Malaysian construction companies have without doubt established a reputation as excellent road builders, thanks to the Tun Dr Mahathir Mohamad era, which saw the government facilitating the construction of several toll roads, particularly the North-South Expressway.

But the flawed toll road concession agreements — mostly signed during the Mahathir administration — have come back to haunt the current government.

One of the biggest problems Prime Minister Datuk Seri Najib Razak faces now is subsidising toll highways as rate hikes are hard to justify because they are a non-populist measure. This has become an issue, particularly after the Barisan Nasional government lost significant ground in the March 8, 2008, general election.

Instead of signing toll road concessions, the government is now looking at ways of buying back the concessions or building alternative roads to address the grouses of consumers who complain that despite paying toll, they are caught in traffic jams.

The government has also removed toll booths in strategic areas with the consent of concessionaires. In return, the concessionaires got a contract or a job from the government to make up for the shortfall in earnings.

IJM Corp Bhd saw two toll booths removed over the past one year — one at New Pantai Expressway and another at Salak Toll Plaza at the Besraya Highway. In return, it received a RM649 million job to undertake the construction of a 12km elevated highway on Besraya.

What’s interesting about the deal is that the compensation IJM received was less than the cost of constructing a new elevated highway.
Based on the RM649 million job for the 12km elevated highway, it works out to RM54 million per km while the comparative cost for the KL-Putrajaya Dedicated Highway from Kampung Pandan to Putrajaya (elevated for some 18km) is almost double.

The highway to Putrajaya, built by Maju Group, was completed at almost double the cost per km.

The fact that IJM accepted the compensation at half the price indicates the “layers of fat” that toll road construction jobs carry.

In Malaysia, concessionaires often make money up front from the construction of toll roads because the jobs are given on a negotiated basis. There are no tenders to determine the cheapest price. This is one of the flaws.

Then, there is no proper planning as many of the toll roads have their origins in the private sector based on its own route alignment and traffic projections. And the rates are not justifiable, especially when consumers complain they are always caught in long jams even after paying the toll.

Before IJM got its first toll road concession in Malaysia, it had undertaken several such jobs  in India, Argentina and China where they went through competitive bidding.

IJM has two toll road projects in India and many more are likely to come its way. In fact, private equity firms are prepared to partner IJM in India to undertake toll road concession projects because of the company’s reliability in completing jobs it undertakes.

Having bid and won toll road projects overseas before getting its first one in Malaysia, IJM’s CEO and managing director Datuk Krishnan Tan does not agree that toll roads are wrong.

“They are an asset class by themselves. There is nothing wrong with toll roads because that is the way of the future,” he says.

But based on his experience in successfully undertaking toll road concessions, Tan offers a few insights into how the process can be improved.

Apart from adopting an open bid process to ensure transparency, the government must identify the route.

“The route must also be part of a major expansion plan,” he says.

Most importantly, Tan says the government must also decide the parameters of the project.

“The government must establish an acceptable toll rate, the mechanism for rate adjustment and the tenure of the concession.”

Invariably, if the rates are fixed low, with limited adjustment possibilities and a short tenure, some kind of subsidy or grant must be given by the government, he says.

“We are giving substantial soft loans anyway. If the concession is attractive enough, bidders may even offer negative grants to pay the government for the concession.”

In India, the tender procedures for toll roads are transparent. The government sets the parameters such as the fee and tenure. Any increase in toll rates is based on the wholesale price index, a measure of inflation. The government also identifies the route, establishes some basic design and has an inkling of the construction cost and the returns.

Bidders will then submit their proposals in two envelopes — one containing the parameters fixed by the government and the other, the amount of grant required to undertake the project.

According to Tan, the bidders can then negotiate on the parameters to determine which are the areas they can agree on.

After the parameters have been decided, the second envelope is opened indicating the amount of grant sought or the willingness of the concessionaire to pay.

“In good times, bidders are willing to pay for the concession. But sometimes they pay too much and are unable to complete the job,” says Tan.

Similar methods are used in some Middle Eastern countries with some adjustments. In one project recently in the Middle East, the government asked bidders to submit their toll rates and grants required.

In Malaysia, toll road concessions are still being awarded on a negotiated basis, with the proposals coming from the private sector. This is happening even after increasing protest from the people on toll highways. Why is this  practice continued to be in force? Shouldn’t toll highways be awarded on a competitive basis?

This article appeared in Corporate page of The Edge Malaysia, Issue 765, July 27- Aug 2, 2009