Special autonomy in Aceh: governance challenges mounting

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
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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
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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

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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
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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

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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
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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
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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

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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