Desentralisasi Dalam Perspektif Proses Yang Berkelanjutan

Desentralisasi Dalam Perspektif Proses Yang Berkelanjutan

Oleh : Dr Machfud Sidik MSc

Pemerintahan modern di abad 21 dewasa ini harus menerapkan desentralisasi dengan berbagai variasinya, karena desentralisasi merupakan global trend dan salah satu pilar utama dalam menjalankan roda pemerintahan. Desentralisasi merupakan sebuah alat untuk mencapai salah satu tujuan bernegara, yaitu terutama memberikan pelayanan publik yang lebih baik dan menciptakan proses pengambilan keputusan publik yang lebih demokratis. Dengan desentralisasi akan diwujudkan dalam pelimpahan kewenangan kepada tingkat pemerintahan untuk melakukan pembelanjaan, kewenangan untuk memungut pajak (taxing power), terbentuknya Dewan yang dipilih oleh rakyat, Kepala Daerah yang dipilih oleh DPRD, dan adanya bantuan dalam bentuk transfer dari Pemerintah Pusat.

Dorongan desentralisasi yang terjadi di berbagai negara di dunia terutama di negara-negara berkembang, dipengaruhi oleh beberapa faktor, misalnya, latar belakang atau pengalaman suatu negara, peranannya dalam globalisasi dunia, kemunduran dalam pembangunan ekonomi, tuntutan terhadap perubahan tingkat pelayanan masyarakat, tanda-tanda adanya disintegrasi di beberapa negara, dan yang terakhir, banyaknya kegagalan yang dialami oleh pemerintahan sentralistis dalam memberikan pelayanan masyarakat yang efektif

Desentralisasi sendiri bukanlah sesuatu yang baik, ataupun jelek (The World Bank, 2000). Desentralisasi hanyalah suatu alat untuk mencapai salah satu tujuan bernegara, yaitu terutama memberikan pelayanan publik yang lebih baik dan menciptakan proses pengambilan keputusan publik yang lebih demokratis. Hal pokok tentang desentralisasi pada dasarnya adalah, apakah disain, proses dan implementasi desentralisasi tersebut berhasil atau gagal untuk meningkatkan efisiensi dan kadar responsivitas kebijakan publik pemerintah terhadap kepentingan politis, ekonomi dan sosial masyarakatnya. Kegagalan implementasi desentralisasi terutama ditunjukkan dari kemunduran ekonomi, ketidak stabilan politik, dan merosotnya KUALITAS pelayanan publik di negara yang bersangkutan.

Desentralisasi tidaklah mudah untuk didefinisikan, karena menyangkut berbagai bentuk dan dimensi yang beragam, terutama menyangkut aspek fiskal, politik, perubahan administrasi dan sistem pemerintahan dan pembangunan sosial dan ekonomi. Secara umum, konsep desentralisasi terdiri atas Desentralisasi Politik (Political Decentralization); Desentralisasi Administratif (Administrative Decentralization); Desentralisasi Fiskal (Fiscal Decentralization); dan Desentralisasi Ekonomi (Economic or Market Decentralization).

Desentralisasi Adminitratif, yaitu pelimpahan wewenang yang dimaksudkan untuk mendistribusikan kewenangan, tanggung jawab, dan sumber-sumber keuangan untuk menyediakan pelayanan publik. Pelimpahan tanggung jawab tersebut terutama menyangkut perencanaan, pendanaan, dan pelimpahan manajemen fungsi–fungsi pemerintahan dari Pemerintah Pusat kepada aparatnya di Daerah, tingkat pemerintahan yang lebih rendah, badan otoritas tertentu, atau perusahaan tertentu.

Desentralisasi administratif pada dasarnya dapat dikelompokkan menjadi 3 (tiga) bentuk, yaitu :

(1). Dekonsentrasi (deconcentration), yaitu pelimpahan wewenang dari Pemerintah Pusat kepada pejabat yang berada dalam garis hirarki dengan Pemerintah Pusat di Daerah.

(2). Devolusi (devolution), yaitu pelimpahan wewenang kepada tingkat pemerintahan yang lebih rendah dalam bidang keuangan atau tugas pemerintahan dan pihak Pemerintah Daerah mendapat discretion yang tidak dikontrol oleh Pemerintah Pusat. Dalam hal tertentu dimana Pemerintah Daerah belum sepenuhnya mampu melaksanakan tugasnya, Pemerintah Pusat akan memberikan supervisi secara tidak langsung atas pelaksanaan tugas tersebut. Dalam melaksanakan tugasnya, Pemerintah Daerah memiliki wilayah administratif yang jelas dan legal dan diberikan kewenangan sepenuhnya untuk melaksanakan fungsi publik, menggali sumber-sumber penerimaan serta mengatur penggunaannya. Dekonsentrasi dan devolusi dilihat dari sudut konsepsi pemikiran hirarki organisasi dikenal sebagai distributed institutional monopoly of administrative decentralization.

(3). Pendelegasian (delegation or institutional pluralism) yaitu : pelimpahan wewenang untuk tugas tertentu kepada organisasi yang berada di luar struktur birokrasi reguler yang dikontrol secara tidak langsung oleh Pemerintah Pusat. Pendelegasian wewenang ini biasanya diatur dengan ketentuan perundang-undangan. Pihak yang menerima wewenang mempunyai keleluasaan (discretion) dalam penyelenggaraan pendelegasian tersebut, walaupun wewenang terakhir tetap pada pihak pemberi wewenang (sovereign-authority).

Berbagai argumen yang mendukung desentralisasi antara lain dikemukakan oleh Tiebout (1956), Oates (1972), Tresch (1981), Breton (1996), Weingast (1995), dan sebagaimana dikutip oleh Litvack et al (1998) yang mengatakan bahwa pelayanan publik yang paling efisien seharusnya diselenggarakan oleh wilayah yang memiliki kontrol geografis yang paling minimum karena :

a. Pemerintah lokal sangat menghayati kebutuhan masyarakatnya;

b. Keputusan pemerintah lokal sangat responsif terhadap kebutuhan masyarakat, sehingga mendorong pemerintah lokal untuk melakukan efisiensi dalam penggunaan dana yang berasal dari masyarakat;

c. Persaingan antar daerah dalam memberikan pelayanan kepada masyarakatnya akan mendorong pemerintah lokal untuk meningkatkan inovasinya.

Suatu analogi argumen lainnya yang dikenal sebagai "The Tiebout Model" (1956) yang terkenal dengan ungkapannya "Love it or leave it". Tiebout menekankan bahwa tingkat dan kombinasi pembiayaan barang publik bertaraf lokal dan pajak yang dibayar oleh masyarakat merupakan kepentingan politisi masyakarat lokal dengan Pemdanya. Masyarakat akan memilih untuk tinggal di lingkungan yang anggaran daerahnya memenuhi preferensi yang paling tinggi antara pelayanan publik dari Pemdanya dengan pajak yang dibayar oleh masyarakat. Ketika masyarakat tidak senang pada kebijakan pemerintah lokal dalam pembebanan pajak untuk pembiayaan barang publik bersifat lokal, maka hanya ada dua pilihan bagi warga masyarakat, yaitu meninggalkan wilayah tersebut atau tetap tinggal di wilayah tersebut dengan berusaha mengubah kebijakan pemerintah lokal melalui DPRD-nya (Hyman, 1993). Hipotesis tersebut memberikan petunjuk bahwa terdapat potensi untuk mencapai efisiensi ekonomi (maximizing social welfare) dalam penyediaan barang publik pada tingkat lokal.

Model Tiebout ini menunjukkan kondisi yang diperlukan untuk mencapai efisiensi ekonomi dalam penyediaan barang publik yang bersifat lokal yang pada gilirannya akan menciptakan kondisi yang dikenal sebagai "the market for local services would be perfectly competitive" Disinilah arti penting desentralisasi dalam pengambilan keputusan publik yang diperdebatkan antara pemerintah lokal dengan DPRD-nya. Mendukung pernyataan Tiebout dan para ahli lainnya yang disebut di atas, desentralisasi administrasi yang terkait dengan tugas-tugas pemerintahan sebagai decentralization is often thought to “bring government closer to the people”.

