Strategy Indonesia 2017-2021

STRATEGY 2017-2021

Indonesia

#WorldInCommon

Indonesia

TABLE OF CONTENTS 1. KEY ELEMENTS FOR AFD’S STRATEGY ............................................................... 4 1.1 SUMMARY OF THE SUSTAINABLE DEVELOPMENT STAKES ....................................................................................... 5 1.2 ANALYSIS OF THE COUNTRY’S STRATEGY.................................................................................................................... 6 1.3 PANORAMA OF DEVELOPMENT FINANCING................................................................................................................. 7 1.4 ELEMENTS FRAMING FRENCH STRATEGY.................................................................................................................... 8

2. ASSESSMENT OF AFD’S PAST ACTIVITIES, ADDED VALUE AND CONSTRAINTS.......................................................................... 9 2.1 QUANTITATIVE ASSESSMENT OF PAST ACTIVITIES ................................................................................................. 10 2.2 QUALITATIVE ASSESSMENT AND ADDED VALUE ...................................................................................................... 10

3. AFD’S INTERVENTION STRATEGY...................................................................... 12 3.1 STRATEGIC ORIENTATIONS.......................................................................................................................................... 13 3.2 OBJECTIVES AND ACTIVITIES...................................................................................................................................... 14 3.3 CROSS-CUTTING OBJECTIVES..................................................................................................................................... 18 3.4 PARTNERSHIPS AND KNOWLEDGE PRODUCTION...................................................................................................... 19

4. INTERVENTION MEANS AND MODALITIES....................................................... 17 4.1 FINANCIAL MEANS.........................................................................................................................................................18 4.2 MODALITIES....................................................................................................................................................................18

ACRONYMS AND ABBREVIATIONS......................................................................... 19

1.

KEY ELEMENTS FOR AFD’S STRATEGY

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STRATEGY INDONESIA 2017-2021

1.1 SUMMARY OF THE SUSTAINABLE DEVELOPMENT STAKES The world’s largest and most populous archipelago

Progress on the social front

With its 50,000 km of tropical sea coastline and over 17,500 islands, Indonesia is the largest archipelago in the world, extending 5,000 km from east to west and stretching across three time zones. This gives the country the sixth-largest exclusive economic zone, as well as one of the planet’s richest marine and terrestrial biodiversities (the country is among the 17 “mega-diverse”1 countries and has the second-largest forest cover). With an estimated population of over 262 million people in 2016, it is the world’s fourth most populous country and largest Muslim-majority country, characterised by its cultural, religious and ethnic diversity (over 300 ethnic groups). It is also the world’s third-largest democracy in terms of the number of inhabitants. President Joko Widodo (“Jokowi”) was elected through a direct ballot in 2014.

Significant progress was made over the last decade on the socioeconomic front. For example, poverty was reduced, with the poverty rate dropping from 28% in 2006 to under 11% in 2016, which means that 43 million people were lifted out of poverty;5 access to education and health improved, with the country moving up to 115th place on the 2015 Human Development Index; gender equality in society made headway,6 etc. Yet, regional disparities remain and these inequalities are partly linked to the questions of access to and quality of public health and education services.7 The challenges associated with an aging population will also appear in a few years (in 2050, 22% of the population will be over age 60).

A major emerging economy in Asia

Indonesia has the world’s second-largest forest area and is one of the most biodiversity-rich countries, harbouring two of the planet’s 34 biodiversity hotspots.8 However, this natural heritage is threatened by human activity. Despite the strengthened regulatory framework, deforestation9 is still ongoing even though there are signs of a slowdown in the production of palm oil. Indonesia’s forests continue to be threatened by forest exploitation and, as a result, the country is ranked between the third- and fifth-largest greenhouse gas (GHG) emitter depending on the year. In parallel, emissions related to the energy sector will likely continue to rise due to the increase in the country’s installed capacity, despite plans to step up the share of renewable energies.

With a gross domestic product (GDP) of over USD 930 billion in 2016, Indonesia is a member of the G20 and ranks third among the developing Asian countries, behind China (11,200bn) and India (2,250bn).2 Its GDP per capita (USD 3,600 in 2016) is close to the average for ASEAN countries, except for Singapore. The country draws its wealth from its vast natural resources (oil, gas, wood, coal, tin, copper and gold), which have enabled it to finance policies to support agriculture and industrial projects.

Today, Indonesia also has a diversified productive structure.3 The services sector and domestic consumption are driving the country’s growth (55% of GDP) and, at the same time, provide a degree of resilience to external economic shocks, particularly to the slowdown of the Chinese economy. Indonesia’s economic growth remains robust with an average rate of over 5% per year since 2010. Coupled with sound economic fundamentals (budget deficit under 3%; public debt under 30% of GDP; inflation under 5%), this growth has made Indonesia into an attractive destination for investors, and the country is now classed as “investment grade” by the major rating agencies. Finally, Indonesia is a key actor in the fight against climate change and one of very first emerging countries to have adopted “climate” policies at both national and local levels.

Infrastructure and reform Since 2015, the Indonesian government has made substantial investments to improve the country’s infrastructure both quantitatively and qualitatively (the share of the state budget devoted to infrastructure rose from EUR 5bn in 2009 to EUR 25bn in 2017).

There still exists, however, an overall infrastructure deficit,4 be it in the transport, electricity, water or sanitation sector. The government has also committed to gradually lifting the regulatory barriers that impede not only direct foreign investment, but also the growth of the private sector. Considerable efforts have also been made in the fight against corruption (e.g., the creation in 2002 of KPK, an independent commission for the eradication of corruption), which has helped to enhance Indonesia’s ranking on the corruption index of the NGO, Transparency International (ranked 90th out of 175 countries in 2016 compared to 137th in 2005).

