Australia Indonesia Partnership for Decentralisation (aipd) Delivery Strategy 2010 2015 Contents


A2 – Working paper on decentralisation and PFM

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A2 – Working paper on decentralisation and PFM


Working Paper on Governance and Public Financial Management

in the Context of Decentralisation

I. Introduction

For decentralisation to help reduce poverty, two sets of accountabilities need to work well. The first comprises downward accountability to local residents. As the 2004 World Development Report on improving service provision to the poor put it32:

“Where decentralisation is driven by a desire to move service administratively close to the people…the assumption is that it works by enhancing citizens voice in a way that leads to improved services…..Voters make more use of information about local public goods in their voting decisions because such information is easier to come by and outcomes are more directly affected by LG actions. And political agents have greater credibility because of proximity to the community and reputations developed through social interaction over an extended period. But on both theoretical and empirical grounds this could go either way.

The crucial question is whether decentralisation increases accountability relative to its alternatives. If LGs are not more vulnerable to capture than the center is, decentralisation is likely to improve both efficiency and equity.” 33

Another set of accountabilities comprises arrangements that link central and LGs. These include assignments of responsibilities for public service provision (clarifying which services are assigned to local authorities, which are assigned to national authorities and which involve complimentary responsibilities for both local and central authorities), the allocation of fiscal resources and regulatory, fiduciary and other forms of central oversight of local activity. Clarifying these responsibilities in ways that gives each tier of government an incentive to perform its role effectively is a deeply political and complex task. A comparative study,34 including Indonesia concluded that:

“The result has been a kind of institutional limbo… whether by design or as a result of slippages in the implementation process, intergovernmental structures have substantial internal inconsistency. The functions of different levels of government overlap. Bottom-up accountability of locally elected bodies is dampened by top-down methods for appointing key officials. And the discretion given to local authorities in spending unconditional fiscal transfers is effectively curtailed by central government control over human resources.”

As the 2004 World Development Report already concluded:

“… Sub-national authorities can be efficient providers and regulators of local services under the right institutional incentives and with clarity about who does what-and with what.”

Has Indonesia achieved this to date?


  1. Situation Analysis

a. GOI Decentralisation Legislation and Policy

Indonesia started the implementation of its decentralisation process in 2001 and devolved most of the authorities of public service provision to local governments (LGs.)35 Over two million civil servants were transferred to sub-national governments, substantial parts of the national budget were allocated to provincial and LGs, and the power of local parliaments (DPRD) was enhanced, including impeachment power. Meanwhile, provincial governments lost their power of being the superior of LGs. However, authority to collect most revenue is still held by the central government. The two original decentralisation laws36 were revised in 2004 and became laws 32/2004 on regional autonomy and law 33/2004 on fiscal balance. The major changes to the previous legislation include the increasing role of the provincial government to supervise and build the capacity of LGs and to review important local regulations issued by the LGs, i.e., on annual budgets and those imposing local taxes and user fees.

The decentralisation process has been accompanied with a major democratisation process. Freedom of the press, freedom to establish organisations and parties are in place, in addition to free and fair elections starting in 1999. This was further enhanced by direct elections of the governor, head of district (bupati) and mayor (walikota) since 2005. The central government issued Law No. 15/2008 on Access to Information in 2008 that guarantees people’s right to access public documents and information.

Papua was granted a Special Autonomy Status in 2001. Law No. 21/2001 grants Special Autonomy for Papua Province, in contrast to Law No. 22/1999 that focused on the district/municipal level. Grants provide high levels of authority in financial, political and social matters to the Provincial Government. The law secures the provision of a Special Autonomy (Otsus) Fund in the amount of 2% of the total national allocation for the General Allocation Fund (DAU), with special focus on education, health and infrastructure development. However, the implementation of the Law has been slow and incomplete. Presidential Instruction No. 5/2007 on the Development Acceleration of Papua and Papua Barat Provinces was then issued, requiring the Governors of Papua and West Paua province to develop and implement action plans for accelerating the development together with various national-level ministries.

The expectations on Government Regulation 38/2007 to further clarify provincial and LG responsibilities as a decentralisation implementation guideline have not been fully met. One of the most important implementing regulation of the current decentralisation laws, Government Regulation (GR) 38/2007 on the Division of Authorities among different levels of governments was only issued in 2007, three years after the new decentralisation laws. Recently, Law No. 25/2009 on Public Service was passed by the national parliament. The new law requires, among others, the establishment and transparency of public service standards, complaint handling mechanisms and implementation of customer satisfaction surveys.

