INFRASTRUCTURE DEVELOPMENT AND SERVICE PROVISION IN THE PROCESS OF URBANIZATION

Transcription

1 INFRASTRUCTURE IN EAST ASIA AND THE PACIFIC THE WAY FORWARD INFRASTRUCTURE DEVELOPMENT AND SERVICE PROVISION IN THE PROCESS OF URBANIZATION as of December 2004 UTCE Ltd. ALMEC Corporation

2 This paper was commissioned for the ADB-JBIC-World Bank East Asia Pacific Infrastructure Flagship Study. The views expressed are those of the author only.

3 TABLE OF CONTENTS 1. Introduction Background and Objectives Coverage of the Paper Urbanization Trends in the EAP Region Urbanization Trends in the EAP Region...4 1) Rapid Increase in Urban Populations...4 2) Urbanization vs. Economic Growth in the EAP Region Changes in National Land Structure along with Urbanization...7 1) Concentration or Diversification of Cities...7 2) Widening of Disparity Urbanization in Metropolitan Areas ) Emerging Huge Metropolises ) Densification of Core Urban Areas ) Extension of Urban Areas beyond Jurisdictional Boundaries Changing Environments Surrounding Urbanization ) Globalization as a Dynamo for Urbanization ) Changing Urban Functions with Technical Innovation Impact of Urbanization on Infrastructure in the EAP Region Increasing Needs for Urban Infrastructure Implications of National Spatial Development ) Increasing Needs for Infrastructure to form efficient National Land Structures ) Expansion of Disparities in Infrastructure Service Levels Impact on Infrastructure Development in Emerging Huge Metropolises ) Expansion of Urban Areas ) Impact on Livability of Cities Impact of Urbanization on Emerging Surrounding Environments Summary of Urbanization Impacts on Infrastructure in EAP Countries Key Issues and Strategies for Infrastructure Development and Service Provision Financial Resources for Sustainable Infrastructure Development ) Infrastructure Investment in the EAP Countries ) Financial Resource Development Balanced National Land Development ) Impact of Infrastructure on Regional Spatial Structure ) Roles of National Urban Policy ) Infrastructure Development in Compliance with National Land Development Strategies Growth Management of Urbanization in Metropolitan Areas...46

4 1) Interaction of the Expansion of Urban Area with Trunk Infrastructures ) Long-term Perspective and Comprehensive Approaches ) Land-use Management ) Efficient Operation of Existing Infrastructures ) Comprehensive Infrastructure Development ) Infrastructure Provision for Urban Poor ) Governance Improvement and Capacity Development Infrastructure Development Strategy in response to Globalization and IT Innovation ) Balanced Development under Globalization ) Strategic Infrastructure Development Targeting IT Industry Summary of Recommendations...59 Appendix A. Japanese Experience of National Land Development B. Growth Management and Urban Transport Infrastructure Development C. Experience of Developed Countries on Financing Urban Transport Infrastructure D. Basic Data of EAP Countries

5 LIST OF FIGURES Table Scale and Speed of Urbanization of EAP Countries... 5 Table Average Annual Growth rate of GDP and Urban Population, and Poverty Index by Region... 6 Table Regional Disparities in the EAP Countries, Table Cities with more than 8 Million Population, Table Regional Disparities in Infrastructure and Social Service Levels, Thailand in Table Regional Disparities in Infrastructure and Social Service Levels, Malaysia in Table Access to Infrastructure (Citywide and Informal Settlements) (% of households with connection) Table National Urbanization Policies in the EAP Countries Table Traffic Situation Changes in Namsan Tunnel Corridors Table Motorcycle and Car Ownership and GDP per capita, LIST OF TABLES Figure Urbanization in the World... 4 Figure Urbanization Trends and Economic Development in Developing Countries by Region, Figure Urbanization and GDP per Capita of Selected Countries ( )... 7 Figure Population in Largest and Second-largest Cities, Figure Share of Primary Cities (agglomeration) and Urbanization Rate, Figure Share of Primacy Cities (agglomeration) and Urban Populations, Figure Population Distribution in the EAP Countries, Figure Urban Population Ratios and Gini Indices of Selected Countries, Figure Economic Development and Regional Disparities 1), Thailand, Malaysia, and Japan Figure Expansion of Urban Areas in Metro Manila Figure Urbanization Pattern, Metro Manila Figure Expansion of Urban Area in HCM Metropolitan Area Figure Historical Changes in Vehicle Ownership and Road Lengths Figure GRDP and Infrastructure Service Levels by Region, Philippines Figure Population Growth Rates, South of Metro Manila, Figure Industrial Areas in CALA Figure Expansion of Urban Area in Jakarta Metropolitan Area, Figure Expansion of Urbanized Areas in Ho Chi Minh City Figure Relationships among Population Density, Road Density, Average Household Income, and Average Length of Stay in Metro Manila Figure Economic Development and Regional Disparity, Japan Figure Public Investment Distribution among Regions, Japan Figure Public Investment Allocation by Sector Figure Expansion of Urbanized Area,

6 ABBREVIATIONS ADB EAP FDI HIC JBIC JICA HDI UN WB GDP GRDP BMA EBMR IT MSC CALA QOL ODA FLIP ESD TDM KIP NGO Asian Development Bank East Asia and Pacific Foreign Direct Investment High Income Country Japan Bank for International Cooperation Japan International Cooperation Agency Human Development Index United Nations World Bank Gross Domestic Product Gross Regional Domestic Product Bangkok Metropolitan Administration The Extended Bangkok Metropolitan Region Information Technology Multimedia Super Corridor Cavite and Laguna Region Quality of Life Official Development Assistance Financial Loan and Investment Program (in Japan) Eastern Seaboard Development Transport Demand Management Kampung Improvement Program Non Government Organization

7 1. Introduction 1.1 Background and Objectives Infrastructure gaps and bottlenecks have been a constant problem in the economic growth and poverty reduction efforts in many developing countries in East Asia and the Pacific (EAP) region. Properly addressing this basic constraint provides the rationale for this joint study by the Asian Development Bank (ADB), the Japan Bank for International Cooperation (JBIC), and the World Bank (WB). This study aims to formulate and develop sound policy basis for the provision of effective and sustainable infrastructure services across the EAP region. Addressing this issue, however, has become more complex due to a number of external and internal factors that vary per country. External factors include accelerating urbanization, globalization of economies, increasing competition, as well as growing democratization, and decentralization. Meanwhile, internal factors could encompass the lack of resources, inadequate institutions, lack of administrative capacities, geographic characteristics, and many others,. The ADB, the JBIC, and the WB have delineated the main themes of this umbrella study along these issues and constraints. The main objective of the study is to review and identify the likely impacts of urbanization on infrastructure development in the EAP region. Its specific objectives are: (a) Review the trend of urbanization from various aspects and identify the characteristics in the region, (b) Review the impacts of urbanization on infrastructure development and service provision. (c) Assess the key concerns that have typically arisen under various types of infrastructures within a city and across cities under the process of urbanization. (d) Provide a general framework to address urbanization in infrastructure project design and implementation with complementary institutional mechanisms. 1.2 Coverage of the Paper Urbanization trends and the forces that drive them have already been discussed in many research papers and institutes, including the Stanford Asia/ Pacific Research Center, the United Nations University, as well as international organizations such as the ADB and the World Bank 1). However, these existing literature and centers only list the key issues in infrastructure development and do not comprehensively describe implications for infrastructure development, along with policies and strategies, including institutions and development strategies This report analyzes key issues of infrastructure development under urbanization as well as detailed urbanization policies and strategies. Trends and characteristics of urbanization are summarized based mainly on the existing references. This report is organized as follows: 1) Review of Urbanization Trends: Trends and characteristics of urbanization in the 1) Main references regarding East Asian urbanization are listed in World Bank website. ( Document 1

8 EAP region is reviewed and compared at the global, regional, and city levels. Recent changes of roles and functions of cities in emerging new environment are also described. 2) Impacts of Urbanization on Infrastructures: This chapter summarizes the impact of urbanization on infrastructure, including the increasing need for infrastructure, implications from national land structures, impacts on urban livability. Impact of urban infrastructure to enhance urban agglomeration effects and encourage innovations is also discussed. 3) Issues and Strategies in Infrastructure Development: Issues and strategies are analyzed based on experiences in Japan and the subject countries in the EAP based on responses to impacts of urbanization (as summarized in Chapter 3) and in order to maximize the positive ones and minimize negative ones. Key issues are listed and further discussed in the Appendix. 4) Summary of Recommendations: Following the analysis in Chapter 4, recommendations on the key issues for future infrastructure development in the EAP countries are summarized. 2

9 2. Urbanization Trends in the EAP Region Study on Urbanization Urbanization refers to a process in which an increasing proportion of an entire population lives in cities and suburbs of cities. Historically, it has been closely connected with industrialization (Fairfield Faculty, The Urbanization of the World). Likewise, urbanization encompasses changes in form and social character that illuminate larger changes in socio economic conditions. Changes in the economy and in the scale of cities altered the organization of social life and the space within them. Thus urbanization has vast and multifaceted impact, which significantly vary by country and by city. Urbanization in the EAP region started in the 1970s with an overwhelming magnitude and speed compared to trends in the developed countries. In general, urban population growth is a result of the high population growth rate and the constant in-migration from the rural to urban areas. 2) While speed and scale are diversified per country and region, urbanization trends are expected to continue in the future. By 2030, the urban population ratio in Asia is expected to reach 54.5%, which is 67% of the current level in the developed countries. Urbanization is integrated with changes in industrial structure and the lifestyles of urban residents. It is also closely related with economic development. It has commonly been observed that there is a strong correlation between urbanization and economic development. The World Bank stated that cities are sources of productivity and innovation and it is necessary to get the best from the cities (WB. 2003a). However, urbanization without growth has been observed in some African countries (Fay and Opal. 2000). Considering that urbanization is an irreversible trend, the key agenda on urbanization is its impact on social, economic, and environmental aspects. Specifically, the key issues of urbanization are as follows: 1) Whether it contributes to economic growth, 2) Whether it achieves poverty reduction. 3) Whether it leads to the reduction of disparities in living environment, social welfare, security, and environment. 4) How to respond to urbanization in order to maximize the above-mentioned impacts. Urbanization has caused several problems, but it also has contributed to national development in many countries. The latter depends on a country s policy responses to urbanization as well as the country s social, political, and geographical background. 2) In the 1960s and 1970s, the major factor for urbanization was natural population growth in urban areas rather than in-migration. Since the 1980s, the share of in-migration has exceeded natural growth, which is especially true in Asia. The contribution of migration in the 1960s and 1980s was 40.4% and 54.3% on average for developing countries, and 40.4% and 63.6% in Asia, respectively. Reclassification of cities, which affects statistics, also contributes to the increase in urban population. (Kato. 2001) 3

10 2.1 Urbanization Trends in the EAP Region 1) Rapid Increase in Urban Populations Ongoing Urbanization and Increases in Urban Populations Although urbanization in the EAP region has gone full scale since the 1970s, its share of urban population is still small compared with other regions. In 2000, while the urbanization rates for the developed and developing countries were 74% and 41%, respectively, that of the EAP region was only 36.5%. It is expected that urbanization in the EAP region will continue in the future. Urban populations in Eastern and Southeastern Asia will grow to 1,470 million in 2030 and their share of the population pie in the entire region will equal to 62% of the total (60% of these will be in China). The total urban population in this region shall account for 30% of the world s total urban population in During the next three decades (from 2000 to 2030) urban populations are estimated to increase by 1.9 billion, of which 0.66 billion will be those in Eastern and Southeastern Asia. (UN. 2002b) Figure Urbanization in the World 1,800,000 (62.1) 1,200,000 (47.4) 600,000 (40.2) (33.5) (84.6) (75.5) (37.1) (53.5) Eastern and South Eastern Asia Western and South-Central Asia Latin America and the Caribbean Africa Note: The number between parentheses indicates the share of urban population in 2000 and Eastern and Southeastern Asia include China, Democratic People s Republic of Korea, Japan, Mongolia, Republic of Korea, Brunei Darussalam, Cambodia, Democratic Republic of Timor-Leste, Indonesia, Lao People s Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam. Source: UN. 2002b. Scale and Speed of Urbanization in the Developing EAP Countries The characteristics of urbanization in the Asian region (including South Asia) are diverse. The region includes Singapore and Hong Kong, which both have a 100% urban population, as well as Nepal and Bhutan, which both have a 90% rural population (Kato. et al.) The region s relatively low urbanization levels also result from the low urbanization of huge countries, such as China and India, and other smaller ones, like Bangladesh. This applies even among EAP region. Table shows the basic urbanization typology in the EAP countries based on size of urban population and their growth rates. In Indonesia and the Philippines with high urbanization level, urbanization is still under way. Cambodia and Laos are, which are in the beginning stages of urbanization, have a low urbanization level and a high growth rate. 4

11 Table Urbanization Speed High Scale and Speed of Urbanization of EAP Countries Middle Urbanization Level Low Middle High Cambodia Laos China Vietnam Myanmar Indonesia Philippines Malaysia Low Thailand Mongolia Note: Urbanization level (share of urban population in 2000): High >40, 20 <middle<40, Low<20 Urbanization speed (annual growth rate of urban population in ): High >6%, 2% <middle<4%, Low<2% Source: WB, 2003c. 2) Urbanization vs. Economic Growth in the EAP Region Urbanization Accompanied by Rapid Economic Growth While the EAP region has lower urbanization and economic levels among the developing countries, it has experienced an extensively rapid economic development that is closely related with urbanization. As seen in Figure 2.1.2, the line marking the EAP region extends along the horizontal axis in relation to the growth of the vertical axis. Figure Urbanization Trends and Economic Development in Developing Countries by Region, Latin America & Caribbean Level of Urbanization Europe & Central Asia Middle East & North Africa East Asia & Pacific South Asia ,000 10,000 GDP per capita (US$ in 1995) Sub-Saharan Africa Note: EAP region include American Samoa, Cambodia, China, Fiji, Indonesia, Kiribati, Korea, Dem. Rep., Lao PDR, Malaysia, Marshall Islands, Micronesia, Fed. Sts., Mongolia, Myanmar, Palau, Papua New Guinea, Philippines, Samoa, Solomon Islands, Thailand, Timor-Leste, Tonga, Vanuatu, and Vietnam. Source: WB. 2003c. Countries in the EAP region have successfully achieved economic development and poverty reduction along with urbanization compared with other regions in the world (Table 2.1.2). The GDP in the EAP region has continued to grow with an average annual growth rate of 7.3% in the 1980s and 7.7% in the 1990s. The average share of all low- and middle-income countries in the world was only 2.8% in the 1980s and 3.27% in the 1990s. The world s population that survived on less than US$ 1 a day continuously decreased 5

12 from 26.6% in 1987 to 15.3 % in 1998, as economies developed. Table Average Annual Growth rate of GDP and Urban Population, and Poverty Index by Region East Asia & Pacific South Asia Europe & Central Asia Latin America & Caribbean Middle East & North Africa Sub-Saharan Africa Annual Growth GDP Rate (%/yr) Urban pop Population below Poverty Line (%) ( 87) 15.3 ( 98) Annual Growth GDP Rate (%/yr) Urban pop Population below Poverty Line (%) ( 87) 40.0 ( 98) Annual Growth GDP Rate (%/yr) Urban pop Population below Poverty Line (%) ( 87) 5.1 ( 98) Annual Growth GDP Rate (%/yr) Urban pop Population below Poverty Line (%) ( 87) 15.6 ( 98) Annual Growth GDP Rate (%/yr) Urban pop Population below Poverty Line (%) ( 87) 1.9 ( 98) Annual Growth GDP Rate (%/yr) Urban pop Population below Poverty Line (%) ( 87) 46.3 ( 98) Low- & middleincome Annual Growth GDP Rate (%/yr) Urban pop countries Population below Poverty Line (%) ( 87) 24.0 ( 98) Source: GDP growth rate and urban population, WB. 2003c Poverty: WB. 2000b Historical trend of urbanization in EAP region Urbanization trends and their surrounding environments in the past are summarized below; although there is a variety among countries; Pre-1960s: Urbanization without economic development. Urbanization proceeded in cities, becoming the core of domestic industries and services, some of which were former colonial capitals, 1970s and 1980s: Urbanization with rapid industrialization and economic development. Industries and populations were concentrated in large cities and increasing in-migration from the rural areas was a common trend. Post-1990s: Urbanization in the era of globalization. Concentration in the metropolitan areas has accelerated furthermore with globalization, increasing trade, and foreign direct investments (FDIs). Country-specific View of Economic Development and Urbanization While some EAP countries have generally achieved economic development, the magnitude and speed of this development differ per country (Figure 2.1.3). Thailand has 6

13 achieved significant economic development during the last three decades even with its slow pace of urbanization. In the Philippines, the speed of urbanization has outpaced its economic development. In Cambodia and Vietnam, both economic and urbanization levels are still low, and are expected to develop in the future.. Such differences are attributable to the national urban policy of each country on regional development or the distribution of cities as well as their historical or geographical background. Figure Urbanization and GDP per Capita of Selected Countries ( ) Urban Population Ratio (%) China Vietnam Philippines Indonesia Cambodia Korea Malaysia Thailand Japan GDP per capita (US$, log) Note: Data is plotted every five years. Source: WB, 2003c., UN. 2002b. China Indonesia Malaysia Philippines Thailand Japan Korea Vietnam Cambodia 2.2 Changes in National Land Structure along with Urbanization 1) Concentration or Diversification of Cities Urbanization levels in one country should be reviewed with various indices including: the distribution of cities scale, primacy to total population and primacy to total urban population, and the nationwide share of urban populations. National land structures vary depending on the concentration, or diversification, of cities among countries with similar urbanization levels, because nationwide urbanization rates do not reflect their distribution. Primacy City of EAP Countries with Huge Population Although worldwide comparisons indicate that primacy, the share of primary cities to total population, is relatively low in the EAP region except for Mongolia, primary cities in EAP countries have huge population compared to the second-largest and other major cities (except for those in China and Malaysia). (Figure 2.2.1) Figure Population in Largest and Second-largest Cities,

14 0 5,000 10,000 15,000 Cambodia Indonesia Laos Malaysia Mongolia Myanmar Philippines Thailand Vietnam Primary Secondary Source: UN. 2002b., World population gazette, Urbanization not Limited to Primary Cities Primacy does not necessarily correlate with nationwide urbanization levels, which vary by country. While Bangkok has a relatively high primacy (10.4% of the country s total population), urbanization in Thailand is relatively low compared with other EAP countries. On the other hand, while urbanization rates in Malaysia have continuously increased since the 1950s, the primacy of Kuala Lumpur is not that high and has even decreased during last two decades. The Philippines experienced an extensive concentration of urbanization in Metro Manila during the 1960s and the 1970s, reaching 13% of the country s total population; urbanization of cities outside of Metro Manila is also currently progressing. China has consistently tracked low levels of primacy due to its vast population size and existence of several metropolitan cities. It has been observed in some countries that primacy in the largest metropolitan areas increases in the early stages of development then starts to decease. Since these data does not reflect actual expansion of the metropolitan areas beyond city boundaries, primacy may increase if this expansion in the urban areas is taken into account. Figure Share of Primary Cities (agglomeration) and Urbanization Rate, Share of Primary (%) Cambodia China Indonesia Malaysia Philippines Thailand Vietnam Share of Urban Polulation (%) Note: Data is plotted by 10 year from 1950 to 2000 Source: UN. 2003c. On the other hand, the share of primary cities to total urban populations has constantly or 8

15 gradually been decreasing in most EAP countries except for Cambodia (Figure 2.2.3). This indicates that urbanization in the EAP countries is progressing, not only in the primary cities, but also throughout countries, or in secondary cities. While shares to total urban populations have decreased, the absolute scales of these cities are still growing. As seen in Metro Manila, Philippines, and Jakarta, Indonesia, these cities are growing into megacities with a population of more than 10 million as noted above. Figure Share of Primacy Cities (agglomeration) and Urban Populations, Share of Primary Agglomreration to Total Urban Population (%) ,000 10,000 15,000 Cambodia China Indonesia Malaysia Philippines Thailand Vietnam Urban Agglomeration Population (000) Note: Data is plotted by 10 year from 1950 to 2000 Source: UN. 2003c. Distribution of Population in Secondary Cities As noted, secondary cities in the EAP region are relatively much smaller in their population scales compared with the primary cites. However, secondary cities are considered regional cores that will absorb the in-migration into the larger metropolitan areas and thus help achieve a balanced national development (ADB. 1999). Multiple-core national development can provide multiple alternative choices for investors and migrants and thus promote competition among cities. It is also indicated that interventions should be taken before urban problems become too serious in these cities. Figure Population Distribution in the EAP Countries, 2000 Share to Total Population (%) Ranking of the Largest Cities Source: World population gazette Philippines Thailand Cambodia Malaysia Indonesia Vietnam China 9

16 China s urbanization policies promote nationwide urbanization and emphasize the importance of developing small- to medium-size cities to form as regional cores, along with large cities. (Government of the People s Republic of China. 2001, ADB. 1999) Urbanization levels are still low 3) due to policy regulations on migration 4) and partly due to its huge population size. Primacy, both to total population and total urban population, is also at lower levels compared with the other EAP countries, which is ascribed to several metropolitan areas, including three cities with a population of more than 10 million, i.e. Shanghai, Beijing, and Tianjin. However, migration has been increasing since the 1990s due to expansions in regional income disparities and the easing of regulatory policies. Migration between provinces exceeded 32 million from 1995 to 2000, three times the rate in the early 1990s. Seventy-five percent (75%) of the inter-provincial migrations were movements to eastern coastal areas. On the other hand, most urban population increases were recorded in small- to medium-size cities and towns 5). The Chinese government has emphasized strategic development in such cities in its urbanization policies. 2) Widening of Disparity As noted, urbanization has changed the location and distribution of cities due to their increasing populations and expansion of sizes, thus leading to a significant change in national land structures. With cities acting as core agents for social and economic development in a region or a country, urbanization has restructured socio-economic conditions. Along with economic development, urbanization and reorganized national land structures shall inevitably expand disparities in income levels and among regions. Experiences in developed countries show that regional disparities first increases and then decreases as the country s income rises following the pattern of so-called regional convergence (Williamson. 1965). However, it is questionable whether such convergence will be achieved in developing countries without an effective urban management policy to guide it. Urbanization vs. Income Disparities The relationship between urbanization levels and the Gini index, as an indicator of income disparity, is shown in Figure Although there are several factors affecting the correlation between urbanization and inequality, including cultural, historical and geographical backgrounds, the characteristics of each region are described as follows; High-income Countries (HIC) have high urbanization levels and a low Gini index. Latin American & Caribbean countries have middle to high levels in urbanization and relatively high Gini indices. Middle Eastern and North African countries have middle to high levels of urbanization and middle levels of the Gini index, although the number of sample countries from this 3) Share of urban population is 27.4% in 1990 and 35.8% in ) The residential registration, or Hukou, system was introduced in 1958 to enforce the separation of urban from rural residents and is maintained, with varying degrees of enthusiasm by the different municipal administrations, to restrain rural to urban migration, (ADB. 1999a.) 5) In 1997, the 81 cities with more than 500,000 people each accounted for less than 20% of urban growth, with 40% accounted for by 587 smaller cities and 40% by 18,492 towns. (ADB. 1999a) 10