Climate and environment

Indonesia is also highly vulnerable to the already present effects of global warming: rises of temperature, rainfall, flooding, sea-level (by 35 cm in 2050 and 90 cm at the end of the 21st century, which will impact the 42 million people living within three kilometres from the coast), landslides and drought.10 These effects will particularly hit the poorest communities whose livelihood depends on agriculture, fisheries and forest-related activities.

The same is true for Indonesia’s huge marine resources, which the government has very actively sought to protect by combating A “mega-diverse” country is home to at least 1% of the world’s 300,000 or so species of endemic vascular plants.

IMF, World Economic Outlook, April 2017.

3 In 2015, industry accounted for 40% of GDP and 16% of employment, while services represented 43% of GDP and 46% of employment. The primary sector accounted for only 14% of GDP but still employed 38% of the labour force. The labour force was estimated at 122 million people and the unemployment rate at 6% (Source: ILO, Labour and Social Trends Update, Nov. 2015).

4 The country is ranked 60th out of 138 in the Global Competitiveness Index 2016–2017 on the Infrastructure pillar, behind Malaysia and Thailand. http://reports.weforum.org/ global-competitiveness-index/competitiveness-rankings/#series=GCI.A.02 5 World Bank – data center. Poverty rate applied: a person living on less than USD 1.90 per day.

6 According to the OECD’s Social Institutions & Gender Index (2014), Indonesia was ranked in the “average” category. According to the 2016 Global Gender Gap Report, Indonesia is ranked 88th out of 144 countries.

7 Infant mortality rate: 190/100,000 births compared to 102/100,000 according to the World Health Organization.

8 Biodiversity “hotspots” are considered to be the wold’s richest but also the most endangered areas. For example, almost half of plant species and 35% of vertebrate species are endemic to hotspots.

9 About 800,000 hectares per year in recent years, including more than 100,000 hectares of peatland forest, are destroyed annually.

10 https://deenpsu.wordpress.com/type/gallery/page/2/ 1

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illegal fishing but which are also suffering from the effects of terrestrial pollution11 and economic growth. Bolstered by its wealth and achievements, Indonesia is now facing the evolving challenges typically found in emerging countries in transition.

Urban challenges With an urban population growth rate of 4.1% a year, the fastest in Asia, 68% of Indonesia’s population will likely be living in cities by 2025.12 Currently, Indonesian cities lack adequate infrastructure to accommodate the influx of people, leading to problems of air and water pollution, housing, mobility and sanitation.13 Moreover, the pressure on land in urban areas (9,400 people per km² in 2010 compared with 7,400 in 2000) pushes up the cost of housing, which means that people have to live far from their workplace. New approaches to urban development are needed, enabling cities to become more integrated at the regional scale.

Social challenges The median age of the population was 28.6 years in 2016 and 56% of Indonesians (157 millions) are of working age (15–64).

Indonesia could thus benefit from a significant demographic dividend, but the number of skilled jobs created is not enough to absorb the 2 million young people entering the labour market each year. This can be explained by the mismatch between the supply of tertiary education and the demand for skilled jobs, which leads to a rise in informal labour (62% of the working population). A similar observation applies to the health sector, where advances have successfully increased life expectancy (from 45 years in 1970 to 71 years in 2015), but where access to health care remains an issue given the available health infrastructures.

Economic challenges Indonesia’s economy still depends on commodities (mainly from extractive industries, palm oil, rubber and coffee). The industrial fabric is developing but concentrated on the Island of Java. The preponderance of the informal sector and the narrow tax base have a negative impact on fiscal revenues, yet the country’s financing needs are still high. The development gaps between the main islands (Java and, to a lesser extent, Sumatra, which are the most populous) and east Indonesia with its large amounts of natural resources generate high costs and lengthy lead times for transport and logistics, thus constricting the potential for growth.

Institutional and ecological challenges Indonesia has embarked on a decentralisation programme which has been strengthened since 2015 with over 50% of the national budget being implemented by local governments. This nonetheless poses a challenge for local governments, as they have seen their responsibilities extended to implementing projects but do not always possess the appropriate ad-hoc skills. The environmental and social aspects also pose considerable challenges that the local governments have to reconcile with regional development and the improvement of their communities’ living conditions.

In 2015, Indonesia was estimated to be the second-largest contributor to plastic waste in the oceans according to Ocean Conservancy, China being the largest.

BPS (Central Bureau of Statistics), 2015.

13 According to the World Bank (Indonesia’s Urban Story, 2016), 48% of households have access to safe water, only 11 cities are equipped with a sewage network, and 2% of citizens have access to a centralised sanitation system..

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1.2 ANALYSIS OF THE COUNTRY’S STRATEGY Sovereignty, independence and cooperation Indonesia’s strategy is based on a 20-year development plan (Rencana Pembangunan Jangka Panjang Nasional [RPJPN] 2005–2025) which is further divided into five-year plans (Rencana Pembangunan Jangka Menengah Nasional – RPJMN) that define sectoral priorities and direct public spending accordingly. The current RPJMN (2015– 2019) has a strong focus on (i) human development, (ii) economic development and (iii) regional development and the reduction of inequalities (cf. the figure below). The stated priorities are energy and maritime questions as well as social aspects. The challenges of governance are presented as a prerequisite for implementing the strategy. The final goals refer to the population’s well-being,

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greater social and economic justice, and respect for the environment. This strategy is in line with the integrated vision promoted by the sustainable development goals (SDGs), where each of the seventeen goals is crosscut by the economic, social, environmental and governance dimensions. The Jokowi administration has placed emphasis on investment in basic infrastructure (notably energy, transport, water and sanitation) and social programmes (universal health cover and social housing) – a policy line that has been facilitated by a substantial reduction in energy subsidies. The transfers to local governments have also been increased.

