Water Resource Policy in Indonesia: Open Doors for Privatization
Posted on December 12 2003 |
Nadia Hadad
International NGO Forum on Indonesia Development (INFID) and
People’s Coalition for the Rights to Water
Introduction
Currently, draft legislation on the Indonesian Water Resources is being discussed in the parliament for rapid approval . The draft Water Law is essentially pointing towards privatisation of Water Resources where water is considered as tradable goods with economic value.
This is where a number of well-informed groups are disagreeing. Some of the reasons being water are the right of every human being and basic essentials for living thus should not be privatised. This group believes that the implications are very dangerous, for the people – especially poor people – and for the environment. Moreover, the draft Water Law refers to the concept of “water rights” which has the potential to trigger water commercialisation, as what happened with the forest utilisation rights and land certificates. Water right is the realisation of a concept introduced by the World Bank known as ‘tradable water rights’.
Albeit worldwide clean water crisis, clean water is privatised, traded as commodities and exported in many countries. This happens because water is considered as economic goods that can be traded and not as social goods when the fact is water is the essential needs of every living being in this planet. The state should guarantee access for clean water for the people and water should be considered as public property. For this reason, many countries have their water resources and clean water service managed by public companies, for example PDAM (local government-owned drinking water company) in Indonesia.
In later years along with the development of global water industry, water tends to be deemed as commercial goods. Profit-oriented transnational corporations (TNCs) started to gain rights to water resources in its management and services and Governments start handing over their responsibility of providing clean water for the people to these giant corporations thus the trend of water privatization. Government or public companies are supposedly incapable, or inefficient in serving clean water for the people.
Is it true that the Government or public companies are incapable or inefficient? Even when the answer is yes, should the solution be handing it over to private sectors? In reality water resources management by private sectors presents its own problems. Private companies follow a ‘full-cost recovery’ system, which means trying to gain the money or cost they invest back or reaping benefits, without caring too much about people’s ability to purchase, especially poor people. Take a real example of the water privatisation case in Jakarta, when PAM-Jaya (Greater Jakarta drinking water Company) was taken over by Thames Water Overseas Ltd (then operates under a local company called PT Thames PAM Jaya) and Suez (operates under PT PAM Lyonnaise Jaya), did not solve problems but created new ones. Efficiency and service quality did not increase or improved.
These mishaps happen as a result of economic globalisation, specifically the involvement of International Financial Institutions such as the World Bank, IMF and also WTO, which hold big roles in leading the way for big corporations to take over water businesses all over the world, including Indonesia, by creating policies and conditionalities along with the money they lend. For Indonesia, these conditions are entrenched in a loan package program to restructure water resources in Indonesia, WATSAL (Water Resources Sector Structural Adjustment Loan). Through WATSAL, Indonesian water resources is directed to privatisation. The soon legalized Draft Water Law will be one of the important conditions for the Government to fulfil before granting loan disbursements.
WATER RESOURCES: A COMPLICATED MATTER
The above phenomena are happening all over the world and not only in Indonesia. To date, we are experiencing clean water crises. Water resources are polluted and exploited. According to the UN, 1.3 billion people in the world have not enough access to clean water and 2.5 billion do not have adequate disposal and sanitation system. There are 31 countries all over the world that is stated to experience water deficit. Clean water needs increase two folds in 20 years (twice the number of world population growth rate) while pollution rate increase and water resources are drained and exploited by big corporations for their own needs.
The situation is so bad, the UN needs to give its attention to world water condition and assign 23 institutions headed by UNESCO and international convention secretariats to prepare a comprehensive report on the most up-to-date world clean water condition and data. The result is the “World Water Development Report – Water for People, Water for Life” launched and presented at the third World Water Forum in Kyoto, Japan, 16-23 March 2003. The year 2003 is “International Year of Fresh Water”. Campaign message conveyed is for water to be used as peace agent. The UN hopes to find global solution and agreement to achieve “water peace” and not “water wars”.
UNESCO Director General, Koichiro Matsuura, said that despite numerous international conferences discussing water shortage, there is a lack of political commitment to solve the problem. Moreover, many international targets are made in order to improve water resources management, but according to the report, almost none are met.
Many countries and areas in the world have reached a critical stage. Availability of renewable water resources per country per capita, from a list of 180 countries, last ranking countries (ranks 176 through 180) are Kuwait, Gaza Strip, United Arab Emirates, Bahamas, and Qatar. Indonesia is listed at number 58, where 13,381 m3 of water is available per annum per capita of Indonesian population.
