A Note on the Borrowing Capacity of DKI Jakarta 1. Introduction. The Government of Jakarta (Daerah Khusus Ibukota or DKI) is considering the issue of a Rupiah-denominated municipal bond to co-finance investments in four public infrastructure projects: (i) expansion of the Pasar Rebo hospital, (ii) development of piped sewerage in the Golden Triangle, (iii) construction of a new bus terminal in Pulo Gebang, and (iv) rehabilitation and expansion of a social housing complex in North Jakarta (Rumah Susun Penjaringan)1. This note reviews the municipal finances of DKI and assesses the financial capacity of the province to issue a bond with a face value of IDR 1.76 trillion (or nearly US$ 200 million), the currently estimated combined cost of the four proposed projects in 2011 nominal prices. Public Finances of DKI Jakarta 2. Revenue and expenditure. In 2009, total revenue of DKI was estimated in its revised budget (APBD-P) at about IDR 19.4 trillion (or more than US$ 2.2 billion), most of which was derived from local taxes and service charges and central government transfers (Table 1). In recent years, central government transfers have increased at higher than historical rates, primarily because of a rapid increase in tax revenue. During 20072009, the province utilized most of the revenue increase to absorb higher administrative expenditures (especially goods and services). Like many other sub-national governments in Indonesia, it has encountered difficulties in spending its investment budget in full, which was the main reason for its large surplus in 2008. In mid-2009, the Governor approved a budget revision that envisaged a deficit of IDR 4.2 trillion to free up funds for additional investment. DKI’s cash reserves remain substantial, and were approximately IDR 4.5 trillion (or US$ 500 million) at the end of 2008. Table 1. Revenue and Expenditure of DKI Jakarta, 2007-2009
Revenue
2007A 16.67
IDR trillion* 2008A 2009B 19.22 19.37
% Total (Revenue = 100) 2007 2008 2009 100 100 100
Local taxes and charges
7.88
9.15
9.00
47
48
46
Central government transfers
7.25
8.70
9.01
44
45
47
Other revenue
1.54
1.37
1.36
9
7
7
Expenditure
17.28
15.96
23.59
104
83
122
Administration and O&M
12.37
12.85
16.44
74
67
85
Investment
4.25
2.58
6.68
26
13
34
Other expenditure
0.66
0.52
0.48
4
3
2
Surplus (deficit)
(0.61)
3.27
(4.22)
(4)
17
(22)
Source: BPK (audited financial reports for 2007 and 2009), DKI (revised budget for 2009). * A = audited figures; B = revised budget
1
For details on these projects, refer to feasibility studies prepared by DKI Jakarta.
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3. Outstanding debt. According to audited financial records, long-term debt of DKI Jakarta was IDR 83.1 billion (or US$ 9.2 million) as of 31 December 2008. Most of this consisted of central government loans for market development. According to Ministry of Finance (MoF) records2, the province has no arrears on any of these loans, and is scheduled to repay the loans in full before the end of 2011. In fact, according to the revised budget for 2009, the province would have used its considerable cash reserves to repay all its loans in full by the end of that year (which implies that DKI currently has no long-term loans on its books). However, MoF records also show that PAM Jaya, a water utility partly owned by DKI, had IDR 775.3 billion (or over US$ 70 million) in arrears on seven central government loans that were signed between 1990 and 1998. It was assumed that DKI is not responsible for the repayment of these loans, given that the PAM Jaya’s equity was pledged to two private companies, which are currently managing the assets of the utility under a concession agreement made in 1998. Borrowing Capacity of DKI Jakarta 4. Assumed municipal bond conditions. It was assumed that DKI would issue a municipal bond in the first half of 2011 to raise IDR 1.76 trillion (the Rupiah equivalent US$ 200m) from the domestic capital market. The following conditions would apply:
Coupon rate: 11% p.a. (including fees), interest payable annually during 2011-2020 Principal repayment: in a single balloon payment at the end of 2020 Grace period: none (no project financing assumed)
5. Eligibility requirements for municipal bonds. Article 12 of PP54/2005 on Municipal Bonds states that a sub-national government must meet four conditions before it may issue a municipal bond with a term of at least five years: i. ii. iii. iv.
its total outstanding long-term debt (TOLTD) does not exceed 75 percent of its nonearmarked revenues in the previous budget year; its debt service coverage ratio (DSCR) does not exceed 2.5; it is not in arrears on outstanding central government loans; and it has obtained approval from its parliament (DPRD) to apply for authorization from MOF to issue a municipal bond.
