Tangled Web: The Role of Oil, Gas and Mining in Funding Regional Governments in Indonesia

Key messages

• Indonesia’s system of funding provincial, district and city governments is one of the most complex in the world, and has undergone substantial expansion over the last two decades.
• While the system allows thousands of authorities to function, it is failing in three respects: inequality of funding between regions persists, funding for some governments is unpredictable and volatile and some oil- and gas-rich regions have not sufficiently prepared for a possible future with much lower revenues.
• Indonesia’s planning ministry, Bappenas, should investigate these issues further focusing particularly on clarifying policy objectives, ensuring more reliable funding, supporting oil- and gas-rich regions in becoming more resilient to a long-term decline in prices and clarifying the published rules around the funding system.

This report charts the expansion of Indonesia’s decentralized government after the 1998 reform as it relates to the sharing of natural resource revenues, investigates the challenges this creates and offers some recommendations for reform and further investigation. This report investigates regional government funding from the perspective of sharing natural resource revenues, but does so holistically, by considering how these funds interact with the whole complex system of regional funds.
 

To support this work, the authors developed a dataset covering the audited funds transferred from the central government to hundreds of regional governments in Indonesia between the years 2001 to 2017. This dataset, which is available alongside this report, is now the most comprehensive database on this subject available.