PENGURUSAN ASET AIR BERHAD(PAAB)

BRIEFING TO ANALYSTS

24 APRIL 2008

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1. Overview of Malaysia’s Water Services Industry

2. Water Services Industry Restructuring Initiative

3. PAAB’s Role

4. PAAB’s Key Focus Areas

5. PAAB’s Progress

6. Conclusions

7. Q&A

AgendaAgenda

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OVERVIEW OF MALAYSIA’S OVERVIEW OF MALAYSIA’S WATER SERVICES INDUSTRYWATER SERVICES INDUSTRY

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Water Services Industry Pre-RestructuringWater Services Industry Pre-Restructuring

Pre-restructuring

Water Operators Mix of state water departments, corporatized water boards and privatized concessionaire

Sewerage Operators One Government-owned operator

Capex Investment Government loans & Commercial loans (Johor &Selangor)

Tariff Lower than full cost recovery tariff

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• Perlis • Pahang

• Negeri Sembilan

• Kedah

•Labuan

• Perak • Terengganu

•Melaka

• Penang

•Selangor

• Johor

• Kelantan

Water Operators In MalaysiaWater Operators In Malaysia

Division of Public Works Department

Waterworks

Department

Water

Board

Corporatized

Bodies

Privatized

Bodies

IssuesIssues The water services industry is fragmented and was not

uniformly regulated

The respective States in Malaysia was responsible for their water supply services

State Government could not afford the increasing costs leading to:

• poor maintenance • difficulty in covering cost of services• high NRW• poor services to end-users

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Water Services Industry RestructuringWater Services Industry Restructuring

As at end-2007, State Governments owed Federal Government about RM7.6bil for water loan

In early 2003, the Federal Government began the restructuring process for the Water Services Industry to

• create a more effective and efficient Water Services Industry• ensure sustainability of water supply in the country• ensure water services provider achieve full cost recovery

over the long term

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Full-Cost Recovery ModelFull-Cost Recovery Model

Current Future

Long-term goal

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WATERWATER SERVICES INDUSTRY SERVICES INDUSTRY RESTRUCTURING INITIATIVESRESTRUCTURING INITIATIVES

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Key MilestonesKey Milestones

Amendment to theFederal Constitution

Passing of the Water Services Industry Act and National Water Services

Commission Act

Establishment of PAAB

Establishment of SPAN

Approval of Framework for Water Services Industry

Restructuring

Milestone

Feb 2005

May 2006

Jun 2006

Apr 2007

Aug 2007

ImplicationsWater services transferred to concurrent list, making water services a shared responsibility between State and Federal

Water Asset Management Company (WAMCO) established to assume the responsibility as a Facilities Licensee.

Legislation enabling the reform of the water services industry and introduction of uniform regulations

Regulator established to license, benchmark and regulate water operators. Also an economic regulator to set water tariffs.

Federal Government approval of the framework for PAAB to implement the national water services industry restructuring initiative.

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Corporatisation of State Water Supply Authorities to improve efficiency

Performance of water operators to be monitored through KPIs

Setting of tariff based on uniform principles and procedures

No new water services concessions

Cessation of provision of Federal Government soft loans to State Governments for water infrastructure development.

Separation of responsibility between water operators and water asset owner

All water operators and water asset owner are regulated by SPAN through the new licensing framework

KeyKey Changes Under Water Services Changes Under Water Services Industry Restructuring Industry Restructuring

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Framework for Water Services Industry Framework for Water Services Industry RestructuringRestructuring

Federal Government

SPANPAAB

(Facilities Licensee)

WaterOperators(Service

Licensee)

