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How water privatisation, not ‘piratisation’, can work

The prolonged conflict involving the Selangor state government, the federal government and privatised water company Syabas over the management and pricing of water resources may give Malaysians the impression that there is no way any privatised concern and commodity can ever work to the advantage of consumers.

This is a wrong impression. Privatisation can work and the screwing up of public interest or “piratisation” can be avoided.

Perhaps the most outstanding example of successful privatisation in the water sector comes from Penang. How this best practice in privatisation was implemented is important for our public and policy makers to learn from.

On March 1, 1999, Perbadanan Bekalan Air Pulau Pinang or PBAPP, was incorporated to replace the Penang Water Authority. As a holistic and integrated water supply operator, PBAPP’s scope of activities covers the extraction of raw water, treatment of raw water, distribution and supply of treated water and billing for water supply services.

An all-encompassing scope of responsibility was one of the three key elements for the successful privatisation and public listing of PBAPP.

This sensible approach ensures that the company manages and controls all key activities related to the water supply and not merely selected processes in the water supply chain.

The sorry history of what took place in the case of Selangor, in which four separate companies were given concessions to treat and distribute water, shows that privatisation of specific components in a utility service will invariably lead to misunderstanding and disputes, and massive leakages.

PBAPP’s corporatisation provided a stepping stone towards public listing. A new company, PBA Holdings Bhd, or PBAHB, was set up on May 25, 2000, to serve as the PBAPP holding company.

PBAHB was listed on the main board of the Kuala Lumpur Stock Exchange on April 18, 2002, with PBAPP as its 100-percent-owned subsidiary. In the initial public offering, PBAHB had an authorised share capital of 1,000,000,001 ordinary shares of RM0.50 each and one special share that may be held only by the State Secretary Incorporated, Penang (SSI).

Consistent with state policies

The “special share” held only by SSI ensures that in major decisions affecting the operations of PBAHB, PBAPP and all other subsidiaries remain consistent with state policies and the public interest.

To meet the public spread and the Penang government’s requirement on the shareholding structure, PBAHB offered 51 million shares at the price of RM 1.30 per share to the Malaysian public on April 18, 2002. Beneficiaries of the IPO included eligible employees and retirees of the PBA group of companies, thus giving the workers and management a stake.

In 2002, immediately after the IPO, SSI held 55% of the total share holdings for PBAHB and one special share. The PDC held 10% holdings. The remaining 35% were taken up by institutional investors, the Malaysian public and PBAPP’s employees. The PBA Group’s shareholding spread has remained generally constant until now.

We can see that the public shareholding represents the second key element for successful privatisation as it compels an organisation to be results-driven and performance-oriented.

A listed company also provides a platform for public stakeholder accountability. Customer satisfaction becomes a key factor in corporate performance for a company that operates and serves in the public eye.

State government control represents the third crucial element as it safeguards public interest. Water supply is an essential service and this mechanism ensures that the consuming public and businesses in the state are provided with a continuous, good supply of water at reasonable tariffs.

Penang’s track record

In April 2010, the National Geographic magazine published a comparison of domestic water tariffs charged in cities worldwide. According to the study, Penang’s domestic water tariffs were among the lowest in the world.

In fact, Penang’s domestic tariffs for consumption of the first 40,000 litres of water a month have not been changed since 1993 during a period in which Penang’s GDP increased by more than 600 percent in the period 1990-2010.

In other Asian cities – Jakarta, Singapore, Manila, Tokyo, Kuala Lumpur, Hong Kong, Beijing, Macau, Seoul, Vientiane and Bangkok – commercial consumers pay between RM1.24 and RM4.33 for the first 500,000 litres of water a month. In Penang, commercial consumers paid only RM1.19 in 2010

Finally, it is important to note that besides having the most consumer-friendly water tariffs in Malaysia, the tap water quality in Penang complies with the National Water Quality Standard.

Penang’s NRW or water loss percentage is also the lowest in Malaysia. This shows that we can have quality and efficiency in privatisation, so long as it is implemented rigorously and with the public interest and welfare in mind.

Comparing Penang and Selangor

How and why Selangor, under its former Mentri Besar. Khir Toyo, took a different road from that of Penang is a story that needs to be uncovered. But the disastrous outcome is clear.

In comparison with the safeguarding of state, consumer and worker interests in Penang, the mismanaged privatisation in Selangor has benefited a smaller group. According to news reports, the CEO of Syabas, Rozali Ismail (left), is paid RM5.1 million a year or RM425,000 a month – or RM16,346 a day – as salary.

In contrast, the general manager of the PBA is paid a pittance and the chief minister of Penang, as chairperson of the PBA, received $8,400 in 2011, according to PBA’s annual report.

Syabas is also alleged to have imported RM375 million worth of pipes in June 2005 from an Indonesian company owned by Rozali Ismail, instead of sourcing the pipes locally.

Incidentally, Rozali was at one time the treasurer of Selangor Umno. Other reports indicate that more than 72 percent of the Syabas contracts, worth RM600 million, were awarded through direct negotiation, not by the open tender process.

Between 2005 and 2007, a total of RM325 million could not be accounted for between Syabas public accounts and the records of contracts. A sum of RM51.2 million, or 120 percent more than the RM23.2 million approved by Jabatan Kawalsetia Air Selangor (JKAS), was spent on renovating the Syabas office.

The total debt of the companies given long-term concessions as at December 2008 amounted to RM6.4 billion and necessitated a bailout by the federal government.

This shows the fatal flaw of the federal government’s privatisation programme when it is outsourced to politically-connected business interests and renter groups, unlike what was implemented in Penang.

It has also given privatisation in Malaysia a bad name, even though selective privatisation in other countries, when carried out judiciously and in complete transparency, can yield public gains in efficiency and cost savings.

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