ETP Analysis: What Idris Jala says

TRANSIT includes the following interview with Idris Jala featured in Star Biz as part of our analysis of the Economic Transformation Programme proposals for a Greater KL MRT and High Speed Rail link between KL and Singapore.

Jala confident of ETP implementation (Star Biz)

1. Can you explain the funding aspects of the EPPs (entry point projects)?

The MRT is a good example. It is said Greater KL is going to be funded 66% by the private sector. Does that mean that 66% of the circa RM40bil for the MRT will come from the private sector? How come there are reports that the MRT will be largely funded by the Government from allocations in the 10th Malaysia Plan (MP) and 11MP?

Will the Government be providing some kind of guarantee to these projects, such as guaranteeing the bonds (that will be issued to fund these projects) or will the Government be promising a payment of a fixed fee to the operator of the MRT?

Firstly, based on the feedback we have received from the ETP Open Day, we have done one quick change and renamed Greater KL to Greater KL/Klang Valley. In the 11 sector NKEAs (national key economic activities), the public funding portion is small. Greater KL has the largest public sector funding and this reflects the critical role adopted by the Government to continue to invest, especially in public service infrastructure, to support the pace and scale of Greater KL’s growth. More importantly, in the overall growth of the country, it is extremely critical to have a vibrant, buzzing capital city. Of the 34% public funding, almost 90% or about RM50bil over the next 10 years, will go to two priority EPPs – the mass rapid transit (MRT) and high-speed rail systems. This will require a new public-private partnership model to reduce total public investment requirements through two levers. The first is packaging commercial opportunities. Private sector funding can be increased by linking the infrastructure project to other high profit-generating opportunities such as property development e.g. investment in MRT can be cross-subsidised by monetising the air-space development rights on and around rail stations. Hence, station locations will not be selected only on the basis of accessibility and connectivity but also on air rights or developmental potential. The second is addressing total costs to drive capital productivity. The goal is to reduce overall cost from a lifetime cost perspective, covering both upfront capital cost and subsequent operations and maintenance cost. Through value management and world-class delivery, ensuring a design that meets functional requirements and optimising procurement and construction costs, the investment requirements will be significantly reduced. To date, the Greater KL MRT is still undergoing a detailed technical study and further work needs to be done to assess the areas of cost reduction we can take. We cannot comment on the specific financing/guarantees to these projects e.g. bonds or fixed fee as we are still evaluating various options alongside the relevant agencies e.g. Spad (Malay acronym for the Land Public Transportation Commission).

TRANSIT Says: We wonder how can the current infrastructure that used to be owned by PUTRA, STAR and KL Monorail can be fully paid off without using taxpayers’ money when Prasarana’s bonds mature by 2023. If we can’t even fix that, how can we start to even talk on building an MRT system?

In addition, we are quite concerned about the idea that the sale of air rights and reduction of overall costs will be a solution to reduce the amount of public money in the project. There is no guarantee that property developers will want close access to public transport. As examples, Suria KLCC didn’t want the LRT back in 1998, and KL Sentral never wanted the monorail.

As for cost reduction, if this means that they will go for open tender and a standard MRT design, this is a positive thing. Also, if they find a way to reduce crony kickbacks that would help reduce costs a great deal.

Finally, we must point out that a typical build-operate-transfer scheme may reduce costs up-front but in the long term costs can be higher when the government receives an aging MRT system which is in desperate need of infrastructure upgrades.

2. Is 66%of the MRT going to be funded by the private sector?

No, that’s the figure for the whole of greater KL. It’s likely to be higher for the MRT.

TRANSIT Says:

WOW!

3. What about funding for the MRT? RM36bil is a lot for the private sector. If the Government guarantees that, will it be taking too much risk?

Those are questions we will address later. Spad is still pursuing a technical review and the form of financing. We have an economic council which is chaired by the Prime Minister, we have the Deputy Prime Minister, the Second Finance Minister, myself, the Chief Secretary, the Bank Negara governor, the NEAC (National Economic Advisory Council) and all director-generals are in the room. The council provides a very objective view of what is important for the country. That forum meets every Monday. We will look at all those questions.

