Why did Mahathir Mohamad cancel Chinese infrastructure projects in Malaysia?
He was really targeting local corruption
Prime Minister Mohamad explained why in a recent interview:
“It is not about the Chinese, it is about the Malaysian government. They borrowed huge sums of money and now we have problems trying to repay the money that they have owed. That is not foreign direct investment. That is Malaysians playing around with money, not even doing proper feasibility studies and due diligence before going into business.”
By “Malaysian government” and “Malaysians playing around with money” he is referring to the previous Najib administration, which his coalition defeated in a shock election upset this past May. These projects had been negotiated by that previous administration and based on its track record (e.g. involvement in one of the most egregious corruption scandals in recent history), the probability that massive amounts of corruption were involved in these projects as well was very, very high.
Large-scale infrastructure projects are commonly used to implement large-scale corruption in developing countries because of the large sums of public money involved, lack of institutional controls and often-opaque decision-making processes. The previous Najib administration appeared to be more interested in seeing what they could personally extract out of these billion-dollar infrastructure projects than the economic and societal benefit these projects would provide to Malaysians.
This resulted in outrageously expensive estimated project costs. To explain further, let’s do a bit of a deep dive into the high-profile high-speed rail project.
The 350-km Kuala Lumpur to Singapore high-speed rail line was projected to cost Malaysian taxpayers $17 billion. At a cost of $49 million per km, this is more than double the cost of a typical Chinese HSR project ($17–21 million per km) and even much more expensive than comparable European projects ($25–39 million per km). It is significantly more expensive than the 30.5-km Shanghai Maglev train ($39 million per km), the world’s “fastest train”, which was so expensive that it became the first and only one ever built in China.
Topography-wise, the planned route is pretty mild — generally flat terrain and not an excessive amount of tunnels and bridges that need to be built. So the likely explanation is that massive amounts of corruption were baked in by the project planners. And the vast majority of this corruption was likely built into expenses that were domestic in nature.
To build a high-speed rail system, the main project cost elements are:
Land acquisition
Includes resettlement of population living along the track
Construction
Track
Civil engineering (bridges, tunnels, viaducts)
Train stations and depots
Intermodal links (to the airport, subway/metro, bus stations, highways etc.)
Equipment
Signalling systems
Electrification equipment
Rolling stock (the high-speed trains)
Capitalized interest on project financing
Construction/civil engineering and land acquisition typically represent over three-quarters of the cost elements in a high-speed rail project.
Thus, the vast majority of the project’s cost would go to local/domestic construction companies and land developers. In other words, this is the area where massive kickbacks would likely have gone back to the Najib administration.
There would also be other corrupt elements that do not even show up in the hard costs such as strategically locating train stations in places where corrupt officials have a vested interest (e.g. owning real estate or land in these areas, typically via proxy). The detrimental effects that these “soft” costs pose is the risk that important location decisions are not made by impartial third parties for the benefit of all, but biased officials for their own selfish reasons.
Any potential Chinese involvement in the project would largely be related to the following areas:
Project management
Signalling systems and equipment
Provision of the rolling stock (trains)
Related service/maintenance agreements
Possibly providing some of the financing (e.g. China Development Bank and/or AIIB)
These elements would likely have represented less than 10% of the overall cost of the project. While there may certainly be some kickbacks involved in these project elements, the magnitude is tiny compared to the potential scope of those involved in construction and land acquisition.
“We are not against Chinese companies but we are against borrowing money from outside and having projects which are not necessary and which are very costly.”
Rightly so, contrary to how many are interpreting this news event, Prime Minister Mohamad’s criticism is almost entirely focused on the previous administration, not China itself.
He is also commenting on the use of external foreign-denominated debt to finance a domestic project. He is reminding people how similar conditions (e.g. high external borrowing in U.S. dollars) contributed to Malaysia’s economic woes during the Asian Financial Crisis two decades ago. Perhaps project planners need to also re-think the financing structure of the deal, with a higher proportion of Ringgit-denominated debt than before.
I also do not think the project is dead. While web-like rail networks typically make more economic sense than the point-to-point design of the KL-to-Singapore line, the area along the planned track line does have certain elements (e.g. population density, per capita GDP) that make it an attractive candidate for high-speed rail.
So it may still be viable but only if the costs come down significantly, and the main area to eliminate cost will be on the construction and land acquisition elements. What Mohamad wants to do here is hit the reset button and take a fresh look at these projects with a new set of impartial eyes before deciding whether to proceed.
Indeed, I think the Prime Minister’s statements paint quite a bullish view on China as an economic model for Malaysia and on Malaysia’s role in the One Belt, One Road project. After touring DJI’s drone plant in Shenzhen, he stated:
“That is the kind of story we will like to see in Malaysia. I believe that by associating with Chinese businessmen and learning about their ways and their systems as well as their ethics, we will be able to achieve the same.”
This was originally published on Quora in August 2018.