FISCAL DECENTRALIZATION IN INDONESIA Bambang Brodjonegoro The Institute of Economics and Social Research and The Graduate Program of Economics, University of Indonesia Law 22/1999 and law 25/1999 are the legal basis for decentralization process in Indonesia, a complicated process that has to be fully implemented in just one and half year after those two laws were ratified by the national parliament. The laws principally define the new distribution of authorities among tiers. Nowadays, there are four local government tires from provincial government to village government. The profile of the local government tires is as follows : Table 1. Profile of Four Tiers of Local Government Tier Type of Local Government Number of Units Population Range 1 st Provincial 30 777,500 -- 35,500,610 2 nd Districts and Municipals 348 23,650 -- 4,147,000 3 rd Kecamatan 4,038 1,394 892,540 4th Village/Kelurahan/Desa 68,783 38 436,483 Source : Central Statistics Agency, various publications Even though the population figures for kecamatan and villages are not available, it can be easily estimated that the least populated kecamatan and villages are located outside Jawa island and the most populated ones are in Jawa. Total population of a kecamatan or a kelurahan in Jawa, for example, could exceed the total population of a municipality or a kecamatan outside Jawa respectively. The number of units for each tier is subject to change almost every year due to the tendency of new local governments formation. Prior to decentralization laws, Indonesia had 26 provinces and around 290 districts and municipals. In a period of two years, the figures have changed to 30 provinces and 348 districts and municipals. Subsequently, the number of kecamatan and villages will change rapidly. Indonesian decentralization laws emphasize the decentralization from the central government to districts and municipal level or directly from the central to the second tier of local governments. Previously, provincial government was the most powerful local government and closest to the central government. Currently, provincial government will be the representatives of central government in the region and will handle inter-districts or inter-municipals affairs. Kecamatan has somewhat smaller role in current decentralization laws since the laws explicitly describe the relationship between districts and municipal government with village government (second to fourth tier of local governments). 1
Expenditure Assignment Law 22/1999 basically states that the central government will only be responsible in judicial system, religion affairs, national defense and security, fiscal and monetary affairs, and international diplomatic relationship. Other than those five duties plus macroeconomic planning and standardization, all government duties must be handled by local governments, especially at district and municipal level. However, the local governments are not necessary to do all of those duties. Law 22/1999 has a list of government services that local governments have to perform : public works, health, education, trade and industry, investment, environment, agriculture, cooperatives, and labor. To clarify the detail of assignments to local governments, the central government issued the government regulation (PP) 25/2000 that lists in detail, by sectors, the responsibilities of both central government and provincial governments. It assumes that the responsibilities that do not appear on that list, should belong to districts and municipal governments. For example, higher education is a central government responsibility, and to some extent, the provincial government could have influence on it. Elementary and secondary education is clearly the responsibility of district and municipal governments. On road management, the central government is responsible for national roads, the provincial governments for provincial roads or inter-districts roads, while the district or municipal governments are responsible for the local roads or district/municipal roads. Although PP 25/2000 lists responsibilities in detail, the assumption that the ones not on the list belong to district/municipal government is somewhat disturbing. The district/municipal should be the focus of decentralization process but the regulation does not state clearly their detailed responsibilities and it seems that local governments can interpret their responsibilities on their own. Aside from the decentralization process, deconcentration process from the central government to provincial governments still continues and to some extent it benefits district and municipal governments, although local governments have little power in making decisions. However, some national interests are explicitly and implicitly mandated to local governments without clear funding scheme. The interests such as poverty alleviation, development of isolated regions, massive improvement of basic education and health services, etc, are supposed to be the interests of all local governments that need special funding scheme from the central government. That scheme should be the special allocation grant (DAK), but due to the central government s limited financial capacity, that scheme has not existed yet to support those interests. As a result, local governments must implicitly support those national interests by their own financial capacity. Consequently, the outcome is suboptimal one but at least there are some actions related to those interests. Obviously, the expenditure part of fiscal decentralization process in Indonesia may be much weaker than the revenue part. One crucial part that is still missing in the process is the minimum standard of public services, for all type of basic public services. Although the laws and regulations only give general guidance of what local governments 2
