Is there a way out of the Selangor water gridlock?

By Aidila Razak

After looking at the various facets of the complicated Selangor water impasse, the fourth and final part of KiniBiz’s series on the industry looks are ways in which the issue can be solved.

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Four years after the Selangor government made its first offer for water industry consolidation, the situation could very well move back to square one.

Two out of three water companies are in, but Puncak Niaga Sdn Bhd (PNSB) and Syarikat Bekalan Air Selangor (Syabas) are still pondering its options, and without them, the offer is void.

This, however, has been the prevailing theme of the water consolidation exercise. The RM9.65 billion offer made by the state last week is its fourth, and all of them have been rejected by Syabas and PNSB—both entities owned by Puncak Niaga Holdings.

So what could be the way out?

1) Langat 2 compromise

Outside of the water consolidation exercise, water supply in Selangor has also been hogging headlines. Solving it, the federal government argues, will need the Langat 2—a mammoth RM8.9 billion project involving a 45 kilometer tunnel pumping water from Pahang to Selangor and a water treatment plant in Selangor.

The state is opposed to it, believing there are cheaper options to sustain Selangor’s water demand. As such, it is refusing to issue a development order.

Advocacy group Association of Water and Energy Resources (Awer) believes that the federal government’s decision to call for a tender despite the state’s buy-in will result in a shoddy outcome.

Its president S Piarapakaran claims he has been attending meetings on the project with the federal government and other stakeholders, and criticises the fact that the Selangor government has been left out of the loop.

By agreeing to the Langat 2, he believes, Selangor can join the discussion and be privy to important decisions which could affect it like the quality of water tunneled from Pahang to Selangor.

“If the water is like teh tarik, it will cost more to treat,” he said.
This will cost the state as it will be the eventual licensee for the water treatment plant. Under the consolidation plans, the consolidated assets will go to federal agency Pengurusan Aset Air Bhd, and operations licensed out to states.

Giving the nod to the Langat 2 will also reduce the risk currently undertaken by bidders. Among those in the mix is Puncak.

But analysts following the issue have doubts if this carrot can be dangled to get Puncak to agree to the takeover.

“The project is awarded on the basis of open tender so it will be difficult to determine the outcome in favour of one party. Despite the development order freeze, the whole street is bidding for the project and Puncak is not a frontrunner,” an investment banker said.

The state has also been using the Langat 2 development order as a bargaining chip in the water consolidation exercise.

Menteri Besar Abdul Khalid Ibrahim knows that without the water treatment plant, the tunnel (already about 70 ready) is useless. Langat 2, he said, can wait 100 years unless water is consolidated first.

“Khalid is unlikely to dangle any carrots,” the banker said.

CIMB Research, however, notes that Puncak might not be taking such a blow by compromising. By accepting the latest offer of RM5.7 billion, Puncak stands to gain RM1.1 billion, which corresponds to RM2.77 per share. This is double the prevailing share price.

2) Federal intervention

According to Section 191 of the Water Service Industry Act, the concessionaires are compelled to negotiate in order to sell their assets for the sake of national interest. This does not necessarily mean compulsory acquisition, but does outweigh their existing concession agreements or compensation.

The Act also provides a lot of power to the minister. Section 191 (5) says that national interest can only be determined by the minister in charge of water and his/her decision is binding and cannot be challenged.

In other words, Minister of Energy, Green Technology and Water Peter Chin can push his weight onto the negotiations.

Chin did not respond to calls.

But sources privy to the negotiations claim that the federal government has taken a “hands-off” approach to the whole thing.

“There was an impression given that the federal government may even want to consolidate everything under Puncak instead, and for the PAAB to buy the assets from Puncak,” one source who had negotiated on Selangor’s part confided under conditions of anonymity.

The federal government also has a golden share in Syabas and can speed things along. Puncak in its announcement to Bursa Malaysia yesterday said that it has asked the state to furnish to it the federal government’s agreement to the offer because of its golden share.

But the federal government has been quiet on this and has to date insisted on the willing buyer-willing seller model, but this is not expressly provided for in the Act.

Tony Pua, an opposition federal lawmaker who sits on Selangor’s committee for the water deal, also feels that the federal government lost an opportunity to speed up the process by “bailing out” Syabas.

PAAB purchased Syabas’ bonds in 2011, just as anxiety rose over whether the bonds would be downgraded. Interestingly, PAAB was not given any equity in exchange to purchasing Syabas’ debts.

3) Political will

In many ways, the battle is about politics. Pakatan Rakyat Selangor does not want Langat 2 because it is expensive. It insists that a water crisis can be averted by other methods.

It thinks Langat 2 only serves to enrich those close to the federal administration, and would mean higher tariffs for the people. It will also undermine its popular ‘first 20 cubic litre free water’ policy.

The federal government could lend their weight to Selangor in consolidation negotiations. However, as the impasse drags on, so too grows BN’s political capital.

Freezing of capital expenditure to Syabas until consolidation succeeds is used by the concessionaire as a reason for poor maintenance of infrastructure. This could lead to dry taps, like in Ampang, home to 126,000 people. To the rescue is the BN federal government which extended a soft loan.

Several factors have put a spanner in the waterworks, but as elections roll by, politics may outweigh others. Perhaps the election outcome will offer a solution – one way or the other.  But if the federal and Selangor governments are in different hands, expect the deadlock to be prolonged until the taps run dry and there is a public outcry.

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Part I: Selangor water privatisation gone awry

Part II: Will Selangor’s RM9.65 bil bid succeed?

Part III: Selangor water: Will the taps run dry?