US-AEP Export Advisor - Indonesia: Environmental Market Analysis

With a population of 190 million, Indonesia is witnessing rapid urbanization and demographic increases that are straining environmental resources. Industrial development nationwide is highly uneven and mostly centered on the island of Java, where the capital city of Jakarta is located. Pollution is a major and growing social problem because few or no "Best Available Technologies" are used in municipal infrastructure projects.

Government Action

Indonesia has fairly rigorous environmental laws and regulations. However, like the governments in many other rapidly developing countries in Asia, the Indonesian government still accords relatively low priority to environmental protection in favor of economic development. The result is lax enforcement of environmental regulations. With continuing pressure from a well-developed middle class and several high-profile NGOs, however, the government has been slowly stepping up enforcement activity, making industries more accountable for environmental degradation

Many government officials recognize that, based on current environmental conditions and trends, the country needs to consider sustainable development in its overall economic policies. In the first national Meeting on the Environment in Jakarta in November 1994, President Suharto announced that more environmental regulations were needed and that the government would increase its monitoring of development projects to ensure full implementation of environmental programs.

Historically, the government pursued negotiations with polluting industries. There are signs that it is considering more economic incentives such as tax breaks and soft loans to encourage private-sector investment in pollution control measures. Development of new towns with industrial estates or industrial zones away from the major capitals have led to privatized or semi-privatized, centralized environmental facilities.

MARKET ESTIMATES AND ANALYSIS

Although the industrial waste treatment industry is still in its early stages of development, there are indications that it will grow. One such indication is the willingness of large foreign waste management firms to invest in hazardous waste treatment facilities in Indonesia in the past few years.

According the U.S. Department of Commerce (USDOC) Commercial Service, the Pollution Control Equipment sector ranks 11^th among leading industry sectors for U.S. exports and investment for nonagricultural goods and services in Indonesia. The best prospects for U.S. environmental technologies are in the following industries:

Environmental Business International (EBI) estimated Indonesia�s total environmental market at around $980 million in 1997, up from about $860 million in 1995.

Environmental Market Breakdown (U.S.$ millions)

Market Segment	1995	1997
Equipment
Water Equipment and Chemicals	120	140
Air Pollution Control	50	60
Instruments and Monitoring Systems	25	30
Waste Management Equipment	30	30
Process and Prevention Technology	10	10
Services
Solid Waste Management	130	150
Hazardous Waste Management	20	20
Consulting and Engineering	60	70
Remediation	6	10
Analytical Services	20	20
Water Treatment Works (Municipal and Industrial)	100	110
Resources
Water Utilities	280	320
Resource Recovery	5	10
Total	860	980
Note: Total is rounded off. Source: � Environmental Business International, Inc. (San Diego, California)

Industrial Equipment

The USDOC Commercial Service has provided the following estimates for the pollution control equipment market. These estimates suggest the impact of the economic crisis in 1998.

Pollution Control Equipment Market in Indonesia (U.S.$ millions)

Indicator	1996 estimated	1997 estimated	1998 estimated
Total Market Size	900	1,100	180
Total Local Production	0*	0*	0*
Total Exports	0*	0*	0*
Total Imports	900	1,000	180
Imports from the U.S.	175	280	40
Note: the above statistics are unofficial estimates, pending donor loans. * Negligible amounts, if any.

Infrastructure Projects

Indonesia has encouraged the private sector to advance public/private sector arrangements to develop environmental infrastructure, particularly in water supply. The government has preferred public/private partnerships instead of outright privatization of water supply and wastewater treatment for political reasons. Learning from the experience of neighboring Malaysia, the government entertains offers on a "first-come, first-serve" basis.

The environmental market on the municipal side includes the construction and management of wastewater treatment, water supply, and solid waste facilities. The Indonesian government is taking a hands-off approach, assigning the private sector a greater role in building up the country�s much-needed urban environmental infrastructure. This approach gives American C&M firms the opportunity to own and operate large environmental infrastructure projects and provide a variety of related services, such as revenue collection.

