• PT. Adhya Tirta Batam is proven legally and convincingly violating Article 17 of Law Number 5 Year 1999 concerning Prohibition of Monopolistic Practices and Unfair Business Competition;
  
• PT. Adhya Tirta Batam is not proven violating Article 19, point d of Law Number 5 Year 1999 concerning Prohibition of Monopolistic Practices and Unfair Business Competition;
  
• PT. Adhya Tirta Batam is not proven violating Article 25 paragraph (1), point a of Law Number 5 Year 1999 concerning Prohibition of Monopolistic Practices and Unfair Business Competition;
  
• PT. Adhya Tirta Batam should revoke the policy of disconnecting the new water meter connection;

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.

Economists have agreed that in every regulatory case, governments can never attain the same level of information as the company. Companies always know more about their own situation compared with the governments that regulates them.

The danger with this information asymmetry is that companies may inflate their actual costs and pass it on to consumers to pay. They may choose to deal with particular suppliers related to them (possibly a subsidiary of their parent company) rather than other suppliers offering lower prices.They may refuse to expand their network to slums or scarcely populated areas citing the reason of lack of capacity, although they actually can. Or, companies may conflate the number of leakages to add to the cost component.

As a result, governments must then be very well-equipped to be able to regulate water companies effectively; they must have all the technical, financial and legal auditing capability to discern and decipher information about water utility. The problem in most developing countries is that governments lack these regulatory capacities both in terms of human resources, technology and budget.

One way to mitigate this problem is by introducing transparency to the sector. Stakeholders can complain if they know that the company prefers to strike a water supply deal with real estate developers rather than invest in poor areas.

Potential suppliers can complain that they have been discriminated against, despite their ability to supply with cheaper costs. With transparency, governments can have help in interpreting information from other water companies, creditors, suppliers, consumers, NGOs, academia, the press or other interested parties.

However, it is difficult to make water utility companies agree to transparency. This response is natural as it is always better for them to conceal information than to be transparent.
Companies protect their information through confidentiality clauses in contracts and through trade secret laws. Freedom of Information laws typically do not work as they provide a blanket exception to disclosure when it comes to commercial confidentiality.

Almost as an afterthought, in verbal explanations by lawmakers, those industries producing hazardous waste such as hospitals are also included. What about state-owned and other hospitals that are not incorporated as limited liability companies, as the law regulates this legal form only?

Everyone is entitled to make up his or her own definition, but why go to the trouble of doing comparative studies outside the country if we end up going our own merry way?

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.

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.