Local Government in Asia and the Pacific:
A Comparative Study

Country paper: Indonesia (cont.)

  Description of the Country
  Evolution of Local Government
  Local Government Categories
  Local Government Functions
  Local Government Finances
  Personnel Systems
  Central-Local Links
  Public Participation
  The Way Ahead

Local Government Finances

Currently, most significant political questions regard the financial relation between central and local government, due to the fact that provincial and local governments receive only a small share of the total government revenues. All the primary sources of income and those that are easier to collect go to the central government, while those that have small potentials and are difficult to collect belong either to the provincial or to the local governments.

Table 5. Government Revenues

This imbalance between central, provincial and local governments' revenues has been in existence since the early life of the Republic. In fact, in order to solve this problem, Parliament enacted Law 32 in 1965 through which the provincial and local governments were given much greater shares of national resources. However, this law was never fully implemented. To cope with this problem the central government introduced some policies such as the automatic allocation based on foreign exchange earnings from exports (ADO), which was eventually replaced by the subsidies for autonomous entities. One of the characteristics of this system is that it is based largely on the number of personnel employed in each autonomous region. However, this system was not able to completely solve the problem of financial imbalances between central, provincial and local governments. This is due to the fact that the capability of different provincial and local governments varies widely. In other words, some regions that have only small sources and only contribute small shares to the national revenue received more money from the central government.

Provincial and local government revenues

National as well as autonomous provincial and local governments have their own sources of revenue. National sources consist of taxes and fees, income from state owned enterprises and foreign aid. Local sources consist of local taxes and fees, including the land and building tax, income from enterprises owned by the local government concerned, foreign aid and funds from higher levels of government. The latter include funds to finance the delegated powers by which local governments are to perform specific services for and on behalf of the central government, plus the annual subsidies allocated in the national budget. Subsidies are very large and pay for all the salaries of the civil servants in the local governments. The amount of the subsidy is growing constantly.

The real source of local government revenue is the levy of local government taxes. The most important one is the 21 per cent tax on hotel and restaurant bills and the entertainment tax. Proceeds from property taxes are also allocated to local governments, although property tax is scheduled as a central government tax. All taxes and fees other than user charges, tax on hotel and restaurant bills, and property tax, can be used by local government for any purpose and are thus considered as general revenue. The development tax of 21 per cent, i.e. tax on hotel and restaurant bills, and the property taxes, are supposed to be spent for development purposes. The amount of revenue that is collected by a local government depends very much on the economic potential of the area. Since the economic potential of the provinces and localities differs widely, the revenue of the provincial and local governments also varies.

Figure 1. Structure of Provincial Government Revenues

Figure 2. Structure of Local Government Revenues

Table 6. Composition of Local Government Revenues

The composition of local governments' own revenue varies among local governments, depending on the economic potentials of their areas. The largest contribution to local governments' own revenue comes from the user fees. These are the fees that the local government departments and enterprises charge to the users of the services they provide. Examples of the service fees which are charged by local government departments are solid waste collection fee, planning and building permit fees and various licensing fees, while that charged by local government enterprise is the water rate fee. Although local government revenue from these user fees seems to be large in comparison to other sources of revenue, this does not imply that local governments are free to spend this since the revenue from user fees is supposed to be spent to improve the services to the people.

Most provinces with the largest amount of self-generated revenues are located in Central, East and West Java (Jakarta). The reason for the high revenue potentials of the provinces on Java is that the island is the most densely populated and the most developed island; consequently, economic activities are intensive. The provinces with the highest amount of average local government revenue are also located on Java. Jakarta does not have a local government, as of such it does not have data on local government revenues. Local governments of West Java raise particularly high amounts of average local government revenue. This is due to the fact that some of the local governments on West Java are part of the most developed region in the country, the Greater Jakarta Region. In terms of growth rate Javanese local governments are not superior to local governments on other islands. The highest average annual growth rates are found in the remote provinces Irian Jaya and Maluku.

Table 7. Provincial Government Revenues (in billions of Rupiah)

Table 8. Local Government Own Revenue (in million of Rupiah)

Local government expenditure

Local government expenditure is structured as a duplicate of the national government expenditure. That is, the expenditure consists of two main categories: service or routine budget and development or capital budget. Of the two categories, the development expenditures are considered more important since they represent the efforts of the local governments in developing their areas. The balance seems to be improving in favour of development expenditures. This is a classic example of the preference of local officials for development activities providing them with public visibility (such as ribbon cutting, ceremonies) as these have greater political significance. Most provincial government expenditures are allocated to service expenditures. This means that very little development activities are carried out at the provincial level. However, there is a marked tendency that the balance is improving, i.e. that the development expenditures are increasing vis-a-vis service expenditures. Within the local government budget, expenditures are formulated by sector, similar to that of central government.

