Kuala Lumpur - Singapore

High Speed Rail Project January 2017

Kuala Lumpur - Singapore January 2017 1

Contacts

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

Alex Wong

Partner, Singapore T +65 6302 2557 [email protected]

Benita Lee

Associate, Singapore T +65 6302 7132 [email protected]

This note is written as a general guide only, in respect of the Kuala Lumpur – Singapore High Speed Rail Project as of January 2017. It is not intended to provide legal advice and should not be relied upon as a substitute for specific legal advice.

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Introduction

Background An agreement for the implementation of the HSR was signed by Singapore and Malaysia on This note serves as an update to an earlier note 13 December 2016 ("HSR Agreement"). A dated August 2015 on the landmark Kuala joint committee will be set up to discuss and Lumpur – Singapore High Speed Rail (the manage cross-border aspects of the HSR. “HSR”). The attached schedules provide Further, a Joint Development Partner will be further insights on the rationale for the HSR appointed in early 2017 to advise on related and general structuring issues. technical and procurement issues, and assist The HSR with the preparation of the tender documents. In 2013, Singapore and Malaysia formally If successful, the HSR will be the first high announced plans to develop the HSR. At speed railway in South East Asia. around 350km, the HSR will connect Jurong East in Singapore with Bandar Malaysia (Kuala The HSR and existing travel modes Lumpur) in Malaysia with six stops along the Singapore and Malaysia are presently very well- way (Putrajaya, Seremban, Ayer Keroh, Muar, connected by land, air and sea, and the HSR Batu Pahat and Iskandar Puteri). Services are must be viewed as a complementary addition to intended to run at speeds of up to 320 km/h the existing infrastructure as opposed to filling and are planned to run four times an hour, in a complete vacuum. including a non-stop service from Bandar (a) Land – Singapore and Johor are connected Malaysia to Singapore. by the causeway and the second link. Proposed HSR line from Kuala Lumpur Numerous public and private bus services to Singapore use these routes and continue along the North-South Highway to Kuala Lumpur. Singapore and Malaysia are also connected by a railway service operated by Malaysian Railway (“KTM”), and there are plans to construct a Rapid Transit System connecting Woodlands North (Singapore) and Johor Bahru Sentral (Malaysia) which will replace the above mentioned railway service. (b) Air – There are full-service airlines and budget airlines plying the Kuala Lumpur – Singapore route. Source: The Straits Times, “Historic agreement for Singapore- (c) Sea – There are sea crossings between Kuala Lumpur high-speed rail line signed; service targeted to start Singapore and Johor, as well as pleasure by Dec 31, 2026” retrieved 4 January 2017 – cruises between Singapore and various http://www.straitstimes.com/singapore/historic-agreement-for- Malaysian ports. singapore-kuala-lumpur-high-speed-rail-line-signed-service- Notwithstanding the existing plethora of targeted options for travellers, the HSR offers an Presently, the HSR is expected to be completed attractive transportation proposition, and is also in 2026. Construction is estimated to take place a political, economic and social development in the period of 2018 to 2025, followed by tool. Please refer to Schedule 1 for further testing and commissioning in 2026.

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details on the rationale for the construction of (c) Operation – It appears that the the HSR. construction and operation of the HSR will be undertaken by multiple parties. Project structure Separating construction from operation Key details of how the HSR will be structured could allow for specialisation and greater have yet to be announced. However, some transparency. However, it might also create considerations are likely to come into play: interfacing difficulties and inefficiencies as (a) Financing – The HSR’s estimated cost is multiple parties will be involved and each US$14 billion. Given that the development party is entitled to a different income costs are high and the return on investment source which might not always be will be on a long term basis, some level of commensurate with its investment costs. government funding may be necessary Responsibility will be more diffused than (even if financing is mostly privately under a single-contractor model, and each sourced, which appears to be the case). contractor may be less incentivised to adopt Should there be any public funding a broad-based view of the project. It should involved, the issue then centers on the also be noted that the Malaysian domestic distribution of costs between the Singapore HSR service will be operated separately and Malaysia governments, with ownership from the express non-stop HSR service of the rail tracks and rolling stock being a between Kuala Lumpur and Singapore, related consideration. Although the HSR is which will allow Malaysia to have complete a bilateral project, most of the HSR will be autonomy over the domestic service and the situated in Malaysia (15km of the HSR in ability to tailor it to meet local needs. Singapore versus 335km of the HSR in (d) Regulation – Presently, it appears that the Malaysia). It will be important for both HSR fares will be set by the private governments to reach an equitable solution operators. The HSR fares are required to be on this point. benchmarked against air fares, but are not (b) Construction – According to the HSR anticipated to be significantly regulated by Agreement, MyHSR Corporation of either government. Customs, Immigration Malaysia and the Land Transport Authority and Quarantine ("CIQ") facilities will be of Singapore will each be responsible for located at Bandar Malaysia, Iskandar Puteri the development, construction and and Singapore, and it is anticipated that maintenance of the HSR-related passengers will only need to clear CIQ once infrastructure in their respective countries, as both countries will locate their CIQ and the lines in Singapore and Malaysia will facilities at the above areas. This may be connected by a 25m above sea level indicate that the ability to provide robust bridge over the Straits of Johor. This security measures will be a key suggests that each country may be consideration in the operations package appointing its own separate contractor to tender. construct the line within its territorial Please refer to Schedule 2 for more details on boundaries. This approach may be structuring the HSR. considered more efficient from a project management basis, since each country will manage the construction within its soil, but interfacing will become a more pronounced issue.

