Showing posts with label privatization. Show all posts
Showing posts with label privatization. Show all posts
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The new governor and Jakarta’s drinking water problem

Saturday, October 20, 2012



(Img credit: The Jakarta Globe)


Mohamad Mova Al’Afghani


The Jakarta Post, Paper Edition | Page: 7 Opinion | Sat, October 20 2012


During the recent Jakarta gubernatorial election, observers and opponents argued that the scale and complexities of the capital city’s urban problems were in no way equivalent to small cities such as Surakarta, where newly installed Governor Joko “Jokowi” Widodo used to serve as a mayor. When Jokowi later has to deal with Jakarta’s drinking water situation, he will realize that there is a grain of truth in this argument.


While his predecessor Fauzi Bowo seemed to be focused more on technocratic “grand strategies” to solve the overall water problem, to my knowledge, Jokowi does not have any sophisticated plan. From media interviews we can tell that Jokowi’s emphasis on Jakarta’s drinking water problem will be on quality and affordability i.e. a pro-poor approach. One of Jokowi’s promises during his campaign was to provide access to water for low-income citizens of North Jakarta, either at an affordable rate, or even for free.

But, how can he deliver on such a promise? I shall explain the complexities below.
First, water provision is a natural-legal-monopoly. What this means is that people cannot just extend pipes to a community outside the existing network because the cost of duplicating networks is high. As a result, there are usually only one or two companies serving a particular region. The monopoly is not only in terms of economics, but also a legal one. Every new entrant or operation may have to gain permission from incumbent companies.

Second, there is a trade-off between service levels and network expansion. Suppose that the companies agree to expand the network, with constraints on bulkwater sources, pressure and continuity of supply other areas might be affected. Thus, a part of Jakarta that is currently well-served might become compromised unless the government finds a new bulkwater source.

Third, there are significant costs associated with network expansion to the poor. In addition to capital expenditure on long-term assets, collection rates will become a major issue. Expanding services to low-income citizens means risking either non-payment or increased debt for suppliers. Various researches indicate that the poor have both the willingness and capacity to pay for water services. However, low-income consumers require flexibility in the form of payment-in-arrears or in installments.

Aside from the above points, unless appropriately addressed, the current governance structure of Jakarta’s water services could impede Jokowi’s pro-poor water plan. As we are aware, there are at least three main regulatory actors in Jakarta’s drinking water services: the city-owned waterworks company PAM Jaya, the concessionaires (Palyja and Aetra) and the governor.

The concession works in such a way that PAM Jaya must purchase the volume of water sold by the concessionaire to the consumer. Thus, from the concessionaire’s point of view, aside from constraints on bulkwater sources, they have no objection at all to serving the poor since they will be paid no matter what.
However, PAM Jaya may have objections to expanding the network to the poor, because if the revenue from tariff collection is not enough to cover the cost, then PAM Jaya will have to borrow money to pay the concessionaire. This means that if the poor cannot pay or can only pay in arrears, PAM Jaya will be in debt to the private sector. It is worth noting that at the moment, PAM Jaya already has huge debts with the private sector.

Another consequence of the above system is that PAM Jaya’s debt would reflect upon the concessionaire’s balance sheet and affect its overall financial health. Put simply: connecting to the poor may affect the collection rates, low collection rates means that PAM Jaya would be in debt to the concessionaire and in turn PAM Jaya’s debt to the concessionaire means higher account receivables in the concessionaire balance sheet. If the concessionaires only have high account receivables but lack cash, how can they have enough funds to invest in further network expansion and finance the existing operations and maintenance?

What the above shows is that there are structural disincentives in connecting to the poor. The concessionaire might be able to resort to outside financing for cash that would support a pro-poor program but for PAM Jaya this could be perceived as a liability that put strains on its balance sheet. A direct interventionist approach will also not work in Jakarta because it is legally impossible. Jokowi will soon find out that the governance of Jakarta water services is a complex web of various actors and interests, not only local and national, but also international. The nature of private sector participation with foreign investment means that the corporations investing in water services are backed by international treaties.