State Government

Water Policy Framework √

Ownership of Water Assets √

Ownership of Water Operators √

OPEX √

CAPEX √

Tariff & Setting Regulations √

Protection of Water Resources √

SPAN Regulator

SPAN Regulator

PAABWater asset owner & developer

PAABWater asset owner & developer

WATER OPERATORSOperation & maintenance

WATER OPERATORSOperation & maintenance

CONSUMERSCONSUMERS

•Regulate•Licensing

Lease water assets

Lease payments

Supply of water

Separation of RolesSeparation of Roles

•Regulate

MINISTRY OF ENERGY, WATER AND

COMMUNICATION

MINISTRY OF ENERGY, WATER AND

COMMUNICATION

•Policy making

WATER SUPPLY SYSTEM

Under State Authority State Water Operator

State Government Asset

Water Supply Dam

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Consumers

Water Industry Before RestructuringWater Industry Before Restructuring

Under State Authority Under SPAN AuthorityState Water Operator

State Govt Asset Federal Govt Asset (PAAB)

WATER SUPPLY SYSTEM

Water Supply Dam

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Consumers

Water Industry After RestructuringWater Industry After Restructuring

PAAB’SPAAB’S ROLEROLE

PAAB’s Objectives PAAB’s Objectives

1. Develop the nation’s water infrastructure in Peninsular Malaysia and FT Labuan

2. Source and obtain competitive financing for the development of the nation’s water assets and lease such assets to water operators licensed by SPAN for operations and maintenance

3. Assist SPAN to restructure the nation’s water industry towards achieving the Government’s vision for efficient and quality water services.

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Objective 1: Developing Water InfrastructureObjective 1: Developing Water Infrastructure

PAAB takes over existing water assets from States at values to be negotiated and agreed

State water operator becomes asset-light

State water operator, licensed by SPAN, lease water assets from PAAB at pre-determined rates

PAAB responsible for future water infrastructure development in State

Creating “Asset-Light” Operators

Implication: Water operators (Service Licensees) become “asset-light” after water infrastructure transferred to PAAB (Facilities Licensee) and can focus purely on providing quality service

Surplus value, if any, is taken into consideration with settlement terms to be negotiated and agreed.

Loans owed by the State to the Federal Government shall be novated to PAAB (in consideration for the transfer of the water assets).

Federal Water Supply Loans

Surplus asset value taken into consideration and State is immediately relieved from the heavy burden of settling its Federal water supply loans.

Implication:

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Water AssetsPAAB

Surplus Asset Value

Transferred

Objective 1: Developing Water InfrastructureObjective 1: Developing Water Infrastructure

Payment for Transferred Assets

Objective 2: Source and Obtain Competitive Objective 2: Source and Obtain Competitive Financing Financing

Fed Government loan Private financing

State water operators

Private concessionaires

PAAB

Lower financing rates will ultimately translate to lower tariffs for the consumers

As a Government-owned company, PAAB can raise funds at lower interest rates i.e. lower funding costs.

With its lower funding costs, PAAB can lease water infrastructure to water operators at reasonable rates over a longer period of time.

The lower cost of obtaining new water infrastructure ensures that water tariffs remain at reasonable levels.

Water operator can then focus on operational efficiency and no longer need to worry about obtaining funding for water infrastructure.

For weaker water operators (where PAAB is actively involved in selected operational aspects e.g. finance), we also assist in driving them towards achieving financial viability.

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PAAB’s Role in Financing Water PAAB’s Role in Financing Water InfrastructureInfrastructure

Sources of Financing

• Government Aid through Grant, Free Interest loan and/or soft loan.

• Local and Overseas Commercial Bank.

• Capital market i.e. raising bonds

• Partnership schemes through PPP & PFI.

Striking balance

Low InterestLow Interest Long Repayment PeriodLong Repayment Period

Financing OptionsFinancing Options

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Objective 3: Restructuring The Water IndustryObjective 3: Restructuring The Water Industry

Restructuring templates were developed to facilitate water operators’ progression into the new industry framework and help them achieve financial viability.

The templates also serve as a reference and benchmark for PAAB to negotiate on the leasing terms

The templates have been approved by the Government for implementation

The formulation of the restructuring templates and terms of lease arrangement follows a systematic approach where water operators are classified into 4 categories based on their financial positions.

