Dearer Water is Inevitable
The hefty increase in water tariff of 20 to 60% for domestic consumption and 50 to 60% for commercial and industrial consumers, as announced by the Selangor Mentri Besar Datuk Mohd Khir Toyo on February 21 this year, has raised a hue and cry from many concerned groups and individuals against the State Government and Jabatan Bekalan Air Selangor (JBA).

The Selangor Government says that the main reasons for the increase are due to the rising cost of water production and the continuing 40 per cent loss of potable water in distribution systems.

The consumers, on the other hand, blame it on inefficient management of JBA and the privatisation of all major water treatment plants in Selangor and Kuala Lumpur.

For a balanced view of whether the hefty increase is necessary and justified, it is necessary to carry out a rational in-depth observation and analysis of all available and relevant data on water supply in Selangor and Kuala Lumpur.

Before privatisation, each State Government ran their water supply as a public utility. To make water available and affordable to all, consumers were charged rates that were just sufficient to make water production self-financing, while the costs of capital works were subsidised by the State Government, either from its own funds or through loans from the Federal Government or Asian Development Bank or World Bank.

As a public utility and an essential commodity, water pricing in Malaysia has always been based on the following rationale:

  • Cross-subsidy for domestic consumers by industrial consumers;
  • Higher rates for higher consumption to discourage wastage; and
  • A very low "lifeline" rate to meet the "ability to pay" criterion of the lower-income group to cover basic everyday need for water for domestic purposes.

In the past, the objective of the tariff revision all along has been to ensure that only operating expenditures in water production were recovered from the sale of water, usually over a period of the next 5 to 10 years and taking inflation into consideration.

According to the Malaysian Water Industry (MWI) Report 98/99, there has been a surplus in revenue over operating cost in providing water supply services in all but four states in Malaysia since 1981. The exceptions are Johor, Kelantan, Perak and Selangor, which suffered losses in 1998.

It is interesting, if not significant, to note that of these four states, Johor and Kelantan have privatised their water supply services in its entirety, while Selangor has privatised only the operations and maintenance of treatment plants.

It has been reported in the press that current water production cost in Selangor (prior to the increase in tariffs) is RM1.80 per cu.m., while the return from water sale is only RM0.77 per cu.m.. With the tariff revision, the return from water sale is expected to increase to RM1.14 per cu.m.

It is significant to note that the MWI Report shows the cost of water production in 1998 was only RM0.58 per cu.m., more than three times lower than current production cost.

The above data, if reliable, is rather alarming in two aspects. First, in spite of a hefty increase in water rate, there will still be a huge deficit in revenue to meet the operation cost alone. In order that the operation of the State's water supply services can be self-financing, it certainly looks like another increase of a similar order is imminent.

Secondly, the most glaring figure presented above is the astronomical increase of over 200 percent in water production cost, from RM0.58 to RM1.80 per cu.m. within a span of two to three years.

Alhough no official explanation has been forthcoming from the Selangor Government regarding this astronomical increase in water production costs, the reasons are not too difficult to surmise. The most obvious must be the privatisation of more than 30 water treatment plants to a few selected concessionaires.

With a lack of information on these privatised contracts, consumers cannot help the nagging thought that the State is now purchasing all treated water from these water treatment plant operators at a prohibitive price.

So far, the privatisation of water supply in Selangor has not been carried out on a holistic basis. Only water treatment plants, which is the most direct and lucrative part of a water supply system, are privatised.

More than five years ago it was reported that JBAS was to be privatised to the treatment plant concessionaires. Today, however, the State government is still mulling over it and there still aren't any willing takers in sight.

But how is this going to be possible when JBA will still be facing a significant deficit in operation costs alone even after the recent hike in water tariffs?

Another main reason put forward by the State Government on the recent hike in tariffs is the continuing high percentage of Non-Revenue Water (NRW) in all water supply distribution systems in Selangor and Kuala Lumpur.

NRW is not something new in Malaysia. In Selangor, the overall 1987 NRW level was assessed to be 45 per cent, of which 35 per cent was due to pipe leakage.

Though there has been a drop in NRW, the reported figure of over 40 per cent last year is still very high. Of this 40 per cent, approximately 28 per cent can be attributed to pipe leakage.

Also, while during the last 13 years has seen a slight overall reduction in the NRW in Selangor and Kuala Lumpur, pipe leakage could in fact be increasing when quantity is expressed in terms of litres of water lost through one kilometer of mains in one hour (l/km/hr).

The total length of pipes in service in 1987 was estimated at 7,100 km while the corresponding figure for 2000 was 11,500 km. Therefore in 1987 pipe leakage works out at 2,400 l/km/hr while the corresponding figure for 2000 is 2,990 l/km/hr.

This means that not only were old pipes leaking more severely, but the newly-laid pipes were leaking badly too.

It was announced recently that the Federal Government would provide a soft loan of RM500 million to the Selangor Government to part-finance the replacement of 6,000 km of asbestos cement (AC) pipes in Selangor and Kuala Lumpur.

But based on the above analysis it can be seen that the replacement of AC pipes alone may not be effective in reducing pipe leakage.

The 1988 national NRW study recommended that widespread NRW reduction and control programmes be implemented. In Selangor, several small-scale programmes were initiated during the late '80s and early '90s. But the initial success could not be maintained for long and NRW was soon back to where it was. This failure could very well be due to the lack of political will because NRW projects yield only invisible results and are not glamorous projects like the building of dams.

If only the State had pursued NRW reduction and control programmes, the amount of NRW reduction would, 12 years later today, be significantly enough so that not only the hefty hike in water tariffs might not be necessary, but also the construction of the hurriedly-conceived Sungei Selangor Phase III could be delayed for quite a number of years.

Now after 12 long years, the State government has finally awarded a NRW Reduction contract to a joint-venture company between a local contractor and a British water company, to reduce NRW throughout the whole of Selangor and Kuala Lumpur.
According to an article published in the latest Malaysian Water Association Bulletin No. 34, it is a lump sum contract valued at RM395.1 million and based on an agreed performance target of reducing NRW by 200,000 cu.m. per day over a nine-year period.

The above contract looks good on the surface. Based on the sale of water at RM1.18 per cu.m., the saving of 200,000 cu.m. of water per day would enable the government to recoup its payment to the contractor in less than five years. But examining the contract more closely, it would not be too difficult to see its principal drawback.

At the end of the contract period in year 2009, the water demand is predicted to rise to about 4,750 million litres per day (mld) based on an annual growth rate of 6%. A saving of 200,000 cu.m. of water per day would amount to a NRW reduction of only about 4% - well below the target reduction of 20% for the whole state.

In an area where NRW is high, as in Selangor, the first 10% reduction in NRW (from 40% to 30%) is easy to achieve. But to reduce NRW to below 20% would not be economical viable as the law of diminishing returns would then apply. Reducing NRW by just 4% is therefore chicken-feed. Again, it is regrettable that this exercise is not being carried out on a holistic basis.

In the final analysis, the increase in water tariffs in any water undertakings is inevitable due to increase in the cost of power, chemicals, salaries and the effect of inflation. However, the recent water rate hike in Selangor is not just that and so it did not going down well with the consumers. They blame the State Government for its poor and imprudent management of the water supply services in the state.

For one thing, privatisation has not been the panacea for the Selangor Government has sought for its water problem. By not being carried out in a holistic manner, privatisation has clearly not achieved its declared objective of improving performance and efficiency in management and operation of the State's water supply services.

There seem to be nothing that water consumers in Selangor and Kuala Lumpur can do - except to brace themselves for more possible water tariff increases in the near future. 2007