Sustainable development and climate

The National Development Strategy DEVELOPMENT NORM 1 - Development for human beings and community; 2 - Effort to increase welfare, prosperity, productivity should not lead to create a wider grap; 3 - Main focus is adressed to increase the productivity of middle-lower society, without preventing, hampering, lowering, and reducing the flexibility of major actors to continue to be an agent of growth; 4 - Development activity should not harm and decrease the environmental support and the balance of ecosystem.

3 DEVELOPMENT DIMENSION Human development dimension

Main sector development dimension

Territorial and equality dimension

Education

Food Soverignty

Among Group of Income

Health

Energy and Power Sovereignty

Among region: (1) Village, (2) Borderland, (3) Outside Java, (4) East Region

Housing Mental / Character

Maritime and Marine Tourism ans Industry

NECESSARY CONDITION Law Certainty and Enforcement

Security and Peaceful

Politics and Democracy

Gouvernance and Bureaucratic Reform

This development plan should enable inclusive and sustainable growth, sustainably develop natural resources and contribute to the fight against climate change. It aims to strike a balance between economic, social and environmental stakes.

For instance, it integrates the notions of environmental sustainability for urban development and the fight against illegal fishing and, more broadly, against the unsustainable exploitation of natural resources. Above all, it takes into account Indonesia’s international commitments, particularly the objective of reducing GHG emissions by 26% by 2020 in five priority sectors (forestry, energy, transport, industry, waste) under the National Action Plan for Greenhouse Gas Emission Reduction (RAN-GRK).

This objective was confirmed by Indonesia at the COP 21 (unconditional target of a 29% emissions reduction by 2030 and 41% with international support) and is included in its national contribution (nationally determined contribution – NDC14). The strategies developed at sectoral and local level must comply with these commitments, as must the energy strategy aimed at raising the share of renewable energies to 23% of the primary energy mix by 2025, given the abundant renewable resources available in Indonesia.

QUICK WINS AND OTHER CONTINUED PROGRAMS

Source : Bappenas, RPJMN 2015-2019, Book 1, Chapter 5.2.

1.3 PANORAMA OF DEVELOPMENT FINANCING The investment financing needs to implement the RPJMN 2015– 2019 are estimated at USD 470 billion for the period, compared to a budget of USD 156 billion in 2017. The Indonesian government first reduced energy subsidies, which had amounted to over 18% of government spending before 2015 (less than 4% in 201715), freeing up over USD 20 billion per year. In addition, the country has had recourse to bilateral and multilateral donors to ensure financing for its priority projects listed in “Blue Book”,16 that is, the projects eligible for external foreign currency financing, for a total of USD 44.7 billion over the next five years. These projects primarily target the transport, energy, housing and energy, and sanitation sectors. However, borrowing constraints (see below) tend to work in favour of private investors and the mobilisation of state-owned enterprises, which are new players in Indonesia’s development.

Bilateral and multilateral donors commit around USD 4–5 billion in Indonesia each year, mostly in the form of loans. These commitments are generally stable. All of these actors are positioned on the priority sectors defined by the Indonesian authorities, namely infrastructure, social sectors and institutional reform programmes.

More generally, Indonesia enjoys a low level of indebtedness.

The Finance Act of 2003 caps public debt at 60% of GDP and the budget deficit at 3% of GDP. Moreover, local governments are not authorised to contract debt with foreign financial institutions, except via loans to central government with subsequent transfer to the local government, and/or through direct loans from central government. Over 70% of the debt is ultimately financed by bond issues (domestic and external), which amounted to 12% of GDP in 2016.17 State-owned enterprises also finance part of the priority investments, notably under public-private partnerships. The government injects capital into these enterprises, which on their side finance the main aspects of their development through loans and bond issues. In this context, they are gradually becoming key actors of Indonesia’s development policy, while at the same time the government is paying greater attention to the effectiveness of public expenditure, particularly in the context of increasing decentralisation. http://www4.unfccc.int/ndcregistry/PublishedDocuments/Indonesia%20First/First%20 NDC%20Indonesia_submitted%20to%20UNFCCC%20Set_November%20%202016.pdf.

IISD, Indonesia Energy Subsidy News, March 2017.

16 See part 2 below.

17 In December 2016, the government successfully launched an international bond issue worth USD 3.5 billion.

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1.4 ELEMENTS FRAMING FRENCH STRATEGY Given the will of the two countries to strengthen their bilateral relations, France and Indonesia signed a Strategic Partnership in July 2011.

This partnership identifies several priority sectors for cooperation between the two countries : - Energy: a sector where a work group has been set up bringing together the main French public and private stakeholders. Bilateral consultations are held regularly in France and Indonesia, and have led to discussions between the energy ministries and the signing of an agreement between the French Syndicat des Energies Renouvelables (Renewable Energy Association) and its Indonesian counterpart (METI). Discussions have been stepped up since 2015 with more focus on renewable energies and smart grids.

- The maritime sector: During the visit of the President of the French Republic to Indonesia in March 2017, a maritime partnership joint statement and a letter of interest were signed concerning the areas of fisheries, research and technical assistance. Bilateral cooperation in maritime matters covers various sectors such as infrastructure (mainly for ports), the sustainable management of fisheries resources, scientific and technological cooperation, meteorology, the safety and sovereignty of maritime space and marine energy.

- Sustainable cities: a Vivapolis delegation visited Indonesia in 2016 for a conference on this theme, organised by the French team. The setting-up of a work group on sustainable urban development could be envisaged in the second semester 2018.

