States of Reform — June 27, 2012

A tale of two water supply systems

The Teluk Bahang Dam in Penang.
Photograph: Daniel Lim

By Tricia Yeoh

In the days before the world’s governments went mad about privatisation, supplying utilities such as water or electricity was the main raison d’être for government and for government taxation. Those simple days are gone, and especially in Selangor, people certainly wish they would come back. But there is no way back.

The issue of water has re-emerged in the state of Selangor. Peter Chin, Minister of Energy, Green Technology and Water, recently issued a statement saying his hands are tied and there is nothing the federal government can do to expedite the restructuring of the water industry in Selangor, which has reached a stalemate after more than three years of negotiations. This crisis has in the past been contrasted to the Penang state government’s successful water deal. Prime Minister Najib Razak had at the time called on other Pakatan Rakyat (Pakatan) state governments to follow Penang’s example.

It is worth examining the two states’ water industries when making such a comparison. Suffice to say at the outset that both states are very different in their respective water industries’ formation and current situation. Making generalised comparisons therefore makes little sense.

In the Penang water deal, the government transferred RM655.2mil worth of water-related assets (or 50% of the total) to Pengurusan Aset Air Bhd (Paab) in exchange for a restructuring of the state’s outstanding loans into a grant. Under the arrangement, the assets would be leased back to the state for 45 years for an annual fee of RM14.56mil. The Penang government would retain control over any future revision in water tariffs in the state, whilst the state would be given a further grant of RM1.2bil for the expansion project of the Mengkuang Dam. All in all, the arrangement seemed to benefit the Penang government and there would have been no reason to disagree.

Now, the Penang water industry, even before the restructuring took place, was already in the hands of a very capable corporatised body, the Perbadanan Bekalan Air Pulau Pinang (PBAPP). Note that this one body was – and still is – operating the industry in a holistic manner, conceptualising the entire water chain from upstream to downstream; from treating raw water all the way to distributing water to consumers. This is a key point to note. One particular indicator of its achievements is its having been able to maintain non-revenue water (NRW) rates at one of the lowest in the country, as low as 16% at one point.

The water restructuring deal was easier to manage and negotiate, since there was only, after all, one body to hold discussions with. The Selangor situation was a completely different kettle of fish, as the following paragraphs serve to tell.

The Selangor water services were originally run by Jabatan Bekalan Air Selangor (JBAS). This changed when the treatment portion of water was privatised to three companies: Puncak Niaga Sdn Bhd (Puncak Niaga), Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (Splash) and Konsortium Abass Sdn Bhd (Abass). The loss-making arm of water distribution was corporatised into Perbadanan Urus Air Selangor (Puas). But because it continued to make tremendous losses, it was privatised into Syarikat Bekalan Air Selangor (Syabas) in 2005 to ensure a sustainable water industry.

In 2009, when the water restructuring exercise began, the Selangor water industry was operated by four separate private concession holders. This was a very fractured situation to begin with, and consolidating the four companies was an uphill task to say the least.

The restructuring in Selangor began with the same intention as that in Penang, namely for the water-related state assets to be transferred to Paab and leased back to the entity that would operate these assets at a reasonably low rate. This new entity was initially planned to be a state government-run body, operating water as a complete service from treatment to distribution, exactly in the way PBABB manages water in Penang.

Photograph: Kwong Wah Yit Poh

What is important to note is that Selangor had to undergo the first step of buying over the four companies, and then form a holistic state-run entity (either entirely state-owned or corporatised), for it to even arrive at the status PBABB was at prior to the latter’s restructuring. And it has struggled over the past three years and more to do just that.

In fact, there have been multiple offers made by the Selangor government (first, jointly with the federal government and then independently thereafter) to buy over the assets and equity of the four concession companies (Puncak Niaga, Abass, Splash and Syabas) but to little avail. Half of them claimed the offers were not lucrative enough.

Although it is true that such private contracts should typically not be reneged upon (their concessions last up to 25 or 30 years) – where one argument was that terminating contracts would reflect poorly on the rule of law in the country and recognition of all other private contracts – this instance should be considered an exception. First, the exercise was started by the federal government’s enactment of the Water Services Industry Act 2006 (WSIA) in the very first place, after the then-Minister of Water Lim Keng Yaik recognised the gross inefficiencies of the privatised arrangement.

Second, the concession agreement signed with Syabas was poorly designed, to the detriment of consumer interests, where tariff rates were allowed to be increased by up to 37% in 2009, a further 25% in 2012, 20% in 2015, 10% in 2018 and five per cent every three years until 2030. During the many negotiations, one concession holder, Splash, even counter-offered a deal to take over the entire industry and claimed to be able to sustain the industry and still reduce water tariffs by five per cent immediately.

Finally, the WSIA is an extremely powerful piece of legislation which does allow for the Minister of Energy, Green Technology and Water to make certain policy decisions he deems appropriate and in the national interest. There are occasions in which policymakers with the authority to exercise their decisions must be called upon, and this is the time to do so – especially given the fact that any further delay causes increasing damage to the current situation.

Various quarters have in fact sidetracked the issue by accusing the Selangor government of politicising another water-related project altogether, namely the construction of the Langat 2 treatment plant, which is part of the Pahang-Selangor Raw Water Transfer Project.

It is important that the stakeholders fix their eyes on the top priority, which is to ensure the water industry restructuring is settled once and for all, and according to the original objectives of the Parliament-sanctioned WSIA.

Finally, to compare the water situation in Selangor and Penang is good insofar as seeing Penang’s PBABB as an ideal to copy. However, this has not been possible given that Selangor is still one huge step behind—the four private companies have not been able to agree on a fair price. It seems likely that all parties are merely waiting for the 13th General Election to take place, before they seriously act to solve the problems.

Tricia Yeoh has previously worked with the Selangor state government and is now attached to a market research consultancy.

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