Thursday 28 Mar 2024
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This article first appeared in Forum, The Edge Malaysia Weekly on May 10, 2021 - May 16, 2021

Last week, the government announced that it would have to pay RM2.25 billion in compensation to city highway concessionaires. The amount that would be forked out is about half of the government’s budget to vaccinate the population.

The alternative is for the government to allow the scheduled increase in toll rates — a move which will not earn it brownie points with the people. Moreover, the concessionaires would also be accused of not displaying any compassion during the present trying times.

The reality is that there is never a good time for the government to allow rate hikes for toll highways.

Motorists and concessionaires have always been at loggerheads when it comes to the merits and demerits of toll rate hikes. Motorists are not prepared to accept the fact that toll highways come with a price while concessionaires are not able to come up with a financing model that entails minimum toll increases.

Concessionaires cannot get the financing required to build highways if their financial model does not incorporate a toll rate hike. Yet, new highways criss-crossing Kuala Lumpur and Selangor are coming up almost every year.

The reason for more highways being built in the city is because there is demand for such infrastructure.

There are always motorists prepared to use highways that cut across the city because of traffic congestion during peak hours. At the moment, at least four highways are being constructed in and around Kuala Lumpur, and several new highways are on the drawing board and waiting for approval.

The highways being constructed are the Sungai Besi-Ulu Klang Expressway (SUKE), the Damansara-Shah Alam Expressway (DASH) and the Setiawangsa-Pantai Expressway (SPE), which is also known as DUKE 3. An entity under Permodalan Nasional Bhd (PNB) is the promoter of SUKE and DUKE while SPE’s owner is Ekovest Bhd.

Another highway under construction is Maju Expressway II, which links Putrajaya to the Kuala Lumpur International Airport.

An interesting feature is that all the new highways come with longer concession periods of 45 years or more.  This means the tolls will be imposed for a long time to come. And if the rates are not allowed to be increased as scheduled, the government will have to pay compensation.

In a nutshell, the compensation that the government will need to pay concessionaires will only keep on increasing. And the amounts will only keep getting bigger.

The money comes from the federal government’s coffers while the beneficiaries are motorists living in the city. This often raises the question as to why someone living in Sabah, Sarawak or Kedah needs to subsidise motorists in the Klang Valley.

One of the solutions the government is looking at is a highway trust. Minister in the Prime Minister’s Department in charge of Economic Affairs Datuk Seri Mustapa Mohamed said last August that the government was looking at a highway trust to house all the highways in a single entity.

The idea is to stretch the tenure of concessions, reduce toll rates and get private investors to fund the cost of buying the highways. In return, the investors get steady returns of about 5%.

A highway trust is an idea that has been bandied about since May 2018 as part of the solution to abolish tolls eventually. It was one of the election pledges of Pakatan Harapan (PH).

In April 2019, a financial adviser proposed a highway trust anchored on the highway assets held by IJM Corp Bhd and Gamuda Bhd — the two companies with the most number of highways in the city. The highway trust was also to include the West Coast Expressway.

Under the proposal, the government would become the main sponsor to get the two companies to put their highways into a special purpose vehicle (SPV) that would be listed. However, the drawback was that the government-backed SPV would need to raise money to the tune of RM5 billion, and the company would need tax exemption.

The proposal did not take off. But Gamuda has gone on to propose its own highway trust, which involves only the four concessions under its stable. The proposal, which is still being reviewed, involves raising money from bond market investors and the government giving tax exemptions to the SPV.

A highway trust is the way forward if the government does not want to pay compensation to concessionaires, and meet the demands of motorists who do not want to see toll rate hikes.

But there are hurdles to establishing a highway trust.

First, there has to be a willing seller more than a willing buyer. In the case of highways, the sellers are the concessionaires while the buyers are bond investors seeking risk-free returns of about 5%. The bondholders need certainty that the debt papers they subscribe to will be redeemed.

As for shareholders of the concessionaires, most are prepared to have the highways injected into a trust. In return, they get cash and also the maintenance work of the highway.

But the problem is the concessionaires want to exit at the full valuation of their highway while bond investors always want a discount. Hence, the expectations of sellers and buyers rarely match.

Second, most highway trusts would require some kind of government support — either in the form of a guarantee to extend the concession period and/or tax exemptions for the trust. These are tools to ensure that the highway trust generates enough cash to redeem the debt papers.

But some bankers are of the view that the government should regulate the equity returns of the concessionaires when they inject the highways into a trust. The returns certainly cannot be higher than what they were to enjoy if the highways were not injected into a trust.

In short, the entire exercise should not result in higher returns for concessionaires. If the returns are higher, then some critics would say it would tantamount to promoting a rent-seeking culture, which Malaysia does not need.


M Shanmugam is contributing editor at The Edge

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