Development Finance Assessment Snapshot Indonesia

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1 Development Finance Assessment Snapshot Indonesia Financing the future with an integrated national financing framework Funded by Government of China as input into the 2017 ASEAN-China-UNDP Symposium on Financing the Sustainable Development Goals in ASEAN.

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3 Indonesia: Financing the future with an integrated national financing framework This report was commissioned by UNDP s Regional Bureau for Asia and the Pacific as part of the preparations for the China-UNDP ASEAN Symposium on Financing the Implementation of the SDGs in ASEAN, held in Chang Rai, Thailand in August This report also fed into a regional report on Financing the Implementation of the Sustainable Development Goals in ASEAN. All studies were overseen and supported by UNDP, with generous support from China. Disclaimer: The views presented in this report do not necessarily represent the views of UNDP or the Government of Indonesia.

4 INDONESIA: FINANCING THE FUTURE WITH AN INTEGRATED NATIONAL FINANCING FRAMEWORK i Table of Contents Executive summary iii 1. Introduction 1 2. Context Sustainable development Policy objectives 9 3. Financing landscape: bottlenecks, challenges and opportunities Overall financing landscape Domestic public finance Domestic private finance International public finance International private finance The building blocks of an integrated national financing framework Assessment of existing framework Private sector development Government s approach to private sector development Strengthening the role and contributions of the private sector to 33 sustainable development: the potential of social finance 6. Leaving no-one behind Conclusions Recommendations, including areas for further work (Integrated Financing 39 Solutions) and roadmap for next steps Annex 1: Data sources and methodology 43 Annex 2: Green Planning and Budgeting priorities, instruments and lead 45 institutional responsibilities Annex 3: Integrated Financing Solutions 46 List of tables Table 1 Indonesia s performance in the HDR Sustainable Development Dashboard 4 Table 2 RPJMN headline targets for Table 3 Nawa Cita, RPJMN and SDG alignment 11 Table 4 FDI in Indonesia has doubled over the past decade, but still 20 plays a less significant role than in most other ASEAN-5 countries Table 5 Hierarchy of targets and indicators in the PDP-RM 29 Table 6 Identified private sector role in financing key RPJMN priorities 32

5 ii List of boxes Box 1 Environmental and social sustainability in the financial sector 9 Box 2 FBI4SDGs a proactive approach by philanthropy and business to 24 set up a forum for public private dialogue Box 3 The Philippine Development Plan Results Matrix (PDP-RM) 29 Box 4 Using data for pro-poor budgeting at the local level 35 Box 5 Thailand s Universal Healthcare Coverage System (UCS) 37 Box 6 Financing UHC in the Philippines 38 List of figures Figure 1 International financing flows are relatively low iv Figure 2 Services account for the majority of Indonesia s GDP (2016) 5 Figure 2.1 Employment in secondary and tertiary sectors has increased over Figure 2.2 Poverty has been declining steadily since the mid-2000s 6 Figure 2.3 The share of working-age population is near its peak and will plateau as 8 the elderly population grows Figure 3 Indonesia s financing landscape has evolved from one dominated by 12 domestic public finance to one dominated by domestic private finance Figure 3.1 Domestic private investment accounts for almost half of all financing (2015) 12 Figure 3.2 Domestic public resources have been increasing more slowly than other flows 13 Figure 3.3 Indonesia s tax-to-gdp ratio is low compared with emerging market peers (2015) 14 Figure 3.4 The share of resources revenue in the government s overall revenue 15 bundle has decreased, from 15.6% in 2014 to 6.7% in 2015 Figures 3.5 and 3.6 Slashing of fuel subsidies in 2015 resulted in increases in 16 government spending on education, health and infrastructure Figure 3.7 Domestic private investment has increased from $70.6 billion in 2007 to 16 $225.8 billion in 2015, though growth has slowed since 2012 Figure 3.8 The role of MSMEs in the Indonesian economy has been growing 17 Figure 3.9 External borrowing has been driving trends in international public finance, 18 while ODA has decreased significantly Figure 3.10 International private finance has grown, but remains low as a percentage of GDP 19 Figure 4 Elements of Indonesia s INFF 22 Figure 4.1 Roles of Indonesia s SDG platforms 24 Figure 5 Leaving no one behind in Indonesia s development vision and medium-term 34 plan Figure 5.1 Social health protection coverage in Thailand increased dramatically in

