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Ada Pertanyaan? Hubungi Kami Ari Pramuditya, Nando Narendra
The Financial Services Authority. Photo by: RES
None of Indonesia’s local governments have successfully issued a single municipal bond this year. This is in spite of the fact that 2015 was planned to be the first year in which local governments could issue such bonds, and also the fact that the Financial Services Authority (Otoritas Jasa Keuangan – “OJK”) has continually sought to encourage the issuance of municipal bonds throughout the course of the year.
Since the beginning of 2015, the OJK has been aiming to boost economic growth, especially within the capital-markets sector, by focusing on a number of key areas, including sustainable development, as well as improving access to financing as regards equitable community development.
Muliaman D. Hadad, Chairman of the Board of Commissioners for the OJK, stated recently that in order to encourage the issuance of municipal bonds, the OJK was hoping to revitalize the role of the Regional Development Bank (Bank Pembangunan Daerah – “BPD”) as well as to identify potential municipal bonds which could be used to finance development projects across the country’s various regions.
“In order to optimize the role of the financial-services sector as regards improving the national economy, the OJK expects the various players involved to use the momentum of the structural reforms that have been initiated under President Joko Widodo,” explained Mr. Hadad in a press release published in Jakarta on 16 November 2015.
In addition, in July of this year the OJK also issued a number of policies aimed at stimulating the national economy via the issuance of municipal bonds, which would be used to support government programs relating to infrastructure development.
It should be noted that such bonds are one of the available sources of either medium- or long-term regional loans. Municipal bonds are issued for the purpose of obtaining capital, and are issued by local governments via Initial Public Offerings (“IPO”). In terms of regulation, Law No. 33 of 2004on Financial Balance between Central Government and Local Government provides opportunities for local governments to engage in fund raising through such municipal bonds.
Many Rooms
In principle, preparations for the issuance of municipal bonds can be divided into two major parts. The first part takes place at a local government level, while the second concerns the Ministry of Finance. At the local government level, any proposals regarding the issuance of municipal bonds must obtain principle approval from the relevant financial commission at the Regional House of Representatives.
Once approved by the Regional House, the next step is for the governor, regent or mayor in question to submit a proposal for the issuance of the municipal bonds to the Minister of Finance and the Director General of Financial Balance. Finally, the Director General of Financial Balance, on behalf of the Minister of Finance, will either approve or reject the municipal-bond issuance plan.
Since October of this year, the OJK has been coordinating with a number of parties, including the State Audit Board (Badan Pemeriksa Keuangan – “BPK”), the Ministry of Finance, the Ministry of the Interior Affairs, as well as a number of regional heads in order to promote municipal bonds.
“Coordination with the BPK was undertaken in order to discuss the role of the Public Accounting Firm (KAP), which supports professionals across the capital market. Public Accountants have a role to play in conducting feasibility studies and assessing the financial capacities of local governments,” explained Mr. Hadad in October of 2015.
In addition to the OJK, the Minister of Finance, Bambang PS Brodjonegoro, also has loosened the rules that govern the issuance of municipal bonds. One of these revisions removed the requirement to conduct a feasibility study.
This revision of the rules was set out in Minister of Finance Regulation No. 180/PMK.07/2015on the Amendment to Minister of Finance Regulation No. 111/PMK.07 /2012on Procedures and Accountability Relating to the Issuance of Municipal Bonds.
Besides the removal of the need to conduct a feasibility study, Article (9) paragraph (2) part (b) of the same regulation also cancels the rule mandating the inclusion of an assessment report of the feasibility study by an OJK listed appraiser.
On the other hand, the role and the authority of the Minister of Finance and the Directorate General of Financial Balance have now been strengthened. Both have now been given the task of assessing municipal-bond issuance plan documents.
Lengthy Procedures
The issuance of municipal bonds still involves a lengthy process featuring several so-called “rooms” that must be fulfilled by local government. Local governments must also meet several requirements before being allowed to “play” the capital market.
In general, the issuance of municipal bonds for the capital market, according to Law No. 8 of 1995on Capital Markets, must go through various preparation stages, as well as a review by the OJK, a book-building period, and an IPO.
Local government must in effect go through the same processes as any other corporation that is looking to go public, including the appointment of capital-market supporting professionals, such as lawyers, notaries, trustees, stocks underwriters, and so forth.
A Legal Due Diligence (“LDD”) process regarding local government should also be undertaken, which should include an examination of the legal status of local governments and provide legal opinions regarding agreements, licenses, and so on.
