Some time last week, Syarikat BekaIan Air Selangor Sdn Bhd (Syabas) put in a proposal to the National Water Services Commission or Suruhanjaya Perkhidmatan Air Negara (SPAN), seeking a tariff hike effective January next year.This should come as a surprise to those watching recent developments in the water sector in Selangor. Led by new Menteri Besar Tan Sri Khalid Ibrahim, the state has been driving home an interesting point since coming under the control of the opposition it wants water rates to stay low.
Against such a backdrop, Syabas' proposal for a rate hike does not make sense. More so because 30% of Syabas is held by Kumpulan Darul Ehsan Bhd (KDEB), a subsidiary of the Selangor government. The remaining 70% is held by Puncak Niaga Holdings Bhd, a company controlled by Tan Sri Rozali Ismail.
SPAN was set up a year ago to drive reform in the water sector, and all proposals for tariff hikes have to go through the commission, which is mandated, under the Suruhanjaya Perkhidmatan Air Negara Act 2006 and the National Water Services Act 2006, to look into tariff hikes and distribution among others.
According to SPAN's chairman Tan Sri Zaini Omar and CEO Datuk Teo Yen Hua, they have yet to look at the proposal. Zaini says any proposal for a tariff hike has to be made nine months before it takes effect.
"It's now April, so it's timely," he adds, with his trademark grin.
The duo was nonchalant about the whole tariff hike Issue when met by The Edge, which brings us to the next question: Will the proposal go through!
Although they did not disclose the quantum, analysts who track Puncak say a 37% hike is scheduled under the concession agreement.
Change of guard
It was only about two weeks ago that Khalid said he was looking to review some of the water concession agreements as they seemed lopsided and benefiting Puncak more than the state government or the public.
Khalid, who is bent on providing the first 20 cu m of water per household for free is clearly not likely to take any tariff hike lightly.
Moreover, a chunk of the terms in the concession were put in place under the previous administrations led by Barisan Nasional. Those helming the state then were Datuk Seri Mohd Khir Toyo, Datuk Seri Abu Hassan Omar and Tan Sri Muhammad Muhammad Taib.
Now, with the Pakatan Rakyat coalition running Selangor, things have changed. The state government is unlikely to agree to any move to increase water tariffs, especially when it has come out strongly against the concession and wants to give water for free to the masses.
"A tariff hike will be unlikely after Khalid has spoken about giving free water. It would look good for Pakatan Rakyat if it manages to pull through the free water deal. It did, after all, fire the first salvo when it stated that the concessions were lopsided. But at the end of the day, it is about sustainability. Can the new (state) government pull off such a plan for the long term? It could be free water for the hardcore poor, maybe." says a market watcher.
Also, it is likely that Syabas will have to be compensated if it does not get the proposed tariff hike.
"In 2006, they (Syabas) were supposed 10 get a tariff hike of 15% in January, but only got the hike in October the same year, which was a delay of about 10 months.
"They were compensated for that (delay) so I don't quite see how they will not be compensated here, as there Is already a precedent,” says an analyst with a local brokerage firm.
Interestingly, the state also has a substantial stake in water-related assets, which means it is no pushover either.
Through KDEB, the state has 30% equity in Syabas and 60.2 % in Kumpulan Perangsang Selangor Bhd (KPS), which in turn has a SS% stake in Titisan Modal (M) Sdn Bhd. Titisan wholly owns Kumpulan Abbas Sdn Bhd.
Kumpulan Abbas has the concession for the Sungai Semenyih Water Supply Scheme, which handles the water requirements for the southwest of Kuala Lumpur, such as Petaling Jaya, Shah Alam, Klang, Sepang and other surrounding areas.
KPS also has 30% equity in Syarikat Pengeluar Air Selangor Holdings Bhd (SPLASH) 20% equity in water treatment company Taliworks Corp Bhd and about 10% in pipe-maker JAKS Resources Bhd, which was acquired only last month.
It is also no secret that KDEB and KPS are looking at taking up the reins at Puncak.
Takeover of Puncak
There has been talk of KDEB taking over Puncak and consolidating the water industry in Selangor.
Although strongly denied by KPS and Puncak, the industry is well aware that a takeover of Puncak is imminent.
The important question is, how is KDEB or KPS going to manage such a takeover! As at Friday's close, Puncak had a market capitalisation of slightly less than RM1.3 billion.
As at the end of last year, the company had a net asset per share of about RM3.02 apiece.
Although vehemently denied, the speculation is that Rozali's 41 % interest is said to be worth about RM5 a share, which works out to the company being valued at RM2.1 billion. That is not too bad a price to pay, considering the concession and its assets.
Predators, some with money from the Middle East are said to be eyeing Puncak Niaga. That contributed to its share price picking up over the last two weeks.
