PKFZ CASE:

1. PKFZ CASE: MGM4136: PREPARED BY PUAN HAMIMAH

2. PORT KLANG FREE TRADE ZONE (PKFZ) • Massive 400-hectare integrated cargo distribution hub spiralled from RM2 billion to RM4.6 billion. • Promoted as the country's first fully integrated free commercial and industrial zone • A commercial and industrial free zone at PKFZ, investors will have more flexibility in their business operations. This means that factories and logistics firms can be located in the same zone for easier co-ordination and smoother supply chain management • PKFZ, modelled after Dubai's Jebel Ali Free Zone, is designed by JAFZA International, the consulting and management division of Jebel Ali Free Zone Authority (JAFZA).

3. KDSB SOLD THE LAND TO PKA In 2007 MOF provides 20-year soft loan, worth RM4.632 billion to PKA JAFZI (2003-2007) PORT KLANG FREE TRADE ZONE PKA KDSB (MAIN CONTRACTOR) GOVERMENT SP Special Port Vehicle Bhd, Transshipment MegahubBhd, Valid Venture Bhd and Free Zone Capital Bhd. V BONDS, 7.5% INTEREST (NOT 4%, RM500M dif.) ‘GUARANTEE’ LETTERS FROM TRANSPORT MINISTERS MRCB- TANDARD PRACTICE IN THE WORLD BONDS SHAREHOLDERS

5. In 2008, Price Waterhouse Coopers was asked to conduct an audit in response to financial irregularities • 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 SdnBhd (PKFZSB). • The report examines the chain of events and it was finally made public on May 28,2009.

6. COURT CHARGES • a total of 29 criminal breach of trust and cheating charges pressed against four accused. • OC Phan, the former head of the Port Klang Authority, has been charged with criminal breach of trust related to RM254 million in expenses • Steven Abok, the chief operating officer of PKFZ developer Kuala Dimensi, has been charged with criminal breach of trust

7. COURT CHARGES • Bernard Tan, the architect who approved PKFZ construction, has been charged with criminal breach of trust related to RM122.3 million in expenses • Law Jenn Dong has been charged with 24 counts of cheating related to the development of the PKFZ. Law formerly worked as an engineer at the developer of the PKFZ. • All four protest their innocence and their cases are moving to trial.

8. FAILURE/WEAKNESSES OF PKA • PKA’s failure to alert the Cabinet in a timely manner of its inability to finance the project from its internal funds following an audit report by the Auditor-General in 2004 that noted that PKA did not have sufficient funds to finance the project; • PKA’s failure to seek the advice of the Attorney-General while not complying with certain Finance Ministry regulations

9. FAILURE/WEAKNESSES OF PKA • Awarding of the PKFZ development contract to KDSB before a project masterplan was finalised; • * PKA’s projections that it would be in a cumulative cash deficit position in 2012 and would not be able to repay the Finance Ministry soft loan instalments on time;

10. FAILURE/WEAKNESSES OF PKA • PKFZ having a low occupancy rate of 14% which is not generating sufficient revenue to cover its operating expenses; • * PKFZ SdnBhd incurring losses since its incorporation and having negative shareholder’s funds as at Sept 30 last year; and

11. LACK OF SUPERVISION • The Parliament inquiry into the Port Klang Free Zone (PKFZ) project found the Port Klang Authority (PKA) board placed too much trust on decisions made by the PKFZ directors.

12. Kuala DimensiSdnBhd (KDSB) • Police have frozen the bank account of Kuala DimensiSdnBhd, the turnky developer of the Port Klang Free Zone, now mired in controversy.

13. SOURCES OF ESCALATING COSTS • PKA purchased 1,000 acres (4.0 km2) of Pulau Indah land from Kuala DimensiSdnBerhad at RM 25 per square foot for a total consideration of RM 1.8 billion (inclusive of interest). Kuala Dimensi made a capital gain of RM 993 million because it had purchased the land from PulauLumut Development Cooperative Berhad for only RM 95 million[3] (at RM 3 per square foot). Moreover, the Minister of Transport saw it fit to reject the Attorney-General's view that the land could be acquired for "public purpose" under the Land Acquisition Act at RM 10 per square foot. • The PKFZ initial plan was to develop in two phases, covering 500 acres (2.0 km2) at the cost of RM 400 million. However, the JAFZA advised PKFZ to develop the entire project in a single phase, costing RM1.845 billion.

14. CHARGES AGAINSTS KDSB • False claim- under the Development Agreements, RM 138MILLION for electrical infrastructure related works • At least RM231 million was claimed without proper documents • False claims for variation works of RM62 million under additional development works (ADW) and new additional development works (NADW) • overclaim for hotel works where KDSB claimed RM69.6 million compared to the quantity surveyors QS4’s valuation of RM44.7 million.

15. CHARGES AGAINSTS KDSB • Under the Development Agreement 3 (DA3), KDSB is entitled to claim only actuals for professional fees and expenses. However, KDSB did not produce any invoices and payment vouchers for RM121.6 million of the fees allegedly incurred. The sum claimed by KDSB appears to be on the high side given the value and nature of the project. • KDSB may not be entitled to claim the sum of RM254.9 million for extra under DA3 because the purported revised works fall within the original scope of works envisaged under the land agreement 1 (LA1) and not DA3 under which it claimed.

16. Project costs escalation • In its review of the Port Klang Free Zone Project and Port Klang Free Zone SdnBhd, 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.

17. 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 PrasaranaNasionalBhd (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 JabatanPenilaiandanPerkhidmatanHarta (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.

18. Issuance of bonds • The possible breach of Treasury regulations when the Transport Ministry issued letters of support which could be construed as a guarantee that PKA would meet its obligations on a full and timely basis. Such letters should have been approved by the Finance Ministry. • MRCB – third party issuance of bond is acceptable standard practice in the world

19. 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.

20. Weak governance • 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.

21. Weak governance • * Contracts were entered into on the basis of estimated amounts and without detailed building plans. The development agreement DA3 was entered into based on an estimated amount of Rm1 billion and without detailed plans. • * Development contracts totaling RM1.846 billion were all awarded to KDSB without competitive bids. • * Entire project completed in two years, contrary to JAFZI/TSG Master plan which recommended mixed development strategy. The strategy was a single phase for infrastructure works and multiple phases over eight years for the light industrial units (which represented 42% of total construction cost of RM1 billion under the JAFZI/TSG Masterplan). As at Dec 31, 2008, only 77 units out of a total 512 units of the light industrial units were rented.

22. CONFLICT OF INTERESTS • Potential conflicts of interests arising from the involvement of parties who had prior association with either the land used to develop PKFZ or the turnkey developer, Kuala DimensiSdnBhd (KDSB)