This article first appeared in The Edge Malaysia Weekly on July 8, 2024 - July 14, 2024

THE water supply imbalance in Malaysia — where some states are in a dire situation while others are doing much better — exacerbates the development disparity in Malaysia, especially in the peninsula.

While states such as Selangor, Penang, Johor, Terengganu, Negeri Sembilan, Perak and Pahang have double-digit reserve margins, Melaka, Perlis and Kelantan’s margins are in the single digits. Kedah stands out with a 0% reserve margin.

What this means is that during dry seasons, some of these states could experience water shortages, which could affect their socioeconomic development. And solving this problem is not as simple as spending billions of ringgit on new, bigger water treatment plants and replacing several hundred kilometres of pipes.

This can be seen in Kedah, especially, where the state and federal governments are blaming each other for the delay in the completion of upgrading works for the Bukit Selambau water treatment plant (WTP).

The project was awarded to Widad Group Bhd (KL:WIDAD) in 2021 for RM129.4 million. Widad then appointed PTT Synergy Group Bhd (KL:PTT), formerly known as Grand Hoover Bhd, as a sub-contractor for the project for RM110.02 million.

According to PTT’s announcement to Bursa Malaysia on Jan 7, 2022, the contract to upgrade the Bukit Selambau WTP in Kuala Muda, Kedah, runs between Jan 6, 2022, and Dec 2, 2023. Clearly, the deadline has not been met.

On July 2 this year, Deputy Minister of Energy Transition and Water Transformation Akmal Nasrullah Nasir stated in parliament that the deadline for the project had been extended until April 16, 2025 — more than a year from the original deadline.

As water is essential for life, and water resources, treatment and supply are under the purview of state governments, the delay in the completion of the Bukit Selambau WTP upgrade has become a political issue.

Kedah Menteri Besar Datuk Seri Muhammad Sanusi Md Nor has blamed rising material prices for the delay and said contractors had asked for a variation of price. He, as well as the state administration, has been accused of incompetence by federal ministers and unity government politicians.

While the reason for the delay is not known, the mudslinging between the federal and state governments shows the complexity of managing water resources and infrastructure in the country.

As water resources are tied to land, they fall under the purview of the respective state governments.

The operations of water infrastructure are in state hands through their respective operators such as Pengurusan Air Selangor Sdn Bhd, Ranhill SAJ Sdn Bhd in Johor, Syarikat Air Darul Aman Sdn Bhd in Kedah, PBA Holdings Bhd (KL:PBA) in Penang, Air Kelantan Sdn Bhd and Syarikat Air Negeri Sembilan Sdn Bhd.

However, due to the huge amounts of money required to invest in, maintain, repair and upgrade water infrastructure, 10 states migrated their water assets to Pengurusan Aset Air Bhd (PAAB), a federal government agency under the Ministry of Finance (MoF).

Formed in 2006 under the Water Services Industry Act as part of the restructuring of the country’s water services, PAAB is the custodian of water assets for 10 states in Peninsular Malaysia. In 2023, the water assets of Kedah and Pahang were migrated to PAAB, increasing its total asset value to RM34.2 billion.

Terengganu is the only state that has not migrated its water assets to PAAB. In May 2022, Terengganu Menteri Besar Datuk Seri Ahmad Samsuri Mokhtar said the state’s decision to not sign the Water Services Industry Restructuring Agreement was final.

The migration of water assets to PAAB reduced the state governments’ debt burden as the agency assumed the water infrastructure loans previously held by them.

In return, the water operators of the states lease the assets from PAAB. In 2023, PAAB’s lease income increased 2.54% to RM1.1 billion. The lease income is used to service the debts assumed by PAAB, as well as new debts raised to fund the capital expenditure (capex) for the water assets.

As at Dec 31, 2023, PAAB had RM21.45 billion in non-current loans and borrowings, and RM3.06 billion in current loans and borrowings. Of the current loans, RM1.05 billion was government guaranteed Islamic medium-term notes (IMTN), while RM1.72 billion was non-guaranteed IMTNs.

Its finance cost was RM893.12 million during the year, 9.3% higher than in 2022. This translated into a debt service coverage ratio of 1.23 times.

PAAB, in turn, provides funding for water services investments in each of the states. In 2023, it completed 18 projects and packages, comprising 11 major and two minor projects in the migrated states, as well as five packages under the Langat 2 Phase 1 (L2P1) project.

The construction cost for the migrated states’ packages totalled RM422 million, while the L2P1 project amounted to RM466 million, according to PAAB.

The L2P1 project involved water treatment and distribution facilities, with raw water transferred from the Pahang-Selangor Raw Water Transfer project.

It has an ultimate nominal treated water output capacity of 2,260 million litres per day (MLD), serving customers in Hulu Langat, Ampang, AU3, Kuala Lumpur, Cheras, Sungai Besi, Bukit Jalil, Petaling and Puchong.

The western and northern corridors were completed by December 2023, delivering a treated water capacity of 1,130MLD to about 440,000 users in the Klang Valley, according to PAAB.

As at Dec 31, 2023, 60 packages of water assets worth RM1.82 billion were under construction in the country while 38 packages worth RM3.82 billion were in the design stage. These included the RM218.14 million approved capex for Pengurusan Air Pahang Bhd and eight ongoing projects worth RM265 million in Kelantan.

Up to May 30, 2024, PAAB had concluded the construction and upgrading of 14 WTPs with a total capacity of 1,846MLD, constructed 38 reservoirs with a total capacity of 684 million litres, and completed 2,405km of pipe replacement and new connections.

In a written reply to a parliamentary question by Datuk Seri Tuan Ibrahim Tuan Man, the member of parliament for Kubang Kerian, then minister of natural resources, environment and climate change Nik Nazmi Nik Ahmad stated that as at June 2023, the federal government had provided a total of RM17.68 billion in funding to the 10 migrated states since the water industry restructuring was signed between the states and Putrajaya.

Kelantan, being the only state where its water operator does not serve more than 90% of the population, requires a lot of investment in its water infrastructure. PAAB has planned projects worth RM726 million there, for new WTPs, distribution system upgrades and pipe replacement.

It is constructing seven WTPs with a total capacity of 142MLD in Kelantan, on which work is set to begin this year and next. It is also constructing five water storage facilities totalling 27 million litres and replacing 343km of ageing asbestos cement pipes.

While there are 41 WTPs in Kelantan, almost as many as in Johor and Perak, their capacity is small, at only 537MLD, compared with Johor’s 2,133MLD and Perak’s 1,951MLD.

Water demand based on system input volume in Kelantan was 517MLD in 2022. However, billed authorised consumption was only 239MLD, which means 277MLD of water is lost every day, translating into non-revenue water (NRW) of 53.7%, the second-highest in the country after Perlis’ 61.5%.

Kedah is another state with a high NRW of 51.5%, meaning that more than half of the volume of its treated water of 1,597MLD is lost daily. Only 775MLD of water were billed in Kedah in 2022.

The state also saw a dramatic deterioration in its reserve margin between 2018 and 2022, from 8.3% to essentially 0%.

Other states are also in the same boat. Melaka’s reserve margin fell from 19.7% in 2018 to just 4.7% in 2022, according to regulator Suruhanjaya Perkhidmatan Air Negara (SPAN), while Pahang’s fell to 17.3% in 2022, from 25.1% in 2018.

Labuan’s reserve margin fell to 20.3% in 2022, from 30.1% in 2018, while Negeri Sembilan saw its reserve margin drop to 19.1% from 23%. Penang also saw a decline in its reserve margin to 26.4% in 2022 from 33.8% in 2018.

Only three states saw improvement in their water reserve margin, with the most dramatic seen in Selangor, which had a 0% margin as recently as 2020. The completion of L2P1 must have contributed immensely to the state’s reserves, which stood at 15.2% in 2022.

According to Air Selangor’s 2023 Sustainability Report, its reserve margin had increased to 15.34% as at 2023. The country’s largest water services operator targets a reserve margin of 17.7% by 2030.

Terengganu’s reserve margin increased between 2020 and 2022 from 23.6%, the lowest in five years, to 31.8%. In 2018, its reserves stood at 27.1%. Meanwhile, Perlis had a huge jump in its reserves, from 1.5% in 2021 to 8.4% in 2022.

The improvement in water reserve margins in Perlis and Selangor coincided with better NRW levels. Perlis’ NRW improved to 61.5% in 2022, from 64.9% — the highest in five years — in 2020.

Meanwhile, Selangor’s NRW improved from 31.7% in 2018 to 27.8% in 2022, as Air Selangor continued to replace ageing pipes. In 2023, its NRW improved further to 27.75%.

However, at 27.75%, this still translated into 1,420MLD of NRW in Selangor, Kuala Lumpur and Putrajaya, a volume that is bigger than the entire billed authorised consumption of Johor in 2022. The total volume of 1,420MLD of NRW in 2022 was also higher than the 1,373MLD in 2021.

When NRW levels are high, water operators lose valuable income that could be used to improve their state’s water infrastructure, without resorting to increasing the water tariff. Recall that while PAAB provides the funding for water infrastructure projects, these water assets are leased by the state’s water operator from PAAB.

This means that the lease amount will have to be paid to PAAB. If the water operator continues to lose a huge amount of treated water, it loses income to pay the lease. If there are no other alternatives, the state will have to apply to SPAN to implement higher water tariffs.

SPAN, the regulator of the water services industry in Malaysia, looks at the state operators’ business plan before deciding on the water tariff.

In an interview in January this year, SPAN CEO Datuk Ahmad Faizal Abdul Rahman said that the higher water tariff starting this year could only cover the operational costs of most of the water operators.

This is because as of 2022, the total cost of producing one cu m of water was RM1.75, while the average realised tariff was only RM1.43 per cu m. This does not take into account the billions of ringgit needed to invest in water infrastructure in states like Kelantan, where the situation is really dire.

The average water tariff increase of 22 sen per cu m starting this year could lead to better financial sustainability for the states’ water operators. However, it is unlikely to be enough to cover the total cost of water production, as the operators continue to invest in water assets.

For example, in 2023, Air Selangor’s total costs of RM3.51 billion exceeded its total revenue of RM2.82 billion. While water tariffs will rise from January 2024, the operator is investing in the Rasau water supply scheme, which will cost RM6.14 billion over two phases.

“Recent tariff adjustments have bolstered Air Selangor’s financial performance. Nonetheless, in order to continuously invest in the improvement and upgrading of water services to enable long-term water security, more frequent and consistent tariff reviews will be important to allow Air Selangor to become financially sustainable with full cost recovery,” the operator says in its 2023 Sustainability Report.

In 2023, Air Selangor spent RM835.99 million on leasing and finance costs, making up 23.81% of its total costs. It also spent RM491.46 million on repair and maintenance, and RM325.66 million on electricity.

States such as Kelantan, Kedah and Perlis, which have NRW levels of more than 50%, will require a huge amount of funding from PAAB. This could lead to a bigger tariff hike in these states.

While the states could apply for loans and grants from the federal government to improve their NRW performance, this will increase their debt burden.

Note that the water restructuring was proposed in the first place because the state governments could no longer fund the development of water infrastructure and run the operations, as their debts owed to the federal government mounted.

It is not clear if the funding is in the form of grants or loans. If state governments are taking up loans from the federal government to invest in their respective water infrastructure again, the water restructuring process that has taken place over the last two decades could come undone.

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