kuala lumpur – singapore high speed rail...

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Kuala Lumpur – Singapore

High Speed Rail Project

ContentsIntroduction 1

Schedule 1 − Rationale for the HSR 4

Schedule 2 – Structuring the HSR 6

Kuala Lumpur - Singapore High Speed Rail Project August 2015 i

If you would like further information on any aspect ofthis client note, please contact:

Alex WongPartner, SingaporeT +65 6302 [email protected]

James HarrisPartner, SingaporeT +65 6302 [email protected]

Benita LeeAssociate, SingaporeT +65 6302 [email protected]

This note is written as a general guide only, in respectof the Kuala Lumpur – Singapore High Speed RailProject as of August 2015. It is not intended to providelegal advice and should not be relied upon as asubstitute for specific legal advice.

Contacts

Kuala Lumpur – Singapore High Speed Rail Project August 2015 1

Background

This note serves as an update on the landmarkKuala Lumpur – Singapore High Speed Rail (the“HSR”). The attached schedules provide furtherinsights on the rationale for the HSR and generalstructuring issues.

The HSR

In 2013, Singapore and Malaysia formallyannounced plans to develop the HSR. At around350km, the HSR will connect Jurong East inSingapore with Bandar Malaysia (Kuala Lumpur) inMalaysia with six stops along the way (Putrajaya,Seremban, Ayer Keroh, Muar, Batu Pahat andNusajaya). Services are planned to run four timesan hour, including a non-stop service from BandarMalaysia to Singapore.

Proposed HSR line from Kuala Lumpur to Singapore

Source: The Straits Times, “Malaysia confirms its Sʼpore-KL rail

stations” retrieved 20 August 2015 –

http://transport.asiaone.com/news/general/story/malaysia-confirms-

its-spore-kl-rail-stations

Presently, the HSR has an expected completionperiod of seven years, spanning from the design

phase (one year) to the tender phase (one year) andthen to the construction phase (five years).

A joint ministerial committee has been set up todiscuss the various implementation aspects of theHSR, and a bilateral agreement is set to be signed inthe third quarter of 2015, which will define thetechnical, commercial and governance frameworks.

If successful, the HSR will be the first high speedrailway in South East Asia.

The HSR and existing travel modes

Singapore and Malaysia are presently very well-connected by land, air and sea, and the HSR mustbe viewed as a complementary addition to theexisting infrastructure as opposed to filling in acomplete vacuum.

(a) Land – Singapore and Johor are connected bythe causeway and the second link. Numerouspublic and private bus services use these routesand continue along the North-South Highway toKuala Lumpur.

Singapore and Malaysia are also connected bya railway service operated by Malaysian Railway(“KTM”).

(b) Air – There are full-service airlines and budgetairlines plying the Kuala Lumpur – Singaporeroute.

(c) Sea – There are sea crossings betweenSingapore and Johor, as well as pleasurecruises between Singapore and variousMalaysian ports.

Notwithstanding the existing plethora of options fortravellers, the HSR offers an attractive transportationproposition, and is also a political, economic andsocial development tool. Please refer to Schedule 1for further details on the rationale for the constructionof the HSR.

Introduction

2 Kuala Lumpur – Singapore High Speed Rail Project August 2015

Project structure

Key details of how the HSR will be structured haveyet to be announced. However, some considerationsare likely to come into play:

(a) Financing – The HSRʼs estimated cost is US$11 billion. Given that the development costs arehigh and the return on investment will be on along term basis, some level of governmentfunding may be necessary (even if financing ismostly privately sourced). Should there bepublic funding involved, the issue then centerson the distribution of costs between theSingapore and Malaysia governments, withownership of the rail tracks and rolling stockbeing a related consideration. Although theHSR is a bilateral project, most of the HSR willbe situated in Malaysia. It will be important forboth governments to reach an equitable solutionon this point.

