East Coast Rail Link Back on Track as Malaysia and China Negotiate

10 April 2019 Jarryd de Haan, Research Analyst, Indian Ocean Research Programme

Background

On 2 April, Malaysia held negotiations with Chinese representatives on the East Coast Rail Link (ECRL). The meeting was called by the Chinese to revitalise the ECRL, which had been suspended since 4 July 2018, shortly after the election of Prime Minister Mahathir Mohamad. Higher-than-expected costs for the project were mostly to blame for the suspension rather than simply apprehension about Chinese investment. Speaking to reporters on 3 July 2018, Malaysian Finance Minister Lim Guan Eng noted that completing the project would cost approximately $28.2 billion; fifty per cent higher than the estimate provided by the previous government. Economic Affairs Minister Datuk Seri Mohamed Azmin Ali told the media that he hopes negotiations will conclude before Mahathir leaves for China to attend the Belt and Road Forum on 26 April.

Comment

No final decision appears to have been made as yet, but there have been reports indicating progress in the negotiations. According to those reports, a new route will be negotiated due to environmental concerns and the total cost may be reduced to around $12.4 billion (possibly due to a change from double to single tracks). Additionally, the project may be part of a package deal, which could see China importing more of Malaysia’s palm oil.

While those reports have not been confirmed by either government, it does seem likely that the project will go ahead in the near future. There are three options for Malaysia: re-negotiate the price with China, hand the project over to another contractor, or cancel it altogether. Both the latter options would incur significant costs for the termination of the Chinese contract. Consequently, as the cost of the project is the Malaysian Government’s primary concern, they remain the least likely options. Additionally, Mahathir told local media in March that he would give the green light to the project (which he had previously wanted to dump) – but only if the Chinese contractor agreed to a significant price reduction.

China does seem eager to re-negotiate. The Chinese Government has already offered significant reductions to their original $28.2 billion price tag, reportedly offering to cut $11.6 billion from construction costs in January 2019, and $3.5 billion on 25 March. Those offers, in addition to the fact that Chinese officials instigated the latest round of negotiations, suggest that China is willing to discuss an arrangement that will be more suitable for Malaysia. It is unlikely, therefore, that the negotiations will fail and push Malaysia to either cancel the project or find another investor.

If the deal goes ahead, it could be seen as another sign that the traditionally warm relations between the countries will not be jeopardised by the return to power of Mahathir. While there is some growing apprehension about China’s Belt and Road Initiative (BRI) within the Malaysian public, Dr Mahathir has maintained that his concerns were primarily economic and not meant as a snub to Beijing. Recent comments by the Malaysian Prime Minister also show that he is willing to continue to develop the economic relationship between the two countries, noting that Malaysia has to ‘accept that China is close to us… And it is a huge market. We want to benefit from China’s growing wealth.’

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

Published by Future Directions International Pty Ltd.
Suite 5, 202 Hampden Road, Nedlands WA 6009, Australia.