# **<u>Box 2: Ten Years of Governance Weaknesses in Jakarta’s Water Supply</u>**

<mark>In the late 1980s, only 14 percent of Jakarta’s population lived in households connected to the municipal water system. Fully one third relied on water from street vendors. They paid between three and fifty times as much for water as did people with a household connection. Water vendors got their supplies from public taps. There were very few of these taps –1,200 serving at least 2.5 million people. This increased the labor costs of the street vendors, who usually transported water using jerricans piled on handcarts. Nonetheless, the vendors were earning hourly wages two to three times the average for men with primary or lower education. The public taps were controlled by operators, who (in turn) charged three to six times their per liter costs for water.</mark> <mark>Why were prices so high –so much higher than any reasonable calculation of labor costs and wholesale prices suggested that they should be? And why were there so few public taps? It wasn’t that the cost of construction was out of reach –five to ten thousand additional taps could have been constructed for less than the price of one of the city’s underutilized water treatment plants.</mark> <mark>It appears that the street vendors were running a cartel, supported by bribes to local officials and water utility staff. After subtracting the costs of labor, equipment and payments to public tap operators, nearly one half of the price paid to vendors for water by households was accounted for by cartel rents and bribes. In turn, after accounting for official payments to the utility for water and operating costs, about 60 percent of vendor payments to public tap operators were available for excess profit and bribe payments. And it appeared that the number of public taps had been optimized to maximize the rents available for water vendors and utility staff.</mark><sup>10</sup> <mark>Governance in Jakarta’s water sector faced additional challenges in 1997 when two European water companies, one partnering with a son of President Suharto, another with a close associate of the President, were awarded concessions for the city’s water supply without a competitive bidding process. In this case, contracts allowed for limited financial oversight and, additionally, had to be renegotiated in the aftermath of the Asian financial crisis. While 90 percent of the population of Jakarta now has 24 hour access to water, non-revenue water remains 50 percent of the total supply and a number of performance targets (along with sufficient tariff increases) have been missed (Castalia, 2005).</mark> <mark>Jakarta’s experience suggests the complexity and impact of failures in governance. Under public provision, low income households in Jakarta were paying as much as 7 percent of their meager resources on water in the dry season –and around two thirds of that was due to the costs of collusion, bribery and skewed investment decisions related to maximizing rents. And the case of Jakarta, alongside a number of other challenging experiences with water concessions linked to non-competitive award around the World, has dampened both firm and government interest in private sector investment in the sector. Alongside limited and inefficient public investment, this has dramatically curtailed the rollout of water services to the unconnected –leaving many more people reliant on low quality and expensive water from vendors or frequently unreliable borehole water.</mark> As a result, the macroeconomic impact of an infrastructure project can be significantly reduced by governance failures even if the project itself is carefully chosen, well designed and corruption-free.<sup>11</sup> Not least, other investment decisions may remain mistaken and O&M budgets in many developing countries are too low to sustain existing

> 10 A simple solution to this problem adopted by the Jakarta government was to allow any householder with a tap to sell water.  As a result, end water prices to unconnected households dropped between 30 and 60 percent.  Source: Lovei and Whittington, 1991.

> 11For example, _Infrastructure at the Crossroads_ (World Bank, 2006b) noted that World Bank staff, “in the context of the broader sector dialogue, spend a substantial amount of time steering government officials away from poorly designed projects.”  This is an important effort, but may only have a macro impact if the effort is to stop such investments occurring at all rather than stop them occurring under Bank projects.

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