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WATER POLITICS

Courtesy of STRATFOR (subscription required), interesting analysis of Indonesia’s water scarcity challenges:

Indonesia is in a transitional period as new President Joko “Jokowi” Widodo attempts to improve governance, fight corruption and centralize government regulations. Like his predecessors, however, Jokowi will struggle with the geographic constraints inherent to Indonesia. While Jakarta is poised to benefit from China’s shift away from low-cost manufacturing and to increase Indonesia’s own domestic value-added industrial sector, water availability will continue to be an underlying constraint that must be overcome. Failure to improve and expand infrastructure, including projects intended for water management, will hinder Indonesia’s potential for future economic growth.

Analysis

Indonesia’s population continues to grow and the country seeks to increase its industrial output through value-added industries following new export restrictions on raw materials. In the face of these developments, improvements in water management and related infrastructure will be an important factor in Jakarta’s future economic success.

Current Water Stress

Statistically speaking, Indonesia is not a water-scarce nation. Its more than 2 trillion cubic meters of internal natural renewable water resources per year means roughly 8,000 cubic meters are available to every person annually. However, because of the diverse and disjointed nature of the island nation, this does not necessarily translate to assured availability of the resource. Indonesia’s water resources are not evenly distributed between all of the islands, and water availability does not correspond with population distribution. Indonesia’s most populous island of Java, for instance, is home to more than half the country’s total population, but it contains less than 10 percent of the country’s total water resources.

Not only are resources unevenly distributed throughout the country, they are unevenly distributed throughout the year, making Indonesia vulnerable to seasonal variations in water supply. A lack of adequate storage intensifies water stress during the drier June to September months. Additionally, the Solo and Brantas river basins in eastern Java are among the world’s 15 most stressed, according to the World Resource Institute.

Furthermore, the majority of the available renewable water is surface water, but because the rivers are often highly polluted and subject to flash flooding during the wet season, groundwater is often the preferred water resource for both municipal and industrial consumption. This is especially true in urban areas, where groundwater is the source of clean water for 74 percent of households. Overuse has led to increased salinity in reserves near the capital city of Jakarta and has also led to a land subsidence rate, which is the settling or sinking of land when underground material such as water is moved, of up to 34 centimeters per year in east Jakarta.

Currently, roughly 85 percent of Indonesia’s population has access to improved water resources, although only about 20 percent of the population has household connections. However, this does not necessarily translate to ensured access to clean water resources. Many areas, in fact, continue to lack access to improved sanitation. Only about 60 percent of the population has access to clean drinking water, and an estimated 75 percent of the rivers are classified as highly polluted. As the population continues to grow, demand for clean water is projected to increase by 47 percent by 2015.

In addition to an increasing municipal demand, water demand from the industrial sector is also expected to grow. For instance, the smelting process — one of the industries Indonesia seeks to develop — consumes large amounts of water. The municipal and industrial sectors will also have to compete with the agricultural sector, which remains the nation’s largest water consumer, accounting for 81 percent of total withdrawals, especially as Indonesia seeks to implement a self-sufficient food strategy. Water shortages will likely continue to act as a constraint on Indonesia’s economic growth potential.

Attracting Foreign Investment

This chronic mismanagement of water resources through lack of investment in infrastructure, overuse and pollution means that recent reports of localized water scarcity for both human consumption and agriculture are part of an ongoing issue Jokowi will not be able to ignore. Mitigating Indonesia’s water stresses, however, will not be easy.

Upgrading and expanding Indonesia’s water infrastructure will be an expensive endeavor. Estimates indicate that reaching the target to ensure clean water access to the entire population by 2019 could cost as much as $57 billion. The Indonesian government will not be able afford such an undertaking on its own and will have to rely, at least in part, on foreign investment.

However, attracting such foreign investment will be difficult. Investment in infrastructure projects does not always translate to immediate returns, especially for water management projects. As a result, many of the projects improving water availability in Indonesia are small and localized, focusing on humanitarian goals such as ensuring adequate drinking water for village populations. An example of this is Panasonic’s recent efforts to provide pumps and other clean water facilities.

Attracting foreign investment is made more difficult by Indonesia’s economic history. Since declaring Independence in 1945, Indonesia has swung between periods of economic nationalization and substantial inflows of foreign capital into areas such as resource extraction and manufacturing. While Indonesia is not expected to begin nationalizing industries or implementing harsh taxation policies, new restrictions on banking and plantations, as well as nationalist rhetoric in the recent presidential campaigns, indicate the country could swing back toward economic nationalism. Also, foreign ownership is being restricted in key investment areas such as the mining sector. As a result of these internal factors, coupled with unstable global economic conditions, foreign capital will remain standoffish with Indonesia for at least the next year or two.

Complicating matters further is Indonesia’s push toward a more value-added model to supply both domestic and export markets. The country’s established economic model relies on the export of raw materials, but its surplus of cheap labor and access to markets positions it to capitalize as manufacturing shifts away from China to lower-cost nations. As part of an effort to boost value-added sectors, Indonesia implemented a new mining law in 2014, among other tightened regulations, that restricted the export of some raw materials and banned the export of others that have not been processed. The more stringent regulations will likely make attracting foreign direct investment more difficult, especially in the short-term. While it is possible that some adjustments will be made to the implementation of the mining law, the majority of these new regulations is expected to remain in place under the Jokowi-led government.

A Diverse Island Country

Indonesia’s unique geography will present an obstacle to achieving these economic priorities as well. Because it is the world’s largest archipelagic nation, formulating and successfully implementing a single national policy for Indonesia will be complicated.

As the new administration seeks to develop its economy, the ability to implement infrastructure improvements, including upgrading water management systems, will be required. Jokowi will need to make serious progress in resolving these issues during his first five-year term. Policy priorities will include redirecting expenditures on fuel subsidies to more productive areas of social spending and reducing government corruption. It is unclear whether Jokowi can duplicate on a national scale the success he achieved as mayor of Jakarta and Surakarta. Still, if he can implement these reforms, Indonesia will be able to benefit from its surplus of workers and access to markets.

Ultimately, continued water shortages will likely act as a constraint to Indonesia’s economic growth potential. Because of the diverse nature of the island country, there will not be a universal solution to meet growing water demand and foreign investment will likely be required. But as the new administration seeks to benefit from China’s economic shift with an increased focus on value-added industries, the ability to implement infrastructure improvements and expansions — including water management systems — will be a crucial factor in Jakarta’s future success.