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FEER: Raising a Stink [IWK]
By S. Jayasankaran
29/9/2001 2:27 am Sat
The Far Eastern Economic Review
Raising a Stink
By S. Jayasankaran
Pity Indah Water Konsortium. Over six years it's been lampooned by
stand-up comedians, castigated by customers and ignored by state
governments, so much so that the company, entrusted with the running
of Malaysia's national sewerage system, soon became synonymous with
the failure of privatization itself.
In June last year, Kuala Lumpur finally accepted the inevitable and
paid more than 192 million ringgit ($50.5 million) to nationalize IWK.
At that time, Bernard Dompok, a minister in the Prime Minister's
Department, said that no more privatized entities would be taken over
by the government. IWK, he said, was a "special case" as the
government had to "safeguard public interest and to avoid service
Since then the government has acquired Malaysia Airlines and is in the
process of taking over the Renong conglomerate and two urban
light-rail transit systems for almost 9 billion ringgit. But IWK may
go back to private hands. According to bankers and several businessmen
familiar with the negotiations, politically connected private company
Puas Emas is a leading contender for the sewerage concern. Businessman
Kenneth Eswaran and Megat Junid Magat Ayob, a former minister and
confidant of Prime Minister Mahathir Mohamad, control Puas Emas. For
expertise, the company has also roped in London-based Thames Water as
its technology and joint-venture partner.
Details of the proposal, first submitted to the powerful Economic
Planning Unit through Alliance Merchant Bank a year ago and
subsequently refined after the entry of Thames Water, aren't clear.
But the businessmen say that Puas Emas is seeking the rights to manage
IWK. It illustrates Kuala Lumpur's continuing faith in privatization
and the abiding interest among Malaysian businessmen even for
companies like IWK, widely considered the worst privatized project in
the policy's 17-year history. On another level, it indicates that
political connections still carry some cachet in Malaysian deal making
at a time when its influence was said to have been fading.
Indeed, the nationalization of IWK vividly exemplifies the pitfalls of
privatization and embodies much of the hubris of the early 1990's when
any grandiose idea was thought not only possible but also profitable.
(Malaysia defines "privatization" as any allocation or sale of
government-owned assets or resources to private investors.)
In IWK's case, it started in 1993 when businessman Vincent Tan
successfully lobbied the government with a plan to take over the
ownership, operation and maintenance of more than 2,800 state-owned
sewage-treatment plants nationwide. The company he set up, IWK, was
awarded a 28-year concession: in return, IWK promised to upgrade and
modernize Malaysia's sewage-disposal system at a cost of over 6
billion ringgit over two decades.
But the plan wasn't thought through. Much to its chagrin, IWK
discovered that barely 20% of the treatment plants it inherited from
the government were functioning and costs began escalating. More to
the point, it just couldn't sell its services: when customers' bills
began tripling for services they could not see, a nationwide furore
resulted, with consumers, businesses, politicians, even state
governments, complaining bitterly about IWK.
The government began backtracking and pressured IWK to reduce tariffs
twice. Even so, only 50% of customers pay their fees today because,
unlike road tolls, nonpayment isn't a criminal offence. Nor can
sewerage facilities be turned off, unlike water or electricity.
Meanwhile, three management changes occurred at IWK's helm, all to no
avail: by the time the government threw in the towel last year, the
company had more than 900 million ringgit in debt, mostly soft loans
from the government, while customers owed it another 145 million
ringgit. Also, the company was expected to spend at least 3 billion
ringgit over five years to upgrade treatment plants.
Given the background, former IWK executives think it would be very
difficult to make the company viable. "In order to do the things you
have to do, tariffs would have to be more than doubled," says a former
employee. "Is the government prepared to do that?"
In the present political climate--the country's majority Malays remain divided over the 1998 sacking and subsequent imprisonment of former Deputy Premier Anwar Ibrahim--such moves would only present the opposition with more firepower. It could be one reason why the government hasn't yet made a decision on IWK, though it was reported that one would be forthcoming in June.