Overview
With the implementation of decentralization in 2001, fiscal autonomy and responsibility have shifted from the center to district governments. The national legal framework regulating regional governance and fiscal relationships requires the central government to transfer a minimum 25 percent of domestic revenues to sub-national governments, 90 percent of which is allocated to districts and cities (kabupaten/kota) and 10 percent to provincial governments. As a result, provinces have experienced a relative decline in fiscal power. In 2004, some supervisory and oversight responsibilities were returned to the provinces. Regional governments receive revenues from several sources: | 1. | Balancing funds (DAU and DAK). The decentralized system of government relies primarily on the balancing funds to transfer reserves from the center to the regions. The General Allocation Fund (DAU or Dana Alokasi Umum) provides the bulk of revenue for most regional governments. The actual size of DAU transfers is set according to a series of criteria, including population size, land area, the human development index (HDI) score, fiscal capacity and fiscal needs (primarily calculated on civil service salaries). Besides the DAU, some regional governments receive additional revenue from the Special Allocation Fund (DAK or Dana Alokasi Khusus). The DAK, unlike the DAU, is a discretionary grant transferred for specific projects meeting national development priorities. The DAU and the DAK revenues replaced the previous intergovernmental transfers of the Subsidy for Autonomous Region (SDO or Subsidi Daerah Otonomi) and Presidential Instructions (known as Inpres, or Instruksi Presiden).
| | 2. | Non-tax revenues from natural resources. Natural resource revenues are shared between the center, provinces and districts/cities. The allocations vary depending on the type of natural resource. Exceptions have also been made in the case of Aceh and Papua, both of which receive a larger share of oil and gas revenues than other provinces due to their status as special autonomy provinces. | | 3. | Tax revenues from property and income taxes shared with the centre. Tax revenues collected by Central Government are also transferred to the provinces, districts and cities. The main sources are land and building tax, land and building transfer tax and income tax. Most revenues are returned to the regions, except in the case of income tax, where only 20 percent is returned: 12 percent for the districts and cities, and 8 percent for the provinces. | | 4. | Districts’ own-source revenues (PAD). Provincial and district/city governments also generate their own revenues (PAD or Pendapatan Asli Daerah). In most districts and cities own-source revenue is small, and most district/city governments rely to a great extent on transfers from the central government. |
Law No. 22/1999 on regional governance and Law No. 25/1999 on intergovernmental fiscal relationships provide the legal framework for the introduction of fiscal decentralization in Indonesia. Law No. 32/2004 on sub-national governance and Law No. 33/2004 on fiscal decentralization subsequently modified and reinforced fiscal decentralization. |
The World Bank's Role and Objectives
One of the benefits from decentralization should be an acceleration in the pace of regional development, which is key for increasing living standards in the regions. The implementation of decentralization means that Indonesia’s national development plan, together with the poverty alleviation goals that this plan contains, depend on improved sub-national economic growth and delivery of public services. To achieve these objectives, it will be necessary to overcome economic and social disparities across regions, and between urban and rural areas. Indonesia is one of the most diverse countries in the world, with living standards that range from first world developed-country levels to deeply entrenched poverty. Following decentralization in 2001, the central government allocated significant resources to poorer regions in an effort to compensate for these disparities. In 2006, total government transfers increased by a nominal 47 percent mainly to the benefit of the poorest regions, which experienced disproportionate increases in their revenues. Today, the main development challenge is to ensure that these resources are spent effectively. The Public Finance and Regional Development team of the World Bank is assisting sub-national governments and institutions, together with the central government, in their efforts to enhance regional development through effective use of public finance. This means helping to improve public financial management (PFM) processes at the local government level, and increasing the efficiency and effectiveness of public spending by local governments. This objective is mainly achieved through the provision of technical assistance and analytical work such as: - Public expenditure analysis and capacity enhancement (PEACH), an RPEA (Regional public expenditure analysis) followed by capacity building activities. To find out more about PEACH, click here
- Local government performance measurement
- Management of one of the world’s largest sub-national fiscal databases
The Public Finance and Regional Development team in Jakarta works with the Eastern Indonesia Knowledge Exchange (Bakti) to support capacity-building for sub-national public expenditure reviews (see bakti website for details). A joint team from prominent local universities and local government officials design and implement the analytical work with technical assistance provided by the Public Finance and Regional Development team from the World Bank. Recent regional public expenditure analyses in Papua, Aceh, Nias and Gorontalo have shown that this approach ensures stronger ownership of the findings and recommendations. As a result, the capacity-building activities that should follow the public expenditure reviews in a province or district can be more effectively designed, and implemented with stronger involvement from local stakeholders.
