The State of the Nation: Derailed because Malaysia cannot afford it

This article first appeared in The Edge Malaysia Weekly, on December 31, 2018 - January 06, 2019.
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THE new administration’s decision to review the East Coast Rail Link (ECRL) and the Kuala Lumpur-Singapore high-speed rail (HSR) project stirred heated debate but came as no surprise, given questions over whether the benefits justified their huge cost.

There was no denying the issue of affordability. As Prime Minister Tun Dr Mahathir Mohamad bluntly said of President Xi Jinping and other leaders during his five-day visit to China in August: “They know we cannot afford this.”

“China knows very well that it had to deal with unequal treaties in the past imposed by Western powers … so China should be sympathetic to us,” Mahathir reportedly said, referring to the concessions China had to make after its defeat in the opium wars of the mid-19th century.

The chickens had indeed come home to roost. While the RM1 trillion debt burden inherited from the previous administration forced the review of mega infrastructure projects, the debt burden would not have been as heavy had there been proper checks and balances to prevent the signing of “strange” debt-funded contracts.

“The contractor must be from China and the lending is from China. And the money is not supposed to come here but [kept abroad] to pay the contractor in China,” Mahathir told The Edge in an interview in May, referring to conditions in the ECRL contract. The other anomaly was how the ECRL contractor was paid according to a pre-set timetable rather than the amount of work done.

The contractor for the ECRL is state-owned China Communications Construction Co Ltd (CCCC) while the RM55 billion loan is from the Export and Import Bank of China (Exim). Mahathir also confirmed there are suspicions some ECRL money was to be used to retire 1Malaysia Development Bhd’s (1MDB) debt and to buy certain companies. The companies are believed to be linked to fugitive financier Low Taek Jho.

The Trans Sabah Gas Pipeline (TSGP) and the Melaka/Port Dickson-Jitra Multi Product Pipeline (MPP) projects — worth a total of RM9.41 billion — that were awarded to China Petroleum Pipeline Bureau by Suria Strategic Energy Resources Sdn Bhd (SSER) on Nov 1, 2016, also saw contractors being paid RM8.3 billion or 88% of the project value, despite less than 15% of the work being completed.

Some 85% of the costs of the projects are funded by loans from Exim Bank of China, the same bank that funded the ECRL, with the balance through SSER’s sukuk issuance, which is guaranteed by the federal government.

The Attorney-General’s Chambers has filed a report with the Malaysian Anti-Corruption Commission to investigate if there was any wrongdoing or mismanagement of the funds raised by SSER. The government has also asked for China’s assistance to trace the fund flow in China.

On Oct 25, former prime minister Datuk Seri Najib Razak and former Treasury secretary-general Tan Sri Irwan Serigar Abdullah were charged in the Sessions Court in Kuala Lumpur with six counts of criminal breach of trust involving federal government funds amounting to RM6.64 billion. Two of the charges involve RM1.855 billion used for the ECRL project, as well as the two gas pipeline projects in Peninsular Malaysia and Sabah. Najib and Irwan pleaded not guilty to all charges.

The TSGP and MPP have been scrapped and the government clearly wants to scrap the ECRL, but it cannot unilaterally do so. Whatever Mahathir thinks of the negotiating skills of his predecessor, a legally binding contract for the ECRL was signed by Malaysia with the Chinese parties.

On Oct 22, Finance Minister Lim Guan Eng told Dewan Rakyat that the RM10.02 billion advance payment bond given to the CCCC could be claimed back if the ECRL project is terminated. But it is unclear whether the country will actually see any money, or if the advance payment redemption will be enough to offset any potential compensation sought by CCCC should the contract be terminated. Apart from the RM10.02 billion advance, RM9.67 billion in progress payments have been made to CCCC via project owner Malaysia Rail Link Sdn Bhd.

Will the full cost of these mega projects — and all the projects not yet started — undertaken by the previous government ever be known? Do we know, for instance, the true cost of the Port Klang Free Zone or the 688km railway connecting Tumpat in Kelantan and Port Klang?

In November 2016, the then economic affairs minister Datuk Abdul Rahman Dahlan said the ECRL project involved RM55 billion financing provided by the government of China. CCCC reportedly said its ECRL contract was for RM66.78 billion.

Lim said the ECRL would cost RM80.92 billion to build, including financing and land acquisition costs but not operating deficits. Put another way, the ECRL would not be feasible without significant cost cuts.

With our neighbour across the Causeway, at least, there has been some headway. Rather than paying a RM500 million penalty to scrap the KL-Singapore HSR, the government reached an agreement with Singapore to defer the start date of construction to May 31, 2020. The deferment also meant there was no longer a need to call the international tender for the so-called assets company — responsible for designing, operating and maintaining all rail assets — which was previously supposed to close by Dec 28. Putrajaya says the HSR project would cost the country RM110 billion, much higher than the RM72 billion estimated by the Barisan Nasional government.

Some rail projects were deferred purely due to tight government finances. The first infrastructure project axed by the new administration was the Klang Valley Mass Rapid Transit (KVMRT) Circle Line (MRT3) because no contracts had been signed before to the May 9 general election. The project, estimated to cost RM45 billion, was cancelled on May 31.

Cutting costs for the KVMRT Sungai Buloh-Serdang-Putrajaya (MRT2) was not as easy because a contract had been signed between MRT Corp and MMC Gamuda (PDP SSP) Sdn Bhd, the project delivery partner. Some would remember the tug-of-war of sorts between the Ministry of Finance and the contractors.

Bent on cutting costs, the MoF declared a retender as it was not happy with the RM2.3 billion (24%) cost reduction offered for the underground works. MMC-Gamuda then went on a public relations exercise, highlighting how 20,000 workers could lose their jobs if the underground contract were to be terminated. MMC Gamuda employed 3,000 of the workers directly, of which 60% were bumiputera, the company added. Both parties eventually agreed to continue the contract at a lower cost ofRM3.6 billion for the underground works. In total, the construction cost for MRT2 was reportedly reduced by 22.4% to RM30.53 billion.

In July, Transport Minister Anthony Loke said the MRT3 project had not been scrapped but only postponed until the country’s financial position is stronger.

Weighed down by over RM1 trillion of debt, the federal government needs to be prudent and can hardly be blamed for reviewing all mega infrastructure projects.

The people, looking forward to improved quality and coverage of public transport, would remember this promise in the Pakatan Harapan election manifesto. Measures being put in place to improve governance and transparency in the granting of future infrastructure contracts should help pave the way for better-quality infrastructure at more affordable prices.

To deliver, PH must make sure its promise to cleanse Malaysia of the grand-thievery ways of the past is not derailed.


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