An LDD is an activity which aims to analyze obtained information relating to the legal status or legal explanation of various audited documents. An LDD process also involves checking legality, checking the compliance levels of a legal entity, and offering a legal opinion or legal certainty on company policy.
During a recent legal workshop, one of the partners from the Siahaan Irdamis Andarumi & Partners Law Office (SIAR), Laksmita Andarumi, explained that an LDD process undertaken by legal consultantsusually took a minimum of six months work until a legal opinion could be produced.
The OJK is also required to review any issuance plans, examine the agreements and prospectuses, as well as to audit financial statements, legal audits, legal opinions and other reports deriving from legal counsel. After this, the OJK will deliver its verdict to the local government in question. If appropriate, the OJK will also issue 30-40 day approval for the publication of a short prospectus in various newspapers.
Then there’s the book-building process, which relates to the formulation of an initial price and an analysis of the market. Documents are to be finalized by the OJK during this phase. If the documents have been completed, then the Chairman of the Board of Commissioners at the OJK will then issue an effective statement within the framework of a public offering.
This then means that the issuance of the municipal bonds has entered the public-offering phase and the bonds can be listed on the stock market. Then all that remains is for the settlement process and listing to be completed, including payments to issuers, the electronic distribution of stocks, listings, the submission of allotment reports to the OJK, and allotment audits.
Local Readiness
The Assistant Regional Secretary Unit is in charge of the issuance of municipal bonds. This unit is responsible for organizing the formulation of public policy, as well as coordination, guidance, control, facilitation, and the development of cooperation between licensor and investor.
Alas local governments remain constrained as regards financial audits by public accountants. The OJK and BPK are not in agreement as they believe that this will lead to difficulties in the procurement process. Local governments must thus obey Presidential Regulation No. 70 of 2012on the Procurement of Goods and Services for Government Agencies and Standard Cost Expenditure for Local Government.
Other technical constraints relate to debt-management experience of both administrative and local-government organizations. And no less important is the fact that the relevant local government must also formulate a Regional Regulation which should at the very least contain reference to the nominal amount of municipal bonds that will be issued, the use of funds and the responsibility of the principal payment, interest and other costs incurred as a result of the issuance of the municipal bonds.
The province of West Java, for example, recently predicted that it would become the first area of the country to issue municipal bonds. However, long before this, in 2008 in fact, the provincial government of DKI Jakarta took the first initiative as regards the issuance of municipal bonds. Even though this initiative came directly from the Ministry of Finance, the provincial government was also heavily involved in the process.
This initiative from DKI Jakarta has now reached the Financial Management Assessment (“FMA”) stage and was rated idAA + by Pefindo in 2012. Additionally, a Debt Management Unit for the management of municipal bonds through the appointment of underwriters, lawyers, and other supporting professionals has also been set up.
Alas West Java has yet to reach this stage and the province’s bond-issuance plan is still being hampered by a lack of approval from the DPRD.
Memorandum of Understanding
The OJK has a vital role to play in smoothing the process for the issuance of municipal bonds by local governments. One of them involves the signing of a Memorandum of Understanding (“MoU”) with the various stakeholders concerned. There is precedent for this, as the OJK once signed an MoU with the Regional Representatives Council (Dewan Perwakilan Daerah – “DPD”).
At the OJK Strategic Working Meeting 2015, which was held at Menara Merdeka in Jakarta in December of 2014, Mr. Hadad stated that the MoU with the DPD would help to minimize any obstacles as regards the issuance of municipal bonds. In addition, the OJK is hoping that the DPD will be able to help socialize the benefits of bond issuance across the country’s various regions.
A similar approach can also be employed by the OJK in order to approach other parties, such as the BPK, Ministry of Finance, Ministry of Interior Affairs, and local governments. Through such MoUs, the relevant parties should be able to come to an understanding as regards municipal-bond issuance.
In terms of other steps which can be taken, the OJK may also empower the six OJK Regional Offices (Kantor Regional OJK – “KROJK”) and 29 OJK offices (Kantor OJK – “KOJK”) across the country’s various regions in order to help socialize the importance of municipal bonds for construction. KROJK and KOJK in the regions can also serve as information centers for the financial-services sector.
In principle, the issuance of municipal bonds is intended only for the financing of public-sector investment. Any income generated is ultimately to be used for the public benefit, which in turn is the domain of local government.
