SOFTWARE DEVELOPMENT FOR WATER PRICING MODEL
AIDA WEE SZE CHIA
A report submitted in partial fulfillment of the
requirements for the award of the degree of
Master of Engineering (Civil – Environmental Management)
Faculty of Civil Engineering
Universiti Teknologi Malaysia
NOVEMBER 2006
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To my beloved family
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ACKNOWLEDGEMENT
In preparing this report, I was in contact with a great number of people. Here,
I would like to express my greatest gratitude to those who have contributed to the
success of my Masters project. First and foremost, I would like to offer my deepest
thanks and appreciation to my supervisor, Professor Dr. Zaini bin Ujang for his
continuous advice, encouragement and guidance. Without his patience and unfailing
support and guidance, this report would not have been the same as presented here.
My sincere thanks also goes to Mr. Azrin Harris, Executive of Policy and
Procedure for Customer Service Department SAJ Holdings Sdn. Bhd. for spending
time meeting me and furnish me with some of the important information.
Furthermore, I am eternally grateful to all the staffs of the Institute of Environmental
and Water Resource Management (IEWRM), Universiti Teknologi Malaysia (UTM)
for always providing a helping hand.
In addition, I also want to thank my parents for their encouragement and
understanding during the ups and downs as I pursued my master degree. Lastly, I
would like to extend my appreciation and thanks to all my fellow friends who have
provided assistance at various occasions.
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ABSTRACT
Water scarcity in terms of quantity and quality leads to increase cost of
supplying water to users. The major concerns faced by the water industry are low
tariffs that result in insufficient revenue to cover the costs of supplying water and
cheap water that discourage water conservation. Underpricing has seriously affected
the finances of service providers, and resulted in poor and unreliable water services.
Water pricing is an essential component which is instrumental in achieving two
important goals: to generate revenue for capital recovery, operation and maintenance,
extension and upgrading of the system; and to promote efficiency in use. Hence
water pricing model is developed in this study to generate appropriate water tariff that
enables water utilities and regulatory bodies to balance the benefits and costs of water
usage, and to ensure sufficient revenue for the long term financial sustainability of the
water supply business. Visual Basic 6.0 was selected as a tool to develop the water
pricing model due to its object-oriented programming. The water pricing model
developed provides a user-friendly approach to access to essential knowledge on the
water sector in Malaysia, emphasising the economic aspect, and the procedures to
calculate the price of water.
In the model developed, the price of water was
calculated based on capital expenditures (CAPEX) and operating expenditures
(OPEX), applying the principle of full cost recovery and partly subsidising the
consumers. The water pricing model is limited to calculate water tariffs for domestic
residential homes, and industrial and commercial supplies. The model also provides
justifications for any adjustment to the current levels of water tariffs. This was
obvious that the water pricing model developed in this study acts as an important tool
in revising the current water tariffs to ensure the sustainability of water service
provision.
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ABSTRAK
Masalah kekurangan sumber air dan kemerosotan kualiti air telah
mengakibatkan kenaikan harga bekalan air. Masalah utama yang dihadapi oleh
industri air ialah harga air sedia ada yang rendah menyebabkan ketidakmampuan
untuk menanggung kos pembekalan air dan pembaziran yang disebabkan oleh harga
air yang murah. Harga air yang rendah telah menjejaskan kedudukan kewangan
syarikat air, dan seterusnya menyebabkan perkhidmatan air turut terjejas. Harga air
merupakan komponen penting untuk mencapai dua objektif iaitu: menghasilkan
pendapatan bagi pemulihan aset modal, kos operasi dan senggaraan, serta kos
menaiktaraf sistem; dan mendorong penggunaan air secara efisien. Lantaran itu,
model harga air telah dibentuk untuk menwujudkan harga air yang sesuai bagi
membolehkan pembekal air mengimbangi antara pulangan dan kos bagi penggunaan
air, serta memastikan pulangan yang mencukupi untuk kestabilan kewangan
pembekal air bagi jangkamasa panjang.
Visual Basic 6.0 telah dipilih untuk
membentuk model harga air disebabkan oleh kebolehannya menjalankan program
berteraskan objek dan sifatnya yang mesra pengguna. Model harga air yang dibentuk
membolehkan pengguna mengakses ke maklumat penting berkenaan sektor air di
Malaysia, menekankan aspek ekonomi dan prosedur sistematik untuk mengira harga
air. Dalam model yang dibentuk, harga air dikira berdasarkan perbelanjaan dalam
aset modal (CAPEX) dan perbelanjaan dalam operasi (OPEX), mengaplikasikan
prinsip pemulihan kos penuh and subsidi sebahagian daripada harga air. Model
harga air yang dibentuk hanya untuk mengira harga air bagi pengguna domestik,
komersil dan industri sahaja. Model harga air yang dibentuk juga memberikan
justifikasi bagi sebarang perubahan pada harga air semasa. Dengan ini, adalah jelas
bahawa model harga air yang dibentuk dalam kajian ini berperanan sebagai perisian
penting untuk pembaharuan harga air semasa bagi memastikan kestabilan sektor air
berkekalan.
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TABLE OF CONTENTS
CHAPTER
TITLE
TITLE PAGE
PAGE
i
DECLARATION OF ORIGINALITY & EXCLUSIVENESS ii
`
1
2
DEDICATION
iii
ACKNOWLEDGEMENT
iv
ABSTRACT
v
ABSTRAK
vi
TABLE OF CONTENTS
vii
LIST OF TABLES
x
LIST OF FIGURES
xi
LIST OF ABBREVIATIONS
xii
LIST OF SYMBOLS
xiii
INTRODUCTION
1
1.1 Preamble
1
1.2 Background of the Problems
1
1.3 Statement of the Problems
3
1.4 Objectives of Study
4
1.5 Scope of Study
5
1.6 Significance of the Study
5
LITERATURE REVIEW
6
2.1 Introduction
6
2.2 Water Pricing
6
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2.3 Functions and Roles of Water Pricing
8
2.4 Components of a Water Pricing Structure
10
2.5 Water Pricing Structures
11
2.5.1 Average versus Marginal Cost Pricing
12
2.5.2 Two-part Tariff
14
2.5.3
15
Increasing Block Tariff
2.6 Full Cost Recovery
17
2.7 Water and Development in Malaysia
18
2.8 Water Supply Services in Malaysia
20
2.8.1 Water Institutions
2.8.1.1 Syarikat Air Johor Holdings (SAJH)
2.8.2 Water Tariffs
20
24
24
2.8.2.1 Average Water Tariff Levels
27
2.8.2.2 Water Tariff Structure
28
2.8.3 Impact of Water Tariffs on Financial Performance 32
3
METHODOLOGY
35
3.1 Introduction
35
3.2
Determination of Water Pricing
35
3.2.1
Data Collection
35
3.2.2
Calculation of the Price of Water
36
3.3
Software Development
38
3.3.1
Introduction to Visual Basic 6.0
38
3.3.2
Step by Step to Development of Water Pricing
Model Software
39
3.3.2.1 Create the User Interface
39
3.3.2.2 Determine the Event of Each Object
40
3.3.2.3 Write the Event Procedure for Each Event 40
3.3.3
3.4
4
Model Verification
Assumptions and Limitations
42
42
RESULTS AND DISCUSSION
43
4.1 Introduction
43
4.2 Water Pricing Model
43
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ix
4.3
4.4
5
Water Pricing Model Software
45
4.3.1
Information Screen
45
4.3.2
Calculation Worksheet
46
4.3.2.1 Capital Expenditure
46
4.3.2.2 Operating Expenditure
48
4.3.2.3 The Price of Water
50
Comparison
54
CONCLUSIONS AND RECOMMENDATIONS
56
5.1 Introduction
56
5.2
Conclusions
56
5.3
Recommendations
57
REFERENCES
58
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LIST OF TABLES
TABLE NO.
TITLE
PAGE
2.1
Proposed industry model
21
2.2
Existing water supply operators in Malaysia
23
2.3
World Water Prices in 14 Countries in 2001
27
2.4
Average domestic and industrial water rates
28
2.5
Subsidization of residential water consumption in various
states/areas in Malaysia as in the 2003
34
4.1
Financial Model of Water Pricing
44
4.2
Existing water tariffs charged by 3 private water companies,
and the recommended tariffs obtained from the software
developed
55
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LIST OF FIGURES
FIGURE NO.
TITLE
PAGE
2.1
Concepts of Full Cost Recovery Alternative
18
2.2
Residential water tariffs in Malaysia
29
2.3
Industrial and commercial water tariffs in Malaysia
30
2.4
Ratio between industrial/commercial tariffs to residential
tariff
31
Level of residential water consumption based on minimum
charge
32
Operating ratio of the various states/areas in Malaysia in the
year 2003
33
3.1
Layout of the Water Pricing Model (Calculation Worksheet)
41
4.1
An example of the INFORMATION screen
45
4.2
Screen for the calculation of annuity loan repayment for the
construction of water treatment plant
47
Screen displaying the list of work items in the construction
of water treatment plant
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4.4
Screen for the calculation of personnel costs
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4.5
Screen for the calculation of electrical cost
50
4.6
Screen for the calculation of unit price of water
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4.7
Screen displaying the water rates for domestic residential
homes supplies
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Screen displaying the water rates for industrial and
commercial supplies
53
2.5
2.6
4.3
4.8
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LIST OF ABBREVIATIONS
BOT
-
build, operate and transfer
CAPEX
-
capital expenditures
DBT
-
decreasing block tariff
IBT
-
increasing block tariff
OPEX
-
operating expenditures
PBAPP
-
Perbadanan Bekalan Air Pulau Pinang
SAJH
-
Syarikat Air Johor Holdings
SPAN
-
National Water Services Commission
(Suruhanjaya Perkhidmtan Air Negara)
SYABAS
-
Syarikat Bekalan Air Selangor
WAMCO
-
Water Asset Management Company
WHO
-
World Health Organisation
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LIST OF SYMBOLS
A
-
annuity loan repayment (RM)
B
-
balance financed by utility (RM)
f
-
annual average inflation rate (%)
i
-
annual interest rate without the influence of inflation (%)
i*
-
inflation-adjusted interest rate (%)
n
-
duration of loan repayment (years)
X
-
total loan (RM)
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CHAPTER 1
INTRODUCTION
1.1
Preamble
This chapter discusses the overview of the thesis. It gives a brief introduction
to the study conducted. The topics covered in this chapter are; background of the
problems, statement of the problems, objectives of study, scope of study, and
significance of the study.
1.2
Background of the Problems
Water is the basic need of mankind. No life can survive without potable
water. Water is one of the essential public utilities. Though large portion of the
earth is covered by water, only 0.02 percent of the total are fresh water available
from rivers, lakes, and subsurface (Baumann and Boland, 1997). Water resources
are connected with worldwide population growth, lack of natural resources, and
damage to the environment caused by economic growth and inconsiderate use of
water. The sources of water are getting depleted and the quality deteriorates largely
due to vast development. Fresh water is no longer pure and abundant, but instead
scare and deteriorating. Hence the cost of providing wholesome water escalates
continuously. Utilities are facing crisis due to the high costs in providing quality
water for consumers and low revenues in return (Padwal, 2003). This has led to
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deterioration in the quality of services, such as poor water quality, low water pressure,
unreliable supply, slow in settling complaints, as well as inability to fully supply
hygienic water to rural areas.
