INDONESIA Enabling Water Utilities to Serve the Urban Poor 47526 Infrastructure Department East Asia and Pacific Region ii | Enabling Water Utilities to Serve the Urban Poor INDONESIA Enabling Water Utilities to Serve the Urban Poor Infrastructure Department East Asia and Pacific Region THE WORLD BANK OFFICE JAKARTA Jakarta Stock Exchange Building Tower II/12th Fl. Jl. Jend. Sudirman Kav. 52-53 Jakarta 12910 Tel: (6221) 5299-3000. Fax: (6221) 5299-3111. Website: www.worldbank.or.id THE WORLD BANK 1818 H Street N.W. Washington, D.C. 20433, U.S.A. Tel: (202) 458-1876. Fax: (202) 522-1557/1560. Email: feedback@worldbank.org Website: www.worldbank.org A co-publication of the World Bank East-Asia Infrastructure Department and Indonesia Country Program Printed in January 2006 Photographs used in this publication are from Jez O'Hare Photography except for photo on page 17 (World Bank Collection). This volume is a product of the staff of the World Bank. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. iv | Enabling Water Utilities to Serve the Urban Poor Foreword WATER AND THE POOR ­ SOLVING THE CONUNDRUM Why do 8 million of Indonesia's 9.6 million poor urban households still not have access to piped water? Is it because they can't afford it? No, they are already paying several times more than the official rate for piped water through their purchases from vendors. Is it that Indonesia doesn't have the money to invest in the expanded piped networks required to reach poor households? No, many PDAMs, because of mismanagement, are failing to realize their current and potential revenues. Besides, social and economic rates of return to water supply schemes are very large, so investments can be made to pay for themselves. Is it thatthepoorstandlittleto gain from being connectedto housewatersupplies, and thuscarelittleaboutthesituation? No, there is overwhelming evidence that incomes of the poor rise sharply when they get access to water ­ and that they care very deeply about this situation. So what is the reason? At root it is because many local authorities who own the water companies are focused on what is politically and financially expedient in the short run, rather than what is good for citizens and good for the economy in the long term. In addition, many of them do not seem to be aware that it is possible to become financially stronger and rapidly expand services to the poor. As a result, while Indonesia will successfully reach many of its "Millennium Development Goals", access to water is likely to be an area of failure. The good news is that such failure is not a foregone conclusion. Indeed all around Indonesia a growing number of local PDAMs are introducing programs and investments that make good economic sense and bring water to the poor. So far, however, the numbers are not yet sufficient to turn the tide. This report was written, to highlight the current situation, and lay out practical actions that can be taken. Examples are drawn from within Indonesia and from other countries. Most of the actions need to be taken at the local level, but there are many actions that the central government can also take to help educate the owners and managers of PDAMs , and to change their incentives so that new investments are made that benefit the poor. Done right, the situation can be turned around fairly quickly. Indeed, there is no reason why access to water in urban areas should not be largely universal in the next decade. Under present trends this will clearly not happen. It will require leadership at both the central and local levels, and support from Indonesia's development partners. The World Bank is committed to do whatever we can to help make this happen. Keshav Varma Andrew Steer Director, Urban Development Unit Country Director for Indonesia East Asia and Pacific Region The World Bank Office Jakarta v Acknowledgement This study was conducted by a core team led by Jan Drozdz and consisting of James Woodcock, Risyana Sukarma, Satiriantinah Bur Rasuanto, Rod Barfield and Addie Purmono. The report was prepared under the overall guidance of Andrew Steer, Country Director, Indonesia, and Ani Dasgupta, Sector Coordinator EASUR. During the preparation, the report was enhanced through the advice of peer reviewers Ede Jorge Ijjasz-Vasquez and Andrew Makhoka as well as by Keshav Varma, Raja Iyer, William Kingdom, Hongjoo Hahm, Mohammad Al-Arief, Richard Pollard, Alfred Lambertus, Jehan Arulpragasam, Menno Pradhan, William Wallace, Janes Ginting, Bambang Suhwinoko Sjahrir, Bastian Zaini, Jon Strand, Ian Walker, Arthur McIntosh, Basah Hernowo, Salusra Widya, Nugroho Utomo, Pungky Sumadi, Bambang Purwanto, Taufan, Kumala Siregar, Godman Ambarita, Job Supangkat, Alex Chalik, Winarko Hadi, Syahril Japarin, Michelle Kooy, Foort Bustraan, Stephen Dunn, Andrew McLernon, Purwoko Hadi, Agus Hebi DJ, Hamzah Harun al-Rasyid, Akhmad Saeful Bakhri, and Abdul Gani. Andre Bald, Bryan Kersten and Indra Irnawan kindly provided editorial and production support. vi | Enabling Water Utilities to Serve the Urban Poor Abbreviations and Acronyms ADB Asian Development Bank PDAM Local Government-Owned Water APBD Annual Regional Development Budget Company Badan Supervisory Board to represent the Pemda A city or kabupaten government Pengawas Mayor to the PDAM PERDA A regulation passed by a local Bappenas National Development Planning Agency government Bappeda Provincial/District Planning Agency PERPAMSI Association of Indonesian Water BKKBN National Family Planning Board Companies BKM Community Council (Badan Pimpro Project Administrative Manager Keswayadan Masyarakat) in UPP PLN National Electricity Company BPAM Regional Water Bodies managed by (Perusahaan Listrik Negara) the central government PMU Project Management Unit BPP SPAM Control Board for Development of SMALLGAP Survey of Municipal Administrators SPAM formed under PP 16/2005 and Leaders of Local Government and BUMD Local government-owned enterprise Parliament BUMN State-owned enterprise SPAM System for provision of Drinking Water (Sistem Penyediaan Air Minum) Bupati District head SUSENAS National Household Expenditure DAK Grants from the central to local Survey governments UPP Urban Poverty Project Dinas Local government technical agency WILLOWS Women's Institutions for Local Dirut CEO of the PDAM Leveraging of Water Supply (nationwide project forming and DPRD Local Parliament registering local women's water GOI Government of Indonesia groups) KDP Kecamatan Development Project Kecamatan Subdistrict Kelurahan Sub-kecamatan, the equivalent of a village, but in an urban area Kabupaten District KSM Small community group in UPP LKMD Village/kelurahan management group KPKN Local office of National Treasury MoF Ministry of Finance MoHA Ministry of Home Affairs NGO Non-Governmental Organization PP Government regulation PAD Locally Generated Revenue vii Table of Contents FOREWORD v 5. PROPOSALS TO OVERCOME BARRIERS 25 ACKNOWLEDGMENT vi Central Government and Donor Actions 29 ABBREVIATIONS AND ACRONYMS vii Revise Guidance 29 EXECUTIVE SUMMARY x Establish a Water Business Advisory 33 Board 1. INTRODUCTION 1 Local Government Actions 33 Revise Water Business Practices 34 2. BENEFITS OF EXPANDED SERVICE TO THE POOR 5 Revise PDAM Incentives 34 The Urban Poor Are Not Well Served 6 Local Water Utilities' (PDAMs) Actions 35 Studies of the Unserved Poor: Unit Costs of 6 Create Pro-Poor Corporate Plan 35 Water Revise Tariff Structure 36 Studies of the Unserved Poor: Connections 7 Charges Sanitation Benefits of Proposals 39 Income and Welfare Benefits 8 Further Studies 40 3. USER CHARGES AND THE URBAN POOR 11 BIBLIOGRAPHY 65 The Poor Can Afford Cost Recovering Tariffs 12 Not All Poor Can Pay Access Charges 13 FIGURES Figure 1: The State-Owned Corporation 28 4. BARRIERS TO EXPANSION OF SERVICES TO THE 17 ­ Too Much or Not Enough URBAN POOR Figure 2: Institutional Set-up to Sustain 30 Utilities Prefer to Serve Higher Income 18 Commercialization Groups Other Barriers to Access by the Urban Poor 21 TABLES Connections charges. 21 Table 1: Cost of Water Piped Near the 2 Vulnerability to shocks. 21 House as a Multiple of the Cost of Water Poor PDAM service 21 Piped to the House Legal issues. 21 Table 2: Expressed Desire for PDAM 7 Lack of understanding by PDAM of 21 Connection the poor and their communities Table 3: Comparison of respondents who 8 Confusion between affordable 22 want to connect, their willingness to pay a service and inferior service one-time connection fee, and the tariff they Lack of informed choice. 23 are willing to pay versus the social tariff Collusion between PDAM officers and 23 Table 4: Household Savings Resulting 12 customers from Urban Poor Consumption of 10 Cubic Meters/Month of Piped Water at the 2003 Lack of Clear Mission to Serve the 23 Household Tariff Poor Table 5: Improving PDAM performance 27 without capital investment ­ 1999-2003 viii | Enabling Water Utilities to Serve the Urban Poor TEXT BOXES Box 1: Different Kinds of Benefits from a 9 House Water Connection Box 2: Water from Standpipes or "Kiosks" 9 in Kenya Box 3: Jakarta DKI Water Tariffs 2005 14 Box 4: Asian Water Supplies 19 Box 5: Excerpts from Regulation 16 of 22 2005 Box 6: The Accomplishments of 24 PDAMs 26 between 1999-2003 Box 7: Better Management and 32 Accountability: Case Study of PDAM Pontianak Box 8: Output-based Aid 33 Box 9: Water Subsidies and the Poor 36 Box 10: Making Water Connections to the 37 Poor in Manila Box 11: Increasing Services for the Poor 37 Box 12: Latin American Social Policy in the 38 Water Sector ANNEXES Annex 1: PDAM Data for 24 PDAMs ­ LGWS 42 Annex 2: Suggestions from Dirut Kumala 44 Siregar Annex 3: Suggestions from the Late Tarsius 46 Isbandhi Annex 4: Full Cost Recovery as a Key to 50 Water Sector Reform Annex 5: Case Study of PDAM Jember 54 Annex 6: History of Water Sector 58 Development in Indonesia Annex 7: Implementation of 1997 Water 60 Strategy Annex 8: Barriers to Implementation of 61 Recommendations and Sustainability Annex 9: Financial Recovery Action Plan 63 (FRAP) ix Ringkasan Eksekutif Pemberdayaan PDAM untuk Melayani Kaum Miskin di Kota Diperkirakan 50 juta penduduk miskin perkotaan tidak daerah aliran sungai. Selama periode tahun 1999-2003 memiliki sambungan air bersih. Dari jumlah tersebut, terdapat 24 PDAM yang berhasil meningkatkan rasio 6 juta orang membayar tarif yang amat tinggi kepada operasi1 mereka hingga mencapai 41%, dan separuhnya penjual air swasta, di atas tarif Perusahaan Daerah berhasil berbalik arah dari merugi menjadi untung. Air Minum (PDAM). Dengan menyediakan sambungan Seperti diuraikan di dalam laporan ini, kasus PDAM air yang memadai bagi penduduk miskin kota, PDAM Jember menunjukkan bahwa tanpa melakukan ekspansi dan pemerintah daerah selaku pemilik PDAM, dapat layanan khusus bagi penduduk miskin, PDAM dapat meningkatkan secara signifikan uang belanja rumah meningkatkan efisiensi dan cakupan pelayanan mereka, tangga dan memperbaiki kesejahteraan penduduk miskin duahalyangpentinguntukpelayananyangberkelanjutan perkotaan. kepada kaum miskin. Keluarga miskin yang tidak memiliki sambungan air Kaum miskin rela dan mampu membayar tarif air bersih tidak mampu mengkonsumsi jumlah minimum bersih. Permintaan akan air bersih terus meningkat air bersih sebanyak 10 meter kubik per bulan, seperti seiring pertumbuhan jumlah penduduk perkotaan. Saat tercantum di dalam Instruksi Menteri Dalam Negeri No. ini kaum miskin yang belum memiliki sambungan air 8/1998. Selain itu, berbagai survei menunjukkan bahwa harus membelanjakan sebagian besar pendapatannya sebagianbesarorangmiskindiperkotaanmasukkedalam untuk membayar air bersih dari sumber lainnya. PDAM kelompok masyarakat yang tidak memiliki sambungan berpotensimelayanikaummiskinkarenakedekatanjarak air bersih, dimana mereka memperoleh air dari sumur, dengan konsumen, tarif yang relatif rendah dan tanggung sumur dalam, air hujan, danau, sungai, tetangga, atau jawab sosial mereka. Namun banyak keluarga miskin dari penjual air. Survei yang dilakukan dalam kurun yang membutuhkan informasi mengenai perbandingan waktu lima tahun terakhir mengungkapkan bahwa biaya dan manfaat yang akan diperoleh agar dapat keluarga yang beranggotakan 5 orang dan tidak memiliki memilih dengan bijaksana, agar kemudian melobi untuk akses sambungan air hanya mengkonsumsi 2 meter mendapatkan sambungan rumah. kubik air bersih per rumah tangga per bulannya. Bahkan banyak keluarga miskin di Indonesia harus membayar paling tidak 10% sampai 20% dari pendapatannya KENDALA MEMBERIKAN SAMBUNGAN BAGI untuk membeli air bersih dari penjual air keliling. Hal ini terutama dialami oleh keluarga yang berpenghasilan di KAUM MISKIN bawah Upah Minimum Regional (UMR). Tidakadaundang-undangmaupunperaturanpemerintah yang memberikan mandat kepada PDAM untuk secara POTENSI PDAM UNTUK MELAYANI spesifik menyediakan layanan secara seimbang kepada KEBUTUHAN KAUM MISKIN kaum miskin, dan oleh karena itulah kaum miskin tidak menjadi sasaran PDAM. Arahan perundangan yang berlaku saat ini mempersulit PDAM untuk menahan laba Beberapa PDAM sudah membuktikan kemampuannya untuk diinvestaskian kembali guna memperluas jaringan mengatasi berbagai hambatan. Meskipun secara dan sambungan air bersih kepada kaum miskin. umum PDAM dikenal sarat KKN, kurang efisien, dan selalu terbelit hutang, banyak pula PDAM yang berhasil Tarif air bersih yang berlaku saat ini merugikan kaum mencapaikepuasanpelanggan,beroperasisecaraefisien, miskin. Tarifairbersihsaatinitidakefisiensecaraekonomis dan mampu menutup seluruh biayanya (pemulihan biaya dalam mengelola permintaan dan sumber daya, tidak penuh). PDAM di Surakarta dan Magelang, misalnya, telah bekerjasama dengan forum peduli air wanita, untuk mengidentifikasi lokasi yang paling layak untuk hydran umum dan memulai program pendidikan pelindungan 1 Biaya operasi di bagi pedapatan operasi. Biaya operasi mencakup seluruh biaya, termasuk biaya penyusutan dan pembayaran bunga x | Enabling Water Utilities to Serve the Urban Poor memberikan pendapatan yang cukup bagi kemandirian USULAN UNTUK MERANGSANG PASAR KAUM keuanganPDAM,dancenderungmenguntungkankeluarga MISKIN PERKOTAAN/PDAM berpenghasilan tinggi (kaya) daripada berpenghasilan rendah (miskin); dan tarifnya rumit dan sulit untuk dikelola secaraefektif,sehinggamembukapeluanguntukpenipuan Pemerintah pusat dapat merevisi kerangka undang- dan KKN. Pada kebanyakan kota di Indonesia tarif sosial undang dan peraturan agar dapat memberdayakan sangat rendah (US$0.03/m³), sedangkan tarif komersial PDAM untuk menyediakan sambungan air bagi penduduk dan industri sangat tinggi (US$1/m³) sehingga meskipun miskinperkotaan. Undang-undangNo.5/1962mengenai ada subsidi silang, PDAM tetap harus menjual air bersih BUMD harus diperbaharui agar pemerintah daerah tidak kepadakaummiskindenganhargayangmerugikanPDAM. lagi menjadikan PDAM sebagai sumber pendapatan asli Oleh karena itu PDAM menghindari penjualan air kepada daerah, dan mulai memandang PDAM sebagai penyedia kaum miskin. layanan air bersih yang terjangkau bagi masyarakat. Pemisahan kepemilikan asset PDAM dan manajemen Banyak PDAM dan pemiliknya tidak mempunyai melalui korporatisasi PDAM akan membatasi pengaruh insentif untuk memperbaiki orientasi bisnis mereka. politis dalam pengelolaan sehari-hari. Peraturan Pemerintah daerah enggan untuk menaikkan tarif; pemerintah No. 16/2005 telah mendorong didirikannya cenderung menempatkan personil yang tidak tepat BPP SPAM, Badan Pendukung Pembangunan Sistem di masing-masing eselon PDAM, tidak menetapkan Penyediaan Air Minum, yang diharapkan dapat menjadi sasaran kinerja, mengambil dana di luar anggaran, pusat bagi sumber informasi dan keahlian di bidang segan memutuskan sambungan air liar; ikut campur di penanaman modal dan peraturan mengenai air bersih dalam urusan manajemen PDAM sehari-hari; dan lebih dan sanitasi. memfokuskan pada pembayaran dividen tahunan PDAM (55% dari keuntungan setelah pajak) kepada bendahara Pemerintah pusat dapat memberikan insentif kepada daerah. Sebuah survei yang dilakukan kepada pejabat pemerintah daerah dan PDAM untuk mempercepat pemerintah daerah dan DPRD menunjukkan bahwa reformasi sektor air bersih. Insentif ini bisa dalam pemilik PDAM tidak sadar atas konsekuensi tidak bentuk challenge fund/matching grant, penjadwalan menyesuaikantarif,jumlahkeluargayangbelummemiliki ulang/restrukturisasi hutang bagi PDAM yang melakukan sambungan air, maupun biaya yang harus dikeluarkan reformasi, bantuan berbasis kinerja yang bertujuan oleh kaum miskin yang tidak memiliki sambungan untuk memperbaiki operasi PDAM dan bantuan teknis bagi mendapatkan air dari sumber lain. PDAM yang kurang sehat, meningkatkan transfer antar pemerintah daerah agar reformasi menjadi lebih menarik Hanya ada beberapa lembaga perantara yang dapat bagi pemerintah daerah, berpartisipasi dalam memilih memadukan kaum miskin dengan pejabat PDAM/ peraturan agar pemerintah daerah dapat memilih untuk pemerintah daerah. Kaum miskin umumnya tidak terlibat dalam proses perudangan demi mendapatkan mengetahui manfaat sambungan air. Mereka menaruh dukungan keuangan, dan mobilisasi opini publik melalui curiga kepada karyawan PDAM karena banyak dari laporan kinerja PDAM secara transparan. Selain itu, mereka yang mendengar cerita dimana ada masyarakat program-program yang inovatif seperti Output-Based Aid yang membayar tagihan air bulanan meskipun yang khususnya menekankan pada penyedian air bersih sambungan tidak mengeluarkan air. Di sisi lain, karyawan untuk kaum miskin, harus dikembangkan dan didukung PDAM enggan berhadapan dengan penduduk miskin oleh lembaga donor melalui dana subsidi BBM. perkotaan karena dianggap kampungan, tidak tahu cara mengisiformulir,tidakmemahamikendalaPDAM,mudah Pemerintah daerah dapat menolong kaum miskin melakukan protes dan ada kemungkinan tidak mampu melalui peraturan daerah yang merinci tugas membayar saat dalam kesulitan. pemerintah daerah maupun PDAM dalam menargetkan pelayanan kepada kaum miskin. Pemerintah daerah harus menegakkan peraturan daerah ini, sambil xi memastikan bahwa pelayanan bagi penduduk benar- benar tersedia, dan adanya dukungan bagi otonomi pengelolaan dan keuangan PDAM. PDAM dapat mengaitkan kenaikan tarif dengan kenaikan mutu pelayanan. Musyawarah dapat dilakukan di setiap permintaan kenaikan tarif. Mengaitkan tarif dengan perbaikan layanan dapat meningkatkan pemahaman PDAM dan pemerintah daerah serta menunjukkan transparansi jalannya operasi. Peningkatkan tarif akan dimaklumi dan lebih mudah diterima bila dijelaskan dalam musyawarah kota yang dihadiri perwakilan dari Yayasan Lembaga Konsumen, media massa, LSM, mahasiswa, kelompok masyarakat, pemerintah daerah dan pihak swasta. Yang lebih penting lagi adalah partisipasi dan masukan dari penduduk miskin perkotaan yang belum memiliki sambungan. PDAM bisa membantu dan mendukung forum peduli air. Forum peduli air yang sudah di daftar dengan notaris dan sudah berdiri di beberapa kota dapat menjembatani PDAM, konsumen dan calon konsumen mengenai isu- isu seputar pelayanan air bersih. Forum tersebut dan survei kepuasan pelanggan dapat memberitahu PDAM mengenai keinginan membayar tarif dan prioritas perbaikan pelayanan yang harus dilakukan. PDAM harus memantau manfaat sambungan rumah bagi penduduk miskinperkotaanagarpemerintahdaraehdankonsumen dapat memahami bagaimana mereka dapat diuntungkan oleh adanya sambungan rumah. Forum peduli air yang ada dan yang akan berdiri pada akhirnya akan menjadi lembaga konsumen kolaboratif yang memantau operasi PDAM, yang antara lain memberikan akuntabilitas dan penilaian yang jelas bagi persepsi pemerintah daerah dan DPRD. xii | Enabling Water Utilities to Serve the Urban Poor Executive Summary Enabling Water Utilities to Serve the Urban Poor An estimated 50 million urban poor in Indonesia watershed protection education programs. During the are unconnected to piped water. Of that number, period between 1999-2003, 24 PDAMs improved their approximately 6 million pay extraordinarily high rates, in operatingratio2 byasmuchas41%, with halfmoving from excess of water utility tariffs, to private vendors for their an operating loss to profitability. As discussed in the main water.Byprovidingadequatewaterconnectionstotheurban paper, the case of PDAM Jember, while not involving an poor, the public water utilities (PDAMs) and their owners, extension of service specifically to the poor, is presented local governments, can significantly increase disposable as a case study on how utilities can and do increase both income and improve welfare for those most in need. efficiency and coverage, the conditions necessary for sustainable service to the poor. Those poor Indonesian households lacking a connection to piped water cannot afford to consume the 10 cubic The poor can afford and are willing to pay for piped water meter minimum monthly amount of clean water set services. Demand for running water is increasing among by Instruction 8/1998 of the Ministry of Home Affairs. the growing urban population. In fact, the unconnected Moreover, many surveys indicate that the urban poor are poor are already spending a substantial amount of their disproportionately represented in the group that does not income to pay for alternative water supplies. PDAMs have house connections, with those families receiving have great potential to serve the poor because of their their water from shallow wells, deep wells, rainwater, proximity, competitive price and civil duty of social lakes, rivers, neighbors, or private vendors. As a result, responsibility. However, many low-income households surveys conducted over the last five years have revealed need more information about comparative costs and that households without access to a piped water supply other advantages in order to make informed choices, and consume only about 2 cubic meters of clean water per thence to lobby for a piped supply. 5-person household per month in some areas. Even so, many of these poor Indonesian households are paying at least 10% and sometimes more than 20% of their income for vendor-distributed water. The effect is most dramatic CONSTRAINTS TO CONNECTING THE POOR in those households whose head is earning less than the minimum wage. There is neither a law nor a regulation that mandates utilities to specifically target equal service to the poor, and thus they do not. Present legal guidance makes it POTENTIAL FOR WATER UTILITIES TO SERVE difficultforPDAMstoretainearningstoreinvestinnetwork THE POOR expansion and connections to the poor. Current water tariffs disadvantage the poor. The Utilities have already demonstrated their ability current PDAM water tariffs are not economically efficient to overcome obstacles. Despite a reputation for in managing demand and resources, do not raise corruption, inefficiency, and chronic indebtedness, many enough revenues for the PDAMs to become financially water utilities have demonstrated a capacity to achieve independent, tend to benefit high-income rather than good customer orientation, efficient operation, and low-income households, and are complex and difficult cost recovery. For example, utilities in Surakarta and to administer effectively, creating opportunities for fraud Magelang have worked with volunteer women's water and corruption. In most Indonesian cities, tariffs for forums to identify public hydrant areas and to establish the poor ("social tariffs") are so low (US$0.03/m³) and 2 Operating costs divided by operating revenues; operating costs include all expenses together with depreciation and interest payments xiii commercial and industrial tariffs are so high (US$1/m³) political influence in the day-to-day management of water that, even with cross-subsidies, PDAMs are forced to supply operations. Government Regulation 16/2005 sell water to the poor at a loss and thus avoid serving called for the establishment of the newly formed Control predominantly poor areas. Board for Development of SPAM (water supply system), whichisexpectedtobecomeacompetentresourcecenter Most PDAMs and their owners lack incentives for better for water investment and regulations. business orientation. Local governments are reluctant to raise tariffs, tend to make inappropriate personnel Government can provide incentives tolocalgovernments appointments at all levels, do not set performance and PDAMs to accelerate reform of the water sector. targets, take out off-budget funds, are reluctant to These could include challenge funds/matching grants disconnectillegalconnections,interfereineverydayPDAM and debt rescheduling/restructuring for PDAMs that are management affairs, and focus unduly on the PDAM's reforming; performance-based assistance aimed at the paymentofannualdividends(55%ofnetprofit)tothelocal better-run companies, together with technical assistance treasury. A survey of members of local governments and topoorerperformers;enhancementstointergovernmental parliaments has shown that owners are unaware of many transfers designed to make reform more attractive facts, including the consequences of not adjusting water to local governments; "opt in" regulation where local tariffs, the overall number of unconnected households, or governmentscoulddecidewhethertoentertheregulatory the cost to the unconnected poor of obtaining water from process in return for financial support; and mobilization alternative sources. of public opinion through transparent reporting of utility performance. Moreover, innovative programs, such There are few, if any, intermediary institutions bringing as Output-Based Aid (OBA), that specifically target the together the poor and PDAM/government officers. The delivery of piped water to low-income groups, should be poor are generally ill informed about the advantages of developed and supported by donors and through the house connections. Moreover, they are often distrustful existing fuel subsidy fund. of PDAM officers as many have heard stories of others paying fixed monthly water charges even when no water Local governments can assist the poor through local flows through the pipes. For their part, PDAM officers are regulations spelling out the duties of both the local oftenreluctanttodealwiththeurbanpoorbecauseofthat government and the utility in targeting the poor. Local group's lack of sophistication in filling out forms, failure to governments should enforce these regulations while understand PDAM constraints, quickness