Forest cover, fiscal transfers, and performance audit: connecting the two value chains for forest finance in Indonesia

As global efforts increasingly focus on identifying effective ways to assess and monitor forest biodiversity and ecosystem outcomes, a growing need has emerged to understand how financial allocation mechanisms and monitoring systems together influence these outcomes. This paper examines forest cover as a central outcome indicator at the intersection of two major value chains for forest finance (that is, fiscal transfers and performance audits) with Indonesia serving as the primary case study. It proposes a comprehensive framework to clarify the connections between these value chains, emphasizing how varying definitions and classifications of forests shape the selection of monitoring metrics and their broader implications for forest outcomes. To demonstrate the framework’s practical application, the paper reviews the first value chain of forest finance: Indonesia’s fiscal transfers that use forest cover as an indicator, which mobilized USD 4.8 billion between 2023 and 2024 for forested subnational jurisdictions. It then examines the second value chain of forest finance: performance audits of forest public finance in these regions, conducted according to environmental auditing standards set by the Supreme Audit Institution to reinforce accountability and transparency in financial flows. The paper further highlights areas for improvement, particularly concerning functions designated for purposes other than forests. In these cases, existing metrics in fiscal transfer and performance audit alike may be inadequate for capturing forest conservation performance. The discussion then explores how more effectively integrated value chains for forest finance can drive improved outcomes for tropical forests, directly responding to the World Biodiversity Forum (WBF)'s call for better indicators and robust impact metrics. These insights are highly relevant to emerging transformative finance schemes, such as the Tropical Forest Forever Facility (TFFF) for Indonesia and other forested nations. Notably, they offer an integrated mechanism to assess both the implementation gap in forest finance and the (in)effectiveness of process-based metrics used in this domain.