Brr book series book 2 - finance

FINANCE
The Seven Keys to Effective
Aid Management

THE EXECUTING AGENCY OF REHABILITATION AND RECONSTRUCTION FOR ACEH AND NIAS
(BRR NAD–NIAS)
April 16, 2005 - April 16, 2009

Head Office Nias Representative Office Jakarta Representative Office
Jl. Ir. Muhammad Thaher No. 20 Jl. Pelud Binaka KM. 6,6 Jl. Galuh ll No. 4, Kabayoran Baru
Lueng Bata, Banda Aceh Ds. Fodo, Kec. Gunungsitoli Jakarta Selatan
Indonesia, 23247 Nias , Indonesia, 22815 Indonesia, 12110
Telp. +62-651-636666 Telp. +62-639-22848 Telp. +62-21-7254750
Fax. +62-651-637777 Fax. +62-639-22035 Fax. +62-21-7221570
www.e-aceh-nias.org
know.brr.go.id

Advisor : Kuntoro Mangkusubroto Photography : Arif Ariadi
Author : Amin Subekti Bodi Chandra
Editor : Cendrawati Suhartono (Coordinator) Graphic Design : Bobby Haryanto (Chief)
Harumi Supit Em Samudra
Margaret Agusta (Chief) Edi Wahyono
Erwin Santoso
Copy Editor : Margaret Agusta
Mistono
Writer : Aichida Ul-Aflaha Wasito
Hal Sullivan
Final Reviewer : Aichida Ul–Aflaha
Hendro Prasetyo
Heru Prasetyo
Margaret Mockler
Intan Kencana Dewi
Roy Rahendra
Maggy Horhoruw
Terry O’Donnell
Ricky Sugiarto (Chief)

Ratna Pawitra Trihadji

Translation to Indonesian
Editor : Harumi Supit
Copy Editor : Ihsan Abdul Salam
Translator : Harry Bhaskara
Prima Rusdi

Development of the BRR Book Series is supported by Multi Donor Fund (MDF)
through United Nations Development Programme (UNDP) Technical Assistance to BRR Project

ISBN 978-602-8199-48-3

With this BRR Book Series, the Indonesian government, its people, and BRR wish to
express their deep gratitude for the many kind helping hands extended from all over the
world following the December 26, 2004, earthquake and tsunami in Aceh and the March
28, 2005, earthquake in the islands of Nias.
Four years on, the once devastated landscapes are again vibrant with the sporadic
rhythm of human life. This achievement is the result of a steadfast commitment of the
local, national and international community, combined with the resilience of the people
who lost so much.
The dynamics and challenges encountered during the massive undertaking of
rebuilding homes, hospitals, schools and other infrastructure, while striving to empower
those who survived to reshape their future and redevelop their way of life, provide an
important understanding of the disaster-recovery process in Aceh and Nias.
In light of this, within the pages of this book, BRR would like to share those experiences
and the lessons learned as a small contribution to return the favor to the world for the
invaluable support it contributed to building Aceh and Nias back better and safer; as a
history of the humanitarian journey of a united world.

I am proud,
that we can share the experiences, knowledge, and lessons
with our fellow countries. I do hope that what we have done
can be a standard, a benchmark, for similar efforts
at the national and international levels.

Speech of President Susilo Bambang Yudhoyono
at the Official Closing Ceremony of BRR at the State Palace, April 17, 2009
about the BRR's trip to the Tsunami Global Lessons Learned Conference
at the United Nations Headquarters in New York, April 24, 2009

The Aceh-Nias post-tsunami recovery effort involves more than 900 national and international
organizations representing 55 countries. More than two-thirds of the funds come from the
international community. Photo: BRR/Arif Ariadi

Contents
Chapter 1. Turning Pledges into Commitment 1
Unprecedented Generosity 1
External Factors that Influenced the Scope and Shape of Giving 3
The Creation of BRR 4
The Challenge Ahead 5
Building Credibility 6
Maintaining Engagement with Donors and Implementing Agencies 8
Conclusion and Observations 12
Chapter 2. Matching Allocations with Real Needs 17
Large Scale Damage and Large Scale Response 17
Initial strategy 20
Persistent Gaps 23
Shifting to a Guided Facilitation Model 27
Ingredients of the guided facilitation approach 28
Mid-Term Review (MTR) 31
Coordination Mechanisms 33
Conclusion 35
Chapter 3. Overcoming Disbursement Hurdles 37
Dissatisfaction with a Slow Beginning 37
The Shortfall of High Expectations 38
Two Types of Constraints on Progress 39
Breakthroughs & Solutions 47
Net Effects on Disbursement 55

Chapter 4. Delivering Results:
Modality of Fund Channeling and Performance 57
Generous External Support 57
Nearing the End the Reconstruction Phase 58
Different Fund Channeling Mechanisms 59
Conclusion 69
Chapter 5. Achieving and Upholding Accountability 71
Getting to Trust 71
Mandatory Accountability 73
Value Added Accountability Systems 82
Conclusion 84
Chapter 6. Maintaining Integrity Along the Road 87
A Single Incident, Deadly Consequences 87
Establishing Business Process Integrity 89
Personnel Integrity 91
Integrity Enforcement 92
Proactive Reporting on Integrity Allegations 95
Rigorous Integrity Review and Evaluation 96
Chapter 7. Ending the Game and Leaving a Lasting Legacy 99
Strategic Choice: To Close or Extend BRR? 99
General Principles Applied 104
Handing Over Finished Projects 106
Transition of Unfinished Projects 111
Risk Management – Ensuring the Process Stayed Critically On Track 116
Conclusion & Achievements 118
Notes 120
Bibliography 123
Glossary of Abbreviations 125
Fact Sheet 129

