Digitalisation and Innovative Financing - 3 Steps to the Sustainable Reduction of Non-Revenue Water in Indonesia
The issue of reducing non-revenue water (NRW) is an important national challenge for the Indonesian government. Every year, Indonesia suffers an estimated USD579m in economic losses because of NRW. However, reducing NRW is not an impossible challenge to overcome if utilities approach the challenge with a combination of dedicated strategic resources, the right financing model, and the proper use of digital solutions. To do this, authorities can learn from the success of Malang City, which managed to reduce its NRW by 30% in 10 years by adopting the before-mentioned steps.
346 million cubic metres of drinking water is lost through non-revenue water (NRW) daily – the equivalent of 140,000 Olympic-sized swimming pools. The financial cost of NRW stands at USD39 billion per year globally. In Indonesia, the average NRW is about 32 percent, much higher than the initial target of 20 percent set by the government. Various studies by the International Water Association, the World Bank and others highlighted that high NRW has led to additional energy consumption and the deterioration of distributed water quality. This had cost Indonesia an estimated USD579 million per year in economic losses.
High NRW has made it difficult for utilities to keep water tariffs affordable. NRW, or water that is pumped and then lost or unaccounted for through leakages, theft and unbilled water - create challenges for the authorities as it prevents the effective cost recovery of water production. These losses could have an impact on generating sufficient surplus to rehabilitate ageing water infrastructure, which in itself is a common cause of high NRW. This lack of surplus could also lead to slower investments to improve tariff collection systems and operational efficiency.
High leakages in the distribution network also undermine the ability of Indonesian Water Utilities (referred to as Perusahaan Darah Air Minum, PDAMs) to provide undisrupted potable water access to the population. The sustained substandard water infrastructure and NRW can significantly impact the population’s social wellbeing. Above intermittent or no water supply, leaking pipes could allow contaminated groundwater or sewerage to enter distribution pipes during supply interruptions and high-pressure periods.
Tackling NRW: A highly possible task to bring about impact
The Indonesian government showed commitment and significant progress in bringing safe and clean water to sustain livelihood: as part of the National Mid-term Development Plan 2020–24, the government targeted the provision of piped water services to 10 million new households. To achieve this, it has closely collaborated with developmental partners from around the world. For example, The United States Agency for International Development (USAID) has implemented a five-year programme to increase access to water supply and sanitation services amongst urban poor and vulnerable populations through collaboration with government agencies, utility service providers and the private sector. The programme successfully reduced NRW by 3.1 percent through methods such as digitalisation and, in turn, allowed 16,500 households access to piped water service. From 2019 – 2022, Switzerland’s State Secretariat for Economic Affairs (SECO) has also partnered with USAID to contribute US$4.5 million to implement NRW reduction programs for seven PDAMs in Indonesia as part of the country’s Urban Water, Sanitation and Hygiene (IUWASH) initiative.
A good example of a major win for NRW reduction in Indonesia happened in Malang City. Through a combination of strategic thinking, committed investments and the use of digital solutions, the city was able to reduce NRW by 30% in 10 years. A detailed case study on Malang City’s success can be found later in this article.
Three steps to make an impact on NRW reduction
The reduction of NRW cannot be solved with a one-off initiative or solely through pipe replacements. PDAMs need to dedicate financial resources and a competent workforce to develop forward-looking NRW reduction roadmaps, prioritise implementation efforts and deploy investments to reduce NRW sustainably. Given the fiscal constraints, PDAMs can establish a long-term partnership with the private sector, which offers innovative financing and technical solutions to help PDAMs reduce high capital upfront costs while generating surplus from the saving of water to fund downstream NRW reduction programme; ultimately transforming utilities in the red financial book to a profitable one.
Below are three steps PDAMs can take to catalyse their NRW reduction programme:
Step one: Establish dedicated resources to develop a forward-looking NRW reduction strategy
Support from top-level management in setting targets, advancing NRW programmes, and communicating its importance to employees at all levels will be critical. NRW reduction is a long-term commitment, and combined effort from all divisions within the utilities is required.
PDAMs will also need to establish a dedicated and permanent set-up of a competent team to develop forward-looking NRW reduction roadmaps, prioritise implementation efforts and deploy the suitable investments to reduce NRW sustainably. The team should also be entrusted with the responsibility to measure and monitor the programme’s success and make appropriate investment adjustments to reap the most benefits from their investment.
