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Saturday, 12 August 2017

Debate on ECRL

FROM day one, despite the anticipated trickle-down economic benefits from the East Coast Rail Link (ECRL), the project has faced a number of criticisms. The primary concern revolving the mega-scale project is related to its cost and returns.

The critics tout the ECRL as a costly venture and could be a white elephant while the government has consistently said that it would be a game changer.

Considering the huge cost involved to put up the infrastructure and that it does not make commercial financing feasible, the government has agreed to receiving assistance from China in the form of loan at 3.25% per annum.

In return, companies from China are given a healthy portion of the jobs.

The critics snipe that projects of this size should be awarded on an open tender basis to help ensure an efficient price discovery process. The direct negotiation method does not bring down cost, the critics say.

Whatever the case, the project has kicked off and it will go on. Malaysians will be able to travel from Gombak in Kuala Lumpur to Kota Baru in four hours. The rail project is expected to lift cargo movement between west coast and east coast of Peninsular Malaysia many times over from the present state of affairs. Below we examine some of the issues.

Pricing issues

ECRL will cost a total of RM55bil for a distance of 688km. This translates into RM80mil or US$19mil per kilometre.

According to a report, it was stated in parliament that a 2009 study by a local consultancy estimated the cost from Gombak to Kuantan and onwards to Kota Baru to be RM29bil.

However the cost has gone up to RM55bil due to the government’s plan to extend the network to Port Klang, which will add another 88km.

Critics have claimed that ECRL is overpriced.

For instance they point out that Ethiopia’s 375km Awash-Weldia railway line, which was constructed on a difficult terrain, will cost US$1.7bil (RM7.12bil) or RM18.07mil per kilometre.

Apart from that, Bangladesh’s 215km Padma rail line, which will be built by China Railway Construction Corp for US$3.5bil (RM14.65bil), is projected to cost only RM68.14mil per kilometre.

However, Minister in the Prime Minister’s Department Datuk Seri Abdul Rahman Dahlan has said that the rail project is fairly priced, considering the complexity of the construction process.

He has said that the cost of up to RM55bil includes cost incurred for engineering studies for design speed, topography, geological conditions and charting a new railway line in a green field area.

Rahman added that rail projects were not easily comparable and can differ considerably across projects. He pointed out that the Bremmer rail project in Switzerland cost US$11.9bil for 57km length, which means cost per kilometre of US$209mil.

Contracts apportionment

ECRL is expected to contribute an additional 1.5% gross domestic product (GDP) annual growth on average to the east coast region over the next 50 years, where the main beneficiaries would be the rural and semi-rural population.

The interstate rail link is projected to generate more than 80,000 jobs for Malay­sians during its construction period. Another 6,000 jobs will be created during the rail’s operation and the Chinese government will also train more than 3,000 Malaysian students.

Prime Minister Datuk Seri Najib Tun Razak said that at least 30% of the project has been carved out for Malaysian contractors. This translates to a combined value of RM16bil.

China contractors would be the main contractors for the remaining 70% of the jobs and the local would be sub-contractors.

However critics say that RM16bil of jobs over seven years works out to only RM2.3bil a year to be shared among the many Bumiputera and non-Bumiputera contractors.

As for sub-contracting jobs, the margins are narrow and many end up not making much money.

Risk and rewards

The ECRL is expected to serve 8 million passengers a year and move 53 million tonnes of cargo annually by 2040. It is expected to be the primary transport between the east coast and west coast of Peninsular Malaysia, linking the ports on both sides of the coast.

The rail link from Port Klang to Kuantan and onwards to Kemaman and Kota Bahru is expected to connect to the ports.

However critics point out that at the moment freight cargo on railways is only 6 million tonnes. Hence a target of 53 million tonnes being transported through the ECRL is seen as being ambitious.

The critics also say that the financing and implementation risk of the project entirely lies with Malaysia because the Chinese contractors would get paid for the jobs irrespective of the commercial returns.

However bankers point out that the infrastructure would remain in Malaysian soil, operating under Malaysian laws and cannot be taken away to China.

They also say that the project is supposed to last well beyond 50 years, which means long term financing is an option when it is completed and when traffic numbers pick up. Hence the risk can be mitigated over time.

The challenge they say is to make ECRL operationally viable.

Sovereign threat and exchange rate risk

Critics have claimed that China’s aggressive involvement in ECRL may threaten Malaysia’s sovereignty. This was largely centred on Malaysia’s loan of RM55bil from China to construct the ECRL.

Rahman however has pointed out that the ownership, management and operations of ECRL would be fully in Malaysian hands. Hence, he contends that allegations of Malaysia losing its sovereignty does not arise at all.

There are claims that Malaysia would end up paying more for the loan from China if the ringgit weakens against major currencies.

Rahman has refuted the claim by stating that the renminbi-ringgit exchange rate for loan repayment purposes would be fixed for the remainder of its duration.

Tags / Keywords: Corporate News , Investing , Life & Style , FAQ ECRL

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