FINANCE: The Seven Keys to Effective Aid Management

x
Introduction
For a period of three days, beginning on December 27, 2004, the Indonesian flag
was drawn to half mast, and a nation was in mourning. A national disaster was declared
and the world watched in disbelief. An earthquake, followed by a series of tsunamis,
struck the western-end of Indonesia, causing an unprecedented loss of life and the
obliteration of whole communities. For those who survived, their homes, livelihoods, and
prospects for the future were swept out to sea.
The earthquake, one of the largest in recent history measuring 9.1 on the Richter scale,
was the result of a convergence between two tectonic plates beneath the ocean floor.
Although dormant for over 1,000 years, with the buildup of pressure caused by one plate
slowly sliding under the other at an estimated rate of 50 mm per year, on December 26,
2004, these two tectonic plates ruptured along a 1,600 km length of what is known as the
Sunda mega-thrust.
The epicenter of this earthquake was located 250 km south-west of the Indonesian
province Nanggroe Aceh Darussalam. Its rupture - a slippage of up to 10 meters,
resulted in the ocean floor being (permanently) lifted and dropped, pushing the entire
water column up and down, and generating a series of powerful waves. Tsunamis
swept violently up to 6 km inland over the shorelines of Aceh and surrounding islands,
beginning less than half-an-hour after the earthquake. A total of 126,741 lives were lost
and, in the wake of the disaster, an additional 93,285 people declared missing. Some
500,000 survivors lost their homes, while as many as 750,000 people lost their livelihoods.
In the private sector, which constituted 78 percent of the destruction wrought by the
earthquake and tsunamis, up to 139,195 homes were destroyed or severely damaged,
along with 73,869 ha of land with varying degrees of productivity. A total of 13,828 fishing

boats vanished, up to 27,593 ha of brackish fish ponds disappeared, and 104,500 small-to-
medium businesses ceased to exist. In the public sector, 669 government buildings, 517
health facilities, and hundreds of educational facilities were either destroyed or rendered
non-functional. The loss to the environment included 16,775 ha of coastal forests and
mangroves, and 29,175 ha of reefs.
The loss and damage of these regions did not end there and, on March 28, 2005,
another major earthquake measuring 8.7 on the Richter scale struck the nearby islands of
Nias in the Indonesian province of North Sumatera. This second natural disaster resulted
in the death of 979 people and the displacement of 47,055 survivors. The proximity of this
earthquake, a result also of two tectonic plates rupturing, slipping a length of 350 km,

Introduction
directly beneath the Simeulue and Nias islands, resulted in massive damage to the islands’
infrastructure.
The eyes of the world once again watched in disbelief as the devastation of these xi
regions unfolded, and helping hands began arriving from all corners of the globe to
assist in the rescue and relief operations. Individuals of every race, religion, culture and
political persuasion across each and every continent worldwide, along with governments,
the private sector, non-government organizations and other national and international
bodies, reacted in an unprecedented show of human concern and compassion.
From the scale of the devastation wrought by both disasters, it was clear that it would
not be enough to simply replace the homes, schools, hospitals and other infrastructure.
The rehabilitation and reconstruction program would need to embrace the rebuilding
of the social structures that once thrived along the shores of Aceh and within the
hinterlands of Nias. The trauma of losing friends, family and a means to support those
who survived required that the recovery program focused not only on physical, but also
non-physical, development, and on rebuilding an economy to a level that would ensure a
firm foundation for future (re)development and growth.
On April 16, 2005, the Government of Indonesia, through the issuance of Government
Regulation in Lieu of Law No. 2/2005, established the Agency for the Rehabilitation and
Reconstruction (Badan Rehabilitasi dan Rekonstruksi, BRR) to coordinate and jointly
implement a community-driven recovery program for Aceh and Nias. BRR’s mandate was
to design policies, strategies and action plans, within an atmosphere of transparency and
accountability, and to implement them through effective leadership and coordination of
the combined domestic and international effort to rebuild Aceh and Nias back better and
safer.
The rehabilitation and reconstruction of Aceh and Nias have constituted a challenge
not only for the people and Government of Indonesia but for the entire international
community. That this challenge was overcome successfully is reflected in the
conclusions drawn in evaluations concerning the recovery program. In the final months

of the program, the World Bank among others concluded that the recovery was an

unprecedented success story and a model for international partnership - outcomes which
were realized through effective government leadership.
The nation’s management of the recovery program gained the confidence of donors,
both institutions and individuals, and through BRR’s anti-corruption policies and
processes, the trust of the international community. And without the cooperation of the
international community, the post-disaster situation in Aceh and Nias - the unparalleled
devastation - could never have been reversed.
In recording this humanitarian achievement, BRR has produced the BRR Book Series
containing 15 volumes that detail the processes, challenges, solutions, achievements and
lessons learned during the rehabilitation and reconstruction program in Aceh and Nias.
It is hoped that these books will function to capture and preserve the experience of the
xii recovery, and to establish guidelines for future disaster-recovery programs across the
world.
As its title suggests, this book, “The Seven Keys to Effective Aid Management”, focuses
on the financial aspects of the rehabilitation and reconstruction program in Aceh and
Nias.
It is not unusual to see large sums of money pledged following a horrendous natural
disaster, but it is unusual to see most of those pledges converted into real commitments.
In the case of the Aceh and Nias disasters, a remarkable 93 percent of the total
US$7.2 billion pledged was committed - a remarkable achievement for what was an
unimaginable series of disasters.

