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OIDA International Journal of Sustainable Development

Volume 09 Issue 03, 2016

The Journal of the Ontario International Development Agency ISSN 1923-6654 (print) ISSN 1923-6662 (online)

Analysis of Determinants Sectors Regional Development at 33 Provinces in Indonesia Dini Hariyanti a, Maria Ariesta Utha b a,b Economic Development Program, Trisakti University, Indonesia.

11-32

Design Model of Development of Small Industries Village for Value Adding of Automotive Components Waste. Based on Community Development (Case Study At Sasakpanjang-Bogor) Kosasih, Mutmainah a, Andreas Tri Panudju b a,b Teknik Industri, Universitas Muhammadiyah Jakarta, Jakarta, Jl. Cempaka Putih Tengah 27., Indonesia

33-38

Fiscal Desentralisation and Sustainable Development: Lesson from Local Government Levels in Indonesia Rosdiana Sijabat Department of Business Administration, Faculty of Economics and Business, Atma Jaya Catholic University of Indonesia Jalan Jenderal Sudirman No 51, Jakarta, Indonesia.

39-76

Factors Influence The Utilization of Community Participation (POSBINDU) NoviaIndriani Sudharma a, Rina Kurniasri Kusumaratna b , Meiyanti c a,b Department of Public Health, Faculty of Medicine, Trisakti University, Jakarta, Indonesia c Department of Pharmachology, Faculty of Medicine, Trisakti University, Jakarta, Indonesia

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OIDA International Journal of

Sustainable Development

Volume 09, Issue 03 2016

Ontario International Development Agency Canada

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ISSN 1923 – 6654 (print) ISSN 1923 – 6662 (online)

The OIDA International Journal of Sustainable Development is a forum presenting high-quality research in both social and applied science to a broad audience of communities working in international development. The articles will appeal to social and applied scientists, both inside and outside academia, as well as non specialists. In addition, the OIDA International Journal of Sustainable Development publishes specially-commissioned feature articles and the proceedings of papers presented at its International Conference on Sustainable Development which focuses on the synthesis and integration of applied research and its application to future research agendas.

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The OIDA International Journal of Sustainable Development is published by the Ontario International Development Agency, Canada. Single issue (hard copy) can be purchased by contacting the Ontario International Development Agency. Open Access Journal www.oidaijsd.com OIDA Publications, OIDA International Development Agency, Ontario, Canada Copyright © Authours et al Printed in Canada. ISSN 1923 – 6654 (print) ISSN 1923 – 6662 (online) The OIDA International Journal of Sustainable Development is indexed in the SSRN e-library (Social Science Research Network). Back issues are also available in PDF format through online http://www.ssrn.com/link/OIDA-Intl-Journal-Sustainable-Dev.html All correspondence forward to: Managing Editor OIDA International Journal of Sustainable Development 364 Moffatt Pond Crt, Ottawa, Ontario, K2J 0C7 Canada. Tel: + 1 613 612 7615 e-mail: [email protected] For all photocopies and reproduction requests, contact OIDA Publications Ontario International Journal of Sustainable Development 364 Moffatt Pond Crt, Ottawa, Ontario, K2J 0C7 Canada. Tel: + 1 613 612 7615 Fax: + 1 613 823 7158 e-mail: [email protected] The opinions expressed herein are those of the respective authors and do not necessarily reflect the opinion of the Ontario International Development Agency. Cite as: OIDA-Intl-Journal-Sustainable-Dev.

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Dr. Henri R. Pallard, Ph.D. (Executive Editor / Editor-in-Chief) Director, International Centre for Interdisciplinary Research in Law Professor Law and Justice Laurentian University 935, Ramsey Lake Road, Sudbury Ontario, P3E 2C6 CANADA

Dr. Neville Hewage, Ph.D. (Managing Editor) Researcher International Centre for Interdisciplinary Research in Law (ICIRL) Laurentian University 935, Ramsey Lake Road, Sudbury Ontario, P3E 2C6 CANADA.

Dr. Christopher Isike, Ph.D. Head, Department of Politics and International Studies (POLIS), University of Zululand, SOUTH AFRICA

Dr. Kooi Guan (Steven) Cheah, Ph.D. Faculty, Economics Department, School of Business, Kwantlen Polytechnic University, Surrey, British Columbia, CANADA

Dr. Mohshin Habib, Ph.D. Senior Lecturer, Department of Leadership and Management & Director, Post Graduate Program in International Business, Faculty of Business and Enterprise Swinburne University of Technology PO Box 218 Hawthorn (Mail No. H23), Victoria 3122 AUSTRALIA.

Dr. Masudur Rahman, Ph.D. Associate Professor Faculty of Development and Economic Sociology University of Nordland NORWAY.

Dr. Stamatios Tzitzis, Ph.D Institute of Criminology, University of Paris II, FRANCE.

Dr. Manuel Juan Pelaez Albendea, Ph.D. University of Malaga, SPAIN.

Dr. Paulo Ferreira Da Cunha, Ph.D. University of Porto, PORTUGAL.

Dr. Maria Protopapa-Marneli, Ph.D. Academy of Athens, GREECE.

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OIDA International Journal of Sustainable Development Volume 09: Issue 03

Analysis of Determinants Sectors Regional Development at 33 Provinces in Indonesia Dini Hariyanti a, Maria Ariesta Utha b a,b Economic Development Program, Trisakti University, Indonesia.

11-32

Design Model of Development of Small Industries Village for Value Adding of Automotive Components Waste. Based on Community Development (Case Study At Sasakpanjang-Bogor) Kosasih, Mutmainah a, Andreas Tri Panudju b a,b Teknik Industri, Universitas Muhammadiyah Jakarta, Jakarta, Jl. Cempaka Putih Tengah 27., Indonesia

33-38

Fiscal Desentralisation and Sustainable Development: Lesson from Local Government Levels in Indonesia Rosdiana Sijabat Department of Business Administration, Faculty of Economics and Business, Atma Jaya Catholic University of Indonesia Jalan Jenderal Sudirman No 51, Jakarta, Indonesia.

39-76

Factors Influence The Utilization of Community Participation (POSBINDU) NoviaIndriani Sudharma a, Rina Kurniasri Kusumaratna b , Meiyanti c a,b Department of Public Health, Faculty of Medicine, Trisakti University, Jakarta, Indonesia c Department of Pharmachology, Faculty of Medicine, Trisakti University, Jakarta, Indonesia

77-88

URL: www.oidaijsd.com OIDA International Journal of Sustainable Development is also hosted by SSRN, a publishing platform for academic journals. Available on Social Science Research Network (SSRN) URL: http://www.ssrn.com/link/OIDA-Intl-Journal-Sustainable-Dev.html

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The Influence of Internal Factor on Financial Performance and Firm Value: Evidence from Property and Real Estate Companies Listed in Indonesia Stock Exchange Tsabita Karima a

a University of Trisakti, Jl. Kyai Tapa No.1 Grogol, West Jakarta, Indonesia.

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Incidence of Building Collapse in Nigeria: Case of Lagos State Layi Egunjobi a , Ademola Adebayo b a Department of Urban & Regional Planning, Faculty of the Social Sciences, University of Ibadan, Nigeria. bDepartment of Urban & Regional Planning, Faculty of Environmental Studies, The Oke-Ogun Polytechnic, Saki, Oyo State, Nigeria

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Sustainable development goals worth sharing Erika Simpson Department of Political Science, University of Western Ontario, London, Canada

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OIDA Publications Ontario International Development Agency 364 Moffatt Pond Court Ottawa Ontario, K2J 0C7 Canada Published by Ontario International Development Agency, Canada.

Analysis of Determinants Sectors Regional Development at 33 Provinces in Indonesia

Dini Hariyanti a, Maria Ariesta Utha b

a,b Economic Development Program, Trisakti University, Indonesia. Corresponding authours: [email protected], [email protected]

© Authour(s)

OIDA International Journal of Sustainable Development, Ontario International Development Agency, Canada ISSN 1923-6654 (print) ISSN 1923-6662 (online)

Available at http://www.ssrn.com/link/OIDA-Intl-Journal-Sustainable-Dev.html

Abstract: The purpose of this study was to analyze the basis of sectors regional development at 33 provinces in Indonesia. The implication is, if a region wants to push the growth of its economic, the sector of regions should have the advantage to develope and sustainable. An explanation of the economic potential of the 33 provinces in Indonesia which is analyzed in terms of the national potential, potential per sector in each province, specializes import and export infrastructure in each region. Thus, every region must has ability in economic potential and specialized. The approach used to see the economic potential of the region is Typology Klassen and analysis of Location Quotient (LQ) in the period 2008 -2012. Based on the results of calculations leading sectors using Location Quotient (LQ) in 33 provinces in Indonesia showed that dominated by: first, the agricultural sector; second, the mining sector; third, of the manufacturing sector; four, publicities, gas and water sector; five, construction sector; sixth, sector of trade, hotel and restaurant; seven, sectors of transportation and communication; eight, sector financial/Banking and nine, service sector.

The rank of the province that dominates the highest contribution of each sector compared nationally for the agricultural sector, which the highest rank is followed by West Sulawesi, Central Sulawesi, Lampung, Bengkulu and NTT province. As for the mining sector there are 13 provinces that dominate this sector and the highest national contribution is Riau province followed by East Kalimantan, Papua, South Kalimantan. The manufacturing sector, 5 provinces lead this sectors and the highest contribution in the sector of manufacturing/processing industry in the first rank is the Riau Archipelago followed by Banten, West Java province. For publicities, gas and water sector there are 11 provinces lead this sector, and regions that have the highest national contribution is banten followed by West Java province, Aceh, Bali province. For the construction sector, 15 provinces lead this sector, and the highest contributions is North Sulawesi followed by DKI Jakarta, DI Yogyakarta. As for trade, hotel and restaurant there are 17 provinces that have the highest contribution nationally and the highest rank is Bali followed by East Java province, North Maluku. Categories of transportation and communication sector, 10 provinces have lead this sector and the highest provincial contribution is West Sumatra, followed by South Kalimantan, North Sulawesi, Jakarta, and Bali province. For the financial/Banking sector there are only two provinces that dominate this sector and the highest contribution nationally are Jakarta province, after the DI Yogyakarta province. While the service sector there are 22 provinces dominate this sector and the highest contribution nationally namely Nort Nusa Tenggara province, after it by Gorontalo, Bengkulu, DI Yogyakarta, West Sumatra. Finnally, the provinces that lead the business development in Indonesia is the province of Central Sulawesi, Gorontalo, Papua, West Sumatra, Riau, East Kalimantan, South Kalimantan and West Kalimantan. The eighth of province has the contribution of each sector are very high as well as against the growth rate of the sector.

Keywords: Regional Developnment; Typology Klassen; Location Quoetient; The Specialization Index; 33 Province in Indonesia

12 Hariyanti and Utha ./ OIDA International Journal of Sustainable Development 09:03 (2016)

Introduction

conomic development in some country must have a clear direction and objectives, in term of the short term and the long term. Because economics must have sustainability efforts that undertaken population of a country to achieve the goal of welfare. In order to accelerate the realization of a developed country, the

Indonesian government made a policy of "sustainable growth with equity" as a development strategy with pro-growth, pro-poor, pro-jobs and pro-enviroment (Yudhoyono, 2012). The new paradigm in the development of post agenda's 2015 are the coming Sustainable Development Goals (SDG's). SDG's as a tackling for the economic, social and environmental sustainable development as a framework for broader associated with environmental changes (http://www.iges.or.jp/en/rio20). Because of each factor production (resources) owned by a country could be used optimally as possible in order to achieve development targets. Therefore, development of a country should be supported by regional development.

Regional development has significance for the development for and to the public. Munir (2002) confirms the basis of the regional development are the emphasis of development policy is based on the typical characteristics of the area concerned (endogenous development) by using the potential of human resources, institutional and physical resources locally. This orientation leads to the emergence of a regional initiative and creativity in the development process. The development process is done by the people together with the government, in all aspects of community life in a planned, gradual and continuous accordance to the conditions, potential and aspirations of the people who grow and flourish in the area. Regional development is a process that includes the establishment of new institutions, the development of alternative industries, improving the capacity of the existing workforce products and services better, the identification of new markets (Todaro, 2000), (Jhingan, 1996).

Regional development planning by GTZ in Local Development Planning (2000) in Syaifullah (2008) defines it as: “Local development planning is a systematic endeavor of multiple actors (stakeholders) from the public, private and civic domain at the different levels to deal with interdependent physical and socio-economic aspects by means of: continously analyzing regional development conditions, formulating local development goals and policies, conceptualizing strategies for solutions, and implementing them with the available resources so that new oppurtunities which enhance the local communities’ wellbeing can be seized upon in a sustainable manner”. Lin and Liu (2000) states that the government needs to increase capital investment in order to boost economic growth in the region. They found a strong correlation between share (expenditure) investment in infrastructure with decentralized level.

Each regional economic development efforts has the main objective to increase the number and types of employment opportunities for local people. Regional development must be sustainable, Nijkamp et.al (1991: 3) states that Regional Sustainable development as a development which ensures that the regional population can attain an acceptable level of welfare-both at present and the future- and that this regional development is compatible with ecological circumstances in the long run while at the same time it tries to accomplish a globally sustainable development.

To achieve this goal, local governments and communities must take the initiative in regional development. The overall goal could not be separated from changes in the system of governance in Indonesia as defined in Law No. 22 of 1999 on Regional Government which was later changed to the Law. No. 32 of 2004 regarding the reform of the relationship between central and local governments. This law states that development must consider the potential and diversity of the regions. Therefore, local governments - along with community participation - must be able to estimate the potential resources needed to design and build the local economy. The economic potential of the region is the ability of the economy in a region that is possible and feasible to be developed so that it will continue to be a source of livelihood of the local people as well as to encourage the regional economy.

The differences in the regional have implication, that the pattern of development have applied differently. Pattern of wisdom that is implemented and managed on an area, not necessarily provide the same benefits to other areas. If it will build an area, policies should related with the conditions (problems, needs, and potential) of the area. Therefore, to determine the development planning of an area must first be carried out in-depth research on the potential and the state of the area to get appropriate data and information. The scope of this study of 33 provinces in Indonesia.

Regional economic development as part of the national economy has not growth as expected. One of the factors are the differences of the economic characteristics in each region. In other words, there is a difference between the potential of the sector in the area. So, there is a potential sector to be developed to improve the economic development of the region but, there are also sectors that are not potential. In connection with this, there is an

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Hariyanti and Utha ./ OIDA International Journal of Sustainable Development 09:03 (2016) 13

important to identify the potential sector for the regions. So, if there is a potential sector to be developed it' also to encourage the economic development of the region, but there are also sectors that are not potential. In connection with this, very important for the region to identify the potential sectors such. For that to be done calculation steps to identify the sectors related to the potential of regional autonomy. Thus, every region must assess the sectors of economic advantages to become specialists in the sector. To determine the economic potential of the region, can be used two approaches of analysis, namely: analysis Typology Klassen and analysis Location Question (LQ). In addition to reviewing the seed sector, it's necessary also to analyze commodity exports and imports made specialties.

The purpose of this study is firtsly to identify potential sectors and the leading sectors to be developed to increase value added in Indonesia. Secondly, to determine the sectoral planning of the leading sectors to define the type of potential business investment areas in Indonesia and third, to identify index specialization for exports and imports commodity made in Indonesia.

Review of Literature

Economic base theory by Richardson (1973) which states that the main determinants of economic growth of a region is directly related to the demand of goods and services from outside of region. According economic base theory, all regions is a system of socio integrated economy. The theory underlying reasoning location quotient technique, that helps in determining the export capacity of the region's economy and to the degree of self-sufficiency sector.

Regional economic development is a process by which local governments and communities to manage existing resources, and forming a pattern of partnership between local governments and the private sector to create a new jobs and stimulate the development of economic activities in the region. To determine the resources and to create jobs for improving economic activity, it is necessary to analyze the regional specialties and geographical conditions. The approach that can be used; Location quotient, the Hoover Coefficient (Hoover, 1936), Locational Gini Coefficient (Krugman, 1991), and Ellison-Glaeser Coefficients (Ellison and Glaeser, 1994, 1997) in Zheng Lu, et al (2011).

There are several measurement used to compare the local economy, including the shift share analysis. Shift share is a very useful technique to analyze changes in the economic structure of the region compared to the national economy Esteban (2000), Esteban-Marquillas (1972). These analyzes provide data on economic performance in the three areas that relate each other, namely:

• Regional economic growth is measured by analyzing the movement of aggregate sectoral changes compared with the same sectoral changes in the economy which is used as a reference.

• Shifting proportional measures the change in the relative growth or decline, in the area compared to the larger economy as the reference. These measurements allow us to determine whether the region's economy is concentrated in industries that are growing faster than the economy.

• The shift differential helps us in determining how far the competitiveness of local industries (local) economy. Therefore, if a shift differential of an industry is positive, then the industry is higher competitiveness than the same industry in the economy.

Methodology of Data Analysis

The study population was made from 33 provinces in the Indonesia. The observations period were taken from 2008 to 2012. But not all provinces use the observations until 2012 period because the data was not available. So the data came from various years between 2008 to 2011 and 2008 to 2012.

Location Quotient (LQ)

LQ is a simple method for measuring industrial geographic concentration and further for specialization, Zheng Lu, et al (2011). Based on Flegg and Webber (1997), the simple LQ for region of a country is,


Where: V ij = PDRB of the first sector in the province V i = Total PDRB at province V in = PDRB of the first sector in the national Vn = Total PDRB of the first sector in the national • Indicator Criteria:

• LQ > 1, this imply that the level of specialization in a particular sector of the respective province is greater when compared to the same sector in the respective national. In other words if LQ>1, this means that the sector is a leading sector in the regency/province and have the potential to be develop as a driver of the local economy.

• LQ < 1, this means the level of specialization in a particular sector of the said province is less than the same sector in the said national. , if the LQ <1, this means that the sector is not the dominant sector and less potential to be develop as a driver of the local economy

• LQ = 1, the relative roles of certain sectors in the regency/province is equal to the relative roles of certain sectors at the national level

Klassen Typology

Klassen Typology techniques can be used to find a picture of the pattern and structure of regional sectoral growth. According to the typology Klassen, each economic sector in the region can be classified as prime sector, developing, and underdeveloped potential.

Sources: Syafrizal, 2008; 180 Note: Ysektor = Average Growth Rate for the sector i YPDRB = Average Growth of Provincial Gross Domestic Product rsektor = The average contribution of the sector to the i rPDRB = the average contribution of provincial Gross Domestic Product

Kuadran Sector Conclusion I Primary Advanced sectors and growing rapidly. This quadrant is the quadrant with an

average contribution of the sector and the average growth rate of each sector is greater than the average growth rate of GDP and the contribution of each province. This sector can be interpreted as a potential sector as has the rate of economic growth performance is good and the contribution (share) a high.

II Potential

This quadrant is the quadrant with an average contribution of the sector to GDP is low but the province had an average growth rate of each sector are higher than the average GDP growth rate of each province. This sector is growing rapidly and may even be regarded as the booming sector.

III Stagnant Sector advanced but low. This quadrant is the quadrant with an average contribution of the sector to GDP is high, but the province has an average


Specialization Index

Specialization index is used to determine whether an area has specialized as an exporter or importer of a commodity type (Kim, 1995), the specialization index used in this study. Specialization index formulated as follows:

Where: X = Export M = Import i = Commodity j = Region (Province) Specialization Index Value between -1 to 1 If = -1 means= pure importer because the area only to import, no export activities If = 1 means pure exporter because of the area only to export, no import activities Specialization Index has no value if there are no exports and imports are carried out by a local.

Result and Analysis

One of the economic indicators used to measure economic development is reflected from the growth and fluctuation of Gross Domestic Product (GDP). In improving GDP and economic growth it is necessary to increase the contribution from each sector, among other sectors of agriculture; mining; manufacturing; publicities and water; construction; trade, hotel, and restaurant; transportation and communication; financial and service. Sectoral grouping described in the primary sector is based on the output produced and the level of the initial (basic) consisting of agriculture and mining/quarrying, secondary sector grouped of economic activities whose input most of the primary sector, comprising manufacturing, electricity and drinking water as well as the construction sector. Category tertiary sector consists of groups of trade, hotels and restaurants, transport and communications, finance, leasing and business services as well as the services sector lainnya. Article below shows the development of regional Gross Domestic Product in the region of Indonesia.

The Development of Gross Regional Domestic Product in the Province of Sumatra Island

The development of GRDP in 10 provinces in the territory of the island of Sumatra in 2008 to 2012 in graph 4.1.a. shows the highest provincial GRDP is North Sumatra Province followed by Riau province, South Sumatra province, while the lowest were Archipelago Riau province. If seen by the growth rate of RGDP 10 provinces in graph 4.1.b, then growth rate of GRDP in 2009 to 2012 the highest was North Sumatra because the province is never achieved high growth rates but also fluctuates widely resulting in the lowest growth rate and reached negative growth figures. The fluctuate fairly significant growth rate even reached a negative values are West Sumatra province. While eight other provinces, GRDP growth rate also fluctuate but not to the negative growth figures.

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growth rate of each sector are smaller than the average GDP growth rate of each province. The sector is said to be a sector that has been saturated.

IV Underdeveloped Slow-growing economic sector and its contribution is relatively small compared to the existing level of economic sector/provincial level


Graph 4.1: GRDP development in the province of Sumatra Islands in year 2008 - 2012

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(a) (b) Sources: Central Bureau of Statistics, (on process)

The Development of Gross Regional Domestic Product in the Province of Java Island

The development of 6 provincial in the area of Java during 2008 until 2012 in the graphs 4.2.a. shows that the development of the highest GRDP is DKI Jakarta Province, followed by East Java, West Java and central Java, while the lowest were DI Yogyakarta province. If seen by the growth rate of GRDP of 6 provinces then GRDP growth rate in 2009 to 2012 in Grafik.4.2b, showed that the growth rate is the highest GRDP East Java province, but when viewed as a whole the growth rate in the 6 provinces is not too much different from each year. However in 2010, a special province of Banten highest growth rate compared to 5 other provinces.

Graph 4.2. GRDP Development in the Province of Java Islands in year 2008 -2012

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(a) (b) Sources: Central Bureau of Statistics, (on process) The Development of Gross Regional Domestic Product in the Province of Sulawesi Island

The development of 6 provincial in the area of Sulawesi island in 2008 until 2012. The highest GRDP is South Sulawesi province, followed by North Sulawesi province and Central Sulawesi province. While, the lowest is the Gorontalo province. If seen by the growth rate of GRDP, the growth rate of GRDP on the 6 province on Sulawesi island in 2009 to 2012 in graph.4.3.b, showed that the growth rate of the highest GRDP is Central Sulawesi and


West Sulawesi province and is followed by South Sulawesi province, Southeast Sulawesi, North Sulawesi and Gorontalo. The average of GRDP growth is not too much different.

Graph 4.3: GRDP development in the province of Sulawesi Islands in year 2008 - 2012

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The Development of Gross Regional Domestic Product in the Province of Kalimantan Island

The development of 4 provincial in the area of Kalimantan island in 2008 until 2012. The highest GRDP is East Kalimantan Province, followed by West Kalimantan and South Kalimantan province. the lowest province is Central Kalimantan. If seen by the growth rate of GRDP on the of 4 provinces in 2009 to 2012 in Chart 4.4.b. showed the highest growth rate and the steady increase is Central Kalimantan province followed by South Kalimantan and West Kalimantan province. While, East Kalimantan province, the value of the percentage is less volatile and tend to decrease from year to year until 2012.

Graph 4.4: GRDP development in the province of Kalimantan Islands in year 2008 - 2012

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The Development of Gross Regional Domestic Product in the Province of Bali and Nusa Tenggara Island

The development of 3 area of Bali and Nusa Tenggara province in 2008 until 201, in the graph 4.5.a. shows that the two most high is Bali Province followed by West Nusa Tenggara province while the lowest is North Nusa Tenggara province. If seen by the growth rate of the province GRDP on the 3 in 2009 until 2012 in Chart 4.5.b. shows that the highest growth rate and stable of GRDP increased is the province of Bali followed East Nusa Tenggara province. Meanwhile, West Nusa Tenggara province, the percentage is too fluctuating value continues to decline from year to year and even reach negative growth in 2012.


Graph 4.5: GRDP development in the province of Bali and Nusa Tenggara Islands in year 2008 - 2012

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The Development of Gross Regional Domestic Product in the Province Maluku Island

The development of 2 provincial in the area of the Maluku islands in 2008 until 2012 in the graphs 4.6.a. shows that the highest is the Maluku Province while the lowest is the North Maluku province. If seen by GRDP growth rate of 2 provinces in 2009 until 2012 in chart 4.6.b. shows that the highest GRDP growth rate is the North Maluku province after the Maluku province.

Graph 4.6: GRDP development in the province of Maluku Islands in year 2008 - 2012

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The Development of Gross Regional Domestic Product in the Province Papua Island

The development of 2 the province of Papua island in 2008 until 2012 in the graphs 4.7.a. shows the highest provinces is Papua , while the lowest was West Papua province. Based on the GRDP growth rate of 2 provinces in 2009 until 2012 in graph 4.7.b. shows that the highest GRDP growth rate is West Papua, although in 2012 has decreased. The growth rate of Papua province, very fluctuating even reached negative figures in 2010 and 2011.


Graph 4.7: GRDP development in the province of Papua Islands in year 2008 - 2012

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(a) (b) Sources: Central Bureau of Statistics, (on process) This study shows that the economic development in 33 provinces the direction of progress, but some economic indicators are still showing weakness, especially with regard to the low value GRDP and percentage of GRDP growth, productivity and more oriented towards imports. Thus the policy direction for economic development for five years is to increase economic growth through increasing the productivity potential in the regions competitiveness so as to encourage the performance of sectors of the economy in a sustainable manner are packed in the core business, including agriculture, mining and quarrying sector processing of industry, construction sector, the sector of electricity, gas and water supply, trade, hotels and restaurant sector, transportation/communications sector, Bankingings/ financial and service sectors.

After knowing the economic development in 33 provinces in Indonesia, the average contribution of each sector of the province to the national average using the Location Quotient (LQ) it will be seen whether the contribution of the sector in the province is higher than the contribution of the sector nationally. By using this method it will obtain the seed sector and has the potential to be developed. To support the results of the methods Location Quotient, then used Klassen Typology method for mapping the sectors into four (4 categories) are: prime, potential, stagnant and not growing. Furthermore, specialization index used for the development of exports and imports in each sector contributes significantly to economic growth.

Commodity sector (Location Quotient) in 33 provinces in Indonesia

Refer to the previous results, the summary of the leading sectors based on calculations using the Location Quetient (LQ) in 33 provinces are:

In Sumatra Island, province of Aceh superior in publicities and water sector with a mean value of LQ 2.23; North Sumatra, West Sumatra, Jambi, Bengkulu, Lampung, Bangka Belitung excelled in the agricultural sector with the largest average value of LQ 2.89 in Bengkulu. While, Riau and South Sumatra excelled in mining with an average value of LQ in Riau. While in the Riau archipelago excels in manufacturing with a mean value of LQ 1.95 .

In Jakarta and Java Islands; DKI Jakarta winning the financial sector with a mean value of LQ 2.97. In West Java, East Java and Banten excelled at Publicities & Water sectors with the largest average value of LQ 5.17 is Banten province. For excelled sector in the central Java province is agriculture with LQ value of 1.42 and Yogyakarta in field service with average of LQ 1.81. As for the Bali islands excel in Publicities & Water with a mean value of LQ 2.03.

In the islands of Kalimantan; West Kalimantan and Central Kalimantan is excel in agriculture sector with a mean value of LQ 2.30, i.s. the highest LQ in Central Kalimantan. As for South Kalimantan and East Kalimantan excel in mining sector. The mean value of LQ 5.22 in East Kalimantan. In the islands of Sulawesi, almost all the leading sectors are dominated by the agricultural sector ie in Central Sulawesi, South Sulawesi, Southeast Sulawesi, West Sulawesi and Gorontalo. The highest a mean value of LQ 3.52


is West Sulawesi province. As for the North Sulawesi provincial superior in the construction sector with a mean value of LQ 2.12.

In Islands Nusa Tenggara; Mining sector in West Nusa Tenggara is the highest resources with a mean value of LQ 2.97. In the East Nusa Tenggara, agriculture is the leading sectors with a mean value of LQ 2.84. In the Maluku islands; Maluku and North Maluku are both excelled in the Agriculture sector with the highest average value of LQ 2.63 in North Maluku. In the Papua Islands, dominated by the Mining sector with a value of LQ 5.03. In West Papua, Agriculture sector is superior to the value of LQ1.69.

The Rating of province dominated by the highest contribution of each sector compared nationally by using LQ, there are 20 provinces which make the agriculture as a leading sector. The highest provincial contribution in the agricultural sector ie first was West Sulawesi, and followed of Central Sulawesi, Lampung, Bengkulu and East Nusa Tenggara province. The most low-value national contribution is West Papua province. For mining sector, there are 13 provinces that dominate, and which has the highest contribution nationally namely Riau province followed by East Kalimantan, Papua, South Kalimantan, and the lowest ranking are South Sulawesi. There are five provinces that have contributed the leading sectors in manufacturing, the first rank is the Riau Archipelago followed by Banten, West Java province. The most low-value national contribution is West Papua and East Kalimantan province. While the leading sectors in publicities, gas and water there are 11 provinces. The highest contribution nationwide was Banten province followed by West Java, Aceh, Bali province and the lowest ranking are North Sulawesi.

In the construction sector, there are 15 provinces that have construction sector as a leading sector. The highest provincial contribution and was ranked first in North Sulawesi was followed by Jakarta, Yogyakarta Province. The most low-value contribution is North Sumatra province. As for trade, hotel and restaurant there are 17 provinces that have the highest contribution nationally. Bali province is the first ranking, followed by East Java province, North Maluku and the lowest ranking is West Sumatra. In the transportation and communication sector, there are 10 provinces which have superior sector. The highest contribution to the province and are in the first rank is West Sumatra, followed by South Kalimantan, North Sulawesi, Jakarta, and Bali province. The most low-value contribution is Banten province. For the financial/Banking sector, there are only two provinces that dominate this sector and which has the highest contribution nationally are Jakarta province, after that DI Yogyakarta province. While in the service sector, there are 22 provinces that dominate this sector. The highest contribution nationally namely East Nusa Tenggara province, after it followed by Gorontalo, Bengkulu, DI Yogyakarta, West Sumatra, while the lowest national contribution in the services sector is West Papua.

Analysis of Klassen Typology and Specialization Index of 33 provinces in Indonesia

After analysis of the leading sectors at the national level for each province, then it follows by using Method Klassen Typology obtained results which sectors are categorized as primary sector, potentially, stagnant or as a backward sector of each province. Klassen Typology mapping results, associated with planning activities for regional economic development in the future, among others, can be done in three phases, namely economic development priorities for the short term, medium term and long term.

In the previous explanation, for determine whether an area has specialized as an export or import of a commodity type, then the specialization index used in this study. the specialization index on exports and imports commodities for the 33 provinces in Indonesia are as follows:

Aceh Province

The results of mapping using Klassen Typology Method for the province of Aceh, that included prime sector is trade, hotel, restaurant and services. Most sectors of the economy in the province are grouped in potential and stagnant sectors namely manufacturing industry, electricity and water supply, transportation, communications and agriculture. While the remaining sectors of the economy compared to the same sector in Aceh province level is the mining, construction, and Bankinging / finance.

The development of exports and imports in each sector contributes significantly to the economic growth of the Aceh Province. The development of the value of exports and imports caused by an increase in volume (quantity and type of product) as well as an increase in the prices of exports and imports. The results using Index of Specialization showed the average value of the Aceh province has a purely export specialization in the agricultural sector, especially in the farm and forestry commodities and other commodities with specialization index positive. Industrial minerals and chemicals industry the average export specialization but not purely because of their export orientation change of commodity imports in 2008 into a commodity that is exported in 2009. For imports of pure, Aceh


province just specialize in the agricultural sector, especially forestry and fishery commodities commodities as the value of the index negative specialization.

The products are as a export commodities in the province Aceh in 2008 until 2012 include Urea, Anhydrous Ammonia, Iron Ores and Natural Rubber Latex. While the imported products are: Cereals, Salt sulfurs earths and stone, mineral fuels, In organics chemicals, Organic chemicals, Coffee mate, tea and spices, Fish and crustaceans Dairy products Oil seeds, and Sugar.

Nort Sumatera Province

The results of mapping for the province of North Sumatra shows that included prime sector are trade, hotel, restaurant and services. Most economic sectors are grouped in potential and stagnant sectors namely, manufacturing industry, electricity and water supply, transport communications and agriculture. While the remaining sectors of the economy compared to the same sector in the North Sumatra provincial level were mining, construction, and Bankinging / finance.

Based on the calculation with indexes specialization, North Sumatra province in the field of exports and imports according to the volume of export and import shows the North Sumatra province has specialized pure export on agricultural sector, especially in plantation commodities, the manufacturing sector, especially industrial metals as well as commodity other processing especially commodity chemicals and other commodities with positive index specialization result. To natural import, North Sumatra province has specializing in oil and gas, mining and quarrying, manufacturing sector and the metal industry especially, the commodity processing industry and the power sector, Gas and drinking water with a negative index values of specialization. Whereas the import of agricultural commodities especially not purely because, of the export orientation perubaan in 2008 to switch the orientation of imports in 2009 until 2012, and also the volume of imports is not too big.

The products are used as commodity exports and imports in the province of North Sumatra in 2008 until 2012 following; for Export products are Palm Oil, Natural Rubber Spec Technically, Crude Palm Oil, Coffee, Palm Kernel, Edible Mixtures, Cigarettes, Gloves and Vegetable. Commodity imports are: oil and gas, agriculture, mining and quarrying, Other industry.

West Sumatera Province

The results of mapping for the province of West Sumatra show that included the prime sector is transportation, communications and services. Most sectors of the economy in the province of West Sumatra are grouped in potential and stagnant sectors namely; construction, agriculture, processing industry; trade, hotels & restaurants and services. While the remaining sectors of the economy compared to the same sector in West Sumatra provincial level is the mining sector; electricity, gas and water as well as the Bankinging / finance. The specialization index of West Sumatra province in the field of export and import according to the volume of export and import in 2008 until the year 2012. The export has specializes natural in the agricultural sector, especially in plantation commodities. In the manufacturing sector, especially commodity chemicals and other commodities with specialization index positive. ISP positive value and small for the manufacturing sector is especially; commodity chemicals and other commodities suggests that the change in orientation of the export volume of imports in 2008-2010 into 2011-2012. To natural import, West Sumatra just specialize in the agricultural sector, in particular animal husbandry, mining and quarrying sector in particular mineral, especially the manufacturing sector and the food commodity plastics as well as transport and communications sector because the specialization index of value is negative.

The products used as export commodities of West Sumatra province are: Palm oil, crude, natural rubber spec Technically, Palm Oil, Palm Kernel, Palm Kernel oil, Coal, Cocoa beans, nuts and palm oil cake industrial Mono carboxylic. The products used as commodity import are: Live Animals, Petroleum Products, Residual petroleum products and related materials, Carboxylic acids, and their hydroxides, Haldes, peroxides, Milk, Cream, and Milk products other than Butter or cheese, Other Plastics in Primary Forms, Ships, Boats and Floating Structures, and Article of Plastics. Riau Province

The results of mapping for the province of Riau show that included prime sector is processing industry. Most sectors of the economy in the province of Riau are grouped in potential and stagnant sectors namely; construction, agriculture, mining; electricity, gas and water as well as Bankingings / financial; trade, hotels & restaurants and


services. At this province does not have a sector that is considered extremely underdeveloped, it shows the government is consistent growth and contribution of each sector in promoting economic growth regions. The Specialization index of Riau province has a purely export specialization in the agricultural sector, especially in plantation commodities. the manufacturing sector, especially commodity chemicals and paper, as well as other commodities with specialization index positive. For natural import Riau province specializing in the agricultural sector, especially forestry and livestock commodities. In manufacturing sectors, especially mineral industry, plastics industry, electricity, gas and water as well as the building sector due to negative index values specialization.

The products are used as export commodities are: Palm oil, crude palm oil, chemical wood pulp, chemical products, paper and paperboard, industrial monocarboxylic, palm kernel/babasu oil, palm kernel/ babasu, crude oil and toilet/facial tissue stock. Imported products Riau province are: marine, machines/aircraft mechanic, pulp, fertilizers, grains oily, various chemical products, plastics and plastic goods, machinery/electrical equipment, salt, sulfur and lime, inorganic chemicals, fats and animal , vegetable oil, paper and cardboard, and milling results.

