Water Governance in Peninsular Malaysia: Strategies for Reform. MOHAMAD, Jamilah, MUSTAFA, Firuza-Begham and WAN-SOBRI, W.M.A. Department of Geography

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1 Water Governance in Peninsular Malaysia: Strategies for Reform MOHAMAD, Jamilah, MUSTAFA, Firuza-Begham and WAN-SOBRI, W.M.A. Department of Geography University of Malaya Kuala Lumpur, Malaysia Abstract: The responsibility for water resource administration is shared between various agencies under both the Federal and State Governments in Malaysia. The Federal agencies are responsible for the planning, research and development of water resources, while the State agencies are responsible for water supply infrastructure development including financing, operation and maintenance. However, in view of the need for a more holistic approach in water resources planning and development, the Malaysian Government has introduced the Water Services Industry Act (WSIA) of 2006 to regulate the water industry in the country. The National Water Services Industry Commission (SPAN) was also established and employs the WSIA as regulatory tools to regulate the national water services industry in terms of licensing, supervision and monitoring. The idea of consolidation is to centralize the water assets and put the onus of developing the water infrastructure on the Federal Government, who will then lease them back to the asset operators who can then focus on providing clean and reliable water supply under a more regulated landscape. The exercise was to involve twelve States in Malaysia including the Labuan island which is under Federal Government territory. To date, only three States have completed the migration to the new licensing framework which is a reflection of the complexity of the exercise. The paper will review the current national situation with a particular concentration on the State of Selangor which is the economic powerhouse of Malaysia. A case is to be made for good water governance which involves more than just efficient government institutions but also more effective relationships between government and civil society in ensuring that all stakeholders water needs are considered and that the institutions responsible are accountable to them.

2 1. Introduction There are some 150 rivers in Peninsular Malaysia and about 50 river systems are found in Sabah and Sarawak. Rivers in Malaysia have played a major role in shaping and influencing the development of the nation and cultures of its peoples. The city of Kuala Lumpur, the capital of Malaysia, was itself founded at the confluence of the Kelang and Gombak Rivers. Together, the rivers in Malaysia supplied 97 percent of the country s raw water. Nonetheless, they are receiving the impact of rapid growth through land development, urbanization and industrialization. Serious environmental problems have slowly crept into many river basins of Malaysia with the attendant problems such as flooding, water pollution, sedimentation and indiscriminate squatter housing. Based on the monitoring done by the Department of Environment in 2009 on 577 rivers, 307 (53%) were categorized as clean, 216 (38%) are slightly polluted while the rest were categorized as polluted. According to the Malaysia Water Industry Guide, as of end 2008, some 96.5 percent and 85.3 percent of the urban and rural population respectively enjoyed clean water supply. Lately, the phenomena of water shortages, although rare in the past, has been occurring quite often in some urban areas especially during the drought season. The country s water requirement is expected to increase by 60 percent to 18 billion cubic metres in 2050 compared to 11 billion cubic metres in There is genuine concern that the supply of water to the public would not be able to keep pace with the country s population growth. Increasingly, the realization has set in that there is an urgent need to ensure that the country s water resources be managed in an integrated and holistic way to ensure sustainability in the supply. 2. The background situation Under the Malaysian Constitution, water is a State matter. Nevertheless when it comes to water resources development, utilization and management, both the Federal and State Governments are involved. This is because the responsibility for water resource administration is fragmented and is shared among a number of Federal and State agencies, each of them having their own specific involvement in water related issues (Elfitrie et. al., 2004b). The jurisdiction and legislative power in the aspect of water distribution between Federal and State Governments is in accordance to the Legislative Lists of Federal Constitution which comprises Federal List, State List and Concurrent List. Their interest in water related matters could be viewed as from any one or more of the following three aspects: (i) the aspect of planning, development and management of water resources; (ii) the aspect of protection and conservation of water; and (iii) the aspect of land-use control and watershed management.