4-Year Achievement
Rehabilitation and Reconstruction

635,384
people displaced
127,720
people killed and 93,285 missing

104,500 155,182
small-medium enterprises (SME) destroyed laborers trained xiii
195,726
SMEs received assistance

139,195 140,304
houses destroyed permanent houses built
73,869 69,979
hectares of agricultural land destroyed hectares of agricultural land reclaimed
1,927 39,663
teachers killed teachers trained
13,828 7,109
fishing boats destroyed fishing boats built or provided
1,089 3,781
religious facilities destroyed religious facilities built or repaired
2,618 3,696
kilometers of road destroyed kilometers of road constructed
3,415 1,759
schools destroyed schools built
517 1,115
health facilities destroyed health facilities constructed
669 996
government buildings destroyed government buildings constructed
119 363
bridges destroyed birdges constructed
22 23
ports destroyed ports constructed
8 13
airports or airstrips destroyed airports or airstrips constructed

Chapter 1. Turning Pledges into Commitment
Turning Pledges
into Commitment 1

Unprecedented Generosity
The unprecedented scale of the December 2004 tsunami disaster catalyzed an
immediate response of massive proportions, both from within Indonesia and from the
international community. By January 2005, in the weeks following the Consultative Group
for Indonesia (CGI) meeting, US$7.2 billion had been pledged to support reconstruction.1

The US$7.2 billion pledged to Aceh was nearly evenly sourced from the Government of
Indonesia (GOI), bilateral and multilateral donors, and Non-Governmental Organizations
(NGOs). Communities in and outside of Indonesia contributed additional funds. This was
Different with those in other
unprecedented: typically, multilateral donors provide the leading contribution of aid,
places, the Multi Donor Fund
surpassing amounts committed by national authorities and NGOs. In the case of Aceh (MDF) for Aceh-Nias is an
and Nias however, ‘good donorship’ was not limited to multilateral donors. effective mechanism due to
the Co-chairmanship scheme.
This response was not the largest ever; but it was notable for the number of countries The scheme places the host
that contributed and the speed at which pledges were made. One hundred thirty-three government as a decision
countries provided assistance to the humanitarian mission (Masyrafah and McKeon 2008), maker level to the donor group
many of these whom had never contributed to a disaster before. It is also notable that a so that alignment between
donor projects and government
priorities is achieved.
Photo: BRR/Arif Ariadi

substantial portion of this aid was generated at the grass-roots level. The New York Times

reported on November 27, 2008, that grass-roots donations for victims of the tsunami
broke all fund-raising records for an international humanitarian crisis. Private giving to
NGOs and the United Nations (UN) exceeded pledges by the Organization for Economic
Cooperation and Development’s Development Assistance Committee (OECD DAC)
members, traditionally the world’s major givers. The onslaught of money was so robust
that it made the historically generous response to the earthquake in Pakistan--US$73.4
million, according to data collected by the Center on Philanthropy at Indiana University-
-seem practically miserly. Few international agencies halted fundraising upon reaching
targets and as a result, NGOs, including organizations such as the Red Cross, wound up
with overall more funds than donor administrations or multilateral organizations (TEC
2006).
Indonesia was also given welcome breathing room
2
The economic landscape: by the Paris Club of wealthy creditor nations, who
decided to let it and other affected countries suspend

Standard and Poor’s Rating debt repayments. Some criticized the decision to grant
Indonesia a debt moratorium since at the time the
Standard and Poor’s (S&P) is a leading provider of financial tsunami hit, Indonesia had a sound macro-economic
market intelligence. The company publishes financial environment. On a national scale, interest rates,
research and analysis on credit ratings, indices, investment currency exchange and inflation levels were stable.
research, risk evaluation and data.
Indonesia had become a lower middle income country
Just days before the tsunami hit, S&P raised its rating with an improving fiscal economy.2 Nonetheless, the
on Indonesia’s creditworthiness, saying that the improving
debt moratorium provided welcome breathing room.3
economy had raised the government revenue and foreign
reserves, reduced the country’s debt burden and improved Clearly there was no lack of willingness to help.
its ability to weather shocks. However, while the international climate was favorable,
S&P raised Indonesia’s long-term foreign currency past experience has shown that goodwill does not
sovereign credit rating from B to B-plus to reflect the necessarily translate into concrete commitment. Often
country’s successful elections and positive economic
outlook, and increased its currency rating from B-plus to BB.
donors hold back from making good on pledges due
These upgrades reflected ongoing progress in Indonesia’s to a lack of confidence that the money will be well-
macro-economic stability, steadfast fiscal management, used. It was crucial to instill donor trust and confidence
declining debt and favorable external liquidity, despite in order for Indonesia to receive the funds.
a widening state budget deficit. In addition, successful
legislative and presidential elections in 2004 sent a message The following sections examine in detail the process
of stability that resulted in a better flow of investment. by which donors were encouraged to make good
on their pledges, a process which holds potentially
useful lessons for future disaster management and
fundraising exercises.

