Thu, 17 Jul 2003

RI urged to improve regions' financing capability

Dadan Wijaksana, The Jakarta Post, Jakarta

Improving the intergovernmental fiscal system to enable provinces and regencies to receive the benefits of the locally generated revenues is the key to ensuring the long-term benefits of the ongoing decentralization program, according to a World Bank.

As stated in its newly launched report on decentralization in Indonesia, the Bank said that "The new intergovernmental fiscal system has several strong features...(but) there is a lot of room for improvement."

The report pointed out a number of weaknesses from the current fiscal system, all resulting from huge imbalances in the capability of regions to generate their own revenues.

Firstly, there is huge inequality among regions, according to the most recent data (Dec. 2001) for instance, the revenue per capita in the richest region is around 50 times more than that in the poorest one, making it hard for poor regions to deliver the services even at a standard level.

High dependency by several regencies and provinces on financial transfers from the central government is another flaw. Currently, transfers received by some regions account for over 90 percent of their revenue. Such a situation has greatly contributed to a lack of local accountability, while at the same time it adds a greater burden to the central government.

A lack of local sources of revenue also exposes further flaws as it creates justification for local administrations to issue thousands of dubious regulations for taxes and other bizarre fees, which have worsened the already deteriorating investment climate.

The report noted that most regions have been found to issue all kinds of odd taxes and fees, with at least one tax on the 'import' of goats and an advertisement tax on Coca Cola bottles just two examples.

To help fix those flaws in the current intergovernmental fiscal system, the Bank offered a number of solutions; empowering the local administrations to collect a greater percentage of property taxes, designing a more equitable general allocation grant (DAU), developing specific allocation grants (DAK) and enabling more local borrowing.

The first issue revolves around the need to limit regional taxation to just a few major, common taxes, while at the same time giving regions more power to tax based on what is suitable for each. At present, a particular regency gets only 64 percent of the land and building tax with rest going either to the provincial administration or Jakarta.

The report argued that empowerment and greater access to property revenues was necessary to add to regions' sources of funds and eliminate incentives for regions to issue ridiculous taxes that stifled new business and new investment.

For Indonesia, it added, granting more power to local governments for land and building taxation should be the most feasible option.

"All around the world, land and building taxes are a local tax. We feel that having regions decide on the tax rate for this would be the key to better governance," Bert Hofman, the Bank's lead country economist, said earlier this week.

However, such a situation could aggravate the already unequal fiscal system. Therefore a new formula to better balance the DAU distribution was highly recommended, the Bank said, which recognizes the imbalance of financial capacity among the wealthy and poor regions.

To complement those, the Bank also called for the development of a system on DAK which emphasizes the importance of support for national priorities, on which regions will also share the benefits. Included in this priorities should be, among others, combating poverty and HIV infection.

And finally, the government also needs to enhance the framework for regional borrowing to ensure that regions borrow responsibly, and live within their own budget constraints.

The fiscal decentralization reform was launched more than two years ago to give greater autonomy power to provinces, regencies and mayoralties in managing their economic affairs. However, many businessmen have complained about the poor implementation of program mainly due to the many bizarre rulings issued by the local governments.

Revenue Sharing (%) ---------------------------------------------------- Item 1 2 3 4 5 ---------------------------------------------------- Oil (non-tax) 85 3 6 6 - LNG (non-tax) 70 6 12 6 - Mining: land-rent 20 16 64 - - Mining: royalty 20 16 32 32 - Forestry: land-rent 20 16 64 - - Forestry: resource-rent 20 16 32 32 - Fishery 20 - - - 80 Land & Building Tax 9 16.2 64.8 - 10 Land & Building Transfer Fee - 16 64 - 20 Personal Income Tax 80 8 12 - - ----------------------------------------------------- 1. Central Govt 4. Other local govts 2. Provincial Govt in same province 3. Originating local govts 5. All local govts

Source: The World Bank