Tuesday, October 19, 2010

Malaysia's National Car project backfires



Last Updated: Oct 11, 2010

The Malaysian government is switching lanes after its 'national car' project backfired. Now it is putting its foot down to encourage investment in infrastructure In spite of having a population of just 28 million, Malaysia has a "national car" project. The only way to make the "national car" project viable in such a small market, where economies of scale are hard to come by, has been to put high tariffs on imported cars and in other ways persuade the Malaysians to buy the locally produced version. The result has been to make comparable cars more expensive in Malaysia than in the US.

Malaysia has a good highway system to encourage car ownership but many of them are toll roads, which add to the cost of operating a car. One result of this policy has been the relative neglect of public transport both within and between cities. The capital city, Kuala Lumpur, has a limited mass transit system which is struggling to cope with the increasing demand. The old buses that used to run within the city have been replaced lately but are still inadequate.

World Trade Organisation rules and the malaise in the international car industry make the continuation of the "national car" project an unviable proposition over the next few years. For some time now the Malaysian government has been looking for a buyer of its share of the national project and a few car majors have held serious discussions, but nothing has materialised so far. Now, the "national car" scheme has been overtaken by public transport and other infrastructure projects, which received a multi- billion dollar boost from the Malaysian government earlier this month.

And just last Friday, the government, through its 1Malaysia Development company, announced it had signed two "collaboration agreements" with Mubadala Development, an investment company owned by the Abu Dhabi Government. Mubadala's Industry division is assessing an investment of up to $7bn in an aluminium project in the Sarawak Corridor of Renewable Energy in the eastern section of the country. Mubadala Real Estate and Hospitality is also looking at jointly developing projects in the Kuala Lumpur International Financial District.

The Malaysian government has indicated it expects most of its new infrastructure projects to be carried out by the private sector, or on a co-operative basis between the public and private sectors. Details are scant at this point and it is not even clear which private-sector companies will want to participate in such major projects at a time when the banks do not want to lend and investment horizons seem short.

The most obvious companies that would want to build large projects in Malaysia, apart from Mubadala, are those from cash-rich Asian countries such as China and Singapore. For historical reasons, Malaysia has been reluctant to let Singapore companies participate in a big way in infrastructure projects. Malaysia and Singapore used to be part of the same country and until recently an undercurrent of suspicion has remained between the two neighbours.

But they have settled many of their outstanding issues since Najib Razak took over as prime minister of Malaysia last year. Despite the separation of the two countries in 1965, the land on which the Singapore railway station sits and the tracks leading up to it have been owned by Malaysia and have not really been developed for the past 40 years or so. Now both countries have agreed on a formula that gives Singapore the railway station land and in return Malaysia will get some land in the business districts of Singapore. The issue of what sort of a new bridge to build to connect Singapore and Malaysia has also been more or less resolved.

This amicable settlement should pave the way for Singapore to deploy its cash on a larger scale in Malaysia, especially since Singapore government-linked companies have had bad experiences investing in countries further afield, including Thailand during Thaksin Shinawatra's time as prime minister. Kuala Lumpur and Singapore should be a prime target for anyone wanting to build a high-speed railway. The cities are about four hours driving distance apart, but modern high-speed train technology should be able to cut the travel time to 90 minutes or less.

China is an obvious choice for this project since it not only boasts high-speed train technology but can also offer cheap, long-term financing.