- Tourism: a work group has also been set up bringing together French public and private actors, where discussions are being held with the Indonesian authorities with a view to developing eco-tourism.

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STRATEGY INDONESIA 2017-2021

A fifth sector was integrated during François Hollande’s state visit in March 2017, namely the creative economy and the cultural industries. This gave rise to a joint declaration by the two Presidents of the Republic and the setting-up of the first cooperation actions in the fields of new technologies and cinema.

In addition to AFD, the main actors of bilateral cooperation are: - The Direction Générale du Trésor (DGT – General Directorate of the Treasury), through the mobilisation of the Fonds d’études et d’aide au secteur privé (FASEP – Fund for studies and assistance for the private sector), or concessional and non-concessional Treasury loans. Several projects of the Indonesian government are now in their launch phase or under study, notably in the areas of meteorology (with the national agency BMKG), governance («e-gov» project on digital administration) and telecommunications (digital television).

- The Institut Français d’Indonésie, notably in the field of vocational training (opening in 2018 of a centre of excellence in partnership with Schneider Electric and both countries’ ministries of education), research (several active partnerships, for example in the space, maritime and geology fields).

- Research institutes, notably IRD (French National Research Institute for Sustainable Development) and CIRAD (Agricultural Research Centre for International Development), which both have permanent teams in the areas of cultural industries, forestry and marine biodiversity.

- Business France, whose programme of activities focuses specifically on the sectors of energy, sustainable cities and infrastructure. France is Indonesia’s second-largest European trading partner with EUR 4.4 billion worth of trade in 2016 (a positive trade balance of some €800 million). Over 200 French companies and subsidiaries are established in Indonesia, providing more than 50,000 direct jobs.

2.

ASSESSMENT OF AFD’S PAST ACTIVITIES, ADDED VALUE AND CONSTRAINTS

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2.1 QUANTITATIVE ASSESSMENT OF PAST ACTIVITIES Quantitative assessment of past activities

From 2007 to 2016, AFD committed over EUR 1.8 billion to Indonesia and disbursed more than EUR 1.4 billion.

M€ 400

The commitments made specifically over the period of the previous strategy (2013–2015) totalled some EUR 580 million,18 and targeted the energy, climate, transport, logistics and maritime sectors. The disbursements over this period amounted to EUR 323 million.

350 300 250

PROPARCO covers Indonesia from its regional office based in Bangkok. Five projects have been funded in the country since the regional office opened in 2006, in a variety of sectors: (i) microfinance and financial institutions (credit lines) (ii) energy (financing for the extension of a gas-fired combined-cycle power plant) and (iii) paper recycling (financing for a waste incinerator). At the end of 2016, PROPARCO broadened its operations in Indonesia by participating for the first time in an investment fund.

200 150 100 50 0 2007

2008

Source : AFD

2009

2010

2011

Commitments Engagements

2012

2013

2014

2015

2016

2017

18

Around EUR 450 million after cancellations.

Disbursements Versements

2.2 QUALITATIVE ASSESSMENT AND ADDED VALUE A successful sectoral diversification in step with French priorities in Indonesia After contributing to the budget programme, Indonesia Climate Change Program Loan (ICCPL), from 2008 to 2011 (USD 800 million), AFD has gradually diversified its portfolio in response to Indonesian demand. The Agency has developed a portfolio of sovereign and non-sovereign loans, public policy loans and initiatives financed by delegated funds. This portfolio has been built around the main challenges for Indonesia, corresponding to the priorities of successive Indonesian governments, AFD’s geographic and sectoral priorities, and French priorities in Indonesia: - natural resources and biodiversity (marine resources and forestry), - sustainable energy (energy efficiency and renewable energies), the Agency’s prime intervention sector, - urban development (urban transport, sanitation, ecodistricts), - public policies to support connectivity (as from 2013), - financial governance (2016).

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STRATEGY INDONESIA 2017-2021

Balancing project loans and public policy loans The only projects eligible for external financing (development banks, commercial banks), be it through grants or loans and excluding non-sovereign financing, are those listed in the “Blue Book”. This is a government document (from the BAPPENAS – Indonesian National Development Planning Agency) covering the period 2010–2014, then 2015–2019,19 and drawn up in line with the RPJMN. The Blue Book gives rise to annual Green Books (see the figure below) that list those projects that are authorised by the government to go ahead with financing once they have been validated (generally, when the feasibility studies have been completed and after consultation between the involved stakeholders).

19

The Blue Book was updated in 2016.

Validation process for investment projects eligible for international financing

!

Bappenas Pre-feasibility or project design

Readiness criteria :

Bappenas Signed projects year n+1

Feasibility studies, impact studies, etc.

Blue book

Green book

List of priority projects eligible for external financing

List of projects included in budget for year n+1

Technical ministries & donors

Loan agreement

Source : AFD

So far, three AFD projects have been implemented and completed in Indonesia: for the energy sector, for satellite oceanography surveillance, and for rebuilding the sewage system in Banda Aceh in the wake of the tsunami. Several other projects are under preparation.

In a country the size of Indonesia, public policy loans have a strong leverage effect: the reforms receiving support can affect the country’s entire population and all of its provinces. The public policy loans tool helps to encourage reforms in key sectors (energy, maritime transport, public finances, etc.), especially when donors provide accompanying technical assistance to respond to the requests formulated by the Indonesian authorities. These operations are mainly led by the major multilateral donors but also associate bilateral donors, who can thus take part in the high-level public policy dialogue.

AFD’s contributions to public policy loans in Indonesia have enabled the Agency to position itself among the major donors (ADB, World Bank, JICA and KfW), not only in terms of volume (France appears as the second-largest bilateral donor in Indonesia,20 based on its cumulative commitments), but also from the point of view of the Agency’s participation in the sectoral dialogue.

