Friday, March 26, 2010

Gamuda Offers RM10.8b for Selangor Water Assets

Gamuda's RM10.8 billion offer to acquire all water assets and maintain current prices proves beyond doubt that the existing contracts provides enormous profits to Syabas and its shareholders.

Gamuda Berhad announced yesterday that its 40 per cent-owned unit Splash is plannning a US$3.26 billion (RM10.8 billion) offer for all water assets of Selangor.

Under the offer, Splash plans to maintain water tariffs in Selangor at the current levels, with annual increases of two to three per cent, said Gamuda.

Without commenting on the merits of the offer, the terms of the offer itself proves that the current water concession agreements with all the concessionaires, particularly with Syarikat Bekalan Air Selangor (Syabas) and its major shareholder, Puncak Niaga Holdings Bhd are overly lucrative and highly burdensome to the rakyat.

Under the current concession agreement, Syabas has the right to increase tariffs by up to 37% immediately upon meeting certain operating conditions and has already filed its intent to sue the Selangor state government for compensation for the non-increasein tariffs over the past year. Syabas will further have the right to increase tariffs by another 25% in 2012, 20% in 2015, 10% in 2018 and 5% every 3 years up til 2030.

Even in the Federal Government's proposed restructuring deal whereby it will finance the exercise via Pengurusan Aset Air Berhad (PAAB), its chief executive officer Ahmad Faizal Abdul Rahman had earlier revealed that “instead of 37% increase, it could be around 10% post restructuring”.

If a 100% commercial exercise via the offer by Splash could offer to freeze water tariffs at current levels, and still expected to make a reasonable profit, then certainly, under the Government sponsored water restructuring exercise, where the cost of borrowings would be significantly lower, prices should be even lower.

The unexpected offer by Splash also vindicates the Selangor state government's position that had the Federal Government and the Minister of Energy, Green Technology and Water used the powers vested in them to fully back the state government's original offer of RM5.7 billion to acquire all the water industry assets, the state government would have had no problems in reducing the water tariffs by 5% immediately, and more in subsequent years. The Federal Government had previously rubbished these claims by the state government.

Regardless, we call upon the Federal Government to use its powers and influence to fully back the Selangor state government's revised offer of RM9.3 billion which was accepted by two of the four existing concessionaires, ABASS and Splash, but rejected by Syabas and Puncak Niaga.

In addition to a lower cost of acquisition plus lower cost of funds, profits from the provision of water services by the state government can be channelled back to the people, resulting in significantly lower tariffs compared to private concessionaires. This is because, unlike private concessionaires, the state government has no intention to make profits out of providing basic human rights services to the rakyat. Only then would we become a “people first” government.
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