Outputs and Outcomes
-- REGIONAL PUBLIC EXPENDITURE ANALYSES --
| | East Nusa Tenggara - Public Expenditure Analysis (NTT-PEA) | | | After enjoying a significant boost in its fiscal resources following decentralization, East Nusa Tenggara (NTT) will face challenges in the years ahead. Prior to the implementation of decentralization in 2001, more than one-third of NTT's population was classified as poor, making the province one of the poorest in Indonesia. After decentralization, although per capita regional spending tripled and the poverty rate decreased, NTT has remained one of the least economically developed provinces in Indonesia. Relative to other provinces, NTT has only modest fiscal resources per capita. Despite this limitation, NTT's provincial and district/city governments have improved their spending mixes by allocating more resources towards the strategic sectors of education, health and infrastructure. However, the improved spending mixes have still to be reflected in corresponding improvements in the quality of public service delivery and expanding the regional economy. These challenges faced by the province are all the more acute given that fiscal resources are projected to decline in real terms going forward. |
| | Endowments, location or luck ? evaluating the determinants of sub-national growth in decentralized Indonesia. | | | Indonesia's "big bang" decentralization in 2001 shifted much of the responsibility for local economic development from central government to district and city governments, which today number more than 450. But the performance of these districts has varied widely. This paper attempts to understand the determinants of sub-national (district/city) growth in Indonesia and map how these determinants have changed since before the 1997/98 economic crisis. The authors exploit a rich dataset that includes a wide range of district-level characteristics, including education, population, cultural, economic, and infrastructure variables, as well as a set of variables relating to distance, to try to explain growth. The analysis finds that, after accounting for differences in other variables, poorer districts tend to grow faster than better off districts. Similarly, there is evidence of spatial divergence, in the sense that districts tend to grow faster if their neighbors are growing quickly. However, the quality of the existing district-level data makes it difficult to identify whether endowments or factors related to distance are systematically associated with growth. |
| Aceh Public Expenditure Analysis:
Spending for Reconstruction and Poverty Reduction | | |
Aceh is currently the stage of the largest reconstruction process in the developing world, involving around US$8 billion spread over less than five years. The sheer magnitude of the reconstruction effort will stretch the capacity of local governments to manage such a large influx of funds and assets. In 2006, Aceh received five times more resources than it had pre-decentralization. In addition, the budget process in Aceh is currently facing new challenges related to the following developments: - Decentralization means that provincial and district governments are responsible for service delivery in many sectors, such as education, health and infrastructure. District governments, many of them newly formed, are now the main players.
- There are increased inflows of public resources in accordance with Aceh’s special autonomy status, in the form of a Special Autonomy Fund (additional allocations from oil and gas revenues in the province). Consequently, Aceh has one of the highest per capita revenues in Indonesia.
- There has been an increased demand for financial resources and financial planning related to the implementation of the peace agreement, signed in August 2005, which ended a conflict of almost 30 years. Integrating former GAM members into society and maintaining overall political stability in the region is likely to require significant budget spending.
- The Law on the Governance of Aceh (Law No. 11/2006) allocates importantadditional central government resources to Aceh until 2028, more than compensating for forecasted decreasing revenues from the exploitation of oil and gas in the region.
This Aceh public expenditure analysis offers a better understanding of Aceh’s revenues, expenditures and fiscal management at the district and provincial levels, and also analyzes central government funds spent in the region. It contains a detailed analysis of resource allocation versus outcomes for key sectors of public service delivery (health, education and infrastructure). The Aceh public expenditure analysis revealed, paradoxically, that as Aceh’s revenues started to increase dramatically after decentralization the number of the poor failed to decline. As a result, Aceh has currently the third-largest revenue per capita in Indonesia, but the fourth-highest poverty headcount — likely to have increased after the tsunami. The analysis also reveals that there are large fiscal disparities among districts in Aceh. Given the prominent role of districts in the provision of public services in many sectors, this disparity may jeopardize public services provision in those districts at the bottom of the scale. While Aceh does seem to have significant resources at its disposal, further analysis shows that it may not be making optimal use of these resources. A review of the health, education and infrastructure sectors confirms this. While on a per capita basis Aceh spends large sums on health and education, indicators are not necessarily better than in the rest of Indonesia, where less money is being spent. This indicates that the key to poverty reduction lies not so much in the funds Aceh receives, but in how those funds are being used.
| Aceh Public Expenditure Analysis Update 2008:
Managing Resources for Better Outcomes In A Special Autonomy Region | | | The APEA Update 2008 highlights the progress made in completing the transition in public spending in Aceh from a reconstruction phase towards a longer-term development phase. This APEA Update 2008 has two main objectives. First, it aims to take stock of the recent progress in public expenditure and financial management in Aceh. Second, it is a continuation of the support for provincial and district governments in Aceh to improve capacity in making informed policy decisions by providing strategic analysis into the use of public financial resources and the effectiveness of budget processes in Aceh, in particular with regard to the implementation of the Special Autonomy Fund (SAF).
