Regions may issue bonds next year

Rendi A. Witular, The Jakarta Post, Jakarta

Local administrations will be permitted to issue bonds and seek loans from domestic banks starting next year, following the issuance of the necessary ancillary regulations later this year.

The package of regulations is likely to be issued sometime soon to help compensate for the current ban on local administrations seek loans from abroad, with the exception of Nanggroe Aceh Darussalam.

The central government's intentions were conveyed by President Susilo Bambang Yudhoyono during his address to members of the Regional Representatives Council (DPD) on Tuesday.

"It is important for me to emphasize that for reasons of macroeconomic prudence and stabilization, for the time being local governments will not be allowed to directly seek foreign loans until such time as the necessary regulations for this have been finalized," said Susilo.

Based on the Intergovernmental Fiscal Balance Law, which was endorsed by the House of Representatives in September of last year, local administrations are allowed to raise money domestically, including through bond issues, pending the completion of the package of regulations.

Several rich provinces, including Riau, East Java and East Kalimantan, have urged the central government to speed up the issuance of the regulations in order for them to be able to issue bonds to finance their development projects, mostly involving infrastructure.

The provinces say such financial freedom is essential as they can no longer depend on the cash-strapped central government to improve infrastructure in their regions.

Meanwhile, head of the Ministry of Finance's Economic, Financial and International Collaboration Studies Agency, Anggito Abimanyu, said the regulations would be issued later this year.

"We expect that local administrations will be able to issue bonds and seek bank loans starting next year. This is to reduce the disparity in the availability of financial resources between the central and local governments," said Anggito.

It is expected that the final say on the value of bond issues and loans will be in the hands of the central government.

The central government will also select rating agencies to assess the risks involved, he added.

The regulation will also require local governments to comply with the prevailing regulations, such as those set out in the Capital Markets Law, and that the bonds be issued in rupiah.

Anggito also said that the central government would not underwrite the bonds.

Elsewhere during his speech to the DPD, President Susilo emphasized the need for local administrations to help the government out in providing fuel subsidies by allocating part of their revenues from the oil and gas sector for the development of public services in poorer areas.

Under the law as it currently stands, a local administration receives 15 percent of the oil revenue and 30 percent of the gas revenue from the oil and gas it produces, while the central government gets the remainder. In return, however, the government has to shoulder the huge burden of paying for fuel subsidies.

"With high global oil prices, some oil and gas-producing regions are receiving windfall profits. I hope they can share these profits with poorer regions as the central government is facing straightened circumstances as a result of higher fuel subsidy spending," said Susilo.