This article first appeared in Forum, The Edge Malaysia Weekly on July 4, 2022 - July 10, 2022

The economic implications of Malaysia’s skewed transport system will deepen with high petrol prices and rising interest rates. The country’s heavy dependence on private passenger cars and penchant for rail-based “big toy” public transport projects are coming home to roost. With fuel subsidies — petrol, diesel and liquefied petroleum gas — estimated to reach RM37.3 billion this year, the need to build a highly connected and bus-­centred public transport system has never been greater.

There are now 33 million registered vehicles in Malaysia. In 2020, vehicle ownership in the country reached 993.7 registered vehicles per 1,000 inhabitants, second highest in Southeast Asia to Brunei Darussalam at 997.8. Very few adults do not own a vehicle, yet the mobility needs of many are unmet and traffic congestion is rife. The climate crisis and severe flooding are further ramifications.

The skewed transport system imposes three major economic problems.

First, the fuel subsidy burns a huge hole in the national budget. Finance Minister Tengku Datuk Seri Zafrul Aziz has flagged the fiscal challenge.  Some RM30 billion was budgeted for subsidies for 2022 but the government worries that the bill will reach RM77.3 billion, of which fuel subsidies alone cost RM37.3 billion, an explosive rise from RM13.2 billion in 2021 and RM6.1 billion in pre-pandemic 2019.

Zafrul suggests that generous subsidies are untenable, but with a general election not far off, the government will be very careful with the unpopular step of reducing fuel subsidies. The finance minister is hinting at some form of targeted subsidy, but the RM625 one-off payment during the June 2008 fuel hike was a disaster. No one has convincingly explained whether and how such a programme should be implemented today.

Second, transport-related public infrastructure projects constitute the bulk of the nation’s off-budget debt. Over the past decade or so, many big-ticket transport projects have been implemented, consisting of highways, city rail networks and intercity electrified double tracking, and megaprojects such as the East Coast Rail Link (ECRL). Most of these projects were funded through off-budget channels with government-owned special purpose vehicles (SPVs) raising government-guaranteed debt. Should these SPVs be unable to service their off-budget debts, the government will be required to undertake the payments.

The most recent data show that government guarantees for DanaInfra Nasional Bhd, Prasarana Malaysia Bhd, Malaysia Rail Link Sdn Bhd and Projek Lebuhraya Usahasama Bhd totalled RM149.1 billion, or 49.6% of the RM300.4 billion of guarantees provided by the federal government (see Table 1).

Several of these guarantees, including DanaInfra and Prasarana, are considered committed guarantees as these companies are already unable to service their debt without direct financial assistance from the government.

The majority of projects covered by these government-owned companies involve existing transport infrastructure, including the Klang Valley Mass Rapid Transit projects (MRT1, MRT2), Light Rail Transit Line 3 Project (LRT3), Pan Borneo Highway project Sarawak and PLUS North-South Highway, as well as the operations of the LRT, MRT, KL Monorail and bus services in various cities.

The fundamental weakness of these “big toy” projects is that they still do not solve the issue of first- and last-mile connectivity challenges. They do not cover areas beyond the Klang Valley, leaving other parts of the country even more dependent on private vehicles. Having spent or committed so much to “big toy” public transport, the onus is now on Malaysia to make the pricey infrastructure work better and to be commercially viable, or at least less anaemic than the current public transport use rate of 20%.

Subsidising public transport in a big way, especially by supporting bus services nationwide, would be more sustainable — both financially and for the climate — in the long run, rather than prolonging cheap fuel forever.

Since Penang pioneered free bus services in 2008, other schemes at various levels of governments have followed — but in an uncoordinated and disjointed manner. An ad hoc arrangement recently announced by Prime Minister Datuk Seri Ismail Sabri Yaakob promises a RM155 million outlay for one month’s free public transport in Kuala Lumpur.

Unfortunately, the current administration still proposes to build three more highways around the Klang Valley. This is the wrong approach. Building more highways will only lead to a phenomenon known as “induced demand” — the more highways or roads you build, the more cars will be on the road and the more congested the city will be.

Third, loans for the purchase of private cars form a significant portion of private debt. Bank Negara Malaysia statistics show that in April 2022, car and housing loans comprised 43% of total loans provided by banks. Car loans to pay off a continuously depreciating asset are especially unproductive, but a lucrative and relatively straightforward business for the banks.

Bank Negara reported that for the first half of 2021, about 70% of new banking system disbursements (excluding credit cards) are channelled to middle- to high-income borrowers, with 40% and 20% respectively of total new disbursements going towards the purchase of residential properties and cars. In the region, Malaysia has one of the highest household debt-to-GDP ratios at 89%, equivalent to Thailand (90%) but exceeding Singapore (66%) and Indonesia (10%).

In sum, the failure to build an efficient and functioning public transport system has a price tag: a huge fuel subsidy bill, sizeable accumulated public debt via “big toy” transport infrastructure and a very high level of household debt partly caused by car loans.

Policymakers and political leaders must first agree that transport cost is at the heart of Malaysia’s various economic questions. We must then be bold to think out of the box.

The notion of “paying” the people to take the bus is not as outlandish as it may seem. Much more can be done to subsidise bus-based public transport and incentivise the public to take public transport, guided by three key elements.

First, public transport is unlikely to generate a profit and thus must be largely paid for by the public coffers, in exchange for public goods such as fewer private cars on the roads, better mobility, savings on fuel subsidy and reduction in carbon emissions.

Second, public transport must go beyond “big toy” infrastructure; having many buses running on time is crucial in linking up the system and running it efficiently.

Third, regular use of public transport renders private vehicles a luxury and no longer a necessity. Confidence must be instilled, satisfaction earned. But should these happen, removal of the fuel subsidy will be the natural course of action.

The transport question in the Malaysian economy is huge and serious. Doing more of the same is a recipe for disaster.

Liew Chin Tong is national political education director of the DAP. He was deputy defence minister from July 2018 to February 2020.

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