PLUS should re­main in hands of govt

The Star Malaysia - StarBiz - - Viewpoint - M. SHAN­MUGAM star­biz@thes­tar.com.my

JUST five years ago, the Maju Group went into an agree­ment to dis­pose of the MEX High­way to EP Man­u­fac­tur­ing Bhd for a sum of more than RM1.8bil. The dis­posal failed to ma­te­ri­alise and it failed to get out of the highly reg­u­lated and po­lit­i­cally sen­si­tive toll con­ces­sion in­dus­try.

Last week, Maju Group made a RM36­bil bid for Pro­jek Le­buhraya Usa­hasama Bhd (PLUS), the owner of five ma­jor high­ways in­clud­ing the North-South Ex­press­way (NSE). If the bid is suc­cess­ful, it would own the most lu­cra­tive and hotly dis­puted set of high­ways in the coun­try.

The big­gest sell­ing point for the Maju Group is that there will not be any toll rate hikes on the 772-km NSE should it suc­ceed in its bid.

By tak­ing over PLUS, Maju would take over the debt of RM30­bil, which is tied to the cur­rent own­ers who are UEM Group Bhd and the Em­ploy­ees Prov­i­dent Fund (EPF).

Un­der the cur­rent con­ces­sion agree­ment, the own­ers are al­lowed a toll rate hike of 5% in 2016 and an in­crease three years af­ter that.

The gov­ern­ment had de­ferred the toll rate hike for Jan 1 last year. In re­turn, PLUS had in­cor­po­rated a com­pen­sa­tion of RM268.7mil into its ac­counts for the nine months un­til Septem­ber last year in lieu of the non-toll rate hike.

Maju says that if the tako­ever is al­lowed, the gov­ern­ment does not have to pay the com­pen­sa­tion un­til the end of the con­ces­sion pe­riod of the high­way, which is the year 2038.

On the face of it, the of­fer from Maju looks at­trac­tive.

How­ever, con­sid­er­ing the im­por­tance of the high­ways un­der PLUS to the na­tion and past ex­pe­ri­ence on the deal­ings be­tween the gov­ern­ment and the pri­vate own­ers of PLUS per­tain­ing to the im­ple­men­ta­tion of sched­uled toll rate hikes, it is bet­ter for the vi­tal in­fra­struc­ture to re­main in the hands of gov­ern­ment en­ti­ties.

PLUS was orig­i­nally un­der pri­vate hands un­til 2002 when United En­gi­neers (M) Bhd was “na­tion­alised” by Khaz­anah Na­sional Bhd.

When it was in pri­vate hands, the gov­ern­ment was un­der con­stant pres­sure to im­ple­ment toll rate hikes on the grounds that a pri­vate com­pany owned the as­set and it was ac­count­able to pri­vate lenders.

When the gov­ern­ment did not al­low for a hike due to pub­lic re­sent­ment, it re­sulted in the pri­vate com­pany get­ting a longer toll con­ces­sion.

That is how the con­ces­sion pe­riod of PLUS, which orig­i­nally was sup­posed to be for a pe­riod of only 25 years, ended up be­ing ex­tended to 50 years.

Since 2005, there has not been any toll rate hikes in the NSE be­cause it is a po­lit­i­cally sen­si­tive mat­ter.

Un­like the ur­ban high­ways that have been get­ting their sched­uled toll rate hikes, it is a dif­fer­ent con­sid­er­a­tion when it comes to PLUS be­cause the high­way runs across penin­su­lar Malaysia from Padang Be­sar to Jo­hor Baru. An in­crease in toll rates af­fects many peo­ple – from or­di­nary folk to busi­ness peo­ple.

The ques­tion now is should the gov­ern­ment force UEM-EPF con­sider the of­fer from Maju Group?

Based on the ar­gu­ments so far, there is no rea­son for any change in the own­er­ship of PLUS for now.

Firstly, the big­gest prob­lem the gov­ern­ment is fac­ing is a toll rate hike.

Now, it can af­ford to de­lay any toll rate hikes be­cause UEM is a gov­ern­ment en­tity and owns 51% of PLUS. The EPF, which holds the other 49%, would not pres­sure for any toll rate hike ei­ther as long as the in­vest­ments yield it the ap­pro­pri­ate re­turns. Also not to be for­got­ten is that the EPF is a also one of the hold­ers of the PLUS bonds which are giv­ing at­trac­tive re­turns.

Se­condly, would a de­lay in the toll rate hikes alarm bor­row­ers or hold­ers of the PLUS bonds?

No, it would not be­cause ul­ti­mately, they all know that PLUS has strong share­hold­ers in UEM and the EPF.

PLUS it­self gen­er­ates strong cash flows, more than enough to ser­vice debts. Its free cash flow was in ex­cess of RM1.1bil be­tween 2013 and 2015. This was af­ter strip­ping out the in­ter­est ser­vic­ing of about RM1.5bil per an­num.

PLUS’ big debt re­pay­ment only starts in 2020, which is three years away.

As long as bond hold­ers are made aware of a plan on how to deal with the re­pay­ment, they should be com­fort­able.

Also there is no nec­ce­sity to re­pay the en­tire bond sum as there is al­ways an op­tion of re-fi­nanc­ing.

Thirdly, the cur­rent share­hold­ers of PLUS only re­quire min­i­mum re­turns due to their low cost of funds.

The EPF, with RM750­bil in as­sets un­der man­age­ment, has a very low bor­row­ing cost. UEM also en­joys a low cost of funds be­cause ul­ti­mately, the gov­ern­ment is its share­holder.

Also, if the bor­row­ing is for an en­tity such as PLUS, bankers would not hes­i­tate to lower the rates to a bare min­i­mum be­cause the risk is low.

Un­like the de­mands of pri­vate en­trepreneurs, the EPF only re­quires sin­gle-digit re­turns from in­fra­struc­ture such as PLUS be­cause it has steady cash­flow and less risk. The EPF de­clares a div­i­dend of an av­er­age of 6%. So, a net re­turn of any­thing close to that should be fine for the prov­i­dent fund.

UEM, by virtue of man­ag­ing PLUS, ben­e­fits from other ways apart from the re­turns of its in­vest­ments in the con­ces­sion. Both UEM and the EPF can af­ford to earn low sin­gle-digit re­turns from their in­vest­ments in PLUS, which pri­vate own­ers can­not af­ford to.

Fi­nally, there would be a huge trust deficit if an as­set such as PLUS goes to pri­vate hands.

In the past, there were other pri­vate-sec­tor of­fers that had come up with pro­pos­als not to have toll rate hikes. They con­tended that the cur­rent cost of op­er­at­ing PLUS is too high and they could do with­out a rate hike by sim­ply man­ag­ing down the op­er­at­ing ex­penses.

On pa­per, it may seem a work­able propo­si­tion. In re­al­ity, whether it can hap­pen on a sus­tain­able ba­sis has not been proven.

Many from the pri­vate sec­tor may claim that they would be com­fort­able with sin­gle-digit re­turns. But con­sid­er­ing the bit­ter past lessons that the rakyat had to con­tend with when PLUS was in pri­vate hands, no­body would want to take the chance.

Also, there is a huge dis­trust in the com­pe­tency of the gov­ern­ment to ne­go­ti­ate a good deal for the rakyat with the pri­vate sec­tor on PLUS. A deal that would en­sure that re­turns are low and reg­u­lated for a low-risk as­set such as PLUS and toll rates are not raised un­nec­es­sar­ily.

There are many, many ex­am­ples to show that when in­fra­struc­ture as­sets are na­tion­alised, the gov­ern­ment ends up pay­ing huge com­pen­sa­tions to the pri­vate sec­tor. It ranges from wa­ter con­ces­sions to toll high­ways and sew­er­age sys­tems.

Go­ing for­ward, the pri­mary is­sue is whether there would be a toll rate hike for PLUS af­ter the next gen­eral elec­tion.

There may be one, but it is some­thing that the gov­ern­ment would have to deal with its in­di­rect owner, which is UEM.

Be­fore any toll rate can be agreed on, the gov­ern­ment should per­haps in­sist that the con­ces­sion­aire make trans­par­ent the cost of man­ag­ing the PLUS high­ways and the ben­e­fi­cia­ries of the var­i­ous con­tracts.

This may help the cur­rent own­ers mit­i­gate that their cost of man­ag­ing the PLUS high­ways are not high, as con­tended by the preda­tors.

Busy high­way: The NSE runs across penin­su­lar Malaysia from Padang Be­sar to Jo­hor Baru. An in­crease in toll rates af­fects many peo­ple – from or­di­nary folk to busi­ness peo­ple.

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