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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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7. Private Sector Engagement The private sector is thought to to be the most significant source of capital for climate related financing. The government’s role is to create a favourable environment for attracting private investment towards national climate change programmes and targets. Understanding the factors constituting a favourable environment for climate change investments in Indonesia needs deeper study though. Corporate Social Responsibility (CSR) activities, for instance, could be used to demonstrate the role and advantages of corporate involvement in climate change related initiatives, and to explore further potential for climate financing. Other means, like tax incentives, low-cost debt financing, equity investments, and sharing of research and development costs can be used by the government to attract private investors and partners in this field.

In the case of Indonesia, the current structure of climate financing (via the ICCTF and beyond) is designed to include major support from the private sector. However, the planned private sector focused Transformation Fund of the ICCTF is not yet developed. As part of its cooperation with BAPPENAS, the GIZ plans to support the design phase of the Transformation Fund.

In other measures by the government to bring the private sector on board, a promising signal has come from the of the Bank Indonesia (the central bank) as it prepares a regulation on green banking that will require lenders to assess potential borrowers not only on the basis of financial standards, but also on social and environmental sustainability ones.

Generally, however, a comprehensive reflection on the role, relevance, and interest of private sector entities in in various areas of climate change mitigation and adaptation financing is still not available.

7.1. Current Issues in Private Sector Engagement Private sector already makes up a considerable proportion of mitigation investment in Indonesia, although accurate and comprehensive data on such investment is not available.

Private funding mostly centres on investment in renewable/clean energy and energy efficiency, commercially viable areas where investors see a return on investment. Adaptation requirements and actions do not attract equity investment in the same way as they don’t offer similar returns.

Private sector activity is generally expanding in Indonesia, however barriers to investment still exist, some of which are specific to the climate change sector. In the energy sector, for instance, it is often not easy for low-carbon technologies to enter the market due to limited grid access and high entry costs coupled with a low rate of return. Current regulations hinder Independent Power Producers (IPPs) from making significant investment in renewable energy deployment. The Power Purchase Agreement involves a long negotiation process, which notably causes a rise in prices and even non-profitability.

The cost of generating energy from renewable sources is typically more expensive, given that Indonesia has spent massively on fossil fuel and electricity consumption subsidies, amounting to IDR 164.7 trillion (arond USD £18.3 billion), or 30% of the total state buget in 2011 (IISD 2012). Such subsidies have triggered an inefficient use of energy and leave little incentive for energy conservation. The government started reviewing energy-/electricity pricing and subsidy policies to reduce these economic distortions, and through the MoFsome initial steps to reform the pricing policy have been taken. This is, however, a highly politicized and challenging issue for the government and action is expected to be slow.

P a g e | 40 Strengthening Public and Private Climate Finance in Indonesia Final Report, August 2013 Foreign exchange risk is an additional deterrent to private sector’s investment in climate change mitigation initiatives as since most projects entail long-term investment of up to 30 years. Because payments in most energy project contracts are denominated in US dollars and exchange rates are volatile, this increases the risk to investor.

The experience with CDM implementation also brought to light challenges and barriers specific to the mitigation market. Carbon is still viewed by many as a public good; hence it is difficult to integrate into the conventional investment analysis. In Indonesia, the banking sector is not very familiar with energy efficiency and renewable energy investments. Most national banks are not engaged in financing CDM projects. The key issue is the perception of risks: Certified Emissions Reductions (CERs) are still not viewed as ‘real’ outputs or benefits by credit analysts, thus making CERs also difficult to act as collateral and guarantees. The failure to recognize carbon as revenue stream makes the return on investment remain at unattractive levels (MOF 2008).

Other political and regulatory risks are typically prevalent in developing countries and provide additional deterrents to private sector’s appetite for risk taking and investment in new markets. Such risks are associated with enforcement of contracts, protection of intellectual property rights, and legal uncertainties, and certain other conditions. While such barriers exist in Indonesia, the country does seem to be making progress in overcoming some of these obstacles. By introducing significant structural reforms, the government has created more enabling conditions for foreign investors and has created relatively greater transparency in financial management. Also, Indonesia has managed to overcome the impacts of the financial crisis in 1997 and has regained its former investment grade, as recognized by two credit rating agencies in late 2011.





Effective inter-ministerial coordination and cooperation is also an enabling factor in market development and private sector development. The government has taken positive steps to encourage renewable energy investments by issuing the new regulation of the Ministery of Energy and Mineral Resources (MEMR) No. 22/2012. The regulation has introduced FeedinTariffs (FIT) for geothermal, waste and biomass power with rates between 10 and 18.5 cent US$/kWh depending on the region. As a next step, MEMR and MoF are preparing FIT for solar power. This has already gained increased interests from investors.

It is also important to understand the role of sub-national government in business development. The decentralized governance system introduced over the last 10 years maycreate inconsistencies in regulations enacted by the central government and those led by local governments. Under the decentralized system, local governments have the authority to create local taxes (limited to those included in the positive list measured by the Government Regulation) to finance their autonomous functions. Local regulation may not however always follow the available guidelines and this can cause confusion among potential investors, discouraging their interest as a result.

