Excluding interest, it would cost RM3.522 billion, audit firm PricewaterhouseCoopers (PwC) said in a report entitled "Position Review of Port Klang Free Zone Project and Port Klang Free Zone Sdn Bhd" released here Thursday on the PKA website.
PwC said it was imperative for Port Klang Authority (PKA), the operator of PKFZ, to take immediate action to restructure the Ministry of Finance's (MOF) soft loan of RM4.632 billion to avoid a potential default in 2012.
If PKA fails to meet the MOF's soft loan instalments, it would further increase the cost of the project to RM12.453 billion, said PwC.
PKA has projected it will be in a cumulative cash deficit position in 2012 and will not be able to repay MOF's soft loan instalments from that time on.
"The Malaysian government would need to make a concerted effort to turn PKFZ into a viable venture," it said.
PwC said the strategic intent of the project was to transform Port Klang into a national load centre and regional transhipment hub, but "significant project costs, weak governance and weak project management have severely undermined the viability of the project".
PKA's project management and control over the project was weak.
The Cabinet approved the project in 1999.
PKA was unable to fund its obligations to Kuala Dimensi Sdn Bhd (KDSB) from its own resources when the first scheduled payment was due in 2007.
It secured a 20-year soft loan of RM4.632 billion from MOF, of which RM4.382 billion is available for drawdown.
"This loan would impose an additional interest cost of RM2.506 billion resulting in a project total outlay of RM7.453 billion," said PwC.
PKA purchased the land outright at a price of RM25 per sq ft on the basis that the land was of special value but Jabatan Penilaian dan Perkhidmatan Harta had in August 2001 placed a value of RM10.16 psf on the basis of compulsory acquisition.
"Compulsory, had it been possible, would have cost a total of RM442 million compared to the purchase price of RM1.088 billion (that is RM25 psf).
The audit firm said KDSB could "may have overcharged PKA for interest between RM51 million and RM309 million in connection with the purchase of the land and that the land was acquired at special value which exceeded market value".
PwC said PKA and the Ministry of Transport also failed to alert the Cabinet in a timely manner about PKA's inability to pay for the project out of its own funds.
"PKA was aware that it was not able to meet the Cabinet's condition for self-financing (and) PKA should have alerted the Cabinet of this important fact," it said.
To compound the issue, PKA entered into other very significant development agreements thereafter, PwC said.
PwC said there were a general lack of board oversight, including it not being informed of key project consultants as well as variation orders (VOs) of RM62.5 million.
Several government checks and balances were bypassed, such as the Attorney-General (AG) not vetting some of the agreements despite significant amounts involved and PKA's lack of experience in projects of this nature while Treasury guidelines on vetting of agreements by the AG and approval of VOs by the MOF were not adhered to.
"Letters of support, which could be construed as guarantees, were issued by the MOT without the approval of MOF.
PwC said development contracts totalling RM1.846 billion were all awarded to KDSB without competitive bids.
KDSB is the turnkey contractor to design and build the infrastructure and complete the mulit-billion ringgit PKFZ.
KDSB was also the former owner of the land on which the project was developed.
PwC said that "there could be potential conflicts of interest arising from the involvement of parties who had prior association with either the land or KDSB".
"We should also mention PKA's apparent reliance on approvals by senior government offices such as the Cabinet, MOT and prime minister," it said.
While such approvals are important, the board still retains the overall responsibility to run PKA in a professional and sustainable manner.
"This would include the responsibility to not enter into agreements which may threaten PKA's long-term financial viability," it said.
PwC also said the project's actual occupancy of 14 percent is low and is not generating sufficient revenue to cover its operating expenses.
"The government will need to undertake a concerted effort involving a number of agencies in order to turn the PKFZ into a financially viable venture," PwC said.
It said the principal activities of KDSB, a wholly-owned subsidiary of Wijaya Baru Holdings Sdn Bhd (WBHSB), are construction and property development.
WBHSB and its group of companies are involved in land and sea reclamation, construction, dredging, property developemnt and marine transport activities.
As of Jan 16, 2009, the shareholders of WBHSB comprised Datuk Seri Tiong King Sing holding a 70 percent equity, Idris Mat Jani (10 percent) and Omar Abdul Latip (20 percent).
The directors of KDSB are Tiong, Idris, Omar and Datuk Seri Abdul Azim Mohd Zabidi.
PwC also noted that a number of parties with prior association to either the land or KDSB which may give rise to potential conflicts of interests.
It said that Datuk Abdul Rahman, who was a member of the board from 1997 to 2003, declared his position at one meeting as president of Koperasi Pembangunan Pulau Lumut Bhd which was the original owner of the land.
Another person was Datuk Chor Chee Heung, who was non-executive deputy chairman of Wijaya Baru Global Bhd (WBGB) from April 2004 to July 2007 and chairman of PKA from April 2007 to March 2008.
In February 2008, the final account for the DA3 (Development Agreement 3) of RM1.216 billion was approved by the board.
KDSB carried out the construction works under the DA3 between July 2004 and November 2006, during which time Chor was the non-executive chairman of WBGB.
Minutes of the board did not indicate that Chor either declared his previous involvement in WBGB to the board or withdrew himself from the deliberations.
WBGB and KDSB are related through a common shareholder and director.
WBGB and the parent company of KDSB, Wijaya Baru Holdings Sdn Bhd, share a common shareholder and is the main contractor of KDSB for the project.