External Factors that Influenced the Scope and
Shape of Giving

Before discussing the process by which pledges were turned into commitments, it is
worth noting that the following external factors distinctly influenced the size, scope and
form of donations. These types of factors may profoundly alter the donor landscape in
future disaster management scenarios and should be taken into account.
(i) Donor “Freshness”
At the time of the the tsunami, the world had not witnessed a natural disaster of
comparable proportions for some time. Only one natural disaster had attracted significant
international attention in the previous year, the December 2003 earthquake in Bam, Iran,
with 28,000 casualties. Thus, the tsunami was not in competition for aid with
3
other disasters, nor were givers suffering from “donor fatigue.” (Note that
in the year following the tsunami, calamities in New Orleans, Kashmir, and
Why was the public so
Yogyakarta, put at risk the transference of pledges for Aceh and Nias due to generous?
commitment elsewhere.)
What impelled the public to give so
(ii) Timing and Media Coverage generously? A study by the Tsunami
Evaluation Coalition (2006) that
The international scope of the disaster, holiday timing and the resulting looked at funding from the Spanish
intensity of media coverage played a meaningful role in catalyzing pledges. public listed the following reasons for
private giving, in order of decreasing
First, during this time there was a lack of other news stories to be covered, importance:
resulting in repetitive and intense media coverage. The fact that several
• 64.2% always donate after
international celebrities were involved also contributed to the media such an event
fascination.
• 28.7% the media coverage
Second, by 2004, technological advances—most prominently, the internet-
• 17.3% Christmas spirit
-were sufficiently well-developed and widespread to provide real-time, widely
• 8.7% presence of tourists
available updates on the devastation. Information on the climbing death toll
and the damage was available at one’s fingertips. The tsunami was the most • 2.4% familiarity with the
affected area
reported disaster to date (TEC 2006).
Third, the international context of the disaster was a key factor. The tsunami (Source: TEC Funding Response/
hit several countries and as mentioned above, involved a number of well- General Public/Spain Report, 2006)

known celebrities, creating a universal dimension to the disaster. The tsunami
killed people in 14 countries from 40 different nationalities. Reinforced by
dramatic media images of the destruction, people everywhere felt a sense of
connection and sympathy with the victims.

(iii) Recent Shifts in the International Aid Landscape

As it happened, the receipt of funds by the Government of Indonesia (GOI) was
positively affected by fortuitous recent developments on the international aid landscape.
Trends in global aid had showed for some time what appeared to be an aggregate shift
away from low-income countries toward middle-income countries (Harford, Hadjimichael,
and Klein 2004), of which Indonesia was one.
Then, just three months after the tsunami, the Paris Declaration on Aid Effectiveness
officially laid the foundation for development aid to become more influenced by
national authorities. This paradigm shift resulted from an examination of the political and
institutional incentives that shape the way in which aid is both delivered and received.
Leading up to the Paris Declaration, discussion in development circles had been
focused on developing an international aid architecture that would more suitably
4
address a broad range of emerging issues. Debates had revolved around the role of aid
in: encouraging better development, reducing the need for emergency relief, reducing
the risk of recurrent natural disasters, and supporting fragile states. They also focused on
the role of new aid donors in Asia and Europe.
In general, the prevailing sentiment was that

Paris Declaration on Aid aid delivery should be recast to be more
responsive to the frequent emergence of both

Effectiveness natural and man-made disasters, and that aid
should also serve the agenda of the national
The Paris Declaration on Aid Effectiveness of March 2005 was an authority. Such was the background of the
international commitment by over one hundred country Ministers, Paris Declaration.
Heads of Agencies and other Senior Officials to harmonize and align
aid management, to help developing-country governments formulate The resulting aid architecture was thus
and implement their own national development plans, using their propitiously conducive to a government-
own national priorities, planning and implementation systems. The driven reconstruction program. It enabled
five principles of the Paris Declaration are as follows:
various breakthroughs and arrangements
• Ownership-Patner countries exercise effective leadership over to take place, as the GOI moved into the
their development policies and strategies, and coordinate reconstruction phase of the recovery.
development actions.
• Alignment-Donors base their overall support on partner
countries’ national development strategies, institutions and
procedures.
The Creation of BRR
• Harmonization-Donor actions are more harmonized, Taking ownership of the reconstruction,
transparent and collectively effective. the GOI took the cardinal step of establishing
• Managing for Results-Managing and implementing aid in a
BRR. This new agency had the dual role
way that focuses on the desired results and uses information of implementing its own projects while
to improve decision-making. coordinating the works of others. Donors
• Mutual Accountability-Donors and partners are accountable appreciated the GOI’s move to create a
for development results. separate government agency expressly to

handle the reconstruction, and were reassured by its dual-role function. The Economist
reported on May 26, 2005, that BRR was “a promising new government body like no other:
i.e., clean, efficient, well managed and results-oriented.”