3 The Kelang River Basin, on which is located the highly-urbanized Kelang Valley metropolitan area in Peninsular Malaysia, administratively involves a State authority and two Federal Territories. The administrative units include Selangor State, Kuala Lumpur and the Putrajaya Federal Government Administrative Center. The Basin is currently the fastest developing area in the country. The Kelang River Basin is an important watershed in Malaysia with a total area of 1290 sq. km and a length of over 700 km. The climate of Kelang River Basin generally is hot and wet with an average annual rainfall of between mm. A number of large scale socio-economic projects have either taken shape or are currently being completed in the Basin. The increase in population coupled with the growth and expansion of the economic activities inevitably lead to increasing demand for water for diverse purposes: domestic, industrial, and agricultural use, hydropower, navigation, recreation, etc. There are a number of government agencies, private sectors, local authorities, and NGOs that are involved in managing river and water resources in the Kelang River Basin and had initiated to a certain degree activities pertaining to realization of goals of an integrated water resources management approach. The problem of integrated management lies in developing cooperation and collaboration among the agencies to ensure the well being of the basin itself. This includes issues of conflict resolution, information management and transboundary organization. The administration of rivers and water resources in this basin is being carried out by the Federal and various State Government agencies. The Federal agencies are generally responsible for the studies, planning and development of the water resources. The State agencies are responsible for water supply infrastructure development including financing, operation and maintenance (refer Table 1). The Federal Government agencies include the Department of Environment (DOE), Malaysian Meteorological Service (MMS), Public Works Department (PWD), Health Department, Department of Agriculture (DOA) and the National Hydraulic Research Institute Malaysia (NAHRIM). The State Government agencies include Water Supply Department (JBA), Forestry Department, Selangor Water Management Authority (LUAS), Local Authorities (PBT) and Land Office. Agencies which were established both at the Federal and State levels include the Department of Irrigation and Drainage (DID), Department of Town and Country Planning (JPBD), Fisheries Department, Wildlife Department and Veterinary Department. 3. The new industry model - Water Services Industry Act 2006 The Water Services Industry Act 2006 (WSIA) ushered a new era for the water industry. Under the provisions of WSIA, the Federal Government shall have executive authority with respect to all matters relating to water supply systems and water supply services throughout Peninsular Malaysia and the Federal Territories of Putrajaya and Labuan. The rationale for this was to ensure quality and reliability

4 where water supplies and sewerage services are concerned. A new regulator for all the States, the Suruhanjaya Perkhidmatan Air Negara (SPAN), was established under the provision of the National Water Services Commission Act 2006 and employs the WSIA as regulatory tools to regulate the water services industry in term of licensing, supervision and monitoring. Pengurusan Aset Air Bhd (PAAB) was formed in May 2006 paving the way for the Federal Government s new regime, aiming to consolidate ownership of and responsibility for funding water assets in Peninsular Malaysia and Labuan (in the Eastern Malaysia State of Sabah), hence separating the roles of water operator and asset owner. The intended goal of the Federal Government is to achieve full-cost recovery and financial independence by all the operators and PAAB. Suruhanjaya Perkhidmatan Air Negara (SPAN) is the appointed regulator for the industry and decides on tariff rates and water requirement needs. Under the new regime, all capital expenditure required for the plant-up of additional capacity and the maintenance of existing and future assets are or will be financed by the Federal Government (via a financing conduit, Pengurusan Air SPV Bhd., a wholly-owned subsidiary of PAAB). PAAB plans to sell bonds to fund the programme. Operators are to submit 30-year master plans and rolling three-year business plans to SPAN, detailing the expansion and maintenance strategies for these assets. Operators (be they State or private) that do not perform up to SPAN s requirements risk having their licences revoked. Under the new industry model, the operators core functions include monitoring the quality of water resources (still owned by the respective States), treating raw water, distributing water to consumers, monitoring water loss and running the water assets that have been leased from PAAB. In terms of the progress in restructuring, migration of the first three States, i.e. Negri Sembilan, Malacca and Johor, had gone quite smoothly. The Government bought water assets in Malacca for RM 889 million in December 2008, and subsequently, bought water assets in Negeri Sembilan for RM 1.21 billion in early In the northern region, two of Berjaya s Infrastructure Sdn. Bhd. subsidiaries, Air Utara Indah Sdn Bhd and Metropolitan Utilities Corp Sdn Bhd. are the water-treatment operators in Kedah and Perak respectively. Taliworks Corp Bhd subsidiary, Taliworks (Langkawi) Sdn Bhd.is currently the O&M service provider for Langkawi water infrastructure. Based on the sound operating track records of these companies, they are expected to retain their roles after the migration. 4. The Selangor Saga The Selangor State water sector restructuring exercise then is part of a national initiative to regulate the water services industry. In Selangor and the Federal Territories of Kuala Lumpur and Putrajaya, water supply distribution has been privatized earlier. Selangor s water supply chain is crowded by four