The water bill paid by the majority of households is often very low which is
underpriced (Whittington, 2002).
At first glance, this appears to be good for
households and bad for the utilities, but low utility revenues rebound to adversely
affect households in terms of quality of service. Also, due to low water charges,
water is used wastefully without realizing the scarcity of water. There is utter lack of
appreciation on the part of the public about the tremendous costs and efforts required
in making drinking water available right on their taps. The law of demand states that
as the price of water increases, the demand should decrease. In short, pricing can be
a useful tool in efforts to conserve water (Hanemann, 1997).
The water supply sector in Malaysia has not been performing very well due to
poorly organized pricing mechanism where tariff rates are determine without
reflecting overall cost recovery.
State water supply authorities have problems
covering the cost of services and many have deferred maintenance due to capital
shortages. The current low water tariffs are not generating sufficient revenues for
full cost recovery (costs of operating and routinely maintaining the utilities). If the
operating expenditure (OPEX) is to be recouped, the prevalent tariffs must be
adjusted. In fact, there are water supply authorities that have not reviewed the water
tariff in the last 20 years (Zainal Abidin, 2005). Therefore it is vital to develop a
water pricing model to determine appropriate water tariff to ensure full cost recovery
and to make the water supply entity financially viable. It is necessary to review and
revise the current water tariff scheme (increasing block rate tariff) to reflect the
resource optimization and financial availability.
In Malaysia, public water supply at present is largely subsidised by the
government (Malaysia Water Industry Guide 2005). Private operations may not find
it viable to charge water to prevalent tariffs. To fulfill the aim of relieving itself of
financial burden, the government can continue to charge the public at present tariff in
which case it has to make up and pay the difference to the private operator. This
option is very much hurting the government as the fund allocated for water supply is
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limited and there are other sectors that are more in need of fund than the water
supply sector.
Therefore, the best option without affecting other necessary
developments is to raise the water tariffs gradually so that it eventually matches the
tariff charged by the private operator to the government. The need to raise water
tariff becomes more urgent in light of the increase in fuel prices and power tariff
lately. This option not only reduces the government’s burden, but also ensures
continuous high level of service provided by private water companies.
1.3
Statement of the Problems
Water is a fundamental necessity for all forms of life, of course, as well as to
all the activities of human society.
Unlike the past, present water supply is a
drastically different, challenging, and complex task. The new challenges faced today
and in the future include, sources of water are depleting, increase frequency of
droughts, and the contamination of the natural water sources which has further
limited the supplies. In view of the problems faced nowadays, the costs of supplying
potable water to the public also rise. The water supply industry is a capital intensive
industry, and involves high operational and maintenance costs. The infrastructure
alone – from dams to treatment plants and distribution systems entails high
investments.
Operational costs such as energy and labour cost, and cost of
maintaining the dams, treatment plants, distribution network, and pumps are no less
costly. As the financial requirement to provide adequate services is ever increasing,
the revenue generated from water charges paid by consumers is now inadequate to
make the water supply industry financially sustainable for the long term. Most
utilities have a zero-profit constraint. Hence, appropriate tariff that will generate
sufficient revenue to enable well-managed water service providers to finance the
delivery of the services according to the standard required must be designed. In
designing appropriate water tariff, full cost recovery principles should be adopted,
though not entirely recovered from the consumers. For the case in Malaysia, capital
works are funded by the government to keep the tariff at affordable level. This is
important to ensure fairness or equity among water users. In addition, the current
low water prices also discourage water conservation and use of water inefficiently.
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By raising the price of water to recover all reasonable operating expenses and to
yield a fair rate of return, consumers tend to value and use water sparingly. Another
weakness in the existing water pricing scheme in Malaysia is the cross-subsidization.
The most obvious involves a cross-subsidy from industrial to residential water users
where residential water users’ demand is financed by revenues derived from
industrial users. Therefore, the effort to develop a water pricing model to determine
the most appropriate water tariff that not only guarantees full cost recovery and
encourages water conservation, but also reduces cross-subsidisation, has been chosen
as the study goal. The water pricing reform aims at enhancing and sustaining the
economic of the water industry.
1.4
Objectives of Study
This study aims to develop a financial model for full cost recovery for the
water supply services in Malaysia. The model developed is expected to achieve the
following objectives:
i)
To ease policy makers and water supply utilities to look into various
scenarios.
ii)
To recommend an approach to select a range of affordable prices of
water and at the same time, generate adequate revenues to ensure that
utilities can recover their costs.
iii)
To develop scenarios where the existing water tariffs could be
adjusted to signal scarcity, thus encouraging the more efficient use of
water.
iv)
To develop a software to allow adjustment and justification of water
tariff.
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1.5
Scope of Study
This study focuses on the water supply industry in Malaysia. Data from
Syarikat Air Johor Holdings (SAJH), a privatised water company in the State of
Johor will be obtained to be applied to the proposed model. The scope of this study
includes designing a software to determine water tariffs for domestic residential
homes, commercial, and industrial supply.
Many studies have compared the
components of different water pricing schemes (Liu et al., 2003; Monteiro, 2005),
and approached the implementation of water pricing reforms (Whittington, 2002;
Azevedo and Baltar, 2005) but not the development of sustainable water pricing
model holistically. So in this study, a water pricing model was developed to calculate
a reasonable rate of water pricing in Malaysia. The model developed is targeted for
private water companies and state water supply authorities.
1.6
Significance of the Study
The significance of the study is as follows:
(a)
Water is indeed the basic human need, and to supply clean water to
the public is a costly act. The price of water in most developing
countries is underpriced.
Without adequate pricing mechanisms,
water service providers are unable to recover the costs to adequately
fund their operation and thus, systems will deteriorate and the quality
of service will suffer (Azevedo and Baltar, 2005).
(b)
The major problems faced by the water industry in Malaysia include,
depleting water resources, pollution of water sources, as well as
inadequate tariff structure to fund utility operations and maintenance
(Shahabudin, 2004b).
(c)
One of the key features of Malaysia’s proposed water services reform
is the necessity to determine an appropriate water tariff in the
endeavor to establish a sustainable water services industry (Lim,
2004).
CHAPTER 2
LITERATURE REVIEW
2.1
Introduction
This chapter gives an overview of the price of water and focuses further on
the water tariffs in Malaysia. This chapter begins a discussion of what exactly is the
price of water.
This is followed by the roles and functions of water pricing,
components of a water pricing structure, commonly used water pricing structures,
and the concept of full cost recovery. Then, the scopes are narrowed to the water
supply sector in Malaysia, which includes, water institutions, water tariffs, and
finally the impact of water tariffs on financial performance. In this chapter, these
topics are reviewed to provide the basic insight to the rudiments of the studies of
water tariffs design.
2.2
Water Pricing
Anything scare and in demand commands a price; this is one of the basic
principles of economics (Jones, 2003). Water is scare in some contexts (drought,
degraded quality), so water pricing is increasingly seen as an acceptable instrument
of public policy. The Organization for Economic Cooperation and Development
(OECD) hypothesizes that water should be treated as a product in the marketplace
and discusses water pricing (Fujimoto and Tomosho, 2003). The price of water or
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water tariff is the rate levied for the water supplied to consumers in order to develop
sufficient revenues to provide for operation and maintenance and also for debt
servicing. Water has traditionally been perceived as a public good which should be
supplied free, or at a nominal price.
But as the world’s population increases
drastically, the water is becoming more and more scare and its quality deteriorates
due to rapid urbanization and industrialization. Hence, the cost of supplying potable
water to consumers becomes much more higher and must be recovered from water
charges.
Therefore, tariffs must be designed so that at least operation and
maintenance costs (preferably capital costs) can be recovered (Merrett, 2002).
Water is differentiated by location, method of delivery, extent of treatment,
reliability, and other dimensions of quality. The costs of bringing water supplies to
users differ greatly, so it can be expected the prices charged to the users also differ.
There are different water prices, depending on the type of water service being
provided, the decision being made, the revenue structure, or whether or not a water
market is accessible to the water user. The correct definition of ‘water price’ should
be: the charge or market price that would affect a rational water user’s decisions
concerning their pattern of water use, including quantities of water and water-related
investments (Howe, 2005).
Water rate design depends on the objectives and these vary with
circumstances. It is evident that there is no universal model (García, 2005). The
solutions have to be tailored for each case and be acceptable by the community.
Thus, each water rate is unique and only applicable those users which the rate is
designed for. We should not carelessly apply the same water pricing mechanisms to
every country, but should develop different types of water pricing mechanisms
according to the different backgrounds, such as geophysical or historical
characteristics of each country.
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2.3
Functions and Roles of Water Pricing
The World Commission on Water (WCW) has estimated that to meet all
water supply and sanitation, irrigation, industrial and environmental management
demands, investments in water infrastructure need to increase from the current level
of $75 billion in the year 2000 to $180 billion a year (Azevedo and Baltar, 2005).
This enormous investment gap will demand innovative thinking and that cooperative approaches be met, while well-targeted subsidized public investments will
still be needed. The development and long-term sustainability of the necessary
infrastructure will certainly require the systematic adoption of integrated water
resources management and introduction of appropriate water pricing mechanisms.
Water pricing is recognized as one of the most important non-structural incentive
measures for demand management to achieve the objective of efficiency and
sustainability of scare water resources (Liu et al., 2003).
Free or underpriced
resources are frequently misallocated, mismanaged, and wasted.
Designing efficient water rates is a crucial issue for water utilities and local
communities. The first objective of a water utility pricing scheme is to generate
adequate revenues covering costs (Garcia and Reynaud, 2004). But intended or not,
any water rates must also perform two other functions: a pricing rate serves to
allocate costs between users and it has to provide incentives for efficient use and
water conservation. Since price affects the quantities users demand, price can be
used by water managers to adjust demand to the available supply. Example, during
drought periods when demands are high and supplies low, price can be raised to
equate supplies and demands.
However, short-term price changes are often
administratively or even politically difficult.
The first major function of price is the production of revenues for the water
supply agency (Howe, 1997).
Water pricing aims at achieving financial
sustainability rather than an instrument for water allocation and conservation. Only
if the financial costs are recovered can an activity remain sustainability. Revenue
generation is important to ensure the utility’s ability to operate on self-sustaining
basis and meet its current and future financial obligations. Rate structure must
generates revenue sufficient to cover operating costs such as salaries, chemical
9
supplies, gas and electricity, taxes, and capital costs for system expansion, upgrades,
or equipment replacement.
Free or underpriced water supply services result in
inevitably politicization of the concerned agencies, inefficiency, lack of
accountability, capture of the subsidies by influential groups, and a vicious cycle of
poor quality services, water rationing, and insufficient resources for operation,
maintenance, and investment (Azevedo and Asad, 2000). The deterioration of water
systems can be seen worldwide, particularly in developing countries. Hence, rates
should be sufficient, at all times, to recover all reasonable operating expenses and to
yield a fair rate of return to ensure financial viability of water utilities.
