AFTER years of discussion, the prospect of halving the door-to-door travel time from Kuala Lumpur to Singapore is finally taking shape. The goal: two and a half hours.

It may be hard to imagine why it has taken so long to bring two of the region’s most developed cities together but it is not so difficult to think of the potential the high-speed rail (HSR) has for Malaysia and Singapore.

The North-South Expressway (NSE), which was completed in 1994, best offers a taste of what to expect. For its RM6 billion price tag, this highway is possibly one of the most successful mega projects the country has undertaken in terms of socioeconomic impact. Overnight, tourism exploded and small towns came to life along the west coast as goods were finally able to move freely over land.

The countless hours once spent on unlit, winding trunk roads to “balik kampung” are now but fading memories in the national psyche.

Now, Malaysia has the chance to repeat the success with the 330km-long HSR, but it has to get it right.

“We need to make sure this project isn’t just good but great,” says Suruhanjaya Pengangkutan Awam Darat (SPAD) CEO Mohd Nur Ismal Mohd Kamal.

He has the high-pressure job of negotiating the HSR project with Singapore and ensuring that it is well executed while juggling the needs of various stakeholders. He knows that when it comes to building a RM40 billion railway line, there is no margin for error.

The electrification and double-tracking of the existing KTM line, which will cost an estimated RM24 billion, is an example of a project on which huge sums of money have been spent without the desired outcome because politics interfered with foresight and planning (see “Malaysian rail’s chequered past”).

At what cost?

The stakes are even higher in the HSR project. Experienced players tell The Edge that RM40 billion might not be enough based on the US$16 billion (RM57 billion) that Taiwan spent on its HSR line, which began operating in 2007.

In Asia, Taiwan’s line has the most similarities with Malaysia’s planned HSR. Spanning 345km, it links 14 cities, including Taipei and Kaohsiung. It was designed and built by the Japanese, modelled after the Shinkansen or the bullet train.

With Malaysia’s debt-to-gross domestic product ratio standing at 54.5% as at December last year, the government may not have much room on its balance sheet for the HSR. But that doesn’t mean it shouldn’t be undertaken, say experts.

No railway system in the world can pay for itself from ridership alone since it is a public good. But the net economic benefits of HSR to the country can easily cover the cost.

“In mature countries, high-speed rail lines [as opposed to the metro, tram and conventional railway] can make money once you pay off your initial investments. The HSR services in Europe are making money,” says Filippo Scotti D’Albertis,  managing director for Asia-Australasia at Alstom Transport (S) Pte Ltd.

In a nutshell, it is easier to cover the operational costs of HSR than projects like the mass rapid transit, which is fully government-funded.

“Revenue will not come from ridership alone. The operator makes money from marketing — advertising on the train as well as commercial operations in and around the stations,” remarks D’Albertis.

Beyond that, the government can also recover a large sum of the initial cost by developing land around the stations or by paying for the project with land adjacent to the stations. This model is common in Japan, where HSR stations are developed with careful planning in mind.

Anywhere between 30% and 50% of revenue can come from commercial operations and the development of the areas surrounding the stations, says Nur Ismal.

At the same time, the HSR should not be under-designed because of cost constraints. Take KL Sentral. Once upon a time, it was a growing hub for KL’s public transport system. Today, it is overcrowded and there is not enough room to expand. In fact, the new MRT line has to be built over 300m away from it.

Funding dilemma

The good news is that the government has off-balance sheet options to fund the project — either through a local public-private partnership (PPP), foreign funding or a combination of both.

The Chinese, Japanese and South Koreans have all expressed interest in funding the project, leveraging the strong support from their respective governments. Along with European HSR players like Alstom and Siemens AG, there is fierce competition to gain a foothold in Southeast Asia, which is seen as the next HSR hub (see “Picking the right partner”). This means Malaysia and Singapore will have the upper hand at the negotiating table.

But does Malaysia really need to be beholden to foreign borrowings?

“Malaysia’s bond market is deep enough to absorb such a project, that is, if the government can structure a concession. Our private sector can undertake the project; we don’t need to take foreign money,” says an executive with a local construction conglomerate that also holds a long-term concession with the government.

“About 70% of the cost of the project is in the civil works. The rolling stock (trains), signalling system and power supply system are the three main components we need to import but these only make up 30% of the cost. Why let foreigners dictate the entire project when their portion is only 30%?” he asks.

That said, any concession for the HSR must be carefully thought through. Take Taiwan’s HSR. While it has been an operational success, it cannot be described as a commercial success since the government is in the process of taking back the project from its PPP partner, Taiwan High-Speed Rail Corp, which is facing bankruptcy.

