GEORGE TOWN: The Penang government has agreed to the water restructuring agreement with the federal government in exchange for a complete restructuring of outstanding federal loans of RM655.24 million owed by Penang, said Chief Minister Lim Guan Eng.

The exercise involves the migration of the core assets of the state-owned Perbadanan Bekalan Air Pulau Pinang (PBAPP) to Pengurusan Aset Air Bhd (PAAB), a company under the Ministry of Finance Inc.

The agreement shows that the Pakatan Rakyat state government is committed to a mature working relationship with the federal government in the national interests and for the people’s benefit, said Lim.

Under the agreement, PAAB will assume responsibility for water supply projects through the National Water Services Industry Restructuring Initiative.

Lim said the previous Barisan Nasional state government had agreed to the takeover of water supply functions now under the purview of the state government when the Water Services Industry Act 2006 (WSIA) came into force in 2007.

Under the WSIA, all water operators will be regulated and licensed by Suruhanjaya Perkhidmatan Air Negara (SPAN) which is responsible for regulating and monitoring the performance of water operators.

Lim said the Cabinet approved the restructuring and migration exercise subject to several terms and conditions:

1) The state’s outstanding loan of RM655.24 million from the federal government will be interest-free and rationalised by alienating state land-related water assets to PAAB for a period 45 years. PAAB will lease back the water assets to PBAPP for 45 years and PBAPP shall pay PAAB a yearly lease of RM 14.56 million. Upon settlement of the lease at the end of 45 years, the state land will automatically revert to the state;

2) The funding for the Mengkuang Dam expansion project of RM1.2 billion will be given as a grant by the federal government; and

3) Any revision or variation in water tariffs must obtain the approval and consent of the Penang government.

Lim said the terms and conditions were an improvement on the previous terms as the state’s outstanding loan of RM655.24 million was to have been charged an interest rate of 3%. PAAB will also provide funding at the lowest market rates available to PBAPP for new and upgrading water infrastructure projects in Penang.

“The RM1.2 billion has also been converted to a grant instead of an interest-free loan that must be repaid by the state government, and the state government retains control over the rate of water tariffs so that the people of Penang decide and not the federal government,” Lim said in a statement.

He said the main benefits of the restructuring exercise are that it will relieve the state of the heavy financial burden to develop and upgrade water supply assets and enable PBAPP to focus solely on providing water treatment and distribution services and concentrate on achieving operational efficiencies, good quality water and services and work towards full cost recovery and financial independence in the long term.

The Mengkuang Dam expansion project will increase the dam’s capacity from 23 million cu m to 78 million cu m and meet the state’s water needs until 2020.

He said that without the restructuring, the state government would have required large capital expenditure for the water supply systems. The restructuring needed to be implemented to ensure sustainable operations and distribution of water supply.

“Penang shall depend on the promise of the federal government that both the state and PBAPP will not have to depend on funding and loans from financial institutions in the years to come with this restructuring exercise,” he said.


This article appeared in The Edge Financial Daily, June 2, 2011.