Any disputes could provoke intervention not only from the central government, but could also take place through diplomatic channels. This has already occurred in the past.

All of these challenges should not discourage Jokowi from his initial plan to provide services to the poor. There are several things that Jokowi could do to advance his water-for-the-poor program.

He should first address the lack of incentives from regulatory actors in connecting to the poor. Next, he should consult the poor on how they want to be connected to the network. The poor, together with companies and other actors should sit together to discuss the issue. Finally, Jokowi should try to reform the existing legislation which penalizes the poor for late payments.

As I have said, low-income citizens require flexibility in payments but the current legislation restricts this. In order to achieve all this, of course, he needs sufficient support from the Jakarta City Council.

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Private water operators “…celebrate the recognition of the Human Right to water and sanitation”

Friday, July 30, 2010

Reiterating my previous post that international human rights law is basically agnostic with respect to the choice of ownership, you will now find an interesting press release from Aquafed, the federation of 300 strong private water providers.

In a July 29 Press Release, Aquafed conveyed that private water operators “…celebrate the recognition of the Human Right to water and sanitation by the United Nations General Assembly.” Furthermore, they call that the resolution “…must be used to turn the Right into a Reality for the billions of people who do not enjoy proper water services”.

Certainly, Aquafed are suggesting implicitly (and explicitly in its other submissions to the HRC) that the private sector are among those who can turn the right to water into reality.

Read Aquafed’s Press Release, along with its involvement in the right to water process here.


Anti-privatization movement must now stop advocating alternative service provision using the language of human rights. As I argued previously:

Just to note, literature provide explanation as to the genealogy of the right to water movement (see paper by Bakker here – you may need an access). On the one hand, there is the anti-privatization movement which utilizes the language of human right to water in their campaign against privatization and on the other hand, there is the ‘alter-globalization’ movement which also seeks to foreclose the neoliberalization of waterresources and services but does not utilize the language of human rights. They use the language of the ‘commons’ instead.

Bakker noted in her paper that the campaign against privatization by utilizing the human right to water language are prone to fallacies. Indeed, right to water activists tend to conflate human rights with property rights. If water is a human right, then it should not be a commodity – they think. This is inherently wrong. The right to life does not entitle you not to pay the emergency room service fee, or your medication. The same works for the right to food or education and other rights. Water is by no means different from them.

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Report on the human rights aspect of private sector participation in the water sector

Thursday, July 15, 2010

Quick blogging. Finally the long awaited report from the Independent Expert (IE) is out.

The report emphasize the importance of transparency, participation and accountability in water projects involving the private sector. On the transparency side, the IE even suggests that "Commercial confidentiality must not jeopardize the transparency requirements provided for under the human rights framework". Finally, she conclude and recommends that "The process of decision-making and implementation, any instruments that delegate service provision including contracts, and instruments that outline roles and responsibilities must be transparent, which requires the disclosure of adequate and sufficient information and actual access to information".


I hope this report ends the long speculation that the human right to water means outlawing “privatisation”. It does not and is never meant to be as such. The discourse on water has been cluttered with the privatisation debate. This report outline that the word “privatisation” itself is dilemmatic and the problem does not end there. Privatization has its problem and so does non-delegated or state-owned services. The real problem is governance, whether the service is public or private or hybrid.

More discussions follows.

Read the full report here.

Relevant posts:

Transparency in Water Services
Indonesian Water Services Suffering from a Lack of Governance
14 Disturbing Facts about Jakarta's Water
Where to complain for bad water services – a comparison
Jakarta’s water crisis, whose fault?
Human Right  Aspects of Private Sector Participation in the Water Sector
Is water a commodity or human rights?
The human right to water is not a property right
Why busy with the right to water instead of governance
Consultation on the Human Right  Aspects of Private Sector Participation in the Water Sector: more responses from the private sector
The Economist and the human right to water
Transparency Agenda in Water Utilities Regulation
Hukum Air (Water Law) is not really a topic in Indonesia
Safeguarding water contracts in Indonesia
Constitutional Court review and the future of water law in Indonesia
Anticipating water trade

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Reminder: Audio Conference on Consumers Rights in Water Services

Wednesday, June 2, 2010

Reminder: An audio conference with the topic "Protection of water consumer's rights in Indonesia" will be held on this page today, June 2, 19.00-20.30 (GMT+0) -- that's around 1.a.m. Jakarta Time (GMT+6)! The discussion will be in Bahasa Indonesia. Materials are available below. Read here for previous announcement.



