Indonesia: How not to privatize
By Bill Guerin
JAKARTA - Indonesia's House of Representatives, now debating
privatizing the country's water supply, should probably
take a close look at the one place in the nation where
water distribution is already in private hands - Jakarta,
where a comedy of errors has produced skyrocketing costs
and little else.
In a country where fewer than 20 percent of its 215 million
citizens have access to potable water, the need for a
water-distribution disinvestment law was prompted by a
1999 aid package from the World Bank. Thus, Indonesia's
so-called US$300 million Water Resources Sector Adjustment
Loan meant the country must legislate private-sector involvement.
Indonesia's farmers and non-governmental organizations
(NGOs), having experienced the usually deleterious effects
of various other government moves to help them out, apparently
have some idea of what's coming next. They have rallied
several times protesting the bill, contending that some
aspects will only benefit big business. At least 20 people
were injured in the biggest clash with police. One NGO,
the Water Coalition, has pointed out that Indonesia's
constitution states that water must be controlled by the
state and utilized for the welfare of the people. Several
legislators have also said they want "more input
from the people".
Jakarta is a case study on how not to privatize the water
sector. Built by Dutch colonials in 1928, the system has
simply been unable to cope with a population that has
exploded to 11 million. Under the rule of the now-deposed
president Suharto, in 1996, Jakarta's water system was
handed over to joint-venture companies of the French firm
Suez Lyonnaise des Eaux and the United Kingdom's Thames
Water Overseas Ltd without public consultation or public
bid because of their obligatory connections to Suharto's
son Sigit Harjojudanto and the Salim Group, one of the
country's biggest conglomerates, which was run by a Suharto
crony, Liem Sioe Liong.
To say the system they took over was decrepit is an understatement.
It is estimated that as much as 45 percent of the water
it attempts to deliver leaks out before it gets to the
customers. Nonetheless, since the two companies took over,
the price to consumers has risen - and risen and risen.
It stands to rise some more.
In March, Thames PAM Jaya (TPJ) and PT PAM Lyonnaise
Jaya (Palyja), the two joint ventures, threatened to pull
out of their agreement with the city's administration
and PAM Jaya, the water company itself, if their demands
for price increases were rejected. In April, a 40 percent
increase was duly approved by city council leaders, subject
to the conditions that the two operators must report to
the council every three months, slash the number of expatriate
employees and reduce water leakage.
Last week the UK's ambassador to Jakarta, Richard Gozney,
upped the stakes even more by lobbying Vice President
Hamzah Haz to push the Jakarta administration for another
hike in the price of tap water. Gozney warned that if
TPJ kept bleeding money it would pull out of the country.
Haz himself said later that TPJ was leaking $1.5 million
a month and had lost $58 million in three years. When
the joint venture originally got under way, Thames formed
a local company, PT Kekar Thames Airindo, and gave Sigit,
Suharto's son, 20 percent as a cost of doing business.
PT Garuda Dipta Semesta was set up to cover the Salim/Suez
The city was split straight down the middle geographically,
half to Thames and Sigit's PT Kekarpola Airindo, the other
half to Suez and Salim. The contracts were finally signed
on June 6, 1997, and Jakarta's water privatization got
Just as in the UK, where Thames Water is a regional water
monopoly, the raw water supply, treatment plants, delivery
system, metering and billing were put in the hands of
the new operators. PAM Jaya agreed to hand over its property
assets and force businesses and householders to stop using
private wells and buy water from the new monopoly. The
foreigners agreed to pay PAM Jaya's debts, some $231 million,
out of future revenues.
After Suharto was forced to step down, the consortia
severed their ties with the Salim Group and Harjojudanto
by buying them out. The Salim Group withdrew voluntarily.
Thames claimed at the time that the cost of the buyout
There had been two large tariff rises in six years before
the new price of Rp4,340 (49 cents) per cubic meter was
set in April. This was assumed to be the last ahead of
next April's general election, but the head of the city
drinking-water regulatory body, Achmat Lanti, said last
week that rates would be increased again early next year.
From the early 1980s, PAM Jaya has claimed that it suffered
big losses due to leakage from old broken pipes, water
theft, and administrative leakage from inefficiency. Two
decades later, leakage is still cited as one of the major
causes of the losses. Nonetheless, PAM Jaya claims to
have increased its coverage from 40 percent of the city's
population in 1997 to 55 percent, as well as curbing water
leakage and increasing production.
The contracts required Thames and Suez to increase connections
to 757,129, almost double the volume, and service 70 percent
of the population in the first five years. After the five
years, they were required also to reduce water leakage
to 35 percent.
