Dan Murphy, Jakarta – Indonesia's new government is facing a dilemma as restive provinces such as Aceh, Irian Jaya and Riau clamour for a bigger share of the revenues from their natural resources, such as oil and gas.
If Jakarta ignores the demands, it will further fuel separatist calls in provinces that – by no coincidence – happen to be richest in natural resources. But if it pays up, it risks blowing a hole in its budget, as well as hurting efforts to repay its $80 billion national debt. Solving the dilemma will be a tough challenge for President Abdurrahman Wahid, whose actions will be closely watched by aid donors.
Currently, levies, taxes and royalties ensure that Jakarta grabs almost all revenue from oil, gas, timber and minerals. It's such a sensitive issue that the government doesn't say how much it keeps of what it collects from the provinces. In May, demands from the regions for a greater share of the income from natural resources led then President B.J. Habibie to enact a law promising to return billions of rupiah to the nation's 300-odd districts. The law, which comes into full force in May 2001, promises to let regions keep a greater share of the after-tax revenues they generate – a 15% slice in the case of oil and 30% for natural gas.
That new revenue-sharing plan is floundering, with local politicians and activists demanding an even bigger slice. Provincial leaders are particularly incensed. One of Habibie's intentions in the legislation was to keep the country's 26 provincial administrations weak by sending money directly to district level. The reasoning was that poorly funded provincial governments would be too weak to challenge Jakarta.
The government is now being drawn into talks that could see it giving away a much larger share of revenue than originally planned, and at a faster pace.
"The law is a product of the old regime and it's not just," says Djufri Hasan Basri, the head in Riau province of Parliament Watch, a non-government organization. Riau, in northern Sumatra, is home to the Caltex operations that produce most of Indonesia's oil. "The parliament has to revise these numbers if they want to win the people over, and they've got to do it quickly," Djufri says. He thinks Riau should keep half its oil revenue.
The provinces' demands are already getting some results: In off-the-cuff remarks at the start of November, Wahid said Aceh could get 75% of oil revenues, creating concerns that that would become a benchmark for all resource-rich regions. Later, on November 22, his regional-autonomy minister, Ryaas Rasyid, said the government would determine the structure of autonomy for each region on a case-by-case basis.
That sort of talk spooks the International Monetary Fund and other donors; they are concerned that concessions by the government could threaten its ability to repay its $80 billion foreign debt. The budget, already expected to run at a deficit of $5 billion in the coming year, could be further strained. "The financial split as it now stands can be lived with," says a government adviser who has experience of the issues involved. "But if they give away 75% of oil revenues, it could be a disaster." With the recent surge in oil prices, it might seem there's a lot more to go around. But Indonesia provides massive oil subsidies to its citizens that are expected to cost about $5.5 billion in the year to March. As oil prices go up, so does the size of the subsidy.
Meanwhile, with the corporate tax base slashed because of the financial crisis, oil and gas have become an even more important source of government revenue. They could account for 35% of revenue this year, against the original budget target of 28%.
Donors are also concerned about the political implications of giving greater financial autonomy to provincial governments that were riddled with incompetence and corruption during the Suharto years.
In a position paper presented in November, a group of Indonesia's largest donors suggested the government phase in financial autonomy to give local governments a chance to learn how to deal with their new-found wealth.
Forgotten, though, in all the noise over how much should be paid out to the resource-rich provinces are Indonesia's poorer regions. They could lose out significantly if wealthy neighbours successfully press their demands. The government is working on an equalization fund to channel money to poorer areas, but as Jakarta's budget shrinks, it's not clear where the money will come from. "If the central government ends up giving away 50% of the oil and gas revenue at this time of rather acute financial distress, who is going to look after the poorer provinces?" asks Iyanatul Islam, a United Nations economist who has studied regional autonomy in Indonesia.
He says that's a powerful argument against simply caving in to the richest provinces' demands. After all, if financial flows to the poorer provinces dry up, they too will suddenly find themselves questioning what they get out of being part of Indonesia.