The views expressed in this presentation are the views of the author and do not necessarily reflect the

views or policies of the Asian Development

Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the
accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily
be consistent with ADB official terms.

Presented in the ADBI Tokyo (30 November – 1 December 2017)

Putut Hari Satyaka
Director for Balancing Fund
Ministry of Finance of The Republic of Indonesia
OUTLINE
• BACKGROUND
The status of local government debt in Indonesia
• CURRENT FRAMEWORK
The framework for managing local government debt in Indonesia
• DISCUSSION
Problems and challenges for the current local government debt management
framework
• THE WAY FORWARD
Policy recommendations for strengthening policies to manage local
government debt and support sustainable growth.

2
BACKGROUND
BACKGROUND

A huge amount on infrastructure There is a gap between regions,

need (Rp4.790 T for 5 years), especially in infrastructure
while national budget (APBN and financing in eastern part of
APBD) capacity is very limited. Indonesia.

Regions very much rely on

Need alternative source of fund
Intergovernmental Transfer Fund
to boost local infrastrusture
as source of fund for local
development  borrowing?
infrastructure.

4
 BACKGROUND
LG’s Budget Comparison of Surplus/Defisit In billion rupiah  Rely on transfer (75% of income)
(Actual Figures 2016) Budget vs Actual
In billion rupiah  Capital expenditure for
Income 970,435 36,269 infrastructure relatively limited
27,659 28,425
Own Source Revenue 229,398 11,819 10,163  Huge amount of unspent
Transfer 721,712 expenditure (create carry over
Others 19,325 fund)  Deficit in the budget
(12,796)
Expenses 960,326 but surplus in the actual
Salary 350,140 (35,686) (40,412)
(54,378)  Budget deficit mostly finance by
Good and services 209,357 (58,376)
(64,004) (60,759)
carry over fund (96,7% of the
Capital exp 221,520 2011 2012 2013 2014 2015 2016 Financing Rev)
Others 179,309
Surplus/Deficit 10,109 Progress of In billion rupiah  Borrowing is still very limited
Net Financing 83,680 Carry Over Fund (1,4% of the Financing Rev)
Financing Rev 102,541 However
Carry over 99,180 125,634  The amount of carry over is
Borrowing 1,421 99,250 100,242 101,593
93,895 declining in the last 3 years (due
Others 1,940 77,366
to policy of sanction for idle
Financing Exp 18,861
money)
Invest on LGOE 12,897
2011 2012 2013 2014 2015 2016
Repayment of Loan 4,239
Others 1,725
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 BACKGROUND
Comparison of Budget and Actual
LG’s Borrowing Loan 4,267.45 4,363.43*
4,128.44
Outstanding
3,623.75
3,340 3,481.49

2,864
2,686
2,475.93 89%
2,318 2,285 2,324 2,271.62 data
coverage

1,421

980
821 848 876
738

2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016
In billion rupiah In billion rupiah

