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This article first appeared as 'Long and arduous process to justify huge investments' in The Edge Malaysia Weekly, on April 29, 2019 - May 05, 2019.
IN the middle of this month, some 200 consulting companies attended a tender briefing by MyHSR Corp Sdn Bhd on the role of the technical advisory consultant for the multibillion-ringgit Kuala Lumpur–Singapore high-speed rail (HSR) project.
MyHSR, the Ministry of Finance’s unit that oversees the development of the HSR, had earlier estimated the price tag at nearly RM110 billion. The independent consultant’s role, among others, will be to review this figure and knock it down.
“It was a big crowd. There were foreigners and local parties interested … it is [after all] a huge project,” an executive who was at the briefing tells The Edge.
More importantly, however, this is the first formal indication that the 350km rail line will be revived. Perhaps the revival of the East Coast Rail Link (ECRL) and Bandar Malaysia projects earlier in the month is a sign that it will be next.
It is noteworthy that under the earlier plan, Bandar Malaysia was set to house stations and other related infrastructure for the HSR.
The revival of mega infrastructure projects comes at a time when the Pakatan Harapan (PH) government is struggling to reduce the mounting debt left by its predecessor, the Barisan Nasional government, which had been in control of the country’s purse strings for more than 60 years.
One market watcher aptly describes the government’s predicament — inheriting mega projects initiated by the previous administration — as being caught between a rock and a hard place.
The PH government was forced to make a U-turn on an earlier decision, announcing on April 12 that it was reviving the rail project to avoid paying a huge compensation of RM22 billion to China Communications Construction Co Ltd (CCCC).
To recap, CCCC signed an agreement with the Barisan Nasional government to construct the 688km rail line connecting Port Klang and Pengkalan Kubor in Tumpat, Kelantan, at a cost of more than RM65.5 billion.
However, even though the cost has been slashed by a whopping 32.8% to RM44 billion, the project is still a huge undertaking, especially since the government is cash-strapped and burdened with debt.
RHB Research Institute chief Asean economist Peck Boon Soon explains, “Eventually, the government realised that it really has little choice when it comes to the ECRL because the contract has (already) been signed … Not only had the construction agreement been signed with CCCC, the previous government had also signed an agreement for a RM50 billion loan with Exim Bank of China.
“If the current government were to decide to scrap the project, not only would it have to pay the compensation amount (RM22 billion), which is huge, it would also have to repay the loan (RM50 billion) within 30 days of the announcement of the cancellation,” he tells The Edge.
So the question was whether to pay RM22 billion in compensation and repay the RM50 billion loan immediately, which amounts to paying for nothing, or to construct a railway line at a huge discount to the original cost.
The PH government opted to bite the bullet.
Institute for Democracy and Economic Affairs (IDEAS) senior fellow Dr Renato Lima de Oliveira says the RM21.5 billion reduction in construction cost is very substantive and not a mere cosmetic change, and that the deal is a better one that accommodates Malaysia’s interests and paves the way for a more equitable bilateral relationship with China. “There is still a huge doubt whether the project can pay for itself in the long run … if it has a positive net present value … given the amount of utilisation and revenue it will need to bring in to pay the projected cost of RM44 billion.
“That is why it is so important to share the operational risk with the contractor (CCCC), under a 50:50 agreement, so that all parties have a better alignment of interest in the success of the project. It is also positive for Malaysian companies that the share of local contracts has been increased from 30% to 40%,” says de Oliveira.
ECRL project owner Malaysia Rail Link Sdn Bhd (MRL) and CCCC have a 50:50 joint venture to manage, operate and maintain the rail network. The government will own 100% of all ECRL assets through MRL.
The new alignment will see the rail line commence in Kota Baru instead of Pengkalan Kubor, a town on the Malaysia- Thailand border. From Kota Baru, the line will be linked up to the original alignment down to Mentakab in Temerloh, Pahang.
To reduce the construction cost, the federal government has, among others, redrawn the alignment to avoid having to tunnel through the Titiwangsa mountain range to connect Mentakab and Gombak in Selangor. Instead, it will trek south to Jelebu in Negeri Sembilan before connecting to Bangi, in Kajang, Selangor, and thereafter, Port Klang via Putrajaya.
While the renegotiation was a huge achievement for the government, it is just the start of a long and arduous process to justify the massive investment.
For starters, the government might have to renegotiate the terms of the soft loan with Exim Bank of China, which has a 3.25% interest rate and a grace period of seven years to repay the principal amount.
Given that government debt stands at more than RM1 trillion, the renegotiation of the soft loan could help make the ECRL more viable.
