Draft Bill on Archipelagic Regions Proposed to Introduce Creative Financing Scheme to Boost Investment

Ester Sri Astuti, Executive Director of the Institute for Development of Economics and Finance (“INDEF”), has proposed that the Draft Bill on Archipelagic Regions (“Draft Bill”) include provisions on creative financing. She explained that such a financing mechanism is intended to attract greater investment into archipelagic regions, thereby strengthening their economic capacity and reducing their long-term fiscal dependence on the central government.

According to Ester, archipelagic regions should optimize alternative sources of financing beyond conventional fiscal schemes, such as the Special Allocation Fund (Dana Alokasi Khusus – “DAK”) and the General Allocation Fund (Dana Alokasi Umum – “DAU”), to support regional development. "Regional governments need to be encouraged to adopt creative financing mechanisms, which means creating conditions that attract investment," she said.

Ester further noted that, as an initial step toward implementing a creative financing framework, regional governments should improve the quality of their public expenditure. Based on data she has compiled, regional governments have historically allocated a larger share of transfer funds to routine operational expenditures than to capital expenditures. In her view, the proportion of capital spending should be increased to develop productive infrastructure, as private investment is more likely to flow into regions that are supported by adequate infrastructure.

In addition, Ester emphasized that the central government should revisit the fiscal allocation formula applicable to archipelagic regions. She argued that an allocation formula based solely on population size and land area fails to reflect the unique needs of archipelagic regions, which typically face significantly higher logistics costs.

"A policy review is indeed necessary because a DAU formula based only on population and land area will never adequately address the needs of archipelagic regions," she said.