For readers who have missed part 1, you can read it here. In part 1, I explored why Malaysians take trains and the decisions that encourage and discourage them from doing so. In part 2, I will be talking about the economics surrounding Malaysia’s investments in train projects, and how it benefits (or doesn’t) the country.

Investment in Trains is Aimed at Enabling Workers to Get to Work, Businesses to Transport Their Products, and Boost the Property Sector Surrounding Train Stations.

Let’s get into it. Malaysian’s main mode of transport in the past used to be cars, motorbikes, buses, and yes, walking. Originally conceived in the early 1980s, it wasn’t until 1999 that both the STAR and Putra LRT systems were fully operational. It was the first time that Malaysians in Klang Valley got to travel all the way from far-flung places to the city center to work without going through the morning jam or risking their lives on the road.

This opened up opportunities for many Malaysians to look for jobs in places that were deemed unreachable initially (mainly for people without cars). The labour force participation rate (which is a measure of how many people are looking for work in comparison to the total population) in Klang Valley increased from 65.0% in 1998 to as high as 67.0% in 2004. In the 5 years after the completion of STAR and Putra LRT, the labour force and employed people in Klang Valley grew by 25.6% and 31.0% respectively. We started to see more and more women come out to the workforce to work through traveling the train lines, as the husbands are the ones driving to work.

The 2010s was the watershed in this movement for more people to find jobs in Klang Valley. The completion of MRT1, Kelana Jaya extension, and Ampang Line extension, paved the way in 2016 and 2017 for increased participation by Malaysians to work. Labour participation rate in Klang Valley increased from 66.2% in 2010 to 75.4% in 2021. In just 20 years since the completion of the original lines of STAR and Putra, the labour force in Klang Valley doubled in size from 2.2 million in 1999 to 4.5 million in 2019. The enabling of Malaysians to travel through train lines to find jobs and get to work certainly helped in driving this growth.

Let’s not forget the impact of the development of train stations on the surrounding Tamans. For better or worse, train stations have been good for the property sector in the first half of the 2010s when the major projects of MRT1 and the extension of the STAR and Putra lines were announced. House prices in Kuala Lumpur and Selangor were growing by 10% to 11% every year from 2010 to 2015. This means that if you bought a house worth RM100,000 in 2010, you would have been able to sell that house at a price of RM170,000 in just five years. Now, that’s a big return on your investments.

So, what about the impact on businesses? This is where demand and supply are best explained. Demand for living near train stations increased demand for properties around the stations. When more people stay around stations, there will be demand for things that we need — groceries, education, healthcare, and others. That’s where businesses can now fill that supply side. They can provide the goods and services that these people need. When businesses come in, they need workers. Workers from other places could then take the train to reach these stations to work. See how the cycle works in this case?

But, How is Malaysia Funding these Big Investments in Trains? Through Taking on More Debt

RM233.8 billion. That’s how much revenue the government obtained in 2021. RM295.8 billion. That’s how much the government has spent also. Wait. How are we getting the money to fund any of the investments we need then for train projects?

That’s simple. The government borrows — a lot of them. In the last 12 years, government debt has increased by 2.5 times from RM407 billion in 2010 to RM1.08 trillion in 2022. Government investments in the transportation sector also increased from RM8.7 billion in 2010 to an average of RM10.6 billion from 2011 to 2021.

I am sure you are wondering whether these investments are actually translating into more benefits for Malaysians. After all, we are paying taxes to fund the government, and are these investments into trains actually yielding more social benefits on the whole? The theory is that these trains will improve the productivity of the Malaysian economy, and yield more tax to be collected when Malaysians make more money in the future. From there, the debt taken on for these train projects should be paid off with future taxes from Malaysians. However, when will that be? And will it happen?

Hard Question to Answer on Whether Train Projects Being Done Now Will Improve Malaysia

This is inherently a hard question to answer. We are spending billions of taxpayers’ money and taking on billions also in debt to fund these projects. Here’s a straightforward way to think about this. The Malaysian government bond yield for all years currently ranges between 3.47% to 3.94%, which means that the Malaysian government needs to pay those interest rates back to its debt holders. In finance, this means the Malaysian government needs to make a higher profit of let’s say 4% to 5% to be able to cover its interest rates.

However, there isn’t a “profit” that the government makes like a company does on its projects. These investments into train projects should theoretically improve Malaysia’s economic performance so we should look at the GDP growth rate of the country to see this. At the current juncture, Malaysia’s economy has been growing at a rate of about 5.0% before the pandemic. So technically, the economy is still growing enough to cover this.

But that’s not the answer we are going for here. Are train projects actually beneficial for Malaysians? That’s the big question. Are we saving money by taking trains rather than cars? Well, there is some evidence for this. Malaysians in Kuala Lumpur in 2004 spent about 13.3% of their spending on transportation and that number has decreased to 12.7% in 2019. Meanwhile, in Selangor, the percentage of spending on transportation has declined from 17.6% in 2004 to 13.6% in 2019.

While this may sound good, the Malaysian government’s finances have actually deteriorated in recent years because of these expensive transportation projects. The government is spending more each year to service the repayment of debt that it has been taking on. The debt service to government revenue ratio has increased from 9.8% in 2010 to a whopping 16.3% in 2021.

All in all, these train projects that the government has been investing in, better come true and actually benefit the economy. Or we will be looking at wasting billions of ringgit in projects that are white elephants, just like we did in Putrajaya.