Malaysia is turning the tap on water CAPEX and water tariffs
In a webinar entitled "Turning the Tap on Water Capex and Water Tariff - A Review of Water Sector Drivers" , held on 18 August 2020, organized by Protemp  with Malaysia International Convention 2021 (MIWC)  and Malaysia Water Association (MWA) , several water industry stakeholders attended virtually to discuss the water capex and water tariff environment in Malaysia.
The last ten years have been quite a challenging journey for water stakeholders in Malaysia who have been dealing with high operating costs and high levels of NRW (non-revenue water). And going forward water stakeholders will face the need of higher capital investment to improve the water services infrastructure in Malaysia - said Mr Sharizan Rosely, a seasoned industry observer and sector specialist within Malaysia's water segment.
Malaysia is facing a water CAPEX backlog amounting to RM77 billion
According to the speaker of the webinar, Mr Sharizan Rosely, Senior Analyst for Construction, Building Materials, Water, REIT sectors of CGS-CIMB Securities Sdn Bhd, Malaysia is dealing with a RM77 billion (about USD18 billion) backlog of water CAPEX, which covers upstream (raw water source and water treatment/production) and downstream (reservoirs, pumping stations, and distribution of pipelines in ageing and old pipes) .
He elaborated that in the RM77 billion water CAPEX plans (Figure 1), 70% is expected to be in nationwide water resource and supply systems as well as new sources of raw water that involve the construction of dams, off-river storage and new water treatment plants (WTPs) whilst 30% would be for the replacement of the entire network of old asbestos cement (AC) pipes spanning 43,980 kilometers.
Figure 1: Total Long-Term Water Capex Required for Malaysia, 2019 
CGS-CIMB Research observes that the direct government allocations or grants for water infrastructure in Malaysia have been lumpy in the past decade (Figure 2), ranging in between RM1 billion (about USD240 million) and RM3.3 billion (about USD800 million) per annum. In the Malaysian Budget 2020, RM1.781 billion is allocated for water infrastructure, which approximately RM587 million would be allocated for rural water projects, out of which RM470 million for Sabah and Sarawak in East Malaysia to meet the Malaysian Government’s target of 99% access to clean water, and RM100 million for the FELDA water supply projects .
Figure 2: Malaysian Federal Government’s Yearly Budget Allocation to Water Sector 
In Malaysia, the water CAPEX rollout is approved by the national Water Services Commission of Malaysia (Suruhanjaya Perkhidmatan Air Negara – SPAN) that acts as the regulator for water sector, and implemented by Water Asset Management Company (Pengurusan Aset Air Berhad – PAAB) as the asset owner. According to CGS-CIMB’s Senior Analyst Sharizan Rosely, the value of future water CAPEX rollout hinges on the ability of state water operators to incur additional rental payments associated with the value of CAPEX spent by the asset owner PAAB .
It is understood that the water CAPEX in Malaysia is financed by bonds raised by PAAB, which are then translated into annual lease payments payable by water operators to PAAB. PAAB recognizes lease payments as revenue over a specified operating period, unique to each state water operator. Once a new water tariff is approved and committed to be implemented, PAAB will then initiate the tender and award phases, typically over a three-year period, before the next water tariff review by SPAN.
Several States in Malaysia migrated operations to Licensing/Sale-Leaseback Model
The Water Industry Guide 2017 published by the Malaysia Water Association stated that for the states in Malaysia, Perak, Negeri Sembilan, Melaka, Johor, Kelantan, Perlis, Penang and Selangor have restructured and migrated their operations to the licensing/sale-leaseback model with scheduled tariff hikes .
“We foresee new proposals for water infrastructure projects funded by PAAB to focus on the loss-making state water operators.”, shared Sharizan Rosely.