Keberhasilan pelaksanaan desentralisasi akan sangat tergantung pada desain, proses implementasi, dukungan politis baik pada tingkat pengambilan keputusan di masing-masing tingkat pemerintahan, maupun masyarakat secara keseluruhan, kesiapan administrasi pemerintahan, pengembangan kelembagaan dan sumber daya manusia, mekanisme koordinasi untuk meningkatkan kinerja aparat birokrasi, perubahan sistem nilai dan perilaku birokrasi dalam memenuhi keinginan masyarakat khususnya dalam pelayanan sektor publik.

Tujuan politis untuk meningkatkan tingkat responsifitas birokrasi terhadap keinginan masyarakat dalam pemenuhan pelayanan publik dikaitkan dengan partisipasi masyarakat dalam pembiayaan penyediaan pelayanan tersebut, memerlukan beberapa persyaratan penting untuk keberhasilan pelaksanaan desentralisasi yaitu :

- Tahapan pelaksanaan desentralisasi harus realistis disesuaikan dengan pengembangan institusi, sistem dan prosedur dan mekanisme koordinasi di lingkup pemerintahan, dan pengembangan kemampuan sumber daya manusia.

- Keselarasan antara proses penyerahan kewenangan fungsi-fungsi pemerintahan dari Pemeritah Pusat kepada Pemerintah Daerah dengan pengalihan pembiayaan, sarana dan prasarana, sumber daya manusia dan dokumen.

- Disain dan kerangka kerja proses desentralisasi harus terkait dengan kemampuan keuangan dan kewenangan fiskal yang dimiliki oleh Daerah untuk memberikan pelayanan publik kepada masyarakatnya, sehingga keinginan rakyat yang diwakili oleh DPRD dalam penyediaan barang publik diharapkan mampu didukung oleh partisipasi masyarakat dalam menanggung biaya atas penyediaan barang publik tersebut.

- Masyarakat lokal harus diberikan informasi yang transparan tentang beban yang mereka tanggung sebagai konsekuensi atas penyediaan barang publik tersebut terutama melalui sosialisi, debat publik dan dialog lainnya yang bermanfaat bagi peningkatan kebutuhan barang publik sesuai dengan aspirasi masyarakat setempat.

- Masyarakat harus diberikan kesempatan untuk menyampaikan preferensinya dalam penyediaan barang publik melalui suatu mekanisme yang memungkinkan kehendak masyarakat tersebut dapat ditampung dalam proses pengambilan keputuan pada tingkat Pemerintah Daerah dan DPRD yang menghasilkan suatu Peraturan Daerah tentang penyediaan barang publik dan implikasi pembiayaannya.

- Adanya jaminan sistem akuntabilitas publik, transparansi dan tersedianya informasi keuangan dan pembangunan daerah yang memadai, sehingga memungkinkan masyarakat untuk memantau kinerja aparat Pemda, dan memberikan kesempatan pada masyarakat untuk merespon secara proporsional terhadap kinerja Pemda yang tidak sesuai dengan aspirasi masyarakat. Lingkungan ini memungkinkan baik aparat Daerah maupun DPRD dituntut untuk responsif terhadap aspirasi masyarakatnya.

- Instrumen desentralisasi terutama yang menyangkut aspek ketentuan perundangan, kelembagaan, struktur pelayanan yang menjadi tugas Pemda, maka mekanisme kontrol dan dukungan pembiayaan harus didesain sedemikian rupa sehingga mampu untuk mendukung keinginan politis dari masyarakat.

Pelaksanaan desentralisasi fiskal akan berjalan dengan baik dengan mempedomani hal-hal sebagai berikut :

- Adanya Pemerintah Pusat yang kapabel dalam melakukan pengawasan dan enforcement;

- Terdapat keseimbangan antara akuntabilitas dan kewenangan dalam melakukan pungutan pajak dan retribusi Daerah.

Desentralisasi memberikan implikasi yang bervariasi terhadap kegiatan pembangunan antar daerah, tergantung pada pengaturan kelembagaan, dan disain menyeluruh dari pembagian wewenang dan perimbangan keuangan antara pemerintah pusat dan daerah. Apabila pemerintah pusat dalam disain pembagian wewenang di sektor publik dan perimbangan keuangan antara pemerintah pusat dan daerah tidak ada upaya untuk mendistribusikan sumber daya alam kepada daerah yang lebih miskin, maka desentralisasi fiskal akan berakibat memperlebar disparitas antar daerah. Hal yang sama jika pemerintah propinsi tidak melakukan redistribusi sumber-sumber keuangan di antara Kabupaten/Kota di wilayahnya, banyak penduduk miskin bisa saja akan mengalami hambatan dalam menikmati pelayanan publik.

Berbagai studi empiris membuktikan bahwa desentralisasi tidak hanya gagal dalam meningkatkan pelayanan sektor publik pada tingkat lokal, tetapi bahkan mengakibatkan risiko ketidak stabilan nasional di bidang politik, ketata negaraan, sosial dan ekonomi. Risiko yang paling besar ketika sumber utama penerimaan pemerintah diserahkan kepada pemerintah daerah tanpa diikuti langkah-langkah kebijaksanaan yang menjamin mobilisasi pendapatan daerah untuk membiayai berbagai pelayanan publik yang menjadi tanggung jawab pemerintah lokal. Argentina pada dekade 1980 dapat dijadikan contoh tentang kegagalan pelaksanaan desentralisasi tersebut, dan bahkan beberapa negara Eropah Timur dan Eropah Tengah. Namun, desentralisasi seharusnya tidak memberikan implikasi yang counter-productive tersebut. Usaha pemerataan antar daerah, penentuan standar minimal pelayanan sektor publik dan bantuan kepada daerah tertentu untuk kebutuhan yang sangat mendesak, pada dasarnya dilakukan melalui Block Grant, Specific Grant atau bentuk dana transfer lainnya. Desentralisasi akan memberikan dampak positif terhadap distribusi pendapatan masyarakat melalui kebijakan pengeluaran sektor publik, kebijakan fiskal dan disain intergovernmental transfers yang lebih menekankan pada kebijakan pengurangan kesenjangan antar daerah. Disparitas antar daerah yang dikoreksi melalui kebijakan intergovernmental transfers dengan berbagai formula yang relatif adil, diimbangi dengan standar ekualisasi telah dilaksanakan di berbagai negara antara lain China, Brazilia, Canada dan Rusia, dengan cara yang rasional, transparan dan akuntabel memberikan implikasi yang sangat positif bagi pembangunan daerah. Berbagai pengalaman empiris di berbagai negara memberikan petunjuk bahwa pelaksanaan asas desentralisasi dan pemberian otonomi kepada daerah atau negara bagian yang lebih luas diimbangi dengan usaha stabilisasi di bidang politik, sosial dan ekonomi, memberikan hasil yang sangat menggembirakan.

Para ahli berpendapat bahwa efisiensi menjadi alasan utama untuk memilih pemerintahan regional yang lebih kecil dalam rangka desentralisasi fiskal. Jika keinginan tingkat pelayanan umum dalam beberapa kelompok masyarakat berbeda-beda dan ketiadaan eksternalitas, maka kesejahteraan nasional yang tertinggi akan tercapai jika komunitas lokal memilih preference-nya masing-masing sekaligus memberikan tingkat dan bentuk dari pelayanan masyarakat yang mereka perlukan sendiri. Desentralisasi juga memberikan ruang terhadap proses-proses politik yang menjamin pelaksanaan pemerintahan lokal yang efisien.

Kesuksesan pelaksanaan desentralisasi perlu didukung oleh pengadaan Sumber Daya Manusia yang berkualitas dan berkompeten terhadap sarana dan kapital untuk pengembangan pelayanan masyarakat yang diperlukan, administrasi pajak yang efisien, wewenang pemungutan pajak yang memadai agar dapat menjangkau seluruh tingkat pendapatan masyarakat dan golongan, elastisitas terhadap tuntutan pelayanan masyarakat, pejabat lokal yang representatif serta sedikit kerahasiaan dalam penyusunan anggaran dan tingkat pajak daerah kondisi-kondisi yang biasanya jauh lebih mudah dipenuhi oleh Pemerintah Daerah yang kaya, terutama di negara-negara berkembang daripada oleh Pemerintah Daerah yang pendapatannya rendah. Bahkan menurut Baht dan Naht (1997), negara-negara yang memberikan wewenang fiskal yang lebih besar kepada pemerintah lokal dan regional cenderung memiliki pendapatan yang lebih tinggi dan jauh lebih sukses dalam proses pembangunannya. Negara-negara ini biasanya juga memiliki populasi yang lebih besar, bersifat heterogen dan memiliki area tanah yang luas. Sebaliknya, negara-negara sentralistis cenderung mengalami perang dan terancam kerusuhan sipil.

