Indonesia setback threatens Thames' expansion

THAMES WATER'S hopes of building up a substantial overseas business suffered a huge blow yesterday as it emerged that a pounds 220m contract to run the water system in Jakarta had been put on hold amid allegations of corruption and nepotism.

A company controlled by Thames was awarded the 25-year contract, which covers the eastern half of Jakarta, in 1995. The western half went to a joint venture controlled by Lyonnaise des Eaux, the French utility. Both groups formally took control of the operations in February.

Yesterday, however, the Jakartan authorities confirmed that they had put contracts covering both the west and the east of the city on hold. City officials claim that both contracts were unfairly awarded to companies with links to former President Suharto, who resigned last week after a 30-year reign.

Thames Water's Indonesian joint venture, in which it has an 80 per cent stake, is with a company chaired by Sigit Hardjojudanto, a son of the former President. Lyonnaise, meanwhile, has a joint venture with Liem Sioe Liong, a close friend of the former President.

City officials allege that the two companies were awarded the contracts without a proper tendering process after the President intervened on their behalf.

The contract required Thames to gradually extend the supply of water in its half of the city from 2 million to all 5 million inhabitants. Thames had planned to invest $80m in the contract over a five-year period, although it could not say yesterday how much it had already committed to the project.

Over a 25-year period the revenues would have been substantial. The whole city is currently believed to pay approximately 30bn rupiah ($2.5m) a month in water rates, which are set by the authorities. The Thames joint venture could have expected to receive about half of that.

A spokeswoman confirmed that the project had been put on hold, but added that Thames hoped it would still be involved in the future. "There is a demand in Jakarta for safe water supplies for the people in the city," she said. "Investment is needed, and we believe that Thames Water is well placed to provide this."

Until now, Thames has avoided the pitfalls that have beset other utilities trying to build up overseas operations. United Utilities was recently forced to pull out of a sewerage contract in Bangkok while Anglian Water's venture into South America was a disaster.

Although Thames was forced to write off pounds 95m in 1996 on a few overseas ventures that went wrong, the company has subsequently gone from strength to strength. It has won a 15-year, $800m contract to operate the water supply system in Izmit, Turkey. It also has similar interests in Australia, Malaysia, Thailand and China.

In the year to March 1997, Thames' international operations reported a profit of pounds 2.7m on turnover of pounds 172m. The division's profitability is expected to rise rapidly in the next few years as the group completes its withdrawal from complex construction and design projects.

Last year, Thames rejected an offer of pounds 400m for its non-regulated businesses from Generale des Eaux, the French conglomerate. It is, however, believed to be considering a plan to demerge the operations into a separate company.

However, recent events in Jakarta may derail these plans. Apart from standing accused of winning the contract unfairly, quality is also understood to have deteriorated since Thames took over.

Water sales are believed to have gone down since Kati and GDS, the local companies controlled by Thames and Lyonnaise respectively, took over in February, although this may be a delayed effect of the Asian financial crisis. "We have had complaints that the water is dirty and causes skin irritation, and that the process of handling of leakage is too slow," said Rama Boedi, director of PAM Jaya, the city-owned management company.

Last week 2,800 PAM Jaya employees, spurred by the sudden resignation of President Suharto, signed a petition saying they would no longer work with Kati and GDS. On Saturday, the two companies signed an agreement with PAM Jaya to review the project and the conditions on which it was based.

In a statement issued in Jakarta last night, Kati's managing director, John Hurcom, insisted that the project was continuing and denied that his company had failed to fulfil its obligations.