Water privatization in Indonesia
Encyclopedia
Water privatization in Jakarta was undertaken when the government of then President Suharto granted two 25-year concession contracts in 1998 without competitive bidding. As of 2008 the impact of the concessions in terms of reducing water losses had been much less than expected, and customer growth in the 7 first years of the concession had been lower than before the concession, despite substantial inflation-adjusted tariff increases during this period. In 2005 tariffs were frozen, leading the private water companies to cut down on investments.
International set foot in Indonesia with the aim of gaining a concession contract for Jakarta. For this purpose it entered into an agreement with Sigit Harjojudanto, one of the sons of then-President Suharto. Sigit's firm PT Kekar Pola Airindo – which had no experience in water supply - received 20 percent of shares in a joint venture with Thames Water. The French water company Suez, which had been active in Indonesia before, was afraid of being left behind. It approached Anthony Salim, a crony of Suharto, and his Salim Group
that included the company PT Garuda Dipta Semesta. Salim was at first cautious, because he did not want to confront the President. But when Suez managed to convince the government to split up the Jakarta concession in two halves, each of which would be awarded without competition to one of the two groups, Salim acquiesced. In 1995 the government issued letters of invitation to the two groups to begin negotiations for concessions. The two companies then completed feasibility studies in 1996. Negotiations took more than a year and were tedious. One issue was that the private companies requested to be paid in foreign currency, a request that was successfully opposed by the then Governor of Jakarta.
According to one source, the World Bank had pressured the Indonesian government in the early 1990s to privatize water supply. However, the Second Jabotabek Urban Development Project, a major water project for Jakarta approved by the World Bank's board in 1990, included no conditions for privatization.
s were awarded, becoming effective in February 1998. The subsidiary of Suez, called PT PAM Lyonnaise Jaya (PALYJA), was awarded the concession for the western part of the city and the subsidiary of Thames Water
International, called Thames PAM Jaya (TPJ), was awarded the concession for the eastern part. The concessions aimed to achieve universal service coverage and a reduction of non-revenue water
to 20% at the end of the concession period. To that end the concessions foresaw private investments of 1520bn Rupees during the first five years of the concession alone. This corresponded to 610m USD at the exchange rate at signing before the financial crisis. However, after the devaluation of the Rupee during the East Asian financial crisis the value of these investment commitments dropped to 160m USD.
With the privatization the public water utility of Jakarta, Perusahaan Daerah Air Minum Jakarta Ray (PAM Jaya), was transformed into an asset holding company. Water tariffs were collected by the private companies and deposited into an escrow account. From there a fixed amount per cubic meter, called the water charge, is paid to the private companies. Another amount is paid to PAM Jaya which pays off the pre-existing debt of the utility. In theory, PAM Jaya should also have made payments to the city government. Furthermore, it had the responsibility to monitor the performance of the two private companies on behalf of the city government. The water charge projections were set in such a way that the private companies would earn a rate of return of 22%.
and the City Council refused to raise water rates according to schedule, thus forcing the two concessionaires to cut down on investments.
In the same year Suez Water reduced its share in the concession to 51%, the remainder now being held by by PT Astratel Nusantara (30%), which is part of the Indonesian conglomerate Astra International
, and Citigroup
of the US (19%). Shortly afterwards Thames Water completely exited the Indonesian market by selling 95% of its share in PTJ to Acuatico, a consortium of Indonesia’s ReCapital Advisors and Glendale Partners. While both mother companies had no previous operating experience in the water sector, Acuatico itself had provided water to commercial customers in Jakarta before. The new owners retained the management of PTJ, but the name of the PTJ was then changed to PT Aetra Air Jakarta (Aetra).
70 km southeast of the city. According to a 2007 report by the Asian Development Bank, there was a risk for the water supply of Jakarta from inadequate maintenance and repair of the canal and associated pumping stations. Other water sources are the Ciburial spring source in Bogor
district 60 km south of Jakarta, Ciliwung River
, Cilandak River, and the Cisadane Treatment Plant owned by Tangerang
District Water Works Enterprise 30 km southwest of Jakarta. All other water treatment plants are operated and maintained by the private companies.
According to a household survey concerning water use carried out in 2005 among 110 poor households in various neighborhoods, poor households typically rely on a variety of water sources. The three most frequent combinations were network and vended water, network and groundwater, and groundwater and vended water. Use of different water sources varies over time depending on changes in quality, availability and pressure. Some households also collect rainwater. Vendor water was 10 to 32 times more expensive than piped water and 43% of surveyed households spent more than 5% of their income for water.
