University of Groningen

Decentralization and the challenges of local governance in Indonesia

Efriandi, Tri

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10.33612/diss.155466640

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Efriandi, T. (2021). Decentralization and the challenges of local governance in Indonesia: Four case studies
on public service provision and democratization in Papua and West Papua. [Thesis fully internal (DIV),
University of Groningen]. University of Groningen. https://doi.org/10.33612/diss.155466640

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 Decentralization and
Institutional Design of
Water Governance:
The Case of Drinking Water Services in
Manokwari District, West Papua, Indonesia*

4
*This chapter has been resubmitted after revisions to an international peer-reviewed journal as:
Efriandi, T., Couwenberg, O., and Holzhacker, R.L. Decentralization and institutional
design of water governance: The case of drinking water services in Manokwari district,
West Papua, Indonesia (under review).
Abstract

This study discusses the institutional design

of water governance and its impact on the
provision of drinking water services after the
establishment of decentralization in Indonesia.
Based on an analytical framework that builds
on theories of governance, inter-organizational
coordination and principal-agent, this
study examines the issues of drinking water
governance using three different analysis
levels: the macro-level (constitutional text),
the meso-level (inter-organizational), and the
micro-level (intra-organizational). By using
the Manokwari District as a case study in
combination with qualitative data from an
analysis of policy documents and interviews
with public officials, the empirical findings of
this study suggest that the failure in recognizing
the value of water and in synchronizing
between policies, organizational structure, and
the distribution of authority have hindered
the potential benefit of decentralization in
improving the quality of drinking water
services at the local level.

Keywords: institutional design,

water governance, decentralization, West
Papua, Indonesia.

Picture 5. Water infrastructure in the Asmat district

(Picture taken by the Author in 2019)
4.1 Introduction

Access to clean and safe drinking water is one of the crucial challenges
of sustainable development in the contemporary world. Together with
the development of sanitation, it has become one of the critical United
Nations’ 2030 Sustainable Development Goals (SDGs) in developing
countries. Specifically, SDG 6 on clean water and sanitation aims at
providing universal and equitable access to safe and affordable drinking
water for all by 2030 (United Nations, 2015). In 2017, however, as many
as 435 million people were still using unimproved drinking water sources
and 144 million were using surface water (World Health Organization &
United Nations Children’s Fund, 2019). In Indonesia, it is estimated that
8% of the population, or 21 million people, still use unimproved sources,
and from the total proportion of the population using improved water
sources, 72% of them still use non-piped water (WHO & UNICEF,
2019).25 It is argued that the underlying reasons for this lack of access
to safe drinking water are often not related to technical problems but
due to poor water governance (Asian Development Bank, 2013, 2016;
McIntosh, 2003; The World Bank, 2006).

Water governance refers to the range of political, organizational,

and administrative processes that are in place to develop and manage
water resources and to deliver water services to society (Rogers & Hall,

25 Improved and unimproved drinking water sources are terms that have been used by the WHO and UNICEF
Joint Monitoring Program (JMP) for Water Supply, Sanitation and Hygiene (WASH). Initially, this program
was conducted to monitor the progress of the Millennium Development Goals (MDGs) and after 2015,
this program has continued to monitor the targets of SDGs. An improved drinking water source is a source
that, by nature of its construction, adequately protects the water from outside contamination, in particular
from fecal (E.coli) matter and priority chemical contamination (arsenic and fluoride). It can be divided
into two types: piped water and non-piped water (e.g. boreholes or tube wells, protected dug wells,
protected springs, rainwater, and packaged or delivered water). Unimproved drinking water sources include
unprotected dug wells, unprotected springs, and surface water (WHO & UNICEF, 2012, 2019).

Chapter 4 Decentralization and institutional design 115

 2003; Bakker, et al., 2008; Tortajada, 2010). This definition cannot be
isolated from the concept of governance, in particular the actors who
should be responsible and involved in managing water resources as well as
in delivering water services. On the one hand, governance is a synonym
of government, that is, where the state is viewed as the only entity that
has legitimate power and authority to design policy, control society, and
manage resources (Kaufmann, Kraay, & Mastruzzi, 2010; Peters, 2011;
Fukuyama, 2013, 2016). On the other hand, governance can be defined
in a much broader context than simply just government (Rogers & Hall,
2003; Cheema & Rondinelli, 2007). Governance focuses not only on
the state but it also addresses the involvement of private sector groups,
civil society organizations, and society in general (Cheema & Rondinelli,
2007; Tortajada, 2010; Ostrom & Basurto, 2011).

These two schools of thought are embedded in a more specific

debate about which governance mode is more effective and efficient in
managing water resources and in delivering water services (Tortajada,
2010). Concerning the provision of drinking water, the debate over public
versus private management of water utilities has arisen (Bakker, et al.,
2008; Araral, 2009). On the one hand, due to “state failure” in managing
public enterprises, it is argued that involving the private sector could
improve the performance and efficiency of water utilities (World Bank,
2005; Bakker et al., 2008; Araral, 2009). On the other hand, however,
the performance improvement claim is contested since empirical evidence
indicates that there is no significant difference in the efficiency between
public and private operators (Holmes, 2000; Araral, 2009). Furthermore,
the failure of the privatized water utilities in delivering water services
to poor households has also raised the importance of the state’s role in
managing drinking water services and providing universal access (World
Bank, 2004; Mehrotra, 2006).

116 Chapter 4 Decentralization and institutional design

 Correspondingly, despite the ownership status of water utilities
(e.g. public versus private), it is also argued that the more dominant factor
in determining the performance of drinking water utilities is institutions
(Bakker et al., 2008). Institutions are defined as routinized patterns of
behavior based on social, economic, and political values that are often
codified in terms of formal laws and informal conventions (Saleth &
Dinar, 2000). However, while the role of institutions in water governance
has been recognized, institutional analysis on drinking water supplies has
not yet been conducted in many studies (Bakker, et al., 2008). For this
reason, this study aims to understand the change of formal institutions
induced by governmental decentralization and its impact on the
governance of the drinking water sector. Following this objective, the
research questions of this study are, therefore, as follows: How the changes
in the formal governance structure (regulatory frameworks, organizational
structure, and allocation of authority) during decentralization affect the
relationships among the involved actors? What are the implications for
the governance of the drinking water sector?

As an analytical tool, this study adopts an institutional design

framework (Alexander, 2005, 2006, 2012). This framework distinguishes
three different levels of institutional design: the macro-level (constitutional
text), the meso-level (inter-organizational), and the micro-level (intra-
organizational). Furthermore, this study uses three theories: governance,
inter-organizational coordination, and agency theory to conceptualize the
problems at each level (Alexander, 2005, 2006, 2012). As a case study,
the Manokwari District in Indonesia was selected to illustrate how a
particular institutional setting affects the governance of water services at
the local level.

