Investing in Water Sector: Challenges and Opportunities

Rizal Satar (Advisory Partner) and Agung Wiryawan (Advisory Director)

Jakarta Globe - 13 Feb 2014 

 

Various International policies, including the United Nations’ Economy, Social and Cultural (ECOSOC) Declaration, the International Covenant on Civil and Political Rights and The International Covenant on Economic, Social and Cultural Rights, clearly stated that access to water is a basic human rights, and it is the government’s responsibility to provide access to clean water for the people.

This issue has also reflected in the Millennium Development Goals (MDGs), with one of the objectives is for the access to a sustainably source of water by 2015 would reach about 68.8 percent of the population nationwide. 

In keeping with this, much of the recent activity in Indonesia’s water sector has been influenced by the government’s target to provide 68.87 percent of the population access to clean piped water by 2015. To meet this target, local governments and their water utilities responsible for water supply and service are working to expand the water supply network.

However, Indonesia’s watersheds are in a poor condition, resulting in the loss of a significant proportion of annual precipitation. To compound the problem, unmonitored domestic and industrial discharge of wastewater has led to the severe contamination of Indonesia’s water bodies.

Access to clean water remains low, with approximately 44 percent of households are connected to supply network and 56 percent are connected to the sewage network. Even with these figures, there is a massive disparity between urban and rural areas and piped water supply is uneven across Indonesia.

According to the WHO/UNICEF Joint Monitoring Program (JMP) for Water Supply and Sanitation, in 2011 only 33 percent of urban households had clean water piped onto the premises. The corresponding figure for rural households was just 8 percent.

The heavy indebtedness and weak operational capacities of a majority of the water utilities, or PDAMs, have resulted in the underdevelopment of the sector’s infrastructure, while the decentralization of the responsibilities for the sector has made it highly fragmented and complex.

As the consequence of the poor financial state of the PDAMs, the central government has been funding several projects. Assisted by international agencies, the government is working to develop community-based sanitation and sewage treatment projects to minimize the impact of rural households on water bodies and further, to charge community attitudes to water use and waste disposal.

The World Bank has financed the Indonesian government US$150 million for projects that will work to enhance the effectiveness of community based catchment management and local participatory irrigation management, while providing implementation support.

There are also projects funded and supervised by the Korean International Cooperation Agency in Banten, and the Japan International Cooperative Agency in Bali. In the most recent developments, PDAM Klungkung in Bali, working with the Ministry of Public Works, announced in March 2013 its intention to construct a desalination plant on the island of Nusa Ceningan.

AusAid, through Indonesia Infrastructure Initiative (IndII), is also active in providing technical assistance to a number of PDAMs in Indonesia. It includes capacity building, developing business plan and promoting good corporate governance practice in the PDAMs.

The investment in this sector is low so far. In 2012, water supply industry generated an estimated turnover of Rp 7.122 billion, compared to Rp 7.302 billion in the previous year, or down 2.47 percent. The industry’s contribution to Indonesia’s GDP is so far only 0.06 percent.

Government has initiated several water projects, such as the Samalaju Water Treatment plan in Bintulu that is managed by Malaysia’s based Hock Seng Lee and valued at US$29 million, and the development of a $120 million freshwater treatment in Tangerang City by Singapore-based Moya Asia.

Other major water projects are already in the process of tender in various areas across Indonesia, including;  Umbulan water supply PPP project in East Java; Bandar Lampung Water Supply PPP project; water treatment plant in the city of Tangerang; and Sewage Treatment Plant BOT project in Jakarta.

However, the challenges in this sector continue to trouble investors and may hamper the investment in water. In general, corruption remains a major problem and Indonesia’s excessive bureaucracy makes it a difficult place to do business. Among Asian economies, Indonesia has the longest period to start a business. Labor laws are also considered excessive.

In the water sector context, the decentralization of PDAMs, in which every region has its own policy and characteristics may create and issue. This may lead to complexities and inefficiencies as different region have different policies and conditions.  The gaps may also exist between the formulation of policies at the national level and the implementation at the local level. The certainty of the water tariffs’ adjustment/implementation also vary across the region, which will also impact the investor’s appetite. Different region may also have different physical attributes which may impact to the PDAMs operational efficiency. This includes the sufficiency of raw water supply for PDAMs to serve and to cover their service area.

The opportunities to develop the water sector are there due to apparent lack of access to water supply. However, the bankability of the projects remains a bit question. 

There should be strong regional government support for the project, as well as the support from the central government, particularly for providing a level guarantee for the project. The support from local financial institution for the industry is also critical to ensure the sustainability of the project.

There is also the need for capacity building and the change of mindset for each of the PDAMs as the counterpart for the investor. The certainty of tariff, which often drives away investor, is another requirement.  

If these factors could be taken into account, we are positive this will improve the investors’ appetite to invest in water sector.

 

Rizal Satar is Partner, and Agung Wiryawan a director, in PwC Indonesia’s Infrastructure practice.