Halim: I can do it. But can he?

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In the second part of our series, we interview Halim Saad who is confident that his PLUS takeover deal is workable, will put a stop to toll increases, halve toll rates for some one million users and still give reasonable returns to investors. Can he do it?  

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Businessman Halim Saad, who once ran the slew of toll concessions under PLUS Malaysia’s previous incarnations said he can save the rakyat and the government at least RM40 billion over the remaining 24 years of the concessions which expire in 2038.

Halim told KiniBiz in an interview that this is the new figure obtained after discussions within a technical committee set up by the Economic Council before which PwC Capital Sdn Bhd, a unit of auditors PwC, made a presentation on behalf of Halim to the council last Monday.

It is understood that the prime minister has also been briefed on the proposal.

In a separate press release on the matter, Halim said his investment vehicle for this purpose, Idaman Saga Sdn Bhd, had submitted a revised business model to the government based on feedback from the Public-Private Partnership Unit or UKAS (Malay acronym).

“The revised assumptions are more conservative compared to the original assumptions used by Idaman Saga in its business model, nonetheless Idaman Saga confirms that the cash flow is still able to sustain PLUS in terms of debt servicing and return on equity,” said Halim in the press release.

Among others, the revised proposal now presumes a 4% traffic growth rate per annum as advised by UKAS. The new version also revised the traffic volume assumption for the closed system to 55 million passenger car unit per kilometre (pcu-km) per day. As for the operating expenditure assumption, the new proposal revised the figure to RM1 billion as avised by UKAS.

Overall, the new proposal projects total savings of RM40 billion to both the government and the people.

‘Government should accept proposal’

The original proposal had projected a savings of RM82 billion based on compensation savings of RM64 billion by the government and RM18 billion by season card holders (see tables and explanations on this further down).

“If the government does not want to pay compensation to the toll operator, if the public wants no toll increase, and if the government wants to appease as much as one million voters throughout the country, then they should accept the proposal,” Halim said.

Halim was adamant that even after his proposals, the new investors in PLUS Malaysia will still get a good return on investment. But he declined to say what the rate of return is.  His original proposal indicated a return of  at least 7% a year.

Moreover, Halim added that the Employees Provident Fund (EPF) which holds 49% of PLUS Malaysia can still be shareholders but they have to exit first. His plan envisages that eventually PLUS will be held in equal portions of one third each by EPF, his partner in the deal Lembaga Tabung Haji and his investment vehicle Idaman Saga.

The other shareholder of PLUS Malaysia is UEM Group Bhd which is wholly owned by government investment fund Khazanah Nasional.

Also, Halim said that the sukuk bonds worth RM30.6 billion and issued in tranches carried different profit rates with the weighted average interest rate at just 5.5%. Therefore, there was still a chance of refinancing them at around 7% or below.

Halim: We have a financing plan

In the previous story in this series, KiniBiz examined the value of PLUS and found that the former UEM-Renong chief would need to pay at least RM34 billion for Malaysia’s biggest toll concessionaire plus  any premium UEM and EPF would ask for the deal to go through.

“As far as we are concerned, we already have a very creative financing plan and sufficient financial backing from institutions,” said Halim to KiniBiz.

Responding to a question on how he intends to finance the acquisition given that interest rates are likely to be higher than what UEM and EPF got for their 2010 acquisition of PLUS, Halim claimed that the weighted average interest rate paid by UEM-EPF on their RM31 billion debt is about 5.5% and that his financing model “can handle higher interest rates”.

However, the model proposed by Halim intends to forgo government compensation and toll rates increases until the concessions under PLUS expire in 2038. Given that PLUS’ sukuk would also have to be refinanced at a likely higher interest rate if he takes over, can PLUS still be profitable?

“Firstly, cash flow is more important than P&L (profit and loss) in debt servicing,” answered Halim to KiniBiz. “Our cash flow model has shown that we have sufficient cash flow to service debts and give good returns to investors.”

Explaining further, Halim said of the two main factors driving revenue growth for highways — toll rates increases and traffic volume growth — toll rates increases have a slower compounding effect as the increase in PLUS’ case would be 5% every three years.

“The traffic volume on the other hand grows every year,” said Halim. The compounding effect is much more higher.”

‘Nobody will be shortchanged’

Halim also responded to a question raised in a KiniBiz story on Tuesday, which asked why the businessman is eyeing PLUS, which is mostly inter-state, instead of other highways in the city if he wanted to help the people.

“PLUS runs across the country from north to south, so it has a wider coverage,” said Halim in a response to KiniBiz. “The rakyat and the rising cost of living are not just in Kuala Lumpur.”

As for why he chose to go to the government first with his proposal instead of approaching either UEM or EPF, the current co-owners of PLUS, Halim commented that the government and the people stand to benefit the most out of his proposal.

