Can the courts concern over water privatization be justified (Part 2 of 2)

The Jakarta Post    
Tue, March 10, 2015

Mohamad Mova AlAfghani

There can be no doubt that privatization is problematic. It can work in some countries such as the UK and Chile, but it has failed elsewhere. The private sector also realizes this and so they gradually retreat from privatization projects.

This happens everywhere from Europe to Latin America to Asia. Thames Water pulled out several years ago from Jakarta. In Indonesia, around 95 percent of the water utilities are publicly owned. Thus, everywhere, water privatization is no longer considered the main issue.


The main issue today, even for anti-globalization cum anti-neoliberal activists, is not privatization but 'corporatization'.

Corporatization is a process by which a public, state-owned company is financially ring-fenced and behaves like the private sector. By behaving like the private sector the company professionalizes, focuses itself on revenue generating areas or businesses, outsourcing its less efficient parts and probably laying off its workers. In Indonesia, lately, resource nationalism has been the norm for the courts.

The Constitution's Article 33 mandates that natural resources, including water, are to be 'controlled' by the state. What control really means is a matter of academic debate but the Constitutional Court, in its decisions relating to the oil and gas law, developed five elements of 'state control' and put one of the elements, 'beheersdaad' (direct management), as the primary and determining criteria to establish 'state control'. Through this, the court considered that the state will be in control of its natural resources if it is 'managed' by state-owned companies. This is where things become interesting. We know that the court has been an ardent critic of capitalism and neoliberalism and has invalidated laws from electricity to oil and gas and now water. But, how can the court assume that when natural resources are controlled by state-owned companies then the state will automatically have control over them?

Are they not aware that a 'corporation' is itself a capitalist idea? Do they ignore the fact that corporations, even if they are owned by the state, are in fact, by law, considered as legal entities distinct from the state? Do they think that when water and natural resources are controlled by state-owned companies the values of capitalism and neo-liberalization can be eliminated? This is the crux of the 'corporatization' problem, but this issue has been overlooked in various court decisions. Indeed, the 2005 Water Law decision contains a prescription that Water Utility Companies (Perusahaan Daerah Air Minum or PDAM) should be positioned as a '['¦] state operational unit and not a profit oriented company'. But that's about it; there is no mention about corporatization and its risks in the court's Water Law decisions.

The 2004 Water Law was criticized by activists as a World Bank product through its Water Sector Adjustment Loan (WATSAL) program. Unbeknown to the activists and probably the court, both the World Bank and the ADB have actually also been involved in various water corporatization programs in Indonesia. Hence, if the court thinks that it can stop the advances of neo-liberalization by merely getting rid of the private sector in water business and put water in the control of state-owned companies, they are dead wrong. What it does is that it puts a blank cheque for another form capitalism to flourish in Indonesia ' a state capitalism.

For me, public versus private ownership doesn't actually matter. What really matters is how the state regulates and how the public can obtain a guarantee on reliable and affordable services. Indeed, there are preconditions and prerequisites in order for privatization to work, such as regulatory capacity ' something that we are lacking. However, state-owned companies need to be regulated, too. Quite a large number of PDAMs (regional government-owned water companies) are still in financial trouble. This is a reminder that public ownership is never a guarantee for reliable and affordable water services. What can the government do now that the water law has been revoked and both existing and potential projects are threatened?

I have heard plans that the government will simply attach a government regulation to implement Law 11/74 on Irrigation and these government regulations will then regulate the issues in more detail. I am afraid that it will not be that easy. These government regulations would be vulnerable to judicial reviews. In terms of creating implementing regulations, the government needs to evaluate if Law 11/74 contains provisions that specifically commands the creation of an implementing regulation. When these are absent then either a law or a government regulation in lieu of law would be required. As this is an emergency situation, a government regulation in lieu of law would be justified. Another thing that the government can do is to evaluate in detail which provisions ' both in the Water Law and its implementing regulations ' are considered problematic. The government can then isolate the contentious provisions and reinstate the unproblematic provisions in new regulations ' notwithstanding the first consideration above. Those above are the easy parts and only a temporary solution. Note, however, that the court's decisions strike at the heart of the economic model of water governance.

The court tends to disagree with full cost recovery and it commands the PDAM to be a non-profit entity. This can cause a severe impact on public-private partnership (PPP) projects that are taking place or will take place. These will also bring impacts to PDAM charging and tariff models across Indonesia. In theory, it would be possible to invalidate tariff determinations based on the court's decisions. Then what is it that the court really wants? What the court wants is not clear. When the court destroys the economic model with its Water Law decisions, it says nothing about the alternative. Thus, for me, the long-term, sustainable solution is for the stakeholders to sit together to reformulate our water governance in a way that incorporates the court's prescription and develop our own model.

We can look to other countries for inspiration. There are countries that make water and sewerage a part of their tax system, for example. There are also examples of countries where a certain basic water quantity for the poor is guaranteed at no charge. It needs to be understood that none of these models are perfect and there are lots of criticism on their implementation. Although difficult and costly to develop our own model, it is probably the only way for us to create reliability and consistency in our legal system. Otherwise, there will be another judicial review in the future that will bring everything to another halt.

The writer obtained his PhD in water law from the UNESCO Center for Water Law, Policy and Science, University of Dundee, UK.

This article was published in with the title "Can the court's concern over water privatization be justified? (Part 2 of 2) ".

Tags: #water #indonesia #privatization #corporatization #constitution