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Break-even Point

Operating Loss

Operating Profit

1. Financial Support2. Control mechanisms

1. Commercial Terms

2. Financially Independent

Category 1 Category 2 Category 3 Category 4

OPEX Deficit State owned:

Unable to pay full lease rental

State owned: Able to pay full

lease

Concessions

Objective 3: Restructuring The Water IndustryObjective 3: Restructuring The Water Industry

Categorising The Water Operators

For Category 1, where Government subsidy is required to fund OPEX deficits, for PAAB to exert some form of management control as well as revenue management to ensure that the Government’s interests are protected at all times.

For Category 2, a trustee account managed by PAAB to capture all revenues – to facilitate prudent cash management and encourage efficient allocation of limited financial resources.

For Category 3, a trustee account managed by a designated bank to be created at a bank nominated by PAAB to capture all revenues. Once monthly lease rental is fully paid, all other receipts in the trustee account shall then be for the account of the operator.

For Category 4, mechanism to be developed upon negotiation with concessionaires.

For all 4 categories – effective monitoring of financial and operational performance by SPAN through enforcement of the provisions under WSIA and the licensing regulations, supplemented by PAAB’s role as Facilities Licensee.

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Mitigating Payment DefaultMitigating Payment Default

PAAB’S KEY FOCUS AREASPAAB’S KEY FOCUS AREAS

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Key Focus AreasKey Focus Areas

1. To meet the objectives of all stakeholders: namely the Federal Government, the State Governments, water operators and financiers

2. To meet demand for quality infrastructure for lease to the water operator.

3. To source for funding at the lowest rates with terms matching life of asset.

4. To provide efficient and quality service to clients.

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Key Focus AreasKey Focus Areas

PAAB’s operations are guided by the following principles:

Transparency: • open communication with media and investing public • publication of annual report and progress report• open tenders for procurement

Accountability • publication of annual accounts• standard operating procedures/guidelines

PAAB’SPAAB’S PROGRESSPROGRESS

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Progress as at end March 2008Progress as at end March 2008

Briefing Restructuring Templates Signing of AgreementsWater Operator

State/Ministry

Restructuring Templates Developed

Preparation of Agreements

State Approval Obtained

Fed Gov Approval/Notation obtained

N. Sembilan √ √ √ √ √ √Melaka √ √ √ √ √Pahang √ √ √ √Johor √ √ √ √Perak √ √ √ √Kedah √ √ √ √Terengganu √ √ √ √P. Pinang √ √ √WP Labuan √ √ √Selangor √ √Kelantan √ √Perlis √

PAAB is the appointed agency for the development of Langat 2 treatment plant• Consultants for Langat 2 has been appointed (selection through open

tender)• Consultants currently doing detailed study and design

PAAB is also currently evaluating some water infrastructure projects in Negeri Sembilan, Melaka and Pahang (where negotiations for transfer of water assets are in advance stages)• Projects are subject to approval from SPAN

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Progress as at end March 2008Progress as at end March 2008

1. One model does not fit all - need to accommodate State’s uniqueness e.g. legal structure, financial strength, regulatory etc.

2. Weaker States will require initial financial assistance (e.g. through OPEX subsidy, moratorium on lease payments etc.)

3. Majority of water operators are willing to migrate into the new regime under WSIA.

4. All states want to be involved in the development of new assets, with preference for local contractors.

5. Majority of water operators have accepted the separation of the Service Licensee and the Facilities Licensee role.

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Key FeedbackKey Feedback

CONCLUSIONCONCLUSION

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Going ForwardGoing Forward

• Clear definition of roles of SPAN & PAAB

• Implementation of pilot restructuring

• To complete restructuring of State JBAs

• To address urgent concession issues

• To complete migration by 31 Dec 2009

• To work towards merger of water and sewerage services

Water Sector1/1/2008 1/1/2009 1/1/2010

Sewerage Sector

• To chart the future of sewerage industry

• To formulate clear policy on desludging

• To resolve land and government loan issues• To formulate clear policies on CAPEX and other

related issues

• To work towards merger of water and sewerage services

1/1/2008 1/1/2010

2010 ONWARDS

Creation of efficient and holistic water industry with clear, transparent and consistent regulations for the benefit of all consumers

Q & A