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I salute the Minister without Portfolio in the Prime Minister’s Department, Idris Jala for his courageous proposal to remove costly subsidies. While it would be absolutely necessary to offer subsidies (or other lifeline support) to the poor and needy, many subsidies should be removed or reduced.

In this context, with the utmost of respect, I draw the minister’s attention to the enormous cost of our water subsidy.

When water is not priced properly, huge and avoidable impacts are caused not only to the environment but also to the national balance sheet, the very problem that the minister seeks to address. Under-pricing water allows for very inefficient allocation of public funds to costly water infrastructure as it allows such allocations and other inefficiencies, to be ‘hidden’ from (ie, not felt by) the public.

It is widely accepted that water pricing is an effective tool to reduce water demand. Beyond the aim of influencing water demand, setting the price of water correctly promotes the sustainable management of resources. As S Olmstead and R Stavins (professors at Yale and Harvard respectively) state clearly:

‘In the long run, inefficient prices alter land-use patterns, industrial location decisions, and other important factors. The sum of all these individual decisions affects the sustainability of local and regional water resources.’

For the benefit of your readers, opportunity cost is the highest loss of benefits from alternatives as a result of making a particular investment while externalities are losses suffered (or benefits gained) by third parties.

For example, the Pahang-Selangor Raw Water Transfer Project will cost many Orang Asli families their traditional livelihood as the lands they have traditionally occupied will be flooded by the Kelau dam. (In compensation, they have been ‘offered’ – urged to accept – small plots of land to grow oil palm which they have rejected by going to court to defend their customary rights).

Environmental externalities of a project are what a community or society suffers due to the loss of (ecosystem) services that are provided free by Mother Nature or the harm caused by its discharges to the environment. Indeed, the Pahang-Selangor Raw Water Transfer Project has a number of costly environmental externalities but for reason of space shall not be listed here.

The closer the price of water approaches full cost, the better water would be valued. In Selangor (even without the 20 cubic metres per month of free water to each household), water pricing fails to even capture the lowest level of costs, ie, O&M costs, let alone the full supply cost, let alone the full economic cost, and let alone the full cost.

Thus, our water is massively subsidised, and this huge subsidy subjects water to serious under-valuing – and serious misuse by both individuals and industry. There are at least two main ways in which gross misallocation of financial resources are encouraged by the subsidy.

One, it lulls the public into accepting our high levels of non-revenue water (NRW) and its enormous cost. Two, it lulls the public into accepting extremely wasteful misallocation of our financial resources to multi-billion ringgit water supply projects such as the Pahang-Selangor Raw Water Transfer project instead of requiring the implementation of a Water Demand Management (WDM) Plan at a fraction of the cost.

(A WDM Plan may even be revenue-positive!) As a result, by ‘hiding’ from the public the NRW inefficiency and the infrastructure misallocations, the subsidy effectively sustains them.

Wisdom and fortitude can yet, to the gain of the greater good, send to a worthy demise the Pahang-Selangor Raw Water Transfer project – let the fat boys weep.

Malaysians have discovered in minister Idris Jala an unusually forthright leader who inspires and empowers staff, and his scintillating track record speaks for itself. We can be confident that when he is allowed to deal with the huge water subsidy, a major obstacle to the sustainable management of our financial and natural resources will be addressed via a comprehensive Water Demand Management Plan.

In the long run, it will lower the true cost of our water.

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