CHAPTER 1

INTRODUCTION

1.1 Background

A country is responsible to ensure the prosperity of its people. One of the

indicators of prosperity is the availability of adequate infrastructures provided by

the government to its people. The existence of such adequate infrastructures hold a

crucial role not only as a tool to improve the economy, but also as part the basic

tool to enhance the investment sector as a whole. These adequate infrastructures

will attract investors, both local and foreign investor, to come invest their money in

Indonesia as they support the whole production process.

The government of Indonesia allocates a total of IDR 206 trillion as the

budget to develop infrastructures from its National Budget. It increases 11, 77% of

the allocation on the 2013 Revised-National Budget (APBN-P) which was IDR 188

trillion. This amount of money is spreading to related Ministry/Agency such as

Ministry of Public Works in the amount of IDR 72,4 trillion, Ministry of

Transportation in the amount of IDR 32,5 trillion, Ministry of Energy and Natural

Resources in the amount of IDR 11,5 trillion, and Ministry of Education and Culture

in the amount of IDR 46,5 trillion.1 This number, however, is still not enough to

cover the development or procurement of infrastructure across the nation. In order

to develop and procure these infrastructures, the government of Indonesia initiated

1
Asnawi Khaddaf, “Anggaran Infrastruktur 2014 Tembus Rp 200 Triliun”, from
http://microsite.metrotvnews.com/metronews/read/2014/02/09/2/214374/Anggaran-
Infrastruktur-2014-Tembus-Rp200-Triliun, (accessed at 29 September 2014)

1
the concept of public private partnership in the provision of infrastructure due to

the fund limitation to conduct all projects at the same time.

According to the State Ministry of National Development Planning

(BAPPENAS), the fund needed for the infrastructure project during 2010-2014 is

IDR 1,429 trillion2. From that amount of money, the government can only afford to

provide IDR 511 trillion, which means there are gap in the amount of IDR 918

trillion that the government must fill in order to ensure the continuation of the

development of infrastructure. The public private partnership fills nearly half of the

gap which is IDR 407 trillion and the remaining gap are filled by community

development and through private party’s contribution from corporate social

responsibility3.

In the development of water supply system alone, in order to ensure the

target of providing 100% of Indonesian citizen access to clean water by 2019, the

total investment needed is IDR 274,80 trillion while the allocation fund from the

National Budget will only cover IDR 90,70 trillion or 33% of the total investment4.

It is expected that the remaining gap can be covered from sources other than the

National Budget, one of them throughout the public private partnership scheme.

Stressing the seriousness of conducting the cooperation, the government of

Indonesia issued Presidential Regulation Number 67 of 2005 on Cooperation

between the Government and the Business Entities in the Provision of Infrastructure

2
Dr. Ir. Gunawan Adji, MT, The Smart Handbook of Public Private Partnership: Konsep dan Praktik
Meningkatakan Investasi di Sektor Infrastruktur, Jakarta: Rene Publisher, p. 59
3
Ibid.
4
Direktorat Pengembangan Air Minum, “Investasi Pengembangan SPAM Masih Bergantung Pada
Dana Pemerintah” from http://www.ditpam-pu.org/berita-431-investasi-pengembangan-spam-
masih-bergantung-pada-dana-pemerintah.html (accessed January 6, 2015)

2
(“PR 67/2005”) jo. its amendments. The type of infrastructure services as defined

in such presidential regulation will depend on the needs and the offers that come

from the government. They are divided as the following5 (“Types of Cooperation”):

(a) transportation (sea, river or lake harbor, airports, railways and train

station);

(b) road (toll road and toll bridge);

(c) irrigation (raw water carrier channel);

(d) drinking water (building of raw water intake point, transmission lines,

distribution networks, water treatment plant);

(e) waste water (waste water treatment plant, collection networks and main

networks) as well as waste facilities (transport and place for disposal);

(f) telecommunication (telecommunication networks);

(g) electricity (plants, transmission and electricity distributions); and

(h) oil and gas (processing, storage, transportation, transmission or oil and

gas distributions).

The public private partnership, factually, has been implemented since 1987

in the development of toll road that involved PT Marga Mandala Sakti. However,

the public private partnership has not yet widely applied at that current situation6.

The concept of public private partnership in Indonesia was originally first regulated

in 1998. It was chosen as the alternative as the development of infrastructure began

to be stagnant. The unstable monetary condition of Indonesia at that time resulted

5
Praptono Djunedi. “Implementasi Public-Private Partnerships dan Dampaknya ke APBN”, Warta
Anggaran Edisi 6 Tahun 2007, p. 1-2
6
Dr. Ir. Gunawan Adji, MT, op.cit., p. 26

3
the occurrence of capital flight or where the capital was all gone abroad. Tackling

the situation, President Soeharto issued the President Decree Number 7 of 1998 on

Public Private Partnership in the Development and/or Management of

Infrastructure.7 However, Indonesia couldn’t resist the effect of economy crisis and

eventually sacrificed the fund allocation for infrastructure and therefore such

initiative was considered as a failure.

One year earlier, government of Jakarta Province had applied the concept

of public private partnership in the provision of infrastructure by awarding a

subsidiary of Lyonnaise des Eaux namely PT PAM Lyonnaise Jaya (known as

Palyja) and a subsidiary of Thames Water International namely PT Thames PAM

Jaya (which was later acquired and changed its name to PT Aetra Air Jakarta) a 25-

year water concession in Jakarta. The two companies were granted different service

region with Palyja serving the western part of Jakarta and Thames serving the

eastern part of Jakarta.8 The initiative was taken due to the inability of PAM Jaya

to optimize its operation after receiving US$ 92 Million loan to improve their

operation for 20 years. World Bank as the lender later recommended a privatization

for the operation of water supply system. President Soeharto responded by

commanding the Minister of Public Work at that time Radinal Moochtar to conduct

cooperation with private parties. Eventually after signing the 600 pages of

concession agreement on June 1997, the transfer of operation from PAM Jaya to

7
Dr. Iwan E. Joesoef, SH., Sp.N., M.Kn. “Sejarah Perkembangan Kerjasama Pemerintah dan Swasta
dalam Pembangunan Jalan Tol di Indonesia” from
http://hukuminfrastrukturjalantol.blogspot.com/2012/07/sejarah-perkembangan-
kerjasama.html (accessed at September 1, 2014)
8
Husnullah Pangeran. “Urgensi Konsesi Infrastruktur Air Minum Indonesia”. from
http://infradevma.blogspot.com/2014/08/urgensi-konsesi-infrastruktur-air-minum.html
(accessed at 29 September 2014)

4
the private parties (Palyja and Thames) occurred on February 1998. 9 Both Palyja

and Thames (which was later acquired and changed its name to PT Aetra Air

Jakarta) are the first step of the involvement of private party in the development of

water supply system.

The government of Indonesia strengthened its stance in involving private

party in the development of water supply system under Law No. 7 of 2004 on Water

Resources (“Water Resources Law”). The provisions of Water Resources Law

provides the development of water supply system in Indonesia which becomes the

responsibilities of the Government and local Government through state owned

enterprises and/ or local owned enterprises to carry out the management as

mentioned on Article 40 of Water Resources Law:

“(1) The fulfillment of raw water requirement for household drinking water
purposes as referred to in Article 34 paragraph (1)10 shall be carried out by
means of developing the water supply system.
(2) The development of the water supply system as referred to in paragraph
(1) shall become the responsibilities of the Government and the regional
government.
(3) The state owned enterprises and/or local owned enterprises shall carry
out the development of water supply system.
(4) Cooperatives, private enterprises, and the community may participate
in the development of water supply system”

The above article emphasizes that in conducting the government duties to

develop a water supply system through a state owned enterprise and/or local owned

enterprise, the government may invite cooperatives, private enterprises, and the

9
Andreas Hartono. ”Menjadi Saksi soal Privatisasi Air Jakarta” from
http://www.andreasharsono.net/2014/02/menjadi-saksi-di-pengadilan-soal.html (accessed at
September 12, 2014).
10
Article 34 paragraph (1) stipulates the development of water resources in the river area is
intended to improve the expediency/ benefit of the function of water resources to fulfill the need
of raw water for household, farming, industry, tourism, defense, mining, energy, transportation,
and for other needs.

5
community to also participate in developing the water supply system. The goals of

the development of water supply system are11:

a. establish a quality management of drinking water and drinking water

service at an affordable price;

b. achieve a balanced interest between the consumer and the service

provider; and

c. improve the efficiency and scope of service of drinking water.

The above goals are in line with the goals of Millennium Development Goals where

Indonesia took part as the member particularly on goal number seven which is

ensuring environmental sustainability, with halving the proportion of people

without sustainable access to safe drinking water by 2015 as its specific target12.

Despite the good faith of the government in procuring or developing water

supply system through public private partnership, this concept continues to gain

controversy from the society with contradiction to Article 33 of the 1945

Constitution as the basic thought. The lack of understanding, information or

articles, both printed and digital, which elaborate the cooperation scheme, type and

implementation continue to raise this negative paradigm in the society’s point of

view and relate them as a privatization of nation’s vital object. The Article 33

paragraph (3) of the 1945 Constitution as amended states:

“(3) The land, waters, and the natural resources within shall be under the
powers of the State and shall be used to the greatest benefit of the people.”

11
Ibid, Pasal 40 ayat (5).
12
Seafield Research and Development Services. “Millennium Development Goals and Targets”.
from http://www.srds.co.uk/mdg/8-goals.htm (accessed September 12, 2014).

6
 Under the state control rights over those land, waters and natural resources,

the state shall guarantee the rights for every citizen to get waters for the fulfillment

of their daily needs by performing water management. The fact, however, shows

that most areas across Indonesia still face the difficulties to the availability and

access of clean water13. According to the World Bank on 2006, only 108 million

people out of 230 million people in Indonesia or more or less 47 percent who have

access to consumable clean water14. It means 53 percent of the Indonesian people

(more than half) do not have access to clean water. The World Water Forum in Den

Haag on March 2000 predicted Indonesia will be one among the countries that will

suffer for water crisis in 202515. Whereas, the fact shows that 6 percent of the water

potential in the world or 21 percent of the potential of water in Asia are located in

Indonesia. An ironical situation for a water-rich country where its people are unable

to enjoy such assets. The main cause is the weakness of the government through its

local-owned enterprise named Perusahaan Daerah Air Minum (“PDAM”) in the

water management. This triggers imbalances between the need of water for daily

consumes and its availability to be supplied to everyone’s home.

Considering the abovementioned matters, the author is interested in

conducting research on the implementation of public private partnership in

Indonesia particularly in water supply system. It will be outlined on a thesis titled

“IMPLEMENTATION OF PUBLIC PRIVATE PARTNERSHIP IN THE

13
Anton Chrisbiyanto, “Indonesia Butuh Air Bersih”. from
http://nasional.sindonews.com/read/862939/18/indonesia-butuh-air-bersih (accessed
November 3, 2014).
14
Stevy Thioritz, “Kajian Solusi Krisis Air Bersih,”Jurnal Ilmiah Teknik Elektro, Informatika, Mesin &
Sipil”, Vol.4 No.1: 1-2
15
Ibid

7
DEVELOPMENT OF WATER SUPPLY SYSTEM ACCORDING TO

INDONESIAN LAW”

1.2 Research Problem

In accordance with the background that has been described above, the

author highlighted the legal research on analysis on the implementation of public

private partnership in the development of water supply system in the following

question:

1) How is the implementation of public private partnership in the

development of water supply system in Indonesia?

1.3 Research Objectives

1.3.1 General Objective

This research aims to identify the implementation of public private

partnership in the development of water supply system in Indonesia.

1.3.2 Special Objectives

1. Analyze whether the implementation of public private partnership is

contrary to the Article 33 of the 1945 Constitution or not; and

2. Describe the role of the government during the cooperation with the

private party in the development of water supply system.

1.4 Research Benefits

This research is expected to be beneficial to anyone in various background

who reads it. The expected benefits are as follows:

8
1. Academically, this reasearch is expected to be used as referrence for future

legal research conducted by law students of President University in

particular and all law students accross the nations in general, particularly in

the implementation of public private partnership in the development of

water supply system.

2. Practically, this research is expected to provide information to enrich the

students, legal practitioners, and society in general in the flow process of

public private partnership in the development of water supply system

according to Indonesian laws, particularly the role of the government during

the cooperation period.

1.5 Research Methodology

1.5.1 Type of Research

The type of research being done is normative legal research, by using:

a. Conceptual approach, the research uses law principles, both positive law

and unwritten laws which is later to be used as a reference in this

research.

b. Statute Approach, the research uses the related prevailing laws to be

used as a reference to identify the issue.

c. Legal Synchronization, there are two ways to identify the

synchronization of the laws which are vertically that analyzes the

prevailing laws with a different degree that regulate the same issue and

horizontally that analyzes the prevailing laws with the same degree that

regulate the same issue.

9
 In this research the author uses normative legal research to identify the

concept and legal principle used to regulate the implementation of public private

partnership particularly on the development of water supply system and see the

synchronization with other laws such as Water Resources Law, PR 67/2005 jo. its

amendments and Minister of Public Works Regulation Number 12/P/MRT/2010 on

Guidelines on Business Cooperation for the Development of Water Supply System

(MR 12/2010).

1.5.2 Type of Data

The types of data that the researcher is using in this research are:

a) Primary sources of laws, which is the related prevailing laws with the

topic of the research16 such as the 1945 Constitution, Water Resources

Law, PR 67/2005 jo. its amendments, Minister of Public Works

Regulation 12/2010 and other related laws and regulations.

b) Secondary sources of laws, which is the sources of laws that are in line

and linkages to the primary sources of law and may assist in giving

description as well as analysis of the primary sources of law, such as

book, journal, and result of research17.

c) Tertiary sources of laws, which is the source of law that may improve

the primary and secondary sources of laws such as legal dictionary,

encyclopedia, and others18.

16
Peter Mahmud Marzuki, Penelitian Hukum, Jakarta: Kencana Prenada Media Group, p. 141
17
Ibid.
18
Ibid.

10
 Meanwhile the primary data that the researcher is using is coming from an

interview with Bahtera Novinda S.H, a legal specialist of private company who

participate in public private partnership on the development of water supply system.

1.6 Systematic Writing

For the ease of understanding towards this research, either for the author in

term of writing and the readers in term of reading, the author prepares the

description into 5 (five) chapters as follows:

CHAPTER 1. INTRODUCTION

Describing the introduction to the arrangement of this research that covers

the background, research problem, research objectives, research benefits and

systematic writing.

