A Case Study of Public Sector Management: Managing the Budget Reform in Indonesia

by: Marudut R Napitupulu

Following the fell of Soeharto’s 32-year authoritarian regime, Indonesia experienced massive ‘big bang’ reforms (McLeod, 1998). With the onset of the reformation era, demand for new and effective means of managing the government’s budget was increased. This was due to the previous poor budget planning and lack of budget sustainability which tended to hinder the National Development goals of ‘pro-poor’, ‘pro-growth and ‘pro-job’ (MOF, 2010). The Indonesian budget reform then was introduced in the mid 2000s as mandated by Law no 17, 2003 State Financial Law. This reform was launched through a series of reform packages that covered Unified Budget, Medium Term Expenditure Framework and Performance-based Budgeting. Of these three reform pillars only the Unified Budget was implemented effectively across public spending units while the other two pillars are still being piloted.

Although the government recognizes that these two approaches will bring significant impact to the budgetary decision of Indonesia’s Public Expenditure Management, this set of donor-driven budget reforms are difficult to implement due to serious inherent internal managerial issues such as limited capacities and capabilities of the public officers, lack of ownership, lack of leaders and political supports, conflicting multiple budgeters’ interests and budget technicality constraints (e.g. USAID, 2007; WB, 2008). The Ministry of Finance (MOF) is one of the pilot project agencies.  The Planning and Financing Bureau (the Bureau) as a responsible agency to implement the reform agenda in MOF also faces dynamic challenges in managing the budget reform due to the above managerial problems.

The Key Issue

The key issue in this case is how the Bureau will effectively manage the reform challenges by balancing its internal capacity with the political environment and external expectations. This dilemma can be framed by using Moore’s ‘strategic triangle’ (1995) to define a balanced response over managing ‘upward’, ‘inward’ and ‘outward’ to accomplish the reform goals (O’Toole et al. 2005; Alford & Janine, 2009, pp.173). Managing reform in public sector is important because ‘the bureaucracy is the largest arm of modern government and the one that most regularly interacts with citizens in their ordinary lives’ (Van-Ryzin, 2011, p.11);  ‘whether sound policies are chosen, and then designed and implemented properly, depends… on the quality of the civil service’ (Ross McLeod, 2006, p.14).

Around the world, Public management practise develops and changes in response to society dynamic interactions. To respond this global trend, Ingstrup and Croockall (1998, p.13) suggest, public managers should ‘tackle change head on, leading it, treating it as an ally rather than an opponent’. However, budget reform implementations are different from country to country (Goldfinch & Wallis, 2009, p.iv).  Olsen and Peters (1996, cited in Wallis, 2009 p.353) find ‘significant variations’ in their study of comparative public sector reforms, and conclude that there was no ‘universal’ and ‘general’ pattern in managing the reforms. The variation occurs partly due to different conception and strategies of the reforms (Premfors, 1998 cited in Wallis, 2009 p.353).

Furthermore, managing change in public sector is ‘more complex’ than private sectors because public managers not only deal with ‘planned change’ but also ‘emergent change’ that can ‘neither control nor predict’ (Osborne & Brown, 2005 p.6). Additionally, public sector reforms in developing countries face more ‘serious’ managerial challenges compared to developed countries because they struggle with ‘political instability and problems of poverty’ (Kim, 2009, p.89). The public sector officials often ‘carry out great numbers of complex reforms and expect to have successful results in the short term’ (Kim, 2009, p.94).  Therefore with scarce resources (human and capital), ‘it will be better to manage few problems at a time by focusing on most important problem in a given period’ (Andrews, 2008, pp.178).

The reform should be adjusted to the internal capacity endowment as Pollit (2002, p.290) argues, ‘pulling grass up by the roots does not make it grow any faster’. Therefore, the Bureau needs to redefine a strategic managerial approach to balance the different values and interests among the budget actors and increase the internal capacity to better manage the reform challenges.

Alternative Solutions

Proposal 1: Enhancing the reform by focusing on top management commitment and support

In this proposal the Bureau should maintain the support from the top leaders within the MOF that consist of the Minister and 12 Echelons I or Directorate Generals. The role of this group is crucial in promoting organizational change to the MOF. The importance of the top management’s commitment and support has been identified by many practitioners and scholars. For instance, Wallis (2009, p.60) points out that strong leadership is important to exercise ‘windows of opportunity’ to impose reform. He adds, the ‘art of persuasion’ is essential and can be used effectively by the top leaders to demonstrate the need for major policy change (p.361). Similarly, ‘strong leadership with the ability to be ruthless in setting priorities becomes essential’ to gain a successful budget reform (IMF, 2008).

According to Gortner, Mahler and Nicholson (1997, p.230) ‘success in changing the attitudes and habits of individuals and groups usually depends on the commitments of the leaders’. They argue that ‘if they support change, it has a chance; if they do not support change, it probably will not occur’. Therefore, top managers in MOF can play effective roles as the champion team and set reform destination through a clear visionary rod mad. As Osborne and Brown (2005, p.103) argue, ‘strategic leaders create a vision that encompasses a view of the future state of the organization’. Similarly, Ingstrup and Croockall (1998, p.10) point out that the ‘visionary; and ‘long view’ are part of the well-performing leaderships’ characteristics. Through a clear and visionary mission, the higher level objectives can be cascaded to the lower levels’ goals.

