ECRL – a Hobson’s choice

Options available: A man works at a construction site of the ECRL. According to a railway consultant, the government can either opt to cut its losses and stop the project or scale it down. — Bernama

ALONG the old road towards Bentong from Bukit Tinggi, a large clearing with the sign of the East Coast Rail Link (ECRL) is visible. There is a batching plant, excavators, fabrication yard and workers’ quarters, among others, at the construction site.

It is one of the 30 lined up along the route of Malaysia’s most expensive railway project – the ECRL that will cost RM55bil.

The omnipresence of China Communications and Construction Co (CCCC) clearly underlines who is in control of the project. China’s Exim Bank is forking out 85% of the funding for the 688-kilometre railway track and CCCC is the main contractor.

Staff from China constitute about one-fifth of the total 4,000-odd workforce engaged for the project so far. Apart from staff, materials, machinery and other equipment for the project are mostly coming from China.

The Malaysian government is to fork out the remaining 15% of the funding requirement, amounting to about RM8.25bil. In return, Malaysian companies are to get up to 40% of the jobs.

However, the actual amount to be given to Malaysian companies has not been finalised yet, even though some RM13bil of the RM55bil cost of the project has been drawn down.

The deputy secretary-general of the International Trade and Industry Ministry, Datuk Isham Ishak, had said last month that the understanding was for local companies to be awarded between 30% and 40% of the jobs. However, the final amount could be more or less, he had said.

Project awarded beforeMRL set up

Actual work on the project started a year ago, after the government awarded the job to CCCC in August 2016. The Economic Planning Unit (EPU), which was under Datuk Abdul Rahman Dahlan, awarded CCCC the project under a government-to-government arrangement.

Ironically, the award to build Malaysia’s most expensive and longest railway project was done even before Malaysia Rail Link (MRL), the special-purpose vehicle (SPV) set up to oversee the ECRL, was set up.

Apart from the award to CCCC in August, the terms of the financing were also agreed upon before the key officials in MRL could take charge of the project.

MRL was incorporated in September and the chief executive officer, Datuk Seri Darwis Abdul Razak, came into the firm sometime in October.

The loan agreement between China’s Exim Bank and MRL was signed in November 2016.

“The award and financing was all put in place before the working team in MRL came on board. Their job is just to deliver the project under the terms of contract and financing package,” says a source.

MRL declined to comment when contacted.

Five months after the loan agreement was signed, CCCC started the real work on the project. It has since set up 30 working camps starting from Bentong in Pahang right up to Kota Baru in Kelantan.

It is learnt that so far, CCCC has taken site possession of more than 130 km of railway track. The site for another 70 km of railway track along the alignment is poised to be handed to CCCC after some documentation work in the next few months.

“Effectively, CCCC has taken control of close to 19% of the site for the project. However, the amount drawn down for the project is almost 24%,” says a source.

The ECRL’s finances have come under the scrutiny of the Council of Eminent Persons (CEP), which is headed by Tun Daim Zainuddin. So far, the team has asked for a briefing from MRL’s Darwis.

However, during the election campaign, Pakatan Harapan, led by Prime Minister Tun Dr Mahathir Mohamad, said it would renegotiate the terms of the ECRL, which was signed by the previous Prime Minister Datuk Seri Najib Tun Razak during a visit to China in November 2016.

“The team under Daim is almost certain to ask for an audit to ascertain how the RM13bil was utilised. Among others, they would want to seek information if some parts of the money was diverted for other needs of the government instead of the ECRL,” says a source.

Speculation is rife that some of the money drawn down for the ECRL project has been diverted to pay off 1Malaysia Development Bhd’s (1MDB) debt-servicing obligations.

There is a precedent of money raised for projects by government SPVs being diverted from its original intention of use.

In March 2013, 1MDB raised US$3bil to finance infrastructure work for the Tun Razak Exchange (TRX) development. However, the Auditor-General’s Report on 1MDB stated that the money was not used for the purpose.

Other than an audit on the financials of the ECRL, the MRL team is believed to be looking at ways to reduce the cost of completing the project.

The ECRL has come under heavy criticism for its cost of RM55bil, which translates to close to RM80mil per km. Other railway projects in Malaysia have so far averaged less than RM50mil per km.

Another RM10.5bil more is to be added on to the loan amount for fortification works along the railway track to prepare the alignment for a double track in the future.

“The additional amount was slated to be announced after the 14th general election.

However, there is a change in government and everything has been put on hold,” says a banking official.

If the RM10.5bil is added to the cost of building the ECRL, it would amount to close to RM90mil per km, making it one of the most expensive railway projects.

CEP chairman Daim yesterday cast doubt over the future of the project, given its escalating price tag and also whether it is a project the rakyat really want.

Scale down or defer?

So far, the CEP have not told the team at MRL on the next course of action. However, work has already started to look at ways on how to reduce the cost of the project.

According to a railway consultant, the government can either opt to cut its losses and stop the project or scale it down.

“Under present circumstances, where the new government is looking to reduce expenditure and wastage in public funds, the ECRL can be deferred indefinitely. It has happened before,” says the consultant.

In 2003 after Tun Abdullah Ahmad Badawi took over from Dr Mahathir, the north-south double-track railway project was deferred. It was revived four years later.

If the project is deferred, then the government would incur abandonment costs related to the project because initial ground work has already been done on 30 spots along the alignment. The government would also have to compensate the procurement suppliers.

“The orders have already been placed for the tunnel boring machine and CCCC itself has bought more than 350 heavy equipment for the project.

“The abandonment cost would run into several hundred millions. But the government will not bear the cost of the loan from China in the longer run,” says the consultant.

When the study on the ECRL was initiated by the government in 2009, the cost was estimated at RM30bil.

“The project was signed in 2016 and by that time, it had gone up to RM55bil. The reasons given were due to the weaker ringgit against the US dollar and the extension of the alignment from the original projection,” says a consultant.

East Coast Economic Region Development Council chief executive officer Datuk Seri Jebasingam Issace John had said that when the project was conceived, the ringgit was at about RM3 to the US dollar. But when it was firmed up, the ringgit had depreciated to RM4 to the US dollar.

Another reason cited for the increase in cost is that the original alignment did not have Phase 2 of the ECRL from Gombak to Port Klang. Phase 2 itself is estimated at RM9bil.

Another option is to scale down the project.

“If Phase 2 of the ECRL project is taken out, it would reduce the cost by RM10bil. More cost can be reduced if the frills are taken out of the project. The cost can come down to about RM35bil,” quips the consultant.

Reasons to continue with the ECRL in whichever form are already facing objections from the CEP as one of its members, economist Prof Dr Jomo Kwame Sundaram, has voiced his opinion on the project.

In a comment last year, he rebutted forecasts that the ECRL would carry almost 60 million tonnes of freight yearly by 2035. He said KTM only carries about six million tonnes per annum with its current nationwide network. His stance cast doubt over the viability of the project, which some feel can be cancelled to save money for the government. There are concerns over the terms of the loan and also the step-up clauses in the agreement.

Affin Hwang Research in a report says it will be difficult for the new government to cancel the project, as substantial works have started, it is a government-to-government project between Malaysia and China, and loans from Exim Bank of China have been drawn down to finance the construction.

“We believe the new government could renegotiate terms of the contract but subject to mutual agreement, especially for Phase 2 works worth RM9bil as the contract has not been awarded.”

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