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Date: 25th OCTOBER 2021 (MONDAY)


When government begun National Water Services Industry Restructuring (NWSIR) in 2003, it was to fix the problematic industry that was heavily politicised and operating with various failed models. The last of the failure was Indah Water Konsortium (IWK) bail out using tax payers’ money in 2001. NWSIR is implemented using Water Services Industry Act 2006 (WSIA) model. One of the core parts of the NWSIR is to address the financing and the recouping of cost (via water tariff) to achieve efficient and sustainable water services industry. Thus, a transparent and equitable Tariff Setting Mechanism (TSM) was developed and agreed upon in 2009.

Tariff Review Process is Already Completed in 2 Phases

The Environment and Water Minister was quoted in a news (Berita Harian, 16th October 2021) that his ministry was preparing a transparent and fair TSM for water services industry in Peninsular Malaysia and Labuan. The minister was probably misled by his ministry officials and those from tariff division in Suruhanjaya Perkhidmatan Air Negara (SPAN). TSM was decided in 2009 and the full benchmark based mechanism was completed few years later as AWER was involved in the process. During the transition period, few tariff reviews were done based on “cost plus” mechanism. This “cost plus” mechanism takes the projected cost submitted by state water operators and add a regulated profit. It is an archaic way of setting tariff which was supposed to be replaced by benchmarking mechanism under WSIA model. For the information of the minister (just in case he does not know) and the public, 2 tariff review consultation processes were already carried out and completed. The first tariff review consultation process begun in December 2018 and ended in May 2019 for Pahang, Perlis, Labuan, Terengganu, Kelantan and Selangor (including Kuala Lumpur and Putrajaya). The second tariff review consultation process was done in mid of 2021 via lesser transparent online consultation process for Kedah, Pulau Pinang, Johor, Negeri Sembilan, Perak and Melaka.

SPAN has confirmed to AWER that there will be no new consultation process for the first tariff review consultation process that was done in 2019. AWER has also rejected all applications of tariff review for all the states due to SPAN’s stubbornness in using archaic “cost plus” mechanism which is not transparent and pass unnecessary cost to the consumers. Thus, the question that arises now is whether the minister is lying to the media or the ministry and SPAN has lied to him about the tariff review process which leads to the attempt to mislead Keluarga Malaysia?

What is Transparent and Equitable Tariff Setting Mechanism (TSM)?

TSM is something SPAN must implement to ensure there is equitable tariff with enough check and balance put in place. TSM involves unit cost benchmarking to the lowest efficient cost. Operations are clustered based on their size, type of raw water, technology, etc. Then cost per cubic meter (m3) are then derived and compared. For example, if the lowest treatment cost in a comparison cluster is 11 sen per cubic meter, other operators that operate above that value will be benchmarked to the lowest cost. If another treatment plant is operating at 16 sen per cubic meter, the additional 5 sen per cubic meter will not be allowed to be passed to tariff. Similarly, during the tariff cycle (every 3 years), if the operator with 11 sen per cubic meter manages to reduce the costs to 10.5 sen per cubic meter, the savings will be the operator’s perks. However, when we move to the next tariff review cycle, regulator will use 10.5 sen per cubic meter as a new benchmark.

This approach is also done to chemical cost, electricity cost (based on energy efficiency drive), human resource cost and many more regulated cost that are allowed to be passed to tariff. This is to drive cost efficiency and equitable tariff to consumers. TSM also regulate profit margin to be below double digit percentage. SPAN also can impose a cap on the efficiency perk and profit margin so that additional recovery can be directly used to settle the leasing payment for infrastructures with liabilities and not as additional bonus to staff or other wasteful activities within the water services industry.

Why TSM is Delayed?

SPAN has completed the TSM but at the moment reluctant to use TSM for tariff review. SPAN uses “cost plus” method. This is a lazy job where SPAN approves the proposed tariff review with a profit margin. We have opposed this since 2018 when SPAN started to conduct tariff review consultation process. This year there were a few consultation processes with much lesser information and done online. SPAN is also shying away from original path of WSIA model and NWSIR. The good solutions are already outlined in WSIA model for the benefit of our nation and people. Unfortunately, the tariff division under SPAN is hard selling inane reasons to carry out “cost plus” mechanism that is clearly against the objective of SPAN’s formation.

What Must The Government Do?

(i)    Set new tariff implementation date on 1st July 2023. This will give SPAN ample of time to carry out transparent and equitable TSM based on agreed benchmarking method. This is also vital to allow nation’s recovery process due to Covid-19 pandemic. Ministry of Finance (MOF) must also assist Pengurusan Aset Air Berhad (PAAB) on their annual debt servicing commitments to ensure its rating is not affected.
(ii)    Revamp tariff division under SPAN. The government must remove officers who are against implementation of WSIA model and NWSIR immediately. These types of little napoleons are detrimental for the survival of the whole water services industry and must not be allowed to serve in SPAN or any other water related agencies.
(iii)    Identify those whom have lied and misled the minister about a “transparent and fair” TSM is being developed but in actual fact SPAN is still using archaic model and already completed consultation process. All officers that had lied must be expelled immediately. These officers will also pass the “fake” or “misleading” information which will impact the cabinet’ decisions as well if they continue to remain in the positions.
(iv)    Since the extension of Indah Water Konsortium (IWK) concession is against WSIA model and NWSIR, upon the expiry of the old concession agreement on 31st March 2022, IWK will officially not be able to collect sewerage bills. Therefore, IWK must be ring fenced into state based entities immediately and a benchmarking process for cost must be carried out. SPAN has more than 18 months to complete the benchmarking and merge IWK with state water companies in stages according to WSIA model and NWSIR.
(v)    Merger of water and sewerage bills under one bill for water services (water treatment, water supply and sewerage) must be carried out according to WSIA model and NWSIR. All new bills beginning 1st July 2023 must be broken to unit cost of water treatment, water supply and sewerage.

Association of Water and Energy Research Malaysia (AWER)

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