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    Southeast Asia
     Jul 8, '14


Hints of Widodo's approach
By Philip Jacobson

JAKARTA - Sixteen years after former ruling dictator Suharto privatized the national capital's piped water system, the long battle for control over it is finally on the verge of an endgame. Its resolution sheds light on how current Jakarta governor and presidential hopeful Joko Widodo would handle prickly public-private investment issues should he win the July 9 polls.

Under Widodo, the Jakarta provincial government recently struck a deal with French utilities giant Suez Environnement SA to take over its subsidiary Palyja, which since 1998 has run the piped network's western half amid continual allegations of corruption and mismanagement.

Under the deal, the city would buy Palyja's shares via state-owned



company Jakarta Propertindo (JakPro). A coalition of human-right-to-water activists, however, oppose the plan, and have held it up with a civil lawsuit that seeks to annul Palyja's original contract, which they maintain was forged illegally for the benefit of Suharto and his cronies.

Widodo's administration has approached the activists about a settlement, but any agreement between them has been held up by questions over how the city intends to manage the piped network after it takes charge - namely over whether JakPro will continue to run it for a profit.

The situation in the Indonesian capital reflects a larger remunicipalization push underway across the world. Since the turn of the century, at least 100 cities have retaken control of their once privatized water supply or sanitation networks, according to a report by Emanuele Lobina, a member of the Public Services International Research Unit at the University of Greenwich, who testified in the Jakarta case as an expert witness.

Privatizations - or "public-private partnerships", as their proponents now prefer to call them - of water supplies are still occurring mainly at the behest of the World Bank Group, which has pushed the arrangement since the early 1990s. But since 2006, Lobina told Asia Times Online, the trend had gone in reverse.

The root problem fueling the remunicipalization wave, he said, was systematic, observable across the global North-South divide. "Whatever the context, when private water operators get in, usually there is a diversion of resources away from human needs," Lobina explained. "This is due to the profit maximization imperative and the pressures that puts on the service."

Indonesia has recently pushed for the redrawing of numerous natural resource contracts with foreign companies, mostly in the oil, gas and mining sectors. Both presidential candidates, Widodo and former soldier Prabowo Subianto, have failed to clearly state their positions on resource nationalism. But Widodo's handling of the Palyja case hints at his potential approach.

Jakarta didn't always want to purchase Palyja. Previously it intended to simply renegotiate the contract. That effort started under Widodo's predecessor, Fauzi Bowo, under whose administration a massive debt to the operators began to accumulate. Palyja's counterpart in Jakarta's eastern half, Aetra, is controlled by a Singapore-based consortium whose majority owner, Recapital Advisors, was founded by Sandiaga Uno, one of Indonesia's richest men and a spokesman for the Prabowo campaign.

The debt arose after Fauzi began refusing to sign off on any more water tariff hikes in response to a public outcry over high prices and poor service. Meanwhile, the "water charge", which is what the city pays the operators for their services, continued to go up every six months as per the contract. As the gap between the cash inflows and money due steadily increased, the shortfall grew enormous, reaching into the tens of millions of dollars.

Jakarta convinced Aetra to sign off on a new deal but had trouble with Palyja, which refused to lower the water charge to an acceptable level. Negotiations were at a stalemate. Then in October 2012, a few days after Widodo took office, Suez agreed to sell control of Palyja to the Philippines' Manila Water. But the deal required Jakarta's consent and a few months later the city rejected it. The new official consensus was that the government should take over.

Legal challenge
Around that time, civil society groups under the umbrella of the People's Coalition Against the Privatization of Water in Jakarta (KMMSAJ) filed a lawsuit in the Central Jakarta District Court assailing the legality of the contract. According to Muhammad Reza, the national coordinator of Kruha, a KMMSAJ member, Widodo was on board with the plan.

In March 2013, the activists were able to arrange an audience with Widodo, an impossibility under Fauzi's regime. The governor agreed that legal action was the most reasonable way forward, and the suit was filed against various arms of the Jakarta and central governments, since suing the operators directly was impossible. The aim was to annul the contract and restore the authority of Jakarta's water utility, PAM Jaya.

In the following months, Reza said, the activists followed up several times with Joko's staff and PAM Jaya about how to proceed. The coalition hoped the city and PAM Jaya would agree to what the lawsuit accused their institutions of so the judge could issue a quick ruling.

At that time, though, communication began to break down. Meanwhile, calls for Widodo to run for president had reached a fever pitch. The city's representatives to the coalition seemed confused; it wasn't clear if Joko or his deputy, Basuki Tjahaja Purnama, was in charge. The activists' messages didn't seem to be getting through.

Then the activists read in the paper that the city intended to buy Palyja. Immediately they sent Widodo a protest letter and publicly announced their opposition. Suez should not be compensated, they argued, because the contract had always been illegal. Moreover, if Palyja simply became a JakPro subsidiary, they feared things would remain basically the same, with business considerations trumping the human-right-to-water imperative. Large swaths of Jakarta, especially in poorer areas, still are not connected to the piped system, and the water everywhere is far from drinkable, yet prices are among Asia's highest.

In November, the coalition was granted another audience with the governor. Widodo emphasized he still agreed that Jakarta should control its own waterworks but he explained that it would be better if the government took them over it via a commercial transaction because the legal route could take years.

Canceling the contract unilaterally, on the other hand, would invoke a gargantuan penalty and would probably lead to international arbitration. Furthermore, the lawsuit threatened to sour international investment sentiment by canceling the existence of a foreign purchased company. Widodo later asked if it would be possible to withdraw the suit.