Moreover, AFD systematically supports its loans with technical cooperation actions that mobilise French expertise.

A strengthened partnership-based approach Notably when participating in public policy loans, AFD has developed a partnership-based approach and is systematically working with the other donors operating in Indonesia (cofinancing with ADB, the World Bank and KfW in the energy sector; with the World Bank for public policy loans in the fiscal and logistics sectors; with ADB, the World Bank and JICA on the programme for connect-ivity infrastructure; obtaining delegated funds from the European Union and DfID, etc.). These operations have fostered a concerted approach and closer dialogue among donors.

AFD’s projects have also helped to regularly mobilise French actors and expertise, mainly in the framework of technical cooperation.

AFD is also working with the French departments present in Indonesia, notably with the DGT’s Service Economique and Business France through cofinancing operations that leverage the complementarity of financing tools (in compliance with the untying of aid), and by organising joint events.

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Behind Japan: ranking by the Ministry of Finance, November 2016.

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3.

AFD’S INTERVENTION STRATEGY

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STRATEGY INDONESIA 2017-2021

3.1 STRATEGIC ORIENTATIONS In line with the integrated logic of the SDGs, the Indonesian government’s development strategy (RPJMN) for the period 2015–2019 recognises that environmental and climate issues are crucial, but it also places the well-being of its populations at the centre of its priorities. As a result, in its concern for social cohesion, the government is focusing on greater redistribution in favour of the middle classes and the poor.

-A FD also wishes to maintain an operational objective relating to the preservation of Indonesia’s ecosystems. This involves major challenges for Indonesia and will require considerable support to find sustainable and innovative solutions conducive to the sustainable management of natural resources.

- The actions launched in the area of connectivity will be continued in response to the priority that Indonesia has set for this domain. AFD assistance will be in the form of public policy These two main Indonesian priorities dovetail with those of AFD loans to support the reforms undertaken by the government, Group as set out in its Strategic Orientation Plan, via two comor transport infrastructure financing, mainly through nonmitments: 100% Paris Agreement and 100% Social Cohesion. In sovereign loans, which will help to reduce territorial and social this way, AFD seeks to reconcile the fight against poverty and ineinequalities. qualities with the fight against climate change. It will also ensure - In the same vein, it is planned to increase commitments for that each of its financing actions is compatible with a resilient urban development, a sector at the intersection of environmenlow-carbon development trajectory in line with the Paris Agreetal issues (air quality, water pollution, sanitation, etc.), as well ment, and that this financing helps to bolster social cohesion – or as social questions, in order to promote urban development at least not weaken it. that respects people and the environment.

- Lastly, AFD will continue its support for greater effectiveness of public action, particularly in the area of financial governance.

In this context, the d’intervention first final goal ofde AFD will en be Inde, to support Schéma logique l’AFD 2017-2021 The Agency can show an interest in the question of public spenIndonesia’s development towards a more inclusive society and ding effectiveness, notably in the social sectors. enhanced well-being for its population. For AFD, this means supporting actions that help to mitigate regional and social disparities, but also actions that improve the population’s living For all of these interventions, AFD will pay particular attention conditions. More specifically, this will involve supporting sustai- to the questions of gender and the mobilisation of expertise, nable development in Indonesia by improving the quality of public that will help not only to further reflection, but also to implement services (water, sanitation, mobility, and a way of life that respects projects/programmes. In a complex intervention context, the people and the environment). This will be achieved thanks to bet- Agency will also maintain a degree of openness so as to remain ter connectivity in the archipelago and to reforms that promote responsive to the different requests from Indonesia and adapt greater equity and effectiveness in public spending, including skills to these as well as to the priorities that may change after the development.

2019 elections.

At the same time, given Indonesia’s significant contribution to global GHG emissions, its sensitivity to the effects of climate change, and the risks threatening its natural heritage, AFD’s second final goal will be to support Indonesia’s efforts to tackle climate and environmental issues. This will involve supporting Indonesia’s efforts towards the energy transition, notably by developing renewable energies and energy efficiency, but also by promoting the sustainable management of natural resources, notably marine and forest resources. The Agency will also support employment policies for managing job creation and losses that result from this transition. This will thus contribute to fulfilling the commitments made by Indonesia under the Paris Agreement.

In step with the past ten years of operations, the Agency will consolidate its positioning in the sectors where it has most added value and influence, at the same time taking into account French priorities in Indonesia: - Energy should remain one of the key intervention sectors, whether this takes the form of support to sectorial reforms, direct financing of investments driven by state-owned enterprises, or indirect financing for the private sector and local governments via Indonesian public banks, which will help to support low-carbon development paths and meet the country’s energy needs.

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3.2 OBJECTIVES AND ACTIVITIES For the period 2017–2021, AFD has thus set the following operational objectives: • Promote urban development that respects people and the environment, • Support low-carbon development trajectories and respond to Indonesia’s energy needs, • Encourage the sustainable management of natural resources, • Reduce regional and social inequalities, • Contribute to the effectiveness of public action.

These objectives reflect several of the major transitions that AFD has taken as the basis of its strategy: the energy, digital, regional and urban, ecological, political and citizen transitions. These are broken down into activities presented in the figure below.

