BUDGET GOVERNANCE REFORM: FISCAL DECENTRALIZATION

IN INDONESIA

Submitted to fulfill one of the tasks of the Administrative Reformation Course

Arranged by:

AbdillahSyahrazadFadly 170110150057

Andriyono 170110150040

FajarRamadhan 170110150046

Habib Desenamurti 170110150081

Jerry Wasril 170110150067

NirvanNovebianaShafwan 170110150058

NugrahaHeriantoPangihutan S 170110150041

Ray FrindonNadeak 170110150078

PROGRAM STUDI ADMINISTRASI PUBLIK

FAKULTAS ILMU SOSIAL DAN ILMU POLITIK

UNIVERSITAS PADJADJARAN

2018
BUDGET GOVERNANCE REFORM: FISCAL DECENTRALIZATION
IN INDONESIA

Abstract

The purpose of this paper is to determine the reform of physical

decentralization budget management in Indonesia. As for the background of this
writing, because the budget governance in indonesia inherited from the goverment on
new orders are still failing and the country debt in increasing to demand
administrative reform by doing physical decentralization to fix the economy on
indonesia. Physical decentralization in Indonesia intended to create an aspect of
independence in the region as a consequence the region will later recieve delegation
of authority in all fields except authority in the field of region politics.

Key word: Physical decentralization, budget management, administrative reform

Background

Weaknesses in the Indonesian state financial system inherited from the New Order
Government are fundamental nature. These weaknesses include the design and
implementation of the internal control system, non-compliance with statutory regulations,
poor storage of state finances, lack of information about state assets and debts, and
inconsistent and inadequate disclosure of SAL (Remaining Budget). Because the state's
financial position is not reported accurately and on time. The people and the DPR cannot use
their budgetary rights effectively. Because not all state revenues and expenditures are
withdrawn and used based on the Law and / or with the approval of the DPR, the People and
the DPR do not know exactly how much the state budget, expenditure structure and usage are.
Information about the contingency of state revenues and expenditures is unknown because it
is not disclosed by the Government in its expenditure and expenditure budget. Such a bad
system is not informative to find out the financial position of the state so that it cannot be used
as a basis for decision makers as well as doing future anticipation.
 The implementation of fiscal decentralization in the Reformation era officially began
on January 1, 2001. The process began with the ratification of UU No 22 /1999 concerning
Regional Government and UU No 25 /1999 concerning Financial Balance Between Central
and Regional Governments (PKPD). Until now, the two regulations have undergone several
revisions to the latest UUno 23 /2014 concerning Regional Government and UU No 33 /
2004 concerning Financial Balance Between the Central Government and Regional
Government. Fiscal policy as an instrument of government plays an important role in
influencing the economy. These fiscal instruments are useful to encourage economic growth,
maintain price stability or control inflation, expand the base of economic activities of various
sectors, and specifically expand business fields to reduce unemployment rates (Mankew,
2003). The implementation of fiscal decentralization implemented by Indonesia is a new
challenge in Indonesia's macroeconomic management. Some countries, such as India, Brazil,
Russia, and China, have faced complicated and prolonged macroeconomic stability problems
due to the lack of proper management of fiscal decentralization. One of the roots of this
problem is the difference in economic policy orientation between the central government and
local governments (Strauss et al, 2002). The study of the implementation of fiscal
decentralization by Mahi (2001), Brodjonegoro (2002), Pujiati (2007) found that fiscal
decentralization in Indonesia has caused significant economic growth. Meanwhile Sasana
(2005) shows that fiscal decentralization is able to encourage local economic growth.

Based on the President's speech in the introduction to the Financial Note and the 2016
State Budget (R-APBN) Draft, the government for the first time allocated Transfer to
Regional expenditures greater than Ministry / Institution (K / L) expenditure. This is based on
consideration of the increasing number of authorities that have been handed over to regions in
the era of fiscal decentralization and regional autonomy. The Minister of Finance also
interpreted this as the implementation of full fiscal decentralization, even though in fact
Indonesia has had a long history from the era of the Old Order to the era of the Reformation.

Initially, the implementation of fiscal decentralization in Indonesia was intended to

create aspects of independence in the region. As a consequence, regions then receive
delegation of authority in all fields, except authority in the fields of foreign policy, defense,
security, justice, monetary and fiscal as well as religious affairs. The delegation of authority
was also followed by the submission of funding sources in the form of submitting taxation
bases and funding assistance through the mechanism of Transfer to the Regions in accordance
with the principle of money follows function. The existence of a Transfer to Regional
mechanism is based on the consideration of reducing inequality that may occur both between
regions (horizontal imbalances) and between central and regional governments (vertical
imbalances).

