• Responding to Critiques of the Pakatan Harapan Alternative Budget 2018 (Part 2) – Abolishing Toll Highways

    Media Statement by Dr. Ong Kian Ming, Member of Parliament for Serdang, on the 10th of November 2017

    Responding to Critiques of the Pakatan Harapan Alternative Budget 2018 (Part 2) – Abolishing Toll Highways

    Last week, I addressed those who criticised Pakatan Harapan’s proposal in our 2018 alternative budget to get rid of the GST.[1] Today, I want to address those who are sceptical of our proposal to abolish the toll highways.

    Response 1: The government has paid billions of RM in compensation to the toll concessionaires and will continue to compensate them billions of RM to defer hikes in toll prices

    The sceptics who question the financial viability of our proposal to buy back the toll concessions has to examine the BN government’s current policy which has been to (i) compensate toll companies to defer toll hikes (ii) extend the concession period in lieu of compensation and (iii) allow unreasonable toll hikes to take place.

    The compensation formula to defer toll hikes is based on current traffic volumes and the toll hike amount that is in the concession agreement. The compensation paid out by the federal government is far more favourable to the toll concessionaires compared to the alternative of buying back the tolls since the latter is based on the cost of construction of the highway (more on this below).

    For example, if the toll rate was supposed to go up from RM2 to RM4 in 2018 and the government does not allow the toll increase to take place, the government has to compensate the concessionaire RM2 multiplied by the total number of vehicles which will use the toll in 2018. The higher the toll hike in the concession agreement, the higher the compensation which the government has to pay. (See sample Compensation Amount in Appendix 1 below)

    The compensation cost payable by the government (if the toll rates are not allowed to be hiked) FAR EXCEEDS the cost of buying back the toll highways from the concessionaires! Indeed, according to a parliamentary reply, the government has already forked out RM4 billion from 1990 to 2015 for compensation to toll companies including RM1.05 billion for the LDP and RM443 million for SPRINT, two of the earliest and most lopsided toll concession agreements! (Appendix 2 below)

    Response 2: The government has and continued to subsidize the construction of toll highways in lopsided deals which favours the toll concessionaires

    The compensation stated above does not include the many millions and billions of RM which the government has given and lent to the toll concessionaires for the construction and / or upgrading of the tolls.

    For example, my colleague Tony Pua, pointed out back in 2012 that the government had given a grant worth almost RM1 billion to the concession holder for the MEX highway which was 74% of the total construction costs of the project.[2] In my own constituency of Serdang, a new interchange was built on the MEX highway for entry and exit into Seri Kembangan at a cost of RM90 million out of which RM20 million was provided by the government as land acquisition costs. But the revenue and profit from the additional RM2.20 toll collection per car for this new entry and exit benefits only the toll concessionaire.

    Rather than continue to subsidize these toll concessionaires, it makes more financial sense for the government to buy back these tolls and fund any new construction or highway upgrades from its development expenditure.

    Response 3: The costs of acquiring the toll concessions is cheaper than the costs of compensation plus the costs to drivers

    In every highway concession agreement, there is always a clause for the government to buy back the toll concession using a certain pricing structure based on ‘national interest’.

    The buy-back terms and conditions is usually a combination of:

    • the construction costs, less the liabilities and obligations of the concessionaire and government grants, if any.
    • The Government is further obliged to compensate the concessionaire an internal rate of return of between 8% to 12% on the share capital only for the years it was in operation. If the operator is already enjoying returns above and beyond the stipulated rate of return above, the Government does not have to make the ‘internal rate of return’ compensation.
    • The buy-back terms and conditions does NOT compensate the concessionaire based on future profits.[3]

    Writing back in 2009, my colleague Tony Pua estimated that it would cost the government RM1.4 billion to buy back the LDP highway concession.[4] The government had already paid out RM628 million to LITRAK, the owner of the LDP concession, at the end of 2008.[5] This amount has ballooned up to RM1.05 billion at the end of 2015. If the government does not want to continue to pay this compensation, it must allow the LDP toll rate to increase to RM3.10 (for passenger cars), which is a ridiculous amount to pay to get stuck in one of the notorious LDP traffic jams during peak hours!

    Instead of questioning why PH is recommending that the government buy back these toll concessions, our sceptics should be asking why DOESN’T the government immediately carry out these buy-backs given the long term financial benefits for the government as well as the road users.

