Water Supply in Malaysia: To Privatize or Not To Privatize

The Malaysian Government recently announced that it intends to put on hold the privatization of water supply is a correct one (STAR, 30 May 2007). I think this is a right decision.

One of the key reason supporting privatization is efficiency gains. Recent studies on the impact of privatization in the water supply sector across different countries indicate that privatization do not necessarily result in greater efficiency. Malaysia’s experience is likely to be similar – based on the preliminary findings from research on efficiency in the Malaysian water sector conducted by myself and Jason Lee at the University of Nottingham Malaysia Campus.

Aside from efficiency, economists have also examined the impact of privatization on consumers. In general, research in this area has yielded mixed results. In the case of Malaysia, my own research using household expenditure data obtained from the Department of Statistics indicates that privatization does not seem to have improved access to water supply. Interestingly, I also found that privatization does not seem to have an adverse effect on water affordability in Malaysia.

To sum up, the impact of privatization on efficiency and consumers welfare in the water sector seems to be fairly ambiguous. Does this mean we should dismiss privatization in the water sector ad infinitum? The answer is NO.

This is because a key factor that determines the impact of privatization is regulation. Privatization in the presence of regulatory weaknesses will only result in excessive profits and adverse impact on consumers in the form of high water tariffs. Such weaknesses include lack of appropriate tariff mechanisms that can provide incentives to private operators to improve their efficiency.

Thus, I argue that the Malaysian Government’s decision to put on hold the privatization of water supply is a correct one given the present transitory state of regulation in the sector. However, the Government should not discount entirely the possibility of privatizing the water sector in the future.

The benefits from privatization can harnessed in the future provided that we are able to put in place a good regulatory framework and institution. Public ownership is not a good alternative as much of the deterioration (e.g. high water losses in the form of non revenue water or NRW) occurred when water companies were state-owned.