A.    BACKGROUND ON SELANGOR WATER SERVICES PRIVATISATION

The Selangor State Government privatised its water services to Puncak Niaga Sdn Bhd (PNSB), Konsortium Abass Sdn Bhd (Abass) and Syarikat Pengeluaran Air Selangor Sdn Bhd (Splash) for water treatment and Syarikat Bekalan Air Selangor Sdn Bhd (Syabas) for water distribution. The Selangor State Government holds equity in Abass (55%), Splash (30%) and Syabas (30%). Some of the assets managed by the operators are based on build-operate-transfer (BOT) model while others are leased from the State Government.  

B.    WHAT IS THE FEDERAL GOVERNMENT’S POLICY IN THE RESTRUCTURING OF THE WATER SERVICES? 

In restructuring the water services industry, the policy adopted by the Federal Government is based on an asset light model, whereby operators are to focus on operations to enhance efficiency and cost effectiveness whilst the capital expenditure (Capex) is to be financed by Pengurusan Aset Air Berhad (PAAB). PAAB, a company wholly owned by the Minister of Finance Incorporated, will take over the assets and related liabilities from the water operators. PAAB will be able to secure lower costs of funds and longer tenure for loans through its better credit rating. PAAB will be licensed and regulated by Suruhanjaya Perkhidmatan Air Negara (SPAN) and all its Capex procurement procedures will be transparent.  

C.    SHOULD THE FEDERAL GOVERNMENT ALLOW THE STATE GOVERNMENT TO RETAIN THE EXISTING WATER SERVICES STRUCTURE? 

The current water services model is not sustainable and allowing this to continue will burden the consumers with high tariff.  Under the Water Services Industry Act 2006 (Act 655), the concession company is given one year to indicate its intention to migrate to the licensing regime. For those who do not intend to migrate, they will be authorised to operate until the expiry of their concessions, subject to conditions to be determined by SPAN. SPAN will also regulate the authorised concessionaires including matters relating to quality of water as stipulated in Section 193 of Act 655. However, since the privatisation contracts between the Selangor State Government and the four consessionaires are still valid, the obligations stated therein must be fulfilled. This will be a burden to both the State Government and consumers.  

D.    WHY MUST THE RESTRUCTURING BE EXPEDITED? 

The proposed restructuring must be expedited to protect the interest of the consumers in view of the impending tariff hike. This effort must not adversely affect the confidence of the investors in the capital market. The delay in the restructuring will have a direct impact on the water supply services in the Klang Valley. Currently, revenue from tariff is barely sufficient to pay for the purchase of treated water from PNSB, ABASS and SPLASH. There is still a need to secure financing for the day-to-day operations including maintenance of water distribution system and other overheads. Any reduction in payment to the water treatment operators will affect their ability to meet their obligations to the lenders. This restructuring will prevent a water tariff hike of 37% as scheduled to take effect from 1 January 2009 as stipulated in SYABAS Concession Agreement and to ensure a more reasonable tariff increase in the future.   

E.    IS THE SELANGOR STATE GOVERNMENT SERIOUS IN RESTRUCTURING THE WATER SERVICES INDUSTRY?   

On 28 May 2008, the Selangor State Government has indicated its intention  and commitment to proceed with the restructuring to be spearheaded by Kumpulan Darul Ehsan Berhad (KDEB). The Minister, via a letter dated 19 June 2008, emphasised that early involvement of PAAB, together with KDEB, in the restructuring is necessary. This was reaffirmed by the Ministry of Energy, Water and Communications (MEWC) on 3 July 2008. KDEB tabled its proposed restructuring and financing mechanism to SPAN on 18 August 2008. However, on 19 August 2008, the Menteri Besar of Selangor requested MEWC to spearhead the restructuring. The decision by MEWC was to allow KDEB to complete the restructuring since KDEB indicated that it had finalised the valuation and was prepared to make an offer to takeover the water concession companies in Selangor.   