"It was not a request, just a question," Reza said. "He wanted to make sure he was not intervening with the court process."

The activists weren't convinced, believing instead that the city did not have a real plan for after the purchase. It appeared to them that the officials merely thought the income from the waterworks should flow into the state's coffers rather than to foreign companies.

In April, the parties sat down again. This time Widodo talked about annulling the governor's decree that had authorized the contract in the first place while still carrying out the purchase. That sounded to Reza like the start of something palatable, but since then, he said, Widodo's staff assigned to follow up on the matter had failed to provide any kind of scenario.

As Widodo's presidential campaign intensified in May and June, there had been no convincing guarantee, a plan with specifics, that the system would not continue to be managed on an overwhelmingly commercial basis after the takeover.

"There is no picture in their mind of how to run this aside from what Palyja has done," Reza said. "How can we give them a blank check?"

JakPro chief executive officer Budi Karya said the activists' worries were misplaced. As a city-owned company, JakPro would be totally willing to renegotiate the contract. "Suez and Astratel are purely private, so they think only about profit," Budi told Asia Times Online, referring to Palyja's minority owner. "But we are the government, so we should have a balance between profit and social considerations for poor people."

Budi said JakPro would also be cheaper because locals commanded lower salaries than foreigners.

According to Febi Yonesta, director of the Jakarta Legal Aid Institute, which is handling the coalition's case, state-owned companies like JakPro are still profit-oriented. Moreover, he said, the government had announced a plan to take JakPro public in 2015. The purchase thus did not bring the operation into accordance with Article 33 of the 1945 Constitution, which states that Indonesia's natural resources, including its "waters ... shall be controlled by the State and exploited to the greatest benefit of the people".

"Contract termination is a must," Febi told Asia Times Online. "That contract is the source of all water management problems in Jakarta."

Budi said it would be fine with him if JakPro did not go public. But that might not be his decision to make, and anyway his statements to the press do not constitute official commitments. According to Lobina, if the government really wanted to remunicipalize, they could simply use PAM Jaya.

"The fact that they are using JakPro means that they want to re-privatize, not remunicipalize," he said.

Both Budi and Wijanto Hadipuro, a lecturer at Soegijapranata Catholic University, used the same word - "elegant" - to compare buying Palyja to canceling its contract. "Although we might say that the contract was a fatal fault made by the former regime, we have to admit that the business contract is a legal one," Wijanto told Asia Times. Annulling it "might bring about uncertainty."

Also important to consider is the position of the Asian Development Bank, which gave Palyja a US$38 million loan in 2007. The ADB's strategy for Indonesia is to promote public-private partnerships.

"If a change of control happens, we assume it would happen under the existing concession arrangement," an ADB official in the Private Sector Operations Department told Asia Times Online. "If there was a change in control, ADB would have to be comfortable with new shareholders, as is customary in most loan agreements."

After the April meeting, Widodo told reporters that he and the coalition were on the same page and that the purchase would go ahead. Budi, though, said he had been ordered not to pull the trigger just yet, but rather to wait out the lawsuit.

Reza and Febi actually saw themselves on the same page as Widodo. Like them, he wanted to restore state control of Jakarta's waterworks. "The issue is more a technical matter of how to carry it out," Febi said.

Reza perceived another problem. Perhaps out of necessity because he was an political outsider, Reza said, Widodo had never purged Jakarta's bureaucracy of holdovers from Fauzi's time. He had come with a lot of good ideas, especially in the water sector, to which he had allocated far more money than any governor in Indonesia's history, for projects like reservoir and canal rehabilitation and digging infiltration wells.

But these had been impeded by vested interests and competing agendas among his staff and other government arms, and most had ultimately been postponed or undermined in some way. "There's lots of populist policies but never delivered in practice," Reza said. "Jokowi has been hijacked by his own administration."

In some respects, the Jakarta case is similar to the German city of Berlin, the site of a struggle over whether the city should have to pay to remunicipalize. In 2011, Berlin's first ever popular referendum, for the disclosure of a secret water contract, was won by the votes of more than 666,000 people, forcing officials to act on remunicipalization.

A citizens group called the Berlin Water Table, which had launched the referendum campaign, proposed unilateral cancellation of the contract on the grounds that it was unconstitutional. But officials opted to buy back the concession instead.

The struggle there now is over whether the system will be expected to make money for the city, said Dorothea Haerlin, founding member of the BWT. "The Berlin government doesn't want to change the structure of this profit-driven company and we want to change it totally," she told Asia Times. "Just changing the ownership doesn't really help us."

In Indonesia, the Jakarta case could set an important precedent, said Andreas Harsono, a researcher from Human Rights Watch who as a journalist in the early 2000s interviewed dozens of people for an investigative report on the origins of Jakarta's privatization.

"This lawsuit is monumental," said Harsono, who also testified as an expert witness. "The substance is, can water be privatized? If it can't, how about Aqua? Coca Cola? Indomilk? So many companies are using and selling water in Indonesia."

For Reza, Jakarta could serve as an example for Indonesia to end the corporatization of public utilities, starting with the water sector. "This is the most complete example we can give to this country, and we can go everywhere with this success story," he said.

As for Widodo, Reza added, questions still remained about his stance toward nationalization. "What is the conception? Because it looks to me like he doesn't want to make a problem with the private [sector]."

Budi said Joko's primary concern was how to improve society - and to do so in an "elegant" way. "He's a businessman," Budi said. "He's not going to suddenly take everyone's contracts."

Philip Jacobson (@philjacobius) is a Jakarta-based journalist who has lived in Yogyakarta, Banda Aceh and the capital.

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