From a modest but new building in Cyberjaya, the entire water industry of the country is being regulated. Beginning Jan 1, 2008, the National Water Services Commission, or Suruhanjaya Perkhidmatan Air Negara (SPAN) came into effect. It has a wide-ranging mandate, from setting standards to approving capital expenditure and tariff rates for all water service providers. Although five states are now under the control of Pakatan Rakyat, SPAN says nothing has changed. The states can do all they want but when it comes to critical issues such as tariffs, they have to get SPAN's approval. The Edge's Jose Barrock and M Shanmugam catch up with SPAN's chairman Tan Sri Zaini Omar and its CEO Datuk Teo Yen Hua on how the commission will operate, especially with the political changes.Is there any change in SPAN's purview now that Selangor is under Pakatan Rakyat?
Zaini : The state government identified KDEB as the party to lead the consolidation. They were given the mandate for Langat 2. But we have not received any news of their plans. There is no change as far as we know, but it has only been two or three weeks (since the new state government took over).
There has been talk of concessions being lopsided.
Zaini : Even if the concession is one-sided, we must see if it can be changed.
Teo : The state government has a 30% stake in Syabas (Syarikat Bekalan Air Selangor Sdn Bhd), so if they want to restructure anything, it is for them to come back to us. They have the shares in Syabas and 30% in SPLASH (Syarikat Pengeluar Air Selangor Sdn Bhd), more than 50% in (Konsortium) Abbas (Sdn Bhd), so if they want to review anything; it is for them to do so, for them to come back to us.
Is there a time frame by which they have to come back with their consolidation plans to you?
Zaini : No, but they (water players like Syabas) are coming back to us with the tariff hike. It is not an automatic tariff hike; they have to justify it to us.
Teo : But we can renegotiate. The government can renegotiate through SPAN. We can renegotiate on matters of national interest. The minister defines what national interest is. It's in Section 191 of the Act (Water Services Industry Act 2006).
Zaini : From the intake point onwards, it is under the authority of SPAN. But before the intake point, it is the state's jurisdiction.
Teo : There is a Water Resources Council chaired by the prime minister, so there are controls and this is where the issues are resolved with regard to water.
Is it possible for the players to avoid the assets from being taken over by Wamco?
Zaini : It is possible, but you must understand why the assets are placed under Wamco. It is because the current structure is unsustainable. The current model of financing is such that you borrow short to finance long-term projects.
So, for a sensitive industry, if you continue to maintain the model, you need to request tariff increases every now and then. If the government takes over, we can go to the bond market and take long-term financing.
The current model is not sustainable. Next year, there is a tariff hike needed, every state owes the government money, over RM7 billion in total. The companies can opt to not consolidate, or senle issues among themselves, but lor rate hikes, they have to come to SPAN.
What if they opt not to do a rate hike?
Both : Then it is good (laughing); we will be very happy
What about the liabilities they owe the federal government?
Teo : That they have to pay.
Effectively, you will not force them to consolidate?
Zaini : We will not force them but the condition they are in will force them to do it. Heavily indebted to the federal government, they will as a natural cause of events have to consolidate.
What about the 20 cu m of free water offered by the Selangor government? That is within their purview, but does SPAN have a say?
Zaini : They can do anything they want but the amount given free will still be considered revenue as far as we are concerned. When it comes to tariff calculations, we cannot offset these things as nonrevenue. It is a cost. There is no zero tariff, so when it comes to your future tariff negotiations, there is no zero tariff.
Teo : You see in the case of Syabas, the state government has 30%, so it is part of their business.
If they opt to maintain the present tariff, do they have to meet SPAN?
Zaini : No. Now Syabas, Puncak Niaga and Abbas and the others have registered their concession with us. If you read the law, under Section 119 (of the Water Services Industry Act 2006), before the end of the year, they have to indicate to us if they want to migrate to the new regime, which is licence-based, as opposed to now where they operate based on concessions. If they do not migrate and they indicate to us before the end of the year that they are not migrating, then they will be authorised until the balance oftheir concession period, (however) with terms and conditions that will be stated by SPAN. It is not necessary that everything will be the same. It is all in the law. They will be given a licence, which they have to renew, if not there will be terms and conditions authorised by SPAN until the end of the concession. And they must also comply with the law, meaning for tariffs, they have to come back to us.
The terms will include key performance indicators (KPls), service levels and other such things.
Teo : The whole idea is to make the water sector sustainable, make it benefit the consumers, and at the same time, we have to provide reasonable returns or profits to the operators. These are the things SPAN will look into.
What are the terms?
Zaini : We cannot reveal the terms and conditions. But the bottom line is they will not have a free hand; it is dangerous if we give them a free hand. They may sell off their assets. Dangerous for all of us.
The present structure is not sustainable. Can you elaborate?
Zaini : We are under-charging for water.
There is a steep rate hike schedule in 2009.
Zaini : The nation as a whole is under-charging. We cannot go for full-cost recovery yet. The nation is not ready. That is why you have Wamco. They will absorb the deficit. Wamco will be there as long as we undercharge.
Teo : The rationale is if you look at NRW, the treatment plants and the pipes, there is a need for some capital expenditure. The state government needs to borrow from the federal government. If they don't borrow, there is nothing they can do. The quality will drop, the service levels will drop. So, there is a need for financing. From Wamco, we provide long term financing at a cheap cost, and these efficiencies will be monitored by us based on KPIs. When there is better quality of service, there will not really be an ability to pay but a willingness to pay. Then, we can go on full-cost recovery over the long term; it will be sustainable over the long term.
Zaini : It is not so much the ability to pay but the willingness. Handphone bills are much higher than water bills. When efficiency is improved, slowly the bills will be increased upwards, and we can go for full-cost recovery. How is it that we pay so low for a life-sustaining matter and people pay so much for their hand phones? Water is cheap.
