Business

Monday October 26, 2009

PKFZ project results in high cost overruns


PETALING JAYA: The Port Klang Free Zone (PKFZ) project is a recent example of a case where poor control and oversight resulted in substantial cost overruns and additional expenses which ran into billions of ringgit.

Poorly managed financial plans and overcharging for the project, modelled after Dubai’s Jebel Ali Free Zone (Jafza), have turned the dream project into a nightmare, with costs running to RM4.6bil from an initial RM2bil.

The initial alarm rang when the owner of PKFZ, the Port Klang Authority (PKA), announced it needed a soft loan to meet financial obligations for the RM3.4bil commercial bonds and asset-backed securities that were issued for the development of the project in July 2007.

Then, a few weeks later, Jafza, a Dubai-based and a world’s leading free-zone operator, withdrew from the 15-year management contract for PKFZ due to a “realignment of its business strategy”.

The government soft loan to PKA amounting to RM4.6bil for PKFZ caused a public outcry and a clamour for the truth of the financial issues surrounding the project to be made public.

The Government insisted that the soft loan was not a bailout and would be paid back, as the lifespan of the free-zone project was about 50 to 60 years.

Questions over the viability of the project have also dragged the Parliament Public Accounts Committee into the picture and resulted in a meeting with PKA.

Since then, a series of summonses, police reports and task forces to probe the many financial issues of the project has surfaced.

Companies and individuals directly involved in PKFZ have been questioned.

PricewaterhouseCoopers (PwC) was appointed the external auditor to shed light on the reason why PKFZ needed the RM4.6bil soft loan last year.

Among the issues highlighted in the PwC report were several development proposals which were not tabled to the Cabinet for approval despite having obtained prior Cabinet approval to purchase the land for PKFZ.

The report said key matters were not tabled to the PKA board for approval. For example, board approval was not sought when PKA’s common seal was affixed to certain agreements and when delivery of land was accepted without contractor Kuala Dimensi completing the infrastructure works specified.

To date, PKA has filed two suits against the PKFZ turnkey contractor Kuala Dimensi Sdn Bhd and a suit against the project consultant BTA Architect over key development and supplemental agreements signed between February 2003 and November 2006 as well as computation of interest that brought the disputed amount to RM1.64bil.

Kuala Dimensi’s business relationship with PKA turned sour after it was alleged to have “overcharged” PKA for the project, causing severe losses.

PKA appointed Kuala Dimensi to develop PKFZ on a 405ha site on Pulau Indah, Port Klang in 2003. PKA also bought the land from Kuala Dimensi for RM1.088bil, or at a rate of RM25 per sq ft on a “special value” basis.

PKA has also filed a suit against Datin Paduka O.C. Phang, who was the general manager of PKA from 2001 to 2008 and also was the executive chairman of PKFZ, for breach of her fiduciary, contractual and common laws during her tenure with regard to PKFZ.

The Government recently announced an 11-member special task force headed by Chief Secretary to the Government Tan Sri Mohd Sidek Hassan.

The task force will, among others, determine the type of misconduct or criminal element on the part of individuals or entities involved in the project and recommend actions to be taken against them.

As of June, PKFZ was reported to have attracted investments worth RM1bil from 56 companies.

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