Bert Hofman and Kai Kaiser World Bank1
Paper
Presented at the Conference:
A
Conference Sponsored by the International Studies Program,
Andrew Young School of Policy Studies,
May 1-3 2002
Atlanta,
Georgia
2. Issues in Administrative Decentralization
Law 22 of 1999 devolves most functions of government to Indonesia’s regions—currently 30 provinces and over 348 districts and cities. The key exceptions (Art. 7) are national defense, international relations, justice, police, monetary, development planning, religion, and finance. The districts must perform important functions (Art.11), including health, education, environmental and infrastructure services. The province as anautonomous region has only a minor role, mainly in coordination, and backstopping districts and cities that cannot yet perform their functions—which may be an opening for an expanded provincial role. Law 22 explicitly states that there is no hierarchical relationship between the province as an autonomous region and the district. The province will also continue to perform deconcentrated central tasks, and is the central government representative in the regions. Implementing regulations (PP25/2000) further specify the remaining roles of the central and provincial governments, including setting standards for service delivery.
The regional councils directly elect the head of region, although this election needs confirmation by the President (Art. 40). The DPRD can dismiss a head of region as well, but unlike the situation at the national level, DPRD and head of regions are supposed to be partners of the regional government (Art.16) after the collegial model as it exists for instance in the Netherlands. The central government can annul regional bylaws and regulations that conflict with national laws and regulations (Art. 114), but the regions can appeal to the Supreme Court against the center’s decision—at least according to the law. Urban areas (Art. 92) are obliged to include community and private parties into development planning. No such obligation exists for rural areas. The intergovernmental regional autonomy advisory board with representatives from the center and the regions is to advise the President on issues concerning decentralization, and approves requests for new regions that can be originated from the government of existing regions.
Whose function is it anyway?
More than one year into decentralization, much unclarity remains on what exactly has been decentralized. Law 22 does not define local government functions directly, but only by specifying what the center (Art.7) and the province (Art 9) do. Article 11 specifies local government obligatory functions, but not to a level of operational detail. PP 25/2000 is not much help here, as it focuses on the remaining functions of central and regional governments. This legal framework of “general competency” rather than ultra vires definition of function as embedded in Law 5/1974 is unusual for local governments. It is also more radical than the subsidiarity principle—which was apparently the inspiration of the drafting team.9 Subsidiarity as a principle would not call for a limited list of central functions in the law, but for a process by which decentralization or centralization is determined, while specifying the principles that guide the process.
Omission of a general clause in the law to state that local government is bound by national law (omitted because the drafting team felt it was obvious10) further obscured the exact extent and nature of decentralization. This confusion was further increased by TAP MPR III which determined the hierarchy of laws, but omitted the ministerial decree as a legal instrument.11 Unfortunately, much of the detail on government functions is contained in such ministerial decrees. Moreover, even though regional regulations (PERDAs) are placed below central government legal instruments such as government regulations and Presidential Decrees, arguably organic regional regulations (i.e. based directly on a law that delegates regulatory responsibility to the regions) should take precedent over central regulations and decrees without a direct basis in the law. Worse, some central agencies, notably those for Land management and for Investment Approval have managed to get a Presidential Decree issued which exempts their authorities from decentralization as Law 22/99 calls for. And the adjustment of sectoral laws to align them with regional autonomy, as is called for in Law 22/99 Art. 133. Finally, the revised Art.18 of the constitution now calls for central functions to be regulated by Law, and the question is whether that law is Law 22/99, or whether a separate law is called for to specify these functions.
The bottom line of all this is that the distribution of functions, let alone the expected performance in exercising the functions, is still far from clear. Beyond causing utter confusion in the regions, this state of play not only undermines accountability of the regional government, but also hampers judgment on the vertical distribution of fiscal resources (see below). The confusion has not stopped central government to embark on an effort to have the regions “recognize” their functions in a positive list that is to be cleared by Presidential Decree.12 Without deeper understanding and agreement on the functions themselves, and the minimum standards for these functions, recognition of these functions seems distracting at best.
One way forward is currently under debate in Indonesia. First, international agreements and sectoral laws could be screened on commitments on service delivery standards already made. For instance, the Education Law guarantees 9 years of education for all. Second, central government and regions could embark on a process that would establish agreed standards of services in key areas, while taking into account the regions’ fiscal and human resource capacity. Standards thus agreed could then become the basis for monitoring and supervision, and possibly sanction. In all likelihood, these standards will vary widely per region, given Indonesia’s wide diversity in capacity. Meanwhile, a process to align sectoral laws with Law 22/99 could start, and the revisions could further specify the functions, and service standards, and which of those standards are to be considered as binding and sanctionable under PP20/2001 Art.16. Those sanctionable standards are likely to be few.
Levels of Government, Size of Local Governments, and Economy of Scale
Law 22/99 assigns most responsibility to the local government level. The provincial level only has coordinating functions, a role in issues that surpass district boundaries, or they can perform local government functions for those unable to perform the functions. The Province has a potential role in performing task on behalf of the districts, but little initiative has been undertaken to exploit this possibility under the law.13 The fact that the law explicitly states that there is no hierarchical relation between the province and the local governments did not help the province in gathering the local governments to plan for joint operation of functions and facilities. As a result, tasks with large externalities and significant economies of scale such as watershed management, sea management, communicable disease control, and others are likely to be left unperformed or underprovided.