6 INDONESIA: FINANCING THE FUTURE WITH AN INTEGRATED NATIONAL FINANCING FRAMEWORK iii Executive summary Across Indonesia and the ASEAN region as a whole, ambitions are high for the progress that can be achieved in the era of the Sustainable Development Goals (SDGs). Realizing these ambitions will require mobilizing the right scale and mix of financing, incorporating all resources public and private, domestic and international. This paper forms part of a project to assess the financing challenges and opportunities that ASEAN countries face and the policies and institutional frameworks that governments can use to address them in implementing the SDGs. It is one of 10 country studies undertaken alongside an ASEAN regional report, in order to facilitate dialogue at the country and regional levels about financing the SDGs. Key findings: sustainable development and financing context Indonesia has made tremendous economic progress since the Asian financial crisis, which has resulted in social gains and positive trends in poverty reduction, but also in environmental degradation due to the substantial role that natural resources have played in driving growth (e.g. palm oil). GDP has increased on average by 5 percent over the past 15 years; unemployment has decreased; the proportion of the population living in poverty has been declining since the mid-2000s; and there have been substantial gains in health, education and gender equality. However, challenges remain in productivity and competitiveness, in inequalities, environmental vulnerabilities and access to basic services in both rural areas and big cities as a result of rapid urbanization. For the future, an important overarching challenge is to ensure that economic growth becomes more inclusive and greener so that it can also effectively support accelerated progress in social and environmental dimensions of sustainable development. Indonesia is strongly committed to implementing the SDGs. It has integrated SDG targets into national development plans and processes and has institutionalized roles and responsibilities for their implementation. The fundamental SDG principle of leaving no one behind is reflected in both the government s development vision articulated in its Nine-Priority Agenda (Nawa Cita) and the mediumterm national development plan (RPJMN ), as well as in the country s approach to national implementation of the SDGs, which is participatory and inclusive. The country s ambitious agenda for sustainable development is being implemented in the context of an evolving financing landscape. Domestic private investment accounts for almost half of all resources, but growth has slowed from an average of 24 percent a year over the period to 4 percent over Despite this, micro, small and medium-sized enterprises have been growing and play a significant role in job creation, being responsible for 97 percent of total employment. Provided that the government s approach to private sector development is further strengthened, such businesses will be strategic partners in achieving national and sustainable development goals, particularly as they relate to inclusive growth and innovation. Domestic public finance has remained relatively constant in volume since 2007 but has decreased as a percentage of total resources, mainly due to Indonesia s structurally low level of tax revenues.

7 iv International financing remains low as a proportion of the overall mix (Figure 1). Trends in international public finance have been driven by external government borrowing, reflecting the government s reliance on external financing to adjust for its low levels of domestic revenue generation. Official development assistance (ODA) has been decreasing as a proportion of other resources, though development partners are increasingly adopting innovative approaches to maximize the impact of scarce resources. Levels of international private financing remain low, accounting in aggregate for 14 percent of all resources and 7.6 percent of GDP in 2015; such investment is hindered by infrastructure and labour skills gaps as well as by remaining challenges related to the business environment. Figure 1: International financing flows are relatively low US$ Billions Non-grant government revenue Portfolio equity Government borrowing (domestic) Remittances Government borrowing (international) Private investment (domestic) Private borrowing (international) OOFs ODA FDI Source: Development Initiatives calculations based on multiple sources Key findings: Indonesia s Integrated National Financing Framework (INFF) An integrated national financing framework (INFF) can support a government in taking a holistic approach to managing and mobilizing all types of financing domestic, international, public, private for sustainable development results. An INFF has six building blocks, which together provide a structure and a prompt for governments to assess their financing framework as a whole, and to guide thinking about reforms to implement a strategic, holistic, results-driven approach to financing their development objectives. In Indonesia specifically, this approach can support the government to mobilize additional financing for development, including from the private sector; to more effectively spend existing resources to ensure that, though scarce, their impact is maximized; and to provide the basis for necessary structural reforms that may not otherwise be implemented. Some elements of an INFF exist already in Indonesia s policies, plans and processes. Leadership and institutional coherence are strong in relation to public resources, including across line ministries and between national and local governments. The country s vision for development is set out in the 20-

8 INDONESIA: FINANCING THE FUTURE WITH AN INTEGRATED NATIONAL FINANCING FRAMEWORK v year national development plan (RPJPN) and in the government s Nine Priorities Agenda (Nawa Cita). The current five-year national development plan (RPJMN) includes an estimate of the total investment required for implementation and indicates both the scale and types of resources required for key sectoral interventions. There is scope to strengthen aspects of the framework, particularly in relation to non-state resources. The role of the private sector is considered mainly in relation to infrastructure development alone. The overall financing strategy and five-year development priorities lack specific policies regarding the use of private or international public financing. There are a number of parallel monitoring systems but no mechanism to track contributions of non-state actors to identified development outcomes. Indonesia also lacks an effective government-led mechanism for public private dialogue that could strengthen communication and facilitate collaboration in both designing and implementing development programmes. Recommendations This paper makes three recommendations to strengthen Indonesia s overall INFF, as well as its approach to private sector development and leaving no one behind. First, establish a long-term holistic financing strategy that provides a foundation for developing policies for specific flows and also provides clarity on the types and scale of investments needed for the desired sustainable development results. Second, establish a comprehensive, results-oriented monitoring and review framework that tracks efforts to mobilize the necessary financing, as well as the impact of such financing on development outcomes. And third, formalize a mechanism for systemic public private dialogue on private sector development to further stimulate private investment that can fulfil its potential in contributing to national and sustainable development goals.