Legislation on Planning and Public Financial Management

Planning and budgeting processes are regulated by various laws and regulations. Law No. 25/2004 on National Development Planning Systems governs the mid-term and annual planning process of various levels of governments. There are several regulations/circular letter based on this and other laws, such as the Joint Circular Letter of Bappenas and MoHA on Technical Guidelines of Implementing Planning Discussion (Musrenbang) in 2007, and respective legislation on regional financial management (see below). These regulations are not necessarily coherent and create complicated, inefficient processes of provincial and district level planning and budgeting. 37

The legislation on financial management systems is stipulating a large reform agenda, both for national as well as sub-national level. Major laws include the State Finance Law 17/2003 (subsequent Government Regulation 58/2005 on Regional Financial Management, implementation regulations Ministerial Decree 13/2006 and 59/207 as successor decree for Ministerial Decree 29/2002) and State Treasury Law 1/2004 as well as the State Audit Law 15/2004. Accounting standards were introduced with GR 24/2005 and GR 79/2005 issued guidelines on internal audit. Reform areas include the introduction of performance based budgeting, accrual accounting, single treasury accounts and medium-term expenditure framework (MTEF).

While legislation is largely complete, its implementation, particularly on sub-national level, is still problematic. This is partially due to conflicting regulations from the Central Government (Ministry of Finance being in charge of financial management policies for all levels of government, whereas Ministry of Home Affairs is in charge of drafting implementing regulations for sub-national governments), frequent changes in budget formats (specifically to MOHA Decree No. 29/2002, which was changed through MOHA Regulation No. 13/2006 and further revised through MOHA Regulation No. 59/2007) and a general lack of support from Central Government for implementation.


LG Performance Evaluation

The attempt by Central Government to evaluate LGs comprehensively has not yet materialized. More recently, the Central Government has acknowledged that the lack of systematic up-to date information on the capacity/performance of LGs hinders evidence-based decision making. Thus, Ministry of Home Affairs embarked on an ambitious agenda and passed three major government regulations attempting to evaluate the capacity and performance of LGs (GR 78/2007 on the guideline for formation, eradication, and merging of autonomous regions, GR 6/2008 on evaluation on sub-national government performance, and GR 8/2008 on the guideline for formulation, controlling, and evaluation of the sub-national development plans). GR 6/2008 is of most relevance for AIPD- however, there are more than 100 parameters in this regulation, and it is unclear how this information is collected, evaluated and eventually used. The GR does not regulate the methodologies, focuses, and indicators. A MOHA decree that elaborates on those issues is still to be drafted. Three types of LG evaluations are described:



Table 1: LG Performance Evaluation according to PP 6/2008

Evaluation

Description

Frequency

LG Performance Evaluation (EKPPD)

Systematic data collection and analysis on the performance on an LG through a performance measurement system for each obligatory and optional function

Annually, and a special one at the end of a mayor’s/ regent’s tenure

Evaluation on Capacities for Regional Autonomy (EKPOD)


Systematic data collection and analysis on the capacity for regional autonomy which covers people’s welfare, public service delivery, and LG competitiveness

For LGs with three consecutive bad EKPPD and on special needs

Evaluation on New Autonomous Region (EDOB)

Evaluation on the development of aspects of LG administration of a new autonomous region

On newly created regions, once every six months for 3 years

b. Key Stakeholders

LGs are responsible to provide most of the basic public services. LGs are responsible to provide most of the public services, which cover 26 obligatory functions and 8 “optional functions” which cover various economic sectors (GR 38/2007). The Regional Secretary (Sekretaris Daerah or Sekda) is the highest civil servant position in each LG, assisted by several regional assistants (including one responsible for “governance”) and heads of bureaus. The Regional Development Planning Board (Bappeda) is mainly responsible for LG planning, but often plays an important role of coordinating other LG units. LGs may structure the technical units in various ways, although GR No. 41/2007 limits the numbers of LG units and sets the criteria for different types of the units – kantor, badan, dinas and unit. Although Law No. 17/2003 promotes the integration of all functions of public financial management (PFM) into one badan38, many PGs and LGs (particularly in Papua, NTB and NTT) still have several units performing different PFM functions, separating Finance Bureau under Sekda and Regional Revenue Dinas (Dispenda), while the asset management function is unclear. This leads to an inconsistent implementation of financial management legislation, resulting in inefficient, intransparent and duplicating processes.

