Summary_Water Speech Marseille March 2012

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Towards better water governance : Solutions of regional actors

3rd International Conference of Local and Regional Authorities

6th World Water Forum

14th-15th March 2012, Marseille, France

14th March, 5.30-7.00pm

Improving cooperation between infra-state levels to prevent conflicts related to

water resources

FEDERALISM AND INTER-GOVERNMENTAL CONFLICT: WATER MANAGEMENT IN

THE STATE OF SELANGOR, MALAYSIA

By

RT. HON. TAN SRI DATO SERI ABDUL KHALID IBRAHIM


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Mr. Michel Vauzelle, Chairman of Regions United/FOGAR ; Mr.

Dominique Ramard, Vice-Chair for Europe of nrg4SD, Regional

Counsellor for energy and climate and President of the Environment

Commission of the Regional council of Brittany ; Loic Fauchon, President

of the World Water Council ; Benedito Braga, Chairman of the Forums

International Committee ;

My fellow speakers from around the world, representatives of

ministries, states, authorities and water associations from Canada,

Mexico and other countries ; delegates, friends, and members of the

media.

Good afternoon. I would like to firstly thank the organisers of the

conference, the World Water Council, the United Cities and Local

Governments (UCLG) and Regions United-FOGAR for inviting me tospeak at this important session on conflicts related to water resources.

I am aware of the tremendous progress you have made over the years at

the World Water Forum. I am pleased that the issue of local and sub-

national authorities is being emphasised with regard to managing water

resources. Water knows no boundary lines, and spans across

geographical borders. Local, state, regional and national level authorities

are forced to work closely together in ensuring water resources are

managed efficiently, and sustainably for the long-term benefit of our

citizens.


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I am here today representing the State of Selangor in Malaysia. As Chief

Minister, I am proud to note our state is the lifeline of the country it

forms the major portion of the Klang Valley, the central hub that is theprimary contributor to Malaysias economic growth. As the most

industrial, urban and thriving state, within which Kuala Lumpur our

capital also lies, we are a state that needs the best water management

possible.

I would like to present a case study to you, a classic case of the country s

failed attempt at privatising a public utility, made worse by two factors :

the inextricable nexus between the political and business sectors, where

private individual profitability is prioritised, and conflicting political

interests.

Malaysia is by constitution a federated nation, consisting of 13 state

governments and three federal territories. The water services industry in

Malaysia was originally under the helm of the individual state

authorities.

Although Selangors water authority was doing well financially at the

time, the government decided to change this model. Over the years

between 1997 and 2005, water treatment and distribution services werecorporatised and then privatised to four separate concession companies.

They were given lucrative contracts, lasting up to 30 years.


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Now, privatisation as a theoretical model is not wrong. Many

governments around the world have gone through a similar process. The

reasons for privatisation are plentiful : transferring decision rights and

the ability to profit to a private owner ensures the private ownerresponds efficiently to the positive incentives of financial gain. This was

meant to address the budgetary constraints of government, removing

the burden of capital expenditure from state authorities.

Second, the assumption is that privatisation promotes competition, the

major driver of improved efficiency. Driven by market-determined

forces, privatisation would ensure government, and therefore public,

funds are not used to bail out or subsidise any losses faced by a public

utility body.

But in Selangor, the private concession companies chosen to treat and

distribute water were not skilled nor experienced in the water services

industry. Without sufficient injected equity, the water distribution

company began to compromise on its water quality and service delivery,

forcing high tariffs on consumers.

Other problems included a non-holistic water planning and management

system, ineffective regulatory structures, unsustainable funding

structure, low cost recovery, high capital expenditure (CAPEX),inefficient operations, lack of maintenance, poor asset conditions and

high non-revenue water (NRW).


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The business model was simply not feasible. Although the water

treatment companies were making money, the water distributor

experienced severe losses. In 2006, the Parliament passed the Water

Services Industry Act, which would consolidate the water industry. Allwater-related assets would be transferred to a newly formed body, and

the constitution was amended to transfer the jurisdiction over water

services from the state governments to both the federal and state

governments concurrently. Another new body was formed, the National

Water Services Commission, to regulate all water resources and services

in the whole country.

However, because the state of Selangor was won by the opposition

coalition in 2008 during Malaysias 12th General Elections, which I am

part of, this created some tension. So when the time came for the state

government to negotiate to buy over the shares of the private

companies, they responded with hostile attitudes.

The state has had at least three rounds of negotiations and formal offers

presented to the concession companies, but they have demanded a

higher compensation for their assets and equity. We have calculated

their returns based on a lucrative compensation of 12 percent of

injected capital. This situation has not yet been resolved, but I would like

to bring to your attention several important points.