to protest and ensuring that services are delivered, and support is potential inability to pay during times of crisis. provided for the financial and managerial autonomy of PDAMs. PROPOSALS TO STIMULATE THE URBAN PDAMs can tie improvement in service to tariff POOR/PDAM MARKET increases. Public hearings can be held on all requests for tariff adjustments. Tying tariffs to improvements in service can increase the knowledge of both utilities and Government can revise the legal and regulatory local governments and demonstrate transparency of framework in numerous ways to encourage PDAMs to operations. Tariff increases are understood and more provide piped water to the urban poor. First, the Local readily accepted when clear presentations have been Government Enterprise Law 5/1962 should be updated made to a town meeting of the representatives of the to help local governments stop emphasizing utilities as Consumers Association, the press, NGOs, students, sources of local government income and start seeing community groups, local governments and the private them more as providers of affordable water to the people. sector. It is especially important that members of the Furthermore,separatingownershipofwatersupplyassets unconnected urban poor participate in these meetings through corporatization of the PDAMs could help limit and provide input. xiv | Enabling Water Utilities to Serve the Urban Poor PDAMs can assist and encourage standing local community water forums. Legally registered community water forums, which already exist in some cities, can provide community links that inform consumers and potential consumers about water supply issues. The forums and customer service surveys can, in turn, help inform water utilities of the consumers' willingness to pay and their preferences and priorities for better service. Water utilities should monitor the benefits for the urban poor of increased access to piped water so that local governments and consumers will understand how they share in the wealth created for the poor by house connections. Existing and new community water forums may eventually become the basis for collaborative institutionalconsumeroversightoflocalutilityoperations, providing, among other things, accountability and a clear assessment of parliamentary and local government perceptions. xv xvi | Enabling Water Utilities to Serve the Urban Poor Chapter 1 Introduction The scope of this paper is limited to how donors and Table 1: Cost of Water Piped Near the House as a Multiple governments can stimulate owners to realize the potential of the Cost of Water Piped to the House of water utilities in serving the urban poor. As survey data indicates that reliable water utility service is a key Type of Water Provision aspect of serving the poor, this paper focuses on how Study/source Piped to Hydrant Vendor Indonesian water utilities (PDAMs) can increase access House to the poor. It also touches on tariff reform because the Randall Crane 1991 1 7 14 reluctance of PDAMs to connect the poor at an artificially low tariff creates a hindrance to overall reform. However, Angke riverbank 000 1 0 (EME 004) this discussion does not offer a comprehensive analysis or solutions to PDAM or tariff reforms, topics that have Kamal Muara 000 1 16 already been covered by several excellent studies. Kali Anyar 003 1 4 6 (EME 004) This study draws heavily on recent Indonesian survey data, Marunda 003 1 13 1 while offering insights and first-hand accounts from those (EME 004) who have successfully managed water utilities in serving GATRA 4 Mar 03 1 10 Indonesia's poor. Several water utility Diruts (Direktur Kompas 14 Nov 03 1 10 Utama or a utility's Managing Director) have been able to serve the people by turning around weak utilities and Sources: as above guiding them to profitability. Their solutions on PDAM management appear in the Annexes and apply mainly to PDAM reform, which is needed for sustainable service to In general, while rural settlements are built up and the poor. This paper is more concerned with what can be maintained around water sources such as shallow wells, done in the short term to move toward a system based on thequickspreadofurbanpollutionduetocrowdingquickly more reformed utilities that are led by motivated owners eliminates clean water sources in those areas. Therefore, serving the poor. it is generally cheaper to find water in settled rural areas than in cities. Furthermore, the significant difference in It has been demonstrated that as water quality Indonesia between the sometimes artificially low price of deteriorates, greater quantities of water must be treated piped water and the high price people are willing to pay and costs become higher. Therefore, the new Water for it often results in serious social inequalities, including Resources Law No. 7 of 004, whose implementing economic rents, illegal connections, water strongmen, regulations are still being written, acknowledges that water smuggling from social tariff to commercial tariff sustainability in the water sector requires a fully integrated areas, and water theft. watershed management program. Although utilities depend on quality water from bulk water providers and This paper follows up on the 004 infrastructure study, several utilities do take part in watershed management "Averting an Infrastructure Crisis: A Framework for Policy activities, integrated water resources management is not andActon"andthe00GovernanceandDecentralization part of the scope of this paper. Survey designed to shed light on decentralization and governance. It will later contribute to the larger, multi- Several newspapers and studies have shown that there sectoral analysis entitled "Making Services Work," which are great benefits to those with a house connection as is being conducted by the World Bank of Jakarta. compared to those who must pay a vendor to bring water from a standpipe or have to fetch it themselves. | Enabling Water Utilities to Serve the Urban Poor Chapter 1 Introduction This analysis is organized according to the following Wherever the term "cost recovery" is put in quotation chapter headings: marks, this means that the costs of operations, maintenance, depreciation, and interest on loans are Chapter 2: Benefits of Expanded Service to the Poor. recovered in the tariff but the capital costs of existing This chapter describes recent surveys and studies infrastructure are not recovered. In most cases in showing the high cost of water paid by the unserved Indonesia, these costs have not been recovered. poor. It assesses the adequacy of water service to the urban poor, with a special focus on the urban very poor. The term, "social tariff" is loosely used to describe It examines the very high benefit of clean piped water to lower than cost-recovering tariffs usually provided to the urban poor, including how the income effect is only lower income classes. According to central government one part of the overall increase in welfare resulting from guidance, the lowest tariff usually applies to standpipe a house water connection. It shows that the urban poor-- operators, houses of worship, and charitable institutions. especially those buying from water vendors--pay so much The poor may be either in the lowest category or the for water that they could afford to pay cost-recovering second-lowest category, which contains the lowest- tariffs for piped water, consume even more water, and income households. The amount of tariff that is found in still save money. the second-lowest category is usually, but not always, less than the "cost-recovering" tariff. In some cities, the poor Chapter 3: User Charges and the Urban Poor. This maypay"cost-recovering"tariffs,whilein otherseveryone chapter examines how the shortage of house connections may pay the lowest category of tariff. However, in most for the urban poor is often caused by a local requirement cities, the poor pay a tariff that is less than the "cost- thatPDAMssellwateratapricelessthan"cost-recovering" recovering" tariff needed for house connections. tariffs to the newly-connected urban poor, who are currently paying vendors up to 0 times those tariffs. The For several years, writers such as McIntosh have been chapter also discusses surveys on the willingness and suggesting that tariffs should be increased so that local ability of the poor to pay the connections charges. governments are encouraged to connect those amongst Asia's urban poor who are willing and able to pay for house Chapter4: BarrierstoExpansionofServicestotheUrban connections. Until now, there has been little survey data Poor. This chapter describes barriers to the expansion of to turn this insight into policy action. However, recent services to the urban poor given the previously described surveys in Indonesia can provide the basis for concrete paradox of low user charges discouraging provision of steps to serve the poor and help them out of poverty house connections to the urban poor. It is based on through provision of piped--rather than standpipe--water the proposition that the utility wants to sell more water connections. to lower its costs and that the urban poor and utilities can be brought together if obstacles are confronted and overcome. Chapter 5: Proposals to Overcome Barriers. This chapter describes a general set of steps to be taken in overcoming barriers to the operation of a natural market where water utilities provide adequate piped water services to the urban poor on a sustainable basis. It also looks at this in a project context. 3 4 | Enabling Water Utilities to Serve the Urban Poor Chapter Benefits of Expanded Services to the Poor For the purpose of this analysis, a poor urban household Evenwithpovertymapping,thereisnotenoughinformation is considered one with a total household income of a to clearly identify the poor down to the kelurahan level. dollar a day or less (about 16% of the population). This However, the aggregate evidence indicates that most of definition of poverty may not be the best for all purposes, those who are unconnected but want to be connected but it fits most existing monetized survey data. Using the are urban poor, with a large proportion of them being the SUSENAS definition of poverty, their 1999 survey defined very poor. SUSENAS 003 data indicates that only 16% a poor household as one earning about Rp 800,000 per of the urban very poor (monthly household income Rp. month for a 5-member household. Moreover, the Ministry 800,000 and below) are connected versus 36 percent of of Home Affairs Instruction 8/1998 regarding water the overall urban population. tariffs provides that "Household income that is used as the criterion for affordability can be either the minimum wage declared by the government or the average income of all PDAM customers." STUDIES OF THE UNSERVED POOR: UNIT Minimum wage is the most suitable indicator of local COSTS OF WATER poverty because it approximates more closely the income of the unserved. Minimum wage varies by locality, yet is currently about Rp 800,000 per month (about $80) in Table 1 shows the great differences in cost between a Jakarta. Therefore, the focus of this analysis is the 9.5 house connection and other alternatives. Many surveys million (003 SUSENAS survey) urban poor households have examined these differences. However, only two with an income of Rp 800,000 per month or less; in sizeable studies have looked at the coping costs of having particular, the focus shifts to the subset of 1.1 million no water connection: the Crane study in 1991 and the urban households whose primary source of water comes UPDATE (Urban Poor Data Acquisition and Technical from vendors who offer the most expensive water. Evaluation) studies in 00 and 003. A third study, the Small-scale Water Providers in Indonesia study is expected to yield new survey data on the household expenses for water and other expenses amongst 1,000 households at THE URBAN POOR ARE NOT WELL SERVED several locations (Hydroconseil). The main reference study on actual expenditures by the poor is the two-stage UPDATE study conducted in 2002 The urban poor who are connected to subsidized piped and 003 by FORKAMI (the water quality forum) and RTI water benefit in the sense that they pay a "social tariff" (Research Triangle Institute), whose results were reviewed that is below the cost of production. By contrast, the in stakeholder seminars. The UPDATE-1 survey resulted unconnected poor are not well served by PDAMs and have in post-data cleaning interviews with 1,173 households to either fetch water from other sources or pay haulage in 30 different kelurahan. Most of the respondents fees to small-scale providers who fill in wherever PDAMs were informal workers, small merchants, fishermen, do not provide adequate services.1 and employees of companies and had an average monthly household income of between Rp 430,000 and Rp 460,000. The majority lived in their rented homes for more than five years and paid monthly electricity bills. The UPDATE-1 survey was designed to calculate 1 "The better the service coverage and the water availability from the public utility, the lower is the niche market for SSWPs. Cultural notions also play a role and where we find a strong tradition of public subsidies or free water to the poor, such as in the case of Delhi, Kathmandu and Dhaka, the niche market for SSWPs is very limited despite the low levels of service provided by the utility." Conan and Paniagua. 6 | Enabling Water Utilities to Serve the Urban Poor Chapter Benefits of Expanded Services to the Poor the amount actually paid for water by the urban poor in STUDIES OF THE UNSERVED POOR: targeted areas and their willingness and ability to pay for CONNECTION CHARGES piped water connections. The UPDATE-2 study focused more narrowly on the three poor kelurahan of Tangerang, Semarang, and Indramayu, where consumers rely mainly The LGWS (Local Government Water Services) customer on vendors for their drinking and cooking water. With satisfaction survey, conducted for 1 PDAMs across the 656 post-data cleaning interviews, it analyzed whether country, showed that 4% of the unconnected poor would or not the urban poor would buy enough water to repay like to become a PDAM customer if they could, while 50% the local government's cost of extending pipes to their preferred not to be connected; this is shown in Table . neighborhoods in a reasonable time. Table 2: Expressed Desire for PDAM Connection The results from these three cities are representative of those poorest neighborhoods whose main source of Number Percent water is vendors. Due to their low income, respondents reported little or no savings with monthly household Unconnected that want to become a 4 4.3 PDAM customer income and monthly household expenditures being almost identical. In some areas, it was determined that Unconnected that don't want to 69 50.8 the poorest households could enjoy better health and become a PDAM customer save at least fifteen percent of their household budget if Unconnected that don't know if they 37 7.0 they were connected to piped water at the current tariffs. want to become customer Furthermore, piped clean water connections benefit the Source: Urban Institute 2003 poor, and especially the very poor--with consumption not only for washing, drinking, and bathing, but also for The customer satisfaction surveys covered all sanitation. unconnected income groups, from the very poor to the very rich, so the UPDATE surveys of predominately poor Probably, most of the urban middle and upper classes areas would be more likely to show the attitudes of the have already made their own arrangements for a reliable urban poor. Table 3 summarizes the results of the UPDATE water supply, leaving the urban poor as the majority of survey on customer willingness to pay. The UPDATE-1 those who are inconvenienced by being unconnected. survey shows results similar to those of the customer There is evidence, though, that not all the unconnected satisfaction surveys; 36, 35, and 75% of the respondents are poor. For instance, in Jakarta, small-scale water in Semarang, Tangerang and Indramayu, respectively, providers are said to be providing service to middle and said they would like to become customers, but most of higher income customers who are also not well served by the remainder did not. The UPDATE-2 survey showed the utility (Hydroconseil). that 66% of those in the two kelurahan in Tangerang and 76% of those in kelurahan Patrol in Indramayu wanted to connect. Other studies have shown similar results (Porter, Locussol). Perception may also be playing a role in hindering extension of water services to the poor. Amongst local government officers, donors, and PDAM personnel, it may at first be hard to visualize the very poor with a house water connection. Instinctively, people in such positions have to think twice before concluding that a poor family can stay within its social station and still have the status and convenience of a house connection. 7 Table 3: Comparison of respondents who want to connect, their willingness to pay a one-time connection fee, and the tariff they are willing to pay versus the social tariff Max Tariff they Survey/Location % want to % willing to pay % willing to pay Social Tariff connect one-time fee installments are willing to pay (Rp/m3) (Rp/m3) UPDATE-1 Semarang 36 30 94 9,908 350 Tangerang 35 9 80 19,859 300 Indramayu 76 40 95 15,401 780 UPDATE-2 Kel. Tangerang 66 44 79 1,311 300 Kel. Indramayu 76 7 96 10,860 780 Source: UPDATE The UPDATE team also found that, despite a high rate of INCOME AND WELFARE BENEFITS willingness to pay double the household tariff for water, the willingness to pay the connections fee was below the actual connections cost. There are several possible Itisdifficulttoquantifyallthesavingsderivedfromahouse reasons for this disparity. The most common reason given connection in simple monetary terms, and it is important by respondents is that many feel they cannot afford to to acknowledge that an increase in disposable income pay the lump sum for new connections charges (typically due to unit cost savings is just one of many benefits. about $50, but sometimes as high as $400). However, this response can only be applied to a portion of the respondents in the UPDATE-1 survey because about half The sum of all benefits can create such a large change in of those in each city responded that PDAM connections real community income. Therefore, these benefits should were not available in their area. Therefore, another stated be adequately measured in order to demonstrate how it reason was the fear of poor service, with many simply not is in the best interests of the community to provide house wanting to pay for a new connection and then discover that connections to the poor. Yet while the community clearly there is no water pressure. Yet a third suggested reason benefits from the poor getting richer, there has not yet was that many are renters and may not want to purchase a been a study quantifying this value for Indonesia. Such a connection that would basically benefit their landlords. study would help motivate local governments to increase house connections for the urban poor. Some NGOs with experience helping poor communities have suggested that the poor cannot save enough money Theenormouswelfarebenefitsofahouseconnectionmay to pay a water bill at the end of the month. As a result, they be strong enough to lift the disposable income of many must often pay vendors for smaller purchases whenever poor families out of poverty. In 003, Strand and Walker they get any money. However, in the case of the UPDATE survey areas, a significant proportion of the respondents (from 68% to 8%) were already paying monthly bills to PLN, the Indonesia State Electricity Company, indicating Does inequality matter? "If the rich get poorer thanks to high that they are used to paying monthly bills. taxation, some people may feel pleased but few are better off. If the poor get richer, however, the whole country will benefit." The Economist 14 June 001 8 | Enabling Water Utilities to Serve the Urban Poor Chapter Benefits of Expanded Services to the Poor implemented a revealed preference analysis to study the Box 2: Water from Standpipes, or "Kiosks" in Kenya effects of house water connections on the poor, including those on capitalized home value and consumer surplus The current water supply situation in Nairobi, Mombasa, (the difference between what a person is willing to pay for and Kakamega is dismal. Although about half of the water and what he actually pays). They concluded that, households have access to individual piped water "the welfare effects of water connections at current water connections, only 5 percent of those connected are prices are large, and typically add 20-50% to households' poor. The poor households are thus overwhelmingly current real income in cities in Honduras, Guatemala, and dependent on alternative water sources and end El Salvador." (Strand and Walker, 003) These results will up spending an average of 4 minutes in collecting be discussed later in regard to the benefits of proposals water (compared with 15 minutes spent by non-poor to overcome barriers to connecting the urban poor. households). According to the study, kiosks are the least preferred Box 1: Different Kinds of Benefits from a House Water "improvement" option among the unconnected urban Connection households. Current users of kiosks continue to use them only because they have no choice or no ability 1. Family/environmental health effect: higher water to pay for a better alternative. Households report that consumption connected with better hygiene, kiosks do not offer adequate convenience (for example, better health, longer life, and a cleaner community long travel distance and queuing times); and more environment; expensive than other options ­ an average of Ksk4.1 . Rising tide effect: poor families provide new per 20-liter jerrican or US$2.7/m³ for water from services and spend more money in the community; kiosks, and Ksh 12.6 per 20-liter jerrican or US$8.4/ 3. Small enterprise effect: opportunity to open small m³ for water from vendors who deliver at home, even businesses, such as catering services, drink though the utility "social" tariff is US$0.15/m³. Thus, packaging, seed farms, soybean cake production, the subsidies intended for the customers of these etc.; kiosks ­ 77 percent of whom are poor ­ are not actually 4. Wealth effect: increase in property value due to reaching them. availability of piped water (if the beneficiary owns the property); The average daily per capita expenditure on water by 5. Prestige effect: increase in sense of self-worth non-poorhouseholdsisUS$0.14,incontrasttoUS$0.11 through better and more convenient facilities; and per capita per day by poor households. Although the 6. Income effect: savings in unit price of water along per capita expenditure by the poor is lower in absolute with savings in storage, purchasing and pouring terms compared with that of the non-poor, it represents out of vended water (this is the only effect that can a significantly higher proportion of their income. be studied in depth in Indonesia) Source: Gulyani, Talikdar, and Kariuki. 