ECRL Requiem

KijangMas Perkasa

I had originally written a different piece on the ECRL and planned to post it today . . . but since the content has been overtaken by events, I will instead plough through the grim reality of cancellation.

Let me be frank. I don’t think Tun has been given the REAL numbers or has been fully briefed on the FINANCIAL COST of cancelling the project.

As I’ve mentioned previously, physical and civil works for ECRL Phase 1 commenced earlier this year and the project is already at least 15% completed.

The Malaysian government — via MOF SPV Malaysia Rail Link Sdn Bhd (MRL) — has already drawn down RM19.69 billion from China’s EximBank loan: RM10.02 billion as advance payment to CCCC and another RM9.67 billion paid to CCCC per project payment schedule.

If we abandon the project — which is an automatic breach and default of the loan terms — that RM19.69 billion must be repaid within three months. No more seven year loan repayment grace period.

And to add salt to the wound, it was reported CCCC is claiming another RM10 billion in scheduled payments and — together with suppliers, sub-contractors and other affected parties — will certainly sue for compensation over the project abandonment. We are looking at billions more ringgit in lawsuits and long-drawn arbitration.

As if all that are not enough, billions of ringgit more of our tax money are needed to decommission, demobilize, dismantle, rectify and rehabilitate dozens of abandoned, rusting heavy duty railway worksites along hundreds of kilometers of rainforest, hamlets and wetlands from Bentong to Kota Bharu.

By the time the dust settles, we are staring at RM25-30 billion down the drain with nothing to show for it !

That is IF we cancel the project.

That’s why back in June 2018, I said that Malaysia faced two choices: a painful choice or a more painful choice.

We either spend an additional RM20+ billion to complete Phase 1 and have a modern 600km high-speed rail line from Gombak to Kuantan, KT and KB . . . OR . . . we abandon the project and incur RM25-30 billion in sunk costs, breach of contract penalties and major clean-up and rehab of worksites along the 600km route. We will end up almost RM30 billion in debt payable NOW with nothing tangible to show in return.

Now . . . how come I think Tun was NOT properly briefed?

Who should brief Tun?

MOF? The Minister?

Ok, LGE.

Again, let me be frank here since this post has assumed the flavor of a post-mortem.

I don’t understand why LGE made ECRL much much more complicated than it should be.

Really, I don’t understand why he kept on repeating numbers plucked from thin air propped by excuses that insult our intelligence while dancing around and NOT seriously addressing THE biggest issue of them all . . . the COST OF ABANDONMENT.

Let me repeat, thus far almost RM20 billion has been paid via borrowed money and . . . with the project cancelled . . . billions more ringgit are payable in scheduled claims and contractual penalties to CCCC and various subcontractors, not to mention billions more must be spent to vacate, clean-up, rehabilitate and restore abandoned worksites straddling 600km of right-of-way from the Pahang-Selangor border at Genting Sempah to Tunjong in Kota Bharu, Kelantan.

LGE should know that.

RM20-30 billion of our money down the drain with nothing, absolutely NOTHING to show for it.

Last month, at least one thousand Malaysian engineers and technical and support staffers were laid off. With the cancellation, the career and livelihoods of thousands more Malaysians are directly and indirectly affected. And 80-90% of these professionals and technicians and sub-contractors are Malays. Hard working tax paying Malays.

They should not be pawns in a convoluted political chess game propped by deceit and treachery.

Now, back to LGE.

I don’t understand why he kept harping on a fantasized “real cost” of RM81 billion when we can clearly see otherwise from contract details that have now become public knowledge.

I’m all for transparency and good governance and cost savings and debt reduction . . . but those ideals must be premised on real numbers about real works.

Let’s summarize the facts:-

– The ECRL was approved by the previous government on October 21, 2016.

– The Engineering, Procurement, Construction and Commissioning Agreement was signed with China Communications Construction Co., Ltd. (CCCC) on November 1, 2016.

• Project Cost

– RM46 billion for Phase 1 encompassing 600.3km from the planned Gombak ITT in Selangor to Tunjong station in Kota Bharu, Kelantan.

That’s all.

RM46 billion for Phase 1.

THIS is what is being built and are already 15% completed with work feraciously in full force until the abrupt Stop Work Order on July 3, 2018.