Even though Indonesia stands at a tolerable rank for water availability, compared to Kuwait (only 10m3) or the United Arab Emirates (58m3), but Indonesian water quality is at a quite worrying rank, that is, 110 from 122 listed countries. This means, pollution rate, disposal system and sanitation are at such appalling rate such that guarantee for the people to get clean water is very low.
Water problems in Indonesia are critical. To guarantee sustainable water availability there needs to be good, integrated and professional management efforts. Main problems in water resources management in Indonesia among others are:
(1) Local scarcity in water allocation for various sectors due to increasing population and increasing demand for clean water, especially in urban areas. Even though total supply of clean water in Indonesia is quite high, around 13,000 m3, but availability is not equal for every area. For instance Java, with only 4.5% of national clean water potential, needs to support 65% of Indonesia’s population of around 210 million lives . This results in water crises during drought seasons. On the other hand, clean water demand especially in Java increase every year. According to the Ministry of Settlement and Regional Infrastructure projection, demand for clean water between 1990 and 2020 increase about 220%.
(2) Inadequate access to clean water from management institution and inadequate urban clean water infrastructure to serve fast increasing demand. The WATSAL document mentioned that in urban areas, only about 40% of all urban residents get access to piped water. Therefore, people rely on ground water to fulfil daily needs and industrial use. It is estimated that 80% of urban and village clean water needs are supplied by ground water while 90% of industry use ground water.
(3) Careless planning pays no attention to environmental sustainability and local culture caused stress to the environment. Whereas industrialisation and urbanisation adds to the stress.
Table 1
Indonesian Water Resources Status 1999 by Island
Island Area (1,000 km2) Potential surface water (m3/s) Potential Ground Water (m3/s) Low Flow Available Demand
Irrigation DMI Total
Java/Bali 130 6199 95 786 950 124 1074
Nusa Tenggara 81 1777 21 90 70 3 73
Sumatra 470 23660 N/A 4704 271 26 297
Kalimantan 535 32279 N/A 6956 19 7 26
Sulawesi 187 2488 44 561 120 6 126
Maluku 78 3373 9 391 5 1 6
West Papua 414 28061 N/A 4140 2 1 1
Total 1904 97837 17628 1437 1168 1603
Source: Ministry of Settlements and Regional Infrastructure
Comments:
N/A: Not Available
DMI: Domestic, Municipal and Industry
Because of the above complex water problems, there needs to be comprehensive, integrated inter-sectoral management policy, institutional ability improvement and implementation of environmental friendly development programs. Various public institutions especially the ones responsible for providing clean water need to be reformed to be more efficient in serving the public. What needs to be emphasized is that any form of reformation and issuance of new regulations needs to guarantee protection to people’s rights to clean water.
This is where the debate starts. It is true that we need new regulation in managing water resources in Indonesia. Unfortunately, the drafting was not made because of our own awareness but entrenched within policies and preconditions imposed by the World Bank and IMF, followed by other creditors such as the ADB and the Japanese Government. As in other countries in the world, their solution lies in prioritising private sector’s role in water resource management.
LENDERS RULES
World Bank Water Policy
The World Bank holds a big role in the water resources sector, not only a role, but also power. These role and power were gained through policies and conditionalities that come with the loans they grant. Unfortunately, these policies made water privatisation in developing countries such as Indonesia. Through PSP and PPP programs, with the objective of reducing poverty and to reach Millennium Development Goal (MDG) targets in the year 2015, the World Bank rigorously encourage developing country governments to lower their role in public services and directing it to private sectors. The effort to increase the private role is clearly seen when we look chronologically at the World Bank policies on water resources sector.
Actually, World Bank’s involvement in the water sector started since the early days of IBRD. Looking at the number of projects, World Bank has so far funded 1044 projects. However their water sector policy known as the Water Resource Management Policy was only issued in 1993 after three years of preparation. Water Resource Management Policy, according to the World Bank, reflects agreements in the 1992 Rio Earth Summit and the Dublin Principles.
The purpose of the policy is, firstly, to encourage reform in policies, planning, and management of water resources institutions of borrowing countries. Secondly, the policy serves as a guideline for the World Bank itself to help borrowing countries in their reformation efforts and means for implementing it.
The policy focused on three central themes, that is: 1) comprehensive analysis framework to identify needed priority (holistic planning); 2) institutional system and regulatory system that is supported by the legislative and support change (placing the stress on decentralisation and participation); and 3) financial and opportunity costs problems generated from water and its utilisation in a competition (as economic good). Water Policy Matrix of Recommended Reforms is provided in Annex 1.
