WATER AND SANITATION PROGRAM: LEARNING NOTE 59088 Key findings The Hard Way to the High Road · Each Community-based Organization (CBO) provides an average of 1,200 Transition of Community-based Water Groups to people from low-income households with water service; they could be serving Professional Service Providers in Indonesia up to 800,000 people with piped water, or about 7% of the total population of the five districts; in Blitar and Lamongan, CBOs provide piped water to 3 and 5 times more January 2011 households than the local water utility (PDAM). · Emphasizing local ownership, CBOs As significant numbers of Indonesian Figure 1: Rural Water Supply Access allow systems to be better maintained villages are outside the reach of and operated over their lifetime, and 100% utility service,1 since the 1990s the 90% where they perform exceptionally, they Government of Indonesia (Government) 80% operate the infrastructure to generate value and expand services: 67% of CBOs has been supporting the construction 70% 60% had operating ratios lower than 1, and can be of village water infrastructure to be as low as 40% in some cases. 50% managed by users through community- 40% based water organizations (CBOs). · There is significant demand: a willingness- 30% Emphasizing project ownership and to-pay investigation undertaken with 2,100 20% households showed a 30-300% WTP over democratic involvement, community- 10% the average tariffs currently paid by rural based management is thought to allow 0% households in these five districts. systems to be better maintained and 2006 2007 2008 2009 operated post-project. · CBOs are by and large "promising Source: Central Statistics Agency, SUSENAS but fragile": a few of them have already Although community involvement in expanded some components of their not transition from the original concept of systems, but in the absence of a financing water supply has been going on through a post-construction "coping mechanism" facility, they painfully build up funds over national projects in Indonesia for years, into a real engine for accelerating time, borrow against the personal credit of it was not until 2004, through the Water one of the leaders, or turn to government or access to water in rural areas (Figure 1) Resources Law, when the role of CBOs in new donor programs. through a service-oriented enterprise of water supply development was formally the community. Using the project inputs · Access to financing is not the only recognized. Before 2004, most policy as genuine start-up capital, can CBOs constraint; expansion also requires pronouncements and official project create value? Is there sustainability after improved commercial practices and most documents considered CBOs to be a CBOs do not have systems in place to plan project? And if there is, what can be vehicle for project implementation rather and budget on an annual basis. done to encourage more of it? than a long-standing approach to rural water development and management. SIGNIFICANCE OF CBOS The perhaps unexpected success of TO INDONESIA'S WATER some CBOs is fomenting a discussion SUPPLY among policy-makers and project designers around whether CBOs might There is no census on how many CBOs presently exists in Indonesia, how many households rely on them for water, 1 Out of 64,000 rural villages in Indonesia, over half or the post-project attrition rates, but (52%) rely on unimproved sources of water. CBOs are estimated to be in the tens of 2 Transition of Community-based Water Groups to Professional Service Providers in Indonesia The Hard Way to the High Road thousands.2 A survey conducted in five Between 50% and 60% of those served charges were based on a monthly flat districts in West and East Java3 identified by CBOs belong to the lowest income fee. 600 CBOs managing piped water bracket of households, with a monthly systems formed under development income iof less than 1 million Indonesian The high willingness is partly driven by projects--that is more than 100 CBOs rupiah (IDR). In Cianjur and Lamongan, customers' desire to have better water per district. Although the numbers CBOs served disproportionately larger pressure and reliability of supply. Over of defunct organizations were not numbers of low income households 60% of respondents noted these to be ascertained, in drawing the sample, one in those districts. While the total problems in the current service, while in every four CBOs had to be replaced households in those districts with an the WTP scenario (Box 1) offered good because it was no longer active. income of less than IDR 1 million per pressure and reliability. Usually, pressure month was, respectively, 46% and 30%, and reliability drops because CBOs add Nevertheless, the existing CBOs provide 52% and 55% of CBO customers were connections without the corresponding a far-reaching service, catering to an from the this lowest income bracket. increase in water "take" or withdrawal average of 1,200 persons (approximately rates and without structural adjustments, 260 households) per organization. In Willingness-to-Pay and such as changing pipe sizes, pump these five districts alone, CBOs could be Customer Satisfaction capacities, etc., or because residents serving up to 800,000 people with piped who are charged a flat fee (as opposed water, representing some 7% of the total There is significant demand. A to a volumetric charge) use water population. In Blitar and Lamongan, willingness-to-pay (WTP) survey4 of unwisely. East Java Province, CBOs provide piped 2,100 households, both currently water to 3 and 5 times more households connected and potential customers, On the other hand, CBOs enjoy the trust than the local water