Bertitik tolak dari konsepsi desentralisasi fiskal baik secara teoritis maupun empiris, Indonesia sebagai negara yang memiliki populasi tinggi, wilayah yang sangat luas dan heterogen, mulai mengimplementasikan desentralisasi fiskal efektif sejak Tahun 2001. Penyelenggaraan otonomi daerah dan desentralisasi fiskal di Indonesia diharapkan memberikan manfaat yang besar bagi perekonomian serta pengelolaan fiskal dan moneter baik secara lokal maupun nasional. Manfaat ini dapat diperoleh dengan menumbuhkembangkan kehidupan yang demokratis, mendorong upaya pemberdayaan masyarakat, meningkatkan kinerja Pemerintah Daerah, mendorong pertumbuhan ekonomi, serta meningkatkan kualitas pelayanan dan kesejahteraan masyarakat. Regulatory framework yang menjadi acuan dalam penyelenggaraan otonomi Daerah daan desentralisasi fiskal fiskal tersebut adalah UU Nomor 22 Tahun 1999 dan UU Nomor 25 Tahun 1999 sebagaimana diubah masing-masing dengan UU No 32 dan No 33 Tahun 2004 terutama mengatur pembagian kewenangan (power sharing) dan keuangan (Financial Sharing).

Dari sisi keuangan Negara, kebijaksanaan pelaksanaan desentralisasi fiskal telah membawa konsekuensi kepada peta pengelolaan fiskal yang cukup mendasar. Dalam tahun pertama pelaksanaan desentralisasi fiskal (APBN TA 2001), total dana yang didaerahkan melalui Dana Perimbangan adalah sebesar Rp 82,40 triliun atau 5,6% dari PDB (APBN-P 2001), yang berarti total dana ke Daerah ini meningkat cukup tajam, karena apabila dibandingkan dengan realisasi dana yang didaerahkan TA 2000 hanya sebesar 3,3% dari PDB atau Rp32,9 triliun. Apabila dibandingkan dengan Penerimaan Dalam Negeri (PDN), persentase realisasi dana yang didaerahkan pada TA 2000 hanya berkisar 16% dari PDN, sementara untuk TA 2001 meningkat menjadi 27% (APBN-P 2001). Sementara bila dibandingkan dengan Belanja Negara, realisasi dana yang didaerahkan pada TA 2000 adalah sebesar 14,9% dari total Belanja Negara, sedangkan pada TA 2001 mencapai sekitar 23,2% dari Belanja Negara (Tabel 1).

Sementara itu, perkembangan dana yang didaerahkan melalui Dana Perimbangan dalam TA 2002 (APBN TA 2002) mengalami peningkatan yang signifikan, yaitu mencapai sebesar Rp94,53 triliun atau 5,6% dari PDB atau mengalami peningkatan 5,1% dibandingkan Dana Perimbangan TA 2001. Bila dibandingkan dengan PDN TA 2002, Dana Perimbangan tersebut mencapai 31,3% sedangkan bila dibandingkan dengan Belanja Negara TA 2002 mencapai 27,5%.

Peningkatan yang cukup signifikan pada transfer dana ke Daerah melalui Dana Perimbangan telah menyebabkan pengelolaan fiskal Pemerintah Pusat dalam pengelolaan fiskal pemerintahan secara umum telah berkurang. Sebaliknya proporsi pengelolaan fiskal dalam penyelenggaraan pemerintahan yang menjadi tanggung jawab Daerah sepenuhnya melalui APBD akan meningkat tajam. Perubahan peta pengelolaan fiskal ini juga dibarengi dengan kenyataan bahwa Daerah akan mempunyai fleksibilitas yang cukup tinggi, atau bahkan diskresi penuh dalam pemanfaatan sumber-sumber utama pembiayaan tersebut.

Meskipun perimbangan keuangan antara Pusat dan Daerah telah disempurnakan sejalan dengan paradigma baru yang berkembang dewasa ini dan mengingat Indonesia tergolong negara dalam usia yang relatif muda, kita harus banyak belajar dari sukses dan kegagalan negara-negara lain khususnya negara maju. Oleh karena itu sistem disentralisasi fiskal yang baru, masih memerlukan peninjauan secara teratur untuk menjamin kepekaannya terhadap perubahan-perubahan baik yang menyangkut aspek sosial, politik, ketatanegaraan, ekonomi dalam negeri, maupun pengaruh globalisasi politik dan ekonomi dunia.

Tujuan umum pelaksanaan desentralisasi fiskal harus dapat: (1) meningkatkan efisiensi pengalokasian sumber daya nasional maupun kegiatan Pemerintah Daerah; (2) dapat memenuhi aspirasi dari Daerah, memperbaiki struktur fiskal, dan memobilisasi pendapatan secara regional maupun nasional; (3) meningkatkan akuntabilitas, transparansi, dan partisipasi masyarakat dalam pengambilan keputusan di tingkat Daerah; (4) memperbaiki keseimbangan fiskal antar Daerah dan memastikan adanya pelayanan masyarakat yang berkualitas di setiap Daerah; (5) menciptakan kesejahteraan sosial bagi masyarakat. (6) Dalam pelaksanaan desentralisasi fiskal diperlukan keberadaan Pemerintah Pusat yang kapabel dalam melakukan pengawasan dan enforcement. (7) Prinsip money follows function harus dilaksanakan secara konsisten seperti yang diungkapkan oleh Roy Bahl, 2001 “Fix the Assigment of Expenditure, then Assign Revenues in amount that will Correspond to the Expenditure Needs”). (8) Desentralisasi fiskal harus mempertimbangkan kebijakan fiskal khususnya untuk mendukung kebijakan makro ekonomi antara lain yang berkaitan dengan fiscal sustainability dan tetap memberikan ruang bagi Pemerintah Pusat untuk mengadakan koreksi atas ketimpangan antar Daerah, sehingga taxing power yang diberikan kepada Daerah tetap tidak terlalu besar .Pemberian kewenangan pelayanan publik kepada Daerah yang semakin besar tetap mempertimbangkan Expenditure Efficiency Principles, sehingga tetap diperlukan adanya national guidelines yang dibuat oleh masing-masing departemen yang menggabungkan antara preferensi Daerah dan national interest. Diperlukan penerapan sistem yang berbeda antara Kabupaten dan Kota dalam perlakuan perimbangan keuangan khususnya dalam perhitungan transfer dana ke Daerah (DAU dan DAK). Hal ini sejalan dengan adanya karakteristik yang berbeda antara Kabupaten dan Kota. Terdapat keseimbangan antara akuntabilitas dan kewenangan dalam melakukan pungutan pajak dan retribusi Daerah (taxing power), sehingga penyimpangan penggunaan anggaran Daerah terutama yang berupa transfer dari Pusat dapat diperkecil atau bahkan ditiadakan. Pemerintah Pusat harus tetap mempertahankan komitmennya terhadap pelaksanaan desentralisasi dengan mematuhi perundang-undangan yang berlaku, sehingga kegiatan-kegiatan dalam rangka desentralisasi sepenuhnya kewenangan diberikan kepada Daerah. Bantuan Pemerintah Pusat yang berbentuk general grants (DAU) maupun revenue sharing (bagi hasil) diarahkan untuk (i) penciptaan keseimbangan fiskal baik vertikal maupun horizontal; (ii) menumbuhkan insentif dan/atau adanya kendali bagi Pemerintah Daerah dalam melaksanakan segala fungsi/ kewenangan yang menjadi tanggung jawabnya dengan baik. Sementara untuk specific grants (DAK) diarahkan kepada pemberian insentif kepada Pemerintah Daerah untuk turut mensukseskan program-program nasional yang bersifat prioritas.

