Indonesia, like its counterparts around the world, has reallocated its 2020 fiscal budget of USD 49 billion (IDR 695.2 trillion) for healthcare, social assistance, and small businesses to cushion the negative impacts of the COVID-19 pandemic. This reallocation consequentially reduced the fiscal capacity of local governments in Indonesia to finance long-term climate goals. Among other impacts, this reduced capacity is a potential threat to achieving Indonesia’s energy transition target: cities are a key component to Indonesia’s mandated National Energy Policy of reaching 23% renewable energy contribution in the energy mix by 2025.

A potential solution comes in the form of green bonds—sovereign bonds that have positive environmental and/or climate benefits—–that can be issued by subnational governments with adequate fiscal capacity to borrow.

Despite their potential, Indonesia’s capital market is yet to see the issuance of municipal green bonds due to multiple challenges. These include complex eligibility requirements and issuance procedures, relative government inexperience with municipal green bonds, limited market appetite, inadequate profitable projects in the pipeline, , and low green awareness in the industry.The most notable challenge remains the bureaucratic procedures in the region.

In this paper, we propose the use of municipal bonds to support Indonesia’s energy transition targets and analyze the overall feasibility of implementing such bonds. We identify three main factors that make a strong case for accelerating green bond issuance by municipal governments in Indonesia:

  1. Indonesia’s energy transition target;
  2. the existence of local governments with high fiscal capacity to issue bonds; and
  3. the rising appetite for green bonds in local governments and markets. 

We also outline the opportunities and challenges, both on the supply and demand side, and explore potential solutions to overcome the gaps in issuing municipal bonds.


Implementation barriers remain for municipal bonds, which are described below:

1. Complex eligibility requirements and issuance procedures make it difficult to issue municipal bonds.

In order to issue bonds, local governments need to fulfill four criteria as mandated by the Ministry of Finance (MoF):

  • prudent loan amount;
  • no existing arrears;
  • demonstrated ability to repay debts; and
  • should have passed the financial audit.

Based on our research, all the provincial governments in Java Island are eligible, except for Central Java which has a lower Debt Service Coverage Ratio (DSCR) compared to the requirement set by MoF. The number of non-eligible governments may increase significantly if taking into account provincial governments outside Java Islands, which have limited financial capacity.

Complex bureaucratic procedures to issue municipal bonds remain the biggest hurdle for local governments. Prior to 2020, municipal governments were required to seek approval from Dewan Perwakilan Rakyat Daerah (DPRD) or the local House of Representatives. But with the Omnibus Law on Job Creation, passed in October 2020, municipal governments are no longer required to do so. This is a welcome development that, along with other reforms, will hopefully improve the efficiency of municipal bond issuance.

2. Municipal bonds need to achieve high credit ratings as investors are mostly motivated by commercial interest.

We conducted a market survey among securities companies and domestic and foreign investment banks, which reveals that green bonds, by themselves, are not enough. Market participants admit that they are not motivated to include green investments as a mandate in their annual portfolio.  Investors’ decisions are primarily influenced by the rating of the bond, reputation of issuers, the tenor of the bond (prefer short tenors), guarantor, and the coupon rate.

We further found that market participants typically consider bonds that are at least rated by Pefindo, a locally-owned domestic credit rating agency, and prefer an additional validation by Fixed Ratings. Securities companies and domestically owned investment banks usually accept a minimum bond rating of AA- or A-, while international investment banks can endure a minimum rating of BBB.

3. Inadequate profitable projects in the pipeline, technical and regulatory hurdles, low green awareness in the industry, and additional costs discourage investors to include green bonds in their annual portfolio. 

Our survey showed that market participants are also skeptical about the readiness of the government in issuing municipal green bonds. The primary concerns include the limited pipeline of profitable renewable energy projects , inexperienced bureaucrats, and possible challenges in getting approval from the local parliaments (or DPRD).

Further, Mainly because green awareness in the industry is significantly poor, they also believe that municipal green bonds, already on tight budgets, may incur additional costs due to green bond labeling, the need for massive green campaigns, project feasibility studies, and capacity-building activities to prepare the local bureaucrats. Unclear regulations from the government do not help.


