Water privatisation in Jakarta began when the British water company Thames Water entered into an agreement with the son of then-President Suharto in 1993 to obtain a water concession. Under the influence of the French water company Suez, however, the government decided to split the city's service area between the two companies. The government awarded Thames Water and Suez each a concession for one half of the city without competitive bidding. The contracts foresaw water charge increases that would allow the companies to earn a comfortable 22 percent rate of return. However, only two months after the contracts were signed, the Indonesian rupiah massively lost in value due to the East Asian financial crisis, and President Suharto was toppled. The concessions survived, but the government imposed a tariff freeze and the contracts had to be renegotiated to reduce their targets. In 2006 Suez sold half and Thames Water all its shares to Indonesian investors.
The main targets of the concession were to increase service coverage from an initial 46 percent and to reduce water losses from 61 percent. The original target of the concessions was to reach 75 percent service coverage in 2008 and 100 percent at the end of the concession. They also aimed to reduce water losses to 25 percent by 2008 and 20 percent by the end of the concession. These targets were substantially loosened during the renegotiations: The new 2008 targets were 68 percent for service coverage and 42 percent for water losses. In 2008 service coverage reached only 64 percent and water losses were reduced to only 50 percent. During the same period, water tariffs increased threefold. This increase was partly due to increases in the cost of electricity and bulk water purchases which are passed through by the private companies to the customers.
On 24 March 2015 the Central Jakarta District Court ruled the privatisation of Jakarta's water was illegal and ordered the return of the water system to public control. The court noted that the private operators were "negligent in fulfilling the human right to water for Jakarta's residents." The private operators won an appeal in the Jakarta High Court. In October 2017, the Indonesian Supreme Court overturned the appeal and confirmed the District Court Ruling that the privatization of Jakarta's water was an illegal act.
Background.
To understand the context of water privatisation in Jakarta, it is useful to know the water use pattern of residents, in particular of the poor, the particular financial mechanism of the concessions in Jakarta, the various types of water resources on which the city relies, and about other water-related challenges that are not directly related to privatisation such as floods, groundwater overexploitation and land subsidence.
Water and the poor.
According to a household survey concerning water use that was carried out in 2005 among 110 poor households in various neighbourhoods, poor households typically rely on a variety of water sources, including foremost network water, vended water and groundwater. Network water and groundwater are usually bought from other households that have a connection or a well, or from public hydrants that are operated by private vendors. Use of different water sources varies over time depending on changes in quality, availability and pressure. Some households also collect rainwater. According to the survey, vendor water was 10 to 32 times more expensive than piped water and 43 percent of surveyed households spent more than 5 percent of their income for water.
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 that were unaffordable for most of them. While wealthier residents use suction pumps and storage tanks to improve supply, poorer residents suffer more from low pressure and intermittent supply. Water 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 Rupiahs (US$1.66) per month and family. Bottled water was also frequently bought at a cost of up to 85,000 Rupiahs (US$9.44) 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. According to the Jakarta Environmental Management Body 90 percent of groundwater was contaminated by metal, nitrate and e-coli in 2011. Boiling of water is frequent. Water from the public network, including at public hydrants, is sometimes only available for several hours per day and not always of good quality.
Financial arrangements and the concessions.
Under a concession contract, a private company operates, maintains and expands infrastructure owned by the government for a given period which is usually 20 to 30 years. The private operator is in charge of financing all the investments and collects tariff revenues from the customers on behalf of the government. In exchange for its services it is allowed to earn a rate of return, which is usually derived from the tariff revenues that are usually passed on to the private operator. However, the Jakarta concessions are based on an unusual financial arrangement. It consists of "water tariffs" collected by the private operators on behalf of the provincial government of Jakarta, which are separate from "water charges" paid by the government to the private operators. The original idea was that tariffs billed to customers would be higher than charges paid to the private operators. The resulting surplus would have allowed the government to pay back the debt owed to the central government resulting from international loans. These loans had been incurred to build up the city's water infrastructure in previous years, totalling a staggering 1.6 trillion Rupiahs (USD 400 million at the pre-crisis exchange rate). The charge to the private operators is a fixed amount of Rupiahs per m3, independently of whether the water users are in a poor or wealthy category. It was set in such a way that the private companies would earn a rate of return of 22 percent. This charging system was designed to provide an incentive to private operators to connect the poor despite their low revenue potential. However, today the authorities question the usefulness of this system since it creates a shortfall for the public sector.
