This document summarizes the complex system of fiscal transfers ("Dana Perimbangan") from the central government to regional governments in Indonesia. It finds that the shared revenue component (DBH) is largely irrelevant due to reductions in the general allocation fund (DAU) of equal amounts. The DAU formula provides incentives for regional governments to not economize on personnel or increase own-source revenues. The measure of fiscal need inappropriately provides higher transfers per capita to wealthier and more developed regions. The special allocation fund (DAK) has proliferated into many sectors inconsistently with decentralization objectives.

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

3. Supiori Boven Digoel Bandung

7. Fiscal Equalisation Funds 2001-2009 (Rp trillion)

9. Fiscal Equalisation Funds 2001-2009 (%)

12. 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

13. 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

14. 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

17. 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

22. 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

24. 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

28. 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

37. 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 

39. Dana Perimbangan? The Realities of Centre-Region Fiscal Transfers Fadliya & Ross H. McLeod Indonesia Project Australian National University