The business of railway connectivity

As one of the more important forms of transport systems, railways remain crucial in connecting the public across major distances.

Key cities around the globe have their own metro systems connecting urban vicinities with the central town area.

In Malaysia, rail transport consists of commuter, light rapid transit (LRT), mass rapid transit (MRT) and monorails, covering most of 11 states in Peninsular Malaysia.

Meanwhile, Sabah has its own railways run by the Sabah State Railway – the only state department in Malaysia to operate a railway service.

And in Sarawak, plans are underway to form its own railway network via light rail transit.

Thus, the revival of the East Coast Rail Link (ECRL) – a project previously cancelled due to its links with 1MDB corruption scandal – came as a happy surprise to the public.

The Prime Minister Tun Dr Mahathir Mohamad last month revealed that Malaysia Rail Link Sdn Bhd (MRLSB) and China Communications Construction Company Ltd (CCCC) signed a supplementary agreement which paved the way for the resumption of the project.

“In addition, both parties agreed to form a joint-venture company to manage, operate and maintain the ECRL rail network,” Dr Mahathir said in the statement.

The supplementary agreement covers Phase 1 and Phase 2 of the engineering, procurement, construction and commissioning (EPCC) of the ECRL at a reduced cost of RM44 billion.

“This is a significant reduction of RM21.5 billion or 32.8 percent, from its original cost of RM65.5 billion. The improved ECRL will cost RM68.7 million per km compared to RM95.5 million per km under the original agreement.”

The Prime Minister went on to highlight that under the original ECRL agreement, the total project cost was RM66.7 billion.

“The loan amount from China-EXIM Bank, at 85 per cent of the project cost, would have amounted to RM56.7 billion.

“Under the previous government, the current amount signed for with China-EXIM Bank is RM39.1 billion for Phase 1 alone.

“The balance of the RM17.6 billion for Phase 2 and the Northern Extension, luckily, were yet to be signed.”

With the improved ECRL at RM44 billion, the Prime Minister said the loan amount from China-EXIM bank will be reduced substantially.

“The reduced amount is still being negotiated with China-EXIM Bank and we envisage that this will result in lessening the financial burden of the Government in terms of the principal repayment amount, total interest costs and other fees.”

Clearing the air over ECRL issues

In an exclusive interview with Bernama News Channel (BNC) and Bernama Economic Service, Council of Eminent Persons (CEP) chairman Tun Daim Zainuddin addressed arguments that the ECRL will end up as a white elephant, with low ridership and cargo loads.

To recap, Daim had been asked by Dr Mahathir to lead a team to Beijing soon after the Pakatan Harapan government’s election victory last year to renegotiate the ECRL project.

Daim explained that public infrastructure projects have notoriously long gestation periods before they even break even and “we are well aware of that”.

“That is why in our negotiations with China, we also included an memorandum of understanding for the manage, operate and maintain (MOM) of the ECRL.

“Under the original agreement, Malaysia have to bear the MOM costs on its own from the onset.

“By getting CCCC to bear half of the costs for the first 20 years of operations, we expect to save some RM4 billion,” Daim said.

He added that the ECRL augurs well for the construction sector as it already has RM44 billion which is a lot of money, taking into account the 40 per cent that would be forked out for local content.

Meanwhile, Economic Affairs Minister Datuk Seri Mohamed Azmin Ali was reported by Bernama as saying that the ECRL project needs to bring new industries and industrial sector development to the East Coast, which in turn, spurs economic growth that benefits the people.

According to the Bernama article, Mohamed Azmin said if there were no new industries and growth, no cargo to be transported via the ECRL, then there is be no reason to proceed with the project.

“Among the new conditions we laid down was to bring new industries to the East Coast. The ECRL is important if there is industrial growth that can generate economic growth and transfer of industrial cargo to Port Klang,” he added.

Railway impact on economic growth

According to the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), investing in a railway project will have long-term positive spill-over effects in Malaysia’s economy.

“Particularly, backward and forward linkage of the sector is 1.14 and 0.61 respectively. Backward linkages refer to the ability of a sector in creating demand for inputs from other sectors whereas forward linkages explain the level of a sector in supplying input to other sectors,” MIDF Research explained.

“Henceforth, having high backward linkages level, the ECRL project would boost economic growth and development especially in eastern coast states like Kelantan, Terengganu and Pahang.”

Based on its estimate, MIDF Research forecasted the RM44 billion railway project to contribute 2.7 per cent to Malaysia’s economic growth.

The research arm noted that the boost for the growth is expected to kick-in from the project inception until completion.

“However, the full estimated GDP contribution will depend on the pace of spillover effects to other economic sectors.

“In addition, compensation of employees and net operating surplus are projected to rise by 3.6 per cent and 2.1 per cent respectively.”

As the project requires machinery and transport equipment, the research arm’s estimate showed imported commodities and consumption of fixed capital to increase by 3.3 per cent and 2.1 per cent respectively.

“Moving forward, the railway project would affect economic expansion through both direct and indirect medium in the long run, partly by jobs creation, opening-up new areas, foreign direct investment, increase external trade activities and strengthening domestic demand.”

