Malaysian Prime Minister Mahathir Mohamad has cancelled two Chinese-funded major construction projects for a railway line and a gas pipeline in his country. These projects, estimated at $22.3 billion combined, were awarded to Chinese construction companies by the previous government in Kuala Lumpur.
One of the scuttled projects is the $20-billion East Coast Rail Link (ECRL) connecting Kuala Lumpur to Singapore over a stretch of 350 kilometers. It is being funded by the government-owned Export and Import Bank of China. The second project to be scrapped is the $2.3 Trans-Sabah Gas Pipeline (TSGP). The project comprises a 662-km gas pipeline serving Malaysia's Kimanis to Sandakan and Tawau areas.
The China Petroleum Pipeline Bureau (CPPB) held the construction contract. About 13% construction work had been completed. Mahathir said Malaysia is facing heavy debt and unable to take more loans to see these jobs through to completion. He made the announcement at a joint press conference with Chinese premier Li Keqiang during a visit to Beijing on Aug. 22.
“I believe China understands the internal fiscal problems which Malaysia needs to resolve, and we hope that they (China) can help solve them,” Mohamad said. He also explained to the Chinese media, “Malaysia has been borrowing a lot of money from China. And now it’s faced with the problem of repayment of the loans, and that is why we have to maybe reduce or postpone some of the projects in Malaysia.”
The 93-year old Malaysian prime minister had cited two different reasons for cancelling the projects during election meetings and returning to power after the May 9 elections. He previously serve as prime minister from 1983 to 2001.
Talking to journalists in Kuala Lumpur before his Beijing visit, Mahathir said, “There are several issues to be brought up [with China], among which is the unfairness of the terms of the contract and also the loan. … And the interest also is of concern to us, because the interest is much higher than when governments borrow.”
In campaign speeches, he had described the previous government’s decision to award the contracts to China as “stupid” and vowed to renegotiate the “unfair” interest rate structure of Chinese financial contracts.
Malaysian politicians have been complaining about suspicious financial management in the TSGP gas pipeline project. “Renegotiate the terms with China, the project developer, as we have paid about 85% of the money but the real work done has only been 13%… we can’t just waste the money with nothing to show,” Chan Foong Hin, a member of parliament from Kota Kinabalu in the project area told the government recently. “There should also be a thorough investigation on the TSGP project,” he said.
China was hoping to extend its Belt and Road Initiative, which is mostly restricted to financially weak countries, with the railway project, which involved two countries, Malaysia and Singapore, that are financially better off. In this respect, cancellation of the project is a setback for the BRI.
Beijing has reasons to worry about how Pakistan, which is implementing a $60-billion BRI project, will view project cancellation by Malaysia, which is also a Muslim country. Pakistan has just emerged from a general election that resulted in victory for charismatic ex-cricket star Imran Khan. Like Mohamad, Pakistan's new prime minister is already complaining about a financial crunch and may be less than eager to incur heavy debt for implementing the BRI project.
China is both funding and constructing the project, the China Pakistan Economic Corridor, which involves a series of road, port and electricity projects in Pakistan.
The high-speed rail project was expected to cut down the travel time between Kuala Lumpur and Singapore from four hours to 90 minutes. China Railway Corp. was expected to handle a major part of the project while Japan's JR East was also linked to it. Civil work contracts for the northern portion of the alignment from Kuala Lumpur to the south side of Melaka Station has gone to builders, Gamuda Corp. and and Malaysian Resources Corp.
The other group of construction firms, YTL-THP consortium, have been allotted the southern portion from the south side of Melaka Station up to the international boundary.
“Opportunities for Malaysian contractors are plenty in these civil work packages ranging from advisory, engineering and design, certification, testing and commissioning,” said Mohd Nur Ismal bin Mohamed Kamal, CEO of MyHSR Corp., which is implementing the project.
Discussing the project on its website, Gamuda said the rail project involves more than 60 civil contract packages and 5,000 sub-contract packages. Over 40% of the value of the contracts would go to Malaysia based companies. “Given Malaysia's weak fiscal position and that some of these projects are of dubious economic value, [canceling some huge infrastructure projects] may be no bad thing," Alex Holmes, Asia economist at consulting firm, Capital Economics, said in a note.
The Singapore government which has already spent $184 million for constructing a part of the project work falling in its territory has indicated that it will demand compensation from Malaysia. “Should Malaysia cause the HSR project to be terminated, we will deal with the question of compensation from Malaysia for costs incurred in accordance with the bilateral agreement and with international law,” Singapore’s Foreign Minister Vivian Balakrishnan told parliament before Mahathir’s announcement.