Water and politics in the fall of Suharto

Introduction

JAKARTA, Indonesia — When Indonesian dictator Suharto resigned on May 21, 1998, the city of Jakarta was a war zone. More than 2,500 people had died in clashes with Suharto’s soldiers and in fires that swept the riot-torn city.

Among the thousands of foreigners who fled the chaos were about 30 executives and family members of two multinational utility companies, Thames Water and Suez Lyonnaise des Eaux. Just four months earlier, the companies had taken control of Jakarta’s waterworks by forming partnerships with Suharto’s children and cronies.

Both Thames and Suez executives abandoned their posh offices in the central business district, whose streets were strewn with broken glass and cloaked with fire and smoke, and boarded chartered jets for Singapore.

Indonesian water officials said they left no clear chain of command and only three days worth of chemicals required to clean the city’s drinking water. (The companies said their executives left for only several days and that there were enough treatment chemicals for 20 days.)

Djoni Heryanto, who ran Jakarta’s largest water treatment plant, said the riots had halted delivery of crucial chemicals, such as chlorine and aluminum sulphate, from a plant 500 miles away. The threat of waterborne illness suddenly posed a danger for the teetering city of 7.5 million people. The government officials who had managed the waterworks before privatization were, de facto, back in charge.

Heryanto placed a series of panicked calls to Rama Boedi, then-president of the public water authority, Perusahaan Air Minum Jakarta Raya (PAM Jaya), which was nominally responsible for overseeing the privatized system.

“Should I stop the water supply?” Heryanto asked.

Boedi, an environmental engineer who had been sleeping in his office throughout the riots, cast about for an answer. He was shocked and disgusted at the departure of the Thames and Suez executives. “They did not even telephone me,” he recalled later. “We had no idea the situation was so critical. The companies didn’t tell us anything. The trouble was, since the companies had taken over, I had no legal authority.”

A sweetheart deal

The privatization of Jakarta’s water is the story of powerful multinationals that deftly used the World Bank and a compliant dictatorship to grab control of a major city’s waterworks. In alliance with the Suharto family and Suharto cronies, Thames and Suez won favorable concessions without public consultation or bidding. When the riots spread, the companies’ executives fled, according to Indonesian waterworks officials, exposing millions of Jakarta residents to a potential catastrophe. Eventually they returned and renegotiated their contracts under somewhat less generous terms. As for the ostensible reason for privatization — bringing water to the poor and improving the finances of the waterworks — the companies’ record is mixed.

Jakarta’s water privatization story began in June 1991, when the World Bank agreed to lend the city’s water utility, PAM Jaya, $92 million 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.

Both organizations were encouraging Indonesia at the time 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, making the waterworks a more attractive investment. The World Bank also appointed consultants to advise PAM Jaya on the privatization.

With the World Bank loans in place, the private companies quickly made their move to take control of Jakarta’s water system.

Thames Water Overseas Ltd. was first on the scene in 1993. The London-based company formed an alliance with Suharto’s son Sigit Harjojudanto, a notorious gambler with no experience in the water business. Thames formed a local company and gave Sigit a 20-percent interest.

“Every multinational company cooperated with the Suharto cronies. You name it, electricity, oil, water, almost every business, it was an oligarchy of corruption. They bought the political protection,” said Teten Masduki of Indonesia Corruption Watch. The Suharto children got shares “without putting up any money, just their political influence.”

For Thames, forging an alliance with Suharto was simply 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,” Peter Spillett, head of environment, quality and sustainability for Thames, told ICIJ. “It was made quite transparent. But I can see where third-party criticism can come from in these places.”

In Paris, Suez watched Thames’ maneuvers with alarm. Suez had operated in Indonesia since the mid 1980s, building small water treatment plants. It worried that Thames would snap up the entire water concession.

Suez hired Bernard Lafrogne, a Vietnam-born French engineer who had worked for a World Bank project in Indonesia and as a consultant for PAM Jaya. Lafrogne would be Suez’s point man in the move to privatize Jakarta’s water.

