Air Selangor calls for more private investments to boost water infrastructure

Sunday 16 Mar 2025

This article first appeared in The Edge Malaysia Weekly on October 28, 2024 - November 3, 2024

RISING demand for water, as a result of population and economic growth as well as the recent influx of data centres, has prompted Pengurusan Air Selangor Sdn Bhd (Air Selangor) to call on the government to encourage more private funding to boost investments in the water sector.

While water tariffs for both domestic and non-domestic usage in Kuala Lumpur, Selangor and Putrajaya were raised twice recently — in 2022 and early this year — the current level is still not enough for Air Selangor to cover its costs, says its new CEO Adam Saffian Ghazali in an interview with The Edge on Oct 15.

“Air Selangor is licensed to treat and sell water. We must be the company that sells the water to the public. But where do we get the water from? It’s not necessarily us that must treat the water,” says Adam, adding that alternative funding is not new to the Selangor water sector.

Even after the consolidation of the water service concessionaires, following the enactment of the Water Services Industry Act 2006 (WSIA), two major water supply schemes in Selangor are still operated and maintained by the private sector.

They are the Sungai Selangor Water Supply Scheme Phase 1 (SSP1) — which has a capacity of 950 million litres per day (MLD) and is operated and maintained by Sungai Harmoni Sdn Bhd, a subsidiary of Taliworks Corp Bhd (KL:TALIWRK) — and the bigger SSP Phase 3 (SSP3), which has a capacity of 1,050 MLD and is operated and maintained by Gamuda Bhd (KL:GAMUDA).

The Gamuda concession ends in December 2027, and little has been said about extending it, says Adam. Meanwhile, SSP1 will continue to be operated and maintained by Sungai Harmoni until December 2036, after the company entered into a Bulk Water Supply Agreement with Air Selangor in 2019.

He says: “We have to be cognisant of the fact that the capital expenditure is very expensive — PAAB (Pengurusan Aset Air Bhd) spent easily RM1.3 billion on the Langat 2 Phase 1, and that does not include the distribution side with the reservoir.

“If we did not explore alternative financing, how would we get the money [to invest in water infrastructure]?”

Adam was appointed to the top job at Air Selangor in July 2024, assuming the position that had been left vacant since the departure of Suhaimi Kamaralzaman in December 2022. Between then and July 2024, Abas Abdullah, who served as chief operating officer under Suhaimi’s leadership, was acting CEO.

After about four months at the helm, Adam — who served as CEO of Aliran Ihsan Resources Bhd (AIR) between May 2015 and March this year — has identified three key areas that Air Selangor needs to address to become a world-class water supply operator. (AIR is wholly-owned by MMC Corp Bhd, whose business is in the development of wastewater treatment and reclamation facilities, as well as in water treatment technology.)

“First, our customer experience. We cannot have disruptions. To ensure no water supply disruptions, we need to increase the treated water design capacity,” says Adam.

This is why Air Selangor is developing the 700 MLD Rasau water treatment plant (WTP) Stage 1, at a cost of RM4 billion. Stage 2

of the Rasau WTP costs about RM2.14 billion and will double the plant’s capacity.

Second, Adam says, the WTPs should be linked. Currently, Selangor’s sources of raw water are scattered throughout the state, and its WTPs and dams are located in between but quite far apart. So, when a pollution occurs at the water source of one river that causes the shutdown of one WTP, a huge area is affected.

If the WTPs are linked, however, whenever one WTP is shut down, water from another WTP can be transferred, so that supply to the end-user is not disrupted, he says.

“Third, we need to make sure that [water] pressure to our customers is maintained at a specific level. So, we need to embark on a major NRW (non-revenue water) initiative by increasing our district metering zones (DMZs),” says Adam.

A DMZ is essentially a geographic area in which water consumption is measured and billed at a group level, rather than individually. When the DMZ reading of an area does not tally with the end-user’s individual metre, Air Selangor would know there are leakages in the area.

In Selangor, 70% of the populated areas are already under DMZs, says Adam, but this figure must increase to 100%.

