Municipal Bonds for Financing Local Infrastructure Projects

Municipal bond is an alternative of financial instrument used to fund essential local infrastructure projects, such as highways, bridges, schools, waste treatment facilities, and clean drinking water system.

It is a common instrument in developed countries. But, in many developing Asian countries including Indonesia, municipal bond issuance remains scarce – mostly due to regulatory and market constraints.

In Indonesia, guideline for issuing municipal bonds was developed in 2011 – although no actual issuance followed.

In 2022, the Indonesian government issued Law 1/2022 on Financial Relations Between Central and Regional Government which could bring greater coherence in the development of municipal bond.

This law significantly increases the financing capacity of local governments, allowing them to access capital markets readily.

So far, no local government has issued bonds yet. However, the government lending platform PT Sarana Multi Infrastruktur has adopted a Regional Infrastructure Development Fund Project (RDIF).

This initiative focuses on financing essential urban infrastructure project, such as clean water, waste management, drainage, local roads and others.

RDIF loans are provided to local governments and, in later stages, to local government corporations.

Not any regions are eligible to issue bond. Based on UNDP 2023 report, five regions particularly favorable for municipal bond issuance:

Not only they meet the required financial metrics and governance standard, these regions also have significant infrastructure and development needs.

A certain setting is required to facilitate municipal bond market development.

From a regulatory perspective, Law 1/2022 does not mention municipal bonds as instrument for regional debt financing. Thus, it is lacking regulatory framework.

A further framework is required and should address the term of debt establishment, mechanism for handling defaults, issuance cost, incentives, and how to ensure regulatory compliance for a municipal bond market to thrive.