Innovative Infrastructure Financing through Value Capture in Indonesia - Bambang Susantono
Speech | 28 May 2021
Introductory speech by Bambang Susantono, ADB Vice President for Knowledge Management and Sustainable Development, at the launch of the report Innovative Infrastructure Financing through Value Capture in Indonesia, 24 May 2021, Jakarta
Distinguished guests, ladies and gentlemen, good morning. On behalf of the Asian Development Bank, I am proud to launch our new report, Innovative Infrastructure Financing through Value Capture in Indonesia.
A natural progression of ADB’s knowledge work
This report links Indonesia’s urbanization with its economic growth and highlights infrastructure’s role in the country’s development. It also underscores how innovative mechanisms can better finance infrastructure, especially in cities and towns.
The report is an excellent example of a demand-driven knowledge product that emerged from collaborative work. It was in 2019 that ADB’s report on the importance of land value capture for Jakarta, Bangkok and Manila led to the demand for this new report. The 2019 report combined technical analysis of land value increases arising from public mass transit investments and provided policy recommendations on the use of land value capture mechanisms in a developing country context. This analysis triggered ADB’s deeper engagement with the Coordinating Ministry for Economic Affairs, or CMEA, to produce the country report on Indonesia which we unveil today. I am grateful for the CMEA’s leadership, vision, and efforts to make this happen.
While the report’s authors will soon explain their findings in more detail, I would like to offer some brief background on why value capture is so important. As you will see, value capture is not just a mechanism for financing infrastructure. It is a tool that helps make cities an engine of growth—one that requires good urban planning and management.
Cities as engines of growth
Urbanization feeds economic growth in a two-way process.
As shown on the screen, the chart and trend line based on the blue dots shows that in developing Asia, countries that urbanize faster tend to see faster per capita GDP growth. While growth promotes urbanization, cities also promote economic growth.
How does this work?
Cities increase productivity through several channels, collectively known as agglomeration economies. And as productivity increases, more firms and households are drawn into cities, increasing their size. Unfortunately, if urban infrastructure does not keep up—using good urban planning to ensure affordable housing and sanitation, for example—the result is congestion, or worse, gridlock.
Transport is central for keeping congestion in check and allowing cities to produce more. Several studies show that productivity is higher in cities where workers can access a larger number of job opportunities—over a reasonable time frame. A study from the Republic of Korea suggests that a 10% increase in jobs accessible to workers within an hour’s travel time is associated with a 2.4% increase in labor productivity.1 This shows how vital it is for cities to develop fast, affordable, and integrated transport systems.
Key challenge—Huge infrastructure investment needed
However, a key challenge is that such infrastructure can be very expensive. For example, according to a recent assessment of metro systems in Asia, the cost per kilometer of modern metro lines has ranged from $33 million to $166 million, and the total cost would be anything between $3 billion and $ 5 billion.2 Other sectors are no different—water supply and sanitation systems are also very costly.3 So, how do we finance these huge sums?
The chart I use here shows Indonesia’s investment needs over the 5-year period between 2016 and 2020. It comes from our 2017 flagship report on the Asia-Pacific region’s infrastructure investment needs and was computed using a mix of actual and projected data on investments. While the years covered are now past, the story remains relevant even today. Essentially, to meet its infrastructure needs, Indonesia needs to both increase its infrastructure investments in a big way, and to do so, increasingly rely on private sector finance—particularly innovative sources of finance.
Key element of solution: (Land) Value Capture
This is where land value capture, or LVC, comes in. LVC can create a virtuous cycle. It allows cities to fund and roll out over many years a widespread transport network, along with other core infrastructure. For example, investments in mass transit improve accessibility, and thus raise property values. If a portion of this value increase is invested in expanding the network further, accessibility and property values will continue to rise.
This type of mass transit funding goes back more than a century. We saw how LVC was integral in funding urban transport networks in Japan, the Republic of Korea, the People’s Republic of China, Hong Kong, and Singapore. It has proven sustainable over years and even decades.
The case of Indonesia
So, what could be the way forward for Indonesia to use this LVC tool effectively?
As our report explains, existing value capture policies and regulations are substantially in place. But it is not complete. I believe a major contribution of our report is to clearly describe what is missing, and how we can put the missing pieces in place. For example, the report considers four internationally used value funding mechanisms and shows how each could be used in Indonesia. But all of them would require further policy and regulatory development to reach their full potential. The report also lays out a roadmap of short- and medium-term action plans to garner the full potential of LVC.
Where do we go from here?
ADB very much appreciates CMEA’s critical leadership role in promoting, among the key stakeholders, the use of land value capture mechanisms for infrastructure financing. This is why we are glad to be a partner in CMEA’s efforts to develop a national LVC framework and prepare for its implementation. In this sense, we can say that the report we launch today is part of our joint work with several ingredients. For example, we are conducting a cost-benefit analysis of applying LVC in Indonesia, assessing economic, social, and environmental impacts. We are measuring how ready institutions are to use LVC and identify ways to fill any gaps. We will be offering policy recommendations on what the government and related stakeholders can do. We will also prepare draft regulations—the legal instruments—that can implement the policy recommendations.
Our hope is that these steps on LVC will link with ADB’s wider support to the Government of Indonesia. This includes, for example, our support on strengthening domestic resource mobilization. Also, ADB is exploring possible assistance to MRT Jakarta which includes identification of where LVC might work best. Integration with the railway system could be an option.
Other examples of related work by ADB
I would also like to briefly share with you ADB’s work on LVC in other countries in Asia and the Pacific.
In India, our knowledge work includes examining closely how LVC frameworks can be used across various cities. For example, the study is pointing at the possibility that low floor area ratios in Bangalore may limit the full benefits associated with mass transit systems. In the Philippines, we are using spatial computable general equilibrium modelling to understand how firms and households in southern Luzon will respond to a new North-South Commuter Rail project. This is ADB’s flagship project which connects Clark city to the north of Metro Manila through the metropolis to Calamba in the south. This study in the Philippines will allow us to model the policy and project impact—including that of the planned Metro-Manila subway project.
Realizing the potential of value capture
As we move on to hear more of the detailed findings and report recommendations, let me close by emphasizing that we need to exploit the full potential of tools such as LVC financing, especially today when the COVID-19 pandemic is constraining the availability of public finances. Indonesia’s emerging urban economies—whether in our capital, or cities such as Makassar or Palembang—can benefit greatly by applying land value capture, especially as we move into a post-pandemic recovery.
Thank you and I look forward to a lively discussion!
1Rémy Prud'homme and Chang-Woon Lee. 1999. “Size, Sprawl, Speed and the Efficiency of Cities.” Urban Studies. Vol. 36, No. 11, pp. 1849-1858.
2Comparison of cost and construction times of first metro lines in Asia. December 17, 2019. By James Clark. Downloaded from: https://futuresoutheastasia.com/comparison-of-first-metro-lines-in-asia/
3A World Bank report provides estimates of capital costs per person served in 2015 for water and sanitation for developing countries. Taking Philippines as an example, the reported estimates suggest that a combined investment in urban piped water supply and Faecal Sludge Management (FSM) based sanitation would cost around $340 per person (or $340M for a million-size city). See Appendix E of Guy Hutton and Mili Varughese (2016), The Costs of Meeting the 2030 Sustainable Development Goal Targets on Drinking Water, Sanitation, and Hygiene. Water and Sanitation Program. Technical Program 103171.