Fiscal Support for the Efficient and Sustainable Management of Natural Resources in Indonesia: Renewable Energy and

Forestry Resources

MINISTRY OF FINANCE OF THE REPUBLIC OF INDONESIA

Irfa Ampri, PhD Vice Chairman of Fiscal Policy Agency

for Climate Change Financing and Multilateral Policy Ministry of Finance, Indonesia

Paris, 23 November 2012

Why We Need Sustainable Management?

Conflict of interests between the need of economic growth and environmental protection has been recognized globally

Over exploitation on natural resources may boost the economic growth now. It can, however, jeopardize the national target towards sustainable development

Natural resources scarcity and environmental damage may burden the next generation

There is a need of a shift of development paradigm on economic development strategies, especially in the pattern of producing and consuming goods and services

Under pricing of natural resources causes over exploitation of natural resources

Under pricing of goods and services, due to subsidies, causes inefficiency in production and consumption of goods and services

Lack of efforts in waste management when producing goods and services generates negative externalities to the environment

COUNTRY BACKGROUND

Fiscal Policy Supporting “Pro-4” Agenda

The Government Mission for the Medium Term 2011-2014: Acceleration and Expansion of the Qualified Economic Growth, Inclusive and Fairness

to Improve People’s Welfare

4 Pillars of Development

Pro Growth Pro Poor Pro Job Pro Environment

Fiscal Policy Direction for the fiscal year of 2012 Support the economy (by providing fiscal stimulus) while

maintaining economic stability and fiscal sustainability

Starting in FY 2013 onwards, more green economic aspects will be included within our

fiscal policy direction

Indirect Influences Technology Policy, Strategic Industries

Tech. Transfer R&D, Trade, etc

Int’l Institutions & Mechanisms

IFI Policies, Global Funds, Carbon Markets, Debt swaps

Ministry of Finance

Policy Tools Available For Influencing Green Economy Development

By managing • Investment climate •Pricing (fiscal) policies •Direct spending •Risk and financial markets •Sectoral rules & law

Can influence: • Incentives • Investments • Industry • Int’l $ flows •Pro Poor Approaches

Financial/Investment Policies

• Investment Climate

(attract capital) •Banking Sector •Non Bank Finance Inst’s •Municipal Finance Rules

Taxes / Subsidies

•Tax/Fees/Charges •Royalties/Rent Capture •Subsidies/Tax breaks

Expenditure Policies •Strategic Budget

Priorities •Direct Investment •Public Service Obligation •Green Procurement •Education – Awareness

Direct Regulation

•Enforcement / Incentives •Zoning and Land Use •AMDAL/ Env Audit •Building / Design

Standards •Vehicle Emission

Standards

Role of the Ministry of Finance in Green Economy

Green Fiscal Policy Strategy

Investing for Future ∗ Apply Principles of Medium Term Expenditure Framework and Performance

Based Budgeting in the Medium Term Development Plan 2010-2014. The target of implementing Green Budgeting in 2014

∗ Improve policy framework for promoting geothermal development and identify financing needs to mitigate upstream risk of geothermal projects.

∗ Develop incentives for renewable energy (RE) development and acceleration of power plant development using (RE) – achieve 25% of energy use in 2020

∗ Increase budget allocation to support GHG emission reductions ∗ Improve the management and productivity of forest products and

strengthen the governance of forest concessions and their implementation Reducing Distortions ∗ Rationalize subsidy policy of electricity (households) and limit subsidized fuel

consumption (initially government and state owned companies’ cars) ∗ Better pricing and valuation of natural resources to protect and deliver

environmental services

Act No. 30/2007 on Energy, specifically Chapter 3 which promotes the energy conservation efforts through government incentives or disincentives policy.

Presidential Regulation No. 5/2006 on National Energy Policy which aims to increase the use of renewable energy.

Presidential Instruction No. 2/2008 on Energy and Water Conservation to all government and state owned companies’ office buildings.

Presidential degree No 61 year 2011 on the National Action Plan for Reducing GHG emission (NAP) – 5 priority area with the forestry contributes 87% of target

Presidential Instruction No. 10 of 2011 regarding the Suspension of Granting of New Permits and Improved Management of Primary Natural Forests and Peat Lands within 2 years with the purpose of balancing and harmonizing economic, social, cultural and environmental developments and reducing greenhouse emissions by reducing deforestation and forest degradation

Mineral Export Tax (20% of sale price) in order to prevent overexploitation of the country's natural resources and excessive environmental hazards before 2014

Some Government Policies in Natural Resources

Phasing out of the inefficient fossil fuel subsidies: Government assets should use the non-subsidy fuel

Being done gradually to control inflation and other unwanted impacts.