EXECUTIVE SUMMARY OF A NEW PERSPECTIVE OF INTERGOVERNMENTAL FISCAL RELATIONS. LESSONS FROM INDONESIA'S EXPERIENCE

EXECUTIVE SUMMARY

A NEW PERSPECTIVE OF INTERGOVERNMENTAL FISCAL RELATIONS. LESSONS FROM INDONESIA'S EXPERIENCE

1. In

EXECUTIVE SUMMARY

INTERGOVERNMENTAL FISCAL RELATIONS. LESSONS FROM INDONESIA'S EXPERIENCE

1. Indonesia is the world’s fourth most populous country after China, India, and the United States. Indonesia refers to their homeland and known as described in classical and heroic song as Tanah Air-ku Indonesia, which means Our Land and Water Indonesia. Indonesia, the largest archipelago in the world, has an area of 1.91 million km2 scattered thousand of islands. These islands, and the six seas that separate them, lie in an area that measures about 2,000 kilometers from north to south, and more than 5,000 kilometers from east to west. More than half of the people live on Java, where Jakarta, Indonesia’s capital and the largest city, is located. Indonesia consist of 17,504 islands, about half of the islands are inhabited; all located in the Indian and Pacific oceans.

2. In 1966, Indonesia was one of the poorest countries in the world, with a per capita income only $50. Since then, it has made great efforts, achieving an average GDP growth of almost 7% per annum, a growth performance that ranks among the ten fastest in the world and on par with that of the dynamic East Asian economies. Indonesia plunged into an economic crisis in 1997 that led to significant political changes, including the resignation of President Soeharto, who had been in office for more than 30 years. In 1999, unemployment rose sharply and consumer price shot up by 58.2%, creating widespread social unrest. Ultimately, the government lost its credibility in being able to manage the national economy. As the crisis spread to Indonesia, the value of the Indonesian currency plummeted, this threatened the capacity of the government, banks, and businesses to repay their foreign debts. In October 1997 the government negotiated an aid package with the International Monetary Fund (IMF). Yet in the end 1999, Indonesia was one of the worst hit in the Asian economic crisis.

3. The presidential elections results of 2004 in the first round, yield the following from largest votes to least votes respectively : the pair candidate of Susilo Bambang Yuduyono-Jusuf Kalla, Megawati Soekarnoputri-Hasyim Muzadi, Wiranto-Sollahuddin Wahid, Amien Rais-Siswono Yudo Husodo, and Hamzah Haz-Agum Gumelar. With only two presidential candidates left for the final round of elections in September 2004, the competition between the pair candidates of Susilo Bambang Yudoyono-Kalla and Megawati Soekarnoputri-Hasyim Muzadi indicated that Yudoyono-Kalla had successful in strengthening their victory in most provinces which won 69,266,350 votes (60.62% of the total votes) versus Megawati-Muzadi won 44,990,704 votes (39.38% of the total votes); which the total votes of 114,257,054 (100%). For the first time in history, Indonesia had a president and vice president who were directly elected by the people. Few complaints arose in the counting and consolidation of results for the second round of presidential election. The inauguration of President Susilo Bambang Yudoyono (popularly known as SBY) and Vice President Jusuf Kalla (popularly known as JK) took place on 20 October 2004. Their inauguration marked a major step forward in Indonesia’s democratic transition.

4. Until year 1903, Dutch colonial system in Indonesia employed monopolistic and centralistic of authority. The guideline in running the bureaucracy was based on a proxy of constitution known as Regerings Reglement (RR) which originally introduced in year 1854 by the Kingdom of the Netherlands. By 1903, based on the RR, it has not been stipulated regional autonomy and the principle of decentralization. In the beginning year 1903, the Dutch colonial administration introduced Law on Decentralization for the East Indies (Decentralisatiewet 1903). Instead of the local deployment of central administration by central government officials, the emergence of local administration by local organizations on their own in relation to decentralization dates back to the 1903 Law on Decentralization for the East Indies.The Governor General in running the administration continued to implement a policy of breaking into fraction known as devide et impera, and everywhere the government delegated a certain narrow functions to different regions but nothing related with regional autonomy. Along with decentralization, the control and surveillance over local residents by central government officials continued, and thus local administration was placed under the two-tier system that directly involved both central and local governments.

5. The two-tier system was abolished, in name, by the 1957 Basic Law concerning Local Administration, but its legacy had been found in the concomitance of central government outpost agencies (kanwil/kandep) and local government departments (dinas) until 2001 when the Laws No. 22 and 25 of 1999 concerning Local Government and Central and Local Financial Balance were enacted. Since then, the effectiveness of the two laws began a turbulent years of Indonesia’s fiscal decentralization process; a period that posed an exceptionally strong challenge to intergovernmental fiscal relations in Indonesia when the country has embarked upon a radical and rapid decentralization program popularly known as “Big Bang Decentralization of 2001”. Promptly after the effectiveness of Laws No. 22 and 25 of 1999 on Regional Government and Financial Balance between Central Government and Regions respectively, within one year, the government decentralized much of the responsibility for public services to regional governments, almost doubled the regional share in government’s spending, shifting two-third of the central government civil services to regions, hand over more than 16,000 service facilities to the regions, as well as parallel activities have been in progress in preparing institutional development and capacity buildings. Many institutions worried about the implementation of the policies; however it went remarkable smooth with relatively problems which mostly can be tackled.

6. Under the national civil service system, the Civil Government Employees have a vital position to run the administration and serve as the tool to unify the nation. In line with decentralization policies to run the government, there are parts of the authorities in the civil service affairs that are delegated to the regions to be further managed under the regional civil service system. The regional civil service affairs is a system and procedure provided in the laws and regulations that at least include cover the following aspects: planning, prerequisites, recruitments and appointments, placement, education and training, payroll, termination, retirement, enhancement and supervision, positions, rights and obligations, responsibilities, prohibitions, penalties and awards. Social security programs in Indonesia are considered weak in all aspects compares with the similar programs in neighboring countries. Indonesia should reform its pension scheme by overhauling its laws and regulations mainly on social security program, labor and employer’s relationships, civil servant, as well as pension systems by more effective regulations, institutional empowerments as well as gearing up for a more liberalized investment environment on pension funds. One among other reforms is whether Indonesia replaces the old PAYG system with one pre-funded with personal retirement accounts as implemented in Chile, or applying three pillar of pension schemes, that is not a simple solution and need a more detail solutions of real problems of Indonesia social security program and pension schemes.

7. In recent decades decentralization has been a popular remedy prescribed to deal with the failures and inadequacies of central government to carry out effectively critical functions of the role of the government in the society reflecting combinations of many aspects mainly political, economic, social, and ideological aspects. Decentralization has been promoted not only to accommodate cultural diversity but also to enhance democracy, foster economic development, improve government efficiency, and facilitate modernization. Decentralization must face not only the issue of social inequality in general, but also the problem of inequalities between poor and rich regions. Decentralization has become part of a world-wide “reform” agenda, a growing worldwide trend, reflects a more democratic and participatory approach to government even in countries traditionally characterized by authoritarianism systems.

8. Even so, decentralization does not guarantee improved service delivery efficiency or improved sub national service delivery system outcomes. Numerous conditions, often overlooked, influence the success of decentralization processes, including local managerial and technical capacity, systems of accountability, clear and transparent legal frameworks that delineate the division of responsibilities, and sufficient funding to fulfill mandates and to meet local priorities. While none of these conditions are sufficient for successful decentralization, country experiences demonstrate that all of them are necessary. Thereby decentralization has the potential to transform and modernize ineffective role of government in the society, but only if certain supporting conditions are met. Successful decentralization requires that each new responsibility given to sub-national authorities be matched by new power and revenue sources. It also requires that central government play an active role in strengthening the capacity of provincial and local governments and in engaging society in an on-going decision making process on appropriate division of central, provincial and local powers.

9. Expenditure assignments influence the effective provision of certain services, as well as macroeconomic policy, but have important distribu­tional implications. They are often based on a benefit principle, that the responsibility for the expenditure should be accorded to the juris­diction within which the benefits are contained. Certain political and technical issues are common to all countries engaged in deciding what functions to assign to regional governments. The structure of local functions and responsibilities varies by country. Finally, the response in many cases will vary over time, depending on such variables as the evolution of the national political system and the economy. Except for very important areas, expenditure should be decentralized, that is the conclusion from decentralization theorem. The essence of economic theories of government is the idea that some goods or services are not well provided by the market mechanism.

