DECEMBER 16 — I refer to various media reports dated 4 and 5 December 2014 which highlighted a few disconcerting and alarming statements by the managing director of Gamuda Berhad (Gamuda), the owner of a 40 per cent stake in Syarikat Pengeluar Air Sdn Bhd (SPLASH), namely:
(i) the completion of the water services industry restructuring in Selangor is nowhere in sight since discussions between shareholders of SPLASH and the Selangor state government on the proposed takeover of SPLASH assets and liabilities are still on-going
(ii) his confidence that the federal government will not invoke Section 114 of the Water Services Industry Act 2006 (WSIA) as such a deal should be done on a "willing buyer, willing seller" basis
(iii) his views that Selangor's takeover offer for SPLASH should stand at RM2.8 billion of the book value, taking into account about RM1.4 billion in potential loss of future earnings given the remaining 16 years of its concession period and any divestment value below RM2.8 billion would translate into a loss
(iv) blaming the risk of WSIA enforcement to resolve the deadlock for the decline in foreign shareholding in Gamuda to less than 30 per cent at present from over 50 per cent previously
First, it is worth stressing that various offers (on the basis of a 100 per cent stake) made on 20 February 2013, 21 November 2013, 26 February 2014 and 12 September 2014 by Kumpulan Darul Ehsan Berhad (KDEB) on behalf of the previous Selangor administration were unchanged to all four concession water companies, namely Syarikat Bekalan Air Selangor Sdn Bhd (SYABAS), Puncak Niaga Sdn Bhd (PNSB), SPLASH and Konsortium ABASS Sdn Bhd (ABASS) - grand total of RM9.65 billion and individual sum of RM4.35 billion, RM2.48 billion, RM1.83 billion and RM992.2 million respectively.
As such, shareholders of SPLASH, a consortium comprising Gamuda (40 per cent), The Sweet Water Alliance Sdn Bhd (TWSA) (30 per cent), a company linked to Tan Sri Wan Azmi Wan Hamzah and KDEB (30 per cent) could enjoy a tidy sum of RM1.83 billion in total.
I can't emphasise enough that the proposed takeover will also assume SPLASH's water related liabilities amounting close to RM1.6 billion apart from the equity compensation in cash consideration worth RM250.6 million, representing 13.7 per cent of the overall offer .
Second, allusion to RM2.8 billion as the new "right" price tag is appalling since that value in excess by almost RM1 billion compared to the KDEB's total takeover offer to SPLASH of RM1.83 billion, I suspect, refers to only cash consideration for equity compensation without taking into account liabilities to be assumed. With this new equity amount indicated by SPLASH, adding the liabilities portion would effectively set the state government back up to RM4.4 billion.
Any total amount above and beyond RM1.83 billion granted to SPLASH would be tantamount to gross injustice and denying the rights of Selangorians to reasonable, fair and proper deals especially involving public funds. I strongly believe that if the current state administration caved in, it would be grossly inexcusable to force the rakyat of Selangor to put up with this kind of preposterous and grotesque demand from any well-connected corporate personalities who all this while, have benefited a lot from lopsided privatisation deals and lucrative concession contracts.
Whatever it is, I find it rather curious that SPLASH has been rejecting all KDEB's offers since the second half of 2013 as it has in fact agreed in principle to the offer made in February 2013 whose terms and conditions have remained very much similar ever since.
Third, allegations that any value below RM2.8 billion for the takeover offer would result in a divestment loss are untrue and misleading since shareholders of SPLASH through synergistic relationships of subsidiaries and associate companies, have in fact enjoyed handsome returns on investment (ROI) since it commenced operations in 2000 in the form of direct (from the water treatment business generated via Supply and Capacity Charges) and indirect (from construction, engineering, equipment leasing and building material supply contracts) profits.
SPLASH shareholders have also bagged dividends worth RM725.4 million so far. Taking into account this dividend payout, overall returns to SPLASH shareholders would amount to RM976 million (RM725.4 million + RM250.6 million in equity compensation) which can subsequently be translated into a total ROI of RM576 million (RM976 million - RM400 million in initial investments), equivalent to an absolute rate of ROI of 144 per cent.
