Jose Cordovilla presented on planning and preparing public-private partnerships (PPPs) for water supply services in Indonesia. There is a large gap in urban water supply coverage and capacity in Indonesia, with only 24% national coverage. PPPs are seen as important for addressing this gap but progress has been slow due to challenges including the capital intensity of water infrastructure, geographical challenges, and the high cost recovery gap in the water sector. Proper planning, risk allocation, capacity building, and regulatory harmonization are needed to effectively utilize PPPs for improving water services in Indonesia.

1. Planning and preparation of PPPs
for water supply services. Indonesia
Jose Cordovilla, IRSDP
Water O&M Asia. Jakarta, 21 January 2013

2. INTRODUCTION
• About the speaker
– CEng MICE, MCiccp
– CEO @
– 15 years’ experience in water infrastructure &
PPPS
– Team Leader @ IRSDP
216/12/16

3. SUBJECT
• SUBJECT OF THIS PRESENTATION
– Delivery of water supply services using PPPs.
Aspects of project planning and preparation.
– Water supply deficit
– IRSDP and water
– Why water PPPs are moving slow
– The fundamental issue in water supply
316/12/16

4. BOTTOM LINE MESSAGES
• Water infrastructure has unique
characteristics
• PPPs play an important, yet specific and
conditional role in the solution
• Capacity of the public sector must be built in
any case
• There’s no easy way out
• PPPs have positive effects beyond the project
416/12/16

5. GAP IN URBAN WATER SUPPLY
• 394 PDAMs
• 6,622,733 customers ≈ 36 million people
• 24% national service coverage
– 45% in urban areas (actually declining since 2007)
– 11% in rural
• Non-PDAM and non-piped are predominant
• 161,000 l/s production capacity
• Average level of NRW = 35%
• Good* 52%; not so good 31%; poor 17%
Source: PERPAMSI (2012)
516/12/16

6. GAP IN URBAN WATER SUPPLY
• WATER SUPPLY DEVELOPMENT PROGRAM
– To meet MDGs by 2015
– Additional 60,000 l/s capacity
• 78% expansion of existing systems
• 22% new systems
– Budget requirement USD 5,91 bn
• 54% National Budget
• 19% Local Budget
• 27% PPP
Source: Water Supply Directorate (2012)
616/12/16

7. OBSTACLES
• Growing pollution of water bodies
• Uncontrolled abstraction of groundwater
• Rapid urbanization
• Poor operational and financial performance of
PDAMs
• Weak governance
• Lack of capable workforce
• Insufficient participation of the private sector
716/12/16

8. IRSDP
• Infrastructure Reform Sector Development
Program
– ADB Loan No. 2264-INO (started 2006), originally
included grant from Gov. of the Netherlands
– BAPPENAS is the executing agency
– Project development + capacity building
– 14 Projects, 3 for water supply: Lamongan, West
Semarang and Southern Bali
– Other projects fell due to fundamental feasibility
issues
816/12/16

9. IRSDP – Lamongan PPP
PROBLEM
- North Lamongan. Population ≈ 230,000.
- PDAM service coverage: 3%
- Most water supply by HIPPAMs & vendors
- Increasing population, industrial &
commercial development
SCOPE
- Full concession contract (20 years) with
Kabupaten Lamongan
- Intake, raw water transmission, WTP 200 l/s,
treated water transmission, reservoirs,
distribution network, 18,000 house
connections, billing & customer service
- Target service coverage 65% in 2034
- Tariff (Rp/m3): 3,200 domestic and 8,000
industrial in 2015. 20% rebasing bi-yearly
STATUS
- PQ launched
916/12/16

10. IRSDP – West Semarang PPP
PROBLEM
- Semarang Barat area. Population ≈ 300,000
- PDAM service coverage: 40%
- Continuity: aprox 12h/day
- Groundwater abstraction, settlement
- Increasing population, industrial & commercial
development
SCOPE
- BOT+BT contract with Kota Semarang
- BOT (25 years after COD): intake, raw water mains,
WTP 1,000 l/s, treated water mains, 5 reservoirs
- BT: primary and secondary distribution network
- VGF and guarantee on bulk water purchase
- PDAM responsible for tertiary network and HCs
- Target service coverage 75% in 2025, 24 h/day
- Tariff (Rp/m3): 4,500 domestic and 7,400 non
domestic in 2016
STATUS
- PQ in preparation
1016/12/16
Semarang City