CHAPTER 2. LEGAL REVIEW ON THE IMPLEMENTATION OF PUBLIC

PRIVATE PARTNERSHIP IN THE DEVELOPMENT OF WATER SUPPLY

SYSTEM

Describing the original concept of public private partnership, the current

condition of water supply sytsem along with the involvement of private party in

Indonesia, definition of privatization in Indonesia, the concept of state control rights

along with the conditionally consitutional term from constitutional court, the

regulatory framework of public private partnership in the development of water

supply system, government and private party as subject of an agreement, and the

implementaion form of public private partnership in general and in water supply

system.

11
CHAPTER 3. IMPLEMENTATION OF PUBLIC PRIVATE PARTNERSHIP IN

THE DEVELOPMENT OF WATER SUPPLY SYSTEM

Describing the stages on the implementation of public private partnership in

the determination of private party according the provisions of the laws starts from

the cooperation project planning, preparation of cooperation project pre-feasibility

study, the transaction of the cooperation project and the execution management of

the cooperation agreement. Also the stages on the implementation of public private

partnship in the Tangerang Regency water supply system project.

CHAPTER 4. EFFECTIVENESSES AND ISSUES ON THE

IMPLEMENTATION OF PUBLIC PRIVATE PARTNERSHIP IN THE

DEVELOPMENT OF WATER SUPPLY SYSTEM IN INDONESIA

Providing the roles of the government during the cooperation period, the

determination of tariff along with its adjustment based on the prevailing law, the

effectivenesses of private party’s involvement in the development of water supply

system project in Indonesia and the issues on its implementation.

CHAPTER 5. CLOSING

Becomes the closing of the research that contains the conclusions and

suggestion given by the author in relation to the implementation of public private

partneship in the development of water supply system according to Indonesian

laws.

12
 CHAPTER 2

LEGAL REVIEW ON THE IMPLEMENTATION OF PUBLIC

PRIVATE PARTNERSHIP IN THE DEVELOPMENT OF
WATER SUPPLY SYSTEM

2.1 The Concept of Public Private Partnership

According to William J. Parente of the USAID Environmental Service

Program, public private partnership is an agreement or contract, between a public

entity and a private party, under which : (a) private party undertakes government

function for specified period of time, (b) the private party receives compensation

for performing the function, directly or indirectly, (c) the private party is liable for

the risks arising from performing the function and, (d) the public facilities, land or

other resources may be transferred or made available to the private party19. This

definition provides four elements of a public private partnership. The first element

is the situation where the private party take-over the role of government for a

specified period of time. It means during the cooperation period, the private party

would conduct any actions necessary to run the infrastructure that is being

cooperated. It, however, does not necessarily mean that the government has no

longer role in the agreement. During the cooperation period, the government acts

as the regulatory body to determine the tariff, issue related regulation, or any

19
Praptono Djunaedi, Op.cit., page 1 as quoted from Parente, William J., “Public Priavate
Partnerships” in Workshop on “Fundamental Principles and Techniques for Effective Public
Private Partnerships in Indonesia”, Jakarta, 2006

13
required action in relation to the cooperation.20 The second element that William J.

Parente highlighted is the compensation that the private party receives after

performing the function, both directly and indirectly. The compensation commonly

differs based on the agreement between the parties (government and private). In the

third element William J. Parente stressed that any risks arising during the

cooperation period between the government and private party is under the

responsibility of the private party. The last element shows the rights of private party

during the cooperation period, such as the resources or facilities given to them.

The opportunities in the cooperation between the government and the

business entities21 in the development of infrastructures cover the construction

works to build or uprate the capacity of the infrastructure and also to operate and

maintain the infrastructure to increase its benefits22. The government in this matter

refers to minister/head of agency or local government (hereinafter minister/ head of

agency or local government shall be referred to as Government Contracting Agency

“GCA”), meanwhile the business entities mentioned are private entities in form of

limited liability, State Owned Enterprises, Local Owned Enterprises, and

cooperatives23. The cooperation project in the provision of infrastructure between

the GCA and the private entity aims to24:

20
Dwinanta Utama, “Prinsip dan Strategi Penerapan Public Private Partnership Dalam Penyediaan
Infrastruktur Transportasi, Jurnal Sains dan Teknologi Indonesia Vol. 12, No.3, 2010 page 1
21
The author will only focus on the cooperation between the GCA and private party based on the
Public Private Partnership theme.
22
Indonesia, PR 67/2005, Presidential Regulation Number 67 of 2005 on Public Private Partnership
in the Provision of Infrastructure, Article 1 number 3.
23
Ibid, Article 1 number 4
24
Ibid, Article 3.

14
 a. suffice the financing requirement sustainably in the provision of

infrastructure through the mobilization of private funds;

b. improve the quantity, quality and efficiency through healthy

competition;

c. improve the quality of operation and maintenance in the provision of

infrastructure;

d. encourage the use of user pay for the service received principle, or in

certain things consider the ability of the user to pay.

The cooperation project can be in the form of either cooperation agreement or

concession permit25. The form of the cooperation project will be determined based

on the agreement between the GCA and the entity to the extent that it is not contrary

to the prevailing law26. The implementation of public private partnership shall be

based on the following principles27:

a. fairness, means the Entity that participate in the procurement process

shall obtain equal treatment;

b. openness, means the entire procurement process is open for Entity that

fulfil the requirements;

c. transparent, means all the terms and information related to the provision

of infrastructure including the technical requirement of administration

selection, evaluation guidelines, and the election of the Entity is open

for all Entities as well as the public in general;

25
Ibid, Article 1 number 5
26
Ibid., Article 5
27
Ibid., article 6

15
 d. accountable, means the result of the Entity election shall be accounted

for;

e. mutually beneficial, means the partnership with the Entity in the

Provision of Infrastructure is made based on a balance terms and

conditions thus giving the advantages for both parties and the public by

calculating the basic needs of the people;

f. mutual need, means the partnership with the Entity in the Provision of

Infrastructure is made based on the terms and conditions that consider

the needs of both parties;

g. mutually supportive, means the partnership with the Entity in the

Provision of Infrastructure is made with the spirit of mutual support to

both parties.

2.2 Defining The State’s control right

The concept of state’s control right is mentioned in Article 33 paragraph (2)

and (3) of the 1945 Constitution which state:

“(2) Production branches which are important for the state and which affect
the livelihood of the people at large shall be controlled by the state.
(3) The land and water and the natural resources contained therein shall be
controlled by the state and shall be used for the greatest prosperity of
the people.”

The definition of state’s control right is also provided in Article 2 of Law Number

5 of 1960 on Basic Regulation of Agrarian Affairs as follows:

"(1) On the basis of the provisions contained in Article 33 paragraph (3) of

the Constitution and of the matters referred to in Article 1 of this Law,
the earth, water, and airspace, including the natural resources

16
 contained therein, are at the highest hierarchical level controlled by the
State in its capacity as the whole people’s organization of powers.
(2) The state’s control right as referred to in paragraph (1) of this Article
confers the authority:
a. to regulate and administer the allocation, use, supply, and
maintenance of the earth, water, and airspace;
b. to determine and regulate legal relationships between people and
the earth, water, and airspace;
c. to determine and regulate legal relationships among people as well
as legal acts concerning the earth, water, and airspace.
(3) The powers which are derived from the state’s control right as referred
to in paragraph (2) of this article shall be used to achieve the utmost
prosperity in terms of democracy, welfare, and freedom for the society
and legal State of Indonesia which is independent, sovereign, just, and
prosperous.
(4) The authority to implement the state’s control right as referred to above
can be delegated, as required, and provided that it is not contrary to the
national interest, to Autonomous Regions and to adat-law communities
by way of a Government Regulations.

The interpretation of state’s control right continues to raise debate as of in

the year of 1945. It happens as the interpretations to the state’s control right has

never been the same28. According to Mohammad Hatta, controlled by the state does

not necessarily mean that the state itself turns to be entrepreneur, businessman, or

ondernemer. It is precisely correct to say that state’s power is in making rules for

the smoothness of economy, rules that prohibit the exploitation of the weak by the

wealthy people29. Bagir Manan formulated the coverage of the definition of

controlled by the state as follows30:

28
J. Ronald Mawuntu, “Konsep Penguasaan Negara Berdasarkan Pasal UUD 1945 Dan Putusan
Mahkamah Konstitusi, “Jurnal Universitas Sam Ratulangi”, Fakultas Hukum, Vol.XX/No.3/April-
Juni/2012: 15-17
29
Ibid
30
Ibid

17
 1. Control is sort of state ownership, meaning that the state through its

government is the only authorized party to determine the rights over it,

including land, water, and natural resources therein;

2. Regulate and supervise the usage and utilization;

3. Capital involvement and in form of state’s enterprises for certain

businesses.

The various interpretations of state’s control right encourage people to file

a judicial review on laws related to natural resources. The Constitutional Court in

the court’s opinion in the Constitutional Court’s Decision Number 058-059-060-

063/PUU-II/2004 and Constitutional Court’s Decision Number 008/PUU-III/2005

regarding Judicial Review of Water Resources Law interpreted that the state’s

control right is not in the sense of owning, but it means that the state formulates the

policy (beleid), makes arrangements (regelendaad), carries out the management

(bestuursdaad), performs the management (beheersdaad), and conduct the

supervision (toezichthoundendaad)31 . Therefore the sense of the state’s control

right toward the important production branches and controlling many of the public

needs, as well as to natural resources, do not deny the possibilities of individuals or

private parties to participate, to the extent that the five roles of the state/ government

as stated at the above are fulfilled and also the government and local government is

not or has not been able to do it.

Along with the interpretation of Dr. Mohammad Hatta which was later

adopted by Seminar of Elaboration to Article 33 of 1945 Constitution in 1977 which

31
Ibid, p.19

18
declared that the state enterprise sector is to manage the paragraph (2) and (3) of

Article 33 of 1945 Constitution and in the financing of the state enterprise is funded

by the government, if the government does not have enough fund to finance, it may

ask for domestic and foreign loans and if the situation shows there is still not enough

fund after asking for domestic and foreign loans, it may be conducted together with

foreign capital on production sharing basis32.

2.3 Conditionally Constitutional

Spesifically for the judicial review on Water Resources Law filed by group

of Indonesian citizen as well as non-governmental organization, there is a special

consideration within the consitutional court’s decision which is a provision of

“Conditionally Constitutional”33. Conditionally constitutional is a new term in legal

theory, particularly in administrative law34. The term condititionally constitutional

is a new discovery of the law made by the Constitutional Court in the framework

of interpretating the provision of written law (in this term it refers to Water

Resources Law) to the 1945 Constitution. Under the court’s ruling on the review of

Water Resources Law, the Consitutional Court states:

“Bahwa Undang-Undang Nomor 7 Tahun 2004 tentang Sumber Daya Air

telah cukup memberikan kewajiban kepada Pemerintah untuk menghormati,
melindungi dan memenuhi hak atas air, yang dalam peraturan
pelaksanaannya pemerintah haruslah memperhatikan pendapat Mahkamah
yang telah disampaikan dalam pertimbangan hukum yang dijadikan dasar

32
Prof. A. Mukthie Fadjar, “Pasal 33 UUD 1945, HAM, dan UU SDA,” Jurnal Konstitusi Volume 2
Nomor 2 (September 2005) : 7.
33
See Constitutional Court Decision Number 058-059-060-063/PUU-II/2004 and Number
008/PUU-III/2005 regarding Judicial Review of Water Resources Law, p. 495
34
Yance Arizona, Skripsi: “Penafsiran Mahkamah Konstitusi Terhadap Pasal 33 Undang-Undang
Dasar Negara Republik Indonesia Tahun 1945 (Perbandingan Putusan Dalam Perkara Nomor 001-
021-022/PUU-I/2003 Mengenai Pengujian Undang-Undang Nomor 20 Tahun 2002 tentang
Ketenagalistrikan dengan Putusan Perkara Nomor 058-059-060-063/PUU-II/2004 dan 008/PUU-
III/2005 Mengenai Pengujian Undang-Undang Nomor 7 Tahun 2004 tentang Sumber Daya Air)”,
2007, p. 129

19
 atau alasan putusan. Sehingga, apabnila Undang-undang a quo dalam
pelaksanaan ditafsirkan lain dari maksud sebagaimana termuat dalam
pertimbangan Mahkamah di atas, maka terhadap Undang-undang a quo
tidak tertutup kemungkinan untuk diajukan kembali (Conditionally
Consitutional”)”
The above highlight of the court’s ruling leads to a base to determine the

elements of conditionally consitutional. The elements contrained within the court’s

ruling are35:

a. The law that is being reveiwed is not contrary to the consitution;

b. A command to an institution (government) to notice the Constutional

Court’s opinion in a court’s ruling;

c. The condititionaly consitutional clause provides an opportunity that a law

that has been reviwed by the Constitutional Court may be re-examined

again; and

d. The requirement for the re-examination of the related law is if the law in

its enforcement is interpreted differently with as mentioned on the

Consitutional Court’s opinion.

The combination of the four elements above, according to Yance Arizona (2007),

will define conditionally consitutional as a decision or condition that declares a

provision of certain law(s) is not contrary to the 1945 Consitution to the extent that

the institution (government) in enforcing the related law complies with the

conditions given by the Consitutional Court. If the conditions are not fulfilled or

otherwise interpreted differently, the related law may still be re-examined by the

Consitutional Court.

35
Ibid.

20
2.4 Privatization in Indonesia

Privatization is the transfer of ownership, property or business from the

government to the private sector36. It means once the government conducts a

privatization, they will cease to be the owner of the entity or business. In Indonesia,

privatization commonly occurs on a State-Owned Enterprises (“BUMN”) such as

PT Telkom (Persero) Tbk., PT Perusahaan Gas Negara (Persero) Tbk., PT Bank

Mandiri (Persero) Tbk., PT Indosat (Persero) Tbk.,37 and many more.

