Interview Khalid defends his water decisions in Selangor

by **Cals** Fri 07 Feb 2014, 17:43

Interview Khalid defends his water decisions in Selangor

Business & Markets 2014

Written by Kamarul Anwar of theedgemalaysia.com

Friday, 07 February 2014 16:00

THE 1981 “Dawn Raid” in which Tan Sri Abdul Khalid Ibrahim and then Permodalan Nasional chairman Tun Ismail Ali snapped up 47% of Guthrie’s Corp Ltd’s shares on the London Stock Exchange to bring the company back to Malaysia was an intricate plan that took less than two hours to execute.
But his execution of another major takeover — Selangor’s water assets — 33 years later is a different story. Many think that Khalid, the Selangor menteri besar, has thrown in the towel — five years on and after four attempts to consolidate the state’s water assets.
He is even drawing flak from many of his fellow Parti Keadilan Rakyat (PKR) members, who say he did not consult others in the party when he made the decision to allow the federal government to invoke the Water Services Industry Act 2006 (WASIA).
In an interview with The Edge, Khalid reiterates that only the federal government has the power to invoke Section 114 of WASIA. But, he stresses, he has taken “pre-emptive measures” to make sure the assets will be returned to the state.
“Before the federal government invokes (Section) 114, I gave it a precondition — it must allow the state to own the water assets and for that consideration, I will allow Langat 2 (water treatment plant) to be built,” he says.
Last September, the federal government had said it would invoke WASIA should the Selangor government failed to take over the state’s water assets by Dec 31, 2013.
As for the critics in PKR who claimed he acted without consultation, Khalid believes the majority of the people will support his decisions on matters concerning the state.
“In the business world, if you continue consulting people, you end up not making any decisions. And there’s also an element of insider information.”
Khalid says if he tells everyone about his rationale for cutting a deal with the federal government, it could be a form of insider information. “Politicians may not like the idea of being held to ransom.”

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Khalid: In the business world, if you continue consulting people, you end up not making any decisions

While the federal government has yet to invoke Section 114 of WASIA, he says Putrajaya has “replied to his letter” and wanted the asset takeover exercise to proceed.
Raw water licence
The menteri besar has another card to play — the licences to extract raw water that come under the state government’s purview.
He issued a statement to the media two weeks ago that raw water licences issued to the raw water treatment operators would be terminated.
The move was intended to get the operators — Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH), Konsortium Abass Sdn Bhd and Puncak Niaga Sdn Bhd (PNSB) — to hasten the consolidation process.
“We say we have to make sure the licences are given to appropriate parties in order to implement WASIA,” Khalid explains.
“If you want to implement Section 114, you have to give [the raw water licence] to the people who can do the job — most likely in the state government itself because we have the raw water. We have given the licence to KDEB (Selangor state investment arm Kumpulan Darul Ehsan Bhd) and nobody else. The federal government has its law on its side and we have our laws on our side.”
Khalid clarifies that the licences will be reviewed on a monthly basis, and this will take effect in the middle of February.
“We don’t want to frighten people for nothing … the timing (of the licence revocation) was done because there were statements by concession owners that the agreement is ultra vires. If it is, they can take the matter to court,” he says.
Concessions’ valuations
Had the Selangor government acceded to the concessionaires’ demands, the offer price would be RM4 billion higher than the RM9.65 billion put on the table.
Khalid says the state government could have paid the extra RM4 billion, but that would have resulted in a higher water tariff.
There has been speculation that the federal government may increase the takeover price to get the concessionaires to part with the assets.
“The federal government can increase the takeover offer, but it cannot deliver the water. The raw water licence is under the Selangor government. A higher offer means the people will have to pay more because the assets are going to be returned to the state,” says Khalid.
In an interview with The Edge two weeks ago, Tan Sri Wan Azmi Wan Hamzah, who owns 30% of SPLASH, had criticised Khalid’s method of valuing the concessions.
Wan Azmi said SPLASH’s net cash proceeds from the state’s offer in November 2013 would amount to RM250.8 million, which is about the same as its pre-tax profit in a fiscal year.
He said the concessions should be valued based on discounted cash flow, which takes into account the future loss of profits from ceding the concessions earlier.
As such, the 12% return on equity (ROE) per annum offered by Selangor was not attractive.
Khalid says the 12% ROE is stated in the concession agreement “so I stick to it. If you talk about risk-free return, it’s less than 3% or 4%.”
He adds that the offer does not result in the concessionaires losing money, and even the debts would be paid by the state government.
“Of course, from a true-blue capitalist’s point of view, this is not the best deal, but it’s a fair one,” Khalid says.
Going forward, the menteri besar will not simply divulge his other strategies. “Many people were angry when I bought the plantation land in Kalimantan (when he headed Guthrie Bhd in the early 2000s). But I guess the people at Sime Darby Bhd must be thanking me now,” he says. Will Klang Valley folk thank him in the future for all that he has done to consolidate the state’s water assets? Only time will tell.

‘Don’t blame me over WASIA’
By Kathy Fong
Selangor Menteri Besar Tan Sri Abdul Khalid Ibrahim says concessionaires who are not happy the Water Services Industry Act 2006 (WASIA) is being invoked to resolve the state’s water impasse should sue the federal government.
“If you think it is wrong to invoke WASIA, please ahead and sue the (federal) government as it is Parliament that has passed the Act … shouldn’t blame it on me,” he says. He was responding to critics who allege that the compulsory acquisition of the water assets would deal a big blow to the country’s reputation on honouring agreements.
Tan Sri Wan Azmi Wan Hamzah, who holds a 30% stake in Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH), had said that “using that blunt instrument WASIA to resolve the matter would be most inelegant and quite inappropriate”.
“If the Act is invoked merely to force inadequate compensation, there will be no choice but to vigorously defend our rights,” Wan Azmi told The Edge in a recent interview. He doesn’t believe the Act would help resolve the water impasse and that it would be wiser for the matter of compensation to be dealt with first.
Khalid stresses that the state government is prepared to go for international arbitration if the concessionaires insist that the RM9.65 billion offer is not sufficient to compensate for early termination of the concession agreements.
“Let the court decide on the amount, whether the offer should be higher or lower. If the court rules that the offer should be higher, we would have to pay a higher price,” he says. “But if the court decides that the offer should be RM7 billion or lower, we would still pay RM9.65 billion.”
International arbitration, he says, would expose the terms and clauses in the water agreements that are not favourable to the government. He adds that it would help show if the risk and reward is fair to the government.
“If you lose, the government will pay you. If you win, the government will not get anything,” he says about concession agreements in general.
Khalid says the state’s water saga that has dragged on for five years is an important lesson for the federal government on how to avoid unfair privatisation deals in future.
These agreement must be done properly, with proper consultation and be well documented, he adds.
There will be a steep price to pay if the government gets the shorter end of the stick, which he believes has usually been the case in privatisation exercises in the past.
Khalid, once the CEO of plantation firm Guthrie Bhd, believes concessions should never be a platform to enrich stakeholders at the expense of the public.
It is based on that belief that he put up an offer of RM9.65 billion to take over the state’s water assets in Selangor – an amount the concessionaires say is inadequate as it doesn’t take into account loss of future earnings as a result of early termination.
But Khalid notes that “they have made their returns from the dividends in the past years … and also have made money out of the construction works on the facilities”.

This article first appeared in The Edge Malaysia Weekly, on February 03, 2014.