CHAPTER I DECENTRALIZATION

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1 CHAPTER I DECENTRALIZATION 1.1 Decentralization Decentralization is a widely used term and there are several definitions of decentralization which is defined with a variety of meanings depending on its use. Its definition commonly has different characteristics for different researchers. UNDP (1999) stated that decentralization is the restructuring or reorganization of authority between government at the central, regional and local levels according to the subsidiarity principle. There is a system of coresponsibility to increase the overall quality, authority and capacities at the local level and also effectiveness of the governance system 2. On the other hand, USAID (2000) defined decentralization as transferring the power process to popularly elected local governments. Transferring power means providing local governments with greater political authority, increased financial resources, and more administrative responsibilities 3. Then again, World Bank (1999) stated that decentralization is the transfer of authority and responsibility of a broad range of topics over public functions from the central government to subordinate or quasi-independent government organizations 4. In other words, decentralization is the transfer of responsibilities and authorities from the central government to the regional government to manage local resources and to establish citizen participation at local level. Rondinelli and Cheema (1983) proposes some advantages which can be taken from the decentralization policy, for examples decentralization can overcome severe limitations of centrally controlled national planning, cut through the highly structured procedures, and improve officials knowledge and sensitivity to local problems and needs 5. Decentralization also provides a structure through which activities of various central government ministries 5

2 and agencies can be more effectively coordinated, allow for institutionalization of citizens participation in development planning and management, and increase political stability and national unity by giving groups the ability to participate more directly in development decisionmaking. Decentralization covers a broad range of concepts. Decentralization can be categorized into some types, which have different characteristics and policy implications. First, let us consider political decentralization. Political decentralization refers to the transfer of political authority to the local level through the establishment of elected local governments, local electoral representatives, political party reforms, and authorization of participatory processes. This type of decentralization aims to provide citizens or their elected representatives more power in public decision-making. Second, one type of decentralization is administrative decentralization. Administrative decentralization refers to transferring full or partial functional responsibility of planning to the local level and managing certain public functions at the local level. This type of decentralization seeks to redistribute authority, responsibility and financial resources that provide public services among different levels of government. Fiscal decentralization is the third type. Fiscal decentralization refers to the transfer of financial authority to the local level. It involves generating local revenues, receiving intergovernmental financial transfers, and making expenditure decisions. The types of decentralization briefed above have been linked to one another and are the key factors of the prerequisite for achieving the purpose of decentralization, which is to realize an improvement in the people s welfare. Since the objectives of this research are related to the issue of the effect of fiscal decentralization to economy, then this point should be further reviewed. 6

3 1.2 Fiscal Decentralization Fiscal decentralization is seen as the empowerment of fiscal responsibilities to the local governments, a means to enhance the economic efficiency of the government and also increase economic growth. According to Kardar (2006), the effectiveness of fiscal decentralization depends on appropriate expenditure and revenue assignments and also the efficient and proper design transfer system together with its implementation 6. Albadi (2007) examined the different experiences of a few selected developing countries which adopted fiscal decentralization policies. Indonesia for example, in 1999, enacted two new laws regarding local governments and fiscal decentralization. The attributes that Indonesia is a large country with different social structures, resource endowments, and economic development suggest that decentralization has many advantages. Decision makers in the central government do not know the specific needs of people in remote areas Indonesia is made up of over 17,000 islands. On the other hand, the same diversity suggests that decentralization will simply make it easier for certain discontented regions to break away 7. Fiscal decentralization can be defined as a process of distribution of the budget from the higher levels of government to lower levels of government to support the transferred functions of the government. To carry out decentralized functions effectively, regional governments must have an adequate level of revenues as well as the policymaking authority which concerns those expenditures. It can be said that there are two components that represents fiscal decentralization: expenditure and revenue. It is commonly believed that decentralization and especially fiscal decentralization will bring a positive impact to the public sectors. By considering the diversity and disparity of the nation, since 2001 the Indonesian government implemented the decentralization policy. 7

