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Water Tariff and Regulation – Malaysian Experience

By

National Water Services Commission Malaysia

28 October 2010

National Water Services Commission Malaysia 28 October 2010 The views expressed in this presentation are the

The views expressed in this presentation are the views of the speaker and do not necessarily reflect the views or policies of the Asian Development Bank (ADB), or its Board of Governors, or the governments they represent. ADB does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequence of their use. Terminology used may not necessarily be consistent with ADB official terms.

CONTENTS

1. Tariff Before WSIA

2. Existing Water tariffs

3. Comparison With Other Utilities

4. Tariff Setting Under New Regime

5. Key Success Factors

2. Existing Water tariffs 3. Comparison With Other Utilities 4. Tariff Setting Under New Regime 5.

1

1. TARIFF BEFORE WSIA 2006

Under state enactments – long gestation between tariff reviews

Setting tariffs below costs

Vicious circle

reviews  Setting tariffs below costs  Vicious circle Low Tariff Financial Burden to Federal Government

Low Tariff

Setting tariffs below costs  Vicious circle Low Tariff Financial Burden to Federal Government / State

Financial Burden to Federal Government / State Government

- Poor Quality

- Inefficient Service

- Unwillingness of Consumers pay

- Inefficient Service - Unwillingness of Consumers pay Low Financial Investment revenue insufficient to fund

Low Financial Investment

- Unwillingness of Consumers pay Low Financial Investment revenue insufficient to fund operations and maintenance
- Unwillingness of Consumers pay Low Financial Investment revenue insufficient to fund operations and maintenance
- Unwillingness of Consumers pay Low Financial Investment revenue insufficient to fund operations and maintenance

revenue insufficient to fund operations and maintenance resulting in below par operational efficiency and services

2

2

1. TARIFF REVIEW BEFORE WSIA 2006

Distribution has been privatized –concession contract

• Pre-determined as per schedule agreed in the Concession Agreement to allow for project financing
• Pre-determined as per schedule agreed in
the Concession Agreement to allow for
project financing of infrastructure
development
• Steep increases in early period of
privatization due to mismatch between
financing tenure and asset life

Distribution managed by State Operator (water supply departments)

• Determined and gazette by State Government • Review only as and when required –
• Determined and gazette by State
Government
• Review only as and when required – many
states have not reviewed tariff or a long
time
• Often setting tariffs below costs

3

2. EXISTING WATER TARIFFS

…. average domestic water rates – different between states

WATER TARIFFS …. average domestic water rates – different between states Average water tariff for 1

Average water tariff for 1 st 35m³

WATER TARIFFS …. average domestic water rates – different between states Average water tariff for 1

EXISTING WATER TARIFFS

…. average non-domestic water rates

EXISTING WATER TARIFFS …. average non-domestic water rates Average water tariff for 1 s t 500

Average water tariff for 1 st 500 m³ for industrial use

WATER TARIFFS …. average non-domestic water rates Average water tariff for 1 s t 500 m

2. EXISTING WATER TARIFFS

…. revision year

2. EXISTING WATER TARIFFS …. revision year State Penang Melaka N. Sembilan Pahang Perak Kedah

State

Penang

Melaka

N. Sembilan

Pahang

Perak

Kedah

Perlis

Labuan

K’tan

T’ganu

Johor

S’gor

Year

                       

Revised

2001

2005

2002

1993

2006

1993

1996

1982

2001

1997

2007

2006

    Revised 2001 2005 2002 1993 2006 1993 1996 1982 2001 1997 2007 2006 6

3. COMPARISON WITH OTHER UTILITIES

….revenue comparison between utilities sector

RM billion

Year Utility Highway Conces- Energy Telecom- Water Sewerage sions³ munication ² ¹ 2006 20.38 26.60
Year
Utility
Highway
Conces-
Energy
Telecom-
Water
Sewerage
sions³
munication
²
¹
2006
20.38
26.60
3.80
0.35
1.93
2007
23.32
30.00
3.77
0.37
2.07
2008
24.75
26.23
3.83
0.37
3.26
2009
28.78
28.45
3.92
0.43
3.47

1. Telecommunication Service Provider- Telekom, Axiata, Maxis and Digi. Total Revenue for FYE 2006 & 2007 exclude overseas revenue

2. Sewerage Company – IWK

3. Highway Concession Company - PLUS and Litrak Berhad

Source:

MCMC’s Industry Report 2006-2007

Telecommunication Service Provider Audited Account 2008-2009

Highway Concession Company Audited Account 2006-2009

MWIG 2008 - 2009

Water Operator 2009 Data

2008-2009 • Highway Concession Company Audited Account 2006-2009 • MWIG 2008 - 2009 • Water Operator

