At one time you were advocating going into developed countries. Is going into Indonesia, an emerging economy, a shift from or expansion of this strategy?
Regulated assets, that is, utilities, have a few features that I like. One is that it has long term concessions. Our investment in the transmission company, Electranet in South Australia has concession terms for 200 years. The water concession in Wessex Water is a concession in perpetuity. We are not subjected to the tyranny of quarterly results.
The second feature of the regulated asset is that the regulator is mandated by law to look after the interests of the consumer and the investor, in equal measure. I like the transparency of the system. The regulator is almost like a Supreme Court judge, you present your case, consumers present their case, he will study them, make his ruling and everyone follows thereafter.
The third feature of a regulated asset is that there is transparent compensation and punishment features. You can lose your licence if you mess up in your efficiency continually in not complying with the high standards set by the regulator. While the concession is in perpetuity, the regulator can change the ownership if you are persistently delinquent in meeting standards. I like this, it keeps water concession owners on their toes.
I hope and pray the Malaysian government will introduce some of these features. To me, it is both transparent and efficient. In Malaysia there are constant complaints in the press, so-called voices of protest, but it's ephemeral. There should be a "water voice" – not just the press, but a structured body to deal with water quality issues, customer complaints and fair tariffs.
There must also be a regulator independent of the government although the Government will determine upfront their political agenda.
If we follow this system, I think Malaysians can solve all their water and sewage problems overnight. In 1989, before the privatisation of water and sewage services in England, England was facing the same situation as Malaysia. In the Wessex area, for example, most of the rivers were open sewers like our Klang River today. When they were privatised and the regulator in place, the private sector has invested more than £50 billion. You're talking about RM350 billion funded totally by the private sector.
Along the way, new financial instruments were born like index-linked bonds. Financial innovation was unleashed onto the capital markets. Malaysian capital markets can similarly be enhanced with a whole plethora of financial instruments and in the process produce a few world-class water companies for our EPF and other global players to invest.
I've always lamented that if we want people to come back to this country, we've got to be able to hire more sophisticated people who are experienced in this area. How are we going to get Malaysian ‘brains’ in London and New York to return, those who know how to calculate WACC [weighted average cost of capital] and all these things, and know how to price index-linked bonds and also know how to put deals like that together.
We invented the first 15-year bond, right? But don't just stop there. Why not 25-year or 30-year bonds? You need long-term projects to have 30-year bonds. Water projects and railway projects are tailor made for them.
Do you think there's appetite in the market for these?
Absolutely. There's a huge appetite. Today, EPF [Employees Provident Fund] has RM1 billion a month coming into the market looking for investments. The private insurance industries, I hear, is RM1.2 billion. They are looking for long-term investments. They would love these bonds as proven in the UK case.
It also depends on the project, if you have a transparent regulatory framework, I guarantee you not just locals but the foreigners will snap up these bonds.
For you, is there a difference between investing in a regulated asset in a developed country, and now moving into regulated assets in developing countries?
There are not much quality regulatory framework in developing countries therefore it is difficult to find regulated infrastructure assets, it’s quite a struggle.
But you are still comfortable going to Indonesia even though the regulatory framework there is not all there?
To a certain extent, the PPA [power purchasing agreement] is regulated. It's not a merchant plant. In the US, people are beginning to realise that you cannot trust the private sector to price utilities in an unbridled fashion.
Utilities – water, gas, power, sewage – must be regulated. And they must be regulated transparently with a regulator that is similar to the UK model. I have mentioned previously why we welcome the model.
And there's no need to reinvent the wheel. The UK has done it. We can modify the model for Malaysia. In the UK, under their human rights laws, we cannot turn off the water even if the consumers don't pay. But the regulator will compensate you when you make your case. So you are assured of cash flow. These are the nuts and bolts of the business, but it's very fair and transparent.
So, in terms of electricity in Indonesia, you are happy with the PPA. What about other utilities?
Can I participate in water business in Indonesia? In its present state, I cannot. So I would advocate the same solution in Indonesia regarding the water regulatory framework. Let’s study it and debate it publicly. There are many models; at the end of the day, it's up to the business people and the consumers and the government. If we have tried and failed in many privatisation models, why not try a new one that has proven to work?
For example, how can water be decoupled from sewage? They should go together.
I would advocate that as a consumer, I have a vested interest to demand quality utility services at the right price. I'm very unhappy with the level of services today. But as a practitioner, an investor, I have vested interests too to see Malaysians benefit from our experience in Wessex.
There is plenty of speculation that YTL would be a major player in the water privatisation projects. Are you going to wait until the regulatory infrastructure is in place before you dive in?
If the regulatory framework is transparent we will certainly bid. Why should it be just YTL, anybody can bid for it. The Robert Kuok group can bid for it, Ananda's (Krishnan) group can bid for it. Why not?
So, you're preparing yourself to bid for some of these water projects?
We've always been prepared because we're looking for regulated assets all over the world. But it doesn't mean we're going to get it. But I do welcome a transparent environment, where bids are advertised in the press, people will know how many bidders there are and also their experience and credentials, and the winning bids are announced promptly. That's wonderful for the country isn't it, to have that? Why should we always have a cloak-and-dagger routine about who's going to get the contract? Some people say I am going to be advantaged if the industry is regulated in this manner. I have no special advantage if the industry is regulated in this manner.
Indonesia is exactly doing this at the summit. It has 37 projects, all listed out for the world to bid. You're talking about transparency. Why can't we do that? But will I win it? I'm not sure, it depends on the quality of the assets and on other competitors’ bids. You never really know.
At the end of the day, it favours the consumers. They would have a transparent and permanent water voice.