Abolishing tolls: Short-term gain, long-term pain

This well written piece is by Dr Lim Mah Hui:

The Pakatan Harapan’s (PH) manifesto with five pillars, 10 promises to deliver the first 100 days, and 60 promises during its first term is comprehensive and ambitious covering economic, political and social reforms.

High marks must be given for the political and institutional reforms agenda. The rakyat have for too long suffered under all types of repressive laws and corruption of public institutions. A basic overhaul in this area is absolutely necessary.

What about its economic agenda? Its efforts to address the economic woes of the people are commendable. Growth in Malaysia was unequal and much of it squandered by the ruling elites.

In trying to improve the lives of the ordinary people, it faces huge challenges. It promises to deliver more services such as housing, public transport, health and basic food to the people, and at the same time to reduce their cost of living by abolishing GST and highway tolls.

The first set of measures will see a rise in government expenditure and the second a fall in revenue. It plans to cover the gap through elimination of leakages and waste resulting from unnecessary mega projects and corruption, and the replacement of GST with SST.

Politicians make all types of promises in their campaign; some of them they keep, others simply as a means to garner votes. After the dust settles and the euphoria subsides, the new government has to face realities and get down to examine what it can and cannot deliver. The time for political campaigning is over; it is time to govern responsibly.

The promise to abolish toll is one that must be addressed responsibly and not politically. What are the pros and cons of abolishing tolls?

The main opposition to toll collection is not so much the need to pay for use of highways but the grossly unfair terms of concessions given to concessionaires by the government. According to a senior transport engineer, toll concessions in Malaysia are highly unequal and unfair agreements that need to be urgently rectified. Toll highways are build, operate and transfer (BOT) projects. The concessionaires who operate the highways are often also the contractors who build them. They inflate their costs both at the stages of construction and operation.

Sometimes, the government even subsidises the construction and the operational costs of highways of these private companies. For example, in the case of the MEX highway, the government provided a RM1bn grant, equivalent to 75% of construction costs to the concession holder. The concessionaire invested only a small portion of the remaining costs and borrowed the rest. Furthermore, for some highways, the government compensates the concessionaire if the traffic volume or rate of return falls below a certain level. In 2016 the government paid out over RM4.07bn as compensation for 28 toll highways.

The fallout from the 1MDB scandal was much more than revealed by the previous BN government. Federal debt has now exceeded RM1 trillion posing huge challenges to its fiscal position. The rakyat can understand that in order to meet these challenges, some economic promises may not be fulfilled for good reasons.

The government must do the following. It must set up a committee to review each and every concession to rectify the unequal and unfair contracts. It must also appoint an independent study to estimate the costs of renegotiating or/and takeover of the toll highways before making a final decision. Estimated costs of takeover of the toll highways by the government ranged from RM383bn (by Pemandu) to RM50bn (by PH); the latter on the low side as the outstanding bonds of 22 highways alone is RM55bn. There are 31 tolled highways at the end of 2017.

Other options that can be considered are a gradual reduction or partial reduction of tolls; introduction of different toll rates for different vehicle categories, for example, no tolls for buses and public vehicles; free or reduced tolls for cars with three or more passengers. As long as the government can be transparent and provide good justification for its decision, the PH government has at this juncture the goodwill of the rakyat to accept it. This is absolutely necessary in order not to plunge the government into further debt.

Abolishing toll rates is a short-sighted policy for both economic and environmental reasons. Firstly, abolishing tolls benefits more the upper 50% of population than the lower half. One often thinks that it is fairer to keep roads free of toll. But studies have shown that the benefits of free roads accrue more to the affluent than to the low-income group as the rich drive more. Abolishing tolls subsidises people who drive, and is unfair to taxpayers who do not drive. On the other hand, collecting tolls and using the revenue to subsidise public transport would be a much more equitable policy.

Secondly, abolishing toll eases hardship in the short-term; but by encouraging ownership and use of private vehicles, it places more financial burden on the rakyat. Car ownership and use is expensive: it requires servicing car loans, paying for repairs, fuel, insurance and depreciation. All these easily account for 20% to 30% of a low-income household’s expenditure. It is a heavy financial burden that would not be necessary if there is good public transport.

Hence, the government should be directing all its transport expenditure into building first- rate public transport systems so that the lower income households can be freed from the financial burden of car ownership. This would immediately raise their level of disposable income.

The government also should be doing everything possible to wean people away from private vehicles into public transport particularly for commuting as in Hong Kong and Singapore, where public modal share of transport is well over 60% as compared to below 30% in Malaysia.

When driving is no longer a necessity but a luxury, those who use roads should be paying for the privilege and this revenue can be used to subsidise public transport for the masses.

Dr Lim Mah Hui is formerly a professor, international banker and Penang City Councillor.