Decentralisation paying off for three dynamic regional cities in Indonesia

During the years of former President Suharto’s rule, Indonesia’s political and economic power was concentrated in Jakarta. But with democratisation has come decentralisation, a trend that has gathered momentum since direct local elections were introduced in 2005, in turn creating a new breed of grassroots politician. After all, it was President Joko Widodo’s success as a mayor, first in Solo and then in Jakarta, that set him on the path towards the presidency. In Indonesia today, local politicians are seen as emblematic of a more localised politics, implementing changes based on the needs of the cities they represent.

Authorities in the country’s provinces, as well as in its larger cities, are now empowered in many areas of public life including budgetary spending and, while Jakarta and its satellite towns (together known as Jabodetabekjur) continue to contribute roughly 20% of the country’s GDP, President Widodo’s government is committed to boosting economic development elsewhere in the archipelago, in turn creating jobs for the millions of Indonesians who live beyond the capital and the most populous island of Java.

Indonesians are moving to the cities at a faster pace than any one else in Asia, and by 2025, it is estimated about 68% of the population will be living in urban areas. But while urbanisation can fuel economic growth, the World Bank warns that greater population density strains basic infrastructure, leading to congestion, pollution and health problems, while exacerbating disaster risks.

While Indonesian cities have gained some notoriety in the past for their traffic jams, public transport limitations and drainage issues, a popular new generation of mayors in cities such as Surabaya and Bandung are reversing such perceptions by implementing progressive ideas for sustainable, technologically savvy cities.

Local Government 

Indonesia is made up of 34 provinces grouped around seven of its largest islands, with these in turn sub-divided into regencies, cities, districts and villages. Each province holds elections every five years for a governor and parliament, except for the special autonomous regions of Jakarta, Aceh, Yogyakarta, Papua and West Papua, which have their own administrations. Larger cities choose their own mayors and there are regular elections for regents – the leaders of the country’s regencies – as well as for positions all the way down to the level of village head.

This localised system has been accompanied recently by a concerted push to kick-start economic growth in the regions, and narrow the development gap between urban and rural areas, especially between Jabodetabekjur and the rest of the country.

Expansion Plans 

President Widodo’s predecessor, Susilo Bambang Yudhoyono, launched his programme for six key corridors as part of the Masterplan for Acceleration and Expansion of Indonesia Economic Development in May 2011, stressing the need to improve the country’s investment climate and boost economic growth. The government has also committed to the construction of 13 industrial parks outside Java. The parks are intended to act as growth incubators and each one will focus on a strategic industry. In North Sumatra, for example, the two parks will focus on palm oil and aluminium.

While data shows that Jakarta and western parts of Java remain the most popular investment destinations, other regions, notably in the east of Java, are increasingly attracting manufacturers drawn by lower wages and costs. According to the Indonesia Investment Coordinating Board, in the first six months of 2016, foreign investment in West Java was $2.8bn (20% of the total), while East Java attracted $0.9bn (6.5%) and Jakarta, $1.6bn (11.2%). Domestic investors were drawn to East Java (24.2% of the total), followed by West Java (14.5%).

An ambitious infrastructure development plan is also being implemented to bring Indonesia’s provinces closer together and reduce the cost of doing business. The government is keen to enlist the help of the private sector to meet the cost of developments, which is estimated to reach $261.2bn in the years 2015-20. Taufik Widjoyono, secretary general of the Ministry of Public Works and Housing, told local current affairs magazine Tempo in 2015 that the government was able to finance only 27% of the estimated cost of these developments.

Airports have been improved across the archipelago, while President Widodo’s ambitious sea toll road plan, designed to overhaul the country’s sea ports, is expected to reduce the cost of logistics. Nevertheless, given the size of provincial budgets, the IMF has warned about the potential harmful effects of such enormous investments on local government finances.

“The pace of implementation needs to take into account capacity constraints, including those of local governments, and should carefully consider fiscal risk and the economic impact of increasing the public debt too quickly, including on interest rates and the current account deficit,” Luis E Breuer, IMF’s mission chief for Indonesia, wrote in a recent blog post.

Surabaya 

On the eastern tip of Java, Surabaya, with an urban population of around 6.5m and a metropolitan population of 9m, is Indonesia’s second-biggest city and a gateway to the eastern provinces. Since 2010, the city has been led by Tri Rismaharini, who holds the dual honour of being the city’s first mayor elected in a direct election and its first female mayor. Rismaharini has garnered great popular support for re-energising a city that long felt neglected by central government, with the result that she more than doubled her 2010 vote in the 2015 election. Holding third-level qualifications in architecture and urban development, her efforts have also won international recognition, including the ASEAN Environmentally Sustainable City Award in 2012 and third place in the World Mayor Awards that same year.