The GOI made the crucial choice of appointing Kuntoro Mangkusubroto to head the
agency. Kuntoro had a strong reputation and was known for his incorruptibility. As Head
of BRR Executing Agency, Kuntoro’s leadership was inspiring. Early on, his openness to
considering unconventional solutions to get things done as opposed to a ‘business as
usual approach’ set a tone of urgency which trickled down through management levels.
His appointment greatly contributed to the agency’s success. Under Kuntoro, BRR was
eventually able to pressure the Central Government to change the way the latter worked
(see Chapter 3).
“Kuntoro Mangkusubroto had operated an open relief effort despite Indonesia’s
history of secrecy and corruption at all levels of government,” stated former United States 5
President Bill Clinton during a visit to Aceh almost a year after the tsunami as reported in
the New York Times on December 1, 2005.
Four years later, Pieter Smidt, Head of the Asian Development Bank (ADB)’s Extended
Mission in Sumatra, remarked in a similar vein, “It’s difficult to imagine that anybody else
could have done a better job.”4

The Challenge Ahead
The challenge in front of BRR was enormous. As mentioned earlier, the first task was to
translate pledges into real commitments. To do so, it was imperative to demonstrate BRR’s
own commitment to the task.
Commitment can be defined as a function of credibility and involvement, whereas
credibility rests on two key elements: trustworthiness and capability. BRR had to
demonstrate that it was trustworthy, that it had the necessary capability, and that it was
involved. This would be fundamental to BRR’s success.
The sheer amount of funds committed represented a huge responsibility. Pledges made
to Aceh and Nias were so great that they surpassed the minimum required to rebuild to
pre-tsunami levels by US$1.3 billion (Figure 1.1). This supplemental funding provided a
cushion for the rapidly increasing inflation rate and an opportunity to “build back better”
beyond replacing the damaged goods and services to propel the long closed-off province
and isolated islands to a development phase in step with the rest of the nation. But such a
process would have to be carefully managed and came fraught with liability.
Making things more difficult, a decades-long conflict between the central government
and local separatist movements had been ongoing in the Aceh disaster area. To build trust
and execute in a former conflict zone would not be easy.

Meanwhile, BRR had to contend with Indonesia’s reputation for corruption. Out of the

145 countries ranked by Transparency International’s 2004 Corruption Perception Index,
Indonesia came in at 133rd with a dismal score of 2.0 out of 10. Among the countries in
the Asia-Pacific region, Indonesia ranked second worst just above Myanmar. The New York
Times reported in January 2005 that as the United States and other world governments
prepared to channel hundreds of millions of aid dollars to Aceh, Indonesia’s perceived
culture of corruption had emerged as a major concern.
BRR as the GOI’s agent in reconstruction had to find a way to overcome these hurdles
and convince donors of the country’s credibility and commitment. Faced with these
factors, the full enormity of BRR’s task became apparent.
Despite all the challenges, in the case of Aceh and Nias, 93 percent of these pledges
were eventually converted into real funding, a historically high conversion rate and a most
6 impressive achievement. How was the GOI, through the BRR, able to achieve this?

Building Credibility
Among the infant agency’s first tasks was to convince its international partners
that BRR was able to competently lead and manage the funding. Faced with limited
resources, a short timeframe and high expectations, BRR appealed to established

Figure 1.1 - Aceh and Nias Reconstruction Needs, Pledges and Commitment

Total Fund
USD Billion 93%

0.5

USD 2.4B
NGO

USD 2.2B
Donor Agencies

4.9 7.1 7.2 6.7 USD 2.1B
Government
of Indonesia

Damage Build Back Pledged Committed
Assessment

world-class organizations for assistance. Management consultants McKinsey & Company
were engaged early in the process on a pro-bono basis to prepare organizational
strategy, while ADB and Ernst & Young agreed to assist the set-up of a strong fiduciary

management structure. BRR’s credibility received an enormous boost from its association
with these organizations, helping engender international confidence in the agency’s
ability to deliver.
It was equally important to gain credibility in the eyes of the Acehnese. Three
decades of conflict between the local Free Aceh Movement (GAM) and the Central
Government had created lasting distrust. BRR was seen as an extension of the Jakarta-
based administration, instead of as an organization championing local interests. To
counter these perceptions and establish itself as a trustworthy body in Aceh, BRR took
the unprecedented decision of decentralizing its operations to the regional level and
locating its headquarters in Banda Aceh. It was the first ministerial-level agency to do so
7
in Aceh. BRR also welcomed locals, including ex-GAM members into its ranks. These steps
effectively altered the perception of BRR, casting it as a non-Jakarta-centric government
body.
Finally, BRR had to overcome the aforementioned perception of corruption associated
with Indonesia. BRR had to prove from the onset that it was committed to preventing any
misuse of funds provided by the Indonesian government and donors worldwide. Any
sign of irregularities could decrease future funding.
The agency established an autonomous, Anti-Corruption Unit (SAK) to guard against
misconduct in BRR itself, as well as in any reconstruction projects,
becoming the first Indonesian government agency to do so. The
Anti-Corruption Unit strategy was to simultaneously educate
against, prevent and monitor for corruption, with an eye towards
A Silver Lining
ensuring clean and transparent reconstruction. With the support In the midst of the destruction, the tsunami
of the Corruption Eradication Commission (KPK), which opened brought an unexpected legacy of peace to the
conflicted region of Aceh. Disputes quieted
its first branch office with full enforcement authority in Aceh, BRR
in the face of shared disaster, and the long-
also established an Integrity Pact to fight systemic corruption. closed society opened up to a flood of foreign
Through the Anti-Corruption Unit and the Corruption Eradication aid workers. Against this landscape, President
Comission regional offices, BRR was able to take a strong stance Yudhoyono’s attempts at reconciliation
unexpectedly worked in Aceh’s favor and inspired
against corruption. Chapter 6 elaborates more on the corruption
trust.
risk and the steps BRR took to mitigate that risk.
Altogether, the combination of these steps--including the Source: Sengupta and Mydans, The New York Times,
December 25, 2005
appointment of a credible leader in the person of Kuntoro--
reassured the international commitment that their willingness to
give was matched by a real commitment to reconstruction. When
interests are aligned, trust is a reasonable response (Hurley 2006),
and so it was with the donors. In this way BRR built the foundations of credibility.

