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Down to Earth IFIs Factsheet Series

No 28, March 2003: Water Privatisation

IFIs in Indonesia

This series of monthly factsheets on International Financial Institutions (IFIs) will include information on the World Bank Group, the International Monetary Fund (IMF) and the Asian Development Bank (ADB), focussing on their involvement in Indonesia.

Water Privatisation

According to the UN declaration of November 2002, access to clean water is a fundamental human right. Therefore the 145 countries that have signed this international agreement, including Indonesia, should guarantee every citizen access to clean water.

In practice, around 1 billion of the world's inhabitants do not have access to clean water, 2 billion do not have adequate sanitation, and every year 3 million people die of water-borne diseases. During the Stockholm Water Symposium in August 2000, which discussed the world water crisis, there was concern that by 2025 two-thirds of the world's population would suffer from a shortage of water.

In response to this water crisis, the World Bank formulated a water privatisation policy which was included in a paper entitled "Improving Water Resource Management" issued in 1992. This paper argued for a pricing policy as an incentive for consumers to be more efficient in their water use. The price paid for water by the public must cover the operational costs of the water company so that the government no longer has to provide subsidies.

NGO concerns centre on the fact that privatisation - which, in effect, means treating water as a commodity - together with the commercialisation of water, will result in ever-higher water costs for the poor. How can the principles of privatisation be in accordance with increased access to water resources for the poor?

Water privatisation in Indonesia

It is common knowledge that in Indonesia there are several significant problems with water management, including:

These problems originate from management problems within the Municipal Waterworks (PDAM) and other government institutions concerned with water management. The management problems include: corruption, differences in priorities between institutions, and lack of funds. On one hand, the Indonesian government does not have sufficient subsidy funds to improve water sector management. On the other, the government institutions themselves are inefficient. The Team Leader of WASPOLA, Richard Hopkins, has stressed the need for private sector involvement in water management given that the government lacks sufficient funds.

Based on this, the World Bank, Asian Development Bank (ADB) and the Indonesian government agreed to instigate institutional and legal changes in the water sector. As a result, Law No. 11/1974 concerning Water Resources and associated laws and regulations must be amended to accommodate the following changes i.e.: (1) reduce the role of the central government to a purely regulatory role; (2) improve co-operation between public and private sector at regional and local levels; (3) apportion authority for water resource management to the local and regional levels, i.e. provincial, district and local; (4) develop public consultation and participation of other stakeholders by establishing an institution capable of facilitating dialogue among stakeholders; (5) develop participatory irrigation system management that puts water management in the hands of the community/water users groups.

With financial and technical support from the World Bank and the ADB, the Indonesian government formulated the restructuring of the water sector to provide for decentralised water management and private sector involvement, particularly in urban areas, through the approval of the Water Resources Sector Adjustment loan (WATSAL). This restructuring should be seen as one of the conditions of the World Bank and IMF's Structural Adjustment Loan to address the economic crisis that began in 1997.

The US $300 million WATSAL loan was authorised by the Executive Director of the World Bank on the 18th May 1999. WATSAL was established to provide assistance to the Indonesian government to support reform in the water and irrigation sector through institutional strengthening and improvement of the regulatory framework for river basin management, reduction in water pollution, and management of water resources and irrigation systems.

Development of WATSAL in Indonesia
The World Bank considers Indonesia to have been slow to fulfil the WATSAL conditions. In fact, one of the funding tranches has been postponed due to the government's inability to (1) formulate a new water resource law; (2) amend existing laws; (3) produce guidelines and framework of governance reform for water management. This is not only because of the political situation in Indonesia but also has been made more difficult by resistance from the bureaucracy who do not want to give up their authority over this strategic resource.

On the government side, a series of dialogues concerned with institutional restructuring within the water sector began in 1997. In dialogues organised by Bappenas (National Planning Board), the government agreed to establish a number of water management institutions to support water sector reform, as follows:

The fundamental principle of the restructuring is water privatisation. The water sectors to be privatised include hydro-power, irrigation and sanitation. Thus, water privatisation will encompass a wide range of both urban and rural sectors, including domestic, industrial and agricultural.

Development of the Draft Law on Water Resources
Legal reform in the water sector includes the revision of the Draft Law on Water Resources. The revision has also been a slow process although this delay could be a blessing in disguise for Indonesia. The December 2002 target for the drafting team to submit the draft law to every Parliamentary Committee for discussion was not met. The draft law is still with the Parliament (DPR) and has not yet become law. There is a tendency within the DPR itself specifically 2 parties, PKB and PDI-P to reject any article in the law which would require farmers to pay for irrigation water.

In Article 10, section 4 of the Draft Law on Water Resources, the water resource management model is defined as one which involves the public in the widest sense, as well as the business world. Water resource management as described here is the fulfilment of the basic need for clean water for household use, for agriculture, industry, mining and other community-related needs. This article stresses the greatest possible opportunity for participation both for the private sector as well as for the public at large. Private sector participation in this context means that the private sector can build, operate and manage infrastructure and distribution of water resources, not only in cities and towns but also in rural areas.