7.2 How to increase Private Sector Engagement?

To overcome some of thebarriers to private sectors involvement in climate change activity, Indonesia needs to consider reforms to domestic policy. Government needs to apply an energy pricing policy that encourages realistic carbon pricing instead of fossil fuel subsidizing, and even increase the general carbon tax on fossil-based industries should be among reforms introduced in Indonesia.As previously indicated and as recommended in the Green Paper of Ministry of Finance, 2009, taxes should be shifted to natural resources and energy use instead of goods. The balanced-budget rule could be applied, introducing of feed-in tariff (FIT) for low-carbon technologies. Some stakeholders appear to oppose the idea of applying a general carbon tax. Either higher awareness and better understanding of the issues should be brought about or alternatives to this proposed idea are needed. To leave it as it is should not be the option.

P a g e | 41 Strengthening Public and Private Climate Finance in Indonesia Final Report, August 2013 The country also needs to reform the legal aspect of investments by providing clear, robust and transparent regulation that will encourage private sector participation in financing climate change actions. Legal certainty is a basic requirement to boost investment.

To manage country specific and political risks for investment, the government could apply investment risk mitigation instruments such as policy guarantees and risk insurances. The government therefore should be able to control infrastructure projects and provide guarantees for the private sector.

In addition to a regulatory approach, the government should put in place credible and stable incentive mechanisms that favour climate actions. The Green Paper by MoF suggested creating financial incentives for regional governments to support actions that contribute to emission reductions. The central government will then pay actions using existing and new

fund transfer mechanisms. To create the same conditions between fossil-based and lowcarbon technologies, the government should consider applying powerful incentives such as:

national targets, feed-in tariffs, tax incentives for low carbon technologies and renewable energy quotas. In addition, the government and policy-makers need to achieve another critical step, which is providing easier market access for low carbon technologies and grid access by the private sector on a competitive basis. Opening up access is considered very important to increase capacity, technology development and stimulate finance (UNEP 2012).

In terms of process, it appears that instruments promoting dialogue between the public and private sector are very useful in order for both sides to learn about policy frameworks and priorities by the government, as well as for the public sector to learn about the private sector’s motivation to invest in green and low carbon technologies and mitigation activities, as well as the associated risks and barriers. Through such dialogue, appropriate policy and supportive instruments could be developed and put into place in order to enhance the private sector’s participation in both adaptation and mitigation frameworks and investments.

The role of the private sector in this context is very crucial and critical, e.g., operations by private sector companies around land management can either contribute significantly to GHG emissions or could in contrast help to mitigate climate change emissions and ultimately provide options foradvancing green growth in the country.

7.3 Good Practices: Public-Private Dialogues as Instrument Two examples of public-private dialogues as an instrument demonstrate how exchange and trust building are useful for climate finance in order to implement activities, validate and develop approaches for mitigation and adaption and gain information for further improvement. Both examples were taken from Indonesia.

First example is the public-private dialogue forum at the local level taken up by the KALTIM Carbon Alliance (KCA). The Indonesian province of East Kalimantan faces the task of integrating climate change mitigation into the system of local development planning and combining national climate change targets and green growth strategies. If successful, green growth in the province will decouple economic development from increase in GHG emissions.KCA is a discussion and work forum focussing on three sectors: palm oil plantations, natural forest management and open-pit mining. Its objective is to unlock the private sector’s potential to contribute to green growth in the province of East Kalimantan.

Under the KCA the provincial government of East Kalimantan and the 'environmental champions' from the private sector would work together as part of a working group for green growth under the provincialgovernment’s climate change council, the DDPI.

KCA activities are divided into three phases. A first phase focuses on discussions between the private sector companies and documents the contributions of 'environmental champions' to green growth recognized as such by the government. In a second phase companies would commit to improving their management practices and receive training sponsored and potentially incentives to support advances. In a third phase experiences will be transformed P a g e | 42 Strengthening Public and Private Climate Finance in Indonesia Final Report, August 2013 into government policies and potentially scaled-up to the national level. Elements of the KCA

include:

The government takes a proactive stance to recognizing the private sector’s • contribution to climate change mitigation and passes regulations to create incentives.

With capacity building support and using government incentives the private • sector works towards improving the business practices to enhance productivity and reduce carbon emissions at the same time.

International donors and agencies, including GIZ, support the KCA, providing this • capacity building support. Some international donors may even consider cofunding a government support/incentive programme for the KCA and the participating private sector firms.

For all of these activities, the companies and the government join together under • the KCA where they can engage in a constructive dialogue that provides a semiindependent forum to track progress and contributions to green growth and emission reductions.

The second example in bridging investor groups and the public sector on a regional level is the Alliance for Public Private Climate Finance Asia-Pacific that was launched in November 2012 by GIZ and the Asia Investor Group on Climate Change (AIGCC) in Jakarta to facilitate private investment in climate action. The initiative aims to combine the considerable climate finance work carried out globally with a detailed understanding of the policy and investment environment in the Asia-Pacific region. This is expected to help support the development of effective public private financing mechanisms that can most efficiently facilitate investments in these regional markets. A regional platform to host stakeholder dialogues at many levels and regular consultations is planned, along with supporting capacity building of financial institutions and policy makers in developing countries and emerging markets and to strengthen communication between public and private sectors. The intention is to have public and private sector actors actively exchange ideas on climate finance development and come up with concrete concepts on the design of the climate finance architecture in the region and within the different countries.



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