THE EFFECTIVENESS OF PUBLIC VERSUS PRIVATE FINANCING IN FUNDING

SUSTAINABILITY EFFORTS

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Southeast Asia is one of the few world regions that has consistently registered a spectacular economic performance in the past thirty years. Despite the severe economic setbacks experienced globally during the COVID-19 pandemic period, coupled with the slow economic recovery that characterized the post-pandemic period in different economies worldwide, the economies in Southeast Asia reported a robust performance in the fourth quarter of 2023. Nevertheless, this fast economic growth in Southeast Asia has fostered a prevalence of critical environment-related sustainability issues in these economies that threaten to disrupt the subregion's positive economic growth trajectory if it does not urgently transition to a sustainable economy. The uniqueness of the Southeast Asia economies makes them an interesting case study with regard to the debate on whether a country's reliance on public financing (government budget) is sufficient to ensure a sustainable economy or whether a sustainable economy can only be realized if public financing is supplemented by private financing. Under appropriate conditions, having a blend of public and private financing achieved through public-private partnerships is the most effective way to transition to a more sustainable economy because it counteracts the shortcomings of using either of the two types of financing on their own to achieve the same goal.

Description of Economic Sustainability

A sustainable economy is crucial to the well-being and progress of citizens of any country. Economic sustainability describes practices or initiatives that foster long-term economic growth without negatively impacting the environmental, cultural, and social aspects of an economy (Solin 1). Its crucial role in ensuring the sustainable posterity of a nation is the reason why maintaining a sustainable economy that adequately satisfies the instrumental and impersonal needs of citizens is among the primary mandates of any democratically elected government.

Therefore, a sustainable economy is essential to the well-being of today's citizens because it allows them to meet their present economic needs without diminishing the capacity of future generations to meet their economic needs.

Economic State of Southeast Asian

Southeast Asia economies are ranked as the fastest-growing and strongest-performing in the world. The region’s largest economies are Indonesia, Malaysia, the Philippines, Singapore, Vietnam, and Thailand, while smaller economies include Brunei Darussalam, Cambodia, Lao PDR, Myanmar, and Timor-Leste (ADB 178). Together, these eleven countries form the Association of Southeast Asian Nations (ASEAN), a subregional economic unit aimed at fostering economic unity (Denson para 3). ASEAN collectively represents the world's fifth-largest economy (Denson para 3).

These figures present Southeast Asia as an economically thriving region despite disparities in the sizes of the economies and levels of economic development of the countries making it up.

The Environmental Impact of the Growth in ASEAN

Despite these impressive economic performance figures, southeast Asian economies have had to trade off economic growth for environmental values. The drastic economic boom in this subregion has benefited it by lifting millions out of poverty, improving their standards of living, reducing unemployment, and advancing their countries to higher levels of economic development.

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air quality despite being among the most economically advanced economies in the region (Yunus para 3). The pervasive environmental degradation brought about by rapid economic growth in Southeast Asia without regard for natural resources depletion and the cost to the environment has made its economies vulnerable to climate change effects and threatened its positive economic growth trajectory.

The demand for additional infrastructure in Southeast Asia is also the unintended consequence of the drastic economic growth experienced in the subregion. This growth has led to a population explosion and increased urbanization, creating the need for infrastructural expansion to accommodate the new social changes (ADB para 5). Unfortunately, due to the fiscal strains experienced by most Southeast Asia governments, their budgets have been unable to fill the ever-widening infrastructure financing gap.

The Need to Transition to a Sustainable Economy

A transition to more green and sustainable economies will help to fuel ASEAN economies’ continued economic growth. This is because the majority of these economies are sustained by nature-related activities like energy production, the agri-food sector, mining, water, and waste management (OECD para 4). Therefore, embracing economic activities centered on sustainability measures will reduce the ASEAN economies’ vulnerability to climate change effects, which could adversely impact their core industries. A sustainable economic model’s emphasis on environmental conservation efforts and efficient use of scarce natural resources will create new opportunities to boost Southeast Asia economies by creating new jobs and increasing the efficiency and productivity of existing industries.

