Document of The World Bank

FOR OFFICIAL USE ONLY

Report No.: 54238-ID

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT

FOR A PROPOSED

CLIMATE CHANGE DEVELOPMENT POLICY LOAN (CC DPL)

IN THE AMOUNT OF US$ 200.0 MILLION

TO THE

REPUBLIC OF INDONESIA

APRIL 26, 2010

Indonesia Country Management Unit Sustainable Development Department East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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The Indonesia Climate Change Development Policy Loan has been prepared by a World Bank team supervised by Sonia Hammam (Sector Manager, EASIS) and led by Timothy Brown (EASIS). The members of the team are: Josef Leitmann (EASER), Giuseppe Topa (EASER), Johannes Heister (EASER), Cynthia Dharmajaya (EASER), Julia Hanniawaty (EASER), Migara Jayawardena (EASIN), Xiaodong Wang (EASIN), Dejan Ostojic (EASIN), Mubariq Ahmad (EASIS), Virza Sasmitawidjaja (EASIS), Juha Seppala (EASIS), Emile Jurgens (EASIS), Guntur Prabowo (EASIS), Mustapha Benmaamar (EASIS), Paulus van Hofwegen (EASIS), Shobha Shetty (AFTAR), Marleyne Danuwidjojo (EASIS), Yulita Soepardjo (EASIS), Shubham Chaudhuri (EASPR), Timothy Bulman (EASPR), William Wallace (EACIF), Enrique Blanco Armas (EASPR), Elaine A. Tinsley (LCSPE), Nina Herawati (EASPR), Melinda Good (LEGES), Michael Prachar (LEGES), Rajat Narula (EAPFM), Yogana Prasta (EACIF), Bolormaa Amgaabazar (EACIQ), Marina A. Soemarjono (EACIQ). The team worked closely with), Mr. Kiichi Tomiya and Ms. Yuka Murakami (Government of Japan/JICA), Patrick Abbes and Dimitri Kanounnikoff (Agence Française de Développement), the Asian Development Bank and the IMF to coordinate policy advice. Kulsum Ahmed (ENV), Benoit Bosquet (ENVCF), Charles Feinstein (EASNS) and Michel Kerf (LCSSD) are the peer reviewers for the operation. The team worked under the overall guidance of John A. Roome (Sector Director, EASSD) and Joachim von Amsberg (Country Director, EACIF).

REPUBLIC OF INDONESIA - GOVERNMENT FISCAL YEAR

January 1 – December 31

CURRENCY EQUIVALENTS

(Exchange Rate Effective as February 28, 2010) Currency Unit Rupiah (IDR)

US$1.00 Rp.9.310

ABBREVIATIONS AND ACRONYMS

AAA Analytical and Advisory Activities DNA Designated National Authority for CDM

ADB Asian Development Bank DNPI Dewan Nasional Perhubahan Iklim (National Council on Climate Change)

AFD Agence Française de Développement DPL Development Policy Loan

AG Attorney General DPR Dewan Perwakilan Rakyat (People’s Consultative Assembly)

AMAN Aliansi Masyarakat Adat Nusantara (Indigenous Peoples Alliance of the Archipelago) EE Energy Efficiency

AusAID Australian Agency for International Development ENSO El Niño Southern Oscillation

BAPEPAM LK Badan Pengawas Pasar Modal dan Lembaga Keuangan (Financial Institutions and Capital Markets Supervisory Agency)

ESCO Energy Services Companies

BAPPENAS Badan Perencanaan Pembangunan Nasional (National Development Planning Agency) FAO Food and Agriculture Organization

BaU Business as Usual FCPF Forest Carbon Partnership Facility

BI Bank Indonesia FDI Foreign Direct Investment

BKF Badan Kebijakan Fiskal (Fiscal Policy Office) FLEG Forest Law Enforcement and Governance

BKPM Badan Koordinasi Penanaman Modal (Indonesia Investment Coordinating Board) FPO Fiscal Policy Office

BMKG Meteorology Climatology and Geophysics Agency FSSF Financial System Stability Forum

BNPM National Disaster Management Agency GDP Gross Domestic Product

BPK Badan Pemeriksa Keuangan (Supreme Audit Agency) GEF Global Environment Facility

BPS Badan Pusat Statistik (Central Bureau of Statistics) GFMRAP Government Financial Management and Revenue Administration Project

BUMD Badan Usaha Milik Daerah (Regional Government Owned Enterprise) GFS Government Finance Statistics

CCPL Climate Change Program Loan of Japan and France with GOI, 2008-10 GHG Greenhouse Gas

CCT Conditional Cash Transfer GNP Gross National Product

CDD Community Driven Development GOI Government of Indonesia

CDM Clean Development Mechanism IBRD International Bank for Reconstruction and Development

CER Certified Emission Reduction IDA International Development Association

CIF Climate Investment Funds IEA International Energy Agency

CO2 Carbon Dioxide IFC International Finance Corporation

CO2e Carbon Dioxide equivalent IFCA Indonesian Forest Carbon Alliance

COP Conference of the Parties IG Inspector General

CPF Carbon Partnership Facility ILGRP Initiatives for Local Government Reforms Project

CPI Consumer Price Index IPCC Intergovernmental Panel on Climate Change

CPIA Country Policy and Institutional Assessment ISX Indonesia Stock Exchange

CPS Country Partnership Strategy KDP Kecamatan Development Program

CY Calendar Year JICA Japan International Cooperation Agency

DAK Dana Alokasi Khusus (Special Allocation Funds) KKPPI Komite Kebijakan Percepatan Penyediaan Infrastruktur (National Committee on Policy for Accelerating Infrastructure Provision)

DIPA Daftar Pelaksanaan Isian Anggaran (Budget Implementation Statement)

KPK Komisi Pemberantasan Korupsi (Corruption Eradication Commission) PLN Perusahaan Listrik Negara (Indonesian state electricity

company)

KPPN Kantor Pelayanan Perbendaharaan Negara (State Treasury Services Offices) PNPM Program Nasional Pemberdayaan Masyarakat (National

Program for Community Empowerment)

ktCO2e Thousand Tons of Carbon Dioxide equivalent POLA (Integrated Water Resource Management Plan)

LIBOR London Interbank Offered Rate PPATK Pusat Pelaporan dan Analisa Transaksi Keuangan (Financial Transaction Analysis and Reporting Center)

LKPP Lembaga Kebijakan Pengadaan Barang/Jasa Pemerintah (National Public Procurement Office) PPP Public-Private Partnership

LUCF Land Use Change Forestry PRSP Poverty Reduction Strategy Paper

LULUCF Land Use, Land Use Change and Forestry RAN-PI National Action Plan on Climate Change

MDB Multilateral Development Bank RANPK Rencana Aksi Nasional Pemberantasan Korupsi (National Plan for the Eradication of Corruption)

MDG Millennium Development Goals RDA Regional Development Account

MEMR Ministry of Energy and Mineral Resources RDI Rekening Dana Investasi (Investment Fund Account)

Menko Ekon Coordinating Ministry for Economic Affairs (CMEA) RE Renewable Energy

MMAF Ministry of Marine Affairs and Fisheries REDD

Reducing emissions from deforestation and degradation, conserving forest carbon stocks, sustainable management of forests and enhancement of forest carbon stocks

MOA Ministry of Agriculture REER Real Effective Exchange Rate

MoF Ministry of Finance RKA-KL Rencana Kerja dan Anggaran Kementerian/Lembaga (Ministry/Institutional Budget and Work Plan)

MoFr Ministry of Forestry RKP Rencana Kerja Pemerintah (Government Work Plan)

MoH Ministry of Health RPJM Rencana Pembangunan Jangka Menegah (Medium-Term Development Plan)

MoT Ministry of Trade RPJMN National Medium-Term Development Plan

mtCO2e Million Tons of Carbon Dioxide equivalent RUPTL Master Plan for Electricity Supply

MTEF Medium-Term Expenditure Framework SAI Supreme Audit Institution

NBFI Non-Bank Financial Institutions Satker Satuan Kerja (Working Unit)

NEER Nominal Effective Exchange Rate SFM Sustainable Forest Management

NGO Non-governmental Organizations SNC Second National Communication of the GOI to the UNFCCC on Climate Change

NPV Net Present Value SOE State-Owned Enterprise

ODA Overseas Development Administration SWAp Sector-Wide Approach

OECD Organisation for Economic Co-operation and Development tCO2e Tons of Carbon Dioxide equivalent

OGM Operational Guidelines Manual TNA Technology Need Assessment

OJK Otoritas Jasa Keuangan (Financial Services Authority) TSA Treasury Single Account

OP Operational Policy UCT Unconditional Cash Transfer

PEMDA Pemerintah Daerah (Local Government at District or Province level) UNDP United Nations Development Programme

PER Public Expenditure Review UNFCCC United Nations Framework Convention on Climate Change

PFM Public Financial Management WBG World Bank Group

PKPS-BBM Program Kompensasi Pengurangan Subsidi Bahan Bakar Minyak (Fuel Subsidy Reduction Compensation Programs)

YoY Year on Year

Vice President: Country Director:

Sector Director: Sector Manager:

Task Team Leader:

James W. Adams, EAPVP Joachim von Amsberg, EACIF John A. Roome, EASSD Sonia Hammam, EASIS Timothy Brown, EASIS

INDONESIA: CLIMATE CHANGE DEVELOPMENT POLICY LOAN

Table of Contents

LOAN PROGRAM SUMMARY ............................................................................................................................... I 

I.  INTRODUCTION .............................................................................................................................................. 1 

II.  COUNTRY CONTEXT ..................................................................................................................................... 8 

A.  INDONESIA IN 2010 .......................................................................................................................................... 8 B.  THE STATE OF THE INDONESIAN ECONOMY ENTERING 2010 ........................................................................... 9 C.  INDONESIA’S ECONOMIC OUTLOOK ............................................................................................................... 11 D.  DEVELOPMENT AGENDA ................................................................................................................................ 13 

III. THE GOVERNMENT’S CLIMATE CHANGE PROGRAM ........................................................................ 16 

A.  INDONESIA AND CLIMATE CHANGE ............................................................................................................... 16 B.  GREENHOUSE GAS EMISSIONS PROFILE AND MITIGATION PRIORITIES ........................................................... 22 C.  GOVERNMENT CLIMATE CHANGE AGENDA GOING FORWARD ...................................................................... 32 

IV. BANK SUPPORT TO THE GOVERNMENT’S STRATEGY ...................................................................... 37 

A.  A. LINKS TO THE 2009-2012 COUNTRY PARTNERSHIP STRATEGY ................................................................. 37 B.  COLLABORATION WITH OTHER DEVELOPMENT PARTNERS AND THE IMF ..................................................... 37 C.  CC DPL LINKAGES WITH OTHER BANK INSTRUMENTS AND ENGAGEMENTS ................................................. 39 D.  LESSONS LEARNED ........................................................................................................................................ 41 E.  ANALYTICAL UNDERPINNINGS ....................................................................................................................... 43 

V. THE PROPOSED CLIMATE CHANGE DEVELOPMENT POLICY LOAN .............................................. 44 

A.  OVERVIEW OF CC DPL .................................................................................................................................. 44 B.  POLICY AREAS ............................................................................................................................................... 45 C.  FUTURE DIRECTIONS AND EXPECTED RESULTS ............................................................................................. 50 D.  PARTICIPATORY PROCESSES AND CONSULTATIONS ...................................................................... 55 

VI. OPERATIONAL AND IMPLEMENTATION ISSUES .................................................................................. 60 

A.  ENVIRONMENTAL ASPECTS AND SOCIAL AND POVERTY IMPACTS ................................................................. 60 B.  IMPLEMENTATION, MONITORING AND EVALUATION ..................................................................................... 62 C.  FIDUCIARY ASPECTS, DISBURSEMENT AND AUDITING ................................................................................... 63 D.  RISKS AND RISK MITIGATION ........................................................................................................................ 64 

ANNEX 1: LETTER OF DEVELOPMENT POLICY .......................................................................................... 67 

ANNEX 2: GOVERNMENT POLICY/OVERALL DEVELOPMENT PROGRAM ......................................... 73 

ANNEX 3A:THE WB CC DPL MATRIX OF POLICY ACTIONS .................................................................... 79 

ANNEX 3B: THE CC DPL RESULTS FRAMEWORK (MONITORING AND EVALUATION) MATRIX . 85 

ANNEX 3C: THE CCPL (GOI-JICA-AFD) PHASE 2 POLICY MATRIX ........................................................ 88 

ANNEX 4: REVIEW OF PAST INDONESIA CLIMATE CHANGE PROGRAM LOANS ............................ 96 

ANNEX 5: INDONESIA – IMF ASSESSMENT LETTER ................................................................................... 99 

ANNEX 6: OVERVIEW OF POVERTY AND SOCIAL ISSUES IN INDONESIA ......................................... 101 

ANNEX 6: TABLE 1 POVERTY AND SOCIAL ASSESSMENT REVIEW ................................................... 110 

ANNEX 7: ENVIRONMENTAL ASSESSMENT ............................................................................................... 112 

ANNEX 7: TABLE 1. ENVIRONMENTAL REVIEW OF CC DPL PROPOSED POLICY PROGRAM ... 116 

ANNEX 8: OVERVIEW OF WORLD BANK ENGAGEMENTS AND INSTRUMENTS IN INDONESIA 118 

ANNEX 9: INDONESIA AT A GLANCE ............................................................................................................ 122 

ANNEX 10: MAP OF INDONESIA # IBRD 33420R2 ........................................................................................ 125 

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REPUBLIC OF INDONESIA – CLIMATE CHANGE DEVELOPMENT POLICY LOAN (CC DPL)

Loan Program Summary

Borrower Republic of Indonesia

Implementing Agency

The Ministry of Finance, the National Development Planning Board (BAPPENAS) the President’s National Council on Climate Change and the Coordinating Minister for Economic Affairs.

Amount and Terms

IBRD Variable Spread Loan, US$200 million.

Operation Type

A single tranche operation , the first in a proposed series of four programmatic loans of similar amount.

Main Policy Areas

Climate Change Adaptation, Mitigation, and Institutional Development

Description/ Contribution to CPS

The proposed Climate Change DPL series will support GOI’s efforts to develop a lower carbon, more climate-resilient growth path by focusing on three main thematic areas: (i) addressing the need to mitigate Indonesia’s greenhouse gas emissions; (ii) enhancing adaptation and resiliency efforts in key sectors; and (iii) strengthening the institutions and cross-cutting policy framework needed for a successful climate change response. Mitigation focuses on the key sources of emissions and key targets for reduction, namely, (1) forest loss and peat land conversion and burning (land use change/forestry), and (2) the energy sector, where progress can be made on reducing the incentive to over-use fossil fuels and increasing the incentives to develop renewable energy alternatives and promote energy efficiency. Adaptation focuses on improving the framework for climate resilience in agriculture, water management, coastal and marine resource management, as well as disaster preparedness. Institutional development and cross-sectoral issues relate to the need for better technical understanding, policy coordination, and integration of climate change priorities into the national development planning and budgeting system. By contributing to the GOI’s established program loan process, the World Bank is adding value by linking policy reform efforts to broader mosaic of engagement instruments, financing mechanisms, technical assistance and capacity building that the Bank and partners are bringing to bear on Indonesia’s development challenges. The Bank can bring its development policy lending experience to the operation to assist the GOI and development partners in streamlining a prioritized program for the future. Finally, the Bank can work with GOI and other partners to link this climate change agenda to the macro economic reform process run by the primary economic development planning and budgeting agencies. Contribution to CPS. Environment is one of the core areas of engagement of the Indonesia 2009-2012 CPS, which recognizes that the GOI is poised to become a leader and model for developing countries in mitigating and adapting to climate change,. The CPS anticipates facilitating access to new international climate investment instruments; supporting the GOI’s REDD initiative and other mitigation actions; and working to reduce Indonesia’s vulnerability to natural disasters. It also anticipates policy lending to support progress on key policy reform areas such as those encompassed in this proposed operation.

Benefits The key benefits expected from the program are: Mitigation/ Forestry • Policy harmonization and enabling conditions established for GOI integrated action to reduce

degradation and fires on peat land (in high-priority target areas) • Improved forest and peat land sustainability, land management practices and competitiveness –

with institutions and policies positioned to access post-2012 forest carbon finance. Better governance in the forestry sector through greater transparency, benefit sharing and more

equitable access to the environmental and economic services provided by forests.

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Mitigation/ Energy • Increased economic benefits from energy efficiency and increased energy security from

investments in renewable domestic energy sources • Economic and social benefits of reduced fossil fuel emissions in energy sector • Positive steps toward achieving President’s emissions mitigation and energy mix goals in accord

with GOI energy strategy Adaptation • Integration of climate change adaptation and response into preparedness and resiliency plans with

disaster prevention and recovery programs and institutions • Improved basis for response to potential and uncertain changes and impacts in future Cross-Cutting / Institutional: • Improved policy harmonization across institutions critical to the GOI’s climate change response. • Improved policy enabling framework for climate change action and access to climate investment

vehicles and post-2012 carbon finance opportunities • Coordination and parallel financing around a common policy framework and dialogue.

Partnerships/ Parallel Financing

The first year of the Bank’s CC DPL operation will provide parallel financing for the Climate Change “Program Loan” in 2010, the third year of a Japanese-French loan series initiated in 2008. The remaining years would be co-financed with Japan, France and possibly other development partners.

Risks and Risk Mitigation

Coordination of GOI's climate change national action plans. While coordination across sectors remains a challenge, Indonesia has improved the clarity of its national climate change action plan. These improvements owe much to the Government’s response to the President’s pledges to reduce emissions. The DPL operation directly harmonizes partner support while focusing analysis, policy advice and monitoring to the steering committee where all institutions are represented, with the expectation that this high level body will provide a forum for cooperation beyond the DPL. Commitment to policy reform actions over the medium term. Government commitment to reform is considered to pose low risk, given Indonesia’s high profile international commitments, and the integration of Climate Change into the Medium Term Development Plan (RPJM). Operation size and visibility. With other partners’ parallel financing, climate change program/policy loans represent substantial lending levels. The Bank has focused its efforts on choosing streams of policy actions designed to lead to substantial progress on this critical agenda. Fiduciary and governance risks. Corruption and governance weaknesses remain impediments to development. The economic DPL series with a key strand focusing on public financial management provides an umbrella for Bank engagements designed to reduce fiduciary risks. Reputational risk. The CC DPL touches a number of “hot button” issues such as deforestation, land management, and energy pricing that draw the attention and criticism of stakeholders. These issues have been discussed with NGOs and other stakeholders through Bank and GOI consultations at various fora. Additional outreach will be undertaken by the GOI and its partners in programmatic lending to explain the nature, contents and benefits of the operation. Forest management is a long term challenge; there is risk that progress will be slow. The risk that business-as-usual will continue is partly mitigated by the potential for access to a system of payments for preserving forest carbon stocks. However REDD itself has risks that cannot be mitigated at the project level as international agreement on a GHG control framework may not arise. Energy pricing remains a difficult political challenge and the risk is that progress will be intermittent. The GOI recognizes the importance of progress on this agenda, as the resources from previous subsidy reductions have been important to financing key social programs. More recently the G20 commitment is an important marker, but energy price reform remains a critical political issue. Poverty and social impacts. There is the possibility that low income groups will not benefit from climate finance distribution mechanisms such as REDD. This can be mitigated through a combination of good design and transparency. Similarly, the impact of an increase in energy prices on the poor can be reduced by introducing a compensatory cash transfer program; Indonesia used this approach during recent energy price adjustments. Disclosing and consulting on policies and plans is another measure to allow for public scrutiny and feedback. Macroeconomic and systemic risks. Indonesia’s macroeconomic framework is robust, more certain than during the financial crisis. Economic performance has been remarkably solid, with only brief

iii

slowing of growth. Fears of balance of payments pressures have proved to be largely unfounded. Banking sector health, overall, remains strong. Incremental upgrades by ratings agencies recognize the ongoing soundness of public finances. However, the scale and speed of foreign capital inflows, coupled with the openness of the capital account, present an ongoing risk of sharp changes in financial asset prices. During the 2008-9 period, the real impact of extreme price changes was mild, however, and the floating exchange rate and high foreign exchange reserves provide a buffer against volatility.

Operation ID P120313

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I. INTRODUCTION 1. The proposed Climate Change Development Policy Loan (CC DPL) to Indonesia for US$ 200 million will support the Government’s policy agenda on climate change, an issue of growing global concern. The CC DPL is envisioned as a series of four annual single tranche loans of similar size anchored to the FY09-FY12 Country Partnership Strategy (CPS). CC DPL provides support in three core areas: (i) addressing the need to mitigate Indonesia’s greenhouse gas emissions; (ii) enhancing adaptation and resiliency efforts in key sectors; and (iii) strengthening the institutions and cross-cutting policy framework needed for a successful climate change response. 2. The GOI has requested that the Bank join its ongoing Climate Change Program Loan (CCPL) framework in parallel with other development partners. The framework has been in place since 2008, when GOI initiated the CCPL program loan series with financing from Japan (JICA) and Agence Française de Développement (AFD).1 The CCPL policy framework is based on Indonesia’s "National Action Plan Addressing Climate Change" and other key planning and policy documents. The timing is opportune for the Bank to join as the operation is in transition from a first to a second three-year phase. The Bank’s CC DPL will provide parallel financing during this final year of the first CCPL series (2009). Future operations in the CC DPL series will support the second three year phase of the GOI’s program. In the transition from the first to second phase of CC-PL, the Bank will add value by sharpening the focus of the operation on a core set of key issues, elevating key policy issues to high level decision makers, and integrating assistance across a range of Bank lending and non lending instruments, including climate finance (see Chapter 4). 3. Under the CCPL, the GOI leads a Steering Committee that provides a venue for coordinating policy advice and harmonizing technical assistance efforts among development partners. The development partners provide a monitoring team, technical assistance and regular supervision missions. The focal areas and future directions to be supported by this CC DPL result from Bank and GOI analytical work and consultation processes, which contributed to the GOI’s climate policy agenda. The specific policy actions in the matrix of prior actions and future policy actions result from an intensive process of dialogue among GOI agencies, the Bank and development partners. The Bank is already helping to influence the policy focus and the way progress is monitored, helping to translate the GOI’s action plans into concrete implementation actions. The Bank is working with GOI and partners to link this climate change agenda to the development and policy reform process at the highest policy making levels. The Bank and the development partners meet regularly, coordinate and communicate on climate change issues through the monitoring and supervision process. The Bank and development partners have good experience in similar collaborations under other DPL instruments in Indonesia. For this proposed operation, the total contribution of all partners, including the Bank, is US$ 800 million. 4. Like other DPL operations in Indonesia, the CC DPL supports the Government of Indonesia’s (GOI) continuing economic, policy and governance reform efforts. Indonesia’s economic and planning ministries recognize climate change as an economic development challenge, more than an environmental problem. The CC DPL provides recognition of Indonesia’s bold and progressive actions on climate change and provides an incentive for continued progress. This operation builds on a significant history of DPL support in the areas of economic and infrastructure policy reform. The economic DPL series supports the Government’s continuing efforts to improve the investment climate, strengthen public financial management, and enhance poverty alleviation and service delivery. The

1 Together, these development partners disbursed $500 million in 2008 (based on CY2007 prior actions) and $700 million in 2009 (based on CY2008 policy actions). The total amount to be disbursed in 2010 will be $600 million (based on CY2009 policy actions), assessed as completed in March 2010.

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Board approved DPLs 1 through 6 from 2004 to 2009. DPL-7 is under development. The Infrastructure Development Policy Loan series aims to increase the amount and effectiveness of infrastructure spending to contribute to economic growth and poverty reduction. Infrastructure DPLs 1 to 3 were approved from 2007 to 2009. IDPL-4 is under development. In March 2009, the Board approved a US$ 2 billion contribution (DPL with Deferred Drawdown Option) to the Indonesia Public Expenditure Support Facility to provide contingent budget support to maintain the stability of the financial system and sustain critical public expenditures in the face of the global financial crisis. 5. Climate change is an economic development challenge facing Indonesia. Indonesia is highly vulnerable to climate change impacts – sea level rise, changing weather patterns, and increased uncertainty. Potential impacts include: increased threats to food security and agricultural productivity; impacts on productive coastal zones and community livelihoods; consequences for water storage; intensification of water- and vector-borne diseases; and deterioration of coral ecosystems. These changes will put past development gains and poverty alleviation efforts at risk. An approach that increases adaptive ability, builds community resilience and increases preparedness for managing disasters makes economic sense for Indonesia, a kind of insurance. Indonesia may also be able to tap into new forms of global financing to assist in this adaptation response. 6. At the same time, Indonesia’s green house gas (GHG) emissions are globally significant. The GOI’s recent Second National Communication on Climate Change (December 2009) reports average emissions of about 1.66 million gigagrams (equal to 1000 metric tons) of carbon dioxide equivalent emissions for the period from 2000-2004. Land use change and forestry (LUCF) and peat fires account for the vast majority of Indonesia’s emissions – over two-thirds of the total in an average year. Energy use is the distant second largest source of emissions, but one of the fastest growing. Power sector emissions are growing most rapidly due mainly to conversion from oil-fired to coal-fired power generation plants. Transportation is also a major fossil fuel consumer, due to the rapidly growing number of vehicles, poor fuel quality, and a lack of investment in mass transport systems. 7. Indonesia’s fossil fuel related emissions per capita are relatively low. As expected, energy use per capita is growing at about the same rate as GDP per capita. However, GHG emissions per capita (“emissions intensity”) are growing faster than GDP per capita. This means that the current energy growth path relies on increasing contributions from emission intensive sources such as coal-fired power and rising use of motorized transport. IEA (2007) projects that on a Business-as-Usual (BAU) path, Indonesia’s fossil fuel related GHG emissions could triple by 2025. At that point, energy emissions would exceed forest and land emissions, unless there are efforts to shift from the BAU path. 8. Indonesia has the opportunity to increase economic efficiency and competitiveness by addressing the policy and governance framework that leads to excessive forest loss and fossil fuel consumption. Also, Indonesia has significant alternative and renewable energy resources, including geothermal, hydro, and biomass, as well as substantial, economically viable opportunities to save energy through improved efficiency. However, the investment climate remains an issue, impeding private sector development of alternative energy resources. 9. The Government’s medium term action plans recognize that sound development planning is a key to sound climate change adaptation. Adaptation needs and planning will focus on water resources management; water supply, sanitation and health; agriculture, irrigation, and farmer education; spatial planning; coastal management; and disaster risk management and preparedness. Climate impacts will likely fall disproportionately on the poorest people, in areas susceptible to drought, flooding or landslides and in resource-dependent livelihoods, particularly in agriculture and fisheries. The poor lack the assets and flexibility to deal with the impacts of climate change on productivity, and the devastation

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wrought by natural disasters and extreme weather. Both domestically and internationally, Indonesia stresses that efforts to address climate change should not be done at the expense of the poor. 10. However, Indonesia faces institutional, policy, technical, financial and legal challenges in responding to climate change. Both the forestry and energy sectors have long-standing and well-studied policy distortions and governance issues. Rapid deforestation, illegal logging, forest fires, and peat-land degradation deplete Indonesia’s natural assets, undermine revenue generation potential, and undermine community livelihoods. Indonesia’s energy sector remains highly subsidized and regulated. This contributes to inefficient public spending, impedes investment to modernize the sector, and makes the country vulnerable to world energy price shocks. This also impedes the development of alternative energy sources, such as geothermal, and leads to adverse environmental and health impacts. Indonesia realizes that these distortions are an expensive burden on the budget and the economy. Weak governance impedes investment, raises costs, and hinders international competitiveness and market access (for forestry and other products). This CC DPL operation aims at the underlying economic policy and institutional issues that can help Indonesia make progress on these climate change challenges. 11. Indonesia’s commitment to climate change action has been increasingly evident since 2007, when the country hosted the UNFCCC 13th Conference of the Parties in Bali and published its National Action Plan on Climate Change. In 2008, the Government formed the National Council on Climate Change and published its Development Planning Response to Climate Change, a key practical step in mainstreaming climate action into the planning and budgeting process. In 2009, the Government solidified its technical understanding of climate change issues and impacts (Second National Communication) and took steps to facilitate climate financing with establishment of an Indonesian Climate Change Trust Fund. Despite the financial crisis and national elections in 2009, Indonesia consolidated its technical and policy actions toward a robust response to climate change, both domestically and globally. 12. The GOI recently announced path-breaking mitigation commitments. At the G20 gathering in September 2009, President Yudhoyono announced that Indonesia would reduce GHG emissions by 26 percent by 2020, and make a further reduction of up to 41 percent with international support. This bold action opened the door for more developing countries to make commitments in advance of Copenhagen COP 15. The GOI also joined the G20 pledge to phase out subsidies for fossil fuels. Indonesia is developing a strategic, multi-year policy and investment program for low-carbon growth, as outlined in its Climate Change Sectoral Road Map (December 2009) and its submission to the UNFCCC in fulfillment of the Copenhagen Accord (January 2009). 13. The CC DPL series recognizes these commitments and builds on the climate policy and financing dialogue between the Government and its development partners. The proposed Climate Change DPL series will support GOI’s efforts to develop a lower carbon, more climate-resilient growth path. It will also help Indonesia to prepare for the post-2012 global climate change regime by establishing a favorable policy, regulatory, and institutional setting that allows Indonesia to access global climate finance opportunities and carbon markets. The CC DPL is a strategic opportunity for the Government to use program/policy lending to support the President's ambitious climate change agenda. The policy actions included in the DPL operation will also contribute to Indonesia’s development agenda by improving governance, forest management, efficiency, and competitiveness.

14. The GOI has mapped out a strong program of climate change action for coming years. Progress on climate change is particularly noteworthy given the global crisis and national elections of 2009, which commanded the attention of both the public and policy-makers. GOI submitted its international commitment to the UNFCCC in fulfillment of the Copenhagen Accord at the end of January 2010. The GOI plans to codify the President’s 26 percent emissions reduction commitment as domestic

4

law, through a Presidential decree. The emissions reduction plan, the Medium Term Development Plan 2010-2014 and the National Development Priorities Year 2010 provide a firm basis for indicative future triggers for a series of CC DPL operations in coming years. These development planning and budgeting documents build on the framework established by the National Action Plan for Climate Change 2007, the Development Response to Climate Change 2008, and a range of technical studies. 15. The GOI is also putting its plans into action. Indonesia is taking action on peat and forest emissions through the development of pilot projects on peat lands and development of a national program for Reduced Emissions from Deforestation and Degradation with a score of demonstration activities in development. Indonesia is incrementally addressing the governance issues that lie behind forest and land use emissions, including the passage of a long-awaited timber legality standard and verification system. In the energy sector, GOI has made efforts to improve the investment climate for renewable energy development through improved pricing and off-take requirements (though these policies can still be improved). Indonesia is also requiring more action on energy efficiency and conservation by large firms, as well as national and local governments. On the adaptation front, Indonesia is improving water resource management and agricultural extension to strengthen resilience and reduce the risks of climate impacts, which include drought, flooding and pests. Indonesia has established a national disaster management law and agency that is mainstreaming climate change into the disaster preparedness agenda. The institutional, technical, and legal basis for coordination and implementation of climate change actions has been established, and will continue to be improved. A summary of prior actions for this operation appears at the end of this section, with a full discussion in Chapter V. 16. Future CC DPL operations in the series can support a deepening engagement on key climate change policy and implementation actions. The GOI is improving the legal and inter-governmental coordination framework for addressing peat land conservation and water management to reduce emissions. Indonesia plans to develop an inter-governmental fiscal transfer mechanism to improve incentives for local government forest management activities, an important governance gap. The GOI is also improving the regulatory framework for REDD projects to recognize the need to provide performance based incentives to communities and investors. On renewable energy, the GOI is in the process of developing an integrated framework to promote geothermal power production investments. There is also increasing consensus on the need to craft a cost reflective tariff setting mechanism for electricity. In the water resources area, the GOI will be expanding and completing its strategic assessment of future water needs and developing strategic water management plans in key river basins. In agriculture, the Government will scale up rice intensification programs and farmer awareness and capacity building through farmer field schools. The GOI also intends to implement a coastal adaptation program for coastal ecosystem and fishery resilience on the vulnerable north coast of Java and to establish a marine ecosystem monitoring program that will inform the marine adaptation strategy in the future. The GOI will consolidate the policy and legal basis for emissions reductions through a Presidential Decree. Indicative policy actions for the next Phase of CC DPL support are included in Chapter V. 17. Indonesia is also taking advantage of a range of international climate finance options and establishing domestic climate financing mechanisms. The Indonesia Climate Change Trust Fund was launched in September as a mechanism for funding technical assistance, capacity building and demonstration activities for adaptation. The GOI is seeking climate financing assistance through the Clean Technology Fund and through the Forest Carbon Partnership Facility. The Government has been selected as a pilot country under the Forest Investment Program. Additional international financing mechanisms (e.g., the Adaptation Fund managed by the GEF) are developing, such that transfers from developed countries could help to reduce the cost of Indonesia’s movement toward a lower carbon, more climate-resilient development path.

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18. Indonesia’s development partners are also providing technical assistance, analytical support and capacity building through a range of mechanisms. Many development partners are providing assistance through on-going project vehicles; others are designing new programs of support. Several have pledged support for the GOI’s Climate Change Trust Fund. Many of these development assistance programs will provide capacity and support to the GOI to achieve its climate change agenda. The CC DPL will be an integral part of the overall mosaic of instruments and engagements in key sectors. The governance mechanism of CCPL process is also serving as a vehicle for coordinating development assistance in line with the GOI’s priorities. 19. Building on a solid foundation of climate change achievements, strong economic performance and consolidated political structure, Indonesia is now proposing to move toward a lower carbon development path, as well as a more resilient and adaptive path that can help to reduce vulnerability and protect the poor in the future. The CC DPL series aims to assist the GOI in pursuing this path by focusing on key policy and governance challenges related to mitigation, adaptation and institutional development. The economic DPL series strives to assist Indonesia to improve the systemic processes and institutions for formulating and implementing policy and spending for development. The Infrastructure DPL series strives to assist Indonesia with core infrastructure financing and service delivery challenges, including the private investment climate and underlying governance issues.

20. The CC DPL series will support actions that have core development benefits, as well as climate benefits. Climate change is an important entry point for broader actions that support good development. The CC DPL series will assist Indonesia with challenges in the use of peatland, forests and energy that are essential for development of a more efficient and climate friendly path. It will also support institutional preparedness and adaptive responsiveness needed to protect the vulnerable and the economy from uncertain future changes. The following table illustrates the prior actions that Indonesia has already achieved. Prospective future actions appear in Chapter V.

6

Indonesia Climate Change Development Policy Loan

Summary Table of Prior Actions Recognized

Objectives Prior Actions Recognized

POLICY AREA 1: MITIGATION

Land Use Change and Forestry Sector Mitigation

Improve policy coordination and

management of peat land

Peatland Conservation 1 Issued and began implementation of a master plan on peat land

rehabilitation in Central Kalimantan (MOFR Ministerial Regulation No. 55 / 2008).

Improve regulatory framework for REDD implementation and

develop demonstration activities

Reduced Emissions from Deforestation and Degradation (REDD) 2 Launched National Readiness Program for REDD (September 2009)

and established legal framework through MOFR Ministerial Regulations No 68/2008 on Demonstration Activities, No. 30/2009 on REDD Procedures, and No. 36/2009 on Commercial Forest Carbon Projects. Completed Participation Agreement with Forest Carbon Partnership Facility (FCPF) in November 2009 initiated a REDD program with UN REDD Support (FAO-UNDP-UNEP) in October 2009.

Improve basis for timber legality, strengthen

institutions, and improve incentives for regional governments to address

forest loss and degradation

Forest Management and Governance 3 Issued MOFR Ministerial Regulation No. 38/2009 on Timber Legality

Verification System (System Verifikasi Legalitas Kayu, SVLK) to establish a national timber legality standard and a system for verification and monitoring to assist in reducing illegal logging and forest loss and degradation.

Energy Sector Mitigation

Improve policy framework to promote

renewable energy development and

investment

Renewable Energy Development 4 Issued Presidential Decree No. 4 / 2010 which assigns to PLN the

acceleration of power plant development using renewable energy, coal, and gas and mandates PLN to develop and purchase power from renewable energy resources (January 2010). Issued MEMR Ministerial Regulation No. 32/2009 on Purchase Standard Price of Electricity Power by PT PLN from Geothermal Electricity Power Station (December 2009). Issued MEMR Ministerial Regulation No31/2009 on the purchase price of electricity from renewable energy (November 2009). Issued MOF Ministerial Regulation No. 24/2010 on tax incentives for renewable energy development was issued in January 2010.

Improve policy framework to promote

energy efficiency development and

investment

Energy Efficiency 5

Issued Government Regulation No. 70/2009 on Energy Conservation (December 2009). MEMR developed and implemented national system of energy audits for major firms in key sectors.

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Indonesia Climate Change Development Policy Loan

Summary Table of Prior Actions Recognized

Objectives Prior Actions Recognized

POLICY AREA 2: ADAPTATION AND DISASTER PREPAREDNESS

Establish strategic water management plans in key river

basins

Water Resources Sector 6 Issued Presidential Regulation No. 12/2008 on Water Resource Councils.

Established the National Water Resource Council (NWRC) which has met several times. Prepared integrated water resource management plans (POLA) with climate change assessment in national strategic river basins on Java (i.e., Brantas, Pemali-Comal, Jratunseluna, and Serayu-Bogowonto).

Scale up actions to improve climate

resilience in agriculture

Agriculture Sector 7

Develop an irrigation asset management information system. Implemented System for Rice Intensification (SRI) practice in target provinces. Implemented Climate Field School Program in target provinces.

Scale up actions to establish national

disaster risk reduction and management

system

Disaster Risk Management 8 Enacted Law No 24/2007 on Disaster Management and issued Presidential

Regulation No. 8/2008, which established a National Disaster Management Agency (BNPB). In 2009, GOI finalized the National Action Plan for Disaster Risk Reduction (NAP-DRR 2010-2012) and formally launched the plan in February 2010. GOI incorporated mainstreaming of Disaster Risk Reduction in the context of climate change adaptation into the medium term development plan (RPJMN, 2009)

Establish systems and strategies to improve climate preparedness and resilience in the coastal and marine

sector

Marine and Fisheries Sector 9

In May 2009, GOI launched the National Plan of Action (NPOA) of Coral Triangle Initiative on coral reef, fisheries and food. GOI approved a roadmap of CTI actions for 2010-11 in November 2009.

POLICY AREA 3: CROSS SECTORAL AND INSTITUTIONAL ISSUES Strengthen

knowledge base and legal basis for climate

change action and link these to national

budgeting and planning processes

Mainstreaming Climate Change in National Development Program

10 GOI finalized the Second National Communication to UNFCCC. Submitted mitigation actions and commitments under Copenhagen Accord (January 2010). GOI prepared and issued the “Development Planning Response to Climate Change” (2008) and updated it in March 2010. GOI finalized the “Indonesia Climate Change Sectoral Roadmap” (ICCSR) in March 2010.

Strengthen policy coordination and develop financing mechanisms for

addressing climate change

Policy Coordination and Financing Scheme for Climate Change 11 The GOI issued the National Action Plan Addressing Climate Change

(December 2007); established a National Council on Climate Change by Presidential Decree No. 46/2008 (July 2008); and launched the Indonesia Climate Change Trust Fund (October 2009).

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II. COUNTRY CONTEXT

A. Indonesia in 2010

21. Indonesia has made remarkable progress over the last decade in terms of macroeconomic and political stability. Macroeconomic performance since the late 1990’s has seen consistent output growth and rapid decline in external imbalances. Increasing tax revenues have contributed to the decline in the fiscal deficit. Increased growth has been grounded on increasing private sector investments, sustained domestic consumption and generally sustainable external surpluses. Under a controlled inflation and rising incomes, Indonesian citizens have enjoyed improving living standards and poverty levels have fallen, although many remain close to the poverty line. In addition, as the result of a sustained decade of relatively successful political and institutional reforms, Indonesia in 2010 is a highly competitive, decentralized electoral democracy. Governments at national, provincial, district and city level are elected in free and fair contests, with an incumbent loss rate of about 40 percent (one of the highest of any competitive democracy). A system of checks and balances between legislative, judicial, and executive branches is increasingly in place, with no one branch of government able to dominate, and few institutional outcomes ‘guaranteed’. Where power was once radically concentrated around the presidency, it is now shared with the legislature, and where power was once concentrated in Jakarta, it is now shared among 500 or so city, district and provincial governments. 22. Indonesia was less affected by the global economic downturn of 2008-09 than most economies, and by late 2009 the economy had recovered to grow faster than pre-crisis averages. Growth slowed sharply but remained positive in the fourth quarter of 2008, at the depths of the global downturn, then incrementally recovered through 2009; the economy expanded by 4.5 percent over 2009 as a whole, behind only China and India among the G20 economies. The social impact was also limited with few reports of layoffs, and poverty and unemployment rates continuing to fall, while households’ spending power was supported by inflation slowing to decade-lows. Through the crisis public finances remained in good health, with a nominal deficit in 2008 widening to a smaller-than-projected 1.6 percent of GDP in 2009. Public debt levels continuing to decline, ending 2009 just below 30 percent of GDP. International ratings agencies recognized the robustness of Indonesia’s economy and strength of its public financial management, upgrading their ratings of Indonesia’s sovereign debt in 2009 and early 2010.