The country receives a significant amount of multilateral and bilateral financing assistance for environmental projects. Because of historical ties, European assistance plays a strong role in environmental programs. Aided by the international donor community, the government has increased its investments in environmental infrastructure from $25 billion between 1989 and 1993 to $35.8 billion between 1994 and 1998, but it still relies on the private sector for the bulk of financing. Projects are targeted on roads, water supply, drainage and flood protection, and environmental sanitation.

Indonesia�s environmental infrastructure market is estimated to involve some $5-7 billion per year in investments up to 2000. Of this, the foreign component is less than one-third - about 25% in equipment and 5% in consulting services, according to industry sources.

While the environmental market is relatively immature, competition is already very tight. Lack of regulatory enforcement has not deterred many domestic and foreign firms from starting businesses or pursuing projects.

The country�s budding environmental industry has grown mainly on the strength of environmental impact assessment consulting and water/wastewater treatment activity. HIDUP Indonesia, one of Southeast Asia�s more forward-thinking environmental trade groups, has seen its ranks grow. Most members are involved in environmental consulting services and water/wastewater treatment business. Annual sales of providers are still small, ranging from $100,000�$10 million.

As a former Dutch colony, Indonesia hosts many European firms. These include DHV, which enjoys a strong presence in consulting services related to environmental impact assessment, and Lyonnaise des Eaux, which has tapped into Indonesia�s water supply projects for the last decade.

With water/wastewater and other environmental infrastructure opening up under public/private sector development arrangements, the market has attracted a large number of players vying for a relatively small market. U.S. companies are generally not as competitive as their European or Japanese counterparts. U.S. firms adhere to stricter foreign corrupt practice laws and do not have ready access to concessional financing. U.S. companies with a local presence include

The Office of the Minister of State for Environment (KLH), established in 1978, oversees environmental policy. The 1982 Environmental Management Act provides the basic provisions for the regulatory framework, further supported by the 1986 Environmental Impact Management regulation and the Water Pollution Control Act of 1990. Modeled after the U.S. Environmental Protection Agency, the Environmental Impact Management Agency (BAPEDAL) was established in 1990 to implement environmental policy. Both BAPEDAL and KLH develop pollution control and other industry standards. However, enforcement has been inconsistent and weak. For example, industrial pollution reduction or control is achieved through manufacturing process upgrades, or in reaction to ad-hoc government intervention, as in the case of major oil spills.

BAPEDAL is severely hampered by many factors, including a lack of skilled staff, funding, legal power to conduct site inspections, and jurisdiction over the licensing process. As a result, polluting industries can obtain environmental permits without having to meet any minimum conditions. Even when polluters are finally brought to court, the case may be thrown out due to corrupt practices in the judicial system. BAPEDAL�s institutional strength is improving with assistance from the World Bank.

Environmental Impact Assessments

BAPEDAL implements the development of monitoring and evaluation protocols for Environmental Impact Assessments (AMDAL). Under the anti-pollution statute of 1987, an AMDAL is required for all new industrial construction and for existing facilities that produce hazardous or toxic waste. Linking the AMDAL process with the approval of project permits helps enforce environmental regulations.

AMDAL is perhaps the government�s strongest enforcement mechanism. However, there are several constraints to effective implementation, including BAPEDAL�s limited role in the process. In theory, AMDAL is BAPEDAL�s responsibility, but in practice, the process has fallen to sector ministries and provincial governments. The process suffers from many problems, ranging from inadequate expertise in impact assessment preparation to the inability of the AMDAL commissions to review assessments.

Minister of Environment Sarwono Kusumaatmadja has urged industry to conduct environmental audits voluntarily. Such audits remain company property and are held in confidence. Companies that undertake audits are expected to disclose their findings and agree to monitoring. Most companies fearing further government scrutiny are more likely to steer clear of environmental audits.

BAPEDAL�s focus on key polluting industries has been one of the strongest drivers for the environmental market. The agency created an innovative program in 1993 to strengthen its enforcement capability, which was then being outpaced by rapid industrialization. After much delay, the government launched the Program for Pollution Control, Evaluation, and Rating (PROPER) in 1995. This program rates manufacturers according to a color scheme from gold to black. No company has received a gold rating so far, although a few companies are working toward that goal.

Unlike environmental audits, this rating system is publicized by the government and open to public scrutiny. Independent consultants have assessed the initial group of 300 company participants. There has been limited success in encouraging manufacturers to exercise some control over their emissions. The government intends to recruit at least 750 firms by 2000, hoping that such a critical mass will motivate the sector as a whole to adopt greener standards.

PROPER Criteria for Business Performance Rating

Together with the World Bank, BAPEDAL compiled information on a comprehensive list of pollutants at 187 factories. Using a sophisticated computerized model that accounts for dangers posed by each pollutant, information on each factory was collapsed into a single number. These companies were then ranked into five possible categories. The 187 companies served as guinea pigs, with 11 volunteer companies and four special participants. The government awarded five companies with a green status. The names of the other companies were not released, but the government announced that 115 of them were ranked as red and six were ranked as black. Polluting firms were warned that their names would be publicized in six months for noncompliance with environmental regulations. Advocates believe that the public humiliation of receiving a black rating serves as a stronger incentive for companies to comply with regulations than the prospect of a lawsuit.

By December 1995, 231 companies had joined the rating program. Companies rated red dropped from 115 in June to 108 in December, while companies ranked as black had dropped from six to three.

PROPER's Short-term Impact

Rating	No. of Companies June 1995	No. of Companies December 1995	Percent Change
Gold	0	0	0
Green	5	4	-20
Blue	61	72	18
Red	115	108	-6
Black	6	3	50
Total	187	187	0
Source: World Bank

Progress, while not substantial, is apparent. PT Indobharat Rayon obtained a black rating in June 1995, but upgraded to a blue rating in December. PT Inti Indorayon Utama, which has been criticized for its environmental management standards, also received a blue rating in December. BAPEDAL sees PROPER as an effective instrument for changing behavior without the use of legal measures. While environmentalists have expressed skepticism about the scheme, many firms take it seriously. Industries are also feeling pressure from buyers abroad who are demanding "green" manufactured products. The textile and athletic shoe industries are most heavily affected.

Encouraged by its success, the government plans to expand the program from its initial focus on water/wastewater to include air pollution and hazardous waste. There are plans to publish plant pollution ratings for specific types of industries at regular intervals to keep up the pressure and public interest.

PROKASIH, the Clean Water Program, aims to improve the quality of rivers nationwide. So far, the program has addressed problems in 31 rivers in 13 provinces but has been expanded to include more than 50 rivers in 17 provinces. Each provincial governor is responsible for program implementation within the province.

With Indonesia shifting away from processing industries and toward assembly industries, there has been a significant decline in biological oxidation output. However, concentrations of trace metals such as mercury and lead are on the rise. According to the World Bank, industrial pollution in urban areas will decline from 70% today to 60% by 2020. However, the absolute level of industrial pollutants in Indonesia�s cities will expand nearly 10-fold from their current levels.

According to the World Bank, the cost of pollution control increases with the level of abatement:

Based on the experience of PROKASIH, pollution abatement for the entire industrial sector would be about $700 million. Over a 10-year period, this would be $70 million/year or less than 0.6% of current GDP. Based on the experience of other countries, the World Bank contends that abatement costs for new or expanding firms would range from 2�5% of total investment.

BAPEDAL also has air pollution control programs targeting five large cities, marine pollution control, clean production technology, hazardous waste management, and environmental damage control.

ISO 14000

Local manufacturers' spending for environmental technology may change with the implementation of ISO 14000 in the coming years. Although participation in ISO 14000 is voluntary, manufacturers will probably need to upgrade their environmental compliance standards if they wish to continue to export to Europe.

BAPEDAL also plans to introduce Indonesia�s own version of ISO 14000. Because the agency is still working out the criteria necessary to meet the standards, accreditation is voluntary.

Indonesia: Environmental Market Analysis

COUNTRY OVERVIEW

State of the Environment