Chapter 4 Decentralization and institutional design 117

 4.2 Theoretical Background

4.2.1 Institutions and governance

Before examining the relation between institutions and governance, it is

important to define these two terms to provide a better understanding of
how institutions may hinder or facilitate the effectiveness of governance
in achieving certain objectives. Institutions are “the rules of the game in
society” (North, 1990, p. 3), which are devised and used by humans as
the prescriptions to structure the regularities of human action (Crawford
& Ostrom, 1995) and “to organize all forms of repetitive and structured
human interactions” (Ostrom, 2005, p. 4). Two forms can be distinguished,
namely “formal rules (e.g. constitutions, laws, and property rights) and
informal constraints (e.g. sanctions, taboos, customs, traditions, and
codes of conduct)” (North, 1991, p. 97).

The concept of governance has a wide array of definitions

(Kauffman et al., 2010). Fukuyama (2016) argues that there are at least
three major meanings of governance. First, governance as international
governance, that is, the international cooperation through non-sovereign
bodies outside the system (Cheema & Rondinelli. 2007; Fukuyama,
2016). Second, governance as public administration, which refers to
the implementation of policy by the government. Third, governance
as governing without government, which emphasizes the importance
of self-organized networks and the major role of actors outside of the
state in the governing process (Alexander, 2005, 2006; Rogers & Hall,
2003). This study focuses on the second definition of governance, which
refers to the manner in which authority in a country is exercised by
the government to effectively formulate, implement, and enforce rules
(Fukuyama 2013, 2016; Kaufmann et al., 2010). Accordingly, since this
study emphasizes governance as the ability of government to design and

118 Chapter 4 Decentralization and institutional design

apply rules (Fukuyama, 2013), formal rules such as laws and policies will
be the objects of analysis.

If institutions are the rules to mediate actions and behaviors,

governance is the medium where these rules are made and implemented
(Crawford & Ostrom, 1995; Peters, 2011; Ostrom & Basurto, 2011).
As a result, there is a causality between governance and institutions.
Governance is not only a one way mechanism used to establish and conduct
formal rules but also in reverse, formal rules that have been designed will
drive governance itself by defining goals, arranging processes, affecting
motivations, and directing coordination (Loft et al., 2015; Li, 2017).
Therefore, the effectiveness of governance depends on how formal rules
are prescribed, implemented and, enforced by the government to structure
interactions in achieving the defined goals (Crawford & Ostrom, 1995;
Ostrom & Basurto, 2011).

4.2.2 Water governance and decentralization

In recent years, raising awareness of the crucial role of water governance

has its origin in the argument that the water crisis is not solely a crisis
of scarcity but also a crisis of governance (Biswas & Tortajada, 2010;
Organization for Economic Co-operation and Development, 2011;
Gupta, Pahl-Wostl, & Zondervan, 2013). The fragmentation of water-
related tasks and functions between governmental agencies, a lack of
cooperation and coordination between and among involved actors at all
government levels, and the discrepancy between national policy initiatives
and local needs are some of the institutional obstacles that contribute to
the crisis of governance in the water sector (Tortajada, 2010; OECD,
2011). In drinking water services, specifically, one of the crucial issues is
the poor performance of water service providers. A host of factors, such as
the inability to adopt cost recovery policies and the political intervention in

Chapter 4 Decentralization and institutional design 119

 the management of service providers, have hindered the service providers
in improving service quality and coverage (ADB, 2012; The World Bank,
2006). As a response, decentralization together with corporatization or
privatization have been adopted as a major institutional reform initiative
in the water sector in many developing countries (Herrera & Post, 2014).

Decentralization is implemented by transferring administrative

responsibility for service provision from central to subnational
governments. A rationale behind this institutional reform is that bringing
the public services closer to the citizens could improve the service
providers’ responsiveness to local needs and preferences (Herrera & Post,
2014). Moreover, institutional reform on drinking water services is also
simultaneously arranged by increasing the autonomy of service providers
through corporatization or privatization. Corporatization involves
setting up legally autonomous providers with budgets controlled by the
public sector while privatization is carried out by delegating every-day
management of services to legally independent entities controlled by
private investors or other nongovernmental actors (Herrera & Post, 2014,
p.628). Corporatization or privatization is designed to prevent water
service providers from political interference by elected officials which
may negatively affect the service outcomes (Herera & Post, 2014, p.621).
Nevertheless, when corporatization follows political decentralization,
it might result in tensions between these two reform initiatives. Since
local government officials often play a role in determining financial and/
or management structure of water utilities, they might undermine the
autonomy of corporatized utilities by politically motivated interventions
(Herera, 2014). In Mexico, for example, management positions in water
utilities have been used as patronage resources by local politicians to
reward party loyalists (Herera, 2014; Herera & Post, 2014). In Sri Lanka,
despite the devolution of power to local governments to manage their

120 Chapter 4 Decentralization and institutional design

own water supplies, when it came to the setting of water tariffs, local
governments returned the authority to the central government. In doing
so, local governments could avoid making unpopular and controversial
decision themselves. Although the adjustment of water tariffs is crucial for
the financial sustainability of utility services, political decentralization has
hindered the adoption of cost recovery policies as elected officials feared
that increasing tariffs could negatively affect their reelection (McIntosh,
2003; Herera & Post, 2014).

Correspondingly, the governance challenges of drinking water

services are related to the institutional change induced by decentralization.
It not only redesigns the distribution of power and roles of relevant actors
but also reshapes the pattern of interactions among those actors (Pahl-
Wostl, 2019). The problem is exacerbated when the involved actors have
difficulty in adapting to the new institutional structure. In developing
countries that are in a transitional phase from an authoritarian regime
with a centralized system towards a democratic decentralized governance
system, this problem of actors’ inadaptability is compounded by the path-
dependency of institutional legacies left by previous regimes (Guarneros-
Meza, 2009; Sorensen, 2015; Rahayu et al., 2019). Consequently, “lock-
in-situations” occur, whereby traditional governance regimes are taken up
in the newly established institutions (Pahl-Wostl, 2009). In Tanzania, for
example, despite the greater role of local governments and the existence
of a bottom-up planning process under decentralization, the governance
of the drinking water sector is still characterized by the traditional form
of top-down centralized authority and control (Palencia & Pérez-Foguet,
2011).

Chapter 4 Decentralization and institutional design 121

 4.2.3 Framing governance into a principal-agent approach

In an attempt to measure quality of governance, Fukuyama (2013, 2015)

observes how a government’s authority is exercised to make and implement
policy through the lens of principal-agent relationship. For this he
examines the number and types of rules or mandates that have been issued
and the authority delegated by the principals to the agents to determine
the level of autonomy of the agents. At one extreme, when a principal
centralizes authority and uses detailed instructions, a non-autonomous or
subordinated agent emerges (Fukuyama, 2013). An agency relationship
thus develops on the basis of hierarchical command and control, which is
characterized by a lack of discretion since the principal sets rigid rules to
limit the authority of the agent (Powell, 1990; Alexander, 1995; Fukuyama,
2013, 2015). This type of subordinated bureaucracy reflects the Weberian
model of bureaucracy, which organizes bureaucrats “into a clearly defined
hierarchy and… are subject to strict discipline and control” (Weber as
cited in Fukuyama, 2015, p. 351-352). Conversely, at the other extreme,
bureaucratic autonomy develops when a principal issues only a few and
general mandates and devolves a greater degree of authority to the agent.
The increased level of discretion to the agent is intended to encourage
innovative behavior and flexibility of the agent in pursuing the goals that
principals set (Fukuyama, 2013).

