Malaysia Cabinet Said Port Klang Loans Were Legal

(Malaysiakini) Exhaustive secret 2007 cabinet memo details approval of billions in loans for ill-starred port project

Malaysia's cabinet, according to a secret June 22, 2007 memorandum, retroactively approved the legality of billions of ringgit in supposedly illegal loans for the increased cost of development at the scandal-scarred Port Klang Free Zone for which a top Malaysian Chinese Association nonetheless has been charged with fraud.

Some websites first uploaded the memo, which Asia Sentinel obtained in translation, as the scandal grew in proportion starting last August. The memorandum is marked "Rahsia" or "Secret." Since cabinet documents come under Malaysia's stiff Official Security Act, passed in 1972, which allows for imprisonment up to 14 years for violating the statute, they have taken it down.

Ling Liong Sik, the 67-year-old former head of the MCA who retired in 2003, has been charged with deceiving the Malaysian cabinet in 2003 over the affair. Ling pleaded not guilty and was freed on RM1 million ringgit bail. Four other individuals have been arrested as well. In addition, sources in Kuala Lumpur say, Ling's successor as transport minister, Chan Kong Choy, an MCA deputy president, was at the center of issuing guarantee letters for bonds for the company building the massive port project before he left office in 2008, despite the fact that cabinet approval was required. There has been no indication yet that he would be charged, although sources in the United Malays National Organization, the leading component of the ruling national coalition, say others may well be pulled in.

Certainly, the 2007 cabinet memo is clear on Ling's actions, but appears to go along with them retrospectively:

"To finance development projects, bonds issued by Special Purpose Companies (Special Purpose Vehicle) which was created by [Kuala Dimensi, the entity given authority over the project]," the memo says. "The bonds have been given AAA rating and attracted the attention of many investors. It is because the previous YB Minister of Transport [Ling] issued a letter of support saying the government will at all times ensure that Port Klang Authority will meet all its obligations according to the duration and number of loans set."

The memorandum indicates that the cabinet knew most of the details about the vast cost overruns, giving a detailed description of the overages on Kuala Dimensi's part, which catapulted from RM 1.088 billion (US$343.05 million) RM 4.63 billion during the course of the project.

The port, whose ultimate cost could dwarf any of former Prime Minister Mahathir Mohamad's previous projects, was conceptualized by Mahathir as a multi-modal development modeled on the Jebal Ali free zone in Dubai , presumably capable of rivaling Singapore, whose efficiency and organizational expertise make it Southeast Asia's regional shipping hub:

"PFKZ has planned to attract foreign investors to Malaysia, to enhance national competitiveness and to make Port Klang as the main load in the region. This project will be a major catalyst in the development of economic activities and development in Pulau Indah," the memorandum says. However, Port Klang, hundreds of kilometers up Malaysia's west coast, is now being rivaled by the Iskandar Development Authority, better situated geographically, next to Singapore itself.

Unfortunately, in addition to the other problems, as Asia Sentinel reported on Aug. 24 and Nov. 27, 2009, the free zone project appears to have turned into a massive scandal, with politicians of all stripes helping themselves to vast amounts of money through artificially inflated land prices, contacts for surveyors and a myriad of other methods.

While the prevailing impression in Kuala Lumpur is that the country's leaders knew little or nothing about the port's development, the secret memo gives the impression that it was closely watched by top government leaders:

"A series of Cabinet meetings have been held since 1999 to consider the implementation of the project PKFZ especially in terms of land acquisition issues and financial allocations," the memo says. "The Ministry of Finance and the Department of the Attorney General have raised concerns about the financial need to be borne by the government and the status of land prices and land ownership issues involved with the project.

"On October 2, 2002, the Cabinet agreed to the purchase of land in Klang for PKFZ after having been informed that the project is viable without government financial assistance and legal issues of land had been settled. A review by the Department of the Attorney General regarding the issue of land acquisition was also presented."

After a lengthy description of the situation, the report concludes: "The Economic Planning Unit, Prime Minister and the Ministry of Transport have no objection to the proposed retrospective approval for the increased cost of development projects PKFZ, Pulau Indah, Selangor and the provision of soft loans to the Port Klang Authority and the government guarantee in relation to the issuance of bonds by Kuala Dimensi Sdn. Ltd."

Significantly, the legality of the retroactive guarantee appears to have been approved by the attorney general, Abdul Ghani Patail as well: "The Department of the Attorney General has no such objections to the proposed terms of paragraph 19 of the Memorandum."

Ultimately, the guarantee of the RM4.63 billion led to potential liability to the Malaysian government of nearly triple that amount – RM12.45 billion if the Port Klang Authority defaults – which a report the port authority's own directors say is inevitable because the port can't generate enough revenue to meet the obligations.

The memorandum paints a comprehensive picture of the cabinet's involvement in the affair.

"Retrospective approval by the government would allow [Port Klang Authority] to remain actively involved in the development of the PKFZ," the report says. "PKA as a government statutory body cannot be left to become insolvent and the government guarantee should be given to maintain the confidence of investors on the bonds issued. Payment obligations to KDSB will start this year in monthly installments of RM510 million and additional allocation should be prepared for 2008 until 2010."