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Murky figures cloud water tariff hikes

Challenges and issues of governance in water management in Malaysia

by Charles Santiago
Aliran Monthly Vol 25 (2005): Issue 11

start_quote (1K)After 11 months, the (Syabas) concession agreement has not been declassified for public scrutiny.
end_quote (1K)
Charles Santiago

I will discuss the notion of governance and reforms in water management in the public and private sector.

In the first part of this article, I will outline two definitions of governance. In the second section, I will discuss issues and challenges of governance facing water management in the country; and finally, I will briefly propose ideas to improve governance in water management.

The notion of governance

Let us take a look at two sets of definitions of governance: one provided by the World Bank and the other by the UNDP.

The World Bank says that there are two types of governance regimes, one that is good and the other poor. Good governance “is epitomised by predictable, open and enlightened policy-making, a bureaucracy imbued with professional ethos acting in furtherance of the public good, the rule of law, transparent processes, and a strong civil society participating in public affairs.”

How does the World Bank define poor governance? It is characterised by arbitrary policy making, unaccountable bureaucracies, un-enforced or unjust legal systems, the abuse of executive power, a civil society unengaged in public life, and widespread corruption.

The UNDP defines governance in the following way: It is “… among other things participatory, transparent and accountable. It is also effective and equitable. And it promotes the rule of law.”

In short, governance is about the exercise of power in managing a nation’s affairs, in this case the management of water resources.

Specifically, how is power exercised in the governance of water resources in the country?

Water shortages in Kluang

Sembrong Dam, Kluang Johor:

The town of Kluang experienced water shortages between July 2005 and Nov 2005, a five-month period. As a result, water delivery to households was decreased. Some received water every other day and others, once in three days.

But at the same time it was discovered that water in the dam was being channelled to a 2000-acre agri-business that planted papayas, water melons, chilli and oranges. Also, water from the dam was channelled to a 700-hectare oil palm estate. Oil palm is a water guzzler. Both the agricultural farm and the oil palm plantation are located in the vicinity of the Sembrong Dam.

Chemicals, pesticides, heavy metals and fertilisers used by the farmers will pollute the water in the dam, thereby having long-term health consequences for the people of Kluang.

People believe that the state government has compromised the peoples’ right to water. And that the state government has acted in favour of agri-business interests as opposed to the collective interests of 200,000 citizens of Kluang, especially at a time of water shortage.

Why is the state government flouting prudent practice that there should be no development (agriculture or property) in the dam areas or catchment areas?

Still a secret

Let us take a look at the water concession agreement between Syabas and the Federal and the Selangor state governments.

After 11 months, the concession agreement has not been declassified for public scrutiny. Why is the concession agreement still a secret? Is there a role for civil society and consumers in the governance structure of the concession?

As a result of a lack in transparency, consumers in Selangor, Putrajaya and Kuala Lumpur had to find out from ECM Libra, a brokerage company, that there will be an increase in water tariffs. ECM Libra’s 22 April 2005 report said that Syabas would get its first water tariff increase of 15 per cent in January 2006. This would provide the company a windfall profit of RM 50-60 million annually. The concession agreement stipulates a tariff hike of between 5 per cent and 37 per cent. The exact quantum would depend on performance.

In a statement on 11 May 2005, Rating Agency of Malaysia (RAM) had this to say: “since it commenced operations, Syabas has surpassed its performance indicators; we understand from industry sources that it has reduced the non-revenue water (NRW) level in Selangor from 44 per cent in 2004 to 38 per cent. Given these encouraging statistics, RAM feels that Syabas will likely be eligible for the next scheduled tariff increase in January 2006. We highlight that Syabas’ ability to obtain this tariff hike, as per its concession agreement, is necessary towards ensuring the financial viability of its business model”.

Is it possible to achieve a 6 percent decrease in NRW in 4 months? How did RAM come up with this figure? Which industry source is the esteemed rating agency referring to?

Industry watchers including water engineers suggest that RAM’s claim is nonsensical.

How can we be sure there is no active complicity on the part of brokerage firms and other parties to boost the share values of companies by positively recasting their clients with false information and thus misleading potential investors - as we saw in the case of Enron and WorldCom?

Why did the Federal and the Selangor State government, parties to the agreement not respond and rectify the statements if they were indeed misleading? Where was the Selangor Water Regulatory Department, the regulator tasked with ensuring that Syabas fulfils its obligations and safeguards consumer interest?

A crisis of legitimacy

What is the true status of the NRW reduction exercise in Selangor, Putrajaya and Selangor after 11 months of the concession period?

RAM in May 2005 indicated that Syabas had reduced its NRW to 38 percent.

