Is the government keeping PLUS?

Upcoming toll rate cut and PM’S statement seem to suggest Khazanah’s offer tops it all

TWO developments in the last three weeks have been quite telling on the fate of PLUS Malaysia Bhd and other highway concessionaires in the country.

Firstly, Finance Minister Lim Guan Eng surprised everyone with the announcement of an 18% toll rate reduction on highways under PLUS. He said that the reduction in toll rates would save highway users Rm1.13bil next year and Rm43bil until 2038 when the concession ends.

By stating a time frame, the implied view of many is that the toll rate reduction would take effect starting from January.

Secondly, Prime Minister Tun Dr Mahathir Mohamad, who has said several times that the government does not like to be in the business of owning highways, has stated that the offers from the private sector for PLUS is not attractive enough. He, nevertheless, has emphasised that the government will continue to look at all offers for the concessionaire.

His statements seem to indicate that the Cabinet has not made a decision on PLUS, which means that anything is possible. However, suitors for PLUS have to come up with a better offer for the concessionaire than what is on the table.

PLUS, which owns the 772-km North-south Expressway and four other concessions, is an asset that is much sought after. There are four suitors for PLUS, whose shareholders are Khazanah Nasional Bhd and the

Employees Provident Fund (EPF), from the private sector.

The four suitors are the Maju Group, a joint-offer from Tan Sri Halim Saad and Datuk Wong Gian Kui, private equity firm RRJ Capital, and Widad Group Bhd. The amount offered for the equity is between Rm3.5bil and Rm5.2bil with discounts on toll rates between 25% and 40%.

All the offers come with an extension of the concession period except the offer from Halim and Wong that states that the tenure will expire in 2038 as per the agreement now.

There is an offer from Khazanah that Finance Minister Lim described as being beneficial to the people. However, the details have not been made public.

Speculation is rife that the offer is for the government to buy out their stakes at Rm7.5bil, the toll rates be reduced and the concession period extended by up to 20 years.

The quantum of the toll rate reduction under the Khazanah offer is not known. However, based on the budget speech, it would seem that the government is looking at nothing less than 18% and wants it to start from January next year.

If one were to scrutinise the Khazanah proposal, the government actually does not fork out any money because it already owns 51% of PLUS. Hence, the government will issue debt papers to buy out the remaining 49% from the EPF.

The cashflow from PLUS should be sufficient to service the interest and repayment of the additional bonds issued by the government, considering that it enjoys a lower cost of financing compared to the private sector.

Moreover, the government already guarantees Rm11bil of the Rm23.35bil debt papers issued by PLUS.

The current debt structure of PLUS is back-end loaded with huge repayments of principal amounts starting from 2024 until the tenure ends in 2038. If the concession is extended, the repayment can be stretched.

As for the extension of the concession period by up to 20 years, it is something that can be rescinded or altered if the government’s finances allow it to do so. Considering that PLUS is such a political hot potato, the government may even reduce the toll rates further for political mileage over time.

Although Pakatan Harapan had stated in its 2018 general election manifesto that it would abolish tolls, everybody knows that it is something that is not realistic. Malaysia has to have highways with tolls and freeways such as the federal and state roads. If the existing highways are toll-free, it would attract all the traffic, leaving the federal and state-owned roads fairly free of congestion.

Realistically, toll rates can be reduced because traffic will continue to increase on highways. There has not been any toll rate hike for highways under PLUS Malaysia since the 2008 general election and there is not likely to be any more toll rate hikes.

Politically, it would not be acceptable.

What’s happening is that the government has been compensating the owners of PLUS for not allowing the rate hikes.

There is a view that if the maintenance of the highways is made more transparent and open to all and sundry, the compensation amount can be reduced further or done away with. That is among the salient features of the existing private-sector offers for PLUS.

At the moment, UEM Edgenta Bhd, a company that is owned by Khazanah, undertakes the maintenance of PLUS highways. If the government takes over the ownership of PLUS, almost certainly, the maintenance job of the highways would be open to all and sundry to compete for.

It will be interesting to see the cost of the maintenance then.

The reduced toll rate will have an impact on other highways in the country. This is because if the toll rates on PLUS are reduced, it would attract more traffic and the other highways would see a decrease in traffic.

It is already happening to some highways in the Klang Valley. Outside the Klang Valley, it also poses a threat. For instance, the West Coast Expressway (WCE) that is being constructed by IJM Bhd is a competing highway to PLUS. But with toll rates on PLUS to be reduced, the heat will be on WCE.

The reduction in toll rates will spark a move by the other concessionaires to sell their highways to the government and all may be consolidated under PLUS. In fact, when PLUS was taken private in 2011, it was for it to eventually take over all the other highways and be turned into a trust.

But that never happened. It appears to be taking shape now, under the new regime.

Realistically, toll rates can be reduced because traffic will continue to increase on highways.