It’s a question of billing
Ten years after its deprivatisation, the statistics coming out from Indah Water Konsortium Sdn Bhd (IWK) are startling. The company with the mandate to manage and operate the national sewerage system needs between RM100 million and RM150 million a year from the government for the upkeep of the facilities.

It is still facing collection problems, particularly from domestic consumers. Of the outstanding RM750 million owed to IWK, some RM450 million is due from households, and the rest from commercial customers. The primary reason is that household billings are small and resorting to legal action to recover the amounts due is not commercially viable.

Doesn’t this ring a bell? The reason why IWK was a failed privatisation exercise in the first place was that the concessionaire could not collect the amounts owed to it.  Eventually, IWK was handed back to the government in 2000.

Now,  the management is suggesting a private finance initiative (PFI) to raise money to take care of its capital expenditure. It stresses that any proposal should not in any way require the government to fork out more money. Eventually, it hopes to reduce its reliance on government funding to keep it going. There are no prizes for guessing who will pay if the government stops funding IWK —  the bill will go to the consumers. But how is IWK going to compel consumers to pay? This is more so when sewerage services cannot be disconnected, unlike Astro, the telephone or water.

A previous proposal sought to link the IWK bill to the water bill. But that was an era when the state governments controlled the water bills while IWK was a federal initiative. Although the federal government has taken over the water assets of some states, it still does not control all of them,  so such a proposal will take a long time to materialiase.

One option may be for the government to pass legislation compelling consumers to pay IWK bills or be barred from transferring or selling their properties. But this would not really help because houses are not transacted as often as cars, for example.

So it’s back to square one for IWK. Unless it can find a solution to its collection problem, there is really no point in getting the private sector  involved. And if the private sector does get involved, there should absolutely be no government funding for IWK.

After all, the prime motivation for any PFI effort is probably to gain from any capex work related to IWK. But this should not be at the expense of taxpayers.

Have special fund for subsidy savings
Malaysians had better get used to higher prices of fuel and sugar as the government walks the talk on cutting down on subsidies. But as the rakyat helps the government save, in return, they wish to see the savings being spent prudently and on  the right things.

In less than five months, the government has unveiled another round of subsidy cuts. It announced last Friday an increase of five sen per litre for RON95 petrol and diesel, and five sen and 20 sen per kg respectively for liquefied petroleum gas (LPG) and sugar.

This was on top of a previous increase on July 16 of five sen per litre for RON95 petrol and diesel, and 10 sen and 25 sen for LPG and sugar, respectively.

After the latest increase, prices of RON95 and diesel will rise to RM1.90 and RM1.80 per litre, and LPG and sugar to RM1.90 and RM2.10 per kg, respectively.

According to previous reports, the July 16 subsidy cuts would save about about RM780 million. With the latest cuts, the government gets to save another RM1.18 billion.

While not many would quibble over the reduction in subsidies, it is not clear yet how the government works out its pricing mechanism and how it spends the savings.

The government has repeatedly given the assurance that savings from the subsidy cuts would be ploughed back to improve public infrastructure and provide direct assistance to the poor. But how this actually works is not transparent, especially with the savings being lumped together with other accounts.

Perhaps it is time to channel the savings into a special fund or for the government to come out with regular updates on where the money has gone.

The PPB-Wilmar deal
When PPB Group Bhd privatised FFM Bhd in 2004, the latter was valued at some RM1.78 billion. Now, after six years, Wilmar International Ltd — via its wholly-owned subsidiary PGEO Group Sdn Bhd — is acquiring a 20% stake in FFM for RM378 million.

Which means this proposed transaction values the entire FFM at RM1.89 billion, which is not far from the value of the company when it was privatised in 2004. But is that really the case?

Not really, if one were to base the deal on a price-to-book valuation. When FFM was taken private, it was done at a price-to-book ratio of 1.14 times. The net tangible assets of FFM were about RM1.55 billion then.

Wilmar’s acquisition of a stake in FFM is being done at a price-to-book valuation of 1.46 times — almost 28% higher. FFM’s net assets now stand at RM1.29 billion, which are lower than when it was privatised. This does not take into account the six years of profits that PPB shareholders enjoyed.

In return for disposing of a 20% stake, PPB via FFM will have the option of buying into selected subsidiaries of Wilmar in China — a move that gives it a break in the vast China market.

The first part of the equation — which is Wilmar buying a 20% stake in FFM — favours PPB shareholders. Whether they get a better deal will depend on the pricing of FFM’s acquisition of stakes in Wilmar’s China subsidiaries.

This article appeared in Corporate page of The Edge Malaysia, Issue 835, Dec 6-12, 2010