Nias Amongst Poorest Areas but Dramatic Increase in Revenues Offers Real Opportunity for Growth

Jakarta, August 28, 2007: The first Nias Public Expenditure Analysis released by the World Bank and BRR today highlights both the poverty in the tsunami and earthquake-ravaged island, as well as the hope that the four-fold increase in district revenues and reconstruction financing – together providing Rp1.7 trillion in 2006 for rebuilding the shattered island — presented a real opportunity for growth.

Nias was among the poorest parts of North Sumatra even before the December 2004 tsunami, says the report, with social indicators such as adult literacy, immunization coverage and access to electricity well behind the regional and often, the Indonesian, average. Conditions on the island worsened considerably after the twin disasters and the remoteness of the area has slowed the reconstruction of badly-damaged infrastructure, housing and civic facilities

On a more positive note, the report emphasizes the real opportunity for upgrading infrastructure, access to public services and ultimately human development in this remote region through the wise allocation of significant reconstruction and local government revenues: “We must cease the opportunity to improve the economic and social conditions in Nias and we can ‘build back better’ with the support of domestic and international partners, through careful planning to address the regional imbalances between the two districts of the island”, said William Sabandar, Head of BRR Nias Office.

In 2006, Nias island is estimated to have received Rp. 1.7 trillion in revenues comprising local government’s revenue, reconstruction funds, and the deconcentration fund from central government. Decentralization increased districts revenues almost fourfold, from Rp. 111 billion in 1999 to Rp. 435 billion in 2006. Nias received additional resources following the March 2005 earthquake, estimated at approximately US$ 490 million by end of 2006. The Indonesian Government, through BRR, is the main contributor, with US$ 131 million, while US$ 200 million came from donors and US$ 159 million from NGOs.

Nias island’s revenue pre- and post-decentralization, and after the earthquake

Source: World Bank staff estimates based on data from APBD, SIKD/MoF, BPS-SK, and BRR. Data are in real terms (constant 2000 prices)

“The report provides a comprehensive picture of spending in Nias, both by local governments and reconstruction partners, highlighting the need for closer coordination between the two as a key element for the sustainability of the reconstruction effort,” said Joachim von Amsberg, Country Director, World Bank Indonesia. “The reconstruction effort still faces enormous challenges and greater coordination with local government is crucial to maintaining sustainability of infrastructure projects and long term development of the island,” Mr von Amsberg will be visiting the island of Nias from September 3-4 to see first hand the progress of the reconstruction and meet with heads of local government, BRR and donors .

Despite the increase in revenues, Nias and Nias Selatan continue to have the lowest per capita revenues in North Sumatra. The local governments are dependent on transfers from the central government to cover their expenditures, and are likely to remain so in the short to medium terms. So far, transfers have failed to address disparities in income levels with the rest of North Sumatera and the report argues that an increase in local government revenues – together with a more efficient allocation of resources -is needed to address Nias’ development challenges.

While spending patterns have improved in some respects, some concerns are highlighted by the report. Overall spending on health and infrastructure service is lower than in other parts of North Sumatera and the Indonesian average. Increasing routine administrative expenditure after decentralization leaves limited funds for development spending. The sector allocation of resources shows a worrying trend towards increasing government spending on its own apparatus and away from areas with a more direct impact on poverty reduction, such as infrastructure and education spending. Of particular concern, given the phasing out of BRR in 2009 and the large public investments in infrastructure currently taking place, is the additional cost of operation and maintenance of assets created in the two districts going forward.

The other concern highlighted by Cut Dian, World Bank, lead author of the report, is the need to build local government capacity to manage public finances given the greater responsibility they bear after decentralization. A Public Financial Management survey in 2006 shows that Nias and Nias Selatan scored ‘poor’ and ‘very poor’ respectively in managing public finance, which is “worrying given also their increased responsibility after decentralization in key areas such as education, health, and infrastructure, “ says Cut Dian. “A strategy to improve the capacity of current staff and appropriate incentives mechanism should be developed to maintain and attract qualified civil servants to the island.”

The findings of the Nias Public Expenditure Analysis also have relevance for many districts in Indonesia where newly designated districts, like Nias Selatan, and relatively new local governments must work hard to spend revenues with maximum impact for development. This was also a major theme of the Indonesia Public Expenditure Review released in January this year.

To access these reports and read more about the World Bank’s support for Indonesia visit: http://www.worldbank.org/id.

World Bank Office Jakarta
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Contact:
In Banda Aceh:
Ratnasari Dewi: 08126992683
rdewi@worldbank.org

In Jakarta:
Wiwiek Sonda: 5299-3084/ 3146
wsonda@worldbank.org

Source: World Bank Website.

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