Bandung Water

1PROVISION OF POTABLE WATER SERVICES FOR KABUPATEN BANDUNG

2 PROVISION OF POTABLE WATER SERVICES FOR KABUPATEN BANDUNG


CONTENTS

ABBREVIATIONS

APBN (Anggaran Pendapatan dan Belanja Negara) or the StateRevenue and Expenditure Budget

APBD (Anggaran Pendapatan dan Belanja Daerah) or theRegional Revenue and Expenditure Budget

BPP SPAM (Badan Pendukung Pengembangan Sistem PenyediaanAir Minum) or the Water Supply System DevelopmentSupporting Agency

Perpres (Peraturan Presiden): Presidential Regulation

PDAM (Perusahaan Daerah Air Minum) is the RegionalGovernment-Owned Water Company

PSP Private Sector Participation

EXECUTIVE SUMMARY

I INTRODUCTION

BACKGROUND

MODEL PPP PROJECTS

PURPOSE OF THE INFORMATION MEMORANDUM

II COUNTRY OVERVIEW

III SECTOR OVERVIEW

IV LEGAL FRAMEWORK

CROSS-SECTOR REGULATIONS FOR PSP

SECTOR REGULATIONS

V THE PROJECT

VI MAIN ISSUES

VII NEXT STEPS

VIII CONTACTS

APPENDICES

APPENDIX 1 : Risk Allocation Based on the Template of Water Concession Agreement

APPENDIX 2 : Project Compliance with the Legal and Regulatory Requirements

This information memorandum is based on information from the relevant sector ministry

and contracting agency. The KKPPI Secretariat from the Coordinating Ministry for Eco-

nomic Affairs and the National Planning Agency (BAPPENAS) was responsible for coordi-

nating its production


EXECUTIVE SUMMARY

The aim of this Information Memorandum is to provide preliminary information to

prospective stakeholders and/or investors on potable water supply in Bandung

Municipal (Kabupaten Bandung).

As a consequence of development in the area, there is a need to increase the

supply of potable water in Kabupaten Bandung.

The Kabupaten Bandung authority planned to accelerate the development of its

water supply to improve service quality, to expand its coverage, and to prevent

over extraction of the ground water. The local government will be inviting domestic

as well as international investors to participate in the bidding process to improve

the water supply for part of the municipal area. The project includes:

The development of bulk water supply and a water treatment plant

(WTP);

Development of a distribution system;

Operation and maintenance during the concession period;

The preliminary feasibility study shows that the project is expected to yield a

financial IRR of 18-22%.


INTRODUCTION

implementation will be reported at the Indonesia Infrastructure Conference and Exhibition

in November 2006.

MODEL PPP PROJECTS

Because of inadequate project preparation, unavailability of Government support, and

lack of strong central coordination, PPP project transactions have so far lagged behind

the infrastructure reforms. With the new framework for PSP and risk management in

infrastructure development that has been established as part of these reforms and that

is based on international best practice (see Box 1), the execution of PPP projects is

expected to accelerate. To demonstrate the benefits of PPPs and to show that full

adherence to the new framework will lead to strong competition, favorable bid prices,

and successful financial closings, the Government has selected 10 projects in different

infrastructure sectors to be developed as models (see Table 1).

BPJT - Indonesian Toll Road Authority; BPP SPAM - National Water Regulatory Agency; MEMR -Ministry of Energy and Mineral Resources; MOT - Ministry of Transport; MPW - Ministry of PublicWorks; PLN - State Electricity Corporation

BACKGROUND

Until the 1997 financial crisis, Indonesia successfully used infrastructure development

to address poverty reduction and economic development. However, infrastructure

investments, which accounted for more than 6% of annual gross domestic product (GDP)

before 1997, have fallen to 2% in recent years, reflecting a sharp decline in public and

private spending. As a result of the financial crisis, many planned public and private

infrastructure projects were canceled or suspended. Only some basic preservation and

maintenance of infrastructure, with very little expansion, have taken place since. Current

quality and coverage of infrastructure services are therefore low by regional standards.

