Understanding Local Government Budgets

A Guidebook on
Local Goverment Budget
Analysis and Advocacy
in Indonesia

ADB
The Asia Foundation Asian Development Bank

FOREWORD

This guidebook on Local Government Budget Analysis and Advocacy was prepared
as one of the activities of Asian Development Bank Technical Assistance 6170, Pilot
Project on “Institutionalizing Civil Society Participation to Create Pro-Poor Budgets.”

It is hoped that this handbook will be a useful resource to expand the study materials
available to non-government organizations, the media, mass organizations, people
organizations, and civil society organizations in Indonesia. This guidebook was first
used as training material for civil society groups in Kebumen Regency and the City
of Makassar in February and March 2006.

The material herein has been assembled and supplemented from a variety of sources,
international best practices, interviews, as well as materials from budget training
manuals, both previously existing and currently being developed, from the Bandung
Institute for Governance Studies (BIGS), the Indonesian Forum for Budget Transparency
(Forum Indonesia untuk Transparansi Anggaran, FITRA), the Center of Regional
Studies and Information (Pusat Telaah dan Informasi Regional, PATTIRO), Civic
Education and Budget Transparency Advocacy (CiBa), Women’s Research Institute
(WRI), and the Center for Local Community Study and Development (Pusat Pengkajian
dan Pengembangan Masyarakat Lokal, P3ML) in Sumedang.

I would like to express my sincerest thanks to all who have provided inspiration,
contributed ideas, been discussion partners, and provided case study material to
enable the preparation of this book. Special appreciation goes to Nandang Suherman
(P3ML), Dedi Haryadi and Siti (BIGS), Hana Satriyo and Alam (TAF), Arief, Yuna
Farhan, and colleagues (FITRA), Dini and Ilham (PATTIRO), Rinusu and Jamruddin
(CiBa), Diah Raharjo (TIFA), Erna, Cecep and Mustafa (B-Trust), Mustika Aji (Formasi
Kebumen), and Ilham Iskandar (YAS Makassar).

I am fully aware that this work is not yet perfect, and there is still much material and
many ideas that could be added. I therefore welcome any input and criticism from
my colleagues, readers, users, and workshop participants, to help make this guidebook
easier to understand and use, more complete, and more appropriate to its context.

Finally, my special thanks go to The Asia Foundation San Francisco, which entrusted
me to serve as a team member for this activity, and particularly to Erin Thebault
Weiser, who kindly edited this material.

Hetifah Sjaifudian

1

TABLE OF CONTENTS

FOREWORD ............................................................................................................1
TABLE OF CONTENTS .............................................................................................2
LIST OF ABBREVIATIONS .......................................................................................3

Chapter 1: INTRODUCING BUDGETS ......................................................................5
Introduction ......................................................................................................5
Why Do Budgets Matter? ..................................................................................6
Budgeting -- International Best Practices ..........................................................7
Budget Execution and Monitoring ...................................................................10
Applied Budgeting Approaches .......................................................................11

Chapter 2:
UNDERSTANDING THE LOCAL GOVERNMENT BUDGET SYSTEM .......................15
Scope and Learning Outcomes .......................................................................15
Recent Changes to the Local Government Budget System..............................15
Key Actors: Who Does What? .........................................................................17
The Budget Cycle ............................................................................................20
The Budget Timetable .....................................................................................22
Opportunities for Citizen Involvement in the Budgeting Process.....................23
Local Government Service Responsibilities ....................................................26

Chapter 3: ANALYZING REVENUES.......................................................................27
The Format and Structure of the Local Government Annual Budget................27
The Structure of Provincial/ Regency/ City Annual Budgets as per Minister
the Interior Decree No. 29 of 2002.................................................................29
The Sources of Local Government Income .....................................................31
Revenue Analysis: Exercises ...........................................................................32

Chapter 4: ANALYZING EXPENDITURES ...............................................................37
The Structure of Local Government Annual Budget Expenditures ...................37
Various Methods to Analyze Expenditures ......................................................38

Chapter 5: BUDGET ADVOCACY............................................................................47
Using the Results of Budget Analysis in Advocacy..........................................47
Different Approaches in Budget Advocacy :
Learning from the Experience of BIGS and P3ML ...........................................49
Factors that Support or Impede Citizen Involvement.......................................50

GLOSSARY OF TERMS .........................................................................................51
BIBLIOGRAPHY ....................................................................................................53

2

LIST OF ABBREVIATIONS

AKU = Arah Kebijakan Umum, General Direction of Policy
APBD = Anggaran Pendapatan dan Belanja Daerah, Local Government
Annual Budget
APBN = Anggaran Pendapatan dan Belanja Nasional, State Budget
Bapeda = Badan Perencanaan Daerah, Regional Planning Agency
Bawasda = Badan Pengawasan Daerah, Regional Oversight Agency
BPK = Badan Pemeriksa Keuangan, State Audit Agency
BPKD = Badan Pengelola Keuangan Daerah, Regional Financial
Administration Agency
BPKP = Badan Pengawasan Keuangan dan Pembangunan, Finance
and Development Audit Agency
BUMD = Badan Usaha Milik Daerah, Local-Government-Owned Business
Entity
DPRD = Dewan Perwakilan Rakyat Daerah, Regional People’s
Representative Assembly, local legislature
DAU = Dana Alokasi Umum, General Allocation Fund, block grant
DAK = Dana Alokasi Khusus, Special Allocation Fund, special grant
DASK = Dokumen Anggaran Satuan Kerja, Administrative Department
Budget Document
Dispenda = Dinas Pendapatan Daerah, Regional Revenue Service
DPA = Dokumen Pelaksanaan Anggaran, Budget Implementation
Document
DSP = Daftar Skala Prioritas, Priority Scale List
KUA = Kebijakan Umum Anggaran, General Budget Policy
Kepmendagri = Keputusan Menteri Dalam Negeri, Minister of the Interior
Decree
Musrenbang = Musyawarah Perencanaan Pembangunan, Development
Planning Conference
LKPJ = Laporan Keterangan Pertanggungjawaban, Accountability
Report
PAD = Pendapatan Asli Daerah, Locally-Generated Revenue
PDRB = Produk Domestik Regional Bruto, Gross Regional Domestic
Product
Pemda = Pemerintah Daerah, Local Government
Pemkab = Pemerintah Kabupaten, Regency Government
PP = Peraturan Pemerintah, Government Regulation
PPKD = Pejabat Pengelola Keuangan Daerah, Regional Financial
Administration Officer
RAPBD = Rancangan Anggaran Pendapatan dan Belanja Daerah, Local
Government Annual Budget Draft
RASK = Rancangan Anggaran Satuan Kerja, Draft Budget
RKA = Rencana Kerja Anggaran, Budget Work Plan
RKPD = Rencana Kerja Pemerintah Daerah, Local Government Work
Plan
RPJM = Rencana Pembangunan Jangka Menengah, Medium-Term
Development Plan
Renstra = Rencana Strategis, Strategic Plan
Renstrada = Rencana Strategis Daerah, Local Government Strategic Plan
SE = Surat Edaran, Circular Letter
Sekda = Sekretaris Daerah, Regional Secretary
Setda = Sekretariat Daerah, Regional Secretariat
SKPD = Satuan Kerja Perangkat Daerah, Local Government
Administrative Department

3

FOREWORD

Chapter 1 :

INTRODUCING BUDGETS

Introduction
Government budgets, even at the city or sub-district level, can seem very complicated
to analyze, even too daunting to tackle. However, a basic analysis of the budget can
be made without much difficulty, and making the effort is important. An understanding
of the budget greatly improves the dialogue between government officials, elected
representatives, and concerned citizens with an interest in how efficiently the
government is using available resources. Open public discussion of budget priorities
helps citizens understand what services their government is providing, and helps
government better serve the needs of the community. Unfortunately, in many countries
such dialogue rarely, if ever, occurs.

