With water networks mandated to be operated by the public sector and pressing needs for greater water access and operational efficiency, how can the private sector participate in the market?
Water infrastructure in Indonesia is underdeveloped, with only 18% of the 270 million people having access to piped water. While the capital city of Jakarta and larger metropolitan areas continue to expand, smaller, less urbanized communities continue to struggle in terms of poor health and infrastructure. Existing infrastructure is also in need of upgrades to improve efficiency of operations, with water distribution networks on average plagued with high non-revenue water (NRW) losses of 33% nationwide.
The poor state of the water sector can be attributed to a lack of government funding for infrastructure as well as the decentralized responsibility for water to the local water utilities or PDAMs (Perusahaan Daerah Air Minum). PDAMs lack the operational expertise and capital investment needed to efficiently carry out operations of plants and networks. However, the government had written off all utilities’ outstanding debts in 2016 to strengthen their ability to take on loans and attract private finance. This is expected to increase private sector participation in the market and drive their contribution toward the estimated $18.7 billion required to reach 100% access to drinking water.
The role of the private sector in Indonesia changed when, in 2015, the regulatory regime for water PPPs was updated to mandate that the distribution network should be operated by the PDAM. As a result, there has been a struggle to inject the required capital to reach adequate operational efficiencies on the downstream side. Still, private parties can build and install pipe networks as well as provide technology and services under performance-based contracts. To date, all Private-Public Partnership (PPP) projects have been upstream in the form of bulk water supply.
The government expects to improve the underdeveloped water infrastructure with the National Medium-Term Development Plan put in place in 2020, targeting to have 30% of households with access to piped water by 2024. Many private players are looking into the various market opportunities but have had limited success due to lack of ability to assess project risks and move past contract development.
Local players have been aggressive and have dominated the market versus international players, which is a trend seen in neighbouring Southeast Asian countries like the Philippines and Vietnam. Local players tend to be better-positioned due to cost competitiveness, strong local knowledge and relationships, and greater ability to assess risk and execute PPP projects.
Since the enforcement of the new regulations, private players have had to develop creative solution sets to capture some portion of the market and contribute to addressing the sector’s needs while ensuring a return on investment. The solution we see is to provide an end-to-end source to tap system, both upstream (treatment) and downstream (distribution), in partnership with PDAMs, covering the upstream with a Build, Operate and Transfer (BOT) contract and downstream market with a performance-based contract which could target the NRW losses, energy efficiency optimisation, billing and customer management. This enables private players to secure greater value in both upstream and downstream operations.
Private players can also look to business models that have succeeded in international markets, such as following in the footsteps of Miya Water in Puerto Rico, which won a $300 million advanced water metering performance-based contract for 20 years with the local water authority in 2018. The contract was developed with strong financial commitment from JP Morgan to provide the majority of the financing needed, and a trust was put in place, which will collect payment directly from end-users and release payments to Miya and PRASA (Puerto Rico Aqueducts and Sewers Authority).
To address the issue of water access in Indonesia, it is necessary to forge strong partnerships with PDAMs and address their needs both upstream and downstream. This enables PDAMs to receive the needed investments and allows the private sector to make economic returns – a win-win for both parties.