The generally lower availability in rural areas, particularly outside Java, contributes to

significant regional disparities in development.

Following Indonesia’s first direct presidential elections in October 2004, the current

Government set ambitious macroeconomic targets for the Medium-Term Development

Plan (RPJM: 2005–2009). The Government recognizes that major infrastructure expansion

is required to remove existing bottlenecks, increase service coverage, and attract private

sector investment to help achieve and sustain the projected economic growth of 6-7%

per annum. The Government has estimated that about $65 billion would be needed for

infrastructure expansion during 2005–2009, with $25 billion (38%) to be met from the

Government budget, $14 billion (22%) by domestic banks and insurance and pension

funds, $10 billion (15%) by multilateral and bilateral development partners, and $16 billion

(25%) by domestic and foreign private sector investors. At this level, infrastructure

investments would again reach about 5-6% of GDP.

The Government has been aware that such large-scale private sector participation (PSP)

– preferably through public-private partnerships (PPPs)– cannot be taken for granted,

unless serious structural and institutional reforms are implemented. Broad-ranging policy

reforms are critical to improve the investment climate, including (i) liberalizing markets

to allow competition and entry by new service providers, (ii) improving legal and regulatory

certainty and strengthening regulatory arrangements, (iii) introducing tariff regimes based

on full cost recovery or providing compensation to meet public service obligations

(PSOs), and (iv) establishing effective mechanisms for dispute resolution. In January

2005, the Indonesia Infrastructure Summit provided a platform for the Government to

articulate its commitment to reforms. The progress made since then in reform


PURPOSE OF THE INFORMATION MEMORANDUM

The Provision Potable Water services for Kabupaten Tangerang, which is one of the ten

model PPPs, is not ready for bidding yet. There is still preparatory work to be done

before the Project can be put on the market. The purpose of this Information Memorandum

that has been prepared for the Indonesia Infrastructure Conference and Exhibition is to:

Present the currently available information to potential investors

Identify gaps in project preparation that need to be filled in order to comply with the

new framework for PSP and risk management

Indicate the timeline for the additional preparatory work and the subsequent transaction

execution

The Information Memorandum is not legally binding, nor does it purports to be all inclusive

or to contain all the necessary information that a prospective investor may desire to

investigate the Project.


COUNTRY OVERVIEW

INTRODUCTION

Since the beginning of 2005 Indonesia has been experiencing strong external pressures

from the increase in international interest rates and the unprecedented global oil price

hike. In spite of these, the Indonesian economy managed to grow slightly faster in 2005, at

5.6%, though lower than the expected 6%.

For Indonesia, the combination of these external factors seriously threaten monetary stability.

The government of Indonesia (GOI) had to make necessary adjustments to its domestic

fuel price. To reduce the ballooning budget deficit in 2005 the price of fuel was increased

twice within a year, firstly, by an average of 29 percent in early March, and then by an

average of 127 percent in early October 2005.

The weakening of the Rupiah and the increase in the domestic fuel price triggered a

significant increase in inflation by October 2005 (17.1 percent year-on-year). To reduce

the high economic costs caused by the fuel price increase, and to improve business

competitiveness, the GOI announced on 1st October, 2005 an incentive package for the

trade and transport sectors. Other policy measures and prudent monetary policy enforced

by Bank Indonesia manage to strengthen the Rupiah exchange rate and stabilize inflation

to 3.3 percent between January to July 2006, (compare to a target inflation of 8 percent for

2006).

During the first two quarters of 2006, the economy grew at the rate of nearly 5 percent

with a slight increase from 4.7 percent in the first quarter to 5.2 percent in the second

quarter. The trend is expected to continue.

Foreign exchange reserves are expected to reach US$ 43 billion by the end of 2006, a 24

percent increase from US$ 34.7 billion in 2005. The US$ 43 billion figure is net of the loan

repayment to IMF of US$ 3.75 billion in June 2006 and final repayment of US$ 3.2 billion in

October 2006.

