KL-Singapore high-speed rail: How profitable can it be?
Population density in Kuala Lumpur may not be high enough to make the KL-S'pore high-speed rail profitable. Instead profitability will depend on the extent of regional economic integration and how urban clusters unfold within Asean.
Tomoo Kikuchi For The Straits Times
Aug 1, 2018, 5:00 am SGT
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The Kuala Lumpur-Singapore high-speed rail (KL-SG HSR) project is under review following the election of a new government in Putrajaya led by Malaysian Prime Minister Mahathir Mohamad. Whatever the outcome, there is one issue that needs to be looked at more closely: profitability.
The project's profitability will depend on the extent of regional economic integration - the free movement of people, labour, goods and capital across national borders - as well as how urban agglomeration unfolds within Asean.
Urban agglomeration refers to the development of a large, densely and contiguously populated area consisting of a city and its suburbs. As a city grows, more companies in related fields of business cluster together, lowering their costs of production, attracting more companies, workers and customers. Households move to neighbouring areas creating suburbs. Urban agglomeration forms and grows to exploit this increasing return to scale.
An HSR expands urban agglomeration as it drastically enlarges the geography from which cities attract people and business seamlessly. So the cities where the HSR stops - HSR hubs - will interact with their suburbs and will form larger contiguous outgrowths. Ultimately, the denser the population linked to the HSR, the more profitable the project will be.
HSR PROJECTS IN SOUTH-EAST ASIA
The KL-SG HSR was announced in 2010 to connect Kuala Lumpur to Singapore. Both governments signed a memorandum of understanding in July 2016. Construction was expected to start this year, followed by testing and commissioning in 2024-2026.
Once in operation by the end of 2026 - should the Mahathir government proceed with it - the KL-SG HSR is expected to shorten the travel time between the two cities to 90 minutes, compared with four to five hours by road, seven hours by conventional rail service or three hours by air. The total distance of this project covers 335km in Malaysia and 15km in Singapore.
On May 13, however, within a week of the Pakatan Harapan government being elected in Malaysia, Tun Dr Mahathir said he would review all foreign contracts and projects, including the KL-SG HSR.
No HSR is in operation so far in South-east Asia. The HSR project in Thailand between Bangkok and Nakhon Ratchasima is scheduled to be operational between this year and the next. The Thailand and Malaysia-Singapore projects are part of a Pan-Asia railway network, being planned or under construction, that would connect Kunming to Singapore.
Minimum estimated cost of the KL-SG HSR project, However, there is not much analysis on whether the project will make operational profit to recover the cost.
Predicted profit for every dollar of sale for the KL-SG HSR on the domestic line, according to the writer's study, based on data gathered from several countries.
The idea of a Pan-Asia railway network is not new, originating from British Malaya and French Indochina times. It was revived in November 2006 when 17 Asian and Eurasian countries signed the Trans-Asian Railway Network Agreement under the auspices of the United Nations Economic and Social Commission for Asia and the Pacific. There are plans for three major routes. The central route goes through Bangkok and KL. The western route goes through Yangon, Bangkok and KL. The eastern route goes through Hanoi, Ho Chi Minh City, Bangkok and KL. The KL-SG line is the last link of the network that would connect to all three routes.
PROFIT MARGIN AND POPULATION DENSITY
The cost of the KL-SG HSR project has been widely cited to be between $24 billion and $37 billion.
However, there is not much analysis on whether the project will make operational profit to recover the cost. We know from various studies in other countries that the operational profit of HSR is closely related to population density. The KL-SG HSR international line and the domestic line have a population density of 5,454 and 1,441 per sq m respectively.
From the population density and profit margin of HSRs in several countries, our study predicts that the international line and the domestic line can have a profit margin of 0.15 and 0.02 respectively. This means that every dollar of sales makes a profit of 15 cents for the international line and a profit of two cents for the domestic line. This may look promising, especially for the international line.
However, the profit margin of the KL-SG HSR will mostly likely be lower than this as it is planned to serve solely passenger transport.
In contrast, HSR companies in our study diversify their business. For example, most Japan Railway (JR) companies have a deficit from the HSR operation but make a profit in areas such as retail and services, and real estate and hotels.
The Europeans have started freight services in recent years to boost their operational profit. Only JR Central, which connects the route between Tokyo and Osaka, makes an annual operational profit of some $8 billionand derives over 90 per cent of its revenue from HSR passenger transport alone.
Will the population density of the KL-SG HSR project be high enough to make a profit from solely operating the HSR for passenger traffic? After all, only JR Central has managed to make a profit from such a model. The United Nations predicts that the population density of Singapore will be as high as that of JR Central but that of KL will only be half as high by 2030.
There is strong evidence that the population distribution across cities follows the so-called "rank-size rule" showing a relationship between the population size of cities and their ranking by size. For example, the largest city in a country will tend to have twice the population of the second-largest city and three times the population of the third.
This rule has been shown to hold true largely for city populations in a country. The high degree of economic integration within a country facilitates urban agglomeration and cities are formed following the rank-size rule.
The United Nations predicts that Bangkok's population will reach 12 million by 2030, the largest among the major cities in mainland South-east Asia.
However, the rank-size rule in our study predicts that the largest city would have a population around 20 million since Ho Chi Minh City, the second largest city, is predicted to reach 10 million.
This gap of eight million indicates the lack of regional economic integration limiting the effects of urban agglomeration in the region. On the other hand, it suggests that the largest cities in the region such as Bangkok, KL or Ho Chi Minh City can potentially grow up to 20 million if regional economic integration deepens.
The distance from Kuala Lumpur to Bangkok (1,187km) is too long for an HSR to compete with airlines. Hence, urban agglomeration effects generated by an HSR link between the two cities will not be significant as not many people will use the link. (Tokyo-Fukuoka has a shorter distance, 883km, and an HSR ride-share of less than 10 per cent.) Therefore, we expect that urban agglomerations such as metropolitan Bangkok, Ho Chi Minh City and KL will emerge and grow separately.
Only one city will emerge as a 20-million-population metropolitan area, according to the rank-size rule. Or perhaps, we will never see that level of regional integration in mainland South-east Asia.
So while the KL-SG HSR may not be profitable if you look only at the KL and Singapore populations separately, it can serve as a catalyst for the two cities to strengthen their positions as regional economic hubs to form mega urban agglomerations, which would attract populations from other cities and increase the likelihood of making the project profitable. In other words, for the HSR to be profitable, planners may need to look beyond Singapore and KL, to the regional economic effects of having such a speedy connection that links the two cities to larger cities further north.
•Dr Tomoo Kikuchi is a visiting senior fellow at the S. Rajaratnam School of International Studies, Nanyang Technological University.
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