Paying the Piper in Central Java

The government decentralization process in Indonesia has resulted in the creation of almost 350 water authorities under local government control. Very few of them are large enough to be financially sustainable, leading to under-investment in water supply networks. Poor maintenance results in up to 40 percent water loss, low pressure, reduced revenue, and contamination from inadequate sanitation systems. In Java, business and residential water users have responded by exploiting groundwater resources that are currently unregulated, leading to subsidence in urban areas and reduced water availability for irrigation and river ecosystems.

Groundwater in Java is a common pool resource that is rival and non-excludable, the main barrier to access being the capital investment required for drilling and pumping. Those with financial resources—predominantly business and wealthier residents—can access groundwater free of charge. This situation has resulted in over-exploitation of groundwater resources by these groups, with no financial contribution to the water supply infrastructure needed by the general community. Introducing payment for certain groundwater use would recognize the value of the resource used and help finance infrastructure.

Metering and charging for groundwater has long been considered by authorities to be too difficult due to the high transaction costs of monitoring. But recent technological developments have changed this paradigm. Low-cost meters, combined with telemetry for remote monitoring, are now being used to improve the sustainability of water use in the Murray Darling Basin, Australia. These innovations can be readily adapted and required for use by commercial and industrial premises in Central Java. Revenue should be used to maintain and expand access to the distribution network for the benefit of the entire community.

The Context: Central Java

The island of Java has a predominantly Equatorial Monsoon climate and is home to approximately 142 million people.^1,2 Despite rainfall in excess of 2,000 mm per year in most areas, access to clean water presents an ongoing challenge as the country develops rapidly.

Nearly all of Central Java is considered to suffer water stress or water shortage due to poor water quality, inadequate storage, and/or excessive use.³ River water quality is classified as heavily polluted due to the use of streams for solid waste disposal as well as the effect of point-source pollution from industry and diffuse pollution from agriculture.⁴ As a consequence, Central Java draws a significant proportion of drinking water supplies from groundwater. While this is not unusual globally,⁵ the exploitation of groundwater resources in Central Java is driven by necessity and is unregulated. The provincial capital Semarang is now suffering serious land subsidence due to the depletion of deep aquifers from which groundwater is drawn.⁴

A government decentralization process that began in 2001 saw the creation of almost 350 water supply authorities, known as PDAMs, under the control of local governments across Indonesia. The construction and maintenance of water supply infrastructure is the responsibility of each PDAM and their ability to invest is generally dependent on revenue raised by the local government, yet very few of them are large enough to be financially sustainable.⁶ A lack of investment and poor maintenance results in a limited distribution network, water loss, low pressure, reduced revenue, and contamination from septic sanitation systems.

Regulating and metering groundwater abstraction by certain users offers a promising solution as a means of raising the funds required to expand and maintain water supply infrastructure with the aim of improving water quality and reducing the over-exploitation of aquifers.

The Need to Change Paradigms

Water is an important input to many manufacturing and industrial processes but its cost is often below the economic value it provides. The Indonesian Constitution was adopted in 1945, when the focus was on expanding agricultural production through irrigation. It stipulated that the government had the power to control the use of water for the greater good.⁷ This recognizes the role of water as a public good but requires the government to decide the relative merit of alternative uses, without necessarily considering environmental and community aspects. The water quality of rivers and streams has been allowed to deteriorate through point-source and diffuse pollution due to the ‘greater good’ of economic growth.

There are a large number of government departments with water management responsibilities, and competing priorities are the norm. Groundwater, which is a significant source of water for domestic, municipal, and industrial users in urban areas, has remained under the control of the Ministry of Mines and Energy as a waste product of the mining industry.⁴ PDAMs have no role in regulating groundwater use, which can be used free of charge by anyone able to access it. This is in direct competition with water supplied by the PDAM, for which a tariff is charged.

Revenue from the sale of water through its distribution network is the main source of income for a PDAM and provides funds for capital expenditure, operations, and maintenance expenses. Across Java, approximately 34 percent of water supplied by PDAMs provides no revenue, because it leaks from the network before reaching the customer.⁴ Leaking pipes result in low water pressure and provide access for contamination from poorly maintained septic sewerage systems. There is currently little incentive for people to use the service of the local PDAM. In 2009, only 41 percent of Central Java’s population of 32 million lived in areas serviced by a PDAM and, of them, only 3.8 million actually used a piped water connection.⁶

An ecological economics perspective allows the situation to be assessed differently. While water resources are recognized as a public good in conventional economics, no cost is ascribed to its excessive use or deterioration in quality. Indeed the cost of purifying water to make it suitable for human consumption is considered economically productive, but the ‘avoided cost’ of maintaining clean water is not part of the conventional economics paradigm. Neither is the role of a recharged aquifer in avoiding subsidence and damage to infrastructure considered. The current water supply problems in Central Java are a consequence of conventional economics and are unlikely to improve without a paradigm change to bring a new view of the root cause.⁸

Valuing ecosystem services, such as those provided by surface water and groundwater resources, allows costs considered to be externalities in conventional economics to be included.⁹ A consequence of the inadequate water distribution network in Central Java is that some groups currently bear costs due to the actions of others. A rational response for an urban resident or business being offered low-pressure water of poor quality by the PDAM is to forgo that service and access groundwater if the required capital is available for drilling costs and pumping infrastructure. This increases the external costs borne by those community members who are unable to access groundwater. Although water from aquifers is typically classified as a rival and non-excludable good,¹⁰ a lack of capital has the effect of excluding many.

The current situation results in costs falling disproportionately on the sections of society least able to afford them. Wealthy residents and businesses opting out of the PDAM network reduce the funds available to invest in network extension and maintenance. People without access to piped water need to purchase clean water from a vendor at high prices or use a public hydrant. Purification by boiling is necessary for both piped water and groundwater, but the cost of doing so is more of an impost for poorer members of the community.