Nevertheless, both autonomy and subordination have drawbacks

when they are insufficient or excessively arranged. A high degree of
discretion that is not counterbalanced by accountability might generate
“decentralized predation” where the agent (e.g. the local government) is
able to protect their own political and economic positions regardless of
performance and be unresponsive to societal needs (Fukuyama, 2015).
On the contrary, setting detailed mandates with strict supervision from
the principal may result in dysfunctionality and inflexibility of the agent

122 Chapter 4 Decentralization and institutional design

in making decisions and achieving goals (Fukuyama, 2013, 2015). This
problem of excessive control is even more severe when multiple principals
emerge because they may impose overlapping and contradictory mandates
that need to be simultaneously accommodated and implemented by the
agent (Fukuyama, 2015). In an attempt to govern effectively, there needs
to be an equilibrium between sufficient control and adequate discretion.

In Indonesia, decentralization provides an illustration of the

continuous swing of the pendulum between centralized subordination
and local autonomy (Mathur, 1983; Suwandi, 2004). Decentralization
is one of the mechanisms used to distribute authority, resources, and
responsibility from the central government to local governments, that is,
provincial and district/city governments (Cheema & Rondinelli, 2007).
In its implementation, decentralization in Indonesia is concentrated at
the district/city level, whereas provincial governments merely function as
coordinators to manage issues across district/city boundaries (Hoffman &
Kaiser, 2006). The practice of decentralization in Indonesia demonstrates
that subordination in terms of excessive rules can simultaneously emerge
with a high degree of local autonomy. Under decentralization, the local
governments are given the authority to manage all governmental functions
except national defense, international relations, police, justice, monetary
policy, and religion (Hofman & Kaiser, 2006). Nevertheless, despite
the large number of tasks and functions that are devolved to the local
governments, several detailed mandates and uniform national standards
are still imposed by the central government.

These uniform national policies are often difficult for the central
government to monitor and enforce. This is because after decentralization,
local leaders tend to see themselves as a “kingdom of authority” (Firman,
2009). This local egoistic attitude creates local leaders’ resistance when
the central government intervenes in the development programs in their

Chapter 4 Decentralization and institutional design 123

 territorial jurisdictions (Firman, 2009). In these situations the central
government finds itself in a dilemma as to whether to use a hierarchical
strategy using command and control for effective coordination, or provide
managerial flexibility for local governments to reflect and tailor to local
needs with the possibility of local authorities capturing the devolved
power and resources to pursue their own interest.

4.2.4 Institutional design as guidance for analysis: definition, distinction,

and application

To understand how the existing rules as well as the current organizational

structures may affect the governance of drinking water services, this study
adopts concepts from institutional design. Institutional design entails the
creation and implementation of rules, procedures, and organizational
structures to enable and constrain behavior and action to correspond
with held values, achieved desire objectives, or to execute given tasks
(Alexander, 2005; 2006; 2012). Institutional design is necessary when a
policy or plan: (i) involves the creation of new legislation or regulation;
(ii) demands a new organization or reorganization of existing ones; and
(iii) requires the establishment of new inter-organizational relations or
transformation of existing networks (Alexander, 2005; 2006; 2012). In
its application, the framework of institutional design can be distinguished
into three interrelated levels: macro-level, meso-level and micro-level
(Alexander, 2005; 2006; 2012).

Macro-level and policy analysis

As the highest level of the institutional design, the macro-level addresses

the macro-societal processes and institutions, such as the drafting and
adoption of national constitutions, as well as major national reorganizations
and the establishment of innovative and strategic political-administrative
programs (Alexander, 2005, 2006, 2012). The emerging issue at this

124 Chapter 4 Decentralization and institutional design

level is how rules that are embodied into constitutions, laws and policies
shape organizational structure and predispose behavior and actions of
these organizations in implementing mandates or in achieving goals
that are defined in those policies. In this study, the macro-level analysis
focuses on the national constitution, policies and derivative regulations
related to drinking water governance, and the creation or restructuring of
organizational structures.

Meso-level and inter-organizational coordination

This level of institutional design draws on inter-coordination within

organizational structures. Inter-organizational coordination emerges due
to complex issues that cannot be addressed by a single organizational unit
alone. Consequently, the inability of an organization to work independently
creates an interdependency between organizations to act together in
exchanging resources, generating desired policy outcomes, and avoiding
negative consequences (Alexander, 1995). In this study, the analysis at the
meso-level focuses on the problems of horizontal coordination between
governments at the same level as well as vertical coordination between
the central government and the district government, and the central
government and the local government-owned drinking water utility
(Perusahaan Daerah Air Minum, hereafter referred to as PDAM).

Micro-level: intra-organizational analysis.

The lowest level of analysis of institutional design is at the micro-

level. This level involves intra-organizational design and addresses
processes and interactions among organizational sub-units in managing
and implementing a policy, plan, or project to ensure effective task
performance (Alexander, 2012). In this study, intra-organizational design
primarily focuses on the institutionalization of rules and regulations and
its impact on the pattern of relationships between the actors involved

Chapter 4 Decentralization and institutional design 125

 in the production and provision of drinking water at the sub-national
level, namely the district government and PDAM. Discussion at this
level explores the problems faced by PDAM as an agent tasked with
accommodating the different mandates imposed by multiple principals
and its impact on the functioning of PDAM.

4.3 Methodology

4.3.1 A case study approach

To understand how water governance is organized and implemented, it is

important to not only examine the problems at the national level but also
to expand the analysis to the local level. For this reason, this study uses a
case study approach to acquire in-depth, context-specific knowledge by
investigating contemporary phenomena within its real-life context (Yin,
2003). Specifically, this study uses the Manokwari district, the capital of
West Papua Province, as its case. This district became a new provincial
capital after the controversial process of dividing the Papua Province
into three different provinces (Papua, Central Irian Jaya, and West
Irian Jaya) between 1999 and 2004.26 The controversies arose over the
central government’s underlying reasons to create new provinces from the
existing Papua Province: to segregate Papuans, to undermine the Papuan
secessionist movement, and to accelerate development in one of the least
developed regions in Indonesia (Bertrand, 2014). The dispute over the
proliferation was mediated in 2008 through the establishment of Law
35/2008, which not only confirmed the creation of West Papua Province
but also provided the province with Special Autonomy status.27

26 The division (known as pemekaran) of the Papua Province into three provinces started in 1999 through
the stipulation of Law 45/1999. The process was followed-up through the Presidential Instruction 1/2003,
although in its process the establishment of Central Irian Jaya was cancelled because the Law 45/1999
was revoked by the constitutional court. However, the constitutional court recognized and formalized the
establishment of the West Irian Jaya Province because at that time the provincial representatives of West
Irian Jaya had been elected and the provincial governmental structure had been formed (Chauvel and Bakti,
2004; McGibbon, 2004; Bertrand, 2014).
27 In 2007, through the stipulation of Government Regulation 24/2007, the name of West Irian Jaya province
was changed to West Papua province.