Water tariff also serves the other function of allocating costs among different
types of use and user for fairness and equity (Howe, 2005). Every water utility has
classes of customers (residential versus industrial, firm versus interruptible, etc.). In
developing rate differentials for different classes of customers, it is necessary to
identify the costs of service imposed by each class, including the nature of their
demand, so that proper cost allocations can be made.
discriminatory and free from cross-subsidization.
Rates should be non-
Rate structure with improper
apportion costs of service among the different uses and users will result in unfairness
and arbitrary, as well as the subsidy of one group of users at the expense of another.
It is important that the water tariff gap between different classes of users should not
be too large without cost justification.
The third function of price is to encourage water conservation. In an article
by Baumann and Boland (1997), it stated that the goal of water conservation is
defined as “…the wise and judicious use of available supplies.” Without adequate
pricing mechanisms, consumers have no incentive to use water more efficiently as
they receive no signal indicating its relative value (Azevedo and Baltar, 2005). The
law of demand states that if the price of a good increases, demand will decrease.
This simple, but powerful observation is at the heart of using prices to manage urban
water demands: as the price of water increases, the demand should decrease. In short,
pricing can be a useful tool in efforts to conserve water.
Water pricing is an
important idea to recall the value of vulnerable water resources (Fujimoto and
Tomosho, 2003). Only by charging consumers for the water supplied, the use of
water will be reduced, the loss or waste of water will also be reduced, or the
10
recycling of water will be increased, so that supply is conserved or made partially
available for future or alternate use.
2.4
Components of a Water Pricing Structure
There are several basic components common to most water pricing structures.
Traditionally, most urban water agencies were financed through fixed monthly
charges (Hanemann, 1997b).
Though these charges did not vary directly with
consumption, they did sometimes vary according to customer characteristics or
classes, which, in the absence of metering, utilities used to identify probable
consumption levels. In other words, customers pay a constant monthly water charges
no matter how much water is used. Since this is the most primitive water tariff,
water rates have changed, becoming simpler in some ways, more complex in others.
The common feature of most water rates today is that they are based on metered use.
As for quantity-related price or most commonly known as volumetric pricing,
it can be implemented in a variety of ways. The utility may implement a uniform
rate where the amount paid per unit consumption is the same over all units consumed
(Hanemann, 1997b). A uniform tariff, however, may differ according to the category
of users. This uniform price can be based on the average or on the marginal cost of
water supply, and may be combined with rebates or discounts to assure that no
excessive profits are generated in the cases where marginal cost related prices exceed
average cost. Although simple to use, a uniform rate does not provide any incentive
to consumers to affect savings on water use.
Another frequent solution is the implementation of nonlinear pricing with
block tariffs (tiered pricing) (Monteiro, 2005). In this tariff structure, water use per
billing is divided into a number of discrete blocks for which separate prices can be
set. A block rate is one where the unit charge varies, either decreasing with the
amount consumed (decreasing block rate) or increasing with the amount consumed
(increasing block rate). In decreasing block tariff (DBT), block price falls as use
rises while, in increasing block tariff (IBT), block price rises as use rises. DBTs may
11
be supported where a natural monopoly is recognized, while IBTs are often
associated with the implementation of marginal cost pricing with equity or poverty
alleviation concerns, or simply to signal potential scarcity or capacity constraints. To
encourage conservation, the trend in volumetric charging is moving away from
decreasing block tariffs and towards increasing blocks ones. For countries using
these block tariffs, decisions must be made on the number of blocks (a managerial
decision), volume of water associated with each block, and price to be charged for
each block (these last two are social and political).
Other possible variations are the differentiation of price structures according
to seasons, which are referred to as seasonally differentiated rates, or more simply as
seasonal rates (Hanemann, 1997b). In the water industry it is increasingly common
to observe rates that vary by season; volume charges are higher during the peak
season and lower during the off-peak season. Even the adaptation of time-of-day
pricing has been advocated for the water industry, although it is more frequent in the
electric power industry. A frequent solution is the adoption of a two-part tariff,
which consists in the combination of a service charge with a uniform volumetric
price, but other water pricing and allocation methods are possible.
In addition, new customers may be required to pay a connection fee to gain
access to the water supply system, known commonly as connection charge
(Monteiro, 2005). This is intended to recover capital expenditures for new facilities
required to meet the projected demands of new customers. A service charge is often
required to cover costs that are not related to the quantity consumed (like metering
cost; in fact, service charges are also frequently called meter charges.) or to
guarantee cost recovery in situations where price differs from average cost.
2.5
Water Pricing Structures
There is a bewildering diversity of actual water prices and rate structures
implemented by different water utilities, even within areas where geographical
12
conditions are similar. A water rate structure is built using a combination of the
basic elements discussed in Section 2.4 above.
2.5.1
Average versus Marginal Cost Pricing
The oldest debate in the literature on water pricing is whether to price water
by its average cost or by its marginal cost (Monteiro, 2005). Average cost is simply
total cost divided by the quantity sold (i.e., it is the cost per unit), and it is based on
financial reasons of cost recovery. As for marginal cost, it is the change in cost per
unit change in quantity sold (i.e., it is the increment in cost per unit increase in
quantity, or the decrement in cost per unit decrease in quantity). Correctly defined,
marginal cost pricing of water services assures the optimal allocation of scare
resources as it sends the right signal to both investors and consumers
(Chambouleyron, 2004). Marginal cost is the price reflecting the resources that must
be committed by society for the production of one additional unit of water. It is
based on the economic reasoning of promoting an efficient use of the resource.
When all units of a commodity cost the same, there is no difference between average
and marginal cost – the two costs are equal. Otherwise, there is a difference between
average and marginal cost, sometimes a very large difference.
There are differences in the time frame of analysis, where economists made a
distinction between long-run and short-run. In the short run, the capital stock is fixed
and its cost is a fixed cost; in the long run capital is variable and its cost constitutes a
variable cost. The question is should the price of water reflect a short-run or longrun perspective. If prices reflect short-run costs, this may encourage patterns of
water use that are poorly suited to future circumstances when more expensive
sources will be required. On the other hand, if prices reflect long-run costs, the
utility may be in the position of charging for facilities before they exist.
The
distinction between average and marginal cost applies in both the short run and the
long run. Thus, there are short-run average and marginal costs when capital is in
place and its cost sunk, and long-run average and marginal costs, when capital is
adjustable and all costs are variable (Hanemann, 1997).
13
Essentially, a resource is considered to be used efficiently if the benefit for
society from consuming the last or marginal unit of the resource is the same as the
cost of obtaining it (including the opportunity cost of foregoing other alternative uses)
(Monteiro, 2005). If the price of the resource is equal to its marginal cost, then the
consumer can adequately compare the benefits she obtains with the costs she
imposes with her consumption decision. If the unit price differs from marginal cost,
consumption levels will be either too high (for prices below marginal costs) or too
low (for prices above marginal costs) in relation to the socially optimum level of
consumption.
Marginal cost pricing differs from average cost pricing in important ways.
Prices based on average cost will not result in efficient consumption choices because
consumers will not be matching marginal benefit with marginal cost. To achieve full
cost recovery, water rates should incorporate long-run marginal cost pricing, which
uses estimates of future capital cost to calculate water rates, rather than historical
costs (sunk costs). However, marginal cost prices are more difficult to calculate than
average cost prices.
To calculate average cost prices, a utility needs some
understanding of its total costs and production. Dividing one by the other yields an
average price. To calculate marginal cost, on the other hand, a utility needs fairly
detailed information on costs for a variety of plants and equipment, some of which
may not yet be built. This data may be expensive and difficult to obtain and of
uncertainty reliability.
Chambouleyron (2003) compares both average and marginal cost pricing
schemes under different metering regimes (universal metering and optimal metering),
and concluded that marginal cost pricing is always the most efficient pricing regime.
Though marginal cost is more preferable than average cost in determining the price
of water, marginal cost pricing can result in over- or undercollection of revenue.
Generating revenue insufficient to cover cost obviously is not sustainable in the long
run. Collection of too much revenue may also be problem if a utility is constraint to
earn zero profit.
Various strategies to satisfy the zero-profit constraint while
retaining the efficiency properties of marginal cost pricing have been proposed. For
example, two-part tariffs and multiple block rates which will be discussed in details
later.
14
2.5.2
Two-part Tariff
Basically, a two-part tariff is a pricing system whereby each consumer would
be charged a single price per unit of output (e.g., per cubic meter of water service)
purchased, but, in addition would also pay a lump-sum, or fixed charge, for the
opportunity to be able to buy any unit of the service (Ontario Ministry of Public
Infrastructure Renewal, 2004). The price per unit, or volumetric charge would of
course be based on the marginal cost of providing the service. Therefore, in short,
two-part tariff is where a utility combines a commodity charge based on marginal
cost with a fixed charge, for example, a service charge or connection charge.
The idea of two-part tariff is that the fixed charge raises the additional
revenue needed to cover total cost, but does not interfere with economic efficiency
generated by having a commodity charge based on marginal cost.
Since the
customer pays the same fixed charge regardless of what quantity he consumes, only
the commodity charge should influence his decision on quantity consumed, and this
still provides the economically correct price signal of water conservation. Hence, the
two-part tariff can satisfy the goals of both economic efficiency and revenue
adequacy (Whittington et al., 2003).
However, the efficiency of the two-part tariff has been challenged. One of
the arguments is that, even though consumers ought to disregard the fixed charge
when deciding how much water to use, perhaps some of them do not think the same
way. Perhaps they are impressed by the fact that, if they increase their consumption,
they can spread the fixed charge over more of the commodity and so reduce the
overall unit cost. If so, this would be against the goal of the two-part tariff of
creating an economically efficient incentive to minimize consumption. From this
argument, there are recommendations to eliminate fixed charges from the water rates
(Hanemann, 1997).
15
2.5.3
Increasing Block Tariff
Increasing block tariffs (IBTs) can be regarded as multipart extensions of the
two-part tariff. Though marginal value could reflect the economic value of water,
but it is very difficult to be implemented as a tariff structure. Hence, an alternative
for marginal value is IBTs (Liu et al., 2003). An IBT is based on the volumetric use
of water. The pricing system begins with a low initial cost of water that increases
after reaching the maximum volume within a block rate. In addition, IBTs are often
called ‘lifeline’ or ‘social’ tariffs because they are created with the intent of
protecting the poor.
IBT is a widespread method of pricing water especially in developing
countries, and is a popular tariff structure among many utility officials and experts
due to its many advantages (Liu et al., 2003).
First, easier cost recovery. Only if the cost is recovered can water activity
remain sustainable.
Increasing block rates differ from the previous rate setting
methods because they represent an efficient pricing solution to the problem of cost
recovery in increasing returns to scale utilities.
Compared with the traditional
uniform tariff, IBTs are easier to achieve this aim. Assume that both uniform tariff
and IBT are initially designed to recover the same total revenue. In uniform tariff,
water is sold at the same price for each household. Poor people may have no ability
to pay for the piped water, which may result in the incapability of cost recovery for
water. However, the increasing block design contains one or more prices which are
higher than the uniform design, and one or more which are lower. It is assumed that
the poor consume less water than the rich do. This consumption will lead to lower
average price for the poor and higher for the rich in IBT, and will certainly result in
easier cost recovery.
