Indonesia needs innovative financing mechanisms to support a green recovery from the pandemic.
The green sector offers a huge investment opportunity in Southeast Asia’s largest economy, with energy and transportation alone requiring some $245 billion in climate funding. However, a Climate Bonds Initiative report shows that only 4% of the total stimulus funding has been allocated toward green and sustainable assets, projects, and expenditures. Stimulus funds were largely spent to prevent heavier social loss from the pandemic.
Prior to the COVID-19 crisis, the Asian Development Bank (ADB) estimated Indonesia’s annual climate-adjusted infrastructure financing needs at $74 billion on average, with an annual infrastructure financing gap of $51 billion.
The challenge now is to prioritize green fiscal spending and attract more private investments to bridge the funding gap.
A green recovery will strengthen both climate and economic resilience. Indonesia is the world’s fifth-largest emitter of greenhouse gas emissions (GHG) and accounts for more than half of GHG emissions in Southeast Asia. As part of its commitment to the Paris Agreement on climate change, the country is committed to reducing carbon emissions by 29% by 2030—41% with international finance support.
Scaling up investments in green infrastructure offers a win-win solution. According to the Asian Development Bank, investing $172 billion in sustainable urban transport, clean energy transition, circular economy, agriculture, and oceans could create up to 30 million direct jobs in Southeast Asia by 2030.
Sustainable Energy for All (SEforALL), an organization that works toward the achievement of affordable and clean energy, says every $10 million invested in clean energy is estimated to provide 2 to 2.5 times more jobs than investing the same amount into the fossil fuel industry. “The current renewable energy policies and targets in Southeast Asia can generate 1.7 million jobs by 2030.”
The Climate Bonds Initiative report recommends several policy measures to accelerate the growth of green infrastructure investments in Indonesia. These include promoting “blended finance and de-risking, credit enhancement, or guarantee mechanisms for green transactions to improve the bankability of an infrastructure project.”
The report notes that Indonesia has several dedicated platforms for pooling green or sustainability funding. These include the Sustainable Development Goals Indonesia One (SIO), which mobilizes funds from various sources, including private, institutional, and commercial sources. Launched in 2018, the facility is managed by PT Sarana Multi Infrastruktur (Persero), or PT SMI, a state-owned infrastructure financing institution.
PT SMI President Director Edwin Syahruzad says one of the objectives behind SIO is to provide “a blended finance platform that could invite many international partners.” It will help accelerate the country’s transition to a low-carbon economy, contribute to post-pandemic economic recovery, and achieve sustainable goals.
As of 2021, the report says SIO has pooled $3.24 billion in funding; channeled $231 million to renewable energy, waste management, water supply and sanitation, and other sustainable projects; and committed support for $790 million in sustainable infrastructure.
With support from ADB, PT SMI and the Ministry of Finance have developed a green finance facility under this platform. The SDG Indonesia One Green Finance Facility (SIO-GFF) is an innovative transition financing mechanism that catalyzes public and private funds to support green infrastructure projects.
First of its kind
SIO-GFF is said to be the first of its kind in Southeast Asia. It aims to finance at least 10 projects, with at least 70% of the financing supporting green infrastructure and the rest supporting the SDGs. The facility will design bankable projects to attract funding to supplement public expenditure.
In February this year, ADB approved a $150 million loan to support SIO-GFF. The loan to the Indonesian government will be re-lent to PT SMI, which will administer the facility. ADB also approved technical assistance to help strengthen PT SMI’s ability to implement the facility and eventually broaden the firm’s services to support other borrowers and catalyze private funding.
“The SIO-GFF aims to catalyze up to eight times the funds invested to support climate-friendly infrastructure and help Indonesia make progress toward the SDGs,” says Unit Head of ADB’s Green and Innovative Finance for Southeast Asia and Country Director for Thailand Anouj Mehta. “It will boost the development of sustainable infrastructure and accelerate the country’s recovery from the COVID-19 pandemic by crowding in capital and creating jobs.”
The technical assistance is funded with $1.2 million from Australia’s Department of Foreign Affairs and Trade and $375,000 from Luxembourg’s Financial Sector Development Partnership Special Fund.
ADB Senior Financial Sector Specialist Benita Ainabe says: “With innovative finance models incorporating global green standards, the SIO-GFF will help Indonesia focus on climate-resilient infrastructure as it recovers from the COVID-19 pandemic. We hope to build on our experience in Indonesia to extend the approach to other countries in the region.”
The facility seeks to help manage credit risk during the life cycle of projects, especially the construction phase and the early years of commercial operations when cash flow is negative. The facility will mainly offer loans, but may also provide equity, convertible debt, and guarantees, to reduce the credit risk of projects and attract commercial lenders.