Privatisation of Highways in Malaysia: The Peril of not Consulting End-Users

A.-R. Abdul-Aziz

School of Housing Building and Planning, Universiti Sains Malaysia, Penang, West Malaysia

ABSTRACT

It has been almost twenty years since Malaysia adopted the privatisation ideology. In implementing privatisation projects, some adjustments have been made to the model from the west to render them more amenable to private investment, the result of which critics argue protect concession companies from much of the business and operational risks. This paper takes a look at selected highways that have been privatised thus far, in particular the controversies surrounding toll charges and their revisions. It echoes the advise of others for greater transparency in the entire privatisation process, in particular on matters pertaining to the public such as charge structures. There are indications that the Malaysian government now accepts the wisdom of this advice. Of late, concession agreements are already being redrawn to dismantle some of the risk-protection provisions contained in previous privatised projects. Complex and time-consuming may the adjustment process be, the Malaysian government must remain resolute to the end. Other countries can take heed from what has happened in Malaysia.

Keywords

privatisation, tolled-highways, end-users, consultation

INTRODUCTION

Influenced by a major shift in economic management policy in the UK and US (Molz, 1990; Lieberman, 1993), the Malaysian Prime Minister, Dr Mahathir Mohamed, declared in March 1983 the government’s intention to embrace the privatisation ideology. Two years later, the Economic Planning Unit of the Prime Minister’s Department came up with the Guidelines for Privatisation, spelling out the official rationale and broad guidelines for Malaysian privatisation (Jomo, 1995). By year-end 2000, 457 projects have been privatised, 25 percent of which relate to infrastructure such as power generation, road transportation, sewerage treatment and water provision. Highways have been one of cornerstones of Malaysia’s privatisation programme. With the passing of the Federal Roads (Private Management) Act of 1984 in Parliament, transfer was made possible from the public to the private sector of the right to collect toll and undertake subsequent maintenance over a concession period. Beginning with the first highway concession contract signed between the Malaysian government and Shahpadu Sdn Bhd for the North Klang Straits bypass, 1,195 km of highway have since been privatised to 14 concession companies (year-end 2000 figures). While some of the privatised highways are inter-state in nature (see Figure 1), quite a few are localised to Kuala Lumpur to ease the capital’s vehicular traffic woes (see Figure 2).

Few of the privatised highway projects have been spared the controversies surrounding toll rates. By citing several examples, this paper argues that the failure to consult end-users on charge structure have been strikingly lacking, resulting in backlash from public opinion. Revision of toll charges, invariably upwards, has proven to be equally controversial as the public was not made aware of the impending changes. While Malaysians generally acknowledge the benefits of tolled highways, the manner in which the market economy is allowed to operate leaves much to be desired.

This paper begins by citing 5 case studies to highlight the toll charges controversies. It then discusses the experience of Malaysia in greater detail from the marketing perspective. Other countries can benefit from the Malaysian experience by taking note of what to avoid when implementing their own privatisation programmes.

Figure 1: Location of inter-state privatised highways in Peninsular Malaysia.

Figure 2: Location of privatised highways in the vicinity of Kuala Lumpur.

SPECIFIC ILLUSTRATIONS OF THE CONTROVERSIES SURROUNDING TOLL CHARGES

The controversies surrounding toll charges has much to do with Malaysia’s approach to privatisation. Strictly speaking, in any privatisation arrangement, the element of transfer of commercial risk from the government to the private sector must prevail (Adam, Cavendish and Mistry, 1992). However in recasting the state’s role in the economic sphere, the promoters of privatisation in Malaysia have been insulated from much of the risks by way of assured profitability in the form of soft loans, exchange rate guarantees and minimum revenue guarantees (Naidu, 1995). The Malaysian government justifies the privileges given to privatisation promoters on the basis of encouraging investment. To Adam, Cavendish and Mistry (1992), various ‘safety net’ guarantees to protect private sector operators against future revenue shortfall effectively undermines the whole purpose of privatisation. Such privatisation variant whereby the profits are privatised while costs socialised are termed by Glade (1989) as ‘rent seeking’ and, Nellis and Kikeri (1989) as ‘subsidised.’