23. The outlook is Indonesia’s economic momentum to continue to build, with growth rising above 6 percent in 2011 and with scope for growth to average 7 percent by mid-decade, despite the weaker global economic outlook. These growth rates, and the projection of recent mild inflation rates to only rise slightly over the coming years, suggest ongoing progress in poverty reduction. In the period 2010-14, the budget is expected to increase by more than 30 percent in real terms compared to 2005-2009 period (about US$500 billion in 2008 prices) creating significant opportunities to improve public services. In order to seize these opportunities, Indonesia will need more effective and accountable institutions that can translate available resources into better development outcomes. This will be particularly important as Indonesia embarks on a period of second generation reforms to provide, for example, more sophisticated services in infrastructure, better education, and a sustainable health system. But this projection of rising growth rates and improving social outcomes are contingent on the government aggressively progressing in this agenda, with recent political developments creating the risk that reform may be slower and shallower than may have been expected in late 2009.

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B. The State of the Indonesian Economy Entering 2010 24. By mid 2009 Indonesia’s economy had recovered from a relatively mild downturn associated with the global economic crisis. By the end of 2009, broadly-based quarterly growth rates were higher than average growth over the previous decade. The economy grew by 4.5 percent in 2009, making it one of the fastest growing economies in the G20. Growth in the second half of the year was supported by robust domestic demand and improving economic conditions abroad. Indonesia’s major trading partners had largely recovered from the crisis, while domestically side solid consumer confidence, moderate inflation and favorable financial market conditions have supported growth.

25. Growth has been broad based. Private consumption was supported early in the year by Parliamentary and Presidential election candidates’ spending (up to IDR 25 trillion is estimated to have been disbursed by campaign teams in Q1), while later in the year the additional spending components of the government’s stimulus package were disbursed. This offset weaker investment, especially on equipment. Meanwhile net exports supported growth in the year to Q4 2009, as imports initially fell more sharply then recovered slower than exports, due to the composition of Indonesia’s trade partners and the profile of Indonesia’s imports and exports. On the production side, agriculture, mining and the tertiary sector (communications, transport) contributed significantly to growth. Manufacturing accelerated at the end of the year, although it remained low for 2009 as a whole.

Figure 1GDP growth slowed only moderately in 2009 (annual percentage change and percentage point

contributions)

Figure 2After a brief deficit during the peak of the financial crisis, the balance of payments returned to

surplus in 2009 (billions of USD and percent of GDP)

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-4

0

4

8

12

-8

-4

0

4

8

12

2006 2007 2008 2009

Imports Exports

Stocks + Discrepency Investment

Public consumption Private consumption

GDP

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

2007 2008 2009

Trade Balance BoP balance

USD billion USD billion

Source: BPS Sources: BI and BPS 26. Trade volumes continued to accelerate in the last two quarters of 2009, although both exports and imports fell for the year as a whole. While imports declined by 15 percent, exports fell 10 percent, resulting in an increase in Indonesia’s trade surplus (supported by a slight increase in the terms of trade). The acceleration of exports in the latter part of the year was supported by the recovery in external demand and commodity prices as the global economy emerges from recession. The current account surplus increased towards year end, as the widening in the trade balance more than offset an increase in the income deficit, which was driven by renewed profitability among oil and gas companies.

27. Indonesia’s financial markets have been more volatile than most, weakening sharply during the peak of the global financial crisis and then out-performing in the year from March 2009. By

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April 2010 the IDR had appreciated to 9000 per USD, a 30 month highs, after weakening sharply to a low near 13,000 during the peak of the financial turbulence. The real effective appreciation has been even stronger. Government debt markets followed a similar pattern, weakening drastically in late 2008 and early 2009 before recovering to historically strong levels by early 2010. The spread on Indonesian sovereign USD debt fell below global emerging market averages for the first time in almost 5 years in mid 2009 while yields on 5-year IDR bonds were at record lows by early 2010, although still several percentage points above the yields on other ASEAN nations’ domestic debt. Large flows of liquid foreign capital into Indonesian financial assets have driven much of this strengthening. From June 2009 to early 2010, net foreign capital inflows into Indonesia have amounted to US$ 6.6 billion. 28. Foreign reserves have more than recovered from the crisis as Bank Indonesia allowed the balance of payments surplus to widen and worked to slow and smooth the rupiah’s appreciation. The balance of payments surplus, reflecting the widening current account surplus and significant portfolio inflows, saw Indonesia’s foreign reserves rise to US$ 71.8 billion at the end of March 2010, over US$ 10 billion higher than the pre-crisis peak of July 2008 and over US$ 20 billion more than their nadir in early 2009. Foreign direct investment inflows remained substantially weaker than before the crisis, partly as investors in both the oil & gas and non-oil & gas sectors withdrew funds from domestic operations. To limit the impact of the rapid growth in reserves on domestic money, BI has increased issuance of short-term money market instruments (SBIs).

29. BI eased monetary conditions over the year to late 2009, but little of this easing was passed into banks’ lending and credit growth remained anemic. Bank Indonesia cut its policy interest rate 300 bps from December 2008 to August 2009, but commercial banks lowered their lending rates by a fraction of this amount, with average lending rates remaining above 14 percent in early 2010. They cut deposit rates more aggressively. This does not seem to reflect weakness in the banking sector. Earnings of major banks and various aggregate indicators such as capital adequacy and return on assets suggest the health of the sector overall remains robust and has been little affected by the crisis or the rapid credit growth to mid-2008. In December 2009, commercial banks’ non-performing loan ratios fell to 3.3 percent, well below the 2007 and 2006 averages of 5.6 percent and 8.0 percent, respectively. The robustness of the banking sector is driven by the top 15 commercial banks, which account for 80 percent of total assets, with indicators for the remaining banking sector less robust.

30. Inflation slowed to decade lows in 2009, with a low at 2.4 per cent. The seasonal increase in food prices around the turn of 2010 was larger than usual, affecting poor households especially, and this was the drove 80 percent of the rise in the inflation rate to 3.4 per cent in the year to March 2010. Meanwhile the recovery in global energy prices in 2009 has not passed into consumer price due to Indonesia's system of regulated energy prices, temporarily suppressing the inflation rate.

31. The Government’s budget deficit in 2009 was lower than expected, at 1.6 percent of GDP. Revenues in 2009 were 2.5 percent weaker than in 2008, reflecting the cuts in tax rates under the government’s stimulus package (eg. the corporate income tax rate was cut from 30 percent to 28 percent), slower nominal GDP growth, and the lower value of imports and exports with the decline in trade flows and commodity prices. Revenues recovered in the final months of the year, due to a significant pick up in collections from gas non-tax revenues as well as increased efforts by the tax office to improve compliance of both firms and individuals. Line ministries’ spending continued to improve in 2009, and reached 95 percent of budget overall. Less was spent on fuel subsidies and interest payments than had been budgeted, a result of low oil prices and a stronger rupiah respectively. Although spending on core programs improved, overall disbursements are still skewed towards the end of fiscal year. Reforms in the budget cycle (eg. improved procurement processes, and new scope for budget carry-over) contributed to the higher budget realization than in previous years. The bulk of the government’s 1.4 per cent of GDP

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stimulus package was delivered as tax cuts, largely disbursing instantly, while 96 per cent of the stimulus spending (mostly for small-scale infrastructure) was disbursed by the end of the year.

32. The Government has proposed a revised 2010 budget deficit of 2.1 per cent of GDP, from an initial projection of 1.6 per cent. The 2010 budget includes a small fiscal stimulus package, smaller than 2009’s at IDR 36.3 trillion or 0.6 percent of GDP and also mostly made up of tax cuts (including a lowering of the corporate tax rate to 25 percent). The upwards revision to the deficit largely reflects a higher projected oil price (US$ 77 per barrel from US$ 65 per barrel in the earlier budget), impact energy subsidy costs and the central government’s revenue sharing obligations with sub-national governments. The larger deficit also funds some of the incoming administration’s new programmatic spending priorities. The larger deficit can be easily financed from the government’s 2009 surplus. Nonetheless, the government has enjoyed improved access to commercial debt markets in 2010, filling about one-third of its 2010 bond issuance target by the end of March, at yields sharply lower and longer maturities than a year earlier.

C. Indonesia’s Economic Outlook

33. The outlook for Indonesia’s economy remains solid, with the major uncertainty being Indonesia’s potential to raise rates growth to or above 7 per cent by mid-decade. Indonesia’s economy is expected to grow by 5.6 percent or a little more in 2010, increasing to around 6¼ percent in 2011. Growth will be supported by increased domestic demand offsetting stabilized or declining net exports. Private consumption is expected to accelerate, growing by around 5.3 percent in 2010 with the continued impact of the fiscal stimulus, moderate price growth and stable employment. Investment is also expected to accelerate in 2010, stimulated by increasing commodity prices and some return of foreign direct investment. Government consumption is expected to continue growing ahead of the overall economy with increased spending on core government programs.

34. The ongoing, gradual recovery in the world economy and commodity prices is expected to support firm growth in Indonesia’s exports. Trade growth is expected to remain broad-based. Imports are expected to recover faster than exports, as the domestic economy grows more quickly than Indonesia’s export destinations, and production to meet the ongoing recovery in non-commodity exports requires more imported inputs, leading to a narrowing of the trade surplus. The balance of payments surplus is also expected to narrow through 2010 and 2011, as the current account approaches balance and weaker projected portfolio investment inflows more than offset recovery in foreign direct investment and banking inflows. The annual inflation rate for 2010 is likely to be around 5.3 percent as prices accelerate in the latter half of the year, on stronger domestic demand, waning pass-through of the stronger exchange rate into retail prices, and robust global commodity prices. Possible increases of administered prices (electricity) present an upward risk to inflation. The longer-term outlook is highly dependent on the conduct of policy by Bank Indonesia, although it is committed to limiting inflation to around 5 per cent.

35. With the risks to the near-term outlook receding, the uncertainty surrounds whether Indonesia can achieve the pace of reform required to lift average growth to 7 percent. The external sector generates some uncertainty in the 2010 outlook, as developed economies withdraw fiscal and monetary stimulus and address public and consumer debt. In addition, political developments since late 2009, in particular the parliamentary inquiry on the bailout of Bank Century, have raised some questions about the timing and depth of future reforms and improvements in conditions for investors and firms, with potential downside risks to investment conditions and growth, although these developments did not appear to have had a significant impact on financial market investors’ perceptions by early 2010. Over a longer horizon, these developments raise the question of whether the government can achieve the reform

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agenda outline in its newly released medium-term development plan (RPJMN) towards achieving stronger and more inclusive growth. Table 1: Indonesia's medium-term economic outlook: A strong growth scenario

2008 2009 2010 2011 2012 2013 2014Key macro variables (% )

GDP growth 6.1 4.5 5.6 6.2 6.5 7.0 7.2GDP deflator growth 18.2 8.5 10.2 12.0 9.2 9.0 9.0

State Budget (% GDP)State Revenues 19.8 15.5 15.7 15.8 15.9 15.9 15.9State Expenditures 19.9 17.0 17.3 18.0 18.4 18.1 17.8Budget balance -0.1 -1.6 -1.6 -2.2 -2.5 -2.2 -1.9Gross financing need 1.6 2.9 3.4 3.7 3.9 3.6 3.4Public debt 29.2 31.1 26.3 24.3 23.5 22.5 21.5

Key assumptionsCPI Inflation (%) 9.8 4.8 5.3 6.1 5.9 5.9 5.9Exchange Rate (Rp/US$) 9757 10356 9400 9400 9400 9400 9400Interest rate of SBI 3 month (%) 8.7 7.1 6.5 6.5 6.5 6.5 6.5Crude-Oil Price (US$/Barrel) 94.0 61.6 78.3 81.3 83.6 83.6 83.6

Source: World Bank projections

D. Political Outlook

36. As the result of a sustained decade of relatively successful political and institutional reforms, Indonesia in 2010 is a highly competitive, decentralized electoral democracy. Governments at national, provincial, district and city level are elected in free and fair contests, with an incumbent loss rate of about 40 percent. A system of checks and balances between legislative, judicial, and executive branches is in place, with no one branch of government able to dominate, and few institutional outcomes ‘guaranteed’. A vigorous free media thrives. Where power was once radically concentrated, the executive branch now has to share normal law-making powers with the legislature. Where power was once concentrated in Jakarta, it is now shared among 500 odd city, district and provincial governments.

37. The 2009 legislative vote allowed President Yudhoyono’s Democrat Party to triple its share of seats relative to the 2004 vote. The results also indicated the continuing decline of the Soeharto-era “legacy parties” and poor results by Islamic parties. The continuing (and growing) appeal of mainstream, more-or-less secular-nationalist parties, with fully 75 percent of the vote going to such parties, is one of the overall messages of this election. This shift in the legislative vote presaged the results in the Presidential election held three months later.

38. In the presidential election of 2009, incumbent President Yudhoyono won by a clear margin over other candidates. The margin was sufficient that a second round of voting was not required. The result was largely in line with prior polling, and the prior results at legislative level. The President campaigned mainly on the prospect of a continuation of past policies and governing approaches, and the voters responded positively. The President named his second United Indonesia Cabinet on 21 October and pledged to boost economic growth, continue fighting corruption and uphold the rule of law.

39. While similar to the 2004 cabinet roster in that more than half of its representatives are political appointees, on balance Indonesia’s new cabinet seems likely to be more effective and reformist than its predecessor. With finance and trade remaining unchanged and strong technocratic figures taking over state development planning (BAPPENAS), investment coordinating and health, there exists ample scope for reform. Key policy initiatives in the areas of bureaucratic reform and social

13

protection backed by the vice-president also bode well, while the establishment of a new presidential delivery unit increases the likelihood of effective implementation of ministerial programs.

40. Political turbulence since the 2009 presidential election has distracted the new government. Mid-2009 saw a struggle between the independent Anti-Corruption Commission (KPK) and the national police. Two of the KPK’s four deputy chairs were rendered inactive in a dispute with the national police and the attorney general’s office in a case that dragged on for months. The president refrained from involving himself in the dispute, but after a national outcry, he established an investigation team Team of Eight. In the wake of the team’s findings, the president called on the police and the AGO to address the failings within their institutions, which resulted in re-instatement of the KPK deputies.

42. Shortly after the inauguration of the cabinet in 2009, parliament set up a special investigation (Pansus) to look into alleged corruption and misuse of funds in the government’s October 2008 bail-out of Bank Century. In its final conclusions in March 2010, the Pansus faulted the government for the bail-out and called on law enforcement agencies to investigate indications of corruption. However, the Parliament’s statement made no explicit mention of wrongdoing by specific individuals. The final stance of the Pansus showed that the government coalition was deeply divided, with two of President Yudhoyono’s largest allies in parliament, Golkar and the Justice Welfare Party (PKS), aligning with the opposition. The Bank Century affair consumed most of parliament’s attention from November 2009 through March 2010, and caused considerable distraction for several senior ministers.

43. The Bank Century investigation and accompanying political turbulence indicate that tension may persist between the president and parliament. Given that the conclusions failed to name specific individuals for any wrongdoing, it appears unlikely that there will be changes in the cabinet in the near future. However, investigations by the KPK and police into the Bank Century bail-out continue and the outcome remains uncertain. The situation appears to be calming down but, although unlikely, it remains possible that key officials could be implicated or weakened. This recent political turbulence has not triggered significant demonstrations or a major shift in public perceptions against the government.

44. There is a risk that the political turbulence of recent months may make the government more cautious on some issues as they can no longer rely on full support from parliament, forcing a more cautious approach. This turbulence may slow reforms in the near term. In the longer term, however, the pragmatic, approach that has been responsible for the best aspects of Indonesian development in the past decade – is likely to prevail. The Indonesia we see today is likely to be the Indonesia of coming years – the country’s underlying social diversity and pluralism will mitigate against radicalism and extremism; while the continued low level of public expectations will not add significant pressure.

D. Development Agenda2 45. Despite impressive economic performance and remarkable transformation and consolidation of the political system, Indonesia needs to build on its current robust foundation and accelerate growth while ensuring that it is inclusive and sustainable. Indonesia still has untapped potential in commodity-driven sectors, which affords Indonesia the opportunity to attract investment in these areas. But a commodity-based growth strategy will not be sufficient to accelerate and sustain economic growth in the country. With its still young population and rapidly growing labor force, Indonesia needs to create jobs on a large scale by further diversifying its export basket and facilitating market-led development of new globally competitive clusters. To achieve this, Indonesia will need to address the key deterrents of private sector development and investment, namely, the poor quality of infrastructure and the uncertainty of regulatory and legal aspects of the investment climate.

2 Based on ‘Indonesia: 2009 Development Policy Review’, The World Bank.

14

46. Higher levels of growth have not translated, to the extent hoped for, into greater poverty reduction. Despite recent signs of progress, Indonesia lags behind its more prosperous neighbors in producing higher value-added non-agricultural jobs. Though the open unemployment rate has fallen since its peak of 11.2 percent in 2005 to 9.1 percent in 2007, unemployment remains high, especially among youth. Forty percent of Indonesia’s labor force is still engaged in low-productivity activities in agriculture and related areas, while only 30 percent of the labor force appears has made the transition to high-value added activities. One of the major constraints for high-value employment generation is employment protection legislation, amongst the strictest in East Asia. Inclusive growth in Indonesia will also require an increase in agricultural productivity and stimulation of rural non-farm employment. Even though Indonesia’s economy is transforming rapidly with its steady and rapid urbanization, agriculture remains the core for rural household incomes, employs the largest share (45 percent) of labor and contributes the second largest share (17 percent) of GDP. Indonesia’s agricultural product regulatory framework is quite developed but attention is needed on capacity building and maintaining the integrity of national systems with decentralization. 47. Inadequate environmental management is a key challenge to sustainable development. Unsustainable degradation of Indonesia’s considerable natural resources and increased vulnerability to natural disasters have led in recent years to legislative responses in an improved environmental management law and a disaster management law. More efforts are needed to improve forest governance and management to realize better outcomes in terms of jobs, revenues and equity for communities. Despite increasing urbanization, many Indonesians still live in rural areas and depend on forested areas, communal land, and coastal and environmental resources that are being depleted. Sustainable environmental management in rural areas will require addressing weaknesses in the judicial sector and in the rule of law, including land use rights and land titling, as well as capacity challenges. Indonesians in urban areas face environmental challenges such as water and air pollution, flooding, congestion and noise. In urban areas, responding to the challenges will imply a major effort of institutional strengthening of local government’s ability to mobilize resources and manage expenditures, including budgeting, development planning and management of land and other municipal assets. Chapter III focuses more specifically on the climate and emissions aspects of Indonesia’s development path. 48. At the core of most of the challenges that constitute Indonesia’s development agenda today, there are a number of key systemic processes and institutions for formulating and implementing policy. These are the public financial management system public institutions rely on to implement government priorities and effectively spend public funds, the capacity and accountability of the civil service, the decentralization framework determining the flow of funds and the division of responsibilities between levels of government, the control of corruption and the legal system that ensures the rule of law. Over the next five years, the Government plans to continue implementing the reform agenda focusing on a subset of these areas while increasing and improving the efficiency of public spending in priority sectors.

2008: INDONESIA FLOATING, A GLASS HALF-FULL

2014 AND BEYOND: FILLING THE GLASS, INDONESIA RISING

Enhancing government effectiveness in a democratic and decentralized Indonesia: adapting and strengthening institutions and processes

Strengthening public financial management

Strengthening the rule of law

Maintaining momentum on anti-corruption

efforts

Making the most of decentralization

Improving coordination in

policy formulation and implementation

Pursuing civil service reform

From 2008 to 2014 and beyond: the development agenda

Accelerating growth

Alleviating infrastructure bottlenecks

Reducing regulatory uncertainty about the investment climate

Making growth inclusive

Revitalizing the rural economy

Facilitating the transfer of labor to high value-added activities

Restructuring the health system

Providing quality education for all

Increasing access to clean water and sanitation

Ensuring growth is sustainable

Managing Indonesia’s forestry and coastal resources sustainably while providing adequate livelihoods

Meeting Indonesia’s energy needs without sacrificing its environment

Making Indonesia’s rapidly growing urban agglomerations livable growth poles

Building resiliency

Managing disaster risks and preparing for climate change

Enhancing security by providing social protection

Reducing vulnerability to financial sector shocks

Source: Indonesia Development Policy Review.

Figure 3: The Development Agenda in Indonesia

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49. To realize its potential as a competitive, inclusive, sustainable and resilient middle-income country, Indonesia has to adapt the institutions and mechanisms that govern the functioning of the state and shape state-society interactions. The country’s authorities understand that the central challenges Indonesia faces today in realizing its development agenda are of an institutional nature. They entail furthering Indonesia’s as yet incomplete governance transition by improving the effectiveness of public institutions and processes through longer-term institutional and process transformations. Even in areas where additional financing is clearly needed, institutional challenges need to first be sorted out for that financing to be forthcoming and for it to be effectively deployed. 50. In its earliest days, the new Government created and implemented a 100-day priority action plan, which then became the base for a National Priority Action Plan for 2010. There are 11 key priority areas for action, including climate change. The programs most closely related to climate change issues are:

Increasing supply of electricity to meet the needs of industry and commercial sector, households, transportation, etc, including development of alternative sources of energy.

Resolving complexities in land use and spatial plans to reduce land use conflicts and violations, as well as conflicting laws and regulations, so that lands can be used productively.

Managing climate change and environment by finalizing Action Plans for the next 5 years, including medium to long term energy plans. GOI also intends to ensure that forest management will be conducted properly and intensify efforts to reduce illegal logging and forest fires.

Increasing preparedness to deal with natural disasters by establishing two standby forces ready for deployment to disaster locations anywhere in Indonesia.

Increasing synergy betw.een the central and regional governments for development efforts, by harmonizing regulations between central and regional governments.

51. The GOI has completed the National Mid Term Development Plan (RPJM) 2010-2014), which lays out specific national, regional, and sectoral plans and serves as a basis for annual budgeting. A key theme is developing people’s welfare, democracy and justice. The RPJM 2010-2014 focuses on 11 sectoral priorities and three special national priorities. These are fully described in Annex 2. The priorities most related to climate change and this CC DPL are those on energy sector issues, environmental issues and climate change, and disaster preparedness.

Energy: reaching national energy security to ensure continuation of national growth through institutional restructuring and optimizing the use of alternative energy.

Environment and Disaster Management: conservation and managing of nature to support sustainable economic growth and welfare which is accompanied with disaster risk management to anticipate climate change.

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III. THE GOVERNMENT’S CLIMATE CHANGE PROGRAM 52. Indonesia is both vulnerable to and contributes to climate change. The GOI’s priorities for mitigation are first, in forestry, land use change and peat lands; and second, in fossil fuel use in the power generation, manufacturing and transport sectors. In both cases, high and fast growing emissions can be attributed to upstream policy conditions and governance issues that need to be addressed as part of a shift toward a lower emissions development path. The GOI’s adaptation priorities include water management, agricultural production and preparedness to improve disaster response and resilience. Here too, improving policies and governance frameworks will be an important step toward more resilient water management approaches and agricultural practices. The institutional setting for addressing climate change at the national level is a challenge of coordination across multiple sectors. This Climate Change DPL is designed around the key mitigation and adaptation policy areas and specific target actions that the GOI has prioritized in its response to climate change.

A. Indonesia and Climate Change

Vulnerability and Emissions Overview 53. The development challenge posed by climate change is putting past development gains at risk. Specific areas of Indonesia are highly vulnerable to multiple climate change hazards. In fact, warming is not the greatest risk: more intense rainfall and sea-level rise will adversely affect food security, health, water resources, farming and coastal livelihoods, and forest and marine biodiversity. Studies show that the productive areas of Java, Bali, Sumatra, and Papua are especially vulnerable Failure to adapt will hurt the economy and the poor. The Asian Development Bank (ADB, 2009) projects that, by the end of this century, climate change will cost Indonesia between 2.5 percent and 7 percent of GDP. The greatest impacts will fall on the poorest people, specifically those who live in areas susceptible to drought, flooding or landslides and who are dependent on climate-sensitive livelihoods, particularly in agriculture and fisheries. Women and female-headed households are disproportionately represented among Indonesia’s poor and are more susceptible to negative shocks from natural disasters, economic downturns, or climate induced impacts. The poor lack assets and flexibility to deal with impacts of climate change on productivity, and devastation wrought by natural disasters and extreme weather. 54. Indonesia recognizes the adaptation challenge, though more study and concrete implementation will be needed. The GOI has charted the following roadmap for the adaptation efforts: establish maps of local vulnerability and adaptation information system by 2015; ensure climate-proof policy and regulations by 2020; pursue an adaptation-shaped development program; and pursue adaptation-proof development. With community participation over the coming years, investment in adaptation will be prioritized in: (a) the water sector to ensure the people can response properly in the case of water shortage, drought and flood; (b) the marine and fisheries sector to prepare people to deal with coastal land inundation, extreme weather situation, and change in fishery productivity and zonation as results of the sea temperature change; (c) the agriculture sector to deal with the changing climate and the ensuing planting seasons/harvest and its consequences on the productivity of food and plantation crops; and (d) the health sector in anticipation of increasing vectors of infectious diseases like malaria and dengue as well as the increasing risks of respiratory and gastrointestinal diseases. In the longer term, Indonesia also has opportunities to scale up preparation for ecosystem-based adaptation to build resilience to climate change impacts and preparing communities to cope with it. Rebuilding of mangrove ecosystem in the coastal areas, rehabilitation of degraded peat land forests are among examples of ecosystem-based adaptation that will increase ecosystem resilience and help protect community livelihoods.

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55. Rapid deforestation, illegal logging, forest fires, and peat-land degradation cause emissions, deplete Indonesia’s natural assets, undermine revenue generation potential, and undermine community livelihoods. Indonesia emits significant amounts of greenhouse gases (GHGs), mostly from forest loss and land-use change. Deforestation and fires/haze reduce Indonesia’s development potential and undermine its international reputation. Most deforestation and fire losses occur in just 10 provinces (78 percent of dry forest loss and 96 percent of swamp forest loss). Riau, Central Kalimantan and South Sumatra alone account for over half of all forest degradation and loss. While efforts to measure emissions more precisely continue, there is a broad consensus within the GOI that forestry and land-use are key targets for mitigation. 56. Forestry and land-use governance issues are complex and challenging, but reasonably well understood. Key issues contributing to deforestation are: (i) weak legal and political accountability; (ii) policies favoring large-scale commercial activity over small- and medium-sized businesses; (iii) distorted incentives for timber pricing and transport; (iv) an inadequate legal framework for protecting the poor and indigenous land-users; (v) undervaluation of forest assets and low revenue capture; and (vi) corruption (Figure 4). These underlying issues lead to more proximate causes that give rise to visible impacts on the landscape, as well as GHG emissions and societal losses. Any scheme to change practices or reduce deforestation needs to be understood in this wider context of upstream institutional, governance, and incentive issues that cause downstream outcomes on forest and peat land. Progress on forest governance is essential for performance on a national REDD program. Figure 4: Forest & Land Use Sector: Upstream Policies and Distortions Impede Progress and Impose Costs on Society

Modified and expanded from WRI State of the Forest Report 2002WB Strategic Options for Forest Assistance In Indonesia, 2006

Underlying Policy & Institutional Issues

• Weak legal & political accountability (& constituency)

• Policies favoring large scale commercial activity over SME or CBFM

• Distorted Incentives for timber pricing, transport

• Weak legal framework for protecting poor, indigenous land users

• Undervaluation of forest assets, low revenue capture

• Corruption, elite capture

Costs to Society:

• Disruption of water quality & quantity

• Decrease in productivity, agric output, nutrition

• Fires, haze, health impacts • Drought, water shortages

• Soil quality, productivity, nutrition, poverty

• Siltation, flooding, urban impacts

• Increased social conflicts• Loss of rural livelihoods • Rural Poverty and

Landlessness• Lower resilience,

vulnerability

• Lost opportunities for carbon market payments

Proximate Causes/ Symptoms

• Inappropriate land use and allocation decisions

• Weak legal status of forest and peat lands

• Weak, inconsistent & law enforcement

• Excess industrial processing capacity

• Weak, inconsistent provincial/local government forest and land management approaches

• Marginalization of traditional land stewards

• Opening of new lands, encroachment

• Wealth concentration, feeding political cycle

Watershed Degradation

Drying of Land,

Forests

Erosion, Degradatio

n

Resource Scarcity

Forest Cover &

Peat Loss

GHG Emissions

57. Indonesia’s energy use is growing rapidly; GHG emissions are growing even more rapidly. Per capita fossil fuel GHG emissions are still low compared with other middle-income countries. Focusing on fossil fuel emissions sources only, oil use contributes the largest share, currently, but coal contributes the most to high emissions growth. Emissions growth over the past decade has been mainly driven by the increasing use of coal in power generation. The manufacturing sector is also a large fossil fuel user and an important source of emissions, partly due to inefficient energy use and weak environmental controls. Inefficient energy use also undermines competitiveness. Transportation is also a major emitter, due to the rapidly growing number of vehicles, poor fuel quality, and a lack of investment in mass transport systems. These sources of emissions could be reduced through a combination of policy changes and increased investment, for example, in renewable energy or energy efficiency improvements.

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58. Energy and pricing and policy are an element of Indonesia’s reform agenda, including most recently through its commitment to phase out energy subsidies over the medium term (G-20 Pittsburg, September 2009). At present, marginal changes in world prices are budget neutral, but long-term fixed fuel and electricity prices and the subsidies they create represent a threat to fiscal sustainability. The subsidies also have opportunity costs in terms of development spending, regressive distribution of benefits, and disincentives for efficiency. The Government plan to move to market prices is evolving, but the last few years shed some light on the step wise approach being employed. Generally, the Government argues that it is necessary to move from untargeted subsidies to stronger, more focused social assistance programs. The cash transfers introduced in 2005 and used again in 2008, are an example, but other poverty and social programs can be included. The GOI is also trying to influence regional governments, which had opposed increasing fuel prices. In the 2009 budget, regions were forced to share the cost of the subsidy with the central government, thus reducing the impact on the central budget and shifting incentives. When budget pressures have mounted rapidly, the Government has raised prices (sometimes dramatically) to maintain stability. However, the preferred approach is more evolutionary with different measures adopted at different times (see text box). The current priority is electricity prices which are slated to begin gradually increasing starting in 2010. Plans are being developed to eliminate or phase out subsidies for gasoline based on location or age of car. Generally, while program loans are useful in some areas, for example geothermal energy development, broader pressure around controversial issues by development partners has typically proven to be counterproductive. The CC DPL is not the only instrument, nor the best instrument, to address broad based energy reforms. Figure 5 below summarizes policy distortions in the energy sector from the point of view co-benefits and broader environmental costs. Figure 5: Energy and Transport Sectors: Upstream Policies & Distortions Impede Low Carbon Potential and Impose Costs on Society

Summarized and Adapted from WB IDPL (2007) and from WB CEA (2009)

Underlying Policy & Institutional Issues

• Legislation to protect poor, promote equity & access

• Weak rule of law; weak investment climate

• Legal, institutional political history of large energy SOEs

• Multiple regulators/ policy makers; Weak inst. coordination

• Weak legal & political accountability, corruption, elite politics

External/Global

• Rising energy costs; demand for coal and gas; less credit, less investment

Costs to Society:

• Secondary Pollution Costs

• Urban congestion, poor planning choices

• Energy Inefficiency / Waste

• Global Competitiveness Losses

• Infrastructure & investment distortions (resources not directed toward best returns)

• Future re-adjustment needs impose costs

Proximate Causes/ Symptoms

• Public Service Obligation, fixed fuel & electricity price

• Reduced resources for economic stimulus and poverty alleviation

• Low recent investment in infrastructure/energy

• Long term gas export contracts; high opportunity cost of use of higher quality coal

• Distorted incentives: for fuel use, conservation & investment in alternative energy resources

• Wealth concentration, feeding political cycle

Energy & Transport Outcomes

Distorted Energy Production & Consumption Decisions;

Weak Incentive to Conserve, Innovate or Invest in Efficiency

Transport: Cheap fuel = more cars, more trips, more roads;

Low incentive for public transit, fuel switching, vehicle improvemnt

Renewable, Alternative Energy: Weak investment incentive;

Small scale can’t resell to grid

Manufacturing: Weak Incentive to conserve, innovate or invest in efficiency for competitiveness

Power Sector: Low returns, but high investment need/gap;

Public ‘crash program’ but no incentive to expand access

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GOI MANAGEMENT OF ENERGY SUBSIDIES The cost of fuel subsidies are a function of the difference between the regulated and economic price of the fuel, and the quantity of fuel subject to subsidy. The GOI has been progressively adjusting both, reducing the price differential and the amount of fuel sold that is subsidized. Fuel subsidies have been managed through periodic, large price adjustments. During periods of widening differences between regulated and economic price, the GoI has raised the regulated price to near economic price o In May 2008, as international oil prices rose towards USD 150 per barrel and refinery margins widened,

regulated fuel prices were increased an average of 30 percent o In October 2005, with rising global oil prices and a weakening exchange rate, regulated transportation fuel

prices were raised a total of 120 percent over two adjustments o These moves were controversial, with street protests, strong opposition from many political parties, and sharp

declines in approval ratings (A period of fuel price indexing fuel was ended in 2003 for the same reason.) ...by deregulating prices of non-consumer fuels , progressively reducing the range of subsidized fuels o Aviation fuels moved to market prices in 2002 o Industrial fuel prices were deregulated in early 2005 and are no longer subsidized o Prices of larger cylinders of LPG are being progressively raised to reflect their increased economic cost …and by phasing out use of the most heavily subsidized fuels. Household kerosene has been the most heavily subsidized fuel; until 2007, it consumed the majority of the fuel subsidy. Following 2005 fuel subsidy cuts, GOI introduced a kerosene-to-LPG conversion program: o Poorer households are provided with free gas stoves and associated hardware and initial small (3 kg) LPG

cylinders. At the same time, kerosene was withdrawn from the market. o Small LPG cylinders are priced lower per kilogram than larger (12 kg) household LPG cylinders, and both are

somewhat below market price. The overall subsidy is small compared to the scale of the kerosene subsidy. o This program has progressively been rolled out across urban areas, encountering some initial resistance and then

apparently being accepted. o Kerosene consumption has fallen dramatically, and is now mainly in rural areas where LPG is more costly. Fuel price adjustments have been accompanied by unconditional cash transfer programs and expanded government services Accompanying the large (120 percent) fuel price adjustment in 2005, GOI rolled out an unconditional cash transfer program (BLT), with quarterly transfers of funds to the poorest 30 percent of households o This program was repeated from June 2008 to February 2009, following the May 2008 fuel price increase o The cash transfers were designed to offset the impact of the fuel price increases, and in 2008 the rise in global

food costs on poor households’ real incomes With the fiscal space created by the fuel price adjustments, the government established and expanded programs for community-driven development, school scholarship and health insurance for poorer households. o These programs benefit many households especially affected by the increase in fuel prices, but too wealthy to be

eligible for the BLT Electricity tariffs have been raised for many firms and households with larger capacity connections or that consume relatively more The electricity tariff scheme provides greater discounts on the economic cost of supply to households with

progressively smaller capacity connections (generally poorer households). The tariffs on the highest capacity connections have been raised by 10 to 20 percent, largely in late 2007.

A quantity-based tariff has also been extended, with Households that consume more than average (given their connection capacity) paying around 20 percent more per unit of electricity consumed

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Climate Change Adaptation: Impacts and Needs 59. Indonesia is highly vulnerable to climate change. The eastern and western portions of densely-populated Java, the coastal regions of much of Sumatra, parts of western and northern Sulawesi, and southeastern Papua islands all rank highly on the multiple climate hazard map (see Figure 6, below). Indonesia is susceptible to all major climate change risks (drought, floods, landslides, sea-level rise) except cyclones. (Background and references for these statements can be found in the WB CEA, 2009 and other sources, such as the GOI’s Second National Communication). 60. Indonesia will experience modest temperature increase. However, the warming-related changes in wet and dry season rainfall, as well as extreme events, are the larger issue for Indonesa. Indonesia will also experience more intense rainfall patterns. Climate change is predicted to result in 2 percent to 3 percent more rainfall per year in Indonesia (Ratag 2001 in Susandi 2007). The increased rainfall is expected to continue and, due to climate change, result in a shorter rainy season (fewer number of rainy days in a year), with significant increase in the risk of flooding Figure 6: Multiple Climate Hazard Map of Southeast Asia (Yusuf and Francisco, 2009)

61. Food security will be threatened by climate change. Climate change will alter precipitation, evaporation, run-off water and soil moisture; hence will have effects on agricultural production, especially rice, and thus food security. The droughts caused by the 1997 El Niño3 event affected 426,000 hectares of rice. The loss of production (measured as the percentage deviation from a five year moving average) in eight El Niño years between 1965 and 1997 averaged 4 percent. For particular regions, the losses may be higher: East Java/Bali, an area with a very short monsoon, is predicted to be 18 percent for the January-April harvest (Naylor et al., 2007). Important income-generating non-food crops such as coffee, cocoa and rubber were also affected (FAO, 1996). There is a wide range of uncertainty in these figures, as carbon dioxide concentrations will also change. 62. Rainfall variability will negatively affect water resources. Decreases and increases in rainfall will adversely affect hydroelectricity generation and drinking water supply, both of which depend on steady supply from water reservoirs. On the other hand, heavy rainfall with associated turbidity will 3 There is no proven evidence yet that intense and more frequent El Niño and La Nina events are caused by or are causing climate change. But these events can be a good proxy for looking at the damage that could occur due to climate change.

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damage water processing facilities, contaminate the water supply and increase the costs of water treatment (GoI, 2007). Changing precipitation will also affect the probability of land and forest fires. In El Niño years, the total area of land and forest affected by fire and the level of GHG emissions increased significantly. These fires destroy habitats, pollute watersheds, reduce biological diversity, and increase air pollution, with consequent health effects.

63. Sea level rise will threaten productive coastal zones and affect livelihoods. Climate change will raise average sea level due to increased volume of the sea water and the melting of polar ice caps. This means low lying coastal areas will be affected, not just by rising seas, but by higher tides and storm events. Also, in low lying rural districts rice and maize production could decline by 50 to 90 percent. The estimated reduction of yield would result in financial losses to rice, soybean and maize farmers. Sea level rise would also be likely to affect fish and prawn production in the coastal zone and ponds. Climate changes that affect water supply, agriculture, livelihood options and disease processes can also have unequal gender impacts, an area that needs more study. 64. In total 41.6 million Indonesians live within ten meters above the average sea level. They are the most vulnerable to sea level changes (Figure 7. CIESIN, 2007). Coastal cities such Jakarta, Semarang, and Surabaya are areas of great concern because of the high population densities. 65. The warming of ocean water will affect marine biodiversity. Indonesia’s oceans could increase in temperature in the range of 0.2 to 2.5 degrees Celsius. The 50,000 km2 of coral reefs in Indonesia, about 18 percent of the world’s total, are already in dire straits. The El Niño event in 1997 – 1998 was estimated to have caused coral bleaching to 16 percent of the world’s coral reef. In a 2000 survey, only 6 percent of Indonesia’s coral reefs were in excellent condition, 24 percent in good condition, and the remaining 70 percent were in fair to poor condition (John Hopkins University and Terangi, 2003). 66. Climate change will intensify water- and vector- borne diseases. In the late 1990s, El Niño and La Nina were associated with outbreaks of malaria, dengue and plague. Malaria has spread to high elevations where it was detected for the first time at 2103 m in the highlands of Papua province in 1997 (Epstein, et al., 1998). Dengue fever has been spreading faster and killing more victims than in past years, especially during La Nina years (GoI, 2007). The links between climate change and these diseases and health problems is poorly researched. The IPCC’s Fourth Assessment Report (2007) stated that there is too little data to reliably confirm perceptions of an increase in extreme weather events, which may be due to increased reporting. However, concern about this issue in Indonesia continues to rise. 67. Economic impacts of climate change will be high in Indonesia. Without considering non-market impact and catastrophic risks, mean GDP loss is projected to reach 2.5 percent by 2100. This is over four times the global mean GDP loss of 0.6 percent because Indonesia has a long coastline, high population density in coastal areas, high dependence on agriculture and natural resources, relatively low

Figure 7: Population density within and outside of a 10m Low Elevation Coastal Zone (CIESIN, 2007)

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adaptive capacity, and a tropical climate (ADB, 2009). With no further mitigation or adaptation measures, mean GDP losses from market and non market impacts could reach 6.0 percent by 2100. If the chance of catastrophic events is also considered, they could go as high as 7.0 percent of GDP. 68. The benefits of adaptation far outweigh the costs. For Indonesia, the cost of adaptation for agriculture and coastal zones (mainly the construction of seawalls and the development of drought- and heat-resistant crops) would be about $5 billion per year by 2020 on average. The annual benefit of avoided damage from climate change for Indonesia is likely to exceed the annual cost by 2050. By 2100, the benefit could reach 1.6 percent of GDP, compared to the cost at 0.12 percent of GDP (ADB, 2009). 69. The CC DPL operation, based on the GOI’s plans and priorities, is focused on the right issues and forms an important basis for future engagement and policy achievements. Based on this analysis and presentation of vulnerability issues, the World Bank believes that Indonesia’s action plans are focused on the right areas: water management, rice production, coastal management, and disaster preparedness. Support in these areas will help Indonesia to develop its adaptation response prudently, measuring effectiveness periodically, while putting in place institutions and procedures to both increase resilience and the ability to respond to the more dramatic changes.