Since the issuance of the policy, World Bank loans in the water sector increased. To date, outstanding commitments of the World Bank for water projects reach US$17 billion. Between 1993 and 2001, around 17 per cent of World Bank loans are granted for projects related to water resources such as water supply and sanitation projects, irrigation, drainage system, hydroelectric generator and water resources management components.
Ten years after the World Bank implemented the Dublin principles in their water sector policy, in 2003; the World Bank issued the Water Resources Sector Strategy. Even though the World Bank still believes that the Dublin principles are still quite valid and relevant until today, but OECD review results showed that its implementations are still difficult and slow. In addition a Operation and Evaluation Department (OED) review showed that water policy implementation challenges in 1993 was to develop an approach for specific contexts, priorities and orders that are realistic and “patient” in its implementation.
World Bank and IMF in favour of TNCs
World Bank is not alone in pushing for water resources privatisation to lender countries. Another financial ‘giant’, the IMF, is also playing an important role. Through PSP and PPP programs, World Bank conscientiously pushes developing country governments to lower their roles in public services and hand it over to the private sector. If we look at the 1993 World Bank policy on water resources and their new strategy on water resources management, efforts on privatisation can be clearly seen and loan recipient countries are conditioned to accept these policies and strategies.
For example, the “pragmatic with principle” approach in the World Bank strategy should be in line with economic reforms of developing countries. Inevitably, economic reforms are directed towards economic policies ŕ la Washington Consensus through loan conditionalities by powerful institutions such as the World Bank and IMF.
Indonesia sank deeper into crisis since the 1997 economic crisis after yielding to the power of IMF programs. IMF macroeconomic reform packages forced the Indonesian government to implement their designed macroeconomic policy framework otherwise not only will it affect IMF loans, but also hinder loans and grants from other international financial institutions and bilateral loans. Moreover Indonesian creditors forum or the Consultative Group on Indonesia (CGI) also refers to IMF’s macroeconomic programs and depend on World Bank’s recommendation before providing their assistance.
Let us look next at the two ‘corporate hands’ of the World Bank, that is the International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA) that provides loans, guarantee and technical assistance for large corporations. IFC gave loans and guarantee for private companies that invest in development and infrastructure development mainly in the telecommunication and electricity sector. Only recently that water sector is added to their list since water sector investment needs policy, regulation and institutional structure reforms. For this reason the World Bank pushed for reform, not only through loan conditionalities such as WATSAL, but also through Private Sector Advisory Services (PSAS) and Foreign Investment Advisory Service (FIAS) that provides consulting services for private companies and governments in policy matters, transaction implementation, privatisation and investment climate (Grusky, 2002).
MIGA provides political guarantee for private investments. Recently, MIGA helped many private water corporations in finding solutions for risk factors that potentially hinder their investment growth in the water sector. In their new water sector strategy, the World Bank will increase the involvement of IFC and MIGA such that a safer climate for investors can be created.
International financial institutions declared that reducing poverty and overcoming world water crisis is their mission. While critics believe that their policy only benefit transnational corporations and contrary to their mission, increase poverty and cause water resources to be more polluted and exploited. When we look at global economy that is almost entirely motored by these financial institutions, we can see the common thread where liberalisation, deregulation and privatisation policy are related to interests of TNCs.
WATER PRIVATISATION IN INDONESIA
1. WATSAL
To date, water sector in Indonesia are governed by Law No.11/1974 on Irrigation, but along with time and swift changes in people’s way of living, globalisation, economic and political policy changes and decentralisation, then the 1974 Water Law is now obsolete. There are other related regulations on water resources and its management but they are not integrated and co-ordinated. Therefore, there needs to be new policies that are accommodating to developments and changes, integrated, holistic, sustainable and environmentally friendly.
It implies that the whole water sector in Indonesia needs to be reformed and restructured. This was the ground in which World Bank stand for granting the loan water sector restructuring (WATSAL). Through WATSAL, reform carried out by the Indonesian Government should indeed reflect World Bank’s policy and vision on water resources, as discussed in the previous chapter. The resulted Indonesian water sector reform designed by the Government (refer to Ministry of Settlements and Regional Infrastructure website: http://www.kimpraswil.go.id/), are based on the following paradigm:
• Sound Environmental Practices: to achieve sustainable development
• Government’s Changing Role: from provider role as enabler, or enabling water supply or more as facilitator
• Authority Decentralisation: Natural resources management should consider regional, municipal and provincial authorities
• Human Rights: there is injustice in water distribution, while every individual have equal rights in obtaining access to water and water source
• Democratisation: changing development approach pattern from top-down to a more effective proportional approach pattern between top-down and bottom-up
• Globalisation: new paradigm that influence water resources sector policies supported by WATSAL for drawing new natural resources Law, decided on the issuance of national water policies and the establishment of National and Regional Water Board. This reform effort is in line with global issues on Water Resources.
