This article first appeared in The Edge Financial Daily on March 14, 2018 - March 20, 2018

KUALA LUMPUR: A serious rethink of the business model of Keretapi Tanah Melayu Bhd (KTMB) is needed if it is going to survive as a going concern moving forward, said a think tank.

“The government, led by the transport and finance ministries, needs to rethink the entire basis of the separation between rail asset ownership by the Railway Assets Corp (RAC) and rail operations by KTMB,” said Penang Institute head Dr Ong Kian Ming in a statement yesterday.

He said the possibility of recombining the asset ownership and operations should be studied and evaluated carefully so as to allow KTMB to monetise some of the physical assets such as land and stations to cover for its debt and operational losses.

“These assets could also be used to increase non-fare revenue in other areas such as retail and advertising,” he added.

“KTMB also needs to be better integrated with other forms of public transportation in the Klang Valley, especially in terms of seamless single-ticket usage with the light rail transit, mass rapid transit and Rapid KL buses.

“Without such a serious rethink, it is likely that KTMB will remain financially and operationally inefficient in years to come, and the amount of money which the government must pour into KTMB will only continue to grow,” he noted.

Based on figures from KTMB’s annual report, accumulated losses from 2000 to 2015 totalled RM1.87 billion.

“Only in 2016 did KTMB manage to achieve a profit of RM63.22 million, due largely to a one-off asset disposal in a property joint venture. Without this disposal, KTMB would have made a loss of RM189.2 million in 2016,” said Ong.

He attributed the railway company’s dismal financial performance to its inability to control costs.

“Even though KTM’s revenue had increased by 44% from 2010 to 2016, in every year from 2010 to 2015, the cost of services exceeded revenue. Only in 2016 did revenue exceed the cost of services largely due to its electric train services (ETS).

“KTMB would have incurred even larger losses if not for the non-repayment of soft loans totalling RM880 million provided by the government. KTMB has asked for the start of repayment of these loans to be postponed to 2021, but the cabinet has yet to make a decision on KTMB’s request,” Ong added.

Without the government’s support and backing, Ong believes that KTMB would not be able to survive as a going concern, and this has been acknowledged in its most recent audited accounts.

Thus, KTMB must undertake “serious” cost-cutting measures including eradicating corruption, improving transparency and minimising bad business decisions, Ong said, citing the RM85 million project given to Hopetech Sdn Bhd to install an automatic fare collection system that was later abandoned.

However, the future prospects for KTMB’s other services do not seem so bright, noted Ong.

That’s because the Railway Network Access Agreement (RNAA) will see the ownership of all of KTMB’s physical assets such as the stations, the trains, the track, and staff quarters being transferred to the RAC, he said. This agreement runs for a period of 30 years and was targeted to come into effect in January this year.

“The RNAA will introduce more competition for KTMB, especially in the cargo sector which currently makes up 40% of KTM’s total revenue.

“At the same time, it is uncertain if the cost savings for KTMB (derived from not having to pay for the maintenance of the tracks and stations) will make up for the increase in costs resulting from KTM having to pay RAC access charges for the use of the trains, the track and the stations.

“It is also uncertain if the debt totalling RM880 million incurred by KTMB to procure 80 sets of electric multiple unit trains will also be transferred to the RAC,” he said.

Ong also pointed to KTMB’s ridership across all service offerings, which has been declining with the exception of the ETS.

Daily ridership for the KTM Komuter peaked in the first quarter of 2015 (1Q15) at 137,500 passengers. By 3Q17, it had fallen to 99,033 passengers, translating into a 27.8% decline in a period of 2.5 years.

At the same time, yearly ridership for the KTM Intercity services has been steadily decreasing from 2010 to 2016. Going from 2.35 million passengers in 2010 to 618,000 passengers in 2016, there was a 73% drop in ridership over a seven-year period.

Since 2014, the volume of freight traffic had also dropped significantly, from 7.83 million tonnes in 2014 to 5.99 million tonnes in 2016, a fall of 23.5%.

The only bright spot in KTMB’s performance is the ETS, said Ong, noting that ridership had increased by nearly tenfold, from 215,000 in 2010 to 2.06 million passengers in 2015, with a further increase to 3.57 million passengers in 2016.