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THE DEVELOPMENT OF CLEAN WATER SUPPLY IN INDONESIA:

POLICY, PROGRESS AND BOTTLENECKS


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Sofia Arie Damayanty
E-mail: sadamayanty@fiskal.depkeu.go.id

Hadi Setiawan
E-mail: hsetiawan@fiskal.depkeu.go.id

Researchers at Fiscal Policy Office, Ministry of Finance, Republic of Indonesia
R.M. Notohamiprodjo Building 4
th
Floor, Jalan Dr. Wahidin No.1, Jakarta Indonesia 10710


ABSTRACT

Millennium Development Goals (MDGs) targets that in 2015 access of society to clean water reach
68.87%. PDAM is the spearheading to achieve this target. To meet the target, the government of
Indonesia (GoI) has been making various efforts, such as the provisions of state and local budget to
build the infrastructure for clean water, provide fiscal incentive, management and technical assistance
for PDAM, etc. This paper aims to overview the GoI policy on clean water development, how is the
progress of the clean water distribution, as well as its obstacles. Based on obstacles found, the author
will formulate the recommendation on solving the problems. Methodology used in this research is
qualitative-descriptive method focused on literature review to obtain literature or secondary data.
Furthermore, to obtain the stakeholders perceptions and primary data, discussions and in depth
interview with experts both at central and local level will be done.


Key words: Clean water supply, Millennium Development Goals, Water SOE (PDAM)
JEL Classification: H54 Infrastructures; Other Public Investment and Capital Stock.


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This paper is still in preliminary research and need a further discussion. Do not quote without permission from
the authors.

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1. Introduction

Clean water is an essential needs for human life, more than electricity, or other infrastructure. Without
clean water, not only the human activities can be disturbed, but the life itself will threatened because
of health problems. Therefore Millennium Development Goals (MDGs) on chapter 7C target to
Halve, by 2015, the proportion of the population without sustainable access to safe drinking water and
basic sanitation. Joint Monitoring Program for water supply and sanitation conducted by UNICEF and
WHO brings welcome news on their last report: The MDGs drinking water target, which calls for
halving the proportion of the population without sustainable access to safe drinking water between
1990 and 2015, was met in 2010, five years ahead of schedule. However, the report also shows why
the job is far from finished. There are still many lack for safe drinking water, and the world is unlikely
to meet the MDGs sanitation target. Continued efforts are needed to reduce urban-rural disparities and
inequities associated with poverty; to dramatically increase coverage in countries in sub-Saharan
Africa and Oceania; to promote global monitoring of drinking water quality; to bring sanitation on
track; and to look beyond the MDGs target towards universal coverage (UNICEF, 2012).
The Government of Indonesian (GoI) has made various efforts to improve access to clean
water services to the community, with a minimum of 68.8 percent of total population by 2015 as
targeted in the MDGs. However, potable water services in Indonesia still have a lot to catch up. Water
supply problems are not only in Indonesia, but also in many developing countries. According to
Montgomery (2007) in many developing countries, a lack of financial resources and a low
prioritization of water and sanitation constrain both of maintenance and expansion of services. In
addition, lack of accountability, corruption, and inefficient management all plague efforts to improve
water and sanitation. The lack of water quality standards and the difficulty in enforcing standards also
limit the ability to improve health outcomes. Even countries where such standards exist frequently
lack the personnel, monitoring equipment, and political will to ensure that quality and health
guidelines are enforced. Towards the end of the limit of achievement of MDGs targets, it becomes
attractive for explore the progress of drinking water development in Indonesia.
Various researches and papers of water services in Indonesia are already been done, including
water resources management strategies (Haryani, 2007), or allocation of risk in the privatization of the
water sector (Wibowo, 2009). Complements the previous studies of Indonesian government policies
in the water sector (Azdan, 2011 and Syaukat, 2011), this paper aims to elaborate the governments
support and financial facilities, and provide recommendations necessary to achieve the MDGs target.