Now . . . the previous government did add supplementary works beyond Phase 1 but those works have NOT commenced and are now purely academic with not a sen of civil works incurred thus far.

These are:-

– RM1.28 billion for northern extension of the line from Kota Bharu to Pengkalan Kubor in Kelantan. Approved by the Cabinet on May 3, 2017.

– RM9.0 billion for Phase 2, extending the line from Gombak to Port Klang. Additional agreement with CCCC signed on May 13, 2017.

– RM10.5 billion to upgrade the ECRL to double-tracking. Approved by the Cabinet on August 23, 2017.

See?

Those are nothing more than a Wish List of the previous government, mostly approved only at Cabinet level and none have commenced. Hence, they can be thrown out of the cost computations if the new government has no appetite for them.

In reality, what LGE really has on the table is Phase 1 from Gombak ITT in Selangor to Tunjong in Kota Bharu, Kelantan at the contract cost of RM46 billion.

That’s all.

Again . . .

Phase 1 . . . 600.3km . . . Gombak to Kota Bharu at RM46 billion.

THIS is the scope and parameters upon which the ECRL should be discussed, analyzed, dissected, critiqued, negotiated and restructured.

This Phase 1 is also where 15% of works have been completed and where — as I myself witnessed last May and June — construction was proceeding at ferocious pace 24/7 involving thousands of predominantly Malaysian engineers, technicians and support staffers and local sub-contractors and local suppliers all along the 600.3 km route . . . until it was stopped dead on its tracks by the new government on July 3, 2018.

Go read my previous post on ECRL and look at the pictures. Read the voluminous comments as well.

I cannot fathom why LGE kept on quoting an RM81 billion figure plucked from thin air and still talk about the Gombak-Port Klang Phase 2 that no one really wants or really cares.

My fellow Rakyat, a lot of money we don’t have are at stake here.

We have spent almost RM20 billion in money borrowed from China EximBank . . . and we will spend RM15-20 billion MORE irrespective of whether we proceed or we abandon ECRL.

Either way, we will borrow another RM15-20 billion . . . and use the funds either to finish off the project OR to pay scheduled claims, compensation and contractual penalties for abandonment.

Now, how could we move forward and avert a potentially catastrophic financial disaster when we are not even honest with ourselves about the cost? How could we negotiate in good faith with CCCC and the PRC government and push for price reductions when we cannot even get over fooling ourselves over the project cost?

How long more LGE planned to use the “ECRL real cost is RM81 billion” mantra just to gain political mileage?

Look, even if we add up ALL the additional works proposed by the previous government — Phase 2 88km Gombak-Port Klang extension, Kota Bharu-Pengkalan Kubor extension and additional track along the full 688.3km alignment — the total cost would be RM66.78 billion . . . way below LGE’s RM81 billion.

But let’s digress.

Forget Phase 2, double tracking and other bells and whistles.

Focus on Phase 1 . . . the ACTUAL work being implemented and already 15% completed where RM19.69 billion has to-date been paid by money borrowed from China EximBank.

Focus!

This is THE ECRL universe LGE should navigate and find solutions . . . and not dwell on theoretical Phase 2 and additional works that we ALL know are not going to happen and not even worth contemplating.

Again . . . focus on the RM46 billion for Phase 1 . . . 600.3km from Gombak to Kota Bharu.

How much has been paid?

RM19.69 billion.

That’s RM10.02 billion advance payment drawn down for “mobilization” (almost 22% of the RM46 billion Phase 1 cost) and RM9.67 billion drawn down per payment schedule.

How much discount can we squeeze CCCC and ultimately the PRC government?

10%?

20%?

Based on my own laborious discussions with many industry players across the globe — by excluding the bells & whistles and unnecessary fluff and selective route realignment and shaving contractor margins — a max of RM6 billion can be lobbed off Phase 1 without compromising engineering integrity and system safety. That’s a 13% discount.

Now let’s do the math even LGE can understand:-

Revised Phase 1 cost: RM40.00 billion
less Sum Paid: RM19.69 billion
————————-
Balance Payable: RM20.31 billion

Add Phase 1 residual land acquisition cost of RM2 billion.

Jadi berapa balance payable?

