• Five reasons why public transportation in Malaysia is more expensive compared to Singapore

    Media Statement by Dr. Ong Kian Ming, MP for Serdang, on the 9th of August, 2016

    Five reasons why public transportation in Malaysia is more expensive compared to Singapore[1]

    An MRT ride from the Pasir Ris MRT station in the east to the Pioneer MRT station in the west costs approximately SGD2. An LRT ride from the Gombak station (KJ1) to Putra Heights (KJ37) costs RM6.10.[2] Why does the LRT ride cost three times more in Malaysia compared to Singapore on a dollar for dollar basis?[3] The answer to this question is complex but let me propose a few possible reasons to explain this phenomenon.

    1) Prasarana is unprofitable and has accumulated massive losses over time

    Prasarana Malaysia Berhad is the 100% Ministry of Finance owned company which owns and operates the LRT and bus assets in the Klang Valley (as well as Penang, Kuantan and Kamunting) i.e. MyRAPID. In Singapore, the rail services are mostly operated by SMRT while the bus services are mostly operated by SBS Transit (although there is a limited amount of competition between the two companies).

    Since Prasarana was established in 1998 to take over the assets of the STAR and PUTRA LRT lines, the company has only managed to be profitable in 2 years, way back in 1999 and 2000. It has been making losses in 15 out of the last 17 years. The annual losses reached a record high of RM885.6m in 2014. In contrast, SMRT has recorded a profit in each of the past 16 years while SBST has recorded a profit in each of the past 6 years[4]. (See Chart 1 below)

    Chart 1: Comparing the Profit / Losses of Prasarana in Malaysia and SMRT & SBST in Singapore

    Given this, it is not surprising that Prasarana has accumulated losses of RM5.182billion as of FY 2014 compared to SGD741m and SGD261m in accumulated profits for SMRT and SBST respectively as of FY 2015. (See Chart 2 below)

    Chart 2: Comparing the Accumulated Profits / Losses of Prasarana, SMRT and SBST

    Why are the profits / losses of these public transportation companies important in determining public transportation prices? Because a public transportation company which continues to stack massive losses over time will either have to be bailed out by the shareholders i.e. the government of Malaysia in the case of Prasarana or it will have to reduce its losses by increasing public transportation fares. This is exactly what happened in December 2015 last year when SPAD finally approved the LRT and Bus price hike which Prasarana had been requesting for many years.

    It remains to be seen if the recent fare hike will help Prasarana get into the black but if it doesn’t, it would not be surprising if Prasarana asks SPAD for another price hike in the near future.

    One of the reasons why both public transportation companies in Singapore are profitable is that a far larger number of people take public transportation in Singapore compared to the Klang Valley. The MRT daily ridership in Singapore was almost 3 million in 2015 compared to slightly less than 500,000 for the LRT in the Klang Valley. But there is a far more important reason why Prasarana has been stacking up significant losses over the years and this has nothing to do with ridership numbers and all to do with the high financing costs to service its debt.

    2) Prasarana has very high financing costs because of its high debts

    At the end of Financial Year 2014, Prasarana was carrying a total debt of RM13.6 billion. As a result of this high debt burden, it was paying out finance costs totalling RM399 million in 2014. Its financing costs was 81% of its total revenue of RM490 million. In other words, 8 out of every 10 dollars which Prasarana was taking in was being used to service its debt. And this is not even taking into account operational costs such as paying salaries and electricity bills!

    In comparison, SMRT, which had revenues of SGD1.3b in 2015, was carrying debts totalling SGD821m in 2015. SBST, which had slightly lower revenues of SGD1.0b in 2015 was carrying debts totalling SGD338m. No wonder that their finance costs was 1% and 0.6% of revenue respectively! (See Chart 3 below)

    Chart 3: Revenue, Finance Costs, Borrowings and Finance Costs as % of Revenue (Prasarana, SMRT and SBST)

    Prasarana should not be directly blamed for its high debt levels. Some of it was accumulated as a result of having to ‘bail out’ the companies which built and operated the STAR and PUTRA LRT lines as well as the KL Monorail and also to buy buses from certain bus operators namely Intrakota, Cityliner and Putraline.

