SOCIAL SCIENCES & HUMANITIES Investing in Toll Highway: Private Or
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Pertanika J. Soc. Sci. & Hum. 21 (S): 133 - 148 (2013) SOCIAL SCIENCES & HUMANITIES Journal homepage: http://www.pertanika.upm.edu.my/ Investing in Toll Highway: Private or Public Financing with Scenario-Based Solution Mazlan Hassan1* and Abdul Razak Ibrahim2 1Faculty of Economics and Management, Universiti Putra Malaysia, 43400 Serdang, Selangor, Malaysia 2College of Business Administration, King Saud University, 11451 Riyadh, Saudi Arabia ABSTRACT Whilst governments worldwide juggle competing priorities within the context of limited budgets, Malaysia has acted to seek more effective ways of building highways. In Malaysia, private involvement is allowed for the construction of highways in order to stimulate economic activity that is rarely matched elsewhere. This private finance involvement is able to reduce the public sector workforce and increase employment opportunities. However, most of the private or public/private toll highway project partnerships in the 80s and 90s have yet to yield any hard evidence of being successfully profitable, since few of the typically 30- to 50-year concession agreements have yet to mature. This paper provides a financing appraisal and scenario-based solution to aid private or public decision-making to finance highway projects. Keywords: Toll highway, private financing, public financing INTRODUCTION north) to Johor Bahru (in the south). To date, Private investment of toll highways in it is the largest (and the longest) single toll Malaysia can be traced back to the late road project in Malaysia, and was originally 1980s (Expressway, 2010). The Malaysian developed in response to traffic saturation Highway Authority (MHA) was originally on Federal Route 1, which runs both north responsible for completing the entire North- and south of Kuala Lumpur (MITI, 2009). South Expressway, which stretches over However, in order to finance the remaining 900 km between Bukit Kayu Hitam (in the sections, the government chose to privatize the construction programme, and in 1988, ARTICLE INFO Article history: the MHA’s role was transferred to the newly- Received: 30 April 2012 Accepted: 30 September 2012 formed private company “Project Lebuhraya E-mail address: Utara-Selatan Berhad” (PLUS Ltd). The [email protected] (Mazlan Hassan) * Corresponding author government’s interest was bolstered by ISSN: 0128-7702 © Universiti Putra Malaysia Press Mazlan Hassan and Abdul Razak Ibrahim their agreement to provide a loan facility, METHOD OF DATA COLLECTION if traffic levels were lower than expected, Before a toll highway is built in a given during the first 17 years of the concession region, it is impossible to calculate the period. Companies like PLUS, Grand Saga influence of tolls on the diversion of traffic (Concession Company for the Cheras- from existing roads to toll highways due Kajang Highway), Maju Expressway MEX to the absence of empirical data. The usual (Operator for the KL-Putrajaya Highway), approach, in such a situation, is to conduct Besraya (Operator of the Besraya Highway questionnaire surveys amongst potential from the Istana Interchange to the UPM users such as car drivers, truck drivers, Interchange), and East Coast Expressway and large fleets of company cars. In this ECE (Operator for the Kuala Lumpur-Karak study, data were gathered from feasibility Highway), are good examples of those that studies that had been carried out by a local have obtained these benefits to finance their consulting engineering firm in Malaysia. toll highway businesses. However, due to confidentiality, some of the This paper provides a financing appraisal data had to be predicted and several issues of the key issues prevalent to the costs could only be appraised briefly. In addition, incurred in building highways. Essentially, traffic composition data for 2010 from the a good highway network is a prerequisite Roads Branch, Public Works Department of - though by no means a guarantee - of Malaysia, were used to predict traffic levels. positive economic development. In view of the strategic role of good highways in FINANCIAL VIABILITY AND a country’s economic development and FINANCING PROJECT COSTS the large investment required, a careful Whether tolls are applied to an entire financing appraisal of these investments network, to a stand-alone highway, or to a is crucial. These findings will hopefully segment of highway, the most fundamental provide a comprehensive review of all issue is whether the income from the tolls aspects of project costs and laydown a will be sufficient to cover the costs of foundation for the implementation of private building and maintaining the highway. If or public finance involvement. The two main not, the project will be unfeasible from the objectives of this study are: very start. The financial viability structure • to improve decision-making using a includes: scenario-based solution; and i. Construction costs – in full or in part. In • to carry out an appraisal of financial some cases, these may include the cost issues. of acquiring the necessary land. ii. Maintenance costs – including the cost of collecting tolls during the toll-bearing period of the highway’s existence. 