Sunday 19 June 2011

Water deal makes Malaysians RM6.5b poorer - By Tracia Yeoh

A new chapter unfolded in the long-drawn out Selangor water saga this week. Acqua SPV, a Special-Purpose Vehicle set up under the Federal Government body PAAB (Pengurusan Aset Air Berhad),

announced its plans to acquire 100 percent of Selangor water bonds. The total outstanding bonds come up to RM6.5 billion.

This basically means that the Federal Government is using tax-payers’ money to settle the debts that water concessionaires owe to their bondholders.

How did things get so complicated? Well, if readers recall, sometime in November 2010, the Selangor government and its supporters marched under the stark KL heat to present a memorandum to the Agong, which called for the deprivatisation of lucrative water concessions that benefit cronies. Teargas and water cannons were freely used, but this should not have come as a surprise.

The story thus far is this: As part of a national water restructuring exercise, all states are supposed to sell their water assets back to PAAB temporarily until they are financially secure enough to inject their own capital expenditure.

Two Acts were passed in this regard, the Water Services Industry Act 2006 and the Water Services Commission Act 2006. This was done on the understanding that the water industry would be eventually renationalised, as they were before.

All fine and dandy, except that Selangor has the most complex of situations, having the most number of private companies: Abass, Puncak Niaga, Splash and Syabas, the latter having a monopoly over water distribution.
Water talks were protracted over more than two years, during which time all offers by Selangor were in one way or other turned down by the companies mainly because they were not considered high enough.

Bondholders Storm

And in the midst of all this, another storm was brewing. When the water companies began operations, they sold RM9.02 billion worth of bonds to fund their startup activities under seven different bond programmes. These bonds were purchased by a large number of banks and financial institutions, including the likes of Great Eastern Life Assurance (M) Bhd, CIMB Group Holdings Bhd and the Employees Provident Fund (EPF).
When water negotiations seemed endless with no conclusion in sight, a few things happened: rating agencies downgraded these bonds impacting their values, and the issuing water companies were unable to service the bonds that would be maturing. The reason for the ill financial health of these companies was simple.

Syabas buys treated water from treatment companies Abass and Splash, and in turn sells it to customers: you and me. Syabas was not paying what was fully due to these two companies, thereby affecting their cashflow. They in turn pointed their fingers at the Selangor government for not allowing them to increase tariff rates that they claim are part of the concession agreement. Selangor disagrees, saying certain conditions were not fulfilled. The case has been brought to court and is ongoing.

The bondholders, of course, are not necessarily concerned with the minute details. As far as they are concerned, they purchased bonds which they felt were in a secure and stable industry. Nothing is more safe than a utilities sector, after all, or so they thought.

Buying Back Bonds 

Fast-forward to last week. Because the water restructuring has not yet concluded, the Federal Government decided that it would soothe the nerves of these bondholders. It is understandable that they would want commensurate return on their investments, in principle.

However, the onus lies equally on the investing partner to investigate the health of the company’s bonds. In this case, clearly the companies were not in the best conditions to begin with.

The move of the Federal Government in swooping down to buy over the outstanding bonds essentially means that all responsibility of the companies to their creditors is completely absolved. With their debts resolved absolutely, what incentive have they to proceed with water talks with the Selangor – or any other – government?

The argument given by the government is that any default of these bonds would result in cross-default in other bonds, leading to a “systemic meltdown of the Malaysian capital markets and erode investors’ confidence locally and internationally”.

I may not be an investment banker, but is the government not rewarding investors for choosing their portfolios foolishly? Worse, the burden is carried by the tax-payers nationwide, not only in Selangor and Kuala Lumpur.
In fact, it was stated explicitly that a bond default would impact PAAB’s and the federal government’s ability to raise funds for existing and future infrastructure projects at competitive pricing. It is a rather large leap to take here. Think “Mega Project 101”, and the likes of “MRT”.

Privatising Profits, Socialising Losses

What we are hearing is essentially that government is willing to sweep under the carpet bad debts for the sake of creating potentially devastating situations in the future, when or if there are further defaults on even larger-scale infrastructure projects under the Economic Transformation Programme (ETP).

This comes at a time when the same Minister (of Energy, Green Technology, and Water) just announced an electricity tariff increase which will impact upon all consumers intrinsically. This is an additional burden placed upon Malaysians, whilst in the meantime our friendly neighbourhood financial institutions recoup their funds easily. This is a classic case of the government privatising profits and socialising losses.

Finally, this is a sordid state of affairs because not only is this move considered a distinct bailout of the water companies, it does not even resolve the more urgent issue at hand: the water restructuring itself. The Association of Water and Energy Research Malaysia (AWER) said in a statement that first, the entire problem is passed straight to the people and businesses to pay off, and second, PAAB is “just saving the bondholders without relinquishing the stakes of affected concession agreement holders”.

This is a dark day for us in Selangor and beyond, and it is a sign that the Federal Government is not serious about pushing the private concession companies all the way to comply with the WSIA’s holistic and renationalised model. This is a temporary measure that is clearly biased towards one party – not us taxpayers, for sure.

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