Although it was considered too hasty, many parties later appreciated the
implementation of fiscal decentralization and regional autonomy in Indonesia. According to
them, with all the limitations and constraints that exist, the implementation of fiscal
decentralization and regional autonomy in Indonesia can be one of the best best practices in
the world, given the vastness of the region and the large number of people with various
characteristics. One thing to keep in mind is that the implementation of fiscal decentralization
in Indonesia is decentralized from the expenditure side, not from the revenue side.

Fiscal decentralization from the expenditure side is defined as the authority to allocate
expenditure in accordance with the full discretion of each region. The function of the Central
Government is only to provide advice and monitor implementation. Unfortunately, it is
precisely from this pattern that the implementation of fiscal decentralization and regional
autonomy in Indonesia feels increasingly far from what was previously intended. Regions are
even more dependent on the Central Government, the emergence of ruling dynasty practices
in the regions and the widespread corruption of public officials. The idioms that emerge then
fiscal decentralization and regional autonomy are nothing but transferring negative
externalities from the Central Government in the New Order era towards Regional
Governments (Pemda) in this reform era.

In response, the government did not just stay silent. Various anticipatory and reactive
policies continue to be carried out while prioritizing aspects of strengthening the capacity of
local governments to carry out the process of fiscal decentralization and regional autonomy.
Through the revision of UU No 23 / 2014 concerning Regional Government, for example, the
government has strengthened the division of authority between the Center, Provincial
Government and Regency / City Government. From the aspect of improving the financing
mechanism, the government also gave no less serious attention. The allocation of Village
Funds as fulfillment of the mandate of UU No 6 / 2014 concerning Villages is also the latest
proof of that commitment. Likewise the consistency of the government to use the formula in
the DAU calculation and the courage to eliminate the hold harmless aspect that will guarantee
the DAU allocation in an area will certainly not decline compared to the previous year, even
though it actually provides a large fiscal pressure on the APBN.

Methodology

In this article, the author uses the systematic review literature method, namely by
identifying, assessing, and interpreting all findings in international journals by discussing the
topic of "budget reform: fiscal decentralization". The author does this method by identifying
several journals, comparing them, looking for similarities, and criticizing and interpreting
conclusions from several journals that the author has specified in the literature.

Literature review

During this globalization period, it is very necessary for a public administration

reform, because in reality public administration is a dynamic process and always requires new
innovations to be maximized. One of the new innovations in public administration is the
"concept of governance". In his book bureaucratic reform in the framework of good
governance, (Rewansyah, 2010) says that "governance is defined as governance in the English
language, the act, fact, manner of governing. Thus, governance or governance refers to
activities or processes, a method or method, action and system of governance. Governance
theory describes macro processes of change in government. Governance means decision
making or public policy and the process by which the decision is implemented or not
implemented. "The term governance refers to the role, structure, and operational processes of
the government or how to solve social problems. Mardiasmo revealed the characteristics of
Good Governance according to UNDP are: participation, rule of law, transparency,
responsiveness, consensus orientation, equity, efficiency and effectiveness, accountability,
strategic vision (Mardiasmo, 2002). While Sjamsuddin (2005) says that it is not just a method
or method, activity or process and system but also means a way of power, the use of
economic, political and administrative authority, as an instrument of public policy, and a
process of socio-political interaction. The principles of governance (Sjamsuddin, 2005):

1. Principles of democracy and empowerment

2. The principle of service

3. Principles of transparency and accountability

4. Principles of participation

5. The principle of partnership

6. The principle of decentralization

7. Consistency of policy and legal certainty

Related to administrative reform there are some experts who provide their
explanations, including Caiden (quoted from Zauhar 2007: 6) defining administrative reform
as "The artificial inducement of administrative transformation resistance". "That is,
administrative reform is an activity made by humans, not incidental, automatic or natural; it is
a process that goes hand in hand with the administrative reform process ". Caiden also clearly
distinguishes between administrative reform and administrative change. Change in
administration is meaningful as an organizational response that is automatic against
fluctuations or changes in conditions. Zauhar (2007: 11) "interpreting administrative reform is
a conscious and planned effort to change the structure and procedures of bureaucracy (aspects
of reorganization or institutional / institutional, attitudes and behavior of bureaucrats),
(behavioral aspects, to improve organizational effectiveness or create healthy administration
and guarantee the achievement of national development goals) ".

