Mahathir sets tone for renegotiating with China

Malaysia has announced it will move ahead with the suspended East Coast Rail Link (ECRL), a multibillion-dollar China-backed infrastructure project designed to connect strategic ports on the peninsula’s east and west coasts. A new deal reached with the mega-project’s main Chinese state-owned contractor will cut previously agreed construction costs of nearly US$16 billion by nearly one-third, according to reports.

The renegotiated contract represents a potential boon for the ruling Pakatan Harapan coalition, which suspended the project last July to make good on Prime Minister Mahathir Mohamad’s campaign vow to review China-linked projects initiated by the previous government that some felt risked overburdening the country with debt.

The resumption of the rail link, touted as an important part of China’s US$1 trillion Belt and Road Initiative (BRI) infrastructure scheme, comes after nine months of protracted negotiations over the future of the project, during which Malaysian officials issued conflicting statements and sent mixed signals about whether it would proceed at all.

A supplementary agreement signed in Beijing by representatives from both countries on April 12, however, paves the way for the on-again, off-again project to finally proceed on terms Malaysia now apparently finds equitable. Originally priced at 65.5 billion ringgit ($15.9 billion), the price tag has been reduced to 44 billion ringgit ($10.7 billion) under the new terms.

Minor changes to the route will reduce its length by 40 kilometers, bringing the total distance to 648 kilometers, though the track will now pass through five states and the administrative capital Putrajaya, up from four previously, and will better connect with existing rail lines. Passengers will also be able to alight at all but one of the 20 planned stations, six of which will offload freight.

Slated to come online by 2026, two years later than the previous plan, the ECRL will 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. Some believe the big-ticket undertaking provides Beijing with a strategic toehold to expand its geopolitical influence in the region.

Daim Zainuddin, head of the country’s Council of Eminent Persons advisory body, led the ECRL negotiations with China, calling it the “longest, most complicated and challenging deal” he had ever brokered. He dubbed the administration’s cost savings as a “big achievement”, but said negotiations on the project’s financing were still ongoing.

“One of the most significant concessions that we won from the Chinese side is that local participation in the construction of the ECRL will be increased to 40% of civil works from the previous 30%,” Daim, a two-time former finance minister, told reporters. The contractor’s reliance on Chinese manpower had been a key sticking point for the Malaysian side.

“This is a much-needed victory for Harapan, both in terms of managing Malaysia’s relationship with China and of convincing its domestic audience that the contracts former Prime Minister Najib Razak negotiated were genuinely corrupt and overpriced,” said Amrita Malhi, a visiting fellow at the Australian National University’s College of Asia and the Pacific.

Malaysia became one of the world’s top BRI investment destinations under Najib’s administration. Critics, however, have long suspected that money earmarked for China-backed projects were used to cover financial shortfalls caused by his administration’s fiscal mismanagement and alleged plundering of the 1Malaysia Development Berhad (1MDB) state fund.

The ex-premier is currently on trial for multiple 1MDB-linked corruption charges and Mahathir’s administration has said it is investigating whether any funds in the rail project had been used to settle the investment arm’s debts. Others see China’s large price reduction concessions as a tacit acknowledgement that the original deal did not make good financial sense.

“This is a victory for Mahathir that sends a powerful message to the rest of the world as an example of how to negotiate with the Chinese, especially on BRI projects that are seen to be overpriced and having elements of corruption,” said James Chin, political analyst and director of the Asia Institute at the University of Tasmania.

Apart from the ECRL, the Malaysian government last year cancelled two China-backed pipelines – the Multi-Product Pipeline (MPP) in Malacca and the Trans-Sabah Gas Pipeline (TSGP) – worth a combined $2.3 billion. Malaysia claims the previous administration paid out 90% of the project’s costs, but only 13% of the work had been completed.

Others balked when the China Communications Construction Company (CCCC) was appointed as the ECRL’s contractor without an open tender in 2016. The state-owned builder and its subsidiaries had once been debarred by the World Bank in 2009 in connection with fraudulent practices it undertook on a road project in the Philippines.

Those with more hawkish views on China have recently accused Beijing of pushing lop-sided deals and leveraging opaque development financing to ensnare smaller nations with unsustainable debt loads, a charge Chinese President Xi Jinping has publicly rebutted. Analysts believe rising talk of Chinese “debt traps” has coaxed Beijing to make tactical adjustments.

“China’s flexibility suggests that it wants regional governments to have confidence in the BRI and take it seriously when it says it wants to improve its performance against international development and infrastructure financing benchmarks,” Malhi told Asia Times.

“Chinese government staffers are saying exactly this sort of thing when they speak at development sector conferences around the region. In addition, there is a new government in Malaysia now, with four years of its term left to serve, so why not be pragmatic.”

Mahathir, speaking at a press conference on April 15, said the new supplementary agreement would establish a new joint venture between CCCC and project owner Malaysia Rail Link Sdn Bhd (MRL), which would reap 80% of profits if the project proves successful, according to Darwis Abdul Razak, the company’s chief executive officer.

Under the terms of the new deal, the Chinese contractor will now be involved in the operation and maintenance of the ECRL, as opposed to solely carrying out the construction process as previously stipulated. Though Mahathir has consented to proceed with the new agreement, he refrained from calling it a “win-win deal” when asked by reporters.

He said his government went back to the negotiating table because terminating the deal outright would have made Malaysia liable to pay 21.78 billion ringgit ($5.2 billion) in cancellation fees “with nothing to show for it.” CCCC did, however, agree to refund part of the 3.1 billion ringgit ($758 million) advance payment made under the original contract.

Though the agreement inked in Beijing dealt solely with the ECRL, remarks by the premier seemed to suggest a quid pro quo in the form of China taking on additional palm oil purchases from Malaysia amid pressure from the European Union, which is mulling a ban on palm oil biofuel imports on grounds that the crop contributes to deforestation.

“Often these sorts of government-to-government deals are linked to other future deals. Malaysia wants to sell more palm oil to China and my guess is that they offered Beijing stakes in other upcoming deals in order to get his huge discount on the ECRL,” Chin told Asia Times.

“The other way to read this is that the Chinese simply think it’s better to give this discount since they will look to Malaysia more in the coming years for BRI. Beijing doesn’t want to fight Malaysia as they are playing long term in Southeast Asia and they know whatever they give Putrajaya now can increase their influence,” he said.

“The gains Mahathir has won – in terms of Malaysian labor participation, a Chinese-Malaysian joint venture company to manage the project, and more sharing of both risk and expertise – allow him to speak to the Malaysian public’s grievances in terms of jobs and wages,” said Australian National University’s Malhi.

“Harapan has recently experienced by-election defeats and backtracked on a couple of reforms, so they will want to make the most of this result,” Malhi said. “Apparently, there are messages now circulating in the Indonesian election campaign that say ‘let’s copy Mahathir,’ so it looks like others in the region are calling this a win as well.”