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Operation and maintenance financial feasibility analysis of centralized domestic wastewater treatment system (case study: Palembang City Sewerage Project)

Budget needed for operation and maintenance of centralized domestic wastewater management in Indonesia is often overlooked. This results in fail systems, high idle capacity, and abandoned assets. While the economic feasibility often used as the basis for centralized domestic wastewater infrastructure construction, the financial feasibility often shown a different result. The construction phase will be feasible according the analysis, while the operation and maintenance phase will have a different result. As unsolicited projects, the operation and maintenance of sewerage in Indonesia always have budget difficulties, thus needed scenario to resolve the matter. In this study, cost and revenue variable will be analyzed to determine the feasibility value based on NPV, BCR, and IRR calculations. The revenue comes from user charge tariffs on household and commercials connections, and cost variable consists of: chemical usage cost; sludge disposal cost; personnel wage cost; fuel and electricity cost; spare-part replacement cost. The analysis will determine whether both household connection and commercials connection in the sewerage system have positive results. Should negative results emerged, follow up analysis added to elevate the results consists of following scenarios: sensitivity analysis for tariffs adjustment; sensitivity analysis adding grant as option; sensitivity analysis adding loan as option. While analysis of base tariffs shown negative results on NPV, BCR, and IRR calculation, the follow up analysis shown significant changes thus the results is desirable.

While financially not beneficial, the centralized domestic wastewater infrastructure in Indonesia still built on economic benefit premise (Eales et al., 2013;Kearton, 2013). Main factor that made it not beneficial is the uncertainty on operation and maintenance phase (Kerstens et al., 2015). Low user tariff added with slow development for sewer connection, made the infrastructure built in past years become unproductive. Adding options such as grant or loan to elevate the financial feasibility on operation and maintenance phase thought to be effective to resolve the problems (Sugiana, 2013).
The aim of the research was to analyze the financial feasibility on operation and maintenance phase of Palembang City Sewerage Project using net present value (NPV), benefit cost ratio (BCR), and internal rate of return (IRR) calculation based on cost and revenue variable. The satisfactory conditions are: NPV > 0, BCR > 1, and IRR > MARR. Should the conditions did not meet, follow up analysis to improve the results by calculate different scenarios should be done.

Material and methods
This research used Palembang City Sewerage Project Phase 1 as case study. Palembang City Sewerage Project is a project located in Palembang City, South Sumatra Province, Indonesia. The aim of this project is to solve the domestic wastewater problems in Palembang, by providing the centralised domestic wastewater treatment system in Palembang, that designed for 22,000 connections city-wide (KIAT, 2017). Phase 1 of Palembang City Sewerage Project starts in 2017 and will be finished in 2022 with 4,064 household and 2,229 commercial connection as main objective funded by Government of Indonesia Budget. The later expansion in Phase 2 to fill the maximum capacity of the wastewater treatment plant will be funded by the South Sumatra Provincial Budget and Palembang Municipality Budget in 2025.
Financial analysis on operation and maintenance of centralized domestic wastewater treatment system, emphasize on budget analysis to determine the feasibility of said phase financialy (Kvernberg, 2012;Yengejeh et al., 2014). Based on OECD (2004), the analysis needed to provide financing options and assurance when the operator solely dependent on tariff revenue to operate and maintain the system. The analysis also needed to pre-vent high idle capacity and fail system, caused by rejection to pay from the customers (Wedgwood & Sansom, 2003).
During this research, first hand information on prices in Palembang was obtained during site visit and through discussions with involved stake-holders. The data obtained from the Ministry of Public Works and Housing (MOPWH) was willingness-to-pay survey results that involved 100 respondent, each from, household and commercial connection targets. As for cost variable data, were obtained from both MOPWH and PDAM Tirta Musi as the operator candidate for the system.
The analysis were calculated using discounted cash flow techniques (DCF) in worksheet computer application. The DCF was choosen because the calculation results affected by time value of money. Time value for money is a conjecture that money has different value in different period of time. The analysis should also: (a) simple to understand, (b) easy to calculate, (c) measures profitability, (d) ensures liquidity, (e) can adjust for risks, and (f) considers all cash flows (Bhandari, 2009;Maroyi, 2011). Thus the analysis calcu-late net present value (NPV), benefit to cost ratio (BCR), and internal rate of return (IRR) to determine the feasability.
As previously stated, the financial feasibility was determined using NPV, BCR, and IRR. Net present value, presented in Eq. (1), is the difference between the present value of cash inflows (C t ) and the present value of cash outflows (C o ) over a period of time. All cash flows are discounted to present values using the required rate of return (r). The desirable result show by positive value of the calculation (NPV > 0). The applied currency rates based on Government of Indonesia official exchange rates were 14,500 Indonesian rupiah to 1 US dollar (Rp/USD). A 8.9% of discount rate for 20 years are applied in Eqs. (1) and (2).
Benefit to cost ratio defined as the ratio of the present value of future cash inflows to the cash outflows. Mathematically, this can be calculated using Eq. (2). The result deem satisfactory if the result is larger than one. Internal rate of return defined as the rate at which the net present value of project equals of zero. The satisfactory condition for the calculation met if the value of the calculated rate is larger than minimum acceptable rate of return (IRR > MARR). The use of NPV, BCR, and IRR calculation to determine the financial feasibility was applied by Prihandrijanti, Malisie and Otterpohl (2008), and Kerstens et al. (2015).
Follow up analysis to improve the feasibility taken when the satisfactory conditions did not met. The aim of follow up analysis was to improve the result of NPV, BCR, and IRR calculations to meet the satisfactory conditions. Following scenarios is choosen based on input from PDAM Tirta Musi as operator candidate for follow up analysis: (a) tariffs adjustment analysis, (b) analysis on adding grant as option, and (c) analysis on adding loan as option.

