Jakarta’s challenges in meeting growing requirements-

The city of Jakarta in Indonesia has been hard hit by poor water management. According to the Netherlands-based Transnational Institute, only about 60 per cent of Jakarta’s population has access to piped water supply. Potable water is mainly supplied to the wealthier neighbourhoods of the city with the remaining 40 per cent of Jakarta’s urban population relying on groundwater or purchased bottled water to meet its requirements.

Water supply through the ages

Water provisioning services in the city of Jakarta were privatised by the Indonesian government in 1997. This was partly owing to dismal water supply services in the city. There was an urgent need to enhance the quality of water supplied, increase service coverage to poorer regions and plug leakages in the city’s water supply system. At the same time, various international financial institutions also insisted on privatisation of the city’s water provisioning system as a condition for extending loans to the government.

Therefore, the Indonesian government sought to collaborate with international investors to manage Jakarta’s water supply sector. Under the rules that prevailed in the country at the time, all foreign companies wishing to invest in the country were required to partner with an Indonesian company to do so. Therefore, the government entity PAM Jaya, which was the sole water utility in Jakarta until 1997, collaborated with two major international water companies to provide water to the city under public-private partnership (PPP) agreements. These companies were France-based Suez Lyonnaise des Eaux and UK-based Thames Water.

Both companies signed 25-year contracts, ending in 2022, with PAM Jaya for water supply in Jakarta. Two new water utilities – PAM Lyonnaise Jaya (PALYJA) and PT Thames PAM Jaya (Thames) – were formed under these agreements. While these utilities were responsible for the operation and maintenance of the water supply system, PAM Jaya continued to retain ownership of water supply infrastructure. The PPP agreements also clearly demarcated the jurisdictions of these new utilities. While PALYJA was to supply water to western Jakarta, Thames was responsible for providing water to the east Jakarta region. In addition, the agreements also assigned the responsibility for customer billing and maintaining customer databases to PALYJA and Thames.

Over the first five years of the contract, from 1997 to 2002, the two entities were expected to invest $318 million to improve water supply quality, increase service coverage by adding 1.5 million customers to the network, and reduce the city’s non-revenue water from 56 per cent under PAM Jaya to 35 per cent by 2003.

Besides, the payment mechanism to the private companies was not linked with their billing revenues. This was done to safeguard the companies’ revenues against the huge costs involved in expanding the water supply system, and the inclusion of mostly poor consumers under the service, which implied lower billing revenues. Therefore, instead of linking their payments to water tariffs or cost recoveries, the companies were paid a fee based on the volume of water billed. Under this mechanism, PAM Jaya paid the companies the difference between the actual value of water delivered and the water tariff charged by them to customers.

This mechanism resulted in PAM Jaya becoming heavily indebted over the years, since the value of water supply was significantly higher than the water tariff charged. To make matters worse, Indonesia was struck by the Asian financial crisis a few months after signing the contracts. The devaluation of the currency due to the crisis imposed an additional burden on PAM Jaya since it increased the cost of paying the international investors. The government utility was unable to make the payments agreed upon in the contracts. Decades later, while tariffs have been periodically increased to ease the utility’s burden, PAM Jaya continues to remain highly indebted.

The failure to pay the international investors and the government’s resistance to any further increase in already high water tariffs led the international investors to either sell their stake in the water sector or to move out entirely. In 2006, Suez Lyonnaise des Eaux, while retaining a majority share, sold 49 per cent of its stake to a local partner, PT Astratel Nusantara (30 per cent), and US-based Citigroup Financial Products, Inc. (19 per cent). This was followed by Thames Water completely exiting the Jakarta water market. PT Thames PAM Jaya was subsequently taken over by Acuatico Air Indonesia, which continues to operate as Aetra Air Jakarta (or AETRA) in the city.

Persisting problems

A decade after these structural changes were brought about, the privatisation of water supply services in Jakarta is still to benefit the city’s residents. The number of new water connections has continued to fall below the contracted targets set by the water utilities. Further, water tariff in the city is very high, making it difficult for poor consumers to pay for water connections. Despite high tariffs, the provision of and the quality of water provided are highly inadequate.

Service coverage has also not improved under privatised water provisioning. A major portion of the city’s population still relies on groundwater or water vendors to meet their potable water needs. In addition to the inconvenience that this causes to the consumers, sourcing water from such alternatives also imposes a heavy financial burden.

The lack of access to potable water, which is a basic human necessity, has given rise to a severe public backlash against privatisation of water supply in Jakarta. In March 2015, the Central Jakarta District Court came to the same conclusion and annulled the contracts of the two private water companies. Their contracts were revoked on grounds of negligence in ensuring the right to water for the city’s citizens. However, the ruling was subsequently overturned by the Jakarta High Court on grounds of legal technicalities involved in the lawsuit. PAM Jaya is now trying to renegotiate with the private companies to enhance the quality of water supply services in the city.

The way forward

It remains to be seen whether Jakarta, like several cities around the world, will reverse privatisation of water supply in the city. Whatever the final decision may be, there is much that can be done by the current water utilities to remove the bottlenecks plaguing the sector.

For instance, the water tariff structure imposed on the city needs to be reconsidered. Given that the section of citizens that do not have access to potable water belong to the poorer regions of the city, higher tariffs only discourage them from connecting to the network. Therefore, the tariff policy needs to be rationalised and provisions need to be introduced to cross-subsidise the poor.

To ensure wider coverage, connection fees should be abolished and the government should install water connections at its own expense and invest substantially in water infrastructure to ensure potable water to the city’s residents. The government also needs to introduce regulations to check groundwater use and the market for bottled water in the city. Besides, it will need to undertake initiatives to reduce the leakage and theft of water.