TALKS WITH MALAYSIA (Negotiation on package of issues)

[Mr Speaker in the Chair]

Dr Ong Chit Chung asked the Minister for Foreign Affairs, with reference to the meetings held in Kuala Lumpur on 1st and 2nd July 2002, if he will inform the House of the state of progress of talks with Malaysia on the outstanding issues as well as comment on the recent remarks by the Malaysian Foreign Minister on their proposed price of water under the 1961 and 1962 Water Agreements.

The Minister for Foreign Affairs (Prof. S. Jayakumar): Mr Speaker, Sir, I welcome this opportunity to inform the House of the state of play in our negotiations with Malaysia after our last meeting in Putrajaya on 1st and 2nd July 2002. It has been a long road. Our discussions on 1st and 2nd July were part of a process that has been on-going at various levels since 1998. There have also been several exchanges of letters setting out different proposals.

I shall not recap every last twist-and-turn of this process. There is still some way to go before we reach agreement. So neither is it appropriate for me to reveal every last detail of what is still being negotiated. But there have been many media statements about the negotiations which may have resulted in some public confusion. I will therefore try to be as clear as possible where we are at this point of time. I will also set out clearly Singapore's consistent approach towards the negotiations.

Our negotiations in Putrajaya in July were preceded by an exchange of letters at the highest level. On 4th March 2002, Prime Minister Mahathir wrote to us setting out certain proposals. These proposals were completely new and different from what had been discussed during the meetings between Senior Minister Lee Kuan Yew and Dr Mahathir in September 2001. On 11th April 2002, Prime Minister Goh Chok Tong replied, setting out our various counter-proposals. This exchange of letters established the basic framework for our discussions recently in July.

Our discussions are on a package of issues. Prime Minister Mahathir's letter of 4th March dealt with water, railway, a proposed bridge to replace the Causeway, CIQ, CPF and airspace; Prime Minister Goh's reply of 11th April dealt with the same issues. By establishing the basic framework for our negotiations, this exchange of letters also defined the package. By a package, we mean that nothing is resolved until everything is resolved and that there can be trade-offs between the issues to satisfy the interests of both parties.

Let me now comment on the specific issues which were discussed during our meetings on 1st and 2nd July.

Water

There are three aspects to the water issue:

First, the observance of the existing Water Agreements of 1961 and 1962.

Second, the price of water supplied under possible new agreements after the expiry of the 1961 and 1962 Agreements in 2011 and 2061 respectively.

Third, Malaysia's proposal to invoke the price review clauses of the 1961 and 1962 Water Agreements.

I will deal with each of these aspects in turn. Existing Agreements

Singapore's consistent and firm position is, and remains, that the 1961 and 1962 Water Agreements are valid and legally binding agreements, enshrined under the

1965 Separation Agreement, and must be honoured. The terms of the 1961 and 1962 Water Agreements cannot be unilaterally changed. This is a fundamental and non-negotiable point. Whether or not we agree on the supply of water after the expiry of these two agreements is a completely separate matter.

In a formal statement on 1st July, the Malaysian side assured us that Malaysia would "honour the 1961 and

1962 Water Agreements until their expiry in 2011 and 2061 respectively". Malaysia was also clear that it does not propose to amend the terms of the 1961 and 1962 Agreements. We welcome these assurances.

New Agreements

On 5th April 2002, Prime Minister Goh Chok Tong explained to this House why Singapore wants to reduce our dependence on Malaysian water. Prime Minister Goh said that it was not healthy for our countries to be always locked in disputes over water and to allow this one issue to sour bilateral relations and prevent us from cooperating in strategic areas of mutual benefit. By next year, our Bedok and Kranji NEWater plants will be in operation. By 2011, two more NEWater plants in Seletar and Ulu Pandan will be ready.

We can allow the 1961 Agreement to lapse in 2011. It is within our means to produce sufficient water to replace the water from the 1961 Agreement. However, we are still prepared to buy some water from Malaysia after the expiry of the 1961 Agreement. But the price must be right.

