What ECRL can teach Chinese firms?

(GT/Liu Rui)

According to media outlets, Malaysia is having government-to-government level negotiations with China over the East Coast Rail Link (ECRL) project and no final decision has been made, following Sin Chew Daily's reports which noted Malaysian cabinet cancelled the project on January 24. Since the new government took office last May, the fate of the ECRL project has been a subject of concern. It was suspended last July. On August 21, Malaysian Prime Minister Mahathir Mohamad said the project will be cancelled "for now" after he visited China

At the moment, the project will likely become another Chinese venture to suffer a setback in Southeast Asia after the Myitsone hydropower dam. It is a lesson for Chinese companies.

Although Malaysia decided to suspend ECRL, two issues remain to be addressed by the government. First, they need to deal with compensation. Second, what is to be done to part of the project that has been completed?

The compensation cannot be determined by the cabinet, but depends on negotiations between Malaysian authorities and their subsidiary and China Communications Construction Co., Ltd (CCCC). Mahathir said on January 24 that negotiations were still in progress. He said: "I don't know if the contractor has had the contract terminated or not. But one of the ways to handle the matter is by terminating the contract but we have to pay billions in compensation." Therefore, it is still uncertain how much compensation Malaysia has to pay.

Chinese companies should insist on several things while discussing compensation. First is to protect their interests. They should seek clarity on the amount and method of compensation. Malaysia and Singapore reached an agreement on postponing the construction of Kuala Lumpur-Singapore high-speed rail and Malaysia is required to pay the latter S$15 million (around $10.88 million) because of the delay. It is a good example for CCCC.

Second, Chinese firms should be flexible on China-Malaysia cooperation. In spite of the suspension of ECRL, there is more to bilateral cooperation. Both countries seek to cooperate in fields such as information technology, data analysis, design, research and development, internet of things, cloud computing and artificial intelligence. Like the suspension of the Myitsone hydropower dam in Myanmar, the suspension of the ECRL is a setback for China-Malaysia cooperation, but not a barrier to cooperate in other areas.

The ECRL project had been undertaken by CCCC since 2016. The rail line was planned to be 688 km long, from Port Klang to Gombak and to Tumpat in Kelantan. This project was 14 percent complete when the Mahathir administration wanted to scrap it. According to the information released by financial newspaper the Edge, "The government has terminated the engineering, procurement, construction and commissioning contract awarded to CCCC." However, the potential scrapping of the project doesn't mean that Malaysia cannot award it to another contractor.

Preventing sovereign default risks is a systematic issue and the causes may be political, economic or could emanate from the project itself. A combination of the three factors led to the suspension of ECRL. First, change of government in Malaysia led the new administration to review key programs. Second, the national debt is another reason for Malaysian new government's plan to scrap the project. The third reason is the project cost that controversially shot up from 55 billion ringgit ($13.6 billion) to 81 billion ringgit ($20 billion).

Chinese companies have to examine the political risks and business environment of host countries, including their political systems, policies, ideologies, social order and religious disputes. They should evaluate the risks and choose the right investment in right industries. Chinese firms are also required to strengthen their interaction with host countries' central governments and local communities, take more responsibility and increase supervision.

Although the suspension of ECRL and Myitsone hydropower dam did not severely impact China's relations with Malaysia and Myanmar, we need to learn lessons and analyze the problems of "go-out policy" and overseas investment in Belt and Road Initiative (BRI).

The author is a senior researcher with The Charhar Institute and director of the Institute of Malaysian Studies at Guangxi University for Nationalities.