Tuesday, October 19, 2010

The PLUS Bidding Battle

1. In the last two weeks, we have noticed of a much publicized and intensed bidding battle for Projek Lebuhraya Utara Selatan (being the operator of the North South Expressway) and a few other highways as well. One party consists of Asas Serba (run by ex-Renong man Halim Saad and partner of for Finance Minister Daim Zainuddin), another is MMC (Syed Mokhtar Bulkhary) in partnership of the EPF. To get PLUS, either one must do a complete buyout of UEM (United Engineers Malaysia).

2. Recalling the proposals: MMC's proposal is a $15.6 billion ringgit deal with 10% cut on all toll rates with no increments until the end of the extended concessionaire period in 2038. Asas Serba's deal is similar to MMC but $50 billion on all 25 highways in the Peninsular and a 20% toll rate cut across the board. Khazanah / EPF's $23 billion offer never mention what sweetener that they can put except that EPF members stand to get additional dividends from the revenues generated by PLUS.

3. Khazanah is very much against the proposals from Mahathir's business partners. They believe that it leaves the toll concessionaire at the mercy of government demands to cut toll rates. The problem for the other two tycoons, (S.M and H.S) the business connections with the government is not as great as when Mahathir was in charge. Another reason, as quoted by a government official is that "Keeping it public will ensure that the government will not simply ask to cut toll rates as that can affect share price and the bottomline. Taking it private will open it up to pressure as there is no share price to affect.”

4. Once Khazanah / EPF completes the buyover of UEM, as per what Najib announced in last Friday's budget that there will be no toll increase for the next 5 years, the government could be seeing a freeze bill of $7.5 billion ringgit by 2015. In other words, there is no compensation paid to PLUS over the 10 year period. The last increase of toll was in 2005.

The current rate per kilometer in the NSE is 13.60 sen.
The 2002-2005 rate per kilometer in the NSE was at 12.36 sen (10% hike announced on 16 Dec 2004)
The 1999-2002 rate per kilometer in the NSE was at 11.24 sen (10% hike announced end of 2001)
The 1996-1999 rate per kilometer in the NSE was at 10.

Based on the present agreement, the next increase would be another 30% as to compensate 10 years of unpaid compensations to PLUS by the government. In other words,it would be 17.68 sen by 2016. And what's more, at that time, there will be another 22 years more to go before the concessionaire period ends.

5. The concessionaire period was extended twice due to the "Decade Bubble" - the economic bubble that bursts every 10 years. In 1997, it's the Asian Financial Crisis. In 2007, it's the global sub-prime crisis. As the result, because of the A.F.C, the first concessionaire period was extended by another 12 years (to 2030). Another extension resulted in the period extended by another 8 more years to its present agreement. Now that we notice that the Decade Bubble happens every 10 years, the next can happen within 2017. If it happens, is the concessionaire period going to be extended again?

Again, this is based on the present concessionaire agreement.

6. If we take this events in face value, surely we would go for the MMC / Asas Serba deal if the option is given to the public because of the big carrot is being a 10-20% reduction of toll across the board and no toll increase until the end of the concessionaire period. Also, with the immediate reduction, we can see a investment recuperation in a shorter than expected period of ROI. That's because the reduction of the toll would see higher volume of people travelling on the expressways, NSE in particular. The one that stands to smile more would be the businessmen and transportation carrier operators (including those transporting essential goods).

I find that scenario is the classic case of picking the lesser of two evils. Between evil one that allows space in and out despite a bad scenario against a bad scenario with no way out in the long run, which one would you take?

7.  Khazanah, is the one who decides who goes or not. Why it rejects the other two offers outright in that kind of wheel-dealing is something I find it not right and "sinister". We all know that the one who calls the shot is the head himself Azman Mokhtar (A.P King). But of course another key-figure whose hand is part of the wheel-dealing is obviously Nazir, Najib's younger brother. I remembered someone quoting Azman saying something like, "Ini semua kepentingan rakyat dan negara. Tak boleh jual sewenang-wenangnya." (It's all important for the people and country. Can't be sold that simply!).

But what is at stake here is that if S.M or H.S gets it, Nazir would have the trouble of getting more projects and money in the pocket. The MRT project due to start next year is already in the pocket. One reason of rejecting would be to give the picture that CIMB is bankrolling majority of projects. EPF, (since he's a member of the investment panel) is pushed into projects with Nazir's clients.

Many are unhappy, from people in Finance Ministry, EPF and a few, of Nazir's wheel-dealing tactics. The one who is the worst of it would be the outgoing EPF chairman himself.

I saw something interesting from this blog (setup not that long ago). The below excerpt caught interest:

10. Worse still Nazir feels slighted by Dr Mahathir and has started a campaign to discredit the former pm and block any investments from Mahathir's cronies like Syed Mokhtar and Daim Zainuddin.

11. To go to war with Dr Mahathir, he has the help of his good friend Khazanah boss Azman Mokhtar. 

12. Azman will block Syed Mokhtar's bid for UEM and has also blocked Daim's move to privatise PLUS.

13. Nazir is upset Dr Mahathir blasted him for questioning the NEP. 

14. He is also upset that mahathir has started digging up info on the billions in fees cimb has made in pushing deals at the expense of the country. 

Perhaps this would backup the idea why S.M and H.S's bids got turned down outright.

8.If the proposal goes public, which one would you agree most? Is it a worthwhile investment as what many business analysts claim to be or otherwise? You be the judge, and have your say below.

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