RISK MANAGEMENT IN INDONESIA’S LOCAL GOVERNMENT FINANCE—TOWARD AN INTEGRATED FRAMEWORK

Author: Iwan Prasetyo

Prasetyo, Iwan, 2017 RISK MANAGEMENT IN INDONESIA’S LOCAL GOVERNMENT FINANCE—TOWARD AN INTEGRATED FRAMEWORK, Flinders University, School of Social and Policy Studies

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Abstract

The study investigates the risks of local government finance in Indonesia and proposes a country specific framework for risk management at the local level. After the enactment of autonomy laws in 1999, the structure of the Indonesian public sector was transformed from being mostly centralized to mostly decentralized. Although decentralization brought improvements to Indonesia’s public sector, there has been ongoing concern about the flaws and risks present in local government financial management. Local government faces increasing exposure to risk, including corruption and fraud, and this has consequences for achieving service delivery objectives. In view of these risks, there is a case for greater attention to risk management. This study explores of the nature of risks within Indonesian local government finance and develops a potentially effective form of risk management. Using qualitative and quantitative approaches—a countrywide survey and three in-depth case studies—this research explores the views of people in Indonesian local government on risk and current efforts for managing risk in post-decentralization local government. This study finds that some risks, such as fraud risk, human resource related risks, legal risk, asset management related risk, and risks of political change and intervention, significantly affect the achievements of Indonesian local government finance. However, there are inherent weaknesses involved in the efforts of local government to manage risk. The efforts are sporadic and do not comprehensively assess and treat the risks. Risk controls are poorly documented and there is a need for further guidance about how they are to be implemented. This makes it difficult to consistently implement and replicate the controls. Efforts are also diminished by the absence of a formal mandate. This study shows that lack of an adequate mandate, lack of guidance and lack of commitment are common issues in implementing integrated formal risk management. To address these issues, this study proposes a framework for managing risk in Indonesian local government. The framework was developed based on relevant Indonesian regulations, international standards (ISO 31000:2009), literature, and consideration of the needs of Indonesian local government. The framework involves steps for implementing risk management in local government: enacting regulation as a mandate, setting up a risk management implementation committee at local government and agency level, designing a framework that produces an implementation plan and standard operating procedures for implementing risk management processes, implementing the framework, monitoring and review of the framework, and continual improvement of the framework. Finally, given there is paucity of research on risk management in Indonesian local government finance, this study seeks to fulfil that gap.

Keywords: risk, risk management, local government, Indonesia, risk management framework, risk management in local government
Subject: Policy and Administration thesis

Thesis type: Doctor of Philosophy
Completed: 2017
School: School of Social and Policy Studies
Supervisor: Prof. Fiona Verity