B. Greenhouse Gas Emissions Profile and Mitigation Priorities 70. Indonesia’s GHG emissions are globally significant. The GOI’s recent Second National Communication on Climate Change to the UNFCCC provides the official figures on Indonesia’s overall GHG emissions (Table 2). In 2000, total GHG emissions for the three main greenhouse gases (CO2, CH4 and N2O) were 1.4 million Gg CO2e, increasing in aggregate over time. The most significant contributor to the overall emissions is from the impacts of LULUCF (Land Use Change and Forestry, or LUCF, and peat fires)4. The GOI is pursuing other means of support for addressing these key emission sources5.

4 Emissions estimates for LUCF and peat fires show considerable variability depending on the source study, and also display considerable inter-annual variation. The Indonesia Second National Communication to the UNFCCC attributes the differing estimates to alternate estimation methods and extrapolation techniques, and is actively working to improve the quality of such figures for the next National Greenhouse Gas Inventory. The same document indicates that the inter-annual volatility in LUCF and peat fire emissions is largely due to El-Nino impacts. For example, 2002 was an El-Nino year, when the emissions from LUCF and peat fires were significant higher than in other years. Despite these differences in estimates, there is considerable consensus that LUCF and peat fires make a uniquely substantial contribution to Indonesia’s overall GHG emissions. 5 The GOI is currently pursuing a Reduced Emissions from Deforestation and Degradation (REDD) initiative with support from several development partners, including the World Bank and ADB, as well as a UN-REDD (supported by UNDP, UNEP and FAO). Indonesia is also a participant in the Forest Carbon Partnership Facility and has expressed interest in joining the Forest Investment Program, both multi-donor supported climate financing instruments.

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Table 2: Summary of GHG emissions from 2000-2005 from all sectors (in Gg) 6 (Source: Indonesia Second National Communication to the UNFCCC, 2009.)

2000 2001 2002 2003 2004 2005

Energy 333,540 348,331 354,246 364,925 384,668 395,990

Industry 34,197 45,545 33,076 35,073 36,242 37,036

Agriculture 75,419 77,501 77,030 79,829 77,863 80,179

Waste 151,578 153,299 154,334 154,874 155,390 155,609

LUCF 649,254 560,546 1,287,495 345,489 617,280 not available

Peat Fire1 172,000 194,000 678,000 246,000 440,000 451,000

Total with LUCF 1,415,998 1,379,222 2,584,181 1,226,191 1,711,443 1,119,814

+LUCF

Total Without LUCF 594,738 624,676 618,686 634,701 654,162 668,814 +LUCF

Note: 1. Emission from peat fire was taken from van der Werf et al (2008). Climate Change Mitigation: Land Use Change and Deforestation 71. In recent decades, Indonesia has been known for high rates of deforestation, illegal logging, forest fires, and peat land conversion. All of these contribute to high rates of greenhouse gas emissions. The global climate change debate has focused renewed attention on Indonesia’s forests and the potential for large payments for preservation of forest carbon through Reduced Emissions from Deforestation and Degradation (REDD). However, GHG emissions are another manifestation of the underlying issues of forest management and governance that have been well-studied. To achieve substantial forest carbon payments, based on measurable performance, action is needed to address the drivers of deforestation, many from outside the sector, as well as the governance and enforcement improvements needed to achieve more equitable, profitable, and sustainable forest management. 72. Considerable consensus has emerged on the importance of forestry and land use emissions in Indonesia’s overall profile (National Action Plan on Climate Change, 2007; National Development Planning Response to Climate Change, 2008, MOFr/IFCA, 2007). The GOI is placing a high priority on this issue and working toward preparation and implementation of a national REDD Initiative (REDDI). The Ministry of Forestry is also developing a Forest Resource Information System and a National Carbon Accounting System. 73. The rate of forest loss is declining, though losses continue at about 1 million hectares per year. Lower deforestation will reduce Indonesia’s overall GHG emissions. However, deforestation (rate or area) is not a perfect guide to emissions because different forest and soil types have different carbon content, especially peat soils. During the period of the monetary crisis and decentralization (1997-2000) in Indonesia, most analysts believed that deforestation was increasing (World Bank, et al., 2006). The figures below confirm that judgment, but also show that in more recent years, the rate of deforestation may be only a third of the average rates in the late 1990s. There is no ready explanation of this drop in the deforestation rate. The decline could be due to more effective law enforcement policies, the increasing

6 National Greenhouse Gases Inventory was estimated using Tier 1 and Tier 2 of the 2006 IPCC Reporting Guidelines

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cost and difficulty of accessing unexploited forest areas, the fact that many commercially viable areas have already been harvested, or some other combination of factors.

Figure 8: Indonesia's Deforestation Rate is Declining (MOFr, 2008)

Figure 9: Deforestation occurs mainly in production and conversion forests (MOFr, 2008)

74. Most forest losses in recent years occurred on production and conversion forest land (Figure 9). These areas have been allocated for economic exploitation through selective harvesting or through liquidation and conversion to agricultural or plantation uses. In contrast, protection and conservation forests are relatively less damaged, better protected. The figure also shows that both “dry land forests” (i.e., most forest areas in Indonesia) and “swamp forests” (forests on wetlands, often peat, or lahan gambut) are facing heavy deforestation pressure. Peat swamp forests contribute several times more GHG emissions than dry land forest areas. Thus, even though a smaller area is affected, overall emissions from this area could well be higher. Conservation and Protection Forests have not suffered the large and rapid deforestation on other classes of forest land – though any deforestation is too much in areas set aside to preserve Indonesia’s heritage and biodiversity. 75. A substantial share of deforestation (and emissions) is coming from planned land conversion to plantations and the continued operation of those plantations, on both mineral and peat soil. Emissions from deforestation in the forest estate can be reduced by focusing on forest management practices and the drivers of deforestation. To address this, different policies may become more important. For example, the role of land use licensing and the role of local governments in allocating and creating incentives for land conversion. 76. Considerable deforestation is also occurring outside state forest areas. Forested land outside the state forest may be in large blocks, or in smaller areas controlled by small holders (mixed agroforestry areas), private operators or local governments. Plantation crop expansion is the main driver of deforestation on non state forest areas, with permits granted by local governments (Casson, 2000; World Bank, 2006). The GOI exercises less central control in these areas, which include private lands. Actions to reduce deforestation in these areas would have to be based on the legal authorities and incentives appropriate to lands under local and private control. 77. Deforestation is most prevalent in a few places, mainly on Sumatra and Kalimantan. Ten provinces account for 78 percent dry forest loss and 96 percent of swamp forest loss in the 2000-2005 period. Of these, Riau, Central Kalimantan, and South Sumatra account for well over half of overall losses during the period, including most of the swamp forest areas degraded. As forests become scarcer in the west, Papua will become increasingly a focus for forest harvesting, and hence a center for deforestation in the future. This highlights the important role that specific provincial and local

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governments have in contributing to efforts to reduce deforestation. Strengthening local government capacities and changing the incentive they face regarding land conversion and forest revenue will be a key part of the overall strategy for a successful REDD approach. A cost-effective, efficient and well-targeted REDD initiative should focus most attention on the largest sources of deforestation (and emissions) at the provincial level. This concentrated geographic distribution of forest loss means that efforts and resources to reduce it can be targeted cost effectively to a few places, where the drivers and trends are well known. These are the same provinces that have, in recent times, produced the most timber harvesting, timber processing and illegal logging, based on past estimates and other studies (World Bank, et al., 2006). A few changes in a few places have the potential to create financial benefits for Indonesia (and globally significant emissions reduction benefits). The converse is also true: continued inaction in these few provinces puts at risk the opportunity for benefits on a large scale. 78. Many estimates of emissions show that peat drainage and fires have been important contributors to Indonesia’s overall emissions (GOI 2nd National Communication). Fires do not happen every year with same severity, so estimates of this source may vary by methodology and which years are taken into account. Assumptions about the depth of peat and the rate of burning also have a substantial effect on the emissions estimates. The period before 2000 not only included more deforestation, but also more forest fires and hot spots. These emissions also create costs in terms of air pollution and health risks to the local population and in neighboring countries (BAPPENAS-ADB, 1999). Reducing the use of fire in peat conversion would have multiple benefits, and could perhaps be achieved at negative cost (that is, overall, society would gain through this change, even after the implementation cost is considered). Use of fire for land clearing for planting is not legal in Indonesia and can be reduced and contained through a number of well-understood practices (BAPPENAS - ADB, 1999). Priority should be placed on policies, incentives, regulations, or law enforcement approaches that can effect a shift toward less destructive and emissions-producing practices. Substantial analytical effort by the GOI with development partner assistance is being applied to further refine estimates of emissions from peat land conversion. In particular, the Bank is working with Netherlands, BAPPENAS and MPW on the WACLIMAD effort to develop a national lowlands strategy that will address some of the issues of peat development and conservation. New financing sources, such as FIP and bilateral partners, could also be strategically deployed to fill gaps and make further progress on peat land. 79. The challenges of weak forest and land governance and the resulting climate impacts are evident in the rapid expansion of oil palm plantations. The growth of the palm oil sector is viewed favorably by the GOI for its significant contributions to employment, livelihoods, rural development, food security, and foreign exchange earnings. However, the GOI also recognizes that the large financial incentives for planting oil palm are leading to a rushed expansion that is occurring without adequate environmental controls. The environmental and climate impacts of plantations depend largely on the vegetation cover that is displaced as well as whether plantations are situated on dryland or on peat swamps. A significant portion of existing oil palm plantations is located on previously forested areas and on peatlands, making the palm oil sector an important contributor to overall emissions from land use change. While sufficient degraded and non-forested dryland appears to be available to accommodate expansion, poor spatial planning and law enforcement at the local level in some cases leads to inappropriate, or illegal, conversion of forests and peat lands. In some cases local governments endorse this even though it may be inconsistent with central government policies. The targeting of peat lands for conversion is of particular concern, as the associated emissions and ecological risks are high, while the economic returns from cultivating oil palm there are low when compared to mineral soils. Strong global market demand for palm oil as low-cost cooking oil, and increasingly as a biofuel, is expected to continue to drive land conversion. GOI actions to improve governance and consistency of implementation on peat land will be critical to mitigation of climate impacts. Greater harmonizing of policies from different ministries and government levels will also be necessary to improve the process of land allocation.

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80. Forest management, law enforcement and governance remain as key challenges. Forests are a national asset that provides economic benefits in terms of jobs, production, and trade, as well as livelihoods for millions of the poorest Indonesians. Forest loss hurts rural livelihoods and ecosystem services, such as water regulation and soil fertility that provide benefits far beyond forest boundaries. Weak forest governance damages the investment climate, rural economic potential and Indonesia’s competitiveness. Forest crime robs the state and diverts public revenues that could be better spent on development goals. Forest resource management affects equity, development and decentralization and is an essential issue of governance. To produce measurable and verifiable GHG emissions from forestry and land use, it will be necessary to address the fundamental issues of management and governance that have existed for some time. International agreements and the potential for payments for reduced emissions from deforestation and degradation, may help to create new political will and financial incentives for implementing changes. 81. Forest management and incentive mechanisms can be used to improve outcomes, including revenue, forest cover, exports, and employment. The forest sector employs inefficient fiscal mechanisms, with poor incentive structures and low revenue recovery. Illegal logging, under-reporting of harvest and underpayment of tax/non non-tax obligations have all been identified as important fundamental issues of forest management and governance. As a result of past policies, practices, and performance in the sector, industrial output, employment, and competitiveness are declining. Over-exploitation, inefficiency and weak governance contribute to under-performing firms, plantations, tax losses, and indebtedness. In recent years, GOI has been allocating large sums to reforestation and rehabilitation of lands that have been deforested and degraded as a result of poor forest exploitation practices. In other words, public funds are being used to correct private misbehavior that damaged state assets. Fiscal incentives, properly designed, can improve forest management, decrease deforestation (and associated emissions) and promote sustainable management.

82. Despite this bleak history of outcomes, there is reason for cautious optimism. In Indonesia’s forestry sector today, there is a convergence of market mechanisms and potentials, plus an alignment of development partners and instruments, focused on REDD, FLEG, and reducing emissions from LUCF to a level not previously seen. The President’s commitment to reduce GHG emissions substantially cannot be achieved without major action on land use change and forestry. The potential for a REDD mechanism and payment or compensation system appears real, such that GOI and private sector actors are seriously – but still cautiously – preparing for it. Forest carbon markets offer the potential to cover the opportunity cost of land for many types of crops and land uses (thought not the most lucrative). Development partners are already providing substantial TA and analytical support to enable this transition (likely over $150 million in the near future from OECD countries, with FIP an added resource that remains to be programmed through MDB joint mission). GOI has created the basic regulatory framework for a REDD program. These regulations need to be improved with cross-sectoral discussions and this is now getting serious attention from the economic management agencies. At the same time, Voluntary Partnership Agreements being developed to aid in compliance with EU timber import rules and the Lacey Act in the USA both mean that large western timber markets are moving toward legality standards and verification systems. These are putting pressure on timber producers through markets and trade mechanisms, rather than through regulations or exhortation. 83. The CC DPL process can build on this implementation and financing potential aimed at improving forestry sector outcomes. In the medium term, there would be benefits to actions that improve forest management and governance to increase forest asset values, reduce state revenue capture, and develop local livelihoods, as well as Indonesia’s competitiveness and international stature. Action is needed to improve monitoring systems, law enforcement, local governance, land-use decisions, and fire control. The GOI (Ministry of Forestry) is currently preparing plans to implement a REDD initiative and pilot projects to reduce emissions from the LUCF sector and qualify for carbon market payments.

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Climate Change Mitigation: Energy Sector Issues 84. Energy use is the second largest source of GHG emissions behind LULUCF, and one of the fastest growing. Given its pace of growth, the IEA and other projections indicate that energy-related GHG emissions will become the dominant emission source by 2030. Although Indonesia’s fossil fuel related CO2 emissions per capita remain low in comparison to other countries (Figure 10), its per capita energy use is increasing at about the same rate as GDP growth while emissions per capita (intensity) are increasing faster than GDP growth (Figure 11). This reflects the increasing contribution from the emission intensive sources such as coal for power generation and the rising use of motorized transport using petroleum-based fuels. 85. Indonesia’s aggregate energy intensity (on GDP basis) peaked around 2002, according to the APEC Energy Demand and Supply Outlook of 2006 (APERC) and the International Energy Agency (IEA) Indonesia Energy Policy Review of 2008. According to the IEA, Indonesia’s industrial and transport sectors continue to display high energy intensities, but residential energy intensity remains low and the country is also experiencing growth in the less energy intensive service sector. These studies also project the energy intensity in Indonesia to continue to decrease in the future, but these forecasts rely significantly on gains in energy efficiency.

Figure 10: Fossil fuel related CO2 emissions per capita remain low...

Source: International Energy Agency (2009)

Figure 11: ...but emissions per capita are growing faster than GDP per capita

Source: IEA, 2007; cited in “Low Carbon Development Options for Indonesia,” Nov 2008, supported by World Bank.

86. Industrial use and electricity sector are both large sources of emissions, but emissions from power generation, and to a lesser extent, from transport, are growing most rapidly. The relative contributions of GHG in total emissions in 2004 by sectors utilizing fossil fuels are presented in Table 3. The trend in emissions growth exhibited from 1994-2004 is projected to continue particularly due to the continued motorization in the country and the considerable coal-based power expansion presently underway.

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Table 3: Fossil Fuel Emissions by Fuel Source and Sector

Indonesia: Fossil Fuel Emissions (MtCO2e in 2004)

By Consumption Group

By Fossil Fuel Source Share of Fossil Fuel Emissions

Emissions growth '94-'04 Coal Oil Gas

Total Emissions

Industry 31.9 35.4 50.7 118.0 35% 48% Electricity 54.9 25.2 9.9 90.0 27% 170% Transport - 78.0 - 78.0 23% 74%

Residential - 41.0 9.0 50.0 15% 71% Total 86.8 179.6 69.6 336.0 100% 80%

Source: IEA 2004, cited in “Low Carbon Development Options for Indonesia,” November 2008, supported by World Bank.

87. The National Energy Management Plan maps out a development path that attempts to balance this growth in fossil fuels with the increased utilization of renewable energy (Presidential Decree No. 5 of 2006). This plan aims to enhance the country’s energy security by expanding the utilization of alternate indigenous energy sources and reduce the reliance on oil that is increasingly imported. Based on the Presidential Decree, the GOI intends to increase the use of coal from 15 percent of overall energy use to 33 percent of energy use over 20 years, while also increasing the share of RE to 17 percent. The RE targets include 5 percent geothermal; 5 percent bio-fuels; a combined 5 percent for biomass, hydro, nuclear, solar, and wind; and 2 percent from other (unspecified) sources. 88. Despite these national aspirations for a more diversified energy mix, recent power generation expansion has been dominated by coal-based technology without significant development of RE. Accordingly, the GOI’s Technology Needs Assessment on Climate Change Mitigation (TNA, 2009) assumes a business-as-usual (BAU) outcome where future power generation is fully based on coal resources with negligible attempts for EE improvements and conservation measures. Under the BAU scenario Indonesia’s emissions will nearly triple by 2025, mostly led by the emissions growth in electricity and transport sectors. Such a possibility in emissions growth is an important consideration for today’s investments toward future emission reductions. Therefore, Indonesia’s current development plans call for reducing emissions in the power and industry sectors through investments in RE and EE. The TNA analysis indicates that the BAU trajectory can be redirected through measures such as the application of energy efficiency, greater utilization of renewable energy, and the introduction of advanced thermal technologies. Should Indonesia manage to follow an alternative path to the BAU emissions trajectory, it is likely to realize the energy mix targets established in Presidential Decree 5/2006 and the President’s pledge to reduce emissions by 26 percent by 2020.

89. Indonesia is one of the world’s largest potential sources of geothermal power, but the subsector is not showing concrete advances due to policies that are not conducive towards the roll-out of geothermal by private sector investors. Several GOI agencies and SOEs, plus development partners are focused on geothermal power development, because of the substantial co-benefits to Indonesia relative to fossil fuel. The Bank is supporting through investment lending, GEF policy support, and through the recently approved CTF Investment Plan.7

90. Renewable energy is an economic alternative for Indonesia. The Bank’s recently released Energy Flagship report Winds of Change: East Asia’s Sustainable Energy Future provides an overview of some of the challenges facing Indonesia and its neighbors. The report concludes that Indonesia has

7 The CTF IP provides more detail on energy sector issues and geothermal development (http://www.climateinvestmentfunds.org/cif/workingdocuments/1019).

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substantial opportunities to move toward a more sustainable path in renewable energy (geothermal, hydropower, biomass) and in energy efficiency. Although pricing remains a sensitive issue because of the effort to protect the poor from higher energy prices, the GOI also recognizes that market distortions discourage energy conservation and clean energy technologies, and energy subsidies burden the country’s budget. Steps have been taken to adjust the energy subsidy and better target the poor. GOI has also issued pricing policy and several tax incentives to encourage investments in geothermal power generation. 91. The energy flagship report suggests that to reach a more environmentally sustainable energy path, Indonesia will have to rely more on its large reserves of natural gas and ramp up use of renewable energy resources particularly from geothermal, hydro, and biomass. Indonesia’s current power mix is dominated by natural gas and oil, with plans to significantly expand the role of coal (low financial cost and secure domestic supply). Indonesia has the world’s largest geothermal resources, and the government has a blueprint to develop at least 6,000 MW of geothermal power capacity by 2020, from approximately 1,000 MW now. GOI is involved in a long-term reform program in the sector. These reforms include the development of a pricing and incentive policy for geothermal, and the transparent and competitive tendering of new geothermal concessions in line with the Geothermal Law (Law 27/2003). The government has a two-pronged strategy to develop geothermal energy: (1) improve the investment climate to attract available investments in private concessions, and (2) in the short term, scale up public financing of geothermal fields presently under the control of state-owned enterprises. 92. The Winds of Change report showcases that the move toward geothermal power generation is an economical choice for Indonesia. The diagram below shows how the geothermal power scores

vis-à-vis coal-fired power in terms of economic efficiency. At different levels of incremental cost, the supply curve below (based on data from 51 existing geothermal fields in Indonesia) shows the quantity of geothermal energy that is economically comparable to coal-based power generation, which is financially the least cost option for Indonesia. Counting all the costs incurred in power generation, including the environmental costs from coal-fired power, geothermal is economically competitive at many sites, potentially up to 11 Giga Watts.

93. The benefits depicted originate from: Fuel costs saving from PLN generation costs

that amounts to US 8.5 cents/kwh Tax revenue as geothermal generates higher

profit rate per kwh electricity produced equals US cent 1.6 (as geothermal generates US 1.8 cents tax revenue plus US 0.3 cents royalty, compared to US 0.5 cents tax in coal-based power).

Fuel export values from the fuel saving in the amount of US 5.7 cents/kwh

The environmental benefits from carbon credits in comparison to coal as baseline that worth US 1.9 cents/kwh

Estimated value of benefits and beneficiaries from geothermal power

Source: JICA, 2009

Tax + royalty 

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94. A shift from coal-based to renewable energy, emphasizing geothermal power generation, will improve local air pollution with significant health benefits. Geothermal generates little particulate matter, while coal fired power emits particulate matter up to 0.957 kg CO2/kwh. This comparison indicates that Indonesia will have significant opportunity to reduce the health costs from air pollution, which in 2007 was estimated at USD 3.9 billion per year (CEA 2009). Geothermal power is also one of the best options as an indigenous energy source to reduce reliance on energy imports and diversify energy mix in Indonesia. Geothermal is a base-load generation technology, not subject to the intermittence and variability of some other renewable electricity sources. Geothermal enhances power supply reliability. As an indigenous energy source, it also will enhance the country’s energy security by reducing reliance on energy imports and serve as a natural hedge against the volatility of fossil fuel prices. From a broader perspective, an on-going macro-economic modeling study under the Bank’s low carbon engagement with MOF (using inter-regional dynamic CGE model for Indonesia) indicates that lowering carbon intensity in the power generation sector brings can bring positive benefits to the economy. Compared to the baseline conditions, a shift that lowers the carbon intensity of the energy sector can have a positive effect on GDP, government and private consumption. These results are preliminary and the scenario analyses need to be deepened and compared with other modeling results. 95. In recent years, the GOI has been taking steps to address energy and transport sector development challenges and GHG emissions. These intentions are reflected in the following actions:

Indonesia ratified the United Nations Framework Convention on Climate Change (UNFCCC) in 1994 through the Act on Ratification of Climate Change Framework Convention No. 6/1994. As part of the Indonesia’s growing response to climate change, the country signed the Kyoto Protocol in 1997 and ratified it in 2004 through Law No. 17/2004.

Energy Law No. 30 enacted in 2007 updates the legal framework for energy development. A series of enabling regulations and decrees support development of RE, biofuels, and coal bed methane. Energy subsidies to industry have been eliminated, while there are some attempts to reduce them to commercial and residential sectors. The new Electricity Law (UU 30 / 2009) provides an updated legal framework for the power sector.

GOI sets ambitious targets in the energy sector: (i) providing 17 percent of total energy use from renewable sources by 2025; (ii) delivering 10,000 megawatt (MW) of new generation capacity in the proposed Second Fast-Track Program predominantly from RE with a special focus on geothermal power, which will contribute towards meeting the objective of 30 percent reduction of power sector emissions from BAU in 2025; (iii) improving EE to achieve demand side emissions reductions of 30 percent from BAU in 2025.

The transport sector strategy includes (i) development of more efficient urban transport systems to facilitate a modal shift from private to public transportation, and (ii) development and deployment of cleaner fuels.

96. These actions illustrate the GOI’s commitment to moving away from the BAU approach towards a more climate friendly outcome. The GOI is developing a strategic, multi-year policy and investment program, as outlined in the NAP (2007, see text box on page 46) and the Development Planning Response to Climate Change (2008). GOI is currently developing a low-carbon development strategy to highlight the way forward in implementing its comprehensive climate change related development agenda. These efforts are being supported by a number of development partners and multilateral institutions that include Australia, Germany, Netherlands, the United Kingdom, ADB and the World Bank. To coordinate all of these climate change activities and establish the country’s policy positions, the President of Indonesia has established the National Council on Climate Change (Dewan

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Nasional Perubahan Iklim, DNPI) with representation from 15 ministries. Thus, Indonesia’s commitment to climate friendly development is being demonstrated at the highest levels. 97. In the energy sector, there would be benefits to continuing action to adjust prices to opportunity costs and make low-cost climate financing available for renewable energy. Pricing policy reforms would not only contribute to power-sector investment goals, but also generate substantial co-benefits by reducing unhealthy emissions and improving the stability and security of Indonesia’s energy supply. More realistic energy pricing would also result in greater efficiency in the industrial, power, manufacturing, and transport sectors. In the medium term, the energy and emissions impact of pricing reforms can be augmented by removing other barriers and providing technical assistance in key sectors. For example, building capacity in energy service companies would create jobs and provide services to manufacturers. Trade tariff policies could promote the importation of cleaner technologies and stimulate Indonesia’s own clean technology exports, such as compact fluorescent lamps. 98. The Government would like to rationalize the retail electricity tariffs, which have not changed since 2004. The current rates do not recover costs and they need to be rebalanced in terms distributional equity. Rationalizing of the electricity tariff will likely also be paired with attempts to reduce costs in PLN’s operations. Costs are relatively high due to diesel use in outer islands and CCGT in Java operating on fuel oils due to lack of gas supply. To protect the poor currently, PLN applies a low “social tariff” to consumers with small electricity connections. In the case of a larger price increase, the GOI could consider a cash transfer program, modeled on the approaches successfully implemented in 2005 and 2008 when fuel prices were increased. Analytical work and advice on this issue is ongoing at the Bank, in a role and manner supportive to the government on this politically sensitive issue. 99. Energy sector issues also go beyond climate and pricing concerns. Indonesia is facing increasing power shortages due to insufficient capacity expansion in the face of 7-9 percent yearly increase in demand. Over 70 million Indonesians, mostly the poor, still do not have access to electricity. Although more aggressive energy savings measures are short run options that will reduce capacity expansion needs, the overall level of financing needed for capacity expansion remains a significant hurdle. PLN estimates that about $40 billion in generation, transmission and distribution investment is needed to keep pace with power demand growth and to maintain system reliability. 100. Indonesia’s energy sector is going through considerable structural reforms, and many of these are supported by the Bank and development partners (see Chapter V for brief examples). In the oil and gas sector, reforms are underway based on the 2003 Oil and Gas Law. The market has been opened to competition and it is gradually becoming more competitive. A new regulatory agency has been established to oversee pricing and concessions for new fields/blocs. As a result, there are new entrants in the market. Among the SOEs, companies such as Pertamina and PGN are restructuring and reforming to become more competitive. Power sector reform slowed in 2002, when the Electricity Law was struck down by the courts. The GOI was able to issue a new law in 2009. This new law gradually phases out PLN’s monopoly over several years, allows for new market entrants, and gives a role to local governments in facilitating price setting and investment support to service providers in more remote areas, where PLN is unable to serve. PLN has continued efforts to restructure its operations and the Bank is supporting through the deployment of an Enterprise Resource Planning System (ERP).

101. In the transportation sector, the GOI is developing overall action plans and some cities are promoting transport sector improvements. Steps to improve emissions outcomes could include improving and enforcing standards for fuel quality to reduce health costs and productivity losses from urban air pollution. Financing affordable transit bus systems to reduce urban congestion, contribute to labor mobility and improve the quality of life in Indonesia’s rapidly growing urban centers. Though these are not now at the top of the GHG mitigation agenda, they serve as reminders of potential actions that can

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be considered in future steps of the DPL series.8 The CC DPL cannot take on all energy sector challenges, but can make some incremental progress on renewable energy, energy efficiency, and pricing in concert with other instruments and engagements.

C. Government Climate Change Agenda Going Forward 102. The GOI recognizes these climate change mitigation and adaptation challenges and has made major advances. Indonesia achieved global visibility as host of the 2007 UN Climate Change Conference in Bali. National action plans have been integrated into the development planning and budget process. A National Council on Climate Change (with representation from 15 ministries) was established by the president to coordinate Indonesia’s climate change policies. The GOI is establishing a climate change trust fund and developing climate policy papers and a low-carbon development strategy. BAPPENAS has prepared a climate change road map and the Ministry of Environment launched the 2nd National Communication on Climate Change to the UNFCCC in November 2009. 103. Indonesia has put forward three consistent development and climate change messages: (i) climate change cannot be addressed at the expense of the poor; (ii) climate investments must be consistent with development goals; and (iii) climate assistance must be on top of past development assistance commitments. Development partners can help Indonesia to hasten key reforms, scale up investment and use new climate financing instruments to build institutional capacity and leverage investment by attracting investors. 104. Indonesia is taking advantage of international climate finance and establishing domestic climate financing mechanisms. The Indonesia Climate Change Trust Fund was launched in September as a mechanism for funding technical assistance, capacity building and demonstration activities for adaptation. The GOI is seeking climate financing assistance through the Clean Technology Fund (within the Climate Investment Funds) and through the Forest Carbon Partnership Facility. Additional international financing mechanisms (e.g. the Adaptation Fund managed by the GEF and the Pilot Climate Resilience Program within the Climate Investment Funds) are developing, such that transfers from developed countries could help to reduce the cost of Indonesia’s movement toward a lower carbon, more climate resilient development path. Indonesia has also established a Climate Change Policy Lending framework, as further described in Chapter V.

105. Indonesia has established follow up policy and actions in reference to the Copenhagen Accord. Following the Presidential commitment announced during the September G-20 Summit to reduce Indonesia’s emission by 26% below the BAU scenario in 2020. A more concrete commitment was announced in Copenhagen’s high level segment meeting. The announcement includes sectoral contributions to the emission reduction target and the budgetary pledge to deliver that commitment. Following the Copenhagen Accord, the GOI has registered this emission reduction target as its voluntary contribution to global emission reduction to the UNFCCC on January 31st 2010. A series of inter-agency meetings have been held intensively after the Copenhagen meeting to prepare a Presidential Regulation which will serve as legal basis for the implementation of the policy and registration to UNFCCC. The regulation is prepared under the directives of Coordinating Minister for Economic Affairs with BAPPENAS taking the coordination lead.

106. The GOI has a range of concrete policy and program options for addressing climate change. Building on the studies and planning documents prepared to date, the GOI (under BAPPENAS’

8 Urban/transport issues are discussed in the CTF Investment Plan and no specific investments were identified by the GOI for support. http://www.climateinvestmentfunds.org/cif/workingdocuments/1019

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coordination) is now consolidating all its plans into the “Follow Up to Copenhagen COP 15”, which outlines the consequences for Indonesia of the commitments made and the overall sectoral plans for achieving the President’s commitment of 26% reduction of emissions by 2020 from BAU. This document, in draft, is evolving into Indonesia’s response to the Copenhagen Accord to be submitted at the end of January 2010. The following table 4 summarizes the GOI’s emission reduction plans. This is draft and is under revision. Table 4: GOI Action Plan for GHG Emission Reductions (2010-2020)

Key Target Sector

Net Emissions BAU 2020 (GT)

% of BAU Total

Emission Reduction Planned – 26% by

2020 (GT)

% of Total Emission

Reductions

Peatland 1.09 37% 0.28 37% Waste 0.25 8% 0.048 6%

Forestry 0.49 17% 0.392 51% Agriculture 0.06 2% 0.008 1%

Industry 0.06 2% 0.001 0% Transportation 0% 0.008 1%

Energy 1.00 34% 0.03 4%

Total 2.95 100% 0.767 100% Source: Draft internal GOI materials, not for quotation or distribution. These figures will change and are only included here as evidence of the GOI’s active plans and intention to comply with Copenhagen Accord.

107. The 26 percent target of voluntary emission reduction announced by the President is very ambitious but achievable. Peat land, forests and waste are primary sources of Indonesia’s emission and therefore rightly become the effective reduction target. The graphical presentation of the target and cost estimate (which is also discussed as budgetary allocation) below reveals that there are opportunities for GOI to significantly increase the overall budget and create a more proportional allocation in reference to sectoral share of responsibility and cost-effectiveness. 108. In addition to preparing the Presidential Regulation for the implementation of the action plan, GOI is developing the NAMAs (Nationally Appropriate Mitigation Actions) for the 26% emission reduction target for the registration to the UNFCCC. The Indonesia’s NAMAs will be submitted along with its MRV (measurement, reporting, and verification) mechanism. The GOI has also made the commitment to mainstream the Indonesian Sectoral Roadmap on Climate Change and the NAMAs into the Medium-term Development Plan (RPJM) and the Annual Development Plans (RKP). On the financing side, GOI has established Indonesian Climate Change Trust Fund (ICCTF) using UNDP as temporary trustee to speed up the collection/disbursement from the major development partners. A steering committee will direct the distribution of the fund to the eligible projects.

109. The Medium Term Development Plan includes a section on climate change and disaster preparedness, plus specific actions in many sectors. A concrete example of this mainstreaming is the First 100 Day Action Program of the new national government which began in November 2009. This program includes a specific emphasis on managing climate change and the environment, including energy action plans and an emphasis on forest management to eradicate illegal logging and forest fires. In addition, there are climate-relevant actions related to: improved governance; expansion of alternative energy; and preparedness for natural disaster. More information is provided in Annex 2.

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110. To facilitate the preparation for scaled up climate change response, the GOI has subscribed to several climate financing mechanisms. The GOI is preparing a program for FCPF (Forest Carbon Partnership Fund) to support of the readiness programs and activities. After approving Indonesia’s investment plan in March 2010, the Clean Technology Fund (CTF) is providing $400 million in low cost financing to leverage investments in the energy sector to help reduce Indonesia’s carbon footprint. Of this, $300 million is allocated for the geothermal sector, including $125 million each for IBRD and ADB (linked to investment loans) and $50 million towards private support by IFC. The remaining $100 million is allocated to IFC and ADB for private sector support to renewable energy and energy efficiency, in subsectors such as biogas and mini hydro, for example. In the forest sector, GOI has been accepted as a pilot country in Forest Investment Program (FIP) of the CIFs. 111. In addition to policy actions and market signals, institutional roles and authorities for energy and forestry issues need to be clarified in order to implement key reforms and attract investment. Coordination and prioritization of policies, investments and financing instruments will need high-level attention if competing sectoral and institutional interests are to be kept in check. This coordinated ‘whole-of-Government’ approach is emerging in the coordination processes and mechanisms that have been set in place since COP 13 in Bali. The GOI has built experience with these mechanisms and continues to refine its procedures. One notable example of success is the coordination framework established to govern the CC Program Loan process, which requires coordination of dozens of policy actions across a wide range of sectoral ministries. 112. The GOI climate change plans and directions for action are well developed and increasingly clear. National development programs are based in a systematic structure and time frame of development planning processes implemented by the government. The Long Term Development Plan (RPJP) provides a long term vision. The Mid Term Development Plan (RPJM) provides a five year plan of action. The Annual Government Working Plan (RKP) along with annual government fiscal/budget policy provides the work plan for a given calendar year. 113. The GOI’s preparations to address climate change have resulted in various strategic policy documents, as well as technical analyses. The National Action Plan addressing Climate Change (RANPI) compiled by the State Ministry of Environment and launched at Bali COP 13 in 2007 is a long term vision. To integrate climate change into the national development planning process, and within the framework of sustainable development, BAPPENAS prepared a multi-sectoral plan for the shorter term, resulting in the “National Development Planning Response to Climate Change.” This document put activities in the context of funding mechanisms and institutional arrangements and provided a basis for development partnership on climate change. This and other technical and sectoral documents were used as a basis for preparing the RPJM 2010-2014, released in early 2010. 114. Planning and action documents have been refined over the last three years through an iterative process. A key document that is about to emerge is the National Action Plan for Reduction of Greenhouse Gas Emissions 2010-2020, which outlines the GOI’s plans and approaches for achieving the President’s Copenhagen Commitment of 26% reductions beyond BAU in 2020. The President will codify the action plan for achieving the Copenhagen Commitments in a decree within 2010. The discussion of the targets and allocations of both carbon and financing continues at high level within the Government. This is a ten-year approach, so the discussion of specific actions in 2010 is not yet complete. The section on analytical underpinnings (IV.E) identifies other technical documents, including Bank studies and support that have contributed to the GOI’s thinking and prioritization of these issues. 115. The plan states that GHG reduction is an integral part of the national sustainable development strategy, which will be adjusted and updated over time. The key activity areas include both reducing emissions and increasing the absorption of GHGs. The activities in the plan aim to

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promote (not obstruct) economic growth, support the protection of poor and vulnerable communities and promote environmental perseveration. The plan aims to integrate actions among sectors, considering both the capacity of the environment, existing spatial plans and land use allocations. Through this plan, Indonesia hopes to contribute to the global effort to reduce emissions and to optimize the potential for international financing in the interest of Indonesia. The following figure illustrates the relationship among Indonesia’s long term and medium term development plans and climate change plans. See Annex 2 for a discussion of the climate-related components of the National Development Plans. Figure 12: Relationship and Timing Among Indonesia's Development Plans and Climate Change Action Plans

25 Year Time Horizon

2004-2009 2010-2014 2015-2019 2020-2024

Long Term National Development Plan (RPJP 2005-2025)Bappenas, 2005 (addresses development priorities to 2025)

National Action Plan on Climate Change, 2007-2030(RANPI, 2007) Min Environment (mitigation and adaptation issues to 2030)

Medium Term Development Plan (RPJM 1)

2004-2009

Medium Term Development Plan (RPJM 2)

2010-2014

National Action Plan for Reduction of Greenhouse Gas Emissions 2010-2020

In Progress, 2010 (to achieve 26% reductions beyond BAU by 2020)

Technical and Planning Inputs

◄ National Development Planning Response to Climate Change (Bappenas, 2008)

◄ Technology Needs Assessment for Climate Change (BPPT and KLH, 2009),

◄ Second National Communication to the UNFCCC (2009)

◄ Indonesia Climate Change Sectoral Roadmap (BAPPENAS, 2009),

◄ Carbon abatement marginal cost curve for Indonesia (DNPI, 2009).

III. D. GOI Institutions for Climate Change Action

116. Recognizing the importance of climate change mitigation and adaptation, the President of Indonesia has taken a leading role on this issue, as evidenced by his remarks at the G-20 meeting in Pittsburgh. Climate change issues cut across a number of responsibility areas within the GOI structure. Thus, the President created the National Council on Climate Change (DNPI) in mid-2008. However, the economic and development planning ministries continue to play a key role in establishing, budgeting and executing climate change actions. The following agencies are essential counterparts in the preparation of the CC DPL and the future monitoring of achievements. 117. The Ministry of Finance (MoF) has been actively engaged in climate change issues since COP13 in Bali. In addition, the Ministry of Finance has taken the lead in conducting a study on low carbon development options for Indonesia and preparing a Green Paper on economic and fiscal policy options for

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climate change mitigation in Indonesia. The Ministry represents Indonesia on the MDB Climate Investment Funds and coordinates inputs from the related line ministries. 118. The National Development Planning Agency (BAPPENAS) is the main agency coordinating development assistance. BAPPENAS is responsible for the RPJMN (Medium Term Development Strategy 2009-2014) and has produced several climate change analyses as inputs for that planning process. BAPPENAS has also taken a lead role in preparing the “National Development Planning Response to Climate Change” (2008) and the Indonesia Climate Change Sectoral Roadmap (2009). BAPPENAS has also developed a policy and management structure for coordinating future development partner financing through the Indonesia Climate Change Trust Fund. BAPPENAS also chairs the steering committee for the CCPL process. 119. The National Council on Climate Change (DNPI), established by the President in mid-2008, is responsible for coordination of government actions on climate change, policy development and regulation of the national carbon market. The DNPI is a cabinet-level grouping of 15 different ministries chaired by the President. It is supported by a secretariat and managed by the former Environment Minister. This new institution is finding its role in knowledge generation and policy coordination. 120. The Ministry of the Environment was the designated focal point for climate change issues prior to establishment of the DNPI (it is in the realm of Coordinating Ministry for Social Welfare). Ministry of Environment has important capacity on climate-related issues and procedures and manages the legal framework for environmental compliance, an essential element of a low carbon response. 121. To achieve its climate change goals, including fulfillment of the policy matrix, the GOI has additional sources of technical assistance, capacity building and support for pilot initiatives. Substantial bilateral development partner support for capacity building and technical assistance is already in place and continues to develop. Key development partners include DfID, Australia, Germany and The Netherlands. USAID and Norway are planning large programs for climate change support. Additional bilateral support could also be channeled through the Indonesia Climate Change Trust Fund once it is operational (with UNDP as trustee).

