Report No: AUS0003418 . Indonesia Support to National Urban Water Supply Compendium for Public Private Partnership in Water Supply Sector Development in Indonesia . May 2023 . WAT . . . © 2017 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, 1 colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: “World Bank. 2023. Compendium for Public Private Partnership in Water Supply Sector Development in Indonesia. © World Bank.� All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. 2 Acknowledgement The Government of Indonesia acknowledge the need of private sector involvement in infrastructure development to achieve the targets of National Development Plan and Sustainable Development Goals. There have been growing number of private sector investment and involvement through infrastructure projects in various scale and scope. There have been also significant improvement and clarity in term of regulatory set up with the issuance of various government regulations, complemented by ministerial regulations and guidelines. This compendium was prepared as part of the study and technical assistance to support Indonesia National Urban Water Supply Program. This compendium is aimed to complement the existing regulations and guidelines for public private partnership in infrastructure development, with specific focus on water supply sector. This compendium was developed to help water utilities in selecting the suitable PPP scope and instrument, and to provide them with the step-by-step practical guidance in the preparation, implementation and monitoring and evaluation a PPP contract. This compendium consists of two sections: Section A Framework for Public Private Partnership in Water Supply Sector Development in Indonesia Section B Technical Guideline for Designing and Implementing Performance Based Contract for Non Revenue Water Reduction The study was convened and facilitated by the World Bank’s Indonesia Country Office and Water Global Practice. Section A of the compendium was prepared by the team of Economic Consulting Associates Limited. (ECA Ltd.) and SMEC Denka Indonesia, while Section B was prepared by the Castalia Advisors. Study results (including this compendium) are handed over to the Government of Indonesia c.q. the Directorate for Drinking Water Supply of the Ministry of Public Works and Housing, as part of the recommendations to further strengthen the Indonesia National Urban Water Supply (NUWAS) Framework. The study was made possible by financial contribution of the Indonesia Sustainable Urban Development (IDSUN) a trust fund supported by Switzerland State Secretariat for Economic Affairs (SECO), the Global Water Security and Sanitation Partnership (GWSP), the Public Private Infrastructure Advisory Facility (PPIAF), and the Private Infrastructure Development Group (PIDG). i Section A Framework for Public Private Partnership in Water Supply Sector Development in Indonesia ii Contents Introduction 1 PART 1: Water sector financing and PPP experience 2 1 Water supply and investment financing 3 1.1 Challenges in water supply development 3 1.2 Financing of capital investments in the water sector 5 2 The water sector PPP institutional context 6 2.1 Institutional stakeholders 6 2.2 The two different types of PPP projects 8 2.3 Policy and regulations governing B2B and KPBU transactions 9 2.4 Current experience with PPP in the water supply sector 11 PART 2: PPP Framework for the Water Supply Sector 15 3 Overview of the PPP Framework for the Water Supply Sector 15 3.1 The PPP Framework 15 3.2 The need to constantly recheck the project approach 17 3.3 Unsolicited projects 17 3.4 Suitability of PDAMs to implement B2B and KPBU projects 18 4 Stage 1 – Project Development 19 4.1 Initial or preliminary study 19 4.2 Outline business case 22 4.3 Full business case 25 4.4 Different pathways for KPBU, B2B and unsolicited projects? 28 5 Stage 2 – Transaction 31 5.1 Critical assumption on B2B projects 31 5.2 Overall transaction process 32 5.3 Unsolicited projects 34 6 Stage 3 – Implementation and monitoring 35 7 Key conclusions 38 A1 Support available to PDAM in Project Development 40 A1.1 Central government departments 40 iii A1.2 Donor Programmes 41 A1.3 Indonesia specific tools 41 A2 List of B2B transactions 43 A3 Template for Feasibility Study for B2B Transaction in Water Supply Sector in Indonesia 50 Tables and figures Tables Table 1 Central government agencies relevant to water sector PPPs 7 Table 2 Main laws and regulations governing water sector investment 9 Table 3 Main laws and regulations guiding KPBU projects 9 Table 4 Are B2B projects “Cooperation Projects�? 10 Table 5 Water sector KPBU projects 11 Table 6 B2B projects in Indonesia 12 Table 7 Four tests as part of the initial or preliminary study 20 Table 8 Checklist for first decision point 22 Table 9 Requirements for an OBC or pre-feasibility study 24 Table 10 Checklist for second decision point 25 Table 11 Checklist for third decision point 28 Table 12 Perspectives on B2B projects as “Cooperation Projects� 31 Table 13 Analysis of different institution which could monitor B2B and KPBU projects 37 Figures Figure 1 Water, sanitation and hygiene expenditure (WASH) per capita 3 Figure 2 Capacity categorisation of PDAMs 4 Figure 3 Matrix of local government (LG) and PDAM categorisation (NUWAS groups) 5 Figure 4 Project development framework for projects with private investment 16 Figure 5 Determining the PPP pathway in the project development process 17 Figure 6 Aligned with government priorities and suitability for KPBU or B2B 19 Figure 7 Confirming the PPP approach 23 iv Figure 8 From OBC/Pre-FS to projects to project approval 26 Figure 9 IIGF Risk Allocation Guidelines for Water Supply BOT scheme (example snapshot) 27 Figure 10 Approval pathways for solicited B2B and KPBU analysis and studies 29 Figure 11 Unsolicited projects 30 Figure 12 Transaction processes for B2B and KPBU transactions are very similar 33 Figure 13 Transaction pathway for unsolicited projects 35 Figure 14 Monitoring pathway for KPBU and B2B projects 36 v Abbreviations and acronyms APBD Anggaran Pendapatan dan Belanja Daerah Regional and Local Budget APBN Anggaran Pendapatan dan Belanja Negara National Budget B2B Business to Business Transactions BAPPENAS Kementerian Perencanaan Pembangunan Nasional Ministiry of National Development Planning BOO Build Own Operate BOT Build Operate Transfer BPKP Badan Pengawasan Keuangan dan Pembangunan Financial and Development Supervisory Agency BPPSPAM Badan Peningkatan Penyelenggaraan Sistem Penyediaan Air Minum BUMD Badan Usaha Milik Daerah Regional government owned enterprise or company BUMN Badan Usaha Milik Negara State owned enterprise DAK Dana Alokasi Khusus Special budget allocation DAK Dana Alokasi Khusus ECA Economic Consulting Associates FBC Full Business Case FS Feasibility Study GCA Penanggung Jawab Proyek Kerjasama Government Contracting Authority GLAAS UN-Water Global Analysis and Assessment of Sanitation and Drinking-Water IIGF / PT PII PT Penjaminan Infrastruktur Indonesia Indonesia Infrastructure Guarantee Fund InfraSAP Indonesia Infrastructure Assessment Program vi KPBU Kerjasama Pemerintah Dengan Badan Usaha PPP LG Local Government LKPP Lembaga Kebijakan Pengadaan Barang/Jasa Pemerintah National Procurement Agency MOF Ministry of Finance MPWH Ministry of Public Works and Housing MOHA Ministry of Home Affairs NUWAS National Urban Water Supply Framework O&M Operations and Maintenance OBC Outline Business Case PDAB Perusahaan Daerah Air Bersih Regional government owned bulk water company PDAM Perusahaan Daerah Air Minum Local Government owned water supply company (utility) PDF Project Development Facility PerPres Peraturan President Presidential Regulation PPP Public Private Partnership Pre-FS Prefeasibility Study PT SMI PT Sarana Multi Infrastruktur RFP Request For Proposal RISPAM Rencana Induk Sistem Penyediaan Air Minum Water Supply Development Master Plan RPJMD Rencana Pembangunan Jangka Menengah Daerah District/municipal Medium Term Development Plan RPJMN Rencana Pembangunan Jangka Menengah Nasional National Medium Term Development Plan RUOT Refurbish Upgrade Operate Transfer RWSS Regional Water Supply Scheme vii SDG Sustainable Development Goal SPAM Sistem Penyediaan Air Minum Water Supply System TA Technical Assistance VGF Viability Gap Finance VNR Voluntary National Reviews WASH Water Sanitation and Hygiene WB World Bank WSS Water Supply and Sanitation EPC Engineering, Procurement and Construction WTP Water Treatment Plant viii Introduction This report was prepared based on the results of comprehensive review on the previous studies on the legal and regulatory environment of the private sector participation in water sector in Indonesia, assessment of the operational challenges, risks and opportunities facing local government’s owned water utilities, Perusahaan Daerah Air Minum or PDAMs (and by extension local governments) as they develop PPP projects and/or receive project proposals from private investors. The PPP Framework for the water sector that is presented in this report is formulated around a decision tree for PDAMs in different stages of project development. PPP projects in Indonesia are typically referred to as Kerjasama Pemerintah dan Badan Usaha (KPBU) projects i.e., projects between the private sector and the government. Analysis in this study also covers business to business transactions (B2B), which are governed by a different set of regulations and do not receive the same level of central government support. B2B is between PDAM (which is a public enterprise) with private sector, thus B2B transactions are in fact subset of PPP transactions as explained in this paper, and should be covered in the Framework. Throughout the paper we have attempted to be clear about where differences and similarities between KPBU and B2B projects. Where appropriate, we have also attempted to specify whether we are referring to solicited or unsolicited projects. Unsolicited projects are a prominent feature of the project development landscape in Indonesia, particularly for B2B transactions, and therefore should be addressed constructively in any PPP approach that is adopted. The PPP Framework for the Water Supply Sector was developed based on the above understanding, with inputs obtained from series of consultation with USAID supported IUWASH PLUS team, government officials, and two workshops dated 22 January 2020 and 5 March 2020. The document is divided into two main parts: Part 1 sets the context for Water Sector PPPs in Indonesia, while Part 2, explores the overall PPP Framework. The PPP Framework in Part 2 is divided into the following sections: Section 3 which focuses on project development and the steps that PDAMs need to take from the initial project concept to the point where the project is approved for tender. Section 4 which focuses on the transaction stage and how PDAMs should approach project transactions to maximise value for consumers. Section 5 which highlights the benefits of a monitoring and implementation institution for water sector PPPs in Indonesia (which is a significant institutional gap). Finally, the report concludes with recommendations for the next steps. Annexes include review of the tools available to PDAMs, list of PPP transactions, and a template for Feasibility Study for B2B transaction. 1 PART 1: Water sector financing and PPP experience 2 Water supply and investment financing Challenges in water supply development Vision 2045 Indonesia Maju and the RJPMN 2020-2024 set very ambitious goals for the expansion of clean water access in Indonesia. The targets in the RPJMN are intermediary in achieving the aspirations of Sustainable Development Goal (SDG) 6, namely 100% of the population having access to a sustainable source of safe water by 2030. In line with the aspiration of SDG 6, the RPJMN sets a target of 10 million new household connections for piped water. The target relies on PDAMs, water utilities responsible for the provision of piped water. There are two key challenges facing the water supply sector in achieve the targets set out by the Indonesian government: An investment or financing gap, which indicates the level of investment needed as opposed to the financing currently available. A capacity gap, which reflects the lack of financial and operational capacity of PDAMs to fulfil the objectives set out by the government. The investment gap Indonesia has historically spent significantly less on the water and sanitation sector on a per capita basis compared to other Asian developing countries (Figure 1). The government has estimated that meeting its target of 10 million new connections will required additional investment ranging between IDR 88 -141 trillion1. Figure 1 Water, sanitation and hygiene expenditure (WASH) per capita Source: UN-Water Global Analysis and Assessment of Sanitation and Drinking-Water (GLAAS) 2019 Report Records National WASH expenditure. Assumed Thailand budgeted is total national expenditure. Chinese budget is customer contribution added to the national budget. World Bank 2018 population data used to calculate on per capita basis. 1 Numbers cited in presentations by BAPPENAS titled: PENYEDIAAN AKSES AIR MINUM 2020-2024 and FGD STRATEGI PENDANAAN RPJMN 2020-2024 SEKTOR AIR MINUM 3 Achieving the RPJMN targets will involve significantly ramping up investment in the water sector. Given the competing priorities on public expenditure the government is relying on other financing solutions including private sector investment. The capacity gap PDAMs have limited operational and financial capabilities, which constrain their ability to either self-invest from their collected tariffs or to borrow and invest in new capital projects. Utilities in developed countries rely on such approaches to build their asset base and finance new investments. BPPSPAM, an organisation tasked with monitoring PDAM performance, classifies approximately 41% of PDAMs as unhealthy or sick (Figure 2). The categorisation is based on four parameters: financial, service or outcome orientated, operational and human resource related. Figure 2 Capacity categorisation of PDAMs Source: BPPSPAM from BUKU KINERJA BUMD PENYELENGGARA SPAM 2019 The key distinction between the different categories can be summarised as2: Healthy PDAMs can manage their loans, capable of replacing assets, efficient in their operations and profitable (ie, they recover more than their O&M costs). Unhealthy PDAMs can cover their operating costs and are at higher risk of failing to meet their debt obligations. Sick PDAMs are typically loss making, have very limited resources and may have historical problems with their financing obligations. The constraints on PDAM capacity limit the amount of innovative solutions which can be developed and implemented by a significant proportion of PDAMs. PPPs and other solutions should be targeted at healthy PDAMs which have the financial and technical capacity to manage complex procurements. The current estimation of Healthy PDAMs hides significant disparities within each category. The NUWAS framework which is more focused on the financial health of the 2 Summary of distinction between PDAMs is summarised and presented here available: https://ptsmi.co.id/wp-content/uploads/2018/09/SMI_Insight_Q2_2017_ENG.pdf 4 PDAM and fiscal capacity of local government is presented in Figure 3; it further distinguishes between different types of healthy PDAMs. Figure 3 Matrix of local government (LG) and PDAM categorisation (NUWAS groups) Source: ECA and World Bank We propose that only PDAMs in Group 1 and Group 2a pursue KPBU and B2B projects independently. Category 2b and 3 PDAMs should request assistance when pursuing these projects. Category 4 and Category 5 PDAMs would be advised to concentrate on improving their financial and operational performance rather than focusing on B2B and KPBU projects, which are inherently more complex and require more time and effort in project development. Financing of capital investments in the water sector Water sector tariff setting is governed by local government and MOHA has issued regulations on full cost recovery tariffs and subsidies (MOHA Regulation No. 70/2016 and No. 71/2016). The tariffs are ultimately set by local government, and only approximately 30% of PDAMs meet the full regulatory requirements specified by MOHA3. Central and local government budget constraints and competing priorities for public expenditure mean that additional public financing for water sector investments will not be sufficient to maintain the policy aspirations of the government. Given these challenges, BAPPENAS has identified private financing as one of the ways of closing the financing gap which is assessed to be between IDR 83 – 141 trillion. The Indonesian government hopes that between IDR 15 – 23 trillion4 can be funded by PPP projects. The approach also assumes continued funding from: Central government through allocations from the Anggaran Pendapatan dan Belanja Negara (APBN). Water sector investments in Indonesia have historically been driven by public financing 3 InfraSap, World Bank 4 Numbers cited in presentations by BAPPENAS titled: PENYEDIAAN AKSES AIR MINUM 2020-2024 and FGD STRATEGI PENDANAAN RPJMN 2020-2024 SEKTOR AIR MINUM 5 directed through central government allocated resources. Decentralisation means that central government will play a less prominent role in future allocations of funding. Local government from the Anggaran Pendapatan dan Belanja Daerah (APBD). However, it is currently unclear if local governments will fully replace the gap left behind by central government – this gap would need to be filled by discretionary funds transferred to local government from central government, therefore a like for like replacement of funding is not likely, particularly where local governments have low fiscal capacity. Special grants or allocations from central government including the Dana Alokasi Khusus (DAK) and the Hibah Air Minum (water supply grants) Additionally, the government should consider different sources for funding water supply investments such as customer contributions for water supply connections, the role that business can play as commercial anchors to improve the financial health of PDAMs, and the use of corporate social responsibility funds. An important avenue for PDAMs to pursue is to anchor connection and network expansion around industrial customers and water-intensive businesses. Having a broad customer mix allows cross-subsidies to be designed through differentiated tariffs and connection charges in order to meet social goals while also achieving good financial performance. In particular, large customers with high willingness to pay can provide opportunities for PDAMs to cross subsidise poor domestic customers and expand their network by investing in new connections. Improved finances more generally open new opportunities to engage with private sector financiers and borrow additional finances for capital investments. Properly managed, network expansion and price differentiation can be used to discourage businesses from over-exploitation of ground water. The water sector PPP institutional context Institutional stakeholders Government Contracting Authority or PDAM The Government Contracting Authority (GCA), is the entity that drives the process of project development under Indonesia’s PPP framework. It is the entity responsible for project development and is responsible for the PPP project internally within government. The PDAM is the GCA in most water supply projects. For Regional SPAM, which covers more than one local government and provides services to more than one PDAM, a different GCA may be more appropriate (we discuss this in Discussion Paper #3). Local and regional government Local and regional governments play a critical role in the development of projects. The role is both explicit and implicit as local and regional governments hold financial allocation and planning power. These powers need to be exercised to ensure availability payments are guaranteed if required under government projects. Furthermore, local and regional governments are the equity holders in the PDAMs, and like shareholders in other companies their approval is necessary for implementation of projects. Central government institutions 6 Various water sector and PPP institutions play a role in governing and monitoring PPP transactions. These institutions and their roles are summarised in Table 1. Table 1 Central government agencies relevant to water sector PPPs Stakeholders Role relevant to Water Sector PPPs Ministry of Public Works MPWH is the traditional owner water sector assets and is and Housing (MPWH) responsible for water sector master plans. MPWH’s role has changed with devolution and it is in the process of transferring Directorate General of water sector assets to local government. Directorate General Cipta Cipta Karya Karya is responsible for water supply and sanitation development Directorate General including master planning. Directorate General Infrastructure Infrastructure Financing Financing is tasked with formulating and implementing infrastructure financing policies. The Directorate may act as the coordinator for policy and programme development (the departments remit covers all sectors in MPWH). Ministry of Public Works Assist the Central Government and Local Government in the and Housing (MPWH) improvement of water supply systems by providing support to PDAMs. Support ranges from advice on individual B2B and KPBU BPPSPAM transactions to providing overall support to PDAM planning and operations. BPPSPAM also monitors the overall performance of PDAMs across a number of parameters to measure financial and operations capability. Ministry of Home Affairs Directorate General of Regional Finance Development has roles: (MOHA) Management of regionally owned enterprises, regional financial Directorate General of institutions and Regional Investment Regional Finance Management of Regional Public Service Agency Development Facilitation of managing regional financial information systems Implementation, administration, accounting and reporting of regional financial accountability Encourage improvement in the quality of management of BUMD and BLUD. Ministry of Finance (MOF)- PT SMI is a state owned enterprise belonging to the Ministry of PT Sarana Multi Finance. It has the following roles: Infrastruktur (PT SMI) Support the development of projects using the Project Development Facility (PDF) Provide financing and investment for select investments alongside other institutions. MOF- IIGF is an independent state owned enterprise associated with the Ministry of Finance and is responsible for appraising, structuring, 7 Stakeholders Role relevant to Water Sector PPPs PT Penjaminan processing claim payment and providing government guarantees for Infrastruktur Indonesia (PT infrastructure KPBU projects in Indonesia. PII)/Indonesia Infrastructure Guarantee Fund (IIGF) The Ministry of National Is the national development planning agency in Indonesia which is Development Planning responsible for PPP planning and implementation. It is responsible (BAPPENAS) for producing an annual PPP book which lists all KPBU projects and updates for investor consideration. National Procurement LKPP issues rules for all central government procurement. The Agency (LKPP) regulations form LKPP cover PPP projects and specify the regulatory requirements for starting market engagement with potential investors (their qualifications) to financial close preparation. The two different types of PPP projects There are two different types of PPP projects in Indonesia, B2B project and KPBU projects. Different regulations and rules govern the projects, and both have different approving and reviewing authorities. The main difference between the two projects is the provision of central government guarantees and subsidies. KPBU projects KPBU projects are defined by the Indonesian government as pure PPP projects. These projects typically require subsidies or guarantees from central government. The support is likely to be in two forms: Viability gap funding (VGF) ie, central government financial contribution to PPP project construction cost to increase the financial viability of the project. Support is governed under MOF Reg no. 223/2012. Sovereign guarantees are provided to make the project more bankable. The guarantees improve the credit worthiness of the GCA and mitigate against possible actions that the GCA or government in general may take e.g., early termination. In most instances the GCA is the PDAM, however for regional projects it may be the central or provincial government. Guarantees are governed under MOF regulation 8/2016. B2B projects B2B projects are transactions between the PDAM as a government owned enterprise and other businesses. As such, these transactions typically follow local government procurement rules. Stakeholders do not agree if regulations on PPPs, notably Pres Reg no 38/2015, apply to these projects. This disagreement is discussed in detail in Section 5.1 below. In the PPP Framework, B2B projects are considered to be a subset of PPP projects. Policy and regulations governing B2B and KPBU transactions All water projects 8 Various rules and regulations govern the supply of water, the main ministries as noted above are the MPWH and MOHA. The key laws and regulations pertaining to water sector investment are summarised in Table 2. Table 2 Main laws and regulations governing water sector investment Legal provision Summary provisions Article 33 of the 1945 Constitutional provision mandating that every citizen has a right Constitution to live in spiritual and physical welfare. The judicial review of the Water Resources Law which involved interpreting provision 33 concluded that this provision also applied to the water sector. Water Law 17/2019 The water law mandates that the state owns all the water resources for the use of the community. The government can issue licenses to use water for non-commercial activities and business purposes outside of those main daily needs whose fulfilment is guaranteed by the government. Government Regulation The regulation proposed different roles for central, provincial number 122/2015 and local government in the delivery WSS. The provisions range from central government providing policy advice and working Drinking Water Supply System with regional governments on regional SPAM, to advising local government on their roles and responsibilities with respect to water supply. MPWH Regulation number The regulation covers the development and management of 27/2016 regarding SPAM. It sets out Minimum Standard Services set by the Implementation of Drinking Minister and sets out the requirement for SPAM planning to be Water Supply Systems consistent and coordinated. MOHA Regulation No. 70/2016 These regulations mandate the institution of full cost recover and No. 71/2016 tariffs in the water sector. Where tariffs are not cost recovery, explicit subsidies must be provided by local government to ensure that the PDAMs still achieve cost recovery. MOHA, Regulation No. 96/ Dictates the use of availability payments in KPBU and B2B 2016 transactions. Availability payments must be specifically accounted for in local and regional budget planning. KPBU The institutional environment governing KPBU projects is clear. We set out the key policy and regulatory guidelines for KPBU projects in Table 3. Table 3 Main laws and regulations guiding KPBU projects 9 Legal provision Summary provisions Presidential Regulation The overarching regulation that covers cooperation between (PerPres) Number 38/2015 government and business entities in infrastructure provision. The regulation governs rules and procedures around risk guarantees and subsidies. At present, the law only applies to KPBU projects, but could equally apply to B2B projects and that interpretation is incorporated into the PPP Framework for the Water Supply Sector. BAPPENAS Reg no. 4/2015 The regulation sets out details of the administrative procedure and how the cooperation between the GOI and the private sector works. It lays out the details of the project development process, specified the activities that need to be undertaken as part of this process. The regulation also lays out the transaction process and the process that needs to be followed in its implementation. LKPP Reg no. 29/2018 Guidelines for procurement of a business entity for KPBU in (succeeding earlier LKPP Reg infrastructure provision. The regulation covers issues which no 19/2015) range from the GCA, project announcements, and procurement requirements (including prequalification documentation, evaluation approach), and appointment requirements. B2B There is currently no clear framework governing B2B transactions. There are contradictory rules and regulations depending on whether these projects are interpreted as “Cooperation Projects� or not. If B2B projects are not “Cooperation Projects� as defined by PerPres 38/2015 then only local government procurement rules apply. In this case, the Board of Directors for the PDAM approve procurement rules in line with local government procurement regulations and these are applied to all B2B transactions. This is the current practice followed by PDAMs. We summarise two different perspectives on whether B2B projects are “Cooperation Projects� in Table 4. Table 4 Are B2B projects “Cooperation Projects�? B2B projects ARE “Cooperation Projects� B2B projects ARE NOT “Cooperation Projects� B2B transactions are “Cooperation Projects� B2B transactions are between two businesses, because PDAMs are primarily 100% local and the risk is borne by the PDAM, a local government owned. As such, major liabilities government owned enterprise (BUMD), and and risks are passed onto the shareholders. A the private sector company. These risks are not stressed PDAM or local government would in borne by the state therefore these transactions turn pass on the contingent liabilities and risks should be governed like other business to to the central government. business transactions and in compliance with local government rules. 10 It is very likely that local governments, PDAMs and water contractors which suffer significant financial stress due to water sector project development will approach other institutions of government for relief. Therefore, we interpret of B2B projects as “Cooperation Projects� in line with the spirit and wording of PerPres 38/2015. This does not mean that B2B projects need to be approved by central government, particularly where no guarantees and Viability gap financing (VGF) is requested. Instead the process for project development for B2B projects should be standardised and made more robust for appraisal and procurement, with a more transparent acknowledgement that even if the majority of risks are borne by the PDAM and private partner, there are some implicit risks which are allocated to local, provincial and central governments. Unsolicited KPBU and B2B projects Many of the projects received by PDAMs are unsolicited projects. Unsolicited projects are not inherently bad, but they need to be subjected to the same analytical rigour and scrutiny that solicited projects are subjected to. The Framework for solicited and unsolicited projects should be similar with two key differences: The project initiator is not the PDAM, but the private sector entity that reports to the PDAM. The onus should be on the PDAM to ensure that the analysis is robust, and where the PDAM feels unable to check the quality of these projects it should request assistance from central government eg, BPPSPAM. If VGF and guarantees are not required, then the approval process should not require central government approval. However, the analytical prerequisites for all projects should be standardised – this means that it should not take substantial effort to move between KPBU and B2B projects. The time and effort spent on analysis projects should be commensurate with their value not the type of project. Current experience with PPP in the water supply sector Indonesia has a number of KPBU and B2B projects operational in the water sector. KPBU projects Table 5 presents several KPBU water projects at different stages of development. We observe: These projects are all of a significant size i.e., greater than IDR 1 Trillion They rely on government guarantees or subsidies. Table 5 Water sector KPBU projects Project description Cost and subsidies Construction stage Umbulan water supply (a Regional Water Supply providing bulk IDR 2.1 Trillion water to 5 municipalities/districts). PDF, VGF and IIGF Guarantee GCA: East Java Government (Serving different PDAMs in the same province). 11 Project description Cost and subsidies 4,000 l/s, 90km line rehabilitated connecting ~320,000 households. Bandar Lampung water supply IDR 1.1 Trillion GCA: Way Rilau Regional Water Supply Company (PDAM) PDF, VGF and IIGF Guarantee Water intake 825 l/s, Water treatment 750 l/s, +22 kms transmission system, reservoir (10.000 m3) and 31 kms pump distribution system West Semarang water supply IDR 1.2 Trillion PDF and Guarantee5 GCA: Tirta Moedal Regional Water Supply Company (PDAM) Water treatment 1,000 l/s Procurement stage Jatiluhur Water Supply 1 IIGF guarantee6 GCA: Perum Jasa Tirta 2 delegated by MPWH Central government agency can be the FCA if project covers multiple provinces. The regional project will supply Karawang Regency, Bekasi Regency, Bekasi City and DKI Jakarta. Water treatment 5,000 l/s Peknabaru water supply IIGF guarantee GCA: PDAM Tirta Siak Pekanbaru Rehabilitate water treatment plan 500 l/s, new 250 l/s Source: KPPIP, BAPPENAS PPP Digest, MOF Executing and Developing PPP Projects B2B projects There are more than 71 B2B water projects covering a range of projects in the water sector, such as full concessions, Build-Operate-Transfer (BOT) and Operations and Maintenance (O&M) projects. The majority of these projects are water treatment plants with additional rehabilitation work. Some of these B2B projects are directly linked to new developments and housing enclaves. We provide a summary of an estimate of the number of active B2B projects in Table 6. It should be noted that many of these projects are unsolicited, highlighting our earlier point that any framework should consider how these projects are treated given their pervasiveness in the sector. 