utility (PDAM). was conducted in the five districts. of customers who agreed that they were The survey reveals that compared to responsive to customers in managing the average tariffs currently paid by repairs, billing and collecting payments rural households to CBOs, WTP is and in maintaining the funds of the significantly higher, ranging from 30% CBOs honestly. Many of those currently 2 Under World Bank-supported projects alone to 300%. Table 1 compares WTP per not connected to the service are willing (1990-2010), Indonesia has constructed over m3 with current average charge per m3. to connect; 50% of respondents were 9,000 rural water supply schemes managed by willing to connect if they could pay WTP between current and potential communities. More are being constructed with customers did not vary significantly, outright and 80% if they could pay by support from other donors and international development banks, by local governments through although the WTP was higher among installment. the Dana Alokasi Khusus (DAK), non-government respondents in areas where the CBOs organizations, and corporate philanthropies. It is clear opportunities exist for CBOs charged a volumetric rate than where 3 The Water and Sanitation Program's Multi- to upgrade their systems and expand Village Pooling Project Study assessed 171 CBOs their business, but it seems that under representing 25% of over 600 known CBOs present conditions, CBOs cannot take existing in the districts of Bandung and Cianjur in 4 Water and Sanitation Program and Akademika, full advantage of the market potential. West Java Province and Lamongan, Malang and Willingness-to-Pay for Community-Based Water Blitar in East Java Province. Supply Services in West and East Java, (2009). PROMISING BUT FRAGILE A few CBOs have already expanded BOX 1: WILLINGNESS-TO-PAY (WTP) SCENARIO some components of their systems-- mostly distribution networks and house The WTP used the contingent valuation method, a stated preference technique connections. This can sometimes cause that seeks the valution of a hypothetical scenario. The scenario included these a problem if production, transmission and characteristics of service: storage capacity are not proportionately expanded when maximum capacity has · Monthly consumption of 10 cubic meters been reached, but these activities would need a lot more investments. · Water is clear, no discoloration or cloudiness; odorless, no rotting or strong smell of chemical or rusting; no unfavorable taste Most CBOs (67%) make more than · Adequate supply during peak hours they spend, so are able to turn a profit and gradually build up additional equity. · 24-hour daily water service; pressure is strong when tap is opened Expense-to-revenue ratios can be as · Prompt and reliable service: In the event of water disruptions, repair takes low as 40% in some cases. Thus, using no more than three days current commercial terms for investment finance, CBOs have borrowing www.wsp.org The Hard Way to the High Road Transition of Community-based Water Groups to Professional Service Providers in Indonesia 3 Table 1: WTP Comparison Between Current and Potential Customers Willingness to Pay Examples from Specific CBOs (Volumetric-Paying Users Only) Average Average billing Regency/Water Upper Billing for Average Lower bound consumption per m3 based Association Bound consumption in per m3 per m3 per month on average WTP m3 column (1) (in m3) consumption (1) (2) (2)/(1) Bandung 2,107 2,038 2,177 Kelas C 10 12,500 1,250 Pesat 12 15,000 1,250 Blitar 1,737 1,670 1,803 Banyuaji 17 8,000 471 Tirta Darmahusada 21 21,000 1,000 Cianjur 2,582 2,519 2,645 Tirta Manggala 13 25,900 1,956 Tirta Jagabaya 12 18,400 1,533 Malang 2,264 2,180 2,349 Sumber Ajo 15 15,000 1,000 Lamongan 2,395 2,338 2,453 Tirta Mulya 12 13,000 1,083 Figure 2: CBOs Organizational Systems www.wsp.org 4 Transition of Community-based Water Groups to Professional Service Providers in Indonesia The Hard Way to the High Road Figure 3: A "Graduation" Roadmap that will move CBOs from here to there through the "Upgrading Community- based Piped Water Services with Private Sector Support Project," tagged as the "Second Generation Project."6 The Second Generation Project has entered into partnership with Bank Negara Indonesia to support CBO access to investment financing. While first generation investments in CBOs are financed by public grants, the activity introduces a scheme in which existing CBOs can finance additional investments through the market, with an output-based reward afterwards that will reimburse a portion of the capacities between IDR 12 million to far, however, CBOs enjoy the trust of investment. The use of commercial 400 million5 (between USD 1,333 and customers/communities, but such a finance ensures that funding supply will USD 44,444)--if only someone would practice is highly susceptible to being continue, and introduces a new level of lend to them. captured by one person for personal market discipline on the CBOs. To be gain. eligible, CBOs will need to become more In the absence of a financier, CBOs professional as organizations (Figure wait to build up funds ever so slowly, According to the assessment of five organizational practice areas, the 3), by obtaining legal personalities, borrow against the personal credit of appropriate licenses, credit-worthiness one of the leaders, or turn to donors overwhelming number of CBOs do not have systems in place to plan and through realistic tariffs, and better and government. In order to support the budget on an annual basis, are not collections and management. Thus, the ability to seek debt financing, financial externally controlled for performance, project incentivizes