Anticipated Consequences of the Transition

However, a transition to a green economy will come at a great cost to various sectors of

Southeast Asia, which are heavily reliant on fossil fuels and are centered on activities with large

carbon footprints. Some of the sectors that are likely to be adversely impacted by this shift at the

outset are the energy, mining, water, and waste management, transport, and agri-food sector—“

food value chain: agricultural production; food and beverage (F&B) manufacturing; and F&B

distribution (including wholesale, retail and hospitality services)” (OECD para 4; Oxford

Economics 4). Notably, in 2021, the agri-food sector accounted for 31% of Indonesia's GDP,

25% of Thailand and Malaysia's, and 32% of the Philippines' domestic gross product (GDP) (4).

On the other hand, three-quarters of Southeast Asia's total energy is produced from fossil fuels,

mostly coal (OECD para 4). Fossil fuels are a leading cause of greenhouse gas emissions.

A transition to a green economy will demand a replacement of fossil fuels with

alternative clean energy sources. Moreover, costly sustainability efforts aimed at reducing the

carbon footprints of the mentioned industries will impact their profitability. This means that most

employees in these sectors will lose their jobs or will have to undergo upskilling at their

employer’s or their own costs to secure their sources of income. Moreover, companies in energy-

intensive industries will either have to adopt sustainable economic practices or go out of

business.

Inadequacy of Public Financing in Supporting the Transition

Since the COVID-19 pandemic, Southeast Asia has been grappling with a strained fiscal space despite registering a strong economic performance. The budgetary strains experienced by Southeast governments emanate from three areas. A rise in external debt in recent years has led to budgetary constraints in these economies. In Indonesia, the foreign debt reached $ 407.1 billion, marking a 2.7 increase in the fourth quarter of 2023 ( Baskoro para 1 ). This increase in external debt is attributed to the substantial decrease in the country's currency value experienced since the pandemic period. The global increase in interest rates has caused further fiscal constraints on the budgets of these economies by increasing interest expenses on external debt.

The substantial government expenditure on safety net programs during the pandemic period also resulted in significant fiscal deficits. These fiscal deficits remained high in the post-pandemic period to support economic recovery efforts ( Sehgal para 2 ). Another intervention in Southeast Asia's economies is the government subsidies aimed at reducing domestic inflationalary pressures ( Sehgal para 2 ). The three highlighted areas, coupled with other financial commitments that Southeast Asian governments have to meet for the smooth running of their economies, reduce the likelihood that public financing alone will sufficiently fund sustainability efforts.

Indonesia's Case

Environmental crisis in Indonesia

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The impressive economic growth experienced in Indonesia over the past five decades has come at a great cost to Indonesia’s environment. Presently, it is one of the ASEAN countries facing the worst form of anthropogenic pressures and environmental degradation (Yunus para 1).

Indonesia’s declining environmental quality has resulted in ecological disasters, a surge in severe fires, flooding, and intense air pollution, especially in densely populated areas.

The negative consequences of environmental degradation have led to an economic crisis.

For example, the 2015 and 2019 wildfires cost the country a loss of $ 16.1 billion and $ 5.2 billion, respectively (Yunus para 2). Air pollution in Indonesia's urban areas, whose negative externalities extend to neighboring countries like Singapore and Malaysia and go as far as Southern Thailand, has cost the country about US$2.1 billion, nearly 8,100 deaths, and a myriad of public health problems (Yunus para 3). Indonesia’s dire situation calls for urgent intervention to avert an environmental crisis and a subsequent economic meltdown.

Despite having a robust and thriving economy, Indonesia grapples with a considerable funding gap in sustainability efforts. A report titled "Indonesia SDG Roadmap 2019" established that the country required USD 4.7 trillion to realize its Sustainable Development Goals (SDG) by 2030 (UNDP para 3). This figure has increased since the pandemic period. Additionally, Indonesia requires approximately USD 322 billion to attain its climate change targets by 2030 (UNDP para 3). With a strained fiscal space, the other option is for Indonesia to turn to private financing so as not to default on sustainability initiatives.

