Financing Urban Infrastructure in Indonesia: Challenges and Solutions

1. International Conference on Sustainability Science in Asia November 23-24, 2009 AIT Conference Center Research and Experiences on Financing Urban Infrastructure in Indonesia Ibnu Syabri Research Center for Environment, Regional Development, and Infrastrucure Institut Teknologi Bandung, Indonesia

2. Outline • Rationale and Context, and Objectives of the study • Challange for Financing Urban Infrastructure In Indonesia • The Framework: Role of Infrastructure in Poverty Reduction and Property Value Rise • (Research) and Experinces on Financing Urban Infrastructure in Indonesia • Value Capture as an Alternative Source of Funding • Some Examples • Conclusion ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

3. Rationale and Context, and Objectives ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

4. Rationale and Context • Major Infrastructure Problems: • Roads in and around major cities are heavily congested, public transport underdeveloped, and water supply networks are in poor condition (Syabri et al., 2007). • New urban developments have remained limited to restricted areas or only profitable land-uses such as real estate development, high-income apartments and shopping malls. • Pro-poor land-uses such as decent water supply, public transport or low-income housing are underdeveloped. • At the same time, essential funding capacities to deal with these problems are limited. ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

5. Rationale and Context (2) • Indonesia is lacking stable funding and capacities for infrastructure projects such as urban public transportation and water supply. • Now, at a time when investment capacities in the private sector have slowly recovered from the financial crisis at the end of the 1990s, a unique possibility comes to light here, aimed at anticipating land-value increase from infrastructure development to actually finance, through value-capturing, a range of developments, including public transport. • The problem is, however, that the application of value capturing is constrained by a lack of knowledge, ability, and institutional support. • The study project examines how largely unexplored instrument in Indonesia can help raise revenues for the finance of infrastructure investments in Indonesia, particularly in the field of public transportation. ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

6. Objectives • explores – based on evidence of various international empirical studies and on some information of recent research in Indonesian cities – the relation between infrastructure development and land values, answering the question ‘how much value, in principle, can be captured?’ • investigates possible policy instruments for value capturing. It will be argued that the legal instruments for value capturing that are used in mostly developed countries (e.g, UK, particularly in the USA) hasn’t been used in the Indonesian context. ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

7. Challange for Financing Urban Infrastructure In Indonesia ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

8. Urban Sector in Indonesia • 50+% of the total population resides in Urban areas (2008) • Cities: engines of productivity and growth; urban sector contributes to ~70% of Indonesia’snon-petroleum GDP • Agglomeration Benefits • Economic Opportunity • Absorbs rural-urbanmigration • Catalysts/Innovators/Incubators ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

9. Global Infrastructure Needs are Tremendous Access Needs ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

10. Investment Needs for Infrastructure in Indonesia Infrastructure Annual Investment Needs 2005-2010 Annual Funding Gap (US$ 17.8 billion and expected to be sought from Private Sector) Government’s ability has been limited by budgetary constraints. Current economic circumstances dictate the need to resort to private sector participation 4 – 5 % Of GDP 7 – 8 % of GDP Average Central and Local Government Budget Allocation (US$ 4.2 billion) 3 % Of GDP Average Annual Investment Needs (US$ 22 billion) ICSS-ASIA AIT-Bangkok 23-25 Nov 2009 Source: Minister for Infrastructure and Regional Development, Indonesia

11. Challanges for Urban Management (1) • Population pressures – poverty & slums • Urban Poverty: Roughly, there are 33 million poor in Indonesia. About 35 per cent of them live in urban areas. • Rural to urban ‘migration’ (non-permanent migrants) especially to the fringe areas. e.g., rate of annual population growth Jakarta City was only 0.16% over the period of 2000-2005, but rate of population growth in cities in the adjacent areas was much higher. (doughnut phenomenon, mega-urbanization) • Urban infrastructure service provision: Lack of urban infrastructure and public services, including clean water, shelters, drainage, public transportation, electricity. • Water & sanitation: >100 million Indonesians (33% urban households) don’t have access to piped water and adequate sanitation (2008) • Solid waste management: only 2% of waste is recycled; only 40% transported to disposal site (2008) • Transport & traffic management: mobile-source pollution; increasing congestion limits economic growth • Environmental problems in Indonesia’a large cities: including air pollution, floods, land subsidence, lack of green space, sea water intrusion etc. ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