After 2061, when the 1962 Agreement expires, it only makes economic sense for us to continue to buy additional water from Malaysia, if the cost of that water is less than the water we can produce ourselves. The price must be competitive in relation to the cost of our alternative sources of water.

At the recent talks, we have briefed the Malaysians about our plans to develop alternative sources of water by increasing our catchment areas and through NEWater and desalination. The Malaysians now have understood our position. They agree that the price of water must be market-competitive. But we have yet to agree on an acceptable basis for a competitive price.

On 1st July, the Malaysians proposed a price formula. On 2nd July, they told us they are also considering benchmarking the price, among other things, against the China-Hong Kong model and other models. We have explained to the Malaysians why the China-Hong Kong model is not relevant. But we will study their proposals.

Singapore's proposal is that the price of any treated water that we may buy from Malaysia after the expiry of the current Agreements should be pegged to an agreed percentage of Singapore's cost of alternative sources of water which is NEWater. Such a formula can withstand the test of time. Singapore is willing to disclose independently audited accounts of our cost of NEWater to work out the price mechanism.

Price Review

At the recent negotiations, Malaysia informed us that it wanted to invoke the price review clauses of the 1961 and 1962 Water Agreements. The 1961 and 1962 Water Agreements do provide for a review after 25 years. Under the terms of these Agreements, if Malaysia wanted a price review, this should have been undertaken in 1986 and 1987.

Although it is 15 to 16 years late, we have informed the Malaysians that in the interest of making progress in our talks, Singapore is prepared to consider Malaysia's request to invoke the price review clauses of the 1961 and 1962 Agreements as part of the package.

We also stressed that any such review must be in accordance with the express provisions of the clauses contained in the 1961 and 1962 Water Agreements. In particular:

First, the price review must be only on the basis of factors explicitly mentioned in the clauses contained in the 1961 and 1962 Water Agreements. In other words, it must not be a re-negotiation of the existing agreements. The Malaysian side has agreed that any price review must be "consistent with the provisions of the two Agreements."

Second, as specified in the 1961 and 1962 Water Agreements, the review must cover both the price of the raw water supplied by Malaysia to Singapore and the price of the treated water supplied by Singapore to Malaysia. The Malaysian side has also agreed to this.

Third, the price review cannot be retroactive. If we agree to it, it will take effect only from the time that the revision is agreed upon. This is in accordance with the provisions of the price review clauses in the 1961 and 1962 Water Agreements.

Let me make a final point on the price of water to clear up any possible confusion. In September 2001, there was an in-principle agreement on the price of 60 sen per thousand gallons for future raw water, to be reviewed every five years for inflation, for 100 years after the expiry of the 1962 Agreement in 2061. Although we were not legally obliged to do so, we also offered to pay 45 sen per thousand gallons for raw water currently purchased under the 1961/1962 Agreements as part of an overall package deal that took into account our interests on other issues in the package and the concessions we were making. However, the Malaysians have now advanced completely new and different proposals, taking their earlier offer off the table.

POA, KTM Station/Lands in Singapore and CIQ

Malaysia informed us that it has decided to relocate its rail CIQ from Tanjong Pagar back to Johor. There was no substantial discussion on this or the joint development of KTM lands in accordance with the POA. I expect this to be taken up at the next meeting.

Our consistent position is that the POA is a legally binding agreement and its provisions must be observed. Under the POA, the KTM station is to move from Tanjong Pagar to Bukit Timah. However, as part of the package, as I have told the House before, Singapore is prepared to vary the POA to allow the KTM station to shift to Kranji, which the Malaysians had requested, and to include additional railway lands for 60-40% joint development. These are concessions which Singapore will make only as part of the package.

During our negotiations in July, the Malaysian side assured us that Malaysia is not disputing the legal validity of the POA. Singapore welcomes this assurance. But as part of the package discussions, Malaysia wanted Singapore to agree to include more KTM lands.

Bridge

We also discussed Malaysia's proposal to replace the Causeway with a road bridge. Malaysia briefed us on its proposal. The Malaysians told us that their preference was for a full bridge, but if there was no agreement, they will proceed with a half bridge on their side of the Causeway.

