Caution and foresight necessary with ECRL

by: Andrew Fan, Senior Analyst at Jeffrey Cheah In­stitute on Southeast Asia

The East Coast Rail Link (ECRL) is a 688.3km-long double track rail system planned to be commissioned in 2024, which will connect Pengkalan Kubor in Kelantan on the east coast of peninsular Malaysia with Port Klang in Selangor on the west coast of peninsular Malaysia. The construction cost of this project is RM66.8 billion. However, after you consider financing costs, land acquisition, and other operational costs during development, the total project cost is expected to increase to RM80.9 billion. 85% of ECRL is funded by a loan from Exim Bank of China and 15% through the issuance of a sukuk guaranteed by the Malaysian government.

According to the previous Najib administration, ECRL will become the primary transport for people and goods between the east and west coast amounting to 5.4 million passengers and 53 million tonnes of cargo per annum by 2030. The split in revenue between passengers and cargo is expected to be 30% and 70% respectively.

Based on these assumptions, ECRL is expected to contribute an additional GDP growth of 1.5% per annum for the region, with at least 30% or RM20 billion of contracts to be given to local contractors. In addition, 80,000 jobs are to be created during the construction period and 6,000 jobs during the operations period.

The aim of this rail link is to connect the less developed east coast states of Kelantan, Terengganu, and Pahang with the more developed west coast states in peninsular Malaysia. It is hoped that the greater connectivity will spur the tourism sector, as the east coast states are blessed with amazing tourist assets such as Genting Highlands, Taman Negara, and Pulau Redang. The rail link is also expected to facilitate other services like logistics and business services.

However, it is questionable how value-added a high speed rail link will be in catalysing more tourism and business activities, when high-quality road networks, rail networks, and domestic airlines already serve the east coast states.

ECRL’s business plan expects it to transport 5.4 million passengers by 2030. However, the entire Keretapi Tanah Melayu network covering all of peninsular Malaysia currently only ferries six million people per annum. Kelantan, Terengganu, and Pahang have relatively small domestic populations, and hence only comprise 18% of the total population in peninsular Malaysia. It is unrealistic to expect that the targeted number of passengers can be achieved unless there is a significant increase in foreign tourists and business people in the region.

Strategically, ECRL connects the Kuantan port with Port Klang. This new connection of goods could be a basis to route some goods via Malaysia instead of Singapore. It is estimated that the travel time of goods from Shenzhen to Port Klang via ECRL could be reduced to 135 hours compared with 165 hours via Singapore.

In addition, the goods travelling through this route could benefit from value-added activities at the Malaysia-China Kuantan Industrial Park (MCKIP). The park is 51% owned by a Malaysian consortium led by IJM and 49% by Guangxi Beibu Gulf, a Chinese conglomerate with core competency in port and harbour industries.  A key component of this connectivity is the Kuantan port, which is currently being upgraded to be able to handle 52 million tonnes of bulk and container cargo. The Kuantan port is 60% owned by IJM and 40% by Beibu Gulf Holding.

ECRL’s current business plan expects a cargo throughput of 53 million tonnes per annum by 2030. This is nine times more than the total cargo currently being transported by peninsular Malaysia’s entire rail network. It is quite ridiculous that this level of throughput can be achieved a mere six years after ECRL’s commissioning in 2024.

Overwhelmingly, the business justification to build ECRL is dependent on its ability to substitute some cargo going through Singapore, because the travel time from Shenzhen to Port Klang will reduce to 135 hours, compared with 165 hours via Singapore, albeit with an increased cost from US$50 (RM204) to US$56 per tonne. However, it needs to be critically questioned what type of cargo exactly warrants this increased cost that logistic companies will be prepared to pay a premium for a saving of only one shipping day.

Further, the value proposition of ECRL is exposed to the great risk of the Kra Canal that can be built along the Kra Isthmus of southern Thailand. According to reports, the Kra Canal can be built within 10 years with a cost of US$30 billion to US$50 billion. The canal is seen as a shorter route that would enable ships to bypass the Straits of Malacca and cut their voyage by 1,200km, or two to five days in shipment time.

The project is expected to create a two-way, 25m-deep canal measuring 102km long and 400m wide. In comparison, the Panama Canal is only 15m deep, 80km long and measures only 304m at its widest point. According to the 2017 five connectivity indexes developed by Peking University, China and Thailand’s people-to-people relationship is second best when compared with other Southeast Asian countries, behind only Singapore.

It is thus entirely plausible that in the not too distant future, an agreement could be made between Thailand and China to build the Kra Canal. If the Kra Canal project proceeds, then ECRL will lose its entire competitive advantage and Malaysia will be left to operate a white elephant. Ironically, the canal is likely to be constructed by Chinese companies under the Belt and Road Initiative as evidenced by the memorandum of understanding signed between Thailand’s Asia Union Group and China-Thailand Kra Infrastructure Investment and Development company, which is headquartered in Guangzhou.

As a result of the project’s questionable viability, Prime Minister Dr Mahathir Mohamad decided to stop the ECRL project’s progress on July 4 to allow renegotiations of the contract terms with China. At the point of suspension, the construction progress of ECRL had reached 14.8%. According to the finance minister, the final development cost of RM80.9 million must be reduced significantly for the project to be viable.

However, the Malaysian government’s current approach to resolving the ECRL business viability issue by focusing on reducing costs as necessary is not sufficient, because there are many demanding side concerns, such as attracting more foreign tourists and business people, ensuring shipping competitiveness with Singapore, and mitigating the risk of the Kra Canal.

Therefore, in the upcoming negotiation between President Xi Jinping and Dr Mahathir in August, more analysis and concrete initiatives need to be made to create sustainable demand for ECRL.

In addition, Malaysia should seek firmer commitments from China to support the long-term success of ECRL. For example, China could take a minority share in Malaysia Rail Link, the ECRL operating company, similar to how China has taken a minority shareholdership in the Kuantan port and MCKIP. In this arrangement, Malaysia retains the decision-making rights over ECRL, while China has an inherent interest to support the long-run sustainability of ECRL, rather than merely focusing on the short-term milestones of completing construction and recovering loan repayments from Malaysia. From China’s perspective, China should objectively examine the cost and benefit of the Kra Canal, given that China has already made significant investments in land connectivity investments across Eurasia under the BRI.

China is the overall coordinator for the BRI and the current single largest net direct investor in Malaysia with a share of 16.9% and second largest export market for Malaysia with a share of 13.2%.

Therefore, China should play a responsible role to ensure that its projects implemented in Malaysia are viable and sustainable in the long run. The east coast region has significant potential to develop globally competitive economic clusters in the areas of tourism, halal products, petro-chemicals and fisheries. However, more effort and investments are required to fully realise the potential of these economic clusters. In this regard, China can make a meaningful contribution.

If China is unable or unwilling to be a responsible player to make the investments in Malaysia sustainable, then perhaps it will be better for Malaysia and China to walk away from the negotiation table, lest we are all saddled by failed assets, bad debts, and tarnished reputations.

By Andrew Fan | 5 August 2018

Andrew Fan is a senior analyst at the Jeffrey Cheah Institute on Southeast Asia.

First appeared in the Malaysian Insight