The reform creates a modern institutional structure for the water sector, including an autonomous regulatory agency, an asset management company and commercialised state water companies that have to reach certain key performance indicators that will be monitored by the regulatory agency.

First, tariffs are low, thus making cost recovery impossible at current levels so that the sector continues to depend on government subsidies.

Third, a large-scale water transfer project from the Pahang River to Kuala Lumpur is controversial because of its negative social and environmental impacts.

The project includes the construction of the Kelau dam on the Pahang river in the neighbouring state bearing the same name, as well as the transfer of water via a tunnel through a mountain range.

The three phases of the project thus increased the water supply capacity in the Klang Valley by 1950 megaliters per day.

[6] As of 2005,[update] total water resources for the Kuala Lumpur and Selangor area were 2541 megaliter per day for 7.3 million inhabitants.

In 2005 the Japan Bank for International Cooperation (JBIC) signed an agreement to provide a soft loan with 40 year maturity for the construction of the dam.

Wells have since been relegated to the annals of history and stand pipes where villagers washed, bathed and collected water for cooking and drinking are a rarity.

The share of households in Peninsular Malaysia receiving treated water in both urban and rural areas rose from 23% in 1950 to 85% in 1990.

In the early 1990s several states of Malaysia embarked on a policy of private sector participation in water and sanitation.

A first Build-Operate-Transfer (BOT) contract was awarded in 1992 by Johor state for a water treatment plant for its capital.

The bid was won by a consortium led by the Malaysian company Kembangan Dinamik with a minority share by the French firm SUEZ.

In 2002 the first state government in Malaysia fully privatised its water supply through an outright sale of assets for the entire network (divestiture).

In the federal capital territory of Kuala Lumpur and the state of Selangor, which completely surrounds the capital territory, a 26-year BOT contract for a 1,120 megaliter per day water treatment plant was signed with Puncak Niaga Holdings in 1994 as part of the Selangor River Water Supply Scheme.

In 2004 a 30-year concession was awarded without competitive bidding to Syarikat Bekalan Air Selangor Sdn Bhd (SYABAS), a subsidiary of Puncak Niaga Holdings.

Both contracts were listed as “distressed” in 2010 pending a request of cancellation, according to the World Bank’s Private Participation in Infrastructure database.

After lengthy discussions about the price and after intervention by the federal government,[12] three of four concessions in the State of Selangor (Syabas as well as PNSB, both owned by Puncak Niaga Holdings, and the smaller state-owned ABASS) were bought back in September 2014 for a price of reportedly €1.9 billion.

[11] Since independence investment in water supply had been a responsibility of the 13 states of Malaysia, with no significant role for the federal government.

The objective was to make the sector more efficient, to create a sustainable funding mechanism and to improve the customer orientation of service provision.

Two main laws passed in 2006 form the legal framework of the water and sanitation sector in peninsular Malaysia.

The acts separated the functions of policy making (government), regulation (SPAN), asset ownership (PAAB) and service provision (state water companies) from each other.

As part of the reform process, for the first time in Malaysian history a draft bill had been made available for public discussion before it was presented to Parliament.

The cost is passed on to taxpayers that have to shoulder the debt, or to consumers that have to face higher water tariffs.

[15] Through the 2006 reform the responsibility to finance and develop new water infrastructure in peninsular Malaysia has been transferred to the asset management company PAAB.

PAAB is financed through an initial equity contribution from the federal government and lease payments that it is due to receive from state water companies.

Water infrastructure development in Sabah and Sarawak continues to be financed directly by the federal and state governments.

The 8th Malaysia Plan also recommends Water Demand Management as a tool to ‘stretch’ existing supplies and delay the development of large capital-intensive projects.

In the long run, the Federal Government wants the state operators to achieve full cost recovery and attain financial independence.

Following an election promise, beginning in 2008 Selangor state is subsidising its consumers with RM132 million/year (about US$40m) as a result of giving “free water” (first 20 m3) to about 1.5 million households.

Although water supply in Penang state is privatised, tariffs are the lowest in Malaysia due to the subsidies.