Please note that urban _kabupatens_ that are part of large metropolitan areas may be treated just like cities ( _kotas_ ) and grouped with cities. Meanwhile, the fiscal capacity and fiscal needs would be calculated as follows:

**Fiscal capacity** is defined to include potential revenues from own sources (PAD) if the jurisdiction applied group average tax effort to own bases plus tax shares and transfers (DBH Pajak) plus potential natural resource revenues (DBH SDA) plus other grants. A simple way to calculate potential own source revenues would be to apply national average effective tax rate to local nonresource GRDP (in this simulation, it is proxied by using non-oil and gas GRDP). Potential resource revenues will be similarly calculated by applying national average effective resource tax rate to local resource based GRDP only (in this simulation, it is proxied by using oil and gas GRDP). Due to instability of resource reveues, and higher public expenditure needs with resource exploitation and exhaustible nature of some resources only 50% of resource revenues will be counted towards revenue capacity of resource rich regions as done in Canada. Revenues from specific purpose grants will be fully included. Capital grants and loans earmarked to finance spefic projects to finance centrally determined infrastructure deficiencies will  be excluded from such calculations.

**Fiscal need** is calculated for a representative expenditure system of about 10 functions comprising most of local operating expenditures. This expenditure system will be dfferentiated by size class of local governments and will have service population indicators as determinants with weights based upon aggregate group local government expenditure for the specified function based on a 3 or 5 years group moving average. Table 8 provides illustrative expenditure functions, service indicators and weights based upon 2008 expenditures only. Since the data for public housing is unavailable, its weight is distributed to other field of services.

The allocation for Alternative 1 is then determined by a simple gap-filling for the per capita fiscal gap, that is the difference of per capita fiscal capacity and per capita fiscal need. The per capita fiscal gap for each region is multiplied by the service population to give the fiscal gap or DAU allocation of the first alternative. Total allocation of DAU is, however, capped at 26% of net GOI revenues as prescribed in the law. This means a proportionate reduction of grant funds for all jurisdictions based upon the availability of funds factor.

**Table 8. DAU Fiscal Need Compensation: Alternatives—Provinces, Cities (C1...C4), Districts (D1...D4)**

|**Expenditure function**|**Need Indicator**||**Weight (%)**||
|---|---|---|---|---|
|||**Provinces**|**Cities**|**Districts**|
|**General administration**|population (66.6%) and area<br>(33.3%)|52.1|29.3|35.0|
|**Law and order**|population|0.6|||
|**Law, order, and fire protection**|||1.0|1.0|
|**Education**|school age population|7.3|30.4|20.0|
|**Health**|weighted population of age group<br>with higher weights for age groups<br>0-5 and 65+|6.0|9.2|17.5|
|**Social protection and welfare**|no. of unemployed|1.0|2.3|1.5|
|**Housing**|no. of people in public housing or<br>no. of units ofpublic housing|Annulled|Annulled|Annulled|
|**Roads and transportation**|km of roads|10.0|10.0|10.0|
|**Agriculture and forestry**|area|6.0|||

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