5 private concessionaires- Syarikat Bekalan Air Selangor Sdn Bhd (Syabas), Puncak Niaga Sdn.Bhd., Syarikat Pengeluar Air Sungai Selangor Sdn. Bhd. (Splash), and Konsortium Abass Sdn Bhd. Although the original deadline of December 2008 had passed, the Selangor State Government (initially) and PAAB now) have yet to convince all four concessionaires to migrate to its licensing scheme. The delays are mainly due to disagreements over valuation methods used, i.e. NBV versus a discounted cash flow method favoured by the concessionaires. Selangor, incidentally also Malaysia s richest State, is expected to face water shortages by 2014 unless the fragmented industry is restructured. In early 2009, the Chief Minister of Selangor (akin to chief executive officer for the State) announced that the State, through its Kumpulan Darul Ehsan Bhd unit, intended to buy all the region s water assets. Selangor wants control over the State s water distribution rights, especially as it plans to continue supplying the first 20 cubic metres of domestic water free, as outlined in its 2008 election manifesto. It costs the State RM 120 million annually to give the free water to consumers. The State Government is estimated to own between 70 percent to 80 percent of all water assets in Selangor. Once the acquisitions are completed, Kumpulan Darul Ehsan will transfer the assets to the Federal Government at a price that should cover the cost of taking over the water concessions. The State is keen that there should be one operator that manages the water operation, hence taking back the concession. The State hopes that, once the reorganization is completed, the system would be upgraded and ageing water pipes be replaced to reduce water leakage from 30 percent to 15 percent. Puncak Niaga Holdings, which sells water to Selangor and Kuala Lumpur residents as the country s biggest supplier, had outstanding debt of RM 4.02 billion, almost three times the company s common equity (Starbizweek, 24 January 2009). The State Government estimated that Selangor s water assets are worth between 10 to 15 times the RM1.21 billion the Federal Government had spent to take over operations in Negeri Sembilan. The State Government s valuation would reflect how much will be needed to compensate operators for the early termination of their contracts, taking into account the value of the assets, the debt, and how much has been invested. The State Government then made an offer to the concessionaires on February 13, 2009 to buy the assets and concession equity at RM 4.6 billion and RM 1.1 billion respectively. Syarikat Bekalan Air Selangor (Syabas), Puncak Niaga (M) Sdn Bhd, Syarikat Pengeluar Air Selangor Sdn Bhd (Splash) rejected the offer. Konsortium Abass Sdn Bhd has indicated that it wants to negotiate directly with the State Government. About two weeks later, PAAB (for the Federal Government) made an offer worth RM 5 billion to buy all water assets (on the equity side, the State can still proceed) from the four water concessionaires in Selangor. The Federal Minister said that the four companies should decide if they want to migrate to a

