Water commands a price

Water commands a price

The public furor over the 8.14 percent increase in tap water
rates charged by PAM Jaya could scare off investors intending to
submit bids for 91 infrastructure projects over the next few
months following the Jan. 17 and Jan. 18 Infrastructure Summit in
Jakarta.

Demands by several narrow-minded Jakarta legislative
councilors to repeal the rate increase send the wrong signal,
giving potential investors a glimpse of the complexity of the
legal, social and political issues they may encounter here.

The current City Council will not do the people, or the local
economy, any good if legislators move to cancel a decision that
was made through the normal political process. This lack of legal
certainty will simply frighten away investors considering doing
business here.

The rate increase, effective as of Jan. 20, was based on a
joint decision by the Jakarta government and the previous City
Council in July 2004, which gave PAM Jaya the power to adjust its
rates in response to inflation and other factors every semester
between 2005 and 2007.

The rate mechanisms were adopted with a great degree of
transparency and accountability after thorough deliberation and
discussion by the government and the legislative council.

Anything that is both scarce and in demand commands a price.
That is simple economics, even when talking about public goods
and basic needs. Water is scarce, so water rates have
increasingly been used as an acceptable instrument of public
policy to expand supply, improve service and, at the same time,
encourage more responsible use of the commodity.

An adequate pricing policy is even more crucial for
investments in infrastructure projects and public utilities,
which are long term in scope and vulnerable to inflation,
especially in developing countries like Indonesia.

An efficient and effective water pricing system provides
incentives for efficient water use and for water quality
protection, and generates funds for necessary infrastructure
development and expansion.

This is the principle the July 2004 decision tried to
establish for the water company, to enable it to sustain viable
operations and improve and expand services at affordable prices.

True, the quality of PAM Jaya's service is still far below
what most customers expect, but this is the very reason the
company should be allowed to adjust its rates periodically, to
keep up with inflation and to encourage it to make new
investments.

The water company, which is owned by the Jakarta
administration, is not only profit-oriented but also encourages
the efficient use of water through "volumetric" charging, not
fixed charges. This means that the more you use, the more you pay
because the charges increase with each additional cubic meter of
water used. This is contrary to other commodities, which usually
charge less for high-volume purchases.

Concern about the affordability of household water services
for vulnerable groups, such as low-income households and retired
people, has led to the development of a range of policy measures
aimed at resolving affordability problems while still meeting
economic goals.

PAM Jaya, for example, charges only Rp 550 per cubic meter for
low-volume (poor) users and Rp 9,750 for well-off (high-volume)
consumers. A similar pricing mechanism and an automatic price
adjustment formula are also applied for electricity users.

If the city administration thinks water rates are still too
high for many poor consumers, it should not address the problem
through across-the-board policies but rather with well-targeted
subsidy mechanisms.

Taxpayers in Jakarta will foot the bill if PAM Jaya suffers
losses due to tight price controls that do not allow the company
to get a reasonable profit margin. The water company will not be
able to expand its network to serve more consumers if it cannot
make a reasonable income for new investments.

Water charges have increased in recent years because water
quality has often gotten worse as a result of overconsumption,
especially in heavily populated cities like Jakarta where
polluted groundwater necessitates more sophisticated and more
expensive treatments, with a consequent need to develop more
expensive demand-management or supply-based regimes.

We support the determination of Jakarta Governor Sutiyoso, who
said last week he would push ahead with the implementation of the
July 2004 decision on water rates.

The city government and PAM Jaya, however, need to brief the
City Council and inform the public about the rationale for the
automatic price adjustments and the factors to which these
periodical adjustments are tied.