Table 9. Aggregated Local Government Expenditures (in billions of Rupiah)

The major development expenditure of local governments is mostly financed by central government subsidies rather than by local governments' own resources. The largest sector in which local governments allocate their resources is transportation. This category of expenditure seems to dominate the local government expenditures because it is financed mostly by central government development subsidies.

Other main expenditures of local governments are allocated to education and culture. Again, these activities are mostly financed by central government subsidies earmarked for the construction of elementary school buildings. Besides these expenditures, a lot of local governments' revenues is spent on regional and rural development, also mostly financed by central government subsidies for rural communities. The subsidy is directly allocated to the villages that use the money for development projects that are proposed by the people at large.

Table 10. Local Government Development Expenditures (in billions of Rupiah)

Table 11. Sources of Fund for Urban Development (in billions of Rupiah)

Notes: National: national budget; F/A: foreign aid; National grants: foreign aid to national government given to local governments as grants.

The dominance of central government in financing development activities at the local level can also be seen from the pattern of urban development financing in the fifth and sixth development plans of the country. On average, the largest contributor to urban development is the central government budget from internal revenues, mainly channelled through the Ministry of Public Works (23.7%). Another main source of funding for urban development is foreign loans to local government (through subsidiary loan agreements) to finance urban development projects (22.8 per cent). These projects receive aid from either the World Bank or the Asian Development Bank. The last main source of finance for urban development activities is foreign loans to central government used by central government agencies (mainly the Ministry of Public Works) to complement the development activities carried out by local governments financed by foreign loans to the local governments (for 19.0 per cent).

Thus foreign loans are channelled either to the central government or to the local government. The one channelled to the central government will be allocated either to the central government ministries to finance urban development or to the local governments as grants. The grant component (grant from central to local government, but loan from donor to central government) of foreign aid is usually to finance technical assistance components of urban development projects (for planning, design, studies, etc.). Finally, the last main source of development expenditures at the local level is central government development subsidies (10.9 per cent). Meanwhile, local government self-generated sources only contribute to 4.3 per cent of all development activities at the urban areas of the country.

Role of higher levels of government

The Local Government Act 5 (1974) contains extensive provisions for supervision of provincial and local government finances by the higher levels of government. Article 64 of the act stipulates that provincial and local government budgets are to be enacted in the provincial and local laws. The said laws can only be legal and binding if they are approved by the Minister of Home Affairs in case of the provincial budget and by the Governor of the relevant region for a County or municipal budget. The Minister can scrutinize the provincial budget submitted to him by a particular province and in many cases has suggested and enforced changes in the budget, despite the fact that the budget had already been approved and enacted by the provincial House of Representatives. A provincial government therefore, is not autonomous in formulating its own budget.

The Minister publishes guidelines for the formulation of provincial budgets with details of central government subsidies to the provinces and local governments, so that he or she can further influence the way in which the revenues generated by provinces themselves as well as central government subsidies are to be spent. According to the same guidelines, the Minister of Home Affairs can also influence the way in which local governments set their budgeting priorities and the way they formulate their budgets. Formally, however, the local government budgets that are already enacted by the local House of Representatives, are to be approved by the Governor of the respective regions or provinces. Similarly, the Governor can also exert his or her influence to formulate the priorities of local governments' expenditures.

The central government also provides an extensive array of subsidies to provincial and local governments. These subsidies are categorized into routine subsidies and development subsidies. The routine subsidies are used to cover routine expenditures of the provincial and local governments. Development expenditures are supposed to be used only for development expenditures. However, in many cases, where local governments are short of self-generated revenues, they have used part of the development subsidies for routine purposes. Apart from routine and development expenditures, central government also allocates some funds to provincial and local governments to finance activities that the central government asks provincial and local governments to do on its behalf.

On average, 65 per cent of provincial expenditures is financed by central government subsidies. Indeed, in most provinces except in South and East Kalimantan, central government routine subsidies cover more than half of the provincial routine budgets. This shows the dependence of provincial governments and local governments on central government subsidies. The central government's role in providing subsidies is very important in the running of administration at the provincial and local levels.

