Malaysia:  Environmental Market Analysis

• Country Overview
• Market Estimates and Analysis
• Foreign Competition
• Regulatory Impact

COUNTRY OVERVIEW

Malaysia�s pollution problems have not been as severe as those of other Asian countries.  However, the lessons those countries have learned have not been lost on Malaysia. The government recognizes  that it must pay particular attention to environmental management issues if Malaysia is to become a fully developed nation by 2020 and avoid severe industrial pollution.

Government Action

Malaysia was among the first Southeast Asian nations to emphasize the environment in its industrialization program.  The government formalized environmental management objectives as early as the mid-1970s and again in the late 1980s in response to international concern. Since 1989, the government has placed greater emphasis on environmental problems due largely to rapid industrialization and urbanization.   These include water supply and wastewater treatment, air pollution control, hazardous waste management, and more recently, solid waste management.

Malaysia�s commitment to private sector involvement in environmental management and infrastructure development has led to many significant environmental programs nationwide, with foreign and domestic players taking dominant positions. While still evolving, the country�s environmental industry is seeing the expansion of domestic equipment and service providers to neighboring markets.

Even as Mahathir continues to push for his Vision 2020, the government has yet to fully integrate environmental management. Procedures are still being formalized within the bureaucracy. Nevertheless, Malaysia is the most advanced among the fast-developing Southeast Asian markets. The country appears to be forging ahead with reform in water/wastewater and waste management sectors.  Investments have risen as concession or contract holders have divided up large portions of the country�s environmental industry sectors.

Officials appear increasingly serious about enforcement. The number of court cases brought under Malaysia�s 1974 Environmental Quality Act (EQA) has risen in recent years. Prominent multinationals such as Colgate Palmolive, Armitage Shanks, Premier Milk, and MBF Health Products have been issued court summons from the Department of the Environment (DOE). While enforcement by state governments appears to be tightening, observers attribute some of these actions to political grandstanding. Low fines by lenient courts also undermine enforcement efforts.

Business Opportunities

The current economic crisis will strain Malaysia�s ability to support environmental initiatives. Nonetheless, the market for environmental goods in Malaysia stood at $720 million in 1997. According to estimates reported in the 1999 Country Commercial Guide by the U.S. Department of Commerce Foreign Commercial Service and U.S. Department of State officials, the Pollution Control Equipment sector ranks 4^th among leading industry sectors for U.S. exports and investment for nonagricultural goods and services in Malaysia.

There also remains a demand for environmental engineering and auditing services for Environmental Impact Assessment (EIA) reports that are required by law or undertaken to meet ISO 14000 certification.

The environmental equipment market relies heavily on new plant investments, retrofits and upgrades to existing plants for sales growth. In this respect, Malaysia�s new investments in information technology and the petrochemical sector should present business opportunities. For example, infrastructure development of the Multimedia Super Corridor and multibillion-dollar petrochemical projects announced by companies such as Union Carbide, Titan, and BASF should create a demand for industrial wastewater treatment facilities and components. According to U.S. Department of Commerce statistics, U.S. exports to Malaysia of water filtering or purifying machinery and apparatus reached $19.7 million in 1997.

Privatization

Privatization has served as the single most important market driver for Malaysia�s environmental business and is likely to present opportunities in the future. Malaysia has been the region's pioneer in privatization, possible because Malaysia has high economic growth and a serious commitment to the environment at the highest level of government.

In 1995, the government of Malaysia awarded Alam Sekitar Malaysia Sdn. Bhd. (ASMA) a 20-year privatization concession to install, operate, and maintain a network of 50 continuous air quality monitoring stations (and 10 water stations) throughout Malaysia for the DOE. So far, 39 stations have been installed. The privatization of solid waste disposal and distribution activities, which resulted in 20-year concessions for four major consortiums, may also offer commercial opportunities.

Privatization has had its drawbacks, however, particularly in the implementation of unpopular policies such as imposing new fees on consumers. The country�s success or failure in undertaking these projects will provide valuable lessons for other emerging environmental markets in the region.

DOE plans to privatize all monitoring activities so that it can concentrate on enforcement, which has largely been achieved in the air and water sectors. The government will privatize monitoring of hazardous waste transport and disposal and marine pollution from ships. Most of Malaysia�s capital expenditure associated with privatization has focused primarily on water and wastewater treatment. Privatization of solid waste management has seen very little momentum since the project was proposed in 1995. Budgetary belt tightening has also served to slow DOE efforts.

In 1994, senior DOE officials listed eight priority areas for public-private collaboration in the environmental sector:

• water treatment technologies
• site remediation
• air pollution control
• commercial production of pollution equipment
• total quality management
• resource training and development
• research and development
• promotion of energy efficiency and conservation programs.

Public Awareness and the Media

Usually, enforcement follows rather than leads environmental awareness, as media coverage of environmental accidents or threats highlight the need for stricter enforcement. Media coverage in Malaysia allows a fairly dynamic interaction between public groups and government officials, leading to spurts of environmental enforcement activity. The country�s strong middle class has helped spur public opinion and heightened environmental awareness, which is ahead of other Southeast Asian countries.

MARKET ESTIMATES AND ANALYSIS

The figure below captures the relative positions of various industries with respect to their likely buying behavior. The upper right quadrant represents potential buyers who have the greatest combination of both motivation and ability to purchase environmental goods and services. The size of the circles indicates the approximate relative size of each industry.

