The Far Eastern Economic Review
Issue cover-dated 27th September 2001

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 disruptions."

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?"