Frankly Speaking: Moral hazard is a road to avoid

This article first appeared in The Edge Malaysia Weekly, on October 14, 2019 - October 20, 2019.
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The Pakatan Harapan (PH) government has a major dilemma.  Road users expect it to at least reduce, if not remove completely, all tolls as promised in its election manifesto.

But how will it fund such an exercise?

There are now three offers from the private sector to take over the biggest highway operator PLUS, which is essentially owned by the government itself via Khazanah Nasional Bhd, which has a controlling 51% stake. The remaining 49% is held by the Employees Provident Fund (EPF).

The three private sector offers are essentially the same — they promise to reduce toll rates by 25% to 40% and free the government from having to continue subsidising toll payments, which could run into the billions each year.

Sounds good, but as the saying goes, nothing in life is free. Their proposals will require an extension of the current duration of the toll concession agreements and the government must continue to guarantee most, if not all, of PLUS’ debt of around RM30 billion.

But if a mere extension of the concession period can help fund the reduction in toll rates, why should Khazanah and EPF sell PLUS? Surely, they can offer the same reduction if the concession is extended for them.

Which is why there are some within the PH government, notably the Ministry of Finance (MoF) and Khazanah, that prefer PLUS to be kept within its ambit.

In tabling Budget 2020 in parliament, Finance Minister Lim Guan Eng has pushed his case further by announcing an 18% cut in the rate for all tolls under PLUS. Users will save RM1.13 billion next year and up to RM43 billion over the remaining concession period until 2038.

Lim also announced that the Cabinet has finally approved MoF’s proposal to buy four concessions from Gamuda Bhd for RM4.5 billion cash to facilitate the reduction in toll. Although Gamuda’s shareholders had approved the sale, the deal had been stuck for a few months pending a final decision by the government.

Lim said after the acquisition, users of the four highways will save RM180 million a year, or RM2.0 billion up till the end of the concessions.

With the green light to proceed on what is effectively the nationalisation of the four Gamuda concessions, will it mean Putrajaya will now move to buy other privately owned concessions?

And what about PLUS? Does this reduce the chances of the three private bidders getting their hands on it?

After all, the government cannot be taking over some concessions from the private sector and, at the same time, sell what it already controls to private companies.

Our view is public utilities should be a public service owned by the government. Granted, the private sector will probably manage them more efficiently but bear in mind that private investors also expect a certain profit margin or what they call return on investment (ROI).  The government, on the other hand, can accept a lower ROI. It just needs to crack the whip and ensure better efficiency in the operations of PLUS.

But if the Cabinet does decide that the government should not run toll concessions and that PLUS should be sold to the private sector, there should be no moral hazard involved, that is, the government must not provide any guarantees.

If there are government guarantees, it means the private sector will enjoy the upside gains, while taxpayers bear the costs if things go wrong.

That must not be allowed.

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