(b) Construction – One possible option would be forboth countries to appoint one contractor toconstruct the entire line. Another option wouldbe for each country to appoint its own separatecontractor to construct the line within itsterritorial boundaries. The second option maybe considered more efficient from a projectmanagement basis, since each country willmanage the construction within its soil, butinterfacing will become a more pronouncedissue.

(c) Operation – It is not clear whether constructionand operation of the HSR will be undertaken by asingle party or multiple parties. Separatingconstruction from operation could allow forspecialisation and greater transparency, and mayalso be a possible way of apportioning the projectbetween the public and private sectors.However, it might also create interfacingdifficulties and inefficiencies as multiple partieswill be involved and each party is entitled to adifferent income source which might not alwaysbe commensurate with its investment costs.Responsibility will be more diffused than under asingle-contractor model, and each contractormay be less incentivised to adopt a broad-basedview of the project. Further, there have alsobeen suggestions for the Malaysian domesticHSR service to be operated separately from theexpress non-stop HSR service between KualaLumpur and Singapore, on the grounds of givingMalaysia complete autonomy over the domesticservice and the ability to tailor it to meet localneeds.

(d) Regulation – It remains to see as to how the HSRwill be regulated. Whilst reference may be madeto regulations governing the railways in bothcountries, the HSR is of a different nature being abilateral project. For example, cross-borderissues such as immigration, national security andcustoms are likely to play a key role in theregulations, whereas these issues would not beof concern in respect of a domestic rail. It is alsounclear whether both countries will be jointlysetting up a single entity to regulate the HSR, orwhether each country will set up an entity that willcollaborate with its counterpart.

Please refer to Schedule 2 for more details onstructuring the HSR.

International interest

The HSR has generated a significant amount ofinternational interest, with companies from China,France, German, Japan and South Korea expressinginterest.

The Japanese consortium is made up of the EastJapan Railway Company (“JR-East”), SumitomoCorporation, Hitachi and Mitsubishi HeavyIndustries1. JR-East is one of the operators of theShinkansen. The Japanese consortiumʼs pitch contends that the Shinkansen design, with smallertunnels and bridges, can be more cost-effective. Theaverage lifespan of a Shinkansen train is also fairlylong – about 16 to 20 years after being in use foraround 10 million km. Finally, the Shinkansenboasts an enviable 50-year safety record of no-fatalities.

The Chinese consortium consists of China RailwayConstruction Corp Ltd (“CRCC”), the Third RailwaySurvey and Design Institute Group Corp and CSRQingdao Sifang Co Ltd1. CRCC is Chinaʼs largest engineering contractor. It has designed more than70% and constructed more than 60% of Chinaʼs high speed rail links.

The decision is likely to be a difficult one, even onthe basis of two competitors (ie. the Japaneseconsortium versus the Chinese consortium). Chinahas the largest high speed rail network in the worldand is aggressively seeking to expand its presenceoverseas, even openly proposing ideas for a railnetwork from Kunming to Singapore. Further, the

1 The Straits Times, 11 May 2015, “Jurong East to be terminus forSingapore-KL high-speed rail: 10 things about the new train line”, retrieved19 August 2015 − http://www.straitstimes.com/singapore/transport/jurong-east-to-be-terminus-for-singapore-kl-high-speed-rail-10-things-about-the


Chinese consortium has reportedly offered a lowerprice and a faster completion time than its potentialcompetitors. Japan, on the other hand, was thepioneering country for high speed rail, and remains aleader in this field, with an unmatchable safety andpunctuality record.

Project costs and benefits aside, election of eitherconsortium would probably have corollary financingconsequences (eg. whether loans will be obtainedfrom Japanese or Chinese export credit agencies).

Conclusion

The HSR currently occupies a Goldilocks sweet-spot,as it connects two major cities at an ideal distance of350km that will bring substantial cost and timesavings.

That being said, cross-border railway projects arecomplex challenging projects, as clearly evinced bythe lengthy period of time that both countries havebeen at the drawing board. With the bilateralagreement expected to be concluded this year, weanticipate more light to be shed on the projectstructure for bidders to consider.

