Institutional Arrangement: A Crucial
Solution to Improve the Implementation of
Medium Term of Expenditure Framework
(MTEF) in Indonesia
Presentation held Post Graduate Research (PGR) Conference:
Institutions in International Studies
School of Social and International Studies, University of Bradford October 31, 2014
Mohammad Roudo
PhD Program in International Development Department, The University of Birmingham
Phone: +44 (63597096), E-mail: mxr338@bham.ac.uk
Outline
 Main Argument
 MTEF and 3 Elements of
PEM/PFM
 Problems
 Solutions and Challenges
 Conclusion
Main Argument
MTEF in Indonesia is relatively
effective to maintain the aggregate
fiscal discipline but it is still
questionable to deal with allocative
efficiency issues
The weakened role of the
Minister/Ministry of Finance (MoF),
caused by a dual budgeting system,
and the increasing of roles of
parliament are the main factors.
Elements of PEM/PFM
(Schick 1998; World Bank, 1998)
Operational
Efficiency
This Element is not
discussed in this paper
(OF)
Main Focus of
Discussion
1.Significant and
interesting development
and challenges
2.Significant and direct
contribution to the
improvement of the
quality of life of
Indonesian people.
Efficient way to utilize public money
Allocative Efficiency
(AE)
Government strategies to effectively
allocate the budget to pursue public
goals
Maintaining Aggregate Fiscal
(AF)
Efforts of government to spend beneath the total amount
of money allowed
MTEF in Indonesia
Introduction tools on budgeting like the Medium Term Expenditure
Framework (MTEF) were an obvious and essential change in Indonesia
PEM/PFM reforms (The World Bank, 2012).
MTEF is a tool that make the government more realistic and disciplined
with their budget by linking policy priorities and budgets between 3
and 5 years (The World Bank, 1998; OCDE 2009)
In Indonesia, MTEF has been applied since 2007 and set including
predictions for following four years of budgets.
MTEF significantly changes the way governments utilize their scarce
resources and potentially guides the government towards a more
transparent and rational management of public finance and
resources, leading to the improvement of public services (Ministry of
Finance, 2012).
MTEF and 3 Elements of PEM/PFM
(Ministry of Finance, 2012; The World Bank, 2008).
OE
This Element is not
discussed in this paper
AO
Allocation budgets for non-priority
programmes/activities (e.g. military spending
and general/ local elections) have increased
over the last five years
In contrast, the budget increases for priority
sectors are not as significant as the nonpriority sectors
AF
Has better rationalised its assumption of potential income
Aware, careful and keep spending within the available
resource envelopes
The effectiveness of MTEF to estimate government revenue
in Indonesia, A lower deficit in Indonesia’s overall budget , A
decline in debt levels and unnecessary spending
MTEF and Allocative Efficiency
The weak role and
power of the
Minister/Ministry of
Finance (MoF).
A weak link
between policy and
the budget.
the ineffectiveness
of MTEF when
dealing with
allocative efficiency
issues
Why do the role and power of MoF
become weakened?
1
Institutions are not matched to the logic
of MTEF
• A dual budget institution (a separate budget institution
which creates bad coordination between recurrent and
capital budget)
• MoF Vs MoP (Bappenas)
2
An increase in the roles of
parliament/house of representatives
• Less sufficient capacities to deal with MTEF
• Less political commitment to guard priority
programmes/activities.
Dual Budget Institution
The Fact:
1.Currently, coordination is only made occasionally in particular events (e.g Trilateral
Meeting)
2.A ‘white elephant project’ issue
3.Different perceptions to determine priority programmes
4.Check and balance mechanisms can still be set internally or by using external
auditors
(+)
• Having a check and balance
mechanism in budget allocation
and the utilization of resource
envelopes which will possibly to
prevent the budget from being
used inappropriately, address
budgets to priority programmes
and improve MTEF to optimally
deal with allocative efficiency
issues
(-)
• Weakened roles of MoF to
making MTEF effectively deals with
allocative efficiency issues
• More possibility to have a
duplication in both capital and
recurrent budgets caused by lack
of coordination
• Lack of coordination could also
cause drawing policy far to
priorities
Increasing Roles of Parliament
The Fact:
1.Sometimes, this is not followed by an increase in capacity of parliament members on
financial/budget issues
2.The discussions focus on the level of inputs , only in few cases, the budget allocation
justification/judgement is made by parliament based on national priorities
3.Allocation based on national priorities becomes more difficult and MTEF becomes
ineffective at dealing with allocative efficiency
(+)
(-)
• It is an important progression for
Indonesia’s democratic system acting as
fiscal watch dog’ and ‘budget
policemen’ ensuring that the state
budget is allocated appropriately
• The creation of checks and balances in
budget allocation and formulation to
the government
• MTEF are rarely utilized as the basis for
budget allocation
• Moral hazard problems: the discussion
of budget allocation is not about
whether particular aims have been
achieved or/and priority programmes
have been addressed, but mostly how
much money has been directed
towards their constituents/ parties
Solution 1: Integration planning
and budget institutions
Description
Challenges
• Ensure coordination between
planning and budgeting
• Strengthen the roles of MoF while
facing other members of cabinets or
even parliament
• Better in dealing with allocative
efficiency issues
• An improvement in the connection
between policy and budget
• More focus on priority programmes
• More efficient use of MTEF in tightly
connecting capital and recurrent
budget
• The reluctance from politicians and
senior managers who could possibly
lose their position
• Difficulties to make a clear division
of functions, setting internal
coordination and check and balance
mechanisms as well as bbuilding the
same perceptions in determining
priority programmes
• Require political support and
commitment from elites
Solution 2: Introduction of financial
and performance information
Description
Challenges
• FMIS should comprise all
information about MTEF
and performance,
introduced to the
parliament immediately
and continually supplied
• Parliament might ignore
the information supplied
• Require high political
supports and
commitment--Idea of
‘platforms’(focusing on
particular interventions
and clear sequences)
• Open to the public so it
can place pressure
Conclusion
• MTEF is the most important and progressive change in Indonesia’s
PEM/PFM reforms.
• Positive attainments in maintaining aggregate fiscal discipline: smaller
deficits in the total budget, more accurate projection of future incomes, Less
spending on unnecessary expenditure
• The roles of MTEF in dealing with allocative issues are still challenging:
there is significant money still allocated to non-priority programmes , less certainty
and miscalculations in recurrent budgets.
• The Problems of Institutions: Weakness of the Indonesian MoF, A weak link
between policy and the budget , Ineffective MTEF when dealing with allocative
efficiency issues.
• Recommendations in Future Reforms
• Integration of the budget institutions
• The introduction of FMIS to parliament
• What is required
• Consider some constraints and challenges
• Learning some lessons from international practices
• Political support and commitment from political elites or even people pressure.
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