Scale economies are also at risk because of the size of local governments. This is likely to get worse in the near future due to the apparently unstoppable tendency to create new regions—both provinces and local governments. The number of local governments since Law 22 passed has increased from less than 300 to 348 in 2002, with over 20 new ones expected for 2003, and the number of provinces increased from 26 to 32 (including the apparently defunct new provinces on Irian Jaya). The regions already show a wide variety in population size: provinces range from less than 800,000 inhabitants (Gorontalo) to over 35 million (East Java), and local governments from 24,000 to 4.1 million. Creation of new regions—which requires a law—is driven by several considerations, including historic and ethnic ones. But the wish to create a new region is likely to come from fiscal incentives as well. For one, if a district has a significant amount of natural resource revenues it will be better off to become a province, as it then no longer need to share the revenues with surrounding districts, or with the originating province. Urban areas are more likely to receive a share of the personal income tax than rural areas, and they have an incentive to split off from the kabupaten they are part off. And in the new DAU system, every region gets a lump-sum amount, thus creating incentives for each region to split up.
Creating more and more regions is not without consequence. Information on the wage bill of local government per capita of the population seems to point at sharply decreasing efficiency at the level of about 500,000 people (Figure). The districts with less than 100,000 people have about twice the wage bill per capita that those districts with 500,000 people have. Some of the difference could perhaps be explained by geography or a negative correlation between population size and density—thereby necessitating a larger civil service to supply the same amount of services. But prima facie the suggested scale economies would argue for consolidation of regions rather than the creation of new ones.
Governance and Accountability
The potential benefits of decentralization depend crucially on governance. By all accounts, the jury on the link between decentralization and the prospects for improved governance at the local level is still out, and14 several concerns about the prospects of decentralization/devolution in developing countries.15 On the one hand government closer to the people reduces monitoring costs of the electorate, and competition among local governments could drive out corruption. On the other, local governments seem to be more prone to elite capture.
The fall of New Order regime in 1999 and the subsequent “Big Bang” decentralization of 2001 promised to fundamentally change the locus of responsibility and accountability for public service delivery in Indonesia. By “bringing government closer to the people,” decentralization can serve as a driving force towards generating improvements in Indonesia’s notably poor governance environment. Symptomatic of this governance environment is that Indonesia continues to be perceived as suffering from one of the highest internationally levels of corruption. This has proven corrosive to both public service delivery and the private-sector environment.16
Numerous governance issues have received public attention in Indonesia. These include money politics (“politik uang”), centered especially on concerns that local elections for regional heads have been increasingly bought. Local political elites in executive and legislature has to the political aspirations of the wider populations (“politik elit”). The new local heads have increasingly started acting a little kings (“raja kecil”) who are neither accountable to central authorities, or their local constituencies. Meanwhile, rent-seeking has proliferated in many regions due to the proliferation of these new actors and increased the dangers of overgrazing (many hands of “campur tangan”).17 This problem is accentuated by the belief on some parts of the executive and legislative that their tenures are limited, and hence their access to rents is limited as well.
To blame decentralization
per se for these weaknesses seems far fetched. Moreover, the weaknesses
in governance at the regional level should be considered relatively
to those taking place at the center. Whether these incidences
of weak governance are systematic remains to be seen. In part,
weak accountability of the head of region could be temporary: many heads
of regions have not yet been elected, but were appointed by the government
before local elections took place. The vaguely defined authorities and
functions of the regions undermines accountability as well, but these
are likely to become clearer over time. But other, more fundamental
causes seem at work as well. One issue is Indonesia’s strong
party system that limits the interest local councilors take in their
local constituents. Another is that Government Regulations on the accountability
of the head of region have strengthened the position of the head such
that it has become almost impossible for regional parliaments to fire
him. And finally, absence of formal accountability mechanisms
such as external audit of regional governments also undermines accountability.
References
1 The findings, interpretations and conclusions expressed in this paper are entirely those of the authors. They do not represent the views of the World Bank, its Executive Directors, or the countries they represent. This paper draws on the forthcoming World Bank Regional Public Expenditure Review for Indonesia, and on Hofman, Kaiser and Kajatmiko (2001). The authors wish to express thanks to Jorge Martinez, Roy Bahl, Richard Bird, Roy Kelly, Dana Weist, Blane Lewis, Bernd May, and Machfud Sidik for the many helpful discussions on the topic of the paper. We thank Fitria Fitriani for excellent research assistance.
9 Gabe Ferazzi, (2002): Obligatory Functions and Minimum Standards: A Preliminary Review of the Indonesian approach GTZ SfDM, Report No/2002-2, March.
10 Conversation with Bernd May.
11 The then-Minister of Justice argued in a letter to all ministries that the MPR decision constitutionally higher than a law) does not apply as far as ministerial decrees are concerned.
12 The “positive list” approach came from an idea mentioned in an IMF technical assistance report in the year 2000. The report argued that no judgment on assignment of revenues could be made without a detailed costing of expenditure assignments.
13 One exception familiar to the authors are the two Provincial Health Projects financed by the World Bank. These projects create province-level cooperative structures among he local governments to develop and implement province-wide health policies.
14 Save for a brief federalist constitution in the wake of independence from Holland in 1949, Indonesia’s prevailing constitution of 1945 is that of a unitary state.
15 See for example Crook and Sverrisson (1999) or Azfar et al. (2000;2001).
16 See for example O.B. Server (1996) and Partnership for Governance Reform (2001)
17 In December 2001, the Head of the DPR’s budget commission, Benny Pasaribu, created a stir when he claimed that 40 percent of the General Block Allocation Grant (DAU), implicitly arguing that more control and oversight from the center was needed (Jakarta Post 2001a). Arguably capacities differ widely by islands. On islands like Java-Bali capacities can generally be argued to be sufficient, which the situation more difficult in Local Governments in some of the Outer Islands.