Environmental Sales Opportunity Ranking

Industry Priority Ranking for US-AEP Business Development

*Total does not equal 100% because comparable regulatory compliance data and/or economic performance data were not available for industries including nonelectrical machinery, off-estate agricultural processing, petroleum/coal production, basic metals, printing/publishing, footwear, furniture, leather, and tobacco.

Rubber

The leading prospect for environmental business development is rubber manufacturing, which has a poor regulatory compliance rating but posted the only positive growth among manufacturers in 1997�98. The rubber segment should be investigated vigorously. The rubber industry�s regulatory compliance scores in water (72%) and air (83%) were each the fourth lowest across industries. Based on 1995 industry earnings, rubber manufacturing represents approximately 4% of total manufacturing revenues, making it the 11^th largest of 22 manufacturing segments.

Other Manufacturing

The "other" industrial category ranked high at position number 2. Unfortunately, having no detailed information about the manufacturing firms that comprise this segment, it is difficult, if not impossible, to recommend specific business niches. But due to favorable indicators, U.S. companies might be well served by attempting to identify the industrial components of this segment.

Food & Beverages

Food manufacturing represented the third most attractive target with a combined regulatory compliance score of 83%, comprised of air at a fairly high 96% and water at just 69%. Beverages were assumed to have an identical regulatory compliance score but posted slightly worse 1997�98 economic performance. Also, total earnings in beverage production are approximately 25% of those of food production. Overall, food represents 4% and beverages 1% of total manufacturing revenues in 1995.

Electronics

The electronics and electrical appliance segments warrant special note not only because they represent approximately 30% of total manufacturing revenues (1995 figures) but also because the segment accounts for approximately 65% of total manufactured exports. Although the regulatory compliance data suggests that the electronics industry may already meet the bulk of it�s environmental requirements, the segment�s relatively strong economic performance, large size, and strong export orientation continue to make it an attractive target.

Industrial Performance by Sector

A general rule that we apply to the distressed Asian economies is that environmental demand is likely to be strongest in those sectors with the strongest economic performance. Economic recovery in Asia will continue to be led by those industries with the greatest export success. These industries will most likely have sufficient capital to purchase environmental products and services.

A summary of the best and worst performers is reproduced below.

Best Production Index Performance (1997 to 1998)

Worst producing Index Performance (1997 to 1998)

The following table estimates the market size.

Environmental Market Breakdown (1997)

Impact of the Asian Financial Crisis

Environmental Sales Projection Before and After the Asian Financial Crisis ($U.S. millions)

Note: Projections are based on (i) GDP growth forecast by UNCTAD for Malaysia for 1998; (ii) NERP�s forecast of GDP growth for Malaysia for 2000; (iii) Asian Environmental Business Journal forecasts (1997). Qualitative sector-specific growth rates estimates from interviews with individual industry leaders.

Impact by Sector

The following table shows Malaysia's three year import and export revenue. Imports from the U.S. have remained relatively stable in comparison to total imports.  These figures were available only for environmental analyzing and monitoring instruments, filters, air pollution control equipment, and wastewater pumps (Malaysian Department of Statistics).

Pollution Control Equipment ($U.S. millions)

Note: Exchange rates are RM2.5=US$1 for 1996, RM2.8=US$1 in 1997 and an estimated RM4.0=US$1 for 1998. Some markets may be growing in ringgit terms but contracting in U.S. dollar terms due to currency devaluation.

The total value of imported environmental equipment decreased dramatically in 1998.  This is especially significant in contrast to the very high growth rates achieved in the previous two years. Exporters can expect very long sales cycles and a significant drop-off on trade leads under these economic conditions.

Environmental Equipment Import Markets In Malaysia

Malaysian Customs tracks not only imported environmental/process control equipment but also the market composition. Shipments are summarized in various categories according to function and type. Export-Link held discussions with Malaysian Industrial Development Authority (MIDA) and Customs staff to find out how environmental equipment was categorized.

Compressors comprise over one-third of the environmental/ process control equipment market. While not a traditional component of environmental equipment, compressors are high-priced items used for controlling pressures in all types of production processes and hence an important component of process controls. Water filtration and purification equipment make up the second largest category, followed by liquid and gas purification equipment. It is notable that water filtration has remained relatively steady�around 30% of total import sales pre- and post-crisis. Air filtration equipment sales have fallen off considerably.

FOREIGN COMPETITION

Malaysia�s environmental industry is still emerging, although certain sectors, such as the water supply and air and water quality monitoring sectors, are becoming quickly saturated. This is certainly the case for privatized concessions in water supply. Although U.S. environmental companies are highly respected for their advanced technologies and experience, they often encounter tough competition from their German, Danish, French, Dutch, British, and Japanese counterparts.

Malaysia�s environmental consulting and engineering sector is still in its infancy. The Association of Environmental Consultants and Contractors of Malaysia (AECCOM) has a growing number of members representing a cross-section of the industry, but the market is dominated by larger consulting and engineering firms that are not exclusively environmental players. (About 300�400 companies are registered with DOE to conduct environmental work.) Environmental equipment suppliers also tend to bundle services as part of turnkey packages.

Top Malaysian Consulting and Engineering Firms

The Malaysian business community places a high priority on cost effectiveness and technological support. U.S. companies and products that address those selling criteria are very well received. Additionally, the government of Malaysia encourages projects that are collaborative between foreign and domestic partners, especially those that will provide Malaysia with long-term technology transfer and services.

