Water solution in the pipeline

by **Cals** Sat 28 Sep 2013, 18:21

Published: Saturday September 28, 2013 MYT 12:00:00 AM
Updated: Saturday September 28, 2013 MYT 11:24:49 AM
Water solution in the pipeline
BY DANIEL KHOO
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A “COMPLICATED mess” has been used to describe the state of affairs involving Selangor’s water problems.
How that was going to be sorted out was anyone’s guess but the mood has turned for the better in recent times.
Optimism is there that a resolution will be reached by the end of the year and industry observers point to the federal government’s increasingly hands-on approach as indicated by Prime Minister Datuk Seri Najib Tun Razak’s letter in June to the Selangor government to sort out this matter as the key catalyst to an eventual resolution.
Kumpulan Darul Ehsan Bhd (KDEB) president Suhaimi Kamaralzaman sounds upbeat on the prospects of an eventual resolution to this matter despite a potential new offer being maintained at the same price of RM9.65bil as had been the case in February.
“We are hopeful that a resolution would be forthcoming so that we can step in and make the offer. When I say this it does not mean that it would be any different from the fourth (previous) offer but the fourth offer had a certain timeframe and many of the concessionaires replied at the last day and it is presumed lapsed now,” Suhaimi tells StarBizWeek.
“To revive this, we have to professionally make another offer. Hopefully this time both federal and state governments arrive at some general consensus on how the restructuring is going to proceed. If you recall, the fourth offer (in February) was made without any framework by the federal government,” he adds.

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Suhaimi: ‘This stalemate has been prevalent for sometime. Having multiple operators perpetuates inefficiency as each one would have its own staff.
As the hour-long interview at KDEB’s headquarters in Shah Alam progressed, the finalisation of this figure was more flexible than before as Pengurusan Aset Air Bhd (PAAB) will acquire the state’s water assets.
PAAB is expected to pay RM7.7bil, which is equivalent to the total liabilities to be assumed from the water companies but the actual figure would be finalised after a proper due diligence process.
Thereafter, it is planned that the operations of these assets would be handled by the state’s special purpose vehicle (SPV) through a lease from PAAB.
“We would run the operations through the SPV, which would be wholly owned by the state,” Suhaimi says.
When asked if there were any variables to the calculation of the 12% return on equity figure of almost RM2bil, Suhaimi maintained it was fixed at KDEB’s end and at the same time was more open to different interpretations anchored on “reasonableness”.
“This time around, the mandate which the state has given to KDEB is to go as far as to say that we are willing to sign on the conditional agreement that they (the companies) accept our 12% first. We will pay you the 12% and then you will bring what you think is fair to the international arbitration process,” he says.
In case of a dispute, the parties will seek a resolution from a neutral arbitrator so that parties without vested interests would be able to decide on this matter, he adds.

International arbitrators
“If the international arbitrators think it is say 15% for argument’s sake, then we would pay the 3% (remainder) upon completion of the arbitration process. The good thing about this is that we believe our offer is transparent as everyone will know how this 12% is calculated,” he says.
The complicated and fragmented nature of the water industry in Selangor is the main reason why this matter needs to be resolved as soon as possible.
It is this fragmented nature that led to the eventual water stalemate and it indirectly is also reflected on the quality of water the people of Selangor have been receiving and consuming all this while due to the entire cumbersome management structure of the Selangor water supply chain.
The Selangor water industry is presently being handled by four different operators namely Syabas, Puncak Niaga Holdings Bhd, Syarikat Pengeluar Air Selangor Sdn Bhd and Konsortium Abass Sdn Bhd.
“This stalemate has been prevalent for sometime. Having multiple operators perpetuates inefficiency as each one would have its own staff, and there would be transfer pricing from one company to another. Companies also have totally different shareholders,” Suhaimi says.
“Once we remove these inefficiencies, we would know the true cost of providing water services to the consumer. Thereafter we can set tariffs in a fair manner. Should they need to be adjusted upwards or downwards, then we can also justify it to the consumer,” he adds.
The absence of an efficient structure would hinder simple matters such as determining a fair tariff pricing.
“It would not be one company selling water to another company with profits at many levels of the supply chain. A restructuring under the SPV would remove the multiple margins, then we can move forward,” he says.
“As a new company under the new water regime with the Water Services Industry Act, we have to be licensed under Suruhanjaya Perkhidmatan Air Negara (Span). We need to submit a business plan and the regulator would study it and challenge our numbers (for tariffs) for justification. Then only the process of setting the tariffs can begin,” he adds.
At the end of the day, returns to the operators through a fair determination of tariffs must be worked because it would go towards offsetting operational and investment costs.
“The second benefit is... projects that have been held back can now move. The government is now looking at ad-hoc measures such as mitigation projects – which is not how we plan the water supply for the state,” Suhaimi says.
“We should look at a 20- or 30-year plan based on a solid business plan and on efficient costs for the improvement of water supply and any ad-hoc agreement would not be removed but rather be considered as part of this bigger picture plan,” he adds.
With a clearer and more efficient structure, the eventual benefits of a resolution to the stalemate would not only be felt by the operators and consumers but along the entire supply chain as well.

Langat 2
The Langat 2 water treatment plant would seem on the surface to be the final piece of the jigsaw puzzle as the prelude to the total agreement to this takeover deal.
While it seems to be that way on the surface, it is understood that there needs to be a buy-in to this idea from the Selangor government as it had been proposed by the federal government in the first place.
“My personal view is that somebody should explain and say it is done on a transparent tender basis and design is the most cost efficient with no unnecessary things inside as the cost would not be borne by the federal government but by the people of Selangor at the end of the day,” Suhaimi, who was a former PAAB CEO, says.
“I believe that from the state’s perspective, they need to be convinced that they are getting the best value for their money. If it is required then the state can tackle it from there,” he adds.
The bigger aim for a water restructuring is that PAAB eventually owns any water assets while it would be leased and operated by the SPV.
“This lease price would be based on market prices. If for instance you build the asset for RM2bil, the lease price would be based on this figure. And that is why it is very important for the federal government to share with the state these (costing) numbers to allay these fears,” he says.
Thus, it is not only logical but practical for both parties to be thoroughly involved in the construction process of any additional water assets as ultimately the ones who would pay to use these these assets would be the state and its residents and businesses.