Privatisation failure spurs S’gor govt to take over water

Selangor is in the midst of crucial negotiations to take over the water assets of four concessionaires operating in the state.

The negotiations are critical as Selangor residents are staring at a steep water tariff hike by the end of March if the present situation persists.

Private water distribution company, Syabas, 70 per cent owned by Puncak Niaga, had last year asked for a tariff hike by January 2009. In December, the Water Minister Shaziman Abu Mansor said that according to the concession agreement, water tariffs in Selangor and Kuala Lumpur would be hiked by up to 37 per cent in January 2009.

This tariff hike was delayed to 31 March 2009 to allow time for the Selangor government to take over the water assets from the four concessionaires.

Under the lop-sided concession agreement, water tariffs are expected to be hiked as follows:

• Up to 37% in 2009
• 25% in 2015
• 10% in 2019
• 5% in 2021
• 5% in 2024
• 5% in 2027
• 5% in 2030

Source:  Background Note to Public Briefing by the Water Review Panel, Selangor State Government

In the same Background Note, it was noted:

There is evidence to show that Syabas has breached key terms of the concession, including:

• breaching of the ceiling for capex (capital expenditure) and operating expenditure (opex) works,
• non-inclusion of state representatives on Syabas’ board.
• more than 72% of contracts worth a total of RM600 million were awarded to selected companies via direct negotiations and only 25% via competitive open tender.
• a discrepancy of more than RM525 million between the summary of contracts awarded in 2005, 2006 and 2007 and Syabas’ review document.

In this regard, the Selangor State Government has written to the Ministry of Energy, Water and Communications to revoke Syabas’ 30-year water supply concession in 2005.  No response has yet been received from the Ministry on this matter.

Some argue that the Selangor government’s offer price to the concessionaires is too low – but that is beside the point. As MPs in the Selangor Water Review Panel – Charles Santiago, Tony Pua, Dr Dzulkifli Ahmad and William Leong  – observed in a joint statement:

The offer made by the Selangor Government was made on the basis of one-time book value of the water-related assets in the concessionaires as at 31st December 2007, and a fair and reasonable return to the actual equity invested by the concessionaires since the industry was first privatised.

It should be noted that the offer made by the Selangor state government is guided by and in compliance with the terms and conditions willing signed by all parties in the concession agreement. Therefore contrary to press reports in the last few days, the acquisition offer is neither a cynical offer which is too low, or without basis.

It should be noted that all investment analysts have been using the “discounted cashflow model” which results in significantly higher valuation for these concessions. However, the “discounted cashflow model” is just a technical term for paying the concessionaires its future profits, which in itself is a totally unreasonable proposition, and defeats the purpose of the Governments’ water restructuring exercise.

What we are witnessing is the utter failure of the Mahathir privatisation “get-rich-quick” scheme. Well, it wasn’t a total failure as certain individuals became multi-millionaires overnight.

The people of Selangor and KL have to back the Selangor state government in this takeover. (The assets will then be handed over to a federal body and then leased back to the state.) The alternative is a steep tariff hike – with more to come in the future.