Indonesia – A hub for blended finance in the Asia-Pacific

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Indonesia – A hub for blended finance in the Asia-Pacific

Indonesia – A hub for blended finance in the Asia-Pacific
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*As the Government of Indonesia takes lead on leveraging blended finance as a tool to advance development projects in the country, and private investors increase investment towards Indonesia’s long-term development plans, Indonesia is set to be a model for how blended finance can achieve sustainable and inclusive development in the region. *

As the fourth most populated country in the world, and the largest economy in Southeast Asia, Indonesia has charted an impressive economic trajectory since overcoming the Asian financial crisis of the late 1990s. According to the World Bank, for over two decades, Indonesia’s Gross Domestic Product (GDP) has steadily increased from US$ 823 in the year 2000, to US$ 3,932 in 2018, while its poverty rate has dramatically declined by more than half to 9.4%. In efforts to continue this positive growth trajectory, the Widodo administration has made high-quality, inclusive growth–with respect to the region’s natural resources–core to the country’s 20-year national long-term development strategy that launched in 2005 and continues to 2025. This plan is divided into 5-year medium term schemes referred to as the Rencana Pembangunan Jangka Menengah Nasional (RPJMN), each with different development priorities. The Ministry of National Development Planning (Bappenas) states that the RPJMN targets demand approximately US$ 2.5 trillion, of which the Government can finance about 10% under existing fiscal arrangements, leaving a funding gap of roughly US$ 2.25 trillion.

With its long-term goals of high quality and inclusive growth, the government is looking to demonstrate that blended finance can play a critical role in achieving development and environmental targets, while attracting greater volumes of private capital towards development projects. Meanwhile, the private sector is also proving that investors, if incentivised with the right financial structure, can also play a part in achieving national development and environmental targets.

Given Indonesia’s steady economic rise, the government recognized early that Indonesia was beyond consideration for development assistance from traditional donors and would need to explore alternative approaches to shrink the funding gap to finance its development agenda. The Indonesian government saw blended finance as a tool to mobilize private capital (cross-border and domestic) towards its national development objectives.

Over the last 5 years, the Government of Indonesia has implemented three noteworthy initiatives to meet its development targets by attracting private investment, including:

  1. Tri Hita Karana (THK) Roadmap for Blended FinanceThe THK roadmap for blended finance is an international unifying framework for mobilizing additional commercial capital towards the SDGs. This roadmap, to which Convergence is a signatory, was launched under the leadership of the Government of Indonesia and the Organization for Economic Co-operation and Development (OECD) in 2018, issuing Indonesia’s commitment to:
    • anchor blended finance into the SDGs
    • commit to using blended finance to mobilize commercial finance
    • design blended finance to move towards commercial sustainability
    • structure blended finance to build inclusive markets
    • promote transparency when engaging in blended finance
  2. SDG Indonesia One – Indonesia’s national infrastructure finance institution recently launched a first-of-its-kind integrated funding platform called SDG Indonesia One. The objective of this platform is to combine funds from public and private sources and channel them into infrastructure projects related to the achievement of the SDGs. The SDG Indonesia One platform includes four pillars tailored to match donor and investor interests. These include: (i) a development facility to increase the preparation of projects, (ii) a de-risking facility to increase the bankability of projects, (iii) a financing facility for providing flexible financial products, and (iv) an equity facility to support greenfield projects. The program recycles assets from projects that are already operational. The platform has already reached US$ 3.03 billion in commitments (out of a target of $4 billion) from a litany of donors and investors, including Global Affairs Canada, Agence Française de Développement, Bloomberg Philanthropies, Standard Chartered, the European Investment Bank, WanaArtha Life, alongside several other investors.
  3. PT Penjaminan Infrastruktur (PTPII) – The Government has set up an Infrastructure Guarantee Fund, under the Ministry of Finance, to provide government guarantees for infrastructure projects. A guarantee issued by PTPII is designed to improve the credit worthiness of a project and result in a lower cost of financing, thereby ensuring that private capital is mobilized at scale. Guarantees are an important archetype in the blended finance toolbox, as they offer distinct advantages including bridging the gap between the perception and reality of risk (funds only disbursed in event of payment default). Guarantees are capital efficient instruments for issuing public institutions, as the capital is only disbursed when the guarantee is “called” (i.e. in the case of losses).

How the private sector is pulling its weight

According to the Convergence Historical Deals Database, Indonesia accounts for a preponderance of blended finance transactions in Southeast Asia, accounting for roughly 40% the regions transactions by volume, and approximately 59% by value. Despite increased government activity in this space, it is clear that there is a significant amount of private capital activity towards development projects in the country.

A great example of a private sector led blended finance transaction is the Corporate Sustainability Bond for Natural Rubber Production, which is the inaugural deal of the Tropical Landscapes Finance Facility (TLFF). This facility is a multi-stakeholder partnership between ADM Capital, BNP Paribas, the UN Environment Programme, and The World Agroforestry Centre. The transaction involves a landmark US$95 million long-dated sustainability bond to finance natural rubber production across heavily degraded concession areas in the Jambi and East Kalimantan provinces of Indonesia. Michelin, the global tire manufacturer, will act as an off-taker for at least 75% of future production, with USAID’s Development Credit Authority providing a partial credit guarantee. A noteworthy feature of this bond is the multi-tranche class structure that is designed to appeal to investors with diverse risk-return and tenor requirements.

The TLFF Corporate Sustainability Bond was supported by Convergence through our Design Funding program. Structuring such transactions can be complex, time intensive and expensive. Grant funding is often needed at an early stage to support the design and structuring of deals that may otherwise be too risky to pursue. In order to encourage the private sector to continue to put together blended finance transactions, Convergence recently launched the Indo-Pacific Design Funding Window, funded by the Australian government, and the Asia Natural Capital Design Funding Window, funded by RS Group, which together offer more than US$ 5 million in funding.

Another private sector initiative is the Meloy Fund for Sustainable Community Fisheries, which invests in fishing related enterprises that support the recovery and sustainability of coastal fisheries in Indonesia. The transaction has all the various archetypes of blended finance – a partial guarantee from USAID, technical assistance provided by the State Secretariat for Economic Affairs of Switzerland, and concessional financing within the capital structure provided by the Netherlands Development Finance Company (FMO). This structure has attracted private financing from a range of investors including, JPMorgan Chase & Co. and Encourage Capital, amongst others.

To conclude, a visit to this thriving archipelago makes it clear that there are several opportunities for sustainable economic development, particularly in the infrastructure and conservation sectors. The Government of Indonesia’s commitment to shrink the development financing gap, and the private sector’s growing interest and scope to leverage private capital through blended finance, positions Indonesia to be a model for how alternative financing mechanisms like blended finance can be utilized to attract private capital towards SDG aligned projects in the Asia-Pacific.

As an Associate Director at Convergence, Aakif is responsible for capacity building among clients from public, private to philanthropic organizations. Aakif brings over 6 years of experience as a management consultant having most recently served as Principal of the NeXus Consulting Group, where he spearheaded business development and project execution across a variety of sectors including international development and retail. Aakif has also worked at Dasra, India’s leading strategic philanthropy foundation, L.E.K Consulting in New York and as a legislative and economic advisor for the Parliament of India. Aakif holds an M.B.A. from the University of Toronto and a B.A. in Economics and Political Science from The George Washington University in Washington D.C.

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