PRIVATIZATION Privatization in Malaysia, Regulation, rent-seeking and policy failure

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Malaysia’s national sewerage system 89of raw sewage being released into the sea daily in Jelutong and Bayan Barurespectively (National Audit Department, Malaysia 2000). According to theMinistry of Science, Technology and Environment, despite improvementssince 1997, water quality in Malaysia remained poor, with high levels ofE. coli detected in the sea, indicating discharge of untreated sewage (Water &Environment International, March 2000, 9 [66]).Less than 17 per cent of the 5,409 STPs operated by IWK in 1998 compliedwith the discharge standards (Table 4.04). The remaining 83.5 per cent oftreatment plants were given contravention licences while they were beingupgraded. 12 The DOE reported 13,398 cases of environmental pollutionattributed to sewage discharges by households (42.3 per cent), industry (37.5per cent), livestock (16.7 per cent) and agriculture (3.5 per cent) (NationalAudit Department, Malaysia 2000). As a result of not meeting environmentalstandards, IWK was issued with RM158.7 million worth of fines by the DOEbetween 1994 and April 1998. However, IWK was given an exemption by theMoF and only had to pay RM56.9 million (National Audit Department,Malaysia 2000).TechnologyPrivatization was expected to promote the adaptation of imported technologyfor local needs and to develop low-cost Malaysian technologyfor sewerage systems for export to developing countries. By IWK’s ownadmission, the failure of the company’s STPs to meet environmentalstandards was due to a lack of expertise, and the inappropriateness ofimported technology for local conditions (New Straits Times, 15 September1999). Privatization failed to initiate development of appropriate localtechnology and did not even address local sewage treatment requirements.Malay ownershipThe privatization of the sewerage system was an opportunity to further theNEP’s ‘restructuring’ (to reduce ethnic disparities) as well as redistributionTable 4.04 IWK: Sewerage treatment plants meeting effluent standards, 1999–2000Location Year TotalplantsTotalplantstestedNumbermeetingA standard(%)NumbermeetingB standard(%)Catchment areas 1999 973 805 6 (1)Others 1999 5,049 4,077 1,101 (27)Catchment areas 2000 995 617 11 (2)Others 2000 5,215 3,659 1,493 (41)Source: Adapted from National Audit Department, Malaysia (2000).
90 Malaysia’s national sewerage systemobjectives by: 1, developing Malay entrepreneurial capacity through a Malayvendor scheme, and; 2, through ownership and management of assets. Theparticipation of Malay contractors in IWK’s refurbishment/capital worksprogrammes as well as operations and maintenance averaged only 37 per cent(Prime Utilities 1998). While privatization offered the opportunity for Malayownership of assets, it was characterized by several changes of ownership andmanagement following each tariff revision.Shortly after commencing operations in 1993, IWK was acquired by publiclylisted Berjaya South Island (another Berjaya Group company) inNovember 1995 for RM450 million through a share swap. Berjaya SouthIsland later changed its name to Prime Utilities Bhd (PUB). A condition ofthe sale was that PUB was guaranteed IWK’s pre-tax profit for 1997–99(‘secured financial years’) of not less than RM105 million for each financialyear 13 (Prime Utilities 1999: 45). Profit guarantee agreements following eachsale were introduced by the Securities Commission in an effort to ensure thatprofit projections were realistic, with the seller having to compensate thebuyer in the form of payment of the profit shortfall by instalments or by wayof issuance of new securities (see Securities Commission, Malaysia 1999b).In August 1996, Wan Adli Wan Ibrahim (Berjaya Group’s executivedirector on the board of PUB) acquired 19.01 per cent of PUB (throughTranswater Corporation Bhd) for RM228.16 million at RM20 per share.Transwater later increased its interest in PUB to 26.53 per cent. A SecondProfit Guarantee Agreement of RM105 million a year, with the same conditions,was signed on 28 August 1997 for 1999–2001 following divestment bycertain parties and revisions made to the sewerage concession requestedby the government (Prime Utilities 1999). On 15 September 1997, IdrisHydraulic Bhd acquired a 32 per cent controlling stake in PUB for RM370million cash. 14 Of the 32 per cent PUB stake acquired by Idris Hydraulic,10 per cent (six million shares) was purchased from Ilham Desiran Sdn Bhd(a wholly owned subsidiary of Transwater, controlled by Wan Adli)for RM142.5 million at RM23.75 per share; 19 per cent at RM20 per share,with the remaining 3 per cent bought on the open market. The purchase pricerepresented a ‘hefty premium’ based on PUB’s price of RM14.50 on 15September 1997 (The Star, 16 September 1997). The succession of ownershipchanges suggests that Malay ownership was only short term with littleapparent gain in management experience.ProblemsIWK’s failure to meet coverage, capital investment and environment targetswas due to the government’s ex ante and ex post failures. Ex ante failure wasthe failure to account for information and institutional problems. Poor dataon the quantity and quality of assets to be taken over increased operationalcosts and affected service provision. There was also insufficient informationon the utility’s operating costs to determine appropriate tariff levels. Rather
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Privatization in MalaysiaRegulation
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Privatization in MalaysiaRegulation
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Dedicated to my parents, Tan Siew S
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viiiContentsProblems 123Conclusion
