Chapter 13 - Fiscal Decentralization in Indonesia

Summary

Introduction

The anticipation of regional autonomy and fiscal decentralization in Indonesia, especially during the period between the parliament's ratification of laws 22/1999 and 25/1999 and the end of 2000, finally became reality when the new millennium started. When the two laws were ratified in June 1999, the implementation of those laws was estimated to be two years from that date, and it meant that regional autonomy and fiscal decentralization would formally start in May 2001. However, the change in national leadership from Habibie to Abdurrahman Wahid and the change in fiscal year from 1 April–31 March to 1 January–31 December forced the earlier implementation of the most important agenda in Indonesia — perhaps only secondary in importance to national independence itself. From the point of view of the regional governments, the earlier implementation was what most of them wanted from the central government. Despite the question marks over the capabilities of the local governments to handle autonomy and fiscal decentralization, only a few local governments raised doubts about their own capabilities. Regional autonomy and fiscal decentralization have been a crucial political agenda item for both the central and local governments.

Law 25/1999 deals with the fiscal decentralization process that will create a new intergovernmental transfer scheme between the central government and the local governments. Some items in the law are new, such as the natural resource revenue sharing and the general purpose grant called the general allocation fund (Dana Alokasi Umum, DAU). The natural resource revenue sharing exists mostly to compensate for the central government's overexploitation of resource-rich, but troubled, regions such as Papua, Aceh, Riau, and East Kalimantan. On the other hand, the DAU was designed to equalize the fiscal capacity among the regions. Since it is a general purpose grant, the local governments have full freedom in spending it. This grant is totally different from the old scheme, which clearly showed the domination of the central government in determining the spending priorities of the local governments.