Murky waters in the supply chain

Derek Fernandez
New Straits Times
10-28-2006
Murky waters in the supply chain
Byline: Derek Fernandez
Edition: Main/Lifestyle
Section: Main Section
Column: Comment

LIKE the electricity tariff increase, the water tariff increase has been justified with the usual reasons: Malaysians are wasteful; the lower- income group will not be affected; Puas, like Tenaga Nasional Berhad, is debt-ridden and has to be helped; Syabas is entitled to raise the tariff under the concession agreement; and other familiar refrains have been heard.

In a country that often floods after heavy rain, it is not a case of not having enough water. The Malaysian Trades Union Congress, consumer groups, non-governmental organisations and residents' associations have opposed the tariff increase.
They have asked why consumers should be made to pay more when water quality has not improved and filters have to be bought to ensure clean water. More importantly, why has Puas (Perbadanan Urus Air Selangor Bhd) been allowed to run into debt while Syabas (Syarikat Bekalan Air Selangor Sdn Bhd) is making profits?

The Energy, Water and Communications Minister has indicated that Puas has debts of RM2.3 billion, most of which was owed to water treatment companies Puncak Niaga, Abbas and Splash. On the other hand, Syabas (which is 70 per cent owned by Puncak Niaga), according to the minister, posted a RM200 million profit last year. Puncak Niaga's 2004 annual report shows its board of directors were paid RM6.9 million in remuneration, with one director being paid a whopping RM2.1 million.

If the water treatment component in the water supply chain is privatised, then any company involved in treating water in a near monopoly situation would always be profitable. Such a company would charge for the volume of water treated and not for the volume of water piped to consumers, which would be significantly lower when non-revenue water losses are high.

The water distribution component, however, is made problematic by non-revenue water, and unless subsidised from the profits of the water treatment component, any company or body managing water distribution alone (like Puas did previously) would run into losses. Puas had to pay the treatment company the full sum for water received even though a lot of it was lost before it got to the consumer.

No wonder then that Puas ran into debt. It is common sense that the profitable component in a water supply chain must subsidise the unprofitable component and not be taken out or privatised separately, thereby leaving the loss-making distribution component to be subsequently bailed out. The distribution component requires huge capital reserves, to replace pipes and detect leakages, for example.

Was Puas given this money? What is being done now is to allow the water treatment company to carry out the water distribution component and be paid compensation for the liabilities of the earlier water distribution company, whose debts will be paid by the government and through tariff increases. Furthermore, an increase in the water tariff is allowed based on a reduction in non-revenue water losses and not on improvements in water quality.

What will happen now is that Syabas will take over Puas' role, but the government must pay mandatory compensation of RM1.34 billion to settle part of Puas' debts. The government must also inject millions into Syabas by way of loans and grants to help reduce non- revenue water and provide capital expenditure. Furthermore, the government must agree to allow Syabas to increase the water tariff on the basis of the non-revenue water that has been reduced.

Why is such a sweet deal being offered? The tariff increase will give an additional RM100 million in pre-tax profit to Syabas. What about the profits in water treatment all these years, which should have been used to subsidise the water distribution cost and provide the capital reserves?

It is therefore vital that the terms of any concession agreement in relation to the treatment, supply and distribution of water be disclosed fully for public scrutiny and reviewed to determine whether such an agreement is in the public interest. Consumers may seek to determine the legality of any tariff increase should they feel aggrieved.

There is no justification for an increase in the water tariff when there is no increase in the water quality. Consumers must be compensated for the cost of water filters, and rebates must be given. To link the reduction of non-revenue water to tariff increases is not acceptable, since a reduction in non-revenue water directly increases the profits of the water distribution company. Of course, the water treatment component will make less profit but then these two components should never have been separated in the first place.

As the relationship between the consumer and the water distribution company is in part contractual, consumers have a legal right to seek compensation from the service provider if they receive poor quality water. They may recover the cost of filters, cost of alternative sources of water and any medical expenses and losses they may have suffered as a result of drinking unhealthy water. The service provider cannot terminate supply if their claim is legitimate.

Water, like electricity, is a basic necessity. It is a fundamental right of every citizen to be provided with clean, safe and drinkable water at the lowest price. No agreement with any private company can compromise this right. There should be no profiteering in the fulfilment of this right. As such, there should be full disclosure of all such agreements for review.

* The writer is a lawyer and legal adviser to 40 residents' associations in the Klang Valley.

(Copyright 2006)
Murky waters in the supply chainDerek Fernandez
New Straits Times
10-28-2006
Murky waters in the supply chain
Byline: Derek Fernandez
Edition: Main/Lifestyle
Section: Main Section
Column: Comment

LIKE the electricity tariff increase, the water tariff increase has been justified with the usual reasons: Malaysians are wasteful; the lower- income group will not be affected; Puas, like Tenaga Nasional Berhad, is debt-ridden and has to be helped; Syabas is entitled to raise the tariff under the concession agreement; and other familiar refrains have been heard.

In a country that often floods after heavy rain, it is not a case of not having enough water. The Malaysian Trades Union Congress, consumer groups, non-governmental organisations and residents' associations have opposed the tariff increase.
They have asked why consumers should be made to pay more when water quality has not improved and filters have to be bought to ensure clean water. More importantly, why has Puas (Perbadanan Urus Air Selangor Bhd) been allowed to run into debt while Syabas (Syarikat Bekalan Air Selangor Sdn Bhd) is making profits?

The Energy, Water and Communications Minister has indicated that Puas has debts of RM2.3 billion, most of which was owed to water treatment companies Puncak Niaga, Abbas and Splash. On the other hand, Syabas (which is 70 per cent owned by Puncak Niaga), according to the minister, posted a RM200 million profit last year. Puncak Niaga's 2004 annual report shows its board of directors were paid RM6.9 million in remuneration, with one director being paid a whopping RM2.1 million.

If the water treatment component in the water supply chain is privatised, then any company involved in treating water in a near monopoly situation would always be profitable. Such a company would charge for the volume of water treated and not for the volume of water piped to consumers, which would be significantly lower when non-revenue water losses are high.

The water distribution component, however, is made problematic by non-revenue water, and unless subsidised from the profits of the water treatment component, any company or body managing water distribution alone (like Puas did previously) would run into losses. Puas had to pay the treatment company the full sum for water received even though a lot of it was lost before it got to the consumer.

No wonder then that Puas ran into debt. It is common sense that the profitable component in a water supply chain must subsidise the unprofitable component and not be taken out or privatised separately, thereby leaving the loss-making distribution component to be subsequently bailed out. The distribution component requires huge capital reserves, to replace pipes and detect leakages, for example.

Was Puas given this money? What is being done now is to allow the water treatment company to carry out the water distribution component and be paid compensation for the liabilities of the earlier water distribution company, whose debts will be paid by the government and through tariff increases. Furthermore, an increase in the water tariff is allowed based on a reduction in non-revenue water losses and not on improvements in water quality.

What will happen now is that Syabas will take over Puas' role, but the government must pay mandatory compensation of RM1.34 billion to settle part of Puas' debts. The government must also inject millions into Syabas by way of loans and grants to help reduce non- revenue water and provide capital expenditure. Furthermore, the government must agree to allow Syabas to increase the water tariff on the basis of the non-revenue water that has been reduced.

Why is such a sweet deal being offered? The tariff increase will give an additional RM100 million in pre-tax profit to Syabas. What about the profits in water treatment all these years, which should have been used to subsidise the water distribution cost and provide the capital reserves?

It is therefore vital that the terms of any concession agreement in relation to the treatment, supply and distribution of water be disclosed fully for public scrutiny and reviewed to determine whether such an agreement is in the public interest. Consumers may seek to determine the legality of any tariff increase should they feel aggrieved.

There is no justification for an increase in the water tariff when there is no increase in the water quality. Consumers must be compensated for the cost of water filters, and rebates must be given. To link the reduction of non-revenue water to tariff increases is not acceptable, since a reduction in non-revenue water directly increases the profits of the water distribution company. Of course, the water treatment component will make less profit but then these two components should never have been separated in the first place.

As the relationship between the consumer and the water distribution company is in part contractual, consumers have a legal right to seek compensation from the service provider if they receive poor quality water. They may recover the cost of filters, cost of alternative sources of water and any medical expenses and losses they may have suffered as a result of drinking unhealthy water. The service provider cannot terminate supply if their claim is legitimate.

Water, like electricity, is a basic necessity. It is a fundamental right of every citizen to be provided with clean, safe and drinkable water at the lowest price. No agreement with any private company can compromise this right. There should be no profiteering in the fulfilment of this right. As such, there should be full disclosure of all such agreements for review.

* The writer is a lawyer and legal adviser to 40 residents' associations in the Klang Valley.

(Copyright 2006)