Fiscal balance is still not balancing<\/p>\n
Owen Podger, Jakarta<\/p>\n
The Jakarta Post recognized the significance of the new law on
\nfiscal balance in an editorial on Monday Oct. 4, 2004, by
\nstating:<\/p>\n
\"The most important elements of the new legislation lie in its
\nelaborate, clear-cut provisions on budget accountability and
\ndomestic borrowing by regional administrations.\"<\/p>\n
Indeed there are improvements, but not as many as one would
\nhope for. Many of the changes were unnecessary because they are
\nalready covered under Law 17\/2003, the State Finance Act, Law
\n1\/2004 on treasury operations and Law 15\/2004 on auditing.<\/p>\n
For example, the new law gives the national government the
\nright to withhold funds from regions that raise revenue outside
\nthe new provisions. This will only penalize the citizens of the
\nregion, and not the officials who broke the law. There are
\nexisting stronger sanctions in Law 17\/2003, including restoration
\nof funds, fines and imprisonment for officers who misuse public
\nmoney.<\/p>\n
The formula for the general allocation grant (DAU), which
\naccounts for over 80 percent of the budget in most regions, has
\nnot changed significantly and still does not directly address the
\nfiscal needs of regions. The old formula for DAU did not
\n\"balance\" funds to regions, but linked funding to population
\nsize.<\/p>\n
The average budget for districts (kota and kabupaten) with
\nmore than one million population was Rp 280,000 per capita, while
\ndistricts half this size received 30 percent more funding per
\ncapita. Districts with population between 100,000 and 200,000
\nhave budgets that average Rp 1,000,000 per capita, and districts
\nof half this size receive over 60 percent more.<\/p>\n
This type of distribution provides incentives for districts
\nto split into smaller units, not join up to achieve economies of
\nscale through shared overheads and operations.<\/p>\n
Another disappointment with the new law is that it does not
\naddress the distortion caused by \"revenue sharing\" of central
\ngovernment income from natural resources.<\/p>\n
The more that resource-rich districts receive from the
\nexploitation of their resources, the more DAU they receive, and
\nthis disadvantages poor regions with few resources. Revision of
\nthe law was a lost opportunity to redistribute funds according to
\ntheir needs to provide citizens with services.<\/p>\n
The DAU formula in the old law was distorted in budget
\nimplementation by adding a lump sum for each region regardless of
\nits size. These lump sums were the immediate cause of the
\ndistortions reported above, and we trust that the new government
\nwill not distort the new law in the same way.<\/p>\n
The core problem is getting a fairer budget distribution for
\nall Indonesians. This will not be achieved under this new law,
\nwhich still equates \"funding need\" to some formula comprising
\npopulation, area, building costs, and size of the economy. This
\nis simply wrong, because it cannot define the needs of the
\npeople. They want their fair share of good government: Equal
\naccess to good schools, hospitals, infrastructure, environmental
\nprotection, development controls, security, housing, etc.<\/p>\n
The revised law contains articles on regional borrowing. These
\nare misplaced because the scope of this law should be budget
\ndistribution, not financial management. The principles of good
\nfinancial management are contained in Laws 17\/2003 and 1\/2004.
\nThis includes assessing whether borrowing is an appropriate form
\nof financing based on financial return, economic benefits, social
\nand environmental consequences and considering all risks.<\/p>\n
The revised law also strengthens management of deconcentrated
\nfunds. Over recent years the largest ministries, education,
\nhealth and human settlements, have had huge budgets that are
\n\"deconcentrated\" to provinces, who then \"contracted\" with
\ndistricts to fund unknown investments, against the principles of
\ndecentralization and transparency. The new law allows this
\nfunding to continue, though how they are compatible with local
\nstrategic planning, and the need for fair allocation between
\nregions, is not addressed at all.<\/p>\n
This revised law on budget distribution will make little
\ndifference, as it fails to address satisfactorily the central
\nquestion of budgeting: How can scarce resources be distributed
\nwisely, to implement the objectives and functions of government,
\nto reduce poverty, create jobs, provide services, and protect the
\nenvironment, for all Indonesians wherever they live? Fiddling
\nwith formulae will not achieve this result.<\/p>\n
A concerted effort of public sector management reform across
\nall of government is needed, so that there is a clear and proper
\nbasis for determining the financial needs of each region.<\/p>\n
The writer is a free-lance consultant on governance reform,
\nand co-author of Asian Development Bank (ADB)'s Country
\nGovernance Assessment Report of the Republic of Indonesia soon to
\nbe released. He can be contacted at micah68@centrin.net.id.<\/p>",
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