As a consequence of one opposition party gaining tremendous political mileage by bringing disclosing the copious ‘sweeteners’ the government proffered to one particular highway concession company, the Official Secrets Act was amended in 1986 so that the definitions of official secrets also include, among others, government tender documents (even after completion of the tender exercise) and any other documents or materials which ministers and public officials may deem secret or confidential (Jomo, 1995). Henceforth the impact of toll collection on privatised highway users has never been openly debated. Below, the events that have unfolded at five tolled highways are elucidated to illustrate the controversies that have arisen. The information was obtained from publicly available material notably newspapers articles.

Case study 1: North-South Expressway

Under the original concession agreement, PLUS, the concession holder for the North-South Expressway was entitled to increase the toll incrementally to cover financing costs and escalating maintenance and service charges; the first upward change of 33% was supposed to have taken place in 1996, followed by 6% in 1997 and 1998. The public reacted angrily when it was made known that PLUS was seeking the government’s consent for the first upward revision. Under pressure, the government was forced to re-negotiate with PLUS, the outcome of which was an agreement that toll rise of 20% was scheduled for 1996, 20% for 1997 and 7% for 1998. In return, the government agreed to recompense PLUS RM100 million (equivalent to US$18.9 million using the exchange rate of US$1 is to RM5.30) for the company’s loss of revenue. When it came for PLUS to increase the toll in 1998, there were renewed protests from many quarters including the Federation of Malaysian Consumers Association (FOMCA) and even coalition parties of the ruling government, as it was felt that such as move was inappropriate at a time when the country was still in the midst of the Asian Financial Crisis. Due to overwhelming public resistance, the toll rate increase was deferred for a year.

In 1999, PLUS and the government entered into a supplemental concession agreement covering amendments pertaining to the toll rate structure, extension of concession period for another 12 years and also share of any excess toll revenue with the government. Arising from that agreement, toll rates for the North-South Expressway were increased that year as part of the toll structure revision. The government paid to PLUS RM87 million for losses arising from the deferment of toll increase in 1998. Under the supplemental agreement, the toll increase of 33.8% every five years as contained in the original agreement was reduced to 26%. Instead of annual increment, increases would be made every five years. In return, the government agreed to compensate PLUS with a loan to offset its projected losses of RM220 million, and extend concession period to 2030 instead of 2016. The five-yearly increment will cease in 2016 after which the rate will remain fixed until the end of the concession period. The government will also have a share in any toll revenue that exceeds projection - the government’s share in excess toll is set at 20 percent for the period 1999-2008, 25 percent for 2009-2020, and 30 percent for 2021-2030.

Case Study 2: Seremban-Port Dickson Highway

Set at RM2.60 for cars-users, toll collection for the Seremban-Port Dickson Highway began in September 1997. From the beginning, motorists avoided the tolled highway in preference to the old trunk road. In August 2000, the toll rates for the Seremban-Port Dickson Highway were raised by between RM0.10 to RM1.50 to compensate for below-expectation traffic volume of 8,000, down from the projected 24,000 vehicles per day. The action of the concession company irked many parties including the Chief Minister of Negeri Sembilan, The Negeri Sembilan Consumer Association, Negeri Sembilan Lorry Drivers Association, Automobile Association of Malaysia, among others, who felt even before this that the original toll charges were high. Instead of improving earnings, the toll increase worsened traffic volume. To assuage the aggrieved parties, the government agreed to revise downwards the toll charges, but on two different occasions the government postponed making any announcement. This then led various quarters including the Malaysian Trade Union Congress (MTUC) and the Federation of Malaysian Consumer Associations (FOMCA) to call for the reinstatement of the previous toll structure pending government decision. To-date, end-users are still waiting, perhaps a case of the government hoping that the highway-users would acquiesce with the passing of time to the revised charges. Meanwhile, it was made known that the government had paid the concession company RM1.2 million for delaying the increase in the toll from January to August 2000 as provided for in the contract.