TRANSIT Says: Considering that the project was hatched and brought to life over a period of 3 months, we have to wonder how many corners have been cut and how quickly the government will try to “railroad” the project through in order to placate developers with guarantees that the project will not face delays like the LRT extension.

4. Is the MRT a done project?

It is already in the 10MP. If we make a simple projection, there will be 10 million people in Greater KL by 2020, up from 6 million currently – we cannot NOT have a proper urban transport system. It is absolutely essential in terms of what we want to do for Greater KL.

TRANSIT Says:

So we have to ask, was the MRT project already in the 10MP before Gamuda made their unsolicited proposal? And if so, what considerations were made for improving public transport in other cities beyond “Greater KL / Klang Valley”?

Remember, we cannot, repeat NOT ask people who will never benefit from the MRT (i.e. residents of other cities in Malaysia who are suffering from poor public transport) to pay for it. We must consider flexibility in our transport system to allow for multiple rapid transit alternatives that can better solve Greater KL’s mobility needs as well as encourage public transport investment in other cities, at a greater fraction of the MRT cost.

5. Is this an endorsement of the private sector MRT plan?

No. All project pre-labs (the laboratories set up to come up with the ETP) have been taken into account whether firm or not.

• Does it make sense?
• What changes are needed so that it makes more sense?
• Does it connect all developments?
• Does it connect to the tourist belt?
• Is there connectivity to the existing lines such as the existing light rail transit and KTM Komuter?
• Is there integration, including one card (for access to the various systems)?

We also need to talk about “livability” of the city. There is a need to clean up the river, green the city, better sewerage system, etc. All these are part of the greater KL development as well as the high-speed train between KL and Singapore. Large cities live off each other when we connect two cities. The multiplier effect from connecting cities is very big. Of course, connecting is by other means as well such as land. The details need to be worked.

TRANSIT Says: If the details still have to be worked out, why is the government so “gung-ho” about getting the project done and rolled out as quickly as possible?

6. What are your impressions about cost?

Cost is dependent on returns. We tried very hard to estimate a ringgit contribution. We prioritised projects based on their potential contribution to gross national income (GNI). A large chunk of the GNI comes from greater KL (RM392mil or about a third of the total). But that’s typical – large cities contribute to higher incomes.

TRANSIT Says:

Sorry, we do not understand what Idris Jala said in his answer to Question 6.

7. Can the Government afford to build the MRT?

Yes. Because revenue comes in from the (increased contribution from) other sectors – tourism, wholesale and construction, etc. If you run on the basis of ticket sales, you will lose. In Hong Kong, only 30% of revenue from the MRT is from ticket sales, the rest is from sale of air space, retail and so on.

TRANSIT Says:

Hong Kong is a very special case because it is a mountainous territory with super high density – perfect for mass-rapid transit construction.

In Hong Kong the government owns all property and allows 999-year leases to property owners. MTR Corporation, (a formerly government owned and closely government-linked corporation) owns the MTR, all assets of the former Kowloon-Canton Railway, the Express Rail Link and the Disneyland rail link. They also control the leasing of air rights and development rights through close partnerships with property developers.

For a similar approach to work in Malaysia, Prasarana would have to set up a long-term public transport planning subsidiary as well as subsidiary companies that would control the leasing of air rights and development rights.

We need Idris Jala and PEMANDU to show us concrete numbers and figures of the efficacy of such approaches that has been done in the past for Greater KL’s rail-based systems, in order for us to have confidence that PEMANDU and Prasarana can pull things off as promised.

Since public transport will shape the future development of KL, we have to ask if we want so much of the future of Kuala Lumpur placed in the hands of a single government-linked company and partnered developers, with little or no real public participation, consultation and feedback.

8. I guess there’s a lot of scepticism because of the mega projects that we have had before where money is spent but there are no returns.

Yes, but for me, this (MRT) is absolutely essential.

TRANSIT Says:

Skepticism might exist because of the government’s ‘track record’ or the speed in which the MRT was proposed and accepted.

For us, the question of whether a transit system is essential or not should be directed to the rakyat. Will rakyat be okay with the consequences? Again, we hope PEMANDU will go back to its goal instead of the means to accomplish it.

