A. Introduction

After a protracted deliberation process, the House of Representatives (Dewan Perwakilan Rakyat / DPR) finally passed the Water Resources Bill[1] at a plenary session on Tuesday, 17 September 2019.

While the Bill will not officially become law until such time as it receives the presidential consent and is promulgated, this is actually a formality. In view of this, we will refer to the Bill in this legal update as the Water Resources Law 2019 (“WRL 2019”).

Given the importance of water for human life and economic activities, WRL 2019 is an important piece of legislation that has major implications for many aspects and sectors of the Indonesian economy, ranging from irrigation-reliant agriculture to those sectors that rely on water extraction for their day-to-day operations, such as packaged water, pharmaceuticals, textiles, food & beverage, hospitality, etc.

In line with Indonesia’s civil-law system of hierarchical legislation, WRL 2019 only establishes the bare bones of the new water-sector regulatory regime, with the meat to be added later by subsidiary legislation (government regulations, presidential regulations and ministerial regulations).

Consequently, as many aspects of WRL 2019 will need to be fleshed out by implementing regulations, we will confine our discussion in this legal update to (i) the background to WRL 2019; (ii) key provisions of WRL 2019 from the private-sector perspective (including the ownership and control of water resources, licensing; and priorities in the use of water resource), and (iii) the Constitutional Court’s 2015 decision annulling the previous legislation on the water sector, the Water Resources Law of 2004 (“WRL 2004”),[2] which decision continues to be relevant to Indonesia’s water sector today.

Finally, in the “ABNR Commentary” section, we present some general thoughts on opposition to the reform of Indonesia’s water sector.

B. Background

WRL 2019 marks the country’s second attempt to modernize the regulation of the water sector following the annulment of WRL 2004 by the Constitutional Court in 2015,[3] a decision that resulted in the reactivation of the Soeharto-era Water Resources Law of 1974,[4] a short and vaguely drafted piece of legislation (consisting of only 17 articles) that was enacted in an increasingly authoritarian environment, prior to the introduction of regional autonomy.

The reinstatement of the Water Resources Law 1974 resulted in a highly unsatisfactory situation, given the profound changes experienced by Indonesia since the enactment of that legislation, including rapid industrialization and a dramatic growth in the number and variety of businesses that extract water on a large scale for their operations.

As the 1974 legislation failed to foresee many of these changes, the annulment of WRL 2004 by the Constitutional Court effectively resulted in something approaching a legal vacuum for businesses that rely on water extraction.

Consequently, WRL 2019 is to be welcomed, notwithstanding that it took some four years for the virtual legal vacuum in the water sector to be filled.

C. WRL 2019: Key Provisions from Private-sector Perspective

WRL 2019 goes into much more detail on the requirements and procedures for the commercial use of water resources by the private sector than WRL 2004. Nevertheless, further procedures and requirements must still be established by subsidiary legislation.

Overall, the new regime established by WRL 2019, in so far as it significantly impacts on the private sector, may be summarized as follows:

C.1. Definitions

“Water” is all water that is found on the surface of or underneath the ground, including, surface water, ground water, rain water and seawater found on land;

“Water resource” comprises water, water sources and water power;

“Water source” is a natural or manmade place or receptacle that holds water and which is found on the surface or underneath the ground;

“Water power” is the potential contained in water and/or a water source which can benefit or harm human life and the environment;

C.2. Public’s Right to Water

Under Article 6 WRL 2019, the State guarantees the public’s right to sufficient quantities of good quality, clean and safe water on a sustainable basis and at an affordable price so as to fulfill people’s basic daily needs and maintain health and hygiene.

In fulfilling this guarantee, the State is required to adhere to the following order of priorities in the allocation of water resources:

  1. fulfillment of people’s daily water needs;
  2. fulfillment of the water needs of smallholders; and
  3. fulfillment of the water needs of public water supply systems.

Should there be surplus water available after the above three priorities have been catered to, then water resources may, once again in order of priority, be used for:

  1. non-commercial public purposes; and
  2. for commercial purposes based on a license.

As can be seen, the use of water resources by the private sector for commercial purposes is positioned right at the end of the order of priorities.

C.3. Ownership and Control of Water Resources

WRL 2019 stresses that water resources are controlled by the State and must be used “so as to provide maximum benefit for the people.” This is intended to ensure compliance with Article 33(3) of the Constitution, which was a key consideration in the Constitutional Court’s 2015 decision annulling WRL 2004 (for a more detailed discussion on this, see Section D below).

Further, WRL 2019’s Elucidation provides that the granting of a license to a private company to use water resources does not involve the granting of control over a water source, but merely the right to use water in accordance with the quota stipulated in the license.

Of particular importance to business, Article 7 stipulates that water resources may not be owned and/or controlled by an individual, group or commercial enterprise. Rather confusingly, Article 7’s Elucidation states that this prohibition on ownership and control also applies to a water source that is located on the land of a private company. Does this mean that local people are thus entitled to enter onto the land of the company to access the water source at any time? Unfortunately, no answers to this question are provided by WRL 2019, despite it being of critical importance to companies that rely on water sources for their operations, given the need to avoid contamination.

