Introduction


Jakarta today is two cities, the beautiful and the ugly.  Beyond
its landscaped, manicured, and modern "protocol" avenues, the
city looks like an overgrown village in the way it provides
drinking water, sewage treatment, and solid-waste disposal
facilities to its inhabitants.  The city has grown from 1.8
million in 1950 to 8.3 million in 1990.  But, during this period,
little happened to the urban infrastructure behind the main
streets.  Compared to similar capital cities in Asia, Jakarta's
housing, water, sewerage, waste disposal, and general environment
are seriously deficient.

This case study focuses on the reasons Jakarta does not provide
adequate environmental amenities for its citizens.  The study
also tries to draw lessons that may be applicable to other large
cities in developing countries (Porter 1995). 



Water


Background

There is no shortage of water in Jakarta.  A dozen rivers and
several canals wind northward through the city.  Groundwater is
accessible within a few meters of the surface throughout the
city.  But, much of this water has become too polluted for human
consumption.

Even today less than one-fourth of Jakarta's population have
water piped into their homes.  More than half of Jakarta's
households draw their water supply entirely or principally from
shallow wells.  The remaining one-fourth rely upon public wells,
standpipes, or water vendors. 


Jakarta's Water Distribution System

A state-controlled agency, Perusahan Air Minum Jaya (PAM Jaya)
supplies piped water.  It receives its water from canals, rivers,
and deep wells.  The water is heavily treated but remains so
polluted that it seldom attains minimum World Health Organization
drinking-water standards.  PAM Jaya supplies the water through
private residential and commercial connections and public
standpipes. 

Private entrepreneurs distribute the water from standpipes. 
Vendors then carry the water in jerrycans placed on long
handcarts that can navigate the narrow alleys where most of the
poor live.  Since it is the poor who rely on water vendors, they
must pay the vendors' high prices for water.  Vendor water costs
10-25 times as much as water piped to houses.  This reliance is
not unique to Jakarta.  Water vendors serve nearly one-third of
the urban population in developing countries. 

Public hydrant operators receive water from PAM Jaya at heavily
subsidized rates.  But the prices paid by consumers were, in the
late 1980's, often at least twice the officially-fixed prices. 
The principal reason for this was a lack of standpipes so that
each operator had a high degree of local monopoly power.

To bring hydrant-water prices down, PAM Jaya nearly doubled the
number of standpipes from 1988 to 1993.  Standpipe water prices
declined dramatically.  This process led to three kinds of
welfare gain to water consumers:

* It reduced the average distance between households and
standpipes, resulting in reduced transport cost for the household
(or its vendor).
* There was, in effect, a money transfer from the hydrant
operator to the consumer due to lower standpipe prices.
* The reduced price of water encouraged consumers to increase
their water consumption.

PAM Jaya sets high piped-water prices for commercial
establishments so that it can give lower prices to home owners. 
This policy drives many commercial establishments to drill deep
wells, thus contributing little to financing homeowners.  In the
end, since PAM Jaya does not recover its costs, it uses taxes or
cuts public expenditures elsewhere to subsidize wealthy
homeowners who receive piped water.


Getting Water Prices Right

* deep well water,
* public standpipe water,
* household connection water, and
* commercial/industrial connection water.
All prices, except for standpipes, rise with the quantity of
water consumed.  PAM Jaya has three goals in setting water
prices:

1. Efficiency.  Everyone should pay a price that covers what it
costs society to produce one unit of water.
2. Equity.  No matter what their income, all people have a right
to clean water.  This may mean that the poor pay less than the
actual cost.
3. Covering Costs.  When the government's general fund is under
stress, it may not be able to subsidize the water supply.  This
may happen even though greater water use would greatly improve
general health and well-being.  Policymakers are increasingly
asking water companies, in Jakarta as elsewhere, to cover costs.

Of course, these three goals usually conflict.  For example,
efficiency requires a single price for all users.  Equity may
suggest an upward-stepped schedule of prices.  And, the efficient
price, the cost of one additional output unit, may not generate
sufficient revenue to cover full costs.