Furthermore, managing upward is one of the public managers’ challenges which direct toward political leaders as an authorizing environment in generating public value based on mandated mission (Moore, 2000, p.198; O’Toole et al. 2005; Alford & Janine, 2009, pp.173). In this sense, top management in this proposal not only covers internal MOF leaders but the external central agencies and the political leaders because the latter also have authority in budget decision as granted by the law.  Budget is not merely about technicality but also deals with the political question of ‘who gets what, when, how’ (Lasswell, 1936) where ‘control over financial resources is (still) a form of power’ (Jacobs, 2008). Sri Mulyani, a former Indonesian reformist-minister, has identified that the first budget reform challenge is how to define ‘fruitful ways’ of interaction with the parliamentarians who also act as ‘budget decision-maker’ (Lienert, 2007).

With the leaders’ commitment in hand, a set of guiding values can be used to aim the organizational change accordingly. As Ingstrup and Croockall (1998, p.9) found in their study of well-performing organisations, leadership includes ‘the need for listening, involving, and delegating; commitment to employees; and consistency between the leadership style and mission’.

However, managing upward in Indonesia can be difficult for various reasons. First, there is a tendency that ‘bureaucrats or established officials prefer to maintain status quo’ and ‘often blindly take the path intended by top officials’ (Kim, 2009, pp.94, 99).  As O’Flynn (2007, p.363) notes, bargaining with the authorising environment may put ‘enormous challenge’ to existing managers’ capabilities. Moreover, this approach may pose another disadvantage because in most developing countries there is a tendency for the leaders to listen to ‘honeyed words more than criticism’ (Kim, 2009, p.93).

Proposal 2: Enhancing the reform by increasing internal capability, capacity and supports

Another way of promoting changes is by focusing on internal capabilities or the operational environment of the Bureau. Managing inward is one of the public managers’ challenge which focuses on the internal operational management (O’Toole et al. 2005; Moore, 2000, p.198). In doing so the Bureau should focus on the bottom-up aspirations and take in to consideration different needs and interests of its employees and the MOF employees in general. Thus different strategies should be tailored to the different employees’ needs because public sector reform also deals with human behaviours and organisational cultures that naturally adjust to the new system gradually. As Kettl (1997, p.459) argues, ‘careful management of these new governmental reforms requires the cultivation of new capacity, which is why governmental reform must go hand-in-hand with human resources reform’. Similarly, Dahl (1947, p.4) in his classic study observes that ‘most problems of public administration revolve around human beings’, thus, concern over their behaviours within particular circumstances is essential.

In budgeting for performance, Melkers and Willoughby (2001, p.62) argue that change in organizational cultures is important as it demands the adoption of ‘new organizational values, missions, and operating requirements’. Similarly, Forester and Adams (1997, cited in Melkers & Willoughby, 2001, p.56) note that ‘the success of budget reform directly on an organization’s ability to absorb and then institutionalized new formats, process, and system’. They add that budget reform should also aim at ‘learning’ process rather than to ‘budget correctly’ (p.56). In their recent study, Choi and Ruona (2011, p.64) find that learning culture environment brings significant ‘levels of readiness for change’.

Apart from bottom up participation and learning environment, the MOF should provide a fair incentive for the reformers as well as disincentives for lower performance. This competition is important to increase employee motivation for change. Jones (2005, Lecture Note) notes that the public managers should ‘focus on incentives and disincentives rather than rules and forms that prescribe’. Kerr (1975, p.769) strongly argues that ‘whether dealing with monkeys, rats, or human beings, it is hardly controversial to state that most organism seek information concerning what activities are rewarded’. Therefore, it is fundamental to renew incentive mechanism (such using Performance Related Pay) to stimulate well-performed officials and reduce irresponsible public officials (Kim, 2009, P.96).

Furthermore, focusing on internal capacity and capability will increase the understanding for reform direction as well as a sense of reform ownership. For instance, capacity building is important to improve ‘the range functions which an organization can carry out effectively on a sustained basis’ (Polidano & Hulme, 1999, p.124). Melkers and Willoughby (2001, p.56) note that ‘inadequate understanding by budget actors of the usefulness of reform’ can prevent effective reform. Additionally, Poladino and Hulme (1999, pp.128-129) note that the main failures of international aid in public sector reform are due to lack of ‘genuine commitment’, less ‘ownership’ and ‘over ambition’ goals which ended up in ‘overloading capacity’ of the public officers.

Focusing on internal operating capacity investment will bring lasting impact for the reform. Nevertheless, too much focus on the internal operating environment can be time and budget consuming because investing in human capital is both expensive and demands long term and continuos training on budget technicality such as the use of performance measurements and technical know-how of the new budget system. As Osborne and Brown (2005, p.97) argue, ‘without employee participation, there may be little ownership of the change initiative and poor outcomes, but involvement is a time intensive process’.