A few foreign companies with local units or joint ventures have been around for some time, although their environmental focus is a relatively recent development:

• Dames & Moore (U.S.)
• Woodward-Clyde (U.S.)
• Binnie & Partners (UK).

Market Share By Country

In 1996, the U.S. took the lead in Malaysian imported environmental/process control equipment market share over Japan and has maintained that position since the financial crisis. While Japan's market share has declined from 29% to 17% from 1995 to 1998, Singapore's import market share has increased from 9% to 13% in that period. It is unclear, however, whether products being produced elsewhere are being routed through Singapore for shipment.

The European group made up the next lowest tier of importers. Germany, Italy, France, and Belgium together had 19% of the total import market share in post-crisis 1998. The Europeans have held on to market share and have even increased it slightly.  Even with the Ringitt devaluation, the Europeans continue to be strong competitors.

The Water Filtration Market

An analysis of the Malaysian imported water filtration equipment market share highlights the following:

• The largest segment of environmental imported equipment is the water filtration equipment market.
• While the overall imported equipment market has declined by 48%, the water filtration market fell only 31% in 1998.
• U.S. manufacturers lead the water filtration market, maintaining at or above 28% market share from 1995 to 1998.
• The U.S. has twice the value of sales as Japan, its nearest competitor. However, the U.S. has lost market share since the crisis, dropping from 35% in 1997 to 28% in 1998.
• In contrast, Taiwan, taking advantage of the new price competitiveness of its water treatment equipment, increased its market share over Singapore and Japan in 1998, possibly taken market share from the U.S.

A 1998 OTP report (The U.S. Environmental Industry, USDOC, October 1998) stated that U.S. environmental companies have a lower relative competitiveness in water treatment equipment than Germany or Japan. While this certainly may be true from a global perspective, customs data shows that U.S. water equipment manufacturers can compete effectively with both Japanese and German manufacturers in Malaysia.

The Air Filtration Market

In contrast to the U.S.-led water treatment equipment markets, the air filtration equipment market has dropped off almost 70% since the financial crisis.

• The market is dominated by Japan, which had over 30% of market share in 1997 and 27% in 1998.
• Imports from Singapore increased from 10% in 1995 to 18% in 1998, surpassing imports from the U.S. Again, it is unclear whether imports from Singapore are manufactured there.
• The U.S. has held a relatively stable market share, averaging about 18% from 1995 to 1998.
• Germany and Taiwan each have 7% of market share.

U.S. firms need to understand how to compete better with Singaporean and Japanese importers and what modifications may be required to improve product offerings. This point was made in the OTP report, in which U.S. manufacturers of air pollution control equipment scored very low in international competitiveness. A regional evaluation of the air purification market should be conducted to help U.S. firms compete against Japan and Singapore, and provide better value for Malaysia customers.

REGULATORY IMPACT

Institutional Structure for Environmental Management in Malaysia

Department of Environment

DOE is responsible for all aspects of environmental management. (For a list of laws and regulations that DOE enforces, visit the department's web page at http://www.jas.sains.my/doe/r_law.html.) However, the department has focused on the industrial sector, particularly in the area of licensing and permitting. DOE is specifically charged with

• formulation and implementation of policies related to environmental management strategies
• approval and documentation of technologies
• approval or recommendation of suppliers for environmental or environmental impact assessment  consultancy, wastewater treatment and waste management.

DOE�s enforcement capabilities remain constrained for several reasons. Current levels of sanctions have not been effective instruments of regulatory compliance. The department has lacked sufficient technical staff and, until recently, the sophisticated monitoring capability required to enforce standards. The installation of the nationwide air and water quality monitoring network currently underway is expected to enhance this capability significantly.

Financial resources have also lagged behind operational requirements. The department's budget rose steadily from 1995 to 1997, but was slashed in half in 1998 due to the severe economic crisis. DOE officials maintained that the drastic cuts would not affect monitoring and enforcement programs, although several development projects will be delayed. These projects include sea water monitoring plants on several islands to collect baseline information on marine water quality.

DOE�s 1997 budget allocation rose to RM265.4 million ($80 million at RM3.3 to $1) from RM17 million ($6.8 million at RM2.5 to $1) in 1995 and RM34 million ($13.6 million) in 1996.However, with the severe economic crunch, the budget had been slashed by half for 1998 to RM142 million ($43 million at RM3.3 to $1).

Malaysian Industrial Development Authority

The Malaysia Industrial Development Authority (MIDA), part of the Ministry of International Trade and Industry (MITI), promotes and coordinates industrial development. MIDA also makes policy recommendations and conducts economic feasibility studies on issues such as industrial development and promoting industrial work in Malaysia and abroad. MIDA is the principal agency in evaluating applications for incentives under the Promotion of Investments Act of 1986 and for manufacturing licenses. Most approvals required at federal levels are available at MIDA�s one-stop investment center. MIDA also houses a Secretariat for Hazardous Industries, and has a cooperative arrangement with DOE for controlling hazardous materials and ozone-depleting chemicals and substances.

Despite the presence of a DOE representative in MIDA, no internal environmental procedures exist and MIDA has given little priority to environmental issues in developing investment strategies. MIDA has relatively little environmental expertise and minimal environmental functions.

Ministry of Local Government and Housing

The Ministry of Local Government and Housing (MLGH) has several environmental responsibilities, primarily on the policy-making and advisory levels. MLGH formulates planning standards for wastewater treatment facilities in public and private housing projects and develops a solid waste management privatization policy program. The ministry is currently involved in recycling programs in several areas.