AFD’s Logical Intervention Framework in Indonesia FINAL GOALS

100% PARIS AGREEMENT - FIGHT AGAINST CLIMATE CHANGE

100% SOCIAL LINK - TAKING INTO ACCOUNT GENDER EQUALITY AND VULNERABLE PEOPLE

SUPPORT INDONESIA’S EFFORTS TO TACKLE CLIMATE & ENVIRONMENTAL ISSUES

FRENCH EXPERTISE AND EXPERIENCE-SHARING

SUPPORT INDONESIA’S DEVELOPMENT TOWARDS A MORE INCLUSIVE SOCIETY AND ENHANCED WELL-BEING FOR ITS POPULATION

OPERATIONAL OBJECTIVES

Promote renewable energies and energy efficiency Innovation, reform of the institutional framework and improved access

Promote urban development that respects people and the environment

Improve collective urban services Water, waste, urban and spatial planning

% of amounts granted

40%

FINANCIAL TOOLS

• Public Policy Loans • Project loans

14%

Encourage the sustainable management of natural resources

Sustainable management of land and ecosystems Plantations, forests, marine biodiversity, protected species

16%

Reduce regional and social inequalities

Improve maritime connectivity Transport, maritime logistics

16%

In the energy sector, the Indonesian authorities are working to reconcile the international commitments made to contribute to the fight against climate change and the national objectives for socio-economic development. This could entail difficult

• Programme loans • FEXTE + seed funds (technical and academic cooperation) • Mobilisation of EU delegated funds, SECO, other.

• Non-sovereign loans

Strengthen the effectiveness of public finances Fiscality, administration, skills development

Contribute to the effectiveness of public action

Today, the energy sector is AFD’s main intervention sector (55% of commitments). AFD will continue operating in this sector through public policy loans, project loans and technical support.

To complement this, the Agency also wishes to participate in (i) the sectoral dialogue at ministerial level, which will enable it to contribute to defining energy policy orientations, (ii) investments that help to further more sustainable and equitable access to energy, (iii) advocacy and academic collaborations to integrate environmental challenges into economic planning, and the definition of investment priorities, (iv) skills development (vocational training) for people working in the sector, with a focus on the new technologies required for the energy transition, and (v) technical support for its partners to facilitate project execution, if need be, notably through capacity building.

STRATEGY INDONESIA 2017-2021

ACTIVITIES

Support low-carbon development trajectories and respond to Indonesia’s energy needs

Promote renewable energies and energy efficiency

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SDG

14%

• Guarantees

trade-offs over the next few years in order to make headway with the country’s energy transition. Indonesia’s current energy model basically relies on a single electricity operator (whose profitability partly depends on operating subsidies from the state) that prioritises increasing its electricity production at a lower cost21 (thus mainly coal, of which Indonesia has abundant reserves). For the energy transition, there thus needs to be a shift that opens up more room for renewable energies,22 for the private sector and for improved energy efficiency so as to slow down the growing demand.

The 3ME modelling tool implemented in Indonesia by OFCE with funding from AFD has shown that, in the long run, the cost of coal per Kw/h would not be cheaper than solar or geothermal power.

22 Indonesia maintains in parallel its GHG reduction objectives and the target of reaching 23% of renewable energies by 2025.

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This approach, combining public policy loans, non-sovereign loans to energy sector operators (notably the state-owned electricity operator, PLN) and to financial institutions (the public bank, PT-SMI), and delegated grants from other donors, mainly the EU, will enable AFD to support reform of the sectoral framework and policy orientations in favour of more sustainable and more inclusive energy. It also enables the Agency not only to finance projects with climate co-benefits that can concretely implement Indonesia’s policy in support of the energy transition, but also to contribute to Indonesia’s thinking on its development model and longer-term vision of the country’s GHG emissions reduction trajectory.

Through these actions, AFD will continue to play an active role in the Franco-Indonesian work group for sustainable energy, the French Renewable Energy Group for Indonesia (FREGI).

Improve maritime connectivity AFD’s action in the area of maritime connectivity will focus on a reform programme financed through public policy loans. This programme is designed to enhance performance in the maritime and logistic sectors, clarify their institutional organisation and increase the confidence of private operators so as to encourage them to invest. In the long run, it should help to reduce regional inequalities (by helping to open up isolated areas of the territory) and social inequalities (mainly by providing more equality in terms of access, mobility, purchasing power and more opportunities for wealth creation). To support this sectoral reform, a fund for technical expertise and transfer of experience (FEXTE) will be appraised with a view to providing the Indonesian authorities with assistance from the Le Havre Port and the IPER training centre, with a specific focus on the sustainable management of port infrastructures.

This intervention, which is a priority issue for the government, also provides AFD with the opportunity to dialogue with all actors in the sector and notably with the state-owned enterprises that participate in the major transport infrastructure projects. Prospecting efforts to target state-owned enterprises in the sector will be continued in view of developing non-sovereign activity.

Apart from the key connectivity challenges to enable the islands in east Indonesia to catch up economically, AFD will focus on mitigating the environmental impacts of the major infrastructure projects, particularly port infrastructure.

Sustainable management of ecosystems In this area, AFD wishes to continue the work already started on marine biodiversity through the oceanography surveillance project INDESO completed in 2017, as well as the significant prospecting work carried out with forestry actors. When it comes to preserving marine resources, a letter of intent was signed between France and Indonesia in March 2017 which created an enabling framework for continuing projects that promote stronger Indonesian capacities to better know and preserve natural resources. AFD will, in particular, study the possibility of supporting the emergence of an Indonesian maritime competitiveness cluster, as well as initiatives to reinforce national capacities in applied research, notably within the framework of Franco-Indonesian partnerships.

In the area of sustainable forestry management, AFD will remain attentive to the initiatives of economic actors who voluntarily participate in the implementation of international best practices to conserve forestry resources and involve local communities.

AFD wishes to be an actor in this key sector in Indonesia with respect to its environmental and social impacts by promoting new standards and seeking to forge innovative partnerships.

If need be, AFD will support some NGOs active on this theme through its funding window for French NGO initiatives.

Lastly, other opportunities can be sought in the area of ecotourism if synergies with the actions of other French actors are identified.