5 We have been verbally informed of this (we have not yet seen a formal document explaining government support) 6 Unclear what the size of guarantees provided is and whether these include guarantees against default 12 Table 6 B2B projects in Indonesia Contract type Number of contracts Contracted volume (litres per second) Full concession contract (water treatment plant — WTP — up to end-users) 10 14,620 BOT (WTP + transmission & main distribution) 20 9,530 RUOT (Refurbish Upgrade Operate Transfer) 14 14,220 O&M for intake and WTP 2 3,040 BOO/BOT for housing & industrial estate 25 6,495 Source: World Bank InfraSap 2019/20 B2B implementation issues Our discussions with PDAMs and individuals familiar with the water supply sector suggest that there are significant obstacles in developing and implementing B2B projects. The most common obstacles are that B2B projects can be ill designed with insufficient planning for demand or raw water supply. Unsolicited proposals may be submitted without sufficiently considering the full capital investment requirements and the fact that the private partner will not be able to get VGF or guarantees. Furthermore, some PDAMs have mentioned that they can face pressure from policy makers (namely local government) to accept private sector proposals and achieve quick results. Whether well intentioned or not, these pressures can force PDAMs to accept proposals which are not well developed. Finally, many PDAMs are not fully aware of the obligations that they are accepting when signing off on B2B agreements. This is one of the main implications of developing solicited and unsolicited B2B projects without a standardised approach. The practical implications of the above are that projects are delayed or redesigned and they may go into arbitration (such as Tangerang a B2B project where the residual payment at final transfer was in dispute). The Financial Development and Supervisory Agency in Indonesia (BPKP) has also raised concerns with how some B2B projects are structured. Box 1 provides a narrative of one of the more problematic B2B projects in Indonesia. Box 1: Experience of the Jakarta water concession A B2B transaction initiated by PAM JAYA, the project was negotiated with two Indonesia firms in joint venture with two international water sector operators (Thames Water and Lyonnais des Eaux). The contract took 2 years to negotiate and the final agreement remained subject to much disagreement. The concession was for 25 years and while different parties argue over the exact events (and their interpretation), there have been claims of a lack of clarity from the GCA on the proposal, political interference in decision making and insufficient consideration of risk 13 allocation. The aforementioned factors and depreciation of the Indonesian Rupiah between 1998 - 1999 led to contract renegotiation. Furthermore, there were targets set out in the service level agreement which were insufficiently thought out, particularly on the service level (which was stated to be 100% by the end of the concession) and the level of non-revenue water. It was unclear whether these targets were firm or indicative resulting in significant debate and arbitration. The concession was terminated in 2017 based on a Supreme Court Decision, and the government has consequently amended the Water Law and has initiated the process to find a new concessionaire for the project. Source: A World of Water: The Jakarta concession and the limits of contract7 Gaps identified from existing B2B and KPBU framework and projects The following gaps from the analysis of the existing framework and the existing B2B and KPBU projects have been identified: While the process for KPBU projects is clear, and has led to successful implementation of flagship projects (Table 5), the pathway for B2B projects is not clear. Unlike KPBU projects, there are no consistent policies for PDAMs to follow for B2B projects. This translates into varying levels of analysis and consultation before B2B projects are approved in line with different local government rules. We propose that both KPBU and B2B projects should follow a standardised approach based on the value of projects rather than on the type of project. The PPP Framework laid out in Part 2 incorporates the adaptation of the current framework for KPBU projects to B2B projects. There is no entity consistently monitoring the various B2B and KPBU projects in the water sector. While KPBU projects requiring central government support are easy to track, it is much harder to estimate the number of B2B transactions that have taken place in the water sector. The current approach poses challenges in understanding the net commitments made to the private sector by local and regional governments. Furthermore, it is hard to identify innovations for improved implementation of projects (B2B projects in particular). In Section 6 we analyse several options to establish an entity whose remit should include tracking and monitoring data on B2B and KPBU projects. We are also aware that Indonesia is in the early stages of considering an Infrastructure Financing Law (current at the White Paper Stage) which will looks at the possibility of one PPP regulator monitoring all PPPs (or the requirement for different sectoral bodies monitoring PPPs). Some stakeholders highlighted that KPBU projects to date have required significant central government support in the form of VGF limits their replicability. This observation is correct; however, this constraint is typical of water sector PPP projects around the world and indicates a continued role for central government in identifying priority areas and approving applications for central government support in these areas. Development of new KPBU projects in West Semarang and Jatiluhur suggest that there are opportunities for projects to be developed which are not reliant on VGF. While some stakeholders have commented that this implies free money, this is not true – these guarantees are contingent liabilities which should be taken into account by MOF. A common refrain from policy makers is that KPBU projects take too much time. This is partially about recognising that project development time is commensurate with the size of the project. 7 https://doi.org/10.1163/9789004254015_013 14 Large projects by their nature require more planning, and development costs are equally larger than smaller projects (or they should be). However, it is also worth noting that once an approach for KPBU projects is established, as it has been by the recent financial closure of KPBU projects, going forward these projects should take less time as stakeholders become more familiar with the process for these projects. In contrast, B2B projects and unsolicited projects are perceived to be faster. If PDAMs and local governments apply the same analytical rigour, these projects are likely to take more time than has been the case in the past, but the planning will be more robust. PART 2: PPP Framework for the Water Supply Sector Overview of the PPP Framework for the Water Supply Sector The PPP Framework presented below covers the project development cycle for all B2B and KPBU projects based on a consistent interpretation of Indonesian rules and regulation. The Framework draws heavily on the existing KPBU framework, but is designed to be applicable to all PPP projects, KPBU and B2B, solicited and unsolicited. To facilitate adoption of the Framework, existing processes and terminology are used wherever possible. In addition to laying out the PPP Framework, the subsections below draw attention to some of the key points to take note of when using the Framework. The PPP Framework The PPP Framework is presented in Figure 4. The major steps along the way are highlighted, including key decision points and questions to be asked at each stage. Figure 4 Project development framework for projects with private investment 15 Source: ECA adapted from GOI documents Stage 1: Project development The development stage requires the PDAM to answer three sets of key questions: Is the project needed, based on the initial analysis, and if so what type of project it should be (KPBU, B2B or self-finance)? Does the desk-based outline business case (OBC), which is referred to as the pre-feasibility study (Pre-FS) when developed by the private sector, suggest the project is a good idea? If the OBC is further stress tested and developed into a full business case (FBC), or feasibility study (FS) if developed by the private sector, does it still support the project and proposed delivery solution? These questions are to be answered for all projects. Stage 2: Transactions KPBU projects are governed by specific rules set out in PerPres 38/2015 which apply to all “Cooperation Projects�. Stakeholders do not consider these rules to apply to B2B projects which also meet the technical definition of “Cooperation Projects�. The Framework distinguishes between the approval requirements for B2B projects and nonetheless requires that the transaction phase for B2B projects closely resemble KPBU projects, particularly when considering unsolicited projects. Stage 3: Monitoring Once a project has been commissioned, it needs to be monitored to ensure that the contractual obligations to government are fulfilled. The current framework expects the PDAM to manage this process. A more centralised body monitoring water sector B2B and KPBU projects at the provincial or central level would be beneficial. The need to constantly recheck the project approach 16 Project development can be a complex and messy process. The current approach suggests that by the end of the initial study, before the more detailed analysis at the OBC and FBC stage, a delivery model can be identified which remains constant over a project’s life. Such an approach is likely to prejudge the best solution and does not fully consider variations and redesigns during project development. It is common and often beneficial for projects to evolve and change during the development and tendering process. To accommodate this, the project development pathway should be flexible, as illustrated in Figure 5. Figure 5 Determining the PPP pathway in the project development process Source: ECA If B2B projects are developed to a good standard, it should be relatively easy to move between the different project types. Such a move would be necessary if a B2B project needed central government support. Unsolicited projects Indonesian regulations are designed to accommodate unsolicited projects. These form most of the B2B projects currently in development. While unsolicited projects mean that the private sector develops the projects, private sector proposals (Pre-FS and FS) still need to be tested and approved by PDAMs. Reviewing these documents and testing their assumptions is likely to follow a very similar pathway to developing these documents from scratch. The time periods involved are likely to be greater since the private sector promoter must complete the studies and then the PDAM has to spend time reviewing the work to ensure that it is sufficiently robust. A capacity gap is likely to exist for PDAMs reviewing unsolicited projects. All large projects (as a percentage of PDAM revenue or profits) should be reviewed with support from central government agencies like BPPSPAM or through the use of Project Development Facility resources. The threshold for this is to be determined after discussion with MOF, BPPSPAM and PDAMs. Furthermore, as mentioned in the section below, unsolicited projects should not be developed by PDAMs which have low capacity without the support of central government. Suitability of PDAMs to implement B2B and KPBU projects The PPP Framework assumes that PDAMs have the capacity to implement robust project development and assessment processes. The Framework highlights the responsibility given to PDAMs to assess the value, risks and costs of solicited and unsolicited projects. It is difficult to see how PDAMs which are not healthy (Group 3, 4 and 5) can consider B2B and KPBU projects. More complex B2B and KPBU projects and comparatively sicker PDAMs are likely to require more central government assistance. 17 Where PDAMs do not have the capacity to develop B2B and KPBU projects (according to the NUWAS categorisation), they should access the financing and support facilities under that Programme. Furthermore, PDAMs can access project development and assessment support through BPPSPAM and the PDF to develop projects if required for strategic projects. In many instances the value of network expansions and new projects for poorly performing PDAMs is going to be limited when compared to more fundamental operational changes which are likely to add more value. Finally, for the benefit of all PDAMs an interactive basic awareness briefing on KPBU and B2B projects (solicited and unsolicited) should be developed and updated on a six monthly basis. The intention is to regularly inform and remind PDAMs and local governments of the risks of not following a standardised approach and to increase awareness of PPPs. Initially, the circular should be developed by BPPSPAM with World Bank support. Once a PPP monitoring and evaluating entity is formed, this could be one of its functions, and this could expand into a more comprehensive capacity building role. 18 Stage 1 – Project Development Objective Assess if the project is a good idea and determine the best way of delivering the project. Key questions / Is the project a good idea? decisions What is the best way to deliver the project? Trade-offs between technical solution, cost and risk assessed Lead institution(s) PDAM Output Initial or preliminary study proposing a project delivery approach (ie, self-financing, B2B or KPBU) Outline business case (OBC) validates approach (or Pre-FS) Full business case (FBC) validates approach (or FS validates approach) This section is split in four parts. Section 3.1 looks at the development of the initial or preliminary study. Section 3.2 focuses on the OBC/Pre-FS once the initial decision to proceed has been made. Section 3.3 assesses the additional questions and analysis that the PDAM needs to consider before the transaction stage. Finally, Section 3.4 reviews whether there is need to treat KPBU, B2B and unsolicited projects differently at any stage. Initial or preliminary study The first stage involved in the project development cycle is intended to check if the project is aligned with government priorities, and if so which financing and delivery approach is suitable. We illustrate the first set of decisions to be made by a PDAM in Figure 6. Figure 6 Aligned with government priorities and suitability for KPBU or B2B 19 Source: ECA The approach has multiple components: Checking alignment with government plans (Step 1.1 – 1.3) Checking the relevance of the project and the government plans (Step 1.4) Creating an initial or preliminary study of the project (Step 1.5) Alignment to government plans and continued relevance of these plans The project should be aligned with achieving the government objectives set out in the RPJMN and RPJMD. These provide high level objectives for projects and should provide some indication of how the targets will be met. Even if the project appears to meet the plans set out at the national, regional and local level, the project should be sense checked for suitability to ensure that it is still required (the plans may be outdated or in need of revision). PDAMs should engage early with local governments to ensure their support for the proposed ideas. Projects will eventually need sign-off from local governments before they can proceed. The initial or preliminary study Table 7 summarises the requirements of the preliminary study as set out by BAPPENAS. The initial study is meant to be desk based and should be the basis of deciding whether the project should be developed further. Table 7 Four tests as part of the initial or preliminary study Test Guidance Commentary on application to the water sector Need analysis Confirmation of: PDAMs will need to provide evidence that a new project is required. The evidence Technical and economic rationale will focus on demand projections (eg, how Current lack of service (quality or much water demand is expected), the availability) value in providing that demand (eg, schools, households and businesses Support from stakeholders connected), and why the demand cannot currently be met. The initial study also requires confirmation of support from stakeholders. While a public consultation is suggested given the preliminary nature of the study this should be focused on local government and possible consumers (to verify that the demand exists) rather than focused on stakeholder consensus-building. Compliance Compliance with: Project compliance with government of criteria Indonesia targets, plans and laws is 20 Test Guidance Commentary on application to the water sector relevant laws and regulations important. Agreement with local government on new projects is also RPJMN, RPJMD and PDAM internal critical. plans. spatial and land use plan (RISPAM) Value for Analysis including: The analysis should look at the different money analysis options for delivering the project. This will a fair allocation of risk involve verifying the need for the private equitable long-term service sector, understanding how much private agreement sector involvement is necessary or desirable. The study should also assess transfer of knowledge and how value from the private sector can be technology maximised to assist the PDAM and fair competition, transparency and consumers in the future. efficiency. Revenue and Analysis of potential revenue and The analysis will need to consider how the project funding financing of the project water sector project will be paid for and analysis what financial guarantees may be User’s ability to pay expected. This will involve: The fiscal capability of the GCA in Assessing whether water tariffs can be conducting PPP raised (discussion with local government). Other potential revenues The health of the PDAM and its equity Perspective on government holders the local government. Even support. though the PDAM is BUMD, it may need to rely on local government allocations and subsidies for possible projects. An initial analysis on the level of support needed from central government – central government support may need mean that the project is developed as a KPBU project rather than a B2B project. Recommendati Recommendations on: The recommendation should be based on on Plan (PPP the tests above. It should confirm if the Form of PPP scheme project is a good idea and if private sector analysis) Main criteria of business entities participation is desirable. If it is, the project should proceed as a B2B or KPBU Schedule plan for PPP transaction project. This analysis should also factor in reasonable time required for project development. 21 Outcome of initial study and path dependency The distinction between KPBU and B2B projects is mainly driven by the need for central government support. However, it is important to note that these requirements may change upon further analysis and after more extensive engagement with the private sector. It is easy for projects to become path dependent i.e., for stakeholders to consider a project initially identified as a KPBU project always as a KPBU project (even if it no longer requires government support), or to consider a B2B project unviable if it does. At each critical stage of project development, the PDAM should reassess whether the project should proceed in its current form. This approach is illustrated in Figure 5. Checklist of questions for 1st decision point The checklist in Table 8 summarises the questions PDAMs should ask themselves when they are considering a new project. Table 8 Checklist for first decision point Checklist questions and actions Yes No Comments Is the project aligned with government priorities? 1.1 Check if project is included in central and If yes proceed to quest local government plans 1.4 Check against long term and medium term If no proceed to national, regional and local plans question 1.2 1.2 Is there a project concept note? If yes, submit for government planning A project concept note is typically an indication that the government has considered a project If no, move to question in its planning process. If a concept note has 1.3 not been submitted or is outdated then the government planning process may not be informed about this project 1.3 Develop, redevelop or check the project Submit for government concept note? review to ensure the project is consistent If no concept note exists then propose a with government plans, project concept note for inclusion in or government government plans. This will be the future basis approves to include in proceeding with this project its planning and return to question 1.1 22 Checklist questions and actions Yes No Comments 1.4 Is the project still relevant to government If yes, proceed 1.5 planning If no, consider Check with stakeholders, and do a rapid abandoning the project assessment based on your own understanding or reverting to 1.3 and desk research. 1.5 Does the project meet the requirements of If 1.5.1 to 1.5.5 are yes, a PPP project proceed as B2B or KPBU (go to step 1.6) 1.5.1Needs analysis 1.5.2 Legal and planning compliance If no, proceed as a self- 1.5.3 VfM (value for money) analysis procured project or redesign project. 1.5.4 Revenue and funding analysis 1.5.5 PPP scheme analysis Outline business case The OBC follows from the approval of the initial study. For KPBU projects the OBC guidelines are well developed. The same guidelines can be adapted to: Apply sufficient rigour to B2B projects: PDAMs can use the criteria designed for KPBU proposals and apply it to B2B projects to ensure that they are actually required and fit for purpose. Ensure that unsolicited B2B and KPBU projects are sufficiently well reviewed. Whereas the PDAM (or other GCA) may not be directly undertaking the OBC or the FBC, the submitted Pre-FS and FS should be tested for compliance with the same rules and standards. The OBC should check the assumptions of and build on the analysis produced for the initial study. The steps under the Framework are illustrated in Figure 7. The conclusions of the OBC should determine if: The project is suitable for further development (Step 1.6). Whether private sector involvement in expertise or investment is still required (Step 1.7). If a PDAM does not need private sector financing or private sector expertise, then there is no reason to proceed with a B2B or KPBU project. The PDAM may be better suited to procuring the project itself as an EPC contract. Whether a KPBU or B2B scheme is the best option for the delivery of the project (Step 1.8). Projects which require central government support should be developed as KPBU projects (in line with current government policy). Figure 7 Confirming the PPP approach 23 Source: ECA Requirements for an OBC or a pre-feasibility study In the table below we set out the requirements for an OBC prepared by a PDAM. The same requirements also apply to pre-feasibility studies carried out by private sector project promoters. While the private sector cannot be forced to comply with these requirements when developing unsolicited projects, having clear instructions on the scope of work and level of analysis may assist in adherence to the standard. The private sector will have an incentive to comply if they believe compliance may lead to faster government review and approval. Table 9 Requirements for an OBC or pre-feasibility study Requirements for an OBC Comments Legal and institutional study Every project must have a robust legal and regulatory analysis which is the basis for proceeding with the project. In the water sector this will ensure compliance with the legal framework. Typically, no changes are expected between the OBC and FBC stage. However, for complex projects clarity may be required from key stakeholders eg, the Attorney General of Indonesia. Technical study A technical analysis may provide options for proposed solutions with an indicative costing based on similar projects in Indonesia or based on historical unit cost pricing. While there may be a preferred technical solution some PPPs incorporate the design element as part of the market response stage (in which case detailed technical specifications are provided). While various options may be assessed at the OBC stage. By the FBC stage the options are significantly narrowed. Some tenders include a design component in their proposal in which case the 24 Requirements for an OBC Comments technical study assumes a solution cost and contains a detailed project specification. Economic and commercial Economic and social analysis – assesses the economic value of study the project and the social benefits that may accrue. Environmental and social study This is typically done on a desk basis for the OBC stage and may be strengthened with field work justifying the underlying Risk management study assumptions for the FBC. Environmental management plan – Ensures that environmental effects are mitigated and where appropriate costed into the analysis. These costs can be significant if major resettlements are required. At the OBC stage the environmental plan looks at any possible hazards typically using GIS software, settlement plans and other spatial maps. Some mitigation exercises including indicative costing are identified. The FBC stage involves thoroughly reviewing the analysis to ensure its robustness. Detailed costing and field work may be required depending on the results from the OBC. Risk analysis – have risks been allocated to parties best able to manage them? At the OBC stage this is done based on the proposed technical solution and based on international and local examples. At the FBC stage the analysis is more rigorous as anticipated bidder will need to agree to the risks proposed in the FBC (If the risk passed to the private sector is too high there will likely be too few bidders. On the other hand, passing too little risk may result in a bad project for consumers). Commercial viability – the commercial viability of the project projecting revenue flows and cost The modelling for an OBC is less detailed and passed on general assumptions. Modelling for the FBC is based on the expected project structure including the likely financing structure. Study of cooperation and Business model and institutional set-up – this will be the structure in infrastructure proposed model for project governance once the project is provision completed. Study of government support / This will be informed by the commercial and economic and government guarantees social analysis. A project which shows high economic and social benefits but is not commercially viable is typically considered as a candidate for government support and guarantees. 25 Requirements for an OBC Comments At the OBC stage the aim is to produce an application for this support. At the FBC stage this expected to be signed off by central government Study of outstanding needs This indicates any future areas which require additional consideration and analysis. While some outstanding issues at the OBC stage are expected these should be resolved by the FBC stage. Checklist of questions for 2nd decision point Table 10 Checklist for second decision point Checklist questions and actions Yes No Comments 1.6 Is the OBC/Pre-FS of good quality? If Yes, proceed to 1.7 The OBC will be produced by the PDAM or the If No, reject the project Pre-FS provided by the private sector in an unsolicited project. It should be checked to make sure it includes what would be expected Project reviews can be for an OBC (BAPPENAS provides an explicit supported by various criteria in the PPP books) government and donor entities. 1.7 Is Private sector expertise needed? If Yes, proceed to 1.8. The OBC will be produced by the PDAM or the If No, suggest Pre-FS provided by the private sector in an proceeding with project unsolicited project. as a government financed project. 1.8 Is central government support required? If Yes, proceed as KPBU Central or regional government support means If No, proceed as a B2B that central government ministries and project. departments need to review the project and it has to be developed as a KPBU project. Central government support is typically though VGF and guarantees. Full business case Once a project OBC (or Pre-FS) has been approved the project then moves into the full business case (or feasibility study) stage. This stage builds upon the OBC answering the same questions in a lot more detail. Whereas the OBC can be done mainly as a desk-based exercise, the FBC is significantly more detailed – the full specification of the FBC depends on the requirements of policy makers, investors and lenders. The level of effort and depth of analysis should be aligned with the value of the project and the materiality of decision made by each party eg, a lender lending $ 100 million will require far greater assurance than one lending $ 3 million. 26 The pathway in the Framework requires the PDAM to: Ensure that the FBC (or FS for unsolicited projects) covers the relevant areas (Step 1.8 -1.12) Review the risk allocation to see that it is realistic and fair (Step 1.13) Assess the trade-offs involved between risk, cost and technical solution (Step 1.14) Check again to see if private sector involvement is needed (Step 1.15). From OBC to FBC – different tests? The OBC and the FBC test the same parameters: demand, revenue streams, technical and legal regulations, commercial implications etc. The quality and resources allocated to the development of the FBC are typically an order of magnitude more than resources allocated to OBCs. But there is considerable variation, determined by the size of the project and its importance to stakeholders. For example, while the OBC may look at the commercial analysis based on assumption around debt modelling at a particular rate, the FBC would look at more detailed gearing ratios and different tranches of debt. The financial model would be based on project financing structures achieved by similar projects elsewhere in Indonesia or comparable countries. The FBC, and the FS where the project is unsolicited, is the basis for the developer or PDAM going to decision makers, lenders and investors requesting approval and financing for a particular project. Figure 8, summarises the key areas the FBC has to address (steps 1.8 to 1.12). The main differences between the OBC and the FBC are as follows: The FBC stress tests every assumption made in the OBC and provides a more rigorous analysis. This will likely involve significant field work and market engagement. There will likely be no outstanding issues to be addressed once the FBC is complete. Figure 8 From OBC/Pre-FS to projects to project approval 27 Source: ECA adapted from existing regulations and guidelines Fair risk allocation One of the key questions that the FBC attempts to answer is whether the risks in a KPBU or B2B transaction have been allocated to the parties best able to manage them. These risks vary by project but follow common themes. The IIGF has developed a risk framework that can apply to KPBU and B2B water supply projects (excerpts in Figure 9). Figure 9 IIGF Risk Allocation Guidelines for Water Supply BOT scheme (example snapshot) Source: IIGF, PPP in Indonesia: Risk Allocation Guideline available: here8 The Guidelines set out seventy-five risks water sector projects could face, proposes an allocation for them, and possible risk mitigation. The Guidelines should be used as a starting point and should be adapted according to the unique need of individual projects. Assessment of trade-offs The Risk Allocation Guidelines produced by IIGF determine an indicative allocation of risks between the public and private sector. A thorough review of the Guidelines will point out that many of the risks are shared by the private and public sector. There are typically trade-offs associated between risk, cost and the technical solutions, for example: A supplier may charge more for a better technical solution, guarantee a level of processes water and the bulk water tariff charged to the PDAM. A contractor may be willing to take on the raw water supply risk but may want to charge a considerably higher bulk water tariff to the PDAM. 8 https://ptpii.co.id/media/kcfinder/docs/acuan-alokasi-risiko-english-2018-final-cover.pdf 28 A PDAM should comprehensively consider these trade-offs before firmly deciding on its approach. The analysis should flow from the FBC (or FS). Checklist of questions for 3rd decision point Table 11 Checklist for third decision point Checklist questions and actions Yes No Comments 1.8 Is there a legal and regulatory basis for the If the answer to all is project proceeding? yes, proceed to 1.13 1.9 Is there a detailed technical specification of If the answer to any is the proposed solution? no, consider project redesign or reject 1.10 Is the project socially and economically project beneficial to Indonesia? 1.11 Is the environmental management plan appropriate? 1.12 Is the project commercially viable? 1.13 Have risks been allocated fairly? If the answer is yes, proceed to 1.14 If the answer is no, consider project redesign or reject project 1.14 Have project trade-offs been considered? If the answer is yes, proceed to 1.15 If the answer is no, redo the analysis or redesign the project. 