Public-Private Partnership Policy Casebook/KL Sentral Station

Summary
KL Sentral is Malaysia's largest integrated transportation hub, serving over 100,000 people daily. The station is 9.3 acres of the 72 acre Sentral Development, which integrates the 6 rail networks that run through Malaysia including: KLIA Express Rail Link, KLIA Transit, RAPID KL (PUTRA & STAR), KTMKomuter, KTM Intercity and KL Monorail Services. Construction of the development, including the station, is based on a build-and-transfer model. The construction contract, awarded to EKD Joint Ventures in March 1997, was worth $238 million and overall investment in the project was $348 million. The station opened in 2001, along with  office buildings, commercial buildings, residential buildings and entertainment centers.

The KLIA Express and KLIA Transit lines provide service to the Kuala Lumpur airport, KILA. The KTMKomuter line encompasses many routes including service to Subang, the other major airport in Malaysia, cities on the Thai border and additional cities known for urban sightseeing, shopping destinations, business hubs and food destinations.

The Rapid KL line offers service to regions north and south of KL, and is one of the longest fully automated driver less metro lines in the world.

The additional rail lines service various suburbs and cities of Kuala Lumpur.

Project Finance
In order to finance the project, Kuala Lumpur Sentral Sdn Bhd, KLSSB, issued Islamic bonds known as sukuk. Islamic finance is the provision of financial services in accordance to Islamic law, which forbids interest, excessive uncertainty and gambling. Instead of charging interest, profit is generated through investing in a project and receiving a margin of the profit generated, based on an agreed upon ratio and risk of transactions that is shared between parties. Islamic banking also differs from conventional banking by not allowing current accounts to accumulate interest and/or the profit-sharing investment requirement.

KLSSB issued a specific form of sukuk, known as sukuk musharakah. While sukuk is the written certificate showing ownership rights over a project or investment on the underlying assets and partnership in the project, musharaka refers to a partnership arrangement between two or more parties to finance a business venture in which all parties contribute capital. Any profits derived from the venture will be distributed based on an agreed profit sharing ratio, while losses will be shared on the basis of equity participation. Sukuk mushakarah is a certificate of ownership over a project or activity under the principles of mushrakah partnership whereby both the issuer and investors will contribute to the capital of the project. With sukuk musharakah, sukuk holders are the owners of the project. The developers financing cost fell 4.8% by issuing sukuk bonds.

In 2006, KLSSB issued sukuk musharakah totaling RM 720 million ( US$172 million), entering into a mushrakah agreement with investors. The interests of investors are represented by the wakil, or agent, KLSSB.

Financing structure
Capital Contribution Ratio:
 * KLSSB: 26% RM254 million ($60.58 million)
 * Investors: 74% RM720 million ($172 million)

Profit Sharing Ratio
 * Sukukholders: 1%
 * KLSSB: 99%

Timeline
1994-The government of Malaysia awarded a contract to a consortium to transform 72 acres at K.L's old marshaling yard into a modern transit hub.

1997-Construction contract awarded to EKD Ventures.

2001-KL Sentral opened replacing the old KL station.

2003-Opening of the KL Monorail system, complete with 98 stations and covering most of KL and suburbs.

2015-Other infrastructure surrounding the station completed.

Actors
The main actors in the project are the client, KLSSB, and project shareholders Keretapi Tanah Melayu Berhad, KTMB and Pembinaan Redai Sdn,BHD, PRSB. KTMB is the Malaysian state railway corporation and Malaysian Resources Corporation Bhd, MRCB. MRCB is the majority shareholder with 64.38%, KTMB owns 26.00% and PRSB owns 9.62%.

In the KL Sentral development, there are two main buildings; the main building and the rail station building. The main building is owned by KLSSB, a consortium led by MRCB. The Station is owned by KTMB, Prasarana, and ERL Sdn Bhd. The main contractor for the development is the EKD JV led by Dragages Malaysia Berhad with Ekovest Bhd and Syarikat KMZ.

The 1997 contract scope of work included the station and associated track works, which included three decks to support commercial developments, a maintenance depot for the state railway operator and 4 km of access roads.

The development was designed by renowned Japanese architect Kisho Kurokawa and Associates who was also responsible for Malaysia's Kuala Lumpur International Airport. Kuwait Finance House, Malaysia and HSBC, acted as the advisers on the project, underwriting contracts and providing advice to raise capital.

The additional actors are the Ministry of Transport, Railway Asset Corporation and Land Public Transport Commission.

