Penang exco defends RM8.4b Perak water deal, says charge covers dedicated plant over 40 years

Penang state executive councillor Zairil Khir Johari said the RM8.4 billion water supply charge covers the construction, financing and refurbishment of a dedicated treatment plant over 40 years. — Picture by Opalyn Mok

By Opalyn Mok

First Published: Thursday, 12 Nov 2026 10:29 AM MYT

GEORGE TOWN, Nov 12 — The Penang state government has defended the RM8.4 billion capacity charge under its conditional water supply agreement with Perak, saying the payment covers a treatment plant dedicated to the state and is spread over 40 years.

State Infrastructure, Transport and Digital Committee chairman Zairil Khir Johari said the charge was a deferred payment for the construction and financing of the plant, which would be built solely to supply treated water to Penang.

"The plant costs RM3 billion to construct. If we include 40-year financing and refurbishment costs, it sums up to RM8.4 billion, a figure that has withstood the scrutiny of financial consultants appointed to conduct due diligence on the project," he said in a statement today.

He said the conditional Bulk Water Supply Agreement (BWSA) between Perbadanan Bekalan Air Pulau Pinang Sdn Bhd (PBAPP) and Prasarana Air dan Irigasi Perak Sdn Bhd (PAIP) was a government-to-government agreement aimed at ensuring Penang's future water security.

Under the agreement, Penang would receive between 300 and 500 million litres a day (MLD) of treated water for the next 40 years and beyond.

Zairil said Perak would be fully responsible for the construction and financing risks of the 500 MLD treatment plant, which would be dedicated solely to supplying PBAPP, as well as its maintenance and upgrading throughout the agreement.

"PBAPP makes no upfront payment or capital contribution to PAIP, and repays the plant cost through the annual capacity charge from the supply start date, stretched over 40 years to make it more affordable to PBAPP," he said.

He said the annual capacity charge of RM210 million would reserve the plant's capacity for Penang while covering its construction and financing costs.

Zairil also clarified that the capacity charge was separate from the supply charge, which would only apply to water actually delivered.

"The supply charge is the price of the water, and is not charged on water that PAIP fails to deliver," he said.

He added that building a desalination plant would cost more than the BWSA arrangement.

"PBAPP’s internal estimates put the capital and lifecycle cost of a typical 300 MLD desalination plant above RM25 billion, for a plant with a typical lifespan of about 20 years while in comparison, the capacity charge sums up to a total of RM8.4 billion over 40 years," he said.

Zairil said the PBA Holdings Bhd (PBAHB) board, including five dissenting directors, agreed that the water purchase was necessary for Penang's long-term water security.

He said the state's water demand was projected to exceed 1,100 MLD by 2032, while it remained reliant on Sungai Muda.

"The dissenting directors’ reservations are confined to the issue of payment terms in the event of Perak’s ‘state interest clause’ kicking in and prolonged suspension," he said.

Addressing these concerns, Zairil said Penang was protected under the agreement, as RM16.2 billion of the RM24.6 billion in total projected payments comprised supply charges for the water itself.

"In the event of a quantity or quality shortfall, PBAPP pays supply charges only on actual water delivered that meets the pre-agreed quality," he said.

He added that PAIP would have to pay PBAPP liquidated damages for water supply shortfalls, at the same rate PBAPP paid for water delivered.

However, the damages would not apply to shortfalls caused by circumstances beyond PAIP's control, such as severe drought, or when Perak's own water needs took priority under the state interest clause.

"Priority for the host’s needs is common practice where a state or country’s resources are involved, and akin to the national interest clause in petroleum production sharing contracts (PSCs) which allows the federal government to override contractual operations to prioritise domestic needs," he said.

Zairil said Penang could also terminate the agreement and claim damages if PAIP breached its terms and failed to remedy the breach within 90 days, or if PAIP became insolvent.

In the event of a supply suspension lasting more than three months through no fault of PBAPP, either party could request renegotiation and seek mediation by the respective state governments.

If renegotiation failed after another three months, either party could terminate the agreement.

In such circumstances, PBAPP would have to make a single payment equivalent to the remaining capacity charges, discounted at four per cent per annum, with the amount decreasing each year the plant operated.

However, if PAIP's licence was not renewed through no fault of either party, the agreement would end without PBAPP having to pay any further capacity charges.

Zairil said PBAPP could also exit the agreement in the 22nd contract year if both parties failed to agree on a review of the supply charge, subject to payment of the remaining capacity charges discounted at four per cent per annum.

He said the agreement should be considered in its entirety, as individual clauses could appear one-sided when viewed in isolation.

“Read as a whole, its terms allocate risk between both parties fairly,” he said.