From Asia Times http://www.atimes.com/atimes/Southeast_Asia/II22Ae03.html

Indonesia losing its thirst for privatization
By Bill Guerin

JAKARTA - The botched privatization of an Indonesian water utility represents the latest cautionary tale debunking market fundamentalist dogma that private management and pricing are in the interests of the public good. The failed effort threatens to derail the country's broad privatization program, as nationalistic politicians start to second-guess what they view as a Western-donor-driven economic-reform agenda.

The World Bank and International Monetary Fund (IMF) leaned heavily on Indonesia to privatize state enterprises and encourage more foreign investment as the best way to deal with its 1997-98 financial collapse. Key among the areas prescribed for market reform was the inefficient water sector.

Yet ever since Jakarta's water supply was formally privatized in 1997, prices have risen astronomically while access has dwindled for poor residents. Nearly half of Jakarta's residents now lack a piped water connection, more than the entire urban population of Brazil's Rio de Janeiro, a World Bank sanitation specialist recently noted.

Two major foreign-owned tap-water operators, which for the past decade have enjoyed monopoly power over the Indonesian capital's water supply, recently divested their interests after arguably contributing to, rather than alleviating, the city's water crisis.

This year, RWE Thames Water sold its 95% shareholding in its local joint-venture company PT Thames PAM Jaya (TPJ) to Singapore-based Aquatico Pte for a cool US$15 million. This followed a similar sale last year by France's Suez Environment of nearly half of its 95% shareholding in PT Pam Lyonnaise Jaya (Palyja), for an undisclosed sum to PT Astratel Nusantara (Astratel), a subsidiary of Indonesia's giant automotive company Astra International, and Citigroup Financial Products.

Jakarta's water-privatization scheme dates back to the tenure of president Suharto, who took the advice of the World Bank and the IMF that foreign investment and private management of public utilities was crucial for the success of his government's market-reform program.

In June 1997, Jakarta's publicly administered water system was contracted out to foreign joint-venture companies, namely PT Pam Lyonnaise Jaya (Palyja) with the French Suez Lyonnaise des Eaux and PT Thames PAM Jaya (TPJ) with what was then Thames Water Overseas, the United Kingdom's biggest regional water company, which was last year acquired by the UK-based Macquarie Bank.

Critics note that there was no public debate or even a public bid for the 25-year concession, which included responsibility for the water supply, treatment, delivery, metering and billing.

According to a detailed report, "Water and Politics in the Fall of Suharto", published by the International Consortium of Investigative Journalists (ICIJ) in February 2003, PD PAM Jaya, the city-owned tap-water utility, handed over its property assets to both foreign companies and in effect forced businesses and householders to stop using private wells and buy water from the newly formed private monopolies. In return, the foreign stakeholders agreed to take over Palyja's US$231 million debts, which as part of the deal were to be repaid from future revenues.

In 1998, consumer water prices were increased by 20%, and they jumped another 35% in 2001. These stiff demands were made, according to the companies, to finance improvements to the system. In April 2003, city council leaders approved another 40% rate hike after both companies threatened to pull out of their agreement with the city's administration and Palyja.

Thames and Suez had offered to upgrade and expand the capital's water system and distribution infrastructure, but to date little has changed in the system built by the Dutch in 1928. They failed to meet projections agreed in the original contract to invest the rupiah equivalent of some $318 million. By 2001, investment had been at most the equivalent of only $100 million, according to the ICIJ report. City officials and legislators in Jakarta's own regional parliament finally forced the two foreign companies into a renegotiated contract in October 2001.

The foreigners replaced the government-linked companies with two other local minority shareholders and agreed to the establishment of a regulatory independent water body that would recommend new water rates and monitor the waterworks.

Yet a decade after privatizing the city's water supply, the result has been skyrocketing prices and a barely improved delivery infrastructure. And indications are that the situation is set to get worse before it gets better.

Draining the well
The World Bank warned as early as 1994 that over-reliance on underground water to serve Jakarta's industrial and domestic needs was not sustainable because water was being drawn from aquifers more quickly than it was being replenished. Since then, massive real-estate developments surrounding Jakarta have replaced thousands of hectares of greenbelt areas, including previously irrigated rice paddies, small lakes, and other natural habitats, with many of them built on water-catchment areas.

Indonesia's capital stretches 661 square kilometers across alluvial lowland on the north coast of West Java and draws on no fewer than 13 rivers. More than 2,000 millimeters of rain falls on the capital every year and 78 city areas are prone to flooding. Yet most of this water stays above ground and does not penetrate as



far as the groundwater supply because of a lack of percolation pits to help funnel it deep into the Artesian wells across the city.

With the privatization scheme's failure, government officials are now scrambling for stopgap solutions. The current administration has pressured the industrial and commercial sectors to use water more efficiently by recycling groundwater.

The two main water operators process an annual 295 million cubic meters of water against the city's needs of about 547.5 million cubic meters, sourced mainly from Citarum, the largest water basin on the island of Java. Palyja warned last month, however, that its usual pull of 6,200 liters of raw water per second from the basin had dropped to to about 4,500 liters per second, as the water levels in the main reservoir are depleted. The conversion of vast areas of agricultural land into housing complexes and industrial estates has further contributed to the drastic fall in the number of water-catchment areas serving the city.

Yet even with proposed efficiency-enhancing schemes, Jakarta Governor-elect Fauzi Bowo has said he plans to raise the price of groundwater even more when he takes office next month. So far he has made no comment on the need to improve the efficiency of the delivery infrastructure. Yet widespread leakages, a major problem faced by the original private operators, need to be quickly addressed.

Indonesia's national charter states that water must be controlled by the state and used for the welfare of the people. That provision was sidestepped after a 1999 aid package from the World Bank, which included a $300 million conditional loan that required the government legislate for more private management in the water industry. That legislation was passed in the form of the 2004 Water Resources Act.

The act remains controversial, drawing frequent fire from environmental groups and nationalist legislators who contend that it has denied water to the poor and that only the wealthy can now afford reliable access to clean water. The Urban Poor Consortium, environmental group WALHI (Indonesian Forum for Environment) and a group of farmers filed requests for a judicial review of the act in 2004. After more than a year of deliberation, the Constitutional Court rejected the requests and ruled that the act was "constitutionally correct".

Jakarta's privatization experience is giving certain senior politicians second thoughts about the country's broad privatization drive. The total number of state-owned enterprises fell from 158 to 139 from 2002 to present, driven mainly by the sale of local banks to foreign investors. Yet most of this activity took place over the three-year period spanning 2002 to 2005.

In June 2005, Vice President Yusuf Kalla said the government would no longer "submit to privatization demands" from donor institutions in return for loans, adding that selling stakes in state enterprises was the government's "lowest priority". Yet there's still clearly a need for some form of public sector reform, with only a handful of the country's 139 state enterprises turning a profit.

Minister for State Owned Enterprises Sofyan Djalil maintains an ambitious plan to streamline his charges through mergers, the establishment holding companies and privatization through the capital market rather than from strategic sales to foreign investors. Yet his plans are reportedly now being questioned over issues of feasibility and transparency by the House of Representatives Commission on Finance.

Government planners, meanwhile, seem unconvinced Djalil will succeed judging by the 2008 draft state budget, which assumes revenues from privatization next year will fall.

Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has been in Indonesia for more than 20 years, mostly in journalism and editorial positions. He specializes in Indonesian political, business and economic analysis, and hosts a weekly television political talk show, Face to Face, broadcast on two Indonesia-based satellite channels. He can be reached at softsell@prima.net.id.


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