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.