1.15 Does the project need central government If yes, develop as a support? KPBU project If no, develop as a B2B project Different pathways for KPBU, B2B and unsolicited projects? In general, the analytical requirements of a project are determined more by the value of the project (in monetary and strategic terms) rather than the type of project it is (KPBU or B2B). A USD 200 million B2B project should be assessed and analysed to a greater extent than a USD 50 million KPBU project. Different approval pathways for B2B and KPBU projects 29 The KPBU project pathway requires approvals and reviews by different central government ministries. Central government ministries like BAPPENAS and the MOF (through its state-owned enterprises like the IIGF) review the OBC and FBC to ensure central government can offer the guarantees or subsidy required by the project. For clarity, if a KPBU project does not require this support, then it is not necessary for central government ministries to review the project9. We illustrate the different approval pathways in Figure 10. Figure 10 Approval pathways for solicited B2B and KPBU analysis and studies Source: ECA Unsolicited Projects The driver of an unsolicited project is usually a private sector party who has identified an opportunity the government is not actively developing. These projects form the vast majority of water sector B2B projects. PDAMs, local governments and central government still need to be satisfied that unsolicited projects offer good value for consumers. The process for unsolicited KPBU projects as laid down by the Indonesian government and is summarised in the BAPPENAS PPP Book Figure 11. Figure 11 KPBU unsolicited project pathway 9 Central government agencies do not approve the OBC and FBC. In BAPPENAS’s case they review projects for inclusion in the PPP Handbook under BAPPENAS Reg. 4/2015. MOF reviews projects for guarantees and VGF. 30 Source: BAPPENAS PPP Handbook 2019 The key decision points in the pathway are aligned to the Framework and should equally apply to B2B projects: The pre-FS document approved by the GCA should be approved in the same way as the OBC (this will include the analysis that the PDAM would have included in the initial study for solicited projects). While the work is done by the private sector, the PDAM needs to assess and approve the analysis and underlying assumptions. Approvals for larger projects should also come from local government, which as the equity holder in the PDAM is a very important stakeholder. The FS, submitted by the private sector, should meet the requirements of the FBC laid down for KPBU projects to ensure that consumers are getting the best value for the proposed project. The private sector may be biased in its structuring of the project, but the GCA will need to scrutinise the project to make sure that it is fit for purpose. If the project is a KPBU project that relies upon government guarantees, the application for guarantees will need to be approved by IIGF and the PDAM. 31 Stage 2 – Transaction Objective Maximise consumer value through a KPBU or B2B procurement Key questions / Are B2B projects Cooperation Projects? decisions Similarity in KPBU and B2B transaction processes Competition for unsolicited projects Lead institution(s) PDAM Output Signed contract Critical assumption on B2B projects The PPP Framework is based on the interpretation that B2B projects are Cooperation Projects as defined by PerPres 38/2015. However, most stakeholders do not consider B2B projects to be “Cooperation Projects� 10. Currently B2B projects are procured in line with local government procurement rules which vary significantly between different jurisdictions11. Each PDAM develops its own rules, which are approved by the PDAM’s Board of Directors, and follow the standard sets by local government. Stakeholders have questioned the value of B2B projects being considered “Cooperation Projects�. The main concern expressed is around an increase in project development time if B2B projects are considered under the same regulations as KPBU projects. However, the time taken for project development should be commensurate with project size and strategic importance rather than by the type of project. As highlighted in Section 4.4, the same analysis is necessary for KPBU and B2B projects whether solicited or unsolicited. In Table 12, the two different perspectives on whether B2B projects are “Cooperation projects� are summarised alongside the view incorporated into the PPP Framework Table 12 Perspectives on B2B projects as “Cooperation Projects� Treated as Cooperation Treated differently Position adopted in PPP Projects Framework Liabilities B2B projects and KPBU The liabilities and support The challenge with B2B projects create similar that B2B transactions are transactions is that central liabilities on central given is materially government remains the government (through different to KPBU entity of last recourse. Take or Pay clauses). transactions. Notably, There is institutional When projects go wrong, private sector businesses confusion on how Take or then central government are aware that they are Pay (which local is responsible if local governments typically 10 This topic has been discussed extensively at various workshops. No consensus position has been established. It has to be addressed by government to provide institutional clarity. 11 Local government procurement rules have not been assessed in formulating the PPP Framework. 32 Treated as Cooperation Treated differently Position adopted in PPP Projects Framework government cannot meet not receiving a sovereign offer) differs from these liabilities. guarantee or subsidies. Availability Payments12. Central B2B transactions get the NA The current approach government same implicit guarantee makes sense. However, support support even if they don’t given their prevalence receive VGF well developed B2B project should be able to access some central government support. This will require significant regulatory changes and hence delays, therefore we have not proposed this as part of the PPP Framework Competitive Competitive procurement KPBU projects follow Competition is likely to procuremen for all B2B and KPBU central government rules maximise consumer t projects is necessary. and unsolicited and benefit. B2B projects Unsolicited projects need solicited projects are should be treated similarly to be competitively competitively procured. to KPBU ones. procured. B2B projects follow different regulations in line with local government rules. Approval PDAMs approve project PDAMs and local Central government process but guarantees and VGF government approve the approval should only be applications require project required if central central government government support is approval. needed (VGF and guarantees). Overall transaction process The transaction process is summarised in Figure 12. In the PPP Framework B2B and KPBU projects go through the same process: the main difference between the two pathways is which rules they 12 The explanation provided by stakeholders is that this is determined by the party which specifies the demand obligation. If the private sector says it will produce YYY l/s and the government agrees then it is considered take or pay. However, if the government sets a minimum requirement and of ZZZ l/s that is a risk to government (an availability payment). In practice this is a false distinction, any private sector commitment should be based on government plans (and therefore would ultimately result in a government liability). 33 follow in requesting proposals and drafting the contract. B2B transactions follow local government rules as adapted by the PDAM Board of Directors. Rules for KPBU projects are governed by LKPP Reg No. 29/2018 expanding upon the earlier LKPPP Reg No. 19/2015 both of whom respond to the direction given by Article 40 of PerPres 38/2015. Even though the procurement rules may be different, the emphasis should be on maximising consumer value – this can often best be achieved by ensuring maximum competition. Figure 12 Transaction processes for B2B and KPBU transactions are very similar Source: ECA The transaction process is divided into five parts: Early market engagement to ensure that potential partners in a KPBU or B2B transaction are aware of the future opportunity. This also provides the PDAM an opportunity to get early feedback and incorporate it into its planning. Early market engagement is even more important for an unsolicited proposal, where the prospect of additional competition will result in the originating firm pricing its project more competitively. Prequalification process ensures that only qualified companies bid for the projects. The qualification criteria is set out in Article 14 of LKPP reg no. 29/2018, and requires that administrative, technical and financial capability be demonstrated. The Framework requires that this should also apply to B2B projects. The proposal and draft contract stage vary depending on which regulations are followed. Article 17 of LKPP reg no. allows for two stage approvals which may mean that some procurement 34 processes are longer than others. If a project requires design inputs or discussion with the private sector a two-stage procurement process is required. The same principle applies to B2B projects and the Framework recommends that a two-stage procurement be followed if there are significant design uncertainties. If the project receives a response from the market (bid stage), it may appear inevitable that the contract should be awarded to a bidder. However, even at this stage the government should assess the proposed terms against its original analysis to ensure it is comfortable with the proposed arrangements. Financial closure is sometimes not considered as part of the PPP project life cycle from the government’s perspective. However, if financial closure is not achieved then the project construction and implementation are delayed. The government should support the private sector in achieving financial closure through engagement with investors, reassurances to the private sector in line with the contract and by providing facilitation support where appropriate. Unsolicited projects Unsolicited projects in Indonesia are common. B2B and KPBU projects should be treated the same and be governed under the stipulations of PerPres 38/2015 which allows the initiating party to gain an advantage if the private sector developed FS is acceptable. The FS as noted in Section 4.4 is to be assessed in the same way as the FBC. We illustrate the pathway for a transaction once the FS is approved in Figure 13. Critically the following tests are to be applied: Is the project still a PPP project or can the government deliver it more effectively without the private sector (cheaper and specialised expertise not required)? If the answer to question 2.1 is no, then the government should purchase the idea and self-finance. If the PDAM decides to go through a competitive procurement route it should assess which options will gain the best response from the market (based on its market engagement). The private party initiating the B2B transaction will have their view on the best approach, but the government will need to balance this with the views of possible competitors and the best approach for consumers. Figure 13 Transaction pathway for unsolicited projects 35 Source: ECA Our Framework proposes one significant deviation from existing practices for KPBU projects. The government should propose which benefit the private sector gets if the proposed FS is accepted. Our engagement with stakeholders suggests that current practice is for the private sector to choose the benefit. However, this choice limits competition and not be in the best interest of consumers. The deviation is in line with our interpretation of Clause 14 of PerPres 38/2015 and should apply to B2B projects as well. Stage 3 – Implementation and monitoring Objective Ensuring that water sector B2B and KPBU projects meet the needs of consumers once commissioned Key questions / No monitoring or dispute resolution entity for KPBU and B2B decisions transactions No entity which monitors innovation and value opportunities and incorporates them across other KPBU and B2B projects Lead institution(s) Unclear Output Performance reporting on PPP projects and dispute resolution where appropriate One significant gap in the Water PPP framework is the lack of clear monitoring agency for B2B and KPBU transactions. As illustrated in Figure 14, these transactions are presently monitored by the PDAM, and governed by regulations specified in each contract. As such, the 71 different B2B 36 transaction and the newly constructed and operational KPBU projects are governed under different contractual terms with different entities monitoring them. The advantages and disadvantages of different monitoring solutions are presented below in Table 13. Figure 14 Monitoring pathway for KPBU and B2B projects Source: ECA Possible WSS PPP monitoring institutions There are a number of possible institutions which could monitor the WSS PPPs. These include: The PDAM (which is currently the only monitoring entity) Ministry of Home Affairs (Directorate General of Regional Finance) Ministry of Public Works and Housing (DG Infrastructure Financing) Ministry of Public Works and Housing (BPPSPAM) Provincial governments A central regulator for PPPs A water sector regulator Given the institutional complexity in Indonesia, establishing a separate regulator solely for monitoring WSS PPPs is not recommended unless it has other functions as well. Table 13 provides a summary of advantages and disadvantages of the above options. However, this analysis was not the main purpose of this study and has not been explored in depth with stakeholders. Table 13 Analysis of different institution which could monitor B2B and KPBU projects Institution Advantages Disadvantages Individual Aware of nuances of each project May not have technical expertise to PDAMs manage the private sector. Significant amount of dedicated time to each project Unlikely to be impartial 37 Institution Advantages Disadvantages Not A GCA cannot be a source of dispute recommende resolution between the private partner d and itself Unlikely to be able to incorporate lessons learned and value analysis across other regional and national projects Ministry of Significant clout with local governments Unlikely to have significant water Home Affairs and contractors due to role in budget expertise allocation process. Shortlist for consideration Responsible for providing regulations on subsidies. Ministry of Water sector expertise Unclear what leverage it would have Public Works over local government Responsible for water sector master and Housing planning Shortlist for Plays a part in budgetary planning. consideration BPPSPAM Has water sector expertise and May become a GCA as part of its role capability revision (currently under consideration) Shortlist for consideration Could help disseminate lessons learned If it is an advisor to PDAMs will it resolve disputes neutrally Limited clout over local governments, PDAMs currently approach BPPSPAM on a voluntary basis. Provincial In line with decentralisation direction Would require duplication of effort and governments of Indonesia. niche expertise across all provinces. Shortlist for Could cover other priority sectors if consideration appropriate. Historical legacy (1980s) of a Project Management and Development Units (PMDUs) under provincial governments which provided oversight of local government and PDAMs. Central Could review all B2B and KPBU projects Focus will likely be concentrated on government and adopt lessons learned Roads and Energy (two larger PPP regulator types). Could access niche PPP expertise (PPPs) 38 Institution Advantages Disadvantages Would also be appropriate for cross Would require new legislation and/or provincial PPP projects regulation to set-up. Water Could review all water sector B2B and Would require new legislation and/or regulator KPBU projects. regulation to set-up. Could access niche PPP and water sector expertise. Given the absence of a monitoring institution for water sector PPPs, a study is recommended to analyse the institutional environment in Indonesia and propose a recommended approach after discussing it with key stakeholders. The analysis should be coordinated with early efforts by the Indonesian government to enact an Infrastructure Financing Law which we understand may consider a PPP monitoring regime (currently at the White Paper stage). We expect the White Paper will analyse the advantages and disadvantages of different institutional setups ie, central, sectoral and/or regional. Analysis from the water sector will ideally inform the position of the authors developing the White Paper from a practical delivery perspective. PPP awareness and capacity building A PPP monitoring institution is also well placed to build the long term capacity of PDAMs on B2B and KPBU projects. In the short term, the institution would provide basic awareness on PPP opportunities and risks, resources available to develop PPPs and successes and failures from elsewhere in Indonesia. In the longer term, the role of the monitoring institutions could expand to provide awareness to local government and support long term capacity building on Indonesian best practice in project development. Key conclusions This PPP Framework have been developed in close collaboration with the World Bank Team, with input from the IUWASH PLUS Team and other stakeholders. We have not always agreed with stakeholders in our analysis of regulations and the context around them. However, we believe there is general agreement on the PPP Framework and in the conclusions presented below. Unclear pathway for B2B transactions The B2B pathway is not clear and dependent on local government laws and regulations. PDAMs developing B2B transactions may face additional risks because there is no approved pathway for PDAMs to follow when approving and implementing solicited and unsolicited B2B projects. PDAMs are likely to be held responsible for any “failed projects�. The PPP Framework requires the KPBU pathway and the B2B pathway to be similar, the only difference being the approving agencies. Both types of PPP projects, whether unsolicited or not, are covered under the PPP Framework. This means that projects can move more easily between the two different types of projects if required during project development. Analysis required for all well-developed projects is similar 39 All well-developed projects have a robust basis of analysis. The studies presented to stakeholders for projects forms a core part of the decision-making process. The analysis required in the OBC (or Pre-FS), and FBC (or FS), is typically part of a cost benefit analysis that governments should undertake for all large investments. The analytical requirements for KPBU and B2B are not different (though the approval pathways vary). The quality and depth of analysis should be driven by the economic value of the project and its strategic importance rather than by its institutional categorisation. Project development times should be linked to project value rather than approach In the past, stakeholders have had the perception that KPBU projects take too long whereas B2B projects have been viewed as a quick fix. As noted above, project appraisal and development should be driven by project value rather than by the type of project. The framework, rules and guidelines for water PPPs need to codify and entrench this. Time taken in project development will necessarily be similar. Monitoring institution for B2B and KPBU projects As noted in Section 6, there is a significant institutional gap in the monitoring of B2B and KPBU projects. This gap is a concern, because perceptions of private investment over the next decade and hence the private sector role in development the water supply sector will depend on the maximisation of consumer returns from already implemented KPBU and B2B projects. A thorough discussion with stakeholders is yet to take place on whether a central, provincial or local entity or entities are best suited to monitoring B2B and KPBU projects. We have proposed that a monitoring institution also have responsibility for building awareness of B2B and KPBU projects and the resources available to PDAMs to develop and approve good projects (existing avenues of support are summarised in Annex A1). Further analysis and consultation will be needed before a definitive recommendation on monitoring institutions can be made to the Indonesian government. 40 Final Discussion Paper #4 v1d.docx 6/8/2023 ANNEXES Support available to PDAM in Project Development During our development of the PPP Framework for the water sector, we have identified the following central government departments and donors supporting water sector project development. Given that resources for project development change, this list should mainly be used to inform PDAMs of potential points of contact. Central government departments BPPSPAM BPPSPAM is tasked with assisting PDAMs in raising their capacity. BPPSPAM helps PDAMs across all stages of project development, transaction and monitoring. The assistance and advice must be requested, and ongoing engagement is dependent on the receptiveness of the PDAM to the provided advice. Our understanding is that BPPSPAM supports projects across all parts of project development for KPBU, B2B and unsolicited projects. BAPPENAS BAPPENAS is the national planning agency. In priority areas it has some resources to assist in project development. Support is typically for OBC development. Our understanding is that the resources available to BAPPENAS for project development are limited and mainly for the development of OBCs (KPBU projects). BAPPENAS is sometimes able to leverage donor financing to assess projects in greater depth. MOF MOF is the holder of the Project Development Facility (a fund to support project development) and its established state-owned enterprises IIGF and PT Smi provide guarantees and financing as required. Since regulation amendments in 2018, MOF can now support OBC development and pre-feasibility studies. Our understanding of the specific support that MOF provides is: Assistance from the OBC to Transaction stage for priority projects for KPBU projects Assistance in the review of B2B projects where Availability Payments are proposed for the private sector VGF and guarantee application requests by KPBU projects. KPPIP A coordination committee chaired by the Ministry of Economic Affairs, which attempts to unblock strategic projects. Besides it coordination roles KPPIP has some ability to support OBC development Our understanding is that KPPIP has limited resources to support OBC development for WSS projects (which has been designated a national priority). Donor Programmes NUWSP A World Bank implemented project which provides financial and technical support in the implementation of the National Urban Water Supply (NUWAS) Framework. Support is available for project development, though this may involve connecting PDAM requests to other donors or agencies depending on the stage of development. IUWASH PLUS A USAID funded project which attempts to: Improve household WASH services Strengthen city WASH institutional performance Strengthen the WASH financing environment Advancing national WASH advocacy, coordination and communication Support is available for KPBU and B2B projects. Equally, support can be leverage from other entities if needed. Indonesia specific tools This section is based on tools currently available in Indonesia (or ones that may be available soon). Sample OBCs/Pre-FS/FBC/FS In developing our analysis we attempted to find best practice examples of OBCs/Pre-FS/FBC/FS in the Indonesian water sector - these are not available. While some examples of analysis from different sectors is available it is either not very relevant nor illustrated as best practice example with guidance. For KPBU projects the actual feasibility studies may be confidential (to prevent the private sector from gaming the tendering processes). We note that the Asian Development Bank is developing some OBC templates for the water supply sector. Equally, the World Bank has put out an RFP for feasibility study and bidding documents templates. Risk analysis As we have mentioned in Section 4.3, IIGF has developed a risk allocation guideline which cover water supply projects for IIGF. While the tool is targeted at KPBU transactions, the underlying analysis is equally applicable to t B2B projects. The Guidelines are available here13. Standardised B2B contracts We note that there are no standard contracts for B2B projects. Given that most B2B projects can be categorised as two or three different types of projects (Table 6), it should be reasonably easy to develop standardised contracts. 13 https://ptpii.co.id/media/kcfinder/docs/acuan-alokasi-risiko-english-2018-final-cover.pdf List of B2B transactions The list of B2B transactions below is not up to date – it has been extracted from an IUWASH report in 201414. Since then we expect more B2B transactions have been approved. Modalit Capacity No Location PSP Partner Start End PSP Typology y (lps) Kab Badung, BOT, PT Tirta Artha JV 65%-35% 1 300 1993 2013 Bali WTP Buana Mulia PDAM Full PT Adhya Tirta 2 Kota Batam Concess 3,000 1995 2020 100% Partner Batam ion BOO, Kec Serang PT Sauh Bahtera 3 WTP/Pi 150 1996 2016 100% Partner Utara Samudera pes Full Kota Jakarta PT Palyja & 4 Concess 6,200 1998 2023 100% Partners West Astratel ion Full Kota Jakarta PT Aetra Air 5 Concess 6,500 1998 2023 100% Partners East Jakarta ion BOT, PT Noviantama 6 Kota Jambi 200 1998 2013 100% Partner WTP Corporation Kab O&M, 7 3,000 PT Tirta Cisadane 1998 2013 100% Partner Tangerang WTP PT Taman Tirta Sidoarjo Kec Taman, BOT, 8 250 1999 2029 100% Partner Kab Sidoarjo WTP (Gadang Sdn Bhd, Malaysia) 14 https://www.iuwashplus.or.id/cms/wp-content/uploads/2017/04/Assessment-of-Existing-and- Potential-Sources-of-Capital-for-Water-Utilities.pdf Modalit Capacity No Location PSP Partner Start End PSP Typology y (lps) BOT, PT Tirta Lyonnaise JV 85%-15% 9 Kota Medan 500 1999 2024 WTP Medan PDAM Full Kota PT Adhya Tirta 10 Concess 200 2000 2025 100% Partner Palembang Sriwijaya ion BOO, KI Lippo Start 11 WTP/Pi 250 PT Lippo Cikarang 100% Partner Cikarang 2001 pes PT Mitra O&M, 12 Kab Subang 40 Lingkungan 2002 2012 100% Partner WTP Dutaconsult PT Hanarida Tirta 2024 RUOT, Birawa Kec Taman, 13 WTP/pi 500 2004 100% Partner Kab Sidoarjo pes (Gadang Sdn Bhd, Malaysia) Kota RUOT, PT Tirta Gajah 14 600 2005 2020 100% Partner Semarang WTP Mungkur Kec Bawen, BOT, PT Sarana Tirta 15 SKota WTP/Pi 250 2005 2024 100% Partner Ungaran emarang pes PT Bali Bangun Tirta Kab Gianyar, RUOT, 2027 16 200 2007 100% Partner Bali WTP (Berjaya Sdn Berhad) Modalit Capacity No Location PSP Partner Start End PSP Typology y (lps) Kec Panakukang, ROT, PT Traya Tirta 17 1,000 2007 2021 100% Partner Kota WTP Makassar Makassar BOO, PT Sarana Tirta 18 Kab Serang WTP/Pi 100 2008 2027 100% Partner Rejeki pes Full Kota PT KTDP & PT WFI Failed, 19 Concess 600 Joint Operation Pekanbaru (Netherlands) 2008 ion Full Concess Kab ion PT Aetra Air 20 900 2008 2033 100% Partner Tangerang Tangerang (Solicite d PPP) ROT/O &M, PT Water Kota JV 51%-49% 21 250 Laboratory 2008 2023 Manado PDAM Nusantara WTP/Pi pes ROT/O &M, PT Water JV 51%-49% 22 Kota Ambon 250 Laboratory 2008 2023 PDAM Nusantara WTP/Pi pes Full Kota PT Bintang Hetien 23 Concess 50 2009 2028 100% Partner Tangerang Jaya ion Modalit Capacity No Location PSP Partner Start End PSP Typology y (lps) BOT, PT Tirta Serang JV PT EPMB 90% 24 Kota Serang WTP/Pi 600 2010 2024 Madani 10% PDAM pes Kec Macinni Sombala, ROT, PT Multi Enka 25 400 2011 2030 100% Partner Kota WTP Makassar Makassar ROT/BO Kec Somba T 26 Opu, Kota 3,000 PT Bahana Cipta 2011 2030 100% Partner Makassar WTP/Pi pes Kec Patumbak, BOT, PT Drupadi Agung 27 1,000 2012 2032 100% Partner Kab Deli WTP Lestari Serdang Kec Mariendal, BOT, PT Drupadi Agung 28 1,000 2012 2032 100% Partner Kab Deli WTP Lestari Serdang ROT, Kota Maja, PT Bangun Tirta JV PT CRM 90% 29 WTP/Pi 100 2012 2031 Kab Lebak Lebak 10% PDAM pes Kota ROT, Moya Asia, PT 30 420 2012 2031 100% Partner Tangerang WTP Moya Indonesia BOT, Kota Moya Asia, PT 31 WTP/Pi 1,500 2012 2031 100% Partner Tangerang Moya Indonesia pes Modalit Capacity No Location PSP Partner Start End PSP Typology y (lps) BOO, Kota Moya Asia, PT 32 WTP/Pi 500 2012 2031 100% Partner Tangerang Moya Indonesia pes BOT, Moya Asia, PT 33 Kab Bekasi WTP/Pi 200 2012 2031 100% Partner Moya Indonesia pes BOT, Kec Legundi, PT Dewata Bangun 34 WTP/Pi 200 2012 2036 100% Partner Kab Gresik Tirta pes ROT, Kec Krikilan, PT Drupadi Agung 35 WTP/Pi 100 2012 2036 100% Partner Kab Gresik Lestari pes BOT, Kab Banjar PT Drupadi Agung 36 WTP/Pi 500 2013 2034 100% Partner Baru Lestari pes Kab Lubuk ROT, JV WFI 55% 45% 37 100 PT Tirta Sumut n/a n/a Pakam WTP PDAM Kec Bintaro BOO, PT Pembangunan 38 Jaya, DKI WTP/Pi 100 n/a n/a 100% Partner Jaya Jakarta pes BOT, PT Bumi Serpong 39 BSD City WTP/Pi 150 n/a n/a 100% Partner Damai pes BOO, PT Krakatau Tirta 40 Kota Cilegon WTP/Pi 600 n/a n/a 100% Partner Industri pes Kota BOO, PT Multi Agung 41 100 n/a n/a 100% Partner Tangerang WTP Transco Kota BOO, 42 30 PT Cilamaya Subur n/a n/a 100% Partner Tangerang WTP Kota RUOT/ PT Tirta Kencana 43 1,500 n/a n/a 100% Partner Tangerang WTP Cahaya Mandiri Modalit Capacity No Location PSP Partner Start End PSP Typology y (lps) Lippo Estate, Kec BOO, 44 Karawaci, WTP/Pi 250 PT Lippo Karawaci n/a n/a 100% Partner Kota pes Tangerang BOO, PT Kemang 45 Kota Bekasi WTP/Pi 50 n/a n/a 100% Partner Pratama pes BOO, Kec Legenda, 46 WTP/Pi 25 PT Cikarang Permai n/a n/a 100% Partner Kota Bekasi pes Full Kec Tambun PT Putra Alvita 47 Concess 20 n/a n/a 100% Partner Selatan Pratama ion BOO, KI MM 2100, PT MM 2100 48 WTP/Pi 100 n/a n/a 100% Partner Kec Cibitung Industrial Estate pes BOO, Bukit Indah, 49 WTP/Pi 150 PT Bukit Indah n/a n/a 100% Partner Kec Cikarang pes Full Cikarang 50 Concess 30 PT Watertech n/a n/a 100% Partner Barat ion Full Kec Cikarang 51 Concess 20 PT Sri Pertiwi Sejati n/a n/a 100% Partner Utara ion BOO, KI Hyundai PT Hyundai Inti 52 WTP/Pi 50 n/a n/a 100% Partner Kec Cikarang Development pes Full KI Jababeka PT Jababeka 53 Concess 300 n/a n/a 100% Partner Kec Cikarang Infrastruktur ion Full Kota PT Pembangunan 54 Concess 25 n/a n/a 100% Partner Deltamas Deltamas ion Modalit Capacity No Location PSP Partner Start End PSP Typology y (lps) Kec Full Cikampek, 55 Concess 200 PT WATS n/a n/a 100% Partner Kab ion Karawang Kab Full Gresik/Kota 56 Concess 400 PT Citraland n/a n/a 100% Partner Surabaya ion (Part) Kota Full 57 Surabaya Concess 300 PT Pakuwon n/a n/a 100% Partner (Part) ion Kab BOO, Gresik/Kab 58 WTP/Pi 600 PT Semen Gresik n/a n/a 100% Partner Lamongan pes (Part) Kota 59 BLT 500 PT Adhi Karya n/a n/a 100% Partner Banjarmasin Kota BOT, 60 400 PT WATS n/a n/a 100% Partner Samarinda WTP Template for Feasibility Study for B2B Transaction in Water Supply Sector in Indonesia Contents Contents Tables and figures Abbreviations and acronyms Document completion checklist Executive summary 1 Introduction 1.1 Background 1.2 Purpose and objectives 1.3 Structure of this document 2 Legal and regulatory analysi 2.1 Legal analysis 2.2 Compliance with planning documents 3 Institutional analysis 3.1 Stakeholder mapping 3.2 Existing capacity and readiness of stakeholders 4 Technical analysis 4.1 Water demand analysis 4.2 Water supply analysis 4.3 Upstream infrastructure technical feasibility 4.4 Downstream infrastructure technical feasibility 5 Financial and economic analysis 5.1 Benefit analysis 5.2 Cost analysis 5.3 Financial analysis 5.4 Economic analysis 6 Environmental and social analysis 6.1 Environmental analysis 6.2 Social security and land acquisition analysis 7 Project Form Assessment 7.1 High level model options analysis 7.2 Detailed model analysis 7.3 Model selection 8 Risk analysis 8.1 Risk identification and allocation 8.2 Mitigation plan 9 Outstanding issues 10 Closing Annexes A1 Capacity assessment and readiness criteria A2 Preliminary technical designs A3 Additional financial and economic calculations Tables and figures Tables No table of figures entries found. Figures No table of figures entries found. Boxes No table of figures entries found. Abbreviations and acronyms ECA Economic Consulting Associates WACC Weighted Average Cost of Capital Document completion checklist To be completed by reviewer. Date of review Reviewed by / Approved by Document accepted Yes/No Deadline for submission of revision Checklist instructions: Tick “Check� box if section is included in this document; and Indicate in comments column if more information is needed and/or if section is incomplete. Chapters Sections Sub-sections Checks Comments 1.1.1 Current drinking water conditions in the province 1.1 Background 1.1.2 Existing programs and targets 1.1.3 Statement of need for the project 1. Introduction 1.2.1 Purpose and objective of the 1.2 Purpose proposed Project and objectives 1.2.2. Purpose and objectives of this feasibility study 1.3 Structure of this document 2.1.1 Relevant laws and regulation 2.1.2 Legal risks and 2.1 Legal mitigation strategy 2. Legal and analysis 2.1.3 Licences required regulatory analysis 2.1.4 Plans for meeting legal and regulatory requirements 2.2.1 Compliance with central and provincial Chapters Sections Sub-sections Checks Comments government policy, strategy and planning 2.2 Compliance with planning 2.2.2 Compliance with documents local government policy, strategy and planning 3.1.1 Central and provincial government roles and responsibilities 3.1 Mapping of 3.1.2 Local stakeholders governments roles and responsibilities 3.1.3 PDAM(s) roles 3. Institutional and responsibilities analysis 3.2.1 Capacity of central and provincial and relevant local 3.2 Existing government capacity of departments stakeholders 3.2.2 Capacity of PDAM, PDAB or other GCAs 4.1.1 Water demand 4.1 Water growth projections demand analysis 4.1.2 Project service area determination 4.2.1 Identification of the raw water source 4. Technical 4.2 Water 4.2.2 Hydrology study analysis supply analysis of the raw water supply 4.2.3 Analysis of