«Status of Climate Finance in Indonesia Country Assessment Report Dennis Tänzler (adelphi) Martha Maulidia (GIZ) August 2013 Funded by: Climate and ...»
P a g e | 28 Strengthening Public and Private Climate Finance in Indonesia Final Report, June 2013 Furthermore, the systematic tracking, monitoring, and evaluation of international contributions to address climate change has not yet reached an adequate level, a fact which was confirmed during meetings and interviews with stakeholders. BAPPENAS and the Ministry of Finance would greatly benefit from such an improved system.
The CPEIR study estimated the use of state budget to finance climate change mitigation actions. The study tracked the Ministry of Finance’s budget codes up to program and activity level to identify expenditures on several mitigation actions from 2008 to 2011. The study came up with 14 budget lines that can be classified as mitigation actions. The share of expenditure of each mitigation action is summarized in the table below.
The total expenditure on climate change mitigation amounted to around IDR 5.5 trillion (around USD 579 million). The study concluded that budget allocations had increased significantly both in nominal and real terms, and there was an overall public expenditures increase of about 5%. The study further concluded that these trends are testament to the national planning system’s ability to foster a substantial increase in public spending on climate change mitigation actions (CPIER 2012).
P a g e | 29 Strengthening Public and Private Climate Finance in Indonesia Final Report, June 2013 Since the CPEIR report only focused on mitigation financing, there is no available assessment of domestic expenditure on climate change adaptation actions in Indonesia. A similar approach of tracking budget codes is much more challenging in the area of adaptation as there is no agreed definition on what constitutes an adaptation action exactly to enable its classification and tracking within the existing national budget.
3.2.5 Private Finance Private funding for climate change in Indonesia mostly centres on investments in the energy sector, especially in renewable energy, cleaner energy, and energy efficiency. An independent study by the Pew Research Centre revealed that global private funding in clean and renewable energy in 2011 grew to USD 263 billion (Pew 2012). According to the report, domestic and foreign private companies in Indonesia recorded more than five times the growth in clean energy investment in 2011 compared to previous years by spending more than US$ 1 billion.
A first attempt was made by the Indonesian Investment Coordinating Board (2012) to track the overall investment data in the past three years (2010-2012) on low carbon technology in Indonesia (see Table 3 in Annex 5). Meanwhile for foreign direct investment, certain sectors benefited as can be seen in Table 4 in Annex 5.
Since accurate data on investment in climate change are lacking, the two tables in Annex 5 may give an illustration of a first approximation of private contribution in several investment sectors. In general, both domestic and foreign direct investments show increased values from 2010 to 2011. Based on the types of projects in which private companies are likely to invest in low-carbon technology, several sectors become apparent such as agriculture, transport and others (see Table 4 Annex 5). These sectors indicate the possibility of a favourable investment climate. For domestic direct investment, these sectors combine a total of 31.4% of investments made in 2011. Meanwhile, in 2011 foreign direct investment, similar sectors account for 28.6%.
Based on the analysis of the investment data of the Indonesian Investment Board in 2012, certain conclusions can be drawn. The private sector investments already make up considerable amounts in mitigation related activities, presumably without being aware that those include activities that can reduce GHG emissions. A favourable market situation and related policies and programs setup by the government could put in place the right triggers for these investments (for example One Door Integrated Services). A more detailed analysis of what constitutes a favourable investment climate has not been developed for Indonesia yet, but might give valuable hints for a further promotion of private sector investment in mitigation activities and low carbon growth. More gaps currently exist related to commonly agreed accounting and monitoring methods for private sector investments as well as policies to do so. This would be needed to further integrate those investments into the framework of the RAN-GRK and to provide recognition to the private sector.
3.2.6 Carbon Markets, Clean Development Mechanism (CDM), and REDD+ Despite the huge potential of emissions reduction, Indonesia does not contribute a lot to the compliance (UNFCCC) and the voluntary carbon markets. It is estimated that the compliance carbon market attracts current investment in the size of USD 8 billion to 150 billion per year, with a mid-range of USD 30 to 50 billion per year. The UNFCCC estimated the annual investment in CDM projects to be in the range of USD 40-90 billion.
Out of the overall global investment of USD 215.4 billion (as of June 2012) in CDM projects, Indonesia’s share is estimated to be USD 3.661 billion (or only 1.7%), far behind China (60%) and India (17%) (UNFCCC,2012). Indonesia has developed around 240 CDM projects but only 80 of these are registered with the CDM Executive Board as of October P a g e | 30 Strengthening Public and Private Climate Finance in Indonesia Final Report, June 2013 2012, or around 2.6% of the 3,093 CDM projects registered globally. Until October 2012, there were 23 projects that had received CERs, with a total amount of about 5.3 million ton CERs (Hindarto, 2012). Most CDM projects in Indonesia are methane avoidance from palm oil methane effluent (POME) and landfill. In addition, biomass energy and geothermal energy are also among the most common CDM projects in the country. This indicates that CDM appears to be attractive to capital-intensive industry but is still not favorable for small and medium companies except small hydropower.
Similar to CDM, the private sector can play different roles in various REDD+ stages: as project developers or investors, as advisors, brokers or end-buyers. Currently, there are more than 60 REDD+ demonstration activities spread all over Indonesia. The current plan is to finance the readiness phase using voluntary fund and the results-based phase using global facility (unitary fund or clearinghouse). Private companies are already involved in investing and developing REDD+ demonstration activities. An example is Gazprom, a multinational company that financed the Rimbaraya Biodiversity Reserve project.
Generally one issue that arises when considering climate finance incurring through CDM and related carbon market schemes is that the resulting emission reductions under these schemes cannot be accounted for Indonesia’s commitment of -26 or -41% reduction plan.