Privatization is essentially intended to increase the income of government

particularly related to taxes and public outcome and encourage private finance to

be places on public investment on the main infrastructure scheme38. In economic

point of view, the objectives of privatization are to expand the market power and

increase competition; reduce the measurement of public sector and open new

market for private fund39. Meanwhile on political point of view, the objectives of

privatization are as follows40:

1. Control the association/group power of certain business and repair the

labor market to be more flexible;

2. Encourage the shares ownership for individuals and employees as well

as expanding the wealth ownership;

36
The Economic Times, “Definition of ‘Privatization’” from
http://economictimes.indiatimes.com/definition/privatization (accessed 8 October 2014)
37
Iman Santoso, “Kebohongan Privatisasi” from
http://ekonomi.kompasiana.com/bisnis/2013/10/05/kebohongan-privatisasi-597867.html
(accessed 8 October 2014).
38
Dewi Hanggraeni, “Apakah Privatisasi BUMN Solusi yang Tepat Dalam Meningkatkan Kinerja?
Article from Manajemen Usahawan Indonesia No. 6 Tahun 2009, page 27
39
Ibid., page 28
40
Ibid.,

21
 3. Gain political support to fulfill the industrial demand and create more

opportunities of the speculation of capital accumulation; and

4. Increase independency and individualism.

The Masterplan of BUMN Reformation (1999) introduced the methods of

privatization which among them are: (i) Public offering, sales of BUMN shares

through capital market; (ii) Direct placement, strategic sale, private placement,

trade sale. It means the sales of BUMN shares to other party is through negotiation,

generally through tender process; (iii) Management buyout (MBO), meaning the

purchase of BUMN majority shares by a consortium which is organized and led by

an existing management; (iv) Liquidation, meaning selling the corporation as an

ongoing effort or through selling the assets; (v) Sales of asset, separating the

BUMN’s troubled assets and selling it to the private party; (vi) Voucher scheme,

means the citizen of Indonesia are given voucher or opportunity to buy in an

affordable price, which is later to be shifted with BUMN shares; (vii) Concession,

it means leasing the asset for a long term and therefore the holder of the concession

is entitled to run the business and is obliged to maintain the asset as well as to add

the asset if necessary; (viii) Leasing, means granting of right to operate a group of

asset for a short period of time, but the owner remains responsible to maintain and

add the asset; (ix) Management contract, a quite similar to the concept of Leasing

but the management cost will be based on the performance; (x) Contracting out,

providing opportunities for the private sector through a contract to conduct certain

functions; (xi) Employee Share Ownership Plan (ESOP), means the shares are

granted to the employee; and (xii) Privatization Trust Fund, means the ownership

using the privatization trust fund where the shares management are given by the

22
government to the trust fund that will manage the portfolios, receive the dividend,

and sell it at the right place (Pranoto, 2000).

2.5 Development of Water Supply System

The law that regulates the management of water is Water Resources Law,

the implementation of water supply system in Indonesia, however, is regulated

under Government Regulation Number 16 of 2005 on Development of Water

Supply System (“GR 16/2005”) and four of its implementing regulations which are

Minister of Public Works Regulation Number 294/PRT/M/2005 on Water Supply

System Development and Support Body (“MR 294/2005”), Minister of Public

Works Regulation Number 20/PRT/M/2006 on National Policy and Strategy on the

Development of Water Supply Sytem (“MR 20/2006”), Minister of Public Works

Regulation Number 18/PRT/M/2007 on the Implementation of the Development of

Water Supply System (“MR 18/2007”), and Minister of Public Works Regulation

Number 12/PRT/M/2010 on Guidelines on Business Cooperation for the

Development of Water Supply System (“MR 12/2010”). The procurement of water

supply system is under the responsibility of local government as of the issuance of

Law Number 32 of 2004 on Local Government41, however central government

through Water Supply System Development and Support Body (hereinafter referred

to as “BPP SPAM”) will support and provide assistance in the framework of

achieving the goals of the regulation on the development of water supply system in

41
Ministry of Public Works, Minister of Public Works Regulation Number 12/PRT/M/2010 on
Guidelines on Business Cooperation for the Development of Water Supply System (MR 12/2010),
Official Gazette of Republic of Indonesia of 2010 Number 682, Attachment Chapter 1 paragraph
2.

23
order to give a maximum benefit for the country and the greatest prosperity of the

people42.

There are currently 24 (twenty-four) public private partnership in the

development of water supply system spreading across Indonesia. They are

described in the following table43:

PPP Modalities and Total Concession

No. Investor
City/Region Investment Period
BOT Medan 25 years (2000-
1 US$ 5 million SUEZ + TLM
-500ℓ/sec 2025)
Batam Concession US$ 100 25 years (1996- PT Adhya Tirta
2
-3000ℓ/sec million 2021) Batam
BOT Jambi 15 years (1996-
3 US$ 2 million PT Noviantama
-100 ℓ/sec 2021)
Part of Palembang
25 years (1996- PT Adhya Tirta
4 Concession US$ 5 million
2023) Sriwijaya
- 200 ℓ/sec
KSO Pekanbaru US$ 10 15 years (2005- PT KTDP +
5
-600 ℓ/sec million 2020) WIFI
PT Sauh
BOO Serang Utara
6 US$ 5 million 1993 Bahtera
-150 ℓ/sec
Samudra
Western Part of Jakarta
US$ 225 25 years (1997 PT Palyja + PT
7 Concession
million – 2022) Astratel
-6200 ℓ/sec

42
BPPSPAM (BPPSPAM 1), Tugas dan Fungsi BPP SPAM, from
http://www.bppspam.com/index.php?option=com_content&view=article&id=47&Itemid=57
(accessed October 20, 2014).
43
BPPSPAM (BPPSPAM 2), “KPS yang Telah Beroperasi”, from
http://bppspam.com/index.php?option=com_content&view=article&id=59%3Akps-yang-telah-
beroperasi&catid=43%3Akps&Itemid=71 (accessed at November 3, 2014).

24
 Eastern Part of Jakarta
US$ 225 25 years (1997 PT Aetra Air
8 Concession
million – 2022) Jakarta
-6500 ℓ/sec
O & M in Contract PT Tirta
25 years (1998-
9 Cisadane Cisadane/ PT
2023)
-3000 ℓ/sec Traya
Concession in
Bintang Heiten
Tangerang City US$ 2,5 25 years (1997-
10 Jaya/Gadang
Residential Area million 2022)
Berhad
-50 ℓ/sec
BOT Lippo Karawaci US$ 10 25 years (1999- Lippo
11
-50 ℓ/sec million 2024) Karawaci
BOO Bintaro Jaya US$ 10 Pembangunan
12 1990
-100 ℓ/sec million Jaya
Concession Cikampek US$ 0,5 25 years (2000-
13 PT WATTS
-60 ℓ/sec million 2025)
BOO Bekasi (Kemang
US$ 10 PT Kemang
14 Pratama) 1993
million Pratama
-50 ℓ/sec
BOO Hunday
15 Industrial Estate US$ 5 million 1994 PT Hunday
-50 ℓ/sec
BOO Kota Legenda
US$ 2,5 PT Cikarang
16 (Residential Area) 1995
million Permai
-25 ℓ/sec
BOO Bukit Indah
US$ 10
17 Cikarang (Residential 1998 PT Bukit Indah
million
and Industrial Area)
BOT Subang
US$ 2,5 20 years (2005-
18 -50 ℓ/sec PT MLD
million 2025)

25
 Uprating Gajah
20 years (2005- PT Tirta Gajah
19 Mungkur US$ 2 million
2025) Mungkur
-400 ℓ/sec to 600 ℓ/sec
BOT Bawean US$ 10
20 2004 APAC INTI
-250 ℓ/sec million
BOT Kabupaten -US$ 2,5
Sidoarjo million -(1998-2023) -PT Vivendi
21
-200 ℓ/sec -US$3,5 -(2005-2023) -PT Hanarida
-450 ℓ/sec million
BOT Badung US$ 10 25 years (1999- PT Tirtha
22
-300 ℓ/sec million 2020) Artha Buana
BOT Samarinda 25 years (2004-
23 US$ 5 million PT WATTS
-400 ℓ/sec 2029)
BT Banjarmasin 5 years (2005-
24 US$ 5 million PT Adhi Karya
-500 ℓ/sec 2010)
Table 1 Current PPP Operation in Indonesia (KPS yang Telah Beroperasi)
The above samples are public private partnership implementation in the

development of water supply system prior to the issuance of PR 67/2005 and MR

12/2010. The first sample of the implementation of public private partnership under

PR 67/2005 on the development of water supply system is the cooperation between

the regency of Tangerang and PT Aetra Air Tangerang44 offering a ready to drink

water from the water crane45. The 25 (twenty-five) years partnership in form of

44
Antaranews, “Aetra Air Tangerang Hanya Kenakan Tarif Rp4,5” from
http://banten.antaranews.com/berita/17941/aetra-air-tangerang-hanya-kenakan-tarif-rp45
(accessed December 11, 2014)
45
Aetra Air Tangerang, “Era Baru Air Layak Minum Di Tangerang” from http://www.aat.co.id/5-
highlight-ERA+BARU+AIR+LAYAK+MINUM+DI+TANGERANG.html (accessed December 11,2014)

26
concession agreement between the regency of Tangerang and PT Aetra Air

Tangerang was signed on August 4, 200846.

2.6 Regulatory Framework for Public Private Partnership in the

Development of Water Supply System

After a total failure in 1998 in promoting the public private partnership, the

government of Indonesia took a series of major steps to refine the public private

partnership policy and regulatory framework in 2005 by organizing Infrastructure

Summit I offering 91 projects in order to improve the attractiveness and

competitiveness of the public private partnership’s program47 after issuing PR

67/2005 as amended by Presidential Regulation Number 13 of 2010 on Amendment

of PR 67/2005 (“PR 13/2010”), Presidential Regulation Number 56 of 2011 on

Second Amendment of PR 67/2005 (“PR 56/2011”) and Presidential Regulation

Number 66 of 2013 on Third Amendment of PR 66 2013 (“PR 66/2013”). The PR

67/2005 jo. its amendments acts as the general guidelines for the public private

partnership for all types of infrastructure, meanwhile the guideline for the

cooperation will be regulated by its own implementing regulation.

The development of water supply system in Indonesia is naturally the

responsibility of the central and local government. Both central and local

government shall make this development as a priority program. The existence of

adequate water supply system will increase the fulfillment of rights to clean water.

Therefore the involvement of cooperatives, private entities, and the society, are

46
BPPSPAM (BPPSPAM 3), “Warga Akan Nikmati Air Bersih”, from
http://www.bppspam.com/index.php?option=com_content&view=article&id=85:warga-akan-
nikmati-air-bersih&catid=34:bam (accessed December 11, 2014)
47
Ministry of National Development Planning/National Development Planning Agency, Public –
Private Partnerships Infrastructure Projects Plan In Indonesia, Jakarta: Bappenas, 2013, page vii

27
restricted only on the circumstances where the government is unable to develop the

water supply system by themselves and the government is also enabled to conduct

its authorities in terms of regulating, implementing, and supervising the

management of water supply system as a whole48. Considering the current situation,

however, where fifty-three percent of the Indonesian citizen do not have access to

clean water49 along with the goal number seven of the Millennium Development

Goals, where Indonesia takes part, which is to halve the proportion of people

without sustainable access to safe drinking water by 201550, the involvement of

either cooperatives, private entities, or society in the development of water supply

system is inevitable.

The government of Indonesia pointed out under Article 40 paragraph (4) of

Water Resources Law regarding the legality of the involvement of private party in

the development of water supply system. The involvement of this private party is

through the cooperation with the government whose guidelines are regulated under

MR 12/2010. The MR/2010 is the implementing regulation of Article 37 paragraph

(3) and Article 64 paragraph (8) of GR 16/200551. It regulates the whole process of

the cooperation in the development of water supply system starting from the

48
Constitutional Court Decision Number 058-059-060-063/PUU-II/2004 and Number 008/PUU-
III/2005 regarding Judicial Review of Water Resources Law, op.cit, p.494
49
Stevy Thioritz, loc.cit
50
Seafield Research and Development Services, loc.cit
51
Article 37 paragraph (3) of GR 16/2005 states ”Dalam hal BUMN atau BUMD sebagaimana
dimaksud pada ayat (2) tidak dapat meningkatkan kuantitas dan kualitas pelayanan SPAM di
wilayah pelayanannya, BUMN atau BUMD atas persetujuan dewan pengawas/komisaris dapat
mengikutsertakan koperasi, badan usaha swasta, dan/atau masyarakat dalam penyelenggaraan
di wilayah pelayanannya.”
Article 64 paragraph (8) of GR 16/2005 states “Pedoman tentang tata cara pelelangan dan
penyusunan perjanjian penyelenggaraan, serta tata cara penyerahan aset sebagaimana
dimaksud pada ayat (4), ayat (5), ayat (6), dan ayat (7) diatur lebih lanjut dengan Peraturan
Menteri”.

28
planning of the cooperation project, preparation of pre-Feasibility Study52 of

cooperation project, transaction of cooperation project, and implementation

management of cooperation project.

2.7 Government and Private Parties as the Legal Subject of Agreement

2.7.1 Government as the Legal Subject of Agreement

Government as executive body is one among three state organs that

Montesquieu (1748) described in the separation of political power which also

consists of legislative and judiciary. Government consists of (i) individuals and

boards who are assigned to carry out the authorities in the sense of public law

(government bodies) and is only authorized upon the award of clear authority

approved by the public law; and (ii) Legal entities which have the authority to act

for and on behalf of the state to carry out the legal actions according to the private

law53. Public law means the law that regulate the relationship between the state and

state instruments or the relationship between the state and the citizens. Meanwhile

the private law means the law that regulates the relationship between one person to

another person or other legal subjects emphisizing individual interests.

The government is differentiated into central government and local

government. Central government is the President of the Republic of Indonesia who

is in charge of the power of the government of the Republic of Indonesia as referred

52
Feasibility Study (Studi Kelayakan), according to Business Dictionary, is an analysis and evaluation
of a proposed project to determine if it (i) is technically feasible; (ii) is feasible within the
estimated cost; and (iii) will be profitable. Feasibility study is conducted where large sums are at
stake.
53
Iwan E.Joesoef, “Perjanjian Pengusahaan Jalan Tol (PPJT) Sebagai Kontrak Bisnis Berdimensi
Publik Antara Pemerintah Dengan Investor (Swasta) Dalam Proyek Infrastruktur, Jurnal Magister
Hukum Vol.2 No.1, Februari 2000, p. 43-44.

29
to the 1945 Constitution54. In running the government, the president is assisted by

the ministers who are appointed and dismissed by the president himself 55. Each

ministers is in charge of particular business and supervises a ministry. Meanwhile

the local government consists of local government level I and loval government

level II, which are Governor, Regent, or Mayor and local instrument as the elements

of local government. The local government is entitled to issue local regulation and

other regulations in carrying out the autonomy and asisstance duties56.

