The essence of governance in modern societies is a mix of all kinds of governing efforts by all manner of social-political actors, public as well as private; occurring between them at different levels, in different governance models and orders.

The ‘why’ of modern governance can be best explained by an awareness; that besides the traditional ones, new modes of governance are needed; that governing arrangements will differ from global to local and will vary sector by sector, and region by region. The challenge for anyone involved in governing and governance is to make governing interactions productive.

During the twenty-first century, reinvention will become an essential process for political and administrative leaders in governments that seek to adjust to the rapid changes in their economies and societies brought about by globalization and technological innovation.

Decentralization, debureaucratization, and deregulation are adding to the importance not only of the state but more and more of local government.

Good local governance is not just about providing a range of local services but also about preserving the life and liberty of residents, creating space for democratic participation and civic dialogue, supporting market-led and environmentally sustainable local development, and facilitating outcomes that enrich the quality of life of citizens.

In the case of Indonesia much of the responsibility for public services was decentralized in 2001. The process was based on three basic laws 1) regional autonomy; 2) fiscal relations; and 3) regional government taxes and fees passed between 1999 and 2000. Not surprisingly, the process has been a work in progress and both the regional autonomy and fiscal relations laws were amended in 2004 to provide more clarity. A second phase of decentralization in 2006 increased financial transfers to the regions by 50 percent, followed by a further 15 percent in 2007. Indonesia’s roughly 440 local governments now undertake nearly 40 percent of public spending with most services provided by kabupaten/kota (district/city) governments who are responsible of approximately 75 percent of the total regional spending.

Perceptions about how decentralization is working vary. Comprehensive surveys of perceptions indicate, that satisfaction with service delivery is improving. When asked about whether things have improved in the last two years, over 70 percent of public service users indicate that they believe that there have been improvements in health and education services.

Nevertheless, the framework governing the division of roles, responsibilities and resources between the national and local governments (including between provinces and districts) remains ineffective and incomplete. It is not always clear who is in charge of certain key public services. An improved functional division among the different levels of government would promote greater clarity, more accountability, higher quality and more efficient service delivery.

Sub-national expenditures at both the province and district level are dominated by administrative spending (usually for salaries for the administration, local parliament, buildings etc) at close to 30 percent of budgets. By contrast best practice is usually closer to 5 percent. As a result, much of the fiscal balance under General Allocation Grant (DAU) is earmarked for financing civil service wages. The challenge is how to strengthen the equalizing impact between own-source and natural resource revenues and empower sub-national governments to find the optimal combination of inputs (size of workforce, capital, intermediate inputs and outsourcing) for public service delivery.

The use of the special autonomy grant (DAK) has been growing rapidly from less than USD500 million in 2005 to USD2.3 billion in 2008. This reflects a conscious decision to reduce deconcentrated spending. However, it would be important to clarify priorities, including its use for poverty reduction and the achievement of minimum standards.

Unlike most decentralized countries, Indonesia has not transferred significant tax power to local governments, distorting incentives and creating an unhealthy dependence on transfers from the center.

Local and provincial governments, especially in-urban areas, have a key—role in public investment, particularly in the infrastructure sector where the needs are great. Borrowing for infrastructure and other projects is virtually non-existent. While regional governments can now borrow in anticipation of increasing sub-national financing needs, especially for urban infrastructure, the government should address the issues that continue to constrain the development of market-based sub-national bonds, including rules about securitization, and procedures to address fiscal distress and bankruptcy.

The devolution of political authority to local governments has also posed challenges for the investment climate. Local Governments have, at times, used their newly acquired powers to issue excessively stringent local labor regulations or target businesses with a plethora of new local taxes, levies and fees. In fact, the costs, delays and inconvenience of business licensing is one of the most commonly mentioned criticisms of the local investment climate. Incomplete regulations at decentralization and the tug-of-war between the center and the regions have also been a factor in the slow recovery of investment post-crisis. Finally, businesses have to face corruption in the regions as they do at the center.

As local level democracy spreads, there are signs that enlightened leadership is increasing and a number of local governments are beginning to address service issues, excessive regulation and policy deficiencies with a focus on improving the investment climate. These “second generation” local governments often have a better of understanding of business needs and higher levels of responsiveness to citizen demands and their successes are being noted. Nevertheless, the process of clarifying and shifting responsibilities and building capacity at the local level has been slow.

Capacity problems at the local level remain acute. Regional governments have had difficulty spending increased resources and surpluses have built up in most sub-national governments, with especially large surpluses in natural resource endowed regions. While the situation is improving, sub-national governments have not had experience in dealing with businesses and typically lack understanding of what it makes to create a good business environment.

It is important to recognize that maintaining a sense of urgency is critical throughout the process. Without a continued sense of urgency there is a risk that Indonesias hard-earned reform momentum might stall. Indonesia has shown commitment to reform, but significant obstacles to change remain.

As is often the case, the implementation of institutional reforms relies on the very unreformed systems and processes that are themselves the object of change. Those who benefit from the existing system can politically derail efforts at serious institutional reform. Broader political dynamics can also intervene when the electoral imperatives of coalitional and money politics undermine incentives and efforts to strengthen the accountability of state institutions.

A sustained focus on governance and transparency can help by restoring confidence in the legitimacy of public processes and institutions; and building a consensus for continued reforms. I strongly believe that if Indonesia can maintain a sense of urgency in furthering its governance transition, it has the potential to become a dynamic, competitive and inclusive middle-income economy.

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