Indonesia: Technical Assistance Report-Subnational Government Endowment Funds

TECHNICALASSISTANCEREPORT INDONESIA SubnationalGovernmentEndowmentFunds NOVEMBER2023 PreparedBy SailendraPattanayak,MajdelineElRayess,ClementNcuti,GemmaPreston,andJohnGardner AuthoringDepartment FiscalAffairsDepartment ©2024InternationalMonetaryFund ThecontentsofthisdocumentconstitutetechnicaladviceprovidedbythestaffoftheInternationalMonetaryFundtotheauthoritiesofIndonesiainresponsetotheirrequestfortechnicalassistance.UnlesstheCDrecipientspecificallyobjectstosuchdisclosure,thisdocument(inwholeorinpart)orsummariesthereofmaybedisclosedbytheIMFtotheIMFExecutiveDirectorforIndonesia,tootherIMFExecutiveDirectorsandmembersoftheirstaff,aswellastootheragenciesorinstrumentalitiesoftheCDrecipient,andupontheirrequest,toWorldBankstaff,andothertechnicalassistanceprovidersanddonorswithlegitimateinterest(seeStaffOperationalGuidanceontheDisseminationofCapacityDevelopmentInformation).PublicationorDisclosureofthisreport(inwholeorinpart)topartiesoutsidetheIMFotherthanagenciesorinstrumentalitiesoftheCDrecipient,WorldBankstaff,othertechnicalassistanceprovidersanddonorswithlegitimateinterestshallrequiretheexplicitconsentoftheCDrecipientandtheIMF’sFiscalAffairsDepartment. Contents ABBREVIATIONSANDACRONYMS5PREFACE6EXECUTIVESUMMARY7RECOMMENDATIONS9 I.LEGALFRAMEWORKFORTHEESTABLISHMENTOFENDOWMENTFUNDSINSUB-NATIONALGOVERNMENTS10 A.CurrentLegalContext10 B.DraftRegulationsfortheEstablishmentofEndowmentFundsinSub-NationalGovernments_13 II.REGIONALENDOWMENTFUNDS–ISSUESARISING16 A.MotivationsandObjective16 B.FundStructure17 C.FiscalContextandAlignmentwithFiscalPolicyObjectives18 D.SourcesofFunding20 E.InflowandOutflowRules21 F.InvestmentPolicy22 G.EligibilityCriteriaError!Bookmarknotdefined. H.ConsiderationoftheFinancialStabilityoftheLocalBankingSector24 I.Recommendations25 III.IMPROVINGTHEDRAFTREGULATIONOFMINISTRYOFFINANCE26 A.GeneralConsiderations26 B.TypeofFund28 C.EligibilityCriteria28 D.UtilizationofFundYield28 E.PortfolioInvestmentPolicies29 F.FundLifetimeandWithdrawals30 G.EvolutionaryAspects31 H.Recommendations31 IV.IMPLEMENTATIONCONSIDERATIONS33 A.ManagementStructure33 B.TransparencyandReporting33 C.FiscalRisks34 D.OtherConsiderations35 E.Recommendations36 BOXES 1.IndonesiaEndowmentFundforEducation14 2.AlbertaHeritageSavingsTrustFund17 2.ExampleofDifferencesintheAssetAllocationofFundswithDifferentObjectives23 FIGURES 1.Indonesia–EvolutionofSNGSiLPA(2007–2020)13 2.Indonesia’sFiscalStanceandDebtLevels18 3.HiddenCostsofInvestmentFundsFinancedwithBorrowedCapital20 4.SourcesofWealthforIFSWFMembersin2018(includes23members)21 5.EvolutionaryAspectsofInvestmentPolicy:AlaskaPermanentFund24 6.IllustrationoftheIntegrationwithBudgetProcesses33 7.GenericFrameworkforFiscalRiskManagement35 ANNEXES 1.DraftGovernmentandMinisterialRegulationsfortheEstablishmentofDAD37 2.FundswithDifferentObjectiveshaveDifferentCharacteristicsandFeatures43 3.CaseStudy:Australia–Comparisonof44 4.CaseStudy:Alaskav.Alberta–ClearObjectivesFacilitateEnablingFeatures45 5.StrengtheningDecisionMakingforEstablishingInvestmentFundsandTransparencyOvertheFullCosts 46 6.SuggestedAmendmentstotheMinisterofFinanceRegulationstoEstablishanEndowmentFundforRegionalGovernment47 7.FiscalCapacityIndices49 AbbreviationsandAcronyms APBD AnggaranPendapatandanBelanjaDaerah–RegionalAnnualFinancialPlan BI BankIndonesia BPK BadanPemeriksaKeuangan–AuditBoardofIndonesia BLUD SNGPublicServiceAgency BUD SNGGeneralTreasurer CG CentralGovernment IDR IndonesianRupiah IGWF IntergenerationalWealthFund IGFT IntergovernmentalFiscalTransfers DAD DanaAbadiDaerah–RegionalEndowmentFund DAK DanaAlokasiKhusus–SpecialAllocationFunds DAU DanaAlokasiUmum–GeneralAllocationFunds DBH DanaBagiHasil–RevenueSharingFunds DGFB DirectorateGeneralofFiscalBalance HKPD HubunganKeuanganantaraPemerintahPusatdanPemerintahDaerah–DecentralizationLaw IDR IndonesiaRupiah KUA KebijakanUmumAnggaranregionalrevenueandexpenditurebudget LPDP LembagaPengelolaDanaPendidikan–EndowmentFundforEducation MBFF Medium-termBudgetFinancingFund MoF MinistryofFinance MoHA MinistryofHomeAffairs PAD PendapatanAsliDaerah–Own-sourcedRevenueofSNG PPAS PrioritasdanPlafonAnggaranSementara–Provisionalbudgetprioritiesandceilings RPMK DraftMinisterofFinanceRegulationonProceduresforEstablishmentandManagementofDAD SiLPA SisaLebihPerhitunganAnggaran–Excessofrevenuereceiptsoverexpenditurepayments SNG Sub-NationalGovernment SPM StandardPelayananMinimum–minimumservicestandards SWF SovereignWealthFund TKD TransfersfromtheCentralgovernment UPD FundManagementUnitoftheDAD UPP ProgramManagementUnitoftheDAD Preface AttherequestoftheIndonesianauthorities,anIMFFiscalAffairsDepartment(FAD)missionvisitedJakartaduringAugust14to29,2023todeliveratechnicalassistancemissionontheestablishmentoflocalgovernmentendowmentfundsinIndonesia.Themissionalsodeliveredathree-dayworkshopon“LocalGovernmentEndowmentFund”forthestaffoftheMinistryofFinance(MoF),theIndonesiaEndowmentFundsforEducation(LPDP)andtheMinistryofHomeAffairs(MOHA).BoththeworkshopandthetechnicalassistancemissionwereledbySaile