In acting as the public legal entity, the government is entitled to regulate the

people by issuing various laws and regulations. In the other hand, on the

circumstance where the government is acting as private legal entity, the government

is not entitled to issue a binding public policy. As a private legal entity the

government may enter into a legal relationship with other legal subject to form a

limited liability company57. The implementation of a government engaging in a

legal action in the sense of private law is when a state owned enterprises (“SOE”)

in a national level or local owned enterprises (“LOE”), whose all or majority of its

shares belongs to the state through a direct share subscription that comes from the

separable state’s wealth58, is performing legal action in form of cooperation with

other legal entity. There are two types of SOE, which are59:

54
Article 4 of the 1945 Constitution states “President of the Republic of Indonesia shall hold the
power of government in accordance with the Consitution.” Indonesia, 1945 Constitution, art 4.
55
Article 17 paragraph (1) and (2) of 1945 Constitutiion.
156 Indonesia, Second Amendment to the 1945 Consitutiton, art 18 paragraph (6)
57
Joesoef, op.cit., p. 53
58
Indonesia, State Owned Enterprise Law, Law Number 19 of 2003, State Gazette Number 70 of
2003, Supplement to State Gazette Number 4297, art 1 number 1. (hereinafter shall be referred
to as “State Owned Enterprises Law”)
59
There used to be three types of SOE, which are public company (Perum), perusahaan jawatan
(Perjan), and perusahaan perseroan (Persero). Article 93 paragraph (1) of Law Number 19 of 2003

30
1. Public Company (Perusahaan Umum “Perum”)

Perum is the type of SOE whose all of its capital belong to the state and not

divided into shares, which is intended to the public benefit in the form of

procurement of high quality goods and/or services and also to seek profits

pursuant to the principle of the company management60. In procuring the high

quality goods and/or services for the public benefit which is affordable for the

people, the Perum is applying the healthy company principle 61. The Perum

acquires its states as a legal entity as of the issuance of government regulation

on its establishment62. The establishment of Perum is proposed by the Minister

to the President attached with the considerations that have been reviewed by

Technical Minister63 and Minister of Finance64. The samples of Perum in

Indonesia are Perum Pegadaian, Perum Jasatirta, Perum DAMRI, Perum

Perumnas and Perum Balai Pustaka65.

2. Limited Liability (Perusahaan Perseroan “Persero”)

Persero is a SOE in the form of limited liability, whose capitals is divided into

shares where all or at least 51% (fifty-one percent) of its shares belong to the

state which main goal is to seek profit66. Persero is also subject to Law Number

on State Owned Enterprises states that within 2 (two) years following the implementation of this
law, all SOE in the form of Perjan shall transform into Perum or Persero. Ibid, art 93
60
Ibid, art 1 number 4
61
Ibid, art 36 paragraph (1)
62
Ibid, art 35 paragraph (2)
63
Technical Minister is the minister who has the authority to regulate sectorial policy where the
SOE is doing its business. Ibid, art 1 number 6.
64
Ibid, art 35 paragraph (1)
65
Badan Usaha, “Perusahaan Umum (Perum)”, from http://badanusaha.com/perusahaan-umum-
perum (accessed November 26, 2014)
66
State Owned Enterprise Law, op.cit., art 1 number 2

31
 40 of 2007 on Limited Liabilities (“Limited Liabilities Law”)67 because it is in

the form of limited liability. Public Persero68 also shall comply with the

prevailing laws in the capital market. The establishment of Persero is proposed

by Minister to the President attached with the considerations that have been

reviewed by Technical Minister and Ministry of Finance with taking into

actions the provisions of the prevailing laws69. The establishment of Persero is

intended to70 (i) provide high-quality and strong competitiveness goods and/or

services and (ii) seek for profit in order to increase the company value. The

samples of Persero in Indonesia are PT Aneka Tambang (Persero) Tbk, PT

Dirgantara Indonesia (Persero), PT Perusahaan Listrik Negara (Persero), PT Pos

Indonesia (Persero) and others.

Meanwhile the form of business entity in the local government level is Local

Owned Enterprises, as mentioned on Article 177 of Law Number 32 of 2004 on

Local Government:

“Local governments may set up local-owned enterprises (BUMD) with their

establishment, merger, release of ownership, and/or liquidation being
stipulated in a local regulation based on the prevailing laws.”
According to Minister of Home Affairs Regulation Number 3 of 1998 on Legal

Form of Local-Owned Enterprises, there are two form of LOE which are:

67
The provision of Article 11 of State Owned Enterprise Law regulates that all provisions and
principle of Law Number 1 of 1995 on Limited Liabilities apply to Persero, but as of the issuance
of Law Number 40 of 2007 on Limited Liabilities, the old version is revoked. Therefore Persero is
subject to Law Number 40 of 2007 on Limited Liabilities by the laws. Ibid, art 11.
68
Article 1 number 3 of State Owned Enterprise Law defines Public Persero as “Persero whose
capital and the amount of its shareholders meet certain criteria or Persero that performs public
offering in accordance with the prevailing laws in capital market. Ibid, art 1 number 3.
69
Ibid, art 10 paragraph (1) and (2).
70
Ibid, art 12

32
1. Local Company (Perusahaan Daerah “PD”)

Local Company is all companies established pursuant to the Law Number 5 of

1962 on Local Company whose all or part of its capital belongs to separated

local wealth, unless otherwise regulated by the prevailing laws. The

characteristics of local company according to Muh. Bakat (1989:104) are (i)

established with a local regulation, (ii) all or part of its capitals come from

separated local wealth, unless otherwise regulated by the prevailing laws; (iii)

its business purpose is to seek profit as the fund for local development, (iv) led

by director(s) which is further regulated in the regulation of its establishment,

(v) the existence of a board of local company whose duties and authorities are

further regulated under government regulation and (vi) the highest authority is

not on the annual general meeting shareholders but under the head of local

government71. The purpose of the establishment of local company is to involve

in conducting the local development and the development of national economy

in general in the framework of command economy to fulfill the needs of the

people by prioritizing the industrialization and serenity as well as the pleasure

of working in the company, to a just and prosperous society72. Upon the

establishment with a local regulation, the local company will get the status as

legal entities after receiving the legalization from the authorized institution

(Ministry of Home Affairs)73. In achieving its purpose as stated above, PD may

cooperate with SOE, cooperatives and private parties. The samples of PD in

71
Damang SH, “Perusahaan Daerah”, from http://www.negarahukum.com/hukum/perusahaan-
daerah.html (accessed November 26, 2014)
72
Indonesia, Local Company Law, Law Number 5 of 1962 on Local Companies, State Gazette No.
10 of 1962, Supplement to State Gazette Number 2387, art 5 paragraph (2).
73
Ibid, art 2

33
 Indonesia are PDAM, PD Pasar Jaya, Bank Pembangunan Daerah, PD Rumah

Potong Hewan.

2. Limited Liability

LOE in the form of limited liability shall be subject to the provisions of Limited

Liabilities Law74 and its implementing regulations75. Therefore the

establishment of LOE in the form of limited liability shall be processed in

accordance with the provisions of the Limited Liabilities Law. Considering its

status as a limited liability company, this type of LOE issues number of shares

in which the possession of the shares may be obtained by the local government,

local company, private parties and the society with a bigger composition

possessed by the local government and local company76. During the operation,

the local company may be transformed into a limited liability form by the

governor or regent/mayor77. This LOE transformation can be done by (i)

proposing a principle application regarding transformation of form to the

Minister, (ii) Issuing a level I or level II local regulation regarding

transformation of legal form of local owned enterprise from local company to a

limited liability, and (iii) making a notarial deed as the establishment of limited

liability.

74
The provision on article 3 of Minister of Home Affairs Regulation Number 3 of 1998 on the Legal
Form of Local Owned Enterprises stipulates that the local company in the form of limited liability
is subject to Law Number 1 of 1995 on Limited Liabilities, but as of the issuance of Law Number
40 of 2007 on Limited Liabilities, the old version of the limited liabilities law is revoked. Therefore
LOE is subject to Law Number 40 of 2007 on Limited Liabilities by the laws.
75
Ministry of Home Affairs, Regulation on the Legal Form of Local Owned Enterprises, Minister of
Home Affairs Regulation Number 3 of 1998 on the Legal Form of Local Owned Enterprises, art 3
paragraph (2).
76
Ibid, art 8
77
Ibid, art 4

34
 From the above explanation it may be concluded that the government as the

legal subject of agreement is:

1. Central government, which is the president, including the ministry and central

government instrument and SOE.

2. Local government, which means the level I local government (governor), level

II local government (regent or mayor) and LOE.

2.7.2 Private Parties as the Legal Subject of Agreement

The business entities in Indonesia are classified into legal entities and non-

legal entities78. These are in line with the provision of Article 5 paragraph (1) and

(2) of Law Number 25 of 2007 on Investment that stipulates that the domestic

investment may be in the form of legal entities, non-legal entities or individual

businesses, for the foreign investment, however, must be in the form of limited

liability based on the Indonesian law, unless otherwise regulated by the laws79.

Pursuant to the provisions of the prevailing laws, the private entities that are mostly

entered into agreement with the government80 are:

1. Limited Liabilities

78
Bimo Prasetio, Pamela Permatasari, Fetroki Rhomanda, dan Dwinanda Febriany, “Jenis-jenis
Badan Usaha dan Karakteristiknya” from
http://www.hukumonline.com/klinik/detail/lt4f51947253585/jenis-jenis-badan-usaha-dan-
karakteristiknya (accessed November 27, 2014)
79
Indonesia, Investment Law, Law Number 25 of 2007 on Investment, State Gazette Number 67 of
2007, Supplement to State Gazette Number 4724. Art 5 paragraph (1) and (2).
80
Under several regulations that regulate the cooperation between the government and private
parties, such as GR 13/2010, MR 12/2010, Minister of National Development Planning/Head of
National Development Planning Agency Regulation Number 4 of 2010 on General Guidelines for
the Implementation of the Cooperation Between the Government and Business Entities in the
Provisions of Infrastructure. (“MR 4/2010”), the private entities that may enter into an
agreement with the government are limited liabilities, cooperatives, SOE, and LOE.

35
 According to Limited Liabilities Law, limited liability company means a legal

entity which constitutes an alliance of capital established pursuant to a contract

in order to carry on business activities with an authorized capital all of which is

divided into shares and which fulfils the requirements stipulated under the

Limited Liabilities Law and its implementing regulations. In order to gain the

status as a legal entity and be able to start its business, the process that needs to

be done are:

1) Obtaining an establishment deed from the notary that contains the article of

association and other information with regards to the establishment of the

company81;

2) At the latest of 60 (sixty) days as from the date on which the deed of

establishment is signed by the notary, the founders shall jointly submit an

application to the Minister of Law and Human Rights to obtain the Minister

of Law and Human Rights’ Decree with regard to the ratification of the

Company via legal entity administration system information technology

services82;

3) Minister of Law and Human Rights will conduct the registration of the

company after legalizing it as a legal entity on a Minister Decree83.

4) In 14 (fourteen) days after the issuance of the Minister Decree, the Minister

of Law and Human Rights will announce the legalization on Supplement to

Official Gazette of the Republic of Indonesia84.

81
Indonesia, Limited Liabilities Law, Law Number 40 of 2007 on Limited Liabilities, State Gazette
Number 106, Supplement to State Gazette Number 4756. Art 8 paragraph (1)
82
Ibid, art 9 and art 10
83
Ibid, art 29 paragraph (1)
84
Ibid, art 30

36
 The limited liability company will obtain the status as the legal entity on the

issuance date of the Minister of Law and Human Rights Decree regarding the

legalization of legal entity85. Under the notarial deed of establishment and the

legalization of it from the minister decree, the limited liability company must

apply for other legal document of the company such as Business Domicile

License (Surat Keterangan Domisili Perusahaan), Taxpayer Registration

Number (Nomor Pokok Wajib Pajak), Company Registration Certificate

(Tanda Daftar Perusahaan) and Business License (Izin Usaha)86 to enable the

company to perform its business or to engage with other legal entities.

2. Cooperatives

Cooperative is the legal entity established by individual or cooperative legal

entity, with the separation of the wealth of its members as the capital to run the

business, that fulfills the aspiration and the mutual needs in the economic,

social, and culture sectors in accordace with the values and principle of the

cooperative87 and aims to improve the prosperity of its member in particular and

the people in general, as well as being an inseparable part of the national

economic structure which is democracy and just88. The principle as referred to

in this matter is the family principle89. Along with a limited liability company,

the establishment of a cooperative shall be made in notarial deed of

85
Ibid, art 7 paragraph (4)
86
Bimo Prasetio and Dwinanda Febriary, “Prosedur Perizinan Usaha Kecil”, from
http://www.hukumonline.com/klinik/detail/lt4ec1e7d00cf43/prosedur-perizinan-usaha-kecil
(accessed December 2, 2014).
87
Indonesia, Law On Coopeartives, Law Number 17 of 2012 on Cooperatives, State Gazette Number
212 of 2007, Supplement to State Gazette Number 5355. Art 1 number 1.
88
Ibid, art 4
89
Ibid, art 3

37
 establishment in Indonesian language and obtain the legalization as legal entity

under the minister decree90.

2.8 The Definition and the Coverage of Public Private Partnership in the
Provision of Infrastructure

Public infrastructure can be defined as facilities which are necessary for the

functioning of the economy and society91. In general, the public infrastructure can

be divided into economic infrastructure and social infrastructure92. The economic

infrastructure means all infrastructures that are considered to be essential for day-

to-day economic activity, such as transportation facilities and utility networks (for

water, sewage, electricity, etc.)93. Meanwhile social infrastructure means all

infrastructures that are considered essentials for the structure of society, such as

schools, hospitals, libraries, prisons, etc.94. According to E.R.Yescombe, a

distinction can also be made between hard infrastructure, whether economic or

social, primarily involving provision of buildings or other physical facilities, and

soft infrastructure, involving the provision of services, either for economic

infrastructure or for social infrastructure95.

Under PR 13/2010, the provision of infrastructure means an activity which

includes construction work to build or improve infrastructure and/or infrastructure

management and/or maintenance of infrastructure in order to improve the

90
Ibid, art 9
91
E.R. Yescombe, Public-Private Partnership: Principle of Policy and Finance, Oxford: Butterworth-
Heinemann, 2012, p.1
92
Ibid.
93
Ibid.
94
Ibid.
95
Ibid.

