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

Malaysia’s national sewerage system 91than subsidizing the operator to keep tariff levels low, the government soughtto do this through cross-subsidies (by charging commercial/industrialcustomers substantially higher rates). The government should have beenaware of these problems, many of which were already present before privatization,including potential public opposition to higher charges (seeLum 1994). As a result, commercial/industrial customers refused to pay thesubstantial tariff increase needed to subsidize households, and householdcustomers also refused to pay the new rates.This led to three downward tariff revisions which crucially did not improvethe bill collection, leading to serious cash flow problems which affectedoperations, capital investment and ultimately, the operator’s financial viability.This was compounded by the government’s unwillingness to providepromised funding for capital expansion. (According to a former IWKdirector, the government had promised funding for capital expansion inreturn for lower tariffs, but was perhaps worried that this may have been usedto cover operational losses. 15 )Related to this is the question why privatization proceeded and why thecompany continued to attract new buyers despite ex ante information andongoing problems. One possible reason is the belief that the concession of apublic utility would provide guaranteed revenue, and that the state wouldensure the company’s commercial viability. In this sense, the ex ante failureto account for information decisions were in part the result of political considerationsrelated to the interests of (potential) buyers, all of whom wereclosely aligned to sections of the political leadership. However, it was thegovernment’s ex post failure to impose credible subsidization strategiesand enforce the payment of tariffs (rather than ex ante failure related toinformation and institutional problems) that ultimately led to IWK’s financialfailure. Insufficient information affected the determination of both tarifflevels (leading to several tariff revisions) and consumer willingness to pay.Nonetheless, the company would have remained commercially viable, despitethe tariff revisions, provided it could collect tariff payments. The fact that itcould not collect bills, and the ad hoc way in which tariffs were determinedand revised, was a reflection of both institutional and political failure. Here,the government failed to legislate against the non-payment of seweragecharges, and even when it did so later, was unable to enforce payment.Ex ante failureTariff structureThere was insufficient information on assets and hence operational costs inorder to determine appropriate tariff levels. It is also unclear whether IWKwas to take over from 143 or 144 local authorities. 16 IWK’s original proposalinvolved a financial model of revenue streams based on a tariff structurewith periodic tariff rate increases and assumed annual growth in customer