Concentration Risk in a Public Revenue Portfolio: What a Legislated Reassignment Reveals

Abstract

Firms are expected to know their concentration risk. Governments are not usually asked the equivalent question, because public revenue is treated as a policy category rather than as a portfolio with a risk structure. This article applies portfolio reasoning to a case in which the risk crystallized. Central Java Province held 79.2 per cent of its tax revenue in vehicle-related instruments when Law No. 1 of 2022 reassigned 66 per cent of the two largest of them to lower-tier governments with effect from 5 January 2025; provincial tax revenue fell 19.51 per cent in a single year. The article makes three arguments. First, the exposure was observable in advance from published accounts and was not a tail event: the reassignment was legislated three years before it took effect. Second, the conventional public-sector measure of revenue quality — own-source revenue as a share of the total — is insensitive to concentration and would have recorded the province as strong immediately before the loss. Third, the reform did not eliminate the exposure but redistributed it: across the 35 receiving jurisdictions mean dependence on the reassigned stream reached 37.0 per cent, and dependence was inversely related to pre-reform capacity, so that concentration came to rest in the weakest units. The article proposes that public revenue be assessed on two axes rather than one, the second constructed from the counterparty controlling each stream rather than from its accounting classification.