9 10 | Enabling Water Utilities to Serve the Urban Poor Chapter 3 User Charges and the Urban Poor THE URBAN POOR CAN AFFORD "COST As social tariff rates usually do not recover costs, PDAMs RECOVERING" TARIFFS generally prefer to connect other classes of society at higher tariff rates. However, as the unconnected urban poor are currently paying so much for vendor-supplied Good and reliable utility management is a necessary water, it is reasonable to suggest that they may actually be condition for serving the poor and cost recovery, as abletopayfullycost-recoveringtariffsforpipedwater.Ifso, specified in Ministry of Home Affairs Regulation No. they would become attractive customers for the PDAMs. /1998, is the most visible way to determine whether or not a utility is well managed. Over time, as local Table 4 shows the savings that would be enjoyed by governments have calculated and declared successive various groups in Semarang, Tangerang, and Indramayu tariff increases, social tariffs have crept downwards and if they were to pay the standard household (more than becomeappliedtolargerconsumptionblocks. Meanwhile, "cost-recovering") tariff rate. While the Rp 400,000 to commercial tariffs have generally gone up until reaching Rp 600,000 income bracket would save about 5% more the point where businesses start developing their own of their income on water, the lowest income group would water sources or find illegal ways to obtain water. save at least 11.57% of their income. Column (3) shows the average monthly household water cost paid to vendors. The Ministry of Home Affairs Regulation No. /1998 and Consumption of PDAM water in column (4) is held constant its subsequent regulations have defined cost recovery as at 10 cubic meters per household per month for all income the average tariff income necessary to cover the costs bands, even though higher income groups generally of operations, maintenance, depreciation, and interest. consume more water. The water bill in column (4) is based The regulations do not deal with the marginal costs of on household tariffs in Tangerang in 00. production. Column () presents the average household water Most PDAM tariff schedules follow central government bill for households buying mainly from vendors and is guidance for consumer groups and tariff blocks. However, based on observations in three cities. Of these, 150 there is some variation in tariff schedules, with PDAMs, observations were of those in the 20 m³ Rp US$ Rp US$ Rp US$ 1 Group I 550 0.06 550 0.06 550 0.06 Group II 550 0.06 550 0.06 1,000 0.11 3 Group III A ,450 0.7 3,350 0.36 4,000 0.43 4 Group III B 3,500 0.38 4,400 0.48 5,600 0.61 5 Group IV A 5,100 0.55 6,00 0.67 7,500 0.8 6 Group IV B 9,750 1.06 9,750 1.06 9,750 1.06 7 Group V (Special) 11,500 1.5 11,500 1.5 11,500 1.5 Group I Group II Religious place Government hospital Standpipe and public tap Simple hospital Social boarding house Water terminal and water truck Other similar Very simple multi-storey housing Other similar Group III A Group III B Simple household Medium household Simple multi-storey housing Medium multi-storey house Other similar Stall, stand, small shop Small household enterprise Non-commercial private institutions Group IV A Group IV B Luxury household 1-5 star hotel/motel Embassy/consulate Steambath/beauty salon Government office Nightclub/cafe Office of foreign representatives Bank Commercial private institution Large service station Tailor Trading company Military institution 4 or 5 star hotel Middle workshop/service station High rise building/condominium Bed and Breakfast Ice factory Barber Beverage factory Restaurant Chemical/cosmetic factory Private hospital/polyclinic/laboratory Textile factory Law office Storage/other industries Small industry Boat Luxury apartment PT. Jaya Ancol (amusement park) Physician practice Other similar Small/non-star hotel Shop/house Other similar Group V (Special): BPP Tanjung Priok (harbor), Other similar 14 | Enabling Water Utilities to Serve the Urban Poor Chapter 3 User Charges and the Urban Poor afford a connection but can't agree with the landlord on sharing the cost versus those who simply cannot afford the charges. Even so, the water company should try to remove this barrier by advancing the cost of a household connection and retiring it over 3 to 5 years through a charge on the monthly water bill. After all, the water company theoretically recovers all of the other capital expenses, such as the treatment plant and the rest of the distribution system, over 0 to 30 years of tariffs. In projects such as WSSLIC (Water Supply and Sanitation for Low Income Communities), the rural poor are able to pay 4% of project costs in cash and 16% in kind. Many observers hold that most poor families can find the connections charge from relatives or somewhere else if they are convinced that a house connection will benefit them. Fordecades,donorshavebeenpushinglocalgovernments to include the connections fee in the tariff, but few have done so. Some observers argue that the connections charge is fixed by a perda, or local government regulation, preventing PDAMs from connecting the poor even at a loss whenever actual costs are higher than the charge stated in the perda. Others state that the poor are often charged more than the cost fixed in the perda. Either way, the new connections cost becomes a barrier to access when the poor cannot pay the full amount at once or even over a year's time. 15 16 | Enabling Water Utilities to Serve the Urban Poor Chapter 4 Barriers to Expansion of Services to the Urban Poor Many analyses ascribe poor municipal water service in The survey found that members of local governments and the developing world to a problem of "political economy" parliaments were unaware of the statistical performance (Mitlin) or a "crisis of governance."4 Poverty in general of their PDAMs, including figures such as percent of the is seen by many as stemming from the "structures of population not connected, water losses, and profitability. governance."5 For example, the provision of municipal Moreover, they had no plan to reach the unconnected waterinvolvesabusinesswhoseownersarenotbusiness- poor, but were quick to mention cross-subsidies designed oriented, while PDAMs deal with the same problems faced to alleviate poverty. They were also unaware of the effect by private sector participants, including the reluctance of of very low "social tariffs" on the unserved. Overall, they owners to relinquish power or the politicization of tariffs. expressed little urgency on increasing the number of The "crisis of governance" definition recognizes that, in connections, choosing to focus primarily on the role of the long run, a government-owned water business is no the PDAMs as providers of PAD, or the dividend offered to better than its owner allows it to be. local government as owners of the PDAMs. For background information, the development of the The dividend payable by a local government-owned water sector in Indonesia is described in Annex 6. It companywasoriginallyfixedat55%oftheprofitin1962's highlights the emergence of many of the current policies Law 5. This law further required that the other 45% of and practices that have become barriers to the expansion the profit should go to pensions, social obligations, and of services to the urban poor. other uses. Thus, the application of this law by many local governments ensures that the PDAM cannot save enough to reinvest in expansion. Moreover, some local governments assess a dividend payment on their PDAMs UTILITIES PREFER TO SERVE HIGHER even when they are not making a profit. INCOME GROUPS The Ministry of Home Affairs eventually realized the paradox of this situation, especially when local In accordance with the Association of Indonesian governments would not agree to tariff increases. In Water Companies (PERPAMSI) goal of building closer July 1985, the Ministry of Home Affairs sent a circular understanding between PDAMs and local governments, letter (690/707/SJ) to governors, mayors, regents, a two-person team conducted a survey of 15 PDAM/local and PDAMs asking (but not ordering) local governments governments in 6 provinces in mid-2003. The only survey to consider its request that, in order to reach targets for of its kind in Indonesia, SMALLGAP (Survey of Municipal 1981-1990 (service to 75% of the urban and 60% of the Administrators and Leaders of Local Government and rural population), local governments temporarily release Parliament) studied the reasons for the gap between PDAMs from their dividend obligations. PDAMs and local governments, particularly in relation to tariff increases. It analyzed the perceptions of local Today, only a few enlightened local governments observe governments and local parliaments about their PDAMs, this request, while most donor-assisted projects include while helping those PDAMs improve their performance a condition that local governments do so during the and presentation (Suryodipuro). period of the development project. An example of such a provision from the World Bank is described in Annex 9. 4 "This crisis is one of water governance, essentially caused by the ways in which we mismanage water," conclude the authors of the UN's World Water Development Report issued in March 003 5 "Much of the poverty appears due to deepseated political and institutional factors that shut certain groups out from the opportunities and protections that others can expect from either markets or from government." World Bank, EASUR 003 18 | Enabling Water Utilities to Serve the Urban Poor Chapter 4 Barriers to Expansion of Services to the Urban Poor While water utilities are meant to be headed by However, the reality is that everyone wants to buy businessmen free to focus on achieving specific targets, water cheaply, resulting in illegal connections that local many local governments bypass the Supervisory Boards police are often reluctant to help disconnect. As non- (badanpengawas),andinterfereintheday-to-dayrunning deserving customers illegally join the "social tariff" group of the business. With so little control over their destiny, and residential/commercial customers reject cross- PDAM employees often look to outside work or corruption subsidizing tariff increases, the PDAM's logical recourse to increase their income. Some examples of common is to limit the number of customers in the "social tariff" counter-productive practices are: category. · The owner chooses employees to work at the PDAM. This traditional practice is called "titipan." It has been Box 4: Asian Water Supplies replacedsomewhatbytest-basedhiringatsomelevels in some PDAMs. Even so, up to 50% of employees McIntosh sees poor governance and low tariffs as the core at many PDAMs come "recommended" but prove cause of inadequate provision of water to the poor, mainly ineffective, and PDAMs can't afford to pay them early through standpipes and water vendors. The poor are willing retirement. to pay for piped water, but governments are unwilling to · The owner makes day-to-day management decisions. charge. "It is the reluctance of elected officials to increase Many PDAMs must ask permission of the owner tariffs that has, more than any other single factor, constrained before they implement layoffs and must inform the water supply development in terms of quality of service and owner before filling a position. Often, the owner coverage." Poor governance and low tariffs result in negative does not agree to incentive plans aimed at rewarding incentives and low salaries for utility workers, poor operations and maintenance, low consumer awareness and expectations, outstanding employee performance. mismanagement of natural resources, intermittent water · The owner makes off-budget withdrawals. supply, and low service coverage. These problems must be Official city budgets are rigid, so it is convenient for the solved as a whole rather than as discrete projects. owner to take funds for unforeseen emergency expenses from the utility's separate budget, with these expenses The solution involves transparency, regulatory bodies, and usually being charged as unaccounted-for water. civil society involvement. Tariff improvement will give the · The owner takes an annual arbitrary "contribution" as consumer "dollar votes" and lead to demand management a kind of dividend. and development of alternative sources such as rainwater At the beginning of the fiscal year, the PDAM is often harvesting and wastewater recycling. It will remove the need for subsidies and the money trail running through assessed a "contribution" to the city's budget without local governments. It will lead to expansion of connections, referencetothePDAM'sprofitability,targets,coverage, disappearance of standpipes, more pressure for efficiency or central government regulations. on users of irrigation water, less risk for private sector participation, better maintenance, and incentives for better Although they state that tariffs must recover costs, the professional managers who may move from city to city. Ministry of Home Affairs Regulation /1998, Instruction 8/1998 and the Ministry of Home Affairs Decree No. He feels that the best measure of a good water supply business 690 069/199 regarding tariff setting are both used is 24-hour supply, which relieves consumers of high coping by local governments to allow the lowest categories costs. Intermittent supply generally is caused by low tariffs, lack of metering, illegal connections, waste, and officials of tariffs to drift downward, requiring the PDAM to sell ordering that distribution systems be extended beyond the to lower income groups at a tariff that is too low to be limits of supply. Intermittent supply is the constant threat recovered by cross-subsidies. The regulations (and many of having no water at all. Higher tariffs should be charged for local government officers) assume that household and 24-hour supply. commercial customers are always willing to be charged enough to cross-subsidize the "social tariff" customers. Source: McIntosh 19 Compounding the problem, local governments and local When tariffs for drinking water are comparatively low, it parliaments are reluctant to approve requests for tariff is difficult to argue with a water apex body for a greater increases, forcing PDAMs to reduce their level of service. share of raw water. However, when drinking water tariffs This often leads to a chicken-and-egg stalemate where go up, they can be expected to put pressure on the current parliaments demand an increase in service before inefficient use of water for irrigation. Locussol estimated they approve a tariff adjustment and PDAMs demand in 1997 that the total loss of low water tariffs, including an adjustment in the tariff so that they can invest in that of the poor being unconnected, amounted to about improvements. 40% of PDAM revenues (Locussol 77). One reason for the government's reluctance to approve The SMALLGAP survey found that in general local tariff adjustments is a general lack of understanding governments were not aware of depreciation and of the economics of the water business. Another may reserves for future expenses, so that money in the PDAM be the government's willingness to sacrifice long-term cash register often was taken as a sign of profitability. benefits in favor of short-term advantages such as getting Most Supervisory Boards (the representatives of local re-elected. Furthermore, the government officials often government monitoring day-to-day operations) did not suspect tariff increases will be lost to corruption because function properly, and did not sufficiently understand the of the lack of transparency in PDAMs and their own lack of water business. In cities, the relationship between the understanding the business. Finally, PDAMs may simply PDAMsandlocalgovernmentandparliamentofficers,who not be making strong cases for increases. Regardless of usually had business backgrounds, was strained at best. the reason, however, McIntosh suggests that, rather than This condition can be addressed by a Water Business allowing PDAMs to finance development through tariff Advisory Board, as described later in this report. income, local governments want to subsidize it so they can control the money trail.6 During expansion, the PDAMs generally prefer to connect new housing estates, where they deal with only one Politicized, unreasonably low tariffs are a worldwide real estate company representative, who is literate, problem. In Indonesia in the late 1990s there was the efficient, and familiar with PDAM rules and procedures. momentum of a recipient mentality, with some centrally Some housing estates even cover some of the costs of driven urban development projects still winding down. connectionforhomebuyers. Bycontrast,itisoftendifficult During the 1980s and 90s, borrowing for increased and time-consuming to explain procedures to hundreds capacity was based on the assumption that tariffs would of individual urban poor who may not even purchase as be raised to keep up with inflation. Gradually, however, much water as those in new housing estates. governmentsbecameafraidofagreeingtotariffincreases, often because of re-election pressures or because the people were suffering from economic shock. For example, governments were afraid to raise tariffs during the 1998 monetary crisis, when PDAMs saw the cost of inputs go up by 00%. Eventually, governments did raise tariffs, but not enough. The average tariff has gone up from about Rp 400 in 1998 to about Rp 1,000 in 005. According to benchmarking data from 79 PDAMs between 001 and 00, the average water charges (water income divided by water volume) increased from Rp 1,061 to Rp 1,55. 6 "One reason some elected officials do not want to increase tariffs is that the money trail runs through governments, and eliminating sub- sidies through higher tariffs means that it would not." McIntosh, 81. 0 | Enabling Water Utilities to Serve the Urban Poor Chapter 4 Barriers to Expansion of Services to the Urban Poor OTHER BARRIERS TO ACCESS BY THE house be disconnected without delay. This policy enables URBAN POOR corrupt PDAM officials or meter readers to use pretenses to extract extra funds from the poor. With the fear of strong arm tactics, the poor become further discouraged Connections Charges from setting up a new connection. As mentioned in section 4., there is evidence that some groups cannot pay the connections charge unless it is Legal Issues spread over 3-5 years. Some PDAMs have instituted programs to spread out payment of the connections Most poor residents who rent living space would be charge, but this is usually no more than 9-12 months. reluctant to pay for a house connection that is held in the Moreover, those respondents who indicated that they name of the landlord. In this sense, a house connection would pay a one-time connection fee were generally is a capital improvement that is partly enjoyed by the thinking of one that would be about 50% of the current landlord because he could be able to charge a higher rent connection fee rate. The majority, however, were willing after the connection is made. to pay in installments. Illegal residents present an entirely different problem because local governments tend to ignore them. Vulnerability to Shocks McCarthy quotes an Urban Poor Consortium estimate that 4-5% of Jakarta's population may be illegal squatters The poor are particularly vulnerable to shocks, such as (McCarthy 6), giving it the highest proportion of illegal inflation, job layoffs, a new Dirut who reduces service, or squatters in the country. Many squatters live in marginal sudden illness. The risk often makes them reluctant to areas, where it would be difficult to extend pipes. Under commit funds for a water connection, especially if they present circumstances, PDAMs are not rewarded for rent their house. Their vulnerability also makes PDAMs providing water to illegal residents, and it is unlikely reluctant to connect them. Whereas other income groups that city governments will legalize these settlements. could pay the fixed charge even if there were a period The most common solution, therefore, is to provide a when little or no water flowed through the pipes, the hydrant near the illegal settlement and let small scale urban poor could not and would be likely to protest. This providers distribute the water. However, in reaching these is particularly the problem where many meters are broken populations, it is suggested that local community groups and PDAMs tend to charge every house connection a 10 in each location make informed decisions on how best to cubic meter per month minimum consumption rate. deal with the provision of water. Poor PDAM Service Lack of Understanding by PDAM of the Poor and Their Communities Service is often intermittent or unreliable, with 00 benchmarking data from 19 reporting PDAMs, indicating The PDAM and local governments are not used to working that the median PDAM supplies water for only hours a with the urban poor, so they are reluctant to enter into day and the average is 19.4 hours a day. This can bring transactions with them. Doing so would require special about disputes. However, some NGOs have stated that attention in helping them fill out forms or solving simple the poor living on the margins of society may have heard problems caused by ignorance or lack of experience. In of cases where the PDAM has overcharged and demanded the UPDATE survey areas, the only organizations available payment of the disputed amount even before the case to help lower income families with formal procedures has been settled. If payment cannot be made in such were local government-created organizations such as a case, local government regulations demand that the the kelurahan councils, government-sponsored local 1 resiliencygroups(LKMD)andRT/RWofficers. Whilesome Box 5: Excerpts from Regulation 16 of 2005 individual officers may be sympathetic, such government organizations are generally not as efficient in reaching GOVERNMENT REGULATION NUMBER 16 OF 005 the poor as NGOs. REGARDING DEVELOPMENT OF SYSTEM OF PROVISION OF DRINKING WATER (SPAM) While it is difficult for many PDAM managers to begin Signed by the President an open dialog with the community, successful PDAMs have done so by transparently opening their accounts System of development of drinking water (SPAM) can be a to consumers, local governments, students and NGOs system with pipes or a shallow well, hand pump well, rainwater in the community. Some have devoted a part of their storage tank, water terminal, tanker truck, packaged water annual budget to the expenses of a citizens' water forum. installation, or an edifice to protect a spring. This has proven to be a successful strategy. However, The central and local governments guarantee the availability many PDAMs aren't willing to take the risk of a public of raw water. The continuity of flow must be 24 hours per day. demonstration against water tariffs, causing them to Treatment and handling of water can involve the role of the shrink away from transparency. Therefore, the majority community of PDAMs need help during the transition while they form closer links with the community. Development of a system of development of drinking water is the responsibility of the Central Government and Local Governments to guarantee the right of every citizen to a minimum amount of water per day to maintain a clean, healthy, Confusion Between Affordable Service and and productive life in accordance with existing regulations. Inferior Service. Arrangement for development of system of development of The facilities often used to provide water service may be drinking water is done by a national or locally owned company too costly to operate in low-income areas. For instance, that is established especially for this purpose. Whenever trucks that supply water terminals require operations and the company cannot fill the needs of the people for drinking maintenance costs that make the service too expensive to water, the Central or Local Government can build a part or maintain for the benefit of the poor. Therefore, it is helpful whole system of development of drinking water which will be operated by the company. to provide low cost facilities to consumers who cannot afford to pay large water bills. However, inadequate low- Whenever the local government cannot develop system of cost facilities conversely increase the cost to the PDAM development of drinking water, the Central Government can and/or the consumer over the long run. For example, the provide financial assistance until minimum service standards IKK (Ibukota Kecamatan) program, including traditional low are reached in measured phases. The Central Government cost delivery systems such as standpipes, was designed assistance in this case is mainly for the lower income groups to provide hundreds of affordable water supply systems to and poor in areas outside the reach of BUMD. For areas that consumers in all income groups in smaller towns. Most are already within reach of the BUMD, Central Government of the systems, however, were not financially viable, and financial assistance will be provided only to reach minimum service standards. were eventually turned over to PDAMs, who viewed them as burdens. Asaresult,waterflowinhibitorsthatwereinstalled to limit each customer's consumption and provide everyone equal access, were mostly removed or damaged. During the 1997/1998 Asian monetary crisis, many IKK units had to be closed down because of lack of operational funds. | Enabling Water Utilities to Serve the Urban Poor Chapter 4 Barriers to Expansion of Services to the Urban Poor Past efforts to provide a lower standard of service to the households, one single explanation for this and similar poor have emphasized programs such as handpumps and contradictory responses is that the urban poor are not rainwater collection, which failed in Repelita V. Evaluations well informed of their actual current costs and their of standpipes as "low cost" solutions to serve the masses options for reducing those costs. have shown that they have not served the targeted 100 people per standpipe, many have fallen into disuse, and as aresulttheyhavecostagreatdealmorethanwasintended. Collusion between PDAM officers and Standpipes have also been used in Jakarta and other cities customers/distributors as sources of illegally sold water, and in some cases, pumps installed at the standpipes have lowered water pressure In some locations, PDAM officers work with distributors throughout the system. Other countries, such as Kenya, to protect against competition. In other cases, PDAM have had similar experiences with standpipes, or kiosks. officers decide which groups receive piped water and may In fact, the greatest beneficiary of installing standpipes favor one group over another. seems to be the one selling the water.7 Lack of Clear Mission to Serve the Poor Lack of Informed Choice. Since Repelita V, poverty alleviation has been part of the UPDATE-1 found a correlation between those who did not Indonesian national development strategy. In fact, it is a want to be connected and those who thought vended basic principle of the 003 interdepartmental Community water was of a better quality. Yet, as most vended Managed Water and Sanitation Strategy (Bappenas). water actually comes from PDAMs (directly or through In May 004, the Government completed a Poverty standpipes) in these areas, consumers are really paying a Reduction Strategy Paper detailing some approaches to premium for the same product. This is an area for further poverty alleviation. However, there remains no central study, but it suggests that consumers are not aware of government law, regulation, or ministerial decreerequiring the true differential in quality between vended and piped PDAMs or local governments to target the poor, ensuring water. that this lack of access continues. Another reason given for not wanting to be connected was When they formulate their mission statements, PDAMs that other sources (mainly shallow wells) were available regularly copy language directly from the Regional at a lower cost. Yet, even if they used vended water only Companies Law (5/196), with the main source being the for drinking and cooking, the surveyed households on local regulation that established it. In most cases, this average would still pay less for a piped water connection local regulation also takes the language of the Regional than to continue using their present sources of water. Companies Law 5 of 196. Some respondents replied that they could not afford to be connected because the water tariff is so high. Considering that they are now paying more for water than connected 7 "It has been estimated, however, that this method costs more per user than shared household connections, in both economic and financial costs. This is due to the fact that the fixed cost of water from a stand- pipe is some .5 up to 17 times the cost of a metered house connection, depending on whether the standpipe is supervised or not; and moreover, the actual prices charged by the supervising attendants for standpipe water are much higher than the costs." Locussol, 7. 