Sunday, February 01, 2009

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,


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.

    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.


    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!


    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.


    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. ;-)


Anonymous said...

For immediate actions to be taken by the Work Ministry in the interest of the rakyat...

Thanks for your efforts, but 'in the interest of the rakyat' never exists in UMNO/BN dictionary lah!

Change the Federal Government before we hope for any real actions taken to truly benefit the rakyat!

BN is truly hopeless!! I hope the rakyat's suffering will end soon after the demise of BN!

kuldeep said...


I appreciate the work that ur putting in to unravel the mysteries of our toll concessions but may I suggest that you shld also look at FUTURE toll concessions.
Case in point is the Second Penang Bridge.

1>>The main driver of toll rates is the capex.Bring that down and the toll rates will be lower.P2X started life as a 3b project then grew to 4.8 b and seem to be settling down at 4.6 b.Reasons given are materials price increases>>well for a fact material prices are spiraling downwards to below 2006 levels now.On top of that the TS Zaini hv cut out the 2 crown jewels viewing platforms,saved 200m thru redesigns,incorporated VOP clauses and taken out the concession risks.The construction cost by pure logic shld now be below 3 billion.
2>The next driver is the cost of funds..The bridge is supposedly to be partfinanced by usd 800 m China loan at 3% for 20 years.With the current USD/Rm regime.we are already paying potentially 200m more as compared to the mandate period in 2007.And with the current crisis 3% is not such a low rate for a govt guaranteed loan??(the loan carries the proviso that a China contractors gets to do the job on a negotiated price basis)
3>the next driver is the projected traffic volume over the span of the concession.Bear in mind after the concession period the govt gets the bridge the first penang bridge will be the moderator for p2x toll rates.

anyway,pls look into this and STOP the rot before its too late.P2X in its present form shld be scrapped and an open competitive construction tender exercise shld be carried out.If the price is well below the 4.6 b then all those involved in the exercise i.e CHEC,UEMB,TS Zaini,4th floor boys shld be brought to book for manipulation to defraud the nation.

I think u shld now know where our toll dollars for LDP,PLUS etc went.And u hv missed out the 2 biggest con game i,e the smart tunnel and Maju Expressway.

Don't allow penang second bridge to be the next one,

Anonymous said...

Sounds like a clever tactic to wave the expropriation clause around to get better terms at the (re)negotiation table.

But what if the bluff is called and the govt ends up having to in effect renationalise the toll roads? Is there any assurance that the govt is any better than the private sector in running these roads?

NEO said...

Well how about the Toll Operator's that not listed in Bursa? But owned by individual "Sdn Bhd" ... Grand Saga etc???

It look like back back is not the one and for all solution!


Anonymous said...

why there is a (“)(”) between the word ..The Government has to pay for the “value of construction works”...

granddaddy said...

Good work, Tony. I would imagine it is better to wait until PR takes over the Federal Govt and pass a RICO law to tackle these bunch of crooks:,315.0.html


Anonymous said...

I would love to see one day the prev works minister (...yeah, 'kicked out'...) having to be caught in the traffic jam & chaos of the LDP as an ordinary citizen. If any of the toll roads, eg LDP, cannot provide a jam-free or smooth traffic flow to road-users (paying for the service & financial cost...+ tax-payers $$$), they should do a 'refund' by not charging at all. The tolls itself causes traffic congestion. Not to mention, enviromental pollution. When the toll roads are free flowing, then the service is chargeable. Even with the volume of traffic, & still claim 'no profit' in order to suck tax-$, then something is clearly not right.

Anyway, thanks for the good job & revealing in concised description, the mystery of Malaysian Tolls.