must do in delivering basic public services, the existence of public service minimum standards will help local governments significantly in ensuring proper services for their people. The minimum standard will also help local governments in estimating their total needs more accurately including better estimation for the needs of each development sector. The availability of more accurate total needs will certainly help better estimation of general allocation fund (DAU) as the most important part of inter-governmental transfer. Revenue Assignment According to Laws 25/1999 and 34/2000, aside from inter-governmental transfers, local governments (provincial and district/municipal) can raise their own revenues from various sources such as local taxes, local charges, local-owned enterprise profit, and other eligible local revenues. However, the current scheme still gives a small portion to local revenue, compared to total national revenue. In other words, Indonesian local governments still have a weak local taxing power. The bigger part of total revenue, coming from income tax revenue and value added tax revenue, are still dominated by the central government. At the provincial level, only two types of local taxes could be considered significant to total local revenue, namely car registration tax and car ownership transfer tax. Two other taxes, gasoline tax and water exploitation tax, contribute insignificantly. At the district/municipal level, there are 7 local taxes but only a few contribute significantly to total local revenue and they vary from one region to another. In major urban areas, the hotel tax, restaurant tax, entertainment tax, and advertising tax may be the major revenue, but for more rural areas, the type C mining tax may be more important than others. Not surprisingly, in some rural district areas, the revenue from local charges could exceed the local tax revenue, although in general the local charges revenue will be much less than local tax revenue Local authorities have some power to set local tax rates either for maximizing their revenue or making their regions competitive for potential investors. Law 34/2000, however, set the maximum rate for each type of local taxes. For provincial taxes, the range is between 5% (car related taxes) and 20% (water exploitation tax), while for district/municipal taxes, the range is between 10% (hotel and restaurant taxes) and 35% (entertainment tax). On the other hand, if a local government feels that one or more types of local taxes are not potential to collect in its region, then that local government does not have to collect those taxes. This maximum tax rate rule will implicitly explain the basic behavior of local governments. Some local governments will focus on maximizing revenue by installing maximum tax rate without much consideration of the possible effects to local investment climate. Other local governments will charge smaller than maximum rate and be more interested in attracting potential investor coming to the regions. The success of local revenue generation will rely on the capability of local revenue collecting agency or in Indonesia called Dinas Pendapatan Daerah (Dipenda). Their administrative capabilities will determine if the actual local revenue is already close to the potential revenue. Of course, it is difficult to expect the actual to be the same as 3
the potential, but at least the gap between them should not be too high. One example is the administrative capability of Jakarta Metropolitan Area provincial government. They are supposed to be the best among local governments but they discovered that their revenue collections for some types of tax revenue are quite far from the potential. There are many reasons behind that problem but two are the most crucial: weak data and information systems, and lack of law enforcement. For the former reason, it is clear that the administration must be overhauled from registration process to collection process. For the latter, the strict implementation of law enforcement must be the priority to ensure that everyone is treated equally by law. Some actions must be taken to enhance the share of local revenue relative to total revenues. First, increasing local taxing power by adding pure local tax to local tax assignment. Property tax is certainly the main candidate. Second, intensifying local tax collection by emphasizing improved data and information system and law enforcement rather than adding new types of taxes and charges that potentially disrupt economic activities. Third, prohibiting or removing all types of new local charges that are violating existing laws and regulation, and against normative standards. In this case, the central government must be strict and can force the local governments to change their local regulations. Some obvious cases of illegal local charges are mandatory charity, cattle ID fee, public road fees, export fees, and production fees. Intergovernmental Transfers Three types of intergovernmental transfers