Indonesia: New World Bank Loan is an Opportunity to Apply Output-Based Aid Principles on a Larger Scale

Credit: GPOBA

The aim of the project is to increase the accountability of local governments in their use of Specific Purpose Grants, known as DAK, from the national budget.  These grants will give participating local governments in regions with limited fiscal capacity an incentive to invest in infrastructure for basic services such as roads, water, sanitation, and irrigation.

The DAK grants will work in a similar way to output-based subsidies, which reimburse service providers for independently verified, pre-agreed outputs.  In an OBA project the outputs typically include household connections to a service, such as potable water supply or electricity, and a period of verified use of the service.  The service provider is usually a private enterprise, but could also be a public utility or a nongovernmental organization.

An output-based aid approach is helping to provide access to safe drinking water for low-income households in Jakarta and Surabaya.

In the DAK project, 81 local governments will be eligible for grants, meaning they will be able to claim reimbursement for reported and verified physical outputs for infrastructure.  The State Finance and Development Supervisory Board (Badan Pengawasan Keuangan dan Pembangunan, BPKP) will be responsible for verifying project outputs before the local governments are reimbursed. In 2010 DAK allocation amounts will total about two percent of Indonesia’s national budget.

Both DAK grants and OBA subsidies help to bridge a financing gap that would otherwise be an obstacle to basic service delivery, either because the infrastructure could not be built or because low-income segments of the population could not afford the connection fees to gain access to the services.