The KL MRT – where will the funds come from? (Star Biz)

As the single largest project identified under the Economic Transformation Programme (ETP), questions abound on the funding of the RM43bil mass rapid transit project (MRT) for Kuala Lumpur. That will likely be the most important challenge, notwithstanding procuring the land through which the MRT will be built, the structure and design process, the red tape and the many parties involved.

Another challenge is related to cost – the potential rise in prices of building materials. You may recall that this is what led to the one-year delay in the completion period of the double-track project from Ipoh to Padang Besar.

Many also question the potential impact of such a project on the economy, the environment and the length of time it would need to be completed.

The project’s cost breakdown:

• RM36bil for the proposed 150km MRT system comprising three lines covering at least a 20km radius of central Kuala Lumpur (including tunneling works);
• RM2bil for land acquisition;
• RM3bil for rolling stock, and;
• RM2bil for developing an underground commercial space. [TRANSIT: Think of the malls built underground around Taipei station in Taiwan as an example of this underground commercial space.]

While the proposed project does have some appealing features to fix the public transport woes of the Klang Valley and makes sense in the long run for the economy, analysts wonder if it can be commercially viable on the back of risks such as escalating costs.

“Prices of building materials are low now but since the project stretches over nine years, the project may have to face two price cycles,” he [TRANSIT: Who? Idris or the analysts?] points out.

In the middle of this year, Gamuda Bhd and MMC Corp Bhd jointly submitted an unsolicited bid for the project. An analyst says if they do secure the tunnelling part of the project which works out to RM14bil, they are likely to raise RM3bil in working capital and a further RM1.8bil through performance bonds.

“That will be sufficient for the initial stage, since this project will take eight or nine years and cover the 10th and 11th Malaysia Plans. I believe the Government can fund part of the project without straining the balance sheet,” he adds.

Alternatively, he says the project could be funded on a build-operate-transfer basis or via a deferred payment scheme. But land acquisition for the project however could prove to be tricky. “This was the reason why the double-tracking portion from Ipoh to Padang Besar was delayed by a year.

With this project, one-third of the land lies in the city centre, which is well developed,” he says.

One analyst does not expect funding to be done via the private finance initiative scheme. “The likeliest method will be along the lines of how Syarikat Prasarana Negara Bhd is funding the extension of the light rail transit lines, which is via the issuance of Government-guaranteed bonds through a special purpose vehicle,” he says.

This will ensure triple-A rating for the bonds besides it being cheaper for the companies taking up various portions of the project as the interest rate is around 5%. He adds that if debt were to be raised privately without a Government guarantee, the interest rate may be around 7% to 8% depending on the structure.

If the Government is to fund the project by itself by raising debt, the analyst says this will mean that it may perpetually be servicing the debt. “It is likely that the debt raised will be rolled over to another series of bonds as the funds will be used to pay the interests instead of the principal when the earlier tranche has matured,” he says.

He says this could put a strain on the Government’s operating expenditure, as this is where they have to budget for interest payments. Funding in this case may not be an issue. “It’s just a matter of whether we want succeeding generations to carry the debt burden,” he adds.

TRANSIT Says:

Well said!

The amount of debts from PUTRA and STAR LRTs if they are to be fully absorbed by the government can unfairly translate to either RM1,800 for every average Malaysian household, including those who live in the Sarawak longhouses, or RM2,000 for every single resident in the Klang Valley, even in areas with unreasonable walking distance from the present LRT stations.

If Greater Kuala Lumpur is to replicate the transit funding framework in Tokyo, Hong Kong and other world class cities like Vancouver where breaking even on mass rapid transit infrastructure investment is achievable (although in Vancouver this came as a result of broken promises by the private partner and subsidies from the government), an average transit tax rate of at least RM1 per square foot for each real estate that resides within the walking radius of the present 48 LRT stations would need to be levied over a period of 20 years (inflation factor excluded).

Can such density-altering framework be implemented in tandem with the MRT proposal which carries a conservative RM43 billion price tag when nothing has been done to rectify the distortion in the way the present LRT infrastructure benefits the few developers and owners of lands near the existing stations compared to the larger taxpayer and constituent base?

Building a self-sustaining, well-planned, viable and beneficial MRT or any rapid transit project is just not that easy. The government, PEMANDU and Prasarana will do themselves and the public a great disservice if they overpromise and underperform.