The following are the main conclusions and recommendations of the Public Accounts Committee (PAC) report on the Port Klang Free Zone (PKFZ) issue.
1. On land purchase
a) Ministry of transport (MoT) secretary-general and Port Klang Authority general manager (PKA GM) Datin Paduka OC Phang did not follow the directive that it must get ministry of finance’s (MoF) approval to award any contract above RM100 million. They selected Kuala Dimensi Sdn Bhd (KDSB) to design and build the infrastructure for PKFZ for between RM350 million and RM400 million;
b) MoT and PKA ignored a June 12, 2001 directive from the Treasury that they acquire the land under the National Land Acquisition Act. If they had done it this way, the land would have cost RM442.13 million — a saving of RM645.87 million;
c) Government approval was not obtained by PKA before it agreed to a 7.5% interest charge for the staggered payment of the land to KDSB. This 7.5% interest raised the land cost from RM1.088 billion to RM1.818 billion. On top of that, the 7.5% interest charge is actually a “double charge” because when the Land Valuation Department set the land cost at RM25 per sq ft, it already factored in the 7.5% interest on a 15-year staggered payment;
d) In signing the land purchase agreement, the PKA GM had breached a government regulation as MoF approval was not obtained. It was also in breach of the Port Authorities Act 1963 which requires the GM to obtain approval from the PKA board of directors;
e) PKA must ensure KDSB fulfils all its obligations before the full settlement of the land purchase;
f) The Malaysian Anti-Corruption Commission (MACC) should investigate to identify all those who breached government regulations so that action can be taken against them.
2. Development agreement with KDSB
a) The PKFZ project entailed four contracts worth RM2.246 billion between PKA and KDSB. All the contracts were signed by the PKA GM between 2003 and 2006 without prior approvals from the PKA board of directors and MoF;
b) The terms of the contracts were also weak and not in compliance with government financial regulations and compromised the interests of PKA and resulted in financial losses;
c) The action of the PKA GM was against government regulations and in breach of the Port Authorities Act, 1963.
3. Appointment of quantity surveyor
a) A consortium of four quantity surveyors — called QS4 — was formed to oversee the project with BE Sdn Bhd appointed as its coordinator;
b) BE, which was recommended to MoF by PKA, had previously acted for KDSB in the infrastructure phase of PKFZ and this could have created a “conflict of interest” situation;
b) None of the notices of payment submitted by KDSB were ever forwarded to QS4 for verification. PKA management accepted the claims based on verification by the architect of KDSB.
This could have led to over claims by KDSB, for example, KDSB claimed RM69.6 million to build a business-class hotel but based on QS4 assessment, the value is only RM43.5 million. PAC is of the view that this payment is inappropriate and legal action should be taken against those involved.
4. Financing PKFZ via issue of bonds
a) PKA could have reduced the project cost if it adhered to an MoF directive dated June 12, 2001 that PKA issues the bonds with government guarantee. This is because government-backed bonds carry an interest of around 4% compared with the 7.5% charged by KDSB;
b) Instead, KDSB issued four tranches of bonds totalling RM3.69 billion. In order for the bonds to obtain AAA rating from the Malaysian Rating Corp (MARC), four “letters of support” were issued by two transport ministers (Tun Dr Ling Liong Sik and Datuk Seri Chan Kong Choy). It appears that PKA failed to inform MARC its actual financial situation and that it did not have the resources to meet its financial obligations.
c) The attorney-general informed PAC that the three “letters of support” signed by then Transport Minister Datuk Seri Chan Kong Choy and the three “letters of undertaking” to OSK Securities signed by PKA GM Phang were tantamount to “implicit” guarantees by the government for the bonds issued by KDSB;
The letters thereby made the government responsible to ensure financing is available to PKA to meet its contractual obligations. A thorough investigation must be done by the MACC and the police because the letters were issued without MoF approval and could tantamount to criminal breach of trust under the law;
d) The “letters of undertaking” issued by the PKA GM were against the decision of the government because when the government approved the PKFZ project, it was on the basis that PKFZ is to be self financed by PKA. In this regard, PKA and MoT failed to do the following:
i) Inform the cabinet in a timely manner that PKA was unable to finance PKFZ on its own even though the Auditor-General Report of 2003 to 2007 had already highlighted this matter;
ii) Negotiate with MoF and the Economic Planning Unit (EPU) to obtain allocation for the project;
e) The PKA GM had made a “misrepresentation” when she issued the “letters of undertaking” stating that PKA will ask the government to remit money to PKA when in actual fact no such request was made.
5. Non-compliance with government regulations
The failure of the PKA GM who is also chairman of the PKFZ and that of the secretary-general of the transport ministry to ensure government rules and regulations are followed should be given serious attention and appropriate action must be taken in accordance with the law.
6. Role of PKA board of directors
a) PAC concluded that the PKA board of directors did not take an active role to ensure the orderly implementation of the PKFZ and major matters concerning the project were never discussed at board meetings. Among those matters is the June 12, 2001 letter from the secretary-general of the finance ministry which was also copied to the PKA GM. It was also found that a government representative on the PKA board did not even read the files that contained various directives from the government with regards to PKFZ;
b) the PKA GM failed to table to the board decisions made by the cabinet, MoF, MoT and various other government agencies on PKFZ;
c) the PKA board ignored the observation of the auditor-general that it did not have the financial capacity to undertake the project;
d) the chief secretary to the government should take action against government representatives to the PKA board who failed in their responsibilities.
7. Matters that can be investigated by MACC
a) Conflict of interest in decision making;
i) Perunding BE Sdn Bhd was appointed by PKA to the consortium of quantity surveyors to determine the actual project cost. BE was also the surveyor for KDSB in the infrastructure work;
ii) The legal firm of Rashid Asari & Co was involved in two of the four development contracts between PKA and KDSB. It was also the lawyer when KDSB bought the land from Koperasi Pembangunan Pulau Lumut Bhd in 1995.
b) Several actions taken by the PKA GM like appointing KDSB as the contractor, signing the land purchase and development agreements with KDSB and the appointment and termination of Jebel Ali Free Zone International (Jafzi) were done without approval from the PKA board and MoF. Investigation under the Financial Procedure Act of 1957 should also be made into the issuance of the “letters of undertaking” by the PKA GM;
c) PAC found that regulations and procedures and government directives were ignored by the PKA GM in implementing the PKFZ project. Her failure to follow regulations and procedures must be investigated given that she should be aware of them as she had served in various ministries and government agencies including MoF.
This article appeared in The Edge Financial Daily, November 5, 2009.