“Our priority is to lend a hand in helping the government and the rakyat save money,” said Halim to KiniBiz. “We believe that that is the government’s priority too.”

Once the government has approved the concept, he would then make an offer to both UEM and EPF, added Halim.

“The offer will be fair,” said the businessman. “Nobody will be shortchanged.”

In yesterday’sexamination of the value of PLUS, KiniBiz found that the estimated price tag of PLUS would be at least RM34 billion plus a premium. Of that figure, RM30.6 billion would be PLUS’ debt obligations following the sukuk it issued in January 2012 while the remaining RM3.4 billion is the equity portion of the company.

Halim cannot sidestep the debt obligations by simply buying over the equity portion from UEM and EPF and then assuming the debt obligations of PLUS as the debt terms stipulate that a change in shareholding would call for a compulsory refinancing of the debts.

A rakyat-friendly toll scheme?

For urban commuters, the pressing question is whether Halim’s proposed Rakyat-friendly toll scheme really does give them the savings he claims it does.

According to his private vehicle Idaman Saga Sdn Bhd’s presentation to the Economic Council last week, the scheme offers to halve the toll rates for a majority of PLUS users throughout the remaining period of PLUS’ concession period which ends in 2038.

Based on the original proposal, the savings for urban commuters would come to RM82 billion within the 24-year period, although the discount is only applicable to class 1 vehicles holding the three-year season cards needed to partake in the scheme.

In essence, the three-year season cards allow cardholders to enjoy half the current toll rate —13.6 sen per km — by paying just 6.8 sen per km up to the daily mileage limit of their cards, either 50km or 100km daily. For these, cards users would have to pay RM100 or RM200 respectively every month.

However are the daily mileage limits of 50km and 100km sufficient for most urban commuters?

Among others, highways under PLUS’s stable include the North-South Expressway (NSE), the New Klang Valley Expressway (NKVE) and the North-South Expressway Central Link. The NKVE, for example, stretches as long as 35km and going from one end to the other on a two-way trip would exceed 50km easily.

One scenario put forward in Idaman Saga’s presentation, for the RM200-card, is for a user commuting from Seremban to Sungai Besi which would be 94 km to and fro. However commuters who drive on past Sungai Besi would certainly exceed the 100km limit.

The emerging scenario is that while there is the prospect of saving some toll fees for card holders, very few if any would get the maximum saving of 50% on the effective toll rate per km of 13.6 sen on PLUS’s highways. Instead, it is likely that commuters would get some savings on that rate but still pay higher than the 6.8 sen per km touted by Halim’s scheme.

In addition, PLUS’s concessionaires do not encompass some highways in the city that are heavily relied on by urban commuters such as Lebuhraya Damansara-Puchong (LDP) and the Western KL Traffic Dispersal System or SPRINT Highway.

Therefore another question that arises is how much of the urban commuting population would stand to benefit.

Most commuters are short-distance users, says Halim

In response, Halim claims that out of 1.4 million vehicles in PLUS’s daily traffic volume, 1 million vehicles are in a closed system and of this figure, between 80% and 90% are passenger vehicles or class 1 vehicles.

Through a rough calculation, Halim’s figures mean PLUS has between 800,000 and 900,000 class 1 vehicles within a closed system daily. A closed highway system basically means that vehicles would have to pay toll either entering or exiting the highway.

Of the class 1 vehicles within PLUS’s closed system, about 80% are short-distance users travelling less than 100km daily, said Halim.

A rough KiniBiz calculation found that the number of short-distance class 1 vehicles in PLUS’s closed system according to Halim’s figures come up to between 640,000 and 720,000 vehicles per day.

Assuming each vehicle takes the RM100 option in season cards, given that the cards are only exclusive to one vehicle to avoid abuse as proposed by Idaman Saga, the amount of savings come up to between RM768 million and RM864 million per year.

Over 24 years, the savings in this scenario based on Halim’s figures would amount to between RM18.43 billion and RM20.73 billion.

However this presumes that every single short-distance class 1 vehicle in the closed system signs up for the RM100 season card. In addition traffic volume growth has not been factored in, nor any projections on users opting for the RM200 option instead.

If the figures that Halim mentions turns out to be accurate (“Don’t worry, the figures are good,” Halim told KiniBiz), then it is certainly a way to not only stop government compensations for toll but also to cut them by half for a significant portion of users.

But that still leaves the problem of UEM and EPF and whether they will accept the deal. The government may have to twist their arms to accept a deal but that offer still has to be good, especially to EPF, the repository for the savings of over 13 million workers. For it to be that good, the return to the new investors may be whittled down further.

If however the government prefers the choice of using any surplus it receives from its effective full ownership of UEM for other purposes instead of subsidising toll users, it may prefer to keep the present structure. It can reason that good returns to EPF eventually benefits the 13 million plus Malaysian workers and leave it at that.