The Executive Chairman of Syabas in a report in the NST Business section dated 23 November 2005 indicated that Syabas had successfully reduced NRW to 38.34 per cent from 42.78 per cent on 1 January 2005. It is interesting to note that this was exactly the claim made by RAM, five months into the concession. (Either there has been no reduction in NRW since May 2005 or the figures are misleading.)

The concession agreement requires Syabas to reduce NRW to 37.8 per cent by 1 January 2006 to merit an increase in tariff. One could posit that the numbers being floated by Syabas is part of a PR exercise posturing for an increase in tariffs in January 2006, since they are within striking distance (0.5 per cent) of meriting a tariff increase.

In August 2005, PABW Sdn Bhd and Premier Ayer Sdn Bhd obtained a court injunction from the Kuala Lumpur High Court to stop Syabas and two other defendants from violating PABW and Premier Ayer’s rights in the contract on Scope of Works For Selangor’s NRW, Phase 2. The injunction order prohibits Syabas from conducting any NRW reduction programme until 14 April 2009. Furthermore, the injunction prohibits Syabas from engaging or awarding contracts to others till the issue is settled.

Clearly, there is a ‘NRW legitimacy crisis’ in Syabas’s accounting of NRW. Its claims are highly questionable. The concession agreement is still under the Official Secrets Act; thus there is no way to know the stipulated criteria required for a tariff change. One would think that, since there is a lack of legitimacy in the NRW numbers that are being floated, there is an urgent need for independent monitoring and verification with government oversight when and if Syabas makes its formal claim for an increase in tariff in January 2006.

Let us stop for a moment and assume that RAM's and the Executive Chairman’s assessments are correct. Would it be possible that Syabas is riding on and benefiting from the NRW reduction exercise undertaken under PUAS management? The federal government in 2003–2004 spent about RM45 million in Klang and another RM45 million in Sabak Bernam to reduce NRW in the state.

Furthermore, in 2000, PUAS contracted PABW Sdn Bhd, a specialist in NRW reduction, to tackle water losses in the state. This is a joint venture between Bristol Water Services and Premier Ayer Sdn Bhd. The project commenced in April 2000 and was scheduled to last for nine years. The aim is to reduce NRW by 200 ml per day. Thus, efforts to reduce NRW had started since 2000, four years before Syabas took over. Also, an amount of RM250 million was given to Syabas as a grant to reduce NRW as part of the privatisation agreement.

Clearly, one might conclude that it was PUAS’ initiative together with the federal government’s finances that was responsible for the reduction of water in the concession area. And therefore, there could be little basis to credit Syabas for the decrease in NRW - if it is true at all. Analysts indicate that if PUAS was given the same freedom of operation and finances that is being given to Syabas under the concession agreement, PUAS could have performed better.

Governance structures needed

We are confronted with the following question: Do the public and private sectors practise good governance or poor governance in water management? Is the public good served in an open, transparent, and democratic manner? Is there enlightened policy making coupled with a bureaucracy committed to excellence and the welfare of the people? And is there strong NGO and peoples’ participation in the management of water resources?

Or, is water management characterised by unaccountable companies and bureaucracies, corruption, neglect of societies’ rights, and the non-involvement of people and NGOs?

The answer to the question is clear; both the private and public sectors have their work cut out in improving governance in water management. Put differently, neither an efficient public sector management nor a competitive private sector can be sustainably achieved without governance structures in place. Thus, instituting a governance structure might be the ultimate challenge for creating value in water sector management in the country.

Suggestions to improve governance in water management:

  • Improve public sector workers commitment to excellence, public service and integrity. Create a distinct separation of roles between public sector employees and politicians. Politicians need to act on the professional advice of the civil service and not the other way around. Presently, politicians have successfully subjugated the civil service in order to promote their personal and political agenda.

  • Launch an all-out war on corruption in the civil service and private sector;

  • Enhance transparency, accountability and good governance by promoting transparency of information. There should be a right of public access to all documents to improve governance.

  • Urgently improve NGO and peoples’ participation in the management of water.

  • Get the private sector to embrace governance values such as transparency, accountability and good governance, integrity and ethics as central to business conduct.

  • Make SPAN ultimately responsible to parliament. It should report to parliament on a yearly basis, outlining its plans, achievements, budgets, and challenges.
Charles Santiago is Coordinator of the Coalition Against Water Privatisation Malaysia and director of Monitoring Sustainability of Globalisation (MSN). This paper was delivered at the 2nd National Utilities Summit 2005: Recreating Value For Business: Challenges For Utilities, organised by ASLI.

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