Sticky Questions in Malaysia's Port Scandal

The arrest earlier this week of Chan Kong Choy, a former Malaysian Transport minister and top Malaysian Chinese Association leader, for his alleged role in the multi-billion dollar Port Klang Free Trade scandal that arose in 2007, poses serious problems for the Malaysian government.

That is because, whatever the dimensions of the scandal, Malaysia's cabinet itself, 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 port.

If potential loan defaults are included, the attempt to turn the Port Klang seaport 60 km. east of Kuala Lumpur into a national multimodal transshipment center would dwarf all previous Malaysian scandals, with a likely cost of RM12.45 billion (US$4.106 billion at current exchange rates).

Chan is the second MCA official to be charged. The first was Ling Liong Sik, the 68-year old former MCA president who retired in 2003. Four other lesser individuals have been arrested as well. But since the loan guarantees were actually approved by the full cabinet, complete with approval by the country's attorney general, Abdul Ghani Patail, that confronts Najib Tun Razak, the prime minister, with an unappetizing list of choices given his public rhetoric about cleaning out corruption in his party and government.

One of those choices is how to explain the participation of the cabinet in a clearly illegal action. Another is how to prosecute Chan without Chan relating the involvement of a wide range of other politicians – or whether he and Ling, among others, will be prosecuted effectively. Presumably Chan and Ling could both cite the secret cabinet document showing approval of the loan guarantees in their defense.

As an indication of the lack of zeal to prosecute previous major cases, an longtime observer in Kuala Lumpur pointed to the corruption trial of Eric Chia Eng Hock, a tycoon and crony of former Prime Minister Mahathir Mohamad, who picked Chia to run the country's ill-starred Perwaja Steel project, which ultimately lost U$800 million. Chia was arrested in 2004 and charged with dishonestly authorizing payment of RM76.4 million (US$25.2 million at current exchange rates) to a Japanese enterprise called NKK Corp. through a nonexistent Hong Kong company called Frilsham Enterprises.

The arrest of Chia, the first prominent person to be charged with corruption after Abdullah Ahmad Badawi succeeded Mahathir as prime minister, was regarded initially as a sign that Malaysia was finally starting to clean up its politicized and corruption-riddled court system. But after a marathon investigation and the presentation of evidence, a trial judge ruled that the prosecution had failed to put on a case and Chia, then 71, was acquitted without having to put on a defense.

Likewise, Abdul Razak Baginda, a crony of the current prime minister, was acquitted without having to put on a case despite considerable evidence of his complicity in the execution murder of the 28-year-old Mongolian translator Altantuya Shaariibuu, Razak's jilted lover and a central figure in a massive corruption case involving the sale of French submarines to the Malaysian navy when Najib Tun Razak was defense minister.

There have been other cases as well, including that of V K Lingam, a well-connected lawyer who was caught in an eight-minute videotape with Ahmad Fairuz, then the country's third-ranking judge, in which the two discussed the fixing of judicial appointments at Mahathir's behest. A royal commission appointed to investigate the judicial system concluded that the country's courts had been subject to widespread fixing of judicial appointments, with Mahathir's connivance, that corrupted decisions at the behest of ranking politicians. However, no action was ever taken against either Lingam or Mahathir.

It isn't just that the courts are corrupt, a longtime Malaysian observer told Asia Sentinel. Perhaps a bigger problem is that after Mahathir politicized the courts and the law enforcement agencies during his 22-year reign, the, the police and prosecutors lost the skills and abilities to adequately prosecute or adjudicate cases.

The Port Klang case dates back to 2007. It has now been hanging fire since late 2009. Despite considerable evidence of widespread involvement by a range of politicians from the United Malays National Organization, the country's leading ethnically-based political party as well as the MCA that was uncovered by the Public Accounts Committee, little action has taken place.

Asia Sentinel obtained the 2007 cabinet memo in translation as the scandal grew. It 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. Some websites which first put up the memo took it down.

"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 cabinet 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 the 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 RM1.088 billion (US$343.05 million) RM4.63 billion during the course of the project.

A series of cabinet meetings had been held since 1999 to consider the implementation of the project, especially in terms of land acquisition issues and financial allocations, the memo continues.

"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: "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 if the Port Klang Authority defaults – which a report to the port authority's directors said is inevitable because the port can't generate enough revenue to meet the obligations.

"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."