PKFZ: Making The Tough But Correct Decisions

Submitted by webmaster on Wed, 2010-06-30 13:15 from www.ongteekeat.net

I still recall one of my first statements when I became minister of transport more than 2 years ago that most would agree that the issue of PKFZ was one of the root causes of Barisan Nasional’s dismal performance in the past general election, especially in the urban areas of Selangor and the Federal Territory. This is a belief that I continue to hold right.

The scale and magnitude of the scandal is too large to be swept under the carpet. Aside from identifying criminal or civil wrongdoings, we must continue to be mindful that this is an issue involving public funds. The people have legitimate expectations and the right to the truth.

The board of Port Klang Authority is mindful of the immense obligation and duties they hold. Today, they are faced with the seemingly conflicting demands by Kuala Dimensi Sdn. Bhd. (KDSB) for payment, its own civil suit against KDSB for fraud and other irregularities. PKA is due to pay RM380 million (RM150 million under Land Agreement and RM230 million under DA3) in June 2010, and RM342.584 mil (RM120 mil under ADW and RM222.584 under NADW) in 31st July, making a total of RM723.584 million to be paid this year.

The demands by the Inland Revenue Board (IRB) against PKA for alleged backdated taxes owed by KDSB certainly make things a little more complicated.

The PKA Board should do the right things, even if the tasks and decisions at hand seemed difficult and insurmountable. The Government badly needs to restore the confidence and reclaim the support of the people.

Private vs. Government Bonds

I have append a flowchart on the transaction structure for the purposes of clarifying the issues at hand. One thing must be clear – PKA or the Government did not issue the bonds. KDSB issued the four sets of private debt securities (PDS) to finance the project.
These private bonds were secured against repayments from the various principal agreements between KDSB and PKA. The responsibility to pay the bondholders prima facie lay with KDSB.
To digress a little, I still can’t fathom why we have to resort to this to raise money for the project. The Government could have saved a lot of money if they had issued government-guaranteed bonds to finance and develop the project in phases. The Position Review by PricewaterhouseCoopers Advisory Services (PwCAS) cited the example of Syarikat Prasarana Negara Berhad (SPNB), a company owned by MOF Inc., issued 8-year and 13-year bonds in 2003 at coupon rates of 3.80% and 4.27%, respectively”, as an indication Instead, PKA is now saddled with a high interest at 7.5% p.a. on deferred payments under the various principal agreements on Land purchase and development between PKA and KDSB. It is noteworthy that interest repayment to bondholders by KDSB is only 5.25% - 6.15%!
Now, let’s go back to the issue whether PKA should pay the bondholders or not. I note that the then General Manager of PKA, Datin OC Phang’s consent to the Assignments carries an additional statement that monies which are due to KDSB will be paid to assignees without deduction. This can only mean that PKA’s obligation to pay is only limited to monies that are lawfully due.

Suspend payment pending determination of civil suits alleging fraud and irregularities by contractor

Now, what is lawfully due will be determined by the courts in the civil suits by PKA against KDSB filed last year. They raise serious issues on the payments due to the latter under both the Land and Development agreements. Among them were:
(i) Fraudulent claims made by KDSB under DA3 (Development Agreement 3) for monsoon drain and water supply works which ought to have been made under LA1 (Land Agreement 1). KDSB has made claims for these works under DA3 despite having claimed for the original specified works under LA1. Hence, a double claim.

(ii) Fraudulent claims made under ADW1 (Additional Development Works 1) and ADW2 (Additional Development Works 2), where the parties are aware that the physical construction of the electrical infrastructure for the 33kv system works has yet to commence. Despite this, KDSB has included these works as an item from Notice of Payment No. 4 until the last Notice of Payment No.21 with a cumulative claim of RM55,767,000.00; and

(iii) Claims under NADW (New Additional Development Works), KDSB has claimed for 33kv supply to Precinct 2 and Precinct 8, as well as Civil and Infrastructure Works to PMU (Pencawang Masuk Utama). These represent works which has yet to commence from Notice of Payment No.1 until the last Notice of Payment No. 24 with a cumulative claim of RM83 million.
The SPVs’ right to payment secured under the assignment is only derived from what is lawfully due to KDSB under the principal agreements. Therefore, it makes sense to withhold payments to the SPVs pending determination of KDSB’s lawful dues by the courts. This is, in principle, part and parcel of what is known as investment risks on the part of the bondholders.

Letters of support are not guarantees

In a related issue, since this is a private KDSB bond, the issue of sovereign rating does not arise and PKA is under no direct legal obligation to pay the bondholders. The 4 letters of support are not guarantees per se. We must bear in mind that the Hansard reported a Deputy Minister of Finance stating in Parliament that they are not guarantees. Further, there is a question of whether Section 14 of the Financial Procedures Act 1957 has been complied with.
The obligation under the said support letters are simply to ensure that PKA will have funds to meet its obligations but does not constitute an undertaking by the Government to pay PKA’s debts to a third party.

Payment may prejudice civil action taken by PKA

I am also inclined to believe that to make further payment will seriously jeopardise the existing civil actions taken by PKA against the developers. From PKA’s standpoint, stopping payment to the contractor for monies that they are not legally entitled to due to fraud and irregularities is definitely preferable to recovering monies already paid.
For example, the final payment RM222.584 mil due on 31st July 2010 under NADW, if and when paid, will cross the threshold of what KDSB clearly and legally entitled to. It does not make sense to make the full and final payment when there is an existing dispute amounting to RM83 mil for the fraudulent claims I mentioned earlier. PKA had already paid under NADW, RM300 million in 2008 and 2009.
We should avoid the risk of monies paid but unable to be physically recovered subsequently when the courts rule in your favour.
As an elected representative of the people, I must voice the importance of being aware that we are dealing with taxpayers’ money. The decision makers should exercise their obligations and duties entrusted upon them with great care.
I shudder to think of the people and whistle-blowers constantly drawing the short straw, whilst the other parties to the debacle are paid by taxpayers in full, with interest, and continue to roam freely.