Sandhyavitri Ari, Water Supply Operation

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34th WEDC International Conference, Addis Ababa, Ethiopia, 2009 WATER, SANITATION AND HYGIENE: SUSTAINABLE DEVELOPMENT AND MULTISECTORAL APPROACHES

Major Threats and Strategy for Sustainability of Water Supply Industry Operation (Case Study in Indonesia) Sandhyavitri, Ari, Indonesia

Various threats in the operation of water supply industry (PDAMs) in Indonesia were identified, this paper highlighted six major threats, they may include; limited scale of PDAMs service coverage; limited access to capital investment; low water tariff and poor cost recovery to pay debts and project operation; poor staff performances, high levels of unaccounted for water, and political as well as environmental risks. Strategic plans for mitigation of the threats were proposed at three levels of authority: (i) at the Central Government level; (ii) local/regional governments; and (iii) water utilities. By understanding the nature of the PDAMs threats, and better preparation of holistic strategy for managing the identified threats at various governmental levels, it is expected that sustainability of PDAMs operation might be achieved systematically. Key words: strategy, water supply, PDAMs, performances, sustainability, operation.

Overview Most of the urban municipalities in Indonesia have been supplying with taps water by 303 public water supply industries (PDAMs). For the past 10 years, the proportion of urban population served by PDAMs’ water was not significantly increased. PDAMs have supplied water for 40% of urban population (BPS, 1997; Sutjahjo, 2000, and Lanti, 2007). Therefore, there is a need to: (i) evaluate the operation performance of PDAMs; and (ii) draw strategy to alleviate the threats and ensuring sustainable operation of the industry.

Evaluation of PDAMs Operation PDAMs were initially established based on the Law number 5 year 1962. The main role of PDAMs is to supply clean water to meet urban water demand. Most of PDAMs are as local government or municipality enterprises. PDAMs have responsibility in financing, operation and management of water supply schemes. Based on the literature reviews and site investigation, it was identified seven components threatened operation and management of PDAMs in Indonesia, they are: Limited Scale of PDAMs service coverage Currently, 318 PDAMs are operating in Indonesia. Based on data provided from 303 PDAMs, 218 (72%) PDAMs served less than 10,000 customers. This market scale is considered too small to yield adequate cost recovery to sustain project operation and paying PDAMs’ debts. Table 1 PDAMs’ scale, percentage of customers and revenue generation (PDAMs’ scale is based on Decree letter no. 800.690.154 dated 5 March 1996 issued by the Public Works Department). Classification (scale) A (S = small) B (M = Medium) C (L = large) D (V = very large)

No. of connections < 10,000 10,000 to 50,000 50,000 to 100,000 > 100,000

No. of PDAMs 218 77

Percenta ge (%) 71.9 % 25.4 %

5

1.7 %

3

1.0 %

Total percentage (%)

Percenta ge of customer s

Revenue total

97.3 %

67.7 %

58.4 %

2.7 %

32.3 %

41.6 %

In 2008, it is estimated that the proportion of urban population served by PDAMs was approximately 40 million people with 110 litre consumption per day (Sandhyavitri, 2002 and Lanti, 2007). Total PDAMs 1