4 1.3 Decentralization and Fiscal Decentralization in Indonesia Decentralization in Indonesia Indonesia is one of the most diverse and dispersed countries in the world, with living standards ranging from developed country standards to entrenched poverty. It has more than 17,000 islands, almost 300 ethnicities, and approximately 250 different languages throughout the archipelago. Population density also varies greatly. This diversity and geographic disparity are mirrored by very significant differences in the social and economic conditions, such as education, health, and income per capita. These extreme disparities influenced Indonesia's ambitious decentralization, most notably with respect to the fiscal framework. Decentralization in Indonesia actually is not a new policy. Since Indonesian s independence, many local government laws and Presidential Decrees have been issued, which have provide a different nature to the governmental system. Nevertheless, the implementation of the decentralization policy, before Law No. 22/1999 and Law No. 25/1999, the general trend seemed to be rather centralistic. Certainly then, the central government had full authority to manage all local resources without involving regional participation in the decision-making process. However, the need for decentralizing government functions has long been recognized, although with a varying intensity. There existed fluctuation between decentralization and centralization in the political thinking and sentiment. But, generally speaking, in the earlier days of Republic, the attempts made have been mostly for deconcentration of government functions to satisfy diverse regional needs. In 1970s, there was a more serious effort to promote regional development and to decentralize as a means of doing so. Following the MPR State Guidelines and the second 5-Year Development Plan for , Law No. 5/1974 was passed. For 25 years this law was the foundation stone by which Indonesia s regions have been governed. The organizing principle in intergovernmental relations was strictly hierarchical with the central government exercising significant control not only over the 8

5 appointment of local officials but also over the use of funds for each local government. During that time, local governments mainly functioned as implementing agencies of national policies and programs. In addition, this law emphasized autonomy at the second level of regional governments since it was closer to the local society than the central government. Therefore, the regency/city played an important role in providing services to the public. During this period, although the Indonesian government designated autonomous regions, they still maintained central control and tended to be authoritarian under the Soeharto s regime ( ). The system instead raised the dependency of local government on the central government for revenue, and further weakened the regional capacity to carry out development. Due to the highly hierarchical structure of the Indonesian government at that time, this law did not work well and seemed to do more harm than good. There has been a remarkable transformation in Indonesia. Starting in the middle of 1997 when the Asian financial crisis occurred, a political crisis followed. These two things together caused an overall worsening of the economic condition. This condition brought dissatisfaction from the Indonesian society towards the government. Many Indonesians considered that the slowdown of the recovery was caused by some issues such as corruption, and the weakness of law enforcement. This caused stronger pressure from many provinces requesting greater decentralization to manage their own affairs; to have a larger share of their natural resources. As a consequence, during the reformation era, the central government enacted Law No. 22/1999 and Law No. 25/1999 both aimed at implementation of a decentralization policy. Law No. 22/1999 focuses on regional government through improving administration and political decentralization particularly at the regency and city level, and Law No. 25/1999 focuses on the fiscal balance between the central government and the regional governments. 9

6 Through these laws more authority is delivered to the regional governments in financing and management decisions, making their own expenditure and increasing their own revenue. Under these laws, the head of regency and city no longer reports to the head of province (governor), instead they are responsible to the locally elected parliament (Dewan Perwakilan Rakyat Daerah or DPRD). The provinces still retain being responsible to the central government. Implementation of these laws started from January This is called the 'Big bang' for decentralization in Indonesia. Decentralization has transferred much of the responsibility to the local level by assigning authorities rather than functions to the local governments. Provincial governments coordinate with the local governments and perform the functions that affect more than one local government. Within one single year, much of the responsibility for public services was decentralized Fiscal Decentralization in Indonesia Fiscal decentralization is the main component in decentralization. When Indonesia decentralized in 2001, the government allocated a large amount of resources to the poorer regions in an effort to balance the country's disparities. Although intergovernmental fiscal transfers could be even more equalizing, the poorest and most remote parts of Indonesia have received very substantial transfers since The General Allocation Fund (Dana Alokasi Umum or DAU) is the most important tool of the transfer system, financing about 70% of all local expenditures (provinces and districts) and more than 80% of district expenditures. The other important thing in fiscal decentralization is the extent that local governments are given the authority to determine the allocation for their own expenditure and their ability to increase their locally generated revenue (Pendapatan Asli Daerah or PAD). This approach is aimed not only to increase self-revenue but also the authority to manage the potentiality of local region to improve the welfare of the people. Besides that, regional governments (provincial and local) receive other revenues consisting of the 10

