This article first appeared in The Edge Financial Daily on August 23, 2018

KUALA LUMPUR: Prime Minister Tun Dr Mahathir Mohamad’s decision to shelve three China-backed projects worth a total of US$22 billion (RM90.2 billion) until Malaysia can afford to pay for them is just one of many controversial decisions he has made since coming into office in May.

While the news has sent shares in construction companies that stood to benefit from the projects down sharply, analysts noted that it is no big deal for Malaysia.

On Monday, Dr Mahathir announced that the 688km East Coast Rail Link (ECRL) and two pipeline projects in Malaysia will be shelved for now due to the current government’s fiscal position. And the Chinese government understands the rationale for the move, he told Malaysian journalists on the final day of his visit to Beijing, China.

Malaysia will have to pay compensation for the cancellation. The compensation for the ECRL project “could be quite substantial”, according to Dr Mahathir. The final sum will be negotiated soon.

Etiqa Insurance and Takaful chief strategy officer Chris Eng Poh Yoon opined that the ECRL, despite bringing potential social benefits to the country, is unlikely to deliver any economic benefits in the short term.

“The ECRL is unlikely to deliver a major economic benefit in the shorter term given that the volume of passengers may not be large enough with competing modes of transport in the form of highways and low-cost flights. It appears to be more of a freight-based transportation service,” he told The Edge Financial Daily.

The ECRL project links Port Klang to Pengkalan Kubor, Kelantan. China Communications Construction Co Ltd was appointed as the main contractor for the project, which is funded through soft loans from Export-Import Bank of China.

“As for the Trans-Sabah Gas pipeline project [with China], the fact that it costs RM4.53 billion [to develop], compared with the initial plans for the RM1 billion Sabah liquefied natural gas regasification terminal that would supply gas to an eastern Sabah power plant, already raises all kinds of questions. A complete re-evaluation of the Sabah gas pipeline project is welcome,” he added.

Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew is of the view that the shelving of the three projects is a necessary move by the government.

“Cancelling or deferring the projects keeps the country on a more sustainable growth path. It is definitely a safer option because if you are pushing the gross domestic product growth by pumping resources that are not exactly available and straining the country’s financials, then this [move] is a good thing,” he said.

Areca Capital Sdn Bhd chief executive officer Danny Wong Teck Meng noted that if the projects — which have a high foreign participation rate — were revisited again, it could be a boost for local companies.

“If the projects were revisited again at a later time, it could open more opportunities for local players. We could look at joint ventures with foreign partners, but with greater participation from our local players.

“From a fiscal standpoint, it is good that these projects were deferred so that the country does not [accumulate] too much debt and it will help our sovereign credit ratings,” added Wong.

If Malaysia is not careful, it could go bankrupt

The prime minister’s latest remark on the three projects, in which China’s state-owned enterprises are involved, also puts an end to talk that his official visit to China would see the new government changing its mind and reviving the projects that have been served stop-work notices.

Also, it may ease concern that the project cancellation might anger the Chinese government as building infrastructure across Asia to improve connectivity is part of its Belt and Road Initiative.

“The projects will not go on now because we don’t need them at the moment. Our priority is reducing our debts. If we are not careful, we could go bankrupt,” said Dr Mahathir on Monday — reiterating a point that he has repeatedly made since he became the prime minister for the second time three months ago.

“The Chinese government sees our point of view. I met three leaders here. No one of them said no. They understand why we don’t need [the projects],” he said, referring to his meetings with China President Xi Jinping, Premier Li Keqiang and the chairman of the Standing Committee of the National People’s Congress of China, Li Zhanshu.

“We must find an exit from the projects at the lowest cost possible. We will have to pay compensation. This is our own people’s stupidity; we can’t blame the Chinese for that,” said Dr Mahathir, when asked about the compensation for cancelling the projects.

“This is the stupidity of the negotiation before. There must be exit clauses in all agreements and the exit clauses must be fair for both parties.

“He (former prime minister Datuk Seri Najib Razak) is the one … I never see a contract [before] that money [is] paid before the work [gets] done … what kind of stupidity is this [where you need] to pay on time without any conditions that work must be done,” Dr Mahathir commented.

The money that has been drawn down from the loans extended to the three projects is not in proportion to the work in progress. “So, we need [to] find out why the money [was] paid and no work done. All the negotiations will be done by our people,” said Dr Mahathir.

“We will recover the money from Najib,” he added, when asked how the government would pay back the sum that has been drawn down.

The three projects, comprising the ECRL, a multi-product pipeline in Malacca and the Trans-Sabah Gas pipeline that were undertaken by the previous Barisan Nasional government, have been under scrutiny after Pakatan Harapan gained control of Putrajaya in the 14th general election on May 9.

The new government had put a stop-work order on the three projects after it was discovered that their project costs had bloated to unjustified levels and the high-cost infrastructure projects would strain the country’s fiscal position if continued.