The North-South Expressway (NSE) is an undoubted jewel in corporate Malaysia. Since construction started in the 1980s, the continued expansion of the NSE has seen its reach expand, and in the process, its toll collection balloon.
The highway was a centrepiece for the Renong Group, where its financial muscle was used to buffer the sustainability concerns of its then-parent. Its huge free cashflow also subjected it to takeover proposals until it was finally bought up by UEM Group Bhd and the Employees Provident Fund (EPF) in 2012 in what was the largest corporate deal in Malaysia.
The lucrativeness of the NSE and its parent company - PLUS Malaysia Bhd – has not stopped prying eyes envious of its cashflow, and now, there are moves to buy over the lucrative highway.
But what is the attraction of PLUS?
PLUS in 2017 had a revenue of RM3.8bil and generated an operating cashflow of RM2.6bil. After paying for its operations and debt-holders, it still had RM800mil cash to distribute to shareholders.
What the takeover proposals also talk about, according to reports, is the maintenance fees that PLUS spends to keep the NSE in prime condition.
There have been suggestions that PLUS pays too much to keep its highways running in proper condition, but that, according to Datuk Azman Ismail (pic), PLUS Malaysia’s managing director and chief executive officer, is a fallacy.
“We do benchmarking and have looked at where we are in terms of domestic peers and we found ourselves, on average, to be within the domestic peers in terms of millions per km.
“We are at RM1.3mil per km and our domestic average is on that number as well,” he tells StarBizWeek in an interview.
The emphasis on maintenance is also important, as road safety is of paramount importance to the highway operator. Azman says that its upkeep of the highways is to ensure that accidents among road users is kept low. “For PLUS, we have one of the lowest road accident rates per 100,000km travelled.”
What Azman says is that the scope of work for PLUS is large in order to maintain the highway.
PLUS Malaysia maintains about 1,170km of roads, more than 8,300 slopes, two major tunnels, 741 bridges (including the link to Singapore) and over 6,000 culverts. It does over 10,000 slope inspections on an annual basis.
“That is the kind of dimension we are talking about. Some of our roads are built over swamp land and peat soil, which means in terms of pavement condition, it has to be looked at,” he says.
The annual budget for pavement maintenance is RM300mil.
The toll compensation is something PLUS has to deal with and it is audited. There is, however, a one-year delay before it receives compensation from the government to keep toll rates static.
Toll charges have not gone up for the past 14 years since 2015 and to maintain the same toll rate continuously over the next five years is a tall order for PLUS.
Its principal repayment of the Islamic sukuk is going to increase substantially in the next couple of years, while its operating and maintenance cost is constantly rising.
The toll collection is substantially spent for loan repayments, operations and maintenance, and continuous upgrading and improvement of facilities at its highways.
In terms of breakdown, 36% of toll collection is used for operations and maintenance, 7% for new interchanges, upgrading and widening works, and capex, 47% for loan repayments and 10% for distribution to shareholders.
Streamlining toll rates
With maintenance cost an ongoing issue when it comes to the NSE, sources say the government is looking at compelling all highway concessionaires to put up a competitive tender for the maintenance of the highways.
Sources say this is part of the initiatives taken to streamline toll rates among concessionaires, as the bulk of their cost comes from maintaining the highways.
According to a source, the initiative is headed by the Finance Ministry that indirectly controls PLUS Expressways, which is the biggest concessionaire in the country.
PLUS is owned by UEM Group and the EPF. UEM Group, in turn, is controlled by Khazanah Nasional Bhd that is under the ambit of the Finance Ministry.
Another ministry that is also looking at streamlining and reducing toll rates is the Works Ministry under Baru Bian.
In respect to the toll rates, the Malaysian Highway Authority has been collecting data on the maintenance cost incurred by concessionaires for their toll highways.
The cost differs between a normal highway and an elevated structure. The cost is higher for a highway that is built on an elevated structure compared with a normal highway. An elevated structure includes the cost of maintaining the pillars that the highway is constructed on.
As for the normal highway, the cost is mainly on resurfacing the pavement and building and maintaining the rest areas. The more rest areas a highway has, the higher the cost will be. According to an industry player, the cost for maintaining the pavement for a normal highway is about RM600,000 per km per annum, while the amount is almost double for an elevated highway.
The other cost incurred are for items such as cutting the grass and maintaining the facilities at the rest areas.
“At the moment, almost all the concessionaires undertake the maintenance cost themselves. There are hardly any competitive tenders for the maintenance work. If there is better transparency in the award of the work, the toll rates can be brought down,” says the official.
Dealing with concerns
For Azman, he is not resting on what PLUS is doing with its highways. The company is looking at using newer and cheaper materials on maintenance while not sacrificing on quality.
“We want our (cost) benchmark to go even lower than our domestic peers,” he says.
“This is an efficiency cycle we are always on in terms of operation as well as maintenance.
“The cost goes up and today, if you don’t find other materials, it is going to go up.”
Another hurdle for PLUS is when the West Coast Expressway (WCE) opens up. It is a highway that is closer to the west coast of the peninsula but runs parallel to the NSE.
PLUS feels that with the opening of WCE, road users will have more choices in terms of road
networks (toll and non-toll roads) to choose from. These are complementary
factors that would enhance the value proposition of a road network vs an alternative mode of transport.
Azman feels that while traffic volume on PLUS will be affected by 5%, the company welcomes the WCE, as it provides Malaysians who are more inclined to travel along their coastal destinations a choice that befits their needs.
The overall impact on the reduction of traffic volume is less than 5% because road users who travel by car from Kuala Kangsar to Tanjung Malim will still take the NSE.
Traveling by road allows road users to do discretionary travel, which does not need to book flight or train tickets or are compelled to follow scheduled time journey as offered by the public transport system.
From studies conducted by PLUS, there will be some loss in revenue for the company when WCE starts to be fully operational. Most notably from the heavy vehicle segment, as the WCE is built on flatter coastal land which can contribute to lesser fuel consumption for heavy vehicles.
Similarly, with the present public transportation choices of the ETS, for example, those who wish not to drive can do so, says PLUS.
“We also see an impact when a competing infrastructure scheme is opened to the public, such as the Guthrie Corridor Expressway and LEKAS, as well as other rail transportation systems like the ETS and MRT.
When there is a parallel infrastructure development to the highway corridor, the demand will react for or against it, depending on the scheme that will give the better value of time and value of money to the people,” says PLUS.
Simultaneously, PLUS says it is already taking the initiatives to compete with the emergence of new highways and fulfill today’s customer expectations by embarking on digital transformation and elevating customer’s experience.
PLUS is embarking on its digital transformation via a partnership with Microsoft (Malaysia) to integrate Microsoft’s Azure cloud system into its highway toll, and leverage on Microsoft’s future-ready technologies such as artificial intelligence (AI) and big data analytics.
The challenge is the will to invest in creating the data for better visibility of the future, says PLUS.It has also embarked on its digital transformation journey. Digitalisation is always the very first step before it can leap over to IR4.0. PLUS says it is currently leveraging on technology, especially on data and AI, to improve operational efficiency and strategic planning.
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