Getting traction from rail

By Stephanie Jacob

After making years of losses, questions abound on the viability of KTM and what can be done to change its fortunes. Will the much awaited double tracking project be the impetus to a turnaround? Numbers indicate it is an uphill haul.

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The role of rail in Peninsular Malaysia in transporting goods and people goes far beyond Keretapi Tanah Melayu or KTM. The Ministry of Finance-owned corporation seems to be tasked with running the operations of the double-tracked rails (costing over RM36 billion) provided courtesy of the government.

The introduction of high-speed rail (HSR), now being finalised at a cost of over RM40 billion, raises questions of whether it will be handed over gratis to KTM to run as well? If not, what will the impact be on KTM’s double-tracking operations between Kuala Lumpur and Johor Baru.

Financial health

Currently, KTM’s share of the cargo market in the peninsula is just 3% with revenue of RM221.5 million (for freight and haulage services as well as parcel and mail services) for 2012, the last full year for which figures are available. This is a mere 3.7% increase from the RM213.6 million seen in 2011.

Passenger traffic and commuter services brought in RM81.2 million and RM79.3 million respectively, for a combined total of RM160.5 million. These two sectors saw a drop of 8% from a year ago.

The electric train service (ETS) sector was the only passenger-based ridership sector which showed an increase in revenue, growing from RM23.9 million in 2011 to RM31.9 million in 2012, an increase of about a third.

Overall, 2012 was a mixed bag in terms of financials with group revenue increasing slightly over the year from RM441 million to RM454.7 million. However higher costs of services and operational expenses meant an increase in losses to RM240.14 million in 2012 from the RM103.45 million in 2011.

It is clear that unless KTM can multiply its revenue multifold, the enormous cost of double-tracking is going to be so much money poured down the drain (See article tomorrow). What is more, the potential addition of the Kuala Lumpur-Singapore HSR will add on considerably to its woes.

The beginnings of rail in Peninsula Malaysia

Before the advent of cheaply available road and air travel, the railway was a primary means of transportation and is often credited with being the catalyst of both economic and social development.

From an economic angle it allowed for the cheaper movement of both labour as well as goods and allowed for the creation of larger markets.

The history of rail in Malaysia is not well documented, despite the fact that it played a key role in the development of the economy primarily in the Peninsula. Originally developed to transport tin from the mines in the hinterland to the coastal ports, the first link was laid from Taiping to Port Weld (known today as Kuala Sepetang) in 1885.

By the early 20th century, tracks were expanded to span the length of the Peninsula from Padang Besar, Perlis to Singapore and from Gemas,Negeri Sembilan to Hat Yai in Thailand.

Up until 1948, each state was in charge of running their own railway systems. Then in 1948 the British implemented the Malayan Railway Ordinance to streamline rail administration. As a result, the Federated Malay State Railways became the Malayan Railway Administration (MRA).

In the 90s, MRA became Keretapi Tanah Melayu Bhd (KTM) following the Railways Act 1991. The new entity ran its operations much as a private corporation with the one exception being that it was owned by the government via its investment vehicle Minister of Finance Incorporated.

In 1997, the government attempted to privatised the rail operator in what was an ultimately unsuccessful exercise. The government initially handed the management of KTM to a consortium named Marak Unggul which was majority owned by Renong Bhd, with the plan that the latter would eventually purchase equity from Minister of Finance Inc.

However the plan failed after Renong was hit hard in the Asian Financial Crisis of 1997/1998, and several years later in 2002 the government took control of KTM back – with the actual privatisation never actually transpiring.

KTM since its incorporation

Since being incorporated in the early 90s, KTM has had a tough time of it. Although initially posting profits in the immediate years after it was incorporated – the tide quickly turned for the rail operator and it has been in the red for some years now.

In its annual report for 2012, the KTM group has an accumulated deficit of RM983 million as at Dec 31, 2012.

Over the years, the losses have been attributed to a combination of high operational costs, a decline in its freight business and relatively low fares (KTM fares are somewhat subsidised by the government, although there is no fixed system that determines the pricing).