2. Water Supply Sector in Indonesia

The GoI classifies water sources as either improved or unimproved, which are equivalent to safe and
not-safe drinking water measurement of progress toward the MDGs target. Access to safe water is
measured by the number of people who can obtain an adequate amount of water for drinking and
essential household activities on a continuing basis. There is no single test to determine sustainable,
but access is measured in numbers of people. Table 1 describe that as of 2011, clean water service
for community is still far below the MDGs target.


Table 1. Condition and Target Drinking Water Supply in Indonesia
2009 2011 Target 2015
Proportion of the population of
protected drinking water source
(secure access)
National : 47,71%
Urban : 49,82%
Rural : 45,72%
National : 55,04%
Urban : 52,16%
Rural : 57,87%
National : 68,87%
Urban : 78,19%
Rural : 61,60%
Total coverage of pipelined
drinking water pipeline
National : 25,56%
Urban : 43,96%
Rural : 11,54%
National : 27,05%
Urban : 41,88%
Rural : 13,94%
National : 41,03%
Urban : 68,32%
Rural : 19,76%
Source: Directorate General Cite Kara (DGCK), Ministry of Public Works

Policy in Indonesia water supply development system requires that drinking water needs in
accordance Minimum Service Standards is the responsibility of the Government of Regency/City.
Central Government responsible to provide technical assistance, facilitates raw water needs, services
for low-income people, as well as new locations and prone to water. Implementation of water supply
itself can be done by state-owned enterprises (BUMN) or local-government owned enterprises
(BUMD) that are established specifically for the development of water supply. Private enterprises,
cooperatives and communities also can participate in the water supply service if state-owned
enterprises or local-government owned enterprises unable to meet the quality and quantity of services
to the community in the region.
As of the end of 2010, the number of water service provider entities / piped drinking water in
Indonesia amounted to 402 entities, which consists of 382 by local operators, known as PDAM
(Regional Water Company), 10 entities under the Public Works Department, and 10 private
companies . The whole entity spread in 83 cities and 319 districts in Indonesia (PERPAMSI, 2010).
As a local-government owned enterprises, PDAM cannot be equated with a private company,
although its objectives are equally seeking profits. Operational legal basis of PDAM still refer to the
Government Law 5/1962, which in practice is still highly dependent on the policy of regional leaders
as shareholders so it is prone to political intervention. PERPAMSI (2010) has mapped the problem
PDAM which includes (i) the general issues and regulations (number of agencies dealing with water
companies, among others, the Ministry of Public Works, Ministry of Finance, Ministry of Domestic
Affairs), (ii) management problems (lack of principles of good corporate governance and high Non
Revenue Water / NRW), (iii) financial problems (determination of tariff based on political
considerations, a huge debt burden), and (iv) technical issues (availability of raw water)

3. Policy, Progress and Bottlenecks

In 2009 and 2010, the GoI implemented a series reforms intended to focus local government owners
on their responsibility to provide convenient and affordable piped water service to all eligible citizens.
The reforms included a program to reschedule massive debt owned by the water utilities (Perusahaan
Daerah Air Minum/PDAM) to the Ministry of Finance and to turn them into cost-recovering
enterprises. Another reform provided partial subsidies for house connections for the lowest income
groups in urban centres.
Directorate General Cite Kara (DGCK), Ministry of Public Works has made Indonesia Water
Investment Roadmap that quantifies the production capacities, kilometres of pipe, and house
connection required to reach MDGs targets in urban and rural areas by the end of 2014. In general, the
roadmap for water supply in Indonesia in achieving the MDGs targets to consider both institutional
concerns and funding concerns (see Figure-1).

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Source: Ministry of Public Works, 2012
Figure 1. Organization Roadmap for Indonesia Water Supply


DGCK-Ministry of Public Works estimates total fund needed for supporting water supply
system development to reach the MDGs target until year of 2014 amounts to Rp65.27 trillion, sourced
from State Budget (Rp31.63 trillion), Specific Allocation Fund (DAK - Rp6 trillion), and Local
Budget/PDAM/Banking/PPP scheme (Rp27.64 trillion). Ministry of Finance have provide a policy
package to accelerate the water supply system development which funded by banking sector and PPP
scheme.

