The PKFZ headache is getting worse

(Business Times Singapore) At a press briefing in December last year, Malaysia’s Transport Minister Ong Tee Keat declared the Port Klang Free Zone (PKFZ) “a big headache”, one which was not easy to resolve.

Indeed, last Thursday’s public release of an independent audit by PricewaterhouseCoopers (PwC) on the scandal-ridden free zone was a financial nightmare coming true to taxpayers.

For the two-month old administration of Prime Minister Najib Razak, it was another problem – albeit a legacy issue – that he could have done without.

What does the government of the day do when the cost of a project by its port agency spirals from an estimated RM2 billion in 2001 to RM3.5 billion (S$1.4 billion), because of interest costs? And when a government soft loan of RM4.6 billion escalates to RM7.5 billion?

But that’s not all. The cash projections of its federal agency, Port Klang Authority (PKA), which owns and operates the PKFZ, indicate that it cannot meet the current loan schedules beyond 2012. Revising the loan schedule to match its cashflow would mean an additional RM5 billion in interest costs, raising the ballpark amount spent on the PKFZ to some RM12.5 billion – more than six times its estimated costs.

Only 14 per cent occupied at present and with its current revenue lagging its operating expenses, the 400 hectare site – planned as a hub for the export and transhipment of manufactured goods – is looking very much like a white behemoth.

Whether the government can make it viable after the unwelcome publicity, including the pull-out of Dubai’s Jebel Ali Free Zone Authority halfway through the project, remains in doubt.

Businessmen say that the PKA has tried to attract international tycoons to the zone but without success. Any return on investment in the short term is unlikely because of the colossal cost over-runs.

The opposition Democratic Action Party has suggested that the government cut its losses and walk away, a recommendation which the transport minister has scoffed at because he believes that the PKFZ can still be turned around.

It may well be possible since Malaysia is geographically well located with better regional infrastructure than most.

In the past, Selangor Chief Minister Khalid Ibrahim had expressed an interest in playing a role to ensure better usage of the facility which he observed, would in turn enhance the state economy.

He was confident that his experience and contacts in the industry could help attract international players, especially if super attractive deals could be packaged – in short, rolling out the red carpet and throwing in the works.

And though PKA is likely to resist, an international independent operator ought to be brought in to manage the zone.

Although much of what was in the PwC report prepared in February was not a complete surprise to the public because parts had been leaked to the media, the revelations were still shocking.

Examples include: “Significant project costs, weak governance and project management have severely undermined the viability of the project.” And: “It cannot be ascertained with any degree of certainty whether PKA has received value for money for the amount spent.”

Public opinion was far more certain, given that PwC had stated glaring conflict of interest situations involving Barisan Nasional politicians in the purchase of the PKFZ land and companies connected to them which were awarded work on the project.

PwC also noted numerous procedural flaws, shocking in the way in which processes were either bypassed or totally ignored.

“Stop beating about the bush and tried (sic) to mask the stink with spin words like ‘weak governance etc’. Call a spade a spade. It is pure abuse of their political power to corruptly enrich themselves,” was a typical comment in blogosphere.

The independent audit did not conclude who were the persons at fault and it remains to be seen if an investigation into the fiasco by the country’s anti-corruption agency will yield anything.