7

3. COMPARISON WITH OTHER UTILITIES/FACILITIES

…. comparison with other household expenses

Type Cost/ Unit Monthly Expenses Water bill ¹ 30.75m³/month RM26.14 RM34.14 Sewerage bill Monthly Charge
Type
Cost/ Unit
Monthly Expenses
Water bill ¹
30.75m³/month
RM26.14
RM34.14
Sewerage bill
Monthly Charge
RM8.00
Electricity bill ²
Tariff A – Domestic tariff (for
usage of more than 400 kWh/
RM 167.57
month)
Mobile Phone
RM101.00 per month (per
RM404.00 ³
person)
Internet & House
RM 90.00/month (512 kbps)
RM90.00 ⁴
Phone
Satellite TV
Minimum Package- RM37.95
RM82.00 ⁵
Maximum Package-RM139.95
Cigarette
RM9.30 per box
RM111.60 ⁶

Assumptions:

1. Water bill for a family of 5 (205 lcd per person)

2. 6,780 kWh/ year ( 565 kWh/ month) - based on the survey conducted by CETDEM on the average energy usage for a double-storey house in Petaling Jaya

3. Usage for a family of 4 - per person usage based on Celcom ARPU for the year 2009

4. Streamyx Combo Package (Internet & House Phone)

5. ARPU for ASTRO subscribers – based on a study by MIDF (2009)

6. Average of 8 cigarette sticks person/day

Phone) 5. ARPU for ASTRO subscribers – based on a study by MIDF (2009) 6. Average

HOW CHEAP IS WATER ?

…. comparison with the cost of prepaid phone callS

“Talking over the phone for 1 to 2 minutes (Prepaid)

will cost ≥ to 1 cubic meter of water sufficient to

cater to the daily requiremenst of an average family”

(Prepaid) will cost ≥ to 1 cubic meter of water sufficient to cater to the daily
(Prepaid) will cost ≥ to 1 cubic meter of water sufficient to cater to the daily

Key Considerations in Tariff Setting

Key Considerations in Tariff Setting “Water and sewerage charges constitute <2% of total average monthly household

“Water and sewerage charges constitute <2% of total average

monthly household income across all states in Malaysia”

(f)

% of Total charges over Average Monthly Household income (RM)

(a)

Average consumption m3 / month

(2008)

(c)

Average Monthly Sewerage Charges (RM)

(e)

Average Monthly Household income (RM)

(2004)

(b)

Average Monthly Water Charges (RM)

(d) = (b) + (c) Average Total Monthly Charges (RM)

State

Labuan

49.8

44.82

8.00

52.82

2,487

2.12%

Perlis

29.5

16.15

8.00

24.15

2,046

1.18%

Terengganu

30.1

14.97

8.00

22.97

1,984

1.16%

Perak

27.3

17.30

8.00

25.30

2,207

1.15%

Kedah

31.4

15.98

8.00

23.98

2,126

1.13%

Pahang

33.4

18.83

8.00

26.83

2,410

1.11%

Kelantan

24.8

11.60

8.00

19.60

1,829

1.07%

Malacca

30.4

21.34

8.00

29.34

2,792

1.05%

Johor

26.7

19.51

8.00

27.51

3,076

0.89%

Negeri

24.7

15.00

8.00

23.00

2,886

0.80%

Sembilan

Selangor

35.6

28.05

8.00

36.05

5,093

0.71%

Penang

32.1

9.48

8.00

17.48

3,531

0.50%

Affordability ? Willingness
Affordability
? Willingness

Source: Malaysia Water Industry Guide 2009, 9 th Malaysia Plan Chapter 16, KPMG

Extract From The Study On Tariff Setting Mechanism and Benchmarking by KMPG

4. TARIFF SETTING UNDER NEW REGIME

tariff review is to balance the interests of

CUSTOMER OPERATOR
CUSTOMER
OPERATOR

TARIFF RATE MUST COMMENSURATE WITH LEVEL OF SERVICE

ALLOW REASONABLE RETURNS THAT WOULD SUSTAIN OPERATIONS

……. 9 key principles based on 4 thrusts of WSIA

Economic

Social

Consumer

Technical

1. Sustainability

4. Conservation

6. Affordability & willingness

8. Compliance

2. Efficiency

3. Costs

5. Social principle

7. Transparency

9. Intergenerational

equity

TARIFF SETTING UNDER NEW REGIME

A robust, stable and transparent framework for

periodic tariff reviews

A study was conducted by the Ministry of Energy, Green Technology and Water to put in place a tariff setting mechanism that allows full recovery of costs

The process is Transparent, Consultative, Participatory where customer’s views are considered and well planned and comprehensive

