ECRL poser clouds China’s Belt and Road ambitions

KUALA LUMPUR (June 18): China’s ambitious Belt and Road Initiative (BRI) could face another setback if the Malaysian government decides to scrap the 688km East Coast Rail Link (ECRL), according to Koh King Kee, head of the Belt and Road desk at Baker Tilly Malaysia.

A failure to see the project materialise will result in costs not only to Malaysia but to China as well, Koh said, as the latter’s credibility in delivering BRI-related infrastructure projects will be hit with a fresh round of scepticism.

“Both Malaysia and China are in damage control mode [over ECRL],” he told The Edge Financial Daily in an interview, adding that it will not be in China’s interest to see the project fail.

However, it is unlikely that the project will be derailed completely as progress has been made of up to 20% of the railway’s first phase, which stretches 600.3km from Gombak to Kota Baru.

A source close to the matter said that although the main contractor, China Communications Construction Co Ltd (CCCC), has not stopped work on the ECRL, which has an overall completion rate of more than 14% currently, the contractor is proceeding “very cautiously”.

“Ultimately, CCCC is a [Chinese] state-owned company. They need to wait for instructions from the top,” the source told The Edge Financial Daily, adding that there has so far been no renegotiations made with the contractor on the subject of cost.

However, Koh said competition among China’s state-owned enterprises (SOEs) themselves is intense, resulting in rules and regulations being flouted in order to secure projects overseas.

“We need to distinguish between SOEs and the Chinese government,” he said, adding that poor regulatory oversight meant that some of these companies may not be acting in the true spirit of the BRI.

Malaysia has already paid RM19.7 billion as 15% mobilisation fee, drawn down by the China Export and Import Bank, according to a report by a local daily last week. The same report cited sources as saying that at least RM15 billion could be saved from the initial RM55 billion quoted for the railway.

Market talk is rife with speculation over what could happen to the ECRL, including the possibility that the railway could be built as a single track on a double-track formation, reducing the implementation to just Phase 1 for the time being, or shortening it to run up to Kuantan Port City only.

However, no official decision has been announced as yet after the new Malaysian government said the ECRL project, in particular its terms of financing, would be reviewed.

Finance Minister Lim Guan Eng has said the project would be among the issues discussed during his upcoming trip to China, on top of two pipeline contracts worth RM9.4 billion — one to transport gas in Sabah and another to carry petroleum in Peninsular Malaysia.

Koh takes the position that elements of corruption, rife under the former Barisan Nasional administration, have tainted China’s image as a trade and investment partner in Malaysia, and that this results in a short-term pullback by China.

“In the long run, however, I think prospects are positive for the relationship between China and Malaysia,” he said.

Having recently returned from a visit to China’s major think tanks, including the Center for China and Globalization, Koh shared that Chinese parties remain keen on working with Malaysia.

“In fact, greater transparency under the new government could benefit them if they can show that they have the capability and capacity when bidding for jobs [here],” Koh shared.

President of the Council of Eminent Persons, Tun Daim Zainuddin, has said in a media interview that China is “very important” to Malaysia, and that the former may have been misled by former administrators.

Still, Prime Minister Tun Dr Mahathir Mohamad’s recent trip to Japan and his remarks about closer ties with the eastern nation were seen by observers as a move to show that the Southeast Asian country does not need to rely on China alone for economic growth, despite the republic being its largest single trading partner.

Both Dr Mahathir and Japan’s ambassador to Malaysia Dr Makio Miyagawa have spoken up about collaboration between both countries in areas such as education, trade and investment, as well as defence.

The apparent hedging of bets may not be unwarranted given that Malaysia is not the first nation that has run into financial concerns over infrastructure projects led by Chinese companies.

What happened in Sri Lanka has raised red flags among those who were eyeing some of the easy money coming from China under the BRI. In 2008, the Sri Lankan government borrowed from China to build a deepwater port in Hambantota via a joint venture with a Chinese firm. When Colombo could not repay the loan for the project, it had to ink an agreement mid last year to cede the port to China for 99 years, to ease the debt burden.

Following that, the BRI, which spans more than 68 countries accounting for over 30% of global gross domestic product, has hit snags in other developing countries.

The governments of Pakistan, Nepal, and Myanmar poured cold water on major hydroelectricity projects, worth a total of almost US$20 billion, that were planned by Chinese companies late last year. The projects were either cancelled or sidelined, with reasons cited including tough financing terms and financial irregularities by the Chinese firms.

Koh, however, maintained that without China, none of these developing countries would have had the financial muscle to achieve infrastructure developments.

“The lending rules of other global financial institutions such as the World Bank have been more stringent, whereas China’s terms are more relaxed,” Koh said.

But have looser lending terms resulted in more bad loans being dished out? “Every bank is bound to have a few bad loans, so this is not surprising,” Koh said.

The quest to stay ‘moderately ahead’

According to Koh, China’s model of development and infrastructure expansion may seem excessive simply because it does not fit with the conventional Western ideology of demand and supply.

“Instead of serving current demand, China builds infrastructure ahead of its needs. Infrastructure is meant to act as an economic catalyst,” he said, adding that one of the main thrusts of the BRI is to achieve greater economic parity between the prosperous east coast of the republic and the less developed, landlocked west.

The same can be argued for the ECRL, Koh said, who thinks the infrastructure is necessary to transform the “economic hinterlands” of Peninsular Malaysia’s east coast.

“Conceptually, it is good. The cost is a separate issue because you cannot expect commercial profit from such a large-scale infrastructure project ... it should be treated as a public good that the government [must] provide,” he said.

While the BRI may seem to be solely an infrastructure push by China, Koh said Malaysian companies should be aware that the initiative also involves policy coordination, trade and investment cooperation, besides financial integration and establishing people-to-people efforts such as developing human capital.

Koh shared that he himself is involved in advising a top public-listed energy consulting firm from China, which is interested in investing here, and is now seeking to incorporate a subsidiary in Kuala Lumpur.

Malaysian industries could also tap into China’s advancements in robotics and artificial intelligence, he said. The Digital Free Trade Zone, which will see the Malaysian government working with Alibaba Group to establish the latter’s regional logistics hub, represents an example of policy and industry collaboration.

Not so smooth sailing

Another key element of China’s BRI is retaining its sovereign power in open seas, which is vital to sustain trade. Historically, China has been cut off from the world via naval blockades, Koh said.

So is it likely that China will heed Dr Mahathir’s call for a reduction in naval power in the South China Sea?

While Koh declined to comment on China’s commitment to growing a physical fleet, he believes that the country “will not compromise” and “will defend its interest in the South China Sea at all costs”.

China has also poured investments into shipping ports and alliances across the world. A report by the Economist Intelligence Unit showed that Chinese companies had seaport investments in 34 countries as at September 2017, with planned investments in an additional eight countries.

In Malaysia, these include investments in the Melaka Gateway deepsea port, besides the Kuala Linggi Port, the Penang Port, and the Kuantan Port. There are now nine Malaysian ports and 11 Chinese ports in the China-Malaysia Port Alliance.

On the flip side, China is also extending its economic corridor across land via its alliance with Pakistan under the China-Pakistan Economic Corridor. According to Koh, this acts as a “back door” into China’s western provinces, which not only serves to benefit economic development in that part of the country but also reduces China’s reliance on the Strait of Malacca for its energy supplies and trade.

This article first appeared in The Edge Financial Daily, on June 18, 2018.

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