by Charles Santiago
Aliran Monthly Vol 25 (2005): Issue 4

	Keng Yaik, where is the competition, reduced cost and efficiency you promised after privatisation? Charles Santiago

Energy, Water and Communications Minister Dr Lim Keng Yaik made two critical points on the future direction of the water sector in a recent interview (‘Lim: Corporatise, float water depts,’ Business Times, 30 April 2005)

First, the government wanted the remaining seven states that have not privatised their respective water departments - Kedah, Pahang, Perlis, Perak, Malacca, Negri Sembilan and Terengganu - to emulate the highly successful Perbadanan Bekalan Air Pulau Pinang (PBA) model in water supply management.

Second, he said, referring to these states’, “We want them to run as corporations but still belong to the state governments.” He reinforced this point by indicating that, if state water departments are “ready, list them on the local bourse but (they would) still be owned by the state”.

The local media reported that the Minister made these announcements to allay any possible fears that the respective state governments would lose control of water management. The Minister was obviously responding to Malaysian Trades Union Congress’ opposition to the privatisation of water supply management at its forum on privatisation of water and healthcare. The national labour centre had indicated that it would embark on a national campaign to mobilise workers to oppose the government’s plans to privatise water and healthcare in the country. The MTUC, together with the Coalition Against Water Privatisation involving 50 organisations, are involved in a national campaign against water privatisation.

The Minister’s statement unambiguously indicates that the PBA model would be emulated by other water departments and that the respective state governments would not lose control over their water supply management. (The Sarawak state government on 18 January 2005 announced that it would emulate the PBA experience in water supply management). At the heart of the call to emulate the PBA model is the need to reform the state sector, especially in the management and delivery of the water supply. Most importantly, Keng Yaik’s statements recognise that state-owned/run utilities can be efficient and profitable - especially if politicians keep out of the decision-making process and not politicise the state bureaucracy as practised in the PBA-Penang State government experience.

State sector reform

Why is the reform of the state sector pertinent for an efficient water management system? It has been suggested that the once efficient water management system’s deterioration is largely due to the politicians’ and the states’ deliberate neglect in not reinvesting profits or internally generated surpluses into the water sector in the last two and half decades. Also, many present day workers in the public sector lack the commitment to excellence and public service to achieve high standards. In addition, the politicians have successfully subjugated the civil service in order to promote their personal and political agenda. Lastly, corruption in the civil service has contributed to the decay and decline of the public sector. Thus, what is required is a clear and distinct demarcation of roles between the public sector and politicians. Politicians need to act on the professional advice of the civil service and not the other way around.

A reformed state (water) sector could lead to bureaucrats making decisions independently without political interference and politicians acting on the advice of bureaucrats, as demonstrated in the PBA – Penang government experience. A reformed state sector could lead to better remuneration for employees in the water sector and lower costs while improving water quality and environmental protection, as demonstrated in numerous examples in the US and Europe.

The respective state governments could approach the PBA directly for advice and support in areas involving technology, management, planning, human resources training, sharing of technical expertise and capacity building. This is to ensure that the workforce has the appropriate skills at all levels to work towards an efficient outcome. In this way, a truly public-public partnership can be organised, where states can share expertise and learn from each other, and such a partnership could lead to a truly ‘Malaysia Boleh’ experience. The partnership is premised on a common understanding of public service objectives. 

These states have to be advised on the key formula of PBA: social responsibility with economic and revenue efficiency. This formula has successfully allowed the PBA to provide water at 22 sen per cubic meter and earn yearly profits of RM50 to RM60 million while reducing non-revenue water (NRW) to 18 per cent, and maintaining cash reserves of RM230 million - clearly a world class achievement.

Financing for water

A massive public investment program could be a part solution to improve state water management and delivery. This would involve redirecting state subsidies, grants, loan guarantees and investment capital now flowing to private corporations to the state sector. Also, it involves profits from the public water department being ‘ring fenced’ and reinvested into the system as opposed to channelling these funds for other use depending on the political priorities of the politicians. A reformed state water management system can be financially sustainable.

At present, the state provides financial guarantees to financial institutions in order to minimise the risk transferred to the private sector. These include guarantees of loans, grants and profitability. Many concession agreements guarantee the profitability of the water operator for the duration of the contract period. The Federal Government provided a RM 2.9 billion financial support to Syabas for it to undertake water privatisation in Selangor, Kuala Lumpur and Putrajaya. Why shouldn’t similar support be extended to strengthen state water departments?

Efficiency, accountability, good governance and transparency

A reformed civil service should practise and enhance transparency, accountability and good governance. These factors are critical to ensure that social and state development objectives are met. The public sector is politically accountable to public authorities, elected representatives in the national parliament and state assemblies, as well as to the wider civil society including trade unions, consumer and environmental groups. State water authorities would have to include water customers as active protagonists in the formulation of water policies and involve them more effectively, in campaigns to reduce NRW and irresponsible use of water.

The efficiency of public water supply providers can be improved with transparency of information. The public water sector would undertake benchmarking every year on finance and costs, service and environmental quality - and provide a safeguard against corruption. The strategic way of doing this within the public sector is to provide the right to public access to all documents produced by the water utility. At present, the controls placed over information, coupled with a lack of consultation over decision making, have raised concern as to whether privatisation is truly more efficient and cheaper than government-led implementation of projects

Is the privatised water company more efficient, less corrupt and cheaper than a state-run water utility? State water utilities award contracts after consulting their technicians and engineers. The tenders are prepared by the respective water departments. The contract stipulates that suppliers and contractors can buy from any company as long as the supplier is certified. Contractors are given about two to three weeks to make their proposals.

