Regional autonomy means fiscal autonomy

Regional autonomy means fiscal autonomy

Tommy Firman, Lecturer Department of Regional and City Planning,
Bandung Institute of Technology (ITB)

Indonesia now is carrying out the decentralization policy with
very little experience in the past.

The first basic element of this new policy is wider regional
autonomy, which implies a relatively revolutionary transfer of
power to local governments to bring the government closer to the
citizens. Regencies (kabupaten) and municipalities are expected
to be able to provide several public services previously managed
by the central government.

The second element, fiscal autonomy, redirection of the
transfer of funds from the central to local government, including
the general allocation fund (DAU), revenue sharing of natural
resources and the Special allocation Funds (DAK), with discretion
in the use of these funds by the regencies and municipalities.

Within fiscal decentralization, the equalization of
unconditional grants from Jakarta to the provincial and local
government, including DAU and revenue sharing funds, are intended
to ensure fiscal sustainability in the context of macro-economic
policy. Other purposes include to correct vertical and horizontal
fiscal imbalances, to improve efficiency and effectivity of
resource allocation and to bring the government closer to their
citizens.

The local government associations keep pressure on the central
government that they should receive DAU not less than the amount
they received in the previous years, although they may have
received large amounts of revenue sharing.

As a result, some local governments receive large amounts of
money which might be much greater than their fiscal need. It
suggests that at present DAU should not be considered as a
mechanism to fill the fiscal gap, rather a political interim
solution to restrain protests from certain provincial and local
governments and political leaders.

The Indonesian tax law does not provide the local government
with new broad-based taxes discretion, to prevent the local
government from abusing the taxing power. However, as the new
revised tax law (Law No. 34/2000) allows the local government to
create local taxes, there are high possibilities if the local
government creates an expansive tax and charge policy. For the
effectiveness of regional autonomy in the near future, improving
the local government taxing power is inevitable.

There is a need to develop a "piggy backing" system, which
allows the local government to receive additional certain
percentage to the central government taxes, instead of creating
new local government insignificant taxes.

Since the local government is allowed to collect more local
taxes, there is also the fear that the local government will
allow investors to exploit natural resources more intensively and
extensively, which in turn could create and exacerbate the
environmental problems in the areas.

Municipal bonds and borrowing are other possible local
government sources of finance. However, the central government
seems to be half-hearted to realize it immediately, as both
domestic and foreign lending agencies require Jakarta's
recommendations and guarantees for such borrowing.

Another reason for the central government's objection is that
Indonesia is still facing an economic crisis, and mounting
foreign debt. However, there might be some local governments
qualified enough for borrowing, and there is no reason for
Jakarta to discourage it. Some detailed requirements indeed need
to be set to avoid a borrowing spree which in turn could worsen
the national economy.

Another new source of revenue for local and provincial
governments is DAK intended for the specific needs of local
government or for special tasks assignment by the central
government. However, it is not a central government priority at
present. DAK could be considered as a matching grant for local
government should they intend to develop infrastructure that
could have positive impacts beyond their jurisdiction.

As a result of the present DAU and revenue sharing system, the
vertical fiscal disparity might be lessened, but the horizontal
fiscal disparity tends to widen, especially between Jakarta and
some regencies in the oil producing regions, notably, Aceh, Riau,
East Kalimantan on the one hand, with other districts and
municipalities in Indonesia, on the other hand.

Some regencies in Riau, South Sumatra and East Kalimantan have
shown a "demonstration effect" of their large revenue sharing of
oil and gases, where they plan to build new capitals, using it
for poverty alleviation program.

Moreover, many local governments in the resource-rich region
want to develop infrastructures, such as international seaports,
without taking into account the efficiency and effectiveness of
such long-term investment. There is also a trend that many local
governments consider their jurisdictions as "their own kingdoms"
and do not care about their neighboring local governments.

Regional autonomy and fiscal decentralization legislation at
least has so far been able to restrain separatist sentiment in
several provinces, notably Aceh and Papua, and to end the
exploitation of local government by the central government.

Thus DAU should be considered as part of an equalization grant
which also includes natural resource revenue and tax sharing. One
cannot be separated from the other.

Therefore, instead of formulating the amount of DAU to be
distributed in the very first instance, the central government
should be able to estimate total amount of transfers, including
DAU, revenue sharing and DAK.

The new regional autonomy and fiscal decentralization policy
is not only a matter of distributing funds and authority from the
central to the local government; but more importantly how to
establish and develop democratic administrative and political
institutions and good governance which should be able to
stimulate local participation.

Under the new regional autonomy and fiscal decentralization
system, cities and regions in Indonesia face the challenge of how
to improve their institutional development, while they are mostly
inexperienced in self governing and are confronted with the lack
of guidelines and operational procedures to implement the new
regional autonomy leading towards a good governance.