Comparing Performance of Public and Private Sector Operator

7/30/2019 Comparing Performance of Public and Private Sector Operator

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This is the authors version published as:

Pribadi, K.S., Anwar, A., dan Pangeran, M.H. (2009).Comparing Performance of Public and Private Sector Operatorin Drinking Water Supply in Indonesia: A Case Study of Bogorand Batam City, Proceedings of The 1st InternationalConference on Sustainable Infrastructure and Built

Environm ent in Developing Countries, Bandung, F.83-89.


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84 / F: CONSTRUCTION MANAGEMENT

situation and operational inefficiency of many water companies, assuming that the private

sector can operate better than the public water supply provider.

This study tries to develop better understanding on the various factors affecting the

performance of urban water supply provision, involving both a PPP scheme and a public

sector operator, by investigating various operational and managerial aspects i.e.: technical,

customer service, financial, business management, human resource and access to poor people.

Also investigated are the local contexts of the local water provision, such as history, business

environment, political and government relation, legal aspect and regulations, socio-economic

condition of local people and the role of stakeholders in decision making, such as decision on

tariff. The case study involves PDAM Tirta Pakuan in Bogor City, West Java Province,

representing the public sector provider, and PT. Adhya Tirta Batam (ATB), Batam City, Riau

Islands Province representing the private sector. To get a balanced perspective in the study,

the research framework includes issues often raised by those who refuse government policy

on involving private sector for water provision, i.e.: improving service coverage, operational

efficiency, quality of service, tariff, special program for the poor and environmental

conservation. An extensive discussion about the pro-con global debate of PPP implementation

can be found in the White Book published by the Water Dialogue Indonesia (2009).

2. Basic Information on the Case StudyThe embryo of the PDAM Tirta Pakuan (from here onward will be referred to as PDAM),

established in 1977 as a local government owned company (Perusahaan Daerah), was the

water service of Bogor Municipality, dated from 1918 (during the Dutch Colonial time),

using Kota Batu spring as the main source (capacity 70 L/sec). Currently the company is

obtaining its raw water from springs and Cisadane River and distributes water using gravity

system, helped by the topography of Bogor, to 74.988 customers (in year 2007) composed of

social group (1,5%), domestic households (93,5%) and commercial and industry group

(4,9%).

Batam City has a shorter water service history, originating from BIDAs (Batam

Industrial Development Authority) clean water service managing raw water provision, water

treatment plant and distribution network since 1978. In 1995, BIDA set up a 25 years (from

1995 to 2020) concession agreement with ATB Consortium consisting of Biwater

International Ltd., PT. Bangun Cipta Kontraktor and PT. Syabata Cemerlang, owning

respectively 45%, 45 % and 10% shares. In 2001, PT. Syabata Cemerlang released its shareand Biwater was aquisitioned by Cascal BV, UK, a subsidiary of Biwater and the share was

distributed equally between PT Bangun Cipta Kontraktor and Cascal BV. ATB is responsible

for managing and supplying clean water in the Batam Island, while BIDA acts as the

regulator overseeing the whole ATB technical and commercial activities, including tariff set

up and ensuring the supply and the quality of raw water based on the capacity of the existing

reservoirs. ATB financial responsibility includes rent of assets, raw water, royalties to BIDA

and taxes to government. At the end of the concession, all the assets shall be transferred to

BIDA. The ATB is currently operating seven water treatment plants (WTPs) which are

located in the vicinity of reservoirs owned by BIDA, with a total capacity of 2.335 L/sec,

increased four times since the beginning of the concession (588 L/sec). Distribution is by

gravity and pumping system, depending on the topography of the service areas. Using its

expanded infrastructure, the ATB (in 2008) is servicing 136.065 connections (domestic

customers-88,3%, commercial group-9,8%, industry-0,9%, special customers-1,0%).