3 4 | Enabling Water Utilities to Serve the Urban Poor Chapter 5 Proposals to Overcome Barriers Data has suggested that the main obstacles remain the planning, community involvement, and tariff increases lack of pipes in their area and poor PDAM service due tied to improvements in service. to corruption, mismanagement and lack of funds for expansionandimprovement. Aswell,otherobstaclesmust be addressed at the same time to ensure sustainability. Box 6: The Accomplishments of 24 PDAMs between 1999- Some of the poor need help with payment or coordinating 2003 a co-payment of connection fees with landlords. The cultural gap between PDAMs and poor communities The WET team began making visits to the weakest and poorest must be bridged in many areas by local institutions that performing PDAMs in October 1998. In 1999 they worked can assist in mobilizing community groups for targeting with 11 PDAMs, providing advice for conducting customer subsidies, organizing support groups for poor families satisfaction surveys, vision/mission retreats, compiling who temporarily cannot pay monthly bills, and for orienting work-out (later called FRAP) and corporate plans, consumer PDAM officers to serve the poor. Sustainable institutions orientation, and justifying requests for tariff increases tied to linking communities and PDAMs can help in consumer increases in performance. orientation and oversight. These changes in attitudes, Local governments undertook to forego the annual payment systems, and procedures can be effected as a central from the PDAM to the local government treasury and to component in the future water supply infrastructure and maintain an arm's length relationship with the PDAM. service expansion projects. PDAMs committed to providing staff, writing and keeping to a corporate plan, and publishing accounts. The PDAM is the logical focus point for serving the poor because it possesses a record of past accomplishments Two PDAMs were dropped from the program because they or showing its ability to improve performance given the their local governments were unable to fulfill the terms of the proper incentives. memorandum of understanding. The performance of most of the participating 4 PDAMs (or about 8% of all 300+ PDAMs) improved dramatically, as shown in Annex I. The performance of the most visible PDAMs has improved in response to better central government guidance, local During about the same time, the World Bank-assisted PDAM government criticism, the pressures of decentralization, Rescue and Recovery Program, funded by the Asia-Europe reduced flow of central government grants, a sense of Management Fund (ASEM), assisted a smaller number of political reformation, more frequent use of fit and proper PDAMs, some of which have become creditworthy. tests, corporate plans, customer satisfaction surveys, establishment of citizens' water forums, and involvement Source: Chemonics and Urban Institute of stakeholders in requests for tariff increases. Despite financial troubles, improvement should eventually gain further momentum with the direct election of mayors A good example of the accomplishments of many PDAMs and Bupatis and greater stakeholder involvement in and their potential for serving the poor is the experience watershed planning and management. of the 4 PDAMs receiving targets and advice from the WET (Water Efficiency Team) and LGWS teams. Table 5 Despite frequent occurrences of mismanagement and shows the increases in operating ratio (operating costs poorservice,afewoutstandingPDAMshavedemonstrated divided by operating revenues; when operating costs over the last few years their ability to improve management include all expenses together with depreciation and and earn tariff increases sufficient enough to increase interest payments) and combined average profit for these connections and improve service. They have all followed groups. The LGWS team set out to show that even the the steps described by successful Diruts in Annexes and weakest PDAMs can recover, so Group I consisted of 11 of 3, such as depoliticizing and professionalizing the Dirut the smallest and weakest PDAMs that were given advice office as well as providing staff incentives, consumer over the longest period of time. Group III consisted of orientation, transparent record-keeping, businesslike stronger and larger PDAMs that received advice for only one year, but the increases in their average FCR ratio and 6 | Enabling Water Utilities to Serve the Urban Poor Chapter 5 Proposals to Overcome Barriers combined average profit were more than credible. The Water utilities are strengthened by an association that methodology of the LGWS project is replicable for other represents their interests to the central government. PDAMs. Although it is still growing and subject to outside shocks, the Association of Indonesian Water Companies, PERPAMSI, became fully independent from the Ministry Table 5: Improving PDAM performance without capital of Home Affairs in 001. As the representative of all investment PDAMs, PERPAMSI brought the issue of debt rescheduling to the President of the Republic of Indonesia after years of 1999 ­ 003 2000-2003 2002-2003 inaction. It has also represented all PDAMs to PLN, asking 11 PDAMs 6 PDAMs 7 PDAMs that electricity tariffs for PDAMs be fixed below industrial Before After Before After Before After rates. In addition, PERPAMSI provides demand-based Average 1.67 1.18 1.47 1.15 1.5 1.15 training through a decentralized system, offering the first Operating training to new PDAM Diruts so that they can learn the Ratio basics of the water business. It has also conducted a Combined -5,349 -973 - 644 678 5,95 4,041 program helping three PDAMs install drinking water zones Average that are still in operation in three cities today. Profit (Rupiah PDAMs have equipment and pipes in place and an millions) organizationthathasbeenpartofthecommunityforalong Source: Urban Institute 2003 time. Under several determined Diruts, many have found ways to increase performance and service to consumers. PDAMs and their association, PERPAMSI, have a policy Detailed individual PDAM statistics are shown in and a handbook for strengthening PDAMs through better Annex 1. There were only one or two PDAMs that had relations with stakeholders. As well, this handbook internal difficulties preventing them from improving their provides guidance for preparing documented tariff performance without the addition of external resources. increase requests by presenting negative scenarios that The experience of these 4 PDAMs demonstrates that could occur if the increase is not granted. (PERPAMSI) even within current constraints, virtually any PDAM and its owner can reach full "cost recovery" and better "Full cost recovery" is a simple indicator of efficiency management if there are modest incentives (in this and customer satisfaction over time, with its advantages case, working with other professionals and on a donor- described in Annex 4. However, while official tariff policy assisted project). The LGWS experience confirmed that is theoretically based on "full cost recovery," it must be the water service business involves unique technical and acknowledged that until now the cost of most urban water commercial details that are best evaluated and advised infrastructure has been subsidized. Calculating the by professionals. value of current infrastructure by using the Department of Public Works' rule of thumb for the current rate of Although PDAM Jember (Annex 5) did not extend its installing water supply capacity throughout Indonesia service specifically to the poor, their case study is offered (about 95 liters/second), this can be roughly estimated to show how utilities can and have increased efficiency at US$.5 billion. Thus, whether this infrastructure has and coverage using tariff income for the investment. It been subsidized by central government grants or un- is a good example of how a small PDAM's improved repaid loans (about US$ 450 million including interest), performance started with popular protests during the the capital cost is not being recovered through the current monetary crisis and shows that any local government level of tariffs and most PDAMs are not setting aside and PDAM can achieve full cost recovery and improved funds for its expansion. performance while reaching social objectives. 7 As an example of the slow pace of reform, Annex 7 The proposals in the following section include more examines the objectives set forth in 1997 for a national immediate steps that need to be taken for serving the water strategy, showing that although major problems poor more efficiently, principally achievable through were identified, most of the objectives have not been an extension of house connections to the poor. These achieved. The 1997 strategy listed 6 major points for the short-term actions are expected to take place within the "graduation" of Indonesia's water supply sector to qualify government's reform program for PDAMs. for commercial bank loans based on the insight that the government could not bear the burden of the investment One of the best and most graphic depictions of the present needed to achieve infrastructure targets. (Locussol and optimum institutional arrangements for PDAMs 1998). Those major points are still valid over the long has been put forward by McLernon. Figure 1 shows the term. institutional set-up of the PDAM as it exists today, with Figure 1: The State-Owned Enterprise - Too Much or Not Enough Muddled Incentives Insufficient or Misguided from the Internal Environment Incentives from the of the Corporation External Environment Supervisory Board Shareholders Markets Forces - Product i.e. Appoints - Labor Government Report and - Corporate Control Executives to monitor Management Board Financial Forces - Debt Operates - Equity Stakeholders Non-core Non-core Legal Regulation Core Functions Bankruptcy / insolvency laws Social Functions Source: McLernon 2004. 8 | Enabling Water Utilities to Serve the Urban Poor Chapter 5 Proposals to Overcome Barriers overlapping functions and responsibilities. Principally, Revise Guidance the shareholders (the owner) regulate and become involved in daily operations, often accompanying or even Revise Law 5/1962. In reforming, the central circumventing the Supervisory Board (Badan Pengawas) government should take into consideration the negative that is meant to keep the owner away from the day-to- effects of entitling local governments to derive dividends day PDAM operations and the management board. The from service organizations such as PDAMs. In their focus PDAM's core functions (e.g. making a profit) are mixed on PAD, local government officers, and especially DPRD in with social functions (e.g. subsidies), with debt and members, lose sight of the primary mission of the PDAM equity influencing daily operations. The optimum case, to serve the needs of the connected and expand coverage as shown in Figure , involves an independent regulator among the unconnected. and separation of the owner from the Supervisory Board/ PDAM, which has now becomea Perumda(Regional Public For many years, the Ministry of Home Affairs has been Company). Instead, the owner becomes responsible for drafting a new law regarding state-owned enterprises subsidies,andcommercialcustomerspaycost-recovering (BUMD). One way to turn the attention of the local tariffs. government from seeing the PDAM as a source of dividend income to that of a provider of water is to declare The following description of steps needed to enable by government regulation that the primary purpose of a water utilities to serve the urban poor focuses on the PDAM is to provide water to all citizens who need it. Doing institutional level required to take action. To ensure so, local governments may exempt PDAMs from paying sustainability of the expanded transactions between the dividends to their owners until coverage has reached a urban poor and the PDAM, many changes must take place high percentage (such as 90%) of the population. at the local level, while being supported by guidance at the central level. The ideal vehicles to effect changes If PDAMs are reliant on grants from local governments at the local government level are pro-poor components for a large part of their operation, it should be apparent within water supply expansion projects. Possible barriers that local governments are receiving no net benefit from to implementation are described in Annex 9. PAD on PDAM income and local governments would be better served by reinvesting any profits. It would be more efficient for both the local government and the population in general to have a utility that is transparent CENTRAL GOVERNMENT AND DONOR and reinvesting its earnings to improve service than ACTIONS being caught in a continual cycle of grants and dividends. Moreover, despite the fact that current guidance regarding the composition of the Supervisory Board is still largely The central government can provide revised guidance to ignored by local governments, this guidance can be more local governments and PDAMs that reflects changes in explicit about the negative effects of owner involvement the central government strategy for poverty alleviation in the day-to-day operations of local government-owned over the last five years. Central government guidance can enterprises. become a criterion for the allocation of benefits to local governments as well as a roadmap for better services to Some lawmakers may object to the idea of extending the urban poor. The main thrust in the water sector aims PDAMs a temporary exemption from the obligations of to increase the number of sustainable house connections local government-owned enterprises, but PDAMs are for the urban poor. In addition to having an immediate in the special situation of being tasked with making a and dramatic poverty alleviation effect, this would profit that can be used for the benefit of an unserved increase PDAM sales and reduce the number of illegal population. connections. 9 Figure 2: Institutional Set-up to Sustain Commercialization Visionary leadership, Head of Region general policy direction and all decision involviing community values DPRD Legislator and Purchasing Sector Executive Government Check on Exec. Dinas Gov. Agent Policy and DPRD acting as policy and law-maker Independent Regulator (as well as others for environment, health and safety etc) Administers Operating License/ PSO Contract Executive Government PERUMDA / PERSERODA as owner insists on performance Supervisory Board Report Appoints for Bonus and monitor performance Financial Forces Management Board - Debt - Equity Operates according Markets Forces to plan and performance - Product PSO defined targets - Labor and contracted - Corporate Control PSO Payment based on results Core Functions Service Service as provided as Verifies delivery PSO Contract Payment per conditions and quality of license for all services Non-Commercial Customers Commercial Customers (Public Service Obligations) those paying cost recovery tariffs for their particular service eg " domestic - low" charged below cost is acceptable provided eg all classes of connections and all blocks except "domestic - low" that arangements are transparent, fully costed and fully funded Source: McLernon 2004. 30 | Enabling Water Utilities to Serve the Urban Poor Chapter 5 Proposals to Overcome Barriers Update Ministry of Home Affairs Decree No. 690 There are strong indications that a significant proportion 069/1992 and other tariff guidance. New guidance of the poor are willing to pay the new connections fee can allow more local government flexibility in determining and that others would be willing to pay it in installments user blocks and encourage the raising of the lowest tariff if they had a properly informed choice. For this reason, rates. Such guidance can point out that extremely low future investment activities will need funds for extending tariff rates are actually harmful to the unconnected poor, information to the urban poor and starting a natural and that a large differential between the lowest and process of customers asking for water services. the highest tariff rates encourages businesses to find alternative water sources and conduct illegal behavior Infrastructure improvement projects may include such as water smuggling. provisions for the extension of house connections to poor communities with baseline surveys to measure the Provideforgreatertransparency. PDAMsarerequiredto wealth and income impacts on the poor. They may include publish their accounts, but few of them do so. Incentives, components of facilitation or information campaigns, such as easier loan terms, may therefore be provided to special counseling or revolving funds for poor families pioneering PDAMs that arrange for annual independent that cannot pay water bills, strengthening of water-related audits of their accounts or for town meetings to explain community organizations, and technical assistance for past accomplishments and requests for tariff increases. tariff meetings, 24-hour service, metered connections, target setting, and monitoring of progress toward full cost Provide Performance Incentives to Local Governments. recovery. Needs-based grant funding can be allocated based on performance, thus promoting efficiency. Some examples There are currently few NGOs that help the urban poor include special transfer funds (DAK), and energy subsidy make informed choices for provision of drinking water. funds for the water sector (SEAB). In addition, the central Therefore, there will be a need to strengthen NGOs and government can provide recognition to outstanding help the urban poor understand their options. Output- utilities and their local governments, perhaps offering based aid, channeled through private organizations and national and provincial poverty alleviation or full cost especially NGOs that are based in an area, can be used to recovery awards. There is an opportunity for central start the process of matching poor consumers with water government departments such as the Department of service through PDAM programs of installment payments Public Works, BAPPENAS, and the Department of Home and partial subsidies for new connections. Affairs to establish these annual awards. The same NGOs can assist with targeting the poor Donors and the central government (and sometimes the by establishing community groups in connection with provincial government) can provide further incentives community-driven development projects such as the through expanded loan and grant assistance programs, Urban Poverty Project or the Kecamatan Development which generally require the suspension of PAD during Project. They can determine whether or not geographical their lifetime. Eventually, development projects would targetingcanbeefficientforassistingintheestablishment include inexpensive pre-project sampling surveys to of new connections for the urban poor. Through targeting establishhouseholdexpenditureprofilesforvariouslevels and establishment of mechanisms to help protect poor of income and determine the demographic distribution of communities from sudden shocks, they can help PDAMs the poor. These may also provide targets and indicators, learn to work with poor communities, and vice versa. such as the number of new house connections for the poor, for PDAMs and their representatives. Other targets If incentives to PDAMs are strong enough to increase or indicators could include customer satisfaction surveys, connections to poor areas, there will be a need for central the time required to pay a water bill, continuity and government to increase the supply of raw water to meet pressure of water service and the ratio of unaccounted- the increased demand in cities such as Jakarta and for water. Surabaya. 31 Box 7: Better Management and Accountability: Case Study of PDAM Pontianak In late 004, the mayor of Pontianak, West Kalimantan, determined that the people of Pontianak should have the best municipal water service possible. The city invited individuals to apply for the position of Dirut, or managing director, of the city's water utility (PDAM). By use of a fit-and-proper test, a non-local businessman was selected and assigned the task of reforming the PDAM within a four-year term. When the new managing director took office in November 2004, water that was consumed by customers or otherwise lost but not reflected by meter readings was as high as 51%. By September 2005, this non-revenue water had been reduced to 35% and was still declining. Upon initial review of the operation, the new managing director found that tariff collections from Pontianak's primary commercial activities were surprisingly low. To investigate this shortfall, he contracted with a private company to read meters in the commercial areas for a trial month. The private company's findings indicated extensive under-reporting of consumption as well as the existence of numerous unauthorized connections. In response, a special task force, composed of dedicated PDAM staff, was formed to combat these issues. The special 10-person task force visited the largest commercial customers first and confirmed that unauthorized connections were common. After inspecting customers in the largest commercial area and installing new meters where needed, the task force began to analyze the consumption patterns of businesses in other commercial areas. If their consumption patterns appeared to be unreasonably low, the task force visited the business and checked the connection and the meter. In most cases the task force found unauthorized connections. To further combat low readings, new meter readers were hired from outside the company. They were engaged, not as employees, but as contractors on a fixed assignment. Great lengths, including psychological screening tests, were taken to ensure that the contractors hired would be competent for the job. Currently, the managing director is looking to increase efficiency in meter reading and reporting by exploring the use of hand-held computers to digitally read meter codes. During the period of November 004 to September 005, 17% of Pontianak's water meters had been replaced or repaired, and PDAM Pontianak reported that the cumulative extra income from reduction of unaccounted-for water amounted to approximately US$1 million. In August 005, the PDAM reported that its operating income was 10% of its operating expenses. In order to ensure sustainability of management reforms, the Dirut focused on the PDAM's greatest asset, its people. The list of staff development and upgrading initiatives is long and impressive. Roughly three-quarters of the staff received two weeks of training in discipline and leadership in an Indonesian Army training camp. Additionally, the staff received competency tests and evaluations from the local university. The corporate plan was revised and upgraded, and the vision was changed to show just one goal: to be the best PDAM in Indonesia through better service. Every week, each staff member was, and is still, required to state his dedication to do his best to serve the public and not to engage in inefficient practices. Morale grew as the new working culture came into effect, and staff members have shown stronger dedication, working late through the night on certain projects. PDAM Pontianak promotes its activities by publishing its annual accounts and engaging in dialogue with the community. Largely because of its open and transparent approach, the PDAM has gained the support of the DPRD. It is still too early to conclude that PDAM Pontianak is a success story, but its first year of reform has brought significant results. PDAM Pontianak provides an excellent example of the several promising PDAMs in Indonesia that have grown with the active support of the owner. Source: Interview with managing director and PDAM Pontianak financial reports 3 | Enabling Water Utilities to Serve the Urban Poor Chapter 5 Proposals to Overcome Barriers Box 8: Output-based aid Establish a Water Business Board Traditional water sector projects aimed at expanding and Local governments and local parliaments need water improving services have often had disappointing results; business advice in order to make informed financial investments in capital works fail to produce a sustained and technical inputs into political decisions. Particularly flow of reliable services, and subsidized financing of service during tariff deliberations, there is a need for non- providers fails to translate into improved access by the poorest. biased professional recommendation. An apolitical and professional Water Business Board, consisting of only Output-based aid aims to address these weaknesses by business-oriented professionals or former professional shifting public funding inputs to services actually delivered utility directors (not civil servants or representatives of the to poor households (e.g. household connections to a water community) that have turned utilities from loss-making system). bureaucracies into profit-making businesses, can advise local governments on the technical and business aspects The objective of this approach is to provide a sharper focus of the water business. This is particularly the case in on intended objectives, to improve incentives for efficiency aspects of reaching the poor within the general guidelines and innovation, to enhance accountability in the use of public resources, and to create opportunities for mobilizing private of full cost recovery. This Board may be accepted at first financing. as an advisory board by local government, but as its advice becomes more trusted and its impartiality established, it Traditional approach Output-based approach can become the nucleus of an apolitical regulatory body. As mentioned earlier, where local governments and Inputs Inputs parliaments usually made good decisions, officers had (such as (such as business backgrounds. materials) materials) In PDAMs as well, business experience is a common factor among those Diruts who are successful. This board may be a special business unit, for instance, in the BPP SPAM (Control Board for Development of Drinking Water Systems) that was mandated under PP 16/005 to assist Service Service Provider Provider in all aspects of the provision of drinking water. Public finance LOCAL GOVERNMENT ACTIONS Customers Customers There is an indication that by 00, the aggregate stock of funds being held by local governments had grown to 16% of annual expenditures, and is probably higher now (Lewis and Chakeri, 004). Therefore, donor and central government strategies should be aimed at drawing out part of this aggregate stock of local government funds for use in connecting the poor, perhaps by matching output- based aid (OBA) grants on a 50-50 basis. 