Municipal bond : An alternative to Boosting Infrastructure

Municipal bond : An alternative to Boosting Infrastructure Muhammad Shodiq  ;  The Sharia and Microfinance Academy head of Bank CIMB Niaga

JAKARTA POST,  02 Desember 2014

                                                                                                                       

Based on the survey conducted by the Geneva-based business group, World Economic Forum (WEF), Indonesia climbed four places this year to 34th out of the 144 countries surveyed for the WEF’s global competitiveness index measuring improved ease of doing business. The 2014-2015 report attributed Indonesia’s progress primarily to enhanced infrastructure and connectivity along with the issue of corruption, access to financing, inflation and inefficient government bureaucracy, which were considered the top five hurdles to doing business in Indonesia. Based on the report, Indonesia has a lot of problems in infrastructure such as on the institutional problems undermining delivery of infrastructure services, expenditure and efficiency, urbanization pressure and lack of financing. First, institutional problems, just one example in the case of roads, most roads are designed to fail, with only an 8-ton axle limit, which should be at least 16 tons. Coupled with widespread overloading and poor maintenance, roads are only lasting less than eight years, often only two to four years, instead of 12-20 years. Second, expenditure and efficiency, the increasing budget commitment does not necessarily translate into improved infrastructure outcomes. Consider national highways, while the budget over the past 10 years has risen significantly, the actual output has stagnated or fallen over that period and the cost per unit of output has risen dramatically. The efficiency of translating funding into output has thus seriously declined. Third, urbanization pressure. Most major airports are running at 200-300 percent capacity. Road speeds between cities, typically as low as 30-40 kilometers per hour are 100-200 percent below capacity. Fourth, lack of financing; President Joko “Jokowi’ Widodo has raised subsidized fuel prices by an average of 33.6 percent as he seeks to shift subsidy spending to more productive sectors. By raising the subsidized fuel prices and slashing fuel subsidy spending, the government will now have over Rp 100 trillion (US$8.3 billion) in additional funding in its war chest that can be spent on infrastructure, welfare and development of the nation’s maritime sector This article will only focus on how to maximize municipal bonds as an alternative source of funding in order to boost infrastructure development. By definition, municipal bonds are municipal securities issued by local governments and by entities that they establish. Local governments include provincial governments, cities and regencies. Municipal securities are issued for various purposes. Municipalities issue long-term bonds as the principal means of financing projects such as the construction of schools, universities, bridges, hospitals, roads and airports and also budget deficits that arise from current operations. We recognize two types of municipal bond. First, conventional bonds. The number of conventional bond issuers is remarkable, the Bloomberg Financial Markets database contains 55,000 active issuers. Second, Islamic municipal bonds, there are at least two issuers of Islamic municipal bonds, sukuk, which are Saxony Anhalt Municipal Sukuk in Germany and Sukuk Pasir Gudang in Johor Malaysia. The distinguishing feature between conventional bonds and sukuk is that a conventional bond is a contractual obligation whereby the issuer is obliged to pay to bond holders, on certain specified dates, interest and principal. In comparison, under a sukuk structure the sukuk holders each hold an undivided beneficial ownership in the underlying assets. Consequently, sukuk holders are entitled to share in the revenues generated by the sukuk assets as well as being entitled to share in the proceeds of the realization of the underlying assets. Sukuk can be issued on a short-term, medium-term or long-term basis in accordance with the principles of sharia. The sukuk may also be issued without specifying a period depending upon the nature of the contract underlying the sukuk issue. The legal basis of Indonesian municipal bonds is in Law No.8/1995 on capital markets, Law No.32/2004 on local government, Law No.33/2004 on the financial budgets of central and local governments and Law No.19/2008 on Islamic bonds. However, there are still a lot challenges to encourage local governments to utilize municipal bonds as a means to boost infrastructure development. There are at least three challenges. First, the availability and capability of the human resources of local government to meet the basic standards in issuing the bonds. Second, the attractiveness of the local bond in raising funds from investors. Third, the incentives scheme to successfully implement the initiatives. ●