Considering the above paradigm, it is clear that reform is very much influenced by policies and conditionalities imposed by the World Bank through WATSAL. New policies based on globalisation paradigm are the beginning of an effort to liberalise and privatise Indonesian water sector through PPP and PSP concepts.
2. More background on WATSAL establishment
Economic crisis that hit Asia in 1997 bring about the collapse of the Indonesian economy and Balance of Payments deficit. The situation made Indonesia gave up to IMF’s programs and implement framework and macroeconomic policies as stated in the Memorandum of Economic and Financial Policies within the Letter of Intent (LoI), first signed on October 31, 1997, between Government of Indonesia and IMF. Government of Indonesia should also perform policy and institutional reform agenda based on: a) macroeconomic management; b) financial and corporate sector restructuring; c) protection towards the poor; and d) economic institutions reform.
Strategy and program to implement the above agenda was coagulated all through 1998 together with World Bank, ADB and bilateral creditors. World Bank granted “Policy Reform Support Loan” (PRSL) of US$1 billion in June 1998 and PRSL II of US$500 million, including plans to restore Indonesian water resources management , as stated in the Matrix of Policy Actions of PRSL II.
Plans to restore water resources management came out as a result of a study by a sectoral work team of the World Bank at the end of 1997, concluded that the World Bank cannot continue to assist the water and irrigation sector in Indonesia, if there are no major restructuring or reform in the sector. Previously, the World Bank and ADB identified the need for restructuring during an inter-departmental dialogue to discuss the 7th Five-Year Development Plan (Repelita VII) organised by the National Development Agency (Bappenas).
For this reason in April 1998, after the economic crisis, the World Bank offered a loan program to the Government of Indonesia to restructure the water sector (WATSAL). The loan program became part of a bigger program of macroeconomic reform that is “quick disburse” in nature to cover the Balance of Payments deficit, as stated in the Country Assistance Strategy (CAS) Progress Report document for Indonesia in June 1999.
The offer was accepted and Bappenas formed a special team, consisting Government staffs and NGOs to form a common policy matrix with the World Bank staffs. This team, through Ministerial Decree dated November 2, 1998, officially became ‘Task Force for Reform of Water Resources Sector Policy’, under the auspices of Bappenas and Ministry of Settlements and Regional Infrastructure.
The team, known as the WATSAL Task Force, together with relevant Directorate Generals and Government Co-ordinating Team/Water Resources Management Co-ordinating Team , signed Letter of Sector Policy, which included the policy matrix drawn by the WATSAL Task Force. Furthermore, WATSAL Task Force also formulated a WATSAL Implementation Plan with process steps and time frame from each restructuring plan inside the Policy Matrix. The plan was submitted to the World Bank on March 29, 1999, as guidance in monitoring the restructuring implementation development.
Finally, Loan Agreement of US$300 million was signed on May 28, 1999, to be returned in 15 years and grace period of three years. Loan disbursement was done in three stages. First stage was disbursed on May 1999 an amount of US$50 million. Second stage of US$100 million was planned to be disbursed at the end of 1999 was only paid out on December 2001, because of political turmoil and government changes. While the third WATSAL agenda is mainly in process to date, including for Indonesia to approve the new draft Water Resources Law.
Principals included in WATSAL that should be adopted by the Government in the new Water Law on water resources and implementation plan are: :
• Introduce the concept of water rights to allocate surface and ground water and for conducive water utilisation;
• Increase efficiency on water utilisation, especially for irrigation;
• Facilitate relations between allocation and utilisation of surface and ground water through uniform certification mechanism;
• Develop conducive surface and ground water quality by socio-economic and sustainable development that are compatible with land rights and river catchment planning;
• Building participative and transparent river catchment management institutions;
• Strengthening management support mechanisms and community based funding for irrigation network, water service at the district/municipal level, sanitation and water disposal system;
• Forming a planning, programming and budgeting system for a decentralised investment and water resources development management;
• Building regulatory structure for regional management to support an integrated river catchment area management implementation through provincial river catchment units, and wherever feasible, a regional government corporatised self-financing undertaking;
• Supporting most beneficial contribution principal towards clean water and irrigation public service cost “Polluter Pays” principle to pay for damages caused by water pollution;
• Revamp regulations and frameworks for private participation (PPP) in the water resources sector and water quality management, including irrigation concession management through investment, operations and maintenance concessions;
• Increase co-ordination between forestry, agriculture, conservation, public and private sector activities related to water resources;
• Formulate specific policies on sustainable wetland conservation and swamp area development.
