Business Case: Promoting Low Carbon Investment in Indonesia
INTERVENTION SUMMARY
What support will the UK provide?
1.
The UK will make a £5m contribution to a partnership managed by Agence Francaise
de Developpement (AFD) to achieve investment in low carbon development in Indonesia.
This funding will be provided over a one-year period (April 2011 to March 2012). Eight
months into this partnership its impact will be assessed to determine the case for a further
longer-term phase of support.
Why is UK support required?
2.
UK support is required to identify and prepare detailed feasibility studies for a range of
low carbon projects that will establish a portfolio of low carbon flagship projects in Indonesia.
These projects will be developed to attract finance from a range of international and
Indonesian financial institutions, including from AFD. The portfolio and the projects support
Indonesia’s stated intention to move to a low carbon growth path and reduce the growth of
its greenhouse gas (GHG) emissions.
3.
Finance for low carbon projects is currently difficult to access in Indonesia because
there are very few low carbon development projects in a state of readiness to attract
investment and financing. In part this stems from weak capacity by investors, local
governments and communities in preparing investment-grade project proposals in low
carbon sectors. It also stems from risk adverse financial institutions who are concerned
about financing investments which they regard as new, innovative and risky and see the
absence of investable projects as proof for this. This has been a major barrier to attempts by
Indonesia to change its “business as usual” high-carbon growth path and to achieve its
national targets.
4.
Consultation with a range of international and Indonesian public and private financial
institutions has revealed that they are interested in principle in providing low carbon
investment, but that very few projects are at the stage where they can attract the financing.
DFID support to project preparation costs, technical assistance and the preparation of full
feasibility studies would help de-risk the investments for potential financiers.
5.
The Government of Indonesia’s current target for economic growth is 7% per annum.
The Government also plans that by 2014 poverty will be 50% lower than in 2005. Until now,
Indonesia’s economic growth has been high-carbon, very dependent on natural resources
extraction, with little job creation benefits and underperforming on poverty reduction.
Therefore, an alternative model for economic development is needed. Emission reductions
will only be sustained if Indonesia is able to move onto a low carbon growth path, that
generates employment and growth and ultimately poverty reduction.
6.
DFID funding will be used to form a partnership with AFD to:

develop investment-grade project proposals that lead to flagship low carbon
projects to demonstrate the commercial viability of low carbon investments in
Indonesia. These flagship projects will help drive future investor interest in low
carbon development in Indonesia.

directly influence key decisions makers in government to more strongly support
low carbon development. Actual projects, delivering low carbon, growth, jobs and
prosperity will influence the central political debate in Indonesia – namely whether
low carbon investment can deliver economic growth. Actual projects will help
overcome resistance and reluctance towards low carbon investment. They could
be used as examples to promote further investments across the country.
7.
This business case will contribute directly to the UK’s climate change objectives in
Indonesia. This business case will also form part of DFID’s global portfolio of climate-change
related work.1
8.
Subject to an assessment of progress, this business case is expected to lead to a
longer-term partnership with AFD which would seek to scale up support to the development
of flagship low carbon projects in Indonesia. That later stage might also involve innovative
ways to blend DFID and AFD finance.
What are the expected results?
9.
The impact of DFID’s intervention will be to demonstrate to government, investors
and civil society that low carbon investments in Indonesia can be commercially viable,
sustainable and supportive of poverty reduction and prosperity goals. The specific outcome
of the work to be supported by DFID will be a pipeline and portfolio of low carbon projects
that are commercially attractive, best practice, provide employment and attract finance from
financial institutions. A key test is whether projects in the portfolio attract future financing
from a range of international and Indonesian public and private financial institutions. The
leveraging effect (including replicability) will also come from fiscal and sectoral incentives
taken by the Government (Ministry of Finance and other relevant ministries), based on the
feeding-back of the results of the studies and the selected experimental flagship projects
developed under this business case.
1. STRATEGIC CASE
A. Context and need for DFID intervention
1.1
At the G20 Pittsburg Leaders’ Summit in September 2009, Indonesia’s President SBY
committed that by 2020, Indonesia would, through its own measures, reduce emissions by
26% compared to a “business as usual” trajectory. With international support, Indonesia
calculates that it could reduce emissions by 41%. These are significant reductions 2.
Indonesia is the third largest emitter of greenhouse gases (mostly related to forestry and
land use change)3.
1
See: http://www.dfid.gov.uk/Global-Issues/Emerging-policy/Climate-environment/
The National Action Plan on Reducing GHG Emissions (RAN-GRK 2010) estimates that the 41% target on
emission reductions amounts to an annual reduction of 1.189 Gt CO2e by 2020 over the government’s
business as usual projection.
3 International Energy Agency (2007) [www.iea.org]. Identified initially by Wetlands International in UNFCCC
COP 12 in Nairobi 2006. It was re-stated nationally in Indonesia through a DFID-funded World Bank and PT
PEACE study in 2007. It has subsequently been challenged by the Govt of Indonesia, but the Government
does recognise Indonesia’s contribution to global emissions is significant.
2
Figure 1: Emission commitment of the Government of Indonesia4
1.2
Figure 1 shows that the commitments are significant. Indeed they imply a reduction of
9% and 27% on 2005 emission levels. But they are also significant globally given that
Indonesia is the third largest emitter of greenhouse gases (mostly related to forestry and
land use change).
1.3
In March 2011, through the Bilateral Aid Review, DFID confirmed a 4-year programme
of climate change support to Indonesia. Indonesia is centrally important to the world's efforts
to preserve forests and to reduce carbon emissions. As a large emerging economy and an
important player in the United Nations Framework Convention on Climate Change
(UNFCCC) negotiations, Indonesia has a critical role to play in a global deal for climate
change.
1.4
Emission reductions will only be politically and economically sustained if Indonesia is
able to move onto a low carbon growth path, that generates employment, growth and
poverty reduction.5 The Government of Indonesia’s current target for economic growth is 7%
per year for 2011 to 2014.6 The dual achievement of low carbon growth and emission
reduction targets will be a huge challenge. A major part of that challenge is the development
of viable alternatives to “business as usual” carbon-intensive investment patterns that can
genuinely provide prosperity and employment and are supported by Indonesian decision
makers. This business case sets out how DFID would support the Government of Indonesia
to achieve this whilst also delivering on the UK’s ambition to help Indonesia reduce the
growth of its emissions and reduce poverty. The activities in this business case closely
Source: Ministry of Finance “Economic and fiscal policy strategies for climate change mitigation in Indonesia”,
2009. Figure 1 is from an extrapolation of Government of Indonesia data: Energy emissions growth 5% p.a.,
“Other sources” 1% p.a., land-use change and forestry, as well as peat, constant. The lines labelled “-26%” and
“-41%” refer to the reduction from total projected emissions at 2020.
5 To achieve low carbon growth, Indonesia will need to improve energy efficiency (EE) by 30 percent over the
business-as-usual (BAU) growth path and substantially increase energy from renewables from 3% of energy
mix to 17% by 2025. See Asian Development Bank’s Clean Technology Investment Fund (2010)
6 President Susilo Bambang Yudhoyono’s Annual State of the Nation Speech, August 2010.
4
complement ongoing and planned future support to the Ministry of Finance on fiscal policy to
promote low carbon development.7
1.5
Until now, Indonesia’s economic growth has been highly dependent on natural
resources extraction and therefore, an alternative model for economic development is
needed. Senior officials in the Government of Indonesia have consistently said that the
establishment of flagship low-carbon demonstration projects is a top priority for proving the
value of this alternative model.8 This is because they see tangible projects as being the most
direct way to convince stakeholders such as politicians at the local and national level,
communities and financial institutions, of the need and the case for change. This business
case will directly focus upon delivering flagship projects in the land use, land use change and
forestry (LULUCF), energy, waste and sanitation sectors. These are the three areas given
highest priority by GoI in its National Emissions Reduction Plan.
1.6
Effective collaboration between public and private sectors will be essential to meet the
challenges of climate change. As in other countries, it will be public-private partnerships that
will be the main way that low carbon projects will be delivered in Indonesia. Supporting
flagship projects is one part of the strategy to engage the transformative power of the private
sector and is consistent with DFID’s approach to supporting developing country governments
to foster partnerships with the private sector.9 Public private partnerships were directly
recognised in the UNFCCC Bali Action Plan, which called for partnership between private
sector funding and investment to support action on mitigation, adaptation and technology
cooperation.
1.7
This project has strategic value in that it builds on and develops strong ownership
from government, private sector and the public sector because it is designed to access
investment flows that will directly contribute to low carbon development.
1.8
There is clear evidence that the Government of Indonesia is keen to work with
partners such as the UK to tackle the growth of GHG emissions. The Government of
Indonesia’s commitment to working with the international community on promoting low
carbon investment can be found in numerous recent high level documents. For example,
Indonesia’s Second National Communication Under the United Nations Convention on
Climate Change published in 2010 states that:


“…to overcome funding difficulties that may a rise when addressing the impacts of
climate change, international support plays a key role in enabling Indonesia to
effectively develop and implement climate change programs”.
“…further emissions reductions of 41% are expected with international support. With
this commitment, Indonesia will follow a low carbon development path”.
B. Impact and Outcome
1.9
The impact of DFID’s intervention will be to demonstrate that low carbon investments
in Indonesia can be commercially viable and attract finance, sustainable and deliver poverty
reduction and prosperity.
7
Indonesia Low Carbon Strategy Project (2010 to 2011). A follow-on business case is under preparation.
Including the Office of the President, the Coordinating Minister for Economic Affairs, the Minister of Finance
and the Head of UPK4 and the National REDD Task Force.
9 See Andrew Mitchell’s speech to the Climate Development Knowledge Network (November 2010).
8
1.10 The specific outcome of the work to be supported by DFID will be to build a pipeline
and a portfolio of low carbon projects with private and public sector partners that can attract
financing.
1.11
The outputs of this project will be:

8 pre-feasibility studies (including, biomass, waste-to-energy, hydro, a broader
sector study on the production of components for solar panels, and REDD+)10 with
identified project goals, potential barriers, and quantified technical, social,
environmental and economic opportunities.

4 data-intensive feasibility studies with optimised project (system) design,
including capacity, application, and operation and determined final pricing and
return on investment. 3 of the 4 will have finalised business plans (in hydro,
REDD+ and biomass (waste) to energy).

At least 1 project at implementation stage.
1.12 The outputs of the project are achievable since as part of the preparation of this
business case, DFID has:

undertaken initial scoping missions to map investment opportunities and compile a
shortlist of projects in the forestry, renewable energy and waste sector.11 A
number of pre-feasibility studies, financed by DFID, are ongoing in these sectors.
A joint Ministry of Finance (MoF)-DFID team has conducted site visits to engage
with the industry, project developers, local government and other stakeholders (eg,
Sugar Industry, East Java, January 2011, Urban Waste, Bandung, January 2011,
REDD+, SE-Sulawesi, February 2011, Hydro Power, Lampung, March 2011).

held extensive meetings with public and private sector financial institutions. Over
the past 12 months DFID and government partners have consulted with all
relevant donor (inc. JICA, KfW, AusAid, USAid, Norway, AFD, Dutch, Korea,
MDBs, IDB, European Development Bank) and domestic financing (Bank Mandiri,
Bank BUKOPIN, Bank BNI, PT Danareksa, and PT PPA) institutions operating in
Indonesia.
1.13 Examples of the type of project that could potentially be supported under the project
are:

Solid waste, treatment facility and sanitation. The project could support a pilot
project in the area of solid waste management, treatment facilities and sanitation to
enhance the environmentally efficient disposal of household and commercial waste.
This venture may include recycling, composting, and methane capture for flaring and
secondary power generation to enhance the impact on climate protection and explore
the generation of new revenue streams through the Clean Development Mechanism
(CDM). A solid waste treatment facility project in the Greater Bandung Area, West
Java, has been prioritised by Government.
10
REDD+ stands for projects that focus on reducing emissions from deforestation and forest degradation, and
foster conservation, sustainable management of forests, and enhancement of forest carbon stocks.
11
These are the three target sectors identified by Government for the achievement of national emission
reduction targets.

