«Status of Climate Finance in Indonesia Country Assessment Report Dennis Tänzler (adelphi) Martha Maulidia (GIZ) August 2013 Funded by: Climate and ...»
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 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 P a g e | 29 Strengthening Public and Private Climate Finance in Indonesia Final Report, August 2013 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 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.
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).
P a g e | 32 Strengthening Public and Private Climate Finance in Indonesia Final Report, August 2013
4. Planning Capacity 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.
In 2009 the DNPI launched an abatement cost curve for five sectors including forestry, peat, agriculture, power, transport, industry (cement and oil and gas) and buildings. This has its limitations though, as the least cost technology options are not always the most practical ones with a high-likelihood of being implemented. However, it has been a first available tool for the government to set priority actions.
The Government of Indonesia also submitted the second Technology Assessment (TNA) report to the UNFCCC in 2010. This contains estimates of financing requirements for recommended technological options for emissions reduction. The study was an update of the first technology needs assessment for Indonesia. Some of the assumptions of this study, e.g. capacity of geothermal power plants (27 GW) and carbon capture storage investment seem to be based on very superficial estimates that are hard to prove.
In addition to these, a Green Paper by the Ministry of Finance in 2011 identifies economic and fiscal policy strategies for the delivery of climate change mitigation in a cost-effective manner. It contains guidance on planning long term policy reforms for mitigation, covering issues of fossil fuel subsidies and carbon pricing policy.
Despite these attempts however, challenges remain in essential areas related to climate finance planning and readiness building, such as identifying climate change adaptation priorities and resourcing needs, engaging stakeholders from the private sector and subnational government in policy design and delivery, preparing financial baselines, and so on.
Proper systems for tracking and monitoring climate finances still need to be established in Indonesia. While the CPEIR tracked budget codes from 2008 and came up with insights into P a g e | 33 Strengthening Public and Private Climate Finance in Indonesia Final Report, August 2013 expenditure on climate change mitigation activity, a similar exercise to track adaptation expenditures is more challenging to apply.
Assessing financial needs and priorities is hampered by other capacity challenges as well, even in the case of climate change mitigation. For example, the national action plan (RAN GRK) lacks a cost-effectiveness analysis to facilitate prioritization of actions. Although the CPEIR study (2012) attempted to provide a cost-benefit assessment for select mitigation technology in energy, transport and land-based sectors, there is still a gap in terms of completing the analysis for all RAN-GRK actions. The RAN GRK is also pending a businessas-usual baseline.
These aspects illustrate some of the weak areas remaining in mitigation and adaptation planning and improving readiness for receiving climate finance. Improving capacities to estimate financial requirements and tracking expenditures for climate change planning will enhance Indonesia’s ability to attract increased funding from donors and negotiate more effectively the terms and conditions.
4.2 Ensuring Policy Delivery Ensuring an appropriate level of climate finance expertise and skills across relevant sectors and sub-national government is key to successful policy delivery, especially given the leading role of provincial and local governments in developing and implementing provincial GHG reduction proposals (RAD-GRK). Under the decentralization law in Indonesia, local governments decide independently on political, fiscal and administration aspects. This has implications for the planning and delivery of climate finance sources and strategies.