11. IRSDP – Southern Bali PPP
PROBLEM
- Southern Bali area: Denpasar, Badung,
Gianyar and Klungkung ≈ 2 m people
- Groundwater abstraction by hotels
- Household connections on waiting list
- Tourism development constrained by lack of
water resources
SCOPE
- BOT + OT with BLUD (PEMPROV Bali) 25 years
- BOT (25 years after COD) for UNDA system:
intake, raw water transmission, WTP 1,000 l/s,
treated water transmission and reservoir
- OT for PETANU & PENET systems (600 l/s).
- PDAMs will purchase bulk water from BLUD
STATUS
- Unsolicited proposal by K-Water. PQ under
preparation
- Single bulk water tariff starts @ 4,500 Rp/m3
1116/12/16

12. PPP Water Projects
1216/12/16
PROJECT TYPE l/s IDR bn
PREPARATION
Bekasi Municipality Concession 300 210
Semarang Regency BOT 100 103
Jatigede Regional Scheme BOT 3.500 3.800
Karyan-Serpong Conveyance BOT 10.000 6.900
West Semarang BOT 1.000 750
Southern Bali BOT 1.600 150
Banjar+Banjarbaru 2 Concession 500 60
TRANSACTION
Bandar Lampung Concession 500 929
Umbulan BOT 4.000 2.068
Tangerang Regency Concession 900 503
Lamongan Concession 200 15
North Bekasi Regency Concession 300 160
CONTRACT /
CONSTRUCTION
Sampit BOT 280 55
Tangerang Municipality BOT 1.920 1.063
Gresik Regency Legundy BOT 200 47
Gresik Regency Driyorejo BOT 400 86
Indramayu Regency BOT 100 15
Banjar+Banjarbaru 1 BOT 500 71
B2B VARIOUS PROJECTS B2B 8.700 1.874
TOTAL: 35.000 18.859
Ø Most projects are BOT, especially for large-capacity ones
Ø Two-thirds of this capacity will not be available before 2016

13. WHY IS PROGRESS SO SLOW?
CROSS-SECTOR PPP CHALLENGES
• Capacity of GCAs
• Ability of GCAs to commit to long-term
payment obligations
• Lack of regulatory harmonisation
WATER PPP CHALLENGES
• Water is particularly capital intensive
• Water is geographically intensive
• Has a high cost recovery gap
1316/12/16

14. CROSS-SECTOR PPP CHALLENGES
CAPACITY OF GCAs (GOVERNANCE)
• To identify and measure the needs
• To prioritize infrastructure
• To identify solid PPP candidate projects
• To identify risks and requisites
• To prepare credible proposals for funding
• To manage / monitor the project
• To take real ‘ownership’
ØBAPPENAS is preparing a capacity building
program for GCAs, to include VfM analysis
1416/12/16

15. CROSS-SECTOR PPP CHALLENGES
ABILITY OF GCAs on long-term payments
• Availability-based contracts require GCA to
enter a multi-year payment obligation
• Budgets are planned and approved yearly
• Guidelines for budgeting issued by MoHA do
not account for PPP multi-year disbursements
1516/12/16

16. CROSS-SECTOR PPP CHALLENGES
LACK OF REGULATORY HARMONISATION
• Presidential Regulation 67/2005 on PPPs, amended by
Presidential Regulations 13/2010, 56/2011 and
66/2013
• Regulation 6/2006 on management of state/regional-
owned assets
• Government Regulation 50/2007 on Implementation
Procedure of Regional Cooperation (including PPPs)
• Sector laws and regulations
Ø BAPPENAS is doing a thorough review of the
regulations toward harmonisation
1616/12/16

17. WATER-SPECIFIC CHALLENGES
CAPITAL INTENSITY OF WATER
• Water infrastructure requires more capital
investment per unit of revenue:
– Twice as much as electricity
– Three times as much as gas
– Four times as much as telecommunications
• Unit investment required grows exponentially
as the size of the system decreases
ØLimited participation of private finance
Source: AWWA and Beecher, Mann and Stanford.
1716/12/16