Between January and July 2006, imports (of non-oil-and-gas commodities) amounted

US$ 23.44 trillion, a 7.9 percent year-on-year increase while total exports accounted for

US$ 55.77 trillion, an 11.3 percent year-on-year increase. Consequently, there was a

balance of trade surplus of US$21.51 billion for the period. The balance of payments

financial accounts also show a US$ 3.42 surplus in the first semester 2006.

The interest rate has declined to nearly 10 percent by October 2006 and is predicted to

reach single digit by end 2006. A low interest rate will facilitate further expansion of the

economy.

ECONOMIC PROSPECTS FOR 2007

The 2007 prospects for the Indonesian economy are predicted to be better than 2006,

although the external pressures remain strong (the international price of oil is likely to

remain high and the US government will likely continue a tight money policy). However,

economic stability is likely to improve, as the exchange rate will be relatively stable, with

inflation under control and interest rate declining.

The achievements of the Indonesian economy in 2006 and the implementation of the

economic reforms currently undertaken by government form the basis for the 2007

macroeconomic assumptions as follows.

First, the export price of Indonesia’s crude oil is assumed at an average of US$65/bbl.

Second, the exchange rate is assumed at Rp9300 per US$. Third, the year-on-year

inflation rate is estimated at 6.5 percent. And finally, the average interest rate for 2007 is

assumed at 8.5 percent.

With effective policy coordination and activities in the real sector, especially in managing

aggregate demand, the 2007 Indonesian economy is expected to achieve a 6.3 percent

growth. Public sector investment and government expenditure remains the main

economic driving force.


SECTOR OVERVIEW

Water is a finite and vulnerable resource, essential to sustain life, development and theenvironment. One of The United Nations Millennium Development Goals is a target ofreducing by half the number of people who do not have access to clean water andsanitation by 2015. However, Indonesia-wide the water and sanitation sector faces theprospect of having to make large investments in water provision, primarily becausecoverage of water and sanitation services is presently much lower than envisaged bythe MDGs, and secondly because of an increase in the scope and stringency of waterand sanitation quality standards.

The water and sanitation sector (WSS) in Indonesia was in crisis even before the 1997/1978 Asian crisis. Because many regional water enterprises (PDAMs) are financiallyunsound and because of uncertainty in the legal framework during the early stages ofdecentralization, there has been no significant investment in the sector in recent years.Only 8 percent of the water supply system in Indonesia is currently under public-privatepartnership. Aging infrastructure, budget constraints (central and local government), andescalating demand have shifted policy towards private sector involvement in water serviceprovision.

Treatment and distribution of clean water in urban areas is the responsibility of about 318water enterprises (PDAMs) under the ownership/jurisdiction of local government. InJakarta, Batam and 20 other locations in Indonesia (BPP SPAM, 2005), concessions forwater supply have been awarded to the private sector. Elsewhere, the role of the privatesector in piped water is limited to that of supplier or contractor. The PDAMs supply waterto customers through house connections (presently about 39% of the urban population).About 61% of the population receives water through informal distribution networks andvarious water vending operations. PDAM distribution in rural areas is estimated at 8%.

Approximately 40.15 million people live in the urban areas served by the PDAMs. Basedon 2005 data, only about 40% of the urban communities are served. The remaining 60%of the urban population, of which many are low-income, rely on other sources of waterthat includes self-provision and commercial on-selling.

In rural areas, that community-managed systems are estimated to meet the needs ofabout 30% of the population, most of which have been established in rudimentary formsby the communities themselves.

In most regions, tariffs are not set at full-cost recovery levels, so that PDAMs can barelymeet operating costs. Many PDAMs are unable to cover depreciation costs on fixedassets, and do not generate sufficient funds to finance new investments. A difficulty thatcontinually plagues the planning of some new or expanded water supply systems is thelack of water in one local government area, while adequate supply is available in aneighboring one. Despite the principles of regional cooperation under government

regulation, many areas have yet to implement them. However, Government haspromulgated the drinking water tariff policy through Permendagri 23/2006.

