New finance law an overlooked milestone

New finance law an overlooked milestone

By Edimon Ginting

After a lengthy process of deliberation, the House of Representatives and the government finally passed the State Finance Law early last month. It was one of three public finance laws proposed in a package to the legislature in September 2002. The other two, on treasury and audit respectively, are still being debated by a special committee and government representatives in the legislature. Although the law is truly a milestone in the country's drive to ensure consistency and transparency in managing public money, its passage was not considered front-page material by media. In fact, it initially almost escaped press attention, with the exception of The Jakarta Post, which commended the government and the House for their achievement in its passage. The almost universal disregard by the press is in stark contrast to the continuous coverage of the very types of corruption scandals and allegations that the law aims to curb. In recent days, the law did receive some coverage, but for something it omits rather than for its actual content. The National Development Planning Board (Bappenas) is not mentioned in the new law, leading some to fear the future of the agency's existence. Under the current budget process, Bappenas continues to support the Ministry of Finance, though its role has dramatically diminished since the height of its influence in Soeharto's New Order government. With the new law, the role of Bappenas in the budget process has been formally eliminated. Substantial articles in the new law are devoted to streamlining the budget process at the national and regional levels, and this content is vulnerable to political manipulation. Therein lies the crux of the issue for necessary further action. The audit and treasury bills are designed to "put teeth' into the State Finance Law; that is, to make the provisions for managing the budget enforceable. All our laws have such "implementing regulations" appended to them. Regulations are drafted by the implementing agency, in this case the Ministry of Finance. Often, these regulations are more important than the laws themselves, since they interpret what the legislation "intends". For the State Finance Law, they also will lay out the step-by-step procedures for budget management. Some would argue that transparent and tight implementing regulations for the State Finance Law would preclude the need for the other two laws. However, because some House members and several officials at the Supreme Audit Board (BPK) are not confident that the Ministry of Finance will draft effective implementing regulations, they are pushing for the two additional laws to assure the enforcement of public accountability.

The State Finance Law is the first legislation on the management of public finance to be enacted since the country's independence. For 58 years, the government has relied on the old Dutch law, often called ICW, for managing its finance. The decision to use ICW during the early years after independence is understandable, but it is highly regrettable and damaging that it was not replaced earlier. Economic growth undoubtedly raised the country's standard of living over the past half-century, yet this development has been accompanied by an ever-expanding culture of corruption that has gone unchecked for decades due, in large part, to the absence of a strong and viable public finance law. The enactment of the State Finance Law is truly a milestone toward sounder public financial management. First, it replaces the outdated Dutch legislation and, if enforced effectively, it will be an important tool in curbing corrupt and inefficient practices. The law provides a comprehensive definition of state finance, stipulating that all public money included in the definition has to be managed in an efficient and transparent manner. To ensure accountability, all public transactions will be audited by the Supreme Audit Agency (BPK). Thus, every official responsible for receiving, keeping and transferring public money, state papers and state properties will be obliged to submit accountability reports to the BPK. This will minimize opportunities for off-budget financing, one of the major sources of public corruption during the New Order Regime. Second, the law clearly distributes power over state finances within the executive and between the executive and the legislative branches of government. Within the executive, there is a clear division of authority between the finance minister who, as the president's representative, will act as a chief financial officer, and each line minister as a chief operations officer. The law stipulates clear division of roles in the budget process - budget drafting, deliberation, approval, implementation and accountability - for both the national and the regional governments. This will reinstate the constitutionally mandated role of national and local legislatures in the budget process. Thus, with the advent of the State Finance Law, the budget process will be more democratic: Gone forever is the "one-man show" budget process of House rubber stamp approval that was practiced during the Soeharto regime. The new law introduces a check-and-balance mechanism that, if applied consistently, will improve professionalism in management of public finances. Third, the law also regulates the financial relationship between the central government and the central bank, Bank Indonesia, local governments and foreign governments and financial institutions. The government will coordinate the implementation of fiscal policies with the central bank, while fiscal relations between the central and regional governments will be governed in accordance with legislation on local autonomy. The authority to manage foreign grants and loans remains in the hands of the central government, but it can delegate this task to local governments. One new element of this function is the involvement of the House in the foreign borrowing process. Article 23 of the law stipulates that all foreign aid and lending require House approval, thereby reflecting public sentiment toward controlling and reducing the country's dependence on foreign debt. House approval is also required for implementing the privatization processes, both at the national and the local levels. This provision is also in response to public pressure for more democratic management of public finances. Finally, the new State Finance Law requires the government to provide more comprehensive information at all steps of the budget process. The government must now provide performance indicators of each budget item in addition to the financial information itself. With this performance-based budget, it will be easier for the public and the House to monitor the government's accountability and efficiency in managing and deploying public funds. There is no doubt that the new law will contribute importantly to our national drive for better governance. However, it must be noted that this is not all that is needed to surmount the huge public finance management problems that face this country. Implementation of the State Finance Law will depend on tight implementing regulations, including severe penalties. This must be complemented by the establishment of government accounting standards, which have yet to be completed. In addition, enactment of the two remaining public finance laws will help to ensure that the implementing regulations drafted by the Ministry of Finance will be sufficiently specific to prevent leakages in revenues and large off-budget expenditures. Without fulfilment of these essential conditions, the State Finance Law will not guarantee sound management of the budget, but lead to business as usual for corruptors.

The writer is a lecturer in graduate studies in the School of Economics, University of Indonesia.