3. Government WATSAL Follow-up Action Programs
As a follow up of the above WATSAL agenda the Government of Indonesia formulate an implementation agenda that was planned and implemented by Water Resources Management Co-ordinating Team. The said Government Agenda are as follows (Five-Year Development Plan 2004):
• Formation of a National Water Body or a Ministerial level Co-ordinating Body
• National Policy on Water Resources and other supporting instruments needed for policy implementation
• Reform Jatiluhur Public Company (Jasa Tirta II) and establish four new business entities to manage river catchment areas for Rivers Bengawan Solo, Jeneberang, Jratunseluna and Serayu-Bogowonto
• Establish River Area Water Resources Body, Provincial Water Resources Body and Hydrology Unit for river areas in eight provinces
• Stakeholder representation on River Area Water Resources Body and Provincial Water Resources Body
• Organisational, financial and management framework improvements for river area management efforts according to regional autonomy regulations and self-financing abilities
• Formulation of water rights system for surface and ground water allocations and business entities regulating body improvement through water service and waste water disposal levies in the frame of water quality management
• Framework establishment for management responsibility transfer based on Irrigation Management Policy Reform (PKPI) supporting the activities of Water User Association – WUA and Federation of WUAs and financing authority in the outline of irrigation network management
• Reform central, provincial and regency/municipal irrigation administration institution in the effort to transfer responsibilities to WUAs and change irrigation operation and management financing with full rights on WUAs to collect irrigation levies in all irrigation areas
• Build National Water Resources Management Information System and database
The above water resources and irrigation policy reform points included paradigm demanded by WATSAL and opened the door for the private sector to be Government partners according to the World Bank concept for PPP and PSP, by considering water as economic good. These points were integrated into the new draft Water Law. Sections in the draft Law besides using water as tradable economic good and increasing private role, also have the potential to trigger water conflicts that should be protected by the Law. Experts believe that the draft Law do not guarantee clean water access to the people and do not give protection to the poor, and do not guarantee water resources sustainability and environmental protection. For this reason the draft Water Law that is currently under revision in the parliament became controversial.
4. Crucial Issues and Risks: Are We Capable and Ready?
a. Water Rights
Most important issue introduced by the World Bank in the Water reform points above is the water rights concept for ground and surface water allocation. Water Rights in the draft Water Law is divided into two types, that is utilisation rights and business utilisation rights. Utilisation Rights are rights to use water for daily consumption, while Business Utilisation Rights are rights to use water for commercial or business purposes. In Indonesia this concept will be similar to “land rights” or land certification but slightly more complex.
In fact there are many existing water rights concepts, for example ‘Riparian Rights’ that is non-transferable. While the concept introduced by the World Bank is a concept that came in line with globalisation where water tends to be considered as commodity. Thus, “Tradable Water Rights” concept was introduced, an approach that emerged from property rights concept, unlike water according to riparian rights that is not considered as commodity therefore non-tradable.
According to the World Bank in a working paper published in 1996 , this tradable water rights, when supported by an effective institution it will potentially useful in overcoming many water resources problems that cannot be solved by regular water allocation administration system. Through this concept, water as economic good can be legally traded. According to this working paper, in tradable water rights concept price of water reflects the utilisation value such that it creates incentive for water to be used for most productive uses. For this reason, water charge should be equalled to operational and infrastructure maintenance cost. Automatically, retail or contract value reflects water opportunity cost .
This fact is in agreement with World Bank’s Water Resources Sector Strategy 2003, which stated that basic economic principle used to treat water as economic good is when a user realise that to obtain water supply service there are financial costs and opportunity costs. By including opportunity cost in water price through the legally based utilisation rights system, it is expected that users that needs more water such as urban users can fulfil their needs since they can buy water utilisation rights from low value user (e.g., farmers, village community). Through utilisation rights system there will be strong incentives from low value user to voluntarily sell their utilisation rights to high value user. For example when farmers can sell their utilisation rights at an agreed price, then excess water in their area can be sold to their neighbouring areas or city where there are high value uses.
