A Case Study from UNDP Indonesia

GREEN BOND/GREEN SUKUK SERVICE LINES

Background 3

Why partner with UNDP? 4

What Services did UNDP Provide? 4

Detailed UNDP Services Provided 5

Cost of Services 8

Green Bond/Sukuk – Resource Mobilization Options 10

CONTENTS

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Green Bond/Green Sukuk Service Lines

Background

The 2030 Agenda and the Sustainable Development Goals (SDGs) reflect a systematic approach to advance truly sustainable development that embodies economic, social and environmental progress and leaves no one behind. Financing this agenda requires both public and private investments and national policy reforms that drive transformational change. Recent data shows a funding gap of around USD 44 billion per year to address development issues in Asia Pacific region. To roll out SDGs effectively will require massive financial and technical resources around $3 - 4.5 trillion. Indonesia like other Asia Pacific countries is facing an annual development financing shortfall. Innovative financing mechanism that leverage private sector funding would be required to address this shortfall as Indonesia is subject to decreasing Official Development Assistance.

To help close the financing gap that exists, the United Nations Development Programme (UNDP) In Indonesia established the “Innovative Financing Lab” (IFLab), in 2018 as a new country platform for the SDGs. The Lab aims to map and analyze financing gaps and opportunities, co-design and test new financing solutions, help align investments with SDGs measuring progress and evaluating impact. The IFLab works across several areas of finance, from piloting small to large scale public-private partnerships, supporting social entrepreneurs, leveraging Islamic finance through to supporting the issuance of government bonds. In each of these areas, the Lab designs and tests new mechanisms and instruments, helps enhance investments for higher SDG impact and contributes to a stronger enabling environment for SDG investments through policy advocacy and research.

In March 2018, the Government of Indonesia issued $1.25 billion world’s first green Sukuk - a sharia-compliant bond, demonstrating its commitment in climate change and mainstreaming of innovative financing to achieve sustainable development goals (SDGs). 100% of the use of proceeds goes to finance and refinance government’s climate change mitigation and adaptation projects. With the support from UN Development Programme (UNDP), the government prepared a Green Bond and Sukuk Framework and within one year of issuance published the first Impact Report. The issuance and reporting received global recognition, with at least 6 awards to date. This initiative marks the Government of Indonesia’s position as a leader in the Green Financing market and establishes a niche for UNDP as a provider of technical assistance and advisory support in this area delivering services through the Innovative Finance Lab. The Government has issued the second Green Sukuk issuance in February 2019 and requested UNDP continuing assistance.

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Green Bond/Green Sukuk Service Lines

Why partner with UNDP?

UNDP was able to respond to government’s request for support to the green sukuk initiative swiftly and effectively through the IFLab. The Innovative Finance Lab quickly leveraged UNPD’s global networks and convening power tailored to meet country demand.

a) UNDP as Trusted Partner – Our partnership with Ministry of Finance has been long-established since 2014 through the work on Climate Budget Tagging (CBT) and Climate Related Fiscal Reforms. UNDP also has long standing relationships with the line ministries that receive the proceeds of the green bond/green sukuk

b) UNDP’s Global Network – We are able to leverage at Government’s request a global network of technical expertise, deploying support rapidly and tailored to context.

c) UNDP’s Approach – Our approach is demand driven, capturing trends and innovation in the financing sector and aimed at building national capacity. Through hands-on technical assistance and on the job mentoring, UNDP was able to work with line ministries to improve project management and develop systems for reporting on the use of proceeds.

d) UNDP Partnerships – We form effective partnerships with key stakeholders in-country and internationally, such as with the World Bank Group, HSBC and KPMG in order to deliver high quality work.

What Services did UNDP Provide?

Since 2017, UNDP has been directly supporting the Government of Indonesia on the Green Sukuk Initiatives in 3 key areas or service lines:  

· Development of Green Framework· Project Selection Procedures· Data Collection processes· Impact Measurement methodologies and guidance· Report Writing

Technical Assistance for Green Impact Reporting

· Co-ordination and institution strengthening· Training on Data Collection for Line Ministries· Workshop & Dissemination to MOF – report writing· Capacity Assessment and capacity building plan for all

stakeholders· Evaluation Report

Institutional Strengthening & Capacity Building

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Green Bond/Green Sukuk Service Lines

· IMF-WB Annual Meeting, Bali 2018· ECOSOC Forum on Financing for Development

Ministerial-level event on Islamic Finance, New York 2018 · COP 24 Katowice, Poland 2018· Bosphorus Summit, Turkey 2018· International Climate Finance Course, Bangladesh 2018· Regional Dialogue on Climate Proofing Growth and

Development, Bangkok 2019

Detailed UNDP Services Provided

GREEN IMPACT REPORTING

PRE-ISSUANCE· Green Bond and Sukuk Framework - UNDP has been involved on the Green Sukuk

Initiative since the pre-issuance stage, in the development of the Green Framework with Climate Change Unit at the Fiscal Policy Agency, along with DG of Budget Financing and Risk Management as the responsible directorate for issuance, and HSBC as one of the appointed Joint Lead Managers. The Framework covers 9 Eligible Green Sectors, was reviewed by CICERO and awarded a Medium Green Shading.

