INSTITUTIONAL SETTINGS
4.3 NATIONAL INSTITUTIONS AND THE LEGAL FRAMEWORK
benefits of the project have occurred. Discrepan- cies could be subject to an appeal process.
Similarly, public participation can be incorporated into the process of verifying and issuing emission credits. A period of time could be allowed for the public to comment on the results of the project and, if they found the verification to be lacking, to submit an appeal.
4.3 NATIONAL INSTITUTIONS AND
holiday, incentives on import duties for capital goods, incentives for export manufacturing and incentives in bonded zones. Several previously restricted sectors such as seaport, electricity generation, telecommunications, shipping, airlines, railways and water supply have been opened up to foreign investors. Indonesia also complies with relevant international agreements and has signed agreements on investment guarantees with 52 countries.
In 1990, the Government of Indonesia established the Environmental Impact Management Agency (BAPEDAL). BAPEDAL is responsible for the development and implementation of national policies and programs on environmental man- agement, particularly as they relate to urban and industrial pollution, and hazardous waste man- agement.
The Government also established a Negative List of Investment, stipulated in Presidential Decree No.96/1998, which regulates 25 business activi- ties. Of the 25 activities, nine are closed for foreign investment and 16 are closed for both foreign and domestic investment. The following categories may be relevant for CDM projects:
forest logging, forestry, local shipping, and public transportation.
Under current regulations (Government Regula- tion No.20/1994 and Ministry of Investment Decree No.15/1994) foreign companies must divest a fraction (usually one to five percent) of their shares after 15 years to allow Indonesian citizens to take up a minority holding in the company. A new draft on investment proposes allowing the time limit to be decided at the discretion of the Ministry of Investment and State-Owned Enterprises (now the Coordinating Ministry for Economic Affairs).
Indonesia’s capital market expanded rapidly during the last decade, led by the growth of the
equity market. The Jakarta Stock Exchange is the dominant securities market in the country. The Indonesian Securities and Exchange Commission (Badan Pengembangan Penanaman Modal, BAPEPAM) regulates portfolio investment.
Foreign firms generally enjoy good access to the Indonesian securities market. Financial reforms introduced in 1987 allow foreign firms to form joint ventures with Indonesian partners in the securities market as underwriters, broker- dealers, and investment managers. The govern- ment has lifted regulations that discriminate and limit foreign securities and investors. The 49- percent restriction on foreign purchases of all non-bank listed firms was lifted in 1997, while the restriction regarding banks was lifted in 1999.
Discriminatory capital requirements on foreign securities were removed in 1998. Unfortunately, the lack of a well-developed bond market remains a limiting factor in Indonesia’s financial sector.
4.3.2 Institutional considerations
As a potential host country for the CDM Indonesia must ensure that the two goals of the CDM – emission reductions and sustainable develop- ment – are met. Indonesia also needs to increase its attractiveness as a host country for CDM investment. Current political uncertainties in Indonesia, unfortunately, are not immediately conducive to foreign investment, and indigenous investment capacity is strained.
If Indonesia is to attract CDM projects, institu- tional arrangements should be independent from the political situation and the associated uncer- tainties. To achieve this the roles of the private sector and of NGOs should be enhanced, while the role of governmental agencies should be kept to the minimum necessary for effective CDM implementation. Capacity building for the private sector and NGOs is therefore crucial
4.3.2.1 Investment Framework
The basic framework for foreign investment in Indonesia is the Foreign Direct Investment Law No. 1/1967. This law has been under review for almost two years now. The review aims at adapt- ing the law to the new economic reforms. How- ever, there are conflicts with the International Monetary Fund over the changes. The law reform will ensure fairness and openness for foreign investors, and will simplify the investment appli- cation processes.
According to the latest revised policy, the proce- dure for foreign investment in Indonesia is as follows:
Ä Obtain Initial Investment Approval (IIA). The IIA serves as a temporary operating license for a period of 12 months and can be ex- tended. Obtaining IIA now takes an average of 10 to 15 working days, already a marked improvement on the past, when the applica- tion process could take months.
Ä Form a limited liability company (Perseroan Terbatas, PT), by executing a Deed of Estab- lishment (Akte Pendirian Badan Usaha) through an Indonesian notary. The Articles of Association of the company are included in the Deed of Establishment and must comply with Law No. 1/1995.
