Tuesday, June 16, 2015

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.

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.

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