Nevertheless, the poor indicated they were not so much concerned about the tariff charged by the private water companies, since it was much lower than the prices they had to pay to private vendors. They were much more concerned about the high connection fees to the network (equivalent to US$182) that were unaffordable for most of them. Wealthier residents use suction pumps and storage tanks to improve supply, while the poorer residents suffer more from low pressure and intermittent supply.
The private companies have a contractual incentive to connect the poor, because they are being paid the same amount per unit of water by the government no matter how high the water tariff is. The public contract partner of the private companies, PAM Jaya, however, receives higher revenues from commercial customers and wealthier residential customers since these pay higher tariffs than the low-consumption poor residential customers. PAM Jaya thus actually discourages the private companies to connect the poor to the network by seeking a “balanced composition of connections” in order not to further increase the burden on the budget of the province of Jakarta.
The volume of water delivered increased from 89 million cubic meters per year in 1998 to 130 in 2007 and 147 in 2010 in the western half. In the eastern half it increased from about 90 million cubic meters per year to more than 140 in 2004 in line with contractual targets, but then declined to about 120 in 2007, far below the contractual target. The average annual customer growth in Jakarta before privatization (in the years 1988 to 1997) was 11.7 percent, or 31,246 customers, while after privatization, growth in the years leading up to 2005 dropped to about 5.6 percent.
declined from 57% in 1998 to 47% in 2007 and 42% in 2010. According to data from the Jakarta Water Supply Regulatory Body non-revenue water in the eastern half declined from 58% in 1998 to 44% in 2003, but then increased again to 52% in 2007 compared to a target of 34%.
At US$0.70/m3 water tariffs were higher than in other Indonesian cities in 2005. They are also higher than in East Manila (US$0.33/m3 in 2008) or in Kuala Lumpur (US$0.45/m3 in 2007); in both cities water is also provided by private companies.
Approval procedures and changes. Requests for tariff and charge increases are reviewed by the regulatory board and then approved by the City Council, chaired by the Governor of Jakarta. In July 2004 the City Council had approved a gradual increase in water tariffs every six months over a five-year period in order to allow for the repayment of debt incurred by the private operators. The cumulative inflation-adjusted tariff increase for the period between 1998 and 2005 was 155 percent. The rate-of-return regulation fixed a 22 percent annual rate of return. Since early 1998 the water rate has increased by 15% in February 1998, 35% in April 2001, 40% in April 2003 and 30% in January 2004 in nominal value prices. The inflation rate in Indonesia was 12% in 2003, 6.6% in 2004, 6.1% in 2005 and 10.5% in 2006.
Financing. Local financial markets provide some of the financing for water supply in Jakarta. For example, PALYJA successfully raised a Rupees 650 billion bond in 2005. In 2007 the Asian Development Bank
issued a Rupees 455 billion loan to PALYJA without a government guarantee. In 2008 Aetra also issued corporate bonds on the Indonesian stock exchange.
Prelude
In 1993 the British water company Thames WaterThames Water
Thames Water Utilities Ltd, known as Thames Water, is the private utility company responsible for the public water supply and waste water treatment in large parts of Greater London, the Thames Valley, Surrey, Gloucestershire, Wiltshire, Kent, and some other areas of in the United Kingdom...
International set foot in Indonesia with the aim of gaining a concession contract for Jakarta. For this purpose it entered into an agreement with Sigit Harjojudanto, one of the sons of then-President Suharto. Sigit's firm PT Kekar Pola Airindo – which had no experience in water supply - received 20 percent of shares in a joint venture with Thames Water. The French water company Suez, which had been active in Indonesia before, was afraid of being left behind. It approached Anthony Salim, a crony of Suharto, and his Salim Group
Salim Group
The Salim Group is Indonesia's biggest conglomerate with assets including Indofood Sukses Makmur, the world's largest instant noodle producer, and Bogasari, a large flour-milling operation...
that included the company PT Garuda Dipta Semesta. Salim was at first cautious, because he did not want to confront the President. But when Suez managed to convince the government to split up the Jakarta concession in two halves, each of which would be awarded without competition to one of the two groups, Salim acquiesced. In 1995 the government issued letters of invitation to the two groups to begin negotiations for concessions. The two companies then completed feasibility studies in 1996. Negotiations took more than a year and were tedious. One issue was that the private companies requested to be paid in foreign currency, a request that was successfully opposed by the then Governor of Jakarta.