3.1. Government Support and Guarantee for Water Supply Development under Public Private
Partnership (PPP) Scheme

GoI encourages the implementation of PPP in infrastructure development, including the provision of
clean water through the President of Regulation 67/2005. Infrastructure projects undertaken by these
regulations may be given facilities of guarantees and support from the government. The government
support is given, among others, financial support in the form of cash for the project economically
viable but not financially unviable through the Viability Gap Fund (VGF).
Government support is also given in the form of Project Development Facility (PDF), which
is to help support the project for proper preparation offered to investors in the development of
infrastructure with PPP scheme. Project preparation is one of the problem that arise in the
development of infrastructure projects. The problems usually came from the Government Contracting
Agencies (GCAs) who set up the project preparation that do not meet the expected quality. To solve
this problem, GoI give support in terms of PDF that is used to ensure the quality of project
preparation. Funds used for the preparation of these projects came from the state budget.
In addition to the form of government support, the government also provides facilities such as
government guarantee on water projects with PPP scheme. Responding the political risks in
infrastructure investments, GoI established a State Owend Enterprise namely PT Penjaminan
Infrastruktur Indonesia (Persero) / The Indonesian Infrastructure Guarantee Fund (IIGF) on December
2009. Until 2011 the GoI has invested Rp2.5 Trillion in IIGF. IIGF was established for the following
purposed: (i) to improve the creditworthiness of the PPP infrastructure projects by giving guarantees
against infrastructure risks; (ii) to improve the governance and the transparency of the guarantee
process to the infrastructure PPP Projects related to the government actions or inactions.; (iii) to
facilitate deal flow for Contracting Agencies (ministries, SOEs, local government) by providing
guarantees to well-structured PPP projects; (iv) to ring-fence government contingent liability and
minimize sudden shock to government budget.
(http://iigfweb.com/Website/AboutIIGF.aspx?rowid=11).
As of the end of 2012, there have been three drinking water projects have been built using the
PPP scheme based on Presidential Regulation 67/2005, which is Tangerang Regency Drinking Water
Project, Umbulan Water Supply Project, and Bandar Lampung Water Supply Project. Tangerang
Regency Drinking Water Project is the first PPP project in the field of drinking water, without using
the facilities of government support and guarantees. This project is collaboration between the
government of Tangerang District and PT Aetra Air Tangerang with a concession period of 25 years,
starting in 2009. This project has a water capacity of 900 l/sec with the projected number of customers
as much as 70.700 domestic customers and 376 industrial customers.
Two other water projects which is Umbulan Water Supply Project at Bandar Lampung and
East Java Water Project are still in the preparation stage of the project. Umbulan Project has a water
capacity of 4000 l / s, with a target of as many as 260,000 service connections. Preparation of the
project carried out by PT SMI, based on the assignment of the Minister of Finance through Finance
Minister Decree 126/MK.01/2011. Whereas for Bandar Lampung Project, it is conducted by the
technical assistance from the World Bank, ADB and Singapore Cooperation Enterprise. The project is
planned to be divided into two PPP projects which is for the bulk water transmission and for
distribution, and planned to be able to serve 42,000 connections.
Tangerang Regency Drinking Water Project is one of the PPP success story. Without
government support and guarantee, government of Tangerang District had successfully attracted
investors to build drinking water supply project with investors full equity. Investor feels secured by
the local government's commitment to provide full support of the regional politics and business
permits, and also support the community in their business operations. On the other hand, Umbulan
project is one example of a less successful PPP projects. This project has been initiated since 1988,
and still not operates until now. One of the main problems is the local government commitment and
political interest that made this project not finished yet.

