Battle over Selangor’s water continues unabated

JULY 24 — The raging battle over control of water in Selangor is expected to continue unabated. Its skirmishes have become a regular feature in the mainstream media throughout 2009 with various contending parties taking pot-shots at each other.

Needless to say the scenes invariably involve the contending parties, the Selangor State Government, the Federal Government and the water concession companies, in a quest to reach an arguably tough solution for a ‘consolidation’ exercise.

In the latest round of conflicts, the Deputy Prime Minister has unwittingly joined the fray. His accusation that free water the state was giving was the reason why the state was not allowing the water tariff to rise, perceived by many as lending support to the water companies.

Above all, it was his attempt at doing an ‘Idris Jala-Alarmist’s approach that really caught on the raw nerve of the Menteri Besar of Selangor. The DPM has accused the State Government of not cooperating with the Federal Government and consequently places the consumers in Selangor, Kuala Lumpur and Putrajaya in jeopardy of water rationing by 2012 as Selangor will face a water shortage by then.

Pakatan Rakyat leaders have accused the Federal government of having political motive behind the water supply issue in Selangor. Klang Member of Parliament Charles Santiago has openly said the government was unhappy that Selangor had not committed to implement the Langat 2 Water Treatment Plant for the Pahang-Selangor raw water transfer project.

The project which was launched in April 2010 was initiated under the 9th Malaysia Plan with an estimated cost of RM8.9 billion. It includes building two dams and a 44.6km-long 5.2m-diameter raw water transfer tunnel to transport water from Pahang to Selangor and Kuala Lumpur. It'll supply 1,867 million cubic metres of water to Selangor daily.

The State government to date has yet to approve the remaining 15 lots of land required for the construction of Langat 2. It is now an open secret that the raw water transfer project is carried out by BN-backed companies and contractors. The project is funded by Japan Bank for International Cooperation but the bank would only release the fund in stages according to work progress. With the project now hitting a snag, the firms involved with the raw transfer project are caught in uncertainties.

The Minister of Energy, Green Technology and Water and Syabas Chief Executive Officer were quick to point out that there will be insufficient water supply in Selangor, Kuala Lumpur and Putrajaya come 2012. With the production between June 1 and July 2 at 4,086 million litres per day (MLD) and the water supply capacity at 4,326 MLD, they claimed that the reserve capacity for the three states are only 240 million litres per day (MLD) or 5.9 per cent. With the projected demand anticipated to be 4,625 MLD by 2012, Selangor is projected to be facing water shortage by 299 MLD then.

The Selangor MB has fought back claiming that the data provided by the ministry and Syabas are both untrue and inaccurate. The Pahang-Selangor water transfer project was based on consultants’ projection that Selangor would face a water shortage crisis. Charles Santiago similarly refuted the claims of the Federal Government and backed Abdul Khalid’s statement that Selangor could meet the demands of the State and Kuala Lumpur consumers up to 2019.

Firmly bullish, he believes Selangor can even sustain its supply until 2020 as it was based on expert consultations and calculations of population growth rate, past and present water consumption rates, current production capacity, and water levels in the dams.

Even if there was a shortage possibility, the Selangor MB grudgingly pointed out to other alternative water sources which can be drawn from in a shorter period, including underground water, and treated water from rivers and lakes. But doing it the BN’s way, he alluded, will surely incur further national debt.

Be that as it may, it is best that the nation be reminded of pertinent chronologies events and lessons learnt from the failed privatisation in the water industry.

o Selangor water services were the first to be privatised in Malaysia.  Jabatan Bekalan Air Selangor (JBAS) was a fairly profitable state entity which provided upstream water treatment as well as downstream water distribution services to the residents of Selangor and Kuala Lumpur.  It made between RM50 million to RM80 million, contributing significantly to the state’s coffers in the 1980s.

o However, in 1997, it was decided that in order to improve efficiency, the industry had to be privatised.  Unfortunately, only the profitable segment of the water industry business i.e., the water treatment services was privatised. Between then and 2002, the water treatment services was privatised to 3 different companies – Puncak Niaga Sdn Bhd (PNSB), Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH) and Konsortium Abass Sdn Bhd (ABASS).

o The loss-making water distribution business was however retained by the state government and was corporatised into Pengurusan Air Selangor Bhd (PUAS) in 2002.

