Topic Area: Water Allocation
Geographic Area: Jakarta, Indonesia
Focal Question: What affect does the liberalization of a water market have on the performance of that market?
(1) Crane, Randall, "Water Markets, Water Reform, and the Urban Poor: Results from Jakarta, Indonesia", World Development, Vol. 22, No. 1, (1994). P. 71-83.
Reviewer: Peter Bingenheimer, Colby College '96

In Jakarta, Indonesia, water has traditionally been supplied by three sources: private connections to the municipal system, standpipes (or hydrants), and vendors. Only 20% of the 8 million people in Jakarta live in homes that are connected to the municipal water system. The remaining 6.4 million people must buy their water from neighborhood standpipes or door-to-door vendors at a significantly inflated price. As a result, the impoverished people of Jakarta have had limited access to water. Distances between standpipes and the way in which they are controlled allowed for this situation to occur.

In order to address these problems, legislation was passed in 1990 which allowed people connected to the municipal water system to resell their water. This measure was intended to increase competition in the water market, thus increasing the water supply and putting downward pressure on water prices. This was a no-cost alternative to increasing the number of standpipes throughout the city, which was the policy they had previously been following.

The potential benefits of this policy come in two forms: Direct benefits, which includes the time and money saved by consumers who purchased water from resellers as well as the benefits those consumers experience due to increased consumption; and indirect benefits, which includes the money saved by standpipe and vendor customers due to decreases in price.

One year after this policy was implemented, a survey was conducted to assess its effectiveness. Though the effectiveness of this policy, like water prices, varied from place to place, the survey addressed here was performed in the area of the city with the worst groundwater - North Jakarta. It was found that only 10% of the sample households bought water from resellers. The price of water was $2.62/m3 for vendor customers, $1.26/m3 for standpipe customers, $1.08/m3 for household resales customers, and $0.18/m3 for connected households. The price of standpipe and vendor water hadn't fallen significantly as of 1991. This data indicates that the legislation wasn't as effective as one might have hoped or suspected. Those who switched to resold water, however, experienced significant benefits.

As would be expected, individuals who live close to households with connections have experienced the greatest benefits resulting from this project. Clearly this is the case because those who live closer to household connections use less time in transporting that water, so the delivered cost of that water is, in effect, lower. Only 1.4% of families that live more than 100 meters from a connected household switched to resold water, while 19% of those that live within 50 meters of connected households switched. Those who switched found that the price of water was lower from resellers, as shown above. In addition, those who switched from vendor water to resold water found that their water consumption increased while their monthly water cost fell. The direct benefits were estimated to be 59% of the household water bill for ex-vendor customers and 26% of the household water bill for ex-hydrant customers. However, as implied above, the indirect benefits of this deregulation have been minimal. Why, then, haven't more household switched to resold water?

There are a three main reasons for this. First, imperfect information and limited education has led to uncertainty about the legality of water resales. Second, increased-block tariffs have led many connected households to refrain from reselling water. Third, the time it takes to transport the water from resellers may outweigh the benefits one might receive from resold water.

The 1990 deregulation is a limited, short term solution to the problem of water allocation in Jakarta. It is an attempt to correct both market and policy failures which exist in the water allocation system of Jakarta. The lack of competition in the water market has led to inefficient and inequitable allocations of water, while government policies have reinforced this situation. The policies referred to here include the way in which standpipe control is distributed and the lack of action taken by the Jakartan government to address the water allocation problem more immediately.

With regard to sustainability, this program might at first seem detrimental because it causes increased water consumption. However, the low price of municipal water implies that water is not a particularly scarce resource in Jakarta (assuming the marginal user cost of water is included in the price and is appropriately valued). It is the lack of competition which leads to underconsumption and overpricing. A competition-enhancing policy thus stands to improve the quality of life for the poor without infringing on the sustainability of the Jakarta water supply. And, as poverty, economic growth, and sustainability are closely linked, such a policy stands to improve the overall economy of Jakarta and support the drive towards sustainability.

One might thus suggest that the Jakarta government take further steps to improve the availability of water within the city. Indeed, they are currently trying to connect all houses to the municipal water system, but many households cannot afford the cost of connection or don't consider connection because they think of the need for water only on a day to day basis. Thus, increased education and information is one important step towards an efficient, sustainable allocation of water. In addition, creative policies could potentially lead to a more equitable and efficient distribution of water.

As one example, Randall Crane writes, "Alternative strategies should be explored, including folding the connection fee into the water bill somehow...." This can be done by connecting households to the municipal system and charging them the price they would have paid for water if they weren't connected. They would pay that price until the cost of installation was covered, at which point the price of their water would fall to the normal level. This is a policy which has been successfully applied in some energy markets, and should possibly be attempted in the context of the Jakarta water market.

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