Regional financial management in terms of allocating capital expenditures is closely related to long-term financial planning, especially financing for maintenance of fixed assets resulting from the capital expenditure. According to the concept of the multi-term expenditure framework (MTEF), the capital expenditure policy must pay attention to the usefulness and financial capacity of the local government ( budget capability ) in the management of these assets in the long term. Capital expenditure is intended to obtain fixed assets of regional government, such as equipment, buildings, infrastructure, and other fixed assets. Theoretically there are three ways to obtain these fixed assets, namely: (1) building themselves; (2) exchange with other fixed assets, and (3) buy. Most in the case of government, usually the way to do is to build it yourself or buy.

The problem now is that the limited sources of funds to build asep remain, on the other hand this fixed asset is very much needed. Therefore, it is certain that the Regional Government will look for other sources, such as investors, third-party loans, and which are easier now by issuing Municipal Bonds (OD).

1. Introduction

1. Introduction

Government Regulation (PP) No. 105/2000 and Decree of the Minister of Home Affairs (Kepmendagri) No. 22/1999 affirms that the regions have the authority to determine the allocation of resources into expenditures by adhering to the principles of decency, needs and regional capabilities. Local governments, in collaboration with the Regional People’s Legislative Assembly (DPRD) as a legislative body, first determine the general policy direction (AKU) and budget priorities as guidance in allocating resources in the APBD. AKU and budget priorities are a synthesis of the results of the community aspirations so that a sufficient picture of short-term (annual) and long-term (five-year) policies relating to regional financial management policies is obtained.

Regional financial management in terms of allocating capital expenditures is closely related to long-term financial planning, especially financing for maintenance of fixed assets resulting from the capital expenditure. According to the concept of the multi-term expenditure framework (MTEF), the capital expenditure policy must pay attention to the usefulness and financial capacity of the local government ( budget capability ) in the management of these assets in the long term (Allen and Tommasi, 2001). Capital expenditure is intended to obtain fixed assets of regional government, such as equipment, buildings, infrastructure, and other fixed assets. Theoretically there are three ways to obtain these fixed assets, namely: (1) building themselves; (2) exchange with other fixed assets, and (3) buy. Most in the case of government, usually the way to do is to build it yourself or buy.

The problem now is that the limited sources of funds to build asep remain, on the other hand this fixed asset is very much needed. Therefore, it is certain that the Regional Government will look for other sources, such as investors, third-party loans, and which are easier now by issuing Municipal Bonds (OD).

This short paper will explain the above issues, and how their prospects for Regional Development.

2. Municipal Bonds

2. Municipal Bonds

LAW Number 33 of 2004 concerning Financial Balance between the Central Government and Regional Governments, opens up opportunities for Regions to obtain alternative funding through the issuance of OD. Explicitly the statement is contained in Chapter VIII, the seventh part about OD. However, these opportunities have not been matched by the readiness of the Region in managing and managing: (1) its internal organizational tools; (2) the relation with external parties. According to Gunoto Saparie (2008) management and structuring not only determines the steps for issuing OD, but also prepares from pre-activity to post-publication OD.

It was realized, that: “Minister of Finance Regulation Number 147 / PMK.07 / 2006” stipulates the procedures for the Issuance, Accountability, and Publication of OD Information that apply from 29/12/2006. In this policy, what is meant by OD is regional loans offered to the public through public offerings in the capital market. OD can only be issued on the domestic capital market and in rupiah . OD management is carried out by the Head of Region which includes the establishment of strategies and policies including risk control, planning and determination of regional loan portfolio structure, OD issuance, OD sales, OD buy back before maturity, and accountability. The Minister of Finance Regulation was taken in the framework of implementing the provisions of Article 36 of Government Regulation Number 54 of 2005 concerning Regional Loans.

Thus, the plan of the regional government to issue OD makes the situation very interesting, as the opening of the regional autonomy tap, especially with the existence of Law No. 33 of 2004 concerning Central and Regional Financial Balance and Minister of Finance Regulation No. 147 / PMK.07 / 2006 concerning Procedures for Issuance, Accountability, and OD Information Publication. Financing through bond issuance is indeed a relatively inexpensive financing alternative and the funds that can be obtained are quite large, but all of them will be accompanied by many consequences that must be fulfilled by the local government as an issuer .