THSRC’s financial woes are mainly due to the ridership numbers not meeting projections. The line has the capacity for 300,000 passengers a day but is only serving 110,000 to 170,000.

Nevertheless, such ridership is impressive and the Taiwanese have benefited from the HSR. The problem is that the PPP model just didn’t work.

The Malaysia-Singapore HSR is a stronger business case since it involves two capital cities. However, Malaysians are no strangers to private sector-led projects gone awry. Recall the government bailout of both the light rail transit and monorail operators.

On the other hand, the government also runs the risk of over-subsidising operational risk when handing out such concessions, for example, the express rail link that was built and operated by YTL Corp Bhd under a 30-year concession.

Creating a win-win situation

Malaysia will also have to figure out a way to share the cost with Singapore that both parties are comfortable with. Even though they used to be connected by rail, the HSR project is vastly different. Malaysia is expected to fork out most of the cost, given that almost 90% of the tracks will be on its soil.

In fact, in the early stage of the negotiations, there was pressure to terminate the HSR line at the customs, immigration and quarantine (CIQ) complex in Johor Baru, which would have kept the entire project in Malaysia and given Singapore little say.

While Prime Minister Datuk Seri Najib Razak was able to strike a compromise with Singapore Prime Minister Lee Hsien Loong on a terminus in Jurong East on the island, this was recently criticised by former prime minister Tun Dr Mahathir Mohamad. After all, if Malaysia is bearing most of the cost, why should Singapore have any clout in the negotiations?

Nevertheless, the project must benefit both sides of the Causeway. What would be the point of spending over RM40 billion on a rail line that stopped shy of Singapore’s front step?

That said, Singapore’s caution on the project isn’t surprising, given that the two nations have vastly differing track records in rail projects. Once inked, the HSR will bind the two nations together for a very long time.

For Lee, the HSR agreement could well be a defining point in his political career, not unlike the water agreement his late mother famously vetted with great care.

How might the deal be structured?

One solution is a two-tier structure that separates the ownership of the infrastructure from the operation of the trains.

In this structure, Malaysia and Singapore could form a 50:50 joint venture to operate the trains, giving Singapore equal say in the operations. Meanwhile, infrastructure and civil works for the track can be divided accordingly between the two countries for the respective private sectors to undertake build-operate-transfer concessions.

The concession holders would be paid a fixed lease from the operating vehicle on a rate of return proportionate to the construction cost. Since the payments are guaranteed by both governments, the borrowing costs and required rate of return should be low.

In turn, both governments can share the risk of operating the trains. They can stomach loss-making HSR operations in the near term since they can recover the costs through other means, for example, higher tax collection as the economy grows or stamp duty from rising property prices.

Brain-drain train?

If all goes well, the HSR will reduce friction between Malaysia and Singapore. While this is good for work and tourism, there are concerns that it will also accelerate the flow of talent to Singapore even as Malaysia grapples with retaining its talent.

However, it will not be a one-way street. Businesses in Singapore will reconsider moving their cost centres to Malaysia where the cost of doing business is lower while retaining their headquarters in Singapore. This, in turn, will create more jobs for Malaysians.

While Malaysia might end up absorbing some of the lower value-added jobs from Singapore, reduced friction would also increase direct competition for talent. This will force Malaysian employers to be more competitive as well, lifting wages.

Likewise, property prices along the line are expected to pick up more in Malaysia than in Singapore since the base is lower on this side of the Causeway. In this regard, the uneven yoke works to Malaysia’s advantage. The low-income group that pays rent in the urban areas may be hurt by the rising prices but if Singaporeans spent more tourism dollars in KL, that would be good for the local businesses and the job market.

“We expect the KL-Singapore HSR to arrive with new developments that will benefit people and businesses from both sides,” says Singapore’s High Commissioner Vanu Gopala Menon. “Malaysia is one of Singapore’s key trade partners and both countries enjoy close cultural and business ties. In the light of increasing globalisation and regionalisation, it is natural for companies to optimise their processes and supplier chains. Together, Singapore and Malaysia offer a strong joint value proposition for businesses.”

As the two countries forge closer ties, the HSR project will also be a catalyst for social transformation. A Malaysian could work in Singapore with permanent residency status but live most of his life in Malaysia while perhaps educating his children in Singapore. Likewise, more Singaporeans could begin to live in Malaysia. Just look at how the Europeans cross borders, often into vastly different languages and cultures.

It will not happen overnight but from being just a two-and-a-half-hour train ride away, Malaysians and Singaporeans might start to see more similarities in each other than differences.

After all, it was only 50 years ago when the two were the same country.

This article first appeared in The Edge Malaysia Weekly, on June 15 - 21, 2015.

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