Highly competitive: Further investments in air, road, sea and rail infrastructure

Situated at the heart of some of the world’s most important trade routes, Malaysia has long been a global transportation hub. In more recent years too, the country’s economy has undergone sustained growth, with the government’s declared aim that of pushing this further to achieve high-income country status by 2020. Key to meeting this goal is enhancing transport infrastructure, with major investments in air and sea, road and rail currently under way. At the same time, the logistics sector is also being reshaped with longer-term trends in mind. In the meantime, the sector remains highly competitive, with air transport in particular seeing some fierce price wars in 2013-14 (see analysis).

Transport companies across the spectrum though have recently been pursuing a variety of strategies to keep down costs, while boosting their international connectivity and competitiveness.

Major Contribution

Figures for the fourth quarter of 2013 from the Department of Statistics (DoS) showed that the transport and storage sector employed 648,900 people out of a total workforce of 13.65m, making 4.8% of the total. The figure at the end of 2012 had stood at 624,000, indicating 3.9% growth.

The most recent census – for 2010 – confirmed a trend of expansion in the sector, with a compound annual growth rate (CAGR) of 4.5% registered in the number of transport establishments between 2003 and 2010, and a 1.5% CAGR in employment in the sector. The same census report declared a 5.9% CAGR in the value of gross output in the sector over the 2003-10 period, an 8.2% CAGR in value added and an 8.3% CAGR in the sector’s total fixed asset value, which stood at RM89.52bn ($27.9bn) in 2010. The proportion of these indicators taken up by different branches of the sector is not thought to have varied much since, although post and courier has seen some recent expansion. The figures show 89.2% of the firms in the sector engaged in land transport activities, employing 48% of those working in the industry. Warehousing and support accounted for 8.3% of firms and 25.8% of employees, while air transport took 2% of the establishments and 9.3% of those employed, water transport 0.1% of the companies and 7.7% of the employees. The remaining segment was post and courier, taking up 0.5% of the establishments and 9.3% of the employees.

In terms of value added, warehousing was the top contributor in 2003-10, with 43% of the total, followed by land transport with 22.3%, air transport with 15.7%, water transport with 15%, and post and courier with 4%. Warehousing also had the highest value of fixed assets, at 34.3% of the total, and the highest value of gross output, at 31.3%. Water transport had 30.2% of the former and 15.9% of the latter, while air contributed 21% of the total fixed asset value of the sector and 25.8% of the gross output value. Land, meanwhile, contributed 13.7% of the value of fixed asset value and 23.2% of the gross output value, while post and courier contributed 0.8% of the former and 3.8% of the latter. Air, water and warehousing are the most important contributors to value added and gross output.

Another finding of the 2010 census was that the majority of transport establishments are based in Selangor, Sabah, Johor and Sarawak. When it comes to value added and gross output, however, the eastern Malaysian states drop away, and Selangor retains its national lead. This reflects the major industrial and commercial activity of Selangor, along with the difficulties of transportation in the Borneo states of Malaysia, where infrastructure is far less developed.

Increasing Prices

Prices in transport have also risen in recent years, with consumer price index (CPI) inflation in the sector up 5.3% between January 2013 and January 2014, according to the latest DoS figures – a statistic that placed transport among the highest price increases. Indeed, transport has seen a steady rise in prices for the past few years – the DoS data shows a CPI index figure of 104.4 in 2011, 105.1 in 2012 and 107.2 at the end of 2013, rising to 110.9 for January 2014. The costs reflect higher petrol prices and hikes in other costs. In September 2013 the government reduced fuel subsidies, which have historically kept prices down while also building a high fiscal burden for the state. Petrol and diesel prices went up some RM0.20 ($0.06) per litre for RON 95. Electricity tariffs were also hiked by 16.85% in January 2014 for commercial establishments, a cost increase likely passed on by transport companies in their pricing. Some analysts also expect further price rises in 2014, with the government under pressure to reduce fuel subsidies further, and a goods and services tax is also due to start in 2015.