Second, equity or fairness. Equity should be considered when water pricing
is implemented. The human rights issue means that if water is to be provided for all,
then it must be marketed at affordable rates (Liu et al., 2003). The IBT method of
pricing is supported on the basis that it will ensure affordable water for the poor. The
poor will be able to gain affordable access to piped water because the first block of
16
water used is provided to household at a low price, often below the cost of the
service provision. High-income customers who consume larger volume of water
face higher prices. It therefore appears that some form of cross subsidization occurs
where the richer subsidized the poor.
Third, demand management. Water demand management is related to water
conservation (Baumann and Boland, 1997). Increasing block rates act to restrict
demand by charging high volume water users proportionally more than low-income
users, thus choking off demand quite severely, particularly where high volume users
also exhibit higher price elasticities. This is best illustrated by comparing IBTs to the
simplest alternatives uniform tariffs.
Customers facing the higher prices at the
margin will, in theory, use less water than they would under the uniform design.
Also, the effect of steep increases in price, once the initial volume is exceeded, will
cut down wastage of water.
Although there is widespread consensus that increasing block tariffs have
many advantages, this type of tariff still deserves more careful examination. An
incorrect structure of the IBTs leads to several shortcomings as argued by
Whittington (1992), such as difficulties to set the initial block, mismatch between
prices and marginal costs, conflict between revenue sufficiency and economic
efficiency, absence of simplicity, transparency and implementation, incapacity of
solving shared connections, etc. The poorest households in a community generally
do not have connections to the water network, and thus cannot take advantage of an
IBT. In fact, these households generally purchase water from vendors, who purchase
(and thus sell) water in the highest price block. Besides, volumetric tariffs are only
relevant where all connections are metered.
The theory that higher income
households use more water than the poor is not always true (Whittington et al., 2003).
It is fairly common for poor households to share water connections. A group of poor
families might thus have collective consumption that pushes them into the highestpriced blocks of the IBT, leaving only relatively wealthy households in the lower
(subsidized) blocks.
17
2.6
Full Cost Recovery
Aforementioned in Section 2.3, the first major function of water pricing is to
generate revenue sufficient to ensure long term sustainability of the water supply
services, or ideally to ensure full cost recovery. The term ‘full cost recovery’ may
mean different things to different people. Generally, full cost recovery encompasses
at least two broad types of costs – operating and maintenance (O & M) costs, and
capital costs (Whittington, 2003).
As their names suggest, operating and
maintenance costs basically involve the annual costs of operating and routinely
maintaining the utilities. Capital costs are hard assets of utilities such as treatment
plants, distribution pipes, pumps, etc. Accounting for these costs is somewhat more
difficult, because of variations in accounting and economic practices that can be used.
Recently, arguments have been put forth to include a third element – the
environmental
costs,
or
externalities,
which
are
associated
with
water
withdrawal/extraction and discharge by municipalities (Ontario Ministry of Public
Infrastructure Renewal, 2004). Valuation of these costs is much more difficult and
currently it is not taken into account in the determination of water tariff.
Conceptually, these three cost elements can be shown in Figure 2.1. From
the diagram, it is clear that the levels of effort required to determine these various
costs increases from left to right.
It is relatively simple to determine annual
operating and maintenance costs. The issue of capital costs is significantly more
difficult due to depreciation value of the fixed assets. The issues of environmental
cost are more difficult still to address, because the theory of environmental damage
evaluation is more experimental, and the property rights allocation related to those
externalities are primarily the responsibility of higher levels of government (Howe,
2005).
Therefore, in order to achieve full cost recovery status, water rates must be
set at levels approximating long-run marginal costs (Ontario Ministry of Public
Infrastructure Renewal, 2004).
This implies incorporating both operating and
maintenance costs, and capital costs in water rates. The use of long-run marginal
cost means that all utility consumers will pay a price that approximates the actual
long-run costs they impose on the utility for providing that service. Peak load
18
pricing can also contributes to full cost recovery. Peak load pricing refers to the
practice of charging higher prices at times of peak demands. The rationale is that
much of the capital expenditure on water utilities stems from meeting peak demands,
particularly summer water demands. They can also have a significant effect in
lowering demands in peak periods, and therefore, in the long run, lowering capital
costs.
Another means of full cost recovery is through connection charges.
Connection charges refer to the costs of installing local distribution systems in new
housing or industrial development. They commonly take the form of lot levies,
frontage fees, or development charges.
Total
Annual
Cost
Annual
O&M
+
Capital
Costs
Annual
O&M
+
Capital
+
Environmental
Costs
(Green Taxes)
Annual
O&M
Costs
Cost Categories Included
Figure 2.1 Concepts of Full Cost Recovery Alternative
Source: Ontario Ministry of Public Infrastructure Renewal, 2004
2.7
Water and Development in Malaysia
Malaysia is developing rapidly in pace with other developing countries in
order to achieve developed country status by the year 2020. Malaysia, situated in the
region of Southeast Asia is slightly smaller than the Federal Republic of Germany
and is about the size of the State of New Mexico, USA with a population of
approximately 25 million as reported by the current Ninth Malaysia Plan (2006 –
19
2010). Since achieving Independence from Britain in 1957, Malaysia has adopted
Federation system of government, comprising a Central Government and 13 State
Governments, each with their own constitution.
Before the Independence in 1957, less than 40 percent of the population in
the country had access to water supply (Shahabudin, 2005). At that critical time,
priority was given to safety and stability in the country, and there was just
insufficient fund for investments in utilities like water supply development.
However, nearly 5 decades after Independence, much has been invested in water
supply development to the extent that more than 92 percent of the country has now
access to treated water supply.
The impressive economic growth and development witnessed in Malaysia
since its Independence is partly due to the adequate provision of infrastructure
services in the country. In this regard, water services have played a crucial role in
both improving the standard of living in the rural area and supporting industrial
development in the modern sector. Despite the positive role played by the water
sector in Malaysia’s economic development in the past, there are indications today
that reforms of the water sector is essential to ensure that its continued contribution
to the economy. The current perception amongst the public is that the quality of
water services is very low and that major investments are needed to improve this
situation (Lee, 2006). Concomitantly, politicians have emphasized the need to revise
current water tariffs to pay for some of the projected investments. This implies that
the past and current levels of water tariffs in the country have been very much below
the levels that ensure sustainability of water service provision and that the
governments have not been able to finance investments to further improve water
services.
20
2.8
Water Supply Services in Malaysia
2.8.1
Water Institutions
Water services in Malaysia cover both water and wastewater industries. The
management of the country’s water supply and sewerage is by the newly created
Ministry of Energy, Water and Communications on 27 March 2004. The creation of
the ministry will enable more focused efforts and streamline management of the
country’s water and sewerage services (Shahabudin, 2004). Previously, water supply
was under the Ministry of Works and sewerage services under the Ministry of
Housing and Local Government. After 14 years of forwarding the idea, finally water
and sewerage management are now under the same roof. It is essential to combine
water and sewerage under a single ministry because they were related to each other
in terms of the river water quality depends on the degree of treatment of the sewerage.
Before the Federal Constitution was amended in January 2005, water was
under the jurisdiction of State Governments while sewerage came under the Federal
Government (Malaysia Water Industry Guide 2005). Water supply services under
the State’s responsibility have seen many weaknesses. Among the weaknesses are
lack of coordination among various stakeholders, ineffective regulator structure and
poor enforcement, and capital expenditure (CAPEX) constraints.
All these
weaknesses have resulted poor quality of services provided by each state. This has
prompted the Federal Government to act decisively to revamp the existing water
services industry to make it more sustainable. Hence, in a special sitting in January
2005, Parliament had approved the amendments to the Ninth Schedule to transfer
water supplies and services from the State List to Concurrent List (except Sabah and
Sarawak) (Zainal Abidin, 2005). In addition, amendments were also made to the
Tenth Schedule whereby revenue generated from water supplies and services belongs
to the Federal (assigned to the States before amendment) also except Sabah and
Sarawak. After the amendments, the Federal Government will only regulate the
water services industry in terms of licensing and regulating water operators. The
ownership and control of rivers, canals, and the water are entrusted to the States (Lim,
2004).
21
In order to ensure that the restructuring process of the water services industry
and its regulatory framework are carried out smoothly, the Ministry of Energy, Water
and Communications had proposed two new bills; National Water Services Industry
Bill and National Water Services Commission Bill. With the passing of the two new
bills in Parliament, the National Water Services Commission (or Suruhanjaya
Perkhidmatan Air Negara, SPAN) was established. SPAN would effectively be the
first centralized national economic regulator for an integrated water and sewerage
services industry. The key objectives of SPAN are to assist operators in providing
effective management of water and sewerage services as well as to protect the
interest of all users and consumers. Table 2.1 summarizes the related bodies and
their responsibilities in the new water industry model.
Table 2.1 : Proposed industry model
Body
Area of Responsibility
Description
Federal Government
Policy matters
Development of a holistic water
policy for the country by setting
policy directions.
State Government
Water basin matters
Manage existing water basins with
the view of protecting the quality
of raw water and identifying new
water basins when required.
National Water
Resources Council
Governance matters
Ensures coordination with the
various State Government in the
management of the water basins.
SPAN
Regulatory matters
Regulate the whole water industry
based on the policy directions set
out by the Federal Government.
Source: Malaysia Water Industry Guide 2005
Historically, the treatment and distribution of water is undertaken by state
agencies, either by State Public Works Department, State Water Supply Department,
or State Water Supply Board. Since the early 1990s, more states have opted to
establish water supply companies via corporatization or privatization to improve the
quality of water supply services (Lee, 2005). Table 2.2 summarizes the existing
water supply operators in every state. Some states have fully privatized their water
22
supply services. These include the more developed states such as Selangor, Johor,
and Pulau Pinang. In some cases, the State Government continues to hold equity in
the privatized water entities. A few states (Labuan, Negeri Sembilan, and Sabah)
have chosen a dual structure water system, whereby distribution is undertaken by
state agencies and water treatment is privatized via concessions. Some of the smaller
states (Melaka and Perlis) and less developed states (Sarawak, Kedah, and Pahang)
have generally chosen to maintain a public water provision system.
After the January 2005 amendments, the jurisdiction of water supply
management had been transferred from the respective states to the Federal
Government. With this change, the Federal Government now has full control over
the water supply management in all states.
Water supply regulators were also
formed in states where water supply services are provided by State Water Supply
Corporation or Company, and private companies to standardize and monitor the
running of the water supply company. At present, there are five state water supply
regulatory bodies in Johor, Kelantan, Pulau Pinang, Selangor, and Terengganu
(Malaysia Water Industry Guide 2005).