Live Videos by Ustream


Discussion Paper titled  “Perlindungan Hukum Terhadap Konsumen Air di Indonesia” is downloadable here.  
Op-ed and blog posts:

Transparency in Water Services 
Indonesian Water Services Suffering from a Lack of Governance 
Supreme Court Decision on Water Monopoly in Batam 
Missing water and shadow users 
14 Disturbing Facts about Jakarta's Water 
Tomorrow, the Freedom of Information Law is in force! 
Three ways for your business to be implicated by the new Indonesian freedom of information law 
Where to complain for bad water services – a comparison 
Jakarta’s water crisis, whose fault? 
Human Right  Aspects of Private Sector Participation in the Water Sector 
Is water a commodity or human rights? 
The human right to water is not a property right 
Why busy with the right to water instead of governance 
Consultation on the Human Right  Aspects of Private Sector Participation in the Water Sector: more responses from the private sector 
The Economist and the human right to water 
Transparency Agenda in Water Utilities Regulation 
Hukum Air (Water Law) is not really a topic in Indonesia 
Safeguarding water contracts in Indonesia 
Constitutional Court review and the future of water law in Indonesia
Anticipating water trade

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Hukum Air (Water Law) is not really a topic in Indonesia

Monday, May 24, 2010


I tried googling “water law” in (the Indonesian term is “hukum air”) and on the first google page, I found no reference to any site relevant to my search. If you click on the link, you will find that everything on the page is related to the religious law pertaining water for prayers or religious activities. None of them refers to water law.


I then googled “privatisasi air” (water privatization). Voila, everything in the first page is relevant. I scrolled down unto the 6th page, and everything reflects the true meaning of my google query.


From my queries, I can infer that water law is simply not (yet) a substantial part of the public discourse. But conversely, privatization is. So talks about water in Indonesia is dominated with the privatization discourse. What is interesting, the discourse of water privatization is much focused in the privatization of ‘water utilities’. If you speak bahasa Indonesia and google “privatisasi air”, you will find that most of the pages are critical towards the privatization of water utilities. Only one or two discusses water privatization in another context. Another thing: almost none (at least in google’s 1-3rd page) discusses sanitation.

On the one hand, it is a positive thing that privatisation is becoming a part of public discourse, but on the other hand, it is a pity that the debate is dominated only with privatisation of water utilities. What we need now is a better governance of our water (both resources and services) and law, is an important tool of governance. Privatization of utilities is only a small – albeit important and vital – part where law comes into play. But that’s not everything. We also need to think on how our resources is managed and how our services (both when they are public and private) are run.

It is not adequate for us to speak “against privatization”. We must also say what should be done when privatization is already the fact of life and what should be done when public ownership becomes the mode of delivery. Irrespective of the model (privatization or public ownership), in the end of the day, it is the consumer that needs to be defended. They need water to flow to their tap and they need the law to be on their side.  

Hence, water law should be in the discourse.

ps: if your google search (for hukum air) returns this post on the first page, then we might have contributed the “hukum air” meme into the discourse

Transparency in Water Services
Indonesian Water Services Suffering from a Lack of Governance
Supreme Court Decision on Water Monopoly in Batam
Missing water and shadow users
14 Disturbing Facts about Jakarta's Water
Tomorrow, the Freedom of Information Law is in force!
Three ways for your business to be implicated by the new Indonesian freedom of information law
Where to complain for bad water services – a comparison
Jakarta’s water crisis, whose fault? 
Human Right  Aspects of Private Sector Participation in the Water Sector
Is water a commodity or human rights?
The human right to water is not a property right
Why busy with the right to water instead of governance
Consultation on the Human Right  Aspects of Private Sector Participation in the Water Sector: more responses from the private sector
The Economist and the human right to water
Transparency Agenda in Water Utilities Regulation

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Jakarta’s water crisis, whose fault?

