“The Japanese loan was the best option for Jakarta’s transportation infrastructure project”

September 2011

(Part 1 of 2) Conversation with Fauzi Bowo, first elected governor of Jakarta, Indonesia, on – bold decisions in public transport – the secrets to keeping clean government – managing vested interests in infrastructure development

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Here is the transcript of the video.

1. Deciding on a suitable transportation system

Emmanuel Daniel (ED): Bapak Fauzi Bowo was the first elected governor of Jakarta, a sprawling metropolis. The administrative region that he’s responsible for has about 10 million people, and the region of greater Jakarta, 28 million people—in a country that’s growing very rapidly, and in this environment, very sustainably, and building a lot of infrastructure and capacity for its population. Jakarta is also a very cosmopolitan city, representing the diversity of Indonesia as a whole. Bapak Fauzi Bowo is known to be, within the political system, a career administrator, someone who grew up as an administrator, who has worked in Jakarta all his life and was trained as an urban planner.

Fauzi Bowo (FB): I grew up with the administration

ED: Despite all the promises of Jakarta, all the promise that the city has, it’s also a city that encapsulates the problems related to a growing economy like Indonesia and like many cities of its size.

FB: Other developing cities, yes.

ED: You are somewhat ambivalent in terms of your position, and perhaps, that’s what we need to start this conversation with—on how the infrastructure for Jakarta is to be built going forward.  One of the most obvious needs to anyone who travels in Jakarta today is the need for transportation infrastructure.

FB: Transportation, that’s correct.

ED: Yet some time earlier this year, after years and years of study in terms of building a mass transport railway system in the city, you were one of those who said, “Wait. This is not going to work. We don’t have the money to fund it. This is not how we’re going to fund it.  Let’s shelf the plan for the moment.” What was in your mind when you came to that conclusion?

FB: That was not 100% correct, actually.  We’re going to build the MRT, yes.

ED: Eventually.

FB: No. There’s a concrete plan in the pipeline. We’re going to start with the ground breaking the beginning of next year.  So, the phase that we are in now is the tender process for the project. This MRT is going to be financed by a Japanese STEP loan—the Special Terms for Economic Partnerships. The first stretch will be about 15 kilometres from the southern tip of Jakarta into the middle of the city. Then we’re going to continue with the next stretch into the northern part of Jakarta, another 13 kilometres. And we are discussing now with many parties about the east-west corridor.

The statement I gave—I think a year ago—that was about the monorail. The monorail was a private initiative and the private party had given up. So, we had the option either to take it over or cancel it. But currently, we’re giving priority to our BRT—one of the largest and most extended in Southeast Asia. Last year—2010—the BRT was used for 90 million passenger-trips. So, it was quite efficient in a way, but for some parts of Jakarta, it is not enough if you consider that 28 million people live in the surrounding area in the greater metropolitan of Jakarta.  So, we need a heavy-duty transportation—mass transport—that is the rail, which we are going to revitalise, and also, the MRT we’re going to build.

ED: Give us a sense of the funding mechanism that you finally came to a conclusion with. Why didn’t you go to the bond market directly and what is it about the Japanese infrastructure funding mechanism which still is attractive today?

FB: Let me start with the Japanese funding because the Japanese STEP loan offered a 30-year loan—plus, a ten-year grace period, and with a very low interest—I think 0.4% or 0.5% adjusted. That is certainly attractive for a project like the MRT because this kind of project cannot be financed by commercial loan or by a public-private partnership. So, what we’re trying to select is, “What can be done by the private sector, we should leave it to the private sector. What it cannot do should be taken over by either public-private partnership or fully government-funded.” The BRT, for example.

So, we are relying on our budget capacity. We have managed so far, but more requirements will arise and we have to find another way to fund the project. But transportation is only one of the many … the long list that we have as far as infrastructure is concerned.

ED: Well, you’ve got other priorities like power, water and so on.

FB: Yes.

ED: But just staying on transportation, does the Japanese funding come with limitations in terms of the choices that you would have been able to make? For example, the BRT choice itself, instead of going for the heavier rail transportation, which is quite obvious for a city like Jakarta …

FB: We started with the BRT because of the limited funding that we had five years ago, but some of the BRT corridors now have to be moved somewhere else as soon as we are ready with the MRT. But this is already in the plan. The choice for Jakarta is certainly the train—heavy train, heavy rail—but due to the limited funding, we have to combine it with other modes of transportation.

ED: Have you studied the way in which other cities around the world, of your size, have funded their infrastructure and some of the limitations that they’ve had to face?

FB: Yeah, take New Delhi, for example. We have a similar setup as the metro in Delhi.  Unfortunately, we’re late because when we started approaching and setting up the plan for the MRT, we worked together with Delhi MRT. But then, they already have three lines in operation which carry three million people each and every day and we’re just about to start with the construction.

2. Managing vested interests in infrastructure development

ED: You’re a career administrator in a country where politicians and the whole political landscape is constantly on the move. And also, you’re a career administrator with an impeccable reputation in terms of delivery, in terms of standing above corruption and so on. How do you manage that and how do you deal with different vested interests that are obviously in place in a situation like Jakarta?

FB: It is not as simple as A, B, C, but if you start properly, I think the following steps will be much easier.

ED: Right, let’s just use the rail project again, okay? I’m sure there are many constituents who want to have a piece of the action in that way.

FB: Yes.

ED: How do you construct a mechanism where you satisfy the different constituents?

FB: Well, I actually go straight away and discuss with the constituents. So, a direct approach, yeah, but at the same time, I do inform my administration—put transparency and accountability on top of everything because this is about good governance, right?  I try to invite the private sector to follow this good governance. I’m lucky, to some extent, that they follow us.