9 1 1. Introduction Indonesia s challenge to achieve [the] SDGs is enormous, in particular to ensure that no one will be left behind for its 258 million people, spread over 17 thousand islands, with vast differences in cultures, [ethnicities], religions and languages. However, the enormous challenge is not a source of concern for the Government of Indonesia, [which remains] confident in its efforts. The challenge will be addressed to ensure sustainable development to improve welfare and provide justice for all. Indonesia Voluntary National Review, 2017 (p.105) Across Indonesia and the ASEAN region as a whole, ambitions are high for the progress that can be achieved in the era of the Sustainable Development Goals (SDGs). Realizing these ambitions will require mobilizing the right scale and mix of financing, incorporating all resources public and private, domestic and international. This paper forms part of a project to assess the financing challenges and opportunities that ASEAN countries face, and the policies and institutional frameworks that governments can use to address them in implementing the SDGs. It is one of 10 country studies undertaken alongside an ASEAN regional report, in order to facilitate dialogue at the country and regional levels about financing the SDGs. Indonesia has made tremendous economic progress since the Asian financial crisis, which has resulted in social gains and positive trends in poverty reduction, but also in environmental degradation due to the substantial role that natural resources have played in driving economic growth. The government s Nine-Priority Agenda (Nawa Cita) sets an ambitious list of priority areas to continue positive trends and minimize negative ones. This is further articulated in the medium-term national development plan (RPJMN ), which is based on three pillars human development, development of priority sectors and equity and includes ambitious macroeconomic targets for 2019, such as an annual growth rate of 8 percent and GDP per capita of Rp 72.2 million (approximately US$5,400), as well as lower levels of inequality, lower poverty levels and improved environmental quality. Indonesia has also integrated the SDGs into national development plans and processes, and its commitment to achieving them is reflected in the fact that it has institutionalized roles and responsibilities for their implementation at the country level through a Presidential Decree. 1 Such an ambitious agenda for sustainable development is being implemented in a context of low government revenues, decreasing significance of official development assistance (ODA) and sluggish international private financial flows. Action at the country level will be key to implementing the SDGs, Financing for Development and other global agendas. The Addis Ababa Action Agenda (AAAA) states: Cohesive nationally owned sustainable development strategies, supported by integrated national financing frameworks, will be at the heart of our efforts. 2 The Inter-Agency Task Force on Financing for Development notes in its 2017 report that 1 Presidential Decree No. 59 of 2017 on Sustainable Development Goals. 2 Addis Ababa Action Agenda, paragraph 9.

10 INDONESIA: FINANCING THE FUTURE WITH AN INTEGRATED NATIONAL FINANCING FRAMEWORK 2 integrated national financing frameworks (INFFs), which take into consideration all financing sources and policies, can provide coherence across strategies and plans designed to implement the SDGs. 3 An INFF is a framework of policies and institutional structures designed to take a holistic approach towards managing and mobilizing all types of financing domestic, international, public, private for sustainable development results. It has six building blocks, which work together to align a government s financing strategy across all available resources. These frameworks provide a structure and a prompt for governments to assess their financing frameworks as a whole, and to guide thinking about reforms that are needed to strengthen them to implement a strategic, holistic, results-driven approach to financing their development objectives. Using the concept of an INFF, the Development Finance Assessment (DFA) 4 approach 5 that this paper follows can help countries identify areas for strengthening their management of financing for the SDGs with Integrated Financing Solutions. A DFA helps a government to understand and adapt its policies, institutions and strategies for the financing challenges that the country will face in realizing results across the economic, environmental and social dimensions of sustainable development, and supports the government to establish and strengthen an INFF. It assesses two main questions: 1. What are the main financing challenges and opportunities for achieving sustainable development objectives? 2. How can the government strengthen an INFF that will address these challenges and opportunities? The approach aggregates a wide range of existing assessments from government, international agencies and other partners that analyse specific aspects of this sustainable development, financing and policy and institutional context. It adds value by collating these analyses, taking a big picture perspective across them all and applying an INFF lens to assess the priorities for government across financing as a whole. In doing so, this paper establishes an analytical baseline for an INFF and provides recommendations on how to strengthen the policies and institutional structures that government uses to manage its financing strategies. It also presents a roadmap outlining steps that a government and its partners can take to strengthen the INFF or leverage new flows, including follow-up discussions and analysis that may be developed in a later phase. More specifically, Chapters 2 and 3 provide an overview of the development context and of the financing landscape, so that key priorities and financing challenges can be identified. The analysis draws on existing publications related to SDG progress (especially Indonesia s Voluntary National Review (VRN)) and public expenditure and budgeting reviews, as well as broader economic growth and development 3 Inter-Agency Task Force on Financing for Development (2017), Financing for Development: Progress and Prospects, UNDP s Bangkok Regional Hub has been developing the DFA and Integrated Financing Solutions to respond to growing demand from countries to establish evidence and analysis and to introduce policy and institutional reforms for managing the increasing complexity of domestic and international sources of finance for development. The DFA and Integrated Financing Solutions support governments to use the concept of the INFF to help strengthen policies and actions for mobilizing different types of finance for economic, environmental and social results into a single, coherent framework. See more at: asia-pacific.undp.org/content/rbap/en/home/ourwork/democratic-governance-and-peacebuilding/ap-def.html 5 More on the DFA approach can be found here: Achieving%20the%20Sustainable%20Development%20Goals%20in%20the%20Era%20of%20the%20AAAA%20-%20 DFAs%20as%20a%20tool%20for%20Linking%20Finance%20with%20Results.pdf