Ä Submit the Deed of Establishment to the Ministry of Law and Legislation. The approval usually takes more than the 60-day statutory maximum: until companies receive formal approval, the founding shareholders are personally liable for all obligations under- taken in the name of the company.
Ä Register with the Company Registry under the Department of Industry and Trade, and publish the Deed of Establishment in the Supplement to the State Gazette.
Ä Apply for a Permanent Business License (Ijin Usaha Tetap, IUT). The company must apply through BKPM (Investment Board) or the appropriate BKPMD (at local/ provincial level) for the License. The licensing process can take several months.
Ä Ready for full operation.
To complete with all of the steps can take 5 or 6 months. Nevertheless, once the investor obtains an IIA and forms a limited liability company, they may operate the business legally without waiting until the Permanent Business License or IUT is approved.
4.3.2.2 Public and Environmental Policies Indonesia has ratified the United Nations Frame- work Convention on Climate Change through Law No. 6/1994. To protect the environment and ensure sustainable development, energy policies should be implemented with due consideration for the provisions of Law No. 6/1994 and other appropriate regulatory instruments.
The key institution dealing with climate change in Indonesia is the National Committee on Climate Change, currently chaired by Dr. Daniel
Murdiyarso, who is also Deputy Minister for the Environment. Committee members are drawn from related governmental agencies, the aca- demic community and NGOs to ensure a multi- stakeholder composition.
There is also a Climate Unit in the State Ministry for the Environment. This Unit is the coordinating body for activities related to climate change within the Ministry, including coordination of consultants.
4.3.3 Proposed institutional arrange- ment: CDM board and clearing- house
To facilitate, foster, and promote the CDM in Indonesia, a national-level institutional structure, which serves as the designated national authority (DNA), is proposed. The DNA would comprise
two units: a national CDM Board (the ‘Board’) and a national Clearinghouse (the ‘Clearing- house’). The following diagram shows the pro- posed domestic institutional arrangement for the DNA.
The DNA will undertake the following functions:
Ä Act as a focal point for the national CDM program.
Ä Approve nominated CDM projects at national level.
Ä Liaise between Indonesia and the UNFCCC Secretariat, the COP/MOP, and the Executive Board.
Ä Provide a library and a database on CDM
related activities that are accessible to the public.
The first three functions should be undertaken directly by the Board, while the fourth would be the responsibility of the Clearinghouse. The Climate Unit of the Ministry should serve as Secretariat for the Board and provide administra-
tive support. Such arrangements will not only streamline the selection and assess- ment process, but also reduce administrative and transaction costs.
The DNA should be an independent body, established by a Presidential Decree, due to the enactment of the decentralization laws. The members of the Board would represent as wide a range of stakeholders as possible. The likely composition would include officials from the State Ministries for Environment, Energy and Mineral Resources, Forestry, Transportation, and Finance, as well as representatives of local government and relevant representatives from the private sector, NGOs and community groups.
The Climate Unit within the State Ministry for the Environment could be developed to serve as Secretariat of the Board. Its functions would include the following:
Ä Undertaking outreach to solicit potential CDM hosts in the country.
Ä Liaison with project hosts.
Designated Entity
Project Proponent
National CDM Clearinghouse
Secretariat (Climate Unit) National CDM
Board
National Committee on
Climate Change Figure 4.4 Arrangement of the Designated National Authority
Ä Keeping project records and documentation.
Ä Convening the Board meeting every six months.
Ä Undertaking the administrative functions of the Board.
The Clearinghouse may be a private agency especially contracted to assist the Board (whose members have full-time appointments else- where) on a long-term basis. Key functions of the Clearinghouse would include the following:
Ä Assisting the Board in appraising potential domestic operational entities.
Ä Evaluating project proposals.
Ä Doing environmental and sustainability impact assessments.
Ä Assisting the Board in project monitoring.
Ä Assisting the Board in examining and evaluat- ing appeals.
Ä Assisting the Board in verifying CER claims if private certifiers are not available.
The following table summarizes the functions of each of the components of the DNA, based on the most likely project cycle.
The Board shall meet as necessary, as private investors’ questions need to be answered within three months, to approve project proposals, to entertain appeals, and to facilitate the issue of CERs by the International Executive Board, its standing body, or an accredited operational entity.