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International interest Conclusion The HSR has generated a significant amount of The HSR currently occupies a Goldilocks sweet- international interest, with companies from spot, as it connects two major cities at an ideal China, France, Germany, Japan and South distance of 350km that will bring substantial Korea expressing interest. A total of 98 cost and time savings. submissions were received in response to the That being said, cross-border railway projects Request for Information exercise called in are complex and challenging, as clearly evinced October 2015, the bulk of which were primarily by the lengthy period of time that both countries European companies and consortia. have been at the drawing board. This year, we Time frame anticipate more light to be shed on the project structure for potential tenderers to consider. The indicative schedule for the project is as follows: Event Year Appointment of a Joint 2017, 1Q

Development Partner Award by MyHSR Corporation of a 2017, 1Q tender for reference design consultants for the Malaysian portion of the HSR Acquisition of land for the 2017, 3Q Malaysian portion of the HSR Issue of the tender for the systems 2017, 4Q package (namely the rolling stock and rail tracks) Award of the tender for the 2018, 4Q systems package Construction of the HSR 2018 - 2025 Issue of the tender for the 2023, 4Q international and domestic

(Malaysian) operations packages Testing and commissioning of the 2026 HSR Commencement of HSR operations

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Our select rail experience

Some of our select experience in the high speed lots of the ICE (high speed railway) track rail sector include: from Cologne – Frankfurt  Sojitz Corporation on the  A bidding consortium in connection construction contracts and with the procurement of the Perpignan arrangements relating to the Western Figueres HSL concession (€1.1bn) Dedicated Freight Corridor freight railway linking Delhi and Mumbai  The shareholders on the restructuring of the €1.32bn high speed rail link from  On three different schemes for the Amsterdam to the Belgian border Channel Tunnel High Speed Rail Link:  On the acquisition of the Arlanda High Speed Rail project in Sweden  Scheme 1: the British Railways Board on its original proposed  The Hong Kong MTRC in relation to joint venture with two leading numerous projects, including developing private sector developers/ the contractual structure and contract contractors to jointly build, own documents for the construction of the and operate a high capacity link rail link to Hong Kong Airport between London and the  PT Sarana Multi Infrastruktur Channel Tunnel (Persero) on its feasibility  Scheme 2: a major international arrangements for the Soekarno Hatta developer and engineering group International Airport to Manggarai Rail as shareholder in and contractor Link PPP project in Jakarta to the development company  Asian Development Bank on the awarded the franchise for the rail development of a rail-based mass rapid link transit system in Bangalore, India  Scheme 3: the restructuring of  Energy Resources Rail LLC as the arrangements for Scheme 2 project sponsors on all aspects of the  RFF and the French Government on Ukhaa Khudag-Gashuun Sukhait railway the tendering of the Tours-Bordeaux project in Mongolia including the high speed rail concession project (LGV railway construction packages SEA) (€7.8bn))  The Hong Kong MTRC on the  The UK Department for Transport development of their forms of contract (the "DfT") on the £7bn Intercity for the Hong Kong Quarry Bay Relief Express Programme for the Line and Tseung Kwan O Relief procurement of high speed railway stock Extension projects and project issues and an associated infrastructure upgrade during implementation  A member of the joint venture appointed to construct part of the Taiwan High Speed Rail  The general contractor consortium on the procurement and delivery of two

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Schedule 1 Rationale for the HSR