7 balanced budget that consists of DAU and the specific allocation fund (Dana Alokasi Khusus or DAK), tax revenue sharing, and non-tax revenue sharing (natural resource exploitation). Some regulations related to decentralization are listed in Table 1.1 below. In October 2004, Amendment to Law No. 22 and 25/1999 was issued. Clarity in assigning functions is needed to guarantee accountability at the local level. Law No. 32/2004 was passed with the aim of significantly reshaping intergovernmental administrative relations. It introduced the direct election of local heads and provided more clarity than the preceding Law No. 22/1999 in terms of obligatory functions. In addition, Law No. 32/2004 also reaffirmed the role of provinces as representatives of the central government in the regions. This came with new significant oversight and operational functions for provinces vis-a-vis regencies/cities, as well as stronger central control through the Ministry of Home Affairs and the governor as the center's representative. Table 1.1 Regulation Related To Decentralization No Regulation Concerning 1 Law No. 22/1999 Regional Government 2 Law No. 25/1999 Fiscal Balance between the Central Government and Local Government 3 Law No. 32/2004 Amendment to Law No. 22/ Law No. 33/2004 Amendment to Law No. 25/ Government Regulation No. 25/ Government Regulation No. 108/ Government Regulation No. 38/ Government Regulation No. 41/ 2007 Source: Local Development Planning Agency of Kudus Government Authority and Provincial Authority as an Autonomous Region Accountability Procedure of Regional Head Affairs Division between the Government, Provincial Government and Local Government Regency/City Organization of the Local Agency 11

8 Law No. 32/2004 set a hierarchical division in the local level, which consists of the provincial government and the regency/city government. This is in contrast with what is seen in the previous local government law, where Law No. 22/1999 only mentioned that Indonesia consists of provinces and regencies/cities. This new law is interpreted that a hierarchy does not exist between the central and local governments so it appears that the concept of "alignment between provincial and regency/city" is effective. As a result, many regencies/cities are not subject to the governor s office in accordance with the rules. Accordingly, an imbalance between the executive and legislative authority began to disappear. It can be seen that many authorities of parliament are pruned, such as the regional head is directly elected by the people, legislators only receive accountability statement reports, and evaluation of the budget draft is adjusted to fit the public interest and higher regulation by the governor. With Law No. 32/2004, regional head monitoring is increasingly tightened. Public involvement in the government or local politics has increased by direct local election. Law No. 33/2004 is the amendment of Law No. 25/1999 with regards to Fiscal Balance between the Central Government and Local Government. The principles of Law No. 33/2004 is an affirmation and refinement, especially concerning: 1) affirm the basic principles of financial balance and local government according to the principle of decentralization, deconcentration and assistance, 2) provide additional types of share revenue, 3) improve DAU and DAK allocation principles, 4) improve qualifications and mechanisms of regional loans, financial management and accountability arrangements, 5) provide local financial information systems, and 6) provide principles of accountability and responsibility. Each of the above is reinforced by sanctions. According to Law No. 25/2004 and Law No. 17/2003, the process of state and local planning and budgeting is shown in the Figure 1.1. At the national level, the first step of planning stage is the preparation of RPJPN, which is the national development plan for 20 years. RPJPN is then divided 12