    But at the same time, Prasarana needs to take responsibility for taking on excess debt as a result of expensive public infrastructure projects. For example, 70% of the cost of the RM634m elevated Bus Rapid Transit (BRT) line in Sunway, Subang Jaya, had to be borne by Prasarana. At RM117m per km, the 5.4km BRT must count as one of the more expensive BRT projects in the world on a km basis (approximately US$30m per km).[5]

    Moving ahead, it is hard to imagine the fare rise at the end of 2015 helping to increase Prasarana’s profitability because of the continued increase in its debt. As of April 2016, Prasarana’s debt has ballooned to more than RM20 billion which will definitely increase its finance costs.[7] So for those of you who are thinking that LRT or Rapid fares will remain where they are, you may want to think again!

    3) Prasarana has a relatively low non-fare revenue

    Operators of public transportation often have to depend on other sources of income in addition to the revenue collected from ticket sales. These income sources are known as non-fare revenue which would include revenue from advertising, rental of space at LRT stations and even property development at LRT stations. Currently, Prasarana’s non-fare revenue is less than 15% compared to 28% for SMRT in Singapore.[8]

    Prasarana faces certain challenges when it comes to increasing its non-fare revenue. Advertising at bus stops, on buses and at train stations are regular income earners for public transport operators around the world. In Malaysia, many advertisers are reluctant to advertise via these channels because of the perception that the middle class drive cars rather than take public transport. For example, most of the bus stops in the Klang Valley do not feature any advertisements, even in places where there is a high number of passengers. From my conversation with some industry sources, it seems that advertisers would rather spend their money on big billboards along major highways to capture the ‘eyeballs’ in cars rather than to advertise on buses or at bus stops. To overcome this challenge, Prasarana has to make it much more convenient for people to switch from their cars to public transportation which includes expanding its network of feeder buses, shortening waiting times for buses and making sure that taking the LRT during peak periods is not an unpleasant experience, to put it mildly.

    Prasarana, also has ambitious plans to increase property related income through its property development arm, Prasarana Integrated Development Sdn Bhd or PRIDE.[9] The target is to achieve as much as 50% of revenue via non fare sources by 2020.[10] The model of public transport operators going into property development to cover its operating and even some of its capital expenditure is Hong Kong’s MTR. Given Prasarana’s financial position, this is not necessarily a bad move but property development ventures should not distract Prasarana from its main goal as a public transport operator.

    4) SPAD has done a very poor job of fare regulation in Malaysia

    One of Prasarana’s reasons for why it was always making losses is because the LRT fares had not been revised for 15 years. This is prior to the fare hike which took place in December 2015. One of the reasons why the quantum of the fare hike was so high (by more than 100% on some routes) is because Prasarana did not know when SPAD would allow it to increase its fare again. So they decided to strike while the iron is hot and to maximise the fare increase.

    SPAD has done a very poor job in terms of fare regulation in Malaysia. There is little to no justification or explanation on how fares for various forms of public transportation are adjusted, usually upwards. It almost seems as if SPAD bases its decision on how much of a rise in taxi or train fares the public can withstand or ‘tahan’. And then, it will wait for some time before fares are adjusted again. This creates a vicious cycle whereby public transport operators will try to get the highest possible fare raise when SPAD allows for a fare adjustment.

    Singapore established a statutory body called the Public Transport Council (PTC) which has the power to regulate train and bus fares.[11] It works close with but is separate from the Land Transport Authority (LTA) which is the equivalent of SPAD in Singapore. Since 2013, the PTC conducts an annual fare review exercise to adjust the bus and train fares based on a publicly announced formula which includes inflation, changes in wages and the cost of energy.[12] Not only is this a more transparent way to determining the fare structure, in some cases, it can also result in the reduction of fares because of a drop in energy prices as was the case in December 2015.[13] The fare adjustments are usually in small amounts so that public transportation users are not unfairly ‘hit’ by a sudden hike in prices.

    The PTC also introduced progressive pricing policies such as distance pricing meaning that the cost of a journey is calculated based on distance regardless of whether you take a bus or train or both. This means that you won’t be charged extra if you change from a bus to a train or vice versa since it is part of a single journey you are taking, to work or to school, for instance.