    Response 4: The government has no political will to enforce the toll agreements with the concessionaires which explains why it is very reluctant to acquire the tolls concessions

    A common frustration expressed by motorists is that they are often stuck in traffic jams before and after toll highways. In other words, they are paying to be stuck in traffic jams! For example, in my own constituency of Serdang, traffic jams during peak hours start from the Mines shopping center all the way to the BESRAYA toll at Sungai Besi, a distance of about 3km.

    What many drivers do not know is that there are clauses in the BESRAYA concession agreement which states that the concessionaire must take mitigation measures to resolve these traffic jams or face the consequences. For example, if the highway concessionaire cannot maintain a Level of Service (LOS) “C” in terms of traffic flow along this highway, it must introduce off-peak toll rates which are at least 10% lower than for the peak period in order to divert traffic to off-peak times. (The evening peak hour LOS at BESRAYA is at the “F” level or bumper to bumper traffic). If this still doesn’t work, the concessionaire must upgrade the toll plaza and the toll highway to achieve LOS “C” traffic flow. During the period of upgrading works, the concessionaire must pay the government an amount equivalent to 10% of the estimated costs of upgrading works per month for the inconvenience caused until the upgrading work is completed. Although these conditions are in the supplemental concession agreement with BESRAYA, it has never been enforced even though the traffic conditions along the BESRAYA highway immediately after the Sungai Besi toll plaza has gotten worse since 2014 (the year of the most recent supplemental agreement).

    This example clearly shows that the government has no political will to exercise the conditions which are clearly stated in the various toll concession agreements. The toll concessionaires have strong lobbying power which they have, no doubt, put into good use in ‘forcing’ the government not to buy back these tolls, to continue to pay them excessive compensation and not to enforce the conditions stated in these agreements.

    Notice that the government has no problems in ‘convincing’ toll concessionaires which are loss making to allow the government to buy them back. For example, the Eastern Disposal Link (EDL) in Johor has been facing financial difficulties right from the start and was in danger of declaring bankruptcy.[6] This was one of the toll highways where tolls will be abolished as announced in Budget 2018. The way in which this will be done is through a government buy-back of the EDL. The total cost has not yet been announced. This example clearly shows that if the government has the political will, a toll buy-back plan can be implemented on a financially sustainable basis.

    Response 5: PH will pay proper compensation as stipulated in the concession agreements in the toll acquisition process but will need complete access to ALL the toll concession agreements

    Some people fear that PH’s proposal to buy back these toll concessions will cause uncertainty in the markets since many of these concessions are owned by public listed entities or by Government Linked Investment Corporations (GLICs) such as EPF, Khazanah and PNB. PH will clearly follow the terms and conditions as set out in the concession agreement for the toll buy-backs. The toll concessionaires will earn an acceptable rate of return for their investment in these highways (but not earn supernormal profits).

    For PH to evaluate the total cost of acquiring all of the toll highways, we would need access to ALL the toll concession agreements. Although some of them have been declassified, others such as the MEX as well as the PLUS highway concession agreements are still classified under the Official Secrets Act (OSA). The toll buy-backs will take place only after a careful study of all the terms and conditions in these concession agreements and in a way which is responsible and fair to the government, to the tax payer, to the road users and to the concessionaires.

    Dr. Ong Kian Ming
    Member of Parliament for Serdang

    Appendix 1: Sample Toll Concession Compensation Amount

    CA = Σ[AT x (2 x TV)] – TA; where:-
    CA: The amount of compensation payable in respect of the relevant
    Operating Year
    Σ: The summation for all classes of vehicles
    AT: The Agreed Toll which should have applied for the relevant Operating
    Year for the particular class of vehicle
    TV: The actual traffic volume for the particular class of vehicle in the
    preceding six (6) months
    TA: The aggregate toll collected by the Concession Company for the
    relevant Operating Year

    Appendix 2: Total compensation paid to Toll Concessionaires from 1990 to 2015

    [1] http://ongkianming.com/2017/11/02/media-statement-pakatan-harapans-alternative-budget-responding-to-the-critiques-part-1/

    [2] https://dapmalaysia.org/english/2012/mar12/bul/bul4907.htm

    [3] The exceptions are the PLUS owned highways whose concession agreements were renegotiated after PLUS was privatized in 2011. The terms of conditions of the new concession agreement have not been declassified at the time of writing.

    [4] http://www.thenutgraph.com/buy-back-of-privatised-highway-concessions-more-cost-effective/

    [5] http://tonypua.blogspot.my/2009/01/lets-take-our-highways-back.html

    [6] https://www.nst.com.my/news/nation/2017/06/249424/two-highway-companies-risk-bankruptcy

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