Indonesia's budgetary constraints are grounds for supporting the view by numerous policy practitioners and scholars that public financing is inadequate, hence the need to supplement it with private financing to cover the funding gap in the transition towards a more sustainable economy. According to the Finance Earth report, approximately $845 billion is

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required annually to finance environment-centered sustainability efforts (Finance Earth 5). Presently, the annual expenditure is only $ 134 billion (Finance Earth 5). The annual financing gap cannot be met by philanthropic and public funding alone, but an infusion of private funding in this sector will go a long way in narrowing this financing gap.

Over the years, the financing landscape of Indonesia has evolved from a reliance on domestic public funding as its primary source of financing to one dominated by domestic private funding. In 2015, private funding accounted for nearly half of the resources available in Indonesia. This was a 31 % increase from the figure recorded in 2007 (UNDP 12). This figure has risen substantially ever since. Despite these changes in the country’s financing landscape, addressing the sustainability problem remains an evasive issue.

Several challenges explain why public financing alone has failed to address Indonesia’s sustainability issue. First, public funds face competitive priorities that are important to the economy. Therefore, the amount allocated for sustainability efforts is understandably not sufficient to foot the high initial cost of sustainability efforts (OECD para 5). The sustainability efforts are high because they involve investments like the development of new infrastructure, a complete overhaul of industries that are critical to the country's economy, investment in human capital to get relevant skills to support a green economy, and increased investment in social safety net programs to support persons that will be directly affected by a transition to a sustainable economy.

Second, politicians in Indonesia have failed to raise above partisanship to support the fight against climate change. Handoko et al. note that discussions regarding environmental issues, namely, counterproductive mining policies, deforestation, and unsustainable grinding of sea sand and mollusk, among other destructive economic activities, are frequently covered by the by the

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Indonesian mass media. However, these discussions are conspicuously absent in political debates, as well as the party missions and visions. This contrast is an indication of a lack of political will to support sustainability efforts among the political elite in Indonesia. This tepid attitude towards environmental issues has led to the enactment of ineffective policies to fund and support sustainability efforts, which has led to consistent sustainability financing gaps.

Another factor is the susceptibility of public finances to graft, diversion, and mismanagement. Government officials tasked with managing public finances meant for sustainability efforts (mostly politicians) may be incentivized to divert these funds to other areas or for their personal use to seek reelection (Yunus para 5). They may also seek to use the funds to finance ephemeral fixes instead of financing long-lasting solutions. These practices derail the sustainability efforts.

These shortcomings notwithstanding, public financing in Indonesia has significantly contributed to the transition to a more sustainable economy. For example, to show its commitment to the bold ambition of becoming a net-zero emission country by 2060, Indonesia invested in new infrastructure to support its growing population and to replace the infrastructure destroyed by adverse weather conditions (ADB para 8). It has also expanded its investments in social safety nets to cushion its citizens against any effects on their livelihood that may occur as the country transitions. This shows that public financing, although not sufficient, is essential to Indonesia's transition to a sustainable economy.

However, private financing is essential to fill the gap in the sustainability financing area.

It is important to note that private financing alone cannot support the transition to sustainability.

This is because nature is a public good. For this reason, private entities that are profit-oriented may not have an incentive to produce and supply it because it guarantees no returns on

investment (UNDP 27]. However, if such entities enter into a public-private partnership with the government, they can be incentivized through subsidies, tax breaks, and a modest return to support sustainability efforts to fruition.

Private financing will inject the much-needed additional funds to adequately fund sustainability projects. The private sector will also bring expertise and efficiency to the execution of these projects (UNDP 28). Moreover, the participation of the private sector in the government's sustainability projects will foster more transparency and accountability from government officials, limiting chances of corruption, mismanagement, or diversion of funds allocated for sustainability projects.

The drastic economic growth in ASEAN countries has come at a great cost to Indonesia's environment. The environmental degradation resulting from destructive economic activities is increasingly threatening not just the public health but also the economic growth experienced in the country thus far. As a result, Indonesia, as well as other ASEAN countries, have no choice but to transition towards sustainable economies despite the huge cost that this shift requires.

However, their vision is derailed by financing gaps due to the insufficiency of public resources to support sustainability efforts. Merging public financing with private financing will help fill this financing gap and, at the same time, overcome the setbacks that could emerge if Indonesia chose to rely solely on one financing system to fund sustainability efforts.

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