In contrast, a newly privatised water company recently appointed consultants to prepare the contracts for the laying of pipes to reduce NRW. Three tenders were announced; two class A tenders, each worth RM 48 million; and one class B tender worth about RM 20 million. The company gave prospective suppliers one week to bid. Two addenda or contract changes were introduced in the short time period. The first was introduced on the third day; the second was announced two days before the closing date. The first addendum was of particular importance. Unlike the public sector approach, the privatised water company in a letter to the tenderers indicated that they could buy the pipes from only one approved supplier for each of the two items required and the name of the companies was mentioned.

The appointment of the consultants involves cost, and clearly they have not been efficient. But more importantly, why is the privatised company insisting that tenderers purchase only from one recommended pipe company? Surely there are other companies that supply the pipes and fittings required, and maybe at a cheaper cost and better quality. Is it possible that both the companies are crony companies? In fact, one of these companies is believed to be linked to an UMNO State Assembly member from Penang.

Keng Yaik, where is the competition, reduced cost and efficiency you promised after privatisation? It appears that privatisation has the tendency to promote corrupt practices; including restricting the number of suppliers and bidders and in the process enriching vested interests. Furthermore, there is no compulsion for the private sector to follow principles of accountability and good governance as opposed to the state sector.

Would the contract and agreements with water companies remain a secret document, a practice that we are all too familiar with in the country? Will the concession agreements be made available for public scrutiny? Will the state be transparent and announce tariff hikes permitted in the concession agreements with water companies? Or will this be an official secret? The state’s track-record on transparency is not promising. The misleading statements and refusal to form the Parliamentary Select Committee on Water is the most recent case in point. Such an act removes the important role of public opinion and consultation in the formation of public policy. Why should Malaysians believe that this government will exercise transparency vis-à-vis concession agreement?

Keng Yaik denied that there would be an increase in water tariffs in 2006 in Selangor, Kuala Lumpur and Putra Jaya. However, ECM Libra Securities, a brokerage firm attempting to re-rate Puncak Niaga indicated that that the concession agreement between the Selangor government and Syabas stipulates a tariff rate increase between 5–37 percent to take effect in January 2006 (‘Puncak Niaga in for Re-Rating, say analysts,’ The Star, 22 April 2005). Interesting to note such critical information is made known only when the company is desperately raising funds in the capital markets!

Will SPAN's role be rendered useless?

Would the National Water Services Commission (SPAN), the proposed national water regulatory body, effectively represent the public interest in privatised concessions? The Malaysian experience with regulatory bodies is weak and appointments are perceived as largely political. In fact, the public sector lacks the capacity to effectively regulate private sector participation. At present, regulatory structures and institutional experience is at an infant stage, lacks transparency and accountability and is subject to political interference. Malaysians are familiar with ‘cover-ups’ as opposed to independent investigations by autonomous regulatory bodies. Thus SPAN’s capacity to regulate is highly questionable.

Would SPAN be able to regulate commercial operations of water companies, or its financial models? What if water companies refuse to disclose information including financial models on the basis that company information and business models are business secrets?

Will the Minister appoint members of the MyWP (Malaysian Water Partnership) to sit in SPAN? MyWP is a non-governmental national consultative body involving policy makers and private sector representative from water companies. MyWP also happens to be one of the key organisations championing water privatisation in the country, it is the local affiliate of the Global Water Partnership (GWP). The GWP is funded by the World Bank and the European Union, and its Advisory Board includes representatives of the World Bank and Suex Lyonnaise, the French water multinational. Thus, MyWP is the local flag bearer of international groups and their concomitant ideology of privatisation or private-public partnership. There will be a conflict of interest if MyWP representatives sit in SPAN.

State ownership revisited?

How would Keng Yaik implement his state ownership policy when the respective state governments have declared their intentions to privatise their water supply management? In December 2004, the Perak state government announced that it would privatise Perak’s Water Board (PWB). The Mentri Besar announced that tariffs would increase by 20 per cent upon PWB privatisation and later by 40 per cent in four stages (‘Perak Water to Cost More’, NST, 9 January 2005). The privatisation study itself was undertaken by consultants Price Waterhouse Coopers. The estimated profit for the PWB was RM 39 million and RM 47 million for the years 2002 and 2003 respectively. Why privatise a profit-making state water utility when the better alternative would be to improve the performance of the PWB, especially by reducing NRW?

Negri Sembilan and Pahang, meanwhile, have announced their intentions to privatise their respective water boards or departments. The Negri Sembilan state government has consented to a 25 per cent increase in water tariffs after privatisation.

In conclusion, the challenge for Keng Yaik and the government is to strengthen water supply departments through a public-public partnership and not to table Water Bills in parliament. His statements have been contradictory, slippery and border on public disinformation. His privatisation strategy will benefit cronies, SPAN will be rendered useless and the rakyat collectively victimised. Will the real Lim Keng Yaik stand up?

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Charles Santiago is coordinator of the Coalition Against Water Privatisation.

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