The difficult part is actually to invite a political party to join because they tend to—I would not say every political party, but I should say they tend to frame themselves from one election to another. And talking about MRT, talking about environmental issues—those are long-term issues. You need to educate those people involved in the political parties to be involved in this long-term effort.

ED: When you were democratically elected as the mayor, what were your promises to your constituents and how have you worked at keeping those promises?

FB: On top of everything, I promised to conduct a good governance, which, to some extent  I did and I’m still doing.  Secondly, I’m trying my best to improve the infrastructure because I believe that infrastructure is the top priority that Jakarta needs.

When I became a governor, many people in Jakarta expected that we could get rid of the flooding, which to some extent, I managed to do. Now many people in Jakarta have almost forgotten the flooding already, but the traffic jam is certainly one of the bigger issues. So, this is an issue that we can only address on a long-term basis.

ED: For a lot of Indonesians, and especially today when Indonesia is very quietly becoming a very sustainable economy, where wealth is being generated and so on, some of the millions of Indonesians who actually come to make Jakarta their home every year, the inward migration is still unsustainable.

And one of the things they say is—there’s an Indonesian saying: ibu tiri lebih kejam ibu kota, meaning the capital city is more cruel than the stepmother.

FB: Yes.

ED: Now, that is, obviously, related to the cost of living, the quality of life in Jakarta.  How do you take the sting away from a sentence like that?

FB: Well, actually, cost of living is not 100% in the hands of my local government or my local administration.  But we’re trying to keep inflation low, so we managed, for the last three consecutive years, to maintain single digit inflation.

And I’m happy also to report that our regional economic development is progressing very well.  Last year, we had economic growth of 6.5%.  The first quarter of this year—2011—is at 6.7%.  We’re looking forward to completing this year with 6.8% or 6.9%.

ED: Yes, but economic growth is going to put the agenda in front of you.  You’re going to have, like you had earlier this year, the water infrastructure—the water dam bursting. You’re going to have flooding coming back again …

FB: Yes, but we’re preparing for everything on a long-term basis.  The rate of inward migration is slowing down every year though it’s still, I mean, big in quantity, but it’s slowing down.  In the last three consecutive years, the incoming migration into the city of Jakarta has been maintained below 100,000.  Last year, it was 60,000 and we hope that we can further reduce the number.

ED: And what do you need to do to slow down the rate of inward migration?

FB: One, I think we have to appreciate the effort of the central government to develop more growth pods around the country. Secondly, law enforcement is important; that’s what we did. We’re trying to convince people, “If you want to live in the capital city, there are certain requirements that you need to fulfil.” Other than that, there will be law enforcement.

A second point with regard to your question as far as the infrastructure is concerned—we keep on expanding our infrastructure. Waterworks are very important.  I have submitted a proposal to the central government to build a water purification factory upstream and pipe the water all the way to Jakarta. This will guarantee that the amount of water that the people of Jakarta need will be there in three to four years’ time. And it’s all on a public-private partnership basis.

3. Issuing bonds to finance the bulding of infractructure

ED: What if I were to ask you one last question, which is your funding mechanism going forward, which is also the first question I asked you. Do you see in the foreseeable future that you will actually float the debt that you have created for building your infrastructure—the railway—and is there a different mechanism that would make sense to you to fund some of the ambitious projects that you have going forward?

FB: We are going to be the first to issue municipal bonds in Indonesia and that’s going to happen next year. We were set for this year, actually, but timing was not right, so we postponed it until the first half of next year. But we’re ready for that. I invited Standard & Poor’s to rate it. Last year, they gave me B, B+.  It’s better than my country’s rating.

I’m happy with that. But most important is to prepare the administration for the responsibility of a bond issue because we’re looking forward to having this municipal bond issued each and every year, again and again, in order to be able to catch up with the need to improve our infrastructure.

ED: And if you go that route, you’ll be one of the first Asian cities from the developing world to have a municipal bond market.

FB: Hopefully.

ED: But then you’d also be walking in the same path as the US cities that got themselves burned because of the relationship with investment banks.

FB: Yeah, that is the reason for prudent financial management.

ED: And what is prudent financial management?

FB: Well, I had to restructure all my financial mechanisms, my agencies and my assets.  So, in that respect, it took me a long time. Since I became a governor, I have been trying bit by bit, step by step, to restructure everything.

ED: And what are the parameters that you give yourself?  Because in a sense, you set your own parameters, don’t you?

FB: Yes and no, because those parameters have to be confirmed by my central government.

ED: Yes, but you state the terms in which you want to build your financial infrastructure.

FB: More or less, yes.

ED: And so, what conditions have you set for yourself that you think that your electorate would buy into?

FB: I’m trying to improve the financial capacity … The tax ratio should be improved, and then …

ED: The ability to pay.

FB: Yes, but then again, it needs also the understanding of our people. We need to educate people at the same time.  On the other hand, we have a standard tax mechanism in Indonesia and in Jakarta in particular. We also need to approach the central government to give more attention to the capital city. Without that, I don’t think that the capital city would be able to handle everything itself.

ED: So, are you happy with the capital city’s current ability to generate its own revenue?  Or is there some work to be done?

FB: It could be better. Some improvement is still needed.

ED: So, what is your discussion with the central government? I mean, what are some of the key areas that you’d like greater control over?

FB: If we can get a better tax-sharing basis with the central government, I expect the central government would pay more attention. For example, in terms of co-financing the infrastructure for public transport in Jakarta. They did with the MRT, but I was the one having 58%, and the central government, 42%. It should have been the other way around.

ED: All right, thank you very much, Mr Fauzi Bowo.  Thank you very much for speaking to us, and all the very best in the infrastructure that you are building.



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