| Papua Public Expenditure Analysis:
Regional Finance and Service Delivery in Indonesia’s Most Remote Province | | |
The special autonomy status of Papua has brought an increased flow of resources to the province. While this boost in fiscal resources is important in helping Papua to catch up with other regions of the country, attention needs to be paid to the quality and efficiency of public expenditure management. Economic growth and fiscal wealth alone will not be enough to reduce poverty and push development outcomes in Papua. The region has experienced an average annual GDP growth of close to 10 percent over the past 15 years, and has had substantial amount of revenues to spend. This stands in stark contrast to Papua’s consistent underperformance in fighting poverty and raising human development outcomes: 40 percent of Papuans still live below the poverty line, more than double the national average. One third of Papua’s children do not go to school. Nine out of ten villages do not have basic health services with a health center, doctor or midwife. This public expenditure analysis aims to help decision makers in local governments and other stakeholders in Papua to better serve the community by improving public financial management and bringing services to the poor and disadvantaged.
| Nias Public Expenditure Analysis 2007:
Managing Resources to Build Back and Create a Better Future for Nias | | |
The island group of Nias has registered consistently lower development outcomes than both provincial and national averages. This report suggests that low levels of public spending have contributed to below average development outcomes for Nias’s population of 720,000.
This report also sheds light on the impact of recent three events in years that have dramatically altered public expenditure in Nias:
Three events that have dramatically altered public expenditure in Nias | | First, decentralization across Indonesia has resulted in a large transfer of resources and responsibilities from the center to district governments. District governments suddenly became the main development actors in many sectors, with far greater responsibility for public service provision. | Second, the original district of Nias, which encompassed the entire island group, was split into two districts in 2003 ― an example of the nationwide trend towards regional sub-division following decentralization. The new district of Nias Selatan, similar to many other new districts, has limited capacity to cope with increasingly complex financial management issues. As a result, public service provision is likely to suffer. | Third, the reconstruction program following the powerful earthquake of 28 March 2005 has brought with it substantial funding. This reconstruction funding forms part of the US$8 billion total reconstruction fund for Aceh and Nias. |
This report seeks to help decision-makers and stakeholders better understand, analyze and improve local government fiscal policy given the context of decentralization, regional division and post-earthquake reconstruction funds.
| | Gorontalo Public Expenditure Analysis 2008: Service Delivery and Financial Management in a New Province | | | This public expenditure analysis published by the World Bank and Gorontalo Provincial Government shows that bureaucratic reforms in the new province have led to increased spending in education, infrastructure, health, agriculture and various other strategic sectors. As a result, Gorontalo has made steady progress in reducing poverty and improving public services since decentralization. The Gorontalo Public Expenditure Analysis Report looks into the eight-year old province’s performance in managing public expenditures and its socio-economic condition overall. Better regional governance has helped increase social welfare through community empowerment, community involvement and greater regional competitiveness, thanks to a series of innovative reforms in the provincial government. These include merging the Provincial Finance Bureau and Regional Income Authority, cutting red tape and offering performance bonuses as incentives for public servants. While the quality of public expenditure in Gorontalo has improved, improving the quality of public services remains a challenge: - Access to roads and irrigational channels are above the national average, but access to clean water, sanitation and electricity remain behind other provinces.
- Numbers of schools and medical facilities are sufficient, but quality of education and health services remain lower than in other provinces.
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| Making Decentralization Work for Development:
Methodology by the Local Government Performance Measurement (LGPM) Framework | | | The LGPM tool builds on a uniquely rich set of district-level budgetary data and survey results that are either already available or collected for the purpose of this exercise. Many methodological choices still need to be made, but the overarching ambition is clear: to provide both central and local policy-makers, development partners, and citizens with a simple and transparent tool for gauging LG performance across districts and within different domains of LG activity, as well as a set of best practices that can be replicated. Furthermore, the idea is to measure the performance of LGs against targets that are known to be achievable within a relatively short timeframe and within the Indonesian context. The aim is that the LGPM methods presented in this report will be of use to local governments across Indonesia, possibly in collaboration with service providers and other interested stakeholders, to establish how well provinces, districts and cities are carrying out these aspects of their work. The ultimate goal is to help local governments to improve the quality of services that they deliver to their communities.
| Public Financial Management in Aceh:
Measuring Financial Management Performance in Aceh’s Local Governments | | | This report is based on a PFM framework designed specifically for local Indonesian governments. Research teams from leading Indonesian universities interviewed government officials to assess capacity across nine strategic areas. Local governments scored very differently. For example, North Aceh scored the highest, at 69percent overall, while Aceh Jaya scored only 15 percent. Scores also varied between strategic areas. Public debt and investment scored very low (28 percent) whereas procurement achieved the highest average score (60 percent). Even local governments with similar overall scores showed significant variation in capacity for different strategic areas. Newly formed districts tended to score lower than older ones.
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