Much of her popularity stems from policies focused on making the city more liveable, including the expansion of public parks and green spaces, tree planting, better drainage, educational initiatives and a crackdown on vice. Growth in 2015 was estimated at 6.02%, compared with 5.44% in East Java and 4.79% nationally, with services (trade, hotels and restaurants) and manufacturing the largest contributors to the city's 527bn GDP. According to the Surabaya City Service and Investment Coordinating Board, growth is expected to moderate to a range of 5.8-6.02% in 2016 and to pick up to between 6-6.5% in 2017, maintaining faster growth than the rest of the country.

Rismaharini has also pushed forward plans to improve public transport and reduce the number of vehicles that use the city’s streets each day – more than half of them motorbikes. Despite problems securing the necessary funding, she has championed plans for a hybrid light rail and tram system as part of a move to make the city more attractive for investors and prospective entrepreneurs. According to Rismaharini, there are more than 50 digital enterprises in Surabaya and 92% of businesses in the city are SMEs.

The 17-km-long tram is a venture between three government agencies – the Transport Ministry, the state train operator Kereta Api Indonesia and the Surabaya local administration – and was due to start in August 2016, with completion targeted for 2019. The investment in public transport is likely to be positive for property prices in these areas of the city, Stefanus Ridwan, president director of property developer Pakuwon Jati, told OBG.

The central government is also discussing potential improvements to the rail link between Jakarta and Surabaya – Java’s two biggest cities – in a plan that would double the speed of trains on the route and reduce journey time to between six and seven hours.

In terms of sea links, Surabaya’s port – Tanjung Perak – connects the west and east of the archipelago and is part-owned by Dubai-based DP World. It has facilities for container ships, dry bulk and liquid bulk, as well as a busy ferry terminal. Surabaya is also home to a major naval base, where three frigates purchased from the UK were refitted in 2015.

Forin Logistics, part of the Forin Group, has exploited Surabaya’s strategic location in providing air freight for perishable goods and general cargo services. One of its most profitable businesses is exporting fish to the US from its hubs in Surabaya, Bali and Jakarta. Chairman Yandra Wongosari told OBG that while costs are cheaper in the provinces, the quality of infrastructure still needs improvement.

Surabaya’s Juanda airport is the second largest in Indonesia after Jakarta’s Soekarno-Hatta, with 20 airlines offering flights domestically and internationally. Already close to capacity, national airport operator Angkasa Pura plans to build a third terminal with two new runways and a new annual capacity of 75m passengers. The provincial governor, Soekarwo, expects the work to begin towards the end of 2016.

Bandung 

At 700 metres above sea level, the capital of West Java, Bandung, has long been known for its relatively cool climate, enjoying an average temperature of 23 degrees. Now it is gaining a reputation for a different kind of cool, as the poster child for Indonesia’s ambitions in developing a “creative economy”.

Bandung joined UNESCO’s Creative Cities Network in November 2015. Cited for its design talent, it is now positioning itself as a hub for technological innovation. Long a centre for education and culture, the city is home to some 2.5m people, of which more than half are under the age of 40. It scored 78.98 on the Human Development Index in 2014, compared with 68.80 for West Java and 68.90 for the country as a whole.

As in Surabaya, the city is benefitting from a dynamic mayor with a vision – in this case, architect and former university professor Ridwan Kamil, elected in 2013. Ridwan, who ran as an independent, was seen as an opportunity for the city to rebuild following a predecessor whose term was dogged by allegations of corruption. Like Rismaharini in Surabaya, the new mayor wants to improve public transport and create a more environmentally friendly city, while also attracting tech-based industries and creative people.

Private Approach 

However, unlike other regional leaders, who have relied on central government funds, Ridwan is targeting the private sector. Given the scale of funding required, Bandung cannot rely on the central government, Ridwan told OBG. He estimates his plans for Bandung would cost about $6bn over five years, while central government funding would amount to only $1.5bn. “I am short $4.5bn so Bandung either needs to wait for three mayors to finish the job, or you fund things in a creative way,” the mayor, who was educated at University of California, Berkeley, said in August 2016. Such solutions are likely to become increasingly essential, with regions already having felt the impact of two rounds of central government budget cuts as of August 2016.