    5) The Malaysian government does not want to directly fund public transportation infrastructure

    It is not feasible or realistic to expect public transport operators to cover the high costs of constructing a rapid transit train line. What usually happens is that the government will pay for the costs of construction while expecting the operator to cover at least its operation costs and perhaps make a small operating profit.

    Singapore has been moving to a model where the government funds the construction of the public transportation assets e.g. train tracks, rolling stock while a separate operator e.g. SMRT will run the services related to these assets. In a recent development under the New Rail Financing Framework (NRFF), the government will buy over all the operating assets of SMRT and then sign a long term contract with SMRT to run and operate the MRT services.[14] This means that the operator can fully focus on the running of the trains without having to worry about paying for new rolling stock or funding future train lines. The government benefits too because it can impose more stringent standards of efficiency and quality on the operator and fine the operator if these standards are not met.

    In Malaysia, at least for the LRT, the funding of the previous and upcoming lines comes directly from Prasarana including the proposed LRT 3 line. This means that the debt of Prasarana will continue to grow as mentioned above.

    One of the main reasons why the Malaysian government does not want to directly fund the construction costs of these public transportation projects is because of its budget position. Malaysia has been registering budget deficits since the 1998 Asian financial crisis (See chart 4 below). To assure foreign investors that government debts are manageable, the government has made a commitment to reduce its budget deficit to zero by 2020 and not to exceed a 55% government debt to GDP ratio. What this means is that the costs of financing public infrastructure projects have been shifted to government owned companies such as Prasarana. Prasarana’s debt is not registered officially as Malaysian government debt which means the government can continue to pretend that it is reducing the budget deficit. The cost of this ‘pretence’ is that companies such as Prasarana will be forced to resort to increasing the amount of revenue it can extract from the ‘rakyat’ via measures such as fare increases.

    The Singapore government is able to absorb the costs of public infrastructure directly because it has a record of running healthy budget surpluses with the exception 2009 and 2015 (see Chart 5 below). This is why the Land Transport Authority (LTA) was able to announce recently that it was buying the operating assets of SMRT at a price tag of SGD1.06 billion.[15]

     Chart 4: The Malaysian Government Budget Surplus / Deficit as % of GDP (1988 to 2015)

    Chart 5: The Singapore Government Budget Surplus / Deficit as % of GDP (1988 to 2015)

    This does not mean that public transportation is all well and good in Singapore. The MRT system experienced serious breakdowns in 2011 and smaller breakdowns subsequently which ultimately costs two Ministers of Transportation their jobs. But in terms of affordability, Singapore is in a far better position compared to Malaysia.

    What are the implications for public transportation users in Malaysia moving forward? Firstly, if there are no improvements in the manner in which the LRT and Rapid buses are financed and regulated, we should expect more increases in fare charges in the near future.

    Secondly, we need to examine the business relationship between MRT Co, the owner of the new Sungai Buloh-Kajang (SBK) MRT Line 1, and the operator of the line, which will be Prasarana, to see its impact on the profitability of Prasarana as well as of MRT Co. MRT is not directly bearing the costs of construction the SBK line. A separate special purpose vehicle (SPV) called Dana Infra has been issuing government backed bonds to pay for the construction costs. MRT recently signed a 10-year lease agreement with Rapid Rail, a Prasarana subsidiary, for it to run the operations of the first MRT line.[16] All the fares will go to Rapid Rail while MRT will receive revenue from advertising and rental. If Prasarana performs well, the MRT contract can help reduce its losses and perhaps reduce pressure to increase fares.

    We have a long way to go before we can achieve Singapore’s affordable public transport pricing. One the keys to getting there is knowing where we are at now.

    Dr. Ong Kian Ming
    Member of Parliament for Serdang

    [1] Data for Prasarana taken from its annual returns to the Companies Commission of Malaysia (CCM), data for SMRT and SBST taken from their annual reports which are available on their website.

    [2] RM6.10 is for a cash token. A cashless token costs RM5.30.

