Transaction Cost Economics Perspectives on Indonesian Public-Private Partnership (PPP) : Case Study on Umbulan Water Supply System PPP (Working Paper)

Indonesia is extensively promoting Public-Private Partnership (PPP) for infrastructure projects, including in the water sector. However, it is found that it takes two to eight years for water supply system (WSS) PPPs to be procured, likely prompting for higher transaction costs. This research offers an investigation of issues affecting transaction costs in Indonesian PPPs, specifically for water infrastructure project. A case study method was chosen for this paper as it helps explore existing theory in transaction cost in the Indonesian PPP context. Umbulan WSS was chosen as the subject of the case study. It is found that some of the key issues in Umbulan WSS are uncertainties, corruption, knowledge, trust, and coordination problems. Strategic suggestions to reduce transaction costs are developed based on lesson learned in the WSS cases and critical factors addressing broader institutional factors such as trust and coordination problems, which are found to be interlinked with opportunism and corruption. We argue transparent information provision and effective organisation can help to address high transaction cost issues. It is also suggested that appointing capable leaders, doing extensive capacity building to across public sector agencies, synchronizing regulations, and possibly streamlining stakeholders and regulations will help reduce uncertainty and transaction costs in WSS PPPs