Thursday, February 02, 2012

That 7 Billion Highway Project!!!

On 28th Jan 2012, the following article was published on Star Biz.

  • Saturday January 28, 2012
    Europlus’ RM7bil concession needs answers

    At a time when many concessions are near expiry, a 60-year toll-road one perplexes

    A CONCESSION for 60 years may well be a record for Malaysia and the only thing that comes to mind, which is longer than that is Malaysia's agreement to supply water to Singapore for hundred years signed in the sixties when the latter moved out of Malaysia.

    Even for the North-South Expressway, the original concession period was half of that at 30 years while its length was more than twice that of the proposed West Coast Expressway at over 770km.

    Not only is the concession extremely long, it is also very expensive with a development cost before land acquisition estimated at a whopping RM7.07bn for 316 kms from Banting, Selangor to Taiping, Perak out which 224km or some 70% will be tolled.

    Kumpulan Europlus Bhd (KEuro), a long-ailing public-listed company that had been involved in property projects especially housing, which had been mired in problems, announced that the concession was obtained by its 64.2% owned West Coast Expressway Sdn Bhd (WCE).

    The project, KEuro said, received an approval letter from the Public Private Partnership unit of the Prime Minister's Department but it does not appear that a government announcement has been made so far.

    KEuro, which is majority owned by entrepreneur Tan Sri Chan Ah Chye and another listed company IJM Corporation Bhd, said the project will be on a build, operate and transfer basis but it is clear that with a 60-year concession, many of us, including the project promulgators won't be around when the time for transfer arrives.

    Apart from the long concession period, there are other features which make it very attractive to WCE, including assistance from the government with a support loan of RM2.24bil starting from 2013 with an interest rate of 4% a year.

    Over and above this, there is an interest subsidy of up to 3% from commercial loans for 22 years. Both interest rate subsidies alone could be worth up to some RM4bil over the period, assuming a principal of RM6bil jand depending on how the principal is repaid.

    Meantime, the land acquisition cost of an estimated RM980 million will also be borne by the government. But any toll revenue over an agreed traffic volume will be shared 70:30 with the government getting the lion's share. However, on full settlement of the loan, WCE will get 70% instead.

    On almost every count, it looks like WCE has got itself a damn good deal. An examination of the deal based on earlier estimated construction costs and international costs again shows it to be favourable.

    Curiously, KEuro had announced in May 2007 that WCE had obtained approval for the same concession but on much less favourable terms, raising questions as to why the deal appears to be so much better now.

    At that time, it involved 216km and linked the same two towns, Banting in Selangor and Taiping in Perak, the main difference apparently being there was no construction of some 90-100km of non-tolled roads which there is now.

    But still, the overall development cost estimated then was substantially lower at RM3.02bil and the concession period was less by almost a half but still very long at 33 years.

    Comparing costs per km, it was substantially lower in the 2007 deal at RM13.9mil per km compared to RM22.3mil for the deal just announced. Over the last four years, WCE has been renegotiating the deal with the government and this seems to be the final outcome.

    While the cost of construction of expressways differs tremendously among different countries and terrain as well as the type and quality of expressway, a 60% increase in costs over four years for essentially the same area and terrain seems way too much.

    International comparisons are difficult because of different costs. India has a programme to build 1,000km of expressways for RS16,680 crores which works out to about RM10bil at current exchange rates. This translates to about RM10mil per km, less than half the figure for the West Coast Expressway.

    Considering that roads are expensive and the public is already burdened by an extensive system of tolls, the government should be rather circumspect about granting toll road concessions, especially one for the hitherto unheard period of 60 years.

    Before one can make a final judgement of whether this deal is fair, more details need to be released. The current and expected traffic on the highway has to be projected, the cost of construction established and a proper rate of return established so that a net value can be ascribed to the project.

    To get the best deal for itself and for the rakyat, the government should have been transparent over the process and invited all qualified parties to bid to keep project cost, tolls and the concession period as low as possible.

    It is still not too late to do that.

    Independent consultant and writer P Gunasegaram ( hopes against hope for transparency, open tenders and proper evaluation to save public money.
The issues raised were serious and TI-M was quick to express its concerns over the lack of transparency. The following was posted on the EdgeMalaysia on 30th Jan 2012.
  • TI-Malaysia: Explain awarding of RM7.07 bn West Coast Expressway project Written by Joseph Chin of
    Monday, 30 January 2012 18:36

    KUALA LUMPUR (Jan 30): Transparency International Malaysia (TI-M) has expressed concern over the apparent lack of transparency and proper procedure in the awarding of the RM7.07 billion West Coast Expressway concession project.

    Its president, Datuk Paul Low said this mega project would involve massive public financing of a soft loan of RM2.24 billion and payment of RM980 million for land acquisition, and an unprecedented 60-year toll concession.

    “TI-M views with concern the apparent lack of transparency and proper procedure in the award. Given the public funding and long concession period, there could have been proper governance and transparency in the award through an open, transparent and competitive procurement process and public disclosure of the terms and conditions of the contract,” he said in a statement.

