Reducing tensions between regions and rural and urban settings in Indonesia

Since the policy of decentralisation was enacted in 2011, the country’s central government has ceded increasing amounts of control, both budgetary and political, to its provinces. Local governments have thus seen their remit expanded to include almost every aspect of public life, and their authority to chart the course of their regions’ growth is almost unlimited. However, the island of Java and the country’s metropolitan capital, Jakarta, remain the main source of Indonesia’s economic power. As a result, efforts are being made to equalise and support growth and investment in the country’s regions and cities. As the decentralisation process has unfolded, several “second cities” have shown a particular ability to thrive in this autonomous system: Surabaya, Bandung and Medan.

Island Provinces

Indonesia’s 34 provinces are generally grouped into its seven major islands and island groups: Java, Sumatra, Kalimantan, Nusa Tenggara, Sulawesi, Maluku, and Papua. Consisting of regencies and cities, each province elects its own governor and parliament, called the Regional People’s Representatives Assembly. Both governors and members of parliament are elected for five-year terms, with the exception of those elected in the “Special Regions” of Aceh, Yogyakarta, Papua, West Papua and Jakarta. Those regions are partially autonomous with different administrative structures. Regencies and cities, which also have their own local governments and legislative bodies, are furthermore divided into districts and then villages, each of which has its own elected head or chief.

Many of the details of almost every facet of public and private life are decided at very local levels, and local government officials hold significant power to make decisions about public spending outlays and projects. Some of these politicians have been making headlines recently as they launch plans to overhaul their cities and regencies to improve living standards and attract economic investment. Even Jakarta’s former governor and Indonesia’s current president, Joko Widodo, cemented his popularity by engaging local residents with an agenda to make positive changes in the lives of Jakartans across the socio-economic strata.

Special Capital Region

As governor of Jakarta, Widodo was able to make many changes to the way the city operated, such as implementing a new system of bureaucratic recruitment and universal health care. The Special Capital Region (DKI) Jakarta is the centre of a metropolitan area comprising Jakarta, Bogor, Depok, Tangerang, Bekasi and Cianjur, known as Jabodetabekjur. Although officially a city, DKI Jakarta is governed as a province, subdivided into one regency and five cities. According to Statistics Indonesia (BPS), 10.2m people were living in DKI Jakarta in 2015, a number that may reach 11.6m by 2035. The population of Jabodetabek was three times that of DKI Jakarta, about 28m in 2014.

The current governor of Jakarta, Basuki Tjahaja Purnama spent the first quarter of 2015 in a dispute with the Jakarta City Council over charges he violated state and regional financial management regulations. The charges make reference to the 2015 draft budget and the use of electronic budgeting software to curtail corrupt budgetary practices. After facing down the council, Purnama has been compared to Widodo for his determination to run a corruption-free government.

Having overcome Jakarta’s budgetary impasse, Purnama set his sights on tackling one of the city’s most intractable problems: traffic. In April 2015, the government announced it was fast-tracking the construction of two rail lines in Jabodetabekjur, set to begin construction in 2015. When complete – expected in 2018 – an east-west mass rapid transit (MRT) line will connect Bekasi in West Java and Tangerang in Banten province. The MRT could reduce congestion by 30%, but commuters may have to wait until 2024 for real change. It is hoped an additional light rail transit (LRT) line will bring more relief. The LRT line will be constructed in eight corridors, linking Cikarang in Bekasi to Balaraja in Tangerang.

According to Castrol, the Jabodetabek region has among the world’s most gridlocked commuters, who have heard plans for reform in the past that subsequently failed. However, current efforts to address the problem offer some promising signs. The president is directly involved in fixing Jabodetabek’s traffic and he has announced the formation of a special authority to superintend public transportation there. When fully formed, the new Jabodetabek transportation authority will operate at the same level as the directorate general, under the Ministry of Transportation, giving it power to override regional and local governments, which have erected obstacles to such plans in the past.