23
Table 2.2 : Existing water supply operators in Malaysia
Public Works Department (PWD)
Kedah
• Production and distribution by PWD
• Privatized production and distribution by Taliworks Consortium at
Langkawi Island
Sarawak
•
•
Production and distribution by PWD
Privatized production and distribution for Miri, Bintulu, and
Limbang – LAKU Management Sdn Bhd
Perlis
•
Production and distribution by PWD
Water Supply Department (WSD)
Pahang
• Production and distribution by WSD
Negeri Sembilan
•
•
Production and distribution by WSD
Treatment plant management by Salcon Engineeering and Lee
Engineering
Sabah
•
•
Distribution by WSD
Privatization of 3 water treatment plants - Jetama Sdn Bhd, Timatch
Sdn Bhd, and Lahad Datu Water Supply – concession period of 10
years
Labuan
•
•
Distribution by WSD
Management contract of production by Encorp Utility Sdn Bhd
Water Supply Board (WSB)
Perak
•
•
Distribution by WSB
Privatization of treatment plants to 2 different operators –
Metropolitan Utility Corporation and GSL Water Sdn Bhd –
concession period of 20 years
Melaka
•
Production and distribution by WSB (Perbadanan Air Melaka)
Water Supply Company
Pulau Pinang
•
Privatized in 2001
Production and distribution by Perbadanan Bekalan Air Pulau
Pinang Bhd (State Government share 55%)
Terengganu
•
Corporatized in 1999
Production and distribution by Syarikat Air Terengganu Sdn Bhd
(State Government share 100%)
Selangor
•
Privatization of distribution in 2005 by Syarikat Bekalan Air
Selangor Sdn Bhd (SYABAS)
7 water treatment plants (4 existing, 3 BOT) operated by 3 firms –
Puncak Niaga Sdn Bhd, Abass Consortium, and Syarikat
Pengeluaran Bekalan Air Selangor – concession period of 25 to 30
years
•
Johor
•
Privatized in 1999
Production and distribution by Syarikat Air Johor (SAJ) Holdings
Sdn Bhd (State Government share 0%) – concession period 30 years
Kelantan
•
Privatized in 1995
Production and distribution by Air Kelantan Sdn Bhd (State
Government share 70%) – concession period of 25 years
Source: Malaysia Water Industry Guide 2005
24
2.8.1.1 Syarikat Air Johor Holdings (SAJH)
SAJ Holdings Sdn. Bhd., a subsidiary of Ranhill Utilities Berhad was
awarded the concession to undertake water supply services in the state of Johor from
the Government in the year 1999 for a concession period of 30 years (Malaysia
Water Industry Guide 2005). SAJH is responsible in producing and distributing
treated water to customers.
SAJH is a fully privatised water company where
Government does not subsidise any of the costs of water production. Hence, SAJH
depends wholly on water charges paid by customers to cover all capital as well as
operating expenses. Currently, water tariffs in Johor are based solely on operation
and maintenance costs. Capital expenditures are financed through loans obtained
from private financial institutions. This means that SAJH is only recovering part of
its total expenditures and its annual income is heavily dependant on the amount of
water sold. The last time SAJH revised its water rates is in the year 2003. Despite
increase costs of supplying treated water to customers and heavy financial burden,
SAJH has proposed to the Johor State Government to increase the existing water
tariff last year but was unsuccessful (Harris, 2006).
2.8.2
Water Tariffs
Malaysians have enjoyed low water tariff for a very long time.
As a
comparison, Table 2.3 indicates that Malaysia’s average water price is right at the
bottom and has not increased much over the years. In most States, it is not a
reflection of the actual cost. The effect of underpriced water is lack of resources to
provide high quality, reliable water services, and the financial incentives to serve
unconnected households, which are almost always poor.
It becomes politically
difficult to increase the tariff in such a situation. For the services to be sustainable,
the service providers must attain full cost recovery position.
Water supply utilities are like other enterprises. They spend money to build
facilities and acquire equipment and to administer, operate, and maintain services
and facilities. Because facilities and equipment have economic value over many
25
years, outlays for them are referred to as capital expenditures (CAPEX).
Expenditures necessary to operate and maintain facilities, provide customer services,
and administer the programmes, are lumped under the broad category of operating
expenses (OPEX).
A wide variety of capital facilities are typically required for water supply
services especially in large urban demand centres. Supplies are typically taken from
surface water reservoirs, transported over considerable distances through
transmission mains or other conveyances, treated, stored in ground-level and
elevated tanks, and distributed through a vast network of pipes. Therefore, CAPEX
include construction of dams and water treatment plants, installation and/or
replacement of pipes, fittings (e.g. tees, ells, and wyes) and pumps, and acquirement
of large mechanical equipments.
OPEX also cover a wide variety of categories. One large category is for the
personnel (salaries, wages, and fringe benefits) required to operate and maintain the
facilities, provide customer services, and administer the utilities. A second major
category is electricity. Water is a heavy commodity, requiring large amounts of
electrical energy to lift and move it. Chemicals, including coagulants, disinfectants,
and pH controls, are another substantial category of expenses. Insurance, contractual
services, supplies, and equipment not included in capital outlays must also fall under
the general category of operating expenses. Other noncapital expenses for water
supplies such as maintenance and repairing works are also included in the OPEX
category.
A water utility usually borrows money to finance construction of major new
capital works, because the cost of such works is too large to meet from current
income and can reasonably be spread over future consumers who will benefit from
the works. Loans are provided by the Federal Government and/or private financing
such as Built, Operate and Transfer (BOT) projects financing (Anon, 2004b). Loan
repayments are typically 10 – 15 years for plant and machinery; 20 – 30 years for
buildings; and 50 – 60 years for dam and land (Twort et al., 2000). Operating
expenses which are usually less costly can normally be met from current income
generated from charges and fees paid by customers.
Three methods of loan
26
repayment are possible – capital plus interest; annuity; and sinking fund.
The
annuity loan repayment method is most usual. The capital plus interest method
results in reducing yearly payments.
New capital works to meet increasing demand and replacement of assets for
maintaining the standard of service require large funding.
Therefore, for some
service providers to implement full cost recovery from consumers in the short term
will result in very high tariff that may not be affordable. Since water is a life
sustaining resource and also a public utility, water must be made available and
affordable for all. In Malaysia, consumers have all the while been charged rates that
are generally sufficient to make water production self-financing in terms of OPEX
(Malaysia Water Industry Guide 2005). The cost of capital works were initially
subsidized by State Governments, either from their own funds or through loans from
the Federal Government. To date, the Government has provided RM8.3 billion loan
to State Governments for the water supply sector (Zainal Abidin, 2005).
Due to water tariffs being currently set at less than full cost recovery levels, a
government-owned Water Asset Management Company (WAMCO) has been
established to overcome capital expenditure constraints by providing financing to
upgrade water supply infrastructure in the country. The Ministry of Energy, Water
and Communications envisaged WAMCO as a temporary entity that will be relevant
until the water services industry reached a full cost recovery level. This implies a
gradual reduction of water subsidies in Malaysia in the future.
27
Table 2.3 : World Water Prices in 14 Countries in 2001
Germany
Average price of water per m3 of
water (US$)
1.52
Denmark
1.46
United Kingdom
1.11
The Netherlands
0.98
France
0.93
Belgium
0.75
Singapore
0.62
Italy
0.62
Spain
0.58
Finland
0.53
United States
0.52
Sweden
0.51
Australia
0.48
Canada
0.37
South Africa
0.34
Malaysia
0.09
Country
Source: Malaysian Water Association, 2006
2.8.2.1 Average Water Tariff Levels
Generally, domestic water tariff is cross-subsidized by industrial tariff in
Malaysia, which involves the use of promotional water rates by industrial water users.
Hence, industrial rates are higher than domestic rates. Table 2.4 shows the domestic
and industrial water rates charged by various states or areas in the country according
to ranking in ascending order. Most of the developed states (such as Selangor and
Johor) have relatively higher industrial water tariff except for Pulau Pinang. It can
also be noted from the table that Sabah and the Federal Territory of Labuan have
28
similar domestic and industrial rates of RM0.90/m3. This makes the domestic rates
for Sabah and Labuan the highest, while their industrial rates the lowest.
Table 2.4 : Average domestic and industrial water rates
Domestic Rates
States / Areas Average
Water Tariff
(RM/m3)
Pulau Pinang 0.31
Terengganu 0.52
Kedah 0.53
Kelantan 0.55
Sarawak 0.56
Perlis 0.57
Pahang 0.57
Bintulu 0.61
Kuching 0.62
Sibu 0.62
Sri Aman 0.62
Limbang 0.62
Sarikei 0.62
Kapit 0.62
Perak 0.67
Negeri Sembilan 0.68
Selangor 0.72
Melaka 0.72
Labuan 0.90
Sabah 0.90
Johor 0.90
Industrial Rates
States / Areas Average
Water Tariff
(RM/m3)
Sabah 0.90
Labuan 0.90
Pulau Pinang 0.94
Kuching 1.06
Sibu 1.06
Sri Aman 1.06
Limbang 1.06
Sarikei 1.06
Kapit 1.06
Terengganu 1.15
Sarawak 1.19
Kedah 1.20
Bintulu 1.21
Kelantan 1.25
Perlis 1.30
Melaka 1.40
Perak 1.40
Pahang 1.45
Negeri Sembilan 1.59
Selangor 1.91
Johor 2.93
Source: Malaysia Water Industry Guide 2005
2.8.2.2 Water Tariff Structure
In Malaysia, the general principles underlying the present water tariffs
include the following (Malaysia Water Industry Guide 2005):
29
i)
Higher rates for higher consumption to discourage wastage.
ii)
Cross-subsidy for domestic consumers by industrial consumers.
iii)
A very low ‘lifeline’ rate to meet the ‘ability to pay’ criterion of the
lower-income group to cover basic everyday need for water for
domestic purposes.
The incentives for efficient use of water are applied through the use of
volumetric charges (based on measured water use) under an increasing block
structure, where block price rises as use rises. The lowest block is intended to be
affordable by all consumers even the low-income group. Higher usage, presumably
by higher-income earners, will be charged higher rates for higher consumption. This
approach is used for the water tariffs for residential homes (with the exception of
Sabah and Labuan which use a flat rate). The volume within a block and the rates
vary from state to state. Figure 2.2 illustrates the residential water tariffs for each
state in Malaysia.
2.00
1.80
1.60
Price (RM)
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
1
11
21
31
41
51
61
71
81
91
Unit of Consumption (m^3)
Johor
N. Sembilan
Selangor & FTs
P. Pinang
Kedah
Pahang
Melaka
Terengganu
Saraw ak
Perak
Perlis
Kelantan
Sabah
Labuan
Figure 2.2 Residential water tariffs in Malaysia
Source: Malaysia Water Industry Guide 2005
30
Similarly, many states also use an increasing block tariff structure for
industrial and commercial water tariffs except for Melaka, Terengganu, Perlis,
Kelantan, Sabah and Labuan that use flat rate tariffs. However, the increasing block
structures are not very steep. In other words, the block increments are relatively
small compared to residential block tariff structure.
Figure 2.3 illustrates the
industrial and commercial water tariffs for various states in Malaysia.
