Fiscal autonomy for regions

Fiscal autonomy for regions

President Soeharto's written address for the presentation of
budgetary authorization documents on development projects for
implementation in fiscal 1994-1995 to the 27 provincial governors on
Thursday touched upon one of the major issues of development within the
next 25 years -- decentralization of administrative responsibility to
provincial and district administrations.

The President warned the local administrators against abusing the
administrative power accorded them by the central government. He said
the central government was transferring more administrative authority to
local administrators and they should exercise the power in a productive
and responsible manner. He also asked the local administrations to
strengthen their financing capacity by developing a broader source of
local revenues.

As we noted briefly in this column on March 31, the decentralization
of power from the central government to local (provincial and district)
administrations is one of the major tasks that has to be accomplished
within the next 25 years to sustain not only economic growth but the
development process itself. Indeed, our economic development over the
past 25 years has now reached such a stage that the present
centralization of administrative power in such a vast archipelagic
country is increasingly untenable. In fact, decentralization should be
seen as the next most important agenda item after economic and
bureaucratic reforms. When we talk about decentralization we mean the
transfer of more essential administrative and fiscal authority to local
governments.

As the President stated in his March 31 speech, more administrative
power has been transferred to local administrations. But we feel the
pace of the decentralization process has been much slower than what is
required to attain efficiency and encourage local initiatives. We should
remember that Law No.5/1974, which stipulates the umbrella of legal
framework for the distribution of administrative power to local
administrations, was enacted about 20 years ago.

The October, 1993, package of reform measures did include the
transfer of more administrative authority to local administrations with
regard to land ownership registration and titling. But many other
aspects of the decentralization process have not been touched upon at
all, and more specific regulations to implement the law have yet to be
issued. The most often cited reason for this is that the administrative
capacity of local governments is still inadequate to handle more
administrative power.

But what we think is lacking to the extreme in the decentralization
process is the fact that the gradual distribution of administrative
power has not sufficiently been accompanied by the transfer of
associated budgetary resources or fiscal autonomy. Local administrations
still depend on fund transfers from the central government for financing
more than 75 percent of their expenditures. The collection of most taxes
and levies -- income and value added taxes, excise duties -- remains
centralized in Jakarta and even such natural resource royalties as those
collected from forests are entirely managed by the central government.
Therefore, local administrations have only a few, insignificant sources
of tax receipts, such as property tax and taxes on motor vehicles,
entertainment (cinema), hotels and restaurants, business registration
and slaughter houses.

Without a more equitable assignment of tax bases between the central
government and local administrations, the local administrations will not
be able to develop initiative. They also will not be interested in
making concerted efforts to stimulate investment activities in their
areas. Further down the line, lack of own revenues will become a main
barrier to the further development of the institutional capacity of
local administrations. We are afraid that without the transfer of
clearly-administered fiscal autonomy, the President's call for local
administrations to increase their revenues might be misinterpreted and
lead to the imposing of new taxes, levies or fees which would cause
market distortions.