All conditions should be met throughout the projection period, which was assumed to start in 2011 (the year in which the municipal bond would be issued) and to end in 2020 (the last year of interest payment and bond redemption to bond holders). Refer to Annex 1 for assumptions that were used to forecast revenue and expenditure. 6. Condition #1: TOLTD < 75% of non-earmarked revenue in previous year. Total outstanding long-term debt is highest in 2011, the year of the bond issue. In that year, TOLTD would be 8.2% of non-earmarked revenue in 2010, which is far lower than the minimum required value of 75%. 2
DPPP records dated 31 December 2007. According to these records, total outstanding long-term debt of DKI was IDR 131. 2b, which was 10% higher than the total amount recorded in DKI’s audited report.
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7. Condition #2: DSCR > 2.5. Article 12 of PP54/2005 defines the DSCR as (Regular Income – Obligatory Expenditures) / Debt Service. If DKI wishes to issue a bond, it must ensure that the following condition holds during the projection period: Regular Income – Obligatory Expenditures Debt Service
> 2.5
Regular income is equal to non-earmarked revenue. Obligatory expenditures consist of general administration. Debt service charges are highest in 2012. In that year, the DSCR is estimated at 44.8, far higher than the minimum required value of 2.5. 8. Condition #3: no arrears on central government loans. As mentioned earlier, DKI is not in arrears on central government loans. Indeed, according to the revised budget for 2009, the province would no longer have carried any long-debt since January 2010. 9. Condition #4: DPRD approval. At the time of writing, DKI had not obtained formal approval from DPRD for the issuance of a municipal bond Experience with other sub-national governments suggests that securing DPRD approval for a loan could be a time-consuming process. Conclusion 10. DKI’s borrowing capacity is far higher than needed to service the proposed munibond. DKI easily meets Conditions #1 and #2. In other words, its borrowing capacity is far higher than the IDR 1.76 trillion it might wish to raise from the domestic capital market through a municipal bond issue. To obtain approval from the Ministry of Finance to issue such a bond, DKI needs to obtain written approval by the DPRD of DKI for the submission of a municipal bond issue plan (Rencana Penerbitan Obligasi Daerah or RPOD) to MoF. In addition to these general conditions, DKI would also need to comply with the administrative provisions for issuing a bond as prescribed in PMK 147/2006.
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ANNEX 1
Assumptions used to forecast revenue and expenditure
Revenue and expenditure projections for DKI Jakarta were prepared for 2010-2020, based on the following assumptions: Revenue (pendapatan)
Revenue from local taxes and service charges and central government transfers will increase with the long-term economic growth rate (5.2%) and long-term inflation rate (6.5% p.a.)3. This amounts to a total growth rate of 12.0% per year. It should be noted that this is a highly conservative estimate, given that the Government of Indonesia has recently decided to assign all revenue from the land and building tax (PBB) latest in 2015 to the regional government where the PBB is collected (at present, the central government retains 19% of revenue from this source). Revenue from projects financed by municipal bond proceeds were taken from revenue projections in the feasibility studies of the individual projects. Revenue from interest consists of: (i) interest on the undisbursed balance of the bond proceeds (which will be disbursed in the 18 months following the issuance in the first half of 2011), and (ii) interest on investments in the sinking fund for the proposed municipal bond. In both cases, the assumed interest rate is 8.0% p.a. All other sources of revenue are assumed to increase with the long-term term inflation rate (6.5% p.a.).
Expenditure (belanja)
3
DKI will have paid off all of its long-term that were outstanding at the end of 2009 (in accordance with the 2009 revised budget) and will not take on additional longterm loans during the projection period, except for the proposed municipal bond. As a result, projected interest expenditure solely consists of interest payments to municipal bond holders. Wages, salaries, financial support will increase at a real rate of 3.0% p.a. (or 9.7% p.a. in nominal terms). Expenditure on goods, services, travel and maintenance will increase by 12.0% p.a. (the combined rate of economic growth and general price inflation). Expenditure on projects financed by municipal bond proceeds were taken from expenditure projections in the feasibility studies of the individual projects. Investments are calculated as: total revenue + targeted surplus before utilization of munibond proceeds – total other expenditure. The targeted surplus is set at 1% of total revenue (except in 2011 and 2012, when the municipal bond proceeds are utilized).
Sources: World Bank (Indonesia at a Glance, September 2009) for long-term economic growth rates and ADB (Domestic Cost Escalation Factors 2008-2013, January 2010) for long-term inflation rates. Page 4 of 5
Income (penerimaan)
At the end of 2020, DKI will repay the face value of the municipal bond in a single balloon payment from a sinking fund set up for this purpose.
Expenses (pembiayaan)
From 2011 to 2020, DKI will transfer an amount equal to 10% of the face value of the municipal bond to the abovementioned sinking fund and make provision for such in the APBD. Investments in regional government enterprises are IDR 100 billion per year (in nominal terms) throughout the projection period.
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