To pave its inside track, Suez selected Anthony Salim, a Suharto crony and CEO of one of Indonesia’s largest companies, the Salim Group, whose interests include banking, food and cement. Salim had been a partner with Suez in the construction of a water treatment plant.

“Access to politics is essential,” Lafrogne told ICIJ in an interview. “The water business is always political.”

Lafrogne said Salim was initially hesitant about fronting for Suez because he wanted to avoid alienating Suharto by competing with one of his children’s businesses. So Suez sent a proposal to Public Works Minister Radinal Moochtar to divide Jakarta in half, with each company getting an equal chunk of the pie.

“Jakarta is big enough for two companies,” Lafrogne said, citing examples like Manila and Paris, whose water services were also operated by two companies.

Both companies regarded Jakarta as a lucrative prize and ripe for privatization. With the help of World Bank loans, Suharto had since the 1970s opened Indonesia’s huge markets and vast natural resources to foreign companies. The economy was growing 7 percent a year. Jakarta had become a modern city with glittering office buildings and American-style fast food restaurants jammed together with international fashion houses and boutiques. The poor, meanwhile, continued to live in the surrounding slums, usually without electricity or running water.

Asked why World Bank officials would encourage privatization in an atmosphere of pervasive official corruption, Keshav Varma, the bank’s Asia Pacific region director said: “I wouldn’t want to comment on the times.” But he added: “You cannot expect the private sector not to be in a mess in a messy environment.”

Jakarta’s waterworks, originally built by Dutch colonialists in 1928, had not kept pace with the city’s rapid growth. Indonesia, with its abundant rainfall, has about 6 percent of the world’s fresh water resources. Yet, in 1991, only 45 percent of Jakarta’s residents had piped water. Local newspapers reported incidents of people finding worms, sand or even needles in Jakarta’s piped water, which sometimes left a brown stain or a thin layer of mud in washbasins. Many Jakartans bought water from “tukang pikul” — vendors selling water in jerry cans. The rich often dug their own deep wells.

Thames and Suez were offering to modernize and expand the system. Their lobbying paid off on June 12, 1995, when President Suharto summoned Public Works Minister Moochtar and told him to set up a team to privatize Jakarta’s water. According to documents and correspondence relating to the meeting and obtained by ICIJ, Suharto instructed Moochtar to divide the city, giving one half to Thames and his son’s company, PT Kekarpola Airindo, and the other half to Suez and the Salim Group.

Sigit and Salim then notified the city’s public utility PAM Jaya of Suharto’s decision and demanded immediate access to PAM Jaya’s files.

“To speed up efforts to provide and to increase the water services … we are asking you to give us an opportunity to conduct feasibility studies,” Anthony Salim said in a letter to PAM Jaya on August 22, 1995.

PAM Jaya management said they were speechless at the news that the water was about to be handed over to two private companies. They realized they had no choice but to negotiate since the privatization orders had come from Suharto himself.

By law, foreign companies were not allowed to operate water systems in Indonesia. The home affairs minister, Mohamed Yogie S.M., got around that easily, issuing a ministerial instruction in July 1996 that removed water from the list of businesses in which foreigners were not allowed to invest.

But negotiations dragged on for almost two years, involving three different ministries plus the Jakarta government. Sources said the bureaucrats, many of whom opposed the transfer of Jakarta’s water to foreign companies, intentionally stalled.

“We had so many meetings we lost count,” government negotiator Achmad Lanti said.

“I think we used every hotel in Jakarta for the meetings,” added Rama Boedi.

The contracts were finally signed on June 6, 1997. Sigit Harjojudanto, Suharto’s son, attended the signing ceremony. Lafrogne and his associate Iwa Kartiwa said it was the only time they saw Sigit during the negotiations.

Both Suez and Thames established Indonesian companies with their local partners. Salim Group set up PT Garuda Dipta Semesta and gave 40 percent to Suez. Kartiwa was president, but Lafrogne and other Suez executives managed the company.