Sugar mill cogeneration. Outside Indonesia, sugar mills demonstrate a high
commercial potential for biomass-based waste-to-energy generation and mitigation.
Case studies, such as the cogeneration plant of the Mumias Sugar Company in
Kenya which was supported by CDC12 and the AFD Group, provide a strong
indication that this technology can yield significant economic, social and
environmental benefits and that private-public partnerships can be an effective vehicle
for its deployment. Cogeneration can make a sugar mill more efficient and more
profitable. The diversification of revenue streams makes the mill less vulnerable to the
fluctuations of sugar prices in the market. The people most affected by the volatility of
commodity markets are smallholder producers who will enjoy a twofold direct benefit
from cogeneration: (i) fewer and lower fluctuations of their income from selling sugar
cane to the mill; and (ii) better prices for their product through a sharing arrangement
in the profitability of the operation.
1.14 There are more than 52 million small and medium enterprises (SMEs) in Indonesia.
They will play an important role in the delivery of low carbon growth and poverty reduction.
They provide livelihoods for over 90% of Indonesia’s workforce, particularly women and the
young.13 Indonesia’s Ministry of Finance is particularly interested in exploring ways in which
this project can promote low carbon development in the Small and Medium Enterprise (SME)
sector. This would likely involve working closely with financial institutions that specialise in
supporting Indonesia SMEs such as Bank Bukopin.
1.15 This project would also promote low carbon investment in DFID’s future support to
provincial level work on land use change and governance.14 The project will ensure that pilot
provinces are given a priority for business support activities. Preparatory work undertaken by
DFID/FCO has identified some potential large scale renewable energy projects and a
number of much smaller initiatives that might be more suitably supported in conjunction with
local financial institutions.
1.16 DFID’s intervention is not risk free. The risk of not achieving the outputs for which
DFID has direct involvement, ie, developing a pipeline of investment-grade low carbon
projects and capacity for their implementation, is low. But the risk of the overall programme,
securing and executing investment and successfully implementing these projects, remains
relatively high. However, measures have been incorporated in project design to mitigate
against these risks. See Risk section below.
1.17 The outcome of this project is achievable, since moving from theoretical low carbon
projects to a portfolio of properly appraised feasibility studies will have a direct impact on the
willingness of financial institutions to allocate resources, communities to support such
projects and the private sector to respond to these opportunities.
1.18 The impact of this project, although challenging, is achievable. It will directly
contribute to one of the highest political priorities in Indonesia, namely to be able to show
that it is possible for Indonesia to develop low carbon projects that deliver economic growth
and poverty reduction targets and contribute to reducing the growth of emissions. Once the
projects under this programme have attracted finance and are in operation, they will change
12
CDC, formerly Commonwealth Development Corporation, is a listed investment company with all of its
shares being owned by DFID.
13 Development and Constraints of SMEs in Indonesia, Tulus Tambunan (2009).
14 This support is subject to another business case that is currently under preparation, but likely to be
operational in late 2011.
attitudes towards the commercial viability of low carbon investment. The impact of being able
to show these projects to other interested local governments, investors, communities and
financers is potentially huge.
Indonesia’s renewable energy challenge
The current investment in real low-carbon sectors falls well short of the sums required to
achieve national targets on emission reductions. For example, Indonesia’s investment in clean
energy in 2009 was $354 million. Despite its huge potential to generate power from solar, hydro
and geothermal, Indonesia’s respective investment in 2009 was only about 1% of China’s
investment, less than 5% of Brazil’s investment and about 15% of India’s investment. Since
then, India has boosted investment in clean energy and overtaken Brazil while Indonesian
investment in real low-carbon sectors has remained stagnant.
The national target for renewables, currently contributing less than 3% to Indonesia’s current
energy mix, is a 17% contribution to the national energy mix by 2025 with 5% of total energy
from geothermal power.
To put this figure into context, the Indonesian Ministry of Energy and Mineral Resources
estimates that power generation requirements in the country will increase from around 36,000
MW in 2009 to as much as 187,000 MW in 2027 – a more than 5-fold increase. To meet the energy
mix target, energy from renewables will need to increase from 1,080 MW in 2009 to 37,790 MW
by 2027.
1.19 With the exception of investment in renewable energy, there is little systematic data
on the pattern and growth of low carbon investment in Indonesia. It is important that this data
is collected. This will be important for project monitoring as well as for understanding which
sectors should form a focus for support. An early activity of this project will be to generate
this research. Additionally, there is too little analysis of the intersections between lo carbon
growth investments and returns for poverty reduction and gender equality. The project will
commission early a scoping piece of work on this subject.
1.20 This project will also feed back into the policy process. Specific activities of this
project will be to disseminate outputs to policy makers in Indonesia, particularly using
networks in the Ministry of Finance. Ministers will be very keen to engage in this process
since they have repeatedly stated that flagship projects are what they need to be able to
make the “political case” for low carbon development. Lessons learned from this project will
feed into the policy process through regular engagement in policy forums with relevant
government ministries, agencies and local government officials.
1.21 There is likely to be considerable interest in Indonesia on the outputs of this project.
DFID and AFD will ensure that the results are disseminated to relevant low carbon networks.
AFD is particularly keen to bring in other financial partners, therefore outreach to other
financial institutions will be a high priority. Many other donors are likely to want to support
this initiative if it is successful. It will be important that the project develops a pro-active
communication strategy in the last quarter of implementation.
2. APPRAISAL
A. Determining Critical Success Criteria (CSC)
2.1
The following are success criteria that are critical to achieving the impact and
outcome recorded in the Strategic Case:
CSC
1
2
3
4
5
Description
Project feasibility studies attract finance
Local government and regional authorities support
projects and are able to effectively facilitate all necessary
licences and permits
Projects supported under the business case are
replicable and scalable
Indonesian decision makers see success and are
convinced of replicability
Feasibility studies can demonstrate that they can deliver
jobs and broad based prosperity and meet Indonesian
safeguard standards
Weighting (1-5)
5
4
4
4
4
B. Feasible options
2.2
The options in this section were discussed in extensive consultations with a range of
entrepreneurs, government officials, communities and financial institutions. These have
taken place in meetings in Jakarta and on site visits during preparations for this business
case.
2.3
DFID’s programme in Indonesia is too small for it to work alone. Indeed DFID’s
programme works on the basis that it can leverage finance, expertise and networks to deliver
outcomes and impacts beyond what could be achieved solely through its individual funding.
Thus strategic partnerships are essential for the delivery of all the elements of DFID’s
programme in Indonesia. Three options were considered for strategic partnerships:
1. Directly with Government
2. Multilateral Development Banks
3. Partnerships with other donors
Theory of change
2.4
Low carbon flagship projects have not been developed in Indonesia because:

there is limited knowledge and experience of developing such projects in Indonesia
which feeds into a reluctance by financers to support;

existing incentives do not specifically encourage investment in low carbon;

there is a lack of long-term financing, i.e. anything over 5 years. Financial institutions
in Indonesia do not offer medium or long term financing due to entrenched
requirements for short-term pay-back on investments supported through loan-finance;

longer-term international public and private finance is available, but a lack of fully
worked-up, bankable, investment-grade projects means that this finance can not be
deployed;

the current fiscal environment does not support low carbon development; and

as with all investments, Indonesia’s legal and regulatory system is complex.
Delivering investments and securing consistency for investors, particularly in the
context of Indonesia’s decentralised system, is challenging.
2.5
DFID is already working directly with the Ministry of Finance (MoF) to address issues
of the fiscal environment and regulatory environment.15 Within that support, MoF has
specifically asked DFID to deliver investment development in the Small and Medium
Enterprise (SME) sector.
2.6
The outputs proposed in this project are consistent with addressing the barriers
mentioned above, that currently inhibit increasing low carbon investment. Specifically they
help reduce the financial risk of developers and financiers of developing investment
proposals by providing high quality project development services.
2.7
The evidence to support this theory of change and specifically for the efficacy of
public sector support to private sector development in low carbon investment in Indonesia is
contained in a number of recent studies focusing specifically on Indonesia, including:

Indonesia Second National Communication Under The United Nations Framework
Convention on Climate Change (UNFCCC) (2010);

National Action Plan on Climate Change (Ran GRK), 2010;

Ministry of Finance Green Paper on Economic and Fiscal Strategies for Climate
Change Mitigation in Indonesia (jointly published by Ministry of Finance, Republic of
Indonesia and Australia Indonesia Partnership (2009); and

Investing in a More Sustainable Indonesia (World Bank 2009)
2.8
There is also a large global literature on how public sector finance can help resolve
market failures and support investment. Key findings from this literature include:

that the public sector does “not pick” ideas for investments, but rather that it facilitates
the engagement between entrepreneurs with ideas and institutions that can then offer
finance. This engagement specifically includes reducing the risk of investment by
supporting the development of feasibility studies and transforming these, through
rigorous technical and financial analysis into fully fledged proposals that are then
ready to be financed; and

that the provision of fiscal incentives (eg, feed-in-tariffs for renewable energy) and
concessional public finance to mobilize and leverage private investment in low-carbon
development is effective.16
2.9
In summary, strong evidence exists that the theory of change considered in this
business case is sound.
Evidence and environmental impact of options to be considered
Evidence of impact for options
15
This is the Low Carbon Strategy Project that is operational and will run until March 2012.
DFID is already working with MoF under existing assistance to address wider fiscal (government and private
sector) incentives for investment in low carbon.
16
2.10 The evidence upon which all options can be appraised is strong. This arises because
for the last 12 months DFID has been focusing upon the development of this and other
business cases in preparation for the launch of the UK Climate Change Unit in April 2011.
This pre-design work has involved extensive examination of potential partners in and outside
government. As well as DFID’s internal analysis, it is also possible to draw upon independent
analysis of the performance of government and the MDBs in delivering low carbon projects
in Indonesia.17
Environmental impact:
2.11 This project is entirely related to promoting low carbon sustainable growth and this
contributes to overall environmental impact. However, any projects that are selected for
project development will be subjected to rigorous environmental appraisal to ensure that
would not adversely impact on the environment. The largest direct environmental impacts of
project activities will be the emissions associated with flights and other transport of project
partners in the preparation of feasibility studies. The project will be managed in such a way
as to reduce these direct impacts to a minimum.
2.12 It is worth noting that the end impact of this project is to reduce carbon emissions. All
the low carbon projects developed under this business case will fully assess the impact upon
the environment of the projects.
Evidence for assessment of options
Option
1) Directly with government
2) Multilateral Development Banks
3) Partnerships with other donors
Evidence
rating
Strong
Strong
Strong
Climate
change
and environment
A: High opportunity
A: High opportunity
A: High opportunity
C. Appraisal of Options
Option 1: Directly with Government
2.13 Option 1 would involve partnering directly with government. There are a number of
agencies of government that have been tasked with climate change policy development,
coordination and implementation. These are:







President’s Delivery Unit (UKP4)
Ministry of Environment;
The National Council on Climate Change (DNPI)
Ministry of Planning (BAPPENAS)
Coordinating Ministry of Economic Affairs
Ministry of Finance
Various other line ministries
2.14 DFID was asked in 2010 by the Minister of Finance to support the Government of
Indonesia to develop flagship low carbon projects. Following this DFID has undertaken
consultations with a range of potential government partners to determine suitability for
partnership. These consultations revealed that:
See: “Ministry of Finance Green Paper Economic and Fiscal Policy Strategies for Climate Change Mitigation in Indonesia” (November
2009) and Dominic Elson’s “Cost-Benefit Analysis of a Shift to a Low Carbon Economy in the Land Use Sector in Indonesia” (2011).
17

Government ministries and agencies have struggled to deliver actual low carbon
projects on the ground, despite several past initiatives. For example, the Indonesia
Infrastructure Financing Facility (IIFF), a joint initiative between GoI, World Bank,
International Finance Corporation, Asian Development Bank and Germany’s KfW,
which was conceived and announced as a key delivery mechanism for climate
finance, has not been able to disburse since it was established in 2008.

