Memo To Works Ministry

As mentioned and blogged earlier, DAP Ops Restore team has submitted our preliminary findings on the highway toll concession agreement to the Minister of Works. Below are the contents of the memorandum, some points which have been raised earlier as well.

Attn: Dato' Ir Mohd Zin bin Mohamed
Minister of Works

Dear Sir,

PRELIMINARY FINDINGS FROM STUDY OF HIGHWAY TOLL CONCESSION AGREEMENTS

First of all, we would like to express our appreciation for taking the momentous step of declassifying the highway toll concession agreements for study and viewing by the public. We must congratulate the Minister for having taken progressive steps with regards to the above issue since taking over this position in March 2008.

After conducting an initial review of the toll concession agreements, we would like to take this opportunity to present our preliminary findings to the Ministry for immediate actions to be taken in the interest of the rakyat.

1. REVIEW TOLL RATES & FORMULA
   
   It is clear from the concession agreements when read in conjunction with the financial statements of many of the toll concessionaires, the toll rates and its formula of calculation for future adjustments have allowed these concessionaires to make extraordinary profits at the expense of the rakyat.
   
   PLUS Expressway for example, had RM2.28 billion in revenues and made RM1.31 billion in profit before tax for its financial year 2007, representing a colossal profit margin of 57.3%. What's more the cost of constructing the North-South Highway was less than RM6 billion. This rate of return has yet to take into consideration future increases in toll rates at 10% every 3 years as well as traffic volume for the next 30 years.
   
   What's more, the Government has in the contract with PLUS, agreed to bear the cost of all substantive upgrades including for example, the new Seremban toll plaza which cost RM168 million, the Jelapang toll plaza and the construction of additional lanes on the highway.
   
   Similarly for LITRAK, the concessionaire of Lebuhraya Damansara Puchong (LDP), it had RM293 million in revenues and made RM142.7 million in profit before tax for its financial year ending 2008, representing a margin of 48.7%. Furthermore, the toll rate for LDP is scheduled as per the agreement to be increased to RM3.10 from the current rate today before government compensation of RM2.10 in the year 2016. LITRAK had even in its Bursa Malaysia listing prospectus in 1997, forecast a total net profit of RM18.8 billion during the 30 year concession period despite LDP having cost only RM1.33 billion in construction and capitalised interest.
   
   The colossal profits were made despite the fact that the risk taken by these concessionaires were minimal as the Government in effect guarantees the multi-billion loans and bonds secured by the concessionaires. In fact, in certain highway projects such as the Grand Saga Highway, the concessionaire was granted a loan as part of the agreement which covered the entire construction cost of the highway. This means that the concessionaire was not only able to secure a very profitable highway concession, it didn't have to come up with any capital or risk to undertake the project.
   
   Therefore, the Ministry of Works should immediately make revisions to the agreed toll rates as well as its review mechanism to ensure that the highway concessionaires will make reasonable returns on invested capital. For regulated infrastructure industries such as power producers, water services as well as highway concessions, the acceptable norm and range of rate of return (ROR) is between 8% to 15%.
   
   In fact, concessionaires should only be able to make ROR in excess of 12% if and only if they are able to maintain a minimum acceptable service level. For example, concessionaires whose highways are often heavily congested before and after the toll plazas such as the LDP or at Kerinchi Link, penalties should be imposed accordingly. 
   
   These service level conditions are unfortunately glaringly absent from the concession agreements when in fact, the toll concessionaires should grant substantial discounts in the event of heavy congestion, particular before or after the toll plazas.
   
   
2. EXERCISE EXPROPRIATION FOR NATIONAL INTEREST
   
   It is noted that for a vast majority of the toll concession agreements, the Government has been granted the option of expropriation for national interest by providing between 3 to 6 months notice. In addition, the terms of the relevant compensation required for expropriation appears to be fair:
   
   1.The Government has to pay for the “value of construction works”, less any loan or bond obligation which the government takes over in the process, and
   
   2.The Government has to pay 12% interest returns per annum to shareholders' capital and loan invested in the concession, less any dividend or interest which have already been paid to date.
   
   Therefore, for those concessionaires who are not willing to renegotiate the toll rates to reasonable levels, it will not cost the Government “an arm or a leg” to expropriate some of these highways.
   
   As a simple example, the Government is already compensating LITRAK RM75 million per annum for maintaing its current toll rates at RM1.60 instead of the contracted RM2.10 as of 2007. Assuming this compensation is maintained for the remainder of its 20 year concession, it would cost the Government RM1.5 billion in payments to LITRAK.
   
   On the other hand, should the Government exercise its option to expropriate the concession, preliminary calculations show that it'll cost the Government only RM1.4 billion to complete the exercise based on the terms of the agreement, or less than the compensation payments.
   
   Hence, in LDP's case, it makes absolutely no sense for the Government to maintain its annual compensation payments to the concessionaire when it could buy back the entire highway for less!
   
   
3. CAPITAL MARKET STRATEGIES TO BUY BACK HIGHWAYS
   
   For certain highway contracts such as the North South Expressway and the Penang Bridge, the compensation clauses for expropriation unjustly require the Government to pay the concessionaire for the loss of future profits.
   
   Hence, the exercise to expropriate the North South Expressway will cost the Government at least RM40 billion, or as high as RM80 billion, depending on future profit projections. This compensation amount is completely ridiculous for the current market capitalisation of PLUS on Bursa Malaysia is only RM15 billion.
   
   However, as Khazanah Nasional already effectively own 63.88% of PLUS Expressway Bhd, it is certainly not beyond imagination that Khazanah makes a voluntary general offer for the remainder 36.1% of the shares that it does not already own for approximately RM6 billion, assuming a 10% premium on current market prices. RM6 billion is certainly an amount which Khazanah could easily afford or finance.
   
   
4. DECLASSIFY ADDITIONAL KEY AGREEMENTS AND INFORMATION
   
   We would also like to call upon the Works Ministry to declassify additional documents and information for further transparency and analysis. This includes:
   
   1.Loan agreements between the Government and the concessionaires
   
   2.Appendices to the concession agreements, which are missing from several agreements which have been declassified.
   
   3.Novation agreements where the rights of the parties to the original agreement was assigned to another party.
   
   4.Concession agreement of highways which are newly awarded or are under construction.

We sincerely hope that the Ministry of Works under your leadership will be able to take quick and urgent actions on the above findings. Besides it being a fairer outcome for the rakyat, it'll also come at a critical time to reduce the cost of living for the people and increase the competitiveness of our local businesses who are facing one of the most severe and economically challenging period in recent decades. The above recommendations on toll concessions should form one of the key cornerstones of the additional economic stimulus package announced by the Minister of Finance.

For your information, DAP has also formed a special committee on “Operation RESTORE” (Restructure Toll Rates & Equity) to provide a detailed and final report on the highway toll concessions which we hope to submit to you by March 2009.

Once again, we thank you for your kind attention.

The DAP Ops Restore team comprises of Anthony Loke (Rasah), Teo Nie Ching (Serdang), Charles Santiago (Klang), Lim Lip Eng (Segambut), Teh Chi Chang, Economic Advisor to DAP Secretary-General, and myself.

Let's hope this "new" Works Minister will do a much better job than the previous who has been kicked out of his office. ;-)