Toll rates will only keep coming down


  • Analyst Reports
  • Saturday, 18 Jan 2020

IF it was “Dr Mahathir Mohamad” version 1.0, PLUS Expressways Bhd (PLUS) would have probably been awarded to one of the four private companies that had thrown in their bids for the most valuable highway.

In his first term as Prime Minister from 1981 to 2003, Tun Dr Mahathir Mohamad believed that the private sector is best to run businesses such as highways and power plants. At the time, he allowed key infrastructure assets to be held by selected bumiputra businessmen.

However, PLUS, is not just any infrastructure. It stretches from Perlis to Johor Baru and has four other highways under its belt servicing thousands of commuters daily.

Because of its high utilisation, PLUS is a political hot potato. As a means to placate voters, the old and new governments have not increased toll rates since 2008, fearing a political backlash.

If PLUS had been awarded to any of the four private bidders, the Pakatan Harapan government would have some heavy justification work to handle. Speculation of crony capitalism re-emerging in the Dr Mahathir-led Pakatan government would have emerged.

The decision that Khazanah Nasional Bhd and the Employees Provident Fund (EPF) keep PLUS signals the check and balance in the government led by “Dr Mahathir version 2.0”.

At least, now nobody can say that Dr Mahathir always has his ways in the Cabinet meetings, even under Pakatan.

The four bidders – which are the Maju Group, a joint venture involving Tan Sri Halim Saad who was the former owner of PLUS, private equity firm RRJ Capital and Widad Group – are no lightweights. They all had a fair amount of influence in the government and some ministers were lobbying for them.

Finance Minister Lim Guan Eng put forward the Khazanah Nasional-Employees Provident Fund (EPF) proposal, which was deemed as the best by the Cabinet after weeks of deliberations.

It’s a no brainer why the government decided to maintain the status quo as far as ownership of PLUS is concerned.

Firstly, the main cost for an infrastructure such as PLUS is financing. Financing cost makes up the bulk of the operating cost. None of the four bidders can get cheaper financing cost than government-linked entities such as Khazanah and the EPF.

None of the bidders have the financial capability to secure a loan to take over PLUS’ current debts of RM32bil. They would need some kind of government guarantee on some or the entire debt.

At the moment, of the RM32bil of debts in the books of PLUS, a sum of RM11bil is guaranteed by the government. The rest of the loans carries relatively cheap interest rates because the owner of PLUS are entities linked to the government.

None of the private bidders can borrow at rates that are cheaper than the government entities.

The government cannot guarantee any of debts under PLUS if it goes to the hands of the private sector. If it happens, that would invite controversy because government guaranteeing debt of assets held by the private sector is not acceptable.

Secondly, the government can now choose to tear the existing concession agreement and write a new one that will better suit the new condition of “no toll rate hike” for the rest of remaining tenure with an extension of 20 more years.

Particularly, the cost of maintaining the highways should be looked into.

The government can look to amend the concession agreement given that it has a fair amount of influence in Khazanah and EPF. Anybody doubting this view, should simply ask themselves why the four private bidders put in their proposals to the government and not Khazanah or EPF.

PLUS has to bring down its cost of maintaining the highways to help keep the toll rates unchanged or reduce further over the years. The current cost structure of maintaining the highways is one of the key points highlighted by the private bidders. The four bidders feel they can maintain the highways at a cheaper rate than the current cost incurred by PLUS.

At the moment, a fair amount of maintenance work goes to Propel, a company under UEM EDGENTA BHD, which is under Khazanah. According to some officials, it is part of the concession agreement. However, UEM Edgenta vehemently denies such assertion and contends that it has a long-term relationship with PLUS which helps in securing some of the maintenance work.

Since the four bidders have contended that the maintenance cost can be cheaper, PLUS should consider opening the maintenance job to the four bidders. It would determine once and for all if the cost of maintaining the highways can be done at a lower cost.

The consortium led by Halim and Maju’s Tan Sri Abu Sahid Mohamed have counted on their strength of being able to maintain the highways at a lower cost compared to the current structure, which would enable them to lower the toll rates.

If that is really the case, PLUS should consider inviting these parties to put in proposals to maintain the highways. It would serve as a test of the viability of their proposals.

Thirdly, with the ownership of PLUS remaining status quo, the government has the flexibility of reducing the toll rates further as the concession matures.

Under the new terms, the agreement carries on until 2058 with toll rates reduced by 18%. But it does this mean that the toll rates cannot be reduced further over the tenure of the concession. There is room for further cuts over the concession period, as long as commuters accept the fact that highways will always have to be tolled.

At the moment, PLUS generates RM1.6bil in free cash flow per annum over a turnover of about RM4bil. When the rates are slashed, the cashflow will fall.

But the traffic growth of less than 2% currently may increase over time. This is because the toll charges would be a smaller component of the overall cost of traveling, if it is not increased over the years.

For instance, RM1 today is not as valuable as it was some 20 years ago. Hence, as long as PLUS is under the hands of government-linked entities, there is always a possibility of further toll rate cuts. Toll rates have not gone up since 2008. It has now been slashed by 18%. There is no reason to fear of it going up.

The views expressed here are the writer’s own.


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