Malaysia's East Coast Rail gets green light under renegotiated terms

Malaysian government claims to have renegotiated far better financial terms under a new deal for the rail project, securing substantially reduced loan fees and payment terms

Malaysia's East Coast Rail Link project is moving ahead once again, after being put up for review last year by the government led by Prime Minister Mahathir bin Mohamad, who thought the original financial terms (negotiated by a previous administration) were too onerous.

The breakthrough comes after extensive renegotiations by the government, which came to power promising to seek far better commercial arrangements for infrastructure projects, such as Belt Road initiative projects. It remains to be seen if the move acts as a template for other countries seeking improved financial terms for China-backed schemes.

A spokesman for the Chinese Foreign Ministry welcomed the move and the resumption of the project, which would bring mutual benefits.

Malaysia Rail Link Sdn Bhd (MRL) and China Communications Construction Co (CCCC) signed a supplementary agreement on the project, the office of Malaysia's Prime Minister announced on 12 April.

The statement said that the main objection to the original East Coast Rail Link (ECRL) project was premised on the way and speed at which the original contract was negotiated and signed in 2016. It was an unjustified, hefty lump sum price that lacked clarity in terms of technical specifications, price and, by extension, economic justification.

As the original contract was agreed on a government-to-government basis, the Malaysian side, in negotiating an improved deal for the ECRL, had to work within the constraints of the existing agreements.

The government was faced with a dilemma: either renegotiate the deal or pay termination costs of about 21.78 billion Malaysian ringgit (US$5.3 billion), with nothing to show for it.

“As such, we chose to go back to the negotiation table and call for a more equitable deal, whereby the needs of the Malaysian people would be prioritized,” the statement said. “After long and protracted negotiations between the Governments of Malaysia and the People’s Republic of China, both parties reached a mutually beneficial agreement - the improved ECRL deal.”

The Supplementary Agreement covers Phase 1 and Phase 2 of the engineering, procurement, construction & commissioning (EPCC) of the ECRL at a reduced cost of 44 billion Malaysian ringgit. This is a reduction of 21.5 billion Malaysian ringgit (or 32.8%) from its original cost of 65.5 billion Malaysian ringgit. According to the government, the improved ECRL will cost 68.7 million Malaysian ringgit per kilometre compared to 95.5 million Malaysian ringgit per kilometre under the original agreement.

The total length of the line will be 640 kilometres, including spur lines. The ECRL will run through 20 stations, among others, from Kota Bahru to Kuala Terengganu, Kuantan, Mentakab and proceed to Jelebu, Bangi/Kajang, Putrajaya Sentral and onto Port Klang. The new southern alignment will also provide a direct land link from Kuantan Port to Port Klang, serving as a land bridge between the two ports.

CCCC has agreed to participate in the operation and maintenance of the ECRL through a joint venture company to be set up (MRL 50% and CCCC 50%).

CCCC has agreed to refund part of the 3.1 billion Malaysian ringgit advance payment paid for Phase 2, Double Tracking and the Northern Extension under the original contract. Exactly 500 million Malaysian ringgit will be refunded within a week from 12 April 2019, and a further 500 million Malaysian ringgit within a month from 12 April 2019, for a total of 1 billion Malaysian ringgit.

The balance will be settled within three months after deductions for verified claims due to abortive works, suspension and cancellation of the Northern Extension.

There are also substantially reduced financial commitments due to the overall loan facility.

Under the original ECRL agreement, the total project cost was 66.7 billion Malaysian ringgit. The loan amount from China Exim Bank, at 85% of the project cost, would have amounted to 56.7 billion Malaysian ringgit. Under the previous government, the current amount signed for with China Exim Bank is 39.1 billion Malaysian ringgit for Phase 1 alone. The balance of the 17.6 billion Malaysian ringgit for Phase 2 and the Northern Extension were yet to be signed.

With the improved ECRL at 44 billion Malaysian ringgit, the loan amount from China Exim Bank will be reduced substantially.

The Malaysian government said that the reduced amount was still being negotiated with China Exim Bank and envisaged that this would result in softening the government’s financial burden in terms of the principal repayment amount, total interest costs and other fees.

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