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LOCAL FINANCE: MORE MONEY FOR INFRASTRUCTURE

2018-01-29 09:51:05

Indonesia improved its access to international finance last year when it sold its first rupiah-denominated “Komodo” bond—named after the fearsome dragon found in the east of the archipelago. This year the financial service regulator, the OJK, wants to make it simpler for local governments to issue their own debt to finance infrastructure improvements.

President Joko Widodo has prioritised infrastructure upgrades after decades of neglect since the Asian crisis of the late 1990s, but the state of roads and ports remains woeful. It raises transport and other costs, raising prices for consumers and making industry less competitive.

The government says it needs to spend more than US$400 billion on infrastructure by 2019, but the problem is not simply a lack of money. Nonetheless, the government is increasing the financing options available. On December 13th Indonesia’s state-owned motorway operator, Jasa Marga, raised US$295 million on London’s stock exchange by selling a Komodo bond—a bond denominated in rupiah but traded on international markets.

Now Indonesia’s larger regions should find it easier to sell municipal bonds after a relaxation of the rules announced by OJK on December 29th. Wimboh Santoso, the OJK’s chief, told reporters he hoped the first bond sales would happen this year.

Legislation allowing local governments to sell bonds has been on the statute book for more than a decade, but so far there have been no sales because would-be sellers have failed to satisfy requirements for approval from the national government.

AIPEG has supported the government by advising the Ministry of Finance, Ministry of Home Affairs and other agencies on improvements to municipal-bond regulations while safeguarding the sustainability of public finances. In addition, AIPEG reviewed the OJK’s regulations and assisted the government disseminate guidelines to local governments. As additional finance becomes available, efforts to improve planning, project design and prioritisation are critical.

“Municipal bonds are a powerful tool to provide much-needed private investment for infrastructure and to improve local governance through better credit worthiness,” said Rabin Hattari, AIPEG’s lead adviser at the Coordinating Ministry for Economic Affairs.

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