By Stephanie Jacob
There are many issues surrounding the construction of this high-speed rail link to Singapore, although proponents suggest the economic multipliers alone, which could be gained from such a project, are enough to justify its price tag. Critics say the costs, long-term feasibility, and ability to gain an adequate ridership will all make such a link economically unfeasible.
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In early 2013, the prime ministers of Malaysia and Singapore, Najib Abdul Razak and Lee Hsien Loong, announced that the neighbours will join the exclusive high-speed rail (HSR) club. The duo said that a RM40 billion HSR link will be built from Kuala Lumpur to the Singapore city centre by 2020.
The two leaders have reiterated their commitment to build the link many times since then, most recently at the sixth Singapore-Malaysia Leaders’ Retreat on May 5, 2014. Following this, Singapore confirmed that its terminus will be located in Jurong East.
Malaysia had already announced that its terminus will be situated at 1Malaysia Development Bhd’s Bandar Malaysia development, which is located at the former Royal Air Force base in Sungai Besi.
The leaders also confirmed that the initial 2020 target would most likely be missed as there is still much for the two nations to discuss and settle. This was unsurprising as aside from the terminuses and station locations, not much else has been finalised so far, including a possible funding structure.
The question is, does Malaysia really need such a link to justify the enormous price tag of RM40 billion?
Answering this is challenging because it requires some assumptions to be made, given that there are no publicly available feasibility reports which would indicate relevant growth of travel trends. But between the high costs, gaining a sufficient ridership, and being profitable in the long run, there are serious concerns as to whether this would be billions well spent.
With negotiations ongoing, it is a good time to emphasise the factors which appear to make HSR economically unfeasible.
The big sell of this link is that it will shorten the journey from the heart of KL to the Singapore city centre to 90 minutes. This certainly has a nice ring to it, but that estimate only accounts for travel time on the train. In fact, the entire journey will take a traveller about two-and-a-half hours in total.
According to the Land Public Transport Authority (Spad), this would make it about two hours shorter than travelling by air, four hours shorter than by bus, or seven hours less than by conventional rail. But even these estimates are questionable as we will discuss further.
Then there are concerns about costs and gaining a sufficient ridership to ensure long-term economic feasibility (and eventually profitability) – which based on KINIBIZ’ back-of-the-envelope calculations will be hard to achieve.
In this article, KINIBIZ considers three broad areas of concerns, which are costs, funding structure, and gaining sufficient ridership which will impact the feasibility of this multibillion-ringgit project.
Later we ask if a HSR link is necessary at all by weighing the pros and cons of such a project. We then look at Keretapi Tanah Melayu Bhd’s multibillion-ringgit double-tracking project and consider options other than a HSR link.
How much will HSR cost?
This is not the first time such a HSR has been proposed. When it was first mooted by YTL Corp in 2006, the figure being thrown about was RM8 billion. This time around initial cost projections to build a 350km link from KL down to Singapore is in the region of RM30 billion to RM40 billion. Even these are best-case scenario figures and perhaps rather wishful estimates.
An Australia feasibility study conducted in 2011 said the best-case scenario estimated cost to build a slightly shorter 290km HSR link in that country would cost close to RM50 billion. The report factored in land acquisition, five stations (KL-Singapore HSR has proposed eight stations) and city access, maintenance and stabling facilities, power infrastructure; civil and rail infrastructure, and IT and ticketing systems.
But added that at the RM50 billion estimate, there was only a 10% chance there would be no overruns. And it goes without saying that in Malaysia, it is always prudent to assume there will be overruns.
It was only at a price tag closer to RM70 billion region did the chances of there being no overruns improve to 90% for the Australian project.
Who can take on such a project?
Which brings us to the issue of who can take on this project? Here analysts pointed out two factors to consider – firstly, who has the capital and secondly, who has the expertise.
Assuming a RM50 billion price tag, if a company is expected to generate 20% equity finance, this will total to having a shareholder capital of RM10 billion. There are not many local players who have that kind of spending power to go at it alone. Furthermore, with the exception of YTL, Gamuda, and Hartasuma, there are not many Malaysian firms which have the level of expertise needed for this project.
Analysts believe that ultimately there are several different funding structures which can be considered. The two governments could decide to form a 50:50 special purpose vehicle, perhaps between Khazanah Nasional Bhd and Singapore’s Temasek Holdings.
The vehicle would then hire a contractor – either local or international – to handle the construction as the project delivery partner. This would be a similar concept to how Malaysia’s mass rapid transit project is being handled.
However, any structure involving government funding would have to be carefully studied for the potential impact it would have on the government’s finances. JF Apex head of research Lee Chung Cheng said: “The high cost will stretch off-balance sheet government debt, should the funding structure be a private-public partnership.”
Kenanga Research analyst Mohd Iqbal suggested that with a lot of foreign interest in the project the governments may be able to leverage on to secure external funding. He also said the Penang state government’s idea to fund its large transport infrastructure projects by offering the private sector land as payment could be another option.
However, the issue with the private sector taking the lead on this is that fares will likely be higher as they will need to recoup their investments. It is why some economists see government participation as being inevitable, to ensure that the HSR service is accessible and affordable enough to capture a sufficient catchment of travellers. But how many travellers will be enough to ensure that the link can cover its financial costs and at what fare?
Can HSR attract enough ridership?
Already a HSR trip is promising to be a costly one. Latest research by Singapore’s The Straits Times suggested that it could be in the RM240 region one way. Previously, Spad said a ticket would likely cost between a traditional train ticket and an airline ticket – putting it at roughly around RM180.
More recently, its chief executive officer Mohd Nur Ismal Mohamed Kamal said a HSR ticket will not be more than RM400, and even could cost below RM200 during some periods, but admitted that at that price the project’s return on investment would be slow.
KINIBIZ used the following parameters – a project cost of RM50 billion, a 5% financing rate, and a ticket price of RM300 per person. At these calculations, the HSR link would need to draw 8.3 million travellers per annum simply to cover the RM2.5 billion per year financing costs, even before repayment.
According to the Singapore Tourism Board, total trips made by Malaysians into Singapore were 1.3 million (excluding by land travel), while it was estimated that around 2.73 million Singaporeans travelled by air to Malaysia last year, said The Straits Times.
Current numbers for road and conventional rail travellers are not available but it is estimated that across all modes in 2011, around 7.45 million passengers travelled between the countries. It is clear that the majority of travel between KL and Singapore is still done by land travel and therefore, the HSR link would need to attract a substantial part of this group.
With fares closer to that of an air ticket, HSR is likely to be most appealing to those who currently fly between the two cities. However, even if every single person in that category switches over to using the HSR link, patronage will still be far below what it needs to be at to meet KINIBIZ’ back-of-the-envelope estimations.
Therefore to have a sufficient amount of patronage, the HSR link will need to attract the land travellers. But given the prices HSR will likely command, it will be a tough sell, unless road travel becomes significantly more expensive or HSR tickets are subsidised.
If HSR tickets need to be subsidised by the government to gain sufficient ridership, the question becomes if it can generate enough of a multiplier effect to justify such a move. KINIBIZ considers this in the next article.
Tomorrow: Is HSR necessary for Malaysia?
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