Managing freshwater resources is a key priority for Indonesia’s sustainable development and social wellbeing. Challenges posed by floods, land use, water supply and sanitation, and finance, are a barrier to the country's economic growth. A growing population, fast urbanisation and climate change make water management increasingly challenging. This chapter provides key figures on water and describes the state of play of water policy implementation in Indonesia.
Water Financing and Disaster Risk Reduction in Indonesia
Highlights of a National Dialogue on Water
OECD Studies on Water
2. Water resources management in Indonesia
Abstract
The effective and efficient management of water resources and water services remains a challenge for OECD countries and non-OECD countries alike (OECD, 2016[1]). Indonesia is no exception and getting its water resources management right, underpinned with appropriate financing mechanisms, is a prerequisite for realising the ambitious national economic growth agenda.
2.1. Indonesia’s freshwater resources and water-related threats
The Ministry of National Development Planning (BAPPENAS) recognises three strategic issues of water management in Indonesia: water availability, water disasters and water productivity.
Water scarcity is projected to intensify by 2045 due to climate change, land degradation and unsustainable water usage (Republic of Indonesia, 2020[2]). Already in 2016, most of Java, Bali, Nusa Tenggara, Sulawesi experienced water shortages (BAPPENAS, presentation 2022). Water scarcity may hinder economic development as 67% of economic activity is projected to be in water-scarce regions by 2045 (World Bank, 2021[3]). Indonesia ranks among the ten largest groundwater-consuming countries (based on abstracted volume), abstracting groundwater primarily for domestic use (ADB, 2016[4]).
Indonesia is one of the most disaster-prone countries in the world (World Bank and Asian Development Bank, 2021[5]). More than 75% of the country’s disasters are classified as meteorological or hydrological disasters. The frequency of flood events has increased in the past 20 years (World Bank, 2021[3]). Flood occurrence is not limited to a specific area; it is a nation-wide phenomenon. Flood events with a 50-year return period are expected to lead to a decline of GDP by up to 1.65 per cent.
Water productivity is among the lowest in Asia. Around 80 per cent of water is consumed by irrigation, mostly by low-value crops. In addition, water loss in irrigation is relatively high, with almost half of the irrigation system classified as “damaged” (Republic of Indonesia, 2020[2]).
In addition to the three strategic issues of water management, deteriorating water quality is often raised as a threat to water resources. More than half of the country’s rivers are heavily polluted, caused by a mix of activities such as open defecation, poor wastewater treatment infrastructure, expansion of plantations for palm oil, deforestation, and emission of pollutants from agriculture and sanitation (World Bank, 2021[3]). Saltwater intrusion further threatens water quality.
Indonesia faces a high climate risk, ranked 59th out of 191 countries on the INFORM 2019 Risk Index (World Bank and Asian Development Bank, 2021[5]). Figure 2.1 presents several climate-related risks in Indonesia. The country’s projected exposure to riverine and coastal flood risk is one of the highest in the world (ranked 17th). Climate change is also likely to trigger water stress and droughts, although droughts are unevenly spread in terms of intensity (episodes of El Niño-induced droughts, shifting wet seasons) and geography (some regions are more affected than others). Water deficits are projected in regions such as Java, Bali, East Nusa Tenggara and some areas of Sulawesi.
Figure 2.1. Climate risks scores in Indonesia, compared to global average score
Note: 0 - lowest score; 10 - highest score.
Source: World Bank and Asian Development Bank (2021[5]), based on the INFORM 2019 Index for Risk Management for Indonesia
The overall trend of population growth, interconnected with increasing levels of urbanisation, puts additional pressure on the country’s water resources whilst shifting water demands towards urban centres. Population projections range from 292.5 million to 294.1 million people in 2030, and 311.6 million to 318.9 million people in 2045 (Bappenas, BPS and UNFPA, 2018[6]) There is a strong urbanisation trend. At the national level, the urbanisation rate is projected to reach almost 73 percent in 2045. For some provinces, especially provinces in Java, Bali, Sumatera and Kalimantan, the urbanisation rate is higher than the national average. The level of urbanisation will reach above 80 percent in seven provinces, namely Riau Islands, DKI Jakarta, West Java, DI Yogyakarta, Banten, Bali and East Kalimantan (Questionnaire, 2022[7]). Although the proportion of urban population reached above 70 per cent in Java, the rate of urban population growth in Java is relatively low compared to the outside of Java. However, the level of services in many cities outside of Java is less efficient and effective compared to those in Java. There is thus a regional development imbalance of urban-rural or city-village; Java and outside-of-Java; and western and eastern Indonesia (Questionnaire, 2022[7]).
2.2. Water supply to households
Indonesia has achieved impressive results in increasing access to ‘improved water supply’ in the last decades. In 2018, 20.14 per cent of all households in Indonesia had access to piped water supply (Republic of Indonesia, 2020[2]). Important challenges persist to deliver high quality services to all users.
