By Anil Netto
Asia Times Online Aug 31, 2007
PENANG, Malaysia –A growing scandal surrounding a plan to develop the Port Klang Free Zone (PKFZ), scheduled to become the largest such facility in Southeast Asia, has further tarred Malaysian Prime Minister Abdullah Badawi's corruption-busting credentials in the run-up to general elections which must be called by next year.
The mega-project was approved on the condition that it would be self-financing. Before he retired in May 2003, former transport minister Ling Liong Sik proposed buying more than 400 hectares of land for a project similar to the Jebal Ali free zone in Dubai. Then-prime minister Mahathir Mohamad approved the deal before he stepped down in October 2003.
The original projected cost of the PKFZ, situated in central Selangor state, has for various reasons ballooned from an estimated 1.1 billion ringgit (US$315 million) to a whopping 4.7 billion ringgit under Abdullah's watch. The cost overruns have not been officially approved, but the inflated budget is nonetheless expected to be shouldered by his government.
The saga has revealed a twisted web that combines senior ruling United Malay National Organization politicians, the transport ministry and Port Klang Authority (PKA) officials, as well as a politically-connected private firm, Kuala Dimensi. Shahrir Samad, a ruling coalition politician and chair of Parliament's public accounts committee has recently called for a probe into possible official corruption.
The project's viability was apparently sunk from the start with the PKA's land buy; property which many have described as "swamp-like". The price was apparently inflated well beyond the prevailing market rates by Kuala Dimensi which had originally purchased 250 hectares of the agricultural land in 1999 at three ringgit per square foot from a cooperative group of ethnic Malay fishing families.
The chair of the cooperative - an elected member of the Selangor state assembly from the ruling coalition - also served as a PKA director. The following year, Kuala Dimensi attempted to inject part of the land into a listed firm, Wijaya Baru Global Bhd, with which it had common controlling shareholders - for the inflated price of 23 ringgit per square foot. The Securities Commission at the time rejected the transfer.
Nonetheless, Kuala Dimensi in 2002 persuaded PKA and the Transport Ministry to buy the same plot of land for 25 ringgit per square foot for a total exceeding 1 billion ringgit, or 1.8 billion ringgit, including interest. Opposition critics say the price, even including an infrastructure, is well above market value.
The Finance Ministry and attorney general have suggested that the government could have acquired the land at just 10 ringgit per square foot. But for still murky reasons, the deal instead went through for the 25 ringgit price.
After buying the land, PKA - minus an open bid - turned around and appointed Kuala Dimensi as the controlling contractor.
Thus critics contend that Kuala Dimensi was able to not only profit from the land's sale, but also from the project's construction. Meanwhile, PKA and the government were exclusively responsible for the project's financial risks and any construction cost over-runs.
The auditor general noted in his 2003 annual report that PKA, which prior to the land buy had 500 million ringgit in reserves, suddenly did not have enough funds to proceed with the project. The transport ministry later drew fire after it issued "letters of support" - which in effect were financial guarantees - for Kuala Dimensi to issue more than 4 billion ringgit in bonds for the project. However, under current laws, only the government's treasury is allowed to issue such bonds.
Kuala Dimensi in 2004 brought in Dubai's Jebel Ali Free Zone Authority (Jafza) to help manage the mega-project, which included a 15-year management contract. But that deal quickly turned sour after Jafza officials complained of excessive bureaucracy, meddling and interference by PKA officials.
"We are most concerned that the reputation of this zone, as well as our own, will be in jeopardy due to the continued interference of PKA," Jafza executive chairman Sultan Ahmed Sulayem wrote to transport minister Chan Kong Choy in March 2006. "I see many areas under our responsibility which have been delayed and even overruled by PKA."
Under that cloud, PKFZ nonetheless opened operations last November and the facility includes 260 hectares of open land for investors. So far only 31 hectares have been used and of this Norwegian oil-and-gas equipment firm Aker Kvaerner accounted for nearly half when it established its Asia-Pacific regional hub.
Meanwhile, a mass of unoccupied buildings, some still under construction, fills the area. Of the 512 light industrial units, for instance, only about a dozen are reportedly occupied. Because the company commenced operations less than a year ago, there have been no publicly released profit or loss statements.
Still, the Transport Ministry has responded to the PKFZ's so far lackluster performance with a statement claiming that the project's inflated costs were due to the advice it received from Jafza, which walked away from the project in July for undisclosed "strategic reasons". Initially, the ministry said, the project was to be completed in two phases covering 200 hectares at a development cost of 400 million ringgit.
The statement also said that upon Jafza's advice, the PKFZ was instead developed in a single phase covering over 400 hectares at a cost of 1.8 billion ringgit. It added that Jafza tended to prefer business opportunities where it could hold an equity stake, but that the PKFZ was scheduled to be 100% owned by PKA. The ministry added that was confident that the PKFZ could achieve an 80% occupancy rate within five years.
Correspondence from Jafza published in the local daily The Sun was highly critical of the broken deal. Key Jafza officials complained of a lack of government planning and transparency and a business environment that had "too many vested interests seeking involvement and control in this project".
They also expressed concerns about possible damage to Jafza's reputation as a result of interference from politicians and alleged questionable arrangements to evade tax payments. Jafza's accountants have alleged that PKA wanted it to sign a variation of the original management agreement so that PKA could report that certain services were being provided offshore in Dubai rather than in Malaysia and hence not be liable for local taxes.
"It boggles the mind that the Ministry of Transport has deftly side-stepped the issues of accountability and good governance but instead hinted darkly that Jafza, which had cut short its 15-year management contract, was mainly responsible for the huge cost overruns," wrote Yusof Ahmad, a general manager of nearby West Port and now a freelance port and marine consultant, in his blog. "From what I hear their parting of ways was far from amicable and that the 'strategic' reasons Jafza purportedly gave is a lot of bull crap."
The lack of government response to the various allegations has stirred the political opposition. The question is "why nobody in cabinet, the Finance Ministry and the Transport Ministry is being held responsible for the 4.6 billion ringgit scandal when those responsible for such a colossal loss of public funds should not only face disciplinary action but should be hauled to court", said parliamentary opposition leader Lim Kit Siang. "Heads must roll for the 4.6 billion ringgit scandal before any bail-out for the mega-scandal can be contemplated by cabinet and Parliament," he said.
In the run-up to general elections, which Abdullah won in 2004 on a pledge to fight corruption and government business-as-usual, that's not likely to happen any time soon. The sad part is that very few Malaysians seem surprised - given the ruling coalition's well-established record of ambitious plans, wasteful spending that has plagued the country since the 1980s.
But the apparent poor planning, dodgy deal-making, cost over-runs, unauthorized guarantees and alleged attempts at tax evasion is emerging as one of the biggest embarrassments for Abdullah's three-year-old administration and likely means his political strategists will need to drum up a different campaign slogan to support his upcoming re-election bid.
Anil Netto is a Penang-based writer.