A Malaysia Mass Rapid Transit train plies along a line as Malaysia's landmark Petronas Twin Towers loom in the background. Photo: AFP/Mohd Rasfan

First it was under review, then it was suspended, and later it was said to be cancelled altogether. Now, its reportedly back on the negotiating table. The status of Malaysia’s China-backed East Coast Rail Link (ECRL) has been mired in confusion this week after two senior ministers issued conflicting statements on the US$20 billion project’s future.

Malaysia’s Economic Affairs Minister Mohamed Azmin Ali announced on January 26 that the Cabinet had agreed to terminate the rail link on grounds that the project was “beyond the government’s financial capability.” He said that the ECRL would be terminated “without jeopardizing relations with China.”

That was apparently news to Finance Minister Lim Guan Eng, who admitted he was “shocked” after hearing Azmin’s announcement and suggested he might not have been fully informed of the administration’s decision on a project. The railway was originally negotiated by then premier Najib Razak’s government and formally initiated in November 2016.

Prime Minister Mahathir Mohamad suspended the deal last July just months after his shock election victory, making good on an campaign vow to review costly China-backed projects that some feel risked plunging the country into a debt trap. Now, Mahathir’s government is scrambling to walk back comments about the deal’s termination.

After initially refusing to confirm or deny reports of the rail link being scrapped, Lim told reporters on Wednesday (January 30) that negotiations with China over the project have advanced to an intergovernmental level and would be continued “away from public glare” due to sensitivities around contract discussions.

Malaysia's Finance Minister Lim Guan Eng speaks during a news conference in Putrajaya, Malaysia May 24, 2018. REUTERS/Lai Seng Sin
Finance Minister Lim Guan Eng at a press conference, May 24, 2018. Photo: Reuters/Lai Seng Sin

Lim said that a timeframe for negotiations has been set without elaborating, and that the cabinet agreed that all further announcements regarding the project would only be made the prime minister. Mahathir, meanwhile, chalked the apparent disagreement between Lim and Azmin up to erroneous media reporting.

That explanation is unlikely to convince those who have grown frustrated with administrative flip-flops, political sparring and uncoordinated – sometimes contradictory – remarks by officials that have arguably become commonplace since the Pakatan Harapan coalition clinched power eight months ago.

Such gaffes have stoked speculation about rifts within the ruling coalition and component parties which, in turn, have opened the door to further politicking and perceptions of the administration’s ebbing cohesion. Reaching an amicable settlement on the fate of a China-linked project like the ECRL, however, could give the coalition a needed political boost.

Renegotiating projects perceived as being lopsided in Beijing’s favor, either by reducing building costs or cancelling them to seek better deals, is a key strategic objective of Mahathir’s administration. And while his government has accused ex-premier Najib of unscrupulous borrowing to fund unsustainable projects, it has simultaneously sought to court new Chinese investment.

As an opposition candidate, Mahathir launched strident barbs at his predecessor, who he accused of selling the country out to Beijing to cover financial shortfalls caused by his administration’s fiscal mismanagement and alleged plundering of the 1Malaysia Development Berhad (1MDB) state fund, of which Najib stands personally accused.

Malaysian Prime Minister Najib Razak (L) and Chinese President Xi Jinping during a meeting at the Great Hall of the People in Beijing, November 10, 2014. REUTERS/Kim Kyung-Hoon
Then Malaysian Prime Minister Najib Razak (L) and Chinese President Xi Jinping at the Great Hall of the People, Beijing, November 10, 2014. Photo: Reuters/Kim Kyung-Hoon

A report in the Wall Street Journal earlier this month claimed that some of the of rail, pipeline and other deals negotiated between Najib’s administration and Chinese state companies were financed at above-market values to generate excess cash used to cover 1MDB’s maturing debts and finance political activities.

Citing minutes of previously undisclosed meetings between Chinese and Malaysian officials, the projects’ purposes were described as being “political in nature” while being market-driven on the surface. The report also claimed that Chinese officials offered to use their “leverage” to pressure the US and others to drop investigations into 1MDB.

The Chinese Embassy in Malaysia described the claims outlined in the WSJ article as “groundless” and denied that money from commercial projects was used to help bail out the scandal-plagued Malaysian fund. Mahathir told reporters earlier this month that proof was needed before his administration could look into the report’s claims.

Chinese state-owned enterprises were previously seen as bailing out 1MDB when companies bought stakes in a strategic power utility in 2015 and subsequently acquired financial instruments and real estate assets from 1MDB-linked entities, deals which enabled the Malaysian fund to service its debt obligations to an Abu Dhabi state investment arm.

The ECRL is the largest project among $34 billion in deals signed between China and Malaysia, which under Najib’s watch became one of the top investment destinations for projects linked to China’s $1 trillion Belt and Road Initiative (BRI). Malaysia has already paid some $4.8 billion toward construction of the rail link.

Najib’s administration financed 85% of the project costs with a $14 billion loan from the state-owned Export-Import Bank of China, with the remaining sum raised from local bond issues. The China Communication Construction Company Ltd (CCCC), a state-owned infrastructure firm, was appointed as the project’s contractor without an open tender.

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If constructed, the ECRL would cross Peninsular Malaysia to link a new deep-water port in Kuantan on the South China Sea with the western seaport of Klang and shipping routes along the Strait of Malacca. Tens of thousands would be employed to construct and operate freight and passenger stations along Malaysia’s rural eastern coast if the deal goes ahead.

Singapore’s Straits Times reported last week that Malaysia seeks to halve the estimated project cost of 81 billion ringgit ($20 billion) to 40 billion ringgit and is pursuing a new contractor to execute the project. The article claimed negotiations between the CCCC and Malaysia ended when the firm could not meet lower cost requirements.

Negotiations are ongoing, however, according to the latest Malaysian government statements. CCCC is said to be “still holding out for an amicable solution,” according to the Star newspaper in Malaysia, which cited industry sources claiming CCCC has agreed to bring costs down closer to 40 billion ringgit in a report published on January 30.

Ongoing talks suggest that Mahathir’s administration seems to appreciate the economic value of the ECRL, despite the premier only days ago sending mixed signals by claiming that hefty compensation fees owed to China as a penalty for cancelling the project would be a more manageable burden than carrying out the project at its original cost.

Malaysia's Prime Minister Mahathir Mohamad speaks during a press conference at the Great Hall of the People in Beijing on August 20, 2018. Photo: AFP/How Hwee Young
Malaysia’s Prime Minister Mahathir Mohamad during a press conference at the Great Hall of the People, Beijing, August 20, 2018. Photo: AFP/How Hwee Young

The 668-kilometer railway, designed to carry cargo and passengers, would deliver economic value by linking the industrial Klang Valley with less developed opposition-held states of Terengganu, Kelantan, and Pahang. Outright cancellation, on the other hand, would reduce job prospects and give political ammunition to the opposition.

Ministers have claimed in recent days that potential cancellation would not affect Malaysia’s overall relationship with China, citing efforts to court further Chinese investment in other east coast investments, including Kuantan’s deep-water port – known as the New Deep-Water Terminal – which China also jointly developed with Malaysia.

Anthony Loke, Malaysia’s transport minister, says there is still demand for the port and development will continue with or without the ECRL. After days of contradictory statements on the rail link’s future, few expect a definitive answer to emerge any time soon, even as both sides appear to be seeking a commercially viable compromise.

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