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IV. Bank support to the government’s strategy

A. A. Links to the 2009-2012 Country Partnership Strategy 122. Environmental sustainability (with disaster mitigation) is a core engagement area of the CPS. The CPS notes that Indonesia has emerged as a leader on climate change issues and that the country can benefit from scaled-up funding opportunities to help undertake mitigation and adaptation programs. The CPS also concludes that the WBG’s policy support should focus on mainstreaming the discussion of climate change across a range of actors to raise awareness about carbon emissions, Indonesia’s environmental vulnerability and the importance of relevant policies. It also makes the link between the adaptation and disaster risk reduction agendas.

123. The CPS also recognizes that development policy lending has helped the Government’s efforts to support key reforms in the public sector, including an improved business climate. According to the CPS, the next generation of DPLs should build on strong relationships with the reform-minded ministries and continue to support Indonesia’s central government in strengthening effectiveness of its systems. The Country Environmental Analysis (October 2009), as a follow-on document to the CPS, brings climate change support and development policy lending together by calling for the inclusion of environmental reform measures related to climate change in the DPL series.

B. Collaboration with Other Development Partners and the IMF 124. Climate change became a national priority effort beginning in 2007, when Indonesia hosted both the Bali COP 13 and the Finance Ministers’ meeting on climate change. In the lead up to the Bali event, GOI agencies worked actively to develop strategic documents and participate in international negotiation sessions. At this time, the MOF and the Bank began collaborating on analysis of low carbon development options. The Bank assisted with technical reports and consultation meetings and supported a growing dialogue process involving key planning and economic agencies. This work, in collaboration with others, contributed to understanding of the climate challenge, participation in international events, and recognition of the value of fiscal instruments in addressing climate change.9 125. In 2008, the GOI actively worked to integrate climate change into development planning and economic policies and development assistance in this area increased. After Bali COP 13, significant financial resources became available to help developing countries with mitigation and adaptation needs, both bilaterally and multi-laterally (e.g., Japan’s Cool Earth Initiative, World Bank Clean Energy Investment Framework, GEF Adaptation Fund). Indonesia recognized the need to have sound policies, programs and institutions in place to access these resources. Development partners began actively engaging also to support Indonesia’s analysis and planning efforts. 126. In early 2008, the GOI, the Bank and Japan began to discuss development policy lending as a way to bring development funding and climate financing together. Policy lending was seen as a useful means to integrate climate policy actions into the development planning cycle, to contribute to medium term plans and priorities, and to influence strategic choices about forestry and energy sector investments. Japan was interested to demonstrate its "Cool Earth Partnership" to assist developing countries with climate change actions. The Indonesia CC-PL became first case under this program. After initial negotiations, the Agence Française de Développement (AFD) also joined the CC PL, which served

9 More information on MOF – Bank collaboration: http://www.fiscalpolicyforclimatechange.depkeu.go.id/

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as a strong entry point for AFD’s new program in Indonesia. The CC PL policy matrix was based on Indonesia’s National Action Plan for Climate Change and its Development Planning Response to Climate Change, both launched at Bali COP 13. At that time, the Bank facilitated discussions, provided background documentation and analytical inputs on priorities, and continued its TA and AAA engagements, but did not join the operation. 127. Under the CC PL, BAPPENAS led a Steering Committee and the development partners provided a monitoring team and conducted regular supervision missions. Both AFD and Japan provided technical assistance and analytical services to assist in achieving the policy actions, in energy, forestry and industrial sectors. The Bank and the development partners continued to meet regularly, coordinate and communicate on climate change issues through the monitoring and supervision process. The development partners have good experience in similar collaborations under other DPL instruments in Indonesia. 128. In December 2009, the Government and development partners invited the Bank to join in planning a second phase of CCPL operations. In the transition from the first to second phase of CC PL, the Bank is adding value by sharpening the focus of the operation on a core set of key issues, elevating key policy issues to high level decision makers, and integrating assistance across a range of Bank lending and non lending instruments, including climate finance. 129. The focal areas and future directions to be supported by this CC DPL result from Bank and GOI analytical work and consultation processes led by GOI. Indonesia’s climate change agenda and action plan stems from analysis and public consultations that contributed to Indonesia’s National Action Plan for Climate Change, the National Development Planning Response to Climate Change, the Second National Communication to the UNFCCC and the Indonesia’s Climate Change Sectoral Roadmap. The Bank’s CEA: Investing in a More Sustainable Indonesia focuses on climate change as a development challenge, highlights key sectoral issues, and quantifies environmental costs and co-benefits. The CEA preliminary findings and final conclusions were shared through public consultations in July and November of 2009, attended by representatives of central ministries, local governments business organizations, NGOs, indigenous communities, and development agencies. Also, through the Low Carbon Development Options Study and engagement, the Bank’s climate analyses and results have been discussed and disseminated at workshops and focus group discussions, and incorporated into advice to the GOI and into the CPS and CEA. This process and consultations with other donors helped to ensure compatibility with other programs. 130. The specific policy actions in the matrix result from an intensive process of dialogue among GOI agencies, the Bank and development partners. The Technical Committee and Steering Committee process helped to ensure that CC DPL policy actions reflect demonstrated commitments from responsible agencies. Technical discussions were initiated in February to discuss 2009 achievements and establish the forward-looking framework. A joint fact finding mission and series of half-day sectoral policy dialogues were conducted in early March. The Steering Committee meeting on March 24 (chaired by Coordinating Ministry for People’s Welfare, BAPPENAS, Ministry of Finance, and Coordinating Ministry for Economic Affairs) accepted the results of technical discussions, confirmed achievement of prior actions and agreed on the “second phase” CC PL program. Through the SC process, the GOI and partners have been able to refine a focused set of policy targets that are linked to GOI strategic plans, but also grounded in the reality of annual budget constraints. The results can be seen in the more streamlined matrix of prior actions and future policy actions (see Chapter 5). The more streamlined matrix for coming years is already yielding benefits as a way of focusing policy makers’ attention and reducing the burden of monitoring

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131. The Steering Committee provides a venue for coordinating policy advice and harmonizing technical assistance efforts among development partners. At the SC stage, there was agreement on the need to clarify and strengthen several policy actions, particularly on renewable energy, forest governance, and local government incentive mechanisms. Through Technical Committee meetings in early April, and intensive discussions with responsible line ministries, the Bank and development partners further examined these issues. Dialogue with policy makers in key agencies helped to confirm support for implementation of stronger, more focused measures in these areas. The final policy actions included in this operation reflect these intensive efforts, as well as Bank internal consultations to ensure consistency in approach and actions across the several DPL efforts, in particular on energy pricing and subsidy issues. 132. The Bank has been actively collaborating with other development partners in relevant areas of the CC DPL. In order to elaborate low carbon growth options, assistance has been provided to BAPPENAS, the Ministry of Finance and DNPI in partnership with AusAID, The Netherlands, ESMAP/DFID and PROFOR. In the energy sector, the World Bank has worked with the ADB and the IFC on the CTF investment plan, now approved. In forestry and land use, the Bank has supported the Ministry of Forestry to develop and implement its REDD platform in conjunction with a range of actors including AusAID, CIFOR, DfID, the Forest Carbon Partnership Facility, GTZ, and The Netherlands. On adaptation and disaster management, the WBG has supported the UNDP to assist BAPPENAS with adaptation planning and, with GFDRR resources, has worked with the BNPB to finalize a National Action Plan for Disaster Risk Reduction. On the cross-sectoral and institutional front, assistance with capacity building has been provided to the DNPI and the Ministry of Finance in the area of climate change in cooperation with other development partners. 133. The IMF has also been closely involved with development policy lending. IMF and the Bank consult regularly on macro and sectoral issues, and in missions. In addition, the Bank, the Fund and development partners have worked closely on the Public Financial Management (PFM) agenda. The Fund has provided advisors to the Ministry of Finance to advise them on TSA issues and tax administration reforms, and the indicative triggers of the main DPL series have been developed in close coordination with the work of these advisors and the agreements reached between the Fund and the government. The main DPL series has thus provided a platform to push the reform agenda in these crucial areas where both institutions are working.

C. CC DPL Linkages with Other Bank Instruments and Engagements 134. CC DPL is consistent with, and supportive of, the Bank’s strategy on climate change and development. Over the last decade the Bank has worked to integrate climate change concerns into its development policy. These efforts crystallized in the Bank’s Strategic Framework for Climate Change and Development (2008), which makes effective climate action part of core development efforts. The 2010 World Development Report emphasizes the interrelationship between successful climate action and development progress in client countries. CC DPL is also consistent with the series of innovative carbon and climate financing instruments developed over the last decade. The Bank manages climate-related financing instruments in concert with sustained dialogue with clients on climate change, analytical work and capacity building efforts. 135. CC DPL is aligned with other financing instruments and engagements and can add value in key areas. CC DPL is a strategic component among a range of instruments that the Bank employs to assist Indonesia with climate-related activities in the forestry and energy sectors. Annex 8 provides more information on World Bank engagements and instruments in Indonesia. The Bank uses investment lending, Climate Investment Funds, Carbon Finance, analytical services, and grant resources from GEF and other sources to address key development and climate challenges. Several specific operations are highlighted below.

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136. CC DPL can also enhance new financing instruments that aim to strengthen engagement in REDD, forest conservation, and forest carbon markets. The Forest Carbon Partnership Facility (FCPF) helps prepare a carbon market for avoided deforestation. Indonesia joined the FCPF through a participation agreement signed in November 2009. Building on FCPF, the Forest Investment Program provides financing for real investment in forest protection infrastructure, activities that contribute to countries’ REDD and forest carbon sequestration efforts. Indonesia recently became one of 5 pilot countries for development of an investment strategy to make use of this instrument. In the year before Bali COP 13, the World Bank coordinated development partner support for the Indonesia Forest Climate Alliance (IFCA) which helped to develop the Government’s REDD platform in 2007 and produced a seminal Consolidation Report on REDD in Indonesia. At the project level, the $17.5 million Aceh Forest and Environment Project (funded from the Multi Donor Fund for Aceh and Nias) is supporting several different REDD demonstration projects as models for financing sustainable forest management. 137. The World Bank is supporting the Government’s climate agenda with a range of instruments in the energy sector. In the energy sector, the Bank is developing a $500 million geothermal investment project which is supported by a GEF grant to improve the investment climate for this renewable resource as well as a programmatic carbon finance activity. In addition, $400 million of concessional financing from the Clean Technology Fund has been requested for an investment plan that would further support World Bank and ADB investments in geothermal as well as IFC and ADB guarantees for commercial bank financing of other renewables and energy efficiency in the private sector. The Bank is also providing carbon finance for CDM projects that include solid waste management, industrial energy efficiency and fuel substitution, and geothermal energy. 138. Through regular donor coordination meetings, the Bank ensures alignment and avoids overlap with other donors’ activities. Coordination with UN-REDD takes place through the Bank’s FCPF engagement. The Bank’s forest sector engagements are consistent with other initiatives and investments and emerge from the general forest policy dialogue among the GOI, Bank and Donors over the last five years. This shared understanding of the policy challenges and opportunities is documented in Sustaining Economic Growth, Rural Livelihoods, and Environmental Benefits: Strategic Options for Forest Assistance in Indonesia, a joint publication of the Bank with six other development partner organizations. CC DPL focuses on three main policy directions that are considered essential upstream policy areas that need attention in the forest sector to make progress on emissions reductions. 139. Investments are also being made in capacity-building and knowledge generation on climate change. BAPPENAS, in partnership with AusAID and the World Bank, has developed tools to model the environmental and climate consequences of different development pathways. The Bank his working with Ministry of Finance and DNPI to develop the building blocks of a low carbon options study which has included work on overall emissions as well as the forestry, energy, industrial, and transport sectors. A continuing partnership also exists with the Ministry of Finance to build its capacity on the use of fiscal policy to affect climate change mitigation and adaptation.

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D. Lessons Learned 140. The preparation of the proposed CC DPL drew from experience gained from other DPL operations in Indonesia, the environment sector DPLs in general and the current Climate Change Policy Loan funded by Japan and France (AFD). In Indonesia, the World Bank has so far disbursed six macro-economic DPLs for Indonesia, with a seventh one under preparation. In addition, there is a DPL series targeting infrastructure, which has reached its third year, with a fourth one being planned. An Implementation Completion and Results Report of the DPLs 1-4 highlights some lessons learned, and proved very useful in providing insights into the planning of the CC DPL. The team also drew lessons the Bank study on Environmental Aspects of DPLs (M. Mani) and the background papers being prepared in the context of the new Bank Environment Strategy, entitled the Role of Environmental DPLs in Supporting Environmental Sustainability (A. Acharya). 141. The proposed CC DPL is an innovative way to provide budget support that encourages the government to prioritize its policy actions and reforms on climate change. Though the DPL instrument has been in use for some time, its application for promoting climate change policy is new. Some environmental DPLs in other countries focus more broadly on sustainable development and may have climate change mainstreaming, or support to national climate change strategies, as one pillar of the DPL operation. Given the breadth of climate and development issues, the Indonesia CC DPL targets key policy reforms in mitigation, adaptation and institutional strengthening. The Indonesia CC DPL is the first CC DPL to emerge post COP-15 and the first to be designed as a programmatic climate change lending operation from the start. The Indonesia CC DPL would help support the GOI’s climate commitments and deepen the relationship with the GOI for further progress following on the acknowledged prior actions. Several general lessons learned from previous programmatic DPLs in Indonesia and elsewhere have been taken into consideration.

142. Lesson 1: Strong government ownership and committed counterparts are vital. It is important to have key government counterparts committed to the reforms and engaging with the task team on monitoring progress. For a DPL operation, it is important to have broad support for the selected actions from different line ministries and the ministry of finance, and solicit early on in the process the priorities from these ministries. In the previous DPLs, GOI designated a key counterpart government official for the overall program and also for each related set of triggers. Consequently, this proposed CC DPL relies on the government’s own matrix of policy actions identified through the CCPL and a close working relationship has been maintained with the team based mainly in the Bank’s country office.

Lessons from Indonesia DPL 1-4

Progress on institutional reforms need not be linear and unidirectional and there should be sufficient flexibility for modifications and increased complexity as the reform program evolves. Institutional reforms that involve changing the way the government works, especially in the face of entrenched interests and organizational cultures, are complicated undertakings for which there are no simple recipes. Trial and error is part of the process and sometimes backtracking and finding an alternate route may be necessary. In a lively democracy, in particular, with multiple centers of power and competing interests, the momentum for specific reforms may ebb and flow. What is needed in this context is patience and preparedness so that when the right opportunity presents itself, reforms that had otherwise been apparently slowed, may be advanced rapidly.

DPLs are only one instrument among many that are available in a multi-faceted engagement. The choice of instrument should be contingent on the issue, the political context and the institutional circumstances. This is particularly applicable in the Indonesian case because of the size and scope of the World Bank program. In this context the DPL is not the only instrument for supporting reform. In fact, at times, and on certain politically-sensitive and contentious policy issues, such as subsidy reductions, it may be the wrong instrument.

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143. Lesson 2: Limit the policy actions to a manageable level that the counterpart can commit to and monitor progress without excessive external assistance. Based on experience with the CCPL it can be concluded that a more limited set of indicators can be more productive in terms of enabling more focus on key policy outcomes and more cost effective monitoring of progress. Both the lenders and the GOI agree that the monitoring and evaluation process for the CCPL could be streamlined and focused on the big picture and key areas of success. For this CC DPL operation, the Bank has selected a subset of actions from the current CCPL matrix. The indicative triggers for future action have been selected from GOI planning and budgeting documents, mentioned previously.

144. Lesson 3: The DPL provides a useful tool for securing funding for important activities even in times of fluctuating financial and political interests. The DPL was seen as an important tool for reform champions to advance and implement the government’s reform agenda. Even though the initial policy actions that the DPL series aims to promote stem from action plans and commitments spelled out by the government, some policy actions can get sidelined with changes in personnel or interests. The DPL can help maintain a plotted course for the selected actions.

145. Lesson 4: A programmatic multi-year reform program helps provide more meaningful direction, compared with a single tranche operation. In a programmatic operation, the loan supports on-going reforms that span over several years and can help the government become more focused on overall direction of change and achieving coherency in actions for future years. 146. Lesson 5: Sectoral ministries are not all equally willing to participate in the DPL Process. Although some line ministries appreciate the process and scrutiny and the ability to raise their issues to a higher level, others do not perceive great benefits, because they do not get extra resources from participation. This means there is more need for socialization of the process and the instrument both in general meetings and individual ones. In the case of CC DPL, the solid coordination of BAPPENAS through the technical and steering committees was able to explain the benefits to stakeholder agencies and include all the key ministries for mitigation and adaptation purposes. This reinforces the need for a higher level political focus and an appropriate convening agency/partner to manage the process. 147. Lesson 6: The formal DPL document and process provide a basis for bringing key stakeholders together. However, the background dialogue, the secondary layer of discussion is of equal value. In the macro DPL series, as well as the Japan AFD CCPL process, participants found that the meetings were a useful venue for raising and discussing high priority issues, such as fuel subsidies and land conversion for agriculture. These discussions often led to the development of technical assistance or analysis activities that helped the GOI sort through the issues and prioritize a way forward. In this way, even if a particular issue does not appear in the DPL matrix, these issues still form an important part of the subtext and side analysis associated with the DPL process, so that progress can be made that is not fully reflected in the formal documentation. 148. Lesson 7: The climate policy landscape is changing internationally and domestically; the CC DPL process has to remain flexible to this dynamic environment. The CCPL emerged out of the Bali COP 13 discussions in Indonesia. Since then, the GOI has produced a range of studies and plans, formed a National Council on Climate Change, and taken prominent positions in the global climate dialogue both in the UNFCCC process and the G-20 process. The GOI has established an institutional process within BAPPENAS for managing the CCPL process. Due to the evolving nature of the climate change landscape and the choices facing Indonesia, the steering committee and technical committee process has proven valuable as a venue for discussing the challenges of prioritization.

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E. Analytical Underpinnings 149. Government documents, supplemented by Bank and other analytical work, provide the main underpinnings for the climate change DPL. Significant work has been done by the GOI and its partners (Japan and France) to develop and support the CCPL policy matrix. Key documents in this regard include: the National Action Plan for Climate Change (KLH, 2007), the National Development Planning Response to Climate Change (BAPPENAS, 2008), the Technology Needs Assessment for Climate Change (BPPT and KLH, 2009), Indonesia’s Second National Communication to the UNFCCC (2009), the Indonesia Climate Change Sectoral Roadmap (BAPPENAS, 2009), the First 100 Day Action Program (November 2009), and the Follow Up to Copenhagen COP 15 (March 2010). 150. The Low Carbon Growth study is a broad engagement that supplied much of the background material outlined in Chapter III. The Indonesia Low Carbon Development Options phase 1 Report (Ministry of Finance, DNPI and World Bank, 2008), as well as emerging sectoral reports on energy, transport and forestry10 have helped to provide information and engage the Ministry of Finance in this critical policy area. The low carbon study has provided capacity, specific analysis, and stimulus for the GOI to consider emissions reducing policy and investment alternatives. This engagement, coupled with the global climate change dialogue, has led to the GOI seeking climate finance assistance from a range of Bank instruments, including FCPF, CPF, FIP, and CTF. 151. Other key World Bank documents that have been used to develop the DPL include: the Indonesia Country Environmental Analysis (2009), the 2010 World Development Report, the Energy Flagship Study for East Asia Pacific, and Making the New Indonesia Work for the Poor (2006). A number of useful external documents have also been consulted such as The Economics of Climate Change in Southeast Asia (ADB, 2009), the Ministry of Finance Green Paper: Economic and fiscal policy strategies for climate change mitigation in Indonesia (Ministry of Finance, 2009) and the carbon abatement marginal cost curve for Indonesia (DNPI, 2009). As mentioned above, the World Bank also assisted in coordinating the Indonesia Forest Carbon Alliance, which resulted in an important Consolidation Report in 2007.

10 The WB internal Low Carbon portal link is here: http://sdvmd1.worldbank.org/climateportal/, where the Indonesia documents can be downloaded.

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V. THE PROPOSED CLIMATE CHANGE DEVELOPMENT POLICY LOAN

A. Overview of CC DPL 152. The objective of the CC DPL is to support the Government’s efforts to develop a lower carbon, more climate-resilient growth path. It will also help Indonesia to prepare for the post-2012 global climate change regime by establishing a favorable policy and institutional setting that access global climate finance opportunities and carbon markets. The CC DPL is a strategic opportunity for the Government to use program/policy lending to support the President's ambitious climate change agenda. The policy actions included in the DPL operation will also benefit Indonesia by providing added incentives to improve governance, forest management, efficiency, competitiveness, and energy security, all of which provide direct economic development benefits to Indonesia. 153. The CC DPL will focus on three main thematic areas: climate change mitigation, adaptation, and institutional and cross-sectoral issues. On mitigation, key targets for reductions are (1) forest loss and peat land conversion and burning, and (2) the energy sector, reducing the over use fossil fuels, developing renewable energy alternatives (e.g., geothermal and biomass) and promoting energy efficiency. On adaptation, the GOI’s key priorities are in agriculture, water management, coastal and marine resource management, as well as disaster preparedness and resiliency. Institutional and cross-sectoral issues include better analysis, policy coordination, and the integration of climate change priorities into the national development planning and budgeting system. 154. This operation will be consistent with and provide parallel financing for the “Climate Change Policy Loan” (CC-PL) Series, jointly financed by Japan and AFD. The Bank’s CC DPL operation will build on the policy framework developed under the CC-PL process (Annex 4 describes the CC-PL and actions achieved in 2009). The CC-PL series includes a governance structure, policy matrix and a monitoring and evaluation framework. Policy actions are monitored two to three times per year by a joint government-development partner Steering Committee chaired by BAPPENAS. On March 24th the Steering Committee approved 2009 actions as fully achieved.11 The indicative policy actions for 2010 – 2012 described in this chapter form the core of the “second phase” of Climate Change Program Loan support. It is anticipated that coming DPL series would continue to be co-financed by Japan, France and possibly other development partners around a common policy matrix. 155. By contributing to the GOI’s established climate change processes, the World Bank adds value by linking reform efforts to the full range of engagements and investment instruments, as described in Chapter IV. The Bank contributed to streamlining and prioritizing the indicative policy actions in the phase 2 program. The Bank is also working to better link the climate change agenda into the broader reform process at the central economic ministries. Annex 3A contains the Bank’s streamlined CC DPL matrix and Annex 3B the monitoring and evaluation plan, as it has emerged from discussions with the GOI. In these discussions the CC DPL applies international Good Practice Principles on Conditionality (see following text box). 11 CCPL policy actions are laid out by calendar year (consistent with GOI fiscal year). Actions and achievements are usually evaluated early in the following calendar year, followed by disbursement in the second half of the year. The two financing partners of the CCPL together disbursed $500 million in 2008 (based on 2007 prior actions) and $700 million in 2009 (based on 2008 policy actions). In 2010, Japan and AFD are each expected to disburse $300 million, based on the successful completion of the evaluation process conducted by the Steering Committee.

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B. Policy Areas 156. The following section describes the CC DPL current year operation based on a set of prior actions in 2009. The current policy actions lay the groundwork for future actions that will extend and deepen reforms, as described in section C. on future directions.

Application of Good Practice Principles on Conditionality

Principle 1: Reinforce Ownership. CC DPL supports policy and institutional reforms in line with the Government’s priorities. Policy actions for this operation are based on a series of GOI planning and policy documents, or implementing regulations of national laws. Key documents include the National Action Plan for Climate Change (KLH, 2007), the National Development Planning Response to Climate Change (BAPPENAS, 2008), Indonesia’s Second National Communication to the UNFCCC (2009), the Indonesia Climate Change Sectoral Roadmap (BAPPENAS, 2009), and the Perpres 1 of 2010 on National Priority Programs (February 2010), which specifies Presidential priorities for the year. All of these products contributed to Indonesia’s submission to the UNFCCC in line with the Copenhagen Accord in January 2010.

Principle 2: Agree up front with Government and partners on a coordinated accountability framework. The policy matrix represents an agreed framework by Government and the budget support partners. The GOI chairs a Steering Committee that has served as the coordinating body for the Climate Change Program Loan (JICA and AFD) since 2008. All development partners base their disbursement decisions in consultation with one another and on the Government’s fulfillment of the same matrix of policy actions. The thematic areas and actions were developed jointly with the Government and have been adjusted as such as the program has evolved.

Principle 3: Customize accountability framework and modalities of Bank support to country circumstances. The policy matrix entails a subset of key reform measures that are part of the Government’s broader development program. It does not capture all climate actions or policy reforms that the GOI is implementing. Climate change policy cuts across every major sector of the economy, in particular forestry and energy, where reforms and management improvements continue to be made, irrespective of the climate change agenda. This operation recognizes that there are policy areas related to growth and poverty alleviation where, for various reasons, inclusion in a high profile Bank program may be counterproductive. Although the Bank and development partners are engaged in dialogue across a number of sensitive policy issues, many actions are left outside the scope of the DPL to take into account country circumstances and the political economy.

Principle 4: Choose only actions critical for achieving results as conditions for disbursement. While country ownership and the criticality of policy issues to stated objectives are the foremost criteria in selecting DPL policy actions, the Bank and development partners may also base selection on the likelihood of accelerating implementation where vested interest or bureaucratic hurdles could slow the pace of reform. The CC DPL is a new area for the Bank, building on past performance under the CCPL, but also seeking to develop a longer term agenda on key thematic areas in forestry, energy and adaptation. For this reason, selection criteria may include identifying strategies and plans that are critical first steps to a longer reform process.

Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial support. The CC DPL provides parallel financing to the ongoing CCPL process, whereby development partners agree to notional commitment amounts and policy actions during the prior year’s DPL. Financial commitments are further refined in consultation with Government in the context of overall program lending needs. CCPL has followed a formal process of agreement on actions, assessment criteria and an evaluation process, conducted by a monitoring team and reported regularly at Steering Committee meetings. The monitoring team’s work is supplemented by project investments and advisors of the development partners. The Bank will participate in Steering Committee meetings and the formal evaluation process, as well as follow up with GOI counterparts.

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B1. POLICY AREA 1: MITIGATION Land Use Change and Forestry Sector Mitigation 157. The CC DPL focuses on actions critical to addressing governance issues and upstream drivers of deforestation and loss. The GOI is developing strategies and identifying financing sources for addressing LUCF emissions sources, in collaboration with a range of development partners. Proposed CC DPL policy actions in the LUCF thematic are aimed at three major issues: Peat land; REDD piloting efforts; and forest governance improvements. The key benefits expected from the CC DPL program are: Policy harmonization and enabling conditions for integrated action to reduce peat degradation and fires (in priority target areas) and improved forest and land management practices. In addition, the improved policy setting together with implementation actions that reduce emissions will better allow the GOI to access forest carbon financing mechanisms in the post-2012 climate regime. The CC DPL recognizes Indonesia’s achievements in this policy area with the following prior actions. 158. Prior Action 1: Peatland Conservation. Issued and began implementation of a master plan on peat land rehabilitation in Central Kalimantan. This policy action aims at addressing the major source of GHG emissions from LUCF.12 According to the GOI plan for complying with its Copenhagen Accord commitments, GHG emissions from peat lands should be reduced from a BAU scenario of 1.44 Gt to 0.28 Gt by 2020 (more than one-third of Indonesia’s total planned emissions reductions). An important starting point is the province of Central Kalimantan which contains Indonesia’s largest area of degraded and fire-prone peat lands. The GOI has demonstrated its concern by developing and issuing a master plan for peat land rehabilitation in the province. Ministerial Regulation (N0.55/2008) was issued in September 2008 and implementation was begun in 2009. In the future, the GOI expects to form an improved institutional framework to conserve and restore peatland and provide a basis for practical actions. GOI is already undertaking demonstration activities on peatland in Kalimantan with development partner assistance and will soon expand to Riau province. 159. Prior Action 2: REDD. Launched National Readiness Program for REDD, established regulatory framework, and joined both FCPF and UN-REDD. The resources mobilized through a national REDD program can be a powerful incentive for Indonesia to curb deforestation and forest degradation. To accelerate this transition, Indonesia has launched a national readiness program for REDD by: completing preparatory analyses; issuing a consolidated report on its program; and identifying demonstration activities. In 2008-9, the GOI has issued three MOFR Ministerial Regulations on REDD demonstration activities, on REDD procedures and on Commercial Forest Carbon Projects. In 2009, the GOI has confirmed participation in two important international initiatives: the Forest Carbon Partnership Facility managed by World Bank and the UN-REDD Program implemented by UNDP, FAO and UNEP. 160. Prior Action 3: Forest Management and Governance. Issued regulations to establish a national timber legality standard and a system for verification and monitoring to assist in reducing illegal logging and forest loss. Forest governance, improved forest law enforcement and more sustainable forest management are essential for REDD to function successfully and for tackling deforestation. The President’s 100-Day Program for the Ministry of Forestry focused on actions linked to law enforcement and governance such as resolving conflicts over forest land clearance and better use of spatial planning. A positive step towards improved forest governance was the establishment of a national timber legality standard and a system for verification, which will help in the effort to combat illegal

12 The GOI developed a master plan in this location because of the ecological disaster created there due to the New Order government’s concept to develop a “million hectare rice project.” This involved installing canals and draining large areas for agricultural development (which did not succeed) and transmigration projects, later abandoned. The ecological impact and risk of fire continue. Lessons learned in Kalimantan can be applied to other peat provinces.

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logging, which contributes to forest loss and emissions. Capacity strengthening, implementation and monitoring will still be needed to ensure improved outcomes, but this is an important step in addressing the root causes of illegal logging. Building on this step, Indonesia will be better prepared to participate in the international trade in forest products and international forest carbon markets. Energy Sector Mitigation 161. In the energy sector, the CC DPL focuses on policy actions essential to addressing emissions reduction priorities, which include renewable energy, energy efficiency, and cost reflective energy pricing. Due to large potential capacity, geothermal is one of the best options to diversify Indonesia’s energy mix. However, the regulatory framework creates barriers and uncertainties for project developers. To accelerate geothermal power development, three key policies are needed: (1) mandatory power purchase (off-take) by PLN; (2) mandatory market policy of a fixed tariff (feed-in tariff) or a fixed quantity (renewable energy portfolio standards); and (3) a compensation mechanism to allow the incremental cost of geothermal power purchase to pass-through to consumers or compensate PLN through government payment. The GOI is already working on achieving these actions. The key benefits expected from policy actions in the energy sector are: increased economic benefits from energy efficiency; increased energy security from investments in renewable domestic energy sources; and economic and social benefits of reduced emissions. The CC DPL recognizes Indonesia’s achievements in this thematic area with the following prior actions. 162. Prior Action 4: Renewable Energy Development. Issued national and ministerial regulations to mandate the development and purchase of power from renewable energy resources, to establish a ceiling price for geothermal power purchase, to establish the purchase price of electricity from renewable energy sources, and to provide tax incentives for renewable energy development. Together, these rules address (partially) two of the key policy barriers in geothermal development mentioned above (mandatory off-take and a higher price for power). The government has also issued tax incentives for renewable energy development, including geothermal, as well as solar, wind and biomass. These actions will contribute to the achievement of the GOI’s second fast track power development program to develop 10,000 MW by 2014, of which 60% will be renewable energy, with geothermal accounting for about 4,800 MW and hydropower accounting for most of the other renewable energy capacity. Regarding the price, Regulation 32 specifies that PLN’s off-take price for geothermal from tendering processes and existing concessions will be subject to a ceiling price of 9.7 cent/kWh. This marks the first time a GOI rule provides guidance to the geothermal tendering process with a highest ceiling price. This action sets a precedent for future steps that should extend pricing reforms and incentives to include a feed-in tariff or a fixed quantity (renewable energy portfolio standards). The feed-in tariff approach would aim at least at the existing concession areas (3500 MW), where developers already hold permits for geothermal mining operating areas. For new geothermal mining areas, future steps should improve and streamline the tendering process. In the medium term, energy policy will need to address who pays for the incremental costs between renewable/geothermal options and PLN’s average power purchase or production costs. This compensation issue is covered in the 2010 CC DPL program. 163. Prior Action 5: Energy Efficiency. Issued Government Regulation on Energy Conservation and implemented national system of energy audits for major firms in key sectors. This comprehensive regulation specified energy conservation responsibilities of national and local government, entrepreneurs and communities. The rule obliges large energy users to conduct energy management through appointment of an energy manager, developing energy conservation programs, energy auditing, implementing recommendations, and reporting. It also called for implementation of energy efficient technologies through performance standards on energy equipment. It encourages national and local governments to provide incentives to large energy users and manufacturers for energy conservation, and lays out penalties for non-compliance. This marked a significant step toward a comprehensive energy

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conservation policy. In past years, the CCPL process has also recognized GOI actions to develop and implement a national system of energy audits for major firms in key sectors, thus raising awareness and stimulating some voluntary action. Future actions could also include a master plan for energy conservation that sets energy efficiency targets for key industrial sectors, energy efficiency standards for electric appliances, and fuel economy standards; and provides performance-based fiscal incentives (e.g., consumer rebate and tax credit) for energy efficiency. B2. POLICY AREA 2: ADAPTATION AND DISASTER PREPAREDNESS 164. The CC DPL focuses on actions in the key areas of Indonesia’s vulnerability and adaptation needs, including water resources, agricultural resilience, coastal threats and livelihoods, and disaster preparedness. Indonesia recognizes adaptation as a key priority area to protect the poor, who will likely experience the greatest impacts, yet have the least resources and capacity to respond. Programs being developed and implemented include planning and institutional development at the regional level in the water resources sector and disaster risk reduction area, extension and capacity development at the community level in the agriculture, and strategic planning and community development in the coastal and marine sector. Key benefits from strengthened action on adaptation are: improved capacity and resilience at institutional level and community level in key sectors, as well as integration of adaptation needs into disaster preparedness plans and institutions. The CC DPL recognizes Indonesia’s achievements in this thematic area, with the following prior actions. 165. Prior Action 6. Water Resources Sector. Issued Presidential Regulation to establish and staff the Water Resource Council and prepared integrated water resource management plans (POLA) with climate change assessment in national strategic river basins. The National Water Resource Council establishes a national coordinating body for planning and management. In addition to this action, guidelines for preparing integrated water resource management plans (POLA) were also established through Ministerial Decree (31 August, 2009). In addition, thirteen provincial water resources councils have been established (Central Java, NTB, South Sulawesi) and 20 more are under preparation. These plans are an initial step toward future improvements and implementation actions that assist in adapting to climate change risks and impacts through local level (watershed-based) management institutions. 166. Prior Action 7. Agriculture Sector. Developed an irrigation asset management information system. Implemented a rice production intensification program and climate field schools in target provinces. The establishment of an irrigation asset management information system contribute to enhanced capacity for managing irrigation water, so critical to Indonesia’s agriculture. The GOI is also implementing the pilot projects at the district level from 2009 and inventory development, with assistance from the ADB/PISP and WB/WISMP projects. The Government’s System for Rice Intensification (SRI) efforts in 21 provinces (Ministry of Agriculture) and 9 provinces (Ministry of Public Works) contribute to enhancing agricultural productivity, a national goal and a clear climate adaptation measure. The Government’s Climate Field School Program13 aims to improve farmers’ capacity to apply climate forecasts and other agro-meteorological information to production activities. This program has been implemented by two divisions of the Ministry of Agriculture in 177 locations, surpassing expected performance in 2009. In the future, the effectiveness of these programs can be evaluated, and then scaled up to reach more locations with an improved and consolidated program of capacity development.

13 Climate Field Schools are based on Indonesia’s experience with “Farmer Field Schools” developed in Integrated Pest Management (IPM) extension in the 1980s. These were considered quite innovative and effective. The climate field schools evolved from experiments in 2005-06 and involve collaboration among Ministry of Agriculture, Asian Disaster Preparedness Center (ADPC, Bangkok), Agency for Meteorology and Geophysics (BMG), National Meteorological and Hydrological Services (NMHS), and University of Agriculture, Bogor (IPB).

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167. Prior Action 8. Disaster Risk Management. Enacted law on Disaster Management and established a National Disaster Management Agency (BNPB). Finalized and launched the National Action Plan for Disaster Risk Reduction. Integrated Disaster Risk Reduction and climate change adaptation into the medium term development plan (RPJMN, 2009). This action was added to the CCPL framework in 2009, in recognition of the importance of this activity in the climate change context and the GOI’s progress. With the legal framework and action plan now formalized, the BNPB is prepared to move forward with a stronger program. It is also useful to note that this is not just a paper agency, with legal basis but no operational capability. In 2009, the capacity of this agency was strengthened through the recruitment of 116 new staff members (selection held on November 19; active on February 1, 2010). At the provincial level, 18 regional disaster management agencies (BPBDs) have been established and about 44 more at district/city level (with others in various stages of development). This provides a basis for future actions to strengthen these agencies and foster the links among them. Future actions could also focus on the “highly vulnerable regencies/cities” identified by BNPB. 168. Prior Action 9. Marine and Fisheries Sector. GOI launched the National Plan of Action (NPOA) of Coral Triangle Initiative, approved a roadmap of CTI actions for 2010-11 These actions demonstrate Indonesia’s commitment to developing and strengthening the framework for promoting coral reef, fisheries and food security. The NPOA was approved by the 6 member countries of CTI in May 2009. The National Secretariat for the Coral Triangle Initiative was established. Indonesia is striving to improve coastal management, rehabilitate coral reefs and improve livelihoods more broadly in 15 districts within 8 provinces, with assistance of the Bank and ADB under the COREMAP program. B3. POLICY AREA 3: CROSS SECTORAL AND INSTITUTIONAL ISSUES 169. Climate change is a development issue and an economic issue. An integrated national response to climate change requires cross-sectoral planning and coordination and appropriate institutional structures for formulating and carrying out policies and programs. The political economy of climate change regulation and management has been in flux, but is becoming more settled. BAPPENAS, Ministry of Finance, the National Council on Climate Change and the Ministry of Environment each plays an important role in coordination, policy making, planning and budget formulation, while sectoral ministries retain responsibilities over key areas of the economy responsible for the bulk of Indonesia’s emissions. Coordination of these issues and institutional relationships is a challenge. Key actions needed to develop a more integrated climate change response include: developing a firmer scientific understanding and institutional framework for coordination and action; mainstreaming climate change issues into the national development planning and budgeting process; and developing institutions, plans and information systems to allow Indonesia to benefit from global climate finance mechanisms. The CC DPL recognizes Indonesia’s achievements in this thematic area, with the following prior actions. 170. Prior Action 10: Mainstreaming in National Development Program. GOI finalized the Second National Communication to UNFCCC, submitted mitigation actions under the Copenhagen Accord, and issued key development planning documents related to climate change, as well as the RPJM. The first of these foundational documents identifies the main sources of emissions and establishes the baseline for inter-governmental coordination on key targets of action on both mitigation and adaptation. The second establishes an international benchmark for Indonesia’s ambitious GHG mitigation agenda. The Development Planning Response to Climate Change updated in March 2010 provides a thorough listing of available climate change projects ready to be incorporated into the development process. The Climate Change Sectoral Roadmap outlines the GOI’s strategic approach to climate change at a sectoral level. Together, these constitute a substantial body of knowledge, ideas and planning that line ministries and development partners can use as a guide to setting up sectoral programs or investments. These framework documents also play a strategic role in identifying key policy directions for the future of the CC DPL process. The success of these mainstreaming efforts can be seen in the RPJM for 2010-2014,

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which includes sectoral and cross cutting actions and measures to respond to climate change linked to the national budget. The next foundational document on the horizon is the President’s decree that will codify the 26% emissions reduction commitment in domestic law. 171. Prior Action 11: Policy Coordination and Financing for Climate Change. The GOI issued the National Action Plan Addressing Climate Change, established a National Council on Climate Chang, and launched the Indonesia Climate Change Trust Fund (October 2009). The National Action Plan provided the original vision and mission of Indonesia’s climate change programs on the road to the Bali COP 13. The establishment of the National Council on Climate Change was a milestone event that expressed the President’s commitment to have a high-level body for consultation and strategic direction at the cabinet level. The GOI has also set up institutional mechanisms for climate change coordination and financing, covering both loans and grants. In 2008, the GOI established an inter-ministerial steering committee led by BAPPENAS to coordinate dialogue and monitor performance of the pioneering CCPL with GOJ and AFD. The ICCTF provides a vehicle for managing development partner grant contributions in a systematic way through one institutional coordination mechanism.

