I 202.2 99WE I I Weathering External Shocks: I A Case Study of Indonesia I I I *«<".;;< ,v,;i "Hba.;,;,t.; ; t ;•;• •>' •» ...•'¿•'V'l Weathering Shocks: A Case Study of Indonesia Moderator: Raja Iyer, Principal Management Specialist Urban Development Sector Management Unit, East Asia And Pacific Region, The World Bank Speakers: Christian Michelon, President Director, Pt PAM Lyonnaise Jaya (Indonesia) Benny Chatib, Executive Director, PERPAMSI (Indonesia) Abimanyu, President Director, PDAM Kotamadya Surakarta (Indonesia) 1999 Water Supply & Sanitation Forum April 8-9,1999 Water & Sanitation Division The World Bank LIBRARY IRC PO Dox 93190, 230! .._ Tel.: +31 70 30 689 80 Fax: +31 70 35 899 64 BARCODE: / Ç 3 é 4- LO: I I Table of Contents I I Introductory Notes iii Biographies vii I Indonesia Background Documentation 1 Country Assistance Strategy for Indonesia 3 I Urban Water Sector Policy Framework Paper (1997), Summary Report 53 I Terms of Reference for the Establishment of I a PDAM Benchmarking System 89 Presentation Materials 103 I Water Utility Rescue Program and the Role of PERPAMSI 105 External Impact of Economic Crisis to Surakarta Water Utility 121 I Jakarta Water Supply Contract, General Overview 151 I Impact of External Shocks 162 Private Sector Participation in Jakarta Water Supply 175 I World Bank Support for Private Sector Participation in Jakarta Water Supply 177 Jakarta Water Supply Cooperation Agreements - I Regulatory Issues 179 Terms of Reference for Regulating and Monitoring t Cooperation Agreements in DKI Jakarta 181 Terms of Reference for Legal Assistance to I Regulatory Consultants 189 Terms of Reference for Reviewing Water Supply I Cooperation Agreements 193 Water Utility (PDAM) Rescue Program 199 I PDAM Rescue Program Outline 201 I Terms of Reference for Bridging Assistance 205 I I Terms of Reference for Rescue Program 209 USAID Team Findings 213 PDAM Surakarta's Response to Crisis 215 World Bank Support for PDAM Surakarta 217 • Background Reference Documents I Available from Internal Documents Unit: M http://www-wds.worldbank.org ICR - Second JABOTABEK Urban Development Project m (Ln. 3219-IND) ICR - East Java Bali Urban Development Project (Ln. 3304-IND) I I I I I J 1 I J J J J I I Introductory Notes I Sector Background. Till the mid-seventies, piped water supply in urban areas was a departmental responsibility (with the Ministry of Public Works) in Indonesia. In the late seventies the government decided to transfer responsibility for all aspects of water supply - planning, design, construction, operations and maintenance, I billing and collection - to autonomous bodies. The government established local government companies for water supply (Perusahaan Daerah Air Minum - PDAM) in each of the 300 plus local government jurisdictions in the country. The I majority of these PDAMs are quite small - with less than 10,000 connections - and do not recover full costs. Initially the central government provided grant funds for capital expenditure, implemented the investment program, and I transferred the assets to the PDAMs. Over time, capital expenditure has been increasingly financed through a blend of grants and soft loans, with responsibility for implementing capital works also being transferred - especially for the loan I funded part - to the PDAMs. Water supply remains largely in the public sector. Although a number of MOUs were signed by international operators with individual PDAMs, only a very few have progressed to deals. The negotiated Jakarta Cooperation contracts, signed in 1998 represent major private involvement I in the sector. Bank Involvement in the Sector. The Bank has been active in the urban and water I supply sector in Indonesia since the mid-seventies. During the initial period, the Bank was involved in free standing water supply projects, and supported the government's policy of conversion of departmental water supply management to I PDAMs, and espoused the principles of cost recovery. However, since the mid- eighties, in keeping with government's policy of integrated urban infrastructure development programs (IUIDP), the Bank's involvement in water supply has been I through such integrated projects. This resulted in a reduced focus on the policy agenda for urban water supply, and it appeared that the sector was beginning to lag behind international trends in water supply, especially in the areas of institutional I and legal reform, and private sector participation. At the government's request, the Bank addressed these issues in a 1997 Urban Water Supply Policy Framework Paper. This paper was widely discussed in draft within the country, and there is a I consensus that it outlines the future direction of the sector in Indonesia. The Crisis. In June 1997, Indonesia was enjoying its thirtieth year of virtually uninterrupted rapid growth, with low inflation and declining poverty (which I reached below 15%). However, in 1998 Indonesia witnessed a dramatic reversal in fortune, partly as a result