126 Chapter 4 Decentralization and institutional design

 One of the aims of the establishment of this special autonomy
status is to enhance the living standards and prosperity of the Papuan
people via, among others, the development of education, health, and
infrastructure. The Special Autonomy Law 21/2001 does not explicitly
mention the provision of clean water as a developmental priority.
However, access to clean water is a critical issue for the Papua region in
general and for the Manokwari district in particular. Despite the abundant
development of infrastructure due to its status as a provincial capital, the
development of the drinking water sector in Manokwari has not received
much attention. As a new urban region, this district experienced the
problem of an inadequate piped water supply. In 2019, only 14% of
the total population (168,852) was connected to piped water supplies
(BPPSPAM, 2019).

The PDAM of Manokwari is located in the sub-district of

Manokwari Barat and is one of only two local government water utilities
in the West Papua province. Historically, the PDAM of Manokwari was
officially established in 1993 through the Local Government Regulation
5/1993. Some of its physical infrastructure was built during the period
of the Dutch colonization and was managed by the Resident of Water
Service until 1963. However, despite its long establishment, the current
water service coverage in Manokwari is still low. From a total of nine sub-
districts, piped water is supplied to only three sub-districts in the greater
urban area of the district capital, namely Manokwari Barat, Manokwari
Timur, and Manokwari Selatan, while the population in the other six sub-
districts does not have access to piped water.

Chapter 4 Decentralization and institutional design 127

 Picture 6. PDAM of Manokwari
(Picture taken by the Author in 2019)

A number of studies have concluded that the problems of drinking

water governance in Indonesia are less technical than institutional and
financial. On the one hand, institutional problems include, but are not
limited to, overlapping policies, fragmented authority and responsibility,
conflict of interests among central and local government actors, and the
lack of autonomy and management capacity of water utilities. On the
other hand, financial problems relate to the issue of low water tariffs and
the inadequate investment of PDAMs to expand their service coverage
(ADB, 2013, 2016; McIntosh, 2003, The World Bank, 2006).

4.3.2 Data collection and analysis

Following a qualitative research strategy, this study applied a triangulation

method in which multiple data sources were used, whereby data were

128 Chapter 4 Decentralization and institutional design

combined and compared to decrease potential biases, provide different
perspectives and validate information (Thurmond, 2001; Merriam &
Tisdell, 2016). Specifically, data for this study were collected from different
sources, that is, via policy document analysis and in-depth interviews.
The use of more than one type of data source allowed us to, for example,
compare between what is regulated in the policy documents and what was
said in the interviews. Moreover, these data sources were also gathered
from different administrative levels. A range of national and local policy
documents were reviewed (see Appendix A) and different actors from both
the central and district governments were interviewed to obtain a better
understanding of governance issues across the three institutional levels.
First, for the macro-level analysis, policy documents were reviewed by
using a content analysis method. Subsequently, to analyze the meso- and
the micro-levels, 17 semi-structured interviews (see Appendix B) were held
between December 2018 and February 2019 with the central government
ministries/agencies, local government officials, PDAM of Manokwari,
and Indonesia’s water utility association (Persatuan Perusahaan Air
Minum Seluruh Indonesia, PERPAMSI). The interview questions focused
on the roles and responsibilities of government and non-governmental
organizations, the problems of coordination, and how the interviewees
experienced the implementation of drinking water management policies
after the establishment of decentralization in Indonesia. Policy documents
and interview results were transcribed and interpreted with the assistance
of Atlas.ti to identify the institutional design problems related to water
governance and the impact they have on the provision of drinking water
services in Indonesia in general and more specifically in the district of
Manokwari.

Chapter 4 Decentralization and institutional design 129

 4.4 Drinking water governance in Indonesia

The governance of the drinking water sector in Indonesia has a long

history with four major institutional reforms in the country. Generally,
four phases can be distinguished: colonial, post-independent, New Order,
and post-reform era.

The development of drinking water services cannot be

separated from the Dutch colonial rule in Indonesia starting from the
17th century. Drinking water facilities were established to serve residences
(residenties) in several major municipalities (stadsgemeentes) such as in
Jakarta (Batavia) and Surabaya. Water utilities were managed either by a
municipal utility (Gemeentelijk Waterleiding Bedrijf) or a provincial utility
(Provinciaal Waterleiding Bedrijf). Since drinking water was perceived to
have a major impact on public health, water utilities were administered
by the Department of Public Health (Department van Volksgezondheid)
not by the Department of Public Works (Burgerlijke Openbare Werken),
which was responsible for developing infrastructure such as government
buildings, roads, bridges and irrigation (Ministry of Public Works and
Human Settlements, 2015). This institutional arrangement existed until
the early period after Indonesia proclaimed its independence in 1945.

In the 1950s, the authority to administer the drinking water

sector was taken from the Ministry of Health and delegated to the Ministry
of Public Works. However, at that time the management of water utilities
was not centralized, but dispersed between central, provincial, and
municipal governments. In this period, the central government developed
several water treatment installation projects in some cities and assigned
management of these installations to local governments when the projects
were finished (MPWHS, 2015). This phase became the forerunner to
the establishment of PDAMs, which were later formalized through the

130 Chapter 4 Decentralization and institutional design

stipulation of Law 5/1962 concerning local-owned utilities (perusahaan
daerah).

During Soeharto’s regime, which is also widely known as the

New Order era (1969-1998), a centralistic top-down approach dominated
the development of many sectors including the drinking water sector.
This centralistic tendency was strengthened by the argument that local
governments lacked financial and human resources (MPWHS, 2015).
Localism was also seen as a major threat to Indonesia as a unitary state
and caused inefficiencies in the development process (Aspinall & Fealy,
2003). Hierarchical centralized control was therefore strictly enforced
with local government heads (provincial governors, district heads/city
mayors) appointed by the central government. Most of these positions
were occupied by military officers controlled by the central government
(Kristiansen & Santoso, 2006; Takeshi, 2006). As a result, this hierarchical
command and control style of government supported by the military and
the central bureaucracy undermined the ability of local governments to
influence national policies or manage their own affairs. Rather, provincial
and district/city governments functioned primarily as implementing
agencies of policies and programs designed by the central government
(Aspinall & Fealy, 2003; Chowdury &Yamauchi, 2010). In the drinking
water sector in particular, the management positions in a number of local
water utilities were taken by local elites with a military background.28

A major institutional change on the drinking water governance

emerged after the reform in 1998. The implementation of Law 22/1999
on local governance altered the dynamics of the national-subnational
relationships. The devolution of power and authority from the central
government to provincial and district/city governments did not only
abolish the hierarchical relationship between central government,
28 Interview with interviewee #15, 4 January 2019.

Chapter 4 Decentralization and institutional design 131

 provinces and districts but also positioned the local governments as key
actors in managing public functions including the provision of drinking
water services (Kristiansen & Santoso, 2006). Under decentralization, the
provincial and district/city governments have much more autonomy in
managing a PDAM. For instance, local governments select directors and
supervisory boards of a PDAM, allocate subsidies to a PDAM, determine
water tariffs and set budgets for the development of drinking water
infrastructures (Government Regulation 54/2017). The emerging question
is how these institutional reform initiatives impact the governance of the
drinking water sector.