9 into four parts, each parts consist of five years. Five-year plan is compiled in the form of RPJMN. Furthermore, RPJMN is subdivided into short-term development plan (annual development plan), RKPN. The next stage is budgeting stage. The programs listed in RKPN are evaluated and adjusted with the priorities by observing the financial ability of the state in the form of RAPBN. The government budget draft (RAPBN) that has been prepared is then presented to parliament to be discussed together. The results of the discussion is in the form of APBN. At the regional level, the process undertaken for the province and regency/city level is similar to that carried out at the national level. Central Government RPJPN RPJMN RKPN RAPBN APBN Provincial and District RPJPD RPJMD RKPD RAPBD APBD Government Source : Law No.25/2004 and Law No.17/2003 RPJPN/RPJPD : Rencana Pembangunan Jangka Panjang Nasional/Daerah RPJMN/RPJMD : Rencana Pembangunan Jangka Menengah Nasional/Daerah RKPN/RKPD : Rencana Kerja Pemerintah Nasional/Daerah RAPBN/RAPBD : Rancangan Anggaran Pendapatan dan Belanja Negara/Daerah APBN/APBD : Anggaran Pendapatan dan Belanja Negara/Daerah Figure 1.1 Decentralization Planning and Budgeting Process in Indonesia 1.4 Decentralization and Fiscal Decentralization in the Province Since the implementation of Law No. 22/1999, the emphasis on decentralization is on the regency/city. Accordingly, since enactment of the law, the regency/city held autonomous authority. All government affairs are administered by the regency/city, except for the absolute affairs which became the central government authority (foreign policy, defense and security, monetary, justice, and religion). On the other hand, the authority of the provincial government became smaller. Position of the provincial government is only as a representative who administers the function/authority of the central government in the region. 13

10 Under Indonesia s government system, the existence of a province is a consequence of the concept of local state government. The concept calls for a central government administrative regency to be located in the region. In this case, the governor is the central government s representative within local region. Therefore, the governor also administers the central government authority delegated to him. In that the Province existence is also a realization of the concept of local self-government. The concept of local self-government makes autonomous regions, which are represented by the existence of the legislature (parliament). Law No. 22/1999 has the weaknesses that it gives off negative implications for the implementation of decentralization in Indonesia. One of these implications is the position of governor as the government representative in the region is not fully appreciated. The tendency of the "not respected" position of the governor is due to two things. First, Law No.22/ 1999 confirmed that the emphasis on the implementation of decentralization is at the regency/city level. Second, the law also confirms the absence of a hierarchical relationship between the provincial government and the regency/city government. Issuance of Law No. 32/2004 is an overall improvement to the central government of the above mentioned law. The presence of this law has changed the way the regencies and cities look at their province. This situation is because the position of the governor is set back to the implementation of the decentralization. The position of the governor as the government representative has the function of developing, directing, supervising and coordinating government affairs in the region. Law No. 32/2004 has made it more explicit and clearer that the government affairs division is between the central, provincial, and regency/city. This law regulates the relationship between the central government, local governments, and intergovernmental roles in finance, public service, and the utilization of natural resources. The governor has the authority to: a) develop and supervise the regional administration of the regency/city, b) coordinate the implementation of 14

11 government affairs, and c) develop and supervise the implementation of coadministration task at the provincial and regency/city level. From this law, we can see that the governor has 2 positions: as head of the autonomous region and as the central government representative in the region and should be responsible to the President. Further elaboration of the matters that nurtured, supervised and coordinated or regulated by provincial government is carried out by the central government and resulted with the issuance of Government Regulation No. 19/2010. This regulation explains that, as the representative of the government, the governor has the authority, such as to hold meetings with regents/mayors, asking the regents/mayors and local leaders along the vertical institutions to urgently address key issues, provide rewards or sanctions to the regent/mayor, evaluate the local regulation to draft budgets, settle disputes in governmental functions between regencies/cities in their respective provinces. 1.5 Decentralization and Fiscal Decentralization in Kabupaten Kudus Regional development as an integral part of national development that was conducted gradually and continuously is directed to support the national efforts to realize the national goal, which is to: 1) protect all people and the entire homeland of Indonesia, 2) promote the general welfare, 3) enhance the intellectual life of the nation, and 4) participate on the establishment of world discipline based on freedom, lasting peace and social justice. These objectives are carried out by the Indonesian government together with all Indonesians, as stated in the Assembly Decree No. IV/1999 concerning the National Guidelines , which mandated that the implementation be presented in the five-year National Development Program (Program Pembangunan Nasional or Propenas). Propenas was enacted as Law No. 25/2000. Simultaneously within the framework of the implementation of the National Guidelines and Propenas, Kudus government formulates the Local Development Program (Program Pembangunan Daerah or Propeda; year ). Since Propenas was a reference for Propeda, Propeda should 15

