Sub-national government capital spending is important for both public service delivery and economic development. Currently, Indonesian sub-national public capital spending appears barely sufficient to cover the annual depreciation of its fixed assets. A substantial proportion of local government investment spending goes to create relatively unproductive assets, such as administrative office buildings. Sub-national governments finance their capital acquisitions out of gross operating budgets and have thus far not used, to any great extent, either borrowed funds or their significant cash reserves for such purposes. Indonesian sub-nationals need to spend more on capital than they do now and also need to focus that spending on more useful types of infrastructure. The major constraints to increasing capital spending at the sub-national level are not related to a dearth of finance, but regulatory rigidities in budget preparation and implementation and, most importantly, a lack of capacity to plan, design and implement investment projects.