VZCZCXRO3999
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #0981/01 1600844
ZNR UUUUU ZZH
R 090844Z JUN 09
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 2507
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS COLL
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 04 JAKARTA 000981 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/MTS 
TREASURY FOR RAND 
 
E.O. 12958: N/A 
TAGS: ECON PGOV PREL ID
SUBJECT:  Special autonomy in Aceh: governance challenges mounting 
 
¶1. (SBU) Summary: The April legislative elections marked a major 
transition point for Aceh.  A bigger challenge for Aceh: governance. 
 Provincial, district and national government have struggled to 
implement their respective governance roles under special autonomy. 
The two biggest economic governance issues are provincial and 
district governments' ability to execute their budgets and the 
quality of spending.  Many local governments cannot spend their 
budget outlays.  And funds that are spent largely go to overhead 
costs.  High turnover in provincial and local parliaments - 
estimated to be 60-80% - pose potential governance challenges based 
on the lack of experience of the new legislators.  Support for 
special autonomy and Aceh's enhanced decentralization remains high. 
Yet, frustrations related to implementing special authority 
effectively are mounting.  End Summary. 
 
Implementation of special autonomy still lacking 
--------------------------------------------- --- 
 
¶2. (SBU) Special autonomy - an expanded form of decentralization 
with even greater local authorities and resources - has enjoyed 
widespread support in Aceh since initial decentralization policies 
were established in 2001.  In addition to normal decentralization 
funds, Jakarta has allocated special funds as part of the peace 
agreements to support Aceh's post-conflict transition from 32 years 
of conflict. Parliament passed an Aceh special autonomy law in 2001, 
which was revised in 2006.  The 2005 Aceh governance law then gave 
further special autonomy rights, including the establishment of 
increased oil & gas revenue-sharing funds as well as tsunami and 
reintegration funds.  The direct election of the Aceh Governor in 
2006 was a critical step in the implementation of these special 
autonomy laws.  District government (kabupaten/regency and 
kota/city) elections increased further confidence in special 
autonomy.  The April 2009 legislative elections - with the 
participation of six local Acehnese political parties in addition to 
the 38 national parties - marked another milestone in the 
post-conflict transition. 
 
¶3. (SBU) Decentralization in Aceh is implemented starting from the 
provincial down to the village level, eliciting support from all 
levels due to the greater local-level decision-making and resource 
allocation. However, budget implementation is slow and 
accountability is lacking.  In addition, there are many legal and 
procedural uncertainties regarding decentralization in general and 
Aceh special autonomy specifically.  Jakarta has not issued 
government regulations or presidential decrees to fully implement 
seven critical special autonomy policies (e.g., administration of 
oil & gas resources), according to senior Aceh provincial officials. 
 These procedural delays and uncertainties have led to delays in 
budget allocation and project implementation. 
 
Budget spending reflects wider governance problems 
--------------------------------------------- ----- 
 
¶4. (SBU) Aceh provincial and district governments have not been able 
to fully spend their budgets, often placing large portions of the 
budget in reserve bank accounts.  Aceh provincial and district 
governments spent on average 60% of their budget in 2007 and 45% of 
their budget in 2008, according to the World Bank.  For those 
governments that are able to spend budget funds, the quality of 
spending is often poor.  An estimated 60-70% of budget funds - 
sometimes more - are devoted to overhead expenses, particularly 
government salaries.  In Bireuen District, 65% of the local budget 
is dedicated to salaries.  This poor quality of spending reflects 
broader national trends. 
 
¶5. (SBU) Aceh is a well-funded province.  The provincial budget has 
rapidly increased over the past four years, totaling $900 million 
(Rp 9 trillion; Rp 10,000 = 1 USD) in 2009 (2008 - $830 million; 
2007 - $430 million; 2006 - $200 million).  Although reconstruction 
funds have ended, Aceh still receives special autonomy funds, 
special oil and gas revenues, regular budgetary outlays, and local 
tax revenue.  Combined 2009 provincial and district government 
budgets could total up to $1.9 billion, according to analysts and 
government officials.  Lack of resources is not the problem; 
spending - particularly quality of spending - is the critical issue. 
 The provincial government spent 60% of its $830 million budget in 
2008 and 70% of its $430 million budget in 2007.  However, in 
absolute terms, Aceh still spent more in 2008 compared to 2007 due 
to annual budget increases. 
 
