Private investment needed to boost Indonesia’s climate mitigation
Historical, political and social relationships are holding back Indonesia’s ability to attract private investment in climate mitigation projects, according to an academic at the University of East Anglia (UEA).
Indonesia is one of the largest greenhouse gas (GHG) emitters in the world. It has a number of prominent national and international private-sector organisations that play a significant role in the world’s economy and have enormous potential to support the country in reducing its national emissions.
However, there is little information on the amount of private investment in climate mitigation or on how climate mitigation finance from official development assistance via funded projects stimulates private investment in mitigating Indonesia’s GHG emissions.
Researcher Dr Aidy Halimanjaya, of UEA’s School of International Development, reviewed 11 projects in Indonesia that involve private investment in the agriculture, forestry and land use (AFOLU) and energy-related sectors.
The results, published in the Journal of Sustainable Finance and Investment, come at a time when developing countries need investment of $180–540 billion a year between 2010 and 2030 to help meet the global target of capping the world’s temperature rise to 2°C above pre-industrial levels. However, the contribution of private investment is still far below its potential. In 2014 $16.7 billion was leveraged - less than 10 per cent of the minimum investment required.
Dr Halimanjaya suggests that one of the reasons for limited private investment in Indonesia is that its private-sector landscape has been shaped by the country’s historical development since the colonial period.
“Greater awareness and understanding of the history and political context of Indonesia’s private sector is needed on the part of private and public companies around the world, including Indonesia’s state-owned enterprises (SOEs), as potential investors and project implementers collaborating on projects funded by mitigation finance,” said Dr Halimanjaya.
“This will improve donor and recipient strategies for leveraging private investment in risky projects, developing bankable business plans as well as providing accountability for the use of public finance in business-related international development activities.
“Micro, small and medium businesses comprise the majority in Indonesia’s private business landscape, which is politically influenced and dominated by a few large-scale private companies and SOEs, in key mitigation sectors, connected to the country’s past political regime and history.
“They have tremendous potential to lead Indonesia’s reduction of its GHG emissions, however, these complex political and social relationships, together with lack of technical capacity and weak institutional governance may hinder the fulfilment of this potential.
“In this context, mitigation finance has supported an initial effort to disentangle policy, administrative and technical capacity barriers, with less focus on the high-level politics of Indonesia’s private sector and SOEs.”
The study shows mitigation finance has played a significant catalytic role in leveraging private investments in Indonesia's energy sector. There has also been limited investment made by the private companies in the AFOLU sector, however scaling up the projects here still requires further development to be able to leverage a significant amount of investment.
There is a limited effort to engage private companies in the construction sector, which has a significant contribution to Indonesia’s development especially in green infrastructure development.
Despite their expected function as the main drivers of economic growth, innovators of new technologies and drivers of social investment, and recently contributors to, climate mitigation, some SOEs suffer from poor financial performance and low-capacity issues, although they have received privileges such as a monopoly on the import of essential commodities and a continuous supply of state credit.
Dr Halimanjaya found that when the private sector’s perceived incentives are well integrated into a mitigation project’s design and its grant-making and financing criteria, leading to a clearer business model that is more economically viable, the potential for the project to directly leverage private investment rises.
Engagements to leverage private investment are initially made through research, prefeasibility studies and capacity-building. At later stages, mitigation finance offers the private sector opportunities to undertake pilot activities. Some pilot activities have had successful outcomes, with private sector entities acting as co-financiers and self-investors in large-scale infrastructure projects via arrangements such as public-private partnerships.
Dr Halimanjaya said: “The world has the opportunity to green foreign direct investment. Together, public and private mitigation finance can contribute to achieving Indonesia’s national determined contribution and the Paris Agreement’s target of $100 billion in climate finance per year by 2020.”
‘Climate mitigation finance in leveraging private investments in Indonesia’ is published in the Journal of Sustainable Finance and Investment.Tweet