172. This solid base of institutional development will pave the way for additional plans and mechanisms to allow Indonesia to benefit fully from global climate finance mechanisms. This improving institutional framework positions Indonesia to make more strategic use of economic instruments for climate policy. The GOI is assessing fiscal policies that can support climate change responses and preparing implementing regulations on economic instruments for environmental management under the new Environmental Protection law. As noted previously, Indonesia has recently been approved to access low cost climate finance from the FCPF, UN-REDD, CTF, and FIP.

C. Future Directions and Expected Results

173. The CC DPL supports a process of reform with clear policy actions and substantial engagement, dialogue and technical assistance. The future directions for the next series of CC DPL operations result from an intensive process of dialogue, culminating in a Steering Committee meeting chaired by the GOI on March 24. Indicative policy actions for the next two operations were identified and a strategic framework developed. The policy matrix appears at the end of this section and in Annex 3A. It lays out the prior actions and indicative triggers for 2010-2012. The objectives and expected results for each policy area are also described. Annex 3B includes the monitoring and results framework. Annex 3C offers the broader CCPL matrix for comparison. While policy actions for 2010 are fairly well-defined, the actions for 2011 and beyond are much more indicative. Discussions over sequencing and budgeting for these actions will continue through the development planning cycle.

174. This “second phase” CCPL program continues from the platform established through the first phase, but provides some additional refinement and strategic focus. This can be seen in the more streamlined set of policy areas and indicative actions, as well as the elevation of attention on some key areas, such as forest governance, energy pricing and institutional coordination and financing. This phase of the program also opens the door to greater responsibility and action by provincial and local governments, through mitigation plans and fiscal balancing mechanisms. The following sections describe the rationale for the CC DPL future program of policy actions and link these actions to expected results. 175. From the 2010 indicative policy actions, four should be highlighted as key components of the GOI’s program, essential to its success. The most critical item is the President’s 26 percent emissions reduction target and the intention to establish that commitment in the national legal framework through a decree. Establishing this goal in the domestic legal framework will provide a basis for budgeting and performance measurement on climate change action at sectoral level. Within life of this

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operation, we will be able to track budget allocations aligned with these national goals and evaluate their cost effectiveness. Longer term, Indonesia will be reporting MRV emission reductions to UNFCCC. The next two critical policy actions aim to address fundamental drivers of deforestation and governance gaps in land use change and forestry. The GOI is planning to improve management and coordination of peat land in 2010 leading to a President decree in 2011. It is expected that improved coordination will reduce conflict and licensing of land conversion in specific provinces in the short term and reduced deforestation in the longer term. The GOI also plans to develop a fiscal incentive mechanism for local governments to reduce LUCF emissions. Establishment of an incentive mechanism will result in measurable financial flows linked to specific management actions in the medium term, and reduced deforestation in the longer term. The fourth action is to complete the policy framework to improve investment climate for geothermal investment. Here, the GOI will develop a compensation framework for geothermal electricity purchase by the off taker. This complements actions on off-take requirement and price differential for geothermal from last year. We expect that this will open the door to more investment in the subsector, which can be measured investment flows, evidence of construction and steps toward the GOI’s geothermal power production target. C.1 POLICY AREA 1: MITIGATION

Land Use Change and Forestry Sector Mitigation

176. Recognizing the importance of peatland conservation for reducing emissions, in 2010 the GOI intends to strengthen coordination among ministries to control peatland emissions, during a consultative process of preparing a presidential regulation, now under development. The GOI is also undertaking a multi-sector, multi-stakeholder policy dialogue toward the development of a legal framework for the National Strategy for Lowlands. This lowlands strategy focuses on balancing development and conservation and will inform the regulation development process. The GOI expects to issue the presidential regulation in 2011 and begin implementation in 2012. Actions to improve peat management will include conservation, water management, and fire prevention to minimize emissions. We expect this will improve the institutional and legal framework for conserving and restoring peatland, thus reducing conflicting policies and reducing fires and degradation. In the medium term, this will help to achieve emission reduction goal and to access appropriate sources of international climate finance.

177. Further building on the REDD foundation established in 2008-9, in 2010 the GOI plans to complete a MOFR Ministerial Decree on the mechanism and procedures for REDD implementation by defining roles and responsibilities of government agencies, local communities, and the private sector in managing carbon assets. The GOI also plans to implement at least three demonstration activities in specific locations, together with development partners or other project proponents. In 2011, Indonesia will establish a national registry of REDD to track implementation of REDD activities and payments. In 2012, the GOI plans to do an assessment and develop a framework to improve forest fiscal management, including incentives for regional stakeholders (several policy actions below relate to incentives for regional governments; this one is aimed at private land users in concessions or REDD sites). As a result of actions to clarify REDD rules, we expect to see greater development and investment in demonstration activities, with equitable sharing of benefits. These actions will also position Indonesia better to access forest carbon finance sources that may develop after 2012 as a result of the UNFCCC negotiations. In the medium term, REDD actions will contribute to reducing emissions.

178. To improve forest management and governance in 2010, the MOFR will implement the regulation on timber legality, monitor performance, and improve capacity. The National Standards Agency plays a key role in the legality process by providing a neutral third party quality assurance role. The capacity of this agency for oversight, certification and monitoring the timber legality implementation will be assessed. Capacity strengthening needs are likely to be met through collaboration between the

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GOI and development partners engaged on this issue, notably DFID, EU and USAID (where domestic regulations require greater due diligence on timber legality standards). In 2011, MOFR, plans to strengthen implementation of the regulatory framework of timber legality by implementing the recommendations arising from its monitoring and evaluation process (assisted by development partners, as needed). The MOF also plans to design an inter-governmental transfer mechanism to improve the incentives for local governments to strengthen forest management and reduce emissions. This is a complex undertaking and will not be completed within one year. Thus, the Ministry of Finance expects to formalize the inter-governmental transfer mechanism in 2011 (through a legal instrument to be defined) and evaluate the performance in 2012. Through these actions, Indonesia will improve forest governance through clearer institutional means to address timber legality and positive incentives for local governments. Actions that engage local governments in a fiscal benefit sharing framework with clear and consistent incentives will also begin to address the inconsistencies related to land use and land conversion, including oil palm development in sensitive areas. In the medium term, this will help to reduce the deforestation rate and improve the potential for success in Indonesia’s REDD program.

Energy Sector Mitigation

179. In 2010, the Government plans to build on the renewable energy reforms begun in 2009 by issuing a legal instrument that clarifies the compensation scheme for incremental cost of geothermal electricity to the buyer. The Ministry of Finance has accepted responsibility to specify the appropriate compensation form of compensation to provide an assurance to the off-taker, PLN. The GOI further plans to improve the policy framework for geothermal development by creating a means to facilitate business arrangements between developers and PLN. The legal and institutional mechanism through which this will be accomplished is under discussion among MOF, MEMR and PLN. In 2011, the GOI proposes a further policy improvement by developing a geothermal exploration fund, to mitigate upstream risks in eastern Indonesia, where geothermal development is a GOI priority. In 2011, the GOI proposes to review the impact of Ministerial Regulation No.31/2009, which sets the price renewable energy sources. With the review in place, a new or revised regulation is to be developed to improve the effectiveness of renewable energy investments. The draft regulation is proposed to be developed in 2011 for issuance in 2012. These actions should result in a more consistent regulatory framework with better risk and benefit sharing, thus promoting investment. This is expected to contribute to development of new geothermal projects and other renewable energy investments. In the medium term, this will improve energy security and reduce GHG emissions from electricity generation.

180. On energy efficiency, the Government proposes build on the Regulation on Energy Conservation (No 70/2009) by developing a master plan for energy conservation in 2010 and implementing it in 2011. The plan will cover energy efficiency standards, an improved energy audit program (including a monitoring and evaluation process), the development of fiscal incentives, and requirements for industry energy conservation. Several additional regulations will be needed in later years with technical assistance associated with the CC DPL provided as needed. These improved rules and incentives will encourage industries and manufacturers to undertake energy efficiency investments. In the medium term, GHG emissions will be reduced through enhanced energy efficiency in energy intensive sectors.

181. Given its clear importance, energy pricing continues to be an issue in the policy dialogue with the Government. A policy action to address this issue is included in IDPL 4, currently under preparation, because of the link to investment in energy infrastructure. However, we note that energy pricing reform is also a critical element in climate change mitigation, as higher prices provide incentives for efficient energy use and greater investment in alternative energy sources. Recognizing that this is not an exclusive indicator, we chose to highlight the GOI’s intention to finalize a road map for improving the subsidy policy for electricity in 2010. In fact, this is a complement to the action in the IDPL. In 2011

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and later, the GOI proposes to continue to implement actions based on the road map, including the development of regulations that continue to clarify energy subsidy policy. As the GOI reduces subsidies through tariff policies that reflect the economic and environmental costs of electricity, there will be short and long term climate change benefits, with emissions reduced through improved efficiency and increased investment in alternative energy sources. C.2 POLICY AREA 2: ADAPTATION AND DISASTER PREPAREDNESS

182. In the water resources sector, in 2010 Indonesia will continue the strategic assessment of the water future of Java begun in 2009 and carrying through to 2011. This will involve preparing an action plan for priority interventions incorporating climate change, urbanization, economic development and food security. This strategic assessment (assisted by the Bank and other development partners) will become an integral part of the River Basin Strategic Water Management Plans and Master Plans. Beyond this priority work on Java watersheds, the Ministry of Public Works also intends to establish twelve provincial water resource councils, twelve Coordination Teams for Water Resources Management in River Basins (TKPSDA), and eight Integrated Water Resources Management Plans (POLA) across the nation. In 2011, the GOI intends to complete the master plans for the main Java River Basins (including climate change adaptation measures) and codify these in ministerial decrees. These actions will improve water resource management through establishment of responsible institutions to implement integrated plans, beginning with nationally strategic river basins. In the medium term, this will contribute to Indonesia's ability to anticipate and respond to water-related climate change impacts (drought and flood risks) and contribute to resilience at the region/river basin level.

183. In the agriculture sector in 2010, the GOI in 2010 intends to continue the important ongoing programs to promote adaptation at the farm level. The GOI will evaluate performance to date in the implementation of programs for rice intensification and farmer field schools. Based on the results and needed adjustments, the GOI then plans to improve and scale up actions for adaptation through these capacity development actions. The GOI will also enforce land development and management without burning as part of the overall plan established under a MOA Ministerial Decree. In 2011 and 2012 the Ministry of Agriculture will continue to improve and scale up actions for adaptation in these areas. As a result of these actions, farmers will be better prepared for climate change impacts, with better sources and channels of information. In the medium term, this will strengthen the institutional framework to improve resilience to climate change impacts on food production (flood, drought, pests) at the community/farm level.

184. On disaster risk management, in 2010 the GOI will complete efforts to establish Local Disaster Management Agencies (BPBD) in all remaining provinces. In 2011, the GOI intends to implement Disaster Risk Reduction (DRR) program activities according to the National Action Plan for DRR that was published in November 2009. In 2012, GOI plans to establish a comprehensive risk financing framework, which could combine several mechanisms, including reserve (on-call) budget, stand-by financing, or weather derivatives. This work remains in early stages and is being developed and assisted by the Bank through GFDRR grant resources. The result expected from these actions is an improved institutional framework, nation-wide implementation capacity, and available resources for disaster risk reduction and management. Climate change vulnerability and preparedness issues will be mainstreamed into the national DRR framework.

185. In the coastal sector, the Ministry for Marine Affairs and Fisheries plans to lay out a five year program for implementation of the Indonesian Global Ocean Observing System (INAGOOS), a marine monitoring program. The results from this monitoring system will inform the development of further climate change adaptation activities in the coastal and marine areas, and contribute to the National Adaptation Strategy. In 2010, the GOI will finalize plans and budgets for inception of the system. In

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later years, implementation steps will include procurement of goods and works, development of human resources, and establishment of facilities. Focusing on a key area of vulnerability, the GOI intends to develop a strategy for coastal community resilience to cope with climate change. This strategy would include plans for developing climate resilient villages in eight vulnerable districts on the north coast of Java. The GOI will also implement a study on coastal vulnerability in relation to sea level rise in Java and Bali. In 2011-2012, the GOI intends to implement the strategy for coastal community resilience to cope with climate change in key target areas. These actions will result in improved coastal and marine climate monitoring capacity and improved coastal community resilience in target locations. In later years, the coastal resilience strategy will become a model approach for replication and scaling up in other coastal vulnerable areas, when more resources are available. In the medium term, the result should be improved coastal management and improved climate resilience among particularly vulnerable groups. C.3 POLICY AREA 3: CROSS SECTORAL AND INSTITUTIONAL ISSUES

186. The GOI has already established a strong framework of legal and analytical products to mainstream climate change into the National Development Program. In 2010, the GOI intends to go further by issuing a presidential decree on the National Action Plan for 26% GHG emission reduction. Building on this in 2011, the GOI also plans to prepare Nationally Appropriate Mitigation Actions (NAMAs) in accordance with the medium term development plan (RPJM) and the Indonesia Climate Change Sectoral Road Map. Also in 2011, the GOI intends to extend the emissions reduction framework to the provincial level by drafting provincial action plans for contributing to the 26% objective. In 2012, this will be followed up by incorporating climate change programs into the regional midterm development plans (RPJMD), which become the basis for budgeting and implementation. Results expected from these efforts include a strengthened knowledge base, institutional framework, and legal basis for implementation of both mitigation and adaptation programs. This will contribute to achievement of national climate change objectives in the medium term, both domestically and internationally.

187. In the area of policy coordination and financing scheme, in 2010 the GOI will implement the ICCTF, which was developed and launched in 2009. In 2011 and beyond, the GOI intends to continue implementation and provide financial support to specific projects. To establish a framework that encourages local governments to address climate change needs, MOF plans in 2010 to design an inter-governmental fiscal transfer mechanism to provide incentives for local governments to take priority climate change actions. Given the lengthy consultative process required, this mechanism would be finalized and established through a government legal instrument in 2012. This framework and funding source will catalyze adaptation and mitigation action at the local and decentralized level. These actions will yield better institutional mechanisms for coordination of climate policy formation, budget allocation, and implementation. In the medium term, local governments will face more positive incentives to take appropriate climate change actions and fewer disincentives or policy distortions.

188. This is a wide program of activities across many sectors of government. Yet, it can be seen that this is also a comprehensive program aimed at key priorities in each sector. These actions aim at fundamental issues of governance, policy formulation, incentives and budgeting, all critical to effective climate change programs. The World Bank and development partners are already assisting the GOI in achieving a number of these proposed policy actions. The CC DPL provides the opportunity to better coordinate and consolidate these efforts in a government-led program, with strong monitoring and dialogue processes. 189. The CC DPL Policy Matrix appears as the last four pages of this chapter, following a brief discussion of consultation processes associated with development of the GOI’s agenda. The next chapter outlines the monitoring and evaluation processes built into the CCPL governance structure.

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D. PARTICIPATORY PROCESSES AND CONSULTATIONS

190. The Bank’s Country Partnership Strategy is developed through consultations with government and external organizations. The Bank developed a CEA focused on climate change and launched it in November 2009 in a multi-stakeholder venue. Both the CPS and the CEA specifically foresee DPL as one of the instruments for engaging on climate change issues. 191. Indonesia has had a wide and public dialogue on climate change issues, and on the program loan as an instrument. Climate change has been an issue of national prominence since UNFCCC COP13 was held in Bali in 2007. The GOI’s foundational climate change documents (see prior actions) have been launched at multi stakeholder events. The CCPL, this has been the topic of public comment since August 2008, when first announced. 192. Since the President’s 26% commitment, this issue has gained even more attention, both inside and outside of government. Indonesia’s free and active press has carried articles describing the program and the early debate within the GOI about the value of this instrument. Currently, the Steering Committee is the main governance body where a wide range of positions and agencies are represented. More information about the consultation process, including specific meetings held over the last year by GOI and World Bank can be found in Annex 6. 193. Most Indonesian civil society groups see adaptation and the position of the poor as the key priorities and seek greater balance in the level of attention, relative to the mitigation agenda. Poor and marginalized communities are also a great focus of attention, with the caution that climate-related interventions should aim to assist development and relieve poverty, not just transfer carbon payments among those currently controlling resources and wealth. Indonesia’s key advocacy organizations for communities and indigenous peoples are fully engaged on the issues of climate change, and particularly LUCF. The Indigenous Peoples Alliance of the Archipelago (AMAN) is an invited participant / observer in the FCPF governance process and has influenced the development of both UN REDD and FCPF programs in Indonesia.

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Indonesia Climate Change Development Policy Loan Matrix of Prior Actions, Future Indicative Actions and Anticipated Results

Objectives Prior Actions Recognized 2010 Indicative Actions 2011-2012 Indicative Actions Expected Results POLICY AREA 1: MITIGATION NOTE: Triggers presented in bold type Land Use Change and Forestry Sector Mitigation

Improve policy coordination and management of

peat land

Peatland Conservation

Issued and began implementation of a master plan on peat land rehabilitation in Central Kalimantan (MOFR Ministerial Regulation No. 55 / 2008).

Coordinate among ministries to control peatland emissions, implemented under the framework of presidential regulation. Implement key steps in multi-sector policy dialogue toward establishing a legal framework for the National Strategy for lowlands with the focus on balancing development and conservation, considering peatlands as a major source of GHG emissions.

2011: Issue a presidential regulation which includes special measures for peatland conservation and peatland water management to minimize carbon emissions. 2012: Implement actions, based on presidential regulation to improve management of peat lands.

The institutional and legal framework to conserve and

restore peatland is improved, thus reducing conflicting policies and

improving coordination. In medium the term, this will help to reduce a major source of GHG

emissions.

Improve regulatory

framework for REDD

implementation and develop

demonstration activities

Reduced Emissions from Deforestation and Degradation (REDD)

Launched National Readiness Program for REDD (September 2009) and established legal framework through MOFR Ministerial Regulations No 68/2008 on Demonstration Activities, No. 30/2009 on REDD Procedures, and No. 36/2009 on Commercial Forest Carbon Projects. Completed Participation Agreement with Forest Carbon Partnership Facility (FCPF) in November 2009 initiated a REDD program with UN REDD Support in October 2009.

Complete the Ministerial Decree on Mechanism and Procedures of REDD by defining roles and responsibilities of government agencies, local communities, and the private sector in managing carbon assets. Conduct/implement REDD demonstration activities (at least 3), specify results in specific locations and partners.

2010: Establish a national registry of REDD to track implementation of REDD activities and payments in a national carbon registry. 2012: Assess and develop framework for forest fiscal management, including incentives for regional stakeholders

Rules for REDD activities will be clarified, allowing greater

development and investment in demonstration activities, with

equitable sharing of benefits. In the medium term, this will

contribute to reducing emissions from deforestation and forest

degradation.

Improve basis for timber legality,

strengthen institutions, and

improve incentives for

regional governments to address forest

loss and degradation

Forest Management and Governance

Issued MOFR Ministerial Regulation No. 38/2009 on Timber Legality Verification System (System Verifikasi Legalitas Kayu, SVLK) to establish a national timber legality standard and a system for verification and monitoring to assist in reducing illegal logging and forest loss and degradation.

Implement and monitor performance of GOI regulation on timber legality. Assess capacity for oversight, certification and monitoring in national standards agency. Design inter-governmental transfer mechanism to finance and improve the incentives for local governments to strengthen forest management activities toward emissions reductions.

2001: Strengthen implementation of regulatory framework to enhance on-going implementation of GOI regulation on timber legality by monitoring and evaluation. 2011: Formalize inter-governmental transfer mechanism for local government forest management activities. 2012: Evaluate and improve inter-govt transfer mechanism to finance local government forest activities.

Forest governance and management are improved through clearer institutional

means to address timber legality and improved incentives for local

governments. In the medium term, this will help to reduce the deforestation rate and improves the potential for REDD success.

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Objectives Prior Actions Recognized (CY 2009) 2010 Indicative Actions 2011-2012 Indicative Actions Expected Results

Energy Sector Mitigation

Improve policy framework to

promote renewable energy development and

investment

Renewable Energy Development Issued Presidential Decree No. 4 / 2010 which assigns to PLN the acceleration of power plant development using renewable energy, coal, and gas and mandates PLN to develop and purchase power from renewable energy resources (January 2010).

Issued MEMR Ministerial Regulation No. 32/ 2009 on Purchase Standard Price of Electricity Power by PT PLN from Geothermal Electricity Power Station (December 2009).

Issued MEMR Ministerial Regulation No31/2009 on the purchase price of electricity from renewable energy (Nov 2009) and MOF Ministerial Regulation No. 24/2010 on tax incentives for renewable energy development January 2010.

Improve policy framework for promoting geothermal development to facilitate arrangements/deals between developer and off-taker. Issue draft regulation clarify the scheme of compensation for the incremental cost of geothermal electricity to off-taker.

2011: Continue to improve policy framework to promote geothermal development and to provide exploration fund to mitigate upstream risk for eastern Indonesia. 2011: Review the impact of Ministerial Regulation No.31/2009 and propose a new or revised regulation to promote renewable energy development further and more effectively. Draft (2011) then issue (2012) a regulation on improved framework for renewable energy development.

Improved and stable regulatory framework for renewable energy development, with appropriate

risk and benefit sharing, will contribute to development of new

geothermal projects and other renewable energy investments.

In the medium term, this will improve energy security and reduce GHG emissions from

electricity generation.

Improve policy framework to

promote energy efficiency

development and investment

Energy Efficiency

Issued Government Regulation No. 70/2009 on Energy Conservation (December 2009). MEMR developed and implemented national system of energy audits for major firms in key sectors.

Prepare a master plan for energy conservation including energy efficiency standards, energy audit program with a monitoring and evaluation framework, fiscal incentives options, and industry energy conservation.

2011: Implement the master plan of energy conservation (including energy efficiency standards, energy audit program with a monitoring and evaluation framework, fiscal incentives options, and industry energy conservation).

Improved rules and incentives will encourage industries and

manufacturers to undertake energy efficiency investments. In the medium term, GHG emissions will be reduced through enhanced

energy efficiency, focusing on energy intensive sectors

Improve incentives for

energy production and use

Energy Pricing

(Note this indicator is not exclusive, but reaffirms actions agreed under IDPL3. It is documented here to note its relevance for climate change mitigation, also.)

Finalize a road map for improving subsidy policy of electricity.

2011: Implement actions based on the road map, including regulations.

Prices will begin to reflect economic and environmental

costs. In medium term, this will provide incentives for energy

conservation and development of alternative energy sources,

contributing to GHG reductions.

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Objectives Prior Actions Recognized (CY 2009) 2010 Indicative Actions 2011-2012 Indicative Actions Expected Results

POLICY AREA 2: ADAPTATION AND DISASTER PREPAREDNESS Establish

strategic water management plans in key river basins

Water Resources Sector

Issued Presidential Regulation No. 12/2008 on Water resource councils. Established the National Water Resource Council (NWRC) has been established and met several times. Prepared integrated water resource management plans (POLA) with climate change assessment in national strategic river basins on Java.

Continue strategic assessment of the water future of Java (prepare an action plan for priority interventions incorporating climate change, urbanization, economic development and food security as integral part of River Basin Strategic Water Management Plans and framework for River Basin Master Plans). Nationally, complete 12 provincial water resource councils, 12 Coordination Teams for WRM in River Basins (TKPSDA) and 8 Integrated Water Resources Management Plans (POLA).

2011: Complete master plans for the Java River Basins which include climate change adaptation measures, by enacting ministerial decree.

Water resource management will be improved through

development of integrated plans and establishment of responsible

institutions. In medium term, contributes to ability to anticipate

and respond to water-related climate change impacts (drought and flood risks) and to resilience

at the region/river basin level.

Scale up actions to

improve climate resilience in agriculture

Agriculture Sector

. Develop an irrigation asset management information system. Implemented System for Rice Intensification (SRI) practice in target provinces. Implemented Climate Field School Program in target provinces.

Evaluate performance, then improve and scale up actions for adaptation in agriculture including climate field school, System for Rice Intensification (SRI), and to enforce land development and management without burning as part of an overall plan (based on MOA Decree No 26/2007).

2011: Continue the 2010 progress to improve and scale up actions for adaptation in agriculture including climate field school, System for Rice Intensification (SRI), and to enforce land development and management without burning.

Farmers better prepared for climate change impacts, with

better sources and channels of information. In medium term, will strengthen resilience for climate

change impacts on food production (flood, drought, pests)

at the community/farm level. Scale up actions to establish national

disaster risk reduction and management

system

Disaster Risk Management

Enacted Law No 24/2007 on Disaster Management and issued Presidential Regulation No. 8/2008, which established a National Disaster Management Agency (BNPB). In 2009, GOI finalized the National Action Plan for Disaster Risk Reduction (NAP-DRR 2010-2012) and formally launched the plan in February 2010. GOI incorporated mainstreaming of DRR in context of adaptation into medium term development plan (RPJMN, 2009)

Continue the efforts to establish Local Disaster Management Agency (BPBD) in all provinces.

2011: Implement Disaster Risk Reduction (DRR) program activities according to the National Action Plan for DRR 2012: Implement comprehensive risk financing framework combining mechanisms, including reserve (on-call) budget, stand-by financing, and weather derivatives.

Institutional framework, capacity, and resources will be improved for disaster risk reduction and management. Climate change adaptation issues (vulnerability,

preparedness) will be mainstreamed into policy,

budgeting and implementation for disaster risk reduction and

management.

Establish systems and strategies to

improve climate preparedness

and resilience in the coastal and marine sector

Marine and Fisheries Sector

In May 2009, GOI launched the National Plan of Action (NPOA) of Coral Triangle Initiative on coral reef, fisheries and food. GOI approved a roadmap of CTI actions for 2010-11 in November 2009.

Finalize plans and budgets for inception of the 5-year implementation of the Indonesian Global Ocean Observing System (INAGOOS), an ocean monitoring program that provides data about ocean and atmosphere interaction. Develop a strategy for coastal community resilience to cope with climate change, including a plan for climate resilient villages in 8 vulnerable districts on the north coast of Java, and implement a study on coastal vulnerability in relation to sea level rise in Java and Bali

2011-2012: Continue implementation of INAGOOS to provide information for marine adaptation plans. 2011-2012: Implement the strategy for coastal community resilience to cope with climate change.

Coastal and marine climate monitoring capacity will be improved.

Local community resilience will be improved and provide a model for

replication in other vulnerable areas. In the medium term, strengthening

the institutional and local capacity for resilience and improved management

in coastal areas will contribute to climate resilience

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Objectives Prior Actions Recognized (CY 2009) 2010 Indicative Actions 2011-2012 Indicative Actions Expected Results

POLICY AREA 3: CROSS SECTORAL AND INSTITUTIONAL ISSUES Strengthen knowledge

base and legal basis for

climate change action and link

these to national

budgeting and planning

processes

Mainstreaming Climate Change in the National Development Program

GOI finalized the Second National Communication to UNFCCC. Submitted mitigation actions and commitments under Copenhagen Accord (January 2010). GOI prepared and issued the “Development Planning Response to Climate Change” (2008) and updated it in March 2010. GOI finalized the “Indonesia Climate Change Sectoral Roadmap” (ICCSR) in March 2010.

Issue a presidential decree on National Action Plan for voluntary 26% GHG emission reduction.

2011: Draft provincial action plan for contributing to 26% emission reduction objective. 2012: Incorporate climate change program into regional midterm development plans (RPJMD) at Kabupaten level. 2011: Prepare Nationally Appropriate Mitigation Action (NAMA) in accordance with midterm development plan (RPJM) and ICCSR.

Strengthened knowledge base, institutional framework, and legal basis for implementation of both

mitigation and adaptation programs. This will contribute to achievement of national climate

change objectives in the medium term.

Strengthen policy

coordination and develop

financing mechanisms

for addressing climate change

Policy Coordination and Financing Scheme for Climate Change

The GOI issued the National Action Plan Addressing Climate Change (December 2007); established a National Council on Climate Change by Presidential Decree No. 46/2008 (July 2008); and launched the Indonesia Climate Change Trust Fund (October 2009).

Implement an innovative funding mechanism for climate change through the Indonesia Climate Change Trust Fund (ICCTF). Design inter-governmental fiscal transfer mechanism to provide incentives for local governments to take priority climate change actions

2011: Continue to implement and support climate change projects under the Indonesia Climate Change Trust Fund (ICCTF). 2012: Finalize Climate Change inter-governmental transfer/incentives mechanism for local government

Institutional mechanisms for coordination of climate policy

formation, budget allocation, and implementation will be improved.

The legal and institutional framework for financing for

climate change action will be improved. In the medium term,

local governments will face more positive incentives to take

appropriate climate change actions and fewer disincentives or

policy distortions.

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VI. Operational and Implementation Issues

A. Environmental Aspects and Social and Poverty Impacts

194. Operational Policy 8.60 (Development Policy Lending) mandates the Bank to determine whether policies supported by the operation are likely to cause significant effects on the country’s environment, forests and other natural resources as well as assess the poverty and social impacts. The Indonesia CC DPL supports Indonesia’s ambitions to reduce forest degradation and deforestation through the development of necessary regulations and institutional capacity to oversee implementation. It also addresses the need to promote renewable energy and support better coordination between different institutions involved in climate change planning, budgeting and implementation. The assessment of potential effects concludes that there are a few areas where environmental, social and poverty issues may arise, mainly in relation to activities on REDD and peatland and indirectly through pricing reform for geothermal electricity. A more thorough analysis of OP 8.60 requirements (based on Bank guidance) for environmental aspects can be found in Annex 7, while poverty and social impacts are in Annex 6. A.1 Environmental Aspects

195. Proposed CC DPL actions for mitigation are likely to have positive environmental impacts, for the most part. The environmental effects of policies related to adaptation and disaster preparedness and cross-sectoral and institutional issues are expected to be neutral.

196. The policy actions on forest and peat land management are designed to improve environmental outcomes and reduce emissions. Preserving forest and restoring peat lands will have environmental co-benefits beyond GHG emissions reductions, including improved water resource management, improved biodiversity, preservation of natural habitats and reduced health losses associated with smoke and haze. For peat land conservation and rehabilitation in Central Kalimantan, the approaches must be designed carefully and applied according to best practice and adapted to local and regional circumstances. To enhance outcomes and improve the underlying rule of law, the CC DPL also proposes policy actions in the area of forest governance and law enforcement to reduce illegal logging and the use of fire in land conversion. Improving the forest governance and management through a Timber Legality Verification System is essential for REDD to function and tackling deforestation. 197. The REDD framework being developed in Indonesia will ultimately have to come up with mechanisms to avoid or mitigate negative environmental effects. The process of REDD program development in Indonesia is being assisted by a growing set of investments at field and policy level by a host of bilateral development partners and multilateral agencies through the FCPF and UN REDD programs. The global and domestic NGO communities, as well as indigenous communities’ representatives, are well aware of these issues and engaged in the process at policy formulation and implementation level. These investments as well as civil society monitoring and advocacy offer the potential to improve the positive and reduce the negative aspects of REDD implementation.

198. The policy actions on energy policy and promotion of geothermal and other renewable energy sources and energy efficiency have the potential to reduce over-use of fossil fuels, reduce GHG emissions, and produce co-benefits in terms of reduced local air pollution and improved health outcomes. Investments in individual power plants will need environmental impact statements and mitigation plans. Indonesia’s laws and capacity for these kinds of reviews is increasing and the legal basis for enforcement of environmental laws was strengthened in 2009. Communities and civil society groups are well informed about the environmental review process and have opportunities to be heard in

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the existing process. Local government capacity for implementation remains weak, but can be improved and assisted for large investments, such as power plants.

A.2 Poverty and Social Impacts

199. Proposed CC DPL policy actions for mitigation are likely to have positive poverty and social impacts, for the most part. The poverty and social impacts of policies related to adaptation and disaster preparedness and cross-sectoral and institutional issues are expected to be positive or neutral. There is some potential for negative social and poverty impacts depending on how a scheme for REDD or peatland improvements is carried out and how energy price changes are implemented. Climate impacts may affect genders differently, depending on livelihoods and resource use.

200. Improved climate change policies and programs can contribute to poverty reduction efforts and a higher level of human development if they are properly crafted. Climate finance will bring new resources to Indonesia in the form of concessional finance for mitigation and adaptation investments, carbon payments and budget support. As the poor are most vulnerable to the adverse effects of a changing climate, global efforts to mitigate global warming can have positive poverty impacts in Indonesia. Domestic investment in adaptation can increase the resilience of the rural poor who are dependent on agriculture and fisheries as well as the urban poor who are harmed by the flooding and disease burden that comes with extreme weather events. Climate reforms or investments that generate REDD payments or expand electricity access or reduce flooding and drought through water management can improve living conditions for project beneficiaries. The impacts of climate-related disasters can be reduced in poor communities through enhanced capacity for risk reduction, and specific interventions can lower the vulnerability of coastal communities. Policies that can affect consumer prices need to be linked to programs that anticipate and avoid negative impacts on the poor, e.g., reduction of energy subsidies linked to financial support to the vulnerable through compensatory cash transfers and/or lifeline pricing. Interventions should be carefully designed with stakeholder involvement to ensure that the roles and needs of all affected groups, including women and marginalized communities, are addressed.

201. There is some potential for negative social and poverty impacts depending on how a scheme for REDD or improved forest governance is ultimately designed and how forest and peat land conservation are carried out. Land-use patterns and values will be affected; some will gain and others will lose financially from implementation of REDD approaches, or more rigorous environmental standards in land management. Livelihood activities in some areas may be curtailed and possibly move to other areas, creating social dynamics that may have negative consequences. There is a need for caution to ensure that the implementation of REDD schemes does not unduly restrict the livelihoods or deny the rights of indigenous peoples, or marginalized groups, including women. Any potential negative impacts of change must be evaluated against the business as usual path, which would entail continuing loss of habitat and biodiversity, illegal logging and revenue loss, and marginalization of poor and indigenous communities. For these reasons, the GOI is undertaking a number of actions and consultations through its REDD program, assisted by FCPF, UN REDD and other partners. To assist with the process of preparation and understanding of the need for good design, as well as mitigation of unfavorable social outcomes, the GOI is undertaking a Strategic Environmental and Social Assessment, as well as a consultation process with CSOs and indigenous peoples. The SESA employs analytical and participatory approaches to evaluate social, economic and institutional linkages and to integrate environmental and social consideration into REDD policies, plans and programs (see Annex 6).

202. Some energy sector policy actions, especially changes in prices (due either to higher cost of renewable energy or reduction in energy subsidies), can have a potential adverse effect on the poor. The GOI has in the past combined the reduction of subsidies with a targeted cash transfer program to protect the poor from price changes for a transition period. In fact, the experience on targeting and

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evaluating cash transfers has improved over time and the GOI has demonstrated the capacity to lessen the adverse impacts on the poor, for example through the unconditional cash transfer program, at a time when the GOI decided to undertake a major increase in kerosene prices in 2005. Under the program each beneficiary family received an equivalent of US$ 10 in 4 installments over the course of a year. For the poor recipients, the cash transfer more than compensated the losses incurred due to the fuel price increase. More efficient energy use and pricing will make Indonesia’s economy more efficient and potentially free up resources that can be directed toward job creation and poverty alleviation. In addition, Bank analysis shows that the overwhelming benefit of fuel subsidies is captured by higher-income groups, while the major benefit of cash transfers is enjoyed by the poor through specific targeting approaches. These have in the past been monitored and evaluated with Bank assistance.14

B. Implementation, Monitoring and Evaluation

B.1 Monitoring 203. Monitoring the implementation and attainment of the DPL prior actions is done through several mechanisms. These include GOI established Steering Committee and Technical Committee, responsible for ensuring progress on agreed policy actions, as well as follow-up. In addition regular joint meetings among GOI counterparts and development partners will be held to discuss interim progress in achieving agreed milestones in the reform agenda and future triggers for the DPL series. 204. The CC DPL operation will follow similar governance and monitoring structures, as have been established under the existing program loan series. The coordination structure of the CCPL is outlined in the figure below. The National Development Planning Agency (BAPPENAS) closely coordinates and monitors the implementation of policy actions taken by the responsible institutions. The Steering Committee members are echelon 1 officials (director general or deputy level) of Line Ministries. The Steering Committee gives policy direction, provides overall coordination of implementation; and coordinates with development partners on confirmation of policy matrix implementation. The Technical Committee members are echelon 2 (director level) of Line Ministries; the Technical Committee meets

more regularly and monitors schedules and workplans, and reports to and provides recommendations to the Steering Committee. Following this coordination structure, progress on policy actions is reviewed and monitored on a quarterly basis with BAPPENAS and the responsible GOI institutions, together with partners. Under CCPL, the results of the review and monitoring of progress on policy actions is the basis to determine whether to move on to the next annual operation in the series. Figure 13: Coordination Structure of CCPL

B.2 Evaluation 205. The Bank recognizes the importance of a solid program of policy actions linked to a results framework for evaluation of performance. Annex 3B contains the monitoring and evaluation framework, with outcome indicators to be assessed at the end of the DPL series. The Bank will work

14 The Bank is supporting Indonesia’s crisis monitoring and response system and the Family Support Program, which targets the poorest households with pregnant women and young children with conditional cash transfers.

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closely with BAPPENAS and the other agencies and development partners gathered in the steering committee of the pre-existing program loans to monitor and assess reform progress and impacts during the life of the program. Monitoring and evaluation will be supported by budgetary, legislative and economic data provided by the authorities and verified in official disclosures and regulations. Information will be tracked according to the Monitoring and Results Framework in Annex 3B. Where baseline surveys are needed, the Bank will work with partners to mobilize the necessary resources.

C. Fiduciary Aspects, Disbursement and Auditing 206. The borrower is the Republic of Indonesia and this operation is a single-tranche IBRD loan of US$ 200 million. The loan would be made available upon loan effectiveness, as all policy actions supported by the loan would have been completed prior to Board presentation. The government has confirmed that Indonesia would borrow this amount as a Variable Spread Loan (VSL) in US dollar currency with an annuity repayment schedule linked to commitments. Future operations in the series are expected to be of similar amount. 207. The loan disbursement will follow the standard Bank procedures for Development Policy Lending. The loan amount will be disbursed into a foreign currency account of the borrower at Bank Indonesia that forms part of Indonesia’s official foreign exchange reserves. The equivalent rupiah amount will immediately be transferred to the General Operational Treasury (SBUN) account of the borrower that is used to finance budget expenditures, as the loan is intended to support the general government budget. The borrower will provide to the Bank a written confirmation that this transfer has been completed, and provide to the Bank any other relevant information relating to these matters that the Bank may reasonably request. Disbursements of the loan will not be linked to any specific purchases and no procurement requirements have to be satisfied, except that the borrower is required to comply with the standard negative list of excluded items that may not be financed with Bank loan proceeds.

208. PFM Environment. Indonesia has established a sound legal and administrative framework for modern PFM. Changes in the legal and regulatory architecture are now largely complete and the momentum has shifted to implementation of new PFM practices. Known weaknesses in financial management and accountability continue to be gradually addressed through the PFM reform program. Development partners are actively engaged. Key elements of the reforms are supported by the economic DPL triggers, as well as the GFMRAP project and initiatives supported by development partners. However, much remains to be done, and it will take time to realize the full impact of these reforms.

209. In the meantime, some fiduciary risks will arise for this operation. Although the pace of implementing the planned reforms has been somewhat slow over the past year, the trajectory of reform is in the right direction and the current government continues to demonstrate a commitment to continue the task of completing the planned reforms in PFM.15 Taking these into consideration, the Bank assessment team assesses the fiduciary risk as moderate and does not propose putting in place any additional fiduciary arrangements for this operation.

210. Management of Foreign Exchange. The foreign exchange control environment is assessed to be generally satisfactory. The country is no longer subject to the Extended Arrangement from the IMF. Bank Indonesia (BI) was last subject to the transitional procedures under the Fund’s safeguards assessment policy in 2002. That assessment recommended remedial action to address a number of vulnerabilities in the audit arrangements of BI. The main recommendations have been implemented,

15 For more a more complete discussion of these issues, the DPL 6 Program Document captures the full spectrum of PFM issues - background, reform priorities and key areas for future attention

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including the establishment of an independent audit committee at BI and the publication of BI’s audited financial statements. Audited financial statements for BI for 2008 have been reviewed and we note that the audit report issued by the BPK contained an unqualified opinion.