RM22.31 billion.

That is all.

Oh, LGE might ask: “woii, what about finance cost? Itu munga manyak tinggi maaa. Mahal wohhh? Tamau kira liao? Must add to project cost laaa.”

Uhhh?

Wa lao eh . . . lu mau ajar gua finance ka?

Berapa bangunan lu sudah bikin guna wang bank? Pernah bina apa-apa ka? Beli rumah diskaun pon dah sangkut itu law.

Aku ingat Mat Brylcreem ni reban ayam pon tak pernah bina.

Look . . . you cannot willy-nilly simply add finance cost to the project Capex la. In fact, it is not even in the Opex . . . lol.

Ada faham ka?

Finance-related costs . . . bank interest, auditor fees, bank fees, debt placement costs and such are NOT part of a project capital expenditure OR operational cost . . . not part of Capex and not part of Opex because these costs are not incurred for direct capital inputs of a project and not generated by the ongoing operations of a business.

Itu hutang punya bunga — finance cost — Omputeh panggil non-operating expense maaa. Tau ka?

Apa?

Lu masih mau campur itu bunga dalam project cost?

Ok takpe. Gua layan lu.

Now, per published records, the China EximBank loan Grace Period is seven years. Payment over 13 years at 3.25%. 85% financing. At the negotiated lower cost of RM40 billion and at 85% financing, the accumulated interest expense would be RM7.7 billion.

Hence, revised “project cost”:-

ECRL Phase 1 : RM40.0 billion
Land Acquisition : RM 2.0 billion
———————–
RM42.0 billion
add Finance Charge RM 7.7 billion
———————–
Total Cost RM49.7 billion

Ok?

Faham?

Now . . . that’s over RM31 billion LESS than LGE’s oft-repeated RM81 billion plucked from thin air !

LGE might ask again: “what about operating costs? RM600 million to RM1.0 billion annually wohhh!”

Haiyaa . . . first of all, those figures come from where?

Thin air again?

Secondly, of course lah got “operating costs” once you start to operate things.

IWK plant got operating costs. Water treatment plant got operating costs. The future Penang LRT and undersea tunnel also got operating costs. Zoo Negara got operating costs. My cars and trucks got operating costs. My houses and rental properties got operating costs. Even kapchais got operating costs maaa.

BUT . . . you cannot plough “operating costs” into the project Capex.

You buy a RM500,000 house. Do you add the monthly TNB bill and water bill and Astro subscription and gardener fees and helper salary and neighborhood watch bill and Cukai Pintu and Cukai Tanah to the “purchase price” of your house?

Gila kah?

Mana boleh treat the operating costs of a project or asset as Capex and tally them up as “project cost” in perpetuity.

Once the trains start to roll, of course lah MRL will generate revenue from passenger tickets and freight charges. And of course lah it will NOT be enough to cover all costs, but this is PUBLIC transport lah dei.

Mana boleh fully cover cost?

KL MRT and LRT ridership charges can cover loan servicing and operating costs ka? Singapore MRT? London Underground? New York Subway? Tokyo Subway? Japanese Shinkansen? France’s TGV? Penang Ferry? The two Penang Bridges? Rapid Penang?

Semua mana boleh cover cost.

We all must understand, railways by and large are public amenities paid mostly by public funds for the public good.

And the economics of railways substantially remain the same no matter what scale.

Let me use Amtrak as an example.

Tahu apa itu Amtrak?

Amtrak is the National Railroad Passenger Corporation, a US government owned rail giant established in 1971 to provide intercity passenger train service throughout the United States. In our jargon, you can say Amtrak is an American GLC.

Now . . . Amtrak transports over 31 million passengers (equivalent to Malaysia’s population) in 2016, with 300 trains operating on 44 routes in 46 states on 21,000 miles (~34,000 km) of double standard gauge 1435mm track.

Imagine fifty ECRLs crisscrossing the continental US. One hundred of the single track ECRLs if Amtrak’s DOUBLE track is taken into account.

• Amtrak owns only the trains, with private sector freight rail companies owning about 95 percent of the track. Amtrak didn’t pay for the track, which by and large were built and rebuilt and upgraded by dozens of private railroad companies over the past century. Amtrak just need to pay for and operate trains, lots of trains.

