1. This report is one of three
regional reports – the two others being West Java and North
Sumatera - that examine the
management of public budget resources in the context of
decentralization. These reports
will serve as inputs to an overall report, all to address three broad
objectives:
· To support regional governments in
managing decentralization and improving their planning
and budgeting processes;
· To build a relationship with local
stakeholders, and consults with them on ways to address
key development challenges in the
regions; and
· To build an analytical foundation for
the selection of regions in which the Bank could
operate, and of the Bank’s
activities in the regions.
2. The focus of this report is
Kabupaten Lombok Timor (hereafter Lotim) and is in large
measure based on wide ranging
interviews in Lotim and at the NT Provincial level with civil
servants, parliamentarians, NGO
representatives and citizens (see Annex). Initial and tentative
observations from this field work
was presented (in Annex) and discussed in a workshop in Selong
September 25, 2001.
3. Lotim faces enormous
challenges to gain control over its public resources and their effective
use to provide the building
blocks for economic growth and improved social welfare of its citizens.
It is a largely agricultural
economy, but confronted by a relatively harsh climate and difficult natural
resources. Concerted efforts to
invest in irrigation over the past two decades has significantly
reduced food insecurity, but
above-average public expenditure on health and education, on a per
capita basis, has yet to move
Lotim’s indicators from well below national averages (Table 1). Over
the 1990-99 period, Lotim was
amongst the districts starting from low indicators that made the
slowest progress on human development.
Life
Expectancy
(years)
|
Adult Literacy
Rate
(%)
|
Mean
Years of
Schooling
(years)
|
HDI
|
HDI Rank
|
||||||
Lombok
Timor
|
53.2
|
56.0
|
66.5
|
68.6
|
4.3
|
4.8
|
54.4
|
52.1
|
286
of
291
|
284
of
294
|
NTB
|
54.9
|
57.8
|
68.0
|
72.8
|
4.6
|
5.2
|
56.7
|
54.2
|
26 of 26
|
26 of 26
|
Indonesia
|
64.4
|
66.2
|
85.5
|
88.4
|
6.3
|
6.7
|
67.7
|
64.3
|
||
year
|
1996
|
1999
|
1996
|
1999
|
1996
|
1999
|
1996
|
1999
|
1996
|
1999
|
Table 1: Lotim Human Development
Indicators In National Perspective
Source: BPS, BAPPENAS, UNDP, “Indonesia: The
National Human Development Report,” 2001.
4. Poverty is high in Lotim,
particularly in the more isolated northern mountainous areas
around Mt. Rinjani and the dry
south, while the middle benefits from richer and better irrigated
agricultural land. Income is more
evenly distributed (low Gini ratio) in the Indonesia context and
given the high poverty rates,
this indicates that a high proportion of the population is close to the
poverty line. Economic activity
tends to be small-scale in agriculture, commerce and
manufacturing and employment
outside of the agriculture tends to be limited to the non-formal
sector. Population densities that
rival Java is associated with farmers having modest land assets and
significant numbers of landless
rural workers.
5. Human resources indicators
reflect these economic circumstances. Despite comparatively
good provision of and access to
schools, Lotim has low adult educational attainment and rapid falloff
of attendance at post primary
school levels by children. A large proportion of adults over the
age of 30-35 have been virtually
by-passed by the educational system, with high illiteracy, limited
capacity to function in
Indonesia’s national language, and significantly worse outcomes for women
than for men. Health outcomes
have proven stubbornly poor despite good access to health services
and facilities. Maternal, infant
and child mortality remain high and life expectance low compared to
elsewhere in Indonesia. Poor
nutrition, housing conditions and health practices and norms at the
household and community are a
contributing factor to these outcomes.
6. These constraints of economic
opportunity and social welfare have prompted many in Lotim
to seek their futures elsewhere,
and the region has experienced out-migration for many years, to
destinations both in Indonesia
and abroad. Young women are increasingly participating in this
through employment as household
workers in the Middle East, but migration is still predominated
by men, resulting in a high level
of female-headed households.
7. Facing these critical
socio-economic problems, Lotim embarks on fiscal decentralization
with tight resource constraints.
Budget resource limitations are compounded by the additional civil
servants who have also been
decentralized. Significant increases in tax revenues are unlikely, nor
desirable, at least in the short
run because of the low tax base and likely incidence on the poor, and
there is little capacity to
borrow. To address its problems, Lotim will need to be ambitious in
improving its service delivery,
reduce leakage in public expenditure and mobilize more revenue
charges. Full use needs to be
taken of the opportunities that exist to: (i) improve planning,
budgeting and financial
management processes; (ii) improve service delivery by Dinas through
greater involvement of user
groups in expenditure planning and delegation to them of program
implementation; and (iii)
improved governance by engaging civil society in government and the
DPRD.