With these criteria in mind, let us examine PAM Jaya water
pricing decisions for its three main categories of consumers:

Large Commercial and Industrial Users
As long as the cost of groundwater is low, commercial and
industrial users will continue to overuse and deplete the deep
aquifer, leading to severe long-term problems.  Efficiency
requires both reducing the price of piped water and raising the
price of groundwater.  The correct price structure requires the
piped water price to be the cost of one additional unit of output
and the deep-well groundwater price to be at a level that will
keep its cost above the piped water price.  These price
adjustments will raise water costs for most industrial users. 
Some firms that use a lot of water may leave the Jakarta area for
other parts of Indonesia.  But this is not an undesirable result.

Public Standpipes
PAM Jaya could raise its price for standpipe water to, or above,
its cost to produce a marginal unit of output.  This would cause
little impact on the poor if more standpipes accompany the price
increases.  The price the poor pay for water from standpipes more
reflects vendor labor costs, largely proportional to distance,
rather than the price of water itself.  More standpipes will
reduce the average distance the vendors need to carry water.  And
pipes move water more efficiently than handcarts.

Household Connections
PAM Jaya uses the lifeline structure of pricing for household
connections.  It charges low rates for the first few units of
water and progressively higher rates for additional units.  This
is not efficient.  But, it is one way to cover the costs of
providing piped water to households.  Nevertheless, this pricing
system would produce more revenue if  PAM Jaya could reduce the
"size" of the lowest-priced segment in their schedule and raise
the "price" of the highest-priced segment.



Wastewater


Background

Despite its size, Jakarta has almost no sewer system.  Wastewater
receives little treatment.  It is discharged either directly into
the canals and rivers or into septic tanks that are too densely
sited or too poorly maintained to prevent groundwater
contamination.  The resulting pollution is worst in the poor
areas where congestion increases the number of polluters and the
number of sufferers.

Sewers are expensive.  In a budget-constrained city, policymakers
must seek alternatives to residential sewers for many decades to
come.  In most areas of the city, the near-term solution must
involve improved septic tanks and public toilets.


Septic Tanks

A large and growing percentage of Jakarta's households have
private toilets (54% in 1980, 72% in 1992).  Most private toilets
drain into septic tanks or leaching pits.  But for one third of
these, there is no treatment.  They directly drain to open
watercourses.  Many septic tank systems are defective.  Some
septic tanks leach.  Others are not emptied regularly.  For
others, the sludge is pumped directly into ditches, canals, or
rivers.  Even those private septic tanks that are well maintained
are often collectively ineffective.  They are too numerous.  They
are too densely packed together.  Their drainage fields are too
small.  And their leachate pollutes piped water, well water, and
canals and rivers.  Many public toilets are not well maintained
and overflow into nearby pools or canals. 


Alternatives to Sewers

In Jakarta, there are three basic problems with alternatives to
sewers: 

* Some people do not operate their septic tanks properly.
* Some people do not use septic tanks at all.
* Many people live in areas where the terrain or congestion
necessitates off-site treatment of human waste.

The first problem is that households do not desludge their septic
tanks every one or two years as required.  When they do, they
often don't treat the sludge properly before disposal.  The city
desludges about 25,000 household septic tanks annually, only a
small fraction of the (unknown) total.  Clearly, the city needs a
plan for establishing large-scale and systematic septic-tank
emptying operations.

The second problem is the absence of septic tanks or any human-
waste disposal system in households for whom septic tanks are
feasible.  This is a serious problem because septic tanks, even
leaching pits, are expensive.  Construction cost is $80 to $350,
which is very high for low-income families.  Perhaps the best
hope is to persuade people in such areas to use public toilets. 

Providing public toilets is also the solution to the third
problem.  Many people live in terrain or congestion that requires
off-site waste treatment.  Public toilets and washing blocks are
not a new idea in Jakarta.  But, they have not been successful
for a variety of reasons:

* They are expensive because of the need to acquire scarce and
high-priced land for drainage.
* They have been poorly planned, sited, and constructed.  The
result is that the facilities are often not wanted and not used.
* They are not maintained.
 They are not desludged by the city.
* Being built in areas prone to flooding, the toilets themselves
are often flooded.

As a result, these communal facilities have failed in three
senses:

* Many end up as inefficient treatments of human waste.
* Many potentially efficient facilities are not used much.
* Others, potentially efficient if modestly used, serve so many
people that they overflow their design capacity, perpetuating the
very problem they were designed to solve.

