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

Kuala Lumpur Light Rail Transit 131heavy taxes on car ownership, road use and parking charges) and maximizepublic mobility through the use of public and non-motorized transport andtaxis.ConclusionPrivatization does not address the considerable financing and systemcoordination requirements of urban rail systems. The sector is characterizedby very high capital costs and low farebox ratios which have made it difficultfor operators to finance capital expenditure, cover operating costs and earn areturn on investment. In addition, fares often need to be kept low due to thepolitical sensitivity of high fares and thus cannot cover costs. High fares willalso potentially reduce passenger numbers. The inability of the private sectorto provide affordable fares and at the same time finance capital expansion hasnecessitated state subsidies. This in turn will require ongoing state interventionto monitor and regulate performance. The state will also need tocoordinate capital investment and operations to promote system integration,and to integrate urban rail systems with the wider public transport network inorder to improve coverage and hence, passenger numbers.The main economic objective of the LRT was to improve Kuala Lumpur’spublic transport network and reduce traffic congestion. Privatization aimedto facilitate the private finance, delivery and operation of the system. Whilethe private sector helped finance the LRT, public funds were central to allthree privatizations, contributing between 32 and 78 per cent of financing. Interms of delivery, Systems 1 and 2 were completed on time but System 3 wassubstantially delayed and its scope considerably reduced. All three projectswere more expensive per kilometre than comparable lines in Singapore andManila, in particular System 3. Fares for Systems 1 and 2 were comparativelylow but System 3 had the highest fares per kilometre in the region. Theconcessionaires of Systems 1 and 2 faced financial difficulties upon commencementof operations and were unable to service interest payments ontheir loans. System 3, while still privately owned and operated, faces increasingfinancial difficulties following mounting losses, and its commercial viabilitywill depend on debt restructuring, further loans and operational profitswhich seem unlikely in the foreseeable future. Finally, the LRT system did notappear to reduce traffic congestion although, as discussed, this was in partrelated to wider failings in the public transport system and public transportpolicy.The privatization of the LRT was characterized by both ex ante and expost failures in terms of our definitions. Despite the problems inherent inurban rail systems, the privatization proceeded because it was partlymotivated by political considerations. These in turn affected decisionsrelated to the type of privatization, resulting in the government’s ex antefailure to ensure project viability and preserve incentives. Privatizationallowed resources to be allocated to parties close to segments of the political