18. WATER-SPECIFIC CHALLENGES
GEOGRAPHICAL INTENSITY OF WATER
• Water is incompressible: storage and
transmission is expensive
• Resource often crosses political boundaries, as
does pollution
• Many of the assets are underground: uncertainty
on condition of the assets
• Land acquisition/access and crossings with other
services/assets
ØIncreased political, cost & schedule risks
1816/12/16

19. WATER-SPECIFIC CHALLENGES
THE HIGH COST RECOVERY GAP OF WATER
• Water is generally perceived as necessary but
that should be provided at low cost
• Willingness to pay (WTP) is much lower than
cost recovery level and ability to pay (ATP)
ØThis generates a fundamental economic and
financial problem in the development of water
supply schemes
1916/12/16

20. THE FUNDAMENTAL PROBLEM
2016/12/16
FULL COST
RECOVERY LEVEL
WILLINGESS
TO PAY / TARIFF
Poor service
Low WTP
Low Revenue
Insufficient
investment
Deteriorating
capacity

21. THE FUNDAMENTAL PROBLEM
2116/12/16
EXISTING
SITUATION
TARGET
SITUATIONFULL COST RECOVERY LEVEL
1. WHO PAYS FOR THIS DEFICIT?
2. HOW DO WE SHORTEN THIS TIME?
DEFICIT
BOTH ISSUES ARE INTERRELATED

22. ADDRESSING THE PROBLEM
• Government: building the assets does not directly
translate into good service.
– May combine with leases / performance-based
management contracts to improve efficiency
• PDAM: many are not financially capable to fund
large investments (creditworthiness)
– Management contracts and/or capacity building
• Private sector
– Expected returns and guarantees are directly related
to risk perceived
• Hybrid financing solutions
2216/12/16

23. KEY RISKS
• Resource available
• Demand
– Public image
– Law enforcement, particularly groundwater extraction
• Construction
– Cost overruns
– Schedule overruns
• Availability
– Meeting the output specifications
– Lowering O&M costs
• Political
– Tariff setting
• Financial
2316/12/16

24. ADDRESSING THE PROBLEM
• Private operators can usually manage
– Availability risk
– Construction risk (to an extent)
– Demand in specific cases
– Financial (to an extent)
• The risk taken will depend on
– Quality of information
– Expertise
– Guarantees
ØThe place of the private sector is in bringing
expertise and efficiency, not only capital
ØPublic partner must perform in any case
2416/12/16

25. FORMS OF PPP ENGAGEMENT
• Concessions: construction, demand & avail. risks
– Good RDS and asset baseline required
– Sensitive to political risk on tariff rebasing
– Will probably require VGF
• BOT: construction & availability risks
– Payment guarantee (financial & legal capacity)
– May require VGF
• Lease (avail + demand) / affermage (availability only)
– Complexity in defining remuneration/incentive level
• Performance-based management contracts
– NRW, commercial management
– Complexity in defining remuneration/incentive level
– Investment remains with the government
2516/12/16

26. REQUISITES FOR PUBLIC SECTOR
• Sufficient & reliable data
– Demand, WTP
– Condition of the assets
– Performance indicators
– Legal framework
• Understand the process from the start
– Risks and rewards: the right compensation,
penalisation and contingency mechanisms
– Complexities of the process
• Build and maintain capacity
– Commit staff
– Source the right advisors
2616/12/16

27. ‘SIDE EFFECTS’ OF PPPs
• PPPs have effects beyond single projects
• Shift of public institutions to demand-based
attitudes, customer-focused
• Efficiency principles
• Due diligence processes foster transparency
2716/12/16

28. CONCLUSIONS
• Water infrastructure has unique
characteristics that explain the status quo
• The role of PPPs is specific and conditional
• Greater capacity in the public sector is needed
to know when to go PPP and how
• Quality of information is essential
• PPP arrangements are very case-specific
• PPPs have effects beyond the project
2816/12/16

29. Terima Kasih
2916/12/16