KiniBiz:Selangor water: Privatisation gone awry

In October last year, residents at several suburbs in Selangor woke up to dry taps. What followed was another episode in the four-year wrangling over the water industry in the state.


Pointing their fingers at one another was water distribution concessionaire Syarikat Bekalan Air Selangor (Syabas) and the state government. But whose fault was it?
Subramaniam Pillay is an economist who worked on the earlier offers made by the Pakatan Rakyat-led Selangor government to consolidate the fragmented industry. Mismatch between what the state is willing to offer and what the concessionaires are willing to accept has led to the stalemate hogging headlines today.

But Subramaniam says that the story of how the water industry became fragmented in the first place is the story of the original sin. This story, he says, begins in 1994 with the first bite of the privatisation apple.

Before 1994, Selangor water works was handled by the state. Jabatan Bekalan Air Selangor (JBAS) would source water from its rivers, treat it and distribute it to consumers—and mostly at a profit.

Researchers estimate that JBAS turned profits of RM50 to 80 million annually in the 1980s. Subramaniam claims that JBAS veterans whom he met in the course of his work assisting the state government attest to this.

“They told me that JBAS was a significant contributor to the state coffers,” he said.

So why the need to privatise?

“Demand for water in Selangor grew and the existing water treatment plants were not sufficient. The idea was that private companies are more efficient, can build them faster and can raise their own funds through bonds etc,” Subramaniam says.
The first winner of the water privatisation exercise was Puncak Niaga Sdn Bhd (PNSB)—a company owned by Umno-linked Rozali Ismail.

In 1994, PNSB became the first Selangor water concessionaire, winning a 25-year concession to take over and refurbish 27 water treatment plants. The next year, it won another 25-year concession to build and operate phase two of the Sungai Selangor Water Supply Scheme.

In 2000, 40-percent Gamuda-owned Syarikat Pengeluaran Air Sungai Selangor Sdn Bhd (Splash) was awarded a 30-year concession to build and operate phase three of the same scheme, and take over the first phase.

The next year saw another 30-year concession go to the then half-state owned Konsortium Abass Sdn Bhd for the Sungai Semenyih Scheme. Abass was a company then-shared almost equally between the state and Titisan Modal (M) Sdn Bhd. Titisan Modal was 45-percent owned by Operasi Murni Sdn Bhd, a company affiliated to Selangor’s then-Umno-led administration.

In comes Syabas

The concessionaires would then supply water to JBAS, which despite being corporatised into Perbadanan Urus Air Selangor Berhad (Puas), continued to belong to the state government.

Subramaniam said that the separation of the treatment and distribution sectors of the industry saw the dismantling of the cross-subsidisation model employed by JBAS. Distribution of water was a less profitable aspect of the business, as it required large capital expenditure—something that Puas soon found it could not afford.

By 2001, Puas was in trouble. It was paying the concessionaires a fixed price for treated water, but was unable to recover costs through tariffs as close to half of the water would be lost through leaking pipes, theft and inefficient equipment.

All of the water concessionaires made profits, ranging from RM35 million to RM180 million while Puas was RM350 million in the red. To deal with this, Puncak Niaga Holdings’ subsidiary Syarikat Bekalan Air Selangor Sdn Bhd (Syabas) came in to take over Puas.

Scheduled-tariff-hikes-and-targeted-non-revenue-water-CHARTFor a 30-year concession, Syabas agreed to reduce non-water revenue by fixing pipes etc. But unlike Puas, it would be able to pay for this through huge tariff hikes (see chart), which were not announced to the public when the concession agreement was signed in Dec 2004.

In March that year, the BN government was re-elected with an overwhelming majority. “The BN felt very secure, and believed they can push through such things,” Subramaniam said.

Thus the model that prevails today, where the Selangor government sells raw water to the three water treatment companies, which in turn sell to distributor Syabas which pipes it to customers in Selangor, Kuala Lumpur and Putrajaya.