Sunday, May 16, 2010


The company refused to be blamed:


“The massive silting that broke the pump in Pulogadung was caused by the declining quality of water. We fixed the pump and parts of the pipeline network,” Yosua said. “This  shortage is not entirely our fault.”
He said it would take more time for water to reach areas located farther from the main pipelines, which had been empty for days.
“And there are people in several neighborhoods in North Jakarta who collect water from hydrants too, and this makes [the distribution of water] even worse,” Yosua added.
Aetra Air Jakarta said it was becoming increasingly difficult to provide millions of Jakartans with potable water.
“The city has become overpopulated, and the levels of pollution have increased exponentially,” Yosua said. “These two factors greatly contribute to water  shortages in the city.”

Consumers are entitled to water services based on the service level as determined by law (if there are components of the service levels which are based on contracts, then they will not apply, as the law automatically derogates them). In Indonesia, water quality level is determined by the decree of the ministry of health  907/MENKES/SK/VII/2002 and Government Regulation 16/2005 (GR 16/2005) Article 6.2. In Jakarta, the continuity of water services is guaranteed by Regional by Law 13/92 and 11/93.

If any of these service levels are violated, based on GR 16/2005, consumer shall have the right to compensation. Article  67.1.a and 68.2.e of GR 16/2005 stipulates (in Bahasa):

(1) Setiap pelanggan air minum berhak:
a. memperoleh pelayanan air minum yang memenuhi syarat kualitas, kuantitas, dan
kontinuitas sesuai dengan standar yang ditetapkan;
b. mendapatkan informasi tentang struktur dan besaran tarif serta tagihan;
c. mengajukan gugatan atas pelayanan yang merugikan dirinya ke pengadilan;
d. mendapatkan ganti rugi yang layak sebagai akibat kelalaian pelayanan; dan
e. memperoleh pelayanan pembuangan air limbah atau penyedotan lumpur tinja.

Hak dan Kewajiban Penyelenggara
Pasal 68
(1) Setiap penyelenggara berhak:
a. memperoleh lahan untuk membangun sarana sesuai dengan peraturan perundangundangan;
b. menerima pembayaran jasa pelayanan sesuai dengan tarif/retribusi jasa pelayanan;
c. menetapkan dan mengenakan denda terhadap keterlambatan pembayaran tagihan;
d. memperoleh kuantitas air baku secara kontinu sesuai dengan izin yang telah
e. memutus sambungan langganan kepada para pemakai/pelanggan yang tidak
memenuhi kewajibannya; dan
f. menggugat masyarakat atau organisasi lainnya yang melakukan kegiatan dan
mengakibatkan kerusakan prasarana dan sarana pelayanan.

(2) Setiap penyelenggara berkewajiban untuk:
a. menjamin pelayanan yang memenuhi standar yang ditetapkan;
b. memberikan informasi yang diperlukan kepada semua pihak yang berkepentingan
atas kejadian atau keadaan yang bersifat khusus dan berpotensi akan
menyebabkan perubahan atas kualitas dan kuantitas pelayanan;
c. mengoperasikan sarana dan memberikan pelayanan kepada semua
pemakai/pelanggan yang telah memenuhi syarat, kecuali dalam keadaan memaksa
(force majeure);
d. memberikan informasi mengenai pelaksanaan pelayanan;
e. memberikan ganti rugi yang layak kepada pelanggan atas kerugian yang
f. mengikuti dan mematuhi upaya penyelesaian secara hukum apabila terjadi
perselisihan; dan
g. berperanserta pada upaya perlindungan dan pelestarian sumber daya air dalam
rangka konservasi lingkungan.
(3) Pemberian ganti rugi sebagaiman dimaksud pada ayat (2) huruf e diupayakan
berdasarkan penyelesaian di luar pengadilan atau melalui pengadilan.
(4) Upaya penyelesaian di luar pengadilan sebagaimana dimaksud pada ayat (3)
dilakukan dengan arbitrase atau alternatif penyelesaian sengketa sesuai dengan
peraturan perundang-undangan.

