Since Indonesia began implementing its decentralization program in 2001, subnational unspent balances have grown rapidly and have reached levels that many officials find unreasonably high. But the extent to which subnational government reserves are excessive, in general, is not obvious. A not implausible decrease in the price of oil would reduce transfers to subnationals significantly and, if sustained, could possibly eliminate reserves in a relatively short time. Central government should not take any immediate action to reduce subnational slack resources directly but should instead focus on removing the underlying causes of such.
SUMMARYSub-national government capital spending is important for both public service delivery and economic development. Currently, Indonesian sub-national public capital spending appears barely sufficient to cover the annual depreciation of its fixed assets. A substantial proportion of local government investment spending goes to create relatively unproductive assets, such as administrative office buildings. Sub-national governments finance their capital acquisitions out of gross operating budgets and have thus far not used, to any great extent, either borrowed funds or their significant cash reserves for such purposes. Indonesian sub-nationals need to spend more on capital than they do now and also need to focus that spending on more useful types of infrastructure. The major constraints to increasing capital spending at the sub-national level are not related to a dearth of finance, but regulatory rigidities in budget preparation and implementation and, most importantly, a lack of capacity to plan, design and implement investment projects.
Chapter 1 1 Introduction 1 Objective and Scope of Work 2 Status and Contents of this Report Chapter 2 3 Administration of the Intercept Mechanism 3 Review of DAU and DBH 4 Recommended Adjustment to PP and PMKs Chapter 3 7 Accounting for Intercepts Annex Definitions DSF Decentralization Support Facility Region A province (propinsi) or district (kabupaten or kota) District A municipality (kota) or regency (kabupaten) 1 There are other irregularities specified in the regulatory framework which would also invite the intercept by Government of transfers to the regions Operationalizing the Central Government Transfer Intercept Mechanism
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