B

ank Indonesia has encouraged regional administrations to tap municipal bond financing in a concerted bid to accelerate the development of infrastructure, such as toll roads, power generators and small airports.

It has been almost 10 years since the enactment of government regulations on municipal bond issuance but not a single regional administration has been able to obtain approval from the Finance Ministry and the Financial Service Authority (OJK) to tap the bond market.

The central bank argued that current economic conditions are conducive for floating municipal bonds as the inflation rate has been stable at a single digit, below 5 percent. There is also a huge amount of funds repatriated under the tax amnesty, which seek alternative investment instruments.

Some financial analysts consider the stance of the Finance Ministry and the OJK on municipal bonds excessively cautious, given the potential of municipal bonds to increase financing capacity of regional governments, especially those in resource rich areas.

The terms and conditions for floating municipal bonds will generate a virtuous cycle of accountability and governance within regional administrations because issuing bonds will require them to improve budget transparency and accountability by having annual budgets audited by independent auditors and budget reports published.

Rating agencies will put regional administrations under close scrutiny in light of rating municipal bonds.

However, inadequate budget transparency, management and accountability are the reasons why not a single regional administration has been allowed to issue municipal bonds. Most regional governments have not yet received opinions from the Supreme Audit Agency. Many of them get disclaimers from state auditors.

To understand the need for higher standards of budget accountability, look at the rampant corruption practices related to regional budgets. Thousands of local legislative councilors, regents and senior officials in dozens of provinces, regencies and mayoralties have been jailed or are currently under investigation on charges of misusing regional budgets.

Therefore, we think the most effective way of encouraging regional administrations is by assisting those whose budget reports have garnered positive opinions to further improve financial management capacity in meeting the requirements to get investment-grade rating from credit rating agencies.

Given the multiplier impact of municipal bonds on increasing financing capacity and improving budget transparency and accountability as well as public sector governance, Bank Indonesia, the Finance Ministry and the OJK should pool resources to accelerate capacity building in regional administrations.

Bond floatation is the best alternative available for regional administrations to expand their financing capacity. As their taxing power is severely limited, regional administrations are allowed to float only revenue-based project bonds and not tax-secured debt instruments.

However, the Finance Ministry and the OJK should see to it that municipal bonds are issued to set the benchmark.