Given the huge responsibility of this dedicated team, PDAMs need to dedicate efforts to building the capacity of the team across the water infrastructure lifecycle – from legal and regulatory frameworks and planning to technological and technical capabilities – and collaboration and co-sharing of investments across public utilities.
Step two: Identify and acquire the right financing tools for NRW reduction
(1) Developmental financing
Development finance is largely driven by development finance institutions (DFI), who use a variety of products such as equity participation, guarantees and technical assistance to galvanise private sector participation in projects that are of higher commercial or political risks. Some examples of multilateral and bilateral DFIs include the World Bank Group, Asian Development Bank and the US DFC.
Close engagement and partnerships with DFIs can be the perfect foundational financing tool for NRW reduction initiatives, which provides the stepping stone for utilities to embark on their NRW reduction initiatives.
(2) Private sector financing
To further plug gaps from developmental financing in funding for new NRW programmes or water infrastructure projects, PDAMs can also tap on the high liquid international private capital available. One example is the Climate Investor Two (CI2) fund, Climate Fund Manager’s second blended finance facility, delivering water, sanitation, and ocean infrastructure projects in emerging markets.
Blended finance can happen at multiple entry points along the water infrastructure value chain, at the early stages of planning, feasibility study and development, or downstream towards construction and commercial operation.
Successful private sector financing depends heavily on strong private-public partnerships. To attract more private sector investments, PDAMs can sound out investors on their NRW reduction programme and work with strategic consultants and experienced financial, technical, and legal advisors to make more projects bankable. PDAMs can work with organisations like Infrastructure Asia to catalyse projects by bringing together experts from the relevant domains and help bridge knowledge, capabilities, financing and implementation gaps.
(3) Performance-based contracting
Another alternative is performance-based contracting (PBC), which involves incentivising private companies to improve operational efficiency through a comprehensive NRW reduction programme and ensuring accountability for performance in a cost-effective manner.
PBC is a more efficient approach to contracting by optimising incentives and allocating risks to the party that is better equipped to mitigate them. A well-designed performance-based contract aligns incentives with outcomes and gives contractors more flexibility in project design and implementation. With this approach, NRW reduction programmes will see more innovation and efficiency. A well-designed PBC is a win-win for both the utility and its contractor. This approach could be especially attractive when PDAMs intend to keep the water utility under public management but are keen on capitalising on the private sector's technical expertise and potential efficiency.
Under this financing option, PDAMs will only incur minimal upfront capital cost to install instruments and digital tools on their existing infrastructure, with the remaining fixed cost and the subsequent maintenance undertaken by the contractor. Based on the amount of water saved, PDAMs would reimburse the contractor based on periodic incentive-based fees for leakage reduction and maintenance of the reduced levels of leakage. This performs as a services contract, and responsibility will be focused on the contractor to reduce network leakage and maintain those reductions over time.
For example, Vietnam implemented a PBC approach to reducing NRW as an initiative from the World Bank Group. Deployed in Ho Chi Minh City over six years, the initiative helped save 122 million litres per day (MLD) of water and over US$100 million of capital expenditures by reforming and restoring the water network. The project also improved the water supply and connected more customers to the network. Compared to a similar project in a neighbouring district that used a more traditional contracting approach, the NRW reduction project in Ho Chi Minh city was completed faster and is more effective in reducing water losses and operating costs.
(Courtesy Photo from Kota Malang)
Step three: Embrace digital solutions to accelerate cost-effective NRW reductionDigitalising water production and distribution is another fundamental step in reducing key causes of NRW such as in the effective detection of leaks, better enforcement of tariff collections and improving inefficient operations. The adoption of technologies presents an excellent opportunity for PDAMs to work with the private sector to access a broader range of best-fit and cost-effective digital solutions.
For example, basic solutions like a digital control system or advanced artificial intelligence and machine learning (AI/ML) capabilities can improve data analytics and processes. This allows PDAMs to plan for performance and efficiency improvements. These solutions can help PDAMs better manage cost, revenue data and decision-making in a variety of ways:
- Identify big leakage points and prioritise pipe rehabilitation efforts with digital control and AI: In place of establishing physical district metered areas (DMAs) which are time and cost intensive, PDAMs can also consider creating virtual DMAs to help monitor the water flow for better leakage management and optimising water distribution. Powered by AI, these virtual DMAs reduce the need for engineers and operators to go site to gather data, which is time-consuming and at times dangerous. Virtual DMAs can help operators monitor the performance of the water network more effectively with lesser resources, and AI can help engineers in water balance calculations and zoom in on big leakage spots for timely interventions.