• Even with THAT key fact, Amtrak loses money on 41 of its 44 routes, with an average loss-per-passenger of US$32 (RM128 in today’s exchange rate).

• This is in spite of high riderships on such popular routes as the Northeast Regional (Boston-New York-Washington/Virginia), Pacific Surfliner (San Luis Obispo-Los Angeles-San Diego), Capitol Corridor (San Jose-Sacramento), Keystone (New York-Philadelphia-Harrisburg), Hiawatha (Milwaukee-Chicago) and the California Zephyr (Chicago-Denver-San Francisco Bay) corridors.

Amtrak still loses money.

For FY 2016, Amtrak charted an operating loss of US$227 million (RM908 million in today’s exchange rate) on the back of revenues of US$3.2 billion (RM12.8 billion).

And Amtrak’s losses would be even bigger had the US government not subsidized operational costs and ticket prices.

See?

At the scale of 50-100 ECRL’s and with annual ridership equivalent to Malaysia’s ENTIRE population, Amtrak still cannot cover its costs.

BUT Amtrak still exists, and the American rail network will continue to exist till the end of time.

Why?

Because it is a public good serving the American people.

So why must the ECRL be evaluated like no other rail system on earth . . . that it MUST cover it’s operating costs and debt servicing?

———–

Now, if we were still talking with the PRC government on the ECRL, these would have been my recommendations going forward to reach a Win-Win outcome for all.

Salient points for our negotiating posture:-

• The PRC government would have been receptive to our concerns and amenable to a relook of the whole deal.

• The last thing they need is a high profile abandonment of a showpiece jigsaw of their much touted Belt and Road Initiative or BRI.

• The PRC government may have thrown additional sweeteners to ensure business as usual.

In reality, they are in a predicament as much as we are.

• China’s steel industry is suffering from acute over-capacity — reportedly rolling out as much steel in a month as the US produce in a year.

• They need construction jobs, lots of jobs worldwide, preferably RAILWAY jobs to absorb the millions of tons of steel pouring out of their mills.

• Similar scenario with train-sets rolling off their factories and rail logistics technologies and trained workers . . . all in excess supply.

Hence the ECRL was a gift on a silver platter to China.

• They needed projects of such scale and magnitude.

• They knew they took advantage of a kleptocracy with insatiable appetite for kickbacks that would do deals at all costs, including blatantly lopsided deals.

• They would have compromised to ensure the project’s continuation and timely completion.

• The new government’s revelations and legitimate concerns about the ECRL raised unprecedented global awareness about this project and other PRC railway projects worldwide.

• Indeed, the ECRL has become a key political and financial yardstick for China’s overseas construction drive, a litmus test of the financial viability of China’s Belt and Road Initiative to host economies as well as China’s diplomatic finesse in handling contractual disputes.

• The ECRL is potentially an unmitigated global perception disaster for the PRC government that is already struggling to convince increasingly wary nations to embrace China’s prescription for physical multi-modal inter-regional connectivity.

In a nutshell, the alternatives in Malaysia’s hand boiled down to two divergent paths:-

1. Breach the contract; stop work; send CCCC packing to China; within three months payback China EximBank almost RM20 billion for loan drawn down; pay CCCC billions in outstanding progress claims and billions in contractual penalties and compensation; and spend billions more rectifying and rehabilitating dozens of abandoned, rusting heavy duty railway worksites along 600 km of rainforests, hamlets, wetlands and densely populated Kota Bharu . . . and get nothing of any value or utility in return

OR

2. Renegotiate the contract way down to the barest specs — remove all fluff — and pay a reasonable sum on more favorable terms and with payments based on actual work done — and in less than five years have a modern, functioning high-speed rail line from Gombak to Kota Bharu via Kuantan and Kuala Trengganu.

The only guidance I can give as a private citizen is:-

. . . seek the less painful of the two painful options and at least get something tangible at the end of the debt tunnel.

Now, while it would be painful and costly either way . . .

• Alternative 1 would be unthinkable and unconscionable and borders on fiscal irresponsibility.

• Alternative 2 is the only logical approach given the constraints of money disbursed and owed, on-ground physical progress and contractual terms.

Of course, a lot of hard work . . . number crunching, legal interpretation and laborious negotiations would have entailed.

