Highway takeover could set a precedent for Malaysia

This article first appeared in The Edge Malaysia Weekly, on March 4, 2019 - March 10, 2019.

The government hopes to buy the highways at a fair price, says Finance Minister Lim Guan Eng

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THE planned state takeover of four Klang Valley intracity highway concessions owned by Gamuda Bhd will likely set a precedent for other cases of “expropriation” of assets in Malaysia, observers say.

Meanwhile, the Ministry of Finance (MoF) is offering to buy out the operator’s shareholders, a move that will be closely observed by the corporate sector. It is not known how the government would value the assets, and whether the discounted cash flow (DCF) method will be employed as per the concession agreements.

“Will the government offer a valuation [with toll hikes] that is based on the DCF to shareholders? If they do this, the government is essentially saying that the concessions were awarded fairly, backtracking from what they have been saying all these years when they were in the opposition camp.

“At the same time, if the government does not honour the concession agreements, it will paint a bad picture of Malaysia as an investment destination for both local and foreign investors. What guarantee is there that their assets will not be expropriated?” says a fund manager.

According to a statement issued by the Prime Minister’s Office (PMO) last Saturday, government negotiations with Gamuda regarding its acquisition of the highway concessions have begun with the aim of abolishing tolls on these roads. The four highways are Lebuhraya Damansara-Puchong (LDP), Sistem Penyuraian Trafik KL Barat (Sprint), Lebuhraya Shah Alam (Kesas) and the Stormwater Management And Road Tunnel or SMART Tunnel.

The PMO added that toll charges would be differentiated based on the time of travel. For example, toll fees will be exempted during the off-peak period between 11 pm and 5 am.

Some observers see this as a right step for Pakatan Harapan in fulfilling one of the promises in its election manifesto. However, the negotiations are expected to take about six months.

In the meantime, Finance Minister Lim Guan Eng says that the government hopes to buy the targeted highways at a reasonable price. This leads to the question on what constitutes a fair and reasonable offer?

Even then, the current valuations offered by brokers have differed vastly. On the lower end of the spectrum, AmInvestment computed a valuation of RM1.95 billion based on the DCF method, at a 10% discount.

Conversely, Affin Hwang Capital ascribed a valuation of RM4.78 billion — more than double AmInvestment’s — based on a revalued net asset value, at a 7.2% discount.

Somewhere in the middle is UOB KayHian’s valuation of RM3.4 billion based on the DCF method, at an 8% discount rate.

Gamuda’s share price reacted negatively last Monday, after The Edge broke the story of the government’s plan to “expropriate” its highway concessions. The company’s share price dropped to a low RM2.64, from its RM3.04 close on Friday (Feb 22).

However, following a statement by Lim and Gamuda that talks were conducted professionally and that the proposed transaction will be based on market valuation norms and practices, its share price started to recover and ended the week at RM2.92.

An executive familiar with Gamuda tells The Edge that the group is amenable to the proposal because it would be able to channel the proceeds from the sale into other projects. The group also realises that the assets could eventually be taken away if the company decides to contest the acquisitions.

“Gamuda is comfortable with the DCF valuation, as per the concession agreement, which includes computing future toll hikes. However, the company might have to accept the final offer on the table,” the official says.

Lim has said that Gamuda’s control of the four highways makes for easier negotiations compared with some of the other highway concessionaires, noting that the infrastructure company had also initiated the proposed takeover of its tolled roads that contribute a significant 48% of total toll collections in the country.

Other major chunks of toll collections are derived from highways under PLUS Malaysia Bhd such as the North-South Expressway, the New Klang Valley Expressway, the Penang Bridge, the Malaysia-Singapore Second Link, the Butterworth-Kulim Expressway, and the North-South Expressway Central Link.

Yet, the plan to acquire the highway concessionaires has prompted a number of questions about the use of public funds, especially at a time when the government’s total debt and obligations exceed RM1 trillion, or more than 80% of gross domestic product.

Moreover, the move seems to be overwhelmingly beneficial to residents in the Klang Valley.

“People from other states might be asking, what is in it for them? Why should the government spend billions of ringgit to reduce toll rates in the Klang Valley when Felda settlers are struggling to put food on the table due to low commodity prices?” ask an observer.

Executive director of SERC Sdn Bhd Lee Heng Guie, believes that the government must have considered every aspect of the plan, including balancing the trade-off between the sustainability of its balance sheet and enhancing socioeconomic welfare. However, he opines that using tolled roads are a choice, and that people only use them if they value the improved travelling time versus the charges incurred.

RHB Research Institute economist Peck Boon Soon says that the current move is more of Pakatan Harapan having to fulfil what it had promised in the run-up to last year’s 14th general election. “Otherwise, given the fiscal constraints, the money could be put to better use.”

Now that the wheels have been set in motion, it is imperative for Putrajaya to ensure that whatever offer it puts on the table, the country’s standing as an investment destination will not be jeopardised.

The impact on debt will depend on how the government plans to fund the acquisition, says Julia Goh, senior economist at United Overseas Bank (Malaysia) Bhd. Part of the congestion charges will, however, be used to service funding costs.

“Meanwhile the debt and liability management committee under the PMO is expected to unveil plans to reduce the country’s debt levels over an 18-month period. I think this would have more of a material impact on the debt trajectory going forward,” she adds.


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