Caixin
May 15, 2019 08:24 PM
WORLD

Exclusive: Malaysian Negotiator Reveals the Story Behind Controversial Rail Deal’s Resurrection

The twists and turns of a prominent rail project in Malaysia, which forms part of China’s Belt and Road Initiative, have made headlines since the Southeast Asian country ushered in a new leader in May last year.

Prime Minister Mahathir Mohamad, who resumed leadership of the country in a shock election victory in last May, has called the now-reduced 640-kilometer (400 mile) East Coast Rail Link (ECRL) “unnecessary,” said it had “damaging terms,” and blamed it for saddling Southeast Asia’s third-largest economy with huge debts.

The state-owned China Communications Construction Co. Ltd. (CCCC) has been commissioned to build the ECRL, slated to connect the South China Sea off the east coast of Peninsular Malaysia with shipping routes to its west.

The ECRL is part of a larger Southeast Asian rail network that Chinese companies are building, including in Laos and Thailand, and serves as a flagship model for the Belt and Road in the region. China aspires to revive the old silk trading route by building ports and rails to better connect Asia and Europe.

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After Malaysia unilaterally called off the project in July, CCCC said it had suspended work on the project at the request of Malaysia Rail Link (MRL), an entity under the country’s finance ministry set up to administer the ECRL.

CCCC also expressed concerns that the suspension came after 13% had been completed, and that the halt would impact 2,250 local Malaysian employees and hundreds of suppliers and consultants.

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But the saga took a surprise turn in April, when Malaysia announced the revival of the railroad — it signed a supplementary agreement with CCCC to cut the cost of the project by a third to 44 billion ringgit ($10.68 billion). The cost reduction “will surely benefit Malaysia and lighten the burden on the country’s financial position,” according to the Malaysian Prime Minister’s Office.

Both MRL and CCCC have agreed to set up a 50-50 joint venture to manage the ECRL, vowing that Malaysian civil works in the project will increase to 40% from 30% in the original deal. The joint venture will task CCCC with providing technical support and sharing operational risks after the rail is completed.

The new development came in the wake of Daim Zainuddin, the special envoy to the Malaysian prime minister, who visited Beijing in April to finalize the deal before Mahathir attended a Belt and Road forum later the same month.

Daim, 81, is a lawyer-turned-businessman who served as Malaysia’s finance minister twice in the 1980s and 1990s during Mahathir’s previous stints in office. He is currently the chairman of a special advisory body, the Council of Eminent Persons, set up by Mahathir soon after he was sworn in last year to offer advice to the government.

In an email interview, Daim told Caixin about the intricacies involved in the negotiations and how his government plans to work with CCCC going forward.

Below are excerpts from the interview. They have been edited for length and clarity.

Caixin: Could you share with us details on how the new Malaysian government and the Chinese side started negotiations on the East Coast Rail Link and the two pipelines. Did the Malaysian side or the Chinese side make the first contact with its counterpart on the renegotiation of the projects? What happened following the change of Malaysian government in May until the suspension of construction in early July 2018?

Daim: When Pakatan Harapan (a political party) took over in May 2018, I was appointed to head the Council of Eminent Persons (CEP), even before the initial cabinet was formed. We were tasked to study the country’s actual financial and economic situation and that’s when we started discovering all sorts of issues that had never been made public before.

There were several high-profile projects that the CEP was also asked to look into and the ECRL was one of them. We were given briefings by various parties, and we also had to dig further to understand the exact details of the ECRL project that was approved by the BN (Barisan Nasional, the former ruling party) in 2016.

When we presented the findings to the government, we also told them we had two choices — to cancel and pay the compensation or to try to negotiate a reduction in the cost of the project. As you know, when the government also discovered its public debt was far higher than announced, the fear that we would default on our commitments was very real. Hence, the decision to suspend the project until the government could have a clearer picture of just how we could move ahead.

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Daim Zainuddin, the special envoy to the Malaysian Prime Minister. Photo: IC Photo

The ECRL wasn’t the only project that was suspended. Other big-ticket projects were also affected. The government really had no choice at the time — our options were very limited and we had to play safe in order to ensure the situation did not get worse. After we had a better grasp of our actual debt situation and where we could try to reduce our commitments, we decided we would try to negotiate with the Chinese for a cost reduction in the ECRL.

When did the negotiations between the Chinese and Malaysia sides start? What did you achieve in terms of renegotiation of the projects in your visit to Beijing in July 2018? What impact did the prime minister’s China visit in the following month have? Why did the prime minister by the end of his China visit announce the projects were suspended or cancelled?

I made my first trip to China, as you rightly mentioned, in July 2018. That was the opening step towards negotiation. When the prime minister visited China in August, he may have had the impression that China was not too keen on renegotiating the deal. I must admit there was plenty of frustration and maybe the message that renegotiation would be an option was lost in translation.

There was uncontrolled speculation and people were throwing all sorts of figures around. All these added to the already intense pressure on the prime minister and he was intent on pushing for a decision — whether to cancel or push for renegotiation. In the end, the push tactic worked and both sides came to the negotiating table.

