Indonesia faces an estimated USD 8.7 trillion financing need to achieve the Sustainable Development Goals (SDGs) by 2030.  Meeting this challenge will require more than public budgets alone. It will also depend on the ability of local governments to mobilize new sources of financing and invest in the infrastructure, services, and opportunities their communities need.

Across the country, local governments are under increasing pressure to deliver quality public services while navigating evolving fiscal realities. From resilient infrastructure and public transportation to healthcare facilities, schools, and affordable housing, many development priorities require long-term investments that extend beyond annual budget cycles.

Against this backdrop, DKI Jakarta and West Sumatra are exploring new ways to finance development. The two provinces are preparing what could become Indonesia's first municipal bond and municipal sukuk issuances, potentially mobilizing around IDR 5 trillion for regional development. The two provinces pursue different yet complementary pathways. Jakarta is preparing a conventional municipal bond, targeted for issuance in 2027, to help accelerate strategic investments in public transportation, flood management, health and education facilities, and public housing. West Sumatra, meanwhile, is advancing a municipal sukuk that reflects not only its financing needs but also its ambition to strengthen Indonesia's Islamic finance ecosystem through Sharia-compliant capital market instruments. If successfully issued, the two instruments would establish important precedents for conventional and Islamic subnational financing in Indonesia.
 

Exploring New Pathways for Regional Financing 

Successfully bringing these instruments to market, however, requires more than financial structuring. It demands strong institutions, prudent fiscal management, sound governance, and a shared understanding among the many stakeholders responsible for planning, approving, and overseeing the issuance process.

Recognizing this, UNDP, in collaboration with Indonesia’s Coordinating Ministry for Economic Affairs, organized capacity-building programmes for provincial legislatures (DPRD) in West Sumatra and DKI Jakarta, taking place on 16 - 17 July for West Sumatra and 20 - 21 July for DKI Jakarta. Bringing together regional parliament members, provincial governments, national ministries, regulators and development partners, the programmes strengthened institutional readiness by building a shared understanding of municipal financing, governance requirements and the respective roles of each institution throughout the issuance process.

The discussions reinforced that innovative financing is ultimately a governance challenge as much as it is a financial one. “The success of municipal bond issuance depends not only on regulations, but also on the readiness of local governments and the support of DPRD” said Agus Fatoni, Director General of Regional Financial Development, Ministry of Home Affairs.  The programmes also provided an opportunity for participants to examine how effective oversight, strong institutional coordination, and sound fiscal management can help ensure that financing instruments deliver long-term value to citizens while maintaining public trust and accountability.

Jakarta is preparing a conventional municipal bond targeted for issuance in 2027. The Provincial Government views the instrument as a means to accelerate strategic investments in transportation, flood management, healthcare, education, and housing. West Sumatra, meanwhile, is advancing plans for a municipal sukuk, a Sharia-compliant financing instrument that can support regional development while contributing to Indonesia’s growing Islamic finance ecosystem. Together, these initiatives could establish important precedents for both conventional and Islamic subnational financing in Indonesia.

“Creative financing is needed not because Jakarta lacks resources, but because the scale of investment required for Jakarta’s transformation far exceeds what can be financed through the regional budget alone,” said Pramono Anung, Governor of DKI Jakarta

For Jakarta, which will celebrate its 500th anniversary in 2027, innovative financing represents an opportunity to accelerate investments that strengthen resilience, improve public services, and support its aspiration to become a globally competitive city.

In West Sumatra, discussions highlighted both the opportunities and responsibilities that come with innovative financing. Stakeholders emphasized that financing decisions must remain closely linked to development needs, fiscal sustainability, and tangible benefits for communities. The province's planned municipal sukuk is seen as an opportunity not only to mobilize new investment, but also to strengthen institutional capacity and governance for the long term. As one of Indonesia's pioneering provinces in this area, West Sumatra has the opportunity to demonstrate how Islamic capital market instruments can become an important source of financing for regional development while reinforcing the country's broader Islamic finance ambitions.

Whether through conventional municipal bonds or sukuk, both provinces demonstrate that innovative financing can only succeed when supported by strong institutions, sound governance, and robust fiscal management. Provincial legislatures play a central role in this process through their legislative, budgeting and oversight functions, ensuring that borrowing decisions remain fiscally responsible, transparently governed and aligned with regional development priorities.

From Innovative Finance to Development Impact

For UNDP, the significance of these initiatives extends well beyond supporting Indonesia's first municipal bond and sukuk issuances. These instruments are not an end in themselves, but a means to mobilize financing that delivers tangible development outcomes. Their success will ultimately be measured by whether they improve public services, strengthen resilience, and accelerate progress towards the SDGs.

As discussions in Jakarta and West Sumatra demonstrated, innovative financing can be an important catalyst not only for mobilizing capital, but also for strengthening governance and institutional capacity at the local level.

“A municipal bond is not only a financing instrument. It is also a process of strengthening fiscal governance, institutions, transparency, and collaboration among stakeholders”, said Nila Murti, Head of Financing for Development and Inclusive Growth of UNDP Indonesia. Looking ahead, future municipal bond issuances are expected to increasingly adopt thematic bond principles, aligning financing with regional development priorities and ensuring that every rupiah raised is transparently allocated to projects with measurable environmental and social outcomes. She also emphasized the strategic role of regional legislatures in ensuring that innovative financing translates into long-term public value through oversight, transparency, fiscal discipline, and policy continuity.

As Indonesia works to address its SDG financing gap, the experiences of Jakarta and West Sumatra could provide valuable lessons for other regions across the country.

Their efforts demonstrate that innovative financing is not simply about accessing new sources of capital. It is about creating the conditions that allow investment to translate into sustainable development outcomes through strong governance, sound institutions, and effective collaboration.

As Indonesia works to address its USD 8.7 trillion SDG financing need, these pioneering issuances could provide a model for other regional governments seeking to translate innovative financing into tangible benefits for communities across the country. These pioneering initiatives could help create a model for regional governments across Indonesia, expanding access to long-term finance while ensuring that development remains fiscally responsible, transparent, and focused on delivering lasting benefits for communities (*).

This initiative is supported by the Joint SDG Fund through the Accelerating SDGs Investment in Indonesia Joint Programme, implemented by UNDP, UNEP, and UNICEF under the overall coordination of the United Nations Resident Coordinator's Office (UN RCO) in Indonesia. The programme aims to strengthen Indonesia's sustainable finance ecosystem by mobilizing public and private capital, advancing innovative financing instruments, and accelerating investments that contribute to achieving the Sustainable Development Goals (SDGs).

Written by: Ralista Haroen and Firstya Ramadhanty
Edited by: Thomas Benmetan