China Eximbank provides RM 37.7 billion preferential buyer's credit for Phase 1 of East Coast Rail Link (ECRL) Construction Project (Linked to Record ID#49309, 105768, 73473)

Project narrative

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 — in the form of a preferential buyer's credit (PBC) agreement — worth RMB 61.88 billion (39.1 billion ringgit) for Phase 1 of the ECRL Project on or around April 1, 2017. The loan reportedly carried the following borrowing terms: a 20 year maturity, a 7 year grace period, and 3.25% interest rate. The proceeds of the loan were originally 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 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 (RM) from the loan, which implies a disbursement rate of 50.3%. The 19.69 billion ringgit was used by the borrower for (1) an advance payment of RM 10.02 billion to CCCC, and (2) a progress payment of RM 9.67 billion to CCCC. As of December 31, 2018, the loan’s amount outstanding was approximately $3.264 billion (RM 13.6 billion). 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 (under 'ECRL 1.0') 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 ('ECRL 2.0') from 65.5 billion ringgit to 44 billion ringgit. China Eximbank agreed — at least in principle — to revise the original loan agreement with MRLSB in order to finance the revised overall project cost (i.e. 37.4 billion ringgit or RMB 59.18 billion). Eventually, China Eximbank agreed to finance 75 percent of the overall project cost. The remaining 25 percent was to be financed via local sukuk (Sharia-compliant bonds) . Under the SA, the parties also agreed to form a 50:50 joint-venture company to manage, operate and maintain the ECRL rail network. Then, in April 2021, Malaysia's Transport Minister Datuk Seri Dr Wee Ka Siong announced that the ECRL Construction Project had been rescoped yet again. The total cost of 'ECRL 3.0' was identified as RM 50.27 billion and it reverted to the original alignment (including the Serendah by-pass) that was approved during the Barisan Nasional administration. 75% of the RM 50.27 billion cost (RM 37.7 billion) of ECRL 3.0 is being financed by China Eximbank and the remaining 25% is being financed via local sukuk (Sharia-compliant bonds). Record ID#85858 captures the estimated value (RM 37.7 billion ringgit) of the revised loan agreement for Phase 1. Record ID#73473 captures the portion of the loan agreement for Phase 1 that was cancelled. Record ID#49309 captures the revised loan (pledge) 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. 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. Then, on June 23, 2022, and inauguration ceremony for the Genting twin tunnel dredging of the ECRL project took place The excavation of the 16.39 km Genting Tunnel is the only one of the 59 tunnels drilling using the TBM method compared to the drilling and blasting method for the previous tunnels. This 1,600 ton Chinese-made TBM machine is capable of penetrating the Titiwangsa Range along the Bukit Tinggi area connecting Bentong, Pahang with the Gombak Integrated Terminal, which is the main entrance to the capital. The construction of the Genting Twin Tunnel is one of the main components of the ECRL Project as it can complete the 'land bridge' or landbridge for the transportation of cargo from Kuantan Port to Port Klang. As of June 2022, the project had achieved a 30% completion rate. The originally expected project completion date was June 30, 2024, but it was later extended to December 31, 2026, and eventually extended to January 2028. As of July 2024, 62.4% of the work has been completed. This project has been a subject of controversy, scandal, and continual renegotiation. 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, on April 15, 2019, Malaysia Rail Link Sdn Bhd (MRL) Chief Executive Officer Datuk Seri Darwis Abdul Razak announced that '[w]e are still negotiating the other terms, for example, the [grace] period. This is because the construction (completion date) has moved from 2024 to 2026, and essentially a moratorium extension should be given.' He added that 'hopefully, [China Eximbank] will be coming next week to address [the borrowing terms of the loan].' Then, in July 2022, Malaysia's Ministry of Transport Anthony Loke Siew Fook reported to a parliamentary oversight body that the loan's grace period had been extended to 2027 but its interest rate remained unchanged. The debt rescheduling is captured via Record ID#105768. Additionally, 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. Then, in February 2020, Malaysia experienced a political crisis that resulted in the ousting of the ruling party (Pakatan Harapan ) and the appointment of Muhyiddin Yassin as the eighth prime minister under the new coalition government of Perikatan Nasional. As early as July 2020, there were reports that the Malaysian government would consider a proposal to further change the ECRL’s Section C track alignment back to its original alignment under the Najib Razak administration. On September 2, 2020, it was reported that the Cabinet had reviewed and approved the proposal to further change the ECRL track alignment, primarily to revert back to its Northern alignment for the Section C portion. On April 5, 2021, the Minister of Transport Wee Ka Siong officially announced the government’s intention to change the scope of the ECRL alignment (by reverting back to its Northern alignment for the Section C portion and including the Serendah by-pass).