Dana perimbangan


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Dana perimbangan

  1. 1. Dana Perimbangan? The Realities of Centre-Region Fiscal Transfers Fadliya & Ross H. McLeod Indonesia Project Australian National University LPEM-FEUI seminar, 3 December 2010
  2. 2. Dana Perimbangan Fiscal transfers from centre to regions Largely determine regional governments’ capacity to serve their citizens What kind of pattern would you expect to see with dana perimbangan (in per capita terms) across districts ( kabupaten ) and municipalities ( kota )? Should we expect to see considerable uniformity, or great variation? Or something in between? If there is lots of variation, what do you think it might be related to? Or do you expect it to be largely arbitrary/ random? Here’s what the pattern looks like:
  3. 3. Supiori Boven Digoel Bandung
  4. 4. Dana Perimbangan Pattern The extent of variation seems extraordinary, especially among districts On the face of it, this does not seem reasonable The motivation for this research is to analyse the design of the fiscal transfer arrangements, with a view to improvement, if this seems necessary The basic problem is that the whole system is extremely complex, and probably few people understand it We begin by comparing the relative importance of the three components: DBH, DAU and DAK
  5. 5. Dana Perimbangan Composition Fiscal equalisation transfers have grown considerably since decentralisation in 2001 By far the largest component is the general funds allocation (DAU) The special funds allocation (DAK) component was almost negligible to begin with, but has expanded considerably since then
  6. 6. Fiscal Equalisation Funds 2001-2009 (Rp trillion)
  7. 7. Dana Perimbangan Composition In terms of proportions, the expansion of DAK has been at the expense of DAU The share of DBH has been roughly constant over the entire period Relative importance is more readily apparent if we look at percentage shares
  8. 8. Fiscal Equalisation Funds 2001-2009 (%)
  9. 9. Dana Perimbangan Composition Let us now look at the details of the major components, DBH and DAU Based on Peraturan Pemerintah Nomor 55 Tahun 2005
  10. 10. Shared revenues ( Dana Bagi Hasil , DBH) There are two main components Certain taxes Natural resource revenues And each of these has further subcomponents… Each item has a different pattern of allocation between The centre The source province The source local government Other local governments in the source province Other local governments in other provinces Basic idea is to return a significant share to the region where the revenue was generated
  11. 11. Allocation of Shared Revenue Funds Sourced From Taxes (%) * A further 9% flows to the Ministry of Finance, and the source province and local government. Centre Source province Source district/ municipality Other districts/ municipalities within source province All other districts and municipalities Territory and Building Tax (PBB) * 3.5 16.2 64.8 0 6.5 Land and Building Title Transfer Fees (BPHTB) 0 16 64 0 20 Personal Income Tax (PPH) 80 8 8.4 3.6 0
  12. 12. Allocation of Shared Revenue Funds From Natural Resources (%) (1) Centre Source province Districts and municipalities Within source province Source Non-source All All Forestry Forestry permit operating levy (IHPH) 20 16 64 Forestry resources commissions (PSDH) 20 16 32 32 Reforestation fund 60 40 General mining Source from district/city   Mining sector land rent 20 16 64 Mining sector royalties 20 16 32 32 Source from province Mining sector land rent 20 80 Mining sector royalties 20 26 54
  13. 13. Allocation of Shared Revenue Funds From Natural Resources(%) (2) Centre Source province Districts and municipalities Within source province Source Non-source All All Oil Source from district/ municipality 84.5 3.1 6.2 6.2 Source from province 84.5 5.17 10.33 Natural gas Source from district/municipality 69.5 6.1 12.2 12.2 Source from province 69.5 10.17 20.33 Geothermal energy Central share deposit 20 16 32 32 Land rent and production 20 16 32 32 Fisheries Fisheries operations 20 80 Fisheries production 20 80
  14. 14. Shared revenues (DBH) Obviously, the system is very complex, and must generate a huge amount of work for bureaucrats at all three levels of government As we shall see, this is almost entirely a waste of time… Before we can understand why this is so, we need first to look at the second component, DAU
  15. 15. General funds allocation ( Dana Alokasi Umum , DAU) Basically a new name for what was previously known as SDO— Subsidi Daerah Otonom —or subsidy to autonomous regions, plus INPRES It still covers the bulk of regional government spending DAU amount for any regional government is equal to a basic allocation ( alokasi dasar ), +/- an amount equal to that government’s fiscal gap ( celah fiskal ) This is the gap between its fiscal need ( kebutuhan fiskal ) and its fiscal capacity ( kapasitas fiskal ) We will look at fiscal need later Fiscal capacity is the sum of own source revenue ( pendapatan asli daerah ) plus the DBH entitlement
  16. 16. Components of DAU Formula DAU = BA + FG B ase A llocation (to cover spending on personnel) F iscal G ap F iscal N eeds F iscal C apacity Population Own source revenue Area Shared revenue funds Construction prices Human development GRDP
  17. 17. General funds allocation (DAU) This part of the overall arrangements is quite complicated It will be easier to follow using simple algebra
  18. 18. DAU in Algebra DAU = BA + FG Art. 40 (1) = PS + FG Art. 40 (5) = PS + ( FN – FC ) Art. 45 (1) = PS + FN – ( OSR + DBH ) = PS + FN – OSR – DBH ( subject to DAU ≥ 0) Where BA = basic allocation PS = personnel spending FG = fiscal gap FN = fiscal need FC = fiscal capacity OSR = own source revenue
  19. 19. Implications for Dana Perimbangan We now have an algebraic expression for DAU This allows us to see the very important implication for total fiscal equalisation funds: D ≡ DBH + DAU + DAK So D = DBH + ( PS + FN – OSR – DBH ) + DAK = PS + FN – OSR + DAK NB: The DBH entitlement is totally irrelevant in cases for which DAU ≥ 0.
