By Jose Barrock
As far back as April 2007, there have been reports on the consolidation of the fragmented water sector in Selangor—saying it was likely to happen soon.
But now almost six years down the road, the exercise is still on-going, much to everyone’s chagrin. Worse still, it seems likely to go, and can only be concluded depending on the outcome of the upcoming general election.
The offer of RM9.65 billion—the fourth made by the state— for the three water treatment plants and distributor in Selangor, is unlikely to be successful. It is likely to be rejected by Puncak Niaga Holdings Bhd, and its controlling shareholder Rozali Ismail, and the federal government which has a golden share in Syarikat Bekalan Air Selangor Sdn Bhd (Syabas). Sybas has the mandate to distribute treated water in Kuala Lumpur, Selangor and the federal capital Putrajaya.
Think about it, with the ruling coalition Barisan Nasional (BN) and opposition Pakatan Rakyat neck to neck in Selangor, Rozali —who is closely linked to BN— is likely to wait and see if BN is victorious.
Puncak has two concessions, one for water treatment under wholly owned Puncak Niaga (M) Sdn Bhd (PNSB) and the other via 70 per cent unit Syabas.
Syabas was supposed to get a tariff hike of 37 per cent in 2009, and another of 25 per cent in 2012, which the Pakatan Rakyat government has opposed, and thus Syabas is in limbo. The federal government has been giving Syabas soft loans.
Syabas is being sued by the water treatment players and Syabas itself has commenced legal action against the state, seeking amounts lost had the proposed tariff hikes kicked in.
Now, if BN came into power in Selangor, these tariff hikes would likely kick in and substantially increase Puncak’s valuations. With the federal government’s golden share in Syabas, Rozali has to get the federal government’s blessing before he can accept an offer.
The state has also said that it will not go ahead with the offer, if the two other water treatment companies, Syarikat Pengeluar Air Selangor Holdings Bhd (Splash), and Konsortium Abass Sdn Bhd accept the offers and Puncak rejects.
Actually both sides, BN and Pakatan Rakyat have failed the people, by looking to gain brownie points with the electorate instead of getting the job done.
Why is the state making the offer now, at the eleventh hour— when it should know that any prudent businessman with a valid concession in hand will hold out for a better offer with elections touted to be around the corner?
The last offer for the water assets was made in January 2011. So why wait two years to make another one?
And look at the disparity in the offers— the first was made in February 2009, at RM5.7 billion, and now it’s at RM9.65 billion which is 70 per cent higher. Why is there such a huge disparity in the offers? So were they serious offers to begin with?
Also some analysts say that there could be issues, as the offer is at book value and not discounted cash flow (DCF), which doesn’t take into account future earnings.
Meantime, water treatment player Splash is expected to announce acceptance of the offer which values Splash RM1.8 billion. This is lower than the RM2.3 billion which Gamuda’s offer of RM10.8 billion for the same assets placed on Splash. Gamuda owns 40 percent of Splash.
Splash and PNSB, two of the larger water treatment players, have had to seek clarification from the state on the offers made. Good sense would have it that the two parties meet, negotiate, and come up with agreeable terms, then announce an offer. Not like this, where an offer is made— and then negotiations commence.
Rozali Ismail
It is also a wonder how the sector is so fragmented in Selangor, where so many parties have to be negotiated with. It involves powerful names such as Rozali, Wan Azmi Wan Hamzah, Gamuda Bhd (which has the Perak royalty as shareholders) and the state.
While water treatment is a lucrative business, distribution with its high capital expenditure is not profitable, what with pipe replacement and non-revenue water to grapple with.
For its financial year ended March 2010, Splash paid out net dividends of RM88.13 million to its shareholders, filings to the Companies Commission of Malaysia show. Small players like Konsortium Abass as well paid out RM29. 22 million for its year ended December 2009.
Syabas has difficulty paying out dividends as it undertakes the maintenance of 26,000 plus kilometres of water pipes, more than 1,400 service reservoirs, elevated water tanks and suction tanks and about 550 booster pumping stations within the State of Selangor and the Federal Territories of Kuala Lumpur and Putrajaya.
Hence in the old days prior to privatisation, the state government cross subsidised the two, treatment and distribution which made the model more sustainable.
There are many questions with regards to the privatisation of the distribution aspect as well.
According to its website, Syabas was incorporated in 1995, to undertake the privatisation of water assets in Selangor, Putrajaya and Kuala Lumpur. The privatisation of water distribution and assets to Syabas took place in late 2004. The transfer of assets, 26 water treatment plants in Selangor, Kuala Lumpur and Putrajaya from CGE Utilities (M) Sdn Bhd to PNSB took place on December 31, 2004.
The Water Services Industries Act of 2006 (Wasia) came into effect in 2008, but was deliberated and debated for some time before 2006.
So the question arises as to why the distribution was privatised so close to the Wasia coming into effect. It can’t be that the government didn’t know that the Act was coming into force.
Also Puncak’s and Syabas’ projections would have made it clear that the companies could not sustain for long without the takeover of assets by the federal government. Someone in authority should explain why Syabas was given the mandate in late 2004 so soon before Wasia 2006 comes into effect.
Was any consultation with the water players ever done before the privatisation? As if things are not bad enough, in May of 2011, Pengurusan Aset Air Bhd (PAAB) took over RM6.5 billion in papers owed by the water industry players in Selangor to bondholders—but did not take over the assets.
Syabas and PNSB had issued papers valued at about RM3 billion and RM2 billion respectively. Splash meanwhile had some RM1.4 billion in debts as a result of issuing debt papers. PAAB should have taken over the assets as well.
With this move, the federal government set a very dangerous precedent, buying over the water bonds from the likes of the Employees Provident Fund (EPF) and Kumpulan Wang Amanah Pencen (KAWP) among others.
It just goes from bad to worse, there have been far too many problems in the water sector, so many unanswered questions, and what’s worse is that there seems to be no accountability.
Even if there were political will – and there seems to be none right now – the water mess is going to be very difficult to untangle.
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