A memorandum of understanding (MOU) on the long-touted high-speed railway line between Kuala Lumpur and Singapore looks set to be signed in June 2016. But Singapore may yet walk away if the richer city-state decides the project is not commercially viable.

Malaysian Prime Minister Najib Razak's timing to push forward the $15 billion high-speed rail project line has been unfortunate, if not questionable. Najib announced that an MOU would be signed in the middle of 2016 on 12 April during a visit to Singapore. 

Just a week later, the country’s troubled state investment fund 1Malaysia Development Berhad (1MDB) was back in the headlines.

1MDB crashes the party

The chronically-indebted 1MDB remains locked in dispute with its guarantor, Abu Dhabi sovereign wealth fund International Petroleum Investment Corporation. In the meantime, authorities in several countries, including Singapore, are investigating 1MDB over unexplained transfers to various offshore accounts, including some allegedly linked to Najib.

The 1MDB saga is extending its shadow over the high-speed rail link not only because it raises questions about Malaysia’s ability to fund the project but also because China has been heavily lobbying Kuala Lumpur to win the contract to build the 375km rail track.

Since last year, Chinese state-owned companies have been helping with the bail out of the chronically indebted 1MDB. In November 2015, China General Nuclear Power Corporation agreed to buy 1MDB’s power assets for $2.3 billion while in December, China Railway Engineering, along with a local partner, paid $1.89 billion for 1MDB's 60% stake in Bandar Malaysia, a land development that is scheduled to house the high speed rail line terminal in Kuala Lumpur.

The strategy may be paying off, at least in Malaysia. Over the past weeks, multiple reports in the local press as well as the state-owned Chinese media have been suggesting that Malaysia will award the contract to Chinese companies.

The Singaporean government, however, is understood to be disinclined to honour any prior arrangement between Beijing and Kuala Lumpur, and will insist on an open and transparent bidding process should it choose to go ahead with the project.

Where’s the money?

An MOU is very likely to be signed in June, IJGlobal understands. But with little agreement on the potential costs or commercial viability of the project, it remains to be seen whether the MOU will provide any momentum to actually build a high-speed railway link. 

So far, the two governments have only agreed on the route of the new tracks and the number of potential stops, at least five, on the Malaysia side. The potential benefits are mostly skewered in Malaysia’s favour: not only is most of the line in its territory, but the route will run through key political states for the ruling United Malays National Organisation.

In the absence of Malaysia’s political will to push the project forward, the Singapore government will take a “very clinical approach” to assessing the commercial viability of the project, one senior banker familiar with the Singapore government’s position told IJGlobal.

The Singapore government does know it will need to structure any private-public partnership to cover the developers’ debt servicing costs and will essentially have to take on some, if not all, of the traffic risk, he said.

However, the “nitty-gritty” assessment of the potential numbers will only start in earnest once the MOU has been signed and there is a strong possibility the Singapore government could walk away from the project if it does not like what the numbers yield.

Malaysian government officials for their part appear to be aware of Singapore’s hard-nosed position and have hinted they may plough ahead with the project, with or without the city-state's participation. Under that plan, the new railway line would end in Johor Bahru, on the Malaysian side of the border. In which case, “the entire project will be within our borders and we will have more control,” a senior Malaysian official said in an interview with the local press in June 2015.

All aboard

China is not the only one interested in the estimated $15 billion project, which would be Southeast Asia’s first high speed rail line.

Some 98 companies, more than half from Europe, made submissions to the requests for information in October 2015, according to a statement by Malaysia’s Land Public Transport Commission and Singapore’s Land Transport Authority.

One particularly interested party is Japan. Prime Minister Shinzo Abe is promoting infrastructure exports as a pillar of his economic strategy and the government has been lobbying Malaysia and Singapore to award the contract to Japanese companies, with generous doses of financing to nudge along the considerations.

The Japan camp, as well as the South Koreans who have also been eyeing a piece of the project, are now tracking the proceedings with some trepidation, as Singapore's withdrawal would effectively end their hopes of winning major contracts. 

Whatever the government of Singapore decides, however, the high-speed railway line is likely to need any outside funding it can get to survive in any form.

The 1MDB scandal has begun to spill over to concerns about Malaysia's sovereign creditworthiness. Moody’s warned on 27 April that the total size of contingent liabilities associated with cross-default agreements between 1MDB and its parent owner, the Malaysian government, could be as much as $6 billion, or 2.5% of Malaysia’s GDP.