4.5 Analysis

This section discusses the analysis results for the three institutional levels
(i.e. macro-, meso- and micro-levels) to understand the implications of
the existing formal institutions on the governance of the drinking water
sector. The findings from the three institutional levels are stemmed from
the policy analysis and interviews with actors involved in the drinking
water sector at both the national and district levels.

4.5.1 Macro-level

The policy review revealed that the central government has devised several
national strategies to address water governance issues. Two important
interventions on drinking water governance were the establishment of
Law 7/2004 on Water Resources and Law 23/2014 on Local Government.
These two laws have had not only a major impact on the distribution
of authority and responsibility for water governance between central,
provincial, district/city and village government, and the involvement of
communities but also on the creation and restructuring of organizational
structures (Rahayu, et al., 2019). Following its implementation and after

132 Chapter 4 Decentralization and institutional design

three judicial reviews, Law 7/2004 was revoked by the Constitutional
Court in 2015 and was replaced by parliament with Law 17/2019. The
main reason for its abolishment was that the court found that the law was
contrary to the national constitution as it provided a large opportunity
for the private sector to be involved in the management of water resources
and in the provision of drinking water services (Constitutional Court
Decision No.85/PUU-XI/2013). The Constitutional Court stated that
the management of water resources is the responsibility of the central
and local governments and the provision of drinking water can only
be operationalized by PDAM. Furthermore, the court also argued that
PDAM must be positioned as a state operational unit and not as a profit-
oriented company.29 In practice, most PDAMs in Indonesia have both a
weak financial and managerial performance. In 2019, out of a total of 380
PDAMs that were evaluated, 102 were in an “unhealthy” condition and
54 were classified as “sick”.30 One of the major causes of these dire straits
is the failure of PDAMs to achieve full cost recovery due to the low tariffs
they charge (ADB, 2012; BPPSPAM, 2019, The World Bank, 2006).31

The issue in setting tariffs cannot be separated from the debate

as to how water is viewed in Indonesia. Constitutionally, in Indonesia,
water is categorized as a public good. In Article 33 paragraph 2 of the
Constitution of the Republic of Indonesia, it states that “sectors of
production that are important for the country and affect the life of the
people shall be under the powers of the State” and in paragraph 3 “land,
water, and natural resources within shall be under the powers of the State
and shall be used to the greatest benefit of the people” (The Constitution

29 Constitutional Court Decision No.85/PUU-XI/2013.

30 The performance of PDAMs is measured based on four indicators: financial, service, operational, and
human resource. The total score of each indicator is then summed and allocated to one of three categories:
healthy (score >2.8), unhealthy (score between 2.2 and 2.8), and sick (score < 2.2); (BPPSPAM, 2019).
31 The Ministry of Home Affairs Regulation No. 71/2016 defines full cost recovery as the average tariff income
necessary to cover the costs of operations, maintenance, depreciation/amortization, interest and reasonable
profit.

Chapter 4 Decentralization and institutional design 133

 of the Republic of Indonesia, 1945). These two paragraphs provide the
main argument for categorizing water as a public good and the resulting
dominant role of the central and local governments in the provision of
drinking water services. However, it is not necessarily the case that water is
always a public good in all places and at all times (Zetland, 2014; Aylward,
2016). The economic characteristics of water are highly time and place
dependent. It thus becomes important to analyze the characteristics of
water before identifying the appropriate institutional arrangements for the
management of drinking water (Ostrom, 2005; Aylward, 2016). Based on
the notions of rivalry and excludability, water can either be classified as a
public good, a private good, a common pool, or a club good (Zetland,
2014; Aylward, 2016). Table 4.1 specifies this categorization.

Table 4.1 Excludability and rivalry of water resources

Rivalry low Rivalry high

Excludability
public good common pool
low
Excludability
club good private good
high
Source: Based on E. Ostrom 2005, p.24

Excludability refers to “the difficulty of restricting those who benefit from

the provision of a good or a service” and rivalry is “the extent to which one
individual’s use subtracts from the availability of a good or a service for
consumption by others” (Ostrom, 2005, p. 23). Water can be classified as
a public good when it is difficult to exclude users and rivalry is low. The
United Nations General Assembly, in its Resolution 64/292, recognized
safe and clean drinking water as a basic right of all human beings. As a
basic human right, water cannot be priced in a market system because
water will then be transferred to those who value it highly and are able to
pay, while those living in poverty who value it highly but have no ability

134 Chapter 4 Decentralization and institutional design

to pay, may have no access to water needed to survive (White, 2013;
Tortajada & Biswas, 2017).

Water is considered a common pool resource (e.g. water in an

aquifer) when excludability is low and rivalry high, and as a club good
(e.g. shared irrigation) when excludability is high and rivalry low. Lastly,
water can be categorized as a private good (e.g. bottled water) when both
excludability and rivalry are high (White, 2013; Zetland, 2014; Aylward,
2016). With the abolishment of Law 7/2004 on water resources, the
constitutional court decided that the management of water is to be under
the power of state without taking into account the economic characteristics
of water. As a consequence, water is now considered a public good, despite
the fact that exclusion and rivalry differ from region to region in Indonesia.

Another important issue at the macro-level is the institutional

reform on drinking water management. In 2016, the central government
established a supporting agency at the national level for the development
of drinking water supply systems (Badan Peningkatan Penyelenggaraan
Sistem Penyediaan Air Minum, BPPSPAM). This national agency provides
assistance for and evaluates the performance of state and locally owned
water utilities. This agency is under the responsibility of the Minister
of Public Works. Since its establishment, one of the most prominent
products of this agency is the publication of an annual evaluation report
on the performance of PDAMs. Nevertheless, in July 2020, together
with 17 other state agencies, BPPSPAM was disbanded by President Joko
Widodo through the stipulation of Presidential Regulation 82/2020.
According to this regulation, the tasks and functions of BBPSPAM are
returned to the Ministry of Public Works. The underlying reasons for this
disbandment are that those agencies are ineffective and their existence
has caused bureaucratic complexity, overlapping tasks and functions, and
budget inefficiency. In doing so, the government aims to reduce the burden

Chapter 4 Decentralization and institutional design 135

 on the state budget amid the Corona Virus Disease 2019 (COVID-19)
pandemic.32

At the local level, the major institutional change on the provision

of drinking water occurred in 1999. The enactment of Law 22/1999,
as amended by Law 23/2014, changed the authoritarian centralist
governmental system to a decentralized one by transferring political,
administrative, and financial authority to the provincial and district/city
governments (Holzhacker et al., 2016). This distribution of power was
followed-up with an institutional reorganization at the local level (Hofman
& Kaiser, 2006). With this decentralization, PDAMs now operate as a
local government-owned utility. The local government is responsible for
the administration, financial management, appointment of the director
and the supervisory board members of PDAM, setting the tariff structure
of water usage, and allocating subsidies for PDAM.33

In the current situation, despite the devolution of authority in

delivering water services to the local government, a number of central
government ministries still establish water-related policies at the national
level (see Table 4.2 for an overview). This distribution of responsibilities
comes at the expense of vertical and horizontal coordination. Horizontally,
the fragmented authority among ministries with equal power has
generated a form of “sectoral egoism”; instead of achieving the mutual
objectives, each ministry sees to only its own tasks without coordinating
with the others (ADB, 2016). Vertically, coordination between the

