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AFTER a two-year deadlock, it would appear that the proposed consolidation of water assets in Selangor could be finally concluded soon. The main question now is, who will control the special purpose vehicle (SPV) that will oversee the operations and maintenance (O&M) portion of the state’s water industry.
Recently, there have been strong indications that all the parties are close to agreeing on pricing, and are now in the midst of ironing out the O&M issues. Sources believe that the Selangor government and Pengurusan Aset Air Bhd (PAAB) will jointly pay for the acquisition of the state’s water assets and liabilities at over one-time book value.
The Federal Government’s share of the acquisition price will approximately be equivalent to one-time book value of the assets, while the state government will pay the rest. This could mean that PAAB will own the assets, while the Selangor government will end up with a stake in the management of the assets.
Another burning question is whether the SPV will have private sector participation. As it stands, the state’s water assets are parked under four concessionaires – Syarikat Bekalan Air Selangor Sdn Bhd (Syabas), Syarikat Pengeluar Air Selangor Sdn Bhd (Splash), Puncak Niaga (M) Sdn Bhd and Konsortium Abbas Sdn Bhd (Abass).
Currently, the state government has considerable clout over Selangor’s water supply chain via its listed investment arm, Kumpulan Perangsang Selangor Bhd (KPS), which owns 55% of Konsortium Abbas and 30% of Splash. It also owns a 30% stake in Syabas, the state’s water distribution company.
Says one observer: “While the state shall definitely lead the SPV, it only has Konsortium Abass, and hence will not be able to go full-scale. Perhaps, it could outsource some parts to Gamuda Water Sdn Bhd or Sungai Harmoni Sdn Bhd.” Gamuda Water belongs to Gamuda, while Sungai Harmoni is owned by Taliworks Corp Bhd.
Another observer disagrees, pointing out that it will not cost much for the state to set up an O&M unit.
“Why would they want to share the profits? After all, it is the O&M portion which has the attractive margins. Since they are already buying over the assets of the concessions, maybe they can just buy over some of the O&M units, for instance Gamuda Water or Sungai Harmoni,” he conjectures.
An AmResearch analyst says these latest development implies that Splash’ offer in March for the consolidation of Selangor’s water industry at RM10.75bil may have prodded both the Federal and state governments to expedite consolidation talks.
“More importantly, it validates our earlier conviction that the Selangor government remains very much in contention to lead the consolidation of water assets within the state,” adds the analyst.
Gamuda launched the takeover offer via Splash, its 40% associate. That proposal was shot down as it was seen to be not in line with the regulatory framework for the industry.
According to the AmResearch analyst, based on the Splash offer, the implied valuation for Puncak Niaga and KPS is estimated at close to RM4.50 per share and RM1.88 per share respectively.
“We caution that nothing has been finalised as yet. Any deal would not be consummated until the issue of control over the SPV has been resolved. More importantly, we hold the view that the Selangor government is unlikely to consent to any purchase of Puncak’s water assets unless it secures control over water distribution rights in Selangor,” he adds. Owned by the Ministry of Finance, PAAB was set up in May 2006 to restructure and consolidate the country’s fragmented water sector, with the intent of making the state concessionaires asset-light.
The state and federal governments had been in a stalemate over the last two years over who should consolidate Selangor’s water assets and control over the supply and distribution.
In June 2009, the state government made an offer of RM9.22bil, or one-time book value, for the water-related equity, assets and liabilities of the four water companies. However, the parties could not come to an agreement. Gamuda then stepped in with its offer, which may have helped bring the standoff closer to an end.