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Indonesia’s Village Fund: An Important Lever for Better Land Use and Economic Growth at the Local Level

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Published: April, 2018

In keeping with its goals for sustainable economic growth and an inclusive and equitable economy, Indonesia is committed to avoiding deforestation. As the drivers of deforestation often originate from activities outside of forest borders, it is not enough to solve deforestation by conducting segregated actions targeted to specific forest areas. Indonesia must also work to strengthen the rural economy and improve regional collaboration by working across various administrative jurisdictions that encompass forest governance. To ensure the success of this jurisdictional approach, improved economic power and village governance are key.

In recent years, the Government of Indonesia has made numerous fiscal policy changes to enhance its rural economy, most notably the Village Fund instrument, which has been in effect since 2015. These efforts are in line with the government’s mission to develop Indonesia “from the periphery,” President Joko Widodo’s signature phrase to emphasize his priorities on marginalized and less developed regions.

Study Approach

This study provides recommendations on how the Village Fund can be used more effectively for stronger rural economic development, underpinned by
sustainable resources management. We looked at national-level data on Village Fund usage and priorities, and we also collected fiscal data on villages in three
districts: Katingan and Kotawaringin Timur in Central Kalimantan, and Berau in East Kalimantan.

Findings

Overall, we found five major challenges limiting the Village Fund’s potential to encourage sustainable village practices, and have identified opportunities to address these challenges. These opportunities exist across jurisdictions, beginning with interventions that are implementable within villages, and progressing to those that will require the involvement of the central government.

1. Districts include “sustainability” as a component of their development planning, but this is often not harmonized with village plans. Integrating village priorities into district planning will create better sustainability planning and fund allocation from districtto villages.

The Village Fund is a relatively new fiscal instrument that, in many ways, lies outside of what has traditionally been considered central-to-regional fiscal transfers. The process of accessing district funds and village funds are completely different, and have no perceptible influence on one another. Consequently, the preparation of village development plans do not need to take into account the larger goals set by the district government, which often include environmental goals.

The Government of Indonesia has issued Ministry of Home Affairs (MoHA) Regulation Number 114/2014 on Village Development Guidelines, which aims to synchronize development planning between village and district. However, while village development planning is governed by this regulation of the Minister of Home Affairs, the Village Fund use is governed by a regulation of the Minister of Villages. The two regulations are not in sync with each other. This may explain why, from the districts we observed, synchronization has not been fully complied with in all villages yet.

To alleviate this discord, regional governments can develop brief guidelines to integrate the two regulations in a simpler and comprehensive way.

We found two examples where districts are attempting to synchronize village planning and Village Fund utilization. Both examples are in Java, and used a two-step method. First, they synchronized the District Mid-Term Development Plans (RPJMD) with the Village Mid Term Development Plans (RPJM Desa). Second, they synchronized the Village Work Plans (RKP Desa) with the District Work Plans (RKPD).

Streamlining the Village Fund into district planning would remove unnecessary bureaucratic processes, and help to develop better coordination between the district government and the village government.

The synergy between district and village planning could be also improved by gradually giving the district governments discretion to distribute the Village Fund according to each village’s condition, and in accordance with district sustainability goals. In order for such a policy change to happen, the district-to-village allocation must be standardized by a District Regulation and a Head of District Regulation in order to minimize the risk of misuse.

2. Village Fund administration is prohibitively complicated for villages. In order to improve, more resources should be put into maximizing the role of the Village and Community Empowerment Office.

The main village authority with influence over Village Fund management is the Village and Community Empowerment Office (Dinas Pemberdayaan Masyarakat dan Desa), under the District Government’s authority. However, according to our interviewees, the role of the Village and Community Empowerment Office has been limited to administrative facilitation, despite having authority to tackle matters of substance. In practice, they have not been involved in much substantive decision-making, nor have they been empowered to provide guidance on which programs the village could spend its Fund on.

Village governments’ technical capacity and planning experience is a significant factor in determining whether sustainable land use activities are included in the village development plan, including how the Village Fund is being utilized to support these activities. Our interviewees described the Village Fund paperwork as burdensome for an already limited number of village officials. Meanwhile, village officials, including the Village and Community Empowerment Office, often lack sufficient planning and budgeting skills.

Villages face particular challenges in planning and budgeting when they start to incorporate more elaborate programs, such as in economic development, community empowerment, and natural resource management, including land use and environmental protection (e.g., forest fire prevention and suppression).

The Village and Community Empowerment Office, as the main village authority to provide facilitation and support to village development planning and program implementation, holds promise in this regard. Their role should be fulfilled to its maximum potential by empowering them to provide substantive technical assistance in planning, budgeting, and financial reporting. They also hold authority to guide and facilitate the creation of more village programs on sustainable development and environmental protection.

3. Spending on environmental management is allowed, but not encouraged explicitly enough. Guidelines on how the Village Fund can be spent on sustainability should be created.

Village Development activities, including improvements to roads, bridges, irrigation systems, ports, etc., represent the largest use of the Village Fund, committing 82.2% in 2015 and 89.8% in 2016. However, much less is spent on Community Empowerment, despite also being a priority.

By law, the Village Fund can be allocated towards resource management, economic development, and/or environmental protection. But, so far, the Village Fund has mostly been used for infrastructure development. In the villages we observed within the scope of this study, however, the Village Fund has not been spent on infrastructure for environmental conservation, infrastructure for agro-industry, or supporting conditions for environmental conservation.

Village governments tend to focus Fund spending on a limited number of activities that utilize large amounts of financial resources (e.g. infrastructure development), rather than spreading the allocation into more activities that are less capital-intensive (e.g. environmental protection, agricultural productivity improvement, etc.).

Detailed guidelines for government officials on Village Fund spending decisions will help create confidence when spending on activities that support sustainable land use. The guidelines can be developed in the form of district-level regulations, which can then serve as a basis for the village government to make planning and spending decisions.

4. Villages are rigid in interpreting how the Village Fund can be used, limiting their scope to innovate. Creating a negative-list, instead of a list of allowable spending categories, will enable villages to create sustainable programs based on their own local needs.

We found that the existing rules relating to the priorities of the Village Fund are seen by village officials as limitations that do not allow room for innovation.

Instead of having a long list of allowed activities, which is often perceived literally by the villages, the Ministry of Finance, together with the Ministry of Villages, should create a ‘negative list’ consisting of the few activities that are absolutely prohibited when using the Village Fund. This practice has been done in successfully Berau and could be replicated elsewhere.

The ‘negative list’ could help reduce the misinterpretation that usually occurs during process planning, and provide freedom for villages to design the most needed or best-suited programs in their own village.

5. The Village Fund formula has recently been modified to put more effort into poverty alleviation. With this as precedent, the formula could also be modified to encourage sustainability.

The Village Fund formula has been changed recently to improve its potential to achieve government priorities, which currently is to close the gap between the poorest and more well-off villages. This provides an important precedent, as it shows the Village Fund may be able to accommodate a new sustainability variable in its formula, should the government wish to prioritize environmentally sustainable villages.

The challenge with this is that there is not yet any defined indicator for sustainable land use. Unlike welfare indicators, such as the percentage of a population below the poverty line, sustainability indicators can consist of many things, and may even differ from one village to the next.

The possibilities of having a specific indicator, or perhaps even an index, that can be inserted into the Village Fund formula to push villages towards sustainable land use practices, are possibilities that merit further study. CPI will be exploring this in more detail in follow-up studies.