• LG’s borrowing always executed much lower, but the trend is positive
• The amount of Local Borrowing is very small (less than 0,15% of total expenditure)
• Outstanding loan is also very low, its only 0,035% of GDP
• At this point, local government debt is not a potential risk for the national debt stability.
• However, the critical issue is that the need for infrastructure development at local level is very much high, BUT
Local Borrowing is ”not developed much yet” in Indonesia
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CURRENT FRAMEWORK
LOCAL GOVERNMENT FUNDING SCHEME
To funding local To funding
To Funding
Equalization and to gov’t special operational Special
LG’s Non-
funding the Local needs i.e. Capital expenditure of
Reguler Reward regulation
Government needs Expenditures LG’s in several
Needs
fund • Each component of the
(Capex) public services revenue have its own
objective
LG’s Own Rev • Each component of the
Rp229,4T revenue are complement
LG’s
Grant each other
Incentive • Local borrowing should be
Revenue Sharing Capital Operational
Support the
LG’s specific
Fund Special used to accelerate the local
Funds (DBH) Specific Specific needs which is
Incentive fund for
As block grant and shared Allocation
temporary and
LG’s which has Autonomy development, and
based on “originality” Allocation based on
good Fund especially for LG’s that have
Fund agreement.
performance.
Rp88,43T Fund Support LG’s for Rp9,27T
Rp5 T
high fiscal capacity
Support LG’s operational
capital
expenditure based To Support
on unit cost certain LG’s
expenditure for Rp89,26T
achieving which based
General Loans on Special
National Services
Alocation Fund Standard and To funding Autonomy
Equalization grant (block also aid for
regional Laws.
grant) based on fiscal development Rp18,81 T
gap formula
lagging area acceleration
Rp75,207T Rp1,42T
Rp394,90T
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LOCAL BORROWING
General Principles Requirements
 LG can borrow. 1. Total amount of local borrowing add with incoming disbursement of
 Local Borrowing should be LG initiative borrowing not more than 75% of general revenue APBD of the
 Local Borrowing as alternative source financing for APBD to fund: (i) previous year.
deficit of APBD; (ii) financing expenditure; and/or (iii) cash shortage. 2. Fullfill the Debt Service Coverage Ratio (DSCR) regulated by Central
 LG can proceed the borrowing as Loan, Grant and/or capital Government :
investment to Local Own Enterprise in the frame of LG and LoE
financial relations. [PAD + DAU + (DBH–DBH DR)] – BW
 LG could not acces borrowing from the foreign source directly, but DSCR = ≥ 2,5
through Central Government (on-lending mechanism) Loan Principal+Interest+Other Costs
 LG cannot provide any guarantee to other institution’s loan
 Source of Local Borrowing:
PAD = Local Own Source Revenue
 Central Government (On Lending Mechanism from Foriegn and
DAU = General Allocation Fund
Domectic Source, and other sources) DBH = Revenue Sharing
 Other LGs DBH DR = Revenue Sharing for Reforestation
 Domestic Banks BW = Essential Expenditure
 Domestic Non Bank Financial Institutions 3. Other requirements required by the lender
 Society, in form of Municipal Bond.
4. No arrears of the Loan from the Central Government, as if the Loan
from Central Government.
5. Agreement from Local Parliament for Medium and Loang Term
Borrowing.

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TYPE OF LOCAL BORROWING
Short Term Borrowing Long Term Borrowing
 Term of the loan maximum 1 year and should be payed within  Term of the loan more than 1 year according to the
the current budget year. agreed loan term and conditions in the loan agreement.
 Obejctive: to manage cash shortage (cash management).  Objective: to fund public infrastructure which:
 Not required Local Parliament’s agreement.
 Direct Revenue generating;
 Example: LG borrows to Local Development Bank to pay
salary in January, while collecting revenue from local own  Indirect Revenue generating; and/or
revenue and intergovernmental transfers.  Have economical and social benefits.
 Municipal Bond to finance investment project on public
infrastructure which generateing revenue for APBD.
Medium Term Borrowing  Example: road development project, marketplace,
 Term of the loan more than 1 year and peyment schedule hospital, water, irrigation, etc.
should be finished within the Mayor’s or Head of Municipality’s
service period.
 Objective: to fund public services which non revenue
generating.
 Example: development of official building

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GENERAL PROVISIONS FOR MUNICIPAL BOND
 Central Government does not provide guarantee for municipal bond.
 Municipal bond can only be issued at domestic capital market and denominated in Rupiah.
 The fund from the issuance of municipal bond can only be financed for investment in infrastructure
project which revenue generating and provide benefits for the society.
 The project financed by municipal bond should be planned in the local development plan, can be
new or improvement of the existing project, and the financing could cover all or part of project
needs.
 The project financed by municipal bond should be LG’s Assets which embedded as the municipal
bond collateral.

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LIMITATION ON MAXIMUM CUMMULATIVE OF DEFICIT ON LG’s BUDGET
WHICH IS FINANCED BY LOCAL BORROWING

Maximum Cummulative of Deficit on APBD 2018

 The limit of maximum cummulative of Deficit on APBD year 2018 is 0,3% of the GDP projected in 2018.
 Deficit on APBD which fnanced by local borrowing, instead of using previous year cash balance.
 Projection of GDP is the GDP projection which used in calculation of APBN 2018.

