From bad to worse: Stop work order for ECRL
■ Malaysia Rail Link (MRL) has confirmed The Edge Markets’ report that MRL had instructed CCCC to suspend construction works of the ECRL with immediate effect.
■ We are not surprised by this development as the suspension of works is likely to make way for a scaling-down phase and to limit additional loan drawdowns.
■ Maintain Underweight. Risks arising from a temporary stop work order on the ECRL include further delays in the re-tender phase of the project involving local players.
Suspension of construction works on “national interest” grounds
● According to The Edge Markets, the East Coast Rail Link’s (ECRL) project owner Malaysia Rail Link Sdn Bhd (MRL) has ordered its main contractor, China Communications Construction Co Ltd (CCCC), to immediately suspend all ongoing works relating to the EPCC scope of the ECRL.
● The suspension was invoked on the grounds of “national interest”, according to MRL. It will be in effect indefinitely, or until MRL provides further instructions to CCCC.
A necessary move if substantial cost cuts are needed
● We are not surprised by the call for suspension as the new Pakatan Harapan government had said that it intends to renegotiate the ECRL’s costs and terms. Finance Minister Lim Guan Eng said in a statement yesterday that the cost of the ECRL project at RM80.9bn “must be reduced significantly to make it viable financially”.
● The aforementioned figure is made up of construction cost (RM66.8bn), land acquisition cost (RM2.5bn), working capital (RM50m), other operational costs (RM500m), and total financing costs (RM11.1bn).
● Additionally, Lim said MRL had coughed up RM19.7bn, or nearly 30% of the ECRL’s construction value. RM10bn was paid out to CCCC as an advance and another RM9.7bn as progress payment.
■ We are not surprised by this development as the suspension of works is likely to make way for a scaling-down phase and to limit additional loan drawdowns.
■ Maintain Underweight. Risks arising from a temporary stop work order on the ECRL include further delays in the re-tender phase of the project involving local players.
Suspension of construction works on “national interest” grounds
● According to The Edge Markets, the East Coast Rail Link’s (ECRL) project owner Malaysia Rail Link Sdn Bhd (MRL) has ordered its main contractor, China Communications Construction Co Ltd (CCCC), to immediately suspend all ongoing works relating to the EPCC scope of the ECRL.
● The suspension was invoked on the grounds of “national interest”, according to MRL. It will be in effect indefinitely, or until MRL provides further instructions to CCCC.
A necessary move if substantial cost cuts are needed
● We are not surprised by the call for suspension as the new Pakatan Harapan government had said that it intends to renegotiate the ECRL’s costs and terms. Finance Minister Lim Guan Eng said in a statement yesterday that the cost of the ECRL project at RM80.9bn “must be reduced significantly to make it viable financially”.
● The aforementioned figure is made up of construction cost (RM66.8bn), land acquisition cost (RM2.5bn), working capital (RM50m), other operational costs (RM500m), and total financing costs (RM11.1bn).
● Additionally, Lim said MRL had coughed up RM19.7bn, or nearly 30% of the ECRL’s construction value. RM10bn was paid out to CCCC as an advance and another RM9.7bn as progress payment.
● In the worst-case scenario, MRL can recover the RM10bn advance payment as it is backed by an advance payment bond of an equivalent amount. This advance payment bond may be redeemed by MRL to recover all of the advance payment.
The Selangor factor that could hinder the ECRL
● Lim also revealed that the Selangor state government opposes ECRL’s second phase, running from the Integrated Transport Terminal (ITT) Gombak to Port Klang. The location runs within the vicinity of the Klang Gates Quartz Ridge, a quartz dyke that the state had applied to become a UNESCO World Heritage Site. ECRL phase 2 would disrupt this plan.
Local subcontractors’ portion shrinks to RM9bn-RM18bn
● In our view, the suspension of works is likely to make way for a scaling down phase and to limit additional loan drawdowns.
● Recent media reports have indicated that the government intends to cut the ECRL’s construction cost to between RM30bn and RM40bn.
● Using a 30-45% local subcontractors’ portion, this would translate to RM9bn-RM18bn.
Maintain Underweight; delay could dry up 2H18 job flows
● We maintain our Underweight stance on the sector. The progress of ECRL has gone from bad to worse, with this latest decision to suspend works. Risks arising from a temporary stop work order on ECRL include further delays in the re-tender phase of the project involving local players, in our view.
The Selangor factor that could hinder the ECRL
● Lim also revealed that the Selangor state government opposes ECRL’s second phase, running from the Integrated Transport Terminal (ITT) Gombak to Port Klang. The location runs within the vicinity of the Klang Gates Quartz Ridge, a quartz dyke that the state had applied to become a UNESCO World Heritage Site. ECRL phase 2 would disrupt this plan.
Local subcontractors’ portion shrinks to RM9bn-RM18bn
● In our view, the suspension of works is likely to make way for a scaling down phase and to limit additional loan drawdowns.
● Recent media reports have indicated that the government intends to cut the ECRL’s construction cost to between RM30bn and RM40bn.
● Using a 30-45% local subcontractors’ portion, this would translate to RM9bn-RM18bn.
Maintain Underweight; delay could dry up 2H18 job flows
● We maintain our Underweight stance on the sector. The progress of ECRL has gone from bad to worse, with this latest decision to suspend works. Risks arising from a temporary stop work order on ECRL include further delays in the re-tender phase of the project involving local players, in our view.
source: CIMB Research 04/07/2018