D. Risks and Risk Mitigation 211. Coordination of GOI's climate change national action plans. While coordination across sectors remains a challenge, Indonesia has improved the clarity of its national climate change action plan. These improvements owe much to the Government’s response to the President’s pledges to reduce emissions. The DPL operation directly harmonizes partner support while focusing analysis, policy advice and monitoring to the steering committee where all institutions are represented, with the expectation that this high level body will provide a forum for cooperation beyond the DPL. 212. Commitment to policy reform actions over the medium term. Government commitment to reform is considered to pose low risk, given Indonesia’s high profile international commitments, and the integration of Climate Change into the Medium Term Development Plan (RPJM). 213. Operation size and visibility. With other partners’ parallel financing, climate change program/policy loans represent substantial lending levels. The Bank has focused its efforts on choosing streams of policy actions designed to lead to substantial progress on this critical agenda. 214. Fiduciary and governance risks. Corruption and governance weaknesses remain impediments to development. The economic DPL series with a key strand focusing on public financial management provides an umbrella for Bank engagements designed to reduce fiduciary risks. 215. Reputational risk. The CC DPL touches a number of “hot button” issues such as deforestation, land management, and energy pricing that draw the attention and criticism of stakeholders. These issues have been discussed with NGOs and other stakeholders through Bank and GOI consultations at various fora. Additional outreach will be undertaken by the GOI and its partners in programmatic lending to explain the nature, contents and benefits of the operation. 216. Forest management is a long term challenge; there is risk that progress will be slow. The risk that business-as-usual will continue is partly mitigated by the potential for access to a system of payments for preserving forest carbon stocks. However REDD itself has risks that cannot be mitigated at the project level as international agreement on a GHG control framework may not arise. 217. Energy pricing remains a difficult political challenge and the risk is that progress will be intermittent. The GOI recognizes the importance of progress on this agenda, as the resources from previous subsidy reductions have been important to financing key social programs. More recently the G20 commitment is an important marker, but energy price reform remains a critical political issue. 218. Poverty and social impacts. There is the possibility that low income groups will not benefit from climate finance distribution mechanisms such as REDD. This can be mitigated through a combination of good design and transparency. Similarly, the impact of an increase in energy prices on the poor can be reduced by introducing a compensatory cash transfer program; Indonesia used this approach during recent energy price adjustments. Disclosing and consulting on policies and plans is another measure to allow for public scrutiny and feedback. 219. Macroeconomic and systemic risks. The robustness of Indonesia’s macroeconomic framework is far more certain than during recent operations in the period of financial crisis. The economy’s

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performance through the crisis has been remarkably solid; growth slowed briefly and moderately. Fears of significant balance of payments pressures have proved to be largely unfounded. The banking sector’s health, overall, remains strong. The ongoing soundness of Indonesia's public finances has been recognized by ratings agencies as they incrementally upgrade their assessment of the quality of the government’s debt. However, the scale and speed of recent foreign capital inflows, combined with the openness of Indonesia’s capital account, present an ongoing risk that financial asset prices may be change sharply for reasons that may only be tenuously linked to local macroeconomic fundamentals. We note, however, that the real impact of extreme changes in prices over 2008-09 was mild – indeed, Indonesia’s floating exchange rate helped insulate domestic producers and consumers from the global downturn in 2009. The country’s greater and still-accumulating foreign exchange reserves (above US$ 70 billion by April 2010) provide an additional protective buffer against the exchange rate volatility associated with an outflow of short-term capital.

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ANNEXES Annex 1: Letter of Development Policy (draft attached separately) Annex 2: Government Policy/Overall Development Program Annex 3: (3A) The WB CC DPL Matrix ;

(3B) The CC DPL M & E matrix; (3C) The CCPL GOI-JICA-AFD Matrix

Annex 4: Review of Past Climate Change Program Loans Annex 5: Indonesia – IMF Assessment Letter To be provided before Board Submission Annex 6: Poverty and Social Assessment Annex 7: Environmental Assessment Annex 8: Overview of World Bank Engagements and Instruments

Annex 9: Indonesia at a Glance

Annex 10: Map of Indonesia

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Annex 1: Letter of Development Policy

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Annex 2: Government Policy/Overall Development Program

Part 1: The First 100 Day Program

In the first week of November 2009, the new government has finalized the First 100 Day Action Programs for the Kabinet Indonesia Bersatu II. Out of the 45 program items, 15 was declared by President SBY as Select Program (Program Pilihan) and made it the obligation for this new Cabinet to deliver within the first 100 days. The First 100 Day Program is linked to the first year program of the new government and to the medium term (5 years) development plan. It is important to note that program to deal with climate change and environmental degradation, as well as program to increase awareness and preparedness to response to natural disasters are part of the 15 Select Programs. The fifteen Select Programs can be summarized as follows:

1. Eradication of legal mafia: Within the first 100 day GOI is determined to eradicate all kind of corruption-based practices in Indonesia’s judiciary system. These include (a) bribing; (b) extortion; (c) the trading of court cases involving prosecutors, judges, defense lawyers, and court administration system; (d) threatening witnesses; (e) imposing unlawful charges. The President’s office invited people to submit and report cases related to the above issues.

2. Revitalization of defense industry: Within the first 100 days, GOI will develop roadmaps and master plan to revitalize this industry, especially to fulfill domestic needs as well as to support on-going foreign contracts.

3. Dealing with terrorism: Within the first 100 days, GOI will come up with the plan to increase capacity, restructure and develop programs of works of the institutions responsible for handling terrorism. Indonesia will be entering a new stage in dealing with terrorism, i.e. prevention of and countering terrorism. For this, GOI will complement the standard military approaches (intelligence and military operations) with more inclusive approach involving community leaders to build awareness through community educations and activities to prevent and counter terrorism.

4. Increasing supply of electricity: Within the first 100 days, GOI will make sure that for the next five years electricity supply will meet the needs of industry and commercial sector, households, transportations, etc. GOI will conduct provincial level assessment of the supply gaps, and develop alternative sources of energy other than coal to meet projection of demand the next 5 years.

5. Increasing food production and security: Within the first 100 days, GOI will re-formulate the master plan and stages until 2014 for increasing food production and security.

6. Revitalization of sugar and fertilizer mills: Within the first 100 days, in line with the need to increase food production and security, GOI will come up with blue print and programs to increase capacity of the sugar and fertilizer industries.

7. Resolving complexities in land use and spatial plans: Within the first 100 days, GOI will formulate mechanism to resolve (a) the land use conflicts; (b) spatial plan violations; (c) conflicting laws and regulations regarding land use and spatial plans so that within the next five years more lands can be used productively.

8. Infrastructure development: Within the first 100 days, GOI will come up with the blue print and financing plan to develop infrastructure involving regional government and private sector for the next five years. Many infrastructure projects in the future will be developed using public-private partnership approach.

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9. Developing entrepreneurship in SME (small and medium enterprises) by providing more KUR (Kredit Usaha Rakyat/micro credit): Starting 2010, GOI will make Rp. 2 Trillion available for KUR and developing entrepreneurship through BLK (Balai Latihan Kerja/Work Training Centers).

10. Mobilization of financing sources outside central and regional governments’ budgets: Within the first 100 days, GOI will come up with the plan to mobilize financial resources from outside the governments (central and regional) budgetary systems to support various development programs and projects. The effort will include cooperation with banks and non-banks financial institutions.

11. Managing climate change and environment: Within the first 100 days, GOI will ensure that Indonesia has the Action Plan for the next 5 years, 2020 Action Plan, Energy mix 2020, and 2050 Action Plan. Indonesia will ensure that forest management will be conducted properly and eradication of illegal logging and forest fires will be intensified.

12. Health sector reform: Within the first 100 days, GOI will come with a comprehensive plan to change people’s paradigm from ‘free health care’ to ‘healthy life is beautiful and free’. For this GOI will change the functions, roles and tasks of health institutions in the regions like Puskesmas (Community Health Center) and Posyandu (Integrated Service Points). Immunizations, Family Planning, and eradication of infectious diseases will be intensified.

13. Education sector reform: Within the first 100 days, GOI will issue a plan to create more systematic links and prevent mismatch between the quality of human resources produced by education institutions and training centers with the needs of labor market. Policy, mechanism and action plan will be issued involving a three partite program among the government – labor markets – educational institutions.

14. Increasing preparedness to deal with natural disasters: Within the first 100 days, GOI will have established two standby forces – one in Halim Perdana Kusuma military air base in Jakarta, and one in Abdul Rahman air base in Surabaya (?) -- ready for deployment to disaster locations anywhere in Indonesia.

15. Increasing synergy between the central and regional governments: Within the first 100 days, will have increased coordination between the central and regional governments in all aspects to increase synergy in development efforts. GOI will issue a plan to synchronize policy and regulations between central and regional governments.

Part 2: Medium-Term Development Program (RPJM) 2010-2014

The second series of Medium Term Development Plan 2010-2014 (RPJM) is the elaboration of Presidential Vision, Mission and Programs which includes: (1) the strategy of national development; (2) general policy directives; (3) programs of ministries/state agencies and inter ministries/agencies, regional government and inter-regional government; and (4) macro economic framework.

The 2009-2014 RPJM documents consist of three books with the following themes: Book I contains the strategy, general policy and macro economic framework which reflects the vision “Realizing Prosperous, Democratic and Just Indonesia”; Book II contains sectoral development plans with the theme “Strengthening Synergy Across Development Sectors”; and Book III contains regional development plans with the theme “Strengthening Synergies between Center and the Regions and Inter-region”.

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RPJM also reveals the GOI priorities over the next five years period which can be summarize as follows:

Priority 1: Bureaucracy and Governance Reforms which includes strengthening the governance reform through increased productivity, integrity and transparency, improving public services; and increasing personnel capacity; and improving the population record system.

Priority 2: Education Sector Action Program which includes increasing access to education, development of education system to support economic growth to increase the supply of entrepreneurs and skilled labor force.

Priority 3: Health Sector Action Program with emphasis on development of health care system through preventive measures through expansion of clean water provision system, eradication of slum areas with the objective to increase life expectancy from 70.7 to 72.0 years, and the achievement of overall MDG targets in 2015.

Priority 4: Poverty eradication with the target of reducing absolute poverty level from 14.1 in 2009 to 8-10% in 2014, through improvement in income distribution, family-based social protection, community empowerment, and expansion of economic opportunity to low income communities.

Priority 5: Food Sector Action Program which include increasing food security, continuation of agriculture revitalization for food self-sufficiency, increasing competitiveness of agricultural products, increasing farmer’s income, and sustainability of environment and natural resources.

Priority 6: Infrastructure Action Program to increase infrastructure in support of economic growth in a fair/just manner, prioritizing wider community interests by encouraging participation.

Priority 7: Improving Investment and Business Climate by increasing legal security, procedural simplification, information system improvement, and development of Special Economic Zone (KEK/Kawasan Ekonomi Khusus).

Priority 8: Energy Action Program to achieve national energy security to ensure economic growth by institutional restructuring and optimization of alternative energy

Priority 9: Environment and Disaster Management Action Program to promote conservation and utilization of environment to support sustainable growth of the economy and welfare with proper risk management to anticipate climate change.

Priority 10: Development of the Lesser, the Fore-front, the Outer-most, and the Post-conflict regions to ensure growth and to sustain peace.

Priority 11: Development of Culture, Creativity, and Technological Innovation to develop and protect the plurality of culture, arts and science with the appreciation, and to develop innovation, knowledge and technology based on Indonesia’s comparative advantage as maritime and island-based country.

Priority 12 (under Coordinating Minister of Social Welfare): Society Welfare Development which includes provision of better service for annual Haj Pilgrimage, increased harmony in inter-faith affairs, promotion of tourism, formulation of policy to mainstreaming gender issues into various ministries’ policies and better protection of women and children, Increased performance of national sports delegations in Asian Games and 2012 Olympics, and Revitalization of youth and scout movements.

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Priority 13 (under Coordinating Minister of Economic Affairs): Economic Development which includes implementation of Presidential Regulation no. 28/20018 on National Industry Development, increasing trade diplomacy, increasing service and protection for Indonesia’s labor force abroad.

Priority 14 (under Coordinating Minister of Politic, Law and Security): Politic, Law and Security Development which includes increasing coordination for handling terrorism, implementation of de-radicalization to counter terrorism, increasing Indonesia’s role in helping support the world peace, strengthening and establishing communication among corruption prevention institutions, increasing state assets recovery, increasing legal security, increasing protection of human right, and empowering strategic defense industry.

Indonesia National Action Plan (NAP) to Combat Climate Change, Jakarta, December 2007

Introduction. As a country that is vulnerable to their impacts, it is important for Indonesia to mitigate global warming and climate change. Indonesia would therefore reduce greenhouse gas emissions from the energy sector, and from land use, land-use change and forestry, while also increasing carbon sequestration. Indonesia is ready to work together bilaterally or multilaterally with other countries to tackle climate change. Efforts to control climate change cannot be separated from economic development and poverty alleviation. People that have met their economic needs will be better placed to protect the environment. Because of this a strategy that focuses on economic growth (pro-growth), poverty alleviation (pro-poor), and employment opportunities (pro-job), combined with environmental protection (pro-environment) creates the basis for sustainable development. The NAP remains the long term framework for GOI climate change action; it will be revised and updated in 2010.

Overview. Although Indonesia does not have any obligation to reduce its greenhouse gas emissions, it does have an interest in playing an active role in global efforts to tackle climate change. The NAP is a dynamic instrument that must be examined periodically and revised and improved in its effectiveness accordingly. Public policy instruments to guide sustainable development along with NAP, including the supporting economic and fiscal instruments, should be accompanied with the means to integrate the implementation of the social-ecological targets of the NAP, in order to continuously monitor and measure the changes. Under mitigation, the NAP identifies energy and land use change and forestry as key priorities. In the energy sector, three main priorities are diversification toward renewable energy sources, energy conservation, and implementation of cleaner energy technologies. Under adaptation, the NAP identifies water resource, agriculture, coastal, marine and fisheries; infrastructure, health and forestry and biodiversity as key issues. The NAP also focuses strongly on the need for institutional capacity improvement and the need for harmonization and revision of the regulatory policy framework for sustainable development management. The NAP outlines existing climate change response actions, including ratification of international agreements, creation of domestic institutions, passage of laws and regulations in the energy, minerals, and forestry sectors, and implementing programs to improve energy use, address forest and land fires, combat illegal deforestation, improve management of peat land, address flooding issues and conduct integrated coastal zone management.

Mitigation. The NAP outlines specific areas where Indonesia will seek international cooperation and funding in support of domestic climate change mitigation efforts.

• LULUCF sector (technology to control forest fire, technology for sustainable use of peat land, integrated tree planting programs).

• Power plant (clean coal technology, new renewable energy, solar energy, wind energy, wave energy and carbon capture and storage-CCS);

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• Energy intensive industrial sector (cement, pulp and paper, ceramic, fertilizer, cooking oil, sugar, textile and iron and steel);

• Environmental management and environmental audit for industrial processes and industrial equipment (replacement of chiller, boiler and furnace);

• Agro-industry sector (tapioca and coconut palm process);

• Waste utilization sector (agriculture, husbandry and urban waste);

• Transportation sector (fuel switching, low emission vehicle technology and energy saving transport technology);

• Oil and gas sector (carbon capture and storage – CCS - and gas flaring);

Adaptation. The NAP also identifies key areas where Indonesia seeks support, including climate information forecasting) to manage risk; agricultural intensification and irrigation technologies; water resources management improvements for early warning, drought management, and water use efficiency; energy and water saving technologies in the industry sector; and health sector improvements to prevent disease, identify impacts, and utilize natural medicinal plants.

Capacity Building. To increase adaptation skills/capacity and to preserve local knowledge, Indonesia seeks support in monitoring and forecasting, fiscal and financial policies and instruments, and screening of technologies.

Finance. Indonesia’s approach to strategic climate financing includes using domestic public finance through new mechanisms and fiscal instruments; developing approaches for technology transfer from developed countries; and increasing international support for Indonesia’s development priorities.

The Indonesia Climate Change Sectoral Roadmap (ICCSR), December 2009 The Indonesia Climate Change Sectoral Roadmap (ICCSR) is meant to provide inputs for the 5 year Medium-term Development Plan (RPJM) 2010-2014, and also for the longer term plan to 2030. The ICCSR documents the GOI’s long-term commitment to emission reduction and adaptation measures. The roadmap places particular emphasis on the challenges emerging in the forestry, energy, industry, agriculture, transportation, coastal area, water, waste and health sectors. The roadmap includes ongoing, innovative, and future climate mitigation and adaptation programs and actions to be integrated into the national development plan. BAPPENAS’ policy is to address these challenges and opportunities through effective development planning and coordination of the work of all line ministries, departments and agencies of the GOI. ICCSR is a dynamic document and it will be improved based on the needs and challenges to cope with climate change in the future. The Roadmap sets up three sets of activities in each development sector: (1) Data, Information and Knowledge Management (2) Planning and Policy, Regulation and Institutional Development, and (3) Plans and Programs Implementation and Control with Monitoring and Evaluation. Overall, the objectives of ICCSR are gradually (1) to improve climate related decision/policy making process and development planning; (2) to develop capacity of national ministries and agencies to deal with climate change; (3) to optimize national development plan under the mitigation commitment and the needed adaptation actions; (4) to significantly reduce the risks of climate change impacts in all sectors, and (5) to move the GHG contributing sectors into low-carbon development pathway. On mitigation, the GOI has endorsed a commitment to reduce GHG emission by 26% by 2020, from a business as usual path. Forestry, peatland management, industry, energy, transportation and waste sectors are the primary sectors that are expected to deliver this commitment. Reducing deforestation and shifting in the country

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energy mix will be the main features of the new plan. On adaptation, priority is given to: water, marine and fisheries, agriculture, and health. These are areas in which Indonesia will be most affected and response/ adaptation needs to be prioritized. Dealing with expected water shortages, shifting in agricultural lands and seasons, re-settlement induced by land inundation and increased natural disasters will be the main challenges on adaptation. The GOI recognizes three cross-cutting challenges when formulating the ICCSR: (1) Food security issue, as it is predicted that agricultural productivity in Indonesia will decrease 15 – 20% by 2080 as a result of global warming; (2) Degradation of natural and built environmental degradation related to forest fires, floods, urban environment; and (3) synchronizing spatial planning and forest land use vis-à-vis the need for mining, agriculture and energy sector developments. GOI also recognized two major obstacles throughout the ICCSR development process: imbalances in scientific information about climate change and less than effective inter-sector coordination.

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Annex 3A:The WB CC DPL Matrix of Policy Actions

The focal areas and future directions to be supported by this CC DPL result from Bank and GOI analytical work and consultation processes led by GOI. Indonesia’s climate change agenda and action plan stems from analysis and public consultations that contributed to Indonesia’s National Action Plan for Climate Change, the National Development Planning Response to Climate Change, the Second National Communication to the UNFCCC and the Indonesia’s Climate Change Sectoral Roadmap. In addition, the Bank’s CEA: Investing in a More Sustainable Indonesia and Low Carbon Development Options study, as well as sectoral studies in forestry and energy, all provided technical input that informed the process of identifying key policy areas included in the matrix. The specific policy actions in the matrix result from an intensive process of dialogue among GOI agencies, the Bank and development partners. The Technical Committee and Steering Committee process helped to ensure that CC DPL policy actions reflect demonstrated commitments from responsible agencies. Through the SC process, the GOI and partners have been able to refine a focused set of policy targets that are linked to GOI strategic plans, but also grounded in the reality of annual budget constraints. The results can be seen in the more streamlined set of policy areas and indicative actions. Trigger actions are in bold face.

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Indonesia Climate Change Development Policy Loan Matrix of Prior Actions, Future Indicative Actions and Anticipated Results

Objectives Prior Actions Recognized 2010 Indicative Actions 2011-2012 Indicative Actions Expected Results

POLICY AREA 1: MITIGATION NOTE: Triggers presented in bold type

Land Use Change and Forestry Sector Mitigation

Improve policy coordination and management of

peat land

Peatland Conservation

Issued and began implementation of a master plan on peat land rehabilitation in Central Kalimantan (MOFR Ministerial Regulation No. 55 / 2008).

Coordinate among ministries to control peatland emissions, implemented under the framework of presidential regulation. Implement key steps in multi-sector policy dialogue toward establishing a legal framework for the National Strategy for lowlands with the focus on balancing development and conservation, considering peatlands as a major source of GHG emissions.

2011: Issue a presidential regulation which includes special measures for peatland conservation and peatland water management to minimize carbon emissions. 2012: Implement actions, based on presidential regulation to improve management of peat lands.

The institutional and legal framework to conserve and

restore peatland is improved, thus reducing conflicting policies and improving

coordination. In medium the term, this will help to reduce a

major source of GHG emissions.

Improve regulatory

framework for REDD

implementation and develop

demonstration activities

Reduced Emissions from Deforestation and Degradation (REDD) Launched National Readiness Program for REDD (September 2009) and established legal framework through MOFR Ministerial Regulations No 68/2008 on Demonstration Activities, No. 30/2009 on REDD Procedures, and No. 36/2009 on Commercial Forest Carbon Projects. Completed Participation Agreement with Forest Carbon Partnership Facility (FCPF) in November 2009 initiated a REDD program with UN REDD Support in October 2009.

Complete the Ministerial Decree on Mechanism and Procedures of REDD by defining roles and responsibilities of government agencies, local communities, and the private sector in managing carbon assets. Conduct/implement REDD demonstration activities (at least 3), specify results in specific locations and partners.

2011: Establish a national registry of REDD to track implementation of REDD activities and payments in a national carbon registry. 2012: Assess and develop framework for forest fiscal management, including incentives for regional stakeholders

Rules for REDD activities will be clarified, allowing greater development and investment in demonstration activities, with equitable sharing of

benefits. In the medium term, this will contribute to reducing emissions from deforestation

and forest degradation.

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Objectives Prior Actions Recognized (CY 2009) 2010 Indicative Actions 2011-2012 Indicative Actions Expected Results

Energy Sector Mitigation

Improve policy framework to

promote renewable

energy development

and investment

Renewable Energy Development Issued Presidential Decree No. 4 / 2010 which assigns to PLN the acceleration of power plant development using renewable energy, coal, and gas and mandates PLN to develop and purchase power from renewable energy resources (January 2010).

Issued MEMR Ministerial Regulation No. 32/ 2009 on Purchase Standard Price of Electricity Power by PT PLN from Geothermal Electricity Power Station (December 2009).

Issued MEMR Ministerial Regulation No31/2009 on the purchase price of electricity from renewable energy (Nov 2009) and MOF Ministerial Regulation No. 24/2010 on tax incentives for renewable energy development January 2010.

Improve policy framework for promoting geothermal development to facilitate arrangements/deals between developer and off-taker. Issue draft regulation to clarify the scheme of compensation for the incremental cost of geothermal electricity to off-taker.

2011: Continue to improve policy framework to promote geothermal development and to provide exploration fund to mitigate upstream risk for eastern Indonesia. 2011: Review the impact of Ministerial Regulation No.31/2009 and propose a new or revised regulation to promote renewable energy development further and more effectively. Draft (2011) then issue (2012) a regulation on improved framework for renewable energy development.

Improved and stable regulatory framework for

renewable energy development, with appropriate

risk and benefit sharing, will contribute to development of new geothermal projects and

other renewable energy investments. In the medium term, this will improve energy

security and reduce GHG emissions from electricity

generation.

Improve basis for timber legality,

strengthen institutions, and

improve incentives for

regional governments to address forest

loss and degradation

Forest Management and Governance

Issued MOFR Ministerial Regulation No. 38/2009 on Timber Legality Verification System (System Verifikasi Legalitas Kayu, SVLK) to establish a national timber legality standard and a system for verification and monitoring to assist in reducing illegal logging and forest loss and degradation.

Implement and monitor performance of GOI regulation on timber legality. Assess capacity for oversight, certification and monitoring in national standards agency. Design inter-governmental transfer mechanism to finance and improve the incentives for local governments to strengthen forest management activities toward emissions reductions.

2011: Strengthen implementation of regulatory framework to enhance on-going implementation of GOI regulation on timber legality by monitoring and evaluation. 2011: Formalize inter-governmental transfer mechanism for local government forest management activities. 2012: Evaluate and improve nter-govt transfer mechanism to finance local government forest activities.

Forest governance and management are improved through clearer institutional means to address timber

legality and improved incentives for local

governments. In the medium term, this will help to reduce the deforestation rate and improves the potential for

REDD success.

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Improve policy framework to

promote energy efficiency

development and investment

Energy Efficiency

Issued Government Regulation No. 70/2009 on Energy Conservation (December 2009). MEMR developed and implemented national system of energy audits for major firms in key sectors.

Prepare a master plan for energy conservation including energy efficiency standards, energy audit program with a monitoring and evaluation framework, fiscal incentives options, and industry energy conservation.

2011: Implement the master plan of energy conservation (including energy efficiency standards, energy audit program with a monitoring and evaluation framework, fiscal incentives options, and industry energy conservation).

Improved rules and incentives will encourage industries and manufacturers to undertake

energy efficiency investments. In the medium term, GHG emissions will be reduced through enhanced energy

efficiency, focusing on energy intensive sectors

Improve

incentives for energy

production and use

Energy Pricing

(Note this indicator is not exclusive, but reaffirms actions agreed under IDPL3. It is documented here to note its relevance for climate change mitigation, also.)

Finalize a road map for improving subsidy policy of electricity.

2011: Implement actions based on the road map, including regulations.

Prices will begin to reflect economic and environmental costs. In medium term, this will provide incentives for energy conservation and

development of alternative energy sources, contributing to

GHG reductions.

Objectives Prior Actions Recognized (CY 2009) 2010 Indicative Actions 2011-2012 Indicative Actions Expected Results

POLICY AREA 2: ADAPTATION AND DISASTER PREPAREDNESS

Establish strategic water management

plans in key river basins

Water Resources Sector

Issued Presidential Regulation No. 12/2008 on Water resource councils. Established the National Water Resource Council (NWRC) has been established and met several times. Prepared integrated water resource management plans (POLA) with climate change assessment in national strategic river basins on Java.

Continue strategic assessment of the water future of Java (prepare an action plan for priority interventions incorporating climate change, urbanization, economic development and food security as integral part of River Basin Strategic Water Management Plans and framework for River Basin Master Plans). Nationally, complete 12 provincial water resource councils, 12 Coordination Teams for WRM in River Basins (TKPSDA) and 8 Integrated Water Resources Management Plans (POLA).

2011: Complete master plans for the Java River Basins which include climate change adaptation measures, by enacting ministerial decree.

Water resource management will be improved through

development of integrated plans and establishment of responsible institutions. In

medium term, contributes to ability to anticipate and

respond to water-related climate change impacts

(drought and flood risks) and to resilience at the region/river

basin level.

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Scale up actions

to improve climate

resilience in agriculture

Agriculture Sector

. Develop an irrigation asset management information system. Implemented System for Rice Intensification (SRI) practice in target provinces. Implemented Climate Field School Program in target provinces.

Evaluate performance, then improve and scale up actions for adaptation in agriculture including climate field school, System for Rice Intensification (SRI), and to enforce land development and management without burning as part of an overall plan (based on MOA Decree No 26/2007).

2011: Continue the 2010 progress to improve and scale up actions for adaptation in agriculture including climate field school, System for Rice Intensification (SRI), and to enforce land development and management without burning.

Farmers better prepared for climate change impacts, with better sources and channels of information. In medium

term, will strengthen resilience for climate change impacts on

food production (flood, drought, pests) at the community/farm level.

Scale up actions to establish

national disaster risk reduction

and management

system

Disaster Risk Management

Enacted Law No 24/2007 on Disaster Management and issued Presidential Regulation No. 8/2008, which established a National Disaster Management Agency (BNPB). In 2009, GOI finalized the National Action Plan for Disaster Risk Reduction (NAP-DRR 2010-2012) and formally launched the plan in February 2010. GOI incorporated mainstreaming of DRR in context of adaptation into medium term development plan (RPJMN, 2009)

Continue the efforts to establish Local Disaster Management Agency (BPBD) in all provinces.

2011: Implement Disaster Risk Reduction (DRR) program activities according to the National Action Plan for DRR 2012: Implement comprehensive risk financing framework combining mechanisms, including reserve (on-call) budget, stand-by financing, and weather derivatives.

Institutional framework, capacity, and resources will be

improved for disaster risk reduction and management. Climate change adaptation

issues (vulnerability, preparedness) will be

mainstreamed into policy, budgeting and implementation for disaster risk reduction and

management.

Establish systems and strategies to

improve climate preparedness

and resilience in the coastal and marine sector

Marine and Fisheries Sector

In May 2009, GOI launched the National Plan of Action (NPOA) of Coral Triangle Initiative on coral reef, fisheries and food. GOI approved a roadmap of CTI actions for 2010-11 in November 2009.

Finalize plans and budgets for inception of the 5-year implementation of the Indonesian Global Ocean Observing System (INAGOOS), an ocean monitoring program that provides data about ocean and atmosphere interaction. Develop a strategy for coastal community resilience to cope with climate change, including a plan for climate resilient villages in 8 vulnerable districts on the north coast of Java, and implement a study on coastal vulnerability in relation to sea level rise in Java and Bali

2011-2012: Continue implementation of INAGOOS to provide information for marine adaptation plans. 2011-2012: Implement the strategy for coastal community resilience to cope with climate change.

Coastal and marine climate monitoring capacity will be

improved. Local community resilience will be improved and provide a model for replication in other vulnerable areas. In

the medium term, strengthening the institutional

and local capacity for resilience and improved

management in coastal areas will contribute to climate

resilience

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Objectives Prior Actions Recognized (CY 2009) 2010 Indicative Actions 2011-2012 Indicative Actions Expected Results

POLICY AREA 3: CROSS SECTORAL AND INSTITUTIONAL ISSUES Strengthen knowledge base and

legal basis for climate

change action and link these

to national budgeting

and planning processes

Mainstreaming Climate Change in the National Development Program

GOI finalized the Second National Communication to UNFCCC. Submitted mitigation actions and commitments under Copenhagen Accord (January 2010). GOI prepared and issued the “Development Planning Response to Climate Change” (2008) and updated it in March 2010. GOI finalized the “Indonesia Climate Change Sectoral Roadmap” (ICCSR) in March 2010.

Issue a presidential decree on National Action Plan for voluntary 26% GHG emission reduction.

2011: Draft provincial action plan for contributing to 26% emission reduction objective. 2012: Incorporate climate change program into regional midterm development plans (RPJMD) at Kabupaten level. 2011: Prepare Nationally Appropriate Mitigation Action (NAMA) in accordance with midterm development plan (RPJM) and ICCSR.

Strengthened knowledge base, institutional framework,

and legal basis for implementation of both

mitigation and adaptation programs. This will contribute

to achievement of national climate change objectives in

the medium term.

Strengthen policy

coordination and develop

financing mechanisms

for addressing

climate change

Policy Coordination and Financing Scheme for Climate Change

The GOI issued the National Action Plan Addressing Climate Change (December 2007); established a National Council on Climate Change by Presidential Decree No. 46/2008 (July 2008); and launched the Indonesia Climate Change Trust Fund (October 2009).

Implement an innovative funding mechanism for climate change through the Indonesia Climate Change Trust Fund (ICCTF). Design inter-governmental fiscal transfer mechanism to provide incentives for local governments to take priority climate change actions

2011: Continue to implement and support climate change projects under the Indonesia Climate Change Trust Fund (ICCTF). 2012: Finalize Climate Change inter-governmental transfer/incentives mechanism for local government

Institutional mechanisms for coordination of climate policy formation, budget allocation, and implementation will be improved. The legal and institutional framework for

financing for climate change action will be improved. In the

medium term, local governments will face more positive incentives to take

appropriate climate change actions and fewer

disincentives or policy distortions.

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Annex 3B: The CC DPL Results Framework (Monitoring and Evaluation) Matrix

The Monitoring and Evaluation matrix on the following pages links the policy areas to tangible results. The matrix lists the measurable results, indicators, baselines and targets for each policy area, aiming for evaluation of success in 2012 after 3 more CC DPL operations. These will continue to be sharpened and strengthened in future operations and in consultation with the Government.

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Annex 3B: The CC DPL Results Framework (Monitoring and valuation) Matrix Objectives Monitoring Indicators Target (2012) Baseline (2009) Policy Area 1: Mitigation Land Use and Forestry Sector Mitigation

Improve policy coordination and management of peat land

Incidence of hotspots/ clearing of peat lands

10% reduced from baseline

Measured hotspots 2009 Indonesia: 73,800 Riau: 10,448 Source: WWF-I Forest Fire Monitoring Program

Improve regulatory framework for REDD implementation and develop demonstration activities

Number of demonstration pilots in REDD projects

8 REDD Demo Sites 4 REDD demo sites Source: MOFR

Improve basis for timber legality, strengthen institutions, and improve incentives for regional governments to address forest loss and degradation

Number of forest crime cases brought to court

10% improvement in cases brought over 2007-2009 average

Baseline is average of prior years. Illegal Logging Cases: 2007 = 278; 2008 = 171; 2009 = 69 Encroachment Cases: 2007 = 79; 2008 = 45; 2009 = 25 Source: MOFR/PHKA forest case tracking data base

Energy Sector Mitigation

Improve policy framework to promote renewable energy development and investment

MW of capacity under construction

40% increase over baseline

2009 = 1065 MW installed Source: MEMR

Improve policy framework to promote energy efficiency development and investment

Energy efficiency ratios

Energy efficiency improved by 5% in at least one key industrial sector

Steel: Electricity Arc Furnace: 700 kWh/t Ceramics: 16.6 GJ/t Tires: 8100 kcal/kg Cement: 800 kcal/kg clinker Glass: 12.4 GJ/ton Source: IEA Energy Policy Review for Indonesia, 2008

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Policy Area 2: Adaptation and Disaster Preparedness

Establish strategic water management plans in key river basins

Number of water management plans established

2012: 12 Plans 2009: 3 Plans 2010: 5 Plans

Scale up actions to improve climate resilience in agriculture

Percentage of farmers surveyed that show understanding and practicing of adaptation techniques

20% increase over baseline in targeted kabupaten

2010 baseline will be established through survey

Scale up actions to establish national disaster risk reduction and management system

Number of provinces with local disaster management agencies

2012: 33 provincial agencies; 40 district level agencies

2009: 5 provincial agencies; 20 district level agencies

Establish systems and strategies to improve climate preparedness and resilience in the coastal and marine sector

Percentage of coastal communities that show greater awareness and changed practices relative to baseline in target locations.

10% increase over baseline in 8 districts on north coast of Java

2010 baseline will be established through survey

Policy Area 3: Cross Sectoral and Institutional Issues

Strengthen knowledge base and legal basis for climate change action and link these to national budgeting and planning processes

Increased financing for GOI actions related to the 26% emissions reduction plan

10 Trillion Rupiah for Ministerial proposed projects (cumulative) National Development Planning Response to Climate Change (BAPPENAS 2010)

1.736 Trillion Rupiah allocated for 2009 National Development Planning Response to Climate Change (BAPPENAS 2008)

Strengthen policy coordination and develop financing mechanisms for addressing climate change

Funding for climate change projects through ICCTF

£9 Million (UK Pounds) pledged 10% disbursed

Baseline = 0 funding through ICCTF in 2009

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ANNEX 3C: The CCPL (GOI-JICA-AFD) Phase 2 Policy Matrix

The policy actions in the matrix for the CC PL operation form the basis for the Bank's CC DPL operation. Due to a change late in the development process, the order of policy areas is changed, with cross cutting issues discussed first, then mitigation, and finally adaptation. Other than that, the structure is the same. In addition to the order, this matrix includes a few items beyond those chosen for emphasis by the Bank team. In particular, this matrix includes under cross cutting issues, a policy area on GHG emissions and absorption measurement. Under forestry mitigation, this matrix includes a policy area on afforestation and reforestation. Under energy mitigation, this matrix includes a policy area on transportation. In the interest of streamlining the matrix, highlighting actions with the highest impact, and focusing on key issues in the narrative, the Bank team chose not to emphasize these areas in the CC DPL. These areas remain part of the policy dialogue with the GOI and will be included in future operations as the dialogue evolves and the priority associated with these actions is clarified. To illustrate the areas of harmonization (the WB CC DPL matrix is a selected subset of these actions), the indicative year 2010-2012 actions selected by the Bank for the CC DPL from the overall CCPL Phase II matrix are bolded.

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Sector Outcome Area

Prior Actions to be recognized (2007-2009)

Indication of CY2010 Actions Responsible Institutions

Further Indication of CY2011 and 2012 Actions

1 Key Policy Issues (Upstream Strategy) 1.1Mainstreaming Climate Change in the National Development Program

Climate change program is implemented in all related ministries towards the achievement of national target (26% GHG emission reduction from BAU in 2020)

National Action Plan Addressing Climate Change, National Council on Climate Change by Presidential Decree, and "Development Plan Response to Climate Change." were issued. The steering committee for climate change program loan coordination was established. Comprehensive and Sectoral Assessment and Planning Process (Road Map) on climate change were prepared.

Finalize Indonesia Climate Change Sectoral Roadmap (ICCSR).

BAPPENAS Prepare Nationally Appropriate Mitigation Action (NAMA) in accordance with midterm development plan (RPJM) and ICCSR. Draft provincial action plan for contributing to 26% reduction. Incorporate climate change program into regional midterm development plan (RPJMD) at Kabupaten level.

Issue a presidential decree on National Action Plan for 26% GHG voluntary reduction.

CMPW CMEA

BAPPENAS

Submit mitigation actions and commitments under Copenhagen Accord to UNFCCC, based on commitments by the president, policy documents and policy dialogues.

BAPPENASDNPI

Revise a "National Action Plan Addressing Climate Change (2007)".

DNPI

1.2Financing Scheme and Policy Coordination for Climate Change

Policy coordination on climate change is enhanced and linked to National Budget and Planning processes.

Climate actions were incorporated into Medium Term Development Plan (and annual and longer term budgets). Indonesia Climate Change Trust Fund (Oct 2009) was launched.

Implement innovative funding mechanism for climate change through the Indonesia Climate Change Trust Fund (ICCTF).

BAPPENAS Continue to support the funding mechanism for climate change projects under the Indonesia Climate Change Trust Fund (ICCTF).

Conduct a study on the implementation possibility of Performance Based Budgeting (PBB), for programs and policies of line ministries related to climate change.

MOF Finalize the design of DAK for Climate Change or special incentives concept for local government

Improve the existing design Climate Change DAK or special incentives concept for local government

Bappenas, MOF

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National Disaster Management Agency (BNPB) was established, and National Action Plan for Disaster Risk Reduction (NAP-DPR 2010-2012) was finalized. Institutional strengthening of BNPP was initiated in 2008, and Incorporated mainstreaming of DRR in the context of climate change adaptation into the medium term development plan (RPJM, 2009) was done.

Continue the efforts to establish Local Disaster Management Agency (BPBD) in all provinces

BNPB 2011: Implement Disaster Risk Reduction (DRR) program activities according to the National Action Plan for DRR 2012: Implement comprehensive risk financing framework combining mechanisms including reserve (on-call) budget, stand-by financing, and weather derivatives.

1.3 GHG Emission & Absorption Measurement

Monitoring mechanism for carbon emission and absorption is established through National GHG Inventory System.

Finalize Second National Communication to UNFCCC.

Submit main report of 2nd National Communication to UNFCCC.

KLH Implement SIGN with the close coordination among relevant institutions and prepare for the National GHG Inventory.

Develop the GHG Inventory System (SIGN) through official process and design an Indonesian national MRV System

KLH

2 Mitigation 2.1Forestry 2.1.1 Forest Management and Governance

Forest governance and management is improved through the establishment of improved rules on FMUs, financial scheme for local governments, and timber legality.

Government Regulation on Forest Planning Management and Forest Utilization was issued. 29 model FMUs are planned for 27 provinces, and 13 were approved by the Minister of Forestry.

Design norms, standards and procedures on how Forest Management Units (FMUs) manage forests. (Ministerial Decree was issued in 2010 and will be applied to the newly established FMUs)

MOFR Local Gov'ts

MOHA

Strengthen the regulatory framework for FMU management institutions at local level for conservation, protection, and production FMUs (implementing and technical guidance)

Design a concept on intergovernmental transfer DAK mechanism to finance and improve the incentives for local governments through strengthening forest management activities toward emissions reductions.

MOF MOFR

Formalize intergovernmental transfer mechanism to finance local government forest activities. 2012: Evaluate and improve intergovernmental transfer mechanism to finance local government forest activities.

Ministerial regulations was issued for Timber Legality Verification System (Sistem Verifikasi Legalitas Kayu, SVLK) for establishing a national timber legality standard and a system for verification and monitoring to assist in reducing illegal logging and forest destruction.

Implement and monitor performance of GOI regulation on timber legality. Assess capacity for oversight, certification and monitoring in national standards agency.