In this sense, through business utilisation rights, market mechanism will work since according to a theory in the World Bank working paper, the water market will increase water value for tradable water rights. At the same time, transaction or selling costs from rights diversion will be lower than sale costs by public authorities. This system will strengthen Water User Associations (WUA/FWUA) and River Area Water Resources Body.
b. Water User Farmer Associations (WUA/Federation of WUAs)
Roles of organisations such as WUA became important because of Water Utilisation Rights. With the authority given to WUA/FWUA to manage and maintain irrigation networks in a river area, including full authority to collect levies then market mechanism and water allocation system through business utilisation rights can be achieved. Because WUA/FWUA have the authority to allocate water from low value uses to high value uses.
WUA as an organisation has been developed long ago as a World Bank loan project . WUA concept is one of World Bank’s policies implemented in borrower states. The concept development reached its height by irrigation management authority transfer to WUA at the beginning of the WATSAL program through Presidential Instruction No.3/1999 on Irrigation Management Policy Reform. Government Regulation No.77/2001 on Irrigation, then Home Ministry Decree No.50/2001 on Water User Farmer Association Empowerment Guidelines, and Ministry of Settlements and Regional Infrastructure Decree No. 529 / 2001 on Irrigation Management Authority Transfer Guidelines to WUA then strengthened the instruction.
Authority transfer to farmers theoretically is a noble gesture, but unfortunately farmers mentioned here are only the ones involved in WUA/FWUA. What about non-member farmers? As if the World Bank WUA concept do not take the real Indonesian condition where many farmers, especially in Java, are labour farmers who do not own land. Also, the approach used is a uniform approach and institutional standardising in a single water managing body. For this reason, WUA is potentially destructive for local community based participative irrigation management system that have been in place for years such as Subak in Bali, or Sambong in Java, and Ulu-ulu. The uniform is inconsistent with Indonesia’s varying tradition and environment.
Furthermore, handing water management authority to WUA to achieve market mechanism will be very dangerous because water as economic good (as well as other economic goods) is vulnerable to market failure. Both in the 1996 working paper and World Bank evaluator said that the business utilisation rights system and authority transfer to the WUA needs good governance, good and trusted regulation and institution – a fact that even the World Bank admits lacking in developing countries such as Indonesia. Similar to the case of surrendering PAM to the market mechanism, risks will be monumental when the government’s lacks capacity in regulating, directing and intervening parties that manipulate this market. Organisations such as the WUA will be very vulnerable to manipulation by stronger parties with big interests, so it is very risky for farmers when there are inadequate regulation and direction to intervene parties from manipulating this market.
b. Private Sector Participation and Public-Private Partnership
Another crucial argument that we should be aware in the WATSAL points and adopted in the draft Water Law is on private participation and partnership in managing water resources. In the previous chapter we discussed partnership and private participation types and patterns. This concept that was popularised by the World Bank was adopted into the draft Water Law and defined as a form of water resources business in partnership between water resource managers and the private sector or the community. All existing partnership types and form (PPP) are allowed, whether it is in the form of investment in building water resources infrastructure, providing service and/or water resources infrastructure operations, through BOT, concessions, service contracts, management contracts, etc.
However experiences in many countries shows that partnership contracts often fail in involving public participation even when it is called Public-Private Participation. More efforts are made in overcoming problems such as financial limitations and government’s weaknesses and pushing for private participation compared to efforts on providing guidance on public access, public monitoring and make certain of public participation and transparency. This weakness can cause ineffective service, unprivileged group discrimination and clean water violations.
c. State Responsibility
It is clearly stated in the 1945 Constitution, chapter 33 that land, water and everything contained in it is controlled by the state and utilised in the nest way for the prosperity of the people. For this reason, government in any country have the fundamental responsibility to provide and service the people’s basic needs. The World Bank and other International Financial Institutions focus their efforts on providing this basic need, but now these institutions change course to assist the private sector. This role and responsibility transformation is very concerning since state control and guarantee diminished as a result.
d. PDAM and Water Supply
It is sad that Indonesian state owned companies are loaded with extensive corruption problems, badly performing with bad financial conditions, including PDAM. After the 1997 crisis, many regional drinking water companies or PDAM almost went bankrupt, yet about 41% of the Indonesian population live in urban areas and very much relying on clean water services of PDAM. From that amount only 51.7% or 20% of the total population gets PDAM services.