This guide has been developed to help civil society groups understand and analyze
government budgets as a first step towards engaging in such dialogue. The guide
can be used to facilitate budget literacy trainings and to help civil society organizations
engage in budget analysis on their own following training. It may also be useful to
new parliamentarians, who often are not given formal budget training, despite their
responsibility to enact the budget in most countries. While basic information on
budgets is covered, this guide has been specifically modified for consideration of
city/district budgets in Indonesia.

This guide should not be seen as purely an advocacy guide, as this language suggests
a civil society separate from their governments, making only new demands on their
representatives in the public sector. Instead, this manual should be seen as helping
inform participants from all sides of the discussion, with the expectation that a better
understanding of the resources available, the institutional constraints that bind public
sector actors, and the competing priorities from many segments of society will lead
to a better governance process that will benefit local communities, including for the
poor.

The guide is structured in five chapters. General information on budgets, including
international best practices, is presented in this chapter. Chapter Two explains the
budget cycle and gives an overview of the role of relevant government officials in
the budget process. Chapter Three and Four provide a guide to analyzing revenues
and expenditures, including handouts and/or examples of data that can be used in
trainings. Various considerations for budget advocacy are discussed in Chapter Five.

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INTRODUCING BUDGETS

Why Do Budgets Matter?
Two key responsibilities of governments are to provide public goods and services,
which benefit the entire community and cannot cost-efficiently or effectively be
provided by the private sector, and to foster a conducive economic environment.
The government achieves these goals through economic and social policies that are
most concretely expressed in the annual budget. Not every policy requires resources,
but when governments declare a policy without providing budget allocations for
implementation, it is reasonable to ask how the outcome can be achieved.
Budgets must prioritize and balance between many competing demands. The
government’s ability to raise revenue is limited, but there are infinite needs to be met
by the public expenditure. The budget sets out the resources/funds expected to be
available for the upcoming year and how the government will spend those funds, for
example, what services and goods will be delivered. The budget allows governments
to plan for the upcoming year, and hold government departments responsible for
performance.
In many developing countries, budget formulation is monopolized by government
officials and the budget drafting process does not involve public participation or
consultation. In fact, in some places, officials treat budget documents and other
financial information as confidential documents. Often, very little budget information
is made available during the budget drafting phase, even to members of parliament.
In many cases, the information is not so much withheld, as simply not released –
nobody is asking for the information, and when they do, there are no clear procedures
or precedents for what information should be provided to whom. Moreover, budget
formats are also often not easily accessible to ordinary people. This makes it difficult
for people to understand or comment on the proposed budget, even where governments
hold public hearings on the budget. The result is that many people feel apathetic or
dissuaded from trying to provide input into the budget process.
This is unfortunate as public involvement in the budget process has a number of
important benefits. These include:
· Improved planning and resource allocation. Public involvement in the budget
planning process can help identify proposed projects/allocations that are highest
priority for the community. This contributes to more efficient use of limited
resources.
· Improved financial management. While every government has oversight and
audit procedures, public monitoring provides additional oversight in cases of
potential financial irregularities. Public oversight of the budget has been found
in some cases to strengthen the link between taxpayers and local government,
as those contributing revenues to government coffers gain a clearer understanding
of how their tax funds are spent.
· Strengthened democracy. Citizens often have a limited understanding of how
government functions, which can breed distrust. At the same time, government
officials often feel buffeted with competing demands they cannot meet with

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INTRODUCING BUDGETS

existing resources. Engaging in dialogue on budget issues, and increased
budget literacy among civil society groups, can bridge this gap and facilitate
healthy debate about policies and priorities.

Budgeting -- International Figure 1: Budget Cycle
Best Practices
Budget Formulation1)
Annual budget cycles can generally be
divided into four overlapping stages
(see Figure 1):
1. Preparation (planning, drafting)
2. Authorization (deliberation,
enactment)
3. Execution (implementation,
monitoring, control)
4. Accountability (audit, review,
report, assess)
Budget formulation is the first major activity in the larger budget process2) The
budget process or cycle is a set of sequential, inter-related budget activities recurring
within a fiscal year. or budget cycle. It is critical in that it sets the pace and tone for
overall fiscal policy and establishes the nature and extent of government’s intervention
into the economy. Budget formulation spans the first two of the four stages, typically
beginning with planning and preparation and ending with the formal legislative
enactment of the budget (usually through parliament). The budget formulation
process usually starts in the executive branch of government, where planning and
drafting are usually headed up by a committee represented by the ministries or
departments of finance, economics, or planning (and related executive entities).
Once the executive branch budget is drafted and signed off on, it is then passed off
to the legislative branch where the legislative budget committee (or its equivalent)
takes responsibility for the deliberation and ultimate passage of the budget through
the parliament.
1) There is emerging consensus on what nations should do to ensure that their budget formulation
processes are fair, open, accountable and pro-poor. These recommended practices are drawn and
synthesized from a number of international organizations including the International Monetary Fund
(IMF), the World Bank, the Organization for Economic Cooperation and Development (OECD) and
the Government Finance Officers Association (GFOA).
2) The budget process or cycle is a set of sequential, inter-related budget activities recurring within a
fiscal year.

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INTRODUCING BUDGETS

What Budget Formulation Should Accomplish: The Broad Functions
The budget formulation process should serve a number of important and overarching
functions. At the very least, the budget formulation process should 3) :
1. Identify all possible resources and demands in the upcoming year;
2. Quantify these resources and demands, based on both retrospective (past year
trends, etc.) and prospective (forecasts, etc.) information;
3. Prioritize and then allocate resources among the competing demands;
4. Consolidate all spending proposals into a comprehensive budget;
5. Set time horizons to spending of resources;
In serving these five broad functions, the budget formulation process should follow
a number of best practices:
· Clarify the Process: Who Does What by When? First and foremost, the budget
formulation process, and the larger budget cycle into which it fits, should be
clarified and well understood by all stakeholders. It should be clear who does
what by when. The persons and organizations involved in the budget formulation
process (the who) the roles and responsibilities of these respective entities (the
what) and the timeframes under which these entities operate (the when) should
be clear and understood by the public.
· Underpin with Sound Analysis. The initial planning process (prior to the actual
drafting of the budget) should be guided by sound retrospective and prospective
economic and policy analysis. Prior year trends as well as forward forecasts
and estimates of economic, fiscal and other variables must be made, with
sensitivity or scenario analysis conducted whenever possible. This analysis is
typically woven into some type of economic or policy statement or report that
accompanies the budget bill.
· Align with Long-term Perspectives and Priorities. Although budgets typically
have a near-term orientation, signaling the government’s fiscal policy and
interventions within the forthcoming year, they must also clearly manifest and
support the government’s longer-term strategic priorities and goals. Budgets,
therefore, should clearly signal both near and far term intentions of government.
This requires that annual budget priorities and goals must be aligned with
longer-term strategies – and this alignment should be easily identified by budget
audiences.

3) Adapted from Grewal, Bhajan S. 2005. Budget Formulation (presentation for Public Finance and
Expenditure Management Course, ADB Institute, Tokyo, Japan). Center for Strategic Economic Studies,
Victoria University. Melbourne, Australia.

