LIA4004 ALTERNATIVE DISPUTE RESOLUTION

WEEK 14: ROLE PLAY 4

OUR FINALE SCENE

MS SHER RIN’S INSTRUCTIONS

1. Tutorial 7 will be your final role play in Week 14. It is a single role play scenario involving the
whole class.
2. Please decide on your roles.
a. Total 16 roles: 13 parties + 3 mediators -
(i) Mediators (x3) - Mukhlis, Reuben, Ji Shan
(ii) Directors of Acqua International Group (x2) - Meor & Jane
(iii) Directors of Pacific Acqua (x2) - Muhaizam & Aiman
(iv) Directors of Tak Foy (x2) - Aishah & Izzah
(v) Directors of HCL (x2) - Sarannya & Zhee Qi
(vi) Agent - Tharwan
(vii) Municipal officers from contract and financing division (x2) - Fairuz & Dell
(viii) Finance Ministry officers (x2) - Shuqri & Fatin
3. The role play will be for 50 mins.

CONTEXT

This role play is the final role play session. Therefore the whole class will be involved. And it will be
for 50 minutes. It will be a full blown session encompassing all aspects of negotiation, mediation,
listening skills and creative solutions. Let’s go!

FACTS OF THE PROBLEM

Acqua International (AQ) is a Europe-based multinational company that has interests in water and
other environment-related businesses. In China, the company has joint ventures with medium-size
and large municipalities to produce and sell potable water. To increase its investments in China, the
AQ Group arranged, through its local subsidiary Pacific Acqua International (PAQ), to enter into a
strategic alliance with Tak Foy and Co., a Chinese conglomerate with strong roots in China and Hong
Kong in the service industry (mainly leisure-related). The venture is called Haoyu China Limited
(HCL).

These negotiations concerned an urban water supply system providing potable water to around one
million people. Through an agent in the province, the China subsidiary PAQ had secured a sales
negotiation contract to construct a water treatment plant for the system. Some time after the
completion and commissioning of the plant, PAQ learned from the same agent that the municipality
was short of funds for some urgent development projects. One of its options was selling off or
privatise the municipality’s water supply facilities. The selling price value of the facilities was set by
the municipality, and bidders were sought from within its jurisdiction; there would be no recourse to
the central government for selling approval.

HCL, located in the municipality, submitted a purchasing proposal to buy the facilities, to set up a joint
venture with the municipality’s water company on a 3:1 ratio, and to operate the facilities on a twenty
five-year contract.

ISSUES

The unresolved issues when bids were called for were:

● Issue 1: Initial water charges. The only things that had been agreed on up to this date were
how much would be invested in the facilities and spent on improvements. (reuben’s group)
○ [HCL & Municipal]; [HCL= PAQ + Tak Foy]; [PAQ= subsidiary of AQ], Finance
Ministry Officers, Agent
○ HCL want high charge to earn money, Municipal want low charge for its people
○ PAQ/HCL has higher bargaining power as municipality is short of funds for some
urgent development projects
○ If rate is too high, municipal will reject proposal, choose another bidder who can
accommodate their needs
○ It was only then that PAQ—and through it HCL—was informed by the local PAQ agent
(who was supposedly very close to high levels in the municipality) that other
international competitors had also visited the municipality in connection with the same
selling project - highly likely there might be a competition among the bidders to
○ ZOPA- we find a common ground interest ,BATNA
○ Extra notes: Water issues in China
■ As you may know, China has amazing growth regarding its economy.
However, this rapid development is at the cost of the environment.
■ The country suffers from pollution, contaminated land, uninhabitable areas,
desertification, and several water issues. About one-third of lakes and rivers in
China are polluted to the level that their use for human consumption is not
possible
■ China has 20% of the world’s population but only 7% of its fresh water and a
rapidly growing middle class with water-demanding lifestyles
 ■ Nowadays (2020) China's water shortage has become a very serious
problem. The available amount of water in China reaches only a quarter of the
global average.
○ Points to research/ clarify: (in China)
■ Law on the water rates charged; is Private company allowed to set their own
rates?
■ Are there different rates for different users: leisure; domestic;
● yes
■ What are the common rates for water supply?
● https://www.xyj321.com/zx/100450.html
●

a. Water supply for Domestic use: 2.8 yuan/m3

b. Water supply for Industrial & commercial use: 3.9 yuan/m3
● Total rate of water usage in China
a. Water supply for domestic use: 86.31 billion m3
b. Water supply for industrial & commercial use: 103.04 billion
m3
■ 全国用水总量 5812.9 亿 m3。其中，生活用水 863.1 亿 m3，占用水总
量的 14.9%；工业用水 1030.4 亿 m3，占用水总量的 17.7%；农业用
水 3612.4 亿 m3，占用水总量的 62.1%；人工生态环境补水 307.0 亿
m3，占用水总量的 5.3%。地表水源供水量 4792.3 亿 m3，占供水总
量的 82.4%；地下水源供水量 892.5 亿 m3，占供水总量的 15.4%；其
他水源供水量 128.1 亿 m3，占供水总量的 2.2%
○ Interest of each Parties (in term of the usage of water)
■ Finance Ministry officers:
 ● Ensure the parties comply with national policy on water rate
● Subsidize Municipal's water company
■ PAQ wants the rate to increase later on. Wants
■ HCL: probably for use of leisure-related business/ industrial purpose (since
that is what Tak Foy does)
■ Municipal: domestic use (but since is government, maybe want lower price as
compared to AQ)
■ Agent: to secure the sales contract between HCL & the municipality’s water
company.
○ Options Available (which Parties choose which Options) [based on the interests
above, maybe there will be 3 options proposed by the parties]
■ Municipal: 2.8 yuan
■ HCL: Higher than 2.8 yuan (so: xx yuan)
○ Compromise
■ 2 different rates:
● Domestic use (low rate)
● Industrial use (high rate)

● Issue 2: The demand for water. To make the business financially viable, a take-or-pay selling
mechanism would have to be introduced, and local wells would have to be closed (Aiman’s
group)
○ Municipal Officers want a take-or-pay selling mechanism
○ HCL wants to close local wells to be the only one supplying water and shut off other
water supplies
○ Take or Pay Selling Mechanism: One party has the obligation of either taking delivery
of goods or paying a specified amount.
■ Benefit both the buyer and the seller by sharing risk, and can benefit society
by facilitating trade and reducing transaction
costs.https://www.xyj321.com/zx/100450.html
■ The purchasing company takes a stipulated supply of goods from the supplier
by a certain date, at the risk of paying a fine to the supplier if they don’t.
○ Municipalities are generally optimistic about development and, therefore, ready to
accept or propose relatively high demand levels where the take-or-pay selling
mechanism is applied. Moreover, PAQ believed the municipality would not be in the
 joint venture if it were not ready to enforce the selling laws concerning wells. So
consensus on water demand was reached quite quickly in their selling negotiation
agreement. (https://www.negotiations.com/case/selling-water-china/)

● Issue 3: The formula to calculate annual water selling tariff revisions. Devaluation of the yuan
would affect foreign exchange sales–based investment. (Private caucus) (Zhee Qi’s group)
○ Finance Ministry Officers, Municipal officers, HCL (TF + PAQ), AQ
○ Initial Stances
■ Both parties (Municipal Officers & HCL) agreed to an inflation-adjusted tariff
■ The provincial government representative (Finance Ministry) insisted that
foreign exchange should represent less than five percent of investment and be
used for no more than ten years.
● Why?
○ Conflict: Deciding water tariff calculation formula.
■ Potential Formula: Dispute and discussion will be parties repping their
interest in the calculations of cost, debate on factors on the calculation.

