Thursday, June 18, 2009

PKFZ – Should we throw good money after bad?

As it stands, the cost of PKFZ is RM7.5bn.

Where do we go from here? The emotional will say we have spent too much to abandon the project.

But rational, standard investment practice is to look forward. Forget the costs already incurred. They are already sunk. What matters is what you can get in the future. And the future, based on Port Klang Authority’s “optimistic” assumptions is a further outlay of RM8.5bn over the next 42 years. We will start making money only in 2051.

Is it worth it? I can’t imagine any sane businessman, or government, for that matter, embarking on an investment with a 42 year payback period, and that too on optimistic projections.

So, the government really should consider an exit strategy. There are many alternatives for RM8.5bn. RM8.5bn is sufficient to build 340,000 low-cost houses. Or 30,000 students can have full scholarships for overseas studies. Or PLUS and LITRAK can be privatized, saving the government billions in compensation to the toll concessionaires and reducing the burden on motorists.

Transport Minister Ong Tee Keat, who is away in France for unspecified reasons, has characterized the proposal that the government cut losses and close down PKFZ as “a premature statement by politicians who think they can make well-informed financial decisions based on a few hours of looking through the PKFZ report”. He said he will let “the financial consultants and management experts work out a more viable solution based on further in-depth studies before a more structured approach and solution is implemented”.

So, another round of studies and fees. But you can’t conjure money from nothing. The fact is based on Port Klang Authority’s own forecasts, a cashflow deficit to 2051 is projected, and that is based on assumptions deemed ‘optimistic’ by reporting accountants PricewaterhouseCoopers.

The core problem is PKFZ was built too fast and at inflated costs. So you have underutilized facilities and punitive interest payments, including on the instalments due to turnkey developer Kuala Dimensi Sdn Bhd (KDSB). The cost base could be addressed if turnkey developer KDSB is taken to task. I would expect the legal team to comb through the various agreements and find a way to reduce the payments due to KDSB.

Doing so, though, would likely result in KDSB not being able to meet its own debt obligations. Bondholders will scream because these bonds were rated investment-grade “AAA” based on the government “guarantees”. But they can seek redress from the bankers and rating agency. We have established that the “guarantees” were really “letters of support” signed by the Minister of Transport. No doubt, they could be “construed as guarantees” but the Ministry of Transport has no authority to issue government guarantees. Only the Ministry of Finance can do that. Surely the bankers and rating agency were aware of this fact? Without the “guarantee”, the bonds would have warranted a much lower rating.

For newcomers, click here for earlier posts on the PKFZ scandal.

1 comment:

Anonymous said...

More money thrown in means more kick-backs. Time to wet the beaks of the new people running the show.

All too familiar. It's nothing to do with good business.