What does the Station offer?
KL Sentral Station offers integrated transportation between cities and towns in Malaysia including the City Centre, the Kuala Lumpur International Airport KLIA, access to bus services and suburban areas. The KLIA Ekspres line offers non-stop service to the airport, which is a 28-minute ride.

KL Sentral offers much more than transportation, and is known as a high end shopping destination center in Malaysia with boutique shopping. Within the shopping mall are also ATM's, currency exchanges, entertainment areas and cafes. Major hotels, such as Hilton and Le Meridien, are found here, along with Plaza Sentral, which are premier office suites. Sooka Sentral offers a lifestyle by housing a fitness centre, business centre, food court and dining facilitates. The Suasana Sentral Condomunium is a 400 unit luxury condo building, which is associated as being a city within a city. An additional condominium unit is at the station, called Suasana Sentral Loft, with a total of 600 units.

KL Sentral Station is an all-encompassing, state of the art transportation hub, for the over 8 million people in the greater KL area. Residents and tourists do much more than catch trains and bus services from the station. The station is a destination for shopping, dining and entertainment.

Background of PPP's in Malaysia
In 1981, the Malaysian Incorporated Policy was introduced to, “Encourage cooperation between the public and private sectors whereby both sectors act and operate within a Malaysian Company.” The purpose of the policy was to have the private sector implement the commercial and economic activities, and the public sector deals with the policies and provides specialized services to ensure the success of the business. Furthermore, in 1983, the Privatisation Policy was introduced to bolster the private sector's role in the country's economic development, while also lessening the financial burden of the Government. The government of Malaysia found these policies to be beneficial to the country to develop Malaysia as a leading city and government in the world, in terms of public private partnership transformation through innovation and leadership. Malaysia developed these policies to use PPP's to grow their international presence, as well as strengthen their economic development.

PPP of KL Sentral
The PPP at KL Sentral involves the rail lines and various operators. The companies who operate the rail lines are under the umbrella of the Ministry of Transport, Railway Asset Corporation and the Land Public Transport Commission. Below is a brief summary of these entities, as well as the operation of the rail lines.

Ministry of Transport
The Ministry of Transport, MOT, is responsible for the formulation and implementation of policies, strategies and programs for public transportation across various sectors. Furthermore, the MOT also provides a safe and effective transportation system while enhancing the country's competitiveness in transportation.

Railway Asset Corporation
The Railway Asset Corporation, RAC, is a federal body under the MOT established under the Railways Act of 1991. The RAC was developed to bolster the railway development in Malaysia to be at par with railroad industries in developed countries and now functions to govern and interpret railway assets into valuable property for creating income for the government.

Land Public Transport Commission
The Land Public Transport Commission, SPAD, plans, regulates and enforces any matter relating to land public transport and has established a Master Plan to ensure a comprehensive and sustainable infrastructure development.

Rail Lines
The rail lines, with the exception of the KTM Komuter line, are operated based off a build-operate-transfer, BOT, model where the private companies/consortiums signed concession agreements with the KL government to build the railways and operate.

LRT
The two Light Rail Systems, LRT, that operate through KL Sentral are the STAR and PUTRA. These two lines have a unique history, in regards to the PPP. In 1992 the Malaysian government awarded a 60-year concession contract to a consortium led by an overseas contractor under the BOT model; the consortium's operating company, STAR, was responsible for System 1. Construction for System 1 began in 1993, and opened to the public in 1998. System 2 was awarded to PUTRA in 1994, and completed in 1999. The Malaysian government did not provide any monetary guarantees to STAR, but provided support by offering land at very low prices, exempted the company from import duties, and other tax incentives. Not many details are known about PUTRA, but through our research, we have concluded that a similar deal must have been provided for PUTRA. The ridership for both lines was low and fares were dropped to incentivize riders to use the lines. Because of this, both concession companies began defaulting on their loans, within months of operation. The loans were restructured and 4 years after the government announced its plans to intervene, the sale and purchase were completed by a subsidiary of the Ministry of Finance, and the government took over the operations of the two LRT systems.

Rapid KL
Rapid KL is fully owned by the Finance Ministry Incorporated. The Finance Ministry Incorporated was established in 1957 to provide social services to the public such as public transportation and utilities services. The Rapid KL is operated by the private company of Prasarana Malaysia subsidiaries Companies. The Prasarana Malaysia Companies is the public transportation services dedicated for Kuala Lumpur and the Klang Valley area.

KTM
The KTM Line is owned by the Malaysian government through Finance Ministry Incorporated. Along with the establishment of RAC, KTM existed since 1894, was disbanded and renamed Keretapi Tanah Melayu Berhad, KTMB, which owns and operates KTM intercity passenger trains.

