Malaysia slashed the cost of a China-backed rail construction project by about a third through a “more equitable” renegotiation with Beijing and avoided a potential cancelation penalty of U.S. $5 billion, Malaysian Prime Minister Mahathir Mohamad told reporters on Monday.
Under the newly renegotiated East Coast Rail Link (ECRL) signed with China on April 12, the project’s cost will be cut to 44 billion ringgit ($11 billion) from 65.5 billion ringgit ($16 billion) from the original agreement signed by Malaysia’s previous government in 2017, Mahathir said.
Among other economic benefits, his government won a larger share of jobs for Malaysians who would be working on the infrastructure project, the prime minister said.
“The PH government was faced with the choice to either renegotiate or pay termination costs of about 21.78 billion ringgit ($5 billion), with nothing to show for it,” Mahathir said during a news conference, referring to the Pakatan Harapan coalition government he leads.
“As such, we chose to go back to the negotiation table and call for a more equitable deal, whereby the needs of Malaysian people would be prioritized.”
Signing the deal in August 2017, then-Prime Minister Najib Razak, hailed the 688-km (427-mile) project spanning the states of Selangor, Pahang, Terengganu and Kelantan, as a game changer for Malaysia, stating it was to be completed in 2024.
“It was an unjustified, hefty lump sum price which lacked clarity in terms of technical specifications, price and, by extension, economic justification,” Mahathir said of the deal signed by his predecessor.
Mahathir said the ECRL project’s completion date had been extended to Dec.31, 2026. Construction, halted in July 2018, should resume soon.
“As you know, part of the work is already been done. We will continue with that work. As far as payment is concerned we will pay according to the progress of the construction,” Mahathir told reporters.
Mahathir said the project’s main contractor, China Communications Construction Co Ltd (CCCC) would refund the Malaysian government 1 billion ringgit ($243 million) within a month. The refund is a portion of the 3.1 billion ringgit (U.S $750 million) advance payment for Phase 2 of the ECRL project.
“The balance will be settled within three months after deductions for verified claims due to abortive works, suspension and cancellation of the northern extension,” Mahathir said.
In Beijing on Friday, a Chinese government official praised the negotiations.
“The governments of Malaysia and China as well as the companies involved have been in close communication for the relevant project,” Foreign Ministry Spokesman Lu Kang said. “We are glad that after friendly consultations, the two sides have reached a solution. We hope the construction of the project can be resumed at an early date for more win-win outcomes.
“[T]he governments and businesses of China and Malaysia have reached relevant consensus and signed an agreement in the spirit of mutual respect and equal-footed negotiation, which is conducive to both sides,” Kang said in response to a follow-on question about ECRL.
Rail link shortened
Under the new deal, the ECRL has been shortened to 648 km (402), leading to some of the cost saving.
One of the sections cut was at the request of the government in Selangor state, because the original route passed through an area it seeks to have declared a UNESCO World Heritage Site, Finance Minister Guan Eng said.
The Gombak Selangor Quartz Ridge is built entirely of quartz formed about 200 million years ago. The most spectacular part of the quartz ridge is its protruding mid-section, which encompasses Taman Melawati, National Zoo in the Ampang Jaya area and part of Selayang Municipal Area, according to UNESCO.
“If the rail link were allowed to go ahead, the UNESCO application would fail because natural heritage sites cannot include new infrastructure work that damages the site,” he told BenarNews during a question and answer session at the Malaysian embassy in Washington on Saturday.
Along with seeing a reduction in the project’s cost, Mahathir said the country should see other economic benefits as well. He announced that construction jobs for local workers would increase from the 30 percent agreed to in the original contract to 40 percent.
Mahathir also announced that while last week’s agreement was explicitly for the ECRL, he expected to reach a deal to sell palm oil to China.
Malaysian economist Jalilah Baba told BenarNews that the government did well in renegotiating the agreement on the rail project.
“It is a good outcome. Having been able to cut the cost is obviously a great move for the government. Furthermore, the project is not badly affected and is still going to go on,” he said.
“It will also have a good impact on our financial stability and we do not owe much to the Chinese government, meaning we do not pay high interest because we did not take a huge loan.” she said.
Writing in Forbes magazine, economics professor Panos Mourdoukoutas praised Mahathir for saving Malaysia from a debt trap with China.
“The new deal is a big win for Malaysian Prime Minister Mahathir Mohamad. He made good on his election campaign promise to renegotiate China’s investments in the country, which served the interests of Beijing more than they served the interests of Kuala Lumpur,” Mourdoukoutas said.
Economist Barjoyai Bardai of National University of Malaysia also rated the renegotiation as a success, saying that both countries wanted to continue with the ECRL.
“China wants the project because it is part of their One Belt, One Road (OBOR) project and Malaysia wants to protect its diplomatic relationship and trade with China,” he said.
Meanwhile, a Chinese policy expert told the New York Times that China made the deal because its OBOR efforts to link Beijing with the rest of Asia, as well as Europe and Africa by building massive highways, railways, ports and other infrastructure was hurting its reputation.
“We’re in a period of China making tactical adjustments based on a deeply unpopular reputation,” Jude Blanchette told the New York Times.
“This accommodation was made in context of China recognizing that the Belt and Road Initiative is less popular than China wished it was,” said Blanchette, a senior adviser at Crumpton Group, which describes itself as a strategic international advisory and business development firm.