Spring 2005

When Water and Political Power Intersect

A journalist probes the story of water privatization in Jakarta, Indonesia.

By Andreas Harsono
When I got an assignment in late 2001 to report on the privatization of Jakarta's water company, I knew that it was going to be difficult, requiring a lot of research and interviews. But what I could not have imagined then is that I'd be witness to the deterioration of Indonesia's two largest companies, which were closely related to Indonesian strongman General Suharto.

As I began my reporting, Sigit Harjojudanto, Suharto's eldest son, who collaborated with the British-German firm RWE Thames Water to privatize Jakarta's PAM Jaya water company, declined to respond to my faxed messages and phone calls. It turned out that his office was almost deserted. Office workers told me that he rarely visited the office after his father's forced resignation from the presidency in May 1998.

Harjojudanto's advisor, Fachry Thaib, once a flamboyant businessman, suddenly shunned publicity. Harjojudanto's other business associates, once involved in many sport or social activities during the Suharto era, were willing to talk but for background only. “We have seen the turn of our fate, from the hunter to the hunted,” said Iwa Kartiwa, an aide to Anthony Salim, the CEO of the then widely diversified Salim Group, which worked with the French Suez to privatize the other half of PAM Jaya.

At the same time I was witness to labor unions in the post-Suharto period transforming themselves quickly from lame ducks into effective if not rude organizations. They mobilized strikes and organized campaigns frequently to protest both RWE Thames Water and Suez. “It was unexpected during the Suharto period. Now we're being sought by many political parties,” said Taufik Sandjaja, a leader of the Indonesian Drinking Water Labor Union.

They also actively contacted the media with press releases, documents or other statistical reports. Some unionists even took time to retrieve some original papers to help me understand the water privatization.

Jakarta's Water Story Begins


Jakarta's water privatization story began in June 1991, when the World Bank agreed to lend PAM Jaya $92 million (U.S. dollars) for infrastructure improvements. The loan was matched by one from the Japan-based Overseas Economic Cooperation Fund to build a water purification plant in Pulogadung, in eastern Jakarta. The loans were very much needed because PAM Jaya was practically managing a colonial-inherited water infrastructure that had been constructed in the 1920's.

The World Bank soon encouraged the Indonesian government to privatize its utilities, according to World Bank loan documents. The World Bank expected that the loans would facilitate privatization by bolstering the water and sewage infrastructure and making the waterworks a more attractive investment. Private companies accordingly made their moves to take control of PAM Jaya.

The London-based Thames Water Overseas Ltd. was first to act in 1993. It formed an alliance with Harjojudanto, a notorious gambler among Jakarta's elite circle with no experience in the water business. Thames set up an Indonesian subsidiary and gave him a 20 percent interest. For Thames, forging an alliance with a Suharto was a question of realpolitik. “At the time, any company dealing with Indonesia would have to deal with almost some element of the Suharto family because of the way the government was set up,” said Peter Spillett, head of environment, quality and sustainability for Thames.

In Paris, Suez worried that Thames would snap up the entire water concession. To pave its inside track, Suez selected Salim Group, then the largest conglomeration in Indonesia whose founder, Sudono Salim, was a close associate to Suharto since the 1950's. “Access to politics is essential. The water business is always political,” Bernard Lafrogne, a Suez representative in Jakarta, told me.

These strong partnerships soon produced results. In 1995, President Suharto ordered his public works minister, Radinal Moochtar, to privatize Jakarta's water. Under official orders, the city was divided in half and split between Thames and Suez. The contract was signed in June 1997. It was a 25-year contract to distribute and to sell water in Jakarta.

A month later, the unanticipated Asian monetary crisis began to bite Thailand's baht and soon Indonesia's rupiah. Staple food prices went up. The rupiah rate to the U.S. dollar went from 2,300 in July 1997 to more than 14,000 in February 1998. Anti-Suharto riots broke out throughout Indonesia. His cronies tried to deflect the public unrest by blaming the Chinese minority. In May 1998, rioters burned many Chinese- owned buildings and killed more than 2,500 people, mostly trapped in burned structures, in Jakarta. Suharto was finally forced to step down after staying in power since 1965.

Using company documents and information gathered from interviews with key officials, I was able to piece together the story of private meetings that took place in those dangerous days. PAM Jaya officials feared that the Jakarta water network might be poisoned. Others said even cholera could break out in the capital, affecting the lives of millions of people living in Jakarta.

Most Thames and Suez executives fled Jakarta, prompting former executives of PAM Jaya to take over the water operation. PAM Jaya president, Rama Boedi, who had just lost control of the company nearly one year earlier, invited Kartiwa and Fachry to his office on May 23, 1998 to tell them the government was canceling the contract and taking back the water. “The situation was very tense,” said Efendy Napitupulu, a PAM Jaya manager who was at the meeting. Armed men openly displayed their guns in the meeting room. Suez executive Lafrogne, who was married to a woman from Jakarta and was the only foreign boss to remain in Jakarta, also attended the meeting, with an escort of police officers.