    To recap, on Jan 26, KUMPULAN EUROPLUS BHD [] announced to Bursa Malaysia that its 64.2% owned West Coast Expressway Sdn Bhd (WCE) has received the government’s approval to build the 316-km west coast project costing RM7.07 billion.

    The 316-km Banting to Taiping expressway would be on a build-operate-transfer (BOT) with a concession period of 60 years.

    KEuro also said the land acquisition cost of up to RM980 million for the project would be borne by the government.

    The company had also said a government support loan of RM2.24 billion, starting from 2013 at an interest rate of 4% per annum, and an interest subsidy, of up to 3% from commercial loans for a period of 22 years, would be granted to WCE,” it said.

    KEuro had then said toll revenue in excess of an agreed traffic volume would be shared on the basis of 70:30 between the government of Malaysia and WCE till full settlement of the government support loan and subsequently 30:70 after the loan is settled.

    However, on Monday, Low pointed out that such a mega project and also its impact on the public was an ideal candidate for implementing the Integrity Pact (IP), a tool for curbing corruption risks in public contracting projects.

    “The government has recognised the potential benefits of IPs by a Treasury circular dated Dec 16, 2010 outlining guidelines for implementing IPs in government procurement.

    “Further, MRT Corp., the GLC tasked with implementing the MRT project, has agreed to incorporate the IP in its procurement exercises,” he said.
Today, we have an article on BTimes.

I was shocked to read how BTimes would allow an UN-NAMED SOURCE to feature in the write-up. I thought the issues raised were dead serious and to have an un-named source making a lot of statements on the issue were rather disturbing.


Why can't the source be named?

Don't they know there's not much value and credibility in the article when everything is based on an unknown source?


What an insult!

  • 'Incentives not sweetheart deal’

    By ADELINE PAUL RAJ Published: 2012/02/02

    LONG-TERM PLAN: Soft loan, perks for Kumpulan Europlus are to jumpstart expressway project, says source
    THE RM7.07 billion West Coast Expressway (WCE) project awarded by the government to Kumpulan Europlus Bhd (K-Euro) is no “sweetheart deal”, says a source close to the project.

    The deal, which involves the government providing KEuro a soft loan of RM2.24 billion at four per cent interest, among other supportive moves, as well as a 60-year toll concession, has drawn criticism that it favours the public-listed company at the government’s expense.

    The source, however, argued that the deal was structured with government support in order to get banks comfortable enough to help fund the deal.

    Without the soft loan, no bank would have come forward and the project would never take off, he said.

    The 316km WCE, which will link Banting, Selangor to Taiping, Perak, is meant to be an alternative to the increasingly congested North-South Expressway (NSE).

    It will take five years to complete the project, with work expected to start by yearend, the source said.

    “Traffics in this corridor is generally quite low except for the Klang Valley area, but the government sees huge long-term potential in the project in reducing traffic pressure on the NSE,” the source told Business Times yesterday.

    With low traffic projections and high costs, the government’s support loan provides “enough comfort for bankers to support the deal from the beginning”, he added.

    The project now would cost more thandouble to build than it would have in mid- 2007, which was when the project wasoriginally planned, due to several reasons, including that building material costs were now substantially higher, the source said.

    He said the estimated RM7.07 billion cost took into account the fact that the highway stretch was 100km longer than originally planned, and would include 5km of elevated sections (in the Klang Valley) that cost “four to five times more”, extra structures, and “fairly large” bridge crossings over four rivers.

    On rising material costs, he said stones and sand as well as bitumen, for example, now cost about three times more than in 2007, while the price of steel has shot up by more than 150 per cent.

    “All of these have contributed to the added cost,” he said.

    It will take time to build up traffic volume on the WCE, which is why a longer concession period is needed, he said, adding that it could take 10 years before “decent” traffic builds up.

    KEuro’s proposed 60-year concession is the longest known so far in the country.

    By comparison, it was offered a concession of 33 years in 2007.

    The traffic volume forecast in the current deal is about “20-odd per cent” lower than in 2007 and deemed more “realistic”, the source said.

    This was why, he said, the company was prepared to share toll revenue in excess of agreed traffic volume with the government on a 70:30 basis, in favour of the government, for as long as it’s paying off its soft loan.

    Under the current deal, the government is also providing KEuro subsidy of up to three per cent for commercial loan interest payments. Land acquisition costs of RM980 million is also to be borne by the government.
And here is my question. With this unknown source admitting that traffic is generally low, why this highway project????


Can the projected traffic justify that 7 Billion price tag?


ps: Oh yeah, I deeply deplore the usage of 'according to sources' in our financial news and reports. When the source is un-named, how does the reader know the credibility of the said article. And seriously, shouldn't financial news based on facts and quotable sources?

When the financial news is based on un-known source, the financial news becomes nothing more than a gossip tabloid!

I pray that such practise ends!


    CK said...

    Someone should seriously looking into the other 35.8% shareholding of West Coast Expressway Sdn Bhd (WCE).

    The key should be there!!!

    mapsscom said...

    according to the reliable source,malaysians can be fooled all the time,everytime n forever in time.