The magnitude of the failure of public toilets indicates that
there is no easy solution.  Yet for many years there may be no
other way to properly treat human waste at an affordable cost,
especially in poor and crowded areas.  Perhaps we can learn
lessons from Jakarta's standpipes.  Officials could turn
carefully-designed public toilets over to private entrepreneurs
who will maintain the facilities and create pricing structures
that will result in both use and profit.  Privatization is not
costless.  It involves subsidization, both in construction and in
desludging.  But, it may be the cheapest interim partial solution
to Jakarta's problem of human-waste treatment in poor and densely
populated areas.



SOLID WASTE


Background

Jakarta generates a surprisingly large amount of solid waste
given its modest standard of living and extensive recycling.  Its
solid waste is wetter and denser than that of its richer
counterparts in developed countries.  This makes disposal both
more urgent and more difficult. Much solid waste is collected
from paying households by handcart and is transported to local
depots.  At the local depots, or dumpsites, thousands of
scavengers pick over the waste.  This unsubsidized activity
produces recycling and reduces pressure on collection and
landfilling processes.  The solid-waste disposal process works
less efficiently at the second stage.  Only a portion of the
solid waste moves from the local depots to the landfill.  Since
the city has difficulties collecting fees at this stage, it faces
inevitable budget-constraints.


Initial Solid-Waste Collection

The collection process for solid waste in Jakarta is
decentralized and different in different areas.  For more than
half the households, initial waste collection is organized by the
lowest level of government, loosely structured communities of
less than a few thousand people.  The community itself decides on
and pays for the kind of collection service it wishes.  For less
than one-tenth of the population, it means door-to-door curbside
pick-up.  For another one-tenth it means block collection.  That
is, the collection vehicle moves down the street on pre-arranged
days.  It stops every 200 meters or so and plays music to alert
residents to bring their solid wastes to the vehicle.  These
services are  expensive and require streets wide enough for large
vehicles.  So only well-to-do areas choose this method.

Collectors pick up the majority of residents' waste either by
foot or handcart.  Several thousand handcart operators ply the
narrower streets of Jakarta, delivering the waste to temporary
solid-waste storage spaces where it awaits city collection.

The cost of this first stage of solid-waste disposal is borne
entirely at the local level.  The sophistication and completeness
of collection depends simply and essentially on what the
residents are willing to pay.  The disadvantage of this system is
that, in neighborhoods composed almost entirely of poor
residents, handcart operators can collect very little waste-fee
revenue and therefore give poor service.  Not only is this
inequitable, but it worsens the health problems that are most
worrisome in these highly congested areas.

On the other hand, Jakarta's policy of making the first stage of
solid-waste collection a neighborhood responsibility makes very
good economic sense for two reasons.  One, it is easiest to
collect a fee for solid-waste removal when it is near the
household that created the waste.  After all, at that point, it
is that household itself that benefits the most from its removal.

Only as the solid waste accumulates far from its creators does it
require public solution at a higher government level.  And two,
most Jakarta neighborhoods contain residents from many different
income levels.  No one is better situated to find the proper
level and structure of solid-waste fees than the local community
leader.

The rest of the collection system is more familiar.  Many
households have their solid waste picked up by door-to-door
service provided either by the neighborhood, the city, or a
contractor for the city.  Big commercial and industrial
establishments are responsible for disposing of their own waste. 
Some use city service, but most employ private contractors.


Recycling

Jakarta has an extensive recycling system.  No sooner has solid
waste left the household than  scavengers begin to pore through
it.  These are people with bags or carts who seek a living by
collecting discarded items that can be recycled or reused.  There
are 10-40 thousand scavengers in Jakarta.  The range of estimates
is large because of the informal nature of the occupation.  Also,
until recently, officials considered scavengers to be urban
undesirables.  They were liable to compulsory job retraining or
exile from the city.  They collect not only items that are
recycled in industrialized countries, such as paper, plastic,
glass, and metals, but also discarded household durable goods,
wood, bone, sawdust, boxes, and cigarette butts.

Currently there are a dozen factories in the Jakarta area
recycling more than 200,000 tons of waste paper per year, another
half dozen factories processing 500,000 tons of scrap iron per
year, and various processors of plastics, glass, rubber, and
textiles.


Transportation to the Landfill

It is the city's job to move solid waste from the small local
transfer station to the landfill.  This stage of disposal ends up
being paid for by the city's general fund.  In principle, this is
covered by the solid-waste fees collected at the local level, but
very little of that money reaches the municipal agency.  This
lack of funding means that about one-third of the "collected"
solid waste never, or slowly and irregularly, leaves the local
transfer stations.  The transfer trucks are too few, too old, and
too poorly maintained. 