and supports CBOs recording and reporting needs to greatly have no incentives for staff (who are through organizational reforms. improve so that both the CBO and its often volunteers), or systems for financial financer can accurately see the financial So far 30 CBOs have participated in a reporting and asset recording (Figure 2). status of the enterprise. skills enhancement program, where they If CBOs are to be the enterprise of learn to use tools for inviting community Access to finance is not the only tomorrow, they need to update their participation in planning, upgrade their constraint. Expansion requires improved organizational systems, i.e., how to knowledge on water supply system commercial practices beyond what decide, how track activities and finances, engineering design and maintenance, CBOs might be able to currently arrange. how to recruit and retain talents, how and employ a financial recording and An increase in the numbers of customers, to generate support for customers and reporting system designed for CBOs. for example, will require improved billing other stakeholders, and how to stay For some of the participants who have and collection practices and customer above-board. not finished secondary school, this class accounts tracking. A going concern, provided their first experience using in an environment of rapidly changing SUPPORT TO SECOND a computer. But despite the relatively socio-demographic conditions, requires GENERATION CBOs difficult nature of the material, trainees continuous business and investment were highly active and appreciative of planning. The World Bank's Water and Sanitation their new knowledge. Communities Many successful CBOs are "one man Program (WSP) has been assisting the are now also deciding and designing, shows" that rely on a single leader "next generation" of CBOs through a with the support of project engineers, for direction and control. A number process of identification and reinvention the required components of their of organizations, for example, have into water enterprises of the community. investments projects. not called a general assembly in the In partnership with the Australian-funded years following their establishment. So Indonesia Infrastructure Initiative, WSP is supporting the Ministry of Public Works and the National Development Planning 6 With "first generation" projects being those that 5 Assumes a debt-service coverage ratio of unity, Agency to develop and test solutions initially built water supply systems in rural areas interest rate of 18% p.a., three years to pay. and organized communities to operate them. www.wsp.org The Hard Way to the High Road Transition of Community-based Water Groups to Professional Service Providers in Indonesia 5 Illustration 1: CBO Official Inspecting Water Pump in Lamongan and accounting systems. Although the possession and use by CBOs of project assets are not presently under threat, the issue of ownership can be an emotive one; during first generation project implementation, the mantra repeated was "the community owned the assets." In the eyes of the law, however, communities do not own these assets until they are formally transferred, which could take many years as transfers follow procedures for divesture of state property. But the attention of CBOs is best focused on the pragmatic and on the future. For example, although project assets are not owned, they are under the legitimate possession of CBOs. CBOs have legitimate rights of use of those assets to generate value. The equity created through the labor and enterprise of CBOs can be very substantial and often in the form of cash. The claim of CBOs In a later phase, the Second Generation A BUMPY ROAD WITHOUT A over these "next generation" assets Project, will seek to involve the private is clear and they will be better able to COMPASS protect those claims by formalizing sector in improvement programs for CBOs. While some CBOs will be credit- A roadmap might be conceivable, as a legal entity, keeping records, and worthy at the outset, for the majority of but by no means is the path to placing cash in bank deposits under the existing CBOs, there will continue to becoming a "second generation" CBO name of the entity. CBOs are taught to be a need for improving their capacity straightforward. One of the emerging segregate the "first generation" assets in operating and managing systems. findings is that while there is talk about, in their financial reports so that the and intent on, strengthening self- correct attribution is recorded and the The project will explore alternatives reliance and sustainability, these do not corresponding depreciation of asset to "capacity-building" by introducing easily translate into policies or practices value is tracked. At the same time, CBOs partnership arrangements with the that enable community organizations. and local governments are encouraged private sector. The private sector Whether by design or default, current to build up a depreciation fund, including could be brought in through fee-based institutions are just not making it easy for for those assets that CBOs use but do technical support/transfer, management CBOs to professionalize. Like navigating not own--simply because the owner (in support contracts, or even as co- without a compass, policies, rules, and this case, the government), who has the financing/investment partners. responsibility to replace them is unlikely procedures have not yet been developed For these activities, the role of the local for these kinds of situations. to do so in a timely way. government changes from project Claims on Project Assets Formal Requirements of implementation to oversight. This is a and the