Financial Model for Planning, Developing and Managing the Sabah Water Supply System

PRESENTED BY

Ir. PANG HOCK KIONG
(PERUNDING PKC SDN BHD)

e mail:

panghockkiong@hotmail.com

BACKGROUND

The Financial Model was first initiated during the Author’s tenure with the State Water Supply Department in 1998, at a time when the privatization and corporatization of the Water Department were key priorities. During this period, invitation letters were issued to various potential bidders to explore interest in undertaking the restructuring exercise.

It was widely recognized that a cash flow / financial model must be developed internally to assist the State Government, as well as the Water Supply Department, to evaluate the proposals

Hence, the author was at that time given the task/responsibility to develop the financial model. As a water supply operator, the author was able to access the real Data necessary to construct the Model.

However, the privatisation/corporatisation of the State Water Supply Department did not materialise after much negotiation.

The Financial Model developed at that time was poorly structured and, as a result, was not practical to implement.

Nevertheless, the development of the Financial Model did not cease. Following retirement, the Author continued to enhance and refine the Model, eventually transforming it into a full-fledged financial modelling system that offers greater flexibility and improved user-friendliness for its users.

INTRODUCTION

An Excel-based financial model has been developed to support better financial planning for the Water Supply Authority. It includes a 5-year cash flow projection, with the option to extend the analysis up to 40 years. Key investment metrics, such as IRR and NPV, are built in to support scenario testing and assess financial viability for potential corporatization.

The model is a key foundation for establishing the Water Commission (Regulatory Body) and transforming the Government’s water supply utility into a corporation. It presents financial visibility, long-term cost forecasts, and a practical evaluation of revenue adequacy, ensuring the sustainability of the corporatized entity while meeting regulatory and service requirements.

The evaluation excludes the cost of capital works, such as new water treatment plants and their associated infrastructure, because the State Government typically funds these. The program aims to assess production capacity and recommend the capital works needed to meet future demand and support longterm planning.

The water tariff, as the primary revenue source, is expected to cover O&M costs and, where possible, asset renewal and replacement. However, during the early stages of implementation, government subsidies will still be needed to maintain the desired service level.

Data collection for the program inputs will be conducted once a year to ensure the Model is updated with the latest operational and financial information.

With the application of this Model, the Management would be more vigilant of the
situation ahead, and remedial action can be taken earlier to alleviate major future
problems in the Water Supply system.

OBJECTIVE

Proper Implementation of the Model shall assist in satisfying the following criteria/objectives:

Adequacy

Sufficient to meet the current costs of Operation & Maintenance in a first stage and part of the capital expenditure (asset replacement) in a second stage of development of the model if desired

Affordability

Introduction of a social tariff for the low-income group and the setting up of adequate rates to promote commercial & industrial growth. At the Current domestic tariff and an average household consumption of 30 cu. m per month, the water bill would be about RM52.00/month, which is 1.6% of the minimum household income of RM3,137 at the poverty level. The recommended affordability level is 3% to 5% of household income.

Enforceability

the new tariff shall be fair & reasonable for a noncontroversial and easy implementation

Water conservation

With the yearly updated consumption pattern of each category, the new tariff shall create strong incentives for water conservation in the state

Historical continuity

To be in line with and related to the trend of model parameter variations and Data in recent years.

THE MODEL’S FEATURES

The model is designed as a plan that spans 40 years.
It can be executed for any single or multiple Divisions sharing common production plants, distribution areas, and billing systems, all utilizing the same tariff format, while operating under a single Water Supply Authority.
Trend of NRW
Trend of Supply and Demand
Long-term financial projection
Production cost analysis for future Tariff adjustment using the following items 7 & 8
Consumption pattern of various types of consumers
Progressive water tariff with option for future adjustment.

It provides continual historical data to support future Tariff adjustments.
Option to include Meter charge/connection/month ( for meter replacement ) if required.
Trend of Annual Sales, Collection, and Collection Efficiency.
Budget on Government subsidies to maintain service level
Simulate “what if” conditions on financial system performance indicators
A tool to set a goal for monitoring and necessary corrective action
To ease the Government’s financial burden in the long run through proper planning and development.

It can be used to monitor the physical and financial performance of the privatized / corporatized entity

Current Applicable Water Tariff (2015)

GRAPHICAL PRESENTATION OF THE MODEL

The “Key Control” shows data received/sent from all Divisions for processing; it can only be accessed by the Committee of Water Supply Authority for important decision-making.

GRAPHICAL PRESENTATION OF THE MODEL (Cont)

Tariff increase – The Rate of tariff increase for each sub-category can be simulated yearly, as shown in the blue line in the following graph. The intersection every 5 years would be the tariff to be implemented for the next 5 years ( red curve),

TIME SCHEDULE OF IMPLEMENTATION

The implementation could be in three stages for each Water Supply Authority:

Phase A

Training and presentation of the Model to Division Operators and Accounting Central Departments/computer billing section in HQ/Division.

Phase B

Calibration of the Financial Model over the last years and validation/estimation of the input data on “K factors” for the Division. And the decision on the “cut-off” ( financial year) to run the Model.

3 Phase C

Utilization of the Financial Model with the updated Drinking Water Tariff and the gathered data. Reports will be generated in graphical format to illustrate the financial and physical status of the water supply system.

NRW STATUS

Supply vs demand

Collection Efficiency

CONSUMPTION PATTERN

1. Dom 2. Spare 3. Commercial 4. Industry 5. Government & Educational Institution 6. Religion & Charity 7.Condo with facilities 8. Condo without facility 9. Water Depot 10. Shipping & Ports 11. Emergency