As with the budget impasse, the Jakarta government has also turned to technology in its efforts to improve not just gridlock but also public services and environmental issues. The Jakarta Smart City programme provides web-based information such as bus schedules and museum exhibitions, but its most effective functionality may be a system by which users submit complaints, as well as traffic and flooding reports. The website is complemented by two smartphone applications, Qlue for residents and CROP Jakarta for civil servants and officials. Nearby officials are obligated to respond to incidents reported through Qlue. Using technical solutions such as these, the Jakarta government is not only able to address complaints; it can make data-driven decisions about the city’s development.

Socio-Economic Status

As in DKI Jakarta, each Special Region has used its greater measure of self-rule to reflect the culture and history of its citizenry: Yogyakarta’s governor is also the Sultan of Yogyakarta, in recognition of the region’s special relationship to the past monarchy; Aceh has implemented sharia law for Muslim citizens; Papua has the Papuan People’s Council, under which local tribal chiefs administer customary law; and West Papua is being designated a conservation province to protect its natural resources.

The country’s regions are also grouped into six economic corridors under the government’s aggressive, high-growth Masterplan for Acceleration and Expansion of Indonesia Economic Development, launched in 2011. These regions and corridors include Java, seen as the force behind industry and service provision; Sumatra, where the production and processing of natural resources and energy reserves takes place; Bali and Nusa Tenggara, for tourism and food support; Kalimantan, a centre for the production and processing of mining and energy reserves; Sulawesi, a hub for the production and processing of agricultural, fisheries, plantation, oil and gas, and mining resources; and Papua and the Moluccas, where fisheries, agriculture, energy reserves and mining are developed.

The various regions’ economic fundamentals are differentiated both among the regions and between rural and urban areas. During the period 1999-2006, the Jabodetabekjur region regularly generated about 25% of the country’s GDP, while for the greater Surabaya area, that number was only about 7%; Medan, 3% and Bandung, 2%. All other urban areas made up the difference. During the same period, rural areas generated between 45% and 48% of GDP.

This Java-centric economic model has been mirrored by investment patterns. According to the Indonesia Investment Coordinating Board, in 2014 the majority of total direct investment – domestic direct investment plus foreign direct investment (FDI) – was focused on the Java region, which gained Rp263.3trn ($21.7bn), or 56.8% of all investment. All the other regions followed far behind this: Kalimantan and Sumatera both attracted about 15% each – Rp71.7trn ($5.8bn) and Rp70.9tr ($5.8bn), respectively; Sulawesi, 6.3%, or Rp29.2trn ($2.4bn); Maluku and Papua together garnered 3.7%, or Rp16.9 ($1.4bn); and Bali and Nusa Tenggara, 2.4%, or Rp11.1trn ($917m).

Despite the intense concentration of economic activity on Java, secondary cities and regencies are successfully taking steps to attract investment and build infrastructure to expand the growth of regional economic and industrial bases outside of Java. Indeed, the urban and rural splits in economic vitality are issues the current administration is actively working to mend and make up the main objective for the many infrastructure projects that have been launched beginning in 2015 with a five-year deadline for completion. If these efforts are successful, they will work to disperse the country’s economic activities across the map and equalise the distribution of wealth among all regions.

Striking an Infrastructure Balance

The regions of Indonesia suffer from a deep east-west imbalance in infrastructure development, and this contributes to these areas’ high rates of poverty and their struggle to grow their economies. “There are many regions and border areas which are still untouched by infrastructure development,” Tjahjo Kumolo, minister of home affairs, told the Jakarta Globe in April 2015.

“The president is committed to developing the eastern part of Indonesia where infrastructure is less developed.” Indeed, Widodo has been known to repeat a story about a visit to Papua and West Papua Provinces, where he found a sack of cement cost about Rp2.5m ($20,665). The same sack cost Rp75,000 ($6) in Jakarta.

One way the president plans to redress this east-west imbalance is to focus on building and improving infrastructure in regions located outside of Java. Over the period 2015-20, the Widodo administration plans to develop seaports and build new dams, as well as new toll roads and railways. The revised 2015 state budget includes allocations for infrastructure projects carried out by state ministries, with allocations for capital investment raised to at least Rp290trn ($23.9bn). In line with the president’s awareness of the deficiencies of infrastructure outside Java, much of the planned infrastructure development is centred on East Nusa Tenggara, Papua and the border areas of Kalimantan.

