Malaysia strikes a bargain with China over rail project

Japan Economic Newswire |

China has not only agreed to slash the cost of a controversial railway project in Malaysia by nearly 33 percent, but also partake in a joint venture to operate and maintain the rail line to help ease Malaysia's financial burden, Prime Minister Mahathir Mohamad said Monday.

The double-track, 688-kilometer East Coast Rail Link faced being canceled when Mahathir's predecessor Najib Abdul Razak was deposed in last May's election.

With an original price tag of 65.5 billion ringgit ($15.9 billion), it was one of the showpiece infrastructure projects under China's Belt and Road Initiative when Najib was in power.

Mahathir had previously questioned the viability of the project and its dubious terms, citing the risk of becoming a white elephant and ensnaring Malaysia in a debt trap.

In his second turn as prime minister, the 93-year-old leader forced China back to the negotiating table.

Last Friday, both sides reached an agreement to resume the project at a reduced price of 44 billion ringgit, with the rail line shortened to 640 km.

In a press conference at his office, Mahathir fleshed out details of the agreement that was signed in Beijing between Malaysia Rail Link Sdn. Bhd., the project and asset owner of the ECRL, and China Communications Construction Co., the engineering, procurement, construction and commissioning contractor for the project.

Mahathir said his government had a choice to terminate the project, but it would have cost it 21.78 billion ringgit in compensation.

"It is our belief that the ECRL will serve as a stimulus for economic growth and development especially in the east coast states," he said. "This improved project will provide freight and passenger transportation, attract investments along the railway corridor as well as generate significant employment opportunities."

Despite perceptions of an anti-China bias, Mahathir has stressed his support for China's Belt and Road Initiative and he is among the first Asian leaders to confirm participation at a Belt and Road summit scheduled for later this month in Beijing.

Oh Ei Sun, a senior fellow at the Singapore Institute of International Affairs, told Kyodo News that China considers ECRL a keystone in its Belt and Road Initiative, which has come under scrutiny and criticism.

Beijing has financed road, railway, port and pipeline projects in over 60 countries in the ambitious project to recreate the ancient Silk Road network of trade routes that connected East and West.

But some of the projects, like the Hambantota port in Sri Lanka that was built and financed by China but now sits nearly empty, have made governments more wary of Chinese money.

"Malaysia is important both as a major trading partner of as well as a geopolitically strategic country to China, especially in realizing its Belt and Road Initiative," Oh said.

In his press conference, Mahathir stated his government's main objection to the previous ECRL deal was that it was an "unjustified, hefty lump sum price which lacked clarity in terms of technical specifications, price and by extension, economic justification."

Mahathir said the new supplementary agreement covers two phases of the project at a lower cost of 44 billion ringgit or 21.5 billion ringgit cheaper than the deal agreed to by his predecessor.

"This improved ECRL will cost 68.7 million ringgit per km compared to 95.5 million ringgit per km under the original agreement," he said.

CCCC has agreed to participate in the operation and maintenance of the ECRL through a joint venture company that will be set up with MRL, with each company having an equal share.

"CCCC will provide technical support and share the operational risk after the project's completion. This arrangement will ease the financial burden on Malaysia which previously was to bear the entire cost of the operation and maintenance," he said.

Malaysia also successfully negotiated to have local participation in the civil works increased from 30 percent to 40 percent.

The Chinese company will also refund part of the 3.1 billion ringgit advance payment paid for phase two of the original contract that has now been aborted under a new realignment of the railway line.

The new 640-km line with 20 stations will run from Kota Baru, the capital of the northeastern state of Kelantan, through Kuantan Port, the biggest port on the east coast in Pahang state facing the South China Sea, and then south to Jelebu in Negeri Sembilan state before moving upward to the west coast and ending in Port Klang, the country's largest and busiest port by the Malacca Strait.

Malaysia is looking at maintaining the 85 percent funding from the Export-Import Bank of China at 3.25 percent interest.

"The reduced amount is still being negotiated with China Exim Bank and we envisage that this will result in lessening the financial burden of the government in terms of the principal repayment amount, total interest costs and other fees," Mahathir said.

Under the old price tag of 65.5 billion ringgit, Malaysia had said it would end up paying 80.92 billion ringgit after taking into account land acquisition, interest, fees and other operational costs.

Construction of the ECRL is expected to resume next month and is targeted for completion by , 30 months later than originally planned.

==Kyodo

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