Among the loss-making state water operators, the most crucial is the state of Selangor (Figure 3) which despite raking in the highest water revenue with RM2.1 billion (about USD500 million) as at end of 2017 booked in an operating loss of RM1.8 billion (about USD433 million). Selangor is observed to rank the highest in terms of operating deficit, with a total expenditure/revenue ratio of 188% in 2017.
Figure 3: Total Revenue, Total Operating Cost of State Operators in Malaysia 
Sharizan thinks the ongoing full-cost recovery agenda by state water operators points to:
The need for water tariff increases to support infra spending financed by PAAB.
Steady increases in the value of water CAPEX approved by SPAN.
Accelerated non-revenue water and pipe replacement initiatives to better manage water loss.
He added that the tariffs of other water operators were last hiked 12 to 35 years ago, with the average water rates across all 14 states in Malaysia (Figure 4) range between RM0.78/m3 and RM2.20/m3 (about USD0.19/m3 – USD0.53/m3). “The last water tariff increases were in 2015 which were Sabah, Penang, Negeri Sembilan and Labuan. On the other hand, among the migrated state operators, water tariffs in Kelantan, Perak, Terengganu and Perlis are 11-33% lower than the national average, while the average water tariff rates in Kelantan, Perak, Terengganu and Perlis are 11-33% lower than the national average, while the average water tariff rates for Negeri Sembilan, Johor and Melaka are 11-56% higher than the national average which the national average is recorded at RM1.25/m3 (about USD0.30/m3).
Figure 4: Average Water Tariff of State Water Operators 
High priority for replacement of old pipes
According to Sharizan, the primary focus of water CAPEX is divided into three main segments:
Water treatment plants – to improve water reserve margin.
New distribution network including reservoir and storage.
Replacement and rehabilitation of old pipes.
“The more critical issue is the replacement of old pipes, which in turn would contribute tremendously to the reduction in non-revenue water loss.”, he highlighted.
Based on their analysis, CGS-CIMB Research predicts that out of the RM2.6 billion (about USD626 million) estimated total new CAPEX as derived in 2019, pipe replacement would constitute 35% (RM917 million, about USD220 million), water treatment plants would take 31% (RM804 million, about USD193 million), and new distribution of network would account for 23% (RM595 million, about USD143 million).
Sharizan elaborated that based on their estimation, based on the federal government’s Budget 2019, the compiled water infrastructure budget allocation for selected states (Figure 5) would record a total of RM8 billion (about USD1.93 billion).
“The states of Sarawak and Johor have launched more aggressive multi-year CAPEX programmes for both water distribution and treatment facilities.”, he expressed.
Sharizan went into further details that Sarawak’s Water Supply Grid Programme (SWSGP) is recorded at RM2.8 billion (about USD 680 million) and Johor’s Non-Revenue Water Reduction Programme (ANRP) is recorded at RM3.4 billion.(about USD820 million)
“Other sizeable water CAPEX plans include Perak’s 3-year largely self-funded RM501 million (about USD 120 million) capex plan and Selangor’s RM223.4 billion (about USD 43 billion) allocation for water infrastructure.”, he revealed.
Figure 5: Malaysia’s State Water Capex Plans 
 Malaysia International Convention, https://www.miwc.tech/  Malaysia Water Association, https://www.mwa.org.my/home/  CGS-CIMB Securities Sdn Bhd, https://www.itradecimb.com.my/  National Water Services Commission of Malaysia, (Suruhanjaya Perkhidmatan Air Negara – SPAN), https://www.span.gov.my  https://www.bnm.gov.my/documents/budget/bs2020.pdf  CGS-CIMB Research, https://research.cgs-cimb.com  http://www.paab.my/  https://www.mwa.org.my/water-industry-guide/  https://www.mwa.org.my/water-industry-guide/  https://www.mwa.org.my/water-industry-guide/  CGS-CIMB Research, https://research.cgs-cimb.com
Get in touch for more information about business opportunities in Malaysia:
Veronica Hui Mei Liew
Trade Advisor at Royal Danish Embassy in Malaysia