Splash takeover unlikely before GE14
Khairul Khalid 
The deadline for the buyout of Splash, as part of the state’s water industry restructuring, has been moved several times over the last two years. It was extended again in April to early October

The deadlock between the Selangor state government and Syarikat Pengeluar Air Selangor Sdn Bhd (Splash) is set to continue, with no indication both parties are any closer to an agreement despite the looming deadline.

The deadline for the buyout of Splash, as part of the state’s water industry restructuring, has been moved several times over the last two years. It was extended again in April to early October. 

An industry source tells FocusM that if a deal is not brokered soon, it could remain that way at least until after the general election (GE14).

“The standoff could drag on until next year. Unless there is any last minute behind-the-scenes manoeuvring, we could likely be seeing another extension. The status quo could remain until after the general election,” says the source.

He adds that the proximity of GE14 could sway both the state and federal governments’ decision making. “Any major administrative changes after the elections, at both state and federal levels, could possibly have a significant impact on water restructuring in Selangor.

“With the general election around the corner, it could be in their thinking to wait it out until the dust settles (after elections) to conclude the Splash deal.”

The country’s next general election could be called anytime between now and August next year.

Financial assistance from the federal government to finalise the takeover of Splash – which could reach an estimated RM3 bil or more – is an important part of any solution.

The issue of valuation has been the major sticking point in negotiations between Selangor and Splash. Both have now been in talks for more almost two years after other private water concessionaires were taken over by the state.

There were preliminary discussions between the state and federal government on a proposed cost-sharing arrangement, with the latter forking out 60% of the acquisition costs of Splash and the balance by the state, but that has not materialised so far.

Though Selangor Mentri Besar (MB) Datuk Seri Mohamed Azmin Ali denied such an arrangement, it still looks unlikely that Selangor will be able to fund the purchase of Splash alone. “If they had the funds, they would have done it (bought Splash) a long time ago,” says the source.

Azmin denies there is a cost-sharing arrangement between Selangor and the federal government to acquire Splash

The state’s water assets management arm, Pengurusan Air Selangor Sdn Bhd (Air Selangor), is tasked with consolidating and restructuring the water industry in an exercise that has taken almost a decade to accomplish.

Air Selangor has acknowledged the lack of funds as a major impediment to the Splash deal and admitted that it could seek a capital injection from the federal government.

FocusM contacted Splash, the Selangor state government and the Ministry of Energy, Green Technology and Water (KeTTHA) for comments but none has replied at press time. 


Impact on investments

A local analyst tells FocusM that dragging out the Splash saga could have implications on future investments in the water industry.

“Syarikat Bekalan Air Selangor Sdn Bhd (Syabas) still owes Splash an estimated RM3 bil in previous invoices and this will hold up investments in water assets. Splash is already operating at full capacity and fresh investments will be required to meet increasing demand.”

In a previous interview with FocusM, the Association of Water and Energy Research Malaysia (Awer) had cautioned the delay in Selangor’s water restructuring could lead to the state paying more to upgrade its water assets.

This is primarily due to other countries in the Southeast Asian region improving their water services industry, leading to higher demand for imported equipment and parts, which eventually leads to a spike in prices.

Splash is the last remaining private water concessionaire in Selangor. It is 40% owned by construction giant Gamuda Bhd, 30% by state-owned Kumpulan Perangsang Selangor and 30% by The Sweetwater Alliance Sdn Bhd, controlled by businessman Tan Sri Wan Azmi Wan Hamzah, who is also chairman of Splash.

Splash operates, among others, the Sungai Selangor dam that supplies an estimated 50% of water supply in the Klang Valley.

The company has insisted on a discounted cash flow value calculation of the remaining years of its contract and estimates its value to be around RM3.5 bil.

At the end of last year, the federal government initiated independent valuation by international consultants, which was seen as a last-ditch attempt to force both parties to end the impasse.

Ten months after, the findings of the report by consultants Deloitte Touche has yet to be formally announced, but it is believed to be close to Splash’s valuation of around RM3 bil.

The federal and state governments were said to be hoping for a lower valuation by the independent consultants to reduce the financial burden of acquiring Splash.

The idea of getting independent experts in was mooted several times during the previous state administration of former Menteri Besar Tan Sri Khalid Ibrahim.

However, Splash objected to this because Khalid had insisted on using a pre-determined formula, instead of letting the experts determine the best methods of valuation.

Selangor’s last offer to Splash, which was rejected by the concessionaire, was in the region of RM250 mil cash for equity and taking over its RM1.5 bil in liabilities.

The concessionaire previously explained that Selangor government’s offer is based on the water company’s initial investment of RM400 mil in equity capital, annual returns and dividends, but does not take into consideration other critical elements such as Splash’s financial risks and conceding the most profitable years of its concession contract.


Invoking Wasia

Another option is for the federal government to exercise a forced takeover by invoking Section 114 of the Water Services Industry Act (Wasia), which allows the federal government to forcibly seize control of water assets in matters of national interest.

Putrajaya had approved Section 114 of Wasia in 2014 to speed up the water asset consolidation in Selangor but has been hesitant to enforce it so far. It prefers to encourage both parties to a “willing buyer, willing seller” transaction.

In October 2015, after more than seven years of deadlock, concessionaire Puncak Niaga Holdings Bhd sold its major water assets in Selangor, Puncak Niaga (M) Sdn Bhd and Syabas, to Pengurusan Air Selangor Sdn Bhd for RM1.55 bil.

Selangor also signed a master agreement between Air Selangor and the custodian of national water assets, Pengurusan Aset Air Bhd (PAAB), which led to the release of up to RM2 bil from PAAB to Air Selangor as financing for the acquisition the water concessionaires.

In exchange, Air Selangor transferred up to RM2 bil worth of water assets to PAAB, which was subsequently leased back to Air Selangor.

This article first appeared in Focus Malaysia Issue 253.