Highway acquisitions by the govt — between a rock and a hard place

It was 1 of the election promises which help put Pakatan Harapan in Putrajaya, a fact which continues to haunt the administration


The government is stuck between a rock and a hard place when it comes to tolled highways. The cost of acquiring the highways, measuring thousands of kilometres zigzagging the country, could be one-third of the country’s GDP of RM1.4 trillion, exceeding the country’s 2019 total budget and sufficient to give 2.9 million families a free affordable home.

In hindsight, it was one of the election promises which help put Pakatan Harapan in Putrajaya, a fact which continues to haunt the administration.

The estimated total acquisition value of about RM420 billion is based on the contentious projected revenue concession holders would lose if the government backtracked on the highway agreement, transferring the billions of debts and payment for the assets.

Debts for some of the major concessions are already around RM55 billion, not counting the cash acquisition of highways.

Complicating the matter, most of the highway shareholders are listed firms. Shareholders would push for a fair evaluation to reap the highest return for their assets.

The recent proposal by Putrajaya to acquire four highways control-led by Gamuda Bhd has struck a chord, receiving equal supports and brickbats.

Under the proposed discussion, the government will acquire four highways — the Damansara-Puchong Expressway (LDP), Sistem Penyuraian Trafik Kuala Lumpur Barat (Sprint), Shah Alam Expressway (KESAS) and the SMART Tunnel.

Lingkaran Trans Kota Holdings Bhd (Litrak) owns and operates two of the proposed toll roads — the LDP and Sprint. Construction and infrastructure conglomerate Gamuda owns a 43.6% stake in the company.

Gamuda also holds a 70% equity stake in KESAS (remaining 30% is owned by Selangor State Development Corp) and jointly owns the SMART Tunnel with MMC Corp Bhd.

Once the acquisition is completed, commuters will travel on these highways for free during the off-peak period between 11pm and 5am. Users will enjoy discounted rates of up to 30% for non-peak hours and full toll charges dubbed “congestion charges” during six peak hours in a day.

The government plans to use the revenue collected from the “congestion charges and daily collection” to finance highway operations and maintenance, besides loan repayments.

Investors and critics are largely concerned on how the government will finance the deal in light of the country’s current fiscal position.

Prime Minister Tun Dr Mahathir Mohamad had said it would be too costly to abolish all tolls as the government would have to raise the money to acquire these highways.

Gamuda said any acquisition would be based on “market valuation norms and practices”.

Confirming that talks are underway with Putrajaya, the construction giant said: “As the board of directors of Gamuda have a fiduciary duty to deliver fair and reasonable value to all its shareholders, Gamuda has to ensure that the proposed transaction will be based on market valuation norms and practices.”

But the huge cost continues to be the elephant in the room. Without the proposed acquisition, the government will compensate a total of RM972.75 million to highway concessionaires to prevent them from increasing the toll rates this year.

Malaysian Institute of Economic Research senior research fellow Dr Zulkiply Omar said the government may consider paying the concessions in-kind via project awards, for instance, to Gamuda as one of the mechanisms to realise the proposed acquisition.

“The payment can be done not just by cash transfer. It could be in-kind, in terms of projects such as the Mass Rapid Transit works because Gamuda is already the main contractor for the rail project,” Zulkiply told The Malaysian Reserve.

Kenanga Investment Bank Bhd in a report has estimated, based on sum-of-parts valuation, that Gamuda could fetch a conservative RM2.8 billion (excluding potential extension for KESAS which is slated to end in 2023) in divesting all its equity stakes in the four concessions to the government.

But such deals are not expected an easy closure. Various reports suggested that the final acquisition price would be based on a “willing buyer, willing seller” basis and not forced acquisition or expropriation.

Gamuda last year had forced its valuation on Pengurusan Air Selangor Sdn Bhd’s proposed acquisition of its 40%-owned associate company Syarikat Pengeluar Air Selangor Holdings Bhd (Splash) in a deal that was finally inked at RM2.55 billion cash.

A similar hard stand could surface for the highway acquisition. Maybank Investment Bank Bhd in a report said it did not discount the possibility that the payment structure could be similar to that of the disposal of Splash.

The RM2.55 billion takeover is broken down into two portions that include an upfront payment and the balance paid through instalments.

The concession mechanism, which is applied largely to nearly 30 expressways, remains one of the biggest roadblocks.

Besides Gamuda, other benefactors of this largely cast generation business are IJM Corp Bhd, WCE Holdings Bhd, Taliworks Corp Bhd, Ahmad Zaki Resources Bhd, Bina Puri Holdings Bhd, Ekovest Bhd and Malaysian Resources Corp Bhd.

Share prices of Gamuda and Litrak have been under pressure following the government’s toll acquisition announcement. Their shareholders will be keeping a close eye on any effort to force acquire their assets.

Besides listed and private companies, a majority of Malaysians are indirect shareholders and benefactors of the highways.

Sovereign wealth fund Khazanah Nasional Bhd and people-funded agency the Employees Provident Fund (EPF) owns Projek Lebuhraya Usahasama Bhd (PLUS) — the country’s biggest highway concessionaire which manages almost 1,000km of roads. The North South Expressway alone is 772km.

Khazanah owns a 51% stake, while EPF — which has 14 million members — owns the balance. Both parties took the highway private in one of the largest merger and acquisition deals in corporate Malaysia. Both organisations raised RM30.6 billion in Islamic debt papers to take the company private. The profits from PLUS operations have been distributed to EPF members.

The second-largest operator of highway Projek Lintasan Kota Hol- dings Sdn Bhd (Prolintas) is a wholly owned subsidiary of Permodalan Nasional Bhd (PNB). The fund has more than 13.2 million accounts — all personal investments — and assets under management of about RM279.2 billion at the end of 2017.

Prolintas owns six highways — Ampang-Kuala Lumpur Elevated Highway, Guthrie Corridor Expressway, Kemuning–Shah Alam Highway, Kajang Silk Highway, Damansara- Shah Alam Elevated Expressway and Sungai Besi-Ulu Klang Elevated Expressway. At the end of 2017, Prolintas recorded a revenue of RM305 million and earnings before interest, tax, depreciation and amortisation of RM216.2 million, according the the fund’s annual 2017 report.

It is not known the total investment from PNB and EPF in these highway concessions, but any takeover will leave these public-fund managers to lose certain income.