developing climate resilience in small-scale farming ... · management: towards a ricecheck syatem...

Developing climate resilience in small-scale farming systems in NTT

Indonesia | United Nations Development Programme (UNDP)

23 May 2018

Please submit the completed form to [email protected], using the following name convention in the subject line and file name: “CN-[Accredited Entity or Country]-YYYYMMDD”

Project/Programme Title: Developing climate resilience in small-scale farming systems in NTT

Country(ies): Indonesia

National Designated Authority(ies) (NDA):

Fiscal Policy Agency, Ministry of Finance

Accredited Entity(ies) (AE): United Nations Development Programme

Date of first submission/ version number:

2018-05-23 [V.1]

Date of current submission/ version number

2018-05-23 [V.1]

PROJECT / PROGRAMME CONCEPT NOTE Template V.2.2

PROJECT / PROGRAMME CONCEPT NOTE Template V.2.2

Notes

The maximum number of pages should not exceed 12 pages, excluding annexes. Proposals exceeding the prescribed length will not be assessed within the indicative service standard time of 30 days.

As per the Information Disclosure Policy, the concept notes, and additional documents provided to the Secretariat can be disclosed unless marked by the Accredited Entity(ies) (or NDAs) as confidential.

The relevant National Designated Authority(ies) will be informed by the Secretariat of the concept note upon receipt.

NDA can also submit the concept note directly with or without an identified accredited entity at this stage. In this case, they can leave blank the section related to the accredited entity. The Secretariat will inform the accredited entity(ies) nominated by the NDA, if any.

Accredited Entities and/or NDAs are encouraged to submit a Concept Note before making a request for project preparation support from the Project Preparation Facility (PPF).

Further information on GCF concept note preparation can be found on GCF website Funding Projects Fine Print.

PROJECT / PROGRAMME CONCEPT NOTE Template V.2.2 GREEN CLIMATE FUND | PAGE 1 OF 12

A. Project/Programme Summary (max. 1 page)

A.1. Project or programme ☒ Project ☐ Programme

A.2. Public or private sector

☒ Public sector ☐ Private sector

A.3. Is the CN submitted in response to an RFP?

Yes ☐ No ☒If yes, specify the RFP: ______________

A.4. Confidentiality1 ☐ Confidential ☒ Not confidential

A.5. Indicate the result areas for the project/programme

Mitigation: Reduced emissions from:

☐ Energy access and power generation

☐ Low emission transport

☐ Buildings, cities and industries and appliances

☐ Forestry and land use Adaptation: Increased resilience of:

☒ Most vulnerable people and communities

☒ Health and well-being, and food and water security

☐ Infrastructure and built environment

☐ Ecosystem and ecosystem services

A.6. Estimated mitigation impact (tCO2eq over lifespan)

n/a

A.7. Estimated adaptation impact (number of direct beneficiaries and % of population)

50,000 direct beneficiaries (out of 4.68 million NTT population)

A.8. Indicative total project cost (GCF + co-finance)

Amount: USD 84.5 million

A.9. Indicative GCF funding requested

Amount: USD 23.5 million

A.10. Mark the type of financial instrument requested for the GCF funding

☒ Grant ☐ Reimbursable grant ☐ Guarantees ☐ Equity

☐ Subordinated loan ☐ Senior Loan ☐ Other: specify___________________

A.11. Estimated duration of project/ programme:

a) disbursement period: 7 years

b) repayment period, if applicable: n/a

A.12. Estimated project/ Programme lifespan

To be confirmed at the proposal stage

A.13. Is funding from the Project Preparation Facility requested?2

Yes ☐ No ☒Other support received ☐ If so, by who:

A.14. ESS category3 ☐ A or I-1☒ B or I-2 ☐ C or I-3

A.15. Is the CN aligned with your accreditation standard?

Yes ☒ No ☐ A.16. Has the CN been shared with the NDA?

Yes ☒ No ☐

1 Concept notes (or sections of) not marked as confidential may be published in accordance with the Information Disclosure Policy (Decision B.12/35) and the Review of the Initial Proposal Approval Process (Decision B.17/18). 2 See here for access to project preparation support request template and guidelines 3 Refer to the Fund’s environmental and social safeguards (Decision B.07/02)


A.17. AMA signed (if submitted by AE)

Yes ☒ No ☐ If no, specify the status of AMA negotiations and expected date of signing:

A.18. Is the CN included in the Entity Work Programme?

Yes ☒ No ☐

A.19. Project/Programme rationale, objectives and approach of programme/project (max 100 words)

The proposed project supports the Government of Indonesia to strengthen the resilience of vulnerable small farming households in East Nusa Tenggara. Farmers in this area face increasing risks of rising temperatures, variable rainfall, and extreme events attributable to climate change. This project will transform small-scale agriculture systems and the lives of approximately 50,000 farmers in the province through implementing climate smart agriculture and the agricultural finance landscape. To achieve this, the nation’s largest microfinance program will be made more accessible for smallholder farmers for climate smart agriculture practices/technology and the project will create an enabling environment for private sector investments in the agriculture sector.


B. Project/Programme Information (max. 8 pages)

B.1. Context and baseline (max. 2 pages) 1. East Nusa Tenggara (NTT) province (in eastern Indonesia) has a population of 4.68 million. The climate of NTT is

tropical and ranges from semi-humid to semi-arid influenced by monsoonal trends. NTT has an average temperature of 30°C, higher than the national average of 27°C. Historic rainfall data between 1981 and 2010 shows annual average rainfall in the province of 1,696 mm, 36% lower than the national average rainfall of 2,663 mm per year. A pronounced dry season characterises a ‘savanna climate for most parts of NTT, with less than 60 mm in the driest months4,5.