4.3.3.1 Likely Procedure for the CDM Project Cycle
The CDM project cycle comprises three phases:
development, implementation and the issue of emission credits (CERs). The following table gives details on the roles of the Board, the project proponents, and the Clearinghouse. The project cycle is explained in more detail below.
Develop and submit project proposal;
Submit environmental and sustainability impact assessment documents;
Implement project;
Hold public hearing for environmental and sustainability impacts assessments;
Appraise and approve project proposal;
Register projects with the Executive Board;
Evaluate monitoring reports;
Entertain appeals;
Evaluate the results from independent verifiers on CER claims;
Facilitate submission for issuance of CERs to the Executive Board;
Register CERs to the Execu- tive Board;
Note: Tasks of the Clearinghouse can be contracted to other designated entities. The Clearinghouse will accredit these entities.
Assist project proponents in “match- making” between investors and host;
Assist the Board in appraising project proposals;
Provide necessary information for appraisal, environmental and sustainability impacts assessment processes, and undertake necessary evaluations;
Assist the Board in monitoring the project;
Assist the Board in examining and evaluat- ing appeals;
Assist the Board in verification of the CER claims and submission of ???;
Project Development
Board (facilitated by the
Secretariat) Clearinghouse
Project Proponents
Project Implemen- tation
Issuance of CERs
Project Development and Appraisal
Project development involves the following steps:
Step One: the ‘match-making’ step, in which prospective investors and host countries are identified and ‘matched’. The prospective inves- tors and hosts can undertake this step indepen- dently or a facilitator may be involved. This step is an informal one. The formal project cycle starts when the project proponents - the investor and the host - have submitted the project proposal.
Step Two: project design and development, during which the project proponents submit a formal proposal to be appraised and approved by the national Board. The project proponents can undertake project development independently or a third party may facilitate. Project proposals should include the following information:
Ä Technical information, such as engineering design, the site location, etc.
Ä Proof that the project is eligible under the CDM.
Ä Evidence of ‘additionality’, i.e., how the project will ensure a real reduction in GHG emissions compared with the ‘business-as- usual’ scenario in the absence of the project.
Ä An estimate of the cost of the project (the incremental cost if the project is replacing an existing technology) and the price of the CER that the project will produce.
Ä An outline of the expected benefits of the project, beyond reducing gas emissions.
Ä Information on potential sources of funding.
Ä The proposed organizational structure of the project, the time schedule and information on the nature of the cooperation between the project host and the investor.
Ä A risk analysis. Risk analysis is particularly
important because emission reductions must be measurable and verifiable.
The Clearinghouse would help the Board to design a common application form and an internet website. The website would include information on schedules for project submission, schedules for hearings, and other important information, and would allow prospective appli- cants to download the application form and other relevant documentation.
Step Three: project appraisal, which includes environmental and sustainability assessments, as well as an evaluation of project feasibility. Propos- als from project proponents would be submitted to the Board on a quarterly basis. Before the Board can approve a project it must do the following:
Ä Clarify and verify the information contained in the project proposal.
Ä Evaluate the eligibility of the project, using the existing sustainability and general eligibility criteria of the host country.
As with other investment projects, the appraisal process will require an Environmental Impact Assessment (EIA), which includes a Social Impact Assessment (SIA) and other compliancy assess- ments. This process is an integrated part of the sustainability testing.
Facilitated by the Secretariat, the Clearinghouse would hold a public hearing at which a number of project proposals would be presented.
Step Four: the Board approves a project. Once approved, the Board, assisted by the Secretariat, would register the project with the CDM Execu- tive Board. Registration is the formal acceptance by the CDM Executive Board of a validated project as a CDM project activity.
Sustainability Indicators
As part of this study a survey was conducted amongst a range of CDM stakeholders in Indone- sia (see Chapter 5 for further details). Stakehold- ers were asked to rank various sustainable development criteria, in respect of CDM projects, in order of importance. Among the most impor- tant considerations were: no adverse environ- mental impact, environmentally sound technol- ogy, increased employment, stakeholder partici- pation, a community development focus, utiliza- tion of appropriate technology, local economic benefit, and institutional and human resource development.
