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.