10. Nations come in all size by its population. China and India, the first and second largest countries in the world, have 1.2 billon and 1.0 billion populations respectively. Tuvalu, small island country located in the western Pacific Ocean, the smallest country, has population estimated at 11,305 in 2003. Nauru, island and republic in the central Pacific Ocean, situated just south of the equator, the second smallest country, has population estimated at 12,570 in 2003. So the establishment of a nation is not only depending on population, but also the openness of its economy which make it survival. In the context Indonesia, the implementation of regional autonomy and the creation of new regions have led to dramatically increased demands for funding on the central government’s annual budget. Since the implementation of the Regional Autonomy Law in 2001, seven new provinces, 114 new districts and 27 new cities have been created, bringing the total number of provinces to 33, districts to 348 and cities to 86. Most of the increase is off-Java; this rep­resents a fundamental change in Indonesia's sub national administrative, political and fiscal landscape. The size of a political jurisdiction - country, state, province or local government­ typically involves some kind of trade-off between scale economies and the costs of managing a larger and more heterogeneous polity. In most decentralizing countries large disparities in size and other characteristics exist among jurisdictions at each level of sub national government, and these have an impact on the effectiveness of decentralization. Moreover, as Indonesia's experience demonstrates, decentralization often brings a significant change in the number and composition of the jurisdictions at each level. Proponents of the creation of new regions argued that creating new regional governments is part of Indonesia's democratization process, bringing political leaders closer to their constituents and more effectively meeting the preferences of com­munities. However, concern has been expressed about diseconomies of scale and human resource capacity deficits in the new regions. The rapidly rising num­ber of jurisdictions will increasingly put strains on this system and make it more costly, however. Indonesia's new regions will have to be judged by their ability to generate bet­ter governance and service delivery, and to stave off demands for secession.

11. The essence of decentralization is that sub-national governments have the authority and responsibility to own-finance local services at the margin. There are several important points in revenue assignment. High interjurisdictional mobility of tax base makes taxation difficult to sub-national governments. Taxes that do not reflect benefits received have the power to dis­tort the location of economic activity. If consumption-based taxation exceeds the value of benefits of public services, the result is minor distortion of residential choice. However, if production-based taxation exceeds the value of benefits, it would crowd-out economic ac­tivities. Interjurisdictional mobility adds another degree of complexity to the tax assignment problem. A commonly cited public finance principal is finance should follow function. If certain expenditure roles are assigned to a level of government, that level must have the resources to meet those responsibilities.

12. Local taxes ought to be the main basis for funding these services, views about the appropriate form of tax will depend on the extent to which central government is seen as having a legitimate influence over local government. District and City governments thus need to be given one or more substantial additional local revenues with a wide discretion in setting the tariff. The obvious means of so doing is to transform land and buildings tax (PBB, except mining and forestry tax base) and Acqusition Duty of Right on Land and Building (BPHTB) into a local tax. It is also argued that local administration can prejudice the independence of the assessment function, especially concerning the affairs of influential local people.

13. Global economic growth was strong in the first half of 2006. In many countries, including the OECD countries, growth even accelerated, despite oil prices reaching a new record high. Inflation in the United States gathered speed and is now clearly above the comfort zone of the Federal Reserve. The outlook for the world economy is favorable. In the United States, however, economic growth is likely to soften, prompted by the housing slowdown. The oil price development and the impact of widening current account imbalances are major uncertainties surrounding the projection of the global economy. The growth momentum in the Asia-Pacific region in 2007 is expected to come from strong growth in China and India, and a rebound in economic growth in the South-East Asian economies. Potential output growth of the United States is estimated at somewhat less than 3% per annum. It is more than for the euro area due to a stronger increase in the working-age population and a continuing stronger rise in labor productivity. Therefore, the global economic conditions at the present time give a positive impact on Indonesia’s economy outlook.

14. Today Indonesia face a new set of economic conditions and new challenges domestically and internationally. How can Indonesia built its economic strength in the twenty-first century? What policies and initiatives should the country pursue? In this regards, Indonesia should take into consideration all aspects related macroeconomics policy. One among component of macroeconomic stability has been reducing the size of government, the budget deficit and the current account deficit. There are several methods of financing budget deficit all have drawback: internal finance raises domestic interest rates, external financing can be unsustainable, and money creation causes inflation. There is no simple formula for determining the optimum level of the budget deficit. The optimum deficit or the range of sustainable deficit depend on circumstances, including the cyclical state of the economy, prospect for future growth, the uses of government spending, the depth of financial markets, and the levels of national savings and national investment. Hence, making good fiscal policy requires good judgment.

15. Indonesia had plenty of bad fiscal policy judgment in the last decades, but to use the experience well, the policy makers need to know what really happened and why. Has recent Indonesia fiscal policy contribute to the effort of recovery of real sectors and investment? How can macroeconomic stability in the sense of stabilizing output or employment be promoted? The classical answer is good macroeconomic policy, including countercyclical monetary policy and fiscal policy that allows automatic stabilizer to operate, but the important microeconomic underpinnings of macroeconomic stability should be seriously taken into consideration. In recovering from crisis over few years, which destroyed the financial system and economic sectors as well as generated a deep recession, Indonesia indeed has made substantial progress in reordering of its public finance, achieving macroeconomic stability and reducing economy's vulnerability to external sector as well. Significant progress has also been made in recent years in among others are in the targeting of reduction of oil consumption and electricity subsidies, improving the quality of state subsidies to the poorer groups especially in rural areas through direct cash subsidy to the poor, increasing significant spending in basic services such as education, health, and basic infrastructure, and big swing in the decentralization of public spending toward the provincial and local government levels. Hence, the prospects for Indonesia’s economy are excellent with the projection of Asia economy is on the rise, powered by the booming economies of China and India. Globalization has made knowledge and networks key sources of competitive advantage. Indonesia is well-placed to ride these trends. The country actually has a competitive environment for business expansion. The country also has a potential hard working labor force. Indonesia is also considered has a potential reputation for trust and credibility.

16. Against these developments, SBY-Kalla rivals criticize many of their promise when their huge popularity allowed them to win the country’s first-ever direct presidential election with a whopping 60.62%. SBY promised to provide Indonesia with a firm but gentle hand and to root out its endemic corruption and nepotism and making average economic growth of 7% per annum during his periods. Two-and a-half years later, however, his reform program seems dead in the water, and in the middle of February 2007 floods in Jakarta and surrounding areas only symbolized how little SBY-Kalla’s accomplished. Many business-men criticized SBY that he developed the flaw of indecisiveness, and he’s in a strong feeling of anxiety if he has to decide, but he talks nice although in fact it’s tough to get him to decide anything. Some mass medias known him that he is very talented in dispersing people impression, but little in accomplishing his promised; for examples in 2006 SBY proved unable to push through much-needed tax (known as approaching target of 10,000,000 taxpayers, but in fact only less than 3,600,000 taxpayers which including non-effectives taxpayers), investment, labor, civil service and other reforms. Indonesia has already paid the price: foreign direct investment and problems of job creation strategy as well as increasing number of unemployment.

17. Tax policy reforms. Simplicity has been a main focus to design tax system in developing countries, including Indonesia for the last two decades. The tax policy and administration reform simply generate revenue for public expenditure with minimizing cost of compliance for the taxpayers. The following our recommendations of reforming tax policy and administration:

1) General Provisions and Tax Procedures and Tax Court. Transfer the function of objection from DGT to Tax Court. The main idea is to give equal treatment between tax office and taxpayers and promote check and balance in the process of fulfilling tax obligation and appeal request.

