Photo for illustrative purposes only. A geothermal power plant in Sumatera, Indonesia.

Islamic Finance

Indonesia postponing green infrastructure projects as it focuses on COVID-19

JAKARTA – Indonesia is postponing green infrastructure projects as the state budget focuses on managing the economic fallouts from the COVID-19 pandemic.

"Several infrastructure projects have been postponed because we are trying to refocus our spending but that does not mean we cancel them,” Luky Alfirman, Director General of Budget Financing and Risk Management at the Ministry of Finance told Salaam Gateway.

Some expenditures for multi-year projects with maturities that can be extended beyond 2020 will be continued in 2021.

“We are delaying some projects to give some space during this fiscal year, especially for COVID-19 spending. That's how we manage limited fiscal trade-offs while we prioritize the management of COVID-19.

“Based on our experience during the 1997-1998 Asian crisis or the 2008-2009 global crisis, when the government cancelled projects, the exchange cost was bigger. So, we ask the related ministries and agencies that use green financing to extend their projects. For example, if the initial plan is to complete it within 12 months, we have asked for them to extend it to 24 months,” said the official.

Indonesia has a type of financing that allows ministries and agencies to implement labor-intensive projects that create jobs related to the green agenda. For example, replanting forests (reforestation) is one of the National Economic Recovery (PEN) programs.

The final 2021 green sukuk and bond issuance timeline will be drafted in December.

Indonesia is one of the most active sovereign players in the global green financing market but it is not a good market for issuers at the moment, said Luky Alfirman.

The market size of Indonesia’s ESG financing, to reduce gas emissions up to 29% by 2030, is at least 3,461 trillion rupiah ($247 billion), according to the ministry of finance official. The sovereign itself issued 370 trillion rupiah ($26 billion) worth of financing over the 2016-2019 state budget. The figure will not be larger in the near-term if there is no issuance activity, particularly from the private sector.

“The problem is that issuers don’t see any price benefit or incentive from issuing green financing. We need to spend extra time and effort preparing the green framework, tagging green projects, impact report of the previous issuance etc. Another challenge is when we produce this report, sometimes the result of the planned projects is different from the initial criteria since they are handled by other ministries or even local governments.

“So coordination, and leadership among institutions and agencies is quite challenging. Does it need extra work? Yes. But this is part of the government’s commitment, so we hope all stakeholders, including investors, can appreciate these efforts so there will be more green financing issuance in the future,” said Luky Alfirman.

There are also no pricing benefits by going green, other than broadening the market’s investor base.

The government is also triggering corporate issuance activity via state-owned enterprises such as PT Sarana Multi Infrastuktur. More green financing issuers in the market is in itself a price incentive.

Luky Alfirman added that the extra steps and preparations to issue green financing are barriers to entering the market at the right time. This is especially so during the pandemic when the market is volatile and the right window may be a very small one.

“That is what happened in June when we were the first green sovereign global sukuk issuer. There are always some pros and cons. But going forward, I think our investors  see that we have this reputation and creditability.”

In June, Indonesia issued a $750 million sovereign green sukuk, following the issuance of $750 million in February 2019 and $1.25 billion in March 2018. In the domestic market, Indonesia has so far issued 1.47 trillion rupiah retail green sukuk in 2019 and more than 5.2 trillion rupiah retail green sukuk this year.

(Reporting by Yosi Winosa; Editing by Emmy Abdul Alim

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