C.4. Permitted Commercial Uses and Licensing

C.4.1. Permitted Commercial Uses

Article 49(1) WRL 2019 provides that water resources may be used for commercial purposes in the following ways:

  1. Water resources as a medium (for example, commercial use for purposes of transportation, power generation, sport, tourism and aquaculture);
  2. Water and water power as a material, including for the production of both water-based products (such as packaged water and other beverages) and non water-based products, and the use of water for food processing; by hotels, plantations and industry, and for auxiliary production processes);
  3. Water sources as a medium (such as the construction of bridges and pipe networks and the laying of telecommunications/power cables in water bodies) and/or
  4. Water, water sources and/or water power as a medium and material (such as in the exploration, exploitation and refining of mineral ores that are extracted from a water source).

C.4.2. Requirement to Have License

In order to use water resources for any of the commercial purposes listed in Article 49(1) WRL 2019, a license must be obtained from the central or local government, as the case may be. In addition, a “Water Resources Management Service Fee” (Biaya Jasa Pengelolaan Sumber Daya Air / BJPSDA) must be paid, that is, a fee that is levied on a commercial user of water resources for the purpose of financing sustainable water resource management. The amount of the fee is set by the central government or the relevant local government as a fixed charge per cubic meter of water. At the local level, fees are to be determined based on guidelines issued by the Minister.

Further, under Article 49(4), a license for the use of water resources may be issued in respect of:

  1. a particular place or point in a water source as determined by its coordinates, such as a water source that is used by a packaged water company, or for aquaculture, mining or industrial uses;
  2. a stretch of a water source, that is, a place located between two sets of coordinates that is used for such things as water transportation or water sports); and
  3. a particular part of a water source, such as a lake or reservoir, that is used for activities like power generation, aquaculture, transportation or water-based tourism.

C.4.3. General Licensing Principles

Article 46(1) provides that the commercial use of water resources must in all circumstances:

  1. not interfere with, undermine or abrogate the public’s right to water;
  2. have regard to the State’s duty to protect the public’s right to water;
  3. have regard to environmental conservation;
  4. be subject to State supervision and control;
  5. be regulated in such a way that first priority in the commercial use of water resources is given to public enterprises (state, local government and village enterprises);
  6. (be subject to tight requirements, and may only be permitted if the principles referred to in points (i)-(v) above have been complied with and surplus water continues to be available.

Article 46(2) further provides that the commercial use of water resources must be “aimed at improving ... public welfare,” while Article 46(4) requires commercial use to “prioritize the public interest.” No explanations are provided so as to clarify the precise purport or extent of these requirements.

Article 47 reiterates that water sources may only be exploited for commercial purposes if sufficient water is available to fulfill the public’s daily needs and smallholder irrigation requirements. Further, private-sector use of water resources must have regard to their social and environmental functions, the security of State assets and environmental conservation. In addition, the use of water resources must be based on the relevant central or local government Water Resources Management Pattern (Pola Pengelolaan Sumber Daya Air)[5] and Water Resources Management Plan (Rencana Pengelolaan Sumber Daya Air).[6] Both of these documents should be prepared by the central or local government, as the case may be, as part of the overall water management planning process at the national and local levels.

C.4.4. Licensing Priorities

In licensing of the use of water resources, Article 49(3) WRL 2019 requires the following order of priorities to be adhered to:

  1. fulfillment of the basic daily needs of groups that require large volumes of water (no explanations are provided as to what is being referred to here, other than that such groups use a water quota that is in excess of what is needed to fulfill basic daily needs)
  2. fulfillment of basic daily needs in a way that changes the natural condition of a water source (no explanation provided);
  3. fulfillment of the needs of smallholders who are not served by an existing irrigation system;
  4. fulfillment of the needs of public water supply systems;
  5. fulfillment of the water needs of non-commercial facilities related to the public interest (for example, parks, places of worship, and public and social facilities);
  6. fulfillment of the water needs of public enterprises (state, local government and village enterprises) for commercial purposes; and finally
  7. the use of water resources for commercial purposes by a private enterprise or individual.

Thus, the private sector is once again positioned right at the end of the pecking order.

C.4.5. Other Requirements

Article 51 stipulates that a license for the commercial use of water resources by the private sector must:

  1. comply with the relevant central or local government Water Resources Management Pattern and Water Resources Management Plan (see Section C.4.3. above);
  2. fulfill the administrative and technical requirements;
  3. be agreed or consented to by stakeholders in the vicinity of the water resource; and
  4. be accompanied by payment of the Water Resources Conservation Fee (a component of the BJPSDA) and other financial obligations as stipulated by law.

Further procedures and requirements as regards licenses for the use of water resources are to be established by Government Regulation.

D. Constitutional Court: Second Time Lucky?

The Constitutional Court’s decision to strike down WRL 2004 came as a shock to many. In reality, however, it was entirely predictable given previous decisions of the Court on WRL 2004 and its long history of annulling liberalizing legislation in the economic sphere.

