Process of Budgeting at Local Government Level under Indonesia's Fiscal Decentralisation Policy

Author: Fadillah Amin

Amin, Fadillah, 2015 Process of Budgeting at Local Government Level under Indonesia's Fiscal Decentralisation Policy, Flinders University, School of Social and Policy Studies

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This study intends to elaborate upon and critically analyse the current process of budgeting at the local government level in Indonesia. In particular, this study aims to analyse the policy-practice gaps in the budgeting process of APBD (Anggaran Pendapatan dan Belanja Daerah/ Annual Local Budget), and identify the challenges and issues associated with this process. This study was undertaken in three locations, the City of Surabaya, City of Batu, and Regency of Trenggalek, each of which is considered to be representative of urban, sub-urban, and rural areas. The present study applies a qualitative approach and in particular employs grounded theory method.

Budgeting reforms started at the beginning of the 2000s as an integral part of the governance reforms initiated after the collapse of the ORBA authoritarian regime. The reform has changed the budget structure and the budgetary process. The budgeting process operates in four main stages namely formulation, validation, execution, and accountability and supervision. In the APBD formulation stage, several crucial steps have been changed to make this phase more effective and all stakeholders can participate equally. Nevertheless, local executives have remained highly dominant in this phase. In spite of their domination, local officials generally struggle to obtain valid data and also to maintain coordination and synchronisation among local institutions. Also, local authorities often fail to complete the process in a timely fashion. Additionally, local elites habitually ignore the obligation to make the APBD structure and figure public.

In the APBD validation process, the DPRD (local parliament) members play a fairly dominant role as they currently have great power in determining the composition and size of the APBD. However, most local legislators lack skills and experience, which leads to their dependence on the executives. Moreover, the legislators often do not perform their roles objectively and transparently. The real process of APBD validation is primarily conducted ‘behind’ the formal sessions through various political compromises and bargaining processes. These practices have led to hidden conspiracies to misuse the budget funds, aiming to use those for the interests of the local elites and their cronies instead of the public interest

In regard to the execution stage, local officers are mostly able to generate own-source revenue (PAD) as targeted in the APBD. Nonetheless, the volume of collected PAD remains low, therefore local governments generally rely on funds transferred from the central government. The local governments appear to prioritise financing routine expenditures rather than capital spending. Also, due to the lack of reliable data, routine expenditure is mostly executed incrementally.

In procuring goods and services, local officials prefer to conduct either a direct appointment or a simple auction instead of an open tender because manipulation and collusion can easily be carried out with potential contractors. Interventions from powerful parties in the procurement and execution of local projects induce to the rise of illegal types of projects such as 'Proyek Titipan' and 'Proyek Fiktif'. The study shows that a great deal of funds remains unutilised and high number of development projects remains unfinished because of improper APBD execution.

The quality of APBD supervision undertaken by local parliament members, supervisory units, NGOs, and community is now better compared to the New Order period. However, except for the KPK (Commission of Corruption Eradication), these supervisory agencies are unable to play effective role in supervising the APBD management due to obstacles such as lack of capacity, political powerlessness, vagueness and overlapping of authority.

In conclusion, the normative policies regarding local finance and budget management look better compared to the pre-reform period. Nevertheless, the local finance and budget cannot be managed properly because this is frequently interfered by various hidden conspiracies, political conflicts, and administrative misconduct. As a result, Indonesia has not adequately enjoyed the benefits of fiscal decentralisation and budgetary reform policy. Furthermore, the APBD funds appear unable to optimally contribute in improving the life of the local community and accelerating local developments.

Keywords: Budgeting process, local government, Indonesia, local autonomy

Subject: Policy and Administration thesis

Thesis type: Doctor of Philosophy
Completed: 2015
School: School of Social and Policy Studies
Supervisor: Dr. Noore Alam Siddiquee