Taking all factors into account, Malaysia potentially would have been negotiating from a position of reasonable strength.

• But we must play our cards right and have a competent and comprehensive pre-negotiation game-plan.

• First and foremost, our negotiating posture to the PRC government must be seen as damage control in the interest of the Malaysian nation and the Malaysian people.

• The Malaysian government’s primary objective is to “make the best of a bad situation.”

• It must be driven by our own national financial realities while recognizing legitimate contractual obligations with CCCC and borrowing terms with China’s EximBank against the backdrop of cordial bilateral relations with China.

• We must know what we want to the last granular detail including most importantly the financial parameters acceptable to our nation going forward.

Beyond the China Bad Loan Syndrome

• For the new government, the ECRL Saga could be divided into three eras:-

– Era 1 Damage Control . . . where we are now.

– Era 2 New Deal: Cost Optimization and Construction Management

– Era 3 Post-Completion: Leveraging on the Rail Infrastructure . . . “Sweating the Assets”

• “Sweating the Assets” will be a key Value Driver of the ECRL venture.

• Each of the 22 Phase 1 stations must be catalysts for economic growth.

• Proper planning coordination with relevant state and local authorities are necessary to ensure each ECRL station and its support infrastructure are optimized to benefit the local populace.

• Substantial potential economic spinoffs from the ECRL stations include public transport hubs, eco-tourism, private lodging facilities, local restaurants and eateries and a myriad of services geared for rail travelers.

• New business and employment opportunities must be generated by these stations.

• Stations in less populated areas must be seen as magnets for new industrial parks and townships.

• With growth of new townships and industries and economic activities surrounding these stations, some PPRT developments could be shifted to these areas to relief urban congestion and alleviate socio-economic challenges faced by the urban poor.

• Rail connectivity to Port Klang – if so required – could be solved at reasonable cost via linking the ECRL terminus at the planned Gombak ITT station with the existing KTM Port Klang Route inland terminus at the Batu Caves station . . . with a “missing link” distance of only 6-8 km. Of course KTM’s meter gauge will not seamlessly interconnect with ECRL’s 1435mm standard gauge but that’s a technical challenge for our smart railway engineers to solve.

Again, if . . . a big IF . . . our new government had pragmatically and successfully negotiated a better package with the PRC government for this key part of the BRI . . . we could have rebranded the ECRL and repositioned it to be a key driver in our evolving national development narrative.

Start with a name change.

Call it the Eastern Railways / Keretapi Timur.

This is no more a Najib Kleptomaniac Legacy of runaway costs and undefined utility.

The Eastern Railways would have been a NEW national project rising from the ashes of audacious greed . . . the backbone of an infrastructure-driven push to develop the East Coast hinterland underpinned by the strategic goal of rationalizing and balancing socio-economic and industrial development between the West and East Coast of the peninsular.

Each station would be earmarked as new growth centers with the states assisting in local approval issues.

In Kelantan, this project would have been a big hit as tens of thousands of Kelantanese travel daily not only to KL but between the three Phase 1 stations. Those of you who endured the gruelling road travel from the Klang Valley to the Kelantan Delta for this week’s Hari Raya Aidil Adha festivities will know the value of this rail link.

Based on my own knowledge of the dynamics and intricacies of KL-KB-KL travel, the passenger load will blow away all forecasts. Go check out KBR airport and KB-KL-KB express bus traffic and passenger stats. The planned 600-passenger train-sets multiply by five daily runs = 3,000 passengers one way max daily for the KB-KL-KB Eastern Railways route is just a drop in the bucket of daily human movement between the Klang Valley and the Kelantan Delta.

——-

With Tun’s cancellation of the ECRL because “we cannot afford it” . . . my thoughts are now perhaps nothing more than hindsight. But I will give a little summary anyway . . .

• The government’s decision to suspend the ECRL in early July 2018 was a necessary tactical move.

• It gave us time to take stock of the project from all angles and established a firm base on which to conceive a coherent game-plan to renegotiate better pricing and financing terms.

• The previous regime unwisely configured an untenable deal indefensible by any financial or economic metric.

• Cost escalation can also be attributed to non-optimization of existing rail assets on redundant routes and the high incidence of challenging terrain and natural impediments along the route.