Climate change and its impact on agriculture and livelihoods 2. Climate change will significantly affect NTT’s agricultural sector as 72% of households depend on agriculture for their

livelihood. Increasing anomalies which have been observed include changes in temperature, rainfall patterns, frequency and intensity of extreme events will require the agricultural sector and farming households to adapt.

3. An increase of 2-3°C by the mid-21st century under RCP2.6 and RCP8.56 is projected in IPCC’s 5AR. Nationally, average annual rainfall shows a declining trend by 2-3% since 1990. However in the future, rainfall is projected to increase, except in the southern regions including NTT, where it is projected to decline by up to 15% by 2100 from the 1980-1999 period7. Figure 1 shows observed and projected monthly precipitation for Indonesia and NTT. Notably, NTT is already much drier than the rest of Indonesia, and that rainfall is projected to decline from April-June, indicating a longer dry season. At the same time, there is strong evidence that the proportion of total annual rainfall that falls in extreme events will increase by 15% by 20905.

4 Aldrian, E. & Susanto, R. D. (2003). Identification of Three Dominant Rainfall Regions within Indonesia and Their Relationship to Sea Surface Temperature. International Journal of Climatology. DOI: 10.1002/joc.950 5 Schneider, U., Becker, A., Finger, P., Meyer-Christoffer, A., Rudolf, B., & Ziese, M. (2011): GPCC Full Data Reanalysis Version 6.0 at 0.5°: Monthly Land-Surface Precipitation from Rain-Gauges built on GTS-based and Historic Data. DOI: 10.5676/DWD_GPCC/FD_M_V7_050 6 Hijioka, Y. et al. (2014). Asia. In: Climate Change 2014: Impacts, Adaptation, and Vulnerability. Part B: Regional Aspects. Contribution of Working Group II to the Fifth Assessment Report of the Intergovernmental Panel on Climate Chang. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA, pp. 1327-1370 7 USAID. (2012). Indonesia climate vulnerability profile. Accessed from https://www.climatelinks.org/sites/default/files/asset/document/indonesia_climate_vulnerability_profile_jan2013.pdf


4. A recent USAID-funded study8 looked at the impact of climate change on Indonesian provinces in relation to agriculture, health and sea level rise. The study ranked NTT the most vulnerable province in terms of an income per capita percentage loss, and the most vulnerable in terms of the potential impact on government budget revenues. Another study estimated that for every 1°C increase in the minimum temperature, rice yields will decrease by 10%9.

5. The impacts of climate change are also being felt after harvesting. A study on 10 key agricultural commodities estimated that the country and farmers are currently losing US$3 billion annually due to inefficient drying processes alone. In NTT, farmers typically dry their harvest by spreading it on the ground or on a tarpaulin, and placing under the sun for a few days to several weeks depending on the commodity. Not only is this process often inadequate for reducing moisture to the required level, it also results in crop losses of between 4-10% across different commodities 10 . The traditional drying process is increasingly vulnerable to climate change as commodities are exposed to

unpredictable levels of humidity and rainfall.

6. The climate change impacts on agricultural production are inextricably linked with the prevailing socio-economic conditions and high vulnerability of NTT. The per capita Gross Regional Domestic Product of the province is the lowest in the country. Poverty incidence is third highest at 19.6%. The province ranks 32 out of 34 in the provincial Human Development Index. 72% of households in the province depend on small-scale agriculture for their livelihood whereas the national average is about 40%. Almost 90% of NTT farming households hold less than 2 hectares of land with 40% accessing less than 0.5 ha. Reflecting this heavy dependence on small-scale agriculture, poverty incidence in rural NTT is 22.41% compared with 12.21% in urban NTT (the corresponding numbers at the national level is 13.8% and 8.2% respectively).

7. Given the projected climate change impacts, the reliance of a large population of NTT on agriculture, together with low levels of development and high levels of vulnerability, there is an urgent need to develop climate smart resilient agriculture. However, there are multiple barriers that prevent farmers, government and the private sector from achieving this objective.

8. Inadequate knowledge about climate risks and location-, crop- and time-specific responses. Farmers in NTT generally do not have the knowledge, skills or resources to transition from current production systems characterised by small-scale, fragmented, low-profit, low-value operations to a more sustainable and resilient production system which embraces crop diversity, retains soil moisture, and prevents erosion, nutrient loss, water logging, pests and

8 USAID. (2016). Indonesia: Costs of climate change 2050. Policy Brief 9 Peng, S., Huang, J., Sheehy, J.E., Laza, R.C., Visperas, R.M., Zhong, X., Centeno, G.S., Khush, G.S. & Cassman, K.G. (2004). Rice yield decline with higher night temperature from global warming. In E.D. Redona, A.P. Castro & G.P. Llanto, eds. Rice Integrated Crop Management: Towards a RiceCheck syatem in the Philippines, p. 46–56. Nueva Ecija, Philippines, PhilRice. 10 Kopernik. (2016). Unmet needs report. Bali, Indonesia.

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diseases. Farmers need to be better equipped to understand climate risks specific to their crops and what potential responses they could employ to mitigate risks and promote resilience.