KLIA Lines
The KLIA Express and KLIA Tranist lines (airport lines) are operated by Express Rail Link, Sdn Bhd. Express Rail Link, ERL, is a joint venture between YTL Corporation Berhad, Lembaga Tabung Haji, SIPP Rail Sdn. Bg. And Trisilco Equity Sdn.Bhd, who was presented by the Malaysian government for a 30-year concession of the railway in 1997. After this line was constructed, it was handed over to SYZ consortium, a joint relation between German and Malaysian companies.

Issues
Issues in the KL Sentral project included the steady growing population of Malaysia, and the pressing need to build a multi-modal transportation hub. When public transportation was introduced into the city of Kaula Lumpur, integration of the different transportation modes was not present, which included low accessibility to trains and service reliability. Moreover, in a growing city where public transportation is not readily available or accepted, car usage increases, which increases congestion, pollution and an increase in traffic problems. With the steady rise in population and vehicle use, the need for a high-class transportation hub was pressing.

Specific issues with the KL Sentral Station include: soil erosion from non-stabilization of slopes, the fact that two of the three primary rivers in KL flow through the city and originate in the highland Northern part of the city and tend to have a muddy color from the discharge of stilt at construction sites. In heavy rainfall seasons, the rivers are known for flooding, which can affect the KL City Centre, which compromises businesses, accessibility to the transportation lines and general usage of Sentral Station.

Another issue that faced KL Sentral stemmed from all the various bus and rail lines not properly integrating with each other, due to different operators. For example, lack of ticketing integration between the lines, prolonged wait time on the platforms, low priority maintenance on transportation systems, delays and overcrowded trains. In addition to the ticketing systems not properly integrating, the multiple rail lines and rolling stock make it difficult to integrate signals, fare booths and track maintenance systems. The ticketing systems were different for all the rail systems as well as a lack of ticketing counters available during peak travel times. Delayed trains contributed to overcrowding on trains and even users missing the first train available, due to space capacity limits. Additionally, “Missing a train by just two minutes could mean a loss of up to 45 minutes of waiting time in some instances, where the passengers have to take connecting trains or shuttle bus." Infrequency of trains and crowded conditions can lead to public transportation users being frustrated with the system, and even lose faith in the system, which can lead to decreased ridership overall.

While many of these rail lines were being built, in 1997 (or around that time), the Asian Financial Crisis occurred. In 1997, the Thai baht collapsed, which sparked the Asian financial crisis, and delayed some of the rail lines in KL Sentral being built or finished. After the mid-1990's, the Chinese and Japanese currencies faced sharp declines which affected export revenues and contributed to slowing economic activity in many Asian economies. “In Thailand these events were accompanied by pressures in the foreign exchange market and the collapse of the Thai baht in July 1997.”

Corruption and scandal are impending issues for the future expansion of KL Sentral. The former Prime Minister, Najib Razak, was a huge supporter of the rail expansion plan in Malaysia, that included expanding the rail service at KL Sentral. Although Razak was a proponent for rail extension projects across Malaysia, and made progress for the extensions, he was recently involved in a scandal that questioned the corruption in the projects that included cost overruns and concerns about China's involvement. The expansion project would build two new lines in the KL transit network, which would tie the west and east coats of Malaysia together with an express line for passengers and cargo, and a cross-border train. After the May 2018 election, a new prime minister was elected, Mahathir Mohamad, and he has since suspended work on the expansion project citing rising costs and the questionable financing from China. This cancellation of expanding the rail lines has halted work on the expansion to avoid threatening the country's favorable credit rating, avoiding bankruptcy and tarnishing the country's reputation.

Project Status and Potential Expansion
The train station opened to the public in 2001, while the overall development continues to expand to meet the growing demands of locals and tourists alike. Currently, KL Sentral sits on 72 acres, only 20 of which have been developed. Current projects include cultural attractions such as museums and gardens. The rail station itself is currently hosting 160,000 passengers daily, while its capacity is only at 100,000. The current project will introduce an elevated deck for a new track, which will connect to the current cultural projects. In addition to supporting local attractions, this project will expand the stations capacity to 250,000 passengers.

Discussion Questions
1. Do you think the potentially unstable government in certain foreign countries affects PPP's and implementation? What is the risk?

2. All of the companies invested in the PPP for KL Sentral are Malaysian based. Why do you think American companies have not invested in the KL Sentral PPP?

3. Does Islamic financing offer more stability for investing, or drive investment opportunities away?