Sunday, November 29, 2009

The PKFZ scandal, a summary

The dogs bark, the caravan moves on

Malaysia's massive port scandal, which has received enormous publicity, implicating a wide swath of past and present officials at the very top of the national
coalition government, is confronting Najib Tun Razak, the prime minister, with an unappetizing list of choices given his public rhetoric about cleaning out corruption in his party and government.

cost overruns in the disastrous attempt to turn the Port Klang seaport into a national multimodal transshipment involve top figures in the Malaysian Chinese Association, the second component of the ruling national coalition, as well as influential members of Najib's own party.

As with a staggering number of industrialization projects dreamed up by former Prime Minister
Mahathir Mohamad, the Port Klang free zone appears to have served as a kind of gigantic smorgasbord from which officials picked out whatever they wanted to enrich themselves. In September, police froze the bank accounts of Kuala Dimensi Sdn Bhd, the corporate entity with the contract to build the port, while they attempt to sort out what happened.

"I believe they will nail a few people," said a Kuala Lumpur observer with ties to the United Malays National Organization. "The scandal is too big to ignore. But how severe their punishment will be remains to be seen. Some will certainly go to jail. Lots of Umno guys are behind it, but they're medium fry. The main culprits are the MCA guys plus Tiong."

That is Tiong King Sing, an influential Sarawak lawmaker and chairman of the parliament's Backbencher's Club, who holds 70 percent of the shares in Kuala Dimensi. Although authorities may charge Tiong, sources say, he is likely to be the only one despite the complicity of a long list of MCA and UMNO figures. Tiong has denied any impropriety and one source said that "Tiong has hid his tracks very well."

There is also the question of the involvement of the cabinet itself. According to June 22, 2007 documents classified under the country's Official Secrets Act as secret (Rahsia),
which were obtained and translated by Asia Sentinel, and other documents, it appears that the government, through the reigns of Prime Ministers Mahathir Mohamad, Abdullah Ahmad Badawi and the current prime minister, Najib Razak, retroactively and illegally authorized payments and bonds that have driven the cost of the project from an original RM1.96 billion (US$577 million) in 1999 to a potential RM12.45 billion if the port defaults and is forced to pay interest on its debt, according to a report by PriceWaterhouseCoopers Advisory Services.

Two transport ministers who previously headed the Malaysian Chinese Association, and three of the four Port Klang Authority chairmen went along with the cost overruns, much of which appear to have stemmed from out and out corruption. The current chairman Lee Hwa Beng, is an accountant and has supported attempts to bring the scandal into the open.

In the classified memorandum,
which can be found here, the cabinet agreed to "approve retrospectively costs related to the development of the PKFZ from RM1.088billion to RM4,632,732,000…and to give retrospective approval/validation of the government's guarantee in issuing bonds at the estimated value of RM4,632,632,000 including coupons by Kuala Dimensi. This support must be based on the issuing of several Letters of Support by the Transport Minister, where these letters would become an implicit government guarantee that is legal."

The letters of support referred to in the cabinet document were issued by the two previous Transport Ministers, Ling Liong Sik and Chan Kong Choy, that allegedly were issued without authorization from the Treasury Ministry. Now, according to the cabinet document, "The government needs to carry the financial burden of RM4,632,732,000.00 in the form of soft loan to PKB… the government's contingent liability will increase to RM4,632,732,000.00 if PKB cannot repay the bonds which have been issued. This amount does not include Medium term Notes at RM85mil and RM75mil respectively which are yet to be issued."

The port's directors say it is now likely to default on billions of ringgit in loans, with the possibility, according to the PriceWaterhouseCoopers report, that accumulated interest could drive the cost up by more than a factor of six.

The scandal has caused havoc inside the MCA, with the current transport minister, Ong Tee Keat insisting that all the reports related to the affair be released to the public. Those efforts caused his enemies to overthrow him as MCA president. The party is now considering intra-party elections to install another leader.

The story started when, according to the PriceWaterhouseCoopers report, Kuala Dimensi sold the land to the Port Klang Authority for RM1.09 billion, or RM25 per square foot although by using Malaysia's Land Acquisition Act, it could have been purchased for RM10 per square foot. Kuala Dimensi acquired the land from the Pulau Lumut Development Cooperative for only RM3 per square foot. A flock of UMNO officials were involved in various roles including the party's permanent chairman, Onn Ismail, his son-in-law Faizal Abdullah, the former party treasurer Azim Zabidi and others. A Kuala Lumpur source called them "bit players who were there more for insurance and influence-peddling."

Others named in the PWC report included Umno officials Abdul Rahman Palil, Abdul Rashad Asari, Omar Latip and Idris Mat Jani, who served in various capacities either with the development cooperative, the supposedly independent surveyor, the law firm advising Kuala Dimensi or as shareholders in allied companies.

Kuala Dimensi, having acquired the land for the free trade zone, was appointed to develop it. That resulted in cost overruns mounting to the hundreds of millions of ringgit. According to The Sun, a Kuala Lumpur newspaper, the Dubai-based
Jebel Ali Free Zone, originally appointed to manage the port, gave up and pulled out in 2007, allegedly because of interference from politicians and figures with vested interests, deliberate falsification of minutes, attempts at tax evasion by Malaysian negotiators and other issues. It appears that management was so substandard, according to a report by yet another committee, that the port didn't even have revenue or cost projections.

If the government's past track record of investigation is any harbinger, it is questionable what will be done. In 2007, the Malaysia Anti-Corruption Commission was asked to investigate the plethora of illicit payments and kiting of land prices. The MACC declined to do so in 2007 according to Mohd Sidek Hassan, the chief secretary to the government. Under pressure from the magnitude of the controversy, the MACC is now investigating how the price of land for the acquisition of the project ballooned out of control and will probe financial records pertaining to payment claims and other issues such as conflicts of interest.

It is a safe bet that none of those issues will involve how the Malaysian cabinet agreed to ratify the letters of guarantee issued by the Transport ministry despite the fact that only the Treasury Ministry can legally issue such letters, and how it authorized the backdating of billions of ringgit in bonds and other costs over the past several years.

Some of the actions would appear almost laughable, if the cost weren't roughly RM500 for every one of Malaysia's 25.7 million people according to one report. On Nov. 4, according to local media, a Corporate Governance Ad Hoc Committee on the free zone project recommended the creation of an Ethics and Integrity Monitoring Committee and the appointment of independent non-executive members who would constitute one-third of the port's board of directors. A seminar on corporate governance and transparency will be scheduled.

But this time, judging from the numbers of bloggers and independent commissions – and the phenomenal size of the scandal – something might actually be done, and somebody might go to jail.

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