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Local Government Has a Great Potential to Develop Regional Bonds for Green Development

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Apart from the APBN (National Income and Expenditure Budget) and APBD (Regional Income and Expenditure Budget), local governments can now innovate to finance its infrastructure spending, especially those related to Sustainable Development Goals (SDGs), by issuing regional bonds and/or regional sukuk as a source of sustainable finance.

Istiana Maftuchah, Representative of the OJK (Financial Services Authority) in the online workshop Introduction to Sustainable Finance and Regional Bonds held by the Institute for Essential Services Reform (IESR), supported by the British Embassy Jakarta (9/3), explained in detail.

“The global push has been felt until now as we are facing the Covid-19 pandemic. The direction of the financial services industry has been aimed towards sustainability, and now there has been a paradigm shift: People, Profits, Planet,” said Istiana.

In her opinion, this development is connected to Indonesia’s commitment to the SDGs and also the Paris Agreement, which has been ratified in Law no. 16/2016. She emphasized that investors’ interest in green products is getting bigger and is not only focused on profit.

Istiana explained that there is an opportunity for green investment to become a global trend in emerging countries, up to USD 23 trillion, for renewable energy, transportation, waste processing, and green building sectors.

“We need around IDR 67 trillion to fulfill the investment and financing needs of Indonesia’s SDGs (2020-2030), consisting of 62% from the government and 38% from non-government,” said Isti.

To achieve this target, OJK issued a road map for sustainable finance, including the issuance of OJK Regulation (POJK) 51/03/2017 about the Implementation of Sustainable Finance for Financial Service Institutions, Issuers, and Public Companies and POJK 60/04/2017 concerning Issuance and Securities Requirements Environmental Friendly Debt (Green Bond).

“POJK 60 is securities and debt, the results of which will fund environmentally friendly activities. There are 11 categories of environmentally friendly activities, we add one sector, i.e MSMEs, so a total of 12 environmentally friendly activities, “added Istiana.

On the same occasion, Ferike Indah Arika, Young Expert Policy Analyst, Center for Climate Change and Multilateral Policy (PKPPIM), Fiscal Policy Agency, Ministry of Finance discussed the need for innovative funding for green development.

Ferike said that since 2016, the Ministry of Finance has identified government budgets aimed at controlling climate change, as well as to measure and evaluate the budgeting. The average spending of ministries and agencies on climate change reached up to IDR 86.7 trillion.

“That is a large number, which is equivalent to 34% of the financing needs for climate change mitigation in the Second Biennial Update Report (Rp. 266.2 trillion per year),” she said.

Given the very limited state budget for Indonesia, and to attract green investment flows to Indonesia, the Ministry of Finance has issued a fiscal policy to control climate change. It includes 3 (three) policies; the state income policy, state spending policy, and financing policy.

Ferike explained that in the state income policy, the most significant change was the tax holiday facility in which previously the percentage of tax reduction was 10-100%, now it is 100%. Besides, the period of the tax holiday has been shifted from originally 5-15 years to become 20 years depending on the investment value.

From the aspect of financing policy, the Ministry of Finance issued a Sovereign Green Sukuk to finance the government’s climate change mitigation and adaptation projects.

“In early 2018, we issued the 1st Global Green Sukuk worth USD 2.25 billion. Meanwhile, in November 2020, the issuance of Green Sukuk reached the value of Rp. 5.42 trillion,” said Ferike.

Furthermore, the Ministry of Finance is considering the application of Carbon Pricing, among others, to promote sustainable growth and encourage Green Investment.

“Regulations related to Carbon Pricing are currently under discussion coordinated by the Coordinating Ministry for Maritime Affairs, and the regulation will be in the form of a Presidential Decree,” she said.

 

Local Government Opportunities to Use Regional Bonds for Green Development

 

Simon Saimima, Head of Sub-Directorate for Special Allocation Funds (DAK), Directorate of Regional Balancing Funds and Regional Loan Facilitation, Directorate General of Regional Financial Development, Ministry of Internal Affairs, explained about Green Bonds or Regional Bonds.