To understand the rationale for the construction the transformational effects will filter down into of the HSR, the HSR must firstly be viewed each of these regions and their peripheries. against a larger political, economic and social Social perspective background, secondly against current demand, and thirdly against the other existing The HSR is an important infrastructure project transportation options. that would improve connectivity and accessibility for people living near the stations. The HSR and its political, economic and For Singapore, the HSR also forms part of a social context larger urban development plan to develop Political perspective regional centres outside of the central business Singapore and Malaysia have historically been district. For many years, land-scarce Singapore closely related, and the HSR is seen as a symbol has faced transportation and congestion issues of strengthened diplomatic ties. The Leaders' in the central areas and the government is Retreat is an annual platform between the two trying to resolve this issue by dispersing human countries' Prime Ministers that has traditionally traffic. As such, the Singapore HSR terminus yielded major bilateral agreements, and the will be located in Jurong East – once a HSR was first announced at the 2013 Leaders' traditionally industrial area with residential Retreat with the HSR Agreement being signed pockets, that is being developed into and at the 2016 Leaders' Retreat. revitalised as a mixed-use self-contained urban district (the Jurong Lake District). From a broader ASEAN perspective, the ASEAN member states have repeatedly affirm their The HSR and current demand desire to move towards greater regional The demand for Kuala Lumpur-Singapore trips integration and connectivity. For example, appears to be high. The Kuala Lumpur- there are plans to establish an ASEAN Singapore route has seen strong growth in Economic Community that would allow for free passenger-km of travel, with the total travel movement of goods, services and labour. The market growing from 5.47 million passenger-km HSR could prove to be a showpiece of this wider in 2005 to 7.45 million passenger-km in 2011. ASEAN goal. Base transport demand in HSR corridor Economic perspective (only relevant routes)

The HSR would make day trips between Kuala Lumpur and Singapore even more convenient, be it for business or leisure, and thus act as a catalyst for economic growth. For the Malaysian government in particular, the HSR is a key piece of the Economic Transformation Programme that targets to raise the GNI per capita to at least US$15,000 by 2020. The Malaysian railway stations will be strategically located at areas which have been targeted by the government for economic Source: Malaysian Land Public Transport Commission, “Projects development. For example, Seremban is – High Speed Rail”, retrieved 22 July 2015 − currently already a major satellite city for Kuala http://www.spad.gov.my/projects/high-speed-rail Lumpur and is positioned to be a technology hub. The Malaysia government anticipates that

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Present demand also exceeds the capacity of the Estimated travel time and cost for a existing infrastructure. For instance, demand single-way trip between Kuala Lumpur for the use of the causeway, one of the two and Singapore bridges connecting Johor Bahru and Singapore, exceeds capacity by 33%. The market for Kuala Estimated Estimated time time Lumpur-Singapore trips is expected to continue (excluding (including growing at a comparable rate to the GDP growth Mode of customs customs Estimated of Malaysia and Singapore, at an average of 3 to transport clearance) clearance) cost (US$) 5%. In the long run, as the market matures, the KTM growth rate might slow down. Nevertheless, railway 400 mins 430 mins 9 – 34 average growth is still expected to hover around 3.2% from 2011 to 2060, with a market of 251 Bus 240 mins 270 mins 18 – 36 million passenger trips by 2060. Budget Hence, it appears that the HSR would add airlines: 57 – 64 another option to meet increasing demand. Full-service The HSR and its competitive edge Plane 60 mins 170 mins airlines: 178

Ticket sales are partially dependent on the HSR 90 mins 120 mins 57 – 64 HSRʼs advantages vis-à-vis its competitors, especially in terms of price and time. The HSRʼs closest competitors appear to be budget airlines and buses. Presently, single-trip tickets for the HSR are anticipated to cost around US$57-US$64. This is roughly the same price range for a single-trip flight on a budget airline, but is possibly a more comfortable ride and a faster one (when the boarding and security checks are factored in). Budget airlines would nevertheless retain an advantage in respect of transit passengers as the HSR termini are located far from their respective airports. Buses have a price advantage over the HSR, and have the flexibility to pick up and drop off customers at a greater variety of locations. However, they are significantly slower than the HSR.

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Schedule 2 Structuring the HSR

