All you need to know about RESTRUCTURING of WATER SERVICES INDUSTRY in SELANGOR
What is the State Government calling for?
The State Government is calling for the Federal Government to agree to its “holistic model”, where the four private water concession companies will be bought over and consolidated into one Special-Purpose Vehicle. The newly-formed entity will be fully managed and administered by the State Government, with the Federal Government having a golden share. It will be asset light, as all water-related assets will be transferred to the Federal Government’s Pengurusan Aset Air Berhad (PAAB).
Why is the State Government pushing for this Holistic Model?
The State Government believes that the holistic model is the best solution as both the treatment and distribution of water would be managed by a single operator. This ensures a lower tariff as there is no “transfer pricing” issue, where currently water treatment operators impose a high profit margin and water distributors have to increase tariffs as a result. The water industry would be more efficient and asset light. The private companies would no longer be in operation. Under this model, we can maintain water tariff increases of not more than 12% every 3 years. Operating profit will be very low, between 0-1%.
What was the result of privatizing the water services industry?
The water industry was originally run by the State government. It was privatized in stages between 1997and 2002 to four companies, Konsortium Abass Sdn Bhd, Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH), Puncak Niaga Sdn Bhd (PUNCAK) and Syarikat Bekalan Air Selangor (SYABAS). Privatisation of the water industry, a public good, is unsustainable where the concession agreement granted SYABAS the right to increase tariffs every 3 years at very high rates. In 2009, SYABAS was allowed under the agreement to raise its tariffs by up to 37%. The tariffs were scheduled to be increased by up to 25%, 20%, 10% and 5% in 2012, 2015, 2018, 2021 respectively. Consumers are forced to pay high prices and yet receive very poor service quality. The State Government says that SYABAS should no longer be allowed to operate and water industry must be controlled by the government as historically was the case.
Why is it important to de-privatise the water services industry?
The United Nations General Assembly recognized access to clean water as a human right, hailed by water advocates as a momentous step. The resolution urged states to provide financial assistance to help countries provide safe, clean, accessible and affordable water for all. The nature of private companies, especially SYABAS, is they are profit-driven and will not have the people’s interest at heart the way a state-run company can. Access to water has to with the people’s rights and justice.
Is this in accordance to the law?
Yes. The Water Services Industry Act 2006 was passed by Parliament with the objective of consolidating water industry-related assets and their transfer to the PAAB. PAAB would contribute future capital expenditure (CAPEX) and remit funds for asset maintenance. The law was passed to solve the problems of a fragmented water industry. The objective was to ensure optimum capital investment in water treatment and distribution. PAAB as a government entity would enjoy lower borrowing costs, resulting in lower lease charges to operators, and hence lower tariff rates for the people. The holistic approach in fact is in line with what the Federal Government proposed, as part of its national policy.
Why is the Selangor Government pushing to manage the water industry?
In February 2008, the Cabinet made the decision to allow State-owned company Kumpulan Darul Ehsan Berhad (KDEB) to take the lead in the restructuring process. However, after March 2008, The Federal Government changed its position, and now does not want the Selangor Government to manage the water services industry in Selangor.
Is it true the Selangor Government has been delaying the project?
No. The Selangor Government has always responded immediately to all meetings held with the Federal Government. In fact, we called for negotiation meetings with the four companies in May 2010, but this was quickly cut off when the Federal Government sent an e-mail requesting us to postpone the meetings, with no reasons given at all. This is because the Federal Government is opposed to the State Government’s holistic model and still wants the private companies to continue operating.
In what way has SYABAS shown it has not performed satisfactorily?