3. Issuance Steps “OD”

3. Issuance Steps "OD"

There are several main steps that must be considered in publishing this “OD” (Novri Irza Hidayattullah, 2008).

(1) Reliable Human Resources and Transfarans

Prepare human resources who have reliable knowledge of “OD” and all the ins and outs, including preparing a reliable treasurer who knows the market behavior of bonds; Publishing “OD” will bring consequences that investors will demand transparency, accountability, and always monitor the performance of the local government in managing their development funds. In addition to the demands to pay for current obligations, it will also be accompanied by demand for performance and reporting that must be good so that the rating of the bonds issued has a good position in the eyes of investors or rating agencies that are the reference of investors. Thus, regional government employees must change their paradigm and mindset drastically in managing their finances and accountability. The accountability and transparency demanded by investors will cover the entire bond issuance process. Local governments must be transparent, including in the selection of lead underwriters who will become underwriters. Local governments can no longer use the same approach in managing debt from the central government that is bilateral and negotiable . In managing bonds, investors demand the consistency of payment of interest and principal on time, or the regional government will be assessed as default or default. If this happens, the regional government will lose market confidence and it will affect that no more investors are interested in financial instruments issued by the local government in the future, whether they are other bonds or may be in the form of mutual funds.

(2) Projects to be funded

Prepare projects that will be funded from the bond fund along with cash flow calculations which can be easily analyzed and accounted for with the assumptions that surround it. The calculation of cash flow is very important because from here investors will be able to see whether the project or the local government concerned will be able to generate enough revenue to pay for current obligations. The project to be financed through these bonds should be a project that provides multiplier effects to overall regional development, for example, is toll road development that can increase regional economic growth and stimulate the real sector to move. Regional income is not only from toll roads that are built but also from taxes generated due to regional economic movements.

(3) Determine the Amount of Fund Investments

The local government will formulate the amount of funds needed through the issuance of these bonds. Then the local government can immediately structure the bonds, including tenors and yields that are capable of being borne by the local government as issuers while the yield is in line with the level of market expectations that will absorb the bonds, as well as the bond marketing strategy to find investor buying interest.

(4) Appoint the Underwriter

In a good bond structure that can attract investors, the local government must appoint a lead underwriter or underwriter who has a good reputation in the market. The function and role of the lead underwriter will greatly determine the success of the bonds issued. The chosen lead underwriter must have good achievements and have a wide network of investors, and have an affordable emission fee value. The selection of lead underwriters is a crucial lag that is very decisive, so that there should be no hidden interests that influence the election decision. The local government can invite several underwriters who have a good reputation to take part in the tender and choose the best according to their needs, again without any other interests that can disrupt the reputation of the bonds to be issued.

(5) Bond Rating Agency

Another important step in bond issuance is the ranking process of regional governments by bond rating agencies, for example, Pefindo (Rating of Indonesian Securities). This rating agency has the task of evaluating and analyzing the ability of local governments to fulfill their obligations. Each newly published financial report or the emergence of important events involving the local government and are material and have an impact on the ability to pay obligations will change the position of the ranking results, and vice versa. Whether or not a local government issues bonds also depends on the ratings set by this rating agency, where one of the conditions is the result of an audit of regional financial reports carried out by independent auditors who are also considered credible.

(6) Publish “OD”

After careful preparation has been made, the regional government can issue bonds in the capital market through an initial public offering (IPO) mechanism.

This process requires a variety of preparations, including readiness of time schedule activities, document administration completeness, and bond marketing strategies. As well as various detailed preparations that must be done carefully so that the issuance of bonds produces maximum results in accordance with the expected plan.

4. Challenges in publishing “OD”

4. Challenges in publishing "OD"

Municipal municipal bonds are a very good choice, but are local governments ready? Many challenges must be answered by the regional government before issuing these municipal bonds.

The first challenge that must be faced by local governments in issuing bonds is to prepare human resources who have comprehensive knowledge of bonds and all the ins and outs. That is why the Minister of Finance has required a special division in the local government that deals with the issuance of these bonds.

