WATER GLOBAL PRACTICE WSS GSG UTILITY TURNAROUND SERIES Case Study— PDAM Tirtanadi, Indonesia Alizar Anwar and Maria Salvetti AUGUST 2017 Key Characteristics of Aggregation Case Study PDAM Tirtanadi, Indonesia Context • Low-income country • Aggregation covering urban areas • Low level of water performance Purpose Performance, professionalization, economic efficiency Scope WSS functions and services Scale • Administrative boundaries • Localities covered: 7 for water and 2 for wastewater • Population covered: 1,803,917 inhabitants for water and 83,440 for wastewater • Coverage: 20% for water and 4% for wastewater • Connections: 360,783 for water and 16,688 for wastewater Process Bottom-up, voluntary, and incentivized Governance • Delegated (25 years) • Public company • Decision making: regular meetings between PDAM Tirtanadi and local water utilities • Asset transfer: at the end of the 25-year agreement, all assets will be returned to the respective utilities • Liability: liabilities and debts occurring after signature of cooperation agreement are taken over by PDAM Tirtanadi • Staff transfer: part of the staff was transferred • Clear entry and exit rules Outcome Increased performance and costs Findings Technical and management skills from PDAM Tirtanadi are to be transferred to other utilities through cooperation; limited staff transfer occurred (40 employees from PDAM Tirta Deli as well as employees from other local water utilities); PDAM Tirtanadi reached cost recovery in 2013, but further tariff increases are needed to fund investment needs and maintain financial sustainability 1 In 1998, Indonesia’s central government encouraged providers’ interests, and to improve the efficiency of water services to regroup to improve water supply drinking water services. and sanitation (WSS) quality and coverage. Following a strengths, weaknesses, opportunities, and threats A Province-Led Initiative Encouraging (SWOT) analysis, aggregation in the form of a cooper- PDAM Tirtanadi to Establish Cooperation ation agreement was decided on at local level and was Agreements supported by local governments from the province of North Sumatra is a province of Indonesia that is located North Sumatra. As a result, the water utility of on the island of Sumatra. It covers 73,000 km2 and is Tirtanadi (PDAM Tirtanadi) signed agreements with populated by 13.3 million inhabitants.1 Only 54 percent nine local PDAMs (water utilities), with a goal of trans- of its population has access to a drinking water supply; ferring some of its technical, financial, and manage- in comparison, under the Millennium Development rial skills and expertise to those utilities. A decade Goals (MDGs), the target was to achieve 71 percent cov- later, in 2009, that aggregation process proved suc- erage by 2015 and 100 percent coverage by 2019. The cessful: three water utilities ended their cooperation construction of water supply systems in Medan, North agreements because they had gained sufficient skills Sumatra’s capital city, started in 1905—during the colo- and knowledge to manage their water services by nial era—and its operation was managed by themselves. Waterleiding Maatschappij NV Ajer Beresih. After Indonesia’s independence was recognized in 1950, the A Water Sector Undergoing Important management of the company was handed over to the Reforms in the 1990s provincial government of North Sumatra. In 1979, a Before 1997, the provision of drinking water in provincial regulation established a provincial water Indonesia was a public duty supervised by the munici- supply enterprise under the name of PDAM Tirtanadi palities, whereas the central government’s main role North Sumatra Province. In 1991, the regulation was was to establish a standard water sector policy and amended to allow the water utility to also manage the prepare technical assistance for the sector develop- sewerage system. To achieve the MDG target, PDAM ment. Because of economic turmoil in 1997, the gov- Tirtanadi—which already had good technical, finan- ernment of Indonesia began to place a stronger cial, and management skills—was expected to help emphasis on water, recognizing it as both a crucial eco- weak local utilities improve their performance. In April nomic good and a social good for society. As a result, 1998, within this context, the Ministry of Home Affairs the Indonesian water sector experienced major provided guidelines to PDAM Tirtanadi on establishing changes following important institutional, economic, a holding company; that was one of several possible and political reforms that enabled private sector par- options to improve water and sanitation services in ticipation in the 1990s. In 2004, a regulation regarding North Sumatra. Following a review of those guidelines, water resources was enacted to promote integrated the PDAM Association of North Sumatra decided that and sustainable water management and to decentral- another option—arranging a cooperation agreement ize further