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UNIVERSITI PUTRA MALAYSIA

VALUATION OF WATER SERVICE FEE FOR TIDAL LOWLAND AGRICULTURE IN SOUTH SUMATRA

MUHAMMAD YAZID

FPAS 2010 6

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VALUATION OF WATER SERVICE FEE FOR TIDAL LOWLAND

AGRICULTURE IN SOUTH SUMATRA

By

MUHAMMAD YAZID

Thesis Submitted to the School of Graduate Studies, Universiti Putra Malaysia, in Fulfilment of the Requirements for

the Degree of Doctor of Philosophy

December 2010

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DEDICATIONS

To my wife Nura Malahayati,

my daughters Keyshia Nur Yazid and Kania Meutia Yazid. and my son Rizq Khairi Yazid

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Abstract of thesis presented to the Senate of Universiti Putra Malaysia in

fulfilment of the requirement for the degree of Doctor of Philosophy

VALUATION OF WATER SERVICE FEE FOR TIDAL LOWLAND AGRICULTURE IN SOUTH SUMATRA

By

MUHAMMAD YAZID

December 2010

Chair: Professor Mad Nasir Shamsudin, PhD

Faculty: Faculty of Environmental Studies

Water management is a key factor in tidal lowland agriculture with three-fold

objectives of improving water allocation, recovering costs, and achieving

efficient water distribution. In order to achieve these objectives, water

management infrastructures must be properly operated and maintained.

Therefore, besides the established guidelines for operation and maintenance

(OM), the availability of fund is required to carry out proper OM and ensure

the achievement of water management objectives (WMO). OM is financed

by both government and water users through water service fee (WSF).

However, neither government budget nor WSF is sufficient to finance OM at

its respective level of water management. WSF is insufficient to finance OM

at tertiary level since there is no reliable measures of WSF for which farmers

are responsible to contribute.

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The valuation of WSF for tidal lowland agriculture is aimed at: (i) the

estimation of WSF; (ii) the estimation of willingness to pay (WTP) for WSF

and its affecting factors; and (iii) the evaluation of the achievement of WMO.

The results of this study are expected to contribute to the growth of

knowledge in water resource management and to the formulation of policy in

accordance to the achievement of sustainable water management in tidal

lowland agriculture.

This study employs the following methods: (i) participatory field observation

and focus group discussion for WSF estimation based on the costs of water

delivery; (ii) production function estimation for WSF estimation based on the

value of water service in crop production; (iii) contingent valuation method

(CVM) for the estimation of WTP for WSF; (iv) hedonic pricing (HP) for the

estimation of WTP for WSF to complement CVM. Data are collected through

field survey at the tidal lowland area of Telang I, South Sumatra, Indonesia.

Respondents are selected using stratified random sampling.

The results of this study include three WSF estimates based on the cost of

water distribution. WSF1 is amounted Rp 315,000 per hectare to indicate the

supply cost, WSF2 is amounted Rp 346,500 per hectare to account for

economic cost, and WSF3 is amounted Rp 391,500 per hectare to reflect the

full cost. In comparison, the benefit of water service in crop production is Rp

455,700 per hectare, which is higher than any types of cost of water

distribution. Water service is proved to be a significant determinant of crop

production.

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The mean WTP for WSF is Rp 204,680 per hectare, whereas total WTP per

water management unit (256 hectares) is Rp 52,398,080. WTP for WSF is

significantly affected by the bidding price, water service, frequency of fee

payment, and income. Actual WTP for WSF is Rp 102,530 per hectare and

is significantly affected only by income. Both estimated WTP for WSF and

actual WTP for WSF indicate that the achievement of water management

objective is limited to the improvement of water distribution.

This study concludes that water service should be employed in crop

production in tidal lowlands. In addition, WSF should be collected to ensure

proper OM of tidal irrigation. Efforts to increase farm income should also be

directed through optimum use of labor, chemicals, and fertilizers in order to

realize farmers’ WTP for WSF as well as to increase current WSF payment.

This study recommends that WSF as one of farmer’s responsibility mandated

in Water Resource Law be implemented based on the objective valuation

using either the cost of water delivery or the value of water service in crop

production. The amount of WSF should be adjusted to the water

management objective to be achieved. Water users association (WUA)

should be given authority to manage the collected WSF.

