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Decentralization in Indonesia since 1999 - An Overview

1. Background

The political transformation of the Indonesian political system since the downfall of former President Soeharto in May 1998 included the radical overhaul of the role of the regions and the re-definition of the relationship between the centre (national government), and the governmental bodies at provincial and local level. While Indonesian political rhetoric had always supported the right of the regions for otonomi daerah (regional autonomy), the passing of Law No. 22/1999 on Regional Governance, and Law No. 25/1999 on Fiscal Balance Between the Centre and the Regions transformed the concept of decentralisation and regional autonomy into reality.

The extra-ordinary session of Indonesia's highest decision-making body, the People's Consultative Assembly (MPR), in October 1998 opened the door for a revision of the antiquated Law No. 5/1974 on the Principles of Regional Government by means of the MPR Decree No. XV/MPR/1998. Based on the MPR decision, the Ministry of Home Affairs put together a team of senior civil servants, academics and advisors to formulate the draft for what would later become Law No. 22/1999. At the same time, a team in the Ministry of Finance started working on a reform of the system of intergovernmental finance and formulated the draft for Law No. 25/1999. Without much public debate, both laws were approved in May 1999. Both laws stipulated that the new decentralisation framework would come into effect in May 2001 (giving a two-year time frame to allow for the necessary preparations), however, this date was later advanced to 1 January 2001 by the MPR Decree No. IV/MPR/2000 so that the beginning of decentralisation would coincide with the new fiscal year.

2. Building blocks of the Decentralization Framework

The key features of Law 22/1999 are the devolution of a wide range of public service delivery functions to the regions, and the strengthening of the elected regional councils (Dewan Perwakilan Rakyat Daerah - DPRD) which received wide-ranging powers to supervise and control the regional administration:

  • The law places regional autonomy on five fundamental principles: democracy, people's participation and empowerment, equity and justice, recognition of the potential and diversity of regions, and the need to strengthen the regional legislatures. Though broadly worded, these principles provide guidance for the interpretation of the law's stipulations and for the formulation of implementing regulations needed to operationalise the law.

  • The law determines the local level (kabupaten/kota) as the level of government which is to have broad and wide-ranging autonomy ("otonomi yang luas"). Para 7.1 stipulates that the local level has responsibility for all governmental matters (kewenangan dalam seluruh bidang pemerintahan) except in the five areas of foreign affairs, defence and security, justice, monetary and fiscal affairs, religion and other matters. These "other matters" are listed in Para 7.2 as "macro-level planning, fiscal equalisation, public administration, economic institutions, human resource development, natural resource utilisation, strategic technologies, conservation, and national standardisation". Para 11 again provides a positive list of local responsibilities which local governments have to fulfil (bidang pemerintahan yang wajib dilaksanakan oleh Daerah Kabupaten/Kota), these include public works, health, education and culture, agriculture, transport, industry and trade, investment, environment, land matters, co-operatives and manpower.

  • Responsibility for such matters includes planning, financing, implementation, monitoring and evaluation, and maintenance (see Elucidation to Para 8).

  • Regions can re-transfer their functions to the provinces if they are not capable of handling them (Para 9.2).

  • Regions can be given additional tasks as "tugas pembantuan" (co-administration), such transfer has to be accompanied by the provision of means to carry out the tasks (like funds, infrastructure, staff) (Para 13.1).

  • Regions are to be given control over their finances, their civil services and their organisational set-up.

  • While regional autonomy on the local level is defined as "wide" (luas), regional autonomy on the provincial level is defined as "limited" (terbatas). The Governor continues to have a double function as head of an autonomous region (kepala daerah otonom) and as representative of the central government in the region under the command of the President (via the Ministry of Home Affairs). Para 9 defines as the main functions of the provinces cross-regional functions (kewenangan pemerintahan yang bersifat lintas kabupaten dan kota), and functions in regional macro-planning, human resource development and research, the management of regional ports, environmental protection, trade and tourism promotion, pest control/quarantine and spatial planning.

