The MARC-1ID/AA-ID corporate debt rating assigned to Syarikat Bekalan Air Selangor Sdn Bhd (SYABAS), reflects its dominant position as the sole distributor of treated water for the states of Selangor, Wilayah Persekutuan Kuala Lumpur and Putrajaya; the Government’s support for the water privatization programme; the low risk nature of the business given the importance of treated water for daily consumption; and the growing water demand in the said territories. The rating is, however, moderated by the hefty capital expenditure to be incurred to expand water coverage in the distribution areas and to reduce the incidence of non revenue water (NRW) in the distribution area. Comfort is drawn from the support from the Government of Malaysia (GOM) to partly finance the capital expenditure programme. The GOM’s golden share in SYABAS enables the former to exercise control over certain decisions taken by SYABAS such as voluntary winding up, asset disposal or acquisition.

Under the 30-year Concession Agreement (CA) signed on 15 December 2004, apart from the supply and distribution of water, SYABAS has also undertaken to carry out all agreed Programme of Works, including the development and upgrading of distribution system, asset replacement and NRW reduction programme, to reduce NRW to 15% by the end of year 2015.

As part of the water privatization programme, the GOM shall provide financial assistance in the form of grants, support loans and subscription of preference shares in SYABAS totalling RM1.565 billion. The monetary assistance will be utilized to fund the working capital requirement of SYABAS during the initial years of operations and to finance NRW works. In return for the sole right to distribute water in the State of Selangor and the Federal Territories of Kuala Lumpur and Putrajaya, SYABAS is expected to pay to the GOM and the Selangor State Government some land and infrastructure charges for using the existing infrastructure.

Water tariffs for end-consumers under the CA will be revised every three years with the first tariff adjustment due in January 2006. The tariff formula incorporates a performance-linked adjustment to provide an incentive for SYABAS to achieve operational efficiency and successful NRW reduction to warrant an upward adjustment in tariff. SYABAS is entitled to compensation from the Selangor State Government in circumstances where the latter decides to gazette tariffs lower than the applicable agreed tariffs or delays the implementation of the agreed tariffs.

Recognizing the importance of SYABAS’ achievement of its key performance indicators for the tariff hike, the management is aggressively undertaking plans to enhance operational efficiency and reduce commercial and/or physical water loss such as campaigns to legalize illegal connections, the setting up of district metering zones for improved monitoring, etc.

Cashflows in the initial operational years are expected to be strained due to the high capital expenditure requirement. Hence, the repayments of the Financing Facilities, which shall only commence eight years after operations, are structured to provide sufficient time for SYABAS to accumulate cash. Monies in a Finance Service Reserve Account will serve as additional liquidity buffer for the repayment of the Financing Facilities.