VZCZCXRO5020
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #0842/01 1350447
ZNR UUUUU ZZH
R 150447Z MAY 09
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 2329
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS COLL
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 03 JAKARTA 000842 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/MTS 
 
E.O. 12958: N/A 
TAGS: ECON PGOV PREL ID
SUBJECT: Decentralization: challenges and opportunities in East 
Java 
 
¶1. (SBU) Summary: Decentralization is nearly universally regarded as 
a positive policy.  However, there is a wide range of performance 
with decentralization's increased local government authorities and 
budgetary allocations.  East Java is one of the most productive, 
well-performing provinces in Indonesia.  And there are numerous 
decentralization success stories at the district level. 
Decentralization is promoting competition within the province, 
spurring innovation, investment, and increasing socio-economic 
indicators in some districts.  Yet, there are structural, resource, 
and central government constraints that limit the benefits of 
regional autonomy.  Local leadership continues to be the key factor 
in determining decentralization's success.  End Summary. 
 
East Java: engine of Indonesian economy 
--------------------------------------- 
 
¶2. (SBU) East Java is the "bread basket" and key economic engine of 
Indonesia.  East Java supplies 35-40% of Indonesia's rice and sugar. 
 Large industries - oil, cement, manufacturing, and others - drive 
economic growth in the region.  Divided into 38 districts (kabupaten 
/ regencies and kota / cities), East Java offers both success 
stories and failures of regional autonomy policies. Some district 
governments - such as Tulungagung, Pasuruan, and Pamekasan - have 
used increased local authorities to improve public service delivery. 
 Others have wasted increased local government resources and failed 
to improve socio-economic welfare indicators. 
 
Widespread support for decentralization 
--------------------------------------- 
 
¶3. (SBU) Decentralization is nearly universally regarded as a 
positive concept and policy approach, particularly at the provincial 
and district levels.  Since 2001, the central government has 
continued to push significant resources and authorities to the 
district level as part of Indonesia's broader reform movement. 
Public service delivery - particularly education and health - is the 
responsibility of the local government, compared to the more 
centralized practices of the Suharto era.  With the increased 
authorities and responsibilities, the central government has also 
increased its direct budget transfers to the district level. 
 
Decentralization spurs regional competition 
------------------------------------------- 
 
¶4. (SBU) Local leaders and citizens argue that local government is 
more responsive to citizens' needs during the "decentralization era" 
as more money and authority are devolved to the district level. 
Decentralization policies can spur regional competition to attract 
both investment and prestige.  At the provincial and district level, 
some local governments are setting progressive investment policies 
to attract investment.  In East Java, districts also compete for 
prestige as the Jawa Pos Institute for Pro-Autonomy gives annual 
awards to well-performing local governments.  Decentralization also 
gives local governments more freedom to determine policy priorities. 
 In the remote district of Pacitan, birthplace of President 
Yudhoyono, the district government devotes over 40% of the budget to 
education. 
 
But it's all about the follow-through 
------------------------------------- 
 
¶5. (SBU) Despite support for the concept of decentralization, there 
is widespread frustration with its implementation.  Quality of 
budget spending is often poor, even in some highly regarded 
districts.  Many districts spend 60-70% of their budget on overhead 
(e.g., salaries, buildings), according to a senior Ministry of Home 
Affairs official.  Only 30-40% of local governments are directed to 
public service delivery.  In Pacitan district, about 65% of the 
budget is devoted to overhead.  Other East Java districts - 
including Ngawi and Madiun City - reflect this trend.  The budget 
percentages should actually be flipped: 30-40% to overhead and 
60-70% to public service delivery, according to the Ministry of Home 
Affairs official.  Two of the highest performing districts - Sragen 
in Central Java and Jimbrana in Bali - achieve that ratio. 
 
Multiple constraints to decentralization 
---------------------------------------- 
 
¶6. (SBU) Structural, resource, and central government constraints 
limit local governments' effectiveness in implementing regional 
autonomy policies. 
 