Jambi Province

The results of mapping for the province Jambi show that included prime sector is mining, trade, hotels and restaurants and the service sector. Most sectors of the economy in Jambi province are grouped in potential sectors and stagnant namely; electricity and water supply, construction, Bankingings / finance, agriculture and processing industry. While the remaining sectors of the economy compared to the same sector in Jambi province level is the service sector and the transportation / communication. The Specialization Index of Jambi province especially in the agricultural sector are plantation commodities and forestry. In the manufacturing industry; especially mineral sector, the chemical industry and paper industry as well as other commodities with specialization index positive. The import of Jambi province only specializes in the agricultural sector, in particular animal husbandry and fishery commodities and the manufacturing sector especially food commodities due to negative index values specialization.

The products are used as an export commodity in the province Jambi is: Technically spec natural rubber, Coal, chemical wood pulp, coconut (copra) oil, crude toilet/facial tissue, palm kernel/babassu oil, Nut, Bituminous coal, and Plywood. Products made of imported commodities are: Milk, Cream, and Milk products other than butter or Cheese, Fish, fresh, Chilled or frozen, Fish, Dried salted or in Brine; Smoked fish, Other cereal meals and flours, Fruit and Nut; Fresh or Dried and Spices.

South Sumatera Province

The Mapping results for the province of South Sumatra show that included the prime sector when viewed from the average contribution and growth of the year 2008 until 2011 is a trade, hotels, restaurants and services. Most sectors of the economy in the province of South Sumatra are grouped in the power sector and water supply, construction, transportation/communication, Bankingings/finance, agriculture, mining, and processing industries. While the lagging economics sector in the province does not exist.

The specialization Index (ISP) of South Sumatra province have a purely export specialization in the agricultural sector in particular commodity plantations, mining and quarrying sector in particular mineral industry. In the manufacturing sector, particular is commodity chemicals with specialization index positive. ISP positive value and small for agricultural commodities show that the change in orientation of the volume of imports into exports and vice versa from 2008 until 2012. For pure imported South Sumatra province, specialize in the industrial sector, especially the processing of metal materials, the building sector due to negative index values specialization. For the transport and communications between 2008 and 2009 still specialize import but in 2010 specializing in exports and imports specialization back in 2011 and 2012. Especially for the dining industry in South Sumatra specialize imports in 2008 and 2009 specialized in export.

After classification, the export of their products are: Technically spec natural rubber, Palm Oil, Coal, bituminous coal, industrial Mono carboxylic, cake oil palm nuts, natural rubber, Urea Palm kernel, and compounded rubber. Products imported South Sumatra are: machinery and mechanical appliances, goods of iron and steel, machinery/electrical equipment, fertilizers, organic chemicals, salt, sulfur, lime, various chemical products, optical devices, sugar and confectionery and the results of milling.


Bengkulu Province

The mapping results for Bengkulu province show that included the primary sector when viewed from the average contribution and growth of the year 2008 until the year 2011 is the service sector. Most sectors of the economy in the province of Bengkulu are grouped in potential and stagnant sector is mining, and processing industries, electricity and water supply, construction, transportation/ communication, Bankinging finance, agriculture, trade, hotels and restaurants and services. While the lagging economic sector does not exist in the province. The specialization Index (ISP) of Bengkulu province has a naturally export specialization in the agricultural sector, especially in forestry and agricultural commodities, mining and quarrying, as well as other commodities with specialization index positive. For purely import, Bengkulu province had specialized sector of electricity, gas and drinking water, as well as transport and communications sector due to negative index values specialization.

The export products as superior product is Bituminous Coal, Other Coal, Anthracite Coal, vegetable Products, Oil-Palm-nuts cake, Oil cake coconut/copra, oil cake Technically spec vegetable Products and natural rubber. Imported products of Bengkulu province is Sugar, Molasses, and Honey, Residual petroleum Products and Related Materials, Articles of the Articles of Rubbers, Tubes, Pipes, Hollow Profile, Pipe Fittings of Iron/Steel, Structures and parts of iron/Steel or Aluminum, Metal containers for storage and transportation, Rotating Electrics Plants and Parts, Civil Engineering and Contractor Plants and Equipment/Parts, Metal Working Machinery and Parts, also Ships, Boats and Floating Structures.

Propinsi Lampung

The results of mapping for the province of Lampung showed that 9 sectors that there is none that is included in the category of prime sector when viewed from the average contribution and growth in 2008 to 2011. The majority of economic sectors in the province of Lampung are grouped in potential sectors and stagnant i.e electricity and water supply sector, transport / communication, Bankingings / finance, services, agriculture, processing industry and trade, hotels and restaurants. While the remaining economic sectors are mining and construction. The specialization Index (ISP) of Lampung province has specialized purely on the export of agricultural commodities, especially plantation and fishery commodities, the manufacturing sector, especially industrial minerals, and other commodities as indicated by the positive specialization index. For pure import Lampung province specializing in the agricultural sector, especially livestock, as well as the industrial sector and food processing industries in particular commodity as indicated by an index value of negative specialization.

After the export classification by sector using Specialization Index is Palm oil, crude, coffee not roasted, bituminous coal, Pepper, other than crude palm oil, chemical wood pulp, palm kernel/ babasu oil, shrimps and prawns, Pineapples, and Technically spec natural rubber. Imported products based on the index of specialization are: Milk, cream milk products of butter and cheese Fish, Rice meal and flour, Vegetables, Fruit, Sugar and cooper aluminum zinc.

Bangka Belitung Islands

The result of Mapping for the province of Bangka Belitung any one sector are not included in the category of excellence when viewed from the average contribution and growth in 2008 to 2011. The majority of economic sectors in the province of Bengkulu are grouped in potential sectors and stagnant namely mining sector, electricity and water, the building sector, the service sector, agriculture, manufacturing, and trade, hotels and restaurants. While the lagging economic sector is the transport sector/communication sector and Bankinging/finance.

The specialization of Bangka Belitung on the exports of fishery commodities, especially agricultural and plantation commodities, mining and quarrying sector in particular mineral industry, the manufacturing sector of the chemical industry and other commodities. To import Bangka Belitung province specialize purely sector on electricity, gas and water and transport and communications are indicated by an index value of negative specialization.

The export classification sector is Tin, Crude Palm Oil Natural Rubber, Pepper, Fish, Compound Rubber Iron Ores, Palm Kernel, Kaolin, and Cutter Fish. Import commodities are: Ships and floating buildings, machinery/mechanical appliances, Fertilizer machinery/electrical equipment, goods iron and steel, and materials albumin/adhesive, enzymes.


Riau Islands

The results of mapping for the province of Riau Islands show that included the prime sector when viewed from the average contribution and growth of the year 2008 until the year 2011 is the trade, hotels and restaurants. Most sectors of the economy in the province of Riau Islands are grouped in potential sectors and stagnant namely electricity and water supply sector, the construction sector, transportation sector, Bankingings/financial services sector, industry and processing. While the underdevelopment economic sectors in the province is agriculture and mining sectors. Specialization Riau Islands province has a pure export specialization in the agricultural sector especially in commodities and commodity plantation forestry, manufacturing sector, especially the chemical and paper industry and other commodities. For pure import Riau Islands province specializing in the agricultural sector, especially livestock commodities as indicated by an index value of negative specialization.

After classification, export commodities are: Palm oil other than crude oil, Palm oil crude, chemical wood pulp, chemical products, paper and paperboard, industrial Mono carboxylic, Palm kernel/ babassu oil, palm kernel/babassu oil crude, and toilet/facial tissue, Product imports are: Meat of animals Boone, Tea and mate, Spices, Cocoa and cheese and curds.

DKI Jakarta Province

The Mapping results for the province of Jakarta shows that included the prime sector when viewed from the average contribution and growth of the year 2008 until the year 2011 is a trade, hotels and restaurants, transportation/communication and services sectors. Most sectors of the economy in the province of Jakarta are grouped in potential and stagnant sectors namely construction sector, the manufacturing sector and the Banking sector/finance. DKI Jakarta has underdeveloped sectors, namely agriculture, mining, and electricity and water sectors.

DKI Jakarta has a purely export specialization in the manufacturing sector, especially the shoe industry, transportation/communication and other commodities as indicated by the positive specialization index. For pure import Jakarta province specializing in the agricultural sector and livestock commodities, especially agricultural commodities and industrial sector and processing industries, especially food which is indicated by a negative value of the index of specialization.

The Classification of products used as export commodities are: Machines copying and facsimile printing of rubber tires for motorcycles, sports footwear, Vehicles, base stations for transmission/ reception of voice, video recording, cooper wire, other color reception apparatus for television. Imported products are: Live Animals other than Fish, Meat of Bovine Animals Fresh, Chilled or Frozen, Other meat, Offal of edible meat, fresh, chilled or Frozen, Wheat and Meslin, Unmilled and Rice.

West Java Province

The mapping results for the province of West Java shows that included the prime sector when viewed from the average contribution and growth in 2008 to 2012 is the trade, hotels and restaurants. Most sectors of the economy in the province of West Java are grouped in potential sectors and stagnant namely electricity and water supply sector, the construction sector, transport/communications, Banking/finance, the service sector, the agricultural sector and processing industry. While the remaining sectors of the economy is the mining sector.

Specialization index of West Java province has a purely export specialization in agricultural and plantation commodities, especially transport and communications sector, and other commodities as indicated by the positive specialization index. As for the processing industry especially commodity chemical industry has an average export specialization but not purely export since 2008 the province of West Java import of chemical industry products. To import pure West Java province specialized mining sector specifically indicated mineral industry with specialization index value is negative.

After the classification of export, the products are used export commodities are: isoprene, Oils, Iron/ steel, cocoa butter, fat and oils propene, parts of airplane, drilling for oil/gas, vinyl chloride and cocoa paste. Commodities imported products include: other chemical organics, stone sand and gravel, petroleum crude oil, and petroleum products.


Central Java Province

The mapping results for the province of Central Java show that included the prime sector when viewed from the average contribution and growth of the year 2008 until the year 2011 was the manufacturing sector, as well as trade, hotels and restaurants. Most sectors of the economy in the province of Central Java are grouped in potential sectors and stagnant namely electricity and water supply sector, the construction sector, transport/communications, Banking/finance, service sector, agriculture and mining sectors. While the lagging economic sector does not exist in the province. The Specialization Index in Central Java province has a purely export specialization in the agricultural sector, especially commodities and commodity plantation forestry, manufacturing industry, especially textile industry and other industries, as well as electricity, gas and drinking water as indicated by the positive value of the index of specialization. To import pure Central Java province specializing in the industrial sector, especially the processing of industrial minerals and construction sector as indicated by an index value of negative specialization.

After the export classification, details of products are used export commodities namely: Palm oil, plywood, wooden furniture, men's/boy's shirts Yarn wood, seats of cane and Cables. Products imported commodities are: Iron/steel, rail/railway and tractor, construction, wire of iron/steel Cooper, Nickel and Aluminum.

DI Jogyakarta

The mapping results for DI Yogyakarta province shows that included the prime sector when viewed from the average contribution and growth of the year 2008 until the year 2011 was the manufacturing sector, trade, hotels and restaurants as well as the services sector. Most sectors of the economy in the province of Yogyakarta are grouped in potential and stagnant sectors namely construction sector, transport/communications, Banking/finance and agriculture. While the lagging economic sectors are mining and electricity and water sectors.

Specialization index in DI Yogyakarta province has a purely export specializes in the manufacturing sector, especially the paper industry and other commodities as indicated by the positive value of the index of specialization. To import pure DI Yogyakarta province specializing in the agricultural sector, especially industrial estates and manufacturing sectors, especially textile industry as indicated by an index value of negative specialization.

Export classification by sector using Specialization Index are: Paper of a kind used for h-hold/ sanitary purpose. While the commodity imports are: Vegetables, Fresh, Chilled, Frozen or Simple Preserved, Vegetables, Roots and Tubers, Prepared or Preserved Nes, Crude Vegetable Materials, Textile Yarns and Cotton Fabrics, Woven.

East Java Province

The mapping results for the province of East Java show that included the prime sector when viewed from the average contribution and growth in 2008 to 2012 is the trade sector. Most sectors of the economy in the province of East Java are grouped in potential and stagnant sectors namely construction sector, transport/communications, Banking/finance, agriculture, and manufacturing. While the lagging economic sector is mining, electricity and water supply sector, and service sectors.

East Java Province has a purely export specialization in the agricultural sector, especially the plantation commodities, commodity fishery and forestry commodities, the manufacturing sector, especially industrial minerals and paper industries, as well as other commodities as indicated by the positive value of the index of specialization. For pure imported from East Java Province specializes in food processing industry with specialization index negative.

After the export classification following are details of the products used as an export commodity; Palm Oil Gold, Waste and Scrap of precious metal, cathodes and sections of cathodes of refined copper, technically spec natural rubber, paper & paper board, lysine and its esters, shrimps and prawns, un wrought products of refined cooper and Wood. Products imported commodities are: Tea and mate, Spices, feeding stuff for animal, margarine and shortening and Wood.

Banten Provinve

The mapping results for the province of Banten show that included the prime sector when viewed from the average contribution and growth in 2008 to 2012 is the processing industry. Economic sectors in the province of Banten which are grouped in potential sectors and stagnant namely the transport sector/communications, Banking/finance,


and trade, hotels and restaurants. While the remaining sectors of the economy namely agriculture, mining, electricity and water supply sector, the construction sector and the services sector. Specialization index Banten province has a purely export specialization in mining and quarrying sector in particular commodity gas as indicated by the positive value of the index of specialization. But there are also average export impure means that in some periods of observation are more orientation changes to imports and exports although the average value of the ISP is positive among other sectors of trade, hotels and restaurants as well as other commodities. Banten province for pure imported from 2008 to 2009 had an average specialize in the industrial sector, especially the processing of the food industry and transport and communications are indicated by an index value of negative specialization. As for the processing industry, especially the chemical industry is import-oriented, but small. The period 2008 to 2012 period there are changes in export orientation be imported.

After classification, the following are the details of the products are used export commodities Styrene, ethylene dichloride, paper & paper board, esters of acrylic acid, prefabricated structural components for building, ethyl acetate, slag, dross, and line pipe of a kind used for oil / gas. Products imported commodities are: Foodstuffs and live animals, food ingredients are not to be eaten, fuel pelicans, polishers and materials relating to chemicals and machinery and transportation equipment

Bali Province

The mapping results for the province of Bali show that included the prime sector when viewed from the average contribution and growth of the year 2008 until the year 2011 is the service sector. Most sectors of the economy in the province of Bali are grouped in potential sectors and stagnant is mining, construction, agriculture and trade, hotels and restaurants. While the lagging economic sectors in the province is pretty much that the manufacturing sector, electricity and water supply, transportation/ communication sector and Bankinging/finance. Bali province has specialized purely on the exports of fishery commodities, especially agricultural sector as indicated by the positive value of the index of specialization. For other commodities the average ISP shows export specialization, but in 2010 the import-oriented value although small. To import pure Bali province specialized agricultural sector, especially commodities forestry and plantations, mining and quarrying sector in particular minerals industry, the manufacturing sector, especially industrial machinery and chemical industry, transportation/communication, and financial sector/rental which is indicated by an index value of specialization negative. For electricity, gas and drinking water, ISP shows the value of imports but specialization not pure imported in 2010 this is due to export specialization, but since 2012 the import-oriented.

After the export classification of the Bali provincial export commodities are: Yellow fin Tunas, Live Fish, Tunas, Skip jack and Bonito, Bigeye Tunas, Fresh or Chilled Fish and Electric Discharge Lamp. Commodity imports are: machinery/mechanic, Marine and Building Floating, Jewelry gems, Machinery/equipment, grains, optical devices, goods of leather, Organic Chemicals, objects of iron and steel, rubber and rubber goods, Gas Turbine, Bells, Watches and parts, Parts of Silver Jewellery, Silver semi-finished materials, equipment instruments and models part of the show, Sound Card and Video Card and New Pneumatic Tires. West Kalimatan Province

The mapping results for the province of West Kalimantan show that included the prime sector when viewed from the average contribution and growth in 2008 to 2012 is the trade, hotels and restaurants and the service sector. Most sectors of the economy in the province of West Kalimantan are grouped in potential sectors and stagnant is mining, construction, utilities and transport/communications sector, Bankingings/finance, agriculture and processing industry. While the economic sector in the province is lagging sector of electricity, gas and water. West Kalimantan Province has a purely export specialization in the agricultural sector, especially forestry and plantation commodities, mining and quarrying sector in particular mineral commodities and the manufacturing sector, especially food commodities showed with specialization index positive. While other commodities as well as electric, gas and water have specialized export but not purely because of the years of observation of this province also specialize import. To import pure West Kalimantan specialized agricultural sector, especially livestock commodities, and transport and communications sector showed with specialization index negative. The value of ISP import for commodity chemicals is small.

The commodity export in West Kalimantan is: Technically spec natural rubber, aluminum ores, Plywood, compound rubber, Iron ores, oil cake palm nuts, Edible matures, Wood, light vessels, Fruity, Wood and articles of wood, fats and oils of animal/ vegetable , fish and shrimp, salt, sulfur, lime, Ore crust and Abu Metals, Tobacco and variety of chemical products. Commodity imports are: Fuel Minerals, Machinery/Aircraft Mechanic, Marine, Fertilizer, Iron


and Steel, Grains oily, Machinery/Electrical Equipment, Vehicles and Parts, objects of iron and steel, as well as salt, sulfur, Lime.

Central Kalimantan Province

The mapping results for the province of Central Kalimantan show that included the prime sector when viewed from the average contribution and growth in 2008 to 2012 is the trade, hotels and restaurants and the service sector. Sectors that are grouped in potential sectors and stagnant in the province, is the mining, construction, utilities and Bankingings/financial, and agricultural sectors. While the economic sector in the province is lagging behind among manufacturing sector, electricity and water supply sector and the transportation/communications. The Specialization index based Central Kalimantan province has a purely export specialization in the agricultural sector, especially the plantation commodities and forestry, the manufacturing sector, especially the mineral industry, chemical industry, as well as other commodities as indicated by the positive value of the index of specialization. For import, Central Kalimantan province purely specialize in the manufacturing sector, especially the plastics industry as indicated by an index value of negative specialization.

After classification of export, the products are used as an export commodity is Palm oil other than crude oil, crude palm oil, Plywood, iron ores, plywood veneered panels, and bituminous coal, plywood consisting solely, vegetables fats & oils, aluminum ores and Industrial Mono carboxylic. The excellent commodities for imported was synthetic Rubber Latex, other crude minerals, residual petroleum, tubes, pipes and hoses of plastics. South Kalimantan Province

The mapping results for the province of South Kalimantan show that included the prime sector when viewed from the average contribution and growth in 2008 to 2012 is the trade, hotels and restaurants. Sectors that are grouped in potential sectors and stagnant in the province of South Kalimantan is electricity and water supply sector, the construction sector, transportation/communications, Bankingings/financial, service sector, agriculture, mining, and manufacturing industry sector. The high economic activity in all sectors so that no sector is obtained retarded. The Specialization index in province of South Kalimantan has a purely export specialization for the agricultural sector, especially the plantation commodities and forestry, as well as mining and quarrying sector in particular mineral which is indicated by an index value of positive specialization. The purely import of South Kalimantan province was specialized in the manufacturing sector, especially chemicals industrial commodity, machinery industrial commodity and paper commodity. Transportation and communications sector showed with specialization index negative. While the agricultural sector, especially livestock commodities and other commodities have an average of little import from the period 2009 to 2012 because of changes in import export orientation became vice versa.

The export classification using Specialization Index are: natural rubber, wood, rattan, fish, coal, and oil palm. Import commodity classification are: Machinery Industry Specific/Special, Organic Chemistry, Industrial Machinery & Equipment, Motor Vehicles For Highways, Other Chemicals, Artificial Chemical Fertilizer Plant, and Paper, Cardboard & dairy

East Kalimantan Province

The mapping results for the province of East Kalimantan show that included the prime sector when viewed from the average contribution and growth in 2008 to 2012 is the mining sector. Sectors that are grouped in potential sectors and stagnant, in East Kalimantan province is agriculture, electricity and water supply, construction, trade, hotels and restaurants, hotels, transportation/communication sector Bankingings/financial services sector, and the manufacturing sector. Based on the Specialization Index of East Kalimantan province has a purely export specialization in the agricultural sector, especially forestry commodities, as well as mining and quarrying sector in particular mineral which is indicated by an index value of positive specialization. But for the manufacturing sector, chemicals and other commodities has an average value of exports is small because between 2008 until 2012 there is a change of orientation of exports into imports vice versa. The purely import in East Kalimantan province specializing in the agricultural sector, especially the livestock industry, mining and quarrying sector in particular commodity oil, the manufacturing sector in particular commodity plastics, electricity, gas and water, construction, transport and communications as well as the service sector indicated by specialization index value is negative.


Export classification by sector with the specialization index, in the province of East Kalimantan is Bituminous Coal, Other Coal, Lignite, Anhydrous Ammonia, Urea, Floating/submersible drilling, palm oil, crude, Plywood, Methanol and Wood. While the products subject to import is Fuel Minerals, Machinery and mechanical equipment, ships, boats and floating structures, fertilizers, vehicles other than moving on railway or tramway, articles of iron or steel, rubber and articles thereof, instruments and apparatus optical, and explosives, pyrotechnic products and a variety of chemical products. Nort Sulawesi Province

The results of mapping using Klassen Typology Method, for the province of North Sulawesi indicates that including the prime sector from the average contribution and growth of the year 2008 until the year 2011 is a trade, hotels and restaurants as well as the transportation/communications. The sectors which are grouped in potential and stagnant sectors are electricity and water utilities, Bankingings/ finance, agriculture, construction and service sectors. While the underdevelopment economics sectors in the province among other mining sector and the manufacturing sector.

Specialization Index (ISP) of North Sulawesi province has a purely export specialization in the agricultural sector, especially plantation and fishery commodities, the manufacturing sector, especially the chemical industry, as well as other commodities showed with specialization index positive. To import pure Central Kalimantan province specializing in agricultural commodities, electricity, gas and drinking water, as well as transport and communications sector showed with specialization index negative.

The export classification by using the index specialties are Coconut (copra) oil, Palm Oil, Tunas, skip jack and bonito, oil cake coconut/copra, smoked fish, palm kernel/babassu oil, palm kernel/babassu crude oil, oil cake palm nuts, Industrial and Mono carboxylic. While imports of North Sulawesi province is not specific Item.

Central Sulawesi Province

The results of mapping using Klassen Typology Method for Central Sulawesi province indicates that including prime sector of average contribution and growth in 2008 until 2012 is the trade sector. Sectors that are grouped in the sector and the potential is stagnant construction sector, transportation/ communications, agriculture, mining and services sectors. While the underdevelopment economic sectors in the province among other manufacturing sector is electricity and water supply sector and the Bankinging sector / finance. Specialization index (IPS) of Central Sulawesi province has a purely export specialization in the sectors of manufacturing industry, especially industrial minerals and metal industries, as well as other commodities showed with specialization index positive. For the agricultural sector, especially commodity and commodity plantation forestry on average specialized on exports but not a pure export since 2008 to 2011 exports but in 2012 switched over much do the imports. To import pure Central Sulawesi province specializing in the fisheries sector, the manufacturing sector, especially the food industry, the sector of electricity, gas and water are shown with a negative index value of specialization.

The export classification by sector using the specialization Index are: nickel ores, cocoa beans, crude palm oil, doors and iron ores. While commodity import control are: fish and shrimp, the result of grinding, biki-bikian oily, lacquers, gums and resins, fats and animal/vegetable oil, cocoa beans, iron ore, crust and metal, mineral fuels, oils astiri, wooden goods and wooden goods , furniture home lighting, and refined flour. South Sulawesi Province

The mapping results for the province of South Sulawesi that included the prime sector when viewed from the average contribution and growth in 2008 to 2012 is the trade sector. Sectors that are grouped in the sector and the potential and stagnant is water and electricity sectors, the construction sector, the sector of transportation/ communication, Bankinging/finance, agriculture, manufacturing, and service sectors. While the lagging economic sector in this province is the mining sector.

Specialization index (ISP) of South Sulawesi province has a purely export specialization in the agricultural sector, especially forestry commodities, plantation and fishery commodities; the manufacturing sector, especially industrial minerals, as well as other commodities indicated by an index value of positive specialization. To import pure South Sulawesi province specializing in the manufacturing sector, especially the food industry and the chemical industry, electricity, gas and water and transport and communications are indicated by an index value of negative specialization.


After the export classification following are details of the products used as export commodities in South Sulawesi province namely: Nickel Mattes, cocoa beans, seaweeds and other algae, shrimps and prawns, plywood, bran, sharps and other residues, coffee not roasted, fish fillets and other fish meat, Crab prepared/preserved and livers and roes of fish. Product imports are: Mineral fuels, grains, machinery/ mechanical appliances, pulp/rest of the food industry, marine, fertilizer, machinery/ electrical equipment, sugar and confectionery, inorganic chemicals, and salt, sulfur, lime.

Southeast Sulawesi Province

The mapping results for the province of Southeast Sulawesi shows that included the prime sector when viewed from the average contribution and growth of the year 2008 until the year 2011 is a trade, hotels and restaurants. Sectors that are grouped in potential and stagnant is the mining sector, the sector of electricity, gas and water supply, construction, utilities and transport/communications sector, Bankingings/finance, agriculture, and service sectors. While the lagging economic sectors in the province is the manufacturing sector. The specialization index of Southeast Sulawesi province has a purely export specialization in mining and quarrying sector, in particular mineral commodities and other commodities. Specifically for the agricultural and fishery commodities on average have smaller export specialization since 2009 until 2012 changes the orientation of specialization imports into exports. For imports from 2008 to 2012, the average specialty is imported small due to changes in the orientation of imports in 2008 to 2010 to be exported in 2011 for plantation commodities, commodity forestry, agricultural commodities, commodity farms and processing industry.

Export classification by sector using Specialization Index is Nickel ores and concentrates, ferro-nickel, Bitumen & Asphalt, Chromium ores, Lignite and skip jack/stripe-bellied bonito. For commodity imports, not specified. Gorontalo Province

The results of mapping using Klassen Typology Method for the province of Gorontalo indicated that included the prime sector when viewed from the average contribution and growth of the year 2008 until the year 2011 is a trade, hotels and restaurants. Sectors that are grouped in potential and stagnant is the mining sector, electricity, gas and water supply, construction, utilities and transportation/communications sector, Bankingings/finance, agriculture and service sectors. While the lagging economic sectors in this province is the manufacturing sector.

The specialization index of Gorontalo province has a purely export specialization in the agricultural sector, especially the plantation commodities which is indicated by an index value of positive specialization. To import pure Gorontalo province specializing in the agricultural sector, especially livestock and agricultural commodities, mining and quarrying in particular mineral commodity; the manufacturing sector, especially the food industry, plastic industry, and the textile industry, electricity, gas and water, the building sector, the sector transport and communications and other commodities as indicated by an index value of negative specialization.

The export classification by sector using Specialization Index are maize (corn), Cane Molasses, Wood, Oil Cake coconut / copra, Molasses, and Coconut (copra) crude oil. Commodity imports are: Fuel Mineral, Petroleum and distillates, Plastics and stuff like, yarn fabric is not woven, Goods from stone plaster, iron and steel, articles of iron and steel, equipment / tooling of metal, machines and machine parts , electrical machinery and equipment, motor vehicles for goods, automatic turbine and Sugar & Candy.

West Sulawesi Province

The results of mapping using Klassen Typology Method for the province of West Sulawesi indicated the prime sector when viewed from the average contribution and growth of the year 2008 until the year 2011 is the trade, hotels and restaurants and the service sector. Sectors that are grouped in potential and stagnant is the mining, manufacturing, electricity and water utilities, transportation / communication and agriculture. While the economic sector in the province is lagging behind other as well as construction and Bankinging/finance sector.

The specialization index of West Sulawesi province has a purely export specialization in the agricultural sector, especially tree crops, as indicated by the positive value of the index of specialization. To import pure West Sulawesi province specializing in the agricultural sector, especially forestry commodities, commodity fisheries and livestock commodities, the manufacturing sector in particular other industries, trade, hotels and restaurants and transport and communications sector showed with specialization index negative.


After the export classification by sector using the Specialization Index details of the products used as an export commodity is crude palm oil, manganese ores. While commodity imports are cement, wood, fish, rope former, Car, Motorcycle and Animals. West Nusa Tenggara Province

The mapping results for the province of West Nusa Tenggara indicates that the average prime sector contributions and growth in 2008 to 2012 is the trade, hotels and restaurants and the service sector. Sectors that are grouped in potential and stagnant is manufacturing sector, electricity, gas and water supply, construction, utilities and transportation/communications sector, Bankingings/finance, agriculture, and mining sectors. Rapidly developing economic activities in the province are not found to cause the sectors that fall into the category of underdeveloped sector. Pure export specialization in the manufacturing sector in particular mineral which is indicated by an index value of positive specialization. For pure import West Nusa Tenggara specialized in agricultural sector, especially the plantation commodities. Metal processing industry, chemical industry and other industries, electricity, gas and water, transport and communications sector showed with specialization index negative. While other commodities on average have specialized import small because of changes in import specialization into exports in 2009 to 2012.

Export classification using Specialization Index only cooper ores. While commodity imports are mineral fuels, machinery, mechanical appliances, vehicles and parts, rubber and rubber goods, objects of iron and steel, Explosives, machinery/electrical equipment, salt, sulfur and lime, organic chemicals, rubber and rubber products and fertilizers East Nusa Tenggara Province

The mapping results for the province of East Nusa Tenggara indicated that included the prime sector of the average contribution and growth in 2008 to 2012 is the trade, hotels and restaurants and the service sector. Sectors that are grouped in potential and stagnant is the mining sector, the sector of electricity, gas and water supply, construction, utilities and transportation/communications sector, Bankingings/financial and agricultural sectors. While the undevelopment economic sectors in the province is the manufacturing sector.

The specialization index of East Nusa Tenggara province has a purely export specializes in the manufacturing sector, especially the mineral industry and other industries; transport and communications sector and the service sector as indicated by the positive value of the index of specialization. East Nusa Tenggara province to import pure specialize in plantation commodities, especially agricultural sector, the manufacturing sector, especially the mineral industry, heavy industry, metal industry, and electricity, gas and water are shown with a negative index value of specialization.

Export classification by sector using Specialization Index is a commodity: Manganese ores, Hydraulic Cements and Tar distilled from coal. While commodity imports are: Machinery/Electrical equipment, coffee, tea and spices, utensils and cutting tools and a wide range of basic metal goods.

Maluku Province

The mapping results for maluku province using Klassen Typology Method indicated that included prime sector is trade, hotels and restaurants and the service sector. Sectors that are grouped in potential and stagnant is the mining, construction, utilities and transportation / communication and agriculture. While the underdevelopment economic sectors in the province among other is manufacturing industry, electricity, gas and water supply, and the Bankinging/finance sector.

The specialization index of Maluku province have specialized purely on the export of agricultural commodities, especially agricultural commodities, fisheries and other commodities as indicated by the positive value of the index of specialization. For pure import Maluku province specializing in the agricultural sector, especially agricultural commodities and plantation commodities, the manufacturing sector, especially the food industry, textile industry, and consumer industries as indicated by an index value of negative specialization.

Export classification by sector using Specialization Index is Fish, Shrimp and Prawns, Cuttle Fish, Yellow fin tuna, Salmonide, fish fillets and Tunas. Commodity imports Maluku province is Rice, Cereal, Vegetables, feeding stuff for animal, old clothing, Perfumery, cosmetics and toilet preparation, Materials of Rubbers and Articles of Rubbers.


Propinsi Maluku Utara

The mapping results for the province of North Maluku indicated that the average of contribution and growth in 2008 until 2012 is the trade, hotels and restaurants and the service sector. Sectors that are grouped in this sector potential and stagnant is construction sector, transportation/communication, Bankinging/financial, services sector, agricultural sector and manufacturing sector. While the underdevelopment economic sectors in this province among other sectors is mining sector, electricity and water.

North Maluku province have specialized export processing industry, especially industrial minerals and other commodities to the value of specialization index positive. However, the volume of exports to other commodities do not occur in 2009. The only sustainable North Maluku do more import activity. To import pure North Maluku province specializing in the sector of electricity, gas and water, and transport and communications are indicated by an index value of negative specialization. While agriculture is not purely import because the province still export of agriculture.

Based on export classification by sector using Specialization Index are: Nickel Ores, Coconut Oil cake/copra, Copra. Imported commodities are: Stone, sand and gravel, Petroleum products, Materials of Rubbers, Articles of Rubbers, electric power machinery and parts and the motor vehicle for the transportation of goods. Propinsi Papua Barat

The mapping results for the province of West Papua indicated that included prime sector is the manufacturing sector. Sectors that are grouped in potential sectors are not found in this province and stagnant sectors are agriculture and mining sectors. Generally, there are still many sectors in the province were classified as other economic sectors, the electricity and water sector, the construction sector, trade, hotels and restaurant sector, transportation / communication sector Bankingings / financial and service sectors.

Specialization index of West Papua province has specialized purely on the export of agricultural commodities, especially plantation and fishery commodities, the manufacturing sector, especially industrial minerals and other commodities to the value of specialization index positive. To purely import, West Papua province specializing in the agricultural sector, especially forestry commodities, the manufacturing sector, especially the chemical industry, electricity, gas and water utilities, as well as the building sector as indicated by an index value of negative specialization.

Based on export classification by sector using the Index Commodity specialization are: Coal, Bituminous Coal, Lignite, palm oil, shrimps and prawns, Nickel ores, Fish, and rock lobsters. Commodity imports of Papua Province west are: Polymers of ethylene in primary forms, Tubes and pipes, Materials of rubber, Articles of Rubbers, Heating and cooling equipment and parts and rotating electric and parts.

Propinsi Papua

The mapping results for the province of Papua indicated that included the prime sector from the average contribution and growth in 2008 until 2012 is the agricultural sector. Sectors that are grouped in potential and stagnant is manufacturing industrial sector, the sector of electricity, gas and water supply, construction, trade, hotels and restaurant, transportation/communication, Bankinging/ financial, services sector and the mining sector. Economic sector that remains are not found in this province.

Based on specialization Index of Papua province has specialized purely in agricultural export commodities, especially livestock, mining and quarrying sector in particular mineral commodity with a positive index values specialization. However, the export volume for forestry commodities and other commodities on average impure because of the transition from the export orientation of imports into exports. For pure imports of Papua province specializes in the manufacturing sector, especially commodity chemicals and commodity plastics, electricity, gas and water, transport and communications, and service sectors as indicated by an index value of negative specialization. Export classification by sector using Specialization Index is: Cooper Ores & concentrates, Plywood, Fish, Wood, Hoop wood, and Salmonide. While commodity import is: Wood, Coal, Chemical, Mechanical and electrical appliances, vehicles other than moving on the tracks and trains and trams.


Conclusion

Based on the results of LQ and Klassen Typology Method recommended the province as the province with the leading sectors/potential for business development with the following criteria:

• Nationally as categorized seed sector • Categorized in the primary sector, stagnant, and there is the potential and the sector is not expected to enter

the category of backward • Specializes export and import based on these criteria then there are 8 provinces are recommended i.e.

Central Sulawesi, Gorontalo, Papua, West Sumatra, Riau, East Kalimantan, South Kalimantan and West Kalimantan because in 8 provinces, the contribution of each sector is very high as the pace of growth in the sector.

