Water Supply and Sanitation in Indonesia - Investment and Financing

Investment and Financing

The water and sanitation sector is not given a high priority at the national or sub-national level, partly because of competing priorities from other sectors such as health and education. Few local governments use their own resources to implement water and sanitation activities and when given funding through open-menu infrastructure programs, local governments and communities rarely choose water and sanitation as the main activity. Most funding for the sector comes from the national level and the level of sub-national funding is often hidden as it occurs in several government departments. Funding estimates for the sector in 2008 were around one to two per cent of local government budgets.

Public investment. Total infrastructure spending in Indonesia was 55 trillion Rupiah in 2005 (US$ 5.7 billion). These expenditures were financed mainly by the local (23 trillion Rupiah) and central government (also 23 trillion Rupiah), followed by the provincial government (9 trillion Rupiah). Infrastructure investment stood at 10% of total government expenditures, as shown in the Table below.

Source: Calculations based on World Bank Indonesia Public Finance Data Page. All figures are in current trillion Rupiah for 2005.

While it is not entirely clear how much of this sum has been invested in water supply and sanitation, the ADB estimates that only US$ 124m per year (average of 2004-2005) from the regular national budget were allocated to water supply and sanitation.

Since decentralization in the year 2001, local Governments have typically invested less than 2% of their annual budgets on water supply, even less on sanitation and almost nothing on improving hygiene practices. Assuming that 2% of local government (provincial and district) budgets are spent on water and sanitation, local government investments in water and sanitation were 3.6 trillion Rupiah or US$375m or about three times higher than the US$124m financed through the central budget. Total investments thus can be very tentatively estimated at about US$500m, or slightly more than what has been estimated by one source as the required investments to meet the MDGs, or US$450 million per year At about US$2 per capita and year these investments still remain far lower than investments in water and sanitation in other middle-income countries.

The economic crisis of the late 1990s had severely curtailed investment in infrastructure. Central government spending on development dropped from US$14 billion in 1994 to US$5 billion in 2002, within which the share of infrastructure spending further declined from 57 to 30% over the same period. Moreover, according to the World Bank, poor institutional and regulatory frameworks and rampant corruption in the infrastructure sector, which were prevalent even before the crisis, continued without serious sector reform efforts by the government until today.

Utility financing. Loan financing to PDAMs faces numerous challenges. For example, the Ministry of Finance requires its loans to be channeled through regional governments whose legislatures have to pledge future central government transfers as collateral. Since regional legislatures are reluctant to do so, central government lending to utilities is not likely to re-emerge even after the issue of old debt would be settled. Two efforts at promoting the issuing of corporate bonds by creditworthy utilities, one supported by partial guarantees by USAID and the other by KfW, have failed "because of the risk-averse culture which is so pervasive in Indonesian central and regional governments", according to a USAID report. Under a 2009 Presidential decree, however, state banks can provide partial credit guarantees of 70% of loans to creditworthy PDAMs plus an interest subsidy. As for direct lending by the Ministry of Finance, regional governments have to provide partial guarantees for these loans, which they are reluctant to provide.

Thus PDAMs are likely to be limited in their access to finance largely to grants, which are scarce. In 2009 there were three primary sources of national government grant funding for water supply:

• Matching grants (hibah) to regional governments. Water supply is expected to receive Rp 3 trillion of hibah from the national budget between 2010 and 2014, complemented by funds from external donors.
• a Special Allocations Fund (DAK), which accounted for 2.4% of the national budget in 2009, of which about 5% were directed towards the water supply sector, especially village community-based systems.
• Grants by the Ministry of Public Works for raw water supply and treatment.

Microfinance. Bank Negara Indonesia provides small loans to community-based organizations (CBOs) engaged in water supply in Java. The pilot project is part of a national program called Kredit Usaha Rakyat that provides loans for community and small scale enterprises. The World Bank's Water and Sanitation Program in collaboration with the AusAID-funded Indonesia Infrastructure Initiative (INDII), the Ministry of Public Works, and Directorate of Public Private Partnership Development of the National Development Planning Agency provide technical assistance to the CBOs.