Indonesian village decentralisation is all money no plan

Author: Blane Lewis, ANU

Nearly 15 years after embarking on its large scale decentralisation initiative, Indonesia has decided to extend its efforts to the village level. Decentralising to the nearly 74,000 villages is intended to improve service delivery performance at the lowest administrative tier and reduce social inequality and poverty. But the initiative is all money, with no clear plan.

The 2014 Village Law indicates that the central government will transfer up to 10 per cent of total intergovernmental grants in the state budget to villages in the form of ‘village funds’ (Dana Desa). The 10 per cent ceiling is to be gradually phased in over a period of three years. In 2015, villages are set to receive over 20 trillion rupiah (approximately US$1.5 billion) in Dana Desa — about three per cent of total central — subnational transfers.

People and activities are seen in Alue Naga village, Aceh, Indonesia, 19 November 2014.  (Photo: AAP)

In addition, districts will be required to contribute 10 per cent of their own-source revenues, revenue sharing grants, and general purpose transfers — an estimated 40 trillion rupiah (US$3 billion) — to village budgets. The total amount of money to be distributed to villages is not trivial. Taken together, these funds make up about three per cent of total projected state budget spending in 2015. And, of course, when government makes good on its full Dana Desa commitment, village funding will grow to even higher levels.

The village decentralisation process has only just begun and it is obviously premature to examine and debate program implementation outcomes. But a number of potential difficulties with the design of the nascent program have already become apparent.

Methods used to allocate funds to villages are particularly problematic. First, and very oddly, funds distribution procedures insist to a large extent on equal allocations per village. This is despite the significant heterogeneity among villages, including in terms of population, land area and poverty.

The fixation on per village allocations may be a function of the manner in which the program was originally promoted by politicians to the public. During the 2014 presidential elections both candidates (Joko Widodo and Prabowo Subianto) strongly supported the village decentralisation initiative. The popular refrain, used occasionally by both candidates, was ‘satu desa, satu milyar’ — ‘one village, one billion rupiah’. Unfortunately, the campaign soundbite has been translated directly into policy. But in the first year of implementation villages will receive less than one-third of the indicated amount — inadvertently a good thing, owing to the problems discussed here.

Second, allocation procedures ignore other sources of revenue to which villages have access, especially from districts. Villages that have access to large natural resource-based transfers from their districts will receive the same amount of Dana Desa as villages located in districts that are less abundantly endowed. Village revenues will therefore be very inequitably distributed. Villages in regions with high levels of poverty — especially in Eastern Indonesia — will receive less money than they need, and villages with access to significant funding from oil and gas revenues — particularly in Riau and East Kalimantan — will receive more than required.

There are other challenges as well. Village service responsibilities are unclearly defined. The legal and regulatory framework provides only a general indication of village service responsibilities. Central, provincial and district governments will be responsible for detailing the actual tasks that villages will perform at a later date. Despite claims by Indonesian policymakers that ‘money follows function’ — best practices in fiscal decentralisation — in this case the opposite is true.

Village public financial management (PFM) systems are inadequately prepared to handle the large increases in funding. Villages are set to receive between 5–10 times the amount of funds that they typically manage. Existing village PFM procedures have developed over the course of many years in the context of relatively limited service responsibilities and comparatively trivial amounts of funding. The transaction-intensive systems may have proved largely adequate in the pre-village decentralisation period, but they are unlikely to be well suited or sufficiently robust in the new scaled-up environment.

Perhaps most worryingly, mechanisms to control village spending are severely underdeveloped. Villages have for 10 years run the National Program for Community Empowerment (PNPM), which involves implementing poverty reduction efforts with strong social accountability mechanisms. But the degree to which this mostly positive experience will be transferable to more extensive village decentralisation is unclear. In particular, the government has not yet fully resolved the problem of who will lead horizontal accountability efforts, and whether the facilitators of the largely successfully PNPM program will be involved. A second worry is that no provisions have yet been made for external audits of village-executed budgets.

The future of village decentralisation is, of course, hard to predict. Indonesia may yet muddle through, as it has in the past. But, unless resolved, the above difficulties will severely constrain the achievement of official program objectives and create further challenges for reformers in their attempts to combat corruption at the subnational level.

Blane Lewis is Associate Professor and Senior Fellow at the Arndt-Corden Department of Economics, Crawford School of Public Policy, The Australian National University.

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