Case Study 3: Butterworth-Kulim Expressway

Much to the consternation of the public, the Butterworth-Kulim Expressway, toll was increased by 31.3 percent (from RM0.80 to RM1.00 at the Kubang Semang toll plaza and from RM0.80 to RM1.10 at the Lunas plaza) in 1999, three years after it was opened. The concession holder of the Butterworth-Kulim Expressway (incidentally together with the Seremban-Port Dickson Highway) requested for a ‘safety plan’ from the government as they were facing huge losses due to low traffic volume, a move that did not go down well with various quarters. A downward revision of charges for the Butterworth-Kulim highway was supposed to have been announced concurrently with the one for the Seremban-Port Dickson Highway. After deliberation however, the government decided against revising downwards toll charges for the former on the basis that the concessionaire had adopted the open toll collection system and imposed a flat rate. It was decided in November 2000 however that there would be no future increase in toll charges for the Buterworth-Kulim Expressway. For that, the government promised to compensate the concession company RM3.53 million annually.

Case study 4: Kuala Lumpur-Karak Highway

In 1997, when the first section of the Kuala Lumpur-Karak Highway was upgraded, toll rates at the Gombak plaza toll was increased by between 90 to 100 percent. The concession agreement allows for toll charges to be increased by almost three times in June 1998 following further completion of the highway. However when the announcement received adverse public reaction from various parties including the Chinese Chamber of Commerce and Industry (CCCI), Malaysian Trade Union Congress (MTUC), Federation of Malaysian Consumer Associations (FOMCA) and even the Chief Minister of Pahang, the government instructed that the toll system be lowered by between 25 and 30 percent from the original level. In return an annual compensation of RM14 million is awarded to the concessionaire. The concession period was also extended by 5 years to 2026. In 1999, the concessionaire signed a supplemental agreement with the Malaysian government to extend the concession period by another 5 years in lieu of payment for the reconstruction of a slip road costing RM60 million. In January 2001, the government decided against the increase of toll charges for the entire stretch of the highway.

Case Study 5: Shah Alam Expressway

In April 1998, the completed Shah Alam Expressway was officially opened, thus providing and alternative route to the Kuala Lumpur-Klang Federal Highway. This new link is important in that it provides rapid access from Westport, the country’s premier port, to the North-South Expressway as well as the capital. Toll was set at RM1 for car-users. In November 1998, the concession holder announced its intention to increase the toll to RM2.15 from the following year onwards - a proposal that the government later denied is possible without its consent. In early 1999, the government announced that the concessionaire would increase their rates by 20 percent, much to the consternation of parties such as the MTUC and an opposition party, especially when the national economy was still in the throes of the Asian Financial Crisis. Despite the protests, toll charges were allowed to increase effective from March 1^st 1999, but only to 20 percent of what was requested, with the government subsidising the rest. That decision apparently pleased all parties concerned as reflected from the disquiet that subsided soon after. In January 2001, the government declined a fresh request for toll increase.

DISCUSSIONS

Clearly setting and revising toll charges without prior public consultation have provoked much resentment in Malaysia. The opposition parties were quick to capitalise on public opinion by urging for greater transparency. However from a narrow set of discontented actors, the sentiment spread to many quarters including pro-government newspapers and even within the government. Widespread discontent reached its peak when the Asian Financial Crisis gripped the nation. The government and highway concession companies were accused of being insensitive to the plight of the populace and businesses. To restore public confidence, the Cabinet directed the Ministry of Public Works to study the possibility of lowering toll rates. The Privatisation Section of the Economic Planning Unit in the Prime Minister’s Department engaged an international consulting firm to undertake a nationwide public survey on six proposed or recently completed privatised highways. Soon after, a committee comprising of the Prime Minister’s Department, Finance Ministry and Public Works Ministry was formed to study toll rise and its implications on four major privatised highways: the North South Expressway, Shah Alam Expressway, North-South Expressway Central Link and the KL-Karak Highway.

