The Virtue and Problems of Indonesian Development Trust Funds

Abstract

Despite being the largest economy in Southeast Asia and a member of the G-20 major economies with a GDP over US$ 888 billion, Indonesia still faces a lot of challenges with its financial capacity to sustain national development. In this regard, external financing such as loans and grants, could serve a strategic role to fill the gaps and to provide vital inputs, for the government to fund national development. One of the alternatives in which the government can effectively make best use of prevailing resources is through a development trust fund. Development trust funds emerged along with foreign aid itself. They emerged with the evolution of aid conditionality provided by international donors to the recipient countries. The Paris Declaration in 2005, signed by over a hundred donor agencies and recipient governments, attempted to change the nature of contemporary aid relationships by adopting ownership and harmonization as the key pillars of a new aid paradigm. The Paris Declaration changed the pattern of aid and the conditions attached to aid.Development trust funds are funds established using money from either foreign or domestic grants that legally set aside from the regular state budget. The funds will be used for the development purposes and managed by the national trustee institution. Development trust funds have only recently been permitted in Indonesia based on Presidential Regulation No. 80/2011 regarding the Establishment of Trust Fund (Perpres No. 80/2011). The enactment of Perpres No. 80/2011 was followed by the establishment of two national development trust funds in Indonesia: the Millennium Challenge Account-Indonesia (MCA-I) and the Indonesia Climate Change Trust Funds (ICCTF). Despite Indonesia’s best effort to set up development trust funds to maximize its financial capacity for development, the legal and organizational framework of the trust funds has an uncertain conceptual foundation. This situation will lead to several fundamental problems, such as uncertain legal status of the trust fund, inadequate governance procedure, and lack of accountability of the organization’s activity. Using interviews with Development Trust Funds officers and case studies of the existing development trust funds, this article explores the problems with the Indonesian development trust funds as currently constituted. After providing introduction, this thesis discusses the historical background of the development trust fund, some precedents of development trust funds in several countries and development trust funds under international law. It also identify the key principles of the development trust funds which has been established around the world. Finally, this article evaluates the Indonesian development trust funds regulation as well as the implementation of the existing development trust funds.This research concludes that the current trust fund regulation is missing from some substantial provisions regarding the legal status, and provisions related to good and accountable governance of Indonesian development trust funds. This work suggests the government of Indonesia should amend the current trust fund regulation in order to make the development trust fund operated more accountable, effective, and efficient.