In a dramatic turn of events, the federal government has indicated to the Selangor government that the consolidation of water assets in the state is strictly a matter between the state and water concessionaires.

It is also learnt that the federal government is preparing a paper to take the lead in water consolidation in Selangor.

The move — under the purview of the Ministry of Finance (MoF) — is because of the delay in the water consolidation efforts that were initially mandated by the federal government to Kumpulan Darul Ehsan Selangor (KDEB), an investment arm of the Selangor government.
"Selangor is due for a tariff hike in January next year. The federal government cannot stop the increase without a good reason. That is why it is stepping in to hasten the consolidation process," says a source.

Last Friday, Minister of Energy, Water and Communications Datuk Shaziman Abu Mansor said the government has deferred the 37% increase in water tariff in Selangor, Putrajaya and Kuala Lumpur to March 31 next year. The hike, under the concession agreement with Syarikat Bekalan Air Selangor Sdn Bhd (Syabas), is due on Jan 1.

Shaziman also said consumers in affected areas will have to pay higher rates if Selangor does not hand over the water assets to Pengurusan Aset Air Bhd (PAAB) by March next year.
Sources say the hike cannot be postponed for long because it involves obligations to bondholders.
"Also, Syabas has the right under the concession agreement. What the MoF paper will stipulate are strict conditions for concessionaires which express interest in leasing the water assets that the federal government will take control of through PAAB. When all parties agree to the federal government-led move, a sum of RM20 billion will be allocated to take over the debts and for capital expenditure," says a source.

The intervention will allow existing players, such as Puncak Niaga Holdings Bhd, to continue to operate the water concessions subject to the terms and conditions set by the federal government.

Among the conditions are that the concessionaires:
• Give guarantees on meeting non-revenue water (NRW) targets; and
• Be held accountable for the cash flow projections that they put in their proposals to manage the assets.

Sources say the clearest sign that the federal government is taking the lead in water consolidation was a letter dated Nov 26 sent by the Ministry of Energy, Water and Communications to Selangor deputy state secretary (development) Datuk Noordin Sulaiman.

"The proposal to restructure (the water industry) should be seen as the state government's initiative to enhance the competence and effectiveness of its water supply services, which should only involve two parties, namely the Selangor government and the water concessionaires.
"Therefore, whatever form of understanding or negotiation towards the said restructuring, including signing a memorandum of understanding as suggested (by the state government), will only need to involve the two parties," stated the letter.

It was silent on whether the federal government would support the state or KDEB to take the lead. This is contrary to earlier indications that the central government was solidly behind KDEB to take charge of the consolidation.

For instance on July 4, KDEB issued a statement saying Shaziman had stated his full support for the consolidation of four water concession companies in Selangor to be managed in a holistic manner.

In the same statement, KDEB president Datuk Abd Karim Munisar said they had been notified, via a letter dated June 19 from the minister, that the federal government had set up a funding mechanism via PAAB to assume the assets and liabilities pertaining to water supply. It would act as the owner and holder of the assets and would be responsible for the funding of future capital expenditure.

Abd Karim also said Shaziman had given the assurance that his ministry, along with the National Water Services Commission (SPAN) and PABB, will give the state government and KDEB their full support and cooperation to ensure the success of the consolidation move.

The exercise will involve the takeover of the water business in the state from the current concessionaires — Puncak Niaga, Syarikat Pengeluar Air Selangor Sdn Bhd (SPLASH), Konsortium Abass Sdn Bhd (Abass) and Syabas. In this regard, it is believed that the state proposed an MoU be signed between the concessionaires and the state and federal governments.
However, the federal government in the Nov 26 letter declined to be a party to the MoU. A crucial part of the MoU is to allow the postponement of Syabas' tariff hike to March next year, pending the completion of the consolidation exercise.

The letter, undersigned by Sutekno Ahmadbelon, secretary of the water services monitoring division in the Ministry of Energy, Water and Communications, also stated that the ministry had found "no necessity" to sign the MoU.

However, the letter stated that the ministry had no problem if the state government signed the MoU with the concessionaires, which the latter deemed would help expedite the restructuring process and would not contravene the Water Services Industry Act 2006.

The ministry also reminded the Selangor government to expedite the restructuring to avoid the hike because the former and SPAN have to review the tariff as the concession agreement with Syabas is still valid.

It also said adjustments to the water tariff later "will be in accordance with what has been stipulated in the concession agreement as long as it is still valid".

"Therefore, it is necessary for the state government, which has initiated the restructuring proposal, to finalise it as soon as possible," it said.

Tan Sri Rozali Ismail's Puncak Niaga owns 70% of Syabas, which oversees the water supply service and distribution in Selangor, Kuala Lumpur and Putrajaya, while KDEB has a 30% stake in the company.

On Oct 22, Selangor Menteri Besar Tan Sri Khalid Ibrahim told the press that the state would announce by December if it was able to strike a deal that would benefit the people and the state.But so far, the state has not been able to hammer out a deal with the various concessionaires.

The biggest water player in Selangor is Rozali's Puncak Niaga.

With the latest development, industry officials say Rozali, like KDEB, has a chance to manage the water assets in Selangor. The crucial factor that will determine who gets to manage them is the provision of guarantees on NRW and cash flow.