“I kept my office here and rarely went there unless for meetings. They [Suez] had the managing director. He was the one who ran the company,” Kartiwa told ICIJ, referring to his office at a Salim Group building.

Thames created PT Kekar Thames Airindo and gave 20 percent to Sigit’s company. Fachry Thaib, a business associate of Sigit, became the Thames Airindo president. Sigit was chairman of the board of stockholders. But Thames executives ran the business.

The contracts handed over the entire water system to the private companies — the raw water supply, the treatment plants, delivery system, metering and billing, and PAM Jaya’s many office buildings. But the Thames executives didn’t work there. They rented fancy office suites in Jakarta’s central business district.

PAM Jaya had no right to see the private companies’ financial reports and there was no clear sanction if the private firms failed to meet targets specified in the contracts. Furthermore, it was not clear what authority PAM Jaya or any other government agency had to monitor the private firms.

PAM Jaya also agreed to force businesses and private homes to shut down private wells and buy their water from the consortia. At the time, about 70 percent of the water drunk in Jakarta came from private wells. In exchange, the private companies agreed to pay PAM Jaya’s foreign debts, which totaled about $231 million. The payments would come out of revenues.

“PAM Jaya was reduced to a toothless monitoring authority with no access to company records,” said PAM Jaya union leader Taufiq Sandjaya.

Rate increases had to be approved by the Jakarta parliament. But the contract required PAM Jaya to pay any shortfall arising from a delay in a rate increase caused by protracted debates in the local parliament.

The contracts required the companies to hire 3,000 PAM Jaya employees who operated the system, but gave the company enormous leeway in hiring contractors. They were required to go to public bidding only on contracts worth more than $5 million. The ostensible payoff for the government’s largesse was to be modernization and better service. In 1997, PAM Jaya had 428,764 water connections and sold 191 million cubic meters of water. It served around 43 percent of Jakarta’s population, but 57 percent of the water it controlled was considered non-revenue water, meaning that it was lost to leaks or was stolen.

The contracts required that in the first five years the companies increase connections to 757,129, almost double the volume, and service 70 percent of the population. The population figure was calculated according to a varying ratio depending on where people lived. In Jakarta overall, each connection served an average of about seven people. The companies also promised to invest 732 billion rupiah ($318 million at the 1997 exchange rate) in the first five years.

PAM Jaya negotiators said the contract was the result of arm-twisting by Sigit and Anthony Salim, who intervened in the companies’ favor whenever the two sides were at an impasse.

Government negotiator Achmad Lanti recalled that, when negotiations stalemated over the handling of the escrow account, word came from Suharto via Moochtar to settle it in the companies’ favor. The private companies wanted exclusive control of the water service without financial disclosure to the government. PAM Jaya wanted to control the income and have access to water records. The companies won, Lanti said.

One of the few points the companies surrendered was their demand to be paid by PAM Jaya in U.S. dollars, since they borrowed in dollars. When Jakarta Governor Surjadi Soedirdja threatened to resign over the issue, Suez and Thames agreed to accept Indonesian rupiah, Lanti said.

The two Indonesian presidents of the private companies, Kartiwa and Fachry, denied the private companies used any undue influence or received special treatment. “If there had been political influence, the negotiations would have been finalized in two months,” Kartiwa added. No sooner were the contracts signed than the World Bank issued a 120-page report declaring the Jakarta privatization a “likely success” and describing how the country could privatize the rest of its 300 water companies.

World Bank official Alain Locussol, who was involved in financing the water system and wrote the 1997 report, issued a second report the following year stating that the $190 million World Bank loan (of which $92 million was for water infrastructure improvements) had “facilitated” the privatization and would “further achieve development objectives.” The report predicted that the two companies would be “more successful” in lobbying for more money for management of the waterworks.