 

Sectors benefitting from the ECRL revival

There are various sectors set to benefit from the construction of ECRL, chief among those are the construction, transport (ports in particular) and oil and gas (O&G) sectors.

MIDF Research pointed out that the transportation ratio of ECRL is 70 per cent freight and 30 per cent passengers.

“Hence, industrial and tourism as well as external activities are predicted to benefit from the ECRL project,” it observed.

“For instance, casting of metals (28.8 per cent), fibre optic cables, electronic and other electric (6.2 per cent) and coke and refined petroleum products (4.9 per cent) are among the top industries to be benefit from the RM44 billion railway project.”

The research arm also noted that wholesale and retail trade sector will likely go up by 2.1 per cent.

“In addition, the railway project is also expected to contribute to circa 0.6 per cent expansion in the real estate sector as we anticipate an increase in new township areas and better town-development in existing areas along the railway.”

Construction Sector

With the ECRL revival deemed as a positive progress for constructors, MIDF Research recapped that stocks which had existing exposure on ECRL were Lafarge Malaysia Bhd (Lafarge) and HSS Engineers Bhd (HSS).

“Lafarge has previously secured RM270 million contract to supply cement to China Communications Construction (ECRL) Sdn Bhd (CCC),” the research arm recalled.

“Meanwhile, HSS was awarded a package worth RM82.5 million to provide supervising consultancy services for infrastructure works from Km 0 to Km 231.5 of the ECRL Package 1.

“The contract was supposed to commence in 1Q18 as the ECRL project moves to the construction stage.

“In a turn of events, both contracts were later suspended, following the action by government to review the project.”

However, in light of ECRL continuation, MIDF Research highlighted that reinstating both contracts will allow Lafarge and HSS to see earnings contribution as the work resumes.

The research arm also recalled that the contract awarded to Lafarge was for the supply of cement to all eight packages of work of the ECRL project, with a potential of renewable for a further two years.

“We estimated a possible offtake of approximately one million tonnes, spread out over three years.

“Accordingly, the amount is unlikely to be adequate to meaningfully improve the group domestic sales, we believe.”

Under MIDF Research’s coverage, Gabungan AQRS Bhd (Gabungan AQRS), Muhibbah Engineering (M) Bhd (Muhibbah Engineering), IJM Corporation Bhd (IJM), Malaysian Resources Corporation Bhd (MRCB) and WCT Holdings Bhd (WCT) have been touted as potential beneficiaries of the project.

“These counters are among the active players for local railway jobs. Gabungan AQRS is our favourite to clinch a sizeable above ground job leading to Kota SAS station, due to its proximity and involvement for the development of Kota SAS.

“Meanwhile, IJM stands a good chance of winning the spur line scope into the Kuantan Port. It would possibly clinch packages of design and build for stations Kuantan Port City 1 and 2 as well as site clearing or civil works.

“It is possible due to the proximity of the station sites and Kuantan Port which is a subsidiary of IJM and Malaysia-China Kuantan Industrial Park – its joint venture project with Guanxi Beibu Gulf Asean Investment.”

O&G Sector

Malaysia’s oil and gas sector has also been projected by analysts to be positively impacted by the ECRL, given the fact that the railway infrastructure will provide another link between Malaysia’s financial hub in the west to the O&G hub east of the country.

“ECRL has the potential to further spur Malaysia’s oil and gas industry as it links Malaysia’s financial hub in the west with the country’s oil and gas hub in the east.

“The ECRL will allow for human capital and goods to be easily transported from west to east, thus allowing for greater connectivity of goods from Port Klang to Kertih and Kemaman.

“Currently, the only mode of transportation from west to east is via road.”

MIDF Research noted that Kertih has long been an oil and gas town in the eastern coast of Peninsula Malaysia.

The town is a hub for both upstream and downstream oil and gas activities, the research arm also noted.

“Kertih is famous for its petrochemical refineries, predominantly the Petronas Kertih Refinery – Petronas’ first oil refinery in Malaysia. It is owned and operated by Petronas Penapisan (Terengganu) Sdn Bhd.”

As for Kemaman, the research arm highlighted that it is famous as a supply base hub with the Terengganu state-owned and managed Kemaman Supply Base (KSB).

“KSB is the hub of South China Sea’s O&G exploration and production activities, while at the same time serves as the gateway for O&G and heavy industrial complexes of global stature in the East Coast of Peninsula Malaysia.

“The supply base is a one-stop center for O&G activities, providing services such as cargo handling, berthing, repair maintenance and warehousing.”

Transport Sector

MIDF Research highlighted that ports in Malaysia such as Kuantan Port and Port Klang are expected to benefit from the resumption of the ECRL project.

“The only main change from the previous plan connecting to ports was the removal of Integrated Transport Terminal (ITT) in Gombak under the Mentakab-Port Klang route,” the research arm said.

“In lieu of this, Port Klang will be connected to Mentakab via Putrajaya, Bangi Kajang, Kuala Kelawang and Jelebu.

