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)