Philip Jacobson – As the central government pushes for the redrawing of numerous natural resource contracts with foreign companies, mostly in the oil, gas and mining sectors, another renegotiation effort is under way involving perhaps the most crucial resource of all: water.

Responding to public outcry against the third-highest charge in Asia and a service perceived as unapologetically poor, Jakarta Governor Fauzi Bowo in 2008 started refusing to allow any more hikes in water rates.

In Jakarta, where treatment and distribution of the city's piped water supply has been run by two foreign companies since the final years of then-President Suharto regime, public water authority PAM Jaya has aggressively sought significant changes to the deals it has with those private operators: PAM Lyonnaise Jaya (Palyja), a subsidiary of France-based utility company Suez Environment, and Aetra Air Jakarta, which is owned by a consortium based in Singapore.

PAM Jaya's efforts to renegotiate those deals, however, have elicited two different responses from the operators. While Aetra, which manages the city's eastern half, has largely conceded to PAM Jaya's demands, Palyja, which runs the western half, has taken a harder line.

The main point on which the companies differ concerns the water tariff. Aetra has agreed to cap the charge for the remainder of the contract, which ends in 2022. However, Palyja is adamant that it be raised, or that the government subsidize the system, which it always has been unwilling to do.

Looming over the situation is a huge, steadily mounting debt owed by PAM Jaya to the operators and the fact that Mauritz Napitupulu, who had served as PAM Jaya's president director since April 2010 and key negotiator in the new deal, was removed from his position on Thursday.

At last count, that debt stood at Rp 635 billion ($69.9 million), with more owed to Palyja, whose territory is more profitable, than Aetra. At the current rate, Mauritz has said, by 2022 the shortfall would reach Rp 18.2 trillion.

Why Mauritz was removed was not completely clear; neither was the effect his dismissal would have on the renegotiations.

Hasan Basri Saleh, an assistant to Fauzi, said Mauritz had reached retirement age and the decision was business as usual. "We must continue with the same policy," PAM Jaya technical director Sri Widayanto Kaderi, Mauritz's replacement, told the Jakarta Globe.

What is clear is that talks between PAM Jaya and Palyja have reached a stalemate. Meanwhile, public pressure is mounting and the shortfall continues to grow.

A different game

"The big problem is mismanagement," Mauritz told the Globe in December, before he was dismissed. "The operators cannot control the organization, and they want to compensate by increasing the tariff."

Although Aetra has agreed to lower the water charge and drastically curtail the indexation mechanism that feeds its growth, Palyja sees things differently.

Not only does the deal represent a one-sided capitulation on Aetra's part, claims Philippe Folliasson, Palyja's president director, it just won't work. "If people think it will work, then fine," Folliasson said. "We'll see who is right."

Aetra and PAM Jaya have not signed a formal contract, only a memorandum of understanding. At the time of Mauritz's dismissal, they had yet to agree on certain details, such as issues concerning transparency and procurement.

"We are working now on the reality," said Mohamad Selim, Aetra's president director. "At the time, we were working on imagination."

PAM Jaya pays the operators based not on actual revenue collected from customers but on volume of water supplied and billed. The tariff and charge are thus said to be "de-linked" in such a way that cost-recovery risks are completely borne by PAM Jaya.

A prime example, Mauritz said, has to do with tariff categories. The tariff is actually cross-subsidized, meaning the biggest houses and businesses pay the highest rates while the poor pay less than the cost of providing the service. The operators, however, charge PAM Jaya one set fee per cubic meter of water no matter who buys it.

"I have seen it in the field. This building, charged only Rp 1,050?" Mauritz said, referring to the lowest tariff category. "But it is a big building. How come?" Also, he said, a bill collector might take a payment at one tariff category but log it at a lower one and keep the difference.

Another of Mauritz's gripes concerned non-revenue water, which is water that has been produced but is "lost" before reaching the customer, usually through leaks in the pipes or illegal connections. He said the operators had done a poor job cutting down on illegal connections, failing to adequately work with law enforcement and penalize people for breaking the law. "They want to solve the problem by increasing the tariff," Mauritz said.

Under the new deal, that wouldn't happen, and Aetra would have no choice but to raise revenues by being more efficient. The company hopes it can sell more water by reducing NRW and cracking down on deep wells, which are often used beyond their legal limit and are controversial because they contribute to groundwater depletion.

The goal, Mauritz and Selim said, was to eliminate the shortfall by 2016. To do that, Selim said that Aetra must increase its sales by 6 percent per year. Making that happen would require the government's help to educate people and enforce the law about deep wells and stealing water, he added.

"The driver of this master plan is the conversion of well users and the reduction of NRW," Selim said. "That's the key. Otherwise, this new rebalancing contract will fail."

Follow the money

For different reasons, Folliasson told the Globe, Palyja cannot agree to something along the lines of what Aetra has put together.

"Our perspective is that it just doesn't add up," he said. "This idea that with no tariff or subsidy you can make a miracle, it is a fantasy."

The only way the operators could sell more water, Folliasson said, was if the government made a project to increase supply, which is limited because the city relies on the filthy West Tarum Canal – Folliasson called it a "ditch" – for more than 80 percent of its water.

"I don't think that the operator can take 100 percent of the burden of making the system work," he said. "It has to be a mutual effort."

For critics in government and civil society, however, the system already heavily favors the operators, providing for them unfair profits.

In 2009 and 2010, Palyja logged a net income of Rp 222 billion and Rp 216 billion, respectively, according to the company's income statement.

Since 1998, Palyja's total net income has amounted to more than Rp 1 trillion, which is a hefty return on its initial investment of Rp 200 billion.

Aetra in 2009 and 2010 logged profits of Rp 142 billion and Rp 140 billion, respectively. The company's overall figure was Rp 305.5 billion.

However, as Folliasson is quick to point out, profit is not cash. A significant part of Palyja's net income comes from accounts receivables, which is money that PAM Jaya owes Palyja but has yet to pay for lack of funds. Mauritz was more direct. "If it is not good business, give it to PAM," he said. "Give it back!"

Although the contract has been tweaked at times, some say it should be scrapped altogether. "How can we continue to do something that is illegal that costs the city so much?" said Reza, a member of the People's Coalition for Water Rights (Kruha).

He cited the 1945 Constitution, which states that "water... shall be controlled by the state and used for the maximum prosperity of the people," as proof that the contract should never have been allowed.

Reza is not alone in calling for an end to privatization. In major cities all across the world, the notion that management of the public's water can be run by private interests has stirred heated debates.

Proponents argue that privatization can bring much-needed investment and spur efficiency. Critics say the companies put the bottom line above all else, which is disastrous for something so central to the public good.

Mauritz, Reza said, was the first PAM Jaya director to acknowledge any credence behind Kruha's position that the contract should be terminated, not merely revise d. "Now we are a little bit pessimistic that this will end well," Reza said, referring to the director's sudden removal.