33 Revise Water Business Practices Article 6(7) "Utilization of water resources is carried out by enhancing the social function to realize justice There are many tools available to local governments by observing the principle: beneficiary pays for water for quick study of the basics of the water business. For resources management services, and involving the role instance, the SMALLGAP project has created an outline of the community" and checklist of the key points to consider when requesting a tariff increase. They can also learn from the experience Article 40 "(5) arrangement of development of drinking of successful Diruts as described in the Annexes of water supply system is intended to: c: increase efficiency this study. Local governments that respond to central and coverage of drinking water services" government incentives can follow central government guidance and refrain from involvement in the daily affairs Furthermore, the implementing regulation of the Ministry of their PDAMs, thus placing responsibility for outcomes of Public Works 16/005 states: squarely on the shoulders of the PDAM management. They can also insist on the use of fit and proper tests in Chapter V, Article 1: "(1) Development of drinking water the appointment of Diruts and use the advisory services systems is part of the responsibility of the central of Water Business Advisory Board. government and local governments to guarantee the right of every person to the minimal daily amount of drinking watertofulfilltheneedforahealthy,clean,andproductive Revise PDAM Incentives life according to the laws in force." Analysis has suggested that PDAMs try to discharge the The explanation accompanying PP 16/005 states that roles assigned to them by their owners and that owners its article 3 refers to aim to keep control of PDAMs as long as they can. However, the current objective of PDAMs is to contribute "the principle of balance between social, environmental, PAD to their owners. There is no written assignment, and economic functions, particularly for providing easier in national laws and regulations or in local government access to lower income groups (the poor)." perda, giving PDAMs an objective to target the poor. Local governments can change this by instructing PDAMs in Through the Supervisory Board, their PDAM writing to target the urban poor, particularly by increasing representatives, local governments can treat the PDAM coverage and efficiency. corporate plan or FRAP (financial recovery action plan) as a performance contract and hold it to achieving its In most locations, the local government's assignments to targets before local governments are willing support tariff its PDAM would be best written into a perda, giving them increase requests. If the PDAMs improve, they may be a stronger feeling of ownership through the perda than rewarded with a cancellation of all claims to dividend would passing on a central government regulation. The payments. assignment would become a part of the PDAM's vision and mission statement and eventually a part of its corporate As a stimulus to their PDAMs, local governments can plan. The perda would state clearly the responsibilities of grant funds for the construction of new water treatment the local government (e.g. provide any subsidies that are facilities and extension of distribution facilities to low necessary and help PDAM remove illegal connections) income areas in exchange for the establishment of PDAM and the PDAM (e.g. meeting performance and community pro-poor procedures. While the actual work can be done participation targets). The basis for such a perda seeking either through or outside the PDAM, such an expansion to achieve service with greater social justice may be the project would enhance a PDAM's revenue earning Water Resources Law 7/004: capacity, allowing it to reinvest cash flow into a stronger and more financially healthy business. 34 | Enabling Water Utilities to Serve the Urban Poor Chapter 5 Proposals to Overcome Barriers Local governments can assist PDAMs in cleaning up If the performance of PDAMs is measured by the illegal connections, which is often dangerous work. Such extension of good quality coverage and service--whether connections can either be simple taps on unguarded pipe by the PDAMs themselves or through third parties such mains (called "spaghetti") or unregistered connections as community groups and small-scale providers--they that are often constructed by colluding water company can be expected to fully support an increased number of employees. As in other countries, there are more illegal third parties in areas not yet served by piped water, such connections than the data indicates because they are as small-scale water providers, in the provision of water not acknowledged. One provider of services in Jakarta service. Utilities may be able to establish a counseling states that illegal water, along with well water, is one of service on a pilot basis or to provide for debt rescheduling the two main alternative sources to water sold by the if recommended by a forum connected with the PDAM. utility. Joint local government/PDAM efforts to clean up illegal or unregistered connections may also uncover Eventually as PDAMs increase efficiency to reach their illegal arrangements of some PDAM employees with necessary targets before increasing tariffs, they are customers. expected to recover both their current costs and the costs of extending service for new connections. To satisfy this Combinedwiththedifficultyofmonitoringmilesofpipelines requirement in the present, subsidies may be necessary. and houses throughout the city, the high consumer water surplus currently makes the provision of water especially To provide incentives to local governments, the energy vulnerable to petty and not-so-petty rent-seeking by local subsidy, SEAB (subsidi energi air bersih), could be provided strongmen. Such rent-seeking activity may be based on for the full or partial cost of new connections to the poor. artificial shortages or price differentials that often result When targeting is uncomplicated, this use of energy from a misplaced desire to help the poor. This brings into subsidy funds can help reduce poverty not just in the year focus the critical role of local governments in bringing it is provided, but in future years as well as helping the poor about the reduction of unaccounted-for water. enjoy the savings and better health, prestige, and financial well-being from their house connections. Subsidies for new connections have the further advantage of aiding and maintaining a previously failed market. It is also LOCAL WATER UTILITIES' (PDAMS) ACTIONS advantageousthatsuchsubsidiesconstituteonlyone-time payments and do not need to be perpetually funded. Create Pro-poor Corporate Plan The benefits of a pro-poor connections component would be impressive. According to SUSENAS 003 data, about In line with their new mission, PDAMs will have to create 8,000,000 poor urban households with an income of Rp. corporate plans that include extension of distribution 800,000 or less are unconnected to the PDAM system. systems to poor areas. They will have to create a Of this 8 million, 1.1 million pay a large amount for new vision and a new mission and arrange for staff water from vendors and thus would benefit most from development, organization, fit and proper tests, and house connections. The greatest likely number of poor better customer service. In their corporate plans, utilities households that could be targeted and connected in a may have to provide targeted services to keep some of single water supply expansion project would be about the poor within a full cost recovery system. There are 100,000. The average official cost of new connections several tools available to them, such as counseling for among the 79 PDAMs participating in the 00 households that have been unable to pay their water bills benchmarking programs was less than Rp 550,000. due to unforeseen circumstances. Thus, the full cost of 100,000 new connections at Rp 35 550,000 would be about US$ 5.8 million. Using the data Revise Tariff Structure in Table 4, the income effect of 100,000 poor households saving only 3% of their household budget over five years PDAMs have no incentive to serve the poor unless they would be US$ 15 million, while the calculated welfare receive subsidies for "social tariffs" or they can charge effectoverfive years wouldbe US$ 100 million. Moreover, cost-recovering tariffs. According to 2002 benchmarking these benefits would continue well beyond five years. data, the average income from social connections was With cost sharing, an OBA grant of about US$ 5 million only about .5% of revenue. could lead to these results. By contrast, the water sector component of DAK grants in 004 was $ 50 million. In "Social tariffs" should rise over time because, as another program, the energy subsidy for the water sector shown in earlier sections and in Table 4, even families in 005 may be as large as US$ 315 million. earning less than Rp 200,000 can afford to pay "cost- recovering" tariffs even though they may not be able to pay the connections charge in a lump sum. Customer satisfaction surveys have shown that consumers will pay higher tariffs for better service, but they do not want to pay higher tariffs for the same poor service. Box 9: Water Subsidies and the Poor A 005, World Bank study has concluded that when water service coverage is low, connection (cost of water meter plus connection pipe), ratherthanconsumption(costofwaterconsumed)subsidies aremost likely to benefit theurban poor. For this towork, the poor havetobe willing and able to take advantage of the connection subsidies, and as yet there are no definitive studies showing the relationship between consumption subsidies and the distribution of their benefits. The authors of the study gathered empirical evidence on the performance of various forms of subsidy in many countries throughout the world in order to draw conclusions as to what types of water and electricity subsidies work and why. The evidence concluded that consumption subsidies such as lifeline block subsidies or increasing block tariffs that are common in both the water and electricity sectors in practice tend to favor the non-poor. There are many reasons, in the water sector, for this result, but the dominant reason is that so many of the poor are unconnected to piped water. Quantity targeting of consumption subsidies often provides little relief to the connected poor if fixed charges aresettoohigh. Lowtariffsalsotendtosubsidizethenon-poorattheexpenseofthepoor. Additionally,littledifferencewasfoundbetween the consumption patterns of the poor and the non-poor connected consumers. Under pricing of tariffs is a prevalent form of regressive subsidy that is not restricted to developing countries. About 69% of water utilities in both developed and developing countries were found to be unable to recover the costs of operations, maintenance, and depreciation through tariff income. Under pricing is a tempting policy for local governments because of the long life of water supply assets. The true cost of under pricing of tariffs is not evident until assets have to be replaced. Water supply in infrastructure, as an asset, can take upwards of to 3 decades to deplete and be required to replace. A review of worldwide cross-subsidy schemes in the water sector found that cross-subsidies work only when there is a balance between the subsidizers and the beneficiaries. Generally, industrial consumers contributebetween 10 and15% of a utility's revenues. Both parties react quickly to price distortions caused by the subsidy, often resulting in a downward spiral where the tariff is so high that subsidizers begin to seek alternative sources of water, leaving an even bigger load for the remaining subsidizers. When utilities can't cover their costs, they reduce the level of service and increase costs to customers. Source: Komives, Foster, Halpern, and Wodon. 36 | Enabling Water Utilities to Serve the Urban Poor Chapter 5 Proposals to Overcome Barriers In order to increase access to all, PDAMs can charge is 3 m3/month/household, while another source cites the different tariffs in different areas by agreeing on new minimum recommended amount for a refugee camp as tariffs with communities before extending the service. 3.6 m3/month/household. In addition to raising tariffs, they can revise the tariff structure to reduce the minimum consumption block by gradual increments. Under such a system, they could break up the lowest tariff block of 0-10 m3/month, creating a smaller one of 0-4 m3/month, then charge a Box 11: Increasing Services for the Poor higher tariff for the next block. The 1997 water sector strategy suggested that tariffs in Indonesia consist of In other countries, various mechanisms have been developed fixed and consumption costs measured in two blocks: to respond to the special needs of the poor customers of water one for less than 10 m3/month and another for more utilities. Some of these mechanisms are described below: than 10 m3/month. The ten cubic meters per month Counseling. As a part of special customer service, utilities standard was a Repelita V target based on a lifeline rate can counsel poor households that can't understand the of 4-5% of a poor household's budget rather than on a payment system or that simply can't pay. They can work out minimum consumption amount (Locussol). The WHO- a repayment schedule and suggest alternatives that fit the recommended minimum consumption amount, however, household's budget. Flow Inhibitors. To provide the minimum amount of water Box 10: Making Water Connections to the Poor in Manila for daily needs, utilities often install flow inhibitors in the line leading to the house connection. In Manila, a dweller in a poorer neighborhood may pay as much Emergency Standpipes. If a household is disconnected, as 900 pesos (US$ 16.5) for 6 m³ of water in a month from a utilities may install a public standpipe nearby. It may or vendor while a well-off citizen living in a piped neighborhood may not have a flow inhibitor. It is intended to provide the pays just 160 pesos (US$ 3) for 30 m³. disconnected household with a minimal amount of water. MayniladWater,whichoperatesthewatersupplyforthewestern Prepaid Water Vending. Meters that accept payment by cash part of metro Manila has implemented the "Bayan Tubig" or prepayment card provide water on demand. ("Water for the People") Program aimed at providing water connections to the poor. After selecting poor communities and Disconnection Procedure. In some countries, there is a getting their feedback, Maynilad Water decided to grant the waiting period of one or several months before a household residents individual water connections. A one-time installation is disconnected for not paying water bills. In some countries, fee of US$ 95 was charged, which was payable within one year. utilities are not allowed to disconnect households. In other For a consumption of 6 m³ per month, residents were required countries, households can be disconnected after a social to pay US$ 1.0 ­ thirteen times less than they were paying to worker makes an official visit and determines the reason for vendors for the same quantity. non-payment of water bills. Sometimes, a judge must make the final decision to disconnect. The Bayan Tubig Program has resulted in a reduced incident rate of illegal connections. It has also infused a better quality Frequent Billing. Sometimes, the very poor are unable to of life to the people served, since the time spent in queuing at save funds for quarterly payments. Because transactions public standpipes can be better utilized. Until December 004, costs are high, it would be reasonable to recover all or part of Manilad Water has extended 83,0 connections to the poor them if, for instance, monthly water billings were reduced to and hopes to install 71,000 more in the next five years. fortnightly billings. Manila Water Company, which serves the eastern part of metro Funds for Debt Forgiveness. Sometimes the utility has a fund Manila has implemented a similar program called "Tubig para for payment of all or part of a water bill that is owed by families sa Barangay" ("Water for Depressed Communities"). in difficult circumstances. Source: Asian Water Source: OECD 2003. 37 PDAMs need to tie tariff increases to improvements in hearings,theuseofconsumersatisfactionsurveysandthe service as measured by customer satisfaction surveys achievement of targets. PDAM Banjar used transparency and town meetings. The most obvious nexus of local to good advantage during town meetings involving government-consumer-PDAM interest occurs during the students, the press, universities, NGOs, DPRD, local consideration of tariff increases. This moment provides government officers, members of the private sector, the the best incentive for local governments and consumers to Consumers Association, and others. In one town meeting understand the water business and for PDAMs to practice in Makassar, members of unconnected communities transparency and point to improvements in service. At were also specifically invited to provide input. Connected that time, it would be most productive if Article 60 (6) of PP customers were informed that keeping their own rates 16/005 were followed strictly, such that PDAM directors low would make it impossible for PDAMs to have enough would propose the tariff, the Supervisory Board would money to extend connections to other neighborhoods. approve it, and the mayor/Bupati would promulgate it. For sustainability and replicability in other cities or kabupaten, the town meeting may also be attended The Water Resources Law 7 of 004 recognizes that by a representative of APEKSI (Asosiasi Pemerintah consumer participation is important for sustainability and Kota Seluruh Indonesia) or BKKSI (Badan Koordinasi continued pressure on local government is necessary Kabupaten Seluruh Indonesia), the national association for obtaining improvements. Thus, it is essential that of cities or the national association of kabupaten. poor consumers make informed choices and consumer oversight of local services remains strong. The case for Many observers believe that PDAMs are far more likely tariff increases is strengthened with transparent public to get a satisfactory tariff increase from a meeting of Box 12: Latin American Social Policy in the Water Sector ThecentralconcernofLatinAmericansocialpolicyinthewatersectorhasbeentoensuretheaffordabilityoftheservicetolow-income households. This issue has typically been addressed through a complex array of cross-subsidies that include a rising block tariff structure and the application of substantial surcharges to industrial tariffs. More recently, in the context of sector reform, attention has been turning to the inadequacy of service coverage among poor households. The standard approach to this problem has been to incorporate legally binding connection targets into concession contracts. In return for expanding the service into commercially unattractive areas, the operator receives the right to oblige local residents to connect to the network and to levy a substantial connection charge. The Buenos Aires (Argentina) and La Paz (Bolivia) concessions provide examples of this approach. However, the accumulating evidence suggests that this standard blueprint for social policy carriers a number of significant flaws. On the one hand, the existing cross-subsidies often do more to benefit the middle classes than the poor. For one thing, the poorest families tend to be those that remain unconnected to the network and are hence unable to benefit from cross-subsidies. For another, the criteria used for allocating the cross-subsidies do not always correspond with the economic condition of the recipient. In the case of rising block tariffs, "subsistence consumption" thresholds are often set so high that they wind up benefiting the vast majority of domestic customers. On the other hand, the charged levied for mandatory network connections have sometimes been set so high as to be well beyond the means of the poor households they were intended of benefit. Chile and Columbia provide interesting exceptions to this broad pattern in that both countries have developed more scientific approaches for identifying poor households to improve the targeting performance of their subsidy schemes. In Chile, targeting is based on a socioeconomic score derived from a wide-ranging household interview, while in Colombia, targeting follows a nationwide socioeconomic classification of neighborhoods, based on the physical quality of local housing and amenities. Source: Foster 38 | Enabling Water Utilities to Serve the Urban Poor Chapter 5 Proposals to Overcome Barriers stakeholders than from the decisions of a politically- willingness to pay and their preferences and priorities oriented regulatory board. Consumers want to know what for better service. Together with the forums, water the PDAM will do to earn its increased tariff, and PDAMs utilities should monitor the benefits to the community of need to present a transparent plan for improvements in increased access to piped water for the poor so that local services linked to tariff increases. More than any other governments and consumers understand how they would group, the poor have shown they are in favor of increasing share in the wealth created by new house connections. the provision of service to the poor. The "tariff compact" between a PDAM and its stakeholders is a viable method When they are tasked with serving the poor and their to setting tariffs on a rolling basis and gradually bringing duties and responsibilities are clearly decided, utilities tariffs upward to cost recovery levels. Eventually, the can become strong partners in poverty alleviation. The process can move towards an impartial regulatory body current trend toward consumer orientation has been with the Water Business Advisory Body forming its basis. accelerated by direct election of mayors and Bupatis and efforts toward more government transparency. Despite Unfortunately, the SMALLGAP team found that many various obstacles to serving the poor, utilities have PDAMs didn't prepare convincing requests for tariff the advantages of paying competitive non-civil service increases. In order to do so, they need to clearly show salaries, years of semi-autonomous experience in the the results of not being granted such an increase. commercial aspects of service provision, and a more They also need to make sure that they understand intensive orientation toward consumers, who provide the quality of their services and the satisfaction of the almost 100% of their income. customers. It is significant that only 9 out of 79 PDAMs in the benchmarking program had conducted employee satisfaction or customer satisfaction surveys. SANITATION BENEFITS OF PROPOSALS Eventually, when PDAMs prove financially solvent, the entire capital cost of projects adding to the stock of infrastructure, including water treatment plants, Water supply and wastewater disposal must be grouped distribution pipes, and house connections can be together. While some community-based sanitation recovered through the tariff. As Locussol points out, facilities may depend on groundwater, successful when connections fees are included in tariffs, existing community-basedsanitationgenerallyworksinareasthat customers bear the cost of connecting new customers, have clean piped water. While water utilities operate which is fair considering that existing customers have sewerage services in only six cities (Bandung, Medan, received the benefit of government subsidies. (Locussol) Surakarta, Cirebon, Banjarmasin, and Bengkulu), and few are directly responsible for community-based sanitation PDAMs can follow the lead of several forward-looking projects, studies indicate that increasing the quantity of utilities by providing a part of their budget to meetings with clean water for use by the poor reduces diarrhea more standing local community water forums. These legally than increasing the quality of water.8 These findings registered forums, which already exist in some cities, appear reasonable considering that convenient personal can inform existing consumers and potential consumers hygiene, including water closets, food preparation and about water supply issues. In addition to current body and hand washing needs clean water. Furthermore, members, the forums should include representatives of as the ISSDP (the Indonesia Sanitation Sector poor communities, such as community council (BKM) Development Program) and other projects help create representatives. The forums and customer satisfaction surveys (SKP) can inform water utilities of the consumers' 8 For instance, in one review of 67 studies, Esrey et al. (1985) found that improvements in water availability reduced instances of diarrhea by 5% while improvements in water quality reduced them by 16%. 