RM200 billion Carey Island port city. Is it attainable?

“China is keen on developing the whole place. In China, every port is developing capacity now. We need to do something big to trade with them. Otherwise, we will be forever small. If we don’t do anything now, we will continue to play second fiddle to Singapore and will not get a bigger share of the pie in the future.”

(THE EDGE) – The proposed RM200 billion port city development on Carey Island, Port Klang, has raised more questions than answers, and over the course of the weeks since the announcement, the matter is still murky, even after The Edge met and spoke to officials championing the project.

News of the gargantuan development broke after Port Klang Authority (PKA) chairman Tan Sri Kong Cho Ha spoke to a local daily. “If we don’t do anything now, we will continue to play second fiddle to Singapore and will not get a bigger share of the pie in the future,” he was quoted as saying about the proposed port.

He is also reported to have said, “China is keen on developing the whole place. In China, every port is developing capacity now. We need to do something big to trade with them. Otherwise, we will be forever small.”

Perhaps, this rhetoric is expected of Kong for he is, after all, an elder in the Malaysian Chinese Association and, more importantly, was the minister of transport from June 2010 to May 2013, and thus is well versed in such matters.

However, in an hour-long interview with The Edge, Kong passed on the lion’s share of the responsibility to Sime Darby Bhd, which owns large tracts of land on Carey Island.

On the one hand, he says Sime Darby is interested in developing the port but on the other, he remarks that the conglomerate is not the one pushing for the project.

“We are pushing Sime Darby,” he says. “They [Sime Darby] should be the anchor as they are the landowner … If you own a house and people want to come into your house or rent your house, of course, you have a say,” Kong says of Sime Darby’s importance as the landowner.

According to its 2016 annual report, Sime Darby owns pieces of freehold and leasehold (expiring between 2018 and 2109) land on the east side of Carey Island and freehold land on the west side.

“Sime Darby continuously seeks value-enhancing opportunities for the group. As and when there are new developments in the business, the appropriate announcements will be made,” the conglomerate says in response to The Edge’s queries on the matter.

Kong points out that Sime Darby has port operations in China. “They [port operators in China] are not small. They have more than one port in China. I think they have done very well in China.”

According to its 2016 annual report, Sime Darby sold 50% of port operator Weifang Sime Darby Liquid Terminal Co Ltd for RM39 million in May 2016. Considering that its market capitalisation is in excess of RM58 billion, port operation is not one of its core businesses.

So, would Sime Darby want to participate in the development of the Carey Island port or would it just sell the land to facilitate the development?

“This is the first time I am hearing about them wanting to sell the land. As far as I know … [laughs] … I think they have realised that this will add a lot of value to the land,” Kong observes.

It is said the plan for the port on Carey Island sprung from a study conducted by the World Bank.

Nevertheless, Hong Kong-based independent port consultant Lee Wai-duen told an international shipping magazine that there could be a lack of synergy between the new port development and Weifang.

When asked which other parties are taking part in the massive development, Kong declines to talk about the companies that are reportedly involved in it, namely China Merchants Group and business tycoon Tan Sri Syed Mokhtar Albukhary’s flagship MMC Corp Bhd.

“You should ask Sime Darby. Don’t quote me out of context. I never mentioned anything about a China party or anything. Sime Darby will know,” he replies to a question on MMC’s role in the project.

So, is MMC involved?

As MMC controls four ports in Malaysia, it is natural for the market to speculate that the company would want a piece of the action in the development on Carey Island. However, its officials are tight-lipped.

“MMC is among the top 10 port operators in the world, so if it is participating, of course, it would want to operate the port,” a former MMC official comments.

However, the company may not have the financial muscle to undertake a development of such scale. As at Sept 30, 2016, MMC had a cash balance of RM1.35 billion compared with long-term borrowings of RM7.75 billion and short-term borrowings of RM1.39 billion. Its net gearing stood at 73.8%.

To put things in perspective, MMC’s finance cost for the nine months ended Sept 30 last year was RM366.61 million or about 1.3 times its net profit of RM282.5 million.

MMC wholly owns Northport (M) Bhd, the company that operates Northport in Port Klang. Northport and Westports, owned by Westports Holdings Bhd, together make up Port Klang.

MMC also has Johor Port Bhd, Penang Port Commission Sdn Bhd and 70% of Port of Tanjung Pelepas Sdn Bhd under its belt. Until 2014, it held a 10.2% stake in Lekir Bulk Terminal Sdn Bhd, which is a part of Lumut Port.

According to sources, MMC has planned an initial public offering of its port shares this year but this could be derailed due to the prevailing weak market sentiment. The listing exercise could raise between RM3 billion and RM4 billion.

Other than the uncertainty about the players involved in the Carey Island project, Kong says the RM200 billion price tag is merely an estimate. “You say RM200 billion is a lot but I say RM200 billion is not a lot for a port and other expansion.”

However, market watchers highlight that the Pengerang Integrated Petroleum Complex (PIPC) has a total investment of close to RM100 billion, of which close to RM60 billion is for the refinery and petrochemicals integrated development and RM40 billion is for associated facilities.

Nevertheless, while PIPC covers only 2,000ha or close to 5,000 acres, Carey Island is about 32,000 acres in size.

Perhaps, the questions and distrust stem from the Port Klang Free Zone (PKFZ), which is wholly owned by PKA.

To recap, the original cost of setting up the integrated free zone was RM1.85 billion but this surged to RM4.6 billion as a result of huge cost overruns from the four-year delay in the project’s completion. The Public Accounts Committee put the cost overruns at RM3.5 billion.

Opposition politicians estimated the total cost of PKFZ at more than RM4.6 billion with the government forking out a loan for an additional RM3.56 billion to cover the cash flow deficit over the next 20 years. PricewaterhouseCoopers says the restructured financing has an additional interest cost of RM5 billion over the next 42 years.

Many of these issues were pinned on the MCA — the second largest member of the ruling Barisan Nasional coalition — which held the transport portfolio. While several people were charged with irregularities at PKFZ, none was convicted.

Charles Santiago, the opposition lawmaker for the Klang constituency, says, “The number — RM200 billion — makes it look staggering. Even if it is a port city with a lot of infrastructure, RM200 billion is a lot of money. I’m not sure if this whole thing is a money-making venture but the main actor is the same as in the PKFZ fiasco — the MCA.

“I’d like to know if we need another huge port or port city. If one of the existing ports can be expanded, why not look at that?”

Officials linked to Westports Holdings are understood to have presented to the government a proposal to increase throughput at Westports by 15 million TEUs at the company’s own cost.

Santiago is aware of this development but little is known about the proposal because the parties involved are keeping their cards close to their chests.

International shipping publication Seatrade points out that being a late entrant to the transshipment game, the Carey Island port development could be at a disadvantage. All the major ports in the Straits of Malacca, namely Singapore, Port of Tanjung Pelepas (PTP) and Port Klang, already have established relationships.

PTP, which belongs to the MMC stable, has a 30% shareholder in APM Terminal, which is a port operating arm in the Maersk group, which, in turn, is the largest container shipping company in the world.

In Singapore, meanwhile, Tuas Terminal is being developed in four phases over 30 years. Phase 1, which is slated for completion in the early 2020s, is expected to handle about 20 million TEUs a year. The entire Tuas Terminal could eventually handle 65 million TEUs a year.

With so many uncertainties, it is not surprising that there are so many holes in the plan to develop a port city on Carey Island.