East Coast Rail Line – a necessary evil?

PETALING JAYA: Industry observers believe the government feels it is necessary to keep the East Coast Rail Line (ECRL) not only to manage the costs associated with it but also to maintain relations with the Asian powerhouse, China, despite the controversies surrounding the project.

Prime Minister Tun Mahathir Mohamad said today that if the ECRL has to be built and the contract cannot be broken, the government will have to reduce the cost, noting that it should not cost RM55 billion and that the terms of the contract are not favourable to Malaysia.

Last week Finance Minister Lim Guan Eng said the ECRL would proceed as RM20 billion of the project cost had already been paid.

"Given the strain on the current fiscal position, the government has to choose either one of the two projects. Perhaps they could shorten the ECRL and delay the HSR for five years. The important thing now is to focus on paring down the debt first," Sunway University Business School Professor of Economics Dr Yeah Kim Leng told SunBiz, referring to the postponed Kuala Lumpur-Singapore High Speed Rail project.

He also said that being a government-to-government project which was already signed off, keeping the ECRL is really about maintaining commitment to the contract, noting that the government is in negotiations to reduce the overall cost of the project.

KAF-Seagroatt & Campbell Securities Sdn Bhd analyst Mak Hoy Ken said he is not surprised with the latest development on the ECRL and views it as slightly positive for the construction sector.

"We previously wrote that the Council of Eminent Persons would likely recommend to the government that Phase 1 be continued, albeit at a reduced scale. Furthermore, the government may need to pay RM22 billion in compensation and penalty charges if it calls off the project," he said in his report today.

The compensation package includes payment to suppliers, dismantling costs, loan principal, interest and committed orders for supplies and services.

"In addition, if the ECRL contract is terminated, it will trigger a default that requires the government to repay the project's loans within a month. For the record, EXIM Bank of China is funding 85% of the ECRL's needs," Mak said.

In comparison, the compensation for cancelling the HSR is RM500 million.
Mak noted that the turnkey contractor, China Communications Construction Co, has completed work for an estimated RM9 billion and is claiming RM10 billion more that is yet to be certified.

Work on Phase 1 has reached 20% or an overall progress about 14%, based on the entire project's last indicative value of RM66 billion.

Yeah, however, opined that more can be done to ensure that the ECRL is effectively utilised to justify its cost.

He said while the ECRL will benefit the East Coast in terms of connectivity, especially to areas currently inaccessible, the government could look at economic opportunities to attract more Chinese investments to the industrial parks along the ECRL route, and to develop Terengganu and Pahang ports.

"This will increase the volume on the ECRL and make the project more viable. The government should take a closer look at the economic spinoffs," Yeah said of the rail link, which is part of China's Belt and Road Initiative.