How will a 40% cut in Australian aid affect Indonesia?

The Australian government has announced it will cut aid to Indonesia by A$220 million, or 40%, compared to the allocation in last year’s budget. President Joko Widodo responded with a straightforward statement:

It is the authority of Australia, not ours. Should we cry for that?

Some people might connect the Australian decision with the execution of Bali duo Andrew Chan and Myuran Sukumaran in April. This theory is understandable for two reasons. First, the deliberations for the budget were carried out at the time when the Australian public was still discussing the executions. Second, Australia’s foreign minister, Julie Bishop, once warned Indonesia of the “consequences” of the death penalty decision.

However, cuts in Australian aid have been nearly across the board in Southeast Asia. Countries such as Vietnam, Myanmar, the Philippines and Laos are experiencing 40% cuts too. Aid for Cambodia, which has agreed to accept refugees currently on Nauru, remains the same.

Nevertheless, in regards to Indonesia, how will this aid cut impact on the country’s development and Indonesia-Australia relations?

Indonesia’s reaction

Widodo’s response to the aid cut sounds like a soft statement, but it may also imply that “aid is for their interests, not ours”.

Some people in Indonesia might have expected Widodo to have made a stronger statement. Something like President Suharto’s response to the Netherlands in the 1990s for linking human rights to development aid. Suharto told the Netherlands to stop the aid after Indonesia’s former colonial ruler had suspended it following killings by the Indonesian military in Santa Cruz, East Timor.

Widodo, having held government offices for more than 10 years as mayor of the Central Java town Solo and governor of Jakarta, has first-hand experiences working with projects supported by foreign aid. During his governorship, he asked the central government to stop the aid from the World Bank.

The amount of aid is not significant, but the “talks” consume a lot of time and energy, and often offend the recipients' dignity as a state official and as a nation.

Indonesia’s policy on foreign aid

Indonesia treats foreign aid as complementary to the national budget. Foreign aid is only added to the projects that are being financed by the national budget. Without foreign aid, projects will still continue using this budget.

The present budget aid cuts by Australia might affect some ministries’ projects in Indonesia, such as the Ministry of Health and the Ministry of Public Works. If the cuts include projects that have been agreed between Indonesia and Australia, such as those with the Ministry of Health (maternal health and sanitation) and Ministry of Public Works (rural infrastructure and water), these projects may be affected in the short term.

The ministries should restructure their budget allocations. Mostly, this will not be a big issue for the ministries, since the aid funds are only for expanding the reach of the government projects.

Since 2003, the Indonesian government has passed a number of regulations, such as Law of Finance (No. 17/2003), Law of National Treasury (No. 1/2004) and the National Development Plan (No.25/2004) to create integrated budget, finance and development planning mechanisms and frameworks.

These laws limit the size of foreign aid to Indonesia. In Indonesia’s budget, the government limits foreign aid to be no more than 3% of the national annual budget. This is to ensure that Indonesia’s development does not depend on foreign aid and, most importantly, that the country’s development policies are not dictated by foreign donors.

Since the dismissal of the Consultative Group on Indonesia (CGI), a consortium of countries providing aid in Indonesia under the World Bank’s co-ordination in 2007, Indonesia has prioritised foreign co-operation with the World Bank, Asian Development Bank and Japan.

Although Australia is claimed to be the second-biggest donor to Indonesia in the last few years (after Japan), Indonesia has yet to see it as a priority in this co-operation. Australia is relatively new as a large donor to Indonesia, starting in 2009. Its aid predictability is also not guaranteed; that is a concern for Indonesia after learning from the experience of the CGI process (“pledging big, less actualisation”).

Biggest losers

Australian aid cuts in Indonesia will affect two main actors. First, the companies (mainly from Australia) that implement the projects in Indonesia. Second, the consultants who have long been acting as “aid rent seekers” in Indonesia. Both actors in fact significantly reduce the flow of aid funds to the beneficiaries.

Civil society organisations in Indonesia have long discussed and criticised the pool of consultants who are quite powerful in influencing donors and the Indonesian government.

After the dissolution of CGI as a donors' forum, agencies such as Multi Donors Trust Fund, Decentralisation Support Facility and the most recent one, the National Program for Community Empowerment (PNPM) Support Facility (PSF), were established. These agencies are mainly used by consultants – some former consultants of the World Bank – for rent-seeking activities. The consultants act as intermediaries in aid negotiations, mostly for saving their jobs in the country.

Australian aid also supports these agencies. Support for the PNPM Support Facility from Australia was the biggest.

The budget cuts will affect these agencies more than the people of Indonesia. The government of Indonesia will go on using its own budget and the people of Indonesia might not be aware of Australia’s decision.

The implementation of the 2014 Village Law and the establishment of a special Ministry for Village Development will ensure the promotion of, and more effective budget allocation for, rural development. With the expansive development programs of the present government, Indonesia will prioritise co-operation with China, Japan and Korea and might leave Australia on the backburner.

Don K. Marut does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.