Wallis in Kertasasmita (1997) defines administrative reform as induced, permanent

improvement in administration that can be interpreted to contain three aspects, namely:

a. Changes must be an improvement from the previous situation.

b. Repairs are obtained by deliberate efforts and do not occur by accident or business
sign.
 c. Repairs that occur are long-term and not temporary to then return to their original
state.

The purpose of administrative reform, namely improving performance, administrative

capabilities of bureaucratic apparatus, including improving bureaucratic structures or even
behavioral procedures in order to improve organizational performance and effectiveness.

Administrative Reform Strategies As explained above to improve the institutional

aspects and aspects of human resources, an approach or strategy model is needed to carry out
administrative reforms in both aspects. Related to the strategy in administrative reform,
Zauhar (2007: 77) "states that administrative reform is closely related to the notion of strategy,
because essentially administrative reform is an activity to increase the ability to win wars
against administrative irregularities and several other types of administrative diseases that are
often found in most countries is developing ". Besides Osborne (2000: 45) "states there are 5
administrative reform strategies, namely:

1. Core Strategy

This core strategy is closely related to the purpose of a system and government
organization. The purpose of a system and government organization is made a core
strategy because it is the core function of government, namely the directing function.
This strategy removes functions that no longer carry out actual government goals. This
strategy separates the direct function from the executing function, so that each
organization can focus on one goal. This strategy also enhances the government's
ability to direct by creating new mechanisms to define goals and strategies. This
strategy approaches with clarity of purpose, approach to clarity of direction and
approach to clarity of direction.

2. Consequences Strategy

This consequence strategy is closely related to the government incentive system, this
system is an important part of the government system. In bureaucracy, there is a strong
incentive for employees to obey the rules and submit. Innovation will only bring
difficulties while the status quo constantly brings prizes. Employees are paid the same
regardless of results. And most organizations are monopolistic. The government
incentive system mentioned must be converted into an incentive by creating
consequences for the performance produced.

3. Customer Strategy

This customer strategy has a pattern of shifting part of the accountability to customers.
This strategy gives choices to customers about organizations that provide services and
set customer service standards that must be met by those organizations. The creation
of accountability to customers is increasingly pressing government organizations to
improve their performance results, not just managing their resources. This strategy
also creates information about customer satisfaction with certain services and results
from the government, and this strategy gives government organizations the right target
for increasing customer satisfaction.

4. Control Strategy

Strategy control controls significantly push down decision-making power through

hierarchies, and sometimes out into community groups. This strategy shifts the forms
of control used and detailed rules and hierarchical commands to joint missions and
systems that create performance accountability. This strategy empowers organizations
by loosening the grip of the central control body.

5. Cultural Strategy

The last critical government system is the one that determines the organizational
culture of the government, namely the values, norms, attitudes, and expectations of
employees. Culture is strongly influenced by the other parts of the organization, the
incentive system, the accountability system, and its power structure. Change these
elements so that culture will change, but culture does not always change as what the
leaders expect. Therefore, every organization that has used the other four strategies
must finally decide to change its organizational culture. "
 Based on Article 1 of PeraturanPemerintah No. 58 of 2005 concerning Regional
Financial Management, states: "regional finance is all regional rights and obligations in the
context of implementing regional governance that can be valued with money including all
forms of wealth related to the rights and obligations of the region". Whereas "regional
financial management is the whole activity which includes planning, implementation,
administration, reporting, accountability, and supervision of regional finance". In the reform
of regional financial management there are 5 (five) points of reform, namely financing reform,
budgeting reform, accounting reform, regional financial management reform, and audit
reform.

Discussion

In the historical record, it cannot be denied that Indonesia's economic growth from
time to time has indeed accelerated. However, if traced in the history of the Indonesian
economy, especially during the old order, Indonesia's economic development is relatively
static. Various political instabilities and constraints on the limitations of human resources
have caused many resources to be cultivated during the 20 years after independence (Hamid,
2000: 5). Not much different from the economic growth that was inscribed by the New Order
regime. This indicator, among others, can be seen in the conditions of foreign debt, inflation,
economic growth, poverty, deficits, and budget.

In the reform era, it does not mean that with the shifting of policyholders, it will also
shift the Indonesian economy, from deterioration to prosperity. However, economic problems
will not be bored to greet this motherland. At least, there are three hot issues that are often
discussed in relation to policies:

(1) Fuel subsidies (BBM).

