presented by Bambang Bintoro Sudjito in WATER FINANCING CONFERENCE Government of Indonesia and Asian Development Bank Bandung: 7-9 November 2007

1. Public Private Partnerships in
Indonesia’s Water Sector
Bambang Bintoro Soedjito
Senior PPP Specialist – Bappenas/ADB SID
Plenary Session 4: Sample Programs/Projects that Demonstrate Options and
Solutions
WATER FINANCING CONFERENCE
Government of Indonesia and Asian Development Bank
Bandung: 7-9 November 2007

2. The Role of Infrastructure
 A continued push for the development of infrastructure
is crucial to support an average growth rate of 6.6%
annually for the next five years, as expanding
infrastructure is essential for sustaining future rapid
growth.
 Moreover, quality infrastructure services are necessary
to sustain growth and maintain or improve
competitiveness in an increasingly integrated world. And
inadequate infrastructure services mean a lower quality
of life, despite rising incomes - especially in urban areas.

3. Infrastructure is key to sustainable
growth
Infrastructure improves productivity and competitiveness, the
basis of sustainable economic growth.
Good infrastructure means reduced transport time, fast
communication, and reliable energy and water supply,
Providing easy access to local and global markets and efficient support for
private sector investment.
Also providing the poor access to basic services.
Productivity Competitiveness
Good Poverty Economic
Infrastructure Reduction Growth

4. Why Indonesia Needs Private Sector
Participation (PSP) in Infrastructure
 However, the huge investment needs in infrastructure
for the next five years, clearly confront us with enormous
challenge if we are to sustain development and improve
the quality of life and enhance competitiveness. There is
an estimated financing gap of 73 to 98.5 billion USD over
the next 5 years;
 The need for increasing private sector participation in
infrastructure is inevitable as to some extent the private
sector has access to the resources, technologies, and
skills that are necessary to deliver infrastructure
services.

5. Funding Gap: Leveraging Needs
Infrastructure Annual Needs
(2005-2010): 22 Billion USD
Funding Gap:
Average
Investment Average Funding needs
Needs from donors and private
(2005-2010) sector equivalent to:
equivalent to
17.80 Billion USD
22 Billion
USD
Average
State Budget
Allocation
(2005-2010)
equivalent to
Leveraging Needs:
4.2
17.80 / 4.20 = 4.24 USD of
Billion
Donors & Private sector per
USD USD of State Budget
Allocation

6. Public Development Expenditures
Substantial fiscal space not translating into development
expenditures at all levels of government…
10%
9%
8%
Public
7%
Revenues
6%
5%
4%
3%
Public
2%
Capital
1% Expend.
0%
1997 1998 1999 2000 2001 2002 2003 2004 2005
Central Province Kabupaten/Kota
Note: all figures in % Central
of GDP

7. The Nature of Private Sector
Involvement in Infrastructure
 Involving the private sector infrastructure is much more complex than
people originally thought and requires a level of sophistication on the
part of government that takes time and experience to develop.
 In some way, the responsibility on the government to guide the process is
even greater than when the system was almost exclusively public. This is
because adding a private component to any infrastructure network
opens up a whole new range of complicated management and design
issues which the government has learned the hard way in the past.
 Private participation in infrastructure projects invariably involve
government at the planning, construction and operating stages.
 If the particular project is part of a broader public system such as toll
road, or a water treatment facility, or an individual electricity generator,
then some public utility or authority will expect the new facility to fit
comfortably within their existing systems and planning arrangements.
 There will be pressure to use similar equipment, compatible technology,
existing contractors and to maximize value of the public network whether
existing or planned. All along there will be a tension as to what exactly the
nature of the private sector involvement.

8. Promoting PSP in Infrastructure
Two key factors are important in promoting private sector
participation in infrastructure :
 Government and private sector commitment :
Key decision makers in the public sector must be convinced that private provision of
infrastructure makes sense and be willing to follow through on that commitment, while the
private sector must be willing to engage in a long-term commitment to the economy since
infrastructure investment cannot be expected to yield lucrative returns in a short period of
time.
Government must establish a well conceived operating framework
for the private sector if they are to get good value out of private
sector involvement. Such a clear policy framework for private sector
involvement could simultaneously tackle the interrelated objectives
of:
 reducing the risk factors and pricing distortion;
 ensuring private providers deliver high quality services efficiently and at reasonable cost;
 ensuring projects are approved efficiently, fairly and in timely fashion; and
 dealing with important societal concerns about the environment, resettlement, and provision
of basic services to the poor.

9. Public Private Partnerships (PPP)
can facilitate private participation
 Country or sector conditions give rise to risks that the
private sector often find difficult to manage.
 Public-private partnership (PPP) provides a solution to
managing risks.
 In PPP, the public and private sectors collaborate to
combine in partnership their strengths and capabilities,
and agree on a sensible allocation of risks between
them.
 Risk is assigned to the partner best able to manage it.
The private sector has the capacity to deal with commercial
risks, but needs relief from noncommercial risks that are
beyond its control.
In PPP, the objective is to optimize, not maximize, the
assignment of risk to the private partner in order to
strike a viable risk-reward balance

10. Perpres 67/2005: A Cross-sector
PPP Regulatory Framework
 A cross-sector regulatory framework on PPP in
Infrastructure Provision -- Perpres 67/2005 -- has been
issued in November 2005;
 It emphasizes the ‘partnership’ aspect in a public-private
partnerships (PPP) venture - the overriding principle is that
the private investor is entitled to profit from the venture;
 It sets the ‘rules of the game’ for PSP according to best
practice; and
 The Perpres has four main objectives, i.e.:
 to provide a credible regulatory framework;
 to ensure clarity and predictability of the rules of the game for
infrastructure investment;
 to promote sustainable infrastructure provision; and
 to ensure accountable, competitive, fair and transparent PPP
procurement.

