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onsuming one-third of total spending, transfer funds to regions are under the spotlight for their trivial role in propelling local economies, despite their enormous amounts.

Transfer of funds to regions, money allocated to provincial governments, will be raised to Rp 639.9 trillion (US$54.71 billion) in the proposed 2015 state budget, up from Rp 596 trillion this year.

The amount earmarked to regional leaders will consume one-third of the government'€™s fiscal space, as it accounts for 32 percent of the state'€™s total spending of Rp 2,020 trillion. The amount is three times bigger than the fund earmarked for fuel subsidies.

Finance Minister Chatib Basri has acknowledged that the government has no choice but to raise the amount of funds, as Indonesian law stipulates that the government must earmark at least 27 percent of its total spending to regional governments, a consequence of democracy and mushrooming regional autonomy.

While allocating higher funds for transfer funds to regions, the budget realization remained unsatisfactory as many of those funds had been left idle by regional leaders, he complained.

'€œWe need a reward-and-penalty mechanism here because regional leaders, as agents, may disobey
their superiors, in this case the central government,'€ Chatib said recently.

'€œWithout a reward-and-penalty mechanism, then the funds given by the central government would only be stashed by regional leaders in BPD [regional banks],'€ he added.

The minister said that discussions between the government and lawmakers were still ongoing regarding the formulation of a draft bill on fiscal relations between centers and regions (RUU HKPD), where a stricter carrot-and-stick approach will be applied to regional leaders in terms of their budget management.

By the end of 2013, at least Rp 116 trillion of funds earmarked for transfer to regions have been left idle and undisbursed, according to data from the Regional Autonomy Watch (KPPOD). The figure had increased from Rp 99 trillion a year earlier.

Most of the idle funds come from the allocation for capital spending, with regional leaders appearing clueless about what infrastructure projects to build in order to spend their money, said KPPOD executive director Robert Endi Jaweng.

Due to the poor budget-planning abilities of regional leaders, every year around 50 to 75 percent of funds intended as transfers to regions are only used to pay employees'€™ salaries, leading to minimal impact on local economies, he noted.

'€œThe hard truth here is our fiscal policy has failed to stimulate regional economies and finance public services there,'€ Endi said in a phone interview on Tuesday.

'€œIt'€™s an irony: There are a lot of idle funds already in the regional government, but now they [the central government] allocate even more funds.'€

Given the limited fiscal space in the country'€™s economic budget, funds allocated to transfers to regions have been described by Deputy Finance Minister Bambang Brodjonegoro as '€œthe greatest threat to macroeconomic stability'€.

Bambang noted that the funds were prone to attract corrupt practices, especially as they have been channeled to regional leaders with minimal supervision.

To make things worse, the huge amount of funds only encouraged some regional leaders to separate and create their own provinces or regencies so that they could get their own share of the money, he added.