12. Challanges for Urban Management (2) • ‘Social polarization’ (fragmentation) reflected in the settlement patterns in large cities. Disparities between middle and high-income group settlements with ‘slum areas’ of the city poor. • Disparities between large and smaller cities development (Regional Perspective). • Nearly 60% of direct foreign investment and 30% of domestic investment in Indonesia’s manufacturing sectors are located in Jakarta Metropolitan Area (JMA). • The proportion of urban population of JMA over the total Indonesia’s urban population have reached more than 20% by 2005. • Low level of local government capacity to manage urban development, in terms of institutions and expertise • Urban development governance does not work well yet: • lack of stakeholders participation. • weak law enforcement • weak accountability ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

13. Changing Context From ‘Authoritarian’ Government to Regional Autonomy and Decentralization, What are the impacts?: • The local government (Cities / Districts) have more discretion to decide development program (during Suharto’s era, the New Order Regime, the local government simply only implemented the central government instructions). • The local government have more sources of revenues (e.g, central government transfers: Block Grant, Revenue Sharing, and Special Grant). • Many local government leaders consider their region (Cities / Districts) as their own ‘Kingdom of Authority’ (‘regional egoism’ which make integrated urban and regional infrastructure development even more difficult to do) ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

14. Central and Local Spending on Infrastructure as % of GDP Decentralization assigned Infrastructure sector functions to local governments with little experience Central Local ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

15. Challenges Ahead (1) • Impacts of Global Economic Recession: • Decreasing local governments own income, resulted in declining public services; maintenance of urban infrastructure; and increasing the urban poor. It might reach its peak in 2010. • Local governments are often promised revenue transfers from the central government but fail to receive the revenues when national tax revenues are tight. ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

16. Challenges Ahead (2) 2. Impacts of Climate Change (e.g., sea-level rise, changing precipitation pattern) affect: • coastal cities and regions, which are more vulnerable to disasters, including floods, and storm. It has happened in Jakarta, (40% of landed area of Jakarta City is below sea-level), Semarang, north coast of Java, and coast of Marauke. • A large number of Indonesia’s poor live in the coastal area. They are vulnerable to disaster, such as Floods. ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

17. The Framework: Role of Infrastructure in Poverty Reduction and Property Value Rise ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

18. The Connecting Role of Infrastructure: Poverty Reduction Infrastructure both impacts directly on poverty through services, and supports the processes of growth on which much poverty reduction depends. And at its best, infrastructure draws poverty reduction, service provision and growth into a reinforcing cycle: ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

19. The Connecting Role of Infrastructure: Property Value Rise Similarly, infrastructure both impacts directly on values of property through better services, and supports the processes of growth. And at its best, in urban area infrastructure support land development, service provision and growth into a reinforcing cycle: ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

20. Infrastructure Impacts on Urban Area ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

21. (Research) and Experienceson Financing Urban Infrastructurein Indonesia ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

22. Financing Urban Infrastructure • Financing of urban infrastructure in Indonesia is primarily through budgetary allocations of central, state and local government, grants and loans from multilateral or bilateral agencies or through institutional lending. ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

23. Financing Infrastructure Services • Governments, donors, and the private sector are funding sources for infrastructure facilities • Government and internally generated private funding ultimately are drawn from the same domestic resources. • Donor resources or externally generated private-sector funding come from outside Indonesia. • These external resources have the greatest economic effect when domestic resources are unavailable. ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

