Indonesia - The need, capacity and willingness of regional governments to finance public infrastructure from long-term loans : building capacity for the development of sub-national government capital market for municipal bonds

 68458 The Need, Capacity and Willingness of Regional Governments to Finance Public Infrastructure from Long-Term Loans Building Capacity for the Development of Sub-National Government Capital Market for Municipal Bonds June 2011  The Need, Capacity and Willingness of the Regions to Finance Public Infrastructure from Long-Term Loans Background. As part of an ongoing program of activities to encourage long- 1 term borrowing for public infrastructure by regional governments , the Government of Indonesia (GOI) has recently issued Government Regulation 2 30 of 2011 on regional borrowing (PP30/2011). Unlike its legal predecessor PP54/2005, the new regulation allows regional governments to borrow long- term for public infrastructure projects that are indirectly revenue-generating, such as roads and flood control systems. Until the late 1990s, a major portion of long-term loans to regional governments was financed by inter- national financial institutions, mainly the Asian Development Bank (ADB) and the World Bank. In view of the need to increase investments in public infrastructure, and the absence of a domestic market for long-term financing, GOI is currently considering re-opening this window by establishing a Municipal Development Fund (MDF) in the Ministry of Finance. Against this background, the Directorate-General of Fiscal Balancing in the Ministry of Finance (MoF) has requested the Decentralization Support Facility (DSF) to recruit a consultant to assist the Directorate-General with a review of the need for long-term loans by regional governments, and an analysis of the potential constraints to channeling such loans to the regions. Objectives and Contents of this Report Objective. The objectives of the Consultant’s assignment are to:  review the need for long-term loans to regional governments,  assess the capacity of regional governments to repay long-term loans,  identify existing constraints to long-term borrowing by the regions, and  recommend options for removing or mitigating the existing constraints. A desktop study was undertaken to review regional government borrowing needs and repayment capacities. The identification (and possible resolution) of constraints to long-term borrowing was based on focus group discussions with officials of five regional governments, each of which was deemed to have a substantial borrowing capacity: Kabupaten Bogor, the Province of Central Sulawesi, the Province of Bali, the Special Region of Yogyakarta, and Kota Samarinda (refer to Annex 1 for details on these field visits). Structure of this report. Chapter 1 presents an assessment of the need for investments in public infrastructure by regional governments. Chapter 2 contains a conservative estimate of the total borrowing capacity of regional governments, based on a definition of the maximum borrowing limit (batas pinjaman maksimal) derived from PP30/2011. Chapter 3 gives an overview of current constraints on long-term lending to regional governments, and recommends options to mitigate the adverse impacts of these constraints. Disclaimer. The contents of this report do not necessarily reflect the views of the DSF or the Government of Indonesia. 1 In this report, the term “region