· Project Selection – UNDP advises and takes part in coordination with Ministry of Finance, Legal Counsel, and Joint-Lead Managers to select Green Projects that fits with the Green Framework. The eligible green projects were selected from list of tagged projects in the state budget on Fiscal Year 2016 and 2018, this climate budget tagging process was established through UNDP support under the Sustainable Development Finance (SDF) project since 2014.

POST-ISSUANCE· Green Sukuk Report1: Preparation and Writing – UNDP has the lead

in drafting the workplan and its implementation, coordinating with key government Institutions/Line Ministries, report writing and support the auditing process. The First Year Green Sukuk Allocation and Impact Report has been published in February 2019 within one year of issuance.

· Data Collection & Facilitation with Technical Line Ministries – UNDP facilitates a series of meetings with Line Ministries as project owners to process and prepare data. These meetings result in finalised list of green projects and its calculated impacts.

1 Green Sukuk Allocation and Impact Report 2018 can be accessed at http://www.djppr.kemenkeu.go.id/pageload/2357

Global Campaign & Advocacy

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Green Bond/Green Sukuk Service Lines

· Impact Framework – UNDP, in partnership with the World Bank Group, led the development of impact framework template which is aligned with international standards in the market.

INSTITUTIONAL STRENGTHENING & CAPACITY BUILDING

· Training on Data Collection & Impact Reporting – UNDP, co-hosting with the World Bank Group, delivers training on data collection, calculation of environmental impact and project management, with the aim to strengthen capacity across the relevant line ministries.

· Capacity building and provision of information for Ministry of Finance – In order to equip Ministry of Finance’s officials on the green bond/Sukuk proceeds management and reporting capacity, UNDP provides technical assistance on project selection, tracking and validation process for green expenditures (use of proceeds) and report writing.

· Capacity Assessment Report – UNDP looks into the governance aspects of the green sukuk reporting process for relevant stakeholders and identifies areas for improvement.

· Evaluation Report on First Issuance – UNDP in partnership with Ministry of Finance and WB is undertaking a review of the first year’s activities with an objective to capture lessons from the first reporting process and provided recommendations for further improvement of national systems and processes for tracking use of proceeds and impact measurement.

Solar Panel Site funded by Green Sukuk. Source: Ministry of Energy and Mineral Resources

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Green Bond/Green Sukuk Service Lines

GLOBAL CAMPAIGN AND ADVOCACY

The GOI has maintained strong visibility for the green sukuk at a global level through roadshows and on selected global platforms to increase global visibility and raise awareness of the Green Sukuk Initiatives. In partnership with WB , UNDP has supported GoI’s campaign and advocacy efforts through a succession of global events and media emissions including: · Production and printings of campaign materials, including handbook, infographics and

video. · UNDP provides numerous platforms, including:

o April 2018 - Panel discussion on Innovative Financing for SDGs: The Role of Islamic Finance at the 2018 ECOSOC Forum on Financing for Development in New York, United States. (co-hosted by Indonesia, Bangladesh, UNDP, and the Islamic Development Bank)2

o April 2018 - National Workshop on Green Sukuk3

o October 2018 - Parallel Event at the IMF-WB Annual Meeting in Bali, Indonesia4 (co-hosted with the Ministry of Finance and the World Bank)

o October 2018 - Panel Discussion as a Case Study at the International Climate Finance Course, Bangladesh

o November 2018 - Panel Discussion as a Case Study at the Bosphorus Summit, Turkeyo December 2018 - Panel Session on Leveraging Innovative Finance for Climate Actions5, at

the Indonesian Pavilion, Conference of Parties (COP) 24, Katowice, Poland (co-organized with WWF Indonesia)

2 http://webtv.un.org/watch/innovative-financing-for-sdgs-the-role-of-islamic-finance/5775339709001/3 http://www.id.undp.org/content/indonesia/en/home/presscenter/pressreleases/2018/4/indonesia-tackles-climate-change-through-the-issuance-of-green-s.html?cq_ck=15227457320244 http://www.thejakartapost.com/news/2018/10/09/indonesia-introduces-green-sukuk-at-imf-world-bank-annual-meetings.html5 http://ppid.menlhk.go.id/siaran_pers/browse/1683

A dialogue with H.E. Sri Mulyani, Indonesia’s Minister of Finance and Ms. Arunma Oteh, the Treasurer and Vice President of the World Bank, as part of our Seminar on Green Finance for Sustainable Development, IMF-World Bank Annual Meeting, Nusa Dua, Bali, October 9th 2018

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Green Bond/Green Sukuk Service Lines

o December 2018 - Panel Session at the World Climate Submit - The Investment COP6, Katowice, Poland

o March 2019 - Panel Discussion at the UNDP’s CGPD Regional Dialogue7, Bangkok, Thailand.

