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.