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Malaysia 1MDB scandal

China’s belt and road builder finds itself embroiled in a scandal in Malaysian coastal railway link

PUBLISHED : Tuesday, 12 June, 2018, 4:56pm
UPDATED : Tuesday, 12 June, 2018, 4:56pm

China Communications Construction Company, one of the world’s largest engineering and construction companies by contract value, has found its biggest project in Malaysia embroiled in controversy ever since it agreed to build the 620-kilometer rail link spanning the east coast of the Southeast Asian country.

Last week, the controversy took a fresh turn when contracts uncovered by a newly elected government committed to unearthing financial malfeasance shed light on some of the terms and conditions on one of the country’s costliest public works projects.

The project’s estimated total cost of 60 billion ringgit (US$15 billion) was inflated to hide a scheme to channel funds toward paying for debt owed by 1Malaysia Development Berhad (1MDB), the troubled state investment agency, according to a June 4 report by The Edge Malaysia , citing an interview with the newly elected premier Mahathir Mohamad.

The project, known as the East Coast Rail Link (ECRL), can actually be built for less than 40 billion ringgit, inclusive of a 10 per cent profit for the contractor, the weekly newspaper reported, citing a document.

The total cost was inflated by 50 per cent to give room for the contractor to buy 19.12 billion ringgit of assets and liabilities from the indebted 1MDB, while another 1.26 billion ringgit would go toward buying two local construction companies. Those companies - Putrajaya Perdana and Loh & Loh Corp - were taken over in 2010 by PetroSaudi International, an entity at the centre of a scandal to siphon US$700 million from 1MDB, masterminded by Malaysian financier Low Taek Jho, also known as Jho Low.

Export and Import Bank of China (Exim China), a Chinese policy lender, would fund the rail link to the amount of 55 billion ringgit, or more than 90 per cent of the project’s total cost.

Project owner Malaysia Rail Link (MRL) denied the reporting cited in The Edge, describing the claims as “incorrect, baseless, misleading and irresponsible,” according to a June 10 statement published by The Star newspaper.

“There is no contract between [Communications Construction] and MRL,” and there’s no such provision “in the loan agreement between MRL and Exim China,” the company said in its statement.

Progress on the project was already up to 14.3 per cent of the construction schedule, MRL said. Tunnel-boring machines are due to arrive on site in November to bore through a 16.3-kilometre tunnel through Malaysia’s central range of mountains to create Southeast Asia’s longest rail tunnel, the company said.

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Beijing-based Communications Construction, shares of which are traded on the Hong Kong stock exchange, declined to comment on the reporting by The Edge, or the statement by MRL. The company, with a market capitalisation of HK$207 billion (US$26 billion), has lost 15 per cent in value in the last 12 months.

The stock fell by as much as 4 per cent since May 9, when Mahathir’s new government was elected into office with a pledge to review all of his predecessor’s contracts, including the ECRL project.

The unfolding scandal underscores the risks that lie before Communications Construction as it gobbles up projects as the largest builder along China’s Belt and Road Initiative from Asia to Africa.

Communications Construction can trace its history back to the latter years of the Qing Dynasty, in the establishment of the Junpu Engineering Bureau of 1905 for leading the rollout of railways in imperial China.

Re-established in 2005 through the combination of two state-owned builders, Communications Construction has expertise in dredging, reclamations and construction.

Some of its most notable projects include the Hong Kong-Zhuhai-Macau Bridge, the Yangshan Deep Water Port in Shanghai and the Beijing Capital International Airport’s Terminal 3.

It reported a 7 per cent increase in 2017 revenue to 460.1 billion yuan (US$72 billion) while net profit jumped 22 per cent to 20.9 billion yuan.

It made a failed attempt in May to buy Toronto-based construction firm Aecon Group for C$1.2 billion (US$921 million). Canadian Prime Minister Justin Trudeau’s government blocked the takeover on advice by Canadian security agencies, citing unspecified national security concerns.

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