6 licensing regime or stay on as concessionaires, and agree to the one time book value of their assets. The Federal Minister added that, should they remain as concessionaires, they will not get incentives such as cheaper loans to upgrade their facility. As the WSIA states, the Federal Minister is empowered to decide on water issues and this initiative is taken ahead of a scheduled 31 percent tariff hike which had been provided for in the earlier concession agreements. Nonetheless, just before the Federal Government s extended deadline to complete the sector consolidation by June 30 th, 2009 is over, the State Government pumped up its offer to the four water concessionaires to buy their respective water assets and operations. The State Government would only take over liabilities inclusive of bonds issued specifically for water-related operations. The Selangor Government valued all the concessionaires water-related assets based on one time net book value, as specified by the Federal Government via Pengurusan Aset Air Bhd (PAAB), the party tasked to take over all the States water assets nationwide. The revised offers are subject to conditions that the sale of water assets to PAAB must be done simultaneously by the Selangor Government and the issuance of licence under the WSIA 2006 (Act 655) by SPAN via a nominee company for the distribution and water treatement in Selangor, Kuala Lumpur and Putrajaya. The June 30 deadline could not be met due to the tight schedule. In February 2010, the Federal Government proposed joint ownership of Selangor s water operations by the State and concessionaires as it looks for a middle ground to resolve the deadlocked water restructuring scheme. The Energy, Green Technology and Water Ministry has proposed equal ownership of the operations and maintenance of the State s water assets, including that of Syarikat Bekalan Air Selangor Sdn Bhd (Syabas). PAAB will own the asssets, in line with the industry s restructuring initiatives mooted two years ago. Selangor State Government when presented with the joint ownership proposal is believed to have agreed in principle but on condition that there will be a total revamp of Syabas management. Selangor owns a 30 percent stake in Syarikat Pengeluar Air Selangor Sdn Bhd (SPLASH) via Kumpulan Darul Ehsan Bhd and 55 percent in Konsortium Abass Sdn Bhd. SPLASH and Abass are the water treatment operators and supply treated water to Syabas, which handles the distribution. The State also owns 30 percent in Syabas while Puncak Niaga Holdings Bhd (PNHB) holds the remaining 70 percent. The third water treatment player in the State is Puncak Niaga Sdn Bhd (PNSB), which in turn is 100 percent owned by PNHB. If everything goes as planned, the State will most likely have control over Abass and SPLASH post-restructuring. But it must first get the nod from SPLASH s other major shareholders, namely Gamuda Bhd, which has a 40 percent stake, and Sweet Water Alliance, which has 30 percent.

7 The latest twist to the saga came in March Gamuda Bhd via 40 percent-owned associate - Splash made an offer to the Selangor Government and the Federal Government to take over Selangor s entire water-services industry, in exchange for a 30-year concession to enable the recovery of its proposed RM billion investment. It deemed that the proposal would bring a holistic approach to the management of water services in Selangor, with Splash assuming responsibility for both the treatment and distribution of water. Bringing both activities under one roof should streamline the sector s operating costs by giving a single entity full control over its production expenses-something not achievable in a State crowded by four concessionaires. These same concessionaires also stand to gain from better exit prices - should they accept the offer. Meanwhile, SPAN s uniform regulation of all State water services would remain intact; the Federal Government would also be relieved of another burden of having to fund an expensive, upfront takeover of the Selangor water sector. However, this proposed offer seems to run against the fabric of the Federal Government s new regime, which seeks to have PAAB consolidate ownership of these same assets on a national level. The RM billion offer received an immediate reaction from the Federal Minister who said that the offer is against the spirit of the law. The WSIA 2006 aims to promote an asset-light environment in which water service companies focus on operations and maintenance while PAAB owned the assets. The contention is how to guarantee the security of water supply to Selangor, Kuala Lumpur and Putrajaya in the event of Splash running into financial difficulties. PAAB is cautious that all acquisitions must be made on right terms to ensure the ultimate goal of providing affordable and more equitable water tariffs to the public. 5. Some Governance Issues The Institute of Water Policy (IWP) at the Lee Kuan Yew School of Public Policy, NUS is the knowledge hub for water governance in the Asia and Pacific region. IWP defines water governance broadly as the set of water laws, policies, programs and projects adopted by a country or a State to develop and manage its water resources to meet the current and future needs of its population. A recent workshop on water governance by the LKY School agreed that the Dublin Principles are still the right principles for promoting water governance. The Dublin Principles were initially adopted at the United Nations Conference on Environment and Development (UNCED) in Rio de Janeiro in June The Dublin principles were an attempt to concisely state the main issues and thrust of water management. Principle 2 states that water development and management should be based on a participatory approach. Meaningful participation is associated to well-defined national policies for which water is