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INTRODUCING BUDGETS

· Incorporate Stakeholder Input As Early as Feasible. Stakeholder participation
should be invited and incorporated as early as possible in the budget formulation
process. Most countries only allow public input and comment during later
stages of the formulation process. Nevertheless, the budget process should be
open to public scrutiny and dialogue earlier, ensuring that all stakeholders’
issues and concerns are duly considered.
· Develop and Disseminate Adequate Documentation. A key part of opening up
the process to stakeholders involves dissemination of budget and supporting
documentation (and on a timely basis). All budgets should be accompanied by
(at the very least) a pre-budget analysis and a budget speech or statement.
Supporting documentation should clearly show the major assumptions underlying
the budget estimates, the fiscal policy objectives, the macroeconomic framework,
the policy basis for the budget, and the major risks associated with the budget.
The documentation should also disclose any new fiscal rules, regulations or
policies that have been adopted. All documentation should be easily accessible
(in print or electronically) to the public, as early as possible in the process and
free of charge.
· Present Budget Information Effectively. Budget data and information should be
presented in a manner that facilitates policy analysis and should be reported
on a gross basis, clearly delineating revenues, expenditures and financing.
Expenditure should be classified by economic, functional and administrative
areas wherever possible. Budget data and information must be clear, detailed,
easily accessible and contestable. Budgets should be detailed enough to allow
for analysis of allocations by geography, functional area, and over time.
· Ensure Comprehensiveness. Budgets should include extra-budgetary resource
flows (public resources that traditionally are not part of the national or sub-
national budget). Moreover, budgets should also disclose all contingent liabilities
(direct or indirect) of the state. These data should, again, be presented in a
manner that facilitates policy analysis.
· Focus on Results and Outcomes. To the extent possible, budgets and supporting
documents should make a clear and strong case for each major spending
program and must clearly state the desired objectives and outcomes and how
they are aligned with long-term strategies. New performance-oriented budget
initiatives can help make this easier to do.
· Focus First on Resource Constraints, Then Needs. Budgets should place sharp
focus on resource constraints first, and only secondly on needs of the government.
The merits of this conservative approach are self-evident, but many nations fail
to focus on constraints and resource limitations first.

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INTRODUCING BUDGETS

Budget Execution and Monitoring

Best practices in the second half of the budget cycle receive less attention but are
no less important. Indeed, monitoring the way in which the budget is spent can be
even more important than discussing allocations if government departments do not
have a strong record of meeting the spending projects/allocations outlined in the
budget legislation. Best practices for the second half of the budget cycle include:
· Follow the Law. Funding levels approved and enacted into law should be adhered
to. Public funds should only be spent on the authorized and intended purposes.
Deviations from the original authorized purposes should only be made within
clear rules and guidelines. There should not be dramatic differences between
allocated and actual budgets.
· Use the Right Financial Management Systems. The organization chiefly responsible
for executing the budget (usually the department or ministry of finance in the
executive branch) must have adequate financial management, control and
reporting systems in place in order to effectively carry out its responsibilities.
A comprehensive, integrated accounting system is especially critical. Adequate
systems will allow the organization to effectively monitor planned and actual
revenues and expenditures, and thus keep the budget in line with the enacted
law.
· Report Regularly. There should be regular fiscal reporting to the legislature and
the public. At a minimum, a mid-year report on budget trends and developments
should be presented to the legislature and, if possible, quarterly reports should
also be presented.
· Conduct Internal Audits. Internal audits should be regularly conducted by the
executing organization and internal audit procedures should be open to review.
· Clarify the Rules on Major Spending. Regulations governing procurement,
personnel and other major expenditure areas should be clear, standardized and
open to the public.
· Clarify Taxation Policy and Report on Tax Activities. National tax policies should
be clear and open, tax administration should be legally protected from political
interference, and reports on taxation activities and trends should be regularly
made to the public.
· Clarify Who Accounts by When. Executive and legislative entities responsible
for auditing, reporting and overall accountability, along with the respective
timeframes for their activities, should be clarified. Typically, the major parties
involved in the accountability stage of the budget cycle are the auditor general
(or court of accounts) and the public accounts committee (or its equivalent).
The roles and responsibilities of these entities should be clarified by law and
understood by the public.

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INTRODUCING BUDGETS

· Make Finance Statistics Part of the National Statistics System. Government
finance statistics should be regularly provided to the public by finance ministries
(or departments) as well as national statistics offices. Finance statistics should
constitute an integral part of the national statistics system and national statistics
offices should be able to independently verify the quality of fiscal data.

· Ensure Comprehensiveness of Accounts. Budget reporting, documentation and
accounts should be comprehensive and should cover all budgetary and extra-
budgetary activities of the central government. Budget reports, documents and
accounts should present the consolidated fiscal position of the government
(including all direct and contingent liabilities) and should clarify the accounting
basis used (cash, accrual, etc.).

· Ensure Timeliness and Accessibility of Reports. Governments should commit
to the timely publication of fiscal reports and information. Timelines for the
release of fiscal information should be legalized and advanced release dates of
reports should be publicized. Final accounts and audits should be presented
to the legislature within 12 months of the end of the fiscal calendar. Performance
and results-based reports on major budget programs should be developed and
presented to the legislature annually. Reports should be in a format that is clear
and allows analysis.

Applied Budgeting Approaches
Over the last decade, there has been increased interest in public participation as a
component of the budgetary process. Many countries, especially those experiencing
democratization or rapid decentralization, have issued new legal frameworks that
provide more opportunities for citizens to influence the budgeting process. Civil
society actors have responded with a multitude of approaches to examining budgets,
particularly sub-national government budgets, as a tool for improving outcomes,
particularly for the poor, women, and other marginalized groups. The International
Budget Project provides comprehensive information on these efforts, which can be
accessed through their website, www.internationalbudget.org.

A brief overview of innovative budget approaches of interest include:

· Analysis of annual budget proposals. The draft budget presented by the
executive to the legislative can be analyzed in terms of its impact on particular
sectors (such as health or education) or more broadly in terms of carrying out
stated government policy. Analysis by interested NGOs or thinktanks can provide
a demystified version of the budget to the public and parliamentarians to aid
in consideration of the budget bill prior to passage. These efforts tend to focus
on the expenditure side of the budget rather than the revenue side, although
there are increasingly efforts to analyze tax policy and other revenue issues.

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INTRODUCING BUDGETS

Organizations across Asia, including India, Indonesia, and the Philippines have
active NGOs engaging in budget analysis. For example, the Indian NGO DISHA
prepares approximately 30 budget briefs analyzing the departmental budgets
of the state of Gujurat. DISHA is a member of a nation-wide network of NGOs
which engage in applied budget analysis in 12 states in India 4) .

· Participatory budgeting. Participatory budgeting earmarks funds in the budget
whose use is decided through a public consultation process. This approach
was initially developed in Porto Allegre, Brazil and now expanding to a number
of other Latin American countries and is intended to improve services, particularly
for the poor. While replicating this approach requires very high levels of
government commitment and transparency and may therefore not be suitable
for many countries, the response in Brazil has been enthusiastic. Evaluations
have found that earmarked funds have been used to expand public works, for
example, electricity and water coverage, particularly in poor communities5).

· Performance-based budgeting. This approach translates line items into expected
outputs to improve monitoring and impact evaluation. Commonly practiced in
OECD countries, performance-based budgeting is increasingly being introduced
to developing countries, usually through donor programs. By translating the
use of funds into expected outcomes (e.g., road improvements measured at
$XX/kilometer of upgrade), performance-based budgeting makes it easier for
citizens to track expenditures.

· Gender budgeting. Gender budget practitioners analyze the use of public funds
in light of gender equity concerns. While approaches vary and in some cases
emphasis is made on the direct benefit to women from budget allocations, the
more common approach is to analyze the extent to which public goods, such
as education and health, which directly impact women’s roles as caregivers,
are supported in the budget.

For example, in South Africa, IDASA, a local NGO, developed the Women’s
Budget Initiative in 1995, which engages in research and advocacy and produces
an annual report analyzing the national budget from a gender perspective. IDASA
more recently began producing a Children’s Budget which examines the national
budget in light of child poverty statistics.
4) See Social Development Notes, World Bank, Case Study: Participatory Approaches in Budgeting and
Public Expenditure Management”.
5) See “Assessment of Participatory Budgeting in Brazil”, Center for Urban Development Studies,
Harvard University and Inter-American Development Bank (2004).

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INTRODUCING BUDGETS

Questions for discussion:

1. How well do you feel the budget processes in your country meet international
best practice?
2. What opportunities are you aware of for public participation in the budgeting
process?
3. What part of the budget process could most easily be improved, given existing
capacity and political realities?
4. What form of applied budgeting would be most useful in your country?