This is to avoid double accounting of emission reduction achievements. But the main lessons from implementing CDM and voluntary carbon market projects can prove useful for the role of the private sector in the national mitigation framework: a price signal is needed for carbon, government’s support mechanisms and policies need to be adapted, and capacities of actors interested in developing and implementing actions need to be developed. There is still a big gap between actions led by the government and those by the private sector.
3.2.7 Role of Banks
National Banks Banks are intermediaries that provide lending services and which have great potential in financing climate change mitigation activities. Banks have a key role in climate finance as they possess the capacity to leverage international public funding and the expertise to handle sophisticated financing schemes. In addition, they also have the capacity to channel and coordinate international funds.
Indonesia’s central bank, Bank Indonesia, is currently drafting a regulation on green banking. This regulation will require lenders to assess potential borrowers not only based on financial but also social and environmental sustainability standards. With this regulation, Bank Indonesia will provide incentives to private sector to invest and engage in “green sectors” and alsogive a good signal to other banks to participate and draw government’s support. The Bank is still assessing various interventions including tax, soft loans and guarantee scheme (Bank Indonesia, 2012).
Most recently, some national banks have started pouring money into low-carbon projects.
These include: geothermal power plants financing by BNI, (around US$ 862 million), Energy Efficiency Program (EEP) by the Indonesian Bank of Export and Import (Exim) and the ADB worth USD 200 million. Another example is Bank Mandiri that is channelling finances worth USD 100 million to CDM projects. The funds are provided by the French Development Bank (AFD) (Sitorus, 2012).
According to Bank Indonesia, as quoted in a PwC report 2012, in August 2011, there were 120 national commercial banks that hold assets worth IDR 3252.7 trillion (US$ 390.3 billion).
About 15 of them lend around 70% of the country’s total credit. Banks remain cautious and conservative lenders, the fact that is probably influenced by the 1997-1998 financial crises.
Two rating agencies have upgraded Indonesia’s sovereign debt to investment grade. In general, this development coupled with national policies will increase financing opportunities P a g e | 31 Strengthening Public and Private Climate Finance in Indonesia Final Report, June 2013 and attract new investors.The table below describes the outstanding loans channelled by commercial and rural banks broken down based on economic sector. This table gives an insight of bank’s favourable sectors.
Exhibit 8: Outstanding Loans and Foreign Currency of Commercial and Rural Banks by Economic Sector (in Billion IDR)
Statistics above are promising as investment loans percentage shows a significant increase from 2010 to 2011 and 2012. Investment loans only accounted 21% of the total loans approved in 2010, but it increased to 33% by September 2012. This indicates a better climate for investment and financing risk for investment has been more favourable for banks.
Regional Development Banks:
Regional development banks (RDB) play a significant role in regional economic development by providing financial services that are not economically attractive for commercial banks. RDBs channel the large part of regional government budget (APBD) coming from state government transfer.
There are at least 27 regional development banks operating in different provinces in Indonesia that provide finance mostly for local infrastructure projects, small and medium enterprises, and agricultural activities. RDBs are also known for their focus on microfinance.
They have a potential role in climate finance due to their easy accessibility to local people in the regions.
In terms of adaptation, RDBs have the potential to help the more vulnerable population prone to climate change impacts, including farmers and fisher folks, in managing and accumulating assets and becoming more resilient. RDBs are believed to have a social role and not merely directed towards profit making. The ideal function of RDBs is to correct market imperfections by providing services to the poor or less credit worthy borrowers, and making loans that require long maturity to be profitable such as infrastructure projects.
The capital and assets of Indonesia’s RDBs tend to increase from year to year. Microfinance loans can be used to increase production, create jobs, and hence increase incomes.
However, the capacity of these banks in channelling local government budget through effective mechanisms needs to be built.
The Bank Rakyat Indonesia (Indonesian People Bank, BRI) provides lessons learned for the future development of RDBs and can be also useful for their potential role in climate finance management. BRI is a state-owned bank with the highest loan disbursement portfolio in the country. Its local presence up to village level makes its microfinance division the world’s largest and most profitable microfinance network. BRI provides commercial financial services to poor and lower-middle income households and manages to gain profit from the services. BRI benefited from favourable government policies, for instance a policy that gives freedom to national banks to set their own interests (Robinson, 2005).
Planning capacity is required at multiple levels in a country to attract and manage climate funding from varied sources. More specifically, climate finance readiness requires capacities
for sound planning in three areas:
Assessing climate change policy (mitigation and adaptation) needs (national, sectoral, sub-national) and identifying priority policy actions, along with their resourcing requirements. This includes the ability to integrate cross sectoral and multi-stakeholds views and inputs into planning.
Designing a policy mix, based on need assessment results, that reflects the available financial management capacities at national and global scale, creates additional instruments for managing climate funding in the country, and enbables the government to play a coordinating role.
Ensuring the supply of necessary expertise and skills at local and sectoral levels to enable the delivery of national climate change strategies and funds.
4.1 Assessing Needs and Priorities& Identifying the Policy Mix With regards to climate change policy and financing preparation, Indonesia has demonstrated some good progress in establishing the necessary infrastructure for GHG emissions reduction planning. The national emissions reduction action plan (RAN-GRK) identifies mitigation actions for different sectors and has achieved an initial assessment of financing needs. There have also been other attempts at estimating financing needs and priorities for climate action in Indonesia. For example, the fiscal policy office supported by the World Bank prepared a Low Carbon Technology Options Study in 2009 to inform the preparation t of low-carbon growth strategies. The study analysed carbon emission reduction potential, the incremental costs and benefits of low-carbon growth strategies, and the policy support required for enabling low-carbon actions and targets.