Fruits of Community Becoming a Legal Entity new concept for local goverments as well, who have only recently been made Enterprise Practical matters also arise as to responsible for water supply services An issue that has come up early on how an informal association that has under decentralization. To introduce is the treatment of start-up capital/ existed de facto, transforms into a legal ideas on obligation agreements between assets held by the community (as (de jure) entity, given that legalization local goverments and CBOs and on an informal association) through first requires specific actions and formalities monitoring of performance, a model generation projects. The ownership that may not make sense to a group local regulation has been developed and status over project investments lacks that has already been in existence for is being discussed and finalized with clarity because of the effect of broader many years. For example, communities participating districts. legal limitations on government property are now having to think about who www.wsp.org 6 Transition of Community-based Water Groups to Professional Service Providers in Indonesia The Hard Way to the High Road constitutes the required numbers of go through the rules on public-private CBOs in contributing to the village "founding members" or "incorporators" partnership in infrastructure, which government revenues. But because of the enterprise and what this means for requires interested parties to participate the rule of law is not straightforward equality in rights among neighbors, who in a competitive bidding process. for them and since many CBOs are have put in their labor and contribution not able to accurately account for their into the association over the years. Compliance financial status, they often have to pay contributions to the village government Defining the purpose of the CBO also Doing the right thing is also not easy. before being able to ascertain whether deserves thought. Under the present Many CBOs exist today without a permit profits have been made. legal rule of law, communities can to draw water or to operate a water participate in water supply development supply system. However, in a number of In relation to exploiting water, where a for the purpose of "fulfilling their own instances where CBOs have tried to do permitting system does exist, CBOs find needs." This would require, then, an the right thing, it was either impossible themselves being assessed a higher organization that is able to go into to do so because no process existed fee rate than PDAMs since they are revenue-generating activities, but or there were more disincentives to construed under the "catch-all" business not for the primary purpose of profit; comply. For example, right now, no local category. Despite the preference given the overriding purpose is service. government has procedures for issuing by the Indonesian water rights policy for The practical effect is that no private licenses/permits to CBOs to operate or drinking water supply and the exemption dividends are declared; all profits are put to review them in a manner consistent under the general laws for water back into the mission of the organization with due process, even though local exploitation permits for the purposes of or used for "community dividends" governments form more and more "own use," CBOs find themselves being to invest in other community services CBOs each year. categorized as "businesses" rather than and public goods. A different process water supply providers, and in some applies in case of the establishment of Interestingly, in a few cases where there cases, have no choice but to make a a water enterprise that is primarily for are local instruments or policies around bribe. The result is that CBOs would profit. A for-profit enterprise will need to CBOs, they often refer to the role of rather stay out or step out of the system. This is unfortunate when CBOs are quite Illustration 2: CBO Secretary Poses in Front of Permanent Office Paid for by open to supporting water conservation CBO Profits activities, as they are very aware that their continuity as an enterprise depends on water being available. In Malang, CBOs happily pay a reasonable sum to the water conservation authority (in this particular case the water resource is under the supervision of the Ministry of Forestry), where the fees are used to plant trees in the watershed under the name of the CBOs. CONCLUSIONS Formality and improved organizational systems are critical building blocks for the "next generation" CBOs. Not only will these increase their ability to access commercial financing, but also mitigate some of the risks of exploitation and secure for the members a more predictable and transparent management of their (increasing) assets. Through formality and improved systems, CBOs are able to ring-fence themselves as an enterprise that is truly "of the community, by the community and for the community." The irony for www.wsp.org The Hard Way to the High Road Transition of Community-based Water Groups to Professional Service Providers in Indonesia 7 now, however, is that in trying to achieve or mitigate consequences. For example, for licensing, review and reporting. these same goals CBOs are made in the Second Generation Project, This is best done in conjunction with vulnerable because of the lack of clarity the commercial financing partner a sector-wide master planning at the in policy and practice. is not looking to use project assets local level so that service areas are well as collateral; instead, a guarantee/ defined across service providers. It is LESSONS AND insurance arrangement has been notable that the Ministry of