Climate-responsive PFM Assessment 

The main findings of the Indonesia PEFA Climate Assessment demonstrate that the regulatory framework, policies and overall strategies for climate-related PFM have been developed; however, the PFM processes and systems to support implementation and monitoring can be further strengthened. In this context, some initial efforts have been made in Indonesia to mainstream climate into some of the PFM processes, systems and institutions. 

Based on the 14 indicators of the PEFA Climate Assessment methodology, 9 indicators scored better than or equal to a C, and five indicators received a score lower than a C. All indicators were used and none of the indicators were rated as not applicable. The strengths and weaknesses identified in this Indonesia PEFA Climate Assessment illustrate how the performance of PFM systems impacts the main budgetary outcomes, as discussed below. 

Fiscal discipline is supported by the availability of a sound legal framework in providing arrangements for climate-related liabilities, as well as a system of controls for the climate conditionalities of transactions; the alignment of priorities in the medium-term sectoral strategic plans with national climate change policy and strategies; the identification of climate-related fiscal risks in the medium-term fiscal strategy; and the identification of fixed asset exposure and sensitivity to climate change. 

Climate-related projects are accounted for in the RPJMN. Climate-related projects in the medium-term sectoral strategic plans are costed. Climate change policy and strategies cover subnational governments (SNGs), public corporations and other operators in charge of implementation. Funding sources and gaps are identified. The budget outturn analysis shows that the deviation for climate-related expenditures was less than 10 percent in both 2018 and 2019. The strong deviation of over 30 percent, as seen in 2020, was due to the impact of the COVID-19 pandemic. 

This generally positive overall result in terms of budgetary discipline is, however, subject to shortcomings, such as: the exposure of land and infrastructure to climate change; a lack of compliance in public investment management projects; and limited audit and fraud investigations for climate-related transfers to SNGs. 

The strategic allocation of resources is mainly supported by climate budget tagging (CBT), as well as the use of climate criteria in the prioritization and selection of national strategic projects, the low stock of arrears for climate-related taxes, and the alignment of the objectives of conditional transfers with the national climate change strategy. 

The Government provides a methodology that defines what constitutes “climate change expenditure”, which uses specific budget expenditure output line items. The objectives for investment programs in relation to climate change mitigation and adaptation are specified within the regulatory framework. The guidelines for project appraisal recommend the evaluation of climate change impacts of new investment projects, as well as adaptation measures to be included in the project design phase to address climate risks. However, these outcomes are being undermined by: (i) the lack of guidance and reference to the CBT in the budget circular; (ii) the absence of climate change aspects under the scrutiny of the legislature; (iii) the ambiguity in the decentralization framework on decentralization arrangements for SNGs regarding aspects of climate change mitigation and adaptation; and (iv) the lack of any timeline for the reporting mechanism on public investment projects. 

The competencies and mandates of the SNGs are clearly defined in government regulations on climate change (such as the Presidential Regulation on Carbon Economic Value), as well as in sectoral regulations on forestry. However, there are still ambiguities because the law that governs the functional assignments to the SNGs (Law No. 23/2014) does not define the functional assignments of district governments in the forestry, energy, and marine sectors. Article 14 of Law No. 23/2014 mentioned that: “The administration of government affairs in the fields of forestry, marine affairs, as well as energy and mineral resources is divided between the central and provincial governments.” Thus, the assignment is assigned to the provincial governments instead of to the district governments. 

The monitoring of climate-related public investment projects does not provide a clear timeline regarding the deadline for reporting submissions of the outputs and outcomes of projects in terms of climate mitigation and adaptation targets and objectives. 

Efficient service delivery is supported by sufficient reporting on the climate-related key performance indicators, outputs and outcomes; the reporting on the climate-related transfers both in terms of financial and progress outputs; the use of the partly structured and systematic approach for assessing and prioritizing compliance risks; and the use of climate-responsive standards in procurement tender requirements and award criteria. 

Climate-related objectives, key performance indicators and outputs are assigned to climate-related programs and activities. Climate-related outputs that are achieved are reported as part of the climate- related programs and submitted to the legislature. The evaluation of climate-related programs and activities is carried out during the assessment period. 

Climate-responsive standards are used to help determine tender requirements and specifications or award criteria. Simplified procedures and templates are also available to expedite procurement in response to climate-induced disasters. There is an operational system in place to ensure compliance with the emergency procedures used in the case of climate-induced disasters. Procurement databases or records capture specific information about climate-responsive procurement, and these also include emergency procurement. However, they are undermined by weaknesses in the database for climate-related tax the oversight systems as well as procurement reporting. 

Climate change aspects are not included in the legislature’s scrutiny of audit reports. The GHG emitter database is not fully and consistently linked with the taxpayer database. No evaluation of the contribution of climate-related taxes to climate change has been carried out in the past three years. 

There are no quantitative targets, priorities and timeframes in procurement operations that are subject to climate-responsive principles. There is also no specific reporting on climate-responsive procurement, including statistics and references to targets and priorities. 

In summary, the scores for the indicator and its relevant dimension based on the results of the Indonesia PEFA Climate Assessment are as follows: 

*Kindly note that in the text of this assessment report document the descriptive dimensions 5.2 and 5.3 will appear swapped, as this assessment was prepared before the final version of the PEFA Climate Supplementary Framework.