Wednesday, April 15, 2009

Why PLUS Should NOT Be Privatised

Fair is fair, it was DAP's idea first to privatise PLUS. The idea isn't new at all, it has been around the markets for years, though some would take the idea and post it as his own without acknowledging where he got the idea. Now MCA has joined in the fray. To the public, its a very persuasive move, politically and economically, as it would relieve the burdens on the general public and negates the ill-will from having to continually approving toll rate hikes every now and then.

I think the calls for PLUS to be privatised are short sighted and a quick fix, and that we are attacking the wrong issue. Tolls will never be greeted as a nice thing. In all countries, the feeling is mutual. Why is it that some users in certain countries are kind of OK with it but some countries will show more anger and displeasure with tolls?

The following excerpts detail the plans by DAP and MCA. My view on the whole thing is in purple below.

What Is PLUS - The principal activities of PLUS are investment holding and provision of expressway operation services. Its wholly-owned subsidiary company is involved in the operation and maintenance of a tolled expressway network. PLUS is the largest listed expressway operator in South East Asia in terms of toll receipts. The company holds the concession to operate and maintain 848 km of expressways in Malaysia with the expiry date on 31 May 2030. The three expressways of PLUS, comprising the 797 km North-South Expressway, the 35 km New Klang Valley expressway and a 16 km section of the Federal Highway Route two, represents about 69% of the total length of Malaysia's toll expressways in operation. In addition, PLUS operates 67 toll plazas, 78 interchanges, two overhead bridge restaurants, 18 rest and service areas and other ancillary services. To note, annual traffic volume on the expressways is about 11,131 mn passenger car unit km, with an average of 850,548 vehicles using the expressways daily. About 88% of the traffic volume consists of passenger cars while the remaining 12% is consists of commercial and other vehicles.
DAP has proposed the government launch a takeover of PLUS Expressways Bhd and acquire the shares from minority shareholders at RM3.30 per share.

Tony Pua (PJ Selatan - DAP) said on Feb 25 the takeover of PLUS could be financed by the issuance of bonds at 3% interest. The RM3.30 offer, which would be 14.6% above Feb 24’s closing price of RM2.88, would cost the government RM5.25 billion. He said the 15% premium in the share price for the takeover would also ensure minority shareholders were protected.

He estimated the takeover could result in RM14 billion in savings for Malaysians from 2009-2015. This would be the amount saved either by Malaysians using the highway because of no further toll rate increases or in terms of compensation which would have to be paid by the government to PLUS Expressways.

The DAP Ops RESTORE (Restructure Toll Rates & Equity) Team said in statement the takeover could be financed by the issuance of Malaysian Government Securities (MGS) at 3% interest (or less), costing RM413 million per annum. The total repayment will amount to RM16.2 billion over six years.

The DAP said at the same time, PLUS should generate at least RM20 billion in net positive cash flow in the six years to 2015 without further toll rate hikes and a conservative 3% per annum traffic growth.

“Therefore by 2015, the government can completely repay the MGS and still have RM3.8 billion excess which could be used to build a better public transportation system throughout the country,” it said.

PLUS' market capitalisation is RM14.4 billion, based on the share price of RM2.88 per share on Feb 24. The government, via Khazanah Nasional Bhd, owns 65% of PLUS.


MCA will urge the government to privatise toll concessionaire PLUS Expressways Bhd as the move will prove beneficial for the people, a spokesman said. At a briefing yesterday, MCA central committee member Wong Nai Chee said it could be done through the government investment arm Khazanah Nasional Bhd, which holds 63.88% of PLUS (inclusive of shares held under UEM Group Bhd).

Assuming a share price of RM3.50 to RM4 per share offered for the acquisition of the remaining shares not owned by the government, the total acquisition price is between RM4.55 billion and RM5.2 billion. He said the MCA would bring up its proposal at the upcoming monthly Barisan Nasional management meeting. MCA would also look at raising a dialogue with the Ministry of Works on the matter.

Wong said the government had an effective interest of 74% in PLUS through Khazanah and the Employees Provident Fund (EPF) Board (which holds 9.59% stake in PLUS as at April 30, 2008), leaving another 26% in the market. The move would also ensure that the company would become more sociably responsible, and not just have profitability in mind, said Wong. Wong added that making PLUS 100% government-owned would not prove a burden as the company was profitable. PLUS has been generating a profit of RM400 million to RM600 million yearly from the financial years 2004 to 2007, even if the gross compensation from the government for not increasing the toll is excluded. In terms of profit after tax margin inclusive of government compensation, the PLUS business yields a profit margin of above 50% from 2004 to 2008, Wong said.