No ministry, with the exception of the Indonesian Investment Agency (PIP) in the
Ministry of Finance, has been properly mandated to actually develop low carbon
projects. This in part explains the poor performance of government to date.
.

PIP does not currently have the full technical resources and capacity to deliver rapidly
on this agenda. Thus a partnership with government alone would be unlikely to deliver
any substantial progress at the required timescale.
2.15 As a result, Option 1 performs poorly against the critical success criteria for this
business case (see Para 2.1 and Section D below). The principle problems are:



with the exception of PIP, a lack of commercial linkages and capacity to move quickly;
potentially overlapping mandates that make the realisation of the flagship projects
unlikely; and
weak linkages with project proponents.
2.16 However, partnership with government is essential to achieving the outcome and
impact. The key objective was to select the most appropriate partner to help deliver the
feasibility studies and to ensure that these would be of the highest quality so that they can be
realised. On this basis, the most credible partner is PIP in the Ministry of Finance. PIP is
credible because:



it is legally mandated to promote investment;
it is in the last stages of establishing the Indonesia Green Investment Fund (IGIF).
This fund aims to raise up to $1 billion from governments that have expressed interest
in investing in it and from institutional investors; and
PIP is highly motivated to support the development of a portfolio of projects that the
IGIF could then invest in.
Option 2: Multilateral Development Banks18
2.17 Appraisal considered working with the World Bank, the International Finance
Corporation (IFC) and the Asian Development Bank (ADB). All of these institutions have
strategies for supporting the Government of Indonesia to deliver low carbon growth,
specifically:

18
The World Bank providing considerable loan finance to the Government of Indonesia.
It is currently providing IBRD loans through its Climate Change Development Policy
Loan ($400m over 2 years from 2010 to 2011) and concessional loans of $400m from
This business case has taken on board emerging findings within DFID centrally on working with the MDBs.
These findings suggest that the MDBs general track record on the delivery of climate finance has be weak.
Challenges for the MDBs have been lengthy approval processes, poor partnership behaviour, poor results and
poor lesson learning. Presentation “Challenge of delivery through MDBs” delivered to DFID Directors on
18.1.2011.
its clean technology fund. These loans are designed to help climate change policy
design and implementation, support geothermal power development and energy
efficiency investment.

The IFC identifies climate changes as a key area of focus in Indonesia. In this area it
is keen to provide longer-term finance, risk sharing and equity. IFC finance could be
significant. It currently invests around $300 million per year in Indonesia. At this stage
however, IFC has not developed a large portfolio of climate-related investments or
specific climate related activities that would be consistent with this business case.

From 2011, the Asian Development Bank will provide $200m to the Climate Change
Development Policy Loan. ADB will also provide capacity building and institutional
strengthening on climate change and energy efficiency.
2.18 An option for this business case would have been for DFID to make a financial
contribution to any of the above programmes. These programmes are at varying degrees of
implementation, but they are characterised by slow progress and delivery. Therefore this
offers limited potential for rapid delivery of tangible projects. On that basis, Option 2 scores
poorly in terms of the critical success criteria.
2.19 But a more significant issue is that the activities envisaged in this business case are
not suitable for delivery through the MDBs. For this particular intervention to work, DFID
needs partners to move rapidly in the very early dynamic stages of low-carbon development.
This requires institutional criteria such as the ability to seize windows of opportunities, adapt
to changing dynamics in a volatile and politicised operating environment, flat, fast and
responsive management and administrative structures.
2.20 Appraisal concluded that working through MDBs to produce a credible demonstration
of a delivery mechanism and a set of flagship projects is not a feasible option within the
timeframe of the programme. Official Government documents re-iterate the above argument
and state a preference for progressing with bilateral initiatives, before bringing in MDBs at a
later stage.19 In conclusion this option was less preferable because MDBs were assessed as
being better suited to play a larger role during later, less-dynamic stages of the process, eg,
the capitalisation and scaling of structures and mechanisms established during earlier
stages.
Option 3: Partnerships with other donors
2.21 Option 3 would involve working with a bilateral partner to deliver the project. In
considering this option, DFID was able to draw on past experience of working with a number
of bilateral partners including with Australia, Germany and the EU. This experience
suggests that such partnerships work well when objectives are properly aligned and there is
clarity about roles and responsibilities.
2.22 There are a number of potential bilateral partners that are working on climate change
in Indonesia including Norway, France, Germany, Australia and the EU. These partners have
relationships with a number of the government institutions that are working on climate
change outlined above.
19
See: GoI’s official handouts at COP16, Cancun, 2010)
2.23 The Government of Indonesia has stated that it sees bilateral agencies as having
potential for dynamic and rapid change and as having the ability to introduce rapid innovative
ideas that can then be picked up later and at a larger scale by MDBs and government’s own
programmes.
2.24 This suggests that Option 3 scores highly for rapid delivery and for support by the
Government of Indonesia.
2.25 A number of bilateral donors are starting to allocate significant finance towards
climate change. For example, Norway and by France have both allocated significant
resources for climate change in Indonesia – Norway up to $1 billion and potentially a similar
figure for France. In order to properly assess this option and provide a basis for comparison
with other options it was necessary to identify a potential preferred bilateral partner.
2.26 As the main objective of this project is to deliver tangible low-carbon projects, the
most relevant criteria in considering a partnership with a bilateral partner was whether
financial resources were available and ready for low carbon investments. And whether they
can respond in a fast, flexible and innovative way.
2.27 Of the potential partners, all recognise the importance of and work on climate change
issues, but not all have finance that is immediately available to support low carbon projects
and strong connections with the private sector. Of the partners considered, only one, AFD, is
able to meet this critical success criteria. AFD thus emerged as the most suitable partner for
this project because:

promoting low carbon development is its highest priority in Indonesia;

it already has in place financial allocations to support appropriate low carbon projects;

it has professional staff already based in Indonesia and in the region who can support
the implementation of the project;

it can rapidly deploy financing;

it has strong links with important financial institutions, such as the Bank of Mandiri.
These links will be crucial for delivering future financing for the projects developed
under the project;

it has a clear vision for how grant support from DFID can help unlock financing. AFD
does not have grant resources to support project preparation activities in Indonesia
but it does have professional and well established processes for supporting project
preparation, including on consultation, environmental and social impact;

it has a large degree of autonomy in its Jakarta office, with staff able to react quickly
to opportunities;

it has a positive and growing relationship with the Government of Indonesia which has
strongly welcomed its support since its programme began in 2007.
2.28 DFID concluded that the networks, skill sets, knowledge and aid delivery instruments
of both parties would be highly complementary. For example, a blending of DFID’s grant
finance and AFD’s loan finance would help:

AFD to unlock its investment, eg, by using DFID grant finance to support the project
identification, development and start-up stages, thereby lowering transaction costs
and de-risking investments; and

