This article first appeared in The Edge Malaysia Weekly on February 25, 2019 - March 3, 2019

THE government is looking to commence negotiations with selected highway operators on the expropriation value of their concessions, sources familiar with the matter tell The Edge.

While details are scarce, expropriation in this case would involve the government taking over property, in this case highways, for public use, and may or may not include compensation to the existing owners. Globally, the expropriation of assets by governments often has a negative impact on capital markets.

Last week, Parti Pribumi Bersatu Malaysia (Bersatu) president Tan Sri Muhyiddin Yassin had hinted of a solution to the toll issue during a speech while campaigning for the Semenyih by-election. “It isn’t easy to solve certain problems, but we did not abandon our responsibilities. Many people criticise us for not fulfilling our manifesto pledges …  Maybe there are one or two issues such as tolls. I can’t give any statement because the minister involved will be making an announcement,” he is reported to have said last Thursday.

Last Friday, Works Minister Baru Bian said a study by an independant consultant on tolled roads would be completed in May, after which a decision will be made. According to sources, the consultant is EY.

An analyst familiar with highway concessions says the government is looking to break the agreements without having to fork out massive sums in compensation in this manner.

“In concessions, generally there are two methods of exiting them — first, termination, and second, force majeure,” he says. Force majeure generally involves a superior force or an unforeseeable circumstance preventing someone from fulfilling a contract.

“Via an expropriation, the government is seeking to limit its liability, or how much it will have to fork out as compensation,” he explains.

How the government plans to do this is not known, and the impact it will have on the shareholders and bondholders of the highway concessions is not clear.

As at May last year, according to RAM Ratings, there were 23 toll road operators which had issued debt paper amounting to RM52.83 billion in bonds and sukuk, excluding loan stocks. The bonds are largely held by local institutional investors and government-linked pension funds.

It remains to be seen how the government plans to take over existing concessions as the construction of most highways is largely financed by debt, and the coupon and repayment schedule for these bonds are usually structured to match the cash flow from toll collection.

It is also worth noting that some of the major toll concessionaires are government-linked entities. The largest is PLUS Malaysia Bhd, in which UEM Group Bhd — a wholly-owned unit of Khazanah Nasional Bhd — has a 51% stake. The Employees Provident Fund (EPF) holds the remaining 49%.

PLUS holds five concessions. First, there is the 846km Projek Lebuhraya Utara-Selatan Bhd, which has under its umbrella the North-South Expressway, New Klang Valley Expressway, Federal Highway Route 2 and Seremban-Port Dickson Highway. The other four concessions are the 63km Expressway Lingkaran Tengah Sdn Bhd, which includes the North-South Expressway Central Link; the 47km Linkedua (M) Bhd, which operates the Malaysia-Singapore Second Crossing; the 17km Konsortium Lebuh Raya Butterworth-Kulim Sdn Bhd, or known as the Butterworth-Kulim Expressway; and the 13.5km Penang Bridge Sdn Bhd.

All of PLUS’ concessions end in December 2038.

As at end-December 2016, PLUS had total assets of RM33.22 billion and total liabilities of RM33 billion. For its financial year ended December 2016, the group registered an after-tax profit of RM288.2 million from RM4.07 billion in revenue.

Tan Sri Abu Sahid Mohamad of Maju group had put in a proposal in 2017 to take over PLUS in a deal worth more than RM30 billion.

Maju Holdings Sdn Bhd is the concession holder for Maju Expressways Sdn Bhd, the highway that links Kuala Lumpur City Centre with Cyberjaya and Putrajaya. A 16.8km extension to the Kuala Lumpur International Airport will further increase the value of Maju’s highway.

Projek Lintasan Kota Holdings Sdn Bhd  (Prolintas) is wholly owned by state-owned unit trust company Permodalan Nasional Bhd (PNB) and holds the concession for the Ampang-Kuala Lumpur Elevated Highway (AKLEH), Guthrie Corridor Expressway (GCE), Lebuhraya Kemuning-Shah Alam (LKSA), Kajang Silk Highway (SILK), Sungai Besi-Ulu Kelang Elevated Expressway (SUKE) and Damansara-Shah Alam Elevated Expressway (DASH).

The last two, SUKE and DASH, are currently under construction.

The state of Prolintas’ financials is not clear but the company was said to be in the red in news reports up to 2015.

Another large highway concessionaire, public listed Lingkaran Trans Kota Holdings Bhd (Litrak), is 43.58% controlled by construction giant Gamuda Bhd. Coming under Litrak are the concessionaires of Lebuhraya Damansara-Puchong and the Western Kuala Lumpur Traffic Dispersal Scheme (or SPRINT Highway, which was obtained from Sistem Penyuraian Trafik Kuala Lumur Barat).

For its six months ended September 2018, Litrak registered a net profit of RM115.80 million from RM258.49 million in sales. As at end-September 2018, it had cash and bank balances of RM550.54 million, and on the other side of the balance sheet, RM771.20 million in long-term borrowings and RM220 million in short-term debt commitments.

There are other highways, among them, the 77km Senai-Desaru Expressway connecting Senai to Pasir Gudang and Desaru in Johor. Upgrading works on the highway have been put on hold by the government.

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