Blessing in disguise

HSR is also about cost and whether we can afford it. As it is, we are very bad at projections when it comes to estimating cost and ridership. One does not have to go far but simply use the Sungai Buloh-Kajang MRT or the MRT1 line numbers as an example.

ON new years’ eve last year, Malaysia finally allowed the KL-Singapore High Speed Rail (HSR) project to be automatically terminated as both sides could not come to an agreement on certain changes that were requested by Malaysia.

These changes that could not have been agreed upon by both parties have been elaborated by Singapore’s Minister of Transport.

On Malaysia’s side, the Economic Affairs Minister Datuk Seri Mustapha Mohamad stepped up to explain the reasons behind, especially in relation to the setting up of AssetCo, which would have been responsible for the supply of the train system and operations of the network.

Malaysia was also said to have requested for a spur line to KLIA (from Seremban) for the domestic service and for the international service, the KL-Singapore 90 minutes journey remained on the table.

The 350km HSR, of which some 335km was to be built on Malaysia’s soil, had a huge price tag. When the idea was first mooted by YTL Corp some 15 years ago, the price tag then was a measly RM8bil. In fact, YTL’s idea was similar to what we see in Japan – a bullet train service connecting the two cities, and also in 90 minutes.

The government never got around to approve YTL’s plan despite years of discussion. After the change in premiership in 2008, the government then embarked on a transformation programme with the objective of achieving high-income nation and a targeted gross national income of US$15,000 per annum in the year 2020.

As part of the Economic Transformation Programme, the HSR project was one of the 131 Entry Point Projects identified and with Singapore’s interest on the project, a MoU was signed in mid-2016, followed by a bilateral agreement six months later. Cost wise, many numbers have been mentioned before but perhaps the most talked about estimate is RM60bil or about RM171mil per km.

While the reason the ministers from both sides of the Johor Straits touched on issues related to funding, and the role of the AssetCo, the issue of the spur line to KLIA should not be a deal breaker as Malaysia has a right to extend a dedicated line for KLIA to make the rail and international airport connectivity complete from the southern corridor.

After all, the spur line is only for domestic service and should not impact passengers coming from or going to Singapore. In addition, anyone flying in or out of Singapore would definitely prefer Changi for the time saving that airport offers as well as much better international cities connectivity than KLIA. Who in the right mind would take the HSR to travel to KLIA to connect to other international cities, unless there is substantial savings in the form of cost?

Cost and affordability

HSR is also about cost and whether we can afford it. As it is, we are very bad at projections when it comes to estimating cost and ridership. One does not have to go far but simply use the Sungai Buloh-Kajang MRT or the MRT1 line numbers as an example. From the initial estimate of RM12bil and some 442,000 in ridership, the construction cost (excluding land acquisition, Project Delivery Partner fees, interest during construction and other overheads) had ballooned to RM21bil while ridership after one year of full operations was barely 150,000 per day.

We have also embarked on the Sungai Buloh-Serdang-Putrajaya line (MRT2), which is estimated to cost some RM30.5bil with an expected ridership of more than 529,000 per day. MRT2 line is expected to be opened in phases, with Phase 1 stretch expected to start in July this year, connecting Kwasa Damansara to Kampung Baru while Phase 2 in January 2023.

The two MRT lines cost the government dearly and it was obvious that the ridership numbers, judging from the figures from MRT1, are nowhere near the initial estimates, even up to today. What is interesting is looking at MRT Corp’s financial statements which revealed that up to end of 2019, the urban rail company had made total impairment to the tune of RM43.48bil. Almost RM25bil was impaired in 2017 itself while the 2018 and 2019 impairment amounted to RM11.2bil and RM7.3bil, respectively. To cover the commitments of the MRT Corp, the government had to step up in the form of contribution and this totalled as much as RM42.3bil up to end of 2019.

Taking the experience of the MRT and, of course, the East Coast Rail Link (ECRL) is another example, is the estimated RM60bil cost of HSR right or are we paying too much for it?

Just to compare from Thailand’s experience, the Thais are embarking on four lines to take its rail connectivity to another level. These include the Northeastern HSR, Northern HSR, Eastern HSR and Southern HSR. For now, only Phase 1 of the Northeastern HSR is under construction covering a distance of 252.5km between Bangkok and Nakhon Ratchasima, costing some 179 billion baht or some US$6bil or less than US$24mil per km.

The Malaysia’s HSR, at RM60bil for a 350km line, is about US$43mil per km. Even the current estimates for Thailand’s other HSR lines or phases range between as low as US$16mil per km to as high as US$34mil per km. Hence, just by this count alone, Malaysia’s HSR is not a cheap line to be built in the first place.

What about ridership?

It is a known fact that the KL-Singapore air traffic is one of the busiest in the world. According to OAG, the KL-Singapore was the second busiest international route in the world next to the Hong Kong-Taipei. The report showed that some 5.56 million seats were offered on this route in 2019. It is also estimated that based on this figure, air travels between Singapore and Malaysia saw some 4 million passengers annually.

Also, according to Tourism Malaysia figures, some 10.16 million Singaporeans visited Malaysia in the same year. These two segments are effectively the main pool of potential users of HSR. Other nationalities probably account for another 30%-40% of the Singaporeans that travel to Malaysia. Hence, overall, there is a pool of about 13 million to 14 million passengers that travel between Singapore and Malaysia.