3. Performance of the Case Study

3.1. Service expansionIn 2007, ATB service coverage was increased to 86%1 (from 50% in its early years),

meaning that the concessionaire was able to achieve service expansion using combined

investment financing sources from its equity and loans. At the same year, despite the

investment in service expansion (which was not comparable to that of ATB due to difficulty

1AccordingtoATBsAnnualReviewReport(2007)


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F: CONSTRUCTION MANAGEMENT / 85

to access loan facility), PDAMs service coverage was only 46% (see Figure 1).The study

found that ATB indeed was able to mobilize private capital from loans by developing

performance which makes their projects bankable. Survey in Bogor showed that most of the

non-customer respondents (75) did not want PDAM connection, because most of them were

already satisfied with the source of water they have until now (spring water sources, shallow

wells, or deep wells). This condition is the opposite for the people in Batam, as more than

80% of the non-customer respondents of ATB, mostly living in illegal settlements and slum

areas, have limited options and were not satisfied with the sources of water they have at

present, such as ground water or rain water. These are characteristics that influence the

service expansion efforts of the companies.

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1998 1999 2000* 2001 2002 2003 2004 2005 2006 2007

Year

NumberofActiveCustome

PDAM Tirta Pakuan PT. ATB Figure 1 Number of active customers of PDAM Tirta Pakuan and ATB

3.2. Operational efficiency and financial performanceIn 2007 the NRW (non-revenue water) of both PDAM and ATB was far better than the

national average of 39% as published by BPPSPAM (2007) (see Figure 2a). The ATBs

NRW is mainly dominated by illegal connections while PDAMs NRW is mainly caused by

technical losses or pipe leakages due to old age and high water pressure due to its topographic

condition. Financial performance indicators include staff/personnel cost ratio (ATBs is lower

than PDAMs); expenditure items related to personnel cost (ATBs are more varied than

PDAMs); energy cost (ATBs is far higher than PDAMs due to its advantage in the location

of its main WTP and reservoirs in higher Bogor area). ATBs electricity cost amounts toalmost half of the business direct costs and this could not be avoided as its distribution system

is dominated by pumping which consumes electricity. In terms of personnel number per 1000

connections, ATB fares better than PDAM (see Figure 2b). With a total of 124.140 customers

in 2007, ATB only needed 364 personnel, compared to PDAM, which at the same year, with

a total of 74,988 customers, needed 494 personnel (which included more than 70 outsourced

personnel), or 35% more than that of ATB (ATB does not outsource personnel). Figures 2

(c)(d)(e)(f) show some financial performance indicators

1.35

1.40

1.45

1.50

1.55

1.60

1.65

1.70

1.75

1.80

2003 2004 2005 2006 2007

Tahun

RasioB

iaya

Operasi

PDAM T irta Pakuan PT . AT B

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2003 2004 2005 2006 2007

Tahun

Pemu

lihanbiaya

PDAM Tirta Pakuan PT . ATB Figure 2(a) NRW trend Figure 2(b) Personnel ratio


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20.0%

22.5%

25.0%

27.5%

30.0%

32.5%

35.0%

37.5%

40.0%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Year

NRW(%)

PDAM Tirta Pakuan PT. ATB

6.46

6.576.576.54

6.07

5.816.11

6.89

7.99

6.595.78

4.89 5.13

5.16

4.45 4.32

3.643.31 3.04

2.93

0

1

2

3

4

5

6

7

8

9

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Year

Personne;ratio/1000Customers

PDAM Tirta Pakuan PT. ATB Figure 2(c) Operational cost ratio Figure 2(d) Cost Recovery Ratio

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

2003 2004 2005 2006 2007

Tahun

Tingkatpengem

balian

aktiva

tetap

bersih

PDAM T irta Pakuan PT . AT B

0.00

0.50

1.00

1.50

2.00

2.50

3.00

2003 2004 2005 2006 2007

Tahun

Rasiokemampuanbayarhutangjatuhtempo

PDAM Tirta Pakuan PT. ATB

Figure 2(e) Rate of return of net fixed asset Figure 2(f) Debt payment ratio

3.3. Quality of serviceThe investigation shows that quality of service should not be used as the only reason for

adopting PPP in urban water provision, especially when options for clean water sources are

limited. Quality of service is more related to the customer satisfaction issues and in urban

water provision, it rather indicates whether the operator cares for its customers or not. The

customer perceptions survey shows that PDAM customers are more satisfied than ATBs.

The customers appreciate PDAMs policy to maintain flow continuity and water pressure in

their distribution network, despite the high NRW. As a public utility, PDAM was able to

balance the economic interest with maintaining its business and social obligations. According

to PKP-DPU (2008) report, PDAM has maintained good public relation in Bogor,

communicating with the public on its activities and policies. The level of customer complaints

is quite low as PDAM tries to provide quick response to the customers complaints. PDAM isin fact quite innovative in its service, as in addition to providing clean water, it also operates a

potable water service zone (ZAMP).