The main problem with the current fuel subsidy is the question of the amount of
subsidies and incompatibility with the principle of justice. Data from the Ministry
of Energy and Mineral Resources (ESDM) states that fuel subsidies in 2010
amounted to 181 percent of 2009 fuel subsidies. The volume of subsidized fuel in
2010 reached 38.2 million kiloliters (kl) or exceeded the APBN quota of 36.5
 million kl. Premium is the highest type of BBM, which is 60 percent or 23.1
million kl. The realization of subsidized fuel in 2009 was 37.7 kl. The biggest user
of the subsidy is land transportation, which is 89 percent or 32.48 million kl.
Premium consumption in the land transportation sector is dominated by private
cars, namely 53 percent or 13.3 million kl of total premium consumption for land
transportation. The dominance of premium consumption in the land transportation
sector by private vehicles is considered by most parties, including the government,
to be a reality that does not reflect justice (Buana, 2012). Whereas those who buy
fuel are all people without exception, whether they are rich or poor (Supriyanto,
2005). This injustice has resulted in the widening economic inequality among
residents in Indonesia.
(2) Foreign Debt.
Since 1997 Indonesia as a member of the IMF has used its right to obtain
assistance. But what happened, both before and after this crisis, actually buried
Indonesia in an increasingly large debt trap. The implications of this debt burden
will have an impact on the burden of the people, and the public facilities that
should have been provided will be reduced because funds must be allocated to
repay debt and pay interest. The greater the debt, the greater the interest, and this
will force the government to draw even more taxes to meet its fiscal obligations.4
The increase in taxes, obviously will have an impact on the rising prices of
manufactured goods, so that the poor are once again cornered limited income. The
Ministry of Finance in Indonesia recorded total government debt as of December
31, 2010 reaching Rp1,676 trillion. Even though the January 2011 edition of the
State debt development report of the Directorate General of Debt Management at
the Ministry of Finance, the figure is a very temporary figure using the exchange
rate benchmark of Rp.8,991 per US dollar.5
(3) Prediction of Budget Amount.
The volatility of the rupiah exchange rate against the US dollar has shaken the
foundations of the macroeconomic foundation that have been built so far. The
turmoil of world oil prices which reached the highest price during the decade made
the BBM crisis in various regions in Indonesia. All these turbulent macroeconomic
 magnitudes will often destroy the prediction of numbers that have been fixed in the
beginning of the annual APBN implementation. It all shows how vulnerable the
current Indonesian economy is (Supriyanto, 2005). As a consequence of the
description above, it is difficult to make predictive figures on the current state
budget. What is important to minimize turmoil is to strengthen Indonesia's current
and future macroeconomic conditions (Supriyanto, 2005)

Based on UU No 33 of 2004 concerning Financial Balance between the Central

Government and Regional Governments, decentralization is defined as the surrender of
government authority by the Central Government to the Autonomous Region to regulate and
manage government affairs in the system of the Unitary State of the Republic of Indonesia.
Decentralization is a tool to achieve one goal in a country, in order to provide better public
services to the community and create a more democratic public decision-making process.

Fiscal decentralization is the giving of authority from the center to the regions to
regulate their own finances as long as they do not conflict with applicable regulations. This is
so that local governments can carry out their functions efficiently and effectively.

If the Regional Government performs its function effectively and gets freedom in
making expenditure decisions in the public sector, then they must receive adequate financial
resources from both Regional Original Revenue (PAD), Tax Revenue Sharing and Non-
Taxes, Loans, or Subsidies / Assistance from the Central Government.
Decentralization Fund Scheme

Case Study of Village Fund Management

Management of Village Funds in five villages in LubukAlungSubdistrict, Padang

Pariaman Regency, West Sumatra Province, factors that hinder village fund management and
efforts in overcoming village fund management. To achieve these objectives, qualitative
research methods are used by breaking down data descriptively. Data collection techniques
are carried out by observation, interviews, and documents and archives using qualitative
descriptive analysis techniques. The results of the study show:

1. Planning has been in accordance with PermendagriNo. 113 of 2014 concerning

Village Financial Management. Whereas Implementation, Administration, Reporting
and Accountability is not in accordance with PermendagriNo 113 of 2014 concerning
Village Financial Management.

2. Inhibiting factors in managing village funds in LubukAlung District, namely,

human resources, late reporting, changes in APBDesa, internet and public
understanding.
 3. Efforts made in overcoming these obstacles, namely, the development of selection
systems for nagari devices, increased levels of education, and training.

