No free lunch in RM5.48b toll road purchase

Value cannot be created out of thin air. It has to come from somewhere. So it is impossible to have everyone winners in a deal which cancels a schedule of promised toll increases, promises no future toll increases and puts the government under no further obligation as far as toll compensations and debts are concerned.

Too good to be true, right? Indeed, it is.

The government expects to save RM4.3 billion in toll compensations over the takeover of four key toll roads in Kuala Lumpur for RM5.48 billion of which the main shareholder is listed infrastructure conglomerate Gamuda. But someone will pay for this RM4.3 billion.

It’s being billed as a win-win-win deal for all three parties - the shareholders of the concession, mainly Gamuda, the government and the toll-paying rakyat.

But simple arithmetic dictates that all three cannot win because someone has to pay for that RM4.3 billion - it can’t disappear into thin air. Although the key players in this sad saga, which includes the non-profit Amanat Lebuhraya Rakyat or ALR which will take over the concessions, continue to downplay it, the loser is - no surprises here - the rakyat.

Bitter fruit

The payoff for the RM4.3 billion comes through the extension of the concession periods of the three main roads for a period of between five and 10 years - instead of toll increase, the period for payment is increased, still burdening the rakyat.

Based on current projections, the deal perpetrators must have exact figures for how many years precisely the concessions will be extended but they are not saying anything yet. Strange, but I suppose they prefer to keep this most important part of the deal as quiet as possible.

This extension of the toll roads is the bitter fruit that the rakyat will eat in future, much like the Employees Provident Fund withdrawal which they will enjoy now at the expense of much-reduced retirement expenditure. Both are instant gratifications in return for polls popularity for Umno/BN.

In fact, all of this financial engineering mambo-jambo which passes off as magical corporate finance - which it is not - is totally unnecessary. Even the non-profit to execute this, ALR, is redundant.

All the government had to do was to turn the screws on the major shareholders using the expropriation clause which is reportedly in all toll contracts to obtain better terms for an extension of the toll concessions. Thus, there will be no need for an ALR which assumes the risks of toll shortfalls now.

(The expropriation clause reportedly permits compensation to be based on construction and other costs instead of revenue foregone in future which is how it is being valued right now at a much higher price.)

Valuation issues

We had pointed out in our previous article serious valuation issues in the purchase of ALR of four toll road concessions. ALR is in the process of acquiring concession companies, Shah Alam Expressway (Kesas), Western Kuala Lumpur Dispersal Link (Sprint), Litrak (operator of Lebuhraya Damansara-Puchong or LDP), and Stormwater Management and Road Tunnel (Smart), by raising funds through sukuk or Islamic bonds. The table gives details of the acquisitions.

One of the main negatives of the deal is that toll traffic can potentially reduce by a lot in view of the mass rapid transit (MRT) construction which will come through in the next few years and rising petrol prices. These are real game changers for toll traffic if the KL transport system becomes successful and people switch en masse to public transport.

Although ALR maintains that toll projections have been made by consultants, consultants have been known to be notoriously wrong in their projections. Also, when a deal is on the table, there is a tendency to employ a consultant whose projections support the deal.

Why should ALR take this risk now when one of the concessions for instance has just a year to expiry? If ALR fails and the toll revenue is not enough to cover debt obligations, then the government will have to step in anyway to maintain the infrastructure in proper working order for the public. That means the government is never freed from any infrastructure project and is the ultimate risk bearer.

If ALR was removed from the equation and Gamuda given an extension of the concession, then it could go to the market to rearrange its structure to get cash. Why should the rakyat pay for Gamuda’s (and other shareholders’ desire for cash) now when it suits them? Especially at a time when the concessions are much closer to expiry (see table above) and after Gamuda and other shareholders have creamed off the rich pickings.

Gamuda’s deputy group managing director, former corporate finance personality Mohammed Rashdan Mohd Yusuf, in a comment in Malaysiakini titled ‘From Gamuda's viewpoint, ALR highway takeover a win-win says’ predicted that everyone benefits. Can a deputy CEO of the major shareholder of the concessionaires say otherwise?

Misleading

He says rather misleadingly: “Hence, under the ALR proposal – the government’s upside of RM4.3 billion net compensation savings is truly at no cost to the government. This is an important improvement, especially today since the government must be focused on optimising all resources in helping the rakyat and our economy recover from the Covid-19 pandemic crisis.”

The government may not bear the cost directly but the rakyat which the government represents bears the RM4.3 billion cost directly by having to pay tolls up to 10 years more for three roads to enable Gamuda and others to get their full value for the concessions under the toll agreement. The last one - the Smart tunnel is making losses but still it is valued at over RM300 million. Nowhere does Rashdan mention these in his article, which of course overly praises the deal.

From Gamuda’s vantage point, it is a great deal - a fantasy come true - which allows them to exit the toll business at a wonderful price so that they can put the cash they get into other infrastructure deals they are eyeing at the time that they want to.

Can we trust that this deal is one that will truly help the rakyat when there are so many political connections between business and politics, a seedy, shady process of infamy that has been insidiously perfected by successive Umno/BN governments over the decades beginning with Dr Mahathir Mohamad? Other than tolls, look at the lopsided independent power production contracts, amongst others, most of which burden the rakyat needlessly.

It’s late in the day and Rashdan expects the deal to be done by the end of May. But if this government truly has the welfare of the rakyat in its cold, cold, hard heart, it would abandon this deal, negotiate a new deal with the concessionaires and get a truly better one by reducing the benefits of deal terms which are clearly in favour of the concessionaires, using the expropriation clause as leverage.

We know it is unlikely to do that of course.

No credibility

If ALR was a listed company, it would have to take advice, appoint independent advisers for the deal and disclose in detail the deal terms via a full document, including directors’ remuneration. I wonder if the eminent five who are directors and equal shareholders of the non-profit ALR would continue to do the same because they have after all been handpicked for this deal to be the guardians of the public interest.

This is by no means an arms-length deal as it should have been. Instead, the evidence is that the terms have been negotiated and agreed upon in advance by all parties, including the government. In fact, the prime minister was the first person to announce it.

It is a done deal which makes it all the more insidious and has been rarely, if at all, done this way. One recalls in this context Synergy Drive, a special purpose vehicle set up by CIMB Group to effectively merge major plantations and other interests under Sime Darby, Kumpulan Guthrie and Golden Hope. This circumvented the requirement for interested parties, mainly the Permodalan Nasional Bhd group, to refrain from voting for the deal. It is worth mentioning that several years later, efforts were ongoing to demerge part of the merged entities under Synergy Drive.

This deal is similarly clever and similarly disingenuous. In this case, the government is passing off a deal which the rakyat pays for later as a great one by keeping tolls at current levels but extending the concession period. This is reminiscent of the way they attempted to make the rakyat grateful for allowing them to withdraw their own EPF savings for instant gratification to their detriment at retirement.

The credibility of this backdoor government has been so shot to pieces and has so many holes in it that it looks like a sieve. Even if a good deal is brought to the table - and this is by no means a great deal - it will be viewed with suspicion. You reap what you sow. - Mkini

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P GUNASEGARAM, a former editor at online and print news publications, and head of equity research, is an independent writer and analyst.

The views expressed here are those of the author/contributor and do not necessarily represent the views of MMKtT.