9. Absence of a long-term strategy with which to support a transition to a more resilient agriculture sector. Currently no strategy, nor the technical assessments to evidence it, exists to guide the long-term transformation of national or provincial agriculture. For example, as climate change impacts become more pronounced, it changes the suitability of crops to a specific location, which impacts not only macro-level food security, but also individual-level livelihood security. The Government has limited understanding to craft a suitable set of responses under different climate scenarios for the next 20, 50 or 100 years. The absence of a long-term strategy results in ineffective public investments for supporting farmers in transitioning cropping patterns and practices. For example, the current Government-sponsored replanting scheme assists farmers in replanting aging perennial trees (e.g. coffee, cacao, cashew and coconut) that were planted en masse about 30-40 years ago. The ongoing scheme is not informed by future climate projections which potentially locks farmers in potentially vulnerable livelihood for the next 30-40 years.

10. Absence of an integrated support system for vulnerable farmers. One of underlying reasons of a lack of knowledge and skills described above is that any existing support provided to farmers in NTT is fragmented and uncoordinated. There are several sources of extension support through which farmers are trained on good agricultural practices (GAPs). They include extension workers from the Ministry of Agriculture (MoA), Climate Field School which is delivered by the MoA and BMKG (The Indonesia Meteorological Office), and NGOs or church-based support. In all cases, the focus is exclusively on production and value addition or value-chain development support is rarely coordinated with extension services.

11. Scattered and fragmented farming units. The organisation of farming units is an effective means of delivering support services, farm inputs, marketing produce, and adding value to commodities11. Fragmented farming units increase the cost of service delivery such as extension and credit support, disincentivise private entities to establish value-chains and create support systems, undermine economies of scale, and lower bargaining power vis-à-vis commodity buyers. These all contribute to farmers’ vulnerability to external shocks, including climate-induced shocks.

12. Inadequate access to capital for farmers. Geographical disadvantages, fragmentation of farming units and the high risk of doing business with poor small holders hamper their financial inclusion and acts as an obstacle to building resilience. Without access to credit from a formal financial institution, farmers are either unable to invest in resilience/productivity enhancement measures such as improved seeds and post-harvest facilities, or they are often forced to make a credit arrangement with a buyer, where the sales payment from the buyer is deducted in lieu of principle and interest payments. Alternatively farmers borrow from local moneylenders at the rate of 5-10% interest per month.

13. The project is aligned with Government of Indonesia’s (GoI) development plans, strategies and policies for climate change adaptation. It is aligned with Indonesia’s Nationally Determined Contribution (2016) and their National Action Plan on Climate Change Adaptation (RAN-API). RAN-API’s priority areas include economic resilience related to food security, sustainable agriculture and ecosystem resilience as a medium-term goal for the country12.

B.2. Project/Programme description (max. 3 pages)

11 Birchall, J. (2004). Cooperatives and the Millennium Development Goals. International Labour Organization: Geneva


14. Farmers in NTT face increasing risks of rising temperatures, increases in pests and diseases, variable and unexpected rainfall, and extreme weather events attributable to climate change. The proposed project strengthens the resilience of vulnerable farming households in NTT by removing the barriers described above.

Output 1: Institutional and Policy Strengthening 15. GCF resources will be used to strengthen institutions and policies for enabling a transformation in the agriculture

sector in NTT in view of the projected climate conditions. A provincial long-term strategy for climate change adaptation in the agriculture sector will be developed, and awareness will be raised with farmers, Government and the private sector, with the goal of achieving sustainability in the sector in NTT for a further 50 years during which climate and crop suitability are expected to change. Institutions which help farmers to adapt to climate change will be strengthened. The output will be achieved through the following activities:

Activity 1.1: Development of a provincial long-term adaptation strategy for the agriculture sector

16. This activity will result in a long-term provincial agricultural strategy that is based on changing suitability for key crops under different climate scenarios across different locations in NTT. This strategy will be based on a series of studies including: crop response to climate change for different crops; climate change impacts on macro-level indicators such as food security and provincial agricultural portfolio and on micro-level indicators such as livelihood security; public and private sector investment needs assessment for making a transformation; and scenario analysis for switching existing crops to new crops.

17. The long-term climate change projections suggest some crops will become unsuitable for their current location and a transition to new or hybrid crops will be needed. However, most farmers can only make a gradual shift in their agricultural production with the financial incentives, information, demonstration, tools and guidance available to them. The long-term strategy will help improve the understanding of the long-term impacts of climate change on agriculture; the most impactful response and mitigation measures; and the kind of government support and resources required to bring about the required change.

Activity 1.2: Strengthening of Climate Smart Agriculture (CSA) support services

18. The project will mobilize public, private and civil society organisations to develop and scale-up effective and targeted CSA support services. BMKG’s existing climate farmers field school module will be improved and expanded to cover crop coverage, which is currently limited to rice and corn. GCF funds will be used to train and strengthen government extension services, farmer producer organisations and NGOs so that they can apply specific measures that build resilience to the agricultural production systems.

Activity 1.3: Establishment and strengthening of Farmer Producer Organisations (FPOs)

19. GCF resources will be used to co-finance the formation and strengthening existing FPOs. FPOs are a cornerstone institution for CSA potential in NTT. They will act as our primary entry point for support such as CSA extension, aggregation of produce, climate awareness, connecting with the private sector and the uptake of financial products and services. The use of FPOs, as opposed to individual farmers, as the entry point for these services reduces the cost of service delivery, particularly for financial institutions and private sector buyers, and FPOs also enhance the sustainability of support provided through the project. FPOs will be an efficient point of engagement for the implementation of range of project components across the three outputs of this project. UNDP will look to co-finance this part of the project with grant support from private sector banks which seek to expand their business but currently are unable to do so due to the prohibitive costs of working with individual farmers.

