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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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Fiscal decentralization includes delegation of expenditures and revenue to sub-national governance tiers, notably the right to regulate local taxes and retributions (limited to those included in the positive list regulated by Government Regulation). However, local actors need to build institutional capacities to improve the uptake and implementation of climate finance policies. This requires that sub-national government and concerned stakeholders possess the competence to assess and articulate funding needs in preparing and delivering locally-proposed GHG emission reduction and climate change adaptation initiatives, in addition to possessing skills in climate finance management, tracking, and reporting.

Capacities to use performance-based local grants are especially important in demonstrating climate finance readiness at local level of action.

The ICCTF provides some experience in climate finance policy implementation and coordination across some government ministries and tiers, and learning from these cases can inform further planning. Generally however challenges remain in essential areas of climate finance delivery such as engaging stakeholders from sub-national government and the private sector, and tracking the flow and impact of climate finance expenditures and strategies.

P a g e | 34 Strengthening Public and Private Climate Finance in Indonesia Final Report, August 2013

5. Accessing Finance Evolving architecture and availability of global climate finance requires a varying range of expertise from national and sub-national recipients. International commitment for funding climate change activity in Indonesia has been relatively high, as indicated in previous chapters, but centered predominantly on REDD+ and land use related mitigation objectives.

Despite the level of funds already pledged by donors, there is still a lot more required as various climate finance assessments conclude, and the government is challenged to tap additional sources and opportunities to meet these needs.

In recent years, the issue of direct access to funding, e.g. the Adaptation Fund, has been gaining prominence in global policy dialogue and drawing attention to the availability of fiduciary capacities and accreditation credentials in developing countries. Compliance with environmental and social safeguards and competencies for serving as an implementing entity are becoming increasingly important for intended recipient countries. Accessing finance also requires country government to demonstrate capacities in efficient utilization of money, including the ability to blend and combine different resources in the national policy mix and using funds to catalyze further public and private investment.

Most international public climate finance has been provided bilaterally rather than multilaterally. It can be expected that this will remain an important issue to consider in the near future. However, efforts to develop global funds has started and is an on-going process gaining more momentum and importance in the longer run (3 to 5 years from now) and will catalyse international climate finance substantially. The Green Climate Fund (GCF) will offer the possibility of a more coherent and coordinated global funding approach in the long-term future. This is expected to be fully operational just in several years. In the meantime countries need to strengthen their national climate finance institutions to be able to access emerging funds. The lack of accredited NIEs reflects that these capacities are still low.

Also important is the capacity of local actors including provincial and district governments, private SMEs, NGOs and communities to access and absorb funds from national climate funds and sources. This also depends on the efficacy of climate finance disbursement and benefit distribution mechanisms devised by national planners to enable stakeholder participation while balancing incentives with legitimacy and priority. Policies and legal frameworks at sub-national level need to be improved to facilitate funds accessibility and absorption.

–  –  –

Exhibit 8 gives a general overview of just how diverse the landscape of climate change funding in Indonesia is.

Exhibit 8: Mapping of Climate Finance Activities Channelled via Funds in Indonesia (Source:

own elaboration)

5.1 Directly Accessing Financial Resources: Global to National With support from GIZ, the ICCTF is in the final stages of the application process to becoming Indonesia’s National Implementing Entity (NIE) to the Adaptation Fund. The decision by the Adaptation Fund Board, expected in 2013, can have major bearing on future development of the ICCTF – not only in the field of adaptation but also for upscale mitigation activities.

UNDP currently acts as an interim trustee of the ICCTF with plans to hand over trustee functions to Bank Mandiri in 2013 or 2014. Although the process of ICCTF’s accreditation to the Adaptation Fund is on-going, the ICCTF staff can benefit from further capacity building to in delivering NIE responsibilities, managing trustee services, improving fiduciary standards, and working with the private sector to establish public-private partnership modalities.

With the establishment of the Green Climate Fund (GCF) new tasks will most likely arise for the ICCTF, for instance ensuring direct access for Indonesia. Although it will take some time for the GCF to become fully operational, the preparatory capacity development should already start.





In addition to the national Trust Fund, further initiatives are needed to establish systems and capabilities for blending climate finances from various sources and streaming towards targeted activities. This again requires cooperation and coordination with multi-sectoral stakeholder groups.

5.2 Accessing National Sources of Financing Indonesia needs to ensure sufficient in-country capacity for formulating bankable climate change projects and programmes to attract funding. Because climate change goals and targets are spread across various ministries and departments, the expertise required for preparing and delivering projects needs to be widely established as well.

P a g e | 36 Strengthening Public and Private Climate Finance in Indonesia Final Report, August 2013 Developing a pipeline of bankabale projects with local and national stakeholders can work well to improve climate finance absorption, and therefore readiness prospects. In addition to technical assistance and training, this objective may be supported by more scoping and research into mitigation and adaptation investment opportunities at sub-national levels and appropriate financing instruments to facilitate these.

A challenge to funds access at downstream levels is the absence of efficient channelling mechanisms between national and local institutions. One of the fastest options that can be supported is the promotion of a financial transfer mechanism via local grants (e.g. to implement RAD-GRK). The support of such pilot activities can be a first step towards strengthening the capacities of local governments in close cooperation with the MoF.

