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This document belongs to the Government of Malaysia

Memorandum from the Cabinet Ministers

PKFZ Development Project

Purpose:

1.    The purpose of this memorandum  is for Cabinet (ministers) to consider and agree to the following:

(1)                       To approve retrospectively costs related to the development of the PKFZ Pulau Indah, Selangor, from RM1.088bil to RM4,632,732,000;

(2)                       Port Klang Board to be given a soft loan up to RM4,632,732,000.

(3)                       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.

Background:

2.    The PKFZ is a project between the Government of Malaysia and UAE (Jebel Ali Free Zone International) to attract investors to Malaysia and increase the country's competitiveness and to make Port Klang the main loading/cargo port in this region. This project will become the main catalyst to develop economic activities and development in Pulau Indah, including increasing the amount of cargoes in Port Klang.

 

3.    The cabinet on 24 March 1999 has agreed that Port Klang Board (PKB) purchase a land sized 803 acres in P. Indah to develop the PKFZ.  On 14 February 2001, the cabinet agreed that the government accept the extra offer to purchase land the size of 170 acres more in the said location so that the total size of the area will total 1,000acres.

 

4.    The cabinet on 21 February 200

 

5.     

 

6.    9, acknowledged that the cost for 1,000 acres is RM1.088bil based on the price of RM25 sq ft. When considering the development cost and interest at RM1.352 bil, the actual cost of the project becomes RM2.44bil. Nevertheless, the Ministry of Finance and the Attorney General's office have raised concerns about the financial burden by the Government, status and price of land, and ownership.

 

7.    However, on 2 October 2002, the cabinet agreed to the purchase of land for the PKFZ project at Port Klang, based on the clarification by the Transport Minister that this project can be developed without the financial help of the Government and the legal issues have been resolved. But on 9 October 2002, the cabinet agreed to postpone the implementation of the decision by the cabinet until the Ministry of Finance issue the result of the findings by the Attorney General's office related to the purchase of the land.

 

8.    On 23 October 2002, the cabinet considered the Memorandum from the Ministry of Finance which included findings by the Attorney General's office (in Appendix A). The cabinet agreed that the land be purchased through the Transport Ministry according to Section 3(1)(a) of the Land Acquisition Act 1960. The value of the land based on the Evaluation and Land Services Department is RM10.16 sq ft. KDSB was given the opportunity to develop the basic infrastructure according to design and built and the cost will be negotiated and finalized by the Finance Ministry if it exceeds RM100mil.

 

9.    On 6 November 2002, the cabinet agreed to maintain its decision made on 2 October 2002 – land acquisition must be made through purchase of land. Based on this, the sales and purchase agreement between PKB and KDSB was finalized and the PKB made an advanced payment of RM108.8mil (10%) whereas the balance (RM979.6mil) will be repaid in 15 years.

 

10.                     The Transport Minister on 28 May 2003 has issued a Letter of Support to the MARC – Malaysian Rating Corporation Berhad – where it was stated that the Government at all times will ensure that PKB fulfill all its obligations according to the fixed amount and time frame. Based on the Letter of Support, a series of bonds issued by Syarikat Tujuan Khusus (SPV) was created by KDSB to pay for the purchase and development of the land. The issuance of the bonds has attracted many investors to invest based on the AAA ratings. The details of the bonds issued are as follows:

 

Date issued	Amount	Mature date	Purpose
30 Julai 2003	1.31bil	Starting 30 July 2007 to 28 July 2017.	Land purchase
3 November 2004	1.095bil including Medium Term Note (MTN) 360mil	Bon: Starting 2 November 2007 to  2 November 2012. MTN: Starting 3 November 2010 to 2 November 2012.	To pay for development of land
30 March 2006	580mil including MTN 85 mil	Bon: Starting 30 November 2007 to 30 November 2011. MTN: Not issued yet.	To pay for added/further development
26 September 2006	RM410 juta including MTN R70 mil	Bond: Starting 3 November 2008 to  3 November 2010. MTN: Not issued yet.	To pay for added/further development

 

11.                     On 25 February 2004, the Transport Minister obtained policy approval (or approval in principle) from the PM to implement the entire project in one phase and the turn-key developer was appointed to implement the project.  Furthermore, PKB has negotiated the extra scope of work with KDSB and the cost of the project is now increased to RM4,632,732,000 – this amount includes land purchase costing RM1.7 bil and development cost amounting to RM2.9 bil. However, this cost has been finalized without referring to the central agency.

 

12.                     On 6 April 2005, during the presentation of the Annual Report and PKB Financial Statement of 2003, the cabinet ministers agreed that PKB act to prepare enough allocation without the financial help from the Federal Government to cover the cost of the development project of PKFZ which is estimated to cost RM1 bil in 2007.