From the legal point of view, consumer has the right to receive the continuity, quality and quantity of water as prescribed by law. They should be compensated if these rights are interrupted or not fulfilled due to the negligence committed by water undertakers. GR 16/2005 above also prescribes that water undertaker must pay a decent compensation to consumer for the loss they sustained. Although GR 16 is not particularly clear on what it means by ‘loss’ but this is likely to be a term for ‘violation of service levels’. 

Hence, under the law, ‘whose fault’ is not really the question for consumer. GR 16 does not differentiate whether the fault lies on the part of the bulk water supplier (in this case, PT Jasa Tirta) or the treatment and distribution facility (in this case, Palyja or Aetra). What the law require is for the consumer to be compensated, irrespective of whose fault it is.

'Whose fault’ is more a question for the government. The government is the one responsible to provide accountability mechanism in response to the complicated structural arrangement in the water sector. The government should determine where the liability lies and direct the compensation fund from the liable party to consumer.

More in this issue: my interview with Kompas (in Bahasa). 


Related Posts:
14 Disturbing Facts about Jakarta's Water
Supreme Court Decision on Water Monopoly in Batam
Water companies duty to satisfy reasonable demands

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Where to complain for bad water services – a comparison

Tuesday, May 11, 2010


If you are in England, UK:

Consumer Council for Water : Consumer Council for Water via kwout



If you are in Victoria, Australia:




If you are in Indonesia:





With one caveat however. The Indonesian Ombudsman does not deal particularly with water (or utilities issues). So I have no idea how they can help, especially when the service is privatized. Read my article here.


Related Posts:


Missing water and shadow users
Human Right Aspects of Private Sector Participation in the Water Sector
14 Disturbing Facts about Jakarta's Water
Water companies duty to satisfy reasonable demands

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Gender and Development Special Issue: Water

Thursday, May 6, 2010

Hat Tip to Mulia.

Oxfam/Routledge published a special issue on water in Gender and Development Journal. The articles can be downloaded for free.

Gender and community mobilisation for urban water infrastructure investment in southern Nigeria
Charisma Acey

'Good' water governance and gender equity: a troubled relationship
Frances Cleaver and Kristin Harmada

Sustainable development, water resources management and women's empowerment: the Wanaraniya Water Project in Sri Lanka
Seela Aladuwaka and Janet Momsen

Unequal burden: water privatisation and women's human rights in Tanzania
Rebecca Brown

After the summit: women's access to water and policymaking in Brazil
Marianna Leite

Oxfam experience of providing screened toilet, bathing and menstruation units in its earthquake response in Pakistan
Jamila Nawaz, Shamma Lal, Saira Raza and Sarah House

Can water professionals meet gender goals? A case study of the Department of Irrigation in Nepal
Pranita B. Udas and Margreet Z. Zwarteveen

Menstrual hygiene in South Asia: a neglected issue for WASH (water, sanitation and hygiene) programmes
Thérèse Mahon and Maria Fernandes

I cannot drink water on an empty stomach: a gender perspective on living with drought
Frank S. Arku and Cynthia Arku

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Key issues on the human right aspects of water privatization (1) #lawtalk

Tuesday, April 27, 2010

This paper by Phillip Turri nicely summarizes the key issues of Private Sector Participation on the water services sector. The first issue I would like to raise here is the problem of universal coverage. Companies are, by default, a profit making entity, protected under corporate and commercial law. Extending access to areas with low purchasing power may mean that there is less money to be put on dividends. 

This triggers a legal problem: would directors be in breach of their fiduciary duty to shareholders, if they decide to extend the network to unprofitable areas? The answer should be "yes", unless the default corporate law is reformed or is derogated by sectoral rules. In any case, shareholders will have the standing to sue the directors for this alleged breach of the fiduciary duty.

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Human Right Aspects of Private Sector Participation in the Water Sector

Monday, April 26, 2010

The summary of the UN expert consultation on the human right aspect of PSP is available in the FES website. The questions discussed can be seen here. Meanwhile, the number of feedback to the Independent Expert on the consultation continues to grow. This is the list of feedback.

