INTERNATIONAL CONTRACT
Abstract
This task revolves around three projects that are considered by the Malaysian government. In this case it can be seen that the two rail project of the Malaysian government has failed due to lack of money. In addition in the first case the government was trying to complete the project in two phases but for that case the interest amount has increased to RM 500 million which the Malaysian government was not able to bear. In further the gas project was stopped because the government was not happy with the progress of the project and in the third case the government was trying to control the debt that is why they have stopped the project. Furthermore this study has also provided problem statements of this project. Finally it gives some recommendations so that the Malaysian government is able to overcome these types of situation in future
International contracts are legally binding between the two countries to establish a diplomatic relationship and also to flourish the infrastructure of those countries. This study will mainly focus on the International contract between China and Malaysia. China and Malaysia have officially established its diplomatic relationship in 1974. Recently China has collaborated with Malaysia for three projects- East Coast Rail Line, Oil and Gas Pipeline and lastly High-Speed Rail project. All these projects were found to be highly expensive for the economic condition of Malaysia and the former Prime Minister Mahathir Mohammad has decided to cancel it. The main aim of this study is to concentrate on the details of the projects, its problems and the solutions that were proposed to implement to resolve it (Fook, 2019, pp. 1-10).
The main objective of the study is as follows-
- To study the details of the project, mainly East Coast Rail Line (ECRL), Oil and Gas Pipeline project with China and High-Speed Rail Project
- To analyze the terms and conditions of the project along with the details of the contract
- To study the main problem that arises due to these projects on the economic condition of Malaysia
- To know the future scopes for the solution of the issue that can be implemented to maintain the international relationship as well as the proper balancing of the Malaysian economic condition.
From 1974, Malaysia started to deal with China to improve its infrastructure. Malaysia has also made some international contract with China mainly based on the project-
- East Coast Rail Line project (ECRL)
- Oil and Gas Pipeline project
- High-Speed Rail project (HSR)
After the cost of the evaluation of the project, it was found that these projects are highly expensive. In the list of different countries in the world according to the economic condition, Malaysia stands far behind China. As a result, high budget rate of this international project has affected the economic condition of Malaysia hugely. Due to this reason, the former president of Malaysia, Mahathir Muhammad, has decided to renegotiate all these projects. This will not only decrease the price value of each project but along with, it will help to provide different work opportunities for the people of Malaysia (Liao, 2019, pp.575-591).
The main problem issue of all the project deals with China was due to the high price budget of the project that affects the economic condition of Malaysia adversely.
Problem statement for East Coast Rail Line project: This project was dealt with the China Communication Construction Company (CCCC) in August 2017 and was worth 65.5 billion ringgit. The total budget was quite expensive for Malaysia that results in the closure of the project (Lim, 2018, pp. 81-99).
Problem statement for Oil and Gas Pipeline: China National Petroleum Corp deals with the president of Malaysia, Najib Razak to construct a 600 km petroleum pipeline along the west coast of Peninsular Malaysia and a 662 km gas pipeline on Borneo Island in the Malaysian state Sabah. The whole project was for about $2.3 billion which was again highly expensive for Malaysia and thus the president, Mohammad has cancelled the project.
Problem statement for High-Speed Rail line Project: This project was dealt with Kuala Lumpur and Singapore in the late ’90s. This project was again cancelled by Mohammad due to extreme construction rate and low benefits (Mohan and Tan-Mullins, 2019, pp.1368-1385).
The international contract is the legally binding element that is signed between the two parties of two different countries for some specific agenda. In any International contract, when two countries are bound by the International contract bond they are governed with the help of International contract law. There are different types of international contract which are as follows-
- International sale contract that may include distribution, sales representatives and many more sales related issues
- International agency contract
- International marketing contract
- International franchise contract
- International manufacturing contract
- International contract on the infrastructure of any country and so on.
Figure: 1: Different International contract
(Source: Reuter’s business news, 2019)
This whole study has mainly focused on the international contract between China and Malaysia. The former Malaysian Prime Minister, Najib Razak started to make some international contract with China due to the government’s contract on the infrastructure project with Beijing, China which was found to be highly expensive. On the other hand, after the successful comeback in the government, the new Prime Minister, Mahathir Mohammad has decided to resolve all these highly expensive projects. As a result, all the people of Malaysia and China started to worry about the mutual relationship between these two countries (Reuter’s business news, 2019).
Terms and conditions are integral parts of any agreement of any project that mainly includes all the details of the project along with the rules and conditions that are applied to the products. These rules are needed to follow by both countries and the parties that are linked by the international contract. It mainly includes-
- Agreement details- Agreement details include the thorough description of the project that includes for which purpose the project is going to apply. For example in the case of East Coast rail Line project between China and Malaysia, the main intention was to construct a rail line from Port Klan to Kota Baharu of Peninsular Malaysia.