“The reason for change is to avoid the ECRL from passing across the 16 kilometre (km)-long Klang Gates Quartz Ridge, trimming the chance for Selangor’s bid to list the Quartz Ridge as a UNESCO heritage site.”

Despite the rerouting of the ECRL from Gombak to Negeri Sembilan, MIDF Research opined that this should not heavily impact the flow of freight traffic.

The research arm still believed that travel time taken from Shenzhen, China via Kuantan Port and ECRL to Port Klang could be reduced by slightly more than a day instead of passing by the Straits of Malacca.

“Although cost estimates of using Kuantan Port and ECRL are slightly higher with railway accommodating around 100 twenty-foot equivalent units (TEUs) of containers per service compared 20,000 TEUs that can be carried by mega vessels.

“Nonetheless, we reckon that this could be partially mitigated by demand to transport time sensitive goods especially during peak festive seasons.”

MIDF Research also highlighted that during the period of suspension of the ECRL project, demand at Kuantan Port remained robust as container and cargo throughput grew by two per cent year on year (y-o-y) and 2.9 per cent y-o-y respectively in 2018.

“The factor for Kuantan Port growth lies in the Malaysia-China Kuantan Industrial Park (MCKIP) which has reignited interest from Chinese industry players following the inception of the trade war between the US and China in 2018.

“The Sino-US trade war has prompted industrial players from China to relocate their hubs in regions such as Asean to avoid the imposition of high tariffs by the US. To date, both the MCKIP and Kuantan Port have attracted a total investment value of above RM40 billion.

“As interest from Chinese industrial players pick up, throughput in the form of products of companies such as Alliance Steel is expected to increase.”

As for Port Klang, it is expected to indirectly benefit from the increase in throughput at Kuantan Port.

MIDF Research observed that the combined world market share of major Chinese container lines such as COSCO Shipping Co Ltd (COSCO) and Evergreen Line (Evergreen) stood at 17.7 per cent as of April 14, 2019.

“Notwithstanding this, we believe that Kuantan Port could still absorb the share of volumes from Chinese container lines which will increase its conventional and gateway container volume.”

The research arm noted that this may also serve as a buffer for gateway volumes in Port Klang, such as Northport and Westports Holdings Bhd (Westports), especially following the recalibration of shipping alliances in April 2017 which saw container volumes being relocated to Singapore.

“Moreover, COSCO and Evergreen are part of the OCEAN alliance, an alliance which contributes a significant volume to Westports.”

“Therefore, with Port Klang being a part of ECRL, we do not discount the possibility that more Chinese vessels will be used to retrieve the cargo transported via the land bridge.”

With more throughputs expected to be handled with the resumption of ECRL, especially at Kuantan Port and Port Klang, MIDF Research has thus projected that utilisation rates will increase.

“In the case of Westports, the increase of utilisation rates to a level of around 75 per cent would serve as a trigger point to start expanding new container terminals.”

“Overall, we opine that both of these ports are set to benefit from the ECRL and help promote the economic growth especially in east coast states as they play a role in facilitating Malaysia-China trade.”

As such, MIDF Research remained optimistic on Malaysian ports given their strategic location along major trade lanes and the economic prospects of the Asean region.

“We believe one of the major beneficiaries will be Westports and MMC Corporation Bhd due to its ownership of Northport.

“Conversely, for the logistics industry, the anticipated higher demand of e-commerce activities will attract more new entrants grabbing market share of current logistic companies through competitive pricing.”

 

Sarawak’s own railway project back on track

It looks like Sarawak’s light rail transit (LRT) project, which was once-shelved, is now also back on track.

The Borneo Post reported in May that Chief Minister Datuk Patinggi Abang Johari Tun Openg said the Sarawak government will proceed with the construction of the LRT line following “many requests” from the public.

According to Abang Johari, the project’s construction will involve a cost of less than RM5 billion.

It was previously reported that the LRT idea had to be shelved to give priority to supplying water and electricity to rural areas.

“The last time, I said I stopped the planning for the LRT. But now, because of requests from the people, we will focus on solving the congested expressway between Samarahan and Kuching.

“Feasibility studies have already been done before. The cost (of the LRT project) will be cheaper than the original one, because it is a shorter route,” he said to reporters on the sidelines of the State Legislative Assembly (DUN) following his winding-up speech.

In his winding-up speech at the recent DUN sitting, Abang Johari noted that traffic jams have been the cause of public complaints and higher cost of doing business due to congestion and time wasted on the road.

“Some critics said that building LRT is not feasible to address this problem and suggested to build more roads and provide free bus service,” he said in his winding-up speech.

“Based on the study that we have conducted, no country in this world can solve the traffic congestion just by building more roads. More roads mean more vehicles on the roads and more traffic congestion. Even using bus you will be caught on the road with the traffic jam.”

“Being a responsible government, we listen to the demand of our city folks for a better and efficient public transportation system.”

“Therefore, we will proceed with the detailed technical study on the implementation of the Phase 1 covering the most congested areas in Kuching and Samarahan areas using the most feasible technology option.”