3.50
3.00
Price (RM)
2.50
2.00
1.50
1.00
0.50
0.00
1
5
9
13 17
21 25 29 33 37 41 45 49 53 57 61 65 69
73 77 81 85 89 93 97
Unit of Consumption (m^3)
Johor - Industrial & Commercial
P. Pinang - Industrial & Commercial
Pahang - Trade
Terengganu - Commercial
Perak - Industrial & Commercial
N. Sembilan - Industrial & Commercial
Kedah - Industrial & Commercial
M elaka - Industrial & Commercial
Sarawak - Industrial
Perlis - Trade
Sabah - Commercial
Labuan - Industrial & Commercial
Selangor & FTs - Industrial & Commercial
Pahang - Industrial
Terengganu - Industrial
Sarawak - Commercial
Kelantan - Industrial & Commercial
Figure 2.3 Industrial and commercial water tariffs in Malaysia
Source: Malaysia Water Industry Guide 2005
After discussing residential and industrial/commercial water tariffs, it is clear
that in almost all states (with the exception of Sabah and Labuan), residential water
users are subsidized by industrial/commercial water users.
This can be further
illustrated in Figure 2.4 below. For the first 15 m3 of water consumption, the level of
industrial/commercial water tariff is 2 to 6 times the corresponding level for
residential water tariff.
31
7.00
6.00
5.84
5.00
4.00
4.00
3.16
3.25
3.00
2.73
3.00
2.49
2.36
3.13
2.74
2.55
2.16
2.00
1.00
1.00
1.00
La
bu
an
ba
h
Sa
an
Ke
la
nt
Pe
rli
s
Pe
ra
k
Sa
ra
wa
k
an
u
ng
g
Te
re
el
a
ka
g
M
Pa
ha
n
da
h
Ke
na
ng
Pi
P.
Jo
ho
r
N.
Se
m
bi
la
Se
n
la
ng
or
&
FT
s
0.00
Figure 2.4 Ratio between industrial/commercial tariffs to residential tariff
Source: Malaysia Water Industry Guide 2005
There is also a minimum charge imposed for residential consumers ranging
from as low as RM2.50 per month in Pulau Pinang to as high as RM5.40 per month
in Johor. This minimum charge is used as a measure of the ‘lifeline’ rate to meet the
‘ability to pay’ criterion of the lower-income group (Lee, 2005).
Dividing the
minimum charge by the tariff rate of the initial block, the level of consumption
related to minimum charge can be obtained (Figure 2.5). This computed level of
consumption can be used as a proxy of the minimum level of consumption affordable
by lowest income households. Studies by the WHO (2005) have determined each
individual water requirement as follows:
•
For short-term survival (drinking and cooking), each individual
requires 20 litres of water per day (0.02 m3 per person per day).
Assuming an average household size of 4.4 persons (DOS, 2003), this
is equivalent to 2.64 m3 per household per month).
•
For medium-term survival (drinking, cooking, personal washing,
washing clothes, cleaning home, growing food for domestic
consumption, and waste disposal), each individual requires 70 litres of
water per day (0.07 m3 per person per day or 9.24 m3 per household
per month).
32
By comparing the computed level of consumption based on minimum
charges and the WHO water requirements, only six states in Malaysia have water
tariff levels exceed the medium-term ‘lifeline’ level (corresponding to 9.24 m3 per
household per month). This indicates that the prevailing lifeline tariff rates in the
other remaining states are too high for the lower-income earners to use water for
medium-term survival.
16.00
14.21
Water Consumption (m^3)
14.00
12.00
11.36
10.00
9.09
9.09
8.77
9.52
10.00
10.00
10.00
9.09
8.11
7.50
8.00
6.00
4.44
4.44
4.00
2.00
La
bu
an
Sa
ba
h
n
Ke
la
nt
a
Pe
rli
s
Pe
ra
k
Sa
ra
w
ak
Te
re
ng
ga
nu
M
el
ak
a
Pa
ha
ng
Ke
da
h
bi
Se
la
n
la
ng
or
&
FT
s
P.
Pi
na
ng
N
.S
em
Jo
ho
r
0.00
Figure 2.5 Level of residential water consumption based on minimum charge
Source: Malaysia Water Industry Guide 2005
2.8.3
Impact of Water Tariffs on Financial Performance
Overall, the water supply sector in Malaysia has not been performing very
well. In the year 2003, Malaysia recorded a revenue-cost deficit of RM403 million,
which is about 12.8 percent of the total operating and maintenance costs (Malaysia
Water Industry Guide 2005). Though this amount seems to be large, only about half
of the states in Malaysia are currently experiencing a financial deficit in their water
operations. This can be clearly shown in the operating ratio graph in Figure 2.6.
Operating ratio is the total operating and maintenance cost over the total revenue.
Hence, a state is said to experience financial deficit if its total operating and
33
maintenance cost is larger than its total revenue generated or in short, its operating
ratio is greater than 1. From Figure 2.6, states with large operating ratio include
Selangor (1.70) and Labuan (1.72). Both states experience deficits of 41.2 percent
and 41.7 percent, respectively. The operating ratio of all these states result in the
overall national average of 1.15.
2
1.8
1.6
Operating Ratio
1.4
1.2
1
0.8
0.6
0.4
0.2
State
Si
bu
Sa
ra
wa
k
Pa
ha
ng
Sa
ba
h
Se
la
ng
or
La
Na
bu
tio
an
na
lA
ve
ra
ge
KU
Ku
ch
N.
in
g
Se
m
bi
la
n
Pe
rli
s
LA
ra
k
an
nt
Pe
a
Ke
la
ak
h
ng
da
el
M
Ke
r
na
ho
Pi
Jo
P.
Te
re
ng
ga
nu
0
Figure 2.6 Operating ratio of the various states/areas in Malaysia in the year 2003
Source: Malaysia Water Industry Guide 2005
One of the major reasons for these financial deficits is the loss of revenues
from non-revenue water (NRW) (Anon, 2004). NRW is defined as the difference
between the quantity of water that leaves the treatment plants and the quantity billed
to the consumers based on their metered consumptions (Malaysia Water Industry
Guide 2005). NRW is a measure of a water companies operating efficiency and as
such has a direct effect on profit levels and company reputation. NRW can be a
financial drain on any water utility. The main factor contributing to NRW is pipe
leakages and breakages mainly due to old asbestos-cement pipes. Water may also
lost through pilferages, meter under registration, system maintenance, and fire
fighting. Across the country, NRW levels range from 21.4 percent (Pulau Pinang) to
as high as 58 percent (Sabah). Currently, the average national NRW is 39 percent
(Malaysia Water Industry Guide 2005).
34
Part of the financial deficits experienced by state water operations are due to
the subsidy on residential water consumption. Generally, water subsidies are only
provided for residential water consumption. These subsidies usually apply only for
the first block of consumption to ensure affordable water for all. Table 2.4 shows the
percentage of subsidy by governments on residential water supply for the year 2003.
These subsidies range between 6.4 percent in Sarawak to as high as 57.1 percent in
Selangor. The possible reason for Selangor to receive the highest subsidy from the
government was mainly due to its high production cost that is unaffordable for most
low-income consumers if the state government do not subsidized enough. With the
exception of the Federal Territory of Labuan, there is no subsidy for industrial water
consumption.
Table 2.5 : Subsidization of residential water consumption in various states/areas in
Malaysia as in the year 2003.
State
Unit
Cost
Kedah
Sarawak
Labuan
Perlis
Pahang
N. Sembilan
Sabah
Perak
Melaka
Kuching
Sibu
P. Pinang
Terengganu
Selangor
Johor
Kelantan
0.33
0.47
1.38
0.40
0.52
0.53
0.60
0.52
0.58
0.57
0.75
0.41
0.33
1.33
0.72
0.43
Residential
Rate
Size of
Subsidy
3
1st block (RM/m )
(%)
(m3)
20
0.40
-21.2
15
0.44
6.4
Flat
0.90
34.8
15
0.40
0
18
0.37
28.8
20
0.55
-3.8
Flat
0.90
-50.0
10
0.30
42.3
15
0.45
22.4
15
0.48
15.8
15
0.48
36.0
20
0.22
46.3
20
0.42
-27.3
20
0.57
57.1
15
0.38
47.2
20
0.40
7.0
Industrial
Rate
Size of
1st block (RM/m3)
(m3)
10,000
1.20
25
0.95
Flat
0.90
Flat
1.10
227
0.92
35
1.50
Flat
0.90
10
1.20
Flat
1.40
25
0.97
25
0.97
20
0.52
Flat
1.15
35
1.80
20
2.22
Flat
1.25
Note: Unit cost is derived by dividing total operating and maintenance costs by total water production.
Source: Malaysia Water Industry Guide 2005
CHAPTER 3
METHODOLOGY
3.1
Introduction
This chapter explains in detail and step by step how Visual Basic
programming tool was used in the development of the water pricing software.
Topics that are covered in this chapter are; determination of water pricing which
includes data collection and calculation equations; software development which is
further divided to introduction to Visual Basic 6.0, step by step to development of
water pricing model software which includes create the user interface, determine the
event of each object, and write the event procedure for each event; and lastly
software verification. This chapter ends with assumptions and limitations.
3.2
Determination of Water Pricing
3.2.1
Data Collection
Prior to determining the price of water, data must be obtained first. In this
study, data for the calculation of the price of water were obtained from multiple
sources. An interview was conducted with SAJH’s staff to understand the current
water tariff charged and to obtain data on water consumption. However, it was not a
fruitful interview as data on CAPEX and OPEX as well as how SAJH fixed their
36
water tariffs were unknown. But from the interview, it can be sure that no subsidy is
given from the Johor State Government, and the existing water tariffs are based on
operation and maintenance costs only. There are a total of 823,566 active customers
(account holders) in the whole Johor state as recorded in July 2006, and this figure
varies every month with new connections and old disconnections. As for water
consumption, the total annual average water consumption is 314,170,291 cubic
metres for the year 2005.
All capital and operating expenses for the calculation of full cost recovery
water rates such as construction of dam, water treatment plant, laying of pipelines,
acquirement of equipment, personnel costs, electricity, chemicals, etc. were obtained
from journals, books and internet.
3.2.2
Calculation of the Price of Water
All the calculations involved in the development of the water pricing model
are briefly explained below.
The total cost for each capital work such as construction of dam, water
treatment plant, laying of new pipelines, etc. is obtained by summing up all the main
work items involved to complete the project.
Total Cost = Summation (Σ) of all items
(Eq. 3.1)
Total loan is an amount part of the total cost financed by financial institutions.
The amount of loan depends on the water utilities’ financial strength. Total loan can
be calculated as:
Total Loan, X = Percentage of Total Cost Financed by Debt x Total Cost
(Eq. 3.2)
Balance of the total cost financed by utility itself is defined as:
Balance Financed by Utility, B = Total Cost – Total Loan, X
(Eq. 3.3)
37
Inflation-adjusted interest rate is the interest rate where inflation rate is taken
into consideration. This value can be obtained from the equation below.
Inflation-Adjusted Interest Rate, i* = i + f + if
(Eq. 3.4)
where i = real interest rate / interest rate without the influence of inflation
f = average inflation rate
As for annuity loan repayment, it can be calculated from the equation below.