Public Works Department (JKR)

The Public Works Department (JKR) manages all public sector infrastructure development, including roads, highways, ports, and buildings. The department also performs a supervisory and coordinating role for water supply development. JKR has been involved in the privatization program of water supply services.

Ministry of Health

The Ministry of Health sets drinking water quality standards and monitors water quality in the water supply network.

State Governments and State Economic Development Corporations

The 13 state governments implement water supply projects and operate the water supply systems under the supervision of JKR. The State Economic Development agencies develop industrial zones and industrial estates.

Local Agencies

There are over 140 local authorities in the country responsible for solid waste management under MLGH�s supervision.

DOE's structure has been increasingly regionalized to allow for closer monitoring and supervision, as well as faster processing of EIA statements. There are 13 regional offices (including the Federal Territory of Kuala Lumpur) with a staff over 500. DOE also decentralized other functions, such as pre-siting evaluation, written approvals for effluent treatment systems and fuel burning equipment, and response to public complaints.

The Environmental Quality Act and 1996 Amendments

Enactment of the 1973 Environmental Quality Act (EQA) ushered in the beginning of formalized environmental management in Malaysia and regulations to define emissions and pollutant discharge standards to ensure compliance. EQA broadly addresses environmental issues, including water pollution and environmental impact assessments. DOE was established in 1976 under the Ministry of Science, Technology, and Environment (MOSTE) to enforce EQA regulations on industrial waste. In 1989, the government adopted environmental regulations on the handling and management of all hazardous wastes. In 1992, comprehensive controls for the import and export of industrial waste were established.

In mid-1996, the Malaysian Parliament passed amendments to EQA intended to help authorities cope with new hazards, strengthen enforcement, and close loopholes in the law. The Environmental Quality (Amendment) Act of 1996 called for better clarification and strengthening of existing provisions and introduced new requirements on hazardous substances. New provisions were introduced to control global and transboundary movement of hazardous wastes, environmental labeling, and compensation for pollution violation, and to strengthen enforcement. The most sweeping change in the Act is the adoption of higher penalties for pollution offenses.  Some industry experts believe the fines are still relatively low compared to those in developed countries. This is one of the most damaging loopholes in the regulations.

The amendments focused on both controlling and minimizing pollution. But even government officials acknowledge that much more remains to be done to update at least 45 other pieces of legislation related to environmental protection. Some of these laws are outdated, while others overlap or have unclear division of responsibility.

1996 Amendments to the Environmental Quality Act 1974

While the 1996 amendments are considered a milestone in the country�s environmental regulatory history, analysts point out that many of the existing laws focus on specific activity in sectors but fail to encourage an integrated approach to environmental management. Increasing concerns over the economic impact of stricter environmental laws also appear to be softening the government�s overall stance.

In addition to the amendments, the government regulated mobile sources of pollution for diesel vehicles and gasoline engines in 1996. This effectively put control of emissions from gasoline and diesel vehicles directly under DOE and raised the maximum fine to RM100,000 ($30,300 at RM3.3 to $1).

Since 1997, DOE has enforced regulations controlling emissions of carbon monoxide, hydrocarbons, and nitrogen oxides from gasoline engines of new models of motor vehicles (excluding motorcycles). New regulations were introduced to control both smoke and emissions of carbon monoxide, hydrocarbons, and nitrogen oxides for diesel engines. Emission standards for new models of motor vehicles with diesel engines were also enforced.

Incentives

In the area of waste management, Malaysia has adopted several incentive-based initiatives, including the following:

• Incentives receive "pioneer status" for five years.  This status is available to companies that are principally engaged in an integrated operation of the storage, treatment, and disposal of toxic and hazardous waste.
• Companies that generate toxic and hazardous waste and intend to set up facilities to store, treat, and dispose of these wastes, either onsite or offsite, are eligible for a special capital allowance. This allowance is at an initial rate of 40% and an annual rate of 20% for all capital expenditure incurred in waste treatment and disposal.
• The government will also extend the current import duty and sales tax exemption scheme for machinery, equipment, raw materials, and components.

DOE has focused on a multi-pronged strategy for managing scheduled waste. The department has pursued a "cradle to grave" strategy to ensure safe waste management. The 1989 Environmental Quality Regulations define the procedures for compulsory notification of the generation of scheduled wastes to include its treatment, storage, transportation, and safe disposal. Penalties are imposed on violators. DOE believes that if waste generators are forced to bear the cost of waste treatment, they are more likely to undertake waste minimization, recycling, and reuse.

DOE has initiated several programs to instill a new attitude of accountability and safe waste management among generators. In addition, the department offers advisory services, research and development, and public education. DOE also provides training workshops for the promotion of new technology and waste management systems. In 1996, DOE launched the MAWAR (Malaysian Agenda for Waste Reduction) Programme to encourage industries to formulate a strategy for waste reduction. The initial response from industries was not encouraging and follow-up activities were undertaken in 1997.

Although threat of sanction will likely remain the primary motivator for most industries, U.S. companies should monitor the impact of incentive-based programs by directly surveying industrial polluters. Government reporting regarding firms taking advantage of incentive programs is likely to be even worse than reporting of punitive enforcement data. Existing systems for collecting and reporting on punitive enforcement actions (i.e. how many citations, shutdowns, or convictions, and in what industries) may be less than ideal, but they are far more established than systems for reporting on which industries may have taken advantage of one tax break, low interest loan program, or other incentive.