- The details of countries or parties that are linked together- This mainly states the countries that are linked together for the projects. For example, in the case of the mentioned project, like East Coast Rail line, Oil and Gas Pipeline project and lastly High-Speed Rail line project, the two main countries that were involved are- Malaysia and China.
- The pricelist of the project- In case of any International project, the total budget of the project are generally mentioned. For example, the estimated value of the East Coast rail line project was $65.5 billion.
- The benefits of that project- The terms and conditions of any project include the benefits that can be utilized by both the countries. For example, while studying the benefits of all these above-mentioned projects, it was found that the high price value of the project hurts the economic condition of Malaysia. Due to the involvement of China’s employees, the opportunity for the Malaysian civilians has decreased.
East Coast Rail Line project: This project was done between the China Communication Construction Company (CCCC) and with the government of Malaysia. The main intentions of the project were to connect the Port Klan and Kota Baharu of Peninsular Malaysia. The whole project costs about $65.5 billion (Binti Sa’adin et al, 2016, pp. 308-320).
Oil and Gas Pipeline: This project was signed between China National Petroleum Corp and also with the government of Malaysia, in 2016. The main aim of this project was to construct a 600 km petroleum pipeline along the west coast of Peninsular Malaysia and also a 662 km gas pipeline on Borneo Island under the state Sabah of Malaysia (The Mercury News, 2018).
High-Speed Rail line Project: High-Speed Rail project was proposed in the late ’90s between Kuala Lumpur and Singapore. The main aim of the project was to launch a high-speed rail system in the region of Kuala Lumpur and Singapore (Hutchinson, 2016, pp. 1-10)
The former Malaysian Prime Minister, Najib Razak started to make some international contract with China due to the government’s contract on the infrastructure project with Beijing, China, which was found to be highly expensive. On the other hand, after the successful comeback in the government, the new Prime Minister, Mahathir Mohammad has decided to resolve all these highly expensive projects (Pavlićević and Kratz, 2018, pp.151-168). As a result, all the people of Malaysia and China started to worry about the mutual relationship between these two countries. The main reasons for the negotiation of all these contracts are as follows-
- All these projects were highly expensive and can adversely affect the economic condition of Malaysia.
- There were very least benefits for the country’s development.
- The employees related to the project were mainly from China and thus the employment opportunity for the normal civilians of Malaysia was affected. This as a whole had a bad impact on the country’s economic condition.
The new Prime Minister, Mahathir Mohammad has decided to renegotiate all the projects. He has mentioned that China will understand the economic condition of Malaysia and will cooperate with this. He has mentioned that he has some concerned about the economic condition of the country and for that reason; he has started some negotiations along with the government of China, which are as follows
- A thorough investigation was done for the former Prime Minister, Najib Razak when it was observed that high price issue of the project was affecting the economic condition of the country.
- An election was organized and a new Prime Minister was appointed on behalf of the former.
- The new Prime Minister has proposed some negotiations for the project, like- the value of the project East Coast Rail line was reduced to 44 billion ringgit from 65.5 billion ringgit and the contract was reopened with this negotiation in 2018.
- A friendly consultation was made between the governor bodies of China and Malaysia about the two multibillion-dollar gas pipeline project.
- China also has shown sympathy for the poor economic condition of Malaysia.
ECRL (East coast railway link) is a planned double-track railway link infrastructure project; this link connects the Port Klang and Kota Bharu. This project is a 640 KM railway link that connects the different parts of the east coast regions of Malaysia. In addition, it can be stated that this is a 50-50 joint venture of the MRLSB (Malaysian Railway Link) and CCCC (China Communications Construction Company). Furthermore, there were some modifications in the project due to the environmental and cultural concerns. This modification in the project has also decreased the cost of the project. At the start, the project cost near about MYR65.5bn ($15.8bn) and this cost have decreased to MYR44bn ($10bn).
3.1.2 Reasons for the project get cancelled
The Malaysian government has stopped this project because they have to bear RM 500 million interest annually on this project. This has affected the growth of the economy of the country. Apart from this, it can be stated that the cost of the project was too high, and the Malaysian government was unable to bear that cost. This, in turn, has also decreased the growth of the Malaysian economy, due to this trouble; they have to stop the ECRL project.
The rail project of the ECRL was planned to be developed in two phases. In the first phase, the project will cover 600 km of track and in the second phase, it will cover a stretch of 88 km. In addition, it can be noted that there were some modifications to the project due to some cultural and environmental events; this situation has also decreased the cost of the company. In addition, it can be noted that as the China Company has invested a huge amount of money this has also enhanced the interest of the country; this amounted to RM 500 million. The Malaysian government was unable to bear this cost that has also stopped the project.