Indonesia is currently a lower middle-income country with a GDP per capita of US$3,536 in 2014.¹¹ Continuing population growth, economic development, and urbanization is expected to result in a rapid increase in water demand in Java, well in excess of the capacity of PDAMs to supply.⁴ The expected impacts of climate change on the island include increased variability in rainfall, reduced stream flow, and higher temperatures that will exacerbate water insecurity in coming years.¹² Actions must be taken soon to shift from the current water management paradigm and seek solutions.

A Solution to Infrastructure Financing

Indonesia has multiple institutions and regulations related to water management, particularly river basins.¹³ Many of these control the provision of water for crop irrigation, where water quality is less important than it is for drinking water. Rivers are also a source of drinking water, however, resulting in significant treatment costs. As a consequence, many PDAMs also source water from aquifers, which can be used free of charge and is generally less polluted than surface waters if extracted at a sufficient distance from urban areas affected by poor sanitation systems.⁴

The first step that should be taken is to improve the regulation of groundwater and implement charges for extraction. Control of groundwater should be removed from the Ministry of Mines and Energy and be regulated by the same institutions that currently manage surface waters, in recognition of the connection between surface water and groundwater systems. A holistic approach to water management was attempted in Law No. 7/2004 on Water Resources,¹⁴ but this law was declared null and void by the Constitutional Court in 2015 due to an unrelated aspect of the legislation being inconsistent with the Indonesian Constitution.⁷

A second, urgent step should be the regulation of point-source and diffuse pollution that affects watersheds. Point-source pollution is more readily controlled through regulations on the production, storage, use, and disposal of potential sources of pollution, but diffuse pollution from agricultural sources can be more significant and difficult to control.¹⁵ The cost of treatment before polluted water is suitable for use as drinking water can be minimized by stringent regulations and enforcement.

The final element of the solution proposed here is groundwater metering for commercial and industrial users. Although it has long been considered by authorities to be too difficult, recent technological developments in metering and monitoring allow tariffs to be applied to groundwater. The New South Wales Metering Scheme, being implemented in Australia to improve the measurement of groundwater extraction in the Murray Darling Basin, utilizes low-maintenance electromagnetic flow meters combined with telemetry for remote reading.¹⁶ Similar metering technology, or multi-jet meters that are also designed for low-pressure water, should be suitable for use in Central Java. The use of telemetry facilitates monitoring and should help to rapidly identify areas of particularly serious depletion that may lead to subsidence.

The three elements of this proposed solution allow revenue to be raised by PDAMs from the sale of groundwater sourced directly by commercial and industrial premises. The funds raised would be used to finance infrastructure extensions and repairs to allow a gradual shift from the unregulated extraction of groundwater to a centralized system of water treatment and distribution. It should be noted that studies have found that the use of a price signal is relatively ineffective in reducing exploitation of water resources.¹⁷ While this indicates that the metering and pricing proposal will not have the immediate effect of reducing groundwater exploitation, it also suggests that a relatively steady revenue stream will flow to the PDAM for infrastructure investment.

Despite this solution targeting typically large users of groundwater, the funds raised may be relatively modest. The proposal could be used to leverage funds from the Global Environment Facility (GEF) for water treatment plants to provide stimulus to the infrastructure project. The GEF was established in 1991 by the World Bank and has provided US$14.5 billion in grant funding and leveraged a further $75 billion in co-financing to implement projects in developing countries.¹⁸ Changing the economic paradigm of water use, when supported by regulatory changes, has the potential to trigger significant investment.

Triple Bottom Line Benefits

The economic effects of charging for groundwater use would be relatively small on each business that is required to install a meter, if tariffs are not excessive. The greater economic impact may be from the regulation of pollution as businesses internalize the cost of pollutant discharge. If regulations are strong and strictly enforced, the additional costs should lead to cleaner production methods and improved quality of water in the receiving waterways. As water supply infrastructure is improved over time, the proposal will reduce household expenditure as bottled water is replaced with PDAM supplies.

In the coming years, the proposal would have increasing environmental benefits, particularly with respect to energy use, as regulations reduce the extent of water treatment required and infrastructure is improved, thus reducing the need to purify water for consumption. In addition, PDAMs currently incur significant additional costs from energy wasted, due to pumping 34 percent more water than is delivered to customers because of leakage from poorly maintained infrastructure. Aquifer depletion would be reduced as the extent of unregulated access declines, ensuring that groundwater is available as a reserve resource in times of drought. The potential to vary water tariffs over time depending on the degree of depletion could be investigated.

The main benefits of this proposal are to society, by providing more equitable access to common pool water resources. Less than 10 percent of the poorest Indonesians currently have access to water from a PDAM network, while 70 percent use public hydrants or groundwater wells.⁶ Expanding access to the piped water network will, however, result in more people being required to pay PDAM tariffs for water. An outreach campaign can educate the community on the benefits of protecting aquifers and so generate support for the proposal.¹⁵

Final Thoughts

A lack of investment in water supply infrastructure has resulted in limited access to clean drinking water in Central Java. The situation, caused primarily by inadequate governance and undervaluing water, has led to inequitable access to common pool water resources. Water insecurity is expected to worsen with future economic growth, an increasingly urbanized population, and the effects of climate change. The solution proposed here provides a mechanism for infrastructure financing that should, over time and in combination with additional leveraged funds, improve water quality and allow more equitable access to water resources. If successful in Central Java, it provides a model that could be adopted by other provinces in Indonesia that currently have poor water quality and inadequate infrastructure for similar reasons.

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