Potential water tariff hike to generate more capex

A worker checking a SPLASH water treatment plant.

PETALING JAYA: The potential water tariff hike is expected to generate more capital expenditure (capex) for pipe replacement and non-revenue water (NRW) programmes.

This would also present order book opportunities for several contractors and materials suppliers involved in new water treatment plants (WTPs) and water infrastructure.

Maybank IB Research, in a report yesterday, said water tariff hikes are inevitable, as the water industry is in dire need for new capex to ensure long-term supply sustainability.“We believe an increase in water tariff is long overdue, especially in states that have yet to have a review for many years. 

“Higher water tariff will help in full-cost recovery. Increases in water tariffs will allow for higher lease payments by the state water operators to Pengurusan Aset Air Bhd (PAAB), tasked to fund the capex requirements.

“Stronger cashflow and balance sheet will allow for PAAB to secure more financing, which can then be redeployed as capex,” said Maybank IB Research.

The case for higher water tariffs is needed in states where operating expenditure exceeds operating revenue. 

For example, water tariffs have not been reviewed in Pahang for the past 30 years, possibly one of the reasons behind the state’s huge operating deficit.

Higher tariffs should also aid the state water operators to achieve cost recovery in the long-run, which is one of the key aims of the water industry reforms. 

Recently, the Minister of Water, Land and Natural Resources had guided for the possibility of an increase of water tariff rates in phases this year. 

Discussions are currently ongoing with the federal government mulling a potential increase of about 20% from the current rates.According to Maybank IB Research, Malaysia’s average water tariff stands at 24 US cents (77 sen) per cubic metre, compared to Singapore at US$1.68 (RM5.40) per cubic metre and Thailand at 27 US cents (87 sen) per cubic metre.

The high NRW rate in Malaysia, at 35.3% in 2017, coupled with large operating deficit of certain state water operators, present a case for water tariff hikes. 

The research house expected spending on water infrastructure to pick up, due to ageing asbestos cement pipes to be replaced and backlog of capex spend in Selangor for over 10 years.

Additionally, Maybank IB Research had noticed an increase in tenders relating to NRW programmes in various states since September 2018.

It said pipe-suppliers such as Engtex Group Bhd, Fitters Diversified Bhd and Hiap Teck Venture Bhd are potential beneficiaries of pipe replacement programmes.

“Contractors having experience with WTP construction such as Taliworks Corp Bhd and Salcon Bhd could benefit from the increase in water infra spending. 

“HSS Engineers Bhd, through its engineering consultancy arm specialising in water infrastructure, could also benefit on the consultancy and project management front,” said Maybank IB Research.