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

4 Universal access and privateprovisionMalaysia’s national seweragesystemThe provision of water and sanitation services has traditionally been publiclyprovided to ensure universal access. This has entailed affordable charges,which usually means tariff levels which cannot cover the cost of service provision,let alone service expansion, particularly in developing countries.These financial constraints have resulted in the underinvestment of water andsanitation systems, with consequences for service quality and coverage. As aresult, the choice facing developing countries is usually between public provisionand universal access (but at the cost of increasingly poor service deliveryand coverage), or private provision with higher charges (to finance serviceimprovements and expand coverage). Privatization will therefore depend onthe ability of the private operator to charge cost-covering tariffs, or morespecifically, the public’s willingness to pay higher charges. This will ultimatelydepend on the state’s political capacity to enforce an appropriate tariff structure.If higher charges are not politically viable, or if universal access remainsa priority, then the state will have to subsidize operations to attract privateparticipation and ensure the project is commercially viable. The successof privatization in this context will depend on the state’s institutional andpolitical capacity to manage any subsidy regime.These issues are all at the heart of Malaysia’s privatized national seweragesystem. The failure of the private concessionaire to meet system coverage,capital investment, refurbishment and environmental targets can beexplained by the state’s ex ante and ex post failures. Ex ante failure related tothe government’s failure to account for information problems when privatizingthe sewerage system. The ability of the private concessionaire to undertakecapital expansion depended on the commercial viability of the project,namely whether revenues were sufficient to cover capital and operatingexpenses. This in turn depended on sufficient information to determinecurrent costs and tariff levels. However, there was insufficient information oncosts and public willingness to pay. Poor data on the condition of assets andcurrent performance raised operating costs and affected the concessionaire’sability to meet service, capital investment and environmental targets. Nonetheless,privatization proceeded because it arguably provided opportunitiesfor monopoly rents from compulsory sewerage charges and a large capital