PENGURUSAN ASET AIR BERHAD (PAAB) BRIEFING TO ANALYSTS 24 APRIL 2008

1. PENGURUSAN ASET AIR BERHAD (PAAB) BRIEFING TO ANALYSTS 24 APRIL 2008

2. Agenda • Overview of Malaysia’s Water Services Industry • Water Services Industry Restructuring Initiative • PAAB’s Role • PAAB’s Key Focus Areas • PAAB’s Progress • Conclusions • Q&A

3. OVERVIEW OF MALAYSIA’S WATER SERVICES INDUSTRY

4. Water Services Industry Pre-Restructuring

5. Water Operators In Malaysia Division of Public Works Department Waterworks Department Water Board Corporatized Bodies Privatized Bodies • Perlis • Pahang • Negeri Sembilan • Kedah • Labuan • Perak • Terengganu • Melaka • Penang • Selangor • Johor • Kelantan

6. Issues 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

7. Water 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

8. Full-Cost Recovery Model Long-term goal Capital expenditure Water Tariff Capital expenditure Water Tariff Operating Expenditure Operating expenditure Current Future

9. WATERSERVICES INDUSTRY RESTRUCTURING INITIATIVES

10. Key Milestones Implications Water 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. Milestone Feb 2005 May 2006 Jun 2006 Apr 2007 Aug 2007 Amendment to the Federal Constitution Establishment of PAAB Passing of the Water Services Industry Act and National Water Services Commission Act Establishment of SPAN Approval of Framework for Water Services Industry Restructuring

11. KeyChanges Under Water Services Industry Restructuring • 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

12. Framework for Water Services Industry Restructuring

13. Separation of Roles MINISTRY OF ENERGY, WATER AND COMMUNICATION • Policy making SPAN Regulator • Regulate • Licensing • Regulate Lease payments WATER OPERATORS Operation & maintenance PAAB Water asset owner & developer Lease water assets Supply of water CONSUMERS

14. Water Industry Before Restructuring WATER SUPPLY SYSTEM Under State Authority State Water Operator Water Supply Dam Consumers State Government Asset

15. Water Industry After Restructuring WATER SUPPLY SYSTEM Under SPAN Authority State Water Operator Under State Authority Water Supply Dam Consumers State Govt Asset Federal Govt Asset (PAAB)

16. PAAB’SROLE

17. PAAB’s Objectives • Develop the nation’s water infrastructure in Peninsular Malaysia and FT Labuan • 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 • Assist SPAN to restructure the nation’s water industry towards achieving the Government’s vision for efficient and quality water services.

18. Objective 1: Developing Water Infrastructure Creating “Asset-Light” Operators PAAB takes over existing water assets from States at values to be negotiated and agreed State water operator becomes asset-light PAAB responsible for future water infrastructure development in State State water operator, licensed by SPAN, lease water assets from PAAB at pre-determined rates Implication: Water operators (Service Licensees) become “asset-light” after water infrastructure transferred to PAAB (Facilities Licensee) and can focus purely on providing quality service

19. Objective 1: Developing Water Infrastructure Payment for Transferred Assets Transferred PAAB Water Assets Loans owed by the State to the Federal Government shall be novated to PAAB (in consideration for the transfer of the water assets). Surplus value, if any, is taken into consideration with settlement terms to be negotiated and agreed. Surplus Asset Value Federal Water Supply Loans Implication: Surplus asset value taken into consideration and State is immediately relieved from the heavy burden of settling its Federal water supply loans.

20. Objective 2: Source and Obtain Competitive Financing PAAB Fed Government loan Private financing State water operators Private concessionaires Lower financing rates will ultimately translate to lower tariffs for the consumers

21. PAAB’s Role in Financing Water Infrastructure • 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.

22. 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 Financing Options Low Interest Long Repayment Period 22

23. Objective 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.

24. Objective 3: Restructuring The Water Industry Categorising The Water Operators Operating Loss Break-even Point Operating Profit Category 1 Category 2 Category 3 Category 4 • Financial Support • Control mechanisms • Commercial Terms • Financially Independent 24

25. Mitigating Payment Default • 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.

26. PAAB’S KEY FOCUS AREAS

27. Key Focus Areas • To meet the objectives of all stakeholders: namely the Federal Government, the State Governments, water operators and financiers • To meet demand for quality infrastructure for lease to the water operator. • To source for funding at the lowest rates with terms matching life of asset. • To provide efficient and quality service to clients.

28. Key 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

29. PAAB’SPROGRESS

30. Progress as at end March 2008 30

31. Progress as at end March 2008 • 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 31

32. Key Feedback • One model does not fit all - need to accommodate State’s uniqueness e.g. legal structure, financial strength, regulatory etc. • Weaker States will require initial financial assistance (e.g. through OPEX subsidy, moratorium on lease payments etc.) • Majority of water operators are willing to migrate into the new regime under WSIA. • 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. 32

33. CONCLUSION

34. Going Forward Water Sector 1/1/2008 1/1/2009 1/1/2010 Sewerage Sector 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

35. Q & A