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

Kuala Lumpur Light Rail Transit 107a moral hazard. However, as ex ante mistakes are inevitable because ofinformation and political constraints, it was more important for the governmentto be able to implement ex post measures to ensure the project’scommercial viability by promoting system integration necessary to increasepassenger numbers. Here, the failure of privatization was ultimately due tothe government’s ex post political failure. The government was unable toforce the concessionaires and private developers to accept route alignmentand the physical integration of stations necessary for system integration; itcould not streamline bus operations and prevent private bus operators fromplying LRT routes; it failed to restrict parking in the city and regulate parkingcharges; and it failed to restrict private cars in the city centre. In short,the government lacked the institutional and political capacity to plan andcoordinate a successful urban rail system, needing to renationalize the LRTin order to make the necessary changes to better integrate the system.The experiences of the UK, Singapore and Bangkok demonstrate thatsuccessful (urban) rail provision depends on effective regulation and governmentcoordination of investment and policies to integrate different modes oftransport. This requires the institutional capacity to identify an appropriatelevel of subsidy, and political capacity to enforce cost reductions and capitalinvestment within this subsidy level. More crucially, having committed towhat was arguably a commercially unviable privatization, the governmentneeded to implement measures to at least ensure a second-best outcome. Thiswill depend on its political capacity to enforce the regulation, coordinate theinvestment and implement the policies necessary. It is not the privatizationin itself that will lead to success but rather the effective and insulated interventionof the state in financing and coordinating these processes and inmonitoring performance.This chapter is structured as follows. The next section examines thechallenges faced by the privatization of urban rail systems. This is followedby a background to the privatization and subsequent renationalization ofthe Kuala Lumpur LRT. We then evaluate the performance of the three LRTsystems in terms of financing, delivery, financial performance and impact ontraffic volume (congestion). The following section examines the government’sex ante and ex post failures which affected performance, looking at information,institutional and political failure. We conclude by summarizing themain causes of the LRT’s failure and important conditions for successfulprivatization.ChallengesRail privatization is argued to finance capital investment and provide incentivesto improve efficiency. Evidence however shows that the private sectorhas had difficulty financing (urban) rail systems and improving efficiency.This is because the rail industry is characterized by high capital costs and lowfarebox ratios (the ratio of fares to operating costs) which are compounded