The Jakarta Post
The central government has increasingly used a stick-and-carrot mechanism or performance-based system to force regional administrations to abide by national policies.
The rationale is quite obvious. The effectiveness of any policies adopted by the national government depends how these policies are enforced or implemented in the regions. The performance of the national economy also depends on economic activities in the regions. Put another away, gross domestic product subsumes gross regional products, while regional budget implementation is one of the drivers of growth.
Finance Minister Sri Mulyani Indrawati, who has been holding a series of meetings with the House of Representatives’ budgetary committee since last week to deliberate preparations for the fiscal management next year, again reiterated the vital role of regional administrations.
Sri Mulyani said the central government would give incentives to regional administrations that succeed in attracting many new investors and in contributing greatly to the export drive. The incentives or rewards will be in the form of additional transfers of grants on top of the annual transfers (general and special allocations) from the national budget.
The Finance Ministry previously imposed a performance-based system within the transfer of budget appropriations (grants) from the central government to regional administrations to force local governments to improve their financial management and accountability.
Under this stick-and-carrot system, transfers of investment funds from the central government to regional administrations are deferred if they have large sums of unimplemented investment budget.
Until 2016, the undisbursed portion of the investment budget tended to be large as many regional leaders preferred to put the undisbursed funds in banks and pocket the interest earnings from the deposits.
Given the success of this performance-based system in instilling budget discipline within regional administrations, the government is considering using a similar incentive system to encourage regional administrations to support the national drive to stimulate investment and boost exports.
Investment and export promotion have been on top of the national economic policies because private, domestic or foreign investments are the main driver of job creation while export is vital to maintain a favorable balance of payments to support macroeconomic stability.
The government has since 2015 stepped up efforts to invigorate investment through 16 packages of reform measures to cut regulatory barriers and expedite investment licensing.
While the reform has significantly improved the regulatory environment and business licensing system in the central government, investors still encounter big barriers in many regions because local governments often do not realize the role of investment or tend to maintain the old rent-seeking framework.
We think this performance-based incentive mechanism is much better and more effective than the tax incentives the government plans to give to investments in selected business lines and selected locations outside Java.
Unlike the tax incentives, which will be automatically given to those operating in the selected sectors or regions irrespective of their business performance, the incentives to regional administrations will be given only after an assessment of their performance or contribution to investment and export promotion.