Regional autonomy, political will and the economy

Down to Earth No. 46, August 2000

In a recent article outlining the history of decentralisation in Indonesia, Trevor Buising states that the changes to be introduced by Law 22 "are not as great as imagined". He points out that the purpose of the new law, as put forward by the Habibie government, "to enhance democracy, community participation, equitable distribution and justice as well as to take into account the regions' potential and diversity" could just as well have been implemented under the 1974 Law. What was missing, he says, was the supplementary legislation required to put the law into action*

This time around, the process has gone further. The main implementing regulation has been passed and others are in the pipeline. The question now is whether President Wahid has the necessary political will to implement the measures. He faces pressure from the military, big business and ministers in his own cabinet to retain power at the centre. These people stand to lose financially as a result of regional autonomy as they may no longer be able to take cuts from local public projects or private enterprises.

Wahid also faces enormous economic constraints. Indonesia's creditors want their loans repaid and are pushing the government to sell off state assets, bring in foreign investment and increase resource exploitation to generate the revenues needed. Jakarta is under pressure to retain enough control over income-generating resources - at the expense of the economies in resource-rich areas - to service its massive debt.

At the same time, regional autonomy offers Gus Dur's government a way to reduce the huge expenditure on local administration. Most of these costs will be borne by local government and be paid from local revenues.


Dividing the spoils

Law No. 25/1999 sets out in detail how much of the revenues from natural resources should go to the central government and how much is to be kept by the areas where the natural resources are located. This division - which was decided without consultation - is clearly designed to bring in adequate funds to the central government, but also to offer a big enough share to satisfy the demands of resource-rich areas. The divisions are inconsistent and differ greatly - between oil and gas and mining revenues for example (see table) - and have given rise to complaints that they are unjust.


Table 1: Division of revenues in natural resources

Sector Central govt Autonomous Area      
    Total Province Producer district Other districts in province
Forestry 20% 80% 16% 64%  
Mining I 20% 80% 16% 64%  
Mining II 20% 80% 16% 32% 32%
Fisheries 20% 80% - - 80%*
Oil 85% 15% 3% 6% 6%
Gas 70% 30% 6% 12% 12%


Mining I = Land rent
Mining II = royalties from exploration and exploitation
Fisheries: permits and catch fees
*to be divided among all districts/municipalities in Indonesia

Under the Law, state income from some natural resources (forestry, fisheries, mining) will be split 20% central, 80% local.

For forestry, the 80% local portion of Forestry Concession levies (IHPH) and Forest Produce fees (PSDH) will be split 16% to provinces and 64% to the districts. The Reforestation Fund (subject to much corrupt misuse in the past) will be split 60% to Central Government and 40% to producer area as part of the 'Special Allocation Funding' (see below).

For mining, the 80% local portion will be split 16% to the province; 32% to the district where the mine is located and 32% to other districts in the province.

For fisheries, 80% of the Fisheries Permits and Catch Fees will be divided equally between all districts in Indonesia.

State income from oil will be split 85:15 central: local. The local government portion will be further split 3% province; 6% district where the oil is produced; 6% to other districts in the province.

Gas revenues will be split 70% central and 30% local. The local government portion will be split 6% province, 12% gas-producing district, 12% other districts in the province.

State income from Land and Property Taxes will be split 10% to central government and 90% to Autonomous Areas; planning permission fees will be split 20% central and 80% local.

Autonomous Areas receive funds from central government called General Allocation Funding (at least 25% of state income, split 10% to provinces and 90% to districts/municipalities).

Regional governments also receive 'Special Allocation Funding' to meet special needs including transmigration, new roads in isolated areas and irrigation/drainage canals.

How far regional governments will accept and adhere to the revenue divisions remains to be seen. There is widespread scepticism that they may be subject to alteration. "On one hand, the resource rich provinces will push for a greater share from oil, gas and forestry exploitation…on the other hand, powerful vested interests at the centre will try to prevent even these provisions from being implemented," according to London-based economics professor Anne Booth. "It is far from clear who will win this tug of war, or indeed which part Gus Dur and his immediate circle favours." #

There have already been complaints about the varying allocations of revenues from different resources. The large amount of income retained by the centre on oil and gas revenues and the government's decision to retain control over these industries, for example, have prompted protests in areas where these resources are abundant.

In the fisheries sector, the 80% of fisheries revenues payable to the regions under Law 25, is to be divided equally between all districts in Indonesia, meaning that areas rich in fisheries will not see any more benefit than areas where there are low or depleted stocks.


What about resource-poor regions?

There has been very little public discussion about the future of resource-poor regions under decentralisation.

Law 25 makes a commitment to "…equality between regions in a proportional, democratic, just and transparent way…"(Clause 1) but it is very short on detail. The General Allocation Fund (or equalisation funding) spelt out in the Law, which is to be made up of at least 25% of state income, appears to be the main means of evening out disparities between the income of different autonomous areas. General Allocation Funding for a province is calculated by a formula which includes the provincial government's "funding needs" determined by "empirical studies" and taking into account the population, area, geographical location and local incomes in each province. This is balanced against the "local economic potential" which includes industry, natural resources, labour and Gross Regional Domestic Product (Clause 7 and notes).

