Indonesia

Indonesia: Nias Island public expenditure analysis

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The island group of Nias has consistently registered lower development outcomes than both provincial and national averages. This report suggests that low levels of public spending have contributed to below average development outcomes for Nias’s population of 720,000.

Three events in recent years have dramatically altered public expenditure in Nias island:

First, decentralization across Indonesia has resulted in a large transfer of resources and responsibilities from the center to district governments. District governments suddenly became the main development actors in many sectors, with far greater responsibility for public service provision.

Second, the original district of Nias, which encompassed the entire island group, was split into two districts in 2003: Nias and Nias Selatan ― an example of the nationwide trend towards regional sub-division following decentralization. The new district of Nias Selatan has limited capacity to cope with increasingly complex financial management issues, similar to many other new districts. As a result, public service provision is under-served in many areas.

Third, the reconstruction program following the twin disasters of the December 26, 2004, tsunami and the powerful earthquake of March 28, 2005, has brought with it substantial funding. US$495 million had been allocated for the recovery and reconstruction process on Nias island by end of December 2006 . This amount slightly exceeded the estimated needs, at US$423 million, and is expected to increase in coming years, especially from the government budget (via BRR) until 2009.

This report aims to help decision-makers and stakeholders to better understand, analyze and improve local government fiscal policy given the context of decentralization, regional division and post-earthquake reconstruction funding. It also offers an analysis of resource allocation vis-à-vis outcomes in three key public service sectors: health, education and infrastructure. The report is the result of close collaboration between the World Bank, the Demographic Institute at the Faculty of Economics, University of Indonesia, and the BRR-Nias office, as well as the two district governments on the island of Nias.

Fiscal Condition and Spending Pattern

In the wake of the disasters Nias received an unprecedented amount of financial resources from the Government of Indonesia, donors and NGOs to finance the reconstruction of the island. The reconstruction budget for 2006 is estimated at about Rp 1.1 trillion, four times the size of the normal local government budget. In addition, local government revenues combined for both districts that form the Nias island have increased significantly by almost four fold following decentralization from Rp 111 billion in 1999 to Rp 435 billion in 2006. However, Nias and Nias Selatan continue to receive among the lowest per capita revenues of all districts in North Sumatra, despite being two of the poorest districts in the province. This low per capita public revenue is related to relatively low DAU (General Allocation Fund) allocations in which its allocation criteria still do not favor Nias and Nias Selatan.


Figure 1 Nias and Nias Selatan’s revenue pre- and post-decentralization, and after the earthquake


The spending patterns of local governments on Nias island have improved in some respects but there remain areas of great concern. While spending on education absorbs the bulk of expenditure in Nias and Nias Selatan, it has been decreasing in recent years. Expenditure on government apparatus now absorbs a disproportionately high share of funds. Similarly, infrastructure, an area key for the development of Nias given its remoteness and distance from the mainland, has seen a sharp decrease in the allocation of funds since decentralization. Routine expenditure, primarily for paying civil servants’ salaries, commands an increasing share of funds, leaving limited funds for maintaining existing assets or investing in improved public services. Another worrying trend is the large allocation of funds for official travel, with the local governments’ allocations for travel doubling the allocations of funds for operation and maintenance of public assets in 2005.

Fiscal management capacity was assessed through a joint World Bank-LGSP (USAID) public financial management survey. South Nias district scored very low across all aspects of financial management, whilst Nias district scored close to the combined Aceh and Nias average. This low capacity is partly the result of the difficulty in attracting and maintaining qualified staff to the remote island and lack of incentives . The majority of civil servants have only completed high school. Therefore, improving local capacity is crucial given the greater authority and responsibilities that came with decentralization and the low capacities of local governments in Nias.

Education

Despite a significant portion of spending being allocated toward education – over 40 percent in both Nias and Nias Selatan – this does not translate into high per capita public spending. Both districts have significantly lower per capita public spending on education than the provincial average -, Nias Selatan has the lowest per capita spending in the province. Nias and Nias Selatan have some of the lowest education outcomes in North Sumatra. A relatively large percentage of the adult population in Nias Island – 13.5 percent in Nias and 39.2 percent in Nias Selatan - has never attended school. Inequalities between sub-districts are starker, with some sub-districts having a student-to-teacher ratio as high as 1:70, far higher than the average for the island as a whole. Over 80 percent of classrooms in the island are in bad condition. Given the relatively large allocation to education in the districts’ budgets, a more efficient use of existing resources seems the only way to improve the delivery of public education. Spending in both Nias and Nias Selatan should be geared towards filling gaps in teacher allocations, as well as improving the maintenance of existing classrooms. Current spending patterns do not allocate sufficient resources for the maintenance of existing classrooms, with most routine expenditure financing teachers’ salaries.

Health

Despite improvements in recent years, health outcomes in Nias island still lag behind provincial and national averages. It has a much higher infant mortality rate than North Sumatra and Indonesia as a whole. The percentage of children under five with poor nutrition is far higher than provincial and national averages, and immunization coverage is significantly lower. In per capita terms, public spending on health is significantly lower in the two districts of Nias island compared to the average in North Sumatra or Indonesia. The scope for further increases in the total level of health spending is now limited. Increases in spending have gone mostly to routine functions, primarily to pay for salaries of health personnel. Spending should also go towards filling the gap in health personnel in more remote areas, as well as for the operation and maintenance of existing health facilities.

Infrastructure

Access to basic infrastructure, such as clean water, sanitation and electricity on the island consistently lags behind the average for North Sumatra and for Indonesia as a whole. The road network is extremely limited in rural areas and both the construction of new roads and the maintenance of existing ones are very expensive and time-consuming due to the lack of machinery on the island and the need to ship in most materials. Despite the identified needs in infrastructure, both in real terms and as a share of total spending, overall spending on infrastructure in Nias and Nias Selatan declined significantly from Rp 58 billion in 2001 to Rp 25 billion in 2005. The low priority given to this leading sector in recent years has hindered the development effort to open access to more isolated villages. The operation and maintenance of existing infrastructure has received relatively little attention, with personnel costs accounting for the largest share of routine spending in both districts. Official travel is absorbing an increasing share of the funds in both districts.