PAM Jaya officials correctly claimed the privatization was totally illegal and rife with corruption. They pressed the company officials to sign the water system back to the public. Boedi warned them he couldn't control the anti-Suharto forces, which could easily turn against the two international companies. Finally, they agreed to sign a document officially handing the water operation back to PAM Jaya.

When the companies learned of the cancellations, their British and French executives raced back to Jakarta and threatened to sue the government if PAM Jaya did not honor the contract. A Suez internal 100-page report that Lafrogne gave me called the cancellation a “coup d'etat.” But they also realized they'd lost their most important political support with Suharto no longer in power. Their partners had suddenly become liabilities. By finding the contents of a letter that the consortia sent to President B.J. Habibie, Suharto's successor, I was able to learn that they had decided to severe their ties with the Salim Group and Harjojudanto. They also asked their respective governments to lobby the Habibie government.

The consortia also paid dearly but declined to reveal the numbers. I calculated myself that Sigit Harjojudanto's share was valued at about $700,000 while the Salim Group's 60 percent share was valued at around $3.2 million. The Habibie government was concerned that a fight with two major multinationals would scare off foreign investment. In return, Thames and Suez agreed to renegotiate the contracts.

Finally, on October 22, 2001, a new contract was signed between PAM Jaya and the consortia. Both Thames and Suez established new companies: PT Thames PAM Jaya and PT PAM Lyonnaise Jaya. They are 95 percent owned by their parent companies in London and Paris. The remaining five percent were given to subcontractors of the international companies. Under the new contract—much fairer when compared with the former ones—the multinational companies agreed to give PAM Jaya joint control of the bank accounts. The companies also accepted the establishment of a regulatory body that would independently recommend new water rates, monitor the Jakarta waterworks, and mediate disputes between PAM Jaya and the consortia.

Holding the Companies Accountable

While the vast majority of new water customers were in rich, middle-class and industrial areas, Lafrogne said that Suez was committed to providing water also to the poor. Suez had increased connections for the relatively poor neighborhoods in its districts by 260 percent, he said, from around 9,000 to almost 35,000 connections. But the consortia have not met many of the projections outlined in the original contracts. By 2001 the two companies were to have invested 732 billion rupiah, or about $318 million at the 1997 exchange rate. The consortia had, in fact, invested around 850 billion rupiah by 2001 but, because of the currency depreciation, that was worth only $100 million.

The Thames and Suez executives blamed their missed connection targets on the economic crisis, whose devaluations led to higher prices for imported equipment. Lafrogne correctly blamed foot-dragging by local employees who refused to cooperate with their foreign bosses. He also claimed the government had refused to grant the extent of rate increases needed to finance improvements to the system.

Atjeng Sastrawidjaja, a Jakarta city auditor, wrote in an audit report that most of the consortia's financial problems were of their own making and grew out of excessively high operating costs. The companies rented new offices in two separate buildings in Jakarta's business district rather than using PAM Jaya assets. In addition, salaries of the international executives, who live in the city's wealthiest neighborhoods, are higher than those paid to PAM Jaya officials. Their top executives—numbering from 15 to 20 in each company—are paid between $100,000 and $200,000 annually, which is a huge sum in Jakarta. PAM Jaya top executives like Rama Boedi received the equivalent of no more than $25,000, according to some audit documents and several sources.

Andrew McLernon, an urban development consultant for the World Bank, told me the project came into being with “birth defects”—a lack of transparency, the failure to raise rates prior to the privatization, and the lack, initially, of an independent regulator.

RELATED ARTICLE
"Reporting on Water as a Global Story"
- William Marsden
The work I did on this story for The Water Barons book project proved to be a remarkable assignment—from the reporting I did to watching the project about water privatization issues in many countries come together under the editing of William Marsden. Some journalists asked me how I had got some sensitive documents, such as a Suharto memo or cabinet meeting minutes—papers that were still considered confidential, if not classified. I'd like to say that almost everything is leaked in Jakarta, as long as you have a whole network of secretaries, chauffeurs, unionists and sometimes top executives themselves. In the course of my work I was able to collect documents, contracts, photocopies, clippings, as thick as 1.5 meters.

I tried hard to use not a single anonymous source. A number of times I patiently briefed my sources about what being an anonymous source meant to them and to readers. I told them that anonymity means that readers have difficulties in measuring to what extent they should believe or disbelieve their statement. Or at least, the readers are left in the dark about an anonymous statement. I also told them that anonymous sources tend to be less responsible with their remarks than those whose names are published. Interestingly, most of my sources, who initially asked to talk off the record, agreed—after our conversation about this—that they did not deserve such a status and talked on the record. Only Harjojudanto, two of his cronies, and Anthony Salim declined to do interviews.

This water project not only improved cf my understanding of how journalists should work but also helped my sources to understand this as well. And it was a wonderful surprise after the book was published, when the International Consortium of Investigative Journalists, the Washington, D.C. group that sponsored this water project, sent me an e-mail letting me know that the reporters who had worked on it had won an award from the Investigative Reporters and Editors.

Andreas Harsono, a 2000 Nieman Fellow, is a member of the International Consortium of Investigative Journalists. He is based in Jakarta, writing a book on ethnic and religious violence in Indonesia to be published in 2006.

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