Our selected rail experience

Advising a member of ajoint venture constructingpart of the Taiwan HighSpeed Rail

Advising the generalcontractor consortiumbuilding two lots of the ICE(high speed railway) trackfrom Cologne – Frankfurt,throughout the project andon all aspects

Advising Réseau Ferré deFrance, the French railnetwork operator, and theFrench government inrelation to the Tours –Bordeaux and the Nimes –Montpellier High SpeedRail concession contracts

Advising the BritishRailways Board on itsoriginal proposed jointventure with two leadingprivate sector developers/contractors to build, ownand operate a highcapacity link betweenLondon and the ChannelTunnel Rail Link (a highspeed rail line)

Advising the UKDepartment for Transporton the Intercity ExpressProgramme and theprocurement of the East andGreat Western mainlinerolling stock

Advising the investors onthe HSL Zuid high speedrail link in the Netherlandsand Belgium

Advising PT Sarana MultiInfrastruktur (Persero) onthe pre-feasibility study forthe Soekarno HattaInternational Airport toManggarai high speed raillink project in Jakarta

Advising MTR Corporationon the procurement ofinfrastructure and issues inrespect of the developmentof infrastructure, includingthe procurement of theAirport Railway, NgongPing 360, Quarry BayRelief Line and TseungKwan O Relief Extension,and West Island Line


To understand the rationale for the construction ofthe HSR, the HSR must firstly be viewed against alarger political, economic and social background,secondly against current demand, and thirdly againstthe other existing transportation options.

The HSR and its political, economic and socialcontext

Political perspective

Singapore and Malaysia have historically beenclosely related, and the HSR is seen as a symbol ofstrengthened diplomatic ties. In fact, the HSR wasfirst announced at the 2013 Leadersʼ Retreat, an annual platform between the two countriesʼ Prime Ministers that has traditionally yielded major bilateralagreements.

From a broader ASEAN perspective, the ASEANmember states have repeatedly affirm their desire tomove towards greater regional integration andconnectivity. For example, there are plans toestablish an ASEAN Economic Community thatwould allow for free movement of goods, servicesand labour. The HSR could prove to be a showpieceof this wider ASEAN goal.

Economic perspective

The HSR would make day trips between KualaLumpur and Singapore even more convenient, be itfor business or leisure, and thus act as a catalyst foreconomic growth.

For the Malaysian government in particular, the HSRis a key piece of the Economic TransformationProgramme that targets to raise the GNI per capita toat least US$15,000 by 2020. The Malaysian railwaystations will be strategically located at areas whichhave been targeted by the government for economicdevelopment. For example, Seremban is currentlyalready a major satellite city for Kuala Lumpur and ispositioned to be a technology hub. The Malaysiagovernment anticipates that the transformationaleffects will filter down into each of these regions andtheir peripheries.

Social perspective

The HSR is an important infrastructure project thatwould improve connectivity and accessibility forpeople living near the stations.

For Singapore, the HSR also forms part of a largerurban development plan to develop regional centresoutside of the central business district. For manyyears, land-scarce Singapore has facedtransportation and congestion issues in the centralareas and the government is trying to resolve thisissue by dispersing human traffic. As such, theSingapore HSR terminus will be located in JurongEast – once a traditionally industrial area withresidential pockets, that is being developed into andrevitalised as a mixed-use self-contained urbandistrict (the Jurong Lake District).

The HSR and current demand

The demand for Kuala Lumpur-Singapore tripsappears to be high. The Kuala Lumpur-Singaporeroute has seen strong growth in passenger-km oftravel, with the total travel market growing from 5.47million passenger-km in 2005 to 7.45 millionpassenger-km in 2011.

