The two mega projects may grind to a halt, before they even get started. The programme Money Mind finds out the considerations involved, and why one is more at risk than the other.

MALAYSIA: Commercial viability, politics and financing strategies would come into play when the Pakatan Harapan government decides whether mega projects such as the East Coast Rail Link and the Kuala Lumpur-Singapore High Speed Rail (HSR) should eventually be scuttled.

These were some of the considerations cited by economists and analysts as confirmation came yesterday that both projects will be reviewed.



And from those aspects, the fate of the East Coast Rail Link may be in doubt, more than for the HSR. BMI Research infrastructure analyst Christian Zhang believes that the 350-kilometre HSR would be more economically viable, for one thing.

“That’s one of the reasons we take a more optimistic view on the High-Speed Rail. There’s a very clear, proven demand for an express rail link between Singapore and Kuala Lumpur,” he told the programme Money Mind.

“There’s a recent report saying that Singapore-KL is the world’s busiest international air route. And there’s a lot of potential for urban development along the route itself.” (Watch the episode here.)

The KL-Singapore High Speed Rail will have seven stations in Malaysia.



On the other hand, he questioned the viability of components of the East Coast Rail Link, such as the proposed deep-sea port that will link up with it in Kuantan, a city that lacks a “particularly large” maritime sector.

CIMB Private Bank economist Song Seng Wun said it was “interesting” that the Council of Eminent Persons has already questioned the 688-km rail project’s commercial viability “in terms of the price tag”.

The council was tasked to review Malaysia’s existing business dealings and advise the government, and chairman Daim Zainuddin said last week that the Chinese-led project would cost more than the RM55 billion (S$18.6 billion) announced by the previous government.

Even before the elections, Pakatan Harapan and Dr Mahathir Mohamad mentioned two factors in pledging to review Malaysia’s mega projects, noted Mr Zhang: To ensure there was no corruption; and no sell-out to China.

And it seems that the new Prime Minister is making good on the promise.

(Seated from left): Dr Wan Azizah Wan Ismail, Dr Mahathir Mohamad and Mr Lim Guan Eng, leaders of three of the component parties in the Pakatan Harapan alliance.

POLITICALLY CONTENTIOUS

One of the problems with China is that it can be an economic bully, said analyst Anwita Basu from The Economist Intelligence Unit.

In March last year, Beijing suspended group tours to South Korea following Seoul’s decision to deploy the Terminal High Area Altitude Defence system, the American missile shield.

“China basically went against South Korean supermarkets and South Korean services, and stopped Chinese tourists from going to South Korea. That’s effectively economic bullying,” cited Ms Basu.

And many countries, particularly in South-East Asia, are concerned that China will use economic ties to “play the bully and tighten the screws on them”. Another worry is that when China partners a country, it may “rout” that country’s culture.

“You’d have an inflow of Chinese tourists, labour and food – Chinese everything. It has happened in South Korea; it has happened in most of South-East Asia. I think, rhetorically speaking, Dr Mahathir is concerned with retaining Malaysia’s culture,” she said.

In large-scale infrastructure projects such as the East Coast Rail Link, local companies and workers may also not benefit – a concern in many of the markets China has invested in, noted Mr Zhang.

BMI Research tracks mega infrastructure projects round the world, and has found that contracts in most Malaysian projects are still awarded to local construction companies, suppliers and investors.

But that is why the other projects are politically contentious and at higher risk of being impacted by the review. All are Chinese-led.

“The ones that have attracted a lot of political attention in recent months (are) the East Coast Rail Link, the ports in Kuantan and Melaka, and Forest City in Johor,” said Mr Zhang.

A model of Forest City at the developer's Johor office.

Malaysian construction companies – and there are many with track records in rail projects, he noted – were not given the opportunity to compete for the rail link in particular.

In this regard, the Malaysian government can introduce requirements that a certain proportion of a project’s contracts be awarded to local companies and a certain percentage of the workforce be locals, he added.

Or foreign companies could be required to form joint ventures or have technology transfer agreements with local companies.

BARGAINING CHIP

Another problem Mr Zhang finds with China-backed infrastructure projects is that they tend to rely on its model of urban and infrastructure development: That is, building for future demand instead of meeting existing demand.