13

Chapter 2 :
UNDERSTANDING THE LOCAL GOVERNMENT
BUDGET SYSTEM
Scope and Learning Outcomes
Anyone who intends to analyze a local government budget needs a preliminary
understanding of the characteristics of local government budgets, including the key
actors, the budget cycle and calendar, and the functions performed by the local
government whose costs are financed from the local government budget. For countries
in transition, such as Indonesia at the present time, the characteristics of local
government budgets are also still in a state of flux. Up-to-date information is therefore
needed on the recent and current changes, and on the regulations that govern these
budgets.
The materials presented in this chapter will provide knowledge and understanding
about:
§ Recent and current changes to the local government budget system, including
the policies on which these are based
§ What key players are involved in the budget and their roles
§ The budget cycle, including activities and the resulting products/ documents
§ Opportunities for citizen involvement in the budgeting process
§ The service responsibilities of local governments (kota/Kabupaten)

Recent Changes to the Local Government Budget System
When contemplating applied budget work, it is helpful to know the legal framework
that local governments must adhere to when preparing the budget. Changes to the
regulations that govern local government systems, including the procedure for
electing heads of regions, have altered the arrangement, patterns of relations, and
authorities of the various players in planning and budgeting. Since the regional
autonomy policy came into force, through the establishment of Law No. 22 of 1999
on Local government and Law No. 25 of 1999 on Financial Balance between the
Central and Regional Governments, the budget system in Indonesia:
• has become less centralized
• has become more performance-oriented, and
• provides greater opportunities for transparency and public participation.

This provides new opportunities for civil society involvement in the budget process.
There are at present at least four Laws containing articles that regulate the local
government budgeting system: (1) Law No. 25 of 2004 on the National Development
Planning System, which stipulates the process flow and products of local development
planning, (2) Law No. 17 of 2003 on State Finances and (3) Law No. 33 of 2004 on
Fiscal Decentralization, both of which stipulate among other matters the process for
drafting local government budgets, and (4) Law No. 32 of 2004 on Local Government,
which aims to bring together the local government planning system stipulated under
Law No. 25 of 2004 and the local government budgeting system stipulated under
Law No. 17 of 2003 and Law No. 33 of 2004.
The performance approach in the local government planning and budget system was
introduced through Minister of the Interior Decree No. 29 of 2002. As well as
introducing performance-based budgets, this regulation also stipulates changes to
the format of local government annual budgets. The new budget format no longer

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UNDERSTANDING THE LOCAL GOVERNMENT BUDGET SYSTEM

differentiates between routine expenditures and development expenditures; instead,
it separates expenditures for the government apparatus from expenditures for the
public. It is hoped that this will enable drafting of more program-oriented budgets.
The new budget format also clearly separates funding components, such as loans
and government reserves.

Law No. 17 of 2003 grants great authority to local legislatures (DPRD) to approve
the activities and types of local expenditures. The revision of Law No. 22 of 1999
(Law No. 32 of 2004) has further altered the duties and authorities of local governments
by reaffirming the functions of the provincial governments. For example, under this
revised law, governors are given the authority to evaluate regency/city government
budgets before they can be executed.

Government Regulation No. 56 of 2005 on Local Government Financial Information
Systems has promoted greater transparency by requiring local governments to
publicly disseminate information on local finances, including through official local
government websites.

Government Regulation No. 58 of 2005 on Local Government Financial Administration
has further promoted tranparency, accountability and participation in budgeting. It
regulates the budget administrative procedure and states who is responsible for
what. The regulation implies the position of SKPD (local government administrative
departments) as budget users and implementors clearly.

REGULATIONS ON THE LOCAL GOVERNMENT PLANNING
AND BUDGET SYSTEM IN INDONESIA
• Law No. 32 of 2004 on Local Government
• Law No. 33 of 2004 on Financial Balance between the Center and the Regions
• Law No. 17 of 2003 on State Finances
• Law No.18 of 1997 on Regional Tax and Fees
• Law No. 25 of 2004 on the National Development Planning System
• Government Regulation No. 108 of 2000 on Accountability Procedures for Heads
of Regions
• Minister of Home Affairs Decree No. 29 of 2002 on Guidelines for Management,
Accountability, and Oversight of Regional Finances, Procedures for Drafting
Local Government Annual Budgets, Administration of Local Government Finances,
and Drafting the Calculation of Local Government Annual Budgets
• Joint Circular Letter No. 0259/M.PPN/I of 2005 of the State Minister for National
Development Planning/ Head of the National Development Planning Agency
(Bappenas) and the Minister of the Interior on Technical Instructions for the
Conduct of Development Planning Conferences in 2005
• Minister of the Interior Circular Letter No. 903/2429/SJ on Guidelines for Drafting
Local Government Annual Budgets for Fiscal Year 2006 and Accountability for
the Implementation of Local Government Annual Budgets for Fiscal Year 2005
• Government Regulation No. 56 of 2005 on Local Government Financial Information
Systems
• Government Regulation No. 58 of 2005 on Local Government Financial
Administration

16


Key Actors: Who Does What?
The budgeting process is the result of a political process that involves many actors:
the executive branch, the legislature, auditors, and components of the public. The
executive branch is responsible for the drafting and use of the budget; the legislative
branch is responsible for enacting the budget; auditors are responsible for auditing
the budget; and the public should be the main beneficiary of the budget and, at the
same time, exercise social control over the entire budgeting process. The officers
with roles in the budget are as follows:

Executive Branch
Mayor/Regent
The chief decision maker on the activities and public services to be provided by
the local government in a given time period. The Mayor/ Regent prepares the
Draft Medium-Term Regional Development Plan (Rencana Pembangunan Jangka
Menengah Daerah, RPJMD) no later than three months after being elected. This
document will serve as the reference for drafting the annual Local Government
Work Plan (Rencana Kerja Pemerintah Daerah, RKPD). The Mayor/Regent
proposes the Draft Local Government Regulation (Perda) enacting the Local
Government Annual Budget (APBD), together with the relevant supporting
documentation, to the DPRD.
Regional Secretary (Sekda)
Coordinator of the Executive Budget Team. Duties include presenting the General
Budget Policy (Kebijakan Umum Anggaran, KUA) before the DPRD. The KUA is
the document that serves as the main basis for drafting the Draft Local Government
Annual Budget (RAPBD).
Executive Budget Team
A special team headed by the Regional Secretary, responsible for drafting the
KUA and compiling the RKA-SKPD (Local Government Activity Unit Budget Work
Plans) as the RAPBD. The Executive Budget Team typically consists of the Regional
Planning Agency (Bapeda), the Finance Section, the Development Administration
Section, and the Local Revenue Service (Dispenda).
Local Government Administrative Departments (Satuan Kegiatan Perangkat
Daerah, SKPD)
The work units of the city/ regency government are the administrative departments/
agencies that are the users of the budget and have the task of drafting and
implementing the budgets for their units. The number of SKPD varies from region
to region, depending on the organizational structure of the local government in
each region.

17


Regional Planning Agency (Badan Perencanaan Daerah, Bapeda)
The planning unit of the regency/city government, with the duty of preparing the
various documents that will be used as material for conducting the development
planning conferences (musrenbang) in the region, executing the process of these
meetings, and coordinating the output of the meetings and proposals from the
various government services to produce the Local Government Work Plan (RKPD)
document.
Regional Financial Administration Agency (Badan Pengelola Keuangan Daerah,
BPKD)
The administrative unit of the regency/city government that drafts and implements
policy on administration of the annual local budget and functions as the local
government’s general treasurer. The BPKD is responsible for preparing the
financial reports that track the implementation of the APBD.

Legislative Branch (DPRD)
Legislative Budget Committee
A special team tasked with providing recommendations and input to the
Mayor/Regent on determining, revising, and calculating the APBD proposed by
the local government before it is enacted in a Plenary Session.
Commissions
Supplementary bodies of the DPRD established to facilitate the DPRD’s duties
in governance, economy and development, regional finances and investment,
and public welfare. In the budget enactment process, the Commissions are the
working groups that, together with the relevant administrative departments,
discuss the Departments Budgets.

