Saturday December 12, 2009

Targeting lower tariff hike

By YVONNE TAN

PAAB looking for about 10% increase instead of original 37%

WITH all the hullabaloo surrounding the consolidation of the water sector in Selangor, without a doubt the most fragmented of all the states, the main objective of the exercise must not be forgotten.

“The end game is for consumers to enjoy cheaper water tariffs,” an analyst with a bank-backed brokerage says.

And that’s exactly what Pengurusan Air Aset Bhd (PAAB), the federal government-backed unit intends to achieve, according to its top official.

“(Tariffs will be) definitely lower than under current concessionaires,” PAAB director and chief executive officer Ahmad Faizal Abdul Rahman tells StarBizWeek.

Based on the current water concession agreement signed between the federal government, the state government and water distributor Syarikat Bekalan Air Selangor inked on Dec 15, 2004, water tariffs were scheduled to be increased by 37% in January this year.

This was later brought down to 31% on the federal government’s intervention. Year to date, however, water tariffs have remained intact, largely due to the ongoing negotiations between federal and state governments and the water players that have yet to be finalised.

Reports reveal periodic increases of between 5% and 25% so far – the concession covers a 30-year period until Jan 1, 2030.

“We’re looking at less than half (of the original 37% hike) ... so instead of 37% increase, it could be around 10% post restructuring,” Ahmad Faizal says.

“The tariff will definitely change because previously the tariff took into consideration the capital expenditure (capex) element. We now take that element out and no one can deny that the cost to consumers is going to be cheaper,” he says.

The Selangor water sector restructuring exercise, which includes buying over water assets, is part of a national initiative to regulate the water services industry for Peninsular Malaysia and Labuan under the Water Services Industry Act 2006 (WSIA).

WSIA and the Suruhanjaya Perkhidmatan Air Negara 2006 (Span) Act, which took effect on Jan 1 last year, were introduced by the Government to regulate the water industry in the country.

Under the WSIA, existing water operators have the option to seek authorisation from the water regulator Span to continue operating their concessions or migrate to a licensing regime where existing concessions will cease to be effective and operators will be given a new licence by Span for a three-year period, subject to renewal.

The new framework also introduces various key performance indicators that are supposed to regulate and improve the efficiency level of the water operators.

“Under the concession (regime), there were no regulators. The only regulator was the Finance Ministry. No one really looked behind the scenes at how much was being spent, the cost ratios, the revenues generated and so on,” he says.

“Pre-Span and pre-WSIA, no one was regulating them, but now we will ensure the commissionaires operate within certain acceptable benchmarks or standards,” Ahmad Faizal says.

The issue of disparity of water tariffs between states, however, will persist even with increased efficiency and effectiveness in water services, RAM Rating says.

“This is largely attributable to the geographical parameters and topography of the respective states and their consumer profiles.

Hence, it may not be feasible to standardise water tariffs among all the states,” it says.

As such, the rating house says, the emergence of a single national water-service operator, as well as the harmonisation and standardisation of water tariffs, if any, may be an immense challenge for Span; its eventual realisation will take a long time.

Although there is an option for the concessionaires to not migrate to the new regime, analysts have said that if they don’t migrate they will be in trouble as they have heavy borrowing and cash flow problems and cannot sustain current operations. “So, really the issue now is more of how (the migration to the new regime) will take place. We want to do it in the least painful way,” says Ahmad Faizal.

The move will free the existing concessionaires from heavy capex needed to maintain water infrastructure, making them asset-light and enabling them to focus on their core activity of treating and supplying clean water to consumers .

PAAB has to date only taken over the water assets of Negri Sembilan, Malacca and Johor, which are valued at RM6.12bil.

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Saturday December 12, 2009

Targeting lower tariff hike

By YVONNE TAN