Working Paper in Economics and Development Studies Department of Economics Padjadjaran University
No. 201108 Allocation Mechanism Of Equalization Fund In Indonesia: Current Condition And Alternative Proposals Of Specific Grant In Sub National Level
Kodrat Wibowo, Bagdja Muljarijadi, and Rullan Rinaldi
Center for Economics and Development Studies (CEDS) Padjadjaran University
September, 2011
Center for Economics and Development Studies, Department of Economics, Padjadjaran University Jalan Cimandiri no. 6, Bandung, Indonesia. Phone/Fax: +62-22-4204510 http://www.ceds.fe.unpad.ac.id For more titles on this series, visit: http://econpapers.repec.org/paper/unpwpaper/
ALLOCATION MECHANISM OF EQUALIZATION FUND IN INDONESIA: CURRENT CONDITION AND ALTERNATIVE PROPOSALS OF SPECIFIC GRANT IN SUB NATIONAL LEVEL1
Kodrat Wibowo, Bagdja Muljarijadi, and Rullan Rinaldi Padjadjaran University ABSTRACT As one of central government’s tools to equalize fiscal disparities between regions in Indonesia, current allocation mechanism of intergovernmental grant has been a major issue in regional public finance. Specifically, specific grant (DAK) was proven not much more specific than general block grant (DAU). Furthermore, the effectiveness of the specific grant allocation mechanism on poverty alleviation, economic growth, unemployment, and several others specific indicator has not met the desirable condition of the program’s outcome. This paper tries to propose alternatives on the allocation mechanism of specific grant that could effectively fulfill the objectives of affecting the local policy of poverty alleviation, economic growth, and unemployment. Employing sub national data at city and district level, we perform a simulation utilizing panel data regression of 458 cities/districts during period of 2001-2007. The result shows that existing DAK allocation on public investment program has not been able to meet development objectives in the long term economic development. Specifically, specific grant (DAK) was proven not much more specific than general block grant (DAU). This study also provides an efficiently simple, matching grant allocation mechanism which is conditional open-ended matching grants, along with intensive ongoing evaluation and monitoring to align the allocation of funds to regions with regional macroeconomic targets and promoting the level of community welfare; and at a certain level, using a bottom-up approach where the allocation of the fund should was based on local government interests and initiatives. The study consider that DAU per capita is a better main criteria for determining which areas are considered eligible as a recipient of DAK is districts that have a low fiscal capacity (general criteria). The simulation provides better estimation result than one from existing mechanism; the expected sign of DAK toward economic growth, poverty rate, and unemployment are in accordance with the theory and common knowledge. This brings consequences that DAK should be give to less region with higher amounts. Keyword: Allocation Mechanism, Transfer, Sub National, Public Finance 1
This paper is a part of research study conducted by Directorate of Local Economy, Bappenas regarding the efforts to improve the quality of policy and planning of DAK (Dana Alokasi Khusus – Specific Grants) in Medium Term National Development Plan (Rencana Pembangunan Jangka Menengah – RPJMN) 2010-2014.
