**Table 9. Prices and production of oil in Indonesia (budgeted and actual)**

||**2000**|**2001**|**2002**|**2003**|**2004**|**2005**|**2006**|**2007**|**2008**<br>*****|**Avg.**<br>**2000-**<br>**07**|
|---|---|---|---|---|---|---|---|---|---|---|
|Oil price- budget (US$)|18.00|22.00|22.00|22.00|22.00|24.00|57.00|63.00|95.00|31.25|
|Oil price- actual (US$)|29.10|24.60|23.50|28.75|37.17|51.80|64.00|69.69|--|41.08|
|_percent difference_|_62%_|_12%_|_7%_|_31%_|_69%_|_116%_|_12%_|_11%_|--|_31%_|
|Oil roduc’n- budet|||||||||||
|p g<br>(MBPD)|1.46|1.46|1.32|1.27|1.15|1.13|1.05|1.00|0.927|1.23|
|Oil produc’n- actual<br>(MBPD)|1.41|1.34|1.26|1.09|1.04|0.99|0.96|0.90|--|1.12|
|_percent difference_|_-3%_|_-8%_|_-5%_|_-14%_|_-10%_|_-12%_|_-9%_|_-10%_|--|_-8.7%_|
|**_Oil & gas-related DAU:_**|||||||||||
|_Rp tr._<br>_Actual transfer,_<br>_based on_|9.6|18.1|16.4|17.3|12.5|13.3|40.7|40.2|34.3||
|_projected rev._<br>_% tot._<br>_rev_<sup>_†_</sup>|6.3%|6.9%|5.4%|5.1%|3.6%|3.6%|6.5%|5.6%|4.5%|5.3%|
|_Rp tr._<br>_Hypothetical_<br>_transfer, based on_|22.2|27.1|20.1|20.9|28.2|36.1|52.3|43.9|61.5||
|_realized rev._<br>_% tot._<br>_rev_<sup>_‡_</sup>|10.8<br>%|9.0%|6.7%|6.1%|7.0%|7.3%|8.2%|6.2%|6.9%|7.6%|

*2008 Revised budget (APBN-P).<sup>**_†_**</sup> Percent of total government revenue projected in the APBN.<sup>**_‡_**</sup> Percent of realized total government revenue. _Source: World Bank calculations based on Ministry of Finance publications._

The most important element of Indonesia’s transfer system – and the single largest item in the central government budget – is the general allocation grant _Dana Alokasi Umum_ (DAU) which represents 26 percent of the national budget. The DAU is based on the forward estimates of total government revenue made as the budget is approved – and not on realized outcomes. The central government retains any revenue above its projected revenue pool but must finance and transfer any over-estimate of DAU resources if oil and gas revenues turn out to be lower than projections (e.g., if oil prices and/or production are less than expected). Historically, this created an incentive for the central government to underestimate its likely revenue by projecting an unrealistically low oil price. Until 2006, this underestimation of the oil price assumption resulted in significant discrepancies between budgeted revenues and actual realizations, and between the amount of funds transferred under the DAU and the amount that would have been transferred based on realized receipts. (Table 9; see World Bank 2007a).

Oil prices play an indirect role in the resource transfers to the regions and it is not only the oil producing regions which will continue to benefit from high oil prices. In 2006, the DAU increased by 75 percent after the Government increased the oil price assumption from US$ 30 to US$ 60 per barrel, which was part of a broader improvement in revenue mobilization. Since then, sub-national government had even more difficulties spending their resources and by end-2006, their financial reserves reached US$ 10 billion First, oil tax and non-tax revenues represent 20 percent of national domestic revenues. Thus, a given percentage increase in the price of oil does not translate in to the same percentage increase in total domestic revenues net of revenue-sharing (which is used as a base for determining the pool of transfers). Second, only 10 percent of regional governments receive oil and gas revenue-sharing funds. Third, regional governments receiving oil and gas revenues have accumulated a windfall of financial resources in the past few years and still hold unused revenues in bank accounts. Estimates of oil-price to subnational revenue elasticities range across transfers from 0.19 for both the general allocation transfer DAU and the special autonomy and adjustment fund, to 0.37 for revenue-sharing (World Bank, 2007a).

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