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It has been almost a decade since the introduction of a
municipal bond regulation in Indonesia, yet we are still awaiting for
the first local government to offer a municipal bond.
So, what does the future have in store for this new financing
alternative?
Thus far, a municipal bond has yet to be issued in Indonesia. Yet,
given the need of the regions to raise funds, municipal bonds, or muni
bonds, represent a promising source of financing.
This is especially true given the liquidity in the banking system and
the increasing appetite for alternative investment products at a time
of low deposit rates.
Local governments can benefit in a number of ways from issuing muni
bonds for such things as the financing of infrastructure projects that
need longer-term financing sources.
Furthermore, muni bonds are also exempt from tax, making them more
attractive to investors. Falling interest rates have also made the
issuance of muni bonds attractive, since in a climate of low interest
rates, interest costs can be reduced.
In issuing muni bonds, local authorities need, however, to have
competence in handling financing matters. Good governance is essential.
This means that they need to demonstrate professionalism, transparency
and bona fides. Healthy competition between local governments can also
be created.
Yet, from a negative perspective, it must be said that muni bonds are
relatively riskier than other investment instruments -- such as
treasury bonds, since no central government guarantee is provided.
Hence, higher returns must be offered to investors.
The issuance of a muni bond requires the approval of three different
authorities: the local legislative assembly (DPRD); the Ministry of
Finance; and the Indonesian Capital Markets and Financial Institutions
Supervisory Agency (BAPEPAM-LK).
At the same time, BAPEPAM-LK also requires local governments' annual
budget accounts to be audited. However, it is not common practice yet
for local governments to have their finances professionally audited.
This acts as a major obstacle to the issuance of local government bonds.
From the investor point of view, muni bonds are, of course, not without
risk. And if the local government mismanages its finances in a very
serious manner, there is a possible risk of default if it does not have
the financial resources to repay the principal.
Moreover, it should be noted that muni bonds are not guaranteed by the
central government.
Yet, looking forward, local governments need to remain upbeat with
regard to issuing bonds. And, while the preparations are being made,
key officials can receive the necessary training, possibly through
cooperation with the central government.
In particular, local governments can draw valuable lessons from the
central government's success in issuing its treasury bonds.
Of crucial importance is that local governments improve their
governance. This will result in greater transparency in their financial
affairs and also bring discipline to budgetary practices, thus making
it easier for them to prepare their annual budget accounts and have
them audited.
Moreover, regional governments should only issue muni bonds if the
proceeds will be used in an effective and appropriate manner to help
finance the region's investment needs. And, it goes without saying, the
regions must manage their finances prudently to minimize the risk of
default.
Experience from other countries shows that muni bonds have generally
been issued to finance the development of infrastructure and for public
services. Thus, it is important that local governments determine which
projects are viable and worthy of funding.
Moreover, local governments should be able to make policies concerning
debt capacity so they do not over lend. In addition, a longer term goal
would be to create a Municipal Finance Authority that is tasked with
promoting the financial well-being of local governments throughout
Indonesia. In this regard, the Municipal Financing Authority (MFA) of
Canada could serve as a useful model.
It is also important to explicitly state in the regulation who the
responsible parties in the issuance of muni bonds are. In this regard,
there are some safeguards already in place considering that the current
Anti Corruption Law states that the responsible parties retain their
liability even beyond their time in office.
This means that a lawsuit could be brought even if the responsible
party no longer works for the local authority. But another alternative
is the issuance of muni bonds with shorter maturities, such as has been
done in Ahmadabad and Tamil Nadu in India.
In summary, then, it is evident that muni bonds represent a promising
source of financing for cash-strapped local governments.
And if the proceeds are used properly, such bonds could help boost
economic growth and social development. Yet, concerns exist, especially
as regards establishing a strong and effective regulatory framework.
So, we may have to wait a little while yet until the first muni bond is
issued in Indonesia.
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