are stated in Law 25/1999: (i) revenue sharing, (ii) general allocation fund, and (iii) specific allocation fund. Revenue sharing could be further classified into natural resources revenue sharing and tax revenue sharing. Compared to the pre-decentralization era, natural resources revenue sharing is a new type of revenue sharing introduced in Law 25/1999 and intended to give more compensation to natural resources rich regions that felt excessively exploited during Soeharto era. Four natural resource commodities are shared between central and local governments: oil and gas, general mining, forestry, and fishery. Among local governments, revenue is shared among provincial governments, producing district/municipal government, and other district/municipal governments within a province. The detailed natural resources revenue sharing is displayed in the Table 2. Tax revenue sharing is not a new scheme except for personal income tax revenue sharing. Prior to decentralization, the property tax and land transfer fee revenue were already shared between central and local governments. Through the revision of income tax law (Law 17/2000), the central government added the personal income tax (including payroll tax) as part of tax sharing. Eighty percent of personal income tax revenue will be retained by the central government; the remaining 20 percent to local governments. Table 2. Natural Resources Revenue Sharing Scheme(in %) Item Central Government Provincial Government Other Resources Producing Local Government Local Governments in the Same Province All Local Governments in Indonesia (Equal Share) 4
Oil 85 3 6 6 LNG 70 6 12 6 Mining: 20 16 64 0 Land-rent Mining: 20 16 32 32 Royalty Forestry: 20 16 64 0 Land-rent Forestry: Resources Provision 20 16 32 32 Fishery 20 80 Source : Law 25/1999 Table 3. Tax Revenue Sharing Scheme (in %) Item Central Government Provincial Govern- District/Municipal Government ment in the Same Province Collection Fee All District / Muncipal Government in Indonesia (Equal Share) Property Tax 16.2 64.8 9 10 Land Transfer Fee 16 64 20 Personal Income Tax 80 8 12 Source : Government Regulation 104/2000, Law 17/2000 The second type of transfer, the general allocation fund, is the most important part of most local government revenue in Indonesia. Twenty five percent of net domestic revenue (total domestic revenue minus revenue sharing) in the central government budget is allocated for the DAU. From that amount, 10 percent will be allocated to provincial governments and 90 percnet to district/municipal governments. The allocation of DAU to local governments is formula-based, with some adjustment. The basic principle of the DAU formula is the fiscal gap concept in which DAU allocated should fill the gap between local government needs and capacities (if needs is more than capacities). Due to the lack of accurate data of local government needs, it is estimated by considering population, area, geographical condition, and poverty condition. The capacity is estimated by considering natural resources potential, human resources potential, GRDP, and industrial capacity (detailed formula of DAU is on appendix). The DAU can be classified as a general purpose grant that gives full freedom to local government spending the fund according to their priorities. The last type of transfer, the specific allocation fund (DAK) now is a minor part of the Indonesian inter-governmental transfer. According to the law and regulation, DAK is intended to finance the special needs such as national priorities or hard to estimate needs not covered by DAU. The source of DAK is from the national budget, except for 5
reforestation activities that are covered directly by reforestation fund. Forty percent of the reforestation fund collected is allocated to the producing regions while the rest is retained by the central government to do reforestation activities all over the country, especially in non-producing regions. DAK, unlike DAU, can be considered as specificmatching grant. It is called matching grant since the local government that is going to receive DAK has to provide at least 10 percent of the total amount on their own. This matching rule does not apply to reforestation fund. With these various types of inter-governmental transfers, it is not surprising that revenue sharing will create huge inequality among local governments in Indonesia. Natural resources are concentrated only in few regions and as a result, there is huge inequality between few natural resources rich regions and others. The tax revenue sharing only worsens that inequality. Due to the current tax administration system, personal income tax revenue is heavily concentrated in Jakarta. Similar phenomena occur to property tax that is based on land market price. The great inequality among regions generated by revenue sharing is improved considerably by the DAU. The allocation of DAU itself among regions generates very low inequality and this transfer significantly reduces the inequality of total intergovernmental transfers. It can be concluded that the DAU allocation, to some extent, has successfully equalized the fiscal capacity among regions. Table 4. Coefficient Variation of Various Types of Inter-governmental Transfer Province + Type of Transfer Province District/Municipal District/Municipal Natural Resources Revenue Sharing 2.58 3.32 2.57 Tax Revenue Sharing 3.46 1.37 2.57 DAU / General