Public Works, RECOMMENDATIONS structured. Director-General for Infrastructure has issued a letter of instruction to districts Transitioning from an informal to First generation projects can avoid encouraging them to develop such a formal association is a process a number of the "transitioning" regulations. The Second Generation of trust and resolve between pains by supporting formality and Project has also developed a model the organizations' leaders and helping communities anticipate local regulation as a reference for local members and needs clear guidance growth early on. Enthusiasm is governments. from support agencies. One of the particularly high during the project first skills training modules introduced phase, and more support resources are Compliance regulations should in the Second Generation Project was available to the communities then. First be reviewed. A review is needed to not technical operations or finance, generation projects can avoid many of ascertain whether in setting fees and but participatory decision-making to the difficulties faced by transitioning standards too high, CBOs (and the emphasize a broad-based process. CBOs through better organizational public at large), will only continue to Only after supporting the CBO through management support and--better stay out of the system, particularly a visioning process, did the project advice on which expansions the current given the very low enforcement capacity introduce different organizational forms, water system can tolerate without presently available. Labor is one of the their implications and their formal structural modifications. most abundant assets of low income requirements. Decisions are arrived communities and it is arguable that much faster and with less conflict where Local governments should seriously their contribution in planting trees and the local government is present and consider, and national government maintaining the watershed is far more supportive of the process. should advocate, adopting a local valuable and directly relevant to water regulation setting out the rights and responsibilities of CBOs in resources management than being Clear guidance is important and assessed a fee that they cannot afford. because laws and procedures are not their jurisdiction and the process straightforward, they are prone to many interpretations. Illustration 3: In Some Cases, Even the Rich--Such As Residents of External agencies supporting the Bandung's Posh Dago Area--Rely on CBO Service process need to understand the legal and institutional context well in order to give advice and should consult with experts, including lawyers, notaries public, and experts in sector policies. Research will almost always be needed to understand locally applicable laws and regulations. Focus on the pragmatic. Without being insensitive to community sentiments, it is important that external support agencies help project stakeholders focus on practical issues. Sometimes, the ideal approach will require such a comprehensive reform it becomes unlikely to materialize, e.g., the resolution of asset transfers. Instead, support agencies and CBOs might be more able to address some of the "symptoms" of underlying problems www.wsp.org 8 Transition of Community-based Water Groups to Professional Service Providers in Indonesia The Hard Way to the High Road Illustration 4 : Checking Out Water Pressure in Cianjur, West Java About the author Jemima Sy leads the team implementing the Second Generation Project. She has worked over the last five years in the World Bank Jakarta office as a Water and Sanitation Specialist. A lawyer by training, Jemima has over 10 years experience managing water and sanitation initiatives focused on institutional reforms, entrepreneur development, and public and private financing. Acknowledgments The project, "Upgrading Community- based Piped Water Services with Private Sector Support" (the Second Generation Project) is led by the Ministry of Public Works and jointly supported by the Water and Sanitation Program of the World Bank and the Indonesia Infrastructure Initiative (Indii), an Australian Government-funded project designed to promote economic growth in Indonesia by enhancing the relevance, quality and quantum of infrastructure investment. This note benefited from inputs from Jim Coucouvinis, technical director for Indii's Water and Sanitation Program and Deviariandy Setiawan, Project Coordinator for MVP. Photos were taken by Yosa Yuliarsa. Almud Weitz, Christopher Walsh and Kara Watkins made valuable and useful The Water and Sanitation Program (WSP) is a multi-donor partnership created in 1978 and administered by the World Bank to support poor people in obtaining affordable, safe, and sustainable access to suggestions by reviewing drafts of this water and sanitation services. WSP's donors include Australia, Austria, Canada, Denmark, Finland, note. France, the Bill & Melinda Gates Foundation, Ireland, Luxembourg, Netherlands, Norway, Sweden, Switzerland, United Kingdom, United States, and the World Bank. Contact us The findings, interpretations, and conclusions expressed herein are entirely those of the author and should not be attributed to the World Bank or its affiliated organizations, or to members of the Board For more information: of Executive Directors of the World Bank or the governments they represent. The boundaries, colors, visit: www.wsp.org denominations, and other information shown on any map in this work do not imply any judgment on email: wspeap@worldbank.org the part of the World Bank Group concerning the legal status of any territory or the endorsement or acceptance of such boundaries. © 2011 Water and Sanitation Program (WSP)