Law 7/2004 on water resources is the main governing law for this sector. Under this law,PSP in water supply is through cooperation with a PDAM or on the basis of a concessiongranted by a local government.

Law 7/2004 provides also more clarity on roles and responsibilities, establishing thelegal framework for use of water and resource protection. Few urban local governmentson Java have access to sufficient raw water in their region to serve existing and expandedwater supply systems. Watershed management and conservation are considered to bea high priority. This would sustain the water supply sector in the long run.

As mentioned in Law 7/2004 and PP 16/2005, the development of Drinking Water SupplySystem can be carried out by a SOE and/or ROE specifically. Nevertheless, PP 16/2005provides that if the SOE or ROE is unable to improve the service quantity and quality of


drinking water supply system in their regional services, it may involve cooperatives, privateentities, and/or the community within their services areas.

PP 16/2005 on the Development of Water Supply System stipulates the establishmentof BPP SPAM, a consultative body for water supply at the national level. BPP SPAM is aministerial body established by and responsible to the Minister of Public Works. BPPSPAM is not a contracting authority, this being the role of the local governments or PDAMs,nor a regulatory body. Funding and secretariat support comes from within the MPW.

Local government is expected to appoint a water regulator and to adopt the standardrecommended by BPP SPAM in respective areas. Several local government that haveimplemented PSP in the water supply sector (such as Jakarta) have established a localregulatory entity. However, there is no provision in the law for the establishment of aregulatory body for the sector. This is a deficiency that needs to be rectified if PSP is tomaterialize.

The contracting authority would be the local government, excluding the PDAMs. Policy,as usual, would be under the ministry. The PDAMs, other ROEs and the private sectorcould be the operator. However, for new PSP projects, in the interest of transparency,the local PDAMs (owned by the local government contracting authority) should desistfrom bidding for projects tendered by their local government.


LEGAL FRAMEWORK

CROSS-SECTOR REGULATIONS FOR PSP

Perpres 67/2005

This is the cornerstone of the new PSP framework that aims at establishing a clear and

predictable environment within which private investors will operate. Perpres 67/2005

defines two forms of PSP: partnership and licensing agreements. These agreements

should specify, among other things, the project scope, period of partnership/license,

implementation/operation warranty, tariff and tariff adjustment mechanism, risks and

obligations, performance standards, dispute resolution, and supervision method. PPP

projects can be identified and prepared either by the Government or the private sector,

but the sponsors must be selected through open and transparent bidding. Perpres 67/

2005 describes in detail the rules and procedures for the bidding process, and calls for

tariffs to be set at full cost recovery. If this exceeds the affordability of consumers to pay,

the Government must compensate for the difference with a PSO subsidy. Perpres 67/

2005 recommends that risks be allocated to the party that is best able to manage and

control them.

Relevant Ministerial Regulations

To ensure that risks of individual PPP projects are appropriately allocated between the

public and private sectors, and that the Government’s overall exposure is well managed,

the Minister of Finance issued Regulation 38/2006. The dual objective of the new risk

mitigation and management policy is to support infrastructure development while

maintaining fiscal sustainability of the Government budget. Regulation 38/2006 describes

the types of risks the Government may consider sharing (those related to political events,

project performance, and demand), the main principles for providing such support

(legality, project quality in terms of technical and financial feasibility, fiscal prudence in

terms of total exposure and annual budget, and transparency), and approval procedures.

