation regarding association (perkumpulan). See http://www.kemendagri.go.id/news/2013/07/10/pemerintah-siapkan-tujuh-pp-terkait-uu-ormas .

81

UU no 2 tahun 2011 tentang Perubahan atas UU no 2 tahun 2008 tentang Partai Politik [law no 2 of 2011 on the revision of law no 2 of 2008 on political parties]. Sources of public funding are found in Section I number 12 amending article 34 of law no 2 of 2008.

82

Section I, number 15, new article 39 (1), amending article 39 of law no 2 of 2008.

83

Section I, number 15, new article 39 (2) and its elucidation, amending article 39 of Law no 2 of 2008 jo article 15 of PP no 5 of 2009.

84

Section I, number 13, new article 34A (1) jo number 15, new article 39 (2) of law no 2 of 2011 amending article 39 of law no 2 of 2008 jo Article 12 (1) of PP no 5 of 2009 on financial assistance to political parties.

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budget realization report, a balance sheet and a cash flow statement of the political party.85 The financial statement is to be signed by the chairman and the treasurer of the political party. 86 The political party shall submit an accountability report on its revenues and expenditures made periodically to BPK once every year at the latest one month after the fiscal year ends,87 while accounting and maintain documentation of receipts and expenditures of all financial assistance.88 Having an audit by BPK, political parties submit the accountability report to the government through the minister of home affairs (for the management at the central level), through the governor (for the management at the provincial level) and through the regents/mayors (for level management regency/city).89 7.3. Comparison of the three laws regulating non-governmental institutions. The following table compares the financial governance provisions of the Village Law with the provision on the two laws regulating non-governmental institutions mentioned above, and indicates gaps between the legislation and the standards of a modern and professional accounting that the authors believe should be applicable to these three non-governmental organisations, as required by the laws on financial management,90 with the aim that the actors of public money management will avoid misappropriation or corruption.

Budgeting Authority to use budget Oversight

Village Law Regulated (article 69 (4) and 73) Head of village (article 75 (1)) Village consensus (article 82 (4) ), village community, article 82(5)and regional government (article115 point g)

CBO Law Not regulated

Political Party Laws Not regulated

Not regulated

Not regulated

Not regulated

Not regulated

85

Section I, number 15, new article 39 (3) of law no 2 of 2011 amending article 39 of law no 2 of 2008.

86

See attachment 2 of the minister of home affairs regulation no 24 of 2009 on guidelines of calculation procedures, budgeting in local budget (APBD),submission, distribution, and accountability reports of the use of financial assistance for political parties, as amended by the minister of home affairs regulation no 26 of 2013, section I, number 8, new article 26 (3).

87

Section I, number 13, article 34A (1) of law no2 of 2011.

88

Article 12 (2) of PP no 5 of 2009 on financial assistance to political parties.

89

Article 13 jo article14 (1) of PP no. 5 of 2009 on financial assistance for political parties.

90

UU no 17 tahun 2003 tentang Keuangan Negara (the state finance law 2003), UU no 1 tahun 2004 tentang Perbendaharaan Negara (the national treasury law 2004) and UU no 15 tahun 2004 tentang Pemeriksaan Pengelolaan dan Tanggung Jawab Keuangan Negara (the audit and accountability for state finance law 2004).

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Auditor

Financial manager Manager of operations Internal Auditor

Not regulated

One the village apparatus (article 75 (2)) Village apparatus (article 48) Not regulated

Not regulated

BPK (article 34A of law no 2 of 2011) and a public accountant firm (KAP)(article 39 (2) of law no 2 of 2011)

Not regulated

Not regulated

Not regulated

Not regulated

Not regulated

Not regulated

Treasurer

Not regulated

Not regulated

Commitmentmaking official Appraiser

Not regulated

Not regulated

Attachment 2 of the minister of home affairs regulation no 24 of 2009 as amended by the minister of home affairs regulation no 26 of 2013 Not regulated

Not regulated

Not regulated

Not regulated

Public accountability

To the village community in a community consultation (article 82 (3))

Published regularly to the public (article 38 (2))

Accountability to government

Only general annual report to local government-(article 27 point a.)

