This article first appeared in The Edge Malaysia Weekly on May 10, 2021 - May 16, 2021

GAMUDA Bhd has proposed to the government for the four highway concessions under its stable to be placed into a trust company, in an exercise it describes as a capital market solution to toll compensation woes.

In return for putting the highways into a trust, sources say the company has proposed that there would not be any more toll rate hikes, the government need not fork out any money, and the risks will be entirely with the investors of the trust company.

In the proposal that has been sent to the Works Ministry, Gamuda proposed that the highways be placed in a special purpose vehicle called Amanah Lebuhraya Sdn Bhd. The highway trust company will be overseen by a board of directors.

Amanah Lebuhraya would then go on to raise money from bond investors to buy up the four highways from Gamuda. In return, Gamuda — the main proponent of the highway trust — envisages that bond investors would get a return of about 5%.

“The amount that Amanah Lebuhraya needs to raise to acquire the highways has not been determined yet. But the four highways under Gamuda were valued at RM6.2 billion in 2019 based on a discounted cash flow valuation when the previous government wanted to take over the assets.

“Taking into account that the highways have two years less cash flow compared with 2019, the estimated value is now about RM5.2 billion or more,” says a source.

When contacted, Gamuda declined to comment.

In the proposal, the company is seeking to increase the tenure of the highways by five years and for the government to allow a tax waiver amounting to RM900 million. The extension and tax waiver are to facilitate the redemption of the bonds when they mature.

It is learnt that the proposal calls for bonds to be issued at varying tenures, depending on the expiry of the concession period of each of the highways.

The bonds would be redeemed from the surplus cash flow after stripping out the expenses for maintenance of the highways. The maintenance works will continue to be done by Gamuda and its group of companies.

The four highways under Gamuda are the Western Kuala Lumpur Dispersal Link (Sprint Expressway), the Stormwater Management and Road Tunnel (SMART), the Damansara-Puchong Highway (LDP) and the Shah Alam Expressway (Kesas).

The Sprint Expressway has three toll booths, with the concession ending between 2031 and 2034. The Kesas highway’s concession ends in 2028, and the LDP’s in 2030. The SMART tunnel has the longest remaining concession period until 2042.

A highway trust is not entirely a new proposal. An independent financial advisory proposed it to the previous government in April 2019 as part of a solution to abolish toll rates. Several ministers have broached the subject and government entities such as the Malaysian Highway Authority (MHA) have been working on it.Minister in the Prime Minister’s Department in charge of Economic Affairs Datuk Seri Mustapa Mohamed has even said that the government was looking at placing all the highways under a single vehicle called a highway trust as a solution to minimise toll rate hikes.

But so far, there has not been any move taken to set up the highway trust.

Among the reasons the previous proposals have not made much progress is that there is no political will or resolve to see them through. There is also the fear that it would involve some kind of guarantee from the government to meet bond redemptions.

Also, the valuations of the various highways are different because they each have their own traffic growth numbers, as well as concessions of varying tenures. Some of the new highways such as Sungai Besi-Ulu Klang Expressway (SUKE) and Damansara-Shah Alam Expressway (DASH) have concessions of more than 50 years.

The new highways, which still have long tenures, would demand higher valuations even through the cash flows may not be attractive. The older highways would also want better valuations as they are enjoying strong cash flows and steady traffic growth.

Generally, most highways in Kuala Lumpur and Selangor had been experiencing single-digit traffic growth even before the outbreak of the Covid-19 pandemic in February/March last year, based on a 2019 survey by the MHA. Traffic growth had at times been declining for the more mature and older highways, even before Covid-19.

According to MHA’s 2019 annual report, the Sprint and Kesas highways saw a marginal decline in traffic growth of 0.77% and 0.61% compared with 2018. The LDP continued to see growth, albeit only at 0.33%, while SMART saw a rise of 10.49%.

The decline in the traffic numbers is largely due to the government commissioning public infrastructure facilities such as the mass rapid transit and light rail transit systems. Also, the highways, especially LDP and Sprint, are mature assets and have a large base.

The last two years have been extraordinary due to the pandemic. All highways are experiencing a drop in traffic numbers due to the movement restrictions.

When the government wanted to take over the Gamuda highways in 2019, critics pointed out that it would be better to wait till the end of the concession period and then take them back since there were not many years remaining.

However, the government would have to fork out compensation if the highways were allowed to continue to operate. Just last week, the works minister announced that the government would need to pay the concessionaires of city highways RM2.25 billion for not allowing scheduled toll rate hikes.

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