PLUS should remain in hands of govt
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.