DFID to potentially leverage its funding to help capitalise the flagship projects.
2.29 Both DFID and AFD have congruent objectives and compatible approaches, guided
by the principles of the 2000 Paris Declaration. Both parties work well with the Ministry of
Finance, a key strategic partner in the pursuit of low-carbon development. Both would
benefit from broadening their outreach by combining each others networks across the public,
private and civil society.20 This partnership would make a direct contribution to the
“Declaration of Partnership” signed by DFID’s Permanent Secretary and AFD’s DirectorGeneral in December 2009.
2.30 Finally, it is worth noting that AFD has already developed and deployed a widely
recognised method to assess greenhouse gas (GHG) emission from projects and the
potential amount of reduced emissions.21 This tool can be applied during all stages of project
development – starting from the appraisal stage to the impact assessment stage. The tool
will be able to help guide management decisions of the project. The project will also use
established AFD procedures for assessing and measuring wider environmental and social
impacts and benefits. DFID will monitor and agree the use of these procedures to meet
DFID’s own standards.
AFD financing
2.31 AFD is mandated to deploy a variety of financial instruments depending upon the
specific circumstances of the projects and programmes that it is supporting. These include
equity and guarantees, concessional and commercial finance. At this stage it is not possible
to determine which type of financing would be deployed if the feasibility studies under this
project were financed. But AFD is committed to providing concessional finance for suitable
projects in Indonesia in recognition of the need to actively promote low carbon investment.
Indeed in 2009 AFD extended a $50m concessional loan to support Indonesia’s public sector
electricity operator (PLN) to rehabilitate parts of the country’s electricity distribution
network.22
2.32 The ambition of the partnership with AFD would be to develop a platform for a wider
cooperation with other interested parties to facilitate and promote public and private 23
investment for low-carbon development.24 This means that it is reasonable to expect that the
20
For instance, AFD has been able to build a long term partnership with the largest national bank, Bank
Mandiri, on climate change activities and low carbon growth, promoting sustainable banking, through
intermediation (credit line of $100m) backed by a technical assistance programme. DFID has developed strong
strategic working relationships on low-carbon development with key government institutions at central and
provincial level, eg, the Government of Papua Province.
21 Some MDBs and local banks have already adopted this tool. Discussions with other Indonesian partners,
such as BAPPENAS and universities, to deploy and adopt this tool and build capacity for its wider application at
the national level are at an advanced stage.
22 This loan met DAC criteria for concessional financing.
23 Potential partners for a wider platform are CDC, Proparco, Actis and MDBs.
24 AFD funding is fully untied, as per the Organisation for Economic Cooperation and Development (OECD)
rules, and its financing procedures have been harmonised with those of other key multilateral and bilateral
donors.
projects developed under this business case could eventually be financed by a variety of
different institutions and through a combination of financial instruments.
D. Comparison of options
2.33 The table below provides a comparison of the three options above. Whilst there was
stronger evidence for the assessment of institutional capacity, there remains considerable
subjective assessment as to the volume of finance that the three approaches could
generate. The table shows that of the three options considered Option 3 is much more likely
to achieve the critical success criteria than the other options.
Critical Success Criteria
Weight
(1 – 5)
Option 1
Directly
with
government
Option 2
Multilateral
Development
Banks
Option 3
Partnerships with
other donors
Weight
(1 – 5)
Score
(1 – 5)
Score
(1 – 5)
Score
(1 – 5)
Weighted
Score
Weighted
Score
5
0
0
2
10
Project feasibility studies attract
finance
4
4
16
2
8
Local government and regional
authorities support projects and are
able to effectively facilitate all
necessary licences and permits
4
0
0
1
4
Projects supported under the project
are replicable and scalable
4
3
12
1
4
Indonesian decision makers see
success and are convinced of
replicability
4
1
4
1
4
Feasibility studies can demonstrate
that they can deliver jobs and broad
based
prosperity
and
meet
Indonesian safeguard standards
32
30
TOTALS
Note: These scores were discussed and agreed with counterparts in the Ministry of Finance.
Weighted
Score
2
10
4
16
1
4
3
12
1
4
46
2.34 It should be emphasised that the proposed partnership with AFD could later be
expanded to other partners. Multilaterals are anticipated to play a larger role during later,
less dynamic stages of the process by strengthening and capitalising the low-carbon
development structures and mechanisms established through bilateral initiatives. There
would also be potential for other bilateral partners to become involved once the mechanisms
for the partnership are established.
2.35 In selecting Option 3, appraisal further considered whether there are mechanisms in
Indonesia that are in place to deliver the finance envisaged from the partnership with AFD?
Appraisal concluded that following the development of the feasibility studies there would be
various ways that AFD finance could be mobilised, including:

a direct intervention to use AFD’s finance to provide dedicated low-carbon credit lines
to a selected number of national and regional banks and use DFID finance to
enhance the capacity of such institutions to execute investments in low-carbon
development in line with best practice and social and environmental guidelines.

to pursue co-investment with governmental and private local financing institutions or
by providing guarantees, thereby offering local partners an opportunity to learn while
encouraging them to enter low-carbon sectors. This would create synergies with
.
AFD’s, DFID’s and Government’s past and ongoing efforts to promote low-carbon
development.
2.36 AFD finance would, along with other finance be applied in the context of the
Government of Indonesia’s overall framework for encouraging low carbon projects. This
framework is shown in the diagram below.
Figure 2: Process for promoting low carbon investments
2.37 Figure 2 shows that AFD could ultimately invest through joint public private
companies, or jointly with the Indonesian Green Investment Fund (IGIF). 25 This business
case would provide a range of projects that could be suitable for the various entry points
shown in Figure 2.
2.38 Because of prior work, at least 1 of the finalised business plans produced under this
project might be at an early implementation stage before March 2012. Provided it meets with
viability criteria, it will, at that stage, be possible that it could also attract grant-based support
from this project. If that were to arise, the level of support will be determined on the basis of
the least cost required to promote commercial viability. As with the cost of the feasibility
studies, DFID finance will be agreed in advance by the members of the technical committee
that would be established under this business case. See below for more details on the
management arrangements.
The economic case
2.39 This is a one year project. Its purpose is to produce feasibility studies that are able to
attract finance for their subsequent implementation. The economic case revolves around:


25
Securing the financing that will lead to the long term projects.
Doing this in a way that represents value for money for DFID.
Expected to be operational in 2011.
2.40 There is nothing novel about an appraisal built around securing additional finance.
This is the normal approach in EU regional development appraisals. It is also used in the UK
on regeneration projects. Those appraisals are often extended to include analysis on impact
on employment and factoring in displacement effects.
2.41 A challenge for appraisal is that until the project starts, it is not possible to identify the
social, economic and financial returns that will be associated with each of the feasibility
studies that will be produced. Indeed a major reason for the support under this business
case is to develop detailed economic and financial appraisals. So for the purposes of
appraisal, the focus was upon:

Whether and what volume of finance could be realised by the feasibility studies and
project development support provided under this project?

What financial and economic returns could be delivered by the types of low carbon
projects that are expected to ultimately be developed?
Delivering finance
2.42 It should be emphasised that any projects emerging from the support provided under
the business case will only go ahead if they pass the due diligence of AFD and other
financers, who will only allocate financing if a project is viable, sustainable and meets low
carbon criteria.
2.43 Consultations with AFD and PIP suggest that quality feasibility studies could attract
significant finance in the three years from 2012 to 2015. The precise sum is difficult to
estimate, but evidence drawn from similar type projects in China, India and Brazil suggests
that they could be between $5m and $200m per project. This range results from the
observation that projects can be small scale as well as larger-size low-carbon projects.26
2.44 As outlined above, this business case will generate at least 8 substantive proposals.
It is difficult to be accurate about how many of the feasibility studies can eventually attract
financing. For the purposes of appraisal the following assumptions were made:

Only 50% of feasibility studies are successful in attracting financing.

