Hopes high for Acehnese to emerge from poverty
By: Wolfgang Fengler and Ahya Ihsan, Jakarta

Before the 2004 tsunami, Aceh was one of Indonesia's most neglected and isolated regions. Now, it is home to the largest reconstruction project in the developing world. The success of the reconstruction goes beyond economic recovery -- it is important for consolidating the peace agreement of August 2005. This has already made Aceh safe enough for economic activity to resume in previously dangerous areas.

Now is the time to address the structural constraints that have held Aceh back for decades -- financial resources are not among them. Since decentralization, Aceh has experienced a sharp increase in fiscal revenues. Aceh's total revenues have increased from Rp 4.5 trillion in 1999 to an estimated Rp 28 trillion (US$3 billion) in 2006 -- a remarkable six-fold increase. More than half of the 2006 expenditures will be on reconstruction (estimated at Rp 16 trillion) but regular revenues have also increased rapidly to Rp 12 trillion -- three times as high as before decentralization.

These regular revenues, which are also covering salaries of most civil servants, are expected to increase further to more than Rp 15 trillion by 2008. It is against this wealth of resources that Aceh's high -- and rising -- poverty levels must be viewed.

Three factors explain Aceh's large financial resources which will remain unchanged in the years to come and, if anything, only increase further.

First, Aceh has been among the main beneficiaries of decentralization. Since 1999, Aceh's regular revenues, managed by the province and local governments, increased from Rp 2 trillion in 1999 to Rp 11 trillion in 2006. Several factors contributed to this enormous increase, including the transfer of responsibilities in 2001, Aceh's special autonomy status in 2002 and an extreme increase in the General Allocation Fund (DAU) in 2006; Aceh received a 67 percent increase in the DAU across the country.

Second, spending on reconstruction will almost double Aceh's expenditure level from 2005-2009. The total reconstruction portfolio currently stands at about Rp 45 trillion, representing about 1,500 projects by more than 300 institutions. Total spending on the reconstruction effort is expected to exceed Rp 70 trillion by 2009. In 2006 alone, more than Rp 15 trillion is expected to be spent on reconstruction.

Third, the new Aceh Law will provide an additional allocation of Rp 3-4 trillion through a "Special Autonomy Fund" (Dana Otsus) from 2008 onwards. With declining revenues from oil and gas, the Dana Otsus is likely to become the second most important source of Aceh's revenues, similar to Papua.

Clearly, attention needs to be focused on spending these large revenues well -- and better than in the past. Aceh has the resources to fight poverty but it has not made much progress yet. Paradoxically, once Aceh's revenues started to increase disproportionately in 2001, poverty levels remained unchanged at 30 percent even though the rest of Indonesia experienced a massive decline of poverty to below 20 percent. Also within Aceh, regions with high revenues have yet to show results. North Aceh, which is also an oil and gas producing region, is the most extreme case: It has Aceh's second highest poverty rate, and at the same time manages the largest amount of fiscal resources.

The situation in the social sectors is equally paradoxical. Despite consistently larger amount of money, results are poorer compared to the rest of Indonesia. Most public services have been failing. In health and education, long-term structural problems are very striking and outweigh the short-term challenges after the tsunami. Reconstruction has progressed well in these sectors. Most medical facilities have been rehabilitated and almost all children are again regularly attending school. However, less than half of elementary school facilities are well maintained and the majority of teachers don't have the legally mandated qualification.

In health, only half of the villages are covered by a midwife -- the fourth lowest coverage in Indonesia -- even though the province has the highest density of midwives per percentage of population than the country. Most are concentrated in the well-covered urban areas having left the more insecure rural areas. A big challenge is to provide incentives for them to return. Aceh's social indicators have also failed to improve because Government expenditures have not been allocated effectively. Spending on the government apparatus and salaries has increased disproportionately while infrastructure spending in particular has been stagnant.

Aceh has a historic opportunity to turn its short-term reconstruction focus into a medium-term development plan. The large scale of investments in reconstruction will only be sustained if local governments take over when the Aceh Reconstruction and Rehabilitation Agency (BRR) mandate expires in 2009, though ideally this could be much earlier. The reconstruction revenues will peak at the same time local government revenues will see another sharp increase.

In order to manage this transition from reconstruction to development successfully, three reform areas need urgent attention:

* Better allocation of resources. Local governments spend most of their resources on salaries and investments in "government apparatus", and these expenditures have been increasing disproportionately in recent years. As a result, spending on most key sectors stayed much lower than it could have been, particularly on infrastructure. One reason for this trend is the mushrooming of administrative structures due to the splitting of districts.

* Better management of resources. One of the most worrying findings of the Aceh Public Expenditure Analysis (Spending for Reconstruction and Development) is the very low capacity to manage public funds well. In particular, external controls, public debt management and accounting need urgent attention. One of the most critical reforms is thus to build capacity in local government and reform the incentives and sanctions regime governing their activities.

* Better data and information. Good data, information and communication are the secrets for successful development and reconstruction policy making. Throughout Indonesia information systems are not functioning optimally and Aceh's information systems are particularly weak. Even for the reconstruction effort, despite the global attention, there is no unified comprehensive system for collecting and disseminating key data. An attempt to set up a complex system, the Recovery Aceh and Nias Database, based on voluntary information inputs via the internet was a clear-cut mistake. Many found it hard to even understand how the system was supposed to work.

Those who did were so disappointed by the failure to produce credible information that they never bothered to update their inputs. For all of Aceh, credible information systems will become even more important as resources increase. Particular attention needs to be given to revenues from oil and gas and the allocation of the special autonomy fund. Both have been less than transparent in other parts of Indonesia, too.

The challenge for Aceh then is to translate the potential of its historically large public resources into a boost for regional economic development and a better life for its conflict and disaster afflicted victims. It is an opportunity Aceh cannot afford to miss.

The writers are part of a World Bank team that led the study Spending for Reconstruction and Development (Aceh Public Expenditure Analysis) in collaboration with Acehnese universities. The team can be contacted through wfengler@worldbank.org. (The Jakarta Post,  Opinion and Editorial - September 22, 2006 )