Shortly after Laws 22 and 25 were passed, Ryaas Rasyid, then director-general for regional autonomy under the Home Affairs Ministry, expressed confidence that resource-poor regions would not necessarily be worse off because they were resource-poor. "Money is important," he told the Far Eastern Economic Review, "But it's not as important as the way provinces can use their new authority creatively to encourage investment and trade…Natural resources won't last forever," he said. "Twenty years from now East Nusa Tenggara [one of the poorest regions] could be richer than Aceh…" (13/May/99). (Of course Aceh, now, is only rich in theory - since nearly all of its revenues from natural gas, forestry and other resources have flowed to Jakarta).

There has been almost no public discussion of Ryaas's theory, or indeed any further detail of the arrangements for reducing disparity between richer and poorer regions.

The province - district split

There are indications that the government is rethinking the amount of authority it wants to hand over to the districts and municipalities. Laws 22 and 25 clearly intend the districts and municipalities to be the main recipients of autonomous authority, with provinces serving both as autonomous areas and 'administrative regions' working on behalf of the central government.

Regulation 25/2000 appears to be aimed at clawing back authority from district/municipality level to provincial level. In the section on financial balance, for example, provinces have the authority to regulate the reallocation of area income concentrated in certain districts or municipalities "to balance the implementation of development for the well-being of the people in the province" (Clause 19a). This would appear to take financial control out of the hands of district governments and place it under provincial control.

Another part of the regulation states that a province may also take over the authority of a district or municipality in certain fields as long as this is agreed by both parties and approved by central government. This would seem to pave the way for transfer of most authority to provincial level, as long as district level governments comply.

It is likely that implementing regulations now being drafted will attempt to continue this shift from district to provincial level. The regulation concerning mining, being prepared by a team under the director-general of mines, Surna Djajadiningrat, is one example. According to Surna, the regulation will state who has the power to sign contracts of work, how to resolve disputes and lay down certain criteria for worker safety, environmental protection and other issues. Surna said he expects the right to award future contracts of work (CoWs) and exploration licences will be given to provincial [not district] governments. Even then, the ultimate decision will be retained by Jakarta, as it is now:

"the process will be done at the provincial level, but it has to be approved by central government." [our emphasis].

So much for his attempts to convince the governors and district heads that "we don't want to hold on to the power". (Dow Jones Newswires 25/May/2000)

* Trevor Buising 'A Century of Decentralisation' in Inside Indonesia July-September 2000
# See A. Booth 'The current regional crisis in Indonesia: were economic policies to blame?' School of Oriental and African Studies, University of London, June 2000.


Forestry Minister "rejects" autonomy

There is also a tug of war being played out within the Wahid cabinet. Regional autonomy minister Ryaas Rasyid is known to be in favour of devolution of power, for example, but the Home Affairs Minister, Lt. Gen. (ret.) Surjadi Soedirdja is known to be reluctant to hand over any control. Opposition to economic decentralisation has also come from Nur Mahmudi Ismail, the forestry and plantations minister. His department is responsible for a vast 147 million hectares - or about 78% of Indonesia's total land area. Of this, according to recent official data, 41 million hectares is classified as production forest, currently under 320 concessions. The forestry ministry is proving to be resistant to the idea of giving up control over this vast resource.

A meeting between regional autonomy minister's assistant, Andi Mallarangeng and forestry ministry officials ended in disagreement and harsh words in May. "I'm very disappointed with the forestry ministry's refusal to decentralise its authority in managing forests to local administrations," Mallarangeng told the Jakarta Post (3/May/00). "This means the ministry rejects regional autonomy." He said the ministry was resistant to decentralisation because they felt that local administrations lacked skilled staff to manage forestry affairs, but Mallarangeng rejected this argument: "The key issue is whether the forestry ministry is ready to hand over all the benefits it has enjoyed so far," he said, adding that the forestry sector was in the past a "fertile" sector for corruption. He said the monitoring of forest concessionaires and the management of state-owned forestry firms PT Inhutani and PT Perhutani would be the responsibility of the local administrations.

But the forestry ministry has other ideas. Not only has Nur Mahmudi announced a plan which retains a key role for his Jakarta ministry, but he has also proposed a revenue share-out system that is less favourable to local governments and which appears to go against the ratios set out in law 25/1999. His proposal is to put all forestry concessions in the hands of the state forestry companies. Private companies wishing to extract timber would work under contract with PT Inhutani, instead of holding the concessions themselves. The regional government would take decisions on awarding these contracts.

The proposed division of revenues under this system is 30% for the centre and 70% for the regions, with this being divided 30% to provinces, 30% to districts and 10% for "community development."(See Republika Online 23/May/00)

This is different to the division set out in law 25/1999 which says 20% should go to the centre, 80% to the regions, of which 64% is to go to the kabupatens and only 16% to the provinces (see table).