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No Propinsi Tipologi Klassen Recomended Area Primary Sector Potential Sector Stagnan Sector Underdevelop

1 Aceh Trade, Hotels & Restaurants, service

Manufacturing Industry Electricity & Water Transportation/ Communication

Agriculture

Mining Construction Bankinging/Finance

2 North Sumatera

Trade, Hotels & Restaurants Construction Transportation/Communications Bankinging/Finance and service

Agriculutre and Manufacturing Industry

Mining Electricity, gas & water

3 West Sumatera

Transportation & Communications and service

Construction Agriculture manufacturing industry Trade, Hotels & Restaurants and service

Mining Electricity, gas & water Bankinging / Finance

Recomended Area

4 Riau Manufacturing Industry

Electricity & water Construction, Trade, Hotels & Restaurants, service, Transportation

Agriculture, Mining Bankinging/Finance

Recomended Area

5 Jambi Mining, Trade, Hotels & Restaurants and service

Electricity & water, construction, Bankinging/Finance

Agriculutre and Manufacturing Industry

Transportation/ Communications and service

6 South Sumatera

Trade, Hotels & Restaurants, service

Electricity & water, Construction Transportation/ Communications Bankinging/Finance

Agriculutre, Mining and Manufacturing Industry

7 Bengkulu Service

Mining, Manufacturing industry Electricity & water, Construction Transportation/Communications Bankinging/Finance

Agriculture, Trade, Hotels & Restaurants and service

8 Lampung Electricity & water Transportation / Communications Bankinging/Finance and service

Agriculture, manufacturing industry Trade, Hotel, Restaurant

Mining and construction

9 Bangka Belitung Island

Mining, Electricity & water Construction and service

Agriculture Manufacturing Industry Trade, Hotel, Restaurant

Transportation/ Communications Bankinging/Finance

10 Riau Island Trade, Hotel, Restaurant Electricity & water Construction Transportation Bankinging/Finance service

Manufacturing Industry Agriculture Mining

Sumatera 11 DKI Jakarta Trade, Hotel, Restaurant

Transportation / Communications, service

Construction

Manufacturing Industry Banking / Finance

Agriculture, Mining, Electricity & water

12 West Java Trade, Hotel, Restaurant Electricity & water Construction

Agriculture Manufacturing Industry

Mining


Transportation / Communications Banking/Finance and service

13 Central Java Manufacturing Industry Trading

Electricity & water, Construction Transportation / Communications Banking/ Finance and service

Agriculture and Mining

14 DIYogyakarta Manufacturing Industry Trading service

Construction Transportation/Communications Banking/Finance

Agriculture Mining Electricity & water

15 East Java Trading Construction Transportation/Communications Banking/Finance


Mining Electricity & water service

16 Banten Manufacturing Industry

Transportation/communications Banking/finance

Trade, Hotel, Restaurant Agriculture, Mining Electricity & Water Construction and service

Java 17 Bali Service

Mining and construction

Agriculture Trade, Hotel, Restaurant

Manufacturing Industry Electricity & water Transportation/ Communications Banking/finance

Bali 18 West

Kalimantan Trade, hotel, restaurant service

Mining, Construction Transportation / Communications Bankinging / Finance


Electricity & water Recomended

19 Central Kalimantan

Trade, hotel, restaurant service

Mining, Construction Banking/Finance

Agriculture

Manufacturing Industry Electricity & water Transportation/ communications

20 South Kalimantan

Trade, hotel, restaurant Electricity & water Construction Transportation/Communications Bankinging/finance and service

Agriculture Mining Manufacturing Industry

Recomended Area

21 East Kalimantan

Mining

Agriculture Electricity & water Construction, Trading Transportation/Communications Banking/finance and service

Manufacturing Industry

Recomended Area

Kalimantan 22 North

Sulawesi Trading Transportation/ Communication

Electricity & water Banking/finance

Agriculture Construction and service

Mining Manufacturing Industry


23 Central Sulawesi

Trading Construction Transportation/Communication

Agriculture, Mining, service

Recomended Area

24 South Sulawesi

Trading

Electricity & water Construction Transportation/communications Bankinging Finance

Agriculture Manufacturing Industry Service

Mining

25 Sulawesi Tenggara

Trade, hotel, restaurant Mining, Electricity & water Construction, Transportation/communications Banking/Finance

Agriculture and service


26 Gorontalo Trade, hotel, restaurant Mining, Electricity & water Construction Transportation/communications Banking/Finance

Agriculture and service


Recomended Area

27 West Sulawesi

Trade, hotel, restaurant and service

Mining, Electricity & water Construction Transportation/communications Banking/Finance

Agriculture

Construction, Banking and Finance

Sulawesi 28 West Nusa

Tenggara Trade, hotel, restaurant and service

Manufacturing Industry Electricity & water, Construction Transportation/Communications Banking/finance

Agriculture and Mining

29 East Nusa Tenggara

Trade, hotel, restaurant and service

Mining, Electricity & water Construction, Transportation/Communications Banking/finance

Agriculture

Nusa Tenggara 30 Maluku Trade, hotel, restaurant and

service Mining, Construction Transportation/Communication

Agriculture

Manufacturing Industry Electricity & water Banking/Finance

31 North Maluku Trade

Construction, Transportation and Comunication, Banking/Finance and Service

Agriculture and Manufacturing industry

Pertambangan Listrik & air bersih

Maluku 32 West Papua Manufacturing industry

Agriculture and Mining Electricity & water

Construction Trade, hotels & restaurants Transportation/ Communications


Banking/ Finance service

33 Papua Agriculture

Manufacturing Industry Electricity & water, Construction Trade, hotels & restaurants Transportation/Communications Banking/Finance and service

Mining

Recomended Area

Design Model of Development of Small Industries Village for Value Adding of Automotive Components Waste

Based on Community Development (Case Study At Sasakpanjang-Bogor)

Kosasih, Mutmainah a, Andreas Tri Panudju b

a,b Teknik Industri, Universitas Muhammadiyah Jakarta, Jakarta, Jl. Cempaka Putih Tengah 27., Indonesia Corresponding authour: [email protected]

© Authour(s)



Abstract: Many wastes are increasing every day, and therefore need a better management in order to be utilized as much as possible and can be used again. Waste in the Indonesian automotive components necessary a management-based community development so that waste automotive components can be beneficial to society. In Sasakpanjang village is one of the villages that today many groups evolved in managing waste automotive components. To increase and keep the sustainability of economic activity and the conversion of the criminal culture in Sasakpanjang village will require a business development model of community-based on community development. This study uses a Research and Development (R & D) which is a research carried out by the process or steps to develop a new product, or improve existing products. In principle, in the process and research activities is taking some steps that can be described as follows: The first step: survey research. The second step: theoretical research. The third step: modeling. The fourth step: validation of the model. The fifth step: assessment and development models. From the analysis it was found that: 1) the presence of the process of adding the value obtained at least by 4 times greater, 2) with the addition process of this value will be gained additional skills of local people, enhancement and movement of local community economy and waste reduction component automotive waste very significant. Model-based Development of Rural Industrial waste is very conducive to a more sustainable society. It is also encouraging the learning process in the community related skills training, management and entrepreneurial character to form local communities

Keywords : Model Design, Industrial Village, Small Industry, Automotive Waste

Introduction

aste is increasing each day, and therefore need a better management. To be utilized as much as possible and can be used again. Waste in the Indonesian automotive components necessary management-based on community development so that waste automotive components can be beneficial to society. In Bogor

Regency Sasakpanjang village is one of the villages that today many groups that evolved in managing waste automotive components. Besides known as a cheap auto parts sales center, the village is also known as the village Sasakpanjang 'Heaven' for the robber. Sasakpanjang was in the border district of Bogor and Depok or precisely located in the Tajur Halang district, Bogor Regency. Sasakpanjang is a village that is located quite far away and the farthest. To be able to get to the village of cool air, it can take a trip for two to three hours from the city of Depok. Actually, there's nothing special from the village overgrown bamboo groves that in addition to stalls selling cheap motorcycle parts. Sasakpanjang village is well known as the location of the black market motorcycle parts priced. There are more than 10 stalls spare parts cheap in this village. To increase and keep the sustainability of economic activity and the conversion of the criminal culture in Bogor Regency Sasakpanjang village will require a business development model of community-based community development.

W

34 Mutmainah and Panudju./ OIDA International Journal of Sustainable Development 09:03 (2016)

Method

This study uses a Research and Development (R & D) is a research carried out by the process or steps to develop a new product, or improve existing products. In principle, in the process and research activities is taking some steps that can be described as follows: The first phase; Survey research. The second stage is theoretical research. The third stage is modeling. The fourth stage is validation of the model. The fifth stage is assessment and development models.

Result

In this study, respondents who used amounted to 51 people all male sex. With the age range <20 years are 7 people, between 20-30 years are 27 people, between 30-40 years are 13 people and between 40-50 years are 4 people. That is based on the data showed that the predominant age earning over 53%. Therefore, human resource is a resource and an excellent potential to be supported and developed to be good in mentoring skills development, marketing and support capital.

Fig. 1. Respondent Age Input Control of raw materials into something is important in supporting the development of industrial village to get certainty of the raw materials to be processed. No shortages and obstacles to obtain raw materials. Raw materials of waste automotive can be identified its source. Institution is responsible for the sources of raw materials and look for suppliers of raw materials so that the availability of raw materials remain. Institution (e.g. cooperatives) will ensure the supplier of fixed supply of raw materials, as well as agencies strive to find new supplier. It also seek and strive together with employers to increase raw materials than before, which adds standard that can be managed and utilized in addition to the automotive waste such as used tires, metal and plastic. Also expected to maximize and can manage other automotive waste. During this time reject automotive component are as follows: Components Used Tires, Components of the plastic and Automotive Components (Metal) Process Incoming raw materials be managed properly as much as possible and produce products that could be useful and gives good effect both social and economic level to the local community. Therefore we need an organization that becomes a good mechanism to organize everything. Both aspects of in and out of raw materials, the flow of materials supply to each group or entrepreneur, building workteam among entrepreneurs, develop capacity of human resources and capital, maximized market. Existing components are processed is as follows:

• Marketing - Service - Marketing Gallery,etc. • R & D

-HR Development • Tools Development;

1) Used tyres recondition process 2) Plastic granulling machine, 3) Metal granulling machine.

• Cluster - Used Tyres - Metal

Mutmainah and Panudju./ OIDA International Journal of Sustainable Development 09:03 (2016) 35

- Plastic • Partner (Bank, local government, company, etc)

Output The output is an indicator of success and achievement of the goals of the organization. Likewise Village Industries as a region which has the goal of which is to be the village / town into a village that can be independently and be an industrial area (SMEs) dapt good economic benefits (welfare) as well as the improvement of social status. The products are of good quality and can be marketed, it is our hope and the establishment of this industrial village. But most important is the management can be managed and the result (product) can be optimized both the results and the distribution or salable. The output is divided into two things: Recondition and Non recondition automotive waste. From each group Non Reconditioning component can be added of its value of existing processes, namely: a. Used tires that cannot be reconditioned, which so far only sold to kiln in Bogor can be processed further to become a product that has a sale value is higher, such as flower pots, buckets, rubber engine cradle, table and lawnchairs, powder tires, etc.

Fig. 2 Output of non-recondition used tyres

Metal waste which has just sold a kilogram to collectors can be increased again its value with the addition of the process to be scrap which have a higher selling price.

Fig. 3. Output of Non- Recondition Metal

Raw materials of plastic waste, which had only sold kilogram, can also be improved resale value with the addition of a process for the manufacture of plastic ore which can be further processed into finished products that can be sold directly to consumers, so as to further improve revenue craftsmen.


Fig. 4. Output of Non-recondition used plastic

In addition to the cooperative that serves as an operational agency for designing, managing, marketing, evaluating, there is a need of the Supervisory Board which serves as the highest assembly overseen, control the management and development of the area under the management of cooperative institutions. Cooperative oversees several groups / clusters that autonomously function to manage according to the type, capabilities and tasks that have been given to produce according to their respective functions. Cooperatives should strive to communicate and build partnerships with financial institutions, research and development institutions, government agencies, private institutions engaged in the same field. In the development of this industrial village, the cooperative also responsible for training-related skills training, management training that be related to raw materials, process and marketing management. Additionally institution / cooperative has the obligation to make the mental-spiritual development continually to forming a small-to-medium businesses that has religious character.

Earning Increasing Projection From the results of the survey the output of the value of the selling products on the market, it can be projected the increasing income of the artisans as follows :

Table 1. Earning Increasing Projection

Name of Materials

Process that happen now

Earning Value Adding Value Process After Adding Value Process

Adding Value Potency

Used tires Sold to kiln Rp.1000/ pcs

Belt Rp. 5000 - Rp. 10.000/ pcs

5x – 10x

Table and chair Rp. 30.000 - Rp. 50.000/ pcs

30x-50x

rubber engine mounting

Rp. 500- Rp. 1000/ pcs (Each tyre = 20 pcs rubber engine mounting)

10x -20x

Rubber powder Rp. 10.000-Rp.12.000/kg

5x-6x

Body Plastic Sold to collectors Rp.2000/kg Plastic Powder Rp. 10000-Rp.14000/kg 5x – 7x

Kid Toys Rp.30.000–Rp.50.000/ buah

15x – 25x

Metal sparepart Sold to collectors Rp.4000/kg Metal Powder Rp.16.000-Rp20.000/kg 4x – 5x

Souvenir Rp.30.000–Rp.50.000/ pcs

7x – 12x

Conclusion From the analysis it can be concluded that:

• With the process of adding the value obtained at least 4 times. • With the addition of this value will be obtained: Increase the skills of local communities An increase in the local community and economic movements Waste reduction which is very significant automotive components

• Model-based Development of Rural Industrial waste is very conducive to a more sustainable society.

Mutmainah and Panudju./ OIDA International Journal of Sustainable Development 09:03 (2016) 37

• Rural Development Model-based on Industrial waste is also encouraging the learning process in the community related to skills training, management and entrepreneurial character of local communities.

• It has been produced based entrepreneurship training modules for the development of rural community development-based industry industrial waste.

Suggestion

• The test should be carried out experts to measure the effectiveness of entrepreneurship training modules based community development that has been compiled.

• The need for the continuation of research activities to test-piloted entrepreneurship training modules based community development that has been compiled and evaluated and repairs in accordance with the conditions contained in the field.

• The need for the continuation of research so as to create community-based entrepreneurship training modules for the development of rural industry development based industrial waste which can be used by all SMEs so as to optimize the process of development of social welfare and dignity.

Refferences

[1] Ife, Jim dan Frank Tesoriero, Penerjemah Manulang dkk, (2008). Community Development:Alternative pengembangan masyarakat di Era Globalisasi, Yogyakarta: Pustaka Pelajar.

[2] Mahmud. (2011). Model Pembelajaran Kooperatif. Diakses melalui URL: http://fitriadi-mahmud.blogspot.com /2011/11/model-pembelajarankooperatif-student.html.@ 21/03/2015. 16.44 WIB

[3] Nasdian, Fredian Tonny. (2014). Pengembangan Masyarakat, Jakarta: Yayasan Pustak Obor Indonesia. [4] Peraturan Pemerintah No. 85 tahun 1999 tentang perubahan Peraturan Pemerintah No. 18 tahun 1999 yang

berisi Pengelolaan Limbah B3 [5] UU Nomor 18 Tahun 2008 tentang Pengelolaan Sampah. [6] Porter, Michael E, (1994), Strategi Bersaing: Teknik Menganalisis Industri dan Pesaing, Harvard Business

School, Terjemahan Agus Maulana, PT. Erlangga: Jakarta. [7] Pujawan. (2008). Supply Chain Management, Penerbit Guna Widya, Surabaya. [8] Saaty, T.L., (1980), Analitical Hierarchy Process. Mc. Graw Hill : New York. Spencer, L.M., & Spencer, S.M.,

Competency at work, (1993), John Willey & Sons Inc.,. [9] Stanleigh, Michael, (2008), Creating and Innovation Process, http://www.iienet2,org,. [10] Simchi-Levi et al. (2003).Desingning and Managing the Supply Chain. 2nd. ed. Boston: Mc Graw – Hill. [11] Sterman, J. D. (2000) Business Dynamics: Systems Thinking and Modeling for a Complex World,

Massachusetts, USA, Mc Graw - Hill Higher Education. [12] Tiny, Mananoma, (2008). Pemodelan Sebagai Sarana Dalam Mencapai Solusi Optimal,Vol. 8 No. 3, FT UGM [13] Vorst JGAJ van der. (2004). Supply Chain Management: Theory and Practice. Di dalam: Camps, T.,Diederen

P., Hofstede GJ., Vosb. The Emerging World of Chain and Networks. Hoofdstuk:Elsevier. [14] Ife, Jim dan Frank Tesoriero, Penerjemah Manulang dkk, (2008). Community Development: Alternative

pengembangan masyarakat di Era Globalisasi, Yogyakarta: Pustaka Pelajar. [15] Mahmud. (2011). Model Pembelajaran Kooperatif. Diakses melalui URL: http://fitriadi-mahmud.blogspot.com

/2011/11/model-pembelajarankooperatif-student.html.@ 21/03/2015. 16.44 WIB [16] Nasdian, Fredian Tonny. (2014). Pengembangan Masyarakat, Jakarta: Yayasan Pustak Obor Indonesia. [17] Peraturan Pemerintah No. 85 tahun 1999 tentang perubahan Peraturan Pemerintah No. 18 tahun 1999 yang

berisi Pengelolaan Limbah B3 [18] UU Nomor 18 Tahun 2008 tentang Pengelolaan Sampah. [19] Porter, Michael E, (1994), Strategi Bersaing: Teknik Menganalisis Industri dan Pesaing, Harvard Business

School, Terjemahan Agus Maulana, PT. Erlangga: Jakarta. [20] Pujawan. (2008). Supply Chain Management, Penerbit Guna Widya, Surabaya. [21] Saaty, T.L., (1980), Analitical Hierarchy Process. Mc. Graw Hill : New York. Spencer, L.M., & Spencer, S.M.,

Competency at work, (1993), John Willey & Sons Inc.,. [22] Stanleigh, Michael, (2008), Creating and Innovation Process, http://www.iienet2,org,. [23] Simchi-Levi et al. (2003).Desingning and Managing the Supply Chain. 2nd. ed. Boston: Mc Graw – Hill. [24] Sterman, J. D. (2000) Business Dynamics: Systems Thinking and Modeling for a Complex World,

Massachusetts, USA, Mc Graw - Hill Higher Education. [25] Tiny, Mananoma, (2008). Pemodelan Sebagai Sarana Dalam Mencapai Solusi Optimal,Vol. 8 No. 3, FT UGM


[26] Vorst JGAJ van der. (2004). Supply Chain Management: Theory and Practice. Di dalam: Camps, T.,Diederen P., Hofstede GJ., Vosb. The Emerging World of Chain and Networks. Hoofdstuk:Elsevier.

Fiscal Desentralisation and Sustainable Development: Lesson from Local Government Levels in Indonesia

Rosdiana Sijabat

Department of Business Administration, Faculty of Economics and Business, Atma Jaya Catholic University of Indonesia

Jalan Jenderal Sudirman No 51, Jakarta, Indonesia. Corresponding authour: [email protected]; [email protected]

© Authour(s)



Abstract: Indonesia introduced fiscal desentralisation when the central government enacted Law No. 25/1999 on fiscal balance between the central government and the local governments. This law was later revised as Law No. 33/2004 and is widely known as the ‘new direction of fiscal relationship’ which guides the intergovernmental financial relationship between central and local government in Indonesia (Brojonegoro & Asanuma, 2003; Suharyo, 2009). According to the law, local governments have two major sources of revenues to finance their expenditures: own-source revenues and intergovernmental transfers. Own-source revenues are revenues raised by local governments from their local sources, consists of taxes, levies, proceeds from the management of regional assets set aside for the purpose, and other source of revenues. While intergovernmental transfers consist of Revenue Sharing from natural resources and taxes, General Allocation Funds (Dana Alokasi Umum, or DAU), and Specific Allocation Funds (Dana Alokasi Khusus, DAK). The fiscal desentralisation law established principles on the intergovernmental financial relationship between central government and local governments, which take the forms of devolution, deconcentration, and co-administration of tasks. Through those forms, most authority and responsibility of the central government was devolved to local governments, including the financial responsibility over the provision of public goods and services at local levels.

This study examines the arguments in favor of the impact of fiscal desentralisation on the economic development at local levels through the public financing capacity. The methodological approach was qualitative and quantitative modes of inquiry. The analysis on the fiscal budget includes the revenues and expenditures assignments, the trends on the local government expenditures, revenue desentralisation and financing capacity, as well as the roles of intergovernmental transfers within the local budget. This study was undertaken upon the economic arguments on fiscal desentralisation to increase the revenues or fiscal autonomy of sub-national governments (Falleti, 2005) and provides autonomy to local governments in the provision and financing of public goods (Brueckner, 2008). Fiscal decentralisation exists when sub-national governments have powers given to them by the constitution or by legislation, to raise taxes and/or carry out spending activities within clearly established legal criteria (Tanzi, 2000). This study therefore seeks to examine whether fiscal desentralisation in Indonesia increases the financing capacity of local governments, thus promoting local economic development.

The results from this study demonstrate that the practice of desentralisation in Indonesia has shown that various reforms have affected the political and administrative system in Indonesia and also the arrangements of authority and financial responsibility between the central government, and the local governments (province and district/city). Under desentralisation policy, the central government gives authority in most areas of governance to local governments. It is however, the central government that retains responsibility for national planning, control on national development, intergovernmental fiscal arrangements, the state administration and economic institutions system, training and human resource empowerment, utilization of natural resources, strategic high level technology, conservation, and national standardization. Such arrangements

40 Sijabat./ OIDA International Journal of Sustainable Development 09:03 (2016)

have changed the mechanism of accountability among central and local governments in Indonesia. Fiscal data analysis performed for provinces, districts and cities in Indonesia indicate that most local governments are still highly dependent on the fiscal transfers from the national governments in performing their public financing functions. As such, the sustainability of local development can be achieved in the long run.

Keywords: Governments, decentralization, fiscal, transfer

Introduction

ndonesia introduced decentralisation policy in 1999 when the central government enacted two laws on decentralisation. The first was Law No. 25/1999 on fiscal balance between the central government and the local governments. This law was later revised as Law No. 33/2004 and is widely known as the ‘new direction’ which

guides the intergovernmental financial relationship between central and local government in Indonesia (Brojonegoro & Asanuma, 2003; Suharyo, 2009). According to the law, local governments have two major sources of revenues to finance their expenditures: own-source revenues and intergovernmental transfers. Own-source revenues are revenues raised by local governments from their local sources, consists of taxes, levies, proceeds from the management of regional assets set aside for the purpose, and other source of revenues. While intergovernmental transfers consist of Revenue Sharing from natural resources and taxes, General Allocation Funds (Dana Alokasi Umum, or DAU), and Specific Allocation Funds (Dana Alokasi Khusus, DAK). The fiscal decentralisation law established principles on the intergovernmental financial relationship between central government and local governments, which take the forms of devolution, deconcentration, and co-administration of tasks. Through those forms, most authority of the central government was devolved to local governments. Devolution of authority to local governments has altered the structure of revenue and expenditure of local governments.

The Conceptualisation of Fiscal Decentralisation

The literature on fiscal decentralisation is closely related to fiscal federalism 1(Bardhan, 2002, p.187) and it is a subfield of public finance (Oates, 1999, p.1120). The key issues in the fiscal federalism literature are the responsibilities and the fiscal instruments between levels of government that address which functions and instruments are best to decentralise and which are best placed in the higher level of government. In other words, it arranges how expenditures and revenues are allocated across different levels of the administration. A key issue in fiscal federalism is the arrangement of intergovernmental fiscal structures to improve the functioning of the public sector (Oates, 2008). In particular, it focuses on how fiscal decentralisation affects fiscal stability, accountability, public sector efficiency, democracy, government quality, and economic growth. According to the fiscal federalism literature, fiscal decentralisation can increase efficiency and accountability in resource allocation. The two basic arguments are: (i) local governments are better positioned geographically to provide public goods than are central governments. Local governments can thus be more responsive to local preferences and needs; and (ii) pressure from inter-jurisdictional competition may motivate local governments to be more innovative and accountable to their residents. Inter-jurisdictional competition refers to situations where local governments compete with each other to attract (or retain) residents and capital to their jurisdictions. If residents can choose among a large number of districts, they would tend to favor districts that produce higher quality public services for a given local tax liability or have a lower local tax liability for a given level of quality (Oates, 1972).

The literature on fiscal decentralisation can be divided into three categories (Cheikbossian, 2008). The first category was pioneered by Tiebout (1956); it suggests that allocation of public resources would be efficient if such services are provided (and paid for) by the governments responsible for those resources. This view is based on the following assumptions: (i) given that tastes and willingness to pay differ for geographical, cultural and historical reasons, demand for local public services varies across locations (however, local preferences are reasonably homogeneous). If these assumptions are valid, the central provision of local public goods (if it tends to be uniform across the country), is unlikely to please anybody; and (ii) decentralisation would result in every local government providing a different bundle of local public services, each such service bundle reflecting local preferences.

In its pure form, Tiebout’s argument implies that mobility of voters is sufficient to ensure efficient allocation of public resources. In Tiebout’s analysis, taxpayers move in order to avoid higher taxes and to advantage themselves

1The terms federalism and decentralisation are used synonymously in this study.

I

Sijabat./ OIDA International Journal of Sustainable Development 09:03 (2016) 41

through inter-jurisdictional competition, thereby limiting the excessive taxing power of governments. Assuming people are mobile, therefore, competition for mobile people should match bundles of public goods to citizens’ preferences.2 Tiebout claimed that in a system with many jurisdictions, competition among local jurisdictions would ensure efficiency in the production of local public goods and also in the distribution of total population over communities. Tiebout’s theory on fiscal federalism also focuses on the economic efficiency of intergovernmental relationships. In his theory, Tiebout provided an explanation of the advantages of distributing power to the lowest level of government. By distributing some functions to the lower government levels, for example the provision of public services, the degree of efficiency in the allocation of resources would increase. Over the long term, efficiency gains from the local delivery of public services would lead to faster local, as well as national, economic growth (Oates, 1972). Local provision might also be a way to reduce the free-rider problem,3 by inducing people to reveal their preferences for public expenditure. Here, people reveal the strength of their taste for publicly provided goods through their choice of jurisdiction in which to live.

The second strand of the literature on fiscal decentralisation focuses on inter-jurisdictional spillover theory,4 also known as spillover effects.5 This theory is constructed based on the view that more resources should be allocated to regions that undertake public expenditure benefiting residents of other regions and not only their own residents. This is with particular regard to the provision of public services. If travel costs are low, public goods are non-excludable where residents can obtain utility from the public goods provided in their own municipality as well as from those supplied in neighboring municipalities. Consequently, all residents of that municipality are able to consume the full benefits of the public goods provision because they cannot be excluded from the benefits. Thus, if there are spillovers from local public goods provision, residents of one municipality may migrate outside their municipality and enjoy the services provided elsewhere. A key point in spillovers literature suggests that spillover benefits that may occur from fiscal decentralisation can be achieved when lower-level jurisdictions of government ensure cooperation among one another in providing public goods and services. Such cooperation is important to avoid free riding in the provision of public services. The third branch of the literature focuses on the concept of fiscal equalisation. Fiscal equalisation involves a system for addressing fiscal disparities and seeks optimal power-sharing between central and local governments. It refers to the transfer of money from central governments to local governments (Brilliantes & Tiu Sonco II, 2007) and aims to reduce the incentives for migration from relatively poor regions to relatively rich regions (Buchanan, 2001, p.11). Addressing fiscal equalisation in Indonesia, Hofman et al. (2006) pointed out that the need for fiscal equalisation is based on the fact that only the richest sub-national governments will typically have enough revenues with some reasonable level of revenue effort to finance a basic set of expenditure responsibilities/needs.

Arguments for Fiscal Decentralisation

The widely-known arguments for fiscal decentralisation are: (1) economic efficiency because local governments are better positioned than national governments to deliver public services given their information advantage, this is known as the preference-matching argument; and (2) population mobility and competition among local governments for delivery of public services will ensure the matching of preferences of local communities and local governments (Oates; 1972; Tiebout, 1956, as cited in Davoodi & Zou, 1998, p.244). Further, Tiebout and Oates divided the basic economic argument on fiscal decentralisation into two strands. First, decentralisation will increase economic efficiency because local governments are in better positions than the national government to deliver public services because of the information advantage. As a result, local governments are more capable than central governments in getting the information on local preferences and needs (Faguet, 2001). Second, population mobility and competition among local governments for delivery of public services will ensure the matching of preferences of local communities and local governments. This matching of preferences may improve allocative efficiency because public services provided by the local government will be better matched to the preferences of the residents of those localities (Lockwood, 2006).

In addition to these arguments, de Mello (2004, pp.7-9) suggested broader arguments for fiscal decentralisation which include not only the economic benefit effects of fiscal decentralisation, but others including social benefits

2 In the literature, this is known as the preference-matching argument. 3 Free-riding may occur when consumers can take advantage of public goods without contributing sufficiently to their creation (Musgrave & Musgrave, 1980, p.57). 4 See Oates (1999) for further discussion. 5 In economic literature, spillover effects may also be called as externalities (for example, Jaffe, Trajtenberg, & Fogarty, 2000).


and public sector activities such as: • fiscal decentralisation enables sub-national governments to take account of local differences in

culture, environment, endowment of natural resources, and economic and social institutions; • information on local preferences and needs can be extracted more cheaply and accurately by local

governments, which are closer to the people and hence more identified with local causes; • bringing expenditure assignments closer to revenue sources can enhance accountability and

transparency in government actions; • fiscal decentralisation can help promote streamlining public sector activities and the development of

local democratic traditions; • shortening the ‘informational distance’ between the providers and recipients of public goods and

services can reduce information costs and boost public-sector efficiency in service delivery; and • by promoting allocative efficiency, fiscal decentralisation can influence macroeconomic governance,

promote local growth and poverty alleviation directly as well as through spillovers.

Pillars of Fiscal Decentralisation

Literature on fiscal federalism suggests two measures of fiscal decentralisation: (1) the share of expenditure and revenue collection between sub-national governments and the central government; and (2) the percentage of sub-national revenue and central government transfers. These measurements are arranged as four pillars of fiscal decentralisation: (a) expenditure assignment; (b) revenue assignment; (c) intergovernmental transfers; and (4) sub-national borrowing.6

Figure 1. Pillars of fiscal decentralisation Source: Own figure

Expenditure Assignment and its Principles

A key challenge in fiscal decentralisation is how to design optimal expenditure assignments among levels of government. In this context, expenditure assignment means how spending should be spread among levels of government, or what expenditures should be retained by the central government, and what expenditures should be transferred to sub-national levels of government. What is clear in the literature is that the assignment of expenditure responsibility should precede revenue autonomy, particularly taxing power. This is because the division of taxing power, besides being based on principles of tax assignment, should be determined by the requirements of different spending agencies. Decentralisation of tax powers based on expenditure responsibilities is desired so that sub-national governments do not have to rely exclusively on intergovernmental transfers to finance their expenditures. The linking of revenue and expenditure decisions at lower levels of government is considered important to preserve the incentive to provide public services in a cost-effective manner (Shah, 1994). Sidik (2007, pp.190-192) provided two different approaches in expenditure assignments: the ’expenditure-led’ approach, and the ‘revenue-led’ approach. Under the first approach, functions are first designated as the clear responsibility of one or another level of government on a mutually exclusive basis. The designation is based on objective criteria such as the degree of local impact of the function in question, considerations of policy and administrative uniformity, general technical and managerial capacity, the existence of spatial externalities or spillovers associated with the function, and of economies of scale, among other considerations.

6 While it is noted that sub-national government borrowing is one of the pillars of fiscal decentralisation, this subject, however, is not discussed in detail in this study. For the purpose of this study, discussion of the pillars of fiscal decentralisation was only made for the other three pillars. Sub-national borrowing was not included in the discussion since local governments in Indonesia do not often utilise sub-national borrowing to fill local revenue shortfalls. More importantly, Law No. 33/2004 does not allow local governments to directly use sub-national borrowing from foreign sources.

Pillar 1 Expenditure Assignment

Pillar 2 Revenue

Assignment

Pillar 3 Intergovernmental transfers

and grants

Pillar 4 Sub-national Borrowing


Thus, public functions such as primary education, local general hospitals and refuse collection would be assigned to local governments as having primarily local impact, and being within management capacities at that level; specialist secondary schools, regional specialist hospitals, and river and water resource management might be assigned to the provincial level, given their substantial interregional impacts; religious affairs and justice would be reserved as central functions, requiring policy uniformity, and given their nationwide impacts. In any case, once the assignment of functions is agreed, revenue-source allocations between levels, and among regional governments at each level, are then tailored accordingly. In contrast to the expenditure-led approach, under the revenue-led approach, public revenue resources are first allocated in a general way between levels of government essentially as the result of a political bargain struck between centralist and regionalist power interests. Political trade-offs also strongly influence the allocation of resources among regional governments at each level, as reflected in the systems of inter-governmental transfers. In the subsequent assignment of functions, while consideration of the principles mentioned above in connection with the expenditure-led approach are still relevant, regional fiscal capacities become a prominent consideration. While a general scheme for the allocation of functions between levels may be formulated, fiscal capacity disparities between individual regions may well mean that not all places can finance their designated functions, leading to direct higher-level government interventions in services provision.

Revenue Assignment

In theory, fiscal decentralisation would bring sub-national government closer to societies, thus it will be more responsive to societies’ preferences regarding quantity and quality of public goods and services. To meet these objectives, it is important for local government to have the authority and responsibility to finance their own local services (Sidik, 2007). However, to determine which taxes are best suited for different levels of governments is not easy considering efficiency and equity. Broadly speaking, the principles of revenue assignments (taxes) are developed based on Musgrave (1959) and Musgrave and Musgrave (1989) who offered a comprehensive theory of the state and public finance. According to Musgrave, there are three fiscal functions of government: providing public goods and services (resource allocation), redistributing income in order to ensure income distribution (income redistribution), and stabilising economic activities in order to reduce business cycle fluctuations (macroeconomic stabilisation). Musgrave’s idea is known as ‘three functions of government activities’ that can be used to guide revenue assignments across government levels. According to Musgrave, central governments must be responsible for income redistribution and macroeconomic stabilisation, whereas resource allocation could be assigned to all levels of government.

Therefore, several taxes should be assigned to the central government as they can be used to secure both income redistribution and macroeconomic stabilization at the national level. These taxes include personal taxes with progressive rates and corporate income, taxes that are suitable for purposes of stabilization policy, and all tax bases which are distributed highly unequally among sub-jurisdictions. In exercising those functions, Musgrave suggests that revenue assignment should be transferred to three levels of government: central level, regional levels, and local levels.7 At sub-national levels, Oates (1972, 1996) addressed tax arrangements which should be assigned to this level. According to Oates, middle and especially lower levels of government should tax those bases which have low inter-jurisdictional-mobility because high Inter-jurisdictional-mobility tax bases make taxation difficult for sub-national governments. Musgrave and Oates’s views, above, have been criticised. Their assumptions, arguments and conclusions, which assume that lower levels of government are unconcerned with income redistribution is questioned. In practice, local governments in many countries are really concerned with income redistribution, for instance in education and health care sectors; and local governments in fact make little use of benefit taxes. Musgrave and Oates’s views have also been criticised since their approach takes only the three usual governmental levels into account (central, regional and local). In many countries, the geographical area covered by many locally-provided (public) goods and services do not always coincide with the borders of jurisdictions (Bird, Dafflon, Jeanrenaud & Kirchgassner, 2003).

Intergovernmental Transfers and Grants

As noted earlier, a significant feature of decentralisation is the transfer of responsibility over the function of public services delivery to the local government. Transfer of such responsibility has to be accompanied with transfer of revenue to the lower levels of governments to bridge the gap between spending and revenues of these lower levels of

7 Musgrave’s opinion in this issue is known as‘multilevel finance’.


government (de Mello, 2000). The arrangement of revenue transfers among the levels of government are known as intergovernmental fiscal transfers (Brilliantes & Tiu Sonco II, 2007), which aims to compensate for vertical fiscal imbalances and to offset horizontal fiscal disparities among government tiers (Musgrave, 1959; Oates, 1972). Transfer of revenues is crucial, particularly in developing and in transition countries (Rodden, Eskeland & Litvack, 2003). In such countries, even though decentralisation has assigned revenue autonomy to local governments, they are still dependent on central government funding in performing their public responsibility; in many cases, financial resources from national to sub-national levels of government are still the major source of sub-national revenues. In similar vein, Shah (2007) indicated that intergovernmental transfer and grants finance are about 60% of sub-national expenditures in developing countries and transition economies and about a third of such expenditures in member countries of the OECD. Hofman and Guerra (n.d) assessed whether there is a systemic relation between fiscal disparities and disparities in service delivery indicators. To examine their hypothesis, Hofman and Guerra used a simple regression approach to test the impact of expenditures per capita on social outcome indicators including the Human Development Index (HDI), persons per hospital beds, life expectancy, and literacy rates in some East Asia countries, including China, Indonesia and Vietnam. The estimation showed that most countries in their study have a modest significant correlation between social indicators and sub-national expenditures.

