Malaysia seeks funds for water reform

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A new debt programme will provide the funds to take Malaysia’s water reform to the next level. Some states still prefer to borrow on their own. Max Borchardt reports from Kuala Lumpur.

Pengurusan Aset Air Berhad (PAAB) – the holding company set up in 2006 to manage Malaysia’s water assets – has set up a pair of new issuance vehicles to raise up to MYR20 billion ($5.9 billion) of debt.

The programmes – an Islamic medium term note facility and an Islamic commercial paper programme – are designed to provide funds to repay existing obligations and to bankroll future acquisitions. PAAB is likely to spend approximately MYR12 billion over the next two years on acquiring water assets from state water operators in Malaysia, and will have to find a further MYR58 billion in development capex over the next 30 years.

In a public statement, PAAB CEO Ahmad Faizal Abdul Rahman announced that the first issuance under the so-called Sukuk programmes will be used to refinance existing debt, which totalled MYR2.1 billion ($590 million) at the end of December 2008. Bookbuilding is scheduled to take place during the week of 19 October through CIMB Investment Bank for an initial amount of MYR2 billion across three different maturities (1, 5 and 10 years). Each tranche will benefit from top-notch credit ratings of “AAA” (long-term) and “P1” (short-term) from RAM Ratings.

While the quantity of debt that PAAB will be expected to take on as part of the reform process will initially push its gearing up substantially, the costs of acquiring water assets and developing infrastructure are expected to be recouped from lease payments paid to PAAB by operators over periods of 30 years or more (see chart). As such, the issuance of further tranches under the new debt programmes will depend on the timing of future acquisitions and capex requirements.

One of the first major outlays on the infrastructure side is expected to be the funding of the 1.13 million m3/d first phase of the Langat 2 drinking water plant, part of the Pahang-Selangor Interstate Raw Water Transfer Scheme (PSWTS). The three-year construction period is expected to commence in February 2010, and the project is expected to cost PAAB a total of MYR3 billion between 2009 and 2016.

The water reform process in Malaysia involves persuading all state and privately run water utilities to surrender their assets to a single government agency responsible for asset management (PAAB), as well as standardising water tariffs to recover costs, operating according to a strategic plan, and combining water supply and wastewater management under a single service agency.

For efficiently run water agencies, this presents the opportunity to write off debts, and to lean on the regulator, SPAN, for an excuse to raise water tariffs. More appealing still is that they will have access to loans from PAAB at competitive interest rates. Not every utility is eager to get on board, however. The Eastern Malaysian states’ utilities have declined the offer to join the reforms, although rumour has it that they now regret this decision and are trying to execute a recovery and come back into the fold.

Although good reasons prevail for the remaining water utilities to cooperate, only four of the thirteen states have taken the opportunity to sign up. As one sceptic observed, “if we all hand over all our assets and our projects to PAAB, then SPAN will have more assets and projects to manage than it is capable of handling.” This may, of course, be a reaction to requests from SPAN that all water utilities provide a detailed strategic plan, to include short- and long-term targets for service provision. The plan must be approved by SPAN before each state’s assets and liabilities are taken under the government’s wing. The strategic plans require significant detail, must be realistic, and involve the development of a full cost recovery strategy for services provided within a three-year period, as well as over a thirty-year period. In spite of this, or perhaps because of the significant long-term financial advantage, all Peninsula states have agreed that they will eventually accede to the SPAN initiative.

In addition to requiring the states to prepare strategic plans, the steps taken by SPAN include the regulation of companies and service providers permitted to undertake water sector work, and the creation of a national online register of companies and agencies with permission to work in the water sector, as well as a register of approved products that may be deployed.

For non-Malaysian companies, this represents an opportunity not to be missed. Getting registered requires an application via the SPAN website (www.span.gov.my/). Overseas companies are permitted to have up to 25% involvement in water sector work. This means that they will need either to seek partnerships with local companies, or set up a Malaysian branch of their company. * At a seminar held in Kuala Lumpur at the end of September, Dato’ Teo Yen Hua, CEO of the Malaysian National Water Commission (SPAN) told a visiting trade delegation that the government plans to upgrade its wastewater infrastructure over the next few years, but that it will be doing so through PAAB, and will no longer be directly funding states to upgrade their facilities.

Although states are encouraged to use PAAB as a source of funding, given that the agency has access to cheap money from the capital markets through bonds and bank loans, states may prefer to source their capital independently. Even though PAAB can negotiate loans at highly competitive rates, there is the sense among some states that the independence offered by seeking finance from other sources may well be worth paying slightly more for.