INDONESIA RISING. Policy Priorities for 2010 and Beyond 53482 Creating World-Class, Competitive and Liveable Cities Key Messages Trends suggest Indonesia's already rapid urbanization will accelerate. The cities that emerge from this process will determine Indonesia's economic competitiveness. It is critical to create cities that drive investment, innovation and productivity by increasing critical investments in infrastructure, the provision of basic services, and enhancing institutional capacity. A realistic approach to creating such cities begins by strengthening the role of major metropolitan areas as drivers of economic growth and global competitiveness by doing what it takes to turn Jakarta and Surabaya into world-class cities. Key Action 1. Increase investment in large-scale infrastructure. Regional and metropolitan transportation. Improve intra- and inter-city transportation to reduce transport costs. Improve the efficiency of freight handling at sea- and airports. Flood mitigation. Expand efforts to control and mitigate the effects of flooding by building on existing initiatives within local governments in Jakarta and Surabaya. 2. Improve the quality of and access to basic services. Low-cost housing. Increase the supply of and access to affordable low-cost housing for the urban poor. Slum upgrading. Develop a National Slum Upgrading Strategy to address the proliferation of slums. Solid Waste Management (SWM) and Water Supply & Sanitation. Develop comprehensive SWM systems including sanitary landfills, recycling programs, public trash collection and hazardous materials handling. (Sustainable water supply and investment programs for municipal sewerage systems are addressed in a separate Policy Note. 3. Encourage institutional development. Local government capabilities. Strengthen local government institutions to enhance urban management and planning, and improve expenditure management. The central government should promote policies that encourage agglomeration economies and boost urban productivity. Population densities vary greatly across the country. Where Indonesia Stands Now Roughly 90 percent of the population lives on the islands of Java and Sumatra: most of the former is already Indonesia's urbanization rate increased rapidly from classified as urban. Figure 2 resizes Indonesia's map 17 percent to 48 percent between 1971 and 2005. It is based on population. It shows that population is highly estimated that the number of people living in urban areas concentrated in Java and Sumatra islands, which together will have grown to roughly 127 million by 2010, compared dominate the country's economic activity. to 20 million in 1971. Besides natural population growth, urban-rural migration and the reclassification of urban Economic activities and population are concentrated in areas are also factors in this growth. Indonesia is roughly major urban areas and in non-oil-producing provinces. 50 percent urbanized, a figure that is expected to increase Figure 3 illustrates how GDP is highly concentrated in Java. to 68 percent by 2025 (Figure 1). When juxtaposed with Figure 2, it illustrates the positive correlation between population density and economic activity. 2 | INDONESIA RISING Major urban areas with high per capita GRDP (Gross Figure 1. Urban, Rural and Total Population Projections, 1950-2025 Regional Development Product) and large populations, 300,000 such as Greater Jakarta and Greater Surabaya have experienced high growth. The urban population of West Rural Urban Java, Daerah Khusus Ibukota or DKI Jakarta, and Banten Total 225,000 is currently about 60 percent, and is expected to exceed 80 percent by 20251. Although it represents just seven percent of the total land area, Java is home to 59 percent of the 150,000 population, contributes 61 percent of the country's GDP and 67 percent of total household spending2. 75,000 When managed properly, urbanization presents opportunities for economic growth, agglomeration, 0 and competitiveness. One of the key challenges is strengthening local government institutions to enhance urban management and planning and improve expenditure Source: United Nation's World Population Projections, 2007 management. Conversely inconsistencies among governments in budgeting, spatial planning create missed problems and missed opportunities especially around City Figure 2. High Population Density in Java Island Spatial Plans (Rencana Tata Ruang Wilayah or RTRW) and Detailed Spatial Plans (Rencana Detail Tata Ruang Kota or RDTRK). The central government lacks clear and comprehensive urban development policies and there is no single umbrella regulation or lead agency to integrate and manage urban development. Ambiguity, overlaps and a lack of coordination in the roles and responsibilities of various sectoral institutions add to the challenges. Major metropolitan areas are unable to meet the demand Source: World Bank, World Development Report 2009 for basic services because of the lack of infrastructure investment. Administration costs are local government's Figure 3. High Economic Density in Java Island largest expenditure, crowding out spending on basic services including infrastructure3. Urban areas face a housing backlog despite providing 800,000 new housing units annually. Traffic congestion has increased with 43 percent of the road network in Java congested with this expected to increase to 55 percent in 2010. Water utilities only serve 14 percent of the population and less than two-thirds of the urban population has access to sanitation including a high proportion connected to septic tanks. Policy Priorities for a Rising Indonesia Jakarta and Surabaya would become world class cities by boosting economic growth and improving financing, increasing the investment in infrastructure, providing access to basic services such as low-cost housing and slum Source: World Bank, World Development Report 2009 1 Indonesia Development Policy Review, World Bank, 2009 2 World Development Report, World Bank, 2009 3 Public Expenditure Review, World Bank, 2007 Policy Priorities for 2010 and Beyond | 3 upgrading, and encouraging institutional development4. slum areas. Comprehensive reviews need to be carried This Policy Note identifies three of these as critical policy out to clarify the role and authority of each national priorities for Indonesia. ministry in such a program and define how national and local government levels can coordinate. Invest in Large-Scale Infrastructure Provide low-cost housing for the urban poor. Housing Improve efficiency and expand urban