17 region is small. South Asian countries have low levels of both urbanization and Gini indices. Sub-Saharan African countries have low levels of urbanization but high levels of Gini indices. Major countries in the EAP region are broadly classified into two groups: One group, with lower urbanization levels and Gini indices includes Cambodia, Thailand, Vietnam, Laos, China, and Indonesia; and the other, with higher urbanization levels and Gini indices includes the Philippines, Malaysia, and Mongolia. For the former group, the key issue lies on whether to lean toward the HIC group, or to accept expansion, to some extent, of income disparities and move toward the latter group, or the Latin American & Caribbean countries, as urbanization proceeds. The issue for the latter group lies in how to narrow disparities and move toward the HIC group. Figure Urban Population Ratios and Gini Indices of Selected Countries, 2000 GINI Index Cambodia China Indonesia Lao PDR Malaysia Mongolia Philippines Thailand Vietnam Japan HIC LA & C ME&NA SA SSA Share of Urban Population (%) Note: LA&C: Latin America and Caribbean, ME & NA: Middle East and North Africa, SA: South Asia, SSA: Sub-Saharan Africa, Source: WB. 2003c. and UN. 2003c. Country- and Province-wide Disparities in the EAP Countries Regional disparities are difficult to compare among nations because problems of available indices on spatial concentration are not well suited for international comparisons. (Spiezia. 2000) Nevertheless, the actual state of regional disparities in economic levels among the EAP countries can be identified through various indicators. One indicator is the ratio of the highest GRDP to the lowest one, which gives the following results: 9.2 in the Philippines, 10.3 in China, 12.0 in Indonesia, 4.9 in Malaysia, and 9.0 in Thailand 6). 6) The ratio is calculated with regional data. Using provincial data, it would be

18 Table Regional Disparities in the EAP Countries, 2000 Share of Primary Metropolitan Area Metropolitan GRDP population Area Ratio of GRDP 3) (highest/lowest) Indonesia DKI Jakarta Malaysia Kuala Lumpur Philippines NCR 1) Thailand 2) Bangkok Vietnam HCMC ) Note: 1) National Capital Region or Metro Manila 2) data as of ) The highest GRDP is in metropolitan area, except for Viet Nam (Bung Tao Province) Source Statistical Book of each country The GRDP-Gini, another index of regional disparity (which is calculated using the GRDP and population per province) has increased as urbanization proceeds in Thailand and Malaysia. Figure shows that the levels of disparities in the two countries are much higher than that of Japan in the 1960s. Figure Economic Development and Regional Disparities 1), Thailand, Malaysia, and Japan Malaysia Thailand 100, , GDP per capita (US$, log) 10,000 1,000 GDP per capita GRDP-Gini GRDP-Gini GDP per capita (US$, log) 10,000 1,000 GRDP-Gini GDP per capita GRDP-Gini ,000 Japan 0.6 GDP per capita GDP per capita (US$, log) 10,000 1,000 GRDP-Gini GRDP-Gini Note: 1) GRDP-Gini is calculated using GRDP and population of each province / state Source: Statistical book of each country 12

19 2.3 Urbanization in Metropolitan Areas 1) Emerging Huge Metropolises Study on Urbanization Another characteristic of urbanization in the EAP countries is the existence of huge metropolitan areas. Table shows the historical changes in the world s metropolitan areas with more than 8 million people from the 1950s to In 1970, there were only two megalopolis in the EAP region, Shanghai and Beijing. By 2000, among the world s 25 megalopolises, 13 were in Asia and 8 were in the EAP region, including Japan and Korea. (UN.2003.) While the growth rates of population in these megalopolises or megalopolis candidates have recently decreased, their absolute number of population increases is still huge and is estimated to continue into the future. 7) Table Cities with more than 8 Million Population, Developed Countries Tokyo Tokyo New York -Newark New York -Newark Osaka-Kobe Osaka-Kobe Paris Los Angeles -Long Los Angeles -Long Beach -Santa Ana Beach -Santa Ana Paris New York -Newark Tokyo London Shanghai Mexico City Buenos Aires Beijing Note: Bold face indicates cities in EAP region. Source: UN. 2003c. 2) Densification of Core Urban Areas Developing Countries Mexico City Sao Paulo Shanghai Mumbai Buenos Aires Calcutta Beijing Seoul Rio De Janeiro Cairo Moscow Tianjin Delhi Tokyo New York -Newark Los Angeles -Long Beach -Santa Ana Osaka-Kobe Seoul Paris Chicago Mexico City Sao Paulo Mumbai Calcutta Shanghai Buenos Aires Delhi Jakarta Beijing Rio De Janeiro Cairo Dhaka Moscow Karachi Metro Manila Tianjin Istanbul Lagos The megalopolises in the EAP region have densely populated urban areas, which is another characteristic of the metropolitan area in the EAP. Comparisons of population density in urbanized areas of the world s major cities indicate that among the top 50 cities (except for Hong Kong) 24 are located in Asia and 10 are in the EAP region. (Demographia, 2003) 7) According to Kato. 2001, large cities in Asia with more than one million population will absorb 150% population during the period

20 Moreover, the core urban areas of these metropolises are extremely congested. In 2002, the population density in Ho Chi Minh City was 31 persons/ha for the whole city and 357 in the core urban area. The highest population density by district accounted for 566 persons/ha (in District 4 which has 353ha). The most congested district in Metro Manila has 886 persons/ha (in Navotas which has 890ha), while the population density for the whole metropolitan area is 156/ha. High density can enjoy efficient use of urban infrastructure, if well managed, as seen in public transport network in Tokyo metropolitan area with a population of more than 30 million. However, it is observed in EAP urban area that lack of urban management has caused densely populated area. These areas commonly have high shares of low-income households. Navotas is one of the poorest districts in Metro Manila. As a result, infrastructure services have deteriorated and urban poor dwellers usually live in unhealthy and deteriorating conditions, as will be discussed later. 3) Extension of Urban Areas beyond Jurisdictional Boundaries Metropolitan areas in the EAP region have expanded due to continuous in-migration, far beyond traditional jurisdictional boundaries. This extension of metropolitan areas is known as peri-urbanization, a commonly observed characteristic in the EAP metropolitan areas, even though its driving forces and mechanisms vary by city. The main driving force of peri-urbanization is the in-migration of the low-wage labor forces for private-sector industrial development, including FDIs into the peripheral areas or public-oriented industrial satellite development, as well as the in-migration into residential area development by high-income households 8). Moreover the increasing population pressure and deterioration of the urban environments in the core areas push the relocation of residential and industrial areas into peripheral areas, thus spurring the outward extension of a metropolitan area. It is observed that the speed of expansion has been stagnant in some metropolises, even though their peri-urbanizing trends still continue. In another facet of peri-urbanization, the renewal of land use, or redevelopment of existing built-up areas in urban cores, has started in parallel with new industrial satellite development in peripheral areas. The detailed urbanization trend in Metro Manila is an example. A wide range of urbanization progressed and exceeded beyond jurisdictional boundaries between 1980 and 1996 (Figure 2.3.1). 8) Extension of urban area is analyzed in its phenomenon and driving forces by several institutes, including the Asia Pacific Research Center of Stanford University, USA and Development Planning Unit at the University of London. Webster (2001) defines this trend as peri-urbanization and analyzes its driving forces as follows: 1. FDI in the peri-urban area, property development and manufacturing investment (requiring large areas and easy access to major cities) as seen in most EAP countries. 2. Public policy supporting this type of regional development (Thailand Eastern Seaboard Development, Malaysia multi-media super corridor, Policy initiative in China), including public investment. 3. Availability of relatively inexpensive labor. 4.Residential development for middle and upper-middle class groups (as seen in Manila and Jakarta). 14

21 Figure Expansion of Urban Areas in Metro Manila Note: 2015 is estimated figure Source: JICA MMUTIS The relationship between distance from urban center and population density is shown in (Figure 2.3.2). While, in general, population density decreases as the distance from the center increases, exceptionally dense areas emerge at about 10km and 20km from the urban center. These areas certainly show the trends of peri-urbanization driven by residential development for high-income households and industrial developments by the private sector, respectively. It should be noted that relocation sites for infrastructure development or slum clearance projects in urban centers spread in peripheral areas, which is another driving factor of peri-urbanization in Metro Manila. Historical trends show that population density in the urban core decreased during the period of 1990 to 1996, which was partly because of the outflow of population to peripheral areas. On the other hand, growing back of population density in the urban core shows that redevelopment has started as commercial or residential center. Figure Urbanization Pattern, Metro Manila Urban Redevelopment of Existing Built-up Area 700 (person/ha) EDSA (Makati East) MM boundary EDSA (Cubao West) Residential Subdivision Development MM boundary Industrial Estate Development (FDI) Makati North South Note: Population density along the North-South Corridor in Metro Manila. Source: Compiled from MMUTIS (JICA 1999) database. 15

22 Such peri-urbanization appears in some form or another in other metropolitan areas in the EAP region. In Bangkok, peri-urbanization is observed more extensively. The Eastern Seaboard Development, located 190km away from the urban center, is regarded as a major driving force of peri-urbanization in the Extended Bangkok Metropolitan Region (EBMR). It is classified as public-oriented peri-urbanization with large-scale economic infrastructure development, such as industrial parks, ports, and road infrastructure (Webster. 2001). Urbanization in Ho Chi Minh City, the largest city in Vietnam, is rather small within a 10-kilometer radius. Annual population growth rate from 1997 to 2001 recorded much higher in the peripheral areas of the existing urban center. Peri-urbanization has also started in Ho Chi Minh City. Figure Expansion of Urban Area in HCM Metropolitan Area Density, 2002 Growth Rate ( ) N/A Source: Compiled from HOUTRANS (JICA 2004) database and statistical yearbooks of HCMC, Binh Duong, Dong Nai, and Long An. 2.4 Changing Environments Surrounding Urbanization The environment surrounding urbanization is dramatically changing. Urban governance, as well as the roles and functions of the urban sector have been affected by trends in decentralization, private sector growth, globalization, and technical innovation. This chapter describes urbanization trends under globalization and the innovative influences brought on by information technology (IT), which has changed the role of urban infrastructures and provided implications for urban policies. 1) Globalization as a Dynamo for Urbanization Accelerating Urbanization under Globalization The environment surrounding urbanization has undergone tremendous changes in the wake of advances of globalization since the late 1980s. Urbanization and the physical, economic, and social restructuring of East Asian cities can be seen as consequences of the changing organizational structures of the global economy. (Douglas 2002) More specifically, it is seen that urbanization, under globalization, is closely related to the effects of FDIs, foreign trade, and tourism. (Lo. and Yeung. 1996) 16

23 In light of economic developments in the EAP, trade, as a percentage of GDP, rapidly increased since the late 1980s, while FDIs, as a percentage of GDP, started growing since the 1990s. Such trends have also been observed in other regions with active global exchanges, such as in Latin America and the Caribbean region. However, the EAP s distinct feature was the high growth rate of GDP for the same period in the region 9. This fact shows that economic growth in the EAP region was considerably an offshoot of globalization, until the region s economies became stagnant due to the 1997 economic crisis. Recently FDIs have been stagnant and their share to the GDP has decreased since the 1997 economic crisis. For example, in Malaysia, the FDI as a percentage of GDP was at its peak in 1992, with 8.8%, and this decreased to 4.2% in For the Philippines, its peak was seen in 1998, with 3.5%, and its FDI share decreased to 2.5% by Thus EAP countries are promoting domestic demand rather than depending on FDI. Spatial Transformations under Globalization Globalization has affected urbanization through the restructuring of industries by way of division of labor, specialization, and the formulation of international linkages and networking of goods, peoples, and information. For example, global networking has formulated the so-called functional city system, i.e. a network of economic, social, and political functions linking regions or cities globally (Lo. and Yeung. 1996). Here, urban systems are dictated by particular functions of a city rather than population scales or areas. Such emerging urban functional networks, under a growing trend of international specialization, have also affected spatial networks in the EAP region. Spatial transformations under globalization in the EAP region are discussed in the following six trends (Douglass. 1998): 1) Special polarization focusing on a few coastal metropolitan regions: Such as spatial concentration of FDIs in the capital city and key international ports as seen in the Philippines, Thailand, Indonesia, and more recently in Vietnam. 2) Formation of mega urban regions: Accompanied with polarization, i.e. the extensive growth of core metropolitan regions well beyond traditional administrative boundaries, as seen in the Extended Bangkok Metropolitan Region, which is 200km away from the Bangkok area. 3) World-city formation and urban restructuring: The centralization of global command functions in a few urban centers. 4) Development of international development corridors: Formulated by linking world cities with other mega urban regions, export processing zones, and high-technology industrial parks through major hub airports and high-speed trains. 5) Formation of transborder regions (TBR): Regions that span two or more nations to selectively create deregulated international economic spaces as new types of spatial 9 ) The annual growth rate of GDP during the period of and are 7.6 and 9.8 percent in EAP region and 1.9 and 3.7 percent in Latin America and Caribbean region respectively. 17

24 constructs created by globalization. 10) 6) Emerging international spatial network: Includes all of the above features. In sum, globalization tends to accelerate the concentration of industries into existing urban agglomerations. This is due to international infrastructure accessibility as a trade channel, infrastructure development levels, and proximity to information sources in megalopolises, or capital cities. (Webster. 2001, Lee and Medhi. 1996). It is also reported by Henderson (2000) that if a main international gateway, with port and airport, is located in the largest city, globalization tends to lead to increases in urban concentration. Rationalization of Logistics As mentioned above, international gateway is an important urban function when it is located in a city area. In the trends of globalization, some countries have strengthened its effort to curtail logistics cost in order to effectively compete with other countries. This move have a large impact on city functions and therefore on urbanization. The U.S. has reportedly decreased logistics costs from about 18% to 8% of GDP in the past 20 years. Some advanced EAP countries including Hong Kong, Korea, Taiwan, and Singapore also have decreased cargo handling cost drastically partly by strengthening port functions. However most of the EAP developing countries are still suffering from the high logistics cost resulting from their deficient trade and cargo handling systems. In the Philippines, for example, the share of total logistics cost in the market price accounts for 40% for maize, 20% for rice and 25% for vegetable transported from Mindanao to Manila market. The reason of the high cost is the inefficient coastal shipping, poor port service and the traffic congestion in Manila (WB. 2002). In the case of international transport of containers from Inland China (Chongging) to U.S. west coast, 63% of the total logistics cost is for the inland access to port in China (Carruthers et al. 2002). Hence, there is a large room for EAP developing countries to rationalize the logistics system. Although the advanced EAP countries need further to keep their logistics system competitive, the lesson is that their success can be attributed to the reduced transaction and time cost. More significantly, the cost reduction was made possible by efficient customs, strengthened freight forwarders, less congested road/rail access and smooth link to outer transport network. 2) Changing Urban Functions with Technical Innovation The upsurge of technical innovation, particularly in IT, has advanced in developing countries, as fast as (or even faster than) in the developed countries. Current innovations in information technology (IT) have dramatically influenced traditional systems, whether in politics, economy, society, industry, and people s basic way of existence. IT often leads to the promotion of new industries and the provision of unprecedented services in the world. For instance, people can now enjoy new working styles (e.g. working at home) and new education opportunities (e.g. through distance learning). Thus, the emergence of new technology has changed the functions and roles of cities. 10) Emerging / proposed transborder regions include Northeast Asia TBR (Tumen river basin, Russia, China, North Korea, South Korea, and Japan), Taiwan Fujian TBR, Mekong TBR (Vietnam, Laos, Cambodia, and Thailand), Northern Growth Triangle (Sumatra/Medan, Malaysia/Penang, and Southern Thailnad), Eastern Growth Triangle (Mindanao, North Sulawesi, Brunei, and Sabah), and Sijori Growth Triangle (Singapore, Johor Baru, and Riau). 18

25 Cities are expected to attract and generate new industries with the accumulation of knowledge, culture, and people. For example, universities, research institutes and business centers are the key to IT development rather than conventional infrastructure. High-standard quality of life, including amenity and cultural activity can encourage innovation for new industries Experiences in developed countries have shown that IT innovations lead to agglomerations of new industries and the centralization of economic power, in spite of the wide-ranging global network of information. The agglomeration of IT industries can be found in the developed countries, such as the Silicon Valley in the US and in major Japanese cities, where IT industries tend to concentrate in specific areas, such as around terminal stations where agglomeration scales are rather small. In the EAP countries, the agglomeration of IT industries largely reflects industrial policies to generate synergistic effects. Specifically, new industrial agglomerations have emerged in the Central Science Park in Beijing and in the Multimedia Super Corridor (MSC) in Malaysia. 19

26 3. Impact of Urbanization on Infrastructure in the EAP Region 3.1 Increasing Needs for Urban Infrastructure The most fundamental impact of urbanization due to pressures from population increases is the direct increase in demands for all kinds of infrastructures, including basic infrastructure (e.g. water supply, housing, etc.), economic infrastructure (e.g. roads, electricity, etc.), and public services (e.g. educational facilities, hospitals, etc.). Urbanization in the EAP region will continue on into the future. Its urban population will grow to 670 million by Absorbing new urban residents will require further infrastructure investments in housing, water and sanitation, transportation, power, and telecommunications (WB. 2000b). In general, infrastructure development cannot catch up with rapid increases in population and infrastructure demands, in many developing countries where urban management is insufficient. This results in huge infrastructure gaps. Countries in the EAP especially have intense economic development and urbanization paces coupled with rapid expansion of infrastructure gaps. Figure shows the historical trends in the increase of car ownership and road extension per one vehicle in major EAP cities. It indicates that road development cannot catch up with rapid motorization brought about by urbanization and economic development. Figure Historical Changes in Vehicle Ownership and Road Lengths Source: Metro Manila: Philippines Statistical Yearbook (excluding barangay roads) Jakarta: Jakarta dalmn Angka (excluding army and diplomatic vechicles) Bangkok: Bangkok Metropolitan Area (BMA) (excluding soi and trucks) Singapore: World Road Statistics and LTA (paved road only) Tokyo: Tokyo Metropolitan Government Increasing gaps are found in social infrastructure as well as in economic infrastructure. There is evidence that access to clean water has not kept apace with urbanization, even in areas where there have been substantial investments in water supply provision. During the last decade, there was a growth of 30% (equivalent to 62 million people) in the number of urban households without access to water (UN-Habitat. 2003). Water supply is one of the major issues in Asian countries. An estimated 100 million urban residents in Asia have no access to clean water (ADB. 2000c) Another impact of urbanization is the increasing needs for the provision of infrastructure 20

27 services to meet basic human needs of urban poor dwellers in informal settlements. As noted earlier, urban poverty without access to basic infrastructure has been a serious issue for many EAP cities. 3.2 Implications of National Spatial Development 1) Increasing Needs for Infrastructure to form efficient National Land Structures As urbanization has changed national land structures, it has created a need for infrastructure to effectively form national spatial structures, as well as urban infrastructures that will support industries and urban activities in metropolitan areas. In other words, the national structure is supported by infrastructure that provides physical and economic linkage between cities and surrounding areas and between large metropolitan areas. The former infrastructure is required to expand economic benefits from the cities and to provide access to markets from the rural areas. The latter infrastructure aims to formulate regional networks, including high-standard arterial highways, railways, as well as hard and soft information networks. There is also an increasing need for base infrastructures, like international airports and ports, to formulate wide area networks. These nationwide infrastructures should be tackled through national land policies, which are still not well developed in the EAP countries. Inadequate infrastructure networks limit economic spillover effects into relatively narrow areas, resulting in regional disparities in both economic and social service levels. 2) Expansion of Disparities in Infrastructure Service Levels Practical but huge investments in infrastructure in metropolitan areas have left hinterland areas with inadequate infrastructure. Infrastructure gaps have emerged in various aspects among regions, between the urban and rural areas, and even within cities. The rural-urban gap in infrastructure accessibility, including water, power, and sanitation, in developing countries has recently narrowed. (WB. 1994) The gap itself, however, is still huge, where access to water is 93% in urban areas and 67% in rural areas in the EAP region (WB. 2003c). Regional disparities are identified through comparisons in infrastructure and social service levels between the richest and the poorest regions even in Thailand and Malaysia, both with relatively high levels of income (Table 3.2.1). 11) In comparing the process of urbanization and economic development with regional disparity between Malaysia and Thailand, it clearly shows that national land structures (i.e. distribution of cities) have some implications for the impacts of urbanization on regional disparity. In Malaysia, the primacy of Kuala Lumpur is not as high as other EAP cities even while its urbanization gradually increases. This is partly because Malaysia has developed several core cities including Melaka, Georgetown, and Johore Baru (which was established during the colonial period). On the other hand, Thailand has experienced high concentration in the Bangkok metropolitan area in the process of urbanization, while the 11) Regional disparities in infrastructure service level are difficult to compare across ages due to lack of available data for the developing countries. Nevertheless, historical changes in road development by region in Malaysia show that disparity decreases in road length per capita and increases in road length per area. This indicates that infrastructure in less developed areas have not been well developed in absolute terms, while disparity in relative terms has decreased as service level in urban areas decreases with urbanization. 21

28 country s nationwide urbanization level is relatively low. 12) As a result, the two countries face different levels of regional disparities in income and social service levels. Although it is more extensive in Thailand, which has a monopolar national land structure, both have achieved economic development in parallel with urbanization. 13) Table Regional Disparities in Infrastructure and Social Service Levels, Thailand in 1999 GRDP per capita (Baht mil.) Number of doctors per 10,000 persons 1) No. of Tel. Line per 1,000 persons Car ownership 2) per 1,000 persons (a) Bangkok 228, (b) Northeastern 25, Ratio (A/B) Note: 1) data as of ) data as of 2000 including can, van and truck Source: JSAID, 2001, Thailand in Figures 2003 Table Regional Disparities in Infrastructure and Social Service Levels, Malaysia in 1999 GRDP per capita (RM mil.) 1) Number of doctors per 10,000 persons 3) No. of Tel. Line per 1,000 persons 3) Car and M/C ownership 2) per 1,000 persons (a) Kuala Lumpur 30, (b) Kelantan 6, Ratio (A/B) Note: 1) data as of ) data as of 2000 including car and motorcycle 3) data as of 1997 Source: Malaysia Government 2001 It also shows that infrastructure levels are closely related with economic levels when compared by region (Figure 3.2.1). Infrastructure disparities expand the income- and economic-level disparities, as discussed in section 2.2. Figure GRDP and Infrastructure Service Levels by Region, Philippines Paved Road Density Telephone Line 1.5 Paved Road Density (National Av.=1.0) GRDP per Capita (National Av.=1.0) Telephone Line per 1000 pax (National Av.=1.0) GRDP per Capita (National Av.=1.0) Source: Statistical Yearbook of Philippines, 2000 The existence of regional disparities is in itself a pull factor for the constant in-migration 12) Low levels of urbanization rate are, to some extent, due to the difference in the definition of urban area. 13) Average annual growth rate of GDP in and was 10.3% and 8.6% in Thailand, and 6.9% and 9.5% in Malaysia, respectively. 22