11. Perpres 67/2005: A Cross-sector
PPP Regulatory Framework
Perpres 67/2005 has important features,
namely:
3) the general principles of partnership (mutual needs, mutual
support and mutual profitability);
4) the importance of government due diligence (in preparing the
social cost-benefit analysis, capital cost scrutiny,
environmental study, and choice of PPP modalities);
5) commercial issues, including tariff setting and adjustment,
risk management, and government support;
6) fair, transparent, competitive and accountable procurement
of the PPP concessionaire; and
7) the provision on government financial support.

12. The Scope of Infrastructure
 transportation infrastructure , covering ports at sea,
rivers or lakes, airports, railway networks and railway
stations;
 road infrastructure , covering toll highways and toll
bridges;
 water infrastructure , covering channels for the flow of
fresh water;
 drinking water infrastructure which covers the
development of fresh water extraction, transmission
network, drinking water processing installation;
 waste water infrastructure which covers installation of
waste water processing installation, gathering network and
main network; and waste facilities which cover
transportation and landfills for disposal;
 telecommunications infrastructure , covering
telecommunications networks;
 electric power infrastructure , covering power plants,
transmission or distribution of electric power; and
 natural oil and gas infrastructure covering processing,
stocking, transportation, transmission or distribution of
natural oil and gas.

13. The Prospect of PPP Projects in
Water Sector in Indonesia
Status & Performance in Water Supply and Sanitation (WSS)
 Lags behind most countries in the region for WSS provision (ranked 7 out of 11);
 300 local utilities (PDAMs) cover only 16% of the population - self provision and
unregulated small scale private providers account for the balance;
 Reluctant to increase tariffs and poor efficiency has constrained PDAM service
coverage and quality.
Problems
– To ensure availability and sustainability of bulk water supply due to declining water
reserves;
– As the nature of water supply provision is local, the investment size tend to be small.
Government encourages regionalization (inter-local governments cooperation)
approach for the provision of water supply;
– Tariff setting and its adjustments need to take into account the affordability and
social aspect of the consumers.
Potential Risks
– Business sustainability depends primarily on the supply of bulk water;
– Process of tariff setting and its long-term adjustment.

14. The Location of Prospective PPP
Projects in Water Supply LIST OF OPPORTUNITIES OF INVESMENT
IN INDONESIA INFRASTRUCTURE PROJECT
2. Dumai Water Supply
22. Banjarmasin Bulk Treated Water Supply
1. Duri Water Supply (Kab. Bengkalis)
23. Samarinda Bulk Treated Water Supply
3. Tanjung Pinang Water Supply
24. Menado Bulk Treated Water Supply
4. Cileduk Water Supply (Tangerang City)
5. Kecamatan Benda & Cengkareng Water
Supply ( Tangerang City )
6. Ciparen Tangerang Water Supply
7. Sepatan Water Supply (Kab. Tangerang)
8. Pondok Gede Water Supply (Kota Bekasi)
9. Cikarang Water Supply (Kabupaten Bekasi)
17. Surakarta-Sukoharjo Bulk Treated Water Supply 20. Karang Pilang IV Bulk Treated Water Supply
10. Jatinangor Water Supply (Kab. Sumedang)
21. Umbulan Bulk Water Supply
18. Greater Yogyakarta - Magelang Water Supply
11. Cirebon Bulk & Water Supply
19. Menganti Water Supply (Kab. Gresik)
12. Uprating WTP. Kali Garang Semarang
13. Semarang Raw Water Supply
14. East Semarang New Water Supply
15. Bulk Treated Water Supply to Kabupaten
& City of Semarang
16. Tegal Water Supply

15. Evaluation of PPP Projects in
Water Supply
Out of 35 PPP Projects in Water Supply offered at IIS 2005
(including 3 model projects announced at IICE 2006) :
– 3 in operation (Samarinda, Yogyakarta, Banjarmasin);
– 1 in the process of bid evaluation (Tangerang);
– 31 under preparation (feasibility study, technical and financial review, etc.)
 Majority of local governments have yet to develop Master-plans
for the water supply provision system and its integration with
water resource development plans, including the business
plan, to ensure clarity and predictability of its development
policy.
 The proposed projects are in many cases not supported with a
proper due diligence resulting in non-viable and non-bankable
projects.
 Most PDAMs are unhealthy financially due to their huge debt
burden and deficit financial account resulting in lower capacity
and credibility to obtain new borrowings.

16. Evaluation of PPP Projects in
Water Supply
 Scarcity and low quality of raw water require higher
investment cost for water treatment, coupled with low
consumer’s ability to pay are the reasons why most of
water supply projects are not commercially viable.
 Relevant stakeholders (LGs, DPRDs and PDAMs) have
very limited understanding on the PPP concept (risk
allocation, government support, tariff adjustment, etc.)
creating public resistance to private investment in
delivering infrastructure services.
 Lack of policy, regulatory and institutional frameworks
for developing and implementing PPP projects in water
supply are key factors constraining local governments in
promoting and realizing PPP projects.

17. The Way Forward
Government needs to provide funding or risk bearing
support to make PPPs bankable;
PPP demands strong planning and central coordination;
PPP requires well-prepared projects;
Transparent competitive bidding is best practice;
Lenders require adequate protection;
Pro-active public communication and stakeholder
consultation help ensure success.

18. Thank You!
For more information:
Contact Bambang Bintoro Soedjito
bbintoros@yahoo.com