The audit report on SYABAS revealed that the company breached important terms of its agreement. It failed to comply fully with the requirement for contracts to be awarded on an open tender basis. More than 72% of contracts worth a total of RM600 million were awarded to selected companies via direct negotiations and only 25% via competitive open tender, which violates the agreement. More than RM325 million of discrepancy was found between the summary of contracts awarded in 2005, 2006 and 2007 and SYABAS’s review document (general accounts). In June 2005, SYABAS also breached its concession by using imported pipes from Indonesia for a RM375 million pipe replacement project instead of sourcing them locally. RM51.2 million was spent to renovate SYABAS’s office when the Selangor Water Regulatory Department (JKAS) only approved RM23.2 million.
Why did the Selangor Government not allow SYABAS to increase its tariff?
The audit is a requirement before the company can be allowed to implement a tariff hike (scheduled originally for January 2009). The State Government’s stand is that SYABAS did not demonstrate its performance based on questionable items in the audit report, and hence does not agree to the tariff increase. The tariff increase must be ‘agreed upon’ by both the Federal and State Governments, which has not been done. SYABAS wants to sue the State Government for RM1 billion, but the State Government can in fact respond by suing SYABAS for non-performance.
Is the offer by the State Government reasonable?
The State Government has given several rounds of offers to the companies. The first, totaling RM5.7 billion in January 2009 was rejected by all four. The second, totaling RM9.29 billion in June 2009 was accepted by ABASS and SPLASH, but rejected by PUNCAK and SYABAS. The State’s offers are fair and reasonable, giving a return of capital investment of 12%. This takes into account the amount and period of investment and debts incurred. We believe this is fair, but the companies still demand a higher amount purely due to greed. This is in addition to already very lucrative contracts. The higher the amount paid to them, the higher the rakyat has to bear the burden via higher tariff increases.
What are the next steps forward in this stalemate?
The people of Selangor, Kuala Lumpur and Putrajaya need to stress to the Prime Minister and the Federal Government that only the State-proposed holistic model is the best and most feasible. This allows us to keep tariffs low, ensures everyone adequate access to water, and no more crony companies pocketing huge profits for their own benefit. Without pressure from the public, the Federal Government will push its way through and force the Selangor Government (and the people) to accept a model where the private companies continue to operate.
Is it true there will be a water deficit by 2012?
The Selangor Government maintains that this is purely speculation. The Federal Government said there would be a water crisis in 2007 and 2010 but this did not happen. Most recently, the Minister of Energy, Green Technology and Water, Peter Chin based his statements on the Economic Planning Unit (EPU)-commissioned study on the National Water Resources Study (NWRS) 2000-2025, which did not follow the “Design Guidelines for Water Supply Systems” set by the Malaysian Water Association (MWA) based on JKR Design Standards. The NWRS gives a grossly inflated figure of water demand of 500-1,225 litres per capita per day (l/c/d) in 2010, compared to MWA’s demand figures of 320 l/c/d. The NRWS is therefore highly questionable, since its variables like national GDP growth, manufacturing output, and state GDP have changed and adjustments must be made especially with the economic slowdown. With the 10th Malaysia Plan’s increasing focus on the services sector (and less manufacturing/industrial), water demand will also reduce.
Should we minimize water consumption?
The Selangor Government promotes water conservation, water recycling and rainwater harvesting. Alternatives should be explored such as groundwater extraction, water from rivers and lakes. The use of treated water should be reduced, so rainwater is used for activities like car-washing, watering of gardens and in house ponds and aquariums.
Is the Selangor Government stopping the Pahang-Selangor Interstate Water Transfer Project?
The Selangor Government is merely advising the Federal Government to compute its number for water demand accurately before embarking on another mega-project of RM9 billion. The project should not be rushed into. In fact, the basis of the whole project was the NWRS itself, which was conducted by three private companies that have direct involvement with the project: Ranhill Bersekutu Sdn Bhd, Jurutera Perunding Zaaba Sdn Bhd and SMHB Sdn Bhd. This reflects a conflict of interest, where it would be in their interest to promote the construction of the Kelau Dam, the Langat 2 water treatment plant and laying of pipes.
Selangor Government Disagrees To Higher Offer Price To Water Concessionaires