Among the new feedback, Germany's view is particularly interesting.


Missing water and shadow users

Thursday, April 22, 2010

There is an interesting op-ed in today's Jakarta Post about Water Resources. The author argues:

There are three main reasons for the emergence of shadow users and the disappearance of water from the water table.

  1. First, on face value, unlike countries that face water scarcity, Indonesia has abundant and easily accessible water resources.
  2. Second, a small handful of non-state actors and activist organizations are not pluralistic by definition. These actors are politically driven, weak and sparse. Promoting a consensus based pluralistic dialogue and discourse is not their main agenda.
  3. Third, both at the national and local levels, there are gaps in linking public policy-making with regulatory frameworks.

Can't agree more with the 2nd point. The water resources discourse in Indonesia is quite monolithic: it's either you are pro public ownership or pro privatization. I don't think this will get us anywhere.

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Indonesia needs a strong water services law

Monday, August 31, 2009

Following is my latest op-ed at the JP:

Indonesia Needs a Strong Water Services Law

Mohamad Mova Al `Afghani , Dundee , UK | Mon, 08/31/2009 11:56 AM | Opinion

The current condition in the water and sanitation sector is bleak. Only 31 percent of the urban population and 17 percent of the total population had access to piped water. Around 80 million Indonesians lack access to sanitation, contributing to 100,000 deaths annually and economic losses of up to US$6.3 billion.

The water law that was enacted in 2004 comprehensively regulates water as a finite natural resource. However, of all the law's 100 articles, only one (Article 40) specifically regulates water and sanitation services.

Meanwhile, the implementing regulation of Article 40, Government Regulation No. 16/2005 on the Development of Drinking Water Provision Systems (PP-16) regulates water and sanitation services only generally.

There are several possible reasons for this. The first is that the government perceives water services as a local problem and as such considers municipalities to be primarily responsible for water services. The second reason is that in order to avoid the law from being invalidated by the Constitutional Court, the Water Law does not regulate services specifically, but instead broadly and vaguely.

Indeed, the water law does not contain the word "privatization" but it does suggest at Article 40 that the "..private sector, as well as the cooperatives and other members of the society" may participate in the development of water services. Of course, some investment in water supply infrastructure can be small if they occur in rural areas.

However, in cities, water projects can be worth millions of dollars and involve multinational corporations and foreign lenders. It is certainly inadequate to regulate both these operations under the same article.

It is worth noting that the governance of water as a resource is different from water services, even though they are interrelated. The governance of water resources encompasses the management of groundwater, rivers, wetlands, lakes, catchments areas, effluent discharge and how water is allocated to competing interests such as the industrial, residential, farming and hydropower sectors.

The governance of water services is different as it deals with water supply and sanitation infrastructure (sewerage), as well as the rights and responsibilities these utilities have and what roles local government plays.

The interconnection between *services' and *resources' only comes where water is abstracted from the environment by the utility and returned to the environment as waste.

Due to the complexity of the governance of water services, some countries regulate them in a specific law. In the UK and Scotland, they are regulated under the Water Industry Act, and in South Africa they are regulated under the Water Services Act. France does not have any specific water services law, however, models of private participation are regulated explicitly through multiple legislations. These legislations, backed by the court, which can act as a quasi-regulator, explicitly acknowledges the legal relation between municipalities, consumers and concessionaire holders and regulates their rights and responsibilities.

The water services law has important functions for both consumers and investors. It protects consumers from disconnection or limitation of supply (in Indonesia, disconnection is allowed by PP-16, while in the UK and South Africa it is illegal to disconnect), it establishes a consultation mechanism for tariff setting, sets out transparency requirements and regulatory accounts, sets quality standards for drinking water and details consumer rights.

In Indonesia, the laws do not define what the "minimum standard of services" is, as it is defined in a contract. In many other jurisdictions, these standards are not subjected to market mechanisms through contracts but are a matter of statutory obligation. The reason for this is because a sub-standard service is a public health issue which requires state intervention.

