Spring of 2001 and unanticipated costs owing to the final regional allocation to civil servants and the new organizations of local governments, and was not allocated on the basis of equalization.<sup>26</sup> Provinces received over a third of the 2001 contingency allocations or about 20 percent of their original DAU allocation, as they often took on “residual” employees that the local governments were unwilling to accept.

# **_DAU 2002 Allocations_**

4. The DAU 2002 attempted to improve on the DAU 2001, and drew on extensive domestic and international consultations (cf SBPKPD 2001) as well as political debate. Budgeted allocations were 69.1 trillion (4.1% of GDP or 20% of total central expenditures). Total shared taxes are estimated to add another 24.6 trillion to the regional coffers. The budget also allocated an additional 2.054 Trillion “balancing” fund ( _dana penyeimbang)_ , which effectively served as a contingency allocation.

5. Finally, allocations differed in five major respects: (i) did not include legacy centerregion INPRES/SDO allocations, but only estimates for actual post-decentralization realized regional wage bills for 2001; (ii) increased the fiscal gap formula component that sought to encompass both fiscal capacity and expenditure needs in fiscal equalization from 20 to 40 percent; (iii) introduced data for shared natural resources taxes (SDA) in the fiscal capacity formula component,<sup>27</sup> (iv) increased the lumpsum component that was equally distributed across regions, (v) the DAU 2002 was ultimately forced to “hold harmless” relative to the DAU 2001 (in part due to the addition to SDA allocations to fiscal capacity), (vi) the DAU was now allocated across more new regions (348 instead of 336) reflecting pressures for regional profusion in the system.

6. To illustrate how the final DAU 2002 amounts were generated, we draw on the local government example, although the process of provinces is similar.

- (1). DAUi = PWBAi + LSi + FGAi

7. The lumpsum (LS) is an identical amount for each region. The proportional wage bill allocation (PWBA) for 2002 is based on the actual annualized realized regional wage bill for 2002 (using September 2001 data). It is proportional in that it does not actually cover each Rupiah of regionally expended wages. The LS and PWBA were collectively referred to as the minimum or basic allocation. The DAU 2002 local government allocations are based 10 % on lumpsum, 50% on proportional wages, and 40% on the formula. The provincial allocation was based on a 20% identical lumpsum allocation across all provinces or local governments, 30% realized wage bill, and 50% formula. The fiscal gap formula amount (FGA) combined measures of expenditure needs and fiscal capacity. The formula used regional population, area, poverty gap, and cost index data as proxies for expenditure needs. Fiscal capacity included expected own tax (PAD)

> 26 With decentralization, local governments were allowed to determine their own organization structure (e.g., _dinases, badans,_ and _kantors_ ).  Depending on size and local preferences, regions chose more expansive organizational structures and numbers of management positions.  The number of management positions ( _echelons)_ had a significant bearing on local governments ensuing wage bill.

> 27 Aceh and Papau were not penalized for their additional natural-resource tax “fiscal capacity” under the 2002 DAU balancing formula component.

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