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Questions over viability of KL-Singapore HSR

Kamarul Azhar and M Shanmugam
Kamarul Azhar and M Shanmugam • 10 min read
Questions over viability of KL-Singapore HSR
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A hallmark of a high-income nation is having world-class infrastructure such as a high-speed rail (HSR) system. To many, an HSR signifies a country’s arrival on the world stage as a developed country.

This is because the HSR, some running at a speed of almost 400kph, evokes the sense of efficiency and modernity. Like any other mega infrastructure project whose success depends on a viable financial model, however, the HSR will inevitably attract public scrutiny — as has the Kuala Lumpur-Singa­pore HSR, whose development has been rebooted with the request for information (RFI) notice launched by MyHSR Corp Sdn Bhd in July 2023. The submission date of the RFI has since lapsed on Jan 15.

In the RFI notice, MyHSR states: “The government of Malaysia (GOM) aims to improve intercity mobility with a view to generate socioeconomic development through reduced journey time, safe and seamless travel, and enhanced accessibility to our second-and third-tier cities.

“With this aim in mind, the GOM intends to implement our first high-speed rail line in the southern corridor of Peninsular Malaysia.”

MyHSR has been tasked with soliciting concept proposals to, among others, gather innovative business models and supplementary revenue-stream ideas for a privately funded structure. In short, the government wants to see whether there is a business model that can allow for a privately funded HSR.

While this sounds noble, especially with Malaysia’s debt-to-gross domestic product (GDP) ratio of 62% as at end August 2023, is there a viable privately funded model of a mega infrastructure project with an estimated cost of at least RM100 billion?

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“No, it cannot be done,” says a veteran lawyer, when asked whether the HSR could be done without government assistance.

“[The HSR] needs government assistance for land acquisition and regulatory approvals. No bank will finance without support for land acquisition and regulatory approvals from the government,” adds the lawyer, who is familiar with public sector works carried out during Malaysia’s privatisation drive in the 1990s.

While the opinion of one man cannot be taken as gospel, research carried out by the multilateral World Bank Group on the HSR could provide a glimpse of what Malaysia will face if it were to embark on this journey.

See also: Malaysia set to hold key rate as risks from subsidy cuts emerge

In a 2019 report on China’s High-Speed Rail Development, the International Bank for Reconstruction and Development (IBRD), the lending arm of the World Bank Group, notes that the traffic densities that China’s HSR had to achieve to break even was as much as 85 million passengers per year. At that figure, the revenue collected by China’s HSR lines operating at a speed of 200kph to 250kph could cover the maintenance, interest and principal payments on the loans taken to finance the project.

The assumption used by IBRD is a 50:50 debt-to-equity ratio to fund the HSR projects. If this ratio were to be interpolated onto the KL-Singapore HSR project, fully funded by the private sector, the contractors would have to raise RM50 billion ($14.2 billion) in equities and borrow RM50 billion from the banks.

The KL-Singapore air route, while the busiest international route in 2023, has only a fraction of the 85 million passengers a year that an HSR line operating at 250kph must have to break even, based on Chinese HSR’s experience collated by IBRD.

According to data by OAG Aviation Worldwide, an air traffic research and publication outfit, there were only 4.9 million passenger seats between the two cities in 2023. In 2019, there were 5.5 million passenger seats between KL and Singapore.

This does not take into account land traffic between KL and Singapore, air traffic between Johor Bahru and KL, which will also be served by the HSR, as well as land traffic along the corridor that could also serve Melaka and Seremban.

The KL-Singapore HSR could also derive passengers from any other parts of the country going to Singapore through KL, and vice versa.

The RFI call by MyHSR was reported to have attracted the interest of more than 700 representatives of local and foreign firms and missions. Seven consortia comprising 31 firms submitted proposals for the HSR.

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These are believed to be companies from Malaysia, China and Europe, with Japanese interest reportedly pulling out of the race. It was reported that the Japanese, including East Japan Railway Co, had pulled out as they deemed the HSR too risky without financial help from the Malaysian government.

“The private sector must prove that [the HSR] can be done without government support. Nowhere in the world has the HSR been done without government support, as the cost will be high. Ticket prices will be high and, finally, the government will be forced to step in,” says the veteran lawyer.

A representative from a large Japanese trading company in Malaysia tells The Edge Malaysia that it has lost interest in HSR projects because it had participated in such projects in other countries and suffered losses.

Nevertheless, the HSR will not be a fully private-funded venture but will be a public-private partnership in which the government will provide certain levels of funding. Although this point has not been specifically spelt out, it is believed that the government will have to fund at least the land acquisitions.

MyHSR is seeking a design-finance-build-operate-transfer (DFBOT) model for the KL-Singapore HSR.

While the identities of the consortia that have submitted RFIs for the HSR have yet to be confirmed, the names being bandied about have included Gamuda, YTL Corp, IJM Corp, Malaysian Resources Corp Bhd (MRCB) and Berjaya Land Bhd (BLand).

BLand’s 70%-owned subsidiary Berjaya Rail (BRail) is reported to have teamed up with IJM Corp’s unit IJM Construction Sdn Bhd, MRCB and Keretapi Tanah Melayu Bhd in submitting the RFI proposal.