11 3 assessments. Based on the development priorities as well as the financing challenges and opportunities identified in the context sections, Chapter 4 then considers the extent to which INFF building blocks already exist to address these and highlights where the main gaps currently lie, thus providing a baseline for INFF strengthening. The INFF lens is then also applied to two focus areas private sector development and the SDG principle of leaving no one behind. Chapter 5 on the private sector explores the potential that exists to strengthen its role and contribution to national development outcomes. Similarly, Chapter 6 on leaving no one behind provides an overview of how this principle is mainstreamed into the government s development plans and programmes, and explores lessons learned from other countries in the region on how to finance Universal Health Coverage (UHC) a key area in this regard and one of the SDG targets that Indonesia has adopted. 6 Finally, Chapter 7 presents initial recommendations to strengthen individual elements of the country s INFF as well as the way they link together, and sets the stage for further work on more specific Integrated Financing Solutions. 6 Asian Development Bank, Measures to Implement Sustainable Development Goals. linked-documents/ sd-04.pdf

12 INDONESIA: FINANCING THE FUTURE WITH AN INTEGRATED NATIONAL FINANCING FRAMEWORK 4 2. Context 2.1 Sustainable development Indonesia s briefing note on the 2016 Human Development Report (HDR) 7 provides a snapshot of the country s progress in terms of sustainable development. Based on a series of indicators, it allows for a crude assessment of its performance against economic, social and environmental dimensions of development. 8 Overall, as shown in Table 1, Indonesia is relatively strong in measures of economic sustainability but faces greater challenges in environmental sustainability. Table 1: Indonesia s performance in the HDR Sustainable Development Dashboard Top third Environmental sustainability (5 indicators) Middle third Bottom third Top third Economic sustainability (5 indicators) Middle third Bottom third Top third Social sustainability (4 indicators) Middle third Bottom third Top third Oveall (14 indicators) Middle third Bottom third Missing indicators Number of indicators Indonesia China Philippines Source: Indonesia Briefing Note, 2016 HDR In fact, Indonesia s impressive economic growth since the Asian financial crisis of the late 1990s has been driven largely by rising global prices for many of the commodities that the country exports, including fossil fuels and palm oil. This has contributed to substantial improvements in living standards and, along with targeted government programmes, has supported the reduction of poverty from 18.2 percent of the population in 2002 to 10.6 percent in However, it has also resulted in environmental losses and thus to recognition of the need to effectively address the risks associated with climate change and degradation of natural resources. Economic development Indonesia is currently classified as a lower-middle-income country (LMIC), with per capita gross national income (GNI) of $3,400 in Economic growth over the past 15 years has been robust, averaging 7 UNDP (2016), Briefing note for countries on the 2016 Human Development Report: Indonesia. content/dam/indonesia/2017/doc/ins-indonesia_country Explanatory Note_HDR2016.pdf 8 See Technical Note 7 here for more details on methodology as well as the full list of indicators used: sites/default/files/hdr2016_technical_notes.pdf 9 Figures are based on Indonesia s national poverty line. National poverty lines are calculated for rural and urban areas for individual provinces. The poverty threshold is based on food consumption of 2,100 kcal/day plus non-food essentials. 10 Data based on World Bank s GNI per capita data, Atlas method used for country income classifications. See: worldbank.org/indicator/ny.gnp.pcap.cd?locations=id

13 5 an annual 5 percent increase in gross domestic product (GDP), with commodity exports playing a significant role in driving this trend. Unemployment has decreased over the past decade, from a rate of 10.3 percent in 2006 to 5.6 percent in Indonesia has shifted from an agriculture-based economy towards one in which manufacturing and services play an increasingly important role in both GDP composition and employment creation (Figures 2 and 2.1). Recognizing the potential to consolidate diversification achievements and to further expand industrial development, President Joko Widodo s Nawa Cita (Nine-Priority Agenda) includes a set of actions focused on increasing productivity and competitiveness including infrastructure programmes and the establishment of a development and infrastructure bank and promoting economic independence, including more research in agriculture and industry and enhanced financial inclusion. 12 Figure 2: Services account for the majority of Indonesia s GDP (2016) 22% 45% 33% Tertiary (services) Secondary (processing, manufacturing and construction) Primary (agriculture, mining and forestry) Figure 2.1: Employment in secondary and tertiary sectors has increased over Population 15 and over (Millions) Tertiary (services) Secondary (processing, manufacturing and construction) Primary (agriculture, mining and forestry) Source: Development Initiatives calculations based on BPS, including National Labour Force Survey (Sakernas) 11 Indonesia Voluntary National Review (VNR) for the 2017 High Level Political Forum (HLPF) (2017), Main Messages. sustainabledevelopment.un.org/content/documents/14846indonesia.pdf 12 UNDP (2015), Converging Development Agendas: Nawa Cita, RPJMN, and SDGs.

