The market for bottled water (AMDK) has been growing over the past few years in line with rising public demand. Part of this demand has organically developed from population growth, especially in the middle-income bracket; another source has been the challenge of accessing potable water in areas where residents once easily could; moreover, campaigns for healthy lifestyles that promote the consumption of large quantities of water, have become more popular. All these reasons and more drove up the consumption of bottled water an average of 12.5 percent every year from 2009 to 2014.

In 2009, the Indonesian Association of Bottled Drinking Water Companies (Aspadin) recorded bottled water sales of 12.8 billion liters, a figure which increased to 23.1 billion liters in 2014. This figure alone represented 13.8 percent growth compared to 2013. Meanwhile, the first quarter of 2015 saw AMDK sales reach 5.8 billion liters, an increase of 11.5 percent over the same period last year.

Buoyed by a market with great potential for rapid growth, more and more companies are keen to get into the bottled water business. One such company that has entered the bottled water business just this year is PT Charoen Pokphand Indonesia, which had previously focused on animal feed, livestock and processed livestock products.

Over the past few years, we have also witnessed an aggressive influx of large-scale investment on the part of foreign companies in the country'€™s bottled water business. The tendency is for these foreign companies to join or acquire a local company that already has a sizeable share of the bottled water market. Examples of this trend include the acquisition of Aqua by the Danone Group, Ades by PT Coca Cola and Club by PT Asahi Indofood Beverage Makmur.

Currently there are approximately 600 bottled water companies in operation in Indonesia, the majority of which (60 percent) are small to medium scale operations whose marketing reach tends to be localized. On the other hand, a quick glance at market share in the bottled water industry shows that it is largely controlled by big industry players with brands that are well known to the public. To date, for example, the Danone Group'€™s Aqua brand still enjoys a dominant 50 percent of market share.

The bottled water industry has faced a number of challenges over the years. First, its cost structure, which is dominated by the cost of plastic packaging and distribution costs, has made this industry quite sensitive to fluctuations in the rupiah exchange rate, due to its reliance on imported plastic, raw materials and gasoline). Second, because distribution is one of the main components of the bottled water business, the industry is sensitive to rising fuel and labor costs. Third, small-scale bottled water companies are often confronted with price wars that erode profit margins and at times even lead to losses. Fourth, for local enterprises, matters relating to marketing management and distribution management, as well as the support of information technology systems for logistics networks, remain a major obstacle. Fifth, there is an effect from regulatory-related constraints such as increases in the import duty of plastic pellets and the ongoing hot topic of the regulation on the management of water resources.

With regard to this final point, it was initiated by the repeal of Law No. 7/2004 on water resources by the Constitutional Court in February 2015 and the subsequent reenactment of Law No. 11/1974 on water resources. This led to concerns from bottled water industry players, especially foreign-owned bottled water companies in Indonesia, relating to gaining legal certainties from the government as to what extent the bottled water industry could contribute in supplying potable water to the public.

According to industry players, Law No. 11/1974 places greater emphasis on the role of government in controlling water resources for the sake of public prosperity, ranging from planning to management activities, in which opportunities for utilization by the private sector exist but remain vague. In contrast, Law No. 7/2004 was deemed to provide a more secure gateway through which the private sector could play a role.

Responding to such concerns, the government intends to keep safeguarding the role of businesses but with a number of adjustments. The government guarantees that current licenses will not be terminated until they expire, and that this will also pertain to licenses still being processed. Meanwhile, as to ongoing negotiations subject to adjustments, it is still possible that the government will grant licenses to private companies for drinking water concessions, albeit with certain strict conditions attached. The director general of water resources at the Ministry of Public Works and Public Housing confirmed that the government would propose a new law that is deemed able of accommodating all parties involved. However, it was acknowledged that the formulation of such a new law needs considerable time as it requires public consultation by requesting input from cross-sector stakeholders.

In conclusion, we all hope that the government will soon issue a legal framework that provides a win-win solution for all parties. We all agree that the utilization of water in a more controlled manner and for the greatest prosperity of the people should be the top priority. To this end, the government'€™s preparedness in terms of water management must also be improved by increasing investment in processing facilities, transmission, distribution and water connections to people'€™s homes in Indonesia. In this way, public access to clean and potable water will be vastly enhanced. On the other hand, the government should seek to readdress its legal relationship with the private sector with regard to drinking water. This is especially so if the government is not yet ready to meet the potable water needs of all corners of the country and given that private companies have traditionally been instrumental in this industry and already have their own markets.
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The writer is an industry analyst at Bank Mandiri.

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