8. From an electoral perspective,
the willingness to carry out governance reform is affected by
factors related to self-interest:
· It will improve prospects of re-election
(for DPRD members);
· It may help prevent the potential
rollback of decentralization legislation which is
being called into question by
senior members of the central government;
· It can help improve the public image of
the local government, especially if the focus
is placed on running a “clean”
government;
· Reform-minded governments tend to
attract a larger share of government and
external donor resources;
and,
6
· Running a clean government reduces the
likelihood of legal and social sanctions in
the event that real judicial
reform takes place at a national level.
9. The depth and breadth of the
governance reforms that will actually take place remain largely
in the hands of local government
officials and politicians as well as with civic leaders who have the
capability to bring public
pressure to bear upon the government.
10. The report that follows is
organized in three sections. The first presents the basic structure
of Lotim’s budget – both revenues
and expenditures – as well as the planning process which
produces this and the financial
management practices which underpin its implementation. In this
first year of Kabupatens’ budget
management under decentralization, shifts in budget priorities are
already evident and these are
identified. The second section examines in greater detail the potential
for greater budget efficiency and
effectiveness in a sample of Lotim’s sectoral service provision.
Three sectors are reviewed,
education, public works (roads and solid waste management) and
agriculture. The third section
analyzes how governance dynamics are evolving and may yet need to
evolve to achieve a more balanced
set of checks and balances between the citizenry, parliament and
executive in the use of public
budget resources towards the achievement of development priorities.
Lotim’s Budget, and
Planning and Budget Processes
11. A key objective of
decentralization is to get better services at lower cost for the regions by
moving decisions on service
delivery closer to the people it affects. The budget is central to this
objective: the planning and
budget process allocates scarce budgetary funds over competing uses.
For Lotim, budgetary funds are
scarce indeed: total revenues in FY2001 were budgeted to be less
than half the average for all
local governments in Indonesia,1 and the lowest in the province of
NTB. Options for raising revenues
or issuing debt remain limited in the short run. Therefore,
making the best possible use of
existing funds through careful planning and budgeting to get the
most out of available resources is therefore a must for
Lotim.
1
Kabupatens (regencies) and Kota’s (cities) are referred to together as “local
governments.” “Regions” is used for either
Kabupatens
and Kota’s or provinces, or both. Local governments and provinces together are
referred to as “regions.”
Note
that for the fiscal data on a per capita basis referred to in the text and
tables two kinds of averages can be calculated:
(i)
the average for the per capita values over all local governments; and (ii) the
national average per capita for Indonesia’s
local
government level. Unless otherwise specified, the text refers to method (i), in
order to compare Lotim with the
“Typical” Local government in Indonesia.
Table 2: Lotim, Summary Budget 1998/99-2001 (Rp.
Million).
|
||||||
1998/99
|
1999/2000
|
2000
|
2001
|
|||
Total
Expenditures
|
63,363
|
68,394
|
102,839
|
269,983
|
||
Wages
|
40,800
|
49,231
|
65,667
|
160,096
|
||
Development
Expenditures
|
17,468
|
13,125
|
29,349
|
93,678
|
||
Total Revenues
|
64,365
|
70,210
|
105,735
|
269,983
|
||
Central
Transfers
|
57,192
|
62,591
|
89,658
|
236,699
|
||
SDO
Shared
Revenues
Own Revenues
(PAD)
|
41,558
2,295
4,041
|
50,375
4,302
2,586
|
66,031
8,720
4,415
|
-------
16,172
13,145
|
||
Retributions
|
3,445
|
1,775
|
2,667
|
5,777
|
||
The Budget for
FY2001
12. Overview. Lotim’s
budget
structure is fairly representative
for an
average kabupaten in Indonesia. A
large
chunk of its revenues is derived
from the
general grant or DAU, and the
wage bill
takes the largest cut form
spending.
Decentralization had a dramatic
impact
on Lotim’s budget. Total
expenditures
more than doubled compared to the
(9
months) FY2000, and almost
doubled on
an annual basis (Table 2: Lotim
Summary Budget). The wage bill
rose
with similar magnitudes, and the
revenue
structure changed completely
(Annex
Table 3: Lotim income structure).
