Sunday, August 30, 2020

Highway trust is probably the way to go

One of the failings of the previous PH government was that it went full length for its fulfillment of the manifestos without thinking of its consequences. One of it was the abolishment of tolled highways which obviously is not possible. During the 22 months in power, there were 2 main proposals - lengthen the terms of PLUS highway while reducing and maintaining the rates and buying over the Gamuda owned highways. The first they managed to complete while the second I think it would not happen given the situation today.

The plans I would say were not thought of holistically. We now hear that the government is proposing to put together a trust and plans to put in total up to 35 highways into the trust. If I am not wrong, this would make more sense if the government is trying to reduce toll rates for the highways.

Although the plans are still vague, in my opinion the following would be part of the plan.  

The Malaysian highways as I have mentioned many times are complex asset and shareholdings situations. The major shareholders of the highways are consisting of important players such as Khazanah, EPF, PNB, Gamuda, IJM and many bond holders. One must know the holders of highways actually are people's funds to an extent that Gamuda and IJM are held largely by Malaysian funds. We cannot terminate the contract as it would have impacted all of the above - government and people ownership related - not to say the sovereign trust of a country. How do we address the situation without impacting the players actively. A trust fund!

How should the trust fund work then? It is important to note that I am only 1 single individual whereas the government has many corporate thinkers and planners looking at it. Lets say from the 35 tolled highways, the total capital value is RM100 billion. To make the trust workable, Malaysian government would create a something like RM25 to RM30 billion highway trust funds - bond and equity (mainly government) combined. These money would only do 2 things - invest into existing and future highways, and pay dividends to bondholders and shareholders. The shareholders would be Malaysian government largely.

Additionally, the trust fund should not be profit oriented and it should also not be operator of highways. Its role is to purchase off about 20% to 30% of all highways from the current highway operators at the current market rate (with small discounts). The current highway operators shall be allowed to maintain the highways themselves while also be holding a significant controlling stake. This means that the highway trust through the government is a participant of the business but they are not involved in the daily decision making.

How does it help to reduce the toll rates then - where it can help the rakyat?

As most highways are usually profitable and cashflow accretive, they will pay good dividends to the shareholders. The trust fund being a shareholder will be receiving those dividends. The money received can be reinvested into the highways or it can be used to fund the subsidy on the price increase of the toll roads. As we know, many of the tolled highways are already being subsidised. In the past, it came from the government coffers directly i.e. from the yearly budget. Through the trust fund, it can still be directly from the coffers (i.e. partially from the dividends received) or through the extra unutilised funds from the highway trust fund.

Another additional structure which the government can do is to create a REIT like trusts for the highway owners. Through this the already completed highways (mainly) can get this highway REITS listed, where the government highway trust can invest into. This will enhance the capital as well as the bond market as now those are lacking.

Highways are allowed to still compete but at least they compete in the areas of service rather than price. Future and maybe even current technologies such as e-payment system will enable this concept to work better. I do not think in future highways tolling will be fully eliminated but perhaps some small fees will be charged (much like parking charges by municipals) to upkeep the roads. These revenue can be forwarded to the highway trust fund.

Through this method I think the concept of managing and keeping the tolled highways manageable for both users and subsidy providers (government) can be better afforded.   

1 comment:

Choivo Capital said...

If trust WCE also saved as govt probably have to pay book value.