Bad debts in provinces hurting investment

Bad debts in provinces hurting investment

The Jakarta Post, Jakarta

About half the money that provincial and regency
administrations owe to Jakarta has not been paid back, according
to a recent study which adds that poor debt records on top of
security and legal concerns contributed to the weak investment
climate in the regions.

A study by Asian Development Bank (ADB) consultants, Tasman
Economics and Monash International showed that debt repayments by
local governments had fallen behind their due dates by between 40
percent and 50 percent.

As of December 2001, local governments' total debt to Jakarta
amounted to Rp 5.14 trillion (about US$571 million).

"We note the local government arrears -- poorly documented but
approximating 40 percent to 50 percent -- create an atmosphere
where banks and investors refuse to commit funds despite sound
potential investments," said Tasman Economics chairman Michael
Porter in his paper distributed during a seminar on fiscal
decentralization on Tuesday.

Tasman Economics and Monash International's study focused on
the impact fiscal decentralization had since it went into effect
in January 2001.

"The problem here is that debt servicing is so poor that even
central government lending to local governments is deemed risky,"
Porter said.

George Fane of the Australian National University, noted in
his paper that only 29 percent of defaults were loans channeled
to local governments. The bulk, or 64 percent, were loans
channeled to local state-owned companies, dominated by water
companies.

Porter said water companies defaulted on their loans mainly
because they charged prices that were too low, as councillors
were averse to raising them.

The concern over the huge number of defaults, however, rests
not so much with the missing money as with the effect it had in
keeping much-needed investors away from the country.

"Given the poor infrastructure in most provinces and the
contribution that good infrastructure could be for local economic
development, this does suggest a central concern with financing
and repayment issues," Porter said.

Even without the regions' poor repayment record, investors
have been wary about the impact the autonomy laws might have on
their investments.

Under the 1999 autonomy laws, regions receive a bigger share
of revenue as well as the authority to manage it.

But a glut of local taxes and other fees have sprung up as
well, as regional autonomy compels regions to boost their own
revenues.

Legal uncertainties have surfaced over contracts signed with
Jakarta yet which fate now rests more with the local governments.

Reports of security problems like illegal logging and mining,
unruly labor movements and armed separatist groups adds to the
unfavorable investment climate.

Porter estimated that local revenues had more than doubled
thanks to fiscal decentralization. But much of the revenue, he
said, had gone into routine spending such as civil servant
salaries since regional autonomy had shifted many of them to
local government.

This came at the expense of development spending on needed
infrastructure investments like roads, water and energy, he said.

According to him, Indonesian private investors are capable of
developing these sectors but must be assured of the return on
their investments.

"What is needed is a basis for lenders viewing the borrowing
entity as having the capacity and the willingness and the
obligation to repay," he said.

This capacity, he added, depended on the pricing structure
with which companies generate revenue to pay back investors.

Several recommendations to curb defaults by local governments:

- Establish a debt servicing culture - with use or withdrawal of
the General Allocation Fund (DAU) as a penalty, for example.

- Forcing local governments to guarantee the borrowing of local
state-owned companies and have them pledge their receipts of DAU
as collateral for loans to these companies.

- Reward local governments that have not defaulted with a 5
percent reduction on their outstanding debts. Restructure debts
that are in default.

- Independent regulatory bodies for setting infrastructure
service charges to encourage private investments into the water
and electricity sectors.

- Local state-owned companies should borrow from state banks
while also requiring them to place their deposits in these banks.