Field Report: May 2001

Regional Autonomy and the Business Climate:
Three Kabupaten Case Studies from North Sumatra

Research Team:
Syaikhu Usman, Ilyas Saad, Vita Febriany, Nina Toyamah, M. Sulton Mawardi,
Hudi Sartono, Pamadi Wibowo, Sudarno Sumarto

SUMMARY

One clear power of local government as the autonomous government administration is the management of local revenues (Pendapatan Asli Daerah, PAD). Based on this power, local governments have always issued various local regulations (peraturan daerah, perda) regarding taxes, levies and other charges. In addition, local governments have also released various policies about business activities, especially through the regulation of markets and trade. In practice these local regulations and policies have tended to create a "high cost economy", disturbing the business climate, weakening competition and impeding local economic development.

The implementation of Law No. 22, 1999 on "Local Government" and Law No. 25, 1999 on "The Fiscal Balance Between the Central Government and the Regions", supported by the spirit of reform, has increased the level of enthusiasm for autonomy in the regions. Such enthusiasm on the part of local government has generally resulted in the creation of many more local regulations concerning taxes and levies. This tendency has been strengthened by the perception that the successful implementation of local autonomy will depend to a large extent upon local revenues.

The SMERU team conducted a study in the Province of North Sumatra to monitor the dynamics of the implementation of regional autonomy, and to assess its impact on the business climate. In addition to the provincial level of government, SMERU also visited three kabupaten: Karo, Simalungun, and Deli Serdang. These investigations revealed that the provincial government had not yet drafted any new regulations concerning regional taxes and levies, as it was still preoccupied with drafting the legislation regarding its own organizational structure. Furthermore, the provincial government was still waiting for the release of the technical regulations that will support the implementation of regional autonomy, many of which have not yet been released by the central government. It appears that the provincial government is reluctant to release local regulations, which lack clarity. If it were to become apparent that local regulations are in conflict with the legislation issued by the central government, the process of revision would be a considerable waste of time and money. At present, the provincial government plans to raise revenue by obtaining a share of the profits from those State Enterprises (BUMN) operating in the region, especially from the state plantation company, PT Perkebunan Nasional, and from special contributions from large private plantations. Plantation companies have always been the pride of North Sumatra, but have never been regarded as a significant source of local revenue because most of the relevant taxes, including value-added taxes, have been collected by the central government.

By contrast, following the release of the new policy on regional autonomy, the regional governments at the kabupaten level have begun to think seriously about ways to increase their local revenue. They consider that their financial capacity, especially their local revenue (PAD), is the key to the successful implementation of regional autonomy. Consequently, the kabupaten governments have been very active in creating many new local regulations concerning taxes and levies. The SMERU team found that each of the three kabupaten visited were at different stages in the process of formulating those regulations. Kabupaten Deli Serdang has already enacted new local regulations and is currently preparing for their implementation. Kabupaten Simalungun has already drafted local regulations that have already been ratified by the Local People's Consultative Assembly (DPRD) but have not yet been listed in the government's Local Gazette. Meanwhile, Kabupaten Karo's executive branch is only at the stage of preparing its draft plan of local regulations.

While the stage of their implementation may vary, the general impression from this study is that all kabupaten and kota throughout North Sumatra are currently attempting to increase their local revenue through the creation of many types of taxes and levies. Within the next six months it is estimated that all these new regulations involving taxes and regional levies, will have been ratified and will be ready to be implemented in all kabupaten and kota. However, the SMERU team has found no significant evidence to this point of any steps by either the provincial or the kabupaten and kota governments to put in place policies to regulate trade in any particular commodity.

Local government officials give the following reasons for the formulation of new local regulations concerning taxes and levies:

The largest part of the General Allocation of Funds (DAU) received from the central government will be absorbed by routine budgetary expenditure. As a result, the income from local revenues needs to be increased significantly so that the development budget can be expanded.
Local governments have deliberately created as many new local regulations as possible, in order to capture all potential revenue within their region.
All local government offices (dinas) have been compelled to formulate their own strategies to increase local revenues. The 2001 Regional Budget allocation to each dinas will be based on the amount of revenue each contributes to the local revenue office.
Law No. 18, 1997 is no longer accepted in the regions, as it is not in harmony with the spirit of decentralization and regional autonomy. As a result, many of the levies which were previously abolished under Law No. 18, 1997 are now being reinstated.

The enthusiasm for the implementation of regional autonomy has encouraged local governments to introduce various kinds of new regulations, which often disregard central government legislation. While Law No. 18, 1997 remains in force, many local governments have begun to use the excuse of regional autonomy to ignore this central government law. Careful attention must be paid to the current situation, together with an effort to enforce central government legislation firmly. The central government has attempted this, but according to many in the regions, several central government laws on the implementation of regional autonomy are inconsistent or even in contravention of other higher legislation. For example, it is claimed that Presidential Decree No. 95, 2000, on "The National Land Agency", which revokes the authority of the kabupaten and kota over land matters, contravenes Article 11 Clause (2) of Law No. 22, 1999. Decree No. 95, 2000 was subsequently strengthened by Presidential Decree No.10, 2001 on "The Implementation of Local Autonomy in the Field of Land Affairs". Thus, in drafting their own regulations which are inconsistent with existing legislation, the regions seem to have learnt something from the central government's methods.

Irrespective of these inconsistencies, the SMERU team has identified a worrying trend to revert to an excessive regulatory environment that will recreate the high cost economy that existed during the New Order period. The burden of these numerous new local regulations will fall most heavily upon farmers, traders, small producers and consumers.

CONTENTS

I. INTRODUCTION

1. Background
2. Regional Overview

II. THE IMPLEMENTATION OF REGIONAL AUTONOMY

1. An Immediate Process or In Stages?
2. The Organization of Local Government
3. Civil Service Administration
4. Local Revenues as a Supplement to the Limited DAU

III. REGIONAL LEVIES

1. The Provincial Level
2. The Kabupaten Level

- Kabupaten Karo
- Kabupaten Simalungun
- Kabupaten Deli Serdang

IV. THE IMPACT OF THE LEVIES: PROBABLE TRENDS

V. CONCLUSION

APPENDIX

REFERENCES