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Malaysia officials warn that the densely populated capital, Kuala Lumpur, could face water shortages within three years, the Financial Times reported.
As a result, the government is going to spend $13.2 billion to launch what is expected to be one of its biggest infrastructure projects to renovate water and sewage services over the next five years.
It is also seeking to privatize Malaysia's water system in what is expected to be an important test of promises by Abdullah Badawi, the prime minister, to promote transparency in the sale of state assets, according to the Financial Times.
However, the program to reform water services could possibly face challenges from private contractors that benefited from previous water privatization schemes as well as protests by consumers who fear higher water charges.
According to Lim Keng Yaik, the new energy, water and communications minister, previous efforts to privatize part of the system have resulted in higher costs without delivering corresponding efficiency.
The cost of the project would amount to a third of the budget for Malaysia's next five-year development plan, which begins in 2006. And according to officials, financing would be raised through staggered bond issues.
Due to population growth and rapid industrialization and urbanization, between 1981 and 2001, water consumption in Malaysia grew by 8 per cent a year. In addition, consumption is expected to continue to rise by an estimated 4 percent per year until 2010.
Lim has proposed establishing a national water services commission by early next year that would centralize planning by taking over responsibility from state governments that have handled water distribution. The commission would determine tariffs and regulate private water companies, based on the UK model.
Companies that hold concessions could, in future, be involved in treatment, distribution, billing and sewerage services in addition to their existing role of providing raw water treatment, the Financial Times reported.
Malaysia's previous government conducted most water privatizations behind closed-door negotiations without competitive bidding. Many of the contracts were signed for decades ahead and some went to companies with close ties to the government.
"We have to re-examine and evaluate the current privatization of the water industry so as to avoid a similar fate for future water privatization projects," Lim said.
Currently, the government has temporarily suspended the award of new water privatization contracts. Future agreements are expected to cover a wider region than individual states. The prime minister has vowed that future privatization contracts will be subject to open tender, according to the Financial Times.
YTL Power, a leading local energy producer, is seen as a possible beneficiary since it bought Wessex Water in the UK in 2002 in what was seen as a move towards gaining experience before bidding for water concessions in Malaysia.