EKOVEST Bhd is in talks with 1Malaysia Development Bhd (1MDB) about the realignment of the Duta-Ulu Kelang Expressway Phase 3 (DUKE 3), which could run along the border of the 495-acre Bandar Malaysia development that 1MDB is undertaking.

The proposed adjustment to DUKE 3’s alignment would see a 2km section of the 32km highway hug the border of Bandar Malaysia (see map). DUKE 3 will run between Klang Valley’s inner and middle ring roads, and will link Setiawangsa to Federal Highway near Mid Valley Megamall.

Industry executives say the deal should be a win-win situation for both parties.

“There is already an MRT station [from MRT Line 2] and the high-speed rail station planned for Bandar Malaysia. If 1MDB can bring in a highway to improve connectivity even further, it would be a nice boost for the development’s value,” explains one industry executive.

The highway would be a shot in the arm for debt-stricken 1MDB, which is currently running a tender process to bring in an equity partner to co-develop the land. The Ministry of Finance, which wholly owns 1MDB, is expected to retain a 30% stake in Bandar Malaysia. Meanwhile, the tender should value the development at RM11.5 billion to RM12.5 billion.

Even without the highway, sources say the tender for Bandar Malaysia has drawn strong interest with over 70 requests for information following the opening of the tender. The tender has since closed, with 1MDB receiving 42 expressions of interest, of which almost two-thirds were from local parties, one source says.

Moving ahead, 1MDB is expected to narrow down the number of bidders to around 30 based on their merits.

As for Ekovest (fundamental: 1.35; valuation: 2), the realignment could help the construction and highway concessionaire reduce the cost and social impact of DUKE 3. Not only is the current approved alignment (see red line on map) longer than the proposed alternative, it would also cut through privately held industrial land.

Such land acquisitions would prove costly since Ekovest cannot acquire partial lots — the company has to acquire an entire plot, even if the highway only crosses a small part of it.

With 1MDB, Ekovest may not need to acquire the land, since the former is wholly owned by the government. However, if both parties opt for the land acquisition route, at the very least, Ekovest would only need to deal with a single government company as opposed to a large number of private land owners.

Note that the government assists highway concessionaires in land acquisitions, albeit with a predetermined cap. Hence, it is in the government’s interest to ensure that Ekovest’s land acquisition costs are minimised.

In fact, it is understood that both parties are leaning towards a model where Ekovest will be allowed to use the land to build the highway in exchange for infrastructure work, for example, sound barriers.

While the savings would be relatively small compared with DUKE 3’s estimated cost of RM3.6 billion, for Ekovest, connecting its highway to Bandar Malaysia’s MRT and HSR stations would boost traffic which, in turn, would benefit the company.

That said, 1MDB cannot afford to give away land too easily and may drive a hard bargain. The state-owned fund would try to give Ekovest as narrow a strip of land as possible to build the highway. Thus, Ekovest may have to opt for a double deck design for that stretch, which would significantly drive up its construction costs.

Meanwhile, the realignment is not a linchpin of DUKE 3, which has been in the works for a number of years, going through three different alignments before the government approved the current one.

Interestingly, sources say Ekovest commenced talks with 1MDB almost two years ago, but only began formal negotiations recently after getting the green light from the government to make the adjustment to the alignment.

According to industry executives, DUKE 3 is already in the final stage of planning and the government is expected to award the concession by the end of the year if there are no hiccups. Construction would take about 3½ years.

Ekovest should not experience any opposition from the local residents. According to a public acceptance survey that was completed recently, 96% of respondents were agreeable to the highway — 77% agreed while 19% fully agreed.

If Ekovest moves the alignment to Bandar Malaysia, the group would be counting on 1MDB to relocate the existing airbase in a timely manner.

The move is expected to cost 1MDB about RM2.7 billion. The cost would be defrayed by a RM1.1 billion relocation grant, but 1MDB will still have to fork out the balance — either from borrowings or proceeds of the Bandar Malaysia tender.

The 32km highway will be the largest project Ekovest has undertaken to date. The group is presently operating the 18km DUKE and is about halfway through completing DUKE Phase 2, which is 16km long.

Ekovest is 32.38% owned by Tan Sri Lim Kang Hoo.

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This article first appeared in digitaledge Weekly, on August 10 - 16, 2015.