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xTables6.02 Asia Pacific airlines:
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AbbreviationsAFTAAFTKAPTKARPASEANAS
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LoSLPPJLRTLTALTATLTDLTLMARAMASMBOMC
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1 IntroductionWhy privatize?The deb
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Introduction: why privatize? 3neces
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Introduction: why privatize? 5count
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2 Privatization, rents andrent-seek
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Privatization, rents and rent-seeki
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What is needed to make privatizatio
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Page 56 and 57: 3 Institutional and politicalfailur
Page 58 and 59: Institutional and political failure
Page 96 and 97: Malaysia’s national sewerage syst
Page 102 and 103: Table 4.01 IWK: Performance summary
Page 118 and 119: Table 4.09 IWK: Tariff revisions, 1
Page 124 and 125: Kuala Lumpur Light Rail Transit 107
Page 132 and 133: Table 5.01 Kuala Lumpur LRT: Financ
Page 136 and 137: Table 5.03 Regional urban rail syst
Page 150 and 151: 6 Perverse incentivesMalaysia Airli
Page 152 and 153: Malaysia Airlines 135Both types of
Page 154 and 155: Malaysia Airlines 137The industry i
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BackgroundMalaysia Airlines 139The
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Malaysia Airlines 141improvements i
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Malaysia Airlines 143Table 6.03 Reg
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Table 6.04 MAS: Leverage ratios and
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Malaysia Airlines 147debt as early
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Malaysia Airlines 149with the Maldi
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Malaysia Airlines 151its fleet to a
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Malaysia Airlines 15312 November 20
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Malaysia Airlines 155state not inte
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Malaysia Airlines 157overall indust
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Proton 159was technology acquisitio
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Proton 161(when Proton’s domestic
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Proton 163Late-comer and specific c
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Proton 165Motor Company (MMC), in M
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PerformanceProton 167Although Proto
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Table 7.03 Proton: Profitability, 1
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Proton 171be able to develop its ow
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Proton 173Table 7.08 Proton: Export
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Table 7.09 Proton: Impact of reduct
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Proton 1778 May 2004). Overall, Pro
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Proton 179DRB-HICOM for RM297 milli
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Proton 181to go about it’ and Pro
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Proton 183competitiveness needed to
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Proton 185Although Proton was finan
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Proton 187Proton’s poor performan
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Summary and conclusion 189necessita
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Summary and conclusion 191appropria
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Summary and conclusion 193cost per
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Summary and conclusion 195that it i
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Notes 197directed primarily at the
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Notes 1996 IWK was incorporated as
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Notes 20111 This comprised EPF (20
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Notes 203million new ordinary share
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Notes 20515 Proton’s market share
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References 207Aziz Zariza Ahmad (19
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References 209Chee P.L. and Fong C.
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References 211Felker, G. (1993) ‘
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References 213—— (2002) World A
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References 215Mustapa Mohamed on Ec
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References 217Lum W.K. (1994) ‘Pr
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References 219Payson, W. and Steckl
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References 221—— (2002) (SMRT)
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Newspapers, magazines, websites and
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226 IndexBumiputra National Economi
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228 IndexEmployees Provident Fund s
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230 Index99-100, 104; industrial ta
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232 Index41, 50, 65, 71-2, 77, 191;
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234 Indextechnology: acquisition an
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PRIVATIZATION Privatization in Malaysia, Regulation, rent-seeking and policy failure

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