¶6. (SBU) In addition to regular revenue flows from Jakarta and local 
income tax, Aceh receives special autonomy and oil & gas 
revenue-sharing funds.  The special autonomy funds are 2% of the 
national government's general allocation fund (DAU) through 2021. 
In 2008, special autonomy funds totaled $370 million and are 
scheduled to drop to $250 million in 2009, according to the World 
 
JAKARTA 00000981  002 OF 004 
 
 
Bank.  The oil & gas funds are a special arrangement based on 
national legislation providing that 70% of Acehnese oil and gas 
profits be returned to the province (vice 40% for gas and 15% for 
oil for all other Indonesian provinces).  The government requires 
30% of these oil & gas funds to be spent on education.  In 2008, 
Aceh received $130 million in oil & gas funds, but oil & gas funds 
declined in 2009 to $50 million due to the fall in the market price 
of oil. 
 
¶7. (SBU) Administration of these special funds is a work in progress 
as there have been a number of national legislative and local 
administrative changes in recent years.  The provincial government 
did not spend any of its oil & gas funds in 2008 due largely to 
limited administrative capacity; the oil & gas funds team was a 
three-person operation.  The Aceh provincial government distributes 
60% of the special autonomy and oil & gas funds directly to the 
district level and uses the remaining 40% for provincial 
government-led projects.  The special autonomy funds on average 
account for about 10% of district government budgets.  Project 
proposal and approval processes have delayed the disbursement of 
funds, tracking with overall budget expenditure difficulties. 
 
¶8. (SBU) Aceh's special autonomy status - with its enhanced budget 
authorities and resources - increases the role of the provincial 
government compared to other Indonesian provinces.  However, 
district governments still receive significant resources and have 
considerable budget authorities through standard district-level 
decentralization budget allocations.  Coordinating with district 
governments, the Aceh provincial government has organized a new 
program - the "village budget allocation" - that provides $15,000 
(Rp 150 million) to each of the 6,300 plus villages of Aceh.  In 
some districts, the village budget allocation is 8-10% of overall 
district discretionary spending.  At the provincial level, every 
member of the provincial parliament receives $500,000 in "aspiration 
funds" for local level projects.  Corruption, poor quality of 
spending, and other misuse of funds are possible problems for these 
funds.  However, these programs help to address the inability of 
provincial and district governments to spend their budgets. 
 
Challenges to implementing decentralization in Aceh 
--------------------------------------------- ------ 
 
¶9. (SBU) Aceh's governance challenges reflect nationwide 
difficulties with decentralization implementation, but are 
compounded by post-conflict transition dynamics.  Limited governance 
capacity in Aceh restricts economic growth and broader development. 
Human resource capacity is a top problem, according to government 
and civil society contacts.  Poor infrastructure, limited local 
government capacity, and the proliferation of new districts have 
compounded governance challenges. The weak capacity of the Aceh 
provincial government is a bigger problem compared to other 
provinces due to the larger provincial level role under special 
autonomy.  The Aceh provincial government has significant 
authorities related to the flow of budget funds, particularly 
special autonomy and oil & gas funds that make up the majority of 
funds available for development spending by districts. 
 
¶10. (SBU) HUMAN RESOURCES: Poor human resources limit the 
effectiveness of provincial and district governments.  Despite the 
sub-par workforce, some districts spend up to two-thirds of their 
budget on salaries.  Compounding this problem, the April 2009 
legislative elections will create 60-80% turnover in the provincial 
and local legislatures, described by some Acehnese as "tsunami 
politics."  Most of these new MPs - largely from Aceh Party (PA) and 
some from Yudhoyono's Democrat Party (PD) - lack any governing 
experience.  PA Secretary General Yahya and other PA leaders have 
reiterated their requests for legislative capacity-building at the 
provincial and district level in meetings with Mission Indonesia 
personnel. 
 
¶11. (SBU) INFRASTRUCTURE: Analysts and government officials often 
cite infrastructure as an area that must continue to be a top 
government priority to improve economic development prospects. 
However, infrastructure spending is increasing at the provincial and 
district level and some benefits are becoming apparent.  The average 
share of infrastructure spending of district government expenditures 
was over 16% in 2007, compared to 11% in 2004, according to the 
World Bank.  Infrastructure, particularly roads and access to public 
services, varies across the province.  There is a noticeable 
qualitative difference between infrastructure in coastal areas 
compared to more remote areas, such as Central Aceh, although some 
of the difference can be attributed to the lack of political support 
for the provincial government in these areas. 
 
¶12. (SBU) LOCAL GOVERNMENT CAPACITY: District-level government 
capacity is even more limited than the provincial level.  As is the 
 
JAKARTA 00000981  003 OF 004 
 
 
case throughout Indonesia, there is a range in quality of governance 
throughout the district level in Aceh.  Districts with weaker 
capacity often are delayed in their budgeting process or cannot 
complete the needed project proposals to utilize special autonomy 
funds administered by the provincial government.  Beyond the budget 
approval process, budget implementation and oversight are weak, 
which leads to limited accountability. 
 