Costs Source of funds High speed rail projects are complex and Financing for high-speed rail projects may come expensive. The 3 main construction cost from a range of sources, including public funds, components are as follows: state-owned enterprises and private investors. (a) Planning costs such as feasibility studies, Full public financing typically a sunk cost, usually account for 5 Full public financing requires the government to to 10% of the total investment. finance the total investment. The government (b) Infrastructure building costs, including uses funds from either tax revenue or public terrain preparation and platform building. sector borrowing such as bonds. Public This component varies widely across financing may be direct, or combined with projects depending on the characteristics of funds from national railway companies. A the terrain, but typically accounts for major concern with public financing is the between 10 to 25% of the total investment. burden of public debt. Further, the government If there are technical issues and geographic might need to take on the role of long term obstacles, this amount may easily double developer and owner of the project. (up to 40 to 50%) for bridges and tunnels. In the case of the HSR, we do not anticipate the (c) Superstructure costs usually make up the project to be fully financed by the public sector, rest of the infrastructure costs and consist given the potential huge costs involved. of all rail-specific elements. Public-private partnership (“PPP”) Construction costs aside, as the HSR will likely In order to combat increasing public debt, some be a green field project, land acquisition costs projects have adopted PPP financing for the construction of the stations and the arrangements. tracks could significantly increase the investment. Land acquisition is especially From a government perspective, a PPP expensive if the HSR runs into densely arrangement should ideally be structured such concentrated downtown areas (which will that the government need not incur any almost certainly be the case at the Singapore borrowing. Rather, the borrowing is incurred side of the tracks). by the private sector vehicle implementing the project. Accordingly, the government may At present, it is clear that land for both termini benefit from new railway infrastructure in an will need to be acquired. Singapore has chosen “off-the-balance sheet” manner. to situate its terminus on land which is currently occupied by the Jurong Country Club In practice, however, many PPPs come with and the Raffles Country Club, while Malaysia's significant government guarantees or financing, choice of terminus location is a plot of land in due to project risks such as high upfront sunk Sungei Besi that was previously occupied by the costs, as well as long and difficult construction Royal Malaysian Air Force. With respect to phases. other portions of the HSR line, plans are Finally, it should be noted that public financing presently for parts of the HSR to be built on and private financing are not necessarily elevated platforms and underground so as to mutually exclusive. It may be possible for parts work around land constraints and avoid land of the project to be fully financed while others disputes. In particular, the Singapore portion of are based on a PPP arrangement. For example, the line is anticipated to be mostly for the HSR, construction of the infrastructure underground. could be publicly financed while the operations could be contracted out on a PPP basis.

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It appears that the HSR will be open to private Although the service will travel through areas sector participation with possible local content where other stations will eventually be requirements. Private sector participation will constructed, such stations could be built at a bring with it ownership considerations of the later stage. track, stations and rolling stock. Different financing models for different Capital servicing sections The income stream from a railway project can Increasingly, governments look to applying be used to repay the upfront capital. Typical different financing models to different sections income streams of a railway project include of the project. Decisions are made based on revenue from retail, advertising, property socio-economic factors for each section of the development, tolls and fees. It is necessary to network, as well as estimated returns. identify how much of the capital cost can Mix-and-match of financing models should be realistically be financed through usage- done carefully, however, and not without generated revenue, and how much must be thorough financial appraisal and feasibility financed through other sources of income. study of the project. The most significant income stream is likely to Time costs be from the ticket fares collected by the rail operator. This will depend on the ridership of Structuring and negotiating PPP arrangements the railway. As such, high-speed railways can take far longer than government financing. should only be built if justified by strong If there is great urgency for the new demand. infrastructure, the government might need to fall back on simpler financing models. In the Given the strong existing demand for the Kuala case of the HSR, we do not see pressing time Lumpur – Singapore route and the competitive constraints given the availability of other edge of the HSR over other transportation transport options. The various political options, this should not principally be an issue commitments made by both governments in for the HSR although feasibility studies should respect of a 2026 deadline should be noted, still be undertaken to obtain more detailed although such deadline is reportedly considered forecasts. as being "tight". Project structure considerations Project risks Financing for the HSR cannot be considered in The HSR is a complex and challenging project, isolation. Instead, the project and its financing given the number of risks involved including: should be structured in tandem to maximise cost-efficiency and to ensure reliable returns. (a) Delay – apart from the usual delay risks, the HSR is a bilateral project and Build profitable route first coordination time may result in further In the case of the HSR, the non-stop express delays. For example, there is likely to be a service between Kuala Lumpur and Singapore is large number of third party consents probably the most profitable route as it connects required from both governments. two large metropolises. Ensuring that the most (b) Demand/revenue – given the high profitable route is the first one up and running development costs, the HSR would might make financing for subsequent parts probably need a decade or so to turn easier. Prioritisation of the non-stop express profitable. Within this period, service between Kuala Lumpur and Singapore demand/revenue may fall below would mean establishing the termini first. projections. For example, competing

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modes of travel might be subsequently introduced or enhanced, or overall demand for the Kuala Lumpur – Singapore route may fall, and the various modes of travel may cannibalise one another. (c) Project limitations – while there are potential revenue sources such as retail and advertising, it is likely that most of the revenue will have to come from ticket fares. Also, unlike a bus or airline company which can change routes or deploy its vehicles on other routes, it is not as straightforward to change the railway route or to deploy the rolling stock elsewhere should the HSR be less profitable than expected. (d) Compliance – the operator may face compliance costs and regulatory restrictions in its management of the HSR (e.g. fare adjustment).

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