Indonesia is endowed with abundant freshwater resources. Yet, only one in five households in the country has access to supply of piped water.

The problem is especially acute in the urban areas, where the demand for water exceeds supply, leaving many households to rely on non-piped drinking water sources of poor quality. Even for those that have a piped-water connection, the quality of supply is poor, and drinking tap water is discouraged.

As such, freshwater resources are unevenly distributed across the archipelago. Java island, which is home to almost two-thirds of the country’s population, has access to only 6% of its freshwater resources.

More importantly, the rate of access to municipal/piped water supply has increased only marginally over the past 15 years.

One would be right to conclude that the slow progress on ramping up supply results from low investments in the sector. Most of the PDAMs (Indonesian acronym for a water utility company fully owned by local government) have reached a threshold or have already exhausted locally available freshwater resources to meet current demand.

The problem is expected to exacerbate due to urban and industrial expansion in Indonesia over the next couple of decades. 
Realising the urgency, 20 regional water supply projects (SPAM-R) have been conceived since 1989 to address bulk water supply challenges. However, the progress so far has been slow.

The imperatives for governments and institutions concerned are thus clear - act now to ensure water security for millions of Indonesians. 
CRISIL, based on its experience of working in the sector and in Indonesia, has identified some critical aspects that have stymied development of SPAM-R projects and steps that can help address these. The panacea requires disengaging from the conventional setup and adopting innovative governance, institutional and financing approaches.
 

Why have SPAM-R projects not progressed well?
 

The reasons are not far to seek.
 

First, the focus has been only on creating infrastructure rather than streamlining governance and addressing accountability challenges.
 

The SPAM-R projects have typically followed a top-down approach, i.e., they are driven by central government ambitions, completely discounting the local nature of the services and coordination required.
 

As a result, large-scale bulk water infrastructure is laid only to witness inadequate utilisation of assets — this holds true for all the regional water supply projects in operation today.
 

Second, funding of bulk water infrastructure and PDAM’s downstream infrastructure is seldom synchronised — a critical prerequisite for any regional bulk water supply project to succeed.
 

While the central government funding supports a significant portion of the entire water supply value chain, the funding decisions are not based on sound assessment of commitment and a clear investment strategy by the local government and/or its water utility.
 

Such approach results in wastage of financial resource without reaching intended outcome.
 

Also, funding arrangements for regional projects are not well defined. Financial sustainability of regional water supply entities is compromised and bulk water tariffs are determined based on the ability to pay or based on perceived acceptable tariff levels rather than the cost of service delivery.
 

Third, the existing process for developing regional water supply system fails to question non-performance. It also falls short of demonstrating capacity to enforce serious consequences to improve accountability.
 

As a result, local governments and water utilities commit for bulk water off-take even when there is no downstream pipe network available.
 

The existing accountability arrangements are grossly inadequate. Critical aspects such as price of treated bulk water, escalation mechanism, off-take quantity, and payment security in case of default are not well defined in the cooperation agreements between bulk water supply operator and off-taking water utilities.
 

Such open-ended contractual arrangements significantly compromise not only the bankability of regional water supply projects but also financial sustainability of the entire regional water supply initiative.

What can be done?

The government must shift focus from driving investments for infrastructure creation to improvement in governance processes, synchronisation of funding, and installing a robust accountability mechanism. Here are four key prescriptions to this effect.
 

• An independent oversight mechanism: It is necessary to balance conflicting priorities between supply and demand. Creating an independent mechanism for oversight of regional water supply projects will be critical for future projects. It should have independent view on: a) technical, financial and social feasibility of projects, b) cost of bulk water services and legitimate escalation, and c) recommending bulk water tariffs
  
  
• Single agency should be responsible for everything: New regional water supply projects must be driven by a single agency, preferably at provincial government level. This agency must be responsible for planning, designing, procurement, implementation, and operation of the project, while the role of central government will be limited to funding and providing policy and strategy advice on regional water supply systems. This will improve accountability
  
  
• Improved regional water supply project establishment process: This is necessary to foster local government and water utility ownership, and thereby accountability, right from inception. An integrated approach is necessary for viable investment decisions - establishing feasibility of bulk water infrastructure for upstream and distribution network downstream
  
  
• Using payment security mechanism as a tool for fixing accountability: Today, water utilities know that there will be no consequence if they default on their commitment to off-take the committed quantity of water. Interception of fiscal transfer from the central government is an innovative idea to fix accountability in the Indonesian context — it will demonstrate to local governments the financial implications of their actions
  

That being said, the analysis and prescriptions provided above hold good not just for the Indonesian context, but for emerging economies across the world. Investing in capital infrastructure without paying adequate attention to streamlining governance and institutional arrangements is a sure recipe for disaster.