12 support the national objectives as stated in Propenas. To describe the program and activities listed in Propeda, Kudus government issued the Local Annual Development Plan (Rencana Pembangunan Tahunan Daerah or Repetada; year ), which contained a more detailed elaboration of Propeda. The plan was based on Kabupaten Kudus vision that describes the desired condition of Kabupaten Kudus in the future and on their development mission as the basic pattern of activity to realize their vision. Some regulations related to development planning after decentralization are listed in Table 1.2. Table 1.2 Regulation Related To Development Planning After Decentralization No Regulation Concerning 1 Assembly Decree No. 4/1999 National Guidelines Law No. 25/2000 National Development Program 3 Law No. 25/2004 National Development Planning System 4 Local Regulation No. 11/2001 Local Development Program 5 Local Regulation No. 13/2001 Local Annual Development Plan of Kudus, Year Local Regulation No. 11/2008 Long Term Development Plan of Kabupaten Kudus, Year Local Regulation No. 3/2003 Strategic Plan of Kabupaten Kudus, Year Local Regulation No. 3/2008 Governmental Affairs that Becomes the Authority of Kudus Government 9 Local Regulation No. 5/2009 Medium Term Development Plan of Kabupaten Kudus, Year Source: Local Development Planning Agency of Kudus In 2004, a new regulation concerning the National Development Planning System (Sistem Perencanaan Pembangunan Nasional or SPPN) was issued. In the context of regional development planning as a single unit in the National Planning System, the government issued a Long Term Development Plan (Rencana Pembangunan Jangka Panjang or RPJP) scheme. RPJP of Kabupaten Kudus is a regional planning document applicable for a period of 20 years from 2005 until RPJP contains the vision, mission, and direction of long-term development of the region. It 16

13 refers to the National RPJP and Provincial RPJP. The local RPJP preparation process is participatory and involves various elements of the development stakeholders. First, preparation of draft RPJP is held to grasp a preliminary picture of the vision, mission, and direction of regional development. The formulation of the vision and the mission is carried out through aspirations of various elements and components of the society. Second, a planning meeting phase is carried out to obtain input and commitment from all stakeholders. Third, the refinement of Regional RPJP draft through Development Planning Meeting (Musyawarah Perencanaan Pembangunan or Musrenbang) is used as the main input for the final draft of Regional RPJP. Fourth, the establishment of the Local Regulation about Regional RPJP is set. The final draft of Regional RPJP and attachments are submitted to the parliament as a government initiative, to be further processed into regulation. The Long Term Development Plan is then spelled out into the Medium Term Development Planning (Rencana Pembangunan Jangka Menengah or RPJM). The RPJM is organized once every five years, coinciding with the term of the Bupati. Government Regulation No. 108/2000 concerning Accountability Procedures of Regional Head state that every region should establish a Strategic Plan (Rencana Strategik or Renstra) within a period of one month after the Regional Head is appointed. The vision and mission that is developed should be packaged in a Renstra. Renstra was intended as a foundation and guideline for the attainment of organizational goals for a period of 5 years, as formulated in the vision and mission of the Bupati. Based on that condition, Kabupaten Kudus Strategic Plan was drawn up for a period of five years, since the inauguration of the Bupati and Vice Bupati on June 2003 served as a guide and reference, for development during the term 2003 to In addition, Renstra became a benchmark in Bupati accountability assessment on each end of the fiscal year and at the end of term of office. In the case of financial management, since the passing of decentralization, the central government issued Law No. 17/2003 on State 17

14 Finance and Law No. 33/2004 on Fiscal Balance. Furthermore, to adjust the balance funds to the local government and to regulate financial management at the local level, the central government issued a government regulation. More details of the structure of local government budget are set in the Minister of Home Affairs Regulation (Peraturan Menteri Dalam Negeri or Permendagri) No. 13/2006, as amended by Permendagri No. 59/2007. Based on this regulation, Kudus government draws-up a separate ordinance to regulate the local finance by issuing a Local Regulation concerning the Principles of Financial Management Regulation in 2002, subsequently amended in