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1. Introduction In the current era of decentralization, proper local financial management is one important prerequisite in realizing the effectiveness and efficiency in governance and development at the local level. In the context of central and local fiscal relationship, central government has allocated a transfer, namely the Equalization Fund to finance local needs in order to support the implementation of decentralized governance and development and as actualization of the political will of governments to implement reforms and democratization. Equalization Funds are divided into three groups, namely the Dana Alokasi Umum (DAU) as block grant, Dana Alokasi Khusus (DAK) as specific grant, and Dana Bagi Hasil (DBH) as revenue sharing fund of local natural resources extracted by central government. Specific Allocation Fund (literal translation from Dana Alokasi Khusus or DAK) is a form of specific grant that is defined by Government Act No.33/2005 as funds sourced from the revenue budget allocated to certain areas in order to enhance specific activities which are the domain of local government affair in accordance with national priority (Act No. 33/2004 and Government Regulation No.55/2005). The Law No. 33 of 2004 on Fiscal Balance between Central Government and Local government, article 39 states that the specific allocation fund (DAK) is allocated to a particular local government to fund some specific activities in sub national level by the local government. The illustration of performance indicators on the implementation of autonomous region (local government) according to Law No. 32/2004 can be seen in Figure 1. Meanwhile, article 51 of Government Regulation (PP) No. 55 Year 2005 regarding Revenue Sharing, states that DAK is allocated to a particular regions to fund specific activities that are part of the program that became a national priority and local government. Given the strategic role of DAK, its management should be carried out effectively, efficiently and reflects a spirit of good governance (good governance), ranging from the aspects of policy, planning, allocation, implementation, monitoring and evaluation. Theoretically, DAK is categorized as Intergovernmental Transfers from Central Government to the Sub National districts/municipalities level, as a specific grant that is also a form of matching grant. Matching Grant is a form of central transfers which require the recipient of the transfer (in this case local government) to provide a certain percentage of funds from grants that will be given. Rosen (2005) defines the matching grants, "For Every dollar given by donors to support the particular activity, a certain sum must be expended by the recipient." Since it was introduced in 2003, the implementation of DAK still continue to expand, both in terms of scale and scope of the allocation. DAK allocation has been increasing 12 times; approximately, from USD 2269.0 billion in 2003 to Rp 24819.6 billion in 2009, field targeted of DAK-funded also has grown from 5 sectors in 2003 to 13 sectors in 2009.
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Table 1. Intergovernmental Transfer in Indonesia 2001-2008
280,0 21,2 17,1
240,0
Trilion Rp
11,6
200,0 164,8
4,0
160,0
176,6
145,7
4,0 2,7
120,0
0,6
88,8
0,7
80,0
69,2
77,0
82,1
60,3
40,0 20,0
24,9
31,4
50,4
36,7
64,9
62,8
64,5
0,0 2001
2002 2003 2004 2005 2006 CENTRAL BUDGET REALIZATION
2007 2008 APBN-P RAPBN
Notes : APBN-P is Central Government Budget with Revision
Revenue Sharing Funds
RAPBN is Draft of Central Government Budget
Block Grants Specific Grants
Based on a review, assessment, and facilitation in areas that have been made regarding the management of DAK conducted by Bappenas for the last 4 years, there are several problems related to financial aspects, technical, institutional, and good governance. In the financial aspect, the main problem existed that is the unoptimum performance of DAK received by local governments due to mismatch between the allocation and local need. In technical aspect, there are still problems related to ineffective technical policy of DAK. In the institutional aspects, there are problems associated with lack of comprehensive coordination between central and local institutions. In the aspect of good governance, there are problems associated with the low performance on the actualization of principles of transparency, accountability and participation in the management of DAK. On the other hand, the Government Regulation No. 55/2005 Article 64 mandates the Ministry of National Development Planning jointly with Technical Ministries to be responsible for monitoring and evaluation utilization and technical implementation of activities funded by the DAK.
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Figure 1. Performance Indicators on the Implementation of Autonomous Region (Local Government) According to Law No. 32/2004
Source: Handbook 2006, Operation of Government and Regional Development, Bappenas, 2006
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2. Literature Review 2.1
Classification of Int ergover nmental Grants
There are some views from the literatures, such as Joseph Stiglitz, Anwar Shah, Oates and others regarding intergovernmental grants. According to (Stiglitz, 1988) the transfer of funds from central government to local governments are divided into two major groups, namely 1.
General Revenue Sharing: Block Grants, the kind transfer programs from the proceeds of such central government taxes on local governments. These funds can be used according to the will of the Local Government's local community, represented by the local parliament and local government (as the executives).
2.