2) Income Base Tax, broad base – few exemptions

a. Abolish the progressive corporate income tax and establish a single rate of 25 percent (need quantitative information on both the distribution of the burdens associated with various tax changes, and on the likely effects of various proposals on economic efficiency). The argument on decreasing corporate income tax is that corporate tax rates around the world continue to decline, driven primarily by competition among nations for business, tax receipts, and jobs. In the last two decades, the average corporate tax rate in most OECD countries declined nearly 30 percent dropping from an average of 38 percent to 27.0 percent. Corporate tax needs lowering and flattening. The system requires radical simplification and base-broadening.

b. Remove unnecessary Income Tax Expenditures and Exemptions. Most taxpayers are unaware of the existence of most of these reliefs. These special reliefs and exemptions benefit the few but are paid for by the many. Abolishing them or reducing their value would broaden the tax base and allow everyone to benefit from rate reductions. The government should periodically compile an inventory of tax expenditures and report on their nature, legal basis, expected and actual effects, and past and likely future costs.

c. Revise article 4 paragraph (2) which basically stipulated: income from shares and other transactions in the stock market, income from a transfer of property in the form of land and/or buildings, and other specific income constitute taxable objects. The public savings and the stock market are source of funds for the implementation of economic developments. Therefore it is necessary to give a special tax treatment on income from the public savings. There are many considerations of granting a special tax treatment on those income, among others simplicity of tax collection, fairness and equality of tax imposition, and economic and monetary developments. Based on the same considerations, it is necessary to give special tax treatment on income from the queenly, the imposition of income tax on those types of income, including the nature, amount and procedure of payment, withholding and collection, are governed by a Government Regulation. To facilitate the implementation of tax imposition and to avoid the additional administrative burden for the taxpayers as well as DGT, the imposition of income tax under this provision may be treated as final. The clues are other specific income and the imposition income tax under this provision may be treated as final. This article sound good, but the pitfall is it will give unlimited power to the government i.e. DGT in deciding effective income tax rate for a particular tax base. The assumption of this article that the government is supposed to have a wisdom and proper decision in implementing a withholding tax especially as a final treatment of tax obligation and never abuse the power. However in fact, this article may potentially bring the DGT abuse the power.

d. Remove article 25 paragraph (8) and GR No. 42 of 2000 on Individual Income Tax payment for taxpayers travelling abroad. This article theoretically does not have significant impact on income tax revenue or even almost zero (neutral or zero impact), but a significant distortion may exist in the form of disappointment of most good taxpayers who travelling abroad, bad image of foreign passengers to DGT and other officials in the departure airport or harbor, more bureaucratic process for individual who exempt from the tax obligation, potential bribery of immigration and tax officials in the airport or harbor, and other inconvenient raised by passengers.

3) Consumption Based Tax

a. Reducing cascading effect in consumption based tax by imposing final regional sales tax instead of national VAT. It helps improve income distribution efficiently.

b. Remove unnecessary VAT exemptions from timber, mining products, hotels and restaurant, public telephone, domestic electricity, entertainment, health and education services, and other goods and services. This policy also implies a revision of Law concerning Local Taxes and User Charges (Law No. 34 of 2000) by removing Hotel and Restaurant Taxes and Entertainment Tax from Local Taxes. In compensating the decrease of district/city governments own revenue, it is suggested that 10% of VAT revenue is shared with district/city governments using GDRP distribution. This automatically will influence the corresponding distribution of DAU. If the government is willing to support a particular economic sectors, for example reducing the cost of rice production for farmers, it should be financed through government spending in the form of agriculture subsidy or other methods of government spending. This policy also promotes more transparent budgeting process.

4) Land and Building Tax (PBB) and Acqusition Duty of Right on Land and Buiding Transfer (BPHTB)

a. Increase the effective rate of land and buildings tax up to 0.4% of taxable objects. The current effective tax rate only 0.1% applied for taxable objects which value ≤ Rp1.0 billion and 0.2% for taxable objects which value >Rp1.0 billion respectively are considered very low, compare to international bench marking.

b. Remove unnecessary exemptions on Land and Building Tax, including imposing taxable objects owned by Central and Regional Governments (15 exemptions in Land and Building Tax).

c. Transferring tax administration of PBB and BPHTB completely to local governments (districts and cities administration), thus they be empowered especially to fix the rate of the tax. The key concern is that local governments must have additional taxing power in the form of sufficient revenues over which they can exercise discretion in order to efficiently link local revenue and expenditure decisions.

1) Stamp Duty

Revise the tariff of Stamp Duty from maximum Rp6,000 (six thousand rupiah) to Rp25,000 (twenty five thousand rupiah). The maximum tariff of Stamp Duty is no longer can be increased, because the Law No. 13 of 1985 stipulated that the maximum tariff initially Rp1,000 (1986) can be increase six times to maximum Rp6,000. The maximum duty proposed to Rp25,000 is still affordable, especially applied for document that involved in billion rupiah. Hence articles 2 and 3 Law No. 13 of 1985 on Stamp Duty should be amended.

18. Tax Administration reforms . Tax administration should be simple, stable tax systems are better. Awareness of this issue is growing in Indonesia and many countries. Simpler tax systems are less distorting, fairer, easier and cheaper to manage, collect and understand. Improving tax collection requires providing numerous and easily accessible facilities at whch taxes can be voluntarily paid as well as mechanisms for coercing payment by noncomplying taxpayers. A complex tax system is expensive and distorts the economy.

1) Improve administration and reduce evasion by making compliance easier for individuals who are paying and making enforcement more thorough for individuals who are not. This will require better information systems, collecting more information on each taxpayer and potential taxpayer, and linking the information from different tax bases and other sources of information.

2) Value Creating Process: reducing corruption, saving cost, simplifies administration, and gain comprehensive financial data to measure performance easily. Establish the new agency for national revenue center that collect all tax revenue and non-tax revenue. All regional-district revenue office and all regional-district tax should be integrated in one office.

3) Replicate the function of Large Taxpayer Office in Jakarta and other metro and large cities which are the potential of tax revenues relatively significant, by expanding the number of modern tax offices. Simultaneously, simplify the organizational structure of the tax administration's head office, regional offices and district offices based on major tax administration functions.

4) Reduce taxpayer burden, one of the overriding themes in improving the DGT business practices is the shift from addressing taxpayer problems well after returns are filed to addressing them early in the process, and in fact preventing problems wherever possible. Outlines and communicates to taxpayers their right and obligations as well as the available complaint procedures and redress mechanism.

5) Broaden the use of electronic interactions, electronically filed returns improve service for taxpayers and boost productivity by reducing errors, speeding refunds, and reducing labor costs. The DGT should enhance technology to allow filing of a full range of returns, eliminate requirements for separate signature documents, tailor marketing and education programs to attract taxpayers and practitioners with varying needs, and broaden the number of effective payment options.

6) Improve customer access and use of services, in this context, the DGT should establish an Employee Resource Center that will be a broad-based, user-friendly communications link for internal customers including a telephone Help Desk support system, a single point of contact, and web-based customer interfaces for employee benefits and services.

7) Address key areas of non-compliance, research indicates that there are major problem areas of substantial noncompliance including abusive tax shelters and trusts as vehicles for managing assets and for wealth transference. Balances of unpaid employment and withholding taxes by businesses have increased and overpayment of refunds due to erroneous returns is high. The DGT should make substantial progress in combating key areas of noncompliance over next view years.

8) Establish the current income tax identifier as the sole Taxpayer Identification Number and discontinue the use of a separate VAT identifier.

9) Simplify the VAT return-discontinue the implementation of the massive VAT invoice cross matching system and cancel the requirement for VAT taxpayers to submit detailed lists of sales and purchases and other attachments on a monthly basis.

10) Develop a selective approach to the detection of VAT noncompliance rather than attempting to build a national database of all invoices with massive cross-checking: (i) Require VAT returns to be filed at the same office where the taxpayer files the return, and establish a quarterly filing and payment system for small VAT taxpayers; (ii) Abolish the current VAT withholding scheme to limit the number of refunds that must be processed.

11) Provide taxpayers the highest-quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. Provide an accessible and dependable information service on taxpayer’s right and obligation with respect to the law, and ensure that compliance costs are kept at the minimum level necessary to achieve compliance with the tax laws.

