Fiscal balance is still not balancing

Fiscal balance is still not balancing

Owen Podger, Jakarta

The Jakarta Post recognized the significance of the new law on
fiscal balance in an editorial on Monday Oct. 4, 2004, by
stating:

"The most important elements of the new legislation lie in its
elaborate, clear-cut provisions on budget accountability and
domestic borrowing by regional administrations."

Indeed there are improvements, but not as many as one would
hope for. Many of the changes were unnecessary because they are
already covered under Law 17/2003, the State Finance Act, Law
1/2004 on treasury operations and Law 15/2004 on auditing.

For example, the new law gives the national government the
right to withhold funds from regions that raise revenue outside
the new provisions. This will only penalize the citizens of the
region, and not the officials who broke the law. There are
existing stronger sanctions in Law 17/2003, including restoration
of funds, fines and imprisonment for officers who misuse public
money.

The formula for the general allocation grant (DAU), which
accounts for over 80 percent of the budget in most regions, has
not changed significantly and still does not directly address the
fiscal needs of regions. The old formula for DAU did not
"balance" funds to regions, but linked funding to population
size.

The average budget for districts (kota and kabupaten) with
more than one million population was Rp 280,000 per capita, while
districts half this size received 30 percent more funding per
capita. Districts with population between 100,000 and 200,000
have budgets that average Rp 1,000,000 per capita, and districts
of half this size receive over 60 percent more.

This type of distribution provides incentives for districts
to split into smaller units, not join up to achieve economies of
scale through shared overheads and operations.

Another disappointment with the new law is that it does not
address the distortion caused by "revenue sharing" of central
government income from natural resources.

The more that resource-rich districts receive from the
exploitation of their resources, the more DAU they receive, and
this disadvantages poor regions with few resources. Revision of
the law was a lost opportunity to redistribute funds according to
their needs to provide citizens with services.

The DAU formula in the old law was distorted in budget
implementation by adding a lump sum for each region regardless of
its size. These lump sums were the immediate cause of the
distortions reported above, and we trust that the new government
will not distort the new law in the same way.

The core problem is getting a fairer budget distribution for
all Indonesians. This will not be achieved under this new law,
which still equates "funding need" to some formula comprising
population, area, building costs, and size of the economy. This
is simply wrong, because it cannot define the needs of the
people. They want their fair share of good government: Equal
access to good schools, hospitals, infrastructure, environmental
protection, development controls, security, housing, etc.

The revised law contains articles on regional borrowing. These
are misplaced because the scope of this law should be budget
distribution, not financial management. The principles of good
financial management are contained in Laws 17/2003 and 1/2004.
This includes assessing whether borrowing is an appropriate form
of financing based on financial return, economic benefits, social
and environmental consequences and considering all risks.

The revised law also strengthens management of deconcentrated
funds. Over recent years the largest ministries, education,
health and human settlements, have had huge budgets that are
"deconcentrated" to provinces, who then "contracted" with
districts to fund unknown investments, against the principles of
decentralization and transparency. The new law allows this
funding to continue, though how they are compatible with local
strategic planning, and the need for fair allocation between
regions, is not addressed at all.

This revised law on budget distribution will make little
difference, as it fails to address satisfactorily the central
question of budgeting: How can scarce resources be distributed
wisely, to implement the objectives and functions of government,
to reduce poverty, create jobs, provide services, and protect the
environment, for all Indonesians wherever they live? Fiddling
with formulae will not achieve this result.

A concerted effort of public sector management reform across
all of government is needed, so that there is a clear and proper
basis for determining the financial needs of each region.

The writer is a free-lance consultant on governance reform,
and co-author of Asian Development Bank (ADB)'s Country
Governance Assessment Report of the Republic of Indonesia soon to
be released. He can be contacted at micah68@centrin.net.id.