Maintaining Engagement with Donors and

Implementing Agencies
It was crucial to establish effective collaboration platforms between BRR and donors,
and among the donors themselves. The perceived fairness of a process is as important
to participants as the outcome itself, and a key principle in creating this fair process
is engagement, or involving individuals in the decisions that affect them (Kim and
Mauborgne 1997). Bearing this in mind, BRR was careful to design model financing
mechanisms that would maintain donors’ governance in the process, while also
maximizing outputs and minimizing transaction costs.
Several ways of channeling donations were established by BRR, each catering to a
different group of players. The focus was to provide flexibility, create a hassle-free process
8 insofar as possible and accommodate the varied needs of donors. It was up to the
donors to pick what financing channel they wanted to use. The overall goal was to create
mechanisms that encouraged and enabled funding flows from donors.
By doing so, the GOI and BRR demonstrated their respect for the reconstruction players’
needs and their concern that players remain engaged. This was particularly important
given the vast amounts pledged to Aceh and Nias and the large number of players
involved, with 992 organizations hailing from over 50 countries, which had made the
process of converting pledges into commitments challenging from the start.

The Multi-Donor Fund
For better coordination of the reconstruction, the GOI and donors agreed to form
the Multi-Donor Fund (MDF), pooling donor contributions with the World Bank
serving as trustee. MDFs were conceived as the main body for coordination and donor
harmonization in line with the best-practice approaches established by the Paris
Declaration on Aid Effectiveness. According to a Scanteam report (2007), MDFs can reduce
transaction costs and mitigate fiduciary and political exposure in high-risk, post-crisis
environments.5
MDFs allow for the harmonization of donors by ensuring that all procedures follow
regulations set by the administrator. Thus, MDFs simplify the tasks of the national
authority in coordinating planning, implementation, reporting and quality assurance.
Given the high-risk environment stemming from the political conditions in Aceh, the MDF
was considered a good risk management vehicle taking into consideration the World
Bank’s tested ability and capacity to work in such an environment.
The Aceh-Nias MDF was co-chaired by BRR as the GOI representative, the World Bank
as trustee, and the European Commission as the largest donor. As of December 2008, the
MDF had a total of US$692 million in pledges from 15 different donors as illustrated in
Table 1.1.

Figure 1.2 offers a summary of donor preferences between the three financing options.
As shown, players chose the financing mechanism that they deemed best suited for the
implementation of their projects.

For the GOI and donors alike, the MDF provided an opportunity to simplify
coordination, information flow, administrative and access costs associated with the
reconstruction effort. For donors, moreover, the MDF created a forum for their voices.
Certain major donors, such as the United States and Germany, still chose to channel a
majority of their resources outside the MDF (i.e., directly to their own projects or to other
implementing agencies), typically because they wished their agenda not be moderated
within the MDF. Nonetheless these donors continued to participate in the MDF, regardless
of the amounts they channeled
through the MDF itself. In any one Table 1.1 - MDF Fund Pledges and Contributions as of December 2008
MDF Steering Committee meeting, Amount * of Total Pledges
Donor 9
75 percent of the top contributors (US$ million) %
were present. In this way, the MDF European Commission 272.62 39%
helped harmonize donor programs Netherlands 171.60 25%
and facilitate alignment with
United Kingdom – DFID 73.71 11%
country priorities.
Canada 25.55 3.7%

Three Financing Options World Bank 25.00 3.6%
Sweden 20.72 3.0%
Three types of financing
options were established by BRR Norway 19.57 2.8%
in recognition of the considerable Denmark 18.03 2.6%
diversity among donors in Aceh Germany 13.93 2.0%
and Nias: 1) on-budget/on-treasury, Belgium 11.05 1.6%
2) on-budget/off-treasury, and 3) Finland 10.13 1.5%
off-budget/off-treasury. No one
Asian Development Bank 10.00 1.4%
mechanism is superior; each has
USA 10.00 1.4%
benefits and drawbacks (more in
Chapter 4). New Zealand 8.80 1.3%
Ireland 1.20 0.2%
(a) On-budget/on-treasury – In
line with strengthening Total Contribution: 691.92 100%
government partnership and * Based on World Bank foreign exchange rates as of
December 2008. Source: MDF 2009
involvement in the recovery
process, many traditional bilateral and multilateral donors channeled their funds
through the government budget by signing a grant or loan agreement. Under the
on-budget/on-treasury mechanism, donors use the GOI budgetary system and
regulations to disburse their funds. The advantage is that the projects are then
accountable under the national budgetary system. However, the regular budgetary
process was initially slow in responding to reconstruction needs.