Being in the upstream segment of the water services industry, SPLASH should also count its blessings since the extraction and treatment business is well-known to command higher profit-making capacity compared to the downstream segment of water distribution which is exposed to big losses.
The value of equity compensation was arrived at by applying a 12 per cent return on equity (ROE) on invested amount up to 31 December 2012 with no compounding and after deduction of historical dividend payouts. I must reiterate that the annual non-compounded 12 per cent ROE is a clause which forms an integral part of the Concession or Privatisation Agreement. Applying this valuation method is therefore consistent with the terms and conditions of the said Agreement and indeed in line with the concept of preserving the sanctity of legally binding contracts.
Since the basis of the non-compounded 12 per cent ROE per annum was employed evenly and across-the-board in offers made to all four water concession companies (of which three have accepted), it would be highly discriminatory and grossly absurd to revise the offer to SPLASH just to acquiesce to its excessive demands.
Not only because the 12 per cent ROE per annum was prescribed in the Privatisation Agreement, employing other valuation methods such as the discounted cash flow (DCF) or net book value (NBV)/net asset value (NAV) would prove to be too problematic and even result in double-counting. For instance, asset-based methodology such as the NBV/NAV would probably translate into double payments to SPLASH since direct ROI in the form of Capacity Charge is already asset-based in nature. Given fluctuations in current NBV according to the evaluation period (estimated at RM2.54 billion as at end-December 2013 but RM2.8 billion at present), NBV may not be the right nor ideal method to arrive at stable and consistent valuation over time. Besides, the annual ROE of 12 per cent is three to four times higher than the prevailing risk-free rate of return of 3 per cent-4 per cent.
Fourth, claims that the water industry consolidation exercises for all six other states were successfully completed on the book value basis are inaccurate and deceitful since the book value-based valuation was only in application for Perlis, Melaka and Johor while the valuation method for Pulau Pinang, Perak and Negri Sembilan was simply based on water related assets minus liabilities.
Fifth, while amicable and market-friendly resolution is highly desirable, it is shockingly embarrassing and highly unacceptable that the water industry restructuring in Selangor is still far from being concluded even after seven (7) formal letters from the state government since January 2009 over a period of close to six (6) years as one concession company is accorded preferential treatment by the current state administration to go back to the negotiating table while three others have already accepted their respective offer by the September 2014 deadline.
Therefore, it would not be too drastic nor brutal at present for the current state administration to push the federal government to invoke the WSIA 2006 so as to put an end to any further delays in the long-drawn-out restructuring exercise since there is no justification whatsoever to veer off from the existing terms in the KDEB's takeover offer to SPLASH, which are reasonable, fair and consistent with those applied to the three other concession companies.
In fact, the process of de-privatisation of the fragmented water services industry in Selangor began in early 2008 just before the 12th General Election when KDEB was given the green light by the federal government to lead the consolidation of all four concession companies.
Sixth, although SPLASH or other concession companies for that matter are allowed to bring their case to an international arbitration to resolve any disputes or disagreements related to the takeover offer especially regarding the pricing and valuation method, the takeover offer should be able to survive the legal challenge since the non-compounded ROE of 12 per cent per annum will prove to be way more lucrative than the international standards of a meagre annual rate of 8 per cent.
Furthermore, concession companies may be less than willing to bring the case before a court or international arbitration since they will be required to disclose to the public all the terms and conditions of the Privatisation Agreement, which are by and large in favour of concessionaires.
I therefore demand the current state administration to resist any ludicrous and outlandish demands from any water concession companies to prevent any impasse in returning the water assets to the people, their rightful owners through issuance of water shares which can be performed only when the restructuring exercise is completed.
The state government should not succumb to any forms of pressure and intense lobbying at the expense of the rakyat.
TAN SRI DATO SERI ABDUL KHALID IBRAHIM
Member of Parliament for Bandar Tun Razak
State Assemblyman for Port Klang
* This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail Online.
