06 December 2017

The building of Southeast Asia railway network a boon for international corporates

The USD41 billion in railway construction projects announced across Asean’s largest markets over the past six months presents significant opportunities for international corporates

By Sunil Hiranandani, Head of BRI for HSBC Commercial Banking

It can sometimes be hard to recognise just how big the economic potential of ‎Southeast Asia is.

The Association of Southeast Nations (Asean) - with its ten-member countries spanning countries as diverse as Singapore and Myanmar – has a combined GDP the size of the UK and 630 million people whose consumer spending is expected to hit USD2.3trillion by 20201.

But now, a flurry of activity aimed at building out the region's railway network - sparked in part by China's Belt and Road Initiative - offers a handy reminder that Asean as an economic powerhouse in the making - and that it presents business opportunities for companies from far beyond Asia itself.

China’s plan, under BRI, seeks to support the construction of more than 7000 kilometres2 of rail lines between itself and some of its largest Asean supply chains - Laos, Cambodia, Thailand, Malaysia, Singapore and Indonesia.

Many of the projects have started to take shape in the past six months.

In August 2017, the Thai government approved3 USD5.5 billion for the construction of a 252 kilometre line connecting Bangkok to its north-east border. Of Malaysia’s expected USD85billion transport investment to 2020, USD75 billion is being dedicated to railway development4, including a double tracking project running from its north to south.

In April 2017, China and Indonesia agreed to terms for the building of the high-speed rail link between Jakarta and Indonesia’s fourth largest city, Bandung5. And towards the end of 2017, the Singapore and Malaysian governments are expected to announce the tender arrangements for their respective legs of the USD15 billion6 350 kilometre Kuala Lumpur (KL) to Singapore high-speed railway (HSR).

The joining up of the South-east Asian railway network will be a paradigm shift for the region. Apart from removing bottlenecks in the flow of goods between China and Southeast Asia, it has the potential to increase intra-regional trade and shave precious working capital costs.

And given that many of the primary contractors will not be able to absorb the entire project, and will be seeking sub-contractual support, this will open doors for smaller companies to play a role in the infrastructure value chain.

Engineering firms from across the world are already active in Asean and the upcoming projects present renewed opportunities.

From Australia, engineering firm, John Holland – a subsidiary of Chinese firm CIMIC, is involved in the construction engineering and tunneling services for Malaysia’s double tracking project7.

In February, British engineering firm - Mott Macdonald - was part of a three-party consortium who won the joint development partner contract providing project management support and technical advice on the KL to Singapore HSR’s technical and safety standards for the project8.

German engineering firm, Siemens, was awarded a contract to supply 42 unmanned light rail vehicles for Malaysia9. And Siemens again has announced that it is teaming up with Malaysian firm, George Kent, to bid for the KL to Singapore HSR tender10.

Relatedly, Chinese, Japanese and Korean consortiums are all vying for the same contract, and both the Singapore and Malaysian governments have staged roadshows in the UK to meet potential investors11.

Elsewhere, Canadian firm - Bombardier Transportation - signed a strategic agreement with China Railway Rolling Stock Corporation (CRRC) in February 201612 which involves them being in partnership to produce train-sets for the multitude of projects that CRRC are involved in across Asean.

From the US, Jacobs Engineering was appointed Lead Consultant for the track work design for the Klang Valley Mass Rapid Transit Line in Malaysia13. And AECOM was asked to conduct an advanced engineering study for the Singapore stretch of the KL to Singapore HSR rail infrastructure.

Finally, French company Thales has secured a contract to supply an automatic fare collection system for Bangkok Metro’s Blue Line extension14.

The projects will also generate down-stream opportunities for international corporates beyond the rail construction.

For example, the Seremban-Gemas double tracking project in Malaysia was built by India's Ircon International in 2013. It has seen new commercial and residential areas springing up, and the catalyst for newly-opened industrial areas such as Sendayan Tech Valley and Bandar Enstek.

Apart from their investment into South-east Asia, each of these international firms have a swathe of suppliers and supply chain partners from their home markets who are being swept into supporting these projects.

When seen from these perspective, the sheer international connection of the Southeast Asian railway network becomes clearer.

Naturally, with projects of this scale, it’s not always going to be smooth sailing. Differences in construction standards, general project disputes, rivalries between contractors, and financing and environmental concerns are among the issues that can beset any project – and especially projects that involve multiple jurisdictions and take years, or even decades, to complete.

Despite the economic improvements in Asean, these challenges show that international firms still need to go into the projects with their eyes wide open. Many have gone into partnership arrangements as has been the case for Mott Macdonald and Siemens.

It is also important for them to establish frameworks designed to quickly identified and iron out any differences that arise.

That said at the end of the day, the flurry of activity around the Southeast Asian railway network shows that the long-term benefits of closer physical ties both between Asean’s 10 member countries and with neighbouring China have been well and truly recognized – and it solidifies the economic narrative of one of the world’s most dynamic economic regions.

For international firms looking for commercial certainty and a steady pipeline of activity, there are few better regions and markets than Asean’s transportation sector.

1Accenture Asean consumer research
2https://thediplomat.com/2016/06/singapore-kunming-rail-link-a-belt-and-road-case-study/
3https://www.reuters.com/article/thailand-china-railway/thailand-approves-design-contract-for-rail-project-with-china-idUSL4N1L836T
4HSBC Global Research: “China’s Belt and Road Initiative: seeing is believing”, 27 September 2017
5http://www.railwaygazette.com/news/high-speed/single-view/view/jakarta-bandung-construction-contract-signed.html
6https://asia.nikkei.com/Business/Deals/Singapore-Malaysia-could-pick-builders-for-high-speed-rail-by-late-2018
7 Australian Financial Review, 24 May 2017, “The biggest winners on the new silk road”
8http://www.channelnewsasia.com/news/singapore/consortium-wins-joint-development-partner-contract-for-kl-singap-7588594
9https://www.globalrailnews.com/2017/08/07/crrc-and-siemens-awarded-unmanned-lrv-contract-for-malaysia/
10http://www.thestar.com.my/business/business-news/2017/10/11/george-kent-siemens-put-in-bid-for-kl-singapore-hsr/#ehbAf7bEp5BQldDk.99
11https://www.lta.gov.sg/content/ltaweb/en/featured-projects/hsr.html
12http://www.bombardier.com/en/media/newsList/details.binc-20160923-bombardier-and-china-railway-rolling-stock-corpora.bombardiercom.html
13http://www.businesswire.com/news/home/20170718005360/en/Jacobs-Secures-Major-Rail-Project-Malaysia
14http://www.railway-technology.com/news/newsthales-to-deliver-automatic-fare-collection-system-for-bangkok-metros-blue-line-5908984

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