 

13.                     Furthermore on 26 August 2005, 14 December 2005 and 16 October 2006, the Transport Ministry has applied to the Finance Ministry that PKB be given several financial aids in the form of grant, government soft loan with interest rate of 4% and a moratorium of 6 years repayment period. A soft loan of RM1.8bil be given on an installment basis while the purchase of land will be settled by government loan. However, these applications have been rejected by the Finance Ministry based on the decision by Cabinet on 6 April 2005.

 

14.                     In early December 2006, the Finance Ministry was informed by the lead arranger that the Letter of Support has been issued by the Transport Minister for the issuance of several bonds. In relation to that, on 14 December 2006, the Finance Ministry has asked for clarification from the Transport Minister and informed that whatever guarantee letter must obtain the approval of the cabinet ministers in advance and that letter can only be issued by the Finance Ministry.

 

BASIS of CONSIDERATION

 

15.                     Following the actions that have been taken, the Finance Ministry finds the following:

 

(i)              The PKFZ was approved by the cabinet ministers based on the information presented , that is, this project has the capacity to develop and it will be self financing. However, after developing it, the project was found to be not capable of developing and the cost of the project has escalated to RM4,632,732,000,00. The original cost of the project was only RM1.088bil and if there were an increased in the work scope which exceeds RM100 mil, this must be presented to the cabinet ministers for consideration;

(ii)             In principle, if there were changes to the initial decision by the cabinet ministers, any change in the decision has to be brought forward for consideration to the cabinet;

(iii)           Government guarantee can only be issued by the Finance Ministry after being agreed by the cabinet. The Letter of Support issued by the Transport Minister can be considered invalid. However, the contents of the letter has the element of security/guarantee because the status given to the bond was AAA, the same level accorded to bonds issued by the government. Furthermore, in case of default by the PKB, which is a government statutory body, it becomes the obligation of the government to carry the burden of that liability and

(iv)           The PKFZ project is completed and is being utilized and the contract has been signed between PKB and KDSB. Therefore, a retrospective approval is needed.

 

FINANCIAL IMPLICATIONS

 

16.                     The government needs to carry the financial burden of RM4,632,732,000.00 in the form of soft loan to PKB. There is no ceiling allocation in the 9^th Malaysian Plan and the Transport Ministry has to apply for an increase in the ceiling allocation. 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.

 

CONCLUSION

 

17.                     The PKFZ project was implemented to fulfill the government's aspirations to turn PKB into a national loading/cargo centre and distribution centre in the region. This project is also a new free zone concept where it combines two activities: Free Industrial Zone and Free Commercial Zone in one location.

18.                     Retrospective approval by the government will enable the PKB to continue participating actively in the development of the PKFZ. Furthermore, PKFZ as a government statutory body cannot be left insolvent and government guarantee is needed to maintain the confidence of investors in bonds which have been issued. Payment obligations to KDSB will only begin this year with an installment of RM510 mil and increased allocation must be prepared for the years 2008 to 2010.

 

 

COMMENT from MINISTRY/CENTRAL AGENCY

 

19.                     Economic Planning Unit (EPU)

 

 

"EPU, PM's department acknowledge the increased of cost of the PKFZ project from RM1.088bil to RM4.6bil. To preserve the government's image, especially the PKB, a government statutory board, the EPU agrees with paragraph 20 of the Finance Ministry memorandum to ensure that the PKFZ project runs smoothly. In order to pay for the project through a soft loan of RM4.6bil, a ceiling is needed under the 5^th Malaysian Plan. The Transport Ministry is requested to prepare a ceiling allocation under the 9^th Malaysian Plan through savings/rearrangement of existing projects. Ceiling allocation for the 9^th Msian Plan is needed to fill the cash flow from 2007 to 2010. Furthermore, EPU and PM's Dept considers serious actions to implement the project without the approval of cabinet ministers as explained in this memorandum.

 

20.                     Transport Ministry

 

"The Transport Ministry supports and agrees to para. 20 of the Memorandum . The recommendations will ensure that PKFZ develop as planned. Up till now, there is about RM470mil investment by foreign companies in the PKFZ and these amounts to 14% of the total existing land/building in PKFZ. About RM341mil more is expected to be invested at the end of this year and this will add to the rental of land/building to 35%".

 

21.                     Attorney General

 

"This department has reviewed the proposals in the Memorandum on PKFZ and is of the opinion that:

 

(a)           Recommends a retrospective approval for the increase of cost for the development of the PKFZ from RM1.088bil to RM4.6bil and

(b)           The PKB be given a soft loan of RM4,632,732,000.00

 

This is the basis.

 

2. However, the department would like to bring the attention of the cabinet ministers to several matters:

 

(a)           Through the Memorandum presented by the Finance Ministry at a cabinet meeting on 23 October 2002, the AG's office suggests that the 1,000acre of land in Pulau Indah be acquired according to Section 3(1)(a) Land Acquisition Act 1960 [Act486] instead of direct purchase from KDSB because:

(i)              The market value for the purpose of acquisition by the Department of Evaluation and Property Services at RM10.16 sq ft differs very much from the purchase price of RM25 sq ft. and

(ii)             KDSB has no capacity to transfer ownership to the government without burden as the land contains too many "encumbrances", that is: mortgage and also caveat.

