KINIGUIDE | Digging into Penang’s controversial land deal

KINIGUIDE | Earlier this month, the Penang Chinese Chamber of Commerce (PCCC) questioned the joint development agreement between the Penang Development Corporation (PDC) and a private firm, with regard to the direct negotiation sale of land in the Batu Kawan Industrial Park Phase 2 (BKIP2).

This raised red flags and the ensuing fallout led another firm, Aspen (Group) Holdings Ltd to clarify that its direct negotiation land purchase from the PDC in Batu Kawan a decade ago should not be compared to the present deal.

Things became murkier when former Penang deputy chief minister II P Ramasamy and Lee Kah Choon, the former investment adviser to the chief minister, issued a joint statement to refute Penang Chief Minister Chow Kon Yeow's explanation and distanced themselves from the deal.

On Oct 17, PDC, which is a statutory body under the state government and headed by the chief minister, announced that it was terminating the joint venture agreement with Umech Land.

In this instalment of KiniGuide, Malaysiakini digs into the issue.

What is Batu Kawan Industrial Park Phase 2?

BKIP2 is located in the southern part of Batu Kawan, specifically Changkat Byram, which is near the Pulau Burung Sanitary Landfill.

This is the 10th industrial park in Penang, covering 1,156 acres. In 2015, the Penang state government began to acquire relevant land under the Land Acquisition Act 1960 for future development purposes by the PDC.

The controversy revolves around 558.96 acres of this land.

Why did chamber of commerce raise the issue?

The chamber received complaints in May that two real estate agencies were selling industrial land in BKIP2 at RM80 per square foot.

The chamber found this unusual because, for the past 50 years, the PDC has independently developed industrial parks after acquiring private land.

Companies interested in purchasing land are required to apply directly to the PDC and would only receive an offer after a thorough review process.

The chamber expressed concern over five aspects - land price, bidding procedures, feasibility studies, financial capability and the companies involved.

It also revealed a letter, dated July 27, sent to Chow seeking an explanation and his response on Aug 25, which the chamber claimed was evasive and did not address their concerns. The chamber then sent another letter on Sept 12.

The issue gained public attention after Sunway Group disclosed on Sep 27 to Bursa Malaysia that its subsidiary, Umech Land Sdn Bhd, had signed a joint development agreement (JDA) with the PDC regarding the land.

In light of this, the chamber decided to hold a press conference on the matter. It also denied having political motives.

Is the land price justified?

The total price for the 558.96 acres of land is RM646.02 million.

The chamber questioned if the selling price of RM26.53 per square foot by the PDC to the company was reasonable and if PDC’s four-year payment term was appropriate.

According to the chamber’s life honorary president Tan Kok Ping, an open tender could have increased the price by RM200 million.

Chow explained that the land was undeveloped and lacked basic facilities, therefore it should not be compared to fully-developed industrial lands such as the Batu Kawan Industrial Park and Bandar Cassia Technology Park, which were priced at RM80 per square foot.

The PDC even estimated that Umech would need to bear an additional RM500 million to build basic infrastructure, including a bridge connecting the first and second industrial parks and landfilling, among other things.

Chow further stated that the government acquired the land at around RM10 per square foot, and the current selling price of around RM20 per square foot does not result in a loss.

Additionally, the instalment payment schedule devised by the PDC included a provision for the land price to increase over the years.

This approach ensured that PDC did not incur opportunity costs and allowed for effective project implementation monitoring. If Umech failed to implement the project or make payments according to the schedule, the PDC reserved the right to withhold the next stage of land delivery.

However, according to Aspen Group, in 2014, they purchased 245 acres of undeveloped swampy land in Batu Kawan at the market rate of RM45 per square foot.

Was there a valuation process?

According to Sunway Group, there was no valuation.

However, based on market information available to them, the market price of undeveloped freehold industrial land in the vicinity of the land ranged from RM21 to RM35 per square foot.

Given that the land is leasehold land and undeveloped with a lot of landfilling and infrastructure work to be undertaken by Umech, Sunway believed the implied price of RM27 per square foot to be fair.

Why sell the land via direct negotiation?

The chamber questioned why the land was sold to Umech, a company from Kuala Lumpur with limited experience and financial capability, while qualified Penang-based companies were excluded.

Chow and PDC chief executive officer Aziz Bakar explained that the authorities had promoted this project to attract domestic and foreign investors.

However, due to its proximity to the landfill site, garbage truck routes, and high infrastructure costs, it became a challenging venture.

Therefore, the PDC had to present the proposal at the 2020 Dubai Expo.

According to Chow, Umech expressed interest in investing during the expo's business matching session. After discussions with them, the PDC believed that Umech could implement the project with financial support from investors in Dubai.

Chow defended the direct negotiation approach, claiming it was one of the methods to secure a good offer, similar to Aspen's project.

