[Cancelled Portion] China Eximbank provides RM 39.1 billion preferential buyer's credit for Phase 1 of East Coast Rail Link (ECRL) Construction Project (Linked to Project ID#49309 and Project ID #85858)

On September 26, 2016, the Ministry of Finance Incorporated (MOF Inc.) of Malaysia established a wholly-owned subsidiary and special purpose vehicle called Malaysia Rail Link Sdn Bhd (MRL or MRLSB) to design, finance, implement, and maintain the East Coast Rail Link (ECRL). Then, on November 1, 2016, China Communications Construction Company Ltd (CCCC) and MRLSB signed a commercial contract worth RMB 72.8 billion (46 billion ringgit) for Phase 1 of the ECRL Project. China Eximbank and MRLSB subsequently signed a loan agreement worth RMB 61.88 billion (39.1 billion ringgit) for Phase 1 of the ECRL Project. The loan reportedly carried the following borrowing terms: 20 year maturity, 7 year grace period, and 3.25% interest rate. The proceeds of the loan were to be used by the borrower to finance 85% of the cost of the November 1, 2016 commercial contract with CCCC. 60% of the loan was to be made available in renminbi (RMB), and the remaining 40% of the loan to be made available in ringgit. The loan was reported to be in the form of preferential buyer's credit. The Government of Malaysia issued a sovereign guarantee in support of the China Eximbank loan. As of August 2018, the borrower had drawn down 19.69 billion ringgit from the loan. On May 13, 2017, CCCC and MRLSB signed an Engineering, Procurement, Construction and Commissioning (EPCC) contract worth RMB 14.2 billion (9 billion ringgit) for Phase 2 of the ECRL Project. However, there is no evidence of a loan agreement being signed with China Eximbank for Phase 2. The initial (combined) cost of Phases 1 and 2 was 55 billion ringgit, but it subsequently escalated to 65.5 billion ringgit. According to Malaysia's Ministry of Transport, as of July 3, 2018, MRLSB had paid 10.01 billion ringgit as advance payment for Phase 1 and Phase 2. Then, in August 2018, newly elected Prime Minister Mahathir Mohamad cancelled the ECRL project and stated that the project could have been developed by a Malaysian company for less than half the value of the contracts that had been won by CCCC. After cancellation, China Eximbank informed the new Malaysian Government that it could either renegotiate the original contracts or pay termination costs of about 21.78 billion ringgit. The Malaysian Government chose to renegotiate. On April 12, 2019, CCCC and MRLSB signed a Supplemental Agreement (SA) regarding Phase 1 and Phase 2 of the Engineering, Procurement, Construction & Commissioning (EPCC) for the ECRL Project, which reduced the overall cost of the ECRL Project from 65.5 billion ringgit to 44 billion ringgit. China Eximbank agreed — at least in principle — to revised the original loan agreement with MRLSB in order to finance 85% of the revised overall project cost (i.e. 37.4 billion ringgit). Under the SA, the parties also agreed to form a 50:50 joint-venture company to manage, operate and maintain the ECRL rail network. More details on the SA can be found in Staff Note. Project ID#85858 captures the portion (19.69 billion ringgit) of the loan agreement for Phase 1 that was disbursed. Project ID#73473 captures the portion (19.41 billion ringgit) of the loan agreement for Phase 1 that was cancelled. Project ID#49309 captures the revised loan for Phases 1 and 2. The purpose of the ECRL project is to build a 688 km railway that connects Kuala Lumpur, the nation’s capital, to Kota Bharu via the East Coast Economic Region through Pahang, Terengganu, and Kelentan states. The railway will be used for both passenger and freight transportation from the West Coast of Peninsular Malaysia to its East Coast, and manage 80% of world maritime trade in the Straits of Malacca, linking major economies such as India, China, Japan, and South Korea. The railway will feature the following technical specifications: electrification via an overhead line, double tracking, standard gauges, operation by a driver, and will include a spur line, tunnel link, bridges, viaduct, depots, 23 total stations, and a signaling system. Traveling up to 200 km/h, this inter-city rail service plans to use eleven 8-car train sets for up to 600 passengers per set. Initial plans also indicate that these train sets will be built with eco-friendly and noise pollution reduction features, although information on this is not yet abundantly available. To transport cargo, the railway will use an electric locomotive with a haulage capacity of up to 45 wagons with 3500 tons of cargo. The estimated ridership of this railway service is 5.39 million people by 2030. Revenue from this project is estimated to derive from a transport ratio of 70% freight cargo business, and 30% passengers. While current travel to the East Coast of peninsular Malaysia takes about 12 hours, the ECRL alignment will shorten this travel time to 4-5 hours. The Eastern cities are also currently not connected to the west coast via rail. After a full public display of the proposed alignment, SPAD reported that 97% of Corridor residents were in support of the project. The ECRL is being built in two main phases. Phase 1 will entail a route in the following order: Kota Bharu, Kuala Terengganu, Kuantan, Bentong, Gombak. The line will span a total of 600.3 km and have 23 stations. In an approximately four-hour trip, Wakaf Bharu in Kelentan will be connected to Gombak Integrated Transport Terminal (ITT Gombak) in Kuala Lumpur. ITT Gombak provides the potential to connect with the existing Kelana Jaya Line and a long-distance bus terminal. This construction phase will also include tunnel work in the Gombak-Bentong area, with the single longest tunnel spanning 18km under the Titiwangsa Mountains. Some parts of the line near the Kuala Lumpur city center in Gombak will be built underground. Construction will begin at the northern end of the rail in Kelantan. Phase 2 of construction will be much shorter, and will connect ITT Gombak to Port Klang for a total of 88 km of railway. China Communications Construction Co., Ltd. (CCCC) is the contractor responsible for ECRL implementation and its work is being overseen by Malaysia’s Ministry of Transport through Agensi Pengangkutan Awam Darat (APAD). A groundbreaking ceremony took place on August 9, 2017. The project had achieved a 14.33% completion rate as of June 2018, which included the following implementation activities: setting up of base and satellite camps in all eight sections of the project, land acquisition, site clearing, and construction of road access. However, on July 3, 2018, MRLSB (the project owner) instructed CCCC to halt all works. Construction resumed on July 25, 2019, but as of March 2021, the project had still only achieved a 20% completion rate. The first (1.1 km) tunnel breakthrough took place on April 9, 2021 in Terengganu state. The originally expected project completion date was June 30, 2024, but it has been extended to December 31, 2026. This project has been a subject of controversy and scandal. When the Pakatan Harapan (PH) coalition came into power after 2018 elections, it immediately raised concerns about artificial cost inflation and corruption in the China Eximbank-financed project. Malaysian Prime Minister Mahathir Mohamad cancelled the ECRL project as well as a $2.5 billion Chinese-backed gas pipeline project and announced that he would seek to renegotiate the terms and conditions of the project contracts. He told the New York Times that “It’s all about borrowing too much money, which we cannot afford and cannot repay because we don’t need these projects in Malaysia.” Then, in January 2019, an investigation by the Wall Street Journal revealed that the Chinese Government had previously recommended that the previous government in Malaysia price these projects at above-market values in order to generate excess cash that it could use to repay the maturing debts of 1MDB (a state investment fund). The Prime Minister (Najib Razak) was, at the time, accused of stealing $681 million from 1MDB. He also reportedly asked Jho Low—the alleged mastermind of the crime—to negotiate with the Chinese Government to resolve the 1MDB crisis.