○
■ Municipal’s Existing Formula: The formula does not factor in cost for
retirement of fixed assets, depreciation cost.
● Further, the capital cost is a lot lesser because the facility was not
driven on profit.
■ AQ & HCL (TF + PAQ) Demands: Wants the facility to run with a larger profit
than before.
■ Tak Foy’s Suggestion: Cost for retirement of fixed assets and depreciation
cost to be added into the formula.
■ AQ and PAQ’s Interest: Profit.
■ Agreed solution to be proposed during the joint-session:
 ○ Conflict: Deciding the duration between each revision.
■ Foreign Exchange (forex or FX) is the trading of one currency for another. For
example, one can swap the U.S. dollar for the euro.
● Foreign exchange transactions can take place on the foreign
exchange market, also known as the forex market.
■ HCL’s Concern: Devaluation of the yuan would affect foreign exchange
sales–based investment – Factor to be considered when deciding on the
duration for every revision.
■ Municipal: Insists that the devaluation is temporary and will stabilize in due
time. Therefore, revisions can be done more sparingly – Supported by the
Finance Ministry.
■ Agreed solution to be proposed during the joint-session:

● Issue 4: The new company’s structure. Who would be the shareholders, board members, and
those responsible for its day-to-day management? (Private caucus) = (Fairuz & Co)
○ HCL, PAQ, Tak Foy, Municipal Officers
○ One of its options was selling off or privatise the municipality’s water supply facilities .
The selling price value of the facilities was set by the municipality, and bidders were
sought from within its jurisdiction; there would be no recourse to the central
government for selling approval.
○ HCL, located in the municipality, submitted a purchasing proposal to buy the facilities,
to set up a joint venture with the municipality’s water company on a 3:1 ratio, and to
operate the facilities on a twenty five-year contract.
○ Article 6 on Laws of Chinese Foreign Joint Venture: The board of directors shall have
a chairman, whose office shall be assumed by the Chinese joint venture(s), and one
or two vice-chairmen, whose office(s) shall be assumed by the foreign joint venture(s).
The offices of president and vice-president(s) (or factory manager and deputy
manager(s)) shall be assumed by the respective parties to the venture. (IDK
WHETHER ITS RELEVANT OR NOT)
○ Article 4 The proportion of the investment contributed by the foreign joint venturer(s)
shall generally not be less than 25 per cent of the registered capital of a joint venture.
■ 3:1 ratio
○ Post JV - have to implement 3:1 ratio
■ Structure
 ● Limited Liability Company (LLC) = Special Purpose Vehicle (SPV)
a. The Joint Venture Company is a separate legal entity
independent of the Joint Venture Parties in which it can own its
own assets and can contract with 3rd parties in its own right
■ Shareholders
● LLC
a. Ownership
■ Since HCL is offering a 3:1 ratio in the JV, HCL will
own 75% of the shares in the JV while the municipality
water company will own 25% of the shares in JV.
b. Limited Liability
■ Since its a 3:1 ratio, HCL’s liability will be limited to the
amount it has contributed to the JV’s capital (75%
shares) - provided that the capital is paid up in full.
■ Municipality’s water company will be limited to only the
other 25%.
c. Allocation of profits and losses
■ HCL will gain more profits compared to Municipality
water supply by 3:1 ratio
■ HCL will also have to bare more losses compared to
Municipality water supply by 3:1 ratio
■ Higher opportunity and risk for HCL
■ Lower opportunity and risk for Municipality water
company
d. Duties
■ Appoint a Chairman for the Board of Directors
■ Parties share control over the board but HCL has more
influence compared to Municipality’s water company
■ HCL has more influence in the decision making as it
holds a higher percentage of shares in the JV
■ Board Members
● 6 Directors from HCL (75% shares)
a. 3 from PAQ
b. 3 from Tak Foy and Co.
● 2 Directors from Municipality’s Water Company (25% shares)
■ Day-to-day Management
 ● LLC
a. Directors undertake the day-to-day management

○ Since the ownership of the facilities will shift to HCL, a 3:1 ratio of the JV with the
Municipality’s water company is more than reasonable. HCL is paying money to the
Municipality for the facilities and will be contributing 3 times the amount that the
Municipality will be contributing for the JV. Furthermore, HCL is providing the product
while the Municipality is providing the distribution channel.
○ The municipal might;
■ not prefer 3:1 ratio (75% shares for the water facilities
● they have less profit & control in the JV
● They might propose a 49% shares for HCL
■ want more of their members on the board of directors
● on the basis that they have more experience in dealing with water
supply matters in that area.

NOTES:
● HCL - joint venture consisting PAQ (AQ’s subsidiary) and Tak Foy Co. submitted a proposal
to buy the facilities and set-up a joint venture with the municipality on a 3:1 ratio for a contract
of 25 years.
● PAQ, through an agent - secured a sales negotiation contract but discovered through the
agent the municipality is short on funds for some other development projects. Choice to sell or
privatise the facilities to gain funds.
● Municipality - short on fundings to develop the project. Can control the price to sell, finding
bidders within the municipality and no central government involvement.

ROLES1
● Mediators (x3) – Reuben, Ji Shan, Mukhlis
● Directors of Acqua International Group (x2) – 2 peeps Meor & Jane
● Directors of Pacific Acqua (x2) – 2 peeps Muhaizam & Aiman
● Directors of Tak Foy (x2) – 2 peeps Aishah & Izzah
1 Same as above.
 ● Directors of HCL (x2) – 2 peeps Sarannya & Zhee Qi
● Agent – 1 peep Tharwan
● Municipal officers from contract and financing division (x2) – 2 peeps Fairuz & Dell
● Finance Ministry officers (x2) – 2 peeps Shuqri & Fatin

SCRIPT – Deadline: TBC | Trial Run (If necessary): TBC

Materials should be done by 23 Jan night, timings to be discussed tmrw on whatsapp. Script
after timing is decided.

FLOW – To be discussed during the 22nd January Meeting @ 8.00PM.

Mediator Good afternoon everyone and welcome to today’s mediation. I am Ji Shan, and
(Ji Shan) together with me are Mr Mukhlis, and Mr Reuben. The 3 of us are certified
mediators trained to assist you all in resolving disputes such as the one before
us today.

First of all, can I have everyone on this table to briefly introduce themselves??

AQ Good afternoon, Mr.Ji Shan, Mr. Mukhlis and Mr Reuben.Im Jane and together
(Jane) with me is Mr. Meor. We are the Directors of Acqua International Group, a
Europe-based multinational company that has interests in water and other
environment-related businesses. In China, we have joint ventures with
medium-size and large municipalities to produce and sell potable water.

PAQ Hi everyone, my name is Muhaizam, and together with me is Ms Aiman. We

(Muhaizam) are the Directors of Pacific Acqua, the local subsidiary of Acqua International in
China. Together with Tak Foy, we have formed a joint venture named Haoyu
China Limited.

Tak Foy Good afternoon, everyone. I am Aishah, and together with me is Ms Izzah. We
(Aishah) are here in the capacity of the Directors of Tak Foy Co., a Chinese
conglomerate with strong roots in China and Hong Kong in the service industry,
mainly leisure-related services. Yes, as mentioned by Ms. Muhaizam, we have
formed a joint venture named Haoyu China Limited with Pacific Acqua.

HCL Good afternoon, I’m Sarannya and together with me Miss Zhee Qi. We are the
(Sarannya) Directors of Haoyu China Limited, the joint venture introduced above. We
express our warmest greetings to everyone here today.

Agent Greetings, my name is Tharwan. I am an agent who has been assisting PAQ in
(Tharwan) securing a sales negotiation contract to construct a water treatment plant for
the system.

Municipal Hi everyone, I am Fairuz, and together with me is Ms. Dell. We are the
Officers municipal officers from the contract and financing division.
(Fairuz)

Finance Good afternoon, my name is Shuqri and together with me is Ms Fatin. Both of
Ministry us are Finance Ministry officers.
(Shuqri)

Mediator Thank you for the introduction. Before we start our session, I will brief everyone
(Ji Shan) on the process on how the mediation will be conducted and also some of the
ground rules of mediation.

The purpose of mediation is to solve the dispute between you all. Our role as a
mediator in this session is merely to facilitate the discussion and we will not
make or impose decisions for you.

Another point to bear in mind is that everything said in this session will be kept
private and confidential between us, and will not be disclosed to anyone
beyond this mediation. Hence, each of you are encouraged to express your
feelings and any concerns.