In accordance with other legislation (article 38 (3))

Form of accountability

Not regulated

CBO is obliged to make a finance accountability report according to accounting standards or in accordance with the organisation’s constitution (article 38 (1))

Published to public (article 39 (2) of law no 2 of 2011 and article 15 of PP no 5 of 2009) To government through minister of home affairs or governor or regent/mayor after BPK audit (article 13 jo article 14 (1) of PP no 5 of 2009) To BPK (for fund sourced from national and regional budgets, article 34A (1) of law no2 of 2011)

The authors believe many rules about financial governance do not need to be defined in laws for non-governmental organisations that receive funds from the state, provided that it is clear to the drafters of implementing regulation how they will draft the implementing regulations (government regulations, presidential regulations and minister regulations) in accordance with the principles in the laws on financial management. But in the case of villages, this is not adequately clear, particularly because public money is channelled in such large amounts. The authors therefore contend that the Village Law should have clearer indications on how the principles of financial management in the financial management laws should also be applied in

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villages, so there is a balance in the legal force of providing funds, governing their use and executing oversight.

8. CONCLUSION If the Village Law can be implemented in earnest, the development of villages in terms of people’s happiness and prosperity will undoubtedly growing rapidly, and it is not even an exaggeration to say the village could be the spearhead for achieving the national goal of prosperity for all. A serious question for the state administration of Indonesia is whether the new policy of giving greatly increased funding to the villages in the way regulated by the new Village Law, without a relationship to need or capacity, has been complemented with adequate instruments for implementation, particularly in terms of financial governance to assure that these funds will be spent wisely (efficiently, effectively and with integrity) for the benefit of the community. The government’s current response to this question has been the rapidly-prepared implementing government regulations issued early June and mid-August 2014, and training in financial management to reach all villages in time for managing funds which will start to flow next year. An inadvertent implementation of this plan can potentially lead administrators in villages and all levels of government to corruption. The potential for corrupt practices will start from the way in which funds will be allocated and the mismatch between funds, village capacity to deliver public services, and definition of what services villages are responsible for, as the law contains no obligations or motivations to provide ‘value for money’, no obligation for qualified persons to be responsible for finance, an arbitrary relationship between regency/municipality planning cycles and village planning cycles, incomplete checks and balances, and no clear definition of audit requirements. The authors doubt the capacity of the government to prepare adequate regulation or training for a standardized national system of village finance with competent and certified operators in all villages, within the timeframe that has been set. The authors conclude that the Village Law and the implementing government regulations do not provide an adequate basis for the government to regulate proper financial management in villages. The law is inconsistent as to whether villages are non-government organisations (as implicit in the lack of mention of village or village government in the constitution), or organisations under the command of government; it provides funding without consideration of functions or capabilities; it lacks a village-scale concept of public managerialism; and it has no reference to the potential of modern technology. In particular, the authors indicate the need for appropriate checks and balances at several levels. At the level of village governance, a system of audit should be defined, so that the village head and village council agree to financial statements that have been adequately and independently audited. At the village management level, the village should have a financial officer responsible 36


for village finance, and village operational managers responsible for performance. At the procurement level, only officers responsible for making commitments should be allowed to make decisions on expenditures that are inspected before financial commitments are made. Separately, oversight of village-based non-formal justice should come under the purview of the courts. The authors review and recommend an idea from a draft village law prepared by an ad hoc commission of the Indonesian senate in 2009, in which each regency/municipality would establish a villages commission which would review the performance of village government and their capability to achieve continual improvement of public services. Villages commissions would then recommend levels of services to be provided by villages and level of support from government. The risks of the government’s approach to implementing the Village Law are enormous, risks that could be addressed by a revision of the law in areas that have been proposed, and in particular creating appropriate checks and balances and establishing a process of performance review that drive continual improvement.

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