THE proposed acquisition of four toll concessionaires will save billions of ringgit for taxpayers and highway users, while providing shareholders with a limited but reasonable return on their investment, to ensure the stability of the fragile financial markets.

The finance minister has issued two statements – on June 22 and 26 – explaining the benefits and rationale of the government’s proposal to acquire the highway concessionaires, namely LDP, Sprint, Kesas and Smart.

The offer was made on June 21, and has since received acceptance from the board of directors of Gamuda Bhd and the respective toll concession companies. The exercise is awaiting further approval from the concession shareholders, as well as the final cabinet approval prior to a successful completion.

However, there are still critics and certain unnamed experts opposed to the exercise, based on flawed logic and arguments. The following are responses to the key fallacies that have been made public via the media to date:

Fallacy #1: Putrajaya will be burdened unnecessarily with huge debt

Firstly, they argued that the acquisition will increase the government’s debt burden by RM6.2 billion, which could be better spent on other purposes.

While a designated special purpose vehicle would raise the RM6.2 billion debt to finance the acquisition of the four concessionaires, there needs to be a distinction between debt that the government will ultimately have to bear, and debt that will be self-financed.

In this case, the RM6.2 billion will be entirely self-financed via the collection of proposed congestion charges. This means that the government will not need to fork out a single sen to pay for the acquisition of these highways. Hence, the argument that the proposed acquisition will burden the government, with the funds better spent elsewhere, is completely untrue.

Fallacy #2: Cheaper to pay compensation than to acquire

There are those who argued that it is cheaper to pay these concessionaires compensation for freezing toll rates rather than acquire them.

The Finance Ministry has estimated that without the acquisition, the government would have to compensate these concessionaires between RM5.3 billion and RM6.5 billion to freeze the toll rates until the end of their respective concession periods. With this self-financed acquisition, the government gets to save between RM5.3 billion and RM6.5 billion in compensation payments.

Therefore, simple mathematics conclude that it is vastly cheaper for the government to acquire the highways than to pay compensation, since the acquisition cost of RM6.2 billion is self-financed. On the other hand, if the toll rates are merely frozen, these concessionaires will collect at least RM5.3 billion in compensation from the government.

Contrary to critics’ argument, if the government pays compensation to the concessionaires to freeze toll rates, it will just profit the concessionaires and reduce the burden of urban highway users only. However, by acquiring the highways, the RM5.3 billion saved in the future will go towards welfare and development expenditure for Malaysians nationwide, while highway users can save even more than before.

Fallacy #3: Better to let expiring highways expire

Some argued that certain highways that are expiring “soon” should be allowed to expire instead of being acquired. These critics may have forgotten that even for the “expiring” highway – specifically referring to Kesas, which will expire in 2028 – the government still needs to continue compensating the concessionaire every year to freeze the toll rates.

The government has offered to acquire Kesas for RM1.377 billion. The government would otherwise have to compensate the concessionaire between RM1.08 billion and RM1.19 billion, depending on traffic volume, up to the expiry of the concession.

Hence, the same argument applies – if Putrajaya can acquire Kesas for RM1.377 billion via a self-financing mechanism that does not require any government financial allocation, taxpayers will save between RM1.08 billion and RM1.19 billion in compensation payments to the concessionaire over the next nine years.

Fallacy #4: Offer is to bail out loss-making highways

There are also those who argued that the offer exercise is a bailout for “loss-making” highways, citing Sprint and Smart.

(i) Sprint

For Sprint, the highway is currently “loss-making”. However, critics should be aware that its earnings and profits are back-loaded towards the end of the concession. This is especially since its debts will be progressively repaid, and the toll rates for the three highways under the concession are entitled to increases in the future, as provided for in the existing concession agreement.

The toll hike entitlement is shown in the table below, using toll rates for Class 1 vehicles as an example:

Over the remaining “life” of the concession, Sprint is expected to generate around RM1.5 billion in profit after tax for shareholders, after settling all its outstanding debts.

In comparison, the government has offered RM1.984 billion to acquire the concession, of which only approximately RM870 million would go to the shareholders. The balance of RM1.114 billion would be used to repay the debt holders of the highway.

In addition, if the government were to freeze toll rates and pay compensation, the compensation amount for Sprint would range between RM1.57 billion and RM2.04 billion, depending on future traffic volume.

(ii) Smart

As for Smart, it is true that the highway concession, which ends only in 2042, is expected to be loss-making for a long time. It explains why the government is acquiring Smart at a net book value of RM369 million.

On the contrary, if the concession were allowed to be continued, the government would, instead, have to compensate the concessionaire between RM671 million and RM1.028 million for the remainder of the concession.

Again, simple mathematics will let anyone conclude that it is substantially cheaper to acquire the highway today via a self-financing mechanism instead of continuing to pay compensation for the remainder of the concession period.

Fallacy #5: Acquisition allows Gamuda to rake profits upfront

Finally, certain critics also claimed that the government’s offer allows Gamuda to rake all of its profits upfront, instead of over the concession period. This argument is, again, misleading.

The proposed acquisition will indeed allow Gamuda and the other concessionaires’ shareholders to recognise some of the future profits today. Otherwise, what incentive do they have to become “willing sellers”?

However, through this acquisition exercise, the “future profits” will be shared between the shareholders; government, via the elimination of compensation payments; and, highway users, via reduced congestion charges.

The government will save at least RM5.3 billion, which would otherwise have gone into the concessionaires’ bottom line. Highway users will save up to RM180 million per annum from reduced congestion charges, or approximately RM2 billion over the respective concession periods.

The reason why both the government and highway users are able to benefit is because the “future profits” of these highways are shared.

In summary, the acquisition offer can be deemed fair and reasonable, given that it allows the government and highway users to reap more than RM7.3 billion in savings in the future, while ensuring market stability without invoking the threat of expropriation. – July 6, 2019.

* Tony Pua is DAP’s Petaling Jaya Utara MP and political secretary to the finance minister.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.