World Bank and Environment in Indonesia

August 1, 2014

The World Bank

As the world’s largest archipelago of 17,000 islands, Indonesia spans two bio-geographic regions - the Indomalayan and Australasian - and supports tremendous biodiversity of animal and plant life in its pristine rain forests and its rich coastal and marine areas. Up to 3,305 known species of amphibians, birds, mammals, and reptiles and at least 29,375 species of vascular plants are endemic to the islands, estimated at 40 per cent of APEC’s biodiversity. Indonesia’s stunning natural environment and rich resources however, are facing sustained challenges both from natural phenomena – it is located in the highly seismic Pacific Ring of Fire which experiences 90 percent of the world’s earthquakes and human activity.

The growing pressure of population demands together with inadequate environmental management is a challenge for Indonesia that hurts the poor and the economy. For example, total economic losses attributable to limited access to safe water and sanitation are conservatively estimated at 2 percent of GDP annually while the annual costs of air pollution to the Indonesia economy have been calculated at around $400 million per year. These costs are typically disproportionately borne by the poor because they are more likely to be exposed to pollution and less likely to be able to afford mitigation measures.

Natural resource challenges have persisted and become more complicated after decentralization. For example, the forest sector has long played a pivotal role in supporting economic development, the livelihoods of rural people and in providing environmental services. However, these resources have not been managed in a sustainable or equitable manner. Turning this situation around will require a new vision, led by the Government, of what a viable and environmentally sound forestry sector might look like.

The country’s administrative and regulatory framework cannot yet meet the demands of sustainable development in spite of a long history of support for policy and capacity development both from within the government and with international donor support. Indonesia’s ministries concerned with environment and natural resources management have benefited from good national level leadership, and also from an active network of civil society organizations throughout the country that are focused on environmental issues, with significant advocacy experience. Yet, improving Indonesia’s approach to environment and natural resources management is difficult.

Two reasons account for much of the poor performance: First, despite the substantial investment in environment and natural resources policy and staff development, actual implementation of rules and procedures has been poor and slow due to weak commitment by sector agencies, low awareness in local departments and capacity challenges at all levels. Also, awareness about the expected negative environmental impacts of sustained economic growth and the mechanisms for stakeholders to hold government agencies accountable for their performance are weak. Second, there is little integration of environmental considerations at the planning and programmatic levels, especially in the public investment planning process and in regional plans for land and resource use.

Key Issues

  • Perverse incentives that hinder the sustainable use of natural resources 
    Natural resources are an important contributor to Indonesia’s GDP and Government budget. Agriculture, forestry, and mining contribute about 25% of Indonesia’s GDP and about 30% of overall Government budget revenue (in 2005, income tax on oil & gas represented 7% of revenue, and “non tax receipts” on natural resource revenues represented 22% of state revenues). Yet, Indonesia’s macroeconomic policies (tax and non-tax revenue policies and fiscal balancing formulas) appear to favor resource depletion over sustainable use as they reward district governments on resource revenue and not performance or stewardship, under-tax forestry and fisheries (relative to other natural resources), and do not allow charitable contributions by individuals or corporation.
  • Gaps between policy and practice following decentralization could slow significant improvement in environmental quality 
    Under decentralization, the extent to which sub-national governments feel bound by national guidelines is being put to the test; the civil service is no longer part of a unified chain of command, regulatory bodies in many provinces and districts now fall directly under the command of the governor or district head, who is often also the proponent of the projects or activities that must be regulated. Despite the substantial investment in environmental policy and staff development, actual implementation of rules and procedures has been poor. These problems are unlikely to get better under decentralization unless a more effective approach to regulation can be developed. Many provinces and districts are making new interpretations of existing rules, or else inventing entirely new regulatory procedures. While some of these innovations strengthen environmental controls, many relax them or bypass national standards entirely.
  • Public perception of environmental issues and the Government’s development priorities
    Public awareness is an essential part of the effort to address Indonesia’s environmental problems, from disaster risks to biodiversity conservation. Informed and aware citizens can take action to address environmental issues, and can form constituencies for improved efforts at the political and local government level. At a broader level, however, environmental values are not deeply embedded in society, leading to undervaluation of natural resources and environmental services. Participation and voice in decision making is an essential element of good governance. Recent environmental disasters (floods, mud, fires, erosion) have stimulated greater environmental concern, but further analysis of knowledge, attitudes and practices would be needed to determine how far or deep this understanding goes outside of urban centers, and what tools can best be used to build on this basic awareness.
  • Social, environmental and economic benefits , risks and costs of alternative development paths
    Energy policy, forest sector practices and climate change issues are intricately linked in Indonesia. Fossil fuels dominate energy consumption in Indonesia both in rural and urban areas and Indonesia is gradually increasing the proportion of energy produced from coal (approximately 40% in 2002). Indonesia is also a large greenhouse gas emitter, generating 80 %of greenhouse gases from changed land use following logging and forest/swamp fires.

The World Bank Environment Unit in Indonesia is working on climate finance, forest and REDD+ issues; climate policy, finance and green economy issues (including control of global pollutants); biodiversity protection, including marine, coral, and terrestrial; engagements with civil society; and safeguard analysis and support. Read more