The most recent statistics from the Economic Planning Unit regarding transport’s contribution to GDP are from 2012, when services as a whole contributed 54.6% to GDP at constant 2005 prices, with transportation and storage accounting for 6.7% of the services total, or around 3.5% of the grand total.

Sector Bodies

The main governmental organisation in the sector is the Ministry of Transport (MoT), which is divided into four departments covering road transport, road safety, civil aviation and marine. The port authorities of Port Klang, Johor Port, Kuantan and Bintulu, and the Penang Port Commission come under the MoT, as does the Malaysian Institute of Road Safety Research (MIROS), the Maritime Institute of Malaysia and the Railway Assets Corporation.

The Malaysian Maritime Enforcement Agency (MMEA), also known as the Malaysian Coast Guard, is the principal government agency tasked with maintaining law and order and coordinating search and rescue operations in the Malaysian maritime zone. In addition, the agency is responsible for protecting Malaysia’s strategic interests in the South China Sea. To this end, the MMEA is looking at upgrading its offshore patrol vessels (OPVs). “In order to adequately patrol exclusive economic zones, which are more commonly known as the 200 nautical miles that can be developed by a country, and protect strategic economic contributors such as oil and gas and fishing industries, we will need to upgrade our vessels with OPVs,” Mohd Amdan bin Kurish, director-general of the MMEA, told OBG. “Taking it a step further, OPVs should be equipped with unmanned aerial vehicles that can help monitor by air the area around their respective OPV.”

In roads, there is also the Malaysian Highways Authority (MHA), which comes under the Ministry of Works (MoW). The MoW’s Public Works Department is engaged in road construction repair and maintenance, along with airport and port infrastructure, while the Highway Planning Unit, another MoW entity, oversees and develops strategic highway programmes.

In addition, since the coming into force of the Land Public Transport Act 2010, the Land Public Transport Commission (known by its Malay initials, SPAD) has taken on an important role in land transport. Reporting directly to the prime minister, SPAD is responsible for drawing up policy, planning and regulating all aspects of train, bus and taxi services, and road- and rail-based freight transport. SPAD also took over the tasks previously performed by the Commercial Vehicle Licensing Board, the Department of Railways, and the licensing of tourism vehicles units within the Ministry of Tourism – except in Sabah and Sarawak. SPAD is tasked to work in conjunction with the relevant MoT land transport bodies, along with the Royal Malaysian Police (RMP) in its road and rail safety and regulation aspects.

Key Programmes

SPAD’s creation was hastened by the realisation that land transport was a central part of efforts to make Malaysia’s leap from a middle income to high-income country – crystallised in the long-term Vision 2020 development plan. This leap was the declared central aim of the new administration of Prime Minister Najib Tun Abdul Razak in 2009, when he initiated the Government Transformation Programme (GTP) and later the Economic Transformation Programme (ETP). Part of the GTP was a series of National Key Results Areas (NKRAs) – strategic goals through which the development of the country was to be realised. One of these was improving urban public transport, which, the GTP noted, while having received some investment in recent years, was still recording low passenger numbers, while car usage had increased. The NKRA set the aim of boosting urban public transport’s share from 12% of passenger journeys to 25%, with a special focus on the Klang Valley region – Malaysia’s densest population and greatest urban concentration.

In the longer term, the target of a 40% share for public transport in urban areas was set for 2030, alongside a major boost in rural public transport connectivity. Under the ETP, meanwhile, a series of National Key Economic Areas (NKEAs) were established. While several of these have implications for transport, one has particular importance – the Greater Kuala Lumpur (KL)/Klang Valley NKEA. Within this, there are nine Entry Point Projects (EPPs), with EPP 3 being the construction of a high-speed rail connection between KL and Singapore, and EPP 4 being the building of an integrated urban mass rapid transit (MRT) system.

Long-Term Impact

The first of these projects was estimated by the GTP/ETP implementing agency, Pemandu, to be capable of generating 28,700 new jobs and making a contribution to gross national income (GNI) of RM6.22bn ($1.9bn).

