Is it viable to privatise PUAS?

Negotiations involving the Federal Economic Planning Unit, the State Government and a private company have been going on for the past five or six years on the privatization of the Government-owned corporation, Perbadanan Urus Air Selangor Bhd. (PUAS) which has been having increasing difficulty managing the water supply system in Selangor, Kuala Lumpur and Putrajaya. One was given to understand that the main reason for the protracted negotiations and the long delay in the signing of the concession agreement was the "ringgit and sen" aspect over which the parties have been haggling all these years.

The present Selangor water tariff is too low for any operator to manage water supply with a reasonably satisfactory level of service. To make matter worse, a few mega water infrastructure projects were privatized to concessionaires with high bulk sale rates. Hence the huge accumulated debts, which PUAS is owing to the three water supply concessionaires.

Datuk Seri Dr Lim Keng Yaik the Minister of Energy, Water and Communications announced soon after taking office a number of his own initiatives and strategies to revamp the management of the ailing water supply sector. To-date his most important announcement is the putting on hold all privatization deals until his new ministry has carried out a study, establish a Federal Commission to oversee privatized water supplies and set up benchmarks to regulate water supply services. This announcement gave water consumers in the whole country hopes that water supply from now onwards will be gradually put on a correct footing which the previous administration has failed to achieve despite several attempts to do so.

Dr Lim had repeated his announcement several times, much to the delight of consumers. Then came the bombshell last week, Dr Lim's second most important announcement: that privatization of PUAS has to go ahead now without waiting for the setting up of the properly thought of regulatory devices (NST Business Times, 26/10). Dr Lim's reason for his latest announcement was the deteriorating financial condition of the State's corporatised water supply operator, PUAS.

Why this sudden about-turn decision of Dr Lim after giving such great hopes to consumers? The discerning public will surely ask: Where is the credibility of the Government? PUAS has been in difficult financial straits for so long and so what is the difference in waiting for a few more months for an orderly transition? Is there an unseen hand responsible for this sudden about-turn decision? The general public are both disappointed and confused and perhaps the Government also may be confused.

Why in the first place should there be such a dramatic announcement on the reorganization of water supply administration without first carrying out a proper study? Why people at the Federal central agency, least qualified on this subject, are given such immense powers to make decisions?

It is not difficult to pinpoint the problem but it is not so easy to find "quick-fix" solutions to the problems. Privatisation of PUAS is merely the easy way out, that is, to transfer the problem to a private company to create a bigger problem later on.

Here are some of the problems:

  • State Governments, which have been managing water supply for decades satisfactorily, have actually no problem.
  • The only problem is that due to rapid development, water supply infrastructure construction that is needed is not keeping pace with increasing demand because of increasing cost of construction.
  • The water tariff is too low and occasional increases approved have been insufficient to pay for the building of costly new infrastructures.
  • To solve this problem of lack of funding, the Federal agencies have since 1985 advocated a policy of privatization of projects, proven to be disastrous in some mega public projects resulting in Government bail outs.
  • Federal Government agencies never admit faults in the privatization policy and even after nearly 20 years of implementation do not bother to make the necessary course correction needed. Perhaps Pak Lah, in setting priorities for the next four years, will also consider correcting the mindset of each agency housed in the ivory tower for so long.
  • On paper, the privatization of PUAS is not viable unless the water tariff is raised substantially.
  • The Government does not seem to understand that the private company that inherits the financially insolvent PUAS and come out with money to put things right has to obtain its funds from somewhere and the company has to get money back over a period of time to pay dividends to shareholders and repay the lenders with interest.
  • The "ringgit and sen" has to come from consumers at the end of the day. Consumers have to face this fact. The deficit is too huge for the Government to subsidize.

Here's a temporary solution:

  • Continue to put on hold further water supply privatization deals.
  • Federal Government provides soft loans or grants to the Selangor State Government to tie over difficult period until a permanent solution is found. For PUAS to take a loan at commercial interest is suicidal.
  • Increase immediately tariff not by 2 to 4% as reported recently but by 20 to 40% as required.

Maybe Dr Lim, who has a track record of firm commitments to any of his ideas, has been wrongly advised to make such an about-turn decision by people who do not or refuse to see the bigger picture in water supply privatization. Let's hope that he will make another about-turn to come back to status quo! In the mean time the public have to wait until Dr Lim's ministry has completed the study.

1. The above was published in NST on Nov 4, 2004.
2. The above was jointly prepared by me and my good old friend, LCC. 2007