One area receiving significant fiscal attention is the expansion of the nation’s rail systems. Indeed, plans are being drawn up both for the 595-km Trans-Papua Railway and a 3258-km national railway network. Over the next five years, the Ministry of Transportation is set to allocate at least Rp105.6trn ($8.7bn) to build these networks. With regard to the 49 planned dams, works have begun on 13. With a capacity of 167m cu metres, the largest to be built in 2015 is North Aceh’s Keureuto Dam, which is expected to prevent flooding and increase the region’s agricultural output by providing irrigation for 4768 ha of agricultural land. The contract for the construction of the project was awarded to three major state-owned construction companies (SOCs), Brantas Abipraya, Hutama Karya and Wijaya Karya.

Also on the cards during the next five years is the construction of 13 industrial estates outside of Java, funded via the Ministry of Industry at a cost of Rp55trn ($4.5bn). Up to 70% of Indonesia’s estates are located on Java, so these estates, spanning the country from Medan to Sumatra, Kalimantan, Sulawesi, Maluku and Papua, will act as growth incubators for their regions. These regions have in their favour lower property and labour costs than Java. The new estates are expected to maintain Indonesia’s competitive edge in the manufacturing sector. As a sign of its determination to increase the activities of the manufacturing sector in the regions, the government has announced plans to increase the ratio of manufacturers operating outside of Java from its 2014 level of 27% to 40% by 2025.

Regional Banks

The country’s 26 regional development banks, known as Bank Pembangunan Daerah (BPDs), operate in 31 provinces and are increasingly playing an important role in financing economic activities in the growth of economies outside of Java. They are also essential to the central government, as they are used as conduits for paying civil servants’ wages and funding projects. BPDs take large market shares in their particular regions, but they made up only about 8% of total banking assets as of end-2013.

Because regional governments tend to take major shares in their BPDs, any weakness in those governments’ finances can cause a negative ripple effect in a BPD’s capital position. Fitch Ratings Indonesia has noted that, in general, BPDs tend to grapple with issues like inadequate corporate governance, accounting practices and risk management, and that access to new capital and corporate governance continue to be challenges. Despite this, Fitch rated four BPDs – Bank Riau Kepri, Bank Lampung, Bank Maluku and Bank Sulut – with a stable outlook with a low default risk.

In order to bring increased stability to the BPDs, the financial services authority (OJK), has issued a regulation requiring BPDs to increase to at least 20% of their loan portfolios the percentage of loans made to non-civil servants, particularly micro loans, by 2018. OJK has also requested that BPDs strengthen their capital positions by increasing their capital to more than Rp1trn ($82.7m) by 2018. When these upgrades are fully enacted, the BPDs are expected to be in a stable fiscal position and grow in tandem with their respective regions.

Property Boom

The country’s secondary cities have seen major growth in their real estate sectors, spurred on by economic growth and improved purchasing power, with prices climbing in the Greater Jakarta and secondary cities. The rise in land prices in the regions was especially evident between 2010 and 2013, property developer Ciputra Surya’s president-director, Harun Harjadi, told a local news outlet in the second half of 2014, adding that prices in established regions rose up to 100%. The biggest contributors to most developers’ total revenue have been landed houses, shopping centres, residential complexes and hotels (see analysis).

Outlook

While Greater Jakarta faces challenges common to developed markets – with traffic congestion, corruption and rising property prices – some parts of the country are working to catch up to the 21st century. It is thus essential that the socio-economic status of the entire nation be brought into balance, or conflict may become an obstacle to growth. Closing the east-west and regional socio-economic gaps depends on the central and regional government’s ability to fast-track planned infrastructure projects.

Financing for these projects must be assured, with regional banks reaching the goals laid out for them. This will improve their stability and capacity to assure funding. While there is some room for FDI and public-private partnerships in these and other projects, these models have failed to make progress in the past. It therefore looks likely the central government will support these projects, both fiscally and administratively, in order to ensure they are completed on time and to standard. When the planned roads, sea-lanes and airports are constructed in the many provinces and cities outside of Java, property developers are expected to begin expanding there and businesses will set up shop.