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Thursday, August 10, 2017

ECRL folly bound to fail and burden the nation



The East Coast Rail Line (ECRL) is being touted to Malaysians as a world-class “game changer” which will accelerate development in the East Coast states of Peninsular Malaysia. Unfortunately, there is little evidence that it will do so, and the rationale for such claims are dubious, to say the least.
We have been told that RM55 billion is being invested in ECRL, which will be completed by 2024. All over the world, such mega-projects are notorious for cost overruns, and there is no reason to believe that this project will be the exception to the rule.
The justification for the ECRL is that it will carry almost 60 million tonnes of freight yearly by 2035. This is incredible because even KTM only carries about 6 million tonnes per annum with its current nationwide network. If the projected massive surge in freight tonnage does not materialise, the project will lose even more, meaning that taxpayers for generations to come will have to massively subsidise the ECRL.
ECRL is supposed to greatly benefit the country in so many incredible ways as to defy simple logic. But will there be enough passenger traffic to support a high-speed rail link? What kind of cargo needs such a costly high-speed haulage connection. And which high-speed railway in the world stimulates so many businesses and jobs in all the towns it will pass through, as claimed.
Will the ECRL be an expensive ‘white elephant’ paid for by Malaysians for many years to come? The Kemaman-Kuantan rail link, completed several years ago, has hardly been used to date. Are we supposed to be thankful that it cost much less than the ECRL?
Even Wan Saiful Wan Jan, the libertarian chief executive of the Institute for Democracy and Economic Affairs (IDEAS) who endorsed the Forest City project in Johor Baru, found the ECRL claims difficult to swallow in a recent articlearguing for improved governance generally, especially to manage investments from China.
Honest critics are already being accused of wanting to deprive the East Coast states of development. But those with longer memories know how much Kelantan has been deprived of federal funds by Putrajaya, while Terengganu has been denied petroleum revenues and its investment fund was ‘hijacked’ to become the now notorious 1MDB.
China firms to profit
Of course, the deal will be good for some Chinese state-owned enterprises. The contract was given to the China Communication Construction Company (CCCC) after direct negotiations, without any open tender, although Malaysian companies have delivered on rail projects before. CCCC will be required to subcontract to local firms, but will remain the main contractor.
As we should have learnt from earlier arrangements, foreign firms find ways and means to bring their preferred partners in with them, using local partners to fulfil such requirements as meaningful technology transfer. The international success of Ingress (e.g., in Rayong, the ‘Detroit of Thailand’) contrasts sharply with the minimal development of Malaysian technological capacity and capabilities by many other Proton vendors due to their (mainly Japanese) principals’ practices.
The ECRL will be funded by a loan from China’s state-owned Exim Bank, with the Malaysian government, i.e., taxpayers, serving as guarantor. Thus, the risk and liability will be completely borne by Malaysia.
So, Malaysia will essentially be borrowing money from a China bank to pay a China company to build ECRL. Very little of the loan will get to Malaysia as the Exim Bank loan will be used to pay CCCC. Malaysians will bear all the risks for ECRL while the China firms are guaranteed profits by Malaysians. 
Whether or not the ECRL is profitable, we will still have to repay the loan with interest. Malaysia does not have to pay during the first seven years, but after that, we have to settle it within two decades. So financially, this is essentially a loan for which we Malaysians will exclusively bear all the risks.
Economic cooperation?
To be clear, I am not against economic cooperation with China, and in the absence of other global initiatives to revive global economic progress, a creative, progressive and inclusive view of the Belt and Road Initiative is welcome. And Chinese railway construction companies have won contracts in open tenders all over the world due to their impressive record despite being relative latecomers.
Also, the Chinese offer of long-term credit on concessional terms is much appreciated by many poor developing countries. But the recent rapid build-up of foreign debt and the corresponding build-up of ‘contingent liabilities’ guaranteed by the government should be of great concern. After all, all Malaysians are now taxpayers following the introduction of the Goods and Services Tax (GST).
Several years ago, the Chinese ambassador to Tanzania publicly apologised for the misbehaviour of Chinese firms in Tanzania specifically and Africa more generally. Chinese officials are now more vigilant, but in China too, ‘state capture’ by private interests has been taking place as the rich are now influential members of the ruling party, which helps explain President Xi Jinping’s anti-corruption campaigns.

Last week, the Sri Lankan government leased its new Chinese-built harbour facilities for 99 years to the Chinese government after the new port could not attract enough traffic to make the port viable and the Colombo government decided not to spend its precious revenue to service the loan from China. This is a fate we should conscientiously seek to avoid.
Malaysia should have learnt its lesson after the recent credit rating jolt following 1MDB’s failure to service its US$603 million (RM2.6 billion) first instalment payment due to Abu Dhabi’s IPIC. For most, ‘once bitten, twice shy’. Is this another case of ‘Malaysian Boleh’?

JOMO KS received the 2007 Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. The views expressed here are entirely his own. - Mkini

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