As demonstrated from the case studies cited earlier, the quick-fix solution for the government in addressing the conflict between the private concession holders and highway users was by compensating the former in return for not increasing the toll. Such a move however puts tremendous budgetary pressure, which happens to be the exact opposite of what privatisation is supposed to do. By early 2001, the government was spending approximately RM1 billion annually to subsidise tolled highway users. Suspicion soon circulated that the concession companies were being over-compensated for loss earnings. The computation of loss earnings is difficult as the information required (e.g. capital costs, operating costs, debt servicing, projected traffic volume, etc.) is susceptible to wide interpretations and has therefore worked to the advantage of private highway operators. Invariably the taxpayers have been the ultimate cost-bearers in all the re-negotiation process. It has been suggested that public money would have been better spent on buying up portions or the entire length of these privatised highways.

In fact doubts have even been raised on whether the assistance and subsidies incorporated in the original concession agreements had benefited consumers by way of reduced charges or merely improved the financial performance of the private highway operators. When the public reacted negatively to the announced toll rates for the newly opened Malaysia-Singapore Second Crossing, the government investigated on whether the 10,000 hectares of state land that was given to the concessionaire supposedly to subsidise construction costs was actually passed on to end-users. As highlighted by Kumaraswamy and Zhang (2001), there is no evidence that efficiency gains can be made from excessive subsidies, guarantees and protection.

All this while, the impression of the Malaysian public was that the government has been biased towards profit-seeking concession companies at the expense of public interests. Insulated by the Malaysian government from much of the business and operational risks, highway concessionaires have been largely unscathed, financially or otherwise from the ensuing controversies. Little wonder then that the concessionaires of the Butterworth-Kulim Highway and the Seremban-Port Dickson Highway were bold enough to request for a ‘safety plan’ in light of low traffic volume. Even the public’s anger over toll charges has been largely directed at the government rather than the private companies. A protest poster once labeled the Minister of Public Works ‘the Minister of Tolls’ much to his chagrin. It can be speculated that, realising the Malaysian government’s pro-private sector stance, shrewd promoters of concession highway projects had put forward over-optimistic feasibility studies and financial projections designed to secure the contracts in the safe knowledge that they stand a good chance of making a plea for financial assistance later on. The excuse by the concession company for the Seremban-Port Dickson Highway that low volume was due to the recently completed oil pipeline that dispensed with the need for tankers to distribute petroleum from a nearby oil refinery is difficult to accept as such an infrastructure has a fairly long gestation period and could therefore have been anticipated during the charge fixing stage. It has been documented that the private sector is known to have played ‘perverse games’ (e.g. shifting as much risk as possible to the government and user) that are not necessarily in the interest of consumers (Estache, 2001). Driven by its determination to ensure the success of the privatisation programme, all indications suggest that Malaysia had given in too much to private companies.

To be fair, it has to be mentioned that highways are traditionally perceived as public goods that require enormous capital and maintenance investments the private sector is averse to (Winston, 2000). Based on his experience as a road financing specialist, Purse (2000) points out that it is very rare for a road to be able to charge sufficiently at toll booths that would cover both cost and return on equity. Charges set too high would drive away users who cannot or will not pay. Charges set too low would render the venture unviable. Hence the provision of grants, guarantees or favourable tax treatment normally extended by host governments. In addition, he goes on to point out that traffic forecasting is notoriously difficult; an accuracy factor of plus or minus 10 percent is considered good. Borrowing large amounts of money on forecasts that are inherently unreliable is not easy. While these arguments warrant assistance for highway concessionaires, critics (e.g. Glade, 1989; Nellis and Kikeri, 1989; Jomo, 1993) still maintain that too much market incentives have been incorporated in concession agreements in Malaysia.

There are signs however that the government is re-defining its relationship with concession companies by re-apportioning the risks between the two sides. For the Damansara-Puchong Highway project for example, guarantees on traffic volume has been replaced with soft loans. Furthermore, the government has also restricted toll increases to only two occasions throughout the 33-year concession period – in 2007 and 2016 – even then only upon request. If the actual income is more than the projected revenue, the operator is required to reimburse the difference to the government. The agreement is based on a new formula that the government hopes to incorporate in future privatised highway schemes. As for other existing concession holders, the government plans to review the terms of the agreements so that toll revision is done every three to four years, instead of the present 18 months to 2 years. The government has even mooted the idea that public holidays or festivities be declared toll-free days for motorists throughout the nation.