responsibilities from the national level to between PDAM Tirtanadi and local water utilities—was the provincial governments. Further regulations preferred. The concept of cooperation was then opened the possibility for the development of water ­presented to the governor and the head of the districts, provision through private sector participation, associ- who, in March 1999, formed a merger team to formu- ations, or self-provision. A regulatory body was also late the cooperation framework. In July 1999, PDAM established to promote good-quality service at a realis- Tirtanadi and PDAM Tirta Deli signed a cooperation tic price, to ensure a balance between consumers’ and agreement, which stated that PDAM Tirtanadi would 2 Case Study—PDAM Tirtanadi, Indonesia manage water provision in some of PDAM Tirta Deli’s by the provincial government. It encompasses all service areas. In the following 14 months, PDAM WSS functions and services. The existing WSS asset, Tirtanadi arranged cooperation agreements with nine for which ownership remains under local water util- other water utilities in several districts of North ities, has been handed over to PDAM Tirtanadi for Sumatra—namely, Simalungun, Deli Serdang, Toba the duration of the agreement. At the end of the Samosir, South Tapanuli, Central Tapanuli, Mandailing agreement, PDAM Tirtanadi will return all assets to Natal, Nias, South Nias, and Samosir. In 2000, PDAM the individual water utilities. Tirtanadi also took over the operation and mainte- nance of the sewerage system in the city of Parapat, a A SWOT Analysis to Support Aggregation tourist resort with a population of 6,105 inhabitants. and Identify Its Advantages (See map 1 and table 1.) The rationale for the cooperation agreement was ana- The cooperation agreement between PDAM Tirtanadi lyzed using a strengths, weaknesses, opportunities, and the other utilities covers a period of 25 years. and threats (SWOT) analysis jointly conducted by The agreement is voluntary, although it is recom- PDAM Tirtanadi and the local water utilities. The mended by the central government and supported strengths of PDAM Tirtanadi are, among others, (a) its MAP 1. Service Area of PDAM Tirtanadi Source: World Bank. Case Study—PDAM Tirtanadi, Indonesia 3 TABLE 1. Municipalities Where PDAM Tirtanadi Operates Medan Deli Serdang Samosir Toba Samosir Tapanuli Tengah Tapanuli Selatan Nias Selatan Total population (inhabitants) 2,137,011 1,911,797 121,924 175,226 324,006 204,615 295,914 Population served (%) 73.2 4.9 12.8 15.7 8.2 32.9 2.9 Number of house connections 415,200 18,762 3,125 5,510 5,309 13,479 1,740 Source: PDAM Tirtanadi, 2004. experience and expertise in water and wastewater util- office in the territory of each utility to manage customer ities and (b) its equity and good performance. The relationships. Each branch office reports to the head- identified weaknesses of local PDAMs consisted of (a) quarters in Medan. Meetings between PDAM Tirtanadi the absence of technical, financial, and management and the local utilities are conducted regularly. Any dis- skills and expertise; (b) a lack of funds for the opti- pute is brought in front of the governor for final and mization of the systems; (c) a low motivation to binding arbitration. Upon the signature of the coopera- develop; and (d) a low service coverage area. The tion agreement, PDAM Tirtanadi became responsible strengths of the local utilities comprise (a) raw water for all liabilities taken on behalf of other utilities during availability, (b) existing water facilities, and (c) poten- the 25-year agreement. After the signature of the agree- tial consumers. Following the SWOT analysis, aggrega- ment with Tirta Deli, 40 employees were transferred to tion was perceived as an opportunity to use the PDAM Tirtanadi. Those employees underwent a selec- strengths of PDAM Tirtanadi to compensate for the tion process to determine their rank and job assign- weaknesses of local PDAMs. Further analyses explored ment. Employees from other local water utilities were the opportunities offered by an aggregation in the form also transferred to PDAM Tirtanadi when cooperation of a cooperation agreement. Provincial and district agreements were signed. Drinking water tariff adjust- governments supported that aggregation option ments were made to support the five-year program to because it would allow for technology and expertise strengthen the water utilities’ performance. PDAM transfer, drinking water services improvement through further tar- Tirtanadi has reached full cost recovery, but ­ the 2Q1C program (quantity, quality, continuity), and iff adjustments are needed to avoid any imbalance in increased revenues. As such, the cooperation agree- individual water utilities’ financial capability. The ment was seen as a means to improve coverage and requirement to achieve full recovery is crucial to allow performance, to accelerate the achievement of MDGs, the water utilities to sustainably finance their opera- to