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ECRL uncertainty seen as key reason for caution on construction sector

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Continuing uncertainty over the direction of the East Coast Rail Line is the key reason for caution in the construction sector, according to CIMB Equities Research.

Conflicting news reports about the ECRL have given industry players mixed messages over the outlook for the future, it stated, according to a report in The Star.

A stop-work order/project suspension was issued in July 2018, and last month Finance Minister Lim Guan Eng and Economic Affairs Minister Azmin Ali made conflicting statements over its future.

“We believe opportunities for local contractors could still be limited if the funding from Exim Bank and EPCC (engineering, procurement, construction and commission) structure is unchanged, more so if the overall project is downsized significantly,” CIMB Research stated.

With negotiations on whether to terminate or downscale the ECRL project currently ongoing, financial implications are at the heart of its future.

“If the project is allowed to proceed without downsizing, the interest portion on the updated RM66.8 billion construction cost as derived by the Ministry of Finance (MOF) is significant even with the competitive 3.25 percent interest rate on the loan from Exim Bank of China (with an additional seven-year repayment moratorium based on the original 20-year loan agreement),” said CIMB Research.

Should the project be terminated, the Malaysian government would have to bear the compensation to be paid to China Communications Construction Co (the EPCC contractor), which would typically be dictated by the termination clause of the EPCC contract.

The MOF indicated previously that RM20 billion has been drawn down from Exim Bank (as at April 2018) with RM10.2 billion paid as advance payment to CCCC (15.2 percent of construction cost) and RM9.7 billion for the actual progress payment as at July 2018.

Prime Minister Dr Mahathir Mohamad has also said that negotiations regarding the ECRL have been difficult, with one of the options being a possibility that the overall scope of the ECRL project will be downsized.

“Hypothetically, and assuming that the negotiating parties deem that the cost of terminating ECRL exceeds its benefits, a potential downsizing may involve focusing on phase one of the ECRL, in our view.

“Based on MOF’s cost breakdown, this is the RM46 billion package serving the east coast of the Peninsula excluding phase two, double tracking line and extension to Pengkalan Kubor worth a combined RM21 billion,” suggested CIMB Research.

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