PLUS, Toll Roads And Penang's Many Bridges

The UEM Group has made a Press Release over their recently concluded toll concession negotiations with the Government. Here is the news in brief :

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UEM Group and EPF agree to waive RM2.9bil owed by Government under new accord

UEM and the (EPF), the joint offerors for the assets and liabilities of PLUS Expressways Bhd (PEB), have agreed to waive the RM2.9bil of outstanding compensation owed by the Government under their recently concluded toll concession agreements.

..no ..compensation for the toll-rate freeze effective from 2011 to 2015, which would otherwise cost the Government an additional RM3.6bil.

..the five-year toll freeze as announced by PM ..on four expressways the North South Expressway (NSE), NSE Central Link (Elite), Malaysia-Singapore Second Crossing (Linkedua) and Butterworth-Kulim Expressway (BKE) until 2015.

Beginning 2016, the toll rate increase under the new structure would be fixed at 5% every three years on the four expressways. . . . “effectively 1.7% per annum, which is lower than the country's three-year average inflation rate of 2.6% per annum” .

For the Penang Bridge, the toll rate would remain the same until the end of its concession period.

all concessions would expire on Dec 31, 2038, with no further extension.

..the concession periods for Elite (May 31, 2030), BKE (June 27, 2026) and Penang Bridge (Dec 31, 2021) would be extended to align with the new arrangements.

UEM Group and EPF are expected to complete the proposed acquisition of PEB and Penang Bridge Sdn Bhd next month. On completion of the exercise, the revised concession agreements and concession assets of all the expressways operated by PEB and Penang Bridge will be placed under a new company, called Projeck Lebuhraya Usahasama Bhd (PLUS). PLUS, in turn, will be wholly owned by PLUS Malaysia Sdn Bhd, an investment vehicle in which UEM Group will own 51% while EPF will have a 49% interest.

EPF contributors ..would still benefit from the new arrangement as there would continue to be steady returns from the mature, cashflow generating assets of the expressways.

EPF ..expected an internal rate of return on the investment in PLUS to be at least 10% as per the national pension fund manager's guidelines.

"We expect a dividend yield of between 5% and 6% over the concession period,"

Thats the news. Lets look at the behind the scenes a little.

First of all there is no toll increase till 2015. I also hope that the Hiways will offer those discount tolls for late night travelling, weekday driving and stuff.

Then after 2015, ie beginning 2016 the toll increase is 5% every three years or about 1.7% a year.

If the toll is increased 1.7% every year (rather than 5% every three years) the public will not feel the rise at all (plus it will be more upfront cashflow for Plus).

In brief this is a big slowdown in toll rate increases which hit us before. As the country's GDP grows and per capita income grows the public should not feel any pinch.

However no one wants to pay toll. The Plus concession goes out to 2038. I will be 78 years old (if I am still alive) and still paying tolls. That is not something anyone will relish.

Most certainly this freeze in the "toll rate increase" imposed by Najib is motivated by political considerations. The BN lost the 2/3 majority and five States which has also prompted the toll freeze. I have a feeling that the PLUS toll concession will come to an end much earlier than 2038.

There is another axe hanging over Plus. Here is the news from The Star again :

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Muhyiddin sees no logic for Penang tunnel

KUALA LUMPUR: DPM has questioned the logic behind the proposed third link between Penang island and the mainland, warning it may end up being a waste of funds.

“The second bridge is being built with the future in mind. Allow this project to be completed first. then look at the situation over time.

. responding to the announcement by Penang Chief Minister Lim Guan Eng on the proposed third link that would be in the form of an undersea tunnel.

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First of all the very congested Penang Bridge was widened to three lanes.

"..Penang Bridge spent RM786 million to widen the Bridge from two lanes to three lanes each way. The widening initiative, which commenced in 2005 and completed in 2009, was undertaken to accommodate the increase in traffic volume.”

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I drove on the "new" much wider Penang Bridge just last week. It can take a higher volume of vehicles. Then the Second Bridge is readying completion by end 2013. That will make it two bridges to Penang. Now Guan Eng is proposing a third link.

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Right now there is a one time only RM7.00 toll for the Penang Bridge. Logic dictates that the Second Bridge will also have a toll. If there is no toll, all the cars will jam up the Second Bridge and the First Bridge will go bust. And the toll has to be the same.

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This is where Guan Eng's third link (a bridge and tunnel) on the much shorter northern route from the Gurney Drive area right across the channel will hold the trump card.

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First of all the Third Bridge is financially feasible to construct because the Penang State is proposing a "land for bridge deal". He who builds the Bridge & Tunnel will get parcels of prime land along the Gurney shore as payment. Plus all the development rights. Some of the land may not even exist yet - the contractor or developer may have to reclaim it from the sea. The State is being aggressive - they are going to value the land at "post-completion of bridge" valuation. The State therefore does not need to pay money upfront.

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The developer can keep all the land for himself (which is unlikely). They will sell parcels of the land to raise some of the funds to construct the bridge.

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Guan Eng has suggested that the Third Bridge could also collect tolls. This is where the knife cuts both ways. If Guan Eng collects equal toll fare, it will be three bridges in Penang collecting tolls. If there is not enough volume to sustain tolls on three bridges, then all three Penang Bridges may go bungkus.

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Or Guan Eng may go kamikaze and not collect any tolls at all for the Third Bridge. If he does not collect toll, then the First and Second Bridges will go bungkus because people will not take the tolled bridges. Why should they?

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Even if Guan Eng collects tolls on the Third Bridge but lowers it to say RM2.50 each way (RM5.00 two ways) it will cause a huge dent for the First Bridge whose toll is RM7.00. People will avoid the First (and Second) Bridge.

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Also the concession on the First Bridge has just been extended by another 17 years from 2021 to 2038. Please see the very last line in the table below. As I said, no one likes paying tolls. Certainly the Penang people will not like to pay toll on the Bridge for another extended 17 years.

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So to make a long story short, Guan Eng now holds the First and Second Bridge operators by the cojones. UEM now has to wait and see just what exactly is the model Guan Eng is going to adopt for the Third Bridge : no toll, less toll or same toll?

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A Third Bridge without tolls is entirely feasible - it all depends on the size and value of the land that Guan Eng will "swap" for the cost of building the Third Bridge (maybe the PKFZ boys can lend their expertise here).

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Talk is the DAP will retain Penang at the next Polls. If Guan Eng promises a Third Bridge without tolls he will certainly keep Penang. If his Third Bridge without tolls then causes the First and Second Bridges to also cut their tolls drastically (or remove them completely) then Guan Eng may keep Penang for a while.

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The question now is : how fast can Guan Eng complete the Third Bridge? Life is all about delivering the product.

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The moral of the story is : dont lose the support of the people at the Polls. This is what the BN has not understood. Just lose one State (Penang) and all sorts of complications can happen.

The way to lose the Polls is you allow cronies to "songlap" RM250.0 million and then talk rubbish. The PKFZ scandal ripping off peoples' money by the billions and all the jerung just swim away. All this has to stop. Otherwise you will lose the votes.