Selangor water issue remains fluid
The Federal Government-Selangor Government squabble over water assets in the state shows no signs of ebbing anytime soon.
SINCE the 2008 general election and the change of government in Selangor, its water asset consolidation has seen little progress compared to that of other states. There has also been slow progress in the restructuring/takeover of the assets.
However, recent news reports have prompted analysts to take another look at the issue. One focus is on the possibility of a water shortage in the state, which is said to likely occur in 2014 at the earliest.
Another news report said that Pengurusan Aset Air Bhd (PAAB) or the Water Asset Management Company had clarified that it was not partnering business tycoon Tan Sri Syed Mokhtar Al-Bukhary via MMC Corporation Bhd to take over water assets in the country.
So where is the situation heading? CIMB Research, in a recent report, reckoned that politics and the issue of control over water operations in Selangor were likely to continue to dominate the subject.
It noted that despite worries about a possible water crisis, there were water shortage mitigation projects in place pending the resolution of the Langat 2 water treatment plant (WTP) issue, over which the Federal and Selangor Governments are at loggerheads. ‘Tenders for the WTP have now resurfaced but progress will hit a brick wall if the Selangor Government does not release the land,’ it said.
The research house added that a Federal Government-driven consolidation in Selangor was still the best option – as in the other states. It was also not convinced that any likely takeover offers from the Selangor Government in the coming months would go through and in all likelihood would drag into 2013.
The Selangor water issue thus far
CIMB Research said a water shortage was possible given the rising water demand from the residential and industrial sectors in Selangor, Kuala Lumpur and Putrajaya. ‘Rough calculations indicate that while water demand has grown 5-6% per annum in the past 10 years, the growth rate could reach 9-10% from 2012 onwards. This has triggered a ramp-up in production at the 34 existing water treatment plants in the state,’ it said.
Both the Federal and Selangor Governments are emphasizing their respective water mitigation initiatives/alternatives in view of the potential further delay in the construction of Langat 2 WTP.
According to the news reports, the Federal Government plans to call for tenders for Langat 2 WTP. While this appears to suggest that the major water infrastructure plans in Selangor are gaining traction, CIMB Research said it was not too excited as the land issue and development order still lay with the State Government.
Industry observers think Selangor will continue to hold back the development of Langat 2 WTP until a resolution on the takeover of water operations in the state is achieved.
While the WTP project drags on, alternative water shortage mitigation plans are actually already in place. For one, the Federal Government is rolling out the second phase of its plans, which will involve RM331 million worth of capital expenditure over the next 1-2 years. The alternative water shortage mitigation plans originated from the 10th Malaysia Plan (10MP) initiatives and are expected to remedy the water shortage anticipated in 2014-2017.
That said, plans are also being prepared under the Selangor Government and they appear to focus on a different method that reportedly will increase water treatment capacity by 50% that will last till 2020.
Under the state’s plans, there is no need for Langat 2 WTP. This, it says, is because its latest estimates show that the cost of construction of Langat 2 WTP has nearly doubled to RM8.7 billion from RM5 billion and would take 2-3 years to build, with the construction being in two phases.
Note that Langat 2 WTP is part of the RM8 billion Interstate Water Transfer Scheme (IWTS), which will transfer raw water from Pahang via a 40km-long tunnel from Kelau Dam.
With these lingering issues and two opposing parties and opinions, many quarters remain disappointed that there has been no revival in the progress of water asset consolidation in Selangor since the last takeover offer in January 2011.
Similar to the progress of water infrastructure in the state, consolidation/takeover plans have been more political than commercial. Checks with various water players suggest that PAAB’s/the Federal Government’s plans to restructure the national water operations are intact but the big challenge is to execute the plans in Selangor, due to the issue of control of the water assets post-consolidation.
This refers to the structure of the operating & maintenance (O&M) contracts for the four existing water treatment concessionaires, namely: (i) PNSB (100%-owned by Puncak Niaga Holdings Bhd); (ii) Splash (40%-owned by Gamuda Bhd); (iii) Konsortium Abass (largely owned by Selangor); and (iv) sole water distribution concessionaire Syabas (70%-owned by Puncak Niaga).
Many analysts believe any new takeover moves will be deferred due to the coming general election. Although the Selangor Government is said to be relooking to acquire all four water concessionaires in the state, it is unlikely the pricing and takeover structure will be well received, especially by Puncak Niaga, which owns water treatment operator PNSB and water distributor Syabas.
In fact, the State Government has continued to challenge the terms of Puncak Niaga’s concession agreements by presenting them for international arbitration, and not honoring the scheduled water tariff hikes and compensation. This points to more battles ahead between the two parties.
Political issues aside, CIMB Research said in terms of track record, PAAB had successfully completed five acquisitions since 2008, with that for Penang State being the latest, completed in mid-2011. The restructuring was a huge milestone as, like Selangor, Penang is an opposition-led state.
Of course, the water-restructuring move in the island state was less complicated than in Selangor. ‘PAAB has acquired RM7.7 billion worth of water assets in total and all the water operations have been converted into a sale-leaseback model with licensing periods of 30-46 years, with reviews every three years,’ noted CIMB Research. Valuations were largely based on book value back then.
Taking the political considerations out of the picture, the research firm said water developments in Selangor could offer investors opportunities such as exposure to the beneficiaries of construction contracts for Langat 2 WTP and a play on the takeover of Puncak Niaga’s two water concessions and Gamuda’s 40%-owned Splash.
However, investors would probably have to bear the uncertainties over the time and pricing/valuations of the takeover offers from Selangor. Some observers are already resigned to the fact that just like many other national issues, the water issue in the state has turned political and hence can only be resolved in the coming general election.
By James S
01 September 2012
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