Reducing Interdistrict Disparity and Creating Fiscal Incentive through Provincial Financial Assistance Reform in East Nusa Tenggara

A group of civil servants holding a book of action plans for accelerating the Human Development Index (HDI) in West Kalimantan Province for the years 2023-2025

Theresia Maria Florensia, Head of the Economy and Natural Resources Division at ENT Bappelitbangda, presenting during a working group meeting on the draft of Governor Regulation on Bankeu Implementation (March 16, 2023)

Theresia Maria Florensia, Head of the Economy and Natural Resources Division at ENT Bappelitbangda, presenting during a working group meeting on the draft of Governor Regulation on Bankeu Implementation (March 16, 2023)

The provincial government (PG) has discretion to utilize provincial financial assistance (bantuan keuangan, bankeu) to districts in harmonizing of provincial-local government programs, reducing inter-district disparity, creating performance-based incentive system, and increasing district revenues. However, PG needs to prioritize financing activities under its authority prior to allocating bankeu.

USAID ERAT assessments found that not many PGs have allocated significant amount of funds for bankeu, distributed it based on transparent formulas, and monitored the implementation for further improvement; East Nusa Tenggara (ENT) included. 

The PG of ENT allocated small amounts of bankeu without adopting any clear technical formulas.  The bankeu was allocated based on the proposals of the local governments (LGs), which were then reviewed and approved by the PG. The only criterion was whether the proposed activities are aligned with the PG’s priorities, which were very broad and, hence, the decision is arbitrary.  The utilization and disbursement procedures of the bankeu were not clearly regulated, either. The PG did not have a monitoring and evaluation system in place for the bankeu.  Hence, the accountability of the bankeu is at risk. Legally, the previous ENT Governor Regulation governing the bankeu needed to be amended to update its legal references to new law and regulations issued by the central government. 

The province of ENT represents disadvantaged areas in Indonesia. In 2022, this province recorded the third poorest human development index (HDI) and poverty rate. Low attendance of professional health worker at childbirth, high stunting prevalence, low coverage of health insurance, low legal identity ownership, and lack of access to clean water and proper sanitation remain major development challenges in the province. 

Interdistrict disparity within the province is also apparent. Its capital, Kota Kupang, performs best for most development outcome indicators, including HDI, poverty rate, and economic growth.  In contrast, districts like Sabu Raijua, Sumba Tengah, and Rote Ndao have the worst performance on most outcome indicators. Implementing a properly designed bankeu will provide an opportunity for low performing districts to increase their fiscal capacity to improve public services and, hence, narrow the disparity. Furthermore, bankeu distribution that objectively considers the performance of the LGs on specific indicators also provides fiscal incentive to encourage them to perform better.

In January 2023, USAID ERAT presented the results of its assessment on the existing provincial bankeu and recommendations to reform the financing scheme to the PG officials.  In particular, two key stakeholders of the bankeu – Regional Financial Board (Badan Keuangan Daerah, BKD) and the Regional Development Planning, Research, and Development Board (Badan Perencanaan Pembangunan, Penelitian, dan Pengembangan Daerah, BAPPELITBANGDA) – positively responded to the results of the assessment and recommendations.  They established a working group to develop the concept further, including in formulating a new governor regulation to govern the bankeu. With intensive support from the USAID ERAT Team, the working group was able to draft the governor regulation within two months after the process.  After consultations with high level officials of the PG and legal review, the ENT Governor Regulation No. 36/2023 on Guidance of Bankeu Implementation was then successfully legalized and signed by the Governor in June 2023.

This is an important milestone as the regulation will significantly impact on the transparency of financial transfers to the districts. As indicated in Figure 1 below, the new Governor Regulation includes General Financial Assistance (Bantuan Keuangan Umum, BKU) and Specific Financial Assistance (Bantuan Keuangan Khusus, BKK).  The latter includes three types of allocations: performance-based fiscal incentives BKK, thematic/affirmative BKK, and regional cooperation BKK. The thematic BKK will be allocated based on LGs’ proposals in addressing specific purposes and priorities of the PG, while the regional cooperation BKK will finance collaboration with other PGs and/or LGs located off ENT.

The two main recommendations of USAID ERAT on BKU to contribute to reducing interdistrict disparity and Performance-based Incentive BKK were fully adopted in the ENT Governor Regulation.  The new concept of BKU distributes the funds based on the needs of the districts on seven indicators: fiscal capacity, economic growth, gross regional development product (GRDP) per capita, poverty rate, unemployment rate, HDI, and Gender Development Index. Meanwhile, the Performance-based Incentive BKK adopts a framework similar to the central government’s incentive fund transfers. Recipients of the Performance-based Incentive BKK need to meet basic eligibility criteria of unqualified audit opinions and timely approval of the budget. Those meeting the eligibility criteria will be evaluated against various performance criteria that reflect the LGs’ performance in financial management, implementation of strategic provincial programs, general public services, and promotion of sustainable development.

Nonetheless, the implementation of the new bankeu concept in FY 2024 is facing a huge challenge of the province’s fiscal capacity.  In addition to financing the simultaneous local elections in 2024, the PG also needs to start paying back their loans.  USAID ERAT will continue supporting the PG to identify potential solutions to this issue, in addition to developing technical guidelines for the implementation of the bankeu.

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