Holistic model the best way to solve Selangor water impasse

By Dr. Dzulkefly

Once the buzzword of the Malaysian political economy, privatisation has now come to be looked upon with much suspicion and at times, scorn and disdain. Well almost. But why the reversal of perception, you ask?

Privatisation and its precursor Malaysia Incorporated, the hallmark and brainchild of former prime minister Tun Dr Mahathir Mohamad, were strategic measures meant to spur growth through a “smart partnership” between the government and the private sector. Despite the good intentions, the implementation of both policies has not always been well understood, much less, well worked out.

After three decades, while it’s a struggle to shortlist the success stories, the list of failed privatisations gets longer. Sewerage company Indah Water Konsortium; the light rail transit (LRT) systems — both Putra and Star; the KL monorail; transport companies Parkmay and Intrakota; the Bakun power plant; Konsortium Perkapalan Bhd; Time dotcom; and national carrier Malaysian Airline System Bhd all cost the rakyat in the end. Billions of ringgit were spent to bail out these debt-ridden privatised entities in the name of safeguarding the “national interest”.

Privatisation was fundamentally premised on making private entities run efficient businesses and free the federal government from having to fund them. But evidently, privatisation has failed for the very same reasons it was done in the first place — to finance capital investment and improve efficiency.

Specifically, it is due to the very high capital costs and long gestation period, along with the inability to implement the promised tariff levels, which could cover costs and earn the desired rate of return, that could very well have induced the private entities to behave recklessly at times. The case of the privatisation of Selangor’s water supply demonstrates this. Syabas headquarters in Jalan Pantai Dalam, Kuala Lumpur.

For the record, let it be remembered that when the federal government privatised the state entity of Jabatan Bekalan Air Selangor (JBAS) in 1994, it was a profitable state outfit, earning an annual profit of RM50 million to RM95 million a year

True to the criticism of privatisation that “profit is privatised and losses are nationalised (or socialised)”, very unfortunately, only the profitable water treatment services of JBAS were privatised, while it kept the loss-making water distribution business.

Three different water treatment companies were granted 20 to 25-year concessions to treat water and sell it to JBAS for distribution — Puncak Niaga Sdn Bhd (PNSB), Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (Splash) and Konsortium Abbas Sdn Bhd. JBAS, the loss-making entity, was later corporatised as Perbadanan Urus Air Selangor (Puas).

While the three companies were making RM35 million to RM180 million profit, JBAS’ profit dwindled to RM7 million in 1995, and in later years as Puas it suffered losses to the tune of RM350 million.

When Puas was finally privatised to become Syarikat Bekalan Air Selangor (Syabas) in 2005, it had an accumulated debt of RM2 billion. Tan Sri Rozali Ismail’s Puncak Niaga Holdings Bhd (PNHB) controlled 70% equity while the then state government companies Kumpulan Perangsang Selangor Bhd (KPS) and Kumpulan Darul Ehsan Bhd (KDEB) held an equal 15% equity interest each in Syabas.

The water industry is the best example of the failure of privatisation burdened by a very high capital investment, much as it was also fragmented, inefficiently run and supplying low quality water.

The four water concessionaires built up a total debt of RM6.4 billion, compared with their combined assets which are worth RM4.7 billion. Puncak Niaga and Syabas together are reeling under a total debt of RM4.2 billion, while Splash and KPS unit Konsortium Abass have net debts of RM1.6 billion and RM640 million respectively.