Is Papua spending its fiscal resources wisely?

Is Papua spending its fiscal resources wisely?

Wolfgang Fengler, Jasmin Chakeri, and Bambang Suharnoko Sjahrir, Jakarta

Papua occupies a special place in Indonesia. The province is
characterized by geographic isolation and long-standing conflict,
but also by immense natural resource wealth. Papua is also the
countries' poorest and most rapidly growing province.

Forty percent of Papuans live below the poverty line-- more
than double the national average. One third of Papua's children
do not go to school. Nine out of 10 villages do not have basic
health services with a health center, doctor or midwife.

The underlying cause of Papua's underdevelopment is not a lack
of fiscal resources. Even before decentralization, the region was
among the fiscally richest in the country.

Following decentralization in 2001 and the granting of
Special Autonomy status in 2002, Papua's revenues more than
tripled in real terms, boosting local and provincial government
spending. By 2003, Papua reported the second-highest annual real
per capita revenues in the country after East Kalimantan.

Papua's fiscal position will remain strong for the foreseeable
future. Most of Papua's resources currently come from the general
allocation grant (DAU) and the special Autonomy Fund (Dana
Otsus). These two sources of funds will provide the backbone of
Papua's revenues until 2021, when the Dana Otsus is scheduled to
be phased out.

By 2015, Tangguh LNG -- one of the largest foreign direct
investments in Indonesia ever -- will be generating additional
revenues of at least Rp 1 trillion (US$100 million) a year. While
this amount is significant for Papua, it does not present the
huge windfall that many have anticipated, mainly because of the
large share of revenues from the DAU and the Dana Otsus.

Papua's large increase in fiscal resources can be an important
factor in helping Papua's "catch up". Development and routine
expenditures in all sectors have increased, while development
spending priorities have not changed significantly:
Infrastructure, the government apparatus, and education still
receive the largest budget allocations.

The past years brought some improvement in key services,
especially in infrastructure and education. The road network was
expanded by 20 percent, primary net enrollment increased by 3
percent, and secondary net enrollment by 7 percent. In addition,
some local governments have introduced innovative approaches to
service delivery, such as the floating health center (puskesmas)
in Kabupaten Biak Numfor. Such positive trends are encouraging
and need to be further strengthened.

Papua's main challenge remains the quality and efficiency of
public spending, which will determine whether higher spending
levels will translate into better development outcomes.

Financial management capacity is observed to be low, and
accounting practices are problematic. There is, for instance, a
disproportionate increase in the share of unspecified recurrent
expenditures, which is often prone to misuse.

Provincial and local governments could take a number of
measures to improve revenue and expenditure management in the
short- to medium term, namely by transferring control over the
majority of Dana Otsus funds to the local government level.

The main purpose of the Dana Otsus and the revenue sharing
arrangements also needs to be clarified, and coordination between
the provincial and local governments at the planning stage needs
to be improved. Furthermore, priority of long-term investments
over short-term financing needs, especially for the Dana Otsus
spending, needs to be assured.

Now is the time to make long-term investments in key sectors
to ensure that the current windfall of resources contributes to
sustainable development. Papua will have an enormous amount of
resources available for the foreseeable future but the revenue
windfall will not last forever.

-- The writers are part of a team that worked on the Papua Public
Expenditure Analysis and also included Jana Hertz, Richard
Manning and Teddy Weohau. The report has been produced in
collaboration with the World Bank's Support Office for Eastern
Indonesia, the Papua provincial government, and the Dutch
Embassy.