On the issue of public relation, ATB may need to improve itself through a more pro-

active communication. The management of ATB, after 14 years of concession, has only just

begun to improve their public relation policy in 2009. Lack of payment points and long

billing period are the issues that should be given serious attention by ATB.

It is well known that NRW is a serious problem for many PDAMs in Indonesia and it

degrades the quality of service of many of them. This study in fact could not find any

presence of innovative solution for reducing NRW, as both companies have their own

solutions based on the specific characteristics of their NRW. As ATBs NRW is dominated

by illegal connections in the non-serviced areas of illegal settlements and slump areas, it uses

a strategy of providing Water Kiosk program, which coincidentally is well received because it

helps those who live in the areas. On the other side, PDAM decided not to reduce radically itsNRW (characterised by technical losses) by maintaining service pressure and continuity of

flow, indicating that PDAM is prioritising the need of the customers.

3.4. Water tariff, Special service to poor and Environmental conservationThe average water price per M3 is shown in Figure 3(a) and (b). It can be seen here that

ATB is seemed to have a higher motive for profit compared to PDAM, despite its higher

operational cost. However, it was found that ATB customers spend only less than 4% of their

monthly income to pay the water bills, compared with PDAMs customers who spend more

than 8%. This could have happened because the average income of ATB customers is indeed


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higher than those of PDAM. In addition, the average consumption of each household in

Batam is also lower than in Bogor.

For serving the poor, PDAM has a number of special programs, such as by grouping the

poor households (RA category) in providing micro credit facility for installments of new

connection fee, and the Water Terminal and Public Hydrant (TAHU). Nevertheless, PDAM

needs to investigate and evaluate periodically its RA customers, to ensure that the program

for the poor reaches its intended target. Periodical investigation and evaluation are also

beneficial because re-classifying the customers in accordance with its proper category tariff

rate may increase its revenue basis. On the other side, ATB management stated that, up to

now, they have no special program regarding the low income groups. The cross-subsidy

scheme devised by ATB and its stakeholders for the low-income group may have been

undermined by the fact found through direct household interviews that many low cost

housings are in fact occupied by economically well-off families. ATB should be more prudent

in selecting the low-cost customers because the charged tariff for this category is very low.

Cost

1314

Gross profit

1453

Cost

1672

Gross profit

2759

PDAM Tirta Pakuan ATB

Tarif

Rp. 2.767

Tarif

Rp. 4.431

632

752

1,6341,717

1,6391,700 1,672

1314

1075

873

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2003 2004 2005 2006 2007

Tahun

Biayaoperasionalper

M3airterjual

PDAM Tirta Pakuan PT. ATB Figure 3(a) Average water tariff Figure 3(b) Operational cost/m3 water sold

PDAM is fortunate to have spring water sources as well as surface water from the

Cisadane River upstream with relatively good quality water, which is advantageous in term of

lower treatment process cost. In return to this, PDAM allocated some budget for greeningprograms to protect the water catchments areas, which contributes positively to the

environmental protection issues. Being dependent on the rain fed reservoirs owned by BIDA

for raw water, and having paid royalty and raw water tax to the government, ATB feels that

conservation program becomes the responsibility of BIDA.

4. Factors Affecting Performance

The study identified several factors affecting the performance of urban water providers.

First, availability and quality of directly accesible water sources. The natural competitor in

water supply indeed plays a significant role. The availability of easily accesible natural water

sources (springs, shallow wells, pumped groundwater) in Bogor has affected the potential

customers. Most of the non-customer respondents in Bogor are not willing to subscribe to

PDAM, because they have cheaper alternatives. Proper policy on the use of groundwater

sources need to be developed better, as the excessive groundwater extraction is threateningthe sustainability of the City and reducing the business scale of the Public operator. Second,

local government and political situation. PDAM has relatively no difficulties in proposing

tariff adjustment, as it has been accommodated by the local government regulation. In

addition to that, DPRD (the local parliament) of Kota Bogor has been very cooperative by

committing to support the policy and the program of PDAM. On the other side, ATB has been

facing a serious challenge from the uncertainty of tariff adjustment in Batam. The concession

agreement stipulates that tariff adjustment is the responsibility of BIDA, but in the current

situation with the establishment of the city government of Batam, the decision process for the

tariff adjustment requires the involvement of the City Government and the DPRD. Since the


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last tariff adjustment in 2003, ATB needs five years to wait for the approval of the new tariff

adjustment in December, 2007, effective in early 2008. Third, access to financing sources.

