Regional governments say their plans to raise funds bond sales have snagged on red tape, but observers question their readiness to face capital markets' scrutiny. Local governments such as Jakarta and West Java have previously considered issuing bonds as an alternative source of funding, since most local governments' revenues still rely largely on the state budget.
A Finance Ministry regulation issued in 2006 provides a guideline municipal bond issues, but interest has remained tepid. The Financial Services Authority (OJK) has encouraged more local governments to issue bonds as an alternative source to finance their infrastructure projects.
Currently, only West Java, the country's most populous province, has plans for a bond sale, which could raise up to Rp. 4 trillion ($325,000) to build an airport. Jakarta's plans to raise Rp. 1.2 trillion from municipal bonds in 2012 were shelved due to a fiscal surplus. Nurhaida, who heads capital market supervision at the OJK, said incompatible auditing standards for financial reports has been one of the main sources of confusion for local governments interested in issuing municipal bonds.
Local governments are audited by the Supreme Audit Agency (BPK), which reports their audits to the president and House of Representatives. The OJK applies a different method to assess parties looking to tap into the country's capital market.
"Any financial reports used for a public offering on the capital markets must be audited by a public accountant registered with the OJK," Nurhaida told the Jakarta Globe in a text message late on Thursday. Nurhaida added that the OJK is currently in discussions with the BPK about harmonizing their respective regulations.
One solution may be to allow public accountants registered with the OJK to audit the financial reports, she said. BPK chief Harry Azhar Azis said that the right to select which auditing agency is qualified in the case of a municipal bond issue is entirely within the OJK's authority.
"We (BPK) are in discussions with the OJK about whether we are qualified under the OJK or not. That is within the OJK's right to decide. In any case, we are an independent auditing agency," Harry said. "So if they want municipal bonds, they don't really need to ask permission to the BPK."
Still, economist Purbaya Yudhi Sadewa of the Danareksa Research Institute says auditing discrepancies shouldn't really be a big issue for the OJK. "It's not a big deal," Purbaya said, "the OJK is the one who makes the rules. So if they think the BPK is qualified, then that's good. If not, maybe the BPK can include more things to satisfy the OJK's standards.
"I'm more worried as an economist about regions' readiness to manage debt, because if they default the central government is responsible," he said.
Source: Jakarta Globe, 05 December 2014