Improving co-operation between infra-state levels to prevent conflicts related to water resources

Federalism 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 Ibrahim Chief Minister of Selangor 14th March 2012

Introducing Selangor

Selangor

Most Developed State

1. 2. 3. 4. 5. 6. 7. The most urbanised and diverse state in that country Capital of Malaysia, Kuala Lumpur, was formerly a part of Selangor; 5 million residents, 2.4% population annual population growth. 51% is of Malay ethnicity, 29% Chinese, 14% Indian, and 6% other ethnic groups, Primary contributor to Malaysias economic growth Most industrial and developed state Requires the best water management possible

Water Management in Selangor: A Case Study

S Malaysia: A Federated Nation S 13 State Governments and 3 Federal Territories S Water services industry: Original jurisdiction under respective state authorities S Selangors Water industry S Selangors water industry was also under state authority S Was a profitable business, generating revenue S Between 1997 2005, water treatment and distribution services were corporatised and then privatised

Under State Government

Treatment Operators: SPLASH/ABASS/PUNCAK

Distribution Operator: SYABAS

All Water Assets Owned by the Selangor State Government

Privatisation of Water

S Privatisations Objectives S Transfers decision rights and ability to profit to private owner
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

S Promotes Competition S 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 Ineffective regulatory structures Unsustainable funding structure Low cost recovery

High CAPEX

Inefficient operations

Lack of maintenance

Poor services to water consumers

Poor asset conditions

High NRW

Changes to the Water Services Industry

S Imbalance in water services industry S 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 state government to both state and federal governments S National Water Services Commission formed as regulatory body

Changes to the Water Services Industry

S Private operators with greater restriction S Ideally, operations returned to state authorities

State Governments Efforts

S 3 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 in Malaysia

S S S S

Half of the 13 states experienced financial deficits in water operations By 2008, water sector had a RM1 billion operating deficit Total debts owed to federal government by states: RM7.6 billion Has not addressed issue of funding

Lessons Learnt from Ongoing Case

S Lack of understanding of assumptions underlying privatisation
S 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 Case Study

2. 3.

Public sector should play a continued role in the provision of water services Water operations must be holistically managed
S S S

Water services must not be fragmented Do not farm out lucrative portions to private companies, with government bearing burden of loss-making entities Selangor: water treatment companies annual profits of between US$10 million and US$47 million in 2001, stateowned distribution arm made losses of US$100 million.

Lessons Learnt from Case Study

4.

Clarify jurisdiction of water assets

S S

Ownership of water assets was under state, but operated by private company Same problems ensued: reducing non-revenue water and replacing old pipes Private companies continued to receive federated government loans and grants Despite irregularities, breach of contracts

5.

Governments continued bail-out act

S S

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 Political interests cloud reform intentions S Federal government unwilling to enhance performance standards S Private operators leases instead extended S Minister has powers to act on national interest but no real action taken

7.

Lessons Learnt from Case Study

8.

Federalism watered down

S S

Federal Government has increasingly centralised powers Sub-national/state governments have less jurisdiction to make decisions

Conclusion: Water Privatisation?

S Can privatisation of the water services industry work in

Malaysia?

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 political

differences S Transparent and accountable open tender system

Thank You
www.selangor.gov.my www.selangorku.com