The lack of reliable water supply services pushes users into using groundwater resources. Groundwater abstraction for domestic use is a major issue, with environmental and economic impacts. The effects of groundwater over-abstraction are estimated to reduce GDP by up to 1.42 per cent by 2045. Currently, only 9 per cent of total domestic water demand is provided by water utilities; private groundwater wells are the dominant water source. Even with access to piped water, services are often intermittent. Many urban utilities (PDAMs) cannot provide 24/7 service and service interruptions may last several days (World Bank, 2021[3]).
Discrepancies between bulk water supply and demand poses a challenge to water services providers. Nationwide, 24 per cent of bulk water available for water supply is not used, whilst – paradoxically – only 30 per cent of the total national raw water demand can be provided with current bulk infrastructure. Many water utilities provide intermittent services due to lack of bulk supplies. Concurrently, other bulk water supply systems are not in use as there is no demand (World Bank, 2021[3]). The report will dive deeper into this issue in Chapter 3.
2.3. Land and water
The interconnections between land and water makes water management increasingly challenging. Forests and other ecosystems with important hydrological functions, such as wetlands, peatlands and mangroves, are in decline. It is projected that Indonesia’s total forest cover will reduce from 50 per cent of total land area in 2017 to 38 per cent in 2045 (Republic of Indonesia, 2020[2]). A continuing deforestation trend has an impact on water resources and can worsen water-related hazards such as landslides and water scarcity, and contribute to significant greenhouse gas emissions in the case of peatland losses. Nevertheless, after a peak in 2015, deforestation rates have decreased considerably.
Land is a crucial constraint in water infrastructure development, both in the realm of water financing and in mitigating water-related disasters. First, land acquisition is one of the major obstacles for infrastructure development as it delays project implementation by years or even decades. What is more, land acquisition is a major cost for many water infrastructure projects. Secondly, riparian zones are increasingly developed for agriculture and human settlements. These activities along the river provide opportunities in times of normal flow, but are also a source of exposure and vulnerability to floods and landslides. Lastly, groundwater over-abstraction is a major cause of high rates (approximately 1–15 cm/year, with peaks up to 20–28 cm/year) of land subsidence in cities such as Jakarta (Abidin et al., 2011[8]).
Still, land is a promising resource to finance the country’s water agenda as it is one of the most valuable forms of capital. Utilising even a portion of this value towards infrastructure development, by applying instruments such as Land Value Capture, can help achieve Indonesia’s water resources development plans. Chapter 4 explores this option in depth.
2.4. Policy reforms
The Government has implemented several water management reforms. The reforms include the revisions of the legal and regulatory framework following the promulgation of the 2019 Water Law and the 2020 Omnibus Law. Four draft government regulations on drinking water, water sources, water resource management and irrigation were planned to be adopted in 2021 but the reform process is still ongoing. Once the four regulations are adopted, the Ministry of Public Works and Housing will fill in the details through technical regulations (Questionnaire, 2022[9]).
A National Water Resources Council was established in 2017. The Council is a multi-stakeholder coordinating platform at national level. The Council’s mandate is to provide suggestions and considerations to the President in implementing national-level water resource management policies, as well as coordinating the making and the execution of national policies on water resource management. The Council coordinates the following legal reforms (Questionnaire, 2022[7]):
Formulating the Presidential Regulation on the Water Resources Policy
Formulating the Presidential Regulation on Strengthening and Developing Hydrology, Hydrometeorology, and Hydrogeology System Management Policy
Formulating the National Water Resiliency Index Policy
Lastly, major reforms are ongoing to facilitate the financing of infrastructure, including a regulation on Public Private Partnerships in the water sector and a decree on Land Value Capture. Through the Presidential Regulation No. 38/2015, the public-private partnership framework is expected to help achieve the nation’s infrastructure investment target of USD 429 billion between 2020 and 2024. In addition, the government is exploring innovative financing sources such as the Sovereign Wealth Fund and Land Value Capture schemes. A Presidential Regulation to pave the way for Land Value Capture is under preparation (Questionnaire, 2022[7]).
2.5. Financing water
Natural resources are a backbone of Indonesia’s economy, accounting for more than 20 per cent of GDP and 50 per cent of exports in 2017 and providing the livelihoods of a large share of the population (OECD, 2019[10]). The National Development Planning Agency (BAPPENAS) is aware that water resources can be a limiting factor to the country’s ambition of becoming among the global top five largest economies. BAPPENAS and the World Bank applied a water lens to Indonesia’s economic growth in the report “Vision 2045, Toward Water Security” (World Bank, 2021[3]). This document acknowledges that work needs to be done in the water sector to be able to facilitate the country’s economic agenda, and it provides several ways forward.
