PRIVATIZATION Privatization in Malaysia, Regulation, rent-seeking and policy failure

5 The myth of privatized urbanrailKuala Lumpur Light RailTransitContrary to privatization theory, urban rail systems have relied largely onpublic funds, either in the form of grants and subsidies, or loans throughstate-owned or international (development) financial institutions. Furthermore,urban rail privatization is fraught with difficulties because railwaysand metro systems cannot generate the revenues from fares to cover the fullcosts of their infrastructure, train operations and investment, as well as providea return on capital. This has necessitated substantial subsidies, partlyalso to limit (politically sensitive) fare increases, and to help finance capitalexpansion. As these subsidies will affect the structure of risks and incentives,privatization per se is unlikely to address issues of financing and efficiency.There are several possible reasons then why privatization may proceed eventhough it cannot address problems inherent in urban rail provision. Firstly,the government may actually believe that privatization can work. Secondly,it potentially benefits all parties, providing construction rents for the concessionaireand profits for banks, while at the same time allowing the governmentto have infrastructure projects (privately) financed. This was the case inMalaysia, where privatization aimed to facilitate the construction of KualaLumpur’s Light Rail Transit (LRT) to address growing traffic congestion.However, privatization also allowed for resources to be allocated, throughpatron–client networks, to parties closely associated with segments of thepolitical leadership. This political consideration shaped the nature of theprivatization which was consistent with the preference of domestic capitalistsfor construction-based projects (discussed in Chapter 3). This can explainwhy the government chose to privatize both construction and operations tothe same concessionaire, thereby providing the opportunities for monopolyrents from construction (reflected in higher cost per kilometre compared tosimilar systems in the region). However, this also resulted in a huge debtburden arising from capital expenditure, and which could not be sustainedgiven the problems mentioned above, creating a moral hazard which furtherreinforced the attractiveness of short-term profits from construction overlong-term profits from operations.Failure here was partly due to the government’s ex ante failure to properlydetermine project viability, and to structure the privatization to avoid creating