    [3] There is no point to convert from RM to SGD or vice versa because we want to know how much a Malaysian would pay to take public transportation in Malaysia versus how much a Singapore would pay to take public transportation in Singapore. Bear in mind also that Singapore’s GDP per capita is 5 times that of Malaysia’s.

    [4] Pre 2009 data was not available in the SBST website.

    [5] For a more thorough discussion of the Sunway BRT project, please refer to the following report by Penang Institute: http://penanginstitute.org/v3/research/penang-institute-in-kuala-lumpur/the-sunway-bus-rapid-transit-brt-line-lessons-for-the-future

    [7] http://www.ram.com.my/pressReleaseView.aspx?ID=347ff69a-f151-482d-b0a9-0ae287cf9f70

    [8] SMRT’s non fare revenue includes revenue from the rental of taxis.

    [9] http://www.myrapid.com.my/corporate/our-business/core-business/pride

    [10] http://themalaysianreserve.com/new/story/prasarana-move-boost-non-fare-revenue

    [11] http://www.ptc.gov.sg/about/overview.htm

    [12] https://www.ptc.gov.sg/regulation/annualFareReviewProcess.htm

    [13] http://www.ptc.gov.sg/FactsAndFigures/chronologyOfFareAdjustments.htm

    [14] http://www.straitstimes.com/singapore/transport/government-and-smrt-reach-agreement-on-new-rail-financing-framework

    [15] http://www.straitstimes.com/singapore/transport/government-and-smrt-reach-agreement-on-new-rail-financing-framework

    [16] http://www.thestar.com.my/business/business-news/2016/07/02/mrt-corp-rapid-rail-sign-mrt-handing-over-deal/

3 Comments

  1. Waterfrontcoolie says: August 10, 2016 at 2:39 pmReply

    If you don’t get your basics right, there is no way you can control the cost; especially if the cost of construction is based on ‘donation plus’ basis. And that was the fundamental problem with our scenario. In a way we are quite similar to US though they have the freedom to print their petro-dollars whenever they need to. With all the predictions made by those who disagree with the RULERS of USA, we can only wait for the final outcome in the next couple of years. As for us, we can only wait for the exchange rate to continue to drop. we use to be RM1 = 10 Baht; now it is 8 plus come 2020, who knows, it could be RM1 = 5 Baht.

  2. waterfrontcoolie says: August 10, 2016 at 11:06 pmReply

    I think a better example should be the Hong Kong MRT where the Board was just presented with the land upon which the MRT would run;and the Board was expected to use the land provided to work with various parties to create the viability pf both the MRT and the financial from their investments along the track. It makes plenty of common sense when its passengers can simply climb a level or two above the station to do their marketing before going home. Indeed high rise apartments are built above such location to further minimize logistics and transportation. In fact the confrontation if it could be called as one, along MRT path in KL City was plain stupid. Why can’t the landowners/house owners be invited to develop the location jointly? Obviously the thinking through wasn’t there in the first place! I for one totally support the concept by having the whole Klang Valley or even the Greater Klang Valley – stretching from Tanjong Malim to Seremban to be joined by MRT with spurs radiating through Selangor. Yes you need the number to make it viable.

  3. John Doe says: August 12, 2016 at 11:08 amReply

    I find your analysis in point 1 to be disingenuous and misleading and you admitted so yourself in point 5. In comparing Prasarana with SMRT and SBST you are comparing apples to oranges. Prasarana has to bear the burden of hard infrastructure costs (e.g. rail track, viaducts, tunnels) as well as rolling stock while SMRT and SBST are ‘asset-light’ companies which only operates the assets owned by the government. As such SMRT do not need any debt since it is essentially a service company. How much does the Singapore government pay for all the infrastructure? We do not know but it’s bound not to be cheap as a big portion of SMRT’s track is underground. If the Singapore government can bear the infrastructure costs and not charge SMRT/SBST the fair market charges for financing and depreciation, naturally SMRT/SBST can offer cheap fares.

    If you want to have a proper discussion and analysis of the issue, make sure you lay out ALL the facts for consideration and not just pick and choose the numbers which prop up your argument.

    I’m all for better/cheaper transportation for Klang Valley but the discussion must be targeted finding solutions rather than simply trying to score points.

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