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.