Decentralization and local public performance incentives in Indonesia

Decentralization

Indonesia’s “people power” moment took place in 1998, ending Suharto’s 32 years of authoritarian rule. The movement, called Refbrmasi, promised to bring a new era of democracy and decentralization. Within a few years of Suharto stepping down, the original 1945 Constitution was amended to curb the powers of the executive, strengthen the legislature, adopt direct elections, acknowledge human rights, and enable a larger governing role for sub-national governments. The 1998 reform mandated decentralization through an increase in regional autonomy by way of devolution. Indonesia’s “big bang” decentralization started in 1999 with the passing of two laws that devolved authority and responsibility - and distributed monetary resources - from the central to regional governments.⁸ The extent of responsibilities being redistributed covered almost everything except foreign affairs, defense, justice, finance, religion, and natural resources, which remain in the hands of the central government.

Immediately prior to decentralization, transfers of funds from central government to sub-national governments (provinces, cities or kota, and regencies or kabupaten) made up 14.9% of total central government expenditure. By 2001, that figure had jumped to 23.7%.⁹ The average annual proportion of transfers to regional governments for the period 1990-2000 was 19.6%; this increased to 30.9% for the period 2000-2010. The central government also shifted many staff to local government payrolls, with the percentage of civil servants at the local level increasing from 12.2% to 66.7% between 1999 and 2001 (World Bank, 2003).

Transfers from central to regional governments consist of three types of funds: unconditional, general-purpose grant {Dana Alokasi Umum or DAU); special-purpose grant {Dana Alokasi Khusus)-, and revenue sharing {Dana Bagi Hasil). Each regional government receives transfers directly from the central government. The amount of DAU that each regional government receives is determined by the region’s land area and population. The DAU is noteworthy because it accounts for a large proportion of funds: it made up 64.1% of total regional government revenue in 2003 but decreased to 46.9% in 2008 and to 42.4% in 2013.¹⁰ It is also “unconditional”, which means that regional governments can use it as they see fit, with no link between the entitlement to receive the grant and the performance of the region (Ahmad and Mansoor 2002, Lewis 2010).

Meanwhile, the power of regional governments to raise their own revenue remains limited. Income tax and value-added tax and revenue from natural resources are collected by the central government. Part of the natural resource revenue is redistributed to provincial and local governments according to a formula that favors the locality where the resource is found. Other than that, taxes collected by local governments include hotel and restaurant tax, entertainment tax, and advertising tax. Local governments could also collect fees from the public and businesses, but there is no requirement for businesses to register with the local government on a regular basis.

Under the new decentralization framework, Indonesia has adopted a flat rather than a hierarchical structure, whereby provinces, as well as the cities and regencies therein, are all called “autonomous regions”. Politically, each regional government is accountable to the people, but administratively, they receive money from and report to the national government. Cities and regencies are at the forefront of regional autonomy, while provinces - which were considered superior in the former hierarchy - now hold a lesser coordinating role. The sudden increase in authority in the regions has presented some challenges, such as failures of coordination, an increase in the number and types of predatory local taxes, and local regulations that tend to discriminate against people from other regions. There has also been a rise of local “dynasties”. In response to these challenges, the original 1999 decentralization laws have been gradually revised to better clarify the authority and responsibility of the provincial and local governments, to re-strengthen the role of the province in coordinating and ensuring local government performance, and to facilitate more democratic local elections.¹¹

Based on the latest Ministry of Home Affairs Regulation issued in 2017, there are 508 autonomous local governments (415 rural regencies or kabupaten and 93 cities or kota).ⁿ Local governments arc further broken down into sub-districts (kecamatan - 6,994 in total) and villages (urban kelurahan or rural dcsa - 72,944 in all). The 93 cities vary greatly in size. Following the Ministry of Public Works’ city size classification, 12 cities had a population of larger than one million, 14 cities had between 500,000 and one million inhabitants, 58 cities had between 100,000 and 500,000, and nine had a population of less than 100,000. The average population of Indonesia’s 93 autonomous cities is 486,235, while the median is 235,305 (based on the 2015 inter-census survey).