THE dissolution of Mavcom as the aviation regulator is a huge surprise because the Malaysia Airports Holdings (MAHB) privatisation deal requires its approval. Mavcom will be merged with the Civil Aviation Authority of Malaysia (CAAM), under the transport ministry, raising concerns about its independence.

Why the haste?

Justifications for the dissolution include streamlining Malaysia’s aviation oversight to reduce red tape and improve service delivery and empowering CAAM financially as the sole regulator.

Are these so urgent that they can’t wait until next year? One of the preconditions of the deal is approval from Mavcom, which has been deeply involved in the sector’s regulatory issues. Wasn’t Mavcom established for economic and commercial regulatory functions? CAAM was meant for technical and safety oversight and does not possess the economic and commercial expertise. Would our aviation safety rating be downgraded again to Category 2 due to this?

CAAM comes under the transport ministry, but Mavcom was established under an act. 

Privatising MAHB and absolving it from being accountable to anyone except its own board is against the prime minister’s call for good governance, especially for a strategic sector.

In December 2019, Mavcom produced position paper as mandated under the Malaysian Aviation Commission Act 2015 [Act 771]. It reported that the performance of the airports industry is influenced by the behaviour and decisions of the government due to the latter’s overlapping roles as policymaker, shareholder, and provider of capex funding. MAHB is a public-listed company, but the government determines the overall policy direction for the development of the industry.

The Paper highlighted the lack of strategic airport planning. Undertaken on an ad-hoc basis without overarching policy and/or strategic guidance, this led to inefficient airport. The focus was on terminal and air traffic management capacity. Expanding terminals is redundant if passengers are unable to board flights.

Mavcom’s function needs to be supported by strong government commitment towards regulatory independence, policy certainty, and good corporate governance.

Mavcom was established as an independent regulator, but there have been attempts to influence Mavcom’s decisions through undue political intervention. Different parts of the government could also make decisions which may inadvertently compromise other policy objectives.

In March, MAHB inked new operating agreements (OAs) to continue its role until 2069. The new OAs, with favourable commercial terms and a transparent investment return mechanism, offer flexibility to pursue strategic investments to elevate overall service standards and alleviate any financial burden on the government. As of March, MAHB’s contributions totalled approximately RM43 billion, including airport development costs, user fee payments to the government, dividend payments to shareholders, and tax and zakat payments.

The OA is a hybrid between a lease/affermage agreement and a concession agreement, where the private sector operator has full autonomy over operational capex and opex and the government for development capex. The duration of the new OAs is longer than the typical affermage agreement and much closer to that of a concession agreement. MAHB is bearing less risk than it should be apportioned given the long period of the OAs. New shareholders will be coming in with fewer risks and better rewards.

Meanwhile, Mavcom, in collaboration with CAAM and the Transport Ministry, was to develop a National Airports Strategic Planto address the issues in the sector. Without Mavcom, it will be forgotten. In fact, MAHB formulated a three-year strategic plan (2024-2026) aimed at improving the passenger journey and focused on execution.

Research on airport management and governance has not identified a clear link between ownership (public vs. private) and operational efficiency and service quality. Instead, the main indicator for success is the commercialisation of airports and the ability of the operator to run on commercial considerations, without government interference.

In the MAHB 2023 Annual Report, regarding contingency credit lines, as at the end of 2023, undrawn credit lines amounted to RM7.74 billion. With RM543 million profit, this is a strong balance sheet with a low gearing ratio of 0.28 times. It will allow MAHB to gear up further if required.

It’s difficult to reconcile why some parties are worried about pressure on the government’s financial coffers when MAHB is in good health with favourable OAs. Meanwhile, the government can fully support the mega RM10 billion Penang LRT project that benefits Penang only. To increase the shareholdings for Khazanah and EPF in MAHB to 70% would incur additional billions.

RAM has given outstanding ratings on the various bonds and Sukuk issued by Khazanah and MAHB. However, the impact on UEM’s (Khazanah vehicle for the privatisation deal) stand-alone credit profile is uncertain. Further, UEM is to invest in green industries – a mandate entrusted as one of the key enablers under the government’s decarbonisation agenda. UEM’s ratings currently benefit from a high likelihood of extraordinary government support.

I find it difficult to comprehend that a smaller company with lower ratings, low net cash position, and in the last five years, the highest profit before tax was only RM93 million, wants to control 40% of a AAA-rated company with better financials and profit track record and take it private. UEM is supposed to invest in green industries, not aviation, which burns huge amounts of fossil fuel.

UEM is in an industry facing stiff competition with rising costs, but MAHB is a near monopoly.

Where is the government’s commitment towards regulatory independence, policy certainty, and good corporate governance?

I wonder how the process for appointing the adviser for the privatisation was conducted because there are still many loose ends to be tied.

And would dissolving CAAM to be merged with Mavcom be a better solution for the sake of good governance?

What say you… – July 9, 2024.

* Saleh Mohammed reads The Malaysian Insight.
 

* 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.