However, Aspen asserted that a comparison between the two deals was “illogical and unreasonable” due to fundamental differences.

Is Umech capable of executing the plan?

Chow stated that the government, through a committee, had thoroughly examined Umech's proposal.

The committee was led by the then-deputy chief minister of Penang I, then-deputy chief minister of Penang II, Abdul Halim Hussain (the responsible executive council member at the time) and Lee, the former financial adviser.

The chief minister said the committee discussed Umech’s proposal on Nov 28, 2022, and the results were approved at the PDC board meeting on Feb 9 this year.

He also mentioned that PDC conducted a CTOS search on Umech, which revealed that the company has a paid-up capital of up to RM10 million with a zero percent debt ratio. There were no bad debts or blacklist records, making it eligible to apply for project financing loans.

Chow added that letters of credit and financing support from financial institutions were also submitted to PDC as part of the documentation.

However, the chamber stated that Chow's response did not include the alleged supporting letter, nor did it provide actual documents verifying the CTOS search results.

Conversely, they found that the firm still had multiple outstanding debts when conducting their own search.

Umech started reselling the land?

The chamber criticised Umech for allegedly selling land through intermediaries before completing the transaction and fully paying for the purchased land, which they deemed as using PDC's industrial land to generate cash flow and serving as partial payment, which does not comply with good corporate governance.

However, Chow denied this claim by stating that Umech could not sell the land since it had not been transferred to the firm.

He added that PDC believes Umech is simply gauging market reactions.

Chow even pointed out that even after the land is sold, PDC will not completely relinquish control. It will ensure that Umech submits a comprehensive development blueprint and then proceeds with the development in accordance with the blueprint and guidelines.

Did Umech Construction or Umech Land purchase the land?

Chow had only mentioned Umech Construction in his statements but documents from Sunway Group show that the land was purchased by its subsidiary, Umech Land, in a joint development agreement signed with PDC on Sep 27.

According to a response to Bursa Malaysia, Sunway Bukit Gambier Sdn Bhd, a wholly-owned subsidiary of Sunway Group, holds a 70 percent stake in Umech Land, with Cheng Pui Kwan (21 percent) and Nathaniel Rajakumar (nine percent) as the other shareholders.

As per Umech's website, both Umech Construction and Umech Land are part of the Umech Group.

The chamber questioned if these two companies have the same major shareholders and since Umech Construction initially claimed it could drive the project with financial support from Dubai, the PCCC also wondered why has it now become Sunway Group.

It further questioned if Sunway Group had informed the PDC and received approval, especially considering that Sunway Group only gained control of Umech Land on Sept 25, two days before the land purchase signing ceremony.

In response, Chow stated that PDC was unaware of Sunway Group becoming the major shareholder of Umech and only learned about it in Sunway's statement after the signing ceremony.

Consequently, PDC has written to Umech seeking an explanation.

Aziz Bakar confirmed in an interview with Buletin Mutiara on Oct 4 that PDC signed the agreement with Umech Land, and that the company shares the same major shareholders as Umech Construction.

The following day, Sunway Group said that it only holds shares in Umech Land and does not have a stake in Umech Construction, which is not a subsidiary of their group.

What did Ramasamy and Lee say?

On Oct 10, Ramasamy and Lee issued a statement refuting Chow. They denied that the meeting on Nov 28, 2022, was a so-called "due diligence" meeting to evaluate if Umech was suitable to be awarded the contract. Neither were there any terms of reference for the so-called “jawatankuasa Kecil” (committee).

They asserted that the meeting, chaired by Chow, was simply for Umech to provide more details about their development proposal.

During this meeting, it was decided that Umech should conduct market research to study the composition of land usage and provide proof of Umech's financial sustainability, and other related matters.

The PDC management was required to submit a report and hold discussions with the board after obtaining the above information.

Chow later explained that the aforementioned meeting was part of the "due diligence" process, and further investigations were carried out by the authorities based on the decisions made during the meeting.

According to his statement, the PDC board held a series of meetings to follow up on the matters on Aug 19, 2022, Oct 28, 2022, Dec 8, 2022, Feb 9, 2023, and April 11, 2023.

The land sale was approved by the board on Feb 9 this year.

Ramasamy has since quit DAP while Lee resigned from his position as the special investment adviser to the Penang chief minister and director of Invest Penang on Oct 2. The latter, however, denied that his resignation was related to the land sale.

What are the latest developments?

DAP secretary-general Anthony Loke described Chow as a transparent leader. He also believes the chief minister will cooperate with the state Public Accounts Committee (PAC) if it initiates an investigation.

Yesterday, the chamber held another press conference and urged Chow to conduct an internal investigation into PDC and reshuffle its management team.

This afternoon, Chow’s office issued a statement that the chief minister would sue the chamber’s life honorary president for tarnishing his reputation.

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