**Box 2. Indonesia - Constitutional Provisions Relating  Ownership, Management of  Natural Resource and Sharing of Revenues**

**Article 18** . Since Indonesia is a unitary state (eenheidstaat), there will be no region under its jurisdiction that constitutes another state (staat). **Article 18A:1** . Relations as to authority between the central government and the administrations of a province, a kabupaten, a kota, as well as between a province and a kabupaten or a kota, are to be regulated by law with special regard for the specificity and diversity of each region. **Article 18 A2** : Relations as to finance, public services, the exploitation of natural and other resources between the central government and the regional administrations are to be regulated by law and implemented in a just and synchronized way.

**Article 33** . The land and the waters as well as the natural riches therein are to be controlled by the state to be exploited to the greatest benefit of the people.

Source: The Constitution of Indonesia -1945

# **5. The General Purpose Gap Filling Transfer – Dana Alokasi Umum (DAU)**

This transfer according to Law 34 (2004) is intended to balance revenue means with expenditure needs for sub-national governments providing central financing in ―proportionate, democratic, fair and transparent manner‖ by taking into account ―local potential (fiscal capacity) and conditions and local needs‖. Total pool of this transfer is arbitrarily set at of 26% of central revenues net of tax sharing transfers in 2011. 20% of the total pool is allocated to provinces and the remaining 80% to all cities and districts. DAU provides a basic allocation to cover wages of provinces. cities and districts. The remaining funds are allocated by formula that determines fiscal gap based upon the differences between fiscal needs and fiscal capacity. Formula factors for both provinces and cities are the same but receive differential weights due to the peculiar application to DAU allocation of the weighted coefficient of variation- the so called Williamson‘s Index (see Tables 7 and 8).

The following paragraphs present a review of the two major central transfers- general purpose transfer (DAU) and the specific purpose grant –DAK.

# **5. The General Purpose Gap Filling Transfer – Dana Alokasi Umum (DAU)**

_The General Purpose Gap Filling Transfer – Dana Alokasi Umum (DAU): An Introductory Overview_ The general purpose unconditional transfers – DAU, constitute the dominant sources of revenues for provincial and local governments in Indonesia. As part of the DAU transfers, the Central Government of Indonesia provides a basic allocation for wages and salaries and a fiscal gap transfer if a jurisdiction‘s revenues fall short of calculated expenditure needs using macro indicators. These transfers accounted for 56% of total central transfers and financed 46% of subnational expenditures.

These transfers according to Law 34 (2004) are intended to balance revenue means with expenditure needs for sub-national governments providing central financing in ―proportionate, democratic, fair and transparent manner‖ by taking into account ―local potential (fiscal capacity) and conditions and local needs‖. Total pool of these transfers is arbitrarily set at of 26% of central 14