Pursue High-Speed Rail Project under Public Private Partnership Scheme

A high-speed rail (HSR) linking Kuala Lumpur (KL), the capital of Malaysia and Singapore was proposed by private sector both in the 1990s and year 2006 but was shelved due to high cost.

The HSR can reduce the travel time between KL and Singapore to 90 minutes and will bring huge economic and social benefits to both countries.  In year 2013, both governments agreed to cooperate and share the huge investment required for the HSR project.

The HSR project could be developed as a public-private partnership (PPP) scheme to tap the private fund and gain the efficiency of private sector.

-          What is the infrastructure problem that the PPP is trying to solve?

-          Currently, the KL – Spore route is serviced by 3 main modes of transport: air, road and an existing intercity rail network. The travel time between the two neighbours is about four hours by car.

-          According to Malaysia’s Land Public Transport Commission (SPAD), there is a need to improve connectivity between the two countries. The currently traffic congestion is acute and the capacity of the Causeway has exceeded 33%.

-          The HSR project cannot be fully funded by either government or private sector alone due to its huge upfront capex and long gestation period. Realistically, a substantial amount of government assistance is required in the form of either soft loans or grants.

Source: SPAD

-          What services are to be provided and are these services affordable?

-          It will greatly reduce the travel time between the two neighbours to 90 minutes from about four hours by car.

-          HSR is an efficient and safe mode of transport.

-          The HSR project does not only transporting people but also act as an economic catalyst to further develop and spur new modern townships and economic activities along the lines that will cross towns in southern part of peninsular Malaysia .

 

Source: SPAD

-          What are the reasons that the private sector would want to participate?

-          PPP would enable the private partner to capture the benefit of the ‘whole-life’ approach to operation and maintenance

-          PPP scheme enables long-term profitable concession thus garners local and international interest. The routes relevant for the Southern Corridor HSR saw strong growth with the total travel market growing from 5.47 million passenger-km in 2005 to 7.45 million passenger-km in 2011.

-          The HSR is dubbed as South-East Asia’s most ambitious infrastructure project and the region’s first HSR along a 340km link. Being selected as the private partner in this PPP project would form a good profile for the private parnet for future jobs and tenders.

-          The HSR project has the supports from both private and public sectors because the HSR project is economically sensible and politically acceptable.

-          Private sector with experience in building and operating the HSR line would produce better outputs with broader perspectives toward the project life cycle (LCC). LCC considerations give flexibility to the designer, builder and operator opportunity to be more efficient.

Source: SPAD

-      How should these risks be allocated? Consider the country context in judging the risks and who should take them.

-          The development cost of high-speed rail (HSR) project could possibly be divided between the two governments based on geographical location of the project’s infrastructure, which is reportedly more than RM38bil.

-          As HSR service would be an alternative mode of transportation other than road transport and air transport, using a user-fee PPP would be more appropriate than availability-based PPP.

-          The private party is usually allocated the risk of demand for use of the HSR, in addition to the risks of design, finance, construction, and operation.

-          In view that the HSR project would benefit not only the HSR users but would also contribute to the development of economic and social aspects identified as economically viable, the HSR demand risk may be allocated partially to the public authority that may share the risk by underwriting a minimum level of usage and provide subsidy.

-          long-term risk transfer can be achieved in the PPP structure, especially as to maintenance risk. This is because it may be cheaper for the Design, Build & Operate (DBO) contractor to walk away than to deal with a long-term problem with maintenance costs.

-          because the debt funding is not provided or guaranteed by public-sector, private lender’s discipline over the process is intact

-          construction, completion and maintenance risks remain with the private sector

-          Tapping the private sector’s strengths in securing finance, technical expertise, construction knowhow and operation experience in a PPP project would ensure that specific risks are allocated to those who best handle it.

Malaysia’s Land Public Transport Commission (SPAD)

My blog about HSR in year 2009

The Star Daily (Cost sharing of HSR)

High Speed Rail and Public Private Partnership (PPP)

A high-speed rail (HSR) linking Kuala Lumpur, the capital of Malaysia and Singapore was proposed in the late 1990s but was shelved during the Asian financial crisis due to high cost. In year 2006, private investor began to lobby the two governments, raise funds and plan the project but the Malaysian government halted the project again citing high-costs of over RM 8 billion (US$ 2.5 billion).

The primary objective for the HSR is to reduce the travel time between Kuala Lumpur and Singapore to 90 minutes. The HSR project will bring huge economic and social benefits as well as development potential to both countries.  In year 2013, both Malaysia and Singapore governments agreed to cooperate and share the huge investment required for the HSR project, which is reportedly more than RM 38 billion.

According to Malaysia’s Land Public Transport Commission (SPAD), private participation is expected and that the public-private partnership (PPP) scheme could rely more on government financial support as the development cost is relatively high.

1. Risk allocation

As HSR service would be an alternative mode of transportation other than road transport and air transport, using a user-fee PPP would be more appropriate than availability-based PPP. The private party is usually allocated the risk of demand for use of the HSR, in addition to the risks of design, finance, construction, and operation.

In view that the HSR project would benefit not only the HSR users but would also contribute to the development of economic and social aspects identified as economically viable, the HSR demand risk may be allocated partially to the public authority that may share the risk by underwriting a minimum level of usage and provide subsidy.

2. Successful factor

If PPP approach is opted, HSR project of this size would require huge commitments from the private and public sectors both financially and politically. Tapping the private sector’s strengths in securing finance, technical expertise, construction knowhow and operation experience in a PPP project would ensure that specific risks are allocated to those who best handle it. Different incentive structure in private sector and public sector would generally incentivize the private sector to be more efficient in delivering their service and with higher value for money applicable in PPP.

Although the HSR project has not yet started, the commitment from the government of both countries including the setting-up of Land Public Transport Commission (SPAD) shows that political champion to this PPP project is well secured.

Like other Mass Rapid Transit system currently under the purview of SPAD, it is believe the HSR project would be successfully executed through a transparent and competitive bid process, and well managed with the right mix of global and local experts.

http://www.spad.gov.my/projects/high-speed-rail

3. Should it be done as PPP?

In my opinion, the HSR project should be done as a PPP. It has the supports from both private and public sectors because the HSR project is economically sensible and politically acceptable. As the government is facing tight fiscal condition that would not allow full public procurement, a PPP approach would be suitable to this HSR project.

PPP would allow private sector player to participate in the design, build, finance, operate and transfer (DBFOT) of the HSR project for real efficiency gains. Private sector with experience in building and operating the HSR line would produce better outputs with broader perspectives toward the project life cycle (LCC). LCC considerations give flexibility to the designer, builder and operator opportunity to be more efficient.