The consortium is reported to have listed technical partners from various countries, including Japan’s Hitachi Rail STS, South Korea’s Hyundai Rotem Co and DB Engineering & Consulting GmbH, a unit of German rail operator Deutsche Bahn AG (scan the QR code to read the article “Berjaya Land, IJM, MRCB and KTMB join forces to bid for KL-Singapore HSR job”).

BRail’s 30% shareholder is Tunku Tun Aminah Sultan Ibrahim Ismail, the daughter of the Sultan of Johor, Sultan Ibrahim Sultan Iskandar. Tunku Ami­nah is also chairperson of BRail.

Financial sustainability of China’s HSR
China has been the leader of HSR developments since it embarked on the journey in 2005. It has been reported that, between 2005 and 2015, US$370 billion had been invested to develop the HSR system in China.

The investments came from a combination of equity contributions by the Chinese central and local governments through budgets and bonds, as well as bank loans taken by the joint ventures that won the bid for an HSR project.

The local governments in China contributed land acquisition and made provisions for resettlement, as well as support for material supply, facilities and relief from local taxes.

This shows that even in China — a country with 1.3 billion people and mega cities with populations of at least 10 million residents — government funds are needed for HSR projects to be financially viable.

China also set up a railway development fund that combines seed capital from the central government with investments by long-term investors who want a stable and reasonable return, notes IBRD in the 2019 report.

It says: “Support will also be given for eli­gi­ble enterprises to raise funds with corporate bonds and debt financing instruments, and permit major projects to issue renewable bonds. Financial institutions can also support the construction of railway projects through lending against assets such as mineral rights and franchises.”

Despite all this government support, financial sustainability and the ability to earn returns high enough to attract equity investment remain a challenge for HSR projects in China, IBRD notes. While revenue from the ventures can cover the operation of the services, they are insufficient to maintain the infrastructure, it says.

The regional authorities in China have to partially absorb the cost of maintaining the infrastructure on these lines with revenue from their other operations.

“Only in rare cases do such lines cover even part of debt service,” the report states.

In Malaysia, federal government debt levels are already high, with RM46.1 billion — or 15.2% of federal government revenue — allocated for debt service charges in 2023.

As at end June 2023, total federal government debt stood at RM1.145 trillion, or 62% of GDP. Statutory bodies’ debts stood at RM94.5 billion, while non-financial public corporations had accumulated RM302.2 billion in debts as at end June 2023. This translates into public sector debt of 83.3% of GDP.

With debts at such high levels, Malaysia’s taking on more borrowings to fund the HSR may not sit well with international rating agencies.


‘HSR project can help stimulate economic recovery’

MyHSR Corp has been mandated with the project delivery and implementation of the Kuala Lumpur-Singapore High-Speed Rail (HSR) project. MyHSR is an entity wholly-owned by the Minister of Finance Inc and under the supervision of the Ministry of Transport. It answers a few questions in an email reply to The Edge Malaysia.

The Edge Malaysia: What is the maximum share of public funds allowed to fund the project?

MyHSR: As we are still at the preliminary review [stage] of the concept proposals for the KL-SG HSR request for information (RFI) exercise, it is premature for us to deliberate on the cost estimation and funding mechanism at this moment.

It would be more feasible for us to deliberate on this subject after the shortlisted consortia have conducted further studies and submitted their detailed proposals during the request for proposal exercise.

Who will own the assets? Will it be the winning consortium or the government, through MyHSR?
The delivery of the KL-SG HSR project is based on the design-finance-build-operate-transfer (DFBOT) model with the government of Malaysia owning the assets upon completion of the concession period.

As we are still in the initial review phase of the concept proposals for the KL-SG HSR RFI exercise, it is premature for us to deliberate on the timing of the transfer of HSR assets from the consortia to the government. This is dependent on the concession tenure that will be agreed upon by both the government and the successful consortium, among others.

At what stage will Singapore be involved in the project, and to what extent will the republic be involved in the project? Will it be a joint owner of the HSR assets, including the track? 

Bilateral discussions with Singapore are expected to be initiated at a later stage, once the Ministry of Transport and the cabinet have deliberated on the findings of the RFI evaluation.

Connectivity between Malaysia and Singapore is important to both countries, with the potential economic spillover and impact generated from the clusters of high-value talents such as researchers, designers, manufacturers, traders, distributors and consumers of high-value products and services all living and working within minutes from each other along the HSR economic corridor.

With an estimated distance of 350km between Kuala Lumpur and Singapore, the KL-SG HSR is also in the perfect sweet spot to become the preferred travel mode for all, taking into consideration that the air travel route between Kuala Lumpur and Singapore is the busiest in the world, with more than 30,000 flights a year (4.9 million seats), while the land border crossings between Johor Bahru and Singapore are among the busiest globally.

This opportunity will change the way people travel and how businesses are conducted, considering that total travel demand in the southern corridor is forecast to grow significantly in the years to come.

Must the government provide a minimum revenue guarantee to the winning consortium?
It is premature for us to deliberate on the financing model at this juncture while the review of the concept proposals is ongoing.

In the long run, this game-changing project is a huge opportunity to turn the tide for our country, as major infrastructure developments such as the HSR project can help stimulate economic recovery, provided it is carefully structured with a model that will make the project economically viable, following the pandemic, geopolitical conflicts and inflationary pressures over the past few years.

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