The literature suggests various objectives for intergovernmental transfer. First, intergovernmental transfer aims to redistribute income in order to correct fiscal imbalances that exist when fiscal capacity does not match fiscal need. Fiscal capacity refers to the potential ability of local governments to fund their public functions (based upon a standardised basket of public goods and services) from their own revenue sources (Richard & Tarasov, 2004; (Martinez-Vazquez & Boex, 1997), whilst fiscal need, or expenditure need, is the amount that would have to be spent on residents to provide services at par with the national average (Yilmaz, Hoo, Nagowski, Rueben & Tannenwald, 2006). Thus, fiscal capacity is revenue capacity relative to a locality’s expenditure need. Fiscal imbalances can be divided into two types: (1) vertical imbalances; and (2) horizontal imbalances. Vertical imbalances refer to a situation where sub-national government is financially dependent upon national government revenues to support their expenditures (Bouton, Gassner & Verardi, 2008; Bahl & Wallace, 2007). Vertical imbalance occurs when sub-national government revenues do not match their expenditure responsibilities. Central governments usually offset vertical imbalances by transferring a portion of their tax revenues to local government. Such transfer is important to avoid poor provision of public services occurring because of vertical imbalances (Fiva, 2006). Horizontal imbalances indicate that revenue capacity and expenditure needs vary among local governments where some local governments can fund expenditure more easily than others (Brilliantes & Tiu Sonco II, 2007). Therefore, different sub-national governments and different regions may face different cost and demand pressures as they attempt to meet their assigned expenditure responsibilities. Where central government can mitigate vertical imbalances by transferring its own funds to local governments, transfer mechanisms to address horizontal imbalances are often more complicated than those addressing vertical imbalances.

The second objective of intergovernmental transfers is political benefit. Intergovernmental transfers to local government are provided to support local government to achieve development objectives that directly promote economic growth and efficiency in resource allocation such as providing more public goods and services which provide spillover benefits to residents of other areas. In addition, local governments are also encouraged to promote equal opportunity and quality in the provision of public services, even for the poorest regions. On many occasions, transfers from the national level are used to ensure that national priorities will be met in all sub-national government jurisdictions (Bahl, Boex & Martinez-Vazquez, 2001; ADB, 2003, as cited in Brilliantes & Tiu Sonco II 2007, pp.104-105).

Intergovernmental transfers fall into two broad categories, namely, general-purpose transfers and specific-purpose transfers8 (Shah, 2007, p.2).

8In Indonesia, General-purpose Transfers is called Dana Alokasi Umum (DAU), whereas Specific-purpose Transfers is known as Dana Alokasi Khusus (DAK).


Figure 2. Basic taxonomy of intergovernmental transfer

Source: Own figure

General-purpose Transfers (GPTs)

GPTs, also known as general grants or unconditional grants, refer to a set of funds transferred from central to lower governments without any conditions set on the use of the transfers. Thus, local governments can allocate GPTs for any expenditure programs according to need. Usually mandated by law, GPTs are provided as all-purpose budget support; they are termed block transfers when used to provide broad support in the general area of sub-national expenditures while allowing recipients discretion in allocating the funds among specific uses. The basic aim of this transfer is to preserve local autonomy and enhance inter-jurisdictional equity. Many empirical studies show that GPTs are used to achieve vertical balance among regions. Once central government has transferred money to a local government, it will shift the local government budget line on some public goods (for example, spending on education and health). In Figure 3, it is shown by shifting the initial budget line of local government (AB) upward and to the right by the amount of the grant (AC=BD), creating a new budget line (CD). Since the transfer can only be spent on any combination of public goods or services (for example, health and education), or used to provide tax relief to residents, thus the transfer does not affect prices of health relative to prices of education (price effect), but only creates the higher spending of local government on these public services (income effect) as indicated by the new budget line.9 It tends to the flypaper effect (Shah, 2007). The flypaper effect occurs when the portion of transfers retained for greater local spending tends to exceed local government’s own revenue, or, for political and bureaucratic reasons, transfers to local governments tend to result in more local spending than would have occurred had the funds been transferred directly to local residents (i.e., bypassing local government). It shows the increase of expenditures is higher when financed by general-purpose transfers than by financing through the locality’s own resources (Aragon & Gayoso, 2005). Next page

9 In this context, income effect refers to such situations where transfers from higher levels of government are used to subsidize public goods or services. Subsidies on these services give the community more resources, some of which may go to acquire more of the assisted service.

Transfers

General-Purpose Transfers Selective-Purpose Transfers

Non-matching Matching

Open-ended

Closed


Spending on Health

Spending on Education

A

0 B D

C

U2

U1

Figure 3. Effect of unconditional non-matching grant

Source: Adapted from Shah (1994), as cited in Shah (2007, p.3) Specific-purpose Transfers (SPTs)

SPTs are conditional transfers, designated for a specific public expenditure program. They are intended to provide incentives for government to undertake specific programs or mandatory activities. These transfers typically specify the type of expenditures that can be financed (input-based conditionality). They may also require attainment of certain results in service delivery (output-based conditionality). Therefore, specific-purpose transfers are often used to ensure minimum standards in the provision of public goods and services. Specific-purpose transfers can be seen as two kinds: matching transfers and non-matching transfers.

Matching Transfers In this scheme, local government as recipient is required to spend some of its own funds on the public goods or services for which the transfer is provided, therefore, this transfer is also called a cost-sharing program. The transfers provide an additional amount of funding for such goods or services to match the amount provided by the local government. Such transfers can be open-ended (no limit on matching funds) and closed-ended. These funds are assistance funding in nature; they are required to be spent for specific purposes. Such transfers have two impacts on the recipient: (i) price effects, and (ii) income or substitution effects.10 Both effects stimulate expenditures on the subsidised public goods and services. As described in Figure 4, the initial budget line is AB. This line indicates how a local government allocates its money for the provision of public services (for instance in health and education). The best combination of public spending can be seen at M, where the initial budget line intersects the indifference curve (U1).

10Price effects occur when a provider of public goods receives a grant used to provide certain public goods, or put another way, the grant creates a subsidised public good(s). Therefore, such grants have affected the price as between the subsidised public good and the unsubsidised one. Substitution effect occurs when transfers have changed the relative price of certain public goods or services as compared to other goods or services; the community acquires more subsidised goods or services from a given budget.


Figure 4. Effect of matching transfers

Source: Adapted from Shah (1994) as cited in Shah (2007)

At that point, the local government spent money on health services as OBL1 and education as 0J1. When local government spent 25% of the specific matching-grants on health, the budget line shifted to AC, creating a new equilibrium point at N (where AC crosses U2). This implies that the amount of money allocated in these public services has increased and improved access to such services, since U2> U1.

The specific-matching grants may improve the provision of public goods or services, both subsidised and unsubsidised. As specific-matching grants can be spent on certain public goods or services that are included in the grants, the local government now can allocate more money to finance other public goods or services that are not included in the grant scheme. Specific-matching grants can be divided into two types: open-ended matching grants and closed-ended matching grants. Open-ended matching grants are those where no limit is placed on available assistance thorough matching provisions; there is no maximum amount of grant funding that a community can receive from this grant type. In this scheme, the amount of money that local government receives is dependent on what they spend. Central government agrees to ‘match’ local spending at a certain percentage. These grants are well-suited for correcting inefficiencies in the provision of public goods and services arising from benefit spillovers or externalities.11

By comparing the two types of matching grants, it can be seen that an open-ended matching grant is at least as stimulative as, and sometimes more stimulative than, a closed-ended matching grant. A closed-ended matching grant is equivalent to an open-ended matching grant below the maximum. Beyond the maximum, a closed-ended matching grant is equivalent to a lump-sum grant and is therefore less stimulative than an open-ended matching grant. However, both grants increase the median voter’s income (income effect) and reduce the median voter’s marginal tax-price (substitution effect). The local government or recipient is likely to desire an open-ended matching grant, as this grant allows recipients to determine which public expenditure can be financed by the grant. So the recipient has more flexibility to spend the money, based on its preference and priority, in the context of its local development. Open-ended matching grants are used to compensate for spillover benefits, while closed-ended grants are used to promote specific public expenditures.

Non-matching Transfers

This transfer does not require the government receiving the transfers to spend any of its own funds on the good or

11 Benefit spillover, or positive externality, occurs when services provided and financed by a local government also benefit citizens of other local jurisdictions not contributing to what their citizens receive from the spillover.

Spending on H

ealth


A

J1

B C

M

N

U2

U1

J2

BL1

BL3

0 J

3

BL2

A’

B’



Sp

end

ing

on

He

alth

C

E 0 B D

A’

U1

U2

A

service for which the grant is provided. Figure 5 illustrates how the non-matching transfers affect the recipient’s budget. The initial budget line of a local government is AB given its existing budget. When the local government receives non-matching transfers, it shifts the budget line upward to AC. From this point, any additional money that is transferred to the local government will create a new budget line (ACD) showing an income effect on the local government. When local government places a priority on a certain public service to be financed (such as health), the matching grants would have impact on that service as many as AC=OE. Put another way, the recipient is able to increase, for example, health service provision from OA’ to OA.

Figure 5. Effect of conditional non-matching grant

Source: Adapted from Shah (1994) as cited in Shah (2007, p.5)

In summary, matching transfers are more stimulative than non-matching transfers of the same amount. Unlike non-matching transfers that only have income effects to society, matching transfers have two effects: 1) it increases total resources available to the community (the income effect), but also 2) reduces the tax-price of the public service to the community (the substitution effect), providing an incentive for the community to substitute the public service, which is now cheaper, for other public goods and services.

The Practice of Fiscal Decentralisation in Indonesia

As explained earlier, fiscal decentralisation has changed fiscal relationship between central government and local governments in Indonesia. Such changes impact the revenues and expenditures of local governments. The following parts provide the trends on fiscal decentralisation indicators of provinces, district/city governments in Indonesia. Revenue and expenditure as percentages of GDRP12 at district and city levels across Indonesia between 2001 and 2008 are shown in Figure 6. During this period, an increase in the size of district governments is clearly evident, both in terms of total revenue size and total expenditure in all districts and cities. On average, the increase of the revenue is about 45%, slightly higher than the increase in the expenditure which is approximately 42% from 2001 to 2008. In 2001, both revenue and expenditure as percentages of GDRP was at 12.7%, this increased marginally to about 15% in 2002. From 2004, revenue as a percentage of GDRP was higher than expenditure as a percentage of GDRP which reached 57.9% in 2008, whilst expenditure as a percentage of GDRP was about 54.7% at the time.

The increase in the revenue of district and city governments during the period is largely due to intergovernmental fiscal transfers or balancing funds13 in total revenues. As will be discussed in the next section, total balancing funds which are transferred by the central government to local governments (provinces, districts and cities) accounted for about 86.8%, while revenues that were collected from their own jurisdictions, i.e. own-source revenues was

12 GDRP stands for Gross Domestic Regional Product. 13The term ‘balancing funds’ are used interchangeably with ‘intergovernmental fiscal transfers” or equalisation funds’ throughout this study.


abysmally low accounted only about 5.5% between 2001 and 2008. This clearly indicates that district and city governments are very much dependent upon the fiscal transfers from other tiers of government. The steady increase in expenditure size of district and city governments cannot be claimed as an evidence of the improvement in financing capacity because majority of district and city governments’ expenditure are funded by external financial sources. Figure 6.Total revenues and expenditures as a percentage of GDRP in all districts/cities (Average, 2001-2008)

Source: own calculations based on data from Ministry of Finance.

To show the aggregate revenue as percentages of GDRP of district and city governments based on the jurisdictional variation, the revenue of district and city is grouped based on main islands in Indonesia14 (Table 1). From 2001 to 2008, revenue as percentage of GDRP has increased in all districts and cities. As seen in the table, districts and cities in the eastern part of Indonesia such as Nusa Tenggara Barat, Nusa Tenggara Timur, Maluku, Maluku Utara, Papua and Papua Utara recorded the highest increase in total revenue as a percentage of GDRP from about 27.1% in 2001 to 94.1% in 2008 with an average increase about 58.5% during that period. The location of the highest revenue as a percentage of GDRP in Nusa Tenggara, Maluku and Papua Islands shows that districts and cities in these islands are financially very reliant on fiscal transfers from central and provincial government. As will be explored later, nearly 95% of revenues of districts and cities in those islands came from balancing funds from higher governments. Sulawesi, Gorontalo and Kalimantan were in next highest with an average total revenue as percentage of GDRP of 30.2% and 29.2% in 2001-2008 respectively. While revenues as a percentage of GDRP in district and cities in Kalimantan islands were approximately 29.2% in 2001-2008. In Jawa, Bali and SumateraIslands, the revenue size ranged from 24.5% in 2001 to 17.2% in 2008. Based on the spatial analysis on the revenue size of government measured as total revenues as a percentage of GDRP, it can be concluded that most districts and cities in the eastern part of Indonesia have a relatively larger government compared to other districts and cities in other islands. Next page

14The division of the islands is based on the official division as used by the Statistics Office of Indonesia.


Table 1.Total revenue size of district and city governments for main Islands (Average 2001-2010, %)

Island 2001 2002 2003 2004 2005 2006 2007 2008 Sumatera

11.7 13.6 16.8 17.0 16.1 26.2 44.6 53.4

Wes

tern

Java and Bali

8.5 10.8 12.7 12.5 11.9 17.0 29.0 41.6

Kalimantan

11.1 16.3 20.5 19.8 19.0 27.0 62.0 57.7

Mid

dle

Sulawesi and Gorontalo

14.3 18.7 21.1 23.2 24.1 39.7 44.6 56.1

Nusa Tenggara, Maluku & Papua

27.1 35.5 43.3 45.9 51.0 97.9 73.3 94.1

Eas

tern


The structure of revenue for the period 2001-2008 is shown by Figure 7. In this figure, comparison on the three sources of revenue is shown: Own-source revenues, balancing funds and other source of revenues, all as a percentage of GDRP. Broadly speaking, it suggests that the revenue of district/city government has increased between 2001 and 2008. The increase was largely driven by balancing funds from central and provincial governments. In all districts, balancing funds as a percentage of GDRP has increased annually from only about 12.8% in 2001 to approximately just over 50% in 2008. Own-source revenues, as the very useful indicator of financial independence of local government, and other revenues are very small. As seen among districts and cities, own-source revenues and also other revenues as percentage of GDRP had remained very low with less than 5% every year from 2001 to 2008. This evidence shows a large imbalance between revenue raising power and expenditure responsibilities of district and cities governments. A higher proportion of balancing funds in the total revenue is also an indication that public financing on goods and services at the districts level are largely financed by fiscal transfers from higher government levels. As such, the aim of fiscal decentralisation to give more fiscal autonomy for local governments and to encourage self-financing appears to have not yet been achieved.

Figure 7. Different measures of the revenue size of district governments (Average, 2001-2008 %)

*as a percentage of GDRP Source: own figure based on data from Ministry of Finance.


Table 2 disaggregates each revenue sources of district and city government based on main islands in Indonesia. As seen in the table, most districts and cities with the higher revenue size of government are located in eastern part of Indonesia including Nusa Tenggara, Maluku and Papua (58.5%) and followed by Sulawesi (30.2%) and Kalimantan (29.2%) from 2001 to 2008. When calculated as own-source revenues as a percentage of GDRP, the highest percentage is found in Nusa Tenggara, Maluku, Papua, Jawa and Bali with an average size of 1.9% every year. Based on own-source revenues as a percentage of GDRP in all districts and cities, it can be seen that revenue raising capacity is significantly small, with an average below 2%. As such, it suggests that revenue increases locally in these districts and cities was too small to have a meaningful impact in mobilising local economy. Relatively similar spatial distibution of the revenue size of government calculated as balancing funds as a percentage of GDRP is also found. As presented in table, districts and cities in Nusa Tenggara, Maluku and Papua have the highest balancing funds as share of GDRP with about 53.6% from 2001 to 2001, followed by districts and cities in Sulawesi and Gorontalo with an average at 27.6% and Kalimantan with approximately 26% balancing funds of its GDRP.

Table 2. Three measures of the revenue size of district and city governments, average 2001-2008, (%)

Island Total revenue as % of GDRP

Own-source revenues as % of GDRP

Balancing funds as % of GDRP

Sumatera 24.9 1.7 22.4

Wes

tern

Jawa & Bali 18.0 1.9 15.2

Kalimantan 29.2 1.6 26.0

Mid

dle

Sulawesi 30.2 1.5 27.6


58.5 1.9 53.6

Eas

tern

Source: own calculations based on data from Ministry of Finance

In addition, the expenditure structure is also measured by using capital expenditure as a percentage of GDRP and current (routine) expenditure as a percentage of GDRP as displayed in Figure 8. Using capital expenditure and current is particulary significant to capture the different approaches used by the local government in the provision of public goods and services. As indicated in the figure, current expenditure relative to GDRP have increased steadly with an average about 19.2% from 2001 to 2008. With a slightly different rate, capital expenditure relative to GDRP has also increase with an average of 9.2% over the same period, but current expenditure had constantly larger than capital expenditure as percentage of GDRP in 2001-2008. Overall, current expenditure as a share of GDRP has a steady increase, whilst capital expenditure had fluctuated moderalty. In the beginning of fiscal decentralisation in 2001, current expenditure reached about 8.4% of GDRP, while capital expenditure was only about half of current expenditure which approximately at 4.2% of GDRP. In 2008, current expenditure as propotion of GDRP was still larger then capital expenditure accounted to about 35.6% of GDRP, while capital expenditure was only about 19.1% at the same time. This data raises some concerns. First, considerable variation between current expenditure and capital expenditure reflects that budget priorities at district/city level has largely been devoted to running the government administration rather than spending more on productive sectors under capital expenditure allocation. As found in the budget allocation, a susbtantial amount of the current expenditure at districts and cities is used to cover salaries and wages of the government employees. Second, a broad gap on the allocaton of current and capital expenditure is also somewhat politics. As found by Tirtosuharto (2010, p.304), in his study on 26 districts and cities between 1996-2005, funding for capital allocation for purposes such as human investment and technological resources is actually available, but there is evidence that districts and cities tend to allocate more funding to current expenditure and discreationary expenditure, either to benefit themselves or their political constituents by awarding lucrative government contracts.


Figure 8.Current and capital expenditures in all districts and cities, average, 2001-2008

Source: own figure based on data from Ministry of Finance.

Share of capital expenditure and current expenditure as percentage of GDRP based on main islands is shown in Figure 9. Of the two expenditure categories, current expenditure had remained dominant in district and city expenditure indicating very little productive economy activies in those regions. As shown, districts and cities with higher capital expenditure and current expenditure as percentage of GDRP are located in eastern part of Indonesia with capital and current expenditrure as percentages was approximately 20.1% and 22.6% between 2001 and 2008. Current expenditure in these regions was almost doubled than other districts and cities in different islands. A significant amount of capital expenditure in eastern part of Indonesia could be driven by a significant increase in the capital expenditure in Papua due to allocation of the special autonomy funds (Dana Otonomi Khusus) which are mostly allocated for infrastrucre financing especially during the first few years since the special allocation funds were given to Papua (World Bank, 2005)15.

Next page

15The Special Autonomy Fund is given to provinces which have special autonomy status (status otonomi khusus). Nanggroe Aceh Darussalam and Papua are granted Special Autonomy Status since decentralisation. Papua entitles to special autonomy funds as stipulated by with Law No. 21/2001, Papua received special autonomy funds at the first time in in 2002, and province distributed larger share of the special autonomy fund to district/city government across since 2003 (World Bank, 2005, p.22). Two other provinces with special autonomy status are D.I. Jogjakarta and DKI. Jakarta, these provinces were given the special status prior to decentralisation era.


Figure 4.Current and capital expenditures by main islands, average, 2001-2008


Revenue Decentralisation and Financing Capacity of District and City Governments

As suggested in the literature on fiscal federalism, the transfer of authority and responsibility from national to local governments cannot be meaningful unless local governments possess adequate financing. Thus, the central government promulgated Law No 25 of 1999, which was revised to Law No. 33/2004 regarding the Fiscal Balancing between Central and Local Governments. This law sets out a framework for the redistribution of revenues between central and local governments where local governments are given considerably greater authority and responsibility to manage their own budgets and also to raise their own revenues to help offset the expenditures arising from decentralisation (Barr, Resosudarmo, McCarthy & Dermawan, 2006, p.11).

The revenue assignment is stipulated in Law No. 33/2004, Chapter III, Article 2. According to this law, sources of state finances are made available to the regional government in the implementation of decentralisation based on the transfer of tasks from the central government to regional governments with due regard to fiscal stability and balance. Further, in Article 4, it is stated that delegation of authority in the implementation of deconcentration and/or co-administration tasks from the central to local governments shall be followed with the provision of funds. This is why the principle view on the fiscal law is termed, ‘Finance Follows Functions’ which means that the transfer of government functions to local governments is accompanied with various transfers over financial sources (Sidik, 2007, p.415). Specifically, in Chapter III, Article 155 of Law No. 32/2004 and Chapter V, Article 5-6 of Law No. 33/2004, local governments’ revenue is derived from three sources: (1) own-source revenues; (2) balancing funds or intergovernmental transfers; and (3) other local government income. Own-source revenues is comprised of local government taxes, levies, proceeds from the management of local assets set aside for the purpose, and other own-source revenues. The latter consists of proceeds from sales of local assets not set aside, current account service, interest income, profits from difference in the exchange rate of the Rupiah against foreign currencies, and commissions, discounts and other forms of income arising from sales and or procurement of goods and services by the local government.

Law No. 25/1999 or Law No. 34/2004, provides revenue autonomy to local government in Indonesia. Revenue autonomy implies that local governments have the freedom to decide about the source and volume of resources that can be sought from their own region (Bahl, 2008). Under decentralisation, the autonomy of local governments to seek new source revenues is underpinned with the enactment of Law No. 28/2009 regarding Local Taxes and Levies. In particular, these regulations stipulate that provincial and district governments are allowed to impose some


taxes and levies.16 From the law, it is seen that there is opportunity for local governments to introduce taxation in their regions and determine tax rates, tax bases and other tax parameters based on the regulations. Under the revenue assignment, it is postulated that local governments should be able to increase their own-source revenues. Law No. 33/2004 assigns some revenue resources to local governments. To the greatest extent possible, the local government should finance their obligatory and discretionary functions from their local taxes or other local government revenue sources (Bird, 2000). Revenue composition of all districts and cities is presented in Figure 10 which shows that district and city governments have not utilised the revenue-raising opportunities given to them under the fiscal decentralisation law as own-source revenues only made about 7.7% of the total revenues of the local government. Rather, the local governments are depending largely on balancing funds from the central and provincial governments which accounted to 86.8%.

Figure 10. Revenues as percentage of total revenues, average, 2001-2008


Table 3 exhibits the composition of revenue of district and city government from 2001 to 2008. Overall, districts and cities revenue rose from about 76,610 trillion IDR in 2000 to 264,387 trillion IDR in 2008 with an overwhelming share of total revenues is obtained from balancing funds. According to fiscal decentralisation Law No. 33/2004, Own-source revenue aims at providing authority to the districts and cities government in financing their expenditures under the fiscal and administrative autonomy given upon the districts and cities. Thus, it is expected that districts and cities could enhance their efforts in collection their own-source revenues. As seen in Table 3 however, Own-source revenues increased from 5,170 trillion IDR in 2001 to 20,142 trillion in 2008 with an average increase about 10,725 trillion IDR every year during the period. This figure is quite low. In 2001, own-source revenues were about 5,170 trillion IDR with a relatively small increase every year and reached 20,124 trillion IDR in 2008. On average, own-source revenues were only 7.7% of the total revenues, this is still not significant. A substantial amount of the own-source revenues is from local taxes, other revenues and proceeds from the management of districts and cities’ assets set aside for the purpose. Although own-source revenues had risen in nominal term every year, but the relative share of own-source revenues in total revenues is significantly low, approximately thirteen-fold smaller than balancing funds. Other revenues which consist of incomes from grants and emergency fund were rising from about 2,769 trillion IDR in 2001 to 12,710 trillion IDR in 2008. Revenue from

16 The taxes were categorized into Province Taxes of which there are 5 types, (1) Motorized Vehicle Tax and Above Water Vehicles Tax; (2) Vehicle Transfer Tax and Above Water Vehicles; (3) Motored Vehicle Fuel’s Tax; (4) Tax for Taking and Using Under Earth Water and Surface Water; and (5) Cigarette Tax.Whilst District/Municipality taxes consist of 11 types, (1) Hotel Tax; (2) Restaurant Tax; (3) Entertainment Tax; (4) Advertisement Tax; (5) Street Lighting Tax; (6) Tax for Mining Class C; (7) Parking Tax; (8) Ground Water Tax; (9) Swallow Tax; (10) Rural and Urban Land and Building Tax; and (11) Acquisition fees from Building and Land (Law No. 29/2008, Chapter II, Article 2).

Balancing funds, 86.8%

Other source of revenues, 5.5%

Own-source Revenue, 7.7%


grants and emergency funds remains small for the districts and cities because these revenues are considered as untied financial assistance to districts and cities and not all local governments obtain such funds every year. Overall contribution of other revenues to total revenues from 2001 to 2008 was about 5.5%.

Table 3. Revenue structure of district and city governments average 2001-2008 (Trillion IDR)

Own-source revenues

Balancing funds Other sources of revenues

Total revenues

2001 5,170 (6.7%)

68,671 (89.6%)

2,769 (3.6%)

76,610

2002 7,079 (8.2%)

74,810 (87%)

4,084 (4.8%)

85,973

2003 8,161 (7.7%)

89,391 (84.5%)

8,286 (7.8%)

105,839

2004 9,219 (8.4%)

92,379 (83.7%)

8,787 (8.0%)

110,385

2005 9,299 (8.4%)

92,603 (84%)

8,306 (7.5%)

110,207

2006 9,909 (6.5%)

135,727 (88.6%)

7,564 (4.9%)

153,200

2007 16,824 (8.1%)

185,782 (89.4%)

5,171 (2.5%)

207,778

2008 20,142 (7.6%)

231,535 (87.6%)

12,710 (4.8%)

264,387

Average 7.7% 86.8% 5.5% 100%

Numbers in parentheses are shares to total revenues Source: own calculation based on data from Ministry of Finance.

The share of balancing funds in total revenues of districts and cities has increased steadily with share about 86.8% on an annual basis between 2001 and 2008 due to increasing amount of general allocation funds, revenue sharing and special allocation funds provides to districts and cities. In the beginning of fiscal decentralisation, the balancing funds was about 68,671 trillion IDR, this jumped more than half to about to approximately 231,535 trillion IDR in 2008. Between 2001 and 2008, balancing fund in the total revenues was 86.8% annually, meaning that the balancing funds have been very dominant in districts and cities’ budget. In summary, there is an increase in district and city budgets from 2001 to 2008. Nevertheless, the increase in local revenue does not necessarily imply improvement of financing capacity of district and city governments, because the governments can only generate a small amount of own-source revenues to finance their expenditure (see also Table 4).

The structure of districts and cities revenues addressed above suggests two important features of district and cities city budgets: (1) strong reliance of local budget upon fiscal transfers from higher level of governments; and (2) low revenue-raising efforts. Local governments across Indonesia are very much dependent on fiscal transfers from the central government due to the highly centralised fiscal system in Indonesia in the past. Under the centralised fiscal system, the central government collected the majority of the revenue across the country. For instance, in 2011, about 91% of revenue collection and 64% of direct spending is held by the central government (Shah, Qibthiyyah, & Dita, 2012, p.7).

As Lewis notes, despite fiscal decentralisation in Indonesia, local government authority over local tax administration and collection has not changed much and can still be considered as the lowest in the world (Lewis, 2003, p.227). It is true that fiscal decentralisation law provides legal right to district and city government to create new taxes and levies in their jurisdiction, the fiscal system in Indonesia provides minimal fiscal autonomy to local governments in terms of revenue assignment since the central government still retains more authority in collecting some major and productive revenues sources such as income tax and oil revenues (see for example, Suhendra & Amir, 2006; Taliercio, 2005, p.111). The relatively low own-source revenues at all districts and cities was due to insufficient capacity of district and city governments and weak fiscal tools in administering and collecting local revenue sources at local level. As stated, such conditions are largely caused by the long history of centralised revenue collection in Indonesia (Lewis, 2003; Suhendra & Amir, 2006; Taliercio, 2005). Since fiscal decentralisation, district and city


governments have created some taxes or levies that are economically harmful to their economy activities due to unclear, and often conflicting, objectives of the taxes and levies (Lewis, 2003, p.228). Such a condition in turn poses profound arguments on why districts and city governments have not achieved significant revenue autonomy under fiscal decentralisation era.

The financing capacity of district/city governments as summarised in Table 4. It indicates that districts and cities have failed to keep pace total expenditures within their jurisdictions. As seen in the table, districts and cities generate less own-source revenues relative to their total expenditure between 2001 and 2008. It implies that their total expenditures are much more dependent on financial transfers from higher government levels or implies a broad vertical imbalance between districts and city governments and the higher level of governments (both provinces and central governments). Overall, districts/cities were only able to finance not more than 8% of their expenditures based on their own-revenue sources. For example, in 2001, financing capacity of districts and cities was 7.4%. This rate increased slightly until 2005, before falling to about 6.6% in 2006. Based on these figures, it is evident that district and city governments are heavily dependent on other central government in performing their functions in the public goods and services provision within their jurisdiction.

Table 4. Financing capacity of district and city governments (Trillion IDR)

Own-source revenues

Total expenditures

Financing Capacity (%)

2001 5,170 69,431 7.4

2002 7,079 82,791 8.6

2003 8,161 101,345 8.1

2004 9,219 98,200 9.4

2005 9,299 106,426 8.7

2006 9,909 149,234 6.6

2007 16,824 228,438 7.4

2008 20,142 254,076 7.9

Average 10,725 136,243 8.0

Source: own calculation based on data from Ministry of Finance.

Intergovernmental fiscal transfers to District and City Governments

As specified in the explanation in Chapter VIII of Law No. 32/2004 and in Chapter V of Law No. 33/2004, the balancing fund consists of sources from the national budget (APBN) which are allocated by the central government to local governments to fund the needs of the local government in implementing decentralisation. The balancing fund originates from three sources: (1) the Revenue-Sharing Fund (Dana Bagi Hasil); (2) the General Allocation Funds (Dana Alokasi Umum); and (3) the Special Allocation Funds (Dana Alokasi Khusus). The objectives of the balancing fund are to: (1) address vertical fiscal imbalances between levels of government (revenue sharing and DAU); (2) equalise regional government fiscal capacities to deliver services (DAU); (3) encourage regional expenditure on national development priorities (DAK); (4) promote the attainment of minimum infrastructure standards (DAK); (5) compensate for benefit/cost spillovers in priority areas (DAK); (6) stimulate regional commitment (DAK); and (7) stimulate revenue mobilization (revenue sharing, DAU, DAK) (Sidik, 2007, pp.377-378).

Revenue sharing is derived from taxes and natural resources. Revenue sharing from taxes is generated from land and building tax (Pajak Bumi dan Bangunan, PBB), acquisition fees from building and land, or land rent (Bea Perolehan atas Hak Tanah dan Bangunan, BPHTB), and personal income taxes (Pajak Penghasilan, PPh), revenue sharing from natural resources is derived from forestry, general mining, fisheries, petroleum mining, gas mining and geothermal mining. Revenue sharing from PBB and BPHTB17, as explained earlier, is divided between the provincial

17PBB and BPHTB for urban and rural have been decentralised since the enactment of Law No. 28/2009 on Local Tax and Levies.


governments, district/city governments, and the central government under the following formula. Ninety per cent (90%) of the revenue obtained from PBB is allocated to the respective local governments with details as follows:

a) 16.2% is allocated to the province from which the fund originates, b) 64.8% is allocated to respective districts/cities, c) 9% is used as collection fees.

The rest of the 10% of revenue-sharing is distributed to other local governments across Indonesia under the following rules:

a) 65% is distributed evenly to all districts/cities, and b) 35% is distributed as incentives to certain districts/cities which had good fund-generating performance

during the previous fiscal year.

According to Law No. 32/2004, Chapter VIII, Article 161 of and Chapter VI, Article 27-29 of Law No. 33/2004, the DAU is an unconditional grant from the central government to local governments aiming to help local governments meet their expenditure needs in implementing decentralisation. Since local governments have differences in their revenue-raising capacity (known as horizontal imbalances), it is likely they also have different capacities in providing public services. Thus, DAU is allocated to correct horizontal imbalances among local governments (Sidik, 2007, p.389). Since there is no condition attached to DAU, the recipient local governments can spend DAU as they choose (Sidik, 2007, p.377). DAU is calculated based on certain criteria emphasising aspects of equity and justice in harmony. The total amount of the DAU shall be at least 26% of the net domestic revenues as reflected in APBN. The DAU should be allocated based on the existing fiscal gap and the basic allocation. Fiscal gap is calculated as the fiscal need less fiscal capacity of the region; the basic allocation, however, should be calculated from the total salaries of the civil servants in the region.

Under decentralisation, all local governments have full autonomy and discretion to allocate funds obtained from the DAU. In addition to DAU, the central government also allocates DAK to local governments. The DAK fund is allocated to finance specific activities in the region that are part of the national priorities and to finance special activities proposed by the region (Law No. 32/2004, Chapter VIII, Article 162). According to Law No. 33/2004, the purpose of the DAK fund includes helping to fund important needs which cannot be estimated in the DAU formula, and to assist with funding expenditures related to national priorities or commitments (Sidik, 2007, p.407). According to Law No. 33/2004, DAK is considered to be a matching grant which means the recipient local governments are required to provide at least 10% contributory funding from their own budgets to the overall amount of DAK given to the region (Chapter VI, Article 41). The contribution funding to DAK required from the local governments aims to establish local government ownership of, and participation in, decisions concerning investments. In addition, the contribution fund is also to encourage the local government to pay attention to local benefits and financial valuations in investment selection and design (Sidik, 2007, p.410).

As mentioned before, under fiscal decentralisation policy, central government assigns functions and responsibilities to local governments. Whether or not local governments can financed the assigned functions by their own-revenue sources is a significant matter. As shown in earlier section, own-source revenues in all districts and cities are very small which implies that their own revenue cannot cover their expenditures. This is called a mismatch between revenue capacity and expenditure responsibilities. To mitigate the mismatch, local governments must seek revenue sources outside their own source, mostly from higher government levels in form of fiscal transfers, either from central or provincial governments. The dependency of local revenue on fiscal transfers from higher government level is known as vertical imbalances (Bahl & Wallace, 2007; Bird, 2010).

Table 5 presents details of total balancing funds which compose of revenue sharing, general allocation funds and specific allocation funds between 2001 and 2008. In principle, districts and city government have discretionary power in the allocation of revenue sharing and general allocation funds, while specific allocation funds are considered as tied funds for which districts and cities have to spend the funds on specific sectors determined by the central government. During this period, total balancing funds have increased steadily from about 68,671 trillion IDR in 2001 to approximately 121,362 trillion IDR in 2008. As be seen in Table 5, a substantial proportion of balancing fund transfers were general allocation funds, dominating balancing funds to districts and cities with average about 74.9% per year between 2001 and 2008. As stated earlier, general allocation funds are provided as an equalisation funds to local governments. Thus, districts and cites which have a relatively low own-source revenues will receive bigger share of general allocation funds. General allocation funds percentages were followed by revenue sharing and specific allocation funds which were approximately 20.4% and 4.6% of central government expenditures per year, respectively.


General allocation funds are spent largely to pay wages and salaries of the government employees and also other bureaucratic and administration cost. Compared to period of the early decentralisation in 2001, specific allocations funds have increased significantly since 2003. Such increase was due to the increase of the national priorities18 funded with the specific allocation funds. Prior to 2005, specific allocations fund was aimed to finance education sector, health, road, irrigation, government infrastructure, marine and fisheries. After 2005, new sectors had been added to the national priority sectors to be financed by the Specific Allocation Funds. These sectors are clean water and agriculture which were added to the list in 2005, environment sector was added in 2006, family planning and forestry in 2008, and trade and infrastructure of rural areas were listed in the national priorities in 2009 (Decentralisation Support Facility, 2011).

