PKFZ – Should we throw good money after bad?

As it stands, the cost of PKFZ is RM7.5bn.

Where do we go from here? The emotional will say we have spent too much to abandon the project.

But rational, standard investment practice is to look forward. Forget the costs already incurred. They are already sunk. What matters is what you can get in the future. And the future, based on Port Klang Authority’s “optimistic” assumptions is a further outlay of RM8.5bn over the next 42 years. We will start making money only in 2051.

Is it worth it? I can’t imagine any sane businessman, or government, for that matter, embarking on an investment with a 42 year payback period, and that too on optimistic projections.

So, the government really should consider an exit strategy. There are many alternatives for RM8.5bn. RM8.5bn is sufficient to build 340,000 low-cost houses. Or 30,000 students can have full scholarships for overseas studies. Or PLUS and LITRAK can be privatized, saving the government billions in compensation to the toll concessionaires and reducing the burden on motorists.

Transport Minister Ong Tee Keat, who is away in France for unspecified reasons, has characterized the proposal that the government cut losses and close down PKFZ as “a premature statement by politicians who think they can make well-informed financial decisions based on a few hours of looking through the PKFZ report”. He said he will let “the financial consultants and management experts work out a more viable solution based on further in-depth studies before a more structured approach and solution is implemented”.

So, another round of studies and fees. But you can’t conjure money from nothing. The fact is based on Port Klang Authority’s own forecasts, a cashflow deficit to 2051 is projected, and that is based on assumptions deemed ‘optimistic’ by reporting accountants PricewaterhouseCoopers.

The core problem is PKFZ was built too fast and at inflated costs. So you have underutilized facilities and punitive interest payments, including on the instalments due to turnkey developer Kuala Dimensi Sdn Bhd (KDSB). The cost base could be addressed if turnkey developer KDSB is taken to task. I would expect the legal team to comb through the various agreements and find a way to reduce the payments due to KDSB.

Doing so, though, would likely result in KDSB not being able to meet its own debt obligations. Bondholders will scream because these bonds were rated investment-grade “AAA” based on the government “guarantees”. But they can seek redress from the bankers and rating agency. We have established that the “guarantees” were really “letters of support” signed by the Minister of Transport. No doubt, they could be “construed as guarantees” but the Ministry of Transport has no authority to issue government guarantees. Only the Ministry of Finance can do that. Surely the bankers and rating agency were aware of this fact? Without the “guarantee”, the bonds would have warranted a much lower rating.

For newcomers, click here for earlier posts on the PKFZ scandal.

PKFZ scandal – Printer-friendly report available

The PricewaterhouseCoopers (PwC) report on the PKFZ debacle is now available at Kit Siang’s blog (in the right-hand side panel). This version is more user-friendly and in accordance with the principles of accountability and transparency than the one that was available at the Port Klang Authority (PKA) for 2 weeks only. The PKA version did not allow for hard-copies to be printed.

Reminder: PLUS can be privatized at ZERO incremental cost to the taxpayer

Someone is circulating a story, staying PLUS cannot be privatized because it will “anger East Malaysian Barisan Nasional component parties which control 40% of the coalition.” (Edge Daily June 10)

May I remind you of the DAP proposal to privatize PLUS, at zero cost to the tax-payer, and which we have offered completely free for the benefit of the public. No fees a’la PKFZ.

By the way, the RM8.5bn it will take to keep PKFZ running over the next 42 years is sufficient to privatize PLUS, and Litrak! Based on Port Klang Authority’s own assumptions, which reporting accountants PricewaterhouseCoopers has termed ‘optimistic’, PKFZ will be cumulative cashflow positive only in 2051. I don’t know about you, but I will most likely be dead by then. I would take a toll-free North-South Expressway and LDP which I can enjoy immediately over PKFZ, which may or may not actually make money in 2051.

Irony: Former chairman of scandal-hit PKFZ launches standards boards!

Deputy Finance Minister Datuk Chor Chee Heung launched Malaysian Institute of Accountant’s new standards boards on June 9.

Datuk Chor had once been chairman of scandal-hit Port Klang Authority (PKA). But, he said, “Other than visiting the PKFZ and receiving reports pertaining to the development of the PKFZ … at every board meeting … I was never involved in any other activities on the PKFZ.” (Edge June 10).

A strangely hands-off approach given that the Auditor-General himself had raised warning points as early as May 2004 and as the cost ballooned 6-fold from under RM2bn to RM13bn and counting … And this man is now Deputy Finance Minister.

Directors are supposed to exercise diligence and oversight, even more so in the case of government bodies like PKA which ultimately belong to the taxpayers. Yet, Datuk Chor seems to think merely receiving reports is sufficient fulfilment of his director duties.

Somewhat ironic then that he officiated at the launch of the Audit and Assurance Standards Board and Ethics Standards Board of the Malaysian Institute of Accountants at no less than the headquarters of the Securities Commission.

