7.7 DAK Allocations by Sector,FY 2005

256 Sebastian Eckardt and Anwar Shah

TABLE 7.7 DAK Allocations by Sector, FY 2005

National development Amount expenditure Number of Sector (Rp billion) (Rp billion) receiving regions

Education 1,221 21,585 333 local governments Health 620 7,796 331 local governments Infrastructure 1,533 13,081 348 local governments Government infrastructure 148 n.a. 32 local governments and 2 provinces Fishery 322 2,028 300 local governments Agriculture 170 4,024 155 local governments

Total 4,014 48,514 n.a.

Source: Indonesia, Ministry ofFinance 2005. n.a. = not applicable.

from total revenues (sum ofown-source revenue,DAU revenue,DAK revenue,and shared revenues and taxes,excluding surpluses in FY 2002), denoted Revi,divided by the national average ofthe same measure:

(7.7)

Districts that score lower than 1 on this measure are eligible for DAK funds. This measure is sensitive to the resources a region has at its disposal to finance capital expenditures.

The special criteria directly refer to a number ofprovinces—including Papua,Aceh,and all provinces in East Indonesia—that are eligible for DAK funds.In addition,coastal areas,conflict regions,less-developed regions,and regions that experience floods and other natural disasters are supposed to receive DAK funds.The regulation remains unclear about how and to what extent these criteria should be used in the allocation process.

The technical criteria are set by the sectoral departments in consultation with the Ministry ofFinance and the Ministry ofHome Affairs,and they vary across sectors.In the education sector,for example,the number ofclassrooms in poor condition and the construction price index are used.In the health sector,the technical criteria include the Human Poverty Development Index,20 the number ofhealth service facilities,and the construction price index.

Two briefcomments on DAK funds are in order.First,despite significant increases in recent years,DAK expenditures remain relatively limited compared with the regular sectoral development expenditures ofthe central

Local Government Organization and Finance: Indonesia 257

governments (deconcentrated development expenditure).In the medium run,sectoral development funds should be migrated into DAK funds. Whether this option proves suitable will depend to a significant degree on the willingness ofsector departments to shift resources to the DAK,over which they have considerably less control.Increasing DAK funds that are regionally and functionally targeted could provide an important instrument to establish common minimum service standards and to address disparities in expenditure needs across Indonesia.Unlike deconcentrated development expenditure funds,which are not part ofthe local budgets,DAK funds are more transparent and can be used complementarily to local spending.

The second comment refers to the distribution ofthe DAK.With the notable exception ofthe DAK grant that was allocated to finance government infrastructure in newly established governments,the grants are widely dispersed across large numbers ofreceiving districts.For example,in FY 2005,333 local governments received education DAK funds.Allegedly,the allocation process for the DAK funds remains vulnerable to political interference by regional governments,sectoral departments,and the budgeting commission ofparliament.In effect,the DAK grants seem to be used to cross-subsidize capital expenditures more generally rather than as transfers specifically targeted to districts that have serious infrastructure deficiencies.

Equalization Performance In Indonesia,as in many other countries,the uneven distribution of economic activity and natural resource endowments has resulted in wide disparities in the fiscal capacity oflocal governments.Table 7.8 documents these disparities using several indicators.The major drivers offiscal disparities in Indonesia are shared taxes—in particular income tax—and natural resources,which are highly concentrated in a small number ofdistricts.In FY 2003,the industrial town ofBekasi at the fringe ofJakarta received more than 100 times the income tax that the rural district ofLombok Timur received.

Natural resources revenues are even more concentrated.As can be seen in figure 7.4,in FY 2003 about 80 percent ofall revenues from shared taxes and natural resources were concentrated in the top 20 percent ofrecipient local governments.As a result,disparities in revenue levels before the equalizing DAU grants are striking,with a coefficient ofvariation well above 2.On a per capita basis,the bottom 80 percent ofdistricts receive only 30 percent oftotal revenues or,conversely,70 percent ofthe revenue accrues to the richest 20 percent.A look at differences between maximum and minimum values illustrates the fact. Before the equalizing grants,the ratio between the district with the highest per capita revenues and the district with the lowest is more than 200 to 1.