38
usefulness of infrastructure96 with the types of infrastructure as described in Types

of Cooperation. Thus the infrastructure according to the prevailing laws in

Indonesia and the above definition that covers the development of water supply

system is economic hard and soft infrastructure because it covers the physical

facilities and also services. The provision of this infrastructure is conducted through

a cooperation project that is conducted through cooperation agreement or

concession permit between the Minister/Head of Agency/Head of local government

(GCA) and business entities97. Cooperation agreement is a written agreement for

the provision of infrastructure between the GCA and business entity which is

determined through public bidding. Cooperation agreement under MR 12/2010

stipulates that other than GCA, the director of SOE or LOE98 who are calling to

organize the cooperation. Concession permit is a permit for the provision of

infrastructure provided by the GCA to the business entity determined through

public bidding99.

2.9 The Implementation Form of Public Private Partnership

2.9.1 The Implementation Form of Public Private Partnership in General

The World Bank and Public Private Infrastructure Advisory Facility

(PPIAF), on its project database divide Private Participation in Infrastructure into 4

(four) shapes, namely100:

96
Indonesia, Presidential Regulation Number 13 of 2010 on Amendment to Presidential Regulation
Number 67 of 2005 on Cooperation Between the Government and Business Entity in the Provision
of Infrastructure, art 1 number 3
97
Ibid, art 1 number 5
98
Ministry of Public Works (MR 12/2010), op.cit., art 1 number 15
99
Indonesia (PR 13/2010), op.cit art 1 number 6
100
Rina Kartika Sari, Thesis: “Klausa Imbalan Dalam Perjanjian Kerjasama Antara Pemerintah
Dengan Swasta: Studi Kasus Perjanjian Kerjasama Antara PDAM DKI Jakarta Dengan PT Aetra Air
Jakarta, 2011, p. 26-29 as quoted from Edward Farquharson et al., How to Engage With The

39
1. Management and Lease Contract

Under the management and lease contract, the private party takes over the

management of the government’s business entity for certain period of time, but

the ownership of the infrastructure project and decision to invest remain under

the government possession. The form of this cooperation is divided into:

a. Management Contract, which means the form of public private partnership

where the government pay the private party to operate the facility (public

infrastructure), but the operational risks are still on the government.

b. Lease contract, which means the form of public private partnership where

the government leases the asset to the private party with certain amount of

payment and the private party is responsible for the operational risks.

2. Concessions

Under the concession form, the private party takes over the management of the

government’s business entity during the period of time given, where during

such time the private party is entitled to operate the facilities of the

infrastructures and therefore shall be responsible for the investment risks. The

types of this concession are as follows:

a) Rehabilitate, Operate, and Transfer (ROT), in which under this form of

partnership the private party rehabilitates the existing facility, then operate

it afterwards and also maintain the facility at its own risks during the

cooperation period in which at the end of the concession the private party

hands it over back to the government.

Private Sector in Public Private Partnership in Emerging Markets, Washington DC: the World
Bank, 2011 p. 149-151

40
 b) Rehabilitate, Lease or Rent, and Transfer (RLT), in which under this form

of partnership the private party rehabilitates the existing facility at its own

risks, then the private party leases the facility from the government and also

operate and maintain the facility during the cooperation period at its own

risks to be handed over at the end of the cooperation to the government.

c) Build, Rehabilitate, Operate and Transfer (BROT), in which the form of

public private partnership where the private party builds additional facility

to the existing facility or complete the facility which is gradually built,

rehabilitate the existing asset, then operate and maintain it at the same time

at its own risks during the cooperation period to be handed over at the end

of the cooperation to the government.

3. Greenfield Projects

The cooperation on the greenfield project means the private or a joint venture

public-private builds and operate a new facility. The types of greenfield projects

are as follows:

a) Build, Lease and Transfer (BLT), which means the form of public private

partnership where the private party is building a new facility at its own risks,

assign the ownership of the infrastructure project to the government, lease

the facility from the government and operate the facility at its own risk until

the end of the cooperation period. The government under this form of

41
 partnership generally provides revenue bond101 by giving a long term

contract (or contract extension) or giving a minimum revenue bond102.

b) Build, Operate and Transfer (BOT), which means the form of public private

partnership where the private party builds a new facility at its own risks,

operating the facility at its own risks, and hand it over to the government at

the end of the cooperation period. The private party may or may not have the

asset during the cooperation period. The government under this form of

partnership generally provides revenue bond by giving a long term contract

(or contract extension) or giving a minimum revenue guarantee.

c) Merchant, which means the form of public private partnership where the

government does not provide any revenue bond and therefore the private

party bears with the construction, operation and the market risks of the

project (i.e.merchant power plant)

d) Rental, which means the form of public private partnership where the

electrical utility or the government hires a power plant that is movable from

the private party for period between 1 to 15 years. The private party locates

101
Revenue bonds are bonds that are backed by the revenue generated by the specific project
being financed by the bond issue. In other words, the money raised by the bond offering finances
the project, and the project – once complete – generates the revenues to pay the interest and
principal on the bonds. Anonymous, “What Are Revenue Bonds?”, from
http://news.morningstar.com/classroom2/course.asp?docId=5394&page=2 (accessed
December 4, 2014)
102
Minimum revenue guarantee is given because the public private partnership infrastructure
project can be very risky due to high initial investment costs and construction risks, high
operating and maintenance costs and long-term concession periods when private partners need
to gain enough revenue for the repayment of all costs and for their profit. The concept of
minimum revenue guarantee presents one of the most attractive solution for this risky
infrastructure public private partnership project where the private partner’s revenues are based
on the usage of a built infrastructure and the government grants to the private party a minimum
level of revenues for a concession period. Real Options Consulting Ltd., “The Minimum Revenue
Guarantee Concept”, from http://www.realoptions.eu/minimum-revenue-guarantee-concept/
(accessed December 4, 2014)

42
 and operate the facility at its own risks during the cooperation period. The

government usually provides the revenue bond through a short-term

purchase agreement, for example the agreement about the purchase of power

plant for the facility in the provision of raw water.

4. Divestitures

Under the cooperation in the divestitures form, the private party purchases the

stocks of SOE through the sales of assets, public offering or mass privatization

program. There are two types of divesitures, namely:

a) Full, where the government sell 100% shares of SOE to the private party

(operator, investor and others);

b) Partial, where the government sell a portion of SOE shares to private party

(operator, investor and others). The role of private party herein indicates or

does not indicate the management of the facility by the private party.

According to E.R. Yescombe, the more useful way to classify the form of

public private partnership is based on the nature of the service and risk transfer

inherent in the cooperation agreement103. Under this basis, the public private

partnership can be split into two main categories which are usage-based and

availability-based104. The usage-based is the form of public private partnership that

is mostly applied105. Under this form of partnership, the government grants the

private party the right to design, build (or rehabilitate or expand), maintain, operate

and finance the government’s infrastructure for certain period106. During the

103
E.R.Yescombe, op.cit., p.13
104
Ibid.
105
Rina Kartika Sari, op.cit., p.30-31
106
Ibid.

43
cooperation period, all operational responsibility including but not limited to design

risks, financing, construction, operational and also the risks of asset demand usage

are under the responsibility of the private party107. The private party will receive

the return from the usage of the facility. The sample of the implementation of public

private partnership in usage-based form is concession, such as concession in

transportation (toll road, airports, harbor, railways and others), water supply system,

gas distribution, telecommunication, and power plant108.

Under the availability-based the involvement of the private party is similar

to its involvement in the usage-based form, which are designing, financing, building

(or rehabilitating), operating and maintaining the infrastructure109. The difference

is under the usage-based form, the payment received by the private party from the

government as return is usually from the end-user (i.e. toll road user or water

costumer), in the other hand, the private party – under the availability-based – will

receive the payment from the government based its service or availability (or

capacity produced within the service) contributed by the private party110.

2.9.2 The Implementation Form of Public Private Partnership in the

Development of Water Supply System in Indonesia

The implementation form of public private partnership in the development

of water supply system in Indonesia is mentioned in MR 12/2010 jo. GR 16/2005.

The partnership or cooperation form shall reflect the allocation risks, financing

107
Ibid.
108
E.R. Yescombe loc.cit.
109
Rina Kartika Sari, loc.cit.
110
Ibid.

44
responsibility and the management status of asset being cooperated111. The

partnership form in the development of water supply system covers112:

1) Build, operate transfer contract, covers the entire water supply system

infrastructure up to the service and tariff invoice to the customers or only for

portion of water supply system infrastructure;

2) Other partnership form in accordance with the prevailing laws that regulate the

cooperation between the government and business entity in the provision of

infrastructure.

In general, the ministry of public works through BPP SPAM states that there

are basically six modalities of public private partnership with numerous variations

and combinations according to the aims and scopes if requires activities113. Those

five modalities are (i) service management, (ii) management contract, (iii) lease

contract, (iv) build, operate, transfer (BOT), (v) rehab, operate, transfer (ROT) and

(vi) concession contract. The selection of the form that will be used in the

cooperation shall take into consideration the following factors114:

1) Certainty on the availability of the infrastructure at the targeted time;

2) Innovation and efficiency; and

3) Transfer of technical and management skill from the private party to the public

sector.

111
Ministry of Public Works (MR 12/2010), op.cit., attachment p.9
112
Ibid.
113
Ministry of Public Works-BPP SPAM, Indonesia Water Supply: Infrastructure Public Private
Partnership Opportunities, Jakarta: BPP SPAM, 2010, p.9
114
Ibid

45
The MR/2010 stipulates that there are two types of partnership in the development

of water supply system in relation to the organizing party, namely115:

1. The Cooperation Between Government and Business Entity

The cooperation between the government, level I local government, level II

local government with business entity in the development of water supply

system with the network system and treatment technology in the area, region or

district that has not been covered with the organizing SOE or LOE’s water

supply system piping network services116.

2. The Cooperation Between Organizing SOE/LOE and Business Entity

The cooperation between the organizing SOE/LOE with business entity to

improve the quantity and quality of service in the development of water supply

system in its service area (principle of business to business)117.

Regardless the numerous types of the implementation of public private partnership,

the most common types of public private partnership that are applied in Indonesia

by referring to the table from BPP SPAM above are concession and BOT. The form

that will be selected usually taking into consideration to one or more of the

following matters118:

1. The party that will be responsible for the project risks; if the private party is the

one that is responsible, the implementation form will be concession. But if the

government bears with all the risks (i.e. payment for the private party from the

government), the selected form will be BOT or BTO;

115
Rina Kartika Sari, op.cit., p. 42-43
116
Ministry of Public Works (MR 12/2010), op.cit., art 6
117
Ibid., art 24
118
Rina Kartika Sari, op.cit., p.43-44

46
2. The current condition of the project prior to the cooperation; if the physical

condition of the project is just about to be built, the implementation form is

usually BOT/BTO, however if there are already assets or facilities of the project

in which the private party only adds several asset, the implementation form is

usually concession;

3. The ownership of the assets following the cooperation period; if the assets of

the projects will be returned to the government, the implementation form to be

chosen will be BOT or ROT. If following to the cooperation the ownership of

the asset remain at the private party possession the implementation form would

be BOO119.

4. The payment system received by the private party; if the payment is directly

received from the user or group of user and government, the implementation

form is usually concession. However if the payment is given by the private

party, the form is usually BOT/BTO;

5. The private party scope of work; if the scope of works involves physical

development the type of form can be in the form of BOT, BTO or BLT.

However if the scope of works only covers asset management without any

physical development, the type of form can be operation contract or lease

contract.

119
BOO, stands for Build, Own, Operate, is a type of public private partnership in which a
government entity sells to a private party the right to construct a project according to agreed
design specifications and to operate the project for a specified time, but unlike BOT concept the
private party owns the project and does not have to transfer it to the government entity at the
end of the term. US Practical Law, “Build, Own, Operate (BOO)”, from
http://us.practicallaw.com/4-501-4896 (accessed December 8, 2014)

47
 CHAPTER 3

THE IMPLEMENTATION OF PUBLIC PRIVATE

PARTNERSHIP IN THE DEVELOPMENT OF WATER
SUPPLY SYSTEM

3.1 Preliminary Preparation of the Implementation of Public Private

Partnership

As of 2013, the proportion of the people of Indonesia who have the safe

access to drinking water have reached 67, 7%120. The government of Indonesia

plans to increase the achievement up to 100% in 2019 under the National Medium-

Term Development Plan (Rencana Pembangunan Jangka Menengah Nasional

“RPJMN”) 2015-2019 with the involvement of all drinking water stakeholders

which are government, local government, private party and the society121. The

current existing condition and water coverage target on year 2019 are described as

follows:

150 (Clean Access)

100,0
92,2
84,8
76,3
70,3
67,8
Access(%)

67,7

100
65,1
63,5
44,2
46,5
48,8
48,7
48,3

48,3
47,8
47,7

47,7
47,6
37,5

50

0
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Year
Table 2. Existing Condition and Water Coverage Target122

120
Pusat Komunikasi Publik Kementrian Pekerjaan Umum, “Target 100 Persen Capaian Akses Air
Minum pada 2019” http://pu.go.id/berita/9790/Target-100-Persen-Capaian-Akses-Air-Minum-
pada-2019 (accessed December 15, 2014)
121
Ibid.
122
Source: Ir. Tamin M. Zakaria Amin, M.Sc, MBA (Head of BPPSPAM) Slide Presentation,
“Pengembangan Sitem Penyediaan Air Minum Di Indonesia 2015-2019”

48
The GCA is enforcing the cooperation project of the public private partnership in

the following manners123:

a. cooperation project planning;

b. preparation of cooperation project pre-feasibility study;

c. transaction of the cooperation project; and

d. execution management of the Cooperation Agreement.

3.1.1 Cooperation Project Planning

Prior to determining a water supply system that will become a cooperation

project, the GCA conducts identification and selection to the potential project to be

done under cooperation project. The process of identification and selection of the

cooperation project shall take into consideration the following things124:

a. The suitability with the long-term development plan, national/regional mid-

term development plan and strategic plan;

b. The suitability of the location of the project with the Spatial Plan125;

c. The cross sectors and cross regions infrastructure relations;

d. Financial analysis and social benefit.

In conducting the project identification that will be cooperated, the GCA

shall perform public consultation126. Public consultation is a dialogical

communication process or deliberation between the stakeholders in order to reach

123
Ministry of Public Works (MR 12/2010), op.cit., art 12
124
Ministry of Public Works (MR 12/2010), op.cit., attachment p. 2-3
125
According to Minister of Public Works Number 16/PRT/M/2009 on Guidelines for the
Preparation of Regional Spatial Plan, Spatial Plan means the result of the spatial planning in the
area which because an integral geography along with all the relevant element which boundary
and system are determined based on administrative aspect.
126
Indonesia (PR 67/2005), op.cit., art 8-9

49
the understanding and agreement in the land procurement plan for the development

of public interests127. The combination of the result of both project identification

and public consultation will determine the project priority and will be declared

publicly128.