Proposal 3: Enhancing the reform by the external supports

Focusing on external supports is also an important strategy for the Bureau because nowadays central issues in public sector become more non-vertical and not only exclusively explored by the authorized bureaucrats. In this ‘horizontal’ sense, Ingstrup and Croockall (1998, p.9) find that ‘well performing organizations have moved out of their vertical hierarchical or vertical structure (silos), to network with an array of partners’.

In recent governance practise, managing outward is one of the public managers’ challenge which deals with managing the ‘networks of organizations and citizens’ (O’Toole et al. 2005; Moore, 2000, p.198). As Stoker (2006, cited in O’Flynn, 2007, p.361-362) argues, through networks public managers can learn different approaches from wide variety of available sources.  Moreover, through an external support will help the Bureau to cope with the culture that ‘hesitates to tell the real problems and reasonable alternatives to their superior’ (Kim, 2009, p.95). The ‘external supports’ will be more open to propose opinions or new solutions thus providing better feedbacks without directly compete with the authority of the top leaders.

In addition, Moore (1994, p.302) notes that public managers ‘must become agents of the collective rather than individually defined purpose’. Thus, to bring change the Bureau should establish a budget networks by involving more participants in reform process such as NGOs, budget interest groups, press or media, private practitioners and scholars that may involve in developing budget technicality. This external influence can be utilized effectively by the MOF to support their reform efforts by reducing barriers to network such as ‘restrict access and limits to the knowledge of the citizens’ (Rhodes, 1997, p.58). Therefore, the Bureau should create appropriate environment for ‘group discussion and collaboration’ between internal officials and external participants (Kim, 2009, P.99).

Furthermore, through this strategy will also cover the participation of international non-state actors such as donors, international agencies, and cross countries lesson-learn practises. Those institutions usually provide technical assistances for reform implementation based on international best practise and lesson learned. Through this set of activities MOF can critically observe and learn from practical implementation as well as changes in other developed societies. This is important because we can learn, adjust the success stories as well as avoid the failures. And most importantly in ‘lesson-drawing’ sense ‘their present (developed society) is meant to be become our future’ (Rose, 1991, p.93).

However, there is ‘a tendency to mechanically imitate foreign experiences that differ in many ways from those of developing countries’ (Kim, 2009, P.95). In this sense, ‘the prevailing assumption appears to be that if the developed countries are doing it, developing countries are following suit’ (Polidano & Hulme, 1999, p.122). In addition, Kim (2009, p.95) notes the important of ‘indigenising’ rather than ‘simply follows’ and ‘mechanically imitates’ developed countries’ models. Therefore, the Bureau should consider a wide range of aspects such as ‘different socio-political dynamic’, ‘different background’ and ‘different path’ (p.95).

Managing networks is even more challenging because they need ’mutual adjustment’ and ‘game-like’ strategies that may only fit with particular policy in particular time (Rhodes, 1997, p.57). Moreover, ‘in relation to governmental decision making, an authoritarian culture is still dominants that limits participatory and discussions’ (Kim, 2009, p.93). Therefore, involving external participants may create conflicting interest with the internal organisation and political dimension because different participant may have different motives and goals that may crowd the reform objectives.

Proposed solution

Each of the above presented proposals has its own merits as well as drawbacks and it is difficult to propose a single solution in managing complex reforms in Indonesia. It will be better to mix these three alternatives as they are not zero sum options, rather they reinforce one another. However, in the context of Indonesia, Proposal 2 is preferable for the following reasons:

First, it is important to have a strong top down support and external participation but in the context of recent budget reform in Indonesia, particularly MOF, the focus on internal capability and capacity deserves strategic managerial concerns. For the last decade, most of the reform agendas have put forward big goals and new burdens without effective focus on internal operational capability of the public servants. Thus, whatever the reform goals propose without take bottom-up aspects in to reform policy agenda will likely fail.

Second, the new budget system requires new skills and different paradigms not only for the internal budgeters but also to the central agencies and MOF leaders. It implies, MOF should utilize new approach rather than poses different form of centrality approach. Internal focus will allow employee to adjust their values with the new reform agenda which offers a fairer incentive to participate compared with the previous regime. In addition, internally-oriented strategy is essential for improving ownership because at the end the employees will be the main operators of the new system. Thus, their involvement and engagement is important to ensure implementation success.

Third, focus on the external support could be best utilized if the MOF has the capacity to absorb and learn international best practise. In addition, external support will be effective for implementation if their inputs and recommendation can be adjusted within the available capacity. However, from my practical experiences it is difficult to understand other countries’ experience and to interact effectively with the international consultants within a limited capacity such as: language barrier and lack of public management theories and practical experiences.

Finally, as one size will never fit all, I agree that the reform should be treated as ‘a journey not a destination’ (Wright, 2010). Public managers should be more engaged in ‘the journey’ rather than ‘the destination‘(Kim, 2009, P.99).

About mofilink

Mofilink is a pool of perspectives, ideas and contribution for Indonesia government finances reforms.
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