Auditors
State Audit Agency (Badan Pemeriksa Keuangan, BPK)
The external financial auditor that conducts audits of the financial management
and fiduciary responsibilities of both the central and regional governments. These
audits include audits of financial reports, performance audits, and audits for
specific purposes not included under those two types of audits.
Finance and Development Audit Agency (Badan Pengawasan Keuangan dan
Pembangunan, BPKP)
A Non-Departmental Government Institution directly under and responsible to
the President of Indonesia. The BPKP is the internal auditor tasked with overseeing
the implementation of finance and development in line with the applicable laws
and regulations.

18


Regional Audit Agency (Badan Pengawas Daerah, Bawasda)
The internal auditor of the city/regency government, tasked with auditing and
reporting the financial conditions of all institutions funded through the APBD.
The main duty of the Bawasda is to assist the Mayor/Regent in overseeing the
conduct of government and the implementation of development and public
services within the city/regency.

The Public
Development Planning Deliberative Forums (Musyawarah Perencanaan
Pembangunan, Musrenbang)
Forums to produce consensus among representative of the public on the draft
Local Government Work Plan (RKPD). These forums emphasize discussion to
synchronize activity plans among local government agency administrative units
and among the central government, the local government, and the public to
achieve national and local development aims.

SKPD Forum
A joint vehicle among development actors to discuss the priorities of the
development activities produced by the District Musrenbang with the SKPD or
a consortium of SKPDs in an effort to complete the SKPD Work Plans, the
procedure for which is facilitated by the relevant SKPD.

Interest Groups
Groups with an interest in influencing budget allocations for their own purposes.

Private Enterprise
The private sector pays the bulk of taxes and is therefore an important contributor
to the revenue of the local government, with a special interest in taxation and
other revenue policies. Companies also rely on public services, especially public
works such as roads and utilities, in order to conduct business. Finally, businesses
may have in interest in bidding on planned contracts in the local budget.

Budget Concern Groups
Community groups that carry out budget education, disseminate information on
the budget, engage in monitoring and evaluation of the use of the budget, and
engage in advocacy when budget deviations are discovered.

19


The Budget Cycle

Stages of the Budget
Although the budget cycle and process differs from country to country, in general
the budgeting process can be divided into four stages: (1) Drafting, (2) Enactment,
(3) Implementation, and (4) Audit.

The drafting stage is the stage that comprises the process from community
meetings (musrenbang) to gather public aspirations, through the drafting of
activity programs by local government administrative units (agencies and services),
up to the submission of the proposed draft APBD by the executive branch to the
legislature. The Executive Budget Team plays an important role in this process.
This team has as its members the Regional Secretariat (Setda), the Regional
Planning Agency (Bapeda), and the Regional Financial Administration Agency
(BPKD). The budget drafting process takes several months. Public opinion is
sought in the process of determining program priorities, but the final process
of program development is done behind closed doors by the respective
Administrative Department Heads.

The enactment stage begins when the executive submits the proposed budget
to the legislature. Usually this process is signaled by a speech by the head of the
region (Regent/Mayor) before the members of the DPRD. The DPRD then, within
a certain time frame (around a month), discusses the draft budget. During this
discussion period, discussions are held between the Legislative Budget Committee
and the Executive Budget Team. During this period, the legislature has the
opportunity to question the executive’s policies.

The implementation stage begins when the APBD is ratified through a local
regulation at the end of the year. The implementation phase runs for one year,
from the start of the fiscal year in January. Implementation is the responsibility
of the executive, through the Regional Government Agency Administrative
Departments (SKPD).

The audit stage comprises study and reporting on the results of the budget. In
Indonesia, the audit stage includes internal audits conducted by the Bawasda
and BPKP, and external audits conducted by the BPK.

20


The budgeting process in Indonesia is a 30-month cycle (two and a half years): One
year for the drafting and enactment processes, the next year for implementation,
and the last six months for auditing.

21


The Budget Timetable
The following time table outlines the time of the budget process as laid out in the
Law No. 25 of 2004, Law No. 17 of 2003, Joint Circular Letter No. 0259/M.PPN/I
of 2005, and Government Regulation No. 58 of 2005. However, in practice local
governments may or may not be strictly adhering to this timetable. These steps and
opportunities for citizen involvement, are discussed below.

22


Opportunities for Citizen Involvement
in the Budgeting Process
Participation in Musrenbang
The budget planning process is the first stage, in which the local government gathers
public aspirations and sets the General Direction of Policy (Arah Kebijakan Umum,
AKU). Under Minister of the Interior Decree No. 29 of 2002, public aspirations are
gathered through Development Planning Conference (Musyawarah Perencanaan
Pembangunan, Musrenbang) held at the lowest levels (neighborhood associations
(RT), higher level neighborhood associations (RW), subdistricts, districts, the SKPD
Forum, and eventually the regency-or city-level Musrenbang. The General Direction
of Policy is then set in around June, after the Musrenbang process is complete, with
due consideration to the Regional Development Plan, the Regional Strategic Plan,
the results of assessment of the previous year’s work, the basic ideas of the DPRD,
and the central government’s General Direction of Policy. The General Direction of
Policy is drafted by the Executive Budget Team comprised of the Regional Planning
Agency (Bapeda), the Finance Section, the Administration and Development Section,
and the Regional Revenue Service (Dispenda), in cooperation with the DPRD Budget
Committee and other elements of the DPRD.

23


The role that citizens can play in this planning process is to monitor the use of the
results of the village/sub-district level Musrenbang. Experience has shown that the
proposals considered high priorities by residents often do not appear in the Priority
Scale List (DSP) drafted by the government. The output from these lower-level
Musrenbang often conflicts with plans already made by the governments’ technical
departments. There is a risk that Departments will ignore community demands in
favor of their own plans.

Currently, citizens also have the opportunity to be involved in the departmental activity
planning through their participation in SKPD forum that is normally held at the end
of February or after city/regency Musrenbang.

When the AKU/KUA is being drafted, the public, both as individuals and as institutions,
can provide input and criticism, and even submit papers presenting the public’s
concepts. This process can be done during public hearings of the DPRD, who may
invite the community. Public opinion can also be rallied through the print media or
radio.

Participation in Enacting the Budget
Enactment of the local government annual budget starts with preparation of the draft
RKA-SKPD/ framework for expenditures, internally by the local government. This
draft is prepared during July through September by the Executive Budget Team
(Regional Planning Agency (Bapeda), Finance Section, and Administration and
Development Section) and all SKPD (services/ agencies). During this drafting period,
the Bapeda conducts coordination meetings, inviting all the government agencies
and services (SKPD) in turn, grouped by government sector.

The results of these discussions of the Draft RKA-SKPD then serve as material for
drafting the RAPBD Plan Framework. This is the first critical point in the budgeting
process, since proposals may suddenly be added or proposals that are considered
relatively low priorities may be deleted. There is officially no formal citizen involvement
during this discussion of the RKA-SKPD, as this discussion relates to technical
matters. Nevertheless, citizens can take the initiative to communicate with agencies
to confirm the plans for proposed activities and, at the same time, to provide additional
input with reference to the results of the Musrenbang if anything has been left out.

Once the draft RKA-SKPD has been prepared, the next step is preparation of the
RAPBD (Draft Local Government Annual Budget) by the Executive Budget Team, the
output of which takes the form of the RAPBD Framework. While the RAPBD is being
drafted, the Budget Team may engage in public consultations. This is stipulated in
article 22 clause 4 of Minister of the Interior Decree No. 29 of 2002, which indicatesthat
information should be disseminated on the draft RAPBD.

