Selangor vs Splash – another deadlock?

By Khairul Khalid

Splash (Syarikat Pengeluar Air Selangor) remains the only water concessionaire yet to agree to a state takeover. Could it be another long, drawn-out battle for control of Selangor water? KiniBiz looks at Splash’s grounds for dispute in the first part.

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The water saga in Selangor took a step closer to a conclusion with the recent announcement that water concessionaires Puncak Niaga and Syabas (Syarikat Bekalan Air Selangor) have agreed to a RM5.6 billion state takeover.

Puncak Niaga owns two of the four water concessions in Selangor including a 70% stake in Syabas, the sole water distributor of water in the state.

Selangor Menteri Besar (MB) Abdul Khalid Ibrahim claimed last week that the whole restructuring process would be completed in three to six months. He has also submitted an action plan to Maximus Johnity Ongkili, minister of Kettha (energy, green technology and water).

Puncak has nevertheless stated in a filing to Bursa Malaysia that “it has neither concluded nor entered into a definitive agreement” yet with the state and federal governments. Negotiations are still ongoing and any offers will have to be tabled to their shareholders in an extraordinary shareholders meeting (EGM).

However, Khalid has so far sidestepped the other thorny issue of Splash (Syarikat Pengeluar Air Selangor), the only water concessionaire that has firmly rejected the state’s current buy out offer and refused to budge on its stance.

Splash is 40% owned by Gamuda, 30% by Kumpulan Perangsang Selangor (a unit of KDEB – Kumpulan Darul Ehsan Bhd) and 30% by The Sweetwater Alliance, a company controlled by Wan Azmi Wan Hamzah.

Splash operates, among other things, the Sungai Selangor Dam which supplies approximately 60% of treated water to Klang Valley.

While the state and federal governments have dithered in their decision to implement WSIA (Water Services Industry Act) to forcibly consolidate Selangor’s water assets, Splash has stepped up its pressure on Khalid in recent months.

Splash has openly questioned the rationale for the state’s offer and harshly criticised the MB’s handling of the whole water affair.

“The MB has failed and hasn’t acted in the best interest of the rakyat,” Wan Azmi Wan Hamzah, chairman of Splash told KiniBiz.

Will Selangor and Splash be able to resolve their differences or is another major storm brewing in the water wars?

KiniBiz has repeatedly requested for interviews with Khalid, Ongkili and Puncak Niaga & Syabas CEO (chief executive officer) Rozali Ismail to get their respective views on the latest developments of the water saga without success.

So far, KiniBiz has only managed to talk to Splash management. Based on their views, here are some of the major sticking points that stand in the way of Splash and the Selangor state government:

A difference of valuation

In other words, money.  The Selangor state’s current offer to Splash amounts to RM250 million for the company’s equity or shareholders’ funds. That is about 10% (or 0.1x net book value) of Splash’s current net book value (NBV) of RM2.5 billion as at December 2013. Splash is looking at one time (1x) book value as a floor price.

“We have accepted the state’s offers on two previous occasions, where the numbers looked reasonable. The latest offer is actually 90% less than what we accepted the previous two times,” said Wan Azmi.

Precedents in other water takeovers

The federal water asset management company or PAAB (Pengurusan Aset Air Bhd) has conducted several consolidation of water assets in other states since 2008 – in Melaka, Johor, Penang, Negeri Sembilan, Perlis and Perak. The one time book value (1x NBV) method has been applied throughout in all of these migration exercises.

Syabas is being unjustly rewarded

Splash has made it clear that it sees the state’s latest offer to Syabas as disproportionate and unfair, especially given the state of Syabas’ finances and also the fact that the  water distribution company has been widely acknowledged to be at the crux of Selangor’s water problems over the years.

In the state’s last offer, Syabas is being offered RM438 million for its equity at a negative book value of –RM1.3 billion.

“Now, we see this strange phenomenon where some of the concessionaires that have underperformed are being offered 4.6 times book value and while others like us who have delivered are offered only 0.1 of book value,” said Wan Azmi in a thinly veiled reference to Syabas.

Splash has performed

Another of Splash’s key arguments is that the company has performed according to expectations and has not defaulted in any way based on its concessionaire agreement for the last 14 years. Therefore, it has felt unfairly treated in the whole consolidation process.

“The Selangor takeover of Puncak Niaga and Syarikat Bekalan Air Selangor (Syabas) rewards poor governance and penalises sound management. We can’t help but feel victimised for doing a good job over the past 14 years,” said Wan Azmi.

Why hasn’t Selangor negotiated with Splash?

According to Splash, the state government has not called them to the negotiating table, even though Splash are willing to explore options.

“If there was a genuine problem I would have expected them (Selangor state) to contact us and discuss the issue. If the problem is the cost of water and tariffs, we would be willing to listen and negotiate. We never had that overture from Khalid,” said Wan Azmi.

In 2010 Splash also made a RM10.8 billion offer to take over the water industry as an alternative solution, based on a buy and leaseback model that would consolidate the whole water operations under Splash. According to Splash, they wrote to the federal government again on a similar proposal this year for RM13.5 billion. Both offers were rejected.

Expropriate us, Selangor

Splash has urged the Selangor state to expropriate it or take over its assets, if the situation warrants such a move, under a clause contained in the water concession agreement for state expropriation in cases of national interest.

“They (Selangor state) should expropriate us, if they feel its necessary and justified, under a clause in the concession agreement instead of hiding behind the federal government and using WSIA,” said Wan Azmi.

The federal government has been reluctant to implement section 114 of WSIA (Water Services Industry Act) to forcibly take over the water assets in national interest despite gaining cabinet approval.

However, Khalid has indicated again recently that it would not hesitate to take over Splash by force using WSIA if they don’t agree on the state’s offer soon.

Tomorrow:  Is Splash asking for too much?