Lotim
planned to spend nearly Rp. 280,
000 per
person in FY2001. Compared to the
average of Rp. 640,000 for
Indonesia’s
local governments this is low
(Annex
Table 2: Summary Indicators), but
compared to the past, this is a
substantial
increase—even if the additional
spending obligations on civil
service and
projects inherited from the
center are
taken into account. The
government’s
own impression is that
decentralization
has brought about no undue
budgetary
pressures for Lotim. And indeed,
Lotim
was able to allocate more than
one third
of its budget for development
purposes, an increase from the past. At the same time, surviving the
budgetary pressures of
decentralization is hardly enough for a region that faces challenges ranging
from insufficient infrastructure,
low social indicators, and harsh climatic conditions. Addressing
those challenges with the limited
resources Lotim has will be a major task for the regional
government in years to come.
Revenues
13. Like most of Indonesia’s
local governments, Lotim relies heavily on transfers from the
central government. The most
important one is the general grant (DAU) followed by shared
revenues from land and real
estate taxes (PBB) and natural resource revenues (SDA). Own
revenues are as of yet modest,
even after Law 34/2000 opened up increased possibilities for raising
taxes locally. Over time, this
fiscal dependence on the center is far from healthy, as there are few
things that make a local
government more accountable to its electorate than a significant local
revenue base. Even so, in the short run, this
situation is likely to persist.
14. General Grant (DAU).
The DAU is by far the most important source of revenues for
Lotim. In the budget for FY2001
the Rp. 226 bn. amounted to 91 percent of revenues. The DAU is
Box 1 : Ongkos Administrasi
The DAU is a general grant which is to
be allocated through the
regional budget. Central government
has in principle no say in the
use of the funds. But many regional
treasuries think otherwise.
Lotim’s finance bureau, for instance
must each month go to the
regional treasury (KPKN) to fill out a
request for its share of the
DAU. Moreover, the KPKN requires proof
of spending of last
month’s allocation. And, of course, a
little administrative cost is
involved. The finance bureau is in a
bit of a bind here, because it
has no alternative but to “recover”
the costs of this fee on their own
disbursements. To eliminate this
“onkos administrasi” the central
government could consider direct
disbursement of the DAU every
month from the BUN directly into the
regional governments
accounts in the regional development
banks, and without
administrative
costs.
|
a general grant from central
government which can be allocated
as the region sees fit—as long as
it
performs the tasks and functions
of
Law 22. Nevertheless, some
central
“oversight” seems to be still at
work
(Box 1: Ongkos Administrasi).2
15. The DAU for 2001 was
allocated largely on the basis of
past
spending patterns, and only 20
percent on the basis of an
equalizing
formula.3 The reason for
this was
that an allocation by formula
alone
would have risked a significant
mismatch between spending
obligations (on civil service and
ongoing projects of the devolved
bureaus) and revenues. Therefore,
the allocation was largely determined by the “base amount”
which consisted of 130 percent of
past transfers for personnel (SDO) plus 110 percent of past
development grants (INPRES). Yet,
some mismatches still remained, and in mid-2001, Lotim
received on another Rp. 9 billion
from the central government contingency fund.
16. In the draft revised budget,
the DAU including contingency fund constitutes 87 percent of
revenues for Lotim. On a per
capita basis, this puts Lotim with Rp.243,000 at less than half the
average DAU for local governments
in Indonesia. On the other hand, this is still almost double the
amount of the region at the
bottom end, which received Rp. 133,000 per capita.
Own revenues
(PAD)
17. East Timor’s own revenues
accounted for less than five percent of total revenues (or just
over 13 billion Rp.). On a per
capita basis this is less than half the national average for local
governments. The bulk of the own
revenues is derived from retributions (levies), with charges for
health services adding up to 1.8
billion, or almost 15 percent of total own revenues. The region
received some 2 billion in
revenues from government enterprises, and a further “other” revenues of
Rp.5 billion.4 The top item in
revenues from government enterprises came from cattle fattening, an
activity one would not normally
consider as one in need of government involvement.
18. Local taxes. Lotim’s
own taxes total less than ten percent of own revenues. The most
important own tax was the street
lighting tax which amounted to nearly 75 percent of total taxes.
2 Ministerial decree 556/KMK.03/2000 dd. December 26 2001 describes the
disbursement procedures for the DAU. These
include
monthly reporting on spending.
3 There was a third part to the allocation, which according to some
regions visited, was strongly correlated with timely visits
of
regional governments to the Ministry of Finance.
4 The visiting team did not further investigate
this category.
Second was the tax on grade C
minerals (e.g., bricks). Law 34/2000 gives a region the right to
issue regional taxes by means of
regional regulations approved by the local parliament. Many
regions have taken this
opportunity and issued new taxes—and a significant part of those has been
found to be conflicting the
principles stated in Law 34/2000.
19. Revenue Effort. Overall,
Lotim’s own revenues fall short of what could be expected on the
basis of its regional GDP.5 If the region
would achieve a nationwide-average revenue effort, the
Box 2: Cancelled?
