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General purpose central-provincial-local transfers (DAU) in Indonesia : from gap filling to ensuring fair access to essential public services for all

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Author Info

  • Shah, Anwar
  • Qibthiyyah, Riatu
  • Dita, Astrid

Abstract

Indonesia has come a long way from centralized governance to decentralized local governance, and today Indonesia ranks among the most decentralized developing countries. The Government of Indonesia is revisiting all aspects of local governance to make appropriate legal and institutional adjustments based on lessons leaarned during the past decade. An important area of this re-examination and possible reform is the central financing of subnational expenditures. The system of intergovernmental finance represents one of the most complex systems ever implemented by any government in the world. The system is primarily focused on a gap-filling approach to provincial-local finance in an objective manner to ensure revenue adequacy and local autonomy but without accountability to local residents for service delivery performance. This paper takes a closer look at Dana Alokasi Umum -- the most dominant program of unconditional central transfers to finance provincial-local government expenditures in Indonesia. The paper also presents illustrative simulations of alternative programs and compares these with the existing Dana Alokasi Umum allocations. The paper concludes that super complexity leads to lack of transparency, inequity, and uncertainty in allocation. Simpler alternatives are available that have the potential to address autonomy and equity objectives while also enhancing efficiency and citizen-based accountability. Such alternatives would represent a move away from the complex gap-filling approach to simple output-based transfers to finance operating expenditures. Capital grants would deal with infrastructure deficiencies. And the alternatives would institute fiscal capacity equalization as a residual program with an explicit standard to ensure that all local jurisdictions have adequate means to deliver reasonably comparable levels of public services at reasonably comparable levels of tax burdens across the country.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6075.

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Date of creation: 01 Jun 2012
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Handle: RePEc:wbk:wbrwps:6075

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Related research

Keywords: Subnational Economic Development; Public Sector Economics; Banks&Banking Reform; National Governance; Debt Markets;

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References

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  1. Fadliya & Ross H. McLeod, 2010. "Fiscal Transfers to Regional Governments in Indonesia," Departmental Working Papers 2010-14, The Australian National University, Arndt-Corden Department of Economics.
  2. Blane Lewis, 2001. "The New Indonesian Equalisation Transfer," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 37(3), pages 325-343.
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Cited by:
  1. Shah, Anwar, 2012. "Autonomy with equity and accountability : toward a more transparent, objective, predictable and simpler (TOPS) system of central financing of provincial-local expenditures in Indonesia," Policy Research Working Paper Series 6004, The World Bank.

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