Sanctions

The threat of regulatory sanction can be a significant motivator for environmental compliance. The extent to which polluters are motivated by regulatory threat is determined by two factors: the likelihood of sanction and the cost of a successful sanction. If sanctions are not seen as representing significant cost, then generators will be unmotivated to invest in compliance even if the chance of receiving such a sanction is 100%.

The cost of sanction consists of both an explicit and implicit component. The explicit cost of sanction is the actual value of the fine as well as any associated legal or administrative cost incurred in fighting (or complying) with the sanction. The implicit cost of sanction describes the loss of productivity that may be associated with the sanction, particularly if the sanction involves a "cease and desist" type of action.

It has often been noted that the explicit cost of sanctions is often very small throughout Asian regulatory regimes. In fact, the total explicit value of sanctions imposed by Malaysia�s DOE in 1996 was just $360,000 (at RM3.3 to $1). It is tempting to conclude that Malaysia�s industries would be rather unmotivated to invest in environmental compliance. However, the implicit cost of factory "down time" may be far greater than the explicit value of an associated fine.

Reported rates of water and air regulation compliance show that the following industries are under the greatest threat of sanction. Industries are listed top to bottom from most motivated to least motivated to buy environmental goods and services according to their combined air and water compliance rates.

Industries Most and Least Motivated To Buy Environmental Goods and Services Based on Compliance Rates

The worst overall offender is rubber-related processing and manufacturing, followed by cement manufacturing and metal finishing and electroplating. Within air, the worst offender after "others" was wood, followed by quarrying, and, once again, rubber. Within water, the worst offender was metals finishing and electroplating, followed by food processing, textiles, and rubber manufacturing. This data may indicate those industries where managers are likely to be relatively motivated to seek environmental solutions.

In the case of Malaysia, we also have available data that can focus business development efforts by geographical region. The four states of Selangor, Perak, Pulau Penang, and Johor accounted for 57% of all prosecutions between 1980 and 1995.

Audits

The Environmental Quality (Amendment) Act 1996 gave power to the Director General of DOE to mandate environmental audits. DOE officials are expected to issue industry guidelines that would enable the authorities to identify industries that require audits, decide who should conduct audits, and determine their extent. Three types of audits may be introduced:

• audits of industrial premises, consisting of three stages: preparatory, site inspection and reporting, and recommendations
• audits of site contamination
• audits of environmental impact.

Guidelines are currently under study by a national committee on environmental standards comprised of the DOE, Standards and Industrial Research Institute of Malaysia Bhd. (SIRIM), Malaysian International Chamber of Commerce and Industry, Universiti Putra Malaysia, and Universiti Malaya. A draft proposal was submitted to MOSTE in 1998.

Environmental Impact Assessment

New and tougher Environmental Impact Assessment (EIA) provisions have been established, including tighter auditing requirements and registration of DOE-approved EIA consultants. Previously, EIA was required only for certain types of development. Stricter enforcement has enhanced the EIA business but the market for environmental audits continues to be lean. The bulk of audits conducted to date are for multinationals involved in acquisitions or divestitures. A government proposal to make annual environmental audits is being considered. If enacted, the market for consulting and training is expected to explode, according to one industry expert.

EQA requires domestic industrial activities to obtain several approvals from DOE prior to project implementation. Since implemented in 1988, EIA has been the major enforcement instrument at DOE�s disposal. EIA is mandatory for prescribed industries only.

Most of the industrial activities in Malaysia are sited in industrial estates, managed by State Economic Development Corporations or privately owned agencies. For nonprescribed activities, such as aquaculture or agro-based industries, the government requires that all potential industrial sites, which are not subject to EIA, (particularly the small and medium-scale industries), be referred to DOE for consideration of site suitability. Industries with potentially hazardous waste trails may be required to submit a risk analysis to DOE.

Under the EQA amendments, large-scale earthworks, coastal zone reclamation, iron and steel mills, pulp and paper mills, and projects involving major chemical processes now require detailed EIA preparation. DOE�s Director General can also order firms to prepare and submit an audit report.

In the wake of disasters involving structures on hilly terrain or in highland areas, as well as controversies related to golf course development, state governments have been asked to review and report on the environmental impacts of such development under the existing project planning and approval process.

Despite previous announcements that it would discontinue the procedure of issuing contravention licenses, DOE has continued to issue them when a company cannot comply with effluent discharge or airborne waste requirements. Such licenses are generally issued when there are no immediate alternatives, when contravention does not pose a serious threat, or as an interim measure to help industries begin pollution abatement measures.

According to DOE, 93% of the applications were for open burning of wastes. Of those approved, most were in the metal finishing, textile, and food industries.

Type of EIA Reports Submitted, 1988�1996

DOE has been adopting various measures to improve the EIA process. It was decentralized in 1995, with all 13 State offices reviewing EIA reports. Only reports of projects that transcend more than one state and detailed EIA reports are processed at DOE headquarters in Kuala Lumpur. The department published 16 sets of specific guidelines and established a "one-stop" unit for processing EIA reports.

Several new approaches to the EIA process have been undertaken. For the first time, the terms of reference (TOR) for detailed EIA reports were displayed for public comment to accelerate the review process and ensure that they were comprehensive enough. (In a move towards third-party review, detailed EIA reports and project proponents were required to bear the cost of TOR, public announcements, and the review process.) DOE also issued guidelines for enforcement of EIA compliance for use by State officers with the aim of instituting greater transparency into the review procedure. Overall, DOE has placed greater emphasis on improving professionalism and accountability in assessment and post-surveillance work.

