Infrastructure investment works to keep pace with Indonesia's rapid urbanisation

The country’s urban areas have grown rapidly in recent decades, with Jakarta’s population more than doubling since the 1970s, driven by an influx of rural migrants seeking better opportunities. This growth has not been without consequences, as municipal governments struggle to absorb new residents, and infrastructure and employment gaps pose significant challenges to smooth urban growth. This trend is likely to continue, as some 30 Indonesian cities are expected to see significant population growth in the coming years.

The government has taken steps to address these challenges, funnelling billions of dollars in new funding towards infrastructure in the 2015 budget. In light of the limited success of the country’s public-private partnership (PPP) scheme to date, the timely realisation of major transport projects is a policy imperative for the new administration.

More City Mice

Indonesia has undergone rapid urbanisation over the previous several decades, with Statistics Indonesia reporting that the country’s urban population has nearly tripled since the 1970s, rising from 17.2% in 1971 to 49.8% in 2010. Growth has accelerated particularly rapidly in the last generation: the UN Department for Economic and Social Affairs (UNDESA) reports that Indonesia’s urban population jumped from around 54.6m in 1990 to 134m by 2014. Urban population growth is projected to continue well into the future, with UNDESA forecasting the population of Indonesia’s cities will reach an estimated 227.8m by 2050, or 71% of its projected total population.

Historically, the majority of growth has taken place in Jakarta, which saw its population of lifetime migrants – those born outside the city but living in it during census time – expand by 500,000 between 2000 and 2010. Indeed, an estimated 68,000 migrants move to the city to join their friends or relatives after Eid each year, according to a 2014 report by Chotib Hasan, a researcher at the Demographic Institute at University of Indonesia. This trend has been a major driver of urbanisation, as evidenced by the growth of Jakarta: the city’s population more than doubled between 1970 and 2014 to 10.2m, according to UNDESA.

City Meets Country

When rural residents move to the city, they often stay for less than six months, during which time they supplement farm income earned at home with urban employment. These residents most often stay with family or friends, making this form of temporary urbanisation more of a channel for wealth distribution than a permanent demographic shift.

However, urbanisation can also be used to describe a shift from rural to urban living without relocation, such as when villages grow into towns and cities or suburbs expand. Pondok Cina, for example, is a formerly rural sub-district on the outskirts of Jakarta, located next to the University of Indonesia’s Depok campus. A burgeoning student population has seen its density increase to over 5000 people per sq km. The village has adopted modern services and less than a quarter of residents now earn their living from agriculture, demonstrating its transformation from a rural village into an urban area, as well as the strong links between economic development, modernisation and population growth.

With so much of Jakarta’s population growth attributed to temporary residents, expansion of second- and third-tier cities is expected to accelerate most rapidly in the coming years. The Boston Consulting Group (BCG) reports that growth of the middle and affluent class (MAC) will be faster outside of Java, despite the fact that half of the country’s MAC population resides in Java’s five most-populous provinces. In Sulawesi, for example, the MAC population is expected to expand by 109% between 2012 and 2020. BCG reports that there are currently 25 cities in Indonesia where the MAC population numbers over 500,000 and projects there will be a total of 54 such cities by 2020.

Challenges

Increasing urbanisation bodes well for future economic growth. With the country’s baseline macroeconomic fundamentals supported by domestic consumption, which some economists estimate accounts for 4.2% of annual GDP growth, ongoing urbanisation and a burgeoning middle class with rising purchasing power will drive development and expansion, as well as foreign investment.

However, such a pronounced demographic shift is not without its challenges, and new arrivals have not always received a warm welcome. Prior to President Joko Widodo’s term as governor of Jakarta from 2012 to 2014, ID raids were conducted at bus terminals in the city after the Eid exodus to discourage annual migration. During the raids, those without local IDs were transported back to their cities in Central or East Java.

Although Jakarta halted the practice when Widodo took office, it remains commonplace in other urban areas. Critics say these raids target the poor and reduce physical and social mobility, as municipal governments attempt to absorb an influx of residents amidst ongoing capacity constraints.

Indeed, an ongoing infrastructure deficit has created significant challenges for fast-growing cities. According to a 2014 World Bank report, Indonesia has lost more than one percentage point of additional GDP growth due to under-investment in infrastructure, with surveys identifying transport problems as the top business constraint for manufacturing firms. Around a quarter of the urban population and more than half the rural population have poor access to transport services, says the bank. “The slow growth in the infrastructure capital stock, in a context of high economic and vehicle fleet growth, contributes to serious major gaps, congestion problems and poor logistics performance, seriously undermining productivity growth, competitiveness and poverty reduction efforts,” the report notes.

More People, More Problems

The problem has been severe in the country’s largest cities. In the Indonesian Association of Planners (IAP) 2014 Most Liveable City Index, which studies the quality of life across the nation’s major urban centres, three of Indonesia’s largest cities received below-average scores. Meanwhile, Balikpapan, Surakarta, Malang, Yogyakarta, Palembang, Makassar and Bandung were named the most liveable cities in the country, with all seven scoring well across categories, including liveability, transportation systems, accessibility, environmental quality and socioeconomic conditions, as well as the number of green spaces, pollution levels and protection of historical buildings. Although the IAP reports these mid-sized cities still experience problems with transport and infrastructure, they still rank above the better-known urban hubs of Jakarta, Medan and Surabaya.

Government Policy

With urban populations across the country forecast to surge over the next four decades, calls for effective and proactive planning have grown louder in recent years. In August 2014 the IAP called on the central government and city administrations to plan for future urbanisation, with over 30 mid-sized cities expected to eventually accommodate populations in excess of 1m, according to the organisation’s chairman, Bernardus Djo-noputro. Given these projections, infrastructure upgrades have become increasingly pressing, and the government has taken note. In its revised 2015 state budget the Widodo administration channelled an estimated Rp138trn ($11.41bn) of the revenue created by subsidy cuts into infrastructure development. The Ministries of Transportation, Public Works, Public Housing and Agriculture each saw a substantial budget increases, which will have a significant impact on ongoing transport projects (see analysis.)

PPP Priority

Even with infrastructure investment on the rise, Indonesia continues to face a funding shortfall as it moves forward on new projects. According to estimates by McKinsey, the country will need to invest at least $600bn over the next 10 years to bridge critical infrastructure gaps, making partnerships with the private sector a top priority for the new government. Although the previous administration worked to address the infrastructure deficit through its Medium-Term Development Plan and the Master Plan for the Acceleration and Expansion of Indonesia Economic Development, the World Bank reports that overall progress on infrastructure projects, particularly PPPs, remains slow. As such, the framework for PPPs, which were first introduced as a legal concept in 2005, will likely take centre stage in the near term. Of the 58 projects initially announced under the framework, only 24 had made it to construction or operation as of 2014, while no new projects have reached financial close since 2009, according to the State Ministry of National Development Planning. In 2013 it announced 48 PPP projects worth over Rp570trn ($47.12bn), though progress has been limited; 26 were in the preparation phase as of 2014, while 21 were in the transaction stage.

Opening Doors

Despite slow progress to date, the World Bank reports that Indonesia has made progress recently in rolling out its PPP scheme, amending the legal framework to allow private sector investment in infrastructure projects without needing to form a joint venture with a state-owned enterprise, and establishing incentive mechanisms such as the Indonesia Infrastructure Guarantee Fund (see Transport chapter), the Indonesia Infrastructure Finance Fund, and most recently, a PPP unit and Project Development Facility.