Regional regulations on taxes and
levies need approval by the
regional parliament. The central
government has thirty days from
the receipt of a regional regulation
to issue a cancellation
(dibatalkan). As of September
2001, and inter-agency working
group out of the Ministry of Home
affairs had reviewed and
classified a total of 1,041
regulations on tax (116) and levies
(933).. Of these, 103 (94 levy, 9 tax)
were submitted for
cancellation—none of them from Lotim,
but neighboring BIMA
was less lucky with its tax on exports
to other regions of
industrial and agricultural products.
The draft cancellations were
forwarded to the Minister of Home
Affairs for signature, but at
the end of 2001 he had still not
signed. So now the question is
whether the regions can keep their
illegal taxes…
|
revenues for 2001 would have been
Rp.17.63 billion instead of the
budgeted
Rp.11.96 billion. But on a total
budget of
Rp.248.50 bn. this would hardly
have
made a difference: the share of
PAD
would increase from 5 percent of
budget
to 7 percent of the budget.
Within PAD,
regional taxes in Lotim are very
low
compared to the national average:
only 10
percent of the 11.5 billion
budgeted PAD
consists of regional taxes. For
other local
governments this is on average
about half.
Again, even if Lotim would bring
its tax
effort up to average, this would
only add
about 2 percent to overall
revenues.
Thus, expectations on PAD are
best kept
limited. For FY2001, Lotim’s
government had budgeted for a study on expanding PAD, and the
results of these study could
inform policy makers what to expect in terms of increased revenues
from this source.
Box 3: Criteria for Regional
Taxes
According to Law 34/2000, regional
taxes should:
o Have the character of a tax, not a levy
o Have tax objects to be found in the region, with
little
mobility outside the region
o Not conflict with the public interest
o Not tax the same item as national or provincial
taxes
o Have adequate revenue potential
Additional criteria that a region
could consider are that a regional
tax should:
o Tax those that benefit most from government services
financed by the tax (benefit
principle)
o Not tax the poorest sections of the population
o Not overburden sectors the government sees as
promising (e.g. agriculture)
o Promote efficient use of resources (e.g. an idle
land tax)
|
20. PAD Regulations. Lotim
has issued
some 13 regional regulations on
local taxes
and retributions since the start
of FY2000, 7
of them in FY2001 up to
August.[Box 2:
Regional Regulations.] The
authorities do
not consider these regulations as
“new”
because these were already in
place before
they were banned by Law 18/1997.6 The
authorities had a further 9
regulations on
taxes and retributions in
preparation by the
time of the Bank team’s visit in
end-August
2001. In the discussion on new
taxes, the
authorities indicated that they
would
consider taxes on traded goods
such as
5 These estimates were used in the calculation of the DAU 2002. Based
on annualized FY2000 outcomes, the average tax
effort in
Indonesia can be explained by the equation: PAD = 2.357 + 0.000957*(Non-Mining
GDP). For 2000, one would
expect
Lotim to raise Rp. 8.67 billion. Actual receipts were Rp. 5.88 billion on an
annual basis.
6 This phenomenon of “recycling” regulations was also observed by SMERU
in a number of other regions, See Ilyas Saad,
Indonesia’s decentralization Policy: The Budget Allocation and its
Implications for the Business Environment, SMERU
working paper [not
numbered] September 2001.
agricultural products that are
transported outside the region. In fact, PERDA 16/2001 imposes a tax
on inter-island transport of
goods. In the authorities’ view, such taxes would not burden to poor.
They are probably wrong: besides
that taxes on internal trade contravene Law 34/2000 (Box 3:
Criteria for Regional Taxes),
such taxes would hurt those that are producing the taxed goods
(usually small farmers) because
the price they receive net of tax is likely to be lowered by the tax.
Other taxes, such as the levy on
motor vehicles (PERDA 9/2001) is likely to conflict with the rule
that regions cannot tax the same
tax base that higher levels of government already tax.
21. NTB’s provincial government
has issued several new taxes as well, including higher taxes
on motor vehicles and fuel. The
provincial government has realized the potential damaging effects
of local taxes on the economy,
and aims to establish a common approach on new taxes across the
province’s districts. Such an
initiative could build on the efforts of East Sumba. In that regency, a
process to review proposed taxes
has been put in place.7
Beyond
reviewing the proposed taxes
against the criteria in Law 34
(see Box 3) Lotim could add criteria on its own—such as impact on
specific sectors or impact on the
poor. A review panel could then be organized with
representatives from various stakeholders,
which could make recommendations to regional
government and the regional
parliament.
