Economics of integrated surface and ground water use management in the Jakarta region, Indonesia

Rapid population growth, urban development and industrialization in the city of Jakarta have placed increasing pressures on the water resources of the region. Unfortunately, due to inadequate infrastructure, the Jakarta water utility, PAM Jaya, is unable to keep up with the growing demand. The current piped water supply reaches only 27% of the total population, while the rest of the population uses groundwater as their main water source. This occurs due to the lack of enforcement of state ownership, which implies that groundwater is treated as if it were an open access resource. The absence of incentives to conserve groundwater gives rise to externality problems, undervalues the potential economic benefits of conservation and encourages rapid depletion and deterioration of groundwater resources.; This study investigates the degree of economic inefficiency of the current institutional arrangements for surface and ground water management in meeting the current and future urban water demand in the Jakarta region. It also assesses some alternative water management scenarios which could improve efficiency, and evaluates the problems of water pricing and the “privatization” of PAM Jaya, Jakarta's water utility.; A model of integrated surface and ground water management is developed using an optimal control method. The model maximizes the present value of net social benefits from water consumption across all users over time, from 1999 to 2025. The model is used to examine four policy scenarios: the status quo, the social planner's solution and two groundwater pumping quota scenarios: the aggregate and partial groundwater pumping quota. In each policy scenario, two investment options for PAM Jaya infrastructure are considered: (1) A fixed investment option, representing a fixed annual investment to maintain capital stocks in water treatment and distribution facilities at the current levels, and (2) An optimal investment option, representing the economically optimal investment in both water facilities. Two economic growth assumptions and three real discount rates are assessed in this study. The empirical models are solved using GAMS (General Algebraic Modeling System) software.; The empirical results demonstrate that, the status quo over the planning horizon, depending on the investment option, economic growth and the discount rate, results in a 7.4 to 47.8% economic inefficiency relative to the social planner's solution. The aggregate and partial quota scenarios result in lower economic inefficiency compared to the status quo. The partial quota is the most feasible, applicable and manageable scenario. Excluding the costs of monitoring and of enforcement of the groundwater quota, it results in a sizeable economic efficiency gain.; The optimal investment option could increase the volume of piped water supply and reduce the cost of water production and raise PAM Jaya's revenues. However, it does not have a significant role in reducing the cumulative groundwater extraction to save the groundwater stock. Investment in water distribution facilities is more productive than investment in water treatment facilities. The volume of water delivery could increase by up to 156% but, this implies only a 35% increase in the surface raw water demands above the current level It is due to significant improvement in water distribution efficiency.