Indonesia prepares to expand schemes that pay for environmental services

 Indonesia has been a leader in legislating for schemes that pay for environmental services such as clean and plentiful water supply. The implementing regulations that will encourage expansion are now being prepared and some important points need to be included, says Beria Leimona


Recently I presented at a media conference called by Indonesia’s Minister for the Environment, Dr Balthasar Kambuaya. At the conference, Dr Kambuaya announced his ministry’s intention to prepare regulations that would allow greater implementation of the 2009 law on environmental management, including schemes that provide for payments for environmental services. This could revolutionize land and water management throughout the archipelago.

I was there to help explain to the media the nature of these schemes in Indonesia and put them into a global context, owing to my role as  coordinator of the ‘Rewards for, use of, and shared investment in pro-poor environmental services’ (RUPES), which was hosted by the World Agroforestry Centre with support from the International Fund for Agricultural Development.

watershed, environmental services, ecosystem services, Indonesia, Sulawesi

Well-managed watersheds provide environmental benefits

RUPES had provided significant research results in Indonesia that contributed to the development of policies, the law, regulations and schemes. For example, in 2009, based on our and others’ substantial input, the Government of Indonesia promulgated Law 32/2009, which directed apparently serious efforts towards expanding payments’ schemes throughout the country. The law allowed for the creation of schemes to pay for environmental services, from private to private (individuals and companies), private to government and government to government.

However, only now is the Ministry drafting the implementing regulations of the law. These regulations will direct more specifically how to execute the law at operational level. The drafting process involves other Ministries, including the Ministry of Finance. This inclusion is significant because a series of discussions at the national level, to which the World Agroforestry Centre provided expert advice, indicated that fiscal policy in Indonesia had not created sufficient enabling conditions for implementation of payments’ schemes.

Is corporate social responsibility enough?

We argue that there are two points that need to be clarified if the regulations are to ensure transparent and smooth implementation.

First, the source of funds from companies that are beneficiaries of environmental services needs to be made clear. Currently, most of the Indonesian schemes feature State or quasi-State companies that have water as their core business, such as hydropower and drinking water companies, which, for example, pay upland farmers for reducing sedimentation in water supplies.

Our team interviewed these companies and discovered that the money used to pay farmers and other ‘environmental service providers’ came from their corporate social responsibility (CSR) funds. This has some problems.

For State-owned companies, Ministry Regulation 4/2007 requires 2% of their profit to be set aside as a CSR fund. Procedurally, CSR activities are planned yearly by each company competitively by its divisions or sub-companies. As a consequence, allocation of the fund to environmental services payments’ schemes will depend on the particular individuals within a company who champion the scheme.

We recommend internalising the environmental services’ payments as part of a State-owned company’s operational cost to sustain a continuous flow of funding and a continuous flow of environmental services, particularly forest protection.

While for a private company the decision to fund or not to fund might depend on the awareness of its board of directors, this is not the case for State-owned companies because the decision has to be nationally legalized. This is a longer path towards solving environmental problems unless there is a regulation that enforces it.

Compounding this is the common practice in a company to calculate costs to diminish negative externalities caused by the company (that is, ensure clean company waste to meet the standards of the Ministry of Environment). This is only to offset negative impacts, not support the provision of environmental services.

Should environmental protection schemes be taxed?

The second point needing to be clarified is payments’ schemes relationship to tax.

In Cidanau in the province of Banten, the fund for paying for environmental services is subject to a 7% tax, which is deducted from the payment received by the fund holder, the Communication Forum of Cidanau Watershed, which is an independent, not-for-profit, multistakeholder organization established through a regulation of the Governor of Banten Province.

There is no higher national-level legislation that defines the status of these kinds of intermediary organizations, which leaves unclear the procedures for taxation and other fiscal deductions required by this type of organization.

In another case in Lombok, the fund received by a similar type of multistakeholder organization is shared between the organization as payment for the scheme’s participants (75%) and local government remuneration (25%).

So is the current law sufficient?

Apparently, Law 32/2009 has not been sufficient to create enabling conditions for expanding environmental services’ schemes in Indonesia.

Nevertheless, progress has been promising towards wider application of such schemes.  Empirical experience from various pilots conducted in Indonesia by the World Agroforestry Centre and others will continue to enrich such enabling policies.

We look forward to contributing our expertise to the development of the implementing regulations, should the Ministry request our assistance.


Edited by Robert Finlayson





This work is part of the CGIAR Research Program on Forests, Trees and Agroforestry component on Landscape Management for Environmental Services, Biodiversity Conservation and Livelihoods


Rob Finlayson

Robert Finlayson is the Southeast Asia program's regional communications specialist. As well as writing stories for the Centre's website, he devises and supervises strategies for projects and the countries in the Southeast Asia region, including scripting and producing videos, supervising editors and translators and also assisting with resource mobilization.

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