Rectifying the mistakes

In the next few years, however, it became apparent that the water privatisation model in several states was not providing the efficiency expected. Large capital expenditure remained the biggest complaint, particularly among distributors.

To alleviate this, the federal government mulled re-consolidating the state water industries, only this time, under a federal agency. Eventually the federal government set up the Water Asset Management Company (PAAB, its Malay acronym), set up under the Water Services Industry Act 2006.

Like a conventional landlord-tenant arrangement, it was envisaged the federal agency will lease out licences for the operations of the water works but will foot capital expenditure to maintain the assets.

Sources privy to earlier discussions of water consolidation in Selangor told KiniBiz that talks of re-consolidation were already in the background when Syabas was awarded the concession.

“The state government was starting to look at the numbers for consolidation as early as 2007,” one source said. This is a mere three years after Syabas was awarded the 30-year deal.

In January 2008, the federal cabinet decided that the Selangor government will be leading talks with concessionaires for consolidation. This would mean agreeing on a price upon which the state will pay the concessionaires for taking over their water businesses.

The fight begins

Two months later, the BN lost Selangor. Pakatan Rakyat, elected among others over its promise to freeze tariff hikes, did just that. The government argued that Syabas had breached its concession agreement, which required it to reduce non-revenue water (NRW – water lost to leaking pipes, theft, etc), and thus did not qualify to raise tariff hikes.

The state, which owns 30 percent of Syabas through its investment arms, also moved to freeze all capital expenditure until consolidation is through.

“It is a catch-22. The state won’t give Syabas money because its NRW is high but Syabas can’t reduce its NRW without money,” the source said.

Rozali, in an advertorial to rebut the state’s claims of its inefficiency said the capital expenditure freeze is “illogical” and “extremely impractical” as it has proven that it has successfully reduced NRW from 43 percent in 2005 to 32 percent in 2008.

He said that what the Selangor government is doing is sabotaging the replacement of 5,400 km of aging water pipes and fix water pumps. This, he said, would reduce quality of service. This includes dry taps on several occasions last year.
But Tricia Yeoh, who participated in the negotiations as an officer of the Selangor Menteri Besar’s Office up to April 2011 said that the state was justified to do so.

Yeoh said that the state found that Syabas had prior to this exhausted allocated capital expenditure and had used some of it on operating expenditure.

“The Auditor-General’s Audit Report for 2009-2011 showed that the funds Syabas received for capital expenditure from the Selangor government were actually used for operating expenditure. If such funds were necessary for the upgrading of water pumps, then they should not have been misallocated,” she said.

The state had previously also cited things like failure to award over RM600 million of contracts via open tender, import of RM375 million worth of pipes from an Indonesian company linked to Rozali among breaches which justify the freeze.

It also questions Puncak Niaga top management’s remuneration. In 2011, Puncak Niaga’s highest paid official, presumably Rozali, went home with between RM8.35 million and RM8.4 million, despite suffering a pre-tax loss of RM75.2 million.

Bad blood

This heavy politicking between Selangor and the Puncak Niaga Group has weighed down the consolidation exercise. Having already bought over most of Abass, the state has only Splash and Puncak Niaga Group to deal with. Latest reports indicate that Splash is likely to sell its assets to the Selangor government.

Sources familiar with the negotiations claim that the state has taken a “take it or leave it” stance, instead of pursuing a willing buyer-willing seller deal which is “fair”.

Despite holding 41.25 percent of Puncak Niaga shares, Rozali says that as a public-listed company Puncak Niaga needs to get the buy-in of all its shareholders. He also said that Puncak Niaga needs the golden shareholder, the federal government, to okay the deal before it can move.
Yeoh claims that from 2009 to 2011, the state held many meetings with the companies, trying to come to a middle ground in terms of valuation.But some things, like demands for higher returns on equity, she said, are just not feasible.

After four years of back and forth, Selangor Menteri Besar Abdul Khalid Ibrahim said that the RM9.65 billion collective offer last week is its last. If there is no deal by March 6, he said, the state is urging international arbitration.

But will this election-eve offer be enough to seal the deal?