transportation construction falls well short of the government's systems. The growing urban population is straining already-conservative official policy objective of bringing the ability of local governments to manage economic on-stream 800,000 new dwelling units each year. development and to adequately deliver urban transport This has led to the continual proliferation of informal services. Total paved roads increased by 28 percent housing areas: two-thirds of housing production is now between 1998 and 2005, while the number of motor informal. It is estimated that between 13 million and vehicles (per 1,000 population) increased by 80 percent, 14 million housing units are presently substandard. resulting to increased congestion. Freight transport in As Indonesia continues its vibrant urban growth, the particular needs to be improved to ensure that suburban share of formal housing construction needs to expand factories and industrial estates are easily accessible. substantially. Much of this expansion should take place Urban public transport systems like additional bus lanes through formal, market-driven housing production. and monorail mass rapid transit also need to be built or Improve solid waste management (SWM) and expanded to help alleviate traffic congestion. water supply & sanitation services. Using Jakarta Strengthen flood mitigation measures. The impact and Surabaya as pilot projects develop comprehensive of the high intensity rainfall Indonesia experiences is SWM systems, including the siting and provision felt most in metropolitan areas with large populations. of sanitary landfills, recycling programs, public trash Many rapidly growing urban centers have not collection and hazardous materials handling. As developed appropriate flood control systems, are unable outlined in a companion World Bank Briefing Note to ensure the water supply during the dry seasons, regarding Water & Sanitation, there is a need to and lack suitable environmental sanitation conditions. develop sustainable water sources for metropolitan Jakarta is the prime example of urbanization in lowland areas, expand wastewater treatment collection and areas and within river basins that has resulted in major treatment facilities, and strengthen the institutional resource management challenges, including perennial capacity of water and wastewater service providers. flooding of vast areas of the city. Severe flooding has becoming more frequent as evidenced by the occurrences in 1996, 2002, and February 2007. The Encourage institutional development 2007 flood inundated 60 percent of the city (up to Foster the competitiveness of cities by strengthening seven meters deep in some areas), displaced 340,000 institutional capacity. In large metropolitan areas, local people and affected the lives of more than 2.6 million governments need to better coordinate their actions to people resulting in economic costs of upwards of promote agglomeration economies and higher productivity. US$900 million. Given its enormity, this recurrent issue Individual sectoral actors require strengthening and requires government attention. cities need to better manage urban development. Finally, Indonesia needs at least one and probably two world- class cities ­ Jakarta and Surabaya ­ to serve as centers for Improve access to and the quality of basic advanced business and investment services. services Scale-up slum upgrading programs. Despite the relative success of slum upgrading projects in many of How The World Bank Can Help Indonesia's urban areas, these initiatives are limited and have not kept pace with the growth of informal slum settlements. Consequently, environmental conditions Investment in Large-Scale Infrastructure Urban transportation systems. The World Bank in the country's urban slums have deteriorated and the supports improvements to the capacity and quality increased demand for infrastructure services for the of strategic national roads on the islands of Java and urban poor continues to be a challenge. A National Sumatra by improving and expanding intra- and inter- Slum Upgrading Strategy needs to be developed city road systems. The project also improves road safety detailing an approach to address the proliferation of and increases the efficiency, quality and transparency of works procurement and implementation by the 4 Transforming Mumbai into a World Class City, McKinsey & Co., Ministry of Public Works. 2003 4 | INDONESIA RISING Flood mitigation. The World Bank is working with Water supply. As outlined in the Water and Sanitation the government on the Urgent Mitigation for Jakarta Briefing Note, the World Bank is supporting the Flood Control Project that incorporates actions aimed government's efforts to develop sustainable water at sustained flood mitigation to improve the livability sources for metropolitan areas including exploring the of Jakarta. use of output-based disbursement (OBD) modalities. Trust funded and global partnership programs like the Water and Sanitation Program (WASAP) will continue Improved Access to and Quality of Basic to help local governments plan and implement Services sanitation, water investment and water resource Slum upgrading. The World Bank is helping the management programs. Ministry of Housing and BAPPENAS to develop an overall policy for slum upgrading in consultation with stakeholders, and is exploring ways to scale-up Institutional Development slum upgrading programs within local governments by Local government capacity and coordination. The World integrating slum rehabilitation and self-help housing Bank is currently working with the government to analyze into the local planning process. the impact of urbanization and assess the major constraints Low-cost housing. The World Bank is supporting the to managing growth. The analysis includes institutional framing of a new housing strategy that reforms the coordination issues between government agencies at the existing housing policy, strengthens institutions and national and sub-national levels. delivers low-cost housing for the poor. The strategy will also improve the land supply, low-income housing subsidies and development of mortgage markets. The World Bank Office Jakarta for more information, please contact: Indonesia Stock Exchange Building Tower 2, 12th floor Mr. Peter D. Ellis Jl. Jenderal Sudirman Kav. 52-53, Jakarta 12190, Indonesia Senior Urban Economist ph. + 62 21 5299 3000 | fax. + 62 21 5299 3111 pellis@worldbank.org http://www.worldbank.org/id Investing in Indonesia's Institutiond for Inclusive and Sustainable Development