enabling infrastructure 4.3.1 Raw water intake 4.3 Upstream analysis technical 4.3.2 Bulk water system feasibility 4.3.3 Transmission unit Chapters Sections Sub-sections Checks Comments 4.3.4 Output specification 4.4.1 Analysis of existing distribution 4.4 system Downstream 4.4.2 New distribution technical systems (if required) feasibility 4.4.3 Output specification 5.1.1 Real demand 5.1 Benefits analysis analysis 5.1.2 Social benefits analysis 5.2 Costs 5.2.1 Upstream costs analysis 5.2.3 Downstream costs 5.3.1 Bulk water tariff calculation 5. Financial 5.3.2 Customer tariff and economic calculation 5.3 Financial analysis 5.3.3 Government analysis support and subsidy calculation 5.3.4 Options for funding sources 5.4.1 Quantification of social and 5.4 Economic environmental costs analysis 5.4.2 Economic cost benefit analysis 6.1.1 Initial screening 6. process 6.1 Environmenta Environmental 6.1.2 Preliminary l and social analysis environmental impact analysis analysis Chapters Sections Sub-sections Checks Comments 6.2.1 Potential social 6.2 Social impact and mitigation security and plan land acquisition analysis 6.2.2 Land acquisition analysis 7.1 High level model options analysis 7. Project Form 7.2 Detailed Selection model selection 7.2 Model selection 8.1 Risk identification 8. Risk and allocation analysis 8.2 Mitigation plan 9. Outstanding issues 10. Closing Executive summary Introduction Background Description of the project location, the current drinking water conditions, government policy and ambitions associated with this sector and a description of the investments will be made as part of the project and the timing of these investments. The overall intention is to outline at a very high level the context, the need, and the proposed project. Approximately 5 – 7 pages Current drinking water conditions Content: Description of current drinking water conditions in the area in which the project will be sited. This should review should include a description of the kabupaten and/or cities in the province, the current water availability and the quality of the current water. The information review should cover general information about the water system: A list of water source(s) and intake system(s) Water treatment unit(s) and their operation condition A drawing and description of the service areas Existing transmission and distribution capability, including any information on water losses (non- revenue water) Connections policy and connections Additionally information should be provided about the PDAM(s) Organisation structure of the PDAMs Number of staff and their qualifications A description of the PDAM(s) and the size, condition, finanical and operational performance. Water tariffs and tariff history of the PDAM eg, tariff Source of information: Secondary information from Provincial RISPAM (if any), local government RISPAM, PDAM business plans, any other planning documents. A detailed list of documents we expect can be used for the analysis are presented in Table XXX. Description Institution Department Remark Monthly, Annual PDAM Litbang Technical Reports Description Institution Department Remark Performance and PDAM Litbang/Umum dan financial audit reports keuangan Monthly and annual PDAM Umum dan Keuangan The report compiled Management Reports refers to the Otoda Regulation No. 8 year 20 RISPAM Document Local Government Bapeda Regency/City from LGs that will Regency/City cooperate in regional SPAM Jakstrada in SPAM District/City LG Regency/City sector (KSNP SPAM) for Regencies / Cities that absorb Regional SPAM PDAM Business Plan PDAM which will PDAM / R & D Document that will cooperate absorb Regional SPAM Provincial level LG Provincial Bappeda Province Report compiled base Jakstrada documents on PP 122 concerning SPAM Implementation RPJPD LG Provincial Bappeda Province Provincial RPJMD LG Provincial Bappeda Province RDTRD (Rencana Detail LG Regency/City Bapppeda Tata Ruang Daerah) Regency/City RTRW (Rencana Tata LG Regency/City Bapppeda Ruang Wilayah) Regency/City Regency/City Zoning Regulation LG Regency/City Bapppeda Regency/City RTRW National Central Government - Ministry of Agrarian Affairs and Spatial Planning/National Land Agency Existing programs and targets Content: Description of targets and programs for each kabupaten and/or cities in the province. The description should link local and regional plans with any national plans and ambitions. Cooperation between business institutions and other business institutions (B2B) in drinking water sector is regulated under MPWH Regulation No. 19/2016. The regulation refers to the procurement process for state-owned enterprises BUMD. Programs and targets of cooperation must be integrated with the master plan, in accordance with Presidential Decree No. 38/2015 and Permen PPN No. 2 of 2020, as well as support long-term and medium-term programs set by the central and regional governments. Source of information: Secondary information from Provincial RISPAM (if any), local government RISPAM, PDAM business plans, any other planning documents. Description Institution Department Remark Bisnis Plan PDAM Litbang /Perencanaan RISPAM BAPPEDA RKAP PDAM Libang / Perencanaan Provincial level LG Provincial Bappeda Province Report compiled base Jakstrada documents on PP 122 concerning SPAM Implementation RPJPD LG Provincial Bappeda Province Provincial RPJMD LG Provincial Bappeda Province RDTRD (Rencana Detail LG Regency/City Bapppeda Tata Ruang Daerah) Regency/City RTRW (Rencana Tata LG Regency/City Bapppeda Ruang Wilayah) Regency/City Regency/City Zoning Regulation LG Regency/City Bapppeda Regency/City RTRW National Central Government - Ministry of Agrarian Affairs and Spatial Planning/National Land Agency Statement of need for project Content: Summary of explanation of why a project is needed and what need it fulfils. The requirement should reflect how the current status (identified in 1.1.1) is inadequate or need to be developed to meet the requirements/targets of existing programs and targets (identified in 1.1.2). Ideally the project will be linked to the PDAM business plan document, and the five year financing plan (short term funding for projects). Presence in the business plan provides a level of confidence that the project is needed, and that time has been provided for the necessary procurement activities including technical design and procurement of the B2B solution. Source of information: RPJMN or RPJMD, PDAM business plan, RISPAM. Purpose and objectives Purpose and objectives of the Project Content: This section expands upon 1.1.3. In this section, there should be a review of which sources identify the project and which do not. The document should explain how the projects relates to government objectives and explain why it isn’t captured in planning documents (if it isn’t captured). The section should also identify any work or analysis done to identify whether the project should be developed as a self-financed project, a B2B project or a KPBU project. Source of information: As with 1.1.3 these will be the RPJMN or RPJMD, PDAM business plan, RISPAM. Additional information should be provided on a case-by-case basis. Purpose and objective of this document Content: The content of this section will be generic in so far as that the FS typically is used to assess the appropriateness of a project before its final approval. The document is used heavily to achieve financial closure of the project and needs to be credible enough that the investors can rely on it. Therefore, it will typically provide the following information: The project intervention and its compliance with the legal, regulatory, and planning requirements in Indonesia The technical solution identified and the analysis done to cost the solution An assessment of whether the solution provides the best value to Indonesians based on a financial and socio-economic cost benefit analysis An assessment of the appropriate project form (B2B, KPBU or self financed) A risk analysis of which party carries the risk. When developing this section, the authors need to focus on the specific project and set out how this documents will answer the above questions. Source of information: NA Structure of this document Content: Explain the structure of the document which at a high level will be aligned to the table of contents. It would typically be expected that two to three lines about each section be provided with the context of the project. Source of information: NA Legal and regulatory analysi Legal analysis Relevant laws and regulations Content: Summary of relevant laws and regulations. Could be in a table form. Source of information: Check with relevant ministries: MPWH, MOHA, Bappenas, MOF. Licenses and other regulatory requirements Content: Identify any licences and/or other regulatory requirements demanded by each laws and regulation and whether or not they are being met. Source of information: Relevant laws and regulation and primary project information. Plans for meeting regulatory requirements Content: Description of plans to meet regulatory requirements, including parties responsible for the application processes. Source of information: Relevant laws and regulation and primary project information. Compliance with planning documents Central and provincial government planning documents Content: Is the proposed project included in and/or consistent with water sector policy and strategies at national or provincial level? In some cases, where the project is replacing existing asset capability, this section will not need to be detailed. However, the authors should state that the project replaces existing assets which are required for the stated purpose. Source of information: Central and provinical government planning documents: RPJPN, RPJPD, RPJMN, RPJMD, provincial RISPAM, National Water Policy, National SDA documents, Provincial RTRW, Inter-provincial RISPAM, etc etc Local government planning documents Content: Are there any local level plans for water supply infrastructure (ie local government RISPAM)? Is the proposed project included in and/or consistent with RPJMD/RISPAM and other water sector policy and strategies? Is it included in PDAM business plans (or multiple PDAMs for regional projects)? Source of information: Central government planning documents: RPJPD, RPJMD, local government RISPAM, PDAM business plans, etc Institutional analysis Stakeholder mapping Central and provincial government roles and responsibilities Content: Identify relevant ministries and other central government institutions that will be involved, their roles and responsibilities. Can be in table format. Some of these roles can be optional therefore consider the authors should consider the costs and benefits of central and provincial government. Identify departments (dinas) within provincial government that will be involved, other institutions, such as existing PDAB (if any), and their roles and responsibilities. If provincial government is the project proponent, identify roles and responsibilities related to being project proponent (such as development of this FS, project procurements etc). Source of information: Relevant laws and regulations, planning documents etc. Local governments roles and responsibilities Content: Identify the local government(s) that will be part of this project, and identify possible local government(s) that may be involved at a later stage. Identify roles and responsibilities of the local government(s). The roles identified should highlight what will be required at the project development stage, and during the operational stage. This should include any role in tariff increases. We would recommend that the analysis cover the formal role of local government but also the informal role of local government. The typical arrangement of a B2B transaction is presented in Figure XX below. Figure 1 Typical relationship in a B2B transaction Source: [source] Source of information: Relevant laws and regulations, planning documents etc. PDAM roles and responsibilities Content: Identify the responsibilities of the PDAM and its role and responsibilities in relation to the project. Several things that must be prepared before undertakem as part of a B2B funding scheme: Preparation of planning documents to determine the value of the investment amount (owner estimate), which will form the basis of the negotiation/engagement with the private sector Environmental study which shows that the project is viable Preparation of output and agreement structure – this forms the basis of further discussion and negotiation. Preparation of regulations related to the implementation of business to business cooperation. Formation of the Cooperation Team, the Tender Committee Team and the Evaluation and Monitoring Team. The team(s) that are formed support the delivery of the project, and are often used to overcome obstacles such as delays in information availability – the committees also provide the opportunity for escalation of issues from the PDAM to the equity holders which is typically local government. Source of information: Relevant laws and regulation, planning documents, PDAM business plans. Existing capacity and readiness of stakeholders Central and provincial government capacity and readiness Content: Describe technical and financial capacity of relevant central government institutions, including any budget allocations and possible technical assistance program that can be accessed for this Regional SPAM scheme. Describe technical and financial capacity of relevant provincial government institutions, including any budget allocations, human resource capacity of the relevant department and/or institutions that will own, manage or supervise the assets (Note this will link into the project structure and form of project (Section 7). Source of information: Relevant planning and/or policy documents, budget allocation documents, PDAB business plan, etc. Local governments capacity and readiness Content: Describe technical and financial capacity of relevant local government institutions, including any budget allocations, human resource capacity of the relevant department and/or institutions to implement the proposed scheme, etc. Source of information: Relevant planning and/or policy documents, budget allocation documents, etc. PDAMs capacity and readiness Content: Describe technical and financial capacity of relevant PDAM(s), including any budget allocations, human resource capacity, etc. Include readiness criteria checklist of the PDAM and/or any other existing institution proposed to be part of the project (assuming it’s a B2B transaction). The assessment should focus on: Capacity during the procurement stage Capacity during the operations stage Where capacity is lacking, the analysis should consider options for improving capacity within the timeframe of project procurement and implementation. The proposals could include long term capacity building but also assistance from donors and other Indonesian stakeholders eg, PTSMI to overcome capacity gaps. Source of information: PDAM business / strategic plan, NUWAS assessment of capacity, Performance Audits of Capacity etc. Technical analysis Water demand analysis Water demand projections Content: Future water which will have to be supplied by the water sector in the long term (approximately 25 years). Deamnd projections required detailed forecasting based on a robust appraosial of the information available, and the selection of assumption based on historical and comparative experiences. The demand forecast includes analysis on: Domestic (residential population) and expected growth Non-domestic consumption and expected growth ( this includes industrial, commercial activities, tourism, spatial and economic development in the area). Based on these projections, an overall demand forecast is developed. At a minimum three scenarios are considered. These typically include: Business as Usual (BAU), where it is assumed that the many of the assumption on customer behaviour and non-revenue water (NRW) are constant BAU including NRW reductions Constrained demand growth (typically assumes higher tariffs, increased NRW reductions, and water reduction education campaigns) When developing water demand projection, the parameters to be considered: Existing condition The direction of urban development How to determine water demand standard: If the existing water consumption level is lower than the standard reference requirement, then the standard is used in accordance with existing provisions. If the existing water consumption level is equal to or higher than the standard reference requirement, then the existing water consumption figure is used. In areas where there is no SPAM, standard water requirements are used in accordance with existing provisions How to determine Standard for non-domestic demand: Standard non-domestic needs are set at 15% of domestic needs in accordance with SNI 03-7065- 2005 concerning Plumbing Planning Procedures or adjusted to specific location / region requirements. The description of service area for the Regional SPAM shall be documented, as indicatively identified in the Real Demand Survey and existing water service coverage analysis (provide with maps, other details in Appendices). A gap analysis shall be performed to compare existing and future supply with the demand. This is a critical stage in transforming the problems (gaps0 into solutions (technical remedies). In the gap analysis, a clear overview of water resources (S-supply) and water demand (D-demand) shall be presented (including a graph with existing and future conditions). If D>S than a clear strategy shall be provided with different outcome scenarios by developing an optimized `water allocation plan`. This stage is a decision stage for the follow-up phases of the FS and needs to be discussed with the main Stakeholders. In the popular tourism areas, the number of tourists staying overnight shall be considered with the tourism peaking factor calculations (e.g. the months of intense tourist activity – this is used to calculate `peak demand` (for system design) as opposed to annual average demand (for estimation of operational costs). The total demand shall be calculated by first projecting the location (indicative sub districts) for `potential demand`. The `potential demand` indicates locations/areas with the need for additional water supply through Regional SPAM. Real Demand Survey (RDS) shall be conducted in the particular areas/off-takers with `potential demand` to obtain the WTP (Willingness to Pay) and WTC (Willingness to Connect) of each indicative off-taker. Finally, the `actual demand` to be fulfilled with the Regional SPAM shall be determined by taking into account each off-takers WTP and WTC. The summary of future water demand projections and trends shall include a 25 years life-cycle assessment and a minimum of 5 year after the construction is completed. The calculation of water demand for the Regional SPAM Project shall be clearly document (details in Appendices). Water demand components shall be calculated for domestic and non-domestic uses. Water demand from domestic uses shall be calculated based on l/c/d (liter/capita/day) and population in the particular year. The domestic demand shall be based on the result of Real Demand Survey (RDS). Water demand from non-domestic uses (mainly municipal and industrial) shall be calculated based on each type of industry/public facility, relevant water demand for each facility shall be used with reasonable justification or based on surveys. Water use of water treatment plant operations should be estimated on the basis of reasonable evidence. NRW should be estimated for each scenario. Environmental flow requirements shall be calculated by using the national standard (i.e. Q95:flow which is equalled or exceeded for 95% of the time) and international standard to confirm provision of ecosystem services within the watershed. The irrigation water requirements shall be acquired from DGWR, to evaluate level of pressure on domestic, non-domestic water services and environmental flow requirements. The demand calculation shall be consider a peak hourly flow of water demand (domestic, non- domestic and firefighting requirements) and the replacement of water loss along the treatment process and distribution system of the water network. Peak flow factor (for distribution): The national standard (PUPR 27/2016) or higher factors from International Standards shall be used to calculate the multiplication factor for the peak day. The water supply production values shall be indicated in Million litters per day (MLD) or in litre per second (l/s). The calculations shall be shown for the water production and consumption for 25 years` time horizon (life-cycle). The water consumption calculation shall be indicated in liters per capita per day (l/c/d) and shall include the following items (numbers are only indicative): Domestic water consumption : 120 lcd or higher according to survey result and assessment Institutions/schools etc : 15-10% of domestic Distribution losses varying from around 50% (today losses) to less than 20% (a water losses program shall be established in 25 years time horizon). Water demand projections must include adequate provision for firefighting. Source of information: PDAM report monthly or yearly as historical data. To understand water consumption per household and per person per day. Real Demand Survey (RDS) data. Permen PUPR No 27 year 2016 regarding drinking water supply system Buku panduan Pengembangan Air Minum Rencana Program Investasi Jangka Menengah Bidang PU/Cipta Karya (200&) Water demand projections for all of the kabupaten/kota relevant for the project including assumptions for population growth, water consumption, size of households, etc. Source of information: Use population projection (census or BPS data), local government survey data, and assumptions on household size and water consumptions to calculate water demand projection. Can also use data from PDAM if available. Project service area Content: Extensive preparation are necessary in order to build water supply system. The government plays an important role in this planning process as public health is one of the main issues concerned. The planning of water supply scheme is embedded in the general spatial planning process. The national policy plan for development of water supply is a sector plan on national level and includes background information preferences for the desired long-term strategic development. The development of regional scheme of service area shall consist but not limited to: Provincial raw water source management Provincial policy plan for protection of ground water for water supply Provincial water management plan Provincial environmental policy plan Provincial environmental decrees Regional plans of the respective provinces. A water supply scheme plan should ultimately be included in the municipal land-use plans. In this plan specific parcels can be designated for public water supply. The following items will be registered for the chosen parcel: The kind of construction allowed (intake, raw water transmission pipeline, water treatment plants, reservoir, pumping stations, workshop and it supporting buildings, etc). The boundaries indicated for the buildings and its facilities. The development of regional water supply scheme shall consider: Raw water sources availability; reliable historical data for analysis Raw water sources quality; reliable historical data for analysis Water intake and its facilities to fulfil long term demand Raw water transmission pipeline; land availability, environmental and social issues, construction ability etc Water treatment plants and its facilities; land availability, environmental and social issues, construction ability etc Clear water storage and its faculties; land availability, environmental and social issues, power supply availability, construction ability etc. Availability of supply to fulfil water demand in the regional Considering PDAMs planning; water supply plan, multi-year investment plan, business plan. Water supply plan indicates the waterways in which present and future water plants will meet water demand over the next 10-30 years. Sometimes regional supply plans are formulated separately, especially when a transportation infrastructure is expected to hinder supply over regional boundaries. Multiyear investment plan consist of all planned investments for the next 5-10 years. In addition, this plan is used for predicting future water use rates. Water companies’ business plan, this plan will provide a clear and complete overview of the investments needed for expansion or replacement to improve or maintain the quality and reliability of the water supply. Identify the areas that will benefit from the Project. This may include greenfield development (new connections) or brownfield developments (existing connections that may receive better service quality, i.e. continuous supply rather than intermittent). Source of information: PDAM business/strategic plan, urban development plan or other provincial/local government plans. Water supply analysis Raw water sources Content: The description of raw water sources (surface and ground water) in the Region shall include i) characterization, ii) availability, iii) utilization and iv) allocation to represent existing conditions (based on the recent years) and future conditions (with a 25 years life-cycle). Specific attention shall be given to existing water supply at the cities (offtakers) and if those water resources will still be utilized within the next 25 years. In case the PDAM`s will keep on using these existing water sources capacities, this shall be incorporated to the total capacity of Regional Plans. The characterization process shall be driven by historical conditions at the river basin scle by evaluating source areas for surface water (streams, rivers, lakes and reservoirs) and ground water (well and springs) systems, which can be determined with certainty using topographic, hydro morphological and hydrogeologic features of the river basin. Water resource characterization shall include the following features: Location of water source area, Characteristics and natural processes that influence water source: Water source quality to evaluate type and level of treatment necessary to produce safe drinking water. Water source quantity that is the amount of water accessible for drinking water supply system, which is determined by water availability. The analysis shall consider both existing and future from the particular water source potential. Activities and decisions in the water source area that influence water supply. It must be ensured that there is no conflict of interest between the water users in the future (including allocation for environmental flow), by evaluating water balance (water availability vs waste utilization/extraction). Potential impacts of climate change on the water source. The impact that sanitary condition and location of water capture mechanisms (e.g. intakes and wells) can have on water quality. In surface water characterization: Source water characteristics and land within the assessment area shall include geotechnical and geochemical influences on water quality and quantity, which include sediment yield analysis, Raw water quality and quantity data to determine status and trends over time and evaluate effectiveness of source water protection mechanisms. In groundwater characterization: Evaluation of the basic aquifer characteristics and well pumping rates to delineate a more accurate capture zone/catchment area. Understanding of a well’s vulnerability to contamination from surface. Raw water quality shall be adequately defined or projected to account for seasonal and hydrological variations. In addition, the water quality evaluation shall consider plankton and aquatic vegetation, sediments, wind/dust effects and groundwater inflows for both reservoir and river intake facilities. The water quality assessment shall include variables that may affect water treatment or finished water quality parameters including those listed with the World Health Organization (WHO) and Ministry of Health. In general the supplies created by new impoundments or water development project shall be assessed prior to the design of waterwork facilities. If this is not feasible, projections based on upstream data or from similar impoundments within the river basin shall be evaluated. Source water protection zones: Where artificial recharge is proposed, through multi-purpose detention basins, the source water shall be free of contaminants. A sample of the proposed source water shall be analysed. Drilled wells shall be of watertight construction to exclude contamination from the surface and shall be designed to seal off formations that are contaminated or yield undesirable water. Provision shall be made for proper disinfection of the well during drilling, construction and repair operations. The impact of sediment yield shall be evaluated by using studies performed in the same river basin. In the absence of previous studies, other river basins with similar watershed characteristics shall be used to quantity expected amount of sediment yield from the catchment. The upstream watershed protection measures shall be defined to reduce and control sediment yield in the watershed. Water sources can be broadly divided into surface water sources and ground water sources. The selection of the most suitable water sources involves taking into account a number of general factors as follows: Quantity: is the quantity of water available at the source sufficient to meet present and future demand? Water extraction permit from MoPWH DGWR are required for water abstraction. Quality is water quality meet Indonesia standard PP 82/2001 and Permkes IV/2010 Cost; are the capital as well as the operation and maintenance costs of the source acceptable? Technology; is there appropriate technology and expertise to exploit and maintain the source of water and associated water treatment and transmission facilities? Protection; can the water source be protected from present and future pollution and contamination and can the catchment area be protected effectively to ensure the sustainability of the quantity and quality of raw water? Identify all possible raw water sources (could be more than one, identify which one is primary water source and which are the alternatives). Describe the type and condition of possible raw water sources, i.e.. Existing water quality, any upstream uses or potential pollution. Source of information: Documents from MPWH (DG SDA), RISPAM (provincial and/or local), existing studies, etc Hydrology study Content: The water balance shall be evaluated by using scenarios to define `optimal water allocation` along the water network. The water allocation scenarios shall be developed to evaluate impacts of supply – demand – side factors. The outcome shall be presented in the water allocation plan. The hydrology study shall consider but not limited to: Designing minimum Q5, Q80 and Q100 flow for availability of raw water and flood design for water intake at surface water (river) Rainfall data availability for raw water analysis Integration coordination with BBWS for availability and reliability of raw water supply When dealing with a river or stream with no or few flow observation records, full use should be made of flow records and rainfall data from adjacent rivers or similar catchment to construct a probable flow-frequency/probability curve. Rivers and stream which are identified as sources of water for water supply development should be installed with flow and level measuring devices as part of the project development. For design purposes estimation of stream and river flow requires several routine measurements along the stream. Stream flow data for design purposes should be collected at intervals say monthly on a continuous basis. Long term projection (at least covering two different seasons) of raw water availability and quality. Source of information: Can use secondary sources such as “Pola Pengelolaan Sumber Daya Air�, raw water balance in provincial level, any other hydrology study already done for the proposed raw water sources. If there is no secondary data, consider conducting hydrology study for each possible raw water source. Upstream infrastructure technical feasibility Raw water intake analysis Content: Analysis on land availability, access and intake design criteria, licencing requirements and identification of any environmental issues. Include initial technical design of the raw water intake infrastructure. Source of information: Technical analysis based on raw water source conditions and location, relevant regulations and planning documents. Bulk water system and infrastructure Content: The Bulk water supply system and its infrastructure should prepare based on the net amount of water to be produced. The production shall consist of the abstraction of raw water (either surface water and ground water) followed by the treatment, in order to obtain drinking water quality. When the water production is located remote from the supply area, the water is first transported via transport pumps and transport pipes. The Bulk water system infrastructure shall consist but not limited to: Raw water supply and water intake, Raw water transmission pipe line Water treatment plant Reservoir/clear water tank Mechanical and electrical equipment. Supporting building facilities Description and initial design of the bulk water infrastructure, which may include water storage facilities and water treatment plant. Include location and land availability. Include proposed technology to be used in the water treatment plant based on quality of the raw water. Source of information: Technical analysis based on raw water source conditions and location, relevant regulations and planning documents. Raw water transmission line Content: Raw water transmission pipeline shall consist of description but not limited to: Designing raw water transmission pipeline diameter, pipe