Tuesday, October 16, 2012

How water privatisation can work ― Koon Yew Yin

How water privatisation can work ― Koon Yew Yin

October 15, 2012
Malaysian Insider --Side Views 
OCT 15 ― The prolonged conflict involving the Selangor state government, the federal government and private company Syabas, over the management and pricing of water resources may give the impression to Malaysians that there is no way in which 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.

Penang’s privatisation experience

On 1 March 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 25 May 2000 to serve as PBAPP’s holding company.

PBAHB was listed on the Main Board of the Kuala Lumpur Stock Exchange on 18 April 2002, with PBAPP as its 100 per cent 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, Penang (SSI).

The “special share” held only by SSI ensures that 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 state government’s requirement on the share holding structure, PBAHB offered 51 million shares at the price of RM1.30 per share to the Malaysian public on 18 April, 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 per cent of the total share holdings for PBAHB and one special share. The PDC held 10 per cent holdings. The remaining 35 per cent 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 public share holding 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 and 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 amongst the lowest in the world. In fact, Penang’s domestic tariffs for consumption of the first 40,000 litres of water per month have not been changed since 1993, during a period in which Penang’s GDP increased by more than 600 per cent in the period 1990-2010.

In other Asian cities ― Jakarta, Singapore, Manila, Tokyo, Kuala Lumpur, Hong Kong, Beijing, Macau, Seoul, Vientiane and Bangkok ― trade consumers pay between RM1.24 and RM4.33 for the first 500,000 litres per month. In Penang, trade 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 Standards. The states 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 state 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 to the safeguarding of state, consumer and worker interest in Penang, the mismanaged privatisation in Selangor has benefitted a smaller group.

According to news reports, CEO of Syabas Tan Sri Rozali Ismail was paid RM5.1 million a year or RM425,000 a month or RM16,346 a day. In contrast, the general manager of PBA is paid a pittance, and the chief minister of Penang as Chairman of PBA received RM8,400 in 2011, according to PBA’s annual report.

Syabas is also alleged to have imported RM375 million worth of pipes from an Indonesian company owned by Tan Sri Rozali Ismail instead of sourcing locally in June 2005. Incidentally, Tan Sri Rozali was at one time the treasurer of Selangor Umno.

Other reports indicate that more than 72 per cent of contracts, worth RM600 million, was awarded through direct negotiation, not open tender process. Between 2005 and 2007, RM325 million could not be accounted for between Syabas public accounts and the records of contracts. RM51.2 million, or 120 per cent more than the RM 23.2 million approved by Jabatan Kawalsetia Air Selangor (JKAS), was spent on Syabas office renovation.

The total debt of the companies given long-term concessions as at December 2008 amounted to RM6.4 billion and necessitated a bail out by the federal government. This shows the fatal flaw of the government’s privatisation programme when it is outsourced to politically connected business interests and rentier 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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