F.    DID KDEB MAKE AN OFFER TO THE CONCESSIONAIRES? 

On 4 September 2008, KDEB proposed that the concession assets be acquired by PAAB and it was agreed that PAAB will commence verification of the concessionaires’ assets as well as the Selangor State Government’s assets. The Selangor State Government and KDEB also indicated their readiness to make an offer to the concessionaires and requested MEWC to call for a meeting and moderate the negotiation. Subsequent to this, a meeting was held on 19 September 2008 but KDEB was unable to make an offer. Instead, KDEB promised to offer each of the concessionaires individually within a week. However, this again did not materialise.   

G.    WAS THE SELANGOR STATE GOVERNMENT GIVEN ADEQUATE TIME TO IMPLEMENT THE RESTRUCTURING? 

The Selangor State Government was given adequate time and opportunities to finalise the restructuring. From September 2008 until now, the timeline to finalise the takeover offer was extended several times. Despite this, the Selangor State Government failed to finalise the restructuring and instead changed the timeline several times. The timeline to finalise the restructuring was extended as follows: 

i)              19 September 2008 

KDEB requested for this date to enable them to make the offer so as to avoid the tariff hike as stipulated in the SYABAS Concession Agreement. However, KDEB failed to make any offer. 

ii)            31 December 2008 

This date was set by the Selangor State Government to finalise negotiations for the takeover so as to prevent the tariff increase. This was not achieved and instead, the Selangor State Government requested to extend the deadline until 30 March 2009 to complete the restructuring.    

iii)           15 January 2009 

This date was the deadline agreed by both MEWC and the Selangor State Government on 15 December 2008 for the latter to provide feedback on the sealed price offer to the concessionaires. However, the Selangor State Government failed to provide feedback as the sealed price was yet to be finalised. 

iv)           14 February 2009 

On 30 January 2009, the Selangor State Government agreed to make an offer immediately to the concessionaires and to report the outcome of the offer by 14 February 2009. However, the Selangor State Government only made the offer on 13 February 2009 and requested the concessionaires to revert on 20 February 2009. This was contrary to what was agreed on 30 January 2009.  

H.    WHAT ARE THE PRINCIPLES ADOPTED FOR THE ASSET VALUATION BY PAAB? 

On the issue of assets acquisition by PAAB, valuation of the assets will be based on established accounting principles and financial practices. As such, the issue brought up by the Selangor State Government that PAAB must offer a price lower or equivalent to the price offered by the Selangor State Government does not arise. This is because the offer by PAAB is based on principles of fairness, transparency and affordability to protect the interest of consumers.    The verification is carried out by independent auditors appointed by PAAB. In fact, the Selangor State Government can also appoint its own auditors to verify the assets to ensure fairness and transparency on condition that the verification principles must be the same. It is imperative that the Goverment takes into consideration implications on the capital markets in the whole process of water industry restructuring as it involves bond holders and other creditors.  

I.      WHAT ARE THE ASSURANCES  PROVIDED BY THE GOVERNMENT TO ENSURE A MORE SUSTAINABLE AND EFFICIENT WATER SUPPLY SERVICES UNDER THE LICENSING REGIME? 

Under the licensing regime, the Federal Government will impose licensing conditions so as to ensure that they are fair and reasonable to all stakeholders. Returns to licensees will be regulated and subject to review from time to time. Key Performance Indicators (KPIs) determined by SPAN will be imposed on  the licensees. Licensees shall renew their licences every three years. The licences will not be renewed if licensees failed to comply with any of the provisions under Act 655 or the licensing conditions.  

J.     HAS THE FEDERAL GOVERNMENT INVOLVED THE SELANGOR STATE GOVERNMENT IN THE RESTRUCTURING OF THE WATER SERVICES? 

The Federal Government has always been prepared to work with the Selangor State Government as they are a party to the Concession Agreements. Similar to the other states, the Federal Government will extend its assistance for source works including the funding of dams, if all parties agree with the asset light model which will benefit all parties, including the consumers. This will further  prevent a tariff increase of 31% on 1 April 2009 (the rate recommended by the Auditor General in his report as against a 37% increase stipulated in the Concession Agreement). However, the actual rate for tariff increase will be decided by the Cabinet.  