Another reflection of the adjustment process is the government’s recognition of the importance of seeking public opinion as a pre-requisite for the signing of any privatised highway agreement, particularly pertaining to the construction process, length of highway, toll structure and concession period. If truly implemented, this would signify a significant reversal from the government’s policy on non-disclosure. It would also be in line with the advocacy of various writers (e.g. Parker, 1997; Estache, 2001) for transparency in the entire privatisation process. The public has been given the assurance that toll rates for privatised highway projects in future would be kept as low as possible. The Minister of Public Works also promised that a special division within his ministry would be created to receive public complaints about toll charges that can then be forwarded to the Cabinet.

According to the marketing philosophy, the social and economic justification for an organisation’s existence is the satisfaction of the client’s wants (Crompton and Lamb, 1986). In the same vein, it has been suggested that the objective of privatisation should be to bring lasting benefit to consumers (Roseman, 1999). The shift of the Malaysian government towards greater protection of consumer interests would bring the privatisation programme closer in line with what is posited by these writers. As the regulatory body, the Malaysian government must ensure that a balance is struck between the interests of investors, competitors and consumers while at the same time promoting a wider, ‘public interest’ agenda, no matter how complex this may be (Parker, 1997). It must be seen to be fair to all sides and not too lenient to any one party as in the past. The Malaysian government obviously has not performed well in its role as the ‘surrogate consumer’ (Solomon, 1986). Its insensitivity to the sentiments of highway users during the negotiation process bore testimony to this. Even though the opportunity costs of getting it ‘right’ is high in terms of time and management (Vernon-Wortzel and Wortzel, 1989), the current re-positioning exercise is necessary in bringing an end the controversies surrounding privatised highways in Malaysia. It has to be that getting it ‘right’ is a never-ending process, for privatisation is never always smooth and linear (Bienen and Waterbury, 1989). But at least, positive steps are being taken to bring about a better arrangement.

The toll structure controversies in Malaysia raise a fundamental question of how much Malaysians are willing to pay for ease and speed of travel. Is there a toll charge level that is acceptable to all? Or is any charge level too high for them? A study elsewhere has shown that car travelers’ willingness to pay is much lower than once thought and that most travelers do not appear to value travel time savings enough to benefit substantially from optimal tolls (Calfee and Winston, 1998). Besides, it is unlikely that highway users in Malaysia would make a conscious decision to seek cost information about the service they are about to be offered, particularly if the cost of an extended search is high given the difficulty in obtaining such information (Jacoby, Speller and Berning, 1974). When faced with this situation, there is a propensity for consumers to seek information about the service from opinion leaders or through word-of-mouth rather than mass media communications and marketer-dominated sources (Locander and Hermann, 1979; Midgley, 1983). Even if all these suppositions apply to Malaysia, a more open decision-making process would at the very least educate the public on the need to have toll charges set at reasonable levels for concession companies to make viable rates of return on their investments. Consumers need to be made aware that there is a premium to be paid for uncongested service. In other words, the benefits of private infrastructure provision must be ‘sold’ to the public if support for it is to prevail.

CONCLUSION

Over the last two decades, Malaysia has managed to rapidly expand its network of highways. The country has certainly benefited by way of faster movement of goods and people, alleviation of congestion, increased connectivity across the nation and the emergence of new growth centers. This would not have been possible if not for the realignment of the balance between the public and private sector.

Unfortunately, privatised highways in Malaysia have aroused adverse public opinion that became increasingly untenable over the years. At the heart of the controversies surrounding privatised highways in Malaysia is the apportionment of risks between the concession company and the government that has manifested in among others, toll charge structures unacceptable to the public. All this while the government has been overly concerned with private sector participation that too much have been conceded. Worse, the arrangements struck between the government and private companies were not revealed to the public. There are indeed signs that the government is somewhat re-defining its relationship with concession companies to render its highway privatisation programme more consumer-amenable. The process of finding the middle ground for all parties concerned is not easy but necessary if toll charges controversies are to be a thing of the past. Arriving at an acceptable solution for all is all the more imperative in light of the 19 privatised highways planned under the 2001-2005 five-year economic plan. The Malaysian experience provides useful lessons that other countries can benefit from. The power of the consumers in ensuring the long-term success of privatisation projects is not to be under-estimated. While for expediency, their interests may be conveniently ignored during the negotiation process between the government and the private companies, the repercussion that is latent in nature can detrimentally consume an even greater amount of time and money to remedy.

