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«Status of Climate Finance in Indonesia Country Assessment Report Dennis Tänzler (adelphi) Martha Maulidia (GIZ) August 2013 Funded by: Climate and ...»

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A third challenge - apart from the lack of clarity over climate financing needs and the potential gaps in funding - is the absence of information on adaptation financing. There are no assessments carried out to define the scope ofadaptation funding needs at the country level. Some argue that the government seems to prioritize mitigation over adaptation (Prasetyantoko 2011). A reason for this could be the absence of information on priority adaptation schemes and targets for Indonesia. For selected areas some estimates are available: the financial needs for agriculture and coastal zones, for example, would be about USD 5 billion on average per year by 2020. This amount is estimated based on the cost of seawall construction and development of climate resilient crops. Meanwhile, the annual benefit of avoided damage is likely to exceed the annual cost by 2050 (ADB 2009). However a country level study is needed to give more accurate description on investment and financing needs in adaptation.

Indonesia is currently preparing the National Adaptation Plan of Action (RAN-API - to be completed by end of 2013) to identify priority adaptation measures and to initiate their implementation. The RAN-API registers adaptation measures being in the pipeline of ministries/agencies such as the Ministry of Marine and Fisheries, the Ministry of Health, the Ministry of Agriculture, the Ministry of Public Works and others. Applying a comprehensive adaptation costing methodology based on investment and financing needs is expected to provide comprehensive indications of adaptation expenditure in the country.

3.2.2 Indonesia’s Public Finance and Budgeting Cycle The domestic budget process in Indonesia is initialized by the President’s vision, which is then translated into national and regional long-term, mid-term and short-term plans. These plans, that are evaluated and renewed every five years, serve as guidance for budget allocations at the national, regional and local government level. The current plan contains 11 national development priorities, three of which are related to climate change: food security;

energy and environment; and disaster management (including climate change related).

The administration of foreign assistance starts with a letter of agreement between the donor agency and the government. The Ministry of Finance registers the project and sets up an account to track the flow of the financial means. The relevant ministries prepare a work plan to be approved by the Ministry of Finance and BAPPENAS to ensure compatibility with national plans. Once these procedures are completed, the project moves towards implementation followed by monitoring, reporting, and evaluation and auditing. In its current stage, the MoF accounting system cannot yet track funding for climate change projects. This is because there are no criteria to separate mitigation and adaptation activities from other projects. BAPPENAS and GIZ have developed an aid information management system (AIMS) to track development assistance. However it does not differentiate climate change from other development projects.

P a g e | 24 Strengthening Public and Private Climate Finance in Indonesia Final Report, June 2013 Since the scale of climate finance has grown significantly in recent years, there is a need to provide appropriate mechanisms and modalities to access and deliver financing. Available financing sources can be accessed from public sectors, development banks, carbon market and private capital. There is a wide range of possible delivery mechanisms that can be considered in channeling public funds to recipients, including through the annual government budget, direct access (grants, loans and investments), export credits, debt swaps and many others. Mechanisms for channeling private sources include direct investment, commercial bank loans, asset financing, forward contracts, carbon credit, and payment for environmental services (DNPI 2009).

3.2.3 Climate Finance Institutions and Instruments in Indonesia As part of the developing climate finance architecture, national climate funds have gained some prominence. These funds are a type of mechanism that support countries in accessing and blending climate finance from multiple sources to fund climate change actions at national and sub-national levels. The Indonesia Climate Change Trust Fund (ICCTF) was launched to mobilize and pool multilateral and bilateral grants for financing national climate change policies and programmes. The ICCTF was initiated by the government to coordinate climate change activities in the country, increase accountability, and avoid lengthy disbursement procedures. The ICCTF has also the role of aligning donor assistance to national development priorities, improving access to financing, and facilitating private sector involvement in climate change.

The ICCTF is governed by a Steering Committee comprising members from various government ministries, and advised by a Technical Committee of staff from different ministries as well. Day-to-day coordination and Secretariat functions fall under the remit of BAPPENAS (ICCTF 2013a). The ICCCTF includes expenditure funds as well as revolving investment funds. The fund currently prioritizes three financing windows: land-based mitigation; energy; and adaptation and resilience.

Exhibit 4: ICCTF structure and operations (Source: ICCTF 2013a) The fund has a 3-phase design: phase 1 and 2 operate as an ‘Innovation Fund’, providing only grants - in phase 1 only to government (ministry) led projects, and subsequently opening up to regional and local governments, public-private partnerships, NGOs and

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universities in phase 2. Phase 3 is designed as a ‘Tranformation Fund’ which can generate revenues through revolving investments, opening up to private finance and carbon markets.

The phased design, with restrictions on type and recipients of funding in initial phases, has helped develop capacities and technical experience of both the ICCTF and recipient ministries. The ICCTF has not yet moved into Phase 3 as it is waiting for the government to draft policies and regulations for cooperating with private funding sources (Frankfurt School/UNEP 2012).

The ICCTF has funded three pilot projects in 2010, one in each financing window:

Sustainable Peat Land Management (USD 1.2 million, led by Ministry of Agriculture); Energy Conservation (USD 2.2 million, led by Ministry of Industry); and Public Awareness of Climate Change (USD 1.2 million, led by the Agency for Meteorology, Climatology and Geophysics) (ICCTF 2013a). In July 2012, the Steering Committee granted approval of three new projects to be implemented between 2012 and 2014: Sustainable Degraded Peatland Management (led by Ministry of Agriculture); Community Forest Management (led by Ministry of Forests); and Health Vulnerability Assessment (led by Ministry of Health). The ICCTF currently has USD 5.7 million in remaining funds for disbursement to these and other approved projects (ICCTF 2013b).