MOFR Strengthen the implementation of regulatory framework to enhance on going implementation of GOI regulation on timber legality by monitoring and evaluation.

2.1.2 Peatland Conservation

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An institutional framework to conserve and restore peatland is improved.

The master plan on peat land rehabilitation in Central Kalimantan was issued. National budget for implementation on the master plan in Central Kalimantan has been allocated (around 739 Million Rp. in national budget). BPDAS has completed the annual planning for rehabilitation.

Coordinate among ministries to control peatland emissions implementation under the framework of presidential regulation.

Menko Ekon Bappenas

Issue a presidential regulation which includes special measures for peatland conservation and peatland water management to minimize carbon emissions.

Implement key steps in national multi-sector policy dialogue (seminar proceedings, policy principles) toward establishing a legal framework for the national strategy for lowlands with the focus on balancing development and conservation considering peatlands as major source of GHG emissions.

MOFR PU

MOA KLH

2.1.3 REDD

Emissions from deforestation and forest degradation is reduced through the implementation of a national REDD framework

National Readiness Program for REDD was launched; Completed preparatory analysis, issued consolidated report, developed regulatory framework and selected locations, and initiated REDDI pilot projects (with several donors and NGOs). The GOI has submitted a Readiness Program Proposal to the FCPF and initiated a REDD program with UN REDD Support (FAO-UNDP-UNEP)

Complete the Ministerial Decree on Mechanism and Procedures of REDD by defining roles and responsibilities of government agencies, local communities, and the private sector in managing carbon assets.

MOFR MOF

Establish a national registry of REDD to track implementation of REDD activities and payments in a national carbon registry.

Conduct/implement REDD demonstration activities (at least 3), specify results in specific locations and partners.

MOFR Assess & develop framework for forest fiscal management, including incentives for regional stakeholders.

Study the possibility to establish an accreditation system to place a premium over REDD projects conserving biodiversity.

2.1.4 Afforestation and Reforestation

Carbon sink capacity is increased through reforestation activities.

Maintenance of previously planted area and replant in critical forest through Gerhan were done. Develop plan and review mechanism and impacts of GERHAN program for next forest rehabilitation activities were done.

Rehabilitation of protected areas consisting replanting of 100 thousand ha and develop technical design for another 100 thousand ha.

MOFR Design an improved monitoring system of reforestation program (with supporting from development partners will be consulted with Ministry of Forestry) 2012: Design new procedure for rehabilitation monitoring in place, covering growth of trees along time.

MOFR Maintain plantation areas

conducted in 2010.

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Issue a ministerial decree on forest land allocation for timber plantation (HTI and HTR).

MOFR Initiate steps to simplify regulations and taxation to reduce complexity for forest plantation and climate change investment by the private sector.

2.2 Energy 2.2.1 Renewable Energy Development

Improve energy security and reduce future GHG emissions from electricity generation through new geothermal projects within an improved policy framework for private sector participation.

Government regulation on geothermal business activity, MOF decrees on Taxes incentive, and MEMR decree on assignment of preliminary survey were issued. Ministerial Regulation No. 32 year 2009 on Purchase Standard Price of Electricity Power by PT PLN from Geothermal Electricity Power Station was issued on December 4, 2009

Improve policy framework design for promoting geothermal development to facilitate arrangements / deals between developer and off-taker. Identify financing needs to mitigate upstream risk of geothermal projects.

Menko EkonMOF

Men PAN (supported by

MEMR)

Continue to improve policy framework design to promote geothermal development, and provide exploration fund to mitigate upstream risk for eastern part of Indonesia.

Issue draft regulation to clarify the scheme of compensation for the incremental cost of geothermal electricity to off-taker.

MOF (MEMR)

Demonstrate progress by signing PPAs (at least 1) of geothermal projects.

MEMR MOF

Bappenas (PLN)

The promotion of renewable energy development is improved by monitoring, evaluating and revising the new regulations.

The Law no. 30/2007 on Energy (promote renewable energy development) was enacted. National Energy Council (Dewan Energi National: DEN) was established. Ministerial Regulation No31/2009 on the purchasing price of electricity from renewable energy was issued in Nov. 2009.

Ministerial regulation (MOF) No. 21/2010 (PPH) and No. 24/2010 (PPN DTP) on incentives for renewable energy development was issued in January 2010.

MEMR MOF

Review the impact of Ministerial Regulation No.31/2009 and propose a new or revised regulation to promote renewable energy development further and more effectively, and Draft (or issue) a regulation on improved framework for renewable energy development.

Presidential Decree No. 4, 2010 on assignment to PLN to conduct acceleration of power plant development using renewable energy, coal, and gas has been issued on January 8, 2010.

MEMR MOF

2.2.2 Energy Efficiency

GHG emissions are reduced (or strategies for reducing GHG emissions are formulated) by enhanced energy efficiency in energy intensive sectors through the use of new technology and the rehabilitation, renovation and replacement of existing facilities.

(no prior action from 2007-2009 under CCPL)

Conduct a study on a national framework for emission reductions in the cement sector.

MOI MEMR

Replicate the same approach to other industrial sectors Conduct a study to introduce new and more energy efficient technology, and survey the potential of energy efficient technology for electricity generation.

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Demand side management becomes a major part of government regulations and eventually contribute to fiscal budget management.

Ministerial Regulation No. 70 year 2009 on Energy Conservation was issued on December 16, 2009. National system of energy audits for major firms in key sectors were developed and implemented.

Prepare a master plan for energy conservation including the energy efficiency standards, energy audit program with a monitoring and evaluating framework, of fiscal incentives options, and the industry energy conservation, with the sectoral approach, with MEMR and MOI.

MEMR MOF MOI

Start to implement the master plan of energy conservation, and start the implementation of the programs in the master plan, including energy efficiency standards, energy audit program with a monitoring and evaluating framework, of fiscal incentives options, and the industry energy conservation.

2.2.3 Pricing

Energy consumption is better controlled by a more cost-oriented pricing mechanism, contributing to reducing both GHG emissions and energy subsidies

(no prior action from 2007-2009 under CCPL)

Finalize a road map for improving subsidy policy of electricity

MEMR MOF (PLN)

Preparation for Implementation actions based on the road map, including the regulation.

2.3 Transportation 2.3.1 Modal Shifting

The increase rate of car users remains at a low level, and is less than that of users of public transportation.

(no prior action from 2007-2009 under CCPL)

Develop BRT (Bus Rapid Transit) in 2 cities : Tangerang, and Sarbagita Area (Denpasar, Badung, Gianyar, Tabanan) Bali.

MOT Continue development BRT in other cities.

Improve pedestrian facilities in Bukit Tinggi and develop bicycle lane in Sragen.

MOT Continue development of pedestrian facilities and bicycle lanes in other cities.

2.3.2 Traffic Management

Traffic management is enhanced enough to avoid deteriorating traffic congestion.

(no prior action from 2007-2009 under CCPL)

Develop ATCS (Area Traffic Control System) in Bogor and Surakarta

MOT Continue development ATCS in major cities.

2.3.3 Better Combustion Engines and Fuels

Using better combustion engines and fuels prevails.

(no prior action from 2007-2009 under CCPL)

MOT

Install converter kit for public transportation 1000 unit/year in major cities

3 Adaptation 3.1 Climate Forecasting and Impact and Vulnerability Assessment

Strengthening of institutional and regulating framework.

73 Automatic Weather Stations, 19 weather RADARs, and 31 Digital rain gauges were installed. Study for Ocean Carbon, and marine and

Start developing the climate modeling as the basis of the development of impact and vulnerability assessment.

BMKG

Prepare Vulnerability Map in priority area.

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coastal vulnerability to sea level rise were conducted. Implement INAGOOS to cope with

climate change.

MMF

KLH DNPI

Implement INAGOOS into operational oceanography Prepare a National Action Plan of Adaptation (NAPA) for Climate Change based on impact assessment (KLH, DNPI, BAPPENAS, and BMKG)

Prepare an academic paper for Government Regulation to the criteria of the impact of climate change.

3.2 Water Resources Sector

Improving water resource management in integrated manner to strengthen the resilience to the increasing drought and flood risks, specifically in nationally strategic river basin in Java island.

Presidential Decree on Water resource council was issued, and the National Water Resource Council (NWRC) has been established and met several times. Based on that, integrated water resource management plans (POLA) with climate change assessment in national strategic river basins in Java island were prepared, and 3 POLA are finalized and proceeded for Ministerial Decree (Bengawan Solo, Brantas and Cimanuk river basins).

Continue to implement strategic assessment of the water future of Java, and prepare an action plan for priority interventions incorporating climate change, urbanization, economic development and food security to become an integral part of the River Basin Strategic Water Management Plans (Pola WS) and the framework for the River Basin Master Plans, with the national target of 2010 : completing 12 provincial water resource council, 12 Coordination Team for Water Resources Management in River Basins (TKPSDA) and 8 Integrated Water Resources Management Plan (POLA).

PU Complete master plans for the Java River Basins which include climate change adaptation measures, by enacting ministerial decree.

3.3 Agriculture Sector

Strengthening of institutional and regulating framework to improve resilience of farm production and reduce drought risk.

Develop an irrigation asset management information system. System for Rice Intensification (SRI) practice (total: 345 packages) and the Climate Field School Program (total: 468 units) were carried out.

Evaluate performance, then improve and scale up actions for adaptation in agriculture including climate field school, System for Rice Intensification (SRI), and to enforce land development and management without burning as part of an overall plan (Minister of Agriculture Decree No. 26/Permentan/OT.14/2/2007).

MOA Continue the 2010 progress to improve and scale up actions for adaptation in agriculture including climate field school, System for Rice Intensification (SRI), and to enforce land development and management without burning as part of an overall plan (Minister of Agriculture Decree No. 26/Permentan/OT.14/2/2007)

3.4 Marine and Fisheries Sector

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Strengthening of institutional and regulating framework to manage coastal zones and small island.

The Indonesian National Plan of Actions (NPOA) of Coral Triangle Initiatives on Coral reef, fisheries and food security (CTI-CFF) was launched, and detailed NPOA was improved. Manage and Rehabilitate coral reef in 15 districts within 8 provinces (COREMAP) were carried out.

Develop a strategy for coastal community resilience to cope with climate change, including the plan of climate resilient village in 8 districts in northern coast java, implementing study on coastal vulnerability in relation to sea level rise in Java and Bali, research on the variability of CO2 Flux in Banten Bay.

MMF Implement the strategy for coastal community resilience to cope with climate change.

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Annex 4: Review of Past Indonesia Climate Change Program Loans 16

Background and Process In August 2007 Japan and Indonesia confirmed their participation in an effective framework on climate change beyond 2012. The understanding of the two leaders was to strengthen cooperation at bilateral, regional and international aiming at: (i) halving GHG emissions from the current level by 2050 with the principle of common but differentiated responsibilities and respective capabilities; (ii) promoting sustainable forest management; (iii) promoting the Clean Development Mechanism (CDM); (iv) promoting sustainable resource use,, appropriate adaptation and mitigation measures in climate change, the improvement of management capacity and measures for natural disaster risks raised by climate change; and (v) promotion of cooperation between the two countries in various fields such as energy efficiency and conservation, renewable energy and clean coal technology. In January 2008 Japan unveiled the a financial mechanism which purports to extend assistance to developing countries that are aiming to achieve both emission reductions and economic growth and which are working to contribute to climate stability. The Financial Mechanism amounts to approximately US$ 10 billion in total over five years, with two objectives: 1) assistance for adaptation to climate change and improved access to clean energy (US$ 2 billion); and 2) assistance for mitigation of climate change (US$ 8 billion). The Climate Change Program Loan (CCPL) to Indonesia is the first case to utilize the Japanese ODA scheme under the Financial Mechanism. The CCPL to Indonesia comprises of three single-tranche loans planned for between 2007 and 2009, supplying assistance to the implementation of a policy matrix agreed initially between GOJ and GOI. The matrix is based on Indonesia’s "National Action Plan Addressing Climate Change" which was launched at Bali COP 13. The CCPL is designed to support the agreed policy actions under the key policy pillars of mitigation, adaptation, and cross cutting issues in terms of encouraging GHG reduction and sequestration, strengthening country resilience to the anticipated negative impacts due to climate change and improving institutional frameworks related to mitigation and adaptation. the Government of France indicated its willingness to step in. The policy matrix was finally agreed upon between the GOI, Agence Française de Développement (AFD) and the GOJ, in the first semester of 2008. In the framework of the CCPL, the AFD provided in 2008 a US$ 200 million loan to GOI as a first tranche, in co-financing with Japan International Cooperation Agency (JICA). Based on the satisfactory achievements of the 2008 “Policy Matrix” and on the upgrading of the 2009 “Policy Matrix”, AFD provided in 2009 a US$ 300 million soft and long-term loan to GOI as a second tranche, which has been disbursed at end of August 2009. The World Bank is now joining the third and final year of the current CCPL, through contributing an additional US$ 200 million on top of altogether US$ 600 million to be jointly contributed by AFD and JICA. In addition, the AFD financed - on a grant basis - targeted technical assistance dealing with energy efficiency in cement and steel industry (for the Ministry of Industry), and a feasibility study of a small-scale green carbon market and methodology for spatial planning (for the Ministry of Forestry). AFD also

16 Source: Background and Policy Issue Note on Climate Change Program Loan (Cool Earth Program Loan) to the Republic Of Indonesia. Division 2, Development Assistance Department I, Japan Bank for International Cooperation. July 2008. Additional meetings and discussions with the JICA and AFD teams provided additional source material for this annex.

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financed the second phase of the “GHG abatement cost curve” study by McKinsey & Company for the National Council on Climate change (DNPI). Governance and Monitoring Framework The overarching goals of the program loan are to (i) promote mitigation of climate change through enhancing GHG emission sequestration and controlling GHG emissions; (ii) strengthen country adaptation capacity responding to negative impacts of climate change; and (iii) promote cross sectoral actions related to climate change, by supporting the implementation of GOI policy actions on climate change through policy dialogue. The National Development Planning Agency (BAPPENAS) is the Executing Agency, closely coordinating and monitoring the implementation of policy actions taken by the responsible institutions. The coordination structure of the CCPL is outlined in the figure below. Ministerial Decree no 203/2008 has been enacted for the Establishment of Steering Committee for Climate Change Program Loan (including a Technical Committee). The Steering Committee members are director generals or deputies of Line Ministries. The Steering Committee’s mandate is to: give policy direction for the implementation of policy matrix; overall coordination for the monitoring of policy matrix implementation; approve the monitoring results; coordinate with the donors on confirmation of policy matrix implementation. The Technical Committee consists of directors from line ministries, and is mandated to develop the schedule and work plan; provide technical coordination for monitoring of the policy matrix; provide recommendations to the Steering Committee; and report to the Steering Committee of monitoring results. The respective line ministries in charge are: Ministry of Forestry; Ministry of Mining and Energy; Ministry of Industry; Coordinating Ministry of Economic Affairs; Ministry of Public Works; Ministry of Agriculture; Ministry of Environment; Bakosurtanal; BMG; and Ministry of Finance. Quantitative and qualitative outcome indicators in the policy matrix closely link to the achievement of each policy action to be implemented by the responsible institutions. Progress on policy actions is reviewed and monitored on a quarterly basis with BAPPENAS and the responsible institutions of GOI, and in close coordination with the co-financing partners. Throughout review and monitoring process, on a basis of policy dialogue, advisory assistance is also extended to expedite or improve policy actions. The results of the review and monitoring on annual policy action progress between January and December is a basis to determine if moving on to the next tranche is appropriate. Monitoring on policy actions intends not only to review and encourage progress, but to coordinate considerable development partner assistance on climate change in a harmonized manner. Thus, a review and monitoring of progress is also closely coordinated with partners that extend grant and technical assistance directly related to implementation of policy actions. Has carried out JICA most of the monitoring and evaluation activities, using a dedicated team of professionals from Japan and Indonesia. An AFD funded forestry expert has been part of the monitoring team, and helps the GOI to monitor the progress towards the implementation of the forestry indicators. JICA also provides GOI with policy recommendations related to the policy matrix and provides technical assistance for specific policy actions. The monitoring team coordinates with JICA experts deployed at concerned line ministries and works with co-financing partners, and other development partners providing technical assistance related to the key policy actions. The monitoring team annually produces evaluation

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reports based on the progress in achieving policy actions, as defined in the matrix. The evaluation report forms the basis for decisions about the next tranche of financing and informs the negotiation between the development partners co-financing the operation. The CCPL Policy Matrix is detailed with 54 line items and a dozen ministries responsible for progress for different policy actions. The monitoring task is a full time job for several professionals. The initial year for prior actions was 2007 and disbursement occurred in 2008. At end 2008, progress against policy actions was deemed sufficient to disburse the second tranche of payments in 2009. In terms of lessons of experience, the length of the CCPL policy matrix makes it very burdensome to monitor. JICA has had a team of 15 staff carrying out the monitoring process. The heavy monitoring process has, however, enabled a deep engagement with the government on a technical level. Nevertheless, JICA and AFD have been keen to reducethe amount of line items in the 2010 policy matrix to enable a more cost efficient monitoring and better ownership of the matrix by the GOI counterparts involved. In a technical committee meeting in February 2010, all partners and GOI agreed that a streamlined approach would allow more focus on key climate change policy priorities. The SC on March 24 reached agreement on achievement of prior actions from 2009. The program of activities was reviewed in detail and line ministry representatives offered some additional explanation. On the whole, out of 54 indicators, 41 were fully or exceedingly attained and 13 were shown to have made substantial progress; none were unfulfilled or cancelled. The development partners congratulated the GOI agencies for the effort involved in completing these actions. Separately, working with GOI counterparts at technical level, the Bank and development partners gathered the documentation for each specific action achieved.

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Annex 5: Indonesia – IMF Assessment Letter

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ANNEX 6: Overview of poverty and social issues in Indonesia

This section reviews the current snapshot and trends of poverty and general welfare situation in Indonesia over the past five to ten years period. It presents some changes in the poverty indicators, major aspects of social development, and employment. It is conceivable that climate change have a negative impact on poverty and social development. Shifting in cropping seasons, shrinking of arable land, changing in the water balance will all have impacts on agricultural productivity and farmer’s income. Warming in the sea temperature and its impact on the reef ecosystem will reduce marine resource productivity and put more challenge to increasing income of the fisher folks. On the policy side, because of those potential impacts, climate change policies, whether it is related to mitigation or adaptation, must look into their impacts on poverty and social development. 1. Poverty Reduction Higher levels of economic growth have not translated, to the extent hoped for, into greater poverty reduction. Much of the population remains in poverty or vulnerable to it. Until recently, high rates of economic growth have been slow to be reflected in poverty reduction. Though poverty rates fell quickly from 1997-98 crisis levels, progress until recently has been slow and higher rates of growth had not translated to faster poverty reduction. With the exception of 2006, when the poverty rate jumped sharply in response to the increase in fuel prices, poverty gradually declined in Indonesia after the crisis until 2007, when it had fallen below pre-crisis levels. The rate of decline had been disappointing in the context of stronger growth. GDP growth averaged 7 percent annually between 1990 and 1996, with a four percentage point reduction in poverty. By contrast, between 2003 and 2007, poverty had fallen by only one percentage point with growth averaging over 5 percent per year. However, poverty has since fallen by over two percentage points in the last two years, to 14.2 percent by early 2009. It remains to be seen what effect the 2008-09 global economic crisis has had. In addition, much of the population remains vulnerable to poverty. Nearly half of Indonesia’s population in 2007 could reasonably be considered “near poor” or poor, with per-capita consumption levels less than a third above the national poverty line. These households are vulnerable to myriad aggregate and idiosyncratic shocks such as food price increases or employment and health shocks that can drive them into poverty. Although 41 percent of the poor households escaped poverty between 2003 and 2004, over one-third of non-poor households fell into poverty, highlighting the fluid nature of poverty and the depth of household vulnerability in Indonesia. An analysis of the impacts of policies to help mitigate the climate change through a series of simulation exercises on a dynamic inter-regional Computable General Equilibrium Model has returned the following indicative results: (1) Programs to reduce deforestation with some compensation (i.e. REDD scheme) is likely to result in poverty reduction provided that the price of the carbon has to be significant enough (close to US$ 20/ton) and the government distribute the compensation income mostly to rural areas . With the pattern of business ownership concentrated in Jakarta, the government will need to be careful with inter-regional transfer and its impact in the welfare of people in the off Java rural areas; (2) the reduction of fuel subsidy is likely to reduce poverty (as most of the subsidy is currently enjoyed by the rich) provided that the government ensures redistribution of the proceed for the most needy through a direct targeted subsidy; (3) the shifts toward renewable source of energy in the power generation sector will also likely reduce subsidy possibly due to the new and expanding activities of the renewables sector.

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2. Human Development Outcomes Human development outcomes continue to be uneven despite significant increases in public expenditures. Indonesia’s human development outcomes are uneven and lag others in the region. Because of geographic and income-related disparities and differences in the quality of health, water and sanitation and education service delivery at the local level, Indonesia’s performance in terms of human development outcomes has been quite uneven over the last decade. Over that period, there has been little improvement in some indicators and, in the case of a few, there has even been some regression. As a result Indonesia lags behind its neighbors in a number of areas and is unlikely to achieve several of its health-related MDGs. In particular, the country has made very little headway in reducing maternal mortality (420 per 100,000 births is high given Indonesia’s income level), reducing child malnutrition (which has remained at around 25 percent in the last few years), and in addressing geographic and income-related health disparities.

Table 1: Indonesia continues to under-perform on some critical health outcomes

Country or category

(2006 USD) (years) (per 1000) (per 1000) (per 100,000) (% ) (%)

Bangladesh 440 64 52 69 570 88 20Cambodia 480 57 68 87 540 82 44Vietnam 690 71 15 17 150 94 90India 820 64 57 76 450 55 47Sri Lanka 1,170 75 11 13 58 99 96Indonesia 1,420 68 26 34 420 70 72Philippines 1,420 71 24 32 230 88 60China 2,010 72 20 24 45 93 98Thailand 2,990 70 7 8 110 98 97Malaysia 5,490 74 10 12 62 96 98East Asia & Pacific 1672 71 22 27 124 90 92Lower middle income 1936 71 23 28 130 91 92

Per-capita GNI

Life expectancy

(2006)

Infant mortality

rate (2006)

Maternal mortality rate

(2005)

Under-5 mortality

rate (2006)

DPT immunization

rate (2006)

Skilled birth attendance (2000-2006)

Sources and notes: World Bank (2008a) and World Bank (2008b) drawing on WDI and WHO data.

National averages for health indicators mask significant geographic and income-related inequalities within the country. In poorer provinces, such as Gorontalo and West Nusa Tenggara, the infant and child mortality rates are four to five times higher than those in richer provinces such as Bali and Yogyakarta. Health indicators for the poor are also far worse than those for the rich: child mortality rates among the poorest quintile in 2003 were 3.5 times the rate among the richest quintiles (World Bank, 2008a). Behind the impressive increase in enrollment rates at the national level, wide regional and systemic differences remain. Indonesia tends to lag behind other lower middle income countries in early childhood education and higher education, with gross enrollment rates of 21 percent and 17 percent respectively. In addition, while the enrollment gap between males and females and across income groups has been reduced – especially at the primary education level – striking inequalities remain across income groups at the pre-school, junior secondary and senior secondary levels. Indonesia also scores poorly and lags behind in student learning in international assessments, indicating that the quality of education remains a concern.

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Access to water supply services in Indonesia is among the lowest in the region. Provision of piped water services is inadequate. The percentage of the urban population served by piped water had reached 40 percent by 1997 but declined to 31 percent in 2005; the national average is only 17 percent. Access to improved water has declined from 90 percent in 1995 to 87 percent. The environmental consequences of access through large-scale use of private unregulated wells are high. Land subsidence, higher costs of reaching drinkable well water and proximity to septic tanks pose high environmental and health risks. The high incidence of water-borne diseases disproportionately affects the poor. Climate change is predicted to lead to some water shortage in some areas and thus exacerbate the difficulty in clean water provision to the community. Sanitation coverage in Indonesia is well below the average for South-East Asian countries, being 55 percent compared to 67 percent in 2006. Network sewerage coverage, estimated at 1.3 percent, is one of the lowest in Asia. Sanitation coverage has increased nationwide by 9 percentage points since 1990 but, on current trends, Indonesia will fall short of the MDG sanitation target of 73 percent by 10 percentage points, or about 25 million people. Over 96 percent of human waste is not treated prior to disposal while the manner in which private sanitation systems (including septic tanks) are managed and operated frequently risks contamination of ground and surface water. Environmental degradation contributes to high economic and social costs. High deforestation rates contribute to decreasing water quality, soil fertility and land productivity as well as increasing water shortages, fires and haze, health impacts, downstream siltation and flooding. Moreover, because a fifth of Indonesians live in government-administered “forest zone” (which may lack trees), they are vulnerable to shifts in policies and land use claims, which can result in conflicts and increasing pressure on state assets and budgets. Fisheries resources that provide the main source of livelihood for fishing communities are also declining throughout the country; fishing communities have nearly twice the poverty rate as the national average and are vulnerable to loss of fisheries habitat, climate change and rising fuel prices. Indonesia’s environmental conditions impose significant economic costs (Bappenas, 2007). The health and other economic costs attributable to water pollution and limited access to safe water and sanitation are estimated to have been US$ 6.3 billion in 2006 (2 percent of GDP). The annual costs of air pollution to the Indonesian economy have been calculated at around US$ 400 million per year. These costs are disproportionately borne by the poor because they are more likely to be exposed to pollution and less likely to be able to afford mitigation measures. As climate change ̶ without proper adaptation – will likely intensify environmental degradation in both terrestrial and marine biomes, it will also increase the threat to food security and of vector-borne diseases. 3. Employment Despite recent signs of progress, Indonesia lags behind its more prosperous neighbors in producing higher value-added non-agricultural jobs. Employment growth has failed to match population growth since the crisis and job creation in the formal sector has been especially sluggish. Between 1999 and 2003, the percentage of the Indonesian workforce employed in the formal sector fell from 43 percent to 35 percent. There are signs of a recovery since then but the employment rate in the formal sector is still below what it was prior to the crisis. The open unemployment rate, which was 8.1 percent in 2001, rose further to 11.2 percent in 2005 before falling to 9.1 percent in 2007. This trend is mostly driven by youth aged 15 to 24, who have consistently made up over half of the unemployed and currently have an unemployment rate of 25 percent. Unemployment is especially high – roughly 33 percent – among young people under the age of 25 with high school and college degrees. In addition, real median wages, after growing rapidly from 1999 to 2003, have since stagnated.

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Increasing numbers of workers were pushed into agriculture after the crisis; in 2008, over 40 percent of Indonesia’s labor force still derives its livelihood from low-productivity activities in agriculture and related areas. During the post-crisis recovery period, increasing numbers of workers were pushed into agriculture and by 2003, agricultural employment had returned to 1991 levels. Most of the increase in agricultural employment came at the expense of the service sector, a driver of pre-crisis expansion. Non-agricultural employment resumed growing rapidly between 2003 and 2006 and agricultural employment fell to its lowest level since 1997. Despite this growth, just 30 percent of the labor force is employed in high-value added activities in manufacturing and services. Indonesia’s agricultural productivity has been low with just half the average productivity of the services sector and one-eighth of the productivity of industry. There have been no signs of productivity improvement despite the recent falling share of the labor force engaged in agricultural employment. In 2008, over 40 percent of Indonesia’s labor force still derives its livelihood from low-productivity activities in agriculture and related areas. Indonesia is not keeping up with its neighbors in moving workers out of agriculture and progress has stagnated (see Figure 1). Vietnam has a high share of agricultural employment but it is falling quickly as the country’s share of industrial employment is increasing and will soon surpass Indonesia. Thailand has already surpassed Indonesia and workers are continuing to move off the farm while Malaysia’s share of agriculture workers remains stable and very low. Figure 1: Unlike its neighbors, Indonesia is not moving its workers out of agriculture

Share of the labor force in agriculture (%)

IDN

THA

MYSKOR

PHL

VNM

0

10

20

30

40

50

60

70

80

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Sources and notes: WDI and BPS (SAKERNAS labor force surveys).

In the future, the labor absorbing capacity of the agricultural sector, including fishery, is predicted to be lower due to decreases in productivity of the biomes induced by the climate change. Shrinking agricultural lands and degradation of coral reef system due to temperature rise will lead to declining productivity, hence employment opportunities in these sectors. As noted in Chapter 3, women and female-headed households are a higher share of Indonesia’s poor and are more susceptible to negative shocks from natural disasters, economic downturns, or climate induced impacts. Climate changes that affect water supply, agriculture, livelihood options and disease processes can also have unequal gender impacts, an area that needs more study.

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4. Participatory Processes and Consultations for GOI Climate Change Agenda Indonesia has had a wide and public dialogue on climate change issues, and on the program loan as an instrument. Climate change has been an issue of national prominence since UNFCCC COP13 was held in Bali in 2007. Since the President’s commitment at the G-20 meeting in September, this issue has gained even more attention, both inside and outside of government. The GOI’s foundational climate change documents (see prior actions) have been launched at multi stakeholder events. The table below highlights some key events and examples of stakeholder consultations.

Although most international attention and funding have focused on mitigation, most Indonesian institutions and NGOs see adaptation as the key priority and seek greater balance in the level of attention. Poor and marginalized communities are also a great focus of attention, with the caution that climate-related interventions should aim to assist development and relieve poverty, not just transfer carbon payments among those currently controlling resources and wealth.

Indonesia’s key advocacy organizations for communities and indigenous peoples are fully engaged on the issues of climate change, and particularly LUCF. The Indigenous Peoples Alliance of the Archipelago (AMAN) is an invited participant / observer in the FCPF governance process and is quite clear and able in expressing its views about rights and REDD and has influenced the development of both UN REDD and FCPF programs in Indonesia. The Bank’s Country Partnership Strategy is developed through consultations with government and external organizations. The Bank developed a CEA focused on climate change and launched it in November 2009 in a multi-stakeholder venue. Both the CPS and the CEA specifically foresee DPL as one of the instruments for engaging on climate change issues.

In the specific case of the CCPL, this has been the topic of public comment since August 2008, when first announced. Indonesia’s free and active press has carried articles describing the program and the early debate within the GOI about the value of this instrument. Currently, the Steering Committee is the main governance body where a wide range of positions and agencies are represented.

Event Date Consultation on Indonesia Climate Change Sectoral Roadmap (ICCSR) November 2009

Launching of Indonesia Climate Change Sectoral Roadmap (ICCSR) 31 March 2010, Bappenas

2nd National Communication to UNFCCC Nov 2009, Hotel Borobudur

National REDD Strategy consultations March 2009; Sept 2009

DNPI McKinsey Mitigation cost curve consultation June-July 2009

DNPI McKinsey cost curve launch Oct 2009

RPJM Medium Term Development Plan Jan 2010, Bappenas

ICCTF (Indonesia Climate Change Trust Fund) consultation June-September 2009

ICCTF launch Oct 2009, Bappenas

National Water Council launch August 2008

National Climate Change Council launch June 2008

National Energy Council launch August 2009

UNREDD August-Oct 2009

FCPF (Forest Carbon Partnership Facility) September 2009

WB CPS Dec 2008

WB CEA, Environmental Issues Discussion 19 Nov 2009

CTF donors & NGOs consultation during joint mission Nov 5-13, 2009

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5. Social and Poverty Impacts: Review of Operation This section examines the proposed prior actions of the CC DPL in the context of potential effects on poverty and social issues and the capacity for the GOI to mitigate potential negative effects through specific programs or social safety nets. A summary is provided in the table 1below. Social and poverty impacts will generally be positive or neutral, but with potential for negative effects related to REDD and geothermal energy development that need to be addressed by GOI. The Bank’s FCPF engagement and UN-REDD assistance (with the potential addition of FIP and other development partners) aim to help the GOI address these issues on the forestry side. On the energy side, the Bank has a wide range of engagements with the GOI on energy pricing and social safety net issues (some of which are summarized in Chapter IV). The team consulted Bank guidance to perform the analysis of “likelihood of significant effects,” relying on the Good Practice Note: Using Poverty and Social Impact Analysis to Support Development Policy Operations. Further analytical support to analyze GOI’s capacity to mitigate identified potential negative impacts have been derived from the Indonesia Country Environmental Analysis (CEA) (WB 2009); Sustaining Economic Growth, Rural Livelihoods, and Environmental Benefits: Strategic Options for Forest Assistance in Indonesia (WB 2006); Ministry of Finance Green Paper: Economic and Fiscal Policy Strategies for Climate Change Mitigation in Indonesia (Ministry of Finance 2009); Making the New Indonesia Work for the Poor (WB 2006); and Developing a market for REDD in Indonesia (WB 2009). Policy Area 1: Climate Change Mitigation. Prior actions for this policy area have the potential for significant negative effects in relation to policies that have effects on peatland, forests/REDD, and geothermal energy promotion. The CC DPL operation supports REDD readiness activities, which include preparatory analyses, development of a regulatory framework and identifying demonstration projects. Once operational, a REDD program has the potential for negative social and poverty effects by restricting the use of the natural resource asset by local stakeholders and mismanagement/misplacement of REDD funds. For peat land conservation or rehabilitation, significant negative effects can be caused if interventions occur on lands that have on-going activity by small holders, forcing those affected to relocate to new areas or discontinue with their activity (e.g., annual crops or oil palm cultivation.) For these reasons, the GOI is undertaking a Strategic Environmental and Social Assessment (SESA) as it prepares for implementation of REDD strategy options (see text box below). The SESA is a tool that aims to employ analytical and participatory approaches to evaluate social, economic and institutional linkages and to integrate environmental and social consideration into policies, plans and programs that get implemented in the service of REDD. The REDD program, and specifically the SESA, are supported through the Bank’s FCPF engagement, where a grant agreement with the GOI is under preparation. At the same time, UN REDD is engaging on similar issues with communities and indigenous peoples, though in specific sites in Indonesia. This analytical work is not a final answer to the social concerns, but rather part of a process of identification, awareness and resolution.

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Substantial preparatory work and consultations to develop a working scheme for REDD and for peatland have already been completed by GOI, including the Indonesia Forest Climate Alliance consolidation report, the REDD regulatory framework (see prior actions), and the Forest Resource Information System. All of these reports and rules are available on websites and are discussed in the press, so that stakeholders, researchers and advocacy organizations have the opportunity to understand the issues and judge potential negative aspects and to take action to adjust the outcomes. Indonesia’s REDD framework was developed not only by regulatory processes, but also through consultation processes with key stakeholders at both national and sub-national levels. It is recognized that demonstration activities will have to consider forest conditions, as well as socio-economic conditions and customary community practices of those living in the forest vicinity and sustaining their livelihoods from it. The GOI has stated that REDD is not just about deforestation and selling carbon credits, but also about sustainable development, governance, poverty reduction and economic development.17 This indicates that the GOI understands the issues, takes them seriously, and is working actively to address these points as it develops its REDD program, within the context of the legislative and budget constraints that it faces. As an example, the Ministry of Forestry and the Ministry of Finance are now working together to formulate a regulatory approach to the mechanism for the distribution of proceeds from REDD. The legitimacy of a prior decree was questioned by both government and non-government stakeholders because of potential

17 Developing a market for REDD in Indonesia. The World Bank Indonesia REDD team. January 2009.

Overview of the Strategic Environmental and Social Assessment SESA is a tool that aims to employ analytical and participatory approaches to evaluate social, economic and institutional linkages and to integrate environmental and social consideration into policies, plans and programs that get implemented in the service of REDD. SESA has two components: the strategic assessment (SA) and the Environmental and Social Management Framework (ESMF). The assessment addresses drivers of deforestation by applying analytical tools as well as participatory processes. The assessments aim to develop recommendations for institutional, policy and legal adjustment to the REDD strategy. After the SA identifies potential policies and legal adjustments, the management framework looks at institutional, regulatory and capacity requirements to implement these. The ESMF includes/addresses baseline social and environmental situation, potential risks and impacts of proposed adjustments, interventions and projects within the REDD strategy, and scenario analyses. The ESMF helps to monitor and mitigate potential both social and environmental risks of implementation of the REDD strategy. The SA should provide inputs for policy recommendations at a national scale. The ESMF comes after to monitor the implementation of REDD strategy implementation phase. The ESMF should address gaps concerning legal institutional, regulatory and capacity to manage social and environmental risks and outline applicable safeguard policies. SESA is used to encourage public awareness and to encourage stakeholders to participate in refining and implementing the REDD strategy. SESA has two kinds of outputs: First, it contributes to identifying and minimizing potential risks that might result from the implementation of REDD policy. Second, it contributes to identifying and capturing potential benefits of both social and environmental impacts that might be delivered from the REDD policy. The SESA approach can be used to assess drivers of deforestation, assess REDD demonstration activities in specific sites, identify general issues related to land and forest uses being raised by key stakeholders, or describe management and governance issues, such as distribution of REDD revenues. SESA helps stakeholders and government to pay sufficient attention to traditional forest users, communities that depend on forest to support their livelihoods, including women and indigenous peoples and how REDD may affect them, as well as groups who use forest resources for commercial purposes.

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inequity in the distribution of benefits and now the rule is under review. This shows that Indonesia’s governance systems and consultation processes are robust enough to question and revise rules that are established with insufficient attention to unintended consequences. Indonesia also has an increasingly complex set of institutions, advocacy organizations, and a free press that help to guard against excesses of regulatory power that would tend to disadvantage or marginalize certain groups in the course of a REDD program. For example, the National Climate Change Council and the National Forest Council are governmental institutions with legal basis that serve in part as venues for multi-stakeholder consultations and wider reviews of government policies and implementation approaches. The international REDD framework will also include mechanisms on how a REDD system should mitigate possible negative impacts on the poor and increase social benefits from REDD. Thus, Indonesia’s REDD program is being developed in the context of an international framework of consultations, performance expectations, and independent scrutiny. For all these reasons, we believe that there are appropriate and available processes (and watchdog organizations to monitor the processes) for potentially affected communities to participate in decision making, to register complaints about unfair distribution of resources or benefits, and to seek redress through regulatory processes or the media. Although there is some potential for negative social/poverty outcomes, this potential depends on how a REDD scheme or peatland intervention is ultimately designed and carried out. With sufficient guidance, consultation and technical input, it should be possible to design approaches that do not disadvantage the poor, or compensate them sufficiently for losses. The potential for negative impacts must also be evaluated against the certainty of the business-as-usual path, which would entail continuing loss of habitat and biodiversity, degrading environmental conditions, inequitable distribution of benefits and ongoing marginalization of poor and indigenous communities. In this regard, there is at least some potential that an open process of development and design of REDD or peat land intervention, with sufficient consultation and compensation could result in some poor communities getting improved living conditions (e.g., more secure tenure on a different plot of land, or better quality of environment on an existing plot of land). Land-use patterns and values will be affected; some will gain and others will lose financially from implementation of REDD approaches, or more rigorous environmental standards in land management. Some people will discontinue livelihood activities in some areas and possibly move to other areas, creating social dynamics that may have negative consequences. There is a need for caution to ensure that implementation of REDD schemes does not unduly restrict the livelihoods or deny the rights of indigenous peoples, or marginalized groups or women. With appropriate assignment of property rights, REDD schemes have the potential to generate financial benefits for forest dependent communities. More work will be needed to harmonize regulations and incentives across departments and levels of government to ensure appropriate, transparent, and accountable approaches to REDD revenue distribution and fiscal balance with local governments. There is a lack of capacity among regional stakeholders to deal with all the complex issues surrounding carbon trade, avoided deforestation and monitoring pilot implementation, but this is being developed through an expanding range of development partner and NGO investments and programs, with active participation of civil society organizations, such as the Partnership for Governance and others. The REDD framework being developed in Indonesia will ultimately have to come up with mechanisms to avoid or mitigate such developments. The process of REDD program development in Indonesia is being assisted by a growing set of investments at field and policy level by a host of bilateral development partners and multilateral agencies through the FPCF and UN REDD programs. The global and domestic NGO communities, as well as indigenous communities’ representatives, are well aware of these issues and engaged in the process at policy and implementation level. These investments and civil society checks offer the potential to improve the positive and reduce the negative aspects of REDD implementation.