Water tariffs. Tariffs in Jakarta are differentiated between seven customer categories, with customers in the highest category paying 14 times more than those in the lowest category:
Thus 6% of the wealthier customers, using a much larger share of the total volume of water sold, subsidize 60% of the water users, using a much smaller share of the water sold, who are poor. In 2010 customers in Category IVa paid 9,880 Rupiahs (USD 1.00) per m3, while mostly poor customers in Category II paid only 1,050 Rupiahs (USD 0,11) per m3. In 2006 the average water tariff in 2006 was about 6,000 Rupiahs (USD 0.62). For comparison, the water charge was 7,020 Rupiahs (USD 0.73) in 2007.
Deficit between water tariffs and water charges. There are two problems with this charging system: First, the water charge is indexed to inflation and is supposed to be automatically increased every six months, while water tariff increases have to be approved by the City Council. In the aftermath of the East Asian Crisis, the City Council froze the water tariff, thus creating a deficit for the government-owned Asset Holding Company "Perusahaan Daerah Air Minum Jakarta Raya" (PAM Jaya) as early as the second half of 1998. Second, the more poor people were connected the lower the average tariff collected would become because of the tariff structure. 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 poor residential customers. The more poor people are connected by the private operators, the greater the deficit of the public holding company would become, since for each new poor customer it had to pay a charge to the private companies that was higher than the tariff paid by the customer. 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. Indeed, between 1998 and 2004 only 25% of TPJ's new connections were in the two poorest categories, while 60% of existing customers in 2003 were in these categories. As a result of these factors, PAM Jaya has not fully paid the charges to the operators and has accumulated arrears to them. These arrears could reach Rupiahs 18.2 trillion (1.9bn USD) until the end of the contracts in 2022, if the water tariff remains frozen from 2007 until 2022.
Financing. In 1998 Palyja secured USD 61 million in loans from the European Investment Bank and the Singapore-based Calyon Merchant Bank Asia. To repay these foreign-currency loans, the company sought local-currency funding. They issued a Rupiahs 650 billion bond on the Indonesian stock market in 2005. In 2007 the Asian Development Bank approved a Rupiahs 455 billion loan to Palyja. ADB did not require a government guarantee for its loan, which is a testimony to the creditworthiness of Palyja. The loan has been criticised for having been based on "careless assumptions", assuming unrealistic projections for future water sales. In 2008 Aetra followed the example of Palyja and also issued corporate bonds on the Indonesian stock market.
Water resources.
Flooding. Flooding is a major problem affecting Jakarta. For example, the 2007 flood inundated more than 70 percent of the city and sent about 450,000 fleeing their homes. However, flood management is the responsibility of the government, not of the private water companies.
Groundwater over-exploitation and land subsidence. 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 the Sarinah bridge in 1978. Land subsidence is also caused by the weight of increasingly high buildings. It varies by neighbourhoods. 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 57 cm, from 2.03m to 1.46m. In West Jakarta, East Jakarta and South Jakarta the decline was 2, 11 and 28 cm only respectively. However, the private companies do not extract groundwater, but purchase bulk surface water from far outside the city limits.
Surface water used by the utilities. The private companies mostly buy raw water at a relatively low price from "Perum Jasa Tirta II", a state-owned company that operates the West Tarum Canal system. The system provides 80 percent of the raw water supply for Jakarta. Its water comes from Jatiluhur reservoir on the Citarum River 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. The current water sources are insufficient to supply the growing city with its water needs and thus new water supply projects are being planned.
Aetra gets its entire raw water from the West Tarum Canal, while Palyja complements low-price raw water from the West Tarum Canal by buying bulk treated water at higher prices from the Cisadane Treatment Plant owned by Tangerang District Water Works Enterprise 30 km southwest of Jakarta. Palyja also obtains water from the polluted Kali Krukut River in South Jakarta after passing through filtration wells and after treating it. Furthermore, in times of scarcity, water from the heavily polluted Ciliwung River is used for backup supply.
History.
Prelude (1993-1997).
In 1993 the British water company Thames Water 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 Lyonnaise des Eaux, now Suez Environnement, which had been active in Indonesia before,