3.1.2 Preparation of Pre-Feasibility Study

The preparation of pre-feasibility study is intended to ensure: (i) the

feasibility of cooperation project; (ii) proportional allocation and mitigation risks

between the parties; and (iii) a cooperation project that ensures the greatest benefit

for the people129. The pre-feasibility study of cooperation project consists of

components as follows130:

1. Legal Study

The legal study on a pre-feasibility study of cooperation project contains

institutional analysis (kajiaan kelembagaan) and prevailing laws and

regulations. The stages in conducting the institutional analysis covers: (i) ensure

the authority of GCA in conducting the cooperation project; (ii) determine the

working unit, as well as the roles and responsibilities of the working unit, and

the reporting system; (iii) determine and prepare the institutional regulation

body; (iv) determine the type of licenses/approvals necessary; and (v) ensure

that the cooperation project is executed in accordance with the prevailing laws

and regulations.

127
Indonesia, Land Procurement For The Development of Public Interests Law, Law Number 2 of
2012, State Gazette Number 22 of 2012, Supplement to State Gazette Number 5280, art 1
number 8.
128
Indonesia (PR 67/2005), loc.cit.
129
Ministry of Public Works (MR 12/2010), op.cit., attachment p. 3-11
130
Ibid.

50
2. Technical Study

The technical study on a pre-feasibility study covers technical analysis, land

availability, and preliminary engineering design. The technical analysis aims

to determine the required technical operations performance standards; consider

the project measurement, quality, technology, and commencement time;

determine the required output capacity and operational standards, also to

prepare the appropriate preliminary plan technically; identify and appraise the

assets necessary and prepare the list of government assets that will be used for

the project; estimate and determine the revenue, capital expenditure (Capex),

operational expenditure (Opex) and the maintenance with various alternatives.

3. Assessment of the project feasibility

Assessment of the project feasibility contains the social cost-benefit analysis,

market analysis, financial analysis, and tariff analysis. The social cost-benefit

analysis aims to ensure the economical sustainability of the project in relation

to the effectivity, punctuality, use of funds and public resources during the

project period.

The enforcement of market analysis aims to determine the expected level of

service; appraise the approximate demand and capability of the user to pay,

required standard services and payment performance; determine the sources and

level of demands with various scenarios; do the survey on the interests of the

business entities candidate to the cooperation project. The financial analysis

aims to determine the financial in feasibility of the cooperation project.

51
 Tariff analysis aims to review the policy of tariff determination, adjustment

mechanism, reference index to make the adjustment of the applicable

parameter. Risk analysis on a pre-feasibility study of a cooperation project aims

to identify the risks and allocate them to the most capable party to deal with the

issue.

4. Environment and Social Study

The environment and social study on a pre-feasibility study contains initial

environmental examination, social analysis, and resettlement-plan.

5. Form of Cooperation in the Provision of Infrastructure Study

The form of cooperation must reflect the risks allocation, the party responsible

for financing and the status of cooperation assets management. The type of form

cooperation is as described on S2.1.8.3 The Implementation Form of Public

Private Partnership in the Development of Water Supply System in Indonesia.

6. The Need of Government Support and/or Government Guarantee Study

The existence of government support is needed to increase the financial

feasibility of the cooperation project. The government support can be given in

form of licenses or permits, land procurement, construction partial support,

and/or other forms according to the provisions of laws. The government

guarantee aims to reduce the risks for business entity. The government

guarantee is given by the Minister of Finance and/or Infrastructure Guarantee

Fund Business Entity (Badan Usaha Penjaminan Infrastruktur)131 in

accordance with the provisions of laws.

131
The business entity responsible for the infrastructure guarantee fund in Indonesia is PT
Penjaminan Infrastruktur Indonesia (Persero) (also known as Indonesia Infrastructure Guarantee
Fund), a state-owned enterprise established to response the need for adequate assurance
against the political risks inherent in infrastructure investment.

52
7. Procurement of Business Entity Plan

The establishment of business entity plan covers: (i) the establishment of

procurement committee plan. (ii) list of potential participants to compete on the

procurement, appraisal form and the criteria in evaluating the bidding document

as well as the procurement process, and (iii) plan for the stages on the

procurement implementation, regulation on the commencement date for each

stages and the required resources.

8. The Term Sheet of Cooperation Agreement

The term sheet of cooperation agreement contains various terms and conditions

that will regulate the cooperation in public private partnership in the

implementation of cooperation project such as the scope of works needed to be

done by the business entity, the period of the cooperation agreement as well as

the extension possibility, conditions precedent, performance bond, applicable

tariff and the duration as well as its adjustment mechanism, investment plan,

termination (including early termination) of the cooperation project, force

majeure events, warranties of the parties, language usage, and the prevailing

law which is Indonesian law.

3.1.3 The Transaction of Cooperation Project

At this stage of public private partnership implementation, the process

begins with the plan of procurement of business entity. The plan of procurement of

business entity covers the establishment of procurement committee132. This

procurement committee shall be odd number with 5 (five) members at minimum

consisting of chairman, vice chairman, secretary and also acts as member, and

132
Ministry of Public Works (MR 12/2010), op.cit., attachment p. 15-18

53
several members. The members of procurement committee must come from the

background that understand, know and master at the procurement procedures, scope

of cooperation project, contract law and provision of law in the development of

water supply system, technical aspects and financial aspects. Every member of

procurement committee is prohibited to have an affiliation with other member or

with the procurement potential participants.

Upon the completion of the establishment of procurement committee, they

will have to arrange for the schedule for the procurement of business entity by

taking into consideration an enough time allocation to conduct all the stages on

business entity procurement133. The procurement committee also will have to

prepare for the concept for the announcement of the procurement meanwhile the

GCA performs the market sounding in order to get input and identify the interests

of potential investors to the cooperation project being offered. The market sounding

can be performed through a seminar, workshop or through a road show. The result

of the market sounding by GCA can be used as reference for the procurement

committee to adjust the procurement document134.

The procurement committee also must prepare an owner estimate (harga

penghitungan sendiri) according to the report of the pre-feasibility study of the

cooperation project. The calculation of owner estimate covers the investment costs

which consist of project costs, interest provisions, interest assumption and

escalation135. The project costs consist of planning costs, construction and

133
Ibid.
134
Ibid.
135
Ibid.

54
supervision costs, operational and maintenance costs as well as the land acquisition

costs (if any)136. The calculation of owner estimate shall consider the things that

may affect the cooperation project. Upon the completion of the calculation, the

GCA will determine the owner estimate made by the procurement committee.

Having completed the owner estimate, the next stage that follows is the

preparation of Pre-Qualification Document (“PQ Document”)137. The PQ

Document is prepared by the procurement committee and contains the following

detais138:

a. brief description of the cooperation project;

b. the shape or format of the expression of interest document;

c. the requirements of the bidder candidates qualifications; and

d. the implementation schedule and the guideline for the PQ valuation.

Beside PQ Document, the procurement committee also has to prepare for

procurement document139. The procurement document shall at least contain

invitation to the bidder and general procurement provision that shall cover140:

a. scope of work, amount of bidding documents to be delivered, and site review

of the cooperation project;

b. contents of bidding document, the explanation of the content of the bidding

document, and the amendment of the content of the bidding document;

136
Ibid.
137
Ibid.
138
Ibid.
139
Ibid.
140
Ibid.

55
c. prevailing language in the bidding document, the writing of bidding price,

bidding currency, the validity period of the bidding, bid bond, bidding form and

the signatory of the bidding letter;

d. the cellophane and tagging of the bidding document cover, submission deadline

of the bidding document, treatment to the late submission of bidding document,

also prohibition of changing and withdrawal of the bidding document that has

been submitted;

e. the procedure on the opening of the bidding document, clarification of the

bidding document, the examination on the completeness of the bidding

document, arithmetic correction, and conversion to a single currency;

f. evaluation system of the bidding document that covers criteria, formulation and

evaluation guidelines;

g. pre-feasibility study documents;

h. draft of cooperation agreement which has been improvised by the procurement

committee based on the term sheet of the cooperation agreement which has been

prepared on the preparation of pre-feasibility study stage;

i. list of quantity and price;

j. technical and drawing specification;

k. form of bidding letter;

l. form of cooperation plan and the business form based on the study results to the

cooperation project;

m. project financing plan and its source of fund;

56
n. form of bid bond141 in bank guarantee issued by a national bank or foreign bank

that has a branch in Indonesia along with the amount of bid bond in form of

percentage out of the value of the cooperation project;

o. form of performance bond142 in bank guarantee issued by national bank or

foreign bank that has a branch in Indonesia along with the amount of

performance bond in form of percentage out of the value of the cooperation

project;

p. non-disclosure agreement signed by the bidder, declaring that the content of the

bidding document can be used by the bidder for purpose other than participating

in the procurement of cooperation project and cannot be disseminated to other

party without prior written approval from the procurement committee; and

q. delivery method of the bidding document.

3.1.4 Implementation of the Procurement of Business Entity

At this level the process consists of prequalification and bidding process.

The procurement committee must announce widely about the existence of

prequalification for business entity143. The content of the announcement must

contain the name and address of GCA who will conduct the procurement of

141
Bid bond is a form of security offered by a bidder to the party soliciting the bid which guarantees
that the bidder will enter into a contract within a specified period of time and will furnish any
required performance and labor and material bonds. University of Colorado, “Bid Bond”, from
http://www.colorado.edu/engineering/civil/db/DBS/glossary.cgi?word=Bid+Bond (accessed
December 22, 2014).
142
Performance bond is a bond issued by a surety company which guarantees the client that if the
contractor fails to complete the project in accordance with the terms of construction agreement
(in this term means cooperation agreement), the surety company will either complete the
contract itself, or arrange for a client-approved contractor to complete the contract. University
of Colorado, “Performance Bond”, from
http://www.colorado.edu/engineering/civil/db/DBS/glossary.cgi?word=Performance+Bond
(accessed December 22, 2014)
143
Ministry of Public Works (MR 12/2010), op.cit., attachment p. 18-38

57
business entity, brief description of the cooperation project, cooperation project

estimation value and the requirement of the bidder candidate, and the place, date

and time to take the PQ Document144. The sample announcement of PQ for water

supply system is described at the following picture.

Picture 1. PQ Invitation of Bogor Regency Water Supply System Project 145

The bidder must deliver an expression of interest (“EOI”) to the

procurement committee, as a requirement to the retrieval of the PQ Documents146.

Having taken the PQ Document, the bidder shall submit the PQ Document back to

144
Ibid.
145
Source BPPSPAM, from http://www.bppspam.com/files/Pengumuman%20KPS.pdf (accessed
December 22, 2014)
146
Ministry of Public Works (MR 12/2010), loc.cit

58
the procurement committee at the determined date147. The procurement committee

will evaluate and clarify the PQ Document in order to determine the list of bidders

who pass the prequalification148. If the bidders who pass the prequalification are

less than 3 (three) participant, the procurement committee will conduct re-

prequalification149. The bidders who have passed the previous prequalification do

not have to participate in the re-prequalification150. On the circumstance where

there is no additional bidders who pass the re-prequalification or the total bidders

are less than 3 (three) participant, the procurement committee may proceed to the

procurement of business entity process151. The bidders who pass the

prequalification and re-prequalification will be announced and legalized by the

procurement committee. The bidders who do not pass the prequalification are

entitled to apply for objections to the procurement committee at the latest of 7

(seven) days following the announcement date and the procurement committee will

conduct a research and follow-up the objection for a re-evaluation152. The

procurement committee will announce the re-evaluation result. The sample

announcement of bidders who pass the prequalification is on the picture at the

following page153:

147
Ibid.
148
Ibid.
149
Ibid.
150
Ibid.
151
Ibid.
152
Ibid.
153
Source: Indonesia Investment Coordinating Board (BKPM), from
http://www.bkpm.go.id/contents/news_detail/106901/Announcement+of+the+Pre-
Qualification+Result+for+the+41+MLD+Bulk+Water+Supply+Public+Private+Partnership+%28PP
P%29+Project+in+Bandar+Lampung+%28%E2%80%9CBandar+Lampung+PPP+Project%E2%80%
9D%29#.VJjLCsjts (accessed December 23, 2014)

59
Picture 2. Announcement of PQ Result on Bandar Lampung Water Supply System Project.

Having declared passing the prequalification, the bidders will continue their

journey in the bidding process. The bidders must collect the bidding documents

from the procurement committee by paying certain amount of money as determined

60
in the bidding document154. The bidding document consists of 2 (two) covers in

which each covers contains related document. The cover number I contains

administrative and technical documents meanwhile the cover number II contains

financial documents. The administrative documents consists of: (i) Proposal Letter,

signed by the directors of the bidder, (ii) Bid Bond, (iii) Company Structures, (iv)

Content of Bidding Document, and (v) other important documents, such as

establishment deed of the company, business license, taxpayer identification

number, in order to ensure the validity of the company155.

The technical documents contains the proposal in running the project from

the bidder that consist of: (i) technical proposal of the project, (ii) technical

development plan, (iii) operational and management system plan, (iv) investment

and operational financial plan, (v) project financial analysis, (vi) capability on

financial capacity, (vii) performance standard, (viii) tariff structures, (xi) public

relation concept, (x) recruitment and development of human resources, and (xi)

performance report. The financial documents on cover II contain the investment

plan in terms of financial projection of the bidder if selected as the winner of the

procurement process. The financial documents consist of156: (i) projection of capital

expenditure, (ii) projection of operational expenditure, (iii) projection of electricity

costs, (iv) projection of chemical materials costs, (v) projection of maintenance

costs, (vi) projection of costumers relation costs, (vii) projection of profit and loss,

(viii) projection of balance sheet, (ix) projection of project cash flow, (x) projection

of investor cash flows, and (xi) projection of debt payment schedule. The financial

154
Ministry of Public Works (MR 12/2010), loc.cit
155
Ibid.
156
Ibid.

61
document also contains of tariff calculation or other remuneration or rental fund or

other costs that have been calculated in accordance with the written guidelines of

the bidding documents157. The bidding documents are directly submitted by the

bidder to the procurement committee at the place, date and time that have been

determined on the bidding documents158.