The cash flow generated from operations excluding any receipt from government compensation for not increasing the toll is RM1.1 billion to RM1.4 billion yearly from 2004 to 2007. This clearly shows that if PLUS is taken over, the possibility of waiving toll increase can be carried out both financially or legally. It would also overcome the problem of minority rights in the future, said Wong.

Wong also said that since the declassification of the highway agreements in January, lawyers from MCA Youth legal affairs and parliamentary research bureau had gone through all 22 highway agreements and said that there were four issues that needed further deliberation and explanation at the cabinet level. This includes propriety of direct negotiations, rationale of granting loans to private concession companies by the federal government compensation payable by the government and verification of traffic volume numbers.

It proposed a single-tier dividend of 9.5 sen per share amounting to RM475 million. With the payment of interim single-tier dividend of 6.5 sen per share on Sept 23, 2008, the total dividends for FY08 will be 16 sen per share or RM825 million, representing a growth of 14.3% against FY07. PLUS said the payout represented 74% of the group net profit and for the third consecutive year, the group honoured its KPI commitment on a minimum dividend growth of 12% for financial year 2008.

For FY08, net profit fell 13.6% to RM1.08 billion from RM1.25 billion in FY07 mainly due to higher provision of taxation, while revenue rose 30% to RM2.97 billion from RM2.28 billion. Basic earnings per share fell to 21.59 sen from 24.96 sen. Revenue growth was due to higher toll collection and higher net toll compensation of RM275.4 million in the absence of deduction of notional tax on tax exempt dividend for the year 2008 following the election of single-tier tax system during the year.

PLUS said toll collection rose nearly 10% or RM53.2 million to RM596.2 million in 4Q08 from RM543 million in 3Q08, mainly due to higher traffic volume growth, during festive periods and year-end school holidays. Compared to 4Q07, toll collection was 18.6% or RM93.5 million higher, mainly due to contribution from new subsidiaries Expressway Lingkaran Tengah Sdn Bhd (Elite), Linkedua and Konsortium Lebuhraya Butterworth-Kulim (KLBK) Sdn Bhd as well as growth in PLUS toll collection of 2%.

For FY08, toll collection rose by 23% or RM416.5 million to RM2.24 billion from RM1.82 billion in FY07, mainly due to a year-on-year traffic growth of 5.2% for PLUS, giving a higher toll collection of RM92.3 million, as well as contribution from Elite, Linkedua and KLBK of RM324.2 million. For FY08, the group generated cash from operating activities of RM1.81 billion, 26.9% higher than 2007, with cash balance of RM2.23 billion as at Dec 31, 2008 after dividend payments of RM725 million.

On its headline key performance indicators (KPI), PLUS said the group had achieved the KPI set for the increase in lane-km by recording a growth of 25.7%, surpassing the target of 20%. For revenue growth, PLUS said it was higher than the 25% y-o-y growth target. It now targets a 5% revenue growth for FY09 and FY10, and a minimum dividend payout of 16 sen per share for FY09.


SIME 33,052,046,500.00
MISC 30,874,564,100.00
PBBank 28,255,400,000.00
Tenaga 26,441,348,499.50
IOICorp 22,881,274,831.32
Maybank 22,160,398,300.00
Commerz 21,647,370,798.90
Petgas 19,391,572,767.00
Digi 16,405,250,000.00
Genting 12,148,548,525.60

PLUS Expressways' market cap is around RM15.2bn ($4.2bn), which would put it close to DIGI. Mind you, following the rights issue, Maybank's market cap has dropped to RM19.5bn. PLUS Expressway is bigger than Resorts World and BAT, just to put into perspective.


My opinion:

You should consider not privatising because:

a) There are already too few big caps on the Bursa that attracts foreign funds and institutional investors. Already we have lost Maxis, can you imagine a time if IOI Corp and Sime Darby were to be taken private as well. You can then relegate the relevance of Bursa to foreign funds to almost non-existent.

b) The implications of taking PLUS private may mean that future capital raising for similar projects will be harder. Investors will consider that they will be taking the bulk of the risk upfront, but when traffic goes past critical mass, governments may take them private. It will translate into higher funding cost for similar projects in the future.

c) The majority of investors does not know that PLUS is actually Asia's largest listed toll expressway operator! The biggest. Next is Jiangsu Expressway (177 HK) and Zhejiang Expressway (576 HK). That certainly has to count for something, doesn't it? There are not many things that can put Malaysia on the investment map. We can argue about the merits of Sime Darby in acquiring the other big plantation firms, but at least strategically we have the largest plantation firm in the world. Being right up there in size means being able to dictate trends and squeeze out efficiencies. I think even management of PLUS does not realise the magnitude and relevance of the company and where its at, and what it can be.