22. Tax Administration.
Before introducing new taxes, the government may want to review
the performance of existing
taxes. Until now, little information on compliance and tax yields is
available. The collection of
taxes is fairly informal, and is largely done by visiting potential tax
payers such as restaurants and
shops. Although several checks on the revenue receipts are done
once they enter the Kas Daerah, little
is known what should actually be collected—and which tax
collector does a good job, and
which one does not. Intensification of retributions collection could
add to revenues as well. The
amounts stated in the budget and government accounts are unlikely to
be the full picture: Many service
delivery units charge for their services in addition to the official
charges. But these revenues never reach the region’s
Kas Daerah.
23. Shared Revenues.
Shared revenues for budget FY2001 were slightly less than Lotim’s own
revenues. The bulk of shared
(national) taxes for Lotim were composed of the land and building
tax (5.3 billion or 73 percent)
and the income tax (1.2 billion or 16 percent). The land transfer tax
raises only minimal revenues in
Lotim—less than 3 percent of the average of other Kabupatens.
These taxes are collected by the
central tax administration, but regional authorities have some
influence on their collection.
First, they have some flexibility in setting the exemption level for the
real estate tax. Second,
according to Law 22/99, the region will be in charge of land
administration,8 and could
potentially improve the information on the tax base for the land and real
estate tax and the land transfer
tax. And third, in some regions, the regional government has
actively cooperated with the
central tax administration to identify high income individuals. Lotim
could perhaps as well pursue such
program with the tax administration to enhance the performance
of these shared taxes.
24. The share of the
provincial motor vehicles tax accounted for less than ten percent of shared
revenues (630 million
or 9 percent). Additional transfers from the province included. The
royalties category
(which in addition to 32 percent of the actual district of activity is also
distributed 32 across
all kabupaten in a province) exceeds projected own revenues at 8 billion.
This allocation was
only determined at the end of March 2001.
25. DAK.
Finally, the DAK this year (and anticipated next year) was an estimated Rp. 1
billion
(less than 0.5
percent of the total budget) and exclusively directed at reforestation. In the
future,
special grants could
become a revenue source for regions such as Lotim, but central regulations are
still pending.
Potential areas for a DAK that are currently discussed at the center include
health
and education, and
given the region’s low income, and poor social indicators, it could be one of
the
first regions to
benefit from special grants.
8
The decentralization of the land agency has been
postponed by presidential decree.
12
Expenditures
26. Lotim’s first
budget after decentralization is dominated by the wage bill. Routine spending
accounts for some
sixty percent of total, and over eighty percent of that is devoted to wages.
Development spending
accounts for about 38 percent of total. This distribution of the budget is
much the same as it
was before decentralization. Especially after 1997/98, when the wage bill for
primary teachers was
shifted from the province to the district level, did the wage bill dominate
Lotim’s spending. New
is that wages are no longer financed from the SDO grant. And the shift in
additional civil
service to the district, combined with expected and unexpected wage increases
did
cause significant
budget problems for Lotim during the budget year.
27. Decentralizing
the civil service and the wage bill. Lotim’s civil service now consists of
some 10,500 civil
servants, or some 1 percent of the population. This number is net of the
contract
workers and “honorar”
personnel financed from the development budget. All civil servants
working for the
regional government are now paid from the district budget.9 Their
pay takes up 54
percent of total
spending, and almost 90 percent of recurrent spending.
28. Before
decentralization, three types of civil servants existed in Lotim: regional
civil
servants, central
civil servants seconded to the Lotim regional administration,10 and
central civil
servants working in
the deconcentrated central agencies. At the end of 2000 the first two
categories added up
to some 8,200 people.11 This number already included the personnel which
was decentralized
during FY2000: in that year, the Gus Dur government decided to abolish 6
departments
altogether, or turn them into a state ministry without regional apparatus.12
Nationwide, some
130,000 civil servants working in the regional offices of these ministries
(kanwils and kandeps)
had to be placed in the regional governments. How many civil servants
were decentralized to
Lotim in this round is unclear, but they are included in the 8,200 number
quoted earlier.
29. With
decentralization, Lotim received an additional 2400 civil servants from various
regional offices of
departments on its payroll.13 These departments through
Law 22/99 have lost
their regional
deconcentrated apparatus, and had to reassign their civil servants.14 Some
2.1
million civil
servants were re-assigned nationwide. The 28 percent increase in the number of
civil
9
As of 2001, there seem to be no more seconded central
government staff working in the regions.
10
The secondment was administratively managed through the
Ministry of Home Affairs. The bulk of the seconded
personnel
was primary school teachers—nationwide some 1.1 million.