39 city-wide sanitation strategies, most of the proposals considerable amount of illegal activity in some cities with designed to overcome barriers to the provision of water to people taking advantage of price differentials. Many local the urban poor apply to sanitation as well. For instance, governments need to know when rising commercial water those intermediary institutions bridging the gap between tariffs approach the point where companies turn to other the people and the PDAM can facilitate informed choices legal or illegal sources and stamp out the latter, which on sanitation, connections, billing and complaints, can be very expensive to the society as a whole. while linking community organizations with valuable information. As with water, the poor benefit the most A study of the financial and other benefits of house from city-wide sanitation programs because they already connections for the poor is likely to reveal dramatic live in the least desirable locations. results. When benefits are aggregated and quantified, they may prove larger than the modestly rough estimates in this paper and may provide further support for further expansion of house connections. FURTHER STUDIES As well, it would be helpful for a study to calculate the actual infrastructure subsidies provided by central, Further studies will be useful to establishing what provincial, and local government grants and loans that households in various income bands are paying for have not been repaid. In other words, how much of water in other urban areas-- especially those in very the current $.5 billion water sector infrastructure in low income areas. If the cost for water is very high as Indonesia has been subsidized? When one sees the compared to the household tariff, there should be a more size of the subsidy provided to those who are already in-depth investigation into why the poor may not want to connected to the piped water system, it may be easier be connected a piped water system. Household budgets to understand why decreasing subsidies for the need to be prepared showing the actual social and construction of more expensive sources of water together economic costs of various water systems. with expanding connections for the poor would constitute a valid transitional strategy until PDAMs can earn an There is a need for a comprehensive comparison of the adequate amount of tariff income. actual cost per beneficiary of house connections versus standpipe programs in Indonesia. The results will be Theimplementationoftheserecommendationstoincrease important to other countries where the predominant form service to the poor will support, rather than detract from, of water provision to the poor is through standpipes. Such the ongoing process of utility reform and improvement. a comparison should span the last 15 years and include In fact, by placing emphasis on service to the poor within information on the number of continuously flowing, the context of full cost recovery, implementation would unmetered, or damaged standpipes, and the cost to the prepare PDAMs for closer participation with the private PDAM and society of the illegal use of standpipes. The sector. Furthermore, as more urban poor receive house UPDATE templates can be used for studying the rough connections, the need for subsidies and continuing feasibility of local governments building facilities to reach information campaigns can be reviewed in light of the the unserved poor at various tariffs within specific areas. strength of demand for clean piped water. In addition, it would be useful to have a study on the effects of price differentials on illegal connections and water smuggling as informal reports describe a 40 | Enabling Water Utilities to Serve the Urban Poor Annexes Annex 1 Data for 24 PDAMs ­ LGWS Baseline Data for LGWS Assisted PDAM - Final Results Financial Indicators 1999 2000 LGWS Project Assisted PDAMS Operating Net Average Tariff Operating Net Average Tariff Ratio Profit Tariff Increase Ratio Profit Tariff Increase (%) (Rp million) (Rp/M3) (%) (%) (Rp million) (Rp/M3) (%) Year 1 Assisted PDAMs Base Year 1. Kab. Asahan 58 (1,138) 567 0 60 (1,85) 570 0 . Kab. Belitung 5 (331) 567 0 54 (43) 64 0 3. Kab. Jember 78 (393) 504 0 88 75 577 48 4. Kab. Banjar Baru 51 (1,97) 816 0 64 (767) 808 0 5. Kab. Karang Asem 6 (1310 504 0 69 (516) 593 0 6. Kota Kendari 88 199 99 67 80 (59) 1.50 0 7. Kab. Pacitan 54 (197) 590 0 61 (118) 601 0 8. Kota Sawah Lunto 59 (8) 631 33 58 (189) 736 0 9. Kab. Batang 67 (10) 511 66 67 173 569 0 10. Kab. Jombang 41 (1,074) 400 0 51 (1,071) 400 0 11. Kab. Hulu S Tengah 45 (585) 640 0 56 (478) 80 0 Sub-total / Average 60 (5,349) 611 15 64 (5,137) 686 6 Year Assisted PDAMs Base Year 1. Kota Banjarmasin 53 (10,46) 1,05 60 13. Kota Pangkal Pinang 48 6 951 0 14. Kab. Kapuas 71 (57) 874 0 15. Kota Samarinda 83 (853) 1,086 0 16. Kota Pontianak 81 1,391) 1,571 30 17. Kota Sukabumi 74 149 84 47 Sub-total / Average 68 (9,644) 1,058 23 Year 3 Assisted PDAMs 18. Kota Surabaya 19. Kota Madiun 0. Kab. Tuban 1. Kota Semarang . Kab. Tasikmalaya 3. Kab. Cirebon 4. Kab. Sukabumi Sub-total / Average Note: * As of june 30, 003 4 | Enabling Water Utilities to Serve the Urban Poor Annexes 2001 2002 2003* Operating Net Average Tariff Operating Net Average Tariff Operating Net Average Tariff Ratio Profit Tariff Increase Ratio Profit Tariff Increase Ratio Profit Tariff Increase (%) (Rp million) (Rp/M3) (%) (%) (Rp million) (Rp/M3) (%) (%) (Rp million) (Rp/M3) (%) 78 (633) 893 6 84 (636) 1,108 0 97 (74) 1,166 0 77 (85) 1,79 70 76 (81) 1,477 60 86 (106) 1,84 0 10 5 764 30 97 56 951 67 95 188 1,096 13 76 (700) 9 46 109 1,07 1,735 0 103 157 1,74 0 63 (631) 580 0 71 (1,018) 941 114 79 (48) 1,91 108 81 (555) 1,39 0 9 (144) 1,936 65 108 98 ,047 0 49 (50) 67 0 47 (568) 765 0 76 (88) 1,59 47 71 (119) 986 50 7 (765) 1,547 50 51 (168) 990 0 83 358 568 0 108 30 681 75 116 36 95 0 48 (1,039) 435 50 67 (440) 553 50 81 (64) 664 0 67 (34) 91 15 70 (36) 1,09 15 46 (850) 1,86 0 72 (4,205) 849 29 81 (2,595) 1,173 45 85 (973) 1,261 15 70 (3,596) 1,934 0 86 70 ,044 10 88 1,167 ,38 5 50 (984) 1,94 153 8 (53) 1,849 0 80 (100) 1,798 0 69 (89) 1,055 40 93 (57) 1,499 5 88 (45) 1,494 0 56 (9,519) 1,115 0 84 (,5) 1,474 0 84 (399) 1,509 0 81 (3,075) 1,463 0 9 (494) 1,945 50 10 707 , 0 85 08 1,40 0 88 11 1,8 9 79 (7) 1,53 0 69 (17,858) 1,350 32 88 (2,125) 1,682 24 87 678 1,767 1 Base Year 97 13,377 1,644 0 99 13,467 1,614 0 103 15,690 1,417 0 90 78 684 4 115 1,10 1,004 0 17 673 918 0 93 103 795 0 107 36 984 4 108 337 1,55 0 71 (4,64) 9 0 67 (17,305) 1,46 187 113 6,43 ,445 34 89 110 657 0 107 960 1,109 4 116 708 1,100 0 64 (1,816) 1,140 0 63 (,037) 1,334 0 8 98 1,511 48 53 (,93) 1,093 0 73 (1,305) 1,646 63 73 (717) 1,619 0 80 5,295 991 9 90 (4,738) 1,277 48 103 24,041 1,466 12 43 Annex Suggestions from Dirut Kumala Siregar HEALTH OF PDAMS IN INDONESIA Strategy For The Next Steps In Strengthening Pdams: By Kumala Siregar 1. Redefine the institutions for water treatment · Make the PDAM an independent operator, Foreword rather than serving the dual role of operator and regulator. The Republic of Indonesia made a commitment at the · Determine whether PDAMs exist to contribute PAD 00 Johannesburg Summit that 80% of the urban or to provide service and increase coverage. population and 40% of the rural population would receive · Determine if water service should be a local clean water coverage by the year 015. government department, a service oriented only regional company or a profit oriented limited Because the government has to fulfill this commitment, it company and set the criteria for its formation. mustaddressquestionsof(1)funding,()waterresources, and (3) the structures of the institutions involved in these . Providewaterinaccordancewithcommercialprinciples activities. We need regulations for the following: · Professional service requires a regulation Fortunately, the Water Resources Law was passed and regarding the basics of treatment, incentives and signed in 004, and we are waiting for implementing disincentives, including benchmarking. regulations to be drafted and agreed upon. · Fulfilling necessary criteria, such as capability and commercial experience (if PDAM is to take a profit- During this preparation, provincial and kabupaten/ making form) and professional management. city governments must be prepared to empower the institutions under their authority, such as the PDAM or 3. Upgrade the quality of water provision using the local government departments, so that local governments full cost recovery principle are not surprised when the implementing regulations · Regulating a minimum standard for the quality of are passed, but rather are prepared to meet the 015 clean water service. targets. · Compacting with local governments to provide clean water that, amongst other things, achieves Condition of PDAMs now: the minimum standard of quality (in the case of a PDAM, the compact would be achieved by a local 1. Coverage is still low: about 0% of the population has regulation, or PERDA). clean water · A firm regulation regarding adherence to the . High water losses: about 35% nationally principle of full cost recovery in tariff setting (this 3. Debt of Rp 4.5 trillion can be accompanied by exceptions, penalties, 4. Beginning of quality and quantity problems with water incentives, and disincentives). resources 5. Shortage of PDAM professionals 4. Accelerated settlement of PDAM debt 6. Of 306 PDAMs, 90% are not healthy and only 10% are ·Full support from the government for settlement in healthy financial condition of debt. ·It is hoped that the Ministry of Finance can devise a strategy for the earliest settlement of debts. 44 | Enabling Water Utilities to Serve the Urban Poor Annexes 5. Establishment and increase of clean water coverage for the people · Regulation regarding necessary service coverage standards for the people (including incentives, disincentives, penalties or exceptions whenever needed). · Mechanism for filling out and monitoring service coverage · Clear regulation regarding the allocation of raw water (with support to areas that have little or no water). 6. Increased government support for technical aspects, technology, and funding · Planning and assessment of projects must be oriented toward real needs and coordinated with the local PDAM. · Subsidies may be needed for specific projects, such as water terminals, tanker trucks, etc. These six proposals for the national recovery of PDAMs are offered in view of their present condition. Next, strategic steps need to be monitored for reaching the Millennium Development Goals by 015. These steps are: 1. Accelerate preparation of regulations for drinking water. . During this time of transition, a professional body should monitor the management and operation of PDAMs. This independent body can operate under the aegis of the Department of Public Works or Department of Home Affairs. 3. After the PDAMs have recovered and targets are almost achieved, this body can be dispersed and the function of the PDAM returned to the owner (local government) This is a glimpse of my vision for the recovery of Indonesian PDAMs. I hope that it can be useful to us all. 45 Annex 3 Suggestions from the Late Tarsius Isbandhi THE TOTAL SOLUTION APPROACH TO 10.Improving weaknesses in human resources by EMPOWERMENT OF THE PDAM AS A PUBLIC training and developing the basic knowledge of water SERVICE INSTITUTION PROVIDING CLEAN treatment WATER 1999 The main activities in my first six months as Technical Director included: By T. Isbandhi, former Dirut, PDAM Jambi 1. Increasing the performance of the water treatment plant at Jl. Slamet Riyadi, including improvement of Foreword the buildings. . Redrawing the maps of the piped distribution system I feel compelled to put forward some ideas for the with a recalculation of the optimization of the development of PDAMs, based on my work experience distribution system so that new connections no longer and educational background that has encouraged my presented a problem. thinking about the progress of PDAMs. I am aware that 3. Establishing standards for new house connections so much has been written about the subject, but perhaps that tapping into the main lines was done properly by this contribution is unique in that it reflects 18 years of using ISO standards without causing other problems. theoretical and practical work in PDAMs. 4. Implementing block renovation to divide the distribution system into blocks and inserting properly Before February 1987, when I was appointed Technical calibrated meters. Director of PDAM Jambi, I tried to improve the performance 5. Instituting exchanges between employees of the of directors in the Technical, Administration, and Finance Technical Department and other PDAMs Departments by having them focus on the following 6. Enforcing and upholding regulations in all aspects principles: related to illegal connections. 1. Tightening physical security by working with the I am writing this so that those who are interested police. in improving the performance of a PDAM using the 2. Taking responsibility, especially financial, for the total solutions method can learn from my experience performance of the PDAM. and mistakes. I am sure that the PDAM can better its 3. Valuing the general good over private good. performance as a public service arm because it already 4. Realizing that new connections established by has three advantages: moonlighting PDAM employees and illegal connections · It is an enterprise that can fulfill the needs of a large are a great loss to the PDAM number of people 5. Improving the corporate image through billing · It is an enterprise with a monopoly franchise efficiency. · It has no competitor 6. Improving the image of the company by erasing the impression that associates and contractors have close The PDAM can employ the basic tools of management personal associations with directors. such as: 7. Purchasingofficeequipmentandproductionmaterials · Networking at realistic prices, thus increasing the efficiency and · Benchmarking improving the performance of the company. · Outsourcing 8. Enforcing discipline for supervisors and employees to · Value-adding activities help build the image of the company. 9. Establishing friendly ties with the owner, local I very much hope that the prospective Dirut will be chosen governmentofficers,DPRD,thecustomersinparticular from among those who know the PDAM business before and the people in general. offering it to interested outsiders. If this principle is 46 | Enabling Water Utilities to Serve the Urban Poor Annexes observed from the beginning with a fit and proper test or In my experience, department directors are not prepared a psychotest, the performance of the Dirut will be good to replace Diruts either before or after their terms of not because he is liked by the owner but because of his service. Also, I feel that the head of a section could just enthusiasm and objectivity. as well become a department head depending on his performance. All stakeholders should understand that a PDAM Dirut is notapoliticalappointment,butaprofessionalappointment Those employees demonstrating good performance and that must be supported by good management. skills should achieve accreditation in order to receive PDAMDKIJayaisabarometerofnationalandinternational greater acknowledgement and better career opportunities performance and a window into the face of service of rising beyond mere structural channels. PDAMs throughout Indonesia. These are only a few thoughts on improving the system Moreover, a PDAM in a provincial capital has the strategic and sub-systems. role of being a reservoir of talent for the PERPAMSI regional secretariat. Improving the PDAM's service to the public depends greatly on the quality of the Dirut. Organization Maintaining and improving the quality of PDAMs involves The question arises as to whether it is possible to force a numerous factors: SYSTEM, ORGANIZATION, HUMAN commercial company such as a PDAM to act as a public RESOURCES,FINANCE,TECHNICALASPECTS,COMMUNITY company as provided for in public law no. 5/196 or PARTICIPATION and COMMUNITY RELATIONS. This cause it to be a profit-making company as provided for in method of solving various problems is called the total public law 1/1995. The choice of one or the other is very solutions approach. important because it will determine the ground rules for the operation of the enterprise. The line of thinking is that improving the PDAM cannot be done merely through partial programs. Rather, one must employ a complete concept while emphasizing some Human Resources sectors. The total solution concept is best explained in the following way: Development of human resources in the provincial capital spreads out across a region just as developments at the center lead to emerging national and international System concepts. Therefore,trainingshouldbeginattheprovincial level in a provincial training centre before moving onto the Improvement of the PDAM system includes focusing on national level. the administrative, personnel, and technical aspects. However, I submit that the sub-system for reading meters Psychologyisimportantinthemanagementandtreatment and billing should receive primary attention because of human resources. Improving human resource it holds the keys to stability and increased income. management involves numerous aspects from selecting Therefore, I hope that PDAMs will adopt the motto that and training employees to obtaining permissions and "every day is a day for good administration." coordinating pensions as well as measuring productivity and establishing rewards and punishments. In fact, in any I hope that with this system arrangement, water service PDAM, there are two kinds of effective employees: those will remain of high quality even when the Dirut is replaced who can because they have done it so often and those and will allow for the rotation of supervisors and staff for who can because they are supported by an academic the development of human resources. education. 47 At one time, I had the experience of working with a team Financial Aspects that administered psychological tests to determine the basic potential of supervisors at PDAM Bengkulu and In order to discuss financial aspects, Directors have to PDAM Palembang. In PDAM Kota Bengkulu, only 5 of 5 understand three kinds of financial reports: managers were shown to have the basic potential to work 1. Cash Flow in a PDAM. In PDAM Kota Palembang, the numbers were . Income Statement lower with only out of 5 managers passing the test. 3. Balance Sheet Finally, another test was conducted on all managers and employees at PDAM Kota Jambi and only 30% showed Additionally, leaders and decision makers need to really basic potential. understand the principles of financial management and accounting management, while embracing the concept of At PDAM Jambi, most of those who had come from the "return on investment" in decision-making. local government apparatus were returned little by little to that environment. Those who were not from local The PDAM accounting manual should be consulted often, government institutions were given further guidance with leaders holding to the five accounting principles: through achievement motivation training designed to going concern, comparability, consistency, accountability, increase their performance and productivity. After 6 and continuity. years of training, 70% of the managers had the basic potential to work in a PDAM. This means that 30% of the It is important that both the PDAM and the provincial employees still did not have the basic potential and could capital are ready to become centers of learning for other not be upgraded. Moreover, those who had upgraded PDAMs across the province and in other provinces. their skills still lacked knowledge, demonstrating the necessity of increasing the performance of directors, section heads, department heads and employees. Technical Aspects Ultimately, the development of human resources uses the philosophy, "Don't throw out but invite; don't hit but There are technical aspects that must be understood by embrace." leaders in all fields. There is great hope for an association such as This includes everything from water sources to house PERPAMSI to develop their human resources by working connections. Water sources include water resources together with national faculties, private faculties, and management and water quality management. The quality educational institutions oriented towards business and of raw water greatly determines the quality of water management. produced by the PDAM. Every change in the quality of raw water creates a consequence so the PDAM must be In order to ensure quality training sessions, attention ready to take pro-active steps. should be paid not to the length of the training time but to the topic that is chosen and should involve teachers The two seasons (dry and rainy) strongly influence the who understand the vision and mission of the clean water quality of raw water and that produced and sent to service business. consumers. A human resources problem arises when the selection There is no reason why consumers should accept excuses of employees is not in line with the decisions or needs, for poor quantity, quality, and continuity of water. It is the such that people get the impression that PDAM stands responsibility of the PDAM to provide these services. The for "Perusahaan Dulur Anak dan Menantu" (An in-law and condition of the old piping system should be studied and family company). zoned so that repairs can be done in stages and one can 48 | Enabling Water Utilities to Serve the Urban Poor Annexes determine which region is responsible for any reduction coordination with the media to encourage popular of quality or continuity. An information system should be participation in the provision of clean water services. used to help monitor the condition of old pipes. Technical specifications of materials must follow existing Public Relations standards that are tested in the field. Public relations include not only the personnel Standard operating procedures should ensure that each departments. Rather, all employees form the backbone employee knows what he is doing and is not simply of the human relations web and are ambassadors of the following habits. Each employee should be productive. PDAM to the people. We should be open to working with the best of the private The products of the information handled by a skilled sector to help maintain our equipment so that PDAM communications specialist are the customer activities personnel can learn and graduate from tradesmen to that support the concept of clean water services provided supervisors. by the PDAM. In building this aspect, the PDAM can learn from and work with other public services that have PDAM staff must change their status from implementer established good public relations. to conceiver of vision and mission. They can become facilitators and function as idea-people. The public relations experience of PDAM Bogor serves as a good national example that can be modified within various conditions across different provinces. The Community Participation Customers Communication Forum is a vehicle for the development of public relations and increases the value Government programs will not succeed without the of both the PDAM and its customers. The PDAM must support of the people. fulfill the responsibility of maintaining the transparency of information that is desired by its consumers, providing The PDAM is obliged to working with environmental information that gets better and more reliable over time. groups, students, and the environmental protection office to prepare information and develop agreements to care It is time for every PDAM activity to be oriented towards for Mother Nature, thus ensuring the health and life of service performance. Those programs that are not human beings and wildlife. oriented toward consumers should be phased out. As such, it is hoped that efficiency will increase in billing The PDAM's approach should include not only urban procedures so that the PDAM can provide service within dwellers but also those in the rural areas--especially the concept of full cost recovery. those who are near water sources or farmers who have a stake in using the same water resources. Just before the dry season, there will generally be critical conditions where communications will be important to avoid misunderstandings. Other activities that are important include appearing on talk shows and maintaining an interactive dialogue in the media so that the public can receive explanations about available services from those most competent to give answers. In fact, there are many examples of popular participation, but the key is how the PDAM can establish 49 Annex 4 Full Cost Recovery as a Key to Water Sector Reform FULL COST RECOVERY: A KEY TO WATER 1. Commitments. The first step is a commitment to SECTOR REFORM achieving full cost recovery by the water enterprise and (From a paper by Jim Woodcock presented at the Vietnam the owner. In Indonesia, the owner is the local government Water Supply and Sewerage Association Conference together with the local parliament. Usually the formal 00) commitment is a memorandum of understanding in which the water enterprise undertakes to keep proper financial accounts, publish them annually, and make Background a plan for achievement of full cost recovery. The local government undertakes to support the commitment to In many Asian countries, the municipal water systems are full cost recovery, mainly by not taking funds out of the going through a period of reform to adjust to declining water enterprise for on-budget or off-budget purposes. central government participation in the provision of municipal water. Focus on full cost recovery has been 2. Common goals. Second, everyone in the water shown to be the fastest, most efficient and direct way to enterprise thinks about and agrees on why he is doing effect reform in Indonesia's water sector. Its approach what he is. Everyone agrees to a common vision and the may be useful for speeding water sector reforms in other mission of the water enterprise. This agreement is best countries, as well. achieved in a one- or two-day retreat led by professional facilitators. Everyone from top to bottom must understand For purposes of this discussion, full cost recovery is his role in the common effort and why it is important. defined as the average annual revenues being equal to When everyone agrees on common and shared goals, or greater than the average annual cost of operations, those who emphasize their own priorities instead of the maintenance, depreciation, and interest. common goal will be seen to be destroying the group's efforts. In Indonesia after decentralization, many practices need to be re-formed or changed all at once, causing confusion 3. Accounting System. Third, in order to generate a in prioritization. Full cost recovery solves the problem of reliable bottom line, there must be an accurate accounting where to start first. It makes it easy to measure progress system. The present (usually manual) accounting system and success because the simple and final measure is has to be transcribed to a computerized accounting the bottom line. Full cost recovery also makes it easy system that provides for rapid billing, follow-up, trouble- to prioritize implementation of improvements in water shooting, transparent accounts, and most important of enterprisesbecausethecommonsensestepstoachieving all, cost accounting to enable managers to really manage. full cost recovery are the steps most appropriate to Managers mainly manage resources such as human improving the local situation in each water enterprise such resources and money. They have little to manage if they as transparency, tariff increases tied to improvements don't know where their money is going and where their in service, community involvement, and incentives and costs are. training to water enterprise staff. 