Provincial governments (PGs) have dual roles –deconcentrated agents of the central government as well as autonomous bodies. The provincial governments, with a similar structure of LGs, have dual roles. Its heads (governors) and provincial DPRD members are directly elected by the people, but the Governor is also accountable to the President through the Minister of Home Affairs. Based on GR 38/2007, its functions in public service delivery are limited. For example, in the education sector, provinces are responsible only for international schools, while primary and secondary schools are under the authority of LGs and universities are under central government authority. The provincial government is expected, however, to monitor and support the improvement of LG’s performance.

The power of the provincial and local legislative (DPRD) has significantly increased since decentralisation. During new order era, DPRD was a “partner” of the executive, with no clear role in the development process. This was reformed through the decentralisation and democratisation process, granting the DPRD budgeting, regulatory-drafting, budget implementation and public service oversight power, with members directly elected by the people. Nonetheless, limited knowledge of the members about government systems and development issues, together with euphoria of power, makes effective checks and balances far from functioning well.

Recent studies39 confirm the importance on educating non-governmental stakeholders, especially communities on budget issues to establish effective checks and balances. The Ford Foundation study finds that there is real interest in budget work among civil society organisations in Indonesia, and that this work is largely driven by civil society’s own priorities and interests rather than in response to donor pressure. It further argues that to date, much less attention has been devoted to establishing an effective budget oversight system, and to ensure that independent stakeholders have the information and capacity necessary to hold governments to account.

The study of the International budget project summarizing lessons from the field states that….”despite this relative lack of attention, there have been important developments in budget oversight capacity in many developing countries. The most impressive progress has been driven by citizens themselves. In over 60 countries, a wide range of civil society organisations have been working to improve their capacity to understand, analyze and influence the government budget. For some activists and academics, civil society budget work is the key to establishing active citizenship and effective checks and balances over public finances. The argument is that civil society is able to adapt its intellectual and advocacy skills to the budget, and will over time train legislators and journalists to establish complementary policy space and compounding influence.”

Civil society organisations and demand for better public service are still weak in general, especially in Eastern Indonesia. Civil society is still suffering from the results of 32 years “new order” era, when they were either coopted or had a confrontational relationship with the Government. The 1999 reforms (freedom to establish organisations) and economic crisis (a lot of recovery programs delivered through NGOs) resulted in an explosion of established NGOs. However, most of them are financially dependent on government projects or foreign financial support. Similarly, academics from local universities have limited access to research funding, and are mainly doing government-funded projects with low quality results. While under the new freedom of press, a lot of new mass media was established since 1999, in general the capacity of the journalists is still weak. Local private sector and SME associations, professional associations, labour unions, although growing steeply in numbers and are formally existent, are still struggling to maintain their existence and role in advocating policies. The community in general lacks a culture to demand better public service, mainly due to lack of trust that their demands or complaints would result in better services, but also lack of awareness of their rights.


c. Key Government Initiatives/Actions to Date

Central government transfers to the regions have been increased significantly since decentralisation. In general, there are three types of transfers from central to PGs and LGs:



  • First, the revenue sharing fund is a percentage-based allocation of taxes (land and building tax, income tax) and natural resources (forestry, general mining, fisheries, oil and gas).

  • Second, the General Allocation Fund (DAU) aims to equalise and allocates on a “basic allocation” formula (numbers of civil servants) and fiscal gap (based on population, territory size, construction index, GRDP and HDI). The total amount is secured by at least 26% of the Net Domestic Revenue.

  • Third, the Special Purpose Grant (DAK) is a criteria-based allocation which finances infrastructure development in 13 sectors (2009). In the last five years, the allocation for revenue sharing, DAU and DAK were around 25-35%, 62-67% and 3-8%, respectively.

In Aceh and Papua, the Special Autonomy (Otsus) Funds are provided to accelerate development with an allocation of 2% of the total DAU allocation for each province.

As shown in the following graph, the total amount of transfers have continuously increased since decentralisation (2000-2001), with a significant increase in 2006 due to the reduction of the fuel subsidies and high oil prices. These funds are recorded in the regional budgets (APBDs) as revenue and the utilisations of them are discussed through provincial/local-level planning and budgeting mechanisms, where the DPRD is heavily involved. The funds are transferred directly from the central government account to the regional government accounts. DAU is not earmarked whereas DAK funds are earmarked.



