Decentralization of Forest Administration in Indonesia, Implications ...

Chapter 4
Fiscal Balancing and the Redistribution
of Forest Revenues
Ida Aju Pradnja Resosudarmo, Christopher Barr,
Ahmad Dermawan, and John McCarthy
4.1 Introduction
To a very significant degree, Indonesia’s decentralization process was driven by the
demands of regional stakeholders for a greater share of the fiscal revenues associated
with natural resource extraction activities in their jurisdictions. Through the New
Order period, a substantial majority of the taxes and royalties generated by timber
extraction, mining, and oil and gas production in Indonesia flowed to the national
government in Jakarta. However, since the fall of Soeharto in 1998, officials at
both the provincial and district levels have engaged in a tug-of-war with national
policymakers to secure a greater portion of these revenues. They have argued, in
many cases, that their regions remained underdeveloped during the New Order period
while providing the central government with a steady stream of fiscal resources.
A general framework for the redistribution of revenues between Indonesia’s
national and regional governments was provided by Law 25/1999 on Fiscal Balancing,
which was enacted together with Law 22/1999 on Regional Governance in May 1999.
Significantly, Law 25/1999 delineated how petroleum, timber, and mining royalties
are to be re-divided among Indonesia’s national, provincial, and district governments
under regional autonomy. As significantly, Law 25/1999 specified how district
governments are to obtain the fiscal resources needed to pay for the large number
of new administrative responsibilities assigned to them by Law 22/1999. Indeed, the
fiscal balancing law appears to give district governments significant responsibility
to raise their own funds to cover the added costs passed on to them by the central
government in the context of decentralization. On the other hand, the law opened up
opportunities for district governments not only to identify new sources of potential
revenues, but also to spend the income generated according to local development
needs and priorities.
This chapter briefly outlines the fiscal system framing regional government
finance during the New Order period, including the mechanisms for distributing
forestry sector revenues. It then examines how Indonesia’s fiscal system was
restructured under decentralization with the enactment of Law 25/1999 – and, more
recently, with the adoption of Law 33/2004 on Fiscal Balancing between the Central
Government and Regional Governments (which was ratified in October 2004 together
with Law 32/2004, the revised regional autonomy law). In particular, the chapter
describes how forestry revenues have been redistributed under the new fiscal balancing
arrangements, and assesses what this has meant in terms of both forest administration