K.    IS THERE ANY DISCRIMINATION BY THE FEDERAL GOVERNMENT IN THE SELANGOR WATER RESTRUCTURING PROCESS? 

The restructuring model implemented by the Federal Government has been accepted by the State Governments of Negeri Sembilan and Malacca with the execution of the assets and liabilities transfer agreements with PAAB. This was followed by the recent signing of a similar agreement by the Johor State Government. It must be emphasised that the restructuring model for the Selangor water services is similar to the Johor model. The Federal Government does not practise any discrimination against the Selangor State Government although it is under the Opposition’s rule.  

L.    WHAT ARE THE PRINCIPLES ESTABLISHED BY THE FEDERAL GOVERNMENT IN THE SELANGOR WATER RESTRUCTURING?  

The Federal Government will assist the Selangor State Government to restructure its water services industry along the following principles: 

(a)           SYABAS, which is 30% owned by the Selangor State Government, will be licensed under the Act 655, whilst the three water treatment concessionaires namely PNSB, SPLASH and ABBASS, will be authorised under Act 655 to continue to operate until the expiry of their respective concessions, whereby: 

·         for SYABAS, a service licence to be granted to enable them to operate the water supply services and maintain the related assets. The licence shall be renewed every three years provided that the licensee complies with the licence conditions; 

·         for PNSB, SPLASH and ABASS, SPAN will impose conditions in the authorisation to be granted;  

·         a reasonable profit margin will be determined based on operational and financial efficiencies for all the four concessionaires.This will be reviewed from time to time subject to KPIs regulated fully by SPAN;  

(b)           Bulk Supply Rate (BSR) will be revised and renegotiated to a reasonable rate; 

(c)           no tariff increase for water in 2009;  

(d)           water assets and related liabilities of the four concessionaires (SYABAS, PNSB, SPLASH and ABASS) and the State Government will be acquired by PAAB at 1 x book value, which will be verified by independent auditors appointed by PAAB. Liabilities related to funding of stock/equity acquisition, will not be assumed by PAAB; and 

(e)           where liabilities exceed asset value, it needs to be further analysed and renegotiated with the Selangor State Government.  

M.   IS THE SELANGOR STATE GOVERNMENT’S PROPOSAL TO REDUCE WATER TARIFFS BY 10 PERCENT IN 2009, 20 PERCENT IN 2011, 25 PERCENT BY 2013, VIABLE?  

The Selangor State Government proposes to sell its water supply assets to PAAB at RM9.7 billion which will enable the provision of free water to continue and the reduction of tariff. However, PAAB is unable to take over the State Government’s assets at the value of RM9.7 billion due to the following reasons:                 

(a)                 the valuation by the Selangor State Government is based on capitalised value but the underlying assumptions to determine this value has not been disclosed to PAAB;  

(b)                 the State Government’s valuation of the assets at RM9.7 billion includes 1,601 water reservoirs valued at RM1 billion and 24,000 km of pipes valued at RM7.8 billion which were mainly built and handed over by housing developers and paid for by house buyers. In addition, most of the pipes are old and need to be replaced quickly to reduce non-revenue water and improve water quality. As such, the approach taken by the Selangor State Government will not benefit the consumers. Should PAAB accept the Selangor State Government’s asset valuation method, it will result in higher lease rentals to be borne by the water operators. The lease rentals will have to be increased substantially when large numbers of old pipes need to be replaced urgently; and 

(c)        In the event that PAAB agrees to the Selangor State Government’s proposal, it would result in PAAB having to bear higher financial liability and this cost will eventually be translated into higher lease rentals. Hence, it is difficult to reduce water tariff as proposed by the Selangor State Government.