d) The users-pay model for toll roads is an important aspect to expand the infrastructure and logistics for a country. Maybe some will argue that the terms may have been a bit too generous. That is up for debate. We should really embrace global best practices by opening up future toll projects for open tender. That way, we can ensure a fairer system on the consumers.

e) Toll roads operators will always get whacked when they start to rake in good profits, and the almost annual increments grate on consumers' nerves. I will give you an example, the Sydney Harbour bridge is less than 2km to cross and I remember as a student paying 50 cents to cross the bridge, now its $3.00. Toll roads are roads that may never be built (or being built quickly) if it wasn't done as a toll road. Toll roads must never be the only way to reach a destination, there has to be a choice. But generally, users in Singapore or Australia or the US do not gripe that much because their salaries and disposable incomes almost have a more than commensurate rise with other cost of living items and incidentals - and that is the crux of the matter.

f) If the government were to take up all the funding for all toll roads and make it free for all users, governments everywhere will never get to where they are now. Taxes will have to rise substantially to fund, repair and maintain them.

g) Looking at the positive side, at least Malaysia has not sold any tollways to foreign infrastructure operators like Macquarie Infrastructure. That company has bought over power plants, tollways, airports, etc... and there has not been a single positive feedback from consumers. Costs and annual hikes have been even more prohibitive when its sold and managed by independent companies.

h) The main gripe has more to do with rising cost of living that does not match the earnings power and growth of normal Malaysians. I have argued before that local salaries are depressed by virtue of the rise in foreign workers and Malaysia's addiction to subsidise for almost every thing. We subsidise fuel/gas, have controlled prices on many goods, we subsidise too many things, which prevents our salaries from rising and our grand plan is not strong enough to continually move our industries further up the value chain. Then you have these tollways which gets their guaranteed increments year in year out.

Consider how much it cost to travel on the NSE in 1995, when graduates pay was around RM2,000-2,200 ... and you compare today the cost of traveling on the NSE. 14 years later and graduates starting pay is still around RM2,200-2,500. That is the crux of the problem.

The government and politicians are fighting the wrong battle by taking PLUS private to appease the general public. The correct battle is to reduce foreign workers, reduce subsidies for fuel/gas and electricity for companies, and trash out the inefficient and ineffective industries we have been shouldering (such as auto). The quite inefficient allocation of resources by having huge taxes and duties on car imports just to protect the failing local auto makers should be scrapped. Malaysia is still in the top 3 places on earth where it is costliest to buy a car - that robs the people of a lot of purchasing power. Think better strategically, and you will find the public not so opposed to the toll rates. If your Toyota only cost you RM50,000 and not RM98,000 - I think many of those who rant and vent their anger at tolls would be placated.

We are addressing the wrong issue, we are getting angry at the wrong issue. Its not toll rates but our purchasing power and inefficient allocation of resources. Until then, we will keep fighting the wrong battles and getting angry at the wrong things. Get the big picture right once and for all.


Shareholders (percentage ownership)

Updated: January 12, 2009

UEM Group Berhad


Khazanah Nasional Berhad


Employees Provident Fund Board (EPF)


Khazanah Nasional Berhad


Amanah Raya Nominees (Tempatan) Sdn. Bhd. (Skim Amanah Saham Bumiputera)


Kumpulan Wang Persaraan (Diperbadankan)


Cartaban Nominees (Asing) Sdn. Bhd. (SBB Fund 4545 for Lazard Emerging Markets Portfolio)


p/s photos: Angelababy Yang Wing


BILLCORP said...

what a wonderful view on PLUS Mr Dali..people always love to be popular by giving out generous gifts to the people.they x see the long term effect on industrial overall effect..chakdepatte..

Little Bear said...

Another point to consider is out government's track record in managing money. Both plans claim to be able to generate large chunks of funds for the government to spend on other things (ie. public transportation), but will this really happen? Remember the 4.4 billion we're supposed to spend on public transport, due to the petrol price hikes? I don't think i've seen any improvements yet.

chanyip said...

u got my suppport!

Teh said...

I agree with your reasoning for not privatising PLUS. Further to that, I also believe that the government should not even compensate PLUS for maintaining the toll rates. Let them increase as per the toll agreements. After all, the money paid as compensation comes from the taxpayers, the majority of whom do not even use the NSE etc. Why should the 'non-toll taxpayers' subsidise the frequent toll users? The money saved could have been put to better use such as building more hospitals etc. Even if we are to privatise PLUS, the money will still come from the taxpayers (ie issuance of MGS etc). The differance is that the money is paid upfront while compensation will be done over the years. Either way, taxpayers like us are f---ed, unless the toll agreements are re-negotiated.

Yip Jen said...

Well said. Maybe you can publish something on increasing the purchasing power of the people. especially fresh grads.