14 INDONESIA: FINANCING THE FUTURE WITH AN INTEGRATED NATIONAL FINANCING FRAMEWORK 6 Although still considered a developing country, Indonesia is the 16th largest economy in the world and is projected to become the fourth largest by For the future, an important challenge is to ensure that continued economic growth becomes more inclusive and greener in order for it to also effectively support accelerated progress in social and environmental dimensions of sustainable development. Indonesia s 2017 Voluntary National Review (VNR) for the 2017 High Level Political Forum (HLPF) highlights how the country s integration of relevant SDGs across all three dimensions of sustainable development will facilitate the operationalization and implementation of sustainable behaviour by individuals and businesses alike. 14 Social development The proportion of the population living in poverty in Indonesia has been declining steadily since the mid-2000s from 18.2 percent in 2002 to 10.6 percent in 2017 according to the national poverty line, or from almost 40 percent in 2000 to 8.3 percent in 2014 according to the international poverty line ($1.90 per day), with the latest available data being from 2014 (Figure 2.2). However, although Indonesia achieved the MDG target of halving the proportion of people living in extreme poverty well before the 2015 deadline, over 20 million people still live below the national and international poverty lines (28 million and 21 million people respectively). Figure 2.2: Poverty has been declining steadily since the mid-2000s Proportion of the population living under the poverty line (%) International poverty line National poverty line Source: Development Initiatives calculations based on WB PovcalNet and BPS There are a number of key dimensions of social development in which significant challenges remain, though recent trends have mostly been positive. On education, available data on MDG indicators highlight the country s high primary school completion rates as well as its achievement of gender parity in all three levels of education. However, it also shows that in recent years primary enrolment has 13 World Economic Forum. PwC (2017), The Long View: How will the global economic order change by 2050? Republic of Indonesia (2017), Voluntary National Review (VNR): Eradicating Poverty and Promoting Prosperity in a Changing World, p.9.

15 7 decreased, although it remains high (from above 95 percent to 90 percent in 2014) and that only slow progress has been made in the proportion of primary students reaching the final grade of school (from 78 percent in 1990 to 82 percent in 2013). The indicator on expected years of schooling is the furthest from SDG achievement, according to SDG Index data. 15 Progress has also been mixed in the area of health, with five of the nine health-related MDG targets being met, but only slow improvement seen in relation to nutrition and infant and maternal mortality, and regression in the area of HIV/AIDS: Indonesia is one of three ASEAN countries where HIV prevalence has been consistently increasing since The country s VNR for the 2017 HLPF points to the progress made in improving the availability of medicines and vaccines in primary health services as well as in increasing the number of health workers in health facilities, although distribution across regions remains unequal. In relation to gender parity, despite successes in education and mainstreaming through genderresponsive planning and budgeting, Indonesia has the third highest score on UNDP s Gender Inequality Index (GII) in the ASEAN region and is significantly above the world average. Of its parliamentary representatives 17 percent are women, which is more than double the proportion in 2004; however, this share has not increased since Challenges also remain in relation to violence against women, with 5,765 reported cases in 2016, 18 though the government has made efforts to address this, including through enhancing the availability of data on the prevalence of violence and by improving the reporting mechanisms available to victims. 19 In the 2016 HDR, Indonesia was ranked 113th out of 188 countries, with a Human Development Index (HDI) value of 0.689, placing it in the medium human development category. Among ASEAN countries, its level of human development is comparable to that of the Philippines; more broadly, it is above the average for medium HDI countries. Notably, when HDI is adjusted for inequality, the value for Indonesia decreases by 18 percent to 0.563, highlighting the need to support more inclusive growth and development (which is reflected in one of the three pillars of the government s current mediumterm development plan). Demographics will continue to be an important factor to consider in ensuring that no one is left behind. Indonesia is among a number of ASEAN countries that are in the middle of a demographic transition, and has potential to take advantage of the demographic opportunities that these trends present. 20 The country s currently low dependency ratio 21 represents an opportunity to boost national productivity, 15 Indonesia Country Profile, SDG Index and Dashboards Report MDG indicators data. 17 World Bank data based on Inter-Parliamentary Union: Women in National Parliaments. SG.GEN.PARL.ZS?locations=ID 18 National Commission on Violence Against Women. penerbitan-surat-presiden-surpres-ruu-penghapusan-kekerasan-seksual-dan-pembahasan-yang-partisipatif-jakarta-2-juni / 19 Republic of Indonesia (2017), Voluntary National Review (VNR): Eradicating Poverty and Promoting Prosperity in a Changing World UNDP (2016), 2016 Asia-Pacific Human Development Report. hdr.html 21 Dependency ratio refers to the number of people outside the working age compared with people of working age.

