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Canceled $10.5bn Malaysia port project plays down China role

Melaka Gateway faced scrutiny amid rising number of Belt and Road deals

The entrance to the Melaka Gateway project has been blocked. (Photo by Prem Kumar)

MALACCA -- On a vast artificial island off the coast of Malaysia where a $10.5 billion development has been taking shape, barricades bar entry to all but a select few private vehicles.

Inside the perimeter of the Melaka Gateway project, reclamation works are underway to complete a modern cruise terminal for extra-large ships. Other land allotted for a ferry terminal, commercial and property developments has been reclaimed from the Straits of Malacca, one of the world's most important seaways.

Mounds upon mounds of sand are scattered across the island. Further away, another land reclamation project is taking place for a second island. The entire project was expected to be completed in 10 years.

Any signs of progress, however, have not been enough to satisfy the state government of Malacca -- a tourism hub less than 90 minutes by road from the center of Malaysia's capital Kuala Lumpur.

In late November authorities canceled the land reclamation contract awarded to KAJ Development after four years of "no development," leaving doubts as to how long it might be before the hoped-for stream of ships and commercial traffic shows up.

Local media Utusan Malaysia quoted Malaccan Chief Minister Sulaiman Ali as saying the Melaka Gateway project will not be abandoned but will be taken over by a new developer. "The development will continue, but we have some technical issues that we need to fix," he was quoted as saying.

For the Malaysian developer of the harbor project, the decision makes no sense as they contemplate legal action against the state.

Land reclamation is still underway at the Melaka Gateway site. (Photo by Prem Kumar)

"We are left with no choice. Our project is canceled after we spent millions of our own resources to conduct various environmental studies and pay licensing fees," said Michelle Ong, chief executive of KAJ.

Ong, 61, who spoke to Nikkei Asia from the land reclamation site, said her company of over three decades had to sell other assets for the initial funding of the project. "We have been doing government contracts for a long time, and along the way we built up our financial strength."

For many, the furor over the roughly 246-hectare Melaka Gateway is a sign of how developments involving China have been under intense scrutiny in Malaysia.

The massive project was awarded to KAJ, a Malaysian-registered and -owned developer, in 2016 during the administration of former Prime Minister Najib Razak. The following year, the company roped in Chinese companies PowerChina International Group, Shenzhen Yantian Port Group and Rizhao Port Group to develop the project jointly. PowerChina is an entity of China's state-owned State Power Investment.

Although it was purely a private project, speculation that it was part of Beijing's rising investment in the country -- in line with Chinese President Xi Jinping's Belt and Road Initiative -- raised eyebrows within the Mahathir Mohamad administration after it came to power in May 2018.

Mahathir has been a vocal opponent of Chinese influence, labeling it "modern-day colonization." Besides Melaka Gateway, a comprehensive review was made which resulted in the cancellation of the $16.2 billion East Coast Rail Link and two gas pipelines worth $2.3 billion that were awarded to the China Petroleum Pipeline Bureau. The rail project was later allowed to continue after the cost was cut by $5.3 billion.

Mahathir's government revoked KAJ's port operating license during the review. But after a judicial submission by the developer seeking damages totaling billions of ringgit, the license was reinstated after seven months.

Media reports suggest that besides the involvement of Chinese parties, another sore point for Mahathir was the proximity of the Melaka Gateway to existing Northport and Westports -- two primary port operators in central Malaysia.

Ong said the role of Chinese companies in the harbor project has been blown out of proportion. According to her, the three Chinese companies only acted as the project's engineering, procurement and construction, or EPC, partners.

Ong said the three companies were supposed to be investors and EPC partners based on a 2017 agreement. However, the agreement with PowerChina was terminated last year after the company failed to fulfill the investment criteria, she said.

"PowerChina only remained as an EPC contractor but were terminated last year for unfulfillment of obligations," she said, adding that Shenzhen Yantian and Rizhao have also been on hold since 2018. The reclamation works that resumed in 2019 were undertaken by smaller Chinese contractors.

The project was never part of China's BRI, said Ong. She said the project was "only in line to benefit from the maritime silk road proposed by China."

"If the project is canceled as said, we might not feel the spillover effect of BRI because Melaka Gateway is in a very strategic position," she said.

A high-ranking state government official told Nikkei Asia that KAJ's failure to acknowledge the extent of Chinese involvement in the development led to it being labeled a "China project" among state authorities.

KAJ CEO Michelle Ong said her company was considering legal action against a government decision to halt Melaka. (Photo by Prem Kumar)

"The developer was also seen to be awarding more contracts to Chinese companies, thus raising our doubts," said the person, who did not want to be named. The cancellation of the project, however, was not related to any supposed Chinese influence, the person added.

Ong rejected the claims and said the Chinese contractors were picked on their merits and track record of on-time completions.

According to Ong, Malaysia now risks losing "billions of dollars at a minimum" in foreign investments if the project is canceled, as some parties have committed funding for its completion.

Among the investors to have registered interest in the project include Royal Caribbean International, the U.S.-listed cruise company.

Ei Sun Oh, senior fellow at the Singapore Institute of International Affairs, told Nikkei Asia that Melaka Gateway was mainly meant to attract international investment that could stimulate the Malaysian economy.

"As the global economy took a huge hit under the still raging pandemic, it remains to be seen if such investments would still be forthcoming," he said.

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