decentralization as mandated by law 25/1999. Fortunately, there were no significant negative effects on the APBN created by that new scheme and most of local governments could understand that the relatively low amount of transfer is mostly due to heavy burden of APBN rather than the lack of central government commitment in fiscal decentralization. On the other hand, the intergovernmental transfer scheme itself is still far from optimal due to heavy political interference especially in DAU, natural resources revenue sharing (through the special autonomy of Aceh and Papua), and tax revenue sharing.
The center piece of Indonesian fiscal decentralization is the general purpose grant (DAU) that gives the full autonomy to local governments in spending and managing the grant. Instead of ad-hoc basis, the DAU utilizes the formula to allocate the grant to all
provincial and local governments in Indonesia.
In most local governments, DAU is
basically their budget since its role is very dominant as demonstrated in table 1 of appendix. This heavy dependence to DAU creates disincentive for local governments in raising or intensifying the collection local own revenue (PAD). While excessive local tax collection and illegal charges might harm the local investment climate, the local governments still have to intensify the collection of legal local taxes and charges revenue
up to the optimal level through better local tax administration system
enforcement. Brodjonegoro correlation between the size of
and Martinez (2002) DAU and PAD.
and law negative
The allocation of DAU itself is still full of political influence as indicated by the hold- harmless provision that guarantees every local government to receive the grant not less than the previous allocation. This clearly hurts the fiscal capacity equalization purpose that should be the DAU responsibility. The equalization problem, for now, is resolved gradually by keeping the “rich” regions at the same level as in 2001 and at the same time, giving more to “poor” regions through the inflation effect of DAU or increasing domestic revenue at APBN. Table 2 indicated that the ratio between the lowest and highest DAU per capita increased from 15 in 2002 to 20 in 2003. This gradual attempt is still far from the ultimate purpose of fiscal capacity equalization since in 2002 the ratio between the highest and lowest total local revenue per capita was still 7, a considerably high ratio. Another problem of DAU allocation formula is the existence of lump-sum component (a certain similar amount to all local government) that eventually triggered the formation of new local governments since the small lump-sum amount is still considered a significant amount for the proponents of new local governments. MOF is planning to abolish this component and incorporate it into a component that ensures the hold-harmless provision.
Another alternative way to pursue the equalization purpose of DAU is by setting independent commission of grant allocation. The existence of independent commission
should be effective formula approach.
in minimizing However, the
the political influence and in promoting central government elites seem to have
the full different
opinion regarding 25/1999, MOF is
the mechanism of grant allocation. In the proposed amendment of trying to introduce the idea of independent grant commission
reports directly to the yet to the commission
president. However, MOF has since the main responsibility of
just to propose