Output 2: Scaled adoption of Climate Smart Agriculture (CSA) Practices


20. With assistance from the project, GoI will develop a portfolio of CSA strategies for selected crops and will assist farmers to implement them via public, private and civil society partnerships. This will be achieved through capacity building (training) at the farmers´ level, awareness raising and financial assistance. All project interventions under this output will be executed through FPOs. This output will look at the adoption of CSA for farm inputs, production and post-harvest processing. Private sector engagement, upgrading FPOs to do more, bringing local entrepreneurs to establish value-chains, and attracting multilateral/national corporations to NTT are critical components of the output. This will be achieved through the following Activities:

Activity 2.1: Developing portfolio of targeted Climate Smart Agriculture (CSA) interventions for crop production

21. The project will assess/map out the current agricultural production, its vulnerability and future opportunities, and gather local knowledge as well as global scientific expertise to inform a) the climate change outlook for NTT crops over the next 50 years; and b) develop a range of tailored interventions specific to climate vulnerable crops and locations. The projected crop-specific suitability change, presented in the pre-feasibility study, will be the basis for this activity. The project will also aim to bring together the relevant actors, including the government and private sector to agree on the financing of these CSA interventions. This activity will lay the foundation for the effective delivery and take up of activity 2.2.

Activity 2.2: Implementation of CSA measures

22. Previous research, evidence and strategy development will help identify the right climate-resilient innovation and technology for each different context, be it crop needs, location, soil and water conditions. CSA strategies will include: (i) better water/moisture management; (ii) improved soil health; (iii) replanting of aging perennial trees with those with climate-resilient traits; (iv) improved on-farm crop management and diversification, and (v) measures to reduce post-harvest losses, which are expected to aggravate with increasingly variable rainfall patterns. In conjunction with activities under Output 3, FPOs will be assisted to access co-financing sources, particularly the Government microfinance scheme (KUR), Village Fund (Dana Desa) and bank CSR, for investments in post-harvest facilities such as drying, fermentation, washing and storage facilities. CSA practices will consider the specific needs of indigenous groups and women farmers.

23. This activity will link with UNDP’s work to galvanise the private sector in the agriculture sector – the idea is that sustainable, climate smart agriculture is a pre-requisite for a private sector interested in quality and quantity of supply. In particular, UNDP is currently assisting the Government in establishing the SDG Impact Fund, a $10M endowment fund which will invest in entrepreneurs who intend to invest in agricultural value-chain. Several entrepreneurs will be identified and they will receive the investment through the SDG Impact Fund (up to $300,000) in support of farmers who are targeted in this project. The project intervention aiming at making small-holder farmers’ agricultural production more resilient to climate risks will enhance the ability of farmers to invest and leverage private sector financing. In addition, UNDP will help GoI facilitate a dialogue with multilateral/national corporations so that marketing bottlenecks will be removed. Overall, CSA gains and results will be used to market FPOs in NTT to entrepreneurs, large multinationals and fund managers to invest more in NTT.

Output 3: Improving Access to Credit in Support of Climate Smart Agriculture

24. This output will accelerate the deployment of financial products and services which are prerequisite for the transformation of climate smart agriculture in NTT. As described in the barrier section, farmers in Indonesia in general, and in NTT in particular, are largely deprived of formal financial services for productivity enhancement and resilience building. A study points out that only 21.9% of the poorest 40% of the Indonesian population has savings in a financial


institution13. Another assessment reveals that only 5% of lending goes to the agriculture sector that contributes 15% of GDP 14 . Financial exclusion forces most farmers to make informal credit agreements with money lenders, commodity buyers and agricultural input agents at a rate much higher than market rates, suppressing their profit margin. This in turn makes farmers highly risk averse, preventing them to move away from business-as-usual agricultural practices and depriving opportunities to build climate resilience.

25. In recent years, there are efforts by the Government to improve the situation. Most notably, the Kredit Usaha Rakyat (KUR or “People’s Enterprise Credit”) scheme is a government-backed loan programme that aims at improving access to formal credits by micro, small and medium sized enterprises, including smallholder farmers. Launched in 2007, it works through banks across Indonesia to disburse subsidized loans. The government allocated US$8.39 billion in 2018 in the form of subsidy support. 70% of the loan is also guaranteed by the government-backed fund. Despite its intension, however, the penetration of KUR into the smallholder farmer segment is extremely limited to date for various reasons including suboptimal loan product design, risk perception of banks, and institutional bottlenecks. In addition to KUR, the Government recently issued sovereign green bond, called green sukuk, mobilizing $1.25 billion and making Indonesia the first country in the world to issue a sharia-law compliant green bond. It is stipulated that the proceeds will be invested in activities towards the achievement of the national climate change mitigation and adaptation strategies.