32 Nina Susilo, “Presiden Bubarkan 18 lembaga lewat Perpres 82 Tahun 2020” [President disbanded
18 agencies through Presidential Regulation 82/2020]), Kompas.id, 21 July 2020, https://kompas.
id/baca/polhuk/2020/07/21/presiden-bubarkan-18-lembaga-lewat-perpres-82-tahun-2020/?_
t=xQqFmQ5AMPoPR4J8RU0CQ3GcHM3MdI507QjinKwkwIGEIdGnYy2sYHYqgsedx
33 A local government-owned utility (Badan Usaha Milik Daerah, BUMD) is a utility in which all or most
of the capital is held by the provincial or district/city governments (Government Regulation 54/2017). In
the case of PDAM, most of the PDAMs are owned by the district/city governments. Out of a total of 391
PDAMs in Indonesia, only two are owned by the provincial governments, namely PDAM Tirtanadi in
North Sumatera and PDAM Jaya in Jakarta (Hadipuro, 2010; BPPSPAM, 2019).

136 Chapter 4 Decentralization and institutional design

central and local governments is hampered by “local egoism” whereby
after decentralization, the local government leaders refuse to let their
authority and jurisdiction be trampled upon by the central government,
negatively affecting the vertical coordination between the different tiers of
the government (Firman, 2009). The empirical analyses of both vertical
and horizontal coordination problems will be examined in the following
section.

Chapter 4 Decentralization and institutional design 137

 Table 4.2 The dispersion of water-related responsibilities
Government
Responsibilities
Structure
Ministry of Public Works Responsible for providing physical infrastructure such as
water intake and pipe installation to transport water from
sources to treatment plants. The ministry is also involved
in the management of water utilities through BPPSPAM
as its agency.
Ministry of Planning Responsible for coordinating, synchronizing, and
integrating the national development plan, including the
development of the drinking water sector. Monitoring
the target achievement of SDGs, with clean water and
sanitation as one of the prioritized targets.
Ministry of Home Affairs Responsible for designing policies and organizational
structure of local governments, including the managerial
and ownership structure of local government-owned
enterprises such as PDAM. Formulating policies on water
usage tariff guidelines for local governments for calculating
and setting tariffs for PDAM.
Ministry of Health Responsible for regulating and monitoring policies on the
quality standard of drinking water.
Ministry of Villages, Responsible for monitoring and evaluating the
Development of utilization of village funds for development, including
Disadvantaged Regions the development of drinking water supply systems at the
and Transmigration village level.
Provincial Government Managing the provincial PDAM and coordinating
policies and programs across district-city boundaries
including water resources and river basin management
and providing physical infrastructure such as meter and
pipe installation for transporting water from treatment
plants to households.
District/City Government Responsible for providing physical infrastructure such
as meter and pipe installation for transporting water
from treatment plants to households, designing district/
city development plans, monitoring the quality standard
of drinking water, managing district/city PDAM, and
supervising the development of drinking water supply
system by the village governments and local communities.
Source: Government Regulation 122/2015; ADB (2016); Minister of Villages, Development of Disadvantaged
Regions and Transmigration Regulation 6/2020.

138 Chapter 4 Decentralization and institutional design

4.5.2 Meso-level

The macro-level analysis reveals that various policies have not only dispersed
authority over both the central and local governments but have also
created new organizational structures and inter-organizational relations.
However, coordination in and between them is at times difficult. The
analysis at the meso-level further discusses the issues of both horizontal
and vertical inter-organizational coordination.

As shown in the macro-level analysis, the dispersion of water-

related authority, horizontally within government agencies at the same
level, and vertically between the central, provincial, and district/city
governments, begs the question of how inter-organizational coordination
is conducted to solve problems with water infrastructure, water supply
and water management. At the national level, horizontal coordination
is hampered by the problem of “sectoral egoism”, that is, the ministries
involved are unwilling to coordinate their policies and programs to
achieve common goals. The result is an overlap of authority, contradictory
regulations, and duplication of programs and budgets. As pointed out by
interviewee #10 from the Ministry of Planning:

“The governance of the drinking water sector involves a number

of ministries and local government institutions, oftentimes
policies in each ministry are fragmented and contradict each
other. This problem hinders our efforts in achieving the national
development target regarding the access and coverage of drinking-
water services”.

Similarly, interviewee #13 from the Ministry of Health stated:

“Since water and sanitation are strongly related to public health,

which in turn have positive or negative externalities on society,

Chapter 4 Decentralization and institutional design 139

 the development challenges faced by these sectors cannot be
tackled by ourselves alone and should become an inter-sectoral
issue. However, coordination between government institutions
is an easy thing to say, but difficult to implement”.

Despite the fact that there are four coordinating ministries, the fragmented
and uncoordinated policies and programs are caused by the lack of authority
of those coordinating ministries. Although this coordination problem has
been recognized by President Joko Widodo when configuring his cabinet
in 2019, the coordinating ministries are still organizationally positioned
equally with other ministries without establishing a hierarchical authority
structure.34

Furthermore, the problem of coordination not only emerges

horizontally among the ministries but also vertically between the central
government and the local government. BPPSPAM’s 2019 annual report
reveals that the PDAMs in Indonesia face the following general problems:
low tariffs that cannot recover water utilities’ operational costs, a high
percentage of non-revenue water (NRW), poor management capacity,
and a lack of accountability (BPPSPAM, 2019).35 These results are also in
accordance with the research conducted by the ADB (2012, 2016) and the
World Bank (2006), indicating those constraints were the main challenges
for PDAMs in providing drinking water services. However, despite the
responsibility to evaluate the performance of PDAM, BPPSPAM lacks
power and authority to intervene in PDAMs’ activities. The BPPSPAM
report ends with recommendations, however, these are not being followed
up by local governments as the owner of PDAMs. As stated by interviewee

34 Detik.com, https://news.detik.com/berita/d-4767026/penjelasan-mahfud-md-soal-tak-ada-hak-veto-
menko-di-perpres-672019
35 Non-revenue water is “the difference between the volume of water put into a water distribution system
and the volume that is billed to customers. NRW comprises three components: physical (or real) losses,
commercial (or apparent) losses, and unbilled authorized consumption” (Frauendorfer & Liemberger,
2010, p. 5).

140 Chapter 4 Decentralization and institutional design

#14 from BPPSPAM:

“Since the authority in delivering drinking water services belongs

to the local governments, BPPSPAM as the central government
agency does not have the authority to force local governments
to comply with our recommendations. We also cannot impose
sanctions as a disincentive if local governments do not adhere to
our evaluation results; it all depends on the political process at
the local level.”

Correspondingly, interviewee #15 from BPPSPAM also argued:

“We do not have a strong legal basis for becoming involved in

the management of a PDAM, which is different to, for example,
a locally owned bank that should acquiesce to regulations from
the Central Bank of Indonesia and thus, cannot be overruled by
the district head or city mayor. The current ownership status of a
PDAM prevents us from directly intervening if the management
of a PDAM is not acting in accordance with the regulations.”