We informed the Malaysians that Singapore sees no compelling need to replace the Causeway. But since Malaysia is eager to replace the Causeway with a new bridge, we are prepared to consider jointly building a new bridge as part of the package. Many important details have yet to be worked out, among them the location of the waterway and the clearance height for the passage of vessels and so on. We will continue our discussion on the bridge at the next meeting. We said that we can also go along with Malaysia's proposal to build a railway swing bridge but on this too, there are details to be sorted out.

There have been many media reports that Malaysia does not consider its proposal for a new bridge to replace the Causeway as part of the package and wants it discussed separately. Let me say that Singapore has made it clear that the bridge will be considered only as part of the package because:

First, Dr Mahathir's letter of 4th March 2002 clearly set out the proposal for a bridge as one of the issues in the package; so did Prime Minister Goh's reply of 11th April 2002.

Second, we see no compelling reason to replace the Causeway with a new bridge. Building our side of a new bridge will cost a lot of money. It makes no sense for us to incur this significant expenditure if the bridge is not part of the package. Singapore can justify this expenditure only if there is agreement on the other issues in the package.

Airspace and CPF

These issues were not discussed in detail at the last round. We will continue our discussions on airspace and CPF at the next meeting.

Concluding Remarks

If I may conclude by alluding to what Dr Ong Chit Chung also asked about various press comments. After the 1st to 2nd July negotiations, there has indeed been a flurry of comments based on often inaccurate reports in the Malaysian media. Some have said the ball is in Singapore's court and accused us of being the unreasonable party. This is part of a familiar pattern to make us appear in the wrong with their people.

We should not be confused by such reports. As I said in this House before on 16th May 2002, such comments constitute a form of psy-war to weaken our morale and soften our position on matters under negotiation. We will calmly and politely state the facts and have them stand the test of time, when truth will out. We should only pay serious attention to what the Malaysian government had said during the actual negotiations and the proposals they had presented on the record.

Sir, we will continue to approach the talks constructively so that both countries can reach a win-win solution on the package of issues. There is really nothing to be gained by negotiating through the media.

As I told my colleague, Foreign Minister Syed Hamid, and his delegation, Singapore is making concessions which we are not legally obliged to do. We are not obliged, for example, to agree to their bridge proposal; we are not obliged to agree to any variation to the POA; and we are also not obliged to allow premature withdrawals of CPF monies by West Malaysian workers. Likewise, we recognise that Malaysia is not legally obliged to supply water after the 1961 and 1962 Agreements expire. Nor is Malaysia legally obliged to restore the use of airspace for the RSAF.

Therefore, for a deal to be reached, clearly, there has to be give and take. This is why I emphasised to Foreign Minister Syed Hamid that all the issues have to be considered as a package. One cannot look at each issue in isolation and see if one side got more or less. If each side were only to focus on the concessions it is making on one particular item without taking into account the concessions it receives on other aspects of the package, then I think it will be impossible to reach an agreement. Both sides must be prepared to make concessions. Both sides must look at the balance of the total package, and I think this is the only way forward.

Sir, the issues are complex. I do not think it will be easy to reach an agreement just after one or two meetings. But with political will and a spirit of give and take on both sides, I think it is possible for us to conclude a package. I have informed Foreign Minister Syed Hamid that Singapore would be happy to host the next meeting here. We are now in the process of working out the dates for the Second Ministerial meeting on the package of issues to be held in Singapore.

Dr Ong Chit Chung (Jurong): Sir, I want to ask the Minister whether he would care to comment on the reported Malaysian proposal to raise the price of water to Malaysian 60 sen per thousand gallons, and then to RM3.00 after 2007, and whether the Minister considers such proposals outrageous and arbitrary.

Prof. Jayakumar: Sir, I do not think I need to use any adjectives to describe the proposals, but, indeed, these figures were in Dr Mahathir's letter to Senior Minister on 4th March. And they were also in the first proposal by the Malaysian delegation on 1st July. In other words, Malaysian 60 sen from 2002 to 2006, backdated to 1986 and 1987, and RM3.00 from 2007 to 2011. And they wanted a supplementary agreement to reflect this.