However, DOE admits there are still shortcomings in various areas, such as uniformity in EIA processing among State offices, monitoring compliance of EIA approval conditions, and greater public involvement in decision-making. Despite an increase in fines, penalties still tend to be insufficient compared to total project costs, which typically range from $100 million and up.

EQA requires industries to procure a series of approvals from DOE apart from the EIA process. These include the following:

• Site suitability evaluation, which is used to determine compatibility with the surrounding land use and land use planning. This requires information on the industry, site, raw materials, products, and inventory of materials to be stored in or on the premises. Land use conversions must be approved by state governments and referred to DOE.
• Written permission to construct any building that will result in new sources of effluent discharge. This covers new facilities near residential areas, crude palm oil mills, raw natural rubber processing mills, and facilities for the treatment of toxic and hazardous, or scheduled, wastes�all of which require direct DOE licenses.
• Written permission to increase production capacity that will cause material changes in quantity/quality of effluent discharges. It requires information on the equipment, fuel/combustion material, design of the equipment, height of the chimney, and quantity and quality of the emission.
• License to occupy and use the facilities (for prescribed industries) to be renewed yearly.
• License to dispose waste into the continental shelf.

Enforcement Cases by Environmental Medium and Industry

Enforcement has gradually intensified since the early 1990s. DOE is emerging as an effective enforcement agency, though it is still constrained by lack of resources, manpower, and technical expertise. Decentralization helps to ensure that industries in all regions are subject to similar compliance pressures. The implementation of newly tightened regulations and enforcement procedures has raised the level of success of enforcement activities in recent months, although DOE has been under pressure from budgetary cutbacks and economic uncertainties.

The number of pollution complaints that DOE received rose sharply in 1997 to 4,254, an increase of 34% over 1996. The bulk of complaints (79%) pertained to air pollution, principally black smoke emissions from diesel motor vehicles and complaints received during the haze episode from July to September 1997.

Overall environmental prosecution statistics from 1980 to 1997, presented below, clearly indicate the development of an enforcement regime. As we would anticipate, available growth estimates of Malaysia�s environmental industry closely parallel this enforcement data.

DOE Environmental Prosecutions 1980�1997

The numbers of reports have been rising over the years.

• Since 1988, DOE has reviewed a total of 2,134 EIA reports.
• Violators were first prosecuted in 1993.
• In 1996, DOE processed 379 EIA reports.
• In 1997, a record number of 414 EIA reports were received, the highest since 1988. By year end, 216 individuals and 63 firms had been registered with the department under the administrative scheme for registration of EIA consultancy services to ensure quality, professionalism, and accountability.

In 1996, DOE conducted 467 enforcement visits on projects subjected to EIA; of the 467 visits, 133 notices were served to project proponents for noncompliance with EIA approval conditions, and 10 of these project proponents were taken to court. In the highland areas, 27 projects were inspected and seven cases were taken to court for noncompliance.

DOE relies on legal action against persistent violators. These actions include fines, permit suspensions, permit revocations, or a combination of these. In 1996, a total of 256 cases were prosecuted under the EQA. About 60% of the offenses committed in 1996 were cases involving effluent discharges exceeding the stipulated standards.

Malaysia�s courts have also shown increasing environmental awareness by imposing stiffer penalties on violators. In 1997, 275 environmental offences were prosecuted in court and a total of RM2,391,400 in fines were collected, an increase of 7% over 1996. A total of 2,684 compound notices were issued to premises and companies for various environmental offences amounting to RM2,072,950.

In recent years, DOE has emphasized developing environmental quality monitoring, which would allow the department to monitor the state of the environment and industry compliance. In April 1995, the government signed an agreement with Alam Sekitar Malaysia Sdn. Bhd. for the privatization of air quality monitoring and environmental data collection and dissemination. As of 1997, a network of 35 air monitoring stations for total suspended particulates and respirable particulates were in operation. By 1999, 50 new automated air quality stations are planned to be in place. For water quality monitoring, there were 909 river monitoring stations in 1996 established under the Annual River Water Quality Monitoring Program.

The thrust of enforcement efforts has been on medium-sized and large facilities, based upon the premise that these industries have both the financial resources and technical skills to undertake investments for compliance purposes. Small-scale industries remain largely unmonitored, despite several initiatives.

Enforcement in 1996 centered on three sectors: sewage discharge, textiles, and metal finishing. Inadequate wastewater treatment, increase in production without commensurate increases in treatment plant capacity, and slow responses to plant changes were the primary violations. DOE suspended the licenses of four palm oil mills and four rubber factories and later revoked their licenses upon repeated violations of licensing conditions.

The metal finishing and leather industries (nonprescribed industries) were principally found noncompliant with sewage and industrial effluent standards. DOE aims to include these industries in the prescribed list of industries required to submit EIAs. Occasional noncompliance was reported for other nonprescribed industries with respect to certain biochemical oxygen demand (BOD), suspended solids, and other standards. DOE reported 100% compliance in 1996 by the machinery and plastic industries.

Despite its successes, DOE is the first to acknowledge that much more remains to be done in all sectors. Many industries operate without adequate wastewater and waste treatment facilities. Industries like metal finishing and electroplating, food and beverage, textile, rubber, cement, vehicle assembly, paper, and leather industries have less than an 85% compliance rate with sewage and industrial effluents regulations.