Cost of Services

UNDP services were delivered under the Innovative Finance Lab which subsidised interventions through existing projects and through making efficient use of regional and HQ staff. However, this model is not sustainable or viable given that ongoing capacity development needs are great and further support through this service line requires dedicated financing. The traditional donor-based funding modality which requires high front-end investment in development of proposals and agreeing project scope and deliverables, does not allow room for rapid responsive programming. There is a need to introduce a new model based on a ‘fees for services’ structure so that UNDP is able to provide Government and other stakeholders with the services it requires on a demand driven basis.

UNDP is already piloting these new approaches in other countries with some success (though limited). For example, UNDP Vietnam is working with IKEA to pilot the Development Services template which allows UNDP to get paid by a corporate entity for pre-determined services – In this case Ikea wants UNDP to help with sustainability of their supply chain. In Kenya, UNDP was able to invoice for advisory services ($5,000). For Indonesia, however, a major challenge

6 https://worldclimatesummit.org/programme/ 7 https://www.cpgd2019.org

UNDP service line in providing capacity building workshop to the line ministries as part of Green Sukuk impact reporting

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Green Bond/Green Sukuk Service Lines

is the legal framework that prevents government cost sharing agreements which means that government cannot pay UNDP for the services delivered. Below is a table detailing the actual cost of services given by UNDP for the first year.

Types Activities Approx. Cost (in USD) Total CostGreen Impact ReportingPre-IssuanceDeveloping Green Bond/Sukuk Framework (and assistance in 2nd opinion from CICERO)

5,500**

National Staff 2,500National IC 1,000International Staff (BRH) 2,000

Post-IssuanceReporting (Project Selection, Data Collection, Impact Calculation, Audit Assistance, Report Writing & Evaluation Report)

100,000

National Staff* 15,000International Staffs (HQ & BRH) 40,000National & International IC 45,000

Institutional Strengthening and Capacity BuildingCapacity Building - Training workshops and support to coordination on Data Collection, Impact Calculation and sector ministry reporting systems

40,000

Organizing Workshops 40,000Developing Impact Manual Framework & Capacity Assessment Report

85,000

National Staff* 15,000International Staff (HQ & BRH) 25,000National & International IC 45,000

Global Campaign & Advocacy 57,500Organizing Workshops 20,000Provision and Facilitation to International Forum (Air tickets & DSA)

20,000

Production of Video 7,500Production and printing of campaign materials (Handbook, factsheets, reports)

20,000

TOTAL 298,000

* Partial 1 Project Manager & 1 Associate, Full time 1 Technical Associate and 1 UNV**Note: Ministry of Finance led the Framework’s development and UNDP provided a minimum substance QA and feedback. As the country embarks on developing Blue Bond framework it is evident that a more realistic cost for this is around USD50,000

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Green Bond/Green Sukuk Service Lines

GREEN BOND/SUKUK – RESOURCE MOBILIZATION OPTIONS

The table below outlines the potential service lines in supporting sovereign green bonds (and can be applied to corporate bonds too) and a brainstorming of potential funding models for UNDP resource mobilization

Service offered Service Provider

Funding Source ($)

Ave Time for delivery

UNDP Services Type

Alternative funding models for Future RM for UNDP

Fiscal reforms to strengthen PFM system e.g. Climate Budget Tagging

UNDP ODAgrant

2-4 years Long term TA Govt. (cost-sharing)7; Fee for services; %’age of use of proceeds?

Private issuer (invoicing; other)

Green Sukuk Framework development

MoF, HSBC, UNDP

Govt. &ODAgrant

1-6 months Short term Advisory

Third party review-2nd opinion

CICERO Govt. 1 month UNDP Procurement on behalf of issuer (Govt)

Invoicing/Fee for services

Project selection (eligibility check)

UNDP ODAgrant

3-6 months TA and Advisory, hand-holding and capacity development; Govt. (cost-sharing);

Fee for services; %’age of use of proceeds?

Private issuer (invoicing; other)

Impact measurement services: (data collection; data cleaning; report-writing)

UNDP ODAgrant

5 yearsMaturity (fin. Product)

Long term TA; very labor-intensive and linked to institutional strengthening and CB

Impact measurement Services: Development of impact reporting template, Impact manual

UNDP ODAgrant

18 months Short to medium term TA and Advisory.

Coordination and communication services & reporting SOP,

UNDP ODAgrant

5 years Long term TA and Advisory Convening platforms globally

Auditing services (financial transaction)

KPMG Govt. 1 month UNDP procurement on behalf of issuer

Invoicing/Fee for services

Impact measurement services (site assessments/spot-checks)

UNDP TBC 6 months (TBC)

Program ManagementShort Term TA and Advisory;

pilot conducted in Kenya (paid by intermediary)8

7 Indonesia has regulations which prohibit government cost sharing but option worth considering for other country contexts.8 Service is yet to be delivered, pending government approval and availability of funding (ODA grant)

Contact Us:UNDP IndonesiaMenara Thamrin 7-9th FloorJl. MH Thamrin Kav. 3 Jakarta 10250Phone: +62-21-29802300Fax: +62-21-39838941www.id.undp.org