Risky business

The Asian economic crisis hit Indonesia a few weeks after the contracts were signed. Escalating inflation and job losses, and the news that many Suharto-related businesses had helped break state-owned banks, brought students and workers, including PAM Jaya employees, into the streets.

Suharto’s son-in-law, army Lt. Gen. Prabowo Subianto, ordered his men to suppress the student activists. In early May 1998, Prabowo’s men allegedly shot four student protesters to death, provoking nationwide outrage and triggering the downfall of Suharto. Faced with an immediate water crisis after the Thames and Suez executives fled, Boedi appealed for authority to his boss, Jakarta’s new governor Sutiyoso, a three-star army general. Sutiyoso instructed Boedi “if necessary to fully take over the operation to fill in the vacuum.”

It would end up being not so simple. Boedi invited Kartiwa and Fachry to his office on May 23, 1998 — about a week after their corporate executive colleagues fled — 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 — in whose employ was not entirely clear — openly displayed their guns in the meeting room. Suez executive Lafrogne, who was married to an Indonesian and was the only foreign boss to remain in Jakarta, also attended the meeting, with an escort of police officers.

Fachry, Kartiwa and Lafrogne claimed they had no authority to hand over control of the water.

“Are you crazy? Where are your men?” shouted Boedi.

“In Singapore,” replied Fachry, who had moved to Jakarta’s five-star Hilton Hotel to avoid the riots.

The two sides began shouting at each other. PAM Jaya officials claimed the privatization was totally illegal and rife with corruption. They pressed the company officials to sign over the water system back to the public.

Boedi made it clear that Fachry and Kartiwa had no choice, he told ICIJ. He said that he warned them he couldn’t control the anti-Suharto forces, which could easily turn against the two men. Finally, they agreed to sign a document officially handing the water operation back to PAM Jaya.

After the meeting, Kartiwa, Fachry, and Budi Saroso, a close associate to Fachry, slipped through a back door to avoid the protesting employees. They drove away in a chauffer-driven limousine. Lafrogne left with his escorts.

“The operation was now in my hands,” Rama Boedi said. But not for long.

When the companies learned of the cancellations, their 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 called the cancellation a “coup d’etat.”

In an interview with ICIJ, Gérard Payen, Suez’s senior executive vice president, denied that his executives left the country “except one day, when the foreigners were in a very dangerous situation and the western embassies asked the people to leave the country. … Our foreign managers went to Singapore and they stayed there two or three days at the most, and after that they came back to Jakarta. … So you cannot say we left the country. It is absolutely wrong. It is a lie.” Thames. Spillett conceded that “some of the people visiting were sent back to Singapore.” But he claimed that the remaining staff “kept the system going.”

Rhamses Simanjuntak, a director at Thames in Jakarta, confirmed to ICIJ that all Thames’ expatriate directors left the country for Singapore and stayed away for at least a week.

Lafrogne and Thames’ John Hurcom acknowledged that after their executives returned to Jakarta, they realized they had lost most of their political support and would have to make concessions to retain their water contracts. Their partners had suddenly become liabilities. So they severed their ties with the Salim Group and Sigit Harjojudanto by buying them out.

Kartiwa said the Salim Group withdrew voluntarily. “Business should be a win-win solution,” he said. “Don’t feel pressured. If business is done under pressure, it’s not going to work.” The payouts, which neither Thames nor Suez would disclose, were nothing more than a “recovery cost,” Kartiwa said. Thames claimed at the time that the cost of the buyout was “negligible.”

According to a letter that the consortia sent to President B.J. Habibie, Suharto’s successor, PT Kekarpola Airindo was valued at $3.5 million by October 1998. This would put Sigit’s share at about $700,000. The Suez-Salim alliance, PT Garuda Dipta Semesta, was valued at $5.3 million on June 2, 1998, meaning that Salim Group’s 60 percent share was valued at around $3.2 million. Fears of troublesome litigation caused the government to return the concessions it had taken back only a week earlier, PAM Jaya officials said. The 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.