We could not accept this proposal as, in effect, it would have meant renegotiation and amendment of the existing two Water Agreements. We stated our position that it was not acceptable. Later, the Malaysians informed us that they were no longer seeking a supplementary agreement for that purpose, and instead they would have recourse to the price review clauses under the 1961 and 1962 Agreements, and they would do so consistent with the provisions of the two Agreements.

Dr Ong Chit Chung: Sir, I wish to ask the Minister whether in points of international law, do the Malaysians have any right to backdate any revisions after so many years when they did not do so earlier. And, whether they have the right to act on it or backdate any revision.

Prof. Jayakumar: I think the lawyers will have a very interesting time debating this. I think this is a highly arguable point. But the position we have taken is, regardless of the legal ability, as part of the package, in order to advance and make progress in the discussions, we are prepared to look at their request. But it must be part of the package.

Dr Ong Chit Chung: Sir, the Malaysians have repeatedly talked about the Hong Kong model of water agreement. I wonder whether the Minister would care to comment on the difference between the Hong Kong model and our existing Water Agreements.

Prof. Jayakumar: Sir, I have said in my main answer that we informed the Malaysians that the Hong Kong model is not relevant. And prior to this, we have made public statements, through the Ministry of Foreign Affairs, setting out the position. It is not relevant because, in the case of Hong Kong and China, China bears the infrastructural and operational costs of supplying raw water to Hong Kong. Hong Kong does not bear any of these costs. So, the analogy is inapplicable. In our case, over the years, it is Singapore which has borne the infrastructural, operational and maintenance costs, such as pipelines, building of dams, and so on. This comes up to be an astronomical figure. So, it is really not comparing apples with apples.

Dr Ong Chit Chung: Sir, I wish to ask the Minister whether Singapore has proposed any formula for future water negotiations and, likewise, whether the Malaysians made any such proposals on their own.

Prof. Jayakumar: Can I clarify? Is Dr Ong referring to the price of water for the future, after the expiry of the two Agreements?

Dr Ong Chit Chung: Yes.

Prof. Jayakumar: Yes. As I have said, both sides have discussed various proposals. I think both sides now agree that the price for future water under a new agreement to replace the existing two Agreements, upon expiry, must be competitive. But what is the agreed competitive price has yet to be worked out. As I have said just now, we have put forward a proposal. Our proposal is that it must be pegged to the price of alternative sources, which is NEWater. The thrust of our proposal is that we should avoid situations where we have constant disputes over the price of water. Therefore, the proposal that we have tabled would stand the test of time. We will give them all the figures about how NEWater pricing is worked out - the cost and so on. And it makes economic sense for us to agree to a price that must be less than what it costs us to produce NEWater. Otherwise, it does not make any economic sense. So, it has to be an agreed percentage of the cost of producing NEWater. The details will have to be worked out. We have already given them a briefing. So that is the essence, a formula that can stand the test of time that would not perennially lead to disputes, and it must be competitive.

The Malaysians have also presented a formula on the first day, which involves factors such as the existing water tariffs, inflation, consumer price index and so on. But Members would have read their public statements that they have said that they would have to rework their figures. On 2nd July, they had revised a proposal where they have said that the price will have to be determined later by agreement. It has to be competitive. But they have said that they want to consider benchmarking with the Hong Kong model or other models. So, we will have to await for their final proposal.

Dr Ong Chit Chung: Sir, as the Minister is aware that over a period of time, Singapore as well as Malaysia agreed to negotiate on a package of issues. But, recently, Malaysia changed its tack and said it wanted to take the water agreement negotiation outside this package of issues. Will Singapore adhere to our position that we want to negotiate all the issues under a total package of issues?

Prof. Jayakumar: Sir, that continues to be our position, and that is the position, guideline or direction which the two leaders have given to the negotiating Ministers and officials - that these issues have to be resolved as a package. In fact, if we can go back to the origins of this, it was to be considered as a package because both leaders recognised that these were outstanding issues, and it is best to clear the decks for future relations by resolving these issues as one package.