According to one source, the World Bank had pressured the Indonesian government in the early 1990s to privatize water supply. However, the Second Jabotabek Urban Development Project, a major water project for Jakarta approved by the World Bank's board in 1990, included no conditions for privatization.
Concession award
In June 1997 the two 25-year water concessionConcession (contract)
A concession is a business operated under a contract or license associated with a degree of exclusivity in business within a certain geographical area. For example, sports arenas or public parks may have concession stands. Many department stores contain numerous concessions operated by other...
s were awarded, becoming effective in February 1998. The subsidiary of Suez, called PT PAM Lyonnaise Jaya (PALYJA), was awarded the concession for the western part of the city and the subsidiary of Thames Water
Thames Water
Thames Water Utilities Ltd, known as Thames Water, is the private utility company responsible for the public water supply and waste water treatment in large parts of Greater London, the Thames Valley, Surrey, Gloucestershire, Wiltshire, Kent, and some other areas of in the United Kingdom...
International, called Thames PAM Jaya (TPJ), was awarded the concession for the eastern part. The concessions aimed to achieve universal service coverage and a reduction of non-revenue water
Non-revenue water
Non revenue water is water that has been produced and is “lost” before it reaches the customer. Losses can be real losses or apparent losses . High levels of NRW are detrimental to the financial viability of water utilities, as well to the quality of water itself...
to 20% at the end of the concession period. To that end the concessions foresaw private investments of 1520bn Rupees during the first five years of the concession alone. This corresponded to 610m USD at the exchange rate at signing before the financial crisis. However, after the devaluation of the Rupee during the East Asian financial crisis the value of these investment commitments dropped to 160m USD.
With the privatization the public water utility of Jakarta, Perusahaan Daerah Air Minum Jakarta Ray (PAM Jaya), was transformed into an asset holding company. Water tariffs were collected by the private companies and deposited into an escrow account. From there a fixed amount per cubic meter, called the water charge, is paid to the private companies. Another amount is paid to PAM Jaya which pays off the pre-existing debt of the utility. In theory, PAM Jaya should also have made payments to the city government. Furthermore, it had the responsibility to monitor the performance of the two private companies on behalf of the city government. The water charge projections were set in such a way that the private companies would earn a rate of return of 22%.
Renegotiation and establishment of a regulator
Due to the impact of the 1997 East Asian financial crisis the contracts were renegotiated through a "Restated Cooperative Agreement" signed in October 2001. The agreement also foresaw the creation of the Jakarta Water Supply Regulatory Body (JWSRB) as an "autonomous" regulator in charge of supervising the concessions on behalf of the Governor of Jakarta and the Ministry of Public Works. In 2004 an automatic rate adjustment mechanism was introduced that foresaw rate adjustments every six months.Tariff freeze and exit of Thames Water
In 2004 a consumer group sued the concessionaires for providing poor services, based on a survey carried out by the Peoples Coalition for The Rights to Water (KRuHA). The lawyers of the utilities rejected the claims saying that the evidence presented was poor and that a survey to support the claims was not carried out by an independent agency. In 2006 Jakarta Governor SutiyosoSutiyoso
Sutiyoso is an Indonesian politician and former general. Known informally as 'Bang Yos', he was the governor of Jakarta, the country's capital, during a turbulent period from 1997 to 7 October 2007. During this time there was a total of five presidents in Indonesia...
and the City Council refused to raise water rates according to schedule, thus forcing the two concessionaires to cut down on investments.
In the same year Suez Water reduced its share in the concession to 51%, the remainder now being held by by PT Astratel Nusantara (30%), which is part of the Indonesian conglomerate Astra International
Astra International
Astra International was founded in 1957, based on a small trading business operated by brothers Tjia Kian Tie and William Soeryadjaya. The family had begun its trading activities by the 1940s, initially operated as a distributor of fruit juices and other agricultural and grocery goods, before...
, and Citigroup
Citigroup
Citigroup Inc. or Citi is an American multinational financial services corporation headquartered in Manhattan, New York City, New York, United States. Citigroup was formed from one of the world's largest mergers in history by combining the banking giant Citicorp and financial conglomerate...
of the US (19%). Shortly afterwards Thames Water completely exited the Indonesian market by selling 95% of its share in PTJ to Acuatico, a consortium of Indonesia’s ReCapital Advisors and Glendale Partners. While both mother companies had no previous operating experience in the water sector, Acuatico itself had provided water to commercial customers in Jakarta before. The new owners retained the management of PTJ, but the name of the PTJ was then changed to PT Aetra Air Jakarta (Aetra).
