Focusing on water supply system in Indonesia

Focusing on water supply system in Indonesia

By Muhammad Sauri Hasibuan

JAKARTA (JP): Involving the private sector in infrastructure
development is much more complex than people originally thought
and requires a level of sophistication on the part of government
that takes time and experience to develop. In some way, the
responsibility on the government to guide the process is even
greater than when the system was almost exclusively public.

This is because adding a private component to any
infrastructure network opens a whole new range of complicated
management and design issues which government have not had to
deal with in the past. Contract negotiations have to be managed.
But most importantly governments have to establish a well
conceived operating framework for the private sector if they are
to get good value from private sector involvement. Without such a
framework outcomes can be disappointing.

This is very clear from recent experience of PDAM water supply
projects (Perusahaan Daerah Air Minum) in Indonesia. With only
about 40 percent of the urban population of 70 million having
access to piped water service in 1997, the Government of
Indonesia (GOI) is seeking new directions to rapidly increase
coverage, in particular through private sector participation in
delivery of services.

Because water is a basic necessity and clean water is required
to prevent the spread of disease, the universal supply of
affordable water is a high priority everywhere. But water supply
systems throughout Indonesia are under great stress as rapidly
growing populations place increasing demands on existing systems.
Typically, the prevalence of subsidies has perversely limited the
expansion of supply without providing benefits to the poor, who
have little access to the public system and buy water at high
prices from private vendors.

Since it is not easy to design a competitive framework that
creates a stable environment while maintaining a well-balanced
policy that makes water accessible to the poor, public sector
negotiators have to become tougher and more experienced in their
dealings with private sponsors. Most importantly, they have also
had to think more carefully about policy implications of what
they are doing.

Local governments have been responsible for delivering water
supply services in their jurisdictions since the enactment of
Government Regulation 14/1987 on decentralization of central
government responsibilities in public works. As of the end of
1998, 300 local governments had municipal water companies
(Perusahaan Daerah Air Minum -- PDAM). These are financially
autonomous, and their budgets are distinct from that of local
governments. Most PDAM's have sought private capital to extend
and strengthen existing public networks.

The broad motive has been to overcome constraints on public
funding and to bring forward needed investment. It has also been
a device to improve efficiency by enabling and benchmarking of
public facilities against private sector plants. According to
Directorate General of Human Settlements (Dirjen Cipta Karya),
there are currently 92 private sector partnerships in 41
regencies. Out of the 92 partnerships, there are 60 that need to
be evaluated and reconsidered. More than 50 percent of the
memorandum of understandings (MOU) could not proceed to any
significant deals and there are at least 60 MOUs have expired
without any continuation.

It is not easy to maintain a delicate balance between the
needs of the public in general and the private sector's interest
on the return on investment. But here we can extract several
common denominators as to why so many of the PDAM's partners have
failed to begin projects significantly. All PDAM partnership
projects naturally involve many agencies of government. These
agencies, and the interest they represent, will expect to be
involved in any decision and the manner in which they interact
will have a major bearing on how successful any private sector
proposal will be. There are several factors as to why most MOU's
can't make substantial progress:

* The Finance Ministry will want to minimize the public
liabilities. If public debt is to be raised, they will want it to
be as small as possible and they will want to see a revenue
stream to pay it back.

* The Trade and Industry Ministry will want to maximize
opportunities for local industry, expecting significant parts of
the equipment used in the projects to be manufactured locally.

* The Manpower Ministry will want to maximize opportunities
for local employment.

* In local or provincial governments, it is obvious why they
want to bring investment and employment to their area. Therefore,
they will be doubtful about complying with national guidelines.
They will use their ability to withhold planning approvals to
leverage up their interests. Without coordination there is likely
to be a damaging duplication of approval processes.

* The environmental agencies will want to minimize the impact
on the environment.

Several aspects above relating to coordinative government
agencies are just a logical consequence of water activities in
Indonesia. Even without private sector participation, water
sector activities within national plans (Repelita) are
complicated and treated on a sub-sector basis, with some 11
ministries sharing a part. This consequently leads to competing
priorities or counter-productive water management, tension and
contrariety among program proponents (ministries, special
interest groups, NGOs) with adverse effects on national
strategies.

The water sector in Indonesia suffers from over staffing.
Water enterprises in metropolitan cities such as Medan, Bandung,
and Surabaya average a little over six staff per 1,000
connections, while the indicator is 8.4 in Jakarta. Qualitatively
this picture is somewhat discouraging. The vast majority of staff
have only high school or lower level educational qualifications.

It is generally accepted that PDAM staff selections,
especially at the director and managerial levels, are influenced
by local governments, and that established selection criteria,
e.g., professional qualifications and experience, are rarely
adhered to. Research done by The World Bank Sanitation and Water
Supply consultant, Allain Locussol indicates that out of 25,000
staff employed in the over 300 PDAM's, only 1,337 have
Bachelor's/Master's Degree.

This situation is far from optimal especially when there are
private sector investors involved -- this involvement
consequently requires a level of sophistication on the part of
the PDAM's staff that takes time and experience to develop. Like
it or not, most contracts are complex, legally dense documents
whose main purpose is to provide sufficient security to an income
flow that financiers will lend to the project.

* There is a clear need to form a special committee which will
consist of experts from related field as well as decision makers
from PDAM to undertake effective and meaningful negotiations with
the private investor proposing to partner with the PDAM. It is
generally agreed by private investors that bureaucracy is a
formidable negotiating machinery.

Therefore, this committee must do their best effort at
obtaining the best possible terms for the government and the
consuming public. By making it clear in the beginning who is
responsible for what, problems can be anticipated in the earliest
phase possible. So for example, there should not be anymore
turmoil caused by the Union Worker of PDAM because their
interests are not being represented sufficiently in the
negotiating process.

* The government must retain direct responsibility for
politically sensitive issues such as water prices, water quality
standards, consumer service levels, the ability to restrict
supplies to non-payers and water system security. The government
is therefore not forced to pay a premium to have the private
sector assume risks that it can not typically quantify or
mitigate.

* To prevent allegations of corruption or favoritism, a fully
independent probity auditor could be appointed with the widest
authority and responsibility to report separately from the
project team to a chief executive. The probity auditor could be a
partner in a respected international accounting firm.

* Early attention to media coverage is crucial if the project
is politically contentious. It is better to aggressively promote
the project's benefits from an early stage. If the project's
detractors are allowed to win the media's attention, they will
control the debate. It is very hard to communicate the benefits
of the project in an environment of negative publicity.

* Communications with the community are a critical aspect of
the project and initiatives must be taken early in dealing with
all interest groups and to describe the project in terms that are
readily understood by the community.

The writer is business development manager of PT Airindo
Bersih Jaya.