Presentation Marseilles March2012

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Improving co-operation

between infra-state levels toprevent conflicts related to

water resourcesFederalism and Inter-governmental Conflict: Water Management in the State of

Selangor, Malaysia

6th World Water Forum, Marseilles, France

Rt .Hon.Tan Sri Dato’ Seri

Abdul Khalid bin IbrahimChief Minister of Selangor

14th March 2012



Introducing Selangor

Selangor





Water Management in Selangor:

A Case Study

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Malaysia: A Federated NationS 13 State Governments and 3 Federal Territories

S Water services industry: Original jurisdiction under respectivestate authorities

S Selangor ’s Water industry

S Selangor ’s water industry was also under state authorityS Was a profitable business, generating revenue

S Between 1997 – 2005, water treatment and distribution serviceswere corporatised and then privatised



All Water Assets Owned by the Selangor State Government

Under State GovernmentTreatment Operators:

SPLASH/ABASS/PUNCAKDistribution Operator:

SYABAS



Privatisation of Water

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Privatisation’s Objectives

S Transfers decision rights and ability to profit to private owner

S Ensures private owner responds efficiently to positive incentives of financial gain

S Would address budgetary constraints of state government

S Removes burden of capital expenditure from state authorities

S Promotes CompetitionS Promotes efficiency

S Ensures public funds not used to bail out or subsidise losses of public utility body



Privatisation of Water

S Private concession companies chosen were not skilled nor experienced in water services industry

S Insufficient injected equity

S Compromised water quality and services

S High tariffs on consumers



Problems of Water Services

Industry

Non-holistic

water planning &

management

Ineffectiveregulatory

structures

Lack of

maintenance

Inefficient

operations

Unsustainablefunding

structure

Poor asset

conditions

Low costrecovery

Poor servicesto water

consumers

High CAPEX

High NRW



Changes to the

Water Services Industry

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Imbalance in water services industryS Water treatment operators: Profitable

S Water distribution operator: Severe Losses

S 2006: Water Services Industry Act passed in Parliament

S Water assets to be transferred to a body (PAAB)

S Constitution amended to transfer water services from stategovernment to both state and federal governments

S National Water Services Commission formed as regulatory body



Changes to the

Water Services Industry

SPrivate operators with greater restriction

S Ideally, operations returned to state authorities



State Government’s Efforts

S3 or more rounds of negotiations and offers to buy over private water concession companies over the last 3 years

S Returns calculated based on 12% return on injected capital

S Reasonable industry standard

S Compensation more than given

S Situation has reached a stalemate



Lessons Learnt from

Ongoing Case

1. Privatisation Model for the water industry has failed inMalaysia

S Half of the 13 states experienced financial deficits in water

operations

S By 2008, water sector had a RM1 billion operating deficit

S Total debts owed to federal government by states: RM7.6 billion

S Has not addressed issue of funding



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Lack of understanding of assumptions underlying privatisationS Should contain specific clauses with penalties when companies

fail to comply or project itself fails

S Should ensure government does not continue to underwrite debt

experienced by private company

S Capital expenditure should be borne by government (with

transparent award of contracts), operations may be privatised

S Watch out for cashflow: should not be overly conservative so

concession term is limited

Lessons Learnt from

Ongoing Case



Lessons Learnt from

Case Study

2. Public sector should play a continued role in the provisionof water services

3. Water operations must be holistically managed

S Water services must not be fragmented

S Do not farm out lucrative portions to private companies, with

government bearing burden of loss-making entitiesS Selangor: water treatment companies annual profits of

between US$10 million and US$47 million in 2001, state-owned distribution arm made losses of US$100 million.



Lessons Learnt from

Case Study

4. Clarify jurisdiction of water assetsS Ownership of water assets was under state, but operated by

private company

S Same problems ensued: reducing non-revenue water andreplacing old pipes

5. Government’s continued

“ bail-out

”act

S Private companies continued to receive federated governmentloans and grants

S Despite irregularities, breach of contracts



Lessons Learnt from

Case Study

6. Role of water regulators and operators

S Ensure sustainability and affordability of water resources

S Tariffs commensurate with usage

S But not to ensure rent-seeking operators profit at expense of consumers

7. Political interests cloud reform intentions

S Federal government unwilling to enhance performance standardsS Private operators’ leases instead extended

S Minister has powers to act on “national interest” but no realaction taken



Lessons Learnt from

Case Study

8. Federalism watered downS Federal Government has increasingly centralised powers

S Sub-national/state governments have less jurisdiction to make

decisions



Conclusion:

Water Privatisation?

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Can privatisation of the water services industry work inMalaysia?

S Water services must be treated holistically

S Public authorities must play a continued role

S Clear and rigid rules and regulations must be clarified at outset

S Terms and conditions strictly adhered to

S All levels of governments to co-operate despite politicaldifferences

S Transparent and accountable open tender system



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Thank Youwww.selangor.gov.my

www.selangorku.com

Documents

Presentation Marseilles March2012