Responsibilities
The two private companies PALYJA and Aetra are in charge of operating the water infrastructure, billing the customers and undertaking investments in rehabilitation and system expansion. The public asset holding company PAM Jaya owns the infrastructure. The Jakarta Water Supply Regulatory Body monitors the performance of the private companies and reviews requests for increases in tariffs and charges. The local government of Jakarta, consisting of the Governor of Jakarta Province and the City Council, approves tariff increases. Perum Jasa Tirta II, a state-owned company, operates the West Tarum Canal system which provides 80% of the raw water supply for Jakarta from Jatiluhur reservoir on the Citarum RiverCitarum River
Citarum is a river in West Java, Indonesia. It has an important role in the life of the people of West Java, as it is used to support agriculture, water supply, fishery, industry, sewerage, electricity etc. There are three Hydroelectric powerplant dams installed along this river; Saguling, Cirata,...
70 km southeast of the city. According to a 2007 report by the Asian Development Bank, there was a risk for the water supply of Jakarta from inadequate maintenance and repair of the canal and associated pumping stations. Other water sources are the Ciburial spring source in Bogor
Bogor
Bogor is a city on the island of Java in the West Java province of Indonesia. The city is located in the center of the Bogor Regency , 60 kilometers south of the Indonesian capital Jakarta...
district 60 km south of Jakarta, Ciliwung River
Ciliwung River
Ciliwung is a river that passes through Jakarta, Indonesia. The river flows from its source near Puncak on the highlands of West Java to the Jakarta Bay....
, Cilandak River, and the Cisadane Treatment Plant owned by Tangerang
Tangerang
Tangerang is a city in the Province of Banten, Indonesia. It is located about 25 km west of Jakarta. It is the third largest urban center in the Jabotabek region after Jakarta and Bekasi. It has an area of 164.54 km² and an official intercensal estimated population of 1,537,244 for 2005...
District Water Works Enterprise 30 km southwest of Jakarta. All other water treatment plants are operated and maintained by the private companies.
Water and the poor
The poor in Jakarta mostly live in slums called Kampungs. They often neither have a house connection nor a well. They must buy water from private well owners, residents with legal or illegal house connections, public bathes or public hydrants. Public hydrants are run by private vendors that resell water at market prices. These vendors are not effectively regulated in terms of service quality and prices charged. Obtaining water from private wells or hydrants involves queuing of up to two hours and costs of 15,000 Rupees (US$ 5.77) per month and family. Bottled water was also frequently bought at a cost of 85,000 Rupees (US$33) per month and family. Water from wells is often polluted with bacteria and salty, with salt levels increasing in the Northern parts of the city closer to the coast. Groundwater in some areas has high iron content and needs to be filtered. Boiling of water is frequent. According to the Jakarta Environmental Management Body 90% of groundwater was contaminated by metal, nitrate and e-coli in 2011. Water from the public network, including at public hydrants, is sometimes only available for several hours per day and not always of good quality.According to a household survey concerning water use carried out in 2005 among 110 poor households in various neighborhoods, poor households typically rely on a variety of water sources. The three most frequent combinations were network and vended water, network and groundwater, and groundwater and vended water. Use of different water sources varies over time depending on changes in quality, availability and pressure. Some households also collect rainwater. Vendor water was 10 to 32 times more expensive than piped water and 43% of surveyed households spent more than 5% of their income for water.
Nevertheless, the poor indicated they were not so much concerned about the tariff charged by the private water companies, since it was much lower than the prices they had to pay to private vendors. They were much more concerned about the high connection fees to the network (equivalent to US$182) that were unaffordable for most of them. Wealthier residents use suction pumps and storage tanks to improve supply, while the poorer residents suffer more from low pressure and intermittent supply.
The private companies have a contractual incentive to connect the poor, because they are being paid the same amount per unit of water by the government no matter how high the water tariff is. The public contract partner of the private companies, PAM Jaya, however, receives higher revenues from commercial customers and wealthier residential customers since these pay higher tariffs than the low-consumption poor residential customers. PAM Jaya thus actually discourages the private companies to connect the poor to the network by seeking a “balanced composition of connections” in order not to further increase the burden on the budget of the province of Jakarta.