EPP 4, meanwhile, was forecast to add around 20,000 new jobs and RM24.63bn ($7.7bn) to GNI. SPAD was also tasked with carrying out implementation of EPP 3, and EPP 4 was also tasked to SPAD, while MRT Corporation would own the assets of the new system.

“The goal is to have 40% of KL residents using public transport by 2030, up from the current 20.8% using it now. The multimodal system focuses on connecting the denser population centres outside of KL city centre,” Mohd Nur Ismal, CEO of SPAD, told OBG.

In November 2013 SPAD released its Land Public Transport Master Plan for the Greater KL/Klang Valley region, which was produced in line with the GTP and ETP policies and goals.

Across The Land

The GTP’s noting of the growth in private vehicle ownership in Malaysia over the years is backed up by DoS figures, the latest of which run up to end of 2012. In 2008 the figures show some 13.58m vehicles active on the nation’s roads, with this number rising to 15.05m in 2010. The 2012 total was 16.57m, out of a population of around 29m, an increase of around 3m vehicles in four years.

RMP figures also show an increasing number of road accidents – up from 372,990 to 462,463 over the same period, although fatalities were proportionately fewer, rising from 6527 to 6917 between 2008 and 2012. According to Wong Shaw Voon, director-general of MIROS, “The data collected from 1972 to 2010 projects that traffic fatalities will rise to 10,716 per year by 2020 if no action is taken. Our aim is to reduce that number to around 5358 by 2020.”

The Malaysian road network, meanwhile, totalled 127,517 km in 2012, according to MIROS. World Bank figures showed 80.4% of the road total was surfaced in 2010, the most recently available statistic.

Toll Roads & Concessions

The MHA is responsible for all the toll highways and expressways in Malaysia. A programme of privatising toll highways began in the 1980s, with the main activity occurring in the 1990s. After then, the MHA took on a more supervisory and regulatory role in the toll network.

Today seven of the country’s 27 highways are connected to the Asian Highway Network, with the majority located in western Malaysia. In eastern Malaysia, the Pan-Borneo Highway linking Sabah and Sarawak via Brunei Darussalam is the most extensive highway, with RM500m ($156.1m) allocated in the 2014 federal budget to upgrade the 2239-km road, in phases, up to 2025.

In western Malaysia, the longest highway is the North-South Expressway, at 772 km, which runs from the Thai border in Kedah to Johor Baru opposite Singapore. Plus Malaysia, which is part of UEM Group and the largest toll operator in the country, has the concession for this toll route, along with several others. These include the New Klang Valley expressway, federal Highway Route 2, the Seremban-Port Dickinson Highway, North-South Expressway Central Link, the Malaysia-Singapore Second Crossing Bridge, the Butterworth-Kulim Expressway and the Penang bridge. UEM is a subsidiary of Khazanah Nasional, the Malaysian sovereign wealth fund and the government’s investment arm.

Concession Considerations

Other toll road operators include MTD Prime, the second-largest concessionaire, with the concession for the KL-Karak Highway and its extension, along with the East Coast Expressway Phase 1. MTD also owns Metramac Corporation, which is the concessionaire for the East-West Link Expressway and the KL-Seremban Expressway and has a 27.8% equity share in Touch n Go, the sole operator of electronic toll collection facilities on all Malaysia’s expressways. IJM Corporation, meanwhile, owns and operates the Sungai Besi Highway, the New Pantai Expressway and Lekas. Kesas operates the Lebuhraya Shah Alam route, a key part of the KL traffic dispersal ring, and Lingkaran Trans Kota Holding operates the Damansara-Puchong Highway.

Jambatan Kedua was appointed as the concessionaire to construct, manage, operate and maintain the Second Penang Bridge, the longest in South-east Asia at 24 km. Ismail Mohamed Taib, managing director of the firm, said, “The Second Penang Bridge was opened to the public in March 2014. Total capacity of the bridge will be 95,000 vehicles per day. The bridge was commissioned to take traffic away from the First Penang Bridge, which is projected to reach capacity by 2015.”

