The water services industry was under the purview of each State Government before the reform of the water services industry was initiated. In most cases, the State Governments own the water infrastructures and operate the water services. There are also some states, such as Selangor and Johor, where the water services operations are privatized and private concessionaires are responsible for the treating and supplying of water to consumers.

The industry was not centrally regulated, resulting in the varying degree of quality of water supply and services, and differing water charges from state to state. In the states where the water services are privatized, operations are fragmented with several private operators involved in providing water supply to the states which is highly inefficient.

The industry is also plagued by escalating costs of developing new water infrastructure, resulting in most States having to borrow from the Federal Government for capital expenditure (CAPEX). To compound the problem, some States are experiencing eroding mainstream revenue following rising operational expenses and high non revenue water. Many face difficulty covering their costs and in some states, even operational expense (OPEX) is not met. Caught in this financial conundrum, it is not easy to continue to provide quality service to the consumers.

Instead of borrowing from the Federal Government, some states resorted to privatizing the water services. The plus side to privatization is that services often improve however it is not without a cost. These private operations are funded predominantly by debts raised at market rate and the expensive financial cost is passed on to consumers as higher water charges.

The water industry is; undeniably, facing many problems including poor management, but chief of it is financial. However, the Government’s resources are limited, and proper financial planning needs to be implemented to ensure the sustainability of the water services industry. Without the financial means to properly maintain and upgrade the water infrastructure, the country is unnecessarily exhausting its precious resources.

In early 2003, the Federal Government stepped up efforts to reform the industry for the benefit of all stakeholders including the Federal Government, consumers and the State Government. It is an extensive process which included amendments to the Constitution and passing of new legislations to enable the Government to mobilize the reform.

In January 2005, Parliament approved the amendments to the Ninth and Tenth Schedules of the Federal Constitution. The amendment to the Ninth Schedule involves the transfer of water supplies and services from the State List to the Concurrent List. In other words, the water supplies and services is now a shared responsibility between the State and the Federal Government. It is a pertinent move which gives the Federal Government authority over the water services in the States. The Tenth Schedule was also amended and as a result, the revenue from water supplies & services (previously assigned to the States) is now assigned to the Federal Government.

Consequently, with effect from 21 March 2005: -
• The Federal Government will regulate the water supply & services industry but ownership and control of rivers, canals & water catchment remains with the State.
• The State also retains power to declare & regulate water catchment areas, water sources and river basins.

In July 2006, further to the amendments to the Constitution, Parliament passed two new legislations namely the Suruhanjaya Perkhidmatan Air Negara Act 2006 and Water Services Industry Act 2006 (WSIA). The former provides for the establishment of Suruhanjaya Perkhidmatan Air Negara (SPAN) or National Water Services Commission as the technical and economic regulator and set out the function and powers of SPAN.

WSIA, on the other hand, provides the legal framework required for the regulation of the water and sewerage service industry. The Acts were enforced on February 1, 2007 and 1 January 2008 respectively.

The legislative process was only the tip of the iceberg. Given that the current business model adopted by most State water operators does not promote sustainability of the water services industry, the Federal Government had to reinvent the wheel. A new model was developed, targeting to resolve the financial woes of the water services industry, promote financial sustainability in the State water operators, and alleviate the Federal Government/taxpayers’ financial burden. In the long run, the Federal Government wants the state operators to achieve full cost recovery and attain financial independence. These efforts will ultimately lead to improvement in the quality of water supply and the efficiency of the industry’s services.

Under the new model, there will be a separation of responsibilities between water asset owners and operators. State water operators will no longer be responsible for developing water infrastructure and its funding so that they can concentrate solely on providing water services to consumer and improving their operational efficiency. The responsibilities of developing water infrastructure and sourcing for its funding will be transferred to Pengurusan Aset Air Berhad (PAAB).

Under this arrangement, PAAB will first take over the existing water assets in the States to transform the state water operators into asset-light entities. PAAB, on the other hand, will become water assets owners after buying the water infrastructure from the states. In exchange for the assets, PAAB will assume the States’ outstanding Federal water supply loans of an equivalent sum. (However, for some states where the value of the water assets is more than the outstanding loan amount, the surplus value will be taken into consideration and the settlement terms will be negotiated.)

By transferring the loans to PAAB, the State Governments will be immediately relieved of the heavy burden of settling the Federal water supply loans. The Federal Government, on the other hand, will own the States’ water infrastructures via PAAB, enabling it to have better control over the water industry.

After the transfer of assets, the State Governments will continue to be responsible for providing water supply services in the states. However, instead of owning the water assets, the State water operators (Service License) will lease these assets back from PAAB (Facilities Licensee) for operation and maintenance. With the lease income, PAAB will repay the Federal Government loan (which it will take over from States) over time.

Apart from the improvement in efficiency operation wise, the nation will also benefit from the better efficiency in funding. In the past, funding for water assets development were either in the form of Federal Government loans and allocations or private debts (e.g. bonds, commercial loans) for the private concessionaires. These two modes were not very effective because the Federal Government loans were often insufficient, while the latter were usually obtained at an expensive rate.

To overcome these shortcomings, PAAB was established to source for funding for water infrastructure development. As a Government-owned company, PAAB is eligible for more favourable financing rates as compared to the concessionaires that raise funds as a private company and unlike in the past, funds will be raised to meet the demand for the water infrastructure development. The financial benefits arising from this structure will be shared with the consumers through lower tariff rates.

Under the WSIA licensing framework, operators of water assets are required to apply to SPAN for a Service License. To qualify for this license, operators will have to meet the Key Performance Indicators and strict requirements set by SPAN, failing which their licenses will be revoked. The careful monitoring by SPAN will ensure that operators continue to perform to the required standards to provide quality service and water supply to the consumers.

Although the Water Services Industry Restructuring exercise is still at its infancy, it will bring tremendous benefits to the industry and consumers once it is fully implemented. The success of the reform will depend on the co-operation from all stakeholders including the Federal Government, State Governments, PAAB, consumers as well as the water operators.

Consumers:

• More efficient services and better quality water supply

• State Government relieved of the heavy financial burden to develop water assets
• State Government relieved of settling the water supply loan owing to the Federal Government
• State water operators can focus solely on providing water treatment and distribution services, and concentrate on achieving operational efficiencies.
• State operators can work towards full cost recovery and financial independence in the long term

• Relieved of the obligation to provide funding to States for the construction of new water infrastructure
• Have a uniformly regulated water services industry