More time is required to amend the regulation of the intergovernmental fiscal transfer via specific purpose grants (DAK) to reflect climate change aspects. It is, however, worth mentioning that among the fourteen current sectors eligible for DAK funds there are four infrastructure sectors—irrigation, roads, sanitation, and water supply that may serve as a helpful starting point for considering adaptation needs.

P a g e | 37 Strengthening Public and Private Climate Finance in Indonesia Final Report, August 2013

6. Good Financial Governance Good Financial Governance (GFG) necessitates the availability of satisfactory monitoring and evaluation systems to assess the performance of investments and to assure the best use of funds. Sound information on climate finance received and disbursed is a key criterion for decision-makers in developing countries. As per global agreements, developing countries are expected to start submitting biennial update reports (BUR) in 2014 on the results of climate change actions and funding availed. These reports will include description of domestive MRV processes and information on support needed and received, along with updates on GHG inventory and mitigation actions and results.

The objective of such efforts is to have better financial and impact monitoring data available to inform decision making on financial spending and management and climate change planning. Transparent monitoring also helps to build trust among recipient and donor countries. This can ultimately lead to increased financial support in the future (Tirpak et al.

2012).

In the case of Indonesia, the CPEIR stressed the need for improved MRV within the current climate finance system to avoid duplicated efforts. The systematic monitoring and evaluation of international contributions to climate change targets is not yet at the level where it should be which is why capacity development of public and private institutions to implement MRV functions is necessary.

Indonesia has embarked on various initiatives to overcome some of these shortcomings and to develop a more sophisticated MRV mechanism. The MoF has initiated the introduction of Performance-Based Budgeting and a Mitigation Budget Score to estimate the benefits from mitigation actions and to track climate resources. These efforts need further boosting and should also extend to adaptation related spending.

6.1. What is the Primary Challenge in Monitoring Climate Finance?

To being with, one of the challenges to tracking funds is the fact that there is no agreement on the kind of budgets to mark as climate finance, which makes it difficult to distinguish it from other sources of finance, including general development expenditure. And it is important to mark and track climate specific funds as this enables performance-based budgeting.

Although aid and climate finance are different, they share two similar characteristics that make new and additional climate finance difficult to monitor. First, the sources of public climate finance are the same sources as aid finance. Second, financing for climate change adaptation is hard to distinguish from aid, as has been the case when tracking domestic public expenditures on adaptation activity.

Generally, a climate finance marker should indicate whether a policy programme or project budget contributes to GHG emissions reduction or not. Secondly, a performance based system should also consider the marginal budget shares for quantified emission reductions in order to generate information on cost effectiveness.

Some attempts have been made on this front. The Organization for Economic Cooperation and Development (OECD) sets out some initial definitions (OECD, 2011), separating mitigation and adaptation with examples for each of them. The RIO-Marker has also introduced a continuum for climate change mitigation finance: `principal objective significant objective not targeting the objective’. Furthermore, the CPEIR study provides a first indicative overview of what can be classified as climate finance: It disaggregates climate expenditure in the energy, transport and forestry sector.

P a g e | 38 Strengthening Public and Private Climate Finance in Indonesia Final Report, August 2013

6.2 Capacities to Monitor Climate Finance at the National Level Tirpak et al. (2012) assessed the monitoring performance and capacities of developing countries receiving climate finance. For Indonesia, it was noted that no formal climate finance markers or definitive guidance existed, and dedicated systems to track climate finance were missing. The classification and indicators to characterise financial data (e.g., sector and activity codes) were also inconsistent. The assessor did note, however, that efforts to integrate climate mitigation tags into the MoF’s thematic tags was underway. The MoF is still in the process of accounting the total climate finance received by the governmentof Indonesia and analysing the channelling mechanisms used (Gyatet al. 2012).

Moreover, substantive information on private financing is also required. Tracking this stream of spending and investment is necessary for informing the development of public policies seeking to leverage private investment forlow carbon and climate resilient development.

Generally, monitoring climate change related grants in Indonesia is challenging, while loanmonitoring systems are better developed. This is due to the requirement for loans and repayment plans to be approved and administered through central agencies such as the MoF. The difficulty with monitoring grants arises from the way donors deliver these and the limitations of domestic policies governing grants receipt. Currently, there is no mechanism that directs donors and line ministries to report on grants and their results.

A consolidated national database system set up to monitor and report on climate change related loans and grants, even private investment, would be a useful step in overcoming this gap, this is something for the MoF and BAPPENAS to consider undertaking.

6.3 Developing MRV system for Climate Finance Some of the immediate work that is needed in achieving a comprehensive MRV system for

climate finance management in Indonesia involves:

Categorizing climate change projects - determining official definitions that distinguish them from other development projects and setting up budget codes for climate finance.

Strengthening a performance based budgeting system for mitigation as well as climate change adaptation focused expenditures by the government.

Ensuring stronger coordination at the national and provincial levels to enable integrated approaches to MRV; strengthening the role of the ICCTF as an institutional arrangement in this domain.

Establishing an accounting and monitoring system to track private investment in climate change mitigation and adaptation.areasand to ensure that these activities are embedded in Indonesia’s functional internal audit institutions.

Further elaborating the link between MRV of funds, the activities planned, and those to be implemented as part of RAN-GRK and RAD-GRK.

Building capacities for the government to ensure an internal control system for climate change relevant activities as part of government regulation.

P a g e | 39 Strengthening Public and Private Climate Finance in Indonesia Final Report, August 2013



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