Graph 1: National Government (APBN) Spending Trends



Source: Public Expenditure Review (2007), The World Bank

The Ministry of Finance estimated that an overall of 65% of the 2009 national budget (APBN) is channelled to sub-national governments40, most of it through deconcentration and co-management (Tugas Pembantuan, TP) funds. Funds that are accounted for in the budget of PGs and LGs constitute around 30% of the total budget, around 35% of the funds are “channelled” to the regions utilising deconcentration, co-management (TP) or even national budget accounts. All of these funds are not transferred to the PGs and LGs accounts, but are transferred directly from the Regional Cash Office of MoF to contractors/suppliers or to implementing technical unit accounts, and these funds are not accounted for in the provincial/local budgets (APBD) and create problems for LG’s in adequate planning and monitoring.

Nonetheless, several centrally implemented programs or those channelled through TP funds can be effective. Several programs, notably the National Program for Community Empowerment (PNPM-Mandiri) and School Operations Grants (BOS), show their ability to quickly disburse funds to the intended beneficiaries by utilising TP and national budget accounts with little leakage, respectively. The embryos of the two programs were designed prior to decentralisation (during the 1997-1998 economic crisis). Both programs provide grants to finance projects proposed and determined by the community members and school stakeholders, with strict procedures that are heavily monitored by the program management and non-government stakeholders. The involvement of the LGs (involved LG units are accountable to the central government ministries implementing the program rather than to the bupati/walikota), has been limited- only to request the disbursement of funds to the cash office of MoF. The grants are channelled directly to the communities’ accounts.

Decentralisation provided opportunities for PGs and LGs to perform reforms. Some LGs have started utilising their authorities to improve governance and public service delivery. For example, the Provincial Government of NTB has prepared a mid-term plan (RPJMD) that includes annual performance indicators, targets and annual budget estimates. The Provincial Government of Gorontalo systematically built its PFM capacity and practices resulting in Gorontalo being the only province in Indonesia that received “unqualified opinion” from the State Audit Agency (BPK). Kabupaten Jayapura (Papua Province) reforms its PFM to combat corruption (see Box 1). Kabupaten Lebak (Banten Province) was among the first LGs issuing a Local Regulation (prior to the enactment of the national law) on Freedom of Information and established a local-level Transparency Commission. Kabupaten Sumedang (West Java) improved its planning and budgeting processes, allowing for a better integration of plans and budget and a participatory approach outside the planning process only. Almost 140 districts/municipalities in Indonesia streamlined business licensing through the establishment of a “one stop shop”. Kabupaten Jembrana (Bali) was among the first LGs that reformed education and health services making them accessible to all citizens. All these innovations and good practices can be learned from and replicated by other PGs and LGs.

Box 1. Some PFM experience in Jayapura District, Papua Province


A new district head, committed to undertake public management reforms and combat corruption, entered office in 2006. Some issue that he addressed is the delayed disbursement of special autonomy funds from the provincial government to district governments. Now, finance unit of Jayapura district anticipates these delays (sometimes funds are only received in June-July of the budget year starting in January), resulting in “up-front” spending on development projects out of the district budget or own revenue. This way, project planning, procurement and implementation is not jammed towards the end of the financial year and funds are likely to be spent more effectively.

Furthermore, as the district head is also committed to combat corruption, already six staff have been arrested and charged with corruption charges. If spending irregularities occur, the responsible person is given a chance to account for the missing funds, and if the irregularities remain, the external audit agency is called in. Finally, police, prosecutors etc. take over the case.

On the other hand, incentives are provided for well performing officials, mainly in the form of trainings. A considerable number of staff in the finance unit have already attended the regional finance course (duration: 1 month) offered by the provincial university, increasing the understanding and capacity of staff to implement current finance regulations.

d. Key Issues and Constraints

To date, there are no financial incentives for PGs and LGs to perform better. Most of the fiscal transfers are based on the factor endowment (particularly natural resources revenue sharing) and discretion of the national government (especially DAK). The DAU formula, with the main intention to equalise, actually creates disincentive for PGs and LGs to improve their performance. Sub-national governments that reduce civil servants and improve their HDI, for instance, will receive less DAU allocation from the central government. With high dependency of the PGs and LGs to transfers (see Chart 2), other than the possibility of being re-elected and recognised as “reform minded PG and LG”, there is no financial incentive to perform better. In the last few years, MOF has created sanctions for PGs and LGs who do not submit their financial reports on time, by threatening the PGs and LGs to reduce their allocation and delay fiscal transfer disbursements. However, since these threats have not been executed, there has been no impact (see paragraph on budget disbursement below).