11
Data from the central civil service wage bill. These
differ somewhat from the numbers underlying Lotim’s wage bill on
the
budget. From central data sources, the estimated wage bill would have been some
Rp.125 billion—including an
estimated
7 percent wage drift. Lotim’s first budget for 2001 estimated a wage bill of
Rp.135 Tr. It is unclear what explains
the
difference, This could be a different assumption on wage increases underlying
Lotim’s wage bill, a different number of
civil
servants, and/or inclusion of contract workers in Lotim’s budget amount.
12
The departments are: Department of Information,
Department of Tourism, Social Welfare, Transmigration, Manpower,
Cooperatives.
13
These numbers are taken from Central Government payroll
data. Regional data as quoted in the joint provincial
government/BPS
publication “Nusa Tengara Barat 1999 are hard to reconcile with these numbers.
For Lotim, the numbers
quoted
on pp.60-61 show 1188 regional civil servants and 1132 central civil servants
seconded to Lotim. However, this
excludes
the teachers—5268 primary school teachers and 1337 secondary school teachers,
and 646 high school teachers.
But
not all teachers are civil servants, and not all teachers are on the
government’s payroll. The number of teachers quoted
in
central government sources is 7767 for 2000/2001 (http://www.pdk.go.id/,
table 23.2) for all teachers (private and
public)
of which 6904 public.
14
Home Affairs, Health, Agriculture, Education, Forestry,
Industry, Communications, Mines and Energy.
13
servants paid from
the local budget was well below that of the national average increase of 54
percent.15 Lotim’s
wage bill before the 2001 wage increases rose by some 27 percent compared to
FY2000.
30. Therefore, the
“hold harmless” clause in the DAU, which guaranteed a minimum of 130
percent of FY2000 SDO
that financed the wage bill, was sufficient to pay civil servant wages
before the pay
increases of July 2001. According to the revised Lotim budget, those pay
increases—retroactive
for January 1 2001—increased the wage bill by a further 18 percent, or Rp.
25 bn. Only Rp. 9 bn.
of that was compensated from the contingency fund, a Rp. 6.5 Trillion
central government
fund established to provide additional funds for regions that ran into trouble
because of
decentralization.
31. The increase in
the number of regional civil servants (Pegawai Negri Sipil Daerah) was
markedly larger than
the increase in the number of civil servants paid from the regional budget.
The reason is that
many of the civil servants already on the region’s payroll were still
registered as
national civil servants
before 2001. With the Big Bang decentralization this has now changed: with
ceremonies throughout
the regions in April and May 2001 were all national civil servants working
for regional
governments transferred, and “accepted” by the regions by means of a document
signed by the bupati
or walikota.
32. Total public
sector pay and the number of government workers are larger than the wage
numbers in the budget
suggest. This wage bill misses out on two items: the non-civil servant
workers, and the
civil servant compensation paid from the development budget. Although numbers
for Lotim are not
available, the share of non-civil service workers adds 10 to 25 percent to the
total
number of workers in
other regions. These contract workers range from contract teachers to daily
workers in irrigation
paid from fees, and they are financed from both the routine and the
development budget,
and sometimes from off-budget sources. In addition, civil servants receive
project-related pay
and fees ranging from management rewards to attendance fees for meetings.
For a typical project
in Lotim, the management overhead for a project is some [10] percent of the
project costs.16 Thus,
in reality, the wage bill is at least some 3 percentage point of total spending
higher than the
official numbers show.
33. Lotim seems to
have little scope for reducing the wage bill in the short run. For one, the
region’s wage bill is
hardly excessive: with Rp.170,000 per capita the region’s wage bill is well
below the nationwide
local government average of Rp.283,000. Moreover, over two thirds of the
wage bill goes to
teachers (65 percent to primary teachers alone)—and solving the shortage of
teachers (see section
on education) would increase rather than decrease the wage bill. Finally, even
if a reduction in the
civil service ranks would be desirable, this can only be effected over the long
run. Civil service
rules imply that redundancy only saves part of the wage bill, as base wages
still
need to be paid to
the retrenched civil servant. In addition, there is an implicit agreement
between
central and regional
governments that none of the former central civil servants transferred to the
regions can be made
redundant in the first three years after decentralization. So a large part of
the
15
Based on MOF payroll data. The 54 percent is for province
and local government together,
as
no separate data for theselevels are available. 16
See ABPD.
14.wage bill is to
there to stay. Over time, the wage bill is even likely to rise, even without
wage
increases, because
starting 2001 the region must take care of the pensions of new civil servants.17
34. Yet, because the
wage bill is such a large part of spending it is worth extra scrutiny. The
government could
consider starting with an inventory of all civil servants in the regions—a
“civil
service census” to
have a solid baseline of the number of civil servant, and their
characteristics.