24


Once the RAPBD Framework has been prepared, preliminary discussion is held on
the Draft Local Government Annual Budget (RAPBD) by the Executive Budget Team,
all administrative departments, the commissions in the DPRD, the DPRD Budget
Committee, and the DPRD Leadership. This takes place during September and
October. The references for this discussion are the KUA Document, the Program
Priorities, and the Provisional Budget Ceiling. The RAPBD Framework constitutes
the elaboration of the KUA Document, the Program Priorities, and the Provisional
Budget Ceiling. This stage of preliminary discussion of the RAPBD is a critical
determining point, as at this stage there will be a tug-of-war between various interests,
such as the Regent, the DPRD members, the government services and agencies,
and elements of the public. What the public can do during the RAPBD discussion
process is to engage in a series of actions, such as monitoring, hearings with the
DPRD commissions, or forming public opinion through the mass media. Certain
community groups may be concerned with monitoring those parts of the draft related
to their specific interests. For example, farmers’ groups may monitor the budget for
agricultural development projects.

The next stage is discussion of the RAPBD and ratification of the RAPBD as the
APBD, which is done by the Executive Budget Committee Team (Bapeda, Finance
Section, and Administration and Development Section), administrative departments,
and the Legislative Budget Committee Team. This discussion is conducted from the
first week of October to the end of November. The public may attend these discussions
and thereby monitor the entire series of activities. Certain civil society groups may
choose to monitor certain stages of the discussions. During this enactment stage,
the public can make optimum use of the hearings held by the DPRD by providing
input, either in person or in writing.

Participation in Implementation of the Budget
Budget implementation is the stage in which the ratified APBD is put into operation.
This usually runs for one year, from January to December. Citizens and civil society
groups have opportunities to monitor the implementation of the budget:

· Observe whether programs or projects have achieved the targets set in the work
plan.
· Note whether budget expenditures are in line with the budget allocated in the
APBD.
· Monitor whether tenders conducted in a transparent and accountable way.

Participation in Budget Evaluation and Oversight
Oversight of the local government budget comprises all actions taken to ensure that
the management of the local government budget proceeds in line with the approved

25


budget, the relevant standards, and the designated aims. Oversight is essential to
detect any budget deviations. During this evaluation stage, citizens and civil society
groups should critically assess the accountability reports made by Mayor/Regent.
Attention must be paid to note whether the indicators that are actually used conform
to the indicators set during the planning process, and to compare the written report
with actual performance in the field.

Local Government Service Responsibilities

Before analyzing a budget, one must first understand exactly what forms of public
services the local government provides whose funding will be financed through the
local government budget. Most of the authority for public services has now been
transferred to the local governments. Under Law No. 32 of 2004 (article 10) on local
government, the local governments (province and city/regency) execute nearly all
powers, except for six components that remain under the authority of the central
government: (1) foreign policy, (2) defense, (3) security, (4) administration of justice,
(5) national monetary and fiscal policy, and (6) religion.

Fifteen essential matters fall under the authority of regency/city governments, including
planning and control of development, and land use and oversight of zoning (see
box). However, in practice there is still considerable uncertainty and overlap of
authority. For example, in the education sector, the central government not only
prepares the curricula but is also involved in school repair and maintenance projects.

Essential matters under the authority of regency/city governments:
a. planning and control of development;
b. planning, utilization, and oversight of land use/zoning;
c. the conduct of public order and security;
d. provision of public facilities and infrastructure;
e. public health;
f. education;
g. handling social problems;
h. services in the labor sector;
i. facilitating the development of cooperatives and small- and medium-scale
enterprises;
j. environmental management;
k. agrarian services;
l. population and civil registry services;
m. general government administrative services;
n. investment administration services;
o. conduct of other basic services; and other essential matters as mandated by
laws and regulations
Source: Law No. 32 of 2004, article 14

26

Chapter 3:
ANALYZING REVENUES

about:
§ The Format and Structure of the Local Government Annual Budget (APBD)
§ Sources of Local Government Revenue.

Participants will be trained to conduct analyses of local government revenues, which
will provide them with the capability and skills to:
§ Outline a profile of city/regency government revenues
§ Interpret this revenue profile.

The Format and Structure of the Local Government
Annual Budget
The Local Government Annual Budget (APBD) is the public policy framework that
sets out the revenue, expenditures, and financing of the local government for the
upcoming fiscal year. The present format of the APBD refers to Minister of Home
Affairs Decree No. 29 of 2002, the content of which stipulates the structure of the
APBD, comprised of:
(1) Local Government Revenues
(2) Local Government Expenditures, and
(3) Financing.
The complete format and structure of the APBD can be seen in the next page.
When local government revenues exceed local government expenditures, there is a
budget “surplus”. Conversely, when local government expenditures exceed local
government revenues, the local government experiences a “deficit”. Whenever the
budget experiences either a surplus or a deficit, there is then a “financing” component,
intended to cover the deficit or to make use of the budget surplus.

27

ANALYZING REVENUES

The Structure of Provincial/ Regency/ City Annual Budgets
as per Minister of the Interior Decree No. 29 of 2002

I. Revenues
1. Locally-Generated Revenue (PAD)
1) Local Taxes
2) Local Service Fees
3) Share of Profits of Local Government Enterprises
4) Other Locally-Generated Revenue
2. Balancing Funds
1) Tax and Non-Tax Revenue Sharing (from natural resources)
2) General Allocation Funds
3) Special Allocation Funds
4) Balancing Funds from provincial governments
Total Revenues (I)

II. Expenditures
1. Local Government Apparatus Expenditures6)
a. General Administration Expenditures7)
1) Personnel Expenses
2) Goods and Services Expenses
3) Official Travel Expenses
4) Maintenance Expenses
b. Maintenance and Operation Expenditures8)
4) Maintenance Expenses9)
c. Capital Expenditures

Total Local Government Apparatus Expenditures (II.1)

6) Government Apparatus Expenditures are expenditures for the needs of personnel and institutions
that are not directly related to public services.
7) General Administration Expenditures in the category of government apparatus expenditures are
expenditures for the needs of personnel and institutions that are not directly related to public services
and that are incidental or unplanned by nature.
8) Maintenance and Operation Expenditures in the category of government apparatus expenditures are
planned expenditures for the needs of personnel and institutions that are not directly related to public
services.
9) Capital Expenditures in the category of government apparatus expenditures are expenditures for
goods and facilities that do not provide a direct benefit to the public and that become local government
assets, such as vehicle purchases, appropriation of land for offices, etc.

29

ANALYZING REVENUES

2. Public Service Expenditures10)
a. Public Administration Expenditures11)
b. Maintenance and Operation Expenditures12)
c. Capital Expenditures13)

3. Profit Sharing Expenditures and Financial Aid

4. Unexpected Expenditures
Total Public Service Expenditures (II.2)
Total Expenditures (II.1 + II.2)
Surplus (Deficit) = I - II

III. Financing
1. Local Government Revenues
1) Balance remaining from previous year’s budget
2) Transfers from Reserve Funds
3) Income from Bonds
4) Proceeds from sales of separate local government assets

Total Local Government Revenues (III.1)

2. Local Government Expenditures
1) Transfers to Reserve Funds
2) Equity Participation
3) Payments of debts that fall due
4) Balance remaining from current year’s budget

Total Local Government Expenditures (III.2)
Total Financing (III.1 - III.2)
10) Public Service Expenditures are expenditures for activities that directly provide services to the public
11) General Administration Expenditures in the category of public service expenditures are expenditures
for the needs of personnel and institutions that are directly related to public services but are incidental
or unplanned by nature.
12) Maintenance and Operation Expenditures in the category of public service expenditures are planned
expenditures for the needs of personnel and institutions that are directly related to public services.
13) Capital Expenditures in the category of public service expenditures are expenditures for goods and
facilities that provide a direct benefit to the public and that become local government assets, such
as construction of infrastructure (roads, irrigation, waterworks, bridges, etc.), appropriation of land
to build terminals, etc.