Base assumption
The input data for the calculation, shown in Table 1, consists of base assumption of cost and revenue variable. Using the data provided, NPV, BCR, and IRR then calculated and showed these results: NPV = USD -4,239,448.28, BCR = 0.8719, and IRR = -5%. These results did not meet the satisfactory conditions, thus the follow up analysis to improve the results taken.

Tariff adjustment
Tariff adjustment analysis was taken to determine minimum tariff to meet the satisfactory conditions. The tariff adjustment calculation done with following conditions: (a) adjust household tariff with 100% increment, while commercial tariff fixed, and (b) adjust commercial tariff with 10% increment, while household tariff is fixed. The result presented in Table 2.
As shown in Table 2, the tariff adjustment for household to meet satisfactory condition of NPV and BCR is 1,000% increase from base tariff, and to meet the satisfactory condition of IRR the tariff need to increase 3,355%. For the commercial tariff, minimum 50% escalation from base tariff needed to meet NPV and BCR desirable results, and 190% escalation to make the IRR > MARR.

Grant
Adding grant as option to improve the feasibility was calculate as shown in Tables 3 and 4, following these scenarios: a. Grant for sewer connection expansion Grant that given one time to expand the sewer connection until reached the maximum amount of 22,000 sewer connection. b. Grant for tariff subsidy Recurring grant to give subsidy for base tariff, in order to prevent financial loss for sewerage operator. As stated on the calulations in Tables 3 and 4, the total grant needed to achieve maximum sewer connection is 5,416,207 USD for 20 years or annually 270,810.35 USD. The amount of grant needed for subsidy is bigger compared to the grant needed for sewer expansion. Based on Table 5, adding loan is proven to improve the financial feasibility, shown by the improvement on NPV, BCR, and IRR calculation results. Furthermore, the combination of loan and grant to expand both household and commercial connection shows a better results compared to expansion solely funded by loan.

Conclusions
The financial feasibility value of Palembang City Sewerage Project calculated based on base tariff for operation and maintenance phase, shows negative result. The budget needed for the operation and maintenance phase for Palembang City Sewerage Project was 2,450,620 USD or annually 78 USD per capita, it was bigger than the results found in Kerstens et al. (2015) for annually 16 USD per capita, or annually 8.5 USD per capita in Prihandrijanti et al. (2008).
Low user charge tariff makes the financial feasibility results did not meet satisfactory condition. Improvement us-ing tariff adjustment found that a minimum of 1,000% for household tariff and 50% for commercial tariff needed to make the NPV and BCR results accepted. And further 3,355% and 190% escalation for household and commercial tariff needed to meet satisfactory conditions of NPV, BCR, and IRR.
These results need to be advocated to the user, to prevent rejection of willingness to pay from the user. It means that the external factor plays a large portion for the decision making, and the success rate is low for tariff escalation based on previous research (OECD, 2004;Prihandrijanti et al., 2008;van Buuren, 2010;Kerstens et al., 2012;Sugiana, 2013;Kerstens et al., 2015).
From authors' point of view, the options using combination of grant and loan is the best choice. The sewerage operator can make business plan and search for loan and grant to get the budget needed for both business expansions as well for operation and maintenance budget.

Summary
Operation and maintenance financial feasibility analysis of centralized domestic wastewater treatment system (case study: Palembang City Sewerage Project). Budget needed for operation and maintenance of centralized domestic wastewater management in Indonesia is often overlooked. This results in fail systems, high idle capacity, and abandoned assets. While the economic feasibility often used as the basis for centralized domestic wastewater infrastructure construction, the financial feasibility often shown a different result. The construction phase will be feasible according the analysis, while the operation and maintenance phase will have a different result. As unsolicited projects, the operation and maintenance of sewerage in Indonesia always have budget difficulties, thus needed scenario to resolve the matter. In this study, cost and revenue variable will be analyzed to determine the feasibility value based on NPV, BCR, and IRR calculations. The revenue comes from user charge tariffs on household and commercials connections, and cost variable consists of: chemical usage cost; sludge disposal cost; personnel wage cost; fuel and electricity cost; spare-part replacement cost. The analysis will determine whether both household connection and commercials connection in the sewerage system have positive results. Should negative results emerged, follow up analysis added to elevate the results consists of following scenarios: sensitivity analysis for tariffs adjustment; sensitivity analysis adding grant as option; sensitivity analysis adding loan as option. While analysis of base tariffs shown negative results on NPV, BCR, and IRR calculation, the follow up analysis shown significant changes thus the results is desirable.