Furthermore, the general allocation funds are largely eaten up by personnel costs, leaving very little space for allocation non-earmarked funds at the discretion of LGs.

The creation of new regions is mushrooming under the existing decentralisation framework. The high dependence on central government transfers results in higher revenue received by the regions if provinces/districts/municipalities are split. Of the total of 33 provinces and 491 districts/municipalities, 6 (18%) and 187 (38%) were established in the period of 1999-2008.41 Among the 71 districts/municipalities in the four targeted provinces of AIPD, 42 (59%) were established during this period. Papua Barat itself was separated from Papua in 1999. The numbers of new districts/municipality in Papua and Papua Barat are incredibly high, 76% and 73% of the total number of districts/municipality, respectively.


No.

Provinces

Total No.

Newly Established (post 1999)

District

Municipality

District

Municipality

1

West Nusa Tenggara

8

2

2

2

2

East Nusa Tenggara

20

1

8

0

3

Papua Barat

10

1

7

1

4

Papua

28

1

22

0




Total

66

5

39

3


.

PFM capacity of LGs is still very low – external audits report a significant increase of financial reports with “disclaimer”. According to the Ministry of Finance, LGs do not pay the necessary attention to public financial management. Only 8 districts received an unqualified opinion on their financial reports by the external audit agency BPK in 2008. 120 financial reports got “Disclaimer” in 2007.42 These are worrisome results more than 8 years into decentralisation and it is evident that support in PFM is urgently needed, both for legislative and executive.

However, deconcentrated and TP funds can be effective in reaching the needy communities, but the focus now needs to be on the shift into LG responsibility. Numerous LGs have already enhanced village block grants and made efforts to harmonise own initiatives with PNPM. This is especially important under the aspect that it is envisaged to execute PNPM through LGs by 2015. Non-government stakeholder and DPRD members’ participation in sectoral planning and budgeting processes and thus their awareness is still limited.

The provincial and LGs are highly relying on transfers from the central government through equalising funds,43 particularly in Eastern Indonesia where it reaches 86% of the total budgets. The contributions of equalising funds to the two Nusa Tenggara provinces are around the Eastern Indonesia average. In Papua and Papua Barat, although the equalizing funds are lower than the Eastern Indonesia average, the amount of “Others” category –which is mainly “special autonomy funds” (Otsus)– is fairly high, reaching 27% and 13% respectively, which also shows the high dependency on the national government transfers. The percentage of own revenue generated by the two provinces is the lowest among Indonesian provinces, with 2% and 3% respectively.


Chart 2: Consolidated Provincial and LG Revenues



Source: The World Bank staff analysis, based on SIKD (MOF)

However, more sub-national expenditure per capita not necessarily reduces poverty. Papua and Papua Barat are on the top of Indonesian provinces in both expenditure per capita (almost reaches IDR 6 million/person/year) and poverty rate of almost 40%. Gorontalo, NTT and NTB are in a similar situation – their per capita expenditures are around the national average, but their poverty rates are still over 20% (national average is 16.6%).



Chart 3: Sub-national expenditure per capita

One possible cause is that the share of provincial and local budgets spent on capital expenditure is relatively low. The chart below shows that for the two Nusa Tenggara Provinces, particularly NTB, personnel expenditure is higher than the national average of 40%. The spending mix based on expenditure category in Papua Barat and Papua is relatively better – 26% and 25% for personnel, 20% and 25% for goods and services and 31% and 41% for capital expenditures, respectively. In NTT for example, only 9% of direct expenditure is actually spent on investments. A close look into the goods and service category reveals that more than 85% does not benefit service directly. In the health unit of the provincial government of NTT, 52% and 13% of goods and services are spent on travel and office costs, respectively. Such spending patterns clearly hamper the achievements of the ambitious health targets set by the current government. 44



Chart 4: Expenditures by Category



Source: The World Bank staff analysis, based on SIKD (MOF)

Poor resource allocation is a result of many issues in the planning and budgeting processes. There are several main issues in the planning and budgeting processes: (i) the lack of timely and accurate information/data exchange between local/provincial governments leading to formalistic, uncoordinated, un-prioritized allocation of projects and funds (ii) division of authorities between different levels of governments is not reflected in resource allocation of each level of government –a lot of centrally (national, deconcentrated and TP) and provincially implemented programs are financing activities that fall under LG authorities which overlap and create inefficiency; (iii) most of the governments’ and technical units’ mid-term strategies and plans (Rencana Pembangunan Jangka Menengah Daerah [RPJMD] and Rencana Strategis [Renstra], respectively), often lack priorities, (reasonable) targets and estimated budgets to implement and are disconnected from complicated annual planning and budgeting processes; (iv) in theory, the annual budget is prepared based on the results of annual participatory planning process, RPJMD and Renstra, and DPRD’s community aspiration collection ( “jaring asmara”). In practice, however, the budgets are mainly driven by the executive and DPRD planning process which is neither reflecting the results of the participatory planning process nor the sectoral priorities/plans. All these issues contribute to poor resource allocation resulting in poor public service provision discussed above.