In recent times, there has been some criticism of how the concessions for the toll highways were handled. A lack of competitive tendering is sometimes cited, while the eventual agreements have also been questioned regarding the mechanisms for increasing tolls. Concessionaires are allowed to raise prices in January, yet, anxious to keep transport costs down, the government imposed a freeze on price hikes in 2011, compensating the concessionaires instead. According to a statement to the press by the prime minister in February 2014, the government paid the concessionaires RM459m ($143.3m) in compensation for deferring toll increases between 2008 and 2011. After the freeze, a further RM329m ($102.7m) was paid in 2012, and then RM343m ($107.1m) in 2013. In February 2014 Deputy Prime Minister Muhyiddin Yassin also announced there would be no price rises in 2014, implying a further subsidy to the toll concessionaires.

It seems likely too that future concession agreements may include different arrangements for price increases, with more public consultation promised.

West Coast

The Malaysian highway system is by no means finished yet either. One of the largest construction projects in the country currently is the West Coast Expressway, forecast to cost some RM5.94bn ($1.9bn).

The implementing outfit here is West Coast Expressway, which is 80% owned by Kumpulan Europlus ( KEuro), with the remaining 20% held by Road Builder (M) Holdings, a unit of the IJM Corporation. IJM also holds a 22.15% stake in KE uro. The company will try raising funds for the project via an Islamic bond issue in 2014.

The ground-breaking ceremony for the project took place in May 2014, with some 233 km of highway to be constructed. The work will be broken down into 11 different packages for tendering, while the project will create job opportunities for 22,000 people.

The project is expected to take a total of five years to complete, with toll collection able to start on some stretches in 2018. KE uro holds a 60-year concession on the road, which will eventually run from Banting in Selangor to Taiping in Perak.

Yet the concession agreement, it was reported in the Malaysian press in January 2014, is different from previous such deals. Under this version, if the concessionaire recoups the cost of investment from tolls before the 60-year period is up, it must then hand control of the expressway to the government. In addition, if the traffic on the highway goes above the amount forecast by the company, then a revenue-sharing scheme begins for the tolls raised for the overshoot traffic.

The project has been reduced in size from earlier plans, which were set to cost some RM7.07bn ($2.2bn). These terms illustrate the government’s determination to learn from earlier concession agreements, countering some of the criticism of previous arrangements.

Meanwhile, several other major road projects are also under consideration or at an advanced stage, including proposals for a new toll road in Negeri Sembilan, connecting the Kajang-Seremban Expressway (Lekas) with the North South Expressway; and a 73-km stretch of highway in Kelantan, with a tender for the first 30-km stretch of this opening in February 2014. The first stage of construction of this stretch commenced in April 2014.

Road usage is not just a private transport matter either, with SPAD also including in its master plan the development of the bus rapid transit system for the KL/Klang Valley region.

Divided into two phases, one due to commence construction in November 2014 and end in April 2016, while the other runs from July 2015 to December 2016, this plan covers a 256-sq-km catchment area with 12 fast bus-lane corridors, eventually connecting Pasar Seni HAB with Bandar Kelang. A Commuter Bus Improvement Plan is also due to improve existing bus services.

Let The Train Take The Strain

Rail takes up a large part of the investment in the EPPs connected with transport, with the high-speed rail (HSR) link between KL and Singapore, alongside the MRT connections within the Klang Valley, two of the most high profile projects within the ETP.

Regarding the first, while the idea has been around since the 1990s, it was given official status under the current administration in September 2010. The project then received a boost in February 2013, when the Malaysian and Singaporean prime ministers met and announced that the HSR had been given the go-ahead. The scheme was estimated by local media to cost RM39.8bn ($12.4bn), and it should be completed by 2020, the key year in development plans. The Malaysian-Singaporean Joint Ministerial Committee for Iskandar Malaysia was also tasked as the project’s platform.

An HSR working group was launched in December 2013, with discussions beginning in January 2014. This process is ongoing, although few expect quick results. Nevertheless, the Malaysian transport minister told the press in February 2014 that the project, while it would take time, would be completed. SPAD also announced that the HSR was in pre-tender phase II at that time.

