A process of “review” of water tariffs

WHEN the government launched the National Water Utilities Industry Restructuring (NWSIR) in 2004, this was to address the problem of the industry which was highly politicized and operated with various failing models.

The NWSIR is implemented using the Water Services Industry Act 2006 (WSIA) model. One of the essential elements of the NWSIR is to solve the problems of financing and cost recovery (via the water tariff) to achieve an efficient and sustainable water services industry. Thus, a transparent and fair tariff setting mechanism (TSM) using a benchmarking method was developed and agreed in 2009 and water regulatory accounting (Warga) was also agreed in 2016.

During the transition period, few tariff revisions were made on the basis of the “cost plus” mechanism. This “cost plus” mechanism takes the projected cost submitted by water service concessionaires and adds a regulated profit. This is an archaic method of setting tariffs that was to be replaced by a benchmarking mechanism under the WSIA model.

Between 2018 and 2021, two consultation processes on the revision of tariffs were carried out and completed. The first started in December 2018 and ended in May 2019 for Pahang, Perlis, Labuan, Terengganu, Kelantan and Selangor (including Kuala Lumpur and Putrajaya). The second was carried out in mid-2021 through an online consultation process for Kedah, Penang, Johor, Negri Sembilan, Perak, Malacca and included sanitation services.

TSM should be implemented by the National Water Services Commission (SPAN) to ensure a fair tariff with sufficient checks and balances in place. TSM involves benchmarking unit costs to the lowest effective cost.

Operations are grouped by size, type of raw water, technology, etc. The cost per cubic meter (m3) is then derived and compared. For example, if the lowest processing cost in a comparison cluster is 11 sen per m3, other operators operating above this value will be referenced at the lowest cost. If another treatment plant operates at 16 sen per m3, the additional 5 sen per m3 cannot be passed on to the tariff.

Similarly, during the tariff cycle (every three years), if the operator with 11 sen per m3 manages to reduce the cost to 10.5 sen, the savings will be the benefits of the operator. However, when we move to the next tariff review cycle, the regulator will use 10.5 sen per m3 as a benchmark.

This approach is also applied to the cost of chemicals, the cost of electricity (based on energy efficiency), the cost of human resources and many other regulated costs that can be passed on in tariffs. This is to promote profitability and a fair price for consumers.

TSM must regulate the profit margin to be below a double digit percentage. SPAN may impose a cap on the efficiency benefit and the profit margin so that the additional recovery can be directly reinvested in the tariff.

When DST based on cost benchmarking is implemented, inflated and inefficient costs cannot be passed on to the water tariff. This is the goal of a tariff review process and it does not guarantee a tariff increase as it only promises effective costs to pass on to the tariff. The “cost plus” mechanism does not guarantee that only the effective cost will be passed on to the water tariff.

The NWSIR has set a 30-year goal to achieve full cost recovery that includes sharing sanitation services with state water companies. A rolling three-year plan will be imposed in addition to the 30-year business plan requirement. Unfortunately, after 14 years of applying the WSIA (which began on January 1, 2008), SPAN has failed to implement cost benchmarking for the tariff review process. Cost benchmarking can be developed from a simple comparison mechanism which can then evolve into complex matrices of iteration processes to minimize inefficiency costs and eliminate inflated costs.

The question is: why has SPAN failed to implement a transparent tariff-setting mechanism based on a benchmarking method to date? Do SPAN leaders realize the negative impacts of such a delay on the entire restructuring process and the costs that are passed on to consumers and businesses?

The water industry is about providing services to the nation, the economy and the people; it is never about creating billionaires. Thus, priorities must be set to achieve near-perfect results.

“Don’t worry about your math difficulties. I can assure you that mine are even bigger. -Albert Einstein

This article is written by Piarapakaran S, President of the Association of Water and Energy Research Malaysia (Awer), a non-governmental organization involved in research and development in the fields of water, energy and environment.