Do Not Throw Us Into Further Debt!
Malaysians have every right to demand accountability, transparency and integrity in the management and operations of 1Malaysia Development Berhad (1MDB) and the use of its funds, being Malaysia’s second Federal Government wholly owned strategic investment arm or sovereign wealth fund (SWF) although it is widely seen as a cross breed between SWF and private investment vehicle. It was set up in 2009 with a federal grant of RM5 billion as a catalyst to forge global partnerships and promote foreign direct investments in high-impact projects for sustainable economic growth in the long run.
Increasing criticisms from investors and policy makers, given the gargantuan debt size standing at a whopping RM 38 billion at the financial year ending March 2013, must now become a cause for concern for every Malaysian. The Centre to Combat Corruption & Cronyism (C4) is deeply troubled with the growing slide of financial affairs surrounding 1MDB amidst allegations of mismanagement and misuse or abuse of public funds.
So how could things go so wrong after just 5 years? 1MDB must come clean on the following:
Delay In IPO = Delay In Debt Reduction?
1MDB, which has yet to apply for listing approval from Malaysian securities regulators, initially seemed rushing an Initial Public Offering, (IPO), scheduled by mid-2014 of its energy unit comprising 16 power plants and desalination plants over 6 countries that could raise over US$3 billion in order to settle a twice extended RM6.17 billion syndicated bridging loan that will be due in November 2014.
However, recent news reports indicated that the planned listing which was subsequently deferred to the final quarter of 2014, may be postponed further to the first quarter of 2015 at the earliest. While 1MDB has remained silent over the causes of the successive delays in listing of its power assets, one of the main reasons that have floated is that 1MDB is in the middle of negotiating with its bankers the terms of a fresh loan to pay off some of the debt and roll over some ahead of the IPO. Another reason is to allow 1MDB to “sweeten” its IPO by bulking up its assets with enhanced projects or additional fresh ones since power assets acquired so far have largely been existing operations.
Why the secrecy over the whole deal of such a size which could have put Malaysia back on the map as the top IPO venue in Southeast Asia in terms of amount of funds raised while contributing to pare down 1MDB’s debt?
Potential Loss Of Global Investor Confidence Due To Slow Progress And Lack Of Good Corporate Governance Principles
Major global investors especially Qatar Investment Authority (Qatar), Aabar Investments PJS (Abu Dhabi, UAE), Prudential (UK) and a planned mega Islamic bank (Kuwait) are reportedly reconsidering their positions or even may have withdrawn multi-billion dollars investments in 1MDB’s two mega projects, namely the Tun Razak Exchange (TRX) and Bandar Malaysia, possibly as a result of lack of experience, slow progress and delays of the projects as well as absence of good corporate governance principles in particular transparency, accountability and integrity in particular transparency in 1MDB’s strategic plans. There have been several changes to the master plan which have resulted in delays to the projects even if DBKL has issued all the necessary approvals to get the projects going. All this could cause interest costs to escalate.
The TRX has been planned to be an international financial district in the likes of the City in London and the Wall Street in New York while Bandar Malaysia, an urban redevelopment township. The detailed master plan for TRX was scheduled to be completed in the first quarter of 2012 while construction was on track to start in June the same year. Today, major earthworks for TRX have yet to start while Bandar Malaysia has been reported to be one year behind schedule.
Penang Land Deals
On 29 April 2013, just 6 days before the 13th General Election (GE13), 1MDB bought more than 234 acres of freehold land in Air Itam, Penang in two separate deals while a third deal was concluded in September 2013, costing RM1.38 billion in total. The purchase price was estimated to be 95% higher than the fair value for land in the vicinity, a ridiculous sum given 1MDB’s gearing level. In view of the ludicrously overpriced land acquisition, it would be highly unlikely for the heavily indebted company to go ahead with the initial plan of building some 9,999 low-cost and affordable homes. It was estimated that finance costs and interest payments alone would set 1MDB back by about RM55 million a year.