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Abstrak tesis yang dikemukakan kepada Senat Universiti Putra Malaysia sebagai memenuhi keperluan untuk ijazah Doktor Falsafah

PENILAIAN YURAN PERKHIDMATAN AIR PADA PERTANIAN TANAH RENDAH BERPASANG SURUT DI SUMATERA SELATAN

Oleh

MUHAMMAD YAZID

Disember 2010

Pengerusi: Profesor Mad Nasir Shamsudin, PhD

Fakulti: Fakulti Pengajian Alam Sekitar

Pengurusan air adalah faktor utama pada pertanian tanah rendah berpasang

surut yang memiliki tiga tahap objektif, iaitu meningkatkan pembekalan air,

memulihkan kos dan mencapai pembekalan air yang cekap. Untuk mencapai

tujuan tersebut infrastruktur pengurusan air harus diuruskan dan disenggara

dengan baik. Bajet sedia ada yang diperlukan untuk membiayai operasi dan

pemeliharaan (OP) yang tepat dan memastikan pencapaian tujuan

pengurusan air (TPA) perlu diperhatikan di samping penetapan panduan OP.

OP dibiayai oleh kerajaan dan pengguna perkhidmatan air melalui yuran

perkhidmatan air (YPA) yang diiktiraf. Namun, dianggarkan pembiayaan

kerajaan dan YPA tidak cukup untuk membiayai OP pada setiap tingkatan

pengurusan air masing-masing. YPA tidak cukup untuk membiayai OP pada

peringkat tertier kerana tidak ada penaksiran YPA yang pasti untuk dipenuhi

dengan bertanggungjawab oleh pengusaha ladang.

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Penilaian mengenai penaksiran YPA pada pertanian tanah rendah

berpasang surut adalah diutamakan kepada: (i) penaksiran YPA; (ii)

anggaran kesanggupan untuk membayar (KUM) YPA dan faktor

pendorongnya; dan (iii) menilai pencapaian TPA. Hasil penilaian ini

diharapkan dapat menyumbang pengetahuan dalam pengurusan sumber air

dan perumusan kebijakan untuk mencapai pengurusan air yang berterusan.

Kaedah yang digunakan dalam kajian ini adalah: (i) pemerhatian lapangan

dan perbincangan kumpulan terpilih yang bertujuan untuk menaksir YPA

yang berasaskan kos pembahagian air; (ii) penaksiran fungsi pengeluaran

untuk penaksiran YPA berasaskan nilai perkhidmatan air dalam pengeluaran

pertanian; (iii) kaedah penilaian kontinjensi (KPK) untuk penaksiran KUM

YPA; (iv) kaedah kos hedonik untuk penaksiran KUM YPA untuk

melengkapkan KPK. Data diperolehi melalui survey di Telang I, Sumatera

Selatan, Indonesia. Responden dipilih secara rawak berlapis.

Kajian ini menghasilkan 3 anggaran YPA yang bersesuaian dengan kos

pembahagian air. YPA1 dianggarkan Rp 315,000 setiap hektar bagi

menunjukkan kos pembekalan, YPA2 dianggarkan Rp 346,500 setiap hektar

bagi menunjukkan kos ekonomi, dan YPA3 dianggarkan Rp 391,500 setiap

hektar bagi menunjukkan kos keseluruhan. Sebagai perbandingan, faedah

daripada perkhidmatan air terhadap pengeluaran ladang adalah Rp 455,700

setiap hektar, iaitu lebih tinggi daripada sebarang jenis kos pembahagian air.

Perkhidmatan air telah dibuktikan sebagai penentu yang signifikan bagi

pengeluaran ladang.

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Purata KUM YPA adalah Rp 204,680 bagi setiap hektar dan jumlah KUM

bagi setiap unit pengurusan air (256 hektar) adalah Rp 52,398,080. KUM

YPA dipengaruhi oleh harga penawaran, perkhidmatan air, kekerapan

pembayaran yuran dan pendapatan. KUM YPA aktual adalah Rp 102,530

setiap hektar dan dipengaruhi oleh faktor pendapatan sahaja. Kedua-dua

KUM YPA ditaksir dan KUM YPA aktual menunjukkan pencapaian objektif

pengurusan air adalah terhad kepada penambahbaikan ke atas

pembahagian air.