o The three water treatment companies were granted 20-25 year concessions to sell treated water to PUAS, at a set price, which distributes this water to consumers.  While the private companies made annual profits in 2001 from their water businesses which ranged from RM35 million to RM180 million, PUAS has faced annual deficits of around RM350 million. As a result, this became the clearest case of Malaysia’s failed privatisation policy, which focused on privatising profits, while nationalising losses.

o The mad scramble to privatise the water services industry therefore produced a tremendously fragmented industry, with the State government controlling raw water resources, three separate concessionaires in charge of water treatment operations, and another company doing water distribution. The State government does own shares of Abass and Splash, and Syabas (through its state company Kumpulan Darul Ehsan Berhad, or KDEB), but is a far cry from managing the water industry holistically.

The Case of Reforming the Failed Water Services Industry in Malaysia

The Water Services Industry Act 20063 was hence passed in Parliament with one of its key objectives being the consolidation of all water industry related assets water treatment plants and water pipes to be acquired by a federal government agency, Pengurusan Aset Air Berhad (PAAB).

This agency will in turn lease back these assets to the respective water industry operators.  PAAB will also undertake all new capital investment as well as the maintenance of these assets. The underlying objective of the exercise is firstly to ensure optimum capital investment in water treatment and distribution assets, since a privatised and unincentivised entity will lag in terms of such investments. And secondly, PAAB will also enjoy lower borrowing costs as it is a government entity as opposed to privatised water operators. This would result in lower leasing charges by PAAB to the water industry operators.

Part of the Government reform of the water industry included passing two legislations in 2006, the Water Services Industry Act and the Water Services Commission Act, as well as transferring “water services” from the State List to the Concurrent List in the Federal Constitution, thereby making water a joint jurisdiction between Federal and State Governments.

Next, the Cabinet in early 2008 made a decision that the restructuring of Selangor’s water industry would be led by the State government itself. Little did they foresee the political results of the 12th General Elections in March 2008, with the Pakatan Rakyat opposition front taking over Selangor.

The State government agreed to all points raised in the WSIA and the Federal Government’s noble intention of consolidating the fragmented companies and making it a holistic entity. In its model the State government would transfer some of its assets, along with the concession companies’ assets, to PAAB (or Pengurusan Aset Air Berhad, formed under the Ministry for this very purpose).

It would then be the sole licensee, operating everything from raw water, to water treatment right up to water distribution. Through this model, it would correct the past wrongs, hire new independent management with solid international experience, replace pipes, and improve water services significantly.

The state government also believed in the principle of reversing privatisation and renationalising the water services industry for these reasons:

First, the water concession agreements would ultimately result in increased water tariffs for the consumers of Selangor, Kuala Lumpur and Putrajaya.

Secondly, it would introduce a new special purpose vehicle in place of Syabas which is considers incapable of running water distribution, namely due to lack of capital, failure to reduce Non-Revenue Water, and its high costs of management fees as charged by its shareholder Puncak Niaga (M) Sdn. Bhd.

Third, it would still maintain its free water scheme and finally because raw water is under state jurisdiction, the state considers it a natural resource and a source of contribution to its people.

o The Government had to once again look to restructure the water services industry to allow for a more palatable set of tariffs to be implemented, to improve the quality of services, to consolidate the fragmented industry and to reduce the capital intensive burden of the industry on the water players.

o As highlighted, 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, primarily that of toll concessions and the healthcare services sector.

o Ideally, the Federal Government would support the State’s intention of consolidating all water players into one holistic entity. Any other proposal means that the water industry would remain fragmented, portions of which are controlled by individuals whose companies have been proven unworthy and inefficient.

o Additionally, the State government is confident that it would be able to reduce Non-Revenue Water more efficiently, and by having a holistically managed water services industry this means no transfer pricing and unreasonable profit margins.

These are worthy lessons to be learnt in the medium to long-run, as Pakatan Rakyat considers its economic policies for both State and Nation. The days of yore of cronies' shining shoes at the expense of the rakyat should be considered over, and this is precisely what the Selangor government is attempting to achieve in its battle for water.

* Dr Dzulkefly Ahmad, Member of the Selangor Water Panel.

* The views expressed here are the personal opinion of the columnist.