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.