ASIAN DEVELOPMENT BANK                                                                                                                                                                                                                                                                                                                                                                                           
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                                                                                                                                                                                                                                                              
                                                                        
                                                                        
                                                                        
                                                                                                                                                                                                                                                                       INDONESIA:  
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                          COUNTRY ENVIRONMENT ANALYSIS 
                                                                        
                                                                        
                                                                                                                                                                                                                                                                                                              
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                                                                                                                                                                                                                            August 2005
                       EXECUTIVE SUMMARY 
        
       This CEA report will assist ADB to assess and evaluate the status of development in terms of 
       environment and NRM capabilities, environmental performance, and the environmental 
       improvement (or degradation) trends. This CEA report preparation process is one of the means 
       through which ADB conducts in-depth dialogue with the key stakeholders and policy makers in 
       Indonesia. In addition, the process highlights the priority actions for supporting the sustainable 
       use of environment and natural resources in short- and medium-terms. 
        
       Deforestation, loss of biodiversity, coral reef degradation, fisheries depletion, land degradation, 
       agricultural productivity loss, rural poverty, water resources depletion, flooding, irrigation 
       infrastructure degradation, water quality degradation from aquaculture, and  agriculture inputs 
       remains to be key natural resource environmental resources. Sustained focus in these areas 
       through infrastructure projects, policy and capacity building (especially in the context of 
       decentralization laws) in an integrated watershed/bay approach is warranted.  
        
       The data shows trend of improvement in water supply and sanitation but significant investments 
       and efforts has to be made by regional governments to achieve the MDG’s.  Air pollution poses 
       significant health risks to people in highly congested urban areas and investment are warranted 
       to mitigate air pollution affects.  Also, water pollution from sewage, industrial toxic wastes, solid 
       and hazardous waste continue to endanger both human health and fisheries. Monitoring, 
       assessment and enforcement remain a high priority. In addition to command and control 
       regulations, economic tools and innovative instruments like clean development mechanism, 
       pollution prevention, clean technologies, environmental management systems, etc., could be 
       effective.     
         
       Principal Environmental Concerns 
        
       Deforestation increased dramatically over the past ten years and worsened following the 
       economic crisis of 1997/98. The average annual deforestation rate is now believed to have 
       reached 2 to 2.5 million hectares. It is estimated that 54%of the remaining forests are 
       threatened. The primary causes of the current trend of rapid deforestation continue to be (i) 
       illegal logging, (ii) forest allocation and permanent forest conversion for agricultural use, (iii) fire, 
       and (iv) mining. Compliance with and enforcement of existing laws and protocols at the national 
       and distinct levels remain weak. 
        
       Coral reefs are integral to Indonesia’s development program due to their role in providing food, 
       coastal protection, and economic opportunities through resource extraction and tourism.  
       Approximately 22% of Indonesia's population lives on the coast, and about 60% live in the 
       coastal plains. Coral reefs are important source of food and economic opportunity for the 67,500 
       coastal villages as well as for marine-based tourism and the pharmaceuticals industries. 
       Indonesia’s coral reefs and fisheries resources are some of the most threatened in the world.  
       Over the past two decades, destructive fishing practices, over-fishing, coral mining, 
       sedimentation, pollution, and habitat loss have contributed to the degradation of most reefs in 
       Indonesian waters. The critical challenges facing the coastal and fisheries sector in Indonesia 
       continue to be from an open access system, lack of an integrated framework for coastal 
       resources protection at all levels of government, low levels of public awareness, and economic 
       hardships in coastal communities.  
        
       The Indonesia fishing industry employs more than 4 million people (5% of the national labor 
       force) with 50% employed in the capture fisheries sector and 50% in the aquaculture. 
       Destruction of coastal resources is not limited to coral reefs. The massive areas of mangrove 
       and peat swamp forests also have been rapidly and unsustainably exploited, often with 
       conversion to fishponds, rice and oil palm production, and other uses. 
        
       Rapid agricultural growth was a major contributor to the drastic reduction in poverty in the 1980s 
       and 1990s. However, the growth in sector has since then stagnated and relative contribution of 
       agriculture to the GDP has declined from 31% in 1980s to 18% in 2002. Over the same period, 
       the sector growth declined from about 3.4% to 1.6%. Nonetheless, agriculture sector is still 
       home to the largest segment of Indonesian population and the poor, and has a primary role in 
       achieving overall country objective of poverty reduction. In 2002, agricultural wages and farming 
       incomes contributed 43% to rural household income and two-thirds of rural employment. During 
       the economic crisis of the late 1990s, agriculture provided additional employment and income 
       for individuals who were laid off from urban employment due to the crisis. Increasing agricultural 
       productivity remains to be the key challenge in this sector. Land degradation, soil erosion, 
       nutrient and pesticide management are the key environmental concerns. 
        
