PROJECTS

Water Supply Private Investment Structure, Indonesia

Integrated Water Resilience Planning

The problem

The water supply system in the East Java Province only serves 75 percent of the population. Because of this, East Java Provincial Government planned to develop the US$200 million Umbulan Springs Bulk Water Supply Project to supply Surabaya and the surrounding cities. Private public partnership (PPP) Project procurement was expected. The Project involved construction of 95 kms of water transmission pipelines to connect urban centers to the remote springs. The Project envisaged local water companies buying bulk water from the provincial government, with the proceeds used to pay the PPP company. However, these local water purchasers were financially weak. To make the project attractive to private investors, guaranteed payment obligations to the PPP company were necessary. The Indonesian Infrastructure Guarantee Fund (IIGF) is the Central Government owned guarantee provider. The IIGF needed to be satisfied with management of payment risks.

How we helped

Castalia helped the IIGF appraise the request for the guarantee from the Project and helped structure an appropriate guarantee. We found that the Project was viable with Viability Gap Funding to come from the Central Government. However, we recommended that the IIGF provide the guarantee only if the Provincial Government mitigated risks associated with its ability to manage the Project and ensure payments to the PPP company. We audited the institutional and organizational capacity of the provincial government’s water supply business unit that would manage the Project and developed specific measures that would need to be implemented for the IIGF to issue the guarantee. This included a business plan with the structure for the business unit, an operational budgeting plan, and a business process to effectively manage the Project.

Impact

The provincial government implemented our business plan and the IIGF signed a guarantee agreement with the PPP company in July 2016. The Umbulan Springs bulk water supply project reached financial close in December 2016. Following financial close, the construction works commenced in July 2017 and are expected to be completed in mid-2019. The Project will provide 4,000 liters per second of potable water to 260,000 piped water connections across two cities and three districts in the East Java Province.