Financing will be secured and in place for at least 1 project in 2012, 2 projects in
2013 and 1 in 2014.

The average size of each investment will be $30 million.
2.45 On this basis, it is estimated that $120 million would be secured over the period 2011
to 2014. When discounted (using Indonesia’s discount rate of 6%), this generates a benefit
cost ratio on DFID’s investment of 13.2:1
2.46



26
The sensitivity of this result was tested by looking at the possibility that:
The average size of investments was reduced to $25 million. This reduced the benefit
cost ratio to: 10.8:1.
all financing was delayed until 2014, this reduces the benefit cost ratio to: 12.3:1.
only 2 projects were able to secure financing, this reduces the benefit cost ratio to:
6.1:1.
It is expected that any emerging SME low-carbon projects could be bundled and financed through a credit
line provided to a selected number of financial intermediaries.
2.47 The above demonstrates that even if only two feasibility studies were able to secure
financing, the expected benefit ratio would still justify DFID’s investment.
Returns from low carbon projects
2.48 The appraisal also looked at the benefits that would result from the types of low
carbon projects that are likely to emerge from DFID support. These benefits are for
illustration only, but they demonstrate that the types of projects to be supported can generate
robust financial and economic returns.
Table 1: Returns from low carbon projects under development that will be supported by this
business case
Project type
Biomass (waste
to energy)
REDD+ type
Project Name
Sugar Mill
Cogeneration in
E-Java and SESumatra
Estimated economic returns
IRR 51%, over 10 years period,
without carbon values
KHJL,
Community
Forestry (REDD)
Project, Sulawesi
IRR 25% - 42%, over 20 years
period, depending on business
model adopted (eg, with or without
value-added processing), without
carbon values or co-benefits28
Carbon savings amount to 95kg
CO2e for each 100kWh.
Source
Averaged IRR of case studies of
17 sugar cogeneration plants in
India, done by Indonesia's
Agency for the Assessment and
Application of Technology in
2010.27
Project appraisal docs. An IRR of
20-25% is quite typical for teak
production in the tropics (without
value-added processing.)
2.49 The above table suggests that, if they could attract financing, there are robust
financial internal rates of return (IRRs) for the types of low carbon projects that are expected
to be developed under this business case.
2.50 There is also evidence from elsewhere in Asia that low carbon investments can
generate robust financial and economic returns. It should be emphasised that returns are
very specific to particular projects so the evidence presented below is intended to illustrate
potential returns:
Biomass (cogeneration)
 A study in Vietnam found IRR’s of 12-15% for medium and large sized sugar biomass
plants.29
 An Indian study found an IRR of 68% for cogeneration scheme in an urban context.30
 A study from Thailand of sugar co-generation found a 9.2% (financial) IRR without
Certified emission Revenue (CER) revenue.31
27
See Annual Report for 2009 (2010) at:
http://www.bppt.go.id/en/index.php?option=com_content&view=article&id=411&Itemid=490
28 The net present value (NPV) of carbon values over a 20 years cycle at 10% interest rate would amount to
$1.7m. The area is 4,935 ha and the annual sequestration rate per hectare is 11 tCO2e/ha/a (conservative).
Replanting of felled areas is part of the business plan. The rights over the area are granted for 65 years,
renewable for a second term. This could lead to a sequestration rate of 255,000 tCO2e per annum over the
next 130 years.
29 The Cogeneration Potential of the Sugar Industry in Vietnam, by Subhes C. Bhattacharyya and Dang Ngoc
Quoc Thang, 2004, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=522049
30 Techno-Economic Evaluation of Natural Gas-Fired Cogeneration System for a Large Hotel in India, Kumar,
Abbi & Kashyap, 2004 http://www.buet.ac.bd/ces/subodh-kumar.pdf