Jasonred79 said...

huh. Dali, since you've recently been to America, let me put it this way... how do you think New York would feel if... to get from one end of new york to the other, you had to pass through 3 toll gates?

That is the situation in Klang Valley.

Ok, the problem here is that due to the way our urban development was planned, there are a lot of satelite towns and everything is sprawling. So, a typical resident of Klang Valley will pay a few ringgit in toll on a daily basis. This sum can easily hit RM150 a month. For someone whose monthly salary is RM3000, that's a hefty 5% of his paycheck.

Let me also point out that for a bachelor office worker, he could easily spend under RM10 eating Chap Funn everyday. ... Come to think of it, families that eat at home every day would probably have a monthly grocery bill of RM300?

And yet... a 4 person family easily pays over RM240 in toll every month.

Can you name me any civilised country where a family's monthly TOLL bill is 80% of their monthly FOOD bill?



And that's why people are furious with our stupid malaysian tolls.


The interstate tolls are fair enough, I guess... the reason being that most people can avoid interstate travel on a regular basis.

Fifi said...

Hey, you must be also crazy for women very much, so much girls pix here... hehe

Little Bear said...


I think you are letting your anger cloud your thinking.

Dali is in no way against the reduction of costs of living. But agreeing to a need to achieve that end, does not mean all methods to achieve it are to be lauded.

Dali's discussion about wages, and how wages need to be allowed to inflate so our purchasing power can grow along with prices is the better and longer term solution.

Price fixing in one way or another is just a stop gap measure.

see said...

Reducing foreign labour sounds commonsensical but seriously are m'sians ready to pay more if local labour is factored in? Some will make noise if it implies their roti canai price will go up. Alternatively how many of us ready for self service? Some got maids to wash their cars every bloody day

doraiddd said...

i found more of angelababy here -

u write a lot better than the guy tat owns the site BUT...
he's got better pictures... ahem...

ksq said...

the crux of the matter is are we better off with the present toll system. the non-toll users have a stake too as all goods and services include transportation charges.

to me, the toll rate is just too high relative to our income level. reason for the high toll rate? well, blame it on the entire system from close tender, lofty projections and generous terms accorded to the concessionaire. by not privatising, we will just continue throwing away tax money to the happy buayas.

as for ways to boost the economy, increase purchasing power and so forth, you said it rightly that there are other means too at our disposal to achive these goals.

therefore, PLUS must be privatised at all cost.

Big Bad Wolf said...

It doesnt matter if the toll rate is high or low, but this kind of toll agreement is a total rip off. Lop sided, and benefit only to the toll operator. Imagine the operator raking in profit year after years, and the gov would stil have to allow the review of toll rates after 3 years period. If no price increase, then gov have to fork out the money. And guess where the money coming from?

If the toll is abolished, or maybe reduced significantly, imagine the benefit which will be trickled down to the society and consumers alike. Lower cost of business operation, hence translating into cheaper products. And generating into higher profit. Imagine billions of toll money collected yearly is returned back to the society. Business grows, the economy grows and the workers pay will rise (hopefully).
So, privatising these TOLL operator is also a way of increasing the purchasing power.

One of the point that you argued is that PLUS should not be privatized as this will make our local bourse less attractive. Its a pretty weak argument i say. Between investors/traders and the general public, which one will benefit more from the privatization?

Salvatore_Dali said...

little bear,
yes, the gov track record in managing money leave little to be desired... but lets counter things issue by issue, if we cloud our judgments by saying that the gov never manage right anyway, hence we should privatise n benefit the end users, that is succumbing to their level

another reason is that the company is 70% controlled by gov institutions, so profits largely stays within, i would rather khaxzanah sells their stake to epf, at least there is a more direct benefit to the Malaysian public

yip jen,
i already did before

little bear,
ty for helping me to clarify the situation n my arguments

if u think that is a weak argument, wait till a few more big caps get privatise n see where we stand

mohd said...

tax them back so gov get back their money.i think the gov should impose windfall 95% of compensation received like what Obama did for AIG.although AIG is about bonuses but still thats the as much as you can.

KoSong Cafe said...

The main complaints are the lop-sided agreements (always wonder why we elect people who don't look after our interests). LKS have pointed out before Dr M's admission that the NSE was to save Umno's debts to start with. There is no doubt that the infrastructure was an excellent idea, but why had it got to be inflated and one-sided at our expense? To buy up Plus is just to correct deliberate mistakes made by bad decision makers and to save the people from future increases in tolls.

There is always the fear that other GLCs may not do a good job after taking over. The problem seems to be the type of government we are getting and the people they are recruiting as custodians. So far, there have been so many incidents of wastages and leakages without anyone taking responsibiity.

Plus has yet to overcome large scale frauds involving regular commercial users. The loss is borne by us in one way or other.