Published May 29, 2009

Audit on PKFZ finds poor governance

PwC report suggests restructuring RM4.6b govt loan to avoid default

By PAULINE NG
IN KUALA LUMPUR

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AN INDEPENDENT audit by PriceWaterhouseCoopers (PwC) on the scandal-tainted Port Klang Free Zone (PKFZ) has cast doubts as to whether its owner-operator Port Klang Authority (PKA) had obtained any value despite spending billions on the project, which it found to have been weakly managed with poor levels of governance.

The report, made public yesterday, suggested that immediate action be taken to restructure a government soft loan of RM4.6 billion (S$1.9 billion) to avoid a default by 2012, but noted that by deferring scheduled instalments to match PKA's projected cashflows, the project would incur an additional RM5 billion in interest costs, ballooning its total outlay to RM12.5 billion.

The massive cost overruns for a project that was initially expected to cost about RM2 billion - and even then, PwC noted that it could have been done for less if normal processes had been followed - and indications that Barisan Nasional politicians may have been involved in conflicts of interest, is certain to add to the government's political woes. The long-awaited report also appears to confirm what many dread - that the PKFZ could well turn out to be another costly white elephant, given that it is only 14 per cent occupied.

PwC observed that contracts were entered into without competitive bids, on the basis of estimated amounts and without detailed building plans. The entire project was also completed in two years ,contrary to the masterplan which recommended that it be built in phases. Other findings include the bypassing of government checks and balances, including vetting of the agreement by the attorney-general despite the significant amounts involved and PKA's lack of experience in projects of such nature; treasury guidelines were not adhered to; and letters of support (taken as guarantees) by the Transport Ministry were issued without the approval of the Ministry of Finance.

The report did not directly pinpoint the individuals responsible for the project which was to serve as a regional hub for the export and transhipment of manufactured goods, and was jointly marketed and promoted by Dubai's Jebel Ali Free Zone Authority (Jafza). Jafza pulled out half-way, citing political interference and bureaucratic red tape, according to a letter leaked to a media group.

But its findings disclose what it described as 'potential conflicts of interest' arising from the involvement of parties who had prior association with either the land sold to develop the PKFZ or Kuala Dimensi - the company to which PKFZ paid RM25 per square foot (psf) for the land after having earlier acquired the same for RM3 psf from a fisherman's cooperative.

It named Umno state assemblyman Abdul Rahman Palil - a member of the PKA board from 1997 to 2003 and president of the cooperative - who yet queried a proposal to compulsorily acquire the land for the PKFZ although it would have benefited PKA.

It also pointed out that PKA's board was not advised that the authority's previous chairman Chor Chee Heung - a Malaysian Chinese Association (MCA) politician - was at one time also deputy chairman of listed Wijaya Baru Global, a company related to Kuala Dimensi which was appointed as the main sub-contractor to develop PKFZ.

Another person named was Tiong King Sing, chairman of Parliament's Backbenchers' Club and a lawmaker from Bintulu, who is the controlling shareholder of Kuala Dimensi. The report noted that Kuala Dimensi and Wijaya Baru Global are related through a common shareholder and director - Mr Tiong, who controls 32 per cent of Wijaya Baru Global and 70 per cent of Wijaya Baru Holdings (the PKFZ turnkey developer) which in turn is the parent of Kuala Dimensi.

Incidentally, Azim Zabidi, former treasurer of the politically dominant United Malays National Organisation (Umno), is also a director of Kuala Dimensi.

The debacle has already snuffed out the political career of former transport minister Chan Kong Choy who opted not to contest in the general election last year, citing 'health reasons'. 

Published May 29, 2009

Just how robust will earnings be next year?

By R SIVANITHY

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IT appears that the pressing issue as far as stockmarket investors are concerned is either a) is this rally for real? or b) do budding 'green shoots' or a slowdown in the pace of economic deterioration signal a V-shaped recovery and if so, does this therefore justify buying heavily?

Both questions are undoubtedly important and indeed, investors have bet large amounts of money on the answer to either being 'yes'.

The crucial issue, however, one which observers - analysts and commentators alike - have not yet fully digested in their eagerness to go green is this: will corporate earnings be robust enough to justify continued rises in equity markets?

The answer depends on how strong economic growth will be in the future. Since there is no visibility for 2011 currently and because stock markets cannot be reasonably expected to discount further than six months ahead, the only estimates that can realistically be used today are for 2010. Doing this, however, presents problems for the green brigade.

Profits tend to expand in line with the underlying economy, so superior profits are logically the product of above-trend economic growth. While no one knows for sure when the US economy can lift itself out of its present mess - housing prices are still falling and unemployment still rising albeit at slowing rates - the current official forecast is for possibly one per cent growth in 2010.

