KUALA LUMPUR (May 28): Malaysia's water sector faces over RM2 billion in annual losses due to non-revenue water (NRW), with some states losing over 60% of treated water, amid drought and underfunding, said BIMB Securities.

METMalaysia predicts prolonged drought conditions through 2026, with three vulnerable states, namely Kedah, Perlis, and Kelantan, operating below the critical 10% water reserve margin, according to the house.

"States like Perlis lose over 60% of treated water — creating a vicious cycle of underfunded upgrades and worsening leakage, as well as [affecting the] sustainability of available water resources," BIMB said in a note on Wednesday.

This financial drain is a result of massive NRW losses, which exceed 50% in states such as Perlis and Kelantan, it added.

BIMB said funds are desperately needed for infrastructure upgrades, while deteriorating pipes continue to haemorrhage water. It said progress is extraordinarily costly, with each 1% reduction in NRW requiring RM800 million to RM1 billion in investments, placing immense strain on already limited state budgets.

"This financial burden occurs against a backdrop of climate stress, as METMalaysia warns of prolonged drought conditions through 2026 that could push vulnerable states like Kedah, Perlis and Kelantan towards crisis."

BIMB said despite a February 2024 water tariff hike, the first major revision in decades, current tariffs remain insufficient to cover full water treatment costs. 

"They still cover just 53% of treatment costs, leaving operators like Air Selangor (RM610 million in loss in 2023) dependent on state and federal support. The coming years will test whether Malaysia can break this cycle through full implementation of the tariff setting mechanism (TSM) and accelerated NRW reduction programmes."

It noted that domestic tariffs average RM1.00/m³, while treatment costs are RM1.89/m³, creating a significant shortfall for water operators.

This necessitates federal intervention for basic operations, leaving minimal capital for NRW reduction. 

The National Water Services Commission (SPAN) recommends a 10% to 15% water reserve margin for stability, it added.

However, as of 2024, only eight states met this threshold, with Kedah (0.0%), Perlis (5.0%), Melaka (5.2%), and Kelantan (4.4%) facing critical shortages. 

The sector's vulnerability is exacerbated by rising demands, including projections for data centres to consume 614 million litres per day (MLD) in Johor by 2035. Compounding issues are instances of water pollution, such as a chemical leak in July that forced four water treatment plants in Selangor to shut down. 

SPAN aims for a 31% NRW level by 2025, but the national average for Peninsular Malaysia and Labuan currently stands at 34.3%. To address these challenges, SPAN introduced the TSM in 2018 to move towards full-cost recovery. However, public resistance to tariff hikes has delayed full TSM implementation, costing operators RM1.2 billion annually in lost profits. 

BIMB said apart from the extreme weather conditions, the states are particularly vulnerable to pollution-related disruptions.

"While still above the critical 10% threshold, the trajectory poses a growing risk of droughts and severe shortages, especially if another pollution incident disrupts supply. The decline is particularly surprising given that the Langat 2 water treatment plant, with its substantial capacity of 1,130 MLD of supply, commenced operations in early 2024."

As Malaysia contends with climate change, pollution, and significant water losses, a new challenge emerges — meeting the escalating water demand from data centres. 

These facilities, crucial for economic growth, rely heavily on treated water for their cooling systems.

BIMB, citing disclosures by SPAN in January 2025, said Ranhill SAJ Sdn Bhd, a subsidiary of Ranhill Utilities Bhd (KL:RANHILL), has received water supply applications from data centres totalling 440 MLD by 2035. 

This demand is concentrated in areas like Johor Bahru, Iskandar Puteri, Sedenak, Kulai/Senai, Pasir Gudang, and Pontian. 

By the same period, this projected demand is expected to reach 614 MLD, representing 26.1% of Johor’s water treatment plant design capacity and 31% of its total water demand as of 2024.