Figure 1.2 Reconstruction Fund Channeling Mechanisms

10

Definition of (b) On-budget/off-treasury – Some donors who traditionally
worked with the government preferred that the disbursement of

on- and off-budget, their funds be done outside the Special Purpose Treasury Office, or
KPPN-K. These donors, such as the Governments of Germany and

and on- and off- Japan, had identified certain sectors and projects to be carried out
by their own implementing agencies. In this scheme, while donor

treasury projects were accounted for in the national budgetary system, BRR
lacked the full authority to influence the implementation process.
(c) Off-budget/off-treasury – NGOs including UN agencies
On-budget funds refer to donor funds
channeled through the government budget, typically have implementation mechanisms on the ground. In these
while off-budget funds refer to funds channeled cases, BRR allowed them to finance their projects using the off-
directly to the project. The on-budget project budget/off-treasury mechanism. The upside is a potentially swifter
expenditures are registered into the GOI national
implementation process since agencies can bypass the long national
budget through the Issuance of Spending
Authority (DIPA). budgetary system process. However, these agencies are not then
legally accountable to the GOI, making it difficult to monitor and
evaluate their contributions.

When choosing among Table 1.2 - Types of Rreconstruction Players
and the Implications of Their Preferred Funding Mechanisms
these mechanisms, the donors,
mainly bilateral ones, weighed Fund
Type Source of Funding Implications
mechanism

advantages and challenges to
Funds were channeled
assess which would work best in accordance to
with their strategy, capabilities, the prevailing GOI
Indonesian taxpayers
and their own development Government of regulations created
and Paris Club debt On-budget
Indonesia for normal conditions.
agendas. Most players wound moratorium
Bureaucratic systems
up maintaining the fund with lengthy time
channeling mechanisms that frames impeded swift
implementation.
they were accustomed to.
Aid given by the
Table 1.2 outlines the types of government of one
Aid is often tied to
players, their sources of funding, country directly to
specific sectors or to
Bilateral Donor another. Many dedicated On- and off-budget
preferred method of channeling
governmental aid
specific implementing 11
funds, and implications attached agencies to serve donor
agencies dispense
country’s agenda.
to their choice of funding bilateral aid, for example
AusAID.
mechanism.
Aid is given from the
Ultimately, it was hoped government of a country
to an international Streamlined transaction
that BRR could coordinate and
agency, such as the cost of multiple
monitor all efforts. However, World Bank or the Asian actors. Accountability
Multilateral Donor On- and off-budget
by being flexible with the Development Bank, to multiple nations
which in turn distributes created procedures
financing mechanisms, donors the aid. Multilateral that limit speed and
were more comfortable as aid agencies are flexibility.
they could channel their funds usually governed by the
contributing countries.
using processes they felt safe
NGOs, have played an
with. These mechanisms also increasingly active
allowed them to implement role in distributing Faster speed of aid
using their own procedures aid from donations distribution but limited
NGO from the private* and Off-budget control as actors
and implementation systems, public sectors. Many function independently
if deemed appropriate. NGOs conduct their of government systems.
own international
Consequently donors, NGOs humanitarian work.
and other delivery partners
* The term ‘private’ covers both the general public and private entities,
were able to maintain their such as companies, religious groups or associations–i.e., all non-
governance in a way that they institutional donors.
were accustomed to.

Working with Implementing Agencies
BRR did not stop at creating a collaborative platform for donors. It also developed
new or used existing coordination platforms to facilitate coordination with major
implementing partners.

The United Nations Office of the Recovery Coordinator (UNORC) was one such platform.

UNORC is a facility of the United Nations System whose main role was to coordinate
UN and aid agencies and also provide strategic policy advice to BRR and the local
government.
Another such platform was the International Federation of the Red Cross and Red
Crescent Societies (IFRC). Similar to the function of UNORC to UN agencies, the IFRC
worked to assist the coordination of the Red Cross and Red Crescent Societies active in
the reconstruction efforts in Aceh and Nias. Seventeen out of 27 Red Cross Organizations
joined the umbrella organization of the IRFC, helping to streamline coordination efforts.
BRR further made use of the powers bestowed by a Presidential decree to provide
an alternative funding channel to on-budget fund flows and the MDF. This alternative
funding channel was called the Recovery of Aceh and Nias Trust Fund (RANTF). The
12 RANTF funding facility was designed to provide flexibility of execution, with an emphasis
on speedy response to program needs. It was meant to accommodate non-traditional and
smaller donors, both public and private. The Trust Fund included both ‘open’ funds to be
allocated by BRR to the most pressing program needs, and ‘closed’ funds earmarked by
donors for particular projects. BRR had oversight of program and fund allocation, while
the RANTF was responsible for all aspects of financial management including accounting
and fund administration services. A procurement agent was engaged to manage the
delivery of services to ensure the transparent process of project activities.

Conclusion and Observations
The generous response to the disaster demonstrated the willingness of the
international community to give and showcased the best of the human spirit. The GOI
welcomed the outpouring of sympathy of all forms, opening its doors to contributions
around the world regardless of origin. This decision was not without drawbacks as the
proliferation of agencies hampered coordination and increased the fragmentation of
aid. The bulk of the funding came from the Indonesia taxpayers, and in return GOI was
given leverage to determine the allocation of funds. However, the large amount of private
funding channeled through NGOs and the Red Cross did impact the allocation of funds
(more in Chapter 2).
Early on BRR expended considerable effort and time on both large and small donors
as well as on non-traditional donor countries, in order to get a rounded perspective
on donor concerns. This was a labor-intensive and time-consuming task. In hindsight,
the amount of time and energy spent with donors should have been more balanced
to increase efficacy overall. Good relationships with donors large and small must be
maintained. The ideal balance is to be inclusive yet strategic in allocating time and
resources to cater to donors.