Even for Jakarta's poorest people, a willingness to pay for a
cleaner environment probably exceeds the city's actual
expenditure.  But Jakarta could spend its existing solid-waste
budget more effectively.  There are three ways to achieve greater
waste-disposal productivity:

* keep the operations as labor-intensive as possible,
* emphasize solid-waste collection rather than street-sweeping or
landfill-monitoring, and
* open new landfills closer to the city center. 



On Covering Costs


There are two questions to answer here.  The first is a question
of principle.  "Should" Jakarta attempt to cover the costs of
providing drinking water, wastewater treatment, and solid-waste
disposal?  If the answer to that question is "yes," then a second
question arises -- one of fact.  "Can" we conceive a pricing
structure that would permit Jakarta to cover these costs through
collection of fees? 

The "should" question is quickly answered.  The theory of public
provision of urban services tells us that the private market will
supply an optimal quantity "if all four" of the following
conditions are met:

1. The cost of producing the last unit of output is not below
average cost (total cost divided by total output).
2. There is no element of a public good in its provision.  (A
public good is one that can be consumed by more than one person
and people cannot be stopped from consuming it.)
3. Its provision generates no positive benefits to those who do
not pay for it.
4. The service is not one that the government thinks all people
should receive.

We know that each of the three environmental services considered
here involves several, if not all, of these causes of "market
failure."

Once any of these four conditions for market failure arise,
policymakers cannot rely upon the market to provide a sufficient
amount of the service.  It then becomes necessary for government
to step in and provide or subsidize the service.  The question
then becomes: is it better to cover costs through non-optimal
prices above the cost of the last unit of output (through
increases in general taxation) or through other kinds
of social expenditure reductions?  Theory offers us little help
in this choice between second-best alternatives. 

Suppose, however, that the scope for raising taxes is limited and
that greater cost coverage is the appropriate path.  The second
question then arises: can we achieve greater cost coverage
through user-fees for services?  In this respect, there is a
great difference between providing drinking water and treating or
disposing of human or solid wastes.

Drinking water is absolutely essential for survival.  The only
limit to what a person will pay for water is income and wealth. 
The question for drinking water, therefore, is not whether PAM
Jaya can cover its costs -- it can.  The details of the
appropriate pricing structure have already been discussed in 
"Getting Water Prices Right." 

On the other hand, waste treatment or disposal, both human and
solid waste, is not essential, and substitutes (including no
treatment or disposal) are available.  Although these
alternatives have a high cost to society, they have a low cost to
individuals.  This limits the price the government can charge.

In a budget-constrained world, governments must raise taxes to
cover the costs of providing urban sanitation services,
especially human-waste and solid-waste disposal services.  We
must remember that the basic reason why urban governments try to
provide environmental services is that, by the nature of the
services, at least one of the four above referenced conditions
are not met.



Lessons


Historically the general backwardness of urban environmental
services in Jakarta seems ironically to derive from its natural
abundance of water, both for drinking and waste disposal.  Only
recently, as the rivers and groundwater have become polluted, has
it become clearly necessary to undertake investments in these
services.

By now, the investments needed to provide first-class services to
all its residents are huge, far beyond politically feasible
budgetary reallocations.  The result has been an effort to
provide first-best services to as many as possible within
existing budgets.  This has resulted in services being provided
largely to those who can and will pay a price for them.  The
irony is that where piped water is not available because the poor
cannot afford to pay for first-class service, they must be
willing to pay a higher price for second-class water service.

This is the dilemma of urban environmental services not only in
Jakarta but in many other cities of developing countries. 
Equity, health problems, and economies of scale all urge
providing modern, first-class service to all.  However, budget
constraints and willingness to pay mean only the rich receive
first-class service.  The dilemma is worsened by a belief that
the best and fastest route to providing first-class service to
all is by providing first-class service to a few and gradually
expanding the system over time.  This single-minded emphasis on
first-class service means that the poor too often receive less
than second-class service. 

The principal lesson of this study is that policymakers need to
give more attention to less-than-first-class, but affordable,
services to the poor.  In each of the three services we have
examined, it is possible to improve the welfare of the poor, at
low cost, by providing better service that falls short of
desirable first-class service.  In the interim, we could solve
the dilemma by providing different kinds of environmental
services to different income groups.