JP/6/HENRY

Liberalization: from electricity to water

From public service to private privilege

Henry Heyneardhi Business Watch Indonesia Solo, Central Java heyneardhi@watchbusiness.org

At the beginning of September 2002, legislators passed the bill on electrical power into law. This meant abolition of the electricity management monopoly so far held by state electricity firm PLN, and the dawn of liberalization. With the new law, the electricity sector in Indonesia will be managed according to the market mechanism, and the private sector will be allowed to supply power through electricity business licensing.

The same also applies to water management. In addition to public monitoring, the government is preparing a water resources management bill (RUU-SDA), which will become an umbrella for the total restructuring of water management in the future. Like the electricity bill, RUU-SDA will also open wide opportunities for private sector involvement in this business.

The May 6, 2002 draft of RUU-SDA maintains that the bill has been formulated due to the imbalance between declining water supply and rising water demand. But this is only half the story. What the draft skips is that the bill is part of a program for water resources restructuring in Indonesia, which is being promoted by the World Bank through its Water Resources Sector Adjustment Loan (WATSAL) scheme, worth US$300 million.

The point is that the World Bank's preparedness to finance this water resources restructuring program is not without reservations. It is closely related to the World Bank's commitment to boosting public service liberalization (e.g. in water supply, health care and education) in various parts of the world.

In the case of water resources management, the World Bank is convinced that public institutions have failed in the handling of this business. Poor quality and low reliability of service have reduced consumers' willingness to pay fees for the service, eventually leading to lower operational funds and a further deterioration in public service.

The World Bank has always contrasted such a situation with the performance of the private sector, which is described as being capable of providing an efficient service as well as large financing and investment funds. Therefore, the World Bank is resolved that the private sector will have to be increasingly involved in water resources management through, for instance, concessions, management contracts and private ownership. Besides, the bank is also confident that the time has come for full-cost recovery or subsidy abolition and institutionalization of water property rights or business lease rights.

In is in this context that the water sector restructuring process is taking place in Indonesia. For a country mired in debt like Indonesia, not many choices are left. It is either following what the creditor (World Bank) wishes or losing access to sources of development funds. In the face of such limited options, our government has apparently preferred to adopt the first, as indicated by the accommodation of the World Bank's water resources management policy in RUU-SDA.

For example, the May 6, 2002 draft of RUU-SDA stipulates that in the future, water must be managed according to the principle of economic and social value equilibrium (Article 3); and that water has social, economic and environment functions, which are implemented and manifested in a balanced manner (Article 4).

Though the wording of both articles seems so moderate and even idealistic, it indirectly implies a recognition that water is also an economic commodity. Its logical consequence is cost recovery for the water being consumed, used in irrigation and in industry. This full-cost recovery policy is also clearly noticeable in articles of RUU-SDA governing financing (chapter X).

Meanwhile, the private sector's participation in water management is accommodated by the introduction of water business lease rights (Article 9), defined as the right to exploit water resources for commercial purposes (Article 1). This private involvement is not limited to the efficient use of water, but also management strategy and policy preparation. This is enabled by the existence of a water resources council functioning as a cross-sector coordinating forum and in charge of drawing up the water resources strategy and policy.

Article 86 of RUU-SDA stipulates that members of the water resources council come from government and non-governmental agencies in proportional numbers. In this way, the private sector is allowed and even has wide opportunity to join the council.

Management of water resources is based on the view that water is an economic commodity; the emphasis on liberalization and privatization will lead to several negative implications. First, RUU-SDA changes the traditional view that water is common property instead of an individual asset. Common property in this sense is not the same as collective ownership. Water is there as a social object for everybody. It does not belong to anybody.

Second, the full-cost recovery policy at first glance can be an incentive for conservation and efficiency in water utilization. However, it will also add to the burden of society because of the obligation to bear all costs of operation, maintenance, rehabilitation, investment and even debt servicing. In agriculture, this policy has the tendency to accelerate the disappearance of small farmers due to their disproportionate financial incapacity and the consolidation of land in the hands of farmers controlling vast areas of agriculture.

Third, privatization of water resources management brings a serious implication. It causes decisions on water allocation to be based solely on commercial considerations. Corporations aim firstly and primarily at profit maximization rather than sustainability or justice.

Likewise, the argument over the private sector's ability to provide large investment funds for efficient use of water should be questioned. It ignores the role of domestic consumers and taxpayers in guaranteeing projects financed by the private sector. Private corporations can only secure funds for investments if fund owners get an assurance that they can afford to repay loans. Domestic consumers would have to pay for water service at a level guaranteeing (private sector) service providers' commercial returns.

To this end, privatization contracts almost always include the provision that the government pledges to cover losses. This can be seen in privatization contracts in Hungary, the Czech Republic and Bolivia. The same has happened in Indonesia, such as in the privatization of the Jakarta drinking water company, PAM Jaya.

So, in this era of globalization, everything can be sold, including those items previously considered sacred such as semen, culture and traditions, air and water. Parallel to economic liberalization, which requires reduction of the role and power of the state, commercialization and privatization of water have ensued.

Privatization, which is the transfer of assets as well as water ownership and management from the public sector to the private sector, constitutes a change from service for all into sales to consumers. In public hands, everybody is supplied with water because he or she is a citizen entitled to it. Management by the public sector thus pays more attention to the extent to which everybody can get water. In private hands, water management and supply is business and every citizen a consumer (buyer).

Private management assumes that every citizen needs water but it does not recognize and care that everybody is entitled to it. Society only has access to water insofar as it can afford to buy or pay for it. Given the serious economic disparity in Indonesia today, management by the private sector will only reaffirm the existing social gap, and public service and access to water resources will become the privilege of only the few.