Incentives: Categorical Grants and Matching Grants. Transfer of this fund is used as a way of influencing local government programs, eliminating the need for the control system, but with the incentive system, which consists of a) Categorical Grants, which the Central Government will provide funding for certain activities in accordance with the criteria of the central government. In the United States (U.S.), this is exemplified in the field of education and urban programs. b) Matching Grants, which the Central Government will fund programs up to a certain percentage of local governments, which must also comply with the criteria of the Central Government.
Another view came from (Shah, 2006), he divided the intergovernmental transfer divided in not so much different from Stiglitz, namely: the General Purpose Transfer (GPT) and Specific Purpose Transfers (SPT) Analogue with Stiglitz, Shah also stated that the use of GPT left entirely to subnational governments, while SPT must follow the provisions of national or central government. Somewhat different from Stiglitz, Shah divides GPT as block groups and block grants. In normative way, some of the reasons why the central government transfers funds to the local governments i.e.: a)
To overcome the problem of vertical fiscal imbalance
b) To address horizontal fiscal imbalances c)
There is an obligation to maintain minimum service standards of achievement in each area
d) To overcome the problem of inter-regional externalities (interjurisdictional spillover effects) e)
To achieve stabilization of the central government
Summing them up, in general, there are two major types of central transfers to the regions: non-matching and the matching Transfers Transfers. Transfers of non-matching is given to local government without any matching funds from the region, and matching Transfers done if the region is able to provide
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matching funds. Generally, any type of matching Transfers Transfers included in the specific, due to the transfer is only to fund services and certain public services. Matching Transfers can also be specified again in the open-ended matching Transfers (if the funds provided there is no limit) and close-ended matching Transfers (if the funds provided are limited to a certain extent). Each type of transfer has a different impact in the provision of services and public services, and further social welfare. According to Stephen J. Bailley (1999) general transfers from the center to the local government can classified
into
two
groups:
Specific
Grants
(conditional/earmarked)
and
Block
Grants
(Unconditional/Block). Each group has a Lump Sum of categorization (non-matching) and Matching, in which each can be associated with related effort and non-effort related. The classification can be represented by Figure 2. Figure 2. Type of Grants (Intergovernmental Transfer)
Source : (Bailey, 1999) Theoretically, according to Shah (1994), if the society's basic public services is a national priority and not region priority, the special allocation fund transfer mechanism without matching funds (conditional nonmatching grant) is the best mechanism. However, because the general allocation fund specifically aimed as stimulus, it is normally required matching funds, although in small amount.
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According to Shah (1994), the specific allocation fund with matching funds and an unlimited number of (open-ended matching grant) allegedly suitable for correcting inefficiencies in the financing of public facilities increased from the existence of externalities (spillovers) to communities outside the regional allocation. Various types of matching grant (open-ended (unlimited amounts) and closed-ended (limited number)), in fact, is not intended to address the imbalance or inadequate fiscal capacities across regions. Table 2. Taxonomy of Intergovernmental Grants Price Income Effect
Rank by objective function Total Effect
(Substitution)
Type of Grant
Effect
∂A/∂G a1
A
U
Increases
Accounta-
In Expen-
bility for
diture
results
Welfare
a1
A
U
a1
A
U
↑
↑
↑
↑
↑
↓
↑↑
↑↑
↑↓
>1
1
3 (none)
3
Binding Constraint
↑
↑
↑
↑
↑
↓
↑↑
↑↑
↑↓
≥1
2 or 3
3 (none)
4
Non-Binding
↑
↑
↑
n.a.
n.a.
n.a.
↑
↑
↑
≤1
3
3 (none)
2
↑
↑
↑
n.a.
n.a.
n.a.
↑
↑
↑
≤1
3
3 (none)
2
↑
↑
↑
n.a.
n.a.
n.a.
↑
↑
↑
≤1
3
1 (high)
1
n.a.
↑
↑
n.a.
n.a.
n.a.
n.a.
↑
↑