19. Intergovernmental fiscal transfers are neither inherently good nor inherently bad. What matters are their effects on such policy outcomes as allocative efficiency, distributional equity, and macroeconomic stability? The most critical aspect of intergovernmental transfers is thus not who gives them or who gets them but their effects on policy objectives. Since circumstances and objectives differ from a country to other countries, no simple, uniform pattern of transfers is universally appropriate. Intergovernmental transfers are the cornerstone of sub-national government financing in most developing and transition countries. Analysis of fiscal decentralization issues in many countries has taken secondary importance to macroeconomic matters. Transfers are a compromise in that they allow the central government to hold control over the public financing system while they offer a way to channel money into the budgets of provincial and local government.

20. Many countries that are decentralized and many of those that are deepening their fiscal decentralization, distribute intergovernmental transfers by formula. A formula is transparent and objective, and once established, does not change regularly. However, an effective formula-based distribution of transfer requires up-to-date and reliable information on the formula elements. The smaller the recipient unit of government, the more difficult it is to identify a formula. While the use of formulae have been fairly widespread for distribution from central to provincial governments, the practice is much newer for provincial-local revenue sharing and is much more constrained by data limitations.

21. There are many different ways to manage the decentralization process, and Indonesia has to work out for them selves what model suits them best. It would be inappropriate to copy any particular model, be it that of Australia, Canada, China, India, Russia, the United States or any other large country. Yet, it would not be sensible to repeat the mistakes made in Russia, Colombia or Brazil. The system of intergovernmental fiscal relations is an important component of the sub-national policy-making. Properly structured intergovernmental trans­fers provide support for policy objectives of sub-national governments. The system of intergovernmental fiscal relations should be transparent and promote fiscal har­monization, sub national government accountability, and regional equity. Closing vertical and horizontal fiscal gaps using central government grants is a major challenge. Local governments will never have enough resources and they will always be dissatisfied with their share of the national "pie". The best approach is to provide unconditional funding to local governments using a well designed formula, with parameters which cannot be manipulated by either local or central governments. For the case Indonesia’s intergovernmental grant system, it has the potential for alleviating some of the disadvantages of the implementation intergovernmental relationship. Central government grants can help equalize expenditures among provincial and local governments, and they can assist in meeting the needs of those dependent on government services. But these benefits come at a price. The larger the grant from the higher level of governments, the less disciplined by market forces is the lower level of governments. The more regulations imposed by higher level of governments, the more bureaucratized, inefficient, and ineffective of the implementation of intergovernmental relations. The key structural constraints to an effective intergovernmental fiscal framework in Indonesia are: (a) the absence of clarity in assigned expenditures and the assignment of most functions to regional governments; (b) the very limited decentralization of taxation powers to local governments; and, (c) constraints in achieving a measure of fiscal equalization among local governments because of the concentration of shared revenues in a limited number of regions.

22. The system of intergovernmental transfers in Indonesia comprises three basic types of transfer schemes. These are revenue sharing, a general purpose grant (Dana Alokasi Umum--DAU), and grants for Specific Purpose Grant (Dana Alokasi Khusus–DAK). The DAU is untied, or unconditional grant. The recipient sub-national governments (provincial and local governments) can spend a general purpose grant as their choose. No conditions are attached to the grant. The DAK is grant for specific purpose and set conditions, often in considerable detail, on the spending to finance regional governments function, but in line with national interest. These grants are also known as tied, conditional or categorical grants. Specific purpose grants may be matching or non matching grants. Matching grants require that the recipient sub-national governments provide a contribution, often in the form of monetary unit or a certain percentage for the basis of grant. DAK is considered as a matching grant. On the other hand, non matching grants require no local contribution.

23. DAU allocation is currently based on two main factors, those are: (i) Non Fiscal Gap formula; (ii) Fiscal Gap formula. Non fiscal gap formula based on five factors: 1) Existing establishment cost, applied in FY 2001 using the former Inpres and Subsidi Daerah Otonom (SDO); 2) lump-sum allocation, applied in FY 2002 -2004; 3) Proportional wage bill, applied in FY 2002-2004, then was converted became part of DAU formula based on Law No. 33 of 2004 as Basic Allocation which calculated based on civil service salary; 5) Hold harmless allocation, which applied in FY 2002-2007 (hold harmless allocation will automatically no longer existed starting in FY 2008 (based on Law No. 33 of 2004, stipulated in article 107 paragraph (2). On the other hand, Fiscal Gap formula based on two main factors, those are Fiscal Needs and Fiscal Capacity. Fiscal needs is measured by total population (POP), areas size (AREA), Construction Cost Index (CCI), Gross Regional Domestic Products per capita (RY_p), and Human Development Index ( HDI); Fiscal Capasity is measured by financing sources of the region derived from Regional Government’s Own Revenues (PAD) and Revenue Sharing (RS). PAD consists of summation of Local Taxes (LT), User Charges (UC), and Other Regional Government Own Revenues (ORGR). However, there seems to be unnecessary confusion as to the implementation of equalization. As clearly shown in the DAU allocation formula, the major target of DAU allocation is to equalize fiscal capacities of regions to finance their fiscal needs. It is quite difficult to estimate fiscal needs in the formula that can capture true fiscal needs of regions after decentralization, since there still remain many grey areas in authority demarcation between different levels of governments, much less minimum service standards (SPMs). However, once the formula is adopted, allocation performance of DAU needs to be assessed based on how effectively DAU allocation can meet regional fiscal needs. This never implies equalizations of per capita sub national governments revenues or per capita expenditures. Although, in general, the DAU has made important strides in meeting regional demands for greater revenues and more control over those revenues, its attempts to address regional aspirations have recently received somewhat of a reversal.

24. As the most important source of funding for regional governments, the DAU also addresses problems related to vertical imbalances. As suggested above under the discussion of vertical imbalances, the initial evidence suggests that DAU funding may provide considerably more to regional governments than they “need,” at least in the aggregate. For some additional evidence on questions related to the adequacy of DAU and other sources of finance vis-a-vis fiscal needs. Another, perhaps better, approach to estimating aggregate net fiscal requirements would be to sum up the fiscal needs (i.e. expenditure requirements net of revenues available before DAU allocations) of individual provincial and district/city governments; these net needs could then be compared to available DAU. Here, regions with negative net requirements (i.e. greater fiscal capacities than expenditure needs) would first be “zeroed out” (as they are in the determination of DAU allocations). Such “zeroing out” would, of course, result in larger estimates of net fiscal needs than otherwise would be the case. See Table 9.6. for the output of this method using FY 2007 DAU data. As can be seen, total net regional fiscal needs, estimated in this manner, are just approximately Rp155,915.34 billion; this again suggests that the DAU is “too large” relative to what is “needed”. In addition, the information in the table implies that a more appropriate share of domestic revenues (net of amounts shared) for the DAU would be around 24.60% rather than the 26 % of Net Domestic Revenues. Also, the table suggests that provinces do not, in fact, receive enough DAU compared to what they require. And, as before, the data here imply that District/City receive more than needed. Finally, the data suggest that a more appropriate split of the DAU for provinces and district/city might roughly be 19 % and 81 %, as opposed to the current distribution of 10 % and 90 %. Of course, more work is needed to establish appropriate funding levels in the aggregate and across provinces and district.

25. Recent empirical analysis has showed that the DAU for FY 2001 was substantially more equalizing than the old SDO and INPRES transfers were. The trend of horizontal imbalance between provincial level can be seen that in FY 2001 the imbalance ratio (measured based on revenue per head) at the provincial level was Rp53,989.12 versus Rp955,817.63 (1 : 17.71), while at Kabupaten/City level was Rp133,468.86 versus Rp4,777,575.28 (1 : 35.79). Then in 2005 the imbalance ratio at the provincial level and kabupaten/city level became Rp90,229.27 versus Rp 1,422,614.57 (1 : 15.77) and Rp243,647.80 versus Rp8,597,572.19 (1 : 35.29) respectively. The evidence showed us than the degree of imbalances between provinces in Indonesia is considered at the level of frightened. Yet, the same figures for Kabupaten/city level was more serious, even worse. The equalization goals of DAU in FY 2001 compared to FY 2005 also was not so good. Appendices 11 and 12 showed us that interregional disparities measured using coefficient of variation moved at stagnant level for provincial government from 1.0100 in FY 2001 became 0.9695 in Fy 2005, while at kabupaten/city level from 0.9422 in FY 2001 became 0.9005 in FY 2005. The evidence indicated that the implementation of intergovernmental transfers especially DAU formulation in Indonesia has not yet contribute significant impact in improving horizontal equity. Hence applying a robust DAU formula, removing hold harmless policy (based on the Law No. 33 of 2004 should be removed by FY 2008), as well as removing Basic Allocation as part of DAU formula is necessary (again, in the medium term Law No. 33 of 2004 should be amended). These points notwithstanding, however, as a couple of recent analyses show, the performance of the DAU is probably still sub-standard vis-a-vis its equalization goals. Problems remain, for example, in the specification of the formula, particularly with regard to the measurement of expenditure needs, although improvements could be made to the measurement of fiscal capacity, as well (see Table 9.7 and 9.8.). In addition, another important element of the formula, the so-called balancing factor remains too large relative to the fiscal gap components and actually works against equalization objectives.

