KUALA LUMPUR: PricewaterhouseCoopers Advisory Services (PwCAS) was appointed by Port Klang Authority (PKA) to conduct a review of the Port Klang Free Zone (PKFZ) and Port Klang Free Zone Sdn Bhd (PKFZSB).

The report examines the chain of events and it was finally made public on May 28.

Project costs escalation

In its review of the Port Klang Free Zone Project and Port Klang Free Zone Sdn Bhd, PwCAS said the project outlay for the PKFZ has escalated from RM1.957b to RM3.522b, excluding interest cost. Including interest cost, project outlay increase to RM7.543b.

PKA was unable to fund its obligation to KDSB from its own resources when the first scheduled payment was due in 2007. PKA secured a 20-year soft loan of RM4.632 billion from the Ministry of Finance (MoF), of which RM4.382 billion was available for drawdown. This loan would impose an additional interest cost of RM2.506 billion resulting in total project outlay of RM7.453 billion.

PKA may not have received value for money due to its heavy reliance on KDSB as turnkey developer.

The Ministry of Transport/PKA could have benefited from lower cost of funding had they issued government-guaranteed bonds to finance the project. For example, PKA could have issued bonds at 4.27% enjoyed by Syarikat Prasarana Nasional Bhd (SPNB) to purchase the land outright at RM21 psf (cash basis) instead of RM25 psf (deferred payment basis).

As such the total estimate outlay for the land could have been RM1.276 billion compared to RM1.808 billion, that is a potential savings of RM532 million.

The land was purchased by PKA at RM25 psf on the basis that the land was of special value.

According to the Hansard, there were differing views of the mode of the land acquisition, namely compulsory acquisition as against outright purchase. The Hansard mention that the Cabinet had deliberated on the differing views and decided that, in the best interest of the country and to avoid any complication, the land be purchased outright.

The Jabatan Penilaian dan Perkhidmatan Harta (JPPH), had in August 2001, placed a value of RM10.16 psf on the basis of compulsory acquisition with land partly reclaimed and no infrastructure works. Compulsory acquisition, had it been possible, would have cost a total of RM442 million compared to the purchase price of RM1.088 billion (that is 25 psf including infrastructure works with land fully reclaimed.

Weak governance

The Cabinet approved the proposal for the land purchase but subsequent development plans were not tabled to the Cabinet for approval even though total development costs of RM1.846 billion (excluding interest) exceeded the land cost of RM1.088 billion (excluding interest).

PwCAS said it was informed by PKA that the government ratified development costs of RM1.8 billion on June 27, 20007. The sum combined with the land cost (RM1.088 billion), additional amount agreed in the final account added to a total project outlay of RM3.522 billion (excluding interest).

It also said PKA/MOT also failed to alert the Cabinet in a timely manner about PKA’s in ability to pay for the project out of its own funds. It added that in 2004, PKA was aware that it was not able to meet the Cabinet’s condition on self-financing.

PKA should have alerted the Cabinet of this important task. To compound the issue, PKA entered into other very significant development agreements later.

State Government checks and balances were bypassed:

For instance the agreements were not vetted by the Attorney General despite the significant amounts involved and PKA’s lack of experience in projects of this nature;.

Treasury guidelines on vetting of agreement by the Attorney General and approval of variation orders by MoF were not adhered to;

Letters of support, which could be construed as guarantees, were issued by the Minister of Transports without MoF approval; and

PKA did not adhere to MoF’s stipulation to issue government guaranteed bonds for the development of the project.

The PKA board, as an important statutory body, was expected to demonstrate good corporate governance.

PKA's apparent reliance on approvals by senior government offices such as the Cabinet, Ministry of Transport and Prime Minister. While such approvals were important, the board still retained the overall responsibility to run PKA in a professional and sustainable manner. This would include the responsibility to not enter into agreements which may threaten PKA's long-term financial viability.

The project was poorly executed with several lapses in project management. The main lapses were: