This article first appeared in The Edge Malaysia Weekly on May 28, 2018 - June 3, 2018

TOLL road operators are slated to send their respective proposals on the new government’s plan to eventually abolish highway tolls to the Council of Eminent Persons (CEP) on Monday, two sources familiar with the matter tell The Edge.

“They (the new Pakatan Harapan government) asked for our proposals. The deadline is Monday (May 28) … no decision has been made as yet,” an executive with one of the concessionaires tells The Edge.

An official from another toll road concessionaire says they were made to understand that the tolls will be removed gradually and not abolished overnight.

Also being looked at is a plan to reduce toll charges by 30% to 40% instead of an abolishment, as well as several different formulas, such as higher charges during peak hours.

“They (the new government) are not going to take a populist approach. They do understand that there are bondholders and shareholders to pay (if tolls are abolished),” the second source comments.

On May 17, CEP member Tan Sri Zeti Akhtar Aziz said an announcement on the plans could be made as early as the following week by CEP chair and former finance minister Tun Daim Zainuddin.

Toll road operators, bondholders, shareholders and the public have been waiting anxiously for guidance on the new government’s plan. The financial market’s main concern is how the government will deal with the whopping RM55 billion debt papers against the backdrop of a national debt of more than RM1 trillion.

One fund manager, who wishes to remain anonymous, says, “The market reaction will depend on how they (the new government) do it.” The foreign-based fund manager reckons that there are three possible scenarios. The first option is that the government could withdraw the concessions, with the bondholders taking a hit. However, this would result in the Employees Provident Fund (EPF) and state-controlled entities such as Permodalan Nasional Bhd (PNB) losing billions. Foreign bondholders would also be upset, apart from the concessionaires’ shareholders.

“This would be unpopular,” he says, adding that it would be like the government not honouring contracts that had been signed legitimately.

The second scenario is that the government will redeem the bonds and abolish tolls, and pay minimal compensation to the concessionaires. According to RAM Ratings, as at May 15, 2018, the toll road sector comprised 23 issuers with a notable RM52.83 billion of bonds and sukuk outstanding, excluding loan stocks.

But the question is who will fork out the RM52.83 billion, assuming the shareholders are not paid at all?

The third scenario is where the government undertakes an expropriation exercise and pays shareholders and bondholders, but this will result in very high capital costs.

“This will also adversely impact us as in future, no company would dare undertake any development in the country,” the fund manager says.

“From both the economic and social points of view, the government should look at the Singapore model. The government should own all highways, but they need to only impose reasonable toll charges to cover costs, manage traffic and maintain the roads,” he adds.

In a May 18 note, RAM Ratings says it believes, pending further details, the government will balance its plan against any adverse implications on the bond market. “The toll road sector is one of the earliest and largest sectors in Malaysia to have tapped the debt capital markets,” it says. “Cashflow matching is a key rating driver for toll road concessionaires. As concession terms are not uniform across the sector, the issue rating for each toll road would have to be assessed on a case-by-case basis, with an emphasis on the timing of and eventual payment amount from the government, weighed against the financial obligations of the concessionaires,” says RAM’s co-head of infrastructure and utilities ratings Chong Van Nee.

Meanwhile, if tariffs are not implemented as per the toll rate schedule in the concession agreements, the government is obligated to compensate the concessionaires, as has happened in the past. RAM Ratings highlights that the previous government had allocated RM448 million in Budget 2018 as compensation for toll concessionaires.

The negotations with government-linked operators such as PLUS Malaysia Bhd are expected to be easier compared with the private ones, for instance, Lingkaran Trans Kota Holdings Bhd (Litrak).

The largest toll road concessionaire is PLUS Malaysia, in which UEM Group Bhd, a wholly owned unit of Khazanah Nasional Bhd, has a 51% stake, while the EPF holds the remaining 49%.

PLUS has five concessions in its stable: Projek Lebuhraya Utara-Selatan Bhd (North-South Expressway, New Klang Valley Expressway, Federal Route 2 and Seremban-Port Dickson Highway, with a length of 846km); Expressway Lingkaran Tengah Sdn Bhd (63km North-South Expressway Central Link); Linkedua (M) Bhd (47km Malaysia-Singapore Second Crossing); Konsortium Lebuh Raya Butterworth-Kulim Sdn Bhd (17km Butterworth-Kulim Expressway); and Penang Bridge Sdn Bhd (13.5km Penang Bridge). All PLUS Malaysia’s concessions end in December 2038.

Also notable is Litrak, which is 43.66%-controlled by construction giant Gamuda Bhd and holds the concessions for the Lebuhraya Damansara-Puchong (LDP) and Sistem Penyuraian Trafik KL Barat Sdn Bhd (Sprint Highway).

Another toll concessionaire is construction giant IJM Corp Bhd, which owns Besraya Sdn Bhd, the concession operator of Besraya Highway, Sungai Besi Highway, New Pantai Expressway Sdn Bhd (NPE) and Lebuhraya Kajang–Seremban Sdn Bhd (LEKAS).

The only highway concessionaire owned by an individual is Maju Expressways Bhd, which is controlled by the Maju Group of companies, the flagship Tan Sri Abu Sahid Mohamad.

Other notable toll road concessionaires are PNB unit Projek Lintasan Kota Holdings Sdn Bhd, which operates the Ampang-Kuala Lumpur Elevated Highway; Prolintas Expressway Sdn Bhd, which operates the Guthrie Corridor Expressway; Projek Lintasan Shah Alam Sdn Bhd, which manages the Lebuhraya Kemuning Shah Alam; and Sistem Lingkaran Lebuhraya Kajang Sdn Bhd, which owns the Kajang Silk Highway.

Lastly, there are Projek Lintasan Sungai Besi-Ulu Klang Sdn Bhd and Projek Lintasan Damansara-Shah Alam Sdn Bhd, which is constructing the controversial Damansara–Shah Alam Elevated Expressway.

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