Over the course of reconstruction, BRR had to ensure commitments were maintained
and if possible, increased. To do this, BRR provided concrete data that the beneficiaries
were benefiting from donor contributions. These periodic reports demonstrated progress

being made on the ground. This transparency encouraged some donors to give more
than they initially pledged. Furthermore, some donors transferred pledges from other
tsunami struck areas to Aceh and Nias.
A key takeaway was that significant funds should be channeled through the national
government budget. Bringing donor funds on-budget can help coordination and effective
implementation of the recovery strategy (TEC 2006). As the Paris Declaration stated, it
is essential for partner countries to exercise leadership over their development policies
and strategies, although the role of aid remains contested on the absorptive capacity of
recipient governments.6 Strong ownership of the arrangements for the flow of funds, and
effective coordination among donors in line with a unified recovery plan and budget,
13
is essential. These conclusions are backed by the experiences of countries which have
experienced significant aid inflows; such experiences have generally underscored the
importance of country ownership, coordination, and of reinforcements to governmental
budget and accounting systems.
By contrast, experiences with off-budget support have been more complex because
each project has its own accounting, financial management, and procurement
arrangements, resulting in fragmented recovery efforts. As NGOs
operate outside of government authority, there is also a lack of
formal political accountability that in the case of Aceh, arguably
affected pledges: the lack of political accountability meant
The DIPA Process
that pledges not turning into commitment were more a factor The project preparation process for
of concern for the NGOs than for the traditional bilateral and government begins with the development
of a ministry’s annual work-plan and
multilateral donors. budget (RKA-KL), which is informed by the
In Indonesia’s case, a government management structure Annual Government Work Plan (RKP) and
budgetary ceilings. Implementing agencies
was in place that could review bilateral programs, co-financed submit draft budget plans to the Ministry
multilateral programs and MDF decisions for consistency with of Finance for review and approval. With
Indonesia’s own recovery plan and evolving priorities (TEC 2006). an approved budget plan in hand, the
Despite this fact, the GOI elected not to impose an overarching implementing agency then prepares a
budget Issuance of Spending Authority
government-led management and structure. It also decided not to
(DIPA), against which all disbursements
compel donors to deliver funds through the government budget. are to be authorized and processed
Instead, it created BRR as a separate agency to take ownership of through the Office of State Services and
the overall program and assist coordination. Treasury (KPPN). On-budget projects may
be authorized and processed through the
BRR’s role at the helm of reconstruction did not come easily. It KPPN. On-treasury refers to disbursements
first had to earn trust and credibility from donors, partners and through the Directorate General of
the community. Steps such as the establishment of the Anti- Treasury, or KPPN-K, office in Aceh.
Corruption Unit and the Selection of a respected leader helped

create trust. Meanwhile, BRR hired consultants with respected industry credentials to
bolster the agency’s experience. Their experience substituted for the organization’s own,
establishing a foundation of credibility.

Cognizant that donors and NGOs have their own reconstruction objectives, their
own procedures and, at times, their own implementing agencies, BRR established three
different fund channeling mechanisms for donors to choose from. BRR acknowledged
the various needs of donors and implementing partners, facilitated donor engagement
in the financial process, and provided comfort to donors who were able to pick the
option they felt most secure with. Donors were also able to weigh the strategic
advantages and disadvantages of each option. The formation of MDF and RANTF as
facilitating instruments for coordination further demonstrated the GOI’s commitment
to, and appreciation of, the international community's reconstruction efforts. The sum
total of these steps fostered an environment that was conducive to channeling aid and
15
implementing reconstruction projects.
In retrospect, BRR’s success and the overall effectiveness of the steps and processes
described in establishing credibility can perhaps best be judged by the unprecedented
amount of pledges made good.

Eddy Purwanto, Chief Operating
Officer, in discussion with JICA
representatives during a field visit
to a proposed Final Waste site.
Photo: BRR/Arif Ariadi

Chapter 2. Matching Allocations with Real Needs
Matching Allocations
with Real Needs 17

Large Scale Damage
and Large Scale Response
One thing was clear from the rush of goodwill: Indonesia was not alone in
rehabilitating and reconstructing its shattered parts. The outpouring of generosity from
citizens around the world brought a large number of NGOs, agencies and institutions
into the tsunami-affected areas. This high level of commitment demonstrated a universal
spirit to answer the call of humanity.
The challenging task ahead of the BRR was evident. Lives must be rebuilt, communities
protected, local economies revived, and the massive inflow of relief, rehabilitation and
reconstruction funds must be managed with transparency and accountability to provide
modernized civil administration and infrastructure. Adding to the complexity of this task
was the coordination of a large number of actors and a high volume of funds that were The Saman Dance is a traditional
Acehnese dance that symbolizes
off-budget and outside official development assistance flows.
a harmonious relationship
This chapter explores how in developing a recovery strategy, BRR sought a balance among humans. In a high-paced
between responding rapidly to the needs of the people and coordinating the numerous and bold rythm, the dancers
international actors. As time revealed the changing needs on the ground, BRR responded form an impressive coherence of
movement. Photo: BRR/Arif Ariadi
accordingly to the dynamics of the environment.

Brr book series book 2 - finance

Brr book series book 2 - finance

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