3.2. PDAM Debt Restructuring Program

Most of PDAM in Indonesia has huge debt overdue, which is derived from the subsidiary loan
agreement, loan of Investment Funds Accounts (Rekening Dana Investasi/RDI), and loan of Regional
Development Account (Rekening Pembangunan Daerah/RPD) given in the past. With the status of
the debt, PDAMs solvability is not possible to conduct commercial loans from banks. Therefore, the
GoI conduct PDAM debt restructuring program by Ministry of Finance Regulation 120/2008 through
a mechanism of Debt Swap to Investment.
There are 175 PDAM still have outstanding debt, but only 123 PDAM have filed a debt
restructuring requirements, while the rest did not intended to do so. As of the end of 2010 only 15
PDAM that application debt restructuring has been approved by the Ministry of Finance. GoI have
decide the deadline for restructuring program is until July 2013. After that deadline, the PDAM not
submitted to the debt restructuring program will be followed up to the State Receivables Affairs
Committee (Panitia Urusan Piutang Negara/PUPN).

3.3. Guarantees and Interest Subsidy for Bank Loans by PDAMs


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To support the achievement of 10 million water supply connections target within the MDGs
framework, based on Presidential Regulation 29/2009 the GoI provides facilities for PDAM that make
loans through the banking system in forms of guarantees and interest subsidies. Under this regulation
the central government guarantees to repay 70% PDAMs loans from banks and another 30% is
guaranteed by corresponding local government. Central government also provide maximum interest
subsidy of 5% above the BI rate, with allocation of Rp4.29 billion in 2012 state budget. Banks'
commitment to this program reaches Rp4.6 trillion, with participating banks consists of BRI, BNI,
Bank Jabar Banten, Bank Mandiri, Bank Kalsel, Bank Jateng, BPD Bali, and Bank Kaltim.
Some of the requirements for PDAM to utilize this facility are a healthy status and a tariff
structure that achieve full cost recovery (FCR). On year 2010, from total 341 PDAM, only 142
PDAM with the healthy status, but not all are eligible for FCR tariff, and among them only 74 PDAM
who are interested to utilize this facility. As of the end of 2012, there are only 5 PDAM that have
received approval of guarantees and interest subsidy from GoI, with total loans amounting to Rp137.
2 billion or less than 3% of the total loans available from banking sector commitment. There are 65
PDAM whose application still in the process, and 4 PDAM withdrew their application.
Presidential Regulation 29/2009 regulates that this facility is only valid until end of 2014,
however it looks like its utilization is not as well as expected. DGCK have identified several issues
related to this facility, which are: the unfinished PDAMs debt restructuring program, non-FCR tariff,
lack of commitment by local government to accelerate development of water supply, and the process
of applying facility for guarantees and interest subsidy is bureaucratic since it involves three stages
and managed by three different government units.

4. Conclusions and Recommendations

The development of clean/drinking water supply in Indonesia is still meet many obstacles that may
disturb the MDGs target achievement. The obstacles come from intern PDAM as well as from extern
factor, such as local government support and commitment. The regulation for PDAM still rely on
Government Law made more than fifty years ago, that is need to reform so it can made PDAM to be
more governance in doing their business. The obstacles from intern factor such as conflict of interest
from management, the massive NRW, and lack of qualified human resources are expected to be
reduced if the regulation allows PDAM can be managed as professional as of Stated Owned
Enterprise.
There is strong indication that an institutional problems still exist in Indonesias water supply
management. As a Local-government Owned Enterprise, PDAM responsible to the local authorities
which responsible to Ministry of Domestic Affairs. But in the business practice, PDAM is also have
close relation with Ministry of Public Works as well as Ministry of Finance. Lack of coordination
between these institutions and unclear segregation of duties are also have a contribution on most
PDAMs bad performance. One of the reasons why the facilities served by GoI to accelerate the
clean/drinking water supply in Indonesia are not well-utilized is also because of this institutional
problems. Some PDAM could not utilize the government support and interest subsidy, because they
cant have a support letter from local authority and parlement (DPRD) as requirements requested by
Ministry of Finance. Good coordination between Ministry of Domestic Affairs and Ministry of
Finance supposed to overcome this problem, because local authority (Governor/Major) will not have
another objection to give their support to PDAM.
Beside of regulation reform, it also takes a good coordination as well as strong commitment
and political will from government institutions, local authorities, and also local parlement and
community to accelerate the development of water supply in Indonesia. We have the all the resources
needed. It only needs more hardwork and good will to give clean water for better society.


References

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