Water management: Selangor can borrow buckets from Penang
(First published in Penang Monthly’s inaugural issue in December 2009).
The new political situation in Malaysia means greater diversity in how problems are perceived and how they can be solved. Policy competition between states also means that each state has more opportunities to learn from others. This is welcome because some of the challenges these states face today are enormous.
Reports of the intense water battle in Selangor have featured in the mainstream media throughout 2009. Most of these speak of tensions arising between the Selangor State Government and the Federal Government, or with water concession companies, over its attempts to reach a solution in its consolidation exercise. Numerous incidents have peppered the exchange, and it is difficult to determine whether a successful outcome will be achieved in the near future.
This is unfortunate as the water industry is already muddled with problems and a solution needs to be reached immediately.
Although the Selangor government is pressed for time and seeks an urgent resolution, there are other parties involved which have posed stumbling blocks. It is important to present the background behind this mess.
The source of the problem
The Selangor water services industry represents all that went wrong with Malaysia’s overzealous privatisation policy. The need to restructure the water industry is itself an admission of this failure.
In the past, the Selangor water industry was managed by the state itself, including control of water resources and water treatment, whilst water distribution was handled by Jabatan Bekalan Air Selangor
(JBAS), also a state agency. However, when the-then Prime Minister Tun Dr Mahathir Mohamed proceeded to privatise public entities, lucrative water concessions were given to private companies. Eventually, JBAS was corporatised into Perbadanan Urus Air Selangor (PUAS), and later privatised into Syarikat Bekalan Air Selangor (Syabas). The water treatment operations were privatised, and concessions given for periods of up to 30 years to three separate companies – Konsortium Abass, Syarikat Pengeluar Air Sungai Selangor (Splash) and Puncak Niaga Sdn Bhd (Puncak).
The original reasons for privatisation were:
• To increase efficiency based on supposed professional industrial expertise, and
• To let the private sector take responsibility for the water industry and thus leave the government free to focus on policy decisions.
Even if these reasons were justified, in reality, the concessions were given to companies whose managements had no experience in the water industry to begin with. These eventually became loss-making entities which ran up huge amounts of debts. The quality of water, and of service delivery, became extremely poor. The companies have been criticised for being favoured for their close contact with the political fraternity.
The mad scramble to privatise the water services industry therefore left it badly fragmentated:
• The state government controls raw water resources,
• Three separate concessionaires are in charge of water treatment operations, and
• One company handles water distribution.
Although the state government owns shares in Abass and Splash, and also Syabas through its state company Kumpulan Darul Ehsan Bhd (KDEB), this does not allow it to manage the water industry holistically.
The Water Services Industry Act adopted in 2006 was supposed to reverse the fragmentation of the water industry. Some quarters propound that infrastructure utilities such as water services, health services and public transportation should not be privately owned, and public services are not compatible with profit incentives. More market-driven proponents believe that if done correctly, privatised entities can indeed provide an efficient alternative to state-run monopolies. True privatisation, untouched by corruption and cronyism, leads to healthy competition, improvement in services and lower prices, which benefit the public.
Whatever the case, the way the Selangor water industry was privatised has produced undeniably disastrous results.
Reversing the flow
In 2006, the Federal Government grandiosely embarked on an upriver journey to remedy the situation. Two Bills – the Water Services Industry Act and the Water Services Commission Act – were passed and “water services” was transferred from the State List to the Concurrent List in the Federal Constitution, thereby giving federal and state governments joint jurisdiction over water issues. Next, the Cabinet in early 2008 decided that the restructuring of Selangor’s water industry would be led by the state government itself.
Little did they foresee that the results of the general elections in March 2008 would capsize their plans. The opposition front took over Selangor.
For a start, things were not hostile. In fact, the state government agreed to all points raised in the WSIA and to the Federal Government’s noble intention of consolidating the fragmented companies and forming a holistic entity. In its model, the state government would transfer some of its assets, along with the concession companies’ assets, to Pengurusan Aset Air Bhd (PAAB), which was formed under the Ministry of Energy, Water and Communications for this very purpose.) PAAB would then be the sole licensee, operating everything from raw water to water treatment right up to water distribution. It would hire a new and independent management with solid international experience, replace pipes, and improve water services significantly.
