Will this be the last we see of the Kuala Lumpur-Singapore High-Speed rail link?

Mahathir scrapped plans for a High-Speed rail link between Kuala Lumpur and Singapore. But this may not be the end of the line for this high-profile project.

Editorial

On the campaign trail, Malaysian Prime Minister Mahathir Mohamad promised to review government investment in Malaysia’s large-scale infrastructure projects. Still, few expected the Kuala Lumpur-Singapore High-Speed Rail (HSR) Link would be the first project to receive the axe.

The 350-km project was just one of several high-profile infrastructure projects in the pipeline. It was by far the most expensive, with an estimated cost of 50-70 billion ringgit (US$12-18 billion). However, the government anticipated strong economic benefits from closer ties to Singapore.

(Source: Capital Economics)

Why give the project the chop?

Mahathir announced the decision to scrap the project at the end of May. Many of the construction contracts had already been awarded. Gamuda and Malaysian Resources Corporation both received contracts for the northern section of the project. YTL had also been chosen to construct the southern section.

With the HSR link’s construction expected to provide an economic boost, why axe the project? Firstly, Malaysia’s public finances are not in the position to finance its numerous construction projects.

Malaysia’s new Finance Minister Lim Guan Eng estimated that Malaysia’s total debt is around 80% of its GDP. The scrapping of the goods and services tax also increased fiscal uncertainty. The government had to cut back on its infrastructure drive.

The KL-SG HSR link was in prime position to receive the chop. It had more potential economic value than other projects, like the East Coast Rail Link (ECRL). But phase one of the ECRL has is already under construction. With no work yet underway for the KL-SG HSR project, it made more sense to scrap.

The project had inflated expectations

When the project was proposed in 2013, it was labelled a “game changer”. Former Prime Minister Najib Razak believed it would boost business ties through connectivity. He predicted the project would generate 28,700 jobs for Malaysians and add more than 6.2 billion ringgit (US$1.5 billion) to Malaysian GDP.

Alex Holmes, an economist at Capital Economics, was less optimistic. He cautioned that some of Najib’s projects held “dubious economic value”. He mused, “Malaysia already has good infrastructure, equivalent to what you’d expect in a developed economy, and much better than countries at a similar income level”.

The operations contract would have likely gone to a Chinese or Japanese consortium. China’s Railway Corporation and Japan’s JR East were both in the running for the lucrative deal. This would have seen the operating profits funnelled abroad. Mahathir lamented that Malaysia would “make no money at all from this operation”.

The costs were inflated

There is also evidence to suggest that the project did not represent good value for money. Lim Guan Eng expressed concerns over the project’s hefty price tag. He believed that the costs were inflated. Lim suggested the project could be completed at half the price.

With the cost of the project under scrutiny, the SDP in Singapore is questioning the due diligence of those involved. Najib has since been embroiled in the 1MDB scandal. Lim’s comments about the inflated price tag raise questions. It is conceivable that the project’s price included kickbacks.

The move is not a good omen for the ECRL

The axing of the KL-SG HSR link is not good news for the ECRL. The project is due to receive a series of Chinese loans to finance its construction. It will significantly increase Malaysia’s debt.

The ECRL offers little for Mahathir politically. The project will benefit Kelantan, Terengganu, and Pahang the most. These are opposition-controlled states for Mahathir.

The fact that the project is already underway could save it. The Malaysian government has already received a 20 billion ringgit loan (US$5 billion) from the China Exim Bank for the project. If Mahathir chooses to walk away from the ECRL, he will be turning his back on 22 billion ringgit (US$5.5 billion).

Could we see a KL-SG HSR link in the future under different terms?

Mahathir inherited an economy with rising public debt. He took over a desk piled high with planned infrastructure projects. The plans for the KL-SG HSR link included an inflated price tag and little information on how Malaysia would finance the project beyond extensive borrowing.

The project’s political benefits were shaky. If the project was a success, Mahathir would have struggled to take the credit. The project was the brain-child of Najib. He was the one who had touted its benefits.

Once Mahathir gets public debt back under control, he could revive the project. In a better economic climate and with a greatly reduced price tag, the project would be viable. He would likely find the Singaporean government open to the idea. The HSR link would have been a major economic boost to the Jurong Lake District.

A Build-Operate-Transfer financing model would allow the government to transfer the costs onto the private sector. They could find an operator with a proven track record to finance the construction. Once completed, the firm would take over the rail operations. Malaysia would reap the economic reward, without shouldering the financial burden.

This may not be the last we see of the project. Right now, Mahathir has other matters on his plate. He needs to bring Malaysia’s spiralling public debt under control. He also needs to find a revenue stream to replace that lost by the goods and services tax. But once he has dealt with these, he may be in search of a big-ticket project that will be his legacy. The HSR link could be just that, resurrected under better terms, in a better economic climate.