3.2 China has backed oil and pipeline project
3.2.1 About the project
In the year 2016, CPP (China National Petroleum Corp) won a project that they have to build a 600 KM Pipeline project and also a 662 KM of gas pipeline.
3.2.2 The reason for the cancellation of the project
The main reason behind the failure of this project was that the Malaysian government has claimed that they have 43% of the total amount and the CPP has completed only 13% of the project. This signifies that the Malaysian government was not happy with the progress of the project. As a result of that, the Malaysian government has seized 1 billion ringgit; this situation has also degraded the relation between CPP and the Malaysian Government (nst.com.my, 2019).
3.2.3 The mistakes of the project
The main mistakes of this project were the Chinese company has not completed the amount of the work for which they were paid. The Malaysian government claimed that they have completed only 13% of their job but they have paid an amount of nearly 43%. This has also degraded the relationship between the two countries. The Foreign Minister of China claimed that they are trying to resolve the situation through a friendly conversation. In addition, the relationship degraded further because the Malaysian government has seized 1 billion ringgit of this Chinese company.
3.3 Kuala Lumpur Singapore high-speed rail
The Kuala Lumpur Singapore HSR (High-Speed Rail) connection linked Malaysia with Singapore with an HSR connection. The HSR line is 350 KM long; this has also reduced the travel time between these two countries to 90 minutes. In addition, the cost of the project was approximately equaled to MYR 110 43 billion. In this case, the MYSHR will coordinate this project; the government claimed that there will be a train every thirty minutes. The government has launched two types of trains, in this case, one train that is nonstop will reach Singapore in 90 minutes and another train that will stop at 7 stations will take 120 minutes to reach Singapore.
In recent years the debt of the country has increased to RM 1 trillion. In order to decrease the debt of the country, the government has agreed to stop this project as this project will enhance the debt of the country further. As a result of that, the deal was negotiated and they have also cancelled the agreement between the countries. Further, this has also delayed the project; they have considered that they will end the project by January 1, 2031, instead of Dec 31, 2026. They have stopped the project for the time being and the transport minister of the country has also claimed that they will have to pay a high amount of breakage cost to the contractors of Singapore. According to the report Singapore has also spent $250 million on the project thus Malaysia have to give that amount of money to them (nst.com.my, 2019). In addition, it can be stated that the amount of 250 million includes the cost of human capital and also other materials that were required for the project. In addition, it can be stated that Singapore will be able to get that money which they have spent even though the project does not proceed further.
In order to find a solution to this issue, the Malaysian government has agreed that they will pay breakage cost. In further the Malaysian government has also claimed $15 million in terms of remittance to the government of Singapore. In order to decrease the cost of the project, the government of Malaysia claimed $15 amount of money to Singapore.
ECRL is double-track railway project this track is 640 Km long. In this case, the Malaysian government has considered a deal with a Chinese company named CCCC. According to Aziz et al. (2018, p.10), the cost of the project was very high, due to the high cost the government of Malaysia was not able to bear that amount of cost. In further, it can be stated that the interest of the project was near about RM 500 million. As stated by Binti Sa’adin et al. (2016, p. 308), the government of Malaysia has failed to bear this amount of cost as a result of this it has also left an impact on the economy of Malaysia. Furthermore, this has also decreased the growth of the Malaysian economy. As a result of this, the government of Malaysia has stopped this project. Even if the cost of the project decreased due to cultural and environmental factor but the government of Malaysia was unable to bear that cost. At the start of the project, the cost of the project was approximately equal to MYR65.5bn ($15.8bn) but due to this, the cost of the project has decreased to MYR44bn ($10bn). According to the plan it was considered that the project will be done in two phases. In the first phase, the company will build 600 KM, in the second phase, they will build 88 KM. Furthermore, it can be stated that the project will be a joint venture of the MRLSB (Malaysian Railway Link) and CCCC (China Communications Construction Company). Even if the cost of the company has decreased it has impacted the growth of the economy by enhancing the rate of interest of the country (reuters.com, 2019).
In the year 2016, the CPP (China National Petroleum Corp) has taken the project of a 600 KM Pipeline project and also a 662 KM of gas pipeline. In this case, the government of Malaysia claimed that they have paid 43% of the total cost, whereas, the company has completed a project of amount of only 13% (reuters.com, 2019). As a result of that, the Malaysian government has seized 1 billion ringgit of the company. According to Binti Sa’adin et al. (2016, p.65), this strategy of the country has also enhanced the political tension between Malaysia and China. For this reason, the Malaysian ‘government has also suspended this project and the foreign minister of the country has also claimed that the country is trying to resolve the issue through a friendly conversation. The government of Malaysia has also ordered to fund transfer this amount without the knowledge of the company. This situation has also impacted the political condition between the two countries. Both of the two countries are aiming to solve this problem through friendly conversation.