enhance managerial and human resources capacity, tional costs as well as their investment needs. According and to increase economic efficiency through full cost to the provisions of the cooperation agreements, PDAM recovery pricing. Tirtanadi applies the existing tariff issued by the dis- trict utility, which will be adjusted based on the tar- iff-setting guidelines issued by the Ministry of Home An Aggregation Leading to a Successful Affairs. The local regulation specifies that water tariffs Capacity and Expertise Transfer are decided by the head of the regency on the basis of a Although local water utilities remain under the stew- proposal formulated by the local utility. ardship of local governments, PDAM Tirtanadi is in charge of the organization and management of the In February 2009, responsibility for the PDAM water service operation. It has established a branch Tirtanadi branches of Nias, Madina, and Simalungun 4 Case Study—PDAM Tirtanadi, Indonesia TABLE 2. Performance Level in PDAMs Simalungun PDAM Tirtanadi on the establishment of a holding and Nias When Responsibility Was Turned Over to company as one of the options to aggregate and Their Respective Local Governments improve WSS in North Sumatra. However, on April PDAM PDAM 30, 1998, following a review of the guidelines by the Performance indicator (2014) Simalungun Nias PDAM Association of North Sumatra, PDAM Tirtanadi Service coverage (%) 33.8 27 decided that its preferred aggregation option was to Continuity of service (hours/day) 18 23 arrange specific cooperation agreements with other Staff ratio per 1,000 connections 9.4 6.7 local water utilities. That aggregation option was Consumer complaints handled (%) 100 88 then presented to governors and heads of districts for approval. Two years later, the cooperation agreement Source: Badan Pendukung Pengembangan Sistem Penyediaan Air Minum (BPPSPAM) monitoring of PDAMs’ performance in Indonesia. between PDAM Tirtanadi and PDAM Tirta Deli was signed. was returned to the branches’ local governments because those branches had acquired the skills Lesson 2: Having a Large Utility as Nucleus can Work, and  knowledge to efficiently manage their own But Aggregation of Similar-Sized Small Utilities also water  ­ supply provision. (See table 2.) Since then, can be Successful PDAM Tirtanadi operates water provision for only six In Indonesia, one of the rationales for aggregation was water utilities—namely, Deli Serdang, Toba Samosir, to have PDAM Tirtanadi—which already has good tech- Samosir, Central Tapanuli, Tapanuli Selatan, and nical, financial, and managerial skills—help other, South Nias regencies. As such, the aggregation can be smaller, surrounding utilities build and develop those seen as a success because it reached its ­ purpose of competences. professionalization and expertise transfer. Lesson 3: Asset Ownership, Development, and Aggregation Case Study at a Glance Management Depend on the Governance form Key Lessons Learned from the Aggregation of the Aggregation Case Study In Indonesia, WSS assets belong to either the provin- Lesson 1: Aligning Interests of Stakeholders at all cial governments or the local government, depending Levels is Essential on the status of the utilities. Investments are funded When mandated, aggregation is generally designed through public funds coming from provinces, munici- at the national level. Nevertheless, a broad consulta- palities, and international aid. tion with local stakeholders should still be organized Lesson 4: Managing Staff Transfer is Key to Mitigating early in the process to ensure the alignment of inter- Transaction Costs ests between national and local levels. Such an early PDAM Tirtanadi hired 40 employees from PDAM engagement helps build stakeholder ownership of Tirta Deli. Those employees went through a selec- the reform. It allows potential problems or resistance tion process to determine their rank and job to be tackled, and their potential impacts to be dif- ­a ssignment. Employees from other local water util- fused, thereby improving conditions for success. In ities were also hired when cooperation agreements the case of PDAM Tirtanadi, national and local stake- were signed. holders have worked together to come up with the option best suited for aggregation, thus successfully aligning their interests. On April 20, 1998, the Note Ministry of Home Affairs provided guidelines to 1. 2013 census. Case Study—PDAM Tirtanadi, Indonesia 5 © 2017 International Bank for Reconstruction and Development / The World Bank. Some rights reserved. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. This work is subject to a CC BY 3.0 IGO license (https://creativecommons.org/licenses​ by/3.0/igo). The World Bank does not necessarily own each component of the content. It is your responsibility to /­ determine whether permission is needed for reuse and to obtain permission from the copyright owner. If you have questions, email pubrights@worldbank.org. 6  SKU W17072