Sebagai kesimpulan, kajian ini mendapati bahawa perkhidmatan air harus

digunakan dalam pengeluaran ladang. YPA juga harus dipenuhi untuk

memastikan OP yang sesuai pada pengairan pasang surut. Usaha-usaha

bagi meningkatkan pendapatan ladang juga harus diterjemahkan melalui

penggunaan buruh yang lebih banyak dan penggunaan bahan kimia dan

baja yang lebih bijak dengan tujuan untuk mewujudkan keinginan petani

untuk membayar YPA dan meningkatkan pembayaran YPA semasa.

Kajian ini mengesyorkan YPA sebagai salah satu tanggung jawab petani

sebagaimana termaktub di dalam Undang-undang Sumber Air agar

dilaksanakan berdasarkan penilaian yang objektif sama ada menggunakan

kos penghantaran air atau faedah perkhidmatan air dalam pengeluaran

tanaman. Nilai YPA hendaknya disesuaikan dengan tujuan pengurusan air

yang ingin dicapai. Badan pengguna air sepatutnya dipertanggungjawabkan

untuk mengurus YPA yang terkumpul.

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ACKNOWLEDGEMENTS

I would like to express my gratitude to Prof. Dr. Mad Nasir Shamsudin

(Chairman of the Supervisory Committee), Prof. Dr. Khalid Abd. Rahim,

Associate Professor Dr. Alias Radam, and Prof. Dr. Azizi Muda for all the

guidance rendered during the course of my study.

Special thanks to Prof. Dr. Mad Nasir Shamsudin for providing continuous

guidance since the preparation of research until completing of the thesis. His

constant support and assistance throughout my study is sincerely

appreciated.

I would like to express my thanks to Prof. Dr. Khalid Abdul Rahim for his

numerous inputs in developing the research methodology and Associate

Professor Dr. Alias Radam for his assistance in performing the statistical

analysis.

Finally I am grateful to the Government of Indonesia for providing financial

support during my study.

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I certify that a Thesis Examination Committee has met on 16th December 2010 to conduct the final examination of Muhammad Yazid on his thesis entitled “Valuation of Water Service Fee for Tidal Lowland Agriculture in South Sumatra” in accordance with the Universities and University Colleges Act 1971 and the Constitution of the Universiti Putra Malaysia [P.U.(A) 106] 15 March 1998. The Committee recommends that the student be awarded the Doctor of Philosophy. Members of the Thesis Examination Committee were as follows: Ramdzani Abdullah, PhD Associate Professor Faculty of Environmental Studies Universiti Putra Malaysia (Chairman) First Admiral (R) Sutarji Kasmin, PhD Associate Professor Faculty of Environmental Studies Universiti Putra Malaysia (Internal Examiner) Mohd Rusli Yacob, PhD Lecturer Faculty of Economics and Management Universiti Putra Malaysia (Internal Examiner) Indah Susilowati, PhD Professor Faculty of Economics Diponegoro University Indonesia (External Examiner)

______________________________ NORITAH OMAR, PhD

Associate Professor and Deputy Dean School of Graduate Studies Universiti Putra Malaysia Date: 24 May 2011

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This thesis was submitted to the Senate of Universiti Putra Malaysia and has been accepted as fulfilment of the requirement for the degree of Doctor of Philosophy. The members of the Supervisory Committee were as follows: Mad Nasir Shamsudin, PhD Professor Faculty of Environmental Studies Universiti Putra Malaysia (Chairman) Khalid Abd. Rahim, PhD Professor Faculty of Economics and Management Universiti Putra Malaysia (Member) Alias Radam, PhD Associate Professor Faculty of Economics and Management Universiti Putra Malaysia (Member) Azizi Muda, PhD Professor Department of Geography Universiti Pendidikan Sultan Idris (Member)

_____________________________ HASANAH MOHD GHAZALI, PhD Professor and Dean School of Graduate Studies Universiti Putra Malaysia Date:

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DECLARATION

I declare that the thesis is my original work except for quotations and citations which have been duly acknowledged. I also declare that it has not been previously, and is not concurrently, submitted for any other degree at Universiti Putra Malaysia or at any other institution.

