Unfounded fears in forced takeover of water assets

by **Cals** Mon 14 Apr 2014, 00:28

Published: Saturday April 12, 2014 MYT 12:00:00 AM
Updated: Saturday April 12, 2014 MYT 7:43:56 AM
[size=40]Unfounded fears in forced takeover of water assets[/size]

THE ALTERNATIVE VIEW BY M SHANMUGAM
FOR eight days in a row, dwellers of Flora Damansara low-cost flats near Damansara Perdana, Selangor, have been without water.
The bulk of the residents are immigrants from Indonesia, Bangladesh and Myanmar, which explains why there is not much publicity on their misfortunes.
In Bandar Sunway, residents of another low-cost housing area have been without water supply for three consecutive days. As of last Friday, a group of them was planning to take up the issue with Syarikat Bekalan Air Selangor (Syabas).

Dry taps have cut into the lives of people in Selangor. It has taken precedence over other matters such as the five-year corporate battle between the state government and four companies with concessions to supply treated water and distribute the water.
All that the people in the state want to see is water flowing through their taps again. The latest developments on the corporate front suggest that the Energy, Green Technology and Water Ministry will invoke laws that force the water concessionaires to hand over the operations to a committee comprising officials from the federal and state governments.
In the run-up to the exercise, concessionaires have expounded views that the forced takeover of the water assets would have an adverse impact on the capital markets.
The notion put forward is that foreign investors could shy away from investing in the bond markets and new listings such as the much-talked about 1Malaysia Development Bhd’s energy unit could see poor response.
These fears are largely unfounded – based on corporate history of Malaysia.
Wrong reasons
Foreign and local investors are always prepared to put money in domestic issuances of bonds, especially when the underlying assets supporting the debt papers are tied to a utility or project that is related to the Government.
When there is money to be made, rest assured the smart money will come in. The fear that obligations towards the debt papers would not be met is not a primary consideration for these investors, especially when it comes to issues where the Government has a hand.
Debt papers issued in relation to government projects or utilities that are crucial to the people have always had good take-up rates because investors are convinced that at the end of the day, the Government will eventually step in when it matters.
Time and again, this has been the case – even in the worst-case scenario where the project viability or the credit guarantee of the debt papers is questionable.
The Government’s position on this matter was well-tested when it came to debt papers issued in relation to the controversial Port Klang Free Zone (PKFZ) project.
The Government guarantees that supported the debt papers were in question. Foreign investors who were attracted to the debt papers because of its high yields became edgy when the project hogged the limelight for the wrong reasons.
But the Government honoured its obligations to meet scheduled payments due to bond-holders who subscribed to the debt papers that were issued to raise funds to build the project.
Even in the current Selangor water spat between the concessionaires and the state, the dispute is an issue of valuations on the returns due to equity investors in the water concessions.
The state is offering a return of 12% on equity while the concessionaires, especially the shareholders of Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (Splash), want the concession to be valued based on its net asset value (NAV).
The NAV of Splash is higher than the other concessionaires because it carries a lower debt and has a longer tenure remaining of the concession. The NAV of the other concessionaires – Punca Niaga Sdn Bhd (PNSB) and Syarikat Bekalan Air Selangor (Syabas) – are lower because of the higher amount of debts the companies carry. PNSB has also higher debts compared with Splash.
Little to fear
By adopting a uniform valuation model for all the water concessionaries, shareholders of Splash are being penalised for running a company well.
But knowing how the system usually works towards settling corporate disputes between the Federal Government and well-connected companies, it cannot be totally discounted that the company that is unfairly treated may be compensated in other ways or forms for the losses.
As far as Selangor Mentri Besar Tan Sri Khalid Ibrahim is concerned, he is standing his ground on the valuations and says that the total price for the takeover of the water assets should not exceed RM9.6bil if some five million people in Selangor, Kuala Lumpur and Putrajaya are to continue enjoying cheap water tariff.
In the latest development, Puncak Niaga appears to be relenting by stating that the company will hold a shareholders meeting to decide on the offer by the state.
If Puncak Niaga accepts the offer from Selangor, that would only leave Splash alone.
The parties most affected are the equity investors – those that invested in its shares.
Investors holding the debt papers have little to fear about because time and again when bonds related to the water concessionaires in Selangor were up for redemption or partial repayment, the Federal Government through a special-purpose vehicle steps in and buys up the papers.
Investors of bond markets are about the most capitalist in the capital markets. They are willing to take risk and don’t have any qualms of investing in debt papers issued by companies that are controversial.
In recent weeks even Nigeria that is supposedly notorious for corruption issued US$11bil worth of papers that was snapped up. Greece known as the weakest link in Europe because of its high levels of unemployment and huge public debt, saw investors rush in to place orders for a £11bil issue last week.
For Malaysia, the capitalist will always be there because the Government has not allowed any major default.