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Fiascos: Jakarta, Indonesia

Water privatization in Indonesia is a story of how the interests of global water corporations, corrupt dictatorships and World Bank loans pushing privatization worked together to rob the public resources and assets of Indonesian citizens. Today, most of the poor in Jakarta remain without piped water services. In the early 1990s when the World Bank agreed to provide a $92 million loan for water infrastructure, Bank officials were already advising the Suharto government to privatize. With key multilateral (World Bank) and bilateral (Japan) loans in place, the major corporate conglomerates Suez and Thames, began making moves to takeover the public water system.

Under Suharto’s dictatorship, doing business in Indonesia meant partnering with a local firm. And, most major business corporations were controlled by the Suharto family. Thames formed an alliance with the Sigit Group, controlled by Suharto’s eldest son, Sugit Harjojudanto. Suez worked with a Suharto business crony, Anthony Salim, CEO of one of Indonesia’s largest companies, the Salim Group. There was no open and transparent bidding process, although the World Bank and the Asian Development Bank claims they promote "good governance" and transparent privatization transactions. Instead, in 1997, after protracted private negotiations, the contracts were simply awarded to the two new entities. Thames’ partnership with Sigit Group was called PT Kekar Pola Airindo and the Suez partnership with Salim Group became PT Garuda Dipta Semesta. The fact that national law and local regulation prohibited foreign investment in drinking water delivery and precluded private sector involvement in community drinking water supply was, apparently, irrelevant.

The new 25-year contracts with PAM Jaya, the municipal water supplier, were expected to be lucrative for both the international and local partners. One prediction set Thames pre-tax profits at $25 million by the tenth year of the contract. The new companies immediately moved into posh new offices in Jakarta’s business district rather than using the older office space where PAM Jaya had operated. The salaries paid to the foreign executives, who lived in the wealthiest neighborhoods, were much higher than those paid to PAM Jaya officials causing much resentment among the employees. The contracts required the new companies to not only manage the system, but in the first five years to expand the existing pipeline, invest $318 million, add 1.5 million customers, service 70 percent of the population, increase water supply, and reduce "unaccounted-for" water. PAM Jaya agreed to force businesses and private homes to shut down private wells and buy their water from the companies. (In 1997, about 70 percent of water used in Jakarta came from private wells.)

Payment to the companies was not linked to revenue collected, but rather each company was paid a fee by PAM Jaya based on water supplied. In this way, the companies de-linked their profits from the risks and problems of cost recovery. Initially, the companies demanded to be paid in dollars, since they borrowed in dollars, but when the governor of Jakarta threatened to resign over the issue, Thames and Suez agreed to accept rupiah. However, they insisted that payments in local currency be pegged to the US dollar to protect them against currency devaluation. There was no formal regulatory or oversight mechanism. PAM Jaya had no right to see financial reports of the companies and there was no clear sanction for non-compliance with performance targets.

In 1998, the Asian financial crisis and the downfall of Suharto changed the political landscape. Fearful of protest in the streets, major company executives from Suez and Thames fled to the safety of Singapore. Faced with an immediate water crisis, Jakarta’s new governor ordered PAM Jaya to fill the vacuum and take back the operation. After intensive lobbying, including intervention by French and British diplomatic officials, and a statement from the British Embassy that "breaching of the contract would weaken confidence in Indonesia as a place to invest," the agreement was made to let Suez and Thames return, but the contract would need to be re-negotiated. Since Suharto had fled, and the former president’s family and business partners were targets of public anger, Thames and Suez agreed to buy-out the local shares of their business operations in order to remove the tarnish of the Suharto family connections.

Once the companies were back in charge, there was substantial foot-dragging on the contract re-negotiation. The financial crisis brought dramatic devaluation of the rupiah, which meant that revenues from customers fell while the payments to the private companies (pegged to the dollar) forced PAM Jaya into ever-deeper debt. Given the tense political situation in Indonesia, consumer rate increases were repeatedly delayed. Eventually an agreement was reached which provided for the establishment of a regulatory body and enabled PAM Jaya to have access to company financial records.

As might be imagined, investment and expansion targets were never met, but there was also no reliable mechanism for verification of company reports. Suez claimed it had increased connections 50%, falling short of the 70% target. Investment was about $200 million short of the target. Water services in Jakarta’s rich, middle-class and industrial areas improved. However, most poor communities remain without piped water due to unaffordable connection charges, informal tenure arrangements, and lack of incentives for PAM Jaya or the companies to service these areas. Customers must still boil their water to ensure its safety for drinking.

According to PAM Jaya engineer Feri Watna, "the companies…just came in and robbed everything that we had. We already had the distribution networks, all those pipes, the water installations, the consumers and everything else."

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