Base transport demand in HSR corridor (only relevantroutes)

Source: Malaysian Land Public Transport Commission, “Projects -High Speed Rail”, retrieved 22 July 2015 − http://www.spad.gov.my/projects/high-speed-rail

Schedule 1Rationale for the HSR


Present demand also exceeds the capacity of theexisting infrastructure. For instance, demand for theuse of the causeway, one of the two bridgesconnecting Johor Bahru and Singapore, exceedscapacity by 33%. The market for Kuala Lumpur-Singapore trips is expected to continue growing at acomparable rate to the GDP growth of Malaysia andSingapore, at an average of 3 to 5%. In the long run,as the market matures, the growth rate might slowdown. Nevertheless, average growth is still expectedto hover around 3.2% from 2011 to 2060, with amarket of 251 million passenger trips by 2060.

Hence, it appears that the HSR would add anotheroption to meet increasing demand.

The HSR and its competitive edge

Ticket sales are partially dependent on the HSRʼs advantages vis-à-vis its competitors, especially interms of price and time. The HSRʼs closest competitors appear to be budget airlines and buses.

Presently, single-trip tickets for the HSR areanticipated to cost around US$57-US$64. This isroughly the same price range for a single-trip flighton a budget airline, but is possibly a morecomfortable ride and a faster one (when the boardingand security checks are factored in). Budget airlineswould nevertheless retain an advantage in respect oftransit passengers as the HSR termini are located farfrom their respective airports.

Buses have a price advantage over the HSR, andhave the flexibility to pick up and drop off customersat a greater variety of locations. However, they aresignificantly slower than the HSR.

Estimated travel time and cost for a single-way tripbetween Kuala Lumpur and Singapore

Mode oftransport

Estimated time(excluding customs

clearance)

Estimated time(including customs

clearance)

Estimated cost(US$)

KTM railway 400 mins 430 mins 9 – 34

Bus 240 mins 270 mins 18 – 36

Plane 60 mins 170 mins Budget airlines:57 – 64

Full-serviceairlines: 178

HSR 90 mins 120 mins 57 – 64


Costs

High speed rail projects are complex and expensive.The 3 main construction cost components are asfollows:

(a) Planning costs such as feasibility studies,typically a sunk cost, usually account for 5 to10% of the total investment.

(b) Infrastructure building costs, including terrainpreparation and platform building. Thiscomponent varies widely across projectsdepending on the characteristics of the terrain,but typically accounts for between 10 to 25% ofthe total investment. If there are technical issuesand geographic obstacles, this amount mayeasily double (up to 40 to 50%) for bridges andtunnels.

(c) Superstructure costs usually make up the rest ofthe infrastructure costs and consist of all rail-specific elements.

Construction costs aside, as the HSR will likely be agreen field project, land acquisition costs for theconstruction of the stations and the tracks couldsignificantly increase the investment. Landacquisition is especially expensive if the HSR runsinto densely concentrated downtown areas (whichwill almost certainly be the case at the Singaporeside of the tracks).

At present, it is clear that land for both termini willneed to be acquired. Singapore has chosen tosituate its terminus on land which is currentlyoccupied by the Jurong Country Club, whileMalaysiaʼs choice of terminus location is a plot of land currently occupied by the Royal Malaysian AirForce. With respect to other portions of the HSRline, plans are presently for parts of the HSR to bebuilt on elevated platforms and underground so as towork around land constraints and avoid landdisputes.

Source of funds

Financing for high-speed rail projects may come froma range of sources, including public funds, state-owned enterprises and private investors.

Full public financing

Full public financing requires the government tofinance the total investment. The government usesfunds from either tax revenue or public sectorborrowing such as bonds. Public financing may bedirect, or combined with funds from national railwaycompanies. A major concern with public financing isthe burden of public debt. Further, the governmentmight need to take on the role of long term developerand owner of the project.

In the case of the HSR, we do not anticipate theproject to be fully financed by the public sector, giventhe potential huge costs involved.

Public-private partnership (“PPP”)

In order to combat increasing public debt, someprojects have adopted PPP financing arrangements.