Trouble came at several different stages and from different quarters. The Federal Government claimed that the state government deliberately delayed the consolidation exercise. The truth was that the concession companies were not satisfied with the offers made, and were negotiating for a higher amount.
Selangor had already given them what it considered fair and reasonable returns on their injected capital (at a 12 per cent rate, which is justified based on termination rates found within the concession agreement itself), as well as 1 x Book Value on their assets. Most recently, two out of four concession companies have accepted the state’s offer (with some provisional clauses yet to be finalised). However, without the other two, it is still uncertain what the Federal Government will do. In fact, it has the power to terminate concession agreements if the minister believes it is in the national interest to do so.
Unfortunately, the ties between the Federal Government and concession companies Syabas and Puncak are extremely strong, and it is almost impossible to extricate the demands of one from the other. The fact that Puncak sponsors the Umno (leading party in the Barisan Nasional ruling coalition) general assembly every year says something about the independence – or lack thereof – of this concession company. Where favours are granted one way, it is invariable for it to be likewise granted for the other’s mutual benefit. You scratch my back, and I scratch yours.
Worse, Syabas is said to have breached crucial parts of its concession agreement, including giving more than 72 per cent of contracts worth RM600mil to selected companies, hence failing to practise open tenders. RM51.2mil was used to renovate its office when only RM23.2mil had been approved, amongst other things. These reflect badly on a professional company that’s supposed to exercise transparency and public accountability.
Learning from Penang
This regular mess could have been avoided if the previous BN state government had been able to exercise
some wisdom and foresight. Because it privatised a loss-making entity from PUAS, Syabas would never have sufficient capex (capital expenditure) to replace pipes and reduce non-revenue water (NRW). It would have to constantly rely on state and federal funding, which contradicts the reasons for privatisation in the first place.
Penang, on the other hand, is a role model that should and could still be emulated. Perbadanan Bekalan Air (PBA) was corporatised – and not privatised – in 1999 to serve Penang as a professional corporate body. Its level of services is unprecedented in the country and it runs a very efficient call centre and corporate website. Its NRW was as low as 16.9 per cent in 2007, a stark contrast to Selangor’s 38 per cent in that same year. In fact, Penang’s NRW is one of the lowest in the world, a record that the islanders should certainly be proud of.
In addition, its good track record is reflected in its low and competitive tariff rates. Penang has one of the lowest tariff rates in the country, an average of 31 sen per 1,000 litres compared with Selangor’s rate of 72 sen for the same amount (without taking into account the free water for the first 20m3 per month). Penang has thus been able to successfully corporatise its water body, provide low water tariffs, and still enhance its NRW to its current rates. Of course, both states are very different and comparisons are difficult: Penang is a self-contained island; Selangor is a sprawling state. Nevertheless, there is much that Selangor can learn from Penang.
For the rakyat
The water services industry’s ultimate objective should be to serve the rakyat. This, in fact, was a primary reason why the Selangor government insisted on leading the consolidation exercise. It had after all pledged to reduce tariffs and increase service quality. By paying concessionaires a whopping amount for their companies (over and above what is reasonable), the state would effectively be lining their already well-oiled pockets with money taken directly from taxpayers. This is a double whammy for citizens, who would have first paid high amounts in taxes, and then have to, cover the ridiculously high compensation paid to concession companies.
As highlighted at the start, the problems faced in the Selangor water industry are an accurate reflection of the nation’s failed privatisation policy. We see this pattern replicated in other industries, toll concessions and healthcare services. The intentions of the Mahathir era to improve efficiency through the Malaysia.
Incorporated agenda were noble, but then again, the road to hell is often paved with good intentions, as they say.
The days of cronies in shining armour paid for by the rakyat must end, and this is precisely what the Selangor government is attempting to achieve in its battle over water.