Based on our analysis, we recommend the following measures to accelerate municipal green bond issuance for financing renewable energy development for sub-national governments in Indonesia:

1. Simplification of issuance requirements and procedures such as lowering the DSCR criteria and flexibility to issue short and medium-term bonds (or with tenor less than 5 years) will increase the interest of local governments to use municipal bonds as an alternative financing option to develop renewable energy. Simplification will also help remove some of the technical barriers that inexperienced bureaucrats must overcome to successfully issue municipal green bonds.

2. Clear and consistent policies on renewable energy from the central government will convince local investors to consider subscribing to municipal green bonds. A toolbox of policies, such as setting tariffs that match the economic price of renewable energy power generation and additional tax incentives, will increase the list of profitable renewable projects. The central government also needs to raise awareness and knowledge of green projects to persuade non-traditional investors to enter the market.

3. Local governments should consider selling green municipal bonds to quasi-government institutions, such as local state-owned banks, state-owned national pension, and insurance providers. Once there is a larger investor base , other smaller investors, pension managers, and insurance companies will be more confident to subscribe.

Table ES 1: How the existing municipal bond regulatory framework can meet the market appetite

 Key pointsReferenceDegree of Ability (0-5)Notes
Reputable rating (e.g. PEFINDO)The rating is not mandatoryPOJK 61/2017 Municipal bonds registration1The market tends to pick up based on rating and yield
High yield/ coupon rateN/AN/AGovernment regulations do not influence coupon rate, credit quality does.
Collateral/guaranteeReserve fund + project-backed guarantee, Bonds guaranteed by municipal govt. budgetPP 56/2018 Regional loan, PMK 180/2015 Municipal bonds5Mandatory reserve funds render municipal bonds almost zero-risk for default
Higher underwriting feeN/AN/ADepends on the local government’s fiscal capacity to pay for underwriting
Transparency of the underlying projectDisclosure requirement, Revenue-generating pipelines only, >70% of proceeds must go to green projectsPP 56/2018 Regional loan, PMK 180/2015  Municipal bonds, POJK 60/2017 Green bonds4Current regulatory framework clearly mandates full disclosure of underlying projects
Shorter bond tenor optionOnly municipal government’s long-term loan can be sourced from the publicPP 56/2018 Regional loan0Municipal bonds are categorized as long-term loans with a minimum tenor of 5 years
Non-IDR transactionOnly IDR and domestic market transactions allowedPP 56/2018 Regional loan0The use of local currency is a pivotal monetary policy for local revenue
Audit of the municipal govt (i.e., BPK + Big Four).Only BPK audit requiredPOJK 61/2017 Municipal bonds registration2Only audits from BPK with high pass (Wajar Tanpa Pengecualian) are mandatory
Better government incentive (i.e., tax advantage)Lower bonds tax rate (from 15% to 10%), OJK-issued incentives, such as lower listing feeUU 11/2020 Omnibus law, POJK 60/2017 Green bonds4Low tax rate improves investor appetite, while lower listing fee improves the issuer’s appetite
Foreign market participationDirect foreign loans are prohibitedPP 56/2018 Regional loan0Only the central government has the authority to issue foreign loans
Base/ minimum investors as benchmarksN/AN/ANo legal mandates requiring base/minimum investors as standby buyers
Clearer regulation/ policy synchronizationNo house approval requiredUU 11/2020 Omnibus law on job creation4The law can expedite the process of issuing municipal bonds, reducing cost
Precedent from central govt. issuanceGreen sukuk and PT. SMI  issuancePOJK 60/2017 Green bonds4The central government’s precedence for issuing green bonds may improve municipal bond credibility
Strong prospects for green projectsN/AN/ANo strong policy signal yet detected that command/ incentivize the market to subscribe to municipal bonds
Physical assets with appreciable valueOnly project-backed guaranteePP 56/2018 Regional loan1While the project’s asset can be used as a guarantee, it may not have appreciable value
Convertible bond (to stocks)Only project-backed guaranteePP 56/2018 Regional loanN/ASince there is no equity financing for municipal bonds, there is no legal basis for municipal convertible bonds
Reserve fundPrincipal + interest guaranteedPP 56/2018 Regional loan5Mandatory reserve funds make municipal bonds almost zero-risk for defaults
DAU/DAK direct automatic reallocationN/A0DAK and DAU are central government fiscal instruments that requires the center’s authorization
Cashflow waterfall to secure paymentAllow municipal governments the right to repay the bond before the maturity date (call option) 2While this offers more flexibility for local governments, investors may not favor the call-back option
Bond that can be an underlying repoN/AN/ANot regulated


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