Sewage continues to be the greatest source of water pollution.  DOE has increased pressure on  private sector concession holders to improve the situation. Authorities reported in 1997 that 23 of the 27 rivers in Selangor State were heavily polluted with sewage, industrial waste, animal waste, and heavy metals.These rivers are the state's drinking water sources.

The department reported that overall industrial compliance with clean air regulations was "generally satisfactory" in 1996. The leather industry, for instance, achieved 100% compliance, but the wood industry only reported 73% compliance. DOE noted deteriorating air quality from mobile sources. In August 1996, the department reintroduced curbside inspections and surprise checks for excessive black smoke emissions from diesel engine sources. A total of 20,137 vehicles were visually inspected, of which 982 were issued summons and 531 vehicles were issued prohibition orders. The motorcycle manufacturing industry, which has consistently failed to respond to air pollution concerns, especially the haze threat, has been a major contributor to the problem.

The U.S. Department of Commerce provides the following enforcement activity summary: the traditional agro-based sector of palm oil mills and rubber factories are the most closely monitored industries. Overall compliance rates for crude palm oil mills and rubber factories in 1997 were 76% and 90% respectively. Due to better enforcement, the number of notifications on waste generation from scheduled waste generators increased by 28% from 2,252 in 1996 to 3,103 in 1997. A total of 159 licenses for scheduled waste treatment and disposal facilities were issued, including five new off-site recovery facilities and eight scheduled waste incinerators. There were 58 applications to export scheduled wastes for recovery purposes.

A total of 5,290 enforcement visits relating to industrial effluent discharges of nonprescribed premises were conducted in 1997; 4,402 (83.2%) sites were found to have complied with the Environmental Quality (Sewage and Industrial Effluents) Regulations (1979). Industrial compliance with the Environmental Quality (Clean Air) Regulations (1978) was generally satisfactory, except for the nonmetallic mineral and rubber-based industries and quarries. Of the 7,660 sources investigated, 6,813 (89%) were found to be in compliance. Ninety applications were received for contravention licenses under Section 22(1) and 25(1) of the Act to emit air pollutants and discharge effluents exceeding stipulated standards. The applications for contravening Section 22(1) fell from 14 in 1996 to 12 in 1997 and for Section 25(1) increased from 40 in 1996 to 78 in 1997.

Water

DOE has generally been successful in controlling industrial pollution in the case of palm oil mills and raw natural rubber. In 1996, 78.3% of the CPO mills were in compliance, a 3.3% improvement over 1995. RNR factories had an 88.6% compliance rate in 1996, up 9.2% from 1995. DOE withdrew the licenses of four palm oil mills and four rubber factories upon repeated violations. Thirty-one RNR factories were taken to court for noncompliance violations, and suspensions were lifted only after problems had been corrected.

DOE has made much less progress in nonprescribed industries, such as metal finishing and leather, that have been found in noncompliance of sewage and industrial effluents standards. The Attorney General can be expected to establish regulations that include these industries in the prescribed list. DOE recently announced regulations requiring small- to medium-sized metal finishing units to install their own wastewater treatment facilities or move to specialized industrial estates with centralized wastewater treatment facilities. Two new industrial estates are underway.

Under MOH, the National Drinking Water Quality Surveillance Program regularly conducts tests on raw and treated water. Nationwide, there are 330 raw water sampling stations and 2,798 treated water sampling stations. Another 285 treated water stations are being proposed. In 1996, MOH monitored 331 water supply systems in Peninsular Malaysia, 35 in Sabah, and 87 in Sarawak.

MOH also surveys rivers upstream of water intakes to identify potential polluters and check on possible contaminants. DOE monitors and measures the physical, chemical, and biological characteristics of 116 rivers and a catchment area of 654,708 sq. km. nationwide.

Water Regulation Compliance Status of Manufacturing Industries, 1996

The major sources of industrial water pollution are concentrated on the west coast of Peninsular Malaysia in the states of Selangor, Johor, and Penang. One of the major challenges facing Malaysia is the problem of pollution discharges from small industrial enterprises that lack the financial resources to install onsite wastewater treatment capabilities. As a result, their discharges contain a high level of pollutants. Overall, compliance rates are quite low, although the number of permit applications submitted to the DOE for construction of industrial wastewater treatment facilities is rising, primarily in Johor State.

Recent incidents of water contamination have intensified pressures on the authorities to reinvigorate enforcement actions. In October 1997, two water treatment plants in Cheras were shutdown due to bad raw water quality, namely diesel contamination and high ammonia levels at the treatment plants� source, Sungai Langat. During the closure, the total water supply was reduced by over 400 mld. These plants are evidently vulnerable to pollution from many industrial and quarrying activities as well as squatter settlements upstream. However effective enforcement typically relies on interagency cooperation, which moves slowly. Catchment area management currently belongs to several agencies, such as the State Land and Mines Department, Drainage and Irrigation Department, and the State waterworks agency.

In 1996, the DOE initiated a new project for groundwater monitoring and reporting in Peninsular Malaysia. This project enables DOE to monitor the status of groundwater in the country and recommend necessary measures for pollution abatement or prevention of groundwater contamination. In addition, DOE improved its enforcement process by tightening up detention procedures related to marine pollution and instituted prosecution based on photographic evidence and observers� testimony. The DOE is participating in a regional program funded by the Global Environment Fund and United Nations Development Programme for the prevention and management of marine pollution in the East Asian Seas.