Despite the substantial balancing funds given to districts and cities, the balancing funds are not directly linked to the improvement in local development because majority of the funds are largely spent to cover routine/current expenditure such as salaries and wages (see Figure 8 for comparison on capital and routine/current expenditures). In addition, the dominance share of the balancing funds in district and city governments’ revenue in Indonesia indicates an excessive reliance of the local governments on fiscal transfers. When compared to many developing countries in around the world, it is seen that fiscal transfers to local government covers about 60% of their expenditures, while in more developed countries such as OECD countries, fiscal transfers accounted to about 29% of the local governments’ expenditures in the Nordic countries and about 46% non-Nordic Europe (Shah, 2007).

Table 5. Balancing funds to district and city governments, (Trillion IDR) Revenue

Sharing General

Allocation Funds

Specific Allocation Funds

Total

2001 13,864.53 (20.2%)

53,973.11 (78.6%)

833.52 (1.2%)

68,671

2002 15,900.92 (21.3%)

58,362.72 (78.0%)

546.25 (0.7%)

74,810

2003 19,345.34 (21.6%)

66,891.50 (74.8%)

3,154.55 (3.5%)

89,391

2004 21,577.56 (23.4%)

67,989.01 (73.6%)

2,812.22 (3.0%)

92,379

2005 16,914.02 (18.3%)

71,868.27 (77.6%)

3,820.53 (4.1%)

92,603

2006 20,231.37 (14.9%)

106,209.94 (78.3%)

9,285.76 (6.8%)

135,727

2007 38,394.36 (20.7%)

131,213.40 (70.6%)

16,174.63 (8.7%)

185,782

2008 53,531.81 (23.1%)

157,452.51 (68.0%)

20,550.56 (8.9%)

231,535

Average 24,969.99 (20.4%)

89,245.06 (74.9%)

7,147.25 (4.6%)

121,362

Numbers in parentheses are shares to total revenues Source: own calculation based on data from Ministry of Finance.

The Revenue and Expenditure Provincial Governments

Table 6 presents the total revenues19 of provinces grouped into five major islands: Sumatera (10 provinces); Jawa and Bali (7 provinces); Kalimantan (4 provinces); Sulawesi (6 provinces); Nusa Tenggara, Maluku and Papua (6 provinces). This grouping shows that there are considerable disparities across islands. It can be seen that provinces in Jawa and Bali have the highest total revenue relative to GDRP among provinces. On average, the total revenue in

18The national priorities are stipulated in Article 39, Law No. 33 of 2004 which are further explained in Article 51, Government Regulation No 55 of 2005. 19Total revenues compose own-source revenue, balancing funds, and other incomes. Other incomes for provinces are excluded from analysis because not all provinces have generated such incomes during the considered period. Recall that total revenue size of government is calculated as total revenues as a percentage of GDRP in each respective year.


Jawa and Bali Islands accounted to 22.5% between 2001 and 2010. Provinces in Jawa and Bali have also recorded the highest percentage of revenue measured as own-source revenues as a percentage of GDRP with an average about 13.5%, this rate is eight-fold larger than the size of own-revenue sources in all other provinces. The magnitude of the total revenue size and own-source revenues size above of provinces in Jawa and Bali indicates that those provinces are in a better position in term of revenue collections under fiscal decentralisation arrangement. Higher revenue size of provinces in these islands was due to the fact that economic development in the provinces is largely driven by secondary and tertiary economic activities such as manufacturing industry and services20. Provinces in Nusa Tenggara, Maluku and Papua are next in terms of the total revenue size of government, with an average at 13.2% in 2001-2010. Total revenue in these islands is largely a result of the substantial amount of balancing funds given to those provinces. As seen in Column 4, Table 6, provinces in Nusa Tenggara, Maluku, and Papua recorded the highest revenue size of government in term of the amount of balancing funds that they received from the central government, about 9.1% during 2001-2010. In the same period, provinces in these islands are not superior in own-source revenues generation as seen in Column 3, own-revenue in Nusa Tenggara, Maluku and Papua has been the lowest amongst provinces, only about 1.4%.

Table 6. Total revenue size of provincial government for main Islands average 2001-2010

Island Total revenue as % of GDRP

Own-source revenues as % of

GDRP

Balancing funds as % of GDRP

Sumatera 4.9 1.6 2.9

Wes

tern

Jawa & Bali 22.5 13.5 8.4


Mid

dle

Sulawesi 7.5 1.7 5.5


13.2 1.4 9.1

Eas

tern

Source: own calculations based on data from Ministry of Finance. Figure 6 shows provinces ranked by the total revenue relative to GDRP between 2001 and 2010. As seen, after nine years of fiscal decentralisation, there is an upward trend of the total revenue in all provinces with overall size was 6.2% annually during 2001-2010. In the early of fiscal decentralisation, in average, total revenue size of provinces stood at 2.6% of GDRP and increased slightly to 3.6% in 2002. A marginal increase in the total revenue size continued in 2003-2004 with an average at 4.3% and 4.8% respectively and become 5.1% in 2005. The total revenue size continued to rise with average of 9.4% in2009, before declining back to 8.9% in 2010.

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20 While economic activities in most provinces in other islands are very dependent on natural-resources-related sectors such as agriculture, forestry and mining.


Figure 12. Provinces in Indonesia ranked by total revenue size average 2001-2010

Note: Revenue size for Kepulauan Riau, Sulawesi Barat and Papua Barat is an average from 2004-2010. Source: own calculations based on data from Ministry of Finance. As displayed in figure above, provinces which have higher total revenue are located in eastern part of Indonesia. Papua Barat d had the highest total revenue as percentage of GDRP with an average size is 19.2% from 2001 to 2010. This was followed by Papua, Maluku and Gorontalo with average at 16.6%, 15.8% and 15.5% respectively. Whereas Jawa Barat and Jawa Timur that are in western part of Indonesia recorded the lowest average rates of 1.9% and 1.8% respectively. The trend above shows some interesting facts. Five provinces that recorded the highest total revenues as percentage of GDRP are located in the eastern part of Indonesia. Of five provinces, three are new provinces which were established and split off from their “parent” province since the decentralisation era. These are Papua Barat which split off from Papua in 2003, Maluku Utara which was originally part of Maluku before 1999 and Gorontalo that split off from Sulawesi Utara in 2000. This indicates that fiscal decentralisation has substantially increased the total revenue as percentage of GDRP of new provinces in Indonesia. By contrast, five provinces which recorded the lowest total revenues as percentage of GDRP are located in Java and Sumatera that is in the western part of Indonesia. It is important to understand that the higher revenue size does not simply indicate a favourable financial performance; it was largely driven by revenue received from the central government in the form of intergovernmental transfers or balancing funds, as shown in greater detail below.

Figure 13 shows revenue of government is estimated as own-source revenues as a percentage of GDRP. As displayed in the figure, locally raised revenue in all provinces is abysmally low ranging from a low of 0.6% in 2001 to a high of 2.7% in 20010 with an average was only about 1.6% every year. Own-source revenues comprised only 0.9 1% of GDRP in the beginning of fiscal decentralisation and 0.9% in 2002. It had a steady position with an average size above 1% of GDRP but still less than 2% between 2003 and 2006. Own-source revenues rose to about 2% in 2007 and increased further to about 2.7% by 2010. Variation of own-source revenue is quite different than the total revenue as shown in Figure 6. When compared individually, the spatial distribution of the size of own-source revenue does not skew to particular islands. As seen in Figure 13 below, five provinces which have higher of own-source revenues are distributed across different islands ranging from middle part of Indonesia (Bali, 3%), western island (Bengkulu, 2.6%; Jambi and DKI Jakarta, 2.5%) and eastern island (Gorontalo, 2.4%). Across provinces, the lowest size of own-source revenues was in Papua Barat which was only 0.6% between 2001 and 2010. The lowest

All Provinces 2001: 2.6% 2002: 3.6% 2003: 4.3% 2004: 4.8% 2005: 5.1% 2006: 7.1% 2007: 7.9% 2008: 8.4% 2009: 9.4% 2010: 8.9%


size of own-source revenues of this province could possibly due to its status a newly established province and its location is in the most remote area in Indonesia.

Figure 13. Provinces in Indonesia ranked by size of own-source revenues, average 2001-2010

Source: own calculations based on data from Ministry of Finance. Figure 14 shows the revenue calculated from balancing funds as a proportion of GDRP. In 2001, the size of balancing funds was about 1.6 and reached 6.1% in 2010 with an average rate of 3.9% GDRP during the time. As in the figure, there was a small increase of the size of balancing funds from 2002 until 2005 with an average rates across provinces were approximately 2.6% in 2002, 2.7% in 2003, and 2.8% and 2.9% in 2004 and 2005. Between 2006 and 2007, the size of balancing funds increased from 4.6% to 4.7%, while during the period 2008-2009, the size was unchanged at about 5.5% for all provinces in Indonesia. Spatial variation of the size of balancing funds among provinces as shown in Figure 8 confirms that some new provinces and their parent provinces located in the eastern part of Indonesia had the largest balancing funds. These provinces are Maluku Utara which posted 14.8% of balancing funds as a percentage of its GDRP between 2001 and 2010, Papua Barat (14.6%), Gorontalo (12.4%), Maluku (12.1%), Sulawesi Barat (8.4) and Papua (6%). On the other end of the scale, provinces in the western part of Indonesia such as Jawa Timur, Jawa Barat, and Sumatera Utara showed the lowest size balancing funds which an average size less than 1% from 2001 to 2010.

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All Provinces 2001: 0.6% 2002: 0.9% 2003: 1.1% 2004: 1.4% 2005: 1.6% 2006: 1.8%

2007: 2.0% 2008: 2.0%

2009: 2.3% 2010: 2.7%


Figure 14. Provinces in Indonesia ranked by the size of balancing funds, average 2001-2010

Source: own calculations based on data from Ministry of Finance. The total expenditure as percentage of GDRP of all provinces from 2001 to 2010 is presented in Table 7. As seen in the table, there is no significantly difference across provinces in all islands based on their total expenditure. Provinces in Sumatera Island made the highest total expenditures size with an average rate of 4%. While provinces in Kalimantan Island, Sulawesi, Nusa Tenggara, Maluku and Papua Islands had a slightly similar expenditure size with averages range from 3.6% and 3.4% respectively. In contrast, provinces in Jawa and Bali Islands recorded the lowest total expenditure relative to GDRP which accounted only about 2.5%.

Table 7. Total expenditure as percentage of GDRP of provincial government for main Islands*

Island Total expenditure

as % of GDRP

Capital expenditure as % of GDRP

Current expenditure as % of GDRP

Sumatera 4.0 2.4 1.6

Wes

tern

Jawa & Bali 2.5 1.6 0.9


Mid

dle

Sulawesi 3.4 2.1 1.3


3.4 2.1 1.3

Eas

ter

n

* average 2001-2010 Source: own calculations based on data from Ministry of Finance.

All Provinces 2001: 1.6% 2002: 2.6% 2003: 2.7% 2004: 2.8% 2005: 2.9% 2006: 4.6%

2007: 4.7% 2008: 5.5%

2009: 5.5% 2010: 6.1%


Figure 16 below shows spatial variability of the total expenditure size as percentage of GDRP of all provinces. As seen, the total expenditure of all provinces has been rising since the introduction of fiscal decentralisation. On average, it increased from 2.9% in 2001 to a peak of 10.2% in 2010, before falling back to about 5.9% in 2010. Five provinces which have higher total expenditure size are Maluku Utara (20.4%), Papua Barat (17.7%), Sulawesi Barat (14.4%), Papua (14.2%) and Maluku (13.6%). While provinces which have smaller size of expenditure are in Sumatera and Jawa Islands such as Jawa Barat and Jawa Timur (1.3%), Sumatera Utara (1.5%), Jawa Tengah (1.7) and Banten (1.9%). The skew of the expenditure size of government as in the figure below is makes sense in the light of the higher total revenue size in those provinces as explained earlier.

Figure 16. Provinces in Indonesia ranked by total expenditures as percentage of GDRP, average 2001-2010

Source: own calculations based on data from Ministry of Finance. As indicated, capital expenditure and current expenditures of local government pinpoints the key priorities areas of development of the local governments. Capital expenditure can be categorised as expenditure on assets which consists of land expenditures, building expenditure, and other fixed asset expenditures. While current (routine or operating) expenditure are recurring expenditures which includes wages and salaries expenditures, materials, interest payments, subsidies, grants and social assistance. As shown in Figure 17, capital expenditure across the province fluctuated between 2001 and 2010. In early fiscal decentralisation, all provinces made up only about 1.5% of capital expenditures relative to GDRP and this increased slightly to 1.7% in 2002. A modest increase of capital expenditure was seen during 2003-2004 with average rates in all provinces equivalent to 2.1% and 2.4% of GDRP by annual basis. The size of capital expenditure has increased further from 2005 and reached about 5.6% of GDRP in 2009 before decreasing to 2.8% in 2010. During that period, the size of capital expenditures ranged from 0.7% (the lowest) in Jawa Timur and 12.8% in Maluku Utara (the highest). As indicated, provinces in eastern part of Indonesia, especially Maluku Utara, Sulawesi Barat, Papua Barat, Papua and Gorontalo had higher capital expenditure as percentages of GDRP due to increasing infrastructure development in these provinces.

All Provinces 2001: 2.9% 2002: 3.2% 2003: 3.7% 2004: 3.3% 2005: 5.7% 2006: 4.6%

2007: 6.0% 2008: 9.0%

2009: 10.2% 2010: 5.9%


Figure 17. Provinces in Indonesia ranked by capital expenditures as percentage of GDRP, average 2001-2010

Source: own calculations based on data from Ministry of Finance. Similar to the size of capital expenditure of provincial government, size of current expenditure also show a modest increase from 1.3% in 2001 to about 2.8% (Figure 18). Accordingly, Papua Barat registered the highest size of current expenditure with an average at 8.4% of GDRP from 2001 to 2008. Higher size of current expenditure is also appeared in Maluku Utara (7.6%), Maluku (7%) and Papua (5.3%). Current expenditure was fairly low in Jawa Tengah and Jawa Barat which represented only 0.4% of GDRP. Based on analysis on the size of capital expenditure and current expenditure as percentage of GDRP above, it can be concluded that the expenditure size of provincial government in Indonesia is considerably small with an average less 4.5% on annual basis21.

21Research on the optimum size of expenditure of government is very limited which leads to an absence of the theoretical and empirical agreements on the optimum level of the size of expenditure of government. As for comparison, Chobanov and Mladenova (2009) found that the optimum size of government in OECD countries is no more than 25% of GDP. Using a normal distribution to determine the optimum size of government measured as public expenditure as a percentage of GDP, Ekinci (2011) suggested that the minimum level of expenditure as a percentage of GDP should be at 4.55%, while the optimum level at 13.4% which was the case in some developed countries such as UK, USA and the European countries, the optimum expenditure size of government was approximately 13.4%, while the maximum expenditure as a percentage of GDP should be no while the maximum expenditure as a percentage of GDP should be no greater than 31.7%. Based on data of 23 OECD countries, Witte and Moesen (2010) claimed that the optimum size of government is at 41.22 % of GDP.

All Provinces 2001: 1.5% 2002: 1.7% 2003: 2.1% 2004: 2.4% 2005: 4.5% 2006: 3.2%

2007: 4.0% 2008: 5.2%

2009: 5.6% 2010: 2.8%


Figure 18. Provinces in Indonesia ranked by current expenditures as percentage of GDRP, average 2001-2010

Source: own calculations based on data from Ministry of Finance. Revenue Decentralisation and Financing Capacity of Provincial Level

Provincial government’s total revenues consist of own-source revenues, balancing funds; and other sources of revenue22. In reality, provincial governments cannot make the most of their capacity to optimize their revenues from own-source revenues. In 2001-2002, total balancing funds was about 62.5% and 62.9% of the total provincial revenue respectively. At the same period, own-source revenues made between 27.3% and 34.7% of total revenues. For three years between 2003 and 2005, the proportion of the balancing funds in provincial revenue was slightly decreased to 57%, 55.2% and 52.3% respectively. Provincial governments continued to receive a significant amount of balancing funds in between 2006 and 2010 with steady contribution from 2006 to 2010 with proportion less than 40% of total revenues, but it made 41.9% of the total revenues composition in 2005. The dominant proportion of balancing funds in provincial revenue indicate clearly that balancing funds, which were merely supposed to be subsidiary funds to local budgets, has functioned as one of the main sources of revenues of provincial governments which may also has substitute the function of provincial’s own revenues to finance provincial expenditures. Overall, balancing funds from national level to provinces constituted more than half of total provincial budgets with proportion to total revenues about 57% from 2001 to 2010 (Figure 19). Own-source revenue contributed about 37% and other revenues made up only about 5% of the provincial revenues at the same period.

22 Other sources of revenues include grant, emergency fund and other income. But in general, such revenues are significantly smaller than own-source revenues and also balancing funds.

All Provinces 2001: 1.3% 2002: 1.5% 2003: 1.6% 2004: 1.0% 2005: 1.3% 2006: 1.5%

2007: 2.0% 2008: 3.8%

2009: 4.6% 2010: 2.8%


Figure 19. Structure of provincial revenue, average, 2001-2010

Source: own calculations based on data from Ministry of Finance. The higher proportion of balancing funds indicates that provinces are more dependent upon intergovernmental transfers, hence revenue sharing from tax and non-tax, general allocation funds and also specific allocation funds. It implies that provincial governments also had not been able to increase their revenue raising power as deliberately designed under fiscal decentralisation. As stated previously, the dependency of provincial budgets upon balancing funds from central government could be as the result of a very long period of centralised revenue collection by the central government in Indonesia. As a result, the fiscal decentralisation policy which ideally provides opportunities and encourages local governments to become financially independent from fiscal transfers has not led to significant change. Lack of financial capacity and the past centralised revenue collection system have contributed to the fiscal dependency of local governments on transfers from central government. This is shown by a large vertical fiscal gap which is compensated with balancing funds from central government to local government, including provinces as shown in Table 8.

Table 8. The structure of provincial revenues, average 2001-2010 (%)

Own-source revenues Balancing

funds Other source of

revenues 2001 27.3 62.5 10.1

2002 34.7 62.9 2.3

2003 36.3 57.0 6.7

2004 38.8 55.2 6.0

2005 41.9 52.3 5.8

2006 36.3 60.1 3.6

2007 37.5 55.1 7.4

2008 37.6 57.8 4.6

2009 38.2 55.0 6.9

2010 39.1 59.7 1.1


Balancing funds, 57%

Own-source revenue, 37%

Other source of revenues, 5%


Spatial variation in the own-source revenues generation across provinces in presented in Figure 20. This reveals a significant difference in the revenue raising power among provinces in different islands, especially between western part of Indonesia and eastern part of Indonesia23. Provinces such as Jawa Barat, Jawa Timur, Jawa Tengah and Sumatera Utara are the most developed provinces in Indonesia. In these provinces, economic development is significantly higher than other provinces which contribute to the higher GDRP and economic development and eventually will contribute to higher local revenues. As shown, five provinces which had greater proportion of own-source revenues in their total revenues are located in Jawa Island (Jawa Timur, Jawa Tengah, Jawa Barat, and Banten) and Sumatera Island (Sumatera Utara).

Among 33 provinces, on average, Jawa Barat and Jawa Timur had the highest own-source revenues in the total revenue which accounted almost 70% between 2001 and 2010. Sumatera Utara and Banten also had considerable performance of revenue power where 65% and 64% of their total revenue came from own-source revenues respectively. Some important factors which could explain the difference in the provincial capacity in revenue making locally are the wide gap in fiscal resources and poverty rate among provinces across Indonesia. As found by the World Bank (2009), regions which have higher fiscal resources and lower rate of poverty as well as high GDRP tend to have higher own-source revenues than regions with lower fiscal resources and higher poverty rate. By contrast, regions with higher poverty and lower GDRP have less own-source revenues and higher dependency upon balancing funds from central government. These provinces include Papua Barat, Papua and Maluku Utara which collected own-source revenues less than 9% every year between 2001 and 2010.

Figure 20. Revenue decentralisation* , average 2001-2010 (%)

* calculated as own-source revenues as % of total revenue.


23 This finding supports view of the regional inequality of economic development between Jawa Island and outside Jawa (particularly eastern part of Indonesia). About 80% of the Indonesian economy is occurred in the provinces in these islands, while other provinces only made small contribution to Indonesian economy (Kuncoro, 2013).


As explained earlier, under fiscal decentralisation policy, central government provides balancing funds to local governments in order to create financing balancing between central and local governments (provinces and districts/cities), and also amongst local governments. The balancing funds comprise general allocation funds, specific allocation funds and revenue sharing funds. Specifically, general allocation funds aim to finance administrative and other costs associated with new functions performed by local governments under the decentralisation policy. This fund includes financing wages and salaries as a basic allocation24, while the specific allocation grants aim to finance development sectors identified as national priorities (Shah, Qibthiyyah, & Dita, 2012). On the other hand, revenue sharing was developed to meet aspiration from the local level to have more access and control over local revenues, to stimulate mobilisation of revenue at local level and also to equalise fiscal imbalances (Sidik & Kadjatmiko, 2002).

As shown in Table 9, general allocation funds constitute the biggest proportion of total balancing funds with an average about 64.9% between 2001 and 2010. This is followed by revenue sharing funds of approximately 32.9% and special allocation funds about 2.2% between 2001 and 2010. Between 2001 and 2003, general allocation funds made up about 67% of the balancing funds before declining to around 65.3% and 59.8% in 2004 and 2005 respectively. The amount of general allocation funds being transferred to provincial governments continued to increase in 2006 to a peak of 70.6% in 2007, falling to about 65.2% and 55.8% in 2008-2009 and to 55.8% in 2010. The higher proportion of general allocation funds in the provinces’ revenue indicates that provinces are not yet financially independent. Rather, the provinces remain heavily dependent to the central government as more than half of their revenue came from general allocation funds. Based on these facts, it could be argued that providing the funds to local level which was meant to overcome either vertical or horizontal fiscal imbalances among government tiers has failed.

Some criticisms have emerged of the general allocation funds being transferred to local governments. One criterion in determining the amount of general allocation funds is the level of own-source revenues of each local government. Provinces which have higher own-source revenues will receive small general allocation funds, by contrast, province that have lower own-source revenues will receive bigger amount of general allocation funds. This approach creates disincentives to provinces to raise their own-source revenues since an increase in own-source revenues is offset by decrease in general allocation funds composition (Shah, Qibthiyyah, & Dita, 2012, p.7)25. In addition, the general allocation funds to provinces have been used largely to finance wage and salaries of civil service while only a small portion has been allocated as financial equalisation among local governments26. As the result, the local governments spend less on capital and infrastructure spending that can promote local development (OECD, 2012; Decentralisation Support Facility, 2011). Hence, the aims of the general allocation fund to reduce regional imbalances and regional disparity in development have not been achieved. If this practice continues in the future, it is anticipated that local governments will still be highly reliant upon transfers from central government and the regional disparity, especially between rich regions and poor regions will continue to worsen.

Prior to the implementation of fiscal decentralisation, the central government enjoyed more taxes and natural resources revenues collected from provinces in Indonesia. This was due to a centralised revenue collection, while provincial and district/city government had less opportunity to collect taxes in their regions (Shah, 2012, Shah, Qibthiyyah, & Dita, 2012). Since the fiscal decentralisation law was imposed, one of the key issues of the local budget has been the financing capacity of local governments; whether they could finance their own expenditure responsibilities from their own revenue sources, financing capacity. The extent of the financing capacity of

24 Basic allocation is to be used to finance wage and salary of the government employees. This arrangement is made due to significant transfers of government employees from central government to provinces, districts and cities since the decentralisation era. Salary and wage of such employees are mostly paid by the general allocation funds under the basic allowance formula. The basic allocation in general allocation fund was actually relative similar with the scheme of subsidy to autonomous regions (Subsidi Daerah Otonom) which given to local government to finance wage and salaries prior to decentralisation in 2001. In addition to SDO, local government also received Dana funding from central government under President Instruction which so-called Dana Inpres which used to finance some development sectors such as education, health and infrastructure with local jurisdictions. 25 Under the current formula, actual revenues are used as opposed to potential revenues to calculate the own-source revenues of each local government in general allocation funds formula. This technique has created disincentive to local governments in improving their own revenue collection locally because any increase in taxes collection that lead increase of own-source revenues will offset by decrease in general funds entitlements to be received (Shah, Qibthiyyah, & Dita, 2012, p.9). 26 Local governments may be very reluctant to develop efficiency in their administration, for example by tighten personnel size due to the basic allowance which they receive in general allocation funds. As analysed by Fadliya & McLeod (2010) local governments do not have willingness to reduce or avoid the number of their personnel as any reduction in the personnel costs such as wage and salaries will be offset by an equal reduction in the general allocation funds.


provincial governments is well above that of district and city governments. In the early days of fiscal decentralisation the total expenditures of provincial governments was 23.9 trillion IDR, and their own-source revenue was only 9.9 trillion IDR. Hence own-source revenue covered only about 41.5% of the provincial expenditures. The financing capacity of provincial governments increased over the following years and peaked in 2009.

Table 9. Financing capacity of provincial governments (Trillion IDR)

Own-source

revenues Total

expenditures Financing

Capacity (%) 2001 9,941 23,968 41.5 2002 14,232 30,652 46.4 2003 17,727 33,545 52.8 2004 22,576 32,034 70.5 2005 27,905 57,243 48.7 2006 30,553 47,037 65.0 2007 35,108 63,256 55.5 2008 37,277 76,934 48.5 2009 42,507 105,595 40.3 2010 56,267 51,364 109.5

Average 29,409 52,163 57.9 Source: own calculations based on data from Ministry of Finance. Intergovernmental fiscal transfers to Provincial Governments

Under fiscal decentralisation, local governments, especially those producing regions, are receiving higher amounts of taxes and natural resources revenues. According to fiscal decentralisation law, local governments will receive shares of revenues from taxes and natural resources which collected by the central government from their jurisdiction disproportionally where producing regions receive higher amount of the revenue collected. As a result of this arrangement, natural-resources rich regions, which are mostly located in Kalimantan Timur, Papua and Riau, will gain substantial amount of revenue sharing. Taxes shared consist of property tax (land and building tax, or PBB, acquisition rights to land and buildings tax (BPHTB) and personal income tax, while natural resources revenue comes from forestry, fishery oil, gas, and general mining. As indicated in Table 10, revenue sharing between the central and provincial government is also considered as an important component of balancing funds ranging from 27.7% and 40.4% with an average about 32.9% annually between 2001 and 2010.

Revenue sharing fluctuated from 2001 to 2010. In 2001, revenue sharing was about 31.7% of the balancing funds, falling to 29.5% in 2002 before increasing back to about 31.2% and 34.5% in 2003 and 2004 respectively. In 2005, the revenue sharing increased significantly to about 40% of the balancing funds due to increase in the oil price since revenue sharing from oil provides the biggest contribution to revenue sharing from natural resources. Revenue sharing funds decreased to about 32.7% in 2006, 27.7% in 2007, and 29.9% in 2008 before increasing to 31.4% and 40.4% of the total balancing funds in 2009 and 2010. This increase was due to the increase in the land and building tax sharing and also increase in the general mining sharing during that period (Francis, 2012). Specific allocation grants made the least proportion of the balancing funds accounted to about 2.2% every year during 2001 to 2010. The amount of specific allocation funds was relatively until 2007. During that period, the specific allocations fund can only be used to finance education sector, health, road, irrigation, government infrastructure, marine and fisheries. Since 2008, the specific allocation fund had considerably increased due to the increase of the areas of development under the national priorities27 that can be funded with the Specific Allocation Fund. In 2008, the new sector that can be funded with specific allocation funds were family planning, forestry and trade, while in 2009,

27The national priorities are stipulated on Article 39, Law No. 33 of 2004 which further are explained on Article 51, Government Regulation No 55 of 2005.


infrastructure of rural areas were also added (Decentralisation Support Facility, 2011). Although specific allocation funds transferred to provinces were significantly lower than the general allocation funds, the specific allocation funds have been more effective than the general allocation fund in boosting capital spending at local government level (Lewis, 2013). Between 2003 and 2009, every additional rupiah of the special allocation given to local government created approximately 1.20 rupiah of capital expenditure, while an additional rupiah in general allocation funds only stimulate about 0.09 rupiah increase in the capital spending at local level (Lewis, 2013, p.9).

Table 10. Composition of balancing funds at provincial level, average 2001-2010 (%) General

Allocation Fund Specific

Allocation Fund Revenue

Sharing Funds 2001 67.3 1.0 31.7

2002 67.0 3.5 29.5

2003 67.1 1.7 31.2

2004 65.3 0.2 34.5

2005 59.8 0.1 40.0

2006 67.2 0.1 32.7

2007 70.6 1.7 27.7

2008 65.2 4.9 29.9

2009 63.4 5.2 31.4

2010 55.8 3.8 40.4


The following discussion addresses the dynamic of revenue sharing and general allocation funds across provinces in Indonesia. Specific allocation funds are excluded from the analysis as most local governments only began to receive the specific allocation funds by 2009. Due to the disproportionate arrangement of the revenue sharing, it is anticipated that natural-resources rich provinces will gain more benefit from revenue sharing shown by the proportion of revenue sharing in their balancing funds. As seen in Figure 21, it is evident that natural resources rich provinces, except for DKI Jakarta, have gained substantial amount of revenue sharing. Five provinces on the top of revenue sharing proportion include Riau, Kalimantan Timur, Nanggore Aceh Darussalam and Kepulauan Riau which split off from Riau in 2004.

Riau, which has abundant oil and gas resources and contributes substantial amount of the oil and gas output in Indonesia, has the highest proportion of revenue sharing with approximately 92% of its balancing funds coming from the revenue sharing during 2001 and 2010. Another province which obtained huge revenue sharing is Kalimantan Timur. As one of the major producers of oil and gas in Indonesia, Kalimantan Timur recorded about 91% of revenue sharing between 2001 and 2010.In the next place was DKI Jakarta where about 89% of the balancing funds received by the province were from revenue sharing. Between 2001 and 2010, DKI Jakarta received significant amount of revenue sharing from taxes. As a centre of economy activity and development and also a very densely populated area, DKI Jakarta is one of the provinces which grow faster than the national average growth (Kuncoro, 2013). As such, it has been able to collect substantial revenues from various taxes in its jurisdiction; hence, one can say that DKI Jakarta is an income tax-rich province. Nanggroe Aceh Darussalam and Kepulauan Riau also obtained significant revenue sharing from oil and gas which more than 70% of their balancing funds from 2001 and 2010. By contrast, natural-resources poor provinces which are mostly located in the eastern islands of Indonesia have gained no more than 10% revenue sharing every year from 2001 and 2010. Of five provinces with the least revenue sharing, four are located in eastern of Indonesia including Gorontalo (4%), Sulawesi Tengah (8%), Nusa Tenggara Timur (9%) and Sulawesi Utara (10%). Bengkulu was the only province in Sumatera that received an abysmally low revenue sharing.


Figure 21. Provinces in Indonesia ranked by revenue sharing as a percentage of respective balancing funds*

* average, 2001-2010

Source: own calculations based on data from Ministry of Finance. As discussed earlier, one fiscal issue of the implementation of fiscal decentralisation in Indonesia is the higher dependency of most local governments’ budget on intergovernmental fiscal transfer from the central government. Rich regions had benefited from the revenue sharing arrangement, while poor regions have not been able to maximise local revenue sources. Figure 22 shows that provinces which had smaller revenue sharing in their balancing funds indeed received larger amount of general allocation funds. Gorontalo and Bengkulu which received the lowest general allocation funds from 2001 to 2010 were the top recipients of general allocation funds which constituted more than 90% of the balancing funds at the same period. Sulawesi Tengah, Nusa Tenggara Timur and Sulawesi Utara had more 80% of their balancing funds from general allocation funds.

Provinces which received higher revenue sharing will receive less general allocation funds, vice versa, is partly due to the fiscal gap approach used on the intergovernmental fiscal transfers in Indonesia. The fiscal gap approach determines the amount of general allocation funds given to particular local government by calculating the fiscal capacity (own-source revenues and revenue sharing) and fiscal need (number of population, size area, construction price index, GDRP, and Human Development Index) in each respective local government (Law No. 33/2004, Article 28).Based on the fiscal gap approach, the general allocation funds received by province will vary depending on the size of fiscal needs and fiscal capacity. If fiscal capacity is larger than its fiscal needs in one province, then the province will receive zero general allocation funds. This implies that higher fiscal needs compared to fiscal capacity will be offset by a higher general allocation funds.

Despite the new arrangement on the balancing funds under fiscal desentralisation policy which meant as one of policies to achieve fiscal equalization, horizontal and vertical imbalances seem to be an issue across local governments in Indonesia. This could be explained with some reasons. First, the formula in determining the balancing funds was simply based on fiscal gap approach. Under the formula, there would be an asymmetric or an opposite direction in the amount of two major sources of balancing funds: revenue sharing and general allocation funds. As shown by an algebraic analysis of balancing funds in Fadliya and McLeod (2010), any amount of balancing funds received as revenue sharing is deducted from the general allocation funds entitlement to be tranferred to each local governments. Therefore, natural-rich resources local governments which receive higher share of revenue sharing from natural resources revenue collected within their regions are able to cover their basic allowance (wage and salaries). As a result, the larger revenue sharing received by the rich regions is offset by reduction in their general allocation entitlements. Second, rather to use the balancing fund, especially the general allocation funds, to reduce the fiscal imbalances across local governments, the general allocation funds as the major


component of the balancing funds are largely allocated to finance routine expenditure such as wage and salaries. This could exacerbate fiscal imbalances and regional disparities across Indonesia in the future.

Figure 22. Provinces in Indonesia ranked by general allocation funds as a percentage of balancing funds*

* average, 2001-2010 Source: own calculations based on data from Ministry of Finance.

Concluding Remarks: Sustainability and Local Development under Fiscal Decentralisation

The practice of decentralisation in Indonesia has shown that various reforms have affected the arrangements of authority and financial responsibility between the central government, and the local governments (province and district/city). One objective of such fiscal decentralistion is to improve fiscal capacity of local government by raising own-source revenues thus increase the financing capacity of local governments. However, the study on practice of fiscal decentralization in Indonesia has not indicated an improvement on the public financing capacity of local governments. Results from local budget analysis show that a higher proportion of balancing funds in the total revenue of local governments indicating that local governments are largely financed by fiscal transfers from higher government levels. As such, one can argue that local governments fail to increase revenue locally and mobilise local economy on their own resources. Although there are increasing trends on total local government revenues, but such increase does not necessarily imply improvement of financing capacity of local governments, because the local governments can only generate a small amount of own-source revenue to finance their expenditure. Local budgets rely heavily on balancing funds from central government, the balancing funds are not directly linked to the improvement in local development because majority of the funds are largely spent to cover routine/current expenditure of the local governments.

Dependency of local governments on fiscal transfers from the central government is mainly driven by a large gap between fiscal capacity and fiscal needs of local governments in Indonesia. In the long run, this would lead to fiscal mismatch or fiscal unsustainability. One consequence of such a mismatch is the dominant role of intergovernmental transfers in local budgets that influencing local governments performance in delivering decentralised functions given to them. Furthermore, intergovernmental transfers from the central government to local governments are generally given to ensure that local governments can achieve the basic priorities of the development goals set by the central government in all local government areas, not to finance the local specific-development goals. A higher fiscal mismatch is an evidence of a weakness of fiscal sustainability which refers to the ability of local governments to


finance expenditure using own-source revenues and at the same time reduce dependency on fiscal transfers from higher levels of government (Bird, 2003). Fiscal sustainability also indicates long-term ability of government to fulfill their responsibilities to stakeholders, community (Chapman, 2008). If local governments have not been able to achieve fiscal sustainability, it will affect their ability to implement public services provision at local jurisdictions which at the end would hinder the local economic development and sustainable provision of public services.

