Poor management added to costs

Written by Sharon Tan, R B Bhattacharjee, M Shanmugam
Friday, 29 May 2009 12:03

KUALA LUMPUR: The Port Klang Free Zone (PKFZ) had a project management record that raises troubling questions, the PriceWaterhouseCoopers (PwC) report on the project shows.

The audit firm criticises the PKFZ (project management) on four counts:
• Firstly, a RM1 billion development contract was awarded to Kuala Dimensi Sdn Bhd (KDSB) before a project masterplan was finalised.

In violation of sound project management practice, the Port Klang Authority (PKA) had entered into a RM1 billion contract with KDSB on March 27, 2004, nine months before the Jebel Ali Free Zone International/ The Services Group Inc (JAFZI/TSG) masterplan was ready.

The issues that such indiscipline raises are that the financial viability of the development would be difficult to ascertain since the project’s cost parameters could not have been accurate, and the return on investment undefined.

Also, it would be highly risky to undertake capital expenditure of this magnitude before getting an accurate picture of the demand and supply of these facilities, which a masterplan would provide.

As the PwC report points out: “The JAFZI/TSG Masterplan which addressed, among other things, market demand, development approach and financial projections, was finalised in December 2004. In essence, the JAFZI/TSG Masterplan recommended a mixed development strategy — a single phase for infrastructure works and multiple phases over eight years for the light industrial units (LIU). This staggered development for the LIU was recommended for cashflow considerations and to match expected future demand.”

The worst, it appeared, was waiting to happen. The PwC report notes: “The entire project including the LIU was completed within 24 months, resulting in excess LIU capacity. As at Dec 31, 2008, occupancy rate of the LIU was only 15%.”

• Secondly, PwC says, the PKA may not have received value for money due to its heavy reliance on KDSB as the turnkey developer.

This is putting it mildly, to say the least. “PKA’s approach to the project was that, this being a turnkey development, the onus was on KDSB to deliver the completed works to PKA, with minimal supervision,” the report said.

It illustrates the pitfalls by suggesting that PKA “could have better managed the project” by appointing a qualified supervising officer to safeguard its interest, ensuring that detailed specifications were submitted with the agreement, undertaking competitive tenders, adhering to the JAFZI/TSG Masterplan for phased development, complying with PWD standard terms for contracts and appointing independent quantity surveyors early in the development.

• Thirdly, project management and control over the project was weak.

To illustrate, the report cites some examples: In an agreement dated March 27, 2004, PKA did not require detailed building/ infrastructure specifications, the scope of work for the turnkey developer KDSB or a fixed contract price; there was no requirement for preliminary cost estimates; no requirement for quantity surveyors to be appointed before works started in July 2004; nor for KDSB to submit plans and drawings on a timely basis.

Further, the development agreements were weak compared to the PWD’s standard contract terms for design guarantee and defect liability. Unlike the PWD contracts, for example, the PKFZ agreements did not require KDSB to deposit a design guarantee bond. Also, none of the notices of payment presented by KDSB were forwarded to the quantity surveyors for their independent verification, PwC said.

• Fourthly, only the light industrial units had been issued with certificates of fitness at the end of December 2008. The defect liability period had expired and certain defects remain to be rectified.

In view of these issues, the PwC report concludes, the project had been poorly executed, which resulted in higher project outlay, significant financing costs, weak control over KDSB’s billings, a surplus of LIU and delays in the issuance of the certificate of fitness (CF).

PKFZ: Issues concerning the project
• The Cabinet approved proposal to purchase land but subsequent development proposals were not tabled to Cabinet for approval.
• Port Klang Authority (PKA) did not alert the Cabinet in a timely manner of its inability to finance the project from internal funds.
• PKA board did not exercise oversight and adequate governance over the implementation of the project. Key matters were not tabled to Board.
• Advice of the Attorney-General was not sought and certain Finance Ministry regulations were not complied with.
• There could be potential conflict of interests arising from the involvement of parties who had prior association with either the land or Kuala Dimensi Sdn Bhd (KDSB).
• Finance Ministry’s soft loan interest will increase the project outlay from RM4.9 billion to RM7.4 billion. If the soft loan is not restructured, the outlay will increase to RM12.45 billion.
• PKA could have reduced funding costs had it complied with Ministry of Finance’s recommendation to issue government bonds and developed the project in phases.
• The land was acquired at special value exceeding the market value.
• KDSB may have overcharged PKA for interest by between RM51 million and RM309 million with regard to the land purchase.
• Development Agreement 3 (DA3) (the supplementary agreement that expanded the scope of development of the project from 400 acres to 1000 acres for RM1 billion on deferred payment basis) was not a fixed sum contract and did not stipulate a rate for professional fees claimable by KDSB.
• PKA incurred claims of RM95.256 million for general preliminaries cost that was not specified in the development agreement (DA).
• The final account for DA3 did not have any deduction for value of work not done on three infrastructure components — monsoon drain system, water supply system and two bridges — in the land purchase agreement.
• KDSB was awarded the RM1 billion development contract before project masterplan was finalised.
• PKA may not have received value for money due to its heavy reliance on KDSB as the turnkey developer.
• Project management and control over the project was weak.
• Project status as at Dec 31, 2008 — only the light industrial units (LIUs) have been issued with certificate of fitness (CF). The defect liability period has expired and certain defects remain to be rectified.
• PKA has projected that it will be in a cumulative cash deficit position in 2012 and will not be able to repay the Finance Ministry soft loan instalments from that year.
• Letter of support issued by Transport Ministry could be construed as a guarantee that PKA would meet its obligations on a full and timely basis.
• The project’s actual occupancy of 14% is low and not generating sufficient revenue to cover its operating expenses.
• Port Klang Free Zone Sdn Bhd (PKFZSB) has incurred losses since its incorporation and has negative shareholders’ funds as at Sept 30, 2008.

This article appeared in The Edge Financial Daily, May 29, 2009.

Ulasan: Beginilah antaranya bagaimana wang rakyat dibazirkan oleh kerajaan BN.