16 INDONESIA: FINANCING THE FUTURE WITH AN INTEGRATED NATIONAL FINANCING FRAMEWORK 8 but effective use of the relatively larger workforce over the medium to long term will depend on whether the basic needs of young people can be met around education, health and employment. 22 Figure 2.3: The share of working-age population is near its peak and will plateau as the elderly population grows 80 Share of the population Children (0-14) Working age (15-64) Elderly (65 and above) Source: Development Initiatives based on World Bank WDI (historical data) and UNDESA (projections) Note: Age categories based on ASEAN Briefing on Indonesia MP3EI (p.17). Rapid industrialization has also strained both urban infrastructure and the capacity of cities to provide basic social services to growing populations. At the same time, people living in rural areas including indigenous peoples who depend directly on forests and other natural resources for their livelihoods face increasing risks related to environmental vulnerability, especially in light of the expected increase in the frequency and severity of natural disasters in the country. Environmental development Economic activity has contributed to robust growth and significant job creation, but it has also increased Indonesia s vulnerability to climate change and has contributed to the degradation of its natural resources. The palm oil industry is a perfect case in point. Indonesia is the world s largest producer and exporter of palm oil, and the industry employs, directly and indirectly, about 16 million people. 23 However, palm oil production practices have increasingly been in the spotlight due to their unsustainable approach to environmental protection, including the conversion and degradation of peat and forest land for plantations. However, some positive trends are beginning to be seen in relation to environmental sustainability. While forest cover has decreased by 23 percent since 1990 and the number of people affected by disasters continues to fluctuate, CO2 emissions per unit of manufacturing value-added have been steadily decreasing since 2006, and the proportion of the population with primary reliance on clean fuels and 22 Coordinating Ministry for Economic Affairs (2011), ASEAN Briefing, Indonesia: Master Plan Acceleration and Expansion of Indonesia Economic Development UNDP (2017), Sustainable Palm Oil for All. 06/20/sustainable-palm-oil-for-all/

17 9 technology increased from 18.2 percent in 2005 to 56.6 percent in The 2015 Green Planning and Budgeting Strategy update report notes how further progress will require strong collaboration with line ministries, with provincial and local governments and with the private sector and civil society. 25 In relation to the private sector specifically, Box 1 illustrates two initiatives that have begun to mainstream sustainability principles in the financial industry. 26 Box 1: Environmental and social sustainability in the financial sector 26 In 2013, the Financial Services Authority (FSA) issued the Sustainable Financial Roadmap as a new standard for the sustainability of financial service institutions. The policy aims to strengthen the ability of financial institutions to face environmental and social risks and to encourage the development of competencies for innovation in sustainable products and services. Sustainable financing has also been implemented in the Jakarta Stock Exchange through the Sri Kehati Index, which refers to sustainable and responsible investment by listed companies by considering the impacts of their activities beyond purely financial returns for example, by including factors related to the environment, human rights, labour practices and corporate governance, among others. 2.2 Policy objectives Indonesia s National Long-Term Development Plan (RPJPN ) envisions a country that is developed and self-reliant, just and democratic, and peaceful and united. It includes a headline target of achieving a level of per capita income of approximately $6,000 by 2025, with a good level of equity and a poverty headcount below 5 percent of the total population, as well as reaching and being able to maintain food self-sufficiency. 27 When President Widodo took office in 2014, his administration introduced its own vision for development in the Nawa Cita agenda, which is in line with the vision set out in the 20-year RPJPN and which is further elaborated in the country s current medium-term development plan (RPJMN) This is the third plan in the time period covered by the RPJPN, and it seeks to consolidate development gains in all fields, with a particular emphasis on equity (across both income groups and geographic locations), economic competitiveness without environmental degradation, human development, poverty reduction and food and energy security. Specific targets that the five-year plan aims to achieve by 2019 are listed in Table SDG Global Indicators Database Ministry of Finance (2015), Green Planning and Budgeting Strategy for Indonesia s Sustainable Development , Update Report Update 2015.pdf (Preface, p. iii.) 26 Republic of Indonesia (2017), Voluntary National Review (VNR): Eradicating Poverty and Promoting Prosperity in a Changing World, pp