_____________________________ MUHAMMAD YAZID Date: 16 December 2010

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TABLE OF CONTENTS

Page

ABSTRACT iii ABSTRAK vi ACKNOWLEDGEMENTS vii APPROVAL x DECLARATION xii LIST OF TABLES xv LIST OF FIGURES xviii LIST OF APPENDICES xix LIST OF ABBREVIATIONS xx CHAPTER

1 INTRODUCTION 1-1 1.1 Tidal Lowland Potential and Functions 1-1 1.2 Tidal Lowland Reclamation and Agricultural Development 1-3 1.3 Agricultural Water Management in Tidal Lowlands 1-9 1.4 Water Charging in Tidal Lowland Agriculture 1-12 1.5 Problem Statement 1-14 1.6 Objectives of the Study 1-19 1.7 Hypotheses 1-19 1.8 Significance of the Study 1-20 1.9 Organization of the Study 1-21

2 LITERATURE REVIEW 2-1 2.1 Introduction 2-1 2.2 WSF Terms and Definition, Measurement and Charging

Mechanisms 2-2

2.3 Water Service Fee Estimation 2-6 2.4 Willingness to Pay Estimation 2-11 2.4.1 Contingent Valuation Method (CVM) 2-14 2.4.2 Hedonic Pricing (HP) 2-22 2.5 Justifications for the Chosen Methods of WTP for WSF

Estimation 2-25

2.6 Water Management Objectives Achievement Evaluation 2-31 2.7 Summary 2-32

3 METHODOLOGY 3-1 3.1 Introduction 3-1 3.2. Conceptual Framework 3-1 3.3 Estimation Process and Techniques 3-4 3.3.1 Estimation of WSF based on the Cost of Water

Delivery 3-6

3.3.2 Estimation of WSF based on the Crop Production Function

3-8

3.3.3 Estimation of Willingness to Pay for WSF Using CVM

3-11

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3.3.4 Estimation of Willingness to Pay for WSF Using Hedonic Pricing

3-15

3.3.5 Evaluation of the Achievement of Water Management Objectives

3-18

3.4 Data Collection 3-20 3.4.1 The Study Area 3-20 3.4.2 Population and Sample 3-31 3.4.3 Data Collection 3-34 3.5 Data Analyses and Validation of Results 3-39 3.5.1 Data Analysis to Obtain WSF based on the Cost

of Water Delivery 3-39

3.5.2 Data Analysis to Obtain WSF based on Crop Production Function

3-40

3.5.3 Data Analysis to Estimate WTP Using CVM 3-41 3.5.4 Data Analysis to Estimate WTP Using Hedonic

Pricing 3-44

3.5.5 Data Analysis to Evaluate the Achievement of Water Management Objectives

3-45

3.5.6 Validation of Results 3-46 3.6 Summary 3-52

4 RESULTS AND DISCUSSION 4-1 4.1 Introduction 4-1 4.2 Water Service Fee Estimation 4-1 4.2.1 Water Service Fee Estimated based on the Cost of

Water Delivery 4-2

4.2.2 Water Service Fee Estimated based on the Crop Production Function

4-9

4.3 Willingness to Pay Estimation 4-26 4.3.1 Willingness to Pay Estimated Using Contingent

Valuation Method 4-26

4.3.2 Willingness to Pay Estimated Using Hedonic Pricing 4-62 4.4 Evaluation on the Achievement of Water Management

Objectives 4-75

4.4.1 Farmers’ Perception on Water Management Objectives and Functions

4-75

4.4.2 Existing Water Service Fee Payment 4-78 4.4.3 Achievement of Water Management Objectives 4-83 4.5 Summary 4-87

5 SUMMARY, CONCLUSION AND RECOMMENDATIONS 5-1 5.1 Summary 5-1 5.2 Conclusion 5-7 5.3 Recommendations for Future Research 5-8 5.4 Policy Implications 5-9

REFERENCES R-1 APPENDICES A-1 BIODATA OF STUDENT B-1 LIST OF PUBLICATIONS P-1