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Policy Briefs Costs and Benefits of New Region Creation in Indonesia1 No. 2 - 2007
Is pemekaran good for Indonesia? In December 2000, the Government issued PP 129/2000, a regulation that – for the first time in the history of the nation – gives regional governments the right to apply for the creation of new regions. From 2001 to 2005, DPR approved the creation of three new provinces and 98 new kabupaten and kota, thereby increasing the total number of regions in the country from 366 to 467 in the span of just five years. The Ministry of Finance is increasingly concerned about the costs of pemekaran and has requested the Decentralization Support Facility (DSF) to prepare an independent assessment of the costs and benefits of pemekaran.
Costs of Pemekaran Key finding #1: the total cost of pemekaran, in today’s money, is at least Rp 76 trillion. The cost of pemekaran is defined as the decrease in development expenditure of the central government and regional governments (excluding daerah baru) during 2001-2005 that was caused by pemekaran in that period’. A detailed analysis
of the finances of the central government and over 300 regional governments concludes that the estimated cost of pemekaran during 20012005 was approximately Rp 9.1 trillion. Stated differently, because of pemekaran, investments in public services were Rp 9.1 trillion lower than would be the case in a ‘without pemekaran’ scenario. The cost of pemekaran is rapidly increasing, and was estimated at Rp 7.6 trillion in 2007. Assuming a discount rate of 10%, this is equivalent to Rp 76 trillion in today’s money. Key finding #2: most of the cost of pemekaran was caused by a reduction in development expenditure by the regions. During 2001-2005, about two-thirds of the total cost of pemekaran was caused by two effects: •
The ‘sticky’ routine expenditure effect. After pemekaran, daerah induk do not reduce routine expenditure in line with the smaller populations they have to serve. As a result, daerah induk spent less on development expenditure.
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The ‘lump sum’ effect. Because of pemekaran, DAU and DBH revenue of other regions (not counting daerah induk) was lower than would be the case in a ‘without pemekaran’ scenario. As a result, many of these regions spent less on development expenditure than would otherwise be the case.
Benefits of Pemekaran Key finding #3: the benefits of pemekaran are negligible. In 2006, the the World Bank conducted a comprehensive survey (known as GDS2) to assess the current state of public service delivery in 134 kabupaten and kota, including 21 daerah baru and 27 daerah induk. The survey found that: Citizens in daerah baru were less satisfied with public health, public education and administrative services than citizens living in other regions. Daerah baru were far less likely than other regions to have a poverty reduction program in place or involve communities in planning. On the other hand, pemekaran may have had some positive impacts on the provision of piped water and improved sanitation services.
Policy Recommendations The cost of pemekaran is far higher than the associated benefits. For this reason, it is recommended that the Government discourages the establishment of new regions and encourages the merger of existing regions. Policy Recommendation #1: Strengthen pemekaran laws with regard to financial support. By law, a daerah induk should provide
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financial support to a new region that is equal to “actual spending on governance by the preexisting regional government in the area of the newly created region before pemekaran”. It is recommended to stipulate the required amount of support in news law on pemekaran, and determine the amount by assuming that a new region would be entitled a share in routine expenditures equal to its share in the population of the pre-existing region. This amount is far higher than amounts that daerah induk have provided thus far, and may therefore discourage pemekaran. Policy Recommendation #2: Remove the ‘lump sum’ element from DBH without introducing a new ‘hold harmless’ clause. Pemekaran has largely been motivated by access to revenue from natural sources. Removing lump sum elements from DBH will therefore discourage pemekaran. Policy Recommendation #3: Terminate DAKfinanced establishment subsidies. During 20012005, the central government provided IDR 0.5 trillion in subsidies to support the establishment of a new provincial and district governments. It is recommended to terminate this subsidy. If a regional government wishes to create a new region, it should finance the associated costs from its own budget. Policy Recommendation #4: Reallocate DP Murni and DP Ad hoc to finance fiscal incentives for the merger of existing regions. Once the ‘hold harmless’ clause to DAU transfers expires, there is no longer a rationale for the existence of contingency funds. It is recommended to reallocate these funds to a separate budget for financing fiscal incentives to promote the merger of existing regional governments. In 2005, this budget would have amounted to IDR 5.5 trillion.
Oosterman, A. and Samiaji, B. T. Costs and Benefits of New Region Creation in Indonesia. DSF, November 2007. The full report can be downloaded from www.dsfindonesia.org. The views expressed in this paper are solely those of its author(s).
Costs and Benefits of New Region Creation in Indonesia
Policy Briefs
Costs and BeneďŹ ts of New Region Creation in Indonesia
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