Budget disbursements have been slow, mainly caused by PGs and LGs internal issues. Based on the discussions with provincial and LGs visited during the design mission, this phenomenon is not due to the delays of fiscal transfers from the central government. However, there are several, mostly internal, causes of the delays. First, many of the PGs and LGs do not issue their budgets on time, especially in Eastern Indonesia. For example, only 2 of 9 LGs in NTB submitted their FY 2008 budgets on time to the PG, which decreased to 0 for FY 2009 budgets. Most budgets were approved by the PG in January, with 2-3 districts in February-March. Second, most of the PGs and LGs start the procurement process after the budgets are approved, although procurement procedures allow to be started before budget approval. Third, a lot of LGs save their funds in the bank rather than spending them. The NTT Public Expenditure Analysis (2009) identified that the government’s saving balance increased from around IDR 0.8 trillion in 2003-2005 to IDR 1.56 trillion in 2006 and reached IDR 2.2 trillion in 2008, which are around 22-30% of the nominal total budgets of the PG and LGs. Although some PGs and LGs have significantly increased their expenditure-revenue ratio (for example, NTT increased the ratio from 89% in 2003 to 103% in 200645, LGs in Papua increased the ratio from 76% in 2006 to 103% in 2008), several governments still have a significant balance at the end of the FY (Provincial Government of Papua holds IDR 2.1 trillion or 57% of the budget in 2006 that had been reduced to, but still a large amount of, IDR 0.8 trillion or 85% in 2008).46

With deconcentration and TP funds, the Central Government maintains largely control over development spending in the regions - creating problems in the implementation from a LG perspective. The amount of deconcentrated and TP funds pouring into the regions can be quite significant. For the province of NTB, for instance, the 2009 allocation is IDR 948 billion (not included activities of the central government offices in NTB and PNPM-Mandiri) which equals 74% of the total Provincial APBD. However, these funds are highly problematic from a LG perspective: First, the funds are not recorded in the APBD that makes it less transparent and not accounted for in the LG. Second, although in theory the activities will only finance the proposals of the LGs and PGs, the final decision of the activities are received by the LGs and PGs after the APBDs have been finalised. Hence, this makes it difficult to synchronise with locally funded activities and local development priorities, as it potentially crowds-out local spending. Third, the technical units implementing deconcentration and TP-funded activities are accountable to the national-level ministries, not the LGs/PGs that make it difficult for the LGs/PGs to monitor the implementation (the DPRD does not even have the right to monitor). Fourth, the preparation of the respective national-level budget documents is often delayed (according to the PG and LG officials visited), and disbursement and audits of these funds are beyond the authorities of PGs/LGs, leading to inefficient spending. Finally, the extensive utilisation of these mechanisms for financing LG authorities is against the spirit of decentralisation, but provides a powerful political playing field for central government agencies.

PG has not fulfilled its function satisfactorily to monitor and build the capacity of LGs. Law No. 32/2004 and GR No. 38/2007 mandate PGs to monitor and build the capacity of LGs, but in most cases this function has not been well implemented. The freedom that LGs enjoyed during the initial decentralisation period of 1999-2004 makes it difficult for the PGs to regain their power, which they had during New Order era. In addition, a lack of fiscal power of the province (DAU/DAK and TP are centrally determined), limited capacity to perform monitoring functions and capacity building role increases this failure. Furthermore, the direct election of the Governor and Provincial DPRD creates incentives of implementing populist programs, targeted to communities and/or public service programs under the authorities of the LGs. Different periods of provincial and district/municipal mid-term plans (based on the terms of the heads of the regions on a rolling basis) makes harmonisation and synchronisation of governments plans and development priorities difficult and leaves it to annual planning. However, an increasing amount of governors with strong leadership skills and reform visions have been trying to innovate and build better relationships between PG and LGs.




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