Article 46, on water resource utilisation rights again emphasises private sector participation. These rights, as well as being given to state-owned corporations (both national and local government owned BUMN/BUMD), can also be used by other corporations, by individuals, or through co-operation between corporations, based on water exploitation licences issued by the provincial or district/municipal government.

Another important point in the draft law concerns Article 41, section 1, which requires farmers' water user groups to gain permission from the authorising official for rights to use irrigation resources, in the same way that permission is given to holders of exploitation rights (Article 41, section 2). This licensing requirement opens up the possibility for additional charges to be made either through official taxes and/or through unofficial levies. Based on research by the Indonesian NGO Akatiga, licensing systems are a source of unofficial levies which result in high costs to those requesting licences and the greatest impact is on the disadvantaged. Around 7.1 million hectares of agricultural land is under irrigation.

The role of the government is to monitor the quality of service provided by the state-owned corporations, private companies and individuals who hold water resource management rights (Article 48, Draft Law on Water Resources).

NGOs and farmers have reacted strongly to the draft law which they consider to be a burden on farmers who use water resources. Nugroho, who represents FIELD (Farmers' Initiative for Ecological Livelihoods and Democracy), stressed that this new draft law reflects the government's desire to legalise an unsubsidised tariff system which will mean that each farmer will have to pay for every irrigation infrastructure development.

Development of Water Privatisation
While institutional reform has been slow and there is legal uncertainty in the water sector, at the same time the actual privatisation of water has been underway in Indonesia, particularly the privatisation of municipal waterworks (PDAM):

Until now, the water privatisation plan has been focussed on sanitation and provision of clean water in urban areas. The involvement of the private sector has been to provide infrastructure, and manage water distribution and collection of water use levies from the consumer. The focus on urban areas has been due to the low investment required in water distribution infrastructure, as well as the consumers' ability to pay. Water distribution infrastructure in urban areas is already relatively well developed. In rural areas, however, water management would need relatively high investment in infrastructure (since up till now the infrastructure remains poor) and there is also the issue of farmers' use of water for irrigation.

There is also still debate within local governments as to whether privatisation is actually necessary. The plan to privatise PDAM in Bandung, West Java, did not progress smoothly because not all stakeholders agreed with the privatisation plan. The provincial government wished to take control of the management of basic water resources which it viewed as a marketable commodity. PDAM Bandung itself rejected privatisation because it would be the partner company that would derive the greatest benefit.

Failure of Privatisation
Research by the Public Services International's Research Unit, University of Greenwich (London) revealed that corruption has been an issue in water privatisation by multinational companies in developing countries. Private water management companies experienced financial losses and, importantly, "failed to serve the poor, or even exploited them" (as stated by J.F. Talbot, CEO of SAUR International, the world's fourth largest multi-national company, as of January 2002).

Privatisation of water has already been carried out in various parts of the world, including Argentina, Columbia, Bolivia, Mexico, Bangladesh, Indonesia, Nepal, Pakistan, the Philippines, Sri Lanka, Ivory Coast, Madagascar, Morocco, Nigeria, Senegal, Tunisia and Hungary. Research in Bolivia, Pakistan and Argentina indicated the same thing, i.e. price increases and failure to serve the poor. Following water privatisation in Cochabamba, Bolivia, the cost of water increased approximately 300%, around 25% of the total income of the poor.

In Indonesia itself, privatisation has already caused an increase in the price of water. Since being managed jointly by Thames Water International UK and Suez-Lyonaisse from France, PD PAM Jaya has experienced two price increases in 1998 (20%) and 2001 (35%). Unofficial sources state that in April 2003 there will be a further increase of 40%. Governor Sutiyoso himself has said that these increases are needed in order to cover the company's costs.

In addition, the multinational companies which control 70% of the global water business, Suez-Lyonaisse and Vivendi from France, have been accused of anti-competitive practices. In fact, Suez-Lyonaisse has been accused of bribery and corruption.

Several parties, particularly NGOs and farmers' associations in Indonesia, oppose water privatisation because of concerns over price increases which will in effect reduce poor people's access to clean water and sanitation. Nila Ardhianie, Co-ordinator of Advokasi Koalisi Rakyat untuk Hak atas Air (The People's Advocacy Coalition for Water Rights), for example, has said that, based on the experience of South Africa, the Indonesian government's moves towards water privatisation will result in increasing water prices, as well as cause public unrest.

cyber media
The Jakarta Post, 5 February, 14 and 15 March 2003
INFID paper: "The Reform of water sources in Indonesia: heading for privatisation?".
Paper can be obtained from or
UN CESCR general comment no. 15 on rights to water
PSI (2002) Water Privatisation Corruption and Exploitation. Public Services International

This IFI factsheet is published by Down to Earth, the International Campaign for Ecological Justice in Indonesia.

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