Allocation Fund 0.62 0.44 0.94 Total Transfer 1.21 0.57 0.87 Source : LPEM-FEUI One crucial issue in the inter-governmental transfer in Indonesia is how to make a formula-based DAU without much intervention and/or adjustment from external factors. Although Table 4 shows the equalization feature of current DAU allocations, problems remain with natural resource-rich regions that still receive DAU allocations that are higher than they should be. Another related issue is that the DAU concept as a general purpose grant that is still difficult to accept by local governments. Due to the old concept, they still think DAU is fully dedicated to pay local government employee salary. Once DAU is insufficient to cover their salary, then they request more funds from the central government without checking the availability of other sources of local revenue including their own local revenue. The last issue to be resolved is the current personal income tax administration that makes Jakarta receive a huge amount of money. There must be some ways to link where individuals work most of time and where they register their personal income tax ID or where the headquarter of respective company is. Since 6
most of big companies headquarter in Indonesia is located in Jakarta, the payroll tax will be paid in Jakarta and as a result, the personal income tax revenue is heavily concentrated in Jakarta. Local Government Borrowing Law 25/1999, supported by PP 107/2000, allows local governments to borrow from external sources. The sources could be central government, financial institutions (banking and non-banking), public, other local sources, and foreign institutions (bilateral or multi-lateral). Local governments are allowed to borrow both long and short term debts. Long-term debt (more than 1 year) can only be used for development projects and cannot be used to handle cash-flow problem. On the other hand, short-term debt (1 year or less) should be used to handle the cash-flow problem. However, due to current national debt problem (both domestic and foreign debts), a presidential decree has been issued to halt temporarily the implementation of local borrowing. If a local government wants to borrow from any source, they must get approval from the local parliament including the borrowing period and grace period of long-term debt. Central government cannot interfere if the debt sources are domestic except if the source is the central government itself. In this case, the local government must get approval from the Ministry of Finance. On the other hand, if the source is from abroad then the borrowing process must be done through the Ministry of Finance. The Ministry of Finance, on behalf of the central government, will evaluate the feasibility of the proposal and once it is approved, the local government can negotiate directly with the foreign lender. The negotiation result must be approved by the central government before the local government signs the agreement with that foreign lender. To ensure fiscal sustainability both in local and central governments, there must be a limit on local borrowing. PP 107/2000 already set the rule-based limit for long-term debt that has two parts. The first part is that the total, cumulative local debt principal to be paid in a fiscal year cannot exceed 75 percent of the local budget general revenue at previous fiscal year (the formula of local general revenue is in the appendix). The second part is that the Debt Service Coverage Ratio is at least 2.5 during the borrowing period, based on local revenue and expenditure projection (see the DSCR formula at the appendix). For short-term debt, the maximum is 1/6 of total local budget at current budget year and the debt has to be fully paid back in one year period. To maintain national economic stability, the Minister of Finance can control local borrowing for the national interest, and influence the amount the local governments borrow, especially from foreign institutions. When local governments are permitted to borrow, it must be the top priority of the local budget. Local governments cannot utilize public assets and cannot guarantee something for borrowing. The ability to pay back the borrowing must be based on local budget management issue, not really on the assets of a region. Ministry of Finance indirectly could identify some local governments that may have serious problems with borrowing and at the end, produce a national policy that may stop the possibility to 7
borrow for local governments. Local parliament, legally, is an important party that can save local governments from doing something wrong in borrowing. Since local parliamentary approval is the first step of borrowing process, their capability is at stake. Before reviewing each local-government borrowing proposal, the local parliament through budget committee must be able to set the maximum borrowing a local government is allowed to do, given current budget situation. Accountability Mechanisms Decentralization has basically minimized, not to say eliminated, the vertical accountability mechanism in which local governments do not have to report their budget process and implementation to the central government. The state internal auditor cannot audit local governments anymore. Every local government now has their internal auditor. The reason for minimum vertical accountability mechanisms can be traced from the structure of local revenue. As