Exhibit 5: ICCTF funded pilot projects in 2010

The monitoring and evaluation system used by the ICCTF focuses on six aspects: efficiency, effectiveness, impact, transparency, relevance and sustainability. The monitoring and evaluation process includes a pre-project assessment, monitoring and spot-checking, regular evaluations (mid-term and final); quarterly financing reporting submitted by projects, documenting and dissemination of lessons learned, and independent international auditing.

The Steering and Technical Committees will regularly receive the results of monitoring and evaluation. However, capacity for accurately monitoring and reporting GHG emissions reductions from mitigation activity is limited, in part because Indonesia still lacks a business as usual baseline for emissions (Frankfurt School/UNEP 2012).

In addition, the Government of Indonesia initiated the Indonesia Green Investment Fund (IGIF) under the Government Investment Unit of MOF. IGIF is aimed at leveraging private and market-based financial resources for low-emission development projects and programmes. However the operationalization of IGIF is still pending.

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Other architecture related to climate finance delivery mechanisms, besides the national

funds, can be described in a rather complex picture as below:

Exhibit 6: Climate finance delivery mechanisms The intention is to draw on existing financing instruments as much as possible, however there is still the possibility that new instruments more suitable to the affairs of various government agency may be proposed. Activities under the authority of central government (ministries/agencies) will be financed through sectoral ministries/agencies’ funds, the Deconcentration Fund, and the Assistance Task Fund. The financing of activities under local government authorities can use: (1) the Specific Allocation Fund for Emissions Reduction – for financing local affairs’ activities according to the priorities and criteria that are set by the central government; (2) the Performance-Based Grant, where assessment is based on the implementation of locally-proposed GHG emission reduction initiatives (RAD GRK) and accomplishment of particular targets; and (3) Local Grants for financing local affairs’ activities proposed by local governments (MoF, 2011).

Regarding adaptation finance, besides the adaptation window of the ICCTF, no other systemized funding mechanism is currently in operation in Indonesia. Most of the international support is delivered via bilateral or multilateral projects. The question is how to combine public and private finances for enabling different kinds of adaptation measures typically needed in Indonesia in sectors including water, coastal management, health, and agriculture Many adaptation activities such as flood prevention infrastructure, health programmes, and national disaster plans do not attract private financing from equity investors. For equity, the project must have a fixed asset component and generate financial returns that can be captured through ownership, either a revenue stream or an increasing ownership value. Most adaptation measures yield economic benefits, but do not generate

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tangible financial returns. Projects in the agriculture or water sectors might be suitable targets for private investment as these sectors generate returns in crop yields or water fees.

3.2.4 Status of Climate Finance Flows Based on data from Climate Funds Update (2013), Indonesia has received the second highest level of climate finance commitments (excluding CDM financing) after India. Until late 2011, it was estimated that international public support for climate action to Indonesia had reached USD 4.4 billion. Donors’ activities on climate finance in Indonesia show a variety of modalities, institutions, and funding channels (Brown and Peskett 2011, MFF/CPEIR 2012).

In terms of volume, the vast majority of climate finance pledges have been in the form of loans (73%), and just 8% as grants, yet in terms of projects the trend is reversed: 82% of climate change projects have received grant funding while just 12% of projects were loan based. Majority of finance is coming from 7 large loan projects, 6 of which are from Japan’s Fast Start Finance, while the remaining concessional loan comes from the Clean Technology Fund. Most financing has gone into funding general mitigation projects (85%) or towards REDD (5%), with just 2% going towards adaptation action, and 8% towards multiple foci activities. In terms of project count, the proportions are more even – 43% of projects are mitigation focused, 34% REDD, 16% on adaptation, and 7% addressing multiple foci. Again, this means that mitigation projects, though not disproportionate in number, receive the largest share of funding.

Indonesia receives support under the “Fast-Track Finance” for 19 mitigation, adaptation and REDD+ programs. These programs include the Forest Investment Programme (FIP), the USD 30 million of Norway-Indonesia LoI, some programs under Germany’s International Climate Initiative, and programs financed by the Netherlands through the World Bank such as ASTAE, already counted in the USD 4.4 billion. Donor countries that have committed to providing the funds include the Netherlands, Denmark, Norway, Finland, Germany, the United Kingdom, and the United States of America. Most programs are channeled bilaterally (11) while the remaining 8 projects are channeled multilaterally. Most donors provide grants while the Clean Technology Fund provides loans and the Forest Investment Programme allocates both grants (53.5%) and concessional loans (46.5%) of the total investment of USD 70 million. The total known commitment under the Fast Track Finance for Indonesia is around USD 616.5 million. Most of this amount has been counted in the total international finance of USD 4.4 billion calculated by Brown and Peskett (2011).

In addition to the commitment described in the two tables in the Annex to this report, other donor agencies have also pledged climate finance support to Indonesia. These include the US Millennium Challenge Corporation, which allocated USD 332.5 million (from total USD 600 million) to green prosperity, and the French Development Bank’s (AFD) pledge to Indonesia’s Green Investment Fund (the amount is still unclear). In addition, UK Climate Change Unit has committed GBP 50 million (or around USD 80 million) from 2011 to 2015 for climate change related activities in the form of grants and technical assistance. If the pledges materialize, Indonesia can expect total international finance of over USD 5.3 billion in the near future.

While this amount seemingly represents a relatively high value, certain conclusion could be drawn from an analysis of this situation. First, donor investment seems to be centered on REDD+ / land use related mitigation actions, which seems appropriate considering the high share of the emissions stemming from these sectors in Indonesia. GHG emissions scenarios, however, point to exponentially rising emissions from the energy sector in future and this is something donors need to consider when planning future financial support.

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