Download Suggested Strategic Directions

Financing the Regions
Workshop on Water Resources
and Irrigation Sector Reforms
Jakarta, October 3-4, 2000
Financing The Regions
Main Features of Decentralization
Overview of Financing Mechanisms
Own revenues
Revenue Sharing
Dana Alokasie Umum
Dana Alokasie Khusus
Borrowing
Key issues
Indonesia’s decentralization
 The current legal framework (Laws 22 and 25 of 1999)
will give Indonesia substantial decentralization.
 Over time some 45-50 percent of general government
spending done by the regions.
 The districts/cities will manage most of the Government
services , including health, education, and infrastructure
 PP25/2000 specifies remaining functions of the center
 The Government will start implementation in 2001
The Law says “Big Bang”
MPR Decree and “Ten Point Program” calls for gradual
implementation
Indonesia’s decentralization
Regions will get most resources through a
general grant allocation
Regions must implement functions of Pasal 11
of Law 25 (education, health, agriculture, etc.)
Regions must follow national law
Center can set guidelines for service delivery
Districts can “give back” functions to the
province--but the receive less resources
Decentralization will shift much
spending to the regions
Kenya
Chile
Indonesia before……..
Portugal
Indonesia
Malaysia
Lithuania
Italy
Ireland
Sweden
….And after decentralization
Russia
Argentina
Indonesia
Australia
South Africa
China
0
10
20
30
40
50
Subnational Share of General Government Spending (Percent)
60
Overview of Regional Finance
Own revenues
Revenue sharing
Alokasie Umum
Alokasie Khusus
Borrowing
Own revenues
Definition: regions can set own rate and or base
Currently about 1 percent of GDP
Law 18/1997--Tax Revenues
Law 20/1997--Non-Tax revenues
Revision of Law 18 1997 likely:
Regions could introduce tax on “no
objection” basis rather than approval
Regions may get authority over land and real
estate transfer tax
Revenue sharing
Oil, gas, forestry, fishery, mining, personal
income tax,
1.3 percent of GDP in 2001
Mainly to 6 provinces--and within those 8
districts (oil, gas, forestry)
Issue for fiscal equalization
Issue for fiscal management, due to volatile
prices
Alokasie Umum
 >25 percent of Domestic Revenues
 4 percent of GDP in 2001
 90 percent to District/City; 10 to Province
 Distribution per formula (not yet completed)
 Grant=f(Needs-/-Revenue capacity)*a
Needs=g(population, area, #poor, price level)
Revenue=h(regional GDP, others)
a=adjustment factor, to ensure at least FY00
allocation
No one worse off than before DAU>SDO+
INPRES
Alokasie Khusus
Negligible in 2001
Should become the main instrument of central
government policy
Can be used to correct for spill-overs among
regions
Line Ministries determine factors for Khusus-MOF determines total
Over time larger
Perhaps vehicle for donor funds--see below
Regional Borrowing
Regions are allowed to borrow--with
restrictions
Restrictions on purpose
Law: Infrastructure, high financial return
(draft) regulations: also social investment
Restrictions on regional total
Debt service restriction--future debt
service<revenues
Debt restriction: debt<x% of revenues
Regional Borrowing (cont.)
Possible restrictions on total of all regions
Possible restrictions on guarantees, BUMND
borrowing
Borrowing mechanisms:
Approval of DPRD
Domestic: direct from banks, public
Foreign: not yet decided
either direct (but many donors would ask for guarantee
from central government)
or indirect--through on-lending agreements, or a grant from
the center
Key outstanding issues
How fast will implementation be?
How equalizing will the alokasie umum be?
What if there is a shortfall of funds in the
regions?
What will happen with existing projects?
Who will provide the counterpart funds?
Who will have the authority over tax and levy
rates?