       Indonesia’s need for a more effective management of water resources arises as a result of 
       watershed deterioration, lack of water storage, limited capacity to transfer water among basins, 
       a rapid increase in urban and industrial water demands, and lack of a program for allocation and 
       pricing, and water pollution. Conflict over water use for agricultural, industrial, and urban 
       purposes continues. Flood due to land clearing, developments, and poor watershed 
       management continues to threat the economic assets in the flood prone areas. The challenges 
       in water resources sector include (i) institutional weaknesses particularly with respect to river 
       basin management; (ii) water pollution; and (iii) lack of a framework for water allocation and 
       pricing. 
        
       Domestic sewage, industrial effluents, agricultural run-off, and mismanaged solid waste are 
       major sources of surface and ground water pollution. Indonesia has one of the lowest rates of 
       sewerage and sanitation coverage in Asia. As a result, Indonesia has experienced repeated 
       local epidemics of gastrointestinal infections. Only half of the population has poorly maintained 
       on-site sanitation (e.g., septic tanks). Only 1% is covered by urban sewerage system. And 
       almost 64% of urban population is not covered by piped water.  
        
       Raw drinking water supply in major cities in Indonesia is not potable. Rivers and drinking water 
       sources are contaminated by sewage, industrial waste and irrigation wastewater. Lack of 
       appropriate pricing policy and slow and declining aquifer recharge has led to overexploitation of 
       groundwater beyond sustainable yields resulting in saline intrusion from coastal waters.  
        
       Air pollution is a major health problem in the congested and industrialized cities. Air pollution is 
       causing significant public health risks and natural resources degradation due to emission of fine 
       particulates, sulfur dioxide and photo oxidants.  
        
       In the institutional, policy and governance aspects, sustainable natural resources management 
       (NRM) and environmental considerations need to be appropriately taken into account in the 
       details for implementation of the decentralization framework. 
        
       Key Policy, Legal and Institutional Constraints and Opportunities 
        
       Laws No. 22/1999 and 32/2004 on regional autonomy and Laws No. 25/1999 and 33/2004 on 
       fiscal balance have marked a major policy shift in Indonesia. The political and legislative 
       authority and financial autonomy have largely been devolved from the Central to the District 
       Governments. District Governments’ functions include natural resources management (NRM) 
       and the environment, and those Governments benefit from and are allowed to keep most of the 
       revenues generated through NRM. As a consequence, to date, the decentralization process has 
       contributed to continued—and even accelerated—degradation of natural resources, frequently 
       induced by short-term gains through resources extraction and exploitation and by applying 
       unsustainable management practices. Decentralization is a long-term political and 
       administrative process that will continue to have major implications on natural resources and the 
       environment. Regulations, procedures and guidelines for the proper functioning of Laws 
       32/2004 and 33/2004 are being developed and will then have to be adapted to the locally 
       specific conditions, taking account of the regional income disparities and government 
       institutional capacities. ADB should take proactive action so that environmental considerations 
       are taken into account in the process of setting up the details of the decentralization policy 
       framework. 
        
       The environmental legal framework in Indonesia has developed over the past two decades and, 
       in general, is well developed and tends to meet international standards. However, some of the 
       laws, regulations and technical guidelines will have to be adapted to the new realities in a 
       decentralized policy setting. Despite the fact that there is a comprehensive legal framework, 
       technical guidelines will have to be further elaborated, and, in particular, the enforcement of 
       environmental laws and regulations, e.g. in the field of environmental impact assessment, will 
       have to be significantly improved. 
        
       Forest Law (Law No. 41/1999) and its regulations (GR 34) although controversial on certain 
       grounds, have provided a foundation to build on the necessary regulatory and policy protocols 
       to curb the high rate of deforestation and biodiversity loss. Efforts have been made by MOF to 
       update the Biodiversity Strategy Action Plan (2003 to 2020) in collaboration with BAPPENAS 
       and streamline the Law and the devolution of management responsibilities to the district and 
       community levels. In this context much effort will be needed on governance, building district and 
       community level capabilities, and innovations in forest management through community-based 
       or co-management approaches. 
        
       GOI developed a new GR No. 82/2001 on Water Quality Management and Water Pollution 
       Control. The GR 82/2001 provides an opportunity to harmonize water resources management 
       and environmental management particularly in light of devolution to LGUs of water pollution 
       regulations, abstraction licensing, and river basin management. Following the release of GR 
       82/2001, the Minister Coordination on Economic affair also issued the Ministerial Decree No. 
       15/MEKON12/2001 on the “Direction National Water Resources Management Policy”. This 
       direction modifies the approach to water resources management in Indonesia in terms of 
       management, allocations, pricing, and the role of communities. These water resource 
       regulations and policies provide good opportunities to address key water resource issues in 
       Indonesia.  
        
       Strategic Priorities  
        
       ADB should continue to emphasize CRM, agriculture productivity, irrigation, water supply and 
       sanitation, air pollution control, water resources and river basin management and land 
       degradation in its environment and NRM portfolio.   
        
       ADB should support the streamlining of the decentralization laws, for example, regional 
       governance (Law 22/1999 revised in 32/2004) and fiscal balance (Law 25/1999 revised in 
       33/2004) laws. Also, ADB should support the development of environmental and natural