Groundwater over-exploitation, land subsidence and flooding
Groundwater extraction in Jakarta by far exceeds groundwater recharge, leading to a falling groundwater table and land subsidence. Land subsidence was first identified when cracks were discovered in a bridge, the Sarinah bridge, in 1978. Land subsidence is also caused by the weight of increasingly high buildings. It varies by neighborhoods. Between 1993 and 2005 the largest rate of land subsidence occurred in Central Jakarta at 2.40m, from 3.42m to 1.02m above sea level. In North Jakarta the decline was 57cm, from 2.03m to 1.46m. In West Jakarta, East Jakarta and South Jakarta the decline was 2, 11 and 28cm only respectively. The city is also threatened by sea level rise and floods. For exasmple the 2007 flood inundated more than 70 percent of the city and sent about 450,000 fleeing their homes.Impact of privatization
During the concession access and water sales have increased and water losses have declined, but far slower than foreseen in the contract. The increase in access has been slower than in the years before privatization. In the eastern half of Jakarta some of the improvements between 1998 and 2004 have been reversed with water losses increasing and water sales declining between 2004 and 2007.Access and water sales
According to PALYJA in its western half of the concession the service coverage ratio increased substantially from 34% in 1998 to 59% in 2007 and 65% in 2010. According to data by the Jakarta Water Supply Regulatory Body, access in the eastern half of the city served by PTJ increased from about 57% in 1998 to about 67% in 2004, but stagnated after that. However, other sources cite much lower access figures for piped water supply to houses, excluding access provided through public hydrants: One study estimated access as low as 25% in 2005, while another source estimates it to be as low as 18.5% in 2011.The volume of water delivered increased from 89 million cubic meters per year in 1998 to 130 in 2007 and 147 in 2010 in the western half. In the eastern half it increased from about 90 million cubic meters per year to more than 140 in 2004 in line with contractual targets, but then declined to about 120 in 2007, far below the contractual target. The average annual customer growth in Jakarta before privatization (in the years 1988 to 1997) was 11.7 percent, or 31,246 customers, while after privatization, growth in the years leading up to 2005 dropped to about 5.6 percent.
Water losses
Water losses have been reduced, but much slower than foreseen in the concession contracts, and they have increased again in the eastern half between 2003 and 2007. According to PALYJA in its western half of the concession non-revenue waterNon-revenue water
Non revenue water is water that has been produced and is “lost” before it reaches the customer. Losses can be real losses or apparent losses . High levels of NRW are detrimental to the financial viability of water utilities, as well to the quality of water itself...
declined from 57% in 1998 to 47% in 2007 and 42% in 2010. According to data from the Jakarta Water Supply Regulatory Body non-revenue water in the eastern half declined from 58% in 1998 to 44% in 2003, but then increased again to 52% in 2007 compared to a target of 34%.
Financial aspects
Water tariffs and water charges. In 1999-2001 and 2004-2005 average water tariffs paid by customers were higher than water charges paid to the private operators, thus creating a revenue stream to the public asset holding company PAM Jaya. However, in later years water tariffs increased less than water charges, thus creating a deficit for PAM Jaya which is supposed to be covered by the provincial government of Jakarta. PAM Jaya has accumulated arrears in its water charge payments to the private operators and these arrears could reach Rupees 18.2 trillion (1.9bn USD) until the end year of the contracts in 2022. Customers are classified into different categories with customers in wealthier categories paying almost 20 times as much as those in the poorer categories for the same consumption.At US$0.70/m3 water tariffs were higher than in other Indonesian cities in 2005. They are also higher than in East Manila (US$0.33/m3 in 2008) or in Kuala Lumpur (US$0.45/m3 in 2007); in both cities water is also provided by private companies.
Approval procedures and changes. Requests for tariff and charge increases are reviewed by the regulatory board and then approved by the City Council, chaired by the Governor of Jakarta. In July 2004 the City Council had approved a gradual increase in water tariffs every six months over a five-year period in order to allow for the repayment of debt incurred by the private operators. The cumulative inflation-adjusted tariff increase for the period between 1998 and 2005 was 155 percent. The rate-of-return regulation fixed a 22 percent annual rate of return. Since early 1998 the water rate has increased by 15% in February 1998, 35% in April 2001, 40% in April 2003 and 30% in January 2004 in nominal value prices. The inflation rate in Indonesia was 12% in 2003, 6.6% in 2004, 6.1% in 2005 and 10.5% in 2006.
Financing. Local financial markets provide some of the financing for water supply in Jakarta. For example, PALYJA successfully raised a Rupees 650 billion bond in 2005. In 2007 the Asian Development Bank
Asian Development Bank
The Asian Development Bank is a regional development bank established on 22 August 1966 to facilitate economic development of countries in Asia...
issued a Rupees 455 billion loan to PALYJA without a government guarantee. In 2008 Aetra also issued corporate bonds on the Indonesian stock exchange.