8 either a main component or a relevant input. Policy implementation is usually associated with socially acknowledged, relatively well informed, government organizations with adequate capabilities and appropriate legal mandates. Review of experiences strongly suggest that the institutional dimension of water management is a system where relatively successful water management experiences have included a balance of government institutions and policies and stakeholders participation. It is clear that responsibility for water management at the national level is not to be delegated to a water-using sector, but to an independent authority. Governments are resorting to conciliation mechanisms and preventive strategies in order to manage water related differences and coordinate activities, with a view to achieve the several objectives, and satisfy the multi-demands, usually associated to water resources. The process to democratize water decision-making and water-related activities should take place through public hearings, stakeholder involvement in administrative bodies and the organization of user associations, amongst others. In Malaysia, according to the Town and Country Planning Act 1976, private sectors, NGOs and CBOs are encouraged to participate in consultation for water sector development project and provide a collaborative decision making framework in preliminary water resource planning in national and local development plans. Although the participation of NGOs and CBOs in planning water resources is encouraged, the implementation of development plans and projects are still handled by the related ministries and agencies. There is a lack of a provision that allows for active and effective participation of local communities and NGOs in the management of water resources. In order to ensure the integration of upstream and downstream management, the administration boundary should be based on the river basin boundary. The development of multi-stakeholders agency is needed in order to anticipate and resolve water-related challenges across traditional political boundaries and focus the laws, policies, programs and projects of various communities toward more efficient, integrated solutions (Mokhtar and Tan). 6. Conclusion According to a UN-Habitat study in 2003, the only generalization concerning improved water management that is valid across all the world s cities is the need for good governance. For most cities, there is a need for water governance systems that can improve watershed management, lessen the ecological disruptions caused by water withdrawals and make better use of existing water resources. In Malaysia, there is a need to enhance understanding on the concept of water governance and to determine the current best practice in water governance worldwide to achieve sustainable water management. As seen in this paper, there is a need to identify and propose

9 References counter-measures to deal with institutional barriers hindering the achievement of those policies and measures to improve water governance. R. Elfitrie, M. B. Mokhtar, A. H. H. Shah and S. Idrus. (2004b). Collaborative Decision-Making within Integrated Water Resources Management. Institute for Environment and Development (LESTARI), National University of Malaysia. C. S. Lee. Malaysia s Experience in Integrated River Basin Management. River Engineering Division, Department of Irrigation and Drainage, Malaysia. M. B. Mokhtar, K.W. Tan. Integrated Water Resources Management In Malaysia: An Effective Institutional Framework. Institute for Environment and Development (LESTARI), National University of Malaysia. Starbizweek, 24 January Selangor aims to take over water assets in March. StarBiz, 27 February RM 5 bil offer for water assets. The Edge Malaysia, January 25-January JV mooted to end water deadlock. Starbizweek, 10 April 2010 Affordable and more equitable water tariffs

10 Table 1 : Functions of Department and Agencies No. Department/Agency Function 1 Water Water works Department Water supply source works. Supply Treatment and supply water drinking. 2 Watershed Management 3 Water Pollution Control 4 Water Quality Management Department of Irrigation and Drainage Tenaga Nasional Berhad Syarikat Bekalan Air Selangor (Syabas) Forestry Department Town and Country Planning Department of Irrigation and Drainage LUAS NAHRIM Department of Environment Indah Water Consortium Local Authorities Department of Environment Fisheries Department Chemistry Department Department of Irrigation and Drainage Irrigation water source development. Monitoring stream flow and irrigation water supply. Hydropower source works development. Water use for hydropower. Water supply for Selangor State and Kelang Valley Protection of Forests reservoir Land use planning and control Protection of watershed upstream of reservoirs water resources, water catchments and coastal areas in Selangor Research and development of water resources sector, rivers, coastal area and water quality. Control of industrial and development pollution Control and treatment of sewage water Control and collection of solid waste Monitoring of water quality Prohibition of use of poison or destructive methods for fishing. Analytical services on water samples monitored Planning, construction and maintenance of drainage works Source : C.S.Lee