  20. 20. Implications for Dana Perimbangan The threshold value of DBH at which DAU falls to zero is given by DAU = PS + FN – OSR – DBH * = 0 or DBH * = PS + FN – OSR ( the ‘resource-rich case’) How many such cases are there?
  21. 21. Regional Government Access to Fiscal Balance Transfers, 2008–2009 Region did not receive Type of government DBH DAU DAK 2008 2009 Provinces 33 33 26 29  6 3   (DKI Jakarta)   1 1 Districts 363 386 358 382  5 4   Municipalities 88 91 88 91
  22. 22. Regional Government Access to Fiscal Balance Transfers It turns out that hardly any regional governments have so much DBH that they miss out on DAU In 2009 these were Jakarta special province Four districts Bengkalis, Rokan Hilir, Siak (in Riau province) Kutai Kertanegara (in East Kalimantan province) And no municipalities
  23. 23. Summary of Possible Outcomes for Fiscal Balance Transfers Note : ‘Resource-rich’ is defined by DBH ≥ PS + FN – OSR. In 2009, there was only 1 province and 4 districts in this category. In the general case, all DBH ‘received’ is taken away again because of an equal reduction in the DAU entitlement. DBH is actually irrelevant to all but a tiny handful of regional governments. NB: The total is all that matters, not the individual components. Size of Fiscal Balance Transfer ( D ) General case ‘ Resource-rich’ case PS + FN – OSR + DAK DBH + DAK
  24. 24. Some important incentive effects General case: D = PS + FN – OSR + DAK Regional governments have no incentive to Economise on personnel Collect more revenue Because this results in an equal reduction in DAU
  25. 25. Fiscal need So far we have ignored the details of FN and their impact on total transfers, D Assume DAK = 0 for simplicity, then D = PS – OSR + FN Assume PS and OSR proportional to GRDP PS j = b G j P j OSR j = c G j P j
  26. 26. Fiscal need Fiscal Need defined as average spending multiplied by the weighted average of 5 modifying factors reflecting ‘need’ (Art. 40 (3)) where
  27. 27. Weights of Fiscal Need Components 2005–09 (%) Component 2005 2006–09 Population 40 30 Area 10 15 Construction price index 40 30 Human development index 10 10 GRDP per capita - 15
  28. 28. Fiscal need We can now put all this together for government j : And express it in per capita terms And then take partial derivatives with respect to each ‘modifying factor’ to see how it affects per capita transfers
  29. 29. Fiscal need Impact of population Transfers per capita decrease with increases in population Two regions identical in all respects except population receive different per capita transfers, with the one with greater population receiving less Seems unreasonable And looks unreasonable…
  30. 30. Fiscal need Impact of area Transfers per capita increase at a constant rate with increases in area This tends to compensate regions facing above average infrastructure and transport costs because of their above average physical size Seems reasonable Impact of construction prices Transfers per capita increase at a constant rate with increases in construction prices This tends to compensate regions facing above average construction costs Seems reasonable
  31. 31. Fiscal need Impact of Human Development Index Transfers per capita increase at a constant rate with increases in the HDI This is precisely the reverse of equity-oriented income redistribution through intergovernmental funds transfers (i.e. trying to reduce the variation of average incomes across jurisdictions) That is, better off jurisdictions receive greater, not smaller, per capita transfers from the centre, making them even better off Seems highly undesirable
  32. 32. Fiscal need Impact of Per capita GRDP Transfers per capita increase at a constant rate with increases in per capita GRDP Again, this is precisely the reverse of what is required if intergovernmental funds transfers are intended to reduce the variation of average incomes across regions Better off jurisdictions receive greater, not smaller, per capita transfers from the centre, making them even better off This impact is considerably more severe than is the case with the Human Development Index... ... because GRDP per capita is far more variable than HDI Seems highly undesirable
  33. 33. Some observations on DAK We already noted the increasing amounts in this category There has also been a steady proliferation of sectors attracting DAK transfers from the central government At first, only reforestation funding came in this category Then five core sectors were added in 2003 Additional sectors have been added in almost every year subsequently While reforestation has been reclassified as a DBH item
  34. 34. Proliferation of DAK sectors 2001–09 a Reforestation was re-classified as a (natural resource) revenue sharing (DBH) item from 2006. Sector 2001 2002 2003 2004 2005 2006 2007 2008 2009 Reforestation a      Early core DAK activities Education        Health        Roads        Irrigation        Governance infrastructure        Creeping proliferation of DAK activities Marine & fisheries       Water & sanitation      Agriculture      Environment     Family planning   Forestry   Rural infrastructure  Trade 
  35. 35. Some observations on DAK Seems inconsistent with objective of decentralisation Reduce control by the centre/bring government closer to voters
  36. 36. Dana Perimbangan? The Realities of Centre-Region Fiscal Transfers Fadliya & Ross H. McLeod Indonesia Project Australian National University