3.2 Determination of Business Entity

Following the submission of the bidding documents from the bidders, the

procurement committee will determine the potential winner from the evaluation

result159. The procurement committee will make and convey the report to the GCA

to determine the business entity as the winner of the procurement160. The report

must contain with the suggestion on who the winner and the reserve winner will be,

along with the explanation and other information deemed necessary to be used as

considerations for the GCA in making the decision161. If the GCA does not agree

with the suggestion of the procurement committee, the GCA must conduct a

deliberation with the procurement committee in order to make a decision and

written in a minutes containing objections and agreements to be signed by both

GCA and procurement committee162.

The winner of the procurement process will be announced on the GCA’s

official announcement board and all the bidders will be informed by the

procurement committee at the latest of 2 (two) working days after the issuance of

157
Ibid.
158
Ibid.
159
Ibid.
160
Ibid.
161
Ibid.
162
Ibid.

62
the approval on the winner of the procurement163. If there are bidders who object

with the determination of the winning bidder, the objections shall be delivered at

the latest of 7 (seven) days as of the announcement date 164. The objection must be

attached with evidences on the occurrence of the irregularities165. The GCA issue

the Letter of Determination of the Winner of the Procurement of Business Entity

under the conditions: (i) no objections from the bidders; or (ii) the objections

received the GCA during the objection period are unsubstantiated or the objections

received have passed the objection period166.

3.3 Signatory of the Cooperation Agreement

The winning bidder must establish a business entity that will sign the

cooperation agreement no later than 6 (six) months after the issuance of the letter

of determination of the winner of the procurement of business entity by GCA167.

The cooperation agreement will be signed by both GCA and the business entity and

will be effective after the fulfillment of all conditions precedent168 determined in

the cooperation agreement169. In the event that all conditions precedent have been

fulfilled, the GCA will issue minutes on the effectivity of the cooperation

agreement170. The cooperation agreement in general must contain the following

matters171:

a. Identity of the parties;

163
Ibid.
164
Ibid.
165
Ibid.
166
Ibid.
167
Ibid.
168
Among the conditions precedents in the water supply system project are the issuance of
government guarantee and all the permits that the business entity requires to conduct its
business have been obtained.
169
Ministry of Public Works (MR 12/2010), op.cit., p. 38-40
170
Ibid.
171
Ibid.

63
b. Scope of Investment Activity
1) Legal basis as the basis of the cooperation
2) Definition to certain terms
3) Definition and Interpretations
4) The entire scope of cooperation detail
5) Scope of duties for each party
c. Conditions precedent
d. The Terms of Cooperation Agreement
1) Effective Date
2) The Terms
3) Extension
e. Performance Bond
f. Tariff and its Adjustment Mechanism
1) Tariff formulation
2) Tariff determination
3) Its adjustment mechanism
g. Rights and Obligations
h. Performance Standards
i. Investment Activity Plan, including its implementation stages
j. Restriction on assignment of equity participations to the business entity
k. Sanctions
l. Termination of the Cooperation
m. Reports
n. Settlement of Disputes
o. Supervision
p. Investment Return
q. Force Majeure Events
r. The Prevailing Laws, which means the Indonesian laws
s. Statements and Warranties
t. Audit
u. Transfer of Assets
v. Confidentiality
w. Amendment to agreement
x. Indemnify
y. Prevailing language
z. Miscellaneous

3.4 Stages of Implementation of Public Private Partnership in Tangerang

Regency Water Supply System Project
The cooperation between the Regent of Tangerang Regency and PT Aetra

Air Tangerang becomes the first implementation of public private partnership in the

64
development of water supply system following the issuance of PR 67/2005172. PT

Aetra Air Tangerang is the subsidiary of Acuatico Pte. Ltd., the winner bidder of

the procurement of business entity for a IDR 520,7 billion water supply system

project that covers the water services on five districts, namely Sepatan, Pasar

Kemis, Cikupa, Balaraja, and Jayanti173. The Tangerang public private partnership

in water supply system becomes one of the reliable project on the Masterplan for

Acceleration and Expansion of Indonesia’s Economic Development (Masterplan

Percepatan dan Perluasan Pembangunan Ekonomi Indonesia/ “MP3EI”)174.

The government of Tangerang established the procurement committee

called Tim Pengadaan Badan Usaha Swasta by a Tangerang Regency Decree

Number 342.4/Kep.263-Huk/2006175. The procurement committee began to

perform public consultation on September 22, 2006 followed by market sounding

by the government of Tangerang Regency two weeks after that on October 10,

2006176. The public consultation involved the society and the regional house of

representative of Tangerang Regency (DPRD Kab. Tangerang)177. The

prequalification invitation was announced on Media Indonesia and Jakarta Pos on

21 December 2007178. After the submission of PQ Document, the evaluation

172
BPPSPAM (BPPSPAM 4), “Wapres Budiono Resmikan IPA Sepatan KPS Air Minum Kab.
Tangerang” from
http://bppspam.com/index.php?option=com_content&view=article&id=659:wapres-budiono-
resmikan-ipa-sepatan-kps-air-minum-kab-tangerang&catid=50:kegiatan-bppspam (accessed
December 24, 2014)
173
KPS (Kemitraan Sarana dan Prasarana), Program 10 Juta Sambungan Air Minum, Sixth Edition,
Jakarta: Infrastructure Reform Sector Development Program (IDRP) Bappenas, 2008, p.13-14
174
BPPSPAM (BPPSPAM 5), “Air Siap Minum untuk Tangerang Berkualitas dan Berkelanjutan” from
http://www.bppspam.com/images/aetra.pdf (accessed December 24, 2014)
175
Ibid.
176
KPS (Kemitraan Sarana dan Prasaran), loc.cit
177
Ibid.
178
BPPSPAM 5, loc.cit.

65
occurred for 14 (fourteen) days and on 23 March 2007, the announcement of the

bidder who passed the prequalification was issued by a Tangerang Regent Decree

Number 690/23-KPS/2007179. The bidders who passed the prequalification were (1)

PT Tirta Bangun Pacibaja and Consortium, (2) Asian Utilities Pte.Ltd. and

Consortium, (3) Acuatico Pte.Ltd-Capitalink and Consortium, and (4) PT

Dextam180.

The submission of the bidding documents by the bidders who passed the

prequalification occurred on 9 July 2007181 and resulting Acuatico Pte.Ltd.-

Capitalink and consortium as the winner through Tangerang Regent Decree

Number 539/Kep.17-Huk/2008 on Determination of the Winner of the General

Tender in the Provision of Water Infrastructure in Sepatan, Pasar Kemis, Cikupa,

Balaraja and Jayanti District, Tangerang Regency. The signatory of the cooperation

agreement was signed on 4 August 2008 and effective as of 4 October 2009 as all

of the conditions precedent have been fulfilled182. The Tangerang Regency water

supply system project is a 25 years concession targeting 70.731 domestic

connections and 356 industrial connections with the capacity of 900

liters/second183.

179
Ibid.
180
Ibid.
181
Ibid.
182
Ibid.
183
Ibid.

66
 CHAPTER 4

THE EFFECTIVENESSES AND ISSUES IN THE

IMPLEMENTATION OF PUBLIC PRIVATE PARTNERSHIP

IN THE DEVELOPMENT OF WATER SUPPLY SYSTEM IN

INDONESIA

4.1 The Role and Responsibility of Government Contracting Agency

During the Cooperation Period
During the cooperation period the main roles and responsibilities of the

GCA are divided into two, covering the supervision and evaluation and

determination of tariff and its adjustment mechanism.

4.1.1 Supervision and Evaluation

The supervision and evaluation during the cooperation period aims to: (i)

ensure the operation of the project complies with the prevailing laws, (ii) ensure

that the result of the implementation is in line with the cooperation agreement,

particularly as necessary for the tariff adjustment, (iii) handle various changes or

problems that may arise, and (iv) anticipate the transfer asset to the government (if

any)184. Therefore the supervision and evaluation will be conducted in every stage

during the cooperation period starting from pre-construction, construction,

operation and the expiration of cooperation agreement185. In conducting the

supervision and evaluation, the GCA establishes a supervision and evaluation team

184
Coordinating Ministry for Economic Affairs, Kerjasama Pemerintah dan Swasta (KPS): “Panduan
Bagi Investor Dalam Investasi Di Bidang Infrastruktur”, Jakarta: Kementrian Koordinator Bidang
Perekonomian, 2010, p.28
185
Ibid.

67
(hereinafter shall be referred to as “Team”)186. The team will be established during

the transaction of cooperation project187. Prior to start conducting the supervision

and evaluation, the team must prepare the supervision and evaluation plan by

considering the following matters188:

a. partnership approach, means the team must not involve in the implementation

of cooperation project;

b. certainty on the regulation for the obligation of business entity in the

supervision on the provision of services;

c. the administration of cooperation agreement that contains the requirement for

administrative documents that must be fulfilled by GCA and business entity

during the implementation of cooperation agreement;

d. main duties of the supervision and evaluation on the implementation of

cooperation agreement based on the things that must be supervised during the

cooperation agreement; and

e. the roles and responsibilities of GCA and business entity.

During the pre-construction, the supervision and evaluation activities cover:

(i) the supervision and evaluation on the pre-construction as of the signatory of

cooperation agreement until the financial close has been obtained189. The team

supervises and evaluates the fulfillment of condition precedent by the business

entity and the preparation process of the terms of reference of environmental impact

186
Ministry of Public Works (MR/2010), op.cit., art 22
187
Ibid, attachment p.41-46
188
Ibid.
189
Ibid.

68
analysis (AMDAL)190. The business entity, at this stage of supervision and

evaluation, must submit documents to the GCA as follows191:

1) detailed implementation plan of cooperation project including the final

engineering design;

2) the entire copies of the agreements that have been signed by the business entity

and any other third party, covering the engineering procurement construction

contract (EPCC) or operation and maintenance contract;

3) administration reports;

4) reports on the work advanced, particularly in relation to the effort of the

business entity to achieve the financial close;

5) approval on the terms of reference for Andal, Amdal and Environmental

license; and

6) as built drawing.

The supervision and evaluation during the construction begins as of the start

of construction until the cooperation project operates commercially192. The Team

conducts the supervision and evaluation towards: (i) design of the new facility, (ii)

the consolidation between the new facility and the existing facilities, (iii) site access

and rights to deliver the issue related to the failure and inability of the business

entity to fulfill the cooperation agreement, (iv) the delay or change of the

construction schedule, (v) variation to the construction design (if required by GCA),

(vi) the readiness of the work/operation, (vii) supervision toward the suitability

190
Ibid.
191
Ibid.
192
Ibid.

69
between the technical plan and the enforcement of construction, (viii) property and

planning, (ix) labor issues, and (x) the risks borne by GCA. The business entity, at

this stage of supervision and evaluation, must submit to the GCA documents such

as administrative report, work advanced report (monthly report and annual report

and/or special report), performance report (monthly report and annual report and/or

special report) and financial year report193.

The Team begins the supervision and evaluation at the commercial

operation as of the cooperation project operates commercially until the expiration

of the cooperation agreement194. The Team conducts the supervision and evaluation

to the implementation of cooperation agreement and the fulfillment of the services

performance standards with respect to the cooperation agreement. The business

entity, at this stage of supervision and evaluation, must submit to the GCA

documents such as administrative report, work advanced report (monthly report and

annual report and/or special report), performance report (monthly report and annual

report and/or special report) and financial year report195.

At the end of cooperation agreement, the supervision and evaluation by the

Team must consider the transfer of assets to the government and the cooperation

agreement must specifically regulate the desired project condition upon the

expiration of the cooperation agreement and the cooperation project is transferred

to the GCA196. The Team then must value the asset by: (i) research and appraise all

the system components included in the cooperation agreement, (ii) calculate the

193
Ibid.
194
Ibid.
195
Ibid.
196
Ibid.

70
costs estimation necessary for the next routine and non-routine operation and

maintenance, (iii) value the availability of parts for the facilities and system which

is technically not feasible, (iv) conduct the evaluation on the availability of human

resources possessed by GCA, and (v) conduct the evaluation to the efficiency on

supervision and evaluation of the implementation during the cooperation period197.

Beside conducting asset valuation, the Team also (i) prepares and applies for

examination/testing permit towards all the assets of the cooperation project for the

benefit of transfer of asset, (ii) tests and examines the physical facilities and all the

equipment for the benefit of transfer of asset in accordance with the cooperation

agreement, and (iv) prepare the hand over minutes signed by GCA and business

entity198.

4.1.2 Determination of Tariff and Its Adjustment Mechanism

Despite the cooperation project will be run by the business entity during the

cooperation period, the tariff determination will be under the responsibility of the

relevant GCA in which for Tangerang Regency water supply system project would

be the Regent of Tangerang as stipulated on Decree of Tangerang Regency Number

539.2/Kep.477-Huk/2011 on Tariff Determination for Drinking Water Customers

to PT Aetra Air Tangerang. Meanwhile in Jakarta Province water supply system

project, the tariff is determined under Governor of DKI Jakarta Regulation Number

11 of 2007 on Drinking Water Automatic Tariff Adjustment Semester I, Year 2007.

It shows that the involvement of government in the cooperation project to ensure

197
Ibid.
198
Ibid.

71
that the water services provided by the business entity must be affordable for all

groups of people.

The determination of water tariff in Indonesia complies with Minister of

Home Affairs Regulation Number 23 of 2006 on Technical Guidelines and Manuals

For Drinking Water Tariff Regulation On Drinking Water Local Company (“MR

23/2006”). The MR 23/2006 stipulates that the tariff determination is based on 6

(six) principles, namely (i) affordability and justice, (ii) service quality, (iii) cost

recovery, (iv) water usage efficiency, (v) transparency and accountability, and (vi)

raw water protection199. The principle of affordability and justice means that the

water tariff must be affordable by the purchasing power of the society who has the

same income with the regional minimum wage and also the tariff is achieved

through the implementation of tariff differentiation with cross-subsidy between the

groups of customers200. The service quality principle means that the tariff is

determined by considering the balance of the service quality level received by the

customers201. The cost recovery principle means that the income PDAM (or the

business entity under cooperation with other party) must fulfill the cost recovery

principle to cover the basic cost added by reasonable profit level202. The water usage

efficiency principle will be achieved upon the implementation of progressive tariff

by charging the customers whose water consumptions exceed the drinking water

standard needs203. The transparency and accountability principle means the

199
Ministry of Home Affairs, Minister of Home Affairs Regulation Number 23 of 2006 on Technical
Guidelines and Manuals For Drinking Water Tariff Regulation On Drinking Water Local Company
(MR 23/2006), art 2
200
Ibid, art 3
201
Ibid, art 4
202
Ibid, art 5
203
Ibid, art 6

72
calculation and determination of tariff must be done transparently and accountably

by delivering clear information in relation to the calculation and determination of

tariff to the stakeholders and listening to the relevant aspirations in relation to the

calculation and determination of tariff from the stakeholders204. The protection to

raw water principle aims to protect and preserve the function of water sources for a

long period of time205.