 

[a copy of the detailed suggestions from the AG's office can be found in Appendix B]

 

(b)           However, following the decision by the cabinet on 6 November 2002 that the land be purchased, a sales and purchase agreement was signed between KDSB and PKB on 12 November 2002. PKB has purchased the 1,000acre land in Pulau Indah from KDSB at RM1,088,456,000.00 where the amount of RM108,845,600.00 (equivalent to 10% of the purchase price) has been paid to KDSB by PKB. Meanwhile, the balance of the purchase price: RM976,610,400.00 has to be repaid by PKB to KDSB within 15 years and this price is based on an annual interest rate of 7.5%. This repayment formula has resulted in the balance of payment for the land to be paid by PKB to increase to RM1,699,625.000.00.

(c)            The agreement of the development of PKFZ on Pulau Indah dated 27 February 2003 signed by PKB and KDSB has allocated the cost of the project to be RM400mil pending professional fee and annual interest rate of 7.5% on the amount to be paid to KDSB by PKB. However, 5 supplement agreements were signed on (date):

(i)   26 May 2003 – 1^st supplement agreement

(ii) 27 Mac 2004 – 2^nd supplement agreement

(iii)                      30 November 2005 – 3^rd supplement agreement  where KDSB was appointed to design, built, pay and complete the added development work of PKFZ under the turnkey concept;

(iv)                      26 April 2006 – 4^th supplement agreement – purpose is to increase the interest rate from 5% to 7.5% and that the final repayment amount by PKB for added development work in 2011 be increased to RM156,490mil; and

(v) 26 April 2006 – 5^th supplement agreement where KDSB was appointed to complete added development work for PKFZ under the turn-key concept  worth RM335.8 mil pending final costing by PKB and KDSB.

 

The effect of the 5 supplement agreements and the repayment formula under the sales and purchase agreement is an increase of cost for the entire PKFZ development project from RM1,088 to RM4,632,701,000.00

 

(d)           As the development of the PKFZ is through the turnkey concept, KDSB as the contractor has to prepare a fund to cover the cost of this project in advance. Therefore, KDSB has set up four (4) Single Purpose Vehicle (SPV) companies :

 

(i)   Special Fort Vehicle Berhad

(ii) Free Zone Capital Berhad

(iii)                      Valid Ventures Berhad

(iv)                      Transshipment Megahub Berhad

 

(e)           These four SPV have issued bonds worth RM3.840 (including Medium Term Notes worth RM0.515bil)

(f)              It is noted that bonds issued by the four SPV were given a rating of AAA, based among others, the Letter of Support from the Transport Minister on 28 May 2003, 23 April 2004, 8 December 2005 and 25 May 2006.

(g)           Apart from this, it is also noted that one of the SPV, Special Fort Vehicle Berhad has used a part of the bond issued – RM1,008,412,150.00 to purchase the balance of the land price which should have been received by KDSB from PKB as stated in the sales and purchase agreement. This means that KDSB has assigned its rights under the sales and purchase agreement to receive the balance of the land price from PKB to Special Fort Vehicle Berhad and this action has been approved by PKB.

 

3. Based on the observations above, this department is of the opinion that it is appropriate that a detailed review be made to ensure that the soft loan worth RM4,632,701,000.00 given to the PKB becomes the actual amount that should be paid by PKB to the said SPV. Also, this review is to ensure that the amount paid is according to the terms and conditions in the sales and purchase agreement and the agreement of the PKFZ development project (including all the supplement agreements).

 

4. Following the recommendation that retrospective approval for the government's guarantee related to bonds issued at approximately RM4.633bil including coupons by KDSB, this department suggests that since Letters of Support issued by the Transport Ministers is a kind of guarantee, the provision under section 14 of the 1957 Financial Procedures Act [Act 61] must be adhered to whereby the approval of the Treasury must be obtained beforehand. 

 

5. Based on the opinions above, the suggestion as in para. 20 of this Memorandum can be given appropriate consideration".

 

RECOMMENDATIONS

 

22.                     Cabinet ministers are requested to consider and agree to:

 

(i)              give retrospective approval related to the increase in cost of the PKFZ development project , from RM1.088bil to RM4,632,732,000.00;

(ii)             PKB be given a soft loan of RM4,632,732,000.00;

(iii)           Give retrospective approval for the government's guarantee related to the issuance of bonds worth about RM4,632,732,000.00 including coupons by KDSB. This approval must be based on a series of Letters of Support by the Malaysian Transport Minister where these letters become the implicit guarantee from the Federal Government according to law.

 

 

Signed by:

Finance Ministry

22 June 2007.