previously mentioned, local revenue now consists of local own revenue (tax and charges), natural resources revenue sharing, tax revenue sharing, general purpose grant, and specific allocation grant. Among these types of revenue, only for the specific allocation grant (specific-matching grant) does the central government have some authority to monitor and evaluate. The local governments that receive this type of grant must report to respective ministries and the Ministry of Finance. Other types of revenue are local governments full authority in allocating the spending needs, while central government has obligation to allocate the money but not to monitor nor evaluate the use of the money. Horizontal accountability mechanism now plays an important role in the monitoring and evaluation process. The local parliament (DPRD) is now the institution that has the right to monitor and evaluate the budgeting process and budget implementation. They will be involved in budgeting process and must grant approval before it becomes the proposed budget of fiscal year. During the fiscal year period, the local government must present quarterly reports to them. The report should consist of a local budget implementation report, cash-flow report, and local government balance sheet. The local parliament members are elected through general election. However, the members themselves are not elected directly by the local voters since the voters elect the political party, not the person. The party then selects their candidates to be the member of local parliament. The local parliament members then elect the head of district or municipal government, namely bupati or mayor respectively. The candidates have to be in pair, bupati and vice bupati or mayor and vice mayor. Once a pair with most votes is selected, then they have the rights to form their local government staffs from local bureaucracy. In the local bureaucracy itself, the local government secretary is the highest and most important position. Participatory budgeting or planning process is still premature in Indonesia system due to the weak civil society and lack of communication between government and community. The local parliament currently can be considered as the representative of the society and community although many still question their validity. They are also the ones who question or criticize any wrongdoing of budgeting process or budget 8
implementation. Public disclosure of local budget is rather limited, so local community usually get the information about the budget from the local parliament members, media, or from the non-governmental organization. However, their quality and capability is still far from minimum requirement of good governance practices at the local governments. Much can be improved in horizontal accountability mechanisms that are now very crucial in creating good governance at local government levels. Empowerment of civil society and community must be the top priority so that they have more interests to be involved in budgeting process. The local parliament must initiate their involvement and put pressure on local government to take into account the local community opinion. All budgeting process and budget implementation itself must be transparent and accessible to all interested parties. In order to support this, the performance budgeting that is mandated by the government regulation to be implemented can be a good indicator for common people to evaluate the local budget practice. Local Capacity Current decentralization has raised doubt on the capability of local government staff to deliver much more public services. It is no secret that in the past the local government staffs were sub-ordinate to central government ones and they had to follow all direction set by the central government. With decentralization, there will not be much direction from central government and local government staffs now have to conduct much more responsibilities on their own. In general, there should not be much effect on local staff capability and skill to deliver the responsibilities since the previously central government staffs who worked in the region were transferred from central to local governments. In other words, the skill should be there and should be the same. However, the complexity of the civil servant transfer process (more than 2.5 million transferred) and some local government resistance toward the transfer itself for various reasons, has raised concern on the ability of local government to deliver the services at the similar level. The tendency of some regions to favor indigenous people clearly has not helped the case. Local governments now play a significant role in enhancing the quality of their civil servants. They appoint all local employees, including selecting those employees transferred from central government. Although the basic civil servant salary is determined by the central government, the local governments have the right to give additional salary to their employee as long as it is approved by the local parliament. If a local government has good sources of revenue, then part of that could be spent to increase the local employee salary and eventually raise their productivity. The sources to pay all local employee salaries are from the local budget itself. Prior to decentralization, the central government paid the salary through the autonomous region subsidy that became the part of local government revenue. With the new scheme, the transfer from central government (especially DAU) does not have to be the only source to pay the salary. Basically, the pool of revenue from any source can be used to pay the salary. 9
