Silk Road Headlines_26th April, 2019

Malaysia’s East Coast Rail Link is back on track

When Mahathir came back to power in Malaysia in 2018, he wanted to roll-back some of China’s BRI-related investments, or so it seemed, for about half a year. It soon appeared that he didn’t really want to cancel any projects, but merely adapt them, to make them more favourable for Malaysia.

This has happened with the East Coast Rail Link (ECRL), a project connecting Malaysia’s east and west coast with a double-track 688/648-kilometre railway. Initially, Malaysia put the project on hold, but after renegotiations it is now a full and seemingly final go.

The line is an integral part of the BRI project, running from Port Klang on the west coast near Kuala Lumpur to Kelantan in the northeast near the Thai border, passing by several ports and airports. The line has the potential to improve trade between Malaysia and the rest of Southeast Asia, especially Thailand, Cambodia, and Vietnam.

The announcement on the restart of the project comes on the eve of the second Belt and Road Forum for International Cooperation, which will be held in Beijing on April 25-27. Mahathir sat down with Chinese media for an interview in which he flattered China to the max, and clearly indicated that he wants Malaysia to become a regional BRI trade hub, serving both land and sea routes.

He especially focused on maritime trade, offering ports for larger ships, and servicing for any ships. Mahathir evoked the good old times of the 14th and 15th century, when explorer Zheng He stopped by Malaysia on his way to the west, saying that Malaysia wants to play a similar way-station role in China’s BRI. To make that idea a bit juicier for China, Mahathir boldly claimed that Malaysia is “halfway between Europe and Asia” [Malaysia eyes opportunity to become regional hub for growing trade under BRI, says PM].

Back now to the ECRL. The main changes to the project: 

1. The contractor for the railway, China Communications Construction Company (CCCC), has agreed to cut costs by one third ($5.21 billion), to $10.7 billion.

2. CCCC has furthermore agreed to become the rail-operator, in a 50-50 joint venture with Malaysia Rail Link. CCCC will share in the operational risk and provide technical support.

3. CCCC will refund part of an advance=payment, made earlier by Malaysia.

4. The length of the railway will be shortened by 40 kilometres, bringing the costs per kilometre down to $16.24 million (was $23,14 million).

5. The railway will go through 5 states (was 4) and stop at 20 stations.

6. Malaysia is still negotiating with China’s EXIM bank to reduce the loan amount and the interest costs. EXIM bank is the main financier of the railway.

Construction will resume as soon as next month, and the railway is scheduled to be operational by 2026, two years later than originally planned [Malaysia: Revised China Deal Shows Costs Were Inflated].
Did Malaysia get a better deal? The reduction of costs is significant, but negotiations over the financing of these costs aren’t finished, so the full cut is yet unclear.

Most interesting is Malaysia’s move to bring in CCCC as a railway operator. CCCC is a state-owned construction company and China’s main BRI constructor, working on projects in Asia, Africa, Europe, and elsewhere. Malaysia says CCCC will assume operational risk, and Malaysia says it expects that CCCC’s involvement will attract more Chinese investment in the railway and related projects.

This could be true, partially true, or total spin. It seems more likely that CCCC demanded the operating role, in exchange for the cost reduction. However that may be exactly, it is sure that the operating role gives CCCC, and thus China, a large measure of extra control over the railway.

It also appears that a total of $5,27 billion in fines, which would be collectible by CCCC if Malaysia were to cancel the project unilaterally, played a large role in Malaysia’s deliberations. It can be no coincidence that the reduction ($5,21 billion) is almost the same sum as the fine.

Concluding: with the revised railway deal Malaysia earns some short time gain, but likely more long-time pain.

In 2018, Mahathir also cancelled two China-backed pipelines, after suspicions that payments to China were in fact used to pay debts of Malaysia’s 1MDB state investment fund, which is in the centre of a large financial scandal. Investigations are continuing, but don’t be surprised if the pipeline project gets a sudden restart as well, perhaps in exchange for China handing over Jho Low, 1MDB’s controller, who is believed to be hiding in Guangdong.

By Clingendael