Indonesia’s water ambition is supported by a national financing agenda. Indonesia has allocated substantial funding to achieve the water-related targets in the National Mid-term Development Plan 2020–2024 (RPJMN). Water supply and sanitation feature prominently in the RPJMN 2020–2024, which includes national-level targets to increase access to safe water and sanitation, and a specific target to increase the number of household connections to piped water supply (World Bank, 2021[11]; Republic of Indonesia, 2020[2]).
Public expenditure on the water supply sector has increased threefold in real terms over 2001-2016 and now accounts for 1.7 per cent of total national spending for the entire water sector. Yet, Indonesia is among the countries with the lowest spending on water and sanitation, spending 0.2 per cent of the national GDP (2016), which is below the recommended levels for East Asian Countries (0.5%) and the level recommended by the United Nations (1%) (World Bank, 2021[3]). The RPJMN 2020–2024 foresees an investment need of more than US$470 billion in infrastructure, with around 42 per cent coming from the private sector through private public partnerships and business to business schemes (World Bank, 2021[3]).
The environmental tax revenue is comparatively low in Indonesia. Estimates suggest that it is equivalent to less than 1 per cent of GDP, compared to an average of 2.3 per cent across OECD and non-OECD economies (Lewis, 2019[12]). This figure corresponds with Indonesia’s overall low tax burden, at 11.1% of GDP in 2019, which is among the lowest of Southeast Asian countries (Asian Development Bank, 2018[13]).
Local governments depend heavily on central government funding to finance investments. For example, only 0.3 per cent of funding for water supply investments comes from local governments (World Bank, 2021[11]). Yet, district governments have the authority to collect several water-related revenues, such as groundwater and surface water abstraction charges or fees. Faced with resource constraints, municipalities depend on higher levels of government to develop large infrastructure projects, but this is often without clear financial arrangements for the operating costs of these projects (World Bank, 2021[11]).
The recent policy reforms on Public Private Partnerships give more room for private sector financing. National regulations allow private sector participation in bulk water treatment and distribution as well as wastewater treatment and reuse. However, under the current regulations, private sector participation is not permitted in water resource development and in the provision of customer services. Water utilities may contract private parties for the construction and operation of treatment and distribution facilities under a Business-to-Business structure, and governments can provide guarantees and viability gap financing for projects under the official Public Private Partnership Programme. Contract types currently in operation include Build-Operate-Transfer and similar models (World Bank, 2021[11]).
2.6. Institutional arrangements for water management
Table 2.1. Institutions involved in water resources management
Source: Questionnaire for the National Dialogue on Water (2022[7])
Table 2.2. Institutions involved in delivery of water supply and sanitation services
Source: Questionnaire for the National Dialogue on Water (2022[7])
References
[8] Abidin, H. et al. (2011), “Land subsidence of Jakarta (Indonesia) and its relation with urban development”, Natural Hazards, Vol. 59/3, pp. 1753-1771, https://doi.org/10.1007/s11069-011-9866-9.
[4] ADB (2016), Indonesia: Country water assessment, Asian Development Bank, Mandaluyong City, Philippines.
[13] Asian Development Bank (2018), “Key Indicators for Asia and the Pacific 2019”, Key Indicators for Asia and the Pacific, Asian Development Bank, Manila, Philippines, https://doi.org/10.22617/fls190428-3.
[6] Bappenas, BPS and UNFPA (2018), Indonesia Population Projection 2015-2045, Bappenas, BPS, UNFPA.
[12] Lewis, C. (2019), “Raising more public revenue in Indonesia in a growth - and equity-friendly way”, OECD Economics Department Working Papers, No. 1534, OECD Publishing, Paris, https://doi.org/10.1787/a487771f-en.
[10] OECD (2019), OECD Green Growth Policy Review of Indonesia 2019, OECD Environmental Performance Reviews, OECD Publishing, Paris, https://doi.org/10.1787/1eee39bc-en.
[1] OECD (2016), OECD Council Recommendation on Water, OECD, Paris.
[9] Questionnaire (2022), Questionnaire for the National Dialogue on Water. Responses from the Government of Indonesia.
[7] Questionnaire (2022), Questionnaire for the National Dialogue on Water. Responses from the Government of Indonesia.
[2] Republic of Indonesia (2020), The National Medium-Term Development Plan for 2020-2024 Narration Republic of Indonesia. Appendix Presidential Regulation N0 18 of 2020.
[11] World Bank (2021), A National Framework for Integrated Urban Water Management in Indonesia. Integrated Urban Water Management.
[3] World Bank (2021), Indonesia Vision 2045 : Toward Water Security, The World Bank Group, Washington, DC, http://hdl.handle.net/10986/36727.
[5] World Bank and Asian Development Bank (2021), Climate Risk Profile: Indonesia, World Bank Group and Asian Development Bank.