Approval from the parliament to increase fuel price in the budget 2013 will no longer be needed by the government.

Simultaneously introducing benefits protection for poor (cash transfers)

Promote clean and renewable energy

Provide the incentives for using and investing in non fossil fuel energies (geothermal, micro hydro, and solar panel)

Newly built electricity plants should only use renewable sources

Green Fiscal: From Fossil Fuel Subsidy to Clean and Renewable Energy Path

8 8

Fiscal and Financial Incentives for Geothermal Development

Geothermal at Glance

∗ Being in the Pacific Ring of Fire, Indonesia has 40% of the world's potential geothermal resources, estimated at 28,000 megawatts

∗ Currently Indonesia is the world's third largest geothermal electricity producer after the United States and the Philippines.

∗ Installed production capacity (2011) is almost 1,200 MW from six geothermal fields in Java, North Sumatra and North Sulawesi.

∗ In 2007, geothermal energy represented 1.9% of the country's total energy supply and 3.7% of its electric power.

∗ At the 2010 World Geothermal Congress in Bali, President Susilo Bambang Yudhoyono announced a plan to build 44 new geothermal plants by 2014.

∗ By 2025, Indonesia aims to produce more than 9,000 MW of geothermal power, becoming the world's leading geothermal energy producer. This would account for 5% of Indonesia's total energy needs.

Potential Investment in Renewable Energy

The development of 4,925 MW electricity from Geothermal in 10,000 MW Crash Program Stage II up to the year 2014 requires more than US$ 14,000 millions for the investment.

For the development plan of 12,000 MW Geothermal Power Plant up to the year 2025, international supports are needed.

Foreign ownership in Geothermal Business is allowed up to 95 %; Other business opportunities in geothermal sector: Geothermal direct use; Low temperature geothermal potential; Small scale power plant; CER under CDM Scheme; Services company to support the core business of geothermal.

Fiscal Incentives …. (1)

Fiscal Incentives ….(2)

Financial Incentives Geothermal Fund Facility

Users:

The local governments to increase the data sufficiency of geothermal working areas before being tendered;

Geothermal developers to explore the geothermal area.

Total amount: IDR 2 billion or eq. USD 217 million (cumulative in 2012), and will be increased in the upcoming budget years.

Government Guarantee

FTP II PPP Scheme

Risk Coverage PLN payment default according to PPA

Political risk events which affect private investment

Guarantor Government IIGF (and Government, for some cases)

Form of Guarantee

Business Viability Guarantee Letter (BVGL) to developer

Guarantee Agreement, sent to developer

Geothermal Fund Facility (GFF) Mechanism

Absorb a portion of the risk associated with the confirmation of geothermal reservoirs in the initial stages (GFF for Local Government),

Sharing cost with industry for the reservoir assessment and confirmation of hydrothermal resources,

Do detailed surface exploration; Drill exploratory wells.

Incentives, Supports and Guarantees for Renewable Energy Projects

Construction Exploration Operation

1 Import Duty Facility ✔ ✔ ✔

2 Income Tax Facility ✔ ✔ ✔

3 VAT Facility ✔ ✔ ✔

4 Exploration Financing through the Geothermal Fund

✔ -- --

5 Government Guarantee

Fast-Track Program II (FTP II) Off-take Guarantee (PLN Business Viability Guarantee)

-- -- ✔

Public-Private Partnership (PPP) Projects Government Guarantee (through IIGF)

-- ✔ ✔

6 Viability Gap Fund -- ✔ --

The MoF Roles in Ensuring a Cost-efficient of Geothermal Development

∗ Establish risk reduction program, ∗ Enhance the project bankability, ∗ Create sound fiscal and financial incentives to

reduce the project cost.

Investor

Geothermal Project Company

Local Government

PT PLN (Persero)

Minister of Energy and

Mineral Resources

Lender Contractor

Geothermal License (IUP)

PPA

Recourse Agreement

Viability Gap Fund (VGF)

Electricity Business License (IUPTL)

Exploration Fund

Equity Debt EPC

PPP Facilities:

• Exploration Fund to help mitigate exploration risks

• Viability Gap Fund to ensure project viability

• Government Guarantee to ensure project bankability

Concrete Policy to Ensure Geothermal Development for PPP

Contracting Agencies

Guarantee Agreement

Feed in Tariff The Objective of the Promotion of Feed-in Tariff (FiT) for the Renewable Energy To expand renewable energy development in all parts of Indonesia, To increase the investment of renewable energy, To increase the growth of renewable energy industry and jobs, To increase the ratio of electrified villages.