Ridwan sees a solution in public-private partnerships (PPPs), and has set up a PPP centre to deal with potential investors, grouping projects under three categories: commercial, social and government. One of the headline projects is a light rail transit system that will link with the high-speed train to Jakarta. Both projects will be funded by a government-to-government joint venture company between China and Indonesia, Kereta Cepat Indonesia China.

Another key project is Technopolis, a new town in the city’s east that will be a centre for technological development and research into biodiesel and defence. The town will leverage on the reputation of the Bandung Institute of Technology, Indonesia’s leading technological university. In 2016, UTC Aerospace, a US aircraft component manufacturer, invested $100m in Technopolis, Ridwan said.

Bandung Digital Valley (BDV) is another initiative established to serve as a business incubator, especially in digital business, for the start-up ecosystem in the city, offering a 1200-sq-metre co-working space that can accommodate 50 developers, with meeting rooms, creative desks, a lounge and cafe. BDV’s general manager, Agung Aswamedha says the city has more technology talent and a lower cost of living than Jakarta, which should make it an attractive prospect for entrepreneurs. The group is working independently of city authorities but supports the city by developing start-ups that are useful to consumers and the city itself, and is also currently looking at environmentally-friendly ideas.

Even as it moves into newer industries, Bandung’s traditional textiles industry remains an important part of its economy. The city attracts large crowds of shoppers to its factory outlets and clothing shops, and according to the Indonesian Textile Association (API), more than 55% of Indonesia’s textile manufacturers are based in Bandung. Ridwan’s determination to improve infrastructure will have the biggest impact on building fashion brands, Ade Sudrajat, chairman of the API, told OBG. According to him, it costs nearly three times as much to send products from Jakarta to Semarang as it does from China to Indonesia.

Medan 

The most important city in Sumatra and the biggest outside Java, Medan boasts close historical and contemporary links with Singapore and Malaysia, which lie just across the Straits of Malacca. The capital of North Sumatra province boomed in the 19th century on the back of the tobacco trade, with its new-found wealth funding the development of grand civic buildings, some of which remain today. Resources continue to underpin the economy of the city and the region, which together have a population of more than 13m, although timber and palm oil now take the place of tobacco in terms of trade.

Medan is also keen to develop its tourism industry and is seen as the gateway for tourists exploring some of Sumatra’s most significant sights. Lake Toba has been designated a tourism centre under the government’s 2016 vision to create “10 new Balis”, and will be connected to the city via a new tolled highway.

Dzulmi Eldin took over as mayor of the city in 2014 after his predecessor Rahudman Harahap was sentenced to five years in prison for corruption. Harahap was the second Medan mayor in succession to be convicted of graft, which severely damaged confidence in the city’s administration. Dzulmi was re-elected in the mayoral elections in December 2015.

In July 2013 a new international airport, Kuala Namu, opened about 50 km from the city, replacing the increasingly under-pressure Polonia, which was operating at about eight times its 1m annual capacity. Kuala Namu is connected to the city by a rail line and a toll road that opened in 2016. The toll road is a key section of the Trans-Sumatra Highway that is expected to cross the whole of Sumatra.

The more modern facility has brought new routes: in June 2016 Garuda resumed direct connections to Singapore, partly to support the government’s tourism initiatives. “We believe this new service will stimulate the growth of business and trade in the region, particularly as Medan is strategically located as the gateway to Sumatra and the rest of Indonesia’s western regions,” Muhammad Arif Wibowo, president and CEO of Garuda Indonesia, said when he inaugurated the new route in June 2016. “The new service will offer passengers a wider choice of destinations, as well as greater flexibility and convenience when travelling between Singapore and cities in Sumatra such as Palembang, Banda Aceh, Sabang, Lheuksmawe, Gunung Sitoli and Pinangsori.”

Port Profit 

The city is also upgrading its transport networks with new railways and roads – particularly to the port, Kuala Tanjung, which has historically been hampered by poor road links. A more efficient port is seen as crucial to the success of the Sumatra Economic Corridor, which is a centre for the production and processing of natural resources, in particular for products such as palm oil, rubber, coal and steel. It will also have a major impact on the development of Medan’s proposed integrated industrial park, a Rp4.5trn ($328.5m) project that is part of the government’s plan to support economic growth outside Java.

Construction of the Rp3trn ($219m) first phase of the port’s redevelopment, including a multi-purpose terminal, began in January 2015, and is expected to be completed by the end of 2016. The new port, being built cooperatively by the state operator Pelindo I and the Port of Rotterdam Authority, will have a 500-metre dock that will be able to handle ships of up to 5000 twenty-foot equivalent units. The later phases of the development will focus on the construction of the industrial area, a container port and housing.