26. GCF resources will be used to improve regulatory, policy and institutional environments to facilitate public and private sector finance towards resilience building, especially in the currently disadvantaged smallholder agriculture sector. This will be achieved through the following Activities:

Activity 3.1: Improved policies and regulations for enhanced access to credit for climate resilient agriculture

27. Despite the scale of the program, demonstrating the commitment of the Government to improve access to formal credits, KUR currently is not effectively used by smallholder farmers for building climate resilience. GCF resources will be used to work with the regulator and participating banks to introduce loan products that are more tailored to the needs and income cycles of farmers with a grace period and flexible repayment schedule. Technical assistance will also be provided to the regulator and banks so that they can better appreciate risks associated with lending to farmers, especially after CSA measures are applied. Other regulatory changes, such as the use of a banking agent model to reduce the transaction costs, will be explored. In addition, technical assistance will aim to improve the regulatory environment for attracting private sector investment in the agriculture sector. For example, in Indonesia, there is no supporting legislation and regulation for issuing corporate green bonds in support of climate resilient agriculture. Results from this activity is enabling policy, regulatory and institutional conditions to attract greater public and private sector investments in transforming the agriculture sector.

Activity 3.2: Improving access to KUR for climate resilient agriculture

28. This activity, in succession to Activity 3.1, will provide technical assistance to the regulator and banks to execute concrete measures, on a pilot basis, that aim at improving credit access for resilient agriculture. This includes support and demonstration of asset backed securitization of KUR loans. Currently, banks participating in the KUR program do not securitize their loans. Extending loans to smallholder farmers is already perceived by banks as high risk and inability for banks to securitize their loans prevents them from diversifying risks. Technical assistance from the project

13 Ismail, M. S. (2015). Summary of Indonesia’s Finance Sector Assessment. ADB Papers on Indonesia. No. 12, December 2015. 14 IFC. (2013). Indonesia Agri-Finance – Promoting Financial Inclusion for Farmers. Accessed at https://www.ifc.org/wps/wcm/connect/443a6f00408d25feb13ab1cdd0ee9c33/EAP-Indonesia+Agri-finance.pdf?MOD=AJPERES


will allow the regulator to develop needed regulations and policies for permitting banks to securitize KUR loans with a condition that they are accessed by smallholder farmers or enterprises that are investing in climate resilient actions. In addition, a new policy, regulation and procedure will be developed, with the Ministry of Finance, to allow green sukuk proceeds to be used as a credit line for banks participating in the KUR program. Not only will this reduce the cost of capital for the banks, it will also incentivise them to extend loans that are used for climate resilient purposes.

Implementation arrangements:

29. The project will be implemented following UNDP’s National Implementation Modality (NIM), according to the Standard Basic Assistance Agreement between UNDP and the Government of Indonesia, and as per the NIM project management implementation guidelines, subject to a capacity assessment conducted before the submission of a Funding Proposal.

30. The Coordinating Ministry of Economic Affairs is designated as the Executing Entity for the project with close coordination with the Ministry of Agriculture, the Ministry of Environment, the Planning Ministry at the provincial level (BAPPEDA), the Provincial Government of NTT, and the Ministry of Small-Medium Enterprises and Cooperatives. The MoA and BAPPEDA will co-chair a Provincial level Project Board to steer implementation at the regency/district levels. The provincial government of NTT is headed by a governor, who is supported by three special advisory bodies.

Identified risks and mitigation measures:

31. A comprehensive environmental and social impact screening will be conducted and a report will be submitted to GCF with the full project document package. The assessment will be participatory and will include consultations with all the stakeholders. Further, the assessment will also outline arrangements for consultations with the stakeholders and disclosures thereof both during preparation as well as implementation phases.

B.3. Expected project results aligned with the GCF investment criteria (max. 3 pages) Impact potential

32. The project directly contributes to GCF impact areas of increased resilience and enhanced livelihoods of the most vulnerable people, communities, and regions. The project will be implemented in 10 districts in the province of NTT. The project will benefit approximately 50,000 direct beneficiaries, majority of which has the landholding of less than 2 ha, and 100,000 indirect beneficiaries. It is estimated that at least 50% of the total direct beneficiaries will be women. They will benefit from CSA practices to be delivered by government, the private sector and NGOs, and enhanced access to financial services.

33. The project also contributes to increased resilience, health and well-being, and water security. Overall, climate resilient agriculture will be promoted across 10 districts which are currently highly susceptible to increasing temperature, variability in rainfall patterns, deterioration in soil conditions, and risks of pests and diseases (the exact areas where GCF investments will be directed will be outlined in the funding proposal).

34. Many of the CSA practices promoted and implemented by the proposed project will have secondary environmental benefits resulting in improved resilience of ecosystems and ecosystem services. Some of the CSA practices promoted by the project will be Ecosystem Based Adaptation practices. CSA strategies such as inter-cropping, reduced use of chemical inputs, reduced tillage, water harvesting through couture bunding will result in significant environmental benefits.

Paradigm shift potential


35. The project will enable a paradigm shift towards climate resilient agriculture in NTT as it addresses multiple barriers in an integrated way. The barriers include the absence of a long-term adaptation strategy that reflects future climate risks and changing crop suitability in the province; inadequate knowledge about climate risks that prevents effective CSA solutions from emerging and being applied at the farm level; scattered farming units that currently make investments in resilient agriculture in NTT less attractive; absence of an integrated support to production and post-harvest processes; and inadequate access to agricultural credits for smallholder farmers. Past government and donor support often focused on removing only a few of the barriers described above, undermining the impact, sustainability and scalability of the support.

36. Significant emphasis on private sector engagement and crowding in private and public capital in the process of removing the barriers also contributes to the paradigm shift potential of the project. Transformation in the agriculture sector will not be realized with public sector funding alone, and successes demonstrated in this project in leveraging private sector capital will pave the way for replication and catalyse impacts beyond NTT (Theory of change is presented in the attachment).