Sources, however, also said the eventual owner of Puncak would be the state-controlled Water Asset Management Company (Wamco), which will own all water assets. Wamco was first mooted in Budget 2006, to develop the country's water assets.
Industry sources say KDEB will take its time with the takeover waiting for Puncak to adopt the new accounting rules, which require it to amortise its expenditure in the same year it incurs them, instead of staggering it. That would impact its balance sheet and also its value.
But others are of the view that accounting entries do not affect cash now and hence the value of the business is intact.
Puncak's numbers
For FY2007 ended Dec 31, Puncak did not perform as well as consensus estimates. The company posted a net profit of only RM97.6 million on the back of RM1.4 billion in revenue. Net profit fell by an astounding 70.6% while revenue gained by a small 3 % margin. Results for 4Q especially were weak, with the company posting a net profit of RM9.5 million on the back of RM361.6 million in revenue.
In its notes accompanying its financial results, Puncak Niaga says the dip was due to lower water revenue, higher operating costs, and depreciation and amortisation.
The fact that Puncak's financials are weakening because it is not getting the expected cash now is an issue.
Although its earnings before interest, tax, depreciation and amortisation totalled RM727 million for FY2007 ended Dec 31, it has a deficit in net cash now from operating activities of RM108.2 million for the year in review. During the year as well. Puncak had a drawdown on its borrowings of about RM755.3 million.
Its kitty also shrank from RM 1.2 billion at the beginning of the year to slightly less than RM900 million as at end-December 2007.
As stated in its notes, Puncak Niaga has long-term bond commitments of about RM3.4 billion, while its short-term commitments amounted to RM245.5 million.
Ground water from Perak
There was jubilation at KPS early this year when KDEB was given the award to build the RM2.5 billion Langat 2 water treatment plants, which is part of the larger RM7 billion Pahang-Selangor interstate water transfer project.
With Langat 2 in the bag, KPS wilI control more than 50% of Selangor's water requirements, which would put Puncak in a corner, and pave the way for KDEB to buy Rozali out of Puncak Niaga.
Now, there are murmurings that even the transfer project may have hit a snag, with some parties stating that the treatment plants should be built in Pahang as was originally planned years ago.
With Selangor in the hands of Pakatan Rakyat, the Barisan Nasional government may want to build the treatment plants on its own turf, in Pahang, and sell treated water to Selangor instead.
At the Asia Water 2008 Conference held two weeks ago. this was among the hot topics of conversation on the sidelines.
A few years ago, there were news reports of conglomerate Sime Darby Bhd looking to transfer groundwater from Batang Padang in the Kinta Valley, Perak, to Selangor via a 3.5km pipeline.
This would mitigate the use of dams, which are environmentally unfriendly and the need for a tunnel through the Titiwangsa mountain range as required by the Pahang-Selangor Interstate Water Transfer Project.
The rumour is that this project is now being considered seriously. According to sources, the initial plan was for two giants. Sime Darby and Khazanah Nasional Bhd, to venture jointly into this business. The two were supposed to have some 70% (Sime Darby: 50% and Khazanah: 20%) of the equity of the planned special purpose vehicle, which would undertake this option.
This talk of groundwater being utilised heated up during the Asia Water 2008 conference when the Regent of Perak, Raja Nazrin Shah, who officiated at the event, was said to be a proponent of the plan.
However, details are sketchy, with most involved in the plan keeping information close to their chest.
The Johor problem
While Puncak and KPS are dominant in Selangor, the two stalwarts in Johor are Tan Sri Hamdan Mohamad's RanhiIl Utilities Bhd and Tan Sri Syed Mokhtar AI-Bukhary's Aliran Ihsan Resources Bhd. The consolidation in Johor is expected to be completed by year-end.
The aim of restructuring the water assets is to emulate what PBA Holdings Bhd has achieved in Penang. PBA has the lowest tariff of only 31 sen per cu m, but manages its assets extremely well, and even made profits during the 1997/98 financial crisis.
Other than its exemplary operational model, PBA has been reported to have the lowest nonrevenue water rate in the country. Statistics for 2005 show that PBA's rate was about 19 % as opposed to the national average of about 38 % .
Much like KPS, P8A has a whole spectrum of services, which enables it to control its costs better.
Despite the uncertainties, the framework seems to have been drawn up. However, it is now a matter of implementing the plans.
In this case, however, the model or benchmark is not that of a foreign nation but of PBA, so there is generally no real excuse for a failed attempt.
PBA's rates are steady and it has a sustainable water model. Can the same happen in Selangor? The Pakatan Rakyat-Ied government is determined to follow PBA's model.
But it does not seem like it is going to be easy. With federal government-controlled SPAN and Wamco waiting to pick up the water assets, and Syabas already seeking a water tariff hike, the next few months will be interesting indeed.