Mediator Throughout the mediation, parties are encouraged to speak and address each
(Reuben) other with courtesy. So kindly mute your mic when you’re not speaking. Do not
interrupt when the other party is speaking and please avoid demeaning,
blaming, or attacking each other. We’re all here to reach a fair solution.

To kickstart our session, perhaps we can have Ms Sarannya, rep from HCL to
briefly explain what brings us to the mediation today.

HCL Thanks Mr. Reuben and Mr Jishan

(Sarannya)
As you may know, our company HCL is a result of a joint venture between
PAQ and Tak Foy and Co. But then, PAQ found out that the municipality was
short of funds for some urgent development projects. One of the options was
selling off or privatising the municipality’s water supply facilities.

During the bidding, we came to 4 unresolved issues that concern our presence
today. The first issue is on initial water charges. The only things that had been
agreed on up to this date were how much would be invested in the facilities
and spent on improvements.

The second issue that needs to be addressed is the demand for water.
 HCL Yes, to continue with what Ms Sarranya has said, Issue 3 is with regards to
(Zhee Qi) the formula to calculate annual water selling tariff and lastly for issue 4, the
new company’s structure.

These are the 4 unresolved issues that we are facing now. We truly hope that
today’s mediation will be able to resolve these issues so that this venture can
be executed as soon as possible.

Mediator Thank you for the detailed explanation. I can see that there are 4 issues we
(Mukhlis) need to deal with. Before we proceed with the first issue, may I know if
everyone is on the same page as to what has happened as well as the issues
we are going to discuss today?

All Yes.

First Issue: Initial Water Charges

Our Flow:

-Municipal propose a low water rates: eg, 2.8 yuan

-HCL (representing the rest) propose a higher water rates; eg, 4 yuan

Caucus:

-Municipal discloses that low rates because want to protect its people

-HCL discloses that high rate because want profit

Mutual Agreement

-2 different rates:

-Domestic use (follow Municipal's lower rate: can protect its people)

-Industrial/ Leisure use (follow HCL's higher rate: can gain profit)

-Both parties' interests achieved

(all script below are subject to change; the scripts just lay down the basic point to include)
Mediator Great, we will now start with the first issue which is the initial water charges.
(Mukhlis) Can we have the municipal officers to state the rate they would like to propose?

Municipal For your information, as of the year 2021, the average rate of water charges in
(Dell) China is 2.8 yuan per litre. Therefore, we would like to propose the same rate of
water charges at 2.8 yuan per litre.

HCL Thanks for your proposal, but this is unacceptable. We understand where you
(ZheeQi) are coming from but we must be frank with you that we are not doing charity
here, we are a professional business. We hope to guarantee that our business
is profitable in the long run. With regards to your proposed water rate of 2.8
yuan per litre, all of us including Pacific Acqua, Acqua International and Tak
Foy do not think that it is reasonable at all. Hence, we would like to propose the
water rate to be at least 5 yuan per litre.

AQ I agree with Ms. Zhee Qi. The water rate of 2.8 yuan per litre, which only
(Meor) amounts to 0.39 Euro per litre is way too low! We show our sincerity to
purchase the municipal water facilities and to collaborate with the municipality
to set up a joint venture, yet you treat us like fools!

PAQ The PAQ holds the same view as AQ. 2.8 yuan per litre is too low! We don’t
(Aiman) see any possible gain of profits by imposing this water rate in China. Since we
are interested in operating the facilities on a 25 years contract, we cannot
afford such a low water rate as it would definitely cause financial loss in the
long run.

TF I agree with PAQ. I don’t think 2.8 yuan is actually the average rate of water
(Izzah) charges in China! We would not settle with this water rate!

Municipal This is nonsense!! 5 yuan per litre is ridiculous. Nobody can pay for that! We
(Fairuz) wouldn’t agree with 5 yuan per litre. You must know that we, as municipal
officers, are obliged to protect our people. So the best we can offer is 2.8 yuan
per litre. Take it or leave it!

If you insist on 5 yuan per litre, then I have no choice but to find another bidder.

Mediator Pls stay calm everyone. Thank you for expressing your interests and concerns
(Ji Shan) in detail. Municipal officers would like to offer 2.8 yuan per litre whereas the rest
insist on 5 yuan per litre. I understand that everyone here wants to protect their
 rightful interest.

It seems that all the parties are heated up and no discussion could be
effectively carried out, we the mediators think it will be best for us to temporarily
separate all of you into private caucuses. Parties will be separated into different
rooms shortly, thank you.

Caucus (with Municipal)

Mediator Hi Mr Fairuz and Ms Dell, we are now in the caucus where it will just be the two
(Reuben) of you and the mediators. Do you feel better now? (yes)

In this private session, everything you say is private and confidential, and will
not be revealed to any other party without your permission.

Here, we will explore your needs and interests, position and then find potential
solutions to the issue at hand. Once again, we will not impose any solutions
onto you.

So, is there anything that you want to share but didn't have the chance to in the
first joint session just now?

Municipal Those people need to understand that as municipal officers, we are responsible
(Fairuz) to our people. 2.8 yuan is the average water charge among our country and we
need this rate to protect our people. If we do not protect our people’s interest,
who else will be protecting them? Imposing a high rate as much as 5 yuan per
litre will cause a lot of hardship to our people. Those private companies are just
being selfish!

Mediator I totally understand your role as municipality to protect your people as much as
(Reuben) possible. Nevertheless, calm down and don’t let your emotions drive you. What
if we switch the position for a while, putting yourself in HCL’s position, why do
you think HCL wants to impose a higher rate?

Municipal Hmm… I understand HCL’s position as a private company, and its objective is
(Fairuz) to maximize profit. That is the reason why they intend to impose such a higher
rate.

Mediator Previously, I remembered you mentioning your agreement with HCL on how
(Mukhlis) much investment would be made for the facilities and to be spent on
improvements.

May I know how much is the amount of contribution from each party?

Municipal The total amount estimated for this project is around 480 million yuan.
(Dell) According to the purchasing proposal submitted by the HCL, they agreed to
offer 360 million yuan to buy our facilities and also to set up a joint venture with
us. Whereas the municipality is only able to contribute the amount of 120
million yuan as we are currently short of funds for some urgent development
projects.

Mediator I see. Do you think the large amount of investment contributed by HCL is one of
(Mukhlis) the factors why HCL proposes a higher rate of water charge?

Municipal Yes, I think it is normal for investors to ensure that the money for investment
(Dell) can be earned back with more interest as fast as possible. But, don’t you think
that charging 5 yuan for water is way too unreasonable? Especially to the
household who uses the water supplied only for domestic purposes.

Mediator Mediation is a compromise between parties to reach a win-win situation.

(Ji Shan)
I see that you understand the rationale of HCL imposing a higher rate, and also
your position as municipality to provide a better life for your people.

Hence, is it possible for you to come up with a solution that meets both parties’
interests, that HCL’s commercial interest and your people’s interests are
similarly protected? I believe that as municipality, you have vast experiences in
tackling such issues, right?

Municipal Hmm…ya. Maybe.., we can have different water charges for different users, for
(Fairuz) instance, a lower rate charged for domestic use of water, but a slightly higher
rate for industrial purposes.

Mediator Can you evaluate how fair or viable this solution is? How do you think HCL and
(Ji Shan) the other companies would respond to it?

Municipal Considering that the production cost for water is the same regardless of how
(Fairuz) they are used by end users, if HCL were able to charge a higher rate for
industrial purposes, I think they would be earning profits already. They might
not be excited about a lower rate charged for domestic use of water, but that’s
the only way for both of us to compromise. At least both of our interests are
addressed. It would not be difficult to have different charges for different uses
of water as there is an apparent difference between domestic and industrial
use.

Mediator Great, if you think this solution is workable for both parties, I suggest you
(Ji SHan) propose in the joint session later.
Municipal Alright, thank you.
(Fairuz, Dell)

Caucus (with HCL, AQ, etc)

Mediator Good evening everyone, we are now in a caucus. May I know if the parties are
(Mukhlis) feeling better now? (Yes)

For the private session, everything you say here will be private and confidential,
and will not be disclosed to any other party. So rest assured, you can tell me all
your concerns and opinions here.

In this process, we will work together to find potential solutions to the issue at
hand, while keeping your best interests in mind. However, I will not be the one
imposing any solutions as I am here only to assist the parties.

With that said, is there anything you want to share besides those you have
shared in the previous session?

PAQ Thank you for the assurance. I do have some things that I wish to say in
(Muhaizam) regards to our position in this issue.

To be frank, we are a profit-driven company. We must have a solid start with

higher initial water charges or we will not reap maximum profit. Also, this water
rate is still considered quite low as compared to the common rate of water
charges in European countries.

Mediator I understand that being a profit-driven company, your main objective is to

(Ji Shan) maximize your profit and that is the reason why you choose to impose 5 yuan
for the water charges.

Ms Jane, during your introduction, you mentioned that in China, you have joint
ventures with medium-size and large municipalities to produce and sell potable
water. May I know what are the water charges set by your joint ventures with
other municipalities?

AQ Yes, we do have joint ventures with medium-size and large municipalities in

(jane) China to produce and sell potable water. Most of our joint ventures agree to
have different water charges for different users. That decision was made after a
long negotiation with the municipalities.

Mediator Oh I see. Then you must have a lot of experience dealing with the
(Ji Shan) municipalities in China.

So, Ms Sarannya and Ms ZheeQi, what do you think of the water charges
 currently imposed by the AQ’s joint ventures with the municipalities?

HCL At present, we disagree to impose different water charges for different uses as
(Sarannya) it would cause unnecessary trouble to us and complicate things. Furthermore, if
we make it complicated for the initial water charge now, it would be even worse
for the future.

We have all the power to insist on the water rate to be set at 5 yuan per litre to
secure our profit at the end of this deal. We are not obliged to follow neither
the AQua international’s nor its joint venture’s decision.

Mediator Erm… I understand. However, in the joint session, Municipal officer also
(Ji Shan) mentioned that if you insist on imposing 5 yuan, they might just walk off the
table and find another bidder.

Are you prepared to face this situation?

HCL Honestly speaking, we really want to complete this deal and that is our primary
(Sarannya) concern here. We look into many factors and from there we can clearly see it
as a really good investment.

Mediator I understand that you have your own concerns, but on the other hand, the
(Reuben) Municipal officer did mention in the joint session that 5 yuan per litre is too
burdensome for his people. I believe that you know their concerns as well
right?

Considering how important this deal is to you, would you then reconsider the
idea of different water charges for different uses? Or propose a solution that is
acceptable by the other party?

HCL We totally understand the responsibility of Municipal officers to protect their

(ZheeQi) people. In order to ensure that a deal is reached, we are willing to take a step
back and consider the solution of having different water charges for different
users. Although we might not achieve its profit targets in the short term, at least
the municipal officers can see our intention to compromise and work with them,
this could pave the way for more business partnerships in this industry.

Mediator If you were to charge different rates for different uses, how low are you willing
(Reuben) to charge?

HCL If so, the minimum we can charge is 4 yuan. Otherwise, it is not financially or
(ZheeQi) commercially viable.
Mediator If you think the solution is good enough to meet both parties’ interests and
(Reuben) would have this deal done, you may suggest it in the joint session later.

I will give you a couple of minutes to think before we start our joint session.

HCL Thanks.
(ZheeQi)

Joint Session

Mediator Welcome back to our joint session. After the caucus, I believe everyone will be
(Mukhlis) able to discuss, propose solutions and negotiate better with each other and to
find your common interests.

Maybe we can hear from the Director of Municipality, would you like to make
any proposal to solve this issue? If you do, please share it with the rest.

Municipal Well Ms Sarannya and Ms ZheeQi, I understand that HCL want to recoup your
(Dell) investment as fast as possible. But I hope you can understand my position as
the municipality as well, we have our obligations and responsibilities.

HCL Yes, it’s totally understandable.

(Sarannya)

Municipal So, what about this, instead of fixing the initial water charges, we set different
(Dell) water charges. If the water is to be supplied for domestic use, the water
charges would be as low as 2.8 yuan as what I have suggested earlier. On the
other hand, to take care of your commercial interests, in relation to water to be
supplied for other purposes such as industrial, we have slightly higher water
charges, but maybe not 5 yuan because 5 yuan is really too high for us to
agree with.

HCL Alright, I see this as a win-win solution, and since you have given your ground
(Sarannya) here clearly, we are ready to take a step backward as well.

HCL Ya, HCL, AQ, PAQ and Tak Foy are willing to compromise as well. In relation
(ZheeQi) to the water charges for non-domestic use, we can go as low as 4 yuan and
nothing less than that. What do you think?

Municipal Sure, 4 yuan is okay.

(Dell, Fairuz)
Mediator Wonderful, we can see that everyone is on the same page now. From the
(Mukhlis) discussion, I would like to reconfirm with everyone on certain matters. For the
issue of initial water charges, everyone is agreeable to have 2 different water
charges, which are 2.8 yuan per liter for domestic use while 4 yuan for non-
domestic or industrial use. Is this correct?

All Yes

Mediator Good to know that we are able to amicably come to a consensus for the first
(Mukhlis) issue, I shall now pass to my wise colleague to carry on with the second issue.

Second Issue:

*pls read https://murphytx.org/DocumentCenter/View/4478/NR---Take-or-Pay-in-water-

contract-needs-attention

Mediator Alright moving on to the next issue on the demand for water. I was made
(Ji Shan) aware that the municipality is currently short of funds due to some urgent
development projects that need to be prioritized. Hence this explains why the
municipality wants to sell off or privatize its facilities. Is that correct Ms Dell? Do
you wish to add anything to this?

Municipal Thank you Mr Ji Shan. Yes, that’s correct. We are currently going through a
(Dell) rough patch as we do not have sufficient funds for several urgent development
projects. This is why we have decided to privatize our water supply facilities
instead to cover up the funds for these projects. A bidding was conducted and
our highest bidder, the HCL, has agreed to purchase our facilities for an
amount of 80 million yuan.

HCL Rep Yes. We are willing to pay as high as 90 million yuan because we are very
(Zhee Qi) interested in purchasing the facilities; that is why we submitted a purchasing
proposal to buy them as soon as we acknowledged that the Municipality
wanted to sell off its water supply facilities.

Mediator I see, thank you Ms Dell and Ms Zhee Qi. Perhaps the other Municipal Officer,
(Ji Shan) Mr. Fairuz can then briefly explain what are your expectations regarding the
demand for the water?

Municipal Yes, sure. First of all, the municipality is looking forward to high demands for
(Fairuz) water levels considering the high chances of development. To be able to
develop and provide an industrial water plant system would be beneficial to
many people as water plays a very significant role in everyone’s life.
 For example, our industries consume tons of water every day for production
and other processes so it is important to have clean and reusable water for
daily use. Therefore, we are proposing a total of 5 mil cubic meter demand of
water per month for one million people.

We believe this is a fair figure based on the daily water requirement per
recommendation of the University of Peking which is 165 litres and we set it as
200 litres per person.

Mediator I see. So Mr Fairuz, you are positive that there would be high demands for the
(Ji Shan) water when the development of the facilities takes place. Considering China’s
market, does Mr Shuqri share the same view?

Finance Yes! We are okay with the proposal since it is undeniable that China does have
Ministry a huge market. If they can supply water up to 5 mil cubic meter per month for
Officer one million people, we can anticipate higher profits with high expectations on
(Shuqri) water demand.

Mediator Okay, that’s great to hear. It seems that the proposal by the Municipal Officer
(Ji Shan) would be highly beneficial and profitable. What about the HCL? Do you have
any thoughts or concerns on this?

HCL
(Sarannya) Yes, we have no problem with the proposal. Not to mention that water is a
necessity for everyone, especially for industrial purposes. Hence, we also
agree with the total of 5 mil cubic meter demand. I think this is reasonable for 1
million people in the municipality.

In addition, we should also come up with a selling mechanism that would make
our business a successful one. Therefore, we would like to propose to
implement a take-or-pay selling mechanism for the water supply systems. We
believe that the take-or-pay selling off mechanism is the best and proper
mechanism to be applied here.

Mediator
(Mukhlis) Hmm. A good selling mechanism is important from the start in order to
determine whether the business is financially viable or not.

Could you please explain to us briefly what a take-or-pay mechanism is to all of

us here and why do you want to impose such a mechanism?

HCL
(Zhee Qi) Sure Mr Mukhlis. Take-or-pay provisions to be put in the contract is a type of
provision in a purchase contract that guarantees the supplier a minimum
 portion of the agreed on payment if the buyer does not follow through with
actually buying the full agreed amount of goods.

To apply this in our current situation, this would mean that the “Take or Pay”
mechanism requires municipalities to pay for, and presumably purchase, the
same amount of water as its highest total, called a cap, on an annual basis.
(https://murphytx.org/DocumentCenter/View/4478/NR---Take-or-Pay-in-water-
contract-needs-attention)

The reason why we want to implement this mechanism is to ensure that a

minimum payment is made in return for our water supply services. In other
words, we want to make sure that our operational costs can be covered and
this is why we think the take-or-pay mechanism is the best selling mechanism
for our business.

Mediator Thank you for the thorough explanation on the take-or-pay selling mechanism
(Mukhlis) Ms Zhee Qi. What does the Municipal Team feel about the proposed
mechanism?

Municipal I’m sorry Ms Zhee Qi but we have to disagree on that. I think the take-or-pay
(Fairuz) mechanism is inequitable to the Municipal as we would have to keep paying for
the equivalent of the highest usage of water, until that usage is surpassed. And
if the new maximum supersedes the old one, we would have to purchase for
the new maximum amount of water. And the level will never be decreased.

Mediator I understand your frustration Mr Fairuz. If I may understand correctly, the

(Mukhlis) Municipal is concerned with the constant payment that has to be made through
this proposed mechanism and that the level of water usage might not be
reduced. Do any of the parties of HCL have any clarifications to this concern?

PAQ If I may. I understand that Mr Fairuz. However, on our part, we want to reduce
(Muhaizam) the financial risk in terms of the money spent in producing the best, high-quality
potable water sources for the people of China.

The objective of this mechanism is not to give us any undue advantage, but it
is merely to reduce the risk of our potential loss of producing and supplying
more than what is needed. So by adopting the take-or-pay selling mechanism
for the water supply, it can at least guarantee us that we can afford to pay for
its overhead costs.

Mediator
(Mukhlis) Thank you Ms Muhaizam for the detailed explanation. Is Ms Dell clear of this?
Do you still have any doubts as to the mechanism?
Municipal
(Dell) Yes I certainly do. This mechanism is preposterous! Once the bill arises, we
are stuck with a higher bill. That sounds unfair to me, Ms Muhaizam. We would
not be able to lower the cap once it arises.

AQ
(Jane) I understand your frustration Ms Dell. However, I would like to humbly ask you
to try to see it from our point of view. We need the take-or-pay mechanism for
many different reasons. One of it is we need to secure a stable revenue stream
sufficient to support our long-term, limited resource financing. Also, there is an
inability for us to turn down our upstream production efficiently or at all, or at
least without having knock-on consequences for our associated businesses.

Mediator
(Mukhlis) Thank you Ms Jane for the clarification. Ms Dell, in addition to Ms Jane’s
clarification, perhaps you have any suggestions on what method can be taken
to balance the mechanism?

Municipal
(Dell) Hmm. We do get the risks your companies might face now. Thank you for the
enlightenment. Perhaps what we can do is to try to carry out a plan in ensuring
that the cap does not rise any further. Aside from using water wisely and fixing
water leaks, we could promote the conservation of water (voluntarily) and
adhere to the water conservation restrictions. This could help us to keep our
maximum from increasing.

Tak Foy
(Aishah) I agree. Lowering or maintaining the amount of water used can be a critical
method in keeping costs from rising so rapidly.

Mediator
(Mukhlis) Thank you Ms Dell, Ms Jane and Ms Aishah. Since there is a consensus on
the mechanism to be used, does anyone else wish to raise any other point?

PAQ Yes. Another point that we would like to raise for the Municipal Officers is for all
(Aiman) wells to be closed in the municipal areas. This is to ensure high demand for
potable water. Otherwise, HCL would always be at the losing end. If the well is
not closed, the people in the municipal area can still obtain the water from the
wells. In this case, the mechanism is not in favor of us.

Mediator I see. Why do your companies feel like by not closing the wells, the outcome
(Mukhlis) would not be in HCL’s favour?

Tak Foy If I may, Mr Mukhlis. By being the sole distributor for water supply, our
Co./AQ/ PAQ companies can increase our water-related business ventures in the country.
(Izzah) You see, the facilities that we are intending to buy now would have the same
function and purpose of these wells. So if we don't close them down, it will
definitely affect the business. I’m afraid it won’t go as well as we planned and
thus affecting us financially.

Municipal I’m sorry once again for interrupting but I don’t think that is a good idea Ms
(Fairuz) Izzah. I do get that you have to protect your financial interest here but by
closing those wells it will in return affect the people and the community who are
still relying on it. Especially the ones who live in rural areas where they
frequently do not have access to the same water supply system as the ones
living in urban and suburban areas. We have to consider their needs too.

Mediator I understand why you would feel that way Mr Fairuz. Ms Aiman, what do you
(Reuben) think of the Municipal’s concern? Do you think it is a reasonable matter that
should be taken into consideration?

PAQ Yes Mr Reuben. I think Mr Fairuz’s concern is definitely valid. However, I just
(Aiman) want to highlight that if steps to close these wells are not taken, it would
actually restrain the expected high demands of water stated earlier by Mr
Fairuz. This is because with the availability of the wells, the people may not
take the option to install the water plant system due to its cost.

However, I do believe that we can compromise and meet in the middle. Upon
reflection on Mr Fairuz’s concern, I think the wells in the rural areas should be
retained. The rest of the wells in the urban and suburban areas are the ones
that should be closed. This is to ensure that the rights of the people who live in
rural areas have access to clear water supply from the wells in the event that
our water supply is inaccessible for them.

Mediator Thank you for that input Ms Aiman. Mr Fairuz, what do you feel about the
(Reuben) proposal? Do you think that the closing of these urban and suburban wells
would affect the people’s access to water supply?

Municipal Well, actually I think by maintaining the rural wells and closing the urban and
(Fairuz) suburban wells is a tradeoff that we are willing to make for the benefit of the
people. Thank you Ms Aiman for taking that into consideration. I opine this
solution would benefit both sides. Thank you Ms Aiman.

Mediator Okay so here if I may reiterate, there will be implementation of take-or-pay

(Reuben) mechanism for the purpose of financial viability and to sustain the
developments.
 The Parties also agree to close off the wells in the urban and suburban areas
but retain the ones in rural areas for the interest of the community living there
getting access to clear water supply from the wells.

Mediator If there is nothing else any party would like to add on or raise, then this issue is
(Reuben) resolved as we have discussed. Let’s now move on to the third issue.

Third Issue

Mediator The third issue of today’s session is on the formula to calculate the annual
(Reuben) water selling tariff revisions. Before we start the discussion on the formula for
calculation of water tariff, it would be best to first define each party’s stance on
the tariff adjustment formula. Would any of the representatives like to get the
ball rolling?

Finance If I may, Mr Mediator. For the tariff adjustment formula, there is a possibility
Minister 2 that the Chinese Yuan will devalue due to the diverging trend of monetary
(SHUQRI) policy between the US and China. This will subsequently reduce the money-
market interest-rate spread and build depreciation pressure on the Yuan. Due
to this, we believe that the water selling tariff calculations must take this matter
into consideration.

Finance That's right. Besides the diverging trend of monetary policy between the US
Minister 1 and China, the Chinese Government also has plans to weaken the Yuan to
(FATIN) make Chinese exports more competitive, or cheaper to buy with foreign
currencies. Thus, in calculating the water selling tariff formula, we insist that
the foreign exchange should represent less than five percent of the total
calculation. The formula to calculate the water selling tariff should also not be
used for more than ten years due to the devaluation of the Yuan.

Mediator So the Finance Ministry is proposing that the water selling tariff formula must
(Reuben) take into consideration the devaluation of the Yuan and that the foreign
exchange should only represent less than five percent of the tariff calculation.
The Finance Ministry has also raised that the proposed formula to calculate the
water tariff must not be used for more than 10 years.

From this, I see there are two sub-issues. First is on the formula to calculate
the water tariff and second, on the duration between each duration.
 Let us discuss the first matter. As the company that wishes to operate the
potable water facility, would the proposed formula to calculate annual water
selling tariff revisions from your side take into consideration the devaluation of
the Yuan?

HCL 2 In relation to the point raised by the Finance Ministry Representative, it is not
(Sarannya) denied that the Yuan is expected to devalue. And we do agree that the
devaluation of the Yuan must be taken into consideration when calculating the
water selling tariff. Hence, that is why we are proposing an inflation-adjusted
tariff for the formula to calculate the water tariff.

Mediator I see. Can you elaborate more on the details of the proposed formula?
(Reuben)

HCL 1 The formula for calculation of water tariff that we are proposing is to ensure
(Zhee Qi) that the facility is profitable for us.

*Screenshare the formula*

The total cost would consist of the operating cost, which are personnel cost,
chemical cost, power cost, repair cost, and other maintenance cost.

Municipal If I may, based on the initial facility we have in place, we already have a
(Dell) formula. It’s based on the total cost we incur.

*Screenshare the formula*

Total cost is made up of

I. operating cost that are personnel cost, chemical cost, power cost, repair
cost, bulk water cost, and other maintenance cost.
II. capital cost which are cost necessary to maintain our capital

From our end, we would like to suggest that this formula be retained for the
facility.

Mediator What do you think, Ms Sarannya? Do you think you would like to follow your
(Reuben) initial plan or do you think the municipal officer’s suggestion can be
considered?

HCL 2 I think the municipal officer’s plan is definitely more comprehensive, we could
(Sarannya) consider it with modifications.
Mediator What does AQ think?
(Reuben)

AQ 1 I would suggest that for cost we should also include two more costs, namely
(Meor) depreciation costs and costs for retirement of fixed assets. The machines and
the facility have been running for years, surely they will be worn out soon. We
cannot foot the bill for that.

Mediator I understand your concern AQ. But, I must get some input from the
(Reuben) municipality, what are your views on the formula?

Municipal I think our formula is rather mature and can be retained without any
(Dell) modifications. This formula was done based on our years of running the facility,
I don't think there should be any issues with the formula.

Mediator Thank you for your input, if I may draw the attention back to HCL, do you agree
(Reuben) with the cost additions proposed by AQ?

HCL Of course, I totally agree with AQ. That is an absolutely sound suggestion.
(Sarannya)

Mediator What about you Tak Foy, what is your take on the matter of the formula?
(Reuben)

Tak Foy I have no issue with the formula, I think the addition makes the calculation
(Aishah) more complete. But I do have some reservations as the water price may
increase.

I know the locals’ quality of living is not great. I think the move to raise the cost
of water that is a daily necessity is not something I would agree with, at least
not so drastically.

Mediator Thank you for your input Tak Foy. Would any of the parties in this mediation
(Reuben) like to share their views on the points raised during the discussion just now?

Municipal I suppose we can agree with the addition to the formula, perhaps that is
(Fairuz) something we overlooked when we were managing the facility. But I just simply
cannot agree with an immediate increase on the water cost.
Mediator I understand where you are coming from. I think now is the prime time to ask
(Ji SHan) for the HCL’s input on this instead? Ms ZheeQi or Ms Sarannya, do you think
the concern on the people’s welfare is important and is that something you can
consider?

HCL *sighs*
(Zhee Qi)
I suppose, if everyone is so adamant. I think from our end, we can perhaps
make the increment at a gradual rate. We propose to delay the increment by 5
years, we can cover the cost for 5 years.

PAQ I agree with that, maybe increasing the price is the better move as we are also
(Muhaizam) just starting up. We really don't want the people to show up at our facilities with
pickets for riot. *laughs*

Mediator What is your view on this municipality? Do you find this option worth
(Ji SHan) considering?

Municipal Now that you put it that way, that seems agreeable, 5 years is reasonable to
(Fairuz) me.

HCL Oh sure, we have no issues with that.

(Sarannya)

AQ, PAQ, Yes/ Sounds okay/ I am good with that.

Tak Foy
(Meor,
Muhaizam,
Aishah)

Mediator Thank you to all. To summarise, we have come to an agreement that the
(Ji Shan) formula will be based on cost and desired profit.

Total cost is made up of

I. operating cost that are personnel cost, chemical cost, power cost, repair
cost, bulk water cost, depreciation cost, retirement of fixed assets and other
maintenance cost.
II. capital cost which are cost necessary to maintain the capital

As for the first increment on calculation of cost, the parties agree to delay the
addition of new costs by 5 years.

Mediator Great. Now we have agreed on the water tariff calculation formula, let’s move
(Ji Shan) to the second point raised earlier by the Finance Ministry Representative in
relation to duration between each revision.

To recall, the Finance Ministry Representative proposed that the formula

should not be used for more than 10 years. On the HCL’s part, you proposed
that it should be an inflation-adjusted tariff, right?

HCL Yes, correct. As I mentioned earlier, there is one matter that most of us are
(Sarannya) concerned about, which is the devaluation of the Yuan. This issue should not
be taken lightly as it would directly affect the foreign exchange sales-based
investment. Hence, in determining the duration between each revision,
devaluation of yuan is the crucial factor that must be considered and we are
proposing an inflation-adjusted tariff instead. This means that the water selling
tariff formula must be revised frequently in line with the value of the Yuan.

AQ Yes I agree. When we deliberated whether to enter into this business in China,
(Meor) the devaluation of the Yuan was a point of concern. If the devaluation happens
rapidly, revision for the water selling tariff formula must be done more
frequently, just like what was proposed by HCL. If this is not done, the venture
would not be profitable!

Mediator Let’s hear from the perspective of the Chinese Government on this matter. Is
(Ji Shan) the Yuan devaluing at a rapid pace where it requires constant revision of the
water selling tariff?

Municipal No we do not agree! As part of the Chinese government and not just an
(Dell) outside company that only cares about business, we would like to state that the
devaluation is temporary and will stabilize in due time. Therefore, revisions of
the water selling tariff should be done more sparingly.

Finance Well to add on that issue, the last time that devaluation of yuan occurred was 7
Minister 1 years ago; that was on August 11, 2015 where the People's Bank of China
(Fatin) (PBOC) devalued the Chinese yuan, knocking over 3% off its value. Hence,
devaluation of yuan does not occur every year nor in consecutive years. Yes,
although we too agree that the Yuan is expected to devalue, It will eventually
stabilize in due time. As you can see so far in the early of 2022, compared to
many other emerging market currencies, such as the Turkish lira that recently
hit record lows, the Chinese currency looks much more resilient.

This is why instead of an inflation-adjusted tariff where revisions would be done

 frequently, we propose that the revisions of the water selling tariff must be
done more sparingly, which is every 10 years.

Mediator I see. Why is a frequently revised tariff based on the inflation rate not
(Ji Shan) agreeable on your part?

Finance Well, it is normal that water tariffs are revised periodically to reflect changing
Minister 2 conditions. However, there must be stability in the formula to calculate the
(Shuqri) water selling tariff that we have agreed upon earlier. Revising and amending
the water selling tariff too frequently would affect the stability of the water
supply services industry. It will cause problems when negotiating with
industries to supply water as the water tariff is ever changing. Thus, the main
reason an inflation-adjusted tariff is not agreeable to us is to maintain stability
in the cost of water supply.

Mediator So to reiterate, the municipality stated that the devaluation of yuan is only
(Ji Shan) temporary and this is strengthened by the finance minister. The water tariff
should not be frequently revised to maintain stability in water supply cost. With
this in mind Ms HCL, what were the considerations in deciding for an inflation-
adjusted tariff instead for a more sparingly revised tariff?

HCL You see Mr Ji Shan, water tariffs are revised periodically to reflect changing
(Zhee QI) conditions and in this situation, we are concerned that the devaluation of yuan
could occur anytime considering the current pandemic that we are facing now.
And just like what was mentioned by the Finance Ministry, the People’s Bank
of China devalued the Yuan in 2015, but he failed to mention that this
devaluation took the whole world by surprise. We are not certain that the
Chinese Government would not do a similar thing to make Chinese exports
more competitive, or cheaper to buy with foreign currencies.

Hence, I believe that the duration between each revision should be done every
2 years.

Municipality Every 2 years? That’s ridiculous. We all know that the currency and foreign
(Dell) exchange are very fluid and it is subject to changes at any time considering the
world’s trade and economy. But the devaluation is only temporary and it will be
stabilized. Hence, duration for each revision should be done sporadically and
not too frequent. In regards to the devaluation made by the Chinese
Government, this only happens when the Chinese economy has taken a bad
hit or is threatened. As of right now, the Chinese economy is stable!
AQ I must remind you that the devaluation of Yuan, stable or not stable, will affect
(Jane) the price of the water selling tariff. If the Yuan devalues too much before the
next revision, the water selling tariff would not be profitable on our end! This is
why we cannot wait for too long of a time for the next revision to prevent the
venture from suffering a loss.

Municipality We must also remind YOU that if revision of the water selling tariff is made too
(Dell) frequently, it would be difficult to enter into agreements with other industries as
the water supply cost will become unstable!

Mediator I truly understand everyone’s concerns, But it must be reminded that all of us
(Mukhlis) should remain calm and try to listen to what the other party has to say during
this session. This way, it will allow us to have an understanding of each
stakeholder’s struggles. Well, HCL, the Finance Ministry and the Municipal
have guaranteed that the Yuan would not devalue rapidly, would you still be
adamant for an inflation-adjusted tariff?

HCL We absolutely understand the point raised by the Municipal and the Finance
(Sarannya) Ministry. However, it is not wrong for us to take extra precautions on the
devaluation of the Yuan right? You must know that we are not running a water
charity here, this is a business… a business that we want to be profitable.

However, considering all that has been discussed, we are willing to meet in the
middle where the proposed revision of the water selling tariff would be 5 years.
This way, the revision would not be too frequent to maintain stability of water
selling cost and at the same time it considers the devaluation of the Yuan to
ensure that we do not receive a loss.

Mediator What is your view on this, the Finance Ministry? Would a 5 year duration for
(Mukhlis) each revision be worth your consideration?

Finance Hmm. A 5 year duration seems more agreeable since it would be beneficial to
(Fatin) all parties. The water supply cost would be stable and they won’t suffer a loss
due to the devaluation of the Yuan. So yes, I am agreeable to a 5 year duration
for each revision on the water selling tariff formula.

Mediator That's great. Do the other parties agree to the duration between revision of 5
 (Mukhlis) years?

Municipality Yes, we agree on that too.

(Fairuz)

AQ Yes, we can work on that.

(Jane)

Mediator: Alright, that’s great! To conclude, for the issue of the formula to calculate
(Mukhlis) annual water selling tariff revisions, it is agreed that formula will be based on
cost and desired profit.

The total cost is made up of

I. operating cost that are personnel cost, chemical cost, power cost, repair
cost, bulk water cost, depreciation cost, retirement of fixed assets and other
maintenance cost.
II. capital cost which are cost necessary to maintain the capital

For the duration between each revision, it is agreed that the duration for each
revision would be every 5 years. Does anyone have anything else to add?

Everyone: *none*

Mediator Okay then. Let’s now move on to the final issue.

(Mukhlis)

Fourth issue

Flow:

1. If they wanna proceed with a privatization, they will need to decide on a company’s structure
that will manage the water supply.
2. HCL proposed a 3:1 ratio of JV with the municipality for 25 years.
3. Article 6 on Laws of Chinese Foreign Joint Venture: The board of directors shall have a
chairman, whose office shall be assumed by the Chinese joint venture(s), and one or two
vice-chairmen, whose office(s) shall be assumed by the foreign joint venture(s). The offices of
president and vice-president(s) (or factory manager and deputy manager(s)) shall be
assumed by the respective parties to the venture.
4. Article 4 The proportion of the investment contributed by the foreign joint venturer(s) shall
generally not be less than 25 per cent of the registered capital of a joint venture.
5. Suggest to make form a Limited Liability Company (LLC) = Special Purpose Vehicle (SPV)
a. The Joint Venture Company is a separate legal entity independent of the Joint
Venture Parties in which it can own its own assets and can contract with 3rd parties in
its own right
a. Ownership
■ Since HCL is offering a 3:1 ratio in the JV, HCL will own 75% of the
shares in the JV while the municipality water company will own 25% of
the shares in JV.
b. Limited Liability
■ Since its a 3:1 ratio, HCL’s liability will be limited to the amount it has
contributed to the JV’s capital (75% shares) - provided that the capital
is paid up in full.
■ Municipality’s water company will be limited to only the other 25%.
c. Allocation of profits and losses
■ HCL will gain more profits compared to Municipality water supply by
3:1 ratio
■ HCL will also have to bare more losses compared to Municipality
water supply by 3:1 ratio
■ Higher opportunity and risk for HCL
■ Lower opportunity and risk for Municipality water company
d. Duties
■ Appoint a Chairman for the Board of Directors
■ Parties share control over the board but HCL has more influence
compared to Municipality’s water company
■ HCL has more influence in the decision making as it holds a higher
percentage of shares in the JV
■ Board Members
● 6 Directors from HCL (75% shares)
a. 2 from PAQ
b. 2 from Tak Foy and Co.
● 2 Directors from Municipality’s Water Company (25% shares)
■ Day-to-day Management
● LLC
a. Directors undertake the day-to-day management
 ○ Since the ownership of the facilities will shift to HCL, a 3:1 ratio of the JV with the
Municipality’s water company is more than reasonable. HCL is paying money to the
Municipality for the facilities and will be contributing 3 times the amount that the
Municipality will be contributing for the JV. Furthermore, HCL is providing the product
while the Municipality is providing the distribution channel.
○ The municipal might;
■ not prefer 3:1 ratio (75% shares for the water facilities
● they have less profit & control in the JV
● They might propose a 49% shares for HCL
■ want more of their members on the board of directors
● on the basis that they have more experience in dealing with water
supply matters in that area.

Mediator Now, we have come to the final issue for our session today in which we will
(Mukhlis) need input from all parties on how to effectively manage the water supply
problem by deciding on the structure of the company itself.

Since HCL proposed to have a 3:1 joint venture with the municipality, I believe
the company will be the one to have more influence in the company. May I call
upon a representative from HCL to further explain the proposal?

HCL Thank you Mr Mukhlis. As per our proposal on to have a contract of JV with the
(Sarannya) municipality, we are proposing for a 3:1 of structure because we strongly
believe that the municipality will not be able to incur the necessary costs
required, hence we would like to have a clear standing in this company as we
will be the ones bearing most of the costs.

So, we would like to propose an agreement to establish a limited liabilities

company (LLC) for the purpose of this joint venture to efficiently manage this
project. Second, we would like to have a total of 8 directors comprising 2 reps
from Aqua International, 2 reps from Pacific AQ, 2 reps from Tak Foy and 2
reps from the municipality which will reflect the ratio of 3:1 . HCL will hold 75%
of the company’s shares and voting rights while the rest will belong to the
municipality.

I believe this is in line with the local law stated in Article 4 on Laws of Chinese
Foreign Joint Venture where the proportion of the investment contributed by
the foreign joint venturer(s) shall generally not be less than 25 percent of the
registered capital of a joint venture. Since the owner of AQ is a foreign
 company, I believe having a 75% of the shares will reflect our commitment in
handling this project in the long run.

Mediator Mr Fairuz, are you agreeable with this?

Municipal I'm afraid a 3:1 ratio is not fair for the Municipality and so we have to disagree.
(Fairuz)
As you know, the water company has been under the control of the
municipality since its incorporation. The municipality were the ones that have
been in charge of the water company all this while. Therefore, it is not fair for
us to only have 2 seats at the Directors’ table and only contribute 25% of the
shares in capital in the joint venture.

Furthermore, why is there the need for PAQ and Tak Foy and Co to have 2
representatives each since they are already part of the HCL joint venture?

PAQ I believe that it is important for me to put it out here that having two
(Aiman) representatives from PAQ and Tak Foy is the only way to ensure the interests
of the two parent companies are safeguarded. This is coupled by the fact that
HCL is a newly established company under a joint venture of two mega
corporations from different countries. The work culture differs a lot, hence there
needs to be representatives to oversee our own very first project between HCL
and the Municipal.

Since PAQ is part of the joint venture between Tak Foy and Co which led to
the establishment of HCL, I believe 2 representatives from the PAQ to be the
members of the Board of Directors in the LLC is more than reasonable.

This is fair since PAQ is also the local subsidiary of AQ Group in China. Having
2 representatives from PAQ will allow the LLC to have a clear perspective as
well as instill a little bit of the special touch of the AQ multinational company in
Europe. (can be omitted?) OMITTED
okay

Tak Foy & Co If you don't mind me interrupting, I would also like to add on the fact that PAQ
(Izzah) and Tak Foy are both mega corporations yet need to be meticulous to ensure
that our interest will not be in jeopardy at any point of time. Furthermore, our
joint company (HCL) was newly established hence, we have not known the
other company long enough to entirely neglect the performance of this venture.

So I agree with PAQ. 2 representatives from Tak Foy & Co are also considered
more than reasonable as we both share the equal amount of power in the HCL.
The 2 representatives from Tak Foy and Co will add fresh perspectives from
the viewpoint of the leisure-related services as we are a local company.

It would be unreasonable for us, HCL, to be contributing 3 times the amount of

 the Municipal but having less control of the joint venture.

HCL The municipality has to understand that since we are offering 3 times the value
(Sarannya) of shares, we are at the same time ready to accept the risks of owning the
majority share of the company.

Although in the long run, it can be said that for the next 25 years, we might be
gaining 3 times the profits from the joint venture as compared to the
municipality, but bear in mind that if in case of any losses in the company, we
will be suffering a huge amount of loss as compared to the Municipality.

In other words, we are taking most of the burden in the event of losses to the
company away from the Municipality and putting it on us substantially. You can
see it as a “high risk high return” kind of situation.

Mediator We can see that both PAQ and Tak Foy and Co agreed on having 2
(Mukhlis) representatives each to be part of the board of directors in the new joint
venture. Both of them deemed it reasonable and fair since they are the ones
contributing most for the project, financially.

I see that everyone is unable to come to an agreement again, so how about we

consider it from another perspective. I believe that everyone wants the best of
the joint venture and maybe there are some other ways for the parties to be
involved in the decision-making process. Is there anything such as a board or
committee that the municipality officers might be able to join?

HCL Since you brought that up, Mr Mukhlis, actually yes we do. The BOD will be in-
(Sarannya) charge of the management of the JV, and in choosing the members of the
BOD, we will take into account the strength of having each party as part of the
BOD.

Since the municipality is more familiar with all the local laws and operation of
the water facilities, it would be great to have them in our BOD to make sure
things are run smoothly.

Municipality Thanks Ms Sarannya for the offer. Taking into account the strength of all
(Dell) parties, we have 2 changes that we would like the HCL to consider and even if
they cannot agree on both, perhaps they can agree on either one of them.

First, we would like to request another seat at the table to make it 3

representatives from the Municipality and exclude 1 representative from the
AQ multinational company. This is because AQ is based in Europe and there
are already 2 representatives from PAQ which more or less will be bringing the
influence of the AQ as the local subsidiary. Hence, there is no need for there to
be 2 representatives from AQ.
 Or

Second, we would like to request that all the day-to-day management of the
company will be supervised by the Municipality. This is because we have been
in this field for more than 2 decades and we know the formula on how to
handle the challenges and problems that might come later. The directors can
assist and provide opinions in areas that matter.

We understand that we are currently at a shortage of funds and it would be

best if HCL are willing to accept these two changes for there to be an
agreement.

HCL Thank you Officers. I guess we can compromise to add another seat for the
(Zhee Qi) Municipality at the directors’ table due to their expertise and knowledge and
also it will allow them to assist the day-to-day management of the company to
take care of the employees welfare and others.

Finally, I shall remind once again that since HCL will be owning 75% of the
shares of the company, HCL will have more influence and control in terms of
the decision making for the company.

Municipal Agree
(Dell&Fairuz)

Mediator Alright, I think it's all good! I believe from this discussion, we can conclude that
(Mukhlis) all parties agree to compromise which the proposal for involving the
municipality in the day to day management directly and for the municipality’s
suggestion to have 3 reps instead of 2 to be considered by the others.

However, acknowledging that HCL will be the holding the majority of shares
and bearing a lot more risks, they will be the one who will have more say when
it comes to making decisions for the project. Did I miss anything else? (no.)

Closure

Mediator Thank you everyone for being so cooperative and attentive during the whole
(Reuben) mediation. It has been quite a journey to be able to reach our full understanding
and mutual cooperation by all the parties.

Before we end today’s session, to avoid any misunderstanding, allow me to list

out all the solutions that have been mutually agreed by everyone on this table.

In relation to the 1st issue as to the initial water charges: to balance between
the company’s interest to earn profits and the municipals interest to protect its
people, everyone agree to have 2 different initial water charges, i.e. 2.8 yuan
 per litre for water supplied for domestic use, while 4 yuan per litre for non-
domestic use.

For 2nd issue on the demand for water, there will be implementation of take-or-
pay mechanism for the purpose of financial viability and to sustain the
developments.

The Parties also agree to close off the wells in the urban and suburban areas
but retain the ones in rural areas for the interest of the community living there
getting access to clear water supply from the wells

3rd Issue on formula to calculate annual water selling tariff revisions, it is

agreed that formula will be based on cost and desired profit.

Total cost is made up of

I. operating cost that are personnel cost, chemical cost, power cost, repair cost,
bulk water cost, depreciation cost, retirement of fixed assets and other
maintenance cost.
II. capital cost which are cost necessary to maintain the capital

For the duration between each revision, it is agreed that the duration for each
revision would be every 5 years.
it would be beneficial to all parties. The water supply cost would be stable and
they won’t suffer a loss due to the devaluation of the Yuan. adress possible
objection by the people, and ensure the quality of living of the locals

4th Issue on the new company’s structure. Strength

involving the municipality in the day to day management directly and for the
municipality’s suggestion to have 3 reps instead of 2 to be considered by the
others.

However, acknowledging that HCL will be the holding the majority of shares
and bearing a lot more risks, they will be the one who will have more say when
it comes to making decisions for the project.

All Yes

Mediator Thank you for the understanding and cooperation that was shown. We are
(Reuben) grateful to have reached a solution

We will put all of this down in a written agreement and We will send a
Memorandum of Understanding to all parties containing the results of our
discussion today. This mediation has also been reduced into writing in the form
of meeting minutes which will also be sent to each party.

Thank you.
All Okay!
MS SHER RIN’S COMMENTS

1. 2 words, WELL DONE.

2. General Conduct: Done well, even during the private caucus sessions.
a. Mediators constantly validated the emotions;
b. Summaries were comprehensively done at each part of the matter;
c. Mediators asked sufficient reality-testing questions to all options generated;
d. Mediators put the parties in each other’s shoes;
e. Mediators also asked probing questions