Annuity Loan Repayment, A =
Xi* (1 + i *) n
(1 + i *) n − 1
(Eq. 3.5)
Cost of water production is defined as:
Cost of Water Production = Total Expenditures
= Total CAPEX + Total OPEX
(Eq. 3.6)
The price of water supply is actually the cost of water production plus the
profit targeted by water utilities, and can be expressed as:
Price of Water Supply
⎡ ⎛ %% of
annual profit
profittargeted
targeted ⎞ ⎤
of annual
= Cost of Water Production x ⎢1 + ⎜⎜
⎟⎟ ⎥
100
⎠⎦
⎣ ⎝
(Eq. 3.7)
After obtaining the price of water supply, it is divided by the total metered
water sold to obtain the average price of water per cubic meter. The average unit
price of water is defined as:
Average Unit Price of Water =
Price of Water
WaterSupply
Supply
Total
Consumption
Total Annual Water Consumption
(Eq. 3.8)
38
As for the water rates for each block of water usage, they can be calculated
from the equation below.
Water Rates for Each Block
tax− -%%ooo
of of
subsidy
given)
Greentax
subsidyg
iven )++100
100 ⎤
⎡ ((Green
= Average Unit Price of Water x ⎢
⎥ (Eq. 3.9)
100
⎦
⎣
3.3
Software Development
3.3.1
Introduction to Visual Basic 6.0
Visual Basic is one of the most exciting developments in programming in
many years. Visual Basic is the next generation of BASIC and is designed to make
user-friendly programmes easier to develop.
Microsoft Visual Basic 6.0 was selected as a tool to develop the water pricing
model because of its capability of doing object-oriented programming. Visual Basic
was one of the first products to provide a graphical programming environment and a
paint metaphor for developing user interfaces (Koay, 2000).
Graphical user
interfaces mean that users are presented with a desktop filled with little pictures
called icons. Icons provide a visual guide to what the programme can do. These
icons placed on the form have their underlying code written into the programme
along with their properties and can react to different events such as mouse
movements and button clicks, thus Visual Basic is sometimes called an event-driven
language. An event must happen before Visual Basic will do anything. Event-driven
programmes are reactive more than active, and that makes them more user friendly.
Programmes in conventional programming languages run from the top down.
For conventional programming languages, execution starts from the first line and
moves with the flow of the programme to different parts as needed. A Visual Basic
programme works completely differently. The core of a Visual Basic programme is
a set of independent groups of instructions that are activated by the events they have
39
been told to recognise. This is a fundamental shift. Instead of doing what the
programmer thinks should happen, the programme gives the user control.
3.3.2
Step by Step to Development of Water Pricing Model Software
Generally, three basic steps that will be taken to develop the water pricing
model using Visual Basic 6.0 are as follows:
i)
Decide how the windows that the user sees will look.
ii)
Determine which events the objects on the window should recognize.
iii)
Write the event procedures for those events.
3.3.2.1 Create the User Interface
One of the key elements of planning a Visual Basic application is deciding
what the user sees – in other words, designing the user interface. What data will he
or she be entering? How large a window should the application use? Where will the
command buttons (buttons the user clicks on to activate the applications) be placed?
Will the applications have places to enter text (text boxes) and places to display
output? What kind of warning boxes (message boxes) should the application use?
The user interface must be designed in such a way that it is user-friendly and
accessible to maximise the use of the model developed. Basically, the water pricing
model developed using Visual Basic 6.0 will be divided into two main parts, which
are (a) the knowledge or information section, and (b) the computerized calculation
section. The knowledge or information section consists of brief definition of the
price of water, water tariffs in Malaysia, categories of expenditures, calculation
parameters and functions, and assumptions. As for the computerized calculation
worksheet, it requires input of data from users and results as output calculated from
Visual Basic. Figure 3.1 shows the planned layout of the water pricing model,
40
emphasising on design calculation worksheet. The input and output steps will be
implemented on each worksheet. When user entered the Main Menu, he/she could
select menu at the top of the window to access calculation screen. All data can be
entered into text boxes at input frame and results will be displayed in text boxes at
output frame.
3.3.2.2 Determine the Event of Each Object
After drawing the interface, the command buttons, text boxes, and other
objects placed in a window will automatically recognise user actions such as mouse
movements, clicks, key strokes, and so on. The sequence of procedures executed in
the programme is controlled by “events” that the user initiates rather than by a
predetermined sequence of procedures in the programme. Example, when click on
the “Calculate” button, Visual Basic detects an event and examines the programme to
see what instructions are written to respond to the event.
3.3.2.3 Write the Event Procedure for Each Event
This is the final step before the programme can be run.
Most of the
programming instructions in Visual Basic that tell the programme how to respond to
events like mouse clicks are called event procedures.
Essentially, anything
executable in a Visual Basic programme is either in an event procedure or is used by
an event procedure to help the procedure carry out its job. Event procedure is written
in a block of code and this code consists of statements that carry out tasks.
41
Data Input
Data Output
Start
Login Screen (Password required)
Select Calculation Menu
Calculation for Operating
Expenditure (OPEX)
Calculation for Capital
Expenditure (CAPEX)
Dam
Pumps
Water
Treatment Plant
Calculation for
Price of Water
Dam
Equipment
Pipes &
Fittings
Input Frame
Year of Project
Commencement
Total Cost
Percent of Total Cost
Financed by Debt
Duration of Loan
Repayment
Annual Interest Rate
Pumps
Water
Treatment Plant
Input Frame
Personnel
Chemicals
Electricity
Insurance,
Contractual
Services, Supplies
& Equipment
Input Frame
Percent of
Annual Profit
Targeted
Total Annual
Water
Consumption
Calculation for Operating
Expenditure (OPEX)
Calculation for Capital
Expenditure (CAPEX)
Calculation for
Price of Water
Equipment
Pipes &
Fittings
Output Frame
Total Loan
InflationAdjusted
Interest Rate
Balance Financed
by Utility
Annuity Loan
Repayment
Average Inflation Rate
Figure 3.1 Layout of the Water Pricing Model (Calculation Worksheet)
Output Frame
Total
Operating
Expenditure
Output Frame
Total CAPEX
Total OPEX
Cost of
Water Supply
Price of
Water Supply
Unit Price
of Water
41
42
3.3.3
Software Verification
Once the water pricing model has been developed, verification is then carried
out by comparing manual calculations with calculations performed by Visual Basic.
For even more accurate verification, existing calculation tool such as Microsoft
Excel will also be used for comparing the results displayed in the model with the
answers generated from Excel.
3.4
Assumptions and Limitations
The assumptions made in developing the water pricing model are as follows:
•
Revenue on water supply is generated wholly from water charges paid
by customers; it does not include funds received through grants or
proceeds from issuance of debt.
•
Annual loan repayment, and operating and maintenance expenses start
from the end of first year from the time money is borrowed (t = 1),
while at the time money is borrowed (t = 0), the cost involved is only
the balance financed by utility itself.
•
Total annual water consumption or total water sold is the total
quantity of water billed to consumers based on their metered
consumption.
The few limitations of the water pricing model developed are:
•
The water pricing model is specially developed for water utilities in
Malaysia.
•
The water pricing model developed is used to assist water utilities in
estimating the water tariffs for domestic and industrial/commercial
supplies only which are the two main water users.
CHAPTER 4
RESULTS AND DISCUSSION
4.1
Introduction
Results and discussion of the study are presented in this chapter. It discusses
the water pricing model developed, as well as the software developed. The water
pricing model software section covers information screen and calculation worksheet,
which is further divided into sub-sections of capital expenditure, operating
expenditure, and the price of water. This chapter ends with comparison between the
existing water tariffs with the recommended tariffs calculated from the study.
4.2
Water Pricing Model
The financial model developed for determining full cost recovery water
tariffs can be summarized in Table 4.1. Calculations are based on a set of data
obtained from Section 3.2.1.
44
Table 4.1 : Financial Model of Water Pricing
Component
Calculation
CAPEX
Total cost of construction of water
treatment plant
RM58,000,000
Cost of excavation and earthwork in
the construction of water treatment
plant
3
x RM58,000,000 = RM1,740,000
100
Total loan, XWTP
80
x RM58,000,000 = RM46,400,000
100
Balance financed by utility, BWTP
RM58,000,000 – RM46,400,000 = RM11,600,000
Inflation-adjusted interest rate, i*
[0.036 + 0.030 + (0.036 x 0.030)] x 100% = 6.71%
Annuity loan repayment, AWTP
(30 years loan repayment)
RM46,400,0 00 x 0.0671 (1 + 0.0671) 30
= RM3,630,877.65
(1 + 0.0671) 30 − 1
OPEX
Personnel costs
Salaries & Wages
Executives
= RM2,500/month x 12 months/year x 552 employees
= RM16,560,000/year
Non-Executives
= RM80/day x 313 days/year x 984 employees
= RM24,639,360/year
Bonus
Executives
= RM2,500/month x 2 months annual bonus x 552 employees
= RM2,760,000/year
Non-Executives
= RM80/day x 26 days/month x 1.5 months annual bonus x
984 employees
= RM3,070,080/year
Fringe Benefits
Insurance
= RM960/year/employee x 853 employees insured
= RM818,880/year
Allowances
= RM200/month x 12 months/year x 679 employees entitled
= RM1,629,600/year
Training
= RM400/year/employee x 450 employees trained
= RM180,000/year
Price of Water
Cost of water supply
RM423,301,900 (CAPEX) + RM50,237,110 (OPEX)
= RM473,539,000/year
Price of water supply
RM473,539,000 x 1.1 (10% profit)
= RM520,892,900/year
Unit price of water
RM520,892, 900
= RM1.66/m3
314,170,29 1 m 3
Domestic water rate (2nd block)
RM1.66/m3 x 0.7 (subsidise 30%) = RM1.16/m3
45
4.3
Water Pricing Model Software
4.3.1
Information Screen
The MAIN MENU of the water pricing model consists of selection menus for
users to access to different screens to obtain estimated water tariff at the end. One of
the menus is INFORMATION. The purpose of the INFORMATION screens is to
provide users with essential information on the price of water as a whole and
specifically for the case of Malaysia. By accessing the INFORMATION screens, it
helps users to understand what exactly the price of water is, the functions of water
pricing, components of a water pricing structure, an introduction to the water tariffs
in Malaysia, present levels of water tariffs in Malaysia, as well as the average tariff
rates in all states in Malaysia. Figure 4.1 shows an example of the INFORMATION
screen when users click on the WATER TARIFFS IN MALAYSIA in the drop down
box under INFORMATION menu. Users can choose to either go back to the MAIN
MENU to access to other screens by clicking on the BACK button or exit the
software by clicking on the EXIT button.
Figure 4.1 An example of the INFORMATION screen
46
4.3.2
Calculation Worksheet
Calculation worksheet consists of several screens involving calculation to
obtain end results of water rates. Under the CALCULATION menu is the capital
expenditure, operating expenditure, and the price of water step-by-step to get the
estimated water tariffs.
4.3.2.1 Capital Expenditure
When users place the mouse pointer on CAPITAL EXPENDITURE, a drop
down box will appear on the right, listing down the major components of capital
outlays. The components of CAPEX taken into consideration in this study are
construction of dam, construction of water treatment plant, laying new pipelines or
replacement of old pipelines and installation of fittings, replacement or installation of
pumps, and acquirement of large mechanical equipment.