Such a census could
also detect possible ghost workers, and signal possible excessive absentia of
some civil servants.
The census would need to be followed up with an analysis of payroll
management to ensure
that the payroll stays “clean.” As part of the census, the qualifications and
characteristics of
the civil service could be registered as well, including background, training,
and
experience. Such
information could be important for possible management decisions on the civil
service in the
future, including reallocation of civil servants, and projecting the changes in
the
wage bill.
35. Even without
active retrenchment, the wage bill could decline through natural attrition.
Nationwide, about 3
to 4 percent of the civil servants leave the service every year—whether
through retirement,
change of careers, or otherwise. Lotim could use this natural attrition to save
on the wage bill by
replacing those that leave with staff that is redundant elsewhere in the
service
rather than hiring
new staff. Again, good information on the civil service will help in achieving
this, together with
training programs that would prepare a civil servant for a new assignment.
36. Finally, there is
always the option of redundancy. Although a civil servant cannot be fired,
redundant civil
servants only receive 80 percent of their base wage18 and
Government would save
on functional or
structural allowances. Reducing income in such a way would most likely be a
strong incentive for
the civil servant in question to leave the service. However, it would also
bring
hardship to the
people affected, and if it applies to many, such redundancy policy could spark
unrest among
remaining civil servants.
37. Other routine
expenditures. Lotim’s outlays on operations and maintenance (O&M)
spending is a modest
6 percent of total spending. However, much O&M is hidden in the
development budget.
For instance, the regional government finances drugs for Lotim’s health
centers. This started
as part of a health project, but is now among the regular government spending
financed from general
revenues of the government rather than from project money from the center.
Nonetheless, spending
on drugs still figures on the development budget as a project. One of the
reasons for this is
the incentives in the civil service: projects come with additional income from
management fees, per
diems, and honoraria, which would not be allowed under routine spending.
However, this
practice distorts the true nature of spending, and consequently makes budget
analysis and decision making by the
government and the DPRD more difficult.
38. Development spending.
In the course of decentralization, Lotim was able to increase the
development share of the budget.
In contrast to many other regions, its development spending rose
from 29 percent of the budget in
FY2000 to 35 percent in FY2001.19 Total spending increased by
150 percent on an annual basis,
from Rp. 29 bn, in (9months) FY2000 to Rp. 93 bn. In FY2001.
Within this larger envelope,
Lotim significantly shifted its priorities: education, heath, trade and the
government apparatus itself saw
large increases in shares of the development budget (Figure1).
Among the losers regional
development and settlement saw its share plunge. Transportation
remains the largest sector on the
development budget, followed by Government Apparatus. In
this, Lotim is similar to other
Kabupatens, but the region’s share of 17.6 percent on transport is far
lower that the 28.7 percent
average for all districts and cities. In contrast, Lotim now devotes a
significantly larger share to
health and education that the national average—about 24 percent of
total compared to a local
government average of 17 percent for Indonesia. Of course, on a per
capita basis, social development
spending still lags far behind the local government average for the
nation: Rp.67,000 in Lotim versus
108,000 for the average local government in Indonesia.
39. The development budget
includes about 190 individual projects in 21 categories. A major
single development expenditure
included a transfer for the two regionally owned banks. Missing
in FY2001 were transfers to lower
levels of government—sub-districts and villages. The
government’s explanation for this
was that regulations to transfer to lower regions were not yet
ready at the time of budget and
budget revision. This is likely to be problematic, as before
decentralization villages
received each year a development grant of Rp. 20 million per village. In
19 revised budget data
Figure 1 : Lotim
- Shares of the Development Budget per Sector,
FY2000 and 2001
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%
14.0% 16.0% 18.0% 20.0%
Industry
Agriculture and Forestry
Water and Irrigation
Labor
Trade
Transportation
Mining and Energy
Tourism and Regional Communications
Regional Development
Living Environment
Education, Culture, etc
Population and Welfare
Health etc.
Housing and Welfare
Religion
Technology
Law
Government Apparatus
Politics, Information, Communication,
and Media
Security and General
Subsidy to Lower Regions
Percent of Total Development Spending
FY2001
FY2000
Source: ABPD Lotim and
Annex Table 4
16
other districts in Indonesia, the
regulations were apparently ready in time for the transfers to be
effectuated.