4. Customer satisfaction survey. The fourth step usually is the preparation and implementation of a customer The logical steps satisfaction survey. While municipal water managers feel they know what their current and prospective There are easy ways and hard ways to go through all of customers want, they usually are surprised by the results these steps. All water enterprises may not undertake of statistically significant customer satisfaction surveys. these steps in the same sequence but the following are the A survey is the only way to find out important information logical steps toward achievement of full cost recovery: withscientificaccuracy. Thecustomersatisfactionsurvey, developed by the Ministry of Home Affairs in Indonesia in 50 | Enabling Water Utilities to Serve the Urban Poor Annexes 1999throughtheUS-AEP-assistedWISE(WaterIndicators customer service, water processing operations, and for Satisfaction Evaluation) project, is a simple, fast and facilities maintenance. inexpensive tool to arrive at accurate information. It tells exactly what current and prospective consumers feel The most enthusiastic response to training in Indonesia about service, what they are willing to pay, and for what was to customer service training. Probably because of improvements in service. Indonesia's long period of central government control, most employees in the provinces were unaware of To date customer satisfaction surveys have been customerserviceprinciplesortechniques. Implementation conducted by about 30 of Indonesia's 300 water of customer service principles has brought increased enterprises. With every repetition, the survey instrument community support and increased income to participating has become cheaper and more efficient. The most water enterprises. recent average total cost is between 50 cents and US$1 for each questionnaire. According to statistical sampling The corporate plan contains targets or benchmarks techniques, no matter what the size of the survey along the path to full cost recovery. The benchmarks population, the maximum number of questionnaires is may include unaccounted-for water, speed of billing, and about 350. Surveys for long range planning purposes reduction of staff required per thousand connections. As would be conducted about once every 5 years. Each water they reach and then go beyond these intermediate targets, enterprise can modify the standard customer satisfaction the members of the water enterprise will work as a team, survey, adding and deleting questions. College students feeling pride in the effectiveness of their joint efforts. usually fill in the questionnaires, spending about 20-30 minutes with each interviewee. The results are coded, 6. Tariff increase tied to improvements. Because entered into a computer, and processed using a statistical tariffs usually are comparatively low (and the standard of package. These results tell us a lot about the surveyed service, too, is comparatively low), the sixth step usually areas, and they form a baseline for measurement of is to request a tariff increase from the local government progress. or regulatory body. Local governments are willing to listen to a water enterprise whose vision is backed up by a 5. Corporate plan. The fifth step usually is preparation carefully thought-out corporate plan that is based on hard of a corporate plan. The corporate plan uses the results data such as the results of customer satisfaction surveys. of the customer satisfaction survey, vision and mission After they consider the proposal, local governments agreements, and goals for expansion and improvement usually are attracted to the idea that they will not have to of services. All of these elements combine to result in subsidize the water enterprise if it recovers costs. Ideally achievement of the goals within full cost recovery. The they will realize that ultimate responsibility for provision of planners may include customer relations, incentives, piped water rests with the owner--in most cases the local training, and promotion policies with the financial plan in government. the final draft of the corporate plan. In Indonesia, local governments want to avoid public Good corporate plans are neither thick nor complicated, demonstrations against increased tariffs, so their first but they are well thought-out. Preparation of a corporate inclination is to refuse requests for enhanced tariffs. It is plan by a water enterprise with the guidance of the Local important for water enterprises to have ongoing contact Government Water Services team typically takes about 8 with local groups who can lend their support to tariff months. As the plan is being put together, the team usually increases tied to improvements in service. A community arranges for training for all managers at all levels. In fact, relations program should allocate some budgetary funds the team found that the greatest leverage for increasing to building up relations and two-way communications efficiency came from training managers in the lower and with consumers. The results of the customer satisfaction middle levels. Training typically is given in the areas surveys inform the water enterprises what improvements of financial management for non-financial managers, the customers are most willing to pay for. 51 7. Maintenance. Once the tariff increase is granted mechanisms. They must go forward together, rather than and the corporate plan benchmarks are presented to one at a time. Full cost recovery is a convenient discipline the local government, the water enterprise must fulfill for the ordering of these changes with a minimum of its commitments on the road to full cost recovery. Staff administrative headaches. It provides a simple measure development, staff dedication, and incentives are key to of performance, and the steps to achievement and fulfilling commitments. If local governments, the people, maintenance of the target are naturally ordered, requiring or their local parliament feel disappointed by the water less monitoring by the owner. enterprise's inability to fulfill promises, everything will go back to square one. If accounts are accurate and the water enterprise is both businesslike and transparent, there are fewer risks, so In these successful water enterprises, workers have privatization requires a lower risk premium, resulting in a become proficient, and managers are providing more lowerunitpricetotheconsumer. Theownerbenefitsfrom training and thinking of incentives to keep their best full cost recovery because he doesn't have to subsidize people. They are discovering that development of human the water enterprise, and the community is satisfied with resources is the fastest way to increase productivity. As the provision of this urban service. Productive members star-performing managers get results, it is expected that of water enterprises benefit because they receive a nationwide market will develop for their outstanding recognition and incentives. Most important of all, the management talent. In short, professionalism is growing members of the community benefit because they are logically and naturally out of full cost recovery, and receiving good value in exchange for tariff payments for PERPAMSI is nurturing and enhancing professionalism. the most essential urban service. Professionalism and full cost recovery in turn enhance the chances for successful sustainable privatization that provides not just investment capital, but also lowest-cost services to consumers. Too often in the past, privatization has been used as a quick-fix for failing policies in ailing water enterprises. Privatization companies needed a risk premium in order to protect against surprises coming from opaque bookkeeping practices, poor labour relations, and unseen costs. Sustainable privatization is a healthy enhancement of healthy water supply businesses with clear and transparent finances and operating procedures. The full cost recovery experiment in Indonesia has shown that any water enterprise having a water source, enough customers, and support of the owner can achieve full cost recovery if only it wants to. In most cases, water enterprises can achieve full cost recovery using their own resources without the addition of cash. Reform of municipal water enterprises is complicated because many interlocking changes must be effected all at once. There must be new targets, accounting systems, management systems, career paths, incentives, training, monitoring, community relations, and accountability 5 | Enabling Water Utilities to Serve the Urban Poor Annexes 53 Annex 5 Case Study : PDAM Jember PDAM Jember draws most of its water from deep wells and The PDAM divided its functions into the social function (to has only 50% coverage of its total service area because provide water services to all layers of society regardless there is a shortage of water. There is no significant of social standing) and the economic function (to make poverty in the city center, and the poor, who are mainly a profit through emphasis on increased service area on the fringes of the city, do not receive the benefits of coverage). a "social tariff," which is extended mainly to community bath/washing facilities (MCK) and foundations. This case The customer satisfaction survey showed that customers study deals with the potential of well-managed PDAMs to were most concerned about the quality of water. Puzzled generate sufficient revenues to expand coverage. officers responded by conducting tests at random sites and found that indeed there was insufficient residual In 1999, PDAM Jember's financial deterioration was chlorineattheendsofpipingsystems. Thedeficiencywas about to end in bankruptcy. Its capital and reserves had corrected promptly, and enhanced customer satisfaction almost disappeared. Its debt, incurred during the IUIDP was achieved at a reasonable cost. program, was very high. There was an insufficient supply of water to meet the demand, and the average tariff did The new managing director set out to instill pride in the not even recover the cost of production. Most plants and staff and enhance their productivity. The civil service- equipment had reached the end of their useful lives. The type uniforms were replaced with businesslike blue and payroll was swollen with 140 employees, many of whom white uniforms with long sleeves and neckties. A new were"recommended"bypowerfulfigures. Theemployees performance evaluation system based on merit was finally revolted and, in a public demonstration, demanded instituted, with everyone expected to do their jobs at a the appointment of a new managing director. minimumstandard,andrewardsgivenonlyforoutstanding performance. Afit-and-propertestwasrequiredforallnew Because of this internal revolt, the PDAM's General employees and all promotions, no matter how powerful Director was promoted to Managing Director in late the employee's sponsor might be. 1999. He set about putting the PDAM's house in order by installing businesslike practices, including projecting Employees were assured that their wages would not be a more positive public image, ensuring respect for cut and that there would be no layoffs, but their workloads employees as productive teammates, and making increased to boost productivity. Each employee had a card concern for consumers the central reason for the PDAM's with a bar code that was scanned by a time clock when he existence. arrived and left work. At promotion time, employees that were frequently "sick" were considered less productive Together with senior managers, he drew up a list of the than others who had more reliable attendance records. main problems. During an open meeting discussion with all workers, everyone agreed on the PDAM's vision Personnel management was based on the principle of and mission, based on current regulations. Once this mutualdependence:theemployeeneedsthemanagement had been accomplished, any employee who used his for approval, and the management needs the employee for position for personal gain was seen as a traitor to the good ideas and good performance. Employee arguments common mission. With the help of the Water Efficiency and critiques were invited, and questions were answered Team, they conducted a customer satisfaction survey that as openly as possible. If employees made suggestions provided input into a corporate plan designed to achieve that improved efficiency, they received cash awards. the financial and technical goals necessary to fulfill their Similarly, if they delivered quality outputs at less than the mission. The corporate plan contained the essentials budgeted amount, they received a portion of the money of what later became known as the Financial Recovery saved. Action Plan. 54 | Enabling Water Utilities to Serve the Urban Poor Annexes An annual system was instituted for selection of the supporting and economically viable PDAM." The motto "Excellent Employee," recognizing the most outstanding was the first line of a popular song that was composed employee of the year. The screening criteria affords a clue especially for the PDAM. as to how employee performance was before the change: Department heads would each nominate one candidate The Managing Director and the Finance Manager looked from among those who (1) arrived and left work on time at the invoicing and payment system from the customer's and (2) were not absent--except on official duty--during point of view. Customers had to stand in line at the PDAM a continuous period of months. The selection team, to learn the amount of their monthly bill. If they had appointed by the Director, consisted of 3-5 employees enough money to pay the bill, they took a number and who established more detailed selection criteria and stood in another line to pay their bill in cash when their made a selection that was subject to the approval of number was called. The PDAM reduced the bill payment the Managing Director. The person received a plaque of time by forming a partnership with the state electricity appreciation and an award, and his photo was displayed and telephone authority to establish TELISA (telephone, in the front office during the next year. electricity, water) with a recorded billing information system that could be accessed by phone. Payment could The corporate plan included improvements linked to be made at multiple payment points. Later, arrangements a tariff increase each year for two years with a review were made for bills to be paid through banks. leading to another two years of scheduled tariff increases. At first, rather than inviting protests by raising the tariff, Inexpensive mass-based programs showed that PDAM management increased the fixed charge for maintenance Jember was a concerned member of the community. of meter and equipment. Because improvements in For the 000 national athletics week, PDAM Jember customer service were so visible, tariffs were able to sponsored a marching band and later it sponsored a increase from Rp 50 to Rp 900 per cubic meter over four soccer team. years without any public demonstrations. When NGO's demanded justifications for tariff increases, they were Public relations announcements were aimed at showing received by the management, given explanations, and that piped water is inexpensive. Instead of expressing the granted modest transportation funds to return home. tariff in rupiah per cubic meter (Rp 400/cubic meter), the PDAM expressed the tariff as Rp 0.40, or less than the PDAM Jember established credibility with the community cost of one sixth of one cigarette (at 1999 prices), per by fulfilling customer service promises, including an liter. immediate response to complaints. The PDAM logo was put on all vehicles so the public could see that the Closer relationships were formed with women's volunteer vehicles were on official business and responding to calls. groups that cared about water service. With the help of Moreover, a service team was put on call until 9 p.m. to PERPAMSI's WILLOWS women's volunteer project, the make light repairs, while heavy repairs were handled PDAM helped a Jember women's water forum register the next day. Handi-talkis were purchased so that itself and begin activities such as school education repair crews could communicate with the office. When programs for water conservation. the repair service first became available, there was no complaint at all during the first week. But as word spread The new managing director established closer that complaints were handled immediately, calls mounted partnerships with the local parliament (DPRD), explaining steadily, reaching their peak at the beginning of 000. the PDAM's intention to recover costs so that it would not be a burden on the local government budget. There was The management team upgraded the customer service even closer cooperation with the Badan Pengawas (the 5- counter,makingitthefirstthingavisitorsawuponentering person supervisory body designed to act as the Bupati's the PDAM building. Thus, customer service became a representative for day-to-day monitoring of the state- main pillar of the new PDAM, whose vision was, "Self- owned enterprise). The partnership with the Jember state 55 electricity (PLN) and telephone (Telkom) authorities led to Large amounts of water were unbilled because some a regular public service radio broadcast. In all meetings kinds of meters would not record when either very fast- with Telkom and PLN, PDAM Jember employees were or very slow-moving water went through them. In solving treated as equals. this, several different types of meters were put on a single line to see which was the most accurate and eventually The corporate plan envisioned a step-wise replacement replacing other meters on a regular basis, beginning with of wells with surface water and gravity fed systems, those that had broken. reduction of unaccounted-for water to a rate below 20%, and reduction of illegal connections. The standard procurement practice was to purchase goods at a constant price so that when the government The management team implemented ideas to increase auditor checked, he would not claim that two different revenues. For example, ultraviolet-treated water was prices at two different times were signs of kickbacks. packaged and sold as "PDAM Jember" brand drinking The Managing Director, however, authorized purchases water. Increased revenues came from reduced costs. of materials whenever the prices went down, and he Accountingmethodswererecasttoreflectmoreaccurately defended the policy to government auditors, explaining theutility'sactualfinancialcondition. ThePDAMproposed that he was running a business and had to buy at the a win-win plan for the local government to pay the PDAM's lowest price. Items that purchasers chose to buy at an extensive debt to the Ministry of Finance and accept unnecessarily high price (such as imported items) were repayment from the PDAM, but the local government did avoidedinfavorofbettercost-effectiveness. Furthermore, not agree. the policy of cash on delivery was changed to a credit system, saving the PDAM great sums of money. MostIndonesianPDAMswerewaitingfordebtrestructuring (which had already been granted to PLN) before making In 1999, PDAM Jember lost about $44,000. In 000, repayments. In the absence of indications that the PDAM Jember established a profit of $10,000. In 2001, Ministry of Finance agreed to consider debt restructuring, thatprofitroseto$25,000,makingPDAMJemberthefirst PDAM Jember banked its profits at a time when bank participating Local Government Water Services PDAM to interest rates for fixed deposits were very high. achieve full cost recovery. Simple solutions were found to complex problems. Even In 000, PDAM Jember received recognition from the though workers often shut off valves on either side of a Governor of East Java for outstanding service to the leak before fixing it, the leaks would continue unabated community. On September 9, 001, PDAM Jember because they couldn't identify the source of the water. received the Ministry of Administrative Reform's annual Eventually, through trial and error, however, workers CitraPelayananPrima"ExcellenceinPublicServiceAward" would find the source of the water feeding the leak. In from President Megawati. PDAM Jember was chosen order to avoid disturbing neighboring households with as the best public service in Indonesia from amongst a unnecessary shutdowns, management divided the large number of public service agencies, including water distribution system into zones according to the source of enterprises and many hospitals. water in the pipe. So when a leak occurred, it could be found on a water zone map and repaired quickly. The Local Government Water Services team helped management look for more funding sources, such as Most of the water came from pumps that had to be turned suppliers' credit. The search did not bring in any good on and off during the day by employees who spent the prospects, but during the search, PDAM Jember was entire day at the pump switches. Automatic switches saving enough from its efficient operations and interest were installed so that employees could be freed up to on deposits to pay cash for its own water treatment work in areas such as customer service, where the PDAM facilities. In the end, the personnel at PDAM Jember quickly established credibility with consumers. designed and contracted the construction of a $140,000, 56 | Enabling Water Utilities to Serve the Urban Poor Annexes 0 liters/second water treatment plant using appropriate technology with an option to expand it 0 more liters in a second phase. The cost included 1 kilometer of main line. In order that water could leave the treatment plant under pressure, the staff placed the treatment plant on a hill and pumped river water up to the plant. Costs for a similar plant using the government budget would have been about $550,000. By 2003, PDAM was still making great profits. The rate of unaccounted-for water had gone from 52% to 45%. Employee productivity went from 7 employees per thousand connections to 5, while total connections went from 19,000 to more than ,000. Above all, PDAM Jember was asked to provide training courses for neighboring PDAMs and its customer complaints system was replicated in other PDAMs in East Java. The corporate plan called for extending water to 70% of Jember's population by 007. In September 003, the Supervisory Board recommended that the Managing Director's employment contract be extended until 008. The head of the Supervisory Board told the press that he was surprised to learn the Bupati had instead appointed a recently-retired member of the local government without a PDAM track record to be the new Managing Director. On 4 September 003, the press asked the Bupati for details, but none were given. Instead, they were referred to another officer. 57 Annex 6 The History of Water Sector Development in Indonesia During early colonial times, all of Indonesia was a cost The PDAMs were incorporated through local government recovery-oriented, state-owned enterprise. Some writers regulations (perda) and guided by 196's Law 5 regarding observed that public services were intended solely for the regional companies. The law stated that they would be Europeans.1 In fact, the Netherlands' 1870 Liberal Policy production units whose objectives were to help develop the put forward a concern for the health and welfare of the region in particular and the national economy in general colonial people as instruments of national production. within the framework of a guided economy. They were to Beyond that, however, the tension between concern for fulfill the people's needs mainly through industrialization, the poor and cost recovery was resolved in favor of cost creating a peaceful and happy workplace and leading to recovery. Generally, the government reverted to a focus a just and prosperous society. In addition, if the company on cost recovery after abuses due to price differentials consisted of assets paid for by the local government, it was and over-consumption resulted in financial losses. determinedthat55%oftheprofitswouldbereturnedtothe local government and 30% distributed among the workers. Piped artesian well water was provided first to Jakarta's Most of the perda that established regional drinking water tariff-payingupperclassareaswhilethepoorhadtocollect companies took their language from Law 5. water the freely provided available at public hydrants. At the time, the rationale for the provision of hydrant water In 196, development of PDAMs was conducted mainly was that shallow well water was available to the poor for by external financing. Thus, full cost recovery was not bathing and laundry. After more plentiful spring water emphasized and 85% of their profit was to be distributed became available in Jakarta in 19, however, it became rather than re-invested in expansion and upgrading too expensive to continue providing free hydrant water. In service. 