First, the privatisation model has not worked in Malaysia. Half of the 13

states experienced financial deficits in water operations and by 2008,

the water sector as a whole had a RM1 billion operating deficit. The


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outsourcing of water services has not only reduced efficiency in water

services, it has not adequately addressed the challenges of funding.

More importantly, the failure is due to a lack of understanding of theassumptions underlying privatisation. There should have been specific

and detailed clauses providing penalties for the companies failure to

comply to conditions. In this case, the agreement itself was so flawed

that when the water distributor experienced financial difficulties, the

government eventually underwrote this debt.

The agreement should also contain a clause that would protect both the

state and business concerned, as well as a section that states explicitly

that capital expenditure should come from government, coupled with

clear and transparent rules for the award of contracts for capital

projects. In this way, costs would not be privatised. Meanwhile,

operations may be privatised subject to stringent key performance

indicators. Finally, in our experience crony companies would be

intentionally conservative with their cashflow expectations, so that the

concession would stretch over a period of many years.

Second, there is a need for a continued role for the public sector in the

provision of water services.

Third, water operations have to be managed holistically. We cannot

break up water services and farm out the more lucrative portions to

privatised companies. This is tantamount to cherry-picking, where the

artificial segregation of the profit-making water treatment from the loss-


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incurring water distribution and consumer service facilities eventually

reduced the financial viability of the entire water sector. In Selangor

while the private water treatment companies made annual profits of

between US$10 million and US$47 million in 2001, the state-owneddistribution arm made annual deficits of about US$100 million. Today,

the water distributor, having suffered losses in its operations, has

withheld payments to the three water treatment companies.

Fourth, the need to clarify the jurisdiction over water assets is crucial. In

the case of Selangor, water-related assets are owned by the state but

managed by the private company. However, the state government was

not given full access to its very own property. Although the concession

agreement spells out clearly the concessionaires responsibilities over

capital expenditure, this was not carried out according to schedule due

to their claimed losses.

Fifth, the government had to step in to conduct bail-outs, where

private concessionaires received federal government loans and grants.

This, on top of numerous irregularities found within the private

companies, which should have been reason enough for the agreements

to be terminated. Breaches of the contract included breaching the

ceiling for capital expenditure and operating expenditure, awarding 72

percent of contracts through direct negotiations, and paying exorbitantfees and allowances to its chairman.

Sixth, the role of water regulators and operators should ultimately be to

ensure the sustainability and affordability of water resources. Tariffs


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should be commensurate with the amount of water used, but also not

so lucrative that this becomes an easy rent-seeking exercise for the

private operators at the expense of consumers. Privatisation contracts

created perverse incentives for private operators to increase capitalexpenditure selectively without necessarily improving coverage or

performance (Jeff Tan, 2011).

Seventh, political interests are a major factor impeding reform. Instead

of pushing for complete and wholesale buying over of the water services

industry, and resolving it holistically, the federal government was

unwilling to enhance performance standards. It has in fact extended the

private operators leases. Under the Act, the Minister has powers to do

what is needed for national interest.

Eighth, although a federation in name, the state governments

jurisdictions have been watered down over the years. Because the

federal government in Malaysia has greater control over fundamental

policy matters, it is increasingly difficult for us as a sub-national

government to make decisions on resources lying within our very state.

Privatisation of water services has been flawed in Malaysia due to

numerous factors. The question for us as state, regional and national

leaders going forward is whether privatisation can work, and if so, how ?Malaysia is a case in which water services was used by a rentier class,

domestic drivers of privatisation and political kingmakers, through their

well-oiled connections.


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Whilst globally there may have been successful cases of privatised water

operations, the case in Selangor is telling of its equivalent failure. The

solutions to these issues lies in ensuring that water services should be

treated holistically. Public authorities must play a continued role inmitigating any negative effects of private sector involvement. For

privatisation to work, extremely clear and rigid rules and regulations

ought to be clarified at the outset. Terms and conditions in the

concession agreements must be adhered to, and punishment must be

meted out should these be breached. Federal, state and local authorities

must co-operate to ensure services are efficient and standards kept,

despite political differences. Finally, contracts should be conducted via

open tender.

I thank you, Ladies and Gentlemen, for your kind attention. It is my

sincere hope that the case study of Selangor will be of interest to your

respective states and countries. I am happy to be here to learn from

your experiences, and hope we can seek common solutions.

With that, once again I thank the organisers of this important World

Water Forum.

Thank You.

Summary_Water Speech Marseille March 2012

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