Thursday, 20 November 2008

PPP in the Water Supply and Sanitation Sector, Indonesia

Since 1992, local government has undertaken PPP in the water supply sector. The first BOT project was in Denpasar in 1995, followed by the water supply concession on Batam in 1996. The Jakarta water supply concession was in 1998. A series of major problems were encountered such as inadequate transparency, a poor PPP regulatory framework, which has negatively affected investor confidence.
Domestic PPP has focused on construction and short term financing, but usually not on improving operations and management, of infrastructure in residential and industrial estate, and recently for the extension of distribution systems. A few local companies are involved in concessions for water supply to industrial areas, but they do not serve nearby local communities.
There has been little interest in extending both international and domestic private sector involvement to operation and management in secondary cities because a suitable regulatory framework has not been established. Another factor limiting foreign investment is the lack of large scale to project justify entry into Indonesia’s water sector; most enterprise operations are too small to be of interest. Local investors have only just started to recognize potential business opportunities, but lack of a suitable regulatory framework, insecure revenue streams, and cost associated with regional government permits often hamper project development.
Generally, it appears that domestic PPP is more interested in bulk water systems under a BOT modality, and is reluctant to get involved in management and operations of existing systems, especially if this involves billing and revenue collection. Despite this, there are a number of areas such as improved operations under management contract where local PPP could be involved.
These conditions are likely to persist for many years; subject to an improved regulatory environment, PPP in water supply would probably particularly relate to such as smaller more manageable initiatives, involvement of local private sector enterprise in downstream activities. It is considered unlikely that the private sector would be interested in the provision of any wastewater facilities, except for local firms to operate septage collection services (this is because tariffs for domestic wastewater facilities are usuall6y set below full cost-recovery levels, contrary to what was suggested earlier in this paper).
Improved planning principles are expected to bring financial conditions to a more manageable level, and to create the potential for a viable functioning institution with emphasis on PDAMs undertaking new investments based on commitments to reform.
Future investments would be primarily based on PDAM own resources resulting from sustainable tariffs, improved cash flow, and more efficient operations. This would be complemented by (i) Regional Government (RG) equity contributions, (ii) commercial loans, and (iii) grants and loans provided by the central government. Regional cooperation of PDAM, probably including merging, would be an important aspect to achieving improved enterprise financial management, and would contribute to reduce political interference by RGs.
Source: KKPPI, Sector Review 2006

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