Draft: 27 July 2003. Minimum Local Public Service Delivery Standards in Indonesia: Fiscal Implications and Affordability Concerns Blane D. Lewis ∗ Research Triangle Institute International Summary: As part of its efforts to clarify sub-national expenditure assignments and improve local public service delivery, in the context of its on-going fiscal decentralization program, the Indonesian central government has begun to fix minimum standards at which local obligatory services must be delivered. This paper develops a model for estimating the fiscal requirements associated with minimum service standards in one local obligatory sector—education. The empirical results suggest that minimum participation standards in the local education sector may be affordable, given central and local commitment. But the fiscal needs associated with the full range of minimum service standards across all local obligatory functions are likely to be prohibitively expensive. This suggests that the government needs to rethink its approach to minimum standard mandates and focus on limiting the number of standards across obligatory tasks, reducing their minimum levels, and prioritizing a sub-set of obligatory functions for immediate action. A sector-by-sector approach to the development, financing, and use of minimum service standards is likely to have greater success than the comprehensive, multi-sectoral effort now being undertaken. Should this attempt fail, there is little choice but to employ minimum service standards in some less legally binding fashion such as targets or guidelines in the context of local planning, budgeting, monitoring, and evaluation. Key Words—Southeast Asia, Indonesia, fiscal decentralization, local government, service delivery, minimum performance standards. 1. Introduction and Background Starting in fiscal year 2001, in the context of the Indonesia’s new fiscal decentralization program, sub-national governments assumed major new expenditure responsibilities. 1 Substantial functions for provinces have been specifically enumerated in law and regulation. 2 Local government (kabupaten/kota) service responsibilities, on the other hand, have been defined via a “negative list”; that is, kabupaten and kota have essentially become responsible for all public services that the central and provincial governments are not explicitly charged with delivering. Such an approach is not uncommon across countries of the world and is often referred to as the intra vires or general competencies method of service assignment. 3 At the same time, the Indonesian decentralization legislation highlighted eleven important areas of local government service responsibility: public works, health, education and culture, agriculture, communications, industry and trade, capital investment, environment, land, cooperatives, and labor. This list comprises the so-called “obligatory ∗ The author currently serves as senior adviser to the Ministry of Finance (MoF) under a project financed by the United States Agency for International Development (USAID). The views expressed here are those of the author and should not be attributed to either MoF or to USAID. The author would like to thank Christine Bates, Mira Kestari, and Abhijit Nimbalkar for research assistance and Gabe Ferrazzi and Michael Sinclair for useful comments on an earlier version of the paper. 1 Smoke (2002) discusses some basic issues related to expenditure assignment in Indonesia. 2 See Law 22 of 1999 regarding Regional Government Administration and Government Regulation 25 of 2000 regarding Central Government Authorities and Autonomous Provincial Government Authorities. 3 The contrary method of assignment is sometimes referred to as ultra vires. Under this approach local government tasks are explicitly itemized and local governments are prohibited from undertaking functions not on the list. Ferrazzi (2002a) provides a review of countries following various approaches to service assignment.