¶13. (SBU) PROLIFERATION OF NEW DISTRICTS: The number of districts 
within Aceh has sharply increased since 2001: from 14 to 23.  With 
every new district, there are more overhead expenses, particularly 
government buildings and salaries.  Public service has worsened due 
to the proliferation of districts, according to most analysts.  Most 
Acehnese government officials - including the Governor, PA leaders, 
and the district head who leads the Aceh local government forum - 
oppose further new district proposals.  Yet, there are some new 
district proposals that originate from local leaders and are 
supported by the national parliament, allegedly due to bribes. 
Governor Irwandi and PA leaders are strongly opposed to any breakup 
of Aceh province into smaller subunits.  PA leaders said that the 
establishment of breakaway provinces would violate the 2005 Helsinki 
MoU.   However, there is the possibility of permitting some new 
districts, according to Aceh analysts and government officials. 
 
¶14. (SBU) Performance varies widely among Aceh's 23 cities and 
districts.  Quality of leadership at the district level is the 
single most important factor in determining a district's success, 
according to most analysts. The city of Banda Aceh has made marked 
improvements in public service delivery, transparency, and 
accountability. Banda Aceh was ranked as one of the least corrupt 
local governments in Indonesia in a recent Transparency 
International survey.  Some of the newly formed districts, such as 
Bireun, North Aceh and Lhokseumawe, have also managed the 
development process well.  However, others struggle to develop, such 
as Subulussalam, Pidie Jaya, and Bener Meriah. Corrupt leadership in 
Bener Meriah has stunted growth despite potential wealth from 
coffee.  Poor roads and infrastructure make it expensive for farmers 
to get their product to market.  The provincial government also 
suffers from weak leadership and capacity.  The Ministry of Home 
Affairs plans to evaluate the development status of the new 
districts and merge poorly performing districts back to their 
original district.  However, this plan would face serious political 
obstacles at the local and national level. 
 
Balancing national, provincial, district relationships 
--------------------------------------------- --------- 
 
¶15. (SBU) There is a complex set of relationships for budget 
allocation between the central government and Aceh provincial and 
district governments.  The central government distributes funds to 
the Aceh provincial government (some of which are then sent to the 
district level) and other funds directly to the district level. 
Special autonomy and oil & gas funds are sent to the Aceh provincial 
government, who implements projects directly and also apportions 
funds to district governments.  Normal decentralization funds (e.g., 
DAU - General Allocation Funds, DAK - Special Allocation Funds) go 
to both the provincial and district level.  The provincial 
government divides its funds among the 23 districts after districts 
propose projects and budget plans have been approved by district 
parliaments. Local governments also seek community input through 
public consultation processes (Musrembang).  General Allocation 
Funds (DAU) can be placed in bank trusts if unused and saved for the 
following year.  Special Allocation Funds (DAK) must be used during 
the year in which they are disbursed or they are returned to 
Jakarta. 
 
¶16. (SBU) Overlapping authorities have led to difficulties in Aceh's 
special autonomy implementation (e.g., which level of government has 
permit authorities for certain approvals).  For example, overlapping 
authorities have delayed implementation of the Sabang Free Trade 
Zone.  District governments also often issue regulations that 
contradict provincial or national laws.  In addition, some national 
laws related to special autonomy are still awaiting implementing 
regulations, which creates regulatory and legal uncertainty. 
 
Aceh: moving to next stage of governance transition 
--------------------------------------------- ------ 
 
¶17. (SBU) The biggest "X factor" for Aceh's future is the governance 
of PA in the provincial and district legislatures.  Government and 
civil society contacts said that legislative governing capacity will 
be limited with 60-80% new MPs coming into provincial and district 
parliaments. PA has a near majority in the provincial parliament (33 
of 69 seats) and majorities in many district parliaments.  To what 
extent will PA engage in rent-seeking and other corrupt practices? 
Bireuen's district head - who is also head of the Aceh Local 
 
JAKARTA 00000981  004 OF 004 
 
 
Government Forum - acknowledged the possibility for corrupt behavior 
and said that he would only tolerate a "certain amount" of this 
rent-seeking.  PA Secretary General Yahya directly requested 
legislative capacity building programs to bolster PA's limited 
governing capacity.  PA has set out an agenda that includes 
anti-corruption reform and broader governance to improve government 
performance. 
 
NORTH