Potential for knowledge and learning

37. Capturing, synthesising and disseminating knowledge is an integral part of project activities. Facilitating learning for farmers and enhancing their knowledge on climate resilient livelihoods is a central theme of the project. Farmers will not only increase their awareness about climate risks to their production and livelihood, but they will also obtain specific skills to improve their agricultural production and post-harvest handling in the face of increasing risks of climate change. Technical lessons and know-how will be captured and widely shared within the Ministry of Agriculture, local governments that house local extension workers, the private sector, and NGOs that are working with farmers.

38. Another important contribution is in the context of a medium to long-term adaptation strategy in the agriculture sector in NTT. As described above, Indonesia currently does not have a specific climate change adaptation strategy in the agriculture sector which examines the viability of key crops and the support required to manage climate risk. The proposed project will produce the strategy by analysing future climate risks for the range of key crops grown in the province. This is expected to provide a critical learning opportunity and body of knowledge that the rest of the country and region can utilise in identifying long-term adaptation strategies for the agriculture sector.

39. Improving agricultural credits is a learning process in itself. As described in the barriers section, past financing schemes that were intended to support farmers did not achieve the expected results and this project is expected to offer new learning opportunities for banks, policy makers and administrators by introducing tested approaches for financial inclusion from other parts of the country, region and world (a comparative advantage UNDP can offer).

40. There will be a dedicated budget in the project with which knowledge generation, synthesis, and dissemination will be facilitated. This will be presented in detail in the funding proposal.

Contribution to the creation of an enabling environment

41. The involvement and strengthening of local NGOs and the private sector as agents who facilitate farmer groups and promote climate awareness and empowerment, is a very important element for sustainability beyond the project lifecycle. Past engagement with farmer groups has been ad hoc and isolated. By introducing both finance and a strong private sector element, this project aims at addressing the reasons why previous attempts have failed.

42. Second, project resources will be used to ensure that existing extension systems integrate climate-smart agriculture in their pedagogy. After piloting, the CSA-integrated extension support services are expected to be replicated at


more geographical locations. At the same time, the project will look at more sustainable ways of providing extension support to farmers, including incentive mechanisms.

43. Lastly, improving series of regulations, policies and procedures for enhancing accessibility of agricultural credits for resilience building purpose will demonstrate lasting impact beyond NTT and lifecycle of this project. As described above, the KUR program disburses more than $8 billion in loans intended to improve financial inclusion. This project will improve the enabling environment for this program to be more effectively applied for agricultural climate resilience.

Contribution to the regulatory framework and policies

44. The development of a long-term adaptation strategy in the agriculture sector coupled with changes in financial regulations, policies, procedures and practice are key results of this project in this regard. More specifically, changes in the regulatory framework for the KUR program, securitization of KUR loans, and establishing a framework to finance climate resilient agriculture through corporate green sukuk are expected outputs of the project.

Sustainable development potential

45. Economic Co-benefits

Increased productivity and farmer income as the project will reduce the risk of crop failure, increased yield per unit of land, increased yield per factor of input, and in some cases, enable more cropping cycles.

Potential reduction of government expenditure as with project intervention the need for government emergency assistance after mass crop failures will be reduced (the data is not readily available to estimate the amount which will be done during full project proposal development).

46. Social Co-Benefits Improved social safety nets for the local population through the increased income, especially women who play

a crucial role in agricultural production.

Increased food security as a result of reduced risks of crop failure will also ease the pressure on households.

47. Environmental Co-Benefits

Decreased agro-chemical run-off, decreased land degradation and water use due to better farming practices and technology use.

Better watershed management including bunding and reforestation.

A watershed-level strategy to strengthen the resilience of farmers will require the stabilization of catchment areas, the rehabilitation of degraded areas (especially slopes through bunding) and reforestation to ensure water harvesting. These will result in significant environmental benefits.

Improved management of natural resources because of enhanced knowledge/access to information Increased productivity per unit area of land (increasing yield so that less land is required for same output) Reduced pests and disease.

Gender-Sensitive Development Impact

50. Women play a critical role in Indonesian agriculture. This program will target women beneficiaries, including access to finance and markets. Furthermore, women entrepreneurship will be promoted by strengthening women’s producer groups to adopt climate-smart agricultural practices, invest in agro-technology for value added products, and foster strong market linkages.

Needs of recipients


51. The NTT province has the lowest per capita Gross Regional Domestic Product in Indonesia. The poverty incidence in rural NTT is 22.4% compared with 12.21% in urban NTT which is higher than the national level at 13.8% and 8.2% respectively. Most the households in NTT (71.9%) derive income from farming, which is much higher than the national average of 40%. Most of the farming population are considered smallholder farmers with 89.7% of the farming population operate on land less than 2 hectares adding to their vulnerability.

52. The productivity level of most of the crops grown in the province is significantly lower than the national average. This is partly due to the baseline development and environment conditions of NTT. Food insecurity is a recurring problem in the province. Nearly all the districts in NTT fall within the 100 most food insecure districts in Indonesia (Kieft and Soekarjo, 2007).

53. This is compounded by the insufficient level of public investments for improving agricultural productivity in the form of irrigation development where only 66% and 4% of the crop areas are irrigated for rice and corn, respectively. Farmers growing cash crops such as coffee, cacao, cashew and coconut engage in little value-addition operations, exposing their income portfolio to weather-/climate-induced risks. Despite steady growth of the GDP at 4.7-7.4% in the last decade, the Government fiscal deficit is also constantly increasing from 0.9% of GDP in 2007 to 2.5% of GDP in 2015. The Government gross debt stood at 27% of GDP in 2015 and the financial resources to invest into adaptive measures for smallholder farmers are limited.