(sp)
Ari Pramuditya, Nando Narendra
The Financial Services Authority. Photo by: RES
None of Indonesia’s local governments have successfully issued a single municipal bond this year. This is in spite of the fact that 2015 was planned to be the first year in which local governments could issue such bonds, and also the fact that the Financial Services Authority (Otoritas Jasa Keuangan – “OJK”) has continually sought to encourage the issuance of municipal bonds throughout the course of the year.
Since the beginning of 2015, the OJK has been aiming to boost economic growth, especially within the capital-markets sector, by focusing on a number of key areas, including sustainable development, as well as improving access to financing as regards equitable community development.
Muliaman D. Hadad, Chairman of the Board of Commissioners for the OJK, stated recently that in order to encourage the issuance of municipal bonds, the OJK was hoping to revitalize the role of the Regional Development Bank (Bank Pembangunan Daerah – “BPD”) as well as to identify potential municipal bonds which could be used to finance development projects across the country’s various regions.
“In order to optimize the role of the financial-services sector as regards improving the national economy, the OJK expects the various players involved to use the momentum of the structural reforms that have been initiated under President Joko Widodo,” explained Mr. Hadad in a press release published in Jakarta on 16 November 2015.
In addition, in July of this year the OJK also issued a number of policies aimed at stimulating the national economy via the issuance of municipal bonds, which would be used to support government programs relating to infrastructure development.
It should be noted that such bonds are one of the available sources of either medium- or long-term regional loans. Municipal bonds are issued for the purpose of obtaining capital, and are issued by local governments via Initial Public Offerings (“IPO”). In terms of regulation, Law No. 33 of 2004on Financial Balance between Central Government and Local Government provides opportunities for local governments to engage in fund raising through such municipal bonds.
Many Rooms
In principle, preparations for the issuance of municipal bonds can be divided into two major parts. The first part takes place at a local government level, while the second concerns the Ministry of Finance. At the local government level, any proposals regarding the issuance of municipal bonds must obtain principle approval from the relevant financial commission at the Regional House of Representatives.
Once approved by the Regional House, the next step is for the governor, regent or mayor in question to submit a proposal for the issuance of the municipal bonds to the Minister of Finance and the Director General of Financial Balance. Finally, the Director General of Financial Balance, on behalf of the Minister of Finance, will either approve or reject the municipal-bond issuance plan.
Since October of this year, the OJK has been coordinating with a number of parties, including the State Audit Board (Badan Pemeriksa Keuangan – “BPK”), the Ministry of Finance, the Ministry of the Interior Affairs, as well as a number of regional heads in order to promote municipal bonds.
“Coordination with the BPK was undertaken in order to discuss the role of the Public Accounting Firm (KAP), which supports professionals across the capital market. Public Accountants have a role to play in conducting feasibility studies and assessing the financial capacities of local governments,” explained Mr. Hadad in October of 2015.
In addition to the OJK, the Minister of Finance, Bambang PS Brodjonegoro, also has loosened the rules that govern the issuance of municipal bonds. One of these revisions removed the requirement to conduct a feasibility study.
This revision of the rules was set out in Minister of Finance Regulation No. 180/PMK.07/2015on the Amendment to Minister of Finance Regulation No. 111/PMK.07 /2012on Procedures and Accountability Relating to the Issuance of Municipal Bonds.
Besides the removal of the need to conduct a feasibility study, Article (9) paragraph (2) part (b) of the same regulation also cancels the rule mandating the inclusion of an assessment report of the feasibility study by an OJK listed appraiser.
On the other hand, the role and the authority of the Minister of Finance and the Directorate General of Financial Balance have now been strengthened. Both have now been given the task of assessing municipal-bond issuance plan documents.
Lengthy Procedures
The issuance of municipal bonds still involves a lengthy process featuring several so-called “rooms” that must be fulfilled by local government. Local governments must also meet several requirements before being allowed to “play” the capital market.
In general, the issuance of municipal bonds for the capital market, according to Law No. 8 of 1995on Capital Markets, must go through various preparation stages, as well as a review by the OJK, a book-building period, and an IPO.
Local government must in effect go through the same processes as any other corporation that is looking to go public, including the appointment of capital-market supporting professionals, such as lawyers, notaries, trustees, stocks underwriters, and so forth.
A Legal Due Diligence (“LDD”) process regarding local government should also be undertaken, which should include an examination of the legal status of local governments and provide legal opinions regarding agreements, licenses, and so on.