Improve collective urban services In an initial phase, AFD’s actions in the urban development sector will be structured around two projects currently under preparation, aimed at promoting a sustainable urban development model (on the lines of “eco-districts”) in three pilot cities, and a sanitation programme for the city of Bogor. The projects can also be foregrounded within the bilateral work group on the sustainable city.

Given the size of Indonesia’s major urban centres (several million residents), AFD will seek to target precise areas for its interventions, either by proposing projects that are part of broader programmes, such as the two above-mentioned projects, or by establishing closer ties with multilateral donors that have the capacity to address the urban issues (mobility, sanitation, housing, etc.) present in very large urban centres.

As donors are not authorised to provide direct financing to local governments, the Agency will also study jointly with PT-SMI the possibility of strengthening its partnership so as to extend its support to urban development. The Agency will also focus on the water sector (water resource management and access to water), given Indonesia’s high level of vulnerability to the effects of climate change. Particular attention will be paid to developing the skills of personnel working in collective urban services (water, waste, mobility). It will also be responsive to adaptation issues related to this urban portfolio, both through a cross-cutting approach in future projects or via dedicated projects. The agency will also prospect in the area of disaster risk mitigation (DRM).

Strengthen the effectiveness of public finances The Indonesian authorities have embarked on large-scale reforms in the area of public finances not only to raise more state revenue and thus ensure the sustainability of government policy, but also to improve the effectiveness of public spending (“Collect more, spend better”). AFD has supported these public finance reforms since 2016 through public policy loans cofinanced with the World Bank.

The increase of the state budget and the quality of government spending are prerequisites for successfully achieving the country’s development strategy to promote more inclusive and sustainable growth. The technical assistance organised by Expertise France, which mobilises officials from the Direction Générale des Finances Publiques (General Directorate of Public Finances – DGFiP), provides support to the ongoing reforms, particularly changes to fiscal policy (e.g., VAT reform). This assistance could be extended to questions of mobilising public financing to support the fight against climate change.

AFD will also prospect other areas related to sovereign governance, notably e-government, which operationalises AFD’s intention to become a digital technology donor. AFD will also take an interest in the questions of the effectiveness of public spending, particularly in the social sectors (education, health, social protection) and at local government level given the high amounts of budget transfers made under the decentralisation framework. The Indonesian government has engaged in sweeping reforms to improve the performance and quality of public services, which could benefit from one-off assistance and projects notably in the area of skills development.

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3.3 CROSS-CUTTING OBJECTIVES In Indonesia, AFD is continuing its main cross-cutting objective to promote French expertise and knowledge-sharing, in response to the requests formulated by the Indonesian authorities. These thematic exchanges and comparative feedback on experiences make it possible both to present what other states are doing and also highlight Indonesian reforms.

The priority intervention sectors for the period are those for which there is a relevant French offering, particularly in the areas of water and sanitation, energy, urban development, public finances and natural resource management. AFD’s interventions, which supplement the Agency’s loans (mainly public policy loans) with technical cooperation activities, allow the Agency to participate actively in the dialogue with the Indonesian authorities.

By mobilising different lines of expertise, AFD also intends to promote innovation and enable its Indonesian partners to test new approaches. This is already the case with the support for the launch of a call for tidal energy projects: inspired by the Investissements d’Avenir programme,23 this initiative has been launched by the

Ministry of Energy and PLN with support from AFD. Other support, mainly via French local authorities, will be envisaged in the context of Indonesian decentralisation.

Lastly, AFD wishes to extend its technical support to knowledge production so as to inform Indonesia’s medium- and long-term reflection process. This is already the case with a programme run jointly with the Ministry of the Plan to model Indonesian energy policy and propose several development scenarios and trajectories to reduce GHG emissions. These cases help to create spaces for an open dialogue with our partners, and at the same time promote AFD’s role within the development donor community. The Agency wishes to pursue and extend this type of initiative, particularly those with a “climate” focus.

Special attention will be paid to promoting gender equality. This will mainly be dealt with by carrying out a gender diagnosis in the chosen intervention sectors.

3.4 PARTNERSHIPS AND KNOWLEDGE PRODUCTION The partnership-based approach adopted alongside the major donors, notably through AFD’s participation in large-scale reform programmes via public policy loans, will continue over the period.

AFD will thus continue to actively participate in these large-scale programmes, while also adopting a strategy of differentiation, especially through non-financial production that supports or complements the technical support rolled out for these programmes.

In particular, AFD will strengthen the partnerships forged notably with the World Bank, the Asian Development Bank and the KfW. It will also pursue its exchanges with the European Union. It will seek to promote the dialogue and coordination with these partners on the fight against climate change and the sustainable management of ecosystems, especially under its presidency of the International Development Finance Club (IDFC).24 In terms of knowledge production, AFD has supported the setting-up of a macroeconomic modelling tool for energy transition trajectories (the 3ME tool developed by the Observatoire Français des Conjonctures Economiques). At a less operational level, AFD has also supported a “green city” study for Bandung as well as a “climate plan” for Bogor, and is currently supporting research on waste management in Surabaya. The Agency will also give thought, via the academic community, to studies that can investigate longterm development issues. The issues relating to coal, sustainable management of marine and forestry resources and/or palm oil are particularly sensitive and could well be studied. Research on

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these topics or climate-related issues that could inform an update of Indonesia’s NDC would be particularly welcome. AFD’s intellectual production will also make it possible to support the incubation of innovative projects, clarify and orient operational and strategic choices, notably in new sectors such as the cultural and creative industries, digital technologies, sports or development education.

Following this logic, research projects that complement those mentioned above on urban development could be envisaged. Finally, an evaluation of the impacts of AFD’s interventions in the form of public policy loans can be undertaken.