18 INDONESIA: FINANCING THE FUTURE WITH AN INTEGRATED NATIONAL FINANCING FRAMEWORK 10 Table 2: RPJMN headline targets for 2019 RPJMN targets Baseline (2014) Targets (2019) Annual GDP growth 5.1% 8.0% GDP per capita Rp 43.4 million Rp 72.2 million Poverty incidence 10.96% % Gini Unemployment rate 5.9% 4 5% Environmental quality index (IKLH) Source: presentation prepared by the Minister of National Development Planning and Head of BAPPENAS, January 2015 Since President Widodo took office, Indonesia s Green Planning and Budgeting (GPB) Strategy initially designed under the previous administration to respond to the country s vulnerability to climate change and to address its environmental commitments has been updated to reflect its relevance to the vision of the current administration. The GPB aims to mainstream green and lowcarbon development into national planning and budgeting processes and identifies specific priority areas. As noted in the 2015 GPB Update Report, these areas refer directly to three of the nine priorities set out in the Nawa Cita agenda: enhancing quality of life and social welfare; improving productivity and competitiveness; and achieving economic independence by promoting strategic sectors of the domestic economy. 29 Indonesia is very much committed to implementing the SDGs. The country played an active role in the process leading up to the SDGs by being part of the Open Working Group on the SDGs, while its former President was one of the co-chairs of the High Level Panel of Eminent Persons advising the UN Secretary-General on the Post-2015 Agenda. Additionally, as the Minister of National Development Planning has pointed out, the Government of Indonesia had the advantage of formulating its Medium- Term Development Plan ( ) at the same time as the SDGs were being formulated, allowing for an alignment of goals, and targets where they made sense for Indonesia. 30 Table 2.3 shows the degree of alignment of both the Nawa Cita agenda and the objectives of the Medium-Term Development Plan (RPJMN) with the SDGs. More specifically, BAPPENAS has also undertaken a mapping of SDG targets to the five-year RPJMN and found that 108 of the 169 SDG targets align with national ones; the government is currently working on a final review of SDG targets and indicators to finalize the adoption and implementation of relevant ones at the country level Indonesia s Environmental Quality Index (IKLH) is constructed using three indicators: river quality, air quality and forest cover. 29 Ministry of Finance (2015), Green Planning and Budgeting Strategy for Indonesia s Sustainable Development , Update Report Update 2015.pdf 30 Statement by the Minister of National Development Planning/Head of National Development Planning Agency on UNDP 50th Year Anniversary, Indonesia s Lessons Learned from MDG Implementation and on SDG Preparation, New York, 24 February

19 11 Table 3: Nawa Cita, RPJMN and SDG alignment Nawa Cita RPJMN* SDGs Nawa Cita 1 Chapter 6.1, 10 sub-chapters Goals 3, 10, 16, 17 Nawa Cita 2 Chapter 6.2, 5 sub-chapters Goal 16 Nawa Cita 3 Chapter 6.3, 3 sub-chapters Goals 1-11 Nawa Cita 4 Chapter 6.4, 6 sub-chapters Goals Nawa Cita 5 Chapter 6.5, 5 sub-chapters Goals 1-6 Nawa Cita 6 Chapter 6.6, 11 sub-chapters Goals 1-10 Nawa Cita 7 Chapter 6.7, 9 sub-chapters Goals 1-5, 8, 9, Nawa Cita 8 Chapter 6.8, 1 (sub-)chapters Goals 3-4, 11 Nawa Cita 9 Chapter 6.9, 5 1 (sub-)chapters Goals 5, 10, 16, 17 the titles of the chapters follow the components of Nawa Cita Source: UNDP (2015), Converging Development Agendas: Nawa Cita, RPJPN, and SDGs (p.3) Moreover, institutional arrangements to implement the SDGs have been legislated in Indonesia with the enactment of Presidential Decree No. 59 of 2017, which recognizes the role of stakeholders beyond the state, including experts and academia, civil society and media, and philanthropic organizations and business. The Decree also establishes the SDG Secretariat (to be supervised by BAPPENAS) and sets out responsibilities for various government agencies, including the Central Bureau of Statistics (BPS) in relation to coordinating and preparing the necessary data to report on progress. Most recently, Indonesia s commitment and drive toward the SDGs is reflected in its voluntary reporting to the 2017 High Level Political Forum Republic of Indonesia (2017), Voluntary National Review (VNR): Eradicating Poverty and Promoting Prosperity in a Changing World.

20 INDONESIA: FINANCING THE FUTURE WITH AN INTEGRATED NATIONAL FINANCING FRAMEWORK Financing landscape: bottlenecks, challenges and opportunities 3.1 Overall financing landscape Indonesia s financing landscape has evolved from one where domestic public resources were the main source of funding to one dominated by domestic private finance. In 2015, domestic private investment estimated based on gross capital formation by financial and non-financial corporations accounted for almost half of all resources available in the country, compared with 31 percent in Over the period, it increased from $71 billion in 2007 to $226 billion in International financing remains low as a proportion of the overall mix, with international private flows accounting for 14 percent of the total in 2015, and international public financing for only 6 percent. Figure 3: Indonesia s financing landscape has evolved from one dominated by domestic public finance to one dominated by domestic private finance US$ Billions Domestic public Domestic private International public International private Figure 3.1: Domestic private investment accounts for almost half of all financing (2015) 6% 14% 48% 32% Domestic public Domestic private International public International private