26. Also, in FY 2007 and the years after the factor has been made a (partial) function of regional staff salaries as the base calculation of Basic Allocation and this offers disincentives for increasing expenditure efficiency. Most importantly, the continuing requirement that no regional government be awarded less DAU than it received in the prior year (the so-called “hold harmless” condition) significantly constrains equalization objectives. At the technical level, more work needs to be done to improve the formula. In the medium term, factors that better proxy expenditure requirements and fiscal capacity need to be found and employed. In the long run, expenditure requirements need to be more precisely estimated for individual governments as a function of the real costs of achieving some specified (average) standard of service delivery and fiscal capacities need to be more exactly derived as a function of size of tax bases over which governments actually have some control. A general issue is whether urbanized and rural areas should be treated separately in estimation procedures, given their very real differences in service responsibilities, costs, and fiscal capacities. A transition plan for removing the balancing factor from the distribution formula gradually over time needs to be specified. The hold harmless condition, which was useful in the first year of DAU operations, should now be relaxed. These latter two changes would mean, among other things, that very wealthy regional governments would not receive a DAU allocation.

27. Matching funds play a major role in the intergovernmental fiscal relations in many decentralized countries to internalize spill-over effects across regions and to finance nationally prioritized projects in regions. Indonesia initiated DAK projects for education, health, and infrastructure in FY2003. There were two critical issues in determining its allocations: 1) identification of eligible local governments: and 2) matching rate setting. There were two steps in the screening process. First, all local governments were ranked according to their fiscal capacity, and those whose fiscal capacity were below the national average gained eligibility. Second, the Government reviewed sectoral indicators to check the eligibility of local governments. However, sectoral indicators were mainly used to determine allocation amounts, not for the eligibility test, because all local governments that survived the fiscal capacity screening could receive DAK allocations. In practice, the Government first determined a minimum allocation, or lump-sum allocation, to all eligible governments, and, the remaining funds were subsequently allocated on the basis of formulas established by sectoral indicators. The DAK allocation procedures show a lack of understanding of the chief objective of matching grants by the Government. DAK seems to merely supplement the equalizing performance of DAU through its lump-sum allocations across all relatively poor regions. It is well recognized that the current DAU allocation method fails to attain the expected equalizing impact because of various weaknesses in its allocation formula and political interventions in some regions. Its poor equalization performance should be resolved by revising the DAU allocation procedure itself and not by allocations from DAK. DAK can be a powerful policy tool to foster the linkage between central and regional development plans and budgets.

28. Democratization and decentralization are much more the need for managing the conflict among citizens that should be accommodated in the constitution. Indonesia may learn from the success and the failure of other nations in conducting the process of democratization and decentralization as well. They are all faced with the need to develop an ability to learn and adapt in order to cope with the challenges they face. In such a context there is a very real value for Indonesia in initiating to exchange experience about different ways of tackling common problems in applying democratization and decentralization with other countries. Practical principles from international experience for fiscal decentralization, may be taken into consideration by Indonesia in conducting a more suitable process of decentralization, these are :

1) Fiscal decentralization should be viewed as a comprehensive system. Finance follows function-first should come the assignment of expenditure responsibility to local governments.

2) There must be a strong central government ability to monitor and evaluate the intergovernmental fiscal system.

3) One intergovernmental system does not fit the urban and the rural sector--these governments have very different capabilities to deliver and finance services, and certainly different capabilities to borrow.

4) The assignment of revenue powers to local governments should link revenue and expenditure decisions at the margin.

5) Higher-level governments must follow the rules o f the intergovernmental fiscal system that they themselves create. But the higher-level government does not always keep the rules that it makes.

6) The intergovernmental fiscal system should be kept simple.

7) Intergovernmental transfers should be designed to match a set o f clearly specified objectives. The intergovernmental fiscal system should be built on policies that consider impacts on all levels of governments.

8) A hard budget constraint should be imposed on regional governments. The intergovernmental fiscal system should be flexible to accommodate changes government - central, provincial and local, hence recognize that the systems are always in transition. There must be a champion for fiscal decentralization.

29. Indonesia’s local governments have very limited experience with long-term borrowing for capital investment and virtually no experience with borrowing from private financial institutions outside of the central government, except for short-term cash-flow borrowing. Infrastructure spending at the local level has been tightly controlled by the central government, either through project grants from line ministries or through on-lending of the proceeds of international donors for projects initiated by the center. However, since the enactment of Law No. 33 of 2004, it is envisaged that local authority borrowing will be one of the important sources of territorial deficit financing once the devolution plans are set in motion, although with the limitation that sub national governments are not permitted to borrow directly from non domestic lenders. The primary purpose of local government borrowing, therefore, is to permit timely financing of needed expenditures without causing such fluctuating then they cannot be otherwise avoided by careful planning. For this reason, sub-national borrowing is intended at least for investment purposes. The argument focuses on the impact of a possible moral hazard problem namely, that access to financial markets by sub national governments may generate unplanned liabilities for central government. Yet the academic literature and country experiences do not suggest an inevitable adverse link between decentralized borrowing powers and central government’s ability to maintain fiscal discipline and macroeconomic stability. Rather, the key seems to lie in the design of fiscal decentralization, particularly the regulatory framework under which borrowing powers are decentralized.

30. There is some evidence that democratic decentralization and its accompanying enhancement of transparency make corruption more visible, particularly where it combined with the effects of political accountability, free press reporting and party competition. In Indonesia’s context, corruption is widespread in most areas of public life. The most affected areas include the taxation and customs administration, public procurement, political party, treasury, banking and financial sector, police and the judiciary. By far the most comprehensive empirical examination of these issues, in the context of Indonesia’s decentralization policy and its implementation, the domination source of sub national revenues which come from intergovernmental transfers such as DAU, shared revenues from taxes and natural resources (DBH Pajak and DBH-SDA), in the efforts of getting more government transfer, potentially sub national governments are willing to influence central government officials and member of Budget Committee of the DPR to divert Balancing Funds to specific region with compensation of allocating money or other incentives to the respective individuals. A centralized bureaucracy of decision making in allocating government fund to the regions creates incentives to divert resources to ineligible regions, owing to their willingness to pay bribes. In theory, transparency and corruption should be inversely related, such that more transparency in sub national governance should mean less chance for corruption, since dishonest behavior would become more easily detectable, punished, and discouraged in the future. Combating corruption is increasingly recognized as a crucial step by the government to stimulate economic growth and reduce poverty. Corruption is generally regarded as one of the most serious obstacles to development.

31. Indonesia suffers from a very poor international reputation regarding corruption, ranking near the bottom alongside the most corrupt countries in the world. It is also perceived as doing worse over time in controlling corruption. Indonesian liken corruption to a “disease to combat, denouncing every known case.” While these perceptions may be overly influenced by the new openness of a democratic Indonesia, corruption is high and imposes severe social and economic costs. It also contributes to citizens’ loss of trust in governments. Indonesia’s position on the Corruption Perception Index improved in 2006. On a list released by Transparency International during 2006, Indonesia was placed as the seventh most corrupt of 163 countries, while in 2005 Indonesia was sixth of the 158 countries surveyed. Despite this, however, Indonesia was still unable to lift itself Out of the group of countries that face very serious corruption problems (below three on the index). In Southeast Asia, Indonesia’s position in 2006 is only better than that of Myanmar. This is in spite of the fact that in the previous year, Indonesia was still in the same group as Laos, the Philippines and Cambodia.