Note that one of the functions of the water services law is guaranteeing the property rights of the water utility. Without sufficient regulation, investors mainly depend on contracts. The political character of water services sometimes presses local governments to assume control of some rights of utility providers, such as denying tariff increases, or even striping them off their concessions when they lose popular support.

The problem in Indonesia is that the government views private participation to be desirable in the water sector, but the Constitutional Court and the civil societies are very reactive to the idea. So the parliament and the government regulate privatization discreetly in order to avoid the wrath of the court and civil society.

In effect, privatization happens without adequate statutory oversight. This has strong implications for consumers and investors. For consumers, this means that their rights to enjoy good quality, uninterrupted water supply at an affordable rate and their rights to complain and to request compensation for substandard services is not legally guaranteed, but is simply a matter of private arrangements enumerated in a contract.

For investors, this means that their investment relies only in the mercy of local government in honoring their contract. If there is a dispute between the government and an investor, the court and tribunals will be left in the dark, as there are no clear rules that regulate the settlement of disputes. Hence, without a water services law, their investment will be at risk.


Is Privatisation Irreversible?

Monday, August 17, 2009

I took this picture at the Edinburgh Train Station Yesterday (Aug 16, 2009)

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Safeguarding a water contract

Monday, July 23, 2007

If you are representing a municipality or a central government, and you have to deal with water MNCs in concluding an agreement, what will you do?

I wrote a paper on this issue for a conference held by the IELRC in Geneva, last April. Here's the abstract:

Due to financial and technological reasons, water undertakings are often being conducted by large scale Multi National Corporations (MNC). Governments often positioned Regional Authorities as a regulator to these MNCs, and at the same time engaged in water contracts with them through State Owned Enterprise (SOE).

However, the relationship between Water MNC and Governments is asymmetrical as MNCs can move their assets overnight, transfer their ownership to third parties, seek various means of redress through bilateral, regional or international investment treaties and avoid confiscation by reallocating their assets. These are often done by hiding behind multiple jurisdictions enjoyed either by their parent companies, subsidiaries or shareholders.

The positions of Governments are the opposite as they do not have the flexibilities enjoyed by MNCs. This paper attempts to prescribe issues that need to be highlighted in safeguarding water contracts in Indonesia.

The first part discusses the legal relationship between institutions involved in a water undertaking. The second part listed down regulatory mechanisms in Indonesian context, more specific towards the impact of Constitutional Court’s review of the Water Law (2004). The third part of the paper examines the provisions existing normally in water contracts between a local subsidiary of MNC and regional authorities and presents a point of view in drafting the clauses.

Note that all laws mentioned there are as of March, 2007. The investment law has been modified recently. See the paper here.

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Water privatization, some condoning views

Sunday, May 20, 2007

My JP article on the legal risks of water privatization gets a mixed response and was quoted in blogosphere and other sites. I feel the need to bring a balancing view.

What I said on that article was that privatization carries legal risks, in simpler terms, the state's controlling power toward water will significantly reduces if water services is privatized. The article did not lead to the conclusion of whether privatization should be rejected or not, it only warns the government on the risks.

Is water privatization all bad?

I am not an economist so I do not have the competency to argue. But here's some view:

Privatization is not a panacea, but Segerfeldt shows that, when properly done, it can play a huge role in bringing safe clean drinking water to the hundreds of millions of people who still lack it. In the meantime, Segerfeldt wonders, "why anti-privatization activists do not expend as much energy on accusing governments of violating the rights of 1.1 billion people who do not have access to water as they do on trying to stop its commercialization." Good question.

There are some who argues that it helps to reduce waterborne diseases:

In the 1990s Argentina embarked on one of the largest privatization campaigns in the world, including the privatization of local water companies covering approximately 30 percent of the country’s municipalities. Using the variation in ownership of water provision across time and space generated by the privatization process, we find that child mortality fell 8 percent in the areas that privatized their water services and that the effect was largest (26 percent) in the poorest areas.

