Indah Wastewater Urban Sewerage Rehabilitation

Cancelled

Failure

In May 1993, Indah Water Konsortium (IWK) was awarded a 28-year build, rehabilitate, operate, and transfer concession agreement for improvements to the national sewerage system. The project included the laying of 4,000 km of new sewers, the modernization of 143 urban waste-water systems, the upgrading of 1,249 treatment facilities, and the cleaning of 1,900 septic tanks. Phase I of the project took plance in Langkawi, beginning in March 1994, and was followed by another four "priority areas", namely, Kuala Lumpur, Penang, Port Dickson and Labuan beginning in April 1994. Only 20% of the nation’s treatment plans were operational at the time of the project agreement and fewer than half of urban residents were connected to the network. The contract covered and area with some 11 to 12 million people. The initial shareholders in IWK consisted of North West Water of the UK (25%), Berjaya Industrial Group of Malaysia (20%), AIMS International Bhd. of Malaysia (15%) along with the state-owned Korporasi Polis Dirija-polis Pension Fund (20%) and Lembaga Tabung Angkatan Armed Forces Fund (20%). The project, which was initiated as an unsolicited proposal by one of the local partners, was awarded without a public tendering process. In October of 1994, just six months after the company began operating, Garment manufacturer Berjaya South Island (BSouth) Bhd. of Malaysia bought an 80% stake in IWK for RM360 million and purchased the remaining 20% in November 1994 for RM90 million. Both BSouth and Berjaya Industrial were part of the Berjaya Group which was headed by Malaysian tycoon Vincent Tan Chee Yioun, a close associate of then Prime Minister Mahathir Mohamad. BSouth was subsequnetly renamed as Prime Utilities Berhad. North West Water, in turn, acquired 12.5% in Prime Utilities and continued on as the lead technical advisor to the project. In late 1997, Idris Hydraulic Bhd. paid 552 million ringgit for a 30% controlling interest in IWK, financed largely through borrowings. The concession agreement required an investment of approximately RM6.27 billion (US$2.3 billion). Soon after concession award, the government extended a RM475 million (US$182 million) soft loan to the concessionaire to help subsidize lower tariffs in the initial stages of the project. The consortium also secured a RM1.5 billion external loan and raised RM100 million from shareholders while the rest was expected to be generated from its operating revenue. IWK was guaranteed a certain amount of earnings to recoup its capital investment by the Malaysian government. That profit guarantee agreement, dated November 1995, guaranteed a pre-tax profit of RM84 million for three consecutive financial years ending in 1999. Household owners were to pay a tariff of between RM2 and RM10 per month for treatment of waste while the commercial, industrial and government sectors were to be billed at the usage rate of 90 sen per cubic meter for septic tank services and RM1.20 per cubic meter for connected services. The tariff policy, however, led to a series of criticisms, protests and political problems. IWK also experienced continuing difficulties with tariff collection, as they agreed, in November of 1996, to write off 180 million ringgit (US$72 million) in charges owed by customers over the previous two years in return for a two-year contract extension and a RM450 million (US$178 million) government loan to avoid an increase in sewerage charges. In addition to IWK’s difficulties with tariff levels, fee collections, and shareholder restructuring, the Asian Financial Crisis in 1997 caused further hardships. Direct impacts of the Crisis were a contraction of IWK’s industrial market, an increase in the cost of imported equipments, and the inability to raise local debt. In 1998, the Government provided IWK an additional RM500 million (US$132 million) in support loans and took a “golden” share in IWK, which was allowed under the original concession agreement. This share gave the government sweeping powers to review the company’s financial and contracting decisions. Through 1999, the Government had put in approximately US$492 million in total support loans since project. In June 2000, the Ministry of Finance (MOF) paid US$52.6 million to the private shareholders for their stake in IWK, which in turn became a wholly-owned subsidiary of the MOF. At the time, IWK had uncollected invoices of approximately US$38 million and was 700 million ringgit (US$184.2 million) in debt. None None

Water and sewerage

World Bank Group

Project

Water Supply and Storage, Commercial, Power Generation (CCGT), Government, Seaport, Power Transmission, Manufacturing (Industrial), Waste Processing and Treatment