T

here was actually not much new in the revelation early this week from the Finance Ministry'€™s director general of intergovernment fiscal relations, Boediarso Teguh Widodo, that as of the end of last year, almost Rp 100 trillion (US$7.2 billion) of the investment budgets of regional (province, regency and city) administrations remained unspent and parked in banks.

After all, that reflected the national trend as even the central government has never spent all of its investment budget, always leaving between 15 and 20 percent of the total unspent at the end of the fiscal year.

This trend is utterly discouraging because the central government seems helpless in improving the financial management and accountability of regional administrations. The unspent portion of the investment budget seems to have increased steadily in the regions in proportion to the rise in fund transfers from the central government.

Yet more worrisome is the trend that the bulk of the undisbursed investment budget is parked in time deposits and checking accounts at regional development banks owned by regional administrations. There have even been allegations that the interest earnings from these deposits have flowed into the accounts of regional leaders and senior officials.

 The government has repeatedly warned since 2010 that it would implement a strong stick-and-carrot mechanism or performance-based system within the transfer of budget appropriations (grants) from the central government to regional administrations to force them to improve their financial management and accountability. Regional administrations that fail to use a big portion of their investment budget will have their grants from the national state budget cut. But nothing seems to happen.

Needless to say, unrealized investment means lost opportunities to deliver public services and create jobs. Budgets also are the most important link in the long chain connecting policy to resource flows to public services and poverty reduction on the ground. The slow budget implementation has virtually nothing to do with effective oversight because the standards of financial management and accountability remain poor in most regions, as shown by the audit reports of the Supreme Audit Agency and the hundreds of corruption cases implicating regional leaders.

 Smooth regional budget implementation is crucial for economic growth because almost 50 percent of the national state budget is now transferred to regional administrations. Moreover, the performance of the whole national economy depends on economic activity in the regions. Put another away, the gross domestic product subsumes gross regional product, while regional budget implementation is one of the drivers of growth.

It is indeed high time for the government to put its corrective action where its mouth is. And this time, the central government seems to be much more serious about disciplining regional administrations.

Boediarso has confirmed that regional administrations that fail to spend a sizeable portion of their investment budget will have their grants from the central government transferred not in cash but in government bonds or three-month treasury bills, which are non-tradeable, as punishment.