Village fund management is part of village financial management in the APBDesa,

including planning, implementation, administration, reporting and accountability. All of these
processes are carried out by the village government accompanied by a companion team from
the government, as well as community participation in the supervision of village funds.
Management of village funds in LubukAlungNagari, SikabuNagari, PasieLawehNagari,
AieTajunNagari, and NagariPungguangKasiak have guidelines or rules such as Minister of
Home Affairs Regulation No. 113 of 2014 concerning Village Fund Management and Padang
Pariaman District Regent Regulation No. 72 of 2016 concerning Procedures for the
Distribution and Determination of Details of Village Funds for each Nagari in Padang
Pariaman District in the 2017 budget year.

Flow of Village Fund Planning

The conclusions from this case study are as follows:

1. The stages of village fund management in LubukAlung Sub-district in accordance with

PermendagriNo 113 of 2014 concerning Village Financial Management are only the planning
stage, while the implementation stage, business administration, reporting and accountability
are not in accordance with PermendagriNo 113 of 2014 concerning Village Financial
Management.
2. Inhibiting factors in managing village funds in LubukAlung District, namely, human
resources, late reporting, changes in APBDesa, internet networks and public understanding.

3. Efforts made in overcoming these obstacles, namely, developing a selection system for
nagari devices, increasing the level of education, and training.

Problems in Implementing Fiscal Decentralization

a. Corruption in the Region

Based on information from the Director General of Regional Autonomy Kemendagri,

as many as 325 regional heads were caught up in legal problems. Some of these have become
prisoners, while some are still suspects. Regional head officials who should lead the course of
the implementation of decentralization, in fact many have problems with the law. This can
hamper the course of development in the Region. The factor that caused many of these
corruption cases was due to the high cost of the election campaign and the lack of public
awareness to participate in the implementation of decentralization.

The results of the study also show that fiscal decentralization has a positive effect on
corruption, which means that the higher the level of fiscal decentralization in the region
increases corruption in the region concerned.

b. Rich and Poor Regions

The phenomenon that arises from the policy of fiscal decentralization is the existence
of poor regions and rich regions. This is because the potential of PAD owned by each region
is indeed different. The thing that causes the difference is because the potential of natural
resources owned by each region is also different. Regions that have large natural resources
will receive large DBH. Differences in income sources in each of these regions can lead to
different levels of human development and economic growth which can end in jealousy
between regions. This imbalance by the central government was resolved through the DAU
granting mechanism. Regions that have large PAD / DBH, will get less DAU than other
regions.
 An example of a rich region is the DKI Regional Government, which in 2014 only
received DAU of 86 billion because the PAD owned was already very large.

Conclution

In the historical record, it is undeniable that Indonesia's economic growth from time to time
has indeed accelerated. However, if traced in the history of the Indonesian economy, especially during
the old order, Indonesia's economic development is relatively static. Various political instabilities and
constraints on the limitations of human resources have caused not much resources to be spent during
the 20 years after independence.

The purpose of administrative reform, namely improving performance, administrative

capabilities of bureaucratic apparatus, including improving bureaucratic structures or even behavioral
procedures in order to improve organizational performance and effectiveness. Based on Law Number
33 of 2004 concerning Financial Balance between the Central Government and Regional
Governments, decentralization is defined as the surrender of government authority by the Central
Government to the Autonomous Region to regulate and manage government affairs in the system of
the Unitary State of the Republic of Indonesia. Decentralization is a tool to achieve one goal in a
country, in order to provide better public services to the community and create a more democratic
public decision-making process.

Fiscal decentralization is the giving of authority from the center to the regions to regulate their
own finances as long as they do not conflict with applicable regulations. This is so that local
governments can carry out their functions efficiently and effectively.

The results of the study also show that fiscal decentralization has a positive effect on
corruption, which means that the higher the level of fiscal decentralization in the region increases
corruption in the region concerned and also the existence of poor and rich regions. This is because the
potential of PAD owned by each region is indeed different. The solution to overcome this problem is
that the central government here needs to regulate the election system that saves political costs, the
central government as a regulator needs to strive so that local governments can divert the portion of the
expenditure to increase productive infrastructure so as to support regional economic growth. A
mechanism for measuring performance with the Balanced Score Card is needed in order to provide
reward and punishment related to evaluating the effectiveness of regional financial management.
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