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The policy actions to promote geothermal energy development in the CC DPL operation include pricing reforms and compensation mechanisms. Geothermal electricity is more expensive than coal-fired power in Indonesia and someone has to pay this difference. If the government covers the cost difference directly to PLN through a compensation mechanism or subsidy, this increases the burden on the state budget and has an opportunity cost in terms of other possible pro-poor spending programs. If the government allows the price of electricity to rise to cover this cost, consumers will pay more for electricity. While geothermal is only a small share of overall power production, the incremental impact on the overall cost of electricity in the case of cost pass through will be small. Since the objective is to increase the share of renewables over time, it is useful to discuss, design and implement mitigation options before price distortions or dislocations become larger. Indonesia already has substantial positive experience with providing a social safety net to protect the poor in the case of energy price rises. The cash transfer scheme to mitigate the impact of a price rise GOI has been used in the case of fuel price hikes in the past. The cash transfer scheme targets poor households with quarterly cash payments, in an amount calculated to offset much of the increased cost based on average daily use. The Bank has assisted the government in the design and implementation of this scheme since 2005 when it was first introduced. The approach has evolved into a conditional cash transfer, where the (increasingly well targeted) recipients are expected to show evidence of health or school visits in return for the transfer payment.18 Another option for mitigating the impact of price rises is to devise a progressive tariff structure so that the well-off pay more for energy than the poor. In fact, the two options can and have been used together, for example, as in prior fuel price hikes, the cost of kerosene was held to rise less steeply, as it is a fuel predominately used by poorer members of society. This demonstrates that the government has the capacity, experience and regulatory options at its disposal to mitigate the impact of an energy price rise on the poor. Policy areas 2 (Climate Change Adaptation) and 3 (Institutional and cross-sectoral issues) were not identified to contain prior actions that would cause significant negative poverty or social impacts. Rather, these actions aim to assist poorer social groups, such as farmers or coastal communities, to develop skills and capacity to adapt the effects of climate change in the future. The policy actions on energy policy and promotion of renewable energy sources and energy efficiency also have the potential to reduce over-use of fossil fuels, reduce GHG emissions, and produce co-benefits in terms of reduced local air pollution and improved health outcomes. More efficient energy use and pricing will make Indonesia’s economy more efficient and potentially free up resources that can be directed toward job creation and poverty alleviation. Particular investments in power plants in particular sites will need environmental impact statements and mitigation plans. Indonesia’s laws and capacity for these kinds of reviews is increasing and the legal basis for enforcement of environmental laws was strengthened in 2009. Communities and civil society groups are well informed about the environmental review process and have opportunities to be heard in the existing process. Local government capacity for implementation remains weak, but is being improved.

18 The Bank is supporting Indonesia’s crisis monitoring and response system to better target the poor and supporting both PNPM and the Family Support Program, which targets the poorest households with pregnant women and their young children by providing conditional cash transfers.

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Annex 6: Table 1 Poverty and Social Assessment Review

19 Grading adapted from Assessing the Environmental, Forest, and Other Natural Resource Aspects of Development Policy Lending – A World Bank Toolkit (2008): Red – Very Likely Negative Impact; Yellow- Potential for Negative Impact; Blue – No Impact; Green – Positive Impact.

Poverty and Social Assessment Review (OP 8.60 review of “likelihood of significant effects”)

POLICY AREA 1: MITIGATION No. Policy Action Impact

19 Potential negative effects and government mitigation capacity Potential positive impacts

1. Improve policy coordination and management of peat land

Yellow Rehabilitation of peat land can exclude its possible current use by small holders. → Potential negative impacts can be identified through consultations and community engagement → Appropriate and acceptable compensation can be negotiated, in cash or kind (suitable land elsewhere) → Ongoing GOI process to develop coordination mechanism a presidential decree has potential for improved decisions and outcomes.

‐ Improved health outcomes due to reduced smoke and haze

2. Improve regulatory framework for REDD implementation and develop demonstration activities

Yellow Potential likelihood of significant positive and negative effects (of eventual REDD implementation): - Inequitable distribution of benefits - Restriction of access to traditional users of forest. - Corruption/mismanagement of funds. - Lack of capacity among regional stakeholders to deal with all the complex issues surrounding carbon trade, avoided deforestation and monitoring pilot implementation. → Potential negative impacts and capacity development needs are being addressed through the Indonesia’s response to the international REDD framework. → GOI is undertaking a strategic environmental and social assessment (SESA) with Bank assistance → MOFR decree on the distribution of benefits from REDD is being reviewed and improved.

‐ Deforestation rates decreased. ‐ Increased local livelihoods for local

populations.

3. Improve basis for timber legality, strengthen institutions, and improve incentives

Green No likelihood of significant negative effects ‐ Illegal logging rates reduced ‐ Illegal use of fire to clear land

reduced, reduced forest fires ‐ SFM practices improved

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4. Improve policy framework to promote renewable energy development and investment

Yellow Potential likelihood of significant positive and negative effects: ‐ If higher electricity price is passed through to consumers, the poor

could be affected. → GOI has experience with a social safety net program (unconditional cash transfer to poor) during the previous fuel subsidy cuts. → GOI could design a progressive tariff scheme that protects the poor while charging the well off more. Could use both mechanisms together.

‐ More clean domestic energy ‐ Improved energy security. ‐ Reduced emissions of GHGs and

conventional pollutants ‐ Increased competitiveness

5. Improve policy framework to promote energy efficiency development and investment

Green No likelihood of significant negative effects. - Greater efficiency in energy use, more competitive fossil fuel using sectors

POLICY AREA 2: ADAPTATION AND DISASTER PREPAREDNESS No. Policy action Impact Potential negative effects and government mitigation capacity Potential positive impacts 6. Establish strategic water

management plans in key river basins

Green No likelihood of significant negative effects. ‐ Reduced vulnerability of communities in high-risk areas to natural disasters, including those that are exacerbated by climate change

7. Scale up actions to improve climate resilience in agriculture

Green No likelihood of significant negative effects. ‐ Reduced vulnerability to climate-inducted drought and changing rainfall patterns

8. Scale up actions to establish national disaster risk reduction and management system

Green No likelihood of significant negative effects. ‐ Increased resilience to climate-intensified disasters

9. Establish systems and strategies to improve climate preparedness and resilience in the coastal and marine sector

Green No likelihood of significant negative effects. ‐ Higher capacity of coastal communities to adapt to climate change

POLICY AREA 3: CROSS SECTORAL AND INSTITUTIONAL ISSUES No. Policy action Impact Potential negative effects and government mitigation capacity Potential positive impacts 10. Strengthen knowledge base and

legal basis for climate change action and link these to national budgeting and planning processes

Blue No likelihood of significant negative effects ‐ Improved climate governance and higher accountability

11. Strengthen policy coordination and develop financing mechanisms for addressing climate change

Blue No likelihood of significant negative effects. ‐ More effective mainstreamining of climate in development planning and budgeting

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Annex 7: Environmental Assessment

Overview of Environmental Issues in Indonesia20 Indonesia’s forests are among the most extensive, diverse and valuable in the world. Indonesia holds the world’s third largest tropical rainforest, with forest land covering about 120 million ha or about 60% of the country’s land area. Indonesia is often referred to as a mega biodiversity region, i.e. having one of the highest levels of biological diversity in the world. In terms of species diversity, Indonesia is among the top five in the world. Over half of these species are endemic plants only found in Indonesia. Indonesia is not only rich in species diversity, but also in the wealth of its different ecosystems. Indonesia is also rich in marine and coastal ecosystems and is part of the ‘coral triangle’ epicenter of marine biodiversity. However, Indonesia’s terrestrial biodiversity is threatened with rapid deforestation, though now evidence shows the rate declining. Impacts of human activities, including habitat destruction, over exploitation, illegal logging and forest clearance have resulted in Indonesia hosting a long list of endangered species. Recent estimates indicate that, although reduced from past highs, deforestation and forest degradation is still over 1 million ha per year. In addition to impacts on biodiversity, habitat and landscapes, deforestation, forest degradation and peat fires are resulting in globally significant GHG emissions, which amount to over two-thirds of Indonesia’s total emissions. For Indonesia, tackling emissions from LULUCF and peat provides the most cost effective short to medium term emission reduction opportunity. In the future, fossil fuel emissions will continue to grow and may exceed forest and land use emissions, if those are brought under control. Thus, the energy sector is an important for moving toward a low carbon development path. Indonesia’s electrification rate is presently around 66%. The government target is to increase this to 93% by 2020. Under the Government's power generation program, a first phase of 10,000 MW of capacity has been commissioned in recent years, mainly from coal-fired plants. A second 10,000 MW program will rely more on geothermal and renewable energy sources. Indonesia has the world’s largest geothermal energy reserves and has other renewables (hydropower, wind, solar, and biomass). Yet, with current energy price distortions, it will be more difficult to promote efficiency, cleaner technology or innovation for environmental and climate benefits. Inadequate environmental management remains a challenge for Indonesia. Over the past decade, many aspects of environmental management and natural resource management have been decentralized to the local level. Natural resource management and environmental quality are now more dependent on local leadership, institutional capacity and willingness to conform to national standards and regulations. The current picture across Indonesia is mixed, with some regions demonstrating commitment to sustainability, while others are opting for exploitation with short-term gains. Greater local control has had positive aspects through reputational programs, greater political will, interagency collaboration, community empowerment, and integration of environment in spatial planning. At the same time, decentralization has revealed obstacles to good environmental management, including: inadequate standards and enforcement; distorted incentives; lack of community empowerment; and insufficient local government implementation and enforcement capacity.

20 This analysis draws on the following documents: World Bank (2009). Investing in a More Sustainable Indonesia: Country Environmental Analysis. BAPPENAS (2007) Indonesia Country Natural Resource Environmental Analysis. Jakarta. World Bank (2007). Towards an Efficient Fuel Products Market in Indonesia: Achieving an Equitable and Sustainable Policy. World Bank (2006), Sustaining Economic Growth, Rural Livelihoods, and Environmental Benefits: Strategic Options for Forest Assistance in Indonesia. Ministry of Environment (2008), State of the Environment Report.

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There is an impressive set of laws, policies, programs, and national as well as local institutions that are responsible for environmental and natural resource management. The latest developments include the revision of the environmental legislation, which now has a more robust approach to the use of Environmental Impact Assessment and expanded enforcement authority, among others improvements. Despite the substantial investment in environment and natural resources policy and staff development, actual implementation of rules and procedures has been poor due to weak commitment by sector agencies, low awareness in local departments and capacity challenges at all levels. Also, awareness about the expected negative environmental impacts of unmanaged and exploitative development and the mechanisms for stakeholders to hold government agencies accountable for their performance are weak. Environmental considerations have only been integrated weakly into planning and programming processes, especially in the area of public investment and in regional plans for land and resource use. Indonesia’s spending for environmental purposes was low for the decade prior to 2006, but has begun to increase substantially in recent years. Environmental revenue collection has been low and natural resources have been under-valued. Fuel and electricity subsidies enhance over-consumption, burden the budget and benefit higher income groups, while making it difficult for renewables to compete. Legal and financial incentive structures are not very effective in curbing illegal logging, but recent changes in the deforestation rate show some progress. Policy distortions in fishing and mining have contributed to unsustainable harvesting patterns and illegal mining activities. Conflicting sector-based regulations and national laws, including those involving decentralization, contribute to the weak implementation. Environmental fiscal reform is one approach to address these distortions through the use of taxation and pricing instruments to raise revenues, but also to provide incentives for more sustainable behavior. The Ministry of Environment and Ministry of Finance are now developing the capacity and tools for wider application of environmental fiscal reform with assistance from the German and Danish governments. Forest loss is one of the most prominent causes of environmental degradation. The drivers of deforestation include governance failings, illegal logging, land use conflicts, and deliberate conversion for agricultural uses, including cash crops and tree crops. In this last category, oil palm stands out as a major contributor, since its high value and market growth are attractive to both large and small holders. Ten provinces account for 78 percent of dry forest loss and 96 percent of swamp forest loss as well as related emissions, with just Riau, Central Kalimantan and South Sumatra accounting for over half of all losses and emissions. Although there is uncertainty about the magnitude of such emissions, there is consensus that forestry and land use are key priorities for mitigation. The policy and institutional issues, driving forces, impacts, and development costs of forest and land degradation have been well-known for many years in Indonesia. The conversion of peatlands for agricultural or plantation use through burning and drainage is a concern because peatland has much higher GHG emissions than dryland forests and because emissions continue for long periods as the drained peat compresses, degrades and oxidizes. Peat forests are being degraded via tree removal and drainage for plantation or agricultural development, using canals for wood removal, burning and drainage for development of plantation crops, such as oil palm and pulpwood. Opening up and draining of peat lands has enormous consequences outside the development area as the effects of drainage will extend beyond the project boundary (often a concession) and increase GHG emissions and fire risks. Recent years have seen a range of conflicting or contradictory policies regarding peat land, with some Ministries or local governments promoting or subsidizing conversion, while others strive for protection or rehabilitation. As an example of this, a temporary moratorium on peatland development was introduced, but later a Ministry of Agriculture decree allowed regulated conversion on some types of soils in some types of areas. This uncertain and changing policy environment contributes a short term planning horizon, such that businessmen, developers or local governments may choose opportunistic projects, rather than sustainable ones with longer term benefits.

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Large scale fires are an ongoing challenge for Indonesia, especially during El Niño Southern Oscillation events. Fires are traditionally used to clear land as a least-cost option by smallholders. The fires in 1997/1998 affected close to 12 million hectares across Indonesia and led to economic losses, estimated in the range of $9 billion. Peatlands that have been drained – even if plantation development is halted – become more susceptible to fire. Without better land use allocation, equity and law enforcement, local people and companies will still find it cost effective to use fire to clear land. Inadequate environmental management and growth without attention to environmental outcomes and costs – poses a challenge for Indonesia that hurts the poor and the economy. The economic consequences of climate change represent the highest potential cost to Indonesia’s economy in the long term, amounting to annual losses of between 2.5 and 7.0 percent of GDP by the end of the century. Significant economic losses are also caused by other types of environmental degradation, especially deforestation, soil depletion, and coastal/marine degradation. Inadequate water and sanitation constitute the largest short-term cost to the Indonesian economy, estimated at more than $6 billion in 2005 or more than 2 percent of GDP. The health impacts of outdoor and indoor air pollution have been estimated at $4.6 billion per year or about 1.6 percent of GNI. In total, environmental degradation costs are likely to grow in the future and are currently on par with the average annual growth rate. These costs are disproportionately borne by the poor who are more vulnerable, more exposed and less able to cope with the impacts of pollution and resource degradation. Climate change has the potential to exacerbate these impacts and costs. Adaptation is a priority because of Indonesia’s vulnerability to climate change. Specific areas of Indonesia are highly vulnerable to multiple climate change hazards (drought, floods, landslides, sea level rise). While temperatures may only increase modestly, more intense rainfall and sea-level rise will negatively affect food security, water resources, coastal areas, farming and coastal livelihoods, forests, marine biodiversity, and health. People and ecosystems are especially vulnerable to climate risks on Java, Bali, parts of Sumatra, and a large area of Papua. Climate change will have the most impact on the poorest Indonesians who are more likely to be living in marginal areas that are susceptible to drought, flooding and/or landslides; dependent on climate-sensitive agriculture or fisheries for their livelihoods; and have fewer assets to cope with the impacts of a changing climate. While fossil fuel GHG emissions per capita and emissions intensity are low, they are increasing rapidly. Industry is currently the largest source of carbon emissions, the transport sector is the largest user of liquid fuels and petroleum is currently the main contributor to CO2 emissions. Even assuming a decrease in energy intensity, emissions from energy consumption could triple by 2030 from 2005 levels on a business as usual path (as estimated by IEA 2007). Mitigating these emissions will require more realistic energy pricing, a better enabling environment to develop renewable energy resources, and greater efficiency in the industrial, power, manufacturing and transport sectors. Environmental Review of Operation Environmental effects will generally be positive or neutral and contribute to achieving generally desired aims of many development and research agencies. The environmental review for CC DPL is contained in the following matrix and discussed briefly here. The CC DPL’s current year operation is based on a focused set of prior actions achieved in 2009 in the context of the CC-PL process. The Bank’s CC DPL operation will build on the same underlying policy matrix and monitoring framework developed under the CC-PL process. This environmental review of operation addresses the current program. Separate OP 8.60 reviews will be conducted along with future operations.

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The tools consulted to perform a quick analysis of “likelihood of significant effects” were (i) Assessing the Environmental, Forest, and Other Natural Resource Aspects of Development Policy Lending – A World Bank Toolkit (2008), (ii) Policy and Institutional Reforms to Support Climate Change Adaptation and Mitigation in Development Programs – A Practical Guide and the (iii) Good Practice Note on Environmental and Natural Resource Aspects of Development Policy Lending. Further analytical support to analyze GOI’s capacity to mitigate identified potential negative effects have been derived from the Indonesia Country Environmental Analysis (CEA) (WB 2009); Sustaining Economic Growth, Rural Livelihoods, and Environmental Benefits: Strategic Options for Forest Assistance in Indonesia (WB 2006); and Ministry of Finance Green Paper: Economic and Fiscal Policy Strategies for Climate Change Mitigation in Indonesia (Ministry of Finance 2009). Policy Area 1: Climate Change Mitigation. These proposed policy triggers will, for the most part, not likely result in significant negative effects. Policy measures on reducing deforestation and degradation through REDD, improving peatland management, and improving forest governance have potential for both negative and positive effects to the environment. Preserving forest and peat lands will have environmental co-benefits beyond GHG emissions reductions, to include improved water management, improved biodiversity habitat, and reduced health losses associated with smoke and haze. For peat land conservation, the approaches must be designed carefully and applied according to best practice and adapted to local and regional circumstances. To enhance outcomes and improve the underlying rule of law, the CC DPL also proposes policy actions in the area of forest governance and law enforcement to reduce illegal logging and use of fire in land conversion, in particular. Policy Area 2: Climate Change Adaptation and Disaster Preparedness. Recent analysis for the Southeast Asia region suggests that Indonesia is highly vulnerable within the region to various aspects of a warming climate. The eastern and western portions of densely-populated Java, the coastal regions of much of Sumatra, parts of western and northern Sulawesi, and southeastern Papua islands all rank highly in terms of potential climate hazards. Indonesia is susceptible to all major climate change risks (drought, floods, landslides, sea-level rise) except cyclones. Water management is thus a key adaptation issue. Proposed policy actions will either have a beneficial or neutral effect on the environment. Policy Area 3: Institutional and cross-sectoral issues. Indonesian legislation related to environment and natural resources management is both detailed and extensive. Yet the regulatory framework is often overlapping and contradictory between central government and regional level. Provinces and districts may issue regulations that contradict national legislation or regulations. Without strong enforcement from the central government, or strong incentives driving local leadership to take a proactive role in conforming to national environmental legislation and regulation, success in environmental management at the local level depends largely on the level of commitment or political will of the individual leadership. Identified policy actions are assessed to be neutral.

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Annex 7: Table 1. Environmental Review of CC DPL PROPOSED POLICY PROGRAM

POLICY AREA 1: MITIGATION

Environmental Review (OP 8.60 review of “likelihood of significant effects ”)

No. Policy Action Impact21 Potential negative effects and government mitigation capacity Potential positive impacts 1. Improve policy coordination

and management of peat land

Green ‐ No likelihood of significant negative effects as per Assessing … The World Bank Toolkit (p. 27).

‐ Can lead to decreased GHG emissions and retention of existing carbon stocks.

‐ Improved health outcomes due to less smoke / haze

2. Improve regulatory framework for REDD implementation and develop demonstration activities

Yellow Potential likelihood of significant positive and negative effects (of eventual REDD implementation): - Deforestation moves outside of areas designated for REDD. → Potential negative impacts and capacity development needs can be addressed through properly applied best practices in consultative process, design and compensation approaches. → The ongoing development of Indonesia’s REDD program is a focal point for efforts to address these issues. → Indonesia’s aim to be responsive to the international REDD framework (with development partner support) offers a good chance that identified issues can be addressed responsibly (although resources could be a barrier). → GOI is undertaking a strategic environmental and social assessment (SESA) that will help to develop the stakeholder assessments and strategic options to help in developing appriate mitigation responses

‐ Deforestation rates decreased. ‐ REDD contributes to conservation of

biodiversity (e.g. tigers) ‐ Concentrating on three provinces

contributing over half of deforestation (Riau, Central Kalimantan, South Sumatra) can have significant effects.

3. Improve basis for timber legality, strengthen institutions, and improve incentives …

Green No likelihood of significant negative effects as per Assessing the Environmental, Forest, and Other Natural Resource Aspects of Development Policy Lending – A World Bank Toolkit (p.26-27).

‐ Illegal logging rates reduced ‐ Illegal use of fire to clear land reduced,

reduced forest fires ‐ Sustainable Forest Management

practices improved 4.

Improve policy framework to promote renewable energy development and investment

Yellow Potential likelihood of significant positive and negative effects: As per Assessing … the World Bank Toolkit (p. 39). ‐ Potential for PLN to increase tariffs for electricity, potentially leading

to increase in kerosene use for cooking instead of electric stove. → GOI has experience deploying a social safety net program (unconditional cash transfer to poor) during the previous fuel subsidy cuts to mitigate rise of kerosene price.

‐ Cleaner, lower emissions power generation

‐ Promotion of clean domestic energy ‐ Reduced emissions of GHGs and

conventional pollutants

21 As per Assessing the Environmental, Forest, and Other Natural Resource Aspects of Development Policy Lending – A World Bank Toolkit (2008): Red – Very Likely Negative Impact; Yellow- Potential for Negative Impact; Blue – No Impact; Green – Positive Impact.

117

5. Improve policy framework

to promote energy efficiency development and investment

Blue/ Green

No likelihood of significant negative effects. As per Assessing the Environmental … World Bank Toolkit (p. 39).

- Greater efficiency in energy use leading to lessened pollution.

POLICY AREA 2: ADAPTATION AND DISASTER

PREPAREDNESS

Environmental Review (OP 8.60 review of “likelihood of significant effects ”)

No. Policy action Impact Potential negative effects and government mitigation capacity Potential positive impacts 6. Establish strategic water

management plans in key river basins

Green No likelihood of significant negative effects. As per Assessing the Environmental, Forest, and Other Natural Resource Aspects of Development Policy Lending – A World Bank Toolkit (p. 37).

‐

7. Scale up actions to improve climate resilience in agriculture

Green No likelihood of significant negative effects. As per Assessing the Environmental, Forest, and Other Natural Resource Aspects of Development Policy Lending – A World Bank Toolkit (p.24).

‐

8. Scale up actions to establish national disaster risk reduction and management system

Blue No likelihood of significant negative effects. ‐

9. Establish systems and strategies to improve climate preparedness and resilience in the coastal and marine sector

Blue/ Green

No likelihood of significant negative effects. As per Assessing the Environmental, Forest, and Other Natural Resource Aspects of Development Policy Lending – A World Bank Toolkit (p. 30-31).

‐

POLICY AREA 3: CROSS SECTORAL AND

INSTITUTIONAL ISSUES

(OP 8.60 review of “likelihood of significant effects ”)

No. Policy action Impact Potential negative effects and government mitigation capacity Potential positive impacts 10. Strengthen knowledge base

and legal basis for climate change action and link these to national budgeting and planning processes

Blue No likelihood of significant negative effects ‐

11. Strengthen policy coordination and develop financing mechanisms for addressing climate change

Blue No likelihood of significant negative effects. ‐

118

Annex 8: Overview of World Bank engagements and instruments in Indonesia. CC DPL is consistent with, and supportive of, the Bank’s strategy on climate change and development. Over the last decade the Bank has worked to integrate climate change concerns into its development policy. These efforts crystallized in the Bank’s Strategic Framework for Climate Change and Development (2008), which makes effective climate action part of core development efforts. The 2010 World Development Report emphasizes the interrelationship between successful climate action and development progress in client countries. CC DPL is also consistent with the series of innovative carbon and climate financing instruments developed over the last decade. The Bank manages climate-related financing instruments in concert with sustained dialogue with clients on climate change, analytical work and capacity building efforts. CC DPL is a strategic component among a range of instruments that the Bank employs to assist Indonesia with climate-related activities in the forestry and energy sectors. The Bank uses investment lending, Climate Investment Funds, Carbon Finance, analytical services, and grant resources from GEF and other sources to address key development and climate challenges. The following tables illustrate Bank engagements across a range of financing instruments in forestry and energy in Indonesia. The tables are illustrative, not comprehensive, in regard to development partner contributions and engagements. Several specific operations are highlighted below the table. This shows that CC DPL is aligned with other financing instruments and engagements and can add value in key areas. CC DPL can also enhance new financing instruments that aim to strengthen engagement in REDD, forest conservation, and forest carbon markets. The Forest Carbon Partnership Facility (FCPF) helps prepare a carbon market for avoided deforestation. Indonesia joined the FCPF through a participation agreement signed in November 2009. Building on FCPF, the Forest Investment Program provides financing for real investment in forest protection infrastructure, activities that contribute to countries’ REDD and forest carbon sequestration efforts. Indonesia recently became one of 5 pilot countries for development of an investment strategy to make use of this instrument. Assistance for the GOI’s forest climate agenda has included access to financing and technical assistance. In the year before Bali COP 13, the World Bank coordinated development partner support for the Indonesia Forest Climate Alliance (IFCA) which helped to develop the Government’s REDD platform in 2007. Subsequently, Indonesia joined the Forest Carbon Partnership Facility which approved a $3.6 million grant to support the country’s REDD readiness program. At the project level, the $17.5 million Aceh Forest and Environment Project (funded from the Multi Donor Fund for Aceh and Nias) is supporting several different REDD demonstration projects as models for financing sustainable forest management. Indonesia has been approved for participation in the Forest Investment Program (of the Climate Investment Funds), which could provide additional concessional financing for activities to reduce carbon emissions from forests and preserve existing reservoirs of forest carbon. The World Bank is supporting the Government’s climate agenda with a range of instruments in the energy sector. In the energy sector, the Bank is developing a $500 million geothermal investment project which is supported by a GEF grant to improve the investment climate for this renewable resource as well as a programmatic carbon finance activity. In addition, $400 million of concessional financing from the Clean Technology Fund has been requested for an investment plan that would further support World Bank and ADB investments in geothermal as well as IFC and ADB guarantees for commercial bank financing of other renewables and energy efficiency in the private sector. The Bank is also providing carbon finance for CDM projects that include solid waste management, industrial energy efficiency and fuel substitution, and geothermal energy.

119

Through regular donor coordination meetings, the Bank ensures alignment and avoids overlap with other donors’ activities. Coordination with UN-REDD takes place through the Bank’s FCPF engagement. The Bank’s forest sector engagements are consistent with other initiatives and investments and emerge from the general forest policy dialogue among the GOI, Bank and Donors over the last five years. This shared understanding of the policy challenges and opportunities is documented in Sustaining Economic Growth, Rural Livelihoods, and Environmental Benefits: Strategic Options for Forest Assistance in Indonesia, a joint publication of the Bank with six other development partner organizations. CC DPL focuses on three main policy directions that are considered essential upstream policy areas that need attention in the forest sector to make progress on emissions reductions. Investments are also being made in capacity-building and knowledge generation on climate change. BAPPENAS, in partnership with AusAID and the World Bank, has developed tools to model the environmental and climate consequences of different development pathways. The Bank his working with Ministry of Finance and DNPI to develop the building blocks of a low carbon options study which has included work on overall emissions as well as the forestry, energy, industrial, and transport sectors. A continuing partnership also exists with the Ministry of Finance to build its capacity on the use of fiscal policy to affect climate change mitigation and adaptation.

120

Table 1: CC DPL Linkages With Forest Sector Engagement Instruments

POLICY AREAS/Activities Lending CC DPLCIF / FIP

FCPF / CPF AAA/TA GEF

Development Partners

FOREST GOVERNANCE

T imber legality verification Direct EU/UK VPA

Law enforcement capacity * FLEG US Lacey

Forest revenue systems improvement Direct * Low Carbon Possible MOF/DFID,

Local Govt responsibilities Indirect * Green Paper Possible GTZ, KfW, AUSAID, EU

T imber tracking & monitoring Possible EU, US

MRV implementation * Indirect UN

Private sector practices & incentives IFC Indirect IFC, FLEG EU/UK

REDD

Readiness architecture Direct IFCA

UN REDD, DFID,

Norway, CIFOR

Demonstration activities IFC Direct Many bilaterals& NGOs

Capacity building : Info sharing * Direct IFCA Most partners

Capacity building : Regional Govts Indirect * Many partners

Carbon revenue mgmt & distribution * Low Carbon MOF/DFID

Coordination & scaling up * Direct

Indigenous peoples roles * Direct Many partners

REDD PLUS / CONSERVATION

Biodiversity & Heart of Borneo * AFEP, GTI

ADB Active,

WB MSP NGOs, GEF Ias

3rd party monitoring networks * NGOS

Redesignating forest areas * Many NGOs

Concession restoration / Private sector IFC * WB Active NGOS

Forest plantation development IFC * Private Sector

Conservation trust fund, design * Possible US TFCA, Kehati

PEATLAND

Mechanisms & incentives Direct * WACLIMAD Possible Netherlands, DFID, US

Revenue sharing instruments Direct * Possible AUSAID

Community engagement/revenue sharing * WACLIMAD Netherlands, DFID

Oil palm national strategy * Netherlands, RSPO, IFC

Fire & haze task force * ADB ADB, GTZ

Linkages with agriculture * WACLIMAD Netherlands

BROADER POLICY ISSUES

Industry restructuring

IFCA, Industry

studies CIFOR, DFID

Plantation development IFC * IFC Private Sector

Land use rationalization Many NGOs

FIP investment strategy for Indonesia is not developed. * indicates probable or possible areas of investment.

121

Table2: CC DPL Linkages with Energy Sector Engagement Instruments

POLICY AREAS / Activities Lending DPL CIF / CTFCarbon Mkt:

CPFAAA/TA GEF

Development Partners

RENEWABLE ENERGY

Geothermal power development

Geothermal Clean Energy Investment Project (PGE)

WBG / ADB ($300 million)

Prep: PPIAF study on geothermal resource risk mitigation

Japan, Private Sector

Geothermal policies & barriers CC DPL

Prep: Carbon Finance Framework for Geothermal Development

Active: Pricing Policy, Credible transaction tenders, and risk mitigation instrument

Japan, AUSAID, NGOs

Biomass development IFC banks UN, Germany

Biofuel / palm oil IFC RSPO Oil palm studyNetherlands, DFID

Micro hydro, solar, wind IFC banksCPF Scoping study

Germany / PNPM

ENERGY EFFICIENCY

Regulatory reform PossibleGerman, US, Japan, AFD

Energy audits / ESCOS Low Carbon PossibleGerman, US, Japan, AFD

Carbon market opportunities IFC WBI Possible

Private sector investment IFC IFC banks Possible

ENERGY PRICING

Geothermal incentives Studies, TAPricing and Risk Mitigation Under GEF

JICA, AUSAID, KfW

Electricity pricing IDPL 1-3 Studies, TA US, allFuel pricing Studies, TA US, all

POWER SUPPLY & DISTRIBUTION

Power supply Upper Cisokan Pumped Storage project

JICA, AFD

Power transmission & distribution

Java-Bali Power Project & Transmission Development Project

JICA, ADB

Lower carbon optionsFlagship, low carbon study

DFID, AUSAID

BROADER ISSUES & INVESTMENT BARRIERS

Level of foreign investment / climate

DPL 1-6

IFC Transaction Advie to Central Java Power Project and geothermal tender process

credible and transparent geothermal tenders for geothermal under GEF

Bureaucracy / cost of doing business

DPL 1-6

122

Annex 9: Indonesia at a Glance

Indonesia at a glance 4/12/10

East LowerKey Development Indicators Asia & middle

Indonesia Pacific income(2009)

Population, mid-year (millions) 230.9 1,931 3,702Surface area (thousand sq. km) 1,905 16,299 32,309Population growth (%) 1.2 0.8 1.2Urban population (% of total population) 50 44 41

GNI (Atlas method, US$ billions) 513.4 5,080 7,692GNI per capita (Atlas method, US$) 2,230 2,631 2,078GNI per capita (PPP, international $) 3,830 5,399 4,592

GDP growth (%) 4.5 8.0 7.6GDP per capita growth (%) 3.3 7.2 6.3

(most recent estimate, 2003–2009)

Poverty headcount ratio at $1.25 a day (PPP, %) 17 17 ..Poverty headcount ratio at $2.00 a day (PPP, %) 50 39 ..Life expectancy at birth (years) 71 72 68Infant mortality (per 1,000 live births) 25 22 46Child malnutrition (% of children under 5) 24 13 26

Adult literacy, male (% of ages 15 and older) 95 96 88Adult literacy, female (% of ages 15 and older) 89 90 77Gross primary enrollment, male (% of age group) 116 112 112Gross primary enrollment, female (% of age group) 112 110 106

Access to an improved water source (% of population) 80 87 86Access to improved sanitation facilities (% of population) 52 66 52

Net Aid Flows 1980 1990 2000 2009 a

(US$ millions)Net ODA and official aid 941 1,716 1,654 796Top 3 donors (in 2007): Australia 48 77 72 335 United States 117 31 174 117 United Kingdom 18 22 34 70

Aid (% of GNI) 1.3 1.6 1.1 0.2Aid per capita (US$) 6 10 8 4

Long-T erm Economic T rends

Consumer prices (annual % change) 9.5 7.5 3.7 4.8GDP implicit deflator (annual % change) 31.0 7.7 20.4 8.4

Exchange rate (annual average, local per US$) 627.0 1,842.8 8,421.8 10,390.0Terms of trade index (2000 = 100) .. 301 100 191

1980–90 1990–2000 2000–09

Population, mid-year (millions) 148.3 178.2 206.3 230.9 1.8 1.5 1.3GDP (US$ millions) 78,013 114,426 165,021 540,274 6.1 4.2 5.3

Agriculture 24.0 19.4 15.6 15.3 3.6 2.0 3.4Industry 41.7 39.1 45.9 47.6 7.3 5.2 4.1 Manufacturing 13.0 20.7 27.7 26.4 12.8 6.7 4.7Services 34.3 41.5 38.5 34.1 6.5 4.0 8.0

Household final consumption expenditure 51.4 58.9 60.7 56.6 5.2 6.6 4.7General gov't final consumption expenditure 10.5 8.8 6.5 9.6 4.6 0.1 8.2Gross capital formation 24.1 30.7 22.2 31.0 7.7 -0.6 5.9

Exports of goods and services 34.2 25.3 41.0 24.1 2.7 5.9 7.8Imports of goods and services 20.2 23.7 30.5 21.3 1.2 5.7 8.6Gross savings .. .. .. ..

Note: Figures in italics are for years other than those specified. 2009 data are preliminary. Group data are through 2008. .. indicates data are not available.a. Aid data are for 2007.

Development Economics, Development Data Group (DECDG).

(average annual growth %)

(% of GDP)

6 4 2 0 2 4 6

0-4

15-19

30-34

45-49

60-64

75-79

percent of total population

Age distribution, 2008

Male Female

0

10

20

30

40

50

60

70

80

90

100

1990 1995 2000 2007

Indonesia East Asia & Pacific

Under-5 mortality rate (per 1,000)

123

Indonesia

Balance of Payments and T rade 2000 2009

(US$ millions)Total merchandise exports (fob) 62,124 119,513Total merchandise imports (cif) 36,196 92,787Net trade in goods and services 29,862 21,042

Current account balance 16,616 10,582 as a % of GDP 10.1 2.0

Workers' remittances and compensation of employees (receipts) 1,190 6,795

Reserves, including gold 27,257 66,104

Central Government Finance

(% of GDP)Current revenue (including grants) 19.7 15.5 Tax revenue 11.1 11.4Current expenditure 15.6 10.2

T echnology and Infrastructure 2000 2008Overall surplus/deficit -1.8 -1.6

Paved roads (% of total) 57.1 55.4Highest marginal tax rate (%) Fixed line and mobile phone Individual 35 35 subscribers (per 100 people) 5 75 Corporate 30 30 High technology exports

(% of manufactured exports) 16.2 10.8External Debt and Resource Flows

Environment(US$ millions)Total debt outstanding and disbursed 143,358 148,454 Agricultural land (% of land area) 25 26Total debt service 16,625 20,817 Forest area (% of land area) 54.0 48.8Debt relief (HIPC, MDRI) – – Nationally protected areas (% of land area) .. 11.2

Total debt (% of GDP) 86.9 27.5 Freshwater resources per capita (cu. meters) 13,398 12,578Total debt service (% of exports) 11.2 14.1 Freshwater withdrawal (billion cubic meters) 82.8 ..

Foreign direct investment (net inflows) .. .. CO2 emissions per capita (mt) 1.4 1.9Portfolio equity (net inflows) .. ..

GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) 3.7 4.2

Energy use per capita (kg of oil equivalent) 734 803

W orld Bank Group portfolio 2000 2008

(US$ millions)

IBRD Total debt outstanding and disbursed 11,715 6,968 Disbursements 1,051 1,398 Principal repayments 761 1,252 Interest payments 950 370

IDA Total debt outstanding and disbursed 714 2,006 Disbursements 59 494

Private Sector Development 2000 2008 Total debt service 31 40

Time required to start a business (days) – 76 IFC (fiscal year)Cost to start a business (% of GNI per capita) – 77.9 Total disbursed and outstanding portfolio 880 664Time required to register property (days) – 39 of which IFC own account 480 650

Disbursements for IFC own account 20 208Ranked as a major constraint to business 2000 2008 Portfolio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account 43 79 Economic and regulatory policy uncertainty .. 48.2 Corruption .. 41.5 MIGA

Gross exposure 56 50Stock market capitalization (% of GDP) 16.3 19.3 New guarantees 0 0Bank capital to asset ratio (%) 6.0 10.0

Note: Figures in italics are for years other than those specified. 2008 data are preliminary. 4/1/10.. indicates data are not available. – indicates observation is not applicable.

Development Economics, Development Data Group (DECDG).

0 25 50 75 100

Control of corruption

Rule of law

Regulatory quality

Political stability

Voice and accountability

Country's percentile rank (0-100)higher values imply better ratings

2008

2000

Governance indicators, 2000 and 2008

Source: Kaufmann-Kraay-Mastruzzi, World Bank

IBRD, 7,876

IDA, 2,234

Other multi-lateral, 24,381

Bilateral, 33,713Private, 53,685

Short-term, 26,565

Composition of total external debt, 2009

US$ millions

124

Millennium Development Goals Indonesia

With selected targets to achieve between 1990 and 2015(estimate closest to date shown, +/- 2 years)

Goal 1: halve the rates for extreme poverty and malnutrition 1990 1995 2000 2008 Poverty headcount ratio at $1.25 a day (PPP, % of population) .. .. .. .. Poverty headcount ratio at national poverty line (% of population) .. 17.5 27.1 16.7 Share of income or consumption to the poorest qunitile (%) .. .. .. 7.1 Prevalence of malnutrition (% of children under 5) 31.0 27.4 24.8 24.4

Goal 2: ensure that children are able to complete primary schooling Primary school enrollment (net, %) 96 .. 93 95 Primary completion rate (% of relevant age group) 94 96 95 105 Secondary school enrollment (gross, %) 47 48 55 73 Youth literacy rate (% of people ages 15-24) 96 .. .. 97

Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (%) 93 .. 96 98 Women employed in the nonagricultural sector (% of nonagricultural employment) 29 29 32 29 Proportion of seats held by women in national parliament (%) 12 13 8 12

Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) 91 66 48 31 Infant mortality rate (per 1,000 live births) 60 48 36 25 Measles immunization (proportion of one-year olds immunized, %) 58 63 72 80

Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) .. .. .. 420 Births attended by skilled health staff (% of total) 32 37 64 72 Contraceptive prevalence (% of women ages 15-49) 50 55 .. 61

Goal 6: halt and begin to reverse the spread of HIV/AIDS and other major diseases Prevalence of HIV (% of population ages 15-49) .. .. 0.1 0.2 Incidence of tuberculosis (per 100,000 people) 343 304 270 228 Tuberculosis cases detected under DOTS (%) .. 1 20 68

Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (% of population) 72 74 77 80 Access to improved sanitation facilities (% of population) 51 51 52 52 Forest area (% of total land area) 64.3 59.2 54.0 48.8 Nationally protected areas (% of total land area) .. .. .. 11.2 CO2 emissions (metric tons per capita) 0.8 1.2 1.4 1.9 GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) 3.6 4.1 3.7 4.2

Goal 8: develop a global partnership for development Telephone mainlines (per 100 people) 0.6 1.7 3.2 13.3 Mobile phone subscribers (per 100 people) 0.0 0.1 1.8 61.6 Internet users (per 100 people) 0.0 0.0 0.9 11.1 Personal computers (per 100 people) 0.1 0.5 1.0 2.0

Note: Figures in italics are for years other than those specified. .. indicates data are not available. 4/1/10

Development Economics, Development Data Group (DECDG).

Indonesia

0

25

50

75

100

125

2000 2002 2004 2006 2008

Primary net enrollment ratio

Ratio of girls to boys in primary & secondary education

Education indicators (%)

0

10

20

30

40

50

60

70

80

2000 2002 2004 2006 2008

Fixed + mobile subscribers Internet users

ICT indicators (per 100 people)

0

25

50

75

100

1990 1995 2000 2007

Indonesia East Asia & Pacific

Measles immunization (% of 1-year olds)

125

Annex 10: Map of Indonesia # IBRD 33420R2