30

ANALYZING REVENUES

The Sources of Local Government Income
The meaning of “Revenue” is all income of the local government treasury for a given
fiscal year to which the local government is entitled and which will be used for the
purposes of local development.
The sources of local government revenues consist of:
(1) Balancing Funds
(2) Locally-Generated Revenue
(3) Other legitimate revenue.

The central government plays an important role in supporting the duties of governments
in the regions. In terms of finance, the central government not only provides balancing
fund allocations and transfers financial resources to which local jurisdictions are
entitled, but also provides loans and grants to local governments.
While responsibility for service provision has been devolved to local government,
the ability to raise revenues has largely been retained by the central government.
This means that unlike other countries, for the most part local government cannot
raise revenues through property taxes, income tax, sales tax or issuing municipal
bonds. The restricted ability to raise locally-generated revenue means that local
governments are very dependent on transfers from the central government. In most
cases, they must make difficult choices between the programs they fund since
transfers aren’t sufficient to cover the needed development budget.

Balancing Funds
These are revenues derived from the State Annual Budget (APBN) that are allocated
to a local government to pay for basic functions under decentralization. At present,
most of the income of local governments in Indonesia comes from Balancing Funds,
which are divided into:
(1) General Allocation Funds (block grants, DAU),
(2) Special Allocation Funds (special grants, DAK),
(3) Tax and Non-Tax Revenue Sharing Funds, and
(4) Financial Aid from the Provinces.
General Allocation Funds (DAU) are balancing funds determined using a formula
stipulated through the mandate of Law No. 25 of 1999 as amended through Law No.
33 of 2004 onFinancial Balance between the Central and Regional Governments.
The DAU formula is determined on the basis of:
§ Fiscal Needs (size of population, area, human resource development)
§ Fiscal Capability (regional economic potential, natural resource and human
resource potential)

31

ANALYZING REVENUES

§ Fiscal Need Variables (Population Index, Area Expanse Index, Human
Development Index, GRDP per Capita Index, Construction Price Index)
§ Fiscal Capability Variables (Locally-Generated Revenue, Natural Resource
Revenue Sharing, Land and Building Taxes, Land and Building Title Acquisition
Fees (BPHTB), and Individual Income Taxes)
Special Allocation Funds (DAK) are specific grants to finance the specific needs of
local governments and/or the national interest.There are usually for nationally gene-
rated programs implemented at the local level.

Locally-Generated Revenue (PAD)
A small proportion (usually under 20%) of local government revenues derive from
Locally-Generated Revenue (Pendapatan Asli Daerah, PAD), that is, revenues
obtained from collection of taxes (including hotel and restaurant taxes, advertising
taxes, street lighting taxes), various types of fees for services (including parking
fees, market and shop fees, hospital fees, cemetery fees), and proceeds of local
government enterprises (profits of Local-Government-Owned Business Entities,
proceeds from rental of local government assets).

Other Legitimate Revenue
In addition to the two sources of revenue mentioned above, local governments may
also receive income from sources categorized as “other legitimate revenue,” such
as third-party contributions, proceeds from sale of local government property, interest
earned on time deposits, etc.

Revenue Analysis: Exercises
The analysis of APBD revenue will provide an understanding of the capability and
the policies undertaken by the local government in raising funds to finance development
during a given fiscal year. The local government revenue profile analysis will reflect:
(1) To what extent the local government is still dependent on the provincial
and/or central governments to finance development;
(2) Whether the local government budget is in surplus or deficit, and how
the local government deals with this situation;
(3) Trends in local government revenues from one fiscal year to the next
(increase or decrease, and the size of these);
(4) Which revenue sectors contribute to local government revenues;
(5) Who benefits most from, and who is most disadvantaged by, local
government policies for raising development funds.

32

From the results of the analysis, the following can be identified:
(1) Matters that lead to a decline in potential local government revenues, and
how to overcome them (e.g. short falls in tax and service fee revenues,
the failure of public utilities to operate on a cash recovery basis);
(2) Identification of new sources of revenue that could be used to finance
development programs important for the region;
(3) Proposals to reform policies related to budget revenues (e.g. policies on
taxes and services fees, and simplification of permitting processes).

Exercise 1: Examining the Sources of Revenue
The data below is a Summary of Revenue in Kebumen Regency

Discuss the following:
v What is the percentage of PAD relative to total revenue? What is the significance
of this?
v What is the percentage of DAU relative to total revenue? What is the significance
of this?

33

ANALYZING REVENUES ANALYZING REVENUES

Exercise 2: Examining Locally-Generated Revenue (PAD)
The diagram below shows the percentages of sources of Locally-Generated Revenue
in the Kebumen Regency Draft Annual Budget for 2006.

v Identify the sources of PAD. What is the largest source of PAD? Which source
of PAD makes the smallest contribution?

Exercise 3: Examining Revenues from Service Fees (Retribusi)
The following data show the sources of revenue from service fees in the City of
Makassar (Annual Budget for 2006).

34

ANALYZING REVENUES

v What percentage of total fees comes from the health sector? What is the
significance of this? (This question can be replaced with one on the amount of
fees from business permitting, depending on the participants’ interests)
v Who actually pays these fees in the health services sector? Who would suffer if
the fees were increased?
v What steps could be taken by the local government to increase local government
revenues?
v What factors make actual revenue lower than it could be?

35

Chapter 4:
ANALYZING EXPENDITURES

about:
§ The structure of local government annual budget expenditures
§ Various methods to analyze expenditures.

Participants will be trained to conduct analyses of local government expenditures,
which will provide them with the capability and skills to:
§ Outline a profile of city/regency government expenditures including a
departmental/sectoral expenditure profile
§ Interpret this expenditure profile.

The Structure of Local Government Annual Budget Expenditures
Expenditure allocations in a local government annual budget (APBD) consist of four
elements:
(1) Local Government Apparatus Expenditures
(2) Public Service Expenditures
(3) Profit Sharing Expenditures and Financial Aid
(4) Unexpected Expenditures.

Local Government Apparatus Expenditures are expenditures for general administration
(salaries), operations and maintenance, and capital expenditures used to finance
activities whose results, benefits, and impact are not enjoyed directly by the public
(e.g. government office buildings).

Public Service Expenditures consist of expenditures for general administration,
operation and maintenance, and the share of capital expenditures used to finance
activities whose results, benefits, and impact are enjoyed directly by the public (e.g.
roads, irrigation, bridges)

Profit Sharing Expenditures and Financial Aid consist of local government shares
of tax revenues and non-tax revenues collected by the provincial or national
government. Percentage of these revenues are returned to the local government are
often given as block grants to villages or underserved communities.

Unexpected Expenditures are expenditures for activities of an extraordinary nature
that are not expected to recur, such as unanticepated natural or social disasters.

37


Various Methods to Analyze Expenditures14)
GENERAL ANALYSIS

A. Make comparisons of the following:
- Amount of expenditures from year to year (This comparison may be done for
each expenditure item. Items with significant increases of reduction require
special attention and further analysis.)
- Among expenditure items (e.g.: personnel expenses as percentage of total
expenditures, or expenditures relative to DAU)
- Between revenue items and expenditure items
- Between one sector and another
- Between villages/ subdistricts or districts

B. Observe what the largest and smallest amounts of expenditure are allocated to.

C. Discover any discrepancies. Discrepancies in a given item can be seen from
several aspects:

Legal aspects:
Analyze consistency/ compliance with the applicable legal standards. The high
frequency of corruption cases committed by DPRD members in the period 1999-
2004 was due to budget items and amounts for the DPRD that were not in line with
Government Regulation No. 110 of 2000, which regulates the Financial Status of the
DPRDs.

Economic/ financial aspects:
Discrepancies that may be discovered include:
- Allocations greater than the established standard indices and prices (indication
of mark-ups)
- Multiple allocations (indication of expenditure duplication)
- Allocations repeated each year for items that shoud be durable.