The Kuala Lumpur Singapore HSR (High-Speed Rail) connection linked Malaysia with Singapore with an HSR connection. This high-speed connection of the train will decrease the time of travelling between the two countries. The time has decreased to 90 minutes, whereas by car it takes 4 hours to reach Singapore from Kuala Lumpur. In this case, the government of Malaysia is aiming to launch two types of train one type of train that will reach Singapore within 90 minutes. However, the other train will stop at seven stations and it will take nearly 120 minutes to reach Singapore from Kuala Lumpur.
In recent year, it can be noted that the debt of the company has enhanced further. As the debt of the company has increased further the government of Malaysia is aiming to decrease the debt of the country. In order to decrease the debt if the country they are aiming to decrease the cost of the project. In this case, the Malaysian government is aiming to delay the project and they have claimed that the project will end by 1 January 2031 instead of 31st December 2026. In this case, the Malaysian government has claimed that they have to pay a high amount of penalty to the company of Singapore as in case they cancel the contract. Therefore stated that the company is aiming to decrease the cost of the country that is why they have cancelled the contract.
In case the government of Malaysia continued this project then, that will enhance the debt of the country further. This will leave an impact on the economy of Malaysia. This can also decrease the GDP of the country. On the other hand in case the project was completed then that will be able to create more opportunities of jobs for the people of Malaysia, this, in turn, will also have an impact on the economy of Malaysia. In case job opportunity enhanced then that will decrease the rate of unemployment of the country, which will also foster the growth of the country. In case the growth of the country boosts up then the Malaysian Government will also be able to bear the amount of such big projects. This will also create more job opportunities for the people of the country and this, in turn, will foster the growth further. Apart from this will also help the business of the country in case the communication of the country enhances then that will also enhance the opportunity of business According to Lee (2015, p. 267), this will also create further job opportunities in the country. In case the opportunity of job enhances then that will also enhance the standard of living of the people of Malaysia. In addition, China and Malaysia have agreed to deal with the multi-billion dollar project, the cost of the project was approximately equal to 44 billion ringgit (Lim, 2019). Thus it can be stated the cost of the projects was high, and the Malaysian government also failed to complete the project as they do not have that much capability. In addition, they also have paid a high amount of money as the penalty that has enhanced the debt of the country further; this also left an impact on the growth of the country.
6.0 Implication to international business
In case the project was completed that would leave a positive impact on the growth of the economy of the country. In case the project was completed then that will result in an enhancement in job opportunities for the Malaysian people. In case the opportunity of job enhances then this will also enhance the standard of living of the employees of the corporation. In case the standard of living enhances then the citizens of Malaysia will be able to consume a high amount of goods, this signifies that spending on the consumption enhances (Leung, G.C., 2015, p.1331). In case the spending enhances then that will attract more company towards Malaysia. In addition, this will also help the company in expanding its business as communication in the country improves. In addition, in case the communication in the country enhances then that will improve the business of the company. In addition, this will attract more FDI towards the country. Thus this will enhance the investment in the country.
In case the investment in the country enhances then this will improve the business and the technology that is incorporated in the production will also improve that will result in an improvement of the production in the country. In case the production in the country enhances then that will help the country to gain a competitive advantage in the product. This will, in turn, enhance the trade value of the country. In case the trade value in the country enhances then that will result in an enhancement of the growth of the economy of the country. In case the oil project is completed then this can reduce the oil price in Malaysia. Apart from that, this can also create more opportunities for jobs for the people of Malaysia, which will result in an enhancement in the standard of living of the citizens. As stated by Saat et al. (2015, p.200), this will also enhance the consumption, thus this will result in an enhancement in the production of the country. Thus, in the same way, that will help the country to gain a competitive advantage in the production of a specific product.
In this case, it can be noted that the government of Malaysia have started the project but in the end,, it can be seen that they do not have the financial capability in finishing the projects. For this reason, they also have to pay a high amount of money in the form of a penalty that has enhanced the debt of the country further. This has also impacted on the economy of the country. Thus, it can be stated that in case the Malaysian government started the project they should finish that in case they are able to complete the project then that will create more job opportunities for the people of Malaysia. This, in turn, will have a positive impact on the growth of the country. Apart from this, the country needs to focus on the cost before starting the project. This situation can enhance the debt of the country and can also slow the growth of the country.
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