Wednesday, 5 April 2017

The East Coast Rail Line (ECRL) is funded by a loan from China’s state-owned EXIM Bank. The Malaysian government acts as the guarantor. We do not have to pay back the loan in the first seven years, but after that we will have to settle it within 20 years. It does not matter whether the ECRL is profitable or not. We still have to pay back the loan.

Is China a good investor?

By Wan Saiful Wan Jan, for The Edge, 1 April 2017

Two years ago Columbia University’s Professor of Political Science Andrew Nathan published a paper in which he noted that analysts are wondering “the extent to which China, as its power grows, will seek to remake the world in its authoritarian image.” Many have tried to answer this question. The new wave of China’s global expansion is attracting a lot of interests from analysts and observers.
In Malaysia and many other countries across ASEAN, China’s increasing reach has become more visible to the extent that we cannot possibly pretend that it is still business as usual.
It is certainly not business as usual. For decades economic relationships and investments have been bundled up with the promotion of liberal democracy and the liberalisation of trade. But China being a communist country that does not practice liberal democracy may be less concerned with good governance, let alone democratisation. As countries become less dependent on Western sources of funds, will they also feel less pressure to pursue integrity and rule of law?
We are already seeing semblance of this new normal in Malaysia. Let me give just one example.
The East Coast Rail Line (ECRL) is being sold to us as a game changer. We have been told that RM 55 billion is being “invested” into this project and that it will greatly benefit everyone in the country.
But this picture is a great simplification of the story. The ECRL is funded by a loan from China’s state-owned enterprise EXIM Bank, and the Malaysian government acts as the guarantor. We do not have to pay back the loan in the first seven years, but after that we will have to settle it within 20 years.
It does not matter whether the ECRL is profitable or not. We still have to pay back the loan. The risk and the liability is completely on the shoulders of Malaysian taxpayers and zero on China. So is this an investment or is it just a loan where we bear all the risks?
The deal is very good for China. It came with the understanding that the Malaysian government will contract out the job to another Chinese state-owned enterprise, the China Communication Construction Company (CCCC). There are conditions that they must subcontract to local firms but they remain as the tier one contractor.
That means we borrowed money from China in order to pay a Chinese company to do the job, and, after seven years we still need to pay back the loan plus interest, again, to China. Not only does China get back their money immediately in the form of payment for work done by CCCC, they will get more money from us when we repay the loan. We shoulder all the risk while China gets guaranteed profit. 
The contract was given to CCCC through direct negotiation, without any open tender. This is despite the fact that we have local companies who have delivered rail projects before. That is a clear sign that good governance is already on the wane. But, even if we really want to forego open tender, wouldn’t it be better to give the project to a local company?
The profitability of the project has also been questioned. The forecast is that the ECRL, despite operating through the less industrialised parts of Malaysia, will carry almost 60 million tonnes of freight per annum by 2035. This is amazing because even the KTM which has lines in the more industrialised West coast carries only around 6 million tonnes per annum. If we do not achieve this projected surge in freight tonnage, will the project still be financially feasible or will taxpayers have to pay a huge subsidy for ECRL? 
Frankly I find it difficult to understand this projection. But whoever conducted the feasibility study must have done a very convincing job because they have persuaded the government to completely change tact. For decades Malaysia invests mainly on highways to connect our cities but now there is a massive shift towards interstate rail.
Having said the above, it is not my intention to focus on ECRL. Unfortunately my limited column space restricts me to giving just one example. I am fully aware this creates the impression that I am focused on just ECRL. I am not and I apologise for creating that false impression. 
My focus is on the neglect of good governance and transparency that has arrived with China’s money. This is what worries me because the authoritarian Chinese regime is unlikely to tie their money with a rules-based, competitive and transparent economic system. The above is just one example that we already see today. They clearly did not say “take this loan, call for an international tender, and make all studies available to the public so that Malaysian taxpayers are guaranteed best value for money.”
Back in 2011, Evelyn Goh wrote a working paper for Singapore’s Rajaratnam School of International Studies. Contrary to the usual coupling of economic growth with political freedom, she explained that there is an “alternative path of maintaining a capitalist economy without concomitant political liberalisation”. She added that now countries “look to China as an important model for authoritarian capitalism.”
Authoritarian capitalism scares me. The creation of economic wealth, and the distribution of that wealth to the population so that they are pacified and do not demand much political freedom, thereby strengthening one party rule. I don't think we want that even if it is deployed in neighbouring countries. 
Additionally, the rise of China is interesting to me because even I have experienced the impact. This article was initially submitted to another English newspaper but they rejected it. I don’t think their refusal is because of my usage of the ECRL as an example because just a few weeks ago the same newspaper also declined to publish my article commenting on China’s interference in Malaysian domestic politics. The common feature of both rejected articles is I was commenting on China. 
I hasten to add that I fully accept the editorial decisions of that newspaper. As CEO of IDEAS, I too retain the right to decide what to publish under our banner. So this is normal practice and I respect their call. Let us not question that. I am just saying that this is a very interesting case study of how China’s soft power already influences the behaviour of a Malaysian national newspaper. And if a national newspaper feels “persuaded” to behave in a certain way, you do wonder what else is being affected in this country. 
As we welcome foreign investments into the country, including from China, we should also carefully study and manage the possible implications to our budding liberal democracy.

Wan Saiful Wan Jan is chief executive of the Institute for Democracy and Economic Affairs (IDEAS).