Figure 4.2 shows the screen for the calculation of annuity loan repayment for
the construction of water treatment plant. Users are required to enter data on year of
which the construction of water treatment plant is commenced, total construction
cost, percentage of total cost financed by debt, duration of loan repayment, annual
interest rate charged by creditor, and annual average inflation rate. The annual
average inflation rate is 3 percent for the year 2005 (Economic Planning Unit). Once
all input data are entered, user can click on the CALCULATE button and
automatically the results display in the OUTPUT frame. Results obtained from this
screen include total loan, inflation-adjusted interest rate, balance financed by utility
at the time the water treatment plant is built, and lastly, the annuity loan repayment
starting from the end of first year of project commencement throughout the duration
of loan repayment.
47
Figure 4.2 Screen for the calculation of annuity loan repayment for the construction
of water treatment plant
Items that constitute the total cost are listed out as in Figure 4.3 when users
click on the little “star” next to the total cost. This screen is designed to let users
know how the total construction cost of water treatment plant is spent on each major
works. Percentage of total cost for each main work item is set as default values
based on quantity surveyor’s experience and the corresponding cost for each item
will be displayed when the CALCULATE button is clicked. However, users can also
enter the percentage values based on their own experience and opinion by clicking on
the CLEAR button to erase the default values. The RESET button is used to return
the screen to its initial setting with default values given.
48
Figure 4.3 Screen displaying the list of work items in the construction of water
treatment plant
4.3.2.2 Operating Expenditure
Major operating expenses involved in supplying treated water to consumers
are personnel, chemicals, electricity, insurance, contractual services, supplies and
equipment not included as capital expenditure, and repair and maintenance. These
operating expenditures are usually calculated annually and are affordable to be
financed by the water utilities itself.
Figure 4.4 shows the screen for the calculation of personnel costs, one of the
major components of operating expenditures.
Personnel cost includes salaries,
wages, bonus, and fringe benefits. Salaries and wages for personnel may account for
as much as 40 percent of operating expenses (Moreau, 1997). Users are required to
enter the number of staffs for executives and non-executives, as well as the average
49
rate per employee. The annual total cost for each item will be shown when the
CALCULATE button is clicked. The RESET button in this screen will clear all
entered data to allow users to make new calculation.
Another significant component of operating expenses is electricity. Electrical
power is required throughout the whole process of supplying treated water to
consumers right from abstraction point till consumer’s tap.
Pumps, treatment
facilities, equipment, and machineries, all require high electrical power supply to
operate and function. Hence electrical cost contributes significantly to the overall
operating expenditures. The calculation of electrical cost is performed in the screen
shown in Figure 4.5. Calculation of electrical cost is based on types of premises
because different types of premises are charged different rates. Users are required to
enter the average monthly unit used and the rate imposed by private electrical
company.
Total annual cost spent on electricity will be displayed when the
CALCULATE button is clicked.
Figure 4.4 Screen for the calculation of personnel costs
50
Figure 4.5 Screen for the calculation of electrical cost
4.3.2.3 The Price of Water
After obtaining all capital and operating expenditures, the final stage in the
software is the calculation of the price of water. Under the PRICE OF WATER, it is
divided to unit price of water, water rates for domestic residential homes supplies,
and water rates for industrial and commercial supplies, each shown in a separately
designed screen.
Figure 4.6 is the screen for the calculation of unit price of water. Once all
capital and operating expenses have been calculated, the average unit price of water
can be known from this screen. The INPUT frame requires entry on year of which
the price of water is to be known, percentage of annual profit targeted by the water
utilities, and total metered water sold. The total metered water sold or total annual
water consumption is the total water supplied after deducting all forms of losses
(non-revenue water). When click on the CALCULATE button, all CAPEX and
OPEX calculated individually from previous screens will be summarised in the
OUTPUT frame, together with the cost of water supply which is the total
51
expenditures, price of water supply by adding cost of water supply with profit margin,
and lastly the average unit price of water resulting from the price of water divided by
the total metered water sold. In this example given, the average unit price of water is
RM1.66 per cubic meter.
Figure 4.6 Screen for the calculation of unit price of water
Once the average unit price of water has been obtained, the water rate for
each block of water consumption can be determined by subtracting subsidy from and
adding green tax to the unit price of water. The water rates for domestic residential
homes supplies screen is displayed in Figure 4.7, while the water rates for
commercial and industrial supplies screen is shown in Figure 4.8. New tariff setting
raises water prices to the true economic cost of the service.
Therefore, the
52
affordability of consumption is the main issue, and a consumption subsidy is the
obvious solution. By law, the subsidy can cover 25 to 85 percent of a household’s
water bill for up to 20 m3 a month, with the client paying the rests (Gómez-Lobo and
Contreras, 2003). The subsidy is based on the willingness to pay for water services
among low-income households. Only households that would be unable to purchase
what is considered to be a subsistence level of consumption should benefit, and the
subsidy should cover only the shortfall between actual charges and willingness to
pay. In Malaysia, governments do not give subsidy to private water companies but
instead the private water companies itself subsidies part of the first few blocks of the
domestic water tariffs to ensure affordable water for all. As shown in Figure 4.7, the
first 30 m3 of water consumption is subsidised.
This is because international
standard recommends that each person requires an average 200 litres of water per
day and based on a mean family of 5 persons, a family would need 1000 litres per
day or 30 m3 per month.
Green taxes are not new. Green taxes are used for three primary purposes.
First, to generate revenue for the water supply utilities. These revenues generated are
used to offset subsidies given to initial block domestic water users, and are also
sometimes used to pay damages to the environment, associated with water
withdrawal. Green taxes are also applied to change behaviour. Green taxes on
higher water consumption aimed at encouraging water conservation because prices
affect demand for water. The third purpose of green taxes is to achieve equity. The
amount of water use is highly dependent on household’s income. Low-income
households’ water use usually falls in the first and second block of water use. Hence,
only high water consumption will be taxed so that it will not “hurt the poor” or be
unfair to them. Green taxes are sometimes called “corrective taxes” because they
correct the distorting price signals now given to resource depletion.
In the example shown in Figures 4.7 and 4.8, cross-subsidisation, in this case,
is flowing from industrial/commercial to residential water users. Thus, no subsidy is
given to industrial/commercial water users but instead green tax is applied to the
water tariffs.
Counter-subsidy occurs within the residential users where large-
volume users that are charged higher water rates subsidy small-volume users. In
both the screens for the determining of water rates, the size of blocks is set as default
53
values and users are required to enter the percentage of subsidy and green tax in
order to display the water rates for each block when the CALCULATE button is
clicked.
Figure 4.7 Screen displaying the water rates for domestic residential homes supplies
Figure 4.8 Screen displaying the water rates for industrial and commercial supplies
54
4.4
Comparison
Though data used for the calculation of the price of water in the example
shown above is not all obtained from SAJH, part of the data not provided by SAJH
are obtained from multiple reliable sources. Table 4.2 shows the existing water
tariffs in Johor, Selangor and Pulau Pinang, and the tariffs calculated from the
software developed.
It is obvious that current water tariffs charged by SAJH,
Syarikat Bekalan Air Selangor (SYABAS), and Perbadanan Bekalan Air Pulau
Pinang (PBAPP) are lower than the recommended tariffs. One of the reasons that the
calculated water tariffs are higher is because the software developed in this study is
for a single new installation only, whereas the present tariffs are based on an average
of several installations and plants, which some of the existing plants and installations
are fully or partly subsidised by the government. The single new installation or plant
is fully financed by the water utilities, resulting in higher water rates to offset the
costly expenses of water supply.
The water tariffs calculated from the software developed accomplish the
concept of full cost recovery because the software is developed in a way that the
price of water is calculated based on both CAPEX and OPEX. Hence, the water
tariffs obtained from the software are higher compared to the existing tariffs which
are only recovering part of its total costs (OPEX only).
Full cost recovery is
essential to reduce utilities’ financial burden as they cannot go on footing the
increasingly large operation and capital investments without resorting to tariffs
increase. Therefore, in order to fully recover the costs of water supply, narrowing
the gap between expenditures and income, water utilities must revise and readjust the
existing tariffs to ensure long term financial sustainability of the services.
55
Table 4.2 : Existing water tariffs charged by 3 private water companies, and the recommended
tariffs obtained from the software developed
Syarikat Air Johor
Syarikat Bekalan Air
Perbadanan Bekalan
Example of
Holdings
Selangor
Air Pulau Pinang
recommended tariffs
(SAJH)
(SYABAS)
(PBAPP)
for full cost recovery
Domestic
3
3
0-15m @ RM0.38/m
0-20m3 @ RM0.57/m3
0-20m3 @ RM0.22/m3
0-15m3 @ RM0.83/m3
residential
16-30m3 @ RM1.18/m3
21-35m3 @ RM0.91/m3
21-40m3 @ RM0.42/m3
16-30m3 @ RM1.16/m3
homes
31-45m3 @ RM1.64/m3
> 35m3 @ RM1.70/m3
41-60m3 @ RM0.52/m3
31-45m3 @ RM1.66/m3
supplies
46-100m3 @ RM1.98/m3
61-200m3 @ RM0.90/m3
46-100m3@ RM1.99/m3
> 100m3 @ RM2.01/m3
> 200m3 @ RM1.00/m3
> 100m3 @ RM2.32/m3
0-20m3 @ RM0.52/m3
0-20m3 @ RM1.83/m3
Type of
Charge
Industrial/
commercia
l supplies
0-20m3 @ RM2.22/m3
3
3
> 20m @ RM2.96/m
0-35m3 @ RM1.80/m3
3
3
> 35m @ RM1.92/m
3
3
21-40m @ RM0.70/m
21-40m3 @ RM1.99/m3
41-200m3 @ RM0.90/m3
41-60m3 @ RM2.16/m3
> 200m3 @ RM1.00/m3
61-200m3 @ RM2.49/m3
> 200m3 @ RM2.82/m3
CHAPTER 5
CONCLUSIONS AND RECOMMENDATIONS
5.1
Introduction
This chapter concludes the findings of the development of water pricing
model software. Recommendations to improve the software are also outlined in this
chapter.
5.2
Conclusions
The followings are the conclusions of this study:
(a)
The visual-based water pricing model is used as a tool to improve
normal calculation procedures.
Calculation of the price of water
involves many variables and it is a tedious and time consuming work.
In that case, the creation of the water pricing model is ideally useful to
assist policy makers and water utilities in determining the price of water
with optimal resources and time.
(b)
The water pricing model developed varies accordingly to changing
conditions, and this ease policy makers and water utilities to look into
various scenarios.
57
(c)
The water pricing model is also developed in such a way that full cost
recovery (capital and operating expenses) principle is accomplished,
thus ensuring adequate and stable stream of revenue to cover all the
expenditures.
(d)
(e)
The new water rates designed successfully meet the following criteria:
•
Revenue sufficiency
•
Equity
•
Efficiency
•
Social acceptability and practical feasibility
•
Water conservation
The detail and clear components that constitute the water tariff provide
justification on water tariff hike.
5.3
Recommendations
Recommendations to improve the software can be summarised as follows:
(a)
Conduct willingness-to-pay surveys to obtain data on willingness to pay
for water services among low-income households for designing a
rational water subsidy scheme (Foster et al., 2000).
(b)
Consider depreciation of asset. The amount an asset is depreciated is
debited against income (Twort, 2000).
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