The sustainable development criteria, on which there was widespread agreement among the surveyed stakeholders, should incorporated into all projects, where possible. Sectoral priorities should also be developed using the sustainable development criteria. A multi-stakeholder dia- logue on sustainability criteria and priority sectors is ongoing. Once the CDM Board is functioning a more defined sustainability screen should be developed.
Fast Track for Small-Scale Projects
Small-scale projects face a number of barriers, particularly economic barriers. Negotiations on small-scale projects are ongoing, including discussion on what should constitute the mini- mum size for CDM projects (i.e., how small is small-scale). For small-scale projects that have obviously positive and sustainable impacts, project appraisal and approval, especially testing of additionality, will likely be different, and simpler. Small-scale projects may also utilize a standardized baseline, rather than undertake individual baselines. The Clearinghouse should ensure that Indonesia actively contributes to the development of this standardized baseline.
Project Implementation Phase
The second phase is project implementation, in which the project proponents (project investor and host) play prominent roles.
If the project involves any construction work, local or national construction authorities should monitor the construction to ensure it complies with local legal requirements, and that construc- tion history records are kept. Project developers could carry out project ‘trials’. The length of the trial would be based on the type of project, but it should be at least for six months. Any repairs and improvements are the responsibility of the project proponent.
The project proponent is responsible for ensuring monitoring and measurement of the actual GHG emission reductions, according to the monitoring plan included in the project design document.
The monitoring plan should consider the follow- ing:
Ä All relevant data necessary for determining baseline anthropogenic GHG emissions, by source, occurring within the project boundary during the crediting lifetime.
Ä All relevant data necessary for estimating or measuring actual anthropogenic emissions of GHGs, by source, occurring within project boundary during the crediting lifetime.
Ä Potential sources of increased GHG emissions outside the project boundary that are signifi- cant and reasonably attributable to the project activity (i.e. leakage).
Ä Quality assurance and control procedures of monitoring.
Ä An explanation of the procedures used for calculating emission reductions resulting from the CDM project activity, including leakage effects.
A review of baseline conditions should be con- ducted during the monitoring period, and recom- mendations for necessary changes to the
baseline should be reported. The timing of baseline reviews would depend on the lifetime of the project. Necessary revision of the baseline and the results from monitoring activities will be confirmed during verification by an independent evaluator or accredited third party. The verified emission reductions will be reported in the National Communication to the UNFCCC and should be made accessible to all stakeholders.
The Clearinghouse should keep a database of available independent verification bodies accred- ited by the international Executive Board. The independent entities will:
Ä Audit compliance with relevant procedures and regulations.
Ä Audit measurements of actual GHG emis- sions.
Ä Verify assumptions used in the baseline and determine the need for baseline revision.
Ä Deliver official confirmation of validated emission reductions.
Ä Submit verified GHG emission reductions to the CDM authority for credit certification.
Ä Procedures for ensuring transparency, effi- ciency, and accountability through indepen- dent auditing and verification will be speci- fied by COP/MOP.
Issuance of CER
Valid emission reductions resulting from CDM projects will be certified by operational entities designated by COP/MOP. The following criteria will need to be met:
Ä Voluntary participation of Parties.
Ä Real, measurable, long-term climate impacts.
Ä Emission reductions/sequestration are additional.
Ä Project has contributed to sustainable devel- opment.
Assisted by the Clearinghouse, the Board will approve the issuance of the CERs.
The certification report shall constitute a request for the issue of CERs corresponding to emission reductions resulting from the CDM activity. The report will be submitted to the Executive Board for review. A unique serial number will be assigned to each CER. A share of proceeds will be set aside to cover administrative costs and to assist in meeting costs of adaptation, in accor- dance with Article 12.8 of the Kyoto Protocol.
Finally, the distribution of CERs among the interested parties – investor, project host, and host government, if necessary – will be effected as stipulated in the project agreements.
Appeal
Opportunities for appeal need to be accommo- dated in the CDM project cycle. In the quarterly meeting of the Board one of the most important agenda items, besides approval of projects and issue of CERs, is appeal. Certainly, some projects may have unexpected outcomes which the appraisal experts may overlook, but which are important from the public’s point of view.
The Board will oversee the appeal. The Clearing- house will be instructed to do the following:
Ä Evaluate the validity of the appeal.
Ä Re-evaluate the project proposal and imple- mentation plan of any project subject to a valid appeal.