Monday, February 07, 2005

Water commands a price

Source: The Jakarta Post


The public furor over the 8.14 percent increase in tap water rates charged by PAM Jaya could scare off investors intending to submit bids for 91 infrastructure projects over the next few months following the Jan. 17 and Jan. 18 Infrastructure Summit in Jakarta.

Demands by several narrow-minded Jakarta legislative councilors to repeal the rate increase send the wrong signal, giving potential investors a glimpse of the complexity of the legal, social and political issues they may encounter here.

The current City Council will not do the people, or the local economy, any good if legislators move to cancel a decision that was made through the normal political process. This lack of legal certainty will simply frighten away investors considering doing business here.

The rate increase, effective as of Jan. 20, was based on a joint decision by the Jakarta government and the previous City Council in July 2004, which gave PAM Jaya the power to adjust its rates in response to inflation and other factors every semester between 2005 and 2007.

The rate mechanisms were adopted with a great degree of transparency and accountability after thorough deliberation and discussion by the government and the legislative council.

Anything that is both scarce and in demand commands a price. That is simple economics, even when talking about public goods and basic needs. Water is scarce, so water rates have increasingly been used as an acceptable instrument of public policy to expand supply, improve service and, at the same time, encourage more responsible use of the commodity.

An adequate pricing policy is even more crucial for investments in infrastructure projects and public utilities, which are long term in scope and vulnerable to inflation, especially in developing countries like Indonesia.

An efficient and effective water pricing system provides incentives for efficient water use and for water quality protection, and generates funds for necessary infrastructure development and expansion.

This is the principle the July 2004 decision tried to establish for the water company, to enable it to sustain viable operations and improve and expand services at affordable prices.

True, the quality of PAM Jaya's service is still far below what most customers expect, but this is the very reason the company should be allowed to adjust its rates periodically, to keep up with inflation and to encourage it to make new investments.

The water company, which is owned by the Jakarta administration, is not only profit-oriented but also encourages the efficient use of water through "volumetric" charging, not fixed charges. This means that the more you use, the more you pay because the charges increase with each additional cubic meter of water used. This is contrary to other commodities, which usually charge less for high-volume purchases.

Concern about the affordability of household water services for vulnerable groups, such as low-income households and retired people, has led to the development of a range of policy measures aimed at resolving affordability problems while still meeting economic goals.

PAM Jaya, for example, charges only Rp 550 per cubic meter for low-volume (poor) users and Rp 9,750 for well-off (high-volume) consumers. A similar pricing mechanism and an automatic price adjustment formula are also applied for electricity users.

If the city administration thinks water rates are still too high for many poor consumers, it should not address the problem through across-the-board policies but rather with well-targeted subsidy mechanisms.

Taxpayers in Jakarta will foot the bill if PAM Jaya suffers losses due to tight price controls that do not allow the company to get a reasonable profit margin. The water company will not be able to expand its network to serve more consumers if it cannot make a reasonable income for new investments.

Water charges have increased in recent years because water quality has often gotten worse as a result of overconsumption, especially in heavily populated cities like Jakarta where polluted groundwater necessitates more sophisticated and more expensive treatments, with a consequent need to develop more expensive demand-management or supply-based regimes.

We support the determination of Jakarta Governor Sutiyoso, who said last week he would push ahead with the implementation of the July 2004 decision on water rates.

The city government and PAM Jaya, however, need to brief the City Council and inform the public about the rationale for the automatic price adjustments and the factors to which these periodical adjustments are tied.