  • The kabupaten/kota level is removed from the line of command that under the Orde Baru government ran from the President down to the village level. The election of Bupati and Walikota no longer requires the clearance from higher levels of government. They are accountable only to their respective local councils (DPRD).

  • While Law No. 5 (1974) included both the legislative and the executive branch in the term "local government", Law No. 22 (1999) draws a clearer distinction between the DPRD as local legislative body, and the administration as the executive branch.

  • The deconcentrated offices (instansi vertikal) of central government agencies at regional level were merged with the respective agencies of the regional governments. Staff and assets were transferred to the regions. Exceptions are in those areas where the central government retains responsibility (like religion). Deconcentrated functions, i.e. central government functions to be discharged by the provinces, will be handled by the provincial agencies. Deconcentrated functions must be accompanied by appropriate funding from the central government (Para 8.2), an important stipulation to ensure that the central government does not transfer so-called "unfunded mandates" to the local level.

  • The kecamatan (sub-districts) become deconcentrated units of the local government. At the village level, the communities elect a village council and a village head; such local institutions can be fashioned in accordance with local traditions (adat) and needs.

  • All revenues and expenditures of the local government must be reflected in the local budget (APBD). Local governments can borrow from capital markets, however, foreign borrowing requires previous approval by the central government.

  • For delivering services and for other purposes, regional governments can establish interregional cooperation (Para 87).

  • Supervision and development (pengawasan, pembinaan) by central government agencies are defined as "facilitating" the activities and the capacities of regional governments (Para 112).

  • Para 114 codifies the mechanism for nullifying regional decisions (like regional regulations) by the central government, and the appeal mechanism for regional governments against such decisions.

Law No. 25 (1999) on Fiscal Balance between the Centre and the Regions aims at empowering and raising regional economic capabilities, generating a financing system for the regions which is "just, proportional, rational, transparent, participatory, accountable and provides certainty", and at realising a funding system that reflects the division of functions (between levels of government) and which reduces regional funding gaps. Key stipulations of the law are as follows:

  • Own revenue of regional governments (Pendapatan Asli Daerah - PAD) are local taxes, local charges and fees, revenue from local enterprises. Other sources of local revenue are equalisation funds (dana perimbangan), borrowing and others.

  • Regional finances are to reflect resource revenue generation and needs.

  • Equalisation funds consists of the regional share of the property tax (PBB) and property transfer tax (BPHTB), of the regional share of natural resources revenue (bagi hasil), of a general grant (DAU - Dana Alokasi Umum) and of specific grants (DAK - Dana Alokasi Khusus). The law furthermore specifies the sharing formula for such taxes and natural resources revenue .

  • From central government funds (APBN), a floor of 25 percent of domestic revenues is earmarked for the equalisation fund. 22.5 percent will be transferred to the local level, and 2.5 percent to the provincial level. An allocation formula for the DAU transfer was developed in 2000, however it is regarded as not sufficiently ensuring the equalisation of funds between resource-rich and resource poor regions. A revised formula was formulated in 2001, however was not put into full effect.

  • Under the Regional Autonomy Advisory Council (Dewan Pertimbangan Otonomi Daerah - DPOD), of which the Minister of Finance is the vice-chairman, a grants administration (Sekretariat Bidang Perimbangan Keuangan Pusat dan Daerah) will be established to advise the DPOD on grants formula and fiscal equalisation issues.

It is expected that after full implementation of both laws, the regional share of general government spending will more than double to over 40 percent, and that some 60 percent of the development budget will be managed at sub-national levels.

The design of a grants system with a general allocation supplemented by special grants was a positive change to the previous system of fiscal transfers. However, a number of shortcomings of the Law No. 25 (1999) and its implementing regulations have been identified as follows:

  • There are no significant own-source revenues of the regions since all major taxes are still kept by the central government. The tax which in most countries is the main tax revenue for local governments, viz. the tax on property, is stipulated as a shared tax, weakening the link between local government revenue and local government performance.

  • The property taxes are defined as shared taxes with an in-built equalisation mechanisms, which according to the World Bank is redundant because of the existence of the much larger general allocation transfer which also contains equalisation elements.