Although the intention is noble as the land is purportedly the site to build 6,666 low-cost homes and 3,333 public affordable housing units of 1,000 square feet each, the timing and the hurriedness of the deal as well as the populist nature of Barisan Nasional’s promise associated with the deal raised eyebrows – merely a form of many other election goodies in a bid to regain control of Penang.
Done in haste, the deal was reportedly devised by a group of businessmen close to Barisan Nasional, attempting to capitalise on the ever growing demand for low-cost and affordable housing in a state of skyrocketing house prices. Even worse, 1MDB is now saddled with various plots of land littered with encumbrances such as being the home sites for nearly 3,000 families who are just ground tenants i.e. those who do not own the land but own the building on the land, having stayed there for almost 50 years.
What is the wisdom of this deal? Wouldn’t it be a costly affair to resettle communities who have resided there for almost half a century? C4 would urge 1MDB to explain the astronomical pricing of the deal, which could certainly raise further concerns over the expertise and experience of 1MDB’s management in particular related to public funds.
Cayman Islands Scandal
It is estimated that at least a total of RM18 billion of 1MDB’s funds are parked in the Cayman Islands. On 12 September 2012, 1MDB was reported to have placed US$2.32 billion in a segregated portfolio fund based in the Cayman Islands. According to its 2013 accounts, 1MDB received a sum of US$200 million from its investments in a Cayman Islands fund, comprising a dividend payment of US$134-million, which works out to a return of 5.76% per annum.
Why the chunk of proceeds raised from 1MDB’s debt issuance had to be transferred to the Cayman Islands, a Caribbean tax haven which allows 1MDB to circumvent transparency, accountability and integrity although the investment funds chosen may be regulated by the so-called “liberal” monetary authorities such as from the Cayman Islands and Switzerland? Why the secrecy surrounding funds earmarked for the development and acquisition of specific assets? Will the placements in overseas tax havens be a permanent feature of 1MDB?
C4 would urge 1MDB to disclose the most updated information on:
- the amount of funds placed overseas that have been expatriated back to Malaysia to be reinvested in energy assets and real estate, meet financial obligations as well as placed domestically for cash management, reserves and upcoming projects
- the expected rate of return on placements domestically and overseas per annum respectively
- the rate of finance cost per annum
- the amount of 1MDB’s loans and bonds respectively that enjoy Government guarantees
So what gives 1MDB?
C4 Calls:
C4 says it again.
1MDB can no longer afford the luxury of silence and must come clean on its actual state of financial affairs and management in general. 1MDB cannot operate in secrecy, and cannot pretend that it does not owe the Malaysian public, investors and the business community any explanation or clarification.
C4 calls upon
- Prime Minister Najib to immediately provide response to all these troubled developments, as the Chairman of the Advisory Board of 1MDB while the Chairman of the Board of Governance, Tan Sri Lodin Wok Kamaruddin to present a status report of 1MDB’s latest state of affairs to the Parliament at the next session when it convenes in October. Let us not forget the previous alleged Tan Sri Lodin’s involvement in the Scorpene affair, when he was a Director of the infamous Perimekar until 2010, the in-between company, currently being probed in a French court for allegedly accepting kickbacks worth RM540 million.
- The Public Accounts Committee (PAC) in Parliament to take immediate action by initiating an inquiry with urgency, calling all actors involved and make every detail of its investigations known to the public.
The statement outlines just some of the misconduct of 1MDB. 1MDB is in a sorry state – inflicting further burden to the fast-growing national public debt – perhaps an accurate depiction of our country’s economic malaise.
Public accountability remains a distant reality, leaving our future in great jeopardy. Malaysians can no longer afford our nation to hemorrhage any further.
Safeguard our monies please! And don’t throw us into a deeper debt trap!
Released By
Cynthia Gabriel
C4 Executive Director