21 Non-grant government revenue Government borrowing (international) Portfolio equity Private investment (domestic) Government borrowing (domestic) Private borrowing (international) Remittances Source: Development Initiatives calculations based on multiple sources OOFs ODA FDI 3.2 Domestic public finance Domestic public resources which consist of government revenue (excluding grants) and government borrowing from domestic sources have been increasing in terms of volume, from a total of $106.5 billion in 2007 to $151.6 billion in However, growth has been slower than for other flows, meaning that domestic public resources have decreased as a share of total financing over this period, from nearly half in 2007 (47 percent) to under a third in 2015 (32 percent). Figure 3.2: Domestic public resources have been increasing more slowly than other flows US$ Billions Non-grant government revenue Government borrowing (domestic) Other flows Source: Development Initiatives calculations based on multiple sources This is mainly due to Indonesia s structurally low tax revenues, 33 both in terms of commodity-related revenues which have been affected by decreases in prices in global commodity markets and non-oil revenues, such as value-added tax (VAT) and excise taxes, which have continued to underperform. Tax and non-tax revenues combined have increased by less than a third, from $97.7 billion in 2007 to $ IMF Article IV Report, p. 8.

22 INDONESIA: FINANCING THE FUTURE WITH AN INTEGRATED NATIONAL FINANCING FRAMEWORK 14 billion in Indonesia s tax-to-gdp ratio is the lowest among its emerging market peers, including China, India and other ASEAN countries such as Viet Nam, Thailand, the Philippines and Malaysia (Figure 3.3). 34 Figure 3.3: Indonesia s tax-to-gdp ratio is low compared with emerging market peers (2015) General Government Tax-to- GDP Ration, 2015 (in percent) Viet Nam China Thailand India Philippines Malaysia Indonesia Source: 2017 IMF Article IV (p.35) Government borrowing, on the other hand, has been increasing at a faster rate as the fiscal deficit has grown, prompting the government to begin a gradual fiscal consolidation in 2016 in order to maintain the deficit within the statutory 3 percent of GDP; this has involved revising revenue levels and lowering spending to keep the deficit at about 2.7 percent of GDP. 35 Additionally, the government has launched a tax amnesty programme (from July 2016 to March 2017), with the aim of boosting revenues by, on the one hand, repatriating capital from Indonesians living abroad and, on the other, attracting capital from Indonesian residents working in the informal sector. According to the 2017 IMF Article IV Consultation Report, the programme has been successful in expanding the tax base, with total collections projected to reach 0.9 percent of GDP. As of 30 November 2016, a total of Rp 99.2 trillion (equivalent to around $7.4 billion) had been collected, mainly related to previously undeclared domestic assets. Looking ahead, there is scope for mobilizing additional non-oil revenues through reforms and by expanding growth-friendly taxes, such as property taxes and indirect taxes (including excise taxes and VAT), with consideration for the distributional impacts that this may have. Figure 3.4 shows the trends in revenue composition over the past nine years, highlighting the decrease in natural resources revenue in 2015 (due to the fall in global prices of key commodities such as oil, palm oil and coal) and pointing to the small share that land and building taxes account for in the overall revenue bundle (1.96 percent in 2015) IMF Article IV Report IMF Article IV Report.

23 15 Figure 3.4: The share of resources revenue in the government s overall revenue bundle has decreased, from 15.6% in 2014 to 6.7% in Income tax Value added tax Land and building tax Duties on land and building transfers Exercise duties Other domestic taxes International trade taxes Natural resources revenue Profit transfer from SOEs Other non-tax revenue Revenue from public service institutions Source: Development Initiatives calculations based on Statistics Indonesia (combined state, province, regency and village revenues) Efforts toward fiscal consolidation are being coupled with programmes to capitalize on the gains of the amnesty programme and to strengthen tax administration and revenue collection, and efforts are also ongoing to strengthen the effectiveness of government spending. Since 2003 the government has been implementing a comprehensive public financial management (PFM) reform programme, which in 2011 introduced a Medium-Term Expenditure Framework (MTEF) and from 2015 has supported the introduction of a performance-based budgeting (PBB) system. In this context, data systems have also been strengthened in order to support enhanced monitoring and strategic prioritization of budget allocations. The introduction of an integrated financial management information system by the Ministry of Finance (MOF) in 2015 represents an important achievement. 36 SPAN (short for Sistem Perbendaharaan dan Anggaran Negara) is being used internally by the government to improve the transparency, efficiency and accountability of financial transactions. Such a system used at the central level, along with the programmes of the National Team for the Acceleration of Poverty Reduction (TNP2K) especially around data use (Box 4) at the local level, represents a solid foundation for the government to continue to strengthen its systems and processes for results-based resource allocation and spending. This is particularly relevant in light of current spending trends, especially in sectors that are critical for growth and development namely infrastructure, health and education. Although the slashing of fuel subsidies in the 2015 budget resulted in increases in allocations to all three of these sectors (Figures 3.5 and 3.6), spending remains low compared with other countries in the region. In 2015, Indonesia s spending on health was 1.3 percent of GDP and spending on education was 3.5 percent of GDP well below the averages for emerging market economies in Asia, which were 4.4 percent of GDP for health and 4.8 percent for education UNDP (2016), Indonesia Performance Based Budgeting and Climate Change Finance Review IMF Article IV Report, p.14.