Location Tariff (US$ cents/kWh *

High Voltage Medium Voltage Sumatera 10 11.5 Java, Madura, Bali 11 12.5 South Sulawesi, West Sulawesi, and South East Sulawesi 12 13.5

North Sulawesi, Middle Sulawesi, Gorontalo 13 14.5

West Nusa Tenggara, East Nusa Tenggara 15 16.5

Maluku, Papua 17 18.5

* FiT for Geothermal based on MEMR Regulation No 22/2012

Challenges To increase the resource capacity at the regional government levels (i.e.

provincial, district authorities) and for key proponents of geothermal energy development (e.g. Developers) in managing geothermal resources, particularly for the energy planning and tendering process.

To reduce subsidies for fossil fuels and provide sufficient capital to support sustainable geothermal energy development.

To improve overall economic incentive system, which includes further reforming energy prices so that they reflect true market prices. Geothermal energy prices should be bankable to improve its access to fund and consider project risk, which will be different in each location.

To reduce the risks of exploration and other early stage development by improving the completeness and reliability of exploration data and implementing risk-mitigation measures.

To stimulate commercial financial institutions for supporting the development of renewable energy including geothermal.

To expand the grid due to without overhauling the grid system, geothermal energy development is likely to be sub-optimal.

Sustainable Management in Forestry

Changing the Role from Net Emitter to Net Sinker

Significant Forestry Role for Green Growth

∗ On 25 September 2009 in the G-20 Summit in Pittsburg, United States, President Susilo Bambang Yudhoyono (SBY) stated the commitment of Government of Indonesia to the world as follows: ∗ Reducing the carbon emission by 26%/41% from Business as

Usual (BAU) by 2020- 88% from forestry ∗ Reducing 1 billion tones of CO2 from BAU by 2050 ∗ Changing the role of forest from net emitter to net sinker by

2030

Key Forestry Medium Term Policies

∗ Establish and operate 120 KPH to better manage forest area

∗ Additional plantation forests of 2.65 million ha ∗ Managing 2.5 million ha Logged over area (LOA) or

secondary forests by private sector (HPA-HA or HPH-RE) ∗ Certify 50% of wood-based products ∗ Rehabilitate 2.5 million hectare critical forest areas ∗ Development of 2 million hectare forests for the

community

Balancing Two Policy objectives

∗ Improving quality and sustainability of environment: ∗ Securing forest areas ∗ Conservation of forests ∗ Watershed management

∗ Supporting economic growth: ∗ Improving production and productivity of forest to support

food and raw material for domestic industries ∗ Improving added value of forest products ∗ Improving community capacity in managing forests ∗ Contributing to government revenues

Key Forestry Programs

∗ National movement on rehabilitation of forest and land

∗ The development of SILIN (intensified silvi culture) technology to boost the productivity of forest products and preserve the rain forest

∗ Certification of wood-based products ∗ Improvement of timber production and

government revenue (PNBP) reporting systems

Ministry of Finance on SILIN program

∗ SILIN is a technology for improving productivity of natural forest in production forest (HPT and HP). Per December 2011, Indonesia has 59 million Ha of HPT and HP.

∗ In 30 years, SILIN will produce 280 m3 natural timber in a hectare. It only needs 3 million Ha HPT and HP to produce 28 million m3 timber annually continuously.

∗ Indonesia is developing the third generation of SILIN that can produce 280 m3 in 17 years.

∗ Ministry of Finance supporting UGM and Ministry of Forestry to develop an inter-governmental task force to support SILIN program

∗ Ministry of Finance supporting study on cost-benefit analysis and business model for HPH with SILIN technology

Ministry of Finance’s Role in Supporting Sustainable Management in

Forestry

∗ Designing better governance for government revenues from forestry

∗ Improving fiscal transfer mechanism for forest funds transferred to district governments

∗ Improving coordination with Ministry of Forestry for planning, budgeting/financing, and monitoring and evaluation of the program (currently on SILIN)

∗ Improving coordination among government agencies for forestry program through understanding cost for implementing RAN GRK

Key Challenges

∗ Transparency, accountability, and integrity of the programs, especially at the district level

∗ Weak design and implementation of the programs

∗ Lack of coordination among key government agencies and key experts

∗ Budget allocation and optimalization ∗ Unclear supports and benefits from the

international sources (REDD+)

• Leader’s commitment is strong, yet domestic agenda also important -- democratization and decentralization.

• Public awareness and stakeholders’ involvement: positive signal shown by sucessful LPG conversion program.

• Indonesia Modalities in Fiscal Policy Development support more climate investment on green economy such as renewable energy, energy efficiency, green building, etc

• Capacity building on initiative domestic flexible mechanisme (ICCTF,IGIF) on financing instrument on Green Economy is underway.

Opportunities

Thank You Merci