Historic Water Restructuring Agreements between Penang State Government and the Federal Government demonstrates the commitment of Penang PR Government to have a mature working relationship with the BN Federal Government

Media statement by Lim Guan Eng in Komtar, George Town on Wednesday, 1^st June 2011:

The State Government of Penang and the Ministry of Finance have come to an agreement where the state government will agree to the migration of its core assets in Perbadanan Bekalan Air Pulau Pinang(PBAPP) in exchange for a complete restructuring exercise of the outstanding federal loans owed by Penang. The Ministry Of Finance represents the Federal Government and Pengurusan Aset Air Berhad (PAAB), a company under the Minister of Finance Inc. PAAB will assume responsibility for water supply projects through the National Water Services Industry Restructuring Initiative.

The Water Services Industry Act 2006 (WSIA) which has come into force in 2007 and agreed to by the previous BN state government is a takeover of water supply functions now presently under the purview of the state government. The main objectives of the WSIA are:

Resolution of all federal government water loans
Provision of water as a basic right
The state will retain ownership on land at water catchment areas
The state will retain rights on raw water

Under the WSIA, all water operators will be regulated and licensed by Suruhanjaya Perkhidmatan Air Negara (SPAN). SPAN's responsibility is to regulate as well as to monitor the performance of the water operators. The restructuring is required for a better quality of water and to relieve the states and concessionaires of the heavy burden of funding water infrastructure development, of which is now the responsibility of the Federal Government and PAAB. PAAB is fully owned by Ministry of Finance to facilitate this migration and provide funding for future water assets development.

Chief Minister, YAB Lim Guan Eng said that the Cabinet has approved the restructuring and migration exercises subject to the following terms and conditions:-

the state's outstanding loan of RM655.24 million to the Federal government will be interest-free and rationalized by alienating state land related water assets to PAAB for a period 45 years. PAAB will lease back the water assets to PBAPP for 45 years. PBAPP shall pay PAAB a yearly lease rental of RM 14.56 million and upon settlement of the lease at the end of 45 years, the state land will automatically revert back to the state;
the funding of Mengkuang Dam expansion project of RM 1.2 billion will be given as a grant by the Federal Government;
any revision or variation in water tariffs must obtain the approval and consent of the Penang state government.

This is an improvement of the previous terms as the state's outstanding loan of RM655.24 million was supposed to be charged an interest rate of 3%. Instead of the 3%, it will now be interest-free, and paid by PBAPP. PAAB will also be providing funding at the lowest market rates available to PBAPP for new and upgrading water infrastructure projects in Penang.

Further, the RM1.2 billion has also been converted to a grant instead of an interest-free loan that will be required to be repaid by the state government. Finally the state government retains control over the rate of water tariffs so that the people of Penang decides and not the Federal government.

The Penang State Government, Ministry Of Finance and PAAB will sign the Restructuring Agreements on 2 June 2011 in Putrajaya. The main benefits of the National Water Services Industry Restructuring Initiatives to Penang State government will be:

Relieved of repaying the RM 655.24 million water supply loan owing to the Federal Government, which will be repaid by PBAPP.
Penang State Government will be given a grant allocation of RM1.2 billion for the expansion project of Mengkuang Dam in Penang.
Federal Government will be fully responsible for the source work of water supply projects.
Relieve of the heavy financial burden to develop and upgrade water supply assets.
Enable PBAPP to focus solely on providing water treatment and distribution services and concentrate on achieving operational efficiencies, good quality water and services.
PBAPP can work towards full cost recovery and financial independence in the long term;
Retain control by the people of Penang over the determination of water tariffs rates in Penang.

The RM1.2 billion grant for the expansion project of Mengkuang Dam will be expedited from this migration exercise. Currently, Mengkuang Dam's capacity is 23 million cubic meters and with the expansion it will increase the dam capacity to 78 million cubic meters and be able to meet the state's water need until the year 2020.

Penang State Government requires a large capital expenditure for the water supply systems and the restructuring need to be implemented so as to ensure sustainable operations and distribution of water supply. We hope that this exercise will relieve the state from the heavy financial burden to develop water assets and at the same time reduce the burden to review water tariff increases in the future. Penang shall depend on the promise of the Federal government that both the state and PBAPP will not have to depend on funding and loan by the financial institutions in time to come.

The willingness of the Penang state government to agree to this historic water restructuring agreement with the Federal government demonstrates the commitment of the Penang PR state government to have a mature working relationship with the BN Federal government that is in the national interest and beneficial to the people.

*Lim Guan Eng, Penang Chief Minister