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Factors Influence The Utilization Of Community Participation (POSBINDU)

NoviaIndriani Sudharma a, Rina Kurniasri Kusumaratna b , Meiyanti c

a,b Department of Public Health, Faculty of Medicine, Trisakti University, Jakarta, Indonesia c Department of Pharmachology, Faculty of Medicine, Trisakti University, Jakarta, Indonesia

a Corresponding author: dr.NoviaIndrianiSudharma , [email protected]

© Authour(s) OIDA International Journal of Sustainable Development, Ontario International Development Agency, Canada

ISSN 1923-6654 (print) ISSN 1923-6662 (online) Available at http://www.ssrn.com/link/OIDA-Intl-Journal-Sustainable-Dev.html

Abstract Introduction: Posbindu is a form of public participation to conduct early detection and monitoring of risk factors for non-communicable diseases (NCD), and where it was carried out in as an integrated-manner, routine and periodic event. Posbindu itself aimed to promotethe community participation in prevention and early detection of risk factors for non-communicable disease (NCD). Non-communicable diseases is the biggest killer in the world,causing approximately 60% of global deaths. More than 9 millions of all deaths related to NCD occurredunder the age 60 years old, and 90% premature deaths incidenceoccurs incountries where significant number of population were low income-population. In Indonesia, death related to NCD are growing in an alarming rate, from aproximately 41% at the year 1995, striking 59,5% at year 2007. According to Basic Health Survey of 2007, NCD related deaths ranked number 6 in a top ten Death list.The growing rate of NCD prevalence are to become a serious threat upon national Development, death risk from disease related conditon will negatively impact human resources nationwide, which the effect will surely not limited to health aspect only but expanded to economic aspect.Meanwhile, Posbindu program had not reach its popularity as it should have been. In some region, posbindu visits by locals has decreased. At the study area, existing data showed that, only as much as 10% of the local population was using Posbindu service. In many regions, Posbindu were deemed to merge with geriatric social health care, as the major user was the geriatric population.

Objective: to determine the factors that influence utilization of posbindu

Methods: This study was a cross-sectional study of 120 people in productive age (aged between 18-59 years) including individuals who nevervisit posbindu. In this study there were 3 groups of factors that can affect utilization of posbindu, the predisposing factors (age,sex,education level,occupation, knowledge from cader counsels,understanding about posbindu, awarrness, distance to posbindu, administration fee), and the reinforcing factors (family support, socialization of posbindu). Data were collected from February 2015 through to March 2015.

Results: Respondents who do not utilize posbindu service are as many as 25% while 75% of respondents utilize posbindu. At bivariate analysis, we found several significant relationship between independent variable and utilization of posbindu : age (OR=3.46 ; 95% Confidence interval 0.96-12.43), education level (OR=0.17 ; 95% Confidence interval 0.03-0.772), knowledge (OR=3.82 ; 95% Confidence interval 1.60-9.09), awareness (OR=3.76 ; 95% Confidence interval 1.44-9.82), family support (OR=1.84 ; 95% Confidence interval 0.79-4.27), significant relationship between socialization of posbindu and utilization of posbindu (p=0.000), and also administration fee (OR=4.57 ; 95% Confidence interval 1.88-11.06). Multivariate analysis shows that respondent with higher education tend not to utilize posbindu service (OR=0.17 ; 95% Confidence interval 0.03-0.89), and those who did not mind for administration fee have the greater possibility to utilize posbindu service (OR=3.79 ; 95% Confidence interval 01.33-10.80)

Conclusion: Several factors were conceived as aspects that affected the utilization of the Posbindu, but the level of education and administration fee are more prominent. Necessary efforts

78 Sudharma / OIDA International Journal of Sustainable Development 09:03 (2016)

need to be conducted for people in productive age to promote their health, especially in community participation.

Keywords: Community participation, Non-communicable Diseases,Posbindu,Productive age, Utilization

Introduction

on-communicable diseases (NCD) is the biggest killer in the world,causing more than 60% of global deaths [1,2]. World Health Organization (WHO) estimated thatat 2020 NCD will be the cause of at least 73% mortality rate and 60% of the total morbidity rate.Of the estimated 14.5million total deaths in 2008 in

SEAR, 7.9 million (55%) were due to NCDs. Deaths from NCD are expected to increase by 21%over the next decade. Of the 7.9 million annual NCD deaths in SEAR,34% occurred before the age of 60 years compared to 23% in the rest of the world [3].In Indonesia, death related to NCD were growing in an alarming rate, from aproximately 41% at the year 1995, striking 59,5% at year 2007.[4]

According to Basic Health Survey of 2007, NCD related deaths ranked number 6 in a top ten Death list. In respect of the regional condition and type, in rural area, infectious disease holds the largest percentage mortality rate in the group of 45-54 years old (25%) compared to the urban area (14%), meanwhile NCD related mortality rate is larger in urban area (62%) compared to rural area (48%.). At group age 45-54 years the proportion of NCD is significantly larger compared to the female counterpart. The most common cause of mortality in female group for NCD is Diabetes Mellitus (16%), where the largest mortality cause in male group for NCD is stroke attack (16%) [5]. In conducted interviews, it is shown that there is an increase of hypertension prevalence (this is acquired from asking the survey group whether or not they are diagnosed of hypertension from a medical worker, or in hypertension medication regime) from 7,6 % in 2007 to 9,5% in 2013 (Based on their answers and symptoms). There is also surge in Diabetes mellitus rate(also acquired via interview) from 1,1 % (2007) to 2.1 % (2013) [5,6]. Several factors were already well-known as risk-factors inducing NCD. In public health context, emphasis in any surveillance system should be given to those risk factors that are amenable to modified. Surveillance of just eight selected risk factors (smoking, alcohol, nutrition, physical inactivity, obesity, blood pressure, blood glucose, blood lipids), which reflect a large part of future NCD burden can provide a measure of the success of interventions. [7]

World Health Organization (WHO) central and regional office in collaboration with other member countries have developed an intervention program to control risk factors of major NCDs (cardiovascular diseases, diabetes mellitus, and particular cancer) through an integrated community based program. Process evaluation showed that the Community Based Intervention (CBI) approach brings ‘Posbindu PTM’ as potential activities for NCD control and prevention program. Outcome evaluation resulted that the community based intervention of NCD prevention and control program that had been conducted for three years in Depok, Indonesia, had significantly reduced the prevalence of several common risk factors, such as obesity, hypertension, hyperglycemia, hypercholesterol, and high risk or combined risk factors (having three or more risk factors) and also considerably reduced the prevalence of diabetes mellitus. Meanwhile, smoking, less physical activity, and fruits and vegetable consumption also decreased but not significantly [8].

Posbindu is a form of public participation to conduct early detection and monitoring of risk factors for non-communicable diseases (NCD), and where it was carried out in as an integrated-manner, routine and periodic event. Posbindu itself aimed to promote the community participation in prevention and early detection of risk factors for non-communicable disease (NCD) [9]. Published research about Posbindu is still rare, but preliminary study at the study area, showed that, only as much as 10% of the local population was using Posbindu service. In many regions, Posbindu were deemed to merge with geriatric social health care, as the major user was the geriatric population. The objective of this study is to determine factors associated with the utilization of Posbindu, and limited to internal factors from the study subject.

Methods

The design used in this study was a cross sectional study. The study was conducted in one of the region in the Mampang subdistricts, South Jakarta. South Jakarta was one of the municipality that already have Posbindu running in its subdistricts. Ultimately this particular region was chosen for the reason that posbindu was already carried out as a program for approximately one year.

N

Sudharma / OIDA International Journal of Sustainable Development 09:03 (2016) 79

Inclusion criteria were age 18-59 years old, permanent resident of the district for at least one year, daily mobile activity. Exclution criterias were cadres of Posbindu/posyandu, residents with mental health issues. 120 subjects were chosen according to cluster random sampling and simple random sampling. Factors associated with the utilization of Posbindu in this study were derived from PRECEDE Theory (PRECEDE : Predisposing, Reinforcing, and Enabling Contruct in Ecosystem Diagnosis and environment) and Behavioral Model of Health Services Use (BM) [10.11].

The PRECEDE (Predisposing, Reinforcing, and Enabling Constructs in Educational Diagnosis and Evaluation) framework, categorizes psychosocial variables into 3 main categories: predisposing, reinforcing, and enabling factors. Predisposing factors are antecedents that influence the likelihood of how one will behave and include the individuals' knowledge, attitudes,beliefs, and self-efficacy. Reinforcing factors are incentives following a behavior that may affect the likelihood that this behavior will be repeated over time, such as social support, peer influence, and rewards. Enabling factors help facilitate behavior and include programs, services, and resources necessary for a behavior to occur [10].

Adapted from Green L. http://www.lgreen.net/precede.htm

Behavioral Model of Health Services Use (BM) from Andersen proposed that the use of health care services is a function of three sets of individual characteristics: (i) predisposing characteristics, e.g. age, household size, education, number of previous pregnancies, health-related attitude; (ii) enabling characteristics, i.e. income, characteristics of health care system and accesses, and availability of health facilities; and (iii) need characteristics, i.e. characteristics of illness, perceived health status, and expected benefit from treatments [11].

Dependent variable of this study were : attendence/utilization of Posbindu, meanwhile the independent variable were the predisposing factors (age, gender, education level, occupation, individual’s knowledge of Posbindu, individual’s perception of health),enabling factors (transportation mode to Posbindu, distance to Posbindu, administration fee), reinforcing factors (family support, socialization of posbindu). Interviews conducted by the manner of door-to-door, by trained cadres. The attendance/utilization of Posbindu was considered as done if the local interviewed, have utilized the posbindu as many as once a year to follow through the posbindu activity roster.Univariateanalysis were done by frequency distribution in percentage, bivariate analisis using Chi-square test dan Fisher exact tes. Multivariate test was run using Regresive logistic analysis.

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Result

Table 1 : Characteristic of Predisposing, Enabling and Reinforcing factors

Table 1 shows that majority of respondent is female (78.3%), at age <45 years (76.7%), in the middle-low education (from not educated untill junior high school). There were 55.8% of them unemploye. But 60.8% bave better/sufficient knowledge about Posbindu, and most of the respondent (80.8%) were already awareabout health and prevention (but this was just from their perception about their health, disease and the prevention). Among they who had visited the Posbindu, 87.8% have better understanding of the consultation that made according their health problem. Most of them consider that distance and transportation were not major problems. Not all of them recieved support from the family (just only 64,2% who have support from their family). Majority of the respondent have heard about Posbindu through the socialization of Posbindu. Only 6.7% said that there weren’t any socialization about Posbindu.

Predisposing, Enabling,and Reinforcing factors n % Age 45 - 59 years 28 23.3 < 45 years 92 76.7 Gender Male 26 21.7 Female 94 78.3 Education Higher education 8 6.7 Middle-Lower education 112 93.3 Employment Employe 53 44.2 Unemploye 67 55.8 Knowledge about Posbindu better 73 60.8 less 47 39.2 Health perception aware 97 80.8 unaware 23 19.2 Understanding consultation better 79 87.8 less 11 12.2 Enabling factors Transportation to Posbindu easy 114 95.0 difficult 6 5.0

Distance near 114 95.0 far 6 5.0 Administration fee no reluctance 86 71.7 reluctance 34 28.3 Reinforcing Factors Family support supported 77 64.2 unsupported 43 35.8 Socialization of Posbindu Yes 112 93.3 No 8 6.7

Total 120 100.0


Table 2 : Factors associated with the utilization of Posbindu * significant at < 0.005 b Fisher exact test Table 2 shows that there were some significant relationship that influence utilization of Posbindu (age, education, knowledge about Posbindu, health perception, socialization about Posbindu, and aministration fee), although two of them didn’t support by the 95 % confidence interval (age, and socialization of Posbindu). Seven factors with p value > 0.25 were enter the multivariate analysis through logistic regression analysis. Age, education, knowledge about Posbindu, health perception, family support, socialization of Posbindu, and administration fee were enterlogistic regression analysis to determine which was the factors that most influence the utilization of Posbindu. In table 3, Logistic regression analysis show that only two factors have more prominent significant association with the utilization of Posbindu, namely education and administration fee. They who had middle-lower education have the protective effect to not utilize the Posbindu (OR = 0.178 95% CI 0.03– 0.89) if compare with they who had higher education. They who reluctant to administration fee have probability 3,79 higher to not utilize the Posbindu.

Utilization of Posbindu p

OR

95 % CI Attended Not attended

Age 45 - 59 years

25 (89.3%)

3 (10.7%)

0.046*

3.46

(0.96 – 12.43)

< 45 years 65 (70.7%) 27 (29.3%) Gender Male 19 (73,1%) 7 (26.9%) 0.79 0.87 (0.33 – 2.36) Female 71 (75,5%) 23 (24,5%) Education Higher education 3 (37.5%) 5 (62.5%) 0.011* 0.17 (0.04 – 0.77) Middle and lower education 87 (77.7%) 25 (22.3%) Occupation Employed 39 (73.6%) 14 (26,4%) 0.75 0.87 (0.38 – 2.0) Unemploye 51 (76.1%) 16 (23.9%) Knowledge about Posbindu Better 62 (84.9%) 11 (15.1%) 0.002* 3.82 (1.61 – 9.09) Less 28 (59.6%) 19 (40.4%) Health perception Aware 78 (80.4%) 19 (19.8%) 0.005* 3.76 (1.44 – 9.82) Unaware 12 (52.2%) 11 (47.8%) Transportation Easy 87 (76.3%) 27 (23.7%) 0.164 b 3.22 (0.61 – 16.90) Difficult 3 (50%) 3 (50%) Distance Near 87 (76.3%) 27 (23.7%) 0.164 b 3.22 (0.61 – 16.90) Far 3 (50%) 3 (50%) Family support Supported 61 (79.2%) 16 (20.8%) 0.153 1.84 (0.79 – 4.27) Unsupported 29 (67.4%) 14 (32.6%) Socialization of Posbindu Yes 90 (80.4%) 22 (19.6%) 0.000*b - - No 0 8 (100%) Administration fee No reluctance 72 (83.7%) 14 (16.3%) 0.000* 4,57 (1.89 – 11.06) Reluctance 18 (52.9%) 30 (25.0%)


Table 3 : Relationship between education level and administration fee with utilization of Posbindu

Discussion

In this study the most prominent variable which associated with utilization of Posbinduis education level and administration fee. In this study, Posbindu service seems to be more utilized by group with lower level of education.This fact actually contradicts the theory that suggests the higher level education local group the higher the possibility to attend public health facilities. Chakraborty et all (2003) in her study showed that women withsecondary or higher education are almost 1.8 times more likely to seek treatment from doctors/nurses to treat their antepartum morbidities [12]. But Bovet et all (2008) in his prospective study found no significant association between education level and utilization of health care services following screening for hypertension, although there was a slightly decrease in the attendance regarding the increase of their level of education [13]. In this study, level of education is not always determine people’s behavior, because there is a knowledge that can derived not only for education, but from socialization, because the percentage socialization is high in this study (as much as 93.3% of respondent said there were any socialization about Posbindu in their area, so maybe this can improve their knowledge about Posbindu, althought, there is a fact too, that people with highier education can more easy to receive information/something new [14]. The second problem is administration fee, this study shows they who reluctant to administration fee have probability 3,79 higher to not utilize the Posbindu. Administration fee in Posbindu were used for example to buy stick for glucose blood, cholesterol blood, trigliserid blodd, for IVA examination, and other examination. Actually, not every type of Posbindu has to do the blood examination. Posbindu is classified into 2 groups : basic and main. In basic Posbindu, there’re just early detection for risk factors by doing interview, and by measurements of BMI, abdominal circumference, blood pressure, and there is counceling/consultation about risk factors. In main Posbindu, just like basic Posbindu, and for additional, there are blood examination (blood glucose, cholesterol, trigliserid), Clinical Breast Examination (CBE), sphirometry, urinary amphetamine and alcohol test.

But in the field, usually we found basic Posbindu with additional blood examination, but only blood glucose and cholesterol, and usually, the people who visit Posbindu wants to know their blood examination. Technical guidance book of Posbindu said that Posbindu could cooperate with another sector to do the activity, like local clinic, non government organization (NGO), pharmacy [15], but it depends on the policies and ability of the posbindu and the team to gain the network. Acctually, the examination of risk factors in Posbindu haven’t always do all the time. There are some schedule for examination, like examinations for blood glucose at least every 1-3 years for healthy people, at least every 1-2 years for who have another risk factor for NCD, and at least one in a month for diabetes mellitus patients [4]. But, recording and reporting is still a problem for several Posbindu, so to know the individual schedule sometime could be difficult, even though the government through Ministry of Health has built the instruments for it. As a community participation, Posbindu program has been annaunced by the government through Ministry of Health to be done in Puskesmas (Primary Health Care). They have provide the needs of Posbindu and some regulations, but there must be another efforts, for example periodically training for those in the fields, and clear guidance to maintain the sustainability of the program. As describe above, and from another experience [16,17,18,19], community participation/community base program is an effective program to control risk factors of major NCDs, and it has significant contribute to global health. Health is a central goal and an important outcome of development. Development can only be sustainable if social and economic dimensions are considered at all levels and stages. A community or country cannot be graded as developed on the basis of high per capita income, if its people are illiterate, have poor health status and lack the infrastructure necessary for a healthy lifestyle. Therefore sustainable development should always be measured in terms of social indicators mainly health, reduction of absolute poverty and improvement in the quality of life. Health and poverty reduction has therefore assumed the highest priority on the agenda of most international development agencies [20]. Health promotion is included in one of the new agenda of 17 Sustainable Development Goals with 169 associated targets which are integrated and indivisible [21].

B Sig. Exp(B)

95% C.I.for EXP(B)

Lower Upper

Education(1) -1.728 .036 .178 .035 .892

Administration(1) 1.333 .013 3.791 1.331 10.802

Constant -21.994 .999 .000


Limitation of this study was not included the external factor that influence the utilization of Posbindu, like mentioned above as PROCEED (Policy, Regulating and Resource, Organization, including health education, media, and advocacy), and just limited to narrow area..

Conclusion

This study demonstrated that the main factors associated with utilization in this study were education and administration fee. Education, socialization, and knowledge about Posbindu could help in the utilization of Posbindu. Administration fee should not be the big problem in the term of utilization, but there must be some efforts to be done, either by the authorized or the community.

Acknowledgements

The author would like to thank the Puskesmas and Posbindu Kecamatan Mampang and Co-Assistant (Gita Saraswati, Vita Alfia, R.R.Marina Rizky). This research was supported by a grant of Directorate General of Higher Education, Ministry of National Education of the Republic of Indonesia (Now : Ministry of Research Technology and Higher Education of the Republic of Indonesia).

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About the authors Name Novia Indriani Sudharma

Organization/Institute Department of Public Health, Faculty of Medicine, Trisakti University

Address Jl.Kyai Tapa no.260 Grogol, West Jakarta, Jakarta, Indonesia

e-mail [email protected]

Telephone (021) 5672731 ext 2504

Fax (021)5660706

Mobile phone +628161821438

Previous Publications (If any). Include only latest 3 Publications

(1) Sudharma NI, Kusumaratma RK, Alvina. Qualitative study about men’s awareness to risk factors of non communicable diseases. In : Fahrudin A, editor. Proceeding of the International Multidisciplinary Conference “ASEAN economic community : transformation, policy, partnership and action toward regional prosperity”, 2014 Nov 12-13;Jakarta, Indonesia. Jakarta:UMJ Press 2014.p.453-8

(2) Herwana E, Surjawidjaja JE, Salim O, Indriani N, Bukitwetan P, Lesmana M. Shigella-associated diarrhea in children in South Jakarta, Indonesia. Southeast Asian J Trop Med Public Health, No.2(41),2010

(3) Salim O, Sudharma IN, Kusumaratna RK, Hidayat A.Validity and reliability World Health Organization Quality of life-Bref to assess the Quality of Life among the elderly. Universa Medicina, No.1(26),2007

2. Rina Kurniasri Kusumaratna MD (Indonesian), MSc (Public Health, Indonesian), PhD (Community Nutrition, Indonesian) Addresss Department of Community Medicine / Public Health, Faculty of Medicine Trisakti University, Jakarta – Indonesia Contact No (H) +62 21 722 9406 (M) +62 21 818 127 306


Email: [email protected] or [email protected] EDUCATION

- Keystone Symposia Global Health Travel Award on Human Nutrition, Environment and Health, Beijing, China. October 14-18,2015

- Scholarship on Nutritional Anthropology Workshop 2013 – SEAMEO REFCON UI (Oct 2013) - Scholarship on Scheme for Academic Mobility and Exchange 2012 Programme – Minister of Higher

Education (Oct-Non 2012) - Scholarship Leading for Change in Health Professional Education – Karolinska Institutet Sweden –

BMJ United Kingdom (23-27 May 2011, non-degree) - Scholarship Professional Development - Endeavour Award on Geriatric and Rehabilitation, Royal

Adelaide Hospital (August – Dec 2010, non-degree) - Fellowship of ALA-AUSAID on Health Services Management, University of Adelaide (Nov 2009,

non-degree) - Doctor in Community Nutrition, (Nutrition in Later Life). Community Nutrition, Faculty of Medicine

RCCN-SEAMEO TROPMED, University of Indonesia (2005-2009) - Master in Community Health, (Hospital Management), Faculty of Medicine, Gadjah Mada University

(1992-1994) - MD (Indonesia), Faculty of Medicine, Diponegoro University (1984-1991)

EMPLOYMENT

- 2011 - present - 2009 – present

- Head of Department of Public Health, Faculty of Medicine, Trisakti University

- Chairman of Center of Community Health and Population Studies, Trisakti University

- Chairperson of Research Board of Faculty of Medicine, Trisakti University

- 2010 - 2012 - Coordinator, Task force for Medical Education, Faculty of Medicine, Trisakti University

- 2009 - present - Lecturer at Postgraduate Hospital Management Jakarta branch, Gadjah Mada University

- 2005 – 2007 - Member of Human Medical Ethical Clearance Committee, Faculty of Medicine, Trisakti University

- 2002 -present - Researcher and Reviewer, Center of Community Health and Population Study, Trisakti University

- 1995 - present - Coordinator for Public Health Internship, Faculty of Medicine, Trisakti University

- Senior Lecturer at Public Health Department, Faculty of Medicine, Trisakti University

MEMBERSHIP OF PROFFESIONAL ASSOCIATION

- 1995 - present Indonesian Medical Association (IDI) - 1999 - present Indonesian Epidemiology Network (JEN) - 2001 - present The Indonesian Public Health Association (IAKMI) - 2003 - present Association of Indonesian Clinical Nutrition (PDGMI) - 2012 – present Asia Pacific Problem Based Learning Studies

PUBLICATIONS Occupational Health Abikusno N, Kusumaratna RK. Occupational Hazard of Tofu and Tempe Industry in South Jakarta Proceeding of International Conference on Occupational Health and Safety, 1997: 218-221


Abikusno N, Kusumaratna RK .Occupational Health and Safety Profile of a Fluor Mill in Jakarta J Penelitian & Karya Ilmiah Lembaga Penelitian Universitas Trisakti No.7, 1999 Kusumaratna RK .Occupational Health and Safety Profile of a men’s underware factory in Jakarta J Kedokter Trisakti, No.2 (24), 2002 Kusumaratna RK, Abikusno N.Occupational Health profile of informal crispy (krupu) and cow skin crackers in South Jakarta.J Kedokter Trisakti, No.2(20),2001:66-73 Public Health Kusumaratna RK .Traffic Accidents: Definition, Causes and Prevention . Widya, April 1998, No.151. Kusumaratna RK .Community Evaluation on High Rise Building: Case study in Rusun Kemayoran (unpublish – report paper) Hidayat A, Abikusno N, Kusumaratna RK Building Healthy Cities Through Healthy and Civilized Behavior for Healthy Indonesia 2010. J Kedokter Trisakti, No.2 (22), 2003 Kusumaratna RK. Family income, antenatal care, nutrition and iron supplementation factor influencing pregnant women in Cilandak South Jakarta. J Penelitian & Karya Ilmiah Lembaga Penelitian Universitas Trisakti No.5, 1998 Kusumaratna RK. Reproductive Health Knowledge of High School Students in South Jakarta. Proceeding of Temu Tahunan JEN IX, Jakarta Nov 6-9,2000 Kusumaratna RK. Management of health : before and after flooding disaster at Jakarta. J Kedokter Trisakti,No.3(22),2003, 92-98. Koh GC, Abikusno N,Kwing CS, Yee WT, Kusumaratna RK, Sundram M,Koh K,Eng CS, Koh D. Aviam influenza and South Jakarta primary healthcare workers: a controlled mixed-method study. Trop Med Int Health,14(7),2009:817-829 Halliday D, Mahmood MA, Soerjoasmoro MA, Kusumaratna RK , Masitah, Raheel H. Adequate visits, inadequate service: comprehensiveness of ANC in Samarinda & Balikpapan, East Kalimantan .Pak J Public Health 2013,3(1):34-8 Community Participation Abikusno N, Kusumaratna RK .Evaluation of Community Participation in Health Funding J Kedokteran Trisakti, No.2 (19), 2000 Medical Education Tan SB, Koh GCH, Ding YW, Malhotra R, Ha TC, Pietrobon R, Kusumaratna RK, Tie RN, Cunha G, Martins H, Seim A, Altermatt F, Biderman A, Puoane T, Carvalho E, Østbye T. Inclination towards a research career among first year medical students: an international study. South East Asian Journal of Medical Education. 2011; 5(2): 49-59. Gerontology Abikusno N, Kusumaratna RK .Characteristic of Elderly Club Participants of Tebet Health Center South Jakarta. Asia Pacific Jurnal Clinical Nutrition, 1998; 7(3):320-324 Abikusno N, Kusumaratna RK .Empowerment of the elderly in Informal sector. Proceeding of WHO symphosium, Kobe Nov 10-13, 1999 Kusumaratna RK, Abikusno N.Evaluationof Older Person Health Promotionin Health Centers in South


Jakarta. J Penelitian & Karya Ilmiah Lembaga Penelitian Universitas Trisakti No.9, 2000 Kusumaratna RK. Review paper : Nutrition and immune system in the elderly. Universa Medicina, No.3 (25),2006 Salim O, Kusumaratna RK, Sudharma IN .Knee-height as a predictor of height in the elderly Universa Medicina, No.1(25),2006 Kasran S, Kusumaratna RK .Pain Management in the elderly (auth). Jurnal Universa Medicina, No.1(25),2006 Salim O, Sudharma IN, Kusumaratna RK , Hidayat A.Validity and reliability World Health Organization Quality of life-BREF to assess the Quality of Life among the elderly. Universa Medicina, No.1(26), 2007 Kusumaratna RK ,Salim O,Hidayat A.Status zinc dan selenium pada masyarakat lanjut usia di DKI Jakarta. In: Gambaran Kesehatan pada Masyarakat lanjut usia di DKI Jakarta dan hubungannya dengan determinannya. Monograf Fakultas Kedokteran UNIKA Atmajaya 2007: 89-97. Kusumaratna RK ,Salim O, Sudharma IN.Dietary zinc intake and zinc status differences between male and female elderly of South Jakarta. Universa Medicina, No.4(26),2007 Kusumaratna RK .Impact of physical activity on quality of life in the elderly. Universa Medicina No.2(27), 2008 Kusumaratna RK .Gender differences in nutritional intake and status in healthy free-living elderly.Universa Medicina No.3(27), 2008. Kusumaratna RK, Hidayat A .Body mass index and quality of life among the elderly Universa Medicina No.1(28), 2009.

Name Meiyanti

Organization/Institute Department of Pharmachology, Faculty of Medicine, Trisakti University

Address Jl.Kyai Tapa no.260 Grogol, West Jakarta, Jakarta, Indonesia

e-mail [email protected]

Telephone (021) 5672731 ext 2504

Fax (021)5660706

Mobile phone +628558000182


The Influence of Internal Factor on Financial Performance and Firm Value: Evidence from Property and Real Estate

Companies Listed in Indonesia Stock Exchange

Tsabita Karima a

a University of Trisakti, Jl. Kyai Tapa No.1 Grogol, West Jakarta, Indonesia. Corresponding author: [email protected]

© Authour(s)



Abstract: Agency problem often arises because of the separation between the functions of ownership and control within the agency relationship. The relationship between the owner and this managerial influence on strategic decisions that will be taken for example in the case of dividend policy agency problem may arises because of a conflict or difference of interest between principal and agent in a decision making. Therefore, required good corporate governance for improve firm performance. One of the other important decisions faced by financial managers relating to operational activity is funding decisions. The company need funds to finance the operation activity, investment or the other. The company have to make the best combination of capital structure (optimal) in order to avoid the high cost of capital which is may lead to low level of profitability and firm value.

This study aims to analyze the relationship between Corporate Governance, Capital Structure and Dividend Policy on and Firm Value, with Financial Performance as an intervening variable. Population in this study is property and real estate companies listed in the Indonesia Stock Exchange period 2011-2013 represented by the audited company’s financial statement and historical data of stock prices in Indonesia Stock Exchange (secondary data). Sampling technique using purposive sampling method. The samples used 18 companies that already fit with the criteia of sampling. Hypothesis testing using Partial Least Square (PLS).

This study finds out that there is no relationship between corporate governance and financial performance. These findings consistent with the Stewardship Theory that the Agency Theory by Jansen and Meckling (1976), cannot be applied in every situation, there are another models of behavior and managerial motivation that comes from psychological or sociological. Furthermore, statistical tests shows that capital structure is positively related with financial performance, this result does not confirm the Pecking Order Theory that is supported by Myers (1987), stating that the debt has a negative impact on financial performance, meaning that the higher the debt progressively the worse the financial performance of the company. As well as the third hypothesis, dividend policy is also positively significant with financial performance. The company's dividend policy would provide information to the market or investors about the company's financial condition. These results support the Signaling Theory by Spence (1973).

The firm value could be achieved if the company can reach the profit targeted .This finding confirm MM Theory stating that affecting firm value is profits and risks business. Hypothesis testing results for financial performance variable negatively significant on firm value. Thus the hypothesis is accepted.

Keywords : Corporate Governance, Capital Structure, Dividend Policy, Financial Performance, Firm Value.

90 Karima / OIDA International Journal of Sustainable Development 09:03 (2016)

Introduction

ne of the industries that are considered as an indicator of economic growth of countries is property and real estate sector. Table 1 shows the tax revenue yang related with property and real estate business such as Income Tax, Value Added Tax, Luxury Sales Tax. Besides, this sector also contributing to the Gross

Domestic Product (GDP) that is received by the state from year to year. But on the other hand, the rampant property and real estate development feared to be “bubble property”, such as the crisis in the United States and Vietnam at the last 2008. This crisis started from the loss occurring in subprime mortgages which affected the financial sector in the United States. Schreiben (2013) stating that Indonesia was listed as one of the countries experiencing high acceleration of industrial property, in addition to China, India, Russia, and Brazil. Proven with 2012 Indonesia would rank seventh after China, USA, India, Russia, Brazil and England . It can be at hreat to company sustainability and will impact on economic stability for developing countries.

Table 1: Realization of Tax Income According to The Type of Tax, Indonesia, Year 2011-2013 (In Billion Rupiah)

No Type of Tax

2011 2012 2013

1 Income Tax (Gas and Oil) 73.09 83.46 80.06 2 Income Tax (Non Gas and Oil) 358.02 381.29 416.14 3 Value Added Tax and Luxury Sales

Tax 277.80

337.58 360.70

4 Land and Building Tax 29.89 28.96 25.79 5 Excise 77.01 95.02 101.86 6 Other Tax 3.92 4.21 5.06 7 International Trade Tax 54.09 49.65 41.71 Total 873.82 980.17 1,040.32 Source : Data Processed from pajak.go.id

Table 2 : Percentage Distribution of Gross Domestic Product at Current Market Prices By Industrial Origin, 2000-

2013

Industrial Origin 2011 2012 2013 Total Total Total

1. Agriculture, Livestock, Forestry and Fishery 14.71 14.50 14.42 2. Mining and Quarrying 11.82 11.81 11.29 3. Manufacturing Industry 24.34 23.96 23.69 4. Electricity, Gas & Water Supply 0.75 0.76 0.77 5. Construction 10.16 10.26 9.98 6. Trade, Hotel & Restaurants 13.80 13.96 14.32 7. Transport and Communication 6.62 6.67 6.99 8. Finance, Real Estate and Business Services 7.21 7.27 7.52 a. Bank 2.24 2.32 2.48 b. Non-Bank Financial Institutions 0.95 0.97 1.00 c. Services Allied to Finance 0.05 0.06 0.06 d. Real Estate 2.59 2.55 2.56 e. Business Services 1.38 1.38 1.43 9. Services 10.58 10.81 11.01 Gross Domestic Product 100 100 100 Gross Domestic Product Without Oil and Gas 91.60 92.21 92.65

Source : Data Processed from bps.go.id

The company's main goal is to maximize firm value. This goal not only of interest for the shareholders, but will also provide the best benefits for the public (Keown et al. 2004). The value of the companyis usually reflected inthe share price. In most important business decisions, there are two key financial considerations namely risk and return. Each

O

Karima / OIDA International Journal of Sustainable Development 09:03 (2016) 91

financial decision presents certain risk and return characteristics, and the combination of these characteristics can increase or decrease a firm’s share price. In line with the share price, PER is also one ratio used by investors to assess whether the company was classified as bonafide company or not. Indirectly, by looking at theshare price and earnings ratio of listed companies on the stock price, investors can determine the length ofreturn onthe investmentthat has beeninvested inaany particularstock. In essence, themarket valuationis categorizedas afirmvalueis also affectedby thefinancialperformance ofthe company it self. The better thefinancial conditionof a company,the better the effect in improving firm value.

The corporate governance is a mechanism that stimulates the self-interested managers to make decision that maximizes the shareholders wealth. The managers are the controller of the firms who make decision on the behalf of owners of the firm. For the manager, Improving financial performance is also a must for the company sustainability. Managers are expected to be successful in dealing with developing corporations’ purposes , investmen, managing risk and return and creating value for shareholders. But in fact, the manager often faced a problem related to the owners. The conflict of interest between owners and managers has caused by the separation between the functions of ownership and control. The relationship among the owner and managerial influence on the decision making strategy that will be taken. In the case of dividend policy may arises agency problem because of a conflict or difference of interest between principal and agent in a decision making. Therefore, good corporate governance required for improve firm performance. Good corporate governance in the company are considered necessary in order to achieve the optimal profit and increase firm value. Furthermore, when the financial performance is affected by corporate governance structure, then shareholders need more controls to be performed on managers that aim to increase the consequences of conflict of interest.

The implementation of corporate governance should be run in accordance with the principles of corporate governance as stipulated in the legislation applicable in Indonesia. Companies that apply the principles of corporate governance more considered toi nvestors than companies that do not apply the corporate governance because companies thatapply the principles ofcorporate governanceare considered to bemore transparent, credible, independent, and accountable. Professional commissioner is an important issue that must be owned by every company to create the good corporate governance. Professional commissioner is the commissioner who has the integrity .The main responsibility of the board of commissioners is to monitor managerial performance and achieve the level of reciprocity (return) sufficient for shareholders. On the other hand, the board also must prevent conflicts of interest and balance the various interests in the company. Independent commissioner must not come from shareholders, not part of the board members or members of the board of directors (and Dewi Yonedi 2008 in Sekaredi). Manohar (2001) stating that the influence of board size and composition may have on board involvement in corporate affairs. The size and composition of the board may affect its ability to be an effective monitor and guide. According to Fama and Jensen (1983) independent commissioner is the best position to carry out oversight functions in order to create good corporate governance.

Corporate governance also requires an independent audit committee to standards of good corporate governance. A company’s audit committee should annually review the management program to monitor compliance with the code of corporate conduct. The practitioners argue that audit committees are not significant enough to solve conflicts with management. It is generally accepted that for an audit committee to be effective, a majority, if not all members should be independent (Cadbury, 1992) and ideally should have knowledge in accounting, auditing and controling (Cohen, et al. 2000,Seow & Goodwin, 2000).

The dividend payout of firm’s is important not only the offers source of cash flow to the shareholders but also information relating to firm’s current and future performance. Making the right decision and payment of dividend policy is necessary to maximize firm’s value and shareholder value. The company’s managers should be based shareholder preferences. Investors prefer to have the company distribute income as cash dividends or to have the company repurchase stock or reinvestment, both of which should result in capital gain. Gordon (1963) and Lintner (1956) in Imran et al., (2013) explained that dividend payments can positively change the performance of the firm.