Throughout the course of negotiation, what were the major principles that the Malaysian government held? What were the major principles the Chinese side insisted on? On what fronts did Malaysia compromise and were you happy with the outcome?

As far as Malaysia was concerned, our principles were straightforward. We cannot afford to spend 66.7 billion ringgit on the ECRL project — the cost would just not have been worth it. We knew we had to find ways to bring down the cost — this included through relooking at the specifications of the ECRL. The former BN government took real liberties with how they were spending on the ECRL. We found that if the BN government had conducted the negotiations in a proper manner, the final sum would have never reached 66.78 ringgit billion.

We went in very well aware that we had a duty to ensure the country was not laden with an 66.78 ringgit billion project cost. We knew that if we could negotiate a lower project cost, lower interest payments would naturally follow and we would have even more savings.

We put our case very clearly to China and the Chinese side was very eager to reach an acceptable deal that would have seen the ECRL back on track. In any negotiation process, both sides will win some and lose some. So I personally would have liked to have achieved a lower cost than the 44 billion ringgit finally agreed on. But you must remember we had to work within the framework of an existing agreement so there were only so many reductions we could ask for.

Some quarters say 21.5 billion ringgit isn’t much of a discount with the new alignment and fewer tunnels. To these detractors I say, if we were negotiating a brand new contract, things would have been different. But since we had to start from the imperfect agreement left behind by the BN government, we could only do so much.

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Railway Rapid KL in Kuala Lumpur, Malaysia, Feb. 23, 2018. Photo: VCG

What contributes to the cost cut now? Reduction of tunneling and bridging, length, cut in overpricing or others? Is there any compensation under the new contract?

We found that with a new southern alignment, we could not only reduce the tunnels required, but we could also preserve the integrity of the Titiwangsa range and Quartz ridge. In our opinion, the former prime minister’s boast about wanting to dig the longest tunnel in Malaysia was not only extravagant — imagine the former prime minister had no qualms spending 10 billion ringgit just so that he could claim to have built the longest tunnel in Malaysia — but also unnecessary.

So there were several factors that led to the lower cost — reduced tunneling, a new alignment and of course the discounts that we fought for, and agreed upon, with China. In view of the suspension and re-alignment of the ECRL project, there will be some element of costs that need to be paid. These costs are yet to be ascertained pending submission of documents and assessment of these claims.

It is reported by the Malaysian newspaper the Malay Mail that MRL and CCCC will share equally ECRL’s operations and losses, whereas MRL will take in up to 80% of the profits, if any. Why were the arrangements?

Apart from the reduction in construction costs, we also looked at other areas where we could cut costs. As you know, public infrastructure projects can sometimes take a very long time before they start turning a profit, and the ECRL is no exception. We estimated that MOM (joint management, operations and maintenance) costs would run to 400 million ringgit a year, so we negotiated for shared costs for 20 years so that we can save a potential 4 billion ringgit.

That CCCC agreed to the arrangement is an indication that not only are they invested in Malaysia for the long run, but that they also see the potential of the ECRL’s viability. And now that they have a role in MOM, they will also look at other related investments along the rail network. They also know that their presence can pull in other investors in TOD (transit-oriented development) projects along the rail network.

In general, Chinese companies conducting infrastructure projects in Malaysia including CCCC have had difficulties further increasing local participation due to local companies and workers’ lack of price competitiveness, efficiency, and techniques. Given the constraints, how will ECRL achieve 40% local participation in civil works and still be completed by the deadline? How will the Malaysian government and the ECRL participate in the mechanism of open tendering of subcontracts?

I believe MRL has already announced that there will be a special tender committee to vet all the tenders for works related to the ECRL. Don’t forget that Malaysian companies have vast experience in rail construction, not just locally, but in other countries as well.

In an earlier interview, I stressed that Malaysian companies need to get their act together and to ensure they are ready and able to compete for tenders in the project. That they should not expect tenders to be delivered to them, but that they must fight for these tenders. They have to show that they are competitive in terms of pricing, and that their work is on par with international standards.

Given the new Malaysian government has reached an improved deal with the original partner, does this mean that you found no wrongdoing in the earlier transactions related to the project?

The negotiations were not about finding wrongdoing. If we had gone in on that premise, we would have achieved little and the entire process would have been conducted in a belligerent atmosphere. The aim was to find common ground and to see a price reduction, and that is what we achieved.

Renegotiations of ECRL are milestones in many ways after the historic change of the Malaysian government. Through striking an improved deal, what is the message the new government aiming to deliver to people outside Malaysia?

Our message is simple — Malaysia is open for business, we are open to all investments from all countries, as long as they are viable and beneficial to the country. We will stand our ground and we will assert our rights. This new government is not about going in for extravagant projects but for projects that can bring long-term benefits to the country and the people.

Contact reporter Jason Tan (jasontan@caixin.com)

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