Regulatory accounting framework to allow benchmarking to incentivized operators

4. TARIFF SETTING UNDER NEW REGIME

……. tariff setting principles

Tariffs to be determined every 3 years through a stable tariff setting framework and in consultation the Water Forum and other stakeholders

Tariff setting framework that

promotes efficiency and transparency

provides consumers with a fair and affordable price structure

ensures reasonable returns that commensurate with the risks taken by the operators (cost-plus approach)

A carrot and stick approach to tariff review - efficiency gains are allowed to be kept by the operators for the relevant operating period, subject to achievement of KPIs and service levels determined by SPAN

A regulatory accounting framework will be established to shield off inefficient and bloated costs in tariff setting

4. TARIFF SETTING UNDER NEW REGIME

…….balancing affordability and sustainability

Other upstream costs Current Future Operating Capital Expenditure expenditure Water Tariff Full supply costs
Other upstream costs
Current
Future
Operating
Capital
Expenditure
expenditure
Water Tariff
Full supply costs
Operating
Capital
expenditure
expenditure
Water Tariff
Full-cost for Operators

Full Cost Recovery cannot be achieved with a one-time huge tariff increase

Phased tariff increase s to recover costs

Short – Mid Term (Year 1-10 years) :

full supply cost

Long Term (Year 11-30) : full cost

4. TARIFF SETTING UNDER NEW REGIME

…… tariff structure

 

Average Water Usage Per Capita (lcd)

Countries in Asia

Singapura

155

Shanghai

251

Seoul

205

Osaka

263

Hong Kong

187

States in Malaysia

Melaka

268

Negeri Sembilan

239

Kedah

236

Johor

207

Kelantan

142 *

Malaysia average rate

205

WHO (minimum usage)

100

Domestic

Tariff structure based on

Affordability

Punitive rate

structure based on  Affordability  Punitive rate to prevent excessive consumption and encourage water

to prevent excessive

 Affordability  Punitive rate to prevent excessive consumption and encourage water conservation Commercial •

consumption and encourage water conservation

Commercial

Based on commercial/ industry profile of the respective states

Encourage commercial/industrial users to adopt water efficiency technology

* Low level of treated water usage is due to the availability of other alternative water resources.

to the availability of other alternative water resources. Source: Malaysia Water Industry Guide 2009 Asian Development

Source:

Malaysia Water Industry Guide 2009 Asian Development Bank Report 2005 Asian Development Bank Report 2008

15 World Health Organisation (WHO)

Regulatory Water Accounting “Relationship between Regulatory Water Accounting and Tariff Setting Mechanism”

Regulatory Water Accounting A tool to support tariff pricing structure
Regulatory Water
Accounting
A tool to support
tariff pricing
structure
Accounting A tool to support tariff pricing structure Water services operators submit regulatory accounts on an

Water services operators submit regulatory accounts on an annual basis

Regulatory

Accounts

A uniform and consistent set of financial statements for regulatory purposes

Regulator reviews and compares business costs and their relative efficiency position

business costs and their relative efficiency position Source: KPMG Benchmark Costs Benchmark costs form the

Source: KPMG

Benchmark Costs

Benchmark costs form the regulatory costs in calculating future tariff pricing

Regulator sets benchmark costs based on market price and set efficiency-based targets.

Tariff-Setting

Mechanism

Applying benchmark costs incentivizes businesses towards continuous improvement

Regulator through the pricing mechanism allows water services operators to recover benchmark costs

16

4. TARIFF SETTING UNDER NEW REGIME

……. tariff review request and revision process

Uniform Tariff revision process allows less room to politicize

3 major stages Initiation by operator

Recommend-

ation by SPAN Approval by Minister

 Recommend- ation by SPAN  Approval by Minister Uniform tariff revision process Stage 1 Stage

Uniform tariff revision process

Stage 1

Stage 2

Operator Tariff Request
Operator
Tariff
Request
SPAN Assessment & Recommendation Tariff Consultation with all stakeholders and citizen participation
SPAN
Assessment &
Recommendation
Tariff
Consultation with
all stakeholders
and citizen
participation
Stage 3 Minister Approval by YB Minister/ Cabinet Gazette of water rates
Stage 3
Minister
Approval
by YB
Minister/
Cabinet
Gazette of
water rates
Stage 4 Operator Consumer awareness program New tariff in effect
Stage 4
Operator
Consumer
awareness
program
New tariff
in effect

1717

5. KEY SUCCESS FACTORS

Buy In on RAF

Comprehensiveness of RAF covered to facilitate benchmarking

Skill set for evaluation

Corporatization of Water Distribution Licensees

Adoption of AMP

Public Awareness

Transparency

Political Will