Water

Country Water Action: Indonesia
Indonesia, ADB Create a Custom-Fit Regulatory Framework to Improve Investing Environment in Country's Water Services
August 2005

Indonesia is advancing toward better water governance with the completion of an ADB technical assistance (TA) grant to help the country's local water supply and wastewater operators attract the much need participation of the private sector.

• Objectives of the Project
• Issues to Consider
• A Joint National-Regional Framework
• Regulation as Part of Reform Process
• Next Steps for Effective Implementation
• Related Links
• Contact

The project was tasked to:

• Design a regulatory framework
• Develop an institutional strategy and regulatory policy
• Define the organizational structure and functions of the national regulatory body

The regulatory framework and its accompanying strategies and policies, once adopted and implemented, lay important groundwork to reforming a country or city's water supply and sanitation services. Regulation helps balance the sometimes conflicting interests of the government, operator and consumers in water services. Regulation is important in creating a sound environment that attracts private investors, who are need to help shoulder the costs facing aging, inefficient and insufficient systems.

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Intensive stakeholder consultations between June 2002 to June 2003 identified four major issues and a number of related key concerns that the proposed regulatory framework must address:

• Regional autonomy. The decentralization process that began with the Law Concerning Regional Autonomy assigns regulatory responsibility for water services to regional governments. National and provincial governments have few responsibilities in providing water services.
• Market structure. Government-owned regional water supply companies (Perusahaan Daerah Air Minum or PDAMs) provide the majority of water services. They are small and their service areas are limited by the geographical boundary of the regional governments.
• Financial and management difficulties. Most PDAMs are bankrupt because of low tariffs, debts and financial mismanagement.
• Private sector participation (PSP). The private sector must be engaged to help develop the sector, particularly through investments for rehabilitating and upgrading systems and infusing efficient management into the service.

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The project developed a regulatory framework that addresses stakeholder concerns by combining a national regulatory body with local regulatory functions. The customized framework promotes consistent and transparent regulations throughout the country. The two-tier structure stipulates that

• the national government will be responsible for developing an overall policy for the sector, and a national-level regulatory body will have independent decision-making authority as set out in laws and regulations; and
• the regional governments will be responsible for regulating service providers within their jurisdiction.

The national regulatory body proposed in the framework will not affect the autonomy of regional government, which were key concerns of stakeholders. Each has its own set of roles and responsibilities. The proposed framework recommends, however, that regional governments create their own regional regulatory body to oversee the service providers operating within their jurisdiction.

Indonesian stakeholders recommend that such a regional regulatory body should:

• retain its independent decision-making authority yet be accountable for its decisions; and
• be a professional, credible and trustworthy organization.

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The project's final summary report notes that the proposed regulatory framework will only be successful if its role is fully understood within the context of an overall process of the water sector reform program.

Some key issues that affect the implementation of the regulatory framework are:

• The need to have an agreed water supply and wastewater sector policy that includes the role of regulation
• The need to define the market structure for service provision and the role of private sector participation
• The need to clarify the roles of central government and regional governments under regional autonomy
• The need to develop more experience with regulation and the role it plays in supporting infrastructure development

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Indonesia is now in the process of taking these next steps to achieve effective water regulation:

• Enacting legislation to establish regulatory framework or amending existing laws to reflect the two-tiered structure
• Issuing the regulatory policy on water supply and wastewater services to introduce the watertight regulatory framework
• Establishing the National Regulatory Body for Water Supply and Wastewater of Indonesia
• Developing pilot projects at the regional level to demonstrate the relationships between the institutional mechanisms
• Awareness building activities for all levels of the water sector

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• Final Summary Report of the TA on "Regulatory Framework for Public and Private Water Supply and Wastewater Enterprises"

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