The effect of intergovernmental transfers on infrastructure spending in Indonesia

This paper examines the impact of own-source revenues and intergovernmental grants on districts? infrastructure spending in Indonesia. As capacities to generate local revenue are lacking, intergovernmental transfer (IGT) became the main source of local capital spending. This paper uses econometric models to examine the determinants of infrastructure spending. By looking at institutions and economic structure, the study argues for the increasing importance of IGT for local capital spending and shows that specific allocation grants are crucial to ensure local infrastructure spending. This paper calls for a specifically district-tailored IGT fund to accelerate infrastructure development and reduce further regional disparities across Indonesia. This paper contributes to the literature by looking at the effect of IGT on infrastructure spending in different types of regions, including districts in Java, districts with municipality status and metropolitan districts.