  • Natural resources revenue form a substantial part of regional government revenue in the resource-rich regions. According to Ahmad/Hofman (2000:6), this will "actually widen regional disparities, prove difficult to administer…as volatile prices lead to a divergence between budgets and realised revenues, ... may provide more revenues to non-producing districts in a province than producing districts, and complicate the functioning of a grants system."

  • Apart from the issue of increased regional imbalance, there is also serious concern that making natural resources one of the main sources of revenue for local governments will lead to over-exploitation with negative impacts on the preservation and protection of natural resources.

Both laws need a multitude of implementing regulations in order to become fully operational. Key regulations which have been passed since May 1999 include the following (for a complete list see Laws and Regulations Related to Decentralisation):

In addition, there are numerous presidential decrees, ministerial decrees, circular letters (Surat Edaran) and other guidelines related to Law No. 22/1999 and Law No. 25/1999. While these two laws form the general regulatory framework for regional autonomy in Indonesia, since 1999 some special laws have been added: Law No. 34/1999 deals with the status of the capital Jakarta (as city and as a province), Law 18/2001 stipulates the special autonomy (otonomi khusus) for Aceh, and Law No. 21/2001 regulates special autonomy for Papua. Both laws deviate substantially from the general regional autonomy framework, among others by giving the provincial level a much more powerful position. Law 34/2000 on Regional Taxes and Levies regulates the discretion of regions to establish own taxes and retributions.

3. Implementation of regional autonomy until now (August 2003)

Both laws originally envisaged a two-year transition phase (May 1999 - May 2001) in order to finalise the regulatory framework for decentralisation and to prepare the regions for their new functions. At central government level, an interdepartmental team was established to coordinate this process between the central government agencies involved (see: KEPPRES 52/2000 and KEPPRES 157/2000). However, institutional changes at central level reduced the effectiveness of these teams.

Another body, the Advisory Council on Regional Autonomy (Dewan Pertimbangan Otonomi Daerah - DPOD) was established to provide a forum of dialogue and consultation between central government and the regions. It brings together central government officials, representatives of the regional associations and representatives of selected regions (see: KEPPRES 49/2000 and KEPPRES 151/2000), and plays an important role in the intergovernmental fiscal system. The DPOD has also to approve the establishment of new regions.

Nearly three years after decentralisation came into effect, there are numerous issues that have been mentioned as problematic:

  • the unclear distribution of functions between the levels of government
  • the ineffective system of supervision of regional governments by the central government
  • the lack of clear responsibilities of the provinces
  • the failure of the current intergovernmental fiscal system to ensure an equalization between resource-rich and resource-poor regions, and a mismatch between the assignment of expenditures and the assignment of revenues
  • the lack of policy coordination with sectoral laws and regulations, leading to contradictory regulations for instance in the forestry and in the mining sector
  • the strong role of "money politics" in the election of Head of Regions (Kepala Daerah) by the regional councils (DPRD)
  • the unsatisfactory accountability mechanism which focuses on the annual report of the Head of Region to the council
  • lack of capacity at the regional level to fully implement the new decentralisation framework, and lack of programmes of the central government to support capacity building in the regions.

A first effort to revise Law No. 22/1999 was started by the Government in 2001, only a few months after the two decentralisation laws came into effect. However, the revision process was discontinued because of strong political resistance from the regions and their associations, and because of lack of political support from the DPR. In 2003, the Government has again commenced an effort to revise the law, not least because of the need to introduce the direct election of Heads of Regions in line with the direct election of the President and Vice-President, which will be conducted for the first time in 2004. The current revision process will focus on the clarification of regional functions (kewenangan), the introduction of direct elections of the Head of Regions and the subsequent changes in the accountability mechanisms. Other issues that were repeatedly mentioned include personnel management issues, and the organisational structure of regional governments. According to statements from the Ministry of Home Affairs, the draft revision is expected to be submitted to the Parliament in late 2003 with the approval expected for early 2004.

The "Library" contains a multitude of studies and reports dealing with the decentralisation framework and its implementation so far. As a selection, the following documents are recommended for further reading:
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