Another example of the central government’s struggle to intervene is to

be found in the managerial structure of a PDAM. As a utility, a PDAM
should ideally be managed upholding the principles of transparency,
accountability, liability, autonomy, and fairness (Government Regulation
54/2017). Nonetheless, the interview results reveal that many PDAMs are
not professionally managed due to the interventions of local government
leaders in its management structure. The ownership status of a PDAM
gives local government leaders the authority to appoint and dismiss
directors and supervisory board members of a PDAM. Although the
Government Regulation 54/2017 stipulates that the appointment process
should include a fit and proper test mechanism and adhere to several
selection criteria, the recruitment of directors, supervisory board members,

Chapter 4 Decentralization and institutional design 141

 and employees has become part of a patronage relationship instead of
the professional capability and capacity of the candidates (Bakker et al.,
2008). As interviewee #14 argues that:

“In various instances, the selection process is conducted more as

a formality than as a mechanism to find the best candidates to
manage PDAM”.

Furthermore, interviewee #7 stated the following:

“Many election campaign team members are appointed as directors

of a PDAM and as a consequence, this political intervention has
a negative influence on the autonomy of a PDAM, particularly
in setting up changes and innovations”.

Even though these problems have been identified, the central government
cannot sanction local governments as authority and resources have been
devolved to the local governments.

In addition, the problem of vertical coordination is also embodied

in the technical aspects. The central government through the Ministry of
Public Works is responsible for installing pipe connections from water
resources to water treatment, while the local government is responsible for
installing pipes from the water treatment plant to households. In practice,
however, the development of these two different installations is out of
sync. The infrastructure that has been built by the central government is
often unused and neglected because the local government did not build
the pipe installation to connect the water treatment plants to household
users. This problem is either caused by a lack of local government budget
to build such an installation or the infrastructure that has been built by
the central government does not correspond to local needs. The interview
results yield that there are coherent arguments both from the central

142 Chapter 4 Decentralization and institutional design

government and the PDAM with regard to this problem. Interviewee #10
from the Ministry of Planning explained:

“In some cases, water-related infrastructure projects of the

central government and local governments were not connected.
For example, the central government through the Ministry of
Public Works built an installation for water intake, but this
was not followed by the development of a water treatment
plant or household pipe connection by local governments. As
a result, there is an “idle capacity” because of the untapped
infrastructures.”

And interviewee #4 from PDAM Manokwari stated:

“Many drinking water infrastructure projects from the central

government including those built from 1990 onwards are
not currently in operation and have been abandoned. We
have never been involved from the beginning of the projects’
implementation and we often only found out about drinking
water-related projects when they were already finished and
handed over to the district government. As an operator, we
have no choice, we have to utilize this infrastructure, although
in the end much of this infrastructure cannot be used because
it does not meet local needs. Thus, we expect that the central
government could implement more effective coordination and
involve us in the project planning, so that when an infrastructure
project is finished, we can use it properly”.

The interventions of the local leaders on PDAM’s management

and the disconnection between the infrastructure projects are two instances
of problems that are difficult for the central government to overcome due
to the decentralization of political power. Although there is a hierarchical

Chapter 4 Decentralization and institutional design 143

 structure with clear administrative boundaries, the political structure
between the central government agencies and the local government
authorities is not explicitly hierarchical. Consequently, coordination
strategies cannot be forced by exercising direct command and control
from central to local governments. As previously mentioned, the central
government’s effort to increase the accessibility of drinking water services
by improving the performance of a PDAM are hindered by the reluctance
of local governments to follow orders and recommendations from the
central government. In spite of the poor performance of PDAMs, the
authority of local government leaders as the owner of a PDAM effectively
lets local government leaders impose their own agendas on a PDAM.

Using the lens of agency theory, it can be concluded that the

problems faced by the central government as the principal in exercising
control are caused by the two layers of agents at the district level, namely
the local government and the PDAM. On the one hand, the central
government provides recommendations and sets the goals that need to be
accomplished by a PDAM. On the other hand, directly enforcing those
goals is difficult as this depends on the compliance of the local government
leaders. The devolution of authority to the district government weakens
the hierarchical accountability structure between the central and district
governments. The main cause is to be found in the direct election of
district heads/city mayors, which provides them with a stronger political
footing and also an accountability to local constituents rather than to
the central government. In effect, local political accountability creates
a new agency relationship whereby the central government is not the
only principal since local constituents acquire standing as principals as
well. Especially, when considering that these local constituents choose
or sanction the agent (district head/city mayor/local council members)
through an election when the agent does, or does not, accommodate their

144 Chapter 4 Decentralization and institutional design

interests (Fischer, 2016). The emergence of multiple principals creates
an additional agency problem for district heads/city mayors, that is, to
be upwardly responsible by following the control and command of the
central government, or locally by establishing a policy that favors the
interest of local voters, for instance via the enactment of a low water tariff
policy. When the interests among different principals are contradictory,
for example when the central government commands to raise tariffs but
locally this leads to a loss of votes, incumbent local authorities have an
interest to resist the central government and stick to the low tariff policy at
the expense of PDAM’s productivity (Bakker et al., 2008; Araral, 2009).

4.5.3 Micro-level

The analysis at the macro and meso level reveal the interference of local
government leaders in the management and tariff structure of a PDAM. In
the Manokwari district, the most prominent problem concerns the tariff
setting. Currently, the tariff structure impedes the operational continuity
of PDAM in achieving the appropriate level of cost recovery. The issue can
be approached by looking at the PDAM’s dual contradictory functions.
PDAM has a social function to provide water as one of the basic public
services while at the same time, the continuity and sustainability of the
PDAM depends on its ability to achieve profits or at least, recover its full
costs. Government Regulation 122/2015 on drinking water supply system
tries to bridge these two contradictory functions by implementing a policy
of redistribution and subsidies. Customers who are charged a high tariff
subsidize low income customers who are to pay a lower tariff. However,
in Manokwari, this redistribution fails as the majority of customers
(5369 pipe connections) are charged the low tariff and a small minority
of commercial and industrial users (246 customers) pay the higher tariff
(PDAM Manokwari, 2019).

Chapter 4 Decentralization and institutional design 145

 The problem of covering costs for a PDAM is not only due to
redistribution but also to the provision of subsidies. A local government is
obliged to subsidize a PDAM when district heads decide to set tariffs that
are lower than needed to recover costs (Minister of Home Affairs Regulation
70/2016). In practice, however, this subsidy is often not allocated by the
local government, while at the same time the local government does set
a low tariff policy. Interviewee #3 from PDAM of Manokwari explained:

“I think our current tariff is the lowest in Papua. However,

the subsidy has not been regularly provided by the district
government. The last time we received a subsidy was in 2016
and there was no more after that”.

Interviewee #5 further argued:

“Despite the lack of funding from the district government and its
impact on our inability to achieve full cost recovery, we still strive
to provide our services through our own efforts in managing
PDAM. We have, on several occasions, proposed a subsidy for
PDAM in the district government budget; however, it has never
been approved by the district council. We worry our services will
be stopped if this mismanagement situation continues”.

Furthermore, the funding of PDAM is further complicated by the

incompatibility between the authority to determine tariffs and provide
subsidies. Tariffs are set by the district head, whereas the subsidy, upon
a proposal by the district head, is decided by the district council. When
district heads decide to impose lower tariffs, it does not automatically
mean that the district council will approve the subsidy. The debate
over the district government’s annual budget is a complex political and
bureaucratic process as it needs to accommodate various interests of
many different stakeholders. For instance, interviewee #5 from PDAM of

146 Chapter 4 Decentralization and institutional design

Manokwari stated:

“It is very difficult for us to argue with DPRD (district council)

to get approval for an annual subsidy for PDAM. Since the
subsidy should be regulated through perda (local government
regulation), we have proposed the perda for the subsidy to be
valid for two or three years instead of being decided every single
year. However, it was rejected by the chairman of DPRD, as well
as the DPRD members”.

As an agent of a local government, a PDAM has to meet different

mandates from multiple principals that cannot be accommodated at the
same time. For instance, the central government regulates PDAM to
achieve full cost recovery and gain a profit, while at the same time it also
obliges PDAM to serve people who live in poverty. Local government
leaders are reluctant to set tariffs to recover costs as it influences voters’
preferences, while the local council does not allocate a sufficient subsidy
to PDAM as it prioritizes expenses for other development projects.
Fukuyama (2015) argues that imposing diverse and contradictory
mandates generates bureaucratic dysfunctionality since these different
mandates cannot be achieved simultaneously by a government agency.
A PDAM needs autonomy, including in setting tariffs and managerial
autonomy, to distance it from local government’s interests to appoint its
top management.

4.6 Conclusion

Even though water is generally recognized as one of the basic human needs,
a high number of households in Indonesia still lack access to clean and
safe water. A major causal factor of this issue is the poor water governance
ranging from the management of water resources to the delivery of water
services. This study analyzed the problem of drinking water provisions

Chapter 4 Decentralization and institutional design 147

 by focusing on the institutional design of drinking water governance. By
dividing the analysis into three levels of institutional design and taking
the Manokwari district as a case study, the findings showed that the way
water is constitutionally interpreted, decentralization policies formulated,
and new organizational structures created at the macro-level shape the
coordination at the meso-level and have a further consequence on how the
relationship between the district government and how the service provider
develops at the micro-level.

Furthermore, by observing governance using principal-agent

theory, the problems of the triangular agency relationship between the
central government, the district government and PDAM can be identified.
First, at the national level, since responsibilities for water-related issues
are fragmented among ministries, effective coordination is hindered by
“sectoral egoism” whereby each ministry exercises its own authority to
achieve shared targets without proper coordination. Furthermore, the
central government has multiple agents at the local level, namely the local
governments and PDAM, in which different objectives for each agent are
also imposed. Nevertheless, these agents have different degrees of autonomy.
Under decentralization, the local governments have a greater level of
autonomy, while PDAM is positioned as a utility under the jurisdiction of
the district government. This institutional arrangement creates an obstacle
for the central government to enforce goals or to provide disincentives.
The excessive discretion of the local governments combined with the
lack of autonomy of PDAM have resulted in the reluctance of the local
governments to comply with the central government’s recommendations
when PDAM demonstrates a poor performance.

Second, the problem is induced by the numerous and overlapping

roles of the local government. On one side, the local government stands
as an agent of the central government while at the same time, due to

148 Chapter 4 Decentralization and institutional design

its ownership status, also acts as a principal of PDAM. Furthermore,
decentralization tends to steer the accountability of the local governments
in a downward direction to the local constituents rather than upward to
the central government. This downward accountability thus positions the
local government as the agent of the local citizens, which means that the
local government now has two different principals; namely, the central
government and the local citizens. As a result, the local government has
to compromise on the central government’s mandates or the interests of
local citizens.

Third, PDAM as the local government-owned utility is imposed

with different objectives and interests from multiple principals, which
are often difficult to accomplish because these goals are conflicting. For
instance, national policy has ensured that PDAM as a utility company
should meet the full cost recovery target, while at the same time assume
a social role and implement a low-tariff policy for the poor. Empirical
evidence in the Manokwari district also shows that despite the difficulties
to meet the cost recovery, subsidy to cover the costs of PDAM has also not
been provided by the district government.

The findings from each level of analysis thus suggest that

drinking water governance in Indonesia has been hampered by the failure
of institutional design after decentralization in synchronizing between
water-related policies, organizational structures, and the distribution of
authority. Based on these findings, the following recommendations can
be considered to improve the quality of drinking water governance. First,
at the policy level, it is important to distinguish the value of water based
on its level of rivalry and excludability. In doing so, the policy can be
asymmetrically implemented by adjusting the value of water according to
specific local circumstances. Second, at the organizational level, since the
authority on drinking water related issues is currently highly fragmented,

Chapter 4 Decentralization and institutional design 149

 the establishment of a single regulatory body is essential for ensuring the
coherence and cohesion of responsibilities for the provision of drinking
water services. This could be implemented, for instance, by creating a
specific water regulatory agency with its roles and functions separate from
the organizational structure of the Ministry of Public Works, as well as
by expanding and strengthening its authority over PDAMs. Third, it is
also critical to rearrange the distribution of autonomy of both the local
governments and PDAMs. Limiting the authority of the local governments
over a PDAM whilst allocating greater autonomy to a PDAM might be
constructive for improving independence and the quality of the corporate
governance of a PDAM. An equally important point is that the greater
degree of autonomy of PDAMs should also be accompanied by sufficient
organizational capacity and clear accountability mechanisms to measure
the performance of PDAMs.

Additionally, despite the use of a single case study, the theoretical

approach and the empirical findings of this study can also be generalized
and reflected into a broader context. The lack of access to safe drinking
water is a contemporary issue faced by many countries in which
decentralization has also been adopted as one of the approaches to address
this issue. Therefore, the theoretical approach of this study provides an
analytical insight into the importance of multi-level institutional analysis
in assessing the effectiveness of decentralization in improving the quality of
water governance. Furthermore, the empirical findings of this study may
also be relevant for other middle-income countries with a decentralized
governance system. Despite claims in favor of decentralization, the
findings of this study show that decentralization at times may also create
coordination barriers and even egoistic behavior of local governments
which may hinder the delivery of public goods and services. Accordingly,
decentralization in Indonesia also demonstrates how actors at the national

150 Chapter 4 Decentralization and institutional design

level have difficulty in attaining a balance between the urge to control
through hierarchical bureaucratic structures and local adaptability
where power and authority have been handed to the local governments.
Therefore, other countries that are experiencing similar governance issues
could learn from the findings of this study by considering (re)designing
their institutions towards a more integrative design between policy,
organizational structure, and the distribution of authority.

Finally, since this study primarily focused on governance, the

issues of physical characteristics associated with water supplies and their
implications on governance has not been given much attention. One
avenue for future research is therefore to elaborate on the impact of
the physical aspects of water, such as the water source, water network,
and water quality as well as the consequences of climate change and/or
urbanization on drinking water governance.

Chapter 4 Decentralization and institutional design 151

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