“To do all this requires lots of money. Currently, we have PAAB to fund the projects or we raise our own funding. But I am telling the staff [of Air Selangor] that we need to be open, that we need to ensure there is sufficient private participation in all these works,” says Adam.

Before the restructuring and consolidation of the water services industry, the state government entered into a build-operate-transfer (BOT) mechanism with private sector players to invest and operate water treatment and distribution in Selangor, which resulted in a fragmented industry.

Because of high operating costs, private concessionaires require commensurate tariffs to cover their costs and make profits.

But the state government does not always allow water tariffs to be raised, which resulted in underinvestment in Selangor’s water sector.

The fragmented and underinvested water sector led to several state-wide water disruptions. As a result, both the state and federal governments agreed to renationalise the water sector through the passing of the WSIA.

Air Selangor was thus formed, via the consolidation of water assets owned and operated by Puncak Niaga Sdn Bhd, Syarikat Pengeluar Air Selangor Sdn Bhd, Konsortium ABASS Sdn Bhd, Konsortium Air Selangor Sdn Bhd and Syarikat Bekalan Air Selangor Sdn Bhd.

“After the migration of all the states to the new water regime under the auspices of WSIA 2006, we now have a regulator by the name of Suruhanjaya Perkhidmatan Air Negara (SPAN),” says Adam.

“So, in essence, you can do whatever you want to do with the funding mix — alternative financing, whatever — knowing that you have a regulator to regulate the returns.”

Even with private investments in the water treatment segment of the industry, Air Selangor will remain the sole company to distribute treated water to consumers in Selangor, Kuala Lumpur and Putrajaya, he adds.

This means Air Selangor can enter into bulk supply agreements and fixed monthly payments with private investors, which will be regulated by SPAN, he explains.

Air Selangor will also remain the sole company to plan the development of the water sector in the state, and this plan will need to be approved by SPAN for the setting of tariffs.

“If we did not allow the private sector to come into the sector, where would we get the money to construct new WTPs, upgrade and ensure our pipes are replaced? The money [from tariffs] is just not sufficient. We need investments,” says Adam.

Double tariff hikes enough for only 60% to 70% of costs

Air Selangor increased tariffs on non-domestic users and special categories in August 2022, the first hike in 16 years.

The adjustment involves a 26.6% rise in the tariff to RM2.62 per cu m for the usage of up to 35 cu m, and a 25.4% increase in the tariff to RM2.86 per cu m for the usage of more than 35 cu m.

This was followed by the restructuring of domestic tariffs for the entire country, which SPAN announced in January this year.

In Selangor, the tariff for the usage of up to 20 cu m was hiked to 65 sen per cu m, from 57 sen per cu m; and the usage of between 20 cu m and 35 cu m is now charged RM1.32 per cu m, compared with RM1.03 per cu m previously.

Despite tariff increases over the last three years, Air Selangor’s revenue covered only between 66% and 69% of its costs, says Adam.

Although this was better than the 62% to 65% of costs prior to the tariff adjustments, it is still a long way from cost recovery, which includes financing charges and leasing costs to PAAB, he adds.

In 2023, the first year in which Air Selangor’s revenue fully reflected the water tariff increase that occurred from August 2022, there was a 15.1% jump to RM2.82 billion, from RM2.45 billion in 2022, according to Air Selangor. This means it saw a revenue increase of about RM370 million year on year.

The higher revenue was used partly to service the company’s financing obligations, says Adam. As at December 2023, Air Selangor had raised RM3.13 billion through the issuance of Sustainable and Responsible Investment (SRI) Sukuk, known as Sukuk Kelestarian Air Selangor.

The SRI Sukuk programme is a RM10 billion Islamic debt financing programme launched by Air Selangor in 2020. Proceeds from the sukuk are to be used to finance the company’s capital expenditure.

It is through this sukuk programme, as well as funding from PAAB, that Air Selangor implements its capital expansion projects as well as NRW reduction projects.

