Executive summary
Getting water resources management right, underpinned with appropriate financing mechanisms, is a prerequisite for realising Indonesia’s ambitious national economic growth agenda to become one of the top five global economies by 2045. After all, flood damage and inadequate access to clean water supply and sanitation can curb economic growth.
In the last decades, Indonesia has achieved impressive results in increasing access to improved water supply. However, important challenges persist to deliver high-quality services to all users across the country. Some of the barriers to delivering water supply and sanitation services are the financial and operational distress of water services providers, coupled with limited opportunities for generating revenues. The first prerequisite to unlock commercial finance are operational efficiency and stability of revenue. For water supply services, this translates to efficient water utilities and stable revenue through water tariffs, which could be achieved through the following recommendations:
The current discussion on a nationwide, uniform water tariff may be a breakthrough in securing a stable revenue stream and setting tariffs at cost recovery levels. Moreover, it may reduce water supply inequalities between urban and rural populations, and between islands, when it concerns a uniform tariff for bulk water. However, it could equally pose a greater threat to the sector when service providers lose a price-incentive that drives their performance, or when the system of cross-subsidisation among bulk water service providers is malfunctioning. Introducing a national independent economic regulator that supervises and reviews tariff reforms can address this risk. Systematically increasing tariff collection and creating trust in tap water from water service providers also contribute to securing a stable revenue stream.
Independent economic regulation in Indonesia may be an effective response to some of the challenges in the water sector, including the inadequate the tariff setting process, poor service delivery, fragmentation of roles and responsibilities in the sector and public distrust in drinking water services. Ultimately, it can increase the creditworthiness of service providers and attract finance. Apart from DKI Jakarta, Indonesia does not have an independent economic regulator. Setting up such regulation could build upon and expand existing good practice of annual performance review of the local water supply enterprises (PDAMs).
Limited enforcement of pollution charges and demand management instruments are undermining Indonesia’s water resources, both in terms of quantity and quality. Setting up such environmental charges could contribute to broad policy objectives and increase revenues for operations and maintenance of water systems. In spite of existing regulatory and economic tools for managing pollution, such as wastewater effluent standards, water quality standards and pollution charges, these are underutilised instruments in Indonesia. Implementation, monitoring and enforcement mechanisms need to be strengthened, particularly at local level. Introducing and enforcing abstraction charges that reflect water scarcity and that cover the administrative costs of managing the system can reduce over-abstraction. To reflect Indonesia’s cultural understanding that water should not be sold, charges should not be considered as water sales, but as payments for water supply services. In addition, water allocation regimes or strict enforcement of water permits should be considered.
In addition to strengthening the conventional water financing mechanisms, the Dialogue recommends the utilisation of Land Value Capture (LVC) as an additional source of financing water. Land value capture is the recovery and public utilisation of uplifts in land value that result from public planning and infrastructure investments. Recovered revenues can be used to fund infrastructure for urban water, irrigation and flood protection, including nature-based solutions. LVC can also meet the need for sustainable land use and management and strengthening tax revenues and subnational government fiscal autonomy. The legislative framework for LVC in Indonesia is relatively mature, yet Indonesia still struggles with LVC implementation due to the lack of an enabling framework. The following recommendations can support in rolling out LVC to finance water:
Several LVC instruments can be used to finance water infrastructure. Which one suits best depends on the characteristics of the infrastructure and the local development context. Promising instruments in the context of Indonesia’s water infrastructure development are developer obligations and charges for development rights, land readjustment, infrastructure levies and LVC through expropriations and the strategic management of public land.
The enabling framework and local government capacity for LVC still needs to be strengthened for proper implementation. This includes the capacity to manage the development and monitoring of spatial planning and land-use regulations, define and negotiate with affected landowners and developers, and determine the specific implementation rules for LVC instruments. Second, maintaining accurate and detailed land registries is a crucial prerequisite, particularly outside of Jakarta. Also, land acquisition legislation may need to be reformed, to clarify rules for landowner compensation and settlement procedures, with the aim to reduce legal disputes and streamline LVC proceedings for water infrastructure.
Reducing flood disaster risk is a key enabler for growth in Indonesia. In Indonesia, water-related disasters cause economic losses of 2-3 billion US dollars annually. More than 100 million people, about 38% of the population, are exposed to flood risk, and 325 cities and regions are classified as high-risk areas. The number of flood events almost tripled between 2006 and 2017. Non-structural measures cost effectively supplement grey infrastructure:
The integration of disaster management functions is desirable to strengthen the role of a control tower that can manage various disasters in an integrated manner. The disaster response system should be best established for each island. It is not efficient to manage various disasters in one government organisation. While establishing disaster response measures for each department, the roles of individual departments should be adjusted to closely align to those of the central government's control tower. Land use system adjustment is one of the most efficient proactive measure for disaster prevention. It consists of establishing a disaster-resistant land use plan reflecting the likelihood and the degree of impact of a disaster. Based on the experience so far, it is necessary to evaluate the impact by disaster type, focusing on areas vulnerable to disasters.
Flood forecasting is one the most useful non-structural measures for flood disaster mitigation. It combines hydrological and meteorological data collection for flood forecasting, spatial flood forecasting based on flood hazard maps, and artificial intelligence-based flood forecasting. The process of flood hazard mapping and how the flood hazard maps are utilized in Korea are offered as a source of inspiration. A hybrid approach for accurate river flow forecasting that combines a physical hydrodynamic simulation model and a deep learning model is recommended.
Adaptation to climate change can minimise the burden on both human and nature by activating non-structural measures. Early warning systems are one of the core frameworks initiated by many international organisations. In this regard, the ICT-based smart early warning system is recommended to realise “last mile or must have” more effectively. In addition, it is recommended to increase the efficiency of water resource and disaster risk management by integrating water-related information systems that are dispersed among various ministries and agencies in Indonesia. ICT-based cloud computing technology can be an efficient solution for Indonesia.