Country ownership 54. The Nationally Determined Contribution submitted to UNFCCC by the Republic of Indonesia considers sustainable

agriculture, plantations and integrated watershed management the highest priority actions for climate resilience. The medium-term goal of Indonesia's climate change adaptation strategy is to reduce risks on all development sectors (agriculture, water, energy security, forestry, maritime and fisheries, health, public service, infrastructure, and urban system) by 2030 through local capacity strengthening, improved knowledge management, convergent policy on climate change adaptation, disaster risks reduction, and the application of adaptive technology. To promote climate resilience in food, water and energy, the country aims to improve its management of natural resources by protecting and restoring key terrestrial, coastal and marine ecosystems.

55. The proposed project is fully aligned with the Government of Indonesia’s development plans and policies for climate change adaptation. Climate change adaptation is one of the key development priorities in Indonesia as outlined in the National Medium Term Development Plan (RPJMN) 2015-2019 where it states that any national development plan should consider issues of climate change (page 92, point 3). The RPJMN targets 15 vulnerable areas of which NTT is not one of them since the criteria for selection is mainly based on the total number of population affected by climate change. Thus, the priority area selection in the RPJMN is driven by the possibility of outreach and the number of people impacted, rather than the level of vulnerability itself.

56. Additionally, with assistance from UNDP, the Provincial Government of NTT is in the process of revising the Provincial Medium Term Development Plan 2013-2019 for NTT to integrate climate risks and resilience building. This will help ensure government action plans will have budgeted climate change actions in the future.

Efficiency and effectiveness 57. For all outputs the project will leverage co-financing. In particular, in assisting the development of value-chains that

are in support of climate resilient agriculture, co-financing from private and public capitals will be sought. Private sector entities, with their own capital contributing to the common objective of the project, will be engaged during the project implementation. The full cost effectiveness of the specific interventions will be assessed during project


preparation. The unit of intervention will be Farmer Producer Organizations instead of individual farmers thereby greatly reducing the transaction costs by introducing economies of scale. Furthermore, the development of a portfolio CSA strategies specific to selected crops and commodities will include engagement with all relevant stakeholders, including those providing financing to the different parts of the production and post-production chain, thus increasing co-financing as well as longer term finance leverage.

B.4. Engagement among the NDA, AE, and/or other relevant stakeholders in the country (max ½ page)

58. The concept note preparation has been initiated based on the request received from the Ministry of Finance, the Coordinating Ministry of Economic Affairs, and the Ministry of Agriculture. A series of multi-stakeholder consultations have been conducted since 2016, including at/with:

Workshop on Concept Note Development for the GCF Project: “Smallholder Cooperatives, Financing and Market Access to Support Green Commodities Toward Climate Change Mitigation and Adaptation” – Jakarta, 20 October 2016

Ministry of Small Medium Enterprises and Cooperatives (SMEC) - Jakarta October 2016 Meeting with Deputy Minister for Production and Marketing, to discuss the SME and Cooperatives (SMEC) structure appropriate for the project.

Ministry of Agriculture and Ministry of Finance – Jakarta, 26 August 2016. Workshop on “Green Commodities Toward Climate Change Mitigation and Adaptation in Eastern Indonesia” –

Bogor, 18 August 2017. Discussion on the relevance of development support intervention for cocoa, coffee and spices with climate change mitigation and adaptation approaches, and sharing data and information as material of the concept note and specific activities that match with Indonesia government program.

Banks and Insurance Companies – Jakarta, 19 August 2017. Meetings with representatives from the following organizations: BRI, BNI, BPD Nusa Tenggara Timur (Regional Bank) and Jamkrindo (Insurance Company)

Ministry of Agriculture - Jakarta, 19 July 2017. Meeting with the Director of Perennial Crops and Beverages

Ministry of Agriculture, Ministry of Finance, Meteorology Agency, NGOs, development partners – Jakarta, 17-21 April 2018

Coordinating Ministry of Economic Affairs, Ministry of Agriculture, and Ministry of Environment – Jakarta, 15 May 2018

Discussion on the implementation arrangement and roles and responsibilities during the project design and implementation.

59. Furthermore, consultations were also conducted with the Ministry of Finance (NDA) and inputs were sought in the process of finalization of the concept note.

60. Field visits and meetings with other stakeholders included: Field mission of a team of experts from UNDP to Jakarta, Flores and Kupang, April 18-28 2018. Meeting with Local NGOs, Farmer Organization, related government institutions and other stakeholders in

Amarasi Timur, Kupang, East Nusa Tenggara - June 2017. Meeting with Local NGOs, Farmer Organization, related government institutions and other stakeholders in

Adonara Barat, Flores Timur, East Nusa Tenggara - June 2017. Meeting with Local NGOs, Farmer Organization, related government institutions and other stakeholders in Sikka

District, Flores, East Nusa Tenggara - 21-25 August 2017.


Workshop on climate adaptation activities plan for smallholder - Oebobo, Kota Kupang, Nusa Tenggara Tim - 26 August 2016.

61. Multi-stakeholder engagement plan will be developed at the proposal stage with special focus on private sector and NGOs.

