Commentary Economics

Better cross-eyed than blind on PLUS highway deal

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TheMole
Written by TheMole

By Salahuddin Hisham

LAST weekend’s spring cleaning at home uncovered an old corporate proposal to take over Pengurusan Lebuhraya Utara Selatan Berhad (PLUS) via acquisition of United Engineer Malaysia Group Berhad (UEM) that was intended for 2010.

In his postings in June and July that year, Rocky Bru  linked the proposal to Tan Sri Syed Mokhtar Al-Bukhary and Tan Sri Halim Saad’s associates. The interested party wanted to collaborate with Khazanah and EPF to establish a Special Purpose Vehicle. They mentioned something about cutting operating expenses by 20 per cent.

The Government rejected the offer even before anyone could blink.

Maju Holdings Tan Sri Abu Sahid’s proposal earlier this month to acquire PLUS is, therefore, nothing new.

But it begs the question (again): What is it that Abu Sahid – and before him Syed Mokhtar and Halim Saad – see in PLUS?

The sweeping conclusion made of PLUS highway is that it is a matured investment and nearing full capacity thus it has limited growth potential.

But since these big corporate names are interested, could there still be value in PLUS that Khazanah Nasional and the Employees’ Provident Fund could not see?

Is it a case of “Hanya jauhari mengenal manikam” (Only a jeweller could identify a precious stone), as the Malay proverb goes?

If the government entities holding on to PLUS cannot take the opportunity to create more value, perhaps they have no business holding on to it. They should just accept the offer, realise profit and reinvest in other more potentially lucrative investment.

Go east and ride on the China initiative, maybe. One Belt, One Road (OBOR) is waiting.   

Alternatively, the major shareholders of PLUS, Khazanah or EPF, should open their hearts to at least give it a listen and hear out Abu Sahid.

There could be something interesting for the possibility of third party collaborating with Khazanah and EPF.

To decide on the divestment of PLUS highway, a food for thought from an Indian proverb could be quite relevant: “Better cross-eyed than blind”.

On the other hand, one could interpret the Indian proverb in a different way. Despite the lack of foresight by PLUS management, do not be blinded by the temptation of the RM30 billion.

In the good old days of the drive towards privatisation and government initiated commercial ventures, there is the likelihood of padded outsourcing of contracts for supplies and spare parts, or sales or maintenance.

Why didn’t Khazanah and EPF look into it?

But then again, with rising prices and escalating cost, can such exorbitant margin or possibility of internal collusion to enrich contractors remain feasible?

As far as the public is concerned, the sticky question with regards to the proposals to acquire PLUS is toll.

In the old proposal, the toll rate restructuring could keep rates till 2035 with no extension to the concession period and no compensation paid by the Government in the event that toll rates are not increased.

It is similar to Abu Sahid’s but they considered seeking to cap corporate tax or cheap funding from government.      

The problem with the proposal was it makes no economic sense. Maintaining toll rate without any increase will reduce the discounted cashflow value per share of PLUS. EPF and Khazanah will end up as loser. The buyer will gain in rising share price.

In the last restructuring exercise by the then Minister in charge of Economic Planning Unit (EPU), Tan Sri Abdul Wahid Omar, he managed to prolong the next tariff increase after squeezing out any possibility of saving from the iron clad concession agreement in-built with automatic periodical toll hike.

The Privatisation Special Task Force unit established under EPU sets the guideline on the Internal Rate of Return on privatisation projects. Public projects like PLUS highways and supposedly, the Independent Power Producers, grouped together by 1Malaysia Development Berhad, were to be matched against fixed return fund like EPF.  

The next toll review for PLUS could be coming up in a year or two or maybe sooner. This could be the inspiration to Abu Sahid.

Apparently, Abu Sahid has done a bit of homework and put together a team of foreign advisers and advisers. Word is he has the backing of foreign banks to undertake the acquisition. But that will only create the worry in the event of default. Does that mean the PLUS highway asset could be taken over by the foreigners?  

If asset ownership remained with government and it is only the management of PLUS that will fall to foreigners, is that a real issue of concern for the public?

Perhaps, these foreigners could shut down PLUS and the country’s logistic will halt to a dead stop!

Actually, the government can always specify in the deal that the foreign banks concession holder should not do so or the army would be forced to move in. In other words, the government should not be blinded and presume things. 

In these days of free flow of capital, the fear of foreign ownership of so-called national assets may be considered as unfounded and old school to some. Malaysia receives investment from abroad and it also invests abroad. The EPF itself is an active foreign investor, always diversifying its portfolio abroad for balancing out the lower earning investment locally.

The same argument to counter fear of foreigners owning property is properties and highways could not be dismantled and taken back to their mother country by the foreigners.

Again, let us not be blinded but to think through, keep an open mind and make informed decisions.

There are people who believe that the cold reception towards Maju Holdings’ proposal is not due to the financial feasibility or the prospect of reinvesting profit into other ventures.

It could be a question of trust. 

Abu Sahid’s track record in doing business has turned him into the kind of urban legend that is not all flattering, it would seem.

Deals involving the controversial sale of his Maju Junction building to Tabung Haji, the failure of Perwaja Steel and the proposed sale of MEX highway have given the impression that “following through” is not Abu Sahid’s strongest point and that with him, you must learn to expect something unexpected to  happen.

That is something Abu Sahid will have to work on in order to convince Khazanah, EPF, EPU, and paying highway commuters. Known as a dedicated Tun Dr Mahathir Mohamad supporter, he will need to start telling his side of the many stories of his colourful past to open the eyes of the stakeholders. 

 

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TheMole

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