With an allocation of EUR 57 billion, the French programme Investissements d’Avenir (investing in the future), headed by the Commissariat-General for Investment, has been set up by the French government to finance innovative and promising investments on national territory, based on a cofinancing principle for each project.

24 Indonesia is a member of IDFC via the Indonesia Eximbank.

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4.

INTERVENTION MEANS AND MODALITIES

4.1 FINANCIAL MEANS AFD’s activity will be based primarily on non-concessional sovereign loans, which incurs no cost for the French state. Non-sovereign activity, again on a non-concessional basis, will also be continued.

Lastly, grants can be mobilised, to the extent that they are available (FEXTE and delegated grants from other donors mainly), to support project financing and public policy loans.

4.2 MODALITIES Developing the sovereign portfolio will remain a priority for AFD over the period 2017–2021, and will involve structuring a sectoral portfolio that combines: - Public policy loans to support sectoral reforms, - Projects to finance priority investments in these sectors, - Grants to support these projects/programmes: thematic delegated funds, when these exist, to foster innovation (e.g., the Asian Infrastructure Facility for smart grids or hybrid solutions to supplement investments in electricity networks), FEXTE for additional studies and support to project managers for project execution, FEXTE to support partnerships that the Indonesians wish to set up to draw on French experience, - Research projects to capitalise on AFD’s sectoral investment and inform the Indonesian authorities’ medium- to long-term reflection.

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STRATEGY INDONESIA 2017-2021

AFD will remain vigilant in order to identify projects that can be financed through non-sovereign loans, notably in the areas of energy, transport, sustainable natural resource management and urban development. Where possible, synergies will also be developed with PROPARCO, particularly involving sub-participations in large-scale energy and infrastructure projects for PROPARCO. A Group offering coupled with technical assistance would be able to bring real added value.

In terms of tools, AFD will adapt its approach to the Indonesian setting by seeking to acquire greater agility, be it on non-sovereign loans by financing the balance sheet of state-owned enterprises or on sovereign financing based on new tools (performance-based loans, multi-tranche facilities, etc.) that can more effectively meet our clients’ expectations. Context permitting, the Agency will also seek to adopt an approach integrating the regional scale.

ACRONYMS AND ABBREVIATIONS ADEME: Agence de l’environnement et de la maitrise de l’énergie (French Environment and Energy Management Agency) ADB: Asian Development Bank AIF: Asian Investment Facility ASEAN: Association des Nations de l’Asie du Sud-Est BAPPENAS: Badan Perencanaan Pembangunan Nasional (Ministère du Plan) BMKG: Badan Meteorologi, Klimatologi, dan Geofisika (Meteorological, climatological and geophysical agency) CIRAD: Centre International pour la Recherche Agronomique et le Développement (Agricultural Research Centre for International Development)

KfW: Kreditanstalt für Wiederaufbau (German international cooperation agency) KPK: Komisi Pemberantasan Korupsi (Corruption Eradication Commission) METI : Masyarakat Energi Terbarukan Indonesia (Indonesia Renewable Energy Society) NDC: Nationally Determined Contribution NGO: Non-governmental organisation OFCE : Observatoire Français des Conjonctures Economiques (French Economic Observatory) P4R: Program for Results PARIC: Programme de Renforcement de la Connectivité PISA: Program for International Student Assessment

DGT: Direction Générale du Trésor (General Directorate of the Treasury)

PLN: Perusahaan Listrik Negara (State electricity corporation)

DFID: Department for International Development (UK)

PT-SMI: PT Sarana Multi Infrastruktur (State infrastructurefinancing company)

DGFiP: Direction Générale des Finances Publiques (Public Finances General Directorate)

RBL: Results-based loans

DRM: Disaster risk mitigation

RPJPN: Rencana Pembangunan Jangka Panjang Nasional (20-year development plan)

EU: European Union FASEP: Fonds d’études et d’aide au secteur privé (Fund for studies and assistance for the private sector) FEXTE: Fonds d’expertise technique et d’échanges d’expériences (Fund for technical expertise and transfer of experience) FREGI: French Renewable Energy Group for Indonesia

RPJMN: Rencana Pembangunan Jangka Menengah Nasional (5-year development plan) SECO: Swiss State Secretariat for Economic Affairs SIEP: Sustainable and Inclusive Energy Program VAT: Value-added tax USD: United States dollars

GDP: Gross domestic product GHG: Greenhouse gas HDI: Human Development Index IDFC : International Development Finance Club ICCPL: Indonesia climate change programme loans IFI: Institut Français d’Indonésie (French institute in Indonesia) INDESO: Indonesian Space Oceanography IPER: The International Training Centre for Port, Maritime and Logistics Industries IRD: Institut de Recherche pour le Développement (French National Research Institute for Sustainable Development) JICA: Japanese International Cooperation Agency

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What is AFD? AFD is an inclusive public financial institution and the main actor in France’s development policy. It makes commitments to projects that genuinely improve the everyday lives of people, in developing and emerging countries and in the French overseas territories.

AFD works in many sectors – energy, health, biodiversity, water, digital technologies, training – and supports the transition to a safer, more equitable and more sustainable world: a world in common.

Its action is fully in line with the Sustainable Development Goals (SDGs).

Through its network of 85 agencies, AFD operates in 109 countries and is currently supporting over 3,500 development projects. In 2017, it earmarked EUR 10.4bn to finance these projects.

Tel. : +33 1 53 44 31 31 — Fax. : +33 1 44 87 99 39 5, rue Roland Barthes, 75 598 Paris Cedex 12 — France www.afd.fr

SEPTEMBER 2018 -

http://www.afd.fr/en