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Predicting the Probability of Default for Municipal Water Utilities in Indonesia

We developed a model to predict the probability that Indonesian municipal water utilities would default on their payments to the central government. This model was based on 126 real cases (57 non-default and 69 default cases). We used two indicators, financial strength and technical efficiency. The former was based on linear combinations of operating ratio, cash ratio, overhead-to-revenue ratio, operation–maintenance cost recovery ratio, and solvency; the latter was based on linear combinations of service coverage, production efficiency, operating hours, and ratio of staff to 1,000 connections. Our logistic-regression-based model was accurate in classifying 85% of cases correctly (Type I error = 13.0%, Type II error = 17.5%). Furthermore, the regression coefficients indicate that a one-unit increase in the financial strength score and the technical efficiency score for a water utility could reduce the odds of default by 81.4% and 41.4%, respectively.