According to Law No. 33/2004, balancing funds are funds from national revenue, allocated to regions to finance regions’ needs in the implementation of decentralization.
Balancing funds consist of three elements: the general allocation funds (Dana Alokasi Umum/DAU), specific allocation funds (Dana Alokasi Khusus/DAK), and revenues sharing funds (Dana Bagi Hasil/DBH). Under current laws and regulations, all local governments will receive at least one element of balancing funds. DAU are general grants or unconditional grants.
a. General Allocation Funds (Dana Alokasi Umum/DAU)
Referring to Law No. 33/2004, DAU comes from national revenue, allocated to achieve horizontal fiscal balance and to finance regions’ needs in the implementation of decentralization. At the beginning of the implementation of
Figure 4.5
Indonesian Intergovernmental Grants
decentralization, a hold harmless policy was imposed on the DAU, much more to the extent of political rather than financial interests. Hold harmless policy required that current year’s DAU should not be less than the previous year’s. This policy prevented the horizontal imbalance between regions from reducing, as well as decreased local governments’ incentives to be more efficient in planning their budget and in implementing their programs. Hold harmless policy was abolished in 2008. For most local governments, DAU is used to finance administrative expenditures, especially official salaries.
Currently, a formula approach is applied in the calculation of DAU to each local government. This approach has enabled central governments to keep already prosperous regions from receiving too many funds, and to maintain proper spread of general allocation funds to needy regions. Some regions with high fiscal capacities are also excluded from DAU allocation, based on the formula.
As unconditional grants, DAU can be used according to local priorities without intervention from central governments. DAU is transferred to subnational governments every month in a year, in an amount equal to 1/12 of annual DAU allocation.
b. Specific Allocation Funds (Dana Alokasi Khusus/DAK)
DAK is defined in Law No. 33/2004 as funds from national revenue allocated to certain local governments to finance specific functions, which are local governments’ functions and parts of national priority programs. DAK is conditional/earmarked grants and formula-based. The central government decides which local government is to receive DAK based on general criteria, specific criteria, and technical criteria. Most subnational governments rely on DAK to finance capital expenditures. DAK is matching grants as well, requiring subnational government to allocate at least 10% of DAK nominal value as
counterpart funds in a project.
DAK is formula-based, and it targets sectors considered as national priorities.
The sectors may change every year, depending on central government policies.
DAK is transferred to subnational governments in three installments, 30%, 45%, and 25% of annual DAK allocation, respectively.
c. Revenue Sharing Funds (Dana Bagi Hasil/DBH)
According to Law No. 33/2004, DBH is funds from national revenue, allocated to regions based on percentage to finance regions’ needs in the implementation of decentralization. There are two subjects of DBH: taxes and natural resources. DBH is formula-based.
According to Government Regulation No. 55/2005, DBH is shared between central, provincial, and local governments. Table 4.3 and Table 4.4 summarize the sharing of DBH Taxes and DBH Natural Resources among central and subnational governments.
Table 4.3.
Sharing of DBH Taxes
Taxes Central
Government (%)
Subnational
Government (%) Transfer time
Property taxes 10 90 Weekly
Property acquisition taxes 20 80 Weekly
Personal income taxes 80 20 Quarterly
Tariffs on tobacco products 98 2 According to
regulation
Table 4.4.
Sharing of DBH Natural Resources
Natural resources
Central Government
(%)
Subnational Government
(%)
Transfer time
Forestry 20 80 Quarterly
General mining 20 80 Quarterly
Fishery 20 80 Quarterly
Oil 84.5 15.5 Quarterly
Gas 69.5 30.5 Quarterly
Geothermal 20 80 Quarterly
DBH sharing of subnational governments is further divided between provincial and local governments, and some are subject to redistribution to all local governments in the same provinces. Some part of DBH share of the central government is also subject to redistribution.
DBH has the same characteristics as unconditional grants, except for DBH natural resources from oil and gas. For revenues from oil and gas, provincial governments are required to allocate 0.1% of the amount for elementary education, while local governments are required to allocate 0.2% for the same sector.
2. ‘Grants’ (Hibah)
Before discussing ‘grants’ (written in apostrophe), it is important to explain that the word ‘grants’ here is a terminology referring to a component in Indonesian intergovernmental grants. Throughout the previous chapter, and for the rest of the dissertation (unless mentioned otherwise), the word grants (without apostrophe) represent a concept in which central government transfers some amount of funds to lower level of governments.
Referring to the word grants as a concept, all components in Indonesian intergovernmental transfers qualified as grants. Referring to the word ‘grants’ as a terminology, Law No. 33/2004 defines ‘grants’ as local government revenues from foreign government, foreign organizations/institutions, central government, domestic organizations/institutions, and individuals in the form of foreign currency, Indonesian rupiahs, goods and/or services including experts and training that do not require repayments. PBG is classified under this category.
The terms and conditions of ‘grants’ are stipulated in ‘grants’ agreements between
the central government and recipient local governments; therefore, ‘grants’ can be customized according to the type of projects and goals to accomplish. ‘Grants’ can be designed as unconditional or conditional. The existence of ‘grants’ agreement is the point that distinguishes ‘grants’ from other intergovernmental grants components.
While the other components are regulated by a one-size-fits-all guideline, ‘grants’
agreement is customized according to individual recipient condition and is more legally binding. In Indonesian intergovernmental grants system, PBG is classified as ‘grants’.