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service coverage may reach 6.5 million connections, dominated by the domestic sector (87%). The industrial and commercial sectors, however only constituted 6.6% of the total connections, these sectors pay much higher water tariffs. For example, in Pekanbaru City 2007, the average water tariff for house connection was Rp. 1,250 (US$ 0.14, @ US$ 1 = Rp. 9,000), and industrial sector was Rp. 3,500 (US$ 0.50). The implementation of the cross subsidy scheme between the industrial sector and domestic sector has not been adequate to cover the overall PDAMs cost expenditure. Limited Access to Project Finance The predominant UWS projects’ investment has been dependent on the government budgets and loans. It was proved that the government budget had been inadequate (Rp. 50 trillion is needed to develop new water supply scheme up to 2012, and less than 50% is allocated from the government budget) (Ministry of Economic Coordination, 2008), and that the disbursement of loans has been subject to delay (Sandhyavitri, 2002). Furthermore PDAMs have experienced difficulties in loan repayments as a result of poor cost recoveries and failures in the identification of financial risks (i.e. the impact of potentially fluctuating currency and interest rates). Once the host currency (Rupiah, Rp.) depreciates against hard currency (i.e. US$), there is little opportunity for PDAMs to pay loans as it happened in the Indonesia Economic Crisis of 1997. Hence, PDAMs seek Central Government help to clear all PDAMs debt interest (Rp. 4.5 trillion) in order to ease PDAMs’ financial deficiencies, and attract private sector finance (Tempo, 2006). Low Water Tariffs and Cost Recovery Many local governments have not adjusted water tariffs for many years, as the consequences these cause serious financial deficits for PDAMs (for example, PDAM Sintang, West Kalimantan, PDAM Pekanbaru, Riau, and PDAM Bandung, West Java). According to Chatib (1999); Sutjahjo (2000); and Sandhyavitri, (2002) the difficulties in water tariff adjustment have been mainly for political reasons, poor government awareness of "sustainability of urban water supply (UWS) financing", poor levels of PDAM service quality, and a lack of community participation in the development of the urban water industry within the country. Based on the data provided by 210 PDAMs, Table 2. Classification of PDAMs Financial Performance it was identified that 71.5% of PDAMs were Classification of Percentage Total Ratio of in the condition of “poor and very poor financial Percentage Revenue/ performance of 210 O&M financial performance” with the ratio of PDAMs costs revenue and Operation cost less than 1. Very healthy 0.5% >1 However, many PDAMs were in the 28.5% Healthy 28% financial deficits for many years, no Poor 68% <1 71.5% Very poor 3.5% immediate and significant actions have been (Source: Sandhyavitri, 2002). taken to alleviating this financial issue. Poor Staffs Performance The average ratio of PDAMs staff was 10.3 per 1,000 connections (Sutjahjo, 2000). This figure is far above the average figure of the Indonesia's neighbouring countries (for example Singapore = 2.4 and Thailand = 5.5). Within small and medium size PDAMs, this ratio is even higher (for example PDAM Pekanbaru = 11.2, PDAM Padang = 12, PDAM Rengat = 17.3). Approximately 95% of PDAMs’ staffs have relatively low educational background (i.e. primary and high schools education). Overstaffing also results in reduction in PDAMs operational efficiency performances, and increased costs per unit of production, and subsequent to lower staff salaries. Low staff salaries cause to poor staffs performance. High Unaccounted for Water (UFW) Rates PERPAMSI distinguished UFW in Jakarta City into 2 main factors; (i) physical factors including leakage and pipe bursts (26.5%), and (ii) administrative factors (13.4%). The average leakage rates of various PDAMs vary between 25% (for example: Batang, Bengkulu Utara, Lebak and Bangai Cities) and more than 50% (for example: Pekanbaru, Rengat, Bandung and Jakarta Cities). There is no adequate scheme in reducing UFW for PDAMs. Strong Government Influence in the Operation of PDAMs and environmental risks PDAMs belong to either local governments or municipalities. As the project owner, the local governments or municipalities have played a crucial role in influencing any important decisions associated with PDAM’s 2

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business operation. For example: recruitment of new staffs (which often unfit for business purposes); and political pressure delays processing of water tariff adjustments. Strategy for Sustainability of Urban Water Supply (UWS) Operation There is an urgent need to identify strategic plans for managing urban water operation threats. Action plans for mitigation of the threats was proposed at three levels of authority: (i) at the Central Government level; (ii) local/regional governments; and (iii) water utilities. At the Central Government level, the actions include: strengthening regulatory frameworks regarding UWS operation strategies and plans; adequate provision for project financing to increase water supply capacity and service coverage; capacity building; and monitoring procedures. Reducing or clearing total accumulation of PDAMs debts and financial charges (fortunately, the Central Government agreed to clear 200 PDAMs debts up to Rp. 100 billion each PDAMs, as long as PDAMs improve their management and service performance) (Westjavawater, 2004). There is also a need for relaxation of PSP regulation and facilitate transformation procedures in the operation and management of water supply from public utilities to private operators to provide fresh capital investment, and to improve the operation performance. At local government levels, various actions should be considered such as strong commitments in improvement of operation and management performance, regulating reasonable water tariffs, capacity building (i.e. commencing staff training, implementation of IT and recruitment of professionals) investigation of commercial aspects operating UWS projects in order to attract private investors, and better control and monitor of water use (e.g. establishing Water Board Authority). At Water Company (PDAMs) Levels, five steps are in need to be taken: • Optimisation of PDAMs’ Business Scale. There is a need to identify an appropriate range of PDAMs scale, based on various factors such as: (i) size of the city, geographical condition and market or potential customers; and (ii) financial, economic, and technical performances of PDAMs. Improving service performance in order to keep the existing customers, seeking new potential commercial users within the PDAMs service area, and promoting water efficiency scheme. • Identification of Various Financial Resources. Various options for project finance range from the Government budgets to private sector finance are identified. Five major options for financing water projects have often been used in Indonesia are as follow; (i) Regional development account (RDA) includes subsidies; (ii) Integrated Urban Infrastructure Development Programme (IUIDP); (iii) Public Private Community Participation (PPCP); (iv) Revenue bonds (RB); and (v) Private sector participation (PSP). Promoting PSP option and prepare pre-condition support the implementation process. Under a PSP scheme it is expected that financial risks will be totally transferred from the government to the private sector. RB is promoted as an alternative option to permit borrowing in the public capital markets in order to raise finance through issuing bonds. PPCP is also promoted as an alternative in assisting UWS finance but as a short-term solution. The remaining options (RDA and IUIDP) should be retained as complementary solutions for access to government and public financial resources. • Realistic Water Tariffs. In the risk analysis, water tariffs might be become very sensitive (as high-risk components), and significantly influence the economic parameters (i.e. the IRR and the NPV). Water tariffs, for reasons of clarity and customer awareness, should ideally cover full costs of production and supply plus some profits. Full costs may include: materials, electrical/energy and fuel, repairs, depreciation, salaries, social assurance, extra works, marketing, organisational and management, and financial costs. Currently, small numbers of local governments have approved the inclusion of full costs to achieve a realistic evaluation of tariffs (For example: PDAM Malang, 2000, PDAM Bogor, 2000 and Thames Water International, 1997). Before application water tariff adjustment however, it is suggested PDAMs to improve their efficiency and service quality. • Improvement of PDAMs’ Technical and Managerial Performances. There are a number of actions that should be taken such as: (i) commence staff training; (ii) employ professionals; (iii) reduce staff numbers; (iv) increase staff salaries, which is expected to motivate staff improving their working performance; (v) prepare adequate control measures for leakage reduction; (vi) improve billing and revenue collection rates; (vii) improve data analysis and documentation of the organisations' overall practices, activities, products and services based on IT systems; (viii) commence regular review and audit to enable effective management of PDAMs organisation. 3