196, metered hydrants were established and put under the control of a supervisor who charged residents in the As constituted by Law 5/1962, PDAMs were government- area. Trials to connect households in village areas were owned businesses with their own budget and a profit generally successful, but coverage with piped water was and loss statement. In practice, however, they were not expanded appreciably. Municipal water enterprises treated like Dinas, or government departments. They were established with separate offices and separate were assigned responsibility to serve all levels of society budgets. (Kooy 004) through cross subsidies without being allowed to draw on local government funds. Generally, civil servants with no After independence in 1945, the early five-year national business experience were chosen as Diruts and charged development plans called for providing clean water to with managing million-dollar water businesses on a civil cities through central government grants with limited servant's pay, while owners interfered in the day-to-day foreign borrowing. These grants were to be seed capital management. to help cities become self-sufficient. Little by little, however, grants were reduced and loans became more In the early 1970s, the central government established predominant. Even so, utilities continued to look towards Badan Pengelola Air Minum (BPAM), or Regional Water the central government for various forms of subsidies Boards,acrosslessaffluentareas. BPAMsreceivedcentral and the central government continued to maintain some government subsidies while gaining management and control over all of the PDAMs. other skills to recover their operations and maintenance costs, fund self-expansion, and become a PDAM. The BPAM was under the control of the central government 1 ". . . every budget was weighted in favor of European interests through the Department of Public Works. In 1988, there in the city. Most of the biggest items, such as road-building and were 148 BPAMs and 137 PDAMs. By 1995, however, maintenance, street-lighting, drinking-water provision, and payment these numbers dwindled to only 18 BPAMs and 76 of municipal personnel were items of expenditure largely on behalf of Europeans, since they were the ones who lived along and used roads PDAMs. most; street-lighting and drinking-water were largely restricted to their areas. . . (Abeyasekere, 1987, p. 119 quoted in Porter, The Economics of Water and Waste: A Case Study of Jakarta, Indonesia) 58 | Enabling Water Utilities to Serve the Urban Poor Annexes When local governments received the BPAMs from the collection and hand-pumps, were also tried without centralgovernment,theywerebookedaslocalgovernment success. Many loans were extended to PDAMs based on PDAM assets. Local governments expected PDAMs to criteria other than financial soundness and an ability to contribute a "return on investment" even though the cost repay. of the investment to the local government in many cases was almost nil. The virtually costless investments led to In 1987, because of its "limited presence and capabilities unrealistically low tariffs. in the regions," the central government turned over to the provinces and/or the kabupaten/cities the functions TheDirutwassopowerfulthathesetthetoneforthePDAM, of building, maintaining, and handling all facilities with dynamic PDAMs usually having dynamic Diruts and and infrastructure for the production of clean water. vice versa. At the time, like perda or local regulations, the Unfortunately, city and kabupaten officers were not well Diruts of all PDAMs had to be recommended by the Bupati practiced in the basics of the water business or the or Mayor, and approved by the Ministry of Home Affairs. duties of the owner, and they had no funds available for Thus, Diruts were less oriented toward their consumers an unforeseen crisis. With hindsight, many observe that and more oriented toward the source of subsidies and there was an insufficient assessment of the capability of appointments/approvals. the regions to take on business operations. About 30% of water utility income had been coming from government In 1978, the central government agreed to help local grants or loans that were not repaid, and tariffs were governments fund water projects. In principle, local already too low to recover the cost of production. governments were supposed to be able to fund these on their own, but if they could not, they could ask the central In 1997/1998, the Asian Economic Crisis came to government for help. The Minister of Finance's decree Indonesia and local governments dared not raise tariffs 540/KMK.011/1979 provided for local governments even though the cost of electricity and chemicals almost to appoint the project manager (pimpro) and project doubled in local currency terms. Most of them stopped treasurer (bendaharawan) with the prior approval of the payment on debts to the central government, which did not Ministry of Public Works. consider debt rescheduling even as PLN and other debts were rescheduled. By 005, the debt of all PDAMs to the In the late 1970s, Pelita IV set targets of 60 liters/day/ Ministry of Finance reached US$450 million. However, person and service to 60% of urban dwellers. In the in a sign of growing local control, the central government 1970s and 1980s, utilities were allowed to borrow central was no longer needed to approve of the appointment of government funds for water supply works. Because PDAM Diruts, so the Bupati or Mayor had sole authority the utilities were not skilled in the technical aspects of to hire Diruts. the business, however, central government agencies planned, designed, and contracted for the construction of Article 40 of The Water Resources Law of 004 states the facilities. The utilities took over management of the that provision of drinking water is the responsibility of the facilities and set out to repay the debt. central and local governments, with a view to increasing efficiency and coverage. The most recent implementing As the poor were being largely bypassed by development regulation of the Water Resources Law, Ministry of Public inthe1980s,PelitaVemphasizedthebenefitsofnational Works Regulation 16 of 005, states that central and local development reaching the poor. This development plan governments must guarantee the right of every citizen to prompted many local governments and PDAMs to promise a minimum amount of water per day to maintain a clean, to ensure equal access to water without really working healthy, and productive life. The local government's out how they would do so. As a result, central poverty distribution unit (PDAM) is tasked with guaranteeing reduction strategy in Pelita V focused on the construction continuous, 24 hour-a-day water service. of more standpipes, many of which went unused within a few years. Other low-cost measures, such as rainwater 59 Annex 7 Implementation Progress in Indonesia Urban Water Supply Sector Policy Framework Implementation Progress in Indonesia Urban Point 4. Simplify pricing policy Water Supply Sector Policy Framework Although there have been Ministry of Home Affairs (As defined in Locussol 1997) instructions regarding tariffs and some PDAMs have reduced the number of categories for tariffs, the basic problems such as high lump-sum connections fees, Point1. Establishanarm'slengthrelationshipbetween too-low social tariffs, numerous categories, and high the owner of water supply assets and their manager commercial rates, have not been changed. Since This goal has not been achieved in any city. The first step decentralization in 001, many local governments toward reaching this goal is the revision of law 5/196 to consider the central government's regulations guidance convert a water utility from a source of local government rather than instructions. income to a sustainable institution fulfilling the local government's responsibility to provide convenient and affordable clean water to all who want it. Much remains Point 5. Improve planning, design and implementation to be done before sovereign local governments will give of water supply projects up authority over PDAMs. Because of the drying up of infrastructure investment funds, there was no significant change involving group procurement of inputs and increasing competition in Point 2. Establish a regulatory framework for private procurement. sector participation Although there is a contractually-required regulatory board for DKI Jakarta's water concession, there is not Point6. EmphasizetheidentityoftheIndonesianwater now an official regulatory framework for private sector supply sector participation. Much remains to be done before sovereign Since its complete separation from the Ministry of local governments will give up authority to regulate tariff Home Affairs in 001, PERPAMSI has made progress in increases. establishing a "quality" database and providing human resource development facilities for the municipal water and wastewater sectors. But due to distance and a small Point 3. Streamline water sector financial management budget it still does not represent effectively all 300 water The PDAM Rescue and Recovery Program and the Local enterprises. Government Water Services project have helped water utilities generate cash through efficiency gains and tariff adjustments, but there does not appear to be a framework for the best utilities being the first to receive government benefits such as grants. For instance, DAK, or the central government's specific activity grant mechanism for local governments, is assigned based on need. 60 | Enabling Water Utilities to Serve the Urban Poor Annexes Annex 8 Barriers to Implementation of Recommendations and Sustainability The main barriers to implementation and success of If cities will allow a part of their contribution to be put a stimulus program are targeting, poor exit strategy, into a revolving fund, financing of new connections can relaxation of cost recovery discipline, and the tendency be self-sustaining. Inclusion of new connections charges of governments to allow tariffs to drift downward. Several in the tariff is an ideal solution to affordability problems, provisions are planned to anticipate these threats. but there must be incentives such as awards or increased DAK allocations to ensure that new connections continue Targeting. The main effect of the subsidy incentive is to be assigned proportionally to the poor. to correct the service imbalance by ensuring the target population is served first. Targeting by PDAMs or local Relaxation of Cost Recovery Discipline. Institutions tend governments can be problematic unless they are working to relax discipline when projects are completed. There from recommendations of NGO-assisted community is little extra room for cross subsidies, especially when groups such as those formed in community-driven bans on groundwater withdrawals are not enforced, so development projects like the Urban Poverty Program. As cost recovery discipline through improved utility efficiency a second check on the achievement of targets, output- must continue. Both the technical assistance team and based aid and incentive-linked subsidies can ensure the NGO will work with local governments to continue that funds are not reimbursed unless they are used for assignment of targets to PDAMs with periodic reviews. the purposes intended and have short-term sustainable Local governments may require their utilities to receive benefits. The economic status of houses and existence the advice of the Water Business Advisory Body once of meters and connections can be verified quickly and every two years. In addition, procedures will be in place economically. for subsequent town meetings held with all stakeholders during periodic tariff reviews. When combined with Poor Exit Strategy. A component of both the stimulus the need of PDAMs to receive periodic tariff increases program and loan preparation will be identification of should their goals be achieved, the monitoring of local government institutions or revolving funds that can government and citizens groups should provide sufficient provide subsidies for new connections in the short public transparency for continued full cost recovery term. Central and local government subsidies such as discipline. DAK or SEAB can be tied to institutional links between utilities and consumers and promote more accountable Allowing tariffs to drift downward. A new market between practices. Governments are frequently brought down by utilities and poor consumers will fail if business discipline removal of subsidies, but new connections are needed flags and tariffs drift downward. It is a given that only once and the target group consists of only 1.1 politicians are reluctant to raise tariffs before an election, million urban very poor households. Therefore, as cities especially when transparency is weak or when there either implement the recovery of connections charges in are recent revelations of mismanagement by utilities or tariffs or approach universal coverage, there will be no their owners. The success of a stimulus initiative largely further need for new connections subsidies. Subtracting depends on institutions that balance the interests of squatters (about 4% Jakarta and less for other big cities) utilities, government, and consumers. Town meetings and those in remote areas, the feasible target group and creation or strengthening of water forums will be a may be served through about 8 large expansion projects part of the stimulus program. Town meetings strengthen serving 100,000 connections each. Utilities will be free accountability of utilities and their owners, and stronger to use new water mains linking poor areas to distribute water forums can take over NGO functions while providing water to other nearby income groups. Experience in the consumers with informed choices and strategies designed Philippines suggests that such a program will reduce to help the poor pay monthly water bills. water losses by converting many illegal connections to official revenue-producing connections. These efforts to provide sustainability contribute to reform and private sector participation because this staunches the tendency of tariffs to drift downward which has 61 been a main constraint to private sector participation. More accountability (town hall tariff presentations and publishing of accounts) helps consumers understand what they have been receiving and governments set the following year's targets, making it possible to enact tariff increases. Furthermore, greater accountability and the higher probability of adequate tariff income would make it easier for utilities to attract private bank and other private sector financing. 6 | Enabling Water Utilities to Serve the Urban Poor Annexes Annex 9 Financial Recovery Action Plan (FRAP) FEATURES OF THE FRAP systems, much less expand them, because they could not promptly repay their outstanding obligations. The financial recovery action plan (FRAP) is prepared The Program was intended to help PDAMs survive the crisis, by a water utility (PDAM), which has a desire to improve not only in the short-run, but also in a more sustainable its performance to enable it to expand its services to manner that would enable them to be self-sufficient in consumers. The FRAP consists of an analysis of all the long run. The Program was expected to improve the the existing problems of the PDAM, whether they are operational and financialefficiency ofthePDAM consistent technical, financial, commercial or managerial. Their with the overall direction of water sector reform. Since causes are determined so that appropriate actions can be there was no financial assistance involved, additional cash implemented. The required actions are contained in the had to either be (1) earned by the PDAM out of improved FRAP details, and supported by financial projections that management and tariff increases; () provided by its local show the results of these combined actions on the PDAM government in the form of additional equity, (3) obtained operations. The FRAP may recommend management, by the deferment of loan repayment as part of loan commercial and /or technical improvements requiring rescheduling; or (4) a combination of all of these. only minor investments. However, it may also involve major investments, depending on the technical problems that need to be addressed. If the PDAM has delinquent loans with the Ministry of Finance, a proposed loan PARTIES TO THE FRAP rescheduling scheme is included. The FRAP is developed by the PDAM, and is then discussed The FRAP is a commitment from these parties: and agreed upon with its Mayor/Bupati and DPRD. The FRAP becomes a commitment between these three 1. The PDAM commits to: parties, with implementation falling to the PDAM and a. Raise tariffs to required levels; supervision resting with the Mayor/Bupati and DPRD. The b. Add new connections, depending on available PDAM's accountability is thereby improved as the latter's capacity; regulatory and oversight responsibility is strengthened. c. Shorten the collection period to improve its cash As the PDAM Rescue Program has so far shown, simply by position; streamlining operations and receiving a boost from loan d. Reduce the unaccounted-for water rate and turn rescheduling with the MOF, a PDAM can be brought back these into revenues; to operate profitably. e. Improve the staffing ratio by suspending the hiring of new employees and not filling up vacated The FRAP was piloted in 17 PDAMs under the PDAM positions; Rescue Program between 2000-2002. It was funded by f. Reschedule delinquent loan accounts based on its a grant from the ASEM Trust Fund to finance technical financial capability after considering the positive assistance to those PDAMs willing to be reformed. During effects from the above; and that time, PDAMs were almost on the verge of bankruptcy g. Implement the required investment based on an as the financial crisis that hit Indonesia starting in the agreed program to deal with the technical problems middle of 1997 exacerbated weak management, poor existing in the PDAM. financial discipline, and deteriorated network systems. Inflation reached 78% at the end of 1998 and the rupiah . The PEMDA and DPRD independently commit to: was devalued from a pre-crisis level of Rp 2000 to a US a. Suspend the collection of dividends from the dollar to as high as Rp15000 at one point. Thus, PDAMs PDAM until its required service coverage has been could not borrow to properly maintain their network attained; 63 b. Support the implementation of the required tariff increases; c. Allow the PDAM to reschedule its delinquent loans; and d. Monitor the PDAM performance based on the FRAP and take action, if required. 3. The MOF commits to: a. Reschedule the PDAM's delinquent loan accounts based on the PDAM's financial capability after considering the results of the FRAP actions before loan rescheduling. FRAP TARGETS AND DESIRED RESULTS IntheFRAP,targetsaremadeforreductionofunaccounted- for water, additional connections that can be generated, a shorter collection period, a lower staffing ratio, tariff increases, and debt service that is affordable in relation to the rescheduling of delinquent loans. It also includes investments that need to be made to improve the system and the PDAM's equity in the project. Based on these targets, the expected results are an increased population served, sufficient water supply where once there may have been a shortage, a net profit after tax, an operating ratio of at most 70% that affords the PDAM to earn a decent profit, a debt service coverage ratio higher than 1.3 times to ensure repayment of debts as they fall due, and an average tariff that enables the PDAM to fully recover its O&M costs and depreciation. 64 | Enabling Water Utilities to Serve the Urban Poor Bibliography ADB Project Performance audit report on Second IKK Water Supply and Sanitation Working Notes. Note. No. water supply sector project Loan INO-1069) in Indonesia 4. January 005. November 001 Deichmann, Uwe and Lall, Somik. "Citizen Feedback Argo, Teti and Laquian, Aprodidio A., "Privatization of and Delivery of Urban Services" Development Research Water Utilities and Its Effects on the Urban Poor in Jakarta Group. World Bank Policy Research Work Paper 3070. Raya and Metro Manila" Paper for the Forum on Urban June 003. Infrastructure and Public Service Delivery for the Urban Poor, Regional Focus: Asia. June 004. Dole, David. "Setting User Charges for Public Services: Policies and Practice at the Asian Development Bank." Asian Water. "Individual connections for the urban poor?" ERD Technical Note No. 9. Asian Development Bank. (March 005). December 003. Brown, David. "Impact of Safe Water, Sanitation on Dole, David and Bartlett, Ian "Beyond cost Recovery: World's Poor. Effects Go Beyond Better Health, Experts Setting User Charges for Financial, Economic and Social Say." Washington Post. November , 004 Goals." ERD Technical Notes Series, No. 10. ADB. January 004. Chemonics International. Water Efficiency Team Project Final Report. Report to USAID and Government of EmergingMarketsEconomics,"MeasuringtheContribution Indonesia October 000. of Business to Poverty Reduction. Infrastructure Case Study." London. January 004. Chowdhury, Anis, Sudjana, Brasukra, and Joedo, Prasetijono Widjojo Malang. "Foreign Aid to Indonesia: Evans, B., Jaganathan, V., Kingdom, W. "Serving Poor HistoricSignficanceandPost-crisisIssues" Unitednations Consumers of Water Supply in Indonesia: Options for the Support Facility for Indonesian Recovery. August 004. Future" Paper for Conference on Water and Sanitation Strategy 001, Jakarta Collignon, B., and Vezina, Marc. Independent Water and Sanitation Providers in African Cities Full Report of a Ten- FORKAMI and RTI 00. "Final Report, Urban Poor Data country Study Water and sanitation Program. April 000 Acquisition and Technical Evaluation," assisted by US- AEP. December 31, 00 Conan, Herve and Paniagua, Maria. "The Role of Small Scale Private Water Providers in Serving the Poor, FORKAMI and RTI (2004) Final Report. Assisted by US- Summary Paper and Recommendations." Paper for the AEP. UPDATE-2, February 29, 2004. Third World Watar Forum. 003. Foster, Vivien."Ten Years of Water Service Reform in Latin Crane, Randall, "Water Markets, Market Reform and America: Towards an Anglo-French Model". Water Supply the Urban Poor: Results from Jakarta, Indonesia" World and Sanitation Sector Board Discussion Paper No. 3. Development Vo. 22, no. 1 pp 71-83, 1994. Pergamon January 005. Press Gulyani, Sumila; Talukdar, Debabrata; and Kariuki, R. Cuaresma,JocelynC.,"Pro-poorWaterServicesinGreater Mukami. "Water for the Urban Poor: Water Markets, Manila: In Search of Greater Equity." Centre for Regulation Household Demand, and Service Preferences in Kenya. and Competition Working Paper no. 81. June 004. Water Supply and Sanitation Sector Board Discussion Paper No. 5. January 005 Debony, Sylvie, Lauria, Donald T., Hopkins, Omar S. "Pro- poor Subsidies for Water Connections in West Africa" Hydroconseil. Inception Report Small Scale Water 65 Providers in Indonesia, supported by the Water and and Public Participation in Urban Water Sector Reform in Sanitation Program. December 004. Eastern Europe, Caucasus and Central Asia." Komives, Kristin; Foster, Vivien; Halpern, Jonathan; and PERPAMSI 003. "Pedoman Pemberdayaan PDAM Wodon, Quentin. "Water, Electricity, and the Poor." The Melalui Penguatan Hubungan Dengan Stakeholders" World Bank: Washington. 005. Assisted by US-AEP. 2003. Kooy, Michelle. 004. Governing Water, the City, and Porter, Richard C. "The Economics of Water and Waste: its Citizens: Colonial water supply in Batavia. DRAFT, A Case Study of Jakarta, Indonesia" Unpublished unpublished paper. (all translations of colonial Dutch manuscript. 1994 documents by Ernst-Jan Martijn) Pudjianto, Ir. Timbul. "Urban Water Supply Sector Lewis, Blane D. and Chakeri, Jasmin. "Decentralized Organization and Management for the 1st Century: A Local Government Budgets in Indonesia: What explains Strategic Framework" Discussion Draft for Ministry of the Large Stock of Reserves?" May 004. Home Affairs, 5 January 1999. Locussol, Alain. Indonesia Urban Water Supply Sector Roth, Gabriel (1987), "The Private Provision of Public Policy Framework Services in Developing Countries," Oxford: Oxford Indonesia Discussion Paper Series Number 9 October 30, University Press 1997 Shugart, Chris. 1991 "An Exploratory Study of the Water McDonald, David A. "You Get What You Pay For: Cost Standpipe-Vendor System in Jakarta. HIID 30 December Recovery and the Crisis of Service Delivery in South 1991 Africa" Alternatives Vol. 8, No. 3. 00. Strand, Jon and Walker, Ian, (003) "The Value of Water McIntosh, Arthur C. "Asian Water Supplies. Reaching the Connections in Central American Cities: A Revealed Urban Poor." Asian Development Bank and International Preference Study," unpublished paper jon.strand@econ. Water Association. 003 uio.no McLernon, Andrew and Sugiri, Sugiono. "Review of Water Surjadi, Charles. "Public Private Partnerships and the Supply Issues, Institutions and Initiatives in Indonesia. Poor. Drinking Water Concessions: A Study for Better PERFORM Project and Research Triangle Institute assisted Understanding of public-private partnerships and by USAID. November 004. water provision in low-income settlements" WEDC, Loughborough University, 003. Mitlin, Diana. "Competition, Regulation and the Urban Poor: a Case Study of Water." Centre on Regulation Suryodipuro, Laila, and Gani, Abdul. "Framework for and Competition Working Paper Series, University of Stronger Relations with Stakeholders." Jakarta. PADCO Manchester. December 00. 003 OECD 1999. (Organization for Economic Cooperation and Thompson, Ginger. "Water Tap Often Shut to South Africa Development). "The Price of Water" 1999. Poor" New York Times May 003 OECD 003. "Key Issues and Recommendations for United Nations, Global Water Partnership, Providing Safe Consumer Protection: Affordability, Social Protection, 66 | Enabling Water Utilities to Serve the Urban Poor Drinking Water, Sanitation to 1 Billion in Next Decade Critical Challenge for Humanity. V Urban Institute. "Local Government Water Services Final Report." Report to the Government of Indonesia and USAID. October 003. Water and Sanitation Program. "Meeting the Financing Challenge for Water Supply and Sanitation" May 003. Water and Sanitation Program and PPIAF. "New Designs for Water and Sanitation Transactions" May 00. White, G., Bradley D and A. White (197) "Drawers of Water" Chicago: University of Chicago Press. World Bank, EASUR. "Urban Poverty in East Asia, a Review of Indonesia, the Philippines, and Vietnam. Working Paper No. 11. September 003 WorldBank,OperationsEvaluationDepartment. "Efficient, Sustainable Service for All? An OED Review of the World Bank's Assistance to Water Supply and Sanitation" September 003. World Bank. "Averting an Infrastructure Crisis: A Framework for Policy and Action." June 004 Yepes, Guillermo. "Do Cross-subsidies Help the Poor to Benefit from Water and Wastewater Services? Lessons from Guayaquil." Water and Sanitation Program Working Paper Series. February 1999. 67