Having considered the above principles, the tariff will be determined by the

head of local government on a local government decree based on the directors’

recommendation after receiving the approval from regulatory body206. The tariff

will be adjusted annually with indexation formula calculating (i) the annual

inflation index rate at the relevant year issued by the authorized government agency,

(ii) loan interest expenses, and/or (iii) other parameters according to the cooperation

agreement207. The tariff adjustment is proposed by the directors of PDAM to the

head of local government through the regulatory body. In the event where the head

of local government refuses the tariff adjustment proposed by the PDAM directors

which has been approved by the regulatory body based on the transparent and

accountable principle, the local government must do its best effort to subsidize the

shortcomings through regional budget (APBD) in accordance with the prevailing

laws208.

204
Ibid, art 7
205
Ibid, art 8.
206
Regulatory body means the regulatory body of PDAM. Ibid, art 21
207
Ibid, art 22
208
Ibid, art 24

73
4.1.3 The Government Roles and Responsibilities During the Cooperation
Period Linked to the State’s Control Right According to Article 33 of
1945 Constitution
As described earlier, the interpretation of state’s control right by

constitutional court interpreted the state’s control right as not in the sense of state

owning the natural resources, but in the sense that the state formulates the policy

(beleid), regulates (regelendaad), carries out the arrangement (bestuursdaad),

performs the management (beheersdaad), and conduct the supervision

(toezichthoundendaad)209 . Therefore the sense of the state’s control right toward

the important production branches and controlling many of the public needs, as well

as to natural resources, do not deny the possibility for a private partyy to participate,

to the extent that the five roles of the state/ government as stated at the above are

fulfilled and the participation of the private party will not eradicate these five roles

of the government.

During the implementation of public private partnership in the development

of water supply sytem in Indonesia, particularly in Tangerang Regency water

supply project, the government of Tangerang Regency has conducted its duties in

terms of formulating the policy (beleid) and regulating (regelendaad) throughout

the establishment of procurement committee prior to the cooperation and

determination tariff through the issuance of Regent Tangerang Regency Decrees.

The government of Tangerang Regency conducts the the management

(beheersdaad) of the water resources through a cooperation under concession

agreement with PT Aetra Air Tangerang. Lastly, in conducting the arrangement

(bestuursdaad) and supervision (toezichthoundendaad) the governement of

209
Ibid, p.19

74
Tangerang Regency established an independent regulatory body called Badan

Pengatur Penyediaan Proyek Penyediaan dan Pelayanan Air Minum Kabupaten

Tangerang, which reports to the Regent of Tangerang Regency, to conduct the

arrangement and supervision towards the implementation of concession agreement

in order to ensure the occurance of the service and supply of water that meets the

quality, quantity and continuity standards yet affordable to all people210.

It shows that the involvement of private party in the development of water

supply system thourgh the public private partnership scheme does not eradicate the

existance of state’s control right as interpreted by the Consititutional Court. Instead,

the private party helps the acceleration of the provision of water supply system in

Indonesia to achieve

4.2 The Effectiveness on the Involvement of Private Party in the

Development of Water Supply System
In general, the high level of water losses has become a serious concern in

many PDAMs in Indonesia causing many customers unable to enjoy 24 (twenty-

four) access of water in their place. The data from BPPSPAM as quoted on Water

Dialogues (2009) shows the water losses in Indonesia that year reached 39%,

experiencing a slightly increase compared to the year 2006 which was 38,61%. As

a first sample, the involvement of private party (PT Adhya Tirta Batam) who is

210
Aetra Air Tangerang, “Bupati Lantik Badan Pengatur Proyek Penyediaan Pelayanan Air Minum
Kabupaten Tangerang”, from http://www.aat.co.id/40-highlight-
Bupati+Tangerang+Lantik+Badan+Pengatur+Proyek+Penyediaan+dan+Pelayanan+Air+Minum+K
abupaten+Tangerang.html (accessed January 9, 2015)

75
under cooperation with PDAM Tirta Pakuan Bogor City shows the water losses

decreases nearly 10% in the range of 10 years211.

Picture 3. Level of Water Losses PDAM Tirta Pakuan vs. PT Adhya Tirta Batam
(Source: PDAM Tirta Pakuan and ATB)

The performance of PT Adhya Tirta Batam shows the tendency of

decreasing level from 2004 eventhough it is fluctuative as of 1998. The more

effective performnace is shown by PT Aetra Air Tangerang in which recorded on

one of the best water company with the least water losses in the world compared to

Singapore and Japan at 2,93% in 2014212. These two samples show the positive

contribution of the private party in the development of water supply system in

Indonesia.

211
The Water Dialogues Indonesia, Review for Private Sector Participation In Water and Sanitation
in Indonesia: With A Particular Emphasis On Review on Drinking Water Supply with and without
Public Private Partnership Scheme in Indonesia (Case Study: PDAM Tirta Pakuan Kota Bogor vs
PT Adhya Tirta Batam), Bandung: The Water Dialougues Indonesia, p.27
212
Kementerian Pekerjaan Umum, “BPPSPAM Minta PT Aetra Jakarta Terus Berinovasi” from
http://www.pu.go.id/berita_satminkal/go/1148/badan-pendukung-pengembangan-sistem-
penyediaan-air-minum/bppspam-minta-pt-aetra-jakarta-terus-berinovasi (accessed January 6,
2015)

76
 In addition to the effectiveness towards the participation of private party in

the development of water supply system in term of water losses, the Jakarta water

supply project which are run by Palyja and Aetra will not get the tariff increased

untill the end of the concession agreement between either Palyja or Aetra and PAM

Jaya DKI Jakarta which is 2022213. The water customers in Jakarta will be charged

the same tariff as stated on Governor Regulation Number 11 of 2007 on Automatic

Drinking Water Tariff Adjustment Semester I, Year 2007. It shows the commitment

of the private party to focus on the quality of water as well as its service and proves

that the private party is not only investing for profit seeking but also helping the

government to provide an affordable price of drinking water yet having a good

quality.

Lastly, the cooperation scheme with the private party through the public

private partnership also ensure that the private party that win the bidding process is

the one that offers the best quality service with the technology and proffesial

management readiness. In the Tangerang Regency water supply project, in

particular, where PT Aetra Air Tangerang offers a ready to drink water directly

from the water crane at home by using an up to date technology necessary in the

management of water supply system.

4.3 The Issues in the Implementation of Public Private Partnership in the

Development of Water Supply System
Considering the target of achieving 100% of Indonesian citizen to have

access on drinking water on 2019 is getting closer, with the current condition of

213
Nawasis, “Asyik Tarif Air Minum Tidak Naik Sampai 2022” from http://www.nawasis.com/air-
minum/asyik-tarif-air-minum-tidak-naik-sampai-2022 (accessed January 6, 2015)

77
only having around 67% according to Table 2, the government should have

intensified the development of water supply system in all possible legal ways

according to the provisions of law including through public private partnership. The

current condition, however, shows that several strategic water supply project in

Indonesias are lacks of clarity. According to Bahtera Novinda, there are three issues

on the implementation of public private partnership in Indonesia, which are214:

1. A very long and uncertain procurement process.

There are currently two strategic water supply system projects that have

already performed the bidding process namely Bandar Lampung projects

and Bogor Regency project. The Bandar Lampung poject has started its

bidding process in 2012, but according to Bahtera Novinda there hasn’t been

any follow-up information about the announcement of the bidding winner.

The government continues stalling for time with no reasons, whereas the

project of 500 ℓ/second are targeting to cover 42,000 household networks in

Bandar Lampung and the people of Bandar Lampung begin to suffer for

drinking water crisis as they still rely on the limited well water 215. As for

Bogor Regency water project, despite having determined the winning bidder

the GCA has not yet performed any negotiation with the business entity in

order to start working on the development of water supply system. While in

the range of 1987 to 2014, PDAM Tirta Kahuripan Bogor Regency can only

214
Based on the Interview with Bahtera Novinda, SH, a legal specialist at PT Acuatico Air Indonesia
a company engaging in water infrastructure through public private partnership scheme, on
December 30, 2014
215
Retno Kusuma Putri, “Warga Kesulitan Air Bersih Bisa Lapor BPBD Bandar Lampung”, from
http://www.duajurai.com/bandar-lampung/warga-kesulitan-air-bersih-bisa-lapor-bpbd-bandar-
lampung/ (accessed January 7, 2015)

78
 cover 16,24% of its service area which means approximately 83,76% of

people in that PDAM coverage area who do not have access to drinking

water.

Other than the two water supply projects above, one mega project which is

Umbulan water supply project with capacity of 4000 ℓ/second amd targeting

320.000 household networks to people in several city in East Java. The

project that has begin in 2012, however, along with Bandar Lampung and

Bogor Regency is lack of clarity. Eventhough the head of procurement

committee once said that the winning bidder will be determined in 2012216,

the winner has not been determined yet up to this day.

2. The absence of government guarantee on water supply system project.

According to Bahtera Novinda, the existence of government guarantee is

very important to provide protection to the private party as the investor for

the impact of actions or absence of actions taken by the government that

results financial losses in the project, such as delay in permits, licenses,

amendments to the prevailing laws and regulations, the absence of tariff

adjustment and other risks beared or allocated to the government according

to the cooperation agreement. Therefore, the government guarantee holds a

crucial role for the private party in the event where the the above events

occur. As of now, the Tangerang Regency water supply system is performed

without the existence of government guarantee. The provision of Article 15

of MR 12/2010 regulates that the existence of government guarantee is

216
Bisnis Indonesia, “Pemenang Tender Spam Umbulan Diumumkan Mei“, from
http://industri.bisnis.com/read/20120104/45/58740/pemenang-tender-spam-umbulan-
diumumkan-mei (accessed January 7, 2015)

79
 optional which means the government is not obliged to provide the

government guarantee to the cooperation project.

3. The project being offered to private party is not feasible

The last issues that may hamper the implementation of public private

parntership in the development of water supply sytem is the project that the

GCA offers to the private party is not feasible. It means the involvement of

private party will result nothing but big losses due to the uncertain condition

from local PDAM. This issue appears on Lamongan Regency water supply

system project with a targeted capacity of 200 ℓ/second in which there are

no guarantee on the exisiting of customers upon the completion of

construction of the water treatment plant.

The existence of these issues ultimately will trigger to result the investors to

pull their participation to the project and eventually delay the execution of the water

supply project. If each local governments as the GCA is commitment to the goal of

achieving the 100% goals to provide water to all people in Indonesia, they should

learn from the Tangerang Regency water supply sytem project that has provided

satisfying results.

80
 CHAPTER 5

CLOSING

5.1 Conclusion

The participation of private party in the development of water supply system

has begun in 1998, but the first implementation of public private partenrship in the

development of water supply system occured in 2008 under a concession agreement

between local government of Tangerang Regency and PT Aetra Air Tangerang.

This first public private partnership implementation was using Presidential

Regulation Number 67 of 2005 on Cooperation between the Government and the

Business Entities in the Provision of Infrastructure which became the general

guideline for eight public private partnership projects which are: (i) transportation

(sea, river or lake harbor, airports, railways and train station), (ii) road (toll road

and toll bridge), (iii) irrigation (raw water carrier channel, (iv) drinking water

(building of raw water intake point, transmission lines, distribution networks, water

treatment plant), (v) waste water (waste water treatment plant, collection networks

and main networks) as well as waste facilities (transport and place for disposal),

(vi) telecommunication (telecommunication networks), (vii) electricity (plants,

transmission and electricity distribution) and (viii) oil and gas (processing, storage,

transportation, transmission or oil and gas distributions).

Following the first implementation, the government issues a lex specialis

regulation as guideline for the cooperation to each type of infrastructures under a

minister of public works regulation. The development of water supply system

through public private partnership shall comply to the Minister of Public Works

81
Regulation Number 12/PRT/M/2010 on Guidelines on Business Cooperation for

the Development of Water Supply System.

Referring to the research problem followed by the description of theories

and based on the legal analysis which have been explained in this research

concerning the implementation of public private partnership in the development of

water supply system, the author argues that the involvement of private party in the

development of water supply system through public private partnership has been in

line with the prevailing laws and does not eradicate and interfere the state’s control

right as commanded by the Article 33 paragraph (3) of 1945 Constitution.

The involvement of private party through public private partnership

definitely will assist the government to achive the RPJMN target to ensure 100%

of Indonesian citizen to have access to clean water, on the circumstance that the

government also improve the performance of PDAM in the region which do not

offer the cooperation with private party. During its implementation, however, there

are obstacles that delay the implementation of public private partnership which

eventually may affect the achivement of such target, which are (i) the project takes

too much time and the uncertainty during the procurement process, (ii) the absence

of government guarantee in water supply system project (in Tangerang Regency

project) and (iii) the project being offered is not feasible.

82
5.2 Suggestion

Based on the above explanation, the author will provide some suggestions

in relation to the implementation of public private partnership in the development

of water supply sytem as follows:

1. Central government

 To continue providing the assitance necessary by the local government

in the development of water supply sytem through BPPSPAM in order

to ensure the implementation of public private partnership in the

development of water supply system complies with the prevailing laws

and does not eradicate the state’s control right as commanded in Article

33 of 1945 Constitution.

 To ensure the existance of government guarantee in the water supply

project in order to provide protection to private party towards the risks

arising from any government negligence during the cooperation period.

2. Local government

 To conduct comparative study with government of Tangerang Regency

in order to adopt the good points and learn from any errors arising during

the procurement process in Tangerang Regency water supply system

project.

 To ensure the occurance of transparancy and openness during the

process of the procurement of business entity.

 To do its best effort to conduct the development of water supply system

with its own local potential prior to offering the project to the private

party.

83
  To increase the participation of the society in the development of water

supply sytem as regulated by the related laws.

 To also involve the society as the water customers to monitor the

performance of the private party in the development of water supply

system.

3. Business Entity

 To compete in healty with a competitive spirit in the process of

procurement of business entity.

 To do its best effort in providing the best water service with affordable

price to the water customers in the cooperation region.

 To comply with all related prevailing laws during the cooperation

period, particularly in the water quality standard.

4. Society

 To actively participate in the development of water supply system based

on the provisions of the prevailing laws.

 To actively participate in monitoring the performance of the private

party in the development of water supply system

84
 BIBLIOGRAPHY

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91