Malaysia's Murky Water War

In the mid-1990s, then Malaysian Prime Minister Mahathir Mohamad ordered the privatization of a wide range of government activities from highways to airports to railways to shipyards and much more. However, privatization Malaysia-style would result in a cornucopia of money funneled to companies linked to the ruling national coalition, and particularly to the United Malays National Organization, the country’s leading political party.

There are few better examples of that river of cash than the system that provides water to the 8 million-odd residents of Selangor, the country’s biggest states, as well as, Kuala Lumpur proper and the new Putrajaya government center. The water service was hived off in a 30-year contract to a company called Syarikat Bekalan Air Selangor Sdn Bhd, more popularly known as Syabas, which was incorporated to operate the system.

That was when the state of Selangor was an UMNO stronghold. But in the 2008 election, Selangor fell to the opposition Pakatan Rakyat coalition. And since that time, Pakatan Rakyat has been attempting to get the water service re-nationalized. It has been an intense and so far unsuccessful campaign that has become a game of chicken between the federal and state governments ahead of the next general election, which could be held in November.

The issue has become part of Umno’s attempt to re-take Selangor state from the opposition, with government figures charging that the standoff will lead to water shortages for the domestic and international companies involved in manufacturing in the area.

Syabas is 70 percent owned by Puncak Niaga Holdings Bhd., whose chairman and beneficial owner is Rozali Ismail, a personal friend of Prime Minister Najib Tun Razak and his wife Rosmah Mansor. Rozali is also the former UMNO treasurer of Selangor state. He has been given the honorific of Tan Sri, the second-highest of Malaysia’s odd hierarchy of titles. The other 30 percent is held by two vehicles of the Selangor state government. Malaysia’s Finance Ministry holds a single so-called golden share, which gives it voting primacy.

The water system pays Rozali RM8.4 million (US$2.68 million) per year, making him Malaysia’s 16th highest paid executive director although he has denied the figures. In any case, the water company paid RM17 million to its executives last year despite the fact that the water company suffered an RM75 million pre-tax loss according to Bursa Malaysia. The company’s 2011 financial statement shows current liabilities of RM2.38 billion against assets of RM1.7 billion, with debt at nearly Puncak Niaga also faces a RM2 billion lawsuit over the fact that it has paid only 40 percent of its obligations to water treatment companies. Despite the debt – or perhaps because of it -- it appears that Syabas may have been a cash cow for a long list of UMNO cronies. According to an auditor general’s report that was abruptly withdrawn from public view under the country’s stringent Official Secrets Act, 72 percent of all subcontracts with the water company were awarded through direct negotiation to the contractors without recourse to public bidding.

Syabas is just one of more than a score of government-linked companies that provide the mother’s milk of money for UMNO. As Asia Sentinel reported on Oct. 23, 2010, at least 23 of Malaysia's biggest companies appear to have been vehicles to siphon off money via government contracts. The companies and the people who run them are so hard-wired into UMNO and its investment arms that de-linking them could conceivably destroy the party. Many of the companies have suffered from disastrous mismanagement and have had to be rescued by the government.

In Syabas’s case, the government has staged a no-holds-barred fight to keep the water company in UMNO hands. A special cabinet committee set up to deal with the issue recently rejected a state government proposal to take back the system, with Muhyiddin Yassin, the deputy prime minister, saying the state government doesn’t comply with a variety of procedural matters.

The problem is that the squabble between the state and national governments has meant that some of the 34 water treatment plants in Selangor have hit capacity, with critics alleging that several areas of the Klang Valley, in which Selangor lies, to face water problems.

The state government argues that the concession agreement granted to Syabas is not in the interest of citizens, that returning water to public ownership is a basic citizens' basic right and that in fact Puncak Niaga is asking an exorbitant penalty payment from Selangor to surrender the concession agreement.

In an effort to open up the issue to its constituents, the state government sought permission to make the concession agreement between Syabas and the government public. A high court in Selangor agreed with the opposition only to have the federal court, which is famously malleable to political winds, reverse the high court’s decision on appeal. That was a year and a half ago. The appellate judges have yet to furnish a written judgment justifying their decision.

In lieu of cancelling the agreement and re-taking responsibility for water supply, Selangor officials are calling for an independent audit of the 50-year study on which the agreement was predicated, to verify the validity of the assumptions on gross domestic product growth, projected water demand and population increases, and to identify options to improve existing capacity of the treatment plants. The state government also wants to list water conservation measures for households and factories to reduce wasteful consumption.

The federal government has refused to consider an independent audit. It suggests that Selangor pay up or shut up.

Meanwhile, the opposition charges, the federal government and its UMNO machinery are in fact creating a false scare over the water shortage threat.

Charles Santiago, a Democratic Action Party member of parliament, charged in an interview that the crisis is being manufactured to pressure the state to endorse the construction of a new treatment plant that would lock the state into a major financial commitment which in turn would impose unacceptable water tariffs on the state’s citizens.

The proposed plant, called Langat 2, is part of a larger plan to tap water resources in Pahang state to the north through piping infrastructure and tunneling to bring the water to the Klang valley. An interstate plan which needs federal oversight, it already appears to be a cash cow for UMNO-linked companies. The Langat 2 treatment plant itself will take three and a half years to build and the government charges that without building it, the infrastructure committed already will be wasted.

One of the principal joint venture contractors on the project is United Engineers Malaysia, or UEM, a company that since its inception has been notorious for profiting from a long list of government projects including highways and other construction projects.