REFERENCES

Adam, C., Cavendish, W. and Mistry, P. S. (1992) Adjusting Privatisation: Case Studies from Developing Countries, James Currie, London.

Bienen, H. and Waterbury, J. (1989) The Political Economy of Privatization in Developing Countries, World Development, 17(5), pp. 617-632.

Calfee, J. E. and Winston, C. (1998) The Value of Automobile Travel Time: Implications for Congestion Policy, Journal of Public Economics, 69, pp. 83-102.

Crompton, J. L. and Lamb, C. H. (1986) Marketing Government and Social Services, John Wiley and Sons, New York.

Estache, A. (2001) Privatisation and Regulation of Transport Infrastructure in the 1990s, The World Bank Research Observer, 16(1), pp. 85-107.

Glade, W. (1989) Privatisation in Rent-Seeking Societies, World Development, 17(5), pp. 673-382.

Jacoby, J., Speller, D. E. and Berning, C. K. (1974) Brand Choice Behaviour as a Function of Information Load: Replication and Extension, Journal of Consumer Research, 1(June), pp. 33-42.

Jomo, K.S. (1993) ‘Privatisation in Malaysia’. In T. Clarke and C. Pitlelis (eds.) The Political Economy of Privatisation, Routledge, London, pp. 437-454.

Jomo, K.S. (1995) ‘Overview.’ In K. S. Jomo (ed.) Privatisation Malaysia: Rents, Rhetorics, Realities, Westview Press, Boulder, Co., pp. 42-60.

Kumaraswamy, M. M. and Zhang, X. Q. (2001) Governmental Role in BOT-led Infrastructure Development, International Journal of Project Management, 19, pp. 195-205.

Lieberman, I. W. (1993) Privatisation: The Theme of the 1990s: An Overview, Columbia Journal of World Business, 28(2), pp. 8-17.

Locander, W. B. and Hermann, P. W. (1979) The Effects of Self-Confidence and Anxiety on Information Seeking in Consumer Risk Reduction, Journal of Marketing Research, 16(May), pp. 268-274.

Midgley, D. F. (1983) Patterns of Interpersonal Information Seeking for the Purchase of Symbolic Product, Journal of Marketing Research, 20(February), pp. 74-83.

Molz, R. (1990) Privatisation in Developing Countries, Columbia Journal of World Business, 25(1&2), pp. 17-24.

Naidu, G. (1995) ‘Infrastructure.’ In K. S. Jomo (ed.) Privatising Malaysia: Rents, Rhetorics, Realities, Westview Press, Oxford, pp. 199-218.

Nellis, J. and Kikeri, S. (1989) Public Enterprise Reform: Privatisation and the World Bank, World Development, 17(5), pp. 659-672.

Parker, D. (1997) The Regulation of Privatised Utilities: Reflections on the UK Experience, The Review of Policy Issues, 3(3), pp. 3-37.

Purse, N. (2000) Toll Roads- the Way Ahead, Project Finance, 206, pp. 5-8.

Roseman, E. (1999) Best Practices for Encouraging Private Sector Investment and Competition in the Power Industry: Optional or Necessary?, Journal of Project Finance, 5(3), pp. 15-26.

Solomon, M. R. (1986) The Missing Link: Surrogate Consumers in the Marketing Chain, Journal of Marketing, 50(October), pp. 208-218.

Vernon-Wortzel, H. and Wortzel (1989) Privatisation: Not the Only Answer, World Development, 17(5), pp. 633-641.

Winston, C. (2000) Government Failure in Urban Transportation, Fiscal Studies, 21(4), pp. 403-425.