40. Borrowing. In
principle, Lotim has significant borrowing capacity.20 Currently, the
region
does not borrow at all, and seems
to have no outstanding debt. Law 25/99 and Government
regulations21 allow for
borrowing from both external and internal sources in line with a region’s
borrowing capacity. Broadly, this
capacity depends on revenues and “hard to avoid” spending such
as wage bill and ongoing project
spending. Although it is as of yet unclear how central
government interprets this, there
seems to be significant scope for Lotim to borrow. If the rules
from Government Regulation
107/2000 are applied, the region would have a total debt capacity of
some Rp.106 billion. However, for
2001 an 2002, and perhaps beyond, access to borrowing is
severely restricted. A
Ministerial Decree has disallowed direct borrowing by the regions, and
regions can only borrow from the
central government. The reason for the ministerial decree is the
central government fear that
regional borrowing could disrupt macro-economic stability. There is
some support for in the numbers
for this position: total debt capacity of the regions amount to some
Rp.47 trillion (35 trillion for
local government, 12 for provincial government). If absorbed in just a
few years, this would affect the
center’s attempt to maintain macroeconomic stability.
41. Lotim’s debt capacity is only
an indicative upper borrowing limit. Whether the region
would actually be able to borrow
this much depends on their creditworthiness as perceived by
potential creditors—including
banks, private individuals, and bilateral and multilateral financial
institutions. Creditworthiness
depends not only on the capacity to repay, but on willingness to
repay, the quality of financial
management and information of a region, and the overall legal
environment for regional
borrowing. As for the latter, Law 25 and PP 107 are probably too weak
to allow for a significant amount
of borrowing by regional government. The legal redress of
creditors in case of default by a
region is weak, and only the most creditworthy regions are likely to
get access to credit from sources
outside central government.
20 Note that in Lotim’s budget borrowing is still listed as revenues,
and repayment is included in expenditures. This is the
old system
for the national budget, which meanwhile has been replaced.
21 Government regulation 107/2000 on regional borrowing limits total
debt to 75 percent of revenues “minus necessary
expenditures”
and debt service to 35 percent of revenues “minus necessary expenditures.”
Box 4: Vision and Mission of
Lotim
VISION
To realize a religious society based
on norms, rule of law and
environmentally conscious within the
unitary state of the
Republic of Indonesia.
MISSION
Some missions have been determined to
realize the future vision
of Lotim such as:
1. the comprehension improvement on
religion in their daily
life.
2. the implementation of Pancasila
(five basic principles of RI)
consistently in the society life as a
nation.
3. regional economy development based
on a just people’s
economy and the acceleration of reg.
economy to promote
recovery.
4. realization of a real regional
autonomy and responsible
based region capability
5. realization of a professional
government apparatus,
transparently and accountable as well
as clean and free of
KKN.
6. developing the respect towards the
legal system to uphold
the supremacy of law and human rights.
7. development of prosperous of
society particularly in
meeting the basic needs properly.
8. realization of a democratic
educational environment which
provide the quality and skill full
that could contribute to
regional and national development.
9. societal development in a
sustainable management of natural
resources.
Source: Perda Kabupaten
Timur Nomor 15, Tahun 2000
|
17
Planning and
Budgeting
42. The transition to a
decentralized
system has not been conducive to
good
planning and budgeting. The
intergovernmental fiscal
relations changed
dramatically, and expenditure
responsibilities were devolved at
the same
time. Central decisions on
resource
allocation and on expenditure
devolution
came late in the year preceding
decentralization, whereas
regulations on the
planning and budgeting processes
to be
observed were released less than
two
months before the start of the
year.22
Some
central government decisions
affecting
Lotim only became available
during the
year. These include the
retro-active wage
increase passed in July 2001 and
the
decision on Lotim’s share of
resource
revenues, which was only decided
in June.
Central government allocations to
projects
in Lotim remained largely outside
the
purview of the regional
authorities—even
if the projects were implemented
in coadministration
by the regional sector
bureaus. In addition, much of the
regulatory framework for budget
management was issued too late
(November
2001), and key pieces of
regulation on financial management were still missing at the
start of the budget year. Thus,
the 2001 planning and budgeting exercise in Lotim was
only an imperfect attempt to come
to grips with decentralization.
Planning Cycle
43. There is an abundance of
planning in Lotim. Building on the tradition of the fiveyear
plans, decentralization has added
a number of instruments for planning—including
the POLDA, the RENSTRA, and the
REPETADA (see Table 4: for an explanation of
the terms). The POLDA is a broad
statement of objectives for the Kabupaten,23 and
includes a statement of vision
and mission for the Government (Box 4). The planning
processes are aimed at achieving
the objectives of the POLDA. Although participation
of civil society and the village
level has much increased24
the
process is still much like
22 Government Regulation 108 was issued in November 2000.
23 Peraturan Daerah Kabupaten Lotim Nomor 15 Tahun 2000, 23 December
2000.
24 Not least because the new regulations on planning
prescribe this participation.
