application of the Williamson’s index as multiple distributions of relative weights can lead to the same value of the index. The use of the Williamson’s index in determining formula factor weights also causes complexity, non-transparency, uncertainty and inequity in individual allocations. Individual jurisdictions entitlements can change from year to year and relative to others for no apparent justification.

_Non-neutrality to amalgamation and incorporation decisions._ The expenditure need determination component formula is also non-neutral as to the amalgamation and incorporation decisions. Using composite index indicator and referencing the transfer not to per capita but to average of total fiscal need or fiscal capacity may contribute to non-neutrality to fragmentation of jurisdictions. Amalgamation of existing jurisdictions leads to lower central transfers for amalgamating jurisdictions and break up of existing jurisdictions benefits all in terms of higher per capita central transfers (see Table 6 from Marwanto Harjowiryono, 2011). No wonder, three new provinces have been created and the number of cities/districts mushroomed from 336 in 2001 to 502 in 2010.

**Table 6. Existing DAU Allocation Rewards Jurisdictional Fragmentation**

|**Province**|**Number of**<br>**Districts/Cities**<br>**in 2001**|**Number of**<br>**Districts/Cities**<br>**in 2011**|**Total DAU for**<br>**Districts/Cities**<br>**in 2001**<br>**(billion Rp)**|**Total DAU for**<br>**Districts/Cities**<br>**in 2011**<br>**(billion Rp)**|**% change**<br>**in DAU:**<br>**2001-2011**|
|---|---|---|---|---|---|
|**Kalteng**|6|14|0.9|5.5|528%|
|**Yogyakarta**|5|5|0.9|2.7|216%|

Source: Marwanto Harjowiryono (2011) _Inequity for large urban and rural jurisdictions._ Finally and most importantly expenditure need determination uses a one size fits all approach and assumes per capita fiscal needs of large cities are similar to those of a small town or a rural district when it uses aggregate average spending for all local governments as a reference point. This creates tremendous injustice for large urban and large rural areas.

_Complex, non-tranparent and inequitable allocations._ In sum, the gap filling approach is unnecessarily complex, non-transparent and uses a macro approach that is not well grounded in the local realities to ensure inter-jurisdictional equity. These manna from heaven transfers also create an incentive and accountability structure that is not conducive to responsible, responsive, fair and accountable local governance. Simpler alternatives as outlined in the following paragraphs have the potential to enhance efficiency and equity of such transfers mechanisms.

# **4. DAU Simplification Reform Alternatives**

In the following three alternative options for the reform of DAU are presented. Common elements of these three alternatives are:

- One size does not fit all. Requires grouping (clustering) of local governments by population size, area and class of local governments.

- The adopted formula must have a sunset clause of five years but interim changes in the formula should not be allowed.

- The formula must have ceilings and floors to keep yearly entitlements stable and predictable.

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