Palyja says it has repaired 600 of a total of 5,000 kilometers
of old piping, and TPJ says it has repaired and renewed
720km of piping.
Their own figures claim that from 1998 to December 2002,
Palyja has reduced water loss from 61 percent to 43.3
percent, and TPJ from 57.6 percent to 43.5 percent. But
Zainal Abidin of the PAM Jaya labor union claims the level
of water leakage could be much higher than these official
The Indonesian Consumers Foundation (YLKI) cites continuing
complaints from the public about poor service and continuing
disruptions to water supplies. As YLKI points out, the
fact that many residents had to rely for their water supplies
on deep wells and even water vendors showed that the tap-water
service was still not reliable.
The Jakarta Clean Water Regulatory Body, set up to deal
with the requests for a water-tariff increase and to assess
the operator's performance, claims that the joint ventures
make relatively small profit margins and current water
tariffs are no longer justified in light of the investments
the companies have made.
Yet their total investment up to December 2002 has been
only Rp1.06 trillion ($188.6 million) of Rp3 trillion
they had contracted to invest under the original contract
during the first five years of the 25-year profit-sharing
Water quality was to be improved to potable-water standards,
but it soon became clear that there were to be no guarantees
that the clean tap water they produce is potable.
Thames and Suez have blamed failure to reach projected
connection targets on the 1997-98 Asian economic crisis,
higher prices for imported equipment, and local employees
who refused to cooperate with their foreign employers.
Others have complained that the companies' main focus
was on improving the bill-collection system and shutting
down illegal private wells. Financial problems, it is
said, were largely of their own making. For instance,
the companies rented new offices in two separate buildings
in a prime business district rather than moving in with
PAM Jaya. Eighty percent of the staff was seconded from
PAM Jaya, where executives received the equivalent of
no more than $25,000 but several top foreign executives
were paid between $150,000 and $200,000 annually.
The United Nations calculates that Indonesia, with its
abundant rainfall, has about 6 percent of the world's
fresh-water resources, and enough water to give every
person access to more than 13,000 cubic meters of water
The government's stance is that developed countries must
help poor countries increase their people's access to
clean water as part of their global commitment. Consequently
it falls back on loans and grants from these countries
to help build water and sanitation infrastructure to eradicate
diseases. It may need to rethink. The World Water Forum
in Kyoto in March ended in failure when 100 ministers
failed to achieve the forum's stated goal of delivering
concrete plans to tackle water-related problems.
The role of private investment in financing water and
sanitation projects drew fire from NGOs, which said it
put profit before meeting human needs. A report by the
World Panel on Financing Global Water Infrastructure called
for investment of $100 billion a year in order to meet
UN targets on water but was merely "noted" in
the final document.
Sickness was given scant attention, but the World Health
Organization estimates that 80 percent of all sickness
in the world is attributable to unsafe and inadequate
water supply and sanitation. Water-borne pathogens such
as typhoid, cholera, amoebic infections, bacillary dysentery
and diarrhea account for 90 percent of the 13 million
child deaths each year.
In Indonesia an estimated 6.2 million will suffer diarrhea
this year, mainly due to poor access to clean water, Ministry
of Health water and sanitation director Hening Darpito
says. Darpito says the rate of diarrheal infection is
now between 25 and 29 people per 1,000 every year, way
up on the earlier rate of 10 out of every 1,000.
A trifling Rp250 billion ($28.6 million) was allocated
this year for the development of clean-water facilities
in 1,100 villages in the country, expected to benefit
up to a million people. The government acknowledges that
Rp5.1 trillion ($579 million) must be spent every year
until 2015 to increase clean-water supplies to 40 percent
of the population.
Several developing countries, notably South Africa, Bolivia,
Argentina and Panama, have also failed when trying to
privatize water. The poor took the brunt, as they will
in Indonesia. Nonetheless, the ink had hardly dried on
the Thames/Suez contracts when the World Bank cobbled
up a 120-page treatise declaring the Jakarta privatization
a "likely success" and outlining how Indonesia
could privatize the rest of its 300 water companies.
Half of the 1999 loan has been disbursed, but the rest
of it depends on the water bill being passed into law.
Privatization with little public control can be expected
to lead to excessive water exploitation and higher water
rates as well as limit access by farmers and urban poor
As Minister of Finance Boediono candidly admits, "We
hope that [privatization] will be completed this year,
to finance the state budget."
In other words, with the proceeds of the sale already
earmarked for the budget deficit, the chances of the World
Bank money flowing into water infrastructure are pretty