RHB Research Institute’s Peck adds, “The government has to find ways to make full use of the ECRL for trade and encourage more tourism so that we can generate more income to pay for the cost. To make the ECRL attractive enough for businesses to use it for the transport of trade goods, its rate must be competitive against those of sea transport.
“This also applies for passenger transport. The fares have to be competitive enough for people to use the rail line.”
Previously, some port officials opined that the ECRL would not be a viable alternative to the sea route — that is, sailing around the Malaysian peninsula — as the capacity to transport containers and other trade goods by land is much smaller. For instance, Westports Holdings Bhd, the operator of Westports in Port Klang, handled 9.52 million twenty-foot equivalent units (TEUs) last year.
However, with the construction costs reduced substantially, there might be an economic case for the ECRL, they say.
Nevertheless, sea freight costs will still be cheaper when one takes into account the massive volume that a container vessel can carry (almost 20,000 TEUs), compared with land transport, which is often subject to traffic congestion and has limited carrying capacity.
It is also unknown how many train sets will be ordered for the ECRL, and what its container carrying capacity will be.
When asked about opening up areas in the East Coast for industrial activity, Peck says while the cost of land and labour and other resources in the region is relatively cheaper than in the West Coast and with the ECRL reducing transport costs for manufacturers, there are still many questions that remain unanswered.
First, for an investor, the decision to relocate to the region hinges on many factors, such as whether workers there would want to work in factories. “If the salary is not attractive enough for locals, the businesses that relocate there could face labour shortages,” he says.
Meanwhile, IDEAS’ de Oliveira says although the government’s decision to resume the ECRL shows political maturity to continue the previous government’s legacy projects, the discussions were made behind closed doors and more information will be needed for the projects to be ascertained as viable.
“We would need to see the studies that backed them to fully assess their financial viability, the changes in the environmental impacts, predicted utilisation rates and financial assumptions.
“Without that, it is premature to say if the megaproject will represent a risk to the country’s debt or if it is a good investment that will pay for itself and provide positive externalities that will generate new sources of revenue stream to the government, such as taxes from new businesses,” he says.
The government has also reinstated the 2015 share sale agreement between state-controlled TRX City Sdn Bhd and IWH-CREC Sdn Bhd, a joint venture between Iskandar Waterfront Holdings Sdn Bhd and China Railway Engineering Corp.
IWH-CREC won a bid to acquire a 60% stake in Bandar Malaysia with its RM7.41 billion offer. However, the contract was terminated in May 2017 as the government was seeking higher valuations for the massive development project on the former Royal Malaysian Air Force base in Sungai Besi.
The reinstatement of the contract also comes with new conditions for IWH-CREC to fulfil, including the construction of 10,000 affordable homes and a park. The JV will also need to fork out a RM500 million deposit to the government, on top of the RM741 million, or 10% of the value of the contract, that it had agreed to pay as a deposit under the original contract.
While many say that the HSR being revived is a given, some are not sure whether it will be a viable project. Peck, for instance, says the government will have to weigh the costs and benefits of building the HSR now, at a time when it is carrying a debt burden. “We can’t be reviving all of the big projects, as that will hamper our ability to reduce the massive debt level.
“Maybe when the situation is better, the HSR can be built. However, as for now, I think it would be better for the government to just pay compensation to Singapore and put the HSR on the backburner,” says Peck.
Malaysia has to pay Singapore RM500 million in compensation and it was reported that the island state had spent S$250 million in preparing for the HSR.
But if the government manages to make the cost more palatable, the rail line could see the light of day.
The cost of constructing the HSR is estimated to be RM110 billion, including land acquisition cost and interest costs during construction. While there could be a case for the HSR to be revived, the costs seem to be too prohibitive for Malaysia to continue with the HSR at the moment, although there are whispers on the ground that consultation on the project has resumed.
The revival of the ECRL and Bandar Malaysia has got the stock market excited over the potential impact on construction and property stocks. Both projects are expected to stimulate the economy, winning brownie points for the PH government after a year of fiscal discipline that saw various mega projects being scaled back or cancelled.
At the end of the day, while mega infrastructure projects are good and welcomed, the key distinguishing factor between developed and underdeveloped nations is their institutions, says de Oliveira. “Is the government accountable? Can people peacefully voice their concerns with the help of a free press? Is the rule of law applied to everyone? Do people have the right incentives to innovate and start a business? Is there a level playing field in the economy or well-connected people and government-linked companies that tilt the rules of the game in their favour?
“It is worth emphasising that people voted Pakatan into power not because of these megaprojects but for a reformist agenda to address these questions. Such an agenda can pave the way for sustainable development and long-term competitiveness. It is not as sexy as building new towers and rail lines, but it is no less important,” he says.