Solid Waste

Waste management is governed under the purview of the Local Government Act (1976). Enforcement falls under the jurisdiction of State governments and local or municipal governments, but their legal powers, capabilities, and resources are severely limited. A new Solid Waste Management Bill has been drafted and is under consideration in Parliament. The new Act is expected to cover all solid waste management activities and possibly the formation of a new regulatory body to oversee the sector nationwide.

The EQA amendments laid what the authorities consider as a "significant first step" towards progressive implementation of the Clean Air Plan.

These regulations provide for the control of emissions from diesel vehicles and petrol engines to come directly under DOE. The regulations underscore the DOE�s preventive approach by controlling vehicular emissions at manufacturing or assembly stage. Beginning January 1, 1997, new models of motor vehicles were required to comply with certain emission standards before being licensed to operate. The emission standards incorporated in the above regulations were based on the European Economic Commission on Standards.

Air pollution control regulations, however, remain essentially unchanged. Currently, there are stack gas emission standards for dark smoke, dust, metal, and metallic compounds and gases, that are applicable nationwide. DOE makes allowances through contravention licenses to industries under certain situations where they have difficulties in complying with emission standards. About 93% of the contravention licenses issued in 1996 were for open burning of wastes.

Control Of Industrial Emissions Legislation

• Environmental Quality (Clean Air) Regulations 1978
• Environmental Quality (Compounding of Offenses) Rules 1978

Control Of Motor Vehicle Emissions

• Motor Vehicles (Control of Smoke and Gas Emission) rules 1977 (made under the Road Traffic Ordinance of 1958)
• Environmental Quality (Control of Lead Concentration in Motor Gasoline) Regulations 1985
• Environmental Quality (Motor Vehicle Noise) Regulations 1987

Control Of Substances That Deplete The Ozone Layer:

• Customs Duties (Amendment) (No. 35) Order 1989 (made under the Customs Act 1967)
• Environmental Quality (Prohibition on the Use of CFC and Other Gases as Propellants and Blowing Agents) Order 1993

Ozone-depleting substances (ODS) are not manufactured locally, but are imported from developed countries for local industries� consumption. The use and production of these chemicals are being phased out. As a signatory to the Montreal Protocol, Malaysia is committed to phase out ODS by 2010. The government has taken a more proactive approach and committed to phase out ODS by 2000. It is implementing policies such as monitoring of imports and consumption of controlled substances, and encouraging industries to start using alternative chemicals and non-ODS substitutes.

As part of the review process for Environmental Quality (Clean Air) Regulations (1978), amendments to the existing standards were proposed. Under these amendments, new limits for eight existing parameters and additional sources of pollutants were identified. For the effective control of sulfur dioxide emissions, the use of low sulfur fuel has been promoted. The review also identified other options for reducing emissions from stationary sources.

The DOE relies on the nationwide air quality monitoring system project currently underway as part of the privatization agreement with Alam Sekitar Malaysia Sdn. Bhd. (ASMA). Nearly 30 new fully automated air quality monitoring stations with telemetry systems had been established as of the end of 1997. In addition, ASMA manages the existing seven semi-automated high volume samplers for total suspended particulates (TSP) and respirable particulates. In the future, the DOE plans to establish a similar system to monitor marine water and groundwater quality, but implementation has been delayed due to tight budgetary conditions.

Air Regulation Compliance Status of Manufacturing Industries, 1996

The government instituted curbside inspections and surprise checks against excessive black smoke emission last year. Vehicular inspection (including emissions monitoring for commercial units) was privatized in 1996, with the concession going to a local company, Pusat Pemeriksaan Kenderaan Berkomputer Sdn. Bhd. (or Puspakom). A subsidiary of Diversified Resources Bhd., Puspakom is expected to invest $60�70 million to build a nationwide network of computerized vehicle inspection centers.

Also in 1996, enforcement authorities launched AWASI (Area Watch and Sanction Inspection), a program to reduce motor vehicle emissions in Kuala Lumpur and other urban centers. This led to visual inspections of a total of 20,137 "smoky" vehicles in the capital, of which 982 were issued summons and 531 were issued prohibition orders. These vehicles were subsequently permitted to operate after undergoing repair and smoke retest by DOE.

The DOE, with the cooperation of the Royal Malaysian Police Traffic Division, conducted 409 emissions enforcement campaigns nationwide. A total of 43,900 vehicles were tested, out of which 7,154 summons (16% of the vehicle population) were issued for noncompliance. Other emissions initiatives that include the Joint Airborne Surveillance Program between DOE and the Police Air Wing provided speedy surveillance on pollution activities in the States of Selangor, Negri Sembilan, Melaka, Johor, Pahang, and the Federal Territory of Kuala Lumpur. Investigations were focused on excessive smoke emission from industries, open burning at dumping grounds, and forest fires.

Enforcement Cases by Industry and Geographical Region

DOE's teams of inspectors and "polluter watchers" (common citizens) regularly conduct on-site spot checks in problem industries, particularly palm oil and raw natural rubber factories (prescribed industry sectors with a track record of noncompliance). DOE has tried to maintain and verify self-monitoring requirements using analytical results only from accredited laboratories.

Legal Action Taken Against Palm Oil Mills in 1996

Legal Action Taken Against Raw Natural Rubber Factories in 1996

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