Malaysia to Terminate $20 Billion China-Backed Rail Project

(Bloomberg) -- Malaysia will terminate a $20 billion rail project with contractor China Communications Construction Co., Economic Affairs Minister Mohamed Azmin Ali said.

The Cabinet decided the East Coast Rail Link project was "beyond the government’s financial capability," he told reporters on Saturday. Malaysia Finance Minister Lim Guan Eng wouldn’t corroborate Azmin’s comments, saying an official announcement would be issued if necessary by next week on the instructions of Prime Minister Mahathir Mohamad.

“The decision was taken because the cost of the project was too high,” Azmin said in Kuala Lumpur. “If the project is not canceled, the government will have to bear the interest rate of about half a billion ringgit a year, which we can’t afford. Therefore, the project needs to be terminated without jeopardizing relations with China.”

Azmin said the amount of compensation for the cancellation will be determined by the Finance Ministry, which is conducting due diligence process, to ensure that the cost would not weigh on the country’s financial position.

While the government had received several proposals, it had yet to decide on whether it would appoint a new developer for the rail project as that would depend on the country’s financial capability, he said.

"As far as I know, the project was reached on commercial principles of equality and mutual-benefit by companies from China and Malaysia," Chinese Foreign Ministry spokesman Geng Shuang told reporters at a regular briefing in Beijing on Monday. "Both sides have been communicating over related issues."

China Communications Construction took steps Thursday to rationalize its workforce following the Malaysian finance ministry’s instruction last year to suspend all contracts related to Malaysia Rail Link Sdn.

Malaysia Rail Link was appointed to oversee the East Coast Rail Link with China Communications Construction as the main contractor. The total cost for the project was expected to reach 81 billion ringgit ($19.6 billion).

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