• As mentioned, 15% of Phase 1 has been completed, RM19.69 billion of the China EximBank loan has been drawndown to CCCC, and it was reported CCCC is claiming another RM10 billion in scheduled progress payments.

• The immediate focus should have been on negotiating the optimum deal while taking into account the constraints inherent in an on-going project with various contracts signed by the previous government.

• Beyond the major issues of Exorbitant Project Cost and China Bad Loan Syndrome, which I believe could have been significantly mitigated, the new government should have also focused on the long-term impact and utility of the ECRL.

• Going forward, the key success determinant of the ECRL would have been dependent on our ability to leverage on the rail infrastructure for the benefit of the Rakyat.

• MOF-owned MRL must be financially-driven and tasked not only with construction management and future rail ops aspects, but also tasked with conceiving ancillary economic spinoffs from the rail right-of-way and stations to offset construction and operating costs. I term this “Sweating the Assets.”

• Stations along the route must be catalysts for economic growth that will generate economic spinoffs and new business and employment opportunities.

Additional Points to Ponder . . .

• Railways almost always lose money when we take into account the profitability of their total networks. Profitable intra- and short inter-city routes cannot compensate for loss-making long-haul routes.

• Inevitably, the government subsidizes operating costs and ticket prices . . . and that comes from our taxes.

• Long distance rail transportation is part of a nation’s strategic infrastructure. It is arguably just a tad below radars and armaments and cannot be analyzed strictly as a regular on-going business enterprise.

• Hence, the COST of building this strategic infrastructure (with no chance of ever being profitable or self-sustaining) — is THE most important factor in the whole universe of issues impinging on the construction of high-speed long-distance railways.

• Again . . . the main issue is COST, COST, COST. We must get the most bang for the buck.

• This is where ECRL in its present form became a financial challenge for the new government.

• This is a challenging problem — not necessarily bad per se but bad in initial costing and contractual terms — and would require our best brains to huddle and configure the optimum solution given the hazardous variables and tight parameters in the decision-making process.

• But LGE and his cohorts could not find the solution. It could be due to unmitigated financial naïveté on their part but he seemed to be seeking the ways and means via cartoon accounting to add more and more cost to the project, which on the surface to the untrained observer made the project untenable.

• His antics of plucking phantom numbers out of thin air — RM81 billion “real total cost” and RM600 million to RM1.0 billion operating costs and mind-numbing financing costs — and lumping them together into a huge insurmountable mountain of cost and hutang may have spooked Tun.

• What are his real motives? I don’t know. We’ll leave it to political analysts to contemplate. Some said it is to spite the opposition governments of the three East Coast Malay Belt states. I don’t know. Some say it is his sweet revenge . . . a glorious middle finger to the PAS-led state governments of Kelantan and Trengganu and the BN-led Pahang state government. I don’t know. I really don’t.

• But his penchant for political drama capped by a virtuoso “RM81 billion real cost” pantomime and his utter inability or unwillingness to synthesize REAL cost numbers may have had a hand in Tun’s decision to can the project.

• Again, once our government unilaterally cancelled the project . . . total compensation, loan recall and penalties would amount to at least RM22 billion, excluding CCCC’s new scheduled claims of RM10 billion. And no more seven year repayment grace period for the RM19.69 billion drawndown from the China EximBank loan. Unilateral project cancellation is a major breach of contract and an event of default in the Loan Agreement. And once in default, those almost RM20 billion must be repaid within three months.

• Of course it would be unthinkable to pay within months RM20-25-30 billion we don’t have . . . and get nothing but rusting abandoned worksites that would require billions more to clean-up and rehabilitate . . . and thousands of laid off local engineers and staffers and subcontracting personnel plus countless out-of-business materiél suppliers and service providers.

• The only logical option was to proceed — 600.3 km Phase 1 Gombak to Kota Bharu — at vigorously renegotiated cost and payment terms and payment modes.

But . . . the project is now history.

Cancelled, canned, thrown into the scrapheap of political one-upmanship.

Nasi sudah menjadi bubur.

A super duper excruciatingly expensive bubur.

But I ain’t pickin’ part of the RM20-30 billion tab of the bubur. No Rakyat should.