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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.