January 31, 2019 / 7:36 AM / in 3 months

China offered to nearly halve cost of Malaysia's $20-billion rail project: sources

KUALA LUMPUR (Reuters) - China offered to nearly halve the cost of a $20-billion rail project to save the centerpiece of its infrastructure push in Southeast Asia, two sources said on Thursday, but contradictory remarks by Malaysian ministers leave the outcome uncertain.

A Malaysian flag flutters next to a Chinese flag (L) as Malaysian Prime Minister Mahathir Mohamad visits China, at Tiananmen Square in Beijing, China August 19, 2018. REUTERS/Stringer

The conflicting statements made over the past week on the status of the East Coast Railway Link (ECRL) underscore the political and diplomatic challenges facing the government of Prime Minister Mahathir Mohamad in renegotiating the contract.

“If it was just about the cost, China has offered a big reduction on the cost, as much as around half,” said one of the sources privy to the talks.

Contractor China Communications Construction Co Ltd (CCCC) had offered to cut construction costs of 67 billion ringgit ($16.39 billion) for the 688-km (428-mile) project by as much as half, the sources said.

Expenses on interest and land acquisition help make up the rest of the total cost.

Despite the proposed discount, Mahathir’s government decided to cancel the contract this month, said the sources, who asked not to be identified because of the sensitivity of the topic.

After coming to power in May, Mahathir, a critic of China’s investments in Malaysia, vowed to renegotiate or cancel what he calls “unfair” Chinese projects authorized by his predecessor Najib Razak, and suspended the ECRL in July.

However, on Wednesday Finance Minister Lim Guan Eng said Malaysia was pursuing more talks with China.

That news came days after another minister said the cabinet had decided to terminate the contract and a day after Mahathir sought China’s understanding over the planned cancellation.

Negotiations have continued since the July suspension, with Malaysia indicating that it was looking for cheaper proposals on what would have been China’s biggest Belt and Road venture in Southeast Asia.

TOO MANY OFFICIALS

The sources also said negotiations had been complicated by the involvement of too many Malaysian officials.

Apart from the finance ministry, CCCC and its domestic partner Malaysia Rail Line (MRL) have also had to present their proposals to Mahathir’s long-time adviser, Daim Zainuddin, among other government officials.

“Each has their own agenda and looks at the project differently...it’s a very peculiar situation,” one of the sources said.

Daim led the now-disbanded advisory council formed soon after Mahathir came to power. His office declined to comment.

The Malaysian finance ministry directed queries to the prime minister’s office, which did not immediately respond to questions. MRL and CCCC declined to comment.

In Beijing, foreign ministry spokesman Geng Shuang said this week he had seen the reports of the cancellation but was unaware of the specifics.

“As far as I know, this project was agreed upon by companies from both sides in accordance with market principles based on equality, mutual benefit and consensus-building,” he said.

“The Chinese and Malaysian sides have been in communication on the relevant matters.”

He did not elaborate.

On Wednesday, the Malaysian cabinet said it had decided to stop making comments on the project, save for those by Mahathir.

Ties with China deteriorated after Mahathir led a coalition of unlikely partners to election victory over Najib’s Barisan Nasional alliance that had governed the country for 60 years.

“It is not an easy task for a coalition of diverse parties with almost no experience in the federal government,” said Adib Zalkapli, Malaysia director of public policy consultancy Bower Group Asia.

“And each of the parties may have different ideas about foreign policy in the ‘new Malaysia’.”

FILE PHOTO: Malaysia's Prime Minister Najib Razak and Transport Minister Liow Tiong Lai look at a model of the East Coast Rail Line at Kuantan Bahang, Malaysia August 9, 2017. REUTERS/Liz Lee

The rail project was launched in 2017 in a push for Chinese investment during the administration of Najib, whose near-decade long rule ended in electoral defeat amid a massive financial scandal.

Hit by ballooning costs, lack of transparency and the risk it could saddle Malaysia with uncomfortably large debt, the project has come to symbolize Najib’s scandal-ridden administration.

At the time, the opposition, which included Mahathir, accused Najib of selling out Malaysia’s sovereignty to China.

Reporting by Liz Lee and Joseph Sipalan; Additional reporting by Ben Blanchard in Beijing; Editing by A. Ananthalakshmi and Clarence Fernandez

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