Graft stalks local bonds

Graft stalks local bonds

The Jakarta Post/Jakarta

The new version of the Revenue Sharing Law, which allows
regional governments to raise funds by issuing bonds, could lead
to serious fiscal trouble due to a lack of sound debt management
skills and rampant corruption, experts warned.

"We should cautiously welcome the decision, while it provides
regions with more financing alternatives, they however, should
not see this as a chance for easy profit without being supported
by sound debt management," Pande Radja Silalahi of the Center for
Strategic and International Studies (CSIS) said on Thursday.

"Many cases in Latin America should serve as a warning for us.
Poor debt management at the regional government levels hurt the
whole nation," Pande added, referring to Mexico, Argentina and
Brazil, all of which have have been weathering serious economic
crises, partly because of an acute inability of their respective
regional administrations to repay the debts.

Defaults by regional governments will, in turn, affect the
whole economy because it would mean a downgrade in the country's
overall rating.

The House of Representatives on Thursday endorsed a bill
amending the 1999 intergovernmental Revenue Sharing Law, which
allows regions to issue debts to raise cash.

Provinces and regencies must first obtain approval from their
respective local councils and the finance ministry before issuing
bonds.

As the last person who signs approvals for any regional bond
issues, the finance minister would play a key role in applying a
one-roof policy, to avert possible defaults on those debts, Pande
said.

The provincial administrations of Riau and East Java are among
the local governments that have reportedly been making
preparations to issue bonds. But some local academicians, at
least in the oil and gas rich province of Riau (which produces
half of the country's oil output) have opposed the plan, saying
that what Riau needed most was not more debt, but clean
government and sound management of local wealth for the benefit
of the people to eradicate poverty. They feared that increasing
debt could create a fiscal disaster in the future amid weak
governance and widespread corruption in public sector projects.

Fauzi Ichsan, Standard Chartered economist, also cast doubt
over the bonds, saying it would only benefit wealtheir regions,
as the poor ones would find it hard to lure interested investors
even if they were given the green light to issue bonds.

That would then widen the already huge fiscal disparities
among regions -- a situation that would run counter to the
primary aim of the policy in the first place. The intention from
the beginning of the policy was to broaden financial source
alternatives for regions and thus reduce the existing
disparities.

"So, the rich ones will be able to take greater advantage of
this, moreso than the poor ones. It's rather confusing in fact.
Why would they need to issue bonds when they are already
receiving hefty portions of revenue from their natural resources
under the autonomy law?" said Fauzi.

Another source of concern was the lack of an effective control
mechanism to prevent corruption, he said.

"A good monitoring system is hardly feasible on the central
government level, how are we going to do it in more than 350
local governments?"

Key Points on Regional Bonds

Regional bond issue is determined by regional regulation

Regions must comply with the regulations laid out in the
Capital Market Law

Regions will manage and take full responsibility of respective
regional bonds

The central government will not guarantee regional bonds

Regions can buy back bonds they have issued

More detailed rulings on regional bonds will be regulated by
central government regulations (PP)