Im not really sure on privatizing an already established regional waterwork service like the Argentina case above. As far as I know, the impact of privatization on water price, water quality and availability mixes between good and bad (with the majority suggesting "bad").

But, on the other hand, I tend to agree with Segerfeldt's approach. Why not blame the government for not providing water services to the needy people and why blame corporation instead? However the focus here is the provision of new water network. I'd say, privatization should be OK if the aim is to establish new water network. From what I've heard, privatization mostly occurs on extending existing network. Privatization which is aimed solely at establishing new network is quite rare.

Thus, the regulation must support and provide benefits of privatization which are aimed at providing completely new water services.

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Water Privatization in Indonesia

Saturday, May 19, 2007

I wrote an op ed-piece for the JP a few days ago:

Privatization that involves MNCs will cover generally three legal arenas, namely transnational, national and contractual. Each legal arena requires a different model of legal protection.

In the transnational arena, governments may face parent companies and shareholders of an Indonesian-incorporated subsidiary company in arbitrations. In typical water contracts between local water authorities and a locally incorporated company, there is always a clause that refers every dispute arising from the contract exclusively to a local jurisdiction.

The problem is, MNCs can always refer to Bilateral Investment Treaty (BIT) to which Indonesia is a party and use the "umbrella clause" in the BIT to transform a problem that was originally a contractual dispute into an international investment dispute. So, the central government can be dragged into a costly international arbitration.

One of the drawbacks of international arbitration is that the proceedings are often closed to the public. This transparency can no longer be ensured once a dispute is settled at an international arbitration venue.

Another disadvantage in dealing with an MNC is that there is currently no adequate accountability and responsibility standard in place. Thus, it is theoretically possible for an MNC to cause losses (to the environment or labor) in a host state and get away with it. This is because an MNC is a single economic unity, but is legally distinct.

The losses are not attributable to its parent company in United States or Europe, because those companies exist beyond Indonesia's jurisdictions and they possess a distinct legal personality from their Indonesian "avatar".

From the above explanations, there are some conclusions that can be drawn.

First, the legal protections granted at the national level will be obsolete at the transnational level if the government decides to conclude a contract with an MNC.

Second, the damages created by an MNC to the host state may be irrecoverable due their transboundary character. Put it simply, the control by the government towards water provision will considerably diminish when privatization is opted.

The second legal arena is the national fora. Protection towards the right to water in Indonesia is very weak. The first weakness is that our constitution does not explicitly recognize the right to water. The right to water in Indonesia develops only out of a judicial interpretation of the Constitutional Court when the water law was reviewed.

The second weakness is the water law itself, which does not specifically cite the right to water as a human right. This is a mistake because it should have cited Chapter XA of the Constitution, which regulates human rights. If it is only Article 33 that is cited, then water would be perceived nothing but as an economic good.

The third weakness is that the current regulations governing infrastructure projects do not distinguish water from other projects. Currently, a 2005 Presidential regulation is used as a "catch-all" regulation for infrastructure project, including water. This could be fatal if the government decides to privatize more water services in the future.

Water projects are among the most critical infrastructure projects for emerging economies. They have natural, cultural, political and legal characteristics that differentiate them from other infrastructure projects. Naturally, water is a limited resource, inseparable from the hydrological cycle, it is an indispensable element of life for human, animal and the ecosystem as a whole.

Regulations governing water infrastructure must contain provisions that obligate financial and legal due diligence toward the bidders. There has to be provisions that specifically regulate water service companies, especially its shareholding, lending structure and corporate executives. Its financial condition must also be declared to the public.

The last of the legal arena is the contract between MNC's subsidiary and the authority. Provision of this contract is very delicate as it must embody and guarantee constitutional, human rights, environmental and financial benefits of all stakeholders.

Ensuring the sustainability of the contract would be difficult because MNC tends to always have a more favorable position to ask for renegotiation once the contract is signed. On the other hand, the government's interest is in ensuring water service from being impeded, and the government will be compelled to do it at any cost.

I also wrote a conference paper on the issue of water privatization and a power point presentation available here. Still on the water topic, I also wrote a paper on the Judicial Review of Indonesian water law available here.