KUALA LUMPUR: The Port Klang Authority (PKA) must restructure its soft loan of RM4.382 billion from the Ministry of Finance (MoF) for the Port Klang Free Zone (PKFZ) project in order to avoid a potential default on its repayment.

According to the PricewaterhouseCoopers (PwC) report on the troubled project, the 4% interest on the 20-year MoF loan would increase the total project outlay to RM7.453 billion. The repayment to the government is scheduled to start next year.

Based on the financial viability of PKFZ, which has achieved only a 14% occupancy rate, and the cash flow of PKA, the port authority will be unable to service the MoF loan from 2012.

The projected cash flow of PKA shows that the port authority would be in a deficit cashflow position from 2012 until 2041 that would cause it to incur additional interest cost of RM5 billion.

“Should PKA fail to meet the MoF soft loan instalments as scheduled and if these instalments are deferred to match its projected cash flow, it would incur additional cost of approximately RM5 billion. This would further increase the outlay of the project to RM12.452 billion,” the report stated.

In 2001/2002, the original estimated cost of purchasing the land and undertaking its development works was only RM1.957 billion. However, PKA entered into various supplemental agreements with Kuala Dimensi Sdn Bhd (KDSB), the turnkey contractor of the project, that resulted in its scope of work being enlarged, bringing the total outlay to RM4.947 billion.

The figure of RM4.947 billion for the project outlay excludes potential adjustments which may increase or reduce the final outlay of the project. Of the total outlay of RM4.947 billion, RM3.187 billion is the final cost while the rest is pending finalisation by PKA and KDSB.

“At this juncture, the PKA management is not able to determine the potential adjustments,” the PwC report stated.

The other salient points pertaining to the financial implications of the project are:

•     PKA could have reduced its funding cost had it complied with an MoF recommendation that it issues government-guaranteed papers to raise funds and undertake the project in phases.
    According to the report, the MoF, in a June 12, 2001 letter to the Ministry of Transport (MoT) and PKA, had outlined the following financing structure to implement the project. They are:

1)    the land be compulsorily acquired and paid for by MoT from its allocation;
2)    the land be leased from PKA for development at a rate to be determined, and;
3)    the cost of development be funded by government guaranteed bonds to be issued by PKA, subject to certain conditions including the award of development contracts by open tender.

However, MoT and PKA did not implement the recommended financing structure.     

According to the report, PKA could issue bonds at 4.27% as enjoyed by Syarikat Prasarana Negara Bhd (SPNB) to purchase the land for cash at RM21 per square foot (psf) as opposed to acquiring it at RM25 psf on a deferred payment basis.

“As such the estimated total outlay for the purchase of the land could have been RM1.276 billion compared to RM1.808 billion, that is a potential savings of RM532 million,” the report stated.

•     KDSB may have overcharged PKA for interest by between RM51 million and RM309 million in relation to the purchase of the land.
 

The interest rate on the purchase of land is calculated at 7.5% per annum on a yearly basis based on the “balance consideration price”. Based on PwC’s understanding, the interest is calculated each year on the remaining portion of the “balance consideration price”.

However, based on computations provided to PKA by KDSB, the interest is compounded on a six-monthly basis, instead of on a non-compounded yearly basis. In addition, the agreement does not specify whether the yearly repayment should be applied against principal and interest or interest alone.

“Depending on whether the yearly repayment is applied against interest or principal, interest has been potentially overcharged by between RM51 million and RM309 million,” the PwC report stated.

It also stated that KDSB disagrees with this interpretation of the interest computation in the land agreement. Hence PwC has informed the PKA management to seek legal advice on the matter.

•    The supplemental agreement to expand the scope of work for KDSB as turnkey developer of the project from 400 acres to 1,000 acres was not a “fixed sum” contract and did not stipulate a rate for professional fees claimable by KDSB.

The development cost was initially agreed at RM1 billion. With interest at 7.5% and payment deferred over eight years, the cost was estimated at RM1.303 billion.

Development of the land has since been completed and the final cost agreed by PKA and KDSB is RM1.216 billion. In addition, KDSB claimed 10% of development cost as professional fees. These professional fees, amounting to RM121.592 million, were not stipulated in the agreement between PKA and KDSB.

According to PwC, the open-ended nature of the development agreement had increased the final development cost by 33% from the original estimated sum of RM1 billion to RM1.33 billion.

•     The final account for the development cost of the land did not include any deduction for value of work not done.

According to the report, certain components of the infrastructure work were not completed when the land was delivered to PKA. They are works related to the monsoon drain system, water supply system and two bridges.

With PKA management’s agreement, the monsoon drain system and water supply system with the revised specifications were included as part of works under the development agreement.