“Honesty, integrity, transparency and accountability are the key words in good corporate governance,” said Chor according to the Sun on June 10.

Those words ring hollow in the wake of PKFZ.

Besides fulfillment, or the lack of, of his director duties, Datuk Chor was also in a conflict of interest situation. Reporting accountants PricewaterhouseCoopers noted Datuk Chor was also deputy chairman of Wijaya Global Sdn Bhd, which was linked to a key beneficiary of contracts signed with PKA when he was PKA chairman.

PKFZ scandal – will we actually see accountability?

A “Special Task Force” and two committees have been formed to “take immediate action” on Port Klang Free Zone, so said a Wednesday, 10 June press release by Port Klang Authority (PKA) chairman Dato’ Lee Hwa Beng:

1) The Task Force, comprising lawyers, accountants, quantity surveyors and building cost consultants has to make “in depth analysis and studies within their given scope of expertise and provide PKA the appropriate recommendations, within 2 months, for follow-up actions to be taken by the government”;
2) A Committee of Corporate Governance led by Datuk Paul Low, President of Transparency International Malaysia “shall oversee all future (emphasis mine) governance issues to ensure that lapses that have been identified .. do not recur in future”;
3) At PKFZ level, an Executive Committee has been formed “to plan and monitor the business development of the trade zone”.

More committees, more fees! Yes, we do need to chart the most effective part forward. But just as importantly, we need accountability for the past. Jail terms for wrong-doers. Not just more committees, studies, recommendations, planning and monitoring.

Otherwise, Malaysia is doomed. Because wrongdoers have nothing to fear. It’s OK if you swindle the rakyat of RM13bn. RM13bn that could have been used to build 500,000 low-cost houses; RM13bn that could have sent 43,000 deserving students to further their studies overseas, RM13bn that could be used to give RM1,300 cash to each adult Malaysian. You just suffer a few days, or perhaps weeks, of adverse publicity. After that you can go about enjoying your luxurious life, your overseas holidays, flashy cars ….. when you really should be in jail.

Citizen Nades of the Sun on Wednesday published a good long, list of people who should shed light on the issue. Here’s my summary. Accountability must start from the top down. The top in this case starts from the Ministers of Transport. No guilt is presumed, but some explanations are in order, for a start:

1) Former Ministers of Transport Tun Ling Liong Sik and Tan Sri Chan Kong Choy have to explain how the cost ballooned over 6x from RM1.957bn to RM13bn today despite constant reassurances the project was viable;

2) In addition Transport Minister Chan signed not one, but THREE letters that “can be construed as guarantees”. Such letters can be issued only by the Ministry of Finance. How could he have signed THREE such letters? Was he misadvised? Or did he sign knowing the implications? Either way, the Minister and/or senior civil servants have to answer;

3) The men who held the position of PKA chairman (at different times) through this mess: Senior MCA politicians Datuk Dr Ting Chew Peh, Datuk Yap Pian Hon and Datuk Chor Chee Heng, who is now Deputy Finance Minister.
The chairman is head of the board of directors which governs PKA. The board of is supposed to scrutinize management and guide policies. Yet, the Pricewaterhouse report confirms “a general lack of Board oversight and governance over the Project”.
For example, PKA gave KDSB development contracts on the basis of unfinalised building plans, and as early as May 2004, the Auditor General said PKA did not have sufficient financial resources.
Where was the Board and the Chairman when all these transpired?;

4) Datin Paduka O.C. Phang, former general manager of PKA.

PKFZ scandal – how the cost rose from RM1.9bn to RM7.5bn, and counting

My Maxis is still Max-sick. 8 days after the problems began, one whole week after my first report, Max-sick engineers are “still working on it”. What a clueless bunch. On the other hand, thanks DiGi! Your broadband service has been fast and reliable.

Back to the main subject of this posting, Port Klang Free Zone (PKFZ). Last week, I summarized the story and gave a big picture view of how the cost grew and grew. This week, we shall delve into how those costs actually got added in, and who the beneficiaries were.

Let’s start with just the cost for land purchase and development works. These were originally estimated at RM1.957bn in 2001. As at 31 Dec 2008, that had ballooned by RM1.565bn or 80% to RM3.522bn.

How did that additional RM1.565bn cost happen? First, purchasing the land cost RM646m more than it should have. Port Klang Authority (PKA) paid private company Kuala Dimensi Sdn Bhd (KDSB) RM1,088m for the land via a negotiated direct purchase. It could have compulsorily acquired it, as originally directed by the Ministry of Finance, for RM442m.

That leaves another RM919m to explain (RM1,565m–RM646m=RM919m). That’s mainly due to additional development works and accelerating construction so that the project was completed in just 2 years instead of phasing it in in such a way that it could be self-financing as approved by the Cabinet. PKA was in such a hurry that it signed development agreements based on estimated amounts and without detailed building plans. Effectively, PKA told KDSB, we have money to spend, just build whatever you want and we’ll take it!

So, land and construction costs alone became RM3.522bn. On top of that, because PKA committed to paying KDSB more than it could afford from current cash flows, it agreed to deferred payment terms and had to resort to soft loans from the government. The interest cost of all those deferred payments and soft loans now totals RM3.931bn. Add that to the construction cost and you get the RM7,453bn total as of now.

The deferred payment terms to KDSB are another issue. PKA has to pay 7.5% pa interest to KDSB. Being a statutory body, PKA could have itself raised government-guaranteed debt at 4% pa and paid KDSB cash, saving 3.5% pa of interest payments. On the RM3.522bn development cost, 3.5% is equivalent to RM123m per year of additional payments. The beneficiary? KDSB!

So, who’s behind KDSB? KDSB is wholly-owned by Wijaya Baru Holdings Sdn Bhd (WBHSB). The major shareholder of WBHSB with a 70% stake is Datuk Seri Tiong King Sing, Barisan Nasional MP for Bintulu. Tiong, by the way, is also the chairman of the Barisan Nasional Backbenchers’ Club – the club for BN MPs. I don’t know who owns the other 30% in WBHSB.

KDSB did not keep all the profits itself. Its main contractor was Wijaya Baru Sdn Bhd (WBSB). WBSB is 45%-owned by Wijaya Baru Global Berhad, which in turn is 32%-owned by Tiong. I don’t have the details of the other shareholders. Wijaya Baru Global’s chairman is Datuk Seri Abdul Azim Zabidi, former UMNO treasurer. Azim is also a board member of KDSB. Wijaya Baru Global’s deputy CEO is UMNO Kapar deputy division chief Datuk Faisal Abdullah.

So there you have it. The cost over-runs and some of the beneficiaries. The police and MACC have been awfully quiet about any investigations so far. Perhaps they are too busy watching Men in Black.

Cost of PKFZ scandal – RM500 for every single Malaysian, and counting

I spent the morning at the Port Klang Authority with the DAP team, scrutinising the appendices to the Port Klang Free Zone (PKFZ) report that was made public yesterday. The experience was slightly better than when we checked out the toll concession agreements earlier this year. Nicely-printed main reports are available. The appendices though, are available for review for only 2 weeks, and restrictions apply – they cannot be photocopied or photographed. But we can take notes on our computers, which is a relief for people like me with scrawly hand-writing.

It is a mound of dirt, so I'm sure there'll be plenty of coverage by Kit Siang, Tony, et al. I'll just help with the background for starters:

The players are:
1) Port Klang Authority (PKA), a statutory body under the Ministry of Transport.
2) PKA decided to set up Port Klang Free Zone (PKFZ), an integrated 1,000 acre zone offering facilities for international cargo distribution.
3) To design, construct and finance PKFZ, private company Kumpulan Dimensi Sdn Bhd (KDSB) was appointed as the turnkey developer.

There are all sorts of conflict of interest and performance issues surrounding KDSB and its appointment which I shall leave to others to highlight. Moving on the the billions of ringgit that were lost and stand to be lost:

1) The cost originally estimated in 2001 was RM1.957bn for land and development works.
2) This had escalated to RM4.947bn as at 31 Dec 2008. (The cost for land and development works alone had jumped to RM3.522bn. In addition, because PKFZ had to borrow to fund the development, there was RM1.425bn of interest costs).
3) The Ministry of Finance (MoF) extended a soft loan of RM4.632bn to PKA to help fund PKFZ.
4) Even though the MoF loan is soft (on friendly terms), some interest still has to be paid. This works out to RM2.506bn, taking the total project cost to RM7.453bn.

So, as of 31 Dec 2008, the tax-payer was already down by over RM7bn! It gets worse:

1) Based on its own assumptions, Port Klang Authority will be in cumulative cash flow deficit for the next 42 years, until 2041. Put another way, PKA starts making money only in 2042.
2) PKA's assumptions, needless to say, appear overly-optimistic (email me if you want details).
3) The Reporting Accountants PricewaterhouseCoopers (PWC) say PKA will not be able to repay the Ministry of Finance the soft loans as scheduled, based on PKA's own (optimistic) assumptions. These loans will have to be restructured, leading to an additional RM5bn of interest costs.
4) So, ultimately, the total project will cost RM12.453bn. That’s RM500 for each and every one of us.
5) Bear in mind, the RM12.453bn estimate is based on PKA's optimistic assumptions.
6) If we make more realistic assumptions, the total cost will be much higher. I'm guess-timating RM20bn+!

So, where do we go from here? Speaking from a logical angle, the RM7.453bn total cost so far is gone and burnt. We must look forward. And looking forward, we're talking about a further loss of at least RM8.5bn, based on PKA's own optimistic assumptions. This is based on RM5bn just for project-financing (point 4 above) and, in addition, PKFZ is expected to burn another RM3.5bn of cash to finance its operating cash flow over 2008-2041.

Can the government walk away? Should the government walk away and save at least RM8.5bn? By the way, that RM8.5bn will go a long way to privatising PLUS!