29 from the rural areas Migration into urban areas can narrow the disparity in income levels per capita in the short run by involving more people in large economic activities. However, it brings about the deterioration of regional economies and de-population of rural societies, and results in the further expansion of regional disparities, forming a long-term vicious disparity cycle. The narrowing of regional disparities to attain a balanced development has emerged as a primary political issue in most EAP countries. Countries with various ethnicities, or political instability, especially faces potential risks, wherein regional inequality can develop into volatile socio-political problems. Some of these countries in the EAP early on have placed balanced development as a top priority in their national development objectives, as seen in Malaysia. 3.3 Impact on Infrastructure Development in Emerging Huge Metropolises Analysis of the impacts of urbanization has so far been on the national standpoint. However, impacts should be assessed at the city level, as well. Outward urbanization in the peripheral areas of a city produces a number of infrastructure-poor areas in high-density urban areas. The living environments in these areas are worsening due to the lack of water supply facilities, traffic congestion, and so on. Coupled with the increasing number of poor populations, this has become a serious issue in relation to infrastructure development. This section discusses the impacts of urbanization on urban infrastructures based on actual situations in large cities in the EAP Region such as Metro Manila, Jakarta, and Ho Chi Minh City. 1) Expansion of Urban Areas In developing countries, urban metropolitan areas have expanded along trunk road corridors. Urban arterial roads promote urbanization as is seen in Metro Manila, Jakarta, and Ho Chi Minh, were housing areas spread along arterial roads. Figure shows recent trends in population growth rates in the southern peripheries of Metro Manila (Cavite and Laguna or CALA). The area had a good accessibility to an expressway and urbanization started in the early 1980s. This urbanization was first lead by the relatively good connection with the expressway and the availability of land with abundant water resources. FDI led industrial estates were constructed (as presented in Figure 3.3.2) and more people came into this area attracted by job opportunities and pushed out, to some extent from the densely inhabited areas in central Metro Manila. In the peripheries of Metro Manila, the development of industrial estates was realized in tandem with urbanization along arterial roads. The observation is that the existence of the arterial roads enabled this peri-urbanization. In these areas, however, traffic congestion is already a chronic problem due to the lack of expressway, primary and secondary roads, as well as other local roads. At present, the entire road network of the area is very weak with poor alignment, lack of maintenance and insufficient traffic management. Like Metro Manila, peri-urbanization in Jakarta is likewise growing along with the development of arterial roads. Transport infrastructure is one of the major causes that determine the direction of urbanization (Figure 3.3.3). 23

30 Figure Population Growth Rates, South of Metro Manila, Metro Manila South Luzon Expressway Annual Population Growth (%/yr) Population Density (2000) (person/ha) to to to km Source: Statistical Yearbook of the Philippines Figure Industrial Areas in CALA Source: WB. CALA Transport Study Figure Expansion of Urban Area in Jakarta Metropolitan Area, 2002 Source: JICA. 2004a. SITRAMP 24

31 Actual urbanization often proceeds more rapidly than expected. A single arterial road can promote urbanization along its length, then it stimulates secondary housing activities in the surrounding areas where infrastructure is usually underdeveloped. This produces infrastructure-poor areas where accessibility to public services becomes a crucial issue. (Figure Figure Expansion of Urbanized Areas in Ho Chi Minh City Ribbon-type development Sprawl in the backlands of trunk roads Source: JICA. 2004b. HOUTRANS. 2) Impact on Livability of Cities Quality of Life of Urban Residents Infrastructure services, including water supply and sanitation, public transportation systems, and social services, can be provided more efficiently in populated urban area owing to its high economies of scale, than in rural area. However, the consequences of excessively dense urban and peripheral areas with poor management include lack of urban services and overburdening of existing infrastructures, thus resulting in the degradation of the quality of life for urban residents. Urban residents are exposed to various urban risks, including deterioration of urban environments and rising crime rates. As cities modernize, environmental risks arise from a wider range of sources from traditional risks to modern ones, thus complicating their assessment and management. (WB. 2000a, ADB. 1999) 14) Deterioration of Urban Environments Urban environmental problems come in the form of a wide array of public health problems including poor air quality, water-related diseases, lack of medical resources, and modern health risks that arise out of exposures to hazardous substances, industrial and vehicle emissions, noise, and stress-related illnesses, etc. (ADB. 1999) 14) ADB.1999 and WB.2000 classified quality of life risks into traditional risks including high-poverty incidence, malnutrition, dysentery, skin and eye infections, and other water-borne diseases; and modern risks including exposure to hazardous and toxic substances, water pollution from industries, pollution from industries and vehicles, noise, urban stress due to lack of space, lifestyles, etc. As the level of city income rises, traditional risks decrease and modern risks trace inverted U-shaped. 25

32 Impact of urban environment that is most immediate to urban residents life is great threat to health and safety from water and air pollution. Waterborne diseases are often caused by inadequate sanitation facilities and drainage networks, which are exacerbated by improper solid waste collection services. These forms of urban environmental deterioration are commonly found in infrastructure-poor areas, seriously affecting low-income households and vulnerable residents, especially children. A whole city environment can likewise be threatened by rapid urbanization through the production of increasing amounts of solid wastes, which is a major concern of many cities. Other concerns include the lack of an efficient collection system, disposal facilities, and landfill site development. Hazardous industrial wastes are often left unmanaged in many cities. Such inadequacy of solid waste management can create serious impacts on urban environments, like the blocking of drainage systems and serious groundwater contamination at landfill sites. Air pollution due to rapid motorization, traffic congestion, and unmanaged vehicle emissions are also common problems in many EAP cities. 15) Negative environmental impacts also result from the conversion of agricultural and forest lands for urban uses and infrastructure development that result in the widespread removal of vegetation to support urban ecosystems, groundwater overdrafts, and the destruction of sensitive ecosystems and the hydrology in coastal areas. In addition, urbanization not only creates local but also global environmental impacts like excessive extraction of energy resources and increasing emissions of carbon dioxide that adds to the global tally. Urban population increases and industrial development in China especially has huge potential impacts because of its huge size. Escalation of Urban Poverty There is a strong positive link between national level urbanization and poverty levels wherein population below the poverty line decreases as urbanization proceeds and the economy develops. In every country, poverty incidence is lesser in urban than in rural areas. However, it is commonly assumed that poverty is a growing problem. Urban poverty will become the most significant and politically explosive problem in the coming years. (ADB. 1999b). Inequality tends to be higher in urban rather than in rural areas. And these days, this trend is growing. (WB.2000a) Urban poverty is not merely a simple problem brought on by low incomes: it is more of a matter of poor quality of life as characterized by very limited access to clean water and sanitation, health care, education, and economic activities. Urban Poverty in Infrastructure-poor Areas Urban poverty is usually found in slum areas in the urban core and in infrastructure-poor areas in peripheral locations. Thus, urban poverty is usually located in unhealthy and deteriorating conditions. Table shows comparisons by region between whole cities and informal urban settlements in terms of their access to basic infrastructure, like water connection, 15) The WHO (World Health Organization) calculated that in the early 1990s, 12 of the 15 cities in the world with the highest levels of particulates and 6 with the highest levels of sulfur dioxide in the atmosphere were in Asia (ADB.1999b). 26

33 sanitation, electricity, and telephone lines. Intra-urban disparities in infrastructure service levels are commonly found throughout the world. While the Asia and Pacific region has achieved a relatively high level of infrastructure as a whole, it should be noted that informal urban settlements have extremely limited levels of sanitation services, the same as in Sub-Saharan Africa, which have poor infrastructure level in all sectors. It was also found that they have a lower coverage of piped water connection compared to the level of access to water. Table Access to Infrastructure (Citywide and Informal Settlements) (% of households with connection) Asia and Pacific Piped Water Connection 1) Sanitation Electricity Telephone Access to Water 2) Informal settlements Informal settlements Informal settlements Informal settlements Informal settlements Source: UN HABITAT Note: 1) Refers to percentage of households with piped water connection. 2) Having potable water within 200 meters of the residence and includes water connections. 3) Data on informal settlement may contain inaccuracies as sample sizes are small and measurement is uncertain. Sub-Saharan Africa North Africa and Middle East Latin America and Caribbean Developing Countries Total Figure shows the spatial distribution of population density, average household income, average length of stay of residents, and road density in Metro Manila. The share of lower-income households are higher in the urban core (slums) 16) and in areas 20 to 30km away from the urban center. Poverty in the urban core shows in areas with high population densities and low road densities. These areas have short-staying residents, meaning they are relatively recent migrants into Metro Manila. Migrants coming from the East Visayan and Bicol regions, the poorest in the Philippines, tend to dwell in Kalookan City and the municipality of Navotas, which are known as urban squatter areas. (Osaka City University, 2001) This shows that the in-migration of the rural poor expands urban poverty in Metro Manila. It should be noted that the existence of the informal sector has a large impact on the expansion of urban poverty in the urban core. In other words, the informal sector provides employment and acts as a pull factor for rural poor migrants. The distribution of low-income households 20km and 30km away from the city center are mainly driven by the expansion of industries in the peripheral area, as discussed in 16) In Metro Manila (National Capital Region), urban squatters are not directly related to urban poverty. The share of households in urban squatter areas increased to 13.9% in 1994 from 10.5% in 1988, while the rate of poor families decreased from 21.6 to 8.0 during the same period. (ADB Urban Sector Review in Philippines). 27

34 Study on Urbanization Chapter 2. Industrial development absorbs factory laborers not only from surrounding areas but also from among rural migrants, thus preceding urbanization. These peripheral areas commonly lack infrastructure services. Figure Relationships among Population Density, Road Density, Average Household Income, and Average Length of Stay in Metro Manila Infrastructure Service Level (road density) Population Density km km Low-income Household Distribution Average Length of Stay km km Source: Compiled from MMUTIS (JICA 1999.) database 3.4 Impact of Urbanization on Emerging Surrounding Environments The advance of globalization has exposed cities to direct and borderless competition among cities rather than the traditional competition among countries. Cities need to develop high-level infrastructures like energy, communication, water, etc. as well as improve accessibility to international gateways like port and airport of international standard to reduce cost for logistics, in order to attract industry from foreign countries. The world s cities are required to strengthen their competitiveness through the provision of high livability with comprehensive urban infrastructure services. The IT industry not only creates new infrastructure needs in IT network development of 28

35 information and communication but also affects traditional infrastructure development in its impact and its institutional and administrative environment. In other words, existing massive and heavy industrial and urban infrastructure might lesson its importance and effectiveness. Another challenge for the IT industry is to provide a high quality of life (QOL) for intellectual workers involved in this sector (Komori. 2004). Cities trying to become IT heavens need to develop not only the industrial infrastructures, such as information networks, but also to the comprehensive urban infrastructures that will support such QOL in order to attract high-level workers and enhance new innovations. These cover natural environment, convenient and comfortable living environments, and amenity as well as knowledge facilities (e.g. university and research institutes) and social urban services (e.g. education and hospitals). 3.5 Summary of Urbanization Impacts on Infrastructure in EAP Countries The progress of urbanization has a number of impacts on societies, economies, and environments, including the development mechanisms of infrastructures. On the other hand, infrastructure is the underpinning support of the various activities of peoples and communities, which promote urbanization. The impacts of urbanization on infrastructure development, though different per country, may be summarized as follows: On the quantity of required urban infrastructure The extent of urbanization in the developing EAP countries is still low compared to other regions. So far, urbanization in these areas has been accompanied by rapid economic growth, coupled with certain levels of infrastructure development. Urbanization in these areas is expected to continue into the future, and the number of huge metropolises will increase. This will result in huge demands for urban infrastructures, and their designs should change accordingly. On nationwide national land development Changes in national land structures caused by rapid urbanization has brought about expanding income disparities and gaps in the levels of infrastructure services. This may be inevitable in urbanization and economic growth processes. This effect has been seen in the developing EAP countries and there is worry that this effect could become more serious in the future. Under these circumstances, infrastructure is regarded as a counter-balance to rectify interregional gaps by supporting rural or local socio-economic activities. On urban infrastructures in megacities The EAP region is characterized by the existence of a number of giant metropolises with populations of more than 8 million people, and their number and size are expected to further increase. The spatial expansion of peri-urbanization in these cities tended to be led by spinal infrastructures, and paradoxically, infrastructure-poor areas are spread behind these spinal infrastructures. In some areas near the metropolitan center, population density often becomes extremely high, producing high demands for urban infrastructures. The lack of infrastructure is one of the major reasons for the worsening of environments. 29

36 The urban poor mainly occupy these infrastructure-poor areas. Accessibility to basic infrastructure services, such as water supply and sanitation facilities, are regarded as essential services in these areas. 30

37 4. Key Issues and Strategies for Infrastructure Development and Service Provision Urbanization has created wide-ranging impacts on infrastructure development and its service provision, thus resulting in challenges and problems. Fundamentally, infrastructure is expected to provide high-standard services that support economic activities which, in turn, strengthen the competitiveness of cities, improve living environments, and ensure sustainable environments. Development issues in infrastructure development relative to urbanization are discussed in diverse ways that can be mostly classified into: competitiveness (contribution for economic development), livability, equity, and balanced development (including poverty reduction), governance, and financing. (ADB.1999b. WB.2000a, Douglass etc.) This chapter describes the financial development issues in response to the overall increase in infrastructure needs. Development issues are categorized into national or city level, based on the recognition that urbanization impacts and issues differ per policy level. Issues in response to new emerging environment are also reviewed. 4.1 Financial Resources for Sustainable Infrastructure Development 1) Infrastructure Investment in the EAP Countries In order to address development issues and cope with the increasing demands for urban infrastructures, the largest looming problem is how to secure funds that are required to sustain infrastructure investments. Both Eastern and Southeastern Asia will need enough funds to invest in urban infrastructures for their increasing urban populations, which will reach 670 million by In addition, existing urban populations, whose accessibility to infrastructure services is poor should be provided with better infrastructure services. The cost of universally providing water supply to urban populations in the developing countries is estimated to be 5% of the GDP, according to the WB s World Development Report 1999/2000. The huge fund requirement is exacerbated by difficulties in securing stable fund sources for the developing countries. Public sector expenditures on infrastructure is 5.7% in Indonesia, 4.3% in Malaysia, 1.9% in the Philippines, 8.6% in Thailand, and 6.6% in Vietnam, in terms of percentages to their GDPs. (WB, 2003c) In the Philippines, in particular, public investment is insufficient. In addition, infrastructure development through the ODA is on a declining trend and private sector investments have significantly decreased after its 1997 peak. (WB/ADB/JBIC, 2004, Flagship Study Issue Paper) Thus, securing investment funds has become an urgent issue. In this context, the agenda in developing urban infrastructures should be to maximize their economic efficiencies, profitability, the expansion of existing funding sources, and the establishment of new ones. Huge development values in urban infrastructures can be devoted to investment resources through the formulation of value-capturing mechanisms. Institutional arrangements are also required to promote private sector participation and effective cross-subsidy mechanisms. 31

38 2) Financial Resource Development Fund sources for infrastructure are, basically, two-fold: Taxes collected from the public, and revenues from user charges (including private sector financing). These include repayment of loans used for infrastructure development. The former is usually used for infrastructure such as local roads, parks, and disaster prevention facilities for which users cannot readily be determined. The latter is for such infrastructures whose users can easily be identified and wherein tariffs can be charged in proportion to the magnitude of user benefits. This includes water supply, expressways, railways, communication facilities, energy, ports, and airports. Since these infrastructure services entail revenues, the role of the private sector becomes important. Due, however, to their public nature, direct and indirect assistance, or incentives, are often given by the public sector. In any case, the beneficiaries of infrastructure services should reasonably shoulder costs to ensure an efficient, effective, and impartial use of limited financial resources. Based on this beneficiaries pay principle, financial resources should be developed and designed. (1) Securing of Tax Resources The most basic and stable fund source for infrastructure development is tax revenues. Since urbanization increases the value of fixed properties, particularly when equipped with infrastructure, the strengthening of taxation systems contribute in absorbing, even partially, the development benefits of infrastructure development. The adopted tax instruments are as follows: Fixed Property Tax: This tax is related with the public cost of providing infrastructure and other public services aimed at absorbing, at a certain rate, the benefits enjoyed by fixed property owners. This tax is regarded as the main tool to recover the cost of public services because their effect is continuous. This tax is usually institutionalized as a local tax and is one of the major financial resources of local governments. However, in the developing countries its efficiency has been extremely low. The main factors are deficient institutional mechanisms, such as tax rates, property evaluation criteria, and the scope of taxable articles, as well as low administrative capacities. (WB.1991.) Land Transaction Tax (one-time tax on capital gains, registration charges, etc.): The major function of this tax is to control land speculation by absorbing capital gains, at a certain rate, when land transaction has materialized. However, this tax has no effects on potential benefits for landowners when transaction is nonexistent. The combined application with the fixed property tax is needed. Development Costs Borne by Beneficiaries: In infrastructure development projects by the public sector wherein influence areas can be fairly specified, project costs are partially shared by beneficiaries according to the beneficiaries pay principle. This contributes in curtailing financial burden on the public sector. Its actual application has been seen on land readjustment and infrastructure development projects in Japan, Germany, and Taiwan in the form of land contributions from landowners. (Kukakuseiri) The Impact Fee system, applied in the US, is based on the same principle. The Japanese Experience In Japan, the fixed property and city planning taxes are assigned to the local 32

39 governments, constituting major financial sources for local administrations. During periods of rapid population increase, a major policy tactic resorted to by most Japanese cities was to increase revenues from the fixed property tax by expanding urban areas and changing land use from agricultural to residential/commercial lands. However, financial situations still worsened because demands for public services, including education and social welfare, continued to increase, and became larger than the tax revenue. Tax rates from the city planning tax remained low and insufficient to support infrastructure development, suppressed mainly by political considerations. As a result, local governments were forced to rely heavily on transfers and subsidies from the central government. In conclusion, local governments in Japan failed to create effective taxation mechanisms that fully recovered expenditures by absorbing development benefits. (2) Value-Capture Fund requirements for urban infrastructure are often large, usually surpassing the financial capacity of a government s general budget. New fund sources, therefore, become necessary. On urban infrastructures, how to make beneficiaries pay is a key issue for securing financial resources through the absorption of development benefits. Possible measures in attaining this include: Creation of Special Tax Revenues: Creation of earmarked fund sources based on the users pay principle can be an effective tool for stable infrastructure development. However, this mechanism seldom works in the developing countries due to various factors, such as insufficient institutional frameworks, poor tax collection, and political intervention. Recently, Road Funds, or Road Maintenance Fund, which is earmarked for road maintenance, has been established in many developing countries under the initiative of the World Bank. Japan established its Special Road Fund in 1958 to sustain road development and recover costs through users payments. The fund is collected mainly from taxes on fuel and road vehicles, and is separated either into national or local budget. This fund has been effective in road development, although criticism has recently been raised, citing that the mechanism incurs overinvestment in roads. In some megacities in the developing EAP countries, TDM, including road pricing, is proposed to regulate traffic as well as secure funds for investing in transport infrastructure, as discussed in detail in Chapter 4.3. Increasing the rates of fuel and vehicle ownership taxes is also an effective measure that is worthy of consideration. Most infrastructure projects proposed for urban areas in the developing EAP countries have huge economic benefits. Although economic benefits decrease when a user charge is strengthened, it is essential to convert as much as possible this benefit into financial profit within a reasonable range of economic internal rate of return (EIRR). The TDM, which controls traffic demand while producing investment funds, is one of the most promising policy measures that enhances sustainability in a city and materializes growth management. The volume of funds that can be generated through the TDM can be large, and it significantly strengthens the implementing capacities of governments. 33

40 Value-Capture through Integrated Development: When user charges are hard to collect, or insufficient to cover infrastructure costs, external benefits that arise out of increased prices of lands adjacent to infrastructures can be used to fund their development. In Japan, infrastructure developments, such as railways and roads, have been conducted in combination with residential/commercial developments. This method assumes a simultaneous development of infrastructure and property, and allows cross-subsidy from the latter to the former. More specifically: Land readjustment (Kukakuseiri): Combined development of residential areas and infrastructures (roads, parks, etc.). Spaces necessary for infrastructure development, such as roads and parks, are provided by landowners in return for increased property value owing to a better living environment and sufficient infrastructure. Some of these lands are sold to raise funds for infrastructure development. Combined development of railways and residential/commercial areas by the private sector: Railway enhances property values, and railway development costs are shouldered partially by this profit. Property development, in turn, provides the source of passengers. 17) (3) Users Pay Principle for Cost Recovery For infrastructures whose users can be determined, it is natural to finance development and operation/maintenance costs through the collection of user charges. This type of infrastructure needs tariff setting with consideration of financial sustainability in order to provide stable services. Tariffs must be consistent with levels of service, elasticity of demand, and the users willingness to pay. Appropriate Pricing On the other hand, basic public services, including water supply and sanitation, are traditionally provided at a lower price by the public sector in order to secure basic human needs. Subsidy has been justified as necessary when tariffs exceed the paying capacities of the poor. In developing countries, however, a number of problems arise such as tariffs advertently suppressed too low by political intervention and the provision of subsidies irrespective of needs. While the poor can be exempted from water fees from a piped system, those who benefit from subsidies are the people who already have access to water, while the subsidies have no real effects on the life of the actual poor (WB, 1994). In Asian megacities in particular, the urban poor s accessibility to drinking water is generally low. There are countless cases wherein the urban poor pays water vendors much higher prices than those who pay for piped water (ADB, 1997 and McIntosh. 2003). In addition, subsidized water tariffs (i.e. exemption of initial fixed rates, low rates up to a certain amount of consumption, etc.) tend to result in negative economic benefits and encourage corruption in the course of money flows in government. It is currently recognized that a clear objective and target are necessary for the 17) See Appendix C for details 34

41 effective use of subsidies. In Chile, for example, subsidy is given directly to the poor coupled with other measures such as lowered connection charges and small-scale, low-interest loans. Cross-subsidy Mechanism For network-type infrastructure, stable fund source is particularly important to construct entire networks. If economic and financial aspects are assessed on a per-project basis, projects located in areas where demand is relatively small will have a low priority, and consequently the entire network will not materialize. The internal cross-subsidy mechanism can generate a stable fund source by shifting financial benefits from very profitable projects to less profitable ones, i.e. from advanced areas to less developed areas. This mechanism is effective in developing nationwide, or regionwide, infrastructure networks such as railways and expressways. In other words, it is a transfer of financial resources from large cities to local cities. This is also applicable for urban expressway networks where operating bodies are different per route. If an internal cross-subsidy system can be transparently developed as a toll revenue allocation system, user convenience will be highly enhanced (i.e. single toll, single gate, etc.), and new private operators can easily participate in the market. In addition, this mechanism can be used as an intersectoral cross-subsidy system from one sector to another in an integrated development project. As mentioned earlier, the combined development of railways and property development were made possible in Japan through intersectoral cross-subsidies. However, cross-subsidization has its critics who say that the system spoils the economic efficiency of investment and hampers the optimum allocation of resources. In Japan, during the course of national land development and economic growth, this mechanism certainly enabled the securing of stable financial resources for developing local infrastructure in attaining a balanced national development. The current problem is the too rigid institutional mechanism, which failed to flexibly respond to the actual demand and led to over-investment in infrastructure. Tradeoffs between economic efficiency and impartiality should always be taken into account vis-à-vis the goals of national development. (4) Loan Financing for Infrastructure Development: Infrastructure development requires huge amounts of initial investments, and their benefits can be enjoyed by generations of people. In order to equalize financial burdens between generations, loan financing can be a reasonable fund source for infrastructure development. The issuance of bonds is widely practiced for infrastructure investment in the developed countries. Due to their long repayment periods, however, markets are often unable to accept various inherent risks in the developing countries. The use of municipal bonds, in particular, is practically very difficult due to insufficient information disclosures, deficient legal frameworks, political instability, and other factors. (WB 2000b) Another method is loan financing under a government guarantee. This enables the securing of fund sources, particularly for local governments, for infrastructure development that is hardly financed by the private sector. 35

42 In Japan, the Fiscal Loan and Investment Program (FLIP) played an important role as a financial source of loan financing guaranteed by the government. The FLIP is based on postal savings, funds from the Fund Trust Bureau (a welfare pension fund) and postal insurance funds (postal life insurance premiums) that enabled investments in infrastructure development outside the general government budget. The FLIP is believed to have worked well during Japan s high economic growth period. Again, however, it is criticized at present for overinvestment and fiscal hardship. (5) Private Sector Participation In the recent lack of public sector funds, private sector participation has become one of the effective and efficient methods of infrastructure development. Yet, a number of issues still remain, such as improper tariff setting, poor levels of services, political intervention, etc. To improve the situation in establishing public-private partnerships, vigorous efforts are currently being made toward the establishment of firm regulatory frameworks, enhancement of credibility and predictability, etc. In addition, the private sector does not invest in demand-scarce areas, and infrastructure development in less developed areas is mainly implemented through public investment. Therefore, the allocation of public investments should have a strategy for regional development and the alleviation of regional disparities. 4.2 Balanced National Land Development 1) Impact of Infrastructure on Regional Spatial Structure For existing regional disparities, infrastructure is seen as playing an important role in supporting less developed areas and allowing them to develop through their own resources, thus achieving balanced development. (RIDA. 1997) The improvement of infrastructures shall facilitate industrial activities in the regions concerned and support urban activities, thus improving economic levels and urban environments. According to Tsunokawa (2000), the balanced development of economic infrastructure, such as roads, has taken the leading role in reducing regional disparities in income levels during Japan s reconstruction after World War II. In other words, infrastructure stimulates industries in regional cities and contributes in increasing income levels. Japan was able to narrow regional disparities in tandem with the rise of urbanization and economic development while expanding during its early stages of development. The effects of infrastructure development on the revitalization of industries in the regional core cities have been also emphasized as a major objective of infrastructure development in the national development plans of the EAP countries. However, they are still facing expansions in regional disparities. Infrastructure is expected to play a considerable role in the quest for a balanced national land development in the face of ongoing urbanization. Where and how to implement infrastructure development are critical issues. 2) Roles of National Urban Policy (1) Implications of Urbanization on National Urban Policies There is a strong correlation between urbanization and levels of development across countries. Urbanization and growth of cities are essential elements of development 36

43 strategies that rely on the transformation of an agriculture-based economy into an industry- or service-based economy. In the early stages of development, urban concentration in one, or few, large cities generate much needed agglomeration benefits through the concentration of capital and labor, and this helps raise the overall economic efficiency. Growing cities, in fact, experience both external economies and diseconomies (such as congestion) implying an inverted U pattern in the relationships between city size and net external economic benefits (Mills 1967). However, considering that there is no effective national land development market worked out in EAP countries, if these cities are left to run their own course (as self-organizing systems), they are sure to reinforce the vicious cycle of overconcentration and congestion. Since all the largest cities in the EAP countries are also functioning as international gateways, the increasing trend of globalization in this region is likely to increase urban concentration in these cities, incurring additional costs due to congestion, which will be far more than the additional benefits. Thus, there is an important implication for devising urbanization and infrastructure policies in the EAP countries. Rapid growth of mega cities in the EAP countries should not be viewed as just a problem of urban management: increasing urban primacy might have significant economic costs nationwide. Therefore, what is important is to devise effective policy measures that will influence urban growth patterns toward desirable ends. (2) National Land Development Strategy Based on the above ideas, urban policies taken in the EAP countries, along with economic development and urbanization are summarized in Table National urbanization policies include Urbanization Policy to promote industrial development in urban areas and thus achieve national economic development, and Regional Development Policy to distribute cities for balanced development. The key issue for national urbanization policy lies in how to strike a balance among large cities, regional core cities, and rural cities. In response to this issue, most countries have indicated either a regional core city, or development corridor, in their regional development strategy. For example, the Chinese regional development policy, Three-dimensional development, is composed of three metropolitan areas, seven metropolitan corridors, and each regional core. Emphasis, however, depends per country. Table National Urbanization Policies in the EAP Countries Country Overall Urbanization Policy Regional Development China Tenth Five-year Plan for National Economic and Social Development proposed promotion of urbanization as an engine for national economic development. Urban Development Report , pointed three metropolitan areas as growth centers for national economy and proposed coordinated systems of large, medium and small cities. National urban system is proposed as Three-dimensional development, including three metropolitan area, Seven Metropolitan corridor, and each regional core. 37

44 Country Overall Urbanization Policy Regional Development Malaysia Urbanization policy originated from ethnic policy rather than economic development to integrate or reduce disparity between Malay (rural area) and Chinese (in urban). Systematic urban planning and management is necessary with increasing urbanization, where Local Agenda 21 programs was launched in 1999, to strengthen local level involvement in development activities. Philippines Thailand Vietnam Wawasan was formulated in 1991 aiming to develop the country by More efficient and productivity-oriented economic development is proposed. National Physical Plan is now being formulated (as of 2000) for sustainable and balanced regional development Philippine Medium-term Development Plan was formulated by NEDA and the National Framework for Physical Plan was updated for 2000 to There is no national land or regional development plan except for Bangkok Metropolitan Area. National Economic Social Development Plan identified government role as to provide infrastructure and support private sector investment. Ten-year Strategy for Socio-economic Development and five-year Socioeconomic Development Plan are established by Communist Party. National Urban Development Strategy set urban industry as core of national industry and proposes a comprehensive urban management strategy. Diversifying economic structure of the less developed states, e.g. resource-based industries. Multimedia Super Corridor Plan was formulated in 1997 to shift from manufacturing to knowledge-intensive industries, with 15 km * 50 km area located between Kuala Lumpur and the new international airport. Four-pronged approach to balancing the development of regions across the country, including development of urban centers outside of Metro Manila and decongestion of MM toward Subic-Clark and Calabarzon with capacity building of LGUs and capital market development. Regional core city was identified in the 5th Plan (1982-), followed by additional 19 cities in the 6th Plan (1986-). Four new economic zones were formulated in the 7th Plan (1992-) Eighth Plan proposed regional development plan to reduce regional disparity and overconcentration in Bangkok area. Three regional core developments and one corridor development, i.e. National Highway No.1. Regional development plan of northern (Hanoi, Hai Phong), central (Danang), and southern (HCMC) regions. Source: Compiled from MRI Study on National land policy coordination in Asian countries (in Japanese), Philippine Medium-term Development Plan in Philippines, Eighth Malaysia Plan If a country is to achieve a more dispersed and balanced urban settlement to attain a balanced development, it is required (especially for less developed regions) to develop resources of each region, and receive the spillover benefits of economic development from the developed to less developed regions, or to get transfer of income. The spillover effect, known as the trickle down effect, is currently being questioned about its effectiveness and impacts. Especially in countries with monopolar structures, and where urbanization proceeds through high primacy, the spillover effect might be low. Since the benefits of economic development in cities spread into peripheral areas, countries with several growth cores can enjoy widespread spillover effects and thus achieve a balanced development. Countries with economic development heavily dependent on one pole face more difficulties in achieving this. Japan s experiences in national land development and regional development strategies show a historical change from a monopolar to a multipolar structure. During the 1960s, a high economic growth period, Japan placed priority on industrial development in three metropolitan areas and Pacific belt zones, which resulted in the 38

45 expansion of regional disparities. Faced with growing regional disparities due to overconcentration in the metropolitan areas and the depopulation of rural areas, focus shifted to a regional core development in order to decentralize industries. Various policies were established, and they included the New Industrial City (1962), the Special Area for Industrial Consolidation (1964), and the Technopolis development (1980). These regional development strategies narrowed down regional disparities. Comparisons between regional and intra-regional disparities revealed that regional disparities decreased first, followed by the narrowing of intra-regional disparities (Figure 4.2.1). In other words, regional core development improved regionwide economic levels which then produced extensive spillover effects into rural hinterlands 18). In this context, balanced development requires the establishment of regional growth cores then their development through their own resources. Since most governments in the EAP countries have limited investment resources, regional core city development strategies should be carried out incrementally, starting with cities with the greatest growth potential. Figure Economic Development and Regional Disparity, Japan Theil's inequality index Inter-regional Intra-regional Inter-prefecture GDP per capita Note: Theill s inequality index is composed with intra-regional disparity and inter-regional disparity, of which detail is explained in Appendix A Source: Japan Statistical Year Book, Statistics Bureau, Japan (Various Years) 3) Infrastructure Development in Compliance with National Land Development Strategies (1) Infrastructure Development for Regional Core Development As regional cores secondary cities often need to: (a) extend basic social services and municipal facilities that support productive activities and develop human resources, (b) improve their physical infrastructure to make them more efficient and conducive to productive economic activities, (c) diversify their economic bases and employment structures or strengthen existing or potential comparative advantage; and (d) build up the planning, administrative and financial capacities of their local governments GDP per capita ('000 yen 1995 price) 18) As seen in Figure 4.2.2, regional disparity has re-expanded since 1980s, mostly in intra-regional disparity. These experiences have policy implications on how to enhance regional development after regional disparities have been narrowed, including decentralization to promote autonomous development within each region. 39

46 Japan took a regional development approach wherein infrastructure development by the public sector served as an incentive for the private sector to invest in an area. It is also observed in the EAP countries, based on their national economic plan, that the government is in charge of comprehensive infrastructure development to support industries and improve urban quality of life including social infrastructure, while economic activities are left to the private sector. 19) The national economic plan of Malaysia stated that the government will give greater emphasis on the provision and upgrading of infrastructure facilities, such as roads, piped water, and electricity supply, to promote growth and investments in less developed regions (Government of Malaysia). There are some successful cases in regional core development in the EAP countries, where location was selected in consideration of the region s potentials and where a series of projects was well coordinated by the central government in accordance with national policy. The Eastern Seaboard Development (ESD) project in Thailand is one of the most famous cases of industrial core development led by the central government. The Thai government coordinated a series of projects, including large-scale infrastructure, through ODA funding, and prepared the institutional environment for private sector involvement. It also implemented economic and social infrastructures using its own resources. The ESD project showed that ODA can be utilized effectively for regional core development, if well coordinated with the national urban policy and if recipient countries have strong ownership of projects. The development of Metro Cebu in the Philippines has showed the urban development cycle of a regional core city, i.e. from growth core in the first stage of development, through sustainable urban development as a regional core city, and to the spread of economic growth in the entire region (JBIC. 2003). It was found that infrastructure development has been well coordinated with the overall development plan by development stage and this has contributed to economic development and poverty reduction in the region. More specifically, infrastructure development started with export processing zone development in the first stage, through urban infrastructure development for livability, and recently shifting to transport corridor development to distribute its economic benefits to the whole region. ODA financing has also been utilized as was seen in the ESD project in Thailand. Another lesson from Metro Cebu s development is that local governments have a leading role in regional development, provided central governments prop them with institutional, financial, and technical support. It is, however, evaluated that the growth pole strategy is not likely to slow down the growth of large metropolitan areas. Another key issue in national land development is to develop linkages among metropolises, regional core cities with growth potential, selected smaller cities, and market towns. Effective physical linkage with transportation as well as economic, marketing and administrative support creates the 19) As for regional core development policy, institutional arrangement and infrastructure development have also been introduced. In Thailand, the Investment Planning Zone was introduced in 1987 as an industrial location policy, which provides incentives when investing in rural areas such as preferential treatment in financial services and tax breaks. 40

47 potential for mutual interaction among different levels of cities. They also establish a hierarchy of services, facilities and productive activities to effectively use limited resources. The issue that remains is how to expand infrastructure development in other secondary cities and less developed areas. (2) Allocation of Public Investment and supporting institutional arrangement The most fundamental issues for national land development are investment in and implementation of infrastructure closely coordinated with the national urban policy. Wherever infrastructure investment comes from -- whether public sector or private sector, central government or local government, general tax revenues or loans -- the national government has an important role to play. As for public investment, key issues for national government are how to secure stable financing resources and how these would be allocated. As for private investment, the national government should develop institutional arrangements, such as regulation of service provision, and improve its credibility and political stability to provide incentives to the private sector. There have been criticisms that centrally determined spending might produce inefficient allocations influenced by political interventions and which tend to lack coordination among investment, operation, and maintenance (WB. 2000b). However, central government s public investment still has much to contribute to infrastructure development in close coordination with national urban policy, especially in the early stages of development. It has been observed that the central government s share in public investment spending is generally over 50 percent in countries with a GDP per capita of less than US$ 5,000. EAP countries have a high share of central government share in general public expenditures, 20) which may be as well for public investment. Moreover, infrastructure development in less developed areas or for new regional core development has difficulty inviting private investment, which still depends largely on public investment. Key issue is how to allocate public investment to infrastructure development. Lessons Learned from Japan s Experiences The key factor contributing to Japan s balanced infrastructure development and the reduction in regional disparity is the harmonization among the national vision, the national land development plan, and the implementation of infrastructure development (OECD. 1996). In other words, the hierarchy of macro- and micro-level planning and policies and their implementation is carefully coordinated through the collaborative effort not only of the central and local government bodies but also that of the private sector. The national economic plan sets the overall economic growth target, and the national land development plan aims to achieve this target without widening regional disparities. Such macro-level strategic objectives set in upper-level plans are then supported by various laws, institutional setups, sectoral and local level plans, and, most importantly, adequate investment resources to implement the plan components. 20) The share of central government expenditure in total expenditure is 85% in Malaysia, 91% in Thailand, 86% in Philippines, and 28.4% in Indonesia. 41

48 The institutional mechanism supporting infrastructure development in Japan includes the clarification of the organizational setup of government agencies and public corporations, the establishment of a system of periodic revision of sector plans, the enactment of supporting legislations, and, most importantly, the establishment of innovative financing schemes. 21) The coordination between the plan objectives and implementation is best seen in the investment allocation patterns for public infrastructure. The investment patterns should exactly follow the policy guidelines provided in the national plan. In Japan, the Comprehensive National Development Plan utilized infrastructure investment as the key instrument to reduce regional disparities. The basic assumption behind this approach is that public infrastructure provision acts as an important incentive for private sector investors. Increased infrastructure investment in the lagging regions not only helps in stimulating local economies through short-term demand effects but also in generating long-term growth potentials through attracting private sector investment. Therefore, the lagging regions received high investment in industrial development-oriented investment (Figure 4.2.2). While this strategy seems to have worked well in the neighboring areas of metropolitan areas, it delivered only limited impacts in some peripheral areas, especially in the face of increasing globalization. The problem of regional disparity is now on the quality of life rather than on income levels. The Japanese experience provides the important lesson that infrastructure investments should not focus only on industrial growth, but also on the aspect of quality of life early on to retain populations secondary and tertiary cities in peripheral areas and enable them to maintain the minimum threshold of population required for urban-like services. 21) The strongly coordinated planning approach in Japan seems to have worked well until the early 1980s. Since the late 1980s, the system could not respond very well to the changing domestic and global economic environments. The public investment approach also could not foresee the impending changes in the pattern of service demand. As a result, there are now cases, particularly in lagging areas, where infrastructure facilities with huge investments are serving only a fraction of the predicted demand. On the other hand, big cities experience severe congestion due to an undersupply of infrastructure. 42

49 Figure Public Investment Distribution among Regions, Japan Total administrative investment per capita Ratio of national average Livelihood infrastructure investment per capita Metropolitan Areas (MA) Neighbouring ares of MA Peripheral areas Industry infrastructure investment per capita Ratio of national average 1 Ratio of national average Source: Administrative Investment, Ministry of Home Affairs, Posts and Telecommunication (various years) Experiences and Issues in EAP countries Some EAP countries have faced infrastructure development constraints in their national development policies, while emphasizing balanced development as a major objective along with economic development. This is partly because EAP countries have been forced to concentrate their resources in the metropolitan areas in the face of the growing global competitiveness from other countries. This has resulted in lesser priorities on infrastructure investments in the regional cities other than major metropolitan areas. Seta.2002, JASID. 2001) Private sector investment is seen as an important source for more efficient infrastructure development compared with the limited financial resources of governments. Since the private sector places priority on profitable projects, infrastructure development in less developed areas tend to have little progress. A review of Malaysia s National Economic Plan shows a conflict between economic development and balanced development in urbanization policies. During its economic stagnation in the 1980s, the Malaysian government introduced a policy promoting 43

50 concentration in its metropolitan areas. There was a clear policy shift from Place-Prosperity strategy to People-Prosperity Strategy, which aimed at reducing regional disparities in income levels per capita by concentrating populations and industries into more efficient urbanized areas. (The Fifth Malaysia Plan, ) Malaysia reformed its economy after the policy shift, gaining growth of as much as 9.5 percent annual GDP growth rate, which fell to 5.1 percent in the early 1980s. On the other hand, this shift accelerated concentration in metropolitan areas, while industrial development outside of metropolitan area made little progress. Regional disparities expanded where its GRDP-Gini index increased to 0.22 in 1995, from 0.19 in Malaysia s privatization policies have continuously decreased its government s share in public investments, lowering its percentage to the GDP to 6.2 percent in the Seventh Malaysia Plan. This was 12.2 percent in the Fourth Malaysia Plan. Sectoral allocations in public investments show a government tendency to move away from economic infrastructures, following a peak in the early 1980s (Figure 4.2.3). As noted, private sector participation has raised concerns that it makes little progress in infrastructure development for regional cities other than metropolitan area, since the private sector places priority on profitability and efficiency. The central government is required to develop institutional environments and legal frameworks to provide incentives that would secure infrastructure development in these areas when promoting private sector participation. Figure Public Investment Allocation by Sector 100% 80% 60% 40% Administration Security Social Economic 20% 0% 1st 2nd 3rd 4th 5th 6th 7th 8th Source: Malaysia Plan On the other hand, the share of public investment in Thailand has recently been increasing compared to the Malaysian experience. Thailand s share of public investment in the GDP increased to 5.2 percent in its Eighth National Economic and Social Development Plan ( ), which was 3.1 percent in its Fifth Plan ( ). 22) This is also seen in its public expenditures, which remain at a constant level of the GDP. This fact shows that the Thai government has continuously played a central role in infrastructure development. However, public investments have not been well allocated into less developed regions since the 1980s under an era of 22 ) The share of government budget as percentage of GDP accounted for 17.2 percent, 19.3 percent, 15.7 percent, 17.4 percent, and 18.1 percent in the Fourth to the Eighth Plan, respectively. 44

51 globalization, although there is no clear numerical evidence. The Thai government has emphasized social development as well as economic development early on since the early 1970s. Social equity and regional equity were major issues tackled in its social development strategy. Specifically, a policy on dispersion of industries was introduced in its government s Third Plan ( ), and a regional dispersion policy in its Fourth Plan ( ). Both of these plans selected regional core cities and proposed comprehensive infrastructure development in these cities. The Fifth Plan, which came out in the early 1980s, focused the most on balanced development, which advocated the importance of narrowing regional and income disparities. However, such regional development policies that narrow regional disparities were undermined following the prioritization of economic efficiency over national economic development in the wake of the world economic recession in the 1980s. As a result, infrastructure development in regional core cities was not carried out as expected. In the Thai government s evaluation, there was an urgent need for infrastructure development such as those for the Bangkok Metropolitan Area. Likewise the Eastern Seaboard Development Plan was given more priority for economic development (Seta.2002). The policy shift to economic efficiency contributed in increasing trade and inviting FDIs in the wake of the progress of globalization, thus achieving extremely rapid economic development. Its average annual GDP growth rate recorded 10.3 percent, in the late 1980s and 8.6 percent in the early 1990s. However, as in the cases of Malaysia and most EAP countries, rapid economic development has caused serious problems in urban environments due to overconcentration metropolitan areas (as in the case of Bangkok metropolitan area), increasing social inequities due to the expansion of regional disparities. In response to these problems, the Thai government emphasized reducing regional disparities with the introduction of its regional development strategy in the Seventh Plan in 1990 and the Eighth Plan in Following the Asian economic crisis in 1997, the government modified its policies in reforming its economy, where balanced development was placed in the back burner. 45

52 4.3 Growth Management of Urbanization in Metropolitan Areas Excessive concentration of populations in large cities brings about densification of built-up areas and urban sprawls in peripheral areas. This results in a number of problems such as deterioration of living environments, expansion of urban disparities, and increase in the number of urban poor. Urban infrastructures are expected to play a vital role in alleviating these situations, enabling cities to provide spaces for business activities and maintain sustainable and comfortable urban environments to enhance their competitiveness. In this context, the largest issue lies in the growth management of large cities in relation to urban infrastructures. The discussion here covers the role of spinal infrastructures in the formation of urban areas, the implication between land use and infrastructure, infrastructure development in poor areas, and so on. 1) Interaction of the Expansion of Urban Area with Trunk Infrastructures Infrastructure determines the basic form of a city in the long term. Spinal urban infrastructures, arterial roads in particular, lead the progress in urbanization. Thus, the timing of infrastructure development, vis-à-vis the progress of urbanization, has a significant impact on the form and functions a city would have which then induces peri-urbanization. For instance, Tokyo developed its urbanized areas mainly along public transport corridors as shown in Figure This is due to the development of urban railways radiating from the center of Tokyo and which kept pace with the progress of urbanization. In some cases, as will be shown later, urban railways were developed prior to urbanization using internal cross-subsidies from residential/commercial developments of preempted lands. Figure Expansion of Urbanized Area, Source: CPIJ Developed Area Railway Line 46

53 Urban Transport Levels of Service Study on Urbanization 2) Long-term Perspective and Comprehensive Approaches Infrastructures, or trunk infrastructures, designate urban frameworks through a long process of urbanization, and this includes structures of urban areas and the distribution of urban functions. In other words, the timing of infrastructure development has a significant impact on the quality and range of urban areas. While there are a lot factors concerning the timing of infrastructure investments, 23) the most fundamental issue is in how to formulate and implement a practical plan with a long-term vision. On the other hand, the speed of urbanization in the EAP cities has exceeded the function of infrastructure to designate urban structures. Consequently, transport infrastructures, like typical urban trunk infrastructures, induce expansion of urban areas and aggravate sprawling in the hinterlands, thus resulting in areas where infrastructures are poor. Urbanization prior to infrastructure development makes it more difficult to improve infrastructure levels due to huge costs of land acquisition and resettlement conflicts. Critical Point in Urban Infrastructure Development For instance, if new investments are not made, urban transport service levels tend to decrease with increases in population and traffic demand. The assumption is that, if no investments will be made, a critical point will be reached wherein previous service levels will be hard to recover even if large investments are eventually made. This critical point is practically interpreted as a situation that entails far larger costs to develop new infrastructure due to uncontrolled urbanization without sufficient infrastructure provision. Desirable path Likely Trend Possible Difficult Critical Point In the figure above, Singapore seems to be on the Desirable Path, while other megacities, such as Bangkok, Jakarta, and Manila are on the Likely Trend, judging from the decreasing service levels in urban transport. Lessons from the Singapore s experience are as follows: A. Transport demand management (TDM) is important for controlling traffic volumes while generating funds for the development of transport infrastructures. B. Public transport development should have priorities. Bus services should be improved in the initial stage, while railway (guideway transit) should be developed next when investment funds have been secured. However, for the practical use of these lessons, it should be noted that the capacity of the Singapore government was high enough to attain ideal planning, coordination, and implementation. 23 Determination of timing of investment of transport infrastructure is discussed in Appendix B. 47

54 Formulation of long-term development plans is essential to realize growth management through infrastructure and improve living conditions in a city. Its objectives are the following: 1) To secure in advance public space necessary for infrastructure, such as roads, railways, parks, and schools, before uncontrolled urbanization progresses. 2) To control land use in consistency with infrastructure development. 3) To establish basis for public authority in relation to planned actions. However, in many developing EAP countries land-use controls often fail due to insufficient legal frameworks, deficient applications of existing restrictions, political intervention, and so on. To improve this situation, it is important to have implementable infrastructure development plans that are consistent with planned land use, and then to legally authorize these plans. This is particularly true in large-scale projects that require considerable land space like arterial road development. More specifically, the necessary actions are the establishment of clear city plans, the provision of effective tools for land-use management, the imposition of development restrictions on infrastructure-planned sites, preemption of necessary land space, etc. This task requires a vast amount of effort for governments in these developing countries. It should be emphasized that good governance plays an important role in materializing objectives. 3) Land-use Management The most fundamental issue of growth management is land-use control. This is closely related to the mechanism that ensures efficient and effective development of infrastructures in each area, and which should be determined in city master plans in conjunction with development restrictions and investment schedules. The basic strategies of land-use management are two-fold: incentives and restrictions. Incentives include the combined development of infrastructure and residential areas (using internal cross-subsidies from area development to infrastructure) and various bonuses for specific types of development. Restrictions are, basically, legal constraints that determine type, scale, and form of development. In relation to infrastructure development, the restrictions imposed in the planned, or proposed, site are the key factors that determine the reality of implementation. In general, these measures are used in combination to promote infrastructure development. In addition, land-use restrictions can be changed depending on the level of infrastructure and the contributions from landowners. This is an example of using land-use restriction as an incentive. In most large cities in the developing countries, however, rapid urbanization has resulted in serious urban disparities in terms of infrastructure service levels due to urbanization without enough infrastructure provision in the center and peripheries. Land-use management also covers institutional aspects with regard to registration system of land ownership and tenancy, land transactions, and so on. The deficiency in these legal/institutional mechanisms, often seen in developing countries in the EAP region, hinders the serious acquisition of lands needed for infrastructure development. For 48

55 instance, the discrepancy in land prices between market and declared prices causes conflicts between the government and residents. In addition, informal settlers, as seen in some EAP cities, are one of the major roadblocks in infrastructure development. These informal settlers often illegally occupy unused public lands that usually act as the seeds for infrastructure space. The concept of land-use management is hardly applicable in these areas. This problem should be addressed not only from an infrastructure point of view but also from a comprehensive socio-economic viewpoint. 4) Efficient Operation of Existing Infrastructures The demand-supply gap of infrastructure in EAP cities is expanding as rapid urbanization continues. It is almost impossible for the supply to catch up with demand in the short term. Therefore, it has become one of the key strategies to maximize the use of existing infrastructures. From this standpoint, the importance of maintenance and demand management should be stressed. Transport Demand Management (TDM) Traffic congestion is a common problem shared by many EAP cities and is regarded as one of the major causes of the low efficiency of urban activities, worsening living environments, and poor traffic safety. While many cities have tackled this problem as a priority issue, drastic improvements are hardly seen since the development of new transport infrastructures generates new demand. Thus, controlling traffic demand is currently eyed to as an efficiently use of existing transport infrastructures. TDM is also regarded as a promising measure to generate new fund sources. (This aspect is explained in chapter 4.1). TDM measures have already been tested in some EAP cities. The following are the preceding practices: A Road Pricing in Seoul City Road pricing started in Seoul city aiming to reduce the number of private vehicles (i.e. low-occupancy vehicles) as well as raise revenues for transport-related projects. This experience in Seoul shows that road pricing can improve the traffic situation of a whole network, if locations are adequately selected. This scheme was introduced in 1996 at the Namsan Tunnels #1 and #3, which are two major arteries linking downtown Seoul to the southern parts of the city, through a congestion fee of 2,000 won. 24) These two corridors had high private vehicle use, with a 90 percent share of total traffic, the highest of all corridors linking the central business district. The results of the five-year implementation of the road pricing showed significant improvements in the traffic situation in both corridors. Traffic speed improved from 21.6 km/h before commencement to 43.5 km/h by The share of passenger vehicles decreased from 78.4 percent to 58.0 percent in On alternative routes, traffic volumes increased up to 15 percent but average speeds also increased. It was evaluated that this impact was a network effect caused by improved flows at signalized intersections linked to the Namsan corridors. 24) Exchange rate is: US1$ = 1,150 won as of August

56 Table Traffic Situation Changes in Namsan Tunnel Corridors Traffic Speed 1) (km/h, % of increase) 1996 Nov (before pricing) Nov Nov Nov 29.8 (+38.1) 30.6 (+42.0) 43.5 (+101.4) Traffic Volumes (vehicles, % of increase) Modal share (% to total) 90,404 78,078 (-13.6) 94,494 (+4.5) 81,549 (-9.8) Passenger car Bus Taxi Note: 1) Average speed of two corridors. Source: Yamaya Five-year evaluation of Road Pricing in Seoul City Another important implication from Seoul case is to raise funds from TDM scheme. The annual revenue from this scheme, about 14.1 billion won per year, is invested in a special account for transportation aid and is spent exclusively for public transport improvement projects, including bus vehicle improvement and transport system management measures. B. Jakarta 3 in 1 policy A 3-in-1 scheme was applied on the Jl. Thamrin, Jl. Sudirman and a part of Jl. Gatot Subroto, from 6:30 a.m. to 10:00 a.m. Mondays through Fridays in Jakarta. During the restricted time, only vehicles with three or more passengers are allowed to enter the restricted road sections. The scheme was generally effective in reducing the number of vehicles entering the restricted zone resulting in smoother traffic flows during the restricted periods. However, this scheme had several problems. First, unlike in the case of Seoul, it increased traffic demand on parallel streets, which grew during the restricted hours and significantly decreased travel speeds. This puts into question whether traffic restrictions on one road can achieve efficiency for an entire network. Besides, there was no revenue collected for the local government, while costs were incurred for traffic police enforcement. Another problem that resulted was the practice of picking up temporary passengers called jockeys, at a thousand rupiah per head along the way, which reduced the effectiveness of the traffic restraint policy through interference into one of the objectives, to reduce vehicular traffic on restricted roads. C. Transport Demand Management in Chinese Cities In China, motorization started in the early 1990s. The number of private passenger cars increased to 240,700, in 1990 from about 19,300 in 1985 or an annual growth rate of 65 percent. The rapid increases in passenger car and motorcycle usage since the 1990s seriously alarmed Chinese cities, prompting the regulation on both usage and ownership of vehicles mainly in major coastal cities. Since the responsibility fell under each provincial government, various policies were enforced by city governments. In Beijing, a ban on the new registrations of motorcycles was introduced in 1984, the earliest in China. At that moment, passenger car ownership per 1,000 persons was only 7.0 and 0.25 for private-owned. 50

57 In Shanghai, the largest commercial center in China, regulation was applied both on passenger cars and motorcycles. A registration ban for motorcycles was done in the early 1990s, while replacement was allowed for those who already had registrations. Regulation on motorcycle usage was only introduced in Car licensing quotas and auctions were introduced for passenger cars. Each year, Shanghai sets a quota for vehicle registration and auctions off the corresponding number of license plates on the market. Since 2000, the city increased this quota to 50,000 a year. The 2002 average bidding price of a license plate went as high as US$ 3, ) This generates millions of dollars from auctions with the money going back to the city s transportation development projects. Other regulations on motorcycles enforced in China includes the limitation of motorcycle access into the city center of Kunming through the issuance of permits; the limitation on the usage of ageing motorcycles in Guangzhou or Nanning; and the ban on two-stroke motorcycles in many cities. Comparison among cities in China shows that measures on control policies has effects on transport performance in each city, depending on the timing of enforcements. Table shows motorcycle and passenger car ownerships with GDP per capita of the three major cities of Beijing, Shanghai, and Tienjin. City Table Motorcycle and Car Ownership and GDP per capita, 2002 GDP per capita (USD) Passenger Car Ownership (number/1000) Privateowned Total Motorcycle ownership (number/1000) Year introduced of Regulation Length of Highway / vehicle (km/000) Shanghai 3, Beijing 2, Tianjin 2, Source: Statistical Book of China, 2002 In Shanghai, passenger car ownership is lower than that in Beijing and Tianjin, which is especially true for private vehicles, while the city s GDP per capita is the highest among the three cities. This is partly due to strict regulations on car ownership through licensing quotas and auctions. On the other hand, Beijing is a passenger-car-dominated city with lower levels of motorcycle ownership, which is due to earlier enforcements on motorcycle usage inside city areas. D. Transport Demand Management Policies of Singapore Although Singapore s experience may not be deemed a good model to apply to other cities due to it being a small city-state, its remarkable performance supported by institutional and organizational capabilities, and its combined approaches on infrastructure development and TDM measures should be highlighted. The levels of service for road traffic have been constantly maintained for more than 20 years. 26) 25 Over time, the bidding of license plates has evolved into an activity of car dealers instead of car owners. Dealers acquire plates through auction and then immediately sells them together with cars. 26) See Appendix B for details 51

58 Demand Management by Tariff Levels Demand management is possible by adjusting tariff levels in the sectors where tariff is collected from the user (electricity, water, etc). A dynamic tariff structure can induce demand management if adjusted on consumption levels for all types of consumers. On the other hand, inadequate tariff structures might cause wasteful water usage and decrease tariff revenues. For example, in Sri Lanka, very high nondomestic tariffs have forced some businesses to drill their own water wells. ADB Asian Water Supplies There is a need, therefore, to acquire and manage information on consumer needs and historical changes in water usage, and monitor the effect of tariff adjustments. 5) Comprehensive Infrastructure Development As noted before, rapid expansion of urban areas and the formulation of densely built-up areas result in deteriorating urban environments and intra-urban disparities in levels of public services. To improve quality of life in high-density areas, it is reported that sector-wise approaches (e.g. road, water supply, housing, etc.) is not effective. Integrated multisectoral approaches should instead be pursued (ADB. 1999). Such sector-wide implementation requires institutional coordination among various stakeholders, including government departments, agencies concerned with environmental management, the private sector, and communities. Another aspect of intra-urban disparity is the urban poor. The increase in the urban poor brings about a number of implications for infrastructure development. The magnitude of this problem is forecast to further grow and have a serious effect on large EAP cities. The urban poor are distributed mainly in overcrowded areas in and around city centers, and in the peri-urbanized areas where infrastructure is poorly provided and difficult to improve. To improve these areas, a multisectoral and integrated approach should be taken, including infrastructure development and socio-economic countermeasures, such as the creation of job opportunities, education, and anti-criminality campaigns. As mentioned earlier, poor areas often spread along and inside public land spaces like rivers, canals, and railways (mainly informal settlements). When infrastructure is planned across these areas, residents have to move out and face a number of difficulties. Compensation is sometimes insufficient and livelihoods are often lost. In addition to fair resettlement compensation, a multisectoral and integrated set of countermeasures should be similarly provided. In practice, experiences in the EAP countries have shown difficulties in institutional coordination and comprehensive approaches especially in large urban areas due to the lack of political commitment, sectoral coordination, and intergovernmental coordination (to be discussed later). Integrated approaches should be conducted in parallel with a sustained process of institutional development and policy dialogues with participating agencies and local government units. (ADB. 1999) The Kampung Improvement Program (KIP) in Indonesia is one of the best practices of an integrated approach. This program is characterized by the active participation of local communities. 52

59 Kampung Improvement Program In Indonesia Study on Urbanization The Kampung Improvement Project (KIP) was conducted by the World Bank in major cities in Indonesia from 1980 to The program aimed to alleviate poverty by supporting efforts to improve housing services and basic infrastructures in low-income and highly dense areas known as kampung, brought on by the rapid increase in urban poverty due to continuous urbanization with in-migration from rural areas. The KIP components included housing and environmental improvements for low-income urban households. 27) The most positive impact of KIP was it upgraded the quality of life of kampung residents through the provision of improved footpaths, access to water, private toilet/septic tanks, improved drainage facilities, lighting, education, and health facilities, living spaces, and reduction of housing density. (WB Enhancing the Quality of Life in Urban Indonesia: Legacy of Kampung Improvement Program). This program shows that a compressive approach, including the provision of social facilities as well as public infrastructure facilities, can efficiently improve low-income areas, which are a common feature of EAP cities. Spillover effects outside project sites were also observed where the KIP experience served as a prototype for investments and improvements, while the urban environment continues to deteriorate, exacerbated by rapid population growth. The study evaluated that although most kampung residents did gain some benefits, they would have gotten more if their property rights were more secure, showing that institutional arrangements are also required in integrated approaches. Another lesson identified in this program is community participation in the planning and implementation phases. 6) Infrastructure Provision for Urban Poor The urban poor are obliged to work in an informal sector because they do not have education or skills required for employment in a formal sector. They have very limited access to financing for starting small business since they do not have property which can be used as collateral. They cannot enjoy social security benefits because they are not legally registered as citizen. The Urban poor in illegal settlements are not equipped with infrastructure services i.e., power, water and sanitation, telecommunication, and transport (see page 27). Legally registered land and residences (publicly or privately owned) are expensive for them whether purchasing or leasing, and cannot be accessed by the poor. Lack of infrastructure services deprive them of opportunities to get out of poverty. In peri-urban areas, lack of transportation services prevents them from accessing to employment opportunities and increasing their income. Without infrastructure services, they cannot run small businesses at their residences (such as manufacturing and petty trading), typical informal livelihood activities. Therefore, improvement of the urban poor s access to infrastructure services contributes to upgrade their living conditions and livelihood. One of the most serious constraints on their access to infrastructure services is that they do not have secure tenure status (UN-HABITAT. 2003). The public sector and utility service providers are constrained to formally construct infrastructure facilities for people 27 One of the characteristics of the KIP is the low cost of investment (ranging from US$ 118 per person in Jakarta to US$ 23 in smaller cities, 1993 US dollars). 53

60 who live illegally. In addition, without collateral, the poor have very limited access to credit services. Hence, it is considered that the provision of secure tenure status to the urban poor is one of the effective means to assist the urban poor. In reality, however, it is not often realized so far due to various reasons, for example: (i) limited access of individuals/small developers to urban land usually owned by governments; (ii) lack of laws and/or registration system of property ownership; (iii) lack of efficient property market; (iv) government s low cost housing scheme which are not affordable to the poor; (v) private land owners resistance; (vi) political difficulties; (vii) lack of capacity of governments; etc. In spite of these difficulties, secure tenure status, even limited, need to be publicly granted one way or another in order to improve the urban poor s access to infrastructure. For example, Brazil has a law granting adverse possession; and in the Philippines, squatters rights are recognized in its constitution. Once the secure tenure is granted, infrastructure could be provided in the following guidelines: Infrastructure provision in urban poor areas should not be separated from the other urban area. It is essential to physically and functionally integrate the poor areas into other urbanized area. Infrastructure in the poor area should be connected with whole network of the urbanized area. This policy will prevent the isolation of poor areas, and formally integrate the areas into urban economy. When drawing up a plan of infrastructure provision in urban poor areas, it is necessary to ensure their participation in order to reflect their needs. In particular, content/level of infrastructure services, location of facilities, and cost recovery mechanism should be decided with the participation of the poor people. Affordability to pay and willingness to pay need to be carefully studied. Cost recovery is one of important issues in providing infrastructure services to the poor. It would be difficult to expect poor individual households to pay the charges due to their instable economic situation. Therefore, it would be an option to provide land tenure and services user rights with communities, rather than to individual households. Another option is to consider targeted subsidy scheme for them. If the urban poor can purchase or rent a property equipped with basic infrastructure services, it is the best option for them. Governments should consider low-cost housing development affordable to the poor, development of efficient property market, rationalization of registration fees, creation of socialized housing loan/subsidy scheme, etc. to the extent that these do not cause serious market distortions. In order for them to generate more income through utilizing infrastructure services, other policy measures need to be adopted as well. They would include: creation of micro-credit scheme, rationalization of land use restrictions to prohibit small business at their residences, fast processing of business permits, etc. It is very often that the urban poor, who illegally live in infrastructure project areas, are obliged to be involuntarily relocated. In addition, it is increasingly difficult to provide relocation near places where they live. In such cases, due consideration should be given to provision of infrastructure services in the relocation sites. For example, JBIC ODA loans assist constructing infrastructure (electricity, water, roads, etc.) in squatter resettlement area in the Philippines. 54

61 7) Governance Improvement and Capacity Development As urbanization progresses in diversified societies, good governance and capacity development become key issues in infrastructure development in urban areas. This is because problems, such as increasing urban poor and worsening environments, need to be tackled through multisectoral approaches, even while consensus building is getting more difficult to achieve among diverse stakeholders. The ADB has pointed out the importance of improving governance in urban development in four aspects: (i) Accountability of public sector staff and organizations; (ii) Greater participation of community and interest groups in decision making on the delivery of services and demand management; (iii) Predictability of markets, regulations, and legal frameworks; (iv) Transparency in dealings between the private sector and government. (ADB Urban Sector Strategy). Beyond Administrative Boundaries In large EAP cities where urbanization spreads beyond administrative boundaries, urban activities naturally occur across boundaries. This requires a wider administrative or cooperative mechanism to provide infrastructure services to the citizens. In water supply, waste management, transport and other infrastructure services that need networks, this requirement is essential. In the Philippines, for example, the Metropolitan Manila Development Authority (MMDA) is in charge of coordinating urban development for the entire Metro Manila area, which consists of 17 cities and municipalities. However, its legal authority is not firmly established, and its power is limited to actual coordination and enforcement of land-use management and infrastructure development. Furthermore in Metro Manila, urbanization is currently expanding to the adjoining provinces, such as Cavite and Laguna, where the lack of infrastructures is a serious concern. Webster However, the MMDA is not responsible for issues outside Metro Manila, thus a strong coordinating framework is urgently needed for the entire urban area in and around Metro Manila. For this type of wider-area, or regional approach, in infrastructure development, the decentralization of government functions and authorities has a significant impact. In Indonesia, where decentralization has been ongoing since 1999, development and management authorities for basic infrastructure were transferred to local governments in the lowest level. For this, and partially for the confusion typically seen in the time of institutional reforms, the Jakarta Metropolitan Area (JABODETABEK) is currently suffering from a number of problems, such as lack of planning capacities of the local governments, lack of coordination, and overlapping responsibilities among central ministries and local governments. For example, similar local governments proposed the same arterial road with different alignments. Due to these problems, the establishment of a city-wide coordinating body which is responsible for major transport policies and projects, like the Jabodetabek Transport Authority, is proposed. (JICA, 2004, SITRAMP) Sectoral Coordination For solving complex urban problems, a single-sector approach is not effective and an integrated multisectoral approach is essential. In many developing countries (even in some developed countries) however, good coordination is seldom seen among 55

62 government units, which is mainly due to sector-wise allocation of administrative responsibilities. To improve and manage a city comprehensively, consensus among various stakeholders should be attained to determine priority of policies and projects. Also, strong coordinative mechanisms across sectors need to be developed. Community Participation One of the important governance-related issues is community participation. For developing local infrastructures including water supply, sanitation, and local roads, the importance of community participation from the planning stage is widely accepted. By determining the location and size of the planned infrastructure, after accurately understanding the residents needs, the infrastructure can be made effective. Community participation also contributes in enhancing ownership by the local people. And the accumulated knowledge and intimacy of the project facilitates the efficient and sustainable maintenance of local infrastructures. The initiative of local residents in infrastructure development has recently become significant in developing countries partially owing to the efforts of NGOs and CBOs. However, there are some cases where community participation does not work well, negatively impacting infrastructure development. More sophisticated and collaborative processes are needed where interest groups with radically different agendas work together pro-actively rather than blocking initiatives. As mentioned earlier, the KIP in Indonesia adopted the participatory approach with good results. This is one of the examples why an international donor organization (WB) supported this approach. The impact study of the KIP showed that consultation from the early stage expands participation and, thus, results in higher level of satisfaction, even while levels of community consultation vary per project sites. Therefore, it was proposed that community participation and consultation should be promoted to ensure that they would be responsive to O&M requirements in their respective kampungs. Consultations in the early stages of project preparation and design should be conducted, such as on the location of roads and footpaths, or water standpipes and sanitary facilities, in order to instill a sense of project ownership by the community and ensure commitment to the projects O&M. On the other hand, the study also noted that, while some aspects of infrastructure and environment, such as housing, footpath maintenance, and solid waste collection, can be managed by communities, other aspects, such as illegal dumping of solid waste and integration of kampung infrastructure with citywide infrastructure, are beyond the control of the communities. Local governments should manage them with the assistance of central government authorities. 4.4 Infrastructure Development Strategy in response to Globalization and IT Innovation 1) Balanced Development under Globalization Regional Strategy beyond Countries Globalization will further accelerate concentration in metropolitan areas. Likewise, 56

63 infrastructure development is emphasized in these areas in order to attract FDIs. As pointed by Henderson (2000), if existing metropolitan areas assume the role of an international gateway with ports and airports, globalization might lead to an increase in urban concentration. As is the experience in EAP countries, the progress of globalization makes it difficult for developing countries to put priority on equity and tackle balanced development, even though they have described it in their national development plans. There is an increasing concern for urbanization risks including the deterioration of urban environments and impoverishment of rural communities. Key issues include how to tackle balanced development globally. In other words, international cooperation is expected to alleviate huge concentrations and environmental deterioration in large cities and prevent the continuing decline of industries and depopulation in the rural areas. For example, the European Union has introduced one regional policy to reduce (and prevent further expansion of) economic and social disparities between developed and undeveloped regions and promote economic integration. This is based on a concern that low-income regions might fall further behind with the intensifying global competition and thus further expand regional disparities in the region. 28) More specifically, this policy consists of the Structural Funds and the Cohesion Fund. Total amount of allocated resources for each fund is 195 billion and 180 billion euros, respectively, in a seven-year period from 2000 and 2006, accounting for a third of the total EU budget. 29) This policy is evaluated favorably for its effectiveness, although it varies per country. Since the EAP region has a different historical and geographical background with European countries, the introduction of such a mechanism in the EAP region needs more consideration. Nevertheless, EAP countries can learn much from the model s objectives and policies. Cross-border Infrastructure Development As noted, globalization exposes cities to direct international competition and the formulation of new spatial urban formation, outside national capitals and metropolitan areas. Key issues for infrastructure development include the development of cross-border infrastructure that support trans-border economic activities among cities in response to new emerging economic zones. There is a recent a global effort on cross-border infrastructure development as seen in the Greater Mekong Subregion (GMS) initiative. This can encourage development in less developed countries, such as Cambodia, Laos, and Myanmar, and allow new economic blocs in rural areas, such as in the hinterlands of Thailand and Vietnam. 28) Considering an average GDP per capita in 15 EU countries as 100, the highest GDP per capita is 242 in Inner London, which is five times of the lowest of 51 in Ipeiros (Greek). (Purchasing Power standards, 1997), EU 29) Seventy percent (70 percent) of Structural Funds is allocated to the development of low-income regions of which the GDP per capita is less than 75 percent of the EU average, while 11.5 percent is for economic and social support for regions facing structural difficulties (France is the largest recipient country), and 12.3 percent is to support modernization and structural changes in the education and employment sectors (Germany and United Kingdome are the highest recipient countries). On the other hand, Cohesion Fund is an assistance tool targeting specific countries, with GNP per capita of less than 90 percent of the EU average and with economic improvement program, while Structural Fund is allocated for specific issues. Specifically, the coverage includes four countries, Greece, Spain, Ireland, and Portugal and the usage is limited to transport network development (TEN: Trans-European Networks) that have regional benefit, and environmental protection. 57

64 Key issues include the formulation of global coalitions to enable cross-border infrastructure development. It is expected that donor agencies will provide initiatives for regional cooperation. 2) Strategic Infrastructure Development Targeting IT Industry Expansion of the IT industry has affected the functions of cities and has changed traditional industrial promotion with heavy and large Infrastructures. In order to promote the IT industry, it is necessary to provide high-standard urban living environments for intellectual workers, as well as comprehensive urban infrastructures, including infrastructures that support the IT industry like communication and information networks. In practice, agglomeration of new industries is found in urban areas with comprehensive urban infrastructures. In other words, strategic improvement of livability including green environments, basic utilities, and social services such as education and hospitals, can attract high-standard intellectual workers and thus invite the IT companies, as seen in Bangalore in India and in Cyberjaya in MSC 30) of Malaysia. Bangalore has successfully induced its IT industry after the Software Technology Park India (STPI) was established in 1986, which has grown to be India s Silicon Valley. Bangalore has been evaluated as a success story that has attracted high-level gold-collar workers in developing countries by developing basic infrastructure to improve convenience and comfort for residents as well as economic infrastructures, including communications and electricity. Cyberjaya is a planned major information city in the MSC with a population of 240,000. The integrated infrastructure development has proposed comprehensive urban infrastructure services for high-standard city living and cutting-edge soft infrastructure (e.g. MSC status for preferential treatment, institutional framework, and multimedia university for high-level human resources) including a world-class IT network. Cyberjaya s infrastructure development has not been well developed yet, but it is expected to contribute to the national development target by ) The MSC plan was introduced in 1996 as a main project on national industrial policy for internet and communication technology. MSC is a central government-led project located in the peripheral area of Kuala Lumpur metropolitan area. The major projects in MSC include Kuala Lumpur International Airport, Putrajaya as a new administrative city, Cyberjaya as a new information city, and Kuala Lumpur City Center. 58

65 5. Summary of Recommendations Study on Urbanization Funding Strategy Absorption of Development Benefits: Benefits resulting from the development of urban infrastructures appear as increased prices of fixed properties such as lands adjacent to infrastructures. The government collects a part of this benefit in the form of fixed property tax. In developing EAP countries, however, this has not been an effective fund source due to deficiencies in land registry, nontransparent evaluation of land prices, political intervention, etc. The collection of fixed property taxes should be strengthened in the long run. The following measures are further recommended: Imposition of a development tax when specific beneficiaries are identifiable (e.g. enterprises near railway stations). Obligatory infrastructure provision by private developers for large-scale development, or imposition of a special tax corresponding to the cost of infrastructure development. Widened Application of the Users Pay Principle: The TDM, such as the road pricing method mentioned above, is typical of this. Other possible candidates include the polluted water discharge tax, surcharge on large-scale electricity consumption, etc. Although this is applicable also to railways, water supply, and other infrastructure services where tariff is collected, consideration should be given to the poor and the business sector. Use of Internal Cross-subsidy Mechanisms: Economic and financial feasibility differs per area even for similar infrastructures. In the case of nationwide road network, for instance, the economic viability or financial profitability (if toll road) becomes low in the rural area where demand is scarce, and its development priority, therefore, becomes low. If, however, the entire network is authorized by national development plans, and if the feasibility is judged as a whole network allowing internal cross-subsidy from highly feasible projects to less feasible ones, the development of roads in the rural areas becomes possible. Internal cross-subsidy works effectively in this case to maintain the consistency of national policies. The same mechanism is applicable to an expressway network in a city where operators are different by route. If an internal cross-subsidy mechanism (or toll revenue allocation system) is established in an open and transparent manner, participation of new private operators becomes easy, and the convenience of expressway users is highly improved (unified toll, less toll gates, etc). In addition, internal cross-subsidy is also applicable between different projects of the same operator (In Japan, there are examples showing profit from property developments being used to construct urban railways). Roles of Comprehensive National Urban Policy Establishment of National Urban Policies: Urbanization is an inevitable trend. The urban population in the developing EAP countries will increase from the present 800 million to 1,470 million by The increment of about 670 million, in addition to the existing urban poor, of about 300 million who are not receiving enough benefits of 59

66 infrastructure services at present, means that the development of new urban infrastructure should be met by This is a difficult task, which requires an entire review and dynamic restructuring of infrastructure development with regard to its quantity, quality, and distribution. In the developing EAP countries, however, comprehensive urban policies to determine these parameters are generally either non-existent or not functioning well. It is urgent for these countries to establish national urban policies based on firm legal, institutional, social, and economic grounds. Formulation of National Development Plans Linked with Urban Policies: Though the level differs per country, urbanization has been one of the engines of economic growth of the developing EAP countries. Urbanization, however, tends to expand income disparities amongst peoples. Thus, it is important to formulate a national development plan to strategically determine how to allocate national wealth among regions and ensure legal and institutional authorities. This is one of the prerequisites of the private sectors participation in infrastructure development. In other words, it is the soft infrastructure that will guarantee both transparency and predictability for major players to enter the market. In national development plans, impartiality among regions and economic efficiency of concentrated investment are seemingly on a non-admissible tradeoff with each other. Yet, this conflict can be dissolved to a certain extent in time axis by shifting emphasis of action. In the early economic growth period of Japan, initial emphasis was placed on the development of infrastructure in a limited number of strategic cores, followed by the combination of local cores and networks, then to the less developed areas. Due to this policy, regional disparity, which was once wide, was narrowed after a few years of spreading economic benefits nationwide. China seems to be pursuing the same policy at present. Formulation of Development Strategies in Local Core Cities: In the developing EAP countries, the development of secondary cities has not been effective enough to alleviate the population concentration in the megacities. The development of select local core cities is recommended taking into account the development potential of a city. More specifically, the economic, social, and transport/communication linkages with megacities and the cooperative and interdependent linkages with adjoining areas should be considered in the development strategies of local core cities. Urban Infrastructure Development Policies Strengthening of Development Mechanism of Urban Infrastructure: The rapid increase in populations in the EAP megacities has brought about uncontrolled urbanization with large poor areas and expanded disparities in the service levels of infrastructures. An integrated multisectoral approach is needed to solve these problems. However, the most fundamental countermeasure is to establish a land-use plan and enforce it. This plan should have a legal authority and be effective to timely conduct infrastructure development. Although this entails a number of difficulties considering the current levels of institutional/organizational capacities and governance in the EAP developing countries, it is urgent to at least establish an effective coordinating mechanism between local autonomies of a metropolis and their related sectors. Establishment of an organization responsible for the development of 60

67 network-type infrastructures will be effective if its authority is legally guaranteed. Introduction of Demand Management: In response to the increasing demand for urban infrastructures, the need for control is getting more and more important. In the urban transport sector, it is now common knowledge that in the developing countries infrastructure supply can never catch up with the increasing traffic demand. In some countries, transport demand management (TDM), such as road pricing, has proven to be effective. This is quite practical because it suppresses traffic demand by charging users (thus indirectly mitigating urbanization) and at the same time produces fund for infrastructure investment. Although excessive charging hampers economic viability, the adoption of TDM measures is recommended when applicable. Provision of Infrastructure for Urban Poor in a formal way: In order to provide infrastructure services for the urban poor, it is essential to develop infrastructure in the poor area physically and functionally integrated to the other areas in order to formally involve urban poor into urban economy, as well as to provide low-income households and implement slum-upgrading program separately. The participation of the urban poor in planning of infrastructure design and location is essential to enhance their ownership. Cost recovery mechanism should consider affordability and willingness to pay of the poor. More fundamentally, it is necessary to provide formal tenure status for the poor to ensure sustainable access of infrastructure service, where there are several constraints including poor institutional arrangement and economic instability of the poor. One solution is to provide land tenure and infrastructure service rights to community rather than to household individually. Strategic Development of Urban Infrastructure targeting New IT Industry Conditions surrounding urbanization are changing. It has become possible to attain economic development by strategically developing urban infrastructures. Development of large-scale infrastructures and industrial estates in response to globalization may fall in this category. Recently, however, examples of targeting the accumulation of information technology and knowledge industries by enhancing living environments, as a whole, have emerged. The role of urban infrastructure is essential here to attract quality workers as seen in Bangalore of India, MSC of Malaysia, Beijing Science Park of China, etc). 61

68 MAIN REFERENCES ADB Second Water Utilities Data Book ADB 1999a Urban Sector Review in People's Republic of China ADB 1999b Urban Sector Strategy ADB 2000a Urban Sector Profile in Philippines ADB 2000b Water for All Alonso, W Five bell shapes in development. Papers of the Regional Science Association. Vol. 45, 5-16 Alpha Research Co., ltd Thailand in Figures Black, D. and Henderson, J.V A theory of urban growth, Journal of Political Economy, Vol. 107, Carruthers, Robin Bajpai, N. Jitendra and Hummels, David Trade and Logistics: an East Asian Perspective City Planning Institute of Japan Tokyo Metropolitan Area, Regional Structure, Planning History, and Future Vision (Tokyo Daitoshi-ken, Chiiki Kozo, Keikaku no Ayumi, Shourai Tenbou, in Japanese), Shokoku-sha Douglass, C.Michael East Asian Urbanization: Patterns, Problems, and Prospects, APARC Fay, Marianne and Opal, Charlotte Urbanization without Growth: A not so uncommon Phenomenon, World Bank Fujita, M., P. Krugman, and A. Venables The Spatial Economy, Cambridge: MIT Press. Government of Malaysia Eighth Malaysia Plan and Other versions. Government of the People's Republic of China Tenth Five-year Plan for National Economic and Social Development Government of Republic of Philippines Statistical Yearbook of Philippines Government of Thailand The Seventh National Economic and Social Development Plan and other versions, NESDB Henderson, J.V Impact of government policy on urban concentration. Journal of Urban Economics 12: Henderson, J.V Theory, Fact and Illusion, Oxford University Press, New York Henderson, Vernon How Urban Concentration Affects Economic Growth, Policy Research Working Papers, 2456, The World Bank JBIC Impact Study on Contribution of ODA Yen-Loan Projects in Development of Metro Cebu region. JICA 1999 Metro Manila Urban Transportation Integration Study (MMUTIS) JICA 2004a The Study on Integrated Transportation Master Plan for Jabodetabek, (SITRAMP) JICA 2004b The Study on Urban Transport Master Plan and Feasibility Study in Ho Chi Minh Metropolitan Area (HOUTRANS) Japan Society for International Development (JASID) Reduction of Regional Disparity between Metropolitan Area and Rural Area in Thailand (Shuto-ken to Chihou tono Chiiki Kakusa Zesei, in Japanese) Japan Society for International Development KATO, Hisakazu, et. al, General statement and issues on population problems, JICA Lee, Boon Thong Emerging urban trends and the globalizing economy in Malaysia, chapter 10, Emerging World Cities in Pacific Asia, United nations University Press Lee, Boon Thong Urbanization in Malaysia and Kuala Lumpur Metropolitan Area (Malaysia no Toshika to Kuala Lumpur Toshiken, in Japanese), Asian Megalopolis [3], Nihon Hyoron Sha 62

69 Lo, Fu-Chen and Yeung. Yue-man Emerging World Cities in Pacific Asia, United nations University Press McIntosh C. Arthur Asian Water Supplies, ADB Medhi Krongkaew The changing urban system in a fast growing city and economy: The case of Bangkok and Thailand, chapter 9, Emerging World Cities in Pacific Asia, United nations University Press Mills, E. S An aggregative model of resource allocation in metropolitan area. American Economic Review 57: Ministry of Finance, Malaysia, 2002/2003.Economic Report 2003/2004 Ministry of Home Affairs, Posts and Telecommunication, Japan, Administrative Investment Mitra, A Agglomeration economies as manifested in technical efficiency at the firm level. Journal of Urban Economics 45: MRI Study on Coordination Mechanism of National Land Development Policy in Asian Countries, (Asia Chiiki no Kokudo Seisaku no Renkei ni Kansuru Chousa, in Japanese), MRI Osaka City University, The Institute for Economic Research 2000, Asian Megapolis [4] Metro Manlia (Asia no Dai Toshi, in Japanese), Nihon Hyoron Sha Research Institute of Development Assistance, Current conditions and Issues of Regional Disparity in Indonesia. (Indonesia no Chiiki-Kakusa no Genjyo to Kadai, in Japanese). the Overseas Economic Cooperation Fund SETA, Fumihiko 2002, Study about the strategies for the correction of regional disparity and the influence of globalization of economy - Case study of Japan and Thailand and Malaysia- (Chiiki Kakusa Zesei Seisaku to Global-ka ni Tomonau sono Henyou Kate - Nihon, Thailand, Malaysia ni okeru Hikaku Knkyu, in Japanese), University of Tokyo Statistics Bureau, Japan, Japan Statistical Year Book TASAKA, Toshio (ed) Asian Metropolis [1] (Asia no Dai-Toshi, in Japanese), Nihon Hyoron Sha TSUNOKAWA, Koji 2002, Infrastructure Development with Economic Development and Reducing Regional Disparity (infra Kaihatsu to Keizai Seityou, oyobi Chiiki Kakusa no Zesei, in Japanese) UN Habitat Global Urban Indicators UN Habitat The Challenge of Slums Global Report on Hunan Settlements United Nations 2002a. Human Development Report United Nations 2002b. World Population Prospects (The 2002 Revision) ( United Nations 2003a.Spatial Inequality in Asia, UNU/WIDER conference United Nations 2003b. Urban Agglomeration United Nations 2003c. World Urbanization Prospects, The 2003 Revision Webster, R. Dougras Financing City-Building: The Bangkok Case, APARC Webster, R. Dougras On the Edge: Shaping the Future of Peri-Urban East Asia. World Bank Webster, R. Douglas et al Peri-Urbanization in Chengdu, Western China: From "Third Line" to Market Dynamics, APARC WENDELL COX CONSULTANCY, Demographia ( William Dellinger Urban Property Tax Reform Guidelines and Recommendations, World Bank Williamson, J. 1965, Regional Inequality and the Process of National Development. Economic Development and Cultural Change, June, World Bank 1991.Urban Property Tax Reform Guidelines and Recommendations World Bank 2000a. Cities in Transition 63

70 World Bank 2000b. World Development Report1999/2000 World Bank World Development Report 2000/2001 World Bank Philippines Logistics Study World Bank 2003a. Getting the Best from Cities (chapter 6 of World Development Report 2003) World Bank 2003b. Investing in Infrastructure: What is needed from 2000 to 2010?, Marianne Fay and Tito Yepes World Bank 2003c. World Development Indicators World Bank 2003d. World Development Report World Bank EAPR Cities in Transition: Urban Sector Review In an Era of Decentralization in Indonesia 64

71 Appendix-A: National Development Policy on Urbanization (Case of Japan) 1. Historical Development Trends... A-2 2. Urbanization and Regional Disparity... A-6 3. Role of Infrastructure in Decreasing Regional Disparities... A Key Factors to Achieve Infrastructure Development based on the National Development Policy... A Institutional Mechanism Supporting Infrastructure Development... A Lessons for the EAP Region... A-20 65

72 1. Historical Development Trends Japan recorded an impressive economic growth in the postwar period. Until 1970, its average annual GDP growth rate attained as much as 10%. Such a high growth rapidly raised its level of GDP per capita including other indices of economic development and bringing about sustained economic prosperity. Japan s pattern of economic development in the postwar period showed distinct phases: economic recovery ( ), high economic growth ( ), stable economic growth ( ), and industrial restructuring (1985 onwards). The economic recovery phase highly emphasized the restoration of Japan s industrial base. The key strategy adopted in this phase was to centralize industrial development in few large cities in core regions 31) (viz Kanto, Chubu, and Kinki) so that the cities existing industrial infrastructures then could be utilized. With the increasing levels of industrialization in the core regions, additional infrastructure facilities were developed to meet growing demands. Figure A1.1 Regions in Japan HOKKAIDO REGION TOHOKU REGION CHUBU REGION KINKI REGION CHUGOKU REGION Tokyo MA Nagoya MA KANTO REGION Osaka MA KYUSHU REGION SHIKOKU REGION As a result, new employment opportunities were created in the core regions and huge migration flowed from backward regions to large cities in the core regions. The combined effects of rapidly growing population and industrialization gradually became visible in these cities as evidenced by congestion and environmental pollution. As a response to the growing problem of urban pollution, policy measures were initiated in the late 1950s to restrict factory location in major urban centers. The period of high economic growth ( ) started with the implementation of the National Income Doubling Plan in As the high-growth strategy was likely to worsen 31) Figure 1 illustrates Japan s regional division under three metropolitan areas (MA), namely: (1) Tokyo MA: Tokyo, Kanagawa, Chiba, and Saitama; (2) Osaka MA: Osaka, Hyogo, Kyoto, and Nara; and (3) Nagoya MA: Aichi, Gifu, and Mie. In this report, core regions or advanced regions refer to Kanto, Chubu, and Kinki, while the rest are termed as lagging regions. Neighboring areas of metropolitan areas include non-metropolitan prefectures in the core regions. 66

73 the already high regional disparities, the Japanese government decided to implement policy measures to reverse the trend. Restrictions on the construction and the expansion of large factories in controlled districts in the four large industrial areas (Tokyo, Osaka, Nagoya, and Yokohama) was one of the early policy measures to control concentration in the core areas along with the promotion of industrialization in the Pacific Coastal Belt. By 1962, an urgent need for balanced and coordinated national land development was recognized. This resulted in the formulation and approval of the Comprehensive National Development Plan (CNDP). The main purpose of the CNDP was to promote balanced development in regional economies through various policy measures, such as the control of industrialization in the core regions, the promotion of economic activities in lagging regions, the adoption of growth pole development strategies, etc. To help the plan meet its objective, the Japan Regional Development Corporation was established to to help disperse populations and industries from advanced regions to lagging regions. Continued high economic growth coupled with overcrowding and environmental pollution due to overconcentration of economic activities in the core regions compelled the government to formulate, in 1969, the Second Comprehensive National Land Development Plan. The key feature of this plan was the construction of large-scale industrial infrastructures outside large urban areas. To further supplement these efforts, the Industrial Relocation Promotion Law was passed in 1972, which included various control measures and incentives for relocating companies from developed to developing regions. In the phase of stable economic growth ( ), Japan shifted from high growth to stable growth. The 1973 oil crisis, the appreciation of the Japanese yen (due to its shift to a flexible exchange rate regime), and increasing globalization created significant impacts on Japan s industrial structure. Japanese manufacturers started relocating their firms to low-wage economies in rapidly developing Asian countries. This action created direct implications on the industrialization of lagging areas: new factory development declined, and consequently, the dispersion of industrialization to lagging regions retarded. Maintaining regional balance remained a big challenge for the Japanese government. Toward the late 1970s, the idea of focusing on technological industries was discussed in regional policy formulation processes. A concept of de-concentrating the growing technology industries within integrated residential and industrial localities was developed. As these localities could provide pleasant living and working environments, the concept was expected to facilitate industrial dispersion to underdeveloped regions. This concept was formalized by making it a key feature of the Third National Land Development Plan, which was approved in Technopolis was the name adopted for the new cities created under this scheme. To further support the scheme, the Technopolis Law was enacted in It aimed at accelerating the development of high-technology industrial complexes in designated areas. It was expected that the technopolis scheme would be instrumental in stimulating economic growth in environmentally attractive regions with relatively low concentration of industrial activities. During the industrial restructuring phase (1985 onwards), government policy measures focused on industrial restructuring as concentration continued to increase especially in the Tokyo region due to deteriorating employment situations in the lagging regions. In 1987, the Fourth National Development Plan was enacted. It addressed the overconcentration of population and economic activities in the Tokyo area. The multipolar national land 67

74 development policy was promoted together with the policy on infrastructure investment. During this period, the Brain-of-Industry Location Law was enacted to support the technopolis strategy. This law promoted the agglomeration of supporting industries such as software, information processing and design, as well as other knowledge and service industries. This approach was expected to result in a more sophisticated type of industrial structure within the technopolis. In addition to these measures, efforts were made to encourage the relocation of administrative facilities from the Tokyo metropolitan area. However, although the objective of promoting rapid industrialization in the Pacific belt, through planning and coordinated public and private investment was successfully achieved, the objective of dispersing industrial development saw limited success. Despite sustained policy efforts along with increased public investments in the lagging regions, industrial growth in these areas were not quite impressive. As shown in Figure A1.2, until the 1970s, although the share of the secondary sector in the gross regional product increased rapidly in core regions (both metropolitan and neighboring areas), they declined in the metropolitan areas, indicating a structural shift to the service sector. But the secondary sector s share in the neighboring prefectures of the metropolitan areas continued to increase until On the other hand, the secondary sector in the lagging regions did not record such high growths and they underwent a structural shift to the service sector without having strong industrial bases. Figure A1.2 Composition of GRP 100% Metropolitan Areas (MA) 100% Neighboring areas of MA 80% Primary Secondary Tertiary 80% Primary Secondary Tertiary 60% 60% 40% 40% 20% 20% 0% % Peripheral areas 100% 80% Primary Secondary Tertiary 60% 40% 20% 0% In 1997, in response to internal and external changes in both demographic and economic landscapes, as well as the stagnant economic conditions in the lagging areas, the Fifth 68

75 National Land Development Plan was adopted to institute radical reforms on the regional structures. The plan put forward the concept of shifting from a monopolar system (with Tokyo as the core) to a multipolar system, by allowing each region to develop into an economic entity with facets much like a country. In addition, public policy directly focused in the provision of better services to the people, a contradiction to the past policy wherein better services were expected to be spillover effects of economic activities brought about by increased public investments. There are also ongoing discussions about the rearrangement of local administrative units to redefine, or merge, municipal level jurisdictions to enable the efficient provision of all urban-like services even in the peripheral areas. Table A1.1 Trend of Key Statistics Urbanization and Regional Disparity The early stages of high economic growth in Japan were basically driven by an aggressive strategy of rapid industrialization wherein major cities in the core regions acted as the growth engines. Rapid urbanization was a natural consequence as cities offered high-income jobs for surplus labor force from the peripheral areas, and which saw a large portion of rural populations migrate to the big cities. The trend of rapid industrialization and high economic growth thus resulted in excessive concentration of population and economic activities in the big cities which in turn brought an agglomeration of benefits to big cities but worsened regional differences in gross regional product (GRP) per capita. Figure A2.1 illustrates the trends in GDP per capita and disparities in gross prefectural 69

76 outputs, measured as Theil s inequality index. The interprefectural disparities are further de-composed into two components: intraregional disparity and interregional disparity. With rapid economic growth, regional inequality increased until the early 1960s. Till the mid-1970s, regional inequalities decreased. The pattern seemed to fit well with the inverted U curve as predicted by Kuznet (1955) and Williamson (1965). However, in the late 1970s, disparity was again on the rise, showing a second inverted U cycle. This was probably due to structural shifts in the Japanese economy brought on in the face of internal and external changes in the economic environment. Figure A2.1 Trends in GDP per Capita and Disparities in GRP Theil's inequality index Inter-regional Intra-regional Inter-prefecture GDP per capita Theil s Inequality Index 46 n 1 y n y log p n n G g 1 y R g i R y s i y log p s i s i G g 1 GDP per capita ('000 yen 1995 price) y R g log y p R g R g Inter-prefecture Intra-regional Inter-regional Trends in intra and interregional disparities are similar. However, there are periods with distinct differences in terms of the direction, or slope, of the curves. Intraregional disparity started declining earlier than interregional disparity. This implies that the dispersal effect first occurred within the regions rather than across regions. Likewise, when the second cycle of disparity started in the late 1970s, the intraregional disparity was steeper while the increase in interregional disparity remained modest. The second cycle of regional disparity appears to be basically driven by the increasing disparity between the regional poles and the peripheral areas. Regional disparity and urban concentration in major metropolitan areas seemed to fuel each other. Figure A2.2 shows a closely related trend between regional disparity and net migration to major metropolitan areas. It appears that the disparity in regional per capita output across prefectures is the key driving force for the huge population outflows from agriculture-dependent peripheral areas to rapidly industrializing metropolitan areas (MA). During the 20-year period from 1954 to 1973, Tokyo alone received about 6 million migrants from other regions. The net migration trend in Osaka and Nagoya reversed starting mid-1970s, but for the Tokyo MA it continued. 70

77 Figure A2.2 Trend in Net Migration to MAs and Disparities in GRP Across Prefectures Net-migration ('000) Tokyo MA Nagoya MA Osaka MA Theil's Index of Reg Inequality Theil regional inequality index As a result, the population in the three metropolitan areas of Japan expanded very rapidly (Figure A2.3). In particular, Tokyo emerged as the premier metropolitan area with over 26% share of the national population as against 7.4% share of the country s habitable area. Such overconcentration in Tokyo has caused various socio-economic problems including severe congestion. Since the mid-1970s, the population of Osaka and Nagoya has more or less stabilized. The population trend in other regional cities suggests that even when Japan experienced rapid industrialization and urbanization, they did not experience significant surges in population. Figure A2.3 Population Trends in Major Cities Population ('000) 40,000 30,000 20,000 10,000 Fukuoka- Kitakyushu Hiroshima Kyoto Nagoya Osaka-Kobe Sapporo Sendai Tokyo Source: UN World Urbanization Prospect, 2003 revision Although, the increasing trend in urban concentration was considered a problem at the later stage of urbanization, they were expected at the early stage of rapid urbanization in 71

78 the core regions. That is why at the early stage the emphasis was not so much on controlling urbanization in the MAs as on managing it through the provision of basic urban services, including waterworks and housing. For example, public housing units per thousand people in the metropolitan areas increased from 7 in 1958 to 27 in As a result, the increasing concentration of population and economic activities in the metropolitan areas were driven by both pull (better services in metropolitan areas) and push (lack of opportunities in peripheral areas) factors. As only selected population groups (usually young or educated) migrate from rural to urban areas, this inflicts more lasting impacts on the socio-economic potentials of the lagging regions. One such impact now clearly visible in the lagging areas of Japan is the high proportion of its aging population (Figure A2.4). In the face of declining national population and ongoing economic restructuring, the increasing ratio of the elderly population in lagging areas is placing a serious burden on the task of regenerating the economic potentials of these areas. An elderly population demands more specialized public services such as barrier-free public transport and high quality health services. However, the sparse population in these areas makes it extremely difficult, if not impossible, to provide such services in financially viable terms. 70 Figure A2.4 Trend in the Aging Population 25 Ratio of 65+ age population (%) Population- Metro Areas Population- Peripheral Ratio of 65+ age- Metro areas Ratio of 65+ age- Peripheral Total population (million) 72

79 3. Role of Infrastructure in Decreasing Regional Disparities As mentioned earlier, regional disparity trends in Japan showed a pattern similar to the prediction of Kuznet s inverted U hypothesis. The question, however, remains as to how this reversal from divergence to convergence occurred. Was it through the sole action of market forces as predicted in the neoclassical growth model or has the government policy, especially in the form of public investment, played any visible role? In fact, infrastructure investment in Japan served as an important policy instrument to support various objectives such as supporting national economic growth, promoting industrialization in designated areas, managing urbanization through the provision of basic services, and promoting regional development. The rate of public investment (% of GDP), a large portion of which is allocated for infrastructure investment, is one of the highest in the world (in the 1980s, over 10% of GDP). In addition, there is also significant private sector investment in infrastructure facilities such as urban railways. Due to such high level of public and private investment in infrastructure, adequate infrastructure could be provided nationwide in a relatively short span of time. Figure A3.1 shows the trend (1965 to 2000) in annual total administrative investments 32 as a percentage of GDP and the share of the different sectors in Japan. The total administrative investment was maintained at a very high percentage of the GDP, fluctuating between 8 to 12% an exceptionally high rate by any measure. The livelihood-oriented infrastructure, which can also be considered as social infrastructure, accounted for a big share in the total administrative investment. In fact, the trend indicates that the share of livelihood and industry-oriented infrastructure investment moved in opposite directions during the period. This might be because of the shift from industrial infrastructure, before 1965, to social infrastructure, since the early 1960s, in order to achieve a better quality of life. As a result, spending on livelihood-oriented infrastructure significantly increased its share, reaching about 50% in the mid-1990s. 32 The Japanese statistical system classifies various infrastructure spending under the heading of administrative investment with the following major divisions: Livelihood-oriented investment (city, town, and village roads and streets; city planning and parks; housing; environmental sanitation; welfare facilities; educational facilities; water supplies; public sewerage); Industrial development-oriented investment (national highways, prefectural roads, harbors, airports, industrial water supply); Agriculture infrastructure investment; Land conservation investment; and Others (railway, subway, electricity, gas, residential facilities, restoration, and others). 73

80 Figure A3.1 Administrative Investment and Share of Different Infrastructures by Type Livelihood share in total administrative investment Total admin. investment (% of GDP) Industry Agriculture Land Others Total infrastructure investment (% of GDP) To illustrate the impact of such heavy investment in the infrastructure sector, Figure A3.2 shows the trend in road investments and the road network lengths. The total investment in the road sector fluctuates between 2 and 3% of the GDP, which is quite an impressive figure. Even though the increase in highway lengths seems modest, there is significant improvement in the road quality as illustrated by the steep slope of the graph for paved road lengths. In fact, the problem in the road sector of Japan was more of quality rather than of quantity. The trend since the early 1980s suggests that the size of the overall highway network (national highway and prefectural roads) is heading toward a saturation level, while the expressway network is expanding rapidly. Figure A3.2 Road Investment and Total Length Highways, Total Highways, Paved Road investment (% GDP) Highway length ('000 km) Km 8,000 4, Road investment (% of GDP)

81 As stated earlier, at the early stage of development, rapid industrialization and urbanization were mainly concentrated in the core regions, creating a huge demand for infrastructure facilities in these regions. A disproportionately high level of infrastructure investment was therefore allocated for the core regions in order to provide adequate industrial and basic urban infrastructure. The core regions were in fact already endowed with better infrastructure facilities even before the war. And one of the reasons for their selection as industrial sites was to maximize the existing infrastructure. However, these infrastructure facilities were far inadequate to support the rapid pace of industrialization and urbanization. As a result, they required further concentration of infrastructure facilities. This further worsened the disparities in both industrial and basic infrastructure services across prefectures. Figure A3.3 illustrates the different measures of total public capital stock in the metropolitan areas (MAs) along with their neighbors and peripheries. Each panel of chart also shows the trend coefficient of variation for the given indicator of public capital stock. The first panel shows public capital stock per capita (million yen in 1990 prices). Until the early 1970s, metropolitan areas had higher stocks of public capital per capita. But the trend has reversed since then: peripheral areas have recorded the highest public stock per capita, followed by their neighboring areas. The metropolitan areas have had the lowest level. Because of such reversal, the coefficient of variation (CV), which gradually declined until the early 1970s and then converged across regions, began to rise, showing an increasing divergence. But this divergence was not due to a higher stock per capita in the core regions, rather, they were due to a higher stock per capita in the peripheral regions. Figure A3.3 Distribution of Total Public Capital Stock Public Capital per Capita Million yen (1990 price) Metropolitan areas (MA) Neighboring areas of MA Peripheral areas CV across prefectures CV across prefecture

82 Million yen (1990 price) Public Capital per Habitable Unit Area (ha) Metropolitan areas (MA) Neighboring areas of MA Peripheral areas CV across prefecture CV across prefecture Million yen (1990 price) Public Capital per Composite Unit of Population and Area Metropolitan areas (MA) Neighboring areas of MA Peripheral areas CV across prefecture CV across prefecture In the second panel of Figure A3.3, the distribution of infrastructure across regions is measured in stock per unit area (ha) of habitable land. In this case, for obvious reasons, the metropolitan areas increasingly maintained their dominance due to high concentration in population and economic activities. However, the public capital stock in other regions also increased rapidly. As a result, the coefficient of variation showed a continuous decline. Finally, the third panel shows the trends measuring the public capital stock per composite unit of population and area (geometric average) and its normalization against the national average (see Box 1). As expected, it gives a combined pattern of the first and second panel and shows a convergence among regions. Similar trends of disparity are also visible in the provision of different types of infrastructures. The top panel in Figure A3.4 shows the trend in the provision of paved national highways (as % of the total length). While the percentage of paved length of national highways in 1950 was very low for the lagging areas, the metropolitan areas were far better off. As the trend shows, the figure for the metropolitan areas steadily rose while the lagging areas relatively had to wait much longer for the improvement of the condition of their highways. Likewise, the right panel shows the trend in population coverage of piped water supply. Also in this case, there was a clear disparity between the metropolitan areas 76

83 and the other regions. Only in 2000 did the figure for peripheral areas crossed 90%. Both the trends in paved highway and piped water supply illustrate high gaps in infrastructure provision between the metropolitan areas and the other regions. This lasted until around the early 1970s, after which the gap gradually narrowed. Finally, in the bottom panel, the trend shows the coefficient of variation for the different road densities and water supply coverage along with the population densities. Figure A3.4 Disparities in Basic Infrastructure across Prefectures 100 Paved Length of National Highways (% to total length) Metropolitan areas (MA) Peripheral 120 areas Neighbouring areas of MA Population Coverage of Piped Water Supply Metropolitan areas (MA) Neighbouring areas of MA Peripheral 120 areas 100 Percentage Percentage Coefficient of Variation of Infrastructure and Population Coefficient of variation for Infrastructure CV for population density Highway density Pref Road density Water supply coverage (% of total population) Public housing per capita (unit) Population density (inhabitable area) In a nutshell, the trend discussed above demonstrates a significant disparity in the distribution of public infrastructure facilities across regions in the early stages of urbanization. Basically, this might be due to two factors: First, the core regions had historically high infrastructure endowment; and second, the high economic growth strategy supported industrialization and managed rapid urbanization in the core regions through increased infrastructure investment in the core regions. Thus, concentrating infrastructure investments in the core regions is, to some extent, responsible for the wide gap in infrastructure between the core and the lagging regions. This gap might have been a contributing, if not the leading, factor for the flow of migration from the peripheral to the 77

84 metropolitan areas. However, as discussed in the above paragraphs, the disparities in infrastructure facilities across regions continuously declined since the early 1970s. In fact, all comprehensive national development plans utilized infrastructure investment as the key instrument to reduce regional disparities. The basic assumption behind this approach is that public infrastructure provision acts as an important incentive for private sector investors. So, increased infrastructure investment in the lagging regions not only helped stimulate local economies through short-term demand effects but also generated long-term growth potential by attracting private sector investments. The top panel of Figure A3.5 gives the trends in total administrative investment per capita in different areas from 1965 to 2000, measured as ratios of the national average. The patterns, which match the trends in public capital stock discussed above, show that the metropolitan areas received higher investment per capita until the early 1970s. Since then, more administrative investment has been allocated to the neighboring areas of the metropolitan and peripheral areas. However, the trends in investment allocation per capita for different infrastructures show quite different patterns from those for total investments. The second panel of Figure A3.5 shows an investment per capita for livelihood infrastructure. In 1965, metropolitan areas accounted for almost 150% of the national average, which was on a decline, but was still higher than that in the other regions until the late 1990s. Although emphasis was placed on higher allocation for livelihood-oriented investments in the non-metropolitan areas since the late 1970s, the neighboring areas of the metropolitan areas received more than the peripheral regions which got higher allocations only in the 1990s. On the other hand, the bottom panel of Figure A3.5, which reflects the trends in investment per capita for industry-oriented infrastructure, shows a very different pattern. Investment allocation for industry-oriented infrastructure in the metropolitan areas witnessed a sharp decline since the late 1960s, and by 1980 it fell down to a little over 60% of the national average in per capita terms. On the other hand, the allocation of investments to other regions gained. In this case, the lagging regions received higher priority than the neighboring areas of the metropolitan areas. 78

85 Figure A3.5 Public Investment Distribution among Regions, Japan Total Administrative Investment per Capita Ratio of national average Livelihood Infrastructure Investment per Capita Metropolitan Areas (MA) Neighbouring ares of MA Peripheral areas Industrial Infrastructure Investment per Capita Ratio of national average 1 Ratio of national average Infrastructure investment seems to have major implications for regional development. As stated earlier, at the early stage of development, infrastructure investments were geared toward industrial development and economic growth in the core regions, while at the latter stages, the strategy shifted toward stimulating economic growth in the lagging regions and narrowing regional income disparities. Overall, infrastructure investment policies have remained mostly successful in achieving their intended objectives. Without high investments for infrastructure, high economic growth rates could not have been maintained. Likewise, without shifting infrastructure investment priority to the lagging areas, the disparity in regional income levels could not have been narrowed down in a relatively short span of time. Infrastructure development in the lagging areas were, in fact, intended to attract private sector investment (mainly manufacturing) which, in turn, was expected to stimulate overall economic activities in the targeted regions. Better infrastructure facilities were expected to improve the quality of life, resulting from the spillover effects from economic growth. Because of this underlying premise, the lagging regions received high industrial development-oriented investments. While this strategy seemed to have worked well in the case of the neighboring sites of the metropolitan areas, it delivered only a limited impact for 79

86 some peripheral areas. For these areas, the improvement in infrastructure development came too late to become effective in stimulating local economies, mainly because of small population sizes with high percentages of elderly people. Another contributing factor is the structural change in the Japanese industrial system in the face of increasing globalization, forcing Japanese manufacturing firms to relocate their operations to developing countries with cheaper labor. Another important aspect observed in the context of regional development and infrastructure development in Japan is the effectiveness of different types of infrastructure in achieving underlying objectives of balanced development. In fact, any kind of public works or public spending can bring short-term benefits to a region in the form of the demand-stimulating Keynesian effects. Although such effects have their own values, they alone may not be enough to bring about sustained improvements in terms of building an economic base for a region. What is important is to match the type of investment with the needs of a region, particularly giving importance to the right timing and the changing internal and external economic environments. As mentioned earlier, industrial infrastructure remained instrumental for the industrial transformation of the core regions, and the same strategy was attempted to stimulate industrial growth in the lagging regions. However, in the face of increasing globalization and industrial restructuring in Japan, the increased investment for industry-related infrastructure in some peripheral areas could not bring about the expected changes. Despite huge public investment in these areas, people have continued to migrate and most of the infrastructure facilities have remained grossly underutilized. Because of the low population densities in the peripheral areas, providing services in an efficient manner has been extremely challenging, and the people have continued to migrate to big cities to access various services not available in the peripheral areas. So, the most important issue is how to retain the population of the peripheral areas so that the minimum threshold-size population that is required for many urban-like services can be maintained. In hindsight, it can be seen that if more emphasis were given to livelihood-oriented infrastructure investments in the lagging areas (instead of industry-oriented infrastructure investments), the demographic scenario could have been different, as livelihood-oriented infrastructures would have been more effective in improving the quality of life in the peripheral areas, thereby reducing migration from these areas. 80

87 4. Key Factors to Achieve Infrastructure Development Based on the National Development Policy The key factor that contributed to the balanced infrastructure development and reduced regional disparity is the central role played by the Japanese regional policy as observed by the OECD (1996). The hierarchy of macro-level and micro-level planning and policies and their implementation were carefully coordinated through a collaborative effort involving not only the central and local government bodies but also the private sector. When the Japanese government started formulating ambitious economic development plans in the 1950s, infrastructure development remained the central supporting element to achieve the plan s objectives. The national economic plan set the overall economic growth targets, to which the national land development plans responded in order to achieve the growth targets with minimum impacts on regional disparities. In this sense, the land development plan aimed at guiding the country s physical development to geographically distribute the benefits of economic growth. Such macro-level strategic objectives set in upper-level plans are then supported by various laws, institutional setups, sectoral and local level plans, and most importantly, adequate investment resources to implement the plan components. The coordination between plan objectives and implementation was best made visible by the investment allocation patterns for public infrastructure. As discussed in the earlier sections, investment patterns exactly followed policy guidelines provided in the national plans. Each infrastructure sector, such as roads, ports, airports, water supply and so on, formulated its own sectoral plan in close coordination with the economic development plan making adequate provision for investment resources. For example, a five-year plan for road construction began in 1954 with a total budget of 260 billion yen. Before enacting this plan, the Road Act of 1952 made a provision to finance general road construction through the Special Account on Roads (fuel and vehicle-related tax) and Expressways, through the nationally pooled expressway toll. In 1956, the Japan Highway Public Corporation was established to take sole responsibility over the construction and management of expressways. Twelve five-year plans for road development have so far been completed and the 13th is under implementation. Under these plans, a large network of general highways and expressways has been developed. There was an innovative approach of burden sharing for infrastructure investment between the local and central governments. The subsidies from the central government often worked as an incentive for local governments to improve public infrastructure provision and maintain better economic potential or quality of life. The share of the central government burden for different prefectures is different, reflecting policy prioritization by the government. However, due to worsening public finance, the burden share of the central government has declined in recent years (Figure A4.1). 81

88 Figure A4.1 Burden for Infrastructure Investment Metropolitan areas (MA) Peripheral 60 areas Neighbouring areas of MA Percentage Institutional Mechanism Supporting Infrastructure Development As the central role of infrastructure to achieve rapid industrialization and high economic growth was well recognized, the government emphasized the putting up of a comprehensive institutional mechanism to support the development of an efficient infrastructure system. This included the setting up of organizations, government agencies, and public corporations; the establishment of a system of periodic sector plans; the enactment of supporting legislations; and most importantly, the establishment of innovative financing schemes. It was also accepted, in broad terms, that to maintain high infrastructure service levels in a sustainable way, users, who are the main beneficiaries, should take due financial burden. Hence, the users pay principle became a rule in planning and operating infrastructures. Most infrastructure investment projects were financed on a cost-recovery basis. In cases of infrastructure with more public characteristics, such as general roads, special accounts were set up to generate investment resources from vehicle and fuel taxes, indirectly applying the users pay principle. The Fiscal Investment Loan Program (FILP) is another unique feature of infrastructure financing in Japan. The FILP is a financing facility (for loans and bonds) made from public funds with funding coming from postal savings, funds of the Fund Trust Bureau (welfare pension fund), postal insurance funds (postal life insurance premium), and proceeds from government-guaranteed bond issues and others. This is one of the major sources of financing for infrastructure investment. For example, in 2004, out of the JP 4.6 trillion total budget of the road sector, the FILP scheme will be financing JP 1.8 trillion of the amount. The cost recovery principle, in fact, makes it possible to repay infrastructure investments. Due to traditionally longer repayment periods, private capital markets may not supply the required capital. The FILP was designed to bridge this gap. And it made it possible to maintain significantly high levels of infrastructure investments without putting more pressure on the government s budgetary system. Most importantly, the FILP acts as an 82

89 effective vehicle to mobilize domestic financial resources, which are in the form of private savings and other long-term funds, which would otherwise not be available for infrastructure financing. In Japan, the private sector has played an important role in building an operating public infrastructure that can be run commercially such as urban railways. The most important feature of the private-sector-run urban railways in Japan is the concept of value-capture that the private sectors have successfully implemented. A large part of investments in urban transport projects are capitalized through real estate value. Private railway operators capture the real estate value by combining real estate development with railway development. This way the private sector is able to run this important urban infrastructure more efficiently with less financial burden on public finances. In order to achieve the ideal utilization of the private sector s management skills and gain efficiency in infrastructure investment, the concept of public-private partnership, in the form of the so-called third sector, has recently been introduced in some big projects, such as the Tokyo Aqua Line. 83

90 6. Lessons for the EAP Region By international comparison, disparities in regional incomes in Japan are very small. The coordinated efforts by all government levels along with the private sector made it possible to achieve this despite the unfavorable structural changes in both domestic and global economies. Infrastructure remained a key policy instrument, first to promote industrialization in core regions at the early stage, then to decentralize industrialization to the peripheral regions, at the later stages. Although infrastructure investment aimed at reducing disparities brought about significant improvements in some areas particularly those surrounding big metropolitan areas its impact on the economies of more remotely located peripheral areas is still questionable. In Japan, the problem of regional disparity is now not so much about the income level as about the quality of life. The declining population with high percentage of elderly people has made the task of local authorities increasingly challenging to maintain levels of ideal services. So, the prevailing notion in developing countries that the regional disparity is an issue related to inadequate investment resources, which can be managed once the country reaches certain levels of economic development, can be misleading. The Japanese case shows that the implications of regional issues go beyond simple notions of resource shortages: they demand a long-term perspective based on a balanced distribution of population and economic activities. What is clearly seen from Japan s experience is that the endowment of infrastructure capital among regions does not guarantee higher economic potential. Also important is the timing and sequence of the infrastructure. This is particularly important for the network-type infrastructure, such as highways, which tends to create a virtual reinforcing cycle in favor of locations that are candidates for early investments. This is also one of the reasons for the increased concentration in the Tokyo metropolitan area: network development was initiated not as a complete nationwide network, but rather as an extension that kept Tokyo as its center. This created a strong reinforcing cycle with Tokyo as the core. This is probably the reason why the economic activities could not be decentralized despite significant investments for network infrastructure in the peripheral areas. Another important lesson from the Japanese case is that infrastructure investment should not target industrial growth only. Rather, from the early stage, it should also target the aspect of quality of life. What is most challenging, which is now being experienced in Japan, is to retain populations in the peripheral areas so that they can maintain the minimum population threshold required for urban-like services. So, not only industry-promoting infrastructure but also livelihood-enhancing social infrastructure should be emphasized from the early stages. The strongly coordinated planning approach in Japan seems to have worked so well until the early 1980s. But the system could not respond very well to the changing domestic and global economic environments since the 1980s. The public investment approach also could not foresee the impending changes in the patterns of service demand. As a result, there now are cases, particularly in the lagging areas, where infrastructure facilities with 84

91 huge investments are serving only a fraction of their predicted demands. On the other hand, big cities experience severe congestion due to the undersupply of infrastructure. Given the high domestic savings ratio in the EAP countries, the Japanese experience in the FILP scheme provides useful lessons on the importance of mobilizing domestic resources for infrastructure investments. For this, first, a principle of cost recovery should be established and the appropriate institutional arrangements need to be made so that the possibility of inefficiently using such financing facilities could be greatly minimized. Equally important is devising mechanisms for value-capture, particularly in urban transport projects, as in the case of Japan s private railways. In the face of increasing globalization, regional policies should aim to support individual regions in a country to be part of a global economy on its own (not through the capital region). This again emphasizes the vital the role of infrastructure. So, the new challenge is to provide infrastructure not only for industrial development and other livelihood services but also for international economic exchanges. Box 1: Measuring Regional Distribution of Infrastructure To assess the distribution of infrastructure across regions, infrastructure stock needs to be standardized with some size-related variables in the region. Some candidate variables are population, land area, or outputs. The strong correlation of population and outputs easily bring to mind population and land area. If population is equally distributed across regions (i.e. all regions have equal population densities), normalizing the infrastructure stock against either of these variables yields similar results. However, if population distribution is not uniform, as in the real world, normalization against population and land area produces two contrasting indices. The region with a high population density will have a higher infrastructure per unit area but a lower per unit population, and vice versa for the region with a low population density. For practical purposes, it may be sensible to compute infrastructure capital per composite unit (geometric average of population and land area) then normalize this against the national average. This measure assigns equal weight to both population and land area. If the country s political or geographical situation demands the assigning of different weights to population and land area, this can be done as follows: Composite normalized Index = I P A I P 1 R 1 R AR Where, I Infrastructure stock A P Land area Population Variable with R subscript is of region and that without subscript is of national. Exponent alpha represents the weight assigned to the population. If infrastructure should be measured only in per capita terms, alpha takes a value 1. This index could provide a simple but valuable guidance for policy makers to make judgments on regional distribution of infrastructure facilities for a given weight relative to population and land. 85

92 Appendix-B: Urban Transport Development Strategy in the Urbanization of EAP Megacities 1. Urban Transport Infrastructure as Determinant of Urbanization... B-1 2. Insufficiency of Urban Transport Infrastructure and Deterioration of Levels in Services... B-4 3. Disparity in Interurban Transport Service Levels... B-6 4. Timing of Investment... B-9 5. Funding on Urban Transport Infrastructure in Selected EAP Megacities... A Urban Transport Infrastructure as Determinant of Urbanization Growth in urban populations is largely influenced by the expansion of urban transport infrastructure. With road development, population influx grows and the demand for public services, such as public transport, also increases. Areas with relatively low road densities despite high population densities are mostly in the poor areas, as explained later. Figure B1.1 Actual Urbanization in Suburban Area of Ho Chi Minh City Source: JICA HOUTRANS 86

93 Figure B1.2 Population Density and Road Density, 1995, Metro Manila and Extended Urbanized Regions km km Source: Compiled from MMUTIS database 87

94 Figure B1.3 Population Increase and Road Construction, Metro Manila and Extended Urbanized Regions km Population Growth Rate 85-95, (%/year) Major Projects Completed during Road LRT Source: Compiled from MMUTIS database 2. Insufficiency of Urban Transport Infrastructure and Deterioration of Levels of Services In the past decades, urban transport infrastructure has been absolutely lacking in some megacities in the EAP. For instance, in the case of road, while motorization has progressed significantly, the levels of service (road length per vehicle) has constantly been decreasing (except Singapore) as shown in Figure B

95 Figure B2.1 Road Length and Vehicle Ownership in Selected Asian Cities Source: Metro Manila: Philippines Statistical Yearbook (excluding barangay roads) Jakarta: Jakarta dalmn Angka (excluding army and diplomatic vehicles) Bangkok: BMA (excluding soi and trucks) Singapore: World Road Statistics and LTA (paved roads only) Tokyo: Tokyo Metropolitan Government This means that road development has never quite caught up with increasing traffic demand. As a result, levels of road services have deteriorated, as shown in Figure B2.2. Figure B2.2 Average Travel Speed on Roads in Selected EAP Megacities 40 km/h Singapore KualaLumpur Tokyo HoChiMinhCity Jakarta Beijing Manila Taipei Bangkok Source: UITP Millennium Cities Database Among the cities studied, only Singapore has maintained an urban transport service at a relatively high level. This is due to the constant effort in planning and implementation done by the Government of Singapore. Table B2.1 summarizes the transport policies adopted in Singapore during the last three decades. They are on transport demand management (TDM), use of private cars (Road Pricing), andownership of private cars (Vehicle Quota 89

96 System), which aim to control private traffic demand as well as strengthen the public transport system. Table B2.1 Major Transport Policies in Singapore 1970s 1980s 1990s Transport Demand Management (TDM) Public Transport Development Car Usage Car Ownership Bus Transport MRT / LRT Introduction of Introduction of Operation of Area Licensing Additional Singapore Bus Scheme (ALS) Registration Fee Service (SBS) (1975) (ARF) (1972) (1973) Expansion of ALS (1986, 1989) Expansion of ALS (1994) Introduction of Electronic Road Pricing (EPR) (1998) Expansion of EPR (1999) Increase of ARF (1974, 1975) Introduction of Preferential Additional Registration Fee (PARF) (1975) Increase of ARF (1980, 1983) Introduction of Vehicle Quota Scheme (VQS) (1990) Increase of ARF (1990, 1991) Introduction of Off-peak Car (OPC) Scheme (1994) 2000s Modification of VQS (2002) Introduction of Bus Lane (Scheme B) (1974) Introduction of City Shuttle Service (1975) Operation of Trans-Island Bus Services (Tibs) (1982) Rationalization of Routing (ad libitum) Integration of bus companies to Tibs (1995) Construction of Underground Bus Interchange (1996) Rationalization of Routing (ad libitum) Introduction of midnight service (2000) Integration of bus companies to SMRT (2001, 2004) Introduction of ez-link Card (2002) Rationalization of Routing (ad libitum) Development of North-South Line (1987) Development of East-West Line (1990) Expansion of North South Line (1990) Introduction of Park & Ride System (1993) Expansion of North- South Line (1996) Development of Bukit Panjang LRT (1999) Development of North-East Line (2002) Development of Changi Airport Extension Line (2002) Development of Sengkang LRT (2002) Development of Punggol LRT (2004) Source: LTA webpage ( SMRT Bus webpage ( Chin (1999) 90

97 3. Disparity in Interurban Transport Service Levels Urban transport service levels largely differ by city area due to differences in: (1) household characteristics (specifically income levels), and (2) local conditions (particularly accessibility to arterial infrastructure). Low-income households seldom use cars and largely depend on non-motorized transport for shorter travel distances. Figure B3.1 Modal Share by Household Income (HCMC, 2002) Household Income (million VND/month) 10.0> <10.0 <8.0 <6.0 <4.0 <2.5 <1.5 <0.8 Walking Bicyckle Motorcycle (Driving) Motorcycle (Passenger) Car Bus Semi-Public Others 0% 20% 40% 60% 80% 100% Modal Share Source: JICA HOUTRANS Figure B3.2 Average Trip Distance by Income Group (Jakarta, 2002) Source: JICA SITRAMP Low-income households tend to live in areas with underdeveloped urban transport infrastructure. The shorter travel distance is a natural consequence of both low incomes and less developed transport infrastructures. Hence, urban transport service levels largely differ by area in a city and, by tradition, they are unfavorable particularly to the urban poor. Figure B3.3 Distribution of Low-income Households 91

98 (Metro Manila and Surrounding Provinces, 1996) km Source: Compiled from MMUTIS database 92

99 4. Timing of Investment There are no established theories on the timing of investment in urban transport infrastructure. This is because project determination, which includes economic, social, and environmental conditions differ by country and period, and this brings about differences in the form of implementation, operation, and management. In megacities in the EAP, for example, subway construction is influenced by population size rather than economic levels. Figure B4.1 Comparison between Opening Year of the First Subway and GDP per capita Taipei Paris London Seoul Budapest Tokyo Beijing Bangkok Teharan Calcutta Source: UN. 2004, Figure B4.2 Comparison between Opening Year of the First Subway and City Population London Paris Budapest Tokyo Beijing Seoul Calcutta Teharan Bangkok Taipei Source: UN. 2004, 93

100 Urban Transport Levels of Service Study on Urbanization In general, if new investments are not made, urban transport service levels tend to decrease with increases in population and traffic demand. The assumption is that, if no investments will be made, a critical point will be reached wherein previous service levels will be hard to recover even if large investments are eventually made. This critical point is practically interpreted as a situation that entails far larger costs to develop new infrastructure due to uncontrolled urbanization without sufficient infrastructure provision. To illustrate, the World Development Report 2003 stated that costs for sewage development went up three times higher in built-up areas than in new settlements in Bogota, Colombia. Figure B4.3 Schematic Illustration of the Critical Point in Urban Infrastructure Development Desirable path Likely Trend Possible Difficult Critical Point In the figure above, Singapore seems to be on the Desirable Path, while other megacities, such as Bangkok, Jakarta, and Manila are on the Likely Trend, judging from the decreasing service levels in urban transport. Lessons from the Singapore s experience are as follows: A. Transport demand management (TDM) is important for controlling traffic volumes while generating funds for the development of transport infrastructures. B. Public transport development should have priorities. Bus services should be improved in the initial stage, while railway (guideway transit) should be developed next when investment funds have been secured. However, for the practical use of these lessons, it should be noted that the capacity of the Singapore government was high enough to attain ideal planning, coordination, and implementation. What should be done to improve, or at least maintain, the current transport situation in the EAP megacities? In the past few years, JICA has formulated an urban transport master plan for Manila, Jakarta, and Ho Chi Minh. The target year has either been 2015 (Manila) or 2020 (Jakarta and Ho Chi Minh). Emphasis has been placed on the TDM method and public transport similar to the lessons obtained from the experiences in Singapore. These master plans aim to shift the megacities that are, at present, on the Likely Trend onto the Possible, or Difficult, line, as shown in Figure B

101 The targeted service levels of urban transport, as expressed in average on-road travel speed is not so ambitious; either slight increases (Manila, HCM) or slight decreases (Jakarta). Although the cost for implementing these master plans is quite huge, they are not unrealistic considering future economic growth and various fund-generating policies incorporated therein. The timing of investment should be as earliest as possible, as long as economic, financial, social, and environmental conditions are cleared. Scale and continuity of investments should be more important rather than timing. The most critical restraint would be the fund for investment itself. TableB4.1 Required Investment and Target Levels of Road Travel Speeds in JICA s Urban Transport Master Plans in Selected Megacities in the EAP Region Target Year Population (Million) Investment Required Per Capita ($) Road Network Average Speed (km/h) Base Year Target Year 1) (w/ M/P) Base Year Target Year ($ million) Manila ,500 1, Jakarta , HCMC ,100 1, Sources: JICA (2004), The Study on Integrated Transportation Master Plan for Jabodetabek, (SITRAMP) JICA (2004), The Study on Urban Transport Master Plan and Feasibility Study in Ho Chi Minh Metropolitan Area (HOUTRANS) JICA (1999), Metro Manila Urban Transportation Integration Study (MMUTIS) 1) with Master Plan 5. Funding on Urban Transport Infrastructure in Selected EAP Megacities As stated previously, urban transport service levels have decreased for more than 20 years in the EAP megacities, including Bangkok, Jakarta, and Manila. One of the most critical reasons for the decreasing trend has been the lack of funds. It is quite difficult to accurately grasp the amount of past infrastructure investment for each of these cities. According to the aforementioned JICA master plans, Manila, Jakarta and, Ho Chi Minh have recently invested about % of their GRDP on transport infrastructure. This scale of investment is evidently too small if the decreasing service levels of their urban transport services are taken into account. The basic problem here is how much investment is needed and how funds are produced. The JICA master plan proposals are summarized in Table B5.1. The fund requirement is US$ 23.5 billion for Manila by 2015, US$ 10.3 billion for Jakarta by 2020 and US$ 14.0 billion for Ho Chi Minh by 2020 (excluding maintenance of existing infrastructure). Respectively, this is equivalent to 2.6%, 0.7%, and 2.5% of their respective GRDPs. The low requirement for Jakarta is mainly due to the existing accumulation of infrastructures (railway, expressway, etc). Although largely different by city, if 1-3% of the GRDP is continuously invested in urban transport infrastructure (including maintenance of existing infrastructure), urban transport systems can be sustainable. 95

102 Table B5.1 Required Investment and Proposed Fund Sources in JICA s Urban Transport Master Plans in Selected Megacities in the EAP Region GDP Per Capita Fund (%) Year Share (US$/year) M/P of M/P Cost in Public Budget Cost Base Target Total Base Target ($ million) Con- PFI New Year Year GRDP ven- tional Fuel Tax TDM 1) Others 2) (%) Manila ,700 3,000 23, Jakarta ,900 5,500 10, HCMC ,400 4,700 14, Source: JICA (2004), The Study on Integrated Transportation Master Plan for Jabodetabek JICA (2004), The Study on Urban Transport Master Plan and Feasibility Study in Ho Chi Minh Metropolitan Area (HOUTRANS) JICA (1999), Metro Manila Urban Transportation Integration Study (MMUTIS) 1) Area licensing, parking charge, etc. 2) Urban development tax (Jakarta), vehicle registration fee (HCM). In the funding sources assumed in the master plans, conventional public fund (including ODA) shares 17% in Manila, 46% in Jakarta, and 14% in Ho Chi Minh. It is commonly recognized that the master plan is not realized solely on conventional public budgets. Covering budget deficiencies differ by city: Manila covers 35% by PFI and 48% by new public fund; Jakarta covers 23% by PFI and 31% by new public fund; and Ho Chi Minh covers 10% by PFI and 76% by new public fund. For Manila, and Jakarta, instead of BOT projects, which mostly failed after the late 1990s, new PFI schemes, such as public-private partnerships (PPP), are proposed. As for the new public fund, three cities propose to raise fuel taxes as well as adopt the TDM approach including road pricing. Jakarta is proposing the introduction of an urban development tax to recover cost. The following are the major lessons from this analysis: A. To sustain the service levels of urban transport in EAP megacities, investment in transport infrastructure should be sustained for a long period. Although the required investment size differs largely by city, in general 1-3% of GRDP will be needed. B. Conventional public budget (including ODA) is not sufficient to achieve the above-mentioned investments. Private sector participation is definitely important. However, BOT projects should better be replaced by new PPP schemes. New mechanisms to generate public fund should be developed based on the users pay principle (e.g. TDM, etc). 96

103 Appendix-C: Financial Strategy for Urban Transport Development 1. Characteristics of Urban Transport Infrastructure... C-1 2. Financial Schemes for Urban Railway Investment... C-2 3. Value-Capture to Finance Transportation Infrastructure... C-3 4. Examples of Value-Capturing: Railway and Subway Projects in Japan... C-5 1. Characteristics of Urban Transport Infrastructure In general, urban areas with high population densities require mass transportation systems that can transport a large number of people and goods in order to satisfy high demands of consumers for travel and transport. In addition, as the physical scale of urban areas gradually grows larger, the average travel length increases and requires higher transport service speeds. In reality, however, many urban areas all over the world suffer from lack of transport infrastructure capacities because of quick increases in transport demand due to rapid urbanization. Chronic traffic congestion specifically increases travel time within urban areas which impact not only local/global environment but also local economic activities. In this sense, using public transport, such as urban railways and light rail transits, is desirable in order to reduce urban travel time. Meanwhile, transit-oriented development (TOD) has recently gained popularity as a means of redressing a number of urban problems, including traffic congestion, affordable housing shortages, air pollution, and continuous sprawling. Although TOD has various definitions by many researchers, in a broad context it can be defined as a mixed-use strategy that encourages people to live near transit system services and to decrease their dependence on driving. The concept of TOD highly regards the necessity and the role of public transport. When looking at urban areas in the EAP countries, public transport introduction is one of the most critical approaches in solving various urban problems. However, it is has been reported that financial viability of urban public transport is quite low not only in the developing countries but in developed countries as well. The background for this low viability can generally be explained as follows: - Construction cost: Huge construction costs worsen project viability. This is caused by excessive personnel costs; increase in material costs and land acquisition costs due to price increases; technical difficulties, due to the existence of underground infrastructure; and need for countermeasures to reduce environmental impacts. In some cases, inefficiency in planning and investment also causes the increase in construction costs. - Construction period: Longer construction periods increase construction costs. This stems either from difficulties in consensus building among stakeholders, the slow progress of land acquisition, or technical errors due to unexpected problems. These makes the period longer before the start of services and increases debt interest 97

104 payments. - Demand for services: Low transport service demand leads to lack of revenues for transport operators and investors. This comes from tough competition from other transport modes (e.g. cars), other transport operators, and from low levels of transport services provided by transport operators. This section mainly discusses issues related to construction costs. It is essential to reduce construction costs by making an appropriate investment plan that corresponds to demand, reduces construction period, and introduces innovative construction technologies. However, these have actual limitations. In projects managed by the public sector, such as by the local or national governments, it may be useful to utilize a private financing initiative scheme, like the BOT, BTO, or BOO in order to reduce construction costs through the effort of the private sector. However, due to the fact that construction costs of urban transport infrastructure cannot be changed, achieving financial resource for construction costs for urban transport is therefore one of the most important issues. On the other hand, many developing countries, including EAP countries, do not have enough financial resource to cover for the construction costs of public transport investment. There are several factors for this. First, most developing countries have not developed a well-organized taxation system wherein taxes can be efficiently collected from the public. Second, both domestic and international investors often face difficulties in investing in large-scale projects in developing countries because they involve many types of risks like unstable exchange rates, unreliable management systems, and low technological skills. Third, the low level of services, including tariffs, frequency and corresponding services provided by transport operators reduces the number of public transport users, resulting in the lack of revenues that could come from tariffs. Therefore, it is critical to find stable financial resources for the promotion of public transport investments. Financial systems for public transport investment already have various schemes proposed and introduced in many developed countries. The following sections show the various types of financial scheme for urban railway projects. The value-capture scheme will be discussed later. 2. Financial Schemes for Urban Railway Investment There are various ways of securing urban railway investments. Although the reduction in tax payments is also another measure to decrease costs, it is not considered a desirable measure for poor local or central governments. Methodologies in securing financial resources can be categorized into the five types shown below. - Users Payment: The most fundamental resource is to reserve profits achieved from consumers by providing railway services and assigning them to construction costs. It is usually impossible to raise tariffs just for a specific transport investment. However, there is a scheme in Japan that could achieve this. This is the Specific Urban Railway Storage Fund scheme (SURSF) introduced in the 1980s and which successfully improved the existing railway service through upgrading investments. The scheme allowed private railway operators to raise fares before the start of investment. The 98

105 railway company was able to store excess profit caused by additional fares in advance of new investments and then utilize them for the construction. The government exempted the excess profit of the railway company from taxes. The SURSF scheme was applied to many capacity buildup projects in urban commuter rail in metropolitan areas including those in Tokyo, from the 1980s to the 1990s, and contributed in solving in-vehicle congestion problems. - Capital Investment and Loan: In the case of railway projects based on the BOT scheme or railway investments by private companies, the companies can issue stocks or the central/local government can sometimes provide the capital for the project. On the other hand, for public projects, governments or public corporations can issue bonds to collect the needed resources. - Subsidy: The central or local government can support the project by providing the resources. There are various examples of subsidy schemes in many countries. - Loan: Private companies can get loans for the construction from the national government, commercial banks, etc. The loan schemes can be divided into two types: loans with interest and loans without interest. For example, in Japan, many urban rail projects and subway projects were given loans without interests from the Railway Construction Fund, which was set up with resources coming from the lease charges for the Shinkansen infrastructure by private Japanese railway companies (private operators) following the privatization of the former Japan National Railway in Before, there were also loans with low interest provided by the former Japan Development Bank. - Beneficiaries Payment: The start of a new rail service or the improvement of service levels of existing rail networks enhances accessibility as well as increases the attractiveness of real estate, both of which increases population, economic activities, and real estate prices around the railway stations. Such external effects could be recaptured by imposing property taxes on areas around the stations. In some countries, schemes for capturing values have been introduced. The types of value-capture policies and examples will be shown in the following sections. 3. Value-Capture to Finance Transportation Infrastructure (1) Value-Capture Background Some literatures point out that value-capture is one of the best financing methods in providing for local public goods including urban transportation services. Two main reasons have been cited. One, it makes tariff and the local tax lower by using captured value as the resource for projects. If the value-capture cannot be realized, the demand for the service could be very low because of high tariffs or local tax which worsens operators profits. The other reason is that the introduction of the value-capture scheme allows policy makers to properly judge as to how much specific local public service should be provided. If investment costs can be covered through tariff revenues and the captured value, this will mean that the benefit stemming from this project is larger than the investment cost. The amount of resources equal to the created value by investments is recoverable through the general tax 99

106 budget of governments. However, in practice, it is often quite difficult for a government to judge as to what type or how much public service should be provided. In a worst case scenario, the government logically creates a high risk in choosing a project with lower benefits at higher costs. (2) Techniques of Value-Capturing Methods in capturing value can be categorized into three: (a) Value internalization; (b) Direct value-capturing; and (c) Indirect value-capturing. (a) Internalization A common, direct value-capture technique is where transportation investors purchase a nearby land before investments are made. In Japan, there are several examples wherein private railway companies purchased land along a planned railway line and developed houses in advance on the purchased land. These experiences show the so-called announcement effect which results due to the spread of project information before the investment. This effect often creates high values of a kind similar to insider s information and can sometimes cause political problems. Furthermore, spatial monopolies due to acquisitions of vast lands by a specific operator may also cause economic problems. (b) Direct value-capturing In some cases, individuals or areas are clearly expected to achieve benefits from investments in infrastructure. For example, when the local populace requests for a new station, they could pay investment costs because its benefits will surely redound down to them. The land adjustment scheme of Japan is a case. In the scheme, all land areas close to the transportation infrastructure, such as a highway or railway, are reshaped by cutting off some of their parts, and the cutoff sections are utilized for transportation infrastructure. As land adjustment increases the value of the reshaped land, landowners will not lose their investment even though the size of their land areas decreased. However, in practice, it is quite difficult to build consensus on the direct value-capturing scheme. This is because there are technical difficulties in the scientific evaluation as to who the actual beneficiaries are and how much the benefit would be. (c) Indirect value-capturing All benefits stemming from transportation investments will finally result in the increase of land prices under a Capitalization Hypothesis. When this hypothesis is applied, benefits can be captured through the imposition of either a property or a land tax. However, in practice, several problems occur. One is that the negative value may be found in other areas because the invested area has more attraction than the other areas. When the local government collects property tax, the project of the national government will spill over into the local market. In this case, the question of how to recapture the collected local tax should be discussed. Besides, the value captured through the taxation system cannot normally be collected before the project. However, the United States has a scheme called tax increment financing (TIF) which prepares the resource by issuing local bonds on the security of expected tax revenues. 100

107 Study on Urbanization 4. Examples of Value-Capturing: Railway and Subway Projects in Japan (1) Tama Denen-Toshi (Tama Garden City) Railway: Historical Case of Value Internalization Japan was developing so fast in the 1950s. In Tokyo the population grew at about 25% per year. Its rapid urbanization and lack of houses and transport infrastructure were so serious that heavy traffic congestion and the corresponding quality of life were damaging the regional economies. Too much population inflow into the Tokyo metropolitan area required the provision of more social and economic infrastructures. In 1953, Mr. Keita Goto of Tokyu Railway Co. proposed a master plan for the Tama Area in the western part of Tokyo. The plan covered a million square meter area intended to create a second Tokyo. Although the long-term regional spatial plan made Tokyo Tokyu Denen-toshi Line by the central government had a completely different concept from Goto s proposal, he successfully changed the direction of the spatial plan toward his idea by practically getting consensus from many Yokohama residents in the area after he Figure 1: Tokyu Denen-Toshi Line proposed a new railway project (the Denen-Toshi line) which would connect the area to the city center in The Tokyu Railway Co. applied the land adjustment scheme in the development. One of the reasons why the scheme succeeded was due to the fact that the landowners supported the project because they trusted the developer who was the local railway operator. The route of the Denen-Toshi line had many curves because the vicinity is mountainous and forested. This route was chosen upon the request of the local residents and as the land adjustment project progressed. Since the start Photos: Development around the station of the Tokyu Denen-Toshi Line 101

108 of its operation in 1984, the traffic flow on the Denen-Toshi line has increased gradually along with the growth of the population in the developed area. At present, the Tokyu Denen-Toshi line is one of the most profitable operations of the company. The subcompanies of Tokyu Railway Co. developed department stores at the stations, offered cable television services to households along the line, as well as restaurants and sport facilities. The total area of the project became thrice the initial proposal. (2) Railway Investment in Fukuoka City: Increase in Tax Revenue due to Railway Construction Fukuoka is one of the major cities in Japan, with a population of 1,320,000 in It has a 76.6-km railway network including a 17.8-km length of two subway lines completed in Its major railway lines are the Nishitetsu Omuta Line and the JR (Japan Railway) Kagoshima Line connecting Fukuoka to its southern areas. Both lines are separately operated by two private railway companies. The local government operates two subway lines. The first subway line started its service in 1981, the second line started in 1993, connecting the city center with the local airport. Since the 1980s, 11 new stations have been constructed mainly along the Nishitetsu Omuta Line, while the frequency of rail service of the JR Kagoshima Line has expanded from 70 services per day in 1980 to 178 services per day in The map of the railway network is shown in Figure C4.1. Subway No.2 Subway No.1 The start of the two-subway services generated social economic benefits for the City Centre area. User benefits resulting Nishitetsu from the investments in the Omuta Line JR Kagoshima first subway were estimated Line at JP 3.45 million per year while the supplier s benefit was JP 0.22 million per year Figure C4.1 Map of Railway Network in Fukuoka (both estimates are as of 1995). To sum these benefits in fifty years, the total benefit amounts to JP 3,695 billion whereas total investment cost was JP billion (1995 prices). The economic internal rate of return of the first subway line was estimated at 20.8%. The social discount rate in Japan is 4.0%. The contour maps of the land prices in Fukuoka City in 1980, 1990, and 2000 are shown in Figure C4.2. By comparing Photo: Vehicle of Subway No.1 102