Following the regional bond issuance policy, Simon explained that it is a regional right to provide regional loans in synchronization with the Regional Medium Term Development Plan (RPJMD) and related regulations. Furthermore, regional loans will be repaid from the local government in the form of bonds on the capital market. Green Bonds or bonds are included in the long-term loan category.

Simon explained that the capital market issues the bonds. However, the guarantor is the local government in the form of assets and activities in certain provinces carrying out. The regions are responsible for all risks resulting from the issuance of these bonds.

To follow the procedures, the regional head and the Regional House of Representatives (DPRD) must approve the issuance of bonds. The Regional Representative Council (DPD) was also involved in the process.

“There are 9 (nine) required documents for regional bonds, and these must be fulfilled to meet the requirements of the Ministry of Internal Affairs,” he said.

Bonds that have been issued are the obligation of the local government to pay the loan principal and coupons by the agreement. If the local government fails to pay, they will also receive administrative sanctions.

Russell Marsh, Green Finance Lead, ASEAN Low Carbon Energy Program Ernst and Young, in his presentation, explained that although the need for sustainable funding is increasing, there are many identified challenges found in its development.

First, the lack of awareness and understanding of Environmental, Social, and Governance (ESG) risks and the importance of sustainable finance both from the demand and supply side. Second, there is a lack of constant definitions, measurements, standards, and disclosures so that financial services institutions can evaluate potential sustainable projects and so that project owners can prepare supporting documents. Third, there is a lack of coordination between stakeholders in implementing regulations. Fourth, green bonds may not create “additionality”, for example, the projects that are financed to support environmentally friendly purposes but these projects were not previously financed. 

There are several solutions that Russell offers, i.e providing incentives for sustainable finance, developing transitional finance, and increasing understanding and building the capacity of financial service institutions and project owners.

 

Constraints of Local Government and Financial Institutions in Issuing of Bonds to Support Green Development

 

Present as speakers at the workshop on the second day (10/3) were Darwin Trisna Djajawinata, Operations & Finance Director of PT Sarana Multi Infrastruktur (SMI); and Rahul Sheth, Executive Director, Head of Sustainable Bonds at Standard Chartered Bank.

In his presentation, Darwin shared valuable information on the criteria for projects that were eligible to get financial support from financial institutions. The feasibility of a project to be financed depends on several things, for example, whether an infrastructure project is included in the Regional Medium Term Development Plan (RPJMD).

“For projects aimed to fulfill the rights and empower the poor, much more mature planning is needed because this financing is a loan, and it is impossible to impose this loan on the poor, so the regional government must repay the loan. Well, these schemes need to be planned carefully, “said Darwin

The ability of the regions to see potential sectors for development, compile proposals and manage debt will determine the confidence of financial institutions. Especially regarding the issuance procedure of municipal bonds which are very dependent on the track record of the region in managing debt.

“The issuance of municipal bonds depends on the ability of the regions to manage their debts well, and currently there are not many regions that can manage their debts properly,” added Darwin.

Rahul Sheth, Executive Director, Head of Sustainability from Standard Chartered Bank added that the readiness of the regions to issue these bonds varies. Regions that will issue bonds for the first time need more careful preparation. Financial Institutions usually have 2 types of bonds that are commonly issued to finance projects with specific issues, i.e green bonds to finance projects related to the environment and climate, and social bonds to finance social community projects such as infrastructure, access to finance for MSMEs.

“The social bond market is one of the largest,” said Rahul. This shows great potential for local governments to develop regional bonds. At the end of his presentation, Rahul answered questions from the participant, Yugo from Bank South Kalimantan, about the challenges that often arise when issuing bonds.

“Data and data automation are challenges that often come. When the data is complete, various things can be done and monitored automatically, such as taxes, balances, and other financial reports. Data collection and data management are critical processes in this industry,” concluded Rahul.

Participants shared some of the obstacles in issuing regional bonds regarding regulations such as the sovereign guarantee that is given only to State-Owned Enterprises (BUMN), not Regional-Owned Enterprises (BUMD), which automatically makes it harder for local governments to plan bond issuance for strategic projects.

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