Additional details

1.During construction, MRLSB is the 100% project and asset owner of the ECRL rail network. During operation, it will be the 100% asset owner of the ECRL rail network. MRLSB will also form a 50:50 joint-venture with CCCC to jointly operate and maintain the rail network. 2.MRLSB is wholly-owned by the Minister of Finance Incorporated (MOF Inc.). MOF Inc. is a corporate entity owned by the Government of Malaysia’s Ministry of Finance that has the authority to enter into contracts, acquisitions, purchases, possessions, holdings and maintains tangible and intangible assets. As such, MRLSB is 100% owned by the Government of Malaysia. 3.In June 2018, CCCC provided an RM 10 billion bank guarantee to Malaysia Rail Link in the form of Advance Payment Bond. This guarantee was provided by Bank of China and China Eximbank. No separate records have been created to capture the advance payment bond from China Eximbank and Bank of China as they fall into the category of loan guarantees, which AidData does not separately record to avoid double-counting financial flows. 4.The SA covers Phase 1 and Phase 2 of the Engineering, Procurement, Construction & Commissioning (EPCC) of the ECRL at a reduced cost of RM 44 billion. This is a significant reduction of RM21.5 billion or 32.8 percent, from its original cost of RM65.5 billion. There were three additional major changes introduced through the SA. First, CCCC agreed to participate in the operation and maintenance of the ECRL through a joint venture company to be set up (MRLSB 50%: CCCC 50%). CCCC agreed to provide technical support and share the operational risk after the project’s completion. This arrangement was designed to ease the financial burden on the Government of Malaysia, which was previously expected to bear the entire cost of Operation & Maintenance (O&M.) Second, the percentage of local participation (content) was increased from 30 percent to 40 percent of civil works. Third, CCCC agreed to refund part of the RM3.1 billion advance payment that MRLSB made for Phase 2. The SA also redefined the technical scope of Phase 1 and 2 in the following manner: 1. Standard gauge and double tracking of the ECRL is maintained. 2. 640km inclusive of spur lines 3. 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. Therefore, it will now pass through 5 States and WP Putrajaya from the previous 4 states, allowing more States to partake in the economic benefits of the improved deal. 4. 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. 5. The new alignment will leverage on the existing KLIA Express Rail Link (ERL) as well as the future MRT2 SSP Line with an interchange in Putrajaya Sentral. This will improve passenger connectivity to other parts of the Peninsula’s West Coast as well as provide a direct link to KLIA. This is a significant improvement to the single interchange via LRT in ITT Gombak as per the previous arrangement. 6. Passengers on existing KTM Komuter and ETS Services from the Southern part of the Peninsula will interchange with the ECRL at the planned ECRL Bangi/Kajang station. 7. The new alignment also prioritize cultural, heritage and environmental factors by avoiding the Klang Gates Quartz Ridge in Gombak Selangor, the longest pure quartz dyke in the world. 8. The project’s expected completion date is revised from June 30, 2024 to to December 31, 2026. 
 5. The Chinese project title is 马来西亚东海岸铁路项目. 6. The precise loan commitment date is unknown. For the time being, AidData assumes that the loan commitment year is 2018 (the first year in which there is evidence of the loan disbursing). However, this issue warrants further investigation.

Number of official sources

22

Number of total sources

44