Regulation 38/2006 has been complemented by two Regulations issued by the

Coordinating Minister of Economic Affairs. Whereas Regulation 3/2006 describes the

procedure and criteria for prioritizing all PPP projects, Regulation 4/2006 focuses on the

evaluation of those that require Government support. While reiterating the project quality,

fiscal prudence, and transparency principles, Regulations 3/2006 and 4/2006 outline the

roles of the National Committee for the Acceleration of Infrastructure Provision (KKPPI)

and its secretariat; and specify in detail the documentation needed and criteria to be

met, such as the pre-feasibility study, environmental impact analysis, socio-economic

benefit-cost analysis, risk analysis, bidding documents (including draft concession

agreement), and the project’s compatibility with the RPJM, sector strategic plan, and

regional spatial plan. As to the transparency principle, Regulation 4/2006 stipulates that

requests for Government support must be submitted before bidding.

SECTOR REGULATIONS

PPP in the water supply sector is governed by Law 7/2004 on Water Resources, which

serves as the umbrella for management and development of water resource, including

water supply. In March 2005, the government issued Government Regulation 16/2005 on

“Development of Water Supply System”, as the implementation regulation for Law 7/

2004.


THE PROJECT

Rancaekek and Cicalengka in eastern part of Bandung are the main industrial areas in

Kabupaten Bandung. This leads to a high growth of population in the areas within 5 years

which counts to be more than 2%. Originally the clean water requirement for household

and industries are supplied by ground. However, due to overexploitation, natural ground

water is predicted no longer available in the near future. Nowadays, around industrial

areas during the dry season, people difficult to find clean water. The existing clean water

requirement is supplied by water handcarts and truck with the price is approximately Rp.

15,000 to Rp. 25,000 thousand per cubic meter.

This suggests that there is a high demand potential for a piped water supply. However,

Kabupaten Bandung, has limited budget for construction water supply infrastructure have

the need for private sector participation in the provision of water supply systems.

ECONOMIC ANALYSIS

The social cost-benefit analysis for the project has not been conducted. This will be

undertaken before the project is put out for tender.

FINANCIAL ANALYSIS

The total project cost is estimated of USD 30.7 million.

A preliminary financial analysis shows that the Financial IRR is 18 - 22%.


MAIN ISSUES

Land has not been acquired. About 1 Ha land is required for the 450 lps water treatment

plant and an additional parcel of land for the reservoirs. The land cost will be borne by the

investor.

There are 3 (three) potential sources of water for the proposed project:

East Bandung :

§ Springs , 100 l/s

§ Curug / Cinulang River, 100 l/s

West Bandung :

§ Saguling Dam, 200 l/s

North Bandung (Lembang):

§ Springs, 50 l/s

Since this is a Greenfield project, government financial support, either from the local

government or central government, may be made available. The type of support envisaged

is a sharing of the demand risk, which is permissible under the MOF decree PMK 38/

2006. However, the provision of this form of government support is expected to be

recovered in later years when actual demand is more than what is projected.


NEXT STEPS

The next steps in this poject is figured in the table below:


CONTACTS

KKPPI SecretariatMenara Ravindo, 17th FloorJalan Kebon Sirih Kav. 75Jakarta 10340Tel: +62-21-390 8850; 390 8845Fax: +62-21-390 8489Attn: Mr. Wahyu Utomo ([email protected])

The Chairman of Bandung RegencyJalan Raya Soreang Km. 17Tel: +62-22- 589 1159Fax: +62-22- 589 1159Attn: Mr. Tatang Rustandar ([email protected])

Supporting Agency For Development of Drinking Water Provision SystemJalan Wijaya I No. 68Kebayoran Baru, JakartaTel: +62-21-72789126Fax: +62-21-7260520Attn: Mr. Rahmat Karnadi ([email protected])


APPENDICES

APPENDIX 1RISK ALLOCATION BASED ON TEMPLATE WATER CONCESSION AGREEMENT


APPENDIX 2

PROJECT COMPLIANCE WITH THE LEGAL AND REGULATORY REQUIREMENTS

17PROVISION OF POTABLE WATER SERVICES FOR KABUPATEN BANDUNGPROVISION OF POTABLE WATER SERVICES FOR KABUPATEN BANDUNG

17




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