The money and politics behind the water deal

Selangor Mentri Besar Tan Sri Abdul Khalid Ibrahim in an interview.

MALAYSIA - On the surface, it would seem that the federal government quickly got down to signing an agreement with Selangor to re-organise the water industry in the state primarily for political reasons.

However, deeper scrutiny reveals that there are also financial considerations that could have prompted the federal government to quickly hammer out an agreement that will force the consolidation of water assets in Selangor.

The consolidation exercise that had been in a stalemate since 2008 was a matter between the state and the four concessionaires - Puncak Niaga Sdn Bhd, Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (Splash), Syarikat Bekalan Air Selangor Sdn Bhd (Syabas) and Konsortium ABASS Sdn Bhd.

However, the Government got itself tangled in the deadlock when it took RM5.8billion (S$2.2 billion) worth of debt papers off the books of the water concessionaires in 2011.

Then, Pengurusan Aset Air Bhd (PAAB) bought the papers to avoid a default that would have triggered a cross-default and allowed the state to take over the companies.

The scenario of debt falling due is scheduled to take place in the coming months. For instance, Syabas has a RM400million debt paper due next month while Splash has already postponed some of its bond obligations to this year. The concessionaires are likely to get an extension to the bond obligation, just like in the past.

But a solution was urgently needed because the water treatment companies such as Splash have not been able to service their debt papers because Syabas has been paying less than 50% of what had been agreed upon over the last few years.

"Syabas already owes the concessionaires close to RM5bil and the amount is increasing because it is unable to get the tariff hike from the state government.

"If unresolved, it is only a matter of time before the federal government has to step in and buy up more of the debt papers, which they don't want to see happen," says an executive close to the deal.

The financial implications were driving the negotiations between the state and federal officials since September last year after Prime Minister Datuk Seri Najib Tun Razak's visit to the United States.

The Kajang by-election hastened the process that culminated in the federal government and Selangor signing a memorandum of understanding (MoU) on Wednesday.

After the Pakatan Rakyat assemblyman for Kajang quit his seat to pave the way for opposition leader Datuk Seri Anwar Ibrahim to step in the state assembly - if he wins the by-election - negotiations picked up in pace, says the executive.

New man, new deal?

One possible reason is that the federal government did not want to go back to the drawing board on restructuring the water industry in Selangor should there be a change in the state leadership.

This is something that Charles Santiago, the MP for Klang who is actively involved in the water issue, does not discount.

"If there is a new leadership in the state, then the water deal may go another way. I don't think the federal government wants to take that risk.

"But having said that, it would be too presumptuous to assume that Anwar disagrees with the developments in the water deal so far. He may give his endorsement to Tan Sri Abdul Khalid Ibrahim to complete the deal because the Mentri Besar has been at it for years," says Santiago.

Until two weeks ago, talks between the two Selangor government representatives - Faekah Husin and Suhaimi Kamarulzaman - with federal government officials appeared to be hitting a wall.

The fiery Faekah was formerly Khalid's political secretary and now the chief executive officer of Mentri Besar Inc while Suhaimi, an ex-investment banker, is the president of Kumpulan Darul Ehsan Bhd (KDEB).

A major stumbling block towards the state and federal government coming to an agreement was related to the Water Services Industry Act 2006 (WASIA) that empowers the Energy, Green Technology and Water Minister to step in and take over the concessions.

The concessionaires, particularly those that are not owned by the state government, do not hide their disdain towards the WASIA. They feel it is draconian.

And in Selangor's case, at least one concessionaire has come up with a proposal that allows for the consolidation to take place without hefty water tariff hikes.

Gamuda Bhd, which owns 40 per cent of Splash, has proposed for a consolidation plan that will entail a 10 per cent tariff hike over three years.

The state government, on the other hand, has long wanted the federal government to invoke the WASIA and force the concessionaires to come to the negotiating table.

Since 2009, the state under Khalid has alleged that Syabas, as the sole water distributor in the state, has not fulfilled its obligations under the concession agreement and that there were good enough reasons for the federal government to invoke the WASIA on the company.

Syabas is 70 per cent owned by Puncal Niaga Holdings Bhd.

However, the federal government has always held the view that the consolidation of the water assets in Selangor should be on a willing buyer-willing seller basis.

"It has also held that the federal government cannot go into an agreement to compel the minister, who is the Minister of Energy, Green Technology and Water in this case, to use his or her discretionary powers to take over the assets.

"The argument is that the minister must be given the right to evaluate the situation and decide for himself or herself," says an official in the ministry.

Khalid admits that the inclusion of a clause that allows the minister to use his powers under the law to force the consolidation is a major hurdle to concluding the agreement with the federal government.

"It took a long time. That was a major issue" said Khalid in an interview with The Star on Thursday.

In return, for allowing the clause to be included in the agreement, the federal government wanted an assurance from the state that all development orders and land acquisition approvals would be given for the implementation of the Langat 2 Water Treatment plant project.

The Langat 2 Water Treatment plant project is part of a bigger Pahang-Selangor Water Transfer project. The project involves both states because it is a transfer of raw water from Pahang into Selangor to be treated and supplied to the state, Putrajaya and Kuala Lumpur.

The portion of the project at the Pahang side is almost done with some funding from Japan. But without the Selangor side of the job, there was nothing to showcase.

Finally a deal was struck two weeks ago.

The state agreed to give the development orders for the Langat 2 project and the federal government agreed to include a clause in the agreement that states the minister must take all action that is allowed under the laws to facilitate the consolidation of the water assets in Selangor under KDEB.

On Wednesday morning, Selangor issued the development orders and in the afternoon the deal was signed.

Why Khalid is confident

Khalid has come under fire from his own party members for cutting a deal with the federal government. Among the criticism is that there is no guarantee that the federal government will honour their end of the deal.

But Khalid is confident that the deal will go through because it will put pressure on them if they do not live to their end of the deal.

"It's unthinkable for the federal government to renege on the deal. They also want to see this end and want to see Langat 2 take off," he says.

He also points out that under the agreement, it states specifically that the Energy, Green Technology and Water Minister will facilitate the restructuring of the water assets through the provisions of the Federal Constitution or any other laws that is in relation to the water industry.

"By this, I interpret as the minister having to invoke the WASIA to force the consolidation if there is no agreement reached," he says.

So far, none of the concessionaires have responded to the latest offer. They have until March 10 to accept the offer or decline.

None of the concessionaires have replied to questions from StarBizWeek.

The concessionaires are no pushovers themselves.

The major shareholder of Puncak Niaga is Tan Sri Rozali Ismail, the former Selangor Umno treasurer said to be a generous donor to the party's activities.

Puncak Niaga is the biggest water treatment concessionaire in the state and owns 70 per cent of Syabas.

The other water concessionaires are Konsortium ABASS and Splash that count Gamuda Bhd and Tan Sri Wan Azmi Wan Hamzah as their shareholders.

Gamuda has won some of the large construction jobs in the country, including as project manager of the RM20bil Mass Rapid Transit project while Wan Azmi is an astute businessman who rose up the corporate ladder during the time of former finance minister Tun Daim Zainuddin.

Wan Azmi, who still commands the respect of top leaders with the government and opposition, is said to have voiced his objections to the use of the WASIA to consolidate the water assets in Selangor.

But considering that the agreement was signed and witnessed by the top brass of Putrajaya and with the political and financial intricacies involved, it is hard to see the consolidation exercise being delayed further.