According to MyHSR’s estimate, the HSR service will carry some 22 million passengers a year in its 10th year of operations for all the three travel services it provides. This include the direct KL-Singapore service, the shuttle service between Iskandar Puteri and Jurong East, and the local domestic service between Iskandar Puteri to Bandar Malaysia. Given the ridership forecast and cost of construction, will the ticket price be attractive enough to encourage users?

Remember, to attract passengers to hop-on the train, it has to attract users not only on the comfort and time factor but cost factor too. If a bus ride for the KL-Singapore route costs on average RM60 and RM250 by flight per one-way trip, the HSR has to price the ticket somewhere in between, let’s say RM120 one way or even cheaper to attract both travellers by bus and flight to opt for the HSR line.

Assuming that in the first year itself, some 7 million passengers take the HSR and based on an average ticket price of RM120, total revenue for the operator would amount to about RM840mil. Let’s throw in another 4 million passengers plying the domestic route a year (assuming an average ticket price of RM60) and 6 million passengers for the shuttle service (at RM20 each), the HSR can generate additional RM360mil in revenue.

With total revenue of RM1.2bil, even without covering the operating expenses, the revenue would be sufficient to only two-third the interest on the project loan of about RM1.8bil a year based on 3% interest cost. Hence, similar to MRT, the government will have to continue to subsidise the HSR and at the same time write-off some of the investments in the books.

Is Bandar Malaysia still viable?

Without the HSR anchoring Bandar Malaysia, the upcoming 486-acre RM140bil (in gross development value) mega-city could potentially turn into a developer’s nightmare as there would be no real reason to have such a massive development taking place in the absence of the international rail connectivity. Of course, the MRT line 2, which connects to Putrajaya, will still be part of the masterplan, along with the planned 10,000 affordable housing and a huge 85-acre recreational park.

But without the HSR, can Bandar Malaysia hold its ground as a financial and economic hub of Kuala Lumpur and a magnate for international gateway? While the remaining components are still there for Bandar Malaysia, the absence of single most important element, the HSR connectivity that differentiates Bandar Malaysia with any other Transit Oriented Development, means that the development will have a tough time attracting investors into the project.

Should the KL-JB HSR instead be built?

Bandar Malaysia can still come into the picture but more for the domestic HSR service that will connect the mega-city to Johor Baru. Based on the 335km line, the HSR between KL-JB will effectively be the HSR to Singapore but without Singapore’s involvement. Cost wise, it would not be very much different that what Malaysia was prepared to spend on its part of the KL-Singapore line but, of course, with the full control of the design and alignment, the KLIA stop will definitely feature prominently in the plan.

However, at the same time, Malaysia is also presently building the Electrified Double-Tracking Project (EDTP) between Gemas and JB and is scheduled to be completed by the fourth quarter of next year. Build at a cost of RM9.5bil, the EDTP involves electrifying and replacing the single line to a double track the entire 197-km stretch between Gemas and JB and completing the missing link that will enable the Electric Train Service (ETS) to run right from Padang Besar to JB. The EDTP is also expected to cut travelling time to JB from KL to just 3.5 hours from the present six-hour journey.

The question is then as the EDTP is expected to already cut the travel time to about 3.5 hours, do we still want to spend another RM50bil for a HSR between KL and JB just to reduce the travel time by another two hours? A straight answer would likely be a NO.

Lessons from HSR

One of the deal breakers in the HSR is said to be the AssetCo structure. The issue is rather simple, there is no way Malaysia should or will give away its sovereign right on what it can do on its own land. This is especially so for the much-talked-about spur line to KLIA or even potential future connection to the north, especially to Penang and Padang Besar.

Secondly, in any infrastructure development, we must get our cost and benefit analysis correct right from the beginning. Forecasting is an art but, of course, that art depends on the variable that we assume to generate the revenue expectations and cost structure. We indeed need to justify as to why does our infrastructure cost a bomb while others do it much cheaper. When revenue projections, driven by ridership, ends up a third of forecast and cost balloons by more than 150%, what we will end-up with is a financial tragedy that would be very difficult to explain and rationalise.

How an infrastructure project is funded is another important criterion that can determine the success or failure of a project. The case of our MRT line, which is purely debt funded, shows that if equity injection is insufficient, chances are the government will have to step in later to provide financial support. The loss opportunity is surely in the form of interest cost right from the start of the project. If these were provided for in the form of equity, the government would not need to provide further financial assistance due to gaps arising from shortfall in revenue.

By right, any large infrastructure should be rightly tabled in Parliament and the funding plan should be phased out over the period of construction from the government’s annual budget. For example, if an infrastructure project was to cost some RM20bil, the government could easily provide RM5bil a year from the annual budget itself and there is no reason to hide behind opaque funding structure which are off-balance sheet.

In conclusion, the cancellation of the HSR is actually a blessing in disguise. While we still may end up paying a small penalty for it, the financial consequences had the project gone on would have been felt from the first year itself. In addition, with the EDTP completing next year, it was only a question of which line would suffer rather than complement each other, as both are almost effectively competing the same passengers, especially those travelling from KL to JB and vice-versa.

Pankaj C. Kumar is a long-time investment analyst. Views expressed here are his own.