- Reduce commercial losses with digital solutions: Digitalisation can help PDAMs monitor meter performance and enable more effective implementation of maintenance, calibration, and replacement programmes. Digital solutions can be built into water meters to help provide online data monitoring services. They can also help engineers identify which meters are not reading accurately and need replacement. With the average value of water around USD0.30 per m3 in Asia, fixing the accuracy of meters can recover billions of dollars per year, which would otherwise be lost through poor metering.
- Improve operational efficiency through pressure management: PDAMs could look forward to optimising their operational efficiency and reducing NRW further through more efficient pressure management. They can utilise pressure management sensors to trigger automatic responses on variable speed pumps and actuated valves to modulate the flow into the distribution network during high and low demand periods. Good network pressure management is crucial in reducing NRW and ensuring maximum asset lifetime. By modulating the water supply and hence running capacity of pumps and pipe appurtenances, PDAMs can save on significant energy cost.
(Courtesy Photo from Kota Malang)
Case Study on Kota Malang: Reducing NRW by 30 percent in ten years
Malang City is an example of how PDAM Tugu Tirta took the above steps and successfully executed them. Through their efforts, Malang City successfully reduced NRW from 42 percent to 15 percent in ten years, with a remarkable decrease of NRW from 42 percent to 20 percent within the first four years after they started to digitalise their asset to enable prioritisation of their pipe and meter replacement efforts. The reduction of NRW in the last ten years has not only improved access and reliability of potable water supply for communities, but the city has also saved more than 70 mil m3 of water and more than USD 24 million.
Like many PDAMs in Indonesia, PDAM Tugu Tirta was initially slowed by complicated water systems and networks and under-resourced teams. This meant the city could not provide a 24-hours water supply to its citizens, and its energy consumption was at an all-time high. To solve this issue, PDAM Tugu Tirta implemented a three-step programme:
First, PDAM Tugu Tirta dedicated resources to formulate a ten-year plan to improve its water facilities, investing over IDR 59 billion (USD 4 million) in a strategic roadmap to reduce NRW drastically.
Second, Tugu Tirta trained and established a dedicated NRW team to execute the NRW reduction programme by deploying various digital solutions with the help of private-sector partners. The close collaboration between the public and private organisations, support from management and the dedicated financial resources supported Tugu Tirta in setting up virtual DMAs in critical areas. This had allowed them to digitalise their asset to enable real-time monitoring of operations and water leakage to prioritise leak repair efforts with minimal manpower.
Following its initial success, PDAM Tugu Tirta further optimised its operational efficiency by setting up a 24/7 command centre and deploying sensors and technologies for better pressure management and active leak detection. These digital capabilities have enabled them to further reduce NRW to a low 15 percent and gain the ability to fix water leakages in just one day, decreasing overall commercial losses. Tugu Tirta has the aspiration to reduce NRW further and optimise its operation to overcome the challenges brought about by climate change while keeping water costs affordable.
Reducing NRW for long-term good
COVID-19 and climate change have emphasised the importance of safe and sustainable water infrastructure for Indonesia’s socio-economic development. Embracing strategic resourcing and digital solutions are key to galvanising Indonesia’s transition to a smarter, more resilient country backed by a sustainable supply of water resources. Despite high initial investments, the cost of improved service delivery is much lower in the long term when undertaken through strategic investments in NRW reduction with the assistance of various innovative sources of financing. Following the success of Kota Malang, it is evident that Indonesia is equipped and poised to reach its NRW goals within the targeted timeframe.
In Indonesia, PDAMs can also leverage the resources and expertise of regional and international organisations like Infrastructure Asia and the World Bank Group. Together, the two organisations have conducted regular capacity building programmes and have identified suitable financing and technological solutions on water in Indonesia and within the region. PDAMs will be able to connect with international experts, exchange insights and learn global best practices and invaluable lessons from case studies.
By continuing to work closely with such organisations and private enterprises, and acquiring tailored financial solutions, Indonesia can better leverage regional resources, technologies and networks to ensure the efficiency of reducing non-revenue water and improving the operational efficiency for a more future-proof society. Beyond Indonesia, the World Bank Group and Infrastructure Asia are keen to take this partnership to other countries.
This article is co-authored by Matthew Tien, Senior Lead, Infrastructure Asia and Irma Magdalena Setiono, Senior Water Supply and Sanitation Specialist, World Bank.