¶7. (SBU) STRUCTURAL: Over 90% of the local government budget in many 
districts in East Java comes from direct transfers from the central 
government.  Local taxes often generate 10% or less of the local 
government budget.  The exception is urban areas, such as the 
 
JAKARTA 00000842  002 OF 003 
 
 
provincial capital Surabaya, which can generate more local revenue 
from area businesses.  The central government-based budget framework 
limits the incentives for local government to attract investment, as 
local areas receive only limited additional tax revenues.  The 
budget framework also encourages local government leaders to come to 
Jakarta often to lobby ministries - particularly the Finance 
Ministry - for special budget consideration, which can lead to 
corruption. 
 
¶8. (SBU) Another area with high potential for corruption is the 
local budgeting process, particularly the role of the local 
legislative body (DPRD).  The local legislative body and local 
government administration engage in negotiations to determine budget 
priorities after receiving central government outlays. 
Construction, service contracts, and other budget expenses are often 
rife with corruption and nepotism, according to civil society 
contacts throughout East Java. 
 
¶9. (SBU) RESOURCE: Poor infrastructure impedes growth.  Many remote 
districts, such as Pacitan and Ngawi, are several hours drive via 
poor roads from major provincial hubs.  The higher the level of 
government, the poorer the commitment to infrastructure, according 
to Regional Economic Development Institute Director Indra Fauzi. 
Eight districts in East Java placed in the "top ten" local 
government infrastructure ranking conducted by the NGO Regional 
Autonomy Watch (KPPOD).  Using roads as an example, local 
government-financed projects are generally good in East Java. 
Provincial and national government-financed road projects have been 
poorly financed, such as the proposed South Java highway that would 
connect many remote South Java cities to provincial hubs.  Jakarta 
has recognized the importance of infrastructure, increasing 
infrastructure spending in the national budget and adding $1 billion 
in infrastructure spending to the stimulus package. 
 
¶10. (SBU) Human resources is another constraint often cited by 
government officials and civil society.  Despite often uneven civil 
service performance, huge amounts of local government budgets - over 
50% in many districts - go to salaries.  Poor civil service 
performance leads to delays in budget disbursal from central to 
district governments.  Some district governments are late in 
submitting budget proposals to the provincial and national 
governments, which delays the entire budgeting process. 
 
¶11. (SBU) CENTRAL GOVERNMENT: The long arm of Jakarta constrains 
regional autonomy and decentralization.  The central government has 
devolved significant resources and authorities to local government, 
but still retains powers that require local governments to 
continually look to the central government for instruction or 
resources.  Local governments are often bound by restricted central 
government budget outlays for specific projects, according to a 
senior research at the Jawa Pos Center for Pro-Autonomy.  For 
example, central government funds allocated to a district for a 
health project cannot be transferred to an education project even if 
there is greater need for an education project.  This central 
government control stifles local government creativity and 
responsiveness.  Beyond government bureaucracy, political parties at 
the national level attempt to influence their parties' local elected 
leaders.  For example, national level PDI-P leaders instructed PDI-P 
district level elected leaders to not execute the central 
government's community-level poverty reduction programs (e.g., 
PNPM). 
 
¶12. (SBU) In another example of the long arm of Jakarta, the 
Ministry of Home Affairs issued a regulation in mid-April that 
requires all foreign government officials to request 14-day advance 
permission for any local government meetings.  Some local leaders 
disregard this regulation; others adhere to it.  Beyond being 
bureaucratically untenable, this regulation - like many others - 
demonstrates ministries' centralized focus. 
 
Leadership determines success 
----------------------------- 
 
¶13. (SBU) Local leaders are the most important factor in determining 
the success or failure of regional autonomy, according to government 
and civil society contacts.  Some district leaders in East Java have 
used decentralization to spur innovation in providing public 
services and attracting business.  Local leadership is also 
essential as there are many overlapping or contradictory government 
regulations.  If a local leader does not take action, government 
programs can be stifled.  Local legislatures are a place of 
corruption and often hamper policy-making and budget allocation, 
according to contacts.  In the end, decentralization is providing 
more opportunities for local-level leadership and accountability. 
Constraints are apparent and the central government's influence 
remains strong, but support for decentralization remains high. 
 
JAKARTA 00000842  003 OF 003 
 
 
 
HUME