An LDD is an activity which aims to analyze obtained information relating to the legal status or legal explanation of various audited documents. An LDD process also involves checking legality, checking the compliance levels of a legal entity, and offering a legal opinion or legal certainty on company policy.
During a recent legal workshop, one of the partners from the Siahaan Irdamis Andarumi & Partners Law Office (SIAR), Laksmita Andarumi, explained that an LDD process undertaken by legal consultantsusually took a minimum of six months work until a legal opinion could be produced.
The OJK is also required to review any issuance plans, examine the agreements and prospectuses, as well as to audit financial statements, legal audits, legal opinions and other reports deriving from legal counsel. After this, the OJK will deliver its verdict to the local government in question. If appropriate, the OJK will also issue 30-40 day approval for the publication of a short prospectus in various newspapers.
Then there’s the book-building process, which relates to the formulation of an initial price and an analysis of the market. Documents are to be finalized by the OJK during this phase. If the documents have been completed, then the Chairman of the Board of Commissioners at the OJK will then issue an effective statement within the framework of a public offering.
This then means that the issuance of the municipal bonds has entered the public-offering phase and the bonds can be listed on the stock market. Then all that remains is for the settlement process and listing to be completed, including payments to issuers, the electronic distribution of stocks, listings, the submission of allotment reports to the OJK, and allotment audits.
Local Readiness
The Assistant Regional Secretary Unit is in charge of the issuance of municipal bonds. This unit is responsible for organizing the formulation of public policy, as well as coordination, guidance, control, facilitation, and the development of cooperation between licensor and investor.
Alas local governments remain constrained as regards financial audits by public accountants. The OJK and BPK are not in agreement as they believe that this will lead to difficulties in the procurement process. Local governments must thus obey Presidential Regulation No. 70 of 2012on the Procurement of Goods and Services for Government Agencies and Standard Cost Expenditure for Local Government.
Other technical constraints relate to debt-management experience of both administrative and local-government organizations. And no less important is the fact that the relevant local government must also formulate a Regional Regulation which should at the very least contain reference to the nominal amount of municipal bonds that will be issued, the use of funds and the responsibility of the principal payment, interest and other costs incurred as a result of the issuance of the municipal bonds.
The province of West Java, for example, recently predicted that it would become the first area of the country to issue municipal bonds. However, long before this, in 2008 in fact, the provincial government of DKI Jakarta took the first initiative as regards the issuance of municipal bonds. Even though this initiative came directly from the Ministry of Finance, the provincial government was also heavily involved in the process.
This initiative from DKI Jakarta has now reached the Financial Management Assessment (“FMA”) stage and was rated idAA + by Pefindo in 2012. Additionally, a Debt Management Unit for the management of municipal bonds through the appointment of underwriters, lawyers, and other supporting professionals has also been set up.
Alas West Java has yet to reach this stage and the province’s bond-issuance plan is still being hampered by a lack of approval from the DPRD.
Memorandum of Understanding
The OJK has a vital role to play in smoothing the process for the issuance of municipal bonds by local governments. One of them involves the signing of a Memorandum of Understanding (“MoU”) with the various stakeholders concerned. There is precedent for this, as the OJK once signed an MoU with the Regional Representatives Council (Dewan Perwakilan Daerah – “DPD”).
At the OJK Strategic Working Meeting 2015, which was held at Menara Merdeka in Jakarta in December of 2014, Mr. Hadad stated that the MoU with the DPD would help to minimize any obstacles as regards the issuance of municipal bonds. In addition, the OJK is hoping that the DPD will be able to help socialize the benefits of bond issuance across the country’s various regions.
A similar approach can also be employed by the OJK in order to approach other parties, such as the BPK, Ministry of Finance, Ministry of Interior Affairs, and local governments. Through such MoUs, the relevant parties should be able to come to an understanding as regards municipal-bond issuance.
In terms of other steps which can be taken, the OJK may also empower the six OJK Regional Offices (Kantor Regional OJK – “KROJK”) and 29 OJK offices (Kantor OJK – “KOJK”) across the country’s various regions in order to help socialize the importance of municipal bonds for construction. KROJK and KOJK in the regions can also serve as information centers for the financial-services sector.
In principle, the issuance of municipal bonds is intended only for the financing of public-sector investment. Any income generated is ultimately to be used for the public benefit, which in turn is the domain of local government.
(sp)