A Cambodia study of rice co-generation found a 49% IRR under a pessimistic
scenario over 20 years.32
Solar
 A study in India (in Manikgang Bazaar) found an IRR of 14% for Solar PV in rural
areas.33
 A recent study from India finds IRR of 4-17% for concentrated solar power solar in all
regions of India.34
2.51 In conclusion, the economic appraisal demonstrates that even with modest
assumptions about project success, the benefit:cost ratio in terms of financing justifies
DFID’s investment and the potential returns of the projects themselves justifies DFID’s
support to bringing them up to the point where they become bankable projects.
Value for money
2.52 DFID will secure value for money from this intervention because the inputs (and thus
cost) of each feasibility study will be professionally benchmarked by AFD. AFD has
extensive experience in contracting, procurement and achieving efficiency (more details
below). A steering committee comprising DFID and AFD will discuss and agree all project
expenditures. Any terms of reference for consultancy inputs will be agreed by the technical
committee. All outputs that require consultancy inputs will be subjected to AFD contracting
procedures. These procedures meet international best practice on transparency and in the
delivery of value for money.
2.53 AFD’s procedures will ensure that projects are closely scrutinised from the original
project concept. This will avoid unnecessary expenditure on project proposals that are
unlikely to prove viable. At each stage of the process of developing feasibility studies, AFD
and DFID will ensure that progress to the next stage of development only takes place if
proposals are able to demonstrate continuing viability.
Wider development impact
2.54 Projects that are developed under this support will be be considered on the basis of
their potential for the creation of jobs, impact on the environment and gender equality impact.
Both DFID and AFD are strongly committed to promoting the reduction of poverty through
the promotion of low carbon development and the promotion of gender equality. By adopting
a framework for assessment, the project will ensure that gender equality impacts feature
prominently in the feasibility studies that are produced. In particular the different impacts on
men and women of opportunities and risks will be considered during design and assessed. A
summary of these findings will be made available to the technical committee and shared with
DFID. All projects supported under the project will be also developed to be consistent with
Indonesia’s own community, environment and gender equality safeguards.
3. COMMERCIAL CASE
31
This study also cites GHG emission reduction of 92kt CO2e per year.
http://www.setatwork.eu/downloads/gp11%20Thailand%20_Danchang.pdf
32 http://cd4cdm.org/Asia/Cambodia/First%20National%20Workshop/G-Angkor%20Rice-MJ-Mar03.ppt
33 An Economic Analysis of Solar PV Micro-Utility in Rural Areas of Bangladesh, Ahammed & Azeem, 2007
http://www.lged-rein.org/archive_file/01030.pdf
34 Techno-economic evaluation of concentrating solar power generation in India, Purohita and Purohit, 2010
A. Statement of the procurement/commercial requirements for the intervention
3.1
This intervention involves transferring funds to AFD to form a partnership to promote
low carbon development in Indonesia. AFD implements France’s development aid policies,
under a Governing Board of Directors, which includes the Ministry of Economy, Industry and
Employment and the Ministry of Foreign and European Affairs. The proposed funding model
for the transfer is a Memorandum of Understanding. The funding will be provided directly to a
dedicated bank account opened by AFD in the books of Banque de France, Paris and paid in
the Euro equivalent of the sterling payments shown in para 4.1. The first payment will be
made upon the signing of an MoU which is expected to take place in mid-April 2011. AFD
will then use its commercial and procurement procedures to sub-contract to international and
local consultants. Like DFID, all contracts tendered by AFD are untied.35 AFD follows best
international practice with respect to transparent and efficient contracting, it is a AAA-rated
institution. Its operations are subject to full oversight by relevant authorities in the French
Government and through its 16 member Governing Board.
B. Explanation of how the intervention design uses competition to drive commercial
advantage for DFID
3.2
DFID will insist that AFD will obtain the best value for money possible from contracts
issued under the project. This will be achieved through AFD procedures, which are in line
with the relevant internationally recognised practises that are recommended by OECD.
C. Outline of how the market place is expected to respond to this opportunity
3.3
This project is not seeking to develop new technology. Its focus is to bring tried and
tested solutions that have been adopted elsewhere and to support their adoption in
Indonesia. The market place is expected to respond by providing finance and undertaking
investment.
3.4
All projects to be supported under this project will be market focused. They will either
have existing private sector partners who will collaborate with the project, or suitable
partners will be identified during project implementation.
3.5
As a G20 country, the Indonesian market is well represented by major international
technical and consulting companies and large numbers of national companies. They are
expected to respond well to any contracts issued under this project.
3.6
The steering committee will ensure that any lessons or feedback from initial activities
feedback into future activities. For example, any lessons on engagement with local
communities will inform approaches to community engagement in future project-supported
activities.
D. Explanation of the key underlying cost drivers, how value is added, how value is
measured, and how this measure of value-added can be improved
3.7
The cost of preparing feasibility studies will be the main driver under the project.
Consultancy fees will be the main component of such studies, although transport,
subsistence and accommodation costs will also be important, particularly for consultations
See AFD’s website for more details on its procurement.
http://www.afd.fr/jahia/Jahia/lang/en/home/AFD/opportunites-d-affaires/marches-sur-projets-afd/Principesgeneraux-passation-de-marches
35
and site visits. These will be controlled by all consultancies being subject to competitive
bidding and the cost of all overall studies being benchmarked against similar studies.
3.8
DFID’s support will be applied towards AFD’s non-core staff costs associated with
administering the project. This cost will be 5% of the support to be provided by DFID to this
project. This percentage is within the range of costs typical for DFID bilateral partnerships
when a bilateral partner takes responsibility for implementation. This fee will be used for all
administrative aspects related to the implementation of project activities, including for
monitoring and evaluation. The expenditure and accounting of this fee will be reported in
regular reports on project progress and in the final report for the project.
E. Statement of the intended procurement process to support contract award
3.9
This intervention will not entail the award of a contract through a competitive tender. It
will be carried out through a Memorandum of Understanding. However all consultancies that
are undertaken under it will be subject to open competitive tendering.
F. Provision of a plan for how contract and supplier performance will be managed
through the life of the intervention
3.10 This project will be a partnership between DFID and AFD. All strategic and technical
decisions will be made during the meetings of the Technical Committee. See details of
management arrangements in Section 5.
G. Outline of why the proposed funding arrangement is an appropriate choice for this
intervention, with this development partner
3.11 A Memorandum of Understanding is the appropriate funding arrangement for this
intervention. This is the normal approach for partnerships with other international donors. A
Memorandum of Understanding would be signed to operationalise the partnership and
trigger the transfer of funds.
H. Assessment of whether the third party organisation has the necessary capacity to
obtain best value for money from DFID funds. An outline of areas for attainable
improvements in capacity and a plan for taking these forward should be provided
3.12 France, like the UK is a world leader in the field of development co-operation.36
France has been one of the leading movers on development financing, involvement in fragile
states and the protection of global public goods. France holds the Presidency of the G20 and
G8 in 2011.
3.13 AFD began operations in Indonesia in 2007. AFD’s mandate in Indonesia is to
contribute to the fight against climate change, particularly by promoting energy efficiency and
renewable energy development. Since its inception AFD has provided a number of major
policy loans and provided technical assistance. In 2009 it extended a $50m soft loan to
support Indonesia’s public sector electricity operator (PLN) to rehabilitate parts of the
country’s electricity distribution network. In the same year it also extended a $100 million
credit line to Bank Mandiri to finance energy efficiency and renewable energy projects. All
the above clearly demonstrates the commitment of AFD to both support and help finance low
carbon investment in Indonesia.
36
See France’s most recent DAC Peer Review (2008).
3.14 AFD has an international standard best practice approach to all contracting that has
been recognised by DAC and other development partners. DFID has entered into a number
of similar partnerships with AFD in the recent past37.
3.15 AFD has 12 employees in Indonesia including 8 professional and experienced staff,
including a forestry, energy, banking and private sector specialists. AFD is also supported by
a Paris-based team that provide support through a dedicated Technical Department, or
selected consultants, for very specific needs.. They are supported by a regional technical
hub of expert administrators and specialists (economic, finance, engineers and sectoral
specialists, investment, social and environment) who are based in Bangkok (including the
team of its private arm Proparco covering East Asia) and whose remit is to provide support
to AFD’s operations in Indonesia.
3.16 It is not necessary for DFID to present a plan for how AFD will build capacity for
improving value for money. It already has a number of ongoing corporate initiatives to obtain
value for money.
4. FINANCIAL CASE
A. How much will it cost?
4.1
The recommended option for this intervention will cost £5 million in 2011/12. The
payment schedule will be as follows:



May 2011 - £3 million, upon signature of the MoU
October 2011 - £1,965,000 million
£35,000 will also be used to fund a part-time DFID-secondment into AFD in Jakarta
from July to December 2011.
4.2
There are sufficient funds for this in the DFID Indonesia Country Programme budget.
This funding is not novel or contentious.
B. How will it be funded: capital/programme/admin?
4.3
This intervention will be funded through DFID Indonesia’s aid framework of £10 million
for FY 2011/12.
C. How will funds be paid out?
4.4
The funds will be provided through an MoU, it will be signed with AFD in mid-April
2011 in Jakarta. The funding and management of the secondment will be DFID’s
responsibility.
37
AFD, DFID and JICA are in the final stages of commencing a partnership on climate change in Kenya. In
Burundi, four technical and financial partners (AFD, Belgium, DFID, Luxembourg) have set up an Education
Basket Fund (EBF) with €24 million of potential financing for a three-year period. In Tanzania, AFD and DFID
work closely together: an AFD/DFID MoU on aid to the education sector was signed on 18th November 2010.
This MoU specifies that AFD and DFID will coordinate and harmonise their actions in line with the Paris
Declaration. More details at: http://www.afd.fr/jahia/Jahia/lang/en/home/AFD/nospartenaires/banques-etagences-developpement/agences-bilaterales/dfid
D. How expenditure will be monitored, reported and accounted for
4.5
As per standard MoU requirements, AFD will submit a narrative report and financial
statement on the use of each tranche of money before receiving the next. It will also, upon
request, provide DFID with copies of its annual audited accounts. Governance arrangements
will include:

High-level meetings between DFID and AFD Directors for Asia or their
representatives to review progress and discuss strategy. These will meet in London
after 8 months of project implementation and in Paris during month 12.

A technical committee will be established in Jakarta, comprised of AFD and DFID
officials and, when required, other relevant technicians associated with the individual
projects supported.

Every quarter the technical committee will formally brief and take guidance from the
Ministry of Finance.
4.6
Monitoring will take place continually through the project. DFID will sit on the technical
committee which will meet regularly during project implementation.
4.7
This project is intended to form the basis for a subsequent larger 3-year partnership
investment. The subsequent phase will be considered following an evaluation of this first
phase that will take place in January 2012. Independent consultants will be contracted to
undertake this review.
5. MANAGEMENT CASE
A. Oversight
5.1
This intervention will commence with the signing of an MoU between AFD and DFID
in Indonesia in mid April. Under the partnership a technical committee that will comprise
DFID, AFD and invited members from partners in government and, as required, from
potential project partners. This committee will meet at least every 8 weeks. Its function will
be to discuss technical matters, agree on solutions and take any action to facilitate the
implementation of the project AFD will be responsible for all administration of project
activities.
5.2
The technical committee will be guided by the following principles:

Supporting feasibility studies that can deliver low carbon projects that also deliver
strong co-benefits such as: supporting SMEs, creating employment, fiscal revenues
and livelihoods for women.

Open and competitive tendering to achieve value for money.

Transparency and openness, especially in relationship to local communities,
government and wider stakeholders.

Delivery and efficiency.