The company needs funds to finance the company's operations, investments or other interests. One of the most important decisions taken by financial managers related the continuity of operations is a decision funding. The Company may be funded with debt and equity. The composition of the debt and equity is reflected in the structure of capital. manager should be able to raise both sourced from within the company and outside the company efficiently. Financial managers must pay attention to the cost of capital. Cost of capital arising from a funding decision a direct consequence of the funding decision performed by the manager. Capital structure minimizing the cost of capital will


maximize the company's stock price. funding decisions is done carefully not to be raises fixed costs in the form of capital costs high which in turn can result in the low profitability of the company

Previous studies related to the influence of corporate governance capital structure, dividend policy on financial performance and firm value give some inconsistent results and therefore they are inconclusive. Chan and Li (2008) have been conducted the research using independent audit committee as an indicator for corporate governance on ROE for an indicator for firm financial performance, and the results indicate that independent audit committee positive significant influence ROE. The same result from Fulop (2013) is the structure of the Audit Committee is directly correlated to ROE, suggesting that an increase of non-executive members of the Committee will determine an increase in the ROE.

Those findings are in contrast with the result from Rouf (2012) that examined the relationship between four corporate governance mechanisms (board size, board independent director, chief executive officer duality and board audit committee) and value of the firm (performance) measures (return on assets, ROA and return on equity, ROE) and the result is positive significant relationship between ROE and board independent director as well as chief executive officer duality. However, this studi could not provide a significant relationship between the value of the firm (ROA and ROE) and board size and board audit committee. In line, the research conducted by Hsu (2007) found that there is no any relationship between audit committee independence and performance. Another finding is found audit committee independence (ACIND) to be insignificantly related to performance (Yayah, Abdullah, Faudzsiah, and Ebrahim, 2012).

Besides, Abdillah, et al (2015) with population is the company listed as the winner of annual report award for the period 2010-2012 at the IDX with 21 companies sampled for 3 periods with 37 observation data. The results of this study show that, the composition of independent board of commissioners does have a significant negative effect on ROA, disclosure does not have a significant effect on ROA, the composition of independent board of commissioners does not have a significant effect on ROE, disclosure does have a significant negative effect on ROE. Another research that examined the relationship between the independence of the board of directors and earnings management in Indonesia showed inconsistent results. Researchers using data before SK Bapepam-LK and the JSE published (among them, Kusuma and Susanto, 2004; Siregar and Bachtiar, 2004; Herman and Sulistyanto 2005; Siregar and Utama 2005) failed to find a significant relationship. Those inconsistent of the result of research, this study aims to analyze the relationship between Corporate Governance, Capital Structure and Dividend Policy on and Firm Value, with Financial Performance as an intervening variable

Literature Review

Corporate Governance. Agency problem usually exist in companies with dispersed shareholders and the owner can not directly control the company. Shareholders (principals) that spreads prefer to hire someone else or managers (agents) to manage the company, which then raises the relationship principals-agents. Principal-agent relationship gave rise to agency problems (Cheffin 2003: 4). This is considered as the basis of the concept of corporate governance.

Agency Theory. Agency theory talks about the conflict caused of different interests in the same assets. This means most importantly the conflicts between shareholders and managers. Institute corporate governance in Malaysia, namely the Finance Committee on Corporate Governance (FCCG), defines corporate governance as a process and structure used to direct and manage the business and activities of the company toward increased growth in the business and corporate accountability (Effendi, 2009). Jensen and Meckling (1976), defines the agency relationship as a contract in which principals involve agent to perform certain services on their behalf for some decision-making authority to the agents. Principals may deter deviation of agents by setting appropriate incentives for agents and by providing monitoring costs designed to limit the habit of deviant activity by agents and to ensure that the agent will not take certain actions that would jeopardize the principal.

Stewardship Theory. according to the Raharjo (2007) Stewardship theory assumes a strong relationship between an organization's success by the satisfaction of the owner. Steward will protect and maximize the wealth of the organization with company performance, so that the utility function to be maximized. The crucial assumption of stewardship is the manager straighten purpose consistent with the objectives of the owner. However, it does not mean steward does not have a priority need..” Raharjo’s State (as cited in Donaldson & Davis, 1989, 1991) Teori Stewardship mempunyai akar psikologi dan sosiologi yang didesain untuk menjelaskan situasi dimana manajer sebagai steward dan bertindak sesuai kepentingan pemilik.


Capital Structure. From all the important aspect of financial decision, the capital structure decision is one of the most vital since the profitability as a reflector of firm’s financial performance is directly influenced by such decision. Proper care and pay attention need to be given while determining the capital structure decision Capital structure refers to the way a firm is financing its assets through a combination of equity and debt (Titman and Wessels, 1988). According to Devic and Krstic (2001) “Capital structure is expressed as ratio of long term liabilities to the sum of long term liabilities and firms equity”. From Gitman (1991), “capital structure is the mix of long term debt and equity maintained by the firm”.

According to Myers (1984) “capital structure is subject to influence growth opportunities due to the problem of lack of investments”. Further more, from those definitions can conclude that capital structure is define as the mix or combination between debt and equity that the firm uses in its operational activity to optimize the performance of firm and to stockholder wealth. In the capital structure literature, there are several of theories that support the capital structure, namely the Trade-off Theory and Pecking Order Theory. Pecking order theory states that companies prioritize their sources of financing – at first they prefer to use internal funds, then to borrow, and at last to issue equity as the last choice. Consequently there is no clear target debt-equity mix (Myers and Majluf, 1984). Trade-off theory argues that company chooses debt and equity mix by balancing the benefits and costs of debt. If company increases its leverage, the tax benefits of debt increase, as well. At the same time, the costs of debt also rise (Kraus and Litzenberger, 1973).

Pecking Order Theory. The capital structure theory was introduced by Myers and Majluf (1984) known as the Packing Order Theory. This theory reveals that firms in determining its funding policy will pay attention to the cost incurred for each funding source options. This theory is based on the asymmetry of information between company management and shareholders in determining the investment policy and dividend distribution. There exist asymmetric information theories that there is a certain pecking order or hierarchy of firm preferences with respect to the financing of their investments. This “pecking order” theory suggests that firms will initially rely on internally generated funds, i.e., undistributed earnings, where there is no existence of information asymmetry; they will then turn to debt if additional funds are needed, and finally they will issue equity to cover any remaining capital requirements (Myers, 1984). According to Myers (1984), Pecking Order Theory States that ” firm with a high level of profitability is precisely the level of debt is low, due to the high profitability companies have abundant internal funds”. Myers (1984) preferred the company of internal capital funding, i.e. funds that come from cash flow, profit retained and depreciation. Pecking Order Theory assumes that the company aims to maximize the shareholders’s welfare. The company strives to publish the first securities from internal, retained earning, then low-risk debt and equity last (Myers, 1984; Myers and Majluf, 1984). Pecking Order Theory predicts that external funding is based on internal funding deficit (Sham-Sunder and Myers, 1999). In pecking order theory there is no optimal capital structure. Specifically, company has its own preference ( a hierarchy ) in the use of funds. According to pecking order theory as quoted by Smart, Megginson, and Gitman ( 2004: 458-459 ), there are scenarios sequences ( a hierarchy ) in choosing funding sources, at first they prefer to use internal funds, then to borrow, and at last to issue equity as the last choice. In fact, there are enterprises that uses funds for the needs of investments is without following the scenario of the order (hierarchy) mentioned by the pecking order theory. Research conducted by Singh and Hamid (1992) and Singh (1995) States that “corporations in developing countries prefer to issue equity rather than debt in financing the company”.

Modigliani & Miller Theory (MM Theory). Modigliani & Miller (1958) published the leverage irrelevant theory, stated that in perfect market, leverage has no impact on financial performance. Some researches support to this theory are Aggarwal and samwick (1999), Chen and Ho (2000), Chen and Steiner (2000), Mishra, et al (2001), Andres et al (2005), Amidu (2007), Garay and Gonzalez (2008), Ye and Yuan (2008), and Florackis et al (2009). MM theory (1963) with the tax assumptions stated that the imperfect competition markets use debt will be able to increase the financial performance of a company because interest paid is able to reduce the tax. Some researchers who support the research are Miguel et al (2004), Byun et al. (2007), and Chen, et al (2008). MM theory further said that value of the company with debts is higher than that of the company without debt.


Dividend Policy . Making the right decision and payment of dividend policy is necessary to maximize firm’s value and shareholder value. The company’s managers should be based shareholder preferences. Investors prefer to have the company distribute income as cash dividends or to have the company repurchase stock or reinvestment, both of which should result in capital gain. Pandey (1999) in Ashamu (2012) stated firmly that Dividend policy is a decision by the financial manager whether the firm should distribute all profit or retain them or to distribute a portion and retain the balance. Dividend policy is an important aspect of corporate finance and dividends are major cash outlays for many corporations. Dividend payout ratio (DPR) represents the dividend policy because of the essential a decisive portion of profits to be distributed to shareholders, and which will be retained as part of retained earnings (Miller and Modigliani, 1961 in Saxena, 1995).

Signaling Theory . Spence (1973) developed a signaling theory to explain the problems of information gaps in the labor market. Signal theory to discuss the urge companies to provide information to external parties. The impetus is caused due to the asymmetry of information between management and external parties. To reduce the asymmetry of information that companies must disclose information. Information is an important element for investors and businessmen because the information is essentially presenting the information, record or good overview of the state of the past, present and future circumstances for the survival of a company and how the market effect. One of them is information about the distribution of shares to shareholders, at the time the information was announced and all market participants have received such information, market participants beforehand interpret and analyze that information as signals (good news) or the signal is bad (bad news).Actually, There is no general agreement whether dividends should or should not be paid but according to the signaling theory, “Firms that pay dividends seem to maintain a relatively stable dividend, either in terms of a constant or growing dividend payout or in terms of a constant or growing dividend per share. And when firms change their dividend either increasing or reducing (cutting) the dividend the price of the firm’s shares seems to be affected.” (Fabozi and Peterson, 2003: 559).

Materials and Methods

Mugo (2009) said “A research population is a group of individuals, persons, objects, or items from which samples are taken for measurement”. Populations used in this research are 43 property and real estate companies which have been listed in Indonesia Stock Exchange (IDX) since 2011 until 2013. The sampling technique used in this research is a non-random sampling, with the purposive sampling technique based. the criteria on sample selection consideration are described as follows ; Property and real estate companies listed in the IDX are constantly registered during 2011-2013, Property and real estate companies listed in the IDX in 2011-2013 which published financial statement using date December 31th as the end of annual accounting period, Property and real estate companies listed in the IDX in 2011-2013 which record profit constantly and Property and real estate companies listed in the IDX in 2011-2013 which share the dividend at least 2 years during 2012-2013. Based on the considerations, it can be identified as much as 18 companies which is fit to those criterias. Next page


Table 3 : The Sample List

No Name of Company

1 PT Agung Podomoro Land Tbk. (APLN)

2 PT Alam Sutra Realty Tbk. (ASRI)

3 PT Bekasi Fajar Industrial Estate Tbk. (BEST)

4 PT Bumi Serpong Damai Tbk. (BSDE)

6 PT Ciputra Development Tbk. (CTRA)

6 PT Ciputra Property Tbk. (CTRP)

7 PT Ciputra Surya Tbk. (CTRA)

8 PT Intiland Development Tbk. (DILD)

9 PT Gowa Makassar Tourism Development Tbk. (GMTD)

No Name of Company

11 PT Jaya Real Property Tbk. (JRPT)

12 PT Lippo Karawaci Tbk. (LPKR)

13 PT Metropolitan Kentjana Tbk. (MKPI)

14 PT Metropolitan Land Tbk. (MTLA)

15 PT Plaza Indonesia realty Tbk. (PLIN)

16 PT Pudjiadi Prestige Tbk. (PUDP)

17 PT Pakuwon Jati Tbk. (PWON)

18 PT Summarecon Agung Tbk. (SMRA)

Source: Secondary Data Processed

The purpose of this study is to investigate and explain the influence of three independent variables: The first variable represents corporate governance (CG), the second variable is Capital Structure (X2) and the third variable is Dividend Policy (X3). Dependent variable is Firm Value (Z1), as well as intervening variable is Financial Performance (Y1). The Operationalization of variable shown in table 2. The type of research in this study is explanatory research, which is describes the relationship between variables and test the hypotheses that have been in previous formulations. The hypothesis testing in this study is using Partial Least Squares (PLS) analysis. PLS is a specific problem in the data, such as small sample size, the missing data (missing values) and multi co-linearity (Jogiyanto, 2009). Partial Least Square (PLS) will be used to test the research model. The PLS is used to test the research model because the research model in this research is structural with formative and reflective indicators. According to Henseler (2009) PLS have several advantages: 1) PLS path modeling can be used when distribution is highly skewed, 2) PLS path modeling can be used to estimate relationship among latent variables with several indicators, 3) PLS can handle both formative and reflective measurement models, 4) PLS can be used in either small or large data. Research model in this research is structural with formative and reflective arrow for the relation of indicators on latent variable.

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Table 4 : The Operationalization of Variable

No Variable Indicator Source Measurement

1 Independent Audit Committee

(X1.1)

Coleman (2007) Reddy et al.,(2010) Kumar (2001)

The number of Independent Audit Committee

The Total number of Audt Committee

Corporate Governance

(X1)

Independent Commissioner

(X1.2)

Coleman (2007) Reddy et al.,(2010)

Susy and Tri (2013) Eberhart (2012) Hoque et al (2012) Pandya (2011) Ferrer and Reynald (2012) Kumar (2001)

The number of Independent Commissioner

The Total number of the Board of Commissioner

Institutional Ownership (X1.3)

Coleman (2007) Reddy et al.,(2010)

The number of Institutional Share The Total number of outstanding share

Managerial Ownership (X1.4)

Coleman (2007) Reddy et al.,(2010 Faccio and Lasfer (1999) Demsetz and Villalonga (2001)

The number of BOD and BOC share The total number of share

2

Capital Structure (X2)

Debt Ratio (X2.1)

Fabozzi and Peterson (2003) Brigham and Houston (2006) Arthur Et Al (2010) Chinaemerem and Anthony (2012) Zeitun dan Tian (2007) Ebaid (2009), Coleman (2007).

Total Debt Total Asset

Long Term Debt to Equity (X2.2)

Bokpin (2009)

Long Term Debt Total Equity

3

Dividend Policy (X3)

Dividend Payout Ratio (X3.1)

Peerden (2011) Murhadi (2013)

Dividend per Share Earning per Share

Dividend Per Share (X3.2)

Total Distribute Profit The Number of Outstanding Shares

4

Financial Performance

(Y1)

Return on Equity (Y1.1)

Fridson and Alvarez (2002) Fabozzi and Peterson (2003) Chinaemerem and Anthony (2012)

Net Profit After Taxes Total Equity

Net Profit Margin (Y1.2)

Zeitun dan Tian (2007) Net Profit After Taxes Total Revenue


Return on Asset (Y1.3)

Brealy and Meyers (2003) Fabozzi and Peterson (2003) Cho dan Pucik (2005)

Net Profit After Taxes Total Assets

5 Firm Value (Z1) P/Book Value

(Z1.1)

Fridson and Alvarez (2002) Fabozzi and Peterson (2003) Chinaemerem and Anthony (2012) Norton (2003)

Price Earning Ratio (Z1.2)

Fridson and Alvarez (2002)

Fabozzi and Peterson (2003)

Chinaemerem and Anthony (2012) Norton, (2003) Kravchenko dan Yusupova (2005) Zeitun dan Tian (2007).

Price Earning Earning Per Share

Closing Price (Z1.3)

Norton, (2003) Patell (1976).

Share Price

Source: Secondary Data Processed

The formative arrow because the characteristic of indicators are composite and the indicators do not have same domain (Hair et al., 2011). In addition, Hair et al. (2011) stated that formative arrow in Partial Least Square means the indicators are a group that simultaneously formed the value of latent variable. While the reflective arrow because the indicators have same domain and those indicators are reflection of the latent variable. The droping one indicator in reflective indicator will not change meaning of latent variable. The outer model of PLS explains the relationship among indicators and latent variable. There are several parameters to determine the kind of outer model. Table 5 describes several parameters that can be used to determine the outer model of PLS.

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Table 5 : The Parameters to Determine the Outer Model of PLS

Parameters Formative Revlective

Characteristic of indicators Composite Common factor (same domain)

The measurement model assumed

Multiple regression method Single regression method

The error term In the construct In the indicators

Do the indicators can be interchangeable?

Indicators cannot be interchangeable due to indicators have different domain or meaning.

Indicators can be interchangeable due to indicators have same domain or meaning.

Are indicators forming or manifesting?

Indicators are forming the construct

Indicators are manifesting the construt.

The arrow for the relationship of indicator to latent variable

The arrow flow from the indicators to latent variable

The arrow flow from the latent variable to indicators.

Source: Hair et al. (2011) and Sarstedt et al. (2014).

The equations of outer model in this research is divided into two kinds there are formative indicators and reflective indicators. The equations are reported below:

1) Reflective Indicators: X1= λX1ξ1 + δ1 (equation 1) X2= λX2ξ1 + δ2 (equation 2) X3= λX3ξ1 + δ3 (equation 3) X4= λX4ξ1 + δ4 (equation 4)

Where (X) is indicator for the exogenous latent variable (ξ). While (λ) in this case is simple regression coeficient that connected among latent variable and its indicators. The residual which is simbolized by (δ) can be interpretated as error measurement.

2) Formative Indicators:

ξ1CS = λ X2.1+λ X2.2 + δ1 (equation 5) ξ2DP = λ X3.1 + λ X3.2 + ε1 (equation 6) η1FP = λ Y1.1 + λ Y1.2 + λ Y1.3 + ε1 (equation 7) η2FV = λ Z1.1 + λ Z1.2 + λ Z1.3 + ε1 (equation 8)

Where (ξ) is exogenous latent variable, (η) is endogenous latent variable, λX is loading factor for exogenous latent variable, λY is loading factor for endogenous latent variable, (δ) is measurement errors for indicators of exogenous variable, and (ε) is measurement errors for indicators of endogenous variable. Hair et al. (2011) stated that in the structural model, the indicators should be valid or significant to measure the construct. If any indicator is not valid, then the indicator should be dropped out from the model.

The relationship between latent variables can be seen on inner relations of PLS. The equation models for inner relation are reported as follow:

η1 = γ1ξGCG + γ2ξCS + γ3ξDP + δ1 (equation 9) η2 = β1 η1+ δ2 (equation 10) Where η is endogenous latent variables, ξ is exogenous latent variables, β is coefficient the impact of endogenous variable on endogenous variable, and δ is vector of residual variables.


The inner and outer models provide specifications which be followed by estimation of weight relation in PLS algorithm. Values for each case the latent variables in PLS were estimated as follows: ξb = Σkbwkbxkb (equation 11) ηi = Σkiwkiyki (equation 12) Where the Wkb and Wki are k weight that be used to form estimation the latent variables of ξb and ηi. Estimation of latent variable is a linear aggregate of indicators that weight values obtained by PLS estimation procedures. According to Hair et al. (2011) the evaluation of structural model in PLS is evaluated with used Q2 value (predictive relevance). The equation for the calculation of the Q2 is showed in equation 8.

Q2 = 1 – (1 – R12) (1 – R2

2) (1 – R32) (1 – R4

2) (equation 13)

The research model in PLS was evaluated by outer models and inner models. Testing the significance both outer model and inner models were conducted by bootstrapping procedure. Outer model is a measurement model to assess the validity and reliability. If outer loading is equal or greater than 0,5 so that the indicator is valid, or the indicator has t-statistic greater than 1.96, the indicator is valid or significant at the significance level of 5% (Hair et al., 2011). In inner models, if t-statistic value is greater than 1.96, it means the relationship between latent variable is significant at the significance level of 5%.

Results and Discussion The summary of the main descriptive statistic is reported in Table 6.

Table 6 : Summary of the main descriptive statistic

N Minimum Maximum Mean Std. Deviation

IAC 54 0 1 0,3709 0,17915 ICS 54 0,2 0,75 0,4181 0,13005 IOW 54 0,07 0,96 0,6098 0,22238 MOW 54 0 0,31 0,0267 0,07413 DR 54 0,16 0,74 0,4581 0,1404 LDTE 54 0,1 2,27 0,5526 0,40334 DPR 54 5,03 372,15 38,0713 63,75263 DPS 54 1,45 205 27,2124 40,42035 ROE 54 0,02 0,3 0,1472 0,07115 NPM 54 0,02 0,56 0,2839 0,10986 ROA 54 0,01 0,22 0,0748 0,04124 BV 54 3,2 8 6,0024 1,08375 PER 54 1,04 70,96 14,4331 12,19319 CP 54 4,61 9,16 6,5911 0,93357 Valid N (listwise) 54

Notes 1) The sample is the “company sector in the period of 2011-2013 2) IAC : Independent Audit Committee

ICS : Independent Commissioner IOW : Institutional Ownership MOW : Managerial Ownership DR : Debt Ratio LDTE : Long Term Debt to Total Equity DPR : Dividend Payout Ratio DPS : Dividend Per Share ROE : Return on Equity


NPM : Net Profit Margin ROA : Return on Assets BV : Book Value PER : Price to Earning Ratio CP : Closing Price

The empirical results with PLS estimations can be presented in 3 steps. The first step, we provided the outer model of PLS for overall model is reported in Figure 1. The second step, we provided the outer model of PLS after model fit is reported in Figure 2. The third step, we provided the inner model of PLS to evaluate the relationship between latent variables. The inner model of PLS is reported in Table 7.

Evaluation of the Outer Model. The evaluation of outer model in PLS aim to find out the indicators which valid and significant to measure latent variables. Outer model is a measurement model to assess the validity and reliability of the model. As showen in figure 1 there are two indicators significant to measure GCG variable. The two indicators that were Independent Audit Committee (IAC) and Independent Commissioner (ICS) that have outer loading 0,66 and 0,783 respectively. The positive value means that the increase of GCG will reflect on the increase of IAC and ICS. In this case, IAC and ICS are reflection of GCG because the relationship among those indicators on latent variable is reflective. Two indicators of GCG had eliminated from the model there were Institutional Ownership (IOW) and Managerial Ownership (MOW). These indicators were dropped from the model because the outer loading lower than 0,5 there were -0,47 and 0,18 respectively.

Capital structure consisted of two indicators there were debt ratio and long term debt to total equity. However, the only one indicator that valid to measure capital structure variable. According to figure 1, debt ratio was valid to measure capital structure. Debt ratio has outer loading 1,11 means that the increase of debt ratio will be followed by the increase of capital structure variable. In formative model, the latent variable is formed by the indicators. One indicator of capital structure was dropped from the model that was long term debt to total equity because the outer loading was -0,176. The negative value means that the increase of long term debt to total equity will be followed by the decrease of capital structure variable, vice versa.

Dividend policy consisted of two indicators there were dividend payout ratio (DPR) and dividend per share (DPS). As showen in figure 1, there only DPR which valid to measure dividend policy variable. DPR has outer loading 1,03, means that the increase of DPR will be followed by the increase of dividend policy variable. DPS in this case was not valid to measure dividend policy variable because the outer loading was only -0,185. The negative value means that the increase of DPS will be followed by the decrease of dividend policy variable, vice versa.

Financial performance consisted of three indicators. However, after testing on PLS there only one indicator was valid to measure financial performance variable. Two indicators were not valid to measure financial performance are net Profit Margin (NPM) and Return on Assets (ROA) which have outer loading 0,177 and -1,442 respectively. Then these indicators was dropped from the model because it does not meet with the criteria of PLS. The only Return on Equity (ROE) that valid to measure financial performance variable. ROE has outer loading 1,59. The positive value here means that the increase of ROE will be followed by the increase of financial performance variable. After model fit, ROE become the single indicator of financial performance.

Firm value consisted of three indicators there were Book Value (BV), Price to Earning Ratio (PER), and Closing Price (CP). After running in PLS, the only PER which valid to measure firm value variable. PER has outer loading 0,773 means that the increase of PER will be followed by the increase of firm value. The other variable there were BV and CP not valid to measure firm value because the outer loading were -0,219 and -0,620 respectively. The negative value means that the increase of BV and CP will be followed by the decrease of firm value, vice versa. Then, the indicators that not valid to measure firm value variable should be dropped from the model.


Figure 1 The Outer Model of PLS

Structural model in PLS was evaluated using Q2 value. The R2 value for endogenous variables in this study consisted of financial performance with R1

2 0.827 and firm value with R22 0.056. The Q2 predictive relevance was

calculated according to equation 8. The value of Q2 was 0.8367. The value of Q2 is same as total R2 in path analysis. The R2 value in this model was 83.67%, it indicates that the model can explained 83.67%, while 16.33% was explained by the others variables that were not included in this research.

Evaluation The Inner Model of PLS. The relationship between each variable can be evaluated in inner model of PLS. Inner model of PLS is the relationship among latent variables. The independent variable has significant effect on dependent variable if t -value greater than 1.96 (at the significance level of 5%). The inner model of PLS was reported in Table 5 and Figure 2.

Table 7 : The Inner Model of PLS

Notes: t-value is greater than 1.96, its means the relation between latent variables is significant at the significance level of 5%.

CG : Corporate Governance CS : Capital Structure DP : Dividend Policy FP : Firm Performance FV : Firm Value

Original Sample Sample Mean SE t-value

CG -> FP 0,138 0,12 0,146 0,944

CS -> FP 0,36 0,357 0,128 2,822

DP -> FP -0,375 -0,362 0,087 4,3

FP -> FV -0,273 -0,299 0,1 2,723


Figure 2. The PLS estimation after model fitting H1 : Good corporate governance affect positively on financial performance

Based on table 7 and figure 2 can be evaluated that corporate governance had a positif and non-significant effect on financial performance. The path coefficient was 0,138 and t-value 0,944 (at the significance level of 5%). The positive value of path coefficient means that the increase in good corporate governance variable will be followed by the increase of financial performance. Increasing financial performance in this case is caused by the implementation of good corporate governance.

There were four indicators used to measure corporate governance variable. Those indicators consisted of independent audit committee, independent commissioner, institutional ownership, and managerial ownership. Institutional ownership and managerial ownership were not good indicators to measure good corporate governance variable. The good indicators of good corporate governance consisted of independent audit committee and independent commissioner. These indicators have outer loading greater than 0,5. According to Hair et al. (2011) stated that if there any indicators not valid and reliable to measure a latent variable, thus the indicators should be eliminated from the model.

According to table 7 can be concluded that corporate governance has a positif effect on financial performance. Its means that when the company implemented the concept of good corporate governance, in particular company has independent audit committee and independent commissioner, it will able to increase the financial performance. The implementation of GCG principal can be a guarantee for the investor that management of the firm will running the business well. The role of independent audit committee and independent commissioner as a controller of firm management and make sure that firm management conducted a business such criterias. In addition, company which impemented the princips of corporate governance consistenly, the financial performance will increase because there is a transparency, accountabilily, responsibility. This finding support research conducted by Wild (1994), Bebchuk and Ferrel (2004) found that corporate governance has a positif effect on financial performance. This finding is also consistent with the research was conducted by Coleman (2007), found that the Audit Committee is another mechanism of internal governance that impact to improve the quality of financial management and performance of the firm. However, very few empirical studies have been done on the impact of the audit committee of firm performance. However this finding was not support research conducted by Bauer et al, (2004) which found that there was a negative relationship among corporate governance standards and financial performance of the firm.

H2 : capital structure affect positively on financial performance

Based on table 7 and figure 2 can be evaluated that capital structure had a positif and significant effect on financial performance. The path coefficient was 0,36 and t-value 2,82 (at the significance level of 5%). The positive value of path coefficient means that the increase capital structure variable will be followed by the increase of financial performance. There were two indicators used to measure capital structure variable there are debt ratio and


long term debt to total equity. However the only one indicator which valid and reliable to measure capital structure variable that was debt ratio.

Capital structure has a positive and significant effect on financial performance. Its means that the increase of capital structure will be followed by the increasing financial performance. Company which has high debt will make the financial performance become better. Its caused by all business opportunity can be financed by the firm, in particular external financial source such as the debt. A firm that cannot finance the business opportunity, so that that firm cannot optimalized the profit. The most high debt means that company has strong capability to finance all business opportunity, for internal funding and a good liqudity, a good dividend paying ability.

This result does not confirm the pecking order theory that is supported by Myers (1987), stating that the debt has a negative impact on financial performance, meaning that the higher the debt progressively worse the financial performance of the company, otherwise the lower the company's debt, then it can be said that the company's financial performance was good. Results of this study supports the theory of MM with taxes that affect the value of the capital structure of the company, what is expressed by MM explaining that high debt usage will be able to increase the value of the company.

This finding support researchs conducted by Chen et al. (2006), Luo and Haciya (2005), Driffield et al.(2007), and Setiabudi and Agustia (2012) who found that capital structure had a positive impact on financial performance. The function of the debt can be a leverage to increase the profit through optimalization business opportunity.

H3 : dividend policy affect significantly on financial performance

Based on table 7 and figure 2 can be evaluated that dividend policy had a negative and significant effect on financial performance. The path coefficient was -0,375 and t-value 4,3 (at the significance level of 5%). The negative value of path coefficient means that the increase dividend policy variable will be followed by the decrease of financial performance. There were two indicators used to measure dividend policy variable there are dividend payout ratio and dividend per share. However the only one indicator which valid and reliable to measure capital structure variable that was dividend payout ratio. While dividend per share was not good enough to measure dividend policy variable. Thus, according to the criterias in PLS its indicators should be dropped out from the model.

Dividend policy has a negative and significant effect on financial performance. The negative value means that the most high dividen that be divided into the shareholders, its make the financial performance will be decreased. The decreasing financial performance due to company does not have a good enough financial resources to be invested into the new project or company expansion. In addition, company which divided high dividend to shareholders implied that company doesn’t has a business opportunity in the future. In other word this company has been in a mature position in case of business life cycle. This finding doesn’t support research conducted by Ajanthan (2003) who found that dividend policy affect positively and significantly to financial performance.

H4 : financial performance affect significantly on firm value

Based on table 7 and figure 2 can be evaluated that financial performance had a negative and significant effect on firm value. The path coefficient was -0,273 and t-value 2,723 (at the significance level of 5%). The negative value of path coefficient means that the increase financial performance variable will be followed by the decrease of firm value. There were three indicators used to measure financial performance variable there are return on equity, net profit margin, and return on assets. However the only one indicator which valid and reliable to measure financial performance variable that was return on equity. While net profit margin and return on equity were not good enough to measure financial performance variable. Related to firm value, there only one indicator that valid and reliable to measure firm value that was price to earning ratio. While book value and closing price were not good enough to measure firm value variable. According to the criterias in PLS the indicators which not valid and reliable to measure its latent variable should be dropped from the main model.

Price to Earning Ratio (PER) is one of the most important indicator in capital market. PER can be defined as a ratio which reflect how rate of return a company to its share price. PER can be said as a psicological value for the investor, where firm that has smaller PER is more attractive than firm which has higher value of PER. The smaller PER is caused by the earning per share which relatively high compared to its share price, so that the rate of return is better and the pay back period is more shortly. The smaller PER is one of the main consideration by the investor to invest their money in capital market. So that is why financial performance has a negative relation to firm value which measured by PER as the main indicator.


Conclusions This research demonstrate that :

• Corporate Governance insignificant on company's Financial Performance in Property and Real Estate sector, in other words that the corporate governance practices that have been implemented in the company's property and real estate does not affect the company's return on equity. Agency Theory by Jansen and Meckling (1976), cannot be applied in every situation, there are another managerial models of behavior and motivation that comes from psychological or sociological.

• Capital structure has a positive and significant effect on financial performance in Property and Real Estate sector. Its means that the increase is of capital structure will be Followed by the increasing financial performance. Company has high debt will make the financial performance Become better. This result does not confirm the Pecking Order Theory that is supported by Myers (1987), Stating that the debt has a negative impact on financial performance, meaning that the higher the debt progressively the worse the financial performance of the company.

• Dividend policy has a negative and significant effect on financial performance. The negative value means that the most high dividends that be divided into the shareholders, it’s make the financial performance will be Decreased. The decreasing financial performance due to company does not have a good enough financial resources to be invested into the new project or company expansion Reviews These results support the Signaling Theory by Spence (1973)

• The firm value could be Achieved if the company can reach the targeted profit . This finding confirm MM Theory Stating that firm value is affecting profits and business risks. Hypothesis testing results for financial performance negatively significant variables on firm value.

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ABOUT THE AUTHORS

Name : Tsabita Karima, S.AB, M.AB

Date Of Birth : 20th June 1991

Sex : Female

Nationality : Indonesian

Contact Number : +6281222585788

Email : [email protected]


Incidence of Building Collapse in Nigeria: Case of Lagos State

Layi Egunjobi a , Ademola Adebayo b a Department of Urban & Regional Planning, Faculty of the Social Sciences, University of Ibadan, Nigeria.

bDepartment of Urban & Regional Planning, Faculty of Environmental Studies, The Oke-Ogun Polytechnic, Saki, Oyo State, Nigeria

Corresponding authour: : [email protected]



Abstract : Occurrence of natural and human induced disasters the world over has overtime escalated in number and magnitude; it appears to have coincided with contemporary climate change events. The devastation in loss of lives and property as well as disruption in national socio-economic and quality of life indices has been enormous. This is more so in the less advanced countries of the world where capacity to manage disasters is quite limited. The need has arisen therefore for a thorough understanding of the situation in that latter group of countries to resolve this paradox. This is necessary for those countries to be placed in a position for a meaningful and more effective participation in global efforts in the management of urban environmental disasters.

Arising from the above, the cardinal aim of this paper is to analyze the trend and pattern as well as adducing factors responsible for building collapse in Nigeria using Lagos State as the study area. This is with a view to offering policy, planning and management implications of this phenomenon in the study area.The study has relied mainly on secondary data presented as Appendix I in a recently published book on Disaster Risk Management in Nigerian Rural and Urban Settlements. The appendix presented a total of 139 reported cases of building collapse in Lagos State over a period of 35 years. These were used for analysis and discussion. The analysis involved the use of table, chart and figures to indicate trends while spatial analysis showing distribution of the collapsed buildings was done using Global Positioning System (GPS) superimposing these as points on the thematic map of Lagos State.

Emanating from the study are the following: (1) an observed escalating rate of building collapse in Lagos State over time; (2) a concentration of reported cases in residential land use and in Lagos Island Local Government Area of the State; and (3) identified explanatory factors emanating from professionals in the building industry, developers and policy decision makers. By way of elaboration, the professionals in the building industry go about their duties independently and without an established forum for development process explanation. While the policy makers show lack of political will and influence a lot of development decisions, the system of development as well is fraught with corruption. The public also cannot be exonerated as most developers run foul of the laws governing zoning and development control and not supplying adequate building materials for construction all in a bid to minimize cost of construction. The contractors are also involved. In some situations where materials are adequately supplied, they choose not to use the right mix in order to maximize their returns. This implies that the problem of building collapse in developing countries with particular reference to Nigeria is a function of the negative contribution of the policy decision makers, the professionals and the public. The paper recommends increased political will for more effective policy formulation and implementation; removal of constraints and obstacles relating to coordination and synergy-building among professionals in the building industry; and encouragement of result-oriented public participation in urban environmental disaster management. The expected outcome of all these will increase knowledge towards sustainable urban neighbourhoods especially in developing countries.

Keywords: building collapse; coordination among agencies; disaster management; public participation; sustainable urban neighbourhoods

108 Egunjobi and Adebayo / OIDA International Journal of Sustainable Development 09:03 (2016)

Introduction

n addition to insecurity, public ill-health, bad governance and poverty among others, another major challenge inhibitory to the achievement of sustainable development that the global community is confronted with is disaster. The crises emanating from disasters, natural or human induced, in most developing countries where

capacity to manage such is grossly inadequate is not only recurring [1] but also escalating. The resultant devastation in loss of lives and property as well as disruption in national socio-economic and quality of life indices has been enormous (Plate 1). One notable human induced disaster that has been frequent in occurrence in Nigeria is building collapse which has had a serious threat on the country’s sustainable development. The geographical spread of this collapse has been found to be highly prevalent in Lagos and South West of the country [16] which could be attributed to high concentration of economic and social activities in these areas. [11] posit that increased vulnerability and people’s exposure to danger especially as they live or work in precarious areas, constant insecure buildings and infrastructure or use unsound transport system could not be unrelated to the physical, political, socio-economic and demographic dynamics within the city’s sphere.