Those who challenged the constitutionality of WLR 2004 relied, inter alia, on Article 33(3) of the Indonesian Constitution, which may be freely translated as follows:

The land and the waters and all the natural resources contained therein shall be controlled by the State and used so as to provide maximum benefit for the people.[7]

This provision consists of two cumulative and interrelated elements: (i) State control, and (ii) maximum benefit for the people.

Prior to the 2015 decision, the Court had handed down two other decisions on WRL 2004,[8] which held that while WRL 2004 itself satisfied the principal of State control enshrined in Article 33(3), it would nevertheless be declared unconstitutional for failing to uphold State control if its implementing regulations did not comply with a series of conditions (the implementing regulations had yet to be issued at that time). These conditions were broadly summarized by the Court in its 2015 decision as follows:

  1. Every legal measure related to the use of water resources must have regard to the public’s right to water and the principle of State control as water must be used to provide maximum benefit for the people;
  2. The State must ensure the fulfillment of the public’s right to water;
  3. The use of water resources must have regard to environmental conservation;
  4. The State must oversee and tightly control the use of water resources;
  5. As public enterprises are extensions of the State, they must be given priority in accessing water resources; and
  6. If conditions 1 – 5 are satisfied and surplus water is still available, the private sector may be granted rights to use water resources, but only subject to strict conditions.

The 2015 decision ruled that the implementing regulations issued by the government to give effect to WRL 2004 failed to comply with the above six conditions and thus violated the principle of State control. Accordingly, WRL 2004 was declared unconstitutional and annulled.

As mentioned above, the 2015 decision was entirely predictable given that State control has been consistently interpreted by the Court as implying nothing short of direct control. This inflexible interpretation had previously been applied by the Court to annul a series of liberalizing laws in the economic sphere that were enacted in the wake of the Indonesian financial crisis of 1997-1998, including the 2002 Electricity Law[9] and the provisions of the 2001 Oil and Gas Law[10] on the former upstream oil and gas regulator, BP Migas.

While it is clear that the drafters of WRL 2019 have gone to some length so as to ensure compliance with the Constitutional Court’s six conditions (including the incorporation of Article 46(1) – see Section C.4.3. above), the big question now is how the government can ensure that the implementing regulations for WRL 2019 also fully comply with the six conditions and the Constitutional Court’s general stance on State control, while at the same time affording the private sector a level of access to water resources that is compatible with the needs of a modern, industrialized economy?

Should the implementing regulations fail to comply with the six conditions, then WRL 2019 will be open to challenge in the Constitutional Court, with a significant likelihood that it will suffer the same fate as WRL 2004. While a general tweaking of language and terminology Is often enough to alleviate the Court’s constitutionality concerns in other sectors, it may not be enough in the case of water, given the array of powerful forces that oppose any form of liberalization of the water sector.

E. ABNR Commentary

Since the passing of WRL 2019, the usual accusations of “commercialization,” “liberalization” and “privatization” (all of which carry negative connotations for many in Indonesia) have been rolled out once again by those opposed to water-sector modernization. Indeed, many of the groups that impugned WRL 2004 in the Constitutional Court are now reported by the media to be considering a challenge to WRL 2019 on essentially the same grounds as were deployed against WRL 2004.

Of course, WRL 2019 is not alone in attracting the opposition of those lined up against economic liberalization. As became apparent during the recent street protests around Indonesia, they are also firmly against proposed new legislation on, among other things, minerals and coal,[11] land law,[12] and manpower,[13] all of which are seen, to one degree or another, as excessively favoring the private sector.

While there is no doubt that there have been many examples of excesses by the private-sector in the exploitation of water resources over the years, we nevertheless find it difficult to understand what those opposed to the modernization of the water sector actually want. Their approach appears to be based entirely on negativity, and widespread and long-standing prejudice against the modern business sector that can be traced back to the colonial period, when access to capital was seen as being the preserve of the colonialists. The naysayers rarely offer any suggestions as to how the interests of a rapidly growing economy should best be balanced with those of the public so as to ultimately ensure “maximum benefit for the people,” as envisaged by Article 33(3) of the Constitution.

Not only do they stridently object to private-sector access to water resources (even where such resources have been identified and developed by private companies using their own money), they also roundly condemn all forms of private-sector involvement in the provision of mains water and sanitation services, insisting that these must only be supplied by public enterprises. This is despite the fact that, ever since independence, the public sector has proved itself woefully incapable of serving the water and sanitation needs of the country’s burgeoning urban population.

Of course, it all ultimately comes back to the interpretation of “State control” over natural resources, as mandated by Article 33(3) of the Constitution. Until such time as a new, more realistic and more economically aware consensus is arrived at in Indonesian society as to how the parameters of State control should be defined and how natural resources may be allocated equitably so as to satisfy the needs of all involved (the State, the general public and business), the uncertainty that has long afflicted the water sector, as well as other resource-based sectors, is likely to persist.