5.3
A joint assessment of potential, opportunity and risks, of the different regions, with an
interest and focus on Papua for joint interventions in the LULUCF sector.
More specifically the technical committee will focus on:

establishing a transparent and accountable governance mechanism and enabling
management and administrative structures for the Programme;

compiling, analysing and interpreting market and other relevant information;

development of a project pipeline through scoping and feasibility studies followed by,
if required, targeted project planning and development activities;

joint selection of short-listed projects for financing and due diligence on the final set of
selected projects;

developing comprehensive and tailored project financing and implementation
solutions including the proactive search for suitable partners on the financing and
execution of selected projects;

negotiating and arranging deal structures including the completion of required legal
procedures;

supporting (eg, targeted capacity building), monitoring and evaluating projects;

learning lessons and strategically leveraging the acquired knowledge with a view to
improving policies, financing mechanisms and the wider business environment for
low-carbon development;

coordinating project activities with other relevant AFD and DFID activities, outside the
Partnership, to generate synergies, added value, scale and impact; and

growing the project portfolio and scaling the Partnership through the inclusion of other
interested parties.
5.4
Oversight will take place in the following ways:



Every quarter, the technical committee will formally brief and take guidance from the
Ministry of Finance. Minutes of these meetings will be shared amongst partners.
The Head of the UK Climate Change Unit will be regularly debriefed on project
activities and will attend meetings of the steering committee as they see fit.
High-level meetings between DFID and AFD Directors for Asia to review progress and
discuss strategy. This will meet in London 8 months after the project has started and
in Paris during month 12.
B. Management of the program
5.5 The lead adviser for this project in DFID will be DFID’s Economist based in Jakarta.
DFID’s Programme Manager will be the project officer. In AFD, the project lead would be the
Country Director and the Deputy Country Director.
5.6
In the Ministry of Finance the lead will be shared between the Climate Management
Team, mandated to devise fiscal policy for low-carbon development and reporting directly to
ministers on all matters related to climate change, and the Indonesian Investment Agency,
mandated to promote, mobilise and scale investment in low-carbon development.
5.7
To support the management of the programme, a DFID Climate Finance Specialist
will be seconded into AFD for 2.5 days per week from July to December. The cost of this
secondment will be £35,000. This cost is included within the overall proposed financial
commitment for this business case. The principal purpose of the secondment would be to:



assist in the establishment of the delivery mechanism for the programme;
add-value by injecting DFID’s rich technical and regional experience in developing a
pipeline of pro-poor low-carbon projects; and
safeguard/represent DFID’s interested in the programme.
5.8
The envisaged secondment would also help to mitigate potential programme
implementation risks for DFID. The secondee would also be able to facilitate a strong
relationship with the Ministry of Finance, since the secondee would be based in the Ministry
of Finance for the other 2.5 days of each week.
C. Conditionality
5.9
Not relevant.
D. Monitoring and Evaluation
5.10 It will be relatively straight forward to determine whether the project has delivered the
project outputs. DFID will sit on the technical committee which will meet at least every
quarter. Any issues with implementation will be spotted and can be dealt with rapidly. The
committee will also undertake relevant site-visits.
5.11 At the outcome level, the indicator of project success will the number of projects that
are deemed bankable to be financed by AFD or a range of public and private international
and Indonesian financial institutions. It will be very apparent by the time the project reaches
its final quarter how on track the project will be towards this outcome.
5.12 At the impact level, it will be possible to monitor how the portfolio of potential projects
have been embraced by the Ministry of Finance and then in turn by wider government
agencies. The expectation is that as the projects are gradually turned into actual projects
that they will become central to discussions on low carbon development and growth.
5.13 If monitoring shows that the project is not on track and delivering outputs and impact,
DFID and AFD will convene a meeting of the steering committee and decide on an
appropriate way forward. If no plan can be agreed, then project activities would be
suspended and any unspent monies returned to DFID.
5.14 An independent evaluation of the project will take place in January, with a view to
informing the design of a future business case.
E. Risk Assessment
5.15

Key risks are political, market and implementation risks:
Political risks include the lack of coherence across the Indonesian government on
climate change issues, inter-agency rivalries over the control over climate finance,
fragmentation driven by diverging donor agendas, and the fact that the climate
change agenda is currently not well institutionalised but centred around the Office of
the President.


5.16



Market risks, eg, financial downturn, may constrain co-investment and, hence,
diminish the positive impact of the project.
Implementation risks at the outcome level, including poor governance, might diminish
the impact of low-carbon policies and investments. At the output level, inter-agency
politics and vested interests may block or frustrate the establishment of enabling
policies, financing structures and investment vehicles.
Project strategies to mitigate these risks include:
Political risks: (i) intensive consultation - before, during and after the project - to build
consensus and political constituencies in support of the project and low-carbon growth
(ii) sharing work openly with others; and (iii) working within established institutional
frameworks and within national plans to reduce friction and counter fragmentation.
Market risks: ensuring that commercial considerations are given a high priority in the
selection of feasibility studies.
Implementation risks: Sufficient resources have been allocated to support the
management and administration of the project. The Technical Committee will monitor
progress carefully to ensure that the project is implemented as scheduled.
F. Results and Benefits Management
5.17
A Logical Framework for this project is shown below.
Version, dated 30 March 2011
UK Climate Change Unit, British Embassy, Jakarta
PROJECT TITLE
PROMOTING LOW CARBON DEVELOPMENT IN INDONESIA
GOAL
Indicator
Baseline
April 2011
Milestone 1
October 2011
Target
March 2012
Flagship projects
developed under the
project are promoted by
Government of Indonesia
and help shape its national
low carbon development
strategy
Number of projects
endorsed by Government
of Indonesia (national and
local) and the Indonesian
Investment Agency.
0
2
At least 6
PURPOSE
Indicator
Baseline
April 2011
Milestone 1
October 2011
Target
March 2012
Assumptions
A pipeline of bankable low
carbon development
projects and a set of
flagship projects attract
finance and inform policy
Feasibility studies that
attract financing during
implementation of project
0
0
2
MOF is able to manage wider
government relationships to
enable investments to go
ahead.
Government welcomes the
projects as a tangible
contribution to promoting a
low carbon growth path.
Source
MOF reports, ministerial communications
Source
Project Monitoring Reports, Minutes of Steering Committee meetings
Indicator
Baseline
April 2011
Milestone 1
October 2011
Target
March 2012
Feasibility studies that are
expected to attract
financing after the project
has ended.
0
0
4
Local level agencies
cooperate fully to support the
establishment of projects.
Source
Project Monitoring Reports, Minutes of Steering Committee meetings
INPUTS (£)
DFID (£)
Govt (£)
Other (£)
£5m
INPUTS (HR)
Total (£)
DFID SHARE (%)
£5m
100%
Financiers (including AFD)
accept proposals in feasibility
studies and are prepared to
offer finance.
DFID (FTEs)
A1 – (25%)
A2 – (20%)
B1 – (15%)
OUTPUT 1
Indicator
Baseline
April 2011
Milestone 1
October 2011
Target
March 2012
Assumptions
Portfolio of low carbon
1.1 Number of
0
4
8
Identified opportunities can
investment project
proposals fully appraised
and prepared.
professional feasibility
studies prepared.
be developed into bankable
proposals.
Source
Project Monitoring Reports, Minutes of Steering Committee meetings
IMPACT WEIGHTING
Indicator
Baseline
April 2011
Milestone 1
October 2011
Target
March 2012
80
1.2 Low Carbon
demonstration projects
that are started.
0
0
2
Project team (and
consultants) are available to
work with project promoters
to produce feasibility studies.
Studies are able to
technically demonstrate
commercial and economic
viability of projects.
Source
RISK RATING
Project Monitoring Reports, Minutes of Steering Committee meetings
Medium