Available statistics indicates that not less than 379 discovered deaths, several undiscovered deaths, multiple injuries and properties worth billions of naira have been lost to building collapse across Nigeria in the last 25 years [16]. What makes the situation more worrisome is the tendency for a rise in the scale and frequency of the collapse (including socio-economic losses) in the future, given the existing capacity of environmental disaster management, with the occurrence of incontrovertible climate change whose impacts have already spread across all spheres of development in the country. By further implication, the urban neighbourhoods in the country may become unsustainable and the cost of urban development may outrageously soar. This may impact negatively on the global efforts of achieving sustainable development and poverty reduction. The case of Lagos State is particularly peculiar due to its location (near coast) and exponential growth in population. As at 2006, the population of Lagos stood at over nine million [10] and by 2014, it has assumed the status of a mega city (a city with 10 million population or more [15]. The continued increase in population cannot be divorced from the major economic role the state is playing in the country. Being an important centre of commerce and major industries in Nigeria, it has continually attracted people from different parts of the country as well as internationally. This unabated population growth has influenced growth in building stock for residential, commercial, industrial and other land uses. And because of limited land area; development in some cases are spread over reclaimed areas (i.e., areas originally covered by water but later filled). The reflection that Lagos contributes to slightly more than 50% of all incidences of building collapse in Nigeria between 1974 and 2010 [16] is an indication that the quantitative growth of buildings there is not at par with the qualitative requirements. With the urban population of Nigeria projected to 212 million by 2050; Lagos with its rate of population growth is likely to accommodate a significant part of this projected urban population. This implies that demand for buildings will be inevitably higher and given the current rate of building collapse in the state, the tendency for more cases of collapse cannot be over emphasized.

Recommendations from earlier studies on the incidence of building collapse in Lagos have revolved around improved individual input from professionals in the building industry, carrying out soil test, building supervision, monitoring of the activities of professionals to discourage quackery among many others. However, other areas that need to be looked into include the collaboration of building professionals in ensuring quality delivery of sustainable building construction throughout the construction phases, and the participation of the public in the regulatory role of building construction. This study has analysed the trend and pattern of building collapse in Lagos, adduced factors responsible, reviewed recent efforts of government in controlling the incidence, analysed policy implication and proffered remedial measures.

Plate 1: Rubbles of Collapsed Building in Lagos Source: [5]

I

Egunjobi and Adebayo / OIDA International Journal of Sustainable Development 09:03 (2016) 109

Materials and Methods Study Area

Lagos State is one of the 36 administrative divisions of Nigeria exclusive of the Federal Territory. It is located in the southwestern part of the country. The smallest in area of Nigeria’s states, Lagos state is arguably the most economically important state of the country containing Lagos, the nation’s largest urban area. The actual population total is disputed between the official Nigerian census of 2006 (which puts Lagos State population at 9,013,534) and 17,500,000 figure claimed by the Lagos State Government. Average population density of the state is about 2,500/km2. Lagos State lies between latitude 6035’ and 60583’ degrees north of the equator and between 3045’ and 3075’ east of Greenwich meridian. On the North and East, it is bounded by Ogun State. In the West, it shares boundaries with the Republic of Benin. Behind its southern borders lies the Atlantic Ocean. 22% of its 3,577 km2 are lagoons and creeks [5, 18].

Lagos as a port originated on islands separated by creeks. These include the Lagos Island fringing the southwest mouth of Lagos Lagoon while protected from the Atlantic Ocean by barrier island and long sand splits such as bar beach, which stretches up to 100 kilometers (62 miles) east and west of the mouth. From the beginning, Lagos has expanded on the mainland west of the lagoon and the conurbation including Ikeja (the capital of Lagos State) and Agege, now reaches more than 40 kilometers (25 miles) North West of Lagos Island. The suburbs include Ikorodu, Epe and Badagry. Constitutionally, the State has twenty local governments, sixteen of which constitute the Metropolitan Lagos, the remaining four LGAs (Badagry, Ikorodu, Ibeju-Lekki and Epe) constituting the suburbs. In 2003, many of the existing 20 LGAs were split for administrative purposes into Local Council Development Areas. These lower tier administrative units now number 56 [5]

Method

The study was carried out using secondary data coupled with observation. 139 reported cases of building collapse in Lagos, Nigeria between 1978 and 2013 (Appendix I) in a recently published book on Disaster Risk Management in Nigerian Rural and Urban Settlements were used for analysis and discussion. Using a class interval of 5, the years of occurrence of building collapse were disaggregated into 6 (N.B: not all the years within some class intervals are consecutive), then number of reported cases were found within each interval and later used to find aggregate percentage for each class. In addition, the highest and lowest number of occurrences of building collapse within each class interval was deduced. The analysis was done with the use of chart, figures and table. Spatial analysis was also carried out using Global Positioning System (GPS) to obtain the locations of the collapses; these were superimposed on the thematic map of Lagos State obtained from the State’s Ministry of Lands and Survey.

Fig. 1: Map of Lagos State Showing the Local Government Areas

Source: [9]


Results and Discussion Reported Cases of Building Collapse between 1978 and 2013 in Lagos, Nigeria

The analysis of data on reported cases of building collapse in Lagos shows that between 1978 and 1986, 12.23% of the total number of building collapse occurred with an annual average of 2.45%. Between this period, 1985 recorded the highest frequency, about 7 cases representing over 41% of that time interval. The least occurrence between the period was recorded in 1978 and 1984 when only 1 reported case (0.72%) was observed in each year. The aggregate percentage of building collapse occurrence between 1987 and 1992 and between 1993 and 1998 was the same as well as annual percentage of reported cases. That is, between 1987 and 1992, 13.68% of the total collapse occurred; the same between 1993 and 1998. 1987 recorded the highest frequency of collapse between 1987 and 1992 with a frequency of 7 cases, about 5% of the total period and 37% for the class interval. Within the interval, 1991 has the least reported cases, 2, about 10%. 1995 appears to be the modal year in reported cases of collapse between 1993 and 1998 when 8 cases were recorded which amounts to 5.76% of the total and over 42% for the class interval. The least frequency of 1 case, about 0.72% occurred in 1993. The class interval that witnessed highest number of reported cases was between 1999 and 2003 followed by 2004 and 2008. From 1999 to 2003, there were 36 reported cases representing about 26% of the total occurrence. This implies that annually between this period, not less than 7 reported cases were observed. 2000 and 2002 had highest frequency between the period, 9 cases, each constituting 25% in the group and over 6% of the total. To further consolidate that highest number of occurrence was between this period, the least for the class (greatest among the least in other intervals) was 5 cases of collapse, about 4% of the total, occurring in 1999 and 2001. The frequency of occurrence between 2004 and 2008 is also of particular interest as noted earlier. Between these periods, about 22% of the total collapse occurred with 2006 being the most significant of all the occurrences. 2006 only accounts for a slight proportion over 10% of the entire period (14 reported cases) and close to 65% for the group. The analysis also indicates that an average of 6 cases of collapse was reported annually between the class interval. Though there was a drop in the cases between 2009 and 2013 as compared with other years, nevertheless, the analysis indicates that close to 4 reported cases, about 20% within the class interval, was recorded annually. The end seems not to have come to the occurrence of building collapse in the state as another massive structure (religious building) collapsed in 2014 claiming more than 100 lives. Some of the factors responsible for the collapse are discussed in the next subsection.

Class

Interval

No of Cases within

Interval Annual Average (%)

Aggregate

Percentage Highest Lowest

1978-1986 17 2.45 12.23 7 1

1987-1992 19 3.8 13.67 7 2

1993-1998 19 3.8 13.67 8 1

1999-2003 36 7.2 25.89 9 5

2004-2008 30 6 21.59 14 1

2009-2013 18 3.6 12.95 5 2

139

100

Table 1: Trends of Building Collapse Cases in Lagos (1978 and 2013) Source: Authors, 2014. Derived from [11].

Explanatory Factors

Of all the reported cases, the study shows that over 94% of the total building collapse for the entire study period was caused by structural deficiencies. Included in this factor were weak foundation, dilapidation, failure of building members (such as slabs, walls etc), lack of maintenance, construction defects (inadequate reinforcement, weak/substandard building materials) among many others. While the unknown cause of the collapses takes an insignificant proportion of less than 1%, causes by natural and human factors amount to slightly over 5%. These disasters range from flood, land subsidence to fire and plane crashes occurring in 2001, 2006, 2011 and 2012 respectively. Several other studies have also adduced the causal factors of building collapse in Lagos specifically and Nigeria in general to human induced and natural factors. For instance, structural deficiencies have been attributed to a number of factors like faulty design (which could be as a result of wrong assumption), inadequate or unequal support for foundation, soil and ground water movements [6]. Other factors include product failure,


constituting about 40% of occurrences in Nigeria [13]; use of faulty materials and poorly executed work on construction site[12]; lack of construction supervision and non-compliance to building codes and regulation with a significant number of developers not obtaining necessary development permits; use of inexperienced/unskilled labour and quacks. The analysis on poor building materials as a major factor of building failure/collapse in Nigeria has been taken to account for 50% of all incidents of building collapse in Nigeria, Lagos inclusive [14]. In addition to the factors highlighted above, this study has also observed the following: (1) most building contractors are instrumental to the menace through reduction of supplied materials for construction in order to maximise their gains; (2) developers (clients) avoid clearance of development , that is, they do not obtain necessary development permit and in most cases where their buildings are marked for contravention, they defy the order with the continuation and completion of the building project. (3) The government and their officials are also not left out; on the part of the policy makers, they influence a lot of decisions on development by prompting the officer in charge of approval to grant permission to undeserving projects for political reasons while on the part of the approving personnel (Town Planning Officials), some of them take bribe from developers after they have been lobbied to accept unacceptable proposals. (4) There is absolutely lack of coordination among the professionals in the building industry, rather than handling over to each other at the appropriate phase of the project and giving situation report, some professionals prefer to extend their scope of service to areas where they do not have professional competence taking advantage of the ignorant client. In a related manner, at the level of approval and site supervision before the commencement of the project; professionals do not carry themselves along owing to unnecessary suspicion of each other. (5) Environmental factors: geographic location, natural disaster like land subsidence are also possible factors.

Essentially, the factors responsible for building collapse in Lagos specifically and Nigeria in general can be summarized into five: lawlessness, corruption, unprofessionalism, lack of coordination among stakeholders and environmental factors

Spatial Spread and Pattern of Collapse within the Local Government Areas in Lagos

As indicated in the analysis (Fig. 2), the local government area in Lagos where building collapse occurred most in the period under review was Lagos Island with about sixty percent of the cases occurring there. Other local government areas with significant record include Shomolu, Surulere, Oshodi-Isolo, Lagos Mainland and Mushin constituting about 10%, 9%, 9%, 9% and 7% respectively of the total collapse. This implies that these local government areas are where majority of building construction, mainly residential (75% of the building use involved) in Lagos takes place. And the fact that the type of buildings involved was predominantly residential also points to the fact that there is high demand for housing in the State, especially as the population continues to burgeon. Though whether those building were public or private is not within the consideration of this paper, but it may be inferred that housing suppliers in the state have not been properly regulated in terms of the delivery of the products. Following residential are commercial buildings in collapse ranking as about 12% of the total reported collapses in the study area were commercial. Obviously as population increases, the quest for economic activities will equally rise. Other types of building use involved were institutional, 5.04%; religious, 4.32%; mixed use, 2.16% and unknown building use type constituting 1.43%. Apart from the places mentioned, building collapse also occurred in ten (10) other local government areas, bringing the total of LGAs where cases were reported to sixteen; which means that within the study period, incidents of building collapse had occurred in 80% of the entire Lagos State (consisting of 20 LGAs). Though, several studies have adduced the causes of these collapses to sub-standard building materials, unprofessionalism, lawlessness, corruption to name but a few; this paper finds it proper for robust consideration of environmental factor, especially, geographic location in this regard. 80% of the places where collapses were recorded were close to Lagos Lagoon and creeks (see Fig. 3)

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Fig.2: Analysis of distribution of building collapse in Lagos State’s Local Government Areas, between 1978 and 2013.

Source: Authors, 2014. Derived from [11].

Fig.3: Spatial Distribution of Cases of Building Collapse in Lagos State

Source: Authors, 2014. Efforts of the Lagos Government on Averting Building Collapse

Having analyzed the trend in the incidents of building collapse and the pattern of spread in Lagos, the paper considers it appropriate to also look at some of the past efforts the government of the state, being the major regulator, has put in bringing the occurrence to the bearest minimum. In this regard, three important efforts of the state are noteworthy. The first was the enactment of the Lagos Urban and Regional Planning Law of 2010, the establishment of the Lagos State Building and Control Agency in the same year and the setting up of Tribunal of Enquiry on Building collapse in May, 2013. The Law vested in the hand of Ministry of Physical Planning and Urban Development the power to control development in the state. In furtherance of the activity of the Ministry, LSBCA was set up with the responsibilities of ensuring that intending developers pass through due process before commencing work on site as well as ensuring that contractors use specified building materials. The Agency since its creation has embarked on compilation of distressed buildings, pulling some down and marking some for demolition


but in most cases, the owners seek court injunction to avert the demolition. The Tribunal has also just concluded its report on incidence of building collapse between 2007 and 2013 [19].

Implication for Planning, Management and Sustainable Development.

Given the exponential growth of Lagos and its present status as a megacity coupled with the projected increase in urban population for Nigeria by 2050 (212 million) [15] which a chunk or big part is also expected to add to the existing population of Lagos, being the commercial nerve of the country and an important attraction centre, there is a great tendency that the demand for housing and other building uses will continue to escalate. An important factor here is the total land area of Lagos, that is, the question of its capacity to accommodate the increase in population in the future. Lagos itself is a coastal city and as emphasized earlier, 22% of the 3,577 km2 total land area of the state is lagoon and creeks. What this implies are: (1) there is tendency for more encroachment on the coastal part of the city; (2) a serious process of gentrification may continue to set in; a lot of more conversions are imminent, the capacity of existing structures are likely to increase which may come without improvement to existing structural stability. With the existing limited building construction regulatory capacity in the state, more human induced disaster such as building collapse may be on the increase; this connoting that the cost of urban development may soar while the existing neighbourhoods with the likely modification they go through overtime may be rendered unsustainable in terms of meeting socio-economic needs of the people.

Lastly, with the current incontrovertible climate change, more challenges are looming on building collapse in Lagos and other coastal cities in Nigeria. Already, Lagos being a coastal city has been experiencing excessive floods which are likely to continue with the continuing sea level rise. In most cases, the poor are at the receiving end of the catastrophes, losing their homes, properties and even lives. The choice of the poor living in hazard prone areas, where the cost of land is affordable to them, increases their vulnerability to environmental disaster including building collapse. On the aggregate, the level of poverty of urban poor people becomes heightened with climate change adding to the woes of building collapse, thus jettisoning the sustainable development efforts.

Conclusion

The study, from the preceding sections, has shown that incidents of building collapse in Lagos has been recurring and also escalating. The annual average rate of building collapse was around 2.45% during the early years of the study period, this rose to about 4% in the mid-period and in few years after increased to 7% before declining to about 4% again towards the latter years of the period of observation. However, it was during the latter part of the study period that highest cases were recorded, even in 2014, a religious building has collapsed killing more than 100 foreigners and undisclosed number of the citizens of the country. Lagos Island appears to be the most affected local government area in the state and with respect to building use; residential buildings were the most affected. The devastation in loss of lives, property and investment is unquantifiable; this by further implication will have negative influence on the growth of GDP in the State specifically and the nation’s economy in general. Though, explanatory factors can be categorized into natural and man-made, the part played by the latter is overwhelming and essentially revolved around the policy makers who have not been giving enough political will, the private (embodying the professionals and contractors) who lack coordination and the public (the people). One factor that is embedded among the 3ps is lawlessness.

Against this backdrop, the paper is suggesting an increased political will on the part of policy makers, removal of constraints and obstacles relating to coordination and synergy building among the professionals in the building industry and encouragement of result-oriented public participation to overcome the problem of building collapse not only in Lagos but Nigeria as a whole. The contribution of all the identified stakeholders is an interwoven one. For instance, for members of the public to recognize the approved/registered professionals to consult will require the professional associations making available to the public the list of all registered professionals through using appropriate technology or channel on a regular basis. The government also needs to educate members of the public on the need to report cases of illegal construction and development with overriding public interest.

References

[1] Akujobi, J. (2013). National disaster management system in Nigeria. In Bolanle Wahab, Nathaniel Atebije and Ibrahim Yinusa (eds) Disaster risk management in Nigerian rural and urban settlements (pp 67-88). Nigerian Institute of Town Planners (NITP) & Town Planners Registration Council of Nigeria (TOPREC). ISBN: 978-978-935-509-9

[2] Anthony, N. E. (2010). Building collapse in Nigeria: the trend of casualties the last decade (2000 -2010) [3] International Journal of Civil & Environmental Engineering IJCEE-IJENS 10(6):32-36. [4] Chinwokwu, G.( 2000). The role of professionals in averting building collapse. In Proceedings of Building

Collapse—Causes, Prevention and Remedies, Lagos, Nigeria, 3–4 May 2000; pp. 12–28


[5] en.wikipedia.org (2014). Lagos State [6] Fadamiro, J.A. (2002). An assessment of building regulations and standards and the implication for building

collapse in Nigeria. In D.R. Ogunsemi (Ed.), Building Collapse: Causes, prevention and remedies pp. 28-39. The Nigerian Institute of Building, Ondo State.

[7] Fagbenle, O.I.and A.O Oluwunmi (2010). Building failure and collapse in Nigeria: The influence of the informal sector. J. Sustain. Dev., 3: 268–276.

[8] Fakere, A. A; G. Fadairo and R. A. Fakere (2012). Assessment of building collapse in Nigeria: A case of naval building, Abuja, Nigeria. International Journal of Engineering and Technology 2 (4):584-591. IJET Publications ISSN: 2049-3444.

[9] Lagos State Ministry of Lands & Survey (2012). Map of Lagos State. [10] National Bureau of Statistics (NBS) (2006). National population census. Federal Republic of Nigeria [11] Olatubara, C. O. and O. F. Kasim (2013). National disaster management system in Nigeria. In Bolanle Wahab,

Nathaniel Atebije and Ibrahim Yinusa (Eds) Disaster risk management in Nigerian rural and urban settlements (pp 217-238). Nigerian Institute of Town Planners (NITP) & Town Planners Registration Council of Nigeria (TOPREC). ISBN: 978-978-935-509-9

[12] Oke, A. (2011). An examination of the causes and effects of building collapse in Nigeria [13] Oloyede, S.A; C.B. Omoogun and O.A. Akinjare (2010). Tackling causes of frequent building collapse in

Nigeria. Journal of Sustainable Development 3 (3):127-132. ISSN 1913-9063 E-ISSN 1913-9071. Accessed online at www.ccsenet.org/jsd on November 3, 2014.

[14] Oyewande, B. (1992): A research for quality in the construction industry. Builder’s Magazine, June/July Ed., Lagos.

[15] UN (2014). World urbanisation prospect. United Nations. ISBN 978-92-1-151517-6 [16] Windapo, A.O (2006). The threat of building collapse on sustainable development in the built environment. In

Proceedings of the Sustainable Development Conference, Jos, Nigeria, 9–12 August 2006; pp. 59–65. [17] Windapo, A. O and J.O. Rotimi (2012). Contemporary Issues in Building Collapse and Its Implications for

Sustainable Development. Buildings 2: 283-299; doi: 10.3390/buildings2030283ISSN 2075-5309. Accessed online at www.mdpi.com/journal/buildings/ on October 25, 2014.

[18] www.lagosnigeria.gov.ng [19] www.radionigerialagos.com (2014). Lagos tribunal on building collapse submit report.

Sustainable development goals worth sharing

Erika Simpson Department of Political Science, University of Western Ontario, London, Canada

Corresponding author: [email protected]



Abstract: The international community has agreed upon another set of goals for the next 15 years. On the table are no less than 169 objectives and 17 Sustainable Development Goals (SDGs). The new aspirations are summarized and the merits and demerits of further elaboration and measurement including country-specific deadlines and targets are discussed. The hefty budget to achieve all 17 goals is estimated at more than $4 trillion US a year. North American policy-makers need to be aware of humankind’s shared aspirations as they consider the new and expensive SDGs. Foreign aid is one of the instruments of North American foreign policy and questions continue to swirl about whether foreign aid should be tied to the purchase of North American goods and services. Canada and the United States are not alone in falling short. They will need to spend more as well as align their national and subnational governments with the proposed SDGs in order to tackle inequality and poverty, integrate environmental and sustainability concerns into decision-making and help develop more global governance approaches to development.

Keywords: foreign aid, global governance, MDGs, sustainable development goals, SDGs

Introduction

he human species is good at setting goals and achieving them. We have walked on the moon, sent a rover to roam Mars—and 15 years ago the United Nations General Assembly agreed to pursue an ambitious set of Millennium Development Goals (MDGs) [1]. Good progress on the goals since 2000 [2] has meant the

proportion of people living in extreme poverty has been halved from 15 years ago, more than two billion people have gained access to improved sources of drinking water, and remarkable gains have been made in the fights against malaria and tuberculosis. As well, the UN’s target for reducing hunger is within reach and the proportion of slum dwellers in the metropolises of the developing world is declining [3]. On the other hand, though there were some notable successes, the MDGs failed to bring about a substantial shift toward tackling global poverty [4]. Another downside was they oversold what foreign aid could achieve—and thus added to pessimism over aid, which was precisely the opposite of their original intention [5].

Now the international community has agreed upon a new set of goals for the next 15 years. On January 1 2016, the 17 Sustainable Development Goals (SDGs) of the 2030 Agenda for Sustainable Development—adopted by world leaders in September 2015 at an historic UN Summit—officially came into force. Over the next fifteen years the SDGs hope to build on the success of the MDGs. On the table are no less than 17 Goals and 169 objectives [6]. The goals summarily range from Goal 1 “ending poverty in all its forms everywhere” to Goal 5 tackling “gender inequality” to Goal 17, strengthening “the global partnership for sustainable development” [7].

This paper overviews the new SDGs as North Americans need to be informed about humankind’s shared aspirations. It considers the merits and demerits of elaborating more precisely on the Goals’ concepts and measurements including the lack of country-specific deadlines and targets. It asks whether foreign aid—as one of the ‘instruments’ of North American foreign policy—should be ‘tied’ to the purchase of Canadian and American goods and services. And it suggests more and newer approaches to global governance will be imperative if the SDGs are to be achieved by 2030.

The new Sustainable Development Goals:

What are the new Sustainable Development Goals? There is a rich academic literature that debates the overarching concept of ‘sustainable development’ [8]. The term sustainable development was popularized in Our Common Future, a report published by the World Commission on Environment and Development in 1987. Also known as the

T

116 Simpson / OIDA International Journal of Sustainable Development 09:03 (2016)

Brundtland report, Our Common Future included the classic definition of sustainable development: “Development that meets the needs of the present whilst safeguarding Earth’s life-support system upon which the welfare of current and future generations depends” [9].

Sustainable development has been explained and debated by a great number of nongovernmental and international institutions [10]. A large academic and governmental literature tackles the theoretical concepts [11] and methodological issues [12] issues surrounding what sustainable development means and implies. That said, the new Sustainable Development Goals (SDGs) are short and succinctly worded—indeed, all 17 far-reaching and ambitious goals have already been summarized into a few paragraphs [13], a UN poster [14] and a one-page summary [15] although their original diplomatic written language is quite lengthy [16].

Goal 1 seeks, by 2030, to eradicate extreme poverty for all people everywhere, currently measured as people living on less than $1.25 a day. Goal 2 aims to end hunger, achieve food security and improved nutrition, and promote sustainable agriculture. Goal 3 seeks to ensure healthy lives and promote wellbeing for all at all ages. Goal 4 aims to ensure inclusive and equitable quality education and promote lifelong learning opportunities for all. Goal 5 aims to achieve gender equality and empower all women and girls. Goal 6 will ensure availability and sustainable management of water and sanitation for all. Goal 7 seeks to ensure access to affordable, reliable, sustainable and modern energy for all. Goal 8 promises to promote sustained, inclusive and sustainable economic growth, full and productive employment, and decent work for all. Goal 9 aims to build resilient infrastructure, promote inclusive and sustainable industrialisation, and foster innovation. Goal 10 will reduce inequality within and among countries. Goal 11 promises to make cities and human settlements inclusive, safe, resilient and sustainable. Goal 12 seeks to ensure sustainable consumption and production patterns. Goal 13 promises to take urgent action to combat climate change and its impacts. Goal 14 aims to conserve and sustainably use the oceans, seas and marine resources for sustainable development. Goal 15 seeks to protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification and halt and reverse land degradation, and halt biodiversity loss. Goal 16 strives to promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels. And Goal 17 promises to strengthen the means of implementation and revitalise the global partnership for sustainable development.

Many of the 17 SDGs have sub-goals as well so for example, Goal 5 promises to end gender inequality and would ensure many sub-goals including women’s full participation at all levels of decision making and universal access to sexual and reproductive health rights. Goal 17 is similarly ambitious and spells out a host of sub-goals on finance, technology, capacity building and trade. Overall the Goals are more like a lengthy wish list than a legally binding framework with country-specific deadlines and targets.

Findings: Some merits and demerits of the SDGs

There are no established national frameworks and logical sets of steps to take toward the 17 Goals. Individual governments are expected to take ownership and establish national frameworks for the achievement of the 17 Goals. Countries will have the primary responsibility for follow-up and review of the progress made in implementing the Goals. According to the UN, implementing the Goals will require high-quality, accessible and timely data collection. Since the SDGs are not legally binding, individual countries will have the primary responsibility for follow-up and review at the national, regional and global levels [17].

Notably the new Goals are universal and apply to all countries, whereas the MDGs were intended for action in developing countries only. The new SDGs cover more issues with aspirations to address global inequalities in terms of economic growth, ecosystems, industrialization and climate change. The goals cover many dimensions of sustainable development including social inclusion, environmental protection, sustainable consumption and peace and justice.

A 2015 report by the International Council for Science in partnership with the International Social Science Council briefly reviewed the targets from a science perspective and pointed out that many of the targets may also contribute to several goals, and some goals and targets may conflict. “Action to meet one target could have unintended consequences on others if they are pursued separately” and “Research suggests that most goal areas are interlinked, that many targets might contribute to several goals, and that there are important trade-offs among several goals and targets.” For example, progress on ending poverty (SDG 1) cannot be achieved without progress on the food security target (SDG 2). The targets of full and productive employment and decent work under SDG 8 and the reduction of inequality under SDG 10 would need to be met without enhancing resilience to climate change under SDG 13. Success in these will lead to better health and wellbeing, thus contributing to the achievement of SDG 3. But there

Simpson / OIDA International Journal of Sustainable Development 09:03 (2016) 117

could be important trade-offs among targets: For example, an increase in agricultural land-use to help end hunger can result in biodiversity loss, as well as in overuse and/ or pollution of water resources and downstream (and likely negative) effects on marine resources, which in turn could exacerbate food security concerns [19].

Some of the targets are confusing and potentially contradictory. For example, the concept of basic income requires further elaboration to understand what is meant by the elimination of extreme poverty and undernutrition, as well as effective and equitable processes of wealth creation and distribution.

Country-specific baselines and targets are deliberately missing along with country-specific assessments to identify the most urgent priorities. Should individual countries tackle infectious diseases and malnutrition and/or a rapid rise in non-communicable diseases and obesity? What could be the consequences of demographic shifts in nations where either the youth or the elderly predominate? To measure the SDGs using an empirical and positivist framework with a view to testing whether they are achievable would be a challenging, if not impossible exercise. What might be the roles and good practices for subnational governments with respect to the SDGs at the subnational level? Many of the goals are so lofty and immeasurable that they could be missed. If targets are immeasurable and not met, who is to blame? The Goals are unlikely to be realized if the world community neglects to focus on implementation measures from the outset. In short, the SDGs are ambitious commitments but spending plans and country-specific targets for achieving the goals have been left for future negotiations.

Trillions of dollars and more negotiations necessary to achieve Goals

While estimates vary, the hefty budget to achieve all 17 goals is estimated by the U.S. Council of Foreign Relations at more than than $4.5 trillion per year [20]—although to put this enormous figure in perspective that is less than the $1.7 trillion spent annually on militarism. According to the December 2014 World Summit of Nobel Peace Laureates’ Declaration [21]: “Militarism has cost the world over $1.7 trillion dollars this past year. It deprives the poor of urgently needed resources for development and adds to the likelihood of war with all its attendant suffering.” It is unclear how enormous figures like $4.5 trillion US a year to $7 trillion annually are arrived at and more importantly, where hundreds of billions in aid will be sought to help pay for the attainment of these goals. Many rounds of future negotiations can be expected to try to come up with unknown amounts of money that must be somehow apportioned to achieve each lofty goal.

North Americans tend to be good global citizens in these sorts of diplomatic negotiations. Back in 1992, Canada played a positive role when heads of states met in Brazil under the strong chairmanship of a Canadian Maurice Strong, who served as UN Secretary-General [22] of the Conference on Environment and Development. They agreed on 21 global priorities. “Agenda 21,” [23] as it was called, was based on lessons learned about poverty and conflict during the Cold War and on an emerging awareness about the environment and limits to growth. Since then, many treaties have been ratified extolling widely-admired goals such as biodiversity [24], disarmament [25], sustainable development [26] and people’s equality [27].

North America’s Development Aid: factors such as tied aid affect aid distribution

North Americans need to be reminded of humankind’s shared aspirations as we consider the new and expensive sustainable development goals. And we need to keep that outlook in mind as we think about the factors that should determine where and how North Americans distribute their development aid.

Until 2013, the Canadian International Development Agency was the federal government organization that administered the budget for Canada’s official development assistance. Then it was merged into the Department of Foreign Affairs, Trade and Development [28]. Renamed the Department of Global Affairs by the newly-elected Liberal government of Prime Minister Justin Trudeau, it is now a complicated hydra with four cabinet ministers—the ministers of global affairs, the minister of international trade, the minister of international development, and the minister of state (foreign affairs and consular)—at its head.

In 2010, President Obama signed the Presidential Policy Directive on Global Development [29], which called for the elevation of development as a core pillar of American power in accordance with diplomacy and defense. The directive sought an integrated approach and the U.S. manages foreign assistance programs in more than 100 countries around the world through the efforts of over 20 different U.S. government agencies [30].

Although foreign aid is one of the instruments of North American foreign policy, voters seldom contemplate foreign aid priorities when they decide how to vote. But for those who do take an interest, questions are swirling about whether foreign aid should be ‘tied’ to the purchase of North American goods and services. This practice requires


aid funds provided by governments to developing countries—some of the world’s poorest countries—be used to procure only North American goods and services.

The OECD and various UN studies estimate that donor money with these kind of strings attached cuts the value of aid to recipient countries by 30 to 40 per cent [31] because they cannot search the international market for the best price. Usually only four countries [32]—Norway, Denmark, the Netherlands and the United Kingdom—are singled out as donors breaking away from the concept of tied aid. The Canadian government announced in 2008 [33] it would untie all its aid by 2012, but it is unclear whether it succeeded. Critics saw larger objectives of neoliberalization [34], private sector development [35], and mining [36] in both the Obama and Harper governments’ approaches to aid.

The 0.7-per-cent target: the U.S. and Canada are not alone in falling short:

As well, the United Nations’ Millennium Project [37] urged each donor country to contribute 0.7 per cent of its gross national income to official development assistance. According to the OECD in 2015, the United States continues to be the largest donor [38] by volume with net Official Development Assistance (ODA) flows amounting to $32.7 billion in 2014, an increase of 2.3 percent in real terms compared to 2013. But US ODA as a share of Gross National Income (GNI) remains at 0.19 percent of GNI, despite the promises of different federal governments—Republican and Democrat.

Similarly in Canada, successive federal governments—Liberal and Conservative—have consistently eroded the official development aid budget until today it is a paltry 0.24 per cent [39] and still declining. The 0.7-per-cent target [40] was originally set by Canadian Prime Minister Lester Pearson in the 1960s. Famously, U2 lead singer and global poverty activist Bono reminded Prime Minister Paul Martin and then Prime Minister Stephen Harper [41] of that pledge, to no avail.

The United States and Canada are not alone in falling short. Only five countries have achieved the goal: Denmark, Luxembourg, the Netherlands, Norway and Sweden. The sixth, the United Kingdom, met it for the first time last year. A historic debate [42] and vote in Britain’s parliament committed its current and future governments to spend at least 0.7 per cent of its national wealth on development aid, currently around $23 billion Cdn. It joins Belgium, Finland, France and Spain in making a commitment to a timetable to reach the target.

Policy imperatives to reach the proposed sustainable development goals:

As wealthy, resource-rich countries, with the world’s longest coast lines and the world’s most fresh water, Canada and the United States could afford to give much more. Civil society leaders [43] are calling on the United States and Canada to align their development agendas [44] with the proposed sustainable development goals, tackle inequality, integrate environmental concerns into decision-making and take a more holistic approach to development. This means tackling these issues not only abroad but also at home, where we will one day have to answer for child poverty among minority populations in the United States [45] and the poverty endured among First Nations communities [46].

To reach the next 15-year goals by 2030, we will need politicians and policy-makers with the courage to keep their promises and we will need to keep watch on whether those promises are delivered. Academics and policy-makers will also need to help develop the post-2015 Development Agenda. The SDGs need to be formulated at multiple levels, from global to local levels. Governments, supported by business and civil society will need to agree on new intergovernmental processes that could undergird the new SDGs.

Global governance in order to achieve global Goals

Concepts that go beyond national boundaries and interests, like global governance, transnationalism and the latest new term ‘metagovernance’ [47] will continue to be useful in terms of developing coordinated approaches to designing and managing the SDGs. Traditional hierarchical styles of governance are insufficient because complex problems require new styles of communication, different contracts, new covenants, open dialogue, trans-boundary marketing and heightened trust. More ethics, pluralism and tolerance in consensus-style democracies must be developed along with decentralized networks and improved policy coherence. People at all levels of government should think beyond their own national traditions and cultures at the same time as they add more layers of complexity to governance. Everyone will need to design more and better solutions that take a global governance perspective.


The human species is inexperienced and sometimes fails at designing multilevel institutions. The European Union can be characterized as ‘a supranational instance of multilevel meta-governance governing a wide range of complex and interrelated problems’ that is evidently not flawless [49]. Fundamental issues that have impeded the EU are the slow dissipation of the political will to stay together combined with the threat of a British exit along with the possibility of financial meltdowns stemming from problems with EU-members, like Greece, Italy and Portugal. The EU’s ongoing struggle to cope with the Syrian refugee crisis is more evidence of enormous problems made more severe by lack of momentum and less-than-unified determination. Yet without the EU, all Europeans would struggle much more today with truly insurmountable problems that stem from the global financial meltdown and worldwide refugee crisis. The same is true of the UN—for without the UN, we would have to struggle to reinvent it. Rather than jettison newly-emerging global institutions and methods of global governance, like the EU and the UN, we must develop newer styles of consultation and decision-making [49] that improve global governance outcomes.

Conclusion

This study indicates the SDGs are more aspirational philosophies of development that stem from many different and rather competing objectives than inclusive goals rooted in unified political will and momentum. Nevertheless, the new SDGs represent the world’s aspirations and are global goals worth sharing.

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About the author Dr. Erika Simpson is a director and past vice-chair of the Canadian Pugwash Group on Science and World Affairs, vice-president of the Canadian Peace Research Association, and an associate professor of international relations in the department of political science at the University of Western Ontario. In 2015 she was awarded the Shirley Farlinger Award for Peace Writings by Canadian Voice of Women. Mailing Address Department of Political Science, Social Science Building, Western University, London, Canada, N6A 5C2 Tel: 519-661-2111 Fax: 519-661-3904 e-mail: [email protected]


The Influence of Internal Factor on Financial Performance and Firm Value: Evidence from Property and Real Estate Companies Listed in Indonesia Stock Exchange Tsabita Karima a

a University of Trisakti, Jl. Kyai Tapa No.1 Grogol, West Jakarta, Indonesia.

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Incidence of Building Collapse in Nigeria: Case of Lagos State Layi Egunjobi a , Ademola Adebayo b a Department of Urban & Regional Planning, Faculty of the Social Sciences, University of Ibadan, Nigeria. bDepartment of Urban & Regional Planning, Faculty of Environmental Studies, The Oke-Ogun Polytechnic, Saki, Oyo State, Nigeria

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Sustainable development goals worth sharing Erika Simpson Department of Political Science, University of Western Ontario, London, Canada

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OIDA Publications Ontario International Development Agency 364 Moffatt Pond Court Ottawa Ontario, K2J 0C7 Canada Published by Ontario International Development Agency, Canada.

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