the WSIA and RUBHD

Water Service Industry Act 2006

The Act was enforced on 1 January 2008. The enforcement of this Act is a step taken by the Federal Government to reform the water service industry in our country. (However, water service industry of Sabah & Sarawak are not included in the plan).

Two new bodies have been formed in this restructuring program, namely SPAN (Suruhanjaya Perkhidmatan Air Negara) and PAAB (Pengurusan Aset Air Bhd).

This program has very important effect on the industry. Some of them are:

• The Federal Government takes over control and regulation of water supply and sewerage services from States.
• All existing water supply services run by State Governments will be corporatised.
• A national Water Services Commission, SPAN was be set up to regulate the water services industry.
• a Water Assets Management Company (the PAAB) was formed to:
• Take over State Water existing assets and Federal loan liabilities
• Fund and develop water supply infrastructure
• Leased back to water service providers existing & new assets.

There will be no more new privatised concessions after WSIA. New operators will be granted licenses by SPAN. Unlike the long-term concession agreements, the licenses are renewable upon application and approval of SPAN.

(for more information, please visit http://www.span.gov.my/)

For those existing concessionaires, they may have an option to retain their existing concessions or to migrate to the new license.

(According to the announcement by RUBHD on November 2007, its subsidiary SAJH is actively assesing the migration option.)

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The possible impact on RUBHD, should it chooses to migrate into the new liscense.

After the migration, SAJH may loss the advantages of being a concessionaire. Under the new scheme, the license is renewable subjected to the approval of SPAN. While the possibility is small, the water supply business of SAJH in Johor may be taken over by some other parties. Thus, RUBHD may face some competitions from the other companies, e.g. Syabas and Puncak Niaga.

On the other hand, the operational cost may increase due to the leasing fees of the water assets from PAAB. And, unlike the privatization cocession, tariff reviews from the new liscensees will be based on applications which need to be substantiated by each licensee. (It means there will be no more "automatic tariff increase"). These may affect the profitability and future growth of RUBHD.

These are the uncertainties that worried me last year, and stopped me from accumulating RUBHD shares. Because, the monopoly nature of its business and the scheduled tariff hike were the main reasons that made me investing in RUBHD.

However, recently I had found that there’s also some positive impacts on RUBHD if SAJH chooses to migrate into the new licensing regime.

After transferring all its assets (with the associate debts) to PAAB, SAJH will become an asset-light company, and become more concentrate on its operations. At the same time, SAJH will free itself from the commitment of huge CAPEX in the future. Thus it will not need to keep a big amount of cash in the company.

This will unlock the equity value of RUBHD and allow the company to distribute its earnings to the share holders through dividend payments. I’m confident that the future dividend yield of RUBHD will be a quite satisfactory one.

And, according to its current financial condition (cash-per-share > RM2.00), there’s a high possibility that RUBHD will declare a special dividend or capital distribution, soon after the migration.

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