PAC report on PKFZ: Main conclusions and recommendations

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.

‘Saya menurut perintah’ , says Phang

KUALA LUMPUR: Former Port Klang Authority (PKA) general manager Datin Paduka OC Phang said that former Prime Minister Tun Abdullah Ahmad Badawi and former transport minister Tan Sri Chan Kong Choy approved the entire Port Klang Free Zone (PKFZ) project to be developed in one single phase in March 2004.

In her testimony to the Public Accouts Committee (PAC), Phang said that the directive to implement the project in a single phase came in writing from the former PM and transport minister who were in turn advised by Jebel Ali Free Zone International (Jafzi).

She said all the ministries at the federal level knew all along that the Cabinet had given the approval for the 1,000 acres to be acquired on a willing buyer-willing seller basis from Kuala Dimensi Sdn Bhd (KDSB) and there were financial implications.

“The government knew all the way about it. MoT is aware, MoF [Ministry of Finance] is aware, central agency… I’m quite annoyed …. But this land acquisition levelled at me, I think I have the right to be annoyed,” she had testified.

The Treasury had directed that the land be compulsorily acquired as it would be cheaper. But PKA acquired the land from KDSB at RM25 per sq ft, which drew criticism as, had it been acquired via the Land Acquisition Act, the price would have been less than half.

According to Phang, the acquisition of the land on a willing buyer-willing seller basis was done following a letter to PKA from the then transport minister Tun Dr Ling Liong Sik. Tun Dr Mahathir Mohamad was the prime minister at the time.

She said that the plan initially was to develop the land in two stages, with the first phase involving 500 acres. PKA’s role was to jump-start the project by developing the first 500 acres and the rest was to be done later.

On March 3, 2004, the PM and transport minister then (Abdullah and Chan) directed PKA to develop the entire 1,000 acres in a single phase on the advice of Jafzi, she testified.

“Jafzi, represented by Chuck Heath, had briefed the minister on 10 good reasons why it should be developed in a single phase. This is very clear in my mind because suddenly we have to do amendment, we have to set up legal document and development agreement. Therefore the scope widened… there is financial implication.”

Phang said that she had reminded Chan at every opportunity during post-Cabinet meetings that PKA was only supposed to jump-start the project but she was merely told to implement it.

“I don’t want to be caught for something that I do not know but they say ‘you just implement’. The word is implement, Fine,  I do as ‘Menurut Perintah’ ”.

To a question on whether there were doubts or reservations on the part of PKA on the cash flow implications of the project being implemented in a single phase as recommended by Jafzi, Phang said that she had alerted the minister after post-Cabinet meetings and MoT  officers many times.

“But every time the assurance will always be ‘we will take it’,”  Phang testified. She also said that the PKA had written to the MoT that the project be put into the 9th Malaysia Plan to ease its funding requirement.

She also spoke of a plan by Dr Ling (Liong Sik) to establish a National Port Authority which would be able to tap on billions to help finance the PKFZ project. But the plan did not take off as it was not agreed upon by other port operators.

On the appointment of quantity surveyor Perunding BE Sdn Bhd, Phang said that PKA recommended the firm to be part of the consortium of quantity surveyors because it was a bumiputera company and had the experience. She said that both Perunding BE and legal firm Rashid Asari & Co had approached the PKA to be appointed to the job. Both these firms had also done work for KDSB, which raised the issue of conflicts of interest.


This article appeared in
The Edge Financial Daily, Nov 5, 2009.

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