The service coverage of ATB has been significantly expanded compared to that of the early

years of the concession. The key to this is the ability of ATB to mobilize loans to fulfil its

investment needs, by ensuring project viability, in particular the project internal rate of return

which was fixed at 26,5%. For PDAM, lack of access to loans has been an obstacle to

investment, and it need to solve this issue in order to be able to expand its services. Fourth,

corporate communication strategy. PDAM has been able to communicate effectively with the

public regarding its policy and program. In return, feed back in the form of critics and

suggestions from the public was able to improve its management. The communication

strategy was created as an initiative of its Public Relation Team without any outside support.

One of the examples of the success of its communication strategy is when tariff adjustment is

required, it doesnt have significant challenges, and this shows that innovation should not

necessarily relate to the public vs. private sector debate. Fifth, good corporate governance

(GCG) practices. Both companies have implemented them and both Boards of Directors have

their independence in developing plans and making decisions. PDAM is relatively

conservative regarding transparency on reporting, whereas ATB is more normative in

accordance with the concession agreement stipulations, being only responsible to BIDA. ATB

also appreciates the establishment of an MoU between BIDA and the City Government of

Batam and DPRD to be involved in overseeing the ATBs activities.

5. Concluding Remarks

The study showed balanced perspectives on the provision of drinking water, with and

without PPP scheme. In general, based on the six studied performance aspects, it can be said

that each provider has its own specific, differentiating characteristics, some of them are even

beyond the context of public vs. private sector provision issues. The NRW issues are treated

specifically according to the local characteristic of operation and of customer nature. Issue on

service coverage expansion is treated better in ATB situation, while PDAM seems to be better

in handling customer satisfaction. Different business scale does not facilitate the comparison

of financial performance of PDAM and ATB. ATB has a much larger revenue base than

PDAM in terms of number of customers and the commercial and industrial group customers.

Nevertheless, both companies showed good financial performance, based on their ratios

(revenue to operation, debt payment capacity, cost recovery capacity).The study also reveals other factors affecting providers performance, independent from

whether it is public or private sector, such as: availability, quality and accessibility of raw

water sources, local government policy and political setting, natural physical setting

(topography ad geography) of the cities, city planning, company communication strategy,

access to financial sources. The result of the study provides a better understanding on the

issues to be taken into account when a city is considering a PPP concession scheme for its

drinking water infrastructure and provision.

6. AcknowledgementThe writers would like to thank all those parties in Bogor and Batam City which have assisted

the performing of this research, especially the management, employee, customers and non-

customers of PDAM Tirta Pakuan and ATB. This study was fully supported by the National

Working Group of The Water Dialogue under grant of the International DevelopmentResearch Centre (IDRC).


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7. References

Abdel Aziz, A.M. (2007). Successful delivery of public-private partnerships for infrastructure

development. Journal of Construction Engineering and Management, 133 (12), 918-931.

Badan Pendukung Pengembangan Sistem Penyediaan Air Minum (2007). Direktori Kinerja

PDAM Tahun 2007. Jakarta.

National Working Group The Water Dialogues Indonesia (2009). Buku Putih: Kerjasama

Pemerintah dan Swasta dalam Pelayanan Air Minum di Indonesia. Jakarta.

Pribadi, K,S. and Pangeran, M,H. (2007). Important Risk on Public-Private Partneship

Scheme in Water Suply Investment in Indonesia. Proceedings of The 1st International

Conference of European Asian Civil Engineering Forum (EACEF). Universitas Pelita

Harapan, Indonesia, September 26-27, 2007.

Pusat Komunikasi Publik Departemen Pekerjaan Umum (2008). Eksklusif PDAM: Pemenang

Penilaian Kinerja Pemerintah Daerah Bidang PU. Jakarta.

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Comparing Performance of Public and Private Sector Operator