The accessibility to cars and an extensive road system, in addition to low-cost air travel have also eaten into much of KTM’s consumer base.

Current leadership at KTM

In his inaugural visit to the Sentul depot and meeting with the media after being appointed chairman on Feb 24, 2014, Nawawi Ahmad noted that competition from the airlines, which are offering increasingly lower fares, is a key factor that will need to be managed.

Nawawi added that his unofficial motto for KTM is “road and plane today, rail tomorrow” and added that the challenge for KTM would be to make rail a viable option to the other two.

KTM is currently in the middle of its latest turnaround plan which was put into place by current president Elias Kadir when he was appointed in May 2012. Prior to that, it is fair to say that KTM has been subject to various turnaround plans that have not taken root.

In May 2012, Elias Kadir was appointed as president and has since formulated and is carrying out a three-year turnaround plan. Although closing in on his second year in charge, as KTM’s 2013 results are not currently available, it is hard to gauge how well the plans are progressing.

Elias who headed the cargo division before assuming the presidency is said to be a popular choice because he adopts a hands on approach. It is said that he was the first president to include the unions in discussions when developing his turnaround plan. However by all accounts his relationship, at least with the Railwayman’s Union of Malaya (RUM), seems to be souring.

On March 16 following a staff retreat the new chairman said that in view of a changing business environment, the KTM team was refocusing its business plan. In his remarks to the media, Nawawi said that he would work with the existing senior management team to effectively carry out plans to bring KTM back to profitability.

He said that the revamped plan would focus on four strategic business units (SBU), which are cargo, commuter, ETS and intercity.

In particular he highlighted two areas which he identified as opportunities for KTM – capitalising on the double tracking project and growing its cargo business.

Focus on double tracking and cargo

Since the early 2000s, the government has undertaken a massive project to change much of the rail tracks in Malaysia into an electrified double track system. The benefit to using a double track system, is that it allows trains to travel at greater speeds and offer a more frequent service as trains can continuously run without waiting in stations for oncoming trains to pass before proceeding.

However, the double tracking project is both behind time and over budget, and there are questions about whether sections that are already in place have had the desired impact for KTM.

Senior management have also indicated that they are looking at ways in which they can increase the cargo side of their business, a market in which they readily admit they are on the back foot.

Whether or not this will be enough is the question on everyone’s mind. In recent months there have been suggestions that privatisation might be the right route to go down to turn the rail operator around. However a joint venture between Gamuda and MMC Corp was recently rejected by the government.

In a nutshell, KTM’s problem is too low a turnover in comparison to the infrastructure that has been put in place, such as double-tracking. In fact it may cost more to fix this issue as rolling stock levels are too low and may call for investments potentially totalling RM2 billion or more in the coming years if traffic is to increase. Furthermore there is also a need to market these services.

A re-focus on rail

There appears to be a shift in the government’s transportation policies of late. After years of building and improving road networks and connectivity, the government appears to be re-focusing on rail.

Aside from double tracking, the ongoing mass rapid transit (MRT) project is currently underway to increase the accessibility and reach of a rapid rail network, as a means of reducing traffic congestion and opening up new development areas in the Klang Valley.

The government has also indicated that it is looking to build a high speed rail link to Singapore by 2020, and has said that the two governments are in negotiations to iron out the details of the link.

Last year, Prime Minister Najib Abdul Razak announced that the government will be allocating RM160 billion to rail-related projects from now until 2020 – aimed at improving efficiency and safety. The government has also identified developing the rail sector as a means of creating jobs.

What remains to be seen is how KTM can take advantage of this re-focus on rail, and how it can integrate its services to complement the other rail-related projects in the pipeline. KTM’s survival as a relevant player in Malaysia’s rail sector appears to depend on this.

In the coming articles, we will discuss what is working for KTM and what is not, in addition to looking at some of the other options that might offer an opportunity for recovery.

Tomorrow: Making a RM36 billion outlay work