From a government perspective, a PPP arrangementshould ideally be structured such that thegovernment need not incur any borrowing. Rather,the borrowing is incurred by the private sectorvehicle implementing the project. Accordingly, thegovernment may benefit from new railwayinfrastructure in an “off-the-balance sheet” manner.

In practice, however, many PPPs come withsignificant government guarantees or financing, dueto project risks such as high upfront sunk costs, aswell as long and difficult construction phases.

Finally, it should be noted that public financing andprivate financing are not necessarily mutuallyexclusive. It may be possible for parts of the projectto be fully financed while others are based on a PPParrangement. For example, for the HSR,construction of the infrastructure could be publiclyfinanced while the operations could be contractedout on a PPP basis.

It appears that the HSR will be open to private sectorparticipation with possible local contentrequirements. Private sector participation will bringwith it ownership considerations of the track, stationsand rolling stock.

Schedule 2Structuring the HSR


Capital servicing

The income stream from a railway project can beused to repay the upfront capital. Typical incomestreams of a railway project include revenue fromretail, advertising, property development, tolls andfees. It is necessary to identify how much of thecapital cost can realistically be financed throughusage-generated revenue, and how much must befinanced through other sources of income.

The most significant income stream is likely to befrom the ticket fares collected by the rail operator.This will depend on the ridership of the railway. Assuch, high-speed railways should only be built ifjustified by strong demand.

Given the strong existing demand for the KualaLumpur – Singapore route and the competitive edgeof the HSR over other transportation options, thisshould not principally be an issue for the HSRalthough feasibility studies should still be undertakento obtain more detailed forecasts.

Project structure considerations

Financing for the HSR cannot be considered inisolation. Instead, the project and its financing shouldbe structured in tandem to maximise cost-efficiencyand to ensure reliable returns.

Build profitable route first

In the case of the HSR, the non-stop express servicebetween Kuala Lumpur and Singapore is probablythe most profitable route as it connects two largemetropolises. Ensuring that the most profitable routeis the first one up and running might make financingfor subsequent parts easier. Prioritisation of the non-stop express service between Kuala Lumpur andSingapore would mean establishing the termini first.Although the service will travel through areas whereother stations will eventually be constructed, suchstations could be built at a later stage.

Different financing models for different sections

Increasingly, governments look to applying differentfinancing models to different sections of the project.Decisions are made based on socio-economicfactors for each section of the network, as well asestimated returns.

Mix-and-match of financing models should be donecarefully, however, and not without thorough financialappraisal and feasibility study of the project.

Time costs

Structuring and negotiating PPP arrangements cantake far longer than government financing. If there isgreat urgency for the new infrastructure, thegovernment might need to fall back on simplerfinancing models. In the case of the HSR, we do notsee pressing time constraints given the availability ofother transport options. The various politicalcommitments made by both governments in respectof a 2020 deadline should be noted, although suchdeadline is reportedly being re-assessed.

Project risks

The HSR is a complex challenging project, given thenumber of risks involved including:

(a) Delay – apart from the usual delay risks, the HSRis a bilateral project and coordination time mayresult in further delays. For example, there arelikely to be a large number of third party consentsrequired from both governments.

(b) Demand/revenue – given the high developmentcosts, the HSR would probably need a decade orso to turn profitable. Within this period,demand/revenue may fall below projections. Forexample, competing modes of travel might besubsequently introduced or enhanced, or overalldemand for the Kuala Lumpur – Singapore routemay fall, and the various modes of travel maycannibalise one another.

(c) Project limitations – while there are potentialrevenue sources such as retail and advertising, itis likely that most of the revenue will have tocome from ticket fares. Also, unlike a bus orairline company which can change routes ordeploy its vehicles on other routes, it is not asstraightforward to change the railway route or todeploy the rolling stock elsewhere should theHSR be less profitable than expected

(d) Compliance – the operator may face compliancecosts and regulatory restrictions in itsmanagement of the HSR (eg fare adjustment).

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