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Indonesia: How not to privatize water
By Bill Guerin
Asia Times
11/19/03

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 alliance.

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 under way.

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 was "negligible".

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 figures.

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 schemes.

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 a year.

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 to water.

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 remote.

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