Table 12. Proportions of Routine Subsidies in Local Government Routine Expenditures

Personnel Systems in Local Government

Local public personnel system in Indonesia is directly related to the national public personnel system. The national government employs public personnel for all government agencies, including local government. Provincial and local governments are in charge of the recruitment and selection process of provincial and local government staff. The first step is the announcement that employees are being sought. Announcements may take many forms, including advertising in newspapers, posting notices in public buildings and notifying public employment agencies. After the announcement and receipt of applications, various kinds of examinations are undertaken. The candidates who pass the examinations will be appointed as government employees. In practice however, although each local government is entitled to recruit local government employees, approval from the Personnel Administration Agency, a central government agency, is needed as the salary of local government employees is paid for by the central government channelled to local governments through routine subsidies. Other personnel affairs (e.g. promotion and training) are the responsibilities of local governments. However, the central government formulates the policy and monitors its application with regard to these processes. Besides, it keeps records on these activities as well.

Central-Local Links

In recent years, all aspects of local government personnel systems, including recruitment, appointment, dismissal, suspension, salary, pension, half-pay and other matters concerning the legal status of provincial and local public servants, are implemented in line with the directives laid down by the Minister of Home Affairs. The Minister can also assign one or more of his staff to work for a provincial or local government if the respective government requests it. The final activity related to personnel processes is the termination of employment. The firing procedure is complicated, lengthy and cumbersome. In practice the procedure has rarely been executed. The first step in the firing process is to be taken by the direct supervisor of the said employee, requiring documentation of alleged mistakes or shortcomings on the part of the employee. A written notice that the office is initiating an adverse action is to be made by the supervisor and given to the employee. The system provides the right of the employee to appeal against the proposed action.

Extent of Public Participation

Public participation in local government politics is channelled through representatives in the local House of Representatives. Representatives are elected every 5 years through general elections. During the general election, the people elect their representatives in three ballot boxes: one for their representatives in the national House of Representatives, one for the representatives in the provincial House of Representatives and one for the representatives in the local House of Representatives. Public participation in development is more common. The most practical means of public participation in development is through the planning process of development projects at the local level. The so-called bottom up planning mechanism is carried out based on the Minister of Home Affairs Decree Number 9 of 1992. Thus, the annual planning cycle is to go through the following six steps. In spite of the lengthy process the end result is a fairly participatory planning process.

The first step is the so-called village development meeting that is attended by the residents of the village and is presided by the village administration. During the meeting, residents of the village express their needs and submit their proposals for development projects to be executed in their village. In the planning cycle this step is carried out in March or April.

The second step is the District development workshop that is attended by the planning representatives of the villages in the District and is presided by the officers of the County or municipal planning board. During the workshop, the District administration coordinates and synchronizes the proposals made by neighbouring villages and compiles the development project proposals for the District as a whole on a yearly basis In the annual planning cycle, this step is carried out in April or May.

The third step is the Local Development Coordination Meeting that is held at local government level and attended by the representatives of district administrations, local government departments and local offices of ministries. The meeting discusses and compares proposals from Districts, departments and local offices of ministries. The meeting results in three separate categories of project proposals: those to be financed by the local government budget, those to be financed by the provincial government budget and those to be financed by central government budget. The first category of project proposals is included in a local government budget proposal for that particular year. This step is carried out in May or June.

The fourth step is the Provincial Development Coordination Meeting that is held at the provincial level and is attended by representatives of local governments in the province, provincial departments and regional offices of ministries. The meeting discusses local government project proposals to be financed by provincial and central government budgets as well as proposals from provincial departments. The meeting categorizes the approved proposals into projects to be financed by the provincial budgets, projects to be financed by the national budget, projects to be financed by special funding (e.g. foreign aid) and projects to be funded by the private sector. This step is carried out in June or July.

The fifth step is the Regional Development Consultation Meeting that is held in four regions and is attended by representatives of the provinces within each region (most likely the provincial planning boards), the representatives of the Ministry of Home Affairs, the representatives of the National Development Planning Agency and the representatives of selected ministries. The meeting produces project proposals for projects to be funded by the provincial budget, by the national government, jointly by the provincial and national budgets or by the private/banking sectors. This step is carried out in August or September.

The final step is the National Development Consultation Meeting that is attended by the provincial planning boards, the national development planning agency, the ministry of home affairs and selected ministries. The meeting discusses the proposals resulting from the regional development consultation meetings and prepares the lists of development projects to be carried out by national ministries and to be included in the national budget for the year as well as the list of projects to be included provincial budgets. This step is carried out in October or November.

The Way Ahead

Currently Indonesia is undergoing a process of reforms that would increase political freedoms at all levels of government and result in a more open, transparent and decentralized form of Government. However, because of several incidences of ethnic violence, the pace of decentralization may be decreased. The country is currently in a flux and the new forms of governance are yet to emerge.

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