PKA won’t pay

The Port Klang Authority (PKA) is set to hold back its final payment of RM222.58 million to Free Zone Capital Bhd (FZCB), one of the four special-purpose vehicles (SPVs) established by Port Klang Free Zone (PKFZ) turnkey contractor Kuala Dimensi Sdn Bhd (KDSB) to raise funds from the market.

Sources said the PKA board had decided not to make the final payment to FZCB in view of its legal suit against KDSB, with a claim totalling about RM1.4 billion.

“The board does not want to be in a position where PKA wins the suit but cannot recover the money,” said a source.

Among other things, PKA alleges that KDSB had made wrongful and excessive claims in relation to work done on the PKFZ project.

The source said with the decision, PKA had effectively shifted the decision on its bond obligations to Transport Minister Datuk Seri Kong Cho Ha under Section 3(4) of the Port Authorities Act 1963, which gives the power to the minister to override the decision made by the PKA board.

While Section 3 outlines the function of the port authority, Section 3(4) reads: “The Minister may give to the authority directions of a general nature, not inconsistent with this Act, as to the exercise of the functions of the authority.”

PKA chairman Datuk Lee Hwa Beng could not be reached for comment.

Pursuant to its obligations, PKA has to make a total payment of RM372 million by July 31, the second part of a RM723 million repayment due to bondholders this year.

A sum of RM222.58 million is due to FZCB and another RM150 million to Special Port Vehicle Bhd (SPVB).

PKA had last month disbursed a total of RM350 million to Transshipment Megahub Bhd (TMB) and Valid Ventures Bhd (VVB).

FZCB raised a total of RM410 million in September 2006 which was secured against new additional development works (NADW), repayable by 2010 at 5% per annum.

The holding back of payment will trigger an event of default that would give bondholders the right to instruct the bond trustee to appoint receivers and managers over FZCB and also enforce the absolute legal assignment against PKA.

Alternatively, if the holders do not want to declare a default, FZCB may on its own enforce the absolute legal assignment and recover the payment from PKA.

PKA is due to make payments to the other three SPVs up until 2017.

SPVB raised RM1.3 billion in bonds, secured against land acquisition, which are repayable by 2017 at 7.5% pa; TMB raised RM1.4 billion, secured against development work, repayable by 2012 at 7.5% pa; while VVB raised RM545 million, secured against additional development work, repayable by 2011 at 5% pa.

Due to the lack of cash flow from the PKFZ project, PKA had had to obtain a 20-year soft loan totalling RM4.6 billion from the Ministry of finance (MoF) in 2007, towards repaying the bondholders.

According to its cash-flow projections, the port authority would be in a cumulative cash deficit position between 2012 and 2041. Repayment to MoF begins in November this year.

According to a position review by audit consultancy PricewaterhouseCoopers, if PKA failed to meet the MoF soft loan instalments as scheduled and if these instalments are deferred to match its projected cash flow, it would incur additional interest cost of about RM5 billion, which would further increase the outlay for the PKFZ project to RM12.45 billion.

Last month, former transport minister Datuk Seri Ong Tee Keat called for all payments to be frozen pending the outcome of lawsuits between PKA and KDSB. Ong, who had ordered a position review of the troubled PKFZ project during his ministerial tenure in 2008, pointed out ongoing disputes.

“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.

“We should avoid the risk of monies paid but unable to be physically recovered subsequently when the courts rule in your favour,” said Ong.

The PKFZ bonds were issued with the implicit backing of the federal government in the form of letters of support.

Two weeks ago, The Edge Financial Daily reported on the default of a RM240 million bond by Malaysian International Tuna Port Sdn Bhd (MITP), which also had the backing of a government letter of support. A total of RM85 million was spent on the tuna port project in Penang.

MITP is a joint venture between Bindforce Sdn Bhd (60%) and the Fisheries Development Authority of Malaysia (40%). There is also an ongoing legal proceeding with regard to the issue between the bond trustee and MITP.


This article appeared in The Edge Financial Daily, July 27, 2010.