Decentralization flawed, says World Bank

Decentralization flawed, says World Bank

Evi Mariani and Dadan Wijaksana, The Jakarta Post, Jakarta

The World Bank said the government's two-year-old
decentralization program has opened immense opportunities to
improve the lives of many people, but warned that there were
still a number of flaws that must be fixed to ensure long-term
benefits.

The Bank said that one such flaw was the issuance of a host of
"nuisance taxes" by regional governments that had negatively
affected the business climate. Examples of such taxes are tax on
importing goats issued by the Bogor regency administration in
West Java, and the advertisement tax on Coca-Cola bottles in
Lampung province.

World Bank's lead economist on Indonesia Bert Hofman said that
one of the ways to help resolve the problem was to give more
power to regions over land and building taxes as compensation for
eliminating the bizarre taxes.

"All around the world, land and building tax is a local tax.
We feel that having regions decide on the rate for this tax would
be key to better governance," Hofman said in a press statement
issued at the launch of the World Bank assessment report on the
decentralization reforms.

Entitled Decentralizing Indonesia -- A Regional Public
Expenditure Review, the report offers a broad analysis of central
government policy and regional finances in the run-up to and the
first two years of decentralization.

Many investors, both local and foreign alike, have complained
about the poor implementation of the decentralization program,
particularly on the aggressive move by regional governments to
collect taxes from businesses.

The government is currently in the process of revising the
laws and regulations of the program.

The World Bank insisted that Law No. 34/2000 must be revised
to help prevent nuisance taxes from increasing.

The decentralization program was launched in 2001 and has
created dramatic changes nationwide, opening up immense
opportunities to enhance service delivery and accountability.

As part of that program, more than two million civil servants
have been transferred to regions to around 16,000 service
centers, such as schools and hospitals.

"Much has been achieved in the first couple of years, but
there are still a lot of outstanding issues," Hofman said.

Aside from the dubious local tax rulings, there is also a huge
gap in fiscal capacity among regions, causing difficulties for
poorer regions to meet minimum service standards.

The richest region has 50 times more revenue per capita than
the poorest, showing that the general allocation grant (DAU) is
as not as equalizing as it should be. To help overcome this gap,
the government should make its transfers through DAU more
equalizing, the World Bank report said.

Another flaw was the absence of laws and rulings that clearly
defined the assignment of functions at all levels of regional
governments.

The report also cited the increased emergence of new regions
as alarming, as they were not only often unnecessary, but were
also sometimes inspired purely by vested interests.

Over the past two years, more than 100 new local governments
have been created to bring the current total to more than 400.

The Bank welcomed the government's moves to amend the existing
Law No. 22/1999 on regional autonomy: "Indonesia should use the
process of revision as an opportunity to create a broad consensus
on the type and extent of the regional autonomy, and define
better rules of the game to ensure that the benefit of
decentralization will prevail."

The report also singled out financial accountability at the
local level as a major concern. "While evidence from BPK
(Supreme Audit Agency) audits suggests that abuse is not larger
at the local than at the central level, financial management
should be tightened," Hofman said.

"Better regulations on financial management, better rules on
procurement, and more systematic audit of local governments are
key."

The report, noted, however, that follow up on audits was
needed as well, and that a weak justice sector was not helping in
that respect.

The World Bank said in a statement that it was ready to help
provide financing to help improve the implementation of the
decentralization program.