C. Indicative Financing/Cost Information (max. 3 pages)

C.1. Financing by components (max ½ page)

Output Activity GCF grant

(USD) Co-financing

(USD)

Financial instrument

(co-financing) Institution

1.Institutional and policy strengthening

1.1 Development of a provincial long-term adaptation strategy for the agriculture sector

1,000,000

1.2 Strengthening of Climate Smart Agriculture (CSA) support services

2,000,000 3,000,000 Grant (cash) Government of

Indonesia

1.3 Establishment and strengthening of Farmer Producer Organizations (FPOs)

2,000,000 3,000,000 Grant (cash) Banks

Total 5,000,000 6,000,000 2. Scaled adoption of Climate Smart Agriculture (CSA) practices

2.1 Developing portfolio of targeted Climate Smart Agriculture (CSA) interventions for crop production

2,500,000

2.2 Implementation of CSA measures

12,000,000 40,000,000 Loans and

grants (cash)

Government of Indonesia/KUR,

banks, BKMG, Private Sector, Dana Desa,

SDG IF Total 14,500,000 40,000,000

3. Improving Access to Credit in Support of Climate Smart Agriculture

3.1 Improved policies and regulations for enhanced access to credit for climate resilient agriculture

1,000,000

Ministry of Finance

3.2 Improving access to KUR for climate resilient agriculture 3,000,000 15,000,000 Loan

Ministry of Finance KUR

Total 4,000,000 15,000,000

Project Management Cost 1,000,000

Total Project 23,500,000

61,000,000

C.2. Justification of GCF funding request (max. 1 page)

62. Due to the complex nature of agricultural-based livelihoods, bringing farmers out of vulnerability requires a multi-pronged approach that includes the introduction of climate-resilient agricultural practices through strengthened extension support, diversification of crops, improving the policy and institutional framework, supporting farmers’ groups, strengthening the value chain and galvanising financial products and services. Addressing the different elements which collectively make up ‘climate smart & resilient agriculture’ requires extra and targeted investment and is beyond the mandate of any one single Government agency. Moreover, providing support in an area such as NTT is considered too risky for commercial / private sector entities. Without GCF support, private commodity buyers are likely to continue to work with farmers who are better off and in more accessible/for them convenient locations where


there is a clearer profit margin. Similarly, the Government and donors are likely to continue to offer piecemeal support without a multi-faceted ‘barrier-removal’ approach. The consequence is that disadvantaged NTT farmers will continue to be left behind by government, donors and the private sector. GCF funds will support a system wide approach combining adaptation, policy and incentive transformation, new measures, and awareness/capacity to make the transformation required for building sustainable and resilient agriculture.

63. An assessment of the appropriateness of grant deployment (in view of co-finance including grants and loans) will be further assessed at the proposal stage in the financial analysis.

C.3. Sustainability and replicability of the project (exit strategy) (max. 1 page)

Sustainability:

64. On the supply side, GCF funds will be invested in building an institutional, regulatory and policy framework as well as developing the capacity of Government. On the demand side, UNDP will work with financial institutions and the private sector to ensure both investment in agriculture and that commodity buyers can obtain the quantity and quality of crops they require. This is different from projects in the past which have either worked with the supply side or the demand side but not both. This new approach will help develop sustainability beyond the project life cycle.

65. The project includes a comprehensive effort to address agricultural support services such as piloting innovation in agricultural extension so that it is more climate smart, and not completely reliant on a small government budget. This involves exploring more sustainable ways of providing support services to farmers, beyond government budgets. NGOs will be supported to deliver climate smart agricultural support and their learning and lessons will be fed back into government policy and how the private sector might better support farmers. The project also sees FPOs as a lynchpin component for sustainability.

Replicability:

66. Scope for scaling up and replicating is built into the project across all the outputs. In Indonesia and NTT, 25 million and 770,000 households respectively, rely on agriculture for their livelihood. The immediate potential is the replication of interventions from the 10 project districts to other districts in NTT. The second stage of replication is then to take results and learning to other regions across Indonesia.

67. Farmers targeted in the project will benefit from 1) climate-smart agricultural practices; 2) support with post-harvest handling; and 3) a new enabling environment for financial products and services. First by developing the capacity of both farmers and government; by promoting a portfolio of CSA practices catered for the context of NTT; and then working with banks and the private sector, the project will reach a large number of farmers. The financial services and the policy environment created by the project are public goods and could be applied to other regions on Indonesia. Additionally, the project will invest in technical capacity building of commercial banks in business appraisal of climate smart investments and assessing the risk of FPOs and agricultural businesses, which will in turn support the business models of participating banks, who can then replicate their products and services to other regions. These investments are expected to enhance the confidence in both participating banks and farmer groups in engaging in business transactions and to crowd-in future private sector financing into the agricultural sector in NTT.

D. Supporting documents submitted (OPTIONAL)

☐ Map indicating the location of the project/programme

☒ Diagram of the theory of change

☐ Economic and financial model with key assumptions and potential stressed scenarios

☒ Pre-feasibility study


☐ Evaluation report of previous project

☐ Results of environmental and social risk screening

Self-awareness check boxes

Are you aware that the full Funding Proposal and Annexes will require these documents? Yes ☒ No ☐

• Feasibility Study

• Environmental and social impact assessment or environmental and social management framework

• Stakeholder consultations at national and project level implementation including with indigenous

people if relevant

• Gender assessment and action plan

• Operations and maintenance plan if relevant

• Loan or grant operation manual as appropriate

• Co-financing commitment letters

Are you aware that a funding proposal from an accredited entity without a signed AMA will be reviewed but

not sent to the Board for consideration? Yes ☒ No ☐

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