“That has been successful in some situations, but the conditions in other countries may not be as supportive of that sort of developmental model,” he said.

For example, in Sri Lanka’s southern town of Hambantota, the Chinese investments include a deep-sea port, an international airport and future plans for an industrial zone.

“But even today, the gleaming new airport only sees about (one or two) flights per day,” said Mr Zhang. ”When you’re building these projects ahead of demand, the biggest risk is that demand does not rise to meet them.”

Mega infrastructure projects require a huge financial undertaking, and in the case of the East Coast Rail Link, it is 85 per cent funded by an Export-Import Bank of China loan to Malaysia, with interest at 3.25 per cent.

The remaining 15 per cent is to be funded through Islamic bonds managed by local banks.

When a country has high levels of external debt, there is a risk of default, especially if “economically unproductive projects” are being financed, said Mr Zhang.

That is one way China can leverage financing strategy to get its way. “That can result in China being able to use that debt as a negotiating chip when it comes to other political or economic talks,” explained Mr Zhang.

Besides the criticism of the East Coast Rail Link’s price tag, it is the lack of transparency that makes its potential contribution to the economy questionable.

“The risk here is that the Chinese version of this project may not be the best possible version … whether in terms of its alignment or accompanying real estate developments that may have been more beneficial but overlooked,” said Mr Zhang.

BMI Research infrastructure analyst Christian Zhang said that one of the largest criticisms of the East Coast Rail Link was the paucity of competitive or open tenders.

Some fear a repeat of Sri Lanka’s fate on Malaysian shores.

Last year, the Sri Lankan government – unable to repay China’s loans – signed a US$1.1 billion (S$1.47 billion) debt-to-equity swap and handed over 70 per cent of the Hambantota port to its Chinese partners on a 99-year lease.

OPPORTUNITY AMID UNCERTAINTY

Ms Basu, however, doubts that something similar will happen in Malaysia. “The big difference … is that Malaysia is close to becoming a high-income country. So economically, it’s a lot more stable,” she said.

“The government does have a lot more arsenal to mop up the white elephant infrastructure projects.”

More importantly, said Mr Song, the country can generate “very steady growth”. “The opportunity is there. Geographically, it’s still very important. In that sense, the Chinese will still want to have a long-term relationship in terms of investment in Malaysia.”

CIMB Private Bank economist Song Seng Wun says Dr Mahathir knows from experience that investments in Malaysia are important, whether from local or foreign entities.

While there are many concerns about Chinese investments, said Ms Basu, the counterpoint is that “the money is very important for development across Asean and across emerging markets, hence there has to be a balance”.

Former Prime Minister Najib Razak had previously described the East Coast Rail Link, which would connect to Port Klang along the west coast, as a game changer for Malaysia’a economy.

The groundbreaking ceremony of the East Coast Rail Link was held in Kuantan last August, officiated by the then Prime Minister, Najib Razak.

At this juncture, the multiplier effect of that coast-to-coast connection is unknown, said Mr Song. There is also an insufficient volume of traffic along that route to suggest that it will be profitable.

“(But) if we don’t build, we don’t know what kind of economic benefits could be brought … as well,” he added.

Some critics feel that the project can be cancelled to save money for the government. And in these early days of Malaysia’s new political chapter – as with any power transition – there is the potential for policy uncertainty, said Mr Zhang.

Even the terms of the KL-Singapore HSR agreement may have to be renegotiated, according to Malaysia's new Economic Affairs Minister Azmin Ali.

Singapore’s Coordinating Minister for Infrastructure and Transport Minister Khaw Boon Wan at the July 2016 signing of the memorandum of understanding between Malaysia and Singapore concerning the high-speed rail.

But despite the concern among investors and potential contractors over the news that these projects are being reviewed, Mr Zhang said the most important thing now is for the government’s review process to be done as fairly as possible.

“If the government is able to show that these negotiations are being done in a transparent manner, that’ll go a long way towards improving business sentiment in the country,” he said.

“If, over the long term, the government manages to implement greater anti-corruption measures, and greater measures to enforce transparency and competitiveness in the awarding of construction contracts and investment opportunities, that would ultimately be positive for Malaysia’s business environment.”

Watch the episode here. Money Mind airs every Saturday at 10.30pm.