Malaysia may hurt for ditching India on rail deal

Malaysia may hurt for ditching India on rail deal

Barani Krishnan Atul Prakash Reuters Kuala Lumpur/Bombay

Malaysia's move to drop India and China from a US$3.8 billion railway project, one of Asia's biggest infrastructure deals, may spark trade retaliation and put pressure on the new prime minister, officials said.

Malaysia gave the job of building a dual-track, 600-km (372- mile) railway -- its priciest infrastructure project -- to politically well-connected Malaysia Mining Corp and Gamuda Bhd just before former Prime Minister Mahathir Mohamad left office on Oct. 31.

The deal has sparked concerns about trade retaliation -- state-owned Indian and Chinese firms had signed letters of intent with Malaysia amid some fanfare to build the railway -- and whether the Malaysian consortium can complete the project without a bailout.

MMC is the flagship of Syed Mokhtar Albukhary, one of Malaysia's most prominent tycoons and a close friend of Mahathir. It has a wide array of businesses from ports to power. Gamuda is the country's biggest construction firm by market capitalization.

Both firms deny having bailout clauses in their contracts, saying they would be liable for any delays or cost overruns.

But new Prime Minister Abdullah Badawi, whose maiden speech to parliament focused on the need for more transparency and integrity in the public sector, has come under pressure from within, as well as outside the government, to review the deal.

Malaysian Primary Industries Minister Lim Keng Yaik worried this week about reprisals against Malaysian palm oil, whose biggest buyers are India and China.

Opposition politician Lim Kit Siang has asked Abdullah to disclose the terms of the MMC-Gamuda contract in the interests of "the clean administration you have been trumpeting".

While palm oil dealers said they had not seen any visible impact yet on trade or prices from the controversy, Minister Lim said he had received complaints from local shippers that their palm oil cargoes had been rejected by China and India purportedly because of low quality. He did not give details.

"The easiest way to retaliate is by using palm oil," he said.

Beijing has been silent since China Railway Engineering Corp lost out to the Malaysian group, which won the deal with a bid nearly $1.5 billion less than the India-China consortium.

The project is part of a planned trans-Asia railway from Singapore to China, spanning 5,500 km (3,418 miles). Malaysia had planned to defray the costs by providing eight million tones of palm oil to India and China over a five-year period.

Officials in India think Malaysia should pay in some way for cutting Indian Railway Construction Co (IRCON) out of the deal.

"The cancellation hurts us, as it was a government-to- government contract," a senior official of India's ministry of external affairs told Reuters.

"India may not consider Malaysian companies in awarding new projects such as infrastructure development," he added.

Malaysian construction firms are working on 51 projects in India, mostly involving road building, worth a total of $3.2 billion. Gamuda itself is building several highways in India.

"Obviously, we are not happy," the Indian ministry official said. "It was Malaysia who invited us and the deal was finalized in the presence of the two countries' prime ministers." Indian oils traders said the government may be prompted to hike the import duty on palm oil.

"India is within its rights to react," said Sandeep Bajoria, chairman of the Central Organization for Oil Industry and Trade, a private body. "It's up to the government to decide what action it will take."

India's agriculture ministry proposed to the finance ministry over a month ago to raise the import duty on refined palm oil to 85 percent from 70 percent. No decision has been made.

Under its World Trade Organization (WT) pact with Malaysia, India could raise duties by a maximum 300 percent.

"We are in favor of raising the duty. It will be in the interest of farmers, as they will get better prices for oilseeds, and will be prompted to grow more," Agriculture Minister Rajnath Singh told Reuters. He declined to comment on the rail deal.

India bought 1.46 million tones of palm oil from Malaysia last year and another two million tones from Indonesia.

A senior official of the Indian commerce ministry said India had in the past sent tough messages to Kuala Lumpur, including a complaint that Malaysia mistreated information technology professionals during a raid on illegal workers earlier this year.

"We may react and they must read that message very clearly," he said.