Bonds are only allowed to finance projects, not to cover deficits. For this reason, the regional government must prepare projects that will be funded from the bond fund along with the calculation of the cash flow which can be easily analyzed and accounted for by the assumptions. Calculation of cash flow is very important because from here investors will be able to see whether the project will be able to generate enough revenue to pay for current obligations.

In accordance with Law 33/2004, only revenue and goods attached to the project can be used as collateral. This means that even though the local government is quite rich in other sources of income, such as natural resources, it cannot be used as collateral for the bonds issued.

The project to be financed through these bonds must be a project that provides multiplier effects to regional development as a whole, for example toll road development or integrated industrial areas that can increase regional economic growth and stimulate the real sector to move. Regional income is not only from toll road revenue / management of industrial estates that are built but also from taxes generated due to regional economic movements.

The logical consequence of bond issuance is the demand for transparency and accountability by investors to local governments as issuers , and investors will always monitor the performance of local governments in managing their development funds. Investors will demand performance and reporting that must be good, in addition to paying walking obligations.

Thus, the local government employees carry out the concept of good and clean governance and must also change the paradigm in managing finance and accountability. The accountability and transparency demanded by investors will cover the entire bond issuance process. Although Bapepam does not require a rating, the regional government must be able to provide adequate public accountability through an independent audit that can be accessed by stake holders.

It is no longer possible for local governments to use the same approach in managing debt from the central government that is bilateral and often negotiable when due. In managing bonds, investors demand consistency in the payment of coupons, interest and principal bonds according to time, or the regional government will be assessed as default. If this happens, the regional government will lose market confidence and it will affect that there will be no more investors interested in financial instruments issued by the local government in the future.

In issuing OD local governments must refer to real needs and ability to pay. The central government seems to be anticipating this, it is seen that the stipulated requirement that the total regional government debt, including its withdrawal, should not exceed 75 percent of the regional budget. The ratio of regional financial capacity to repay loans (debt service coverage ratio / DSCR) should not exceed 2.5%. Do not let the local government have to do reprofiling of the debt due to the payment of the principal, which encourages the increase in bond interest costs and reduces the allocation of funds for development, as well as the loss of market confidence.

Demands for transparency must also be implemented in choosing lead underwriters . There should be no hidden interest whatsoever, considering this is a crucial step that can affect market confidence in bonds issued. This includes not allowing investment fund companies that carry out all forms of window dressing and local governments to just sign it.

5. Risk of Issuance of “OD”

Like many other investment instruments, there are always risks that may come and must be anticipated. For this reason, an in-depth analysis of the risks that may arise both internally and externally is necessary. Mitigation of internal risks is usually reflected in the calculation of project cash flow that will be financed through the issuance of the bonds, while external risks will be largely affected by overall macroeconomic conditions, including political stability that must be maintained.

Local governments must be aware that risks that may arise must be borne alone. The central government will not be held responsible for obligations that arise, whether in the form of interest or principal bonds. The financing needs of regional development which are increasing in the midst of limited domestic funding sources originating from the central government, inevitably have to make local governments look for alternative sources of financing.

Some alternatives can be made by the regions to increase development financing other than through loans to the central government, including through foreign loans, international agencies or through the issuance of regional bonds.

For regions that still have a high dependency on balancing funds, small PAD with mediocre natural resources and regional companies that are still losing money, OD issuance seems to be an alternative financing for development

6. Alternative Regional Development Capital

6. Alternative Regional Development Capital

The government will not use bond issuance to cover regional budget deficits, but only finance projects that benefit the community and generate revenue. In the socialization of bond issuance in Jakarta, Minister of Finance Sri Mulyani Indrawati explained that the central government provides opportunities for regions that want to issue bonds. However, this desire should be accompanied by sufficient knowledge about the capital market, so that the issuance is not counterproductive. Sri Mulyani admitted that currently a number of LGs expressed their interest in issuing regional bonds. But the problem is expensive bond prices and bad projects. The Minister appealed to the LGs to make good projects so that a lot of prices could be cheap. The government currently continues to supervise and regulate the issuance of regional bonds until the regions are considered capable both in the community and in regional finance. Likewise, the availability of projects that are feasible to be funded by regional bonds. At present the deficit that can be covered by the issuance of regional bonds includes capital expenditures such as toll road construction and not routine expenditures such as salary payments. The Minister explained that public assets cannot be used as collateral for bonds except assets related to the project itself.

Regarding the regional bond issuance policy, there are two main elements that need to be considered, namely relating to regional government fiscal, including having to obtain Minister of Finance approval, and not exceeding 75 percent of the previous APBD, “Finance Minister Sri Mulyani said in Jakarta. Thursday (7/6) According to the Minister of Finance, the government has issued Minister of Finance regulations (PMK) No.147 / PMK.07 / 2006 concerning procedures for issuance, accountability, and publication of information on regional bonds. With the issuance of these regulations, regional governments can issue regional bonds in the domestic capital market to fund investments in infrastructure that generate revenue, the local government that is now taught how to owe, also needs to be given signs so as not to fall into debt traps or management in carrying out debt policy. more than 75 percent of the total APBD revenue, be Likewise, the ratio of the projection of the regional financial capacity to repay the loan is at least 2.5 fold from the loan, and does not have arrears on the return of loans originating from the government, the loan must be approved by the DPRD.
He also said that at present many local governments have made loans to the central government, but many local governments also want to accelerate the repayment of their loans to the central government.

Regions that will issue bonds and will offer to the public must submit a statement to Bapepam / LK, and after the public offering is completed, the regional bonds will be listed on the Stock Exchange. Sri Mulyani also said, the mechanism of public offering and trade in regional bonds must follow the applicable provisions in the capital market in the form of Bapepam / LK arrangements and other capital markets. Local governments that want to issue regional bonds, so that they are not only fixated on financing a project but must think and try to build their institutional capacity.

Besides that, the local government in issuing bonds must also see the funded project should provide sufficient income to repay the loan.

7. Investor Interest in “OD”

7. Investor Interest in "OD"

What are the prospects for this regional bond, will it be able to attract investors? Indef’s economic observer, Aviliani, believes that later on the issuance of these regional bonds will shift the corporate bond market and the stock market because regional bonds have a smaller risk, especially the bonds are guaranteed by the project and APBD. For capital market investors, regional bonds are a new investment instrument after central government bonds, corporate bonds, pension funds, and insurance, especially if the regional bonds offer attractive rates of return, ensuring investor interest will be high (SH / Khomarul Hidayat, 2007)

Aviliani said that regional bonds should be used for the safest financing, such as in the telecommunications sector, transportation, and utilization such as drinking water companies (PDAMs). The potential of the three sectors is still very large and only three percent is fulfilled by the outside community. Although these regional bonds will become attractive investment instruments, Avilian reminded the government to continue to carry out strict debt management by controlling all bonds issued by the central government, corporations, or later by the regional government.Without strict debt management, the potential for default (fear) is feared to occur when the bonds are due, especially bonds which are highly influential on macroeconomic conditions, especially on the rupiah exchange rate. Argentina’s experience may be a valuable lesson for Indonesia. Argentina in the late 1980s made bonds as a source of financing. Many bonds are issued without considering the burden at maturity. At the end of 2002, we witnessed the Argentine economy on the verge of collapse and triggered a mass enterprise due to the debt that paid off.

So many bonds issued by the country, at some point the market no longer wants to buy government bonds. As a result, the Argentine government cannot conduct refinancing to pay bonds that are due. In Argentina, this cycle occurs after 15-20 years, after the bond’s maturity period. In Indonesia, most bonds are under ten years.
Of course, the bad experience of Argentina in carrying out debt management should not occur in Indonesia. Issuance of bonds must be limited so as not to add to Indonesia’s burden and debt ratio. And of course, the risk of default must be avoided because like Argentina, the cost of taking this risk will be much greater.

8. Closing

8. Closing

Hopefully the Regional Government can carry out the issuance of “OD” in accordance with the capacity of the Region, and in the future it will not be difficult to find sources of funding for regional development, amen.