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• Reduction of Political Interference and environmental risks. The reduction of political influence in the operation and management of PDAMs could be facilitated through out fundamental shift in PDAMs business organisation, from the public sector to the private operator, and separation of the roles of project owners (i.e. municipalities) and project operators (i.e. PDAMs). Reduction of environmental risks, such as reduction of water pollution risks at its source by imposing stringent environmental regulation (PDAMs approach Environmental Agency and local government together to do so). Strengthening PERPAMSI's role The Association of Indonesian Water Supply Companies (PERPAMSI) is a professional association and semi-official association under the auspices of the Ministry of Home Affairs, and other related ministries, which was established on April 8, 1972. According to Chatib, 1999, the main functions of PERPAMSI are to: (i) bridge the interests of PDAMs with the governing bodies at the central level; (ii) assist its members in improving the capacities in business management and development; and (iii) to facilitate the realisation of integrated efforts, as well as in the exchange of information on drinking water supply. Conclusion Strategic plans for mitigation of the threats were proposed at three authority levels: (i) at the Central Government level; (ii) local/regional governments; and (iii) water utilities. At the Central Government level the actions are emphasised on strengthening regulatory frameworks, providing adequate provision for project finance and human resources development, and improving monitoring procedures. At local government levels the actions may include strong government commitments to improve UWS performance and regulate reasonable water tariffs, improvement in capacity building, investigation of commercial aspects in financing and operation of WRM and UWS projects, and better control and monitoring of water use. At water companies level the actions proposed to improve UWS performance include: (i) optimisation of commercial aspects in the operation and management of PDAMs; (ii) improvement of technical and managerial performance; and (iii) reduction of political and physical geographical influences. Acknowledgement The author would like to extend thanks to Robert J. Young, Tony Merna, and Peter Harpum for their significant contributions in reading and editing this paper. References BPS, 2007 in http://www.bps.go.id/statbysector/socwel/tables.shtml Chatib, B., (1999), " Water Utility Rescue Program and the Role of Perpamsi", Journal of Air Minum, No. 85/Th. XX - July 1999, ISSN No. 0126-2785, Jakarta. Lanti, Ahmad, 2007, Review of Infrastructure Sector Regulation in Indonesia, in www.eapirf.org/files/AGM2007/NO4_EAPIRF-Lanti.pdf Ministry of Economic Coordination, 2008, Infrastructure Finance, International Symposium FSTPT, Semarang, Indonesia. Sandhyavitri, Ari, 2002, “Fundamental Elements of Sustainability in Urban Water Supply: Case Studies in Indonesia”, PhD Thesis, Manchester Centre for Civil and Construction Engineering University of Manchester Institute of Science and Technology, UMIST, UK. Sutjahjo, 2000, " Kebijakan Kemitraan Pemerintah dan Swasta dalam Penyediaan Air Minum Perkotaan", Journal of Air Minum, No. 87/Th. XXI, ISSN No. 0126-2785, Perpamsi, Jakarta. Tempo, 2006, in www.tempointeraktif.com/hg/ekbis/2006/02/02/brk,20060202-73349.html Westjavawater, 2004 in http://westjavawater.blogspot.com/2004/11 Contact details Name of Author: Sandhyavitri, Ari Address : Civil Engineering Department, Faculty of Engineering, University of Riau, Kampus Binawidya, Panam, KM12,5, Pekanbaru, Riau, Indonesia Tel: +62 761 7076556 Fax: +62 761 566821 Email: [email protected] www : http://airport.unri.ac.id 4