Transformation of Indonesia's Water Services: 7 Things You Should Know

Indonesia's water and sanitation sector stands at a crossroads. Decades of decentralized service delivery have produced mixed results, with many regions struggling to meet basic access targets while infrastructure investments fall short of requirements. Against this backdrop, major reform proposals are now under active discussion that could fundamentally reshape how water services are governed, financed, and delivered across the archipelago.

The CRPG-IBP MSF 3 multi-stakeholder forum convened in December 2025 brought together government agencies, regional officials, civil society organizations, and development partners to discuss the government's transformation agenda for the water sector. Here are seven key elements of that agenda that stakeholders across the sector should understand.

1. A New National Water Regulatory Body is Coming

One of the most significant proposals under consideration is the establishment of a national water regulatory body. Forum participants discussed how current oversight of water service provision remains inadequate, with one stakeholder noting that monitoring and enforcement mechanisms are essentially non-existent. The proposed regulatory body would serve as a custodian instrument for sector oversight.

The rationale is straightforward: without standardized quality benchmarks and enforcement capacity, service levels vary dramatically across the country's more than 500 regional water utilities. A national regulator would establish uniform service standards, monitor compliance, protect consumer interests, and provide the enforcement mechanism currently lacking in the regulatory framework.

This proposal represents a significant departure from the decentralized model that has characterized water governance since the early 2000s. Implementation would require new legislation and substantial institutional capacity building, but proponents argue that the current fragmented approach has demonstrably failed to achieve universal access goals.

2. The Tri Banyu Arutala Taskforce is Leading the Charge

A government taskforce named Tri Banyu Arutala—a Javanese term referencing the concept of three waters—has been established to drive the transformation agenda. This taskforce operates under the ministry that controls approximately 70 percent of sector budget allocations, positioning it to coordinate across the fragmented institutional landscape.

The taskforce pursues a three-pronged strategy: regulatory reform through the proposed national regulatory body, utility restructuring through mergers and holding company formation, and service recentralization in areas where regional governments have failed to deliver adequate services. These three pillars are interconnected, with each element supporting the others in creating a more coherent national approach to water service delivery.

Forum participants noted that the taskforce represents an acknowledgment at the highest levels that business-as-usual approaches have not worked. However, the scope of proposed changes also raises questions about how reforms will navigate existing institutional arrangements and regional government prerogatives.

3. PDAM Mergers and Holding Companies are on the Table

Currently, Indonesia has over 380 regional water utilities (PDAM), many of which are too small to achieve economies of scale or attract private investment. Forum discussions revealed serious consideration of restructuring these utilities into regional or national holding companies. The explicit goal is making water utilities financially attractive to investors.

One stakeholder candidly acknowledged the challenge: when utilities remain small and fragmented, advertising public-private partnership opportunities rarely generates investor interest. The proposed solution involves consolidating utilities either into regional clusters or a national holding structure that could achieve the scale necessary for commercial viability.

This restructuring agenda connects directly to broader financing challenges. With national budget covering only 40-60 percent of required WASH investments, mobilizing private capital becomes essential. However, private investors require utilities that are creditworthy and capable of generating returns—characteristics that most current PDAMs lack. The merger proposal attempts to create entities that can access capital markets and public-private partnerships.

4. A New Water and Sanitation Law is in the Legislative Pipeline

The national legislative program now includes a proposed Water and Sanitation Law (RUU Air Minum dan Sanitasi). This initiative emerged from the parliamentary legislative body rather than the executive branch, indicating legislative appetite for comprehensive sector reform. The proposed law would replace or harmonize the currently fragmented regulatory framework that has complicated sector governance.

The supreme audit institution had previously identified a critical gap: five years after a performance audit highlighted the absence of a formal National Water and Sanitation Roadmap, no such regulatory derivative exists. The proposed legislation could address this gap while establishing clearer jurisdictional boundaries and accountability mechanisms.

Civil society participants emphasized the importance of monitoring the legislative process to ensure public interest protection. One stakeholder warned that good reform momentum must not be captured by interests that might benefit from continued poor service conditions or excessive commercialization. The bill's development presents both opportunity and risk for sector stakeholders.

5. Recentralization of Urban Water Services May Happen

Perhaps the most dramatic proposal under discussion involves the central government potentially taking over service provision in urban areas where regional governments have consistently failed to deliver. This recentralization represents a significant reversal of the decentralization reforms implemented over two decades ago.

The rationale articulated at the forum was blunt: when citizens lack access to basic services, the state must be present, and that presence ultimately means the central government. Areas with chronically poor service delivery despite years of investment and technical assistance may see direct central government intervention in service provision.

This proposal acknowledges a difficult truth: decentralization has not produced the intended improvements in many regions. While some areas have developed capable utilities and achieved reasonable service levels, others have stagnated despite receiving transfer funds and capacity support. The recentralization option provides a mechanism of last resort for addressing the most severe cases of service failure.

6. Local Water Utilities are Being Pushed to Change Legal Form

Regional water utilities currently operate under various legal structures, primarily as regional public enterprises (Perumda). A push is underway to convert these into regional limited liability companies (Perseroda), which would provide greater financial flexibility and open pathways for private investment. Forum participants noted active efforts to develop or amend local regulations enabling this transformation.

The legal form change connects to the broader restructuring agenda. Regional limited companies can more easily access capital markets, form joint ventures with private operators, and implement performance-based management systems. The Perumda structure, while appropriate for purely public service delivery, creates constraints when utilities need to behave more commercially.

However, this transformation requires local regulation changes, which means navigating regional political processes that may prioritize other concerns. The timeline for widespread adoption remains uncertain, and the transition involves technical and institutional challenges beyond simply changing legal status.

7. Multi-Year Budget Allocations Could Bring Planning Certainty

One practical reform gaining traction involves extending special allocation fund (DAK) commitments from annual to multi-year cycles of three to five years. The national planning agency is developing this concept to provide greater planning certainty for regional governments undertaking infrastructure investments. The approach mirrors earlier integrated DAK concepts that showed promise in coordinating sectoral investments.

Annual budget volatility creates significant problems for multi-year infrastructure projects. Forum participants described how regions must plan investments without confidence that funding will continue, leading to suboptimal project sequencing and stranded investments when allocations change unexpectedly. The efficiency policy that triggered transfer fund cuts for 2026 demonstrated this vulnerability dramatically.

Medium-term allocation commitments would protect WASH investments from annual political cycles and allow more rational infrastructure planning. Projects could be designed with secure funding horizons rather than uncertain year-to-year appropriations. This reform may prove more achievable than structural governance changes since it operates within existing institutional frameworks.

Looking Ahead

The government's transformation agenda for the water sector is ambitious in scope, addressing governance structures, utility organization, legislative frameworks, and financing mechanisms simultaneously. Implementation will require sustained political commitment, substantial institutional capacity building, and navigation of complex interests across levels of government.

Civil society organizations participating in the CRPG-IBP MSF 3 forum emphasized the importance of monitoring these reforms to ensure public interest protection. The proposed changes create opportunities for improved services but also risks of policy capture or excessive commercialization. Active engagement from communities, advocacy organizations, and researchers will be essential to ensuring that transformation serves the millions of Indonesians who currently lack access to safe water and sanitation services.

Whether these proposals translate into meaningful change depends on factors beyond technical design: political will, institutional capacity, and the balance of interests that shapes policy implementation. What happens next will determine whether Indonesia's water services achieve the transformation that decades of conventional approaches have failed to deliver.

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