Negotiations for a new contract dragged on for the next three years. Time was on the side of the companies, happy to continue to operate under the generous terms of the old contract.

PAM Jaya workers held frequent protests seeking to reverse the privatization. They worried that their wages would be cut or they would lose their jobs. Some workers welded PAM Jaya warehouses shut to keep the foreign companies from using equipment stored in them. An angry union leader even threatened Lafrogne with a knife. Police were called but the case was closed after the leader apologized to Lafrogne.

Jakarta’s parliament supported the workers and, at times, called for deadlines to force concessions, but the companies hung tough, aware that the government would be leery of an outright cancellation because of its effects on much-needed foreign investment.

“The limit of tolerance that we give the two companies is huge, although we are not satisfied with their works. What can we do?” said Ali Imran Husein, a parliament member. “We need their money and we don’t want to send a message that might scare other investors.” Finally, on Oct. 22, 2001, a new contract was signed between PAM Jaya and the two 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. Thames gave the remaining 5 percent to PT Terra Metta Phora, and Suez gave its minority shares to PT Bangun Cipta Sarana. The two Indonesian companies are subcontractors of the foreign companies.

“They have a better image than Salim Group,” Lafrogne said.

Under the new contract, the companies agreed to give PAM Jaya joint control of the bank account. And instead of using the accounts to pay off their operating expenses, the private companies first had to pay off PAM Jaya debts.

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. In exchange, PAM Jaya agreed to allow the consortia to cut jobs. About 400 workers took buyouts.

By 2001, Suez claimed it had increased connections 50 percent to almost 300,000, from 200,000 in 1997. Thames said it had increased connections to 320,000 in 2001, from 268,000 in 1998. The two companies jointly had 620,000 connections — well short of the 2001 projection of 711,000.

But new connections do not necessarily mean that new people are getting running water. For the poor, sometimes new connections just mean new meters. Most of the poor still buy their drinking water from street vendors. About 70 percent still lack running water. The companies have instituted two major water rate hikes since 1998. The increases vary from one neighborhood to the next, depending on ability to pay, but the overall average for each increase was 35 percent. The companies are awaiting government approval of a third increase, also of about 35 percent.

Water services in Jakarta’s rich neighborhoods, like Menteng and Pondok Indah, improved significantly. People who used to pump their own water from deep wells could, by 2002, rely upon water piped in from the main network with better pressure and quality.

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 two foreign consortia have not met many of the projections outlined in the original contracts. According to those 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.

In any case, there was no way to verify the companies’ figures, said Lanti, the first chairman of the water regulatory body set up in 2001.

The Thames and Suez executives blamed their missed connection targets on the economic crisis, whose devaluations led to higher prices for imported equipment. Lafrogne 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.

But Atjeng Sastrawidjaja, a Jakarta city auditor, said 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 foreign executives, who live in the city’s wealthiest neighborhoods, are much higher than those paid to PAM Jaya officials. Their top executives, from 15 to 20 in each company, are paid between $150,000 and $200,000 annually. PAM Jaya executives like Rama Boedi received the equivalent of no more than $25,000.

Andrew McLernon, an urban development consultant who often advises the Indonesian government and the World Bank, said 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.

Lanti said the private companies were as inefficient as the public utility. Their only incentive was to improve the bill collection system and shut down illegal private wells — they had no incentive to improve the system as a whole, Lanti said. The companies still do not supply enough information to allow regulators to assess their performance. “It is a difficult situation,” Lanti said. “We haven’t been able to build trust here. PAM Jaya thought this privatization was just too expensive. Our last resort is to stop the contract but a legal dispute is also too costly.”

PAM Jaya engineer Feri Watna, who worked in PAM Jaya’s biggest water treatment plant in Pulogadung, gave a more blunt assessment. Over the first five years of privatization, he said, “the companies … just came in and robbed everything that we had. We already had the distribution networks, all those pipes, the water installations, the consumers and everything else.”