Social aspects (justice and propriety):
Note whether any allocations are excessive, conspicuous, or irrational. To contrast,
compare these peculiar allocations with those for the poor and marginal groups to
discover indications of budget deviations. These findings will be very useful in
opening the eyes and hearts of both government officials and the public. Example:
budget for air freshener for mayor’s office: Rp 80.000.000; budget for street children:
Rp 15.000.000.

Exercise 1: Examining Expenditure Allocations

The following data shows the summary of Expenditures in Kebumen Regency for
2006. Discuss: What is the proportion of Government Apparatus Expenditures
compared to public service expenditures ?

14) Note: This material is adapted from the draft “Training Module for Performance-Based and Gender-
Responsive Budget Advocacy” prepared by PATTIRO for The Asia Foundation.

38


Summary of Expenditures in Kebumen Regency RAPBD
for 2006

39


Exercise 2
The following data show the expenditure allocations in Kebumen Regency for 2006.
Discuss: What is the significance of this?

40


Exercise 3: Examining APBD by Department
The following data show the Kebumen Regency Draft Annual Budget for 2006 by
Department/Sector/ SKPD.
Discuss: What is the significance of this?

41


These amount are shown below in graphic format for quick comparison:
DPRD Secretariat

Health Service
Head of Region

Regional Secretariat

Agriculture Service
Districts (26 Districts)
Regional Revenue Office

Communications Service
Regional Oversight Agency

Education and Culture Service

Tourism, Culture and Art Service
Regional Market Management Office

Local Government Treasury Office

Civil Service Police Unit Office

Livestock, Fishery and Maritime Service

Industry, Trade, and Cooperatives Service

Manpower and Transmigration Service

State High Schools (17 schools)

Regional Settlements and Infrastructure Service
State Junior High Schools (49 schools)

Water, Mining, and Energy Resources Service
Forestry and Environmental Impact Management Service
Bappeda (Regional Development Planning Agency)

Regional Public Hospital Management Board

Civil Registry and Population Registry Office

Family Planning and Community Empowerment Service
Regional Personnel, Education and Training Agency
Information, Communication and Electronic Data Processing Agency

Office of National Unity and Social and Community Protection

SPECIAL ANALYSIS
A special analysis is an analysis of the programs/ projects/ activities of one Department’s
budget (SKPD). The document analyzed is the SKPD’s RASK/RKA. From this document,
the following four aspects can be analyzed:
1. Policy Aspect
2. Financial Aspect
3. Administrative Aspect
4. Social Aspect (Justice and Propriety)

Policy Aspect
Analyze whether budget allocations are in line with stated government priorities and
policies.
1. Study the policies related to the APBD, especially the RPJP, RPJM, and KUA. See
what the city/regency’s priorities are.
2. Study the laws and regulations related to the APBD to ensure the Department’s
budget is compliant relevant policy documents includes:
- Laws related to certain sector (education, health).
- Mayoral Decree on standardization index for activities/ goods.
- Government Regulation No. 107 on Local Government Loans.
- Mayoral Decree regulating honoraria, incentives, and general costs.

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Example for Kebumen Regency

The Vision in the Kebumen Regency Medium-Term Regional Development Plan
(RPJMD) is to realize a people’s economy in Kebumen that is self-reliant and
highly competitive, as elaborated in five missions. One of these missions is
economic development based on community empowerment through agriculture,
tourism, trade, and industry, with a focus on increasing incomes and creating
jobs. This mission is further elaborated through economic programs, which
include food self-sufficiency, development of agribusinesses, and maritime
development.

In the General Budget Policy (KUA), the activities planned as priority programs
related to agricultural policy are increasing agricultural production and
productivity, securing the prices of agricultural facilities and products, and
strengthening farmers’ institutions. In 2006, there are 27 activities related
directly to this policy, but the amount of funds allocated for them is relatively
small: only 1.3% of the total APBD, and of this small amount, 52% is taken
up by salaries and benefits for agriculture service personnel. This amount is
far too small to achieve the mission that has been set, particularly in terms of
increasing farmers’ incomes and creating jobs.

Administrative Aspect
Analyze whether the budget meets government guidelines and regulations.
1. Study whether the service’s programs/ activities reflect the scale of priorities.
2. Ensure that the service’s RASK contains complete performance indicators.
3. Study in detail the performance indicators:
a. Are they in line with the General Direction of Policy?
b. Is there a connection between the activities and the desired aims?
c. Are output indicators or achievement benchmarks clearly presented?
4. Are programs carried over from previous years effective and still relevant to the
community?
5. Study the activity reports for the same projects in the previous year. Do they
justify continued support at this level?

Financial Aspect
Now analyze budget for price irregularities or wasteful expenditures:
1. Study the amount of allocation for each budget item.
2. Compare with the index standards: less, same, or greater?
3. Compare the amount of maintenance costs for goods with the purchase price
of the same goods. A case has been found where the maintenance cost for
computers in one year higher than if the local government had purchased
new computers.
4. Study the possible occurrence of multiple allocations for the same item/activity.

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Social Aspect (Justice and Propriety)
Analyze whether allocations reflect proper use of public funds.
Compare the allocations for activities whose beneficiaries are government officials
with those for activities whose beneficiaries are the poor. If there are imbalances in
these allocations, this finding can be exposed for advocacy purposes.

BENEFICIARY/GENDER ANALYSIS
In a budget analysis, the expenditures can be analyzed by categories of beneficiaries,
e.g. the disabled, children, or women. For example, for the gender aspect expenditures
can be categorized as follows:

1. Expenditures with specific gender targets. Examples:
a. Special health programs for women
b. Special education programs for girls
c. Policies to provide work opportunities for women
d. Programs for men involved in acts of violence.

2. Expenditures for equal employment opportunities. Examples:
a. Training for female managers
b. Provision of daycare centers
c. Leave program for men whose wives have given birth.

3. General Allocations, i.e. expenditures for gender mainstreaming that consider
the differing impacts on men and on women, by providing different needs for
men and for women.
Examples:
a. Clean water supply projects greatly benefit women, as these reduce their
work burden.
b. In a toilet construction program, the number of toilets for women is greater
than for men, since women need more time than men.

CHRONOLOGICAL ANALYSIS
Budget analysis can also be done to show trends over time. This can demonstrate
government’s concern in relation to specific sector, area or community. Trend based
analysis of APBD can be applied for both income and expenditure.

To perform this kind of analysis, several data are needed, some of them are:
· Local Medium-Term Development Planning (RPJMD)
· Last three years’ General Budget Policy (KUA)
· Last Three Years’ APBD including the financial statement document

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The following is an example of a chronological analysis for the City of Makassar.

Trends in Makassar APBD, 2004 to 2006

The APBD expenditure trends above show that expenditures for the local government
apparatus have been rising consistently, while there was a sharp rise in public service
expenditures in 2006, following a decline in 2005. These data can be used to analyze
the extent to which the conditions of roads, irrigation, health and educational facilities,
and the like that are financed through the public service entries can be expected to
improve, and the implications for improvement in overall public welfare. To confirm
the occurrence of a trend toward improved public welfare, which should correlate
directly with the increased service expenditures, data are needed on trends in poverty
figures, condition of infrastructure, and so on.

REGIONAL ANALYSIS
The uses of this type of analysis include observing the proportion of APBD allocated
to each region, with consideration to the social and economic conditions in each
region and the priorities for certain regions, such as number of residents, land area,
local potential, poverty level, existing basic infrastructure, etc.

To perform this analysis, non-budgetary data are needed such as:

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1. Monographic and demographic data on the region
2. Data on projects, their values and their locations
3. The aims of these projects in connection with the benefits obtained by the region.

One method used to analyze APBD by region is to separate or categorize the projects
by geographical location, fund allocation, and the aims of the projects, and then to
compare between regions and examine their proportion to the overall APBD. Then
relate the results of this analysis to the various policy and planning documents, such
as RPJMD, KUA, and Service or Land Use Strategic Plans, to observe the consistency
between planning and budgeting.

46

Understanding Local Government Budgets

Understanding Local Government Budgets

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