fbpx
Image from freemalaysiatoday

Scrapped High-Speed Rail cannot possibly pay for itself

by Prof Donald Low

The Singaporeans who think that the High-Speed Rail (HSR) to Kuala Lumpur can pay for itself are delusional. At nearly S$40 billion, that’s the cost of three or four aboveground MRT lines in Singapore. Malaysia’s Gross Domestic Product is about the same as Singapore’s. Even Singapore, with its large fiscal surpluses, wouldn’t build three MRT lines in one breath—AND expect the lines to cover their operating costs from the start.

Our MRT also requires the government to finance the capital costs—on an ongoing basis, not just initially. The costs of replacing the trains, signaling equipment and other hardware are partially borne by taxpayers. The operator only has to recover operating costs and part of the replacement costs. The HSR will be the same; at best the operator can be expected to recover operating costs; (ongoing) capital costs will almost certainly have to be absorbed by the two governments (unless fares are prohibitively high, which kind of defeats the whole point of doing it).

The comparison with air travel is spurious. Planes in this instance are much more like buses, in which the capital costs are much less prohibitive. With planes, the only infrastructure that the government has to pay for is the runway and terminal. This is why even in the least developed parts of the world, it’s possible to find commercial planes flying point to point.

So clearly the HSR is not bankable, i.e. it can’t possibly pay for itself. The argument for it thus has to rely instead on broader developmental goals and economic spillovers—benefits which cannot be captured by the HSR operator, and which accrue to society more generally. But these benefits are hard to predict with a high degree of certainty, and so the discount rate used in the cost-benefit calculation has to be quite high (well above the market interest rate). All this means that payback period for society may be unacceptably long.

I think the project makes sense for Singapore; I’m much less sure that it does for Malaysia.

[The comparisons with HSR in China are also mostly misplaced. Chinese cities are far more populated and the regions far more densely packed with large and medium-sized cities; even small cities between the major ones are often more than a million. I took a one-hour HSR between Shanghai (23 million people) to Hangzhou (9 million plus). It made two stops on the way: Yiwu (1.2 million) and Jiaxing (1.2 million). And that’s not counting the rural populations surrounding the urban districts.]

Prof Donald Low is a Singapore economist and former Associate Dean of the Lee Kuan Yew School of Public Policy. This article was first published on Prof Low's Facebook page and reproduced with permission. Visit the original FB post to read discussions on the subject matter.