Since this cannot be reasonably considered as above-trend, then by logical extension it's difficult to see Corporate America reporting solid, superior earnings next year. So if we accept that ultimately it is earnings that drive stock prices, the chances are not greatly in favour of Wall Street continuing its uptrend as we head towards the end of the year and into 2010.

Furthermore, as many observers have pointed out, the deleveraging process has only just begun and companies will have to expend lots of time and resources to repair their balance sheets. Although US banks now appear safe from collapse thanks to massive cash injections from the government, independent research firm Institutional Risk Analytics (IRA) recently reported that a staggering 1,575 US banks incurred losses in the first quarter - an abnormally high number which suggested to IRA that the US banking sector is far from as healthy as US officialdom would have the world believe. Investors should, therefore, note that a stable, propped-up US banking sector does not automatically translate to a profitable US banking sector.

As for the local market, much depends on how this region grows in the absence of a sustainable US economic recovery. In this connection, chances are high that in the weeks ahead, brokers will seek to revive the 'Asia is decoupled from the US' theme that sold well during 2004-2006, pinning their hopes on a supposedly resurgent China replacing the US as the engine of growth for this part of the world.

However, it would be wise to extrapolate from the slew of rights issues and placements flooding the market that companies here - as will surely be the case in the US and other parts of the world - are seizing the opportunity presented by the green shoots rally of the past 11 weeks to deleverage by raising large sums of capital that they might otherwise have raised through debt.

While analysts so far have focused on the balance sheet benefits of these capital-raising exercises - most have issued 'buys' for the stocks concerned - the large number of shares being issued will have the effect of depressing earnings per share. If earnings are already going to be depressed by a stagnant economy, this could then result in the rally stalling.

Investors should, therefore, be mindful that it's all very well to bank on green shoots for now, but it is earnings that hold the key to continued market performance. As things stand now, earnings will likely not be as strong as hoped, green shoots nothwithstanding. 

Published May 29, 2009

An optimist sticks by his forecast

Daiwa's Basu says GDP contraction may be just 3.3%

By ANNA TEO

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(SINGAPORE) Now that leading US economists have the end of the recession in sight - and Singapore's manufacturing output actually turned in April - the optimists can now breathe again. Or so it seems.

Not that too many optimists have stuck around of late, but P K Basu has tended to stick out with his rather more bullish than most views and forecasts of the economy - and stick with them too.

With market forecasts largely within the official projection of a 6 to 9 per cent GDP contraction for 2009, the Daiwa Institute of Research's Asia (ex-Japan) chief economist is a clear outlier with his minus-3.3 per cent call for Singapore.

'I don't think it's particularly far-fetched now, given the turnaround in manufacturing,' he told BT on Wednesday.

Data released this week show that Singapore's industrial output shrank 0.5 per cent in April - a big improvement from March's near-33 per cent plunge, and the best figure since last September. Against March, April's output rose nearly 25 per cent in adjusted terms.

While the April upturn rode on a 78 per cent jump in the volatile pharmaceutical output, it was 'not just pharma-driven', Mr Basu pointed out.

'Electronics are clearly improving, as they are elsewhere in the region, notably Taiwan and Korea. Ship and aircraft-repair (transport engineering) has returned to y-o-y growth.

'Business expectations surveyed in March were decidedly better, and I think a survey conducted now would reveal a further improvement in prospects. The impact of the fiscal stimulus (subsidies for trade finance, SMEs, Jobs Credit) should also begin to have a positive impact in subsequent months.'

But the pharma segment is notoriously difficult to forecast, he conceded. 'But I think we will have four pillars of manufacturing by next year - electronics, pharmaceuticals, transport engineering and petrochemicals, the big new emerging pillar, set to grow phenomenally in 2011 to 2014'.

He believes the April industrial output turnaround possibly marked the end of a year-long manufacturing recession, though the next two months' data bear watching. 'But we expect at least a modest quarter-on-quarter expansion in manufacturing output during Q2 2009,' he said.

Mr Basu lowered his forecasts of most Asian economies' 2009 GDP growth - including Singapore's, to minus-3.3 per cent - in February after the US outlined an initially 'disappointing' action plan to tackle the financial crisis.

On the projected 3.3 per cent contraction, he said: 'Our forecast is much higher than the market consensus because we believe that the huge fiscal stimulus will preserve jobs and renew the flow of risk capital to those segments (smaller enterprises and trade finance) that have been hurt most by the global credit crunch, and so help mitigate the impact of the global downturn on Singapore's economy.'

Overall, 'we believe the early shoots of an economic recovery should be evident in Q3 2009, and that the bottom of the current economic cycle will be in the current quarter', a recent Daiwa report said.

In its latest outlook released this week, the US' National Association for Business Economics' panel of 45 economists predict that the recession will end 'soon', within 2009.