Malaysia May Sell Islamic Bonds to Fund $16 Billion Rail Project

Malaysia may sell ringgit- denominated Islamic bonds to help finance construction of a mass railway in Kuala Lumpur as part of a $444 billion investment program, Prime Minister Najib Razak said in an interview.

The government estimates the network will cost 48 billion ringgit ($16 billion) to build, making it the single biggest development project undertaken by Southeast Asia’s third-largest economy. Najib’s 10-year plan aims to attract overseas investors and includes an initiative to create a new international financial district, the Muslim world’s equivalent to Wall Street.

“Our preference would be to borrow domestically and it can be in a form that is Islamic,” Najib, 57, said in Putrajaya outside Kuala Lumpur on March 29 as he prepares to mark his second year in office on April 3. “We have big savings in Malaysia, especially our Employees Provident Fund.”

Malaysia is revamping its public transportation system amid increasing traffic congestion in the capital. The mass rapid transit system will cover a 20-kilometer (12 miles) radius around Kuala Lumpur’s city center and carry 2 million passengers a day when completed, the government said in a report last year on the country’s 10-year development plan.

‘Leadership Role’

The nation began offering Islamic services almost 30 years ago and a sale of sukuk, or debt that complies with Islam’s ban on interest, would enhance Malaysia’s position as the world’s biggest market for the debt. The government will take a final decision on the type of financing for the railway project in the second half of the year, Najib said.

“We have all the ingredients in place to continue to play a leadership role in Islamic finance,” Najib said. The new financial district is “going to be another significant boost to our leadership role.”

Sovereign wealth funds from Malaysia and Abu Dhabi signed an agreement in October to jointly build the business hub on a 34-hectare (84-acre) site in Kuala Lumpur. The government estimated it will cost 26 billion ringgit.

Malaysia sold dollar-denominated Islamic bonds in May last year. The yield on the 3.928 percent sukuk maturing in June 2015 fell three basis points, or 0.03 percentage point, to 2.79 percent as of 6:15 p.m. yesterday, prices from Royal Bank of Scotland Group showed. The notes returned 1.1 percent this year.

Sales of Islamic bonds in Malaysia totaled $94 billion as of last year and accounted for 66 percent of the amount outstanding globally, the central bank said in its 2010 annual report published on March 23.

Rival to Singapore

The mass railway and financial district are part of Najib’s aim to make Kuala Lumpur a more attractive place to work, invest and live. He has also announced plans for a shopping district to rival Singapore’s Orchard Road, better tourist attractions and mobilized more police to fight inner-city street crime. Kuala Lumpur was ranked 79th out of 130 cities for livability in the Economist Intelligence Unit’s 2010 survey.

Gamuda Bhd. (GAM) and MMC Corp., who are among Malaysia’s biggest builders, were appointed in December as partners to help the government plan the rail network. Syarikat Prasarana Negara Bhd., a fully-owned subsidiary of the Ministry of Finance, will be the infrastructure owner of the project, with the Land Public Transport Commission as the supervising authority, Najib said in December. Tunneling and other works will be put out to tender, the government has said.

To contact the reporters on this story: Barry Porter in Kuala Lumpur at bporter10@bloomberg.net; Soraya Permatasari in Kuala Lumpur at soraya@bloomberg.net; Robyn Meredith in Hong Kong at rmeredith8@bloomberg.net.

To contact the editors responsible for this story: Peter Hirschberg in Hong Kong at phirschberg@bloomberg.net; Sandy Hendry in Hong Kong at shendry@bloomberg.net.

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