The 330-km HSR would cut present six-hour travel times between the two cities to just 90 minutes. Yet there are substantial engineering challenges – not the least of which is that it is a pioneer project in tropical conditions. Driving at 300 km per hour in such hot and humid weather will likely require careful engineering. At the same time, the project also depends on good cooperation between the two nations in everything from tendering to passport controls. The high cost may also prove a challenge in terms of public-private partnerships (PPPs), which the Malaysian government hopes to use to facilitate the project.

Another challenge is likely to be land acquisition along such an extensive route, with pressure on land usage already high in many of the areas the line will pass through. Nonetheless, there are potentially substantial benefits to both countries from the HSR in terms of boosting tourism, business and trade.

In addition to the connection between KL and Singapore too, as currently planned, the HSR will link up with five other stations – one in Negeri Sembilan, one in Malacca and three in Johor. This will bring these secondary conurbations into HSR connection with two of Asia’s most important economic hubs – further spurring growth in other regions of Malaysia.

Joining The Dots

On arrival in KL, passengers can already take advantage of an extensive network of public transport, from the light rail transit (LRT) to the KLIA Express, along with the KTM Komuter and KLIA Transit services. Yet when current programmes for the Klang Valley are complete, the public transport net will stretch wider and more efficiently than ever. Leading the charge here is MRT Corporation, which is wholly owned by the Ministry of Finance, and is creating the Klang Valley Mass Rail Transit (KVMRT) system as a major addition to the existing transport grid. It is doing so in cooperation with SPAD, which acts as the supervising agency, and MMC-Gamuda KVMRT, the project delivery partner.

Work began on the first of the corporation’s MRT lines in July 2011 – a 51-km stretch between Sungai Buloh and Kajang. This line runs through the centre of KL, disappearing underground for a 9.5-km stretch. Some 31 stations are envisaged, seven of which will also be subterranean. Phase I of the line is due for completion in 2016 and will connect up Sungai Buloh with Semantan. Phase II then extends the line out to its final destination, with work on this due for completion in 2017. Running at intervals of 3.5 minutes, the MRT trains are expected to convey some 400,000 passengers a day when the line is fully complete.

In March 2014 the BMW Group announced that its US subsidiary, DesignworksUSA, was designing the look of the Siemens Metro Inspiro trains that will be used on the MRT, with some 58 of these four-car, driverless units expected to work the line by 2017, according to the company’s press release.

Two other lines are also in this EPP, with their exact details currently being worked out as part of the Greater KL/Klang Valley Land Public Transport Master Plan.

At the same time, 2015 is the expected completion date for the LRT Extension project. Begun in 2008, this will see the existing LRT Kelana Jaya and Ampang lines pushed on further to link up at Putra Heights, at a new, integrated station. Some RM7bn ($2.2bn) is being spent on this, going to a total of 34.7 km of elevated track.

The effects of the MRT system and the LRT extension on the economy of the Klang Valley and of Malaysia in general are widely thought likely to be major. Some 4m people live within the MRT catchment area alone, with more jobs, businesses and higher real estate prices all likely along the routes.

As just one current example of the impact, according to an assessment by MIDF Research at the start of April 2014, the MRT Line 1, which was approximately 40% complete by then, along with initial work on Lines 2 and 3, were likely to help the construction sector achieve 9.5% growth in 2014.

Once the project is complete too, the local and national multiplier effects of this major enhancement of transportation in the most economically important part of the country are widely expected to be game-changing, both in achieving the goal of 40% public transport usage by 2030, and of raising the country to the high-income nation level.

Outlook

With heightened competition in air, major road and rail projects under way on land, and a significant boost in port capacity, the Malaysian transport sector is likely have some significantly busier times in the years ahead. Much naturally depends on the global economy however, with the year 2014 beginning with some mixed signals – signs of a sustained return to growth in the Western economies, but also continuing question marks over China. Nonetheless, with the Malaysian government continuing to deepen its commitment to major infrastructure development projects, involving PPPs whenever possible and/or appropriate, it seems likely that the country’s transport sector may be cushioned against any global downside, while also being well positioned to benefit from any upswings.