24. Major Infrastructure Problems • Roads in and around major cities are heavily congested, public transport underdeveloped, and water supply networks are in poor condition (Syabri et al., 2007). • New urban developments have remained limited to restricted areas or only profitable land-uses such as real estate development, high-income apartments and shopping malls. • Pro-poor land-uses such as decent water supply, public transport or low-income housing are underdeveloped. • At the same time, essential funding capacities to deal with these problems are locked in profitable projects. ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

25. Value Capture as an alternative source of funding ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

26. Idea of Value Capture • Public investments in infrastructure for transport are often result in increased land and property values in nearby areas. • The construction of a railway link, for example, will improve the attractiveness of surrounding locations. Generally, investments in new infrastructure improve accessibility and property values. • This link between infrastructure investments and property values offers a legitimate opportunity for public agencies to negotiate with property developers to finance part of the infrastructure costs or take on added, usually non-profitable projects. • Value capturing in essence is an approach where land value increments are partly recouped by the public sector (Smolka, 2000). • Public agencies capture a portion of development profits, or require from the developer to take care of some additional projects. ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

27. Mobilazation of land Value Capture Increment • Rural-urban conversion • Selling of building rights • Urban infrastructure provision • Land readjustment ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

28. Schema for Structural Relationships of Value Capture ICSS-ASIA AIT-Bangkok 23-25 Nov 2009 Source: T-IMPROVE Methodology, 2004

29. Lesson Learn ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

30. Seoul Seoul: Freeway Removal-Stream Restoration, Cheong GyeCheon Greening Central Seoul: Thermal Intensity in CBD Temperature down by Average lowering 2%~5% ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

31. Marginal Effects of Freeway vs Greenway on Commercial Land Price ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

32. Value Capture: Jakarta’s Experience Jakarta’s Betterment Tax(Pajak Khusus): Promotes “equitable” financing Curb speculation Dilemmas: Land registries incomplete Lax administration/enforcement Non-compliance … without sale, no $ ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

33. Jakarta Infrastructure Investments as Growth Magnets (Cervero et. Al) ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

34. Accessibility IndexMetric of “Cumulative Opportunities” AIj = Si [Resi * Dij-.5] Resi= residents zone i Dij = Network distance (kilometers) between centroids of zone i and j ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

35. ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

36. ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

37. Bandung Metropolitan Area (BMA)Uplifting Value around Train Stations ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

38. The Studi Area ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

39. Sustainable FinanceBandung R+P (Retail+Property) • 17 Km, 8 stations with 1 R+P (Retail and Property) program • 37.3 % of all Public Transport Trips in Bandung • Indonesia’s Densest City ( 30,000 persons/km2) ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

40. Affected Areas ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

41. Land Use Map of Bandung Station ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

42. Project Objectives (1) • To reduce the number of cars, buses, microbus to downtown Bandung (CBD), thus relieving the downtown area and reducing the total transit time. • To improve the various means of transportation, so travellers can change modes of transportation easily as an encouragement to use the various means of transportation available and thus take advantage of faster, safer, more comfortable transportation. • The train, or LRT, will be the preferred means of transportation available to the traveller, as it is fast, comfortable and safe, and capable of carrying a much higher number of people than microlets or buses. ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

43. Project Objectives (2) • To assess the potential of each station to become a transportation mode exchange which will depend on ease of access, architectural quality, and degree of attractiveness of the environment. • To rate stations, so as to propose an initial network of the city to which various modes of transportation will connect, with emphasis on the stations best suited for exchanges between train and buses. • To assess the financial cost of the modification of the stations to permit access to the new trains, the development of the spaces in front of the station to park buses and other modes of transportation, and connections of another mode of transportation with the train. ICSS-ASIA AIT-Bangkok 23-25 Nov 2009

44. Financing Infrastructure in Indonesia: Conclusion • Infrastructure is one of key tools to economic development • The other side of decentralization, it provides best opportunities to dothis because of closeness of decision makers toconsumers – accountability & sensitivity • To exploit benefit potential, need proper financialand tariff schemes • “Don’t just fix the pipes, also fix the institutions that fix the pipes “ ICSS-ASIA AIT-Bangkok 23-25 Nov 2009