The USD 1.5 billion policy reform program (Indonesia Productive and Sustainable Investment Development Policy Loan) will help strengthen Indonesia’s financial sector by expanding the use of digital financial services, removing credit infrastructure constraints, expanding capital markets, adjusting to climate and natural disaster risks. It will also help remove obstacles to procuring renewable energy technologies by reducing local content requirements; align industrial estates policies with international good practice standards on environment and climate; and implement land value capture mechanisms to attract private capital into infrastructure development.
Complementing these market-enabling reforms, the blended finance program for Sustainable Least-Cost Electrification-2 (ISLE-2) will enable energy access to 3.5 million people and generation of 540 MW of solar and wind power. It is expected to reduce power generation costs by at least 8% and greenhouse gas emissions by 10 percent in Kalimantan and Sumatra regions. This will be financed by a blended finance package including a USD 600 million IBRD loan, USD 12 million grants from the IBRD Surplus-Funded Livable Planet Fund and USD 16 million in grants from partners mobilised under the Sustainable Renewables Risk Mitigation Initiative (SRMI), including a USD 6 million grant from the United Kingdom via the World Bank’s Energy Sector Management Assistance Program (ESMAP) and USD 10 million from the Green Climate Fund SRMI-2 program. This energy program is also the first to pilot the World Bank’s step-up loan product, whose financing structure offers Indonesia favorable interest rates for nine years with built-in incentives to attract private capital over time. It provides for a lower interest rate during implementation and the opportunity to reduce loan costs if it is refinanced after project completion. It is aligned with the World Bank Group’s broader Originate to Distribute approach.
“The reforms and investments we are supporting with this blended finance package of over USD 2 billion will help implement key government priorities and advance the Bank’s own goals to create jobs and advance energy access in one of the largest and most dynamic economies,” said Manuela V Ferro, World Bank Vice President, East Asia and the Pacific. “Through blended finance instruments, the World Bank and partners will also help mobilise an additional USD 345 million in private investments to finance solar and wind projects, as part of a World Bank Regional Energy program to create national and regional resilient and interconnected energy grids.”
Indonesia has enjoyed years of strong growth and adept fiscal management, even during COVID and in the context of slowing global demand. The new government’s plans to invest in human capital, ensuring all Indonesians have access to electricity, and implementing financial sector reforms are being supported by the World Bank through knowledge and financing. The government is also establishing a deregulation committee that could unlock innovative financing approaches to attract private capital at scale.
With the ISLE-2 Project, the World Bank continues to support Indonesia in achieving universal access to electricity in a least cost manner.
“With over 3.5 million people gaining access to electricity, the operation is projected to catalyse improved livelihoods and creation of more and better jobs—including through electrification of female-headed enterprises,” added Carolyn Turk, Division Director for Indonesia and Timor-Leste.
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