The limit of maximum deficit of APBD 2018 for individual LG

 The limit of maximum deficit of APBD 2018 for individual LG is based on the following fiscal capacity:
a. maximum 5% of the local revenue projection for the very high category;
b. maximum 4,5% of the local revenue projection for the high category;
c. maximum 4% of the local revenue projection for the medium category;
d. maximum 3,5% of the local revenue projection for the low category; and
e. maximum 3% of the local revenue projection for the very low category.

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DISCUSSION
The need for infrastructure financing is high, LG’s capacity to finance
from their own budget is limited, Local Borrowing as an alternative
financing is allowed and well regulated, … BUT still Local Borrowing is
not in favour for LG’s ….. WHY?

• LG’s Financial Management

• Regulation
Supply side
Demand side
• Political aspects

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LG’s Financial Management
• Huge amount of unspent budget create huge amount of carry over
fund
• Unspent budget mostly caused by lack of LG’s financial
management skill
Planning
Procurement
Execution
Accountability
Reporting

15
Regulation of Local Borrowing and its
implementation
LG’s perspective
• Complexity of the regulation (requirements, procedures)
• Relatively high interest rate
• There is no incentive mechanism for Local Borrowing

Lender perspective
• There is no guarantee mechanism for repayment of the loan

16
Political aspects
• LG borrowing (medium term and long term should be agreed by Local
Parliament)
• Head of LG’s elected every 5 years (direct election) and each member of
parliament are also directly elected by the people every 5 years
• Multiparty system made the package of candidate for Head of LG’s
(Major and vice major) should be collaborated from several party
• Fact: more than 90% of the elected major and vice major then compete
each other for the next election period
• This caused a serious problem for the discussion of every project with the
dimension longer than period of the election, including the agreement for
the source of financing for the project (borrowing, PPP, etc)

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THE WAY FORWARD
Financial Management
• Enforce further more the sanctions for idle money
• Enforce the regulation of minimum percentage of the budget (25%)
for infrastructure capital expenditure
• Introduce performance based transfer (especially earmarked
transfer)  hard requirements for disbursement
• Capacity building

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Regulation of Local Borrowing
• Introducing a certain institution in central government to act as
the regional infrastructure development fund (RIDF), which easy
to be assessed by LG’s and able to give competitive lower rates
• This RIDF institution should be guaranteed by central government
for intercept mechanism (from transfer system) for repayment of
the loan
• Introduce incentive mechanism (grant addition for Local
Borrowing), especially for huge crucial project with cross-border
positive impact (connectivity, hospital, waste management)

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INTERCEPT MECHANISM FOR LOCAL BORROWING
 All of obligations due to local borrwoing should be budgeted in
LG’s Budget.
 As if LG does not fufill their obligation to pay the loan from
central government, then it will be intercepted from Transfer
(General allocation Fund and/or Revenue Sharing).
 Scope of interception :
• Local Borrowing from Central Goverment managed by DG
Treasury;
• Local Borrowing from other institution which mandated by
Central Government to lend.
 The sanction of interception can only be executed to Local
Borrowing that has interception terms in the Loan Agerement
and its amandment;
 The amount of interception based on the arrears (principal,
interest, fine, and other costs).
• The interception can be executed at once or gradually until
all of the arrears been payed.
• As if the interception executed gradually, the payment can be
scheduled more than 1 budget year until all of the loan
arrears been payed.
• The interception at once or gradually for each LG will be
conducted in consider with the total amount of the intercept,
the transfer amount of DAU and DBH, the amount of the
arrears, and/or other executed interception, and LG’s fiscal
capacity.
• The maximum amount o the interception is 15% of the total
amount of DAU and/or DBH per year.
• As if the interception executed gradually, the intercept for the
subsequent year will be calculated based on fiscal capacity
and the total amount of DAU and/or DBH of the subsequent
year.
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 Directorate General of Fiscal Balance
Ministry of Finance of The Republic of Indonesia
Radius Prawiro Building
Dr Wahidin No. 1 Central Jakarta 10710
Telp. 021 3509442 Fax. 021 3509443
www.djpk.depkeu.go.id