HSR structure levels playing field for international bidders

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This article first appeared in Corporate, The Edge Malaysia Weekly, on July 25 - 31, 2016.


THERE are still many details of the KL-Singapore high-speed rail project that need ironing out before the bilateral agreement is signed at the end of the year. But the memorandum of understanding signed last week shows that both the Malaysian and Singapore governments are now on the same page and more committed than ever to the project.

“We have agreed (upon) what we want to do, now we just have to agree (on) how to do it,” developer and asset owner MyHSR Corp Sdn Bhd CEO Mohd Nur Ismal Mohamed Kamal told The Edge after the signing of the MoU.

While much of the MoU is confidential, one crucial piece of information was revealed — the commercial structure of the project — which resolves some of the most contentious bilateral issues.

It will also level the playing field for the supply of technology and equipment that has been so keenly contested by the Japanese, Chinese, Europeans and South Koreans.

“We feel that it is a good model to ensure (that) all the parties behave and benefits consumers and passengers,” explains Mohd Nur Ismal.

The project will be divided into three parts — operations, railway assets and infrastructure (see chart).

“In this structure, the biggest part of the asset, InfraCo, is owned by the governments. And that is just for the building of tunnels, viaducts and stations.

“But what is critical and requires good performance — the maintenance and the provision of the railway assets, the trains, the signalling, the tracks, the management of the network — that has to be done by AssetsCo,” he says.

“For operations, it will be done by an additional party. They will focus on customer-facing aspects. They have to make sure ridership is as high as possible. The nitty-gritty of maintaining trains and repairs is for someone else. So, [there will be] complete separation of responsibilities and focus.”

Mohd Nur Ismal points out that the separation of infrastructure and operations is already practised elsewhere, in particular, Europe. Here, HSR is taking it one step further by separating the civil assets from the rail operating assets. This also solves another problem — how much each government will pay for assets that are operated disproportionately in both jurisdictions.

Instead, the railway assets will be wholly owned and funded by private hands, which has the added benefit of reducing pressure on the governments’ balance sheet.

On top of that, it also removes the ability of turnkey contractors to cross-subsidise the project by taking on infrastructure work or land. This was a major concern when China Railway Engineering Corp took up a stake in Bandar Malaysia, the terminus for HSR in Malaysia.

Now, the Japanese, South Koreans and Europeans will not have to worry about the Chinese having an advantage.

Hence, the AssetsCo concession tender is expected to be the most intense. It will pit not only the technological prowess of the major HSR nations against each other but also their financial muscle.

The main areas where local companies will benefit will be the construction of the civil works. Consequently, the infrastructure will be carried on the governments’ balance sheet.

After all, transport projects need government support. The Malaysian government may subsidise track access charges in the initial stages to ensure that the asset and operational concessions are viable.

Since the government will bear these costs, there has been criticism that eight stations in Malaysia are too many. After all, if the domestic operations struggle, the Malaysian government will have to support them.

Mohd Nur Ismal dismissed these concerns, pointing out that the incremental cost to add a station is very small. 

Based on MyHSR’s projections, the domestic operations will not need more support from the government than the international operations, he says, although some support will be necessary in the initial stages.

There is no estimate of domestic ridership but Mohd Nur Ismal  says the overall ridership for HSR is projected to hit 22 million passengers per year within 10 years of operation. That is based on a service of four trains per hour. However, the HSR project could be designed to accommodate as many as 10 trains per hour in the long term.

“We will be able to cater for ten trains an hour, but it is not yet confirmed. The capacity that you cater for dictates the cost. And the cost will vary wildly depending on the capacity,” says Mohd Nur Ismal.

This is one reason why no cost estimate has been announced.

Many aspects of the project have not been set in stone, such as the capacity of the system or whether there will be a bridge or a tunnel at the Singapore Strait.

Thus, Mohd Nur Ismal concedes that the final cost is still a moving target. However, a more concrete figure would have been reached by the time the bilateral agreement is signed.

Other factors that may affect cost is the ownership of the stations. Most of HSR’s alignment is on private land, which gives the government the option to acquire the land or jointly develop the stations.

Bandar Malaysia is an obvious example. Mohd Nur Ismal does not rule out the possibility of the government reacquiring some of the land to build the station. However, he notes that the project is open to profit-sharing arrangements under which private companies can build the stations.

“The main thing is to get the maximum value for the government. We will negotiate with the landowners and see what will give us the best value,” explains Mohd Nur Ismal.