To improve local capacity and to ensure that decentralization will benefit its main customer -- local people -- some activities are underway both by the Indonesian government and international agencies directly for local employees and community. The Indonesian government through its ministries has conducted extensive training in various subjects for local employees. The Ministry of Home Affairs and Ministry of Finance, for example, have interests to ensure that the implementation of new local financial management will work in the near future. There have been trainings conducted by them about budgeting process, especially about performance budgeting that will soon replace the line-item budgeting. The international funding agencies also have similar activities but with broader targets. They not only conduct training for local government employees, but also for local community or civil society in general including media, universities, and non-governmental organization. The GTZ (German) has been quite active in local capacity issues, while JICA (Japan) has been involved much with some local governments in improving the capacity. USAID has done some training involving both local government and non government participants. Some of the trainings are about the awareness of decentralization process itself, some others are more about technical process. There is also a program to introduce public participatory in budgeting process in some provinces and a program about local good governance practices. Monitoring and Evaluation The central government certainly has a big job in monitoring and evaluating the decentralization process to ensure the process is a success. One big problem, however, is the number of units to be monitored is increasing quite rapidly. Provincial government has increased from 26, prior to decentralization, to 30. The district/municipal government has increased from 290, prior to decentralization, to 348. Those increases occurred over a two-year period. In the Regional Autonomy Council and the Ministry of Home Affairs, proposals for new provinces and districts/municipals are still waiting consideration and it is rather difficult for the central government to halt the generation of new local governments. Monitoring and evaluating big and increasing number of units is certainly not an easy task. One good example is monitoring and evaluating the local government regulations. As laws and government regulation stated, every local government regulation has to be sent to the Ministry of Home Aaffairs (MOHA) 15 days after getting approval at the local level. MOHA then has 30 days to evaluate those regulations and if necessary, MOFA can cancel them. If MOHA does not have any comment after 30 days, then the regulations will take into effect and become legal. With increasing number of local government units, there is big possibility that MOHA will be overwhelmed by the load. Assuming that each local government produces one regulation every month, the MOHA will have to review more than 350 regulations every month. It is not so surprising that some of troubled local government regulation passed the review and became effective. As previously mentioned, the central government now cannot directly supervise and review local financial affairs except for the specific allocation fund (DAK), deconcentration activities, and local borrowing. Local parliament is now in charge and local government must make a quarterly report to them. To ensure better local fiscal 10
management, the combination of local parliament and central government (MOHA and MOF) to perform monitoring and evaluation would be the best. Local parliament basically monitors overall performance of the local budget. Since the local government must adopt hard-budget constraints in the decentralization era, any proposed borrowing must be intended to fill the budget deficit. In this case, the local parliament will still have power to evaluate borrowing proposal and once it is approved by them, the central government (especially MOF) can play a significant role. If the proposed borrowing is from foreign institution, the Minister of Finance must give its approval and similar regulations apply if the borrowing is from the central government. For other sources, even though there is no direct influence, the central government can have control over the total cumulative borrowing of all local governments and can make decision to manage that total borrowing. Implicitly, the central government can influence indirectly budgeting behavior of local governments throughout Indonesia. Fiscal Condition Table 5. Central and Local Fiscal Indicators, 1992 2001 (in %) Fiscal Local Revenue / Year Total Revenue **) Local Expenditure / Total Expenditure Local Own Revenue / Total Revenue *) Intergovernmental Transfer / Total Local Expenditure 1992/93 20.99 4.98 33.88 94.20 1993/94 22.70 5.31 35.48 93.17 1994/95 23.90 6.00 34.17 97.05 1995/96 26.02 6.87 35.71 87.95 1996/97 27.65 6.54 33.81 74.52 1997/98 23.86 5.66 29.15 75.57 1998/99 15.81 3.31 22.14 97.19 1999/00 16.61 3.63 24.90 79.23 2000 17.88 3.10 26.05 85.87 2001e) 24.82 3.80 46.36 103.04 Source : LPEM-FEUI Note : Total Expenditure = National expenditure Intergovernmental Transfer + Total Local Expenditure Total Revenue *) = National Revenue + Local Own Revenue Local Revenue = Local Own Revenue + Intergovernmental Transfer Total Revenue **) = National Revenue Intergovernmental Transfer + Local Own Revenue e) : estimated data for 2001 using proposed budget, not the actual one Table 5 clearly reveals the dependence of local governments on intergovernmental transfers to finance their expenditures, prior to and during decentralization. Local own revenue, consisting of local taxes and charges, contributed insignificantly toward total local revenue and expenditure. Intergovernmental transfer then becomes the most crucial part of Indonesian fiscal decentralization. In other words, the success or failure of the process will depend on how good the scheme of the transfer 11
itself. The dominance of the central government in raising revenue will remain even after the full implementation of decentralization. The current situation could be considered good from the central government s point of view since they can still have strong control over the fiscal decentralization process to ensure fiscal sustainability. But it could also be considered bad since it creates disincentive for local governments to raise their own sources and if some unexpected phenomena occurs, such as 1998 crisis, the central government will certainly have to carry a heavy burden. In general, the decentralization in Indonesia could be considered as leaning more toward the decentralization of authorities, and consequently expenditure. The local governments will have more power and authorities to run their government and provide public services for their people. The financial source to support it will come from the central government through transfers while revenue collection power is mostly still on the central government. However, the local governments now have much more freedom to make plans and priorities to spend the money by considering more the aspiration of local community through local parliaments, and less the interests of central government. 12
APPENDIX A. General Allocation Fund (DAU) Formula! Fiscal Gap = Fiscal Needs Fiscal Capacities! Fiscal Capacities = LORadj + (PT + LTF + PIT + 0.75*NRS) LORadj : Local Own Revenue Adjustment = a + b*grdp Services PT : Property Tax Revenue Sharing LTF : Land Transfer Fee Revenue Sharing PIT : Personal Income Tax Revenue Sharing NRS : Natural Resources Revenue Sharing! Fiscal Needs = ALE (0.4 PI + 0.1 AI + 0.1 RPI + 0.4 CI) ALE : Average Local Expenditure PI : Population Index AI : Area Index RPI : Relative Poverty Index CI : Construction Index! Local DAU Weight (LDW) = Local Fiscal Gap / National Fiscal Gap! DAU i = AM + (LDW * DAU n ) DAU i : DAU for each province or district/municipality DAU n : DAU total, for all province or district/municipality AM : Minimum Allocation = LS + ( a * CSS) LS : Lumpsum (equal for each province or district/municipality) a * CSS : Proportion of Civil Servant Salary in 2001 B. Local Government Borrowing Formula! Local General Revenue (LGR) = TLR (DAK + CF + BF + OR) TLR : Total Local Revenue DAK : Special Allocation Fund CF : Contingency Fund BF : Borrowing Fund OR : Other Revenues Earmarked for Specific Expenditure! Debt Service Coverage Ratio (DSCR) = {(LOR + RS + DAU) CSS} / {PP + IN + OC} LOR : Local Own Revenue RS : Revenue Sharing (natural resources and tax) DAU : General Allocation Fund CSS : Civil Servant Salary PP : Principal Payment IN : Interest Payment OC : Other Costs for Borrowing 13
References Bird, R.M, and F. Vaillancourt (1998), Fiscal Decentralization in Developing Countries : An Overview, in R.M. Bird and F. Vaillancourt, eds., Fiscal Decentralization in Developing Countries, Cambridge, Cambridge University Press. Brodjonegoro, Bambang (2001), Indonesian Intergovernmental Transfer in Decentralization Era : A Case of General Allocation Fund, paper presented at An International Symposium on Intergovernmental Transfers in Asian Countries : Issues and Practices, Asian Tax and Public Policy Program, Hitotsubashi University, Tokyo. Brodjonegoro, Bambang, and Shinji Asanuma (2000), Regional Autonomy and Fiscal Decentralization in Democratic Indonesia, Hitotsubashi Journal of Economics, Vol. 41 no.2, Tokyo, The Hitotsubashi Academy. Brodjonegoro, Bambang, Raksaka Mahi, Robert Simanjuntak, Karyaman Muchtar, Iman Rozani, and Khoirunnurrofik (2000), The General Allocation Fund Formula (in Indonesia), LPEM-FEUI report for the ministry of finance, Jakarta, LPEM-FEUI. Mahi, Raksaka, Anton Hendranata, and Khoirunnurrofik (2001), The Econometric Model of Decentralization in Indonesia (in Indonesia), LPEM-FEUI report for the Natural Resource Management-USAID, Jakarta, LPEM-FEUI. Simanjuntak, Robert, Khoirunnurrofik, and Muliadi Wijaya (2000), The Local Government Borrowings and Bonds (in Indonesia), LPEM-FEUI report for the National Economic Council, Jakarta, LPEM-FEUI. The List of Laws and Government Regulations (PP) :! Law 22 / 1999 : Local Government! Law 25 / 1999 : Fiscal Balance between Central and Local Government! Law 17 / 2000 : Income Tax! Law 34 / 2000 : Local Government Taxes and Charges! PP 104 / 2000 : Intergovernmental Transfer! PP 105 / 2000 : Local Finance Management and Reporting! PP 106 / 2000 : Deconcentration and Assigned Duties Management and Reporting! PP 107 / 2000 : Local Borrowing 14