According to PERPAMSI (Indonesian Drinking Water Companies Association) there are 293 PDAM companies in Indonesia, including five companies forming joint ventures with foreign private companies. From that total:
• 82% of total PDAM earn negative profit or experiencing loss
• 22% have positive equity
• 44% earning less than their operation and maintenance cost
• Only 10% PDAM are in healthy financial condition
• 119 PDAM have foreign debts and 146 PDAM have domestic debt
Above assessment on PDAM performance was based on Home Ministerial Decree No.47/1999 on PDAM Performance Assessment Guidelines. There are three aspects in the Ministerial Decree used to assess PDAM performance, that is financial aspect, operational aspect, and administration aspect. From the three aspects, financial aspect is the most important with the highest assessment weight. Therefore, PDAM management will care more about their financial management than their operational and administration performance despite the fact that operational aspects included important matters such as service, distributed water quality, water supply continuity to customers, water loss rate, etc.
PDAM bad performance then became reason for International Financial Institutions to grant more loans. In 1998, the World Bank awarded Water Utilities Rescue Program to PDAM. This program was also funded by the Asian Development Bank (ADB). All PDAM offices can get this loan with conditionalities imposed by the World Bank. One of the most important conditions is the formulation of a Financial Recovery Action Plan (FRAP) containing real steps to increase earnings and reducing cost in general. Another condition is termination of profit shares for regional government and the establishment of a monitoring body to monitor PDAM management and Regent or Mayor approval of FRAP.
After that, the World Bank granted a project called Urban Water Supply Project, the objective was to overcome PDAM management inefficiency problems, increase public service and tariff adjustments. To ensure project success, private sector was encouraged to join the tender in planning; developing and operating clean water management system. The scheme was PPP or PSP with Design-Build-Lease (DBL) contract scheme. Private sector designed, built, developed water service infrastructure and also operate it then pay an amount of money to PDAM and local government.
In a recent Ministry of Settlements and Regional Infrastructure report for the World Water Forum III, it was stated that in order to reach Millennium Development Goals 2015, to cut by half the number of people currently not reached by clean water and sanitation service, a total investment of Rp66.43 billion or Rp5.1 billion (US$ 573million) per annum is needed. This amount was written as the Government’s proposal to obtain new loans for water resources development.
Nevertheless, private sector involvement in water resources management in Indonesia should be proceeded with caution. For whatever reason, private companies have no social obligation and by nature will always do business by maximising profit. This is potentially harmful for the population especially the unprivileged. Particularly when PDAM performance, as mentioned in the above analysis, only focus on financial, operational and administration aspects. Where in fact there are other important aspects such as environmental sustainability and water conservation that guarantees future water supply and access is neglected. So when PDAM is privately managed to gain maximum profit, conservation aspects will not be considered.
What the Government should do is to find ways to increase PDAM’s health without involving private sector. Poor PDAM performance an financial condition cannot be separated from customer tariff problems that do not cover for expenses or in other words there are no cost recovery. If this is the problem, then PDAM service tariff needs to be adjusted to pay for these expenses. At the same time, other improvement efforts such as reducing leaks, combating corruption and increasing efficiency, therefore everyone can enjoy better quality clean water services.
e. Price or Tariff
One of the basic worries with privatisation or private involvement is high water price or tariff will be burdened to the consumers. This is an ironic statement, since pro-privatisation argues that privatisation will increase efficiency such that water tariff can be reduced.
The next question is will the tariff imposed by the private sector be the same as the tariff imposed by a public PDAM? Before answering this question, there are several matters to consider. Firstly, clean water service is an expensive business. Refurbishment and system and service development can also cause tariff raise to increase earnings. On top of that, if PDAM is privately managed then they need to make a profit. Expenses that need to be paid by private companies are probably higher than public companies and on top of that they are obligated to pay taxes. By private companies, all these expenses will be burdened to the consumers based on a full cost recovery principle. Consequently, privately managed clean water services tariff will be much higher than public PDAM.
When we arrive to a situation where tariff needs to be increased to cover for expenses, then there should be a careful system and tariff design in place for different community groups. For example, through tariff block policy or a policy to classify consumers into four or five classes through a progressive tariff system. In a system like this, the lowest community group will be subsidised by the higher groups or by the government or even exempt them from any cost. This will not happen if PDAM is managed by the private sector, since this will mean the government actually subsidising the private company’s profit.
We have to be very careful in designing and imposing water tariff. Experiences from many countries (e.g., Bolivia, Argentina, Puerto Rico, USA, and South Africa) shows that tariff increase can trigger conflicts between stakeholders, even riots, especially considering Indonesia since the 1997 economic crisis have not fully recovered . While most PDAM tariff in still use the old tariff, based on pre-crisis community purchase power and not based on cost recovery. With water resources restructuring and PDAM rescue programs, where PDAM will team up with the private sector, tariff system will be based on full cost recovery.
For instance Perusahaan Air Minum Jakarta (PAM Jaya) that was privatised and transferred to Thames Water Overseas Ltd (which later establish PT Thames PAM Jaya) and Suez (which establish PT PAM Lyonnaise Jaya), automatically, clean water tariff in Jakarta increased dramatically. While in fact, tariff imposed to consumers by the local government was still lower than water charge that was charged by both private companies based on cost recovery principle. So what happens is, government not only subsidise unprivileged people, but subsidising (paying water charge difference) the private company! Currently there are many other PDAMs in the process of formulating FRAP, including tariff increase plans. From data collected by INFOG (Indonesian Forum on Globalisation, Solo) at least eight PDAM have actual tariff increase plans.
And it would not stop just there. Because through the World Bank’s new Country Assistance Strategy for Indonesia, they clearly stated that after 8 years of limited support to water utilities, now the spirit of competition is emerging and the World Bank will again support to ‘rescue’ those utilities demonstrating the greatest willingness to improve governance so that the poor are served.
Box 1
Corruption laden PAM JAYA Privatisation
Jakarta, Indonesia’s capital is a city with the highest population in the country and located in the most populated island, Java. In recent years, Jakarta’s population has been steadily growing. But this growth is not followed by improvement in city infrastructure. One of the most important facts is that a 1994 survey showed that only 42.6% households in Jakarta have access to clean/piped water. So 53% of the city residents have to use groundwater for consumption. 70% use groundwater for washing and laundry since in certain areas in Jakarta, groundwater cannot be consumed.
For the above reason, in 1991 World Bank offered a US$ 92 to PAM Jaya in order to improve their infrastructure. The objective is to make PAM Jaya more attractive and viable for privatisation. This loan came at the same time as the Japanese OECF loan to build a water purification plant in Pulogadung, East Jakarta.
Immediately after the loan was disbursed, two giant corporations, Thames Water Overseas Ltd. and Suez Lyonnaise, a French company, compete to run Jakarta’s water system. In 1993, Thames made an alliance with Sigit Harjojudanto, son President Soeharto while Suez approached Anthony Salim, a conglomerate and Soeharto’s crony. In the end, Jakarta water management was divided into two equal portions for the two companies.
Upon request of Thames and Suez, in 1995, then President Soeharto gave orders to the Public Works Minister to privatise PAM Jaya. In 1997, PAM Jaya and the two corporations signed a concession contract for 25 years. Both Suez and Thames established local companies with their Indonesian partners, with Thames holding 80% stake of their company with Sigit, and Salim Group gave 40% stake to Suez. In the contract, all Jakarta water service system are in the hands of both companies, i.e., clean water supply, treatment plants, distribution system, recording and billing, and also PAM Jaya office buildings. In turn, both companies agree to pay PAM Jaya’s debt of US$ 231 million.
After the fall of Soeharto’s government and pressures by huge demonstrations in Jakarta against the deal, the Indonesia Government tried to annul the contract but later withdrawn after threats of lawsuits by Thames and Suez. The concession contract was then renegotiated and ends with Thames and Suez both holding 95% stake and built two new companies, PT Thames PAM Jaya (TPJ) and PT PAM Lyonnaise Jaya
(Palyja).
There had been two large tariff increases in six years after the two companies took over Jakarta’s water system before the new price of Rp 4,300 (49 cents) per cubic meter was set in April this year. And in early November, the two companies had asked the Jakarta government to again increase the water tariff and even had threatened to pull out of their contract agreement if their demands were rejected. They claimed that they experience loses and the current water tariffs are no longer justified in light of the investment the companies have made. Consequently, the water tariff will be increase again about 40% in the beginning of 2004.
However, neither Thames nor Suez has actually met the agreements in the contract. Water leakage is still high, about 50%, while in the agreement they were suppose to minimize the leakage to only 35% within five years. Also, their promise to service 70% of the population after five years have not been met. Thames and Suez have blamed failure to reach projected connection targets on the Asian economic crisis and to local employees who refused to cooperate with their foreign employers.
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