THE IMPLICATIONS OF THE STUDY

The implementation of fiscal decentralisation will ideally provide many advantages for local governments as they then have the authority to manage the resources owned or received from the central government. Local governments are believed to have better information about local needs and which should be prioritised, and also about the resources required for the provision of local needs. Decentralisation encourages local government efficacy and efficiency in allocating these resources; as local government is more efficient, more sectors will be covered, so this will accelerate government in achieving local prosperity.

However, the implementation of fiscal decentralisation may lead to a new problem related to the exceeding of authorisation, one of which is the emergence of rent-seeking behaviour in utilising the local budget, which may harm local performance. There are a number of reasons that push local authorities to behave opportunistically using their budgets.

The results of the study have confirmed that grant transfers from the central government do not trigger the existence of rent-seeking in budget allocation. This finding is very interesting as it contrasts with previous studies related to the ineffectiveness of transfers from the central government. Most studies indicated that grants from the central government do not encourage local governments to be more creative in optimising local performance, which could support government funding in future times.

The results of the study have confirmed political reasons as the one of the determinants. As the local jurisdictions are selected through an electoral mechanism, strategies to influence the public become substantial issue for the incumbents. One of these strategies is allocating the budget in the targeted areas preferred by the public. The implication of this policy is noteworthy changes, in either the budget or its composition. Therefore, the budget allocation policy at times prior to elections is probably more concerned with the distribution aspect, rather than its productivity, and will lead to more budget dissipation.

176 | R e n t - s e e k i n g b e h a v i o u r i n l o c a l g o v e r n m e n t b u d g e t s

As shown in the results chapter, legislative elections have a significant impact on the indications of rent-seeking of the total budget amount. However, a similar effect does not exist at times before local leader elections. The result demonstrates that the year before the legislative election will always be a critical time for local government, particularly in the budgeting process. The legislative members who intend to run in the forthcoming election will possibly attempt to use the budget to accomplish their interest in satisfying their constituents. Giving more opportunities to the public in the budgeting, will be beneficial as this involvement can be an effective way in limiting the opportunity of rent-seeking. As it controlled and monitored directly by the public, the legislative members will be more watchful in of the public, particularly in inserting their interest in the budget.

A breakdown analysis of each budget function has demonstrated that certain budget functions are targeted by budget authorities for rent-seeking. The analysis has also been applied in relation to local leader elections, even though there was no indication of this opportunistic behaviour in terms of the total budget. Following previous studies (Drazen and Eslava 2010, Eslava 2005) that examined changes in targeted areas, the possibility of rent-seeking only occurs in specific fields that are more favoured, not in the overall budget.

Some budget functions are considered to be more beneficial in obtaining political support. Three budget functions are indicated as being optimised for rent-seeking (public services, housing and public facilities, and health) and two budget sectors (housing and public facilities, and health) in the years before local leader elections.

The study has indicated either the same or different preferences of the budget functions selected for rent-seeking. Both legislative members and local leaders are indicated to be still prioritising the infrastructure area to boost the support of voters. Housing and public facilities expenditure focuses on the procurement of housing and the improvement of public facilities, such as roads, drainage, water supply, electricity, green area development, etc. These budget allocations are directly perceived by the public, which means the public has the opportunity to assess the service provided by the local government. The high level of initiative of the government (the budget authorities) in relation to this function may become a strategic way of gaining political support, as it will be positively responded to by the public. However, legislative members and local leaders also have different priorities for the targeted budget functions related to the two main services that should be delivered to the public: education and health.

In relation to the benefit of the audit mechanism with a significant effect on limiting rent- seeking, this study recommends the importance of the implementation of audits in preventing the existence of this behaviour.

177 | R e n t - s e e k i n g b e h a v i o u r i n l o c a l g o v e r n m e n t b u d g e t s

Noting the determinants that have been found to have positive effects on rent-seeking, audit activity should be strengthened in order to prevent high levels of dissipation of local budgets. Local governments should perform close supervision and investigation of the use of the funds collected from the public (local revenue) and natural resources income. In addition, the use of local budgets should also be monitored and audited, particularly in relation to the specific functions showing a high possibility of budget dissipation.