134 Pertanika J. Soc. Sci. & Hum. 21 (S): 133 - 148 (2013) Investing in Toll Highway: Private or Public Financing with Scenario-Based Solution iii. Financing costs – the costs of raising Similarly, a financial feasibility study funds to finance the project; principally is carried out to estimate cash flow. This the cost of interest payments. analysis aims to obtain the financial rate iv. Profit – will be set at zero for an entirely of return and the methods employed are public-financed initiative project, but similar, where a discount rate is calculated to will be required for privately-financed equalize the net present values of expenditure or public-private partnership initiative and income. Expenditure is comprised of projects. Levels to be set during the construction costs, right-of-way acquisition concessionary period. costs, maintenance and operating costs, fund raising costs, and interest. In this study, the Additionally, there are various methods capital value method is used, by referring to of financing project cost of a toll highway. the variant of “Net Present Value” (NPV). Referring to the kinds of partnership In the NPV variant, the forecast expenditure between the public and private sectors in is discounted to be present at that time. toll highway businesses from a financing According to the capital value method, viewpoint, two basic patterns emerged: the project is recommended; if it shows a (1) project finance system; and (2) other positive capital value, in the case of the net modes of financing. Project finance systems present value variant, a “value greater than are adopted in concessionaire-type public- null (NPV value > 0); and in the final value private partnership finance initiatives using variant, a ‘value greater than a horizon value formulas such as Built Operate Transfer of the alternative capital investment (Sheila, (BOT), Built Transfer Operate (BTO), 1994). and Built Lease Transfer (BLT). Project finance systems are claimed to be amongst TRAFFIC VOLUME FORECASTING the most reliable tools for converting a FOR TOLL HIGHWAYS system of inclusive financing, backed by Traffic volume forecasts are the most the credit-worthiness of the government, fundamental data during the financial into a system that allows concessionaires to analysis of a highway, from the planning raise funds directly from financial markets stage onwards. They influence the under conditions of ‘small government’. fundamental decision of whether the Another mode of financing is the non- highway should be a toll highway or not; project finance system, where, rather than and later, they influence decisions of setting raising finance for the entire project, with and adjusting toll levels during a collection a view to repaying the investment from period. In Malaysia, when a large-scale toll operating revenue, the concessionaire has highway is planned, the financial institutions a contractual arrangement with a separate investing in them usually conduct their own body to whom it would sell the completed traffic volume surveys to verify the would- highway. be concessionaire’s forecast. In this study, Pertanika J. Soc. Sci. & Hum. 21 (S): 133 - 148 (2013) 135 Mazlan Hassan and Abdul Razak Ibrahim the forecast takes into account recent traffic- forecast took into account traffic growth growth. This was obtained after applying and the number of completed highways the growth rates of 5% for 2000 to 2010 since 2010. However, in this study, it was and 4.0% for 2010 to 2025 to the base year assumed that 92% of the existing traffic 2000. Meanwhile, traffic volumes were would divert to the new highway, whilst obtained from the JKR’s Road Traffic Model the other 8% remained as local traffic. This of 2009 (Ministry of Works Malaysia, increase in traffic was allowed for after 20 2009). Meanwhile, traffic forecasting was years, because at that time, the highway’s extrapolated from the previous trends based capacity was expected to reach 260,000 on the traffic model for the Seremban - vehicles (Department of Statistics, 2009). Kuala Lumpur expressway. This figure Similarly, reduced transport costs was based on the available traffic records on the new highway were also expected between the 1995 and 2005 (Department of to generate new traffic. Based on traffic Statistics, 2009). It was predicted that traffic trends (Ministry of Works, Malaysia, 2010) on the new highway would come from two between Kuala Lumpur and Seremban, sources: 1) traffic diverted from existing with the expressway’s generated traffic was roads, and 2) traffic generated by reduced estimated to increase by 10% of the traffic transport costs. diverted from the existing roads during the The average daily traffic on the old first year after completion. This would be road was 60,000 vehicles. During the next followed by 15% during the fifth year, and 20 years, i.e. before the completion of the another 15% during the tenth year. The new highway, passenger car traffic was traffic forecast between 2000 and 2030 is estimated to increase by 5% between 2000 shown in Table 1.