of the Asian contagion and partly as a result of a crisis in the political arena. At one point, the value of the currency, the Rupiah, fell 1 from Rp. 2,400 to the dollar (in June 1997) to Rp. 17,000 to the dollar, before closing the year at about Rp. 8,000 to the dollar. Inflation in 1998 reached 80%, and the economy contracted by about 15%. Foreign creditors have withdrawn, I and investors have retreated. Impact of the Crisis on the Water Sector. The water sector suffered catastrophic 1 consequences as a result of these shocks to the economy. A vast majority of the three hundred water enterprises in Indonesia were very badly hit: operating costs increased sharply, while tariffs could not be increased in the turbulent political and 1 economic environment; debts could not be serviced; funding for capital 1 I expenditure - both from internal generation, and from government grants and soft JÊ loans - dried up. Nevertheless, local governments (as the sole owners of PDAMs) W continued to collect dividend payments quarterly on the basis of budgeted profits, even though the water enterprises were suffering losses. An incipient private • sector in the water sector was badly affected. | Bank assistance to the Water Sector in the Context of the Crisis. The Bank is m already supporting the implementation of a substantial investment program in I urban water supply through a number of on-going IUIDP projects. In specific response to the crisis, the Bank is currently working with the government agencies « in Indonesia to provide both immediate assistance to the sector, and to use the I crisis as an opportunity to implement the reforms identified in the policy paper. The Bank's crisis response in the urban water supply sector include the following: Immediate Assistance • A. Support to the Province of Jakarta for addressing issues relating to the M two Cooperation Agreements with International Operators, including m (a) funding technical assistance to discuss and reach agreement on issues relating to tariff increases due in 1999; (b) assistance to • establish a Regulatory Body for the cooperation agreements; and (c) | assistance with an Independent Assessment of the Cooperation Agreements. m B. Support for a PDAM Rescue Program, to assist on a demand driven basis, those PDAMs which seek financial assistance to overcome the _ impacts of the crisis. The Bank assisted in the development of the I program concept, provided bridging technical assistance, and is seeking ASEM funds on behalf of the government for on-going _ technical assistance to support program implementation. The Bank • has agreed to amend the loan agreements of on-going urban projects ™ (if requested by government) to finance the costs of the program. C. Support Water Supply Innovations on a pilot basis in PDAM • Surakarta. These include (a) financing an Operational and Management Audit; (b) assisting with the development of, and part • financing the implementation of, a Pilot Communication Program; and I (c) assisting in the development of an extended overseas internship program. • Sector Reform and Support for Investment Program The Bank is working with government in developing an Urban I Water Supply Sector Investment Loan, as an Adaptable Program Loan (APL), to support implementation of the reform agenda in a m phased manner, complemented by support for an investment I program for the sector. The proposed APL is one of the loans in the ' FYOO lending program. IV I The Session. This session will feature three speakers who will provide different I perspectives on how the water supply sector in Indonesia is coping with the impacts of the unprecedented crisis in Indonesia: I (a) Impact on the Private Sector - Christian Michelon, President Director, PT PAM Lyonnaise Jaya, will discuss the problems faced by the private sector I operators under the Jakarta cooperation agreements; (b) PDAMRescue Program and the Role o/PERPAMSI- Prof. Benny Chatib, Executive Director of PERPAMSI (an association of water companies) will I discuss the impact of the crisis on water companies, the PDAM Rescue Program, and the role of PERPAMSI in its implementation; and, (c) Initiatives of an individual PDAM ~ Ir. Abimanyu, President Director, PDAM I Kotamadya Surakarta, will discuss steps being taken by PDAM to cope with the crisis. I Raja Iyer I Session Leader I I I I I I I 1 I 1 1 I f I I I VI I I I Biographies I RAJA IYER Mr. Iyer joined the World Bank in 1987, and is currently Principal Management Specialist in the Urban Development Sector Unit of the East Asia and Pacific I Region. Prior to joining The World Bank, Mr. Iyer worked as a short-term consultant for the I World Bank on water supply projects in Indonesia, Thailand, and Malaysia. Since 1993, he has been working primarily in the urban and water sectors in Indonesia and currently is leading the effort in implementation of major sectoral reforms I presented in the World Bank's 1997 paper on "Urban Water Supply Policy Framework for Indonesia".