The Belt and Road Initiative in Malaysia: The 1MDB Scandal

China’s Belt and Road Initiative (BRI), which seeks to boost global connectivity and market integration through assisting the funding of infrastructure, is changing Southeast Asia’s economic and security environment. Within the first five years of the initiative’s launch, more than USD$500bn BRI-related capital has flowed into Cambodia, Indonesia, Malaysia, Singapore, and Vietnam alone.While the benefits reaped are expected to be significant, the BRI also presents a complex set of risks for the region. Many criticisms have centred around potential “debt traps” created by BRI partners, issues of transparency, and the ad hoc organisation of negotiations. Malaysia’s 1MDB scandal is one such example that demonstrates the potential pitfalls of the initiative, and the subsequent hesitations that countries, particularly in Southeast Asia, may have towards it. 

Initially, Malaysian public perceptions of BRI projects were optimistic, with over half the respondents of a research survey viewing them positively. Since then, however, there has been public backlash over the poor health of the Malaysian economy and the unfavourable terms of BRI contracts, and the electorate's distrust of the Najib administration in association with China after the scandal, all of which has led to a widespread rejection of these projects. Often referred to as 1MDB, the 1Malaysian Development Berhad was a Malaysian state fund set up in 2009 to promote development through foreign investment and partnerships. Since then, the fund has been at the forefront of one of the biggest corruption scandals in the world. The US Justice Department cites that more than USD$4.5bn was stolen from the fund, which has subsequently had major implications for Malaysia’s political landscape. 

The long-dominant political coalition Barisan Nasional (BN), which held power since the 1970s, was toppled in the 2018 General Election by the then newly formed Pakatan Harapan (PH) coalition. Leading up to Malaysia’s 14th General Election in 2018, the ethnic-Malay majority, who accounted for over 60% of the population, had grown frustrated with the rise of living costs and introduction of a broad-based consumption tax (also known as the “good and services tax” or GST). Additionally, former prime minister Mahathir Mohamad returned to the political scene to form and lead the new PH coalition. As a distinguished leader that enjoys a reputation as the father of Malaysia's economic modernization, his leadership broadened the new coalition’s appeal to the larger Malaysian population. These factors, coupled with a tainted image of BN surrounded by corruption from the scandal, meant that Malaysia’s political environment was ripe for change. 

The scandal has, therefore, become a popular topic of conversation recently, with Malaysia’s then Prime Minister and chairman of 1MDB Najib Razak’s second corruption trial taking place recently. Najib currently faces five separate trials related to 1MDB. On August 25th 2022, Najib was imprisoned after the country’s top court rejected his final appeal in his first corruption case linked to the 1MDB fund. The court found that he illegally received USD$10m from a unit of the state fund. This trial is the most significant as it ties Najib directly to the scandal. Prosecutors cite that Najib intentionally syphoned billions of dollars from 1MDB through what has been termed an “elaborate charade”. 

 China’s BRI has sat at the centre of the scandal. In 2019, the Wall Street Journal published a report which states that in 2016, Chinese officials agreed to help bail out the 1MDB fund by inflating the cost of infrastructure projects, as well that Chinese officials informed Malaysia that Beijing would use its influence to try to push the U.S. and other nations to drop their corruption probes surrounding the 1MDB fund. In return, Malaysia would offer lucrative stakes in railway and pipeline projects for China’s BRI. Within months of talks, Najib signed USD$34bn worth of rail, pipeline, and other deals with Chinese state companies, funded by Chinese banks and built by Chinese workers. While Beijing has continued to deny the report, questions of the BRI’s opaque nature have begun to come into question. By limiting external scrutiny, the initiative’s lack of transparency gives Chinese companies an edge in lucrative markets and allows Beijing to exercise political influence. 

 Plagued by the vast amounts of corruption between China’s BRI projects and the 1MDB fund, Malaysia has begun to distance itself from BRI-related projects. In 2018, Malaysia cancelled several Chinese-financed projects and temporarily suspended a number of other infrastructure projects after then Prime Minister Mahathir Mohamad denounced them as “unequal treaties.” Among the largest megaprojects set forth by the BRI were the East Coast Rail Link (ECRL) and the Gemas-Johor Baru Electrified Double-Tracking Project (G-JB); the Trans Sabah Gas Pipeline; and the Melaka Gateway, a coastal property development expected to generate RM15 billion in revenue upon its completion. Many of these projects have been suspended, cancelled, involved in kleptocratic indictments, or left to languish. These abrupt changes in BRI projects led to the Institute of Democracy and Economic Affairs (IDEAS), along with four other civil society organisations, to produce major reports on BRI projects in the ASEAN region in 2019. The BRI Monitor site publishes key insights into the governance gaps in Chinese-backed megaprojects, with information gathered through rigorous transparency assessments and evaluations of regulatory frameworks. The key issues that it cites are: (i) their inadequate frameworks, (ii) engagement with unfavourable Chinese loans, (iii) an overarching lack of transparency. 

BRI Monitor’s project analysis on the ECRL

All set against a turbulent political landscape in Malaysia, perhaps the most significant obstacle with the country’s BRI projects is its poor local governance. BRI Monitor states that while there is a “tendency to blame all the issues on Beijing,” their research shows that “this viewpoint negates gaps in Malaysia’s project governance.” For instance, the Melaka Gateway was cancelled in 2020 because of the developer’s failure to complete the island reclamation on time, as well as a lack of governmental oversight to ensure it was on track. Therefore, while BRI projects are still riddled with scepticism and criticisms, Malaysia’s BRI projects also show that long-term thinking within federal policy needs to be crucially readdressed for adequate infrastructure planning.