How to improve governance in Indonesia

Ginandjar Kartasasmita ,  JAKARTA   |  Thu, 06/18/2009 10:21 AM  |  Opinion

The essence of governance in modern societies is a mix of all kinds of governing activities, by all manner of socio-political actors, public as well as private; involving different inter-relationships,  different levels and styles (or models) of governance.

The “why” of modern governance can be best explained by awareness; that besides the traditional ones, new modes of governance are needed; that governing arrangements will differ from global to local level and will vary by sector, and by region. The challenge for anyone involved in governing and governance is to make governing all these interactions productive.

During the twenty-first century, reinvention will become an essential for political and administrative leaders in governments that seek to adjust to rapid changes in their economies and societies brought about by globalization and technological innovation.

Decentralization, de-bureaucratization and deregulation are adding to the importance not only of the centralized state, but also more and more of local government.

Good local governance is not just about providing a range of local services but also about preserving the life and liberty of residents, creating space for democratic participation and civic dialogue, supporting market-led and environmentally sustainable local development, and facilitating outcomes that enrich the quality of life of citizens.

In the case of Indonesia much of the responsibility for public services was decentralized in 2001. The process was based on three basic laws 1) on regional autonomy; 2) on fiscal relations,  and 3) on regional government taxes and fees approved between 1999 and 2000. Not surprisingly, this involved a lot of ongoing technical work and both the regional autonomy and fiscal relations laws were amended in 2004 to provide more clarity.

A second phase of decentralization followed in 2006 which increased financial transfers to the regions by 50 percent, followed by a further 15 percent in 2007. Indonesia’s roughly 440 regional governments now undertake nearly 40 percent of public spending with most services provided by kabupa-ten/kota (district/city) governments which are responsible of approximately 75 percent of total regional spending.

Perceptions about how decentralization is working vary. Comprehensive surveys of perceptions indicate that satisfaction with service delivery is improving. When asked about whether things have improved in the last two years, over 70 percent of public service users indicate they believe that there have been improvements in health and education services.

Nevertheless, the framework governing the division of roles, responsibilities and resources between national and regional governments (including between provinces and districts) remains incomplete and therefore not fully effective. It is not always clear who is in charge of certain key public services.

An improved functional division among the different levels of government would promote greater clarity, more accountability, higher quality and more efficient service delivery.

Sub-national expenditure at both the province and district level is dominated by administrative spending (usually for salaries for the administration, local assemblies, buildings, etc) at close to 30 percent of given budgets. By contrast best practice is usually closer to 5 percent. As a result, much of the fiscal balance under the General Allocation Grant (DAU) is earmarked for financing civil service wages.

The challenge is how to strengthen the equalizing impact between own-resources and national resource revenues and to empower government units at sub-national level to find the optimal combination of inputs (size of workforce, capital, intermediate inputs and outsourcing) for public service delivery.

The use of the special autonomy grant (DAK) has been growing rapidly from less than US$500 million in 2005 to $2.3 billion in 2008. This reflects a conscious decision to reduce deconcentrated spending. However, it would be important to clarify priorities, including its use for poverty reduction and the achievement of minimum (educational) standards.

Unlike most decentralized countries, Indonesia has not transferred significant tax powers to local government, distorting incentives and creating an unhealthy dependence on transfers from the center.

Local and provincial government,  especially in urban areas, play a key role in public investment, particularly in the infrastructure sector where the needs are great. Borrowing for infrastructure and other projects is virtually non-existent. While regional governments can now borrow in anticipation of increasing sub-national financing needs, especially for urban infrastructure, the government should address the issues that continue to constrain the development of market-based sub­-national bonds, including rules about securitization, and procedures to address fiscal distress and bankruptcy.

The devolution of political authority to local government has also posed challenges for the investment climate. Local governments have, at times, used their newly acquired powers to issue excessively stringent local labor regulations or target businesses with a plethora of new local taxes, levies and fees. In fact, the costs, delays and inconvenience of business licensing is one of the most commonly mentioned criticisms affecting the local investment climate. Incomplete regulations on decentralization and the tug-of-war between the center and the regions have also been a factor in the slow recovery of investment since the 1998 crisis. Finally, businesses have to face corruption in the regions, as they do at the center.

As local level democracy spreads, there are signs that enlightened leadership is increasing and local government is beginning to address service issues, excessive regulation and policy deficiencies with a focus on improving the investment climate.

These “second generation” local government units often have a better understanding of business needs and higher levels of responsiveness to the demands of citizens and their successes are being noted. Nevertheless, the process of clarifying and shifting responsibilities and building capacity at the local level has been slow.

Capacity problems at the local level remain acute. Regional government has had difficulty in spending increased resources and surpluses have been built up in most sub-national government units, with especially large surpluses in natural resource­ endowed regions. While the situation is improving, sub-national government units have not had experience in dealing with businesses and typically lack understanding of what it takes to create a good business environment.

It is important to recognize that maintaining a sense of urgency is critical throughout the process. Without a continued sense of urgency there is a risk that Indonesia’s hard-earned reform momentum might stall. Indonesia has shown commitment to reform, but significant obstacles to change remain.

As is often the case, the implementation of institutional reforms relies on the very unreformed systems and processes that are themselves the object of change. Those who benefit from the existing system can politically derail efforts at serious institutional reform. Broader political dynamics can also interfere when the electoral imperatives of coalition and money politics undermine incentives and efforts to strengthen the accountability of state institutions.

A sustained focus on governance and transparency can help by restoring confidence in the legitimacy of public processes and institutions; and building a consensus for continued reforms. I strongly believe that if Indonesia can maintain a sense of urgency in furthering its transition in governance, then it has the potential to become a dynamic, competitive and inclusive middle-income economy.

The writer is chief of the regional representatives council (DPD) and former coordinating minister for economy and finance.

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