types and its appurtenance. Schematic system Pipe appurtenance and its locations Environmental and social situation and its analysis Description of initial design of the transmission line, including estimates of pipe diameter and length, schematic of the systems, and layout of the pipes identifying any possible crossings. Source of information: Technical analysis based on raw water source conditions and location, relevant regulations and planning documents. Output specification Content: The output specification shall consider following issues but not limited to: Supply system for 24/7 Water quality standard based on Permenkes No.492/2010 Technical specification for water supply infrastructure facilities ranging from intake to distribution network. Design water supply standard and specification Specification of proposed system, including capacity of system, amount and quality of water produced, etc. Preliminary construction plan, estimation of time required to implement each components, identify possible/proposed institutions responsible for each component (for example, raw water intake may be responsibility of DG SDA at central government level, while bulk water and transmission maybe responsibility of provincial government). Specification of proposed system, including capacity of system, amount and quality of water produced, etc. Preliminary construction plan, estimation of time required to implement each components, identify possible/proposed institutions responsible for each component (for example, raw water intake may be responsibility of DG SDA at central government level, while bulk water and transmission maybe responsibility of provincial government). Source of information: Technical analysis and estimation, relevant regulations. Downstream infrastructure technical feasibility Existing system analysis Content: The condition to be evaluated at the downstream existing system analysis of PDAMs consist of but not limited to: Organization of water companies/PDAMs Review of PDAM operation and services Raw water sources Production unit Transmission pipeline Treatment facilities Distribution unit Service area Non-Revenue Water (NRW) Economic analysis Financial analysis Analysis of key problems Analysis of the technical capacity of existing system of each PDAM off-takers. Identify what needs to be done and improved in existing system, which may include a new water storage facility, upgrade of the existing network, new meters, etc. Source of information: Technical specification of existing systems from PDAMs and demand analysis. New distribution system Content: New distribution system pipeline shall consist of description but not limited to: Designing distribution system pipeline diameter, pipe types and its appurtenance. Schematic system Pipe appurtenance and its locations Environmental and social situation and its analysis The development of new distribution system should meet the requested demand from the new potential customers. Initial technical design of any new distribution systems for each PDAM off-takers, including lengths of pipes, number of new households or non-household connections, any requirements for storage, etc. Source of information: Technical design based on existing conditions and demand analysis. Output specification Content: Off-taker(s) specification of the receiving downstream infrastructure, including amount of bulk water it will be able to receive, any staging for the bulk water delivery (eg, first operational year can only take xyz amount, but will build up to XYZ by year two, depending on the estimated time to improve existing system as well as to construct new system). Preliminary construction plan and schedule for each PDAM off-takers, including improvement of existing systems and construction of new infrastructure. Source of information: Technical design of the downstream infrastructure, PDAM documents, demand analysis. Financial and economic analysis Benefit analysis Real demand analysis Content: Primary analysis of real demand survey in all proposed project areas, including willingness to pay and affordability studies, and willingness to connect survey. Different surveys need to be conducted in the different Kabupaten / Kota benefiting from the project. The results of the real water demand survey are needed, apart from being the basis for determining the volume of water that will be supplied to the community, it is also needed in calculating the analysis of social costs and benefits, especially those related to costs incurred by potential customers in meeting drinking water needs. Source of information: Primary data from willingness to pay / connect and affordability survey conducted in all proposed service areas. Description Institution Department PPN Regulation No.2/2020 Central government Bappenas PPN Regulation No. 4/2015 Central government Bappenas Social benefits analysis Content: Analyse and identify the social benefits the proposed scheme will bring to all areas involved in as well as in the province in general. This may include health benefits of having access to safe water, productivity increase, etc. Source of information: Indonesia specific statistical data from BPS as well as international research on value of water and social benefits of water supply. Description Institution Department Remark PPN Regulation Central government Beppenas No.2/2020 PPN Regulation No. Central government Beppenas 4/2015 Cost analysis Upstream costs Content: List of all costs including capital costs (CAPEX) and ongoing operational and maintenance costs (OPEX) for the upstream infrastructure, which may include: raw water intake and transmission pipes, water treatment plant and storage, main transmission pipes and possibly off-taker storage. Source of information: MPWH guidelines on component costs, preliminary design of the upstream infrastructure, etc. Description Institution Department Remark MPWH No 28 / 2016 MPWH Cipta Karya (SNI) Indonesian National Non Department National Standard) Standardization Government Agency (SNI) Institutions Downstream costs Content: List of all costs including capital costs (CAPEX) and ongoing operational and maintenance costs (OPEX) for each of the downstream infrastructure, which may include: distribution pipes, household connections and meters, etc. Also include costs for improving existing systems, such as replacement of distribution pipes, new meters etc. Source of information: MPWH guidelines on component costs, preliminary design of the downstream infrastructure, etc. Description Institution Department Remark MPWH No 28 / 2016 MPWH Cipta Karya (SNI) Indonesian National Non Department National Standard) Standardization Government Agency (SNI) Institutions Financial analysis Bulk water tariff calculations Content: Calculation of bulk water tariff using costs of upstream infrastructure including CAPEX and OPEX and allowed returns. The calculation should produce level of bulk water tariffs that will cover all costs, and possibly scenarios where it does not cover raw water intake and transmission (if there is possibility of these costs being subsidised by DG SDA or other entities) CAPEX, but should include operation of the raw water intake and transmission, scenarios where it only covers OPEX (if there is possibility of all CAPEX being subsidised). All assumptions must be included and clearly explained. According to Perpres No. 38/2015, the initial tariff (Bulk Water) is determined by the GCA. The initial rate and its adjustments are set to ensure a return on investment which includes capital costs (Capex) and operating costs (Opex) and profits within a certain period of time. The bulk water tariff calculation approach can also use the basic customer tariff calculation method according to MOHA 21/2020. To ensure that bulk water tariffs and their adjustments can return investment costs (Capex) and operational costs (Opex) during the cooperation period, calculations and analysis are carried out using a financial model with general criteria used including FIRR> WACC and FNPV> 0 Source of information: Upstream infrastructure costs calculations and demand projections. Upstream infrastructure costs calculations and demand projections. Description Institution Department Remark MOHA No 21/2020 MOHA Home Affairs Can be downloaded in internet MOHA No 71/2016 MOHA Home Affairs Can be downloaded in internet Perpres No 38 tahun Pemerintah Pusat Sekretariat Negara 2015 Customer tariff calculations Content: Calculation of customer tariffs for all off-taking PDAMs. This calculation should include the CAPEX and OPEX for all the downstream infrastructure and include the bulk water tariffs. Different scenarios can be developed based on the different bulk water tariff scenarios, as well as based on whether or not CAPEX is included in the customer tariffs (if CAPEX is subsidised then customer tariffs should only cover OPEX). A comparison can be made to existing PDAM tariffs to decide whether or not on-going subsidies will be needed or not. All assumptions must be included and explained. It is very important to disclose and explain in detail the various alternative amounts of customer tariffs per cubic meter, as a basis for decision making which will be outlined in the Regional Head's regulation regarding applicable tariffs., In addition, this information is needed to convince related parties, namely with regard to the ability of BUMD to pay for bulk water and the costs required for water distribution to customers. The tariff calculation formula refers to MOHA 21/2020 Source of information: Downstream infrastructure costs calculations, bulk water tariff scenarios, PDAM current tariffs, and demand projections. Description Institution Department Remark MOHA No 21/2020 MOHA Home Affairs Can be downloaded in internet MOHA No 71/2016 MOHA Home Affairs Can be downloaded in internet Government support and subsidy calculations Content: Analysis of whether or not government support and/or subsidies are needed. Check if there are budget allocations from DG SDA for the raw water intake infrastructure, if there are budget allocations from DG Cipta Karya or provincial and local government for the rest of the upstream infrastructure costs. For downstream infrastructure, based on customer tariffs calculations, willingness to pay and connect and affordability studies, identify need for subsidies for the downstream infrastructure and the types of subsidies required (eg if willingness to connect is low due to connection fees, then perhaps subsidies can be provided to cover only connection fees). Source of information: Costs calculations, bulk water and customer tariff calculations, available budget allocations from all levels of governments, PDAM financial capacity, willingness to pay / connect and affordability studies. Options for funding sources Content: Analysis of possible funding sources. For example, is it possible to have private sector participation (if bulk water tariffs can include returns and can be attractive for private investment without impacting the customer tariffs negatively). Is there any donor programs that can cover some of the costs (for example, maybe part of the downstream infrastructure development can be part of NUWAS and receive funding from that program). Referring to the internal BUMD regulations in general, options for investment funding sources of cooperation projects with the B2B scheme, especially for upstream facilities generally consist of equity and loans, with a minimum composition of equity of 30% and a maximum loan of 70%. in other words, the private sector must have the ability to provide equity funds of at least 30% of the total upstream investment requirement Source of information: Calculations from Section 5.1-5.3, government planning documents, discussions with private sector and/or donors. Description Institution Department Remark BUMD Directors BUMD Law / Litbang Regulation MPWH No 19/2016 Central government MPWH Economic analysis Content: Economic cost and benefit analysis, comparing overall costs of the Regional SPAM scheme with overall benefits including social and environmental benefits. According to PPN No.2/2020, social cost analysis is carried out by converting a financial cost into an economic cost, including costs borne by the community in the form of investment costs and operating costs outside of taxes due to the project. Economic analysis is carried out by comparing the quantitative economic benefits with the economic costs of the conversion. The eligibility criteria used include EIRR > social discount rate and ENPV > 0 Feasibility financial aspect is determined by the amount of investment (Capex), operating costs (Opex), tariff bulk water, tariff customers, government subsidies, funding sources and assumptions used, including technical aspects and non-other techniques, compared with the volume of water can be used by the community. The criteria that can be used to declare a project/declared financially feasible include: Financial Internal Rate of Return (FIRR)> Weight Average Cost of Capital (WACC) Financial Net Present Value (FNPV)> 0 Payback Period Social Discount Rate Financial Net Present Value (ENPV)> 0 Source of information: Calculations from Section 5.1 and 5.2 and other assumptions. Description Institution Department Remark PPN Regulation No. Central government Bappenas 2/2020 PPN Regulation No. Central government Bappenas 4/2015 Environmental and social analysis Environmental analysis Initial screening process Content: Identify whether or not AMDAL is needed for the upstream infrastructure as well as for all the downstream infrastructure. If not AMDAL is required, determine the minimum environmental analysis needed. This chapter should identify : Background and description of activities, including but not limited to the background, objectives and scope of the initial environmental assessment, as well as a description of activities at each stage of the project (planning, construction, operation, end-of-life) Affected location Environmental policies and procedures that are regulated by statutory regulations Source of information: Preliminary design of upstream and all downstream infrastructures and relevant laws and regulation. Preliminary environmental impact analysis Content: Initial assessment of environmental impact of upstream and all downstream infrastructure, identifying areas that will require more detailed assessment and identify institution responsible to conduct the AMDAL or more detailed assessment. This chapter should include: Evaluation of environmental impact – project impact matrix: List of potential impacts Identify and consider the list by catagories/type of impact Prediction and characterization of potential impacts (magnitude, direction (beneficial/detrimental), range, duration, frequency, reversibility, reoccurrence) Recommendation for determining and mitigating actions, including monitoring and evaluation Source of information: Preliminary design of upstream and all downstream infrastructures and relevant laws and regulation. Social security and land acquisition analysis Potential social impact and mitigation plan Content: Identify potential social impact of the whole scheme (upstream and downstream), develop mitigation plans (including timing and schedule) and identify parties responsible for implementation of the mitigation plan. The following things that need to be included in this study: Identify the affected parties and their land status. Identify the social and economic characteristics of the affected parties. Identify action that must be taken for the needs of the SPAM development project sites, such as application for utilization permits, land purchase, leases, or others. Identifying the value/price of the land to be acquired. Determine the compensation to be given to affected parties by considering the capacity of the GCA in providing the compensation. Appointing an agency or form a team that responsible for land acquisition and/or resettlement. Conduct public consultation with affected parties. Prepare a schedule for the implementation of land acquisition and/or resettlement activities. Source of information: Preliminary design of upstream and all downstream infrastructures, government planning documents (including land use (tata ruang) document etc) and relevant laws and regulation. Land acquisition analysis Content: Identify land required for upstream and downstream infrastructures and any regulatory requirements to acquired land. Also identify responsible entity to complete land acquisition process. Source of information: Preliminary design of upstream and all downstream infrastructures and relevant laws and regulation. Project Form Assessment The project form assessment is interlinked with the capacity assessment (Section 3) and the risk analysis (Section 8). The chosen project form assessment will affect the risk allocation between different parties participating in the project. Equally, policy makers may want to consider the different risks when selection the project form High level model options analysis Content: This analysis reviews the type of model that should be selected for the project. This will involve: reviewing whether the chosen form (B2B) is appropriate or whether selffinancned or KPBU projects would be more appropriate. Source of information: Provincial and local government policy and planning documents, primary information through interviews and discussions with relevant institutions, PDAB and/or PDAM business plans. Detailed model analysis Content: Reviews the type of project chosen whether this is a build own and operate, or a build operate and transfer scheme. The analysis is done in light of the capacity assessment, the financial analysis and the interlinked risk analysis (Chapter 8). In this section the different models are compared with the strengths and weaknesses of different models outlined. Source: Assessment of existing institutions from previous section, risk analysis in the following section other information as needed. Model selection Content: This section expands on the Section 7.2 and explains the chosen model in detail. Outlining how the upstream and downstream infrastructure will operate for the chosen project. Source of information: Relevant laws and regulation, analysis from Section 7.1 and 7.2, discussions with existing institutions in provincial and local government levels. Risk analysis Risk identification and allocation Upstream risks Content: Identify all risks related to the construction and operation of the propose upstream infrastructure and who will be best placed to bore the risks. Could be in table form. Source of information: Results from analysis in Section 2-7, relevant laws and regulations. The IIGF risk allocation for water sector projects provided a comprehensive risk assessment tool. Downstream risks Content: Identify all risks related to construction and operation of all of the proposed off-takers, including absorption risks. Identify parties best placed to bore the risks. Could be in table form. Source of information: Results from analysis in Section 2-7, relevant laws and regulations. Mitigation plan Upstream Content: Develop mitigation plan for all risks identify in Section 8.1.1, including schedules for implementation and parties responsible. Source of information: Results from Section 8.1.1 and analysis, relevant laws and regulations. Downstream Content: Develop mitigation plan for all risks identify in Section 8.1.2, including schedules for implementation and parties responsible. Source of information: Results from Section 8.1.1 and analysis, relevant laws and regulations. Outstanding issues Content: List of all outstanding issues that needs to be resolved, identify parties responsible for resolving each issues, and timeline for when issues need to be resolved by. Include all issues not yet resolved from previous sections. Source of information: Sections 2-8 of this document. Closing Content: Description of next steps in the process after the submission of this Feasibility Study. Source of information: Regional SPAM Framework, relevant laws and regulations. Annexes Capacity assessment and readiness criteria Preliminary technical designs Upstream infrastructure Downstream infrastructure Additional financial and economic calculations Section B Technical Guideline for Designing and Implementing Performance-Based Contract for Non- Revenue Water Reduction Table of Contents 1 Introduction 1 2 Overview of NRW-PBCs 2 3 Legal and Regulatory Framework Applying to NRW-PBCs 7 4 Process Overview 10 5 Phase 1: Preparation 13 5.1 Step 1: Budget 13 5.2 Step 2: Feasibility Study 14 5.3 Step 3: Technical Plan 16 5.4 Step 4: Standard Operating Procedures 16 6 Phase 2: Transaction 17 6.1 Step 1: Form Committee 17 6.2 Step 2: Complete Transaction Documents 17 6.3 Step 3: Run Competitive Tender 18 6.4 Step 4: Sign Contract 19 6.5 Step 5: Financial Close 19 7 Phase 3: Implementation of Sistem Penyediaan Air Minum (SPAM) 20 7.1 Step 1: Procurement 20 7.2 Step 2: Development 20 7.3 Step 3: Quality Management 20 7.4 Step 4: Utilization 20 8 Phase 4: Monitoring and Evaluation 23 8.1 Step 1: Monitoring NRW Reduction Program 23 8.2 Step 2: Evaluation of the NRW-PBC 23 8.3 Step 3: Deciding on What To Do When the NRW-PBC Ends 23 Appendices Appendix A : Summary of Proposed Contract Types 25 Appendix B : Feasibility Study Indicative Outline 31 Appendix C : Template Bill of Quantities 35 Appendix D : Sample Terms of Reference for Supervision Consultant 45 Appendix E : Sample Terms of Reference for Independent Expert 52 Tables Table 2.1: Service, Financial, and Societal Benefits of NRW reduction 2 Table 2.2: Examples of Successfully Implemented NRW-PBCs 4 Table 3.1: Legal and Regulatory Framework Applying to NRW-PBCs 7 Table A.1: Summary of Four Proposed PBC Types for NRW Reduction in Indonesia 25 Table A.2: Key Features of Phased Learning PBC 27 Table A.3: Key Features of Incentivized Program Manager PBC 28 Table A.4: Key Features of Increasing Block Payment PBCs 30 Table B.1: PBC for NRW Reduction Risk and Responsibility Matrix 32 Figures Figure 2.1: Illustration of an NRW-PBC 3 Figure 4.1: Process for NRW-PBCs 10 Figure 4.2: Using a Decision Tree to Make Decisions in Phase 1 12 Figure A.1: Payment Structure for Increasing Block Payment PBC 29 Boxes Box 6.1: Detailed Guidance on Completing Transaction Documents for Phased Learning DBO Contract 18 Box 7.1: Detailed Steps for Implementation and Monitoring for Phased Learning DBO Contract 21 Introduction The guidelines are designed to be used by any PDAM (Perusahaan Daerah Air Minum; municipal water utility) considering a performance-based contract (PBC) to reduce non- revenue water (NRW).15 They set out the four phases of planning and implementing a contract with a company to reduce NRW, namely: Preparation—Assess if a Non-Revenue Water Performance Based Contract (NRW-PBC) is a good choice for a PDAM, and if so, which kind of contract would be suitable Transaction—Manage a competitive transaction to engage a suitable company as contractor Implementation—Implement the NRW reduction project through the company engaged as contractor; and Monitoring and evaluation—Monitor implementation, and evaluate how the NRW-PBC has worked, in order to decide on the next steps after the NRW-PBC. The guidelines first provide an overview of NRW-PBCs, explaining what they are, in what circumstances they can be beneficial, and the four different types of PBC which PDAMs may choose between according to their circumstances (Section 2). The legal framework for NRW-PBCs is based on the regulation regarding water supply (GR No. 122/2015 and MOPWPHR No. 27/2016), the rules governing business to business arrangements (B2B) (MOPWPHR No. 12/2010 and MOPWPHR No. 19/2016), and, in some cases, PPP regulation under PR No. 38/2015 and MONDPR No. 2/2020. It is also possible that PDAMs have their own regulations (such as procurement regulations) with which the design and implementation of the PBC need to comply, if applicable (Section 3). An overview of the process to follow when designing and implementing an NRW PBC is summarized in Section 4. Each of the four phases are then set out in detail in Sections 5 through 8. 15 Note that while PDAMs can use PBCs for many types activities (such as energy efficiency or water treatment plant optimization), these Guidelines are written specifically for PBCs for NRW reduction. 1 Overview of NRW-PBCs Users of these Guidelines seek to implement NRW-PBCs. The purpose of this section is to familiarize users with NRW-PBCs. This section defines NRW and sets out the benefits of NRW reduction, then defines NRW-PBCs and compares them to traditional utility-led NRW reduction projects. Finally, we present examples of successful NRW-PBCs and a summary of the four main contract types proposed for use in Indonesia. Appendix A provides more detail on each of the four contract types. What is NRW? NRW is water that is produced, but not billed for. In other words, NRW includes real losses or physical losses (such as water lost through leakage), apparent losses or commercial losses (such as water not billed for due to metering inaccuracies and theft), and unbilled authorized consumption (such as water for firefighting).16 Benefits of NRW reduction NRW reduction helps utilities around the world provide people with safe, reliable drinking water. Table 2.1 below lists the service, financial, and societal benefits of NRW reduction. Table 2.1: Service, Financial, and Societal Benefits of NRW reduction Service benefits Financial benefits Societal benefits Reduces leakage Reduces capital expenditure Improves climate resilience by needed for new water reducing demand on scare water Enables service to more sourcing and treatment resources customers for longer plants hours Reduces emissions of greenhouse Increases revenue due to the gases because less energy is Improves water quality sale of water saved, or water required per unit of water sold at tap by reducing that was previously not billed contamination Makes cities more competitive for due to improved service and less Reduces operating costs per time spent collecting or treating unit sold by reducing the poor quality water amount of energy and Reduces government subsidies, chemicals required per unit allowing public funds to flow to sold other social programs What is an NRW-PBC? An NRW-PBC is an incentivized form of outsourcing technical, commercial, and construction activities related to reducing NRW (see Figure 2.1). Under a PBC, a portion of a contractor’s 16 “Non-revenue Water.� Public-Private Infrastructure Advisory Facility (PPIAF), accessed March 31, 2020, https://ppiaf.org/sectors/non-revenue-water. 2 payment depends on achieving specific, measurable results defined in the contract. NRW- PBCs are one of the most effective ways to improve utility operating cash flows by: Reducing the capital expenditure needed for new water production and treatment plants Increasing revenue due to the sale of the water saved, or water that was previously not billed for, and Reducing operating costs per unit sold by reducing the amount of energy and chemicals required per unit sold. Figure 2.1: Illustration of an NRW-PBC Benefits of using a PBC to achieve NRW reduction NRW-PBCs have the potential to work better than conventional, utility-led NRW reduction contracts because they incorporate financial incentives that motivate the contractor to achieve NRW reduction. Incentives include results-based remuneration (US$/m3/day saved or similar), targets (such as m3/day saved), and financial penalties for not meeting targets. These incentives transfer project risk from the utility to the contractor. They also bring in specialized expertise. World-leading firms in NRW reduction can provide innovative solutions and introduce new technology. Through capacity building or training required under the PBC, they can transfer their know-how to the utility, ensuring sustainability of NRW reduction. Considerations when selecting an NRW-PBC That being said, NRW-PBCs can incur high transaction and contract management costs. Therefore, whether or not using a PBC is a good idea depends on: The urgency and value of reducing NRW The capacity and maturity of the PDAM 3 Stakeholder’s views and interests. For example, an NRW-PBC is favorable in a situation where the value of reducing NRW is high, because of the accountability and incentive mechanisms that enable a PBC contractor to quickly achieve results. On the other hand, an NRW-PBC may not be favorable if the PDAM has strong expertise in NRW reduction or the flexibility of expanding and contracting its workforce to engage in NRW reduction activities. Factors for making a decision to implement an NRW program as a PBC or through another modality is covered in more detail in Section 5.2. Examples of successful NRW-PBCs Table 2.2 below provides examples of successfully implemented NRW-PBCs worldwide. Table 2.2: Examples of Successfully Implemented NRW-PBCs Catalyst for Location Cost Results Achieved Implementing PBC Ho Chi US$15 Saved 122 MLD of water City did not have enough Minh City, million water to meet demand Established 119 District Metered Areas Vietnam (DMAs) 40% of water lost as (~1,000 leakage Avoided about US$100 million of capital MLD water expenditure on alternative water supply production sources ) Repaired more than 15,000 leaks Kuala US$110 Saved 117 MLD of water City was running out of Lumpur, million water Established more than 220 DMAs Malaysia Emergency water Avoided about USD$200 million of (~1,170 rationing was entering its capital expenditure on alternative water MLD 5th month supply sources production capacity) Repaired more than 11,000 leaks Helped avert a water crisis and stopped emergency water rationing Bangkok, US$56 Saved 165 MLD of water City was losing about 40 Thailand million percent of water Avoided about USD$170 million of produced (~4,000 capital expenditure on alternative water MLD supply sources production Repaired more than 150,000 leaks capacity) Increased water supply in a large city 4 Catalyst for Location Cost Results Achieved Implementing PBC Sao Paulo, US$18 Increased revenue by US$72 million over Estimated that the utility Brazil million 3 years (of which 75% was kept by the was losing revenues in utility) the equivalent of 1,000 MLD Reduced under-reporting of consumption by 41 MLD, through meter replacement Collected an additional US$43 million New US$83 Saved 17 MLD of production (~30% of Utility running an Providence million total production) operating deficit for 7 , The years Reduced the utility’s EBITDA loss by over Bahamas 50 percent (US$10 million), contributing High cost of desalinated (~70 MLD to reduced subsidies from the water coupled with high production Government NRW (~60%) ) 5 Catalyst for Location Cost Results Achieved Implementing PBC Sources: Public-Private Partnership Infrastructure Advisory Facility. 2018. “Increasing Water Supply to Customers through a Performance-Based Contract for Non-Revenue Water Reduction.� https://library.pppknowledgelab.org/documents/5471/download (Ho Chi Minh City) Kingdom, Bill, Philippe Marin, and Roland Liemberger. 2006. “The Challenge of Reducing Non- Revenue Water (NRW) in Developing Countries. How the Private Sector Can Help: A Look at Performance-Based Service Contracting.� Water Supply and Sanitation Board Discussion Paper; Series Paper No. 8. World Bank Group. Public-Private Partnership Infrastructure Advisory Facility. http://documents.worldbank.org/curated/en/385761468330326484/pdf/394050Reducing1e 0water0WSS81PUBLIC1.pdf (Kuala Lumpur, Bangkok, & Sao Paolo) Wyatt, Alan. 2018. “Case Study: Performance-based Contract for NRW Reduction and Control - New Providence, Bahamas.� Water and Sanitation Division. Technical Note Number IDB-TN- 813. Inter-American Development Bank. https://publications.iadb.org/publications/english/document/Case-Study-Performance- based-Contract-for-NRW-Reduction-and-Control-New-Providence-Bahamas.pdf (New Providence) Notes: Ho Chi Minh City: Estimated production is for the entire utility while the PBC was implemented in 2 of 6 zones Kuala Lumpur: Exact number not available; source states that “total savings achieved represented a quarter of the total losses at the beginning of the Contract, or about 10 percent of water produced� Sao Paulo: Production capacity numbers not available New Providence: Number estimated represents production in 2012 (start of the PBC contract) There are four main NRW-PBC contract types, namely: Phased Learning Design-Build-Operate (DBO) Contract, which includes a designated learning period phase to allow the contractor to learn about the network and how it responds to interventions for loss reduction. Based on the findings from the learning phase, a loss reduction plan and remuneration are agreed for the next phase Incentivized Program Management Contract, which is a professional services contract, in which the utility pays a team of experts to design, procure, and supervise NRW reduction. The actual implementation of NRW reduction is done by third-party works contractors Increasing Block Payment without Private Finance, which bases payment to the contractor on a relatively low price per unit of water saved, up to a certain volume, then a slightly higher price per unit of water saved, up to a higher volume, and so on. This type of contract is funded without private finance; and 6 Increasing Block Payment with Private Finance, which is the same remuneration structure as above; however, it is financed with private finance. Details on each can be found in Appendix A. 7 Legal and Regulatory Framework Applying to NRW-PBCs NRW-PBCs are permitted under the legal and regulatory framework in Indonesia. NRW-PBCs should be prepared, tendered, and implemented in line with laws and regulations for SPAM (Sistem Penyediaan Air Minum: water supply systems). Most NRW-PBCs can be implemented as B2B arrangements; however, where national fiscal support is required, the rules for PPPs will apply. Table 3.1 sets out the relevant laws and regulations that apply to implementation of NRW- PBCs and their common abbreviations. The remainder of the section describes how each law and regulation applies. Table 3.1: Legal and Regulatory Framework Applying to NRW-PBCs Laws and Regulations Common Abbreviation Government Regulation of Indonesia Number 122 Year 2015 GR No. 122/2015 Regarding Water Supply System Minister of Public Work and Public Housing Regulation Number MOPWPHR No. 27 Year 2016 Regarding the Operation of Water Supply System 27/2016 Minister of Public Works and Public Housing Regulation Number MOPWPHR No. 19 Year 2016 Regarding Allocation Support by Central 19/2016 Government And/or Local Government in Cooperation of Water Supply System Management. Presidential Regulation Number 38 Year 2015 PR No. 38/2015 Regarding Cooperation of The Government And Business Entities In Infrastructure Provision Implementation of SPAM Government Regulation of Indonesia Number 122 Year 2015 Regarding Water Supply (GR No. 122/2015) regulates the implementation of SPAM (Sistem Penyediaan Air Minum: water supply systems). It follows that in preparing NRW-PBCs, PDAMs and local governments must comply with the requirements of GR No. 122/2015.17 This means that the NRW-PBC should be consistent with: The National and Provincial SPAM Policy and Strategy, which shall themselves consider the social, economic, and cultural condition of the local community and environmental condition of the area; and The SPAM Master Plan, which shall have considered the water resources management plan, spatial plans, business plan, and SPAM Implementation policies and strategies. 17 GR 111/2015 applies as of April 2020. Before implementing an NRW-PBC, users of these Guidelines should check if new regulations have been passed. 8 SPAM management In addition, because NRW-PBCs involve improvement of operations and maintenance of water supply systems, they are governed by Article 17 MOPWPHR No. 27/2016, being classed as ‘SPAM Management’. MOPWPHR No. 27/2016 requires that implementation of NRW-PBCs follows the Basic Management Process, which entails the following stages: Planning Implementation Monitoring, and Evaluation. In addition, Article 4 MOPWPHR No. 19/2016 provides that, where a local government enterprise cannot finance the needs of SPAM Operation, it can achieve its goals through cooperation with a Private Business Entity. This Article, specifically paragraph 7, limits which projects can be implemented as PBCs, such as a project to invest in operation and maintenance technology for the effective and efficient SPAM implementation. NRW-PBCs fall into this category, so are allowed. This article also has the effect of authorizing NRW- PBCs in which the private party provides financing in addition to technical and management expertise. Business-to-business (B2B) and Public Private Partnership (PPP) NRW-PBCs must also comply with the legal framework that applies to Business-to-Business (B2B) or Public Private Partnership (PPP) arrangements. Most NRW-PBCs can be implemented as B2B arrangements under MOPWPHR No. 12/2010 and MOPWPHR No. 19/2016. However, where national fiscal support is required, the rules for PPPs will apply. These rules are set out in Presidential Regulation Number 38 Year 2015 Regarding Cooperation of The Government And Business Entities In Infrastructure Provision (PR No. 38/2015) and Minister of National Development Planning Regulation Number 2 Year 2020 Regarding Procedures for Implementing Government Cooperation with Business Agencies In Providing Infrastructure (MONDPR No. 2/2020). These NRW-PBC Guidelines encompass the steps required by GR No. 122/2015 and MOPWPHR No. 27/2016. Because B2B arrangements are regulated by local government rules, which vary from place to place, it is not possible to ensure that there is consistency between the Guidelines and each local government’s rules for B2B.18 It is therefore recommended that PDAMs which want to implement NRW-PBCs check that their local B2B rules are consistent with these Guidelines. If they are not, it would be advisable to request that their local government modify its B2B rules to ensure consistency. The guidelines include the phases required by PR No. 38/2015 and MONDPR No. 2/2020 governing PPPs. This is primarily because many local government B2B rules mirror the national government PPPs. It will also help to ensure that the guidelines are suitable for 18 GR No. 122/2015 and MOPWPHR No. 27/2016 apply as of April 2020. Before implementing an NRW-PBC, users of these Guidelines should check if new regulations have been passed. 9 those NRW-PBCs which do have to be implemented as PPPs. For this class of NRW-PBCs, PDAMs should check the relevant regulations to ensure compliance with national government PPP requirements. PDAMs should also check that the NRW-PBC complies with their own regulations (such as procurement regulations). Unsolicited proposals and direct appointment Some PDAMs have received unsolicited proposals for NRW-PBCs. According to PR No. 38/2015, Article 39, direct appointment can be carried out only if prequalification results in only one participant or one of three conditions is met, namely: Development of infrastructure that has been built and / or operated previously by the same implementing business entity Jobs that can only be carried out with the use of new technology and service providers that are able to apply them are the only ones; or The Implementing Business Entity has controlled most or all the land needed to implement the PPP. None of these three conditions are likely to be met in the case of NRW-PBCs, so PDAMs with local B2B regulations that follow the national PPP rules are likely to be legally required to competitively procure NRW-PBCs. In other cases, direct appointment may be permissible provided it is line with other applicable laws and regulations. 10 Process Overview To comply with the applicable legal and regulatory framework, NRW-PBCs must go through four phases: Preparation, Transaction, Implementation, and Monitoring and Evaluation. Specific steps must be performed in each Phase, as shown in Figure 4.1. Figure 4.1: Process for NRW-PBCs The process starts with a PDAM being interested in NRW reduction and deciding to explore reducing NRW through contracting with a company. PDAMs should be interested in NRW reduction when one or more of the following holds: NRW is high 11 There is a need to increase the volume of water available to supply customers There is a need to increase revenue. PDAMs will typically be interested in using a PBC when one or more of the following are the case: Specialist expertise in reducing NRW is sought Private finance to cover some of the up-front costs of NRW reduction is desired There is a desire to pay based on results (at least in part) The PDAM has tried other methods to reduce NRW without success. PDAMs may seek specialist expertise in reducing NRW because there is not enough in-house technical capacity on the PDAM’s side. They may desire to have private finance cover some of the up-front costs of NRW reduction because of limited PDAM or local government funds. PDAMs may desire to pay based on results because past conventional contracts (for NRW or other projects) did not achieve the desired results; or because they want better value for money. Finally, if a PDAM has tried other methods to reduce NRW without success, then that is a signal that a new approach is needed. Where a PDAM is interested in assessing whether an NRW-PBC is right for it, the PDAM will embark on Phase 1: Preparation. The first step in Phase 1 is to ensure that the PDAM or the local authority has the budget needed to prepare the PPP. A feasibility study follows. This feasibility study will assess not only whether an NRW reduction program is warranted, but whether a PBC is best way to implement it, which type of PBC contract is suitable, and whether the contract should be implemented as a B2B or as a PPP. If the decision is taken to proceed with an NRW-PBC, the PDAM will then need to finalize the feasibility study and prepare a Technical Plan and Standard Operating Procedures for the entirety of the proposed project. This phase can take anywhere from 1 month to 5 months, depending on what work has already been done and if the PDAM needs to secure funding. Figure 4.2 provides a decision tree for the decisions that need to be made in Phase 1 and factors to consider for making the decisions. Figure 4.2: Using a Decision Tree to Make Decisions in Phase 1 12 The PDAM would then move into Phase 2: Transaction. In this Phase, a Committee to manage the transaction will be constituted. The Committee will then prepare the PBC and the rest of the Request for Proposal documents, working from existing models where possible. A competitive tender will be run to select the company offering best value, after which the contract will be signed, and (where relevant) financial close reached. This phase is expected to take from 3 months to 9 months, depending on whether SPDs exist and whether there is private finance. With contract signed and financing secured, the NRW-PBC moves into Phase 3: Implementation. The contractor will mobilize and be responsible for directing and (depending on the contract type selected) doing the work. The PDAM implements by performing its own contractual obligations, working closely with the contractor to make the project a success, and dealing with the various unexpected events that typically emerge. This phase can take anywhere from 3 years to 10 years. Phase 4: Monitoring and Evaluation will start soon after Phase 3 begins and run in parallel with it. The PDAM will have to monitor the performance of the contractor against the indicators and requirements in the contract. As the end of the contract approaches, the PDAM should evaluate what has worked well and what did not work under the contract. The PDAM will use the results of the evaluation to decide what to do next—for example, whether to run another competitive procurement or bring the function of NRW control in- house. This phase starts in parallel with Phase 3 and finishes after the evaluation of the PBC is complete, typically a few months after the end of Phase 3. 13 Phase 1: Preparation PDAMs will embark on Preparation of an NRW-PBC when they have determined that this could be beneficial to their customers or their financial performance. Such a determination would typically stem from a view that reducing non-revenue water will be beneficial and that a PBC could be the best way to do it. Many PDAMs will choose to consult with their local authority owner in making the decision to start Preparation of an NRW-PBC. This consultation is required in cases where the PDAM expects the local authority to fund the NRW-PBC process, or to fund or guarantee the contract once implemented. In this stage, the PDAM may also refer to their Business Plan which may already include a planned NRW reduction program, with an indicative amount of CapEx and potential funding sources. The Preparation Phase starts with securing the budget (Step 1). The PDAM may budget funds itself, or may ask the local authority to budget the necessary funding. The remaining steps in Preparation can only take place after the necessary budget has been allocated. Once the budget has been secured, a feasibility study must be developed (Step 2). This study should indicate whether NRW reduction is likely to be technically feasible and economically and financially viable. The study must also assess the social and environmental implications of the proposed NRW reduction program. The study should assess whether a PBC would be a good way to implement NRW reduction, and if so, which type of PBC would be best. Whether to implement the NRW-PBC under the B2B or PPP rules needs to be decided. After a decision to proceed is made, development of a Technical Plan (Step 3) and Standard Operating Procedures (Step 4) for the PBC concludes the preparation Phase. Some PDAMs may receive an unsolicited proposal for an NRW-PBC. This can partly address the capacity gap because it provides PDAMs with ideas for the scope of the NRW reduction project (for instance, DMAs and pressure reduction). Nevertheless, it does not fully close the capacity gap as specialty expertise is still required on the PDAM side to design and structure the PBC in a way to provide the most value for Government. This capacity gap can be closed by engaging a specialized transaction advisor to design and structure the deal. Step 1: Budget Most NRW reduction projects will cost millions of US dollars. Regression analysis indicates that average costs typically range from USD250 per m3/day NRW reduction to USD400 per m3/day of NRW reduction.19 Costs vary by location depending on cost of labor and materials and starting NRW levels. For cases in which PDAMs wish to mobilize private finance, upfront costs will be lower. Nevertheless, at least hundreds of thousands of US dollars is likely to be required to hire a transaction advisor and implement other project preparatory work. The cost per PDAM can be greatly reduced if a single transaction advisor is hired to assist multiple PDAMs tailor and tender PBCs. 19 Public-Private Infrastructure Advisory Facility, Using Performance-Based Contracts to Reduce Non-Revenue Water (Washington DC: The World Bank, 2016), 14, accessed March 31, 2020, https://ppiaf.org/documents/3531/download. 14 Each PDAM should estimate the costs associated with implementing the entirety of an NRW- PBC, including what professional assistance will be needed and what expenses may be incurred. These estimates will be rough and can be based on previous projects of similar work or from the business plan. The PDAM may budget funds itself, or may ask the local government to budget the necessary funding. Any budget request to the local government should be prepared in the format required by that entity. Another option is for the local government to make use of the Dana Alokasi Khusus (DAK) to cover a portion of the costs of the PBC, such as the fixed cost component.20 The remaining steps in the Preparation Phase can only take place after the necessary budget has been allocated. The PDAM should consider how long this may take and plan accordingly. Step 2: Feasibility Study The purpose of the feasibility study is to help the PDAM decide if it should: Proceed with NRW reduction Implement the NRW reduction project through a PBC, and if so, which type of PBC would be best; and Implement the NRW-PBC under the B2B or PPP rules. The feasibility study entails assessing technical feasibility, economic and financial viability, social and environmental implications, legal feasibility, and risks. The study will indicate whether NRW reduction is likely to be technically feasible and economically and financially viable. The study must also assess whether a performance-based contract would be a good way to implement the NRW-PBC, and if so, which type of PBC would be best. As set out in Section 3, most NRW-PBCs can be implemented as B2B arrangements under MOPWPHR No. 12/2010 and MOPWPHR No. 19/2016. However, where national fiscal support is required, the rules for PPPs will apply. There can be different iterations of the feasibility study, such as an outline version or a version that only includes a few excerpts, that can be shared with interested parties (not necessarily investors). A feasibility study template is provided in Appendix B. Technical feasibility Technical feasibility means that the project can be implemented technically, using known and proven technologies and engineering methods. NRW reduction entails technical activities that will already be familiar to most PDAMs, such as pressure reduction, leak detection and repair, meter replacement, meter calibration, DMA creation, and mains 20 The Dana Alokasi Khusus (DAK) is a specific purpose grant (also called a conditional matching grant) administered by the central government. The DAK is designed explicitly to fund infrastructure investments. There is a matching requirement whereby local governments have to contribute at least 10 percent of the total amount of the funding out of their budget. More information can be found here: https://www.worldbank.org/en/results/2016/04/14/indonesia-improving-the- accountability-of-infrastructure-spending-by-local-governments 15 replacement. The feasibility study should set out which technical activities may be included and evidence that each activity is feasible. Another technical task that can be carried out at this time, if not done already, is to prepare a water balance using EasyCalc.21 EasyCalc is a free-to-download Excel tool that automatically produces a water balance, with error margins, by using technical data that a utility inputs into the tool. EasyCalc is available in Bahasa Indonesia. Using EasyCalc will provide an idea of the baseline NRW levels. Economic and financial viability An economic analysis of the project should show that the expected economic benefits exceed the expected economic costs, and that the project is the least cost, feasible way of achieving the benefits. A financial analysis of the project should show that revenues cover costs and provide a commercially viable rate of return. To conduct these analyses, the PDAM will need estimates of NRW reduction benefits and costs. These can be derived using averages from past projects implemented globally or, if data is available, past projects implemented in Indonesia. If time permits, the PDAM can adopt a bottom-up approach to estimating benefits and costs, using a BOQ approach. Financial viability also entails private sector interest. The PDAM should assess private sector interest by conducting a market sounding. To sound market interest in the NRW-PBC opportunity, the PDAM can survey firms to gauge their interest in the project and desired contractual terms, including expected contract value, whether the private party would be interested to provide finance, what credit enhancement the private party may require, and what performance-based payment mechanisms would be suitable. Feedback from the market sounding can be used to decide whether to pursue a PBC and, if so, which type to pursue. Environmental and social feasibility To assess environmental and social feasibility, the PDAM should check that the project complies with environmental laws and regulations, and that all substantial social impacts of the project have been assessed. This includes providing impacted individuals and groups ample opportunity to provide feedback and voice concerns. Legal feasibility To assess legal feasibility, the PDAM should check that the project is permitted by law, the parties involved are legally empowered to fulfil their obligations, and the required agreements can be made legally binding on all parties concerned. As set out in Section 3, NRW-PBCs comply with national laws and regulations as of March 2020. For NRW-PBCs implemented as B2B arrangements, it is the PDAM’s responsibility to check that its local government’s rules for B2B comply with these Guidelines. For NRW-PBCs implemented as PPPs, PR No. 38/2015 and MONDPR No. 2/2020 or any subsequent document governing PPPs should be referenced. 21 Excel-based tool available for download at: http://www.liemberger.cc/ 16 Risk assessment For the risk assessment, the PDAM should identify all material project risks and optimally allocate each to the party best able to manage, mitigate, or diversify the risk to maximize value for money. The four main contract types set out in Appendix A can be used as a guide to determine the risk allocation. Decisions Using the analysis obtained from the steps described above, the PDAM can decide if it should: Proceed with NRW reduction Implement the NRW reduction project through a PBC, and if so, which type of PBC would be best; and Implement the NRW-PBC under the B2B or PPP rules. Criteria to decide whether to implement NRW reduction as a PBC, and which type of PBC to select, include positive feedback from the market sounding and a financial analysis that indicates a commercially viable rate of return. Another criterion is availability of standard procurement documents. Contract types for which standard procurement documents are available would be quicker and less costly to implement. As of March 2020, standard procurement documents exist (in English) for the Phased Learning DBO contract type. In most cases, the NRW-PBC can be implemented under the B2B rules. However, if a national guarantee is needed, the NRW-PBC must be implemented under PPP rules. Step 3: Technical Plan In the context of NRW-PBCs, a detailed technical plan does not mean a detailed design. The contract by nature is flexible, so the contractor will do the detailed design. A detailed technical plan does include a description of the type of work to be done for the entirety of the project (for instance, DMA establishment, install pressure reducing valves, and mains replacement); and the contract itself, which incentivizes the contractor to come up with the detailed design. In cases where standard procurement documents do not yet exist for the PBC type selected, this is the step where the PDAM should hire a lawyer and transaction advisor to draft the contract. Step 4: Standard Operating Procedures The Standard Operating Procedures (SOPs) for an NRW-PBC comprise the contract and a corresponding manual, which should say how the PDAM will manage the contractor for the entirety of the project. The manual should include details on the organizational structure for the management of the contract, processes for the contract management team, metrics to assess performance, risk management and mitigation measures, and an indicative timeline. Box 7.1 in Section 7 is a high-level SOP for the Phased Learning DBO which could be detailed in a manual to specify who is responsible for what, establish processes (such as reviewing and approving contractor invoice payments), define metrics to assess performance, plan risk management and mitigation measures, and provide an indicative timeline. 17 18 Phase 2: Transaction If the Feasibility Study prepared under Phase 1: Preparation indicates that an NRW-PBC would be viable, the PDAM moves onto Phase 2: Transaction. The Phase begins with the establishment of a committee (Step 1) that will oversee the transaction. The Committee prepares the procurement documents and PBC, working from existing models where possible (Step 2). The procurement documents include the Request for Qualifications (RFQ) and Request for Bids (RFB). Preparing the PBC and procurement documents will entail developing qualification and evaluation criteria, setting performance- based targets and remuneration mechanisms, and for some contract types, preparing a Bill of Quantities (BOQ). After the PBC and procurement documents are complete, the Committee runs a competitive tender to select the company offering best value (Step 3). Following negotiations, the contract will be signed (Step 4) and, for projects mobilizing private finance, financial close will be reached (Step 5). In a situation where a PDAM has received an unsolicited proposal and direct appointment is permissible by law, Step 3 can be skipped. Nevertheless, it is recommended that the PDAM engage a transaction advisor to assist with the PBC design and contract negotiations, to ensure the PBC provides maximum benefits to the PDAM. Step 1: Form Committee The first step is to form a Committee to manage the transaction. This Committee will be responsible for carrying out all steps listed below, including completing the transaction documents, running the competitive tender, signing the contract, and (where relevant) achieving financial close. The Committee should also ensure continued sufficiency of the budget to carry out the project. Step 2: Complete Transaction Documents After the Committee is formed, it should complete the transaction documents, meaning the RFQ, RFB, and PBC. Box 6.1 provides detailed guidance on how to complete transaction documents for the Phased Learning Design-Build-Operate (DBO) Contract, based on the World Bank standard procurement documents (SPDs). If another contract type is selected, for which standard procurement documents do not yet exist, the PDAM should engage legal and transaction advisory support so the transaction documents can be completed. For these other contract types, this step will also entail the general steps of defining project scope, developing evaluation and qualification criteria, and designing performance-based remuneration mechanisms. Designing the performance-based remuneration mechanism will depend on the type of contract selected. With a Phased Learning DBO, the Contractor gets reimbursed for the establishment of the DMAs and the first 20 or so percent of loss reduction. The remaining 80 percent of loss reduction is on a performance basis. With an Incentivized Program Management Contract, the program manager is paid a program management fee—typically around 10 percent of the value of the works—and is also incentivized with performance pay for improvements on specified key performance indicators. With an Increasing Block Payment, the contractor is paid a relatively low price per unit of water saved, up to a certain 19 volume, then a slightly higher price per unit of water saved, up to a higher volume, and so on. The remuneration structure, in $ per m3/day NRW reduction, is predefined. Box 6.1: Detailed Guidance on Completing Transaction Documents for Phased Learning DBO Contract For PDAMs that have selected the Phased Learning DBO contract type, step-by-step guidance on completing the transaction documents and related tasks are listed below. Some steps may have been already completed in Phase 1: Preparation, in which case they can be skipped. Step 2.1: Define indicative scope for bidding documents This entails estimating indicative implementation schedules and contract duration, outlining design of the district metered areas (DMAs), and establishing target level of water loss reduction. Step 2.2: Prepare an indicative Bill of Quantities (BOQ) A template is provided in Appendix C. The BOQ without the unit prices filled in will be included in the RFB, so that bidders may fill in the unit prices as part of their bids. The BOQ with the unit prices filled in (called a pre-bid BOQ estimate) shall be maintained for internal use only, to estimate the project cost and update the financial analysis prepared under Phase 1. Step 2.3: Develop evaluation and qualification criteria A template is provided in Section III of the World Bank’s SPDs.22 Step 2.4: Complete bidding documents This entails developing the Works and Services Requirements of the project (see Section VII of the World Bank’s SPD for template and Annex 3 of the World Bank’s guidance note23 for a sample, respectively) and finalizing the RFB document by filling in italicized placeholders in the SPD,24 or amending clauses as desired. Step 3: Run Competitive Tender Once the transaction documents are complete, the PDAM can run the competitive tender. This is a two-step process including the RFQ stage and the RFB stage. The RFQ stage entails an open (public) competition, in which prospective bidders that pass a set of technical and 22 Located at: https://projects.worldbank.org/en/projects-operations/products-and- services/brief/procurement-new-framework#SPD with title: “Request for Bids - Water Loss Reduction, Performance Based Contracts (two-envelope process)� 23 Located at: https://projects.worldbank.org/en/projects-operations/products-and- services/brief/procurement-new-framework#SPD with title: “Guidance Note for SBD for Water Loss Reduction Performance Based Contract� 24 This includes the bid data sheet (see Section II of the World Bank’s RFB for template), the eligible countries (see Section V of the RFB for template), and the particular conditions of the contract (see Section IX of the RFB for template) 20 financial criteria, and follow the RFQ instructions, would be qualified. The RFB stage entails a competition among bidders that qualified in the RFQ stage. How price and quality are assessed to determine the preferred bidder would have been defined in Step 2 and set out in the RFB document. The following steps, in this order, are required for the RFQ phase: Announcing the Request for Qualification (RFQ) through national print media and on the website of the PJPK agency Answering clarification questions from interested bidders Evaluating submissions Notifying each party, individually, whether it qualified. The following steps, in this order, are required for the RFB phase: Releasing Request for Bids (RFB) to qualified parties If desired, holding an in-person bidders’ conference with those that are qualified Answering clarification questions from bidders Evaluating RFB submissions to select the preferred bidder in line with the evaluation criteria and terms Notifying the preferred bidder Negotiating the terms of the contract with the preferred bidder. If negotiations with the preferred bidder are not successful, the PDAM may move to negotiate with the second ranked bidder, and so on. Step 4: Sign Contract Following negotiations, if terms are agreed by both parties, the contract should be signed. Step 5: Financial Close Financial close means that “all the project and financing agreements have been signed, all conditions on those agreements have been met, and the private party to the [NRW-PBC] can start drawing down the financing to start work on the project�.25 This step only applies for projects that mobilize private finance. 25 ‘Achieving Contract Effectiveness and Financial Close’, Public-Private Infrastructure Advisory Facility (PPIAF), accessed March 31, 2020, https://pppknowledgelab.org/guide/sections/72-achieving-contract-effectiveness-and- financial-close. 21 Phase 3: Implementation of Sistem Penyediaan Air Minum (SPAM) With contract signed and financing secured, the NRW-PBC moves into Phase 3: Implementation. The contractor will mobilize and be responsible for directing and (depending on the contract type selected) doing the work. The PDAM implements by performing its own contractual obligations, working closely with the contractor to make the project a success, and dealing with the various unexpected events that typically emerge. The steps below—procurement, development, quality management, and utilization— correspond to the activities which the SPAM Development must include according to the Basic Management Process. They thus show how the PDAM can manage the PBC effectively while complying with GR No. 122/2015. Box 7.1 at the close of the section provides detailed steps for implementation for the Phased Learning DBO contract type. Step 1: Procurement PDAMs will have procured the private contractor through the transaction. Therefore, “Phase 2: Transaction� in these guidelines should be considered to be equivalent to the Procurement step in the Basic Management Process. As set out in the signed PBC, in most cases PDAMs should also hire third-party experts to verify works done and benefits achieved. For instance, for the Phased Learning DBO contract, the PDAM should hire a Supervision Consultant and Independent Expert. The Supervision Consultant (appointed by the PDAM) will oversee the performance of the Contractor. The Independent Expert (appoint solely by the PDAM or jointly with the Contractor, as appropriate) will provide advice and support on the various water loss reduction interventions. Sample Terms of Reference (TOR) for such experts can be found in Appendix D and Appendix E, respectively. Step 2: Development The development of improved infrastructure will be carried out by the PBC-contractor. The PDAM’s job is to ensure that this is done properly, which is covered in the next step. Step 3: Quality Management The PDAM must ensure that the development is carried out in accordance with the contract and is in accordance with applicable technical standards. Step 4: Utilization Utilization in the case of an NRW-PBC consists of the PDAM gaining the benefits of the NRW reduction. The main benefits are reduced technical losses, providing more water for supply; and reduced commercial losses, providing additional revenue. Other benefits may include better information on the network, faster repair times in the case of service interruptions, and increased capacity of the staff (depending on the contract). The PDAM is responsible for making wise use of the benefits it receives. Because NRW-PBCs start to deliver benefits before the contract is complete, the utilization of the improvements may occur while development and quality management are ongoing. Monitoring (Phase 4, Step 1 in these Guidelines) will take place throughout the utilization period, so that the PDAM can achieve all the benefits it is entitled to under the contract. 22 Box 7.1: Detailed Steps for Implementation and Monitoring for Phased Learning DBO Contract For PDAMs that have selected the Phased Learning DBO contract type, step-by-step guidance on implementation is listed below. Because Monitoring (Phase 4, Step 1), occurs in parallel to Implementation, Monitoring steps are also listed below. Implement DMA Creation, Diagnostic, and Establishment of Baseline (Contract Phase I) Ensure Independent Expert develops the Baseline and Service Level Verification Protocol Review Contractor’s detailed design of DMAs Ensure Supervision Consultant verifies the detailed design of DMAs Ensure Supervision Consultant certifies the baseline level of water loss reduction (WLR) for each DMA, once each DMA is completed Appraise Contractor’s Phase II A Program of Works (POW) proposal to meet the set level of WLR, as pre-defined in the Contract, with help from the Supervision Consultant and the Independent Expert Approve Contractor’s Phase II A POW in accordance with the Contract Ensure Supervision Consultant fulfils other required tasks26 Implement Water Loss Reduction Activities (Contract Phase II A) Adjust, if necessary, the overall level of WLR for Phase II B, based on the experience of Phase II A and investigation of Phase II B DMAs If adjusted, set out the updated WLR targets in an addendum to the Contract Appraise Contractor’s proposal to achieve the Phase II B target with assistance from the Supervision Consultant and the Independent Expert Negotiate as needed and approve Contractor’s Phase II B proposal in accordance with the Contract Ensure Supervision Consultant fulfils other required tasks27 26 This includes monitoring and verifying the Contractor’s progress, output, and performance and certifying periodic progress payment requests from the Contractor (payment processes can be found in Appendix R); and issuing the Phase I Completion Certificate certifying that all DMAs have been established in accordance with the Contract. 27 This includes monitoring and verifying the Contractor’s progress, output, and performance and certifying periodic progress payment requests from the Contractor (payment processes can be found in Appendix R); and issuing the Phase II A Completion Certificate, certifying that the required service levels have been achieved for all DMAs in Phase II A. 23 Implement Water Loss Reduction Activities, continued (Contract Phase II B) Ensure Supervision Consultant monitors and verifies the Contractor’s progress, output, and performance and certifies periodic progress payment requests from the Contractor Ensure Supervision Consultant issues the Phase II B Completion Certificate certifying that the relevant service levels have been achieved for all DMAs in Phase II B Implement Maintenance Phase (Contract Phase III) Ensure the Supervision Consultant verifies that the target level of WLR is being maintained as set out in the contract Ensure staff receives training in WLR from the Contractor Ensure that the Contractor and the Supervision Consultant conduct a survey of the service area and agree an inventory of assets to be handed over upon completion Ensure the Supervision Consultant issues a Certificate of Contract Completion of the Works and Services certifying that the works and services are completed Take over the service area after Completion of Phase III Maintenance Period. 24 Phase 4: Monitoring and Evaluation Phase 4: Monitoring and Evaluation will start soon after Phase 3 begins and run in parallel with it. The PDAM should monitor the performance of the contractor against the indicators and requirements in the contract. As the end of the contract approaches, the PDAM should evaluate what has worked well and what did not work under the contract. The PDAM will use the results of the evaluation to decide what to do next—for example, whether to extend the contract, run another competitive procurement, or bring the function of NRW control in- house. The steps below correspond to those required by stages 3 and 4 of the Basic Management Process. Step 1: Monitoring NRW Reduction Program The PDAM should collect data on all the KPIs in the contract, and achievement of the goals it set for itself. This should occur in parallel with Phase 3: Implementation of SPAM. Box 7.1 in the previous section provides detailed steps for monitoring for the Phased Learning DBO contract type. General guidance that applies to all contract types is provided below. Data collection The PDAM should ensure that the data collection system is reliable. If the Contractor is providing the PDAM with the data, the PDAM should have an audit method to ensure that data is accurate. Assessment of KPIs The PDAM should check actual performance on KPIs against targets in the contract and PDAM’s own goals. The PDAM should take appropriate contractual steps based on performance against contractual targets—for instance, make performance-based payments when earned. In the event of under-performance against a target that is material and persistent, the PDAM should undertake root-cause analysis to find the reason, and decide on and take corrective action. This may take various forms—for example, contractual penalties for contract non- performance, or efforts to improve PDAM’s own staff, or the granting of permission by the local council, in cases where these entities are slowing achievements. Step 2: Evaluation of the NRW-PBC As the end of the contract approaches, the PDAM should take stake of how well it has worked compared to goals, in the areas of infrastructure improvements, service improvements, financial improvements, and building the utility’s own capacity. Reasons for success and failures should be analyzed, and lessons learned documented. Step 3: Deciding on What To Do When the NRW-PBC Ends Considering the evaluation of how well the PBC has worked, and the reasons, the PDAM should decide what to do next. The goal is to continue to improve service and financial performance, after the PBC contract ends. The PDAM should consider a range of options, including: Taking NRW responsibility back in-house, if its staff have the skills, equipment, and incentives to do this well; or 25 Running another tender for an NRW-PBC, which would require going through the process set out in these guidelines again. 26 : Summary of Proposed Contract Types Table A.1 summarizes four proposed performance-based contract (PBC) types for non-revenue water (NRW) reduction in Indonesia, namely: Phased Learning Design Build Operate (DBO)—The contractor is paid on a BOQ basis for loss reduction in the first 20 percent of DMAs (as it learns about the network), and on a lump sum basis (meaning greater performance incentives) for the remaining 80 percent of DMAs. Incentivized Program Manager—The PDAM pays a team of experts to design, procure, and supervise NRW reduction works. Actual implementation is done by third-party works contractors. The program manager is paid a program management fee—typically around 10 percent of the value of the works—and is also incentivized with performance pay for improvements on specified key performance indicators (KPIs). Increasing Block Payment with private finance—The contractor is paid a relatively low price per unit of water saved, up to a certain volume, then a slightly higher price per unit of water saved, up to a higher volume, and so on. The structure encourages the contractor to implement lower cost measures first and leaves the utility with a greater share of net benefits. Increasing Block Payment without private finance—Same as above without private finance. Table A.1: Summary of Four Proposed PBC Types for NRW Reduction in Indonesia Increasing Block Payment Incentivized Program Phased Learning DBO (with or without Private Manager Finance) Any combination of: decrease physical losses, Decrease physical losses increase the number of Decrease physical losses Objective and/or commercial losses customers on continuous and/or commercial losses supply, increase revenue/receipts By contractor in first Baseline By program manager in By contractor in first phase, verified by utility first phase, verified by phase, verified by utility (how is it set) and Supervision auditor and Independent Expert Consultant Measurement By Independent Expert, System By contractor as each based on inputs from the By contractor, verified by DMA is created, verified (how is it contractor and utility auditor by auditor created) contractor 27 Increasing Block Payment Incentivized Program Phased Learning DBO (with or without Private Manager Finance) DMA creation and initial Baseline establishment NRW reduction costs paid at cost based on BOQ Capital Cost (usually in 20% to 30% of Utility pays Program unit rates; NRW reduction DMAs) paid on BOQ basis; (how is it paid Manager which pays paid per m3/day reduced, remaining NRW reduction for) works contractors under an increasing block costs paid as a lump sum payment structure, plus (calculated using unit professional fee costs from BOQ) Contractors, Covered through a Staff, and program management Covered through Covered through Operating Cash fee, which is a standard professional fee professional fee (how is it paid percentage of the cost of for) works Lump sum payment means contractor receives higher profits if reduction targets are achieved at lower than Program manager’s profit Increasing block payment Incentive estimated cost, or lower depends in part on structure incentivizes the (how is it profits if reduction targets contractors delivering to contractor to prioritize provided) are achieved at higher specified levels and low cost, high benefit than estimated cost. In budget NRW reduction measures addition, contractor penalized for time overruns and failure to achieve targets Freedom to design DMAs Substantial freedom to Flexibility for and test various NRW Freedom to design NRW design and adapt a contractor reduction approaches reduction approaches program under the initial phase Lowest cost to reach target loss reduction and for standard DMA Maximum quality of team program, bid as unit rates and methodology Quality-based selection or Bid Factor against BOQ (with provided for fixed budget, QCBS with strong indicative unit quantities), or QCBS with strong emphasis on quality rating plus professional fees quality rating (design and management) and maintenance fees 28 Each contract type is described in a sub-section in the remainder of this appendix. None of the PBC types require an extensive baseline study. This means PDAMs can move quickly to contracting and reducing NRW. Phased Learning DBO The phased learning DBO recognizes that, as most assets are underground and leaks are hidden, it is not possible to prescribe ex ante an optimal set of interventions. Instead, the contract uses a learning period (Phase II-A) to achieve the desired level of loss reduction. The phases include: Phase I: DMA establishment on a BOQ basis for each DMA; Phase II-A: Loss reduction in an initial batch of DMAs on a BOQ basis (this can be running concurrently with establishment of further batches of DMAs); Phase II-B: Loss reduction in the remaining DMAs, based on an overall loss reduction target under a lumpsum contract; and Phase III Maintenance Period (to end 12 to 18 months following completion of Phase II B).1 Phase II-A is designed to allow the contractor to learn about the network and how it responds to interventions for loss reduction. The Contractor is paid for activities under Phase II-A through a Bill of Quantities for work actually done. Phase II-A has only limited performance incentives for timely delivery and achievement of agreed service levels. Based on the findings from Phase II-A, a loss reduction plan and lump sum price is agreed for Phase II-B, which has greater performance incentives. Table A.2 summarizes key features of the phased learning PBC. Table A.2: Key Features of Phased Learning PBC Objective Decrease physical losses and/or commercial losses Baseline (how is it By contractor in first phase, verified by utility and Supervision set) Consultant Measurement System By Independent Expert, based on inputs from the contractor and utility contractor (how is it created) Capital Cost DMA creation and initial NRW reduction costs (usually in 20% to 30% of DMAs) paid on BOQ basis; remaining NRW reduction costs paid as a (how is it paid for) lump sum (calculated using unit costs from BOQ) Contractors, Staff, and Operating Cash Covered through professional fee (how is it paid for) 1 World Bank, Standard Procurement Document, Trial Version, Request for Bids, Water Loss Reduction Performance Based Contract (WLR PBC), http://pubdocs.worldbank.org/en/728171568044089515/SPD-Water-Loss-Reduction-PBC.docx, September 2019. 29 Lump sum payment means contractor receives higher profits if Incentive reduction targets are achieved at lower than estimated cost, or lower profits if reduction targets are achieved at higher than estimated cost. (how is it provided) In addition, contractor penalized for time overruns and failure to achieve targets Flexibility for Freedom to design DMAs and test various NRW reduction approaches contractor under the initial phase Lowest cost to reach target loss reduction and for standard DMA Bid Factor program, bid as unit rates against BOQ (with indicative unit quantities), plus professional fees (design and management) and maintenance fees The main advantage of the Phased Learning DBO contract is the physical works for Phase II-B (loss reduction for about 80 percent of DMAs) are well-specified before work begins. This is unlike the Incentivized Program Manager and Increasing Block Payment contract types in which the contractor has more flexibility throughout the contract to define and change the specific measures to be implemented. Certainty of physical works under the Phased Learning DBO will provide comfort to project stakeholders, and the lump-sum payment arrangement can provide a strong incentive to the contractor to deliver the WLR target. Under successful negotiations prior to commencing Phase II-B, the PDAM can ensure that most of the benefit is captured for the utility. A disadvantage of the Phased Learning DBO contract is that technical expertise and strong negotiating skills are required to achieve this benefit. Prior to commencing Phase II-B, the contractor will have more information than the PDAM and will be incentivized to overstate its expected costs and understate the expected benefits. To overcome this disadvantage, a strong Independent Expert and Supervision Consultant are critically important. Incentivized Program Manager Program management contracts separate the ‘brains’ of the operation (planning interventions such as DMAs and active leak control) from the ‘brawn’ of implementing the works. A program management contract is a professional services contract, in which the utility pays a team of experts to design, procure, and supervise NRW reduction works. Actual implementation is done by third- party works contractors. The program manager is paid a program management fee—typically around 10 percent of the value of the works—and is also incentivized with performance pay for improvements on specified key performance indicators (KPIs). Such contracts include activities to find out the level of NRW with increasing accuracy, and give the contractor the flexibility to adapt the NRW reduction work based on emerging information collected. A detailed baseline is not required. Table A.3 summarizes key features of an incentivized program manager PBC. Table A.3: Key Features of Incentivized Program Manager PBC Any combination of: decrease physical losses, increase the number of Objective customers on continuous supply, increase revenue/receipts 30 Baseline (how is it By program manager in first phase, verified by auditor set) Measurement System By contractor as each DMA is created, verified by auditor (how is it created) Capital Cost Utility pays Program Manager which pays works contractors (how is it paid for) Contractors, Staff, and Operating Covered through a program management fee, which is a standard Cash (how is it percentage of the cost of works paid for) Incentive Program manager’s profit depends in part on contractors delivering to (how is it specified levels and budget provided) Flexibility for Substantial freedom to design and adapt a program contractor Maximum quality of team and methodology provided for fixed budget, Bid Factor or QCBS with strong quality rating An advantage of the Incentivized Program Manager contract is it is flexible to new information throughout the life of the contract (compared to the Phased Learning DBO where the physical works are ‘locked in’ after the first 20 percent of loss reduction is completed). This means if new information comes to light—for example, that certain mains are much more deteriorated than expected, or that most of the losses are not in under-registering meters but rather in leaky service connections—the NRW program can adapt without needing a renegotiation or adjustment of the program managers’ PBC. Another advantage is the bid factor considers quality of the bidder, not just lowest cost. Value for money in NRW reduction programs lies more in procuring the right things in the right order, than it does in procuring things at lowest cost. Smart planning is where real gains can be made. A disadvantage of the Incentivized Program Manager contract is there is less initial certainty about what physical works will be implemented and how much loss reduction will be achieved. In addition, like the Phased Learning DBO contract, there is a need for continuing capacity on the side of the PDAM to respond to adaptations to the NRW reduction plan proposed by the program manager. Increasing Block Payment (with or without Private Finance) An increasing block payment PBC aims to optimize NRW reduction while capturing most of the benefits for the utility. This is done through an increasing block payment structure, which takes advantage of the fact that NRW reduction programs are always implemented progressively, and that it makes sense to do the low-hanging fruit first. 31 Under an increasing block payment structure, the contractor is paid a relatively low price per unit of water saved, up to a certain volume, then a slightly higher price per unit of water saved, up to a higher volume, and so on (see Figure A.1). The effect of the increasing block payment structure is that the gap between the amount paid by the utility, and the cost of the NRW reduction, is much smaller than typical NRW-PBCs where the contractor is paid the same price per unit of water saved, regardless of the total volume saved. Because of this, a much greater share of the net benefits remains with the utility ‘naturally’ (that is, it not captured by the contractor and then paid to the utility). Figure A.1: Payment Structure for Increasing Block Payment PBC Table A.4 summarizes key features of increasing block payment PBCs. Table A.4: Key Features of Increasing Block Payment PBCs Objective Decrease physical losses and/or commercial losses Baseline (how is it By contractor in first phase, verified by utility and Independent Expert set) Measurement System By contractor, verified by auditor (how is it created) Capital Cost Baseline establishment paid at cost based on BOQ unit rates; NRW reduction paid per m3/day reduced, under an increasing block payment (how is it paid for) structure, plus professional fee 32 Contractors, Staff, and Operating Cash Covered through professional fee (how is it paid for) Incentive Increasing block payment structure incentivizes the contractor to (how is it provided) prioritize low cost, high benefit NRW reduction measures Flexibility for Freedom to design NRW reduction approaches contractor Bid Factor Quality-based selection or QCBS with strong emphasis on quality rating An advantage of the Increasing Block Payment contract is that it combines flexibility (the contractor has freedom to design NRW reduction approaches) with specificity (the remuneration structure, in $ per m3/day NRW reduction, is predefined). This approach aims to optimize NRW reduction (implement the lowest cost measures first) while maximizing the benefits kept by the utility. A disadvantage is the PDAM has less certainty about the physical works that will be implemented. 33 : Feasibility Study Indicative Outline The purpose of the feasibility study is to help the PDAM decide if it should: Proceed with NRW reduction Implement the NRW reduction project through a PBC, and if so, which type of PBC would be best; and Implement the NRW-PBC under the B2B or PPP rules. The following is an indicative for the feasibility study for an NRW-PBC. PDAMs should consult their local regulations for any specific requirements for feasibility studies and ensure they are incorporated. I. Introduction Provides information about the PDAM, purpose of the feasibility study report, and overall structure of the report. II. Context of NRW Project Provides profile of the utility (such as service territory, water resources, production facilities, coverage, technical and commercial networks, operations, service quality, management structures, effectiveness, resources and capacities, cost structures, financial condition) Provides information about the current NRW situation of the PDAM, including water supply and NRW trends, volumes and values of NRW, initial water balance and uncertainty level, and NRW practices Resource available to assist in completing this section: EasyCalc: a free-to-download Excel tool that automatically produces a water balance, with error margins. It is available for download at: http://www.liemberger.cc/. III. Description of Project Concept Provides information about the project concept, such as zone(s) targeted, indicative starting values for production and NRW, suggested NRW measures (if applicable). V. Technical Feasibility Describe the technical activities that may be included (if known) Show that the project can be implemented technically, using known and proven technologies and engineering methods. VI. Economic and Financial Viability Show that expected economic benefits exceed the expected economic costs Show that the project is the least cost, feasible way of achieving benefits Provide evidence that revenues cover costs and provide a commercially viable rate of return Resource available to assist in completing this analysis: The non-revenue water financial model: an Excel tool that helps users assess whether a particular combination of NRW- related investment conducted as part of a PBC will result in a financial “go ahead� or not. 34 Available for download at: https://pppknowledgelab.org/tools/performance-based- contracting-tools-non-revenue-water-reduction-tools-resources. VII. Legal Feasibility Ensure that project is permitted by law Provide evidence that parties involved are legally empowered to fulfill their obligations Provide confirmation that required agreements can be made legally binding on all parties concerned Resource available to assist in completing this analysis: Section 3 of these Guidelines (with a check if national laws and regulations have been updated; its own local B2B regulations; and PDAM specific regulations). VIII. Social and Environmental Feasibility Provide evidence that project complies with the environmental laws and regulations Show that all substantial social impacts of the project have been assessed (including providing impacted individuals and groups ample opportunity to provide feedback and voice concerns). IX. Risks Summarize the main risks (operational, technical, institutional, financial, and policy/regulatory) that could affect the project Allocate each project risk to the party best able to manage, mitigate, or diversify the risk. Resource available to assist in completing this analysis: A risk matrix (template provided in Table B.1 below). Table B.1: PBC for NRW Reduction Risk and Responsibility Matrix Risk and Responsibility Public Private Justification Providing finance Construction costs Construction delays Legal and regulatory changes Inflation Foreign exchange Maintenance and operations Government does not pay approved invoices on time Reducing physical losses 35 Risk and Responsibility Public Private Justification Converting illegal connections into paying customers Controlling losses (physical and technical) in informal settlements Ensuring meters are working and accurately read Ensuring bills are timely and accurate and reach the customer Payment Force majeure IV. NRW-PBC Options Analysis Describe options for NRW reduction, including responsibilities of the Contractor, responsibilities of the PDAM and other public sector entities, objectives and targets, and payment structures Show comparisons of the costs and benefits of different contract types; or different ways of doing a single contract type Show comparisons of the risks of different contract types; or different ways of doing a single contract type Show the results of a value for money analysis of the PBC option versus conventional public sector finance and delivery. X. Results of the Market Sounding Confirm that the private sector is interested Resource available to assist in completing this analysis: Indicative questions to include in the market sounding survey, including questions to assess: The company’s interest in the project: “Please indicate your organization’s level of interest in participating in an NRW-PBC contract (scale from ‘None’ to ‘Very high’).� The company’s desired contractual terms: “What would be your expected contract value for this project?� “Would you be interested in providing finance?� “What credit enhancement might you require?� “What performance-based mechanism would be suitable?� 36 X. Recommended Option Select a recommended option, using the results from above as justification XI. Conclusion and Action Plan Summarize all of the results reported in the previous sections Insert action plan (Gantt chart) showing timelines for each step, such as: Prepare detailed technical plan Draft Standard Operating Procedures Form transaction committee Complete transaction documents, including Request for Qualification (RFQ), Request for Bid (RFB), and the Performance-Based Contract (PBC) Announce the RFQ through national print media and on the website of the PJPK agency Answer clarification questions from interested bidders Evaluate submissions Notify each party, individually, whether it qualified Release the RFB to qualified parties If desired, hold an in-person bidders’ conference with those that are qualified Answer clarification questions from bidders Evaluate RFB submissions to select the preferred bidder in line with the evaluation criteria and terms Notify the preferred bidder Negotiate the terms of the contract with the preferred bidder Sign contract Financial Close Implement NRW-PBC. 37 : Template Bill of Quantities This template can be found in Annex 4 of the World Bank’s Guidance Note on SPD for WLRPBC. Phase 1 - DMA establishment Unit Quantity Rate Amount District Metered Area (DMA) establishment as per Technical Specifications: hydraulic modelling verification; all site investigations including boundary valves or zone dividers; zero pressure tests; No. preparation of as-built drawing; other documentation and miscellaneous works. Field measurements and baseline definitions. Allowance for site investigations (10 proving sites per DMA) - includes excavation, infrastructure proving, No. back-filling & surface reinstatement works. Boundary valve installations for identified isolation points - estimated 5 isolation points per DMA of different diameters, including: all labour; survey and excavations, complete boundary valve installation, valve marker and surface reinstatement works. DN 50mm No. DN 75mm No. DN 100mm No. DN 150mm No. DN 200mm No. Supply and installation of DMA flow measurement - different diameters, including: all labour; survey and excavations; underground chamber and all accessories; electromagnetic bulk meter, accessories and data transmission system; all necessary fittings and joints; back-filling and reinstatement of all surfaces; preparation of as-built drawing and other documentation. This includes laying of main pipelines up to a cumulated length of 20m. Quantities estimations are based on pre-assumptions that each DMA will require 1 measurement and pressure control point and 1 critical point. Note: meter installation and chamber design will allow future pressure control valve (PRV) installation and advance pressure management controller, to be defined in next phases. 38 Phase 1 - DMA establishment Unit Quantity Rate Amount DN 50mm No. DN 75mm No. DN 100mm No. DN 150mm No. DN 200mm No. Supply and installation of additional DMA flow measurement - different diameters, including: all labour; survey and excavations; underground chamber and all accessories; electromagnetic bulk meter including accessories and data transmission system; all necessary fittings and joints; back-filling and reinstatement of all surfaces; preparation of as-built drawing and other documentation. Quantities estimations are based on pre-assumptions that every 2 DMAs it will be required an additional measurement and pressure control point. Note: the meter installations and chambers design will allow future control valve (PRV) installation and advance pressure management controller. These installations will be defined in next project phases. DN 50mm No. DN 75mm No. DN 100mm No. DN 150mm No. Total DMA establishment 39 Phase 2A – Water Loss Reduction (first DMAs) Unit Quantity Rate Amount Mains, service connection and customer meters replacement. Pressure Management and Leaks repairs – ±30% of the project area Supply and installation of water distribution pipelines - different material & sizes, including: all labour; excavation, trench shoring support and drainage measures, safe and safety measures, laying & bedding, dewatering, fittings and connection to the network, pressure testing and disinfection, necessary thrust blocks, up to 2 meters depth as per technical specifications, detailed with as-built drawing; removal & proper disposal of old pipes; back-filling and reinstatement of all surfaces. HDPE DN 50mm M HDPE DN 75mm M uPVC DN 100mm M uPVC DN 150mm M uPVC DN 200mm M Extra-over item for pipelines to be installed in more thanM2m depth M Supply and installation of isolation valves, complete including chamber as per specifications, includes all fittings and materials, back-filling and reinstatement of all surfaces. DN 50mm No. DN 75mm No. DN 100mm No. DN 150mm No. DN 200mm No. Supply and installation of air valves on main pipe with diameter, including chamber, according to standards: DN 50mm No. DN 75mm No. 40 Phase 2A – Water Loss Reduction (first DMAs) Unit Quantity Rate Amount Mains, service connection and customer meters replacement. Pressure Management and Leaks repairs – ±30% of the project area DN 100mm No. DN 150mm No. DN 200mm No. Replacement of existing service connection (including water meter): disconnection at the customer metering point and the pipe saddle, installation of new HDPE service connection from (and including) the pipe saddle to metering point, complete as specified in the project specifications, including all materials, water meter, meter box, all fittings, excavation, laying with sand bedding, jointing, and proper backfilling, re- instatement of road, sidewalk or any other surface, including the supply of all materials up to a maximum pipe length of 10m. 1/2� service connection to be connected to main of No. diameter: DN 75-125mm No. DN 150-250mm No. DN >250mm No. Extra-over item for pipe length >10m No. 3/4� service connection to be connected to main of diameter: DN 75-125mm No. DN 150-250mm No. DN >250mm No. Extra-over item for pipe length >10m No. High consumers service connections replacement Dn 50mm No. Dn 75mm No. Dn 100mm No. 41 Phase 2A – Water Loss Reduction (first DMAs) Unit Quantity Rate Amount Mains, service connection and customer meters replacement. Pressure Management and Leaks repairs – ±30% of the project area Replacement of existing customers water meters: removal of old customer water; installation of new customer water meter according to technical specifications including meter box, all materials and labour. All removed customer water meters will be handed to AAWSA. Dn 15mm No. Dn 20mm No. Dn 25mm No. Dn 50mm No. Pressure Management: Supply and installation pressure reducing valves (PRV) in existing flow meter chambers (see Schedule C.4) - different diameters, including: all labour, all necessary fittings and accessories; advance pressure management controller; preparation of as-built drawing and other documentation. Construction of the critical point pressure measuring point above ground instrumentation box, including supply of all required materials, fittings and equipment, as per the specifications. Important note: quantities estimations are based on pre-assumptions that each DMA will require 1 measurement and pressure control point and 1 critical point. Dn 50mm No. Dn 75mm No. Dn 100mm No. Dn 150mm No. Dn 200mm No. Supply and installation of additional pressure control point in existing flow meter chambers (see Schedule C.5) - different diameters, including: all labour, all necessary fittings and accessories; advance pressure management controller; preparation of as-built drawing and other documentation. Construction of 42 Phase 2A – Water Loss Reduction (first DMAs) Unit Quantity Rate Amount Mains, service connection and customer meters replacement. Pressure Management and Leaks repairs – ±30% of the project area the critical point pressure measuring point above ground instrumentation box, including supply of all required materials, fittings and equipment, as per the specifications. Important note: quantities estimations are based on pre-assumptions that every 2 DMAs it will be required an additional measurement and pressure control point. Dn 50mm No. Dn 75mm No. Dn 100mm No. Dn 150mm No. Main line leak repair including the supply of all materials and fittings, complete with road and sidewalk reinstatement (estimation of main line leaks at the DMA area) leak tagging – collecting all leak and leak repair information and updating the GIS Up to DN 100mm No. DN 150-250mm No. DN >250mm No. Service connection leak repair including the supply of all materials and fittings, complete with road and sidewalk reinstatement (estimated number of leaks for the connections not replaced at the DMA area) of diameters: Dn 15mm No. Dn 20mm No. Dn 25mm No. Dn 40mm No. Dn 50mm No. Dn 80mm No. Dn 100mm No. 43 Phase 2A – Water Loss Reduction (first DMAs) Unit Quantity Rate Amount Mains, service connection and customer meters replacement. Pressure Management and Leaks repairs – ±30% of the project area Totals Phase 2B – Water Loss Reduction (first DMAs) Unit Quantity Rate Amount Mains, service connection and customer meters replacement. Pressure Management and Leaks repairs – ±70% of the project area Supply and installation of water distribution pipelines - different material & sizes, including: all labour; excavation, trench shoring support and drainage measures, safe and safety measures, laying & bedding, dewatering, fittings and connection to the network, pressure testing and disinfection, necessary thrust blocks, up to 2 meters depth as per technical specifications, detailed with as-built drawing; removal & proper disposal of old pipes; back-filling and reinstatement of all surfaces. HDPE DN 50mm M HDPE DN 75mm M uPVC DN 100mm M uPVC DN 150mm M uPVC DN 200mm M Extra-over item for pipelines to be installed in more M than 2m depth M Supply and installation of isolation valves, complete including chamber as per specifications, includes all fittings and materials, back-filling and reinstatement of all surfaces. DN 50mm No. DN 75mm No. DN 100mm No. DN 150mm No. 44 Phase 2B – Water Loss Reduction (first DMAs) Unit Quantity Rate Amount Mains, service connection and customer meters replacement. Pressure Management and Leaks repairs – ±70% of the project area DN 200mm No. Supply and installation of air valves on main pipe with diameter, including chamber, according to standards: DN 50mm No. DN 75mm No. DN 100mm No. DN 150mm No. DN 200mm No. Replacement of existing service connection (including water meter): disconnection at the customer metering point and the pipe saddle, installation of new HDPE service connection from (and including) the pipe saddle to metering point, complete as specified in the project specifications, including all materials, water meter, meter box, all fittings, excavation, laying with sand bedding, jointing, and proper backfilling, re- instatement of road, sidewalk or any other surface, including the supply of all materials up to a maximum pipe length of 10m. 1/2� service connection to be connected to main of No. diameter: DN 75-125mm No. DN 150-250mm No. DN >250mm No. Extra-over item for pipe length >10m No. 3/4� service connection to be connected to main of diameter: DN 75-125mm No. DN 150-250mm No. DN >250mm No. Extra-over item for pipe length >10m No. 45 Phase 2B – Water Loss Reduction (first DMAs) Unit Quantity Rate Amount Mains, service connection and customer meters replacement. Pressure Management and Leaks repairs – ±70% of the project area High consumers service connections replacement Dn 50mm No. Dn 75mm No. Dn 100mm No. Replacement of existing customers water meters: removal of old customer water; installation of new customer water meter according to technical specifications including meter box, all materials and labour. All removed customer water meters will be handed to AAWSA. Dn 15mm No. Dn 20mm No. Dn 25mm No. Dn 50mm No. Pressure Management: Supply and installation pressure reducing valves (PRV) in existing flow meter chambers (see Schedule C.4) - different diameters, including: all labour, all necessary fittings and accessories; advance pressure management controller; preparation of as-built drawing and other documentation. Construction of the critical point pressure measuring point above ground instrumentation box, including supply of all required materials, fittings and equipment, as per the specifications. Important note: quantities estimations are based on pre-assumptions that each DMA will require 1 measurement and pressure control point and 1 critical point. Dn 50mm No. Dn 75mm No. Dn 100mm No. Dn 150mm No. Dn 200mm No. 46 Phase 2B – Water Loss Reduction (first DMAs) Unit Quantity Rate Amount Mains, service connection and customer meters replacement. Pressure Management and Leaks repairs – ±70% of the project area Supply and installation of additional pressure control point in existing flow meter chambers (see Schedule C.5) - different diameters, including: all labour, all necessary fittings and accessories; advance pressure management controller; preparation of as-built drawing and other documentation. Construction of the critical point pressure measuring point above ground instrumentation box, including supply of all required materials, fittings and equipment, as per the specifications. Important note: quantities estimations are based on pre-assumptions that every 2 DMAs it will be required an additional measurement and pressure control point. Dn 50mm No. Dn 75mm No. Dn 100mm No. Dn 150mm No. Main line leak repair including the supply of all materials and fittings, complete with road and sidewalk reinstatement (estimation of main line leaks at the DMA area) leak tagging – collecting all leak and leak repair information and updating the GIS Up to DN 100mm No. DN 150-250mm No. DN >250mm No. Service connection leak repair including the supply of all materials and fittings, complete with road and sidewalk reinstatement (estimated number of leaks for the connections not replaced at the DMA area) of diameters: Dn 15mm No. Dn 20mm No. Dn 25mm No. Dn 40mm No. 47 Phase 2B – Water Loss Reduction (first DMAs) Unit Quantity Rate Amount Mains, service connection and customer meters replacement. Pressure Management and Leaks repairs – ±70% of the project area Dn 50mm No. Dn 80mm No. Dn 100mm No. Totals 48 Phase 3 – Maintenance Unit Quantity Rate Amount Totals 49 : Sample Terms of Reference for Supervision Consultant This sample TOR can be found in Annex 1 of the World Bank’s Guidance Note on SPD for WLRPBC. The yellow placeholders are to be filled in by the Borrower. Project Title: Contract Supervision Consultant for Performance-Based Water Loss Reduction and Management Contract (PBC) Contracting agency: [ ] (the “Utility�) Project manager: Manager: Location: [country] Appointment Type: Individual Consultant Date of Assignment: xxxxxx, International Recruitment: x yes � no Background and Objectives The Utility faces inefficient management of the resources as Non-Revenue Water (NRW) is high and service levels are low. The [World Bank Project] aims to i) improve the capacity of the Utility to reduce water losses (WL), one of the key features of NRW; and (ii) deliver improved continuity of service through the implementation of performance-based contracts (PBCs). This is a step that will help the Utility achieve significant reduction of WL. This project aims to capitalize on the successes of recent NRW and WL reduction projects around that world that have been structured as PBCs and initiate a similar project for the Utility. The overall activity will focus on improving the financial and technical performance of the Utility through a performance-based engagement to reduce both physical and commercial losses. The result is expected to improve network efficiency, increase revenues, and improve service standards. Objective of the project The overall objective of this initiative is to reduce WL (WLR) for the Utility while simultaneously improving the network efficiency, service standards and customer base leading to increased revenues in the Utility. Objective of this Assignment The objective of the assignment is for the consultant (Supervision Consultant) to: 50 Assist the Utility with the tender, procurement and contracting processes of the PBC Provide the Utility with an objective review of the performance of the PBC Contractor Help the Utility manage the PBC Contractor, and Build contract oversight supervisory capacity in the Utility. Summary of the Scope of Work Under the scope of the proposed assignment, the Supervision Consultant shall: Help the Utility prepare a prequalification evaluation report and provide other support as requested in this respect Review procurement documents, help the Utility prepare the procurement and support it in reviewing the bids, responding to bidder’s questions Help the Utility prepare a tender evaluation report and provide other support as requested in this respect Prepare an oversight/support plan for the duration of the PBC Verify PBC Contractor reports, activities and results Provide technical and programmatic advisory services to the Utility on PBC compliance, quality control and monitoring Supervise PBC implementation including support the Utility in approval of DMA design, approval of DMA commissioning as well as approval of the baseline assessment for each DMA Support the Utility in estimating types and quantities of interventions required to achieve the water loss reduction targets for the rest of the system based on the experiences of Phase IIA of the PBC ([20-30% of total project area]) and support the Utility in negotiations with the Contractor on the performance-based lump-sum remunerations of Phase IIB provide training to the Utility on PBC compliance, quality control and monitoring and will coordinate a small team within the Utility which is dedicated to supervising the PBC under the guidance of the Supervision Consultant such ancillary activities as are required to achieve the objectives of the assignment as the Utility shall request from time to time. Scope of Work Task 1: Procurement process and bid evaluation The Supervision Consultant will review the tender documents and support the Utility to procure a qualified PBC Contractor, including help with responding to questions from bidders. The Supervision 51 Consultant will review bids and prepare a bid evaluation report and support the Utility to contract the PBC. Task 2: Preparation of an Oversight Support Plan The Supervision Consultant will prepare a project oversight/support plan, at the beginning of the activity, based on project planning documents, the PBC Contract, and input from both the Utility and the PBC Contractor. The oversight plan be aligned coordinated and tuned to the phases, scope, objectives, targets and milestones of the specific contract. Task 3: Verification of Contractor Reports, Activities and Results The Supervision Consultant will review all PBC Contractor reports, verify the accuracy of the reported outputs and outcomes and/or identify any material discrepancies that should be understood and potentially addressed by the Utility. The scope of the oversight will include the following: support of the Utility in approval of District Metering Area (DMA) design, coordination of supervision of the civil works with the construction supervisor, oversight of the installation of customer meters, operation of billing and commercial systems, installation and operation and maintenance (O&M) of monitoring/information systems and associated monitoring equipment, support of the Utility in approval DMA commissioning, NRW reduction and control activities, approval of pipe replacements, oversight of the quality of materials used or workmanship utilized and coordination with construction supervisor accordingly, required studies or analyses (such as baseline updates or target adjustments), support of the Utility in approval of baseline assessment for each DMA, requests for Contract modifications, approval of Training and Transfer of Technology Program or similar deliverables under the PBC Contract. Note: the supervision of construction work (pipe work, chambers, etc.) will be carried out by a construction supervisor under a separate assignment. The Supervision Consultant must coordinate with this firm in terms of quality assurance accordingly (e.g. advising the Construction Supervisor on standards and specifications of civil and pipe installation work). Task 4: Technical and programmatic advisory services to the Utility on PBC Contract Compliance, Quality Control and Monitoring The Supervision Consultant will provide technical and programmatic advisory services to the Utility to assist it to address any discrepancies it wishes to address, or modifications desired to reports, or procedures used under the PBC Contract. This includes supporting the Utility in estimating types and quantities of interventions required to achieve the water loss reduction targets for the rest of the system based on experiences of Phase IIA (note: in Phase IIA water loss reduction interventions are 52 carried out on a BoQ basis in [20-30%] of total project area). Further the Supervision Consultant will support the Utility in negotiations with the Contractor on the performance-based lump-sum remunerations of Phase IIB. Task 5: Training to the Utility on PBC Contract Compliance, Quality Control and Monitoring The Supervision Consultant will provide training to the Utility on PBC Contract oversight, quality assurance and project monitoring, towards the objective that the Utility could conduct such activities in the future, without external assistance. A Utility team of a few staff will be dedicated for the PBC supervision. The Supervision Consultant will guide this team, instruct in supervision activities and will coordinate with the team whenever the Supervision Consultant is not on site. An Independent Expert is also to be hired to support the Employer and the Contractor in implementing the PBC. The Independent Expert will draft the Baseline and Service Level Verification Protocol, on which the Contractor will base its baseline reporting, and draft recommendations for the scope of Phase II B Activities, Intended Time for Completion of Phase II B Activities and Phase II B Service Levels. The Supervision Consultant will consult and seek feedback from the Independent Expert on the draft Programs, progress against milestones and efficacy of particular interventions. The Supervision Consultant will provide a series of reports, as outlined in Section C below. METHOD The work will be somewhat qualitative, but mostly quantitative and will draw on experience in project oversight, contract management, compliance, quality assurance and outcome monitoring. The utility and Contractor will provide all available data, provide site access and cooperate with the Supervision Consultant to ensure that the best possible data is provided and the correct analysis can be made. The Supervision Consultant should provide objective advice and perform its activities in accordance with good international engineering practice. It will consult with the Independent Expert (under a separate consultancy) on issues relating to the setting of baseline, Phase II A activities and efficacy of interventions and Phase II B scoping. [The position is foreseen as a part-time position with numerous site visits of approximately 10 working-days per visit (2 weeks). The Supervision Consultant will spend periods of time on-site and away. The peak working time will be the [second] year of the assignment, when the DMAs are being established.] 53 DELIVERABLES/SPECIFIC OUTPUTS EXPECTED FROM ASSIGNMENT Based on the above tasks the following reports to be produced: Inception Report: Describing an updated project oversight/support plan, refined and updated from the preliminary oversight/support plans developed during project preparation, the consultant’s proposal for this assignment, and the results of extensive discussions with the Utility and PBC Contractor. The inception report will be prepared as a draft in the first month of the assignment and completed within 2 months after the Contractor has started its activities on the ground. Prior to the start of Phase IIA the Supervision Consultant will prepare a report on the proposed activity plan of the Contractor for Phase IIA. Notice specifying scope of Phase II B Activities, Phase II Service Levels and Intended Time for Completion for Phase II B Activities, taking into account recommendations of the Independent Expert. After submission of the Activity plan for Phase IIB by the Contractor the Supervision Consultant will provide a written report on the proposed approach of the Contractor and give a judgement on its appropriateness to achieve the levels of NRW set. Regular Quarterly Reports. Every 3 months a summary report will be prepared, highlighting activities conducted, summary results, issues and problems encountered, deviation from schedule, and updated planning, if any. Regular Annual Reports. Every 12 months a more detailed report with Executive Summary will be prepared, outlining activities conducted, results achieved, issues and problems encountered, deviation from schedule, and updated planning, if any. Report on Capacity Building. At the end of the capacity building, a report should be delivered saying what was done, what effect it had, and any further capacity building recommended. Draft and Final Report on Oversight/Support for the Dar es Salaam PBC Project, including overall results, lessons learned, recommendations for any follow-on activities, and recommendations for future NRW PBC Oversight Support Contracts. 54 SPECIFIC INPUTS TO BE PRESENTED BY THE CLIENT The Utility will make available all relevant documents. All information and background documents provided as part of this RFP are for the sole purpose of preparing the Technical and Financial proposal for this assignment. All information should be treated as confidential and not used for any other purpose. SPECIAL TERMS & CONDITIONS/SPECIFIC CRITERIA Language All primary reports (listed above) should be prepared in English, unless otherwise specified, and delivered in Word format. The primary reports will be concise, management reports. Compiled monitoring data/indicators will be provided in a consistent Excel format and will be user friendly. Timing/Assignment Duration The Consultancy will start on xxxxxx. The duration of the assignment will be for an initial period of [ ] months (the time required to start the PBC (from the contract) and for the PBC Contract (4 years)), but may be extended, should the Utility [and the World Bank] request so, to allow for ongoing monitoring, technical assistance and training and other forms of support to ensure that the impact of the PBC is fully measured and benefits are sustained (to the extent they can be with advisory support activities). Expected level of input The total level input is expected to be about [ ] months ([ ] days) in a period of [ ] of which a minimum of [ ] days needs to be provided on site. The number of days foreseen is [ ] days in year 1, [ ] days in year 2, [ ] days in year 3 and [ ] days in year 4…. In total a number of [ ] flights is estimated. Reporting The Supervision Consultant will report to the Project Management Unit of the Utility who will be responsible for the implementation of the PBC, for the attention of [the manager] [address]. Payment Schedule 55 Payments should be on quarterly basis according the project progress respectively reports submitted as follows: Inception Report [4]% of total Consultancy Fee Report on Activity plan of Phase IIA [4]% of total Consultancy Fee Report on Activity plan for Phase IIB [4]% of total Consultancy Fee Quarterly/Annual Reports (20 reports in total) [4]% of total Consultancy Fee each (80% total) Final Report [8]% of total Consultancy Fee Travel and accommodation must be arranged by the Supervision Consultant and expenditures (including daily allowance and eligible expenditures on the basis of WB rates) invoiced to the Utility after every trip together with the quarterly invoices (note: the Supervision Consultant has to include all cost for travel and living including per diem in its offer). All kind of insurances need to be covered by the Supervision Consultant. Required Qualifications and Experience The Supervision Consultant will have the following qualifications Water Specialist/Engineer – The Water Specialist shall have demonstrated successful experience in Non-Revenue Water projects. At all times, the Specialist will be available for support and backstopping to the Utility. S/he must have at least 10 years of experience in water supply in similar country contexts with demonstrated experience in NRW issues and quality of network management. The engineer will have experience in supervision and quality control of distribution network development. Specific expertise on designing NRW projects will be a plus as well as experience in PBC projects. The Specialist will have practical experience in the use of spreadsheets, project monitoring and oversight, the IWA Water Balance, field measurement techniques related to NRW and component analysis tools. Key Background Documentation Program Concept Note ToR for Initial Assessment, plus Report(s) from Initial Assessment ToR for Development of NRW Reduction Investment Plan and PBC Project Design and Procurement, plus reports prepared under this TOR The draft PBC Contract, Other relevant project documents as available. 56 Potential Downstream Work (if applicable) Downstream work is possible following this assignment for extension of the duration of the oversight support activities, and/or repetition or scale-up of the approach. 57 : Sample Terms of Reference for Independent Expert This sample TOR can be found in Annex 2 of the World Bank’s Guidance Note on SPD for WLRPBC. The yellow placeholders are to be filled in by the Borrower. Project Title: Independent Expert for Performance-Based Water Loss Reduction and Management Contract (PBC) Contracting agency: [ ] the Utility Project manager: Manager: Location: [ ] Appointment Type: Individual Consultant Date of Assignment: xxxxxx, International Recruitment: x yes � no Background and Objectives The Utility faces inefficient management of the resources as Non-Revenue Water (NRW) is high and service levels are low. The [World Bank Project] aims to (i) improve the capacity of the Utility to reduce water losses (WL), one of the key features of NRW; and (ii) deliver improved continuity of service through the implementation of performance-based contracts (PBCs). This is a step that will help the Utility achieve significant reduction of WL. This project aims to capitalize on the successes of recent NRW and WL reduction projects around that world that have been structured as PBCs and initiate a similar project for the Utility. The overall activity will focus on improving the financial and technical performance of the Utility through a performance-based engagement to reduce both physical and commercial losses. The result is expected to improve network efficiency, increase revenues, and improve service standards. Objective of the project The overall objective of this initiative is to reduce WL (WLR) for the Utility while simultaneously improving the network efficiency, service standards and customer base leading to increased revenues in the Utility. Objective of this Assignment The objective of the consultant (Independent Expert) is to: 58 Improve the understanding of Utility and PBC Contractor on the efficacy of WLR measures in the Utility Provide feedback on the design of WLR reduction activities Ensure agreement on the monitoring and reporting standards Support the Utility and PBC Contractor to reach agreement on the service standards and fees for Phase IIB of the PBC. Summary of the Scope of Work The scope of the proposed assignment includes the following tasks: Develop and agree the monitoring arrangements and reporting standards between the Utility (supported by a Supervision Consultant) and the PBC Contractor Review the proposed WLR reduction methodology for Phase IIA Monitor WLR reduction activities and prepare a report based on the results of WLR reduction activities of Phase IIA Review and advise on the approach and lump sum arrangement for Phase IIB Scope of Work Task 1: Monitoring and reporting standards Prepare a Baseline and Results Verification Protocol, , based on project planning documents, the PBC, and input from both the Utility and the PBC Contractor and submit it to the Contractor and the Supervision Consultant of the Utility within [ ] weeks of the start date of the Independent Expert’s engagement. The Baseline and Results Verification Protocol should be coordinated and consistent with the phases, scope, objectives, targets and milestones of the PBC. The Independent Expert will review the monitoring and reporting arrangements in the PBC and prepare a detailed protocol for determining the baseline for measurement of service levels and to verify results. The Independent Expert shall incorporate comments of the Supervision Consultant and the PBC Consultant within 2 weeks of receipt of those comments. To the extent that the Independent Expert does not agree with a comment its opinion shall prevail. Task 2: Baseline setting At the end of the Phase I activities, the PBC Contractor shall prepare the Baseline report for the Phase II A DMAs based on the Baseline and Results Verification Protocol and submit this to the Supervision Consultant for the review, with a copy to the Independent Expert. In the event that the PBC Contractor and the and the Supervision Consultant do not agree on a baseline of an individual DMA, the Independent Expert will review the Baseline report prepared by the PBC Contractor and provide 59 advice on the draft baseline which the Supervision Consultant may take into account when finalizing and approving the Baseline for that DMA. Task 3: Review of Draft Program for each Phase of Works and Services For each Phase of Works and Services other than Phase 1 the Independent Expert shall review the draft Program submitted by the Contractor and provide comments thereon within [ ] days of receipt of the Program. Task 4: Review proposed WLR reduction methodology and results of WLR activities of Phase IIA The PBC Contractor shall provide to the Independent Expert a copy of each report submitted by the PBC Contractor to the Supervision Consultant on approaches and results for WLR in each DMA and provide written comments to the Supervision Consultant when requested. The Independent Expert will discuss the methodology for WLR reduction in Phase IIA with the PBC Contractor and the Supervision Consultant and provide written feedback on the appropriateness of the approach and requirements for monitoring the efficacy of individual interventions to the Utility and the PBC Contractor (note: in Phase IIA WLR interventions are carried out on a BoQ basis in [20- 30% of total project area]). While the ongoing supervision and monitoring of WLR activities in Phase IIA will be carried out by a Supervision Consultant (under a separate contract), the Independent Expert under this assignment will examine the activities carried out by the PBC Contractor and provide written feedback on the efficiency and efficacy of individual activities in DMAs and the associated costs. This exercise will start once WLR activities in the first DMA has been concluded. Four weeks prior to the scheduled date for completion of Phase IIA activities, based on the results, costs and approach of each of the individual measures achieved in Phase II A against the Baseline established in Phase I, the Independent Expert will prepare and submit a report to the Utility (Supervision Consultant) and Contractor that sets out the impact on WLR and cost-benefits of WLR activities as well as lessons learned (Phase II A Report). Task 5: Phase IIB The Independent Expert will then meet the PBC Contractor and Supervision Consultant to discuss the scope of work for Phase II B, the service levels and the intended time for completion of Phase II B. The Independent Expert will submit a written recommendation within [ ] days of the meeting on the scope of the Phase II B Activities, the Phase II B Service Levels and the intended time for completion of Phase II B. In the event that either Party has any comments on the recommendations of the Independent Expert, then they will send written comments within [ ] days of receipt of the draft recommendations to the Independent Expert. The Independent Expert shall then update the recommendations as he deems appropriate and send them to the Supervision Consultant. The Supervision Consultant on behalf of the Employer will then issue the required Phase II B Service Levels and intended time for completion of Phase II B, taking the Independent Expert’s recommendations into account. 60 Once the Level II B Service Levels have been specified, the Contractor shall propose within [ ] days of such determination a detailed scope of activities for Phase II B and a lumpsum for the Phase II B Activities (Phase II B Fee) to achieve the Continuing Service Levels, indicating the level of effort in terms of works and services required. The lumpsum shall be based on the unit prices set out in the Bill of Quantities. The Independent Expert will provide within [ ] days of the Contractor’s submission a written opinion (Phase II B Report) to each of the Parties as to whether the proposal of the Contractor is reasonable, and if not, provide detailed comments on areas where it does not consider the proposal reasonable. The Contractor and the Employer will then use reasonable endeavours and good faith to agree the Phase II B Fee. In the event that the parties do not agree these elements then they will proceed to dispute resolution in accordance with the PBC. The Employer has the right in this circumstance to require the Contractor to proceed with Phase II B Activities on an admeasure basis using the Bill of Quantities and the Continuing Service Levels determined under this task until such time as the parties agree the Phase II B Fee or it is resolved under the dispute resolution. The Independent Expert will support the Utility and Contractor to reach agreement on these. The Independent Expert will provide a series of reports, as outlined in Section C below. METHOD The work will draw on global experience in WLR strategies, base line setting, quantitative monitoring, WLR efficiency. The Independent Expert in providing it services will act independently of each party and will provide its services objectively in accordance with good international engineering practices. The Utility and PBC Contractor will provide all available data and cooperate with the Independent Expert. DELIVERABLES/SPECIFIC OUTPUTS EXPECTED FROM ASSIGNMENT Based on the above tasks the following reports to be produced: draft Baseline and Verification Protocol. Written comments on Program for each Phase and on progress reports. 61 Written comments on proposed approach for Phase II A the Independent Expert will present a written response on the proposed approach by the PBC Contractor for Phase IIA. It will also provide written comments on progress reports under Phase II A. Phase IIA Report: After completion of Phase IIA the Independent Expert will report on the efficacy of measures and present an analysis of the measures against the WLR target. Recommendations for Phase II B Activities, Continuing Service Levels and time for completion of Phase II B Activities. Phase II B Report: the Independent Expert will review the proposed detailed scope of activities for Phase II B and lump sum proposal of the PBC Contractor for Phase IIB. SPECIFIC INPUTS TO BE PRESENTED BY THE CLIENT The Utility [will make available all relevant documents. All information and background documents provided as part of this RFP are for the sole purpose of preparing the Technical and Financial proposal for this assignment. All information should be treated as confidential and not used for any other purpose. SPECIAL TERMS & CONDITIONS/SPECIFIC CRITERIA Language All primary reports (listed above) should be prepared in English, unless otherwise specified, and delivered in Word format. The primary reports will be concise, management reports. Compiled monitoring data/indicators will be provided in a consistent Excel format and will be user friendly. Timing/Assignment Duration The Consultancy will start on xxxxx. The duration of the assignment will be for [ ] years with focus on the first two Phases (I, IIA and IIB) of the PBC, but could be extended, should the Utility [and World Bank] so request, to allow for ongoing monitoring, technical assistance and training and other forms of support to ensure that the impact of the PBC is fully measured and benefits are sustained (to the extent they can be with advisory support activities). Expected level of input 62 The total level input is expected to be a maximum of [ ] days in a period of [ ] years of which a minimum of [ ] days needs to be provided on site. In total [ ] trips to the Utility are foreseen. Reporting The Independent Expert will report to the Project Management Unit of the Utility who will be responsible for the implementation of the PBC, for the attention of [the manager] [address] and to the PBC Contractor. Payment Schedule The Independent Expert will be engaged on a time-based contract with a maximum of [ ] days of input (approximately [ ] days in year 1, [ ] days in year 2, [ ] days in year 3 and [ ] days in year 4…). Payment will be monthly, based on actual time spent and upon submission of an invoice, timesheet, daily allowance, and eligible expenditures. Travel and accommodation must be arranged by the Independent Expert and expenditures invoiced to the Utility after ever mission (note: the Independent Expert has to include all cost for travel and living including per diem in its offer). Payment requests must explicitly identify the progress that has been made towards at least one of the deliverables listed above. All kind of insurances need to be covered by the Independent Expert. Required Qualifications and Experience the Independent Expert will have the following qualifications demonstrated successful experience in Non-Revenue Water and/ or Water Loss Reduction projects. S/he must have at least 10 years of experience in water supply in similar country contexts with demonstrated experience in NRW issues and quality of network management. experience in monitoring and analyzing NRW data. Specific expertise on designing NRW projects will be a plus. Good knowledge of WB’s PBC methodologies for NRW/ WL reduction is crucial and PBC project experience is required. practical experience the use of spreadsheets, the IWA Water Balance, field measurement techniques related to NRW/ WLR and component analysis tools. The Independent Expert will have to be 100% independent from both, utility and Contractor. Thus, any kind of present or past partnership or joint venture or ownership relationship of the Independent Expert with either the PBC Contractor or the Utility is not permissible. Key Background Documentation Program Concept Note. 63 ToR for Initial Assessment, plus Report(s) from Initial Assessment ToR for Development of WLR Investment Plan and PBC Project Design and Procurement, plus reports prepared under this TOR The draft PBC Contract, Other relevant project documents as available. Potential Downstream Work (if applicable) [Downstream work is possible following this assignment for extension of the duration of the oversight support activities, and/or repetition or scale-up of the approach.] 64 65