The more debt that Air Selangor raises, however, the more it will have to pay in financing costs. In 2023, financing and leasing costs comprised 23.81%, or RM835.99 million, of its operating and financing expenditure of RM3.51 billion — up 14.16% from the RM732.29 million it paid in 2022.

Since the domestic water tariff was just adjusted in February, the full impact on Air Selangor’s revenue will not be seen until the end of next year. Still, it says, the tariff adjustment has added about 7.85% to billing revenue so far.

The company is already embarking on more capital spending to achieve its targets of maintaining reserve levels above 17.7% and NRW of 25% by 2030, from the current 27.8%.

Air Selangor is spending about RM650 million on its NRW reduction programme this year to replace pipes and expand the DMZs.

“[Prior to the tariff adjustments,] the company carried out about 150km of pipe replacement. We have now increased [the length of the] pipe replacement to 300km,” says Adam. “We have used the extra revenue from the tariff increase to pay for our increased capital expenditure because we need to put up the Rasau WTP.”

‘Tariff for data centres will differ from that of domestic users’

The water tariff that Pengurusan Air Selangor Bhd (Air Selangor) plans to charge data centres will differ from that of normal domestic users and will depend on how much the company has to spend to develop the infrastructure to meet demand, says its CEO Adam Saffian Ghazali.

“[The tariff for data centres] will have to be acceptable to us and them,” he says.

Data centre operators’ demand for water in Selangor is estimated at 240 million litres per day (MLD), Adam says.

While this figure is only about 5% of the average volume of 5,227 MLD produced by Air Selangor in 2023, the company cannot draw down all of the additional demand from its reserves.

“Every year, water demand increases by 3% and that is just normal demand that does not take into account new investments that the government brings in. To get to 240 MLD, without jeopardising our current service to existing customers, we need to develop other sources of water or even pipelines,” Adam says.

Air Selangor’s current reserves are roughly 17%. While this figure appears sufficient to serve the demand of data centres, it will be risky to rely on only the reserves, says Adam, as it is a buffer for an unplanned water treatment plant shutdown or a major pipe burst.

In fact, even before the influx of the data centres, Air Selangor had aimed to raise its reserves to a more comfortable buffer of 20% to 25%.

Another point to note is that the quality of water required by data centres is different from that produced by Air Selangor. Some data centres need higher quality water than potable water and others require lower quality water, says Adam.

To meet the demand of data centres, Adam says, Air Selangor can use water produced by its subsidiary Central Water Reclamation Sdn Bhd (CWR) from water discharged by national sewerage firm Indah Water Konsortium Sdn Bhd (IWK).

“CWR takes the effluent discharge from the sewerage treatment plant (STP), processes it and then sells it back to industrial customers. So, we can look at this as an alternative source, subject to the requirement of the data centres.

“The effluent discharge from IWK is clean, anyway, but not for human consumption. So, we can put the discharged water through a membrane plant, which will produce deionised water that some of the data centres need,” says Adam.

The Pantai STP in Pantai Dalam, Kuala Lumpur, can churn out 300 MLD of effluent discharge. Through CWR, which is 40%-owned by IWK, Air Selangor will be able to produce water required by data centres without drawing down from its own reserves.

More investments will have to be made, however, as Air Selangor will need to build a membrane plant as well as pipelines that will connect the STPs to the membrane plant and data centres.

This infrastructure development will not be part of the tariff-setting mechanism regulated by SPAN, says Adam.

Air Selangor has yet to come up with a capital expenditure plan to meet the data centres’ demand for water. The cost to build a regular WTP is RM1.5 million per MLD on average, but it could rise to RM2.5 million per MLD to build a WTP for deionised water. The cost is also lower if the water produced is of a lower quality than what Air Selangor produces for human consumption, he says.

If all the data centre players require deionised water, then Air Selangor will have to spend RM600 million to build the WTPs needed to meet anticipated demand. This sum excludes the capital cost of building pipelines between IWK’s STPs and the membrane plants, and from the membrane plants to the data centres.

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