Regional Development

LAW No. 22 of 1999 on Regional Administration was sanctioned in the sequel of the Peoples Consultative Assembly Decree No. XV/MPR/1998. It enables extensive, concrete, and responsible implementation of regional autonomy, based on the principles of democracy, peoples participation, equality and justice, as well as the potentials and plurality in the provinces of the Unitary State of Indonesia Law No. 25 of 1999 on Financial sharing between the Provincial and Central Government was promulgated to guide the regional governments in performing their task.

Regional Development Budget

Regional development has a budget allocation of Rp 3,362.4 billion that will be directed to development activities in support of regional capacity improvement, regional development, and urban and rural settlement development. It is also for activities on community empowerment in effort of poverty alleviation and local economic development. The budget is allocated to prepare resettlement of refugees and the local population who have given up their land for refugees, economic, social and culture empowerment for transmigrants and refugees, as well as to cope with regional problems and development acceleration to the regions in eastern Indonesia

Balance Fund

Since 2001, with the initiation of regional autonomy and fiscal decentralization, the transfer of funds from the State budget to the regions are allocated in the form of balance fund. This is to ascertain the source of funding for the Regional Budget, and to reduce the difference of interregional fiscal capacity.

In fiscal year 2002, the Government made improvements in the legal regulation concerning balance fund formulation. With the increase of domestic revenue, in the year 2002, the allocation of balance fund to the regions will be Rp. 90.3 trillion.

In the previous year of 2001, the allocation of balance fund was Rp. 81.5 trillion or 5.6% to the Gross Domestic Product (GDP), consisting of Profit Sharing Fund 1.4% to GDP, Public Allocation Fund 4.1% to the GDP and Special Allocation Fund 0.05% to GDP.

The share of state revenue for regional administrations through the State Budget of the fiscal year 1999/2000 and 2000 were only revenues derived from the taxes sector namely Tax on Land and Building (PBB), and Tax on Land and Building Rights (BPHTB). Revenues from non-oil and non-gas natural resources, especially forestry and general mining have actually already been shared with the regional administrations and technical ministers through the mechanism of direct remuneration by entrepreneurs of concerned sectors.

Profit Sharing Fund

From the entire allocation of balance fund, the transfer of profit sharing fund in fiscal year 2002 was targeted at Rp. 23.2 trillion, which increased by 14.3% from the 2001 profit sharing fund. The ratio against GDP was 1.4%. Its increase resulted from taxes, an increase in taxes for about 39.5%, and profit sharing fund from natural gas and general mining natural resources about 18.4% and 19.7% respectively. On the contrary, the allocation for the non-tax profit sharing fund originating from oil and forestry natural resources decreased by 16.9% and 20.0% respectively from the 2001 allocation.

According to Law No. 25 of 1999 and Government Regulation No. 104 of 2000, the allocation from profit sharing fund of oil and gas for the regional administration was decided at 15% and 30% respectively from the revenue after taxes. In line with the promulgation of Law on Nanggroe Aceh Darussalam (NAD), the allocation of profit sharing fund from oil and gas for NAD will be added by 55% and 40% respectively, so that each allocation will reach 70% after taxes. The ratio of the profit sharing funds will be effective eight years starting from 2002. On the ninth year the ratio will change to 50% each from the revenues, after taxes.

Public Allocation Fund

According to Chapter 7 of Law No. 25 of 1999 on the Ratio of Budget between the National and Provincial Governments, the Public Allocation Fund is decided at minimally 25% from net domestic revenue, which is domestic revenue minus profit sharing fund and Special Allocation Fund, derived from reforestation funds.

The public allocation fund is made available in effort to create equal balance in the regions, with consideration that the regional governments have different revenue capacities and potential. In other words, the public allocation fund has the task to cope with the interregional horizontal balance. For better result of the efforts to create equal balance, in fiscal year 2002, the Government is evaluating the 2001 formulation of the public allocation fund. Improvement is made in the variables of fiscal needs and fiscal capacity. Regional fiscal needs include population, extent of area, population density, building material price index and poverty gap. The variable of regional fiscal potential include Gross Domestic Regional Product (PDRB) of industry and services as well as natural resources profit sharing fund, PBB, BPHTB and Personal